This Article is written by Pratham Bhatt.
Introduction
Contractual law is a branch of civil law that deals with the legal enforcement of agreements between two or more parties. Different states have different laws and varying ways of interpreting contracts. In case of any possible dispute arising, there is a need for relevant laws and regulations that can settle it. The set of laws relating to contracts in India are given under the Indian Contract Act of 1872. Based upon the principles set forth by the English common law, it came into force on the 1st of September 1872. The Act was enacted by the Imperial Legislative Council. The compositions of the Contract Act are as follows;
- General principles relating to contractual law are covered under sections 01 – 75.
- Contracts that involve the sale of goods are covered under sections 76 – 123.
- Special contracts are covered under sections 124 – 238.
- Partnerships are covered under sections 239 – 266.
Broadly, the Act has been divided into 2 parts. The first part {sections 1 to 75} deals with the essentials of a contract and the rest of the Act is dedicated to Special Contracts. The 25th section of the Indian Contract Act deals with the agreements with no valid consideration.
Section 25 of the Indian Contract Act
The exact words of Article 25 say that “Any agreement without consideration shall be void unless it is given in writing or registered as a promise to compensate”.Consideration is an essential element of a contract that can be defined as the value exchanged by the parties involved in the contract. Consideration may be a promise to do or to refrain from doing something. When two parties decide to enter into a contract, they mutually exchange promises that act as the consideration value. Section 2(d) of the Indian Contract Act talks about consideration as essential to any contract. It also covers all exceptions as to when a contract stands valid without consideration. These exemptions are as follows –
- When the contract is registered and in writing.
- When it is in the form of compensation for services offered in return.
- When the consideration is in form of a promise made by the promisor or his agent to repay a debt barred by the limitation law.
The section is not applicable in case of a transfer of property or assets as a gift or out of affection. Inadequate or insufficient consideration does not lead to a contract being rendered null but it questions the consent of one or more parties involved.
Illustrations – i. A who owns a watch worth Rs 1000 informs B that he would give it to him without any consideration in return. This agreement will be declared null and void.
ii In a similar situation, A is willing to give his watch worth Rs 1000 as a gift to B but this time he makes a written promise in favour of B. This is an enforceable contract.
iii A owes Rs 500 to B but the debt is barred by the Limitation Act. He then makes a written promise to pay 50% of the debt and B agrees. This is a contract.
Relevant case laws
- Suresh Kumar Joon vs Mool Chand Motors & Ors, Delhi High Court, 22nd August 2012.
8561/2011 and 8562/2011 in CS(OS) 389/2009.
Facts of the case – The plaintiff Suresh Kumar filed the suit for recovery of Rs. 74,88,340. He had advanced a sum of Rs 35,00,000 to defendant No. 1. Mool Chand Motors (defendant 1) was a partnership with the partners being defendants 2 and 3. The terms of the loan were that 50% of the entire gross profit was to be shared and an annual interest of 24% was to be paid to the plaintiff. A new deal was executed and instead of sharing profits, the plaintiff was allowed to operate the petrol pump which the defendants owned. He also advanced an additional loan of Rs 12,00,000. The plaintiff was not allowed to take charge of the petrol pump as agreed and the process of repayment was still not started by the loanees. After multiple reminders, the plaintiff was issued a cheque of Rs 51,29,000 by the defendants on the 13th of March 2007.
The cheque bounced and Suresh Kumar claimed an amount of Rs 74,88,340 (51,29,000 plus the amounting interest of Rs 23,59,340). All of the defendants were parties in the first agreement whereas the 2nd loan was agreed to only by the 2nd defendant – Shri Rajendar Kumar Sharma. The first loan agreement was executed on the 18th of May 1999 and the second loan agreement was executed on the 13th of July 2000.
Arguments made – The plaintiff’s counsel argued that the bounced cheque given by defendant 2 can be considered as a written promise to pay his debt. They based their arguments on section 25(3) of the Indian Contract Act.
The counsel of the defendants argued that the cheque was merely an instrument of payment. They claimed that according to section 9 of the Indian Contract Act, the express promise was never made by the defendants. The council also argued that defendant 2 was solely responsible for the 2nd loan executed in between him and the plaintiff.
Judgement – The court held that the cheque was issued to the plaintiff with an intention of repaying the defendant’s debt. The cheque was a promise made by the debtor towards the creditor to fulfil his debt. The promise here was an implied one. Since the debt was time-barred and the issuance of a cheque was for the same debt, according to section 25 of the Indian Contract Act, the contract was a solid one. The amount due on the 13th of March 2007 was a principle of Rs 47,00,000 (35 lacs plus 12 lacs) and 4,29,000 which was the tanker charges. Thus the plaintiff was entitled to an amount of Rs 51,29,000 and he was issued a cheque for the same. All elements of a contract were fulfilled.
The courts also came to the conclusion that all of the defendants were jointly and separately liable for both the loans taken. Section 19 of the Indian Partnership Act, 1932 says that any activities conducted in the course of business by any individual partner bind to the entire firm. Section 23 of the partnership act also states that a partner is a representative of the firm. Section 25 also states that a partner can be held liable for his own actions and the actions of other partners while the firm is in existence. Therefore, the plant cannot be rejected either qua of either of the defendants.
References
- https://indiankanoon.org/doc/1266802/
- https://blog.ipleaders.in/examining-section-25-indian-contract-act/#:~:text=Section%2025%20of%20the%20Contract%20Act%20reads-%20%E2%80%9CAgreements,to%20pay%20a%20debt%20barred%20by%20limitation%20law%E2%80%9D.
https://www.casemine.com/search/in/section+25+of+indian+contract
