CA Foundation –June 2024

(New Syllabus)

Revisionary Notes

Indian Contract Act 1872

A

GIFT

By “Law Queen ”
Deepika Ma’am

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 Contents
S. No. ICAI Topic Name Page Nos.
Chapter
No.
1. Unit -1 Nature of Contracts 3 to 25

2. Unit -2 Consideration 26 to 31
3. Unit -3 Other Essential Elements of a Contract 32 to 50

4. Unit -4 Performance of Contract 51 to 63

5. Unit -5 Breach of Contract and Its Remedies 64 to 70
6. Unit -6 Contingent and Quasi Contracts 71 to 77

7. Unit -7 Contract of Indemnity and Guarantee 78 to 90

8. Unit -8 Bailment and Pledge 91 to 105

9. Unit -9 Agency 106 to 121

I have complied these "Indian Contract Act 1872" notes, organized into 9 units, are a concise
and effective tool crafted for CA Foundation students. Designed for quick revision, these
chart notes encapsulate the key principles, cases, and nuances of the Act. With a focus on
clarity and simplicity, they serve as a valuable resource to enhance understanding and aid in
exam preparation.

I hope that this notes serves the purpose of its readers.

Valuable suggestions and constructive feedback form learners is welcome and would be
gratefully acknowledge please feel free to e-mail your feedback, problems or suggestions to us
on drathi31@gmail.com.

Happy Learning and all the best !!

CA Deepika Rathi

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Unit -1 : Nature Of Contracts

Contract

Element of Essentials of a Types of

Contract Valid Contract Contracts

Agreement Enforceability

Offer Acceptance

Legal Rule Essentials Communication Legal Rules of a Communication

of Valid Kinds of of a of Offer valid acceptance of acceptance
offer offer Proposal

Governing Law, Enforcement & Applicability

• Law relating to contract is governed by the Indian Contract Act, 1872.

• Formed on : April 25, 1872
• Enforcement : September 01, 1872
• Applicability : Extends to the whole of India.
• Preamble : It is an Act to define and amend certain parts of the law relating to
contract.

The Act is divisible into two parts

The First part (Section 1-75) The Second part (Section 124-238)

Deals with the Deals with

General principles of the law of Certain special kinds of contracts,
contract, and therefore applies to all e.g., Indemnity and guarantee,
contracts irrespective of their bailment, pledge, and agency.
nature.

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1.What is a Contract ?
Definition as per Section 2(h) : “An agreement enforceable by law.”

Contract = (i) Agreement + (ii) Enforceability by law

(i) Agreement

❖ Definition as per Section 2(e) : “Every promise and every set of promises, forming
the consideration for each other”.

❖ Section 2 (b) defines promise as-“when the person to whom the proposal is made
signifies his assent there to, the proposal is said to be accepted. Proposal when
accepted, becomes a promise”.

Agreement = (i) Offer/ Proposal + (ii) Acceptance

When the person to whom the proposal is made

Signifies his assent on that proposal which is made to him

proposal becomes accepted

Accepted proposal becomes promise

(ii) Enforceability by Law

❖ An agreement to become a contract must give rise to a legal obligation which

means a duly enforceable by law.

Contract = Accepted proposal/Agreement + Enforceability by law

❖ Contract comprises of an agreement which is a promise or a set of reciprocal

promises, that a promise is the acceptance of a proposal giving rise to a binding
contract.
❖ Section 2(h) : An agreement capable of being enforceable by law before it is
called ‘contract’.
❖ Where parties have made a binding contract, they created rights and obligations
between themselves.
❖ Domestic and Social obligations are out of scope of the Contract Act, as they are
not legally enforceable.

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Difference between Agreement and Contract

Basis of Agreement Contract

differences
Meaning Every promise and every set of Agreement enforceable by law.
promises, forming the (Agreement + Legal enforceability)
consideration for each other.
(Promise + Consideration)
Scope It’s a wider term including both It is used in a narrow sense with the
legal and social agreement. specification that contract is only
legally enforceable agreement.
Legal It may not create legal Necessarily creates a legal obligation.
obligation obligation. An agreement does A contract always grants certain
not always grant rights to the rights to every party.
parties
Nature All agreement are not All contracts are agreements.
contracts.

2.Essentials of valid contract

As given by Section 10 of Indian Not given by Section 10 but are also
Contract Act,1872 considered essential (General Essential)
1 Agreement 1 Two parties
2 Free consent 2 Intention to create legal relationship
3 Competency of the parties 3 Fulfilments of legal formalities
4 Lawful consideration 4 Certainty of meaning
5 Legal object 5 Possibility of performance
6 Not expressly declared to be void
[as per Section 24 to 30 and 56]
Section 10 : “All agreements are contracts if they are made by the free consent
of the parties competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void”.
Both general essentials and elements given in Section 10 shall be present in a
contract for it to be a valid contract.

General Essential

1.Two Parties

• A person cannot enter into a contract with himself, a contract involves at least
two parties
• A contract can be made by either natural persons or other persons having legal
existence.

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State of Gujarat vs. Ramanlal S & Co.

Fact : when on dissolution of a partnership, the assets of the firm were divided among
the partners, the sales tax officer wanted to tax this transaction.
Held : It was held that it was not a sale. The partners being joint owner of those
assets cannot be both buyer and seller.

2.Parties must intend to create legal obligations

• There must be an intention on the part of the parties to create legal relationship
between them.
• Social or domestic type of agreements are not enforceable in court of law and
hence they do not result into contracts.
• Balfour v. Balfour
✓ Fact : A husband agreed to pay to his wife certain amount as maintenance
every month while he was abroad. Husband failed to pay the promised amount.
Wife sued him for the recovery of the amount.
✓ Held : Wife could not recover the amount as it was a social agreement, and the
parties did not intend to create any legal relations.

3. Other Formalities to be complied with in certain cases

• A contract may be written or spoken. But in the interest of the parties the
contract must be written.
• In case of certain contracts some other formalities have to be complied with to
make an agreement legally enforceable.

4. Certainty of meaning

• The agreement must be certain and not vague or indefinite.

5. Possibility of performance of an agreement

• The terms of agreement should be capable of performance.

• An agreement to do an act impossible in itself cannot be enforced.

Essential Elements Section 10

1. Offer and Acceptance or an Agreement

• An agreement is the first essential element of a valid contract.

• Section 2(e) of the Indian Contract Act, 1872 : “Every promise and every set of
promises, forming consideration for each other, is an agreement”
• Section 2(b) of the Indian Contract Act, 1872 : “A proposal when accepted,
becomes a promise”

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2. Free Consent

• Two or more persons are said to consent when they agree upon the same thing in
the same sense.
• This can also be understood as identity of minds in understanding the terms viz
consensus ad idem.
• Further such a consent must be free.
• Consent would be considered as free consent if it is not caused by coercion,
undue influence, fraud, misrepresentation or mistake.

3. Capacity of the Parties

• Capacity to contract means the legal ability of a person to enter into a valid
contract.
• Section 11 : A person is competent to contract if he satisfies all the given
conditions :
1. He attained the age of majority : → Must be of 18 years of age.

2. Is of Sound Mind :
➢ He should be in his senses so that he understands the implications of the
contract at the time of entering into a contract.
➢ A lunatic, an idiot, a drunken person or under the influence of some
intoxicant is not supposed to be a person of sound mind.
3. Is not disqualified by law
Disqualified by law unless they fulfil certain formalities
➢ Alien enemy,
➢ Foreign sovereigns
➢ Convicts

4. Consideration

➢ A valuable consideration in the sense of law may consist either in some right,
interest, profit or benefit accruing to one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken by the other.

➢ ‘quid pro quo’ i.e. ‘something in return’.

5. Lawful Object

• The consideration and object of the agreement must be lawful.

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• Section 23 : Consideration or Object is not lawful if

- it is prohibited by law, or
- it is such as would defeat the provisions of law,
- if it is fraudulent or
- involves injury to the person or property of another or court regards
- it as immoral or opposed to public policy.

6. Not Expressly Declared to be void

• The agreement entered into must not be which the law declares to be either
illegal or void.

• An illegal agreement : → is an agreement expressly or impliedly prohibited by

law.

• A void agreement :→ is one without any legal effects.

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3.Types of Contracts

Types of Contract

Validity or Formation Performance

Enforceability • Executed Contract
• Express Contract
• Valid Contract • Implied Contract • Executory Contract
• Void Contract • Quasi Contract ▪ Unilateral
• Voidable Contract • E- Contracts ▪ Bilateral
• Illegal Contract
• Unenforceable
Contract

I. On the Basis of Validity or Enforceability

1. Valid Contract

• The Valid Contract is an agreement that is legally binding and enforceable.

• It must qualify all the essentials of a contract.

2. Void Contract

• Section 2 (j) : “A contract which ceases to be enforceable by law becomes void

when it ceases to be enforceable”.
• Thus a void contract is one which cannot be enforced by a court of law

3. Voidable Contract

• Section 2(i) “An agreement which is enforceable by law at the option of one or
more parties thereto, but not at the option of the other or others is a voidable
contract”.

• Where one of the parties to the agreement is in a position or is legally entitled or

authorized to avoid performing his part, then the agreement is treated and
becomes voidable.

• Consent in a contract is obtained by -

• Coercion,
• Undue influence,
• Fraud or
• Misrepresentation

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Cancel the Contract

Option Available to Aggrieved Party OR

Continue if Beneficial

Distinction between a void contract and a voidable contract

S. No. Basis Void Contract Voidable Contract

1 Meaning A Contract ceases to be An agreement which is
enforceable by law. enforceable by law at the
option of one or more of the
parties thereto, but not at the
option of the other or others, is
a voidable contract.
2 Enforceability A void contract cannot be It is enforceable only at the
enforced at all. option of aggrieved party and
not at the option of other
party.
3 Cause A contract becomes void A contract becomes a voidable
due to change in law or contract if the consent of a
change in circumstances party was not free.
beyond the contemplation
of parties.
4 Performance A void contract cannot be If the aggrieved party does
of Contract performed. not, within reasonable time,
exercise his right to avoid the
contract, any party can sue the
other for claiming the
performance of the contract.
5 Rights A void contract does not The party whose consent was
grant any legal remedy to not free has the right to
any party. rescind the contract within a
reasonable time. If so
rescinded it becomes a void
contract. If it is not rescinded
it becomes a valid contract.

4. Illegal Contract

• A contract which the law forbids to be made.

• Court will not enforce such a contract but also the connected contracts.
• All illegal agreements are void but all void agreements are not necessarily illegal.
But both are void ab initio and cannot be enforced by law.

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• According to Section 2(g) of the Indian Contract Act, “an agreement not
enforceable by law is void”.
Distinction between a Void Agreement and a Illegal Agreement

Basis of Void Agreement Illegal Agreement

Difference
Scope A void agreement is not An illegal agreement is always void.
necessarily illegal.
Nature Not forbidden under law. Are forbidden under law.
Punishment Parties are not liable for any Parties to illegal agreements are
punishment under the law. liable for punishment
Collateral • It’s not necessary that Agreements collateral to illegal
Agreement agreements collateral to void agreements are always void.
agreements may also be void.
• It may be valid also.

5. Unenforceable Contract

• Unenforceable contracts are rendered unenforceable by law due to some

technical defect.
• Example : Absence in writing, Barred by limitation etc.

II. On the Basis of formation of Contract

1. Express Contracts
Words
❖ The terms are expressed by Or
In writing
❖ Section 9 : If a proposal or acceptance of any promise is made in words, the
promise is said to be express.

2. Implied Contracts

• These contracts come into existence by implication.

• This implication is by action or conduct of parties or course of dealing.

• Section 9 of the Act contemplates such implied contracts :→ when it lays down
that in so far as such proposal or acceptance is made otherwise than in words, the
promise is said to be implied.

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• Tacit Contracts :
✓ Tacit means silent.
✓ Tacit contracts :→ are those that are inferred through the conduct of
parties without any words spoken or written.
✓ It is not a separate form of contract but falls within the scope of implied
contracts.

3. Quasi Contract

• It is not an actual contract but it resembles a contract.

• Created by law under certain circumstances.

The law creates and enforces legal rights and obligations when no real contract
exists.

Such obligations are known as quasi-contracts.

4. E-Contract

When a contract is entered into by two or more parties using electronics means,
such as e-mails is known as e-commerce contracts.

III. On the Basis of performance of Contract

1. Executed-Contract 2. Executory-Contract

• When the act is done or executed or • In an executory contract the

the forbearance is brought on consideration is reciprocal promise
record, then the contract is an or obligation.
executed contract.
• Such consideration is to be
• The consideration in Executed performed in future only and
Contract could be an act or therefore these contracts are
forbearance. described as executory contracts.

A. Unilateral Contract B. Bilateral Contract

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Unilateral Contract →is a one sided Bilateral Contract → is one where

contract in which one party has the obligation or promise is
performed his duty or obligation and outstanding on the part of both the
the other party’s obligation is parties.
outstanding.

4. PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN CONTRACT

ACT, 1872]

Definition of • “When one person signifies to another his willingness to do or to

Offer/ abstain from doing anything with a view to obtaining the assent
Proposal of that other to such act or abstinence, he is said to make a
[Section 2(a)] proposal”

Essentials of a proposal/offer

Offeror Promisee/
1 Makes Promise Offeree Accepts an Offer
/Promisor Acceptor

2 For a valid offer, the party making it must express his willingness ‘to do’ or
‘not to do’ something:

The willingness must be expressed with a view to obtain the assent of the
3
other party to whom the offer is made.

An offer can be positive as well as negative

4 • “doing” is a positive act and Both have same effect in
• “not doing”, or “abstinence” is a negative act eyes of law

Kind of Offer

How Made To whom made ?

Express Offer Implied Offer General Offer Specific Offer

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Classification of offer

General Special Counter Standing

Offer Offer Cross Offer
Offer Offer

Case Law: Carlill Vs. Case Law: Boulton

Carbolic Smoke Ball Co. Vs. Jones

a. General Offer

• A general Offer is an offer that is made to the public at large.

• Section 8 : Anyone performing the conditions of the offer can be considered to

have accepted the offer.

• Until the general offer is retracted or withdrawn, it can be accepted by anyone

at any time as it is a continuing offer.

Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)

• Fact: Carbolic smoke Ball Co. advertised in several newspapers that a reward
of £100 would be given to any person who contracted influenza after using the
smoke balls produced by the Carbolic Smoke Ball Co. according to printed
directions. One lady, Mrs. Carlill, used the smoke balls as per the directions of
company and even then, suffered from influenza.

• Decision by Court: It was held, she could recover the amount as by using the
smoke balls she had accepted the offer.

b. Special/Specific Offer

• When the offer is made to a specific or an ascertained person, it is known as a

specific offer.

• Specific offer can be accepted only by that specified person to whom the offer
has been made. [Boulton Vs. Jones]

c. Cross Offer

• When two parties exchange identical offers in ignorance at the time of each
other’s offer, the offers are called cross offers.

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• There is no binding contract in such a case because offer made by a person cannot
be construed as acceptance of the another’s offer.

d. Counter Offer

• When the offeree offers a qualified acceptance of the offer subject to

modifications and variations in terms of the original offer, he is said to have made
a counter offer.

• Counter-offer amounts to rejection of the original offer.

• It is also called as Conditional Acceptance.

e. Standing/ Continuing/ Open Offer

• An offer which is allowed to remain open for acceptance over a period of time is
known as standing or continuing or open offer.

• Tenders that are invited for supply of goods is a kind of standing offer.

Essentials of Valid Offer

1. It must be capable of creating legal relations

Offer must be capable Offer which does not A social invitation, even if
of being accepted and intend to give rise to legal it is accepted, does not
giving rise to legal consequences and creating create legal relations
relationship legal relations, it is not because it is not so
considered as a valid offer intended.
in the eye of law.

2. It must be Certain, Definite, and not Vague

If the terms of an offer are vague or indefinite, its acceptance cannot create
any contractual relationship.

3. It must be communicated to the offeree

An offer, to be complete, must Unless an offer is Acceptance in ignorance of the

be communicated to the person communicated, proposal does not amount to
to whom it is made, otherwise there can be no acceptance
there can be no acceptance of it. acceptance by it.

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Case Law: Lalman Shukla Vs. Gauri Dutt

• Fact: G (Gauridutt) sent his servant L (Lalman) to trace his missing nephew. He
then announced that anybody who traced his nephew would be entitled to a
certain reward. L traced the boy in ignorance of this announcement.
Subsequently when he came to know of the reward, he claimed it.

• Decision by Court: He was not entitled to the reward, as he did not know the
offer.

4. It must be made with a view to obtaining the assent of the other party

• Must be made with a view to obtaining the assent of the other party.

5. May be Conditional

• An offer can be made subject to any terms and conditions by the offeror.

6. Offer should not contain a term the non-compliance of which would amount
to acceptance:

• One cannot say that if acceptance is not communicated by a certain time the offer
would be considered as accepted.

7. Offer may be General or Specific

• Any offer can be made to either public at large or to the any specific person.

8. Offer may be Express or Implied

• An offer may be made either by words or by conduct.

9. Offer is Different from a mere statement of intention, an invitation to

offer, a mere communication of information, A prospectus and Advertisement.

A statement of Offer must be A statement of An invitation to

intention and distinguished from price is not an make an offer or
announcement an answer to a offer do business.
question
In case of “an invitation to make an
Harvey vs. Facie [1893] offer”, the person making the
invitation does not make an offer
rather invites the other party to
make an offer.

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Case Law: Harvey vs. Facie [1893] AC 552 :

Fact : The plaintiffs through a telegram asked the defendants two questions
namely,
i. Will you sell us Bumper Hall Pen? And
ii. Telegraph lowest cash price.

The defendants replied through telegram that the “lowest price for Bumper Hall
Pen is £ 900”.
The plaintiffs sent another telegram stating, “we agree to buy Bumper Hall Pen at
£ 900”.
However, the defendants refused to sell the property at the price. The plaintiffs
sued the defendants contending that they had made an offer to sell the property
at £ 900 and therefore they are bound by the offer.

Judgement: While plaintiffs had asked two questions, the defendant replied only
to the second question by quoting the price but reserved their answer with regard
to their willingness to sell.
The mere statement of the lowest price at which the vendor would sell contained
no implied contract to sell to the person who had enquired about the price.

When goods are sold through auction :

The auctioneer does not The auction is only an advertisement to sell but
contract with anyone who the items are not put for sale though persons
attends the sale. who have come to the auction may have the
intention to purchase.

Prospectus issued by a company :→ is only an invitation to the public to make an

offer to subscribe to the securities of the company.
10. A Statement of Price is not an Offer
Question: What is invitation to offer ?
Answer: An offer should be distinguished from an invitation to offer :

• An offer is definite and capable of converting an intention into a contract.

• Whereas an invitation to an offer is only a circulation of an offer, it is an attempt

to induce offers and precedes a definite offer.

• An invitation to offer is an act precedent to making an offer.

• Acceptance of an invitation to an offer does not result in the contract and only an
offer emerges in the process of negotiation.

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Difference between offer and invitation to make an Offer

• Offer :→ Section 2(a) : An offer is the final expression of willingness by the

offeror to be bound by the offer should the other party chooses to accept it.

• Invitation to Offer :→ Offers made with the intention to negotiate or offers to

receive offers are known as invitation to offer.

• Where a party without expressing his final willingness proposes certain terms on
which he is willing to negotiate he does not make an offer, but only invites the
other party to make an offer on those terms.

• Instances of invitation to offer to buy or sell :

i. A Prospectus by a company to the public to subscribe for its shares.
ii. Display of goods for sale in shop windows.
iii. Advertising auction sales
iv. Quotation of prices sent in reply to a query regarding price.

Basis Offer Invitation to Offer

Meaning Section 2(a) : An offer is the Where a party without expressing
final expression of willingness his final willingness proposes certain
by the offer or to be bound by terms on which he is willing to
the offer should the other negotiate he does not make an offer,
party chooses to accept it. but only invites the other party to
make an offer on those terms.
Intention of If a person who makes the If a person has the intention of
Parties statement has the intention to negotiating on terms it is called
be bound by it as soon as the invitation to offer.
other accepts, he is making an
offer.
Sequence An offer cannot be an act An invitation to offer is always an act
precedent to invitation to precedent to offer.
offer.

Act Words Written

Offer can
be made by
Abstinence Conduct Oral

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5.Acceptance

❖ Section 2 (b) : “When the person to whom the proposal is made signifies his
assent thereto, proposal is said to be accepted. The proposal, when accepted,
becomes a promise”

❖ According to Sir William Anson “Acceptance is to offer what a lighted match

is to a train of gunpowder”
▪ What acceptance triggers cannot be recalled or undone.
▪ But offer can be withdrawn just before it is accepted.
▪ Acceptance converts the offer into a promise and then it is too late to revoke
it.
▪ An offer in itself cannot create any legal relationship but it is the acceptance
by the offeree which creates a legal relationship.

Legal Rules regarding a valid acceptance

1. Acceptance can be given only by the person to whom offer is made

➢ In the case of a specific proposal or offer, it can only be accepted by the person it
was made to. No third person without the knowledge of the offeree can accept the
offer. Case Law : Boulton vs. Jones (1857)

➢ When the proposal is a general offer, then anyone with knowledge of the offer can
accept it.

2. Acceptance must be Absolute and Unqualified

❖ Section 7 : Acceptance is valid only when it is

- Absolute and
- Unqualified and
- Expressed in some usual and reasonable manner unless the proposal prescribes
the manner in which it must be accepted.

❖ If the proposal prescribes the manner in which it must be accepted, then it must
be accepted accordingly.

➢ Case Law: Neale vs. Merret

➢ Case Law: Union of India vs. Bahulal

3. Acceptance must be Communicated

❖ To conclude a contract between the parties, the acceptance must be

communicated in some perceptible from.

❖ Any conditional acceptance or acceptance with varying or too deviant conditions is

no acceptance.

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❖ Such conditional acceptance is a counter proposal and has to be accepted by the

proposer, if the original proposal has to materialize into a contract.

❖ Further when a proposal is accepted, the offeree must have the knowledge of
the offer made to him.

❖ Case Law : Brogden vs. Metropolitan Railway Co. (1877)

4. Acceptance must be in prescribed mode

❖ Acceptance of the offer must be in the prescribed manner that is demanded by

the offeror.

❖ If no such manner is prescribed, it must be in a reasonable manner that would be

employed in the normal course of business.

5. Time

❖ Acceptance must be given within the specified time limit, if any, and if no time is
stipulated, acceptance must be given within the reasonable time and before the
offer lapses.

❖ What is reasonable time is nowhere defined in the law and thus would depend on
facts and circumstances of the particular case.

6. Mere silence is not acceptance

❖ The acceptance of an offer cannot be implied from the silence of the offeree or
his failure to answer, unless the offeree has in any previous conduct indicated
that his silence is the evidence of acceptance.

❖ Case Law : Felthouse vs. Bindley

7. Acceptance by Conduct/ Implied Acceptance

❖ Section 8 of the Indian Contract Act 1872, provides that acceptance by conduct
or actions of the promisee is acceptable.

❖ So, if a person performs certain actions that communicate that he has accepted
the offer, such implied acceptance is permissible.

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6.Communication of Offer & Acceptance

• When the contracting parties are face-to-face, there is no problem of

communication because there is instantaneous communication of offer and
acceptance. In such a case the question of revocation does not arise since the
offer and its acceptance are made instantly.

• The difficulty arises when the contracting parties are at a distance from one
another and they utilise the services of the post office or telephone or email
(internet). In such cases, it is very much relevant for us to know the exact time
when the offer or acceptance is made or complete.

• The Indian Contract Act, 1872 gives a lot of importance to “time” element in
deciding when the offer and acceptance is complete.

Communication of Offer

• Section 4 : “The communication of offer is complete when it comes to the

knowledge of the person to whom it is made”

• When a proposal is made by post, its communication will be complete when the
letter containing the proposal reaches the person to whom it is made.

• Mere receiving of the letter is not sufficient, he must receive or read the
message contained in the letter.

Communication of Acceptance

There are two issues for discussion and understanding they are :

The modes of acceptance When is acceptance complete ?

Mode of Acceptance

Section 3 : In general terms two modes of communication namely,

a. By any act b. By omission, intending thereby, to

communicate to the other or which has the
effect of communicating it to the other.

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a. Communication by Act/Conduct would include

Any expression of words whether Any conduct intended to communicate

written or oral. like positive acts or signs so that the
• Written words : → Include letters, other person understands what the
telegrams, faxes, emails and even person ‘acting ‘or ‘making signs’ means to
advertisements say or convey.
• Oral words : → Include Telephone Example : when a person boards a bus,
messages he is accepting to pay the bus fare via
his conduct.

b. Communication of Acceptance by omission to do Something

Such omission is conveyed

By conduct OR By forbearance

• on the part of one person to convey his willingness or assent.

• However, silence would not be treated as communication by ‘omission’.
• Example : A offers Rs.50,000 to B if he does not arrive before the court of law as
an evidence to the case. B does not arrive on the date of hearing to the court.
Here omission of doing an act amounts to acceptance.

When is acceptance complete ?

As per Section 4 of the Act, it is complete

A. As against the proposer B. As against the Acceptor

When it is put in the course of When it comes to the knowledge of

transmission to him so as to be out of the proposer
the power of the acceptor to
withdraw the same

Where a proposal is accepted by a letter sent by the post

Communication of acceptance will be complete

• As against the proposer :→ when the letter of acceptance is posted and
• As against the acceptor :→ when the letter reaches the proposer.

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Acceptance over telephone or telex or fax or e-mail

When an offer is made of instantaneous communication like telex, telephone, fax or

through e-mail, the contract is only complete
- when the acceptance is received by the offeree, and the contract is made at
the place where the acceptance is received (Entores Ltd. v. Miles Far East
Corporation).
- However, in case of a call drops and disturbances in the line, there may not be a
valid contract.

Communication of Special Conditions

• Sometimes there are situations where there are contracts with special
conditions.
• These special conditions are conveyed tacitly and the acceptance of these
conditions are also conveyed by the offeree again tacitly or without him even
realizing it.
• Example : Where a passenger undertakes a travel, the conditions of travel are
printed at the back of the tickets, sometimes these special conditions are
brought to the notice of the passenger, sometimes not. In any event, the
passenger is treated as having accepted the special condition the moment he
bought his ticket.
• Case Laws
1. Mukul Datta Vs. Indian Airlines
2. Lilly White Vs. R. Mannuswamy

7.Communication of Performance

From the viewpoint of proposer From the viewpoint of acceptor

When the acceptance is put into a It would be complete when it comes
course of transmission, when it would to the knowledge of the proposer.
be out of the power of acceptor.

Some times the offeree may be required to communicate the performance (or
act) by way of acceptance.

• In this case it is not enough if the offeree merely performs the act but he
should also communicate his performance unless the offer includes a term that a
mere performance will constitute acceptance.

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Case : Carlill Vs Carbolic & Smokeball Co.

Fact of the Case : The defendant a sole proprietary concern manufacturing a
medicine which was a carbolic ball whose smoke could be inhaled through the nose to
cure influenza, cold and other connected ailments issued an advertisement for sale
of this medicine. The advertisement also included a reward of $100 to any person who
contracted influenza, after using the medicine (which was described as ‘carbolic smoke
ball’). Mrs. Carlill bought these smoke balls and used them as directed but contracted
influenza.
Judgment of the Court : It was held that Mrs. Carlill was entitled to a reward of
$100 as she had performed the condition for acceptance.

• As the advertisement did not require any communication of compliance of the

condition, it was not necessary to communicate the same.
• The court thus in the process laid down the following three important principles:

i. An offer, to be capable of ii. An offer may be iii. if an offer is made in

acceptance, made either to the form of a promise in
- must contain a definite - a particular person return for an act, the
promise by the offer or or performance of that act,
- that he would be bound - to the public at even without any
provided the terms large communication thereof,
specified by him are is to be treated as an
accepted. acceptance of the offer.

8.Revocation of Offer & Acceptance

In term of Section 4, communication of revocation (of the proposal or its

acceptance) is complete.

1. As against the person who makes OR 2. As against the person to whom

it when it is put into a course of it is made, when it comes to his
transmission to the person to whom it knowledge.
is made so as to be out of the power
of the person who makes it

As per Section 5 of the Act

Offer can be revoked at any time Acceptance can be revoked at any time
before communication of acceptance is before the communication of acceptance
completed as against the offeror. is complete against the acceptor.

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Contract over Telephone-

• A contract can be made over telephone.
• The rules regarding offer and acceptance as well as their communication by
telephone or telex are the same as for the contract made by the mutual meeting
of the parties.
• The contract is formed as soon as the offer is accepted but the offeree must
make it sure that his acceptance is received by the offeror, otherwise there will
be no contract, as communication of acceptance is not complete.
• If telephone unexpectedly goes dead during conversation, the acceptor must
confirm again that the words of acceptance were duly heard by the offeror.
Revocation of proposal otherwise than by communication:
• When a proposal is made, the proposer may not wait indefinitely for its
acceptance.
• The offer can be revoked otherwise than by communication or sometimes by
lapse.
Modes of Revocation of Offer:

1. Notice of revocation

2. Lapse of Time: The time for acceptance can lapse if the acceptance is not
given within the specified time and where no time is specified, then within a
reasonable time

3. Non-fulfilment of condition: Where the acceptor fails to fulfill a condition

precedent to acceptance the proposal gets revoked.(Section -6)

4. Death or insanity: Death or insanity of the proposer would result in automatic

revocation of the proposal but only if the fact of death or insanity comes to the
knowledge of the acceptor.

5. Counter Offer

6. Non-acceptance of the offer according to the prescribed or usual mode

7. Subsequent illegality

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Unit -2 : Consideration

CONSIDERATION

Doctrine of
Legal Rules Rules of “No
Meaning & Privity of
regarding valid consideration,
Definition Contract with
consideration no contract”
exception

1.What is Consideration ?

❖ Consideration is the price agreed to be paid by the promisee for the obligation of
the promisor.

❖ The word consideration was described in a very popular English case of Misa v.
Currie as:

A valuable consideration in the sense of law may consist either

In some right, interest, profit forbearance, detriment, loss or

or benefit accruing to one OR responsibility given, suffered or
party (i.e. promisor) undertaken by the other (i.e. the
promisee).”

❖ Section 2(d) of Indian Contract Act 1872

When at the desire of the Promisor

Promisee or any other person

- has done or
- abstained from doing, or
- does or such an act or abstinence
- abstains from doing or or promise is called
- promises to do or
- abstain from doing something
Consideration for the promise

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Consideration

Is an act/ Is abstinence- Must be at May move May be past,

doing abstain from the desire from promisee present or
something doing of the or any other future.
something promisor person

Consideration = Promise /Performance that parties exchange with each other.

Form of consideration = Some benefit, right or profit to one party / some

detriment, loss, or forbearance to the other.

2.Legal Rules Regarding Consideration

1. Consideration must move at the desire of the promisor

• Consideration must be offered by the promisee or the third party at the desire
or request of the promisor.
• Contract of marriage in consideration of promise of settlement is enforceable.
• An act done at the desire of a third party is not a consideration.

Case Law : Durga Prasad v. Baldeo

➢ D (defendant) promised to pay to P (plaintiff) a certain commission on articles
which would be sold through their agency in a market.
➢ Market was constructed by P at the desire of the C (Collector), and not at the
desire of the D.
➢ D was not bound to pay as it was without consideration and hence void.

2. Consideration may move form promise or any other person

• Consideration may move from the promisee or any other person who is not the
party to the contract to the contract.
• There can be a stranger to consideration.

✓ Case Law : Chinnayya Vs. Ramayya

• An old lady made a gift of her property to her daughter with a direction to pay
a certain sum of money to the maternal uncle by way of annuity.
• On the same day, the daughter executed a writing in favour of the brother
agreeing to pay annuity.
• The daughter did not, however, pay the annuity and the uncle sued to recover it.
• Held : There was sufficient consideration for the uncle to recover the money
from the daughter.

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3. Executed and Executory Consideration

• A consideration which consists in the performance of an act is said to be

executed.
• When it consists in a promise, it is said to be executory.

4. Consideration may be past, present or future

• Past Consideration : → If the promise or act is performed before the contract

was made.
• Present consideration : → When one of the parties in the contract has performed
his part of the promise, which constitutes the consideration to be performed by
other party.
• Future consideration :→ When a party makes a promise in exchange for the
promise from the other party and the performance of the consideration is to be
done after making the contract; then it is a

5. It need not be adequate

• It is not mandatory for the consideration to be equivalent to the promise.

• Parties are free to determine the appropriate consideration at the time of
negotiating the terms of contract.
• While the law allows the parties to decide an ‘adequate’ consideration for them, it
must be real and have value in the eyes of law.
• While the Court will not consider inadequacy, it will look at it to determine if the
consent was given by the party with free-will or not.

6. Performance of what one is legally bound to perform

• If the promisor is already obligated either by his promise or law to perform or

abstain from a certain act, then it is not a good consideration for a promise.
• Such a contract is void for want of consideration.
• Example : A promise to pay money to a witness is void, for it is without
consideration
• Example : An agreement by a client to pay to his counsel after the latter has been
engaged, a certain sum over and above the fee, in the event of success of the case
would be void, since it is without consideration.
• But where a person promises to do more that he is legally bound to do, such a
promise provided it is not opposed to public policy, is a good consideration. It
should not be vague or uncertain.

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7.Consideration must be real and not illusory

• Consideration has to be certain, definitive and competent.

• It cannot be vague, uncertain or impossible.
• It must be something real and not something imaginary

8.Consideration must not be unlawful, immoral or opposed to public policy

• Only presence of consideration is not sufficient it must be lawful.

• Anything which is immoral or opposed to public policy also cannot be valued as valid
consideration.

3.Suit by a Third Party to a Contract

• Consideration for an agreement may proceed from a third party, the third party
cannot sue on contract.
• Only a person who is party to a contract can sue on it.
• As per the ‘Doctrine of Privity of Contract’ a stranger to a contract cannot sue.

However in certain contract a stranger may enforce a claim these are following

1. In the case of T rust

• A beneficiary can enforce his right under the trust, though he was not a
party to the contract between the settler and the trustee.

2. In the case of Family Settlement

• If the terms of the settlement are reduced into writing, the members of family
who originally had not been parties to the settlement may enforce the agreement.

3. In the case of certain marriage contarcts / arrangements

• A provision may be made for the benefit of a person, he may file the suit though
he is not a party to the agreement.

4. In the case of assignment of a contract

• When the benefit under a contract has been assigned, the assignee can enforce
the contract but such assignment should not involve any personal skill.

5. Acknowledgement or Estoppel

• Where the promisor by his conduct acknowledges himself as an agent of the

third party, it would result into a binding obligation towards third party.

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6. In the case of covenant running with the land

The person who purchases land with notice that the owner of land is bound by
certain duties affecting land, the covenant affecting the land may be enforced by
the successor of the seller.

7. Contracts entered into through an agent

The principal can enforce the contracts entered by his agent where the agent has
acted within the scope of his authority and in the name of the principal.

4.Validity of an Agreement without Consideration

❖ Section 25 : General Rule is that an agreement made without consideration is

void.
❖ In every valid contract, consideration is very important.
❖ A contract may only be enforceable when consideration is there.

Exceptions to this rule.

1. Natural Love and affection [Section 25(1)]

Conditions to be fulfilled under section 25(1)

It must be made out of Parties must stand Must be in Must also be

natural love and affection in near relationship writing. registered
between the parties. to each other. under the law

A written and registered agreement based on natural love and affection between
the parties standing in near relation (e.g., husband and wife) to each other is
enforceable even without consideration.

2. Compensation for past voluntary services [Section 25(2)]

❖ A promise to compensate, wholly or in part, a person who has already voluntarily

done something for the promisor, is enforceable.

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❖ In order that a promise to pay for the past voluntary services be binding, the
following essential factors must exist:

Services Services must Promisor must be Promisor must

should have have been in existence at the have intended to
been rendered rendered for the time when services compensate the
voluntarily. promisor were rendered. promisee.

3. Promise to pay time barred debt[Section 25(3)]

❖ Where a promise in writing signed by the person making it or by his authorised

agent, is made to pay a debt barred by limitation it is valid without consideration

4. Agency [Section 185]

No consideration is necessary to create an agency.

5. Completed Gift

• Explanation (1) to Section 25 : “nothing in this section shall affect the

validity as between the donor and donee, of any gift actually made.”
• Thus, gifts do not require any consideration.

6. Bailment [Section 148]

No consideration is required to affect the contract of bailment.

7. Charity

If a promisee undertakes the liability on the promise of the person to contribute

to charity, there the contract shall be valid. (Kadarnath v. Gorie Mohammad)

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Unit -3 : Other Essential Elements Of A Contract

Essential Elements of a Valid Contract

Capacity to Lawful Not Expressly

Free Consent
Contract Consideration Declared Void
& Object
Not caused by
Major
Coercion

Sound
Mind Undue Influence

Fraud
Not
Disqualified
Misrepresentation

Mistake

1.Capacity to Contract
❖ Meaning : Capacity refers to the competence of the parties to make a contract.
❖ Who is competent to contract (Section 11) :
Every person is competent to contract who

A. Has attained the B. Is of sound mind C. Is not disqualified from

age of majority contracting by any law to
which he is subject.

A. Age of Majority

Age of majority is Every person domiciled The age of majority being

regulated by the in India shall attain the 18 years, a person less than
Indian Majority Act, age of majority on the that age even by a day would
1875. completion of 18 years be minor for the purpose of
of age and not before. contracting.

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Law relating to minor’s agreement

1. A contract made with or by a minor is viod ab-initio

❖ A minor is not competent to contract and any agreement with or by a minor is void
from the very beginning.

Case Law: Mohori Bibi vs. Dharmo Das Ghose (1903)

Facts: A, a minor had borrowed some money from B (a money lender) by

mortgaging his house. He became a major a few months later. The moneylender
moved to take possession of the minor’s house when he defaulted payment.

Judgement: A mortgage by a minor was void and B was not entitled to repayment
of money.

2. No ratification after attaining majority

❖ A minor cannot ratify the agreement on attaining majority as the original

agreement is void ab initio and a void agreement can never be ratified.

3. Minor can be a Beneficiary or can take benefit out of a contract

❖ Though a minor is not competent to contract, he can be a beneficiary to the

contract.

4. A minor can always plead minority

❖ A minor can always plead minority and is not stopped to do so even where he has
taken any loan or entered into any contract by falsely representing that he was
major.
❖ Rule of estoppel cannot be applied against a minor.
❖ It means he can be allowed to plea his minority in defence.

5. Liability for Necessaries

❖ A claim for necessaries supplied to a minor is enforceable by law.

❖ But a minor is not liable for any price that he may promise and never for more
than the value of the necessaries.
❖ There is no personal liability of the minor, but only his property is liable.

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To render minor’s estate liable for necessaries two conditions must be satisfied.

i. The contract must be for the goods ii. The minor must not have already a
reasonably necessary for his sufficient supply of these
support in the station in life. necessaries.

Note :→ Necessaries mean those things that are essentially needed by a minor. They
do not include luxuries or costly or unnecessary articles.

6. Contract by Guardian – how far enforceable

❖ Where the guardian enters into a contract for the minor, which is within his
competence and for the benefit of the minor, such a contract will be valid and
enforceable by the minor.

7. No Specific Performance

❖ A minor’s agreement being absolutely void, there can be no question of the

specific performance of such an agreement.

8. No insolvency

❖ A minor cannot be declared insolvent

9. Partnership

A minor being incompetent to But as per Section 30 of the Indian

contract cannot be a partner in a Partnership Act, Minor can be admitted
partnership firm, to the benefits of partnership.

10. Minor can be an Agent

❖ A minor can act as an agent.

❖ But he will not be liable to his principal for his acts.
❖ A minor can draw, deliver and endorse negotiable instruments without himself
being liable.

11. Minor cannot bind parent or guardian

❖ A minor is not capable of binding his parent or guardian, even for necessaries.
❖ They will be held liable only when the minor acts as their agent.

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12. Joint contract by Minor and Adult

❖ The adult will be liable on the contract and not the minor.

13. Surety (Guarantor) for a Minor

❖ When an adult gives a guarantee on behalf of a minor, then the adult is liable to
the third party as if there is direct contract between the surety and the third
party.
14. Minor as Shareholder

A Minor cannot be If by mistake he But a minor may, acting though

a shareholder of becomes a member, the his lawful guardian become a
the company. company can rescind the shareholder by transfer or
transaction and remove transmission of fully paid shares
his name from register to him.

15. Liability for Torts

❖ A tort is a civil wrong.

❖ A minor is liable for tort, unless the tort in reality is a breach of contract.

B. Person of Sound Mind

Section 12 : A person is said to be of sound mind for the purposes of making a

contract if

at the time when he makes it is And of forming a rational judgement as

capable of understanding it to its effect upon his interests.

❖ A person who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind.
❖ A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind.

Position of unsound mind person making a contract

A contract made by a person of unsound mind is void.

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C. Contract by Disqualified Persons

❖ There are also other persons who are disqualified from contracting, partially or
wholly, so that the contracts by such person are void.
❖ Incompetency to contract may arise from political status, corporate status,
legal status, etc.
❖ The following persons fall in this category:
✓ Foreign Sovereigns and Ambassadors
✓ Alien enemy
✓ Corporations
✓ Convicts
✓ Insolvent etc.

2.Free Consent

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Consent (Section -13) : → Two or more persons are said to consent when they
agree upon the same thing in the same sense.

Same thing’ must if the parties to A contract cannot arise in the absence of
be understood as the contract do consent.
the whole content not agree in the
of the agreement. same sense, there
cannot be consent. Consent may Only free consent is
be free or necessary for the
not free validity of a contract.

Free Consent (Section -14) :→ Consent is said to be free when it is not caused by

Coercion Undue Influence Fraud Misrepresentation Mistake

When consent to an agreement is caused by these

The agreement is a contract voidable at the option of the party Contract

whose consent was so caused becomes void

3.Elements Vitiating Free Consent

I. Coercion (Section 15) Coercion is

Committing or the unlawful detaining or with the intention of

threatening to commit threatening to detain any OR causing any person to
OR
any act forbidden by property to the prejudice enter into an
the India Penal Code of any person whatever agreement.”

In case of Coercion, it is not necessary that it should proceed from a party to a

contract neither it is necessary that coercion must be done on the other party.

Effects of coercion under section 19 of Indian Contract Act, 1872

I II
Contract induced by coercion is A person to whom money has been paid
voidable at the option of the party or anything delivered under coercion
whose consent was so obtained. must repay or return it . (Section 72)

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Threat to commit suicide – Whether is it coercion ?

❖ A threat to commit suicide will be regarded as coercion.

II. Undue Influence (Section 16)

A contract is said to be induced by ‘undue influence’ where the relations subsisting

between the parties are such that

one of the parties is in a position to he uses that position to obtain an

and
dominate the will of the other unfair advantage over the other

The essential ingredients under this provision are

1. Relation between the parties

❖ A person can be influenced by the other when a near relation between the two exists.

2. Position to dominate the will

❖ Relation between the parties exist in such a manner that one of them is in a position to
dominate the will of the other.

A person is deemed to be in such position in the following circumstances:

Real and apparent Fiduciary Mental distress Unconscionable

authority relationship bargains
An undue influence can
Where a person Where relation of be used against a Where one of the
holds a real trust and person to get his parties to a
authority over the confidence exists consent on a contract contract is in a
other between the where the mental position to
parties to a capacity of the dominate the will of
contract. person is temporarily the other and the
or permanently contract is
affected by the apparently
reason of mental or unconscionable
bodily distress,
illness or of old age.

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3.The object must be to take undue advantage

❖ Where the person is in a position to influence the will of the other in getting consent, must
have the object to take advantage of the other.

4.Burden of proof

When a party to contract decides to avoid the contract on the ground of undue influence, he
has to prove that :-

The other party is in the other party actually Transaction is unfair

position to dominate used his position to or unconscionable.
his will obtain his consent

Effect of undue influence- (Section 19A)

The agreement is a contract • Any such contract may be set aside

voidable at the option of the party either absolutely or,
whose consent was so caused. • If the party who was entitled to avoid it
has received any benefit thereunder,
upon such terms and conditions as to the
Court may seem just.

III. Fraud (Section 17)

Fraud means any of the following acts done with an intention to deceive the will of the
other
a. False Suggestion
b. Active Concealment of facts
c. Promise without intention of performing
d. Other act fitted to deceive
e. Act or omission which law specially declares to be fraudulent

Essential elements of the fraud

• There must be a representation or assertion and it must be false.

Silence is fraud in following situations explanation of section 17

There is duty to speak. When silence is equal to speech.

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must be related to a fact.

should be made before the conclusion of the contract with the

Representation intention to induce the other party to act upon it.

should be made with a knowledge of its falsity or

without belief in its truth or recklessly not caring
whether it is true or false.

must have been induced to act upon the representation

or assertion.

must have relied upon the representation and must have

Other Party been deceived.

acting on the representation must have consequently

suffered a loss.

Effect of Fraud upon validity of a Contract

The contract is voidable at option of the Remedies

party defrauded

Exception Rescind the Sue for Insist on performance

contract damages of contract

In the following cases, contract is not voidable

i. If the party whose consent was ii. A fraud which did not cause the
caused by silence which amounting to consent of the party to
fraud, had the means of discovering agreement.
the truth with ordinary diligence

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IV. Misrepresentation (Section 18)

Statement of fact, which When there is a breach When a party causes, even
of false, would constitute of duty by a person though done innocently, the
misrepresentation without any intention to other party to the
deceive which brings an agreementto make a mistake
If the maker believes it to advantage to him as to the subject matter
be true but which is not
justified by the
information he possesses

Difference between Coercion and Undue Influence

Basis of Coercion Undue Influence

Difference
Nature of • It involves the physical force or It involves moral or mental
action threat. pressure
• The aggrieved party is compelled to
make the contract against its will.
Involvement of It involves committing or threatening to No such illegal act is committed
criminal action commit and act forbidden by Indian or a threat is given.
Penal Code or detaining or threatening
to detain property unlawfully.
Relationship It is not necessary that there must be Some sort of relationship
between parties some sort of relationship between the between the parties is absolutely
parties. necessary.
Exercised by Coercion need not proceed from the Undue influence is always
whom promisor nor need it be the directed exercised between parties to the
against the promisor. It can be used contract.
even by a stranger to the contract.
Enforceability The contract is voidable at the option Where the consent is induced by
of the party whose consent has been undue influence, the contract is
obtained by the coercion. either voidable or the court may
set it aside or enforce it in a
modified form.
Position of In case of coercion where the contract The court has the discretion to
benefits is rescinded by the aggrieved party, as direct the aggrieved party to
received per Section 64, any benefit received return the benefit in whole or in
has to be restored back to the other part or not to give any such
party. directions.

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Distinction between fraud and misrepresentation

Basis of Fraud Misrepresentation

difference
Intention To deceive the other party by There is no such intention to
hiding the truth. deceive the other party.

Knowledge of The person making the suggestion The person making the statement
truth believes that the statement as believes it to be true, although it is
untrue. not true.
Rescission of the The injured party can repudiate The injured party is entitled to
contract and claim the contract and claim damages. repudiate the contract or sue for
for damages restitution but cannot claim the
damages.
Means to discover The party using the fraudulent act Party can always plead that the
the truth cannot secure or protect himself injured party had the means to
by saying that the injured party discover the truth.
had means to discover the truth.

Mistake

Mistake of Law Mistake of Fact

Mistake of Indian Law

Bilateral Unilateral

Mistake of Foreign Law

Mistakes as Mistakes as
to subject to possibility Identity of
matter of person
performance
Quality
Character of
Legal written
Existence document
Physical
Identity

Title

Price

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Mistake

❖ Mistake may be defined as innocent or erroneous belief which leads the

party to misunderstand the others.

Mistake may be either

Mistake of Law Mistake of fact

Mistake of Indian Mistake of Foreign Bilateral Mistake Unilateral Mistake

Law Law
• Where both the Section 22,
A person cannot Such a mistake parties to an A contract is not
be allowed to get is treated as agreement are voidable merely
any relief on the mistake of fact under a mistake because it was
ground that it had and the as toa matter of caused by one of
done a particular agreement in fact essential to the parties to it
act in ignorance of such a case is the agreement, being under a
law. there is a mistake as to a
void.
bilateral mistake. matter of fact.

• The agreement is
void (Section 20).

Cases of Bilateral Mistakes

(i) Mistake as to the quality of the subject-matter.
(ii) Mistake as to the existence of the subject-matter.
(iii) Mistake as to the identity of the subject-matter.
(iv) Mistake as to the title of the subject-matter.
(v) Mistake as to the price of the subject-matter.
(vi) Mistake as to the quantity of the subject-matter.

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4.Legality of Object and Consideration

Which considerations and objects are lawful, and those which are not (Section
23):

As per Section 23 in following cases the consideration or object of an agreement is

said to be unlawful

1. When consideration or object is forbidden by law

Acts forbidden by law are those which are
- punishable under any statute as well as
- prohibited by regulations or orders

2. When consideration or object are of such a nature that if permitted it

would defeats the provisions of law

If the consideration or the object of an agreement is of such a nature that

not directly but indirectly, it would defeat the provisions of the law

Agreement is void

3. When it is fraudulent

Agreements which are entered into to promote fraud Void

4. Injury

❖ The general term “injury” means criminal or wrongful harm.

❖ The object or consideration is unlawful as it involves injury to the person or
property of another.

5. When Consideration is Immoral

6. When Consideration is opposed to public policy (for the good for the community)

Some of the agreements which are held to be opposed to public policy are-

1.Trading with the Enemy

Entering into an agreement with a person from a country with whom India is at
war → Void

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2.Stifiling Prosecution

❖ This is a pervasion of the natural course of law, and such contracts are → Void
❖ The principle is that one should not make a trade of felony.
❖ The compromise of any public offence is generally → Illegal.
❖ However, a statutory list of compoundable offences and an agreement to drop
proceeding relating to such offences with or without the permission of the Court,
as the case may be, in consideration the accused promising to do something for the
complainant, is not opposed to public policy.
❖ In case of an uncompoundable offence, it is → Void.

3.Maintenance and Champerty

1. Maintenance agreement:→ is when a person promises to maintain a suit in which

he has no real interest.
2. Champerty:→ is when a person agrees to assist another party in litigation for a
portion of the damages or proceeds.

The agreement for supplying funds by way of Maintenance or Champerty is valid

unless

It is unreasonable so as to • It is made by a malicious motive and

be unjust to other party • Not with the bonafide object of
assisting a claim believed to be just.

4.Trafficking relating to Public Offices and Titles

• An agreement to trafficking in public office is opposed to public policy, as it

interferes with the appointment of a person best qualified for the service of the
public.

• Public policy requires that there should be no money consideration for the
appointment to an office in which the public is interested.
• Examples of agreements that are void
➢ An agreement to pay money to a public servant in order to induce him
to retire from his office so that another person may secure the appointment
is → Void.
➢ An agreement to procure a public recognition like Padma Vibhushan for
reward is → Void.

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5.Agreements tending to create Monopolies

Agreements having for their object the establishment of monopolies are opposed
to public policy and therefore → Void.

6.Marriage brokerage Agreements

An agreement to brokerage marriage for rewards is → Void.

7.Interference with the course of Justice

An agreement whose object is to induce a judicial or state officials to act corruptly

and interfere with legal proceedings.

8.Interest Against Obligation

Agreements which tend to create interest against obligation are → Void.

9.Consideration 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.

5.Void Agreements

Expressly declared Void Agreements

1 Made by incompetent parties 6 Agreement in restraint of marriage

(Section 11) (Section 26)
2 Agreements made under Bilateral 7 Agreements in restraint of trade
mistake of fact (Section 20) (Section 27)
3 Agreements the consideration or 8 Agreement in restraint of legal proceedings
object of which is unlawful (Section (Section 28)
23)
4 Agreement the consideration or 9 Agreement the meaning of which is
object of which is unlawful in parts uncertain (Section 29)
(Section 24)
5 Agreements made without 10 Wagering Agreement (Section 30)
consideration (Section 25)
11 Agreements to do impossible Acts
(Section 56)

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I. Agreement in restraint of Marriage (Section 26)

• Every agreement in restraint of marriage of any person other than a minor, is void.

II. Agreement in restraint of Trade (Section 27)

• An agreement by which any person is restrained from exercising a lawful

profession, trade or business of any kind, is to that extent Void.

Sale of Goodwill
Exception to rule that an
Agreement in Restraint Statutory Provisions
of Trade is void Indian Partnership Act
1932

III. Agreement in restraint of Legal Proceedings (Section 28)

❖ An agreement in restraint of legal proceeding means an agreement

By which any party thereto is which abridges the usual period for
restricted absolutely from enforcing OR starting legal proceedings.
his rights under a contract through
a Court

❖ A contract of this nature is void

Exception

a. A contract by which the parties agree b. A contract by which the parties agree to
that any dispute between them in respect refer to arbitration any question between
of any subject shall be referred to them which has already arisen, or which may
arbitration and that only the amount arise in future, is valid; but such a contract
awarded in such arbitration shall be must be in writing.
recoverable is a valid contract.

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IV. Agreement the meaning of which is uncertain (Section 29)

• An agreement, the meaning of which is not certain, is → Void.

• But, where the meaning thereof is capable of being made certain, the agreement
is → Valid

V. Wagering Agreement (Section 30)

• Wagering agreement is an agreement involving payment of a sum of money upon

the determination of an uncertain event.
• An agreement by way of a wager is → Void.
• But if one of the parties has control over the event, agreement is not a wager.

Promise to pay money or money’s worth

Promise must Conditional on an event

happening or not happening

Uncertainty of event

Essentials of a Wager
Two parties- each must stand to win or lose

Common intention to bet at the time of making

the agreement

No interest in the event except for stake

Transactions Similar to Wager (Gambling)

Lottery Transactions Crossword Puzzles and Competitions

• A game of chance and not of skill or • Crossword puzzles → in which prizes

knowledge. depend upon the correspondence of the
• Prime motive of participant is gambling, competitor’s solution with a previously
the transaction amounts to a wager. prepared solution kept with the editor of
• The person responsible for running the a newspaper is a lottery and therefore, a
lottery will not be punished under the wagering transaction.
Indian Penal Code • Crossword puzzles, picture competitions
• Section 294A of IPC :→ Lotteries are and athletic competitions where prizes
illegal and even collateral transactions to are awarded on the basis of skill and
it are tainted with illegality intelligence are the games of skill and
hence such competitions are valid.
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Crossword puzzles, picture competitions and athletic competitions where prizes are
awarded on the basis of skill and intelligence are the games of skill and hence such
competitions are valid. According to the Prize Competition Act, 1955 prize
competitions in games of skill are not wagers provided the prize money does not
exceed Rs.1,000.

Crossword Puzzles and Competitions

Case Law: State of Bombay vs. R.M.D. Chamarbangwala AIR (1957)

Facts of the Case : A crossword puzzle was given in magazine. A solved his
crossword puzzle and his solution corresponded with previously prepared solution
kept with the editor.

Held : This was a game of chance and therefore a lottery (wagering transaction).

Speculative Transactions Horse Race Transactions

An agreement or a share market A horse race competition where

transaction where prize payable to the bet winner is
- the parties intend to settle the less than Rs.500 is a wager.
difference between the contract
price and the market price of
- certain goods or shares on a
specified day, is a gambling and
- hence void.

Transactions resembling with wagering transactions but are not void

Chit Fund

• Chit fund does not come within the scope of wager u/s 30.
• In case of a chit fund, a certain number of persons decide to contribute a fixed sum for a
specified period and at the end of a month, the amount so contributed is paid to the lucky
winner of the lucky draw.

Commercial transactions or share market transactions

In these transactions in which

→ delivery of goods or shares is intended to be given or taken, do not amount to wagers.

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Games of Skill and Athletic Competition

• Crossword puzzles, picture competitions and athletic competitions where prizes

are awarded on the basis of skill and intelligence are the games of skill and hence
such competition are valid.
• According to the Prize Competition Act, 1955 prize competition in games of skill
are not wagers provided the prize money does not exceed ₹1,000.

Contract of Insurance

A contract of insurance is a type of contingent contract and is valid under law and
these contracts are different from wagering agreements.

Distinction between Contract of Insurance and Wagering Agreement

Basis Contracts of Insurance Wagering Agreement

1 Meaning It is a contract to indemnify It is a promise to pay money or money’s
the loss. worth on the happening or non-
happening of an uncertain event.
2 Consideration The crux of insurance contract There is no consideration between the
is the mutual consideration two parties. There is just gambling for
(premium and compensation money.
amount).
3 Insurable Insured party has insurable There is no property in case of
Interest interest in the life or property wagering agreement.
sought to be insured. There is betting on other’s life and
properties.
4 Contract of Except life insurance, the Loser has to pay the fixed amount on
Indemnity contract of insurance the happening of uncertain event.
indemnifies the insured person
against loss.
5 Enforceability It is valid and enforceable It is void and unenforceable
agreement.
6 Premium Calculation of premium is based No such logical calculations are
on scientific and actuarial required in case of wagering
calculation of risks. agreement.
7 Public Welfare They are beneficial to the They have been regarded as against
Society the public welfare.

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Unit -4 : Performance of Contract

Liability of Time Place Contracts

Performance Discharge
By Whom Joint of which need
of Reciprocal of a
Promisor & Performance not be
Promises contract
Promisee of Promise Performed

Rights of Joint Agreement to do

Promisees Impossible Acts

1.Performance of Contract

❖ Meaning : Fulfilment of obligations to the contract

❖ Section 37 : The parties to a contract must either perform, or offer to

perform, their respective promises unless such performance is dispensed with or
excused under the provisions of the Contract Act or of any other law.

Types: As per Section 37, “Performance of Contract” may be :-

A. Actual Performance B. Offer to perform or attempted

performance or tender of performance

Where a party to a contract has When the performance becomes due,

- done what he had undertaken to do - the promisor offers to perform his
or obligation but
- Either of the parties have fulfilled - the promisee refuses to accept the
their obligations performance.
- under the contract within the time
and in the manner prescribed.

2.Conditions to be Satisfied for a Valid Tender or Attempted Performance

It must be

Unconditional Made at Reasonable For whole obligation

proper time opportunity to
and place examine goods

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3.By Whom a Contract may be Performed (Section -40,41,42)

Promisor Legal Agent Third Persons Joint Promisors

Himself Representatives (Section 41) (Section 42)

(Section 40)

1. Promisor Himself

If there is something in the contract to show that Then such promise

- it was the intention of the parties that the promise must be performed
should be performed by the promisor himself, by the → Promisor

Contracts which involve the exercise of

- personal skill or Must be performed
- diligence, or by the promisor
- which are founded on personal confidence between himself
the parties

2. Agent

❖ Where personal consideration is not the foundation of a contract,the promisor

or his representative may employ a competent person to perform it.

3. Legal Representatives

❖ A contract which involves the use of personal skill or is founded on personal

consideration comes to an end on the death of the promisor.

❖ As regards any other contract the legal representatives of the deceased promisor
are bound to perform it unless a contrary intention appears from the contract
(Section 37, para 2).

❖ But their liability under a contract is limited to the value of the property they
inherit from the deceased.

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4. Third Persons : Effect of accepting performance from third person

Section 41

❖ When a promisee accepts performance of the promise from a third person, he

cannot afterwards enforce it against the promisor.

❖ That is, performance by a stranger, if accepted by the promisee, this results in

discharging the promisor, although the latter has neither authorised not
ratified the act of the third party.

❖ Example : A received certain goods from B promising to pay Rs. 100,000/-.

Later on, A expressed his inability to make payment. C, who is known to A, pays
Rs. 60,000/- to B on behalf of A. However, A was not aware of the payment.
Now B is intending to sue A for the amount of Rs.100,000/-. Therefore, in the
present instance, B can sue only for the balance amount i.e., Rs.40,000/- and not
for the whole amount.

5. Joint promisors (Section 42)

❖ When two or more persons have made a joint promise, then unless a contrary
intention appears by the contract, all such persons must jointly fulfil the
promise.

❖ If any of them dies → his legal representatives must, jointly with the
surviving promisors, fulfil the promise.

❖ If all of them die → the legal representatives of all of them must fulfil the
promise jointly.

4.Distinction between Succession and Assignment

Succession Assignment

• In case of succession both the • In case of assignment, the benefit

burden and benefits attaching to of the contract can only be assigned
the contract are succeeded by but not the liabilities.
process of law. • Benefit is coupled with a liability OR
• However, the successor's liability is when a personal consideration is
limited to the extend to the involved, then benefit cannot be
property inherited by him. assigned.

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5.Liabaility of Joint Promisor & Promisee

Devolution of Joint Liabilities (Section 42)

❖ If two or more persons have made a joint promise, ordinarily all of them
during their life- time must jointly fulfil the promise.

❖ After death of any one of them,:→ his legal representative jointly with the
survivor or survivors should do so.

❖ After the death of the last survivor :→ the legal representatives of all the
original co-promisors must fulfil the promise.

Section 42 deals with voluntary discharge of obligations by joint promisors.

Any one of Joint promisors may be compelled to perform (Section 43)

❖ When two or more persons make a joint promise,

- the promisee may, in the absence of express agreement to the contrary,
compel
- any one or more of such joint promisors to perform the whole of the
promise.

❖ Each promisor may compel contribution – Each of two or more joint promisors
may compel every other joint promisor to contribute equally with himself to
the performance of the promise, unless a contrary intention appears from the
contract.
(if one of the joint promisors is made to perform the whole contract, he can
call for a contribution from others)
❖ Sharing of loss by default in contribution : - If any one of two or more
joint promisors makes default in such contribution, the remaining joint
promisors must bear the loss arising from such default in equal shares.

Effect of release of one joint promisor (Section 44)

Where two or more persons have made a joint promise, a release of one of such joint
promisors by the promisee

Does not discharge the other Neither does it free the joint promisors
joint promisor or joint promisors, so released from responsibility to the
other joint promisor or promisors.

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Other joint promisor(s) The released Joint

Promisee releases one or
are not released from promisor(s) remains liable
more of joint promisors
their liability to other joint promisor(s)

Right of Joint Promisees (Section 43)

“When a person has made a promise to two or more persons jointly,

- then unless a contrary intention appears from the contract,
- the right to claim performance rests, as between him and them,
- with them during their joint lives, and
- after the death of any of them, with the representative of such deceased
person jointly with the survivor or survivors, and after the death of the last
survivor, with the representatives of all jointly’’

Summary

If a person make a promise to two or more persons jointly (i.e., joint promisees),
ordinarily all of them during their life-time have joint right to claim the performance.

After death of any one of them, : After the death of the last survivor
His legal representative jointly with The legal representatives of all the
the survivor or survivors have joint original joint promisees have the right
right to do so. to claim the performance.

6.Time of Place for Performance of the Promise

Section 46 : Where no application Performance should be within a

is to be made by the promise and reasonable time (it differs from case to
no time is specified case, based on facts and circumstances).

Section 47 : Where time is Perform at any time during the usual

specified and no application to be hours of business, on such day and place
made by the promisee at such time as specified.

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Section 48 : Application for The promisee should apply for

performance to be made on a performance at a proper place within
certain day usual business hours

Section 49 : Where no application The promisor should apply to the

to be made and no place fixed for promisee to appoint a reasonable place
performance for performance.

Section 50 : Performance in To be performed in such manner or at

manner or at a time prescribed or such time as promisee prescribes or
sanctioned by promisee sanctions.

7.Performance of Reciprocal Promise

(i) Promisor not bound to perform, unless reciprocal promisee ready and willing
to perform- Section 51

When a contract consists of no promisor unless the promisee is ready

reciprocal promises to be needs to perform and willing to perform his
simultaneously performed, his promise reciprocal promise.

(ii) Order of performance of reciprocal promises- Section 52

Order of performance is expressly

Perform in that order
fixed by the contract

Perform in that order which the

Order is not expressly fixed –
nature of the transaction requires.

(iii) Liability of party preventing event on which the contract is to take

effect- Section 53

When a contract contains reciprocal promises, and one party to the contract
prevents the other from performing his promise

He is entitled to compensation from

Contract becomes voidable the other party for any loss he may
at the option of the party so And
sustain in consequence of the non-
prevented performance of the contract

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(iv) Effect of default as to that promise which should be first performed in

contract consisting of reciprocal promises - Section 54

❖ Section 54 applies when the promises are reciprocal and dependent.

❖ If the promisor who has to perform his promise before the performance of
the other’s promise fails to perform it, he cannot claim performance of the
other’s promise, and is also liable for compensation for his non- performance.

(v) Effects of failure to Perform at a Time Fixed in a Contract in which Time

is Essential - Section 55

When a party to a contract promises to do certain thing at or before the

specified time, and fails to do any such thing at or before the specified time,

the contract, or so much of it as has not been performed, becomes voidable at the
option of the promisee, if the intention of the parties was that time should be of
essence of the contract.

Effect of Such Failure when time is not essential

The contract does not become The promisee is entitled to

voidable by the failure to do such but compensation from the promisor for
thing at or before the specified any loss occasioned to him by such
time, failure.

Effect of acceptance of performance at time other than agreed upon

The promisee cannot claim compensation for any loss occasioned by the non-
performance of the promise at the time agreed, unless,
- at the time of acceptance, he gives notice to the promisor of his intention to do
so.

(vi) Agreement to do Impossible Act - Section 56

The impossibility of performance may be of the two types, namely

a. Initial impossibility b. Subsequent impossibility

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a. Initial impossibility (Impossibility existing at the time of Contract)

❖ When the parties agree upon doing of something which is obviously impossible in
itself the agreement would be → void.
❖ Impossible in itself means impossible in the nature of things.
❖ The fact of impossibility may be and may not be known to the parties.

If known to the If unknown to If known to the

parties the parties promisor only

• Promisor should have known

Agreement is Void. Contract is Void.
it with reasonable diligence
• The promisee is entitled to
claim compensation for any
loss he suffered on account of
nonperformance.

b. Subsequent or Supervening impossibility (Becomes impossible after entering into

contract)

• When performance of promise become impossible or illegal by occurrence of an

unexpected event or a change of circumstances beyond the contemplation of
parties, the contract becomes → Void.

• The performance of a contract is quite possible when it is made. But

subsequently, some event happens which renders the performance impossible or
unlawful.

• Such impossibility is called the subsequent or supervening.

• It is also called the post-contractual impossibility

(vii) Reciprocal promise to do certain things that are legal and also some other
things that are illegal - Section 57

Where persons reciprocally promise

First to do certain things which And Secondly, under specified

are legal circumstances, to do certain other
things which are illegal

First set of promises is a valid contract Second is a void agreement

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(viii) ‘’Alternative promise’’ One branch being illegal - Section 58

“In the case of the alternative promise, one branch of which is legal and the other
illegal, the legal branch alone can be enforced”

8.Appropriation of Payments

• Sometimes, a debtor owes several debts to the same creditor and makes
payment, which is not sufficient to discharge all the debts.
• In such cases, the payment is appropriated (i.e. adjusted against the debts) as
per Section 59 to 61 of the Indian Contract Act.

If debt to be discharged is indicated (Section 59)

Payment should be applied to that debt indicated either by express intimation or

under circumstances implying a particular debt.

If debt to be discharged is not indicated (Section 60)

• Creditor may apply it at his discretion to any lawful debt actually due and payable,
where its recovery is or is not barred by law.
• However, the creditor shall not apply the payment to the disputed debt.

If neither part appropriates (Section 61)

• The payment shall be applied in discharge of the debts in the order of time,
whether they are or are not barred by law.
• If all the debts are equal, payment shall be applied proportionately.

9.Contracts, Which need not be Performed with the consent of both the parties

i. Effect of Novation (Section 62)

“If the parties to a contract agree to substitute a new contract for it, or to rescind
or alter it, the original contract need not be performed”.

a. Effect of Novation

• Parties to a contract may substitute a new contract for the old one.
• Old contract is discharged and need not be performed
• parties to the contract may be same or different
• It can take place only by mutual agreement between parties

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b. Effect of Rescission

• When the parties to a contract agree to rescind it, the contract need not be
performed.
• only the old contract is cancelled and no new contract comes to exist in its place.
• It is needless to point out that novation also involves rescission
• The contract is discharge by mutual agreement

c. Effect of Alteration

• A contract is also discharged by alteration.

• The terms of contract may be so altered by mutual agreement that the
alteration may have the effect of substituting a new contract for the old one.
Difference between Novation and Alteration

Novation Alteration
1. There may be a change in the 1. The contract is altered by mutual
contracting parties in case of agreement, but the parties to the
novation. contract remain the same.
2. The old contract is substituted with 2. In alteration, there may be some
a new one in case of novation. change in the terms and conditions of
original contract.

ii. Promisee may waive or remit performance of promise (Section 63)

Every promisee may

- dispense with or remit, wholly or in part, the performance of the promise made
to him, or
- may extend the time for such performance or
- may accept instead of it any satisfaction which he thinks fit”.

A contract may be discharged by remission.

iii. Restoration of benefit under a voidable contract (Section 64)

• When a person at whose option a contract is voidable rescinds it, the other party
thereto need not perform any promise therein contained in which he is the
promisor
• If the party rescinding the contract has received any benefit under the contract,
he must restore such benefit to the person from whom he has received it.

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iv. Obligation of Person who has Received Advantage under Void

Agreement or contract that becomes void (Section 65)

• When an agreement is discovered to be void or when a contract becomes void, any

person who has received any advantage under such agreement or contract is
bound to restore it, or to make compensation for it to the person from whom
he received it.

v. – Communication of Rescission (Section 66)

• Rescission must be communicated to the other party in the same manner as a

proposal is communicated under Section 4 of the Contract Act.
• Similarly, a rescission may be revoked in the same manner as a proposal is
revoked.

vi. – Effects of neglect of promise to afford promisor reasonable

facilities for performance (Section 67)

• If any promisee : → neglects or refuses to afford the promisor reasonable

facilities for the performance of his promise,
• The promisor : → is excused by such neglect or refusal as to any non-performance
caused thereby.

10.Discharge of Contract

• A contract is discharged when the obligations created by it come to an end.

• A contract may be discharged in any one of the following ways:

i. Discharge by Performance

When the parties to a contract fulfil the obligations arising under the contract
within the time and manner prescribed, then the Contract is discharged by
performance.

Actual Performance Attempted Performance

when each of the parties has done When the promisor offers to perform
what he had agreed to do under the his obligation, but the promisee refuses
agreement. to accept the performance, it amounts to
attempted performance or tender.

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ii. Discharge by Mutual Agreement (Section 62)

If all parties to a contract mutually agree to replace the contract with a new one or
annul or remit or alter it, then it leads to a discharge of the original contract due
to a mutual agreement.

iii. Discharge by impossibility of performance

• The impossibility may exist from the very start. In that case, it would be
impossibility ab initio.

• Alternatively, impossibility may supervene. Supervening impossibility may take

place owing to :

An The destruction of The non-existence or non- Declaration

unforeseen the subject-matter occurrence of particular of a war.
change in law essential to that state of things, which was
performance naturally contemplated for
performing the contract, as a
result of some personal
incapacity like dangerous
malady

iv. Discharge by lapse of time

• The Limitation Act, 1963 prescribes a specified period for performance of a

contract.
• If the promisor fails to perform and the promisee fails to take action within this
specified period, then the latter cannot seek remedy through law.
• It discharges the contract due to the lapse of time.

v. Discharge by operation of Law

A contract may be discharged by operation of law which includes by death of the

promisor, by insolvency etc.

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vi. Discharge by breach of contract

• If a party to a contract fails to perform his obligation according to the time and
place specified, then he is said to have committed a breach of contract.

• Breach can be of two types

1. Actual breach 2. Anticipatory breach

In both cases, the breach discharges the contract.

vii. Promisee may waive or remit performance of promise

• A promisee can waive or remit the performance of promise of a contract, wholly

or in part.
• He can also extend the time agreed for the performance of the same.
• A contract may be discharged by remission. (Section 63)

viii. Effects of neglect of promisee to afford promisor reasonable

facilities for performance

If any promisee neglects or refuses to afford the promisor reasonable facilities

for the performance of his promise, the promisor is excused by such neglect or
refusal as to any nonperformance caused thereby [Section 67].

ix. Merger of Rights

• In some situations, it is possible that inferior and superior right coincides in the
same person.
• In such cases, both the rights combine leading to a discharge of the contract
governing the inferior rights.

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Unit -5 : Breach Of Contract And Its Remedies

Breach of
Contract

Anticipatory Actual Breach of Remedies for Breach

Breach of Contract of Contract
Contract

Suit for Suit for Suit for

Recission of Suit for
Damages Specific Quantum
Contract Injunction
Performance Meruit

Ordinary Special Vindicative Nominal Prefixed

Damages Damages Damages Damages Damages

Liquidated
Penalty
Damages

Meaning of Breach

• Breach means failure of a party to perform his or her obligation under a contract.

• Breach of contract may arise in two ways:

1. Actual breach of contract
2. Anticipatory breach of contract

1.Anticipatory Breach of Contract

o An anticipatory breach of contract is a breach of contract occurring before the

time fixed for performance has arrived.

o When the promisor refuses altogether to perform his promise and signifies his
unwillingness even before the time for performance has arrived, it is called
Anticipatory Breach.

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Anticipatory breach of a contract may take either of the following two ways :

A. Expressly by words spoken or B. Impliedly by the conduct of one of

written the parties

Effect of Anticipatory Breach

As per Section 39 of the Indian Contract Act, 1872 –

“When a party to a contract has refused to perform or disable himself from

performing, his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, but words or conduct, his acquiescence in its
continuance.”

• The promisee is excused from performance or further performance of the

contract.
He further has the following options

He can He may decide

- Rescind the contract and - Not to rescind the contract and
- sue the other party for damages - treat it as still operative and wait till
immediately without waiting till the time of performance and then
the due date of performance. hold the other party responsible.

2.Actual Breach of Contract

• While an anticipatory breach is before the time of performance, an actual breach

of contract is on the scheduled time of performance of the contract.

An actual breach of contract can be committed either

A. At the time when the B. During the performance of the

performance of the contract is due contract

Actual breach of contract also occurs

when during the performance of the
contract, one party fails or refuses to
perform his obligation under it by
express or implied act.

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Remedies Available

Suit for Rescission Suit for specific Suit for Suit upon
Damages of Contract performance Injunction quantum meruit

3.Suit for Damages

Compensation for loss or damage caused by breach of contract (Section 73)

• On the breach of the contract, the party who suffers from such a breach is
entitled to receive, from the party who has broken the contract, compensation
for any loss or damage caused to him by breach.

• Compensation can be claimed for

Any loss or damage which naturally Any loss or damage which the party
arises in the usual course of events knew when they entered into the
contract, as likely to result from the
breach

• Special damages, if any, can be claimed only if the suffering party has given notice
about it earlier.
• But the party suffering from the breach is bound to take reasonable steps to
minimise the loss.
• No compensation is payable for any remote or indirect loss.

Damages

General/ Vindictive or Damages for Pre-fixed

Special Nominal deterioration
Ordinary Exemplary damages
caused by
delay

i. General / Ordinary Damages

When a contract has been broken,

• The party who suffers by such breach is entitled to receive, from the party who
has broken the contract, compensation for any loss or damage cause to him
thereby, which naturally arose in the usual course of things from such breach,
or which the parties know, when they made the contract, to be likely to result
from the breach of it.

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• Such compensation is not to be given for any remote and indirect loss or damage
sustained by reasons of the breach. (Section 73 of the Contract Act and the
rule in Hadley vs. Baxendale).

Case Law: Hadley vs. Baxendale

Facts: The crankshaft of P’s flour mill had broken. He gives it to D, a common
carrier who promised to deliver it to the foundry in 2 days where the new shaft was
to be made. The mill stopped working, D delayed the delivery of the crankshaft, so
the mill remained idle for another 5 days. P received the repaired crankshaft 7 days
later than he would have otherwise received. Consequently, P sued D for damages not
only for the delay in the delivering the broken part but also for loss of profits
suffered by the mill for not having been worked.

Judgement: The court held that P was entitled only to ordinary damages and D was
not liable for the loss of profits because the only information given by P to D was
that the article to be carried was the broken shaft of a mill and it was not made
known to them that the delay would result in loss of profits.

ii. Special Damages

Where a party to a contract receives a notice of special circumstances affecting the

contract, he will be liable not only for damages arising naturally and directly from
the breach but also for special damages.

iii. Vindictive or Exemplary Damages

These damages may be awarded only in two cases

i. For breach of promise to marry ii. For wrongful dishonour by a banker

of his customer’s cheque (Gibbons v
West Minister Bank).

iv. Nominal Damages

• Nominal damages are awarded where the plaintiff has proved that there has been
a breach of contract, but he has not in fact suffered any real damage.

• It is awarded just to establish the right to decree for the breach of contract.

• The amount may be a rupee or even 10 paise.

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v. Damages for deterioration caused by delay

• In the case of deterioration caused to goods by delay, damages can be recovered

from carrier even without notice.
• The word ‘deterioration’ not only implies physical damages to the goods, but it
may also mean loss of special opportunity for sale.

vi. Pre-Fixed Damages

• Sometimes, parties to a contract stipulate at the time of its formation that on a

breach of contract by any of them, a certain amount will be payable as damage.

• It may amount to either or

liquidated damages (i.e., a reasonable A penalty (i.e., an amount

estimate of the likely loss in case OR arbitrarily fixed as the damages
of breach) payable).

Section 74 : If a sum is named in a contract as the amount to be paid in case of a

breach, the aggrieved party is entitled to receive from the party at fault a
reasonable compensation not exceeding the amount so named.

3.Penalty and Liquidated Damages (Section 74)

❖ English Law makes distinction between liquidated damages and penalty, whereas
Indian Law does not make any distinction between the two.

❖ If the sum fixed in the contract represents a genuine pre-estimate by the parties
of the loss, which would be caused by a future breach of the contract it is
liquidated damages.

❖ Penalty : → Where the sum fixed in the contract is unreasonable and is used to
force the other party to perform the contract, it is penalty.

❖ Section 74 : → If the parties have fixed what the damages will be, the courts
will never allow more. Thus, a person complaining of breach of contract is entitled
to get reasonable compensation and is not entitled to realise anything by way of
penalty.

❖ Exception: If a party enters into a contract with the State or Central

government for the performance of an act in the interest of the general public,
then a breach of such a contract makes the party liable to pay the entire amount
mentioned in the contract.

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Distinction between liquidated damages and penalty

• If the sum payable is far in excess of the probable damage on breach of the
contract, then it is a penalty.

• If a contract mentions an amount payable at a certain date and an additional

amount if a default happens, then the additional sum is a penalty.

• Even if the contract specifies a sum as ‘penalty’ or ‘damages’, the Court needs to
discern this from the facts of the case.

• In penalty, the payment intended to threaten (i.e., as a terrorem to) the

offending party, whereas Liquidated damages is a genuine pre-estimate of the
damage.

• The Indian Courts focus on awarding a reasonable compensation not exceeding

the amount fixed in the contract and does not distinguish between the two.

Other remedies available for the breach of Contract, besides claiming damages

Rescission Quantum Suit for specific Suit for

of contract Meruit performance injunction

(i) Rescission of Contract

• When a contract is broken by one party, the other party may treat the contract
as rescinded.
• In such a case he is free from all his obligations under the contract and is
entitled to compensation for any damages that he might have suffered.

(ii) Quantum Meruit

• Where one person has rendered service to another in circumstances which

indicate an understanding between them that it is to be paid for although no
particular remuneration has been fixed, the law will infer a promise to pay.

• Quantum Meruit i.e. as much as the party doing the service has deserved.
• It covers a case where the party injured by the breach had at time of breach
done part but not all of the work which he is bound to do under the contract and
seeks to be compensated for the value of the work done.

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For the application of this doctrine, two conditions must be fulfilled:

It is only available if the original The claim must be brought by a

contract has been discharged party not in default

• Damages are compensatory in nature while quantum merit is restitutory (i.e.,

seeking to restore the person to the position which he was in earlier).

The claim for quantum meruit arises in the following cases

▪ Agreement discovered to be void or when contract becomes void.

▪ Something done without intention of doing so gratuitously.

▪ Express or implied contract to render services but no agreement as to

remuneration.

▪ Party refuses or abandons to perform contract.

▪ Divisible contract and party not in default has enjoyed benefit of part
performance.

▪ When an indivisible contract for a lump sum is completely performed but badly
the person who has performed the contract can claim the lump sum, but the
other party can make a deduction for bad work.

(iii) Suit for Specific Performance

Where damages are not an adequate remedy in the case of breach of contract, the
court may in its discretion on a suit for specific performance direct party in breach,
to carry out his promise according to the terms of the contract.

(iv) Suit for injunction

• Where a party to a contract is negating the terms of a contract, the court may
by issuing an ‘injunction orders’, restrain him from doing what he promised not to
do.
Party rightfully rescinding contract, entitled to compensation (Section 75)

A person who rightfully rescinds a contract is entitled to compensation for any

damage which he has sustained through non-fulfilment of the contract

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Unit-6 : Contingent and Quasi Contracts

Contingent Contracts Quasi- Contracts

Rules Relating to Cases deemed as

Enforcement of Quasi-Contracts
Contingent Contracts

Difference between
Contingent & Wagering
Contract

1.Contingent Contracts

Definition of ‘Contingent Contract’ (Section 31)

“A contract to do or not to do something, if some event, collateral to
such contract, does or does not happen”.
Contracts of Insurance, indemnity and guarantee fall under this category.

Meaning of collateral Event

Pollock and Mulla : “An event which is neither a performance directly promised
as part of the contract, nor the whole of the consideration for a promise”.
Essential of a Contingent Contract
(a) The performance of a contingent contract would depend upon the happening
or non-happening of some event or condition. The condition may be precedent or
subsequent.

(b) The event referred to as collateral to the contract. The event is not part of
the contract. The event should be neither performance promised nor a
consideration for a promise.

(c) The contingent event should not be a mere ‘will’ of the promisor. The event
should be contingent in addition to being the will of the promisor.

(d) The event must be uncertain. Where the event is certain or bound to
happen, the contract is due to be performed, then it is a not contingent contract.

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2.Rules Relating to Enforcement

The rules relating to enforcement of a contingent contract are laid down in

sections 32, 33, 34, 35 and 36 of the Act.

(a) Enforcement of Contracts contingent on an event happening (Section 32)

• Where a contingent contract is made to do or not to do anything if an uncertain

future event happens, it cannot be enforced by law unless and until that event has
happened.
• If the event becomes impossible, such contracts become void.

(b) Enforcement of Contracts contingent on an event not happening

(Section 33)

• Where a contingent contract is made to do or not do anything if an uncertain

future event does not happen, it can be enforced only when the happening of
that event becomes impossible and not before.

(c) A contract would cease to be enforceable if it is contingent upon

the conduct of a living person when that living person does something to
make the ‘event’ or ‘conduct’ as impossible of happening.(Section 34)

• If a contract is contingent upon as to how a person will act at an unspecified time,

the event shall be considered to have become impossible when such person does
anything which renders it impossible that he should so act within any definite time
or otherwise than under further contingencies.

Case Law: Frost V. Knight

Facts: The defendant promised to marry the plaintiff on the death of his father.
While the father was still alive, he married another woman.
Judgement: It had become impossible that he should marry the plaintiff and she
was entitled to sue him for the breach of the contract.

(d) Contingent on happening of specified event within the fixed time

(Section 35)

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Contingent contracts to do or not to do anything, if a specified uncertain event

happens within a fixed time, becomes void if

At the expiration of time fixed, Or If, before the time fixed, such
such event has not happened event becomes impossible.

(e) Contingent on specified event not happening within fixed time: (Section
35)

Section 35 also says that –

“Contingent contracts to do or not to do anything, if a specified uncertain event

does not happen within a fixed time, may be enforced by law when
• The time fixed has expired, and such event has not happened or
• Before the time fixed has expired, if it becomes certain that such event will
not happen”.

(f) Contingent on an impossible event (Section 36)

Contingent agreements to do or not to do anything, if an impossible event happens

are void, whether the impossibility of the event is known or not to the parties to
the agreement at the time when it is made.

Difference between a contingent contract and a wagering contract

Basis of Contingent contract Wagering contract
difference
Meaning A contingent contract is a A wagering agreement is a
contract to do or not to do promise to give money or money’s
something with reference to a worth with reference to an
collateral event happening or not uncertain event happening or not
happening. happening.

Reciprocal Contingent contract may not A wagering agreement consists

promises contain reciprocal promises. of reciprocal promises.

Uncertain In a contingent contract, the In a wagering contract, the

event event is collateral. uncertain event is the core
factor.

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Nature of Contingent contract may not be A wagering agreement is
contract wagering in nature. essentially contingent in nature.
Interest of Contracting parties have The contracting parties have no
contracting interest in the subject matter interest in the subject matter.
parties in contingent contract.

Doctrine of Contingent contract is not A wagering contract is a game,

mutuality of based on doctrine of mutuality losing and gaining alone matters.
lose and gain of lose and gain.

Effect of Contingent contract is valid. A wagering agreement is void.

contract

3.Quasi Contracts

• Even in the absence of a contract, certain social relationships give rise to certain
specific obligations to be performed by certain persons. These are known as quasi
contracts as they create same obligations as in the case of regular contract.

• Such cases are not contract in the strict sense, but the Court recognises them as
relations resembling those of contracts and enforces them as if they were
contracts. Hence the term Quasi contracts (i.e. resembling a contract).

• Quasi contracts are based on principles of equity, justice and good

conscience.
• A quasi or constructive contract rest upon the maxims, → “No man must
grow rich out of another person’s loss”

Example: T, a tradesman, leaves goods at C’s house by mistake. C treats the goods
as his own. C is bound to pay for the goods.
Example: A pays some money to B by mistake. It is really due to C. B must refund
the money to A.

➢ These relations are called as quasi-contractual obligations.

➢ In India it is also called as ‘certain relation resembling those created by
contracts.

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Salient features of quasi contracts:

a. Such a right is always b. It does not arise c. It is a right which is

a right to money and from any agreement of available not against all
generally, though not the parties concerned, the world, but against a
always, to a liquidated but is imposed by the particular person or
sum of money. law persons only, so that in
this respect it
resembles a contractual
right.

Cases Deemed as Quasi –Contracts

Claims for Obligation of Money paid by

Payment by Responsibility
a person mistake or
necessaries an interested of finder of
enjoying under
supplied person goods
benefit of coercion
[Section 68] [ Section 69] [Section 71]
non [Section 72]
gratuitous
act
[Section 70]

A. Claim for necessaries supplied to persons incapable of contracting (Section 68)

• If a person, incapable of entering into a contract, or anyone whom he is legally

bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.

• To establish his claim, the supplier must prove that

The goods were supplied to the Also, that they were suitable to his
And
person who was minor or a lunatic actual requirements at the time of the
sale and delivery

B. 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.

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C. Obligation of person enjoying benefits of non-gratuitous act (Section 70)

• Where a person
- lawfully does anything for another person, or delivers anything to him not
intending to do so gratuitously and
- Such other person enjoys the benefit thereof, the latter is bound to pay
compensation to the former in respect of, or to restore, the thing so done or
delivered.

• For a suit to succeed in this case, the plaintiff must prove:

➢ That he had done the act or had delivered the thing lawfully
➢ That he did not do so gratuitously and
➢ That the other person enjoyed the benefit

Case Law: Shyam Lal vs. State of U.P.

Facts: ‘K’ a government servant was compulsorily retired by the government. He
filed a writ petition and obtained an injunction against the order. He was reinstated
and was paid salary but was given no work and in the meantime government went on
appeal.
Judgement: Appeal was decided in favour of government and ‘K’ was directed to
return the salary paid to him during period of reinstatement.

D. Responsibility of Finder of Goods (Section 7 1 )

A person who finds goods belonging to another and takes them into his custody is
subject to same responsibility as if he were a bailee.

Thus, a finder of lost goods has:

To take proper care of the No right to appropriate To restore the goods if

property as man of ordinary the goods the owner is found
prudence would take

Case Law: Hollins vs. Howler L. R. & H. L.

Facts: ‘H’ picked up a diamond on the floor of ‘F’s shop and handed over the same
to ‘F’ to keep till the owner was found. In spite of the best efforts, the true owner
could not be traced. After the lapse of some weeks, ‘H’ tendered to ‘F’ the lawful
expenses incurred by him and requested to return the diamond to him. ‘F’ refused
to do so.
Judgement: ‘F’ must return the diamond to ‘H’ as he was entitled to retain the
goods found against everybody except the true owner.

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E. Money paid by mistake or under coercion (Section 7 2 )

A person to whom money has been paid or anything delivered by mistake or under
coercion, must repay or return it.
• Shivprasad Vs Sirish Chandra - Every kind of payment of money or delivery of
goods for every type of ‘mistake’ is recoverable.

• Sales tax officer vs. Kanhaiyalal - A payment of municipal tax made under
mistaken belief or because of mis-understanding of the terms of lease can be
recovered from municipal authorities.

• Seth Khanjelek vs National Bank of India - Any money paid by coercion is also
recoverable. The word coercion is not necessarily governed by section 15 of the
Act, rather, it is interpreted to mean and include oppression, extortion, or such
other means.

Case Law: Trikamdas vs. Bombay Municipal Corporation

Facts: ‘T’ was traveling without ticket in a tram car and on checking he was asked
to pay ₹5/- as penalty to compound transaction. T filed a suit against the
corporation for recovery on the ground that it was extorted from him.

Judgement: The suit was decreed in T’s favour.

Difference between quasi contracts and contracts

Basis of distinction Quasi- Contract Contract

Essential for the The essentials for the The essentials for the
valid contract formation of a valid contract formation of a valid contract
are absent are present
Obligation Imposed by law Created by the consent of the
parties.

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Unit-7 : Contract of Indemnity and Guarantee

Overview

Contract of Indemnity
{Section 124-125}

Contract of Guarantee
{Section 126-127}

Nature of Surety’s Liability

{Section 128}
Contract of Indemnity and
Guarantee {Section 124-147} Continuing Guarantee
{Section 129-132}

Discharge of Surety
{Section 133-139}

Right of Surety
{Section 140-147}

Introduction

• Contract of Are Provided under section 124

Indemnity and specific types to 127 of the Indian
• Guarantee of contracts Contract Act 1872.

• In addition to the specific provisions u/s Section 124 to Section 147 of the Indian
Contract Act, 1872
• General principles of contracts are also applicable to such contracts which are

a. Offer and Acceptance

b. Intention to create legal obligation
c. Consideration
d. Competency to contract
e. Free consent
f. Lawful object
g. The agreement must not be expressly declared to be void
h. The terms of the agreement must not be vague or uncertain
i. The agreement must be capable of performance
j. Legal formalities.

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Contract of Indemnity

Definition u/s 124 of Indian Contract Act 1872

• by the conduct of the

A contract one party promises from loss promisor himself, or
by which to save the other caused to him • by the conduct of any
other person

Meaning

Indemnity/ Indemnify means

Security against loss or To make good the loss or To compensate the party
who suffered some loss.

As per English Law {Gajanan Moreshwar v/s Moreshwar Madan (1942)}

• Indemnity means → Promise to save another harmless from the loss.

• It covers every loss whether due to negligence of promisee or by natural calamity
or by accident.

Basic Condition

❖ Existence of loss is essential

❖ Unless the promise has suffered a loss he cannot liable on the contract of
indemnity.
❖ Such loss is caused by

Conduct of the promisor himself Conduct of any other person

❖ Loss occasioned by

An accident not caused by any person An act of God/ Natural event is not covered

Mode of Contract of Indemnity

Express : It is said to be express when Implied : It is said to be implied when it

a person expressly promises to is to be inferred from the conduct of
compensate the other from loss. the parties or from the circumstances
of the case.

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Insurance Contracts

a. Fire Insurance or Marine insurance → Contract of Indemnity

b. Life Insurance → Not a Contract of indemnity

Two parties in Contract of indemnity

Indemnifier Indemnified/ Indemnity Holder

The party who promises to The party who is promised to be saved

indemnify/save the other party against the loss
from loss.

Contract for
Compensation

Indemnifier Indemnity Holder

(Promisor)
Contract (Promisee)

Compensation Paid
on Actual Loss

Right of Indemnity Holder (Section 125)

The promisee in a contract of indemnity, acting within the scope of his authority,
is entitled to recover from the promisor/indemnifier

(a) All damages (b) All costs which he may (c) All sums which he
which he may be have been compelled to may have paid under the
compelled to pay in pay in bringing/ defending terms of any
any suit the suit compromise of suit

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When does the liability of an Indemnifier Commence?

❖ The Indian Contract Act, 1872, → is silent on the time of commencement of

liability of indemnifier,

❖ As per judicial pronouncements → The liability of an indemnifier commences as

soon as the liability of the indemnity-holder becomes absolute and certain.

Contract of Guarantee

‘’Contract of guarantee’’, ‘’surety’’, ‘’principal debtor’’ and ‘’creditor’’[Section 126]

A Contract of Guarantee is a contract

To perform the promise or To discharge the liability

of third person in case of default

Three parties are involved in a contract of guarantee

• Surety :- Person who gives the guarantee

• Principal Debtor :- Person in respect of whose default the guarantee is given
• Creditor :- Person to whom the guarantee is given

• Guarantee is a promise to pay a debt owed by a third person in case the latter
does not pay.
• Guarantee: An Express contract → Given may be oral or written

Contract of Guarantee (Tripartite Agreement)

Principal Secondary Implied

Contract Contract Contract

Principal Principal
Creditors Creditor Surety Surety
Debtor Debtor

Principal debtor is under an obligation to indemnify

the surety if the surety is made to pay or perform.
Note :→ The right of surety is not affected by the fact that the creditor has
refused to sue the principal debtor or that he has not demanded the sum due from
him.

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Principal
Creditor Main Payment Relationship
Debtor

Surety

ESSENTIAL FEATURES OF A GUARANTEE

Purpose

To secure the The existence of If there is no principal

payment of a debt recoverable debt debt, there can be no valid
is necessary guarantee.

Consideration

Should be There is no need for a Section 127: Consideration

supported by some direct consideration received by the principal debtor
consideration between the surety is sufficient consideration to
and the creditor. surety for giving the guarantee.

• Principal Debtor incompetent to contract :→ Guarantee is valid

• Surety incompetent to contract :→ Guarantee Void (Surety must be competent
to contract)

Existence of a liability

There must be an existing Such liability or The liability must be legally

liability or a promise whose promise must be enforceable and not time
performance is guaranteed. enforceable by law. barred.

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No misrepresentation or Concealment (Section 142 and 143)

Section 142 Section 143

Any guarantee which has been obtained Any guarantee which the
by the means of misrepresentation made creditor has obtained by means
by the creditor, or with his knowledge and of keeping silence as to material
assent, concerning a material part of circumstances, is → Invalid
the transaction, is → Invalid

Writing not necessary

Section 126:→ Guarantee may be either oral or written

Joining of the other co-sureties (Section 144)

• Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety, the guarantee is not
valid if that other person does not join.

• The guarantee by a surety is not valid if a condition is imposed by a surety

that some other person must also join as a co-surety, but such other person does
not join as a co-surety.

Types of Guarantees

A. Specific Guarantee B. Continuing Guarantee [Section 129]

• A guarantee which extends to a • A guarantee which extends to a

single debt/ specific transaction is series of transaction is called a
called a specific guarantee. continuing guarantee.

• The surety’s liability comes to an end • A surety’s liability continues until

when the guaranteed debt is duly the revocation of the guarantee.
discharged or the promise is duly
performed. • The essence of continuing
guarantee is that it applies not to a
specific number of transactions but
to any number of transactions and
makes the surety liable for the
unpaid balance at the end of the
guarantee.

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DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND A CONTRACT
OF GUARANTEE

Point of Contract of Indemnity Contract of Guarantee

Distinction
Number of There are only two parties There are three parties- creditor,
party/parties namely the indemnifier principal debtor and surety.
to the [promisor] and the indemnified
contract [promisee]
Nature of The liability of the indemnifier The liability of the surety is
liability is primary and unconditional secondary and conditional as the
primary liability is that of the
principal debtor.
Time of The liability of the indemnifier The liability arises only on the non-
liability arises only on the happening of a performance of an existing promise
contingency. or non-payment of an existing debt.
Time to Act The indemnifier need not act at The surety acts at the request of
the request of indemnity holder. principal debtor.
Right to sue Indemnifier cannot sue a third Surety can proceed against principal
third party party for loss in his own name as debtor in his own right because he
there is no privity of contract. gets all the right of a creditor after
Such a right would arise only if discharging the debts.
there is an assignment in his
favour.
Purpose Reimbursement of loss For the security of the creditor
Competency All parties must be competent In the case of a contract of
to contract to contract guarantee, where a minor is a
principal debtor the contract is still
valid.

Nature and extent of surety’s liability [section -128]

➢ Section 128 :→The liability of the surety is co-extensive with that of the
principal debtor unless it is otherwise provided by the contract.

➢ Liability of surety is of secondary nature as he is liable only on default of

principal debtor.

➢ Where a debtor cannot be held liable on account of any defect in the

document, the liability of the surety also ceases.

➢ A creditor may choose to proceed against a surety first, unless there is an

agreement to the contrary.

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Liability of two persons, primarily liable, not affected by arrangement between

them that one shall be surety on other’s default

Section 132 :-
- Where two persons contract with a third person to undertake a certain
liability and
- also contract with each other
- that one of them shall be liable only on the default of the other,
- the liability of each of such two persons to the third person under the first
contract is not affected by the existence of the second contract,
- although such third person may have been aware of its existence.

Discharge of a Surety
❖ A surety is said to be discharged when his liability as surety comes to an end.
❖ The various modes of discharge of surety are -
By Revocation of By Conduct of the Creditor By the invalidation of
the contract of the contract of
guarantee guarantee
a.Revocation of a.By variance in terms of contract a. Guarantee obtained
continuing (Section 133) by misrepresentation
guarantee by Exception : Variation which is not invalid (Section 142)
notice (Section substantial or material or which is b. Guarantee obtained
130) beneficial to surety will not discharge by concealment
b.Revocation of him of his labiality invalid (Section 143)
continuing b.By release or discharge of principal c. Guarantee on
guarantee by debtor (Section 134) contract that
surety’s death c.Discharge of Surety when creditor creditor shall not act
(Section 131) compounds with, gives time to, or on it until Co-Surety
c.By Novation agree not to sue principal debtor joins (Section 144)
(Section 62) (Section 135)
i. Composition
ii. Promise to give time
iii.Promise not to sue
Exception:
(i) Surety not discharge when
agreement made with third person to
give time to principal debtor
(Section- 136)
(ii) Creditor’s forbearance to sue
does not discharge surety (Section-
137)
d. Discharge of surety by creditor’s
act or omission impairing surety’s
eventual remedy (Section 139)

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By Revocation of the contract of guarantee

(a) Revocation of continuing guarantee by Notice (Section 130)

The continuing Once the guarantee is A specific guarantee

guarantee may at any revoked, the surety is not can be revoked only if
time be revoked by the liable for any future liability to principal
surety as to future transaction however he is debtor has not accrued.
transactions by notice liable for all the
to the creditors. transactions that happened
before the notice was given.

(b) Revocation of continuing guarantee by surety’s death (Section 131)

In the absence of any contract to the However, the surety’s estate remains
contrary, the death of surety operates liable for the past transactions which
as a revocation of a continuing have already taken place before the
guarantee as to the future transactions death of the surety.
taking place after the death of surety.

(c) By Novation (Section 62)

The surety under original contract is discharged if a fresh contract is entered into
either between the same parties or between the other parties, the consideration
being the mutual discharge of the old contract.

By Conduct of the Creditor

(a) By variance in terms of Contract (Section 133)

Where there is any variance in the it would discharge the surety in

terms of contract between the respect of all transactions taking
principal debtor and creditor without place subsequent to such variance.
surety’s consent,

(b) By release or discharge of principal debtor (Section 134)

The surety is discharged if the creditor

(i) Enters into a fresh/ new contract (ii) Does any act or omission, the legal
with principal debtor; by which the consequence of which is the discharge
principal debtor is released of the principal debtor.

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(c) Discharge of surety when creditor compounds with, gives time to, or agrees
not to sue, principal debtor (Section 135)

A contract between the creditor and the principal debtor, by which the creditor
makes
- A composition with, or
- Promises to give time to, or
- Promises not to sue, the principal debt or,
- Discharges the surety,

unless the surety assents to such contract.

(i) Composition

If the creditor makes a composition Composition inevitably involves variation

with the principal debtor, without of the original contract, and, therefore,
consulting the surety, → The latter is → The surety is discharged.
discharged (Surety)

(ii) Promise to give time

• When the time for the payment of the guaranteed debt comes, the surety has
the right to require the principal debtor to pay off the debt.
• Accordingly, it is one of the duties of the creditor towards the surety→ not to
allow the principal debtor more time for payment.

(iii) Promise not to Sue

• If the creditor under an agreement with the principal debtor promises not to
sue him, the → surety is discharged.

Cases where surety not discharged

Surety not discharged when agreement Creditor’s forbearance to sue does not
made with third person to give time discharge surety [Section 137]
to principal debtor [Section 136]:

Where a contract to give time to the Mere forbearance on the part of the
principal debtor is made by the creditor creditor to sue the principal debtor or
with a third person, and not with the to enforce any other remedy against
principal debtor, → The surety is not him does not in the absence of any
discharged. provision in the guarantee to the
contrary, discharge the surety.

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(d) Discharge of surety by creditor’s act or omission impairing surety’s eventual

remedy (Section 139)

If the creditor does any act/omits to do an act, which is inconsistent with the rights
of the surety, then → The surety is discharged.

State bank of Saurashtra V Chitranjan Rangnath Raja (1980)

In a case before the Supreme Court of India,
“A bank granted a loan on the security of the stock in the godown. The loan was also
guaranteed by the surety. The goods were lost from the godown on account of the
negligence of the bank officials. The surety was discharged to the extent of the
value of the stock so lost.’’

By invalidation of the contract of guarantee

A. Guarantee obtained by misrepresentation invalid (Section 142)

Any guarantee
• which has been obtained by means of misrepresentation made by the creditor
or
• with his knowledge and assent, concerning a material part of the transaction

Invalid

B. Guarantee obtained by concealment invalid (Section 143)

Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is →Invalid.

C. Guarantee on contract that creditor shall not act it until co-surety joins
(Section 144)

Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co- surety, the guarantee is not valid
if that other person does not join.

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Right of a Surety

Right against the principal debtor

Rights of subrogation [Section 140] Right of indemnity [Section 145]

Surety, upon payment of all that he is • In every contract of guarantee there

liable for, is invested with all the rights is an implied promise by the principal
which the creditor has against the debtor to indemnify the surety.
principal debtor i.e., the surety steps • The surety is entitled to recover
into the shoes of the creditor from the principal debtor whatever
sum he has rightfully paid under the
guarantee, but not sums which he
paid wrongfully.

Right against the Creditor

(a) Surety’s right to benefit of (b) Right to set off (c) Right to share
creditor’s securities [Section 141] : reduction
A surety is entitled to the benefit
If the creditor sues The surety has
of every security which the the surety, for right to claim
creditor has against the principal payment of principal proportionate
debtor at the time when the debtor’s liability, the reduction in his
contract of suretyship is entered surety may have the liability if the
into, whether the surety knows of benefit of the set principal debtor
the existence of such security or off, if any, that the becomes insolvent.
not; and, if the creditor loses, principal debtor had
or, without the consent of the against the creditor.
surety, parts with such security,
the surety is discharged to the
extent of the value of the security.

Right against the Co-Sureties

‘’When the same debt or duty is guaranteed by two or more persons, such
persons are called co-sureties’’

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(a) Co-sureties liable to contribute (b) Liability of co-sureties bound in

equally (Section 146): different sums (Section 147):

Unless otherwise agreed, each surety • The principal of equal contribution

is liable to contribute equally for is, however, subject to the maximum
discharge of whole debt or part of limit fixed by a surety to his
the debt remains unpaid by debtor. liability.
• Co-sureties who are bound in
different sums are liable to pay
equally as far as the limits of their
respective obligations permit.

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Unit-8 : Bailment and Pledge

Bailment and Pledge [Section 148-181]

Bailment [Section 148-171] Pledge [Section 172-181]

Distinction
between bailment
and pledge
General
Duties & Duties & Finder
Lien and
Rights Rights of
Particul
of Bailor of Bailee Goods
ar lien

Pledge by
Pawnee Pawnor
Mercantile
Rights Rights
Agent

➢ Question : What is Bailment ?

➢ Answer :
• The word “Bailment” has been derived from the French word “ballier” which
means “to deliver”.

• Bailment etymologically means ‘handing over’ or ‘change of possession’.

• As per section 148 of the Act,

- Bailment is the delivery of goods by one person to another for some purpose
- upon a contract
- that the goods shall, when the purpose is accomplished
- be returned or otherwise disposed of according to the direction of the
person delivering them.

➢ Parties to bailment
a. Bailor : The person delivering the goods.
b. Bailee : The person to whom the goods are delivered.

Essential Elements of a Contract of Bailment

a. Contract :
➢ Bailment is based upon a contract.
➢ The contract may be express or implied.
➢ No consideration is necessary to create a valid contract of bailment.

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b. Delivery of goods:
➢ It involves the delivery of goods from one person to another for some
purposes.
➢ Bailment is only for moveable goods and never for immovable goods or money.

The delivery of the possession of goods is of the following kinds

Actual Delivery Constructive Delivery

• When goods are physically handed • Where delivery is made by doing

over to the bailee by the bailor. anything that has the effect of
• E.g: Delivery of a car for repair to putting goods in the possession of the
workshop. bailee or of any person authorized to
hold them on his behalf.
• Eg: Delivery of the key of car to a
workshop dealer for repair of the car.

c. Purpose :
The goods are delivered for some purpose. The purpose may be express or implied.

d. Possession :
➢ In bailment, possession of goods changes.
➢ Change of possession can happen by physical delivery or by any action which has
the effect of placing the goods in the possession of bailee.
➢ The change of possession does not lead to change of ownership.
➢ In bailment bailor continues to be the owner of goods.
➢ Where a person is in custody without possession he does not become a bailee.

e. Return of goods :
➢ Bailee is obliged to return the goods physically to the bailor.
➢ The goods should be returned in the same form as given or may be altered as
per bailor’s direction.
➢ It should be noted that exchange of goods should not be allowed.
➢ The bailee cannot deliver some other goods even not those of higher value.
➢ Deposit of money in a bank is not bailment since the money returned by the
bank would not be identical currency notes.

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1. The contract may be express or implied

Contract 2. No Consideration is necessary

1. Bailment is only for movable goods never for

immovable goods or money.
2. Delivery of the possession of goods is of two
Delivery of Goods kinds
i. Actual Delivery
Essentials of

ii. Constructive Delivery

Bailment

Goods are delivered for some purpose. Purpose may

Purpose be express or implied.

1. Possession of goods change but does not lead to

change of ownership.
2. Change of possession can happen either by
Possession Physical Delivery or by any action which has the
effect of placing the goods in the possession of
bailee.

1. Bailee is obliged to return the goods physically

to the bailor.
Return of Goods 2. Exchange of goods not allowed, even not those
of higher value.

Types of Bailment

1.On the basis of benefit, bailment can be classified into three types

For the exclusive For the exclusive For mutual benefit

benefit of bailor benefit of bailee of bailor and bailee

2.On the basis of reward, bailment can be classified into two types

Gratuitous Bailment Non- Gratuitous Bailment

• The word gratuitous means free of Non gratuitous bailment means

charge. where both the parties get some
• So, a gratuitous bailment is one when benefit i.e. bailment for the benefit
the provider of service does it of both bailor & bailee.
gratuitously i.e. free of charge.
• Such bailment would be either for the
exclusive benefits of bailor or bailee

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Duties of a Bailor

Duty to indemnify
Bailor’s duty to Duty to pay Bailor’s
the Bailee for
disclose faults in necessary responsibility to
premature
goods bailed expenses bailee
termination
{Section 150} {Section 158} {Section 164}
{Section 159}

Gratuitous Indemnify for

bailment Bailor shall any loss
Gratuitous
Bailor is liable to compensate the Bailee sustain
bailment
pay the bailee bailee for the because of
Bound to
the necessary loss or damage Bailors defective
disclose faults in
expenses suffered by the title in goods
the goods bailed
incurred by him bailee that is in
if some work has excess of the
been done on benefit
bailed goods Bailor duty to
Non-gratuitous received, where receive back the
bailment he had lent the goods when the
Bailor is goods bailee return
Non-gratuitous gratuitously and
responsible for them after the
bailment decides to
damage whether time of bailment
Bailor is liable to terminate the
was aware or not has expired or
pay the bailment before purpose has been
extraordinary the expiry of accomplished
expenses the period of
incurred by the bailment
bailee

i. Bailor’s duty to disclose faults in goods bailed [Section 150]

a. In case of gratuitous bailment

• The bailor is bound to disclose to the bailee faults in the goods bailed, of
which the bailor is aware, and which materially interfere with the use of
them, or expose the bailee to extraordinary risks and
• If he does not make such disclosure, he is responsible for damage arising
to the bailee directly from such faults.

b. In case of non-gratuitous bailment

• If the goods are bailed for hire, the bailor is responsible for such damage,
whether he was or was not aware of the existence of such faults in the
goods bailed.

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ii. Duty to pay necessary expenses [Section 158]

✓ In case of gratuitous bailment

• Where, by the conditions of the bailment, the goods are to be kept or to be
carried, or to have work done upon them by the bailee for the bailor, and the
bailee is to receive no remuneration (gratuitous bailment),

• The bailor shall repay → to the bailee

• Necessary expenses incurred by him and
• Any extraordinary expenses incurred by him for the purpose of the
bailment.

✓ In case of non-gratuitous bailment

• The bailor is liable to pay the →extraordinary expenses incurred by the
bailee.

iii. Duty to indemnify the Bailee for premature termination [Section 159]

✓ The bailor must compensate the bailee

• for the loss or damage suffered by the bailee that is in excess of the
benefit received, where he had lent the goods gratuitously and decides
to terminate the bailment before the expiry of the period of bailment.

iv. Bailor’s responsibility to bailee [Section 164]

The bailor is responsible to the bailee for following :

a. Indemnify for any loss which the bailee may sustain by reason that the
bailor was not entitled to make the bailment, or to receive back the goods or
to give directions, respecting them (defective title in goods).

b. It is the duty of the bailor to receive back the goods when the bailee returns
them after the time of bailment has expired or the purpose of bailment has
been accomplished.

If the bailor refuses to take delivery of goods when it is offered at the

proper time the bailee can claim compensation for all necessary expenses
incurred for the safe custody.

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Duties of a Bailee

Take Reasonable No Unauthorized No mixing of bailor’s

Return the good
Care of the goods use of goods goods with his own
(Section 160 & 161)
(Section 151 & 152) (Section 153 & 154) (Section 155, 156 & 154)

To Return any extra profit accruing from goods bailed

Not to setup Adverse Title
(Section 163)

i. Take reasonable care of the goods [Section 151 & 152]

• In all cases of bailment, the bailee is bound to take as much care of the goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take care of his own goods of the same bulk, quality and value, as the goods
bailed.
• Exception: Bailee when not liable for loss, etc.,of thing bailed [Section
152]: The bailee, in the absence of any special contract, is not responsible for
the loss, destruction or deterioration of the thing bailed, if he has taken
reasonable care as required under section 151.

ii. Not to make inconsistent use of goods [section 153 & 154]

• Section 154 :If the bailee makes any use of the goods bailed, which is not
according to the terms and conditions of the bailment, he is liable to compensate
the bailor for any loss or destruction of goods.
• Section 153 : A contract of bailment is voidable at the option of the bailor, if
the bailee does not use the goods according to the terms and conditions of
bailment.

iii. Not to mix the goods [Section 155,156 & 157]

a. Goods mix with consent of the bailor (Section 155) : If the Bailee, mixes
the goods bailed with his own goods, with the consent of the bailor, both the
parties shall have an interest in proportion to their respective shares in the
mixture thus produced.
b. Goods mix without consent of the bailor & can be separated (Section 156) :
If the bailee, without the consent of the bailor, mixes the goods bailed with his
own goods and the goods can be separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to bear the
expense of separation or division and any damage arising from the mixture.
c. Goods mix without consent of the bailor & cannot be separated (Section
157) : If the bailee, without the consent of the bailor mixes the goods of the
bailor with his own goods in such a manner that it is impossible to separate the
goods bailed from the other goods and to deliver them back, the bailor is
entitled to be compensated by the bailee for loss of the goods.

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iv. Return the goods [Section 160 & 161]

a. Duty of bailee to return or delivery according to bailor’s direction (Section

160) : It is the duty of bailee to return, or deliver according to the bailor’s
directions, the goods bailed without demand, as soon as the time for which
they were bailed, has expired, or the purpose for which they were bailed has
been accomplished.
b. Bailee responsible for any loss because of his default (Section 161) : If, by
the default of the bailee, the goods are not returned, delivered or tendered at
the proper time, → he is responsible to the bailor for any loss, destruction
or deterioration of the goods from that time.

v. Return an accretion from the Goods [Section 163]

In the absence of any contract to the contrary, the bailee is bound to deliver to
the bailor, or according to his directions, any increase or profit which may
have accrued from the goods bailed.

vi. Not to setup Adverse Title

• Bailee must not set up a title adverse to that of the bailor.

• He must hold the goods on behalf of and for the bailor.
• He cannot deny the title of the bailor.

Rights of a Bailor
i. Right to terminate the bailment [Section 153]

• A contract of bailment is voidable at the option of the bailor,

• if the bailee does any act with regard to the goods bailed, inconsistent with the
conditions of the bailment.

ii. Right to demand back the goods [section 159]

• When the goods are lent gratuitously, the bailor can demand back the goods at
any time even before the expiry of the time fixed or the achievement of the
object.
• However, due to the premature return of the goods, if the bailee suffers any
loss, which is more than the benefit actually obtained by him from the use of
the goods bailed, the bailor has to compensate the bailee.

iii. Right to file a suit against a wrong doer [Section 180 & 181]

iv. Right to sue the bailee

• The bailor has a right to sue the bailee for enforcing all the liabilities and
duties of him.

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v. Right to compensation
• If any damage is caused to the goods bailed because of the unauthorized use
of the goods or unauthorized mixing of the goods, the bailor has a right to
claim compensation for the same.

Rights of a Bailee

i. Right to Deliver the Goods to any one of the joint bailors [Section 165]

• If several joint owners bailed the goods, the bailee has a right to deliver them
to any one of the joint owners unless there was a contract to the contrary.

ii. Right to indemnity [section 166]

• Bailee is entitled to be indemnified by the bailor for any loss arising to him by
reasons that the bailor was not entitled to make the bailment or to receive
back the goods or to give directions in respect to them.
• If the bailor has no title to the goods, and the bailee in good faith, delivers
them back to, or according to the directions of the bailor, the bailee shall not
be responsible to the owner in respect of such delivery. Bailee can also claim
all the necessary expenses incurred by him for the purpose of gratuitous
bailment.

iii. Right to claim compensation in case of faulty goods [Section 150]

• A bailee is entitled to receive compensation from the bailor or any loss caused
to him due to the failure of the bailor to disclose any faults in the goods
known to him.
• If the bailment is for hire, the bailor will be liable to compensate even though
he was not aware of the existence of such faults.

iv. Right to claim necessary expenses [Section 158]

• In case of gratuitous bailment, the bailor shall repay to the bailee the
necessary expenses incurred by him and any extraordinary expenses incurred
by him for the purpose of the bailment.

v. Right to Apply to court to decide the title to the goods [Section 167]

• If the goods bailed are claimed by the person other than the bailor, the bailee
may apply to the court to stop its delivery and to decide the title to the
goods.

vi. Right to particular lien for payment of services [Section 170]

vii. Right to general lien [Section 171]

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RIGHTS OF A BAILOR AND BAILEE AGAINST ANY WRONG DOER (THIRD

PARTY)

Suit by bailor & bailee against wrong Apportionment of relief or

doers [Section 180] compensation obtained by such suits
[Section 181]
If a third person wrongfully deprives
the bailee of the use or possession of Whatever is obtained by way of relief
the goods bailed, or does them any or compensation in any such suit shall,
injury- as between the bailor and the bailee,
be dealt with according to their
• The bailee is entitled to use such respective interests.
remedies as the owner might have
used in the like case if no bailment
had been made; and
• either the bailor or the bailee may
bring a suit against a third person for
such deprivation or injury.

TERMINATION OF BAILMENT

Expiry of Fulfilment By death of Inconsistent Destruction/

fixed of the bailor or use of modification of
period purpose bailee the subject
goods
matter

A contract of bailment shall terminated in the following circumstances:

1. On expiry of stipulated period : If the goods were given for a stipulated period,
the contract of bailment shall terminate → after the expiry of such period.

2. On fulfillment of the purpose : If the goods were delivered for a specific

purpose, a bailment shall terminate → on the fulfillment of that purpose.

3. By Notice :

Where the bailee acts in a manner • A gratuitous bailment can be

which is inconsistent with the terms of terminated by the bailor at any time
the bailment, the bailor can always by giving a notice to the bailee.
terminate the contract of bailment by • However, the termination should not
giving a notice to the bailee. cause loss to the bailee in excess of
the benefit derived by him.

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4. By Death : A gratuitous bailment terminates upon the death of either the bailor
or the bailee.
5. Destruction of the subject matter : A bailment is terminated if
• the subject matter of the bailment is destroyed or
• there is a change is in the nature of goods which makes it impossible to be
used for the purpose of bailment.

Finder of Lost Goods

Right of finder of lost goods may sue for specific reward offered [Section 168]:
• The finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him to preserve the goods and to find out the
owner.

• but he may retain the goods against the owner until he receives such compensation

• and, where the owner has offered a specific reward for the return of goods lost,
the finder may sue for such reward, and may retain the goods until he receives it.

When finder of thing commonly on sale may sell it [Section 169]:

When a thing which is commonly the subject of sale if lost, if the owner cannot with
reasonable diligence be found, or if he refuses, upon demand, to pay the lawful
charges of the finder, the finder may sell it-

when the → thing is in danger of when the → lawful charges of the

perishing or of losing the greater finder in respect of the thing found
part of its value or amount to two-thirds of its value

Right of Lien

Lien is the right of a person

• to retain the goods belonging to another
• until his claim is satisfied or
• some debt due to him is repaid.

Types of Lien: Lien may be of two types

Particular Lien General Lien

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Particular Lien [Section 170] General Lien [Section 171]

It is a right to retain only the • It is a right to retain the goods not

particular goods in respect of which the only for demands arising out of the
claim is due. goods retained but for a general
Section 170 provides, balance of account in favour of
• Where the bailee has, in accordance certain persons (in the absence of a
with the purpose of the bailment, contract to the contrary).
rendered any service involving the
exercise of labour or skill in respect • Section 171 provides this right is
of the goods bailed. available to Bankers, factors,
• He has, in the absence of a contract wharfingers, policy brokers and
to the contrary, a right to retain attorneys of law.
such goods until he receives due
remuneration for the services he has
rendered in respect of them.

Difference between Bailee’s General and Particular Lien

General Lien Particular Lien

Section 171 of the Indian Contract Act, Section 170 of the Indian Contract Act,
1872 confer on Bailee the right of General 1872 confers on the Bailee, the right of
Lien. particular lien.
General lien alludes to the right to keep Particular lien implies a right of the bailee
possession of goods belonging to other to retain specific goods bailed for non-
against general balance of account. payment of amount.
A general lien is not automatic but is It is automatic
recognized through on agreement. It is
exercised by the bailee only by name
It can be exercised against goods even It comes into play only when some labor
without involvement of labor or skill. or skill is involved has been expended on
the goods, resulting in an increase in value
of goods.
Only such persons as are specified under Bailee, finder of goods, pledgee, unpaid
section 171, e.g., Bankers, factors, seller, agent, partner etc. are entitled to
wharfingers, policy brokers etc. are particular lien.
entitled to general lien.

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Pledge

“Pledge”, “Pawnor” and “Pawnee” defined [Section 172]:

• Meaning: The bailment of goods as security for payment of a debt or performance

of a promise is called “pledge”.
• The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”.

Section 172 to 182 of the Indian Contract Act, 1872 deal with the contract
of pledge.
Essential of Contract of Pledge

Since pledge is a special kind of bailment, therefore all the essentials of bailment
are also the essentials of the pledge.

There shall be a The subject Goods pledged There shall be the

bailment for security matter of for shall be in delivery of goods
against payment or pledge is goods, existence, from pledger to
performance of the pledgee
promise,

Rights of a Pawnee/Pledgee

a. Right to retain the pledged goods [Section 173] :

The Pawnee may retain the goods pledged, not only for payment of the debt or
the performance of the promise, but for the interest, of the debt, and all
necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.

b. Right to retention of subsequent debts [Section 174] :

✓ The Pawnee can retain the goods pledged for any debt or promise other than the
debt or promise for which they are pledged.
✓ But he can exercise this right only when there is a contract to this effect. i.e.
a right to retain goods for subsequent debts can be exercised only when it has
been provided for in a contract to this effect.

c. Pawnee’s right to extraordinary expenses incurred [Section 175] :

✓ The pawnee is entitled to receive from the pawnor extraordinary expenses

incurred by him for the preservation of the goods pledged.
✓ For such expenses, however, he does not have the right to retain the goods,
but he can sue the pawnor for such expenses.

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d. Pawnee’s right where pawnor makes default [Section 176] :

✓ If the pawnor makes default in payment of the debt, or performance, at the

stipulated time of the promise, in respect of which the goods were pledged, the
pawnee has the following rights :
i. the pawnee may bring a suit against the pawnor upon the debt or promise,
and retain the goods pledged as a collateral security or
ii. he may sell the thing pledged on giving the pawnor reasonable notice of
the sale .
✓ If the proceeds of such sale are less than the amount due in respect of the
debt or promise, the pawnor is still liable to pay the balance.
✓ If the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.

Right of a Pawnor [Section 172]:

As the bailor of goods, pawnor has all the rights of the bailor. Along with that he
also has the right of redemption to the pledged goods which is enumerated under
section 177 of the Act.

Right to redeem [Section 177]:

✓ If a time is stipulated for the payment of the debt, or performance of the
promise, for which the pledge is made, and the pawnor makes default in payment
of the debt or performance of the promise at the stipulated time,
✓ he may redeem the goods pledged at any subsequent time before the actual sale
of them
✓ But he must, in that case, pay, in addition, any expenses which have arisen from
his default.
Dutiesof the Pawnee
a. Duty to take reasonable care of the pledged goods.
b. Duty not to make unauthorized use of pledged goods.
c. Duty to return the goods when the debt has been repaid or the promise has
been performed.
d. Duty not to mix his own goods with goods pledged.
e. Duty not to do any act which is inconsistent with the terms of the pledge.
f. Duty to return accretion to the goods, if any.

Duties of the Pawnor

a. The pawnor is liable to pay the debt or perform the promise as the case may
be.
b. It is the duty of the pawnor to compensate the pawnee for any extraordinary
expenses incurred by him for preserving the goods pawned.
c. It is the duty of the pawnor to disclose all the faults which may put the
pawnee under extraordinary risks.

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d. If loss occurs to the pawnee due to defect in pawnor’s title to the goods, the
pawnor must indemnify the pawnee.
e. If the pawnee sells the good due to default by the pawnor, the pawnor must
pay the deficit.

Pledge by Non -Owners

a. Pledge by mercantile agent [Section 178]:

• A mercantile agent, who is in the possession of goods or document of title, with

the consent of owner, can pledge them while acting in the ordinary course of
business as a Mercantile Agent.
• Such Pledge shall be valid as if were made with the authority of the owner of
goods.
• Provided, Pawnee acted in good faith and had no notice that Pawnor has no
authority to pledge.

b. Pledge by person in possession under voidable contract [Section 178A]:

• When the pawnor has obtained possession of the goods pledged by him under a
contract voidable under section 19 or section 19A (contracts where consent has
been obtained by fraud, coercion, misrepresentation, undue influence),
• but the contract has not been rescinded at the time of the pledge, the
pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor’s defect of title.

c. Pledge where Pawnor has only a limited interested [Section 179]:

Where a person pledges goods in which he has only a limited interest i.e. pawnor
is not the absolute owner of goods, the pledge is valid to the extent of that
interest.

d. Pledge where Pawnor has only a limited interested:

Where the goods are owned by many person and with the consent of other owners,
the goods are left in the possession of one of the co-owners. Such a co-owner may
make a valid pledge of the goods in his possession.

e. Pledge by seller or buyer in possession:

A seller, in whose possession, the goods have been left after sale or a buyer who
with the consent of the seller, obtains possession of the goods, before sale, can
make a valid pledge, provided the pawnee acts in good faith and he has no
knowledge of the defect in title of the pawnor.

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DISTINCTION BETWEEN BAILMENT AND PLEDGE

Basis of Bailment Pledge

Distinction
Meaning Transfer of goods by one person to another Transfer of goods from one person to
for some specific purpose is known as another as security for repayment of
bailment. debt is known as the pledge.
Terms • The person delivering the Goods under • The person who delivers the good as
Applicable a contract of bailment is called as security is called the “Pawnor’’.
“Bailor’’ • The person to whom the goods are
• The person to whom the goods are delivered as security is called the
delivered under a contract of bailment is “pawnee’’
called as “Bailee’’
Purpose Bailment may be made for any purpose (as Pledge is made for the purpose of
specified in the contract of bailment, eg: for delivering the goods as security for
safe custody, for repairs, for processing of payment of a debt, or performance of a
goods). promise.
Consideration The bailment may be made for Pledge is always made for a
consideration or without consideration. consideration.
Right to sell • The bailee has no right to sell the goods The pawnee has right to sell the goods if
the goods even if the charges of bailment are not the pawnor fails to redeem the goods.
paid to him.
• The bailee’s rights are limited to suing
the bailor for his dues or to exercise lien
on the goods bailed.
Right to use of Bailee can use the goods only for a purpose Pledgee or Pawnee cannot use the goods
goods specified in the contract of bailment and pledged.
not otherwise.

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Unit -9 : Agency

Appointment
Meaning
Authority

Sub Agents

Ratification
Agency
{Section 182-238}
Revocation of Authority

Duties, obligations and

Rights of Agent

Effect of agency on
contract with third persons

What is Agency ?

➢ Question : What is Agency ?

➢ Answer :
✓ The Indian Contract Act, 1872 does not define the word ‘Agency’.
✓ However, section 182 of the Indian Contract Act, 1872 defines Agent and
Principal as :
▪ Agent: means a person employed to do any act for another or to
represent another in dealing with the third persons and
▪ The principal: means a person for whom such act is done or who is so
represented.

➢ Test of Agency
Question (a) : Whether the person has the capacity to bind the principal and
make him answerable to the third party ?
Question (b) : Whether he can establish privity of contract between the
principal and third parties ?

Answer : If the answer to these questions is in affirmative (Yes), then there is

a relationship of agency.

❖ ‘Agency’ is a comprehensive word used to describe the relationship between

one person and another, where the first mentioned person brings the second
mentioned person into legal relation with others.

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❖ Thus, ‘Agency’ is a comprehensive word used to describe the relationship
between one person and another,
• where the first mentioned person brings the
• second mentioned person into legal relation with others.
❖ The Rule of Agency is based on the maxim “Qui facit per alium, facit per se” i.e.,
he who acts through an agent is himself acting.

Appointment and Authority of Agents

Who may employ an agent ? [Section Who may be an agent ? [Section 184]
183]
• A person who has attained majority • A person who has attained majority
according to the law (+18). according to the law (+18) [to be
• Has sound mind. responsible to his principal]
• Has sound mind.
Whether the consideration is necessary?
✓ As per Section 185
- No consideration is necessary to create an agency?
- Acceptance of the office of an agent is sufficient consideration.

Creation of Agency

In the words of Desai J, of the Supreme Court of India : →“The relation of

agency arises whenever one person called the agent has the authority to act on
behalf of another called the principal and consents to act. The relationship has
genesis in a contract”
The relationship of the principal and the agent may be created in any of the
following ways
The authority may be express or implied [Section 186]

Definitions of express and implied authority [Section 187]

1.Express Authority 2.Implied Authority

An authority is said to be express It is to be inferred from

when it is given by words, spoken or • The circumstances of the case
written. • Things spoken or written
• Or in the ordinary course of dealing.

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Implied Agency includes

(a) Agency by Estoppel [Section 237]

Where the principal by his conduct or statement willfully induces another person
to believe that a certain person is his agent, he is subsequently prevented or
estopped from denying the fact of agency.

According to section 237 of the Contract Act, an agency by estoppel may be

created when following essentials are fulfilled:

principal must representation Representation principal must third person

have made a may be express must state that have induced must have
representation or implied the agent has an the third believed the
authority to do person by representation
certain act such and made the
although really he representation contract on the
has no authority belief of such
representation.

(b) Agency by Necessity

• An agency of necessity arises due to some emergent circumstances.

• where an agent is authorized to do certain act, and while doing such an act, an
emergency arises, he acquires an extra-ordinary or special authority to prevent his
principal from loss

3.Agency by Operation of Law

• When law treats one person as an agent of other.

• For example :→ A partner is the agent of the firm for the purposes of the
business of the firm.

4. Rights of person as to acts done for him without his authority, Effect of
ratification [Section 196]

• ’Ratification ” means approving a previous act or transaction.

• Where acts are done by one person on behalf of another, but without his knowledge
or authority he may elect to ratify it.

• This will make the agency valid.

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Essential of Valid Ratification

a. Ratification may be expressed or Implied [Section 197]:

• Ratification may be expressed or may be implied in the conduct of the
person on whose behalf the acts are done.

b. Knowledge requisite for valid ratification [Section 198]:

• No valid ratification can be made by a person whose knowledge of the
facts of the case is materially defective.

c. The whole transaction must be ratified [Section 199]:

• There can be ratification of an act in entirely or its rejection in entirely.
• The principal cannot ratify a part of the transaction which is beneficial to
him and reject the rest.

d. Ratification cannot injure third person [Section 200]:

• When the interest of third parties is affected, the principle of
ratification does not apply.
• Ratification cannot relate back to the date of contract if third party has in
the intervening time acquired rights.

e. Ratification within reasonable time:

• Ratification must be made within a reasonable period of time.

f. Communication of Ratification:
• Ratification must be communicated to the other party.

g. Act to be ratified must be valid:

• Act to be ratified should not be void or illegal, for
• e.g. payment of dividend out of capital, forgery of signatures, any other
criminal offence, or anything which is not permitted under law

Extent of Agent’s Authority

(A) Under Normal Circumstances (Section 188)

To do an act has authority to do To carry on a business has authority

every lawful thing which is necessary to do every lawful thing necessary
in order to do such act for the purpose, or usually done in
the course, of conducting such
business.

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(B) In Emergency (Section 189)

• An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence, in his own case, under similar circumstances.

• Conditions for valid agency during emergency

1. Agent should not be a in a position or have any opportunity to communicate

with his principal within the time available.

2. There should have been actual and definite commercial necessity for the
agent to act promptly

3. Agent should have acted bonafide and for the benefit of the principal.

4. Agent should have adopted the most reasonable and practicable course
under the circumstances, and

5. Agent must have been in possession of the goods belonging to his principal
and which are the subject of contract.

Sub-Agents

PRINCIPAL • Delegates act/work

AGENT • Further delegates

SUB-AGENT

• When agent cannot delegate [Section 190] : An agent cannot lawfully employ
another to perform acts which he has expressly or impliedly undertaken to
perform personally, unless by the ordinary custom of trade a sub-agent may, or
from the nature of the agency, a sub-agent must, be employed.

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• “Sub-agent” defined [Section 191] : A “Sub-agent” is a person employed by,

and acting under the control of, the original agent in the business of the agency.

• The appointment of sub agent is not lawful, because the agent is a delegatee and a
delegatee cannot further delegate.
• This is based on the Latin principle “delegatus non potest delegare’’.
• A contract of agency is of a fiduciary character.
• It is based on the confidence reposed by the principal in the agent and that is why
a delegatee cannot further delegate.

Exception where an agent can appoint Sub-agent

The appointment of a • Sometimes customs of Where in the course of the

sub agent would be the trade may provide agent’s employment,
valid if the terms of for appointment of sub unforeseen emergency arise
appointment originally agents making it necessary for him
contemplated it. • In both these cases the to delegate the authority
sub agent would be that was given to him by the
treated as the agent principal
of the principal.

Representation of principal by sub-agent properly appointed [Section 192]

Where a sub-agent is properly appointed

Principal is liable to Agents responsibility Sub-agents liability to

third parties for the for sub agents: principal:
acts of the sub-agent
The agent is responsible The sub-agent is
to the principal for the responsible for his acts to
acts of the sub-agent. the agent, but not to the
principal, except in case
of fraud or willful wrong.

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Agent’s responsibility for sub-agent appointed without authority [Section 193]

Where an agent, without having authority to do so, has appointed a person to act as
a sub-agent

Agent is responsible for Principal is responsible • Sub agent is not

his acts both to the for the acts of the sub responsible to the
principal and to third agent principal at all.
persons • He is answerable
only to the agent.

Substituted Agent

➢ Substituted Agent is a person appointed by the agent to act for the principal,
in the business of agency, with the knowledge and consent of the principal.
➢ Substituted agents are not sub agents.
➢ They are agents of the principal.

Relation between principal and person Agent’s duty in naming such person
duly appointed by agent to act in [Section 195] :
business of agency [Section 194]:

Where an agent, holding an express or • In selecting such agent for his

implied authority to name another principal, an agent is bound to
person to act for the principal in the exercise the same amount of
business of the agency, has named discretion as a man of ordinary
another person accordingly, such prudence would exercise in his own
person is not a sub-agent, but an agent case and
of the principal for such part of the • if he does this, he is not responsible
business of the agency as is entrusted to the principal for the acts or
to him. negligence of the agent so selected.

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DIFFERENCE BETWEEN A SUB-AGENT AND SUBSTITUED AGENT

S. No. Sub Agent Substituted Agent

1. A sub-agent does his work under the A substituted agent works under the instructions
control and directions of agent. of the principal.
2. The agent not only appoints a sub- The agent does not delegate any part of his task
agent but also delegates to him a part to a substituted agent.
of his own duties.
3. There is no privity of contract between Privity of contract is established between a
the principal and the sub-agent. principal and a substituted agent.
4. The sub-agent is responsible to the A substituted agent is responsible to the
agent alone and is not generally principal and not to the original agent who
responsible to the principal. appointed him.
5. The agent is responsible to the The agent is not responsible to the principal for
principal for the acts of the sub- agent. the acts of the substituted agent.
6. The sub-agent has no right of action The substituted agent can sue the principal for
against the principal for remuneration remuneration due to him.
due to him.
7. Sub-agents may be improperly Substituted agents can never be improperly
appointed. appointed.
8. The agent remains liable for the acts of The agent's duty ends once he has named the
the sub-agent as long as the sub- substituted agent.
agency continues.

DUTIES AND OBLIGATIONS OF AN AGENT

• Agent should perform the work which he has been

Duty to execute appointed to do.
mandate • Otherwise he shall be liable to compensate the
principal.

• Agent must conduct business as per the instructions of

the principal.
Duty to follow
• In absence of instructions, he must follow general
instructions or customs
(Section 211) customs of business.
• Otherwise, loss sustained/ undue profits made must be
compensated back by agent to principal.

• Duty to reasonable care and skill to be used in

Duty to Reasonable
care and skill exercising all his duties.
(Section 212) • Moreover, he is liable to compensate the principal for
his negligence/misconduct

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Agent duty to • Agent duty to communicate with principal and seeking

communicate with his instructions in case of any difficulty in execution of
principal (Section 214) his duties.

a. Right of Principal when agent deals, on his own account,

in business of agency without principals consent
(Section 215)
Duty to Avoid Conflict of The Principal may cancel the transaction if :
Interest (Section 215) i. Material fact has been dishonestly concealed
from him or
ii. Dealing have been disadvantageous to him.
b. Principal’s right to benefit gained by agent dealing on
his account in business of agency (Section 216)
• The principal is entitled to claim any benefit
resulting from the transaction from the agent.

• An agent not to make any secret profit in the business

Duty not to make secret of agency.
profits • His relationship with the principal is of fiduciary
nature and this requires absolute good faith in the
conduct of agency.

Duty to render proper • Accounts supported with vouchers must be submitted

accounts (Section 213) whenever demanded by principal.

Duty not to Delegate • Acts which he is personally responsible to fulfil unless

(Section 190)
its required in ordinary course of trade.

Agent’s Duty to pay

• Subject to such deductions, the agent is bound to pay
sums received for
principal (Section 218) to his principal all sums received on his account.

Duty not to use any confidential information received in the course of agency against
the principal.

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RIGHT OF AN AGENT

a. All moneys due to himself

Right of retain out of
sums received on b. Expenses properly incurred by him in
principal’s account conducting such business
(Section 217)
c. Remuneration

• Remuneration may be as per contract or as

per usual customary in business.
Right to remuneration
(Section 219) • Section 120 : However an agent who is
guilty of misconduct in the business of the
agency is not entitled to any remuneration in
respect of that part of the business which
he has misconducted.

In the absence of any contract to the

contrary an agent is entitled
• Retain the goods, papers and other property,
whether movable or immovable of the
principal.
• Until the amount due to himself for
commission, disbursement and services in
respect of the same has been paid or
accounted for him.

Agent’s lien on principal’s Conditions :

property ✓ Agent should be lawfully entitled to receive
(Section 221) remuneration /commission from the principal
✓ Property belongs to the principal
✓ Property has been received by the agent in
his capacity and during the course of his
ordinary duties as agent.
✓ Agent has only a particular/ specific lien.

The agent’s right to lien is lost in the following

cases:
✓ Possession of the property is lost.
✓ Agent waives his right expressly or impliedly.
✓ Contract does not allow lien.

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a. Right of indemnification for lawful acts

(Section 222) :
Loss caused even after lawfully execution of
authority shall be indemnified by principal
Right to indemnity
b. Right of indemnification against acts done
in good faith (Section 223)
• Losses/ damages caused even though
agent acted in good faith shall be
indemnified by principal.
• Reimbursement cannot be claimed where
the agent has contravened any laws and
penalty is levied.

c. Non-liability of employer of agent to do a

criminal act (Section 224)
• Principal must make compensation to his
agent any loss/damage caused to him due
to principal’s neglect or want of skill.

Right to compensation
• Principal must make compensation to his
for injury caused by
agent any loss/ damage caused to him due to
principal’s neglect
principal’s neglect or want of skill.
(Section 225)

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Principal’s Liability to Third Parties

Section 227 Section 229 Section 238

Section 226
Principal not bound, Consequence of Principal’s liability for
Principal is
when agent exceeds notice given to the agent’s fraud,
liable/bound by
authority : In such agent: Any notice misrepresentation or
for the Acts of
situation part of the given to agent
the Agent as per torts:
contract which is as during course of
authority given • Misrepresentation
per the authority, business would
in contract. by agents acting in
shall be binding on deemed notice to
the principal. principal. the course of their
business for their
principals, have the
same effect as if
Section 228 Exception
such
Principal not bound, Section 237 misrepresentations
when excess of agent’s Liability of principal or frauds had been
authority is not inducing belief that made or committed
separable from the agent’s unauthorized by principal
authorized part of the acts were • Matter which are
transaction. authorized. not fall within
authority of agent
do not affect their
principals

PERSONAL LIABILITY OF AGENT TO THIRD PARTIES

➢ Agent cannot personally enforce nor be bound by, contract on behalf of

principal [Section 230] :
• In the absence of any contract to that effect, an agent cannot personally
enforce contracts entered into by him on behalf of his principal, nor is he
personally bound by them.
• He can neither sue nor be sued on contracts made by him on his principal’s
behalf.

Exceptions

Where the contract Where the agent Non Pretended When

is made by an agent does not disclose existence or agent agent
for the sale or the name of his incompetent (Section exceeds
purchase of goods principal or principal 235) authority
for a merchant undisclosed
resident principal;
abroad/foreign (Principal
principal unnamed)

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Agent cannot personally enforce, nor be bound by, contracts on behalf of

principal (Section 230) : Agent can neither sue nor be sued on contracts made
by him on his principal’s behalf.

RIGHTS OF THIRD PARTIES

(i) Rights of parties to a contract made by undisclosed agent [Section 231]

• If an agent makes a contract with a person who neither knows, nor has reason
to suspect, that he is an agent, his principal may require the performance of
the contract; but the other contracting party has, as against the principal,
the same right as he would have had as against the agent if the agent had
been the principal.
• If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfill the contract, if he can show that, if
he had known who was the principal in the contract, or if he had known that
the agent was not a principal, he would not have entered into the contract.

(ii) Rights of parties to a contract made by undisclosed agent [Section 231]

• Where one man makes a contract with another, neither knowing nor having
reasonable ground to suspect that the other is an agent, the principal,
• If he requires the performance of the contract, can only obtain such
performance subject to the rights and obligations subsisting between the
agent and the other party to the contract.

(iii) Option to Third Person –Sue the Agent or the Principal

a. Right of person dealing with agent b.Consequence of inducing agent or

personally liable [Section 233]: principal to act on belief that
principal or agent will be held
In cases where the agent is exclusively liable [Section 234]:
personally liable, a person dealing
with him may hold either him or his • When a person who has made a
principal, or both of them, liable. contract with an agent induces the
agent to act upon the belief that the
principal only will be held liable or
• induces the principal to act upon the
belief that the agent only will be held
liable, he cannot afterwards hold liable
the agent or principal respectively.

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REVOCATION OF AUTHORITY

Termination of Agency [Section 201]

Renunciation Completion of Death of Principal or

Revocation
by agents business the agent

Principal or agent Insolvency of Expiry of time

becoming of unsound mind principal

i. Revocation

• Section 203 : Principal may revoke the authority given to his agent at any time
before the authority has been exercised so as to bind the principal .

• Section 204 : However, the principal cannot revoke the authority given to his
agent after the authority has been partly exercised so far as regards such acts
and obligations as arise for acts already done in the agency.

• Compensation for revocation by principal [Section 205] : If there is premature

revocation of agency without sufficient cause, the principal must compensate the
agent, for such revocation.

• Notice of revocation [Section 206]: When the principal, having justification to

do so, revokes the authority, he must give reasonable notice of such revocation to
the agent, otherwise, he can be liable to pay compensation for any damage caused
to the agent.

• Revocation and renunciation may be expressed or implied [Section 207]:

Revocation of agency may be expressed or implied in the conduct of the principal.

ii. Renuncation by Agent [Section 206]

• An agent may renounce the business of agency in the same manner in which the
principal has the right of revocation.

• Section 205 : If the agency is for a fixed period, the agent would have to
compensate the principal for any premature renunciation without sufficient cause.

• Section 206 : A reasonable notice of renunciation is necessary. Length of notice

is to be determined by the same principles which apply to revocation by the
principal. If the agent renounces without proper notice, he shall have to make good
any damage thereby resulting to the principal.

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iii. Completion of Business

• An agency is automatically and by operation of law terminated when its business is

completed.
• Thus, for example, the authority of an agent appointed to sell goods ceases to be
exercisable when the sale is completed.

iv. Death or Insanity

• An agency is determined automatically on the death or insanity of the principal or

the agent. Winding up of a company or dissolution of partnership has the same
effect.
• Act done by agent before death would remain binding.

v. Principal’s Insolvency

An agency ends on the principal being adjudicated insolvent.

vi. On Expiry of Time

• Where an agent has been appointed for a fixed term, the expiration of the
term puts an end to the agency, whether the purpose of agency has been
accomplished or not.
• An agency comes to an automatic end on expiry of its term

When the Agency is Irrevocable ?

When the agent is personally Section 202 states that ”where the
interested in the subject matter of agent has himself an interest in the
agency the agency becomes property which forms the subject
irrevocable. matter of the agency, the agency
cannot, in the absence of an express
contract, be terminated to the
prejudice of such interest.”

Effect of Termination [Section 208]

[When termination of agent’s authority takes effect as to agent, and as to

third persons Section 208]:

The termination of the authority of an agent does not, so far as regards the agent,
take effect before it becomes known to him, or, so far as regards third persons,
before it becomes known to them.

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Agent’s duty on termination of agency by principal’s death or insanity [Section

209]

When an agency is terminated by the principal dying or becoming of unsound mind,

the agent is bound to take, on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interests entrusted to
him.

Termination of sub-agent’s authority [Section 210]

The termination of the authority of an agent causes the termination (subject to

the rules herein contained regarding the termination of an agent’s authority) of
the authority of all sub-agents appointed by him.

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