LLM Group 2 Business Law Fundamental Principles of Law of Contract and Allied Laws 2024-25 Question Paper with Solutions

For full marks, cover: section 2(h) and section 10 as the frame; then each element in turn, but taken by what the Act does when the element is missing, because the consequences differ and the difference is the examinable point; a worked case on each; and a closing statement of the three-way distinction between void, voidable and unenforceable.

The frame: sections 2(h) and 10

Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement enforceable by law. Section 2(e) defines an agreement as every promise and every set of promises forming the consideration for each other. The definition of a contract therefore contains two ideas: an agreement, and enforceability.

Section 10 supplies the conditions of enforceability: all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. The second paragraph preserves any law requiring writing, attestation or registration.

Failure here means there is no agreement at all, and therefore nothing to be void or voidable. This is not a defect in a contract; it is the absence of one. Lalman Shukla v. Gauri Datt, (1913) 11 Allahabad Law Journal 489, is the illustration: a servant who found his master's missing nephew without knowing of the announced reward could not claim it, because there can be no acceptance in ignorance of the proposal.

The related failure is uncertainty, and there the Act does declare the agreement void. Section 29 provides that agreements the meaning of which is not certain, or capable of being made certain, are void. Illustration (a) to section 29: A agrees to sell to B "a hundred tons of oil"; there is nothing to show what kind of oil was intended; the agreement is void for uncertainty. But illustration (b) shows the qualification: where A is a dealer in coconut oil only, the nature of his trade makes the meaning certain and the agreement stands.

Coercion (section 15), fraud (section 17) and misrepresentation (section 18) make the agreement voidable at the option of the party whose consent was so caused: section 19. The contract is good until avoided, so a third party who has taken an interest in good faith and for value before avoidance is protected, and the proviso to section 19 says so. Section 64 then requires the party rescinding a voidable contract to restore any benefit received.

Undue influence (section 16) makes the agreement voidable under section 19A, but with an important addition: the Court may set the transaction aside either absolutely or, if the party entitled to avoid it has received any benefit, upon such terms and conditions as to the Court seem just. Section 16(3) shifts the burden: where a person in a position to dominate the will of another enters into a transaction which appears on the face of it or on the evidence to be unconscionable, the burden of proving that it was not induced by undue influence lies on him.

Element four: capacity, sections 11 and 12

Section 11 makes competent to contract every person who is of the age of majority according to the law to which he is subject, of sound mind, and not disqualified from contracting by any law to which he is subject. Section 12 defines soundness of mind as the capacity to understand the contract and to form a rational judgment as to its effect upon one's interests, and provides that a person usually of unsound mind but occasionally of sound mind may contract when he is of sound mind.

Mohori Bibee v. Dharmodas Ghose, (1903) 30 Indian Appeals 114, decided that failure of this element produces a void agreement and not a voidable one. A minor mortgaged his house to secure a loan; the lender's attorney had written notice of the minority. The Privy Council held the mortgage void ab initio, because sections 10 and 11 make competence a condition of a contract coming into existence at all. It refused relief under section 64, which applies only to a voidable contract, and refused section 65, whose words "discovered to be void" do not fit a case where the lender knew the age throughout. It also rejected an estoppel, holding that estoppel cannot validate what the statute makes void.

Unlawfulness of consideration or object: section 23 makes the agreement void, and its five heads are that the consideration or object is forbidden by law, or is of such a nature that if permitted it would defeat the provisions of any law, or is fraudulent, or involves or implies injury to the person or property of another, or the Court regards it as immoral or opposed to public policy.

Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156, is the modern Indian use of the public policy head and should be worked. Rule 9(i) of the corporation's service rules allowed termination of a permanent employee on three months' notice or pay in lieu, without any reason. The Supreme Court struck it down as void under section 23 as opposed to public policy, holding that the courts will not enforce 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. The Court expressly refused to confine public policy to the recognised heads, holding it to be a principle capable of application to new situations. Life Insurance Corporation of India v. Consumer Education and Research Centre, (1995) 5 SCC 482, extended the reasoning to a term in a life insurance policy.

Element seven: possibility of performance

Section 56, first paragraph: an agreement to do an act impossible in itself is void. This is initial impossibility, and it is a distinct element from the doctrine of frustration in the second paragraph, which deals with a contract that becomes impossible or unlawful after it is made and provides that it thereupon becomes void. The third paragraph gives a claim for compensation where the promisor knew, or with reasonable diligence might have known, of an impossibility which the promisee did not know.

Satyabrata Ghose v. Mugneeram Bangur and Co., AIR 1954 SC 44, is the leading Indian authority on the second paragraph. Land had been sold for development, and a portion was requisitioned for military purposes during the war. The Supreme Court held the contract not frustrated: the requisition was temporary, no time for performance had been fixed, and the interruption did not strike at the root of the adventure. Mukherjea J. held that section 56 lays down a positive rule of law and that the English theories of an implied term or of a disappearance of the foundation of the contract are not the basis of the Indian rule; the word "impossible" is used in a practical and not a literal sense.

Conclusion. A contract under section 2(h) is an agreement enforceable by law, and section 10 states the conditions of enforceability. The elements are cumulative, but the effect of failure is not uniform, and that is the discussion the question calls for. Absence of offer, acceptance or intention means there was never an agreement. Uncertainty under section 29, absence or unlawfulness of consideration or object under sections 23, 24 and 25, incapacity under section 11 as construed in Mohori Bibee, bilateral mistake of fact under section 20, initial impossibility under the first paragraph of section 56, and an express statutory avoidance under sections 26 to 30 all produce a void agreement, on which no rights can be founded and where restoration is governed by section 65.

Coercion, fraud, misrepresentation and undue influence produce a voidable contract under sections 19 and 19A, which is good until avoided, protects a bona fide third party who has taken for value without notice, and requires restoration under section 64. Want of a statutory form usually produces a contract that is valid but unenforceable, and In Re: Interplay (2023) confirms that inadmissibility for want of stamp belongs to that category and not to the first. A candidate who states the elements without stating which of these three consequences each failure produces has answered only half the question.