LL.B. (Three Years) Sem 1 Law of Contract I Oct 2025 Question Paper with Solutions

1. The governing section

Section 10 provides: "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."

Its second paragraph is a saving clause. The Act does not affect any other law that requires a contract to be in writing, to be made before witnesses, or to be registered.

The section names five requirements. The courts and other sections of the Act add a few more. Together they give the essentials below.

2. The essentials, one by one

(1) An agreement: a valid offer and a valid acceptance. There must be a proposal under section 2(a) and an acceptance under section 2(b). "A proposal, when accepted, becomes a promise". The acceptance must be absolute and unqualified under section 7. Both must be communicated in the way section 4 lays down. Without an agreement, section 10 has nothing to work on.

2. Consent caused by undue influence makes it voidable under s.19A. The court may set it aside on just terms.
3. Where both parties are mistaken about a fact essential to the agreement, the agreement is void (s.20).

(4) Parties competent to contract. Under section 11, a person is competent if he is of the age of majority, of sound mind, and not disqualified by any law.

1. Majority. Under the Indian Majority Act 1875, a person attains majority at eighteen.
2. Sound mind. Section 12 looks at the time the contract is made. The person must then be able to understand it and to judge its effect on his interests. A man so drunk that he cannot understand the terms cannot contract while the drunkenness lasts.
3. Disqualification. Some persons are barred by a particular law, for example an alien enemy in time of war.

(6) Lawful object. The purpose of the agreement must also be lawful. Section 23 gives five cases where the consideration or object is unlawful. It may be forbidden by law, or defeat the provisions of any law. It may be fraudulent, or involve injury to the person or property of another. Or the court may regard it as immoral or opposed to public policy. "Every agreement of which the object or consideration is unlawful is void". Illustration (f) is a promise to pay money for getting someone a government job. It is void.

Gherulal Parakh v. Mahadeodas Maiya, AIR 1959 SC 781. Two men formed a partnership to enter into wagering contracts in wheat. One paid all the losses and sued the other for his half. The defence was that the partnership's object was unlawful under section 23. The Supreme Court rejected it. A wager is void under section 30, but it is not forbidden by law. So an agreement collateral to a wager is not unlawful. The case teaches a key distinction. Every unlawful agreement is void, but not every void agreement is unlawful.

(7) Not expressly declared void. The agreement must not fall within the agreements the Act itself declares void. These are:

1. consideration or object unlawful in part (s.24);
2. agreement without consideration (s.25);

3. What happens when an essential is missing

The result depends on which essential fails.

1. Void agreement, s.2(g): no agreement, no competence, unlawful object or consideration, or an express declaration of voidness. No rights arise at all.
2. Voidable contract, s.2(i): consent was not free. The contract binds until the wronged party chooses to avoid it.
3. Unenforceable: the contract is good, but a formality required by another law is missing.
4. Illegal agreement: void under section 23, and transactions collateral to it are also tainted.

For full marks, cover: the definitions in sections 2(a) and 2(b); the rules of a valid offer (intention to obtain assent, communication, certainty, legal relations, offer and invitation to offer, general offers, no term that silence is acceptance); the rules of a valid acceptance (absolute, in the usual or prescribed manner, communicated, with knowledge of the offer, while the offer is open, by conduct under section 8); communication and revocation under sections 4 to 6; and the leading cases.

Introduction

A contract starts with an offer and an acceptance. The Act calls an offer a proposal. Section 2(a) provides: "When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal". Section 2(b) provides: "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted". It adds: "A proposal, when accepted, becomes a promise". The rules below decide whether a statement is a valid offer and whether a reply is a valid acceptance.

4. It must be distinguished from an invitation to offer. An invitation to offer only invites the other side to make an offer. Common examples are goods displayed in a shop, a price list and a catalogue. So are an advertisement for goods, a call for tenders and an auctioneer's call for bids. The customer, the tenderer or the bidder makes the offer.

Harvey v. Facey, [1893] AC 552. Harvey telegraphed Facey: would he sell Bumper Hall Pen, and what was his lowest cash price? Facey replied that the lowest price was 900 pounds. Harvey telegraphed that he agreed to buy at that price. The Privy Council held there was no contract. Facey's reply only stated a price. It was not an offer to sell. Harvey's last telegram was itself an offer, and Facey never accepted it.

5. It may be specific or general. A specific offer is made to a particular person, and only he can accept it. A general offer is made to the world at large. Anyone who performs its conditions accepts it.

Felthouse v. Bindley, (1862) 11 CB (NS) 869. An uncle offered to buy his nephew's horse. He wrote that if he heard no more, he would consider the horse his. The nephew did not reply, though he meant to sell. The auctioneer then sold the horse by mistake. The uncle sued the auctioneer. The court held that no contract had been made. The nephew's silence was not an acceptance.

9. Cross offers are not acceptance. If A and B each send the other an identical offer, and the letters cross in the post, there is no contract. Neither offer was made in reply to the other.

10. A counter offer ends the original offer. A reply that changes the terms is a new offer. It rejects the original, which cannot later be accepted.

Part B: Rules of a valid acceptance

1. It must be absolute and unqualified. Section 7(1) requires this. An acceptance that adds a condition or changes a term is only a counter offer. A mere request for information is not a counter offer, so the original offer stays open.

1. by notice of revocation from the proposer;
2. by lapse of the time fixed for acceptance, or of a reasonable time if none is fixed;
3. by the acceptor's failure to fulfil a condition precedent to acceptance; or
4. by the death or insanity of the proposer, if the acceptor knows of it before accepting.

Part C: When communication is complete, and revocation

Section 4 fixes the moments that decide most problems.

1. Proposal: complete when it comes to the knowledge of the offeree.
2. Acceptance: complete as against the proposer when it is put in course of transmission to him, out of the acceptor's power. It is complete as against the acceptor when it comes to the proposer's knowledge.
3. Revocation: complete against the person revoking when it is sent. It is complete against the other when it reaches him.

Section 5 follows from this. A proposal may be revoked before the acceptance is complete against the proposer, that is, before the letter of acceptance is posted. An acceptance may be revoked before it is complete against the acceptor, that is, before it reaches the proposer.

For full marks, cover: consent under section 13 and free consent under section 14; the five factors and the "but for" test; void and voidable compared; coercion under section 15 (two limbs, "any person whatever", intention, the Explanation and the BNS); its effect under sections 19, 64 and 72; undue influence under section 16 (domination, unfair advantage, the presumptions, the burden); pardanashin women and unconscionable bargains; its effect under section 19A; the leading cases; and coercion and undue influence compared.

Introduction

A contract rests on agreement. The law asks two questions about that agreement. First, did the parties really agree on the same thing? Second, was the agreement given freely? Section 10 requires that every contract be made by the "free consent of parties". Sections 13 to 22 explain what that means.

Void and voidable. Where there is no consent at all, the agreement is void. Where there is consent that is not free, the contract is usually voidable at the option of the party whose consent was so caused. A voidable contract is valid until that party avoids it.

3. Coercion: section 15

Section 15 provides: "'Coercion' is 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 two limbs. Either is enough.

1. An act forbidden by the penal law, committed or threatened. A threat to beat or kill is the usual case.
2. Unlawful detention of property, or a threat to detain it. A lawful lien is not coercion. The detention must be unlawful.

Three phrases decide problems.

1. "To the prejudice of any person whatever." The threat need not be aimed at the other party. A threat to harm his son or even a stranger is enough.

3. Money paid under coercion, section 72. "A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it". Illustration (b) is a railway company that refuses to deliver goods except on payment of an illegal charge. The consignee pays and may recover the excess.
4. Burden of proof. The party who alleges coercion must prove it. There is no presumption.

Sales Tax Officer, Banaras v. Kanhaiya Lal Mukundlal Saraf, AIR 1959 SC 135. A firm paid sales tax on forward transactions under assessment orders. The levy was later held invalid, and the firm claimed a refund. The State argued that the money was paid voluntarily under a mistake of law and had been spent. The Supreme Court ordered repayment under section 72. It held that a person may recover money paid by mistake or under coercion. "Mistake" includes a mistake of law. The case shows how wide the section 72 remedy is.

2. where he stands in a fiduciary relation to the other, as a doctor, lawyer, guardian or spiritual adviser; or
3. where he contracts with a person whose mental capacity is affected by age, illness, or mental or bodily distress.

Illustration (b) is a medical attendant who makes a patient weakened by disease agree to pay an unreasonable fee. That is undue influence.

The shift of burden: section 16(3). Suppose the dominant party contracts with the other. And suppose the transaction "appears, on the face of it or on the evidence adduced, to be unconscionable". Then the dominant party must prove that undue influence was not used.

1. Illustration (c): a village moneylender gives a fresh loan to a debtor on terms that look unconscionable. The lender must prove there was no undue influence.
2. Illustration (d): a banker lends at an unusually high rate in a tight money market. This is ordinary business. It is not undue influence.

The difference is the relationship, not merely the high price.

Subhas Chandra Das Mushib v. Ganga Prosad Das Mushib, AIR 1967 SC 878. A father executed a deed of settlement in favour of his grandson. The deed was challenged. The High Court presumed undue influence from the family relationship and the donor's great age. The Supreme Court held that this approach was wrong. A court must first ask whether one party could dominate the other's will. It must then ask whether he used that position to gain an unfair advantage. Mere relationship and mere old age raise no presumption. The same law applies to a gift as to a contract.

Ladli Prasad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279. A company alleged that its managing director had coerced and unduly influenced its directors into passing resolutions in his favour. It gave no particulars of this plea and led no evidence on it. The Supreme Court held that a party alleging undue influence must plead the particulars and prove them. The finding is mainly one of fact. A vague allegation of domination is not enough.

5. Coercion and undue influence compared

1. Nature of pressure. Coercion is physical or penal pressure. Undue influence is moral or mental pressure that comes from a relationship.

2. Misrepresentation (s.18): an innocent false statement made without intent to deceive. The contract is voidable, but not if the party could have found the truth with ordinary diligence.
3. Mistake: a mutual mistake of fact essential to the agreement makes it void (s.20). A mistake about Indian law does not make it voidable (s.21). A one-sided mistake of fact does not either (s.22).

Conclusion

Conclusion. Consent means agreeing on the same thing in the same sense (s.13). It is free only when it is not caused by coercion, undue influence, fraud, misrepresentation or mistake (s.14). Coercion is penal or unlawful pressure on property, aimed at getting an agreement, and it may be used by or against anyone. Undue influence is the misuse of a dominating position to gain an unfair advantage. It must be pleaded and proved (Ladli Prasad), and relationship alone is not enough (Subhas Chandra). Both make the contract voidable, under sections 19 and 19A. Money paid under coercion can be recovered under section 72 (Kanhaiya Lal). The law protects a person's will, not just his signature.

1. What consideration is: section 2(d)

Section 2(d) provides: "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."

In simple words, consideration is the price paid for the promise. It may be an act, an abstinence or a promise.

2. The essentials of consideration

(1) It must move at the desire of the promisor. An act done at the request of a third party, or done voluntarily, is not consideration for the promisor's promise.

Durga Prasad v. Baldeo, (1881) ILR 3 All 221. The plaintiff built shops in a market at the order of the Collector of the district. The defendants occupied a shop in the market. They promised to pay the plaintiff a commission on goods sold there. When they did not pay, he sued. The court held that the promise was unenforceable. The shops were built at the desire of the Collector, not of the defendants. So there was no consideration for their promise.

(4) It must be real, but need not be adequate. Consideration must have some value in the eyes of the law. An impossible act, or doing what one is already legally bound to do, is not consideration. But the law does not weigh whether the price is fair. Explanation 2 to section 25 provides that an agreement freely consented to "is not void merely because the consideration is inadequate". Inadequacy may be taken into account only in deciding whether consent was free. In illustration (f), A agrees to sell a horse worth 1,000 rupees for 10 rupees. If his consent was free, it is a contract.

(5) It must be lawful. Section 23 lists when consideration is unlawful. It is unlawful if it is forbidden by law or defeats the provisions of any law. It is also unlawful if it is fraudulent, injures another's person or property, or is immoral or opposed to public policy. An agreement with unlawful consideration is void.

3. The rule: section 25

Section 25 opens: "An agreement made without consideration is void, unless" it falls within one of three cases. In those cases, "such an agreement is a contract". Illustration (a) states the rule: A promises, for no consideration, to give B 1,000 rupees. This is a void agreement.

Rajlukhy Dabee v. Bhootnath Mookerjee, Calcutta High Court, 25 January 1900. A husband promised by a registered document to pay his wife a monthly sum for her maintenance. The document itself recorded quarrels and disagreements between them. The wife sued on the promise. The court held that the agreement was not enforceable. The document was registered, and the parties were near relations. But it was not made on account of natural love and affection, as its own recitals showed. So the exception did not apply. The case shows that the exception needs every one of its elements.

Exception 2: compensation for past voluntary service, section 25(2). A promise is valid if it is a promise "to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do". No writing is needed.

1. Illustration (c): A finds B's purse and gives it to him. B promises to give A 50 rupees. This is a contract.
2. Illustration (d): A supports B's infant son. B promises to pay A's expenses. This is a contract.

The act must have been done voluntarily, and for the promisor. It differs from past consideration under section 2(d), which needs the promisor's request.

Charitable subscriptions. A bare promise to donate is not enforceable. But if the promisee, relying on the promise, has taken on a liability, as by ordering building work, the courts treat that as consideration. This is an application of the ordinary rule, not a true exception.

5. The exceptions in a line each

1. Writing, registration, love and affection, near relation: s.25(1).
2. Past voluntary service: s.25(2).
3. Signed written promise to pay a time-barred debt: s.25(3).
4. A gift actually made: Explanation 1.
5. Remission of performance: s.63.
6. Creation of an agency: s.185.

The two can differ. Suppose A lends B money, knowing that B will use it to buy smuggled goods. The money is lawful consideration. But the object of the loan is unlawful, so the agreement is void. Both the price and the purpose must pass section 23.

The text of section 23

"The consideration or object of an agreement is lawful, unless it 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."

It ends: "Every agreement of which the object or consideration is unlawful is void."

The five heads

1. Forbidden by law. The act is prohibited by a statute, or by rules having the force of law, or is an offence. In illustration (f), A promises to get B a job in the public service, and B promises to pay A 1,000 rupees. The agreement is void, as its consideration is unlawful.

1. Immoral. In illustration (k), a woman agrees to let her daughter to B for concubinage. The agreement is void as immoral. In Indian law, "immoral" has a narrow meaning, as Gherulal Parakh shows below.
2. Opposed to public policy. An agreement is against public policy if it tends to injure the public good. The settled heads include trading with an enemy, stifling a prosecution and interfering with the course of justice. Selling public offices is another. So are agreements in restraint of marriage, trade or legal proceedings. In illustration (h), A agrees to drop a prosecution against B for robbery, if B restores the value of the things taken. The agreement is void, as its object is unlawful.

Niranjan Shankar Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 SC 1098. An employee agreed not to work for any rival during his five-year term of service. He left early and joined a rival. The Supreme Court held that a negative covenant operating during the employment is not a restraint of trade under section 27. It may be enforced, unless it is unconscionable or excessively harsh. So not every limit on a person's freedom is against public policy.

Unlawful in part: section 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." In the illustration, A agrees to manage a lawful indigo business and an illegal trade for B, for one salary. The whole agreement is void. Where the lawful part can be cleanly separated, as under sections 57 and 58, the lawful part may stand.

The effect of unlawfulness

1. The agreement is void. No party can sue on it.

For full marks, cover: the meaning of a quasi contract and the Chapter V heading; the basis in unjust enrichment; how it differs from a contract; the five kinds in sections 68 to 72 with the Act's illustrations; the conditions of section 70 and B.K. Mondal; mistake of law under section 72 and Kanhaiya Lal; the remedy under the third paragraph of section 73; and quantum meruit.

Meaning

A quasi contract is an obligation that the law imposes on a person, though he made no contract. "Quasi" means "as if". The law treats the parties as if they had a contract. There is no offer, no acceptance and no consideration.

The Indian Contract Act deals with it in Chapter V, sections 68 to 72. The Chapter's heading is "Of certain relations resembling those created by contract". The Act does not use the term "quasi contract". That name comes from English law.

The five examples in the Act

1. Supply of necessaries to a person incapable of contracting: section 68. If a person who cannot contract, or anyone he is legally bound to support, is supplied with "necessaries suited to his condition in life", the supplier "is entitled to be reimbursed from the property of such incapable person". In illustration (a), A supplies B, a lunatic, with necessaries. A is entitled to be reimbursed from B's property. In illustration (b), A supplies B's wife and children. A is again paid out of B's property. The incapable person is not personally liable. Only his property is.

2. Payment by an interested person: section 69. "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." In the illustration, B holds land on a lease from A, a zamindar. A falls into arrears of revenue, and the land is to be sold, which would end B's lease. B pays the arrears to save his lease. A must repay B.

State of West Bengal v. M/s B.K. Mondal and Sons, AIR 1962 SC 779. A firm of contractors did additional building work at the request of Government officers. The bills were not paid. The Government argued that there was no valid contract, since the constitutional form for government contracts had not been followed. The Supreme Court held the Government liable under section 70. A party who has enjoyed the benefit of work lawfully done, and not meant to be free, must pay. The absence of a valid contract does not excuse him. The liability under section 70 does not rest on contract at all.

4. Responsibility of a finder of goods: section 71. "A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee." So the finder must take reasonable care of the goods and try to find the owner. Under section 168, he cannot sue the owner for his trouble and expense. But he may keep the goods until he is paid. If the owner has offered a specific reward, the finder may sue for it.

Quantum meruit

Quantum meruit means "as much as he has earned". A person who has done work under an arrangement that fails may claim a reasonable sum for what he has done. It rests on sections 65 and 70. The claim is for the value of the work done, not the profit he hoped to make.

Conclusion

Conclusion. A quasi contract is an obligation the law imposes to prevent unjust enrichment, without any agreement. The Act gives five examples. They are necessaries supplied to an incapable person (s.68) and payment by an interested person (s.69). Then come the benefit of a non-gratuitous act (s.70) and a finder of goods (s.71). Last is money paid by mistake or under coercion (s.72). Section 70 applies even where a contract is invalid (B.K. Mondal). Section 72 covers a mistake of law (Kanhaiya Lal). Breach of such an obligation is compensated under section 73, as if it were a contract.

Part A: Who has to perform the contract

1. The promisor himself, where the contract is personal: section 40. "If it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor." In illustration (b), A promises to paint a picture for B. A must paint it himself, since his skill is the point of the contract.

2. The promisor, his representatives, or a competent person, in other cases: section 40. Where personal skill does not matter, the promisor or his representatives "may employ a competent person to perform it". In illustration (a), A promises to pay B a sum of money. A may pay it himself or cause another to pay it.

3. The representatives, on the promisor's death: section 37. "Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract." In illustration (a), A promises to deliver goods to B and dies before the day. A's representatives must deliver the goods, and B must pay them. In illustration (b), A promises to paint a picture and dies. The contract cannot be enforced by either side, because it was personal.

Part B: Reciprocal promises

Meaning. Section 2(f) provides: "Promises which form the consideration or part of the consideration for each other are called reciprocal promises". A promise to deliver goods and a promise to pay for them are reciprocal.

Three kinds.

1. Mutual and concurrent: to be performed at the same time, like delivery and payment in a cash sale.
2. Conditional and dependent: one must be performed before the other can be claimed.
3. Mutual and independent: each must be performed regardless of the other.

The rules on performance

Rule 1. Promises to be performed together: section 51. "When a contract consists of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise." In illustration (a), A is to deliver goods to B, to be paid for on delivery. A need not deliver unless B is ready and willing to pay. B need not pay unless A is ready and willing to deliver.

Rule 4. Default in the promise to be performed first: section 54. Where one promise cannot be performed, or claimed, until the other is performed, and the party bound to perform first fails, he "cannot claim the performance of the reciprocal promise". He must also compensate the other. In illustration (a), A hires B's ship to carry a cargo that A is to provide. A provides no cargo. A cannot claim B's performance and must compensate B. In illustration (b), B refuses to supply the scaffolding and timber A needs for building work. A need not do the work, and B must compensate him.

Rule 5. Legal and illegal promises together: section 57. Parties may promise first to do legal things, and then, in certain cases, illegal things. The first set is a contract. The second is a void agreement. In the illustration, A agrees to sell B a house for 10,000 rupees. But B is to pay 50,000 rupees if he uses it as a gambling house. The sale at 10,000 rupees stands. The second promise is void.

Conclusion

Conclusion. Under section 37, the parties must perform or offer to perform. A personal promise must be performed by the promisor himself; others may be performed by an agent, a representative or a competent person (s.40). Representatives are bound on death unless the contract was personal. Joint promisors are each liable for the whole (s.43). Reciprocal promises follow sections 51 to 54. Neither party need perform a simultaneous promise unless the other is ready and willing. The order is fixed by the contract or the nature of the transaction. A party who prevents or fails to perform first cannot demand performance, and must compensate the other.

The aim is to put the injured party, as far as money can, where he would have been if the contract had been performed.

Part A: Types of damages

1. Ordinary or general damages. These cover loss that "naturally arose in the usual course of things" from the breach. No special notice is needed. The usual measure, where goods are not delivered, is the difference between the contract price and the market price on the date of breach.

2. Special damages. These cover loss arising from special circumstances. They are recoverable only if the parties knew, when they made the contract, that such loss was likely to result from a breach. This is the second limb of section 73.

3. Nominal damages. Where there is a breach but no real loss, the court may award a small token sum. It recognises that the plaintiff's right was infringed.

4. Substantial damages. These are the opposite of nominal damages. They compensate an actual loss that is proved.

Hadley v. Baxendale, (1854) 9 Exch 341. The crankshaft of a mill broke. The mill owners hired a carrier to take it to engineers as a pattern for a new one. The carrier delayed the delivery, and the mill stayed idle longer. The owners claimed their lost profits. The court refused the claim. The carrier had not been told that the mill would stand idle until the shaft came back. Loss is recoverable only if it arises naturally from the breach, or if both parties contemplated it when they made the contract. Section 73 enacts both these rules.

Rule 3. Knowledge must exist when the contract is made. For special loss, knowledge gained after the contract is too late.

Karsandas H. Thacker v. Saran Engineering Co. Ltd., AIR 1965 SC 1981. The appellant agreed to buy scrap iron from the respondent at a controlled price. He meant to export it and had resold it for that purpose. The respondent failed to deliver. The appellant claimed his loss on the export deal. The Supreme Court rejected the claim. The seller did not know the goods were bought for export. Only the ordinary loss could be claimed. Since the price was controlled, there was no ordinary loss.

Fateh Chand v. Balkishan Das, AIR 1963 SC 1405. A buyer of property paid 25,000 rupees and took possession, but the sale was not completed. The seller sought to forfeit the 25,000 rupees. The Supreme Court held that section 74 covers every penalty clause, including a forfeiture of money already paid. The court must award only reasonable compensation, not the sum named. In the absence of proof of damage, the forfeiture could not stand.

Maula Bux v. Union of India, AIR 1970 SC 1955. A supplier defaulted, and the Government forfeited his security deposit. The Supreme Court held that reasonable earnest money may be forfeited. But a forfeiture of other money already paid is a penalty under section 74, and only reasonable compensation may be kept.

Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd., AIR 2003 SC 2629. Where the named sum is a genuine pre-estimate and actual loss is hard to assess, the court may award it without separate proof of loss. It remains the upper limit.

Kailash Nath Associates v. Delhi Development Authority, (2015) 4 SCC 136. The DDA forfeited earnest money and later resold the land at a higher price. The Supreme Court held that where no loss at all is caused, no compensation can be awarded under section 74.

For full marks, cover: the meaning of privity; the rule that only a party may sue, with Dunlop and M.C. Chacko; privity of contract and privity of consideration told apart (section 2(d) and Chinnaya); the six exceptions (trust or charge, family arrangement and marriage settlement with Khwaja Muhammad Khan, acknowledgment or estoppel, covenant running with the land, agency, assignment); and section 15 of the Specific Relief Act.

Meaning

Privity means a relationship between the parties to a contract. The doctrine of privity of contract says that a contract binds only its parties. Only a party can sue on it. A third person cannot sue on it, even if it was made for his benefit.

The reason is simple. A contract is a private bargain. A person who made no promise and accepted none should not be bound by it or be able to enforce it.

1. Privity of consideration says consideration must move from the promisee. India does not follow it. Section 2(d) says consideration may come from "the promisee or any other person".
2. Privity of contract says only a party may sue. India follows it, as M.C. Chacko shows.

Chinnaya v. Ramayya, (1882) ILR 4 Mad 137. An old woman gifted her land to her daughter. The daughter agreed with the old woman's siblings to pay them a yearly sum. When she stopped paying, they sued. The Madras High Court held that they could sue, though the consideration came from the old woman. The plaintiffs were parties to the daughter's promise, so privity of contract was satisfied. They were only strangers to the consideration, which section 2(d) allows.

The exceptions

A stranger to a contract may sue in these cases.

1. A trust or a charge. Where a contract creates a trust for a third person, or charges specific property with a payment to him, he may enforce it. In M.C. Chacko, the claim failed because no charge was proved. That shows the exception is real but strict.

6. Assignment. The assignee of a right under a contract may sue on it, subject to the equities. He stands in the shoes of the party.

Statutory support. Section 15(c) of the Specific Relief Act 1963 supports the second exception. It covers a settlement on marriage, or a compromise of doubtful rights between members of the same family. There, "any person beneficially entitled" may obtain specific performance.

Conclusion

Conclusion. Privity of contract means only the parties to a contract can sue on it. Dunlop states the rule, and M.C. Chacko applies it in India. India rejects privity of consideration, because section 2(d) lets consideration come from "any other person" (Chinnaya). The rule yields for a trust or charge, and for a family or marriage arrangement (Khwaja Muhammad Khan). It also yields for an acknowledgment, a covenant running with land, agency and assignment. England changed its rule by statute in 1999. India has not, so these exceptions still define who may sue.

For full marks, cover: section 16 of the Specific Relief Act 1963 as amended in 2018; its three clauses; the exception and the Explanation to clause (c); readiness and willingness; and Ram Awadh.

Meaning

Specific performance is an order that a party must actually perform his contract. Since 1 October 2018, section 10 of the Specific Relief Act 1963 says the court "shall" enforce it, subject to sections 11(2), 14 and 16. Section 16 lists the personal bars. They are defects in the plaintiff himself that stop him from getting the relief.

The three bars

Section 16 provides that specific performance "cannot be enforced in favour of a person":

1. (a) "who has obtained substituted performance of contract under section 20". A party who has had the work done by someone else at the defaulter's cost cannot also ask for specific performance.

The 2018 changes. Clause (a) was substituted. The words "who fails to aver and prove" became "who fails to prove".

The leading case

Ram Awadh v. Achhaibar Dubey, AIR 2000 SC 860. A plaintiff sued for specific performance of an agreement to sell land. She had not at first pleaded readiness and willingness. A later purchaser of the land wanted to raise this point. The lower courts held that the plea was personal to the vendor. A bench of three Judges of the Supreme Court disagreed. Section 16 places the duty on the court not to grant relief to a plaintiff who fails these tests. So any defendant may raise the point.

Conclusion. Section 16 bars specific performance to a plaintiff who has taken substituted performance, or who has broken or undermined the contract himself. It also bars one who cannot prove that he has always been ready and willing to perform. The court must check this itself (Ram Awadh).

2. Since 1 October 2018, section 10 provides: "The specific performance of a contract shall be enforced by the court subject to the provisions contained in sub-section (2) of section 11, section 14 and section 16." The Specific Relief (Amendment) Act 2018 made it the rule, not the exception. The adequacy of damages is no longer the test.

So every contract can now be specifically enforced, unless section 11(2), section 14 or section 16 shuts it out.

Contracts commonly enforced

1. Sale or lease of immovable property. This is the most common case. Each piece of land is unique.
2. Sale of unique movable goods, such as a rare painting, an heirloom or shares not freely available in the market.
3. Contracts connected with trusts. Under section 11(1), specific performance "shall" be enforced where the act agreed to be done is in performance of a trust. But under section 11(2), a contract made by a trustee in excess of his powers or in breach of trust cannot be enforced.
4. Part of a contract, under section 12, in defined cases.

Who may claim

Under section 15, a party to the contract may claim specific performance. So may his representative in interest or his principal. In some cases, a beneficiary under a marriage settlement or a family compromise may also claim it.

Conclusion. Since 2018, specific performance is the normal remedy. Any contract can be specifically enforced unless sections 11(2), 14 or 16 forbid it. Land, unique goods, trusts and, in defined cases, part of a contract (B. Santoshamma) are the usual examples.

2. A change of terms. In illustration (b), A owes B 10,000 rupees. B accepts a mortgage of A's estate for 5,000 rupees in place of the debt. This is a new contract, and it extinguishes the old one.

Conditions.

1. All parties must consent, including any new party. In illustration (c), A owes B 1,000 rupees and B owes C 1,000 rupees. B tells A to credit C. C does not agree. There is no new contract, and B still owes C.
2. The old contract must still be in force.
3. The new contract must be valid. If it is void, the old one is not discharged.
4. The substitution must be made before the time for performing the old contract has passed.

Rescission by agreement

Rescission means cancelling the contract. Under section 62, the parties may agree to rescind it. Then neither need perform, and nothing new takes its place. This differs from unilateral rescission. There, one party ends the contract because of the other's default or fraud, as under sections 19, 19A, 39, 53 and 55.

For full marks, cover: the second and third paragraphs of section 56; what counts as impossibility and what does not; Satyabrata Ghose; the contrast with English law; and the effect under section 65.

Meaning

Supervening impossibility is impossibility that arises after a contract is made. Initial impossibility, at the time of the agreement, makes the agreement void from the start under the first paragraph of section 56. Supervening impossibility is dealt with in the second paragraph.

The section

Section 56, second paragraph: "A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful."

The third paragraph adds a duty to compensate. Suppose the promisor knew, or with reasonable diligence might have known, that the act was impossible or unlawful. If the promisee did not know, the promisor must compensate him.

The leading case

Satyabrata Ghose v. Mugneeram Bangur and Co., AIR 1954 SC 44. A company agreed to sell plots of land in a scheme and to build roads and drains before taking the balance price. During the war, part of the land was requisitioned. The company treated the contract as cancelled. The Supreme Court held that the doctrine of frustration falls within section 56. "Impossible" is not limited to physical impossibility. It includes an act that has become impracticable in view of the object of the contract. On the facts, the contract was not frustrated. The requisition was temporary, and the company had no fixed time to complete the work.

India and England. English law first based frustration on an implied term, as in Taylor v. Caldwell, (1863) 3 B & S 826, where a music hall hired for concerts burnt down. Satyabrata Ghose holds that in India section 56 is a rule of positive law. The court does not ask what the parties must have intended.