III BCOM A B.

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Legality of Object
Introduction:

The word object means the purpose or design The object of an agreement must be lawful. As per Section 23 if
the object or purpose or design of the contract is unlawful, the contract becomes void. Hence it becomes an
illegal agreement and cannot be enforced.

What objects are unlawful?

In the following cases, the object is unlawful:

1. Where it is forbidden by law :

If the object or consideration is to do an act forbidden by any law, the agreement is void. An act is
forbidden by law (a) when it is punishable by the criminal law, or (b) when it is prohibited by special
legislation or regulations.
Eg. 1: A and B made an agreement to smuggle goods. It is void agreement.
Eg. 2: A sold liquor without licence to B. The sale is void as the sale of liquor without licence is forbidden by
law (K.M.Kamath v/s K.R.Baliga).
2. Where it defeats the provision of any law:
Sometimes, the object or consideration of an agreement is not directly forbidden by law, but it may defeat
any provision of law. In such cases, the object is unlawful.

Eg. 1: M agrees to enter into service under N on a weekly wage of Rs. 200 and an expense allowance of Rs. 50.
Both M and N know that the expense allowance is a device to evade tax. The agreement is therefore void
(Napier v/s National Agency Ltd).
Eg. 2: A borrowed Rs. 10,000 from B. A entered into an agreement with B, and agreed that he might recover
the amount even after the expiry of limitation period (The period within which the debt can be legally
recovered), and he (A) would not raise any objection as to limitation. This agreement is void as it defeats the
provision of Limitation Act. (Ramamurthy v/s Goppaya).
3. Where it is fraudulent:
An agreement whose object or consideration is fraudulent is void.

Eg.: A, B and C agree to divide among themselves any money or gains acquired by fraud. The agreement is
void, as its object is unlawful.

4. Where it is injurious to another person or his property:

An agreement to commit a crime or any wrongful deed, for which a civil suit can be brought, is
unlawful and void.
Eg. 1: A agrees to pay Rs. 50,000 to B if he kills C. The agreement is void. Eg. 2: X promises to pay Rs.
1,000 to Y if Y beats or assaults Z. Y agrees. The agreement is unlawful and void (Alien V/s Rescous).
5. Where it is regarded as immoral:
An agreement, whose consideration or object is immoral, is illegal and therefore void.
Eg.: A person who knowingly lets his house for prostitution cannot recover the rent because the
purpose of the agreement is immoral (Gangamma v/s Kupamal).

6. Where it is opposed to public policy:

An agreement, which is injurious to the public or against the interest of the society is said to be
opposed to public policy.

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Eg. Agreement for trading with enemy countries, agreement interfering with the course of justice etc.
Immoral agreements:
An agreement whose object or consideration is immoral is illegal and hence void. The term 'immoral' stands
for:

1. Sexual immorality. Eg. Illicit co-habitation prostitution,

II. Furtherance of sexual immorality

III. Interference with marital relations, and

IV. Such acts which are against good public morals.

I. Sexual immorality: X agrees to let her daughter to Y for concubinage. The agreement is void because of
sexual immorality.

II. Furtherance of sexual immorality: A man knowingly lets his house to a prostitute for immoral purposes.
He cannot recover the rent from the prostitute because his act amounts to furtherance of sexual immorality.
(Choga Lai v/s Piyasi & Gangamma v/s Kupamal).

Eg.: A let a flat to B, a woman whom he knew to be a prostitute. It was ruled that, the agreement was
unlawful if A knew the purpose that B's object was to use the flat for immoral purposes. (Uphill V/s Wright)

III. Interference with marital relations: M gave Rs. 10,000 to N, a married woman, to enable her to procure a
divorce and to marry M. M could not recover the money advanced to N because the object of the agreement
was interference with marital relation.

IV. Acts, which are against good public morals: An agreement for future marriage, after the first wife expires,
is against good public morals, and it is void (Wilson v/s Carnley).

AGREEMENTS OPPOSED TO PUBLIC POLICY:

An agreement is unlawful if the court regards it as 'opposed to public policy'. It is not possible to give a
precise or exact definition of the term 'public policy'. It is, in a way, a vague and elastic term, and its
connotation may vary with the social structure of the state. Broadly speaking, an agreement, which is
injurious to the public or against the interest of the society, is said to be opposed to public policy . The
following agreements have been held to be against public policy:

I. Agreements of trading with enemy : An agreement made with an alien enemy in time of war is illegal
on the grounds of public policy. This is based upon two reasons: either that the further performance of the
agreement could involve commercial relationship with the enemy or that the continued existence of
agreement would confer upon the enemy an immediate or future benefit. Contracts, which are entered into
before the outbreak of war, are either suspended or dissolved accordingly as the intention of the parties
may or may not be carried out by postponing performance till the end of hostilities.

II. Agreement to commit a crime : Where the consideration in an agreement is to commit a crime, the
agreement is opposed to public policy. The court will not enforce such an agreement. Likewise an agreement
to indemnify a person against consequences of his criminal act is opposed to public policy and hence
unenforceable.

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Eg . 1: A promises to indemnify B in consideration of his beating C. The agreement is opposed to public policy.

III. Agreements, which interfere with administration of justice: An agreement, the object of
which is to interfere with the administration of justice is unlawful, being opposed to public policy. It may take
any of the following forms:

1. Interference with the course of justice: An agreement, which obstructs the ordinary process of justice, is
unlawful. Thus an agreement for using improper influence of any kind with the judges or officers of justice is
unlawful.

2. Stifling prosecution: It is in the public interest that if a person has committed a crime, he must be
prosecuted and punished. Hence an agreement not to prosecute an offender is an agreement for stifling
prosecution and is unlawful.

Eg.: A promises to drop a prosecution which he has instituted against B for robbery, and B promises to restore
the stolen property, the agreement is unlawful.

3. Maintenance and Champerty:

'Maintenance' is an agreement to give assistance, financial or otherwise, to another to enable him to bring or
defend legal proceedings or when the person giving assistance has got no legal interest of his own in the
subject matter.

Eg. A offers to pay Rs.2,000 to B if B will sue C. A ‘s motive is to help B. This agreement between A and B is a
maintenance agreement.

'Champerty' is an agreement whereby one party is to assist another to bring an action for recovering money
or property, and is to share in the proceeds of the action.

Eg.: A agrees to pay the expenses to B if B sues C. Therefore, B agrees to give A one-half of any proceeds
received by B as a result of the said suit. This is champertous agreement.

IV. Agreement in restraints of legal proceedings : Section 28 which deals with these agreements
renders void two kinds of agreements viz;

1. Agreement restricting enforcement of rights: An agreement, which wholly or partially prohibits any party
from enforcing his rights under or in respect of any contract, is void to that extent.

2. Agreement curtailing period of limitations: Agreements, which curtail the period of limitation prescribed
by the law of limitation, are void because their object is to defeat the provisions of law.

V. Trafficking in public offices and titles: Agreements for the sale or transfer of public offices and titles
or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for monetary
consideration are unlawful being opposed to public policy. Such agreements, if enforced, would lead to
inefficiency and corruption in public life.

Eg.1: A promised to obtain an employment to B in a public office and B promised to pay A Rs.10,000. It was
held that the agreement was against public policy and was illegal.

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Eg. 2: R paid a sum of Rs.1,00,000 to A who agreed to obtain a seat for R's son in a medical college. On As
failure to get the seat, 'R' filed a suit for the refund of Rs.1,00,000. It was held that the agreement was against
public policy.

VI Agreement tending to create interest opposed to duty : If a person enters into an agreement
whereby he is bound to do something which is against his public or professional duty, the agreement is void
on the grounds of public policy.

Eg.: An agreement by a newspaper proprietor not to comment on the conduct of a particular person is
unlawful as it is opposed to public policy.

VII. Agreements in restraint of parental rights: A father, and in his absence the mother, is the legal
guardian of his/her minor child. This right of guardianship cannot be bartered away by any agreement. A
father is entitled by law to the custody of his legitimate child. He cannot enter into an agreement, which is
inconsistent with his duties arising out of such custody. If he enters into any such agreement, it shall be void
on the grounds of public policy.

VIII. Agreement restricting personal liberty: Agreements, which usually restrict the personal freedom
of the parties to it, are void as being against public policy.

Eg.: A debtor agreed with his money lender that he would not without the lender's written consent, leave his
job, or borrow money, or dispose his property, or change his residence. It was held that the agreement was
void.

IX. Agreement in restraint of marriage (Section 26): Every agreement in restraint of marriage of any
person, other than a minor, is void. This is because the law regards marriage and married status as the right of
every individual.

Eg.: P promised to marry L only and none else. He further promised to pay L a sum of Rs.2,000, if he married
someone else. P married X. The court ruled L could not recover the sum agreed as the agreement was in
restraint of marriage.

X. Marriage brokerage or brokerage agreement : An agreement by which a person for a monetary

consideration promises in return to procure the marriage of another is void, since it is opposed to public
policy. Similarly, an agreement to pay money to the parent or guardian of a minor in consideration of his/ her
consenting to give the minor in marriage is void, as it is opposed to public policy.

XI. Agreements interfering with marital duties : Any agreement, which interferes with the
performance of marital duties, is void as it is opposed to public policy. Such agreements have been held to
include the following:
1. A promise by a married person to marry someone else during the lifetime or after the death of spouse.
2. An agreement in contemplation of divorce.
XII. Agreements to defraud creditors or revenue authorities:
An agreement the object of which is to defraud the creditors or the revenue authorities is not enforceable,
because it is opposed to public policy.
XIII. Agreements in restraint of trade (Section 27): An agreement which interferes with the liberty of a
person to engage himself in any lawful trade, profession or vocation, is called an 'agreement in restraint of
trade'. Public policy requires that every man should be at liberty to work and he should not be deprived the

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fruit of his labour, skill or talent under any agreement. Every agreement, by which anyone is restrained from
exercising a lawful profession, trade or business of any kind, is to that extent void.
Exceptions: The following are the exceptions to the rule that an agreement in restraint of trade is void.
1. Sale of goodwill.
2. Partners' agreements.

Wagering Agreements
Section 30 lays down that “agreements by way of wager are void”
Literally the word ‘wager’ means a ‘a bet.: something to be lost or won on the result of a doubtful issue” and,
therefore, wagering agreements are nothing but ORDINARY BETTING AGREEMENTS.

Example 1:A and B mutually agree that if it rains today A will pay B Rs 100 it does not rain B will pay A Rs 100

Example 2: C and D enter into agreement that on tossing up a coin, if it falls head upwards C will pay 50 to D and if
it falls tail upwards D will pay C Rs 50; there is, a wagering agreement

Possibly the most expressive and all-encompassing definition of a “was agreement” was given by, Hawkins., in
Carlill vs Carboli,c Smoke Ball Co.

“A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future
uncertain event mutually agree independent upon the determination of that event, one shall win from the and
the other shall pay or hand over to him, a sum of money or other neither of the contracting parties having any
other interest ill that contract than the sum of stake he will so win or lose, there being no other real consideration
‘for the making of such contract by either of the parties. It is essential to a wagering contract that each party may
under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore,
remaining ‘uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but
cannot win, it is not a wagering contract.”

Thus a wager may be made upon the……

Result of the cricket match which is to take place next month in Calcutta, or
Upon the result of an election which is over, if the parties do not know the result.
Example: A and B enter into an agreement which provides that if England’s cricket team wins the test match, A
will pay B Rs, 100, and if it loses B will pay Rs. 100 to A, nothing can be recovered by the winning party under the
agreement, it being a wager.

It is here that wagering agreements differ from insurance contracts which are valid because parties have an
interest to protect the life or property, and have, for that very reason, entered into the contract of insurance.

Essential features of a wager

The essentials of a wagering agreement may thus be summarised as follows:
1.    There must be a promise to pay money or money’s worth.
2.    The promise must be conditional on an event’s happening or not happening
3.      The event must be an uncertain one. If one of the parties has the event in his own hands, the transaction
is not a wager.
4.     Each party must stand to win or lose under the terms of agreement. An agreement is not a wager if one
party- may only win and cannot lose, or if he may lose but cannot win, or if he can neither win nor lose.
5.      No party should have a proprietary interest in the event. The stake must be the only interest which the
parties have in the agreement.
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It is important to note that in the States of Maharashtra and Gujarat wagering agreements are, by a local
statute, not only void but also illegal. As a result in these states even the collateral transactions to wagering
agreements become tainted with illegality and hence are void.

Special Cases of wager

We now turn to certain special cases in order to examine as to whether they are wagers:

1. Horse Racing: The Section makes an exception in favour of certain prizes for horse racing .Thus, a bet on a
horse race carrying a prize of Rs 500 or more to the winners has been made valid under the exception. But with a
view to protecting the poor persons from gambling, a bet on a’ horse race carrying a prize of less than Rs 500
remains a wager.

2. Speculative transactions: Agreements for sale and purchase of any commodity or share market transactions, in
which there is a genuine intention to ‘do legitimate business i. e., to give and take delivery of goods or shares, are
not wagering agreements. If there is no such genuine intention and parties only want to gamble on the rise or fall
of the market by paying or receiving the differences in prices only, the transaction would be a wagering agreement
and therefore void. “In order to constitute a wagering contract, neither party should intend to perform the
contract itself, but only to pay the differences”

3. Lotteries. A lottery is a game of chance. Hence the lottery business is a wagering transaction. Such a transaction is
not only void but also illegal because 294-A of the Indian Penal Code declares ‘conducting of lottery a punishable
offence. If a lottery is authorized by the Government, the only effect of such permission is that the persons
conducting the lottery (i. e., the persons running the lottery and the buyer of lottery ticket) will not be guilty of
a criminal offence, but the lottery remains a wager. (Dorabji Tata vs Lance).  

4. Crossword puzzles. Where prizes depend upon a chance, it is ‘a lottery and therefore a wagering
transaction. Thus a crossword puzzle, in which prizes depend upon correspondence of the competitor’s
solution with a previously prepared solution, is a wager. But if prizes depend upon skill and intelligence, it is
a valid transaction. Thus prize competitions which are games of skill and in which an effort is made to select
the best competitor e.g., picture puzzles, literary competitions and athletic competitions are not wagers. Even
in such competitions .The amount of prize should not exceed Rs 1,000, otherwise they shall be wagers as per
the provisions of the Prize Competition Act, 1955.

5. Insurance contracts: Insurance contracts are valid contracts even though they provide for payment of
money by the insurer ,on the happening of a future uncertain event. Such contracts differ from wagering
agreements mainly in three respects:

(a)  The holder of an insurance policy must have an ‘insurable interest’ in the event upon which the insurance
money becomes payable. ‘thus contracts of insurance are entered into to protect an interest. In a
wagering agreement there is no interest to protect and the parties bet exclusively because they can
thereby make some easy money.
(b)   Contracts of insurance are based on scientific and actuarial calculation whereas wagering agreements are a
gamble without any scientific calculation of risks.
(c)      Contracts of insurance are regarded as beneficial to the public, whereas wagering agreements do not
serve any useful purpose.

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CONTINGENT CONTRACTS

Introduction: Contracts may be of two types- (I) unconditional contracts, and (ii) conditional contracts. An
'unconditional contract' is one whose performance does not depend upon any event, but it takes its normal
course in a usual manner. A contract, not dependent on any condition, may also be called an 'absolute
contract'. Conditional contract is also called contingent contract.

Definition: Section 31 defines contingent contract as "run on a contract to do or not to do something, if some
event, collateral to such contract does or does not happen".

Meaning; A contingent contract is a contract, the performance of which is dependent upon, the happening or
non-happening of an uncertain event, collateral to such contract. That is why, a contingent contract is also
known as a conditional contract.
Eg.: A contracts to indemnify B up to Rs.20,000 in consideration of B paying Rs.1,000/- annual premium, if B's
factory is burnt. This is a contingent contract.
Any ordinary contract can be transformed into a contingent contract, if the performance is made dependent
upon the happening or non-happening of an uncertain event, collateral to such contract.
Examples:
a) A promises to pay Rs.50,000 to B if a certain ship does not return, of course after charging usual premium.
It is a contract of insurance.
b) C advances a loan of Rs.10,000 to D. M promises C that if D does not repay the loan, M will do so (It is a
contract of guarantee).
c) A promises to give a loan of Rs.1,000 to B, if he is elected the president of a particular association. (It is a
contingent contract).

Contracts of insurance and contracts of guarantee and indemnity are popular instances of contingent
contracts.
Contingent contracts are also known as 'conditional' contracts. But in certain cases a contract may look like a
'conditional' contract but it may be simply an ordinary absolute contract.
Eg.: A promises to pay Rs.50 to B, a property broker, if B manages to get two rooms accommodation for him at
a rental of Rs.500 per month. It is not a contingent contract. It looks like a conditional contract. But it is an
ordinary absolute contract.
Collateral event: The collateral event is one, which does not form part of consideration of the contract, and is
independent of it.
Eg.: A contracts to pay Rs.50,000 to B, a contractor, for constructing a building, provided the construction is
approved by an architect. It is a contingent contract because the consideration of the promise to pay
Rs.50,000 is the construction of the building and approval by an architect is a collateral event which is
independent of the consideration, and it is on the happening of this collateral event that contract can be
enforced.
The two essentials of a contingent contract are:
a) The performance of such a contract depends upon the happening or non-happening of some future
uncertain event.

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b) The future uncertain event is collateral i.e., incidental to the Rules regarding the performance of
contingent contract:

The rules regarding the performance of contingent contract, as contained in Sections 32 to 36 of the
Contract Act, are given below:
I. If an uncertain future event happens (Section 32): Contingent contract to do or not to do anything, if an
uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the
event becomes impossible, such contracts become void.
Eg. 1: A makes a contract with B to buy B's horse if A survives C. The contract cannot be enforced by law
unless and until C dies in A’s lifetime.
Eg 2: A contracts to pay B a sum of money (as loan) when B marries c. C dies without being married to B. The
contract becomes void.
II. If an uncertain future event does not happen (Section 33):
Contingent contracts to do or not to do anything, if an uncertain future event does not happen, can be
enforced when the happening of that event becomes impossible, and not before.
Eg.: A agrees to pay B a sum of money (as insurance claim) if a certain ship does not return (of course after
charging premium). The ship is sunk. The contract can be enforced when the ship sinks.
III. Upon how a person will act at an uncertain specified time (Section 34): The event upon which the
performance of the contract depends, may also be an 'act of the party'. Thus, a contract which is dependent
upon some 'act of the party' is also a contingent contract. It will be interesting to note that the 'act' may be of
the either party to the contract or of a third party.
Eg: A agreed to pay Rs. 20,000 to B if he(B) married C. It is a contingent contract. In this case, B's act of
marrying C is an uncertain event because he may or may not marry C. Now suppose that there is already an
agreement between B and C, whereby B has agreed to marry C. And in consideration of this agreement, A
agrees to pay Rs. 20,000 to B. This is not a contingent contract because its performance does not depend
upon an uncertain event. As B has already agreed to marry C, and thus his marriage with C cannot be said to
be an uncertain event. In fact, this is an absolute contract because each party has given a promise to the other
party and one's promise is consideration for the other.
IV. If a specified uncertain event happens within a fixed time (Section 35(1)): Contingent contracts to do or
not to do anything if a specified uncertain event happens within a fixed time, become void, if, at the
expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes
impossible.
Eg: A promises to pay B a sum of money (as a loan) if a certain ship returns within a year. The contract may be
enforced if the ship returns within a year, and becomes void if the ship is burnt within the year or if the ship
does not return within the year.
V. If a specified uncertain event does not happen within a fixed time (Section 35(2)): 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.
Eg : A promises to pay B a sum of money (as an insurance claim) if a certain ship does not return within a year.
The contract may be enforced if the ship does not return within the year, or is burnt within the year.
VI. If an impossible event happens (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 known to the
parties to the agreement at the time when it is made.
Eg. 1: A agrees to pay B Rs.1,000 (as a loan) if two straight lines should enclose a space. The agreement is void.
Eg. 2: A agrees to pay B Rs.1,000 (as a loan), if B will marry A's daughter C. C was dead at the time of the
agreement. The agreement is void.

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Difference Between Wagering Agreement Contingent Contracts

QUASI CONTRACT

Principles of equity says - “No person shall be allowed to enrich himself at the expense of another”

Introduction:
Quasi Contract is not at all a contract. A quasi contract rests upon the equitable principle. Here the person
shall not be allowed to enrich himself at the expense of another. Thus it is not at all a contract. But it is an
obligation, which the law creates. The law implies a promise and imposes an obligation on one party and
conferring a right in favor of the other. Actually here there is no offer, no acceptance. In fact, there is neither
an agreement nor a promise. It is based on principles of equity.

Meaning: contracts which are created or presumed by law.

Definition:
1. It is referred to as "certain relations resembling those created by contracts".
2. "It is an obligation, which the law creates in the absence of any agreement".
3. "It is fictitiously deemed contractual in order to fit the cause of action to the contractual remedy".
Kinds or Types of Quasi Contract:
There are five types of quasi contract:

1. Supply of necessaries ( Section 68): If a person incapable of entering into a contract is supplied by
another with necessaries suited to his condition, the latter is entitled to be reimbursed. The following points
must be noted:
a) The incompetent person is not personally liable but his estate is liable for reimbursement.
b) The necessaries supplied to him must be suitatble to the conditions of his life.
c) The necessaries should have been supplied to incompetent persons or such other persons who are legally
bound to be supported. Eg: Necessaries supplied to Wife and children of a lunatic person.
d) Incompetent person's propety is liable for the payment of only a reasonable price.
Eg.: Mr. A supplies B, a lunatic with necessaries suitable to his conditions. A is entitled to be reimbursed from
B's property. Thus a minor or lunatic is not personally liable but their property is held liable.

2. 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. The following points may be noted:
a) The payment must have been made in good faith and in order to protect one's own interest.
b) The payment should not be a voluntary one. It must be one which the other party was bound to pay.
c) The payment must not be such that the plaintiff himself was bound to pay. He must be only interested in
making a payment.

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Eg.: A's goods were wrongfully attached in order to realize the arrears of the government revenue due by Mr.
B. A pays the amount to save his goods from being sold. He is entitled to recover the amount from B. Here, A
pays the amount to save his goods, actually arrears are payable by B. That is why B is bound by law to pay A.
(AbidHussain v/s Ganga Sahai)
Eg.:Mr. A paid his friend B’s exam fees to make him to appear for exam. B is bound by law to pay A.

3. Obligation to pay for non-gratuitous acts (Section 70):

When 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 restore the thing so done or delivered.
The following points may be noted:
a) The thing must have been done lawfully in good faith.
b) The person must have done the act, not intending to do gratuitously, i.e. his intention must be to be paid
for.
c) The person for whom the act is done must have enjoyed the benefit of this act.
Eg . 1: A, a businessman leaves goods at B's house by mistake. B treats the goods as his own. He is bound to
pay for them for the expenses incurred. (Union of India v/s Sita Ram)
Eg. 2: A village was irrigated by a tank. The tank was damaged. Government or concerned department
repaired the same by spending Rs. 1000, The tank facility was used by the four zamindars. The government
asked the same amount from them. But they refused. The same case went to the court of law. The court held
that all zamindars were equally responsible for the payment of Rs.250 each. (DamodarMudaliar v/s
Secretariat of State, Madras)

4. Responsibility of finder of goods or finder of lost goods (Section 71) : A person who finds the
lost goods belonging to another and takes them to his custody is subject to same responsibility as a bailee. He
must take reasonable care. He must take necessary steps or measures to trace the true owner or real owner.
If he does not take these measures, he will be guilty of wrongful conversion. The goods belong to him till the
true owner is found out.
The finder can sell the goods under following circumstances:
a) Where things are in danger of perishing.
b) Where the owner cannot be found out.
c) Where the owner is found out, but refuses to pay maintenance expenses.
d) Where the lawful charge is more than 2/3 of the things found.
Eg.: Mr. A picks up a diamond necklace on the floor of B's shop. He gives it to Mr. B to keep it till the real
owner is found. No one claimed it in spite of advertisement. Then A asked B to return the same. But B refused
to give it back. It was decided that B was bound to return the diamond necklace to Mr. A, as A was the finder
of lost goods. (Hollins v/s Fowler)

5. Payment by mistake or coercion (Section 72): A person to whom money had been paid by mistake
must return it to the person who paid it. The following points may be noted:
a) Money must have been paid or something must have been delivered by one person to another.
b) The money must have been paid or the thing must have been delivered by mistake or coercion.
Eg. 1: A pays a certain sum of money to B by mistake. It is really due to C. Here B must refund the money to A.
C cannot sue B as there is no contract between them. (Privity of contract or stranger to contract).

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Eg.2 : An insurance company paid the amount on a policy by mistake that the goods had been destroyed. But
the goods in fact had been sold. It was held that insurance company could recover the money paid.

PERFORMANCE AND DISCHARGE OF CONTRACT

PERFORMANCE OF CONTRACT
Section 37 of the Indian Contract Act lays down that the parties to the contract must either perform or offer
to perform their respective promises, unless such performance is dispensed with or excused under the
provisions of the Indian Contract Act or any other law.
Meaning of Performance of Contract: Performance of a contract means fulfillment or offer to fulfill, by the
parties to the contract, of their respective obligations under the contract within the time, at the place and in
the manner prescribed therein.
Types of performance:
Performance of a contract may be:
1. Actual Performance: When a party to a contract has done what he has undertaken to do, he is said to
have actually performed his obligation or promise and there is said to be actual performance.
2. Tender of Performance or offer of Performance (Attempted Performance): When a party to a contract
does not actually perform, but offers to perform, his obligation under the contract at the proper time and
place, but the other party does not accept the offer, there is said to be an offer to perform, tender to perform,
tender or attempted performance. A valid tender is considered equivalent to actual performance.
DISCHARGE OF CONTRACT:
Meaning: A contract gets discharged when the parties fulfill their respective obligations under the contract;
the parties are no more liable under the contract. Rights and obligations created by the contract will come to
an end.
Modes of discharge of a contract: A contract can be discharged by:
1. Performance
2. Impossibility of performance
3. An agreement
4. Operation of law
5. Lapse of time
6. Breach.
1. Discharge by performance: When parties to a contract perform their respective obligations under the
contract, the contract gets discharged. Performance should be complete precise and according to the terms of
contract. Performance can be through tender also. Tender is not actual | performance but it is an offer to
perform the obligation.
2. Discharge by impossibility of performance:
If a contract contains an undertaking to perform something, which is impossible, it is void ab initio. It is based
on the rule that the law does not recognize what is impossible and what is impossible does not create an

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obligation. The law lays down that an agreement to do an act impossible in itself is void. This is known as pre-
contractual impossibility.
Eg. 1: Taylor v/s Caldwell: Caldwell let a music hall to Taylor for a series of concerts on certain days.
Subsequently however, before the contract could be completed or fully performed, the hall was burnt down
accidentally. Disputes arose between Taylor and Caldwell and the matter went to the court of law. The court
held that it was a case of contract void-expost-facto i.e., contract becoming void subsequently.
It may be added that "impossibility of performance" is, as a rule, not an excuse for non-performance.
Eg. 2: A and B agreed to marry each other. Before the time fixed for marriage A goes mad. The contract
becomes void. This is a post-contractual impossibility (supervening impossibility). Supervening impossibility is
known as doctrine of frustration. It means the impossibility of performance due to subsequent unexpected
event.
a. Destruction of the subject-matter: Sometimes the subject matter of the contract is destroyed after the
formation of the contract. In such a case contract is discharged. The parties are no more liable to
perform their obligations. But the destruction of the subject-matter should be without any fault or
mistake of the parties to the contract.
b. Failure of the subject due to non-occurrence of the said event: Contract gets discharged only when
the happening of the event is the basis of the contract
c. Death or incapacity of the promisor discharges a contract:
d. Where the performance of a contract depends on the personal skill, ability or qualification of a party,
the contract is discharged on the death or incapacity of that party subsequent to the formation of the
contract.
e. Change of circumstances: The contract is discharged only where the performance becomes extremely
difficult or hazardous. It may be noted that the contract is discharged only when the change of
circumstances has affected the performance of the contract too such an extent that the performance
becomes virtually impossible.
f. Change of law or government policy: Sometimes, the contracts are valid and lawful when they are
made. But they become unlawful due to subsequent change in the law or change in the government
policy. I these cases, the contract are discharged as their performance becomes impossible.
g. Outbreak of war: A contract entered into with an alien enemy during war is unlawful, and is void ab
initio, and becomes impossible of performance.

In the following cases the impossibility of performance (rule of frustration) does not apply:
1. Difficulty in performance.
2. Commercial hardship.
3. Impossibility due to the conduct of a third person.
4. Strikes, lockouts and civil disobediences.
5. Failure of one of the several objects.
3. Discharge by mutual agreement or mutual consent.
A contract may be terminated through or with the help of new agreement or new contract. The rule is “thing
may be destroyed in the same manner in which it is constructed or constituted". If the parties to the contract
agree to substitute a new contract for the old, the original or old contract need not be performed.
Various modes of discharge of a contract by mutual agreement are:
I. Novation: A new contract is substituted for an existing one between the same parties or between different
parties. lt may be noted that the novation must be with the mutual consent of all the parties. The novation
may be of the following two types:
i. Novation involving change of parties, but the contract remaining the same: Sometimes, the parties to the
contract are changed. But the contract remains the same. In such cases, the contract betwen the original

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parties are discharged and need not be performed. However, all the parties must give their consent to the
new contract.
Eg. A owed certain money to B under a contract. It was agreed between A, B and C that B would accept C as
his debtor instead of A. In this case, A is discharged from his liability to pay the debt to B.
ii. Novation involving substitution of a new contract, but parties remaining the same: Sometimes, the
concerned parties to a contract agree to substitute the existing contract for a new one. In such cases, the
original contract is discharged and need not be performed.
Eg.A owed Rs. 5000 to B. A entered into an agreement with B and gave B a mortgage of his land for Rs. 3000
in place of the debt of Rs.5000. It is a new contract and discharges the original contract to pay Rs.5000.

II. Rescission: It takes place when all or some of the terms of the contract are cancelled. It may be noted that,
in the case of rescission, the existing contract is cancelled by mutual consent without substituting a new
contract in its place.
III. Alteration: It takes place when all or some of the terms of the contract are altered by mutual contract. It
may be noted that, in the case of alteration, only the material terms of the contract are discharged, but the
parties continue to be the same.
IV. Remission: Acceptance of a lesser fulfillment of the promise made is called remission.
V. Merger: When an inferior right accruing to a party merges into a superior right of the same party. The
following points may be noted: 1. For merger, the parties must remain the same. 2. The subject-matter must
also remain the same. 3. The rights must be different, one of which must be inferior and the other must be
superior.
VI. Waiver: Waiver means deliberate or intentional giving up of a right mutually. The following points may be
noted:
1. A party to a contract may waive his rights under the contract.
2. If a party to a contract waiver or abandons his rights under the contract, the other party to the contract is
discharged from his obligation.
Differences between Novation and Remission:
1.. In the case of novation, the agreement affects the rights of both the parties to the contract. But in the
case of remission, the agreement affects the rights of only one party, viz., tie promise.
2. In the case of novation, consideration is implied in the form of mutual renunciation of rights. On the other
hand, in the case of remission, the promise can discharge the promisor without consideration.
3. Novation may be between the old parties or between different parties, whereas remission is between the
same parties.
Differences between Novation and Alteration
1. In the case of novation, there may be change of parties. But in the case of alteration, the parties remain
the same, and only the terms of the contract are altered.
2. In novation, the original contract is totally substituted. But in alteration, the original terms may continue
to be part and parcel of the contract.
Differences between Novation and Rescission
1. In the case of novation, a new contract is substituted for the old one. But in the case of rescission, no new
contract is substituted in the place of the old one, and only the old contract is cancelled.
2. Novation may be between old parties or between new parties. But rescission is only between old parties.

4. Discharge by operation of law: A contract may be discharged independently by operation of law. It

takes place under the following circumstances:
a. By death: Where the contract involves pesonal skill or ability, it is terminated on the death ofo the
promisor.

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b. By merger: Where an inferior right under a contract merges with a superior right under a contract, the
former contract stands discharged automatically.
c. By insolvency: A contract is discharged by the insolvency of one of the parties to it when he is adjudged
insolvent.
d. By unauthorized alteration of the terms of a written agreement: Where one party to a contract makes
any material alteration in a contract without the consent of the other party, the whole contract becomes void
and the other party is discharged from his obligations under the contract. But, if the alteration is not material,
it does not affect the validity of the contract.
e. By rights and liabilities becoming vested in the same person: When the rights and liabilities under a
contract are vested in the same party, the other parties to it are discharged from the contract.
Eg: When the same person become acceptor of a bill & payee .
5. Discharge by lapse of time: The Limitation Act 1963 lays down that a contract should be performed
within a specified time (i.e., 3 years for debt and 12 years for immovable property ), called period of
limitation. If it is not performed and no action is taken by the promisee under law, he is deprived of his
remedy.
Eg.: Goods are sold on credit to be paid for, after the expiry of period of credit. In this case price should be
paid within three years before the expiry of period of credit. If the price is not paid and the creditor does not
file a suit for recovery within three years, the debt becomes time-barred and it becomes irrecoverable.

6. Discharge by breach of contract: A breach of contract occurs when a party thereto, without a lawful
excuse, does not fulfill his contractual obligation. In other words breach of a contract means one party puts an
end to the obligations created under a contract but the other party not at fault can sue the party at fault for
damages. lt may be actual breach of contract or anticipatory breach of contract.
i. Actual breach of contract takes place at the time when performance is due, one of the parties to the
contract fails to fulfil his obligation under the contract. Eg : A agrees to deliver 50 bags of cement to B on 1st
November. He does not deliver the cement on 1 st November. In this case, there is said to be actual breach of
contract.
ii. Anticipatory breach of contract: It occurs when a party to the contract declares his intention of not
performing the contract or obligation before the performance is due. He can expressly renounce his
obligation under the contract.
Eg : A undertakes to supply B 50 bags of sugar on 10 th December. Before the due date, A informs B that he is
not going to supply the sugar. This is a case of anticipatory breach of contract.

REMEDIES FOR BREACH OF CONTRACT

"Where there is a right, there is a remedy"
Introduction:
A contract gives rise to correlative rights and contract would be of no value if there were no remedy to
enforce that right in a law court in the event of its infringement or breach of contract.
Meaning of a remedy:
A remedy is the means given by law for the enforcement of a right.
When a contract is broken, the injured party (aggrieved party)has one or more of the following remedies:
1. Rescission of the contract.
2. Suit for damages.
3. Suit upon quantum meruit.
4. Suit for specific performance of the contract.

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5. Suit for injunction.

1. Rescission:
When one party breaks a contract, the other part may treat the contract as rescinded and refuses further
performance. In such a case, he is absolved of all his obligations under the contract.
Example: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the
receipt of the goods. A does not supply the goods. B is discharged from liability to pay the price.
When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has received
under the contract to the party from whom such benefits were received. But if a person rightfully rescinds a
contract he is entitled to compensation for any damage, which he has sustained through non-fulfillment of the
contract by the other party.
2. Suit for Damages:
Damages are monetary compensation allowed to the injured party from the guilty party through the court of
law for the loss suffered by him. The guilty party is liable to pay damages. Following are the different types of
damages.
i) Ordinary damages:
Case reference - Smith v/s Green
Injured party can recover damages that arise naturally and directly in the usual course of things from the
breach.
Eg. 1: A agrees to sell 100 quintals of wheat to B at Rs.175 per quintal. As the price of wheat rises to Rs.180
after the agreement A refuses to deliver. B can claim damages at the rate of Rs.5 per quintal (i.e. Rs.500).
ii) Special damages:
If there are any special circumstances, which would result in a special loss due to breach of contract, such
special circumstance must be brought to the notice of the other party. If there is a breach, special damages
may be recovered.
Case: Hadley v/s Baxendale:
X's mill was stopped by the breakdown of a shaft. He delivered the shaft to Y a common carrier to be taken to
the manufacturer for making a new one. X did not make known to Y that delay would result in loss of profits.
Due to delay in transit the shaft could not be delivered within a reasonable time. The court ruled that Y was
not responsible for the loss of profits, because he was not informed that a delay in delivery would amount to
loss of profits. However common carrier was liable for ordinary damages.
Eg. 2: Victoria Laundry v/s Newman Industries: N agreed to sell to V a boiler for use in his laundry. At the time
of agreement it was communicated that delay would result in loss of profits. The boiler was to be delivered on
5th June but N delivered it on 8th November. V claimed:
1. Loss of profit that he would have made had the boiler been delivered in time.
2. Loss of profit from some highly lucrative contract.
The court held that V was entitled to recover special damages for loss of profits caused by delay which was
communicated to N at the time of contract.
Eg. 3: Mr. S sends certain goods for exhibition. On the railway consignment he wrote a note, which read "must
be certainly delivered before Monday at the exhibition ground". Due to the fault of the railways, the goods
were delivered after the completion of the exhibition. Here S can claim special damages for the loss of profits.

iii) Exemplary damages: Generally, damages for breach of contract are given by way of compensation for loss
suffered and not by way of punishment. Hence vindictive or revengeful or punitive damages, which are penal
in nature, have no place in the law of contract. However, the court of law may award exemplary damages in
case of breach of promise tomarry and wrongful dishonour of a cheque.

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iv) Nominal damages: An injured party, who has not suffered any loss, can recover nominal damages for
breach of a contract.
Damages for loss of reputation: Damages for loss of reputation are not generally recoverable. An exception is
wrongful dishonour of a cheque. Here, the smaller the amount of a cheque wrongfully dishonoured, the larger
is the amourjt of damages awarded.

V) Damages for inconvenience and discomfort: Damages for inconvenience and discomfort are not
recoverable. Eg: Mr. A was dismissed from service. It was held that Mr. A could recover the sum representing
his salary or wages for the period of notice. He could not recover anything for his injured feelings.

3. Suit for Quantum Meruit:

It means as much as earned or as much as merited. When a person has done some work under a contract and
a further performance is impossible, then the party who has performed the work can claim the remuneration
for the work he has already done. The claim on 'quantum meruit' arises in the following cases:
i) When a contract is discovered to be unenforceable
When an agreement is discovered to be void or 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.
ii) When one party abandons or refuses to perform the contract:
Where thereis a breach of contract, the aggrieved party is entitled to claim reasonable compensation for what
he has done under the contract (for eg construction contracts).

4. Suit for Specific performance:

In certain cases of breach of a contract, damages are not an adequate remedy. The court may, in such cases,
direct the party in breach to carry out his promise according to the terms of the contract. This is a direction by
the court for specific performance of the contract at the suit of the party which is not in breach.
Some of the cases in which specific performance of a contract that can be enforced at the discretion of the
court are as follows:
• When the act agreed to be done is such that compensation in money for its non-performance is not an
adequate relief.
• When there exists no standard for ascertaining the actual damages caused by the non-performance of the
act agreed to be done.
• When it is probable that the compensation in money cannot be got for the non-performance of the act
agreed to be done.
Ex: Vilas Nayak Ujire Asia’s lead speed painter agreed to sell an old painting to Vinay for ₹50000.
Subsequently if Vilas Nayak refused to sell the paintings. Hence there is no exact substitute for ones art work
Vinay may file suit against him for specific performance.

Specific performance will not be granted where -

 Damages are an adequate remedy.
 The contract is not certain, or is inequitable to either party.
 The contract is in its nature revocable.
 Contracts are made by trustees in breach of their trust.
 Contracts are of personal nature. ;.

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 The contract is made by the company in excess of its powers as laid down in its Memorandum of
Association.
 The court cannot supervise its execution.
5. Suit for Injunction:
Where a party of a contract is doing something which he promised not to do, the court may, by issuing an
order, restrain him from doing what he promised not to do. Such an order of the court is known as an
'injunction'.
Eg. 1: Arjith sing agreed to sing for Anu malik’s new movie, and during a certain period, he will sing no where
else. Afterwards Arjith made contract with A.R Rahman to sing at another theatre and refused to perform the
contract with Anu malik. It was held that, Arjith could be restrained by injunction from singing for A.R Rahman
.
Eg. 2: Warner Bros. V/s Miss Nelson: N a film actress,agreed to act exclusively for W for a year and for no
one else.During the year she contracted to act for Z. It was held that shecould be restrained by injunction
from doing so.
Eg. 3: Metropolitan Electric Supply Co. v/s Ginder: Gagreed to take all the electric energy required by his
premises from M. It was held that this was in substance an agreement not to take energy from any other
person and it could be enforced by injunction.

SPECIAL KINDS OF CONTRACTS

CONTRACT OF INDEMNITY AND GUARANTEE

CONTRACT OF INDEMNITY AND GUARANTEE

Introduction : Both contract of indemnity and guarantee are special types of contracts. That means contract
of indemnity and guarantee must fulfill essentials of a valid contract as well as other special conditions.

CONTRACT OF INDEMNITY
Meaning :
"It is a contract by which one person 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".
Dictionary meaning of Indemnity is : "Protecting the loss".
Parties Involved: Following two persons are involved in a contract of indemnity:
1. Indemnifier: The party who gives the indemnity. He gives promise to compensate the loss.
2. Indemnity holder or indemnified: The party for whose protection the indemnity is given or person
protected against loss or the person to whom the indemnity is given.
Eg.: In case of agreement made between insurance company and policy holder, insurance company is
considered as indemnifier and policy holder is considered as indemnity holder.

Essentials of valid contract of indemnity:

1. Contract of indemnity must satisfy all the essentials of valid contract:

Case reference - Smith v/s Clinton
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It is a special type of contract. It must fulfil all the essentials of a valid contract.
Eg.: A requested B to publish in a newspaper a defamatory statement against C. A promised to indemnify B
against any loss, which he may suffer by way of damages or compensation payable to C. It is not a valid
contract of indemnity because the object of the contract is opposed to public policy.

2. There must be a promise to save the other from some loss:

The agreement must be related to save the loss of other person.
Eg.: A is appointed a cashier in B's firm at the request of Mr. C. C promised to indemnify Mr. B for the loss that
may be caused due to the dishonesty of A. This is a contract of indemnity between B and C.

3. The loss may be due to the conduct of promisor himself or any other person:
Eg: A insured his house with B an insurance company against the risk of fire. B agreed to indemnify A against
the destruction of his house by fire. This is a contract of indemnity.

4. The contract of indemnity may be express or implied:

The express promise is one where a person promises either in words spoken or written.
The implied promise is one where the conduct of the promise shows that he promises to indemnify the other
party against th loss.
Eg.: A and B claimed certain goods from Mr. C, a godown keeper, as rival owners. A took the delivery of goods
from C ar agreed to compensate him if B turns out to be the real owner It is express contract of indemnity.

CONTRACT OF GUARANTEE
Meaning:
"A contract of guarantee is a contract to perform the promise or discharge the liability of the third person in
case of default".
Parties Involved: There are three parties involved in a contract of guarantee. They are:
1. Surety:The party who gives the guarantee is called 'surety' or 'guarantor'.
2. Principal Debtor: The party on whose behalf the guarantee is given is called 'principal debtor'.
3. Creditor:The party to whom the guarantee is given is called 'creditor'
Eg.: A asked B to give a loan of Rs. 25,000. B agreed to give the loan provided C guarantees the repayment. In
this example C is the surety, A is the principal debtor and B is the creditor.

Essentials of a Valid Contract of Guarantee:

1. Contract of guarantee must satisfy all the requirements of a valid contract: It is a special kind of
contract. It must fulfilall the essentials of a valid contract.
Eg.: A requested B to give him a loan of Rs.25,000. B agreed to give the loan provided C guarantees the
repayment. C refused to give the guarantee. Later C's guarantee was obtained through coercion. It is not a
valid contract of guarantee.
2. Contract of guarantee must be supported by consideration: There need not be direct consideration
between surety and creditor. Consideration received by the principal debtor is the sufficient consideration for
the surety. It is not necessary that the surety himself must be benefited.
Eg.: A requested B to sell a tape-recorder on credit. B agreed to do so, provided C guaranteed the payment.
B's promise to sell the tape-recorder to A is a sufficient consideration for Cs promise of guarantee.

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3. The contract of guarantee must be made by the parties competent to contract:

Eg: A requested B to lend Rs.10,000 to C, who is a minor. A promised to pay B if C failed to repay. In this case
though the principal debtor (C) is a minor, the contract between A and B is enforceable.
It means that the principal debtor need not be competent to enter into a contract. However, surety and the
creditor must be competent.
4. There must be someone primarily liable: Eg.: A owed Rs.5,000 to B. The debt became time-barred as
per the Limitation Act'. Afterwards C gives a guarantee to B for the payment of the amount. This is not a valid
contract of guarantee because primary liability between A and B is not enforceable at law.
5. The promise to pay must be conditional: Eg: A and B went together to C's shop; A purchased some goods
from the shop. B guaranteed to pay the amount if A failed. This is a contract of guarantee. Here the primary
liability to pay the price is that of A. B is liable only on the default of A.

6. There should be no misrepresentation (Section 142):

Eg.: A purchased goods from B on credit. A failed to pay the amount. B refused to allow further credit. C
guaranteed the payment. At the time of guarantee B informed C that previously A was making all the
payments on the due date. In this case guarantee given by C was invalid, as guarantee was obtained by
misrepresentation of facts.
7. There should not be concealment of facts (Section 143):
The guarantee obtained by concealment of any material fact is invalid.
8. The contract of guarantee may be oral or written.

Differences between Contract of Indemnity and Contract of Guarantee:

Point of Contract of Indemnity Contract of guarantee
Difference

1. Number of There are two parties; There are three parties, i.e., surety, principal debtor and
parties indemnifier and indemnified creditor

2. Nature of The liability of the indemnifier to The liability of the creditor is collateral or a secondary
liability the indemnity holder is primary one. Primary liability is that of principal debtor.
and independent

3.Number of There is only one contract There are three contracts, one between prinicipal debtor
contracts between the indemnifier and and creditor. The second contract is between creditor and
indemnity holder surety. The third contract is between surety and principal
debtor.

4. Act It is not necessary for the Surety should give the guarantee at the request of the
indemnity holder to act at the principal debtor.
request of the indemnity holder

5. Occurance The liability of the indemnifier The liability of the surety arises on the default on the part
of liability arises on the happening of a of principal debtor.
contingency

6. Suit An indemnifier cannot sue a A surety, on discharging the debt of principal debtor, steps
third party into the shoes of the creditor. Subsequently he can
proceed against the principal debtor.

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Rights of Surety;
Rights of surety may be explained under three heads:
I. Rights against the principal debtor.
II. Rights against the creditor.
III. Rights against the co-sureties.
I. Rights against the principal debtor:
1. Right of subrogation or substitution (Section 140):
The term subrogation is defined as the substitution of one person for another. According to this right, when
the surety has paid the debt of the principal debtor, he will enjoy all the rights of a creditor. The surety steps
into the shoes of the creditor.
2. Right of indemnity (Section 145) : Indemnity means the compensation In a contract of guarantee there is
an implied promise by the principal debtor to indemnify the surety.
Eg.: P is indebted to C; S is the surety for the debt. C demands payment from S. S defends the suit. He is
compelled to pay the amount. He can recover the amount paid from the principal debtor.
3. Right to be relieved from liability: The surety can ask the principal debtor to pay off his debts and relieve
him from liability. This the surety can ask even before making any payment to the creditor. However, he can
do so only after the debt has become due.
II Rights against creditor:
1. Right to claim securities: On payment of the debt to the creditor, the surety becomes entitled to claim the
securities, which the creditor has against the principal debtor.
Eg.: A borrowed Rs,25,000 from B against the mortgage of his house. This loan was guaranteed by C. On the
due date A failed to pay the loan. B recovered the full amount from C. C is entitled to claim the security
(house) from B and can enforce it against A.
2. Right of set-off: It is defined as a counter deduction from the amount of the loan.
Eg.: A borrowed Rs.5,000 from B. C guaranteed the loan. A also had a claim of Rs.1,000 against B on some
earlier transactions. On the due date A failed to repay the amount. In this example C is entitled to deduct
Rs.1,000 that B owed to A. Thus C's liability only Rs.4,000.
3. Right to claim reduction: Sometimes, after the recovery of the guaranteed amount from the surety, the
debtor is declared insolvent. And on debtor's insolvency, the creditor also receives some dividend (i.e. share)
out of the assets of insolvent. In such cases, the surety is entitled to claim the proportionate reduction of his
liability by the amount of dividend claimed by the creditor.
Eg.: A agreed to supply certain goods to B on credit. And A's friend C gave a guarantee for the payment of the
price of the goods up to Rs. 2,000. A supplied goods to B to the amount of Rs. 10,000. But B failed to pay the
price and A recovered the guaranteed amount of Rs. 2,000 from C. Subsequently, B became insolvent, and A
proved the whole of his debt (i.e. Rs. 10,000) in insolvency of B and A received 25 per cent of Rs. 10,000 as
dividend in the insolvency. In this case, C can claim a refund of 25 per cent of Rs. 2,000, i.e. Rs.500 from A
which he has already paid.
III. Rights against the co-sureties:
Sometimes two or more persons give guarantee for the same debt. They are termed as 'co-sureties'. All the
co-sureties are equally liable to the creditor.
1. Right to contribution (Section 146): When one of sureties makes payment of the debt, he is entitled to
claim contribution from the other co-sureties.
Eg.: A borrowed Rs.6, 000 from B. C, D and E gave joint guarantee for the repayment. On the due date A failed
to pay. C paid the debt. C is entitled to claim contribution from D &E
2. Right to share benefit from securities: Sometimes, at the time of guarantee, one of the co-sureties
receives a security from the principal debtor, or on payment of the debt, he receives security from the
creditor. In such cases, the co sureties are entitled to share the benefit of the securities.

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Eg.: A, B and C were sureties to D for the loan of Rs. 1,20,000 advanced to E. However, A had received a
security of E's house, E defaulted payment of the loan, and D recovered the amount from A, B and C. A
obtained an order from the court for the sale of the house. In this case, B and C are also entitled to share the
proceeds of the house realized by A.

Extent of surety's liability:

1. Surety's liability is co-extensive (Section 128): The surety is liable to the same extent to which the principal
debtor is liable. It is co-extensive. Whatever amount can be realized from the principal debtor including
interest, damage etc., can be recovered from the surety. That means surety's liability is equal to that of the
principal debtor.
Eg.: Mr. A gave a guarantee to B for the repayment of the loan due from C. On the due date C failed to repay
the loan. In this case A is liable not only for the principal amount but also for interest and other charges.
2. Surety's liability may be limited: It is open to the surety to limit his liability. A surety by special agreement
can limit his liability for a fixed amount.
Eg.: A gave a loan of Rs.10,000 to B on the guarantee of C. C gave the guarantee to A for the repayment of
loan up to Rs.7,000. On the due date B failed to pay the whole amount. In this case C is liable only to the
extent of Rs.7,000, as he has restricted his liability.
3. Surety's liability arises immediately on the default on the part of the principal debtor: Surety cannot be
called upon to pay unless the principal debtor has committed the default.
Eg: A borrowed a loan of Rs.5,000 from B on the guarantee given by C. On the due date A paid the full
amount. Here the liability of the surety is nil.
4. Surety's liability where the original contract between the creditor and the principal debtor is void or
voidable: The contract between the surety and the creditor is an independent contract and not a collateral
or secondary one. It cannot be said that the surety will be liable only if the principal debtor is liable. Therefore,
when the original contract between creditor and principal debtor is void i.e., where the principal debtor is a
minor (incompetent), the surety will remain liable.
5. Surety's liability under continuing guarantee: (Section 129): When a guarantee extends to a series of
transactions, it is called a continuing guarantee. The liability of the surety, in case of continuing guarantee,
extends to all the transactions contemplated, until the revocation of the guarantee.

Discharge of surety's liability:

A surety is discharged from liability when his liability under the contract comes to an end. Following are the
various modes of discharge of liability of a surety.
1. By notice of revocation by the surety (Section 130):
Case reference : Afford v/s Davies
A surety may revoke the guarantee by giving a notice of revocation to creditor. Only a continuing guarantee
can be revoked by notice. However, surety is discharged only from future liability. The surety cannot revoke a
specific guarantee.
Eg.: S stands as surety to P for amount advanced by C within 12 months up to a maximum of Rs.10,000. After
three months, S revokes the guarantee. By that time C has already lent Rs.3,000. Surety is liable only for
Rs.3,000 on default of P.
2. Revocation by death (Section 131): The death of the surety operates as a revocation of the continuing
guarantee for future transactions.

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3. Revocation by Novation: A surety may be discharged by novation. Novation means a fresh contract
entered into either between the same parties or between the other parties, as a consequence of which the
original contract gets discharged.
4. By variance in terms and conditions by contract (Section 133): The creditor is not entitled to make any
changes in the terms of original contract. Surety is discharged if the creditor makes any changes in the
contract without the consent of the surety.
Eg.: C appoints P as a salesman on a yearly salary or fixed salary. S gave his surety that P would honestly
account for money received. Later without the consent of S, C and P agree that commission on the goods sold
and not a fixed salary shall be paid to P. In this example, S is not liable for the subsequent misconduct of P.
5. By release or discharge of the principal debtor (Section 134): Sometimes the creditor may release or
discharge the principal debtor from his liability. In such a case, the surety is automatically discharged from his
liability. The creditor may release the principal debtor by a fresh contract, or by some of his acts or omissions
which have the effect of discharging the principal debtor.
6. By composition with the principal debtor (Amicable settlement with principal debtor) (Section 135): If
the creditor enters into an amicable settlement with the principal debtor without the consent of the surety,
the surety is discharged from his liability. It amounts to a variation of the original contract,
Eg.: A borrowed Rs.5,000 from B. The repayment was guaranteed by C. A was unable to repay the loan. At
that time A entered into an agreement with B whereby he agreed to transfer his furniture to B in full
settlement of the loan. B accepted the furniture. This composition agreement between A and B discharges C
from liability.
7. By giving more time to the principal debtor (Section 135):
Sometimes, without the consent of the surety, creditor gives more time to the principal debtor for the
repayment of the amount. In such a case surety is automatically discharged from his liability.
Eg.: A purchased a car from B on instalment system. C guarantees the payment of instalments. Instalments fell
in arrears. B settled with A that he should pay certain amount immediately and the balance at the end of the
month. Here surety C was discharged from liability as more time is given by the creditor to the principal
debtor.
8. By promise not to sue the principal debtor (Section 135):
Sometimes without the consent of the surety, the creditor enters into an agreement with the principal debtor
and promises that he will not file a suit against him. This agreement discharges the surety from liability.
Eg.: A owed Rs.20,000 to B, which was guaranteed by C. The debt became payable. At that time B entered into
an agreement with A and promised not to file a suit against him. In this case C is discharged from liability.
9. By invalidation of the contract of guarantee (Sections 142, 143,144): The surety is liable only if the
contract of guarantee is valid. Under the following circumstances the contract of guarantee is invalid.
• Guarantee obtained by misrepresentation of facts.
• Guarantee obtained by concealment of facts.
• Guarantee obtained without any consideration
A person gives a guarantee on the contract that he will be liable only if some other person also joins as co-
surety. Eg: A agreed with B to stand as surety for C for a loan of Rs. 5,000, provided D also joins him as co-
surety. D refuses to join is co-surety. In this case, the guarantee is invalid, and A is not liable as surety.
10. By impairing surety's remedy (Section 139): The term 'impairing surety's remedy' means damaging or
diminishing the rights of the surety. As a matter Of fact, it is the duty of the creditor not to do anything
inconsistent with his rights against the principal debtor. If he does so, the surety is discharged from his
liability. Eg.: A contracted to build a ship for B for a given sum to be paid by instalments as the work reaches
certain stages. C became surety to B for A's due performance of the contract. B, without the knowledge of C,
paid to A the last two instalments before the due date. In this case, C is discharged by the prepayment of the
instalments.
11. By losing the security by the creditor (Section 141):
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Sometimes, at the time of guarantee, the creditor may receive some security from the principal debtor. If the
creditor loses or parts with the security without the consent of the surety, the surety is discharged from his
liabilities to the extent of the value of the security. However, the surety is not discharged, if the creditor loses
the security with his consent. Eg.: A took a loan of Rs. 10,000 from a bank. B guaranteed the loan. The bank
also had a security by way of mortgage of A's land. However, the bank cancelled the mortgage. In this case, B
is discharged from his liability to the extent of the value of the land.

BAILMENT AND PLEDGE

Introduction:
Contracts of bailment and pledge are also special kinds of contracts. The special principles applicable to them
are contained in Sections 148 to 181 of the Indian Contract Act, 1872. It may be noted that the Indian
Contract Act does not deal with all types of bailment and pledges. It only deals with the general principles
relating to the contract of bailment and pledge.

Meaning of bailment:
The delivery of goods by one person to another for some specific purpose is known as
bailment.
A bailment is a contract, which results from the delivery of goods. It implies a sort of relationship in which the
personal property of one person goes into the possession of another person temporarily for some specific
purpose. It may be noted that the ownership of the articles or goods remains with one person, while the
possession is with another person. Thus, the bailment involves a change of possession only (not ownership)
from one person to another, eg. delivering a car, cycle, radio, TV., etc., for repair, or delivering garments to a
drycleaner, leaving scooter, car at the parking, etc.

Definition: Section 148 defines bailment as "the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished or completed, be returned or
otherwise disposed of according to the directions of the person delivering them".

Parties involved : There are two parties:

1. Bailor: The person delivering the goods is called the bailor.
2. Bailee: The person to whom the goods are delivered is called the 'bailee'.
Eg. 1: A delivers a piece of cloth to B, a tailor, to be stitched into a suit. This delivery of cloth from A to B is a
contract of bailment. In this example A is the bailor and B is the bailee.
Eg. 2: Mr. A lends a book to B to be returned after the examination. It is a contract of bailment. Here A is the
bailor and B is the bailee.

Essential requisites of bailment:

1. Contract: A bailment is usually created by contract between the 'bailor' and the 'bailee'. It is followed by
delivery of goods from 'bailor' to the bailee for some purpose. When the purpose is fulfilled the goods are to
be returned. In exceptional cases, it may be implied by law eg. as between a finder of lost goods and the
owner.
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2. Delivery of possession: In bailment possession passes from the owner to the bailee and not the ownership.
The delivery of goods may be actual or constructive (Section 149). When the bailor hands over the physical
possession of the goods to the bailee, it is called actual delivery. In the case of constructive delivery, there is
no actual handing over of the physical possession of goods but something is done which has the effect of
putting the goods in the possession of the bailee or any person authorized to hold them on his behalf.
Eg. 1: A purchased an air-conditioner from B's shop. A left the air-conditioner at B's shop and requested him to
send it to his (A's) residence. In this case, B has taken the constructive delivery of A's air-conditioner and thus,
B has become the bailee.
Eg. 2: A servant receives the goods from the master to be delivered to third party. Here servant gets mere
custody of goods, the master retains possession. Hence the servant cannot become a bailee.
3. Return of specific goods: As soon as the purpose is served the goods are to be returned. If the specific
goods are not returned, it is not a bailment.
Eg. 1: When a customer deposits money in a bank account, the banker will be under an obligation to return an
equivalent amount but not the identical money. Hence the relationship is that of debtor and creditor.
4. Movable goods: There can be bailment of only movable) goods. But money is not included in the category
of movable goods. Hence, a deposit of money in a bank is not a bailment.

Types of Bailment

The bailment may be classified on the basis of benefit and reward to the parties as below:
I. On the basis of benefits:
1. Bailment for the exclusive benefit of the bailor: It is a bailment in which the goods are delivered by the
bailor to the bailee only for the exclusive benefit of bailor himself.
Eg.: A, while going out of station, delivered some ornaments to B, his neighbour, for safe custody without any
charges. This is the bailment for the exclusive benefit of the bailor (A).
2. Bailment for the exclusive benefit of the bailee: It is a bailment in which the goods are delivered by the
bailor to the bailee only for the exclusive benefit of bailee.
Eg.: Lending of a scooter to a friend for temporary use without charge.
3. Bailment for the mutual benefit of both bailor and bailee: It is a bailment in which the goods are
delivered by the bailor to the bailee for the mutual benefit of both of them. Eg.: Giving a tape-recorder for
repairs.
II. On the basis of charges:
1. Gratuitous bailment: It is a bailment without any charge or reward. In other words, when the bailor
delivers the goods to the bailee without any charge, it is called a gratuitous bailment.
Eg.: A lent his scooter to his friend B, for two days without any charge. This is a gratuitous bailment.
2. Non-gratuitous bailment: It is a bailment for some charge or reward. In other words, when the bailor
delivers the goods to the bailee for some charge it is called a non-gratuitous bailment.
Eg.: A hired a taxi from B for Rs. 100 per day. This is non-gratuitous bailment.

Duties of the bailee:

1. To take care of goods bailed (Section 151): The bailee should take care of goods entrusted to him.
According to Section 151 he 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 as the goods bailed.
According to Section 152, If in spite of bailee's reasonable care goods are destroyed, the bailee is not liable.

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Eg. 1: Martin v/s London County Council: Miss M was admitted to a hospital. Her jewellery was handed over
to the hospital officials for safe custody. The jewellery was stolen. It was held that hospital officials were
bailees. Since they failed to exercise reasonable care they should make good the loss.
Eg. 2: A entered a restaurant. His coat was taken by waiter who hung it on a hook behind A. When A was
about to leave, the coat was missing. It was ruled that the proprietor of the restaurant was liable for the loss.

2. Not to make any unauthorized use of goods; The bailee is under a duty not to use the goods in a manner
different from the terms of the bailment. If otherwise, there is a breach of good faith, bailor can terminate the
contract.

3. Not to mix bailor's goods with his own goods: It is the duty of the bailee not to mix bailor's goods with his
own goods. He should maintain its separate entity. This duty of the bailee may be explained in the following
three ways -
i. Mixture with bailor's consent: Section 155 of the Contract Act provides that if the bailee mixes the
goods of the bailor with his own goods with the consent of the bailor, the bailor and the bailee shall have an
interest in proportion to their respective shares in the mixture thus produced.
ii. Mixture without bailor's consent, when goods can be separated: Section 156 of the Act lays down
that if the bailee mixes the goods of the bailor with his own goods without the consent of the bailor and the
goods can bo separated or divided, then the bailor and the bailee remain owners of their respective goods.
But the bailee is bound to bear the expenses of separation or division and any damage arising from the
mixture.
Eg.: P bails 200 bags of A.C.C cement to R. Without P's consent, R mixes these bags with his own bags of
Trishul cement. Here, P is entitled to have his 200 bags returned, and R is bound to bear all the expenses
incurred in the separation of the bags and any other incidental damage.
iii Mixture without bailor's consent, when the goods cannot be separated: According to Section 157
of the Contract Act, if the bailee mixes the goods of the bailor with his own goods without the consent of the
bailor in such a manner that it is impossible to separate the goods bailed from the other goods and deliver
them back to the bailor, the bailee is bound to compensate the bailor for the loss of the goods.
Eg.: P bails 50 kgs, of basmati rice to R. Without P's consent, R mixes them with his own rice of lower quality.
Here, R is liable to compensate P for the loss of his 50 kgs, of basmati rice because it cannot be separated
from the other rice.
4. Not to set up an adverse title to the goods: The bailee must hold the goods on behalf of the bailor. He
should not deliver the goods to a person other than the bailor.
5. To return any increase to the goods: The bailee is bound to return any increase accrued from the goods
bailed by the bailor.
Eg. A left a cow in the custody of B. The cow gave birth to calf. B has to deliver the cow and the calf to A.
6. To return the goods: It is the duty of the bailee to return the goods as soon as the purpose is completed. If
he fails to return them, he will be responsible for the loss. (Section 16)
Eg. 1: Shaw and Co. v/s Simmons and sons - A delivered some books to B with certain condition as to return
but B neglected to return them. A fire broke out on the premises of B. The books were destroyed. B was held
liable to bear the loss for his negligence in not returning the books.

Duties of Bailor:
1. Duty to disclose known faults (Section 150): It is the duty of the bailor to disclose known faults. Otherwise
he is responsible for any damage caused to the bailee.
Eg.: A lends a horse to B. The horse was known to be vicious. He does not disclose this fact to B. The horse
runs away. In effect B is injured. Here A is responsible to B for damages sustained (Coughlin v/s Illison).

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2. Duty to bear extraordinary expenses of bailment (Section 158); Where the bailee is to receive
remuneration for his services, it is the duty of the bailor to bear extra-ordinary expenses of bailment. In such a
case, the bailor is however not required to bear the ordinary or usual expenses of bailment.
Eg.: A lends his horse to B for journey at Rs. 200 per day. All the expenses of feeding the horse are normal
expenses and are to be borne by the bailee (B). If the horse is stolen, and the bailee has to bear additional
expenses, such extra-ordinary expenses will have to be borne by the bailor (A).
3. Duties to receive back the goods: The bailee should return the goods to the bailor after the fulfilment of
the purpose. It is the duty of the bailor to receive the goods back. If bailor refuses to receive the goods back,
he should compensate the bailee for the custody of the goods.
Eg.: A delivered his cycle to B, a cycle-stand contractor, for two days. However, A did not take back the cycle
for one month. In this case B, can claim the necessary expenses incurred by him for the safe custody of the
cycle.
4. Duty of indemnifying the bailee (Section 164): Where the title of bailor to the goods is defective and the
bailee suffers a loss, the bailor has to make good the loss.

Rights of Bailee:

1. To claim damages: If the bailor has bailed the goods without disclosing the defects therein and the bailee
has suffered some loss due to such defects, the bailee has a right to claim damages on this account (Section
150).
2. To claim necessary expenses: Where the bailee is not to receive any remuneration for the work done by
him as per the terms of the bailment (i.e. the bailment is gratuitous), the bailee is entitled to recover from the
bailor all necessary expenses incurred by him for the purpose of the bailment (Section 158).
3. Right to be indemnified: If the bailor demands return of goods before the specified time and the loss of
the bailee in such a situation is greater than the benefit actually derived by him from the use of the goods,
then the bailee has a right to be indemnified by the bailor for the excess loss (Section 159).
4. To recover loss due to defective title of the bailor: It is a right of the bailee to recover from the bailor any
loss suffered by him because of the fact that the bailor was not entitled to make the bailment of the goods, or
receive back the goods, or to give directions with regard to them (Section 164).
5. To deliver the goods to any one of the joint bailors: If the goods are owned and bailed by more than one
person, then in the absence of any contract to the contrary, the bailee has a right to deliver back the goods to
any one of the joint bailors without the consent of all (Section 165).
6. To file a suit to decide the title of goods bailed: If a person other than the bailor claims the goods from
the bailee, the bailee may apply to the court to stop the delivery of the goods to the bailor and decide the title
to the goods (Section 167).
7. Right of lien: Where the bailee has rendered any service in respect of goods bailed, he has a right to
retain such goods until he receives the remuneration for the service he has rendered in respect of them
(Sections 170 and 171).
8. Right to sue : A bailee may sue any person who has wrongfully deprived him of the use of possession of
the goods bailed to him or has caused any damage to the goods bailed (Section 180).

Rights of Bailor:

1. Right to claim damages: By implication of Section 151 of the Contract Act, it is an inherent (i.e. natural and
permanent) right of the bailor to claim damages for any loss that might have been caused to the goods bailed,
due to the negligence of the bailee.

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2. Right to terminate the contract: Section 153 of the Contract Act lays down that if the bailee does any act
with regard to the goods bailed, which is inconsistent with the terms and conditions of the bailment, then the
contract of bailment becomes voidable at the option of the bailor. Thus, if the bailee acts contrary to the
terms and conditions of the bailment, i.e. if he disobeys the instruction of the bailor, the bailor is entitled to
terminate (avoid) the contract.
Eg.: X lends his car to Y for his personal use only, for a period of one month for certain fixed charges. Y starts
using the car as a taxi. X can terminate the bailment.
3. Right to claim compensation: The bailor has a right to claim compensation from the bailee in the following
cases: (I) if any damages are done to the goods, because of its unauthorized use by the bailee, or (II) if some
losses or expenses are incurred with regard to the goods bailed, because of unauthorized mixing of the goods
of bailor with his (bailee's) own goods (Sections 154, 156 and 157).
4. Right to demand back at any time the goods lent without charges: According to Section 159 of the
Contract Act, if the bailment is gratuitous (without reward), the bailor has a right to demand the return of
goods at any time he so chooses, even though the goods were bailed for a specified time or purpose.
However, he will have to compensate the bailee for the loss, if any, due to such premature return of goods.
5. Bailor entitled to any increase or profit accrued from the goods bailed: Section 163 of the Contract Act
lays down that in the absence of any contract to the contrary, the bailor is entitled to any increase or profit
which may have accrued to the bailee from the goods bailed.
Eg.: X hands over his car to Y for safe custody for a week. Y uses it as a taxi and earns Rs. 2,000 from such
services, X is entitled to the profit of Rs. 2,000.
6. Rights to file a suit for the enforcement of the duties imposed upon a bailee: There are certain duties,
which a bailee has to discharge. If he neglects them, the bailor can enforce these duties or liabilities by filing a
suit against him.

Pledge
Definition: Section 172 defines pledge as "the bailment of goods as a security for payment of a debt". In case
of pledge the bailor is called the 'pawnor' or 'pledger', bailee is called 'pawnee' or 'pledgee'.
Eg.: A borrows Rs.10,000 from B and keeps her gold necklace as security. The bailment of necklace is a pledge.
Here A is the pawnor and B is the 'Pawnee'.
Similarities between bailment and pledge:
1. Both are created by agreement between the parties.
2. Both involve transfer of possession of goods.
3. Both have movable property as the subject matter.
4. In both the cases the goods are to be returned after the completion of the purpose.

Essential

Rights and duties of the Pawnor and Pawnee:

I. Rights of a pawnee or pledgee':

1. Right to retain (Section 173): The pawnee may retain the goods pledged until the debt is paid. He can
retain the goods for principal amount, interest and even for the other expenses.
2. Right to retain for subsequent advance (Section 174): The goods or property pledged are security only
for the particular debt. It can also be presumed that the right to retain goods extends even to subsequent
advances.
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3. Right to receive extraordinary expenses (Section 175): If any expense is incurred to preserve the goods, it
can be recovered.
4. Other rights (Section 176):
He may file a suit against the pawnor for the recovery of the debt.
• He may retain the goods as security.
• He may sell the goods after giving a notice.
• He may sue for the sale of goods for the realization of money due.
• He may sell the goods pledged after giving a reasonable notice of sale to the pawnor.
• He can recover any deficiency arising on the sale of goods. In case there is any surplus, he has to pay the
same to the pawnor.
II. Rights of a pawnor or pledger:

1. Rights to repay debt (Section 176): Usually a period of time is stipulated for the payment of debt. In case
pawnor defaults he may redeem the goods pledged on a subsequent date but before the actual sale.
2. Preservation and maintenance of the goods: Pawnor can enforce pawnee's duty to preserve the goods
pledged.
3. Rights of an ordinary debtor: Pawnor gets the rights of a debtor under the Money Lender's Act.

III. Duties of a pawnee:

The duties of a pawnee are almost similar to those of a bailee, which have been already discussed in bailment.
However, the following are some of the additional duties of a pawnee.
1. Duty not to use goods pledged: The pawnee should not use the goods pledged by the pawnor. The
reason is that the goods are pledged as a security and not for the use of the pawnee. If the pawnee uses the
goods, he may be held liable for damages for loss caused to the goods by such use.
2. Duty to return the goods: It is the duty of the pawnee to return the goods to the pawnor when the
pawnor has paid the debt.
IV. Duties of a pawnor:
The duties of a pawnor are almost similar to those of a bailor. However, the following are some of the
additional duties of a pawnor:
1. Duty to repay the loan: It is the duty of the pawnor to repay the loan taken from the pawnee. If he fails to
repay the loan, as per the terms of the contract, the pawnee may bring a legal action against him for the
recovery of the same.
2. Duty to pay expenses in case of default: Sometimes, a pawnor may make default in payment of debt at
the stipulated time. However, he may subsequently repay it and take back the goods. In such cases, he must
pay the expenses incurred by the pawnee due to default in repaying the debt at the stipulated time.

Pledge by non-owners:
Generally, the owner can pledge the goods. But in the following cases a non-owner can also pledge the goods.
1. Pledge by mercantile agent (Section 178): Mercantile agent is one who has the authority to buy, sell or
consign goods having the authority of an agent. He must be in possession of the goods. He should have acted
in the ordinary course of business. The pawnee must act in good faith.

2. Pledge by seller or buyer in possession after sale: A seller of goods, who is in possession of goods already
sold, can create a valid pledge, provided the pledgee acts in good faith and has no notice of the previous sale
of goods. The original buyer can obtain damages from the seller but he cannot recover the goods from the
pledgee.

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3. Pledger having limited interest (Section 179): Where a person pledges goods in which he has limited
interest the pledge is valid to that extent.
Eg.: F finds a pen on the road. He spends Rs.100 to repair it. Then he pledges it with P for Rs.260. The real
owner can get the pen by paying Rs.100 to P.
4. Pledge by co-owner: One of the several joint owners with the consent of other co-owners can create a
valid pledge.
5. Pledge by person in possession under a voidable contract (Section 178 A): A person may obtain
possession under a contract which is voidable at the option of the lawful owner on the ground of
misrepresentation, fraud etc.The person in possession may pledge the goods before the other party avoids
the contract.

CONTRACT OF AGENCY
Introduction and meaning:
The law relating to contract of agency is contained in sections 182 to 238 of the Indian Contract Act, 1872. A
person usually employs another person to act on his behalf. The person who acts on behalf of some other
person in known as 'an agent'. The person, on whose behalf the agent acts, is known as 'the principal'. The
contract, which creates such a relationship, is known as 'agency'.
Definitions:
1. The term agency may be defined as the relationship between an agent and his principal created by an
express or implied agreement.
2. An agent is a person employed to do an act for another in dealings with the third person (Section 182).
3. The person for whom such act is done is called 'the principal'.
4. The function of an agent is to bring his principal into contractual relations with third persons.
Eg.: A appoints B to purchase 100 bags of rice on his behalf. In this example A is the principal, B is the agent
and the relationship between A and B is 'agency'.

Essentials of a valid contract of Agency:

1. There should be an agreement between the principal and the agent (Section 184): Agency must be
created by an agreement between the principal and the agent. The agreement may be express or implied.
Agreement made between two agents or two principals cannot be considered as contract of agency. That
means one must be the principal, another must be the agent.
2. The agent must act in the representative capacity: An
agent must represent his principal and act on his behalf. He has the power to bind his principal with third
person. What ever the person can do personally he can do through an agent. Thus an agent can work within
the authority or power delegated.
3. The principal must be competent to contract.
4. The agent need not be competent to contract.
5. The consideration is not necessary (Section 185).
Modes or methods of creation of Agency: Following are the important ways or modes or methods of creation
of agency:
IAgency by express agreement.
II Agency by implied agreement.
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1. Agency by estoppel.
2 Agency by holding out.
3 Agency by necessity.
4. Agency by operation of law.
5. Agency by husband and wife relations
6. Agency by ratification.

Agency by express agreement (Section 187): An express agreement is one, which is made in writing or by
word of mouth. No particular set of words is required to create agency. In case of written agreement, power
of attorney is executed on stamped paper in favour of the agent. It gives authority to the agent to act.
Eg.: A entered into an agreement with B, authorizing him to sell his (A's) home for a particular amount this is
an express agency.
Agency by implied agreement (Section 187): It arises from the conduct, situation or relationship of the
parties. Eg.: A and B are brothers. A lives in Delhi and B in Bangalore. B has a house in Delhi. A without the
knowledge of B lets out the house and collects the rent and sends it to B. B accepts the same. In this example
A is the implied agent of B though he has not been expressly appointed.
Agency by estoppel (Section 237): The term estoppel is defined as a prevention of a claim by law. When a
person by his conduct wilfully leads another person to believe that a certain person is his agent, then he is
estopped from denying the truth of the agency.
Eg.: A in the presence of C, the owner of the goods, informed B that he was appointed by C as an agent to sell
the goods. C listened to the statement of A and remained silent. Subsequently, A sold the goods to B. This sale
is binding on C. He cannot deny A's authority to sell the goods. Mr. C, by remaining silent, has accepted A as
his agent.

Agency by holding out: It is a kind of agency by estoppel. Here there is some prior positive conduct of the
principal. Agency by holding out is based on the doctrine of holding out. Eg.: A allowed his servant B to
purchase goods on credit from C. A used to pay the price. But on one occasion A gave cashto B to purchase
the goods. But B purchased the goods on credit in A's name - A is bound by his prior conduct in holding out
that B was his agent, C can recover the price from A.
Agency by necessity (sections 188 and 189): Sometimes extraordinary circumstances may necessitate a
person to act as an agent without requiring the authority of the principal. Such an agency is called 'Agency by
necessity'. In case of agency by necessity there must be real emergency and agent must not be in a position to
communicate to the principal. The agent must act honestly.
Eg.: A consigned a certain quantity of perishable goods with the railways. Due to strike the goods were
delayed in transit. The railways sold the goods, as it was perishable. Sale was binding on the owner. Here
railways became an agent by necessity.
Agency by operation of law: In certain circumstances the law treats one person as an agent of another.
According to Partnership Act, every partner of the partnership firm is an agent of the firm for the purpose of
the business of the firm. Moreover, he is also an agent of the other partners of the firm. Eg.: A, B and C were
partners in a firm. A purchased some raw material from D on credit for the purpose of the firm. In this case
the firm is bound by the purchases made by A. In this instance A is considered as partner as well as agent of
the firm.
Husband and Wife Relations: A wife, who lives with her husband, has an implied authority of her husband to
buy articles of household necessity. This means that the wife is considered as implied agent of the husband
for the purpose of buying household necessaries on credit, and the husband becomes bound to pay for the
same.
Agency by ratification (Section 169-200): Ratification may be defined, as the confirmation of acts already
done. A persondoes some acts on behalf of another person without his knowledge or authority. The other

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person subsequently confirms the acts done on his behalf. It is known as 'expost facto agency'. It is the
agency arising after the event. When aperson accepts an unauthorized act done on his behalf it is known as
ratification. On ratification the principal is bound bythe acts already done.
Eg. 1: Mr. A purchased goods for P without authority. Afterwards P sells them to X of his own accord. P's
conduct implies a ratification of the purchase made by A.
Eg. 2: A without B's authority lends B's money to X. Afterwards B accepts interest from X. Here B's conduct
implies a ratification of the loan.
Eg. 3: A insured Bs goods without his authority. Subsequently, B confirmed A's act of insuring the goods and
accepted the insurance policy. In this case, the insurance policy is as if A had been authorized by B to insure
the goods. (Williams v/ s North China Insurance Co.)

Duties of an agent:

1 Duty to follow the instructions of the principal (Section 211): If no instructions are given, customs of the
business must be followed.
Eg :Mr. A, a broker sold goods of B on credit to Mr T. In that business goods were sold on cash basis. Mr. T
became
2. Duty to carry out the work with care and skill (Section 212): The standard of reasonable care and skill
depends upon the nature of the business and circumstances or situations. If the principal suffers any loss due
to negligence of the agent, the agent should compensate the principal. The agent is liable only for direct
damage.
Eg.: A was an agent of B. A has the authority to sell the goods on credit. A sold the goods to C on credit. But
before the sale he failed to make enquiries about C's solvency. C became insolvent. Here A must compensate
the principal the loss that occurred due to C's insolvency.
3. Duty to render accounts to the principal (Section 213): It
is the duty of an agent to keep true and correct accounts. If required he should explain the same to the
principal.
4. Duty to communicate with the principal (Section 214): It
is the duty of the agent, in cases of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions.
Eg.: A consigned goods to B his agent at Mumbai and directed him to send the goods immediately to Assam.
On receiving the goods B found that the goods were damaged and could not be sent to Assam. He sold the
goods at Mumbai itself. Here B is justified in selling the goods as he has acted in good faith.
5. Duty not to deal on his own account (Section 215 and 216): Agent must conduct his business of agency
in absolute good faith. There must be mutual trust and confidence. Hence an agent should not deal on his
own account. Eg.: A appointed B to sell his estate. B found a mine on the estate, which was unknown to A. B
bought the estate for himself concealing the fact. A on discovering the fact that B knew of the mine at the
time of sale can cancel the sale.
6. Duty to pay the amount received for the principal (Section 217): An agent should pay to his principal all
money receivedon his behalf. He can deduct reasonable expenses.
Eg.: A appointed B to collect rent from the tenants. B collected Rs.10,000/- by incurring a travelling expense of
Rs.200. Here B is entitled to deduct travelling expenses and his remuneration.
7. Duty not to make secret profits from agency (Section 218):
An agent stands in a fiduciary relation to his principal and therefore, he must not make any profit for himself
from agency business. If he makes any secret profit or takes bribe from a third party in agency business, he

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will have to account for the secret profit to his principal and lose his remuneration or commission or even his
agency.
Eg.: A directed B to sell certain goods. B sold the goods to C and received some secret commission from C in
addition to the normal commission from A. It was ruled that B should hand over the commission received
from C to A.
8. Duty not to set up adverse title: The agent must not set up his own title to the goods received from the
principal. He should not dispute the ownership of the principal.
9. Duty not to use the information received in course of agency against the principal: It is the duty of an
agent to pass on any information received in the course of the agency to his principal and not to use it against
him.
10. Duty to protect and preserve the interest of the principal in case of his death or insolvency (Section
209): When the agency is terminated due to the death or insolvency of the principal, the agent is bound to
protect and preserve the interest of the principal.
11. Duty not to delegate authority (Section 190): It is the duty of an agent not to delegate the work
entrusted or given to him. This rule is based on the principle "Delegatus non-protest delegare" i.e. " a
delegate cannot further delegate."

Rights of an agent:

1. Right to retain money due from the principal (Section 217):

The agent has the right to retain money of the principal till his remuneration and expenses are paid.
2. Right to receive remuneration (Sections 219 and 220): The
agent is entitled to receive his agreed remuneration, or if there is no agreement, a reasonable remuneration.
In the absence of any special contract, the right to claim remuneration arises only when the agent has done
his part of the work under the agency.
3. Right of lien (Section 221): An agent has the right to retain goods, papers and other movable or immovable
property of the principal, received by him until the amount due to him for commission, disbursements and
services in respect of the same has been paid or accounted for to him.
4. Right of indemnification (Section 222): An agent has the right to be indemnified against the consequences
of all lawful acts done by him in exercise of the authority conferred upon him.
5. Right of compensation (Section 225): An agent has a right to be compensated for injuries sustained by him
due to the principal's neglect or want of skill.
6. Right of stoppage in transit: An agent has a right to stop the goods in transit to the principal- (I) if he has
bought the goods with his own money or by incurring a personal liability for the price and (II) if the principal
has become insolvent.

Liabilities of an agent:

Liabilities of an agent arise in the following circumstances:

1. The agent acting for a foreign principal (Section 30):
Where an agent makes a contract for the sale or purchase of goods for a merchant residing in a foreign
country, he is presumed to be personally liable for such transactions.

2.The agent acting for an undisclosed principal (Section 230): Where an agent acts for an undisclosed
principal and contracts in his own name, he is personally liable to the third party, if the undisclosed principal
remains undisclosed.

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3. The agent acts for an incompetent principal and a principal not in existence: Where the agent acts for the
principal not in existence and for incompetent principal, he is held personally liable as in the case of
promoters of a company not yet incorporated.

4. Exceeding authority (Sections 227 and 228): Where the agent exceeds his real and apparent authority and
thus commits a breach of warranty of authority, he will be personally liable to third party, for exceeding his
authority. If the authorized part can be separated from the unauthorized part, he can be held liable only for
the latter. Otherwise, he will be held liable for the whole contract.

5. Pretended agent; Any person who pretends to be an agent is called a pretended agent. He also invites
liability like any other agent.

6. Express agreement to incur personal liability: Where an agent, while contracting with a third party,
expressly agrees to be personally liable on the contract, he can be held personally liable in case of breach of
such contract.

7.Agent having an interest in the subject matter: Where an agent has an interest in the subject matter of the
contract entered into with a third party, he is personally liable to the extent of his interest.

8. Agent receives money by mistake or fraud: Where the agent receives from a third person to him any
money by mistake or fraud, he is personally liable to the third person.

9. Customs or usage: An agent may be held personally liable if there is some trade usage or custom, provided
there is no contract to the contrary.

CHAPTER -6.

INFORMATION TECHNOLOGY ACT

INFORMATION TECHNOLOGY ACT, 2000

Introduction: New communication systems and digital technology have made dramatic changes in the ways of
transacting business. Use of computers to create, transmit and store information is increasing Computer has
many advantages in e-commerce. It is difficult to shift business from paper to electronic form due to two legal
hurdles
(a) Requirements as to writing and (b) Signature for legal recognition. Many legal provisions assume paper-
based records and documents and signature on paper.

Objectives of the law:

 To grant legal recognition to electronic records.
 To grant legal recognition to Digital Signature for authentication of the information or matters
requiring authentication under any law of the country.
 To permit retention of information, documents and records in electronic form where any law requires
such retention for a specific period.
 To foster use and acceptance of electronic records and digital signatures in Government offices and its
agencies.

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 To prevent the possible misuse arising out of transaction and other dealings concluded over the
electronic medium.
 To prevent and punish offenders as well as to deter abuse of Information technology.
 To deal with civil and criminal liabilities arising out of contravention of the provisions of the law.
 To provide necessary changes in various provisions, which deal with offences relating to documents
and paper-based transactions.
 To facilitate electronic fund transfers between banks and financial institutions.
 To give legal sanctity for books of account maintained in electronic form by the banks.

DIGITAL SIGNATURE: A paper-based document becomes legally valid or authenticate when it is signed by the
executor/originator. Similarly, an electronic record can be authenticated by affixing the
Digital signature of the originator. Digital Signature has been defined section 2(1 )(p) of the Act and it means
authentication of any electronic record by a subscriber by means of an electronic method or procedure in
accordance the provisions of section 3. The object of the Act is to recognize transactions carried out by means
of Electronic data Interchange and other means of Electronic Communications as an alternative to paper-
based methods. It also provides for storage of information and method of authentication of documents.
Section 4 of the Act confers legal recognition to the electronic records, which are authenticated by Digital
Signature. It states that where any law re or provides that information or document should be authenticated
by affixing the signature of any person; the said requirement is if such information or document is made
available in electronic form and accessible for future use.

Secure Digital Signature (Sec 15): Digital Signature is deemed to be a Secure Digital Signature if by application
of a security procedure agreed by parties concerned that the signature is capable of being verified and at the
time when it was fixed was
a. Unique to the subscriber affixing it.
b. Capable of identifying such subscriber.
c. Created in a manner or using a means under the exclusive i of the subscriber and is linked to the
electronic record to relates in such a manner that if the electronic record was altered digital signature would
be invalidated.

Security Procedure (Sec 16): The Central Government will scribe security procedure after considering the
following commercial circumstances prevailing at time of procedure is used.
a. The nature of transaction.
b. The level of sophistication of parties with reference to their technological capacity.
c. The volume of similar transactions engaged in by other parties
d. The availability of alternatives offered to but rejected by any party.
e. The cost of alternative procedure.
f. The procedures in general use for similar types of transmission or communications.

Issue of Digital Signature Certificate (Sec 35): Any person subscriber can make an application to the Certifying
Authority in the prescribed form for issue of Digital Signature Certificate. The application should be
accompanied by fees not exceeding Rs. 25000/- and a certificate of practice statement or a statement
containing such particulars specified in the regulation. The certifying authority can grant digital signature
certificate after satisfaction of following conditions:-
 The applicant holds the private key corresponding to the public key to be listed in the Digital Signature
Certificate.
 The applicant holds a private key, which is capable of creating a Digital Signature.

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 The public key to be listed in the certificate can be used to verify a digital signature affixed by the
private key held by the applicant.
He can also reject the application after recording reasons in writing giving an opportunity to show cause
against the proposed rejection.

SIGNIFICANCE OF IT LAWS
The IT Act 2000 attempts to change outdated laws and provides ways to deal with cyber crimes. We need such
laws so that people can perform purchase transactions over the Net through credit cards without fear of
misuse. The Act offers the much-needed legal framework so that information is not denied legal effect,
validity or enforceability, solely on the ground that it is in the form of electronic records. In view of the growth
in transactions and communications carried out through electronic records, the Act seeks to empower
government departments to accept filing creating and retention of official documents in the digital format.
The Act as also proposed a legal framework for the authentication and origin of electronic records /
communications through digital signature.
 From the perspective of e-commerce in India, the IT Act 2000 and its provisions contain many positive
aspects. Firstly, the implications of these provisions for the e-businesses would be that email would
now be a valid and legal form of communication in our country that can be duly produced and
approved in a court of law.
 Companies shall now be able to carry out electronic commerce using the legal infrastructure provided
by the Act.
 Digital signatures have been given legal validity and sanction in the Act.
 The Act throws open the doors for the entry of corporate companies in the business of being Certifying
Authorities for issuing Digital Signatures Certificates.
 The Act now allows Government to issue notification on the web thus heralding e-governance.
 The Act enables the companies to file any form, application or any other document with any office,
authority, body or agency owned or controlled by the appropriate Government in electronic form by
means of such electronic form as may be prescribed by the appropriate Government.
 The IT Act also addresses the important issues of security, which are so critical to the success of
electronic transactions. The Act has given a legal definition to the concept of secure digital signatures
that would be required to have been passed through a system of a security procedure, as stipulated by
the Government at a later date.
 Under the IT Act, 2000, it shall now be possible for corporate to have a statutory remedy in case if
anyone breaks into their computer systems or network and causes damages or copies data. The
remedy provided by the act in the form of monetary damages, not exceeding rs.1 crore.

Cyber crimes
Definition of cyber crime: Cyber crime refers to all the activities one with criminal intent in cyberspace or
using the medium of Internet. These could be either the criminal activities in the conventional sense or
activities, newly evolved with the growth of the new medium. Any activity, which basically offends human
sensibilities, can be included in the ambit of Cyber crimes.
Because of the anonymous nature of Internet, it is possible to engage in a variety of criminal activities with
impunity, and people with intelligence, have been grossly misusing this aspect of the Internet to commit
criminal activities in cyberspace. The field of Cyber crime is just emerging and new forms of criminal activities
in cyberspace are coming to the forefront each day. For example, child pornography on internet constitutes
one serious cyber crime. Similarly, online pedophiles, using Internet to induce minor children into sex, are as
much cyber crimes as any others.

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It may be,
 Against persons
 Against Property
 Against Government

VARIOUS MAIN FORMS OF CYBER CRIME

1) Fraud
Computer fraud is any dishonest misrepresentation of fact intended to let another to do or refrain from doing
something which causes loss. In this context, the fraud will result in obtaining a benefit by:
 Altering computer input in an unauthorized way. This requires little technical expertise and is not an
uncommon form of theft by employees altering the data before entry or entering false data or by
entering unauthorized instructions or using unauthorized processes;
 Altering, destroying, suppressing, or stealing output, usually to conceal unauthorized transactions: this
is difficult to detect;
 Altering or deleting stored data;
 Altering or misusing existing system tools or software packages, or altering or writing code for
fraudulent purposes. This requires real programming skills and is not common.
Other forms of fraud may be facilitated using computer systems, including bank fraud, identity theft,
extortion, and theft of classified information. A variety of Internet scams target consumers directly.

2) Obscene or offensive content

The content of websites and other electronic communications may BE distasteful, obscene or offensive for a
variety of reasons. In some instances these communications may be illegal.
Many jurisdictions place limits on certain speech and ban racist, blasphemous, politically subversive, libelous
or slanderous, seditious, or inflammatory material that tends to incite hate crimes. The extent to which these
communications are unlawful varies greatly between countries, and even within nations. It is a sensitive area
in which the courts can become involved in arbitrating between groups with entrenched beliefs. One area Of
internet pornography that has been the target of the strongest efforts curtailment is child pornography.

3) Harassment
Whereas content may be offensive in a non-specific way, harassment directs obscenities and derogatory
comments at specific individuals focusing for example on gender, race, religion, nationality, sexual orientation.
This often occurs in chat rooms, through newsgroups, and sending hate e-mail to interested parties (see cyber
bullying, cyber stalking, and harassment by computer, hate crime, online predator, and stalking). Any
comment that may be found derogatory or offensive is considered harassment.

4) Drug trafficking
Drug traffickers are increasingly taking advantage of the Internet to sell their illegal substances through
encrypted e-mail and other internet technology. Some drug traffickers arrange deals at internet cafes, use
courier Web sites to track illegal packages of pills, and swap recipes for amphetamines in restricted-access
chat rooms. The rise in trades could also be attributed to the lack of face-to-face communication. These virtual
exchanges allow more intimidated individuals comfortably purchase illegal drugs. The sketchy effects that are
often associated with drug trades are severely minimized and the process that comes with physical interaction
fades away. Furthermore, traditional drug recipes were carefully kept secrets. But with modern computer
technology, this information is now being made available anyone with computer access.

5) Cyber terrorism
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Government officials and Information Technology security specialist have documented a significant increase in
Internet problems and scans since early 2001. But there is a growing concern among officials that such
intrusions are part of organized effort t terrorists, foreign intelligence services, or other groups to map
potential security holes in critical systems. A cyber terrorist is someone who intimidates or coerces a
government or organization to advance her political or social objectives by launching computer-based attack
against computers, network, and the information stored on them terrorism in general, can be defined as an
act of terrorism com through the use of cyberspace or computer resources (Parker 1983) As such, a simple
propaganda in the Internet, that there will be bomb attacks during the holidays can be considered cyber
terrorism. At worst, cyber terrorists may use the Internet or computer resources to carry an actual attack. As
well there are also hacking activities directed towards individuals, families, organized by groups within
networks, tending cause fear among people, demonstrate power, collecting information relevant for ruining
people's lives, robberies, blackmailing etc.
6) Email bombing
Email bombing refers to sending a large amount of emails to the victim resulting in the victim's email account
(in case of an individual) or mail server (in case of a company or an email service provider) crashing.
7) Data diddling
This kind of an attack involves altering the raw data just before it processed by a computer and then changing
it back after the processing is completed.

Offences / Cyber Crimes recognized under the Act

Legal recognition granted to Electronics Records and Digital Signatures would certainly boost E – Commerce in
the country. It will help conclusion of contracts and creation of rights and obligations through electronic
medium. In order to guard against the misuse and fraudulent activities over the electronic medium, punitive
measures are provided in the Act. The Act has recognized certain offences, which are punishable. They are: -

1) Tampering with computer source documents (Sec 65)

Any person knowingly or intentionally conceals, destroys or alters or intentionally or knowingly causes
another person to conceal, destroy or alter any -
a) Computer source code when the computer source code is required to be kept by law for the time being in
force,
b) Computer programme,
c) Computer system and
d) Computer network.
is punishable with imprisonment up to three years, or with fine which may extend up to two lakh rupees or
with both.
2) Hacking with computer system (Sec 66):
Hacking with computer system is a punishable offence under the Act. It means any person intentionally or
knowingly causes wrongful loss or damage to the public or destroys or deletes or alters any information
residing in the computer resources or diminishes its value or utility or affects it injuriously by any means,
commits hacking. Such offences will be punished with three years imprisonment or with fine of two lakh
rupees or both.
3) Publishing of information which is obscene in electronic form(Sec 67):
Whoever publishes or transmits or causes to be published in the electronic form, any material which is
lascivious or appeals to prurient interest or if its effect is such as to tend to deprave and corrupt persons who
are likely, having regard to all relevant circumstances to read, see or hear the matter contained or embodied
in it shall be punished on first conviction with imprisonment for a term extending upto 5 years and with fine
which may extend to one lakh rupees. In case of second and subsequent conviction imprisonment may extend
to ten years and also with fine which may extend up to two lakh rupees.
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4) Failure to comply with orders of the controller by a Certifying Authority or any employee of such
authority (Sec 68):
Failure to comply with orders of the Controller by any Certifying Authority or by any employees of Certifying
Authority is a punishable offence. Such persons are liable to imprisonment for a term not exceed ing three
years or to a fine not exceeding two lakh rupees or to both.
5) Fails to assist any agency of the Government to decrypt the information (Sec 69):
If any subscriber or any person-in-charge of the computer fails to assist or to extend any facilities and
technical assistance to any Government agency to decrypt the information on the orders of the Controller in
the interest of the sovereignty and integrity of India etc. is a punishable offence under the Act. Such persons
are liable for imprisonment for a term, which may extend to seven years.
6) Unauthorized access to a protected system (Sec 70):
Any person who secures access or attempts to secure access to a protected system in contravention of the
provisions is punishable with imprisonment for a term which may extend to ten years and also able to fine.
7) Misrepresentation before authorities (Sec 71):
Any person who obtains Digital Signature Certificate by misrepresentation or suppressing any material fact
from the Controller or Certifying Authority as the case may be punished with imprisonment for a term which
may extend two years or with fine up to one lakh rupee or with both.
8) Breach of Confidentiality and privacy (Sec 72):
Any person in pursuant of the powers conferred under the act, unauthorisedly secures access, to any
electronic record, books, register, correspondence, information, document or other material without the
consent of the person concerned discloses such materials to any other person shall be punished with
imprisonment for a term which may extend to two years, or with fine up to one lakh rupees or with both.
9) Publishing false particulars in Digital Signature certificate (sec73)
No person can publish a Digital Signature Certificate or otherwise make it available to any other person with
the knowledge that :
 the Certifying Authority listed in the certificate has not issued it or
 the subscriber listed in the certificate has not accepted it or
 the certificate has been revoked or suspended unless such publication is for the purpose of verifying a
digital signature created prior to such suspension or revocation. Any person who contravenes the
provisions shall be punishable with imprisonment for a term, which may extend to two years or with
fine up to rupees 1 lakh or with both.

10) Publication of Digital Signature Certificate for fraudulent purpose (Sec 74):
Any person knowingly creates, publishes or otherwise makes available a Digital Signature Certificate for any
fraudulent or unlawful purpose shall be punished with imprisonment for a term which may extend to two
years or with fine up to one lakh rupees or with both.
INTELLECTUAL PROPERTY RIGHTS
Meaning:
It is defined as "creations of mind; inventions, literary artistic works, and symbols, names, images, and designs
used in commerce".
Patents, designs, copyrights and trademark are industrial property as they are used in some form of industry
or business. They are also termed 'intellectual property' since they are the products of pure intellectual effort.
Attempts have been made from time to time to expand the boundaries of Intellectual property and to convert
a protective law into a source of monopoly.

Different types of Intellectual Property Rights. (12 marks)

The Intellectual property regime protects the innovation/creation in the following forms:
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1) Patent:
PATENTS ACT, 1970
Patents Act, 1970 is designed to protect inventions in respect of manufacture, machine or process of
manufacture. On the other hand, the Copyright Act, 1957 is to protect rights of artists, authors, producers of
films, computer software owners etc. Patent is an exclusive right granted to the patent holder, for a limited
period, as a reward for creative work based on his private initiative. 'Creativity' is accorded the status of
'property', which can be bought, sold, licenced or hired like any other commodity. The principle behind patent
protection is that creativity will not get encouragement if it cannot be protected from pirating or copying.

Meaning of Patent:
What is a Patent - Section 2(1 )(m) merely states 'Patent' means a patent granted under this Act'. Thus, word
'patent' is not defined under the Act, though what can be patented and what cannot be, has been specified. - -
A patent, generally speaking, is a grant from Government which confers on the grantee for a limited period of
time the exclusive privilege of making, selling and using the invention for which the patent has been granted
and also of authorizing others to do so.
Thus, Patent, under the Act, is a grant from the Government to the inventor for a limited period of time, the
exclusive right to make use, exercise and vend his invention. After the expiry of the duration of patent,
anybody can make use of the invention.
Meaning of an Invention.
Invention means a new product or process involving an inventive step and capable of industrial application
[Section 2(1 )(j)]. - - 'Inventive step' means a feature that makes the invention not obvious to a person skilled
in that art [Section 2(1 )(ja). 'Capable of industrial application', in relation to invention, means that the
invention is capable of being made or used in an industry [Section 2(1)(ac)].
Thus, Invention means any new and useful:
a. art, process, method or manner of manufacture
b. machine, apparatus or other article
c. substance produced by manufacture
The purpose of the patent:
The purpose of the patent system is:
1. To encourage research and promote the inventive genius;
2. To secure for inventor's awards for inventing useful invention.
3. To give protection to inventors by conferring them a monopoly in commercially exploiting their inventions;
4. To induce industries to undertake research and development:
5. To maintain a flow of inventions, one invention leading to another.
6. To increase both qualitatively and quantitatively the production potential in the country by creating new
processes and new methods in production of goods and services;
7. To aid the industrial growth of the country and improve the quality of life.

What can be patented: Requirements of patent are: (a) The subject matter should be new. This is test of
'novelty', (b) It should be useful. This is test of 'utility', (c) It should be an 'invention'. It should be non-obvious,
(d) It should be a manner of manufacture,i.e, it should be capable of industrial application, (e) 'Vendibility' test
(i.e,test of marketability) is important - the subject matter should have commercial purpose. Any invention
which satisfies the definition of the ‘invention' given in the Act may be patented.
Life of Patent: Subject to the payment of prescribed renewal fee within the prescribed period, the term of
every patent granted under the Act is 14 years from the date of filing the application for patent [Section
53(1)]. [The period was 5 or 7 years for process of manufacture of food/medicine/drug and 14 years in other
cases, prior to Amendment Act, 2002].
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Rights of a patentee: Patentee has following rights (a) where the patent is for a product, the exclusive right to
prevent third parties, who do not have his consent, from the act of making, using, offering or sale, selling or
importing for those purposes that product in India
(b) where the subject matter of patent is a process, the exclusive right to prevent third parties, who do not
have his consent, from the act of using that process, and from the act of using, offering for sale, selling or
importing for those purposes the product directly obtained from that process, in India. However, that product
should not be such that no patent can be granted for that product in India [Section 48].

Infringement of Patent: Patentee and his agents and licensees have exclusive rights to make, use, exercise or
distribute the invention in India under section 48. Infringement means violating the statutory rights of
patentee. Innocent infringement, i.e. infringement without knowledge that a patent exists, does not require
payment of damage and a share of profit (section 111). Suit for infringement can be filled only in District Court
(section 104). The reliefs that can be claimed are (a) damages and a share of profit to patentee, (b) Injunction
on infringee on the terms the Court may deem fit [section 108(1)]. COURT can also order that the infringing
goods shall be seized, forfeited or destroyed, as the Court deems fit.

2) Copy rights: the object of copyright law is to encourage authors, composer, artists and designers to
create original works by rewarding them with the exclusive right for a limited period to exploit the
work for monetary gain. It protects the writer or creator of the original work from the unauthorized
reproduction or exploitation of his materials.
Copyright is only in expression of an idea. There is no copyright in an idea. Copyright protects skill,
labour and capital employed by the author. Its object is to protect the writer and author from the
unlawful reproduction, plagiarism, piracy, copying and imitation. Copyright subsists only in material
form in which the ideas are expressed. Works protected by copyright are:
a) Original, literacy, dramatic, musical, and artistic works.
b) Cinematographic film
c) Records
3) Industrial designs: sec 2 (d) of the Designs Act defines that ‘design’ means only the features of shape,
configuration, pattern, ornament or composition of lines and colours applied to any article whether in
two dimensional or three dimensional or in both forms, by any industrial process or means, whether
manual, mechanical or chemicals, separate or combined, which in the finished article appeal to and
are judged solely by the eye; but does not include any mode or principle of construction of anything
which is in substance a mere mechanical device.
Essentials of designs:
 It must be applied to an article.
 The design should be new ad original.
 The designs should not have previously been published or used in any country before the date
of applications for registration.
 The novelty may reside in the application of a known shape or pattern to new subject matter.
 A design must have eye appeal.
4) Trademarks: A ‘trade mark’ is a very important and valuable asset of a company in a market oriented
economy. The act is designed to protect this valuable property. Customers identify a product by its
trademark. Value and importance of trade mark increases as business grows.
a trademark is a mark used in relation to goods for the purpose of indicating a connection between the
goods and some person having the right as proprietor to use the mark. It is a visual symbol in the form
of a word, device or s label applied to articles of commerce with a view to indicate to the purchasing
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public that they are goods manufactured or otherwise dealt in by a particulars person or a particular
organization as distinguished from similar goods manufactured or dealt in by others.
Functions of a trade mark:
 It identifies the product and its origin.
 It proposes to guarantee its quality.
 It advertises the product. The trade mark represents the product.
 It creates an image of the product in the minds of the public particularly the consumers or the
prospective consumers of such goods.
5) Trade Secrets: Trade secrets are transferable technical information, which are not generally known and not
patented. These include ideas, concepts, inventions, manufacturing processes and other confidential
information. Trade secret is any valuable commercial information that provides a business with an advantage
over competitors who do not have that information.
A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information used
by a business to obtain an advantage over competitors or customers. In some jurisdictions, such secrets are
referred to as "confidential information."
In general terms trade secrets include inventions, ideas, or compilations of data that are used by a business to
make itself more successful. Specifically, trade secrets include any useful formula, plan, pattern, process,
program, tool, technique, mechanism, compound, device that is not generally known or readily ascertainable
by the public. Whatever type of information is represented by a trade secret, business must take reasonable
steps to safeguard it from disclosure.
6) Geographical Indications: It is defined as an indication used to identify the goods whether natural or
manufactured goods emanating from a particular areas or territory known for particular quality or
characteristics of the goods. Such geographical name, if used by a person in relation to originating from
entirely different places, is likely to cause confusion or deception. Examples of geographical indications are:
Basamati Rice, Banaras Silk, Kanchipuram Silk, Dharwad Pedas, Hyderbad Biriyani, Dargeling Tea, etc.,
7) Traditional Knowledge: The term "traditional Knowledge “is too broad to provide a precise definition. It
may, however, be explained to include the tradition-based or customary expression of individuals or groups of
their intellectual capacity manifested in the form of their social or cultural identify. This knowledge includes
medicine, healthcare practice, education and training of and youth, traditional skills leading to economics
pursuits, and environment, traditional crafts etc.,
8) Plant variety rights: Plant breeders' rights, also known as plant variety rights (PVR), are intellectual
property rights granted to breeder of a new variety of plant. These laws typically grant plant breeder control
of the propagation material (including cuttings, divisions, tissue culture) and harvested material (cut flowers,
fruit, foliage) of a new variety and the right to collect royalties for a number of years. This can provide income
for the breeder to cover the costs of research and development. The purchase protected varieties gives
farmers the benefits of superior varieties. In return, farmers are expected to pay a small royalty, included the
purchase price, and not to sell the seed that they produce. Farmers may store the production in their own
bins for their use as seed, but further sales for propagation purposes are allowed without the written approval
of the breeder. Violations of Plant Breeders' Rights can result in litigation and court ordered restitution to the
breeder.

RIGHT TO INFORMATION ACT, 2005

INTRODUCTION

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Right to Information Act, 2005 is a landmark for good governence and helps the common citizens especially
the poor and underprivileged to get their dues from government. However, this will depend upon the
implementation of the Act in letter and spirit. The original root of the word "information" is the Latin word
informare, which means to fashion, shape, or create, to give form to. Information is an idea that has been
given form, such as the spoken or written word. Right to is a part of fundamental rights of an Indian citizen
under Article Constitution. Article 19(1) state that every citizen has freedom of speech and expression. Until
1976, the Supreme Court ruled that people cannot express themselves unless they know. India is a democratic
country where people are the masters and have the right to know the method of functioning of the
Government of India, which is meant to serve them. The main aim of this Act is to eradicate the existing
practice of concealing facts and events and to empower every citizen to exercise their legal right in obtaining
information under the RTI Act, 2005.

"Information" means any material in any form, including records-documents, memos, e-mails, opinions,
advices, press releases, circulars orders, logbooks, contracts, reports, papers, samples, models, dale material
held in any electronic form and information relating to any private body which can be accessed by a pubic
authority under any other law for the time being in force.

Right to Information
Right to Information is a part of fundamental rights under Article 19(1) of the Constitution. As per (section 2(j)
of the Act "Right to information* means the right to information accessible under this Act, which is held by or
under the control of any public authority and includes the right to-
(i) Inspection of work, documents, records.
(ii) Taking notes, extracts, or certified copies of documents or records.
(iii) Taking certified samples of material.
(iv) Obtaining information in the form of diskettes, floppies, tapes, video cassettes or in any other electronic
mode or through printouts where such information is stored in a computer or in any other device.

The Need for the Right to Information

In recent years, there has been an almost unstoppable global trend towards recognition of the right to
information by countries, intergovernmental organizations, civil society and the people. The right to
information has been recognized as a fundamental human right, which upholds the inherent dignity of all
human beings. The right to information forms the crucial underpinning of participatory democracy- it is
essential to ensure accountability and good governance.
The greater the access of the citizen to information, the greater the responsiveness of government to
community needs. Alternatively, the greater the restrictions that are placed on access, the grater the feelings
of 'powerlessness' and 'alienation'. Without information, people cannot adequately exercise their rights as
citizens or make informed choices.
However, the free flow of information remains severely restricted by three factors:
 The legislative framework includes several pieces of restrictive legislation, such as the Official Secrets
Act, 1923.
 The pervasive culture of secrecy and arrogance within the bureaucracy and
 The low levels of literacy and rights awareness amongst India's people.
The ideal objectives of the RTI Act are to promote transparency and accountability the working of public
authority and to set up a practical regime for giving citizens access to information under the control of public
authorities.
RTI Act, 2005, was implemented in our country on 15 June 2005 and became operational on 12 October 2005.
The Act extends to the whole of India except the State of Jammu and Kashmir.

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Rights under RTI Act, 2005

Right to information Act, 2005, empowers every citizen to:
 Pose any question to the Government or seek any information
 Obtain copies of any Government documents
 Inspect any Government's documents
 Inspect any Government's work
 Take samples of materials of any Government work.

Coverage of the Act: The RTI Act covers:

 All levels of the Government - Centre, State, District and Local Self Governing Bodies like Panchayat
and Municipal bodies.
 NGOs that are financed substantially with public funds provided by Government.

Every citizen of India is empowered to seek information from pubic authority. As the purpose of this Act is to
evolve an interface between pubic authority and citizen, the information must be shared for the interest of
public. Since the Act imposes liability on public authority, it should not be misinterpreted; rather it makes the
administration more responsive and removes sloth. The maximum possible information must be disclose-
voluntarily. For this, openness and change of attitude is required.

Main Features of Right to Information Act

The Right to Information Act is a codification of this important right of Citizens. The right existed since the
time India became a republic, but was difficult to enforce without going to Court. The Act and its rules include
the following:
 Define a format for requisitioning information.
 A time period within which information must be provided, namely 30 days.
 Method of giving the information.
 Some charges for applying. The principle is that charges should be minimum, - more as a token. They
are not representative of the costs, which may be incurred.
 Some exemptions of information, which will not be given.
 Citizens can ask for information by getting Xerox copies of documents, permissions, policies, and
decisions.
 Inspection of files can also be done and samples can be asked for.
 All administrative offices of public authorities have to appoint 'Public Information Officers (PIO)'.
 Citizens apply for information to the Public Information Officer of the concerned office.
 If information is not provided or wrongly refused, the Citizen can go in appeal to an Appellate
Authority who would be an official in the same department, senior to the PIO. The Appellate authority
has to give a decision in 30 days.
 If this too does not give a satisfactory result, one can appeal to the State or Central Information
Commissioner, which is an independent Constitutional Authority, established under the Act.
 The Act provides for a penalty for delay on the PIO at a rate of Rs. 250 per day of delay, or for malafide
denial of information. In case of information being delayed, no charges for information are to be paid.
 Information can be demanded from all Public authorities, i.e. All Govt, bodies and organizations
substantially financed by the Government including NGOs. Each State has the right to frame its rules in
terms of fees, procedures and forms, which have to be in consonance with the Act.
 Thus RTI provides for a time bound and defined process for Citizens to access information about all
actions taken by Public authorities.

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 The penal provisions on the PIO are the real teeth of the Act, which ensure that the PIO cannot treat
Citizen's demands for information in a cavalier manner.

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