Indian Contract Act PDF
Indian Contract Act PDF
INTRODUCTION
The law of contract is the most important branch of Mercantile Law. Without such a law it would
be difficult, if not impossible, to carry on any trade or business in a smooth manner. The law of
contract is applicable not only to business but also to all day-to-day personal dealings. In fact,
each one of us enters into a number of contracts from sunrise to sunset. When a person buys a
newspaper or rides a bus or purchases goods or gives his radio for repairs or borrows a book from
library, he is actually entering into a contract. All these transactions are subject to the provisions
of the law of contract.
The term business law refers to those rules which govern and regulate business transactions.
These rules, regulations etc bring a sense of seriousness and definiteness in business dealings.
They provide for rules regarding the validity of making contracts and their performances.
INDIAN CONTRACT ACT, 1872
In the year 1861,the third law commission of British India under the chairmanship of Sir John
Romily presented the report on contract law for India.The law commission submitted a draft on
28th July 1866.The draft contract law after several amendments was enacted as The Act 9 of 1872
on 25th April 1872 and the INDIAN CONTRACT ACT 1872 came into force w.e.f1st September
1872.The Indian Contract Act, 1872 is one of the oldest in the Indian law regime, passed by the
legislature of pre-independence India; it received its assent on 25th April 1872. The statute
contains essential principles for formation of contract along with law relating to indemnity,
guarantee, bailment, pledge and agency.
WHAT IS A CONTRACT?
Broadly speaking, a contract is an agreement made between two or more persons to do or to
abstain from doing a particular act. A contract invariably creates a legal obligation between the
parties by which certain rights are given to one party and a corresponding duty is imposed on the
other party. The law of contract is the most important part of mercantile law in India. It
determines the circumstances in which the promise made by the parties to a contract shall be
binding on them and provides for the remedies available against a person who fails to perform his
promise. The law of contract is contained in the Indian Contract Act, 1872, which deals with the
general principles of law governing all contracts 'and covers the special provisions relating to
contracts like bailment, pledge, indemnity, guarantee and agency. Section 2(h) of the Act states
that an agreement enforceable by law is a contract. Let us discuss these two elements in detail.
Every contract thus combines two essential elements(i)agreement and (ii)obligation.It creates
rights and obligations between the parties to the contract which are correlative,in casea party
refuses to honor a contacted obligation it will give right of action to other party.
According to the terms of Section 10 of the Act, an agreement is a valid contract if it is 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. On analysing this definition of contract, you will
notice that a contract essentially consists of two elements: (i) an agreement, and (ii) its
enforceability by law.
Agreement
Section 2(e) of the Contract Act defines agreement as every promise 'and every set of promises
forming the consideration for each other. In this context a promise refer to a proposal (offer)
which has been accepted. For example, Ramesh offers to sell his T.V. for Rs. 8,000 to Shyam.
Shyam accepts this offer. It becomes a promise and treated as an agreement between Ramesh
and Shyam. In other words, an agreement consists of an offer by one party and its acceptance by
the other. Thus, Agreement = Offer + Acceptance. From the above analysis it is clear that there
must be at least two parties to an agreement, one making an offer and the otheraccepting it. No
person can enter into agreement with himself. There is another important aspect relating to an
agreement i.e., the parties to an agreement must have an identity ofminds in respect of the
subject matter. They must agree on the same thing in the same sense. This is also called
consensus-ad-idem. Suppose A has two houses, one situated in South Delhi and the other in
North Delhi. He offers to sell his North Delhi house to B while B is under the impression that he is
buying the South Delhi house. Here, there is no identity of minds. Both theparties are thinking
about different houses. Hence there is no agreement.
Legal Obligation
In order that an agreement may be regarded as a contract, it must give rise to a legal obligation
i;e., it must be enforceable by law. Any obligation (duty) which is not enforceable by law is not
regarded as a contract. Social, moral or religious agreements do not create any legal obligation.
For example, an agreement to take lunch together or to go to a picnic is not a contract because it
does not create a duty enforceable by law. Such agreements are purely of a social nature where
there is no intention to create legal relationship. Hence, they do not result in contracts. , In case
of business agreements, however, the usual presumption is that the parties intend to create a
legal relationship. For example, an agreement to sell a scooter for Rs. 8,000 is a contract because
it gives rise to an obligation enforceable by law. In this agreement if there is default by either
party, an action for breach of contract can be enforced through a court of law provided all the
essentials of a valid contract are present in the agreement.
DISTINCTION BETWEEN AN AGREEMENT AND A CONTRACT
Agreement. Contract
Offer and its acceptance constitute Agreement and its enforceability ,an agreement.
anagreement. constitute a contract.
An agreement may not create a legal A contract necessarily creates alegal obligation.
obligation.
Every agreement may not be a All contracts are agreements.
Contract
Agreement is not a concluded or Contract is concluded and binding on the
a bindingcontract. concerned parties
.
CLASSIFICATION OF CONTRACTS
Contracts can be classified on a number of basis. They are:
1) On the basis of creation.
2) On the basis of execution.
3) On the basis of enforceability.
1) On the Basis of Creation
A contract may be (i) made in writing or by word of mouth or (ii) inferred from the conduct of
the parties or circumstances of the case. The first category of contract is termed as 'express
contract' and the second as 'implied contract' '
i) Express Contract: An express contract is one where the terms are clearly stated in words,
spoken or written. For example, A wrote a letter to B stating "I offer to sell my car for Rs.
30,000 to you", B accepts the offer by letter sent to A. This is an express contract. Similarly,
when A asks a scooter mechanic to repair his scooter and the mechanic agrees, it is an express
contract made orally by spoken words.
ii) Implied Contract: A contract may be created by the conduct or acts of parties (and not by
their words spoken or written). It may result from a continuing course of conduct of the
parties. For example, where a coolie in uniform carries the luggage of A to be carried out of
railway station without being asked by A to do so and A allows it, the law implies that A has
agreed to pay for the services of the coolie. This is a case of an implied contract between A
and the coolie. Similarly, when A boards a D.T.C bus, an implied contract comes into being. A is
bound to pay the prescribed fare. 'There is another category of implied contracts recognized
by the Contract Act known as quasi-contracts (Sections 68 to 72). Strictly speaking, a quasi-
contract cannot be called a contract. It is regarded as a relationship resembling that of a
contract. In such a contract the rights and obligations arise not by an agreement between the
parties but by operation of law. For example, A, a trader, left certain goods at B's house by
mistake. B treated the goods as his own and consumed it. In such a situation, B is bound to pay
for the goods even though he has not asked for the goods.
Void Illegal
All void agreements are not necessarily illegal. 1) All illegal agreements are void.
Example : The goods belonging to A were wrongfully attached in order to realise arrears of
Government revenue due by G. A paid the amount to save the goods from sale. Held he was
entitled to recover the amount from G (AbidHussain v. Ganga Sahai).
iii) Obligations to Pay for Non-gratuitous Acts :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 make compensation to the former in
respect of, or to restore, the thing so done or delivered.
Under section 70, three conditions are required to establish a right of action at the suit of a
person who does anything for another:
a) The thing must be done lawfully.
b) It must be done by a person not intending to act gratuitously.
c) The person for whom the act is done must enjoy the benefit of it.
iv) Contracts required to be in writing: You should note that where there is a mandatory
provision in an act requiring contracts to be in writing, an oral contract is void. But it has been
held by the Supreme Court that where work has been done and accepted, Section 70 is
applicable and payment should be made for the work done (State of West Bengal v. B.K.
Mandal& Sons).
v) Responsibility of a Finder of Goods: A person who finds goods belonging to another and
takes them into his custody is subject to the same responsibility as a bailee. In such a case, an
agreement is implied by law between the owner and finder of goods and the latter is deemed
to be a bailee. A finder is, thus, bound to take as much care of the goods found as a man of
ordinary prudence would under similar circumstances take of his own goods of the same bulk,
quantity and value. Besides, he must make reasonable efforts in finding the real owner.
Rights of the Finder of Goods : A finder of goods has the following rights:
1. The finder is entitled to retain the goods against the whole world, except the true owner. For
example, A picked up a diamond from the floor of B's shop and handed it over to B to keep it till
the owner is found. In spite of best efforts, the true owner could not be found. After some time,A
tendered to B the lawful expenses incurred by him for finding the true owner and asked himto
return the diamond to him (A). B refused to do so. Held B must return the diamond to A as Awas
entitled to retain it against the whole world, except the true owner (Hollins v. Fowler). 2.The
finder has lien in respect of any sum which may be due to him on account of expenditureincurred
by him in respect of the goods (section 168).
3. 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 (section 168). This right was
re-endorsed in the case of Harbhajan v. Harcharan.
4. The finder may sell the goods in the following circumstances :
a) Where the thing found is in danger of perishing.
b) Where the owner cannot, with reasonable diligence, be found out.
c) Where the owner has been found but he refuses to pay the lawful charges of the finder.
d) Where the lawful charges of the finder, in respect of the thing found amount to 2/3rd or
more of the value of the thing found.
Contract of Indemnity
The term indemnity is derived from the Latin word “indemnis” which
denotes uninjured or suffering no damage or loss. It is a sort of security or
protection against loss.
Indemnity is to indemnify one person by bearing his losses incurred to him by
the conduct of promissory or by any other party.
Section 124 of the Indian Contract Act, 1872 defines a contract
of indemnity as a contract wherein one party promises to save the other from
loss caused to him by the conduct of the promisor himself, or by the conduct
of any other person.
In an indemnity contract, there are only two parties i.e.,
o The Indemnifier: The promisor, who agrees to make up the damage caused
to the other group.
o The Indemnified: The person who is assured of compensation for the
damage incurred (if any) is referred to as the indemnity holder or the
indemnified.
Essentials in the Contract of Indemnity
Valid contract: An indemnity contract must have all parts of a valid contract.
The Indian Contract Act of, 1872 applies to indemnity contracts.
Loss protection: The indemnity contract is for loss protection. The indemnifier is
bound to recover the losses.
Parties: The indemnity contract shall have two parties. The indemnifier and the
holder.
Contracts: There is one contract only between the holder and the indemnifier.
Express or implied: The indemnity contract can either be spoken or written. The
parties can also imply it.
Types of Indemnity
Express Indemnity:
o This is also known as written indemnity. Under this, all the terms and
conditions of the indemnity are mentioned specifically in the contract.
o The rights and the liabilities of both parties are clearly set out in the
agreement.
o This type of agreement includes insurance indemnity contracts,
construction contracts, agency contracts, etc.
Implied Indemnity:
o It refers to that indemnity wherein the obligation arises from the facts
and the conduct of the parties involved. This is not a written contract.
o The core example of this type of indemnity is the master-servant
relationship.
o The master is liable to indemnify his servant for the losses that he incurred
while working as per his instruction.
Contract of Guarantee
Guarantee means to give surety or assume responsibility. It is an agreement to
answer for the debt of another in case he makes default.
Section 126 of the Indian Contract Act, 1872 provides that a "contract of
guarantee" is a contract to perform the promise, or discharge the liability, of
a third person in case of his default.
Three parties are involved in the contract of guarantee.
o Surety: The person who gives the guarantee is called the surety. The
liability of the surety is secondary, i.e., he has to pay only if the principal
debtor fails to discharge his obligation to pay.
o Principal debtor: The person in respect of whose default the guarantee is
given is the principal debtor.
o Creditor: The person to whom the guarantee is given called the creditor.
A guarantee is either in the format of writing or of oral.
This contract lets the principal debtor to avail employment, loan or goods on
credit and the surety would ensure repayment in case of any default in the part
of the debtor.
Example
o Mohan takes loan of Rs. 5 lakhs from the UCO Bank of Lucknow University
Branch. Sohan promises to UCO Bank that if Mohan fails to rupee the loan
timely then, Mohan will pay. This is a contract of guarantee and Mohan is
Principal debtor UCO Bank is creditor and Sohan is surety.
Essentials of Contract of Guarantee
1. The contract can be either oral or in writing. Nevertheless, the assurance
contract can only be in writing in English law.
2. The guarantee contract presumes a principal liability or a discharge duty on
the part of the principal debtor. Even if there is no such principal liability, one
party agrees to pay another under such situations, and the enforcement of this
obligation is not contingent on anyone else's default, it is an indemnity contract.
3. Sufficient consideration is to support the principal debtor. It is not necessary to
have clear consideration between the creditor and the assurance that it is
appropriate that the creditor has done anything for the good of the principal
debtor.
4. Assurance consent cannot be obtained by misrepresentation or cover of any
material information relating to the transaction.
Liability of Surety
Section 128 of the Indian Contracts Act, 1872 states the liability of the
surety is co-extensive with that of principal debtor, unless it is otherwise provided
by the contract.
Surety's liability is the same as that of the principal debtor. A creditor can
move directly against the surety. Without suing the principal debtor, a creditor may
sue the surety directly. Surety is liable to make payment immediately after the
default of any payment by the principal debtor.
Primary responsibility for making payment, however, is from the principal debtor,
and the responsibility of the surety is secondary. In fact, if the principal debtor
cannot be held liable for any payment due to any document error, then surety is not
responsible for such payment as well.
Rights of Surety
A. Rights against the principal debtor
o Right to give notice.
o Rights of sub-rogation.
o Right of indemnity.
o Right to get securities.
o Right to ask for relief.
B. Rights against the creditor
o Right to get securities.
o Right to ask for set-off.
o Rights of sub-rogation.
o Right to advice to sue principal debtor.
o Right to insist on termination of services.
C. Rights against co-sureties
o Right to Ask for Contribution: Surety can ask its co surety to add the sum
when the principal debtor defaults. If they have issued commitments for equal
quantities, they would have to make equivalent contributions.
o Right to claim share in securities.
Continuing Guarantee
One form of guarantee that extends to a series of transactions is a continuing
guarantee. A continuing guarantee extends to all transactions that
the principal debtor enters into before the surety revokes it.
A continuing guarantee for future transactions may be withdrawn at any time by
notice to the creditors. However, the responsibility of a surety for transactions
completed prior to such revocation of guarantee is not diminished.
Conclusion
Both the contract of indemnity and contract of guarantee are similar in the sense
that they provide protection against loss. However, as mentioned above, there is
an important distinction between the two. Whether a contract is a contract of
indemnity or a contract of guarantee is a question of construction in each case.
Section 148 of the Indian Contract Act 1872 states bailment. Under a contract of bailment, one person
has the goods to the other for some purpose, and when the goal is fulfilled, the goods are returned to the
owner. The person who has the goods is called a 'Bailor'. The person who accepts the goods for a specific
goal is called 'Bailee.' In the Contract of bailment, the goods are kept as security for a debt or the
performance of a promise as specified in the Contract. Section 172 of the Indian Contract Act limits that
the bailment of goods for security or for payment of debt or version is viewed as a pledge. A contract of
the pledge is regarded as the subset of a contract of bailment.
Contracts of bailment cover a very vital portion of the UGC NET exam. From this topic, we can expect
at least 1-2 questions in the UGC NET exam as per the Commerce syllabus. Going through this article
will help the students mark the right answers to the questions asked.
In this article, we will study the Contract of bailment and pledge, its essential features, duties, and rights
of bailor, bailee & pawnor, and pawnee. We will also learn about the contrast between a contract of
bailment and a contract of pledge.
There are certain features of the Contract of bailment; a few of the key essential features are examined
below.
A Valid Contract
A contract of bailment is a special type of Contract. The Essential elements of a valid contract must be
present in it. Essential elements include offer and acceptance, lawful consideration, the parties' capacity
and legal intentions. Without these elements, the Contract will not be enforceable by law. But a contract
of bailment in certain cases can be valid without regard. There are two types of bailment, as stated below.
Delivery Of Possession
Delivery of goods in case of a bailment contract can be actual and constructive. Actual delivery of goods
means the bailor physically gives goods to the position of the bailee. In the case of constructive delivery
of goods, goods are not physically yielded, but a few actions imply that the bailee has been given custody
of the goods.
After creating a contract, the goods are relaid from the bailor to the bailee. The Contract must have
details about the transfer and the return of the goods. Contract of bailment can be expressly signed by
parties or told by the parties.
When the lost goods are found by a third party or a stranger, in that case, the founder of the goods acts as
the bailee of the goods that are found.
o The finder of the Lost goods must try to keep the goods safe.
o The finder of Lost goods must ensure the goods are delivered to the real owner.
o She cannot use it for personal use.
o The finder of Lost goods must make crucial efforts to find the owner of the Lost goods.
The rights of the finder of lost goods have been stated below.
o The founder of the Lost Goods must be paid for the expenses he has made on the Lost Goods.
o He must also be paid for his trouble to keep the goods safe and find the real owner.
o It is the right of the finder of Lost goods to sell the goods in case.
o The goods are perishing in nature.
o And the owner of the Lost goods could not be found.
Purpose
There must be a specific goal to transfer the goods from the bailor to the bailee. The Contractbailment
contract is terminated if the bailee makes unauthorized use of the goods. A particular purpose is very
vital in the case of the bailment of goods. A bailee cannot use the goods other than for the purpose that
has been stated in the Contract.
Return Of Goods
When the purpose is fulfilled, for which the goods were moved from the bailor to the bailee, then the
goods are returned to the bailor. The bailee must return the goods to the bailor as per the directions,
without demand, as soon as the contract period expires.
In the Contract of bailment, there are certain duties of the bailor and the bailee that they need to follow.
A few of the critical points are stated below.
Duties Of The Bailor
o To reveal faults in goods - It is the duty of the bailor to disclose the faults in the good if there are any. If
the bailor fails to do so, then in case of loss, the bailor is liable.
o To cover necessary and extraordinary expenses - All the expenses, whether necessary or extraordinary,
that the bailee has incurred to keep the goods safe, then the bailor is liable to cover those expenses.
o Indemnify the bailee of all the losses - If the bailor asks to return the goods before the contract's fixed
time, he has to indemnify the losses incurred to the bailee.
o To collect the bailed goods - The bailor's responsibility is to collect the goods after the expiration of the
specified date. If the date has expired and the bailor did not collect the goods, then he is liable for what
has been incurred to the bailee.
In the Contract of Bailment, there are certain duties that Bailey needs to follow; a few of the key points
are revealed below.
Section 151 of the Indian Contract Act 1872 defines that the bailee is required to take care of the goods
bailed to him as of his own. But in section 152, it has been stated that in the absence of any kind of
special Contract, the bailee is not liable for the loss or collapse of the goods bailed if he has taken care of
the goods as stated in the Contract.
It is the responsibility of the bailee to use the goods only for the purpose stated in the Contract. If the
bailor finds out that the bailee is using the goods for unauthorized Purposes, then the bailor can declare
the contract void.
The bailee has to return the goods to the bailor safely. He is liable to keep the goods separately.
o Section 155 - with the bailor's consent, the bailee can mix his own goods with the bailor's goods. In this
case, the bailor and the bailee must be interested in the mixture produced.
o Section 156 - if the bailee mixes the goods without the bailor's consent, and the goods can be separated,
the bailee is found to bear the expenses of partition or division or any losses due to the mixture of the
goods.
o Section 157 - if the bailee mixes the goods without the bailor's consent and cannot be split in this case,
the bailee is liable to cover the damage and pay the bailor.
Once the bailment's purpose is fulfilled, the bailee must return the goods to the bailor.
o The rights of the bailor in the case of the Contract of bailment are stated below -
o The bailor has to be repaid if the bailee makes unauthorized use of the goods.
o If the belly does not act about the goods bailed and the bailee varies with the conditions of the Contract
of the bailment, then the bailor can end the Contract.
o The bailor can receive any profits raised when the goods are bailed.
o It is the right of the bailor to receive the goods back on the expiry of the Contract of bailment.
Rights Of Bailee
o It is the right of the bailee to receive compensation due to the losses suffered due to the defect in the
goods.
o The bailee has the right to receive back the great expenses made by him for the bailed goods.
o The bailee has the right to stop the delivery of the goods when he finds out that the bailor does not have
the title.
If the bailor withholds compensation and refuses to cover any expenses he is liable to pay, the bailee has
the right to lien the bailed goods. There are different types of lien, as mentioned below.
o Particular lien - a particular lien is on a specific property. The bailee can retain the goods until the charges
on that property are paid.
o General lien - when the lien on a property is not specific but for the debts on the general account, it is
called a general lien.
Contract Of Pledge-Introduction
In the Contract of pledge, the goods are kept as a security for a debt. Section 172 of the Indian Contract
Act 1872 defines 'the bailment of the goods as security for a payment of a debt or performance of a
promise is called pledge'. In this case, the bailor is known as the pawnor, and the bailee is called the
pawnee.
Certain Essential elements of a contract of the pledge have the utmost importance. A Few of the key
essential points are discussed below -
The duties of a pawnor in the case of the Contract of the pledge are explained below.
o To compensate for the expenses - The pawnor must compensate all the ordinary and extraordinary
expenses incurred by the pawnee for maintaining the well-being of the pledged goods.
o To repay the entire amount along with interest - It is the responsibility of the pawnor to repay the
amount due to the pawnee. This amount could be the principal amount or the interest that has occurred
during the Contract.
o To disclose the faults in the goods - Before entering into the Contract, the pawnor must state all the
material facts and faults in the goods to the pawnee. If the pawnor does not disclose the faults and the
pawnee suffers losses, the pawnor must cover all the damages.
o To take reasonable care of the goods under consideration- The pawnee must take reasonable care of
them and pledge them as his own. He should take care of the goods as his personal belongings. If any
losses are incurred due to irresponsibility or negligence in the case of the pawnee, then he is liable to
cover all the damages.
o To use the goods only for the authorized purpose - The pawnee must use the goods only for the purpose
that has been stated in the Contract. If the pawnee uses the goods for unauthorized purposes, the
pawnee must compensate for the damages.
o Return the goods - When the purpose of the Contract of the pledge is fulfilled, the pawnee must return
the goods to the pawnor. The goods should be returned to the pawner as per his instructions.
o Return the profits arising from the goods - During the Contract of pledge, if any profits have been
incurred on the pledged goods, then the pawnee must return the profits to the pawner.
o To keep the goods separate - The pawnee must keep the pledged goods separate from the pawnor's
goods. In case the pawnee mixes his goods with the pawnor's goods, then the pawnee is liable for the
expenses of the separation of goods.
The rights that the pawnor needs to follow in the Contract of the pledge are stated below.
o To redeem the goods - suppose Ram has given a machine to Sushant as security for 1000 rupees. Both
parties in this Contract agreed to repay the amount within 15 days. If Ram fails to pay Rs 1000 to Sushant
within that stipulated time, then he can redeem his machine even after the expiration of the stipulated
time because Sushant has not yet sold the machine. In this case, RAM is liable to pay the expenses that
have been incurred by Sushant while safekeeping the machine.
o To get the goods back - Once the pawnor repays the amount, including the interest, then he has the right
to get back the goods.
o To retain the good - the pawnee has the right to retain the goods until the amount is repaid by the
pawnor. The amount might be the expenses incurred or any interest accrued on the pledged good.
o To get compensation for extraordinary expenses - The pawnor is liable to pay the ordinary and the
extraordinary expenses that have been incurred by the pawnee while safekeeping the goods.
o To sell the goods - if the pawnor is not able to repay the loans within a specified time period, then the
pawnee can keep the goods as Collateral security and sell the goods by giving the pawnor reasonable
notice of the sale.
Few of the common differences between the contract of bailment and pledge are discussed below.
The contracts of bailment and pledge is a very wide and crucial concept. All contracts of the
pledge are contracts of bailment, but all contracts of bailment are not contracts of the pledge.
The contracts of bailment and pledges protect the interest of the parties to the Contract. It also
gives a framework to form the Contract, and it has suggested rights and duties for the pawnor
& pawnee and the bailor & bailee. The Contract of bailment and pledge also requires the
Essentials of a valid contract; otherwise, the Contract will be invalid and not enforceable by
law.