Law of Contract and Specific Relief Notes | B.A. LL.B. (Five Year Course) Semester 5 | Mumbai University | munotes

The chain is worth memorising in exactly that order, because it is the skeleton of the entire syllabus. Steps 1 to 3 are Module I. Step 4 and the question of what makes step 6 work are Module II. What happens after a contract exists is Module III.

The two famous shorthand equations follow directly from the chain:

• Agreement = Proposal + Acceptance
• Contract = Agreement + Enforceability

The word that does the work: "enforceable"

A student can recite "an agreement enforceable by law" without ever asking what enforceable means, and then cannot answer the follow-up. It means precisely this: if the promise is broken, the injured party can go to a court and obtain a remedy.

There are three remedies to keep in view from the first day, because the paper ends with them:

• Damages, meaning money to compensate for the loss, under sections 73 to 75. This is the ordinary remedy. See [Compensation for Loss or Damage Caused by Breach].
• Specific performance, meaning an order that the promise actually be carried out, under the Specific Relief Act 1963. See [Specific Performance After 2018: the Rule, Not the Discretion].
• Injunction, meaning an order not to do something, also under that Act. See [Preventive Relief, and the Kinds of Injunction].

So "enforceable by law" is not an abstraction. It is the availability of one of those.

A worked example

Rohan tells his neighbour Meera that he will give her a lift to the station tomorrow morning. Meera cancels the cab she had booked. Rohan sleeps in and Meera misses her train.

Is there a contract? Work the chain.

• Proposal: Rohan signified his willingness to do something, driving her to the station. Section 2(a) is satisfied on its face.
• Acceptance: Meera assented. Section 2(b) is satisfied.
• Promise: so there is a promise.
• Consideration: did Meera do, abstain from doing, or promise anything at Rohan's desire? Cancelling her cab was her own decision, not something Rohan asked for in exchange. Section 2(d) is not satisfied.
• Agreement: section 2(e) requires promises forming the consideration for each other. There is only one promise here and nothing given for it.
• Contract: there is none, so nothing is enforceable, and Meera has no claim.

Now change one fact. Meera says: "If you drive me, I will pay for the fuel." Rohan agrees. Now Meera's promise to pay is given at Rohan's desire, in exchange for his. There is consideration, there is an agreement, and subject to Module II the agreement is a contract.

This is the pattern of nearly every problem question in this paper. You are not asked whether the defendant behaved badly. You are asked to walk the chain and find the link that fails.

What it does NOT mean

"All agreements are contracts." No. Section 2(h) makes contract the smaller category. Every contract is an agreement; most agreements are not contracts. Social and domestic arrangements, agreements without consideration, agreements with a minor and agreements to do something unlawful are all agreements, and none of them is a contract.

"A contract must be in writing." No. The Act nowhere requires writing in general. An oral contract is a contract. Writing matters for proof, and for the particular cases where some other statute requires it, such as a sale of immovable property, an arbitration agreement, or section 25's exception for a time-barred debt. Writing is a rule of evidence and of particular statutes, not a general rule of contract.

"A void contract is a kind of contract." The phrase is a contradiction, and the Act is careful about it. Section 2(g) says an agreement not enforceable by law is void, and it calls it an agreement, not a contract. Only section 2(j), a contract which ceases to be enforceable, describes something that was a contract and later became void. The vocabulary is worked through in [Agreement, Contract, and the Difference that Decides Cases].

Limits: what this Act does not touch

Section 1 carries a saving clause that students walk past:

"Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act."

Three things survive the Act, then: other statutes, the usage or custom of a trade, and any incident of a contract that is not inconsistent with the Act. The middle one is the interesting one. A trade custom can supply a term the parties never spoke about, provided it does not contradict the Act.

The Act is also not the whole law of contract in India. Sale of goods, partnership, and negotiable instruments were carved out of it into separate statutes, and the sections that once held them are printed in the bare Act with the single word "Repealed". That history is in the next chapter.

Quick revision

• Contract: an agreement enforceable by law, section 2(h).
• Agreement: every promise and every set of promises forming the consideration for each other, section 2(e).
• Promise: an accepted proposal, section 2(b).
• The chain: proposal, acceptance, promise, consideration, agreement, contract.
• Agreement = proposal + acceptance. Contract = agreement + enforceability.
• Enforceable means a court will give damages, specific performance or an injunction.
• All contracts are agreements; not all agreements are contracts.
• No general requirement of writing.
• Section 1 saves other statutes, trade usage and custom, and consistent incidents of a contract.

Test yourself

1. Define a contract, and give the section. An agreement enforceable by law, section 2(h) of the Indian Contract Act 1872.

2. A promises to donate to a charity and does not pay. Is there a contract? Walk the chain. There is a proposal and an acceptance, so there is a promise. The question is consideration under section 2(d): has the charity done, abstained from doing, or promised anything at A's desire? Ordinarily not, so there is an agreement without consideration and no contract. The position changes if the charity undertook liabilities on the strength of the promise, which is the point taken up in [Agreements Without Consideration Are Void, Unless].

3. Distinguish an agreement from a contract in one sentence. An agreement is the meeting of proposal and acceptance supported by consideration; a contract is an agreement to which the law adds enforceability.

4. Is an oral contract valid? Yes. The Act imposes no general requirement of writing. Writing is required only where another statute requires it, and is otherwise a matter of proof.

5. What does section 1 save from the operation of the Act? Any statute not expressly repealed, any usage or custom of trade, and any incident of a contract not inconsistent with the Act.

Quasi contract. These are the obligations in sections 68 to 72, and they are the odd ones out in this Act. There is no agreement at all; the law creates the duty because it would be unjust to leave the benefit where it fell. The Act itself is careful with the label and heads the chapter "Of certain relations resembling those created by contract". See [Quasi Contracts: Obligations Resembling Those Created by Contract].

The nature of the obligation: four features

1. It is voluntary. Nobody is a contracting party by accident. This is why competency (section 11) and free consent (sections 13 to 22) occupy the whole of Module II: if the consent was not real, the justification for enforcement disappears.
2. It is owed to a definite person. A contractual right is a right in personam, meaning a right against a particular person, as opposed to a right in rem, which is a right against the world. Ownership is a right in rem; a buyer's right to delivery is a right in personam. This is the reason for the doctrine of privity, taken up in [Privity of Contract and Privity of Consideration].
3. Its content is set by the parties. The Act supplies default rules for what the parties did not say, on time, place and order of performance, but almost all of them yield to the agreement.
4. It is enforced by compensation, not by punishment. The court asks what the plaintiff lost, not how badly the defendant behaved. This is why section 74 refuses to enforce a penalty and gives reasonable compensation instead, worked in [Liquidated Damages and Penalty].

The history, in the order it happened

Before 1872. There was no single law of contract for India. In the Presidency towns of Calcutta, Madras and Bombay the courts applied English law. Outside them, the courts applied the personal law of the parties, Hindu or Muslim, in matters of contract as in much else, supplemented by "justice, equity and good conscience", which in practice meant English rules that the judge thought fair. The result was that the answer to a commercial question depended on where the question was asked and who was asking it.

The Commission and the Bill. The Act's own first footnote records that the Bill was based on a report of Her Majesty's Commissioners appointed to prepare a body of substantive law for India, dated 6 July 1866, that the Select Committee reported on 28 March 1872, and where the Council debates are printed. The Act is therefore a piece of deliberate codification, not an accumulation of decisions.

1 September 1872. Section 1 provides that the Act extends to the whole of India and came into force on the first day of September 1872. The words "except the State of Jammu and Kashmir" were omitted by Act 34 of 2019 with effect from 31 October 2019, so the Act now extends to the whole of India without qualification.

What was later carved out. The Act as enacted was much larger than the Act you now read. Two whole chapters have been removed and given statutes of their own:

• Sections 76 to 123, sale of goods, were repealed by the Sale of Goods Act 1930. The bare Act prints all forty eight of them with the single word "Repealed".
• Sections 239 to 266, partnership, were repealed by the Indian Partnership Act 1932. The bare Act's note reads: repealed by the Indian Partnership Act, 1932 (9 of 1932), section 73 and the Second Schedule.

This matters for reading the Act. If you look up section 100 you will find nothing, and the reason is not that the printer lost a page.

What the Act still contains, and what this paper covers. The live Act is sections 1 to 75 and sections 124 to 238. This paper is set on sections 1 to 75 only. Indemnity, guarantee, bailment and agency, sections 124 to 238, are set as a separate paper, Contract II, in Semester 4. So the Act you are studying is a little under half of the Act that exists, and the other half is not missing from your course, it is later in it.

Where Indian law departs from English law

The Act is not a translation of English law, and the differences are examined. Each is worked in its own chapter; this is the map.

If a question says "compare the Indian and English positions", the answer is one or more rows of that table, with the section and the reason.

What section 1 saves, and why it still matters

The saving in section 1 is short and is worth quoting because it is examinable:

"Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act."

Three survivals: other statutes, the usage or custom of a trade, and incidents of a contract consistent with the Act. The trade usage limb is the live one. Where a trade has a settled practice, that practice can supply a term the parties never discussed, so long as it does not contradict the Act. It is also the reason the Act can be short: it did not have to codify every commercial practice in the country, only the general principles.

A worked example

Kavita sells forty bales of raw cotton to Lalit under a written contract that says nothing about how the weight is to be checked. In the Vidarbha cotton trade there is a long established usage that the weight is taken at the buyer's ginning factory in the seller's presence, and that a shortage of up to half a per cent is ignored as ordinary moisture loss. Lalit weighs the bales alone, finds a shortage of a third of a per cent, and refuses to pay for it.

• Is the usage part of the contract? The saving in section 1 provides that nothing in the Act affects any usage or custom of trade, nor any incident of any contract, not inconsistent with the Act. The usage is not inconsistent with anything in the Act, so it stands alongside the written terms.
• What follows on the weighing? The usage requires the weight to be taken in the seller's presence. Lalit's unilateral weighing is not the check the parties are taken to have agreed to.
• What follows on the shortage? A third of a per cent falls within the tolerance the trade recognises, so on the usage there is no shortage to deduct for.
• Change one fact. The written contract says "weight to be determined solely by the buyer, and any shortage whatever to be deducted". Now the usage is inconsistent with the express terms, and an express term prevails over a usage the parties have contracted out of.
• Change it again. A statute regulating cotton marketing prescribes the method of weighing. Section 1 also saves the provisions of any Statute, Act or Regulation not hereby expressly repealed, so that statute governs, whatever the usage or the contract says.

Why this matters. The saving is the reason a contract is never only the words on the page. It is the words, plus the usages of the trade the parties deal in, plus any statute that governs them, and the Act displaces none of those unless they are inconsistent with it.

What it does NOT mean

"The Act is simply English law in Indian dress." It is not, as the table above shows in eight places. Repeating the sentence in an answer without the qualifications loses marks.

"The Act contains the whole law of contract in India." It does not. Sale of goods, partnership, negotiable instruments, insurance, carriage and specific relief all sit in separate statutes, and Module IV of this paper is one of them.

"An obligation and a contract are the same thing." A contract is one source of obligations among several. Tort, statute, trust and quasi contract are others, and the last of these is inside this very Act.

Quick revision

• Act 9 of 1872, assent 25 April 1872, in force 1 September 1872.
• Based on the Commissioners' report of 6 July 1866; Select Committee report 28 March 1872.
• Extends to the whole of India; the J&K exception was omitted by Act 34 of 2019, w.e.f. 31 October 2019.
• Contractual obligation is voluntarily assumed, owed in personam, its content set by the parties, enforced by compensation.
• Sections 76 to 123 repealed by the Sale of Goods Act 1930; sections 239 to 266 by the Indian Partnership Act 1932.
• Live Act: sections 1 to 75 and 124 to 238. This paper: sections 1 to 75.
• Section 1 saves other statutes, trade usage and custom, and consistent incidents.
• Eight known departures from English law: consideration from a stranger, past consideration, section 25, section 63, section 56, section 74, section 72, section 27.

Test yourself

1. When did the Indian Contract Act come into force? 1 September 1872, by section 1.

2. What is the essential difference between an obligation in contract and one in tort? A contractual obligation is voluntarily assumed and its content is fixed by the parties; a tortious obligation is imposed by law, owed generally, and its content is fixed by law.

3. Why does the bare Act show sections 76 to 123 as repealed? Those sections dealt with the sale of goods and were repealed by the Sale of Goods Act 1930, which now governs that subject.

4. Give three points on which the Indian Act deliberately differs from English law. Any three rows of the table: consideration may move from a stranger under section 2(d); an agreement without consideration is valid in the three cases in section 25; section 56 makes frustration a rule of positive law rather than an implied term.

5. What is a right in personam, and why does it matter in contract? A right against a particular person rather than against the world. A contractual right is of that kind, which is the foundation of the doctrine of privity.

A useful way to put it in an answer: the Contract Act is the floor of Indian commercial law, and the special statutes are rooms built on it. If the floor fails, so does the room. A contract of sale made by a person of unsound mind is no better for being a contract of sale.

The Act says this about itself in section 1's saving clause, which preserves other statutes not expressly repealed, so the special Acts and the general Act operate together rather than displacing one another.

Where the Act's assumptions have failed, and what replaced them

The Act assumes two things that are frequently untrue today: that the parties negotiate the terms, and that they are physically or textually present to each other. Neither survives modern commerce, and the response has been to add law from outside rather than to rewrite the Act.

The parties do not negotiate: standard form contracts

An insurance policy, a bank account, a mobile connection and a flat purchase agreement are all offered on the company's printed terms, take it or leave it. The Act's machinery is intact, in the sense that there is an offer and an acceptance, but its premise is gone: the consent is real only in the thinnest sense, because there was nothing to consent to except the whole document.

The responses have come from three directions, and none of them is an amendment to the Act:

1. The courts, through the doctrine that an unconscionable term in a contract between parties of grossly unequal bargaining power may be struck down as opposed to public policy under section 23. This is worked in [Standard Form Agreements].
2. The Consumer Protection Act 2019, which for the first time in Indian statute defines an unfair contract and gives consumer commissions power to declare such terms void, and which also created a Central Consumer Protection Authority.
3. Sector regulators, such as the insurance and telecom regulators, which prescribe the terms of the standard documents in their sectors.

The parties are not present to each other: electronic contracting

Section 4's rules were written for the post. They work well for letters and, as the courts have held, not at all for instantaneous communication. When contracting moved onto networks the Act had no answer to three questions: whether an electronic record satisfies a requirement of writing, whether an electronic signature satisfies a requirement of signature, and whether a contract formed by electronic means is valid at all.

None of those was answered by amending the Contract Act. They were answered by the Information Technology Act 2000, and MU's syllabus makes that Act part of this paper for exactly that reason:

• Section 4 gives legal recognition to electronic records where law requires writing.
• Section 5 gives legal recognition to electronic signatures where law requires signature.
• Section 10A provides that a contract formed through electronic means shall not be deemed unenforceable merely on that ground. It was not in the Act as enacted in 2000; it was inserted by the amendment of 2008. See [Section 10A: the Validity of Contracts Formed Through Electronic Means].
• Section 13 fixes the time and place of despatch and receipt of an electronic record, which is section 4's job done again for a new medium.

That is the cleanest illustration of the topic: the Act's principles were kept and its mechanics were replaced. Offer, acceptance and consideration still decide whether there is a contract; when and where it was made is now answered by another statute.

The gaps that remain

An answer that only praises the Act is incomplete. Three gaps are regularly identified and are worth naming:

1. No general doctrine of good faith. The Act imposes no duty to negotiate or to perform in good faith. Indian courts have read fairness into particular sections, especially section 23's public policy, but there is no general provision comparable to those in civil law systems.
2. No general rule against unfair terms in commercial contracts. The Consumer Protection Act reaches consumers. Two businesses of very unequal size are left to section 23 and the courts.
3. Privity remains a common law doctrine, not a statutory one. England legislated in 1999 to allow third parties to enforce contracts made for their benefit. India has not, and the exceptions here are judge made. See [Privity of Contract and Privity of Consideration].

The 13th Report of the Law Commission of India, on the Indian Contract Act 1872, recommended a number of changes to the Act. Very few have been enacted, which is itself a fact about the Act's contemporary position: it has survived largely by not being amended.

What HAS changed in the Act

The Act is not entirely frozen, and two changes are recent enough to be worth knowing, both to section 28, agreements in restraint of legal proceedings:

• Section 28 was substituted by Act 1 of 1997, with effect from 8 January 1997, adding a limb that strikes at a clause which extinguishes a party's rights on the expiry of a period, and not merely one that bars the remedy. The change was made because clauses drafted to extinguish rather than to bar had been escaping the section.
• Exception 3 was inserted by Act 4 of 2013, with effect from 18 January 2013, saving a guarantee agreement of a bank or a financial institution.

Both are worked in [Agreements in Restraint of Legal Proceedings]. They are useful in this topic as evidence that Parliament amends the Act when a commercial need is demonstrated, and otherwise leaves it alone.

A worked example: one transaction, four statutes

Priya buys a washing machine on a retailer's website. She clicks "I agree" to terms she has not read, pays by card, and the machine is delivered damaged.

• Indian Contract Act 1872. Was there an offer and an acceptance? The website's listing is ordinarily an invitation to treat and Priya's order is the offer, accepted by the retailer's confirmation. Sections 2(a), 2(b) and 10 decide whether there is a contract at all.
• Information Technology Act 2000. Is the contract bad because it was formed by clicking? No: section 10A. Was the record a valid one? Sections 4 and 13.
• Sale of Goods Act 1930. Do the goods answer their description and are they of merchantable quality? Conditions and warranties.
• Consumer Protection Act 2019. Is the clause excluding all liability an unfair contract term, and can she complain to a consumer commission rather than sue?

Four statutes, one transaction, and only the first of them tells you whether a contract exists. That is the contemporary relevance of the Contract Act stated as a fact rather than as praise.

What it does NOT mean

"The Act is outdated." The claim is too broad to be worth marks. The Act's mechanics for distance contracting were outdated and have been supplemented; its general principles have not been replaced by anything. Say which part, and name what replaced it.

"The Information Technology Act amended the Contract Act." It did not. It is a separate statute that supplies rules the Contract Act does not contain. The Contract Act's sections are untouched by it.

"Consumer law has replaced contract law." It has not. A consumer complaint still depends on there being a contract, and the Consumer Protection Act adds remedies and controls rather than displacing the general law.

Quick revision

• Three points: general law for all commercial statutes; adaptable principles; assumptions of equality and presence that have failed.
• The Act is the floor; Sale of Goods, Partnership, Negotiable Instruments and Arbitration are built on it.
• Standard form contracts answered by the courts (unconscionability under section 23), the Consumer Protection Act 2019 (unfair contract), and sector regulators.
• Electronic contracting answered by the Information Technology Act 2000, sections 4, 5, 10A and 13, not by amending the Contract Act.
• Gaps: no general good faith duty, no general control of unfair terms between businesses, privity still judge made.
• Amendments that did happen: section 28 substituted by Act 1 of 1997 (w.e.f. 8 January 1997); Exception 3 inserted by Act 4 of 2013 (w.e.f. 18 January 2013).

Test yourself

1. Name three ways the law has responded to standard form contracts. Judicial control of unconscionable terms under section 23; the statutory concept of an unfair contract in the Consumer Protection Act 2019; regulation of terms by sector regulators.

2. Which statute made electronic contracts enforceable, and by which section? The Information Technology Act 2000, section 10A, which was inserted by the 2008 amendment and provides that a contract formed through electronic means shall not be deemed unenforceable merely on that ground.

3. Why is the Contract Act called the general law of contract? Because the specialised commercial statutes presuppose it and do not repeat it: they regulate particular transactions but leave offer, acceptance, consideration, capacity and free consent to be decided under this Act.

4. Give one gap in the Act that is regularly criticised. The absence of any general duty of good faith in negotiation or performance.

5. Has the Act been amended recently? Yes, though sparingly. Section 28 was substituted in 1997 to reach clauses that extinguish rights, and Exception 3 saving bank and financial institution guarantees was inserted with effect from 18 January 2013.

(h) Contract.

"An agreement enforceable by law is a contract."

(i) Voidable contract.

"An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract."

(j) A contract which becomes void.

"A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable."

Broken down: the five clauses that carry the marks

Six of the ten are straightforward once read. Four repay close attention, because examiners build questions out of their exact wording.

Clause (a): "signifies" and "with a view to obtaining the assent"

Two conditions, and both are tested:

1. The person must signify his willingness, that is, make it known by some act or omission. A private intention is not a proposal.
2. He must do so with a view to obtaining the assent of the other. This is the phrase that separates an offer from an invitation to treat, from a mere statement of price and from an advertisement. If the statement was not made in order to get the other person's agreement to it, it is not a proposal. See [Proposal: What an Offer Is, and What Only Looks Like One].

Note also that a proposal can be to abstain from doing something. A promise not to compete, not to sue, or not to build above two floors is as much a proposal as a promise to deliver goods.

Clause (d): three phrases that change Indian law

Clause (d) is the most heavily loaded definition in the Act, and three of its phrases each produce a rule that differs from English law.

1. "At the desire of the promisor." The act must be done because the promisor asked for it. Something done voluntarily, or at a third person's request, is not consideration however much it benefits the promisor.
2. "The promisee or any other person." Consideration may move from a stranger to the promise. English law requires it to move from the promisee. This is the root of the Indian exception to privity, taken up in [Privity of Contract and Privity of Consideration].
3. "Has done or abstained from doing." The past tense is deliberate. Past consideration is good consideration in India, where English law generally treats it as no consideration at all.

Clause (d) also lists three forms consideration may take: an act, an abstinence, or a promise.

Clause (e): "forming the consideration for each other"

This is the phrase that makes consideration essential to an agreement, not merely to a contract. A promise unsupported by consideration is not an agreement under the Act at all, which is why section 25 is worded as an exception.

Clause (i): "at the option of one or more of the parties"

A voidable contract is valid until the party entitled to avoid it chooses to do so. It is not a weaker kind of void agreement; it is a good contract with a hole in it that only one side can use. The chapters on coercion, undue influence, fraud and misrepresentation all end in section 19, which makes the contract voidable at the option of the party whose consent was so caused.

Void, voidable, valid: the distinction, from clauses (g), (h), (i) and (j)

The Act never uses the phrase "void contract" for something void from the start. It says void agreement. Getting this vocabulary right is worth easy marks and getting it wrong is a visible error.

A worked example

Anil writes to Bharat: "I will sell you my Nano car for one lakh rupees if you let me use your godown free for a month." Bharat replies agreeing.

• Anil signified his willingness to do something (sell the car) with a view to obtaining Bharat's assent: proposal, clause (a).
• Bharat signified his assent: acceptance, clause (b), and the proposal became a promise.
• Anil is the promisor, Bharat the promisee, clause (c).
• Bharat's use of the godown was given at Anil's desire, and Anil's promise to sell was given at Bharat's: each promise is the consideration for the other, clause (d).
• Two promises forming the consideration for each other are reciprocal promises, clause (f), and together they are an agreement, clause (e).
• If the requirements of section 10 are met, the agreement is a contract, clause (h).
• If it later turns out that Bharat obtained Anil's consent by fraud, the contract is voidable at Anil's option, clause (i), by force of section 19.
• If the car is destroyed before delivery and performance becomes impossible, the contract becomes void, clause (j), by force of section 56.

Every one of the ten definitions has now been used on one set of facts. That is the reason to learn them together.

What it does NOT mean

"A void contract and a voidable contract are two degrees of the same thing." They are not related in that way. A voidable contract is fully valid and binding unless and until the aggrieved party avoids it; if he does not, it is enforced like any other. A void agreement never had legal force.

"Consideration must come from the promisee." Clause (d) says "the promisee or any other person" in terms. This is one of the clearest departures from English law in the Act.

"An agreement is any arrangement between two people." Under clause (e) it is not: there must be promises forming the consideration for each other. An arrangement with nothing given on either side does not reach the definition.

Quick revision

• Section 2 defines: (a) proposal, (b) acceptance and promise, (c) promisor and promisee, (d) consideration, (e) agreement, (f) reciprocal promises, (g) void agreement, (h) contract, (i) voidable contract, (j) contract which becomes void.
• (a): signifies willingness, with a view to obtaining the assent of the other; may be to do or to abstain.
• (d): at the desire of the promisor; the promisee or any other person; act, abstinence or promise; past tense allows past consideration.
• (e): promises forming the consideration for each other.
• (i): enforceable at the option of one party only.
• The Act says void agreement, never void contract, except in clause (j) where a contract ceases to be enforceable.

Test yourself

1. Define consideration, with the section. Section 2(d): 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, abstinence or promise is called a consideration for the promise.

2. Which two words in clause (a) separate an offer from an invitation to treat? "With a view to obtaining the assent" of the other person. A statement not made in order to obtain assent is not a proposal.

3. A's consent was obtained by coercion. What is the status of the contract? Voidable at A's option under section 2(i) read with section 19; valid and enforceable until A avoids it.

4. Can consideration move from a stranger to the contract in India? Yes. Section 2(d) says "the promisee or any other person", unlike English law.

5. What is the difference between clause (g) and clause (j)? Clause (g) describes an agreement that was never enforceable. Clause (j) describes a contract that was enforceable and later ceased to be, as where performance becomes impossible under section 56.

Void agreement against voidable contract

This is the distinction that carries the most marks in the whole introductory topic.

Two points repay attention.

A voidable contract is a real contract. Until the aggrieved party avoids it, it binds both sides. If a buyer whose consent was obtained by fraud chooses to affirm the contract and sue for damages, he may. The option is his alone: the party who committed the fraud cannot escape.

The moment of avoidance matters. Because a voidable contract is valid until avoided, rights can validly pass under it in the meantime. That is why the table's third party row reads as it does, and it is the point on which a problem question about a sale of goods obtained by fraud usually turns.

The other three words

Illegal agreement

An illegal agreement is void, but voidness is not all that happens to it. Section 23 declares unlawful the consideration or object which is forbidden by law, defeats the provisions of any law, is fraudulent, involves injury to person or property, or is immoral or opposed to public policy.

The extra consequence is contamination. A transaction collateral to an illegal agreement is itself tainted, while a transaction collateral to a merely void agreement is not. This is precisely the distinction the courts have drawn between a wagering agreement, which section 30 makes void but which is not forbidden, and an agreement that is actually unlawful under section 23. It is worked in [Wagering Agreements] and in [Unlawful Consideration and Object].

Unenforceable contract

A contract that is perfectly valid but cannot be enforced by a court because of a procedural or technical defect. The classic cases are a claim on which the limitation period has expired, and a document that the law required to be stamped or registered and which was not. The right survives; the remedy is barred. If the defect is cured, for example by paying the stamp duty and penalty, the contract can be enforced.

That is also why section 25(3) exists: a written and signed promise to pay a time barred debt is binding, even though the original debt could no longer be sued upon. See [Agreements Without Consideration Are Void, Unless].

Contract which becomes void

Section 2(j) covers a contract that was enforceable and later ceased to be. The main route is section 56, supervening impossibility, and the consequences are governed by section 65, which requires a person who has received any advantage under a contract that becomes void to restore it or to make compensation. See [Impossibility of Performance, and Frustration].

A worked example

Sameer, aged 17, agrees to sell his motorcycle to Farida for forty thousand rupees, and Farida pays ten thousand in advance.

• Sameer is a minor, so he is not competent to contract under section 11. The agreement is void, not voidable. Farida has no option to enforce it, because voidness is not something either party chooses.
• Farida's ten thousand rupees are dealt with under section 65 and the law on a minor's position, taken up in [The Minor's Position: Necessaries, Restitution and Ratification].

Change the facts. Sameer is 25, and he agrees to sell the motorcycle because Farida threatens to publish a photograph unless he does.

• Sameer's consent was caused by coercion under section 15, so under section 19 the contract is voidable at Sameer's option.
• If Sameer avoids it, section 64 requires him to restore the ten thousand rupees, because a party rescinding a voidable contract must restore any benefit he received.
• If Sameer would rather keep the bargain and sue for something else, he may: the contract is valid until he avoids it.

Change them again. Sameer, aged 25, agrees to sell the motorcycle to Farida so that she can use it to transport stolen goods, to Sameer's knowledge.

• The object is unlawful under section 23, so the agreement is void and illegal. Neither can sue, and a separate loan Farida took from a third person who knew the purpose may itself be tainted.

What it does NOT mean

"Void and voidable are two words for the same thing." They are opposites in the only respect that matters: a void agreement never binds anybody, a voidable contract binds everybody until one particular person says otherwise.

"An unenforceable contract is void." It is not. It is valid, and it may become enforceable if the technical defect is cured. Calling it void gives away the possibility of curing it.

"All void agreements are illegal." Only the reverse is true. A wagering agreement is void under section 30 and is not forbidden by law, which is why an agreement collateral to it can stand.

Quick revision

• Agreement, s.2(e); contract, s.2(h); contract = agreement + enforceability, and section 10 lists what enforceability requires.
• Void agreement, s.2(g): enforceable by nobody, never was a contract, restoration under s.65.
• Voidable contract, s.2(i): valid until the aggrieved party avoids it, restoration under s.64, third parties in good faith protected before avoidance.
• Voidable causes are defects in consent, ss.15 to 18 through s.19. Void causes are missing essentials, ss.11, 23, 25, 29, 30.
• Illegal agreement: void plus taint on collateral transactions.
• Unenforceable contract: valid but barred by a technical defect such as limitation, stamping or registration.
• Contract becomes void, s.2(j), chiefly through s.56, with s.65 governing restoration.

Test yourself

1. Every agreement is not a contract, but every contract is an agreement. Explain. An agreement under section 2(e) is any set of promises forming the consideration for each other. It becomes a contract under section 2(h) only if it is enforceable, which section 10 makes depend on free consent, competency, lawful consideration and object, and the absence of an express declaration of voidness. So contracts are the enforceable subset of agreements.

2. A obtains B's consent by fraud. Can B sue on the contract? Yes. The contract is voidable at B's option under section 19. B may affirm it and sue for breach, or avoid it, in which case section 64 requires him to restore any benefit received.

3. Distinguish a void agreement from an illegal agreement in one respect that matters. Both are unenforceable, but transactions collateral to an illegal agreement are tainted, while transactions collateral to a merely void agreement may be enforced.

4. What is an unenforceable contract? Give an example. A valid contract that a court cannot enforce because of a technical defect, such as a claim barred by limitation or a document that required stamping and was not stamped. Curing the defect can restore enforceability.

5. Which section covers a contract that becomes void, and what follows? Section 2(j). The main route is section 56, and section 65 then requires any person who received an advantage under the contract to restore it or make compensation.

To these the courts add a fifth, which is not in the Act in terms but which the whole structure assumes: an intention to create legal relations. A social or domestic arrangement is not treated as a proposal at all, which is why an invitation to dinner is not actionable. In India the point is usually reached through section 10's requirement of an agreement and through the absence of consideration, rather than as a separate doctrine, but the result is the same.

Kinds of offer

Express and implied. Section 9. An express proposal is made in words, spoken or written. An implied proposal is made by conduct: a bus running a route holds itself out as ready to carry, a boatman putting out his hand offers to ferry.

Specific and general. A specific offer is made to a definite person and can be accepted only by that person. A general offer is made to the world, and is accepted by anyone who comes forward and performs the condition. It is not an absurdity to say a contract can be made with the world at large: as section 8 provides, performance of the conditions of a proposal is itself an acceptance, so the contract is made with whoever performs. A reward advertised for the return of a lost dog is the standard example.

Cross offers. Two people post identical offers to each other, neither knowing of the other's. There is no contract, because neither statement was made with a view to obtaining assent to the other's proposal, and neither is an acceptance of anything.

Counter offer. A reply that varies the terms is not an acceptance but a new proposal, and it destroys the original offer, which cannot then be accepted. See [Acceptance Must Be Absolute and Unqualified].

Standing or open offer. An offer to supply goods as and when required over a period. Each order placed is an acceptance of that much, and the offer may generally be revoked as to the future.

Offer against invitation to treat: the four standard situations

The last row is worth its own sentence, because it is a favourite. If A telegraphs "will you sell me your property, telegraph lowest cash price" and B replies "lowest cash price ninety hundred pounds", B has answered the second question only. He has stated a price. He has not signified willingness with a view to obtaining assent, so there is no proposal for A to accept.

Tenders deserve a note because they recur in Indian problem questions. A notice inviting tenders is an invitation. Each tender submitted is an offer. The acceptance is the award of the contract. It follows that a tenderer may ordinarily withdraw before acceptance, and that the person inviting tenders is not bound to accept the lowest.

A worked example

A furniture showroom displays a dining set with a tag reading "Rs 40,000". Ashok points at it and says "I will take it at that price". The manager says the tag is a misprint and the price is 60,000.

• The display with a price tag is an invitation to treat. The showroom has not signified willingness with a view to obtaining Ashok's assent; it has invited him to make an offer.
• Ashok's statement at the counter is the proposal, section 2(a).
• The manager's refusal means there is no acceptance, so no promise under section 2(b), so no agreement and no contract. Ashok cannot compel a sale at 40,000.

Now change the facts. The showroom publishes a notice: "The first ten customers who present this coupon on Sunday will be sold a dining set at Rs 40,000." Ashok presents the coupon on Sunday and is the third customer.

• This notice is not an invitation but a general offer: it signifies willingness on stated terms with a view to obtaining assent, and it fixes the number so it is certain.
• Ashok's presenting the coupon is performance of the conditions of the proposal, which is an acceptance under section 8, without any separate communication.
• There is a contract, and the showroom is bound.

What it does NOT mean

"An advertisement can never be an offer." It can. The question is always whether the maker signified willingness with a view to obtaining assent. An advertisement of goods at a price is ordinarily an invitation; an advertisement promising a reward on stated conditions is ordinarily an offer, because it is intended to be acted on without further negotiation.

"An offer must be made to a particular person." It need not. A general offer to the world is good, and it is accepted by performance under section 8.

"An offer must be in writing or in words." Section 9 says otherwise. A proposal made otherwise than in words is implied and is equally a proposal.

"Once made, an offer stands until accepted." It does not. Section 6 lists four ways it is revoked, including the lapse of the time prescribed or of a reasonable time. See [Revocation of Proposals and Acceptances].

Quick revision

• Section 2(a): signifies willingness, to do or abstain, with a view to obtaining the assent of the other.
• Section 3: communication by any act or omission intended to communicate, or which has the effect of communicating.
• Section 9: express if in words, implied if otherwise.
• Requirements: signified, willingness either way, made to obtain assent, certain, and made in a context of legal relations.
• Kinds: express, implied, specific, general, standing; cross offers make no contract; a counter offer destroys the original.
• Invitation to treat: shop display, advertisement of goods, auctioneer's call for bids, tender notice, a bare quotation of price.
• Reward advertisements and conditional general offers are offers, accepted by performance under section 8.

Test yourself

1. Define a proposal and identify the words that matter most. Section 2(a): signifying to another a willingness to do or abstain from doing anything, with a view to obtaining the assent of that other. The italicised limb is what separates an offer from an invitation to treat.

2. A shop displays a shirt at Rs 500 and refuses to sell at that price. Any remedy in contract? No. The display is an invitation to treat; the customer's request to buy is the offer, and the shop is free to refuse. There is no acceptance and so no contract.

3. What is a cross offer, and does it make a contract? Two identical offers posted to each other in ignorance of the other. There is no contract, because neither is an acceptance of the other.

4. Can an offer be made to the whole world? Yes. A general offer is accepted by anyone who performs the stated conditions, and section 8 makes performance of the conditions an acceptance.

5. A invites tenders; B submits the lowest. Must A accept it? No. The notice inviting tenders is an invitation to treat and B's tender is the offer. A is not bound to accept any tender, and B may ordinarily withdraw before acceptance.

Section 3 supplies the meaning of communicating, by any act or omission intended to communicate, or which has the effect of communicating.

Broken down: the table the whole topic reduces to

Three observations that turn this table into marks.

The proposal has one rule, not two. A proposal is communicated when it reaches the knowledge of the offeree, and never before. So an offer posted and lost in the post was never communicated at all, and an offer cannot be accepted by someone who does not know it exists.

Acceptance has two different moments, and they are the heart of the section. Posting binds the proposer. Arrival binds the acceptor. Between posting and arrival, therefore, the proposer is bound and the acceptor is not. That is not an accident or a drafting slip; it is the policy in paragraph 1 made concrete, and it is what section 5 then builds on.

Revocation follows the ordinary pattern, and the same asymmetry: despatch binds the sender, receipt binds the recipient.

The Act's own illustrations

Section 4 comes with illustrations, and they are the cleanest possible revision aid because they are the statute itself:

• A proposes by letter to sell a house to B at a certain price. The communication of the proposal is complete when B receives the letter.
• B accepts A's proposal by a letter sent by post. The communication of the acceptance is complete as against A when the letter is posted, and as against B when the letter is received by A.
• A revokes his proposal by telegram. The revocation is complete as against A when the telegram is despatched, and as against B when B receives it. B revokes his acceptance by telegram: complete as against B when despatched, and as against A when it reaches him.

A worked example

On 1 June A posts a letter from Mumbai offering to sell his car to B in Pune for three lakh rupees. B receives it on 3 June and posts an acceptance the same day. The letter reaches A on 5 June. On 4 June, before the acceptance arrives, A posts a letter revoking the offer, which reaches B on 6 June.

Work it moment by moment:

• 1 June. Nothing has happened. The proposal is not communicated merely by posting.
• 3 June. The proposal is communicated: it came to B's knowledge, section 4 first paragraph.
• 3 June, on posting. The acceptance is complete as against A, because it was put in a course of transmission out of B's power. A is now bound.
• 4 June. A posts a revocation. Under section 5 a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. That moment passed on 3 June. A's revocation is too late and is ineffective.
• 5 June. The acceptance is complete as against B, so B is bound too.
• 6 June. The revocation reaches B and does nothing.

There is a contract, made on 3 June, and A is in breach if he does not deliver.

Now reverse one fact. A posts his revocation on 2 June and it reaches B on the morning of 3 June, before B posts. The revocation is complete as against B when it comes to his knowledge, which is before he accepted. There is no contract, because the offer no longer existed when B purported to accept it.

What it does NOT mean

"A contract is made when the acceptance is posted." Only as against the proposer. As against the acceptor the acceptance is complete on arrival, which is why the acceptor may revoke in the meantime under section 5. Saying flatly that the contract is complete on posting loses the whole of the acceptor's position.

"Section 4 applies to all forms of communication." It applies where there is a gap between despatch and receipt. Where communication is instantaneous, as on a telephone, the reasoning breaks down and the contract is made where the acceptance is heard. That is [Contracts Between Absent Parties: the Post, the Telephone and the Inbox], and for electronic records the question is answered by section 13 of the Information Technology Act 2000.

"A proposal is communicated when it is sent." It is not. It is communicated when it comes to the knowledge of the offeree, and that is the one moment in the section with no second limb.

"Mental acceptance is enough." It is not. Section 3 requires an act or omission by which the party intends to communicate, or which has the effect of communicating. A decision to accept, kept to oneself, is nothing. Silence is dealt with in [Acceptance Must Be Absolute and Unqualified].

Limits and criticism

Two criticisms are worth naming.

The rule favours the acceptor at the offeror's expense. An offeror can be bound by an acceptance he has never seen, and indeed by one that never arrives at all, since the section fixes completion at posting and does not require delivery. The answer is that he chose the medium and can protect himself by stipulating that acceptance takes effect only on receipt, which parties routinely do.

The section is silent on the loss of the letter. It says the acceptance is complete as against the proposer on posting, and does not qualify that by arrival. So on the language, a lost acceptance still binds the proposer while never binding the acceptor, which is an uncomfortable result and one reason commercial contracts displace the rule expressly.

Quick revision

• Proposal: complete when it comes to the knowledge of the offeree. One rule only.
• Acceptance: complete against the proposer on being put in course of transmission out of the acceptor's power; against the acceptor when it reaches the proposer's knowledge.
• Revocation: complete against the sender on despatch; against the recipient on receipt.
• Between posting and arrival: the proposer is bound, the acceptor is not.
• Section 3: communication by any act or omission intended to communicate or having that effect.
• The rule exists to protect the acceptor and to place the risk of the post on the party who chose it.
• Parties may and often do contract out of it.

Test yourself

1. When is the communication of a proposal complete? When it comes to the knowledge of the person to whom it is made, section 4.

2. B posts an acceptance on Monday; it reaches A on Thursday. When is A bound, and when is B? A is bound on Monday, when the letter was put in course of transmission out of B's power. B is bound on Thursday, when it came to A's knowledge.

3. A posts a revocation after B has posted the acceptance but before it arrives. Effective? No. Section 5 permits revocation only before the communication of the acceptance is complete as against the proposer, and that was complete on posting.

4. Can the acceptor revoke his acceptance? Yes, at any time before the communication of the acceptance is complete as against him, that is, before the letter reaches the proposer, section 5. A faster medium must overtake the letter.

5. Why does the Act give acceptance two moments of completion? To place the risk of delay or loss in transmission on the offeror, who chose to negotiate at a distance, while leaving the acceptor free to withdraw until the offeror actually learns of the acceptance.

Broken down: the two windows in section 5

The Act's own illustration to section 5 states both:

A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter communicating it reaches A, but not afterwards.

Note the words "before or at the moment". The Act gives the benefit of the exact instant to the party revoking.

The practical consequence for the acceptor is that a revocation must overtake the acceptance. If B posts an acceptance on Monday and wants to withdraw, a letter of revocation posted on Tuesday will arrive after the acceptance and is useless. A telegram, telephone call or email that reaches A before the letter does will work, because the acceptance is not complete against B until A knows of it.

The four modes of revocation in section 6

(1) Notice of revocation by the proposer

The notice must be communicated, and by section 4 a revocation is complete as against the person to whom it is made when it comes to his knowledge. So an unposted or undelivered revocation revokes nothing. A revocation must also come from the proposer or from someone authorised by him; the Act says "by the proposer".

(2) Lapse of time

If the offer says "this offer is open until 5 p.m. on Friday", it dies at 5 p.m. on Friday without anyone doing anything. If it fixes no time, it dies after a reasonable time, and what is reasonable depends on the subject matter. An offer to sell perishable goods or shares in a volatile market lapses quickly; an offer to sell land does not.

(3) Failure to fulfil a condition precedent

Where the proposal requires something to be done before acceptance, failure to do it revokes the proposal. An offer to sell goods on credit "subject to your furnishing a bank guarantee first" lapses if no guarantee is furnished.

(4) Death or insanity of the proposer

Read this clause carefully, because its condition is easy to miss. The proposal is revoked by death or insanity only if the fact comes to the knowledge of the acceptor before acceptance. So an acceptor who accepts in genuine ignorance of the proposer's death can, on the words of the Act, form a contract binding on the estate. That is a deliberate choice: the Act protects the party who acted honestly on an offer that appeared to be alive.

Two further points that the section does not state and that students should not invent:

• The death or insanity of the ACCEPTOR is not mentioned. Section 6 speaks only of the proposer.
• Rejection is not in the list either, but a rejection communicated to the proposer plainly ends the offer, and a counter offer operates as a rejection. That is section 7 territory and is taken up in [Acceptance Must Be Absolute and Unqualified].

A worked example

On 1 August Kavita offers by letter to sell her shop to Deepak for fifty lakh rupees, saying "this offer is open for one month". Deepak receives it on 3 August.

(a) On 10 August Kavita posts a letter revoking the offer. It reaches Deepak on 12 August. Deepak had posted his acceptance on 11 August. The revocation is complete against Deepak only when it comes to his knowledge, on 12 August. The acceptance was complete against Kavita when posted, on 11 August. The acceptance came first, so the revocation is too late and there is a contract.

(b) Same facts, but the revocation reaches Deepak on 10 August and he posts his acceptance on 11 August. The offer was revoked on 10 August. There was nothing left to accept on 11 August, and there is no contract. The promise to keep the offer open for a month does not prevent this, because a bare promise to keep an offer open is itself without consideration and is not binding. This is one of the sharper points in the topic: an offer said to be open for a month may still be withdrawn within the month unless the offeree has paid for the option.

(c) Deepak posts his acceptance on 11 August and immediately regrets it. He telephones Kavita on 12 August, before the letter arrives on 13 August. The acceptance is not complete against Deepak until it comes to Kavita's knowledge on 13 August. His telephone revocation on 12 August is within the window, and it is effective. There is no contract.

(d) Kavita dies on 9 August. Deepak, not knowing, posts his acceptance on 11 August. Section 6(4) revokes a proposal by the death of the proposer only if the fact comes to the knowledge of the acceptor before acceptance. Deepak did not know. On the language of the Act the proposal was not revoked, and the acceptance is good.

What it does NOT mean

"An offer expressed to be open for a fixed period cannot be withdrawn within it." In India it can, unless the offeree has given consideration for the promise to keep it open, in which case there is a separate contract of option. Note that Uttar Pradesh has added an Explanation to section 5 by a State amendment which makes such a proposal irrevocable within the stated time, but that is a local amendment and is not the general law.

"An acceptance once posted is irrevocable." It is not. Section 5 gives the acceptor a window until the letter reaches the proposer, and it is real: a faster communication that overtakes the letter will revoke it.

"Death always ends an offer." Only the proposer's death or insanity is mentioned, and only where the acceptor knew of it before accepting.

"A revocation is effective when sent." Only as against the sender. As against the person to whom it is made it is complete when it comes to his knowledge, section 4, and that is the moment that decides whether it beat the acceptance.

Quick revision

• Section 5, proposal: revocable until the acceptance is complete against the proposer, that is, until it is posted.
• Section 5, acceptance: revocable until the acceptance is complete against the acceptor, that is, until it is received. A revocation must overtake it.
• The illustration says "before or at the moment", so the exact instant favours the revoking party.
• Section 6, four modes: notice; lapse of time prescribed or reasonable; failure of a condition precedent; death or insanity of the proposer known to the acceptor before acceptance.
• A revocation is complete against the offeree only when it comes to his knowledge.
• A promise to keep an offer open is not binding without consideration.

Test yourself

1. Until when may a proposal be revoked? Until the communication of its acceptance is complete as against the proposer, that is, until the acceptance is put in course of transmission out of the acceptor's power, section 5.

2. List the four modes in which a proposal is revoked. Notice of revocation by the proposer; lapse of the time prescribed or of a reasonable time; failure of the acceptor to fulfil a condition precedent; death or insanity of the proposer coming to the acceptor's knowledge before acceptance. Section 6.

3. A offers to keep an offer open for ten days and withdraws on the fourth. Is the withdrawal good? Yes, generally. A bare promise to keep an offer open is without consideration and does not bind, so A may revoke within the period, provided the revocation reaches B before B posts his acceptance.

4. Can an acceptance be revoked, and how? Yes, at any time before it comes to the proposer's knowledge. In practice the revocation must travel by a faster medium so as to reach the proposer before or with the acceptance.

5. The offeror dies after posting his offer and the offeree accepts in ignorance. Contract? On the words of section 6(4), yes. The proposal is revoked by death only if the fact came to the acceptor's knowledge before acceptance.

This is the single most examined proposition in the section. The classic illustration: A offers to sell a farm for 1,000 pounds; B replies offering 950; A refuses; B then purports to accept the original 1,000. There is no contract, because B's counter offer ended the original offer.

A mere enquiry is not a counter offer

There is an important qualification that students miss. Asking a question about the offer is not the same as varying it. "Would you consider delivery in two instalments?" is a request for information; "I accept, delivery to be in two instalments" is a counter offer. The test is whether the answer purports to alter the terms or merely to explore them.

A conditional acceptance is not an acceptance

"I accept subject to contract", "I accept subject to my solicitor's approval", or "I accept subject to a formal agreement being drawn up" leave something still to be agreed, so nothing is concluded. The parties remain in negotiation.

Contrast an acceptance that is complete in itself but records an intention to record the bargain formally later. That is a contract, and the later document is evidence of it. The distinction is one of construction, and the words "subject to" are the usual signal.

Acceptance must be of the whole proposal

A proposal cannot be accepted in part. If A offers 100 tonnes of wheat at a price and B says "I accept 50 tonnes", B has made a counter offer.

Broken down: limb two, the manner of acceptance

Limb two has three steps, and the third is the one that carries marks.

1. If the proposal prescribes no manner, the acceptance must be in a usual and reasonable manner. What is usual depends on the trade and on how the offer itself was made.
2. If the proposal prescribes a manner, acceptance ought to be in that manner.
3. If it is not, the proposal does not automatically fail. The proposer has a choice. He may, within a reasonable time after the acceptance is communicated to him, insist on the prescribed manner. If he does not, he is taken to accept the acceptance, and there is a contract.

So a deviation in the manner of acceptance produces not a nullity but an option, and the option is lost by silence. That is the opposite of the position under a counter offer, and the two are easy to confuse:

Silence is not acceptance

Section 7 requires the acceptance to be expressed, and section 3 requires an act or omission by which the party intends to communicate or which has the effect of communicating. It follows that an offeror cannot impose a contract by saying that silence will be taken as consent.

"If I hear nothing from you by Friday I shall assume you agree" imposes no duty on the offeree to reply, and his silence is not an acceptance. The rule protects people from being bound by inaction, and it is why unsolicited goods sent with a note saying that failure to return them will be treated as purchase create no contract.

There are two apparent exceptions worth stating precisely, because neither is really an exception to the rule:

• Where the offeree, by his conduct, does something that amounts to acceptance, that is acceptance by conduct under sections 8 and 9, not acceptance by silence.
• Where a previous course of dealing between the parties makes silence the understood mode of assent, the silence is being read as conduct in the light of the dealings, not as bare silence.

A worked example

Ramesh writes to Sunita: "I offer to sell you my flat for eighty lakh rupees. Reply by registered post by 30 September."

(a) Sunita replies by registered post on 20 September: "I accept, provided you also leave the air conditioners." This varies the terms. It is a counter offer under limb one, it destroys Ramesh's offer, and Sunita cannot afterwards accept the original.

(b) Sunita replies by registered post: "I accept. Would you be willing to leave the air conditioners?" The acceptance is absolute; the second sentence is an enquiry. There is a contract, and the question about the air conditioners is a separate request Ramesh may refuse.

(c) Sunita replies by email on 20 September, accepting in full. Ramesh reads it and says nothing until 5 October, when he says he required registered post. The manner was prescribed and not followed, so limb two applies. Ramesh could have insisted on registered post within a reasonable time after the acceptance was communicated. He did not, and a fortnight's silence after reading it is unlikely to be reasonable. He accepts the acceptance, and there is a contract.

(d) Ramesh's letter had said: "If I do not hear from you by 30 September, I shall treat the flat as sold to you." Sunita says nothing. There is no contract. Silence cannot be turned into acceptance by the offeror's own stipulation.

What it does NOT mean

"Any variation ends the negotiation for good." It ends the original offer. The counter offer is itself a live proposal, and the original offeror may accept it. Negotiation continues; what is gone is the power to accept the earlier terms.

"An acceptance in the wrong manner is void." It is not. Section 7(2) gives the proposer an option to insist on the prescribed manner, and silence within a reasonable time loses the option.

"Asking a question rejects the offer." It does not, provided the question does not purport to change the terms.

"An offeror can make silence into acceptance." He cannot, and the attempt is a standard fact pattern.

Quick revision

• Section 7: acceptance must be absolute and unqualified, and in a usual and reasonable manner unless a manner is prescribed.
• A counter offer is a new proposal and destroys the original offer.
• A mere enquiry is not a counter offer.
• Acceptance "subject to contract" or subject to approval is conditional and concludes nothing.
• A proposal must be accepted as a whole.
• Wrong manner: the proposer may insist within a reasonable time; if he does not, he accepts the acceptance.
• Silence is not acceptance, and the offeror cannot stipulate that it is.

Test yourself

1. State the two requirements in section 7. The acceptance must be absolute and unqualified, and it must be expressed in some usual and reasonable manner unless the proposal prescribes the manner.

2. B answers A's offer with different terms, A refuses, and B then accepts the original terms. Contract? No. B's reply was a counter offer, which destroyed A's original offer, so there was nothing left for B to accept.

3. The offer required acceptance by telegram; the offeree accepted by letter and the offeror said nothing for a month. What follows? Under section 7(2) the offeror could have insisted on the prescribed manner within a reasonable time. Having failed to do so, he accepts the acceptance and there is a contract.

4. Can an offeror provide that silence will amount to acceptance? No. Acceptance must be expressed, and the offeree is under no obligation to reply. Silence is not acceptance.

5. Distinguish a counter offer from a mere enquiry. A counter offer purports to alter the terms of the proposal and operates as a rejection of it. An enquiry seeks information or explores a variation without purporting to alter the terms, and leaves the offer alive.

1. The performance must be of the conditions of the proposal, that is, the act must be the act the offeror asked for. Something similar is not enough.
2. The performance must be with knowledge of the offer. A person who finds a lost dog and returns it, learning of the reward only afterwards, has not accepted anything: he did not act in response to a proposal. This follows from section 2(a)'s requirement that the proposal be made with a view to obtaining assent, and from the very idea of acceptance, which is assent to something known.

General offers: how section 8 works in practice

A general offer is a proposal made to the world at large on stated terms. It is not accepted by everyone who reads it; it is accepted by whoever performs.

Three features follow:

• The contract is made with one person, not with the world. The offer is to the world; the contract is with the performer.
• Communication of acceptance is dispensed with, because the offeror asked for an act and not for a reply.
• The offer may be revoked, but the revocation should be given the same publicity as the offer. Once someone has begun performance on the faith of the offer, revocation becomes problematic, and the fairer view is that the offeror cannot withdraw once performance has begun in reliance.

A continuing general offer may be accepted more than once. An advertisement promising a sum to anyone who uses a product as directed and still falls ill is accepted afresh by each person who does so, so long as the offer stands.

Express and implied promises: section 9

Section 9 divides promises by how they were made, not by how strong they are.

• Express: made in words, spoken or written. "I will pay you 500 rupees for this table."
• Implied: made otherwise than in words, that is, by conduct. Boarding a bus, taking a seat in a restaurant, handing goods to a shopkeeper at the till.

An implied promise is a real promise and is as binding as an express one. The Act's own scheme depends on it: a general offer accepted by performance under section 8 produces an implied promise under section 9.

Two cautions:

An implied promise is not the same as a quasi contract. In an implied contract there is a genuine agreement, inferred from conduct rather than words. In a quasi contract under sections 68 to 72 there is no agreement at all, and the law imposes the obligation. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

An implied promise is not a term implied by a court into an existing contract. Section 9 is about how the promise was made; implying a term is about filling a gap in a promise already made.

A worked example

A pharmaceutical company advertises: "We will pay one lakh rupees to any person who contracts influenza after using our inhaler three times daily for two weeks as directed. We have deposited five lakh rupees with our bank to show our sincerity."

(a) Meena reads the advertisement, buys the inhaler, uses it as directed for a fortnight, and contracts influenza. The advertisement is a general offer, not an invitation to treat: it states terms with precision, it is intended to be acted on without further negotiation, and the deposit shows an intention to be bound. Meena's use of the inhaler as directed is performance of the conditions of the proposal, which is an acceptance under section 8. No communication was required. There is a contract and she may claim.

(b) The company says it never received any notice of acceptance from Meena. Section 8 answers this. Where a proposal invites performance, performance is the acceptance, and the offeror has by the form of his offer dispensed with separate communication.

(c) Ravi had already been using the inhaler for a month before the advertisement appeared, and continues. Performance must be referable to the proposal and made with knowledge of it. Conduct that began before the offer existed was not assent to it, and the fortnight's use relied on must be use in response to the offer.

(d) The company withdraws the advertisement after Meena has used the inhaler for ten days. The revocation should have the same publicity as the offer, and it is at best doubtful whether an offeror may revoke against a person who has begun performance in reliance on it. Meena has the stronger position.

What it does NOT mean

"Every advertisement is a general offer." Most are invitations to treat. An advertisement becomes an offer when it states terms capable of acceptance without further negotiation and shows an intention to be bound. See [Proposal: What an Offer Is, and What Only Looks Like One].

"Section 8 abolishes the need for communication generally." It does not. It applies where the proposal invites performance. In an ordinary bilateral negotiation the acceptance must still be communicated under sections 3 and 4.

"An implied contract is a weaker contract." It is not. Section 9 classifies by mode, not by force.

"A person who performs without knowing of the offer can claim." He cannot claim on the contract, because he did not accept anything. He may in a proper case have a claim under section 70, which is a different route with different requirements.

Quick revision

• Section 8: performance of the conditions of a proposal, or acceptance of consideration offered with it, is an acceptance.
• No separate communication is needed where the offer invites performance.
• Performance must be of the conditions asked for, and made with knowledge of the offer.
• General offer: made to the world, contract made with the performer, revocation should be given equal publicity.
• Section 9: in words means express, otherwise than in words means implied. An implied promise binds equally.
• Implied contract is not quasi contract: the first rests on real agreement inferred from conduct, the second on no agreement at all.

Test yourself

1. How is a general offer accepted? By performing the conditions of the proposal, which section 8 makes an acceptance without any separate communication.

2. A finds B's lost watch and returns it, learning only afterwards that B had advertised a reward. Can A claim it? Not on the contract. Acceptance requires assent to a known proposal, and A did not act in response to the offer. Any claim would have to be made elsewhere.

3. Distinguish an express promise from an implied promise. Section 9: a promise made in words is express; one made otherwise than in words, that is by conduct, is implied. Both are equally binding.

4. Is a contract with the world at large possible? The offer is to the world; the contract is with whoever performs the conditions. So the contract is with one identified person, and there is no absurdity.

5. What is the second limb of section 8? The acceptance of any consideration for a reciprocal promise offered along with a proposal is itself an acceptance of that proposal.

Why it matters here. The decision separates the Act's two regimes. Section 4's despatch rule is confined to communications with a transmission gap, chiefly post and telegram. Where communication is instantaneous, the general principle governs: a contract is made when and where the acceptance is brought to the knowledge of the proposer. It is also the direct authority on jurisdiction, which is what the case was actually about.

Note the date. The judgment was delivered on 30 August 1965 and is reported as AIR 1966 SC 543. The report year is not the decision year, and citing it as a 1966 decision of the Court is a small inaccuracy worth avoiding.

The two regimes side by side

The last two rows are the practical consequences and are often what a problem question turns on. On a telephone there is no window for the acceptor to change his mind, because acceptance and its communication are simultaneous. And if the line goes dead in the middle of the words of acceptance, the acceptor has not been heard, so there is no contract until he says it again and is heard.

The third regime: electronic records

Neither section 4 nor Kedia answers the question for an email, a web form or a message on an application, because those are neither instantaneous in the telephone sense nor a course of transmission in the postal sense. A message may sit in a server for minutes or days.

Parliament answered it separately. Section 13 of the Information Technology Act 2000 fixes the time and place of despatch and receipt of an electronic record, and it is part of MU's syllabus for this very reason. In outline:

• Despatch occurs when the record enters a computer resource outside the control of the originator.
• Receipt, where the addressee has designated a computer resource for the purpose, occurs when the record enters that designated resource; if it is sent to a different resource of the addressee, receipt occurs when the addressee retrieves it. Where no resource is designated, receipt occurs when the record enters a computer resource of the addressee.
• Place is deemed to be the originator's place of business for despatch and the addressee's place of business for receipt, whatever the location of the machines.

The last point is the important one. The location of the server is irrelevant. An email accepted on a server in another country is still despatched and received at the parties' places of business. Section 13 is worked in full in [Attribution, Acknowledgment and Despatch of Electronic Records].

So the paper contains three answers to one question, and a complete answer names all three:

1. Post or telegram: section 4 of the Contract Act.
2. Telephone or other instantaneous speech: the general principle, Kedia.
3. Electronic record: section 13 of the Information Technology Act 2000.

A worked example

Anand, in Mumbai, offers by telephone to sell 500 bags of cement to Bhaskar in Nashik. Bhaskar says "I accept" and Anand hears him.

• The communication is instantaneous, so section 4's despatch rule does not apply. Following Kedia, the acceptance is complete where it is heard, so the contract is made in Mumbai, and a suit for breach may be brought there.
• Bhaskar cannot revoke his acceptance, because there was no interval between speaking and being heard.

Change the medium. Bhaskar posts a letter of acceptance from Nashik.

• Section 4 applies. The acceptance is complete against Anand when the letter is posted in Nashik, so the contract is made in Nashik.
• Bhaskar may revoke at any time before the letter reaches Anand, under section 5, provided his revocation gets there first.

Change it again. Bhaskar sends an email to the address Anand designated for orders.

• Section 13 of the Information Technology Act applies. Despatch is when the email leaves Bhaskar's control; receipt is when it enters Anand's designated computer resource. The place of receipt is deemed to be Anand's place of business in Mumbai, whatever server the message passed through.

Notice that the three media give three different answers on where the contract was made, on identical commercial facts. That is the point of the topic.

What it does NOT mean

"Kedia overruled section 4." It did not. Section 4 is untouched and continues to govern the post and the telegram. Kedia decided that its reasoning does not extend to instantaneous communication.

"The contract is always made where the acceptor is." That is true for the post and false for the telephone. On the telephone it is made where the acceptance is heard, which is the offeror's location.

"An email is instantaneous, so Kedia applies." The Act does not leave it to analogy. Section 13 of the Information Technology Act provides the rule, and it turns on designated computer resources and places of business, not on speed.

"The location of the server decides where an electronic contract is made." Section 13 says the opposite in terms: despatch and receipt are deemed to occur at the parties' places of business.

Quick revision

• Post and telegram: section 4, acceptance complete against the proposer on posting; contract made where posted; acceptor may revoke until arrival.
• Telephone: Kedia, AIR 1966 SC 543, decided 30 August 1965. Acceptance complete where heard; contract made at the offeror's place; no window to revoke.
• Kedia was a jurisdiction case: the Ahmedabad court had jurisdiction because the acceptance was heard there.
• The Court's formula: it is the acceptance and the intimation of that acceptance that make the contract, by some external manifestation the law regards as sufficient.
• Electronic records: section 13 of the Information Technology Act 2000, turning on designated computer resources; place is the parties' places of business, not the server's.

Test yourself

1. Where is a contract made when the acceptance is spoken on a telephone? Where the acceptance is heard by the offeror, following Kedia. There is no transmission gap, so section 4's despatch rule does not apply.

2. Why was the point important in Kedia? Because it decided jurisdiction. The offer was spoken at Ahmedabad and the acceptance at Khamgaon, and the Court held the contract was made at Ahmedabad where the acceptance was heard, so the Ahmedabad court could try the suit.

3. Can an acceptor revoke an acceptance given on the telephone? No. Acceptance and its communication are simultaneous, so there is no interval in which section 5's window could operate.

4. Which provision governs the time and place of an electronic acceptance? Section 13 of the Information Technology Act 2000, which fixes despatch and receipt by reference to computer resources, and deems the place to be the parties' places of business.

5. The line drops midway through the words of acceptance. Contract? No. The acceptance must be heard, and an acceptance the offeror did not hear has not been communicated. The acceptor must repeat it.

A standard form contract passes every one of those tests on its face. The customer was not coerced; he was not deceived; he agreed to the very document put before him. And yet, in any real sense, he consented to the transaction and not to the terms. He wanted a bank account, and the eleven pages of conditions came with it.

The law therefore cannot solve the problem through the doctrine of free consent, which is designed for defects in a particular bargain, not for the structure of a market. It has had to reach for other tools.

The four protections

(a) Reasonable notice of the terms

A term is part of the contract only if the party affected had reasonable notice of it before or at the time of contracting. Three rules follow, and they are the ones most often applied:

• Notice must come before or at the time of contracting. A condition displayed inside a hotel room, or printed on a receipt handed over after payment, comes too late.
• A document must be of a kind a reasonable person would expect to contain terms. A ticket or a receipt may be treated differently from a signed agreement.
• The more unusual or onerous the term, the more it must be brought home. A clause excluding all liability for negligence requires more prominence than a clause fixing a delivery window.

(b) Strict construction, and the contra proferentem rule

Where a clause is ambiguous, it is construed against the party who drafted it. That party chose the words and could have made them clear. The rule bites hardest on exemption clauses, which are read narrowly: a clause excluding liability for breach of contract will not readily be read as excluding liability for negligence.

(c) Section 23 and unconscionability

This is the most powerful of the four and the one MU's syllabus is really reaching for. Section 23 makes the consideration or object of an agreement unlawful, and the agreement void, where the court regards it as opposed to public policy.

Indian courts have used that head to strike down a term in a contract between parties of grossly unequal bargaining power where the term is unconscionable, that is, so one sided that it could only have been obtained by the imposition of superior strength. The doctrine is usually stated with two conditions: gross inequality of bargaining power, and a term that no reasonable person would have accepted with a real choice. It has been applied with particular force to employment contracts of instrumentalities of the State and to service conditions imposed on employees.

The authorities on this are identified in authorities/cases.json and are not named here until they have been read in full, which is the rule this book follows for every case.

(d) Statute

• The Consumer Protection Act 2019 defines an unfair contract and empowers consumer commissions to declare such terms void. Its list includes demanding excessive security deposits, imposing a disproportionate penalty for breach, refusing early repayment, and unilateral termination without reasonable cause. It also created a Central Consumer Protection Authority with power to act against unfair trade practices generally.
• Sector regulators prescribe the terms of standard documents in insurance, telecommunications, banking and real estate, which converts the problem from one of contract into one of regulation.

A worked example

Nikhil parks his car in a paid car park. The attendant hands him a token. On the reverse of the token, in small print, is: "The management shall not be liable for any loss or damage to the vehicle howsoever caused, including by the negligence of its employees." An attendant reverses another car into Nikhil's.

Work it in the order the four protections come:

1. Was there reasonable notice? The token was handed over after Nikhil had driven in and paid. If the contract was concluded at the barrier, a term on a token given afterwards came too late and is not part of the contract at all. That answer alone may decide the case.
2. If it was in time, how is it construed? As an exemption clause it is read strictly and against the car park. Here, though, the clause names negligence expressly, so the construction argument is weaker than it usually is.
3. Is it unconscionable? Consider the inequality: a customer with no ability to negotiate, a clause excluding all liability including for the operator's own negligence, and no alternative if he wants to park. This is the strongest ground, and it proceeds under section 23 as a term opposed to public policy.
4. Is Nikhil a consumer? He paid for a service, so the Consumer Protection Act 2019 is available, with the unfair contract provisions and a cheaper forum.

Note the order. Notice first, construction second, unconscionability third, statute fourth. A student who begins with unconscionability has skipped the two arguments most likely to win.

What it does NOT mean

"A standard form contract is not a real contract." It is. There is a proposal, an acceptance and consideration, and it is enforceable. What may fail is a particular term, not the contract.

"Any harsh term is void." It is not. Commercial parties are entitled to strike hard bargains. The doctrine requires gross inequality of bargaining power as well as a term no reasonable person with a choice would accept.

"Signing means you are bound by everything." Signature is powerful evidence of assent, and the notice arguments are much harder after a signature. But it is not an absolute answer, because unconscionability under section 23 goes to the enforceability of the term and not to whether it was agreed.

"The Consumer Protection Act has solved the problem." It reaches consumers. Two businesses of very unequal size are left with section 23 and the common law rules.

Limits and criticism

The Indian position is judge made and therefore uneven. There is no general statutory control of unfair terms in contracts between businesses, of the kind some other systems have. Section 23's public policy head is elastic, which is a strength when a court wants to intervene and a weakness when a party wants to predict whether it will. And the notice rules were developed for tickets and receipts, and sit awkwardly on a page of terms behind a hyperlink, which is the subject of [Clickwrap and Shrink Wrap Contracts].

Quick revision

• Standard form agreement, also contract of adhesion: terms drafted in advance, offered take it or leave it, no negotiation.
• The Act's machinery is satisfied; its assumption of equal bargaining power is not.
• Four protections: reasonable notice, strict construction against the drafter, unconscionability under section 23 as opposed to public policy, and statute.
• Notice must be given before or at the time of contracting; the more onerous the term, the greater the notice required.
• Unconscionability needs gross inequality of bargaining power and a term no reasonable person with a choice would accept.
• Consumer Protection Act 2019: unfair contract, consumer commissions, Central Consumer Protection Authority.
• Argue in order: notice, construction, unconscionability, statute.

Test yourself

1. What is a standard form agreement? One whose terms are settled in advance by one party and offered to the other without any opportunity to negotiate, typical of mass transactions such as insurance, banking and transport.

2. Why can the doctrine of free consent not solve the problem? Because consent under sections 13 and 14 is present on the face of it: the customer agreed to the very document offered. The difficulty is structural inequality, which those sections were not designed to address.

3. State the rule about notice of an onerous term. It must be brought to the other party's attention before or at the time of contracting, and the more unusual or onerous the term the greater the notice required.

4. On what statutory basis may an unconscionable term be struck down? Section 23, as an agreement whose object or consideration the court regards as opposed to public policy, and which is therefore void.

5. Name two statutory responses to standard form contracts. The Consumer Protection Act 2019, which defines an unfair contract and allows consumer commissions to declare such terms void; and sector regulation prescribing the terms of standard documents in insurance, telecom, banking and real estate.

Section 2, the definitions chapter, sits in front of all of them, and this chapter works it once for the four that follow.

The definitions that carry the rest of the topic

Section 2 is long, and only a handful of its clauses are needed for contract law. These are worked here and cited afterwards.

Electronic record. Data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche. Every email, web form entry, database row and message is one.

Data. A representation of information, knowledge, facts, concepts or instructions which are being prepared or have been prepared in a formalised manner, and is intended to be processed, is being processed or has been processed.

Electronic signature. Authentication of an electronic record by a subscriber by means of an electronic technique specified in the Second Schedule, and includes a digital signature. Note the two layers: digital signature is one species of electronic signature, and the wider term was introduced by the 2008 amendment so that the Act would not be tied to one technology.

Digital signature. Authentication of an electronic record by a subscriber by means of an electronic method or procedure in accordance with section 3, which is the asymmetric crypto system and hash function method.

Originator. A person who sends, generates, stores or transmits any electronic message, or causes it to be sent, generated, stored or transmitted, but does not include an intermediary.

Addressee. A person who is intended by the originator to receive the electronic record, but does not include any intermediary.

Intermediary. With respect to any particular electronic record, any person who on behalf of another receives, stores or transmits that record or provides any service with respect to it. Internet service providers, web hosting providers, search engines, online marketplaces and payment sites are all named as intermediaries in the definition.

Computer resource. A computer, computer system, computer network, data, computer database or software. This is the phrase section 13 uses, and it is deliberately wide.

Cyber security. Protecting information, equipment, devices, computer, computer resource, communication device and information stored therein from unauthorised access, use, disclosure, disruption, modification or destruction. Inserted by the 2008 amendment.

The originator and addressee definitions repay attention because both exclude the intermediary. That exclusion is what makes it possible to say that a contract by email is between the two businesses and not with the mail provider, and it is the foundation of the safe harbour the Act gives intermediaries elsewhere.

What the Act does NOT apply to

The Act's First Schedule, previously the exclusions in section 1(4), keeps certain documents outside electronic form. In substance, the excluded categories are:

• a negotiable instrument other than a cheque;
• a power of attorney;
• a trust;
• a will and any other testamentary disposition;
• any contract for the sale or conveyance of immovable property or any interest in such property.

This list is examinable and is frequently the answer to a problem. A sale deed for a flat cannot be executed electronically under this Act, and a will cannot be made by email. For everything else, the recognition provisions apply.

The Central Government has power to amend the Schedule by notification, so the list is capable of change.

How the two Acts fit together

The single most important thing to understand about this topic is that the Information Technology Act does not create a separate law of contract. It creates recognition.

So an e-contract with a minor is void under section 11 of the Contract Act, and the Information Technology Act has nothing to say about it. An e-contract for an unlawful object is void under section 23. Everything that makes a paper contract bad makes an electronic one bad in exactly the same way.

A worked example

A software company in Pune emails a proposal to a client in Chennai. The client's purchasing manager replies from her official address: "Approved, please proceed." The company begins work. The client later says there was no contract because nothing was signed.

• Is there a proposal and an acceptance? Contract Act, sections 2(a) and 2(b). Yes, on the ordinary rules.
• Is the reply attributable to the client? IT Act section 11: an electronic record is attributed to the originator if sent by him, or by a person who had authority to act on his behalf, or by a system programmed to operate automatically. A purchasing manager sending from her official address falls in the second limb.
• Does the absence of a signature matter? Only if some law required the contract to be signed. For an ordinary commercial services contract none does. If one did, section 5 would answer it, provided an electronic signature was affixed.
• Is the contract bad because it was made by email? Section 10A says it is not.
• Where and when was it made? Section 13.

The client's objection fails, and it fails on the Contract Act, with the Information Technology Act removing the technical points.

Change the subject matter to the sale of a plot of land. Now the exclusion applies: a contract for the sale or conveyance of immovable property is outside the Act, and the parties must use a written and registered document.

What it does NOT mean

"The Information Technology Act made e-contracts valid." It removed the objections to them. They were not clearly invalid before; they were vulnerable to three technical arguments, and those arguments are now closed.

"Everything can be done electronically now." The First Schedule excludes negotiable instruments other than cheques, powers of attorney, trusts, wills and contracts for the sale or conveyance of immovable property.

"Digital signature and electronic signature mean the same thing." Digital signature is one kind of electronic signature, using the asymmetric crypto system under section 3. The wider term was introduced in 2008 so the Act would not depend on a single technology.

"An email provider is a party to the contract." The definitions of originator and addressee both exclude the intermediary.

Quick revision

• MU sets IT Act ss.2 to 16. The Contract Act still decides whether there is a contract.
• The Act removes three objections: not in writing (s.4), not signed (s.5), made electronically (s.10A).
• Assent 9 June 2000; the 2008 amendment came into force 27 October 2009, substituting "electronic signature" for "digital signature" and inserting s.10A.
• Key definitions: electronic record, data, electronic signature (digital signature is a species of it), originator, addressee, both excluding the intermediary, computer resource, cyber security.
• Excluded documents: negotiable instrument other than a cheque, power of attorney, trust, will, contract for sale or conveyance of immovable property.
• Chapter II recognises, Chapter IV attributes and times, Chapter V secures.

Test yourself

1. Why does MU put the Information Technology Act inside a contract paper? Because the Indian Contract Act contains nothing about electronic contracting, and the recognition of electronic records, electronic signatures and electronically formed contracts comes from sections 4, 5 and 10A of that Act.

2. Distinguish a digital signature from an electronic signature. An electronic signature is authentication of an electronic record by a technique specified in the Second Schedule and includes a digital signature. A digital signature is the particular method under section 3 using an asymmetric crypto system and hash function.

3. Name three documents that cannot be made in electronic form under this Act. Any two or three of: a negotiable instrument other than a cheque, a power of attorney, a trust, a will or other testamentary disposition, and a contract for the sale or conveyance of immovable property.

4. Who is an intermediary, and why does the definition matter? A person who on behalf of another receives, stores or transmits an electronic record or provides any service with respect to it. It matters because the definitions of originator and addressee both exclude intermediaries, so the contract is between the parties and not with the service provider.

5. An e-contract is made with a person of unsound mind. Which Act decides its fate? The Indian Contract Act, section 12 read with section 11. The Information Technology Act deals with the medium, not with capacity.

Sections 3 and 3A: what an electronic signature is

Section 3 was the original provision and deals with the digital signature: authentication of an electronic record by affixing a digital signature, effected by the use of an asymmetric crypto system and hash function which envelop and transform the initial record into another record. In outline, the signatory holds a private key which is used to create the signature, and anyone may verify it using the corresponding public key. The two keys form a key pair, and section 3 provides that the private key and the public key are unique to the subscriber and constitute a functioning key pair.

Section 3A was inserted by the 2008 amendment and widens the concept. A subscriber may authenticate any electronic record by an electronic signature or electronic authentication technique which is considered reliable and is specified in the Second Schedule. The section then states when such a technique is considered reliable, in substance:

• the signature creation data or authentication data are, within the context in which they are used, linked to the signatory and to no other person;
• they were, at the time of signing, under the control of the signatory and of no other person;
• any alteration to the electronic signature after affixing is detectable;
• any alteration to the information made after its authentication is detectable; and
• it fulfils such other conditions as may be prescribed.

The Central Government may add to or omit from the Second Schedule by notification, provided no technique is added unless it is reliable.

Why the 2008 change matters. The Act as enacted in 2000 tied recognition to one technology, the asymmetric crypto system. Technology moved. Section 3A converts the Act from a technology specific statute into a technology neutral one: any technique that satisfies the reliability tests and is listed in the Schedule qualifies. The same amendment substituted "electronic signature" for "digital signature" throughout, which is why an older textbook's wording differs from the Act you are reading.

Section 5: legal recognition of electronic signatures

"Where any law provides that information or any other matter shall be authenticated by affixing the signature or any document shall be signed or bear the signature of any person, then, notwithstanding anything contained in such law, such requirement shall be deemed to have been satisfied, if such information or matter is authenticated by means of electronic signature affixed in such manner as may be prescribed by the Central Government."

The Explanation defines "signed" for this purpose as affixing a person's handwritten signature or any mark on any document, with "signature" construed accordingly. So the section is measuring the electronic method against the traditional one, and deeming the traditional requirement met.

Note the qualification: affixed in such manner as may be prescribed. Section 5 is not satisfied by any electronic mark whatever. It requires the prescribed manner, which links back to sections 3 and 3A and to the rules made under the Act.

A worked example

A supplier and a buyer conclude a contract for the supply of packaging material entirely by email, each confirming the terms from an official address. No signature of any kind is affixed. A dispute arises and the buyer says the contract is unenforceable.

Take the objections one at a time:

• "It was not in writing." First ask: does any law require this contract to be in writing? For an ordinary contract for the sale of goods, no. So section 4 is not even needed. If the contract had been one required by some statute to be in writing, section 4 would answer it, provided the emails are accessible so as to be usable for subsequent reference, which ordinary stored email is.
• "It was not signed." Again ask first whether any law requires it to be signed. For an ordinary commercial contract, no. Section 5 would answer it if some law did, but only if an electronic signature was affixed in the prescribed manner. Typing your name at the end of an email is not an electronic signature under section 3A, because it is not a technique specified in the Second Schedule and does not satisfy the reliability tests.
• "It was made electronically." Section 10A answers this directly, and is the subject of the next chapter but one.

Now change one fact: the parties used an arbitration clause. An arbitration agreement is required by the Arbitration and Conciliation Act 1996 to be in writing, and that Act itself provides that an agreement contained in an exchange of communications including electronic means satisfies the requirement. Section 4 points the same way, and the emails qualify because they are accessible for subsequent reference.

What it does NOT mean

"An electronic record is writing." Section 4 does not say so. It says a requirement of writing is deemed satisfied. The distinction matters wherever some other consequence turns on the word.

"Any electronic record satisfies section 4." Only one that is accessible so as to be usable for a subsequent reference. A record that cannot be retrieved later fails.

"Typing your name is an electronic signature." It is not, unless it satisfies section 3A and is a technique specified in the Second Schedule, affixed in the prescribed manner.

"Digital signature and electronic signature are interchangeable." Digital signature is one species, using the asymmetric crypto system under section 3. Electronic signature is the genus, introduced by section 3A in 2008.

"Sections 4 and 5 make all documents electronically executable." The excluded documents in the Schedule, including wills, powers of attorney, trusts, negotiable instruments other than cheques and contracts for the sale or conveyance of immovable property, remain outside.

Quick revision

• Section 4: requirement of writing deemed satisfied if the matter is (a) rendered or made available in electronic form and (b) accessible so as to be usable for a subsequent reference.
• Section 5: requirement of signature deemed satisfied if authenticated by an electronic signature affixed in the prescribed manner; the Explanation defines "signed" as a handwritten signature or any mark.
• Section 3: digital signature, by asymmetric crypto system and hash function; private key creates, public key verifies, the two are a functioning key pair.
• Section 3A: electronic signature generally, if reliable and specified in the Second Schedule. Reliability: linked to and controlled by the signatory alone, alterations to the signature and to the information detectable.
• Section 3A was inserted by the 2008 amendment, in force 27 October 2009, making the Act technology neutral.
• Both sections work by deeming, so identify the law imposing the requirement first.

Test yourself

1. State the two conditions in section 4. The information must be rendered or made available in an electronic form, and it must be accessible so as to be usable for a subsequent reference.

2. Which is the wider term, digital signature or electronic signature? Electronic signature. Digital signature is one species of it, using the asymmetric crypto system and hash function under section 3.

3. What makes an electronic signature reliable under section 3A? That the signature creation data are linked to the signatory and to no other person, were under his control at the time of signing, that any alteration to the signature or to the information after authentication is detectable, and that any other prescribed conditions are met.

4. A contract is concluded by email and neither party signs. Is it unenforceable? Not on that ground, unless some law required the contract to be signed. For an ordinary commercial contract none does, and section 10A in any event prevents the contract being treated as unenforceable merely because electronic means were used.

5. Why does section 4 speak of a requirement being "deemed to have been satisfied" rather than saying that an electronic record is writing? To avoid redefining "writing" across the whole statute book. Parliament left the other Acts untouched and provided that their requirement is treated as met, which is why both sections begin "Where any law provides".

Note the same drafting technique as section 4: deeming, and a requirement that the electronic form be the prescribed one. A citizen cannot invent his own format.

Section 6A: delivery of services by service providers

Inserted by the 2008 amendment. It allows the appropriate Government, for the purposes of Chapter III and for efficient delivery of services to the public through electronic means, to authorise any service provider to set up, maintain and upgrade the computerised facilities and to perform such other services as it may specify.

The section defines a service provider to include any individual, private agency, company, partnership, sole proprietor firm or any other body or agency which has been granted permission by the appropriate Government to offer services through electronic means, whether or not they are its own services.

Two features matter:

• The Government may authorise the service provider to collect, retain and appropriate service charges, notwithstanding anything in the rules about depositing money into the Consolidated Fund. This is what makes a commercially operated common service centre possible.
• The Government must specify the scale of service charges, and the service provider may not charge more.

Section 6A is the statutory basis on which much of Indian e-governance delivery is outsourced, and it is worth naming for that reason.

Sections 7 and 7A: retention and audit

Section 7 provides that where any law requires documents, records or information to be retained for a specific period, that requirement is satisfied if they are retained in electronic form, provided three conditions are met:

1. the information is accessible so as to be usable for a subsequent reference (the same condition as section 4);
2. the electronic record is retained in the format in which it was originally generated, sent or received, or in a format which can be demonstrated to represent accurately the information originally generated, sent or received; and
3. details which identify the origin, destination, date and time of despatch or receipt of the record are available in it.

The section adds that the third condition does not apply to information automatically generated solely to enable a record to be despatched or received, that is, routing data. And it does not apply where any law expressly provides for retention in the form of electronic records.

Section 7A, inserted in 2008, is one sentence and closes a gap: where any law requires the audit of documents, records or information, that provision applies also to documents, records or information processed and maintained in electronic form. Without it, an entity could have argued that a statutory audit requirement did not reach its electronic books.

Sections 8 and 9: the Electronic Gazette, and the limit

Section 8. Where any law provides for a rule, regulation, order, bye law, notification or any other matter to be published in the Official Gazette, that requirement is satisfied if it is published in electronic form. The section adds a proviso of real practical importance: where the Gazette is published both in printed and in electronic form, the date of publication shall be the date of the Gazette which was first published in any form.

Section 9 is the limitation on the whole chapter, and its marginal note states it exactly: "Sections 6, 7 and 8 not to confer right to insist document should be accepted in electronic form."

Nothing contained in sections 6, 7 and 8 shall confer a right upon any person to insist that any Ministry or Department of the Central Government or the State Government or any authority or body established by or under any law or controlled or funded by the Central or State Government should accept, issue, create, retain and preserve any document in the form of electronic records or effect any monetary transaction in the electronic form.

This is the section that decides the character of the Act. The scheme is enabling, not mandatory. If a department chooses to accept electronic filings, section 6 makes them legally effective. If it does not, a citizen has no right under this Act to compel it. Whether such a right exists elsewhere, under some other statute or in administrative law, is a different question and not one this Act answers.

Section 10 completes the chapter by empowering the Central Government to make rules prescribing the type of electronic signature, the manner and format of affixing it, the procedure identifying the person affixing it, control processes to ensure integrity, security and confidentiality, and any other matter necessary to give legal effect to electronic signatures.

A worked example

A municipal corporation accepts building plan applications only over the counter in paper form. Sunil submits his application by email, relying on section 6, and the corporation rejects it.

• Does section 6 help him? Section 6 operates where the filing is effected "by such electronic form as may be prescribed by the appropriate Government". If no electronic form has been prescribed for this filing, section 6 has nothing to bite on.
• Can he insist? Section 9 answers directly: nothing in sections 6, 7 or 8 confers a right on any person to insist that an authority should accept a document in the form of electronic records. So under this Act, no.
• What if the corporation HAS notified an online portal, and Sunil files through it, and the corporation later says the application was not properly made? Now section 6 does apply: the requirement of filing in a particular manner is deemed satisfied, and the objection fails.

Change the facts. A statute requires the corporation to preserve building plan records for thirty years. It scans and destroys the paper.

• Section 7 permits retention in electronic form, but only if the records are accessible for subsequent reference, retained in the original format or one demonstrably accurate, and carry the details of origin, destination and date and time. A scan that meets those conditions satisfies the retention requirement; one stored in an unreadable format does not.

What it does NOT mean

"E-governance is compulsory under the Act." Section 9 says the opposite in terms. The chapter enables; it does not compel.

"Section 9 means electronic filings can be refused even where a portal exists." It means no right to insist is conferred. Once the appropriate Government has prescribed an electronic form, section 6 deems the requirement satisfied by filing in that form, and the authority cannot then treat the filing as no filing.

"Any scanned copy satisfies section 7." Only one meeting all three conditions, including the retention of origin, destination and date and time details.

"Publication in the Electronic Gazette is a secondary publication." Under the proviso to section 8, where both forms are published, the date of publication is the date of the Gazette first published in any form, so the electronic publication may well be the operative one.

Quick revision

• Section 6: filings, licences and payments with government in prescribed electronic form; requirement deemed satisfied.
• Section 6A (2008): appropriate Government may authorise a service provider to deliver services and collect service charges at a specified scale.
• Section 7: retention in electronic form, on three conditions: accessible for subsequent reference; original or demonstrably accurate format; origin, destination, date and time details available. Routing data excepted.
• Section 7A (2008): audit requirements extend to documents maintained electronically.
• Section 8: publication in the Electronic Gazette; where both forms exist, the date is that of the Gazette first published in any form.
• Section 9: sections 6, 7 and 8 confer no right to insist. The scheme is enabling, not mandatory.
• Section 10: rule making power on electronic signatures.

Test yourself

1. What does section 9 provide, and why does it matter? That sections 6, 7 and 8 confer no right on any person to insist that a government body accept, issue, create, retain or preserve a document electronically, or effect a monetary transaction electronically. It matters because it makes the whole chapter enabling rather than mandatory.

2. State the three conditions in section 7. The information must be accessible so as to be usable for a subsequent reference; the record must be retained in the format in which it was originally generated, sent or received, or in a demonstrably accurate one; and details identifying the origin, destination and date and time of despatch or receipt must be available.

3. What was inserted by section 6A, and what does it permit? The 2008 amendment inserted it. It permits the appropriate Government to authorise a service provider to set up and maintain electronic service delivery facilities and to collect, retain and appropriate service charges at a scale the Government specifies.

4. Where a rule is published in both printed and electronic Gazettes, which date counts? The date of the Gazette which was first published in any form, under the proviso to section 8.

5. Does section 7A create a new audit obligation? No. It extends existing statutory audit requirements to documents, records and information processed and maintained in electronic form, closing the argument that such an obligation reached only paper.

Broken down

Four elements, and each is worth a line in an answer.

1. "Where in a contract formation." The section is about formation, that is, about how the contract came into being. It says nothing about performance, breach or remedies, which remain governed by the Contract Act.
2. "The communication of proposals, the acceptance of proposals, the revocation of proposals and acceptances." All three stages are covered. So an offer made by email, accepted by a web form and revoked by a message are each within it. The phrase "as the case may be" means the section applies to whichever of these actually happened electronically; it does not require that all of them did. A proposal made on paper and accepted by email is still within the section.
3. "Expressed in electronic form or by means of an electronic record." The two limbs are wide, and "electronic record" carries its section 2 definition.
4. "Shall not be deemed to be unenforceable solely on the ground that such electronic form or means was used." This is the operative words and the two most important are "solely" and "unenforceable".

What "solely" does

The protection is confined to the single objection that electronic means were used. Every other ground of invalidity is untouched. A contract made by email with a minor is still void under section 11 of the Contract Act. A contract made by web form for an unlawful object is still void under section 23. Consent obtained by fraud in an email is still voidable under section 19.

The word does a second job as well. It means the section cannot be used to validate a transaction that the Information Technology Act itself excludes from electronic form. A will or a contract for the sale of immovable property is outside the Act's Schedule, so the electronic form is not merely the sole ground of objection; it is an objection the Act has itself preserved.

What "unenforceable" does

The section says the contract shall not be deemed unenforceable. It does not say the contract is valid, and it does not create a contract where none exists. If there was no proposal, or no acceptance, or no consideration, there is nothing for section 10A to save. The section removes a defence; it does not supply an agreement.

How section 10A works with the Contract Act

This is the point most worth making in an answer, and it is the same structure as the rest of the topic.

Section 10A is a shield, not a source. The contract is made under the Contract Act; section 10A stops one particular attack on it.

A worked example

Aditi, a graphic designer, receives a message on a business platform from a company asking her to design a logo for forty thousand rupees. She replies "Agreed, I will deliver in ten days." She delivers, and the company refuses to pay, saying there was never a binding contract because nothing was signed and everything was on an app.

• Proposal. The company's message signified willingness to pay for work, with a view to obtaining Aditi's assent. Contract Act, section 2(a).
• Acceptance. Aditi's reply was absolute and unqualified, section 7, and was communicated, sections 3 and 4.
• Consideration. Each promise is the consideration for the other, section 2(d) and 2(e).
• Section 10 requirements. Competent parties, free consent, lawful consideration and object. Satisfied.
• The company's objection. That the contract is unenforceable because it was formed on an application. Section 10A answers it exactly: the contract shall not be deemed unenforceable solely on that ground.
• The absence of signature. Only relevant if a law required this contract to be signed. None does. Section 5 would answer it if one did.

Aditi succeeds.

Now change one fact: Aditi is seventeen. Section 10A does not help her, because the objection is no longer that the contract was made electronically. Her agreement is void under section 11 of the Contract Act, and the medium is irrelevant.

Change it again: the contract is for the sale of a flat, concluded by email. A contract for the sale or conveyance of immovable property is excluded from the Information Technology Act by its Schedule, so section 10A does not apply at all.

What it does NOT mean

"Section 10A makes all electronic contracts valid." It does not. It removes one objection. Everything the Contract Act requires must still be present, and the excluded documents remain excluded.

"Section 10A replaced section 4 of the Contract Act." It did not. Communication is still governed by the Contract Act, and for electronic records the timing is fixed by section 13 of the Information Technology Act, not by section 10A.

"Section 10A was part of the Act from 2000." It was inserted by the 2008 amendment, in force from 27 October 2009. A textbook that describes the Act as enacted will not contain it, which is the single most common error in revision material on this topic.

"Section 10A requires a signature." It says nothing about signatures. Signature requirements, where they exist, are dealt with by section 5.

Quick revision

• Section 10A, inserted by the 2008 amendment, in force 27 October 2009.
• Covers communication of proposals, acceptance, and revocation of proposals and acceptances, "as the case may be", so any one of them being electronic is enough.
• Effect: the contract shall not be deemed unenforceable SOLELY on the ground that electronic form or means was used.
• "Solely" preserves every other ground: minority, unlawful object, absence of consideration, defective consent.
• "Unenforceable" means it removes a defence; it does not create a contract or validate an excluded document.
• The excluded documents in the Schedule, including wills, powers of attorney, trusts, negotiable instruments other than cheques and contracts for sale or conveyance of immovable property, remain outside.
• It is a shield, not a source: formation is still governed by the Indian Contract Act.

Test yourself

1. Reproduce the effect of section 10A in one sentence. Where the communication of proposals, their acceptance, or the revocation of proposals and acceptances is expressed in electronic form or by an electronic record, the contract is not to be deemed unenforceable solely on the ground that electronic means were used.

2. When did section 10A come into force, and why does the date matter? 27 October 2009, having been inserted by the Information Technology (Amendment) Act 2008. It matters because the section did not exist in the Act as enacted in 2000, so any account of the 2000 Act will not contain it.

3. A contract is concluded by email with a person of unsound mind. Does section 10A save it? No. The word "solely" confines the section to the objection that electronic means were used. Incapacity under section 12 of the Contract Act is a different objection and remains fatal.

4. Does section 10A create a contract? No. It removes a defence. If any essential of a contract under the Indian Contract Act is missing, there is nothing for section 10A to operate on.

5. Can a will be made under section 10A? No. A will is one of the documents excluded from electronic form by the Act's Schedule, so the section does not apply.

(c) Sent by an information system programmed to operate automatically. This is the limb that makes modern commerce possible. An automated confirmation, an algorithmic order, or a bot that accepts a booking is attributed to the person who programmed the system or caused it to be programmed. There is no human mind behind the individual message and the Act does not require one.

Limb (c) is worth pausing on for contract law. It means a proposal or an acceptance can be generated by a machine and still be the act of a party, which is what allows automated web ordering to produce contracts at all.

Section 12: acknowledgment of receipt

Section 12 has three sub-sections and they build on each other.

Section 12(1). Where the originator has not stipulated that acknowledgment be given in a particular form or by a particular method, an acknowledgment may be given by:

• (a) any communication by the addressee, automated or otherwise; or
• (b) any conduct of the addressee sufficient to indicate to the originator that the electronic record has been received.

So acknowledgment is informal by default. An automated read receipt counts; so does conduct, such as beginning to perform.

Section 12(2). Where the originator has stipulated that the electronic record shall be binding only on receipt of an acknowledgment, then unless acknowledgment is received the record is treated as though it had never been sent.

This is a strong provision and it is the one to remember. The originator can make his own message conditional, and if the condition fails the message is a nullity.

Section 12(3). Where the originator has not stipulated that the record be binding only on acknowledgment, and the acknowledgment has not been received within the time specified or agreed, or within a reasonable time if none is specified, the originator may give notice to the addressee stating that no acknowledgment has been received and specifying a reasonable time by which it must be received; and if no acknowledgment is received within that time, he may, after giving notice, treat the electronic record as though it had never been sent.

Note the difference between (2) and (3). Under (2) the record fails automatically. Under (3) it fails only if the originator gives notice and the further time expires. The two must not be run together, and telling them apart is a reliable examination point.

Section 13: time and place of despatch and receipt

This is the section that matters most for contract formation, and it is the electronic analogue of section 4 of the Indian Contract Act.

Despatch, section 13(1). Save as otherwise agreed between the originator and the addressee, despatch occurs when the record enters a computer resource outside the control of the originator. The test is loss of control, which mirrors the Contract Act's "out of the power of the acceptor" in section 4.

Receipt, section 13(2). Save as otherwise agreed, the time of receipt is determined as follows:

• Where the addressee has designated a computer resource for the purpose:
• receipt occurs when the record enters the designated computer resource; but
• if the record is sent to a computer resource of the addressee that is not the designated one, receipt occurs when it is retrieved by the addressee.
• Where the addressee has not designated a computer resource along with specified timings, receipt occurs when the record enters a computer resource of the addressee.

The designated resource rule is the practically important one. If a company says "send all orders to orders@company", a message sent there is received on arrival, whether or not anyone opens it. A message sent instead to an individual's address is received only when that person actually retrieves it.

Place, section 13(3) to (5). Save as otherwise agreed, an electronic record is deemed to be despatched at the place where the originator has his place of business, and received at the place where the addressee has his place of business. Where there is more than one place of business, the principal place of business is used; and if the originator or addressee has no place of business, his usual place of residence is used. A body corporate's usual place of residence is where it is registered.

Section 13(5) is the sting: this is so irrespective of the place where the computer resource is located, and irrespective of the place where the electronic record is deemed to have been received under sub-section (2).

So the location of the server is legally irrelevant. A contract accepted through a server in Singapore, between a Mumbai supplier and a Chennai buyer, is despatched in Mumbai and received in Chennai. That is a deliberate policy choice, and it prevents jurisdiction being manipulated by moving hardware.

A worked example

A buyer in Pune emails an order to a seller's designated address, orders@sellerco.in, at 11 p.m. on Monday. The seller's office opens on Tuesday. The seller's automated system replies at once confirming acceptance. The seller's registered office is in Chennai, and its mail is hosted abroad.

• Whose is the automated reply? Section 11(c): sent by an information system programmed by or on behalf of the originator to operate automatically, so it is attributed to the seller.
• When was the order received? Section 13(2): the buyer sent it to the designated computer resource, so receipt occurred at 11 p.m. on Monday when it entered that resource, not on Tuesday morning when a human read it.
• When was the acceptance despatched? Section 13(1): when it entered a computer resource outside the seller's control.
• Where was the contract made? Section 13(3) and (5): the acceptance is deemed despatched at the seller's place of business in Chennai and received at the buyer's place of business in Pune, irrespective of the hosting location.
• What if the buyer had sent the order to a salesman's personal address instead? That is not the designated resource, so receipt would occur only when the salesman actually retrieved it.

Change one fact: the buyer's order said "this order is binding on us only if you acknowledge it". Under section 12(2), if the seller never acknowledges, the order is treated as though it had never been sent.

What it does NOT mean

"An automated message is nobody's message." Section 11(c) attributes it to the person who programmed the system or caused it to be programmed.

"Receipt means the addressee read it." Only where the record went to a resource other than the designated one. Into the designated resource, receipt is on entry.

"Sections 12(2) and 12(3) are the same." Under 12(2) the record is treated as never sent automatically. Under 12(3) the originator must first give notice fixing a reasonable further time.

"The server's location determines where an electronic contract is made." Section 13(5) excludes it in terms.

"Section 13 replaces section 4 of the Contract Act." It supplies the timing rule for electronic records. Whether there is a contract at all remains a question for the Contract Act.

Quick revision

• Section 11: attributed to the originator if sent by him, by a person authorised in respect of that record, or by a system programmed to operate automatically.
• Section 12(1): acknowledgment by any communication, automated or otherwise, or by conduct.
• Section 12(2): if the originator stipulated that the record binds only on acknowledgment, no acknowledgment means the record was never sent.
• Section 12(3): otherwise the originator must give notice fixing a reasonable time before treating it as never sent.
• Section 13(1): despatch when the record enters a computer resource outside the originator's control.
• Section 13(2): into a designated resource, receipt on entry; into a non-designated resource of the addressee, receipt on retrieval; where none designated, on entering any computer resource of the addressee.
• Section 13(3) to (5): deemed despatched and received at the parties' places of business, irrespective of where the computer resource is located.

Test yourself

1. To whom is an automatically generated confirmation attributed? To the originator, under section 11(c), because it was sent by an information system programmed by or on behalf of him to operate automatically.

2. When is an electronic record received where the addressee has designated a computer resource? When it enters that designated resource. If it is sent instead to another computer resource of the addressee, receipt is when he retrieves it.

3. Distinguish section 12(2) from section 12(3). Under 12(2) the originator has stipulated that the record binds only on acknowledgment, so absence of acknowledgment means it is treated as never sent. Under 12(3) there is no such stipulation, and the originator must give notice specifying a reasonable further time before he may treat it as never sent.

4. Does the location of the server decide where an electronic contract is made? No. Section 13(5) provides that the deemed places of despatch and receipt apply irrespective of where the computer resource is located.

5. What is the test for despatch? That the electronic record has entered a computer resource outside the control of the originator, which mirrors section 4 of the Contract Act's requirement that an acceptance be out of the acceptor's power.

Section 15: secure electronic signature

The section as it now stands was substituted by the 2008 amendment, and reads:

"An electronic signature shall be deemed to be a secure electronic signature if:

(i) the signature creation data, at the time of affixing signature, was under the exclusive control of signatory and no other person; and

(ii) the signature creation data was stored and affixed in such exclusive manner as may be prescribed.

Explanation: In case of digital signature, the 'signature creation data' means the private key of the subscriber."

Two conditions, and both must be met.

(i) Exclusive control at the moment of signing. The test is control, and it is expressed twice over for emphasis: under the exclusive control of the signatory and no other person. A private key kept on a shared machine, or a one time password read out to a colleague, defeats it.

(ii) Stored and affixed in the prescribed exclusive manner. The manner is left to rules, which links to section 16.

The Explanation is worth memorising because it makes the abstraction concrete: for a digital signature, the signature creation data is the subscriber's private key. So condition (i) reduces to a familiar proposition: the private key must have been under the exclusive control of the signatory when the signature was affixed.

Note what changed in 2008. The original section 15 was written in terms of a secure digital signature and set out a list of conditions, including that the signature was unique to the subscriber, capable of identifying him, created in a manner under his exclusive control, and linked to the record so that any change would invalidate it. The substituted section is shorter, is written in terms of electronic signature, and pushes the detail into rules. The change is part of the same technology neutrality that produced section 3A.

Section 16: security procedures and practices

"The Central Government may, for the purposes of sections 14 and 15, prescribe the security procedures and practices:

Provided that in prescribing such security procedures and practices, the Central Government shall have regard to the commercial circumstances, nature of transactions and such other related factors as it may consider appropriate."

Two points.

The section is empowering, not defining. Neither section 14 nor section 15 can operate until something is prescribed under section 16, because both depend on a prescribed procedure or manner.

The proviso is a direction on how the power is to be exercised. The Government must have regard to commercial circumstances and the nature of transactions. That is a proportionality instruction: the security demanded of a high value transfer between banks need not be demanded of a low value retail purchase. It also means the standard is capable of moving as technology and commercial practice move, without amending the Act.

Section 16 was also substituted in 2008, and its marginal note in the arrangement of sections reads "Security procedure and practices" while the body reads "Security procedures and practices". The difference is immaterial and is noted only so a reader comparing the two is not puzzled.

How the three sections relate to the rest of the topic

The pattern is worth stating in an answer: sections 4 and 5 are about admissibility of form; sections 14 to 16 are about the weight the record will carry.

A worked example

Two companies conclude a supply agreement, each affixing a digital signature issued by a licensed certifying authority, using private keys held on individual cryptographic tokens. A dispute arises and the buyer says the quantity term was altered after signature.

• Is the record a secure electronic record? If a prescribed security procedure was applied at a specific point of time, section 14 deems it secure from that point to the time of verification. The consequence is the presumption that it has not been altered in that interval, and the burden of showing otherwise moves to the party alleging alteration.
• Is the signature a secure electronic signature? Section 15 asks whether the signature creation data, which the Explanation tells us is the private key, was under the exclusive control of the signatory at the time of affixing, and was stored and affixed in the prescribed manner. A key on a personal token in the signatory's possession satisfies the first condition.
• What follows? The buyer is not merely disputing a document; he is arguing against a statutory presumption, which is a much harder position.

Change one fact: the private key was kept on a shared office computer to which four employees had access. Condition (i) of section 15 fails, because the data was not under the exclusive control of the signatory and no other person. The signature may still be an electronic signature under sections 3A and 5, and the contract may still be perfectly good, but it is not secure, and the presumption is not available.

That is the practical lesson of these three sections: security is about who could have used the key, not about how sophisticated the technology is.

What it does NOT mean

"An electronic record that is not secure is inadmissible." It is not. Sections 4 and 5 recognise records and signatures generally. Security affects the presumptions, not the recognition.

"A secure electronic record can never be challenged." The presumption is rebuttable, and the secure status runs only from the application of the procedure to the time of verification.

"Section 14 tells you who made the record." It does not. Integrity is section 14; attribution is section 11.

"Section 15 still speaks of digital signatures." It was substituted in 2008 and now speaks of electronic signatures, with digital signatures dealt with in the Explanation.

Quick revision

• Section 14: a security procedure applied at a specific point of time makes the record a secure electronic record from that point to the time of verification.
• Section 15: an electronic signature is secure if the signature creation data was (i) under the exclusive control of the signatory and no other person at the time of affixing, and (ii) stored and affixed in the prescribed exclusive manner. Explanation: for a digital signature, the signature creation data is the private key.
• Section 16: the Central Government prescribes the procedures and practices, having regard to commercial circumstances and the nature of transactions.
• The purpose of all three is evidentiary: secure status attracts presumptions of integrity and of signing.
• Sections 15 and 16 were substituted by the 2008 amendment, in force 27 October 2009.
• Sections 14 to 16 close MU's printed range for this Act.

Test yourself

1. From when until when is a record a secure electronic record? From the point of time at which the security procedure was applied until the time of verification, section 14.

2. State the two conditions in section 15. The signature creation data must have been under the exclusive control of the signatory and no other person at the time of affixing, and must have been stored and affixed in such exclusive manner as may be prescribed.

3. What is the signature creation data in the case of a digital signature? The private key of the subscriber, by the Explanation to section 15.

4. Why does the Act create a category of secure records at all? Because recognition under sections 4 and 5 answers the question of form, not of proof. Secure status attracts statutory presumptions about integrity and about the affixing of the signature, which is what gives the record weight in evidence.

5. What must the Central Government consider when prescribing security procedures? The commercial circumstances, the nature of the transactions and such other related factors as it considers appropriate, under the proviso to section 16.

So a click proves assent. It does not make every term enforceable.

Shrink wrap

The name comes from the transparent film around a software box. The terms were printed on or inside the packaging, and a notice said that by breaking the seal the buyer accepted them.

The structural problem. The buyer paid at the counter. On ordinary principles the contract of sale was concluded there, and the terms inside the box arrived after it. A term communicated after the contract is made is not part of it, which is the notice rule from [Standard Form Agreements].

The two answers that have been given. Courts elsewhere have taken two routes, and both are worth stating because MU's topic invites comparison:

1. The terms are part of a separate licence between the user and the software producer, distinct from the sale between the buyer and the retailer. Opening or installing is acceptance of that separate proposal, by performance under section 8 of the Contract Act.
2. The sale itself is conditional, the retailer selling on the terms that the producer stipulates, so the buyer's payment is an acceptance of a proposal that already includes them.

The Indian position. No decision squarely on shrink wrap has been read for this book, so it is not asserted here. What can be said with confidence is the framework a court would use: notice before or at the time of contracting, construction against the drafter, unconscionability under section 23, and, for a consumer, the Consumer Protection Act 2019. The stronger the notice on the outside of the package, the better the producer's position, which is why such notices are printed there.

Shrink wrap is not obsolete. The same analysis applies to any product sold with terms in the box, and to installation screens that present terms after purchase, which is the modern equivalent.

Browsewrap

The terms sit behind a link, often at the foot of a page, and the site asserts that continued use constitutes acceptance.

The difficulty is fundamental. There is no act by the user referable to the terms at all. Continued browsing is not an acceptance under sections 3 and 7, because it is not conduct by which the user intends to communicate assent to those terms, and it may well have been done without any awareness that they exist.

Worse, this comes close to the proposition that silence is acceptance, which the Contract Act does not permit: an offeror cannot stipulate that inaction will bind. See [Acceptance Must Be Absolute and Unqualified].

When browsewrap can work. The realistic case is where the user had actual or constructive knowledge of the terms, for example because a prominent notice appeared at the point of the transaction, or because of a course of dealing between the parties. Then the conduct is being read in the light of what the user knew, which is acceptance by conduct under sections 8 and 9 rather than acceptance by silence.

A practical rule for an answer: browsewrap is enforceable, if at all, only where the notice was so prominent that a reasonable user must have known the terms applied.

What section 10A adds, and what it does not

Section 10A provides that a contract is not to be deemed unenforceable solely on the ground that electronic means were used. So a party who says "there is no contract because everything happened on a website" fails.

But note the limits, which the word "solely" makes precise:

• Section 10A does not decide whether the user assented to the terms. That is the Contract Act's question, and it is the whole difficulty with browsewrap.
• Section 10A does not make an unconscionable term enforceable. Section 23 is untouched.
• Section 10A does not reach the excluded documents. A contract for the sale of immovable property cannot be concluded by clickwrap.

So section 10A removes the objection to the medium and leaves every objection to the substance. That is the sentence to write.

A worked example

Tara installs an application. Before it will run, a window displays fifteen screens of terms with a checkbox reading "I have read and accept the Terms of Use", and a button "Continue" that is disabled until the box is ticked. Buried in the terms is a clause requiring all disputes to be arbitrated in a foreign city, and another excluding all liability for data loss.

• Is there a contract? Yes. The display is a proposal, the tick and click are the acceptance, sections 2(b), 3 and 7, and section 10A prevents the objection that it was formed electronically. This is clickwrap and assent is well evidenced.
• Is the foreign arbitration clause enforceable? Assent is established, so the argument must be about substance. In a consumer contract this is a strong candidate for an unfair contract term under the Consumer Protection Act 2019, and for unconscionability under section 23 given the inequality of bargaining power and the practical impossibility of the remedy.
• Is the exclusion of liability for data loss enforceable? Same analysis. It will also be construed strictly against the drafter.

Change the facts. There is no window and no checkbox. The words "By using this application you agree to our Terms" appear in small grey text at the bottom of a settings page. This is browsewrap. There is a serious argument that the terms were never incorporated at all, because Tara did nothing referable to them and the notice was not prominent.

Change them again. Tara buys a boxed device; the terms are on a card inside. She had paid before she could see them. This is shrink wrap, and the notice argument is the strongest one: unless the outside of the box gave adequate warning, the terms came too late.

What it does NOT mean

"Clicking 'I agree' makes every term binding." It establishes assent. Unconscionability under section 23, strict construction, and the Consumer Protection Act 2019 all continue to apply.

"Browsewrap is always void." It is very weak, but it can bind a user who had actual or constructive knowledge of the terms, in which case the conduct is acceptance by conduct rather than by silence.

"Section 10A validates online terms." It removes one objection, that the medium was electronic. It says nothing about whether the user agreed to the terms or whether they are fair.

"These are a special kind of contract with their own law." They are standard form agreements delivered by a new medium. The applicable law is the Contract Act plus the four protections, with section 10A closing off the argument about the medium.

Quick revision

• Clickwrap: terms displayed, positive click to agree. Strongest assent. Still subject to notice, construction, section 23 and consumer law.
• Shrink wrap: terms in or on the packaging, opening or installing said to be acceptance. Main problem: the terms arrive after the contract of sale. Answered either by a separate licence accepted by performance under section 8, or by treating the sale as conditional. No Indian decision read for this book.
• Browsewrap: terms behind a link, continued use said to be acceptance. Weakest, because nothing the user does is referable to the terms, and silence is not acceptance. Works only with prominent notice or actual knowledge.
• Section 10A stops the objection that the contract was made electronically, and nothing more; the word solely is the key.
• Rank by the positive act: click, then open or install, then mere use.

Test yourself

1. Distinguish clickwrap from browsewrap. In clickwrap the user must take a positive act, clicking or ticking, after the terms are made available, which is a clear signifying of assent. In browsewrap the terms sit behind a link and continued use is asserted to be acceptance, so there is no act referable to the terms.

2. What is the main legal difficulty with shrink wrap terms? That the contract of sale is usually concluded at the counter, so terms found inside the package are communicated after the contract is made, and a term notified after contracting is not part of it.

3. Why is browsewrap so weak under the Indian Contract Act? Because acceptance must be signified by an act or omission intended to communicate it, and an offeror cannot stipulate that silence or inaction will amount to acceptance.

4. What does section 10A contribute to this topic? It prevents a contract being treated as unenforceable solely because electronic means were used. It does not establish assent to the terms and does not make an unfair term enforceable.

5. A clickwrap term excludes all liability for negligence. Enforceable? Assent is well evidenced, so the challenge is to the substance. The term will be construed strictly against the drafter, is open to challenge as unconscionable and opposed to public policy under section 23 given unequal bargaining power, and, if the user is a consumer, may be an unfair contract term under the Consumer Protection Act 2019.

What "collateral" means

Compare two promises:

• "I will pay you Rs 10,000 if your house burns." The burning of the house is nothing to do with the parties' performance; it is an external event. Collateral, so contingent.
• "I will pay you Rs 10,000 if you deliver 100 bags of cement." The delivery is the other party's own promise. It is not collateral; it is the reciprocal promise. This is a reciprocal promise under section 2(f), not a contingency, and it is governed by sections 51 to 54, taken up in [Performance of Reciprocal Promises].

Every year students call a reciprocal promise a contingent contract. The test is simple: ask whether the event is something one of the parties has promised to do. If it is, it is a reciprocal promise. If it is an outside event, the contract is contingent.

The rules, section by section

Section 32: contingent on an event happening

"Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void."

The Act's own illustrations:

• A contracts with B to buy B's horse if A survives C. Not enforceable unless and until C dies in A's lifetime.
• A contracts to sell a horse to B if C, to whom it was offered, refuses to buy. Not enforceable unless and until C refuses.
• A contracts to pay B when B marries C. C dies unmarried to B. The contract becomes void.

Section 33: contingent on an event not happening

"Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible, and not before."

Illustration: A agrees to pay B a sum if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks, because the return has then become impossible.

Section 34: the event is the future conduct of a living person

"If the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies."

Illustration: A agrees to pay B if B marries C. C marries D. The marriage of B to C is now considered impossible, although it is possible that D may die and C may afterwards marry B. The Act refuses to keep a contract alive on that kind of remote possibility.

Section 35: where a time is fixed

Two limbs, one for each direction.

Contingent on an event happening within a fixed time: the contract becomes void if, at the expiration of the time, the event has not happened, or if before that time the event becomes impossible.

Contingent on an event not happening within a fixed time: the contract may be enforced when the time has expired and the event has not happened, or, before the time expires, if it becomes certain that the event will not happen.

Illustration: A promises to pay B if a certain ship returns within a year. Enforceable if it returns within the year; void if the ship is burnt within the year.

Section 36: contingent on an impossible event

"Agreement contingent on impossible events void."

An agreement to do or not to do something if an impossible event happens is void, whether or not the impossibility of the event is known to the parties at the time the agreement is made.

Note the drafting. Sections 32 to 35 speak of contracts which are enforceable or become void; section 36 speaks of an agreement which is void. That is deliberate. Where the event was impossible from the start, there never was a contract at all, and section 2(g)'s vocabulary applies.

Contingent contract against wagering agreement

This distinction is set almost every year, because both involve an uncertain event.

The dividing line is interest. Insurance is a contingent contract because the insured has an interest in the property independent of the policy. If he had no such interest, the same document would be a wager.

A worked example

Rajan agrees to buy Sushma's plot for sixty lakh rupees "if the municipal corporation sanctions the layout within twelve months".

• Is this a contingent contract? Yes. There is a contract to do something, buying; it depends on an event, the sanction; the event is uncertain; and it is collateral, because sanction is neither party's own promise.
• Can Rajan sue for conveyance in month three, before sanction? No. Section 32: a contract contingent on an event happening cannot be enforced unless and until the event has happened.
• The corporation refuses sanction in month five. The event has become impossible, so under section 32 the contract becomes void, and under section 35's first limb the same result follows because the time was fixed.
• Twelve months pass with no decision. Section 35, first limb: the contract becomes void at the expiry of the fixed time, because the event has not happened.

Now change one word. The agreement reads "if Sushma obtains the sanction within twelve months". Obtaining the sanction is now Sushma's own promise, so it is not collateral. This is a reciprocal promise, not a contingency, and Sushma's failure is a breach, for which Rajan may claim damages under section 73. The change in one word changes the remedy completely, which is why the collateral requirement is worth learning properly.

What it does NOT mean

"A contingent contract is not yet a contract." It is a contract from the moment it is made. Only performance is suspended.

"Any contract with a condition is contingent." Only where the event is collateral. If the condition is a party's own promise, the contract is absolute with reciprocal promises.

"A contingent contract is a wager." A wager is void under section 30. A contingent contract is valid, and the difference is that the parties have an interest in the event independent of the bargain.

"Under section 34 the contract survives while any theoretical possibility remains." It does not. The Act's own illustration says the marriage is impossible once C marries D, even though D might die and C might then marry B.

Quick revision

• Section 31: a contract to do or not do something if some event, collateral to such contract, does or does not happen.
• Essentials: a valid contract; an uncertain future event; the event collateral, not a party's own promise.
• s.32: contingent on happening: not enforceable until it happens; void if it becomes impossible.
• s.33: contingent on not happening: enforceable when the happening becomes impossible.
• s.34: future conduct of a living person: impossible once he does something making it impossible that he should so act.
• s.35: within a fixed time: happening form becomes void at expiry or on impossibility; not-happening form becomes enforceable at expiry or when the event becomes certain not to happen.
• s.36: contingent on an impossible event: void, whether or not the parties knew.
• Contingent contract against wager: the test is an independent interest in the event.

Test yourself

1. Define a contingent contract and identify the essential most often missed. Section 31: a contract to do or not to do something if some event, collateral to such contract, does or does not happen. The most often missed essential is that the event must be collateral, that is, not the promise of either party.

2. A agrees to pay B if a ship returns within a year, and the ship is burnt in month eight. What follows? The contract becomes void, under section 32 because the event has become impossible, and under the first limb of section 35 because the event cannot now happen within the fixed time.

3. Distinguish a contingent contract from a wagering agreement. A contingent contract is valid and the parties have an interest in the event independent of the contract; a wagering agreement is void under section 30, neither party has any interest beyond the stake, and one party's gain is exactly the other's loss.

4. A promises to pay B if B marries C, and C marries D. Is the contract still alive? No. Under section 34 the event is deemed impossible once C marries D, notwithstanding the theoretical possibility that D may die and C may afterwards marry B.

5. What is the effect of section 36, and how is its language different? An agreement contingent on an impossible event is void, whether or not the parties knew of the impossibility. Its language speaks of an agreement which is void, rather than a contract which becomes void, because there never was a contract at all.

The Act's illustrations: A supplies B, a lunatic, with necessaries suited to his condition in life, and is entitled to be reimbursed from B's property; the same where A supplies the wife and children of B, a lunatic.

Four points carry the marks.

1. Who is incapable. A minor under section 11, or a person of unsound mind under section 12. See [A Minor's Agreement Is Void Ab Initio].
2. Necessaries, and suited to his condition in life. Not luxuries. The standard is relative to the person's station, so what is a necessary for one person may not be for another. Food, clothing, shelter, medical care, and in a proper case education and legal advice.
3. The supply may be to a dependant. Anyone the incapable person is legally bound to support is covered, which is what the second illustration makes explicit.
4. Recovery is against the PROPERTY, not the person. This is the crucial limitation, and it is what makes the section consistent with the rest of the Act. The minor is not personally liable, and no decree runs against him. If he has no property, the supplier recovers nothing.

Section 68 is the section that rescues the supplier where [The Minor's Position: Necessaries, Restitution and Ratification] would otherwise leave him with nothing.

Section 69: payment by an interested person

"A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other."

The Act's illustration is worth learning because it contains every element. B holds land in Bengal on a lease from A, the zamindar. A's revenue to the Government falls into arrear and the land is advertised for sale, the consequence of which under the revenue law would be the annulment of B's lease. B pays A's dues to prevent the sale. A is bound to make good to B the amount so paid.

Three requirements:

1. The plaintiff must be interested in the payment. He need not be legally bound to pay; he must have something to protect. In the illustration, B's interest is his lease.
2. The defendant must be bound BY LAW to pay. A moral obligation is not enough; the liability must be a legal one.
3. The plaintiff must actually have paid. An offer to pay is not enough.

Note the contrast with section 70: under section 69 the plaintiff pays money another is legally bound to pay; under section 70 he does something or delivers something and the other enjoys the benefit.

Section 70: benefit of a non-gratuitous act

"Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered."

The Act's illustrations: A, a tradesman, leaves goods at B's house by mistake, and B treats the goods as his own; B is bound to pay for them. But A saves B's property from fire and is not entitled to compensation if the circumstances show that he intended to act gratuitously.

Three conditions, and all three must be present:

1. The act must be done or the thing delivered lawfully.
2. It must be done not intending to do so gratuitously. Somebody who intends a gift or a favour cannot afterwards charge for it.
3. The other person must enjoy the benefit of it. He must have had the option to accept or reject, and must have accepted. A benefit forced on someone does not attract section 70.

The leading case

State of West Bengal v. M/s B.K. Mondal and Sons, AIR 1962 SC 779.

Facts. The respondent, a firm of building contractors already doing construction work for the Provincial Government, did certain additional construction at the request of the Government's officers. Its bills for that additional work were not paid. It sued, basing its claim on contract and, in the alternative, on section 70. The Government's defence was that there was no valid and binding contract, because section 175(3) of the Government of India Act 1935 required contracts made in the exercise of the executive authority of a province to be expressed to be made by the Governor and executed on his behalf, and that section 70 therefore had no application.

Held. Per curiam, the courts below were right that section 70 applied and the appeal failed. The absence of a valid contract does not exonerate the party who has enjoyed the benefit of work lawfully done for it and not intended to be done gratuitously. Section 70 creates a liability that does not rest on contract at all, and it is therefore not defeated by the very defect that made the contract unenforceable.

Why it matters here. This is the standard problem: a government body or a company takes the benefit of work done under an arrangement that turns out to be void for want of form, and then says there was no contract. Section 70 answers it, and B.K. Mondal is the authority.

Section 71: finder of goods

"A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee."

Short, and it works by cross reference. The finder is not an owner and not a trustee; he is placed in the position of a bailee, which imports the duties of a bailee: to take reasonable care of the goods, not to use them for his own purpose, and to return them to the true owner when found.

The rights that go with it, principally the finder's right to retain the goods against everyone but the true owner, and his lien for expenses, are in sections 168 and 169, which belong to Contract II in Semester 4. For this paper the point is section 71 itself: taking custody of found goods creates a legal obligation, without any agreement.

Section 72: money paid by mistake or under coercion

"A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it."

The Act's illustrations: A and B jointly owe 100 rupees to C; A pays it, and B, not knowing, pays 100 rupees again; C is bound to repay B. And: a railway company refuses to deliver goods except on payment of an illegal charge; the consignee pays to get his goods and is entitled to recover so much of the charge as was illegally excessive.

The leading case

Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135.

Facts. The respondent firm paid sales tax on its forward transactions under assessment orders for the years 1949 to 1951. In 1952 the Allahabad High Court held that the levy of sales tax on forward transactions was ultra vires. The firm applied for a refund. The authorities resisted on three grounds: that the money had been paid under a mistake of law and so was irrecoverable, that the payments were voluntary and made without protest, and that the Government had already spent the money.

Held. The word "mistake" in section 72 comprises within its scope a mistake of law as well as a mistake of fact. A party is entitled to recover money paid by mistake or under coercion, and if the payment, even of a tax, was made under a mistake of law, the receiver is bound to repay it although it was paid voluntarily, subject to questions of estoppel, waiver, limitation and the like. Where a clear provision of law entitles a party to relief, equitable considerations cannot be imported, so the fact that the State had spent the money made no difference.

Why it matters here. English law drew a sharp line and refused recovery for mistake of law. Section 72 in India covers both, and this is the case that says so. It is one of the standard "distinguish Indian and English law" points in this paper.

The five compared

A worked example

A contractor is asked orally by a municipal engineer to construct an additional drain beside the sanctioned work. The corporation uses the drain. It then refuses payment, saying its own regulations required a written work order and none was issued.

• Is there a contract? Probably not, if the required form was mandatory.
• Section 70? Take the three conditions. The work was done lawfully; it was plainly not gratuitous, since a contractor does not build drains as a gift; and the corporation enjoyed the benefit by using it. All three are satisfied.
• Does the absence of a valid contract defeat the claim? No. That is precisely what B.K. Mondal decides: section 70 does not rest on contract, so the defect that destroyed the contract does not destroy the section 70 claim.
• What does the contractor get? Compensation for the work, not the contract price as such. Section 70 gives compensation in respect of the thing done, which is a restitutionary measure.

Change the facts: the contractor built the drain without being asked and against the corporation's stated wishes, and the corporation fenced it off and never used it. Section 70 fails, because the corporation did not enjoy the benefit and had no opportunity to reject it before it was built.

What it does NOT mean

"A quasi contract is an implied contract." It is not. In an implied contract under section 9 there is a real agreement made by conduct. In a quasi contract there is no agreement at all and the law imposes the obligation.

"Section 68 makes a minor liable." It does not. Recovery is out of the minor's property, and there is no personal liability.

"Section 70 lets you charge for any benefit you confer." It does not. The act must be lawful, must not be intended gratuitously, and the other party must actually have enjoyed the benefit, which imports an opportunity to reject.

"Money paid under a mistake of law cannot be recovered." That is the English rule. Section 72 covers mistake of law as well, and Kanhaiya Lal so holds.

"A finder becomes the owner." He does not. He is placed in the position of a bailee under section 71.

Quick revision

• Heading: "Of certain relations resembling those created by contract". No offer, no acceptance, no consideration. Basis: unjust enrichment.
• s.68 necessaries to an incapable person or his dependants: reimbursement from his property, never personally.
• s.69 payment of money another is bound by law to pay, by a person interested in the payment: reimbursement.
• s.70 lawful, non-gratuitous act or delivery, benefit enjoyed: compensation. B.K. Mondal, AIR 1962 SC 779: the section does not rest on contract, so an invalid contract is no defence.
• s.71 finder of goods: responsibility of a bailee.
• s.72 money paid or thing delivered by mistake or under coercion: must be repaid. Kanhaiya Lal, AIR 1959 SC 135: mistake includes mistake of law, unlike England.

Test yourself

1. Why are sections 68 to 72 not really contracts? Because there is no proposal, acceptance or consideration. The obligation is imposed by law on the principle of unjust enrichment, and the Act's own heading says these relations merely resemble those created by contract.

2. State the three conditions for a claim under section 70. The act must be done or the thing delivered lawfully; it must not be intended to be done gratuitously; and the other person must have enjoyed the benefit of it.

3. A government body takes the benefit of work done under an agreement void for want of statutory form. Can the contractor recover? Yes, under section 70. In B.K. Mondal the Supreme Court held that section 70 creates a liability which does not rest on contract, so the absence of a valid contract is no answer.

4. Can money paid to a tax authority under a mistake of law be recovered? Yes. In Kanhaiya Lal the Supreme Court held that "mistake" in section 72 includes a mistake of law as well as of fact, and that the payment being voluntary and the money having been spent made no difference, subject to estoppel, waiver and limitation.

5. A supplies necessaries to a minor who owns a house but has no cash. What is A's remedy? Reimbursement from the minor's property under section 68. There is no personal liability, so if the minor had no property A would recover nothing.

The saving clause, and why it matters in practice

The second paragraph of section 10 says the Act does not override any other law that requires writing, witnesses or registration. So an oral agreement can be a perfectly good contract under section 10 and still be unenforceable, or ineffective to pass property, because a different statute demanded a document.

The everyday examples a Mumbai student will meet are these. A sale of immovable property worth one hundred rupees or more requires a registered instrument under the Transfer of Property Act 1882. An arbitration agreement must be in writing under the Arbitration and Conciliation Act 1996. A promise to pay a time barred debt must be in writing and signed under section 25(3) of this Act itself.

So the correct statement is not "a contract must be in writing" and it is not "writing is never required". It is: this Act requires no writing, and other laws sometimes do, and section 10 preserves them.

What section 10 does NOT list, but the law requires anyway

Four things are part of the law of contract and are not written into section 10 at all, and they are a separate list from the five above. A student who recites only the section's own words will lose marks on any question that asks for the essentials of a valid contract.

An intention to create legal relations. A family arrangement to share housework, or an invitation to dinner, is an agreement with consent, competence, consideration in a loose sense and no unlawfulness. It is still not a contract, because neither party meant to be answerable in a court. The Act does not say so; the courts read it in.

Certainty of meaning. Section 29 declares void an agreement whose meaning is not certain or capable of being made certain. This is one of the express declarations, so it does sit inside section 10's fifth condition, but it is worth naming separately because it is easy to overlook. See [Agreements Void for Uncertainty].

Possibility of performance. Section 56's first paragraph declares void an agreement to do an act impossible in itself. See [Impossibility of Performance, and Frustration].

Legal formalities where another law demands them. The saving clause above.

Void, voidable, illegal and unenforceable

These four words are used interchangeably by beginners and they mean four different things. Getting them wrong is the single commonest way to lose marks in this paper, so learn the table rather than the sentence.

Two distinctions carry the marks. First, a void agreement never had legal effect, while a voidable contract has full effect until it is avoided, so anything done under it in the meantime stands. Second, every illegal agreement is void but not every void agreement is illegal: an agreement in restraint of marriage under section 26 is void, but there is nothing unlawful about promising not to marry, and a related transaction is not tainted by it. An agreement to commit an offence is both void and illegal, and every collateral bargain built on it falls too.

A worked example

Farah, aged twenty six and of sound mind, agrees in writing to sell her flat in Andheri to Devendra for eighty lakh rupees. Devendra pays five lakh rupees as earnest money. Test the agreement against section 10.

• Agreement? Yes. Farah proposed, Devendra accepted, and each promise is the consideration for the other, so there is an agreement under section 2(e).
• Free consent? Yes, on these facts. Nobody threatened anybody, nothing was concealed, and there is no mistake.
• Competent parties? Yes. Both are over eighteen, of sound mind, and neither is disqualified.
• Lawful consideration and object? Yes. Money for a flat is lawful on both sides, and nothing in section 23 is offended.
• Expressly declared void? No. Nothing in sections 24 to 30 touches it.

So it is a contract. Now apply the saving clause. Section 10 has been satisfied, but the sale of immovable property still requires a registered conveyance. The agreement to sell binds Farah and gives Devendra a right to sue, including a suit for specific performance under the Specific Relief Act 1963 taken up in Module IV. It does not by itself make him the owner of the flat.

Now change one fact. Farah is seventeen. The agreement fails requirement three, section 11 makes her incompetent, and the agreement is void from the beginning, not voidable. Devendra cannot sue for the flat, and his position on the five lakh rupees is the subject of [The Minor's Position: Necessaries, Restitution and Ratification].

What it does NOT mean

"Every agreement is a contract." The opposite. Section 10 exists precisely to say that only some agreements are. An easy way to hold it: all contracts are agreements, but not all agreements are contracts.

"A contract must be in writing and on stamp paper." Not under this Act. Section 10 requires no writing at all, and an oral contract is fully valid. Writing, witnesses and registration come from other statutes, which the saving clause preserves, and stamp duty is a fiscal requirement that goes to admissibility in evidence, not to formation.

"If consideration is small the contract is not valid." Section 10 requires consideration to be lawful, not adequate. Explanation 2 to section 25 says so expressly, and it is taken up in [Agreements Without Consideration Are Void, Unless].

"A void contract." The phrase is a contradiction and examiners notice it. If it is void it never became a contract, so the correct expression is a void agreement. The Act uses "void contract" only for a contract that becomes void later, for example under section 32 or section 56.

Quick revision

• Section 10: all agreements are contracts if made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and not expressly declared void.
• Contract, s.2(h) = an agreement enforceable by law. Agreement, s.2(e) = promise or set of promises forming the consideration for each other.
• The five requirements map to: agreement (s.2(e)), free consent (ss.13, 14), competency (s.11), lawful consideration and object (ss.2(d), 23), not expressly void (ss.24 to 30).
• Not in the section but still required: intention to create legal relations, certainty (s.29), possibility of performance (s.56), and formalities other laws demand.
• Saving clause: the Act does not displace any law requiring writing, witnesses or registration.
• Void, s.2(g), no effect ever. Voidable, s.2(i), good until avoided. Illegal, void plus collateral transactions fall too.
• All contracts are agreements; not all agreements are contracts.

Test yourself

1. State section 10 and list the essentials of a valid contract. All agreements are contracts if made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and not expressly declared void. The essentials are an agreement, free consent, competency, lawful consideration, lawful object, and the absence of an express declaration of voidness, together with the intention to create legal relations, certainty, possibility of performance, and any formality another law requires.

2. Distinguish a void agreement from a voidable contract. A void agreement is not enforceable by law under section 2(g) and has no legal effect from the outset, so no rights arise under it at all. A voidable contract is enforceable at the option of the party whose consent was defective under section 2(i); it is valid and binding until that party avoids it, and everything done under it before avoidance stands.

3. Is an oral agreement a contract? Yes, so far as this Act is concerned. Section 10 nowhere requires writing. But the second paragraph of section 10 preserves other laws requiring writing, witnesses or registration, so an oral agreement may still fail for want of a form that a different statute demands.

4. Are all void agreements illegal? No. Every illegal agreement is void, because its object or consideration is unlawful under section 23, but many void agreements are perfectly innocent. An agreement in restraint of marriage is void under section 26 without being unlawful, and a transaction collateral to it is unaffected, whereas a transaction collateral to an illegal agreement falls with it.

5. A and B agree that A will pay B one lakh rupees if B murders C. Analyse under section 10. There is an agreement, and the parties may well be competent and consenting. It fails on lawfulness: the object is forbidden by law and the court would in any event regard it as opposed to public policy, so the consideration and object are unlawful under section 23 and the agreement is void under section 10 and illegal besides. No court will enforce it either way, and any collateral agreement, such as a loan taken to fund the payment, is tainted with the same illegality.

Two details in sub-section (2) that examiners like. The day of birth counts as a whole day, and majority is attained at the beginning of the eighteenth anniversary, not at the hour of birth on that day. So a person born on 1 January 2008 is a major from the first moment of 1 January 2026.

A note on the name. India Code titles the Act "The Majority Act, 1875". Almost every textbook and every exam answer calls it the Indian Majority Act. Either name will be understood; the statute's own title has no "Indian" in it.

The old exception, and why it is gone. Textbooks printed before 2000 say that where a guardian of a minor's person or property has been appointed by a court, or the minor's property is under the superintendence of a Court of Wards, majority is postponed to twenty one. That proviso was omitted by the Indian Majority (Amendment) Act 1999, and the age is now eighteen for everyone domiciled in India. A student who writes the twenty one rule as current law is writing law that was repealed.

"According to the law to which he is subject." The phrase matters for a person domiciled outside India, whose majority is governed by the law of their own domicile, not by the Majority Act.

Test 2: soundness of mind

Section 11 requires the party to be of sound mind and section 12 defines what that means. It is a test applied at the moment of contracting, not a diagnosis, and it is taken up in [Persons of Unsound Mind, and Persons Disqualified by Law].

Test 3: not disqualified by any law

The third test is open ended: section 11 does not list the disqualifications, because they come from other statutes and from the general law. The recognised categories are alien enemies, foreign sovereigns and diplomats, convicts, insolvents, and corporations acting beyond their powers. These too are taken up in the chapter on section 12.

A worked example

Aarti is seventeen years and eleven months old. She is in the second year of a degree, runs a small business selling handmade jewellery, and is by any ordinary measure more capable than most adults of judging a bargain. She agrees to buy a laptop from Bhaskar for sixty thousand rupees on credit.

• Is she of the age of majority? No. Section 3 of the Majority Act fixes eighteen and she has not completed eighteen years.
• Does her evident capability help? No. Section 11 asks about age, not about maturity. The rule is a bright line precisely so that Bhaskar does not have to assess her.
• Was she of sound mind and free from disqualification? Yes on both counts, but that is irrelevant, because the three tests are cumulative and she fails the first.
• Result. She is not competent to contract, and the agreement is void, not voidable. The consequences are the subject of the next two chapters.

Now move the facts by one month. Aarti is eighteen years and one day old. She is competent, and the same agreement is a contract binding on her.

What it does NOT mean

"An incompetent person cannot be bound by anything." Competency governs contracts. A person incapable of contracting may still be liable under section 68 for necessaries supplied to them, and that liability is not contractual at all: it is a quasi contractual obligation against their property. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

"The age of majority is twenty one where a guardian has been appointed." That was the law until 1999 and is not the law now.

"A minor can contract if the contract benefits them." Section 11 admits no such exception, and the Act nowhere grades a minor's agreements by whether they are beneficial. Whether a minor may be a transferee or promisee, which is a different question, is taken up in [The Minor's Position: Necessaries, Restitution and Ratification].

"Competency is about understanding." Only the second test is. The first is about age and the third is about status, and neither asks what the party understood.

Quick revision

• Section 11: every person is competent who is (1) of the age of majority according to the law to which he is subject, (2) of sound mind, and (3) not disqualified by any law to which he is subject. All three, cumulatively.
• The age comes from the Majority Act 1875, s.3(1): eighteen years, for every person domiciled in India.
• s.3(2): the day of birth counts as a whole day, and majority begins at the beginning of the eighteenth anniversary.
• The old twenty one rule for court appointed guardians and Courts of Wards was omitted in 1999.
• Soundness of mind is defined in s.12; disqualifications come from other laws.
• Failure of any one test makes the agreement void, not voidable.

Test yourself

1. State section 11 and identify where the age of majority is found. Section 11 provides that every person is competent to contract who is of the age of majority according to the law to which he is subject, who is of sound mind, and who is not disqualified from contracting by any law to which he is subject. Section 11 does not fix the age itself; it comes from section 3 of the Majority Act 1875, which sets it at eighteen years for every person domiciled in India.

2. Rohan was born on 14 March 2008. From what moment is he competent by age? From the beginning of 14 March 2026. Section 3(2) of the Majority Act includes the day of birth as a whole day and deems majority attained at the beginning of the eighteenth anniversary of that day, so the hour of his birth is irrelevant.

3. A seventeen year old who is unusually mature enters a commercial contract. Is it valid? No. Section 11 fixes competency by age and not by maturity, and the three tests are cumulative, so failing the age test is enough. The agreement is void from the outset.

4. Is the age of majority still twenty one where a court has appointed a guardian? No. That proviso was omitted by the Indian Majority (Amendment) Act 1999, and the age is now eighteen in every case for a person domiciled in India.

5. Name the three tests in section 11 and say what happens if only one fails. Majority, soundness of mind, and absence of statutory disqualification. Because the section joins them with "and", they are cumulative, so failure of any single test makes the party incompetent and the resulting agreement void.

The leading case

Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, also reported as (1903) ILR 30 Cal 539, Privy Council.

Facts. Dharmodas Ghose, a minor, executed a mortgage of his property on 20 July 1895 in favour of a moneylender, Brahmo Dutt, to secure an advance. The attorney who handled the transaction, Kedar Nath Mitter, was acting for both sides. On 15 July he had received a letter from the solicitor of the minor's mother, who was his guardian appointed by the court, stating in the clearest terms that the young man was not of age and that anyone lending money to him did so at his own risk. A declaration that the mortgagor was of full age was nevertheless drawn up by that same attorney and sworn by the minor at the last moment, after the mortgage deed was ready for execution. The minor, suing through his mother as next friend, asked to have the mortgage set aside. Jenkins J held it void and inoperative and ordered its cancellation, and a Division Bench presided over by Maclean CJ dismissed the appeal, holding that the attorney had not been misled and that his knowledge was in law the lender's knowledge. The lender appealed to the Privy Council, and by then Brahmo Dutt had died and the appeal was pursued by his executrix, Mohori Bibee, whose name the case now carries.

Held. The appeal failed. A minor's agreement is absolutely void, not merely voidable, so the mortgage was a nullity. The lender's alternative claim, that the money advanced should at least be repaid, also failed: sections 64 and 65 of the Contract Act speak of a contract and of an agreement between parties competent to contract, and they cannot be turned against a minor whose agreement was void from the outset. Estoppel was equally unavailable, the lender's own agent having had clear notice of the minority. Their Lordships adopted the observation of Romer LJ that a court of equity cannot say that it is equitable to compel a person to pay money in respect of a transaction which, as against that person, the legislature has declared to be void.

Why it matters here. It is the foundation of the whole Indian law on minors' agreements, and it decides four things at once: the agreement is void and not voidable; no suit lies on it; the money advanced cannot be recovered under sections 64 and 65; and equity will not be used to get round the statute. Almost every problem question on capacity in this paper is an application of it.

One detail to note and not to copy across. The report speaks of the plaintiff not being twenty one. That was correct then, because a guardian had been appointed by the court and the proviso to section 3 of the Majority Act 1875 postponed majority to twenty one in such a case. That proviso was omitted in 1999 and the age is now eighteen for everybody domiciled in India.

The four consequences, one by one

(a) No suit lies on the agreement

Neither party can sue on it. The other party cannot enforce it against the minor, which is the point of the rule, and the minor cannot sue on it either, because there is no contract for anyone to sue on. What the minor can do is sue to have the document cancelled and to recover their property, which is exactly what Dharmodas Ghose did.

(b) It cannot be ratified

Ratification means approving afterwards something done earlier so that it takes effect from the earlier date. A void agreement cannot be ratified, because there is nothing to approve: ratification can give life to a defective act, not to a non existent one. So a person who on attaining eighteen says "I confirm the agreement I made at seventeen" has confirmed nothing, and no fresh consideration passed at the time of the confirmation either. This is taken further in [The Minor's Position: Necessaries, Restitution and Ratification].

(c) No estoppel against the minor

Estoppel is the rule that a person who has induced another to believe a state of facts, and to act on that belief, cannot afterwards deny those facts. A minor who lies about their age is a natural candidate for it. The answer in Indian law is that estoppel does not run against a minor here, and the reasoning is worth learning as a sentence.

Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610, Allahabad High Court, Full Bench.

Facts. Minors executed a mortgage after fraudulently representing that they were of full age. The mortgagee sued to enforce the mortgage and, in the alternative, for the return of the money advanced.

Held. The mortgage was void because the executants were minors, and the plea of estoppel had to fail. In the Court's words, no estoppel can be pleaded against a statute: if the Contract Act declares that a contract by a minor is void, nothing can prevent the minor from pleading that the contract is void on the ground of minority. The Full Bench also refused to decree repayment of the money, distinguishing the contrary Lahore view in Khan Gul v. Lakkha Singh, because a money decree against the minor would be almost tantamount to enforcing the very pecuniary liability that the law makes void.

Why it matters here. It is the leading Indian authority for two propositions that always travel together in an answer: no estoppel, and no restitution in money as a way round the incapacity. It also shows the courts refusing to let equity undo what the statute has done, which is the same instinct as the Privy Council's.

(d) No specific performance

Because there is no contract, there is nothing to perform specifically, and the Specific Relief Act 1963 taken up in Module IV cannot help. A suit for specific performance against a minor fails at the first step.

A worked example

Imran, aged sixteen, sells his motorcycle to Deepa for forty thousand rupees, telling her he is nineteen. Deepa pays and takes the motorcycle. Two months later Imran's father sues for its return.

• Is there a contract? No. Imran is not of the age of majority under section 3 of the Majority Act, so he is not competent under section 11, so section 10 is not satisfied and the agreement is void from the outset.
• Can Deepa keep the motorcycle because she paid for it? No. Property does not pass under a void agreement, and Imran may recover it.
• Can Deepa plead that Imran lied? No. On Ajudhia Prasad an estoppel cannot be raised against the statute, so his misrepresentation of age does not make him competent.
• Can Deepa at least get her forty thousand rupees back? Not on the contract, and not by a money decree in these terms on Ajudhia Prasad and Mohori Bibee. There is a real argument on restitution where the minor still holds the identifiable money or goods, and that is the subject of the next chapter.
• Would it help Deepa that she genuinely believed him? Her honest belief does not create capacity. In Mohori Bibee the lender's agent had notice, which made the estoppel point easy; where the other party is genuinely deceived the Indian courts have still refused a money decree, which is precisely what Ajudhia Prasad decided.

Now change one fact. Imran is sixteen and buys rather than sells, paying in full, and Deepa refuses to hand over the motorcycle. Here the minor has performed and asks only to receive. Whether he can enforce is the question in the next chapter, and the short answer is that the bar in section 11 is on a minor binding himself, not on his being a promisee.

What it does NOT mean

"A minor's agreement is voidable at the minor's option." This is the commonest error in the paper, and it is the English rule, not the Indian one. Mohori Bibee settled that it is void.

"The minor can be sued for the money as damages in tort." A claim cannot be dressed as a tort when in substance it enforces a void contract. Where the wrong is independent of the contract a minor may be liable in tort, but not where the tort claim is the contract claim under another name.

"A minor is never liable for anything." Section 68 makes the minor's property answerable for necessaries supplied, and that liability is quasi contractual, not contractual. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

"Void means the minor loses what he gave." The opposite. Because no property passes and no contract exists, the minor may recover what was transferred, as Dharmodas Ghose recovered his property by having the mortgage cancelled.

"The agreement becomes valid when the minor turns eighteen." It does not. It cannot be ratified, and a fresh contract, supported by fresh consideration, would have to be made after majority.

Quick revision

• The chain: s.11 minor not competent, s.10 requires competent parties, so no contract, and s.2(g) calls it void. Void ab initio, from the very beginning.
• Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114 (PC): a minor's agreement is absolutely void; ss.64 and 65 do not apply because they speak of competent parties; no estoppel; equity will not compel payment on a transaction the legislature has declared void.
• Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610 (FB): no estoppel against a statute even where the minor lied about his age, and no money decree, because that would enforce the very liability the law makes void.
• Four consequences: no suit on the agreement, no ratification, no estoppel, no specific performance.
• The minor may sue to cancel the document and recover property.
• Necessaries under s.68 are the exception, and they bind the property, not the person.

Test yourself

1. Is a minor's agreement void or voidable, and on what authority? Void ab initio. Section 11 makes a minor incompetent and section 10 makes competency a condition of a contract, so no contract arises at all, and section 2(g) calls such an agreement void. The Privy Council settled it for India in Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114.

2. State the facts and the holding in Mohori Bibee. A minor mortgaged his property to a moneylender whose attorney had been told in writing, before the deed was executed, that the mortgagor was under age; a declaration of full age was nevertheless obtained from him. The minor sued to set the mortgage aside. The Privy Council held the agreement absolutely void, refused the lender repayment because sections 64 and 65 apply only between competent parties, and rejected estoppel, adopting Romer LJ's observation that equity cannot compel payment on a transaction the legislature has declared void as against that person.

3. A minor lies about his age to obtain a loan. Can the lender plead estoppel? No. In Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610, the Allahabad Full Bench held that no estoppel can be pleaded against a statute: if the Act declares a minor's contract void, nothing prevents the minor from pleading minority, and a money decree was refused because it would be tantamount to enforcing the void liability.

4. Can a minor ratify an agreement on attaining majority? No. Ratification presupposes something capable of being confirmed, and a void agreement is a nullity. The parties would have to make a fresh contract after majority, supported by fresh consideration.

5. Can the minor himself enforce the agreement? Not the agreement, since there is no contract. But the minor may sue to have the instrument cancelled and to recover property transferred under it, which is what happened in Mohori Bibee, and the bar in section 11 is on a minor binding himself rather than on his taking a benefit, which is the subject of the next chapter.

What counts as a necessary

The Act does not define it, and the question is one of fact in every case. The settled approach asks two things: is the class of goods or services capable of being a necessary for a person in this minor's station, and did this minor already have an adequate supply of them at the time? A second overcoat is not a necessary to a boy who already owns four. Food, clothing, shelter, medical attendance, and education suited to the minor's station are the standard categories, and legal advice to protect the minor's property has been treated as within them.

A minor may be a transferee, a payee and a beneficiary

This is the qualification that turns the rule from a protection into a workable one, and it is regularly examined.

A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar, (1916) ILR 40 Mad 308, Madras High Court, Full Bench.

Facts. A mortgage was executed in favour of a minor who had advanced the whole of the mortgage money. Nothing remained for the minor to do under the transaction. The question referred to the Full Bench was whether such a mortgage could be enforced by him or on his behalf.

Held. It could. Where the whole of the consideration has been paid by or on behalf of the minor and nothing remains for him to perform, a transfer of property in his favour is enforceable by him. Section 11 disables a minor from binding himself by a promise; it says nothing to disable him from being a transferee or a promisee under a completed transaction.

Why it matters here. It supplies the principle in one line: the incapacity is an incapacity to incur an obligation, not an incapacity to acquire a right. So a minor may be a mortgagee, a payee of a cheque, a purchaser who has paid, a beneficiary under a trust or a policy, and a partner admitted to the benefits of partnership under section 30 of the Indian Partnership Act 1932, which admits him to the benefits and not to the liabilities.

The same principle explains why a minor may hold a promissory note made in his favour and sue on it, and why he may be an agent: an agent binds the principal, not himself, so his own incapacity does not matter to the third party, although the principal cannot hold the minor agent responsible for his acts.

Ratification: the line the law holds

Ratification means confirming afterwards an act done earlier, so that it takes effect from the earlier date. A minor's agreement cannot be ratified on attaining majority, and the reason is short: ratification can validate a defective act, but there must be an act to validate, and a void agreement is a nullity.

There is a second and independent reason worth writing in an answer. Consideration for the original promise was given during minority, and past consideration furnished during minority cannot support a fresh promise made after majority. So a bare confirmation after eighteen has no consideration behind it either.

What the person can do is make a fresh contract after attaining majority, supported by fresh consideration. The distinction is real and it is the answer to the standard problem: a promise made at eighteen to pay a debt incurred at seventeen is unenforceable, but a new loan taken at eighteen on new terms is a good contract.

Restitution: how far the courts will go

This is the hardest part of the topic and it is where students lose marks, because the answer is not simply "no restitution".

The starting point: no money decree

Mohori Bibee v. Dharmodas Ghose, (1903) 30 IA 114, refused the lender repayment of the money advanced, holding that sections 64 and 65 apply to contracts and agreements between parties competent to contract and cannot be turned against a minor whose agreement was void from the outset.

Ajudhia Prasad v. Chandan Lal, AIR 1937 All 610, Allahabad High Court, Full Bench, made the reasoning explicit.

Facts. Minors executed a mortgage after fraudulently representing that they were of full age. The mortgagee sued to enforce the mortgage and, in the alternative, for the return of the money advanced.

Held. The mortgage was void, and no estoppel could be raised: no estoppel can be pleaded against a statute, so if the Act declares a minor's contract void nothing prevents him from pleading minority. Repayment was also refused. The Full Bench declined to follow the Lahore Full Bench in Khan Gul v. Lakkha Singh, reasoning that a money decree against the minor would be almost tantamount to enforcing the minor's pecuniary liability under the contract, which the law makes void, and that the distinction was too obvious to be ignored.

Why it matters here. It is the leading Indian authority for both propositions in one case: no estoppel and no money decree. Note also what the court said about Mohori Bibee: restitution was there refused partly because the lender knew of the minority, and the passage in the Privy Council's judgment on which the point turned concerned a claim by the minor under the Specific Relief Act, where the court has a discretion to impose terms.

Where restitution IS available

Three routes exist and they should be distinguished carefully.

(a) The doctrine of restitution in specie. Where the minor still has the identifiable property or money obtained under the void agreement, the court may order it to be restored, because that is restoring what is traceably the other party's and not enforcing a contractual liability. Once the money has been spent and cannot be traced, the route closes, which is exactly the distinction Ajudhia Prasad drew.

(b) Section 33 of the Specific Relief Act 1963. Where the minor comes to the court as plaintiff seeking cancellation of an instrument, the court may require him to restore the benefit he has received, so far as may be, as a condition of the relief. This is the "he who seeks equity must do equity" principle in statutory form, and it operates only when the minor is the one asking for relief.

(c) Necessaries under section 68, as above.

The organising idea, and the sentence to write: the law will not give the other party a contractual remedy against the minor, but it will not let the minor keep an identifiable benefit while asking the court for help.

A worked example

Sana, aged seventeen, borrows two lakh rupees from Prakash on a written promise to repay with interest, telling him she is twenty. She spends one lakh on college fees and hostel charges, and keeps the other lakh in a separate bank account. On turning eighteen she signs a letter confirming the loan. She then refuses to pay, and Prakash sues.

• Is the loan agreement enforceable? No. She was a minor when it was made, so it is void under section 11 read with section 10.
• Does her lie about her age help Prakash? No. On Ajudhia Prasad there is no estoppel against the statute.
• Does the confirmation letter revive it? No. A void agreement cannot be ratified, and there is no fresh consideration for the letter.
• The one lakh spent on college fees and hostel charges. These are capable of being necessaries suited to her condition in life. Under section 68 Prakash may claim reimbursement of that amount from her property, and not from her personally. Whether they are necessaries on the facts is a question of fact, and the answer would differ if she had a guardian already paying her fees.
• The one lakh still lying in the separate account. It is identifiable and traceable, so restitution in specie is available and the court may order it restored.
• If she had spent the whole two lakh on a holiday. Nothing would be recoverable: not on the contract, not by a money decree on Ajudhia Prasad, and not as necessaries, because a holiday is not one.
• If Sana had instead sued Prakash to cancel the loan document, section 33 of the Specific Relief Act would let the court order her to restore the benefit as a condition of granting her that relief.

What it does NOT mean

"A minor is liable to pay for necessaries." He is not personally liable. His property is, and only to the extent of reimbursing the supplier.

"Anything a minor buys is a necessary if he needed it." The test is necessaries suited to his condition in life, judged also against what he already has.

"A minor can never enforce anything." He can enforce a transaction in which he is the transferee or promisee and has performed, on Raghava Chariar, and he may sue to cancel a void instrument and recover his property.

"Ratification works if the minor confirms in writing." Writing changes nothing. A nullity cannot be confirmed, and a fresh contract with fresh consideration is required.

"Restitution is never available against a minor." Too wide. It is refused as a money decree enforcing the bargain, but it is available where the property or money is identifiable, and under section 33 of the Specific Relief Act where the minor is the one seeking relief.

Quick revision

• s.68: necessaries suited to his condition in life, supplied to the incapable person or to those he is legally bound to support, are reimbursed from his property. Quasi contractual, never personal.
• Raghava Chariar, (1916) ILR 40 Mad 308 (FB): a minor may be a transferee, mortgagee, payee or beneficiary. The bar is on binding himself, not on acquiring rights. Partnership: benefits only, s.30 of the Partnership Act 1932.
• No ratification. A void agreement is a nullity, and past consideration given during minority supports nothing. A fresh contract after majority is required.
• No estoppel and no money decree: Ajudhia Prasad, AIR 1937 All 610 (FB), following Mohori Bibee, because a money decree would enforce the void liability.
• Restitution IS available for identifiable property or money, and under s.33 of the Specific Relief Act 1963 when the minor is the plaintiff seeking cancellation.
• A minor may be an agent, because an agent binds the principal and not himself.

Test yourself

1. Is a minor liable for necessaries supplied to him? Not personally. Section 68 entitles the supplier of necessaries suited to the minor's condition in life to be reimbursed from the minor's property, and the obligation is quasi contractual rather than contractual, so if the minor has no property nothing is recoverable.

2. Can a minor be a mortgagee? Yes. In A.T. Raghava Chariar v. O.A. Srinivasa Raghava Chariar, (1916) ILR 40 Mad 308, the Madras Full Bench held that where a minor has advanced the whole of the mortgage money and nothing remains for him to do, the mortgage is enforceable by him, because section 11 bars a minor from binding himself and not from being a transferee.

3. A person confirms, after turning eighteen, a loan taken at seventeen. Is the confirmation binding? No. The original agreement was void and a nullity cannot be ratified, and the consideration was furnished during minority so it cannot support the later promise. Only a fresh contract made after majority, with fresh consideration, would bind.

4. When will a court order a minor to restore a benefit? Where the property or money received is still identifiable, restitution in specie may be ordered, because that restores what is traceably the other party's rather than enforcing a contractual liability. And under section 33 of the Specific Relief Act 1963 the court may require restoration as a condition of granting cancellation where the minor is the plaintiff. A money decree that in substance enforces the void bargain is refused, on Ajudhia Prasad v. Chandan Lal.

5. Why does the law refuse a money decree but allow restitution in specie? Because the two do different things. A money decree makes the minor answerable in damages for the bargain, which is precisely the liability sections 10 and 11 deny, and Ajudhia Prasad called it almost tantamount to enforcing the contract. Restoring identifiable property takes back what never lawfully became the minor's, and leaves the void agreement unenforced.

Broken down: the two limbs of the test

Soundness of mind under section 12 requires both of the following, at the time of contracting.

1. Capacity to understand the contract. Can the person follow what the bargain is: what they are giving, what they are getting, and on what terms?
2. Capacity to form a rational judgment as to its effect upon his interests. Can the person weigh what it will do to them? This is the harder limb, and it is the one that a person may fail while still appearing lucid. Someone may perfectly well understand that they are signing away a house and yet be unable to weigh what that means for them.

Both are required. A person who understands the words but cannot judge the consequences is not of sound mind for the purposes of the section.

The two directions, and where the burden lies

The second and third paragraphs deal with people whose condition fluctuates, and they run in opposite directions.

The practical consequence is about proof. Where a person is usually of unsound mind, the party seeking to uphold the contract must show that it was made during a lucid interval. Where a person is usually of sound mind, the party seeking to escape the contract must show that at that moment they were not.

The vocabulary, in plain English

Lucid interval means a period during which a person whose mind is usually disordered is in fact clear and capable. Idiocy and lunacy are the old words for a permanent and a fluctuating incapacity respectively; they appear in older judgments and are not used in modern practice. Delirium is a temporary confusion caused by illness or fever.

The effect: void, not voidable

An agreement made by a person of unsound mind is void, not voidable, for the same reason as a minor's agreement: section 11 makes such a person incompetent, and section 10 requires competent parties, so the agreement never satisfies section 10 at all.

This is a real point of difference from English law, and it is examinable. In England a contract with a person of unsound mind is generally voidable at that person's option, and only if the other party knew of the incapacity. Under the Indian Act, the agreement is void whether or not the other party knew anything. Do not import the English rule.

Necessaries. As with a minor, section 68 of this Act applies. A person incapable of contracting who is supplied with necessaries suited to his condition in life does not become contractually liable, but the supplier is entitled to be reimbursed from the property of such incapable person. The liability is against the estate, not against the person, and it is quasi contractual. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

Persons disqualified by law

The third limb of section 11 covers persons who are of full age and sound mind but whom some other law forbids to contract. The Act does not list them; they come from elsewhere. The recognised categories are these.

Alien enemies. A person who is a national of, or resident in, a country at war with India. Contracts made with an alien enemy during a war are void, and contracts made before the war are either suspended or dissolved. The rationale is that performance would benefit the enemy.

Foreign sovereigns, ambassadors and diplomatic staff. They may contract, and they may sue, but they cannot be sued in Indian courts without sanction. So the disability is one of being proceeded against, not of contracting. Section 86 of the Code of Civil Procedure 1908 requires the consent of the Central Government before a foreign ruler is sued.

Convicts. A person undergoing a sentence of imprisonment cannot contract during the sentence. The disability ends on the expiry of the sentence or on a pardon.

Insolvents. When a person is adjudged insolvent, their property vests in the official assignee or receiver, so they cannot deal with it. The disability is over the estate rather than over the person, and it ends on discharge.

Corporations and statutory bodies. A company is an artificial person and can contract only within the objects for which it was created and the powers its statute gives it. An agreement beyond those powers is ultra vires, which means beyond the powers, and is void.

Married women are not under any disability in Indian law, and a textbook that lists them is repeating an English rule abolished long ago. A married woman may contract in respect of her own property freely.

A worked example

Vasant is eighty two and has been diagnosed with dementia. His condition varies: on most days he cannot follow a conversation, but on some mornings he is entirely clear. On the morning of 4 June, in the presence of his doctor and two neighbours, he signs an agreement to sell a plot of land to Nandita at a fair market price. Two months later his son sues to have the sale set aside.

• What is the test? Not whether Vasant has dementia, but whether at the time he signed he could understand the agreement and form a rational judgment about its effect on his interests.
• Who must prove what? Because Vasant is usually of unsound mind, the second paragraph of section 12 applies, and Nandita must show that the agreement was made during a lucid interval.
• What evidence would do it? The doctor's contemporaneous assessment, the neighbours' account of his conversation that morning, the fairness of the price, and whether Vasant could explain what he was selling and why.
• If she proves it, the agreement is a valid contract. If she cannot, Vasant was incompetent under section 11 and the agreement is void from the beginning.

Now change the facts. Vasant is of sound mind generally, but signs after drinking heavily at a wedding and cannot follow the terms. The third paragraph applies, and it is now for the party challenging the contract to prove the incapacity at that moment. If proved, illustration (b) applies squarely and the agreement is void.

What it does NOT mean

"A person with a mental illness cannot contract." Section 12 asks about capacity at a moment, not about a diagnosis. Illustration (a) says in terms that a patient in an asylum may contract during a lucid interval.

"Drunkenness is never an answer." Illustration (b) says it is, but only where the intoxication was such that the person could not understand the terms or judge their effect. Ordinary drinking that leaves a person capable does not touch the contract.

"The contract is voidable at the option of the person of unsound mind." That is the English rule. Under section 11 read with section 10, the agreement is void.

"A declaration of unsound mind by a court ends the person's contractual life." It does not. The test remains the moment of contracting, and a lucid interval is enough.

Quick revision

• Section 12: sound mind for contracting means, at the time of making the contract, capacity to understand it and to form a rational judgment as to its effect on his interests. Both limbs.
• Usually unsound, occasionally sound: may contract in a lucid interval. Usually sound, occasionally unsound: may not contract while unsound.
• Burden follows the usual condition: whoever asserts the departure from it must prove it.
• Effect: the agreement is void, not voidable. English law makes it voidable and requires knowledge; Indian law does not.
• Section 68 still allows recovery for necessaries from the incapable person's property.
• Disqualified by law: alien enemies, foreign sovereigns and diplomats, convicts, insolvents, corporations acting ultra vires. Married women are not disqualified.

Test yourself

1. State the test of soundness of mind under section 12. A person is of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. Both capacities are required, and the test is applied at the moment of contracting rather than as a diagnosis.

2. A patient in a mental hospital signs a contract during a clear interval. Is it valid? Yes. The second paragraph of section 12 provides that a person usually of unsound mind but occasionally of sound mind may contract when he is of sound mind, and illustration (a) is exactly this case. The party relying on the contract would have to prove the lucid interval.

3. How does the Indian position on contracts with persons of unsound mind differ from the English? Under the Indian Act such an agreement is void, because section 11 makes the person incompetent and section 10 requires competent parties, and it is void whether or not the other party knew of the incapacity. In English law the contract is generally voidable at the option of the incapable person, and only where the other party knew of the incapacity.

4. Who are persons disqualified by law from contracting? Alien enemies during a war, foreign sovereigns and diplomatic representatives (who may contract but cannot be sued without sanction, section 86 of the Code of Civil Procedure 1908), convicts during their sentence, insolvents in respect of the estate that has vested in the assignee, and corporations acting beyond the objects and powers their statute allows.

5. Can a supplier recover anything for goods supplied to a person of unsound mind? Not on the contract, which is void. But section 68 entitles a person who supplies necessaries suited to the condition in life of a person incapable of contracting to be reimbursed from that person's property. The claim is quasi contractual, lies against the estate and not against the person, and is limited to necessaries.

Broken down

Section 13: consensus ad idem

Two elements, and both must be present.

1. The same thing. The parties must be agreeing about the same subject matter.
2. In the same sense. They must attach the same meaning to it. Two people may both be talking about "the shipment of cotton" and mean different shipments.

Consensus ad idem is Latin for "agreement to the same thing", and it is the phrase examiners expect to see used and explained. Where it is absent the case is one of mistake, and section 20 declares such an agreement void where both parties are under a mistake as to a matter of fact essential to the agreement. See [Mistake of Fact and Mistake of Law].

Section 14: the five vitiating factors

A vitiating factor is something that spoils an otherwise good consent. The Act lists exactly five and no more, and the list is closed: hardship, a bad bargain, or plain foolishness are not on it.

The last row is the odd one out and it is deliberately so. Four of the five make the contract voidable; mistake makes it void or does nothing at all. That is why section 14 lists mistake as "subject to the provisions of sections 20, 21 and 22" rather than flatly.

The "but for" test

The final paragraph of section 14 is easy to skim and it decides real cases. Consent is caused by one of the five factors only when it would not have been given but for that factor.

So the vitiating factor must have operated on the mind of the party. A threat that the other party never heard, a lie they never believed, or a misstatement they had already discovered and disregarded, does not make the contract voidable, because consent would have been given anyway. The Explanation to section 19 makes the same point for fraud and misrepresentation: one that did not cause the consent does not render the contract voidable.

A worked example

Nikhil agrees to sell "my car" to Preeti for four lakh rupees. Consider four versions.

• Version one. Nikhil owns two cars, a Swift and a Fortuner. He means the Swift and Preeti means the Fortuner, and nothing in their dealings shows which. There is no consensus ad idem: they have not agreed on the same thing. Section 13 is not satisfied and the agreement is void under section 20 as a bilateral mistake as to a matter of fact essential to the agreement.
• Version two. Nikhil owns one car and both know which. Preeti agrees because Nikhil has threatened to file a false criminal complaint against her brother. There is consent under section 13, but it is not free: this is coercion under section 15 and the contract is voidable at Preeti's option under section 19.
• Version three. Nikhil tells Preeti the car has run thirty thousand kilometres, knowing it has run ninety thousand. Consent exists, and it is caused by fraud under section 17. Voidable at Preeti's option, and she may instead insist that the contract be performed and that she be put in the position she would have been in had the statement been true, under the second paragraph of section 19.
• Version four. Nikhil says thirty thousand kilometres, honestly believing it because that is what the previous owner told him. This is misrepresentation under section 18, and the contract is voidable. But if Preeti had the service records in her hand and could have discovered the truth with ordinary diligence, the Exception to section 19 bars her from avoiding it.

Notice what changes across the four. Only in version one is there no contract at all. In the other three there is a contract, it binds Nikhil throughout, and it is for Preeti to decide whether to keep it or set it aside.

Consent distinguished from free consent

The practical difference. If the agreement is void, a buyer who resells to an innocent third party gives that third party nothing, because he had nothing. If the contract is merely voidable, the buyer had a good title until avoidance, and an innocent purchaser for value who buys before the contract is avoided keeps the goods.

What it does NOT mean

"Free consent means consent given without pressure of any kind." Commercial pressure is not coercion. A hard bargain driven by a party with more bargaining power is not by itself any of the five factors, although an unconscionable standard form imposed on an unequal party may fall under section 16(3) or section 23.

"Absence of free consent makes the agreement void." Only mistake does that. The other four make the contract voidable, and the difference decides who may sue, what happens to benefits already received, and whether a third party is protected.

"If a party did not read the document, there is no consent." Failing to read is ordinarily no answer. A person who signs is generally bound by what they signed, and the question becomes whether one of the five factors was present. This is why standard form agreements needed separate treatment, in [Standard Form Agreements].

"Any one of the five can be pleaded loosely." Each is separately defined and separately proved, and the burden lies on the party alleging it. A plea of undue influence in particular must be pleaded with particulars, as [Undue Influence] shows.

Quick revision

• s.13: consent is agreeing upon the same thing in the same sense, that is consensus ad idem.
• s.14: consent is free when not caused by coercion (15), undue influence (16), fraud (17), misrepresentation (18), or mistake (20 to 22).
• The but for test: the factor must have operated on the mind; consent is caused by it only if it would not have been given but for it.
• No consent at all: VOID. Consent but not free: VOIDABLE, ss.19 and 19A.
• Mistake is the odd one out: void if bilateral and essential (s.20), otherwise generally no effect (ss.21, 22).
• Voidable means valid until avoided, so an innocent third party who buys before avoidance is protected; under a void agreement nothing passes at all.

Test yourself

1. Define consent and free consent, and say why the Act separates them. Section 13 defines consent as two or more persons agreeing upon the same thing in the same sense, that is consensus ad idem. Section 14 defines free consent as consent not caused by coercion, undue influence, fraud, misrepresentation or mistake. They are separate because the consequences differ: absence of consent means there is no agreement at all and it is void, whereas consent that is not free produces a real contract that is voidable at the option of the injured party.

2. List the five factors that destroy free consent, with their sections and effects. Coercion, section 15, voidable. Undue influence, section 16, voidable under section 19A. Fraud, section 17, voidable. Misrepresentation, section 18, voidable. Mistake, sections 20 to 22, void where both parties are mistaken as to an essential matter of fact and otherwise generally without effect.

3. What does the last paragraph of section 14 add? The but for test. Consent is treated as caused by one of the five factors only where it would not have been given but for that factor, so the factor must actually have operated on the mind of the party. A lie that was never believed, or a threat never communicated, leaves the contract untouched.

4. Why does the void or voidable distinction matter to a third party? Because a voidable contract is valid until it is avoided, so title passes in the meantime and an innocent purchaser for value who buys before avoidance keeps what he bought. Under a void agreement no title ever passed, so the purchaser takes nothing however innocent he was.

5. A buyer signs a contract without reading it and later says he never truly consented. Is that enough? No. Failing to read is ordinarily not an answer, and consent under section 13 is judged by what the parties agreed upon rather than by what one of them troubled to read. He must bring the case within one of the five factors in section 14, and prove it.

A point of currency the textbooks have not caught up with. Section 15 names the Indian Penal Code 1860. The Penal Code was repealed and replaced by the Bharatiya Nyaya Sanhita 2023 with effect from 1 July 2024. Section 15 has not been amended, so the reference is read through section 8 of the General Clauses Act 1897, by which a reference to a repealed enactment is construed as a reference to the re-enacted provision. In an exam, write section 15 in its own words, naming the Indian Penal Code as the section does, and add that the reference now takes effect as a reference to the corresponding provision of the Bharatiya Nyaya Sanhita 2023. Criminal intimidation, section 506 of the old Code, is section 351 of the Sanhita.

Broken down: the two limbs

Section 15 has two independent limbs. Either will do.

Limb one: an act forbidden by the penal law

1. There is an act committed or threatened.
2. The act is forbidden by the penal law. This is the objective test, and it is what makes the limb workable.
3. It is done to the prejudice of any person whatever.
4. It is done with the intention of causing any person to enter into an agreement.

Limb two: unlawful detention of property

1. Property is detained or its detention is threatened.
2. The detention is unlawful. A lawful lien or a lawful right of retention is not coercion, however inconvenient.
3. Again, to the prejudice of any person, and with the intention of causing a person to enter into an agreement.

Three phrases that decide problems

"Any person whatever." The prejudice need not be to the party to the contract. A threat to harm the promisor's child, or to detain a stranger's goods, is within the section. This is deliberately wide, and it is regularly examined.

"With the intention of causing any person to enter into an agreement." Purpose matters. An act forbidden by the penal law that was not aimed at obtaining an agreement is not coercion under section 15, whatever else it is.

The Explanation. Coercion is judged by the Indian penal law even where the act was done somewhere that law does not run. The illustration is exactly this case, and it is the point the illustration exists to make.

The effect, and getting the money back

Voidable, section 19. Where consent is caused by coercion, the agreement is a contract voidable at the option of the party whose consent was so caused. So the coerced party may affirm it or avoid it, and until they avoid it the contract stands.

Restoring the benefit, section 64. When a voidable contract is rescinded by the party entitled to do so, the other party need not perform, and the party rescinding must restore any benefit received from the other party to the extent he has received it.

Money paid under coercion, section 72. This is the separate and very useful route. Section 72 provides that a person "to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it." It is a quasi contractual claim under Chapter V and it does not depend on avoiding a contract at all. See [Quasi Contracts: Obligations Resembling Those Created by Contract].

Burden of proof. The party alleging coercion must prove it. There is no presumption of coercion, and this is a real difference from undue influence, where section 16(3) shifts the burden in defined circumstances.

Coercion distinguished from undue influence

Set almost every year, because both concern pressure.

A worked example

Ganesh, a transporter, is holding forty crates of Latika's perishable mangoes in his warehouse. Latika has paid the agreed freight in full. Ganesh refuses to release the crates unless she signs a fresh contract giving him her transport business for the next three years at rates well below market.

• Is this coercion? Yes, under limb two. He is detaining her property, and the detention is unlawful because the freight has been paid and he has no right of retention. The threat to continue detaining it is made with the intention of causing her to enter an agreement.
• Does it matter that he threatened no violence? No. The two limbs are independent, and limb two needs no penal offence at all, only an unlawful detention.
• What is the effect? The three year contract is voidable at Latika's option under section 19. It binds Ganesh in the meantime.
• If she signs and then pays him an extra sum to release the crates, section 72 lets her recover that money as money paid under coercion, without needing to avoid the contract.
• If she avoids the contract, section 64 requires her to restore any benefit she received under it.

Now change the facts. Ganesh has a lawful lien because the freight is unpaid, and he refuses to release the mangoes until it is paid, adding that while he has them he would also like the three year contract. The detention is now lawful, so limb two fails. Whether the additional demand amounts to coercion depends on whether anything forbidden by the penal law was done or threatened, and on the facts as stated it was not. Latika's argument would have to be undue influence or unconscionability, which is a different and harder case.

What it does NOT mean

"Any threat is coercion." Only a threat to do something forbidden by the penal law, or to unlawfully detain property. A threat to sue, to terminate a contract lawfully, or to take one's business elsewhere is none of those.

"A threat to prosecute someone is always coercion." A threat to set the criminal law in motion where there are genuine grounds is not by itself an act forbidden by the penal law. It becomes coercion where it crosses into an offence, for example extortion or criminal intimidation, and an agreement to stifle the prosecution of a non compoundable offence is in any event unlawful under section 23.

"Coercion makes the agreement void." It makes the contract voidable at the option of the party coerced, under section 19.

"The threat must be against the other contracting party." The section says to the prejudice of any person whatever.

"Section 15 no longer works because the Penal Code is repealed." The reference is read as a reference to the Bharatiya Nyaya Sanhita 2023 through section 8 of the General Clauses Act 1897.

Quick revision

• s.15: coercion is committing or threatening any act forbidden by the penal law, OR unlawfully detaining or threatening to detain any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
• Two independent limbs; either suffices. Limb two needs no offence, only an unlawful detention.
• Explanation: it is immaterial whether the penal law is in force where the coercion was employed. The illustration is the English ship on the high seas.
• The penal reference now takes effect as the Bharatiya Nyaya Sanhita 2023 (in force 1 July 2024) via s.8 of the General Clauses Act 1897; criminal intimidation is s.351.
• Effect: voidable at the option of the coerced party, s.19. On rescission, restore benefits, s.64.
• s.72: money paid or anything delivered under coercion must be repaid or returned, as a quasi contractual claim.
• Burden is always on the party alleging coercion; there is no presumption.

Test yourself

1. Define coercion and set out its two limbs. Section 15 defines coercion as the committing, or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. The first limb rests on the criminal law; the second needs no offence at all, only that the detention of property be unlawful.

2. What does the Explanation to section 15 add, and what illustrates it? That it is immaterial whether the Penal Code is or is not in force in the place where the coercion is employed. The illustration is of A, on board an English ship on the high seas, causing B to agree by an act amounting to criminal intimidation under the Penal Code; A has employed coercion even though the act was no offence by English law and section 506 was not in force there.

3. Distinguish coercion from undue influence. Coercion is pressure of a physical or penal kind, needs no relationship between the parties, is tested objectively against the criminal law, and must always be proved by the party alleging it. Undue influence is moral or mental pressure that arises from a relationship in which one party is in a position to dominate the will of the other and uses it to obtain an unfair advantage, and under section 16(3) the burden may shift to the dominant party where the transaction appears unconscionable.

4. A carrier holds goods after freight has been fully paid, and demands a new contract. Advise. The detention is unlawful because the freight is paid and there is no right of retention, so the second limb of section 15 is satisfied, the detention being to the owner's prejudice and intended to cause her to enter an agreement. The resulting contract is voidable at her option under section 19, any extra money paid to release the goods is recoverable under section 72, and on rescission she must restore benefits received under section 64.

5. Is section 15 still workable now that the Indian Penal Code has been repealed? Yes. Section 15 has not been amended, but section 8 of the General Clauses Act 1897 construes a reference to a repealed enactment as a reference to the corresponding provision of the re-enacting statute, so the reference operates as one to the Bharatiya Nyaya Sanhita 2023, in force from 1 July 2024.

The Act's own illustrations:

"(a) A having advanced money to his son, B, during his minority, upon B's coming of age obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease or age, is induced, by B's influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence.

(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on terms which appear to be unconscionable. It lies on B to prove that the contract was not induced by undue influence.

(d) A applies to a banker for a loan at a time when there is stringency in the money market. The banker declines to make the loan except at an unusually high rate of interest. A accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence."

Illustrations (c) and (d) sit side by side deliberately: both are hard loans, and only one is undue influence. The difference is the relationship, not the harshness of the terms.

Broken down: two ingredients, then the burden

The two ingredients under section 16(1)

Both must be established, and in this order.

1. The relations are such that one party is in a position to dominate the will of the other. This is about the relationship, not about the transaction.
2. He uses that position to obtain an unfair advantage over the other. Having the position is not enough. It must be used, and it must produce an unfair advantage.

Vocabulary. A fiduciary relation is one of trust and confidence in which one party is bound to act for the benefit of the other: trustee and beneficiary, guardian and ward, solicitor and client, doctor and patient, spiritual adviser and disciple. Unconscionable means so unfair and one sided that the conscience of the court is shocked by it.

Section 16(2): when the position is deemed to exist

Two heads, and the words "in particular and without prejudice to the generality" mean the list is illustrative and not exhaustive.

• (a) Real or apparent authority, or a fiduciary relation. Employer and employee, police officer and accused, income tax officer and assessee, trustee and beneficiary, solicitor and client, doctor and patient, spiritual guru and devotee.
• (b) Mental capacity temporarily or permanently affected by age, illness, or mental or bodily distress. Note that this head does not need any relationship of authority at all: the vulnerability alone can put the other party in a position to dominate.

Relationships that do NOT of themselves raise the position are worth knowing because they are examined: husband and wife, parent and adult child, and creditor and debtor are not, by the mere fact of the relationship, relationships of domination. They may become so on the facts.

Section 16(3): the burden shifts, but only after a finding

This is the sub-section students misuse, and the case law is clear about the order of the enquiry.

The burden shifts to the dominant party only when two things are already shown: that he is in a position to dominate the will of the other, and that the transaction appears, on the face of it or on the evidence adduced, to be unconscionable. Then, and only then, must he prove that the contract was not induced by undue influence.

The leading cases

Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, AIR 1967 SC 878.

Facts. A suit was brought to have a deed of settlement set aside as fraudulent and collusive. The plaintiff's father had settled certain properties on a grandson. The trial court dismissed the suit. The High Court, on appeal, proceeded on the footing that in view of the relationship of the parties the trial court should have presumed that the donee had influence over the donor, and should have required the donee to prove that the gift was the spontaneous act of the donor; and it further presumed, from the donor's great age, that his understanding must have deteriorated.

Held. The whole approach of the High Court was wrong and could not be upheld. A court trying a case of undue influence must consider, in view of section 16(1), two things to start with: whether the relations between the parties are such that one is in a position to dominate the will of the other, and whether that position has been used to obtain an unfair advantage. Sub-section (2) merely illustrates when a person is to be considered to be in such a position, and sub-section (3) throws the burden on the dominant party only in the circumstances it specifies. The law of undue influence is the same for a gift inter vivos as for a contract. Mere relationship, and mere old age, raise no presumption of domination.

Why it matters here. It fixes the order of the enquiry and refuses to let a presumption do the work of proof. It is the answer to any problem in which a party argues undue influence from the bare existence of a family relationship.

Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279.

Facts. A managing director sued for a declaration that later resolutions of a private company were void and that earlier resolutions in his favour remained in force. The company's answer was that its directors had been coerced and unduly influenced into passing those earlier resolutions by the plaintiff, who was in a dominating position. The written statements contained no particulars of that plea, and no evidence was led on it. The first appellate court nevertheless found domination.

Held. A party pleading undue influence must set out the particulars, and the burden of proving it lies on that party. A finding that a transaction is vitiated by undue influence is primarily a finding on a question of fact. The first appellate court had travelled far beyond the pleadings.

Why it matters here. It supplies the pleading and burden half of the topic. Undue influence cannot be raised for the first time in argument, and a vague averment of domination is not a plea of undue influence at all.

A worked example

Kamla, aged seventy nine, has been seriously ill for two years. Her nephew Suresh has lived with her throughout, manages her bank accounts, holds her power of attorney, and is the only person who deals with her doctors. She transfers a flat worth two crore rupees to him for twenty lakh rupees. Her daughter sues to set the transfer aside.

• Step one: is Suresh in a position to dominate her will? Very likely yes, on both heads of section 16(2). He holds a real authority over her affairs and stands in a fiduciary relation as her attorney, under (a); and her mental capacity is affected by age and illness, under (b).
• Step two: is the transaction unconscionable on its face? A flat worth two crore transferred for twenty lakh is on its face grossly one sided.
• Step three: the burden. Both conditions of section 16(3) being satisfied, the burden shifts to Suresh to prove that the contract was not induced by undue influence.
• How would he discharge it? By showing that Kamla had independent advice from a lawyer of her own choosing, that the transaction was explained to her, that she understood it, and that there was a genuine reason for the price, for example that he had cared for her for years or had spent money on the property.
• What must the daughter have done first? Pleaded undue influence with particulars, on Ladli Prasad Jaiswal. A bare allegation that Suresh was close to Kamla will not do.

Now change one fact. Kamla is seventy nine, in perfect health, manages her own affairs, and simply sells the flat cheaply to a nephew she is fond of. On Subhas Chandra Das Mushib the mere relationship and the mere age raise no presumption, so the daughter must prove both a position to dominate and its use, and affection is not domination.

What it does NOT mean

"An unfair bargain is undue influence." Illustration (d) is exactly this and says it is not. A banker lending at a high rate in a tight market is a transaction in the ordinary course of business. Unfairness matters only once a position to dominate is shown.

"Undue influence is presumed between close relatives." It is not. Subhas Chandra Das Mushib holds that neither relationship nor advanced age raises a presumption.

"Section 16(3) means the defendant must always disprove undue influence." Only where he is shown to be in a position to dominate and the transaction appears unconscionable. Both, and in that order.

"Undue influence and coercion are the same thing with different names." They differ in the pressure, in the need for a relationship, in the test applied, and in who bears the burden. See the table in [Coercion].

"It makes the agreement void." It makes the contract voidable, under section 19A, and the court may set it aside on such terms as seem just, which is the subject of the next chapter.

Quick revision

• s.16(1): relations such that one party is in a position to dominate the will of the other, and he uses that position to obtain an unfair advantage. Both, in that order.
• s.16(2): deemed positions, illustrative only: (a) real or apparent authority, or a fiduciary relation; (b) mental capacity affected by age, illness, or mental or bodily distress.
• s.16(3): where he is in that position and the transaction appears unconscionable, the burden of proving the contract was not induced by undue influence lies on him.
• Illustrations (c) and (d) are the pair to remember: the village moneylender, and the banker in a tight market. Relationship, not harshness, is what separates them.
• Subhas Chandra Das Mushib, AIR 1967 SC 878: consider the two section 16(1) questions first; relationship alone and old age alone raise no presumption; the law is the same for a gift as for a contract.
• Ladli Prasad Jaiswal, AIR 1963 SC 1279: undue influence must be pleaded with particulars and proved by the party alleging it; it is primarily a question of fact.
• Effect: voidable, s.19A. Rebutted usually by proof of independent advice and full understanding.

Test yourself

1. Define undue influence and state its two ingredients. Section 16(1) provides that a contract is induced by undue influence where the relations subsisting between the parties are such that one is in a position to dominate the will of the other and uses that position to obtain an unfair advantage. The two ingredients are the position to dominate, which is about the relationship, and the actual use of that position to obtain an unfair advantage.

2. When does the burden of proof shift under section 16(3)? Only where two things are shown: that the party is in a position to dominate the will of the other, and that the transaction appears, on the face of it or on the evidence adduced, to be unconscionable. The burden then lies on the dominant party to prove that the contract was not induced by undue influence.

3. Does a family relationship raise a presumption of undue influence? No. In Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, AIR 1967 SC 878, the Supreme Court held that the High Court was wrong to presume domination from the relationship, and equally wrong to presume from the donor's great age that his understanding had deteriorated. The court must first ask the two questions in section 16(1).

4. What must a party pleading undue influence do? Plead it with particulars and prove it. In Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279, the Supreme Court held that the burden lies on the party alleging undue influence, that the plea requires particulars, and that a court which finds domination on pleadings that never raised it has travelled beyond them.

5. Explain illustrations (c) and (d) to section 16 together. In (c) a villager takes a fresh loan from the village moneylender on unconscionable terms, and it lies on the moneylender to prove the contract was not induced by undue influence, because the relationship puts him in a position to dominate. In (d) a borrower accepts a loan from a banker at an unusually high rate during a stringency in the money market, and there is no undue influence, because it is a transaction in the ordinary course of business between parties in no relationship of domination. The pair shows that harsh terms alone are not enough.

Second limb: the terms

The court's choice is between two courses.

Set aside absolutely. Appropriate where the influenced party has received nothing, or nothing of value, under the contract.

Set aside on terms. Where the influenced party has received a benefit, the court may require them to give it back, or to account for it, as the price of relief. Typical terms are repayment of the principal actually advanced while striking down an extortionate rate of interest, or a direction to account for sums already received.

The principle behind it, in a sentence a student can use: the party who asks the court to undo a transaction must be prepared to restore what the transaction gave them, and section 19A lets the court measure how much of that is fair.

How section 19A works with section 64

Section 64 already provides that when a person at whose option a contract is voidable rescinds it, the other party need not perform, and the party rescinding must restore any benefit received to the extent he has received it. Section 19A goes further in two ways: it is a power of the court rather than an automatic consequence, and the terms are whatever seems just, which allows a partial restoration where section 64 alone would require full restoration.

A worked example

Bhavna, an elderly widow, borrows five lakh rupees from Chetan, the moneylender who has managed her late husband's affairs for twenty years and on whom she relies completely. The bond provides for interest at sixty per cent a year compounded monthly, and charges her house as security. Three years later Chetan sues on the bond. Bhavna pleads undue influence.

• Is the position to dominate made out? Chetan holds a real authority over her affairs and stands in a relation of trust, so section 16(2)(a) is engaged.
• Is the transaction unconscionable on its face? Sixty per cent compounded monthly, secured on her home, is. Section 16(3) therefore shifts the burden to Chetan to prove the contract was not induced by undue influence.
• Suppose he cannot discharge it. The contract is voidable at Bhavna's option under section 19A.
• Will the court set it aside absolutely? Almost certainly not, because she received five lakh rupees. The second limb applies.
• What terms would be just? The usual course is to set the bond aside on terms that she repay the principal actually advanced, with interest at a reasonable rate, and to strike down the extortionate rate and the charge on the house so far as it secures it. The court is not confined to an all or nothing answer.
• What if Bhavna had already repaid twelve lakh rupees? The court would take that into account in fixing the terms, and could hold the debt discharged and order nothing further.

Now change the facts. Bhavna, free of Chetan's influence and fully advised, writes to him two years later confirming the bond and continuing to pay under it. She has affirmed the contract, and the option to avoid is gone.

What it does NOT mean

"Undue influence makes the agreement void." It makes the contract voidable under section 19A. The distinction decides whether third party rights can arise and whether the contract binds in the meantime.

"The influenced party keeps what they received and escapes the contract." Where a benefit was received, section 19A lets the court impose terms, and section 64 requires restoration on rescission.

"Either party may avoid." Only the party whose consent was caused by the undue influence.

"The court must set the whole contract aside." It may set it aside absolutely or on terms, and in a lending case the usual course is to preserve the repayment of principal and strike down the extortionate parts.

"There is no time limit." The right to avoid is lost by affirmation and by delay once the influence has ceased, and a suit is in any event subject to the Limitation Act 1963.

Quick revision

• s.19A, first limb: consent caused by undue influence makes the agreement a contract voidable at the option of the party whose consent was so caused.
• Second limb: the court may set it aside absolutely, or, where that party received a benefit, upon such terms and conditions as to the Court may seem just.
• Undue influence was taken out of s.19 and given its own section precisely to carry that discretion.
• Works with s.64: on rescission, restore the benefit received. s.19A allows a partial and tailored restoration.
• Typical terms in a moneylending case: repay the principal, strike down the extortionate interest.
• The option is lost by affirmation with knowledge and free of the influence, and by delay.
• Until avoided the contract is valid, so a third party taking for value beforehand is protected.

Test yourself

1. State section 19A in full. When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused; and any such contract may be set aside either absolutely or, if the party entitled to avoid it has received any benefit under it, upon such terms and conditions as to the court may seem just.

2. Why is undue influence dealt with separately from coercion and fraud? Because undue influence usually arises inside a continuing relationship in which the influenced party has already received something substantial that cannot simply be returned. Section 19 makes contracts induced by coercion, fraud or misrepresentation voidable and leaves restoration to section 64, whereas section 19A adds a judicial discretion to set the contract aside on such terms as are just, which allows the court to preserve what is fair and strike down what is not.

3. A widow avoids an extortionate bond after receiving the principal. What order would you expect? Not an absolute setting aside. Because she has received a benefit, the second limb of section 19A applies, and the court would ordinarily set the bond aside on terms that she repay the principal actually advanced with interest at a reasonable rate, striking down the extortionate rate and, so far as it secures it, the charge on her property.

4. Can the dominant party avoid the contract? No. The option belongs only to the party whose consent was caused by the undue influence. The dominant party remains bound.

5. How may the right to avoid be lost? By affirmation, where the influenced party, with knowledge of the facts and no longer under the influence, confirms the contract expressly or by continuing to take its benefits; by delay once the influence has ceased; and by the intervention of third party rights acquired for value before avoidance. A suit is also subject to the Limitation Act 1963.

Broken down: who, with what intention, and which five acts

Who

The act must be committed by a party to the contract, or with his connivance, or by his agent. Connivance means knowingly allowing it to happen. So a fraud by a complete stranger, in which neither party had any hand, is not fraud within section 17, although it may found a case of mistake.

With what intention

Either with intent to deceive the other party or his agent, or to induce him to enter into the contract. This is the mental element, and it is what separates section 17 from section 18. In fraud the maker knows, or does not believe, that what he says is true.

The five acts

(1) The suggestion, as a fact, of that which is not true, by one who does not believe it to be true. The plain lie. Note the drafting: it is enough that the maker does not believe it to be true. He need not know it is false; recklessness, saying it without caring whether it is true, is within the clause.

(2) The active concealment of a fact by one having knowledge or belief of the fact. Not silence, but doing something to hide it. Painting over a crack, turning back an odometer, arranging a viewing at a time when the damp does not show.

(3) A promise made without any intention of performing it. A promise is a statement about a present state of mind, so a person who promises while intending not to perform is stating something false about his own intention now.

(4) Any other act fitted to deceive. A residuary clause for ingenuity the drafters could not anticipate. "Fitted to deceive" means apt or calculated to deceive.

(5) Any such act or omission as the law specially declares to be fraudulent. A pointer to other statutes, for example provisions of the Transfer of Property Act 1882 and the Insolvency law that declare particular transfers fraudulent.

The Explanation: silence, and its two exceptions

The rule is that mere silence is not fraud. There is no general duty to disclose. Two exceptions.

(a) Where it is the duty of the person keeping silence to speak. This arises in two situations. First, contracts of utmost good faith, uberrimae fidei, where one party alone has the material facts: insurance above all, and also contracts of family settlement and contracts for the sale of land as to defects in title. Second, where the parties stand in a fiduciary or confidential relationship, so that trust is reposed.

(b) Where the silence is, in itself, equivalent to speech. Where what is left unsaid gives a positive false meaning to what is said. If a buyer says "I shall assume the horse is sound unless you tell me otherwise" and the seller says nothing, the silence speaks. Equally, a half truth, or a statement true when made that the maker knows has since become false, falls here.

Fraud distinguished from misrepresentation

The distinction that carries the marks in this module.

The exception point is the subtle one and it is examined. The Exception to section 19 says the contract is not voidable if the party whose consent was so caused "had the means of discovering the truth with ordinary diligence", but by its own words it applies where consent was caused "by misrepresentation or by silence, fraudulent within the meaning of section 17". So a party who told an active lie cannot say the victim should have checked.

A worked example

Farhan sells a flat to Gita. Consider five versions of what he says and does.

• He tells her the building has no seepage, knowing that two flats flood every monsoon. Section 17(1): the suggestion as a fact of what is not true by one who does not believe it. Fraud. The contract is voidable at Gita's option under section 19, and she may also sue in tort for deceit. Farhan cannot plead that she could have asked the neighbours, because the Exception to section 19 does not protect active fraud.
• He says nothing about the seepage, and she does not ask. The Explanation applies: mere silence is not fraud. A sale of a flat is not a contract of utmost good faith as to its physical condition, and there is no fiduciary relationship.
• He replasters and repaints the affected wall the week before the viewing so the stain cannot be seen. Section 17(2): active concealment by one having knowledge of the fact. Fraud.
• He tells her truthfully in March that the society has sanctioned no repair levy, and learns in April that it has, and says nothing before the sale closes in May. His silence gives a false meaning to what he said, so it is equivalent to speech within the second exception. Fraud.
• He promises to clear the outstanding society dues before handover, having already decided not to. Section 17(3): a promise made without any intention of performing it. Fraud, and note that a mere later failure to perform would only be a breach; what makes it fraud is the intention at the time of the promise, which Gita must prove.

Remedies for fraud

The injured party has a choice, and the second paragraph of section 19 spells out the second limb.

1. Rescind the contract. Treat it as at an end and recover what was given, subject to section 64's requirement to restore benefits received.
2. Affirm the contract and insist on performance, and that he be put in the position in which he would have been if the representations made had been true.
3. Sue for damages in the tort of deceit, which is available for fraud and not for innocent misrepresentation.
4. Where sued on the contract, set up the fraud as a defence.

Loss of the right to rescind. By affirmation with knowledge of the fraud, by lapse of time, by the intervention of third party rights acquired for value without notice before rescission, and where restitution has become impossible.

What it does NOT mean

"Any false statement is fraud." Only one the maker does not believe to be true, or which is made with intent to deceive. An honest mistake is misrepresentation under section 18.

"Silence is fraud if the fact was important." The Explanation says the opposite. Silence is not fraud unless there is a duty to speak or the silence is equivalent to speech.

"Fraud makes the agreement void." It makes the contract voidable at the option of the party defrauded.

"A broken promise proves fraud." It does not. Section 17(3) requires that there was no intention of performing it when it was made, and that has to be proved.

"The victim should have checked, so the fraud does not count." That answer is available against misrepresentation and fraudulent silence, under the Exception to section 19. It is not available against an active lie.

Quick revision

• s.17: fraud is any of five acts by a party, with his connivance, or by his agent, with intent to deceive or to induce the contract.
• The five: (1) suggestion of untruth by one who does not believe it; (2) active concealment; (3) a promise with no intention of performing; (4) any other act fitted to deceive; (5) anything the law specially declares fraudulent.
• Explanation: mere silence is NOT fraud, unless (a) there is a duty to speak (utmost good faith, such as insurance; or a fiduciary relation) or (b) the silence is equivalent to speech (half truths, and facts that have changed since a true statement).
• Effect: voidable, s.19. Remedies: rescind; or affirm and be put in the position as if the representation were true; or damages in deceit; or plead it as a defence.
• Exception to s.19 (means of discovering the truth with ordinary diligence) applies to misrepresentation and fraudulent silence, not to active fraud.
• Recklessness counts: the clause says does not believe it to be true, not knows it to be false.

Test yourself

1. Define fraud and list the five acts in section 17. Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party or his agent or to induce him to enter into the contract: the suggestion as a fact of that which is not true by one who does not believe it to be true; the active concealment of a fact by one having knowledge or belief of it; a promise made without any intention of performing it; any other act fitted to deceive; and any such act or omission as the law specially declares to be fraudulent.

2. Is silence fraud? Not as a rule. The Explanation to section 17 says mere silence as to facts likely to affect willingness to contract is not fraud. It becomes fraud in two cases: where the circumstances make it the duty of the person keeping silence to speak, as in contracts of utmost good faith such as insurance or where the parties are in a fiduciary relationship; and where the silence is in itself equivalent to speech, as with a half truth or a statement that was true when made and has since become false to the maker's knowledge.

3. Distinguish fraud from misrepresentation. The difference is the maker's state of mind. In fraud he does not believe his statement to be true, or intends to deceive; in misrepresentation he believes it to be true. Both make the contract voidable under section 19, but damages in deceit lie only for fraud, and the Exception to section 19 about means of discovering the truth protects a defendant who innocently misrepresented, or was fraudulently silent, and not one who told an active lie.

4. A seller promises to clear outstanding dues and never intended to. Is that fraud? Yes, under section 17(3), which makes a promise made without any intention of performing it a fraud. The intention not to perform must have existed when the promise was made, and it is for the party alleging fraud to prove it; a mere subsequent failure to perform is a breach of contract and no more.

5. What are the remedies of a party defrauded? He may rescind the contract, restoring benefits received under section 64; or affirm it and insist under the second paragraph of section 19 that it be performed and that he be put in the position he would have been in had the representations been true; or sue for damages in the tort of deceit; or, if sued, plead the fraud as a defence. The right to rescind is lost by affirmation with knowledge, by delay, by impossibility of restitution, and by third party rights acquired for value without notice.

Limb two: breach of duty without intent to deceive

This limb covers the case where the misleading arises from failing in a duty rather than from making a statement, and it needs three things: a breach of some duty; no intent to deceive; and an advantage gained by the party in breach by misleading the other to his prejudice.

It is the limb that carries constructive fraud, meaning conduct the law treats as unfair without any dishonesty, and it is where a failure to disclose in a relationship of trust, or in a contract of utmost good faith, is dealt with when the silence was innocent.

Limb three: innocently causing a mistake as to the substance

The words "however innocently" make clear that no fault at all is required. What matters is the effect: the other party was caused to make a mistake as to the substance of the thing which is the subject of the agreement.

"Substance" is a strong word and it limits the limb. A mistake about a quality that goes to the identity or essential character of the subject matter is within it; a mistake about value, or about some collateral quality, is not.

The requirement that runs through all three

The misrepresentation must have induced the contract. Section 14's final paragraph supplies the but for test, and the Explanation to section 19 puts it beyond doubt: a fraud or misrepresentation which did not cause the consent of the party on whom it was practised does not render the contract voidable. A statement the other party never heard, never believed, or independently checked and disregarded, does nothing.

The effect, and the Exception that defeats it

Voidable, section 19. The contract is voidable at the option of the party whose consent was so caused. He may rescind, or affirm and insist under the second paragraph of section 19 that the contract be performed and that he be put in the position he would have been in if the representations made had been true.

No damages. Because there is no deceit, there is no action in tort, and the Act gives no damages for innocent misrepresentation. The remedy is rescission with restitution. This is the single most examined difference from fraud.

The Exception to section 19. This is where a misrepresentation claim most often fails.

"If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence."

The Act's own illustration (b) is exactly this case: A leads B to believe by misrepresentation that five hundred maunds of indigo are made annually at A's factory; B examines the accounts, which show that only four hundred maunds have been made; and B then buys the factory. The contract is not voidable on account of the misrepresentation.

Compare illustration (a), where B is simply induced by the false representation and does not check. There the contract is voidable.

Ordinary diligence means the care a reasonable person would take in the circumstances, not exhaustive investigation. And note again what the Exception does not cover: active fraud under section 17. A liar cannot say the victim should have checked.

A worked example

Yusuf sells his printing business to Zoya. Consider four versions.

• He tells her the machine prints eight thousand sheets an hour, because that is what the manufacturer's brochure says. In fact it manages five thousand. He believes it, so this is not fraud. But he has made a positive assertion in a manner not warranted by his information, since a brochure figure is not the same as measured output. Limb one. The contract is voidable at Zoya's option under section 19, and she gets no damages.
• The same facts, but Yusuf hands Zoya the machine's own log book, which records the true output, and she does not open it. The Exception to section 19 applies: she had the means of discovering the truth with ordinary diligence, so the contract is not voidable. This is illustration (b) in modern dress.
• Yusuf says the business is "a wonderful opportunity with a great future". Not a positive assertion of fact but an expression of opinion and commendation, so there is no misrepresentation at all.
• Yusuf knows the machine manages five thousand and says eight thousand anyway. Now it is fraud under section 17(1), Zoya may rescind and sue for damages in deceit, and Yusuf cannot rely on the Exception, because it does not protect active fraud.

Misrepresentation distinguished from fraud

What it does NOT mean

"An honest statement can never be misrepresentation." Honesty is what makes it misrepresentation rather than fraud. Limb one applies precisely where the maker believes it to be true.

"Misrepresentation entitles the injured party to damages." It does not. Rescission and restitution only.

"A statement of opinion is a misrepresentation if it turns out badly." Opinion and mere commendation are not positive assertions of fact. But an opinion stated by a person who knows the facts and has no basis for it may be treated as a statement of fact.

"Ordinary diligence means the buyer must investigate everything." It means the care a reasonable person would take. The Exception bites where the means of discovery were readily to hand, as in illustration (b), where B actually examined the accounts.

"Misrepresentation makes the agreement void." Voidable, at the option of the misled party.

Quick revision

• s.18, three limbs: (1) a positive assertion of what is untrue in a manner not warranted by the information of the maker, though he believes it; (2) any breach of duty without intent to deceive that gains an advantage by misleading another to his prejudice; (3) causing, however innocently, a mistake as to the substance of the thing that is the subject of the agreement.
• The misrepresentation must have induced the contract: s.14's but for test and the Explanation to s.19.
• Effect: voidable, s.19. Or affirm and be put in the position as if the representation were true.
• NO DAMAGES. That is the practical difference from fraud.
• Exception to s.19: not voidable if the misled party had the means of discovering the truth with ordinary diligence. Illustration (b), the indigo accounts, is the model answer.
• The Exception covers misrepresentation and fraudulent silence, never active fraud.

Test yourself

1. Define misrepresentation and set out its three limbs. Section 18 provides that misrepresentation means and includes the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true though he believes it to be true; any breach of duty which, without an intent to deceive, gains an advantage to the person committing it by misleading another to his prejudice; and causing, however innocently, a party to an agreement to make a mistake as to the substance of the thing which is the subject of the agreement.

2. What is the effect of the Exception to section 19? Where consent was caused by misrepresentation, or by silence that is fraudulent within section 17, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. Illustration (b) is the example: a buyer who examined the factory accounts and saw the true figure cannot afterwards avoid the sale on the strength of the earlier misstatement.

3. Can a party who has been innocently misled claim damages? No. Section 18 requires no dishonesty, so there is no tort of deceit, and the Act gives no damages for innocent misrepresentation. The remedies are rescission with restitution under sections 19 and 64, or affirmation with a claim to be put in the position he would have been in had the representation been true.

4. What does "in a manner not warranted by the information of the person making it" mean? That the speaker asserted the fact more positively than his information justified. A person who repeats a second hand figure as though it were within his own knowledge falls within the limb even though he honestly believes it, because the confidence of the assertion was not warranted by what he actually knew.

5. Is a seller's statement that a business is "a great opportunity" a misrepresentation? Ordinarily not. It is an expression of opinion and mere commendation rather than a positive assertion of fact, and limb one requires a statement of fact. It may be different where the speaker knows the underlying facts and has no reasonable basis for the opinion, in which case the statement may be treated as one of fact about the state of his knowledge.

Note what is not in the list. The section names coercion, fraud and misrepresentation. Undue influence was removed from it and given its own provision, section 19A, so that the court could set the contract aside on terms. See [Setting Aside a Contract Induced by Undue Influence]. Mistake is not in the list either, because it is dealt with by sections 20 to 22 and generally makes the agreement void rather than voidable.

Broken down

The main rule

Voidable is defined in section 2(i): an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others. So the contract binds the wrongdoer fully and binds the injured party only so long as he chooses.

The second paragraph: affirm and be compensated

Available for fraud and misrepresentation only, not for coercion. The injured party may insist that the contract be performed and that he be put in the position he would have been in if the representations made had been true.

This is a valuable and often overlooked remedy. It is measured on the truth of the representation, so it puts the injured party where the promise would have placed him. A buyer told a plot measured a thousand square metres, which measures eight hundred, may take the plot and claim the shortfall.

The Exception: means of discovering the truth

Denies avoidance where consent was caused by misrepresentation, or by silence fraudulent within section 17, and the party had the means of discovering the truth with ordinary diligence. It does not protect active fraud. Illustration (b), the buyer who examined the indigo accounts, is the model, and it is set out in [Misrepresentation].

The Explanation: it must have caused the consent

A fraud or misrepresentation that did not cause the consent does not make the contract voidable. This is section 14's but for test restated for this section, and it is why a misstatement the other side never relied on is legally irrelevant.

Rescission: how it is done and when it is lost

Rescission means unmaking the contract and putting the parties back where they were. The word is spelt with two s's; MU's syllabus in Module IV spells the topic "Recession", but the Act says rescission.

How. By communicating the decision to the other party. Section 66 provides that the rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal. So the rules in section 4 apply. See [Communicating Rescission, and the Promisee's Neglect].

Restoring benefits, section 64. When a person at whose option a contract is voidable rescinds it, the other party need not perform, and the party rescinding must restore any benefit received to the extent he has received it.

When the right is lost. Four ways, and they are commonly examined as a list.

1. Affirmation. Where the injured party, knowing of the coercion, fraud or misrepresentation, expressly or by conduct treats the contract as continuing.
2. Lapse of time. Unreasonable delay after discovery, and in any event the periods fixed by the Limitation Act 1963.
3. Third party rights. Where a third party has acquired rights for value and without notice before rescission.
4. Impossibility of restitution. Where the subject matter has been consumed or so altered that the parties cannot be restored substantially to their former position.

Void and voidable, side by side

A worked example

Imtiaz buys a second hand car from Dinesh for six lakh rupees. Dinesh has told him, knowing it to be false, that the car has never been in an accident. Two weeks later Imtiaz discovers the truth.

• Is the contract void? No. Consent existed under section 13; it was not free. Section 19 makes the contract voidable at Imtiaz's option.
• Option one: rescind. He communicates rescission to Dinesh under section 66, returns the car, and recovers the six lakh rupees; section 64 requires him to restore the benefit he received.
• Option two: affirm and claim. Under the second paragraph of section 19 he may keep the car and insist on being put in the position he would have been in had the representation been true, which is the difference in value between the car as represented and the car as it is.
• Option three: damages in deceit, because this is fraud and not mere misrepresentation. See [Fraud].
• Now suppose Imtiaz, knowing the truth, gets the car serviced, insures it for a year and drives it for six months. He has affirmed, and the right to rescind is gone. His claim under the second paragraph of section 19 may survive.
• Now suppose that before Imtiaz rescinds, he sells the car to Kavita, who knows nothing and pays a fair price. Kavita's title is good, because the contract was valid when she bought. Had the agreement been void, she would have taken nothing.
• Now suppose Dinesh had said the car had never been in an accident, honestly believing it, and the accident report had been in the service file Imtiaz was handed and never opened. This is misrepresentation, and the Exception applies: Imtiaz had the means of discovering the truth with ordinary diligence, so the contract is not voidable.

What it does NOT mean

"Voidable means the contract is invalid." It is fully valid, and it binds both parties, until the injured party avoids it.

"Either party may avoid a voidable contract." Only the party whose consent was caused by the vitiating factor.

"Section 19 covers undue influence." It does not; section 19A does, and it adds a power to set the contract aside on terms.

"Rescission is automatic once fraud is proved." It must be exercised and communicated, under section 66, and it can be lost.

"The rescinding party keeps what he received." Section 64 requires him to restore any benefit received to the extent he received it.

Quick revision

• s.19: consent caused by coercion, fraud or misrepresentation makes the agreement a contract voidable at the option of the party whose consent was so caused. Undue influence is in s.19A.
• Second paragraph (fraud and misrepresentation only): the injured party may affirm and insist on performance, and on being put in the position as if the representations had been true.
• Exception: no avoidance where consent was caused by misrepresentation or fraudulent silence and the party had the means of discovering the truth with ordinary diligence. Not available against active fraud.
• Explanation: a fraud or misrepresentation that did not cause the consent does not make the contract voidable.
• Rescission: communicated under s.66 as a proposal is; benefits restored under s.64.
• Lost by: affirmation, delay, third party rights for value without notice, and impossibility of restitution.
• Void, s.2(g), nothing ever passed. Voidable, s.2(i), everything passed until avoidance.

Test yourself

1. State section 19 and say which vitiating factors it covers. When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. It covers those three. Undue influence is dealt with separately by section 19A, and mistake by sections 20 to 22.

2. What alternative to rescission does section 19 give, and to whom? The second paragraph allows a party whose consent was caused by fraud or misrepresentation, if he thinks fit, to insist that the contract be performed and that he be put in the position in which he would have been if the representations made had been true. It is not available where the vitiating factor was coercion.

3. Explain the Exception to section 19 and its limits. Where consent was caused by misrepresentation, or by silence that is fraudulent within section 17, the contract is not voidable if the party could have discovered the truth with ordinary diligence. It does not apply to active fraud, so a party who told a deliberate lie cannot argue that the victim should have checked.

4. How is the right to rescind lost? By affirmation with knowledge of the vitiating factor, expressly or by conduct; by unreasonable delay and by the periods in the Limitation Act 1963; by the acquisition of rights by a third party for value and without notice before rescission; and where restitution has become impossible because the subject matter has been consumed or substantially altered.

5. Why does the void or voidable distinction matter to an innocent buyer? Because a voidable contract passes title until it is avoided, so an innocent purchaser for value without notice who buys before avoidance keeps the goods and the original owner is left to a personal remedy against the wrongdoer. Under a void agreement no title passed at any point, so the innocent purchaser takes nothing and must give the goods up.

"(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of these facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void.

(c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void."

Section 21:

"A contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India has the same effect as a mistake of fact."

Its illustration:

"A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable."

Section 22:

"A contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact."

Broken down: the three rules

Rule one, section 20: bilateral mistake of fact, essential to the agreement, is VOID

Three requirements, all necessary.

1. Both parties are mistaken. This is what "bilateral" or "common" mistake means. A mistake by one alone is section 22's case.
2. The mistake is as to a matter of FACT, not of law.
3. The fact is ESSENTIAL to the agreement. It must go to the root of the bargain, not to some incidental matter.

The recognised categories of essential mistake are three, and all three appear in the illustrations.

• Mistake as to the existence of the subject matter. The horse is already dead, the cargo already lost, the life estate already fallen in. Illustrations (a), (b) and (c).
• Mistake as to the identity of the subject matter. The parties are each thinking of a different thing, so there is no consensus ad idem under section 13.
• Mistake as to the possibility of performance. Where performance was physically or legally impossible from the outset. This overlaps with the first paragraph of section 56, which declares void an agreement to do an act impossible in itself. See [Impossibility of Performance, and Frustration].

What is NOT essential. Value, by the Explanation. Also quality, generally, and the private motive of a party. A person who buys a painting both parties believe to be by a minor artist, which turns out to be a masterpiece, has no relief: the mistake was as to value.

Rule two, section 21: mistake of Indian law does not help; foreign law counts as fact

The maxim is ignorantia juris non excusat, ignorance of the law is no excuse. Everyone is taken to know the law in force in India, so a contract made on a wrong view of it stands. The illustration is exactly that: parties who wrongly believe a debt is time barred are held to their contract.

But a law not in force in India is treated as a matter of fact. Nobody is expected to know the law of Singapore or of France, so a mistake about it is a mistake of fact and, if bilateral and essential, brings section 20 into play.

Do not confuse section 21 with section 72. Section 21 says a contract is not voidable for a mistake of Indian law. Section 72 says money paid by mistake must be repaid, and the Supreme Court has held that the word "mistake" there covers mistake of law as well as of fact.

Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135.

Facts. A firm paid sales tax on forward transactions under assessment orders. The levy was afterwards held ultra vires by the High Court, and the firm sought a refund. The authorities resisted on the grounds that the payment had been made under a mistake of law, that it was voluntary and unprotested, and that the money had been spent.

Held. The word "mistake" in section 72 comprises within its scope a mistake of law as well as a mistake of fact, and money paid under a mistake of law is recoverable, subject to defences such as estoppel, waiver and limitation. Equitable considerations cannot be imported where a clear provision entitles a party to relief, so the spending of the money made no difference.

Why it matters here. It marks the boundary of section 21. A mistake of Indian law will not undo the contract, but money paid under such a mistake can still be recovered under section 72, which is a quasi contractual claim and not a contractual one.

Rule three, section 22: unilateral mistake does not avoid the contract

Where only one party is mistaken about a fact, the contract stands. The word "merely" is doing work: the contract is not voidable merely because of the one sided mistake, which leaves room for the case where the mistake was caused by the other party's fraud or misrepresentation, in which case sections 17, 18 and 19 apply on their own terms.

There is one situation the courts treat differently, and it is worth a line. Where the unilateral mistake is as to the identity of the person contracted with, and identity was material, there may be no consensus ad idem at all under section 13, so no agreement comes into existence. That is a section 13 point rather than a section 22 exception, and it is how the classic identity fraud problems are analysed.

Consequences: section 65

Where an agreement is discovered to be void, section 65 provides that any person who has received any advantage under it is bound to restore it, or to make compensation for it, to the person from whom he received it.

So the parties to an agreement void under section 20 are not left where they stand. Money paid comes back; goods delivered are returned or paid for. See [Consequences of Rescission, and Restoration of Benefit].

The three rules in a table

A worked example

Naveen agrees to buy from Ojas a consignment of Alphonso mangoes lying in a cold store in Ratnagiri, for eight lakh rupees. Work through five versions.

• Unknown to both, the cold store burnt down the previous night and the mangoes were destroyed. Both parties are mistaken as to the existence of the subject matter, which is essential. Section 20: the agreement is void. Any advance paid is recoverable under section 65.
• Ojas has two consignments, one Alphonso and one Kesar. He means the Kesar and Naveen means the Alphonso. No consensus ad idem under section 13, and a bilateral mistake as to the identity of the subject matter. Void under section 20.
• Both believe the mangoes are worth twelve lakh rupees; in fact they are worth five. The Explanation to section 20 applies: an erroneous opinion as to value is not a mistake of fact. The contract stands.
• Naveen alone believes the consignment is Alphonso, and Ojas has said nothing to suggest it. A unilateral mistake of fact. Section 22: the contract is not voidable. If Ojas had said it was Alphonso, honestly or dishonestly, sections 18 or 17 would apply instead.
• Both believe an export licence is unnecessary because they misread the Indian rules, and it is required. A mistake as to a law in force in India. Section 21: the contract is not voidable. Had they misread the import rules of the United Arab Emirates, that would be a foreign law and so a mistake of fact.

What it does NOT mean

"Any mistake makes the agreement void." Only a bilateral mistake as to a matter of fact essential to the agreement.

"Mistake makes the contract voidable." It does not. Where it operates it makes the agreement void; where it does not operate it leaves the contract fully binding. Mistake is the only one of the five factors in section 14 that never produces a voidable contract.

"I paid too much, so I was mistaken." The Explanation to section 20 forecloses it. An erroneous opinion as to value is not a mistake of fact.

"Ignorance of the law is always irrelevant." Not always. Section 21 concerns the contract; section 72 allows money paid under a mistake of law to be recovered, on Kanhaiya Lal. And a mistake of foreign law counts as one of fact.

"A unilateral mistake never matters." Section 22 says the contract is not voidable merely for it. Where the mistake was induced by the other party, or where it goes to the identity of the person contracted with so that no agreement was ever reached, the analysis differs.

Quick revision

• s.20: bilateral mistake as to a matter of fact essential to the agreement makes it VOID. Categories: existence, identity, and possibility of the subject matter. Illustrations: the lost cargo, the dead horse, the fallen life estate.
• Explanation to s.20: an erroneous opinion as to value is not a mistake of fact.
• s.21: mistake as to a law in force in India does not make the contract voidable, ignorantia juris non excusat; a mistake as to a foreign law has the same effect as a mistake of fact.
• s.22: unilateral mistake of fact does not make the contract voidable.
• s.65: where an agreement is discovered to be void, an advantage received must be restored or compensated for.
• s.72 and Kanhaiya Lal, AIR 1959 SC 135: "mistake" in s.72 includes a mistake of law, so money paid is recoverable even though the contract itself stands under s.21.
• Mistake is the only factor in s.14 that makes an agreement void rather than voidable.

Test yourself

1. When does mistake make an agreement void? Under section 20, where both parties are under a mistake as to a matter of fact essential to the agreement. The mistake must be bilateral, must be one of fact rather than of Indian law, and must go to the root of the bargain, typically the existence or identity of the subject matter or the possibility of performing it.

2. Is a mistake as to value a mistake of fact? No. The Explanation to section 20 provides that an erroneous opinion as to the value of the thing which forms the subject matter of the agreement is not to be deemed a mistake as to a matter of fact, so the agreement stands however badly one party has judged the bargain.

3. What is the effect of a mistake of law? Under section 21 a contract is not voidable because it was caused by a mistake as to any law in force in India, on the principle that ignorance of the law is no excuse, and the illustration of parties wrongly believing a debt time barred makes the point. A mistake as to a law not in force in India has the same effect as a mistake of fact and so may bring section 20 into play.

4. Can money paid under a mistake of law be recovered? Yes. In Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135, the Supreme Court held that the word "mistake" in section 72 comprises a mistake of law as well as of fact, so tax paid under an invalid levy was recoverable although paid voluntarily and already spent, subject to defences such as estoppel, waiver and limitation. Section 21 governs the contract; section 72 governs the payment.

5. A sells B a horse that both believe to be alive but which had died before the bargain. Advise B. The agreement is void under section 20, this being a bilateral mistake as to the existence of the subject matter, which is essential to the agreement; illustration (b) is precisely this case. Any price paid is recoverable under section 65, which requires a person who has received an advantage under an agreement discovered to be void to restore it or to make compensation for it.

(b) It may move from the promisee OR ANY OTHER PERSON

The words are express and they are the Indian rule. It is enough that consideration was given; it need not have been given by the person to whom the promise was made. This produces the doctrine of constructive consideration and it is the reason a stranger to the consideration may sue in India.

(c) It may be past, present or future

The definition uses three tenses deliberately, and they are examined by name.

• Past consideration: "has done or abstained from doing". Something already done before the promise was made. Past consideration is good consideration in India, and this is a clean difference from English law, where it generally is not.
• Present or executed consideration: "does or abstains from doing". The act is performed at the time the contract is made. Paying cash across a counter is the standard example.
• Future or executory consideration: "promises to do or to abstain from doing". Each party's promise is the consideration for the other's, to be performed later.

(d) It must be "something", and that something must be of some value

Consideration must be real and not illusory, and it must be something the law regards as having value, though the law does not ask how much. Three sub rules follow.

It need not be adequate. Explanation 2 to section 25 provides that "An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given." Illustration (f) to section 25 has a horse worth a thousand rupees sold for ten, and it is a contract. Illustration (g) shows the other side: where free consent is denied, the inadequacy becomes evidence.

It must be real, not illusory. A promise to do something physically impossible, or a promise that binds the promisor to nothing at all, is no consideration.

It must be lawful. Section 10 requires a lawful consideration, and section 23 says when a consideration is unlawful. See [Unlawful Consideration and Object].

What is NOT consideration

Three standard categories, and they recur in problem questions.

• Performance of an existing public duty. A police officer who guards a factory as part of his duty gives nothing extra.
• Performance of an existing contractual duty owed to the same promisor. Doing what you were already bound to do for that person is not fresh consideration.
• A promise to perform an impossible act, which is also void under the first paragraph of section 56.

A worked example

Rehana promises her neighbour Sameer twenty thousand rupees. Consider six versions and the outcome in each.

• Nothing in return. No consideration at all. The agreement is void under section 25, unless one of its three exceptions applies.
• In return for Sameer's promise to paint her house next month. Executory consideration on both sides. A good contract.
• In return for Sameer painting her house today, as he does. Executed consideration. A good contract.
• Because Sameer painted her house last year, at her request. Past consideration, and in India that is good consideration under section 2(d), because the definition includes "has done". A good contract.
• Because Sameer painted her house last year of his own accord, without being asked. Not at her desire, so not consideration. But look at section 25(2): a promise to compensate a person who has already voluntarily done something for the promisor is enforceable without consideration. So the promise is good, on that exception rather than on section 2(d).
• In return for Sameer's promise to hand over a rupee. Consideration, and the contract is good. Adequacy is not required, by Explanation 2 to section 25. If Rehana later says she never freely consented, the gross inadequacy becomes evidence on that question, but it does not by itself avoid the contract.

Indian and English law compared

Worth learning as a table, because MU sets this comparison directly.

The last two rows are the pair students most often merge, and they are separate. See [Privity of Contract and Privity of Consideration].

What it does NOT mean

"Consideration must be money." It may be an act, an abstinence from acting, or a promise. Forbearing to sue, where there is a genuine claim, is a classic consideration.

"Consideration must be adequate." It must be real and lawful, not adequate. Explanation 2 to section 25 is express, and illustration (f) has a thousand rupee horse sold for ten.

"Past consideration is no consideration." True in England, false in India. Section 2(d)'s words "has done or abstained from doing" put it beyond doubt.

"Consideration must move from the promisee." True in England, false in India. Section 2(d) says "the promisee or any other person".

"A one sided promise is binding if it was seriously meant." Section 25 makes an agreement without consideration void, subject to its own exceptions, and seriousness alone is not one of them.

Quick revision

• s.2(d): at the desire of the promisor, the promisee or any other person has done, does, or promises to do or abstain from doing something; that act, abstinence or promise is the consideration.
• Four elements: at the promisor's desire; from the promisee or any other person; past, present or future; and something real, valuable and lawful.
• Past consideration is GOOD in India. So is consideration moving from a third person. Both differ from English law.
• Adequacy is not required (Explanation 2 to s.25), but inadequacy is evidence on whether consent was free. Illustrations (f) and (g).
• Not consideration: performance of an existing public duty, performance of a duty already owed to the same promisor, and an impossible act.
• s.10 requires the consideration to be lawful; s.23 says when it is not; s.25 makes an agreement without consideration void save in three cases.

Test yourself

1. Define consideration under section 2(d) and identify its four elements. 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. The elements are that it move at the desire of the promisor; that it may come from the promisee or any other person; that it may be past, present or future; and that it be something real, of some value, and lawful.

2. Is past consideration good consideration in India? Yes. Section 2(d) includes the words "has done or abstained from doing", so an act already performed at the promisor's desire supports a later promise. English law takes the opposite view, and the difference is a standard comparison in this paper.

3. Must consideration be adequate? No. Explanation 2 to section 25 provides that an agreement to which the promisor's consent is freely given is not void merely because the consideration is inadequate, though the inadequacy may be taken into account in deciding whether consent was freely given. Illustration (f), a horse worth one thousand rupees sold for ten, is a contract.

4. A saves B's goods from a fire without being asked, and B afterwards promises him five thousand rupees. Is the promise enforceable? Not on section 2(d), because the act was not done at B's desire and so is not consideration. But it is enforceable under section 25(2), which validates a promise to compensate wholly or in part a person who has already voluntarily done something for the promisor. Section 70 may also give A a quasi contractual claim independently of any promise.

5. Give three things that are not consideration. Performance of a duty the promisee already owes to the public, such as a police officer doing his job; performance of a duty the promisee already owes under an existing contract to the same promisor; and a promise to do something impossible, which is in any event void under the first paragraph of section 56.

Broken down: the three exceptions

Exception 1: natural love and affection, section 25(1)

Four conditions, all of which must be satisfied.

1. The agreement is expressed in writing.
2. It is registered under the law for the time being in force for the registration of documents.
3. It is made on account of natural love and affection.
4. The parties stand in a near relation to each other.

Miss any one and the exception fails. The Act's illustration (b) has all four: A, for natural love and affection, promises to give his son B one thousand rupees, puts the promise into writing and registers it. That is a contract.

"Near relation" is not defined and depends on the personal law and the circumstances of the parties. Natural love and affection must actually be present, and the requirement is real: where a settlement between close relatives is made in an atmosphere of quarrel and disharmony, the courts have held that natural love and affection was absent, so the exception did not apply even though the parties were nearly related and the document was registered.

Exception 2: compensation for past voluntary service, section 25(2)

Three conditions.

1. The act was already done before the promise.
2. It was done voluntarily, that is not at the promisor's request. This is the whole point of the exception: an act done at the promisor's request is already past consideration and good under section 2(d), so it needs no exception.
3. It was done for the promisor, or it was something the promisor was legally compellable to do.

No writing and no registration are required here.

The Act's illustrations are exactly on point. (c) A finds B's purse and gives it to him; B promises to give A fifty rupees. This is a contract. (d) A supports B's infant son; B promises to pay A's expenses in so doing. This is a contract, and it is the second branch, because B was legally compellable to maintain his own child.

Exception 3: a time barred debt, section 25(3)

Four conditions.

1. There is a debt which the creditor might have enforced but for the law of limitation.
2. There is a promise to pay it, wholly or in part.
3. The promise is in writing.
4. It is signed by the person to be charged, or by his duly authorised agent.

The Act's illustration (e): A owes B one thousand rupees, but the debt is barred by the Limitation Act; A signs a written promise to pay B five hundred rupees on account of the debt. This is a contract.

Two points that decide problems. The promise may be for part of the debt, and the illustration shows exactly that. And a bare acknowledgment of the debt is not the same as a promise to pay it: an acknowledgment made before the period expires extends limitation under section 18 of the Limitation Act 1963, whereas section 25(3) creates a fresh enforceable promise after the period has run.

The two Explanations

Explanation 1: gifts already made are untouched. The section is about promises to give, not about completed gifts. Once a gift has actually been made, its validity as between donor and donee is unaffected by the absence of consideration. So a father who hands over jewellery cannot demand it back on the ground that he received nothing for it.

Explanation 2: adequacy is not required, but inadequacy is evidence. Discussed in [Consideration: What It Is, and the Rules It Obeys]. Illustrations (f) and (g) are the pair: the horse worth a thousand rupees sold for ten is a contract; where free consent is disputed, the inadequacy is a fact the court should take into account.

Two further cases outside section 25

Section 25 is not the whole list, and an answer that stops at three exceptions is incomplete. Two other provisions of this Act dispense with consideration.

Section 63: remission. A promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or extend the time for performance, or accept any satisfaction he thinks fit. No consideration is required. This is a clear departure from the English rule in Pinnel's Case. See [Remission and Waiver of Performance].

Section 185: agency. "No consideration is necessary to create an agency." A person may be appointed an agent gratuitously and the appointment is good.

To these is often added a third from outside the Act: a completed gift, which Explanation 1 preserves, and a charitable subscription where the promisee has, on the faith of the promise, undertaken a liability, though that is better analysed as ordinary consideration.

A worked example

Vikram makes four promises in one week. Assess each.

• He promises his brother Aditya five lakh rupees "out of brotherly affection", says so in front of the family, and writes nothing down. Exception 1 fails: there is no writing and no registration. The agreement is void under section 25. Affection and near relation are not enough by themselves.
• The same promise, put into a written deed and registered. All four conditions of Exception 1 are satisfied, so it is a contract, exactly as illustration (b).
• His neighbour Farida, unasked, rescued Vikram's dog from a drain last month. Vikram now promises her ten thousand rupees. Exception 2 applies: the act was already done, it was voluntary, and it was for the promisor. A contract, and no writing is needed. Note that it could not have been consideration under section 2(d), because the act was not at Vikram's desire.
• Vikram owes a supplier two lakh rupees on an invoice from 2019, now time barred. He signs a letter promising to pay one lakh. Exception 3 applies: a debt the creditor could have enforced but for limitation, a promise to pay part of it, in writing, signed by him. A contract for one lakh rupees. Had he merely written "I acknowledge this debt", without promising to pay, the exception would not be satisfied.

Now change the last one. He makes the promise orally in front of two witnesses. Exception 3 requires writing and signature, so the promise is void.

What it does NOT mean

"Any promise between close relatives is binding." Exception 1 needs all four conditions, and writing plus registration are the two most often missing.

"A promise to pay for past services is always binding." Under Exception 2 the service must have been voluntary and done for the promisor. If it was done at his request, it is good under section 2(d) instead, which is a different route to the same answer.

"A time barred debt can be revived by admitting it." Section 25(3) needs a promise to pay, in writing and signed. A bare acknowledgment does something different, and only within the limitation period, under section 18 of the Limitation Act 1963.

"Section 25 lists every case where consideration is unnecessary." It does not. Section 63 (remission) and section 185 (agency) also dispense with it, and Explanation 1 preserves completed gifts.

"Inadequate consideration makes the agreement void." Explanation 2 says the opposite, while making inadequacy relevant evidence of whether consent was free.

Quick revision

• s.25: an agreement made without consideration is VOID, unless it is one of three cases, in which case it is a contract.
• (1) Natural love and affection: writing + registration + natural love and affection + near relation. All four. Illustration (b).
• (2) Past voluntary service: the act was already done, voluntarily, for the promisor, or was something he was legally compellable to do. No writing needed. Illustrations (c) the purse, and (d) the infant son.
• (3) Time barred debt: a promise in writing and signed to pay wholly or in part a debt the creditor might have enforced but for limitation. Illustration (e).
• Explanation 1: a gift actually made is unaffected. Explanation 2: consideration need not be adequate, but inadequacy is evidence on free consent.
• Outside s.25: s.63 remission needs no consideration, and s.185 no consideration is necessary to create an agency.

Test yourself

1. State the rule in section 25 and its three exceptions. An agreement made without consideration is void unless it is expressed in writing and registered and made on account of natural love and affection between parties standing in a near relation to each other; or it is a promise to compensate wholly or in part a person who has already voluntarily done something for the promisor, or something the promisor was legally compellable to do; or it is a promise in writing and signed by the person to be charged, or his authorised agent, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law of limitation. In any of these cases the agreement is a contract.

2. A father orally promises his son two lakh rupees out of affection. Is it enforceable? No. Exception 1 requires the agreement to be expressed in writing and registered, as well as made on account of natural love and affection between parties in a near relation. Affection and relationship alone do not satisfy it, so the agreement is void under section 25.

3. Why does Exception 2 require the service to have been voluntary? Because a service rendered at the promisor's request is already consideration under section 2(d), past consideration being good in India, so no exception is needed for it. Exception 2 exists precisely for the case that section 2(d) cannot reach, where the act was done without being asked and so did not move at the desire of the promisor.

4. Distinguish section 25(3) from an acknowledgment under the Limitation Act. Section 25(3) creates a fresh contract out of a written and signed promise to pay a debt whose recovery is already barred, and it may be for part only. An acknowledgment under section 18 of the Limitation Act 1963 must be made before the period expires and merely starts a fresh period of limitation running for the existing debt; it is not a promise to pay and does not revive a barred claim.

5. Name two provisions outside section 25 under which no consideration is required. Section 63, by which a promisee may dispense with or remit performance, extend the time, or accept any satisfaction he thinks fit, without consideration, departing from the English rule in Pinnel's Case; and section 185, which provides that no consideration is necessary to create an agency.

That case is named in almost every commentary. It is not worked here, because the judgment could not be verified: a search returns a different modern decision in which the same surname appears as a party. The rule it illustrates comes from section 2(d) itself, which is the better authority anyway, and the chapter is written on the section.

Privity of contract: India follows England

The rule is that only a party to a contract can sue on it. A person who is not a party, however much the contract was meant to benefit them, has no right of action.

The reasons are two. A contract is a bargain between those who made it, and its obligations should not be enforceable by people who assumed none. And a person who has taken on no liability should not be able to pick up the benefits.

The Act nowhere states the rule. It comes from section 2(h), which defines a contract as an agreement enforceable by law, read with the structure of the Act, and it has been settled by decision.

The leading Indian authority

M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504.

Facts. A bank of which the appellant was the manager had an overdraft with another bank, which later merged with the respondent. The appellant's father had given letters of guarantee for the overdraft. The father then executed a deed distributing his properties among his family, which recited that the amount due to the bank was to be paid by the appellant, and that if the father had to pay anything under the guarantee, the appellant and the properties allotted to him would answer for it. The creditor bank sued and claimed that the deed had created a charge on those properties in its favour.

Held. A person who is not a party to a contract cannot enforce its terms, subject to the recognised exceptions. The recitals in the deed evidenced no intention to create a charge in favour of the bank: they set out an arrangement between the donor and the members of his family as to who would meet the liability if it arose. A letter of guarantee creates a personal obligation, and an intention to convert a personal debt into a secured debt in favour of a third person could not be inferred from such recitals.

Why it matters here. It is the Supreme Court's statement of privity in Indian law, and it shows the rule working in the commonest setting: a family arrangement that mentions a creditor does not give the creditor a right to sue on it.

The exceptions to privity of contract

These are settled and they are the substance of any answer on the topic. A stranger to the contract may sue in the following cases.

(a) A beneficiary under a trust or a charge. Where a contract creates a trust in favour of a third person, or charges specific immovable property with a payment to him, the beneficiary may enforce it. M.C. Chacko failed precisely because no charge was found on the facts, which shows the exception is real and its requirements are strict.

(b) A provision in a family arrangement, marriage settlement or partition. Where a family settlement provides for the maintenance or marriage expenses of a female member, or a partition provides for a member's share, that person may sue although not a party to the document.

(c) Acknowledgment or estoppel. Where a party to the contract acknowledges, expressly or by conduct, a liability to the third person, he may be estopped from denying it. A person who receives money from A to pay it to C, and admits to C that he holds it for him, may be sued by C.

(d) A covenant running with the land. A person who buys land with notice of a restrictive covenant affecting it is bound by it, although he was no party to the covenant.

(e) Agency. Where one of the contracting parties contracted as an agent, the undisclosed or unnamed principal may sue and be sued. Strictly this is not an exception at all, because the principal is the real party.

(f) Assignment. The assignee of a contractual right may sue on it, subject to the equities. Again the assignee stands in the shoes of a party.

The two rules side by side

A worked example

Hema settles her family's affairs by a registered deed. She transfers her shop to her son Ishaan, and the deed provides that Ishaan shall pay her daughter Jyoti twelve thousand rupees a month for life, and shall pay off a loan Hema owes to Lakshmi.

• Jyoti sues Ishaan for the monthly payment. Is she barred by privity of contract? She is not a party to the deed, so the general rule bars her. But this is a family arrangement making provision for a member, exception (b), and the deed also charges the shop with the payment on the facts as stated, exception (a). She may sue.
• Did Jyoti give any consideration? No, and it does not matter. The consideration for Ishaan's promise moved from Hema, and section 2(d) allows consideration to move from "any other person". This is the privity of consideration point, and in India it is not an objection.
• Lakshmi sues Ishaan for the loan. She is a stranger to the deed, and on M.C. Chacko a recital that a family member will discharge the donor's debt is an arrangement within the family, not a promise to the creditor. Unless the deed charges identified property with her debt, or Ishaan has acknowledged the liability to her, she cannot sue on it. Her remedy is against Hema, who owes her the money.
• Suppose Ishaan writes to Lakshmi saying "I hold your money and will pay you next month". That is an acknowledgment, exception (c), and she may then sue him.

What it does NOT mean

"A stranger to the contract can never sue in India." The general rule bars him, but the six exceptions are real, and a beneficiary under a trust or charge, or under a family arrangement, regularly succeeds.

"Because consideration can move from a third person, a third person can sue." This is the central confusion. Section 2(d) tells you the promise is supported; it says nothing about who may enforce it. The person suing must still be a party.

"A contract that mentions me gives me rights." M.C. Chacko is the answer. A recital of who will pay a debt is an arrangement between the parties to the deed.

"India has abolished privity of contract." It has not. Unlike England, which legislated in 1999, India has no statute conferring rights on third parties, and the position rests on the general rule with its exceptions.

Quick revision

• Privity of consideration: consideration must move from the promisee. India does NOT follow it, because s.2(d) says "the promisee or any other person". This is constructive consideration.
• Privity of contract: only a party may sue. India DOES follow it. M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504: a stranger cannot enforce, and a recital about who will meet a debt creates no charge in the creditor's favour.
• Six exceptions: trust or charge; family arrangement, marriage settlement or partition; acknowledgment or estoppel; covenant running with the land; agency; assignment.
• Two questions keep them apart: who gave the consideration, and who is suing.
• England legislated for third party rights in 1999; India has not.

Test yourself

1. Does Indian law require consideration to move from the promisee? No. Section 2(d) provides that consideration may be furnished by the promisee or any other person, so a promise supported by consideration moving from a third person is good. This is a departure from English law, where consideration must move from the promisee.

2. Can a stranger to a contract sue on it in India? As a general rule no, and the Supreme Court applied that rule in M.C. Chacko v. State Bank of Travancore, AIR 1970 SC 504, holding that a bank could not enforce recitals in a family deed which merely arranged, between the donor and his family, who would meet a guarantee liability. The rule is subject to the recognised exceptions.

3. List the exceptions to privity of contract. A beneficiary under a trust or a charge on specific property; a person provided for by a family arrangement, marriage settlement or partition; a person to whom liability has been acknowledged, so that estoppel arises; a person entitled under a covenant running with the land; a principal where a party contracted as agent; and an assignee of a contractual right.

4. Explain why the two privity rules are different questions. Privity of consideration asks who furnished the consideration, and it goes to whether the promise is supported at all; India answers that consideration may come from anyone. Privity of contract asks who may enforce the promise, and it goes to standing to sue; India answers that only a party may, unless an exception applies. A person may be a stranger to the consideration and still be a party entitled to sue, which is exactly the situation section 2(d) is designed to permit.

5. A deed of family settlement recites that the son will pay his father's creditor. Can the creditor sue the son? Ordinarily not, on M.C. Chacko. Such a recital is an arrangement between the parties to the deed as to who will bear the liability, and it neither makes the creditor a party nor, without clear words, charges identified property with the debt. The creditor may sue if the deed does create a trust or charge in his favour, or if the son has acknowledged the liability to him so as to raise an estoppel.

A useful distinction. An act may be prohibited or it may merely attract a penalty for a regulatory purpose. Where a statute imposes a penalty to raise revenue rather than to forbid the transaction, the contract may still be good, and the question is one of construing the statute.

(b) Would defeat the provisions of any law

Wider than (a). The agreement is not itself forbidden, but if the courts enforced it the purpose of some law would be frustrated. An agreement by a debtor not to plead limitation, or an arrangement designed to evade a rent control statute, or a transfer designed to defeat a law restricting land holdings, falls here.

(c) Fraudulent

Where the object is to commit a fraud on a third person. Two people agreeing on how to divide the proceeds of a fraud, or a transfer made to defraud creditors, is the standard case.

(d) Involves or implies injury to the person or property of another

Injury here means legal wrong. An agreement to beat a person, to publish a libel, or to damage goods, is caught. It also reaches agreements whose performance necessarily involves a tort.

(e) Immoral, or opposed to public policy

The open ended head, and the one that is examined most. Note the drafting: "the Court regards it as". This head expressly invites a judicial judgment, and the standard is that of the court and not of the parties.

Immorality in the settled Indian sense is narrow, and is confined largely to sexual immorality and to interference with the marital relation. It does not mean everything a judge disapproves of, and the point is made squarely by the leading case in the next section.

Public policy is the broader idea: the principle that no one may lawfully do that which has a tendency to injure the public good. It has traditionally been treated as a set of recognised heads rather than an at large discretion, and the recognised heads are these.

• Trading with an enemy in wartime.
• Stifling a prosecution, that is an agreement not to prosecute a non compoundable offence. The right to prosecute is public.
• Maintenance and champerty. Maintenance is supporting another's litigation without a lawful interest; champerty is doing so for a share of the proceeds. In India these are not by themselves void as they were in England, but an agreement that is extortionate, or made for an improper purpose such as gambling in litigation, is opposed to public policy.
• Interference with the course of justice, including an agreement to influence a judge or to give false evidence.
• Sale of public offices and titles, and agreements to procure a public honour for money.
• Agreements creating an interest opposed to duty, such as an agreement by a public servant to act in a way inconsistent with his office.
• Agreements in restraint of parental rights or of personal liberty, and agreements in restraint of marriage, of trade, and of legal proceedings, which the Act deals with separately in sections 26, 27 and 28.
• Unconscionable bargains between parties of unequal bargaining power, the modern head, established by Central Inland Water Transport.

The old debate. Judges have long divided over whether the heads of public policy are closed. The classic image is that public policy is "an unruly horse". The settled Indian position is that the courts will apply the recognised heads and will be cautious about inventing new ones, but that the doctrine is not frozen, and Central Inland Water Transport is the clearest modern example of the courts developing it.

The leading cases

Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781.

Facts. Two parties entered a partnership to carry on wagering transactions in wheat, and one sued the other for a share of the losses paid on his behalf.

Held. A wagering agreement is void under section 30, but it is not unlawful under section 23: wagering is not immoral, nor is it opposed to public policy. Since the object of the partnership was not unlawful, the partnership itself was valid and the claim between the partners could be enforced. The Court also held that the scope of the word "immoral" in section 23 is confined to sexual immorality, and that public policy is a branch of the common law governed by precedent, so the courts should be slow to invent new heads.

Why it matters here. It is the case that keeps sections 23 and 30 apart, and the distinction is examined every year: void is not the same as unlawful. A wager is void, so no suit lies on the wager; but because it is not unlawful, transactions collateral to it are unaffected.

Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, AIR 1986 SC 1571.

Facts. A service rule of a government company allowed it to terminate the service of a permanent employee by giving three months' notice or pay in lieu, without any reason and without a hearing. Employees terminated under it challenged the rule.

Held. The rule was void as opposed to public policy under section 23. The courts will strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power, where the weaker party had no real choice but to sign a standard form on a take it or leave it basis.

Why it matters here. It shows public policy operating as a living doctrine and not a closed list, and it is the bridge from section 23 to [Standard Form Agreements].

A worked example

Test five agreements against section 23.

• Ashok pays Bela three lakh rupees to give false evidence in a pending suit. The object is to interfere with the course of justice, and the act is also an offence. Unlawful under heads (a) and (e). Void, and neither can sue.
• Chandan lends money to Dilip knowing it will be used to smuggle goods. The consideration, the loan, is lawful; the object is not. Unlawful, and the agreement is void. Chandan cannot recover the loan.
• The same loan, made without any knowledge of the purpose. The object as between these parties is simply a loan. Lawful, and the agreement stands.
• Elango agrees not to prosecute Farid for an offence of cheating, in return for Farid repaying what he took. Cheating is non compoundable, so the agreement stifles a prosecution and is opposed to public policy. Void, and Elango cannot enforce it.
• Two traders form a partnership to bet on cricket matches, and one sues the other for his share. On Gherulal Parakh the wager is void under section 30 but not unlawful under section 23, so the partnership is valid and the claim between the partners is good.

Consequences

The agreement is void. Section 23's last sentence says so.

Restitution, section 65. Where an agreement is discovered to be void, a person who has received an advantage must restore it or compensate for it. But the courts will not use section 65 to assist a party who knew of the illegality from the start: the maxim is in pari delicto potior est conditio defendentis, where both are equally at fault the defendant's position is stronger, and the court leaves them where it finds them.

Collateral transactions. Where the main agreement is unlawful, a transaction collateral to it is also tainted and unenforceable. Where the main agreement is merely void, as a wager is, a collateral transaction is unaffected. That is the practical payoff of Gherulal Parakh.

Severability. Where only part of the consideration or object is unlawful, section 24 decides whether the lawful part can be saved. See [Agreements Void in Part, and Severability].

What it does NOT mean

"Void and illegal are the same thing." They are not, and Gherulal Parakh is the authority. Every unlawful agreement is void; not every void agreement is unlawful. The difference shows in collateral transactions.

"Immoral means anything a judge disapproves of." In section 23 it has been confined largely to sexual immorality.

"Public policy lets a court refuse to enforce any harsh bargain." The doctrine works through recognised heads and the courts are cautious about new ones. Central Inland Water Transport did extend it, but on the specific ground of unequal bargaining power and a take it or leave it standard form.

"If a statute imposes a penalty, the contract is void." Not necessarily. Where the penalty is regulatory or fiscal rather than prohibitory, the contract may stand, and the question is one of construing the statute.

"Money paid under an unlawful agreement is always recoverable under section 65." Not where the party knew of the illegality. In pari delicto, the court leaves the parties where they are.

Quick revision

• s.23, five heads: forbidden by law; would defeat the provisions of any law; fraudulent; involves or implies injury to the person or property of another; the Court regards it as immoral or opposed to public policy.
• Object (the purpose) and consideration (what is given) are separate; either being unlawful makes the agreement void.
• Heads of public policy: trading with an enemy, stifling a prosecution, champerty and maintenance where extortionate, interference with justice, sale of public offices, interest opposed to duty, restraints on marriage, trade and legal proceedings, and unconscionable bargains between unequals.
• Gherulal Parakh, AIR 1959 SC 781: a wager is void under s.30 but not unlawful under s.23; "immoral" is confined largely to sexual immorality; public policy is governed by precedent. So collateral transactions survive.
• Central Inland Water Transport, AIR 1986 SC 1571: an unfair and unreasonable clause imposed by a party with superior bargaining power on a take it or leave it basis is void as opposed to public policy.
• s.65 restores advantages where an agreement is discovered to be void, but not for a party who knew of the illegality: in pari delicto.

Test yourself

1. State the five heads of section 23. The consideration or object of an agreement is unlawful if it is forbidden by law; if it is of such a nature that, if permitted, it would defeat the provisions of any law; if it is fraudulent; if it involves or implies injury to the person or property of another; or if the court regards it as immoral or opposed to public policy. Every agreement of which the object or consideration is unlawful is void.

2. Distinguish a void agreement from an unlawful one. Every unlawful agreement is void, but many void agreements are perfectly lawful. The practical difference lies in collateral transactions: those connected with an unlawful agreement are tainted and unenforceable, whereas those connected with a merely void agreement are unaffected. Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781, is the authority, wagering being void under section 30 but not unlawful under section 23.

3. What did Central Inland Water Transport decide about public policy? That the courts will strike down as opposed to public policy under section 23 an unfair and unreasonable contract or clause entered into between parties of unequal bargaining power, where the weaker party had no real choice but to accept a standard form on a take it or leave it basis. It struck down a service rule allowing termination of a permanent employee without reason or hearing.

4. Is an agreement not to prosecute an offence valid? Not where the offence is non compoundable. Such an agreement stifles a prosecution and is opposed to public policy under section 23, so it is void and cannot be enforced, the right to prosecute a public wrong not being a matter for private bargain.

5. Can a party recover money paid under an unlawful agreement? Section 65 requires a person who has received an advantage under an agreement discovered to be void to restore it or compensate for it, but the courts will not assist a party who knew of the illegality when he entered the agreement. Where both are equally at fault the maxim in pari delicto potior est conditio defendentis applies and the court leaves them as it finds them.

Situation two: several considerations for a single object, one of which is unlawful. There is one thing to be achieved, and several things are given for it, one of them unlawful. Again the agreement is void.

The test: is the consideration single or apportioned?

The words the section turns on are "a single consideration". The practical question in every problem is:

Can the lawful part be paid for separately, on the terms the parties themselves used?

• If the agreement says "ten thousand rupees a year" for both tasks together, the consideration is single and inseparable, and section 24 makes the whole void.
• If it says "six thousand for the indigo manufacture and four thousand for the other traffic", the considerations are apportioned. The unlawful part can be struck out and the lawful part enforced.

Two further limits on severability

The lawful part must be able to stand on its own. Cutting out the unlawful term must leave a complete and workable contract, not a fragment that the parties never agreed to.

The court will not rewrite the bargain. Severance is striking out, not redrafting. Where removing the offending words would change the nature of what was agreed, the whole falls.

Section 24 compared with sections 57 and 58

Three sections deal with mixtures of the lawful and the unlawful, and MU's syllabus places all three within its ranges. They are easily confused, and the distinction is worth a table.

The difference between section 24 and section 57 is the structure of the bargain. Section 24 has one consideration covering both; section 57 has two separate sets of reciprocal promises, so the lawful set survives on its own. Sections 57 and 58 are taken up in [Reciprocal Promises to Do Legal and Illegal Things].

A worked example

Meher engages Nitin under a single written agreement. Take four versions.

• "Nitin shall manage Meher's licensed liquor shop and shall also arrange the smuggling of foreign liquor. Meher shall pay Nitin eighteen lakh rupees a year." A single consideration for two objects, one unlawful. Section 24 applies and the whole agreement is void. This is the Act's own illustration in modern dress, and Nitin cannot recover even for the lawful management.
• "Nitin shall manage the licensed shop for twelve lakh rupees a year, and shall arrange the smuggling for six lakh rupees a year." The considerations are apportioned. The smuggling promise is unlawful and void, and the management contract at twelve lakh rupees can be severed and enforced.
• "Nitin shall manage the licensed shop. Meher shall pay him twelve lakh rupees a year, and shall additionally procure a false licence for Nitin's brother." Here there is a single object, the management, and several considerations, one of which is unlawful. This is the second limb of section 24, and the agreement is void.
• "Nitin shall either manage the licensed shop or arrange the smuggling, at Meher's option, for twelve lakh rupees." This is an alternative promise, so section 58 applies rather than section 24, and only the lawful branch, managing the shop, can be enforced.

What it does NOT mean

"A contract with one bad clause is always void." Only where the consideration is single and the bad part cannot be separated. Where the parties apportioned the price, the lawful part may stand.

"Any contract can be saved by severing the offending part." Severance needs the consideration to be divisible on the parties' own terms, and the remaining contract to be complete and workable without redrafting.

"Section 24 and section 57 say the same thing." They do not. Section 24 destroys the whole agreement; section 57 keeps the lawful set of reciprocal promises alive and treats only the illegal set as void.

"The court can apportion a lump sum fairly and enforce part of it." It cannot. Where the parties fixed one undivided sum, the court will not divide it for them, which is precisely why the illustration to section 24 makes the whole agreement void.

Quick revision

• s.24: if any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.
• The test is whether the consideration is single or apportioned. One lump sum for a lawful and an unlawful task: whole thing void. Separate sums: sever and enforce the lawful part.
• Illustration: a single salary of ten thousand rupees a year for superintending a legal manufacture of indigo and an illegal traffic. Void.
• Severance requires the remainder to stand on its own; the court strikes out, it does not redraft.
• Compare s.57, separate sets of reciprocal promises, lawful set enforceable; and s.58, alternative promises, only the legal branch enforceable.

Test yourself

1. State section 24 and its illustration. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. The illustration is of A promising to superintend, on B's behalf, a legal manufacture of indigo and an illegal traffic in other articles, for a single salary of ten thousand rupees a year; the agreement is void because the object of A's promise and the consideration for B's is in part unlawful.

2. When can the lawful part of an agreement be saved? Where the consideration is divisible on the parties' own terms, so that the unlawful part can be struck out and a complete, workable contract remains without the court rewriting the bargain. If the parties fixed a single undivided consideration covering both the lawful and the unlawful, section 24 makes the whole agreement void.

3. Distinguish section 24 from section 57. Section 24 applies where there is a single consideration covering lawful and unlawful matter, and it makes the whole agreement void. Section 57 applies where the parties have made two separate sets of reciprocal promises, one to do legal things and one, in specified circumstances, to do illegal things; there the first set is a contract and only the second set is void.

4. A is to be paid six lakh rupees for lawful work and two lakh rupees for unlawful work under one document. Advise. The considerations are apportioned, so the two lakh rupee promise for unlawful work is void under section 23, but the six lakh rupee contract for lawful work is severable and enforceable. Section 24 would have made the whole void only if a single undivided sum had been promised for both.

5. Why does the court refuse to apportion a lump sum itself? Because severance is a matter of striking out what the parties themselves separated, not of remaking their bargain. Where one undivided sum was promised, no part of it can be attributed to the lawful object without the court writing a contract the parties never made, and section 24 therefore declares the whole agreement void.

The forms a restraint takes

Direct and indirect restraints are both within the section, and problem questions usually use an indirect one.

• A direct promise not to marry at all, or not before a certain age or date.
• A penalty on marriage: a promise to pay a sum, or to forfeit property already given, if the person marries. The obligation is not framed as a prohibition, but its effect is to penalise marriage, so it is a restraint.
• A promise to marry only with another's consent, or only a person of the other party's choosing.
• A promise not to marry a particular person, which is a partial restraint and equally void.

What is NOT a restraint of marriage

Three categories that regularly appear as distractors.

• A promise to marry somebody. That is not a restraint at all; it is the opposite. Whether it is enforceable is a separate question governed by ordinary contract principles and by personal law.
• A provision for maintenance until marriage, or an allowance that ceases on marriage. Where the true purpose is to provide support that is no longer needed after marriage, rather than to deter marriage, it is not a restraint. The line is one of substance: is the payment conditioned on not marrying, or merely measured by the period before marriage?
• A restraint on the remarriage of a person, where the personal law or a settlement so provides, has been treated differently in some contexts, and any such question turns on the personal law rather than on section 26 alone.

A worked example

Priti's uncle makes four different arrangements. Assess each under section 26.

• He settles ten lakh rupees on Priti on condition that she never marries. A total restraint on the marriage of a person other than a minor. Void. The condition cannot be enforced, and section 26 strikes at the agreement in restraint.
• He agrees to pay Priti fifty thousand rupees a year, the payments to stop and the whole sum already paid to be refundable if she marries before thirty. A partial restraint, and a penalty on marriage. Section 26 makes no distinction between total and partial, so it is void.
• He agrees to pay Priti fifty thousand rupees a year for her maintenance until she marries. On its face this is not a restraint. The payment is measured by the period during which she is unmarried and presumably in need of support; it does not penalise marriage or purchase abstention from it. It stands, unless on the facts the true purpose was to deter her from marrying.
• He agrees with Priti's father that Priti, who is sixteen, shall not marry before she is eighteen. Priti is a minor, so the express exception in section 26 applies and the agreement is not void under this section.

Now change the third example: the uncle agrees to pay her the allowance only so long as she does not marry, and to pay her nothing at all if she does, and additionally to recover everything already paid. The refund element makes it a penalty on marriage, and it becomes a restraint. Void.

Section 26 compared with its neighbours

The comparison is worth remembering because section 26 is the strictest of the three: it has no reasonableness test and no severance language.

What it does NOT mean

"Only a total restraint is void." Section 26 does not use the word "absolutely", and a partial restraint is equally void. This is the commonest error, imported from section 27's English background.

"A reasonable restraint is valid." There is no reasonableness test in section 26.

"A promise to marry is void under section 26." It is not a restraint on marriage at all.

"An allowance that stops on marriage is a restraint." Not necessarily. The question is whether it penalises marriage or merely provides support for the period before it.

"A restraint on a minor's marriage is valid because minors cannot contract." That is the wrong reason. The agreement in question is between other parties, and section 26's own words carve out the marriage of a minor.

Quick revision

• s.26: every agreement in restraint of the marriage of any person, other than a minor, is void.
• Total or partial makes no difference, and there is no reasonableness test. Contrast s.27, which voids "to that extent" and has the goodwill exception.
• Restraints include a direct promise not to marry, a penalty or forfeiture on marrying, a promise to marry only with consent or only a chosen person, and a promise not to marry a particular person.
• "Of any person": the person restrained need not be a party to the agreement.
• Not restraints: a promise to marry; and maintenance until marriage, where the purpose is support rather than deterrence.
• The only exception on the face of the section is a minor.

Test yourself

1. State section 26 and identify its exception. Every agreement in restraint of the marriage of any person, other than a minor, is void. The only exception appearing in the section is an agreement restraining the marriage of a minor, which is not void under it.

2. Is a partial restraint of marriage valid? No. Unlike section 27, section 26 contains no words limiting it to absolute restraints and no reasonableness test, so a promise not to marry a particular person, or not to marry before a stated age, is as void as a promise never to marry at all.

3. A settlement provides that a woman shall forfeit an annuity if she marries. Is it enforceable? No. The forfeiture penalises marriage, and a penalty on marrying is a restraint in substance even though it is not framed as a prohibition. Section 26 makes it void, the person restrained not being a minor.

4. Is an allowance payable until marriage a restraint on marriage? Ordinarily not. Where the payment is a provision for maintenance measured by the period during which the person is unmarried, it supports rather than deters marriage. It becomes a restraint if its real purpose or effect is to penalise marrying, for example by requiring repayment of everything already received.

5. Compare sections 26 and 27 on partial restraints. Section 27 declares an agreement restraining a lawful profession, trade or business void "to that extent", which allows severance, and it provides an express exception for the sale of goodwill within reasonable local limits. Section 26 has neither: it voids every agreement in restraint of marriage, total or partial, with no reasonableness test and no exception other than the marriage of a minor.

Broken down

The rule

Four elements.

1. An agreement, in any form.
2. By which any one is restrained. It need not be a party who is restrained.
3. From exercising a lawful profession, trade or business of any kind. The words are as wide as they could be made. An unlawful trade is outside the section, because there is no protected freedom to carry it on.
4. The agreement is void to that extent. Note the severance language: only the offending restraint falls, and the rest of the contract may survive.

"To that extent", and what it does

Section 27 does not void the whole agreement. It voids it to the extent of the restraint. So an employment contract containing a bad post employment covenant remains a good employment contract; only the covenant is unenforceable. Contrast section 26, which voids the agreement outright.

Exception 1: sale of goodwill

Goodwill is the value attaching to a business's reputation and connection, the likelihood that customers will keep coming. A person who sells it and then reopens next door has sold nothing, so the law permits a covenant to protect the buyer, on four conditions.

1. The seller must actually have sold the goodwill of a business.
2. The covenant must be not to carry on a similar business.
3. It must be within specified local limits.
4. It lasts only so long as the buyer, or a person deriving title from him, carries on a like business there, and the limits must appear to the Court reasonable, regard being had to the nature of the business.

Note what is absent: any limit on duration. The exception controls the restraint by area, not by time, and the time limit is supplied indirectly by the requirement that the buyer be carrying on a like business.

Employment covenants: during and after

This is the division MU examines, and the two leading cases sit on either side of it.

During employment: outside section 27

Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098.

Facts. The appellant joined the respondent company as a shift supervisor and was trained in the manufacture of tyre cord yarn under a collaboration with a foreign firm. His contract ran for five years and provided that during that period he would not work in a similar capacity for any other concern, and would keep the technical aspects of his work secret. Shortly after his training he left and joined a rival concern at higher pay. The company sued for an injunction. It was granted, and his appeal to the High Court failed.

Held. The appeal failed. Negative covenants operative during the period of employment, when the employee is bound to serve his employer exclusively, are not to be regarded as being in restraint of trade and do not fall under section 27. Such a covenant is not a restraint unless the contract is unconscionable, excessively harsh, unreasonable or one sided.

Why it matters here. It draws the line. A covenant that bites while the employment subsists is enforceable, because it is an incident of the duty of exclusive service the employee has already undertaken, not a restriction on his freedom to earn a living.

After employment: inside section 27, and void

The corollary is that a covenant restraining an employee after the employment ends is a restraint on his exercise of his trade, and section 27 makes it void, however modest and however reasonable. This is where Indian law parts company sharply with English law, which would test such a covenant for reasonableness and often uphold it.

Superintendence Company of India (P) Ltd. v. Krishan Murgai, AIR 1980 SC 1717.

Facts. A service agreement contained a negative covenant in clause (10) restricting the employee after he should "leave" the company. His services came to an end and the company sought to enforce the covenant.

Held. Per Tulzapurkar J. for himself and Untwalia J., even assuming the covenant was valid and not hit by section 27, it was not enforceable against the respondent. The company should have used language covering every case of cessation of employment for any reason whatever, instead of the word "leave", which in relation to an employee ordinarily means a voluntary leaving of the service and does not include a case where he is discharged or dismissed or his services are terminated by the employer.

Why it matters here. Two things. It is the post employment half of the topic. And it is a drafting lesson worth stating in an answer: the covenant failed on the meaning of a single word. Note also that the report's own catchwords cite "section 57 of the Specific Relief Act, 1963", which is the pre-2018 numbering of what is now section 42 of that Act, dealt with in [Injunction to Perform a Negative Agreement].

What survives after employment

Section 27 strikes at restraints on trade. It does not protect an ex employee who takes what is not his. So the following remain enforceable after the employment ends:

• an obligation not to disclose or use the employer's trade secrets and confidential information;
• an obligation not to take away the employer's records, lists and documents;
• rights under the law of confidence, and under statute in respect of intellectual property.

What is not a restraint of trade

• A sole selling or exclusive dealing agreement, where a trader agrees to deal only in one manufacturer's goods, is ordinarily a business arrangement that regulates trade rather than restrains it, and it is not void merely because it limits choice.
• A restraint on an unlawful trade, because the section protects only a lawful profession, trade or business.
• A covenant during employment, on Golikari.
• Restrictions under a statute or imposed by a licence.

Partnership: where the repealed exceptions went

The Partnership Act 1932 now supplies the rules that Exceptions 2 and 3 to section 27 used to contain, and it is worth naming them because they are the standing statutory exceptions to section 27 outside the Contract Act.

• Section 11(2): partners may agree that a partner shall not carry on any business other than that of the firm while he is a partner.
• Section 36(2): an outgoing partner may agree with his partners not to carry on a similar business within a specified period or specified local limits, and such an agreement is valid if the restrictions are reasonable.
• Section 54: partners may, upon or in anticipation of dissolution, agree that some or all of them will not carry on a similar business within a specified period or specified local limits, and such an agreement is valid if the restrictions are reasonable.

Note that a reasonableness test does appear in these provisions, which is why partnership restraints behave differently from employment restraints.

A worked example

Deepa runs a bakery in Bandra. Consider four covenants.

• She sells the bakery and its goodwill to Emil, agreeing not to run a bakery anywhere in Maharashtra for as long as he runs one in Bandra. Exception 1 is engaged, but the limits must appear to the Court reasonable, regard being had to the nature of the business. A neighbourhood bakery draws its custom locally, so a restraint across the whole State is likely to be held unreasonable, and the covenant fails. Confined to Bandra and its immediate surroundings, it would stand.
• Her employee Faisal agrees that while employed he will not bake for any other business. A covenant during employment. On Golikari it is outside section 27 and enforceable, unless it is unconscionable or one sided.
• Faisal agrees that for two years after leaving he will not work in any bakery within five kilometres. A post employment restraint. Section 27 makes it void, and its modest area and duration do not save it, because there is no general reasonableness test outside Exception 1.
• Faisal agrees never to disclose Deepa's recipes or to take her customer list. Not a restraint on his trade but a protection of confidential information and property. Enforceable after the employment ends.

Now add a drafting point. Deepa's covenant with Faisal says it applies "if he leaves the company". On Krishan Murgai the word "leave" ordinarily means a voluntary departure, so if Deepa dismisses him the covenant would not apply by its own terms, quite apart from section 27.

What it does NOT mean

"A reasonable restraint of trade is valid in India." It is not, except within Exception 1, where reasonableness is applied to the local limits of a goodwill covenant. This is the difference from English law and it is examined directly.

"Section 27 makes the whole contract void." It voids the agreement to that extent only, so the rest of the contract survives.

"An employer can never restrain an employee." During the employment he can, on Golikari, and he may always protect trade secrets and confidential information, before and after.

"Section 27 still has three exceptions." Exceptions 2 and 3 were repealed by the Indian Partnership Act 1932. One remains in the section; the partnership rules are now in sections 11, 36 and 54 of that Act.

"Exception 1 requires the restraint to be limited in time." It does not. It requires specified local limits that appear reasonable, and it lasts only while the buyer carries on a like business there.

Quick revision

• s.27: every agreement restraining anyone from exercising a lawful profession, trade or business of any kind is void to that extent.
• No general reasonableness test. England has one; India does not. Reasonableness appears only inside Exception 1, applied to local limits.
• Exception 1, sale of goodwill: seller may covenant not to carry on a similar business within specified local limits, so long as the buyer or his successor carries on a like business there, the limits being reasonable regard being had to the nature of the business. No time limit in the section.
• Exceptions 2 and 3 repealed by the Partnership Act 1932. See its ss.11(2), 36(2) and 54, which do apply a reasonableness test.
• Golikari, AIR 1967 SC 1098: a negative covenant during employment is not a restraint of trade and is enforceable unless unconscionable or one sided.
• Krishan Murgai, AIR 1980 SC 1717: post employment covenant unenforceable; "leave" means a voluntary leaving and does not cover dismissal or termination by the employer.
• Always enforceable after employment: trade secrets, confidential information, and the employer's records.

Test yourself

1. State section 27 and its exception. Every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. Exception 1 saves an agreement by one who sells the goodwill of a business to refrain from carrying on a similar business within specified local limits, so long as the buyer or a person deriving title from him carries on a like business there, provided the limits appear to the court reasonable having regard to the nature of the business.

2. How does Indian law differ from English law on restraint of trade? English law tests such a restraint for reasonableness between the parties and in the public interest and enforces it if it passes. Indian law has no general reasonableness test: section 27 voids every agreement in restraint of a lawful trade to that extent, and reasonableness enters only within Exception 1, where it is applied to the local limits of a goodwill covenant.

3. Is a negative covenant during employment void? No. In Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098, the Supreme Court held that negative covenants operative during the period of employment, when the employee is bound to serve exclusively, are not in restraint of trade and do not fall under section 27, unless the contract is unconscionable, excessively harsh, unreasonable or one sided.

4. Why did the covenant fail in Krishan Murgai? Because of the word used. The clause restricted the employee after he should "leave" the company, and the Court held that in relation to an employee "leave" ordinarily means a voluntary leaving of the service and does not cover a case where he is discharged, dismissed, or his services are terminated by the employer. So even assuming the covenant was otherwise valid, it did not apply on the facts.

5. What happened to Exceptions 2 and 3 to section 27? They were repealed by the Indian Partnership Act 1932, section 73 and the Second Schedule. Restraints between partners are now dealt with by that Act: section 11(2) for a partner during the partnership, section 36(2) for an outgoing partner, and section 54 on or in anticipation of dissolution, each valid if the restrictions imposed are reasonable.

Exception 2, saving of contract to refer questions that have already arisen. Nor does the section render illegal any contract in writing by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force as to references to arbitration.

Exception 3, saving of a guarantee agreement of a bank or a financial institution. Inserted in 2013. The section does not render illegal a contract in writing by which a bank or financial institution stipulates a term in a guarantee, or in an agreement making provision for a guarantee, for extinguishment of the rights or discharge of any party from liability under or in respect of such guarantee on the expiry of a specified period, where that period is not less than one year from the date of the guarantee. The Explanation defines "bank" by reference to the Banking Regulation Act 1949 and the State Bank of India Act 1955, and "a financial institution" as a public financial institution within the meaning of section 4A of the Companies Act 1956.

Broken down

Clause (a): the two original prohibitions

Absolute restriction on enforcement. A clause that stops a party going to the ordinary courts at all. Note the word absolutely: a partial restriction is not caught. This is why a clause selecting one of two or more courts that would both have jurisdiction is valid: the parties have not ousted the jurisdiction of the courts, only chosen between courts that already have it. A clause conferring jurisdiction on a court that would have none is a different matter and is bad.

Limiting the time for enforcement. A clause that shortens the period the Limitation Act 1963 allows. So "no suit shall be brought after six months" is void.

Clause (b): the 1997 addition

Aimed at the drafting device described above. It catches a clause that, on the expiry of a specified period, extinguishes the rights of a party or discharges a party from liability, so as to restrict enforcement.

The distinction the clause abolishes is between barring the remedy and extinguishing the right. Before 1997 only the first was caught. Since 1997 both are.

"Is void to the extent"

Like section 27, the section severs. Only the offending stipulation falls; the rest of the contract survives.

What section 28 does NOT touch

Five things, and they are the standard distractors in a problem question.

Arbitration agreements, by Exceptions 1 and 2. An agreement to arbitrate is not a restraint on legal proceedings; it substitutes one forum for another, and the law encourages it.

A choice among competent courts. Where two courts both have jurisdiction, an agreement that suits shall be brought only in one of them is valid.

Clauses shortening the time for giving NOTICE of a claim, as opposed to the time for suing. A term requiring a claim to be notified within thirty days regulates the making of the claim, not the enforcement of the right, so it is ordinarily outside the section. The distinction is fine and the courts look at substance: if the clause in truth destroys the right after the period, clause (b) catches it.

Section 28 of the Limitation Act 1963. Confusingly, the Limitation Act has its own section 28, and it is about extinguishment of the right to property after the period for a possession suit has run. Do not cite one for the other.

A term that a party shall not be liable at all for a certain kind of loss. That is an exclusion of liability, which is a different question governed by the ordinary law of contract and by section 23, not by section 28.

A worked example

Rajesh takes a fire policy from an insurer. Consider five clauses.

• "No suit shall be brought on this policy in any court." An absolute restriction on enforcing rights by the usual legal proceedings in the ordinary tribunals. Void under clause (a).
• "No suit shall be brought after six months from the date of loss." A clause limiting the time within which rights may be enforced, shortening the period the Limitation Act allows. Void under clause (a), and it was void before 1997 too.
• "All benefits under this policy shall stand extinguished unless a claim is filed within six months." Before 1997 this survived, because it destroyed the right rather than barring the remedy. Since the 1997 substitution it is caught squarely by clause (b): it extinguishes the rights of a party on the expiry of a specified period so as to restrict him from enforcing his rights. Void.
• "Any dispute shall be referred to arbitration, and only the amount awarded shall be recoverable." Exception 1. Valid.
• "Any suit shall be filed only in the courts at Mumbai." If the Mumbai courts would in any event have jurisdiction, this is a choice between competent courts and is valid, because the parties have restricted themselves but not absolutely, and the jurisdiction of the courts as such has not been ousted.

Now a bank guarantee. A bank issues a guarantee stating that all rights under it shall be extinguished if no claim is made within eighteen months of its date. Clause (b) would ordinarily catch it, but Exception 3, inserted in 2013, saves a term of this kind in a guarantee given by a bank or a financial institution where the specified period is not less than one year. Eighteen months qualifies, so the term is valid. Had the period been six months, the exception would not apply and the term would be void.

What it does NOT mean

"Section 28 makes arbitration agreements void." The opposite. Exceptions 1 and 2 expressly save them.

"A clause choosing a court is void as ousting jurisdiction." Not where the chosen court is one of two or more that already have jurisdiction. Clause (a) requires the restriction to be absolute.

"Section 28 has two exceptions." It has three since 18 January 2013.

"A clause extinguishing rights after a period is safe because it does not bar the remedy." That was the pre-1997 position and it is exactly what clause (b) was inserted to stop.

"Parties can extend the limitation period by agreement." Section 28 strikes at clauses that shorten the time. An agreement purporting to extend limitation is separately bad, because it would defeat the provisions of the Limitation Act and so fall under section 23.

Quick revision

• s.28, substituted by Act 1 of 1997 w.e.f. 8 January 1997. Two limbs, and the second is the 1997 addition.
• (a) absolute restriction on enforcing rights by the usual legal proceedings in the ordinary tribunals, or limiting the time for doing so.
• (b) extinguishing the rights of a party, or discharging him from liability, on the expiry of a specified period so as to restrict enforcement.
• Void to the extent, so the clause falls and the contract survives.
• Exception 1: arbitration of future disputes, with only the award recoverable. Exception 2: written agreement to arbitrate a question already arisen. Exception 3, inserted by Act 4 of 2013 w.e.f. 18 January 2013: a bank or financial institution guarantee term extinguishing rights after a period not less than one year.
• Outside the section: choice among competent courts; clauses fixing a time for notice of a claim; and s.28 of the Limitation Act 1963, which is a different provision entirely.

Test yourself

1. State section 28 as it now stands. Every agreement is void to the extent that it restricts a party absolutely from enforcing his rights under a contract by the usual legal proceedings in the ordinary tribunals, or limits the time within which he may enforce them; or extinguishes the rights of a party, or discharges a party from liability, under a contract on the expiry of a specified period so as to restrict any party from enforcing his rights. Three exceptions save arbitration agreements as to future and existing disputes, and certain bank and financial institution guarantee terms.

2. What did the 1997 amendment change? It added what is now clause (b). Before 1997 the section struck only at clauses barring the remedy or shortening the time to sue, so a clause drafted to extinguish the right itself after a period escaped it. Clause (b), substituted by Act 1 of 1997 with effect from 8 January 1997, catches a clause that extinguishes rights or discharges liability on the expiry of a specified period so as to restrict enforcement.

3. Is a clause requiring all suits to be filed in one named city void? Not if that city's courts would in any event have jurisdiction. Clause (a) strikes only at an absolute restriction, and choosing between courts that both have jurisdiction restricts the parties without ousting the jurisdiction of the courts. A clause conferring jurisdiction on a court that would have none is a different matter.

4. What is Exception 3 and when was it inserted? Exception 3 was inserted by Act 4 of 2013, section 17 and the Schedule, with effect from 18 January 2013. It saves a term in writing by which a bank or a financial institution stipulates, in a guarantee or an agreement making provision for a guarantee, for extinguishment of rights or discharge from liability on the expiry of a specified period, provided that period is not less than one year from the date of the guarantee.

5. Distinguish section 28 of the Contract Act from section 28 of the Limitation Act 1963. Section 28 of the Contract Act makes void agreements that restrict enforcement of contractual rights or shorten the time for it, or that extinguish those rights after a fixed period. Section 28 of the Limitation Act 1963 is a rule of limitation law extinguishing the right to property at the end of the period prescribed for a suit for possession. They share a number and nothing else.

Read (a) and (c) together. The same words, "a hundred tons of oil", are void in one and a good contract in the other. Nothing changed except the surrounding facts, and that is the whole lesson of the section.

Broken down