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Fundamental Principles of Law of Contract and Allied Laws
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LLM · Group 2 Business Law
2015 Examination
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LLM Group 2 Business Law Fundamental Principles of Law of Contract and Allied Laws 2015 Question Paper with Solutions
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First published on munotes.in on 12 August 2026.
This edition revised 6 September 2026.
Published by munotes.in, Mumbai.
Model answers written and edited by the munotes.in editorial desk.
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The University does not publish an official answer key for this paper. The answers in this volume are model answers, written to show how a full-mark answer is built. They are a study aid, not an authority on what an examiner marked.
The question paper reproduced here is the paper as set by the University of Mumbai at the 2015 examination.
The law in these answers is stated as at August 2026, and five changes since these papers were set alter the answers. The Mediation Act, 2023 would substitute sections 61 to 81 of the Arbitration and Conciliation Act, 1996, but its section 61, which carries that Sixth Schedule, was never commenced, so conciliation is still governed by the 1996 Act. The 2019 scheme for appointing arbitrators through graded arbitral institutions was never brought into force, though Part IA creating the Arbitration Council of India was commenced on 12 October 2023. Gayatri Balasamy, 30 April 2025, gave courts a limited power to modify an award. Central Organisation for Railway Electrification, 8 November 2024, made unilateral appointment clauses impermissible. And the Specific Relief (Amendment) Act, 2018 made specific performance enforceable as of right rather than in the court's discretion.
Contents
The questions below are the paper as the University of Mumbai set it at the 2015 examination, in the order it was set.
MarksPage
The Paper as Set
The questions in this volume are the questions asked at the 2015 examination, reproduced as the University of Mumbai set them, in the order it set them. Nothing has been reworded, added or left out. Only the answers are ours. See the original question paper.
Duration 3 hours · Total marks 100 · 5 questions answered
How to use this volume
Solve the paper first, under exam conditions and against the clock. Then read the answers here and mark your own. Reading a solution before attempting the question feels productive and teaches very little, because recognising an answer is not the same as being able to write one.
SECTION I
QP Code 12195. Attempt any four questions, all questions carry equal marks
any four of five · 100 Marks
Q.1.Explain the concept of "Lassiez Faire" in the context of individualistic ideology. The freedom of contract and sanctity of contract were the necessary instruments of laissez faire, "it was the function of the court to foster the one and vindicate the other". Discuss "consensus" theory of contract?[25]
Answer
For full marks, cover: laissez faire and the individualist premises behind it; the two instruments named in the quotation with their statutory footprint; then the consensus theory at length, since the question ends by asking for it in terms, taking its origins, its Indian enactment, its critics and its present condition.
The paper prints "Lassiez Faire" in the opening line and "laissez faire" correctly in the quotation. The misspelling is the University's and is reproduced as set.
Laissez faire and individualism
Laissez faire, "let do", is the doctrine that the State should not interfere in economic life beyond keeping order and enforcing bargains. Its classical source is Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776), and it was carried into nineteenth century English legal thought by the Benthamite utilitarians and the political economists.
The individualist ideology behind it rests on three premises, and naming them is the first requirement of the question.
Each person is the best judge of his own interest. It follows that a bargain freely made is presumed beneficial to both, and that a court which reopens it is substituting its judgment for that of the people best placed to make it.
The autonomous will is the source of obligation. A person should be bound by what he has chosen and by nothing else, which is why the nineteenth century treated contract, and not status, as the paradigm of legal obligation.
The aggregate of self-interested exchanges produces the greatest general welfare. Intervention is therefore not merely an intrusion but is likely to make matters worse.
Sir Henry Maine's formula in Ancient Law (1861) is the jurisprudential expression of the same movement: the movement of the progressive societies has hitherto been a movement from status to contract. Rights and duties which had attached to a person because of the group into which he was born came increasingly to be determined by agreements he made for himself. The Indian Contract Act, 1872 was enacted eleven years after that book, and it carries its assumptions in its structure.
The two instruments named in the quotation
Freedom of contract is the liberty to decide whether to contract, with whom, and on what terms; the court's function, on the quotation's account, is to foster it.
The Act fosters it in four ways. It imposes no general requirement of writing, the second paragraph of section 10 preserving only such formalities as another statute requires. It refuses to price the bargain: Explanation 2 to section 25 provides that inadequacy of consideration does not void an agreement, and Illustration (f) treats a horse worth a thousand rupees sold for ten as a contract. It supplies default rules which the parties may displace, as sections 46 to 50 do for the time and manner of performance. And it protects the freedom not to contract, which is why a shop display is an invitation to offer and not an offer: Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd., [1953] 1 Queen's Bench 401.
Sanctity of contract is the principle that an agreement once made must be performed and will be enforced as made; the court's function is to vindicate it.
The Act vindicates it in four ways. Section 37 requires the parties to perform or offer to perform. Section 73 compensates on the expectation measure, putting the injured party where performance would have put him. Section 56 discharges a contract only where performance becomes impossible or unlawful, and Alopi Parshad and Sons Ltd. v. Union of India, AIR 1960 SC 588, holds that a contract is not frustrated merely because performance has become onerous. And section 74, though it caps recovery at reasonable compensation, still gives effect to the parties' own allocation of the consequences of breach up to the sum named.
The consensus theory of contract
The question ends by asking for this in terms, so it should have the largest share of the answer.
The consensus theory holds that a contract binds because the parties agreed, and that the law does not impose the obligation but recognises one the parties have created for themselves. It is the Indian name for what jurists call the will theory, and it is the doctrinal expression of the individualist premise that the autonomous will is the source of obligation.
Its origins are in the natural lawyers and in the nineteenth century pandectists. Grotius, in De Jure Belli ac Pacis (1625), derived the binding force of promises from natural law. Savigny and the German pandectists made the declared will the source of the obligation, so that the law's task is to identify what the parties willed and give effect to it. In English writing the same idea appears as the "meeting of the minds"; in the Indian syllabus and in these papers it appears as the consensus theory.
Its Latin tag is consensus ad idem, and section 13 of the Indian Contract Act, 1872 enacts it in those very words: two or more persons are said to consent when they agree upon the same thing in the same sense.
Its statutory footprint is the largest of any theory in the Act, and the answer should trace it provision by provision.
Sections 3 to 9 are a machinery for locating the moment two wills coincided. Section 4 fixes when the communication of a proposal and of an acceptance is complete; section 5 permits revocation until that moment; section 7 requires the acceptance to be absolute and unqualified, because a qualified acceptance shows that the minds have not met, and a counter-offer destroys the proposal: Hyde v. Wrench, (1840) 3 Beavan 334.
Section 14 defines free consent negatively, by excluding coercion, undue influence, fraud, misrepresentation and mistake, on the reasoning that a will which has been forced or deceived is not truly a will at all.
Section 20 is the clearest expression of the theory in the whole Act. Where both parties are under a mistake as to a matter of fact essential to the agreement, the agreement is void. Not voidable, void. That consequence is intelligible only if the premise is that there never was an agreement, because the two minds were never on the same thing, so there is nothing to avoid. Section 22 confirms the reasoning from the other side by providing that a contract is not voidable merely because one of the parties was under a mistake as to a matter of fact: the appearance of consensus holds where only one mind was astray.
Two further provisions belong here. Section 10 requires the free consent of the parties, which is the consensus requirement stated as a condition of enforceability. And section 2(e), by defining an agreement as promises forming the consideration for each other, presupposes a reciprocal meeting of intentions.
The critics of the consensus theory
Four criticisms are standard and a good answer gives all four.
First, the law does not in fact inquire into the actual will; it applies an objective test. A party who did not intend what his words conveyed is bound if a reasonable person would have understood him to mean it. Smith v. Hughes, (1871) Law Reports 6 Queen's Bench 597, is the classical statement: if whatever a man's real intention may be, he so conducts himself that a reasonable man would believe he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract, he is equally bound as if he had intended to agree. The consensus the law requires is therefore an apparent consensus, ascertained from what was said and done.
Second, the standard form contract has hollowed the theory out. Where an insurer, a bank, an airline or a software supplier writes every word of the document, the other party's assent is genuine as to the transaction and fictional as to the terms. Indian law's response has been to control the terms rather than to deny the contract: section 16(3) shifts the burden of disproving undue influence where a transaction is unconscionable, and the section 23 public policy jurisdiction was used in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly, (1986) 3 SCC 156, to strike down a service rule permitting termination on three months' notice without reason, Madon J. holding that the courts will not enforce an unfair and unreasonable clause in a contract between parties who are not equal in bargaining power. Life Insurance Corporation of India v. Consumer Education and Research Centre, (1995) 5 SCC 482, extended the reasoning to an insurance policy term.
Third, the theory cannot explain obligations that arise without any agreement. Sections 68 to 72, headed "Of certain relations resembling those created by contract", impose liability for necessaries supplied to an incapable person, for payment by an interested person, for a non-gratuitous act whose benefit was enjoyed, for the responsibilities of a finder and for money paid by mistake or under coercion. State of West Bengal v. B.K. Mondal and Sons, AIR 1962 SC 779, applied section 70 because there was no valid contract at all.
Fourth, it cannot explain why the law enforces some agreements and not others for reasons unconnected with consensus. A wager under section 30 is made by competent parties with free consent for a consideration, and it is not a contract because Parliament said so. So is an agreement in restraint of trade under section 27. Those are legislative judgments of public policy, and no theory of consent explains them.
The present condition of the model
The statement in the question describes the law of 1872 accurately and the law of today only partly, and the discussion should end there.
The movement Maine described from status to contract has been partly reversed. Standard form contracting removed negotiation from most consumer and many commercial transactions; labour, tenancy and insurance legislation removed whole classes of term from the parties' control; and the courts subjected unequal bargains to review under section 23. The Consumer Protection Act, 2019 is the sharpest modern instance, defining an unfair contract in section 2(46) and empowering the commissions to declare such terms null and void, which is a legislative rejection of sanctity of contract wherever the parties are unequal.
And enforceability has come to rest on grounds the consensus theory does not supply. Promissory estoppel, as developed in Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, (1979) 2 SCC 409, enforces a representation acted upon without consideration, as a cause of action and not merely as a defence, and against the Government subject to a defence of overriding public interest. That is enforcement founded on reliance, not on consensus.
Conclusion. Laissez faire is the doctrine that the State should hold the ring and not interfere in the terms of private bargains, and it rests on an individualist ideology whose premises are that each person is the best judge of his own interest, that the autonomous will is the source of obligation, and that self-interested exchange maximises welfare. Its two legal instruments are freedom of contract, which the Indian Contract Act fosters by requiring no general form, refusing under Explanation 2 to section 25 to inquire into adequacy, and supplying displaceable default rules; and sanctity of contract, which it vindicates through section 37, the expectation measure in section 73, the narrowness of section 56 as applied in Alopi Parshad, and the enforcement of a stipulated sum up to the cap in section 74.
The consensus theory is the doctrinal method by which a court performs both functions. It holds that the obligation is created by the parties' agreement, it is enacted as consensus ad idem in section 13, and it is worked out in the offer and acceptance machinery of sections 3 to 9, in the negative definition of free consent in section 14, and above all in section 20, which makes a bilateral mistake of fact void rather than voidable because the minds never met, with section 22 confirming the reasoning for a unilateral mistake.
The theory is qualified by the objective test in Smith v. Hughes, under which the law enforces apparent rather than actual agreement; it fails against the standard form contract, where the courts have had to reach for sections 16(3) and 23 in Brojo Nath Ganguly and Parliament for section 2(46) of the Consumer Protection Act, 2019; it cannot explain sections 68 to 72; and it cannot explain the agreements sections 26 to 30 declare void for reasons of public policy. The function the quotation assigns to the court is one it still performs, but no longer without first asking whether the parties were equal.
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