UNIT 1 Indian Contract Act, 1872:

 Contract-meaning, characteristics and

kinds of contract
 Essential of a valid contract offer and
acceptance, consideration , contractual
capacity, free consent, legality of objects Void
agreements
 Quasi-contracts
 Discharge of Contract and Remedies for Breach
 UNIT – I
The Indian Contract Act, 1872
General Principles of Contract

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 a Contract is concluded and binding on the
bindingcontract. concerned parties
.
 Characteristics of Contract -
1. *Offer and Acceptance*: There must be a clear offer by one party and acceptance by the other.
2. *Intention to Create Legal Relations*: The parties involved must intend for the agreement to be
legally binding.
3. *Consideration*: Each party must provide something of value, such as money, services, or goods.
4. *Capacity*: The parties involved must have the legal capacity to enter into a contract (e.g., be of
legal age).
5. *Legality*: The contract's purpose must be legal and not violate any laws.
6. *Possibility of Performance*: The terms of the contract must be possible to fulfill.
7. *Mutuality*: Both parties must be bound by the contract terms.
8. *Certainty*: The contract terms must be clear and understandable.
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.
 2. On the Basis of Execution
On the basis of the extent to which the contracts have been performed, we may classify them as
(i) executed contracts, and (ii) executory contracts.
i) Executed Contracts: It is a contract where both the parties have fulfilled their respective
obligations under the contract. For example, A agrees to sell his book to B for Rs. 30. A delivers
the book to B and B pays Rs. 30 to A. It is an executed contract.
ii) Executory Contracts: It is a contract where both the parties to the contract have still to
perform their respective obligations. For example, A agrees to sell a book to B for Rs. 30. If the
book has not been delivered by A and B has not paid the price. the contract is executory.
A contract may sometimes be partly executed and partly executory. It happens where only oneof
the parties has performed his obligation. In the example given above, if A has delivered thebook
to B but B has not paid the price. the contract is executed as to A and executory as to B. On the
basis of execution, a contract can also be classified as unilateral or bilateral. A unilateralcontract is
one in which only one party has to perform his obligation, the other party hadfulfilled his part
of the obligation at the time of the contract itself. For example, A buvs a ticketfrom the conductor
and is waiting in the queue for the bus. A contract is created as soon as the ticket is purchased.
The other party is now to provide a bus wherein he could travel. 'A bilateral contract is one in
which the obligations on the part of both the parties are outstanding at the time of the formation
of the contract.
3. On the Basis of Enforceability
From the point of view of enforceability a contract may be (i) valid, (ii) void, , (iii) voidable, (iv)
illegal or (v) unenforceable.
i) Valid Contract: A contract which satisfies all the conditions prescribed by law is a valid
contract. If one or more of these elements is/are missing, the contract is either void, voidable,
illegal or unenforceable.
ii) Void Contract: According to Section 2 (j) A contract which ceases to be enforceable by law
becomes void when it ceases to be enforceable. It is a contract without any legal effects and is a
nullity. You should note that a contract is not void from its inception. It is valid and binding
upon the parties when made, but subsequent to its formation, due to certain reasons, it
becomes unenforceable and so treated as void. A contract may become void due to
impossibility of performance, change of law or some other reasons. For example, A promised to
marry B. Later on, B dies. This contract becomes void on the death of B. A void contract should
be distinguished from void agreement. Section 2(g) says that an agreement nor enforceable by
law is said to be void. In the case of void agreement no contract comes into existence. Such an
agreement confers no rights on any person and creates no obligations. It is void ab-initio i.e.,
from the very beginning. For example an agreement with a minor is void because a minor is
incompetent to contract.
Now it should be clear to you that a void agreement is not the same thing as a void contract. A
void agreement never matures into a contract, it is void from the very beginning. A voidcontract,
on the other hand, was valid when it was entered into, but subsequently, because of one reason or
the other, became void. A contract cannot be void ab-initio, it is only an agreement which can be
void ab-initio.
iii) Voidable Contract: According to Section 2(i) of the Contract Act, An agreement which is
enforceable by law at the option of one or more of the parties thereon, but not at the option of
the other or others, is a voidable contract. Thus, a voidable contract is one which can be set
aside or repudiated at the option of the aggrieved party. Until it is set aside or avoided by the
party entitled to do so, it remains a valid contract. A contract is usually treated as voidable
when the consent of a party has not been free i.e., it has been obtained either by coercion,
 undue influence, misrepresentation or fraud. The contract is voidable at the option of the party
whose consent has been so caused. For example, A threatens to shoot B if he does not sell his
new scooter to A for Rs. 5,000. B agrees. Here the consent of B has been obtained by coercion.
Hence, the contract is voidable at the option of B, the aggrieved party. If, however, B does not
exercise his option to set aside the contract within a reasonable time and if in the meanwhile a
third party acquires a right in relation to the subject matter for some consideration, the
contract cannot be avoided. For example, A obtains a ring by fraud. Here, B's consent is not free
and therefore he can cancel this contract. But if, before this option is exercised by B, A sells the
ring to C' who acquires it after paying the price and in good faith, contract cannot be avoided.

Void Agreement Voidable Contract

It is void from the very beginning. It remains valid till it is repudiated
by the aggrieved party.
A contract is void if any essentialelement of a A contract is voidable if the consent
valid contract (otherthan free consent) is of a party is not free.
missing.
It cannot be enforced by any party. If the aggrieved party so decides,the contract
may continue to bevalid and enforceable.
Third party does not acquire anyrights. An innocent party in good faithand for
consideration acquires goodtitle before the
contract is avoided.
Lapse of time will not make it avalid contract, If it is not avoided withinreasonable time, it
it always remains void. may become valid.
Question of damages does not arise. The aggrieved party can also claimdamages.
i) Illegal or unlawful contract: The word illegal means contrary to law. You know that contract is
an agreement enforceable by law and therefore, it cannot be illegal. It is only the agreement
which can be termed as illegal or unlawful. Hence, it is more appropriate to use the term 'illegal
agreement' in place of 'illegal contract'.
An 'illegal agreement' is one which has been specifically declared to be unlawful under the
provisions of the Contract Act or which goes against the provisions of any other law of the land.
Such agreement cannot be enforced by law. For example, A agrees to pay R;. 50,000 to B if B kills
C. This is an illegal agreement because its object is unlawful. Even if B kills C, he cannot claim the
agreed amount from A.
The term 'illegal agreement' is wider than the term 'void agreement'. All illegal agreements are
void but all void agreements are not necessarily illegal. For example, an agreement to sell a
scooter to the minor i,e void but it is not illegal because the object of this agreement is not
unlawful. The other important difference between the illegal and the void agreement relates to
their effect on the transactions -which are collateral to the main agreement. In case of illegal
agreements even the collateral agreements become void. For example, A engages B to shoot C. To
pay B, A borrows Rs. 10,000 from D who is aware of the purpose of the loan. In this case, there are
two agreements - one between A and B and the other between A and D. Since the main
agreement between A and B is illegal, the agreement between A and D ,which is collateralto the
main agreement, is also void. D cannot recover the money from A. Take another example. A
borrows money from D to pay off his wagering (betting) debts to B. Here the main agreement is
void (not illegal). Hence the agreement between A and D being a collateralagreement shall not be
affected even though D was aware of the purpose of the loan. From these examples, it should be
clear to you that the agreements collateral to the illegal agreements are also void but the
transactions collateral to void agreements are not affected in any way, they remain valid.
 ii) Unenforceable contract: It is a contract which is actually valid but cannot be enforced
because of some technical defect. This may be due to non-registration of the agreement, non-
payment of the requisite stamp fee, etc. Sometimes, the law requires a particular agreement to
be in writing. If such agreement has not been put in writing, it becomes unenforceable. For
example, an oral agreement, for arbitration are unenforceable because the law requires that an
arbitration agreement must be in writing. It is important to note that in most cases, such ,
contracts can be enforced if the technical defect involved is removed. For example, if the
document which embodies a contract is under stamped, it will become enforceable if the
requisite stamp is affixed.

Void Illegal
All void agreements are not necessarily illegal. 1) All illegal agreements are void.

Collateral transactions to a void agreements ) Collateral transactions to an illegal

are not affected i.e.,they do not become void. agreements are also affected i.e they also
become void.
If a contract becomes void subsequently, the The money advanced or thing given cannot be
benefit received has to be restored to the claimed back.
other party.
Essential Elements of a Valid Contract
An agreement to be enforceable at law must satisfy the essentials of a valid contract.
According to Section 10 of the Act. “All agreements are contracts, if they are made by the
free consent of parties, competent to contract, for a lawful consideration and with a lawful
object, and not hereby expressly declared to be void.”
Thus, the following are the essential elements of a valid contract:
(i) Agreement, i.e., Proposal and Acceptance.
(ii) Intention to create legal relationship
(iii) Lawful Consideration
(iv) Competent Parties
(v) Free Consent
(vi) Legal Object
(vii) Not expressly declared void by law.
(viii) Certainty and possibility of performance
(ix) Compliance with legal formalities.
(i) Agreement: An offer or proposal by one party and an acceptance of that offer by
another party is called an agreement. An agreement has been defined by the Act as “every
promise or every set of promises forming considerations for each other.” The acceptance of
the offer must be according to the mode prescribed and must be communicated to the proposer.
Further, the intention of the agreement must be to create legal relationship between the parties.
Agreement must be capable of performance with terms which are clear and certain. It should
not be suffering from either a fundamental mistake or impossibility of performance.
(ii) Intention to create legal relationship: Whenever parties make an agreement, their
must be an intention to create a legal relationship between them. If such intention is not
present, there is no contract between the parties. In case of social or domestic agreements,
parties do not contemplate legal relationship, as such these are not contracts. [Balfour Vs.
Balfour (1919) 2 K.B. 571]
But in case of business agreements or commercial agreements, the usual presumption is
that the parties have intention to create legal relationship. But this presumption is rebuttable
with the help of evidence.
[Rose and Frank co. Vs. Crompton Bros. (1925) A.C. 445]
[Jones Vs. Vernon's Pools. Ltd. (1938) 2 AII.R. 626]
(iii) Free Consent: Two or more persons are said to have consented when they agree upon
the same thing in the same sense. Thus, if two persons enter into an apparent contract
concerning a particular person or thing and it turns out that each of them was misled, by a
similarity of name and actually each had a different person or thing in mind, no contract
would exist between them. For example, A has two cars, one blue and the other red. He wants
to sell his blue car. B, who knows of only A's red car, offer to purchase A's car for Rs.20.000.
A accepts the offer thinking that it is for his blue car. There is no consent because both the
parties are not understanding the same thing in the same sense. Besides, to make a contract
valid not only consent is necessary but the consent must also be free. According to Sec. 14,
consent is said to be free when it is not caused by coercion, undue influence, fraud,
misrepresentation or mistake. A clear distinction must be made between 'no consent' and 'no
free consent'. In the case or 'no consent,' there is no identity of mind and therefore, in the
absence of consent the agreement is void abinitio—from the very beginning. In the later case
of 'no free consent', consent is there but it is not free, the agreement is voidable at the option
of the party whose consent is not free.
A thief who deprives a person of his goods without his consent cannot claim any title
whatsoever in the goods. But a dacoit who obtains goods from the other person by obtaining
his consent at the point of pistol (coercion) can retain the goods until the real owner claims
them back. The possession of the thief is void for want of consent but the possession of the
dacoit is voidable at the option of the real owner, i.e., valid unless challenged by the real
owner because it has been obtained with the consent of the real owner though the consent had
not been free.
(iv) Competent Parties: At least two parties are essential for every valid contract. A
person cannot enter into a contract with himself except in a different capacity, e.g., a partner
may purchase goods from his own firm. In order that an arrangement may be a binding
contract, the parties must have the legal capacity of entering into the contract. According to
Sec.11 of the Act “Every person is competent to contract who is of the age of majority
according to the law to which he is subject and who is of sound mind and is not disqualified
from contracting by any law to which he is subject.” Thus, a contract entered into by a minor
or by a lunatic is void. In India, a person who has not completed his 18th year of age is
considered to be a minor. However, a lunatic can enter into binding contracts during his lucid
intervals.
The legal presumption is that every party to a contract has the capacity to contract unless
contrary is proved and the presumption is rebutted.
(v) Lawful Consideration: Consideration is an essential element of a valid contract. An
agreement without consideration is a bare promise and is not binding on the parties.
Contracts result only when a promise is made in exchange for in something in return.
This something in return is termed as “consideration”. Consideration is the price paid by the
promisee for the obligation of the promisor. Consideration need not be a benefit to the
promisor. If the promisee has suffered some loss or detriment, it will be taken as a sufficient
consideration for the promisor to fulfill his promise.
Example: A agrees to sell his car to B for a sum of Rs.10,000. For A’ a promise the
consideration is a sum of 10,000 while for B’s promise consideration is the car.
Consideration is also the necessary evidence required by law about the intention of the
parties to establish legal relationship.
Consideration must be real, and not illusory or illegal. Consideration may be past, present
or future. It may move from the promisee or any other person but it should always be
furnished at the desire of the promisor. Consideration must be valuable in the eyes of law, i.e.,
it must result in some gain to one party and detriment to the other.
(vi) Legal object: The agreement must not relate to a thing which is contrary to the
provisions of any law or has expressly been forbidden by any law or which is opposed to
public policy or immoral. All agreements which are not lawful cannot be enforced by law.
This is because courts will not allow polluted hands to touch the pure fountains of justice. No
agreement can be allowed to defeat the provisions of any law or to cause injury to the person
or property of any person or to achieve fraudulent objects.
Example: A agrees to sell certain goods to B. A knows that the goods are to be smuggled
out of the country. The contract is unlawful and not enforceable.
A person who knowingly lets out his house for prostitution cannot recover the rent thereof
because the purpose of the agreement has been immoral.

(vii) Not expressly declared void: The agreement must have not been expressly declared
void by any law in force in the country. In India agreements in restraint of trade, in restraint
of marriage, or to do things which are impossible or are in the nature of illega1 or immoral
agreements, etc., are expressly declared void by the Indian Contract Act.
 Example: A and B are competitors in a business. B agreed to pay A a sum of money if
he would close his business. A did so but B refused to pay him the money. Held, the agreement
was void because it was in the nature of restraint of trade and therefore, money could not be
recovered.
(viii) Certainty and possibility of performance. The agreement between the parties must
be certain. It should not be vague or indefinite. If it is vague and the determination of its
meaning is not possible, it is not a contract and can not be enforced.
In addition to this, the terms of the contract must be such which can be performed. An
agreement to do an impossible act can not be enforced. For example, A agrees with B to put
life into B’s dead child, the agreement is void as it is impossible of performance. [Sec 56 (1)
(ix) Compliance with Legal Formalities: If any legal formalities of writing, registration,
etc. are necessary by law, these must be satisfied. In the absence of these legal formalities,
agreements will not be enforceable in courts of law.
Contracts which must be registered
(i) A promise made without consideration on account of natural love and affection
between parties standing in near relation to each other.
(ii) Documents of which registration is compulsory under Sec.17 of the Registration
Act, 1908.
(iii) Contracts relating to the transfer of immovable properties under the Transfer of
Property Act 1882.
(iv) Memorandum and Articles of Association, debentures, mortgages and charges
under the Companies Act, 1956.
 QUASI CONTRACTS

In a contract the promisor is under an obligation to the promisee and this obligation is
undertaken voluntarily. The contract has all the essential elements of a valid contract, namely
offer and acceptance, free consent, legal object and consideration and intention to enter into
the contract. But sometimes an obligation may be imposed by law upon a person for the
benefit of another person, even though the essential elements of a valid contract are absent.
In fact, in such a case, there is neither an agreement nor a promise. Such an obligation, though
not contractual, resembles an obligation as created by contract, and the Court would enforce
it as if were a contract. Such obligations are called Quasi Contracts, or relations resembling
those of contracts. On the other hand, obligations created by agreements are called contracts.
A quasi Contract rests upon the equitable principle that a person shall not be allowed to
enrich himself unjustly at the expense of another. Duty, and not agreement or promise or
intention, defines it. Thus, in the absence of any agreement, the law creates an obligation so
that a person in possession of money or property should return it if in justice and fairness he
ought not to retain it. For example, if a sum of money is paid by mistake, by A to B, then
B is bound to return the money to A. This obligation or duty of B has certainly not arisen out
of a contract, because B never agreed to return the money to A. This obligation is imposed
upon B by law because he cannot be allowed to keep the money which belongs to A.
Sections 69 to 72 of the Contract Act deal with the cases which are deemed to be quasi
contracts. The quasi-contracts are as follows;
1. Necessaries supplied to person incapable of contracting (S. 68).
2. Suit for money had and received (S. 69 and 72).
3. Quantum Meruit (S. 70)
4. Obligations of a finder of goods (S. 71).
5. Obligations of a person enjoying benefit of non-gratuitous act (S. 70).
1. Claim for necessaries supplied to a person incapable of contracting: We have seen
before that a contract with a minor or a person of unsound mind is void; but his estate is liable
to reimburse the person supplying him necessaries of life. Thus, if A supplies B, a minor
necessaries suited to B's conditions in life. A can recover price from B's property. Or, where
A supplies necessaries to the wife and children of B, a lunatic, suited to his condition in life,
he is entitled to be reimbursed from B's property.
2. Suit for money had and received. The right to file a suit to recover money under this
head may arise in the following cases:
(a) Where a person paid money to another person under a mistake of fact or mistake of
law or under coercion, the person so receiving the money must pay it back to the
person who paid it by mistake of under coercion. A and B jointly owe Rs.1,000 to
C. A pays the amount to C and B, not knowing this fact, also pays Rs. 1,000. C must
pay back the amount to B. Again where A is caught travelling without ticket on a
tram-car and pays on demand by the inspector Rs.5 as penalty to avoid prosecution,
he can recover the amount.
(b) In pursuance of a contract the consideration for which has failed. Thus where A paid
premium to B for his apprenticeship with B, and before the relationship had
started, B died, the money was recoverable.
(c) Payment to third party of money which another is bound to pay. Where A's goods
are attached in order to realise arrears of government revenue due by B, and A pays
the amount to save his goods from being sold, he is entitled to recover the amount from B.
(d) Money obtained by a party from third parties. Thus, A, who is an agent of B obtains
secret commission from a third party, can recover this amount from A.
3. Quantum Meruit. The expression quantum meruit means “as much as earned”. It is
used where a person claims a reasonable payment for services rendered by him. A claim under
quantum meruit generally arises where services are rendered in pursuance of a contract which
provides for a lump sum payment after the promise is fully performed, and the party claiming
for the part performance is prevented by the other party from completing it. Thus if A has
worked for B in pursuance of a contract which has since been discharged by B’s breach, A
may obtain reasonable remuneration for his work by sueing B on a quantum merit. The claim
on quantum meruit may also arise where work has been done and accepted under a void
contract. Thus, A was employed as a managing director by a company under a written contract.
The contract was void and not binding because the directors who made it were not qualified.
A rendered the services and sued for remuneration. He was entitled to recover on a quantum
meruit.
A party in default may also sue on a quantum meruit for what he has done if the contract
is divisible and the other party has had the benefit of the part which has been performed. A,
the ship-owner failed to carry the full cargo. He was held to be entitled to recover the freight
in proportion to the cargo carried. But if the contract is not divisible, the party at fault cannot
claim the value of what he has done.
4. Obligations 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. The finder of
goods must take reasonable care of the protection and preservation of the goods. The care
must be such as would be taken by a man of ordinary prudence of his own goods. He must
not appropriate the goods to his own use and, when the real owner is traced, he must return
them to the owner. He is entitled to receive from the true owner all expenses incurred by him
for protecting and preserving the goods. He has a lien on the goods for the money so spent
and he can refuse to deliver unless he is paid. He may sell the goods if they are perishable.
If they are not perishable, he can sell only if the costs and expenses incurred by him amount
to two thirds of the value of the goods. Any balance of the proceeds after deducting the costs
and expenses must be paid to the owner. It should be noted that only the true owner can
recover possession from the finder. If the true owner is not found, the finder can retain the
goods and no other person can claim them from him.
5. Obligations of a person enjoying benefit of a non-gratuitous act. Where a person
lawfully does something for another person, or delivers anything to him, without any intention
of doing so gratuitously (i.e., without charge or payment) and the other person enjoys the
benefit thereof, the latter is bound to compensate the former or restore to him the thing so
delivered. Thus where one of the two joint tenants pays the whole rent to the landlord he is
entitled to compensation from his co-tenant. Where a tradesman delivers a bag of wheat by
 mistake at B’s house instead of at C’s, there is an obligation on the part of B to return the
bag of wheat or pay its value. Here the parties never intended to enter into a contract, but the
law implies a contract.

Discharge and Remedies on Contract

When the obligations created by a contract come to an end, the contract is said to be
discharged or terminated. A contract may be discharged in anyone of the following ways :
1. By performance of the contract.
2. By mutual agreement or consent canceling the agreement or substituting a new
agreement in the place of the old one.
3. By impossibility of performance.
4. By lapse of time.
5. By operation of law.
6. By breach of contract made by one party.
1. Termination by Performance
The obvious mode of discharge of a contract is by performance, for that is what the
parties had in mind when they made it. Thus, when a party performs a promise, his obligations
come to an end. Performance by all the parties puts an end to the contract completely.
An offer of performance or Tender has the same effect as actual performance. If a party
to a contract is willing and ready to perform his promise at the proper time and place, but the
other party does not accept performance, the obligations of the first party are mentioned, i.e.,
the contract is discharged. A tender, to be valid, must be (i) unconditional, (ii) made at a
proper time and place, and (iii) the party should be willing and ready as well as able to
perform, (iv) the party should offer to perform the whole of what he is bound by his promise,
and (v) the other party should have a reasonable opportunity to see that the article offered is
the thing which the promisor is bound by his promise to deliver.
Mode of performance: A person who has to perform a contract must be ready to perform
it at the time when he had undertaken to do so. Where the time and place are prescribed by
the contract, the performance must be at the specified time and place; otherwise within a
reasonable time and at some customary or reasonable place. The performance must also be
in strict accordance with the terms of the contract.
Who may demand performance: The person to demand performance is a party to whom
the promise is made, even though the promise was made for the benefit of some third person.
For example, where A promises to B to give Rs.100 to C, the person who can demand payment
is B, and not C.
Who is to perform: In cases involving personal skill or credit, the promisor must himself
perform the contract. In all other cases, the promisor or his representative may employ a
competent person to perform it. A promises to paint a picture for B, A must paint it personally.
But where A promises to pay B a sum of money, A may pay it personally, or cause it to be
paid to B by another. Where, however, a promisee accepts performance of a promise from a
third person, he cannot afterwards enforce it against the promisor.
2. Discharge by Mutual Agreement or Consent
By agreement of all parties a contract may be cancelled or a new agreement substituted
for it. Whenever any one of these happens, the old contract is terminated.
Termination by mutual agreement may occur in any one of the following ways (Section
62-63) :
Novation takes place by the substitution of an old contract by a new contract. This
substitution may be between the same parties or between different parties: consideration
in-novation is the discharge of old contract. Novation should occur before the old contract is
(or existing contract) put to an end.
A owes money to B under a contract. It is agreed between A, B and C that B shall accept
C as his debtor, instead of A. There is novation. The old debt of A to B is at an end, a new
one from C to B has been contracted.
Alteration: Alteration of a contract takes place when one or more of the terms of the
contract are changed with the consent of all the parties to contract.
Remission: Remission is the acceptance of a lesser sum than what was contracted for or
a lesser fulfillment of the promise made. Thus, where A owes Rs.5,000 to B and pays Rs.4,000
and B accepts the amount in full satisfaction of the debt, the whole debt is discharged.
Waiver: Waiver means intentional giving up of a right which a person is entitled to. If
a party waives his right under a contract, the other party is discharged from his obligation.
Merger: When a superior right and an. inferior right coincide and meet in one and the
same person, the inferior right vanishes into a superior right. This is known as merger. Where
a man, holding property under a lease buys it, his rights as a leasee (inferior right) are merged
into his rights of ownership (superior right) which he has now acquired.
3. Discharge by Impossibility of performance
Section 56 of the Contract Act lays down the law relating to impossibility of performance and
discharge of a contract under this heading.
(i) A contract to perform something which is impossible in its very nature is void and
creates no rights and obligations, e.g., a promise to ride a horse to the moon.
(ii) A contract which at the time it was entered into, was capable of being performed, may
subsequently become impossible to perform or unlawful. In such cases also the contract
becomes void. This is sometimes described as the 'Doctrine of impossibility'.
A contract will be void by subsequent or supervening impossibility in any of the following
ways:
(a) Where there is a contract in respect of a particular subject matter that is later destroyed
without the fault of the parties, the contract is discharged. A music hall was agreed to be let
out for a series of concerts. The hall was burnt down before the date of the first concert. The
contract was held to have become void.
(b) When a contract is entered into on the basis of the continued existence of a certain
state of things, the contract is discharged if the state of things changes or ceases to exist. A
and D contract to marry each other. Before the time fixed for the marriage A goes mad, the
contract becomes void.
(c) Where the personal qualification of a party is the basis of the contract, the -contract
is discharged by the death or physical disablement of that party. A contracted with B that he
should play the piano at concert given on a specific day. B was very ill on that day and unable
to perform. The contract was discharged and B was excused from performance.
(d) Discharge by supervening Illegalities: We have seen earlier that a contract which is
contrary to law at the time of its formation is void. But if after the making of the contract
owing to change of law, the performance of the contract becomes impossible, the contract is
discharged.
A contract entered into during war with an alien enemy is void, if war breaks out after
the contract is entered into it becomes void and discharged of its performance if this aids the
enemy in the pursuit of war.
Instance where a contract is not discharged on the ground of impossibility: Apart from
the case mentioned above, impossibility does not discharge contracts. Therefore, in the following
cases the contract is not discharged :
(i) The mere fact that performance is more difficult or expensive or less profitable than
the parties anticipated does not discharge the duty of performance. A promised to send certain
goods from Bombay to London in September. In August war broke out, and the shipping space
was available only at very high rates. The increase of rates did not excuse performance.
(ii) Commercial impossibility to perform a contract does not discharge the contract. A
contract is not to be said to be impossible because expectation of high profits is not realised.
(iii) The principle of supervening impossibility does not extend to the case of a third
person on whose work the promisor relied. A agreed to sell B a specified quantity of cotton
goods to be manufactured at a particular mill. A could not supply the goods as agreed as the
mill failed to produce the goods. It was held that the failure of the mill to produce did not
make it impossible for A to perform his promise, the contract was not discharged on ground
of supervening impossibility.
(iv) Strikes, lockouts and civil disturbances like riots do not terminate contracts unless
there is a clause in the contract to the contrary e.g., A dock strike does not set free a
labour contractor from unloading the ship within a specified time.
4. Discharge by Lapse of Time
If a contract is not performed at the stipulated time it is discharged and the other party need
not perform his part of the contract. Also where the limitation period is over party entitled to
sue the other party, is deprived of the remedy.
5. Discharge by operation of Law
A contract may be discharged by operation of law in the following cases :
(a) By death. In contracts involving personal skill or ability, the contract is terminated
on the death of the promisor.
(b) By merger. Merger takes place when an inferior right accruing to a party under a
contract merges into a superior right accruing to the same party under the same or
some other contract.
(c) By insolvency. When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
(d) By unauthorised alteration of the terms of a written agreement. Where a party to a
contract makes any material alteration in the contract without the consent of the
other party, the other party can avoid the contract. A material alteration is one which
changes, in a significant manner, the legal identity or character of the contract or the
rights and liabilities of the parties to the contract.
(e) By rights and liabilities becoming vested in the same person, e.g., when a bill gets
into the hands of the acceptor, the other parties are discharged.
6. Discharged by Breach of Contract
Breach of contract may arise in two ways: (i) by anticipatory breach, and (ii) by actual
breach.
Anticipatory breach of a contract occurs when a party repudiates his liability under the
contract before the time for performance is due to when a party by his own act disables
himself from performing the contract.
(a) A agrees to supply B with certain articles on June 15. Before that date A informs B
that he will not be able to supply the goods.
(b) A agrees to marry B on a certain date. Before the agreed date of marriage, he marries C.
When anticipatory breach occurs, the aggrieved party can take the following steps :
(1) He can treat the contract as discharged, so that he is no longer bound by any
obligations under the contract; and
(2) He can immediately take the legal action available to him for breach of contract,
namely, file a suit for damages or specific performance or injunction.
But an anticipatory breach of contract does not by itself discharge the contract. It is
discharged only when the aggrieved party elect to treat it as discharged by actual breach. If
he does not accept his repudiation, the contract continues to exist and may be performed by
the other party, if possible. And if in the mean time an event happens which discharges the
contract legally (e.g., a supervening impossibility) the aggrieved party loses its right to sue for
damages.
(a) A agrees to employ B as secretary the service to begin from first May. On 20th April,
he informs B that his services will not be required. On 21st April, A files a suit for
damages. He is entitled to do so even though the date of performance of the contract
has not arrived.
(b) A promised to assign to B within 7 years from the date of promise all his interest
in house for Rs.10,000, but before the end of 7 years he assigned his interest to C,
B could file a suit for breach of contract without waiting for the expiry of 7 years.
(c) A agreed to load a cargo of wheat on B’s ship at Hamburg within a certain number
of days. When the ship arrived, A refused, to load the cargo. B did not accept the
refusal and continued to demand the cargo. Before last date of loading had expired
the war broke out, rending the performance of the contract illegal. The contract was
discharged and B cannot sue for damages.
Actual breach of contract occurs when during the performance of the contract or at the
time the performances of the contract are due; one party either fails or refuses to perform his
obligations under the contract. A promise to deliver to B, 10 tonnes of sugar on 15th June.
There is a breach of contract by B, if on the sugar being offered by A on the 15th June, B
refuses to accept it without any valid reason.
 Remedies for Breach of Contract
Parties to a contract are expected to perform their respective promises. But one of the
parties may break the contract by refusing to perform his promise. In that event the parties
become connected by a new obligation. One of them has a right of action against the other.
Remedies: When a contract is broken, the injured parties become entitled to any one or
more of the following reliefs: (1) Rescision of the contracts; (2) Suit for damages; (3) Suit
upon a quantum meruit; (4) Suit for specific performance of the contract; (5) Suit for an
injunction.
A contract may be rescinded by agreement between the parties at any time before it is
discharged by performance or in some other way. For example, a contract for the sale of goods
can be discharged by mutual agreement between the buyer and the seller at any time before
delivery of the goods or the payment of the price.
Recision may also take place in the following manner; where a party to a contract fails
to perform his obligations, the other party can rescind the contract without prejudice to his
rights to receive compensation for breach of contract is a voidable contracts, one of the parties
has the options of rescinding the contract.
Damages: When a party suffers by a breach of contract, he has a right to claim damages
or compensation from the party who has broken the contract. The damages that may be
allowed by the Court are of four kinds: (1) Ordinary, general or compensatory (2) Special (3)
Exemplary, punitive or vindictive; (4) Nominal.
Ordinary Damages: Ordinary or general damages are calculated in such a way as to
compensate or make up the loss suffered by the aggrieved or injured party. They are restricted
to the natural and proximate consequences of the breach of contract and the remote or indirect
consequences are not considered. The measure of damages is the estimated loss directly and
naturally resulting, in the ordinary course of events, from the breach of the contract.
(a) A agreed to sell and deliver a radio-set to B on 2nd April for Rs.1,000 to be paid
on delivery. A breaks his promise, and B had to pay Rs.1,200 in the market for a
similar set. He can recover from A the sum of Rs.200 being the difference between
the contract price and market price therefore, Rs.200 is the direct loss resulting from
the breach.
(b) A sent by rail a wagon-load of certain goods from Delhi to Bombay. The goods were
delayed in transit and arrived after the season for their sale was over. A sued the
railway administration for damages, including profits which he would have earned
if the goods had arrived in due course. A was awarded the damages equal to the
difference between the price at which he purchased the goods and the value on resale,
but no profits were awarded.
Special Damages: Special damages are those damages which result from the breach
under special or peculiar circumstances. They need not arise naturally from the breach if the
damages may reasonably be supposed to have been in the contemplation of both the parties
at the time they made the contract. If any unusual damages are likely to be sustained as the
result of the breach of contract, their nature should be communicated to the other party before
the contract is made, so that he contract to pay the special damages.
A bought from B some copra cake (cattle feed). A sold the copra cake to farmers who
used it for feeding cattle. The copra cake was poisonous and cattle fed on it died. The farmers
claimed and got the damages for the loss of cattle and the cost the copra cake form A. A in
turn, got the same from B, as it was within the contemplation of the parties that the copra cake
was to be used for feeding cattle.
Exemplary or Vindictive Damage : These damages are awarded by way of punishment
only, in two cases, namely, (1) for breach of promise to marry, and (2) for wrongful dishonour
by a banker of his customer's cheque. In a breach of promise to marry, the amount of damages
will be determined by the extent of injury to the lady's feelings. The amount may be quite
heavy. Similarly, a drawer of the cheque wrongfully dishonoured, may be awarded heavy
damages against the banker, depending upon the loss of credit and reputation of the drawer
on account of the dishonour of the cheque. A businessman whose credit has suffered will get
exemplary, damages even if he has sustained no pecuniary loss. The rule is the smaller the
amount of cheque dishonoured, the greater the damage.
Nominal Damages: Nominal damages consist of a sum of money which is very small in
quantity, e.g., a rupee. Where the court finds that party has not actually suffered much damage
or when the court is of the opinion that the breach complained of was too petty or insignificant,
the court allows a petty sum as damages.
Rules regarding amount of damages: The amount of damages is calculated in accordance
with the following rules :
(a) The injured party is to be, as far as money can do it, placed in the same financial
position as if the contract had been performed.
(b) Ordinarily, the injured party can recover by way of compensation only the actual
loss suffered by him.
(c) Remote damages i.e., damages for remote consequences, or those not naturally
arising out of the breach are usually not allowed.
(d) Special damages may be recovered, if such damages may reasonably be supposed to
have been in the contemplation of both the parties at the time they made the contract.
(e) In order to recover special damages the special circumstances must be communicated
to the other party at the time of the contract.
(f) If the parties agree about the amount of damages for breach of contract, no more
than the agreed amount can be recovered.
(g) It is the duty of the injured party to minimise the loss as much as possible, e.g. A
took a shop on lease and paid an advance to B. B could not give A possession of
the shop for 8 months, and A chose not to do any business during this period,
although other shops were available in the vicinity. It was held that he was entitled
only to a refund of his advance as his duty was to minimise damages and he could
have done so by taking another shop.
Liquidated Damages and Penalty: A contract sometimes contains a clause in which a sum
of money is named as the amount payable in case of breach of contract. In such cases the
question arises whether the court will accept this figure as the measure of damages. According
to English law, the amount of money payable is regarded as liquidated damages" or as a
“penalty”. It would be treated as liquidated damages if the amount fixed is based upon a
reasonable estimate of the probable actual loss which a party will suffer in case of breach. On
the other hand, the amount fixed is considered to be penalty if it is not based upon reasonable
calculation of actual loss but is fixed by way of punishment and as a threat. In case of
liquidated damages English Courts allow only the amount stipulated, but penalty clause is
treated as invalid.
In India, the distinction between liquidated damages and penalty is not recognised. Section
74 of the Contract Act lays down that if the parties have fixed the amount, the court will allow
only a reasonable compensation, not exceeding the sum named by the parties. But the Court
may allow less.
(a) A contracts with B to pay Rs.1,000 if he, A fails to pay Rs.500 on a given day. A
fails to pay Rs.400 on that day. B is entitled to recover from A such compensation
not exceeding Rs.1,000 as the Court considers reasonable
(b) A borrows Rs.100 from B at 15 per cent per annum interest and agrees to pay back
the principal and the interest within 12 months. He further agrees to pay three times
the rate of interest if he fails to pay either the interest or the principal or both. This
is a stipulation by way of penalty and the Court will not allow this rate.
Quantum Meruit: We have already seen that the term “quantum meruit, means as much
as merited or earned”. A person can, under certain circumstances, claim payment for work
done or goods supplied where the contract has terminated by breach of contract by one party
or has become void for some reason. Thus, where there is a breach of contract the injured
party is entitled to claim reasonable compensation for what he has done under the contract.
A contractor is engaged by B to build a house for him. After a part is constructed, B
prevents the contractor from working any more. The contractor is entitled to reasonable
compensation for the work done.
Specific Performance : Specific performance means the actual carrying out by the parties
of their contract. In a proper case the Court will order the party breaking the contract to
perform what he has promised to do. Generally speaking, specific performance will be ordered
only in cases where monetary compensation is not an adequate remedy, for example, in
contracts for the sale of a particular house or of some rare article, e.g., an art piece, money
compensation is not enough because the injured party will not be able to get an exact substitute
in the market. In such cases, specific performance will be ordered. In the following cases
specific performance is not ordered :
(1) Where monetary compensation is an adequate remedy.
(2) Where the contract is of personal nature, e.g., a contract to marry, or a contract of
personal services such as painting a picture or working as a secretary.
(3) Where one of the parties is a minor.
(4) Where the contract was not certain, fair or just.
Injunction: An injunction is an order of the Court restraining a person from doing some
act. It will be granted to enforce a negative stipulation in a contract where damages would not
be an adequate remedy. If a party has agreed not to do something and then does it, the other
party can obtain an injunction from the Court stopping him from doing it. For example, a film
actor agreed to act exclusively for Gemini Film Co., for a year. During the year he contracted
to act for Prabhat Studio also. He could be restrained by an injunction from acting for Prabhat
 Studio.
Restitution of benefit: When a person, at whose option a contract is voidable, rescinds
such contract, he must restore to the other party any benefit which he may have received from
him. For example, when a contract for the sale of house is avoided on the ground of undue
influence, any money received on account of price must be refunded.
Further, when an agreement is discovered to be void or when a contract becomes void,
any person who has received any advantage under such agreement contract is bound to restore
it or to make compensation for it, to the person from whom he received it. For example, A
pays B Rs.1,000 in consideration for B's promising to marry C, A's daughter. C is dead at the
time of promise. The agreement is void, and B must pay back to A Rs.1,000.