INDIAN CONTRACT ACT 1872

CONTRACT INGREDIENTS OF A CONTRACT

• A contract is a promise or a set of OFFER/PROPOSAL

promises for the breach of which the law
• When one person signifies to another his
gives a remedy, or the performance of which
willingness to do or to abstain from doing
the law in some way recognises as a duty
anything, with a view to obtaining the assent of
(American Law Institute’s Restatement
that other to such act or abstinence, he is said
Second of the Law of Contracts)
to make a proposal (Sec. 2 (a))
• Sec. 2 (h) of the Indian Contract Act 1872:
ACCEPTANCE
“An Agreement enforceable by Law”
• When the person to whom the proposal is
Examples from day to day life
made signifies his assent thereto, the proposal
 Consumer transactions: Travel by bus or train is said to be accepted. A proposal, when
(contract of carriage), purchase of groceries accepted, becomes a promise (Sec. 2 (b))
(contract for sale of goods), getting a haircut
• The person making the proposal is called
(contract of service), having a meal at a restaurant
(contract of sale as well as services) the “promisor”, and the person accepting the
 Commercial transactions: involving exchange of proposal is called the “promisee” (Sec. 2 (c))
land, goods, or services for money (exchange is
CONSIDERATION
not immediate, take place in future)
• When, at the desire of the promisor, the
promisee promises to do or to abstain from
doing, something, such act or abstinence or
promise is called a consideration for the
promise (Sec. 2 (d))

• What promisor demands as the price for his

promise

INGREDIENTS OF A CONTRACT AGREEMENT

 PROPOSAL/OFFER • Every promise and every set of promises,

 ACCEPTANCE forming the consideration for each other, is an
 PROMISE agreement (Sec. 2 (e))
 PROMISOR/PROMISEE
 CONSIDERATION
 AGREEMENT

ELEMENTS OF A CONTRACT
 OFFER/PROPOSAL
 ACCEPTANCE
 CONSIDERATION
 CAPACITY OF PARTIES
 FREE CONSENT
 LEGALITY OF OBJECT
RULES OF OFFER

 Offer may be expressed: In writing, or

Verbally, or Implied from the offeror’s conduct
Carlill v. Carbolic Smoke Ball 1892
 Offer may be made to a particular person, a
Facts: The Carbolic Smoke Ball Co produced the
class of persons or the whole world
'Carbolic Smoke Ball' designed to prevent users
 Offer must be communicated to offeree contracting influenza or similar diseases. The Co.
advertised that they would pay £100 to anyone who
• Offer has to be distinguished from caught the flu after using the ‘smoke ball’ 3 times a
statements of information or invitations to day for 2 weeks - to show their sincerity they
treat deposited £1000 in a bank. After seeing this
advertisement Mrs. Carlill bought one of the balls and
• Offer may be revoked or lapse used it as directed. She subsequently caught the flu
and claimed the reward. Defendants later argued that
the advertisement was a "mere advertising puff" and
OFFER NOT STATEMENT OF INFORMATION was not intended to create any legal relations.

Harvey v Facey (1893- Privy Council) Court of Appeal Held: £1,000 deposited at the bank
was a clear indication of the intention of the party to
Harvey sent a telegram to Facey which stated: -"Will create legal relations. Here advertisement was
you sell us Bumper Hall Pen? Telegraph lowest cash regarded an offer as it went beyond mere enticement
price" and showed a clear intention to be unilaterally bound
by any positive response.
Facey replied by telegram:-"Lowest price for Bumper
Hall Pen £900.”

Harvey then replied:-"We agree to buy Bumper Hall COMMUNICATION OF OFFER

Pen for the sum of nine hundred pounds asked by
you. Please send us your title deed in order that we • The communication of a proposal is
may get early possession." complete when it comes to the knowledge of
the person to whom it is made
Held: No contract existed. Facey’s telegraph was not
an offer but an answer to Harvey’s request i.e. lowest REVOCATION OF OFFER
price of Bumper Hall Pen if they were to sell. Harvey’s
3rd telegraph was thus an offer that Facey had not yet • A proposal may be revoked at any time
accepted. before the communication of its acceptance is
complete as against the proposer, but not
OFFER NOT INVITATION TO TREAT afterwards.

 Not legally binding • The communication of a revocation is

complete,—
 Instances of Invitation to treat include:
• as against the person who makes it,
 Advertisements and catalogues
when it is put into a course of
 Display of goods in shops transmission to the person to whom it is
made, so as to be out of the power of
 Auctions the person who makes it;
 Tenders • as against the person to whom it is
made, when it comes to his knowledge.
 • Acceptance by performing conditions, or
receiving consideration
LAPSE OF AN OFFER
RELIANCE ON THE OFFER
 Counter-offer – response to an offer that
essentially changes one or more material R v Clarke (1927 HC of Australia)
terms of the offer.
Facts: The WA government had offered a reward of
 A counter-offer destroys the original offer. £1000 for information leading to the arrest and
conviction of people who had murdered two
Counter Offer policemen.

Hyde v Wrench (1840) C was arrested in connection with the murders, and
in order to clear himself he made a statement that
Facts: led to the conviction of the real murderers. (He
actually admitted he was giving info to secure his
6 June – Wrench offers to sell land to Hyde for release and not for the reward.)
£1,000
C was released and later claimed for the reward.
8 June – Hyde responds by offering to buy land for
£950 Issue: Whether C was entitled to the reward
money?
27 June – Wrench rejects Hyde’s offer
Held: There was no acceptance as C gave
29 June – Hyde agrees to the original price of information to clear himself and not in reliance
£1,000 upon the reward. Acceptance can only be made in
Wrench refuses to sell the land to Hyde. Hyde sues response to the offer and not independently of it.
for breach of contract. SILENCE IS NOT ACCEPTANCE
Issue: Was there a contract?
Felthouse v Bindley (1862)
Held: No contract – offer of 6 June was rejected by
the counter-offer of 8 June and could not be Facts: Felthouse offered to buy a horse from his
revived. By purporting to accept the £1,000 on 29 nephew and stated in a written offer “If I hear no
June, Hyde was in fact making a new offer. more about him, I consider him mine at £30 13s".
Nephew did not reply. The horse was later sold by
an auctioneer Bindley. Felthouse sued Bindley for
selling the horse, which he stated belonged to him
RULES OF ACCEPTANCE as his nephew accepted his offer by being silent.

• Acceptance must be absolute. In order to Issue: If the nephew’s silence amounted to

convert a proposal into a promise, the acceptance?
acceptance must— Held: For there to be an agreement, acceptance
must be communicated. Acceptance cannot be
• (1) be absolute and unqualified;
inferred from silence of inaction of offeree.
• (2) be expressed in some usual and COMMUNICATION OF ACCEPTANCE
reasonable manner, unless the proposal
prescribes the manner in which it is to • The communication of an acceptance is
be accepted complete,—

• Made in reliance of the offer • as against the proposer, when it is put

in a course of transmission to him, so
• Must be communicated; Silence is not as to be out of the power of the
acceptance acceptor;
 • as against the acceptor, when it • The revocation is complete as
comes to the knowledge of the against A when the telegram is
proposer. despatched. It is complete as against B
when B receives it.
REVOCATION OF AN ACCEPTANCE
• (d) B revokes his acceptance by telegram.
• An acceptance may be revoked at any time
before the communication of the acceptance is • B‟s revocation is complete as
complete as against the acceptor, but not against B when the telegram is
afterwards. despatched, and as against A when it
reaches him.
• The communication of a revocation is
complete,— REVOCATION WHEN COMPLETE

• as against the person who makes it, Illustrations

when it is put into a course of
transmission to the person to whom it is • A proposes, by a letter sent by post, to sell
made, so as to be out of the power of his house to B.
the person who makes it; • B accepts the proposal by a letter sent by
• as against the person to whom it is post.
made, when it comes to his knowledge. • A may revoke his proposal at any time
EXPRESS OR IMPLIED PROMISE before or at the moment when B posts his letter
of acceptance, but not afterwards.
• In so far as the proposal or acceptance of
any promise is made in words, the promise • B may revoke his acceptance at any time
is said to be express. In so far as such before or at the moment when the letter
proposal or acceptance is made otherwise communicating it reaches A, but not afterwards.
than in words, the promise is said to be RULES OF CONSIDERATION/ ESSENTIAL
implied. ELEMENTS
COMMUNICATION WHEN COMPLETE • Must move at the desire of the promisor
Illustrations
• May move either from the promisee or any
• (a) A proposes, by letter, to sell a house to B other person
at a certain price.
• Need not be adequate
• The communication of the proposal
• Must be real and competent
is complete when B receives the letter.
• Must be legal
• (b) B accepts A‟s proposal by a letter sent
by post. The communication of the acceptance • May be present, past or future
is complete,

• as against A when the letter is post;

• Must move at the desire of promisor
• as against B, when the letter is
• Durga Prasad v. Baldeo (1880):
received by A.
Plaintiff constructed some shops in a
• (c) A revokes his proposal by telegram. market under the orders of the collector.
The defendant occupied a shop and
 promised to pay some commission to the release him and therefore the son
plaintiff and did not pay. In an action continued to be liable for debt
against the defendant, it was held not
maintainable. Reason for the judgment:
the consideration was not at the desire of
the promisor

• Move either from the promisee or any

other person PAST, PRESENT OF FUTURE CONSIDERATION

• Chinnayya v Ramayya (1881): A, • PAST CONSIDERATION: when promisor

an old lady, granted an estate to her had received the consideration before the date
daughter (defendant) with a direction of promise
that the daughter should pay an annuity
• Eg. A’s scooter stops on his way from
of Rs. 653/-, to A’s brothers (plaintiffs). On
office due to mechanical failure. A
the same day, the defendant made a
requested B, a passerby to repair his
promise with the plaintiff’s that she would
scooter, which B does. A promises to pay
pay the annuity as directed by A. The
B Rs. 100/- in consideration of his past
defendant failed to pay the stipulated
service.
sum. In an action against her by the
plaintiff’s she contented that since the • In English law, past consideration is
plaintiff’s themselves had furnished no no consideration. However Indian law
consideration, they had no right of action.
recognizes past consideration and the
• Court held: In this agreement contract to be valid
between defendant and plaintiffs, the
• PRESENT/EXECUTED CONSIDERATION:
consideration has been furnished by the
when one party has performed his part of the
defendant’s mother and that is enough
promise, which forms the consideration for the
consideration to enforce the promise
between the plaintiffs and the defendant
promise of the other

• Eg: A makes an offer of Rs 100/- for

• Must not be real not illusory
anyone who finds and brings his lost dog.
• White v. Bluett (1853): a son used to B finds the dog and brings it to A. B’s
complain to his father that his brothers action becomes both the acceptance and
had been given more property than him. the consideration for the promise of A
The father promised that he would
• FUTURE/EXECUTORY CONSIDERATION:
release the son from a debt if the latter
stopped complaining. After the father’s When one person makes a promise in exchange
death an action was brought by executors of a promise by other, the performance of the
to recover the debt. The son contended obligations on either side to be made
that the father had made a contract to subsequent to the making of the contract
release him from the debt in
• Eg: A agrees to supply certain goods
consideration for his promise not to bore
to B, and B agrees to make the payment
his father.
at a future date
• Court held: the promise by the son
not to bore his father with complaints in
future did not constitute good
consideration for the father’s promise to
 • No ratification
• No restitution
• No estoppel
• No specific performance
• No vicarious liability

CONTRACT WITHOUT CONSIDERATION

VOID AB INITIO: invalid, from the beginning.
• S. 25- general rule- A contract without
• Mohiribibi v Dharmadas Ghose – a
consideration is void.
minor mortgaged his house for Rs.20,000/- to
• A contract is valid without consideration in money lender and received an advance of Rs
the following cases: 8000/- Later he avoided the contract and did
not return the advance. In an action by the
• Love and affection. Eg. A, promised minor to set aside the mortgage deed, it was
to his son B, to pay Rs 1000/- in writing. The held that the contract is not enforceable on
promise is enforceable the ground that, an agreement with minor is
void ab initio.
• Compensation for voluntary
services. Eg. A promised to pay Rs `00/- to the • However, if the minor has carried out
person who had handed over the missing bag his obligations, he can bring a suit against the
is enforceable other party for the enforcement of the other
parties obligations. Eg. If a minor entered into
• Time barred debt. Eg. A owes B Rs a contract for sale of goods and delivered the
1000/- but the debt is barred by Limitation goods to the purchaser, he is entitled to bring
Act. A signs a written promise to pay B Rs a suit for the recovery of the price of the
500/- on account of the debt. This will be a goods sold.
valid contract and shall not be void for want
of consideration • A mortgage deed, sale deed or
promissory not in favour of minor is valid
CAPACITY OF PARTIES (S.11)
PROMISEE OR BENEFICIARY BUT NOT PROMISOR
• Should be age of majority
• He can enjoy the benefits and
• Who is of sound mind privileges under the contract but cannot be
• Not disqualified from contracting by any law held liable under the contract
(status) • Property, promissory notes, bonds
INCAPACITY OR DISQUALIFICATION TO etc in favour of minors
CONTRACT NO RATIFICATION
• Minors • Minor’s agreement is void and being
• Person of Unsound mind a nullity cannot be ratified after attainment
of majority. The benefits of minority would
• Persons disqualified by law continue even after attaining majority. Need
not ratify the liability
MINORS AGREEMENT
NO RESTITUTION
• General Rule: Void ab initio
• Promisee or beneficiary but not promisor
 • Minor need not return or restitute • May enter into contract but not bound
the benefits received under void or voidable
• Can receive benefit, need not be refunded
agreements
• Minor cannot ratify a contract later on
• However, if minor obtains property
reaching majority, Can plead minority
by fraudulently misrepresenting his age, he
can be ordered to restore the property or • If money lent to him or items sold, court will
goods- based on equitable doctrine. A ask minor to return- on equitable grounds
minor is estopped from raising the plea of
minority • Cannot be a partner in partnership firm

NO ESTOPPEL • Can be an agent, but no personal liability

• Principle of estoppel (s.115 of Indian • Necessaries for life, liable, from estate
Evidence Act 1872): When one person has,
MENTAL COMPETENCE
by his declaration, act or omission,
intentionally caused or permitted another • Person of unsound mind (s. 12) are not
person to believe a thing to be true and to competent contract and the contract is
act upon such belief, neither he nor his absolutely void.
representative shall be allowed, in any suit
or proceeding between himself and such • Idiots, lunatics and drunken persons
person or his representative, to deny the • Occasional soundness- contract possible
truth of that thing.
• Soundness depends on two facts:
• S. 11 of Contract Act over rides
Evidence Act • Capacity to understand the terms of
the contract
NO SPECIFIC PERFORMANCE
• Ability to understand the terms of
• A minor cannot be sued for specific the contract
performance of the contract
• Necessaries of Life- same as minors
NO VICARIOUS LIABILITY
STATUS OF A PERSON
• Vicarious liability- Liability of one
person for the acts of another. Parent or • Alien Enemy (Political status)
guardian is not vicariously liable for the
• Foreign Sovereigns and Ambassadors
liabilities of minor
(Political status)
• Exception- Liability for necessaries
• A company (Corporate status)
supplied to him or his dependents.
Necessaries include food, clothes, • Persons disqualified by law
residence, education, funeral expenses of
parents, marriage expenses of sisters of the • Alien enemies, Insolvents, Convicts
minor etc. Minor held liable for necessaries FREE CONSENT
under the principle of equity- quasi
contractual obligation u/s 68 of Indian • Consent (s.13)- Consensus ad idem (meeting
Contract Act. of minds)

CAPACITY OF A MINOR • Free consent (14) - not caused by

 • coercion, FRAUD (ss. 17 and 19)

• undue influence, • Intend to deceive other and induce him to

enter into a contract
• fraud,
• the suggestion, as a fact, of that
• misrepresentation or
which is not true, by one who does not
• mistake believe it to be true;

• active concealment of a fact by one

having knowledge or belief of the fact;

• a promise made without any

COERCION (s. 15) intention of performing it;

• Committing or threatening to commit any • any other act fitted to deceive;

act forbidden by the Indian Penal Code
• any such act or omission as the law
• Have been exercised against the specially declares to be fraudulent.
promisor or against any other
person MISREPRESENTATION (ss.18-19)

• Effect of coercion- voidable • Simple misrepresentation:

UNDUE INFLUENCE (s.16) • the positive assertion, in a manner

not warranted by the information of the
• One of the parties is in a position to person making it, of that which is not
dominate the will of the other and uses that true, though he believes it to be true;
position to obtain an unfair advantage over the
other. • any breach of duty which, without
an intent to deceive, gains an advantage
• Parent-child, guardian-ward, doctor- to the person committing it, or any one
patient, spiritual guru-disciple, lawyer- claiming under him; by misleading
client, trustee-beneficiary another to his prejudice, or to the
prejudice of any one claiming under
• No presumption in husband-wife,
him;
master-servant, creditor-debtor,
landlord-tenant • causing, however innocently, a party
to an agreement, to make a mistake as
• Can dominate the will of another where
to the substance of the thing which is
• He holds real and apparent the subject of the agreement.
authority, or stands in a fiduciary
• Contract voidable
relation
MISTAKE (ss. 20-21)
• Makes contract with person whose
mental capacity is • Erroneous belief on the part of the parties
temporarily/permanently affected (age, to the contract concerning something
illness, mental) pertaining to the contract. Where both the
parties to an agreement are under a mistake as
• Effect of undue influence- voidable
to a matter of fact essential to the agreement,
contracts
the agreement is void.
• Mistake of fact – bilateral and unilateral £1200 a year. In order to reduce the
municipal tax, A made two agreements. The
• Mistake of law – of the land and foreign first was a lease of the flat for a rent of £450 a
year. The second was an agreement to render
• Ignorantia juris non-excusat
services which were virtually the same as
LEGALITY OF OBJECTS under the lease for £750 a year. When Rayson
refused to pay some of the rent the plaintiff
• Unlawful consideration and object – sued her. At first instance, the trial judged
unenforceable held that the contract was lawful and there
was no intention to perform it in an unlawful
• Sec. 23- defines an illegal agreement as one
manner. The defendant appealed. 
the consideration and object of which:
• Issues: The defendant argued that the
• Forbidden by law agreement should be void for illegality
because it had an illegal object. By splitting
• Defeats the provision of any law
the agreement into 2 parts the plaintiff hoped
• Is fraudulent to defraud the local council. Hence, the
agreement should be void as it was contrary
• Involves or implies injury to the to public policy.
person or property of another
• Held: The Court of Appeal ruled in favour of
• Court regards it as immoral or defendant since it was obvious that the
opposed to public policy plaintiff intended to commit fraud against the
council. The court held that where a contract
1. IF IT IS FORBIDDEN BY LAW was intended to be used for an unlawful
• Srinivas v. Raja Ram Mohan (1951) purpose courts will not enforce it.

• A loan granted to the guardian of a 3. IF IT IS FRAUDULENT

minor to enable him to celebrate the
• Example: A, being an agent for a landed
minor’s marriage in contravention of
proprietor, agrees for money without the
the Child Marriage Restraint Act is illegal
knowledge of his principal to obtain for B, a
and cannot be recovered
lease of land belonging to his principal. The
• A promise to drop a prosecution which he agreement between A and B is void as it implied
has instituted against B for robbery and B a fraud by concealment by A, on his principal.
promised to restore the value of the things
4. IF IT INVOLVES OR IMPLIES INJURY TO THE
taken. Agreement is void as its object is
PERSON OR PROPERTY OF ANOTHER
unlawful.
• Ram Swaroop v. Bansi (1915 Cal)
2. DEFEAT THE PROVISIONS OF ANY LAW
• Whether certain bond is enforceable at law. A
• If it is of such a nature that if permitted it borrowed Rs.100 from B. A, executed a bond
would defeat the provisions of any law promising to work for B without pay for 2 years
and in case of default agreed to pay interest at a
• Alexander v. Rayson 1939 1K.B. 169-
very exorbitant rate and the principal amount at
illegality includes lawful contracts made for
once.
unlawful purposes
• Held: The contract was void
Alexander v. Rayson 1939 1K.B. 169-
5. IF THE COURT REGARDS IT AS IMMORAL
• Facts: The plaintiff, A, agreed to rent a flat to
the defendant, Mrs. Rayson, at a rent of
• Baivijli v Hamda Sagar • Held: Agreement is void

• M advanced money to R, a married woman to (v) Agreements in restraint of parental rights

enable her to obtain a divorce from her husband.
M agreed to marry her as soon as she could • Giddu Narayanish v. Mrs. Annie
obtain a divorce Besant: A father having two minor sons
agreed to transfer his guardianship in
• Held: M could not recover advanced money favour of Mrs. Annie Besant and also
because the object of agreement was immoral agreed not to revoke the transfer.
Subsequently filed a suit for recovery of
the boys and a declaration that he was
the rightful guardian

• Held: that he has the right to revoke

the authority and get back the children

AGREEMENTS AGAINST PUBLIC POLICY (VOID

(vi) Agreement in restraint of marriage
AGREEMENTS)
• Eg: A promises to pay Rs. 50,000/- to B, if B
• A, who is B’s Power of Attorney promises to
does not marry C. This agreement imposes
exercise his influence with B in favour of C, and partial restraint upon the freedom of B, to
C promised to pay Rs 5000 to A. Agreement is marry C only. If the promise was for not
void as it is against public policy marrying anyone, there is total restraint. Both
are not valid
i. Trading with enemy
ii. Agreements for stifling prosecution • Marriage Brokerage Contract:

iii. Contracts in the nature of champerty and • Venkatakrishna v. Venkatachalam: A

maintenance sum of money was agreed to be paid to
the father in consideration of his giving
iv. Agreements for the sale of public offices
his daughter in marriage
and titles • Held: such a promise amounted to
v. Agreements in restraint of parental rights marriage brokerage contract and was
void.
vi. Agreement in restraint of marriage
vii. Agreement in restraint of legal proceedings (vii) Agreement in restraint of legal proceedings

viii. Agreements in restraint of trade • Bennet v. Bennet: The plaintiff in this case
(wife) filed a petition against her husband for
ix. Uncertain or Ambiguous Agreements
maintenance. While the petition was pending
x. Wagering Agreements before the Court, she entered into an
agreement with her husband not to proceed
(iv) Agreement for the sale of public offices and with the petition against his promise to pay
titles maintenance. On default by the husband, she
sued him. It was held that the covenant
• Swaminathan v. Muthusami: A
(agreement) by the plaintiff with her husband
promises to pay a sum to B in order to
not to proceed with the petition was void.
induce him to retire so as to provide room
for A’s appointment to the public office (viii) Agreement in restraint of trade
held by B.
 • Public policy requires that everyone should be • Event must be collateral ie
free to exercise his profession incidental to contract

• Oakes & Co. v. Jackson: J, an employee of a • QUASI CONTRACT- not an actual contract
company, agreed not to employ himself in a
similar concern within a distance of 800 miles • Claim for necessaries supplied to
from Madras after leaving the company’s person incapable of contracting
service. Held: Agreement is void
• Reimbursement to a person paying
• Nordenfelt v. Maxim Nordenfelt Co. (1874) money due by another in payment of
which he is interested
Nordenfelt v. Maxim Nordenfelt Co. (1874)
• Obligations of person enjoying
• Facts: Nordenfelt, a Swedish national, the
benefits of non-gratuitous act
defendant sold his business of quick firing
guns to the plaintiff company for GBP • Responsibility of finder of goods
287,500/- against the following conditions:
• Liability of a person to whom money
• That for 25 years, he would not is paid, or thing delivered by mistake or
engage in similar business except on under coercion
behalf of the company
PERFORMANCE AND DISCHARGE OF CONTRACT
• That he would not engage in any
business, whatever likely to compete • Performance-Fulfilling the terms of the
in any way with the business carried contract
on by the company
• Actual performance–by fulfilling the
• Issues: Whether the defendant was bound by obligations
the above two restraints? Whether the
restraints are void. • Offer to perform- tender

• Held: First condition is reasonable since the • Who can perform

business was bought for a huge amount.
• By promisor personally
Second condition which prevents the
• By a third party on promisor’s behalf (Agent)
defendant from engaging in any other
• By legal representatives (in event of death)
competing business, was regarded
unreasonable DISCHARGE
(viii) Agreement in restraint of trade- Exceptions • Discontinuation of the contractual
relationship
 Sale of goodwill of a business
 Partner’s Agreement • Mode of discharge:
 Restrictive Trade Agreements (to regulate
business or to fix prices) • Discharge by Performance- actual
 Service Agreements or attempted

CONTINGENT AND QUASI CONTRACT • Discharge by mutual consent or

agreement
• CONTINGENT CONTRACT:
• Novation, Rescission,
• contingent upon happening or non- alteration, remission and waiver
happening of a future event
• Discharge by subsequent or
• Event must be uncertain supervening impossibility or illegality
 • Destruction of subject matter, • Article 299 lays down the following formal
death or personal incapacity of requirements that are to be fulfilled for a valid
promisor, outbreak of war, change of contract-
law, non-existence or non-occurrence
of a particular state of things • The contract must be expressed to
be made by the president or the
• Discharge by Lapse of time governor, as the case may be.

• Discharge by Operation of Law • The contract must be executed on

behalf of the president or the Governor,
• By death of the promisor
as the case may be.
• By insolvency
• By merger • The contract must be executed by a
• By unauthorised material alteration person authorised by the president or
• Discharge by Breach of Contract the governor, as the case may be.

• Government contract also governed by

Indian Contract Act
BREACH OF CONTRACT AND ITS REMEDIES
• Article 299- additional mandatory
• If any party refuses or fails to perform his requirements
part of the contract or by his act makes it
• No implied contract
impossible to perform his obligation
• Must be a formal written contract
• Remedies- courses of action available to
the aggrieved • If Art. 299 not complied with, the contract is
void and cannot be ratified. No damages can be
• Rescission of contract
claimed for breach
• Suit for damages
• Article 300- Government may sue or be
• Suit for specific performance sued

• Suit for injunction Case Laws

• Suit for quantum meruit • Union of India v. Hanuman Oil Mills Ltd
(1975)- if authorised to act on behalf of President
GOVERNMENT CONTRACTS of India- under Art. 299
• Contract to which The Central Government • Facts : a notice was issued by the Chief
or a State Government is a party is called a Director of Purchase. Government of India,
'Government Contract'. Ministry of Food, Army Purchase
Organisation). New Delhi, for and on behalf of
• Contracts undertaken for varied purposes
the President of India inviting tenders or
like construction, management,
offers for supply of cottonseed oilcake. The
maintenance and repair, manpower supply,
appellant submitted its tender addressed to
IT related projects, et the President of India through the Chief
Director of Purchase
• Party who executes the contract on behalf
of Govt is the contractor • Issue: Whether Chief Director of Purchase
authorised to act on behalf of President of
• Art. 299 of the Constitution of India
India- under Art. 299
 • Judgment: Since there were no sufficient • cost of item or service you are
evidence, appeal dismissed purchasing remains fixed, no matter
how long it takes to make the item,
• K.P. Chowdhary v. State of MP (1966):
complete the service, or how much any
• Facts: The appellant gave the highest bids for required materials cost.
two forest contracts at an auction. As the
• Cost Re-imbursement contracts
amount of the contract was more than what
the Division Forest Officer could accept, he • where a contractor is paid for all of
matter was referred to the Chief Conservation its allowed expenses to a set limit, plus
of Forests who had the necessary authority to additional payment to allow for a profit.
accept the bids. After the close of the auction
the appellant had signed the contract form as • Incentive contracts
required, and the documents were sent to the
Chief Conservator of Forests for sanction and • entered into when there is some
signature. Before the Chief Conservator of uncertainty in the cost of work,
Forests could accept the contract, the particularly when a product is being
appellant raised a dispute as to the marking of built to unique specifications. These
the trees. As that dispute was not settled to contracts specify the amount of profit
the satisfaction of the appellant has refused or fee payable under the contract for a
to complete the contract. The Divisional contractor's performance
Forest Officer gave notice to the appellant
that if he did not complete the formalities • Indefinite- Delivery Contracts
action would be taken under the conditions of
• provide for an indefinite quantity of
the auction to re-auction the contract and if
services for a fixed time. They are used
there was any deficiency it would be
when government can't determine,
recovered from him. He did not comply and
above a specified minimum, the precise
ultimately he was informed that the two
contracts had been cancelled. After re-auction quantities of supplies or services that
the deficiency was sought to be recovered the government will require during the
from the appellant, who filed a writ before HC contract period.
challenging recovery of the amount as arrears
• Time and Materials Contract
of land revenue.
• An arrangement under which a
• Auction for forest contracts, appellant signed
contractor is paid on the basis of (1)
the sale notice agreeing to abide by the
actual cost of direct labor, usually at
terms. a dispute arose between the bidder
and forest department regarding the marking specified hourly rates, (2) actual cost of
of the trees auctioned. Bidder refused to materials and equipment usage, and (3)
complete the contract. Argued contract was agreed upon fixed add-on to cover the
not signed. HC held implied contract because contractor's overheads and profit.
of appellant’s acceptance of the conditions of
BASIC ELEMENTS OF LAW RELATING TO AGENCY,
auction. SC reversed.
GUARANTEE AND PLEDGE
• Held: 299 (1) is mandatory. There can be No
implied contracts with the Government . • indemnity and guarantee,

• bailment , pledge and

TYPES OF GOVERNMENT CONTRACTS • contract of agency

• Fixed-price contracts
CONTRACT OF INDEMNITY AND CONTRACT OF protects the promise for the surety of the
GUARANTEE from loss. creditor.
In Contract if indemnity, In contract of guarantee,
• Contract of Guarantee- to perform the the promisor cannot file the surety does not
promise or discharge the liability of a third the suit against third require any
person in case of default. Eg: A and B go person until and unless relinquishment for filing
the promisee of suit. The surety gets
into a shop. A says to the shopkeeper, C. Let
relinquishes his right in the right to file suit
B have the goods, and if he does not pay, I favour of the promisor. against the principal
will. debtor as and when the
surety pays the debt.
• In the case of State Bank of India v. Mula
Sahakari Sakhar Karkhana (2006),  the
Supreme Court was of the view that whether
a contract is one of guarantee or of indemnity Punjab National Bank Limited vs Bikram Cotton Mills
is a question of construction in each case. The & Anr (1970) – Contract of Guarantee
difference between the two types of contract
• The first respondent company opened a cash-
are enumerated below:
credit account with the appellant bank to
secure repayment of the balance due at the
foot of the account the first respondent
CONTRACT OF CONTRACT OF company executed three documents through
INDEMNITY GUARANTEE its managing agents i.e. a promissory note, a
It refers to a Contract by It refers to a Contract to deed of hypothecation and a letter assuring
which one party perform the promise or the appellant bank that the company would
promises to save the discharge the liability of
remain solely responsible for all loss, damage
other from loss caused a third person in case of
or deterioration of the stocks hypothecated
by conduct of the his default.
promisor or another with the bank. On the same day R a Director
person. of the managing agents executed a bond
In contract of indemnity In contract of guarantee called "agreement of guarantee' agreeing to
there are two parties there are three parties pay on demand all monies which may be due
indemnifier and the i.e. creditor, the as the "ultimate balance" from the company
indemnity holder. principal debtor and to the bank. On December, 1953 the company
surety. closed its business. The stocks pledged were
Contract between the Contract between surety disposed of by the bank and the amount
indemnifier and the and principal debtor is realised was credited in the company's
indemnity holder is implied and between
account. A balance of approximately Rs. 2.56
express and specific. creditor and principal
lakhs remained due at the foot of the
debtor is express.
In contract of indemnity, In contract of guarantee, account.
the liability of the the primary liability is of
• Held: Although the bond was not also
promisor is primary. principal debtor and the
executed by the company, the 'fact that it was
liability of surety is
secondary. executed simultaneously with the other
In Contract of indemnity In contract of guarantee documents and the conduct of R as well as
there is only one there are three the company indicated that R agreed to
agreement i.e. the agreements i.e. guarantee payment of the debt due by the
agreement between agreement between the company. It must be held, therefore that the
indemnifier and creditor and principal Bank, the company and R were parties to the
indemnity holder. debtor, the creditor and agreement under which for the dues of the
surety and surety and company, R became a surety.
principal debtor.
Contract of indemnity Contract of guarantee is
Gajananan Moreshwar vs. Moreshwar Madan (1942 deposited with the money lender, as
Bom HC)- Contract of Indemnity security for repayment of a debt owed
by him/her or performance of promise.
• Facts: Plaintiff (P) got a plot of land on lease
from municipal corp. of Mumbai. P allowed Agency
Defendant (D) to erect building on that land.
D, in this course, incurred debt of Rs.5000 • An agency relationship exists when one
from building material supplier (K), twice. On party (the agent) acts /has power to make
both the occasion, P mortgaged part of the contracts/ transact on behalf of another
land to K. P, on D’s request transferred the [the principal] with a third person [the third
land to D, on the consideration that he (P) party]
would be discharged of all the liabilities
arising out of that land. D failed to adhere to • “Agent” is a person employed to do any act
his consideration. P filed a suit for discharge for another or to represent another in
of liabilities on him, alleging D to be dealings, with 3rd person. The person for
indemnifier. whom such act is done is the “principal”

• ISSUE: Whether the suit for indemnity was

premature as P had not yet incurred any loss
as such?

• Held: Section 124 of Contract Act deals only • Agency created by

with one particular kind of indemnity in which
• Express Agreement
the loss is caused  by the conduct of the
indemnifier himself or of other person, but • Word of mouth.
does not cover the cases outside this or cases
when liability arises because of something • Writing – sometimes
done by the indemnified at the request of the required by statute e.g.
indemnifier. S. 124 talks about subsequent conveyancing agents can’t sue for
conduct but here the liabilities were past, i.e. commission if unwritten.
prior to the date when the contract was
actually entered into force. Earlier to this • Implied Agreement
contract, all the acts were done merely on
• By holding out or estoppel
request and without any consideration and
hence, were not binding. Therefore s.124 is • Ratification
inapplicable here.
• Operation of law

Agency by implied agreement

• Pledge- bailment of goods as security for
payment of a debt or performance of a promise • Agency by Estoppel

• Bailment refers to hand over or • Agency by Holding out

assignment the goods, which involves • Principal’s actions (word or
change in possession but not in the conduct) makes it appear that
ownership of goods. It is the transfer of another party is their agent.
goods from one party to another party
for some specific purpose. It is not same • Determining if there has
as pledge, which is just a variant of been holding out/estoppel is a
bailment. Pledge implies a contract, in question of fact.
which an article is delivered or say
 • Agency by Necessity made by the Government to claim that the
Government was bound to carry out the
• Agency by Ratification promise made by it.
• Agency by operation of law LEGITIMATE EXPECTATION
PROMISSORY ESTOPPEL • The ‘Doctrine of legitimate
• Equitable Doctrine expectation‘ means an expectation of a
benefit, relief or remedy that may ordinarily
• S. 115 of the Evidence Act: flow from a promise or established practice.

• “When one person has, by his • Expectations -not be based on the strength
declaration, act or omission, intentionally of sporadic, casual or random acts; not be
caused or permitted another person to unreasonable, illogical or invalid. should be
believe such a thing to be true and to act reasonable, logical and valid.
upon such belief, neither he nor his
representative shall be allowed, in any • Subject to the discretion of the Court. has
suit or proceeding between himself and application in the field of administrative law
such person or his representative, to deny
the truth of that thing.” • No enforceable right

• Illustration: “A, intentionally and • An expectant may also take aid of this
falsely leads B to believe that certain doctrine when there is an express promise
lands belong to A, and thereby induces B given by a public authority or because to
to buy and pay for it. The land afterwards the existence of a regular practice which the
becomes the property of A, and A seeks expectant can reasonable expect to
to set aside the sale on the ground that at continue, however, any change in policy in
time of sale he had no title. He must not public interest altered by a rule or
allow prove his want of his title.” legislation will not attract this doctrine.

Union of India vs Anglo Afghan Agencies

• ‘Export Promotion Scheme was published by STANDARD FORM CONTRACTS

the Textile Commissioner. It was provided in
the said scheme that the exporters will be • Standard contracts are contracts which are
entitled to import raw material up to 100 drafted by one party and signed by another
percent of the value of goods of the exports. party without any modification or change.
Relying on this representation, the petitioner they are essentially "take it or leave it"
exported goods worth about rupees 5 lakhs. contracts with no room for negotiations.
The Textile commissioner did not grant the killing the bargaining power of the weaker
import certificate for the full amount of goods party and open up wide opportunity for
exported. No opportunity of being heard was exploitation
given to the petitioner. The Supreme Court
held that the Government was bound to carry • Issues involved in standard form contracts
out the obligations undertaken in the Scheme.
• Consent
• Even though the scheme was merely • Unfair terms of the contract
executive in nature and even though the • Unconscionable nature of the contract
promise was not recorded in the form of • Inequality of bargaining powers
formal contract as required by the article
D.C.M. Ltd. v. Assistant Engineer (HMT Sub-Division),
299(1) of the Constitution, still it was open to
Rajasthan State Electricity Board, Kota 
a party who had acted on a representation
• The division bench had to consider the
question whether the Rajasthan State
Electricity Board functioning under the
Electricity Act of 1910 and the Electricity
(Supply) Act, 1948 could in exercise of its
powers under Section 49 of the Supply Act
require the consumer-appellant before them
to pay by way of minimum charges at nearly
three times the normal rate charged from
other consumers being heavy industries
consuming heavy demand of 25 MW. Even
though the appellant before them, D.C.M.
Ltd., had entered into such an agreement with
the Board it was held that the said term in the
agreement was unreasonable and
consequently the demand of such excessive
minimum consumption charges was not
justified