JIGL-16-Chapter-Indian Contract Act 1872

INDIAN CONTRACT ACT,1872 - JIGL- CS EXECUTIVE
Chapter-16 THIS NOTES IS ONLY FOR REFERENCE AND YOU SHOULD STUDY BOOK
Indian Contract Act, 1872 - Lesson 16

The Law of Contract does not only extend to business contracts, rather it even applies to day-to-day personal
dealings.
Example:
 When you order food at a restaurant, you enter into a contract.

 When you take a metro or a bus to reach your class, you enter into a contract.
 When you visit a salon for haircut, you enter into a contract.
The Law of Contract is governed by Indian Contract Act, 1872.
The Act came into force on 1st September, 1872 and extends to the whole of India.
The Act can be divided into two parts
First Part:
Sections 1-75 deals with the general principles of the law of contract, and therefore applies to all contracts
irrespective of their nature.
Second Part:
Sections 124-238 deals with certain special kinds of contracts, namely contracts of Indemnity and Guarantee,
Bailment, Pledge, and Agency.
It is to be noted that the Part which deals with Sections 76 to 123 relates to sales contract and has been repealed
and converted into a separate Act called Sales of Goods Act, 1930.
The Indian Contract Act has defined contract in Section 2(h) as “an agreement enforceable by law”.
A contract therefore, is a combination of the two elements: (1) an agreement and (2) an obligation.
Example: A orally agreed to supply goods to B and to receive payment against it. Is it an agreement?
Yes, it is an oral agreement.
Contract Agreement / Promise / Proposal

An Agreement enforceable by law is a Contract.
In other words, only those agreements which can be enforced by law becomes a Contract. Therefore, a contract
must have the following two elements: -
Contract = An agreement + Enforceability by law.
Now, the next question is what is an agreement?

Agreement [Section 2(e)]
Every promise and every set of promises, forming the consideration for each other, is an Agreement.
Agreement =
 Plurality of persons (There must be two or more persons to make an agreement because one person cannot
enter into an agreement with himself)
Consensus ad idem (The meeting of the minds is called consensus- ad-idem. It means both the parties to an
agreement must agree about the subject matter of the same sense and at the same time)
Now the next question is what is a promise?

Promises [Section 2 (b)]
When the person to whom a proposal is made, signifies his assent thereto, the proposal is said to be accepted.
In simple words, when a proposal is accepted, it becomes a promise.
Promise = Proposal + Acceptance
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Next we need to understand what is a proposal?

Proposal offer [Section 2 (a)]
A person is said to make a Proposal when he signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or abstinence.
Example: Mr. Ram offers to sell his car for Rs.5 Lakhs to Mr. Shyam. Mr. Shyam accepts this offer. This offer after
acceptance becomes promise and this promise is treated as an agreement between Mr. Ram & Mr. Shyam.
In simple words, agreement consists of an offer by one party and its acceptance by the other.
Difference between Contract & Agreement

Basis Agreements Contracts
Formation (Offer + Acceptance) (Agreement + Enforceability)
Legal obligation An agreement may or may not A contract creates legal
create a legal obligation obligation on both parties
One in other every agreement need not be a every contract is an agreement
contract
Binding Agreement is not binding Contract is binding on the parties
Scope its scope is wide its scope is narrow
Obligation
An obligation is the legal duty to do or abstain from doing what one has promised to do or abstain from doing. A
contractual obligation arises from a bargain between the parties to the agreement who are called the promisor and
the promisee. Section 2(b) says that when the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted; and a proposal when accepted becomes a promise. In broad sense, therefore, a
contract is an exchange of promises by two or more persons, resulting in an obligation to do or abstain from doing a
particular act, where such obligation is recognised and enforced by law.
Rights and Obligations

Where parties have made a binding contract, they have created rights and obligations between themselves. The
contractual rights and obligations are correlative, e.g., A agrees with B to sell his car for Rs. 10,000 to him. In this
example, the following rights and obligations have been created:
A is under an obligation to deliver the car to B. B has a corresponding right to receive the car.
B is under an obligation to pay Rs. 10,00,000 to A. A has a correlative right to receive Rs. 10,00,000.
Enforceable by law
Enforceable by law means there should be some legal obligation attached to the Agreement.
In simple words the parties are bound to perform the obligations between them and in case of default by one party
other party can sue the first party. Where parties have made a binding contract, they have created rights and
obligations between themselves.
Agreements which are not Contracts (not enforceable by law):

Agreements in which the idea of bargain is absent and there is no intention to create legal relations are not
contracts.
These are: Agreements relating to social matters and Domestic arrangements between husband and wife.
 Agreements relating to social matters: An agreement between two persons to go together to the cinema, or
for a walk, does not create a legal obligation on their part to abide by it. Similarly, if I promise to take you for
a dinner and break that promise, I do not expect to be liable to legal penalties. There cannot be any offer and
acceptance to hospitality.
Another Example: if two persons agree to assist each other by rendering advice, in the pursuit of virtue, science or
art, it cannot be regarded as a contract.
 Domestic arrangements between husband and wife: In Balfour v. Balfour (1919) 2 KB 571, a husband working
in Ceylone, had agreed in writing to pay a housekeeping allowance to his wife living in England. On receiving
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information that she was unfaithful to him; he stopped the allowance. Held, he was entitled to do so. This was
a mere domestic arrangement with no intention to create legally binding relations. Therefore, there was no
contract.
Intention to Create Legal Relations

Intention to Create Legal Relations is an essential element of a valid contract is that there must be an intention among
the parties that the agreement should be attached by legal consequences and create legal obligations. If there is no
such intention on the part of the parties, there is no contract between them.
For example, in commercial and business agreements, the presumption is usually that the parties intended to create
legal relations. But this presumption is rebuttable (Subject to change) which means that it must be shown that the
parties did not intend to be legally bound.
Other Important Types of Contracts

Contingent Contract (section 31)
As per Section 31, a contingent contract is a contract to do or not to do something, if some event collateral to such
contract, does or does not happen.
For example, A contracts to sell B 10 bales of cotton for Rs. 20,000, if the ship by which they are coming returns safely.
This is a contingent contract.
Contract of insurance and contracts of indemnity and guarantee are popular instances of contingent contracts.
Rules regarding contingent contracts

The following rules are contained in Section 32-36:
1. Contracts contingent upon the happening of a future uncertain event cannot be enforced by law unless and
until that event has happened. If the event becomes impossible, the contract becomes void - Section 32.
 A makes a contract to buy B’s house if A survives C. This contract cannot be enforced by law unless and until
C dies in A’s lifetime.
 A contract to pay B a sum of money when B marries C, C dies without being married to B. The contract
becomes void.
2. Contracts contingent upon the non-happening of an uncertain future event can be enforced when the
happening of that event becomes impossible and not before - Section 33.
 A contract to pay B a certain sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.
3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it impossible that he should so act within
any definite time or otherwise than under further contingencies - Section 34.
4. Contracts contingent on the happening of an event within a fixed time become void if, at the expiration of the
time, such event has not happened, or if, before the time fixed, such event becomes impossible - Section 35.
Contracts contingent upon the non-happening of an event 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 - Section 35.
5. 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-
Section 36.
Law relating Other Important Types of Contracts

There are some special type of contracts. These are:
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 Indemnity - one party promises to save the other from loss (Example: Insurance)
 Guarantee - legal contract will be duly enforced
Example: A requests B to lend Rs. 20,000 to C and assures that C will pay back the sum within the
agreed period. If C fails to make payments, A will repay B as per the agreement agreed between them
under the Contract of guarantee.
Three Types of Guarantee: Real (relating to assets having an intrinsic (worth) value), Personal (debt
obligation for one or more people) and Moral (do not provide the lender with any real legal security)
 Bailment - delivery of goods
 Pledge - specific actions for common objects.
 Joint Ventures, Collaborations and Multinational Agreements
ESSENTIAL ELEMENTS OF A VALID CONTRACT

Section 10 of the Indian Contract Act, 1872 provides that “all agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby
expressly declared to be void”.
Therefore, the essential elements of a valid contract are:
1. An offer or proposal by one party and acceptance of that offer by another party resulting in an agreement –
consensus-ad-idem.
2. An intention to create legal relations or an intent to have legal consequences.
3. The agreement is supported by a lawful consideration.
4. The parties to the contract are legally capable of contracting.
5. Genuine consent between the parties.
6. The object and consideration of the contract is legal and is not opposed to public policy.
7. The terms of the contract are certain.
8. The agreement is capable of being performed i.e., it is not impossible of being performed.
Therefore, to form a valid contract there must be (1) an agreement, (2) based on the genuine consent of the parties,
(3) supported by a lawful consideration, (4) made for a lawful object, and (5) between the competent parties.
Offer/Proposal[sec2(a)] & Acceptance:

Offer/Proposal is the first step towards formation of an agreement. There are two parties involved:
 Offeror: The person who makes a definite proposal to another party.
 Offeree: A person to whom offer is made.
Definition: As per Section 2(a) "A person is said to make a Proposal when he signifies to another, his willingness, to
do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence."
Elements of Offer:
There should be 2 parties involved. There cannot be an offer made a person to himself.
 It must be expressions of willingness to do or to abstain from doing an act.
 In simple words, the offer may be for a positive act (to do something) or a negative act (abstain from doing
something).
 The willingness must be expressed with a view to obtain the assent of the other party to whom the offer is
made.
Kinds/Types of Offers
There are generally 7 type of Offers with difference as to type of offers and their parties. They are as under:
1.General Offer: General Offer means an offer made to the public at large and can be accepted by anyone from the
general public. It is not necessary for offeree to be known to the offeror.
Example: Participation in Lottery, Purchasing the ticket of performance etc.
2. Specific Offer/ Particular offer: Specific Offer means an offer made to definite (specific)
person or group or group of persons. It can be accepted only by the person to whom the offer is made.
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Example: A offers to sell his car to B on a consideration of Rs. 1,00,000/-. This is a type of particular offer.
3. Cross Offers: When two persons make identical offers to each other, in ignorance of each other's offer, it is called
Cross Offer. A cross offer does not lead to an agreement as both are Offers and there is no Acceptance.
Example-1: RAM of Chennai sends a letter by post to Shyam of Hyderabad offering to sell his furniture for Rs. 15,000.
The letter is posted on 1st of May. On the same day, in ignorance of Ram's offer, Shyam sends a letter to Ram offering
to buy his furniture for Rs. 15,000. These two letters cross each other.
Example-2: A offers to sell his old mobile phone to B at a price of Rs. 10,000/-. B offers to purchase A’s old mobile
phone at a price of Rs. 10,000/-. There is no concluded contract.
Note: Here, both the parties are making offer and no party has accepted the offer. Therefore, there is no Agreement
& Contract. As Offer & Acceptance lead to an agreement.
4. Counter offer: An offer made against an offer already made. In these offers, the contracts can be made only after
acceptance of counter offer. This type of offer permits a person to decline a previous offer and allows further
negotiations.
Example: M offers to sell his car for Rs. 3.8 Lakhs to N. N says he would buy it for Rs. 3.5 Lakhs. This is not valid
acceptance but a counter offer by N for Rs. 3.5 Lakhs which M may or may not accept.
Example: A offers to sell his old mobile phone to B at a price of Rs. 10,000/-. B made a counter offer to purchase the
said phone at a price of Rs. 9500/-. There is a situation of counter offer.
5. Open/Continuing/Standing Offer: An offer is allowed to remain open for acceptance over a period of time is known
as a standing, open or continuing offer.
Example: Tender for supply of goods.
Where P tendered to supply goods to L up to a certain amount and over a certain period, L’s order did not come up to
the amount expected and P sued for breach of contract Held:
Each order made was a separate contract and P was bound to fulfill orders made, but there was no obligation on L to
make any order to all [Percival Ltd. vs. L.C.C. (1918)].
6. Contracts by Post: Contracts by post are subject to the same rules as others, but because of their importance, these
are stated below separately:
 An offer by post may be accepted by post, unless the offeror indicates anything to the contrary.
 An offer is made only when it actually reaches the offeree and not before, i.e., when the letter containing
the offer is delivered to the offeree.
 An acceptance is made as far as the offeror is concerned, as soon as the letter containing the acceptance is
posted, to offerors correct address; it binds the offeror, but not the acceptor.
 An acceptance binds the acceptor only when the letter containing the acceptance reaches the offeror. The
result is that the acceptor can revoke his acceptance before it reaches the offeror.
 An offer may be revoked before the letter containing the acceptance is posted. An acceptance can be
revoked before it reaches the offeror.
7. Contracts over the Telephone: Contracts over the telephone are regarded the same in principle as those
negotiated by the parties in the actual presence of each other. In both cases an oral offer is made and an oral
acceptance is expected. It is important that the acceptance must be audible, heard and understood by the offeror. If
during the conversation the telephone lines go “dead” and the offeror does not hear the offerees word of
acceptance, there is no contract at the moment. If the whole conversation is repeated and the offeror hears and
understands the words of acceptance, the contract is complete [Kanhaiyalal v. Dineshwarchandra (1959) AIR, M.P.
234].
Rules governing Offers / Rules for a Valid Offer:

A valid offer must comply with the following rules: -
 An offer must be certain, clear, definite, complete and final. Offer must not be vague or ambiguous.
 An offer must be communicated to the offeree so as to give him an opportunity to accept or reject the same.
 The offer must be distinguished from an invitation to offer. (Explained below)
 The communication of an offer may be made by express words - oral or written - or it may be implied by
conduct.
 The offer must be capable to create legal relation. A social invitation, even
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 it is accepted does not create legal relations because it is not so intended

 The communication of the offer may be general or specific. (Explained below)
 The offer must be made with a view to obtain the consent of the offeree.
 The offer should not contain a term the non-compliance of which would amount to acceptance. Thus, the
offeror cannot say that if acceptance is not communicated by a certain time the offer would be presumed to
be accepted.
 An offer may be conditional.
Offer and invitation to offer:
Invitation to offer is a communication to invite certain person(s) or public for making offer. The same may be
understood from below mentioned examples:
1. An invitation to treat or an invitation to make an offer: e.g., an auctioneers request for bids (which are offered
by the bidders), the display of goods in a shop window with prices marked upon them, or the display of priced
goods in a self- service store or a shopkeepers catalogue of prices are invitations to an offer.
2. A mere statement of intention: e.g., an announcement of a coming auction sale. Thus, a person who attended
the advertised place of auction could not sue for breach of contract if the auction was cancelled [Harris v.
Nickerson (1873) L.R. 8 QB 286].
3. A mere communication of information in the course of negotiation: e.g., a statement of the price at which one
is prepared to consider negotiating the sale of piece of land [Harvey v. Facey (1893) A.C. 552].
An offer that has been communicated properly continues as such until it lapses, or until it is revoked by the offeror,
or rejected or accepted by the offeree.
Lapse of Offer:
Section 6 deals with various modes of lapse of an offer. It states that an offer lapse if—
1. if, it is not accepted within the specified time (if any) or after a reasonable time, if none is specified;
2. if, it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner,
e.g., by sending a letter by mail when early reply was requested;
3. the offeree rejects it by distinct refusal to accept it;
4. either the offeror or the offeree dies before acceptance;
5. the acceptor fails to fulfill a condition precedent to an acceptance;
6. the offeree makes a counter offer, it amounts to rejection of the offer and an offer by the offeree may be
accepted or rejected by the offeror.
Revocation of Offer by the Offeror:
An offer may be revoked by the offeror at any time before acceptance.
Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually
communicated to the offeree. The revocation must reach the offeree before he sends out the acceptance. An offer to
keep open for a specified time (option) is not binding unless it is supported by consideration.
Mode of Revocation:
A proposal Revocation may revoke either by act or by omission. Section 6 provides the following modes for revocation:
1. by the communication of notice of revocation by the proposer to the other party.
2. by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed,
3. by the lapse of a reasonable time, without communication of the acceptance.
4. by the failure of the acceptor to fulfil a condition precedent to acceptance.
5. by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the
acceptor before acceptance.
Point no. 1 of the above is revocation by an act and 2 to 3 are revocation by omission.
Acceptance
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A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an offer.
Under Section 2(b) of the Contract Act when a person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted becomes a promise.
Rules Governing Acceptance
 Absolute and Unqualified: Acceptance must be absolute and unqualified. As per section 7 of the Act,
acceptance is valid only when it is absolute and unqualified or unconditional. Acceptance with variation
means a Counter Offer by the Offeree which the Offeror may or may not accept.
Example: Jai offers to sell his cow to Veeru. Veeru replies that he would buy it only if he gave the calf along with it.
This is not acceptance because it is qualified. This will be a counter offer made by Veeru, which may or may not be
accepted by Jai.
 Communication: The acceptance must be communicated to the offeror. A mere mental determination of
acceptance is not an acceptance until it is communicated by the offeree to the offeror. In simple words, it is
complete only when it is communicated to the offeror.
 Time Limit: Acceptance should be within specified time and if no time is specified then within reasonable
time or before the offer lapses. What is a reasonable time depending on the facts and circumstances of each
case?
 Acceptance before the Lapse of Offer: Acceptance should be communicated before the offer lapses, or
terminates, or is revoked by the Offeror. There can be no acceptance of a revoked offer.
 Mere silence is not acceptance: Mental acceptance, failure to answer or silence on the part of the Offeree is
Not acceptance, as it is not communicated.
Silence = Acceptance only if the Offeree, has by his previous conduct, indicated that silence amounts to his
acceptance.
 Acceptance to Offeror only: The acceptance should be communicated to the offeror only, in order to be
effective.
Thus, if a reward is offered for finding a lost dog, the offer is accepted by finding the dog after reading about the
offer, and it is unnecessary before beginning to search for the dog to give notice of acceptance to the offeror.
 Acceptance by Offeree or Authorised person: Acceptance should be communicated by the offeree or by an

authorised person to make it effective.
An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly,
performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Thus, in Lalman
Shukla v. Gauri Dutt (1913), where a servant brought the boy without knowing of the reward, he was held not entitled
to reward because he did not know about the offer.
Consideration
Consideration is a “quid pro quo”, i.e. something in return. Consideration is the price for which the promise of the
other is brought, and the promise thus given for value is enforceable.
'Consideration' has to be understood as a price paid for an obligation.
As per Section 2(d): When, at the desire of the promisor, (the promise) or (any other person has done) or (abstained
from doing), or (does) or (abstains from doing), or (promises to do) or (to abstain from doing), (something, such act)
or (abstinence) or (promise) is called a consideration for the promise.
Example: A agrees to sell his Car to B for Rs. 10 Lakhs. The consideration for B's promise to pay = As promise to sell
the Car and consideration for A's promise to sell B's promise to pay Rs. 10 Lakhs.
Every promise and every set of promises, forming the consideration for each other, is an Agreement. Hence,
consideration forms the essence of an Agreement. Promise without consideration is gratuitous and even if
such promise is binding, it does not create legal obligation. A contract without consideration is thus devoid of any
legal obligation "No Consideration, No Contract" is the rule of law.
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Essential Elements of a Valid Consideration
1. Consideration at the desire of the promisor:

However, it is not necessary that the promisor should benefit by the consideration when moving at the instance of a
third party, it cannot valid consideration. But, consideration for the benefit of a third party is valid.
Case Law: Durga Prasad vs. Baldeo
Facts: A builder spent Rs. 1,00,000 on the construction of shops at the request of the Collector of the district. In
consideration of this, a shopkeeper promised to pay some money to the builder.
Judgement: The agreement was considered to be void being without consideration because the builder has
constructed the shops on request of Collector and not at the desire of the shopkeeper.
2. Any act which is a consideration of a contract may be done by the promisee or by any other person.
Any other person is referred to as stranger to consideration. Privity of consideration is not required.
Facts: A by gift deed transferred certain property to her daughter, with a direction that daughter should pay an
annuity to A's brother. On the same day, the daughter executed a writing in favor of A's brother, agreeing to pay
annuity. Afterwards, she declined to fulfil her promise saying that no consideration had moved from her uncle.
Judgement: In this case, it was held that words 'promisee or any other person' in Section 2(d) clearly shows that the
consideration need not necessarily move from the promisee, it may move from any other person. Hence, A's brother
was entitled to maintain the suit.
3. consideration should be of some value in the eyes of law. It may or may not be adequate.
It means adequacy is not important, value in the eyes of law is important.
4.The consideration must be real and not illusionary.

Example: If a snake bites Anuj's wife and she is dead, snake charmer Kaaliya promise to make her alive if he gets Rs.
2,00,000. This is an illusionary consideration.
5. The performance of an act by a person what he is legally bound to perform, the same cannot be consideration
for a contract. Hence, a promise to pay money to a witness is void, for it is without consideration. Hence such a
contract is void for want of consideration.
But where a person promises to do more than he is legally bound to do, such a promise provided it is not opposed to
public policy, is a good consideration.
6. In addition to being real and competent, consideration must be legal. Illegal consideration has no value in law.
Also, consideration must be moral and not opposed to public policy.
Exception to the general rule of 'No Consideration, No Contract'

Ex. Nudo pacto non oritur action, i.e. an agreement without consideration is void is a general rule. The following are
the exceptions to the Rule "No Consideration No Contract".
Written and Promise to Promise to Completed Agency Gratuitous

registered compensate pay Time Gifts [Section 185] Bailment
agreement for past Barred Debt [Explanation [Section 148]
out of love voluntary [Section to Section
and affection services 25(3)] 25]
[Section [Section
25(1)] 25(2)]
An • A promise •A debt 'No • No •Consideration

Agreement made barred by consideration consideration is not
made without limitation No Contract' is required to necessary to
without consideration cannot be does not create an effect a valid
consideration is valid if it is recovered. apply to agency. bailment of
is valid if it is: a promise to Hence, a completed . If no goods. It is
• -Expressed compensate promise to gifts, i.e. gifts consideration called
in writing, wholly or in pay such a given and has passed to
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and part, a debt is accepted. agent, he is Gratuitous

registered person who without any However, a only a Bailment.
under law for has already consideration. promise to gratuitous
the time voluntarily • A promise gift is not agent and is
being in force done to pay, wholly valid. not bound to
for something or in part, a do the work
registration for the debt which is entrusted to
of Promisor, or barred by law him, but if he
documents, • Example: of limitation begins the
made on #-A find B's can be work, he
account of purse and enforced if: must do it to
natural love gives it to - It is in the
and him. B writing, and satisfaction
affection, promises to - Is signed by of his
between give A Rs. the debtor or principal.
parties 500. This is a his authorised
standing in a valid agent.
near relation contract. • Example: A
to each #-X supports owes
other. Y's infant B Rs. 10,000
• Special son. Y but the debt
Note: For an promises to is barred by
agreement to pay X's Limitation
be valid, expenses. Act. A signs a
agreement This written
must be as a is a valid promise to
result of contract. pay B Rs.
natural love 8,000 on
and account of
affection. debt. This is a
valid contract.
• Mere
nearness of
relation does
not
necessarily
imply natural
love and
affection.
Terms Must be Certain

A contract will not be valid, when the terms are uncertain. Thus, an agreement to agree in the future (a contract to
make a contract) will not constitute a binding contract e.g., a promise to pay an actress a salary to be “mutually
agreed between us” is not a contract since the salary is not yet agreed: Loftus v. Roberts (1902).
Similarly, where the terms of a final agreement are too vague, the contract will fail for uncertainty. Hence, the terms
must be definite or capable of being made definite without further agreement of the parties.
Kinds of Consideration:
 Past Consideration
The consideration which has already moved before the formation of agreement
Example: A renders some services to B at B's request in November. In December, B promises to pay a sum of Rs.
10,000 for his services. Services of A = Past Consideration.
Note: English Law does not recognise past consideration.
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 Present Consideration
The consideration which moves along with the promise is called present consideration
Example: Cash Sales.
 Future Consideration
The consideration that will move after the formation of agreement

Example: A promises to deliver 110 bags of rice to B at the end of this month.
Doctrine of Privity of Contract and of Consideration
Doctrine of Privity of Contract:
Only parties of contract can sue - Privity of Contract:

Only those persons, who are parties to a Contract, can sue and be sued upon the Contract. This Rule is called
"Doctrine of Privity of Contract".
Privity of Contract refers to the relationship between the parties who have entered into a Contract. It implies the
mutuality of will and legal bonding between the parties.
Consequences of Privity of Contract:

A Third Party to a Contract cannot sue upon it, even though the Contract may be for his benefit.
The rights obligations arising out of a Contract, rest with the contracting parties only, and not outsiders. Third Parties
cannot enforce the rights of the Promisee of the Contract.
Stranger to Contract cannot sue:

A Stranger to Contract means a person who is not a party to the Contract. Such a person cannot bring a valid suit
under the Contract.
Example: A who is indebted to B, sells his property to C. C promises to pay off the debt to B. When C fails to pay, B
has no right to sue C, because he is a Stranger to Contract.
Stranger to Consideration:
"Stranger to Contract" must be distinguished from a Stranger to Consideration. Consideration need not necessarily
be provided by the Promisee.
It may flow from a third party also. Such a person is 'Stranger to Consideration'.
Hence, a Third Party to a Contract can sue upon it, though the Contract may be for his benefit.
Privity of consideration in India:
In India privity of consideration is not strictly applicable. It means that consideration may be paid by parties or any
other person. The doctrine of privity of contract provides that a contract cannot confer rights or impose obligations
upon any person who is not a party to the contract.
Exceptions: i.e. Stranger to Contract has the Right to Sue
It is applicable in India with certain exception like trust, covenant running with land, family settlements etc.
One of the relevant examples of this transaction is, trust, under the Indian Trust Act, 1882, where one person
creates a legal body called, trust, for the benefit of another person called the beneficiary. But the title of the
property is with a third party called the trustee who works for the benefit of beneficiaries. Here the consideration is
moved by the trust settlor to the trustee. But the benefit is received by a third party.
Case Law: Chinnaya vs. Ramayya
Void, Voidable & ILLEGAL Contracts: Flaws in Contract and Free Consent
There may be the circumstances under which a contract made under these rules may still be bad, because there is a
flaw, vice or error somewhere. As a result of such a flaw, the apparent agreement is not a real agreement. Where
there is no real agreement, the law has three remedies:
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Firstly: The agreement may be treated as of no effect and it will then be known as void agreement.
Secondly: The law may give the party aggrieved the option of getting out of his bargain, and the contract is then
known as voidable.
(a) Void Agreement

A void agreement is one which is destitute of all legal effects. It cannot be enforced and confers no rights on either
party. It is really not a contract at all, it is non-existent. Technically the words ‘void contract’ are a contradiction in
terms. But the expression provides a useful label for describing the situation that arises when a ‘contract’ is claimed
but in fact does not exist. For example, a minor’s contract is void.
(b) Voidable Contract

A voidable contract is one which a party can put to an end. He can exercise his option, if his consent was not free. The
consent of a party is not free and so he is entitled to avoid the contract, if he has given his consent due to
misrepresentation, fraud, coercion or undue influence.
Note: Only For not Free Consent. The contract will, however be binding, if he does not exercise his option to avoid it
within a reasonable time.
(c) Illegal Agreement

An illegal agreement is an unlawful agreement. The law prohibits agreements made with unlawful object or
consideration. Parties to an unlawful agreement cannot get any help from a Court of law, for no polluted hands shall
touch the pure fountain of justice. On the other hand, a collateral transaction can be supported by a void agreement.
Example
A & B entered into contract in which A will steal a Diamond from a museum and B will give him Rs. 5,00,000/-. Is
it a valid contract?
No, the consideration should not be illegal.
1. Note: An agreement which loses its legal status is a void agreement. An illegal agreement is one which is
not permissible under law.
2. Note: A void agreement is not punishable under law whereas an illegal agreement is considered as an
offence, hence the parties to it are punishable and penalised under Indian Penal Code (IPC)
Firstly: The agreement may be treated as of no effect and it will then be known as void agreement.
Secondly: The law may give the party aggrieved the option of getting out of his bargain, and the
The chief flaws
contract in contract
is then known asare:
voidable.
Capacity (or) Competency to contract (section-11)

Flaw in Capacity – Capacity and Persons
In law, persons are either natural or artificial. Natural persons are human beings and artificial persons are
corporations. Contractual capacity or incapacity is an incident of personality.
The general rule is that all-natural persons have full capacity to make binding contracts. But the Indian Contract Act,
1872 admits an exception in the case of:
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1. minors,
2. lunatics, and
3. persons disqualified from contracting by any law to which they are subject.
Minors Contract: Is Invalid / void

Note: But where any fraudulent representation by the minor or some property was sold by him and the transactions
are set aside as being void, the Court may direct the minor to restore the property to the other party.
Example: -
A minor fraudulently overstates his age and takes delivery of a motor car after executing a promissory note in favor
of the trader for its price. The minor cannot be compelled to pay the amount to the promissory note, but the Court
on equitable grounds may order the minor to return the car to the trader, if it is still with the minor.
Thus, according to Section 33 of the Specific Relief Act, 1963 the Court may, if the minor has received any benefit
under the agreement from the other party require him to restore, so far as may be such benefit to the other party, to
the extent to which he or his estate has been benefited thereby.
 A minor’s estate is liable to pay a reasonable price for necessaries supplied to him or to anyone whom the
minor is bound to support (Section 68 of the Act).
 A minor can be an agent, but he cannot be a principal nor can he be a partner. He can, however, be
admitted to the benefits of a partnership.
 An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for
his benefit or is for legal necessity.
e.g., if the parties are of the community among whom it is customary for parents to contract marriage for their
children. The contract of apprenticeship is also binding.
However, it has been held that an agreement for service, entered into by a father on behalf of his daughter who is a
minor, is not enforceable at law (Raj Rani v. Prem Adib, (1948) 51 Bom. L.R. 256).
Lunatics Agreement: Is in Valid / Void

A person of unsound mind is a lunatic.
Note: But if he makes a contract when he is of sound mind, i.e., during lucid intervals, he will be bound by it.
But for necessaries supplied to a lunatic or to any member of his family, the lunatics estate, if any, will be liable. There
is no personal liability incurred by the lunatic.
If a contract entered into by a lunatic or person of unsound mind is for his benefit, it can be enforced (for the
benefit) against the other party but not vice-versa [Jugal Kishore v. Cheddu, (1903) l All. L.J 43].
Other Persons qualified and disqualified from contracting: Is in Valid / Void

Some statues disqualify certain persons governed by them, to enter into a contract.
Alien Enemies:
A person who is not an Indian citizen is an alien.
Any Country People who have declared war against India (or) India declared against them (or) act as a threat for the
peace (or) against India (or) An Indian citizen who is voluntarily resident in hostile territory (or) is carrying on business
there is an alien enemy. Trading with an alien enemy is considered illegal, being against public policy.
Foreign Sovereigns and Ambassadors:
Foreign sovereigns and accredited representatives of foreign states, i.e., Ambassadors, High Commissioners, enjoy a
special privilege in that they cannot be sued in Indian Courts, unless they voluntarily submit to the jurisdiction of the
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Indian Courts. Foreign Sovereign Governments can enter into contracts through agents residing in India. In such cases
the agent becomes personally responsible for the performance of the contracts. Moreover, the contract with them
can be enforced in the court only with the permission of Central Government.
Professional Persons:
In England, barristers-at law is prohibited by the etiquette(professional/good behavior) of their profession from suing
for their fees. So also, are the Fellow and Members of the Royal College of Physicians and surgeons. But they can sue
and be sued for all claims other than their professional fees. In India, there is no such disability and a barrister, who is
in the position of an advocate with liberty both to act and plead, has a right to contract and to sue for his fees [Nihal
Chand v. Dilawar Khan, 1933 All. L.R. 417].
Corporations:
A corporation is an artificial person created by law, e.g., a company registered under the Companies Act, public bodies
created by statute, such as Municipal Corporation of Delhi. A corporation exists only in contemplation of law and has
no physical shape or form.
The Indian Contract Act does not speak about the capacity of a corporation to enter into a contract. But if properly
incorporated, it has a right to enter into a contract. It can sue and can be sued in its own name. There are some
contracts into which a corporation cannot enter without its seal, and others not at all. A company, for instance, cannot
contract to marry. Further, its capacity and powers to contract are limited by its charter or memorandum of
association. Any contract beyond such power in ultra vires and void.
Married Women:
In India there is no difference between a man and a woman regarding contractual capacity. A woman married or single
can enter into contracts in the same ways as a man. She can deal with her property in any manner she likes, provided,
of course, she is a major and is of sound mind.
Under the English law, before the passing of the Law Reform (Married Women and Tortfeasors) Act, 1935, a husband
was responsible for his wife’s contracts but since 1935 this liability no longer arises unless the wife is acting as the
husband’s agent. Now, therefore, even in England a married woman has full contractual capacity, and can sue and be
sued in her own name.
Free Consent: Flaw in Consent
The basis of a contract is agreement, i.e., mutual consent. In other words, the parties should mean the something in
the same sense and agree voluntarily. It is when there is consent, that the parties are said to be “consensus ad idem”
i.e. their minds have met. Not only consent is required but it must be a free consent. Consent is not free when it has
been caused by coercion, undue influence, misrepresentation, fraud or mistake. These elements if present, may vitiate
(in valid) the contract.
Mistake (Sections 20 and 21)

The law believes that contracts are made to be performed. The whole structure of business depends on this as the
businessmen depend on the validity of contracts. Accordingly, the law says that it will not aid any one to evade (to
escape) consequences on the plea that he was mistaken.
On the other hand, the law also realises that mistakes do occur, and that these mistakes are so fundamental that there
may be no contract at all. If the law recognises mistake in contract, the mistake will render the contract void.
Effect of Mistake:
A mistake in the nature of miscalculation or error of judgement by one or both the parties has no effect (valid) on the
validity of the contract. For example, if A pays an excessive price for goods under a mistake as to their true value, the
contract is binding on him [Leaf v. International Galleries (1950) 1 All E.R. 693].
Therefore, mistake (fact)must be a “vital operative mistake”, i.e. it must be a mistake of fact which is fundamental to
contract. To be operative so as to render the contract void, the mistake must be:
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1. of fact (also known as a point of fact), and not of law or opinion (also known as a point of law);
2. the fact must be essential to agreement, i.e., so fundamental as to negative the agreement; and
3. must be on the part of both the parties.
Thus, where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the
agreement is void (Section 20). Such a mistake prevents the formation of any contract at all and the Court will declare
it void. For example, A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of bargain
though neither party was aware of the fact. The agreement is void.
Mistake of Law (also known as a point of law) and Mistake of Fact (also known as a point of fact):
Mistakes are of two kinds: (i) mistake of law, and (ii) mistake of fact. If there is a mistake of law of the land, the
contract is binding because everyone is deemed to have knowledge of law of the land and ignorance of law is no
excuse (ignorantia juris non-excusat).
But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are excusable.
The law of a foreign country is to be proved in Indian Courts as ordinary facts. So, mistake of foreign law makes the
contract void. Similarly, if a contract is made in ignorance of private right of a party, it would be void, e.g., where A
buys property which already belongs to him.
Unilateral Mistake:
Mistake must be mutual or bilateral, i.e., it must be on the part of both parties.
A unilateral mistake, i.e., mistake on the part of only one party, is generally of no effect unless (i) it concerns some
fundamental fact and (ii) the other party is aware of the mistake. For this reason, error of judgement on the part of
one of the parties has no effect and the contract will be valid.
Common Mistake as to Subject-matter:
A contract is void when the parties to it assume that a certain state of things exist which does not actually exist or in
their ignorance the contract means one thing to one and another thing to the other, and they contract subject to that
assumption or under that ignorance. There is a mistake on the part of both the parties. Such a mistake may relate to
the existence of the subject matter, its identity, quantity or quality.
1. Mistake as to existence of the subject matter: Where both parties believe the subject matter of the contract
to be in existence but in fact, it is not in existence at the time of making the contract, there is mistake and the
contract is void.
In Couturier v. Hastie (1856), there was a contact to buy cargo, described as shipped from port A to port B
and believed to be at sea, which in fact got lost earlier unknown to the parties and hence not in existence at
the time of the contract. Held, the contract was void due to the parties’ mistake.
2. Mistake as to identity of the subject matter: Where the parties are not in agreement to the identity of the
subject matter, i.e., one means one thing and the other means another thing, the contract is void; there is no
consensus ad idem.
In Raffles v. Wichelhhaks (1864), A agreed to buy from B a cargo of cotton to arrive “ex Peerless from
Bombay”. There were two ships called “Peerless” sailing from Bombay, one arriving in October and the other
in December. A meant the earlier ship and B the latter. Held, the contract was void for mistake.
3. Mistake as to quantity of the subject matter: There may be a mistake as to quantity or extent of the subject
matter which will render the contract void even if the mistake was caused by the negligence of a third-party.
In Henkel v. Pape (1870), P wrote to H inquiring the price of rifles and suggested that he might buy as many
as fifty. Later he sent a telegram with the words “send three rifles. Due to the mistake of the telegraph clerk
the message transmitted to H was, sent the rifles. H dispatched 50 rifles. Held, there was no contract
between the parties.
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4. Mistake as to quality of the subject-matter or promise: Mistake as to quality raises difficult questions. If the
mistake is on the part of both the parties the contract is void. But if the mistake is only on the part of one-party
difficulty arises.
The general rule is that a party to a contract does not owe any duty to the other party to discloses all the facts in his
possession during negotiations. Even if he knows that the other party is ignorant of or under some misapprehension
as to an important fact, he is under no obligation to enlighten him. Each party must protect his own interests unaided.
In contract of sale of goods, this rule is summed up in the maxim caveat emptor (Let the buyer beware.) The seller is
under no duty to reveal the defects of his goods to the buyer, subject to certain conditions.
Note: Caveat emptor is Latin word for "Let the buyer beware" and caveat venditor for "let the seller beware”
Example for “Caveat Venditor” - Fitness of Product for the Buyer's Purpose, Goods Purchased under Brand Name,
Goods sold by Description, Goods of Merchantable Quality, Sale by Sample, Sale by Description and Sample, Usage
of Trade, Fraud or Misrepresentation by the Seller.
Mistake as to Nature of the Contract:

The general rule is that a person who signs an instrument is bound by its terms even if he has not read it. But a person
who signs a document under a fundamental mistake as to its nature (not merely as to its contents) may have it avoided
provided the mistake was due to either-
1. the blindness, illiteracy, or senility (incapacity due to old age) of the person signing, or
2. a trick or fraudulent misrepresentation as to the nature of the document.
Mistake as to the Identity of the Person Contracted With:
It is a rule of law that if a person intends to contract with A, B cannot give himself any right under it. Hence, when a
contract is made in which personalities of the contracting parties are or may be of importance, no other person can
interpose and adopt the contract. For example, where M intends to contract only with A but enters into contract with
B believing him to be A, the contract is vitiated by mistake as there is no consensus ad idem.
Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if:
1. the identity is for material importance to the contracts; and
2. the mistake is known to the other person, i.e., he knows that it is not intended that he should become a party
to the contract.
In Cundy vs. Lindsay (1878) 3 A.C. 459, one Blenkarn posing as a reputed trader Blankiron, placed an order for
some goods with M/s Lindsay and Co. The company, thought that it is dealing with Blankiron and supplied the
goods. Blenkarn sold the goods to Cundy and did not pay to Lindsay. The latter sued Cundy. The Court held that
there was no contract between Lindsay and Blenkarn and therefore Cundy has no title to the goods.
Facts:
M/s Lindsay and Co sold goods (linen Handkerchief’s) by letter to a rogue (Blenkarn) who represented
themselves as ‘Blenkiron & Co’ of 37 Wood Street. There was a real and respectable company in the area by the
name of Blenkiron & Co occupying premises at 123 Wood Street. The rogue (Blenkarn) took possession of the
goods without paying. Blenkarn then sold the goods – 250 dozen linen handkerchiefs – to an innocent third
party, Cundy. When Blenkarn failed to pay, Lindsay & Co sued Cundy for the good. Cundy was not aware of the
fraud.
Decision:
The House of Lords held in favor of Lindsay. There had never been a valid contract (void ab initio) between Lindsay
and the rogue. Therefore, the rogue (Blenkarn)never acquired any property in the goods which he could pass on to
Cundy.
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Cundy v Lindsay (1877–78) case on the subject of mistake, introducing the concept that contracts could be
automatically void for mistake to identity, where no meeting of minds (no consensus ad idem - unilateral) it is
of crucial importance.
Note:
 If the contract is bilateral without consensus ad idem than, the contract is void.
 If the contract is unilateral with consensus ad idem than, the contract is valid and the affected person
can sue for the claim.
Misrepresentation (Section 18)

The term “misrepresentation” is ordinarily used to connote both “innocent misrepresentation” and “dishonest
misrepresentation”. Misrepresentation may, therefore, be either (i) Innocent misrepresentation, or (ii) Willful
misrepresentation with intent to deceive and is called fraud.
Innocent Misrepresentation:
If a person makes a representation believing what he says is true he commits innocent misrepresentation. Thus, any
false representation, which is made with an honest belief in its truth is innocent. The effect of innocent
misrepresentation is that the party misled by it can avoid the contract, but cannot sue for damages in the normal
circumstances (Aggrieved - affected party cannot claim damages (Section 19).
But in order to avoid a contract on the ground of misrepresentation, it is necessary to prove that:
1. there was a representation or asser-tion (initiate or pursue).
2. such asser-tion induced the party aggrieved to enter into the contract.
3. the assertion related to a matter of fact (and not of law as ignorance of law is no excuse).
4. the statement was not a mere opinion or hearsay, or commendation (i.e., reasonable praise). For example,
an advertisement saying, “washes whiter than the whitest”.
5. the statement which has become or turned out to be untrue, was made with an honest belief in its truth.
Damages for Innocent Misrepresentation
Generally, the injured party can only avoid the contract and cannot get damages for innocent misrepresentation.
But in the following cases, damages are obtainable:
1. From a promoter or director who makes innocent misrepresentation in a company prospectus inviting the
public to subscribe for the shares in the company;
2. Against an agent who commits a breach of warranty of authority:
3. From a person who (at the Courts discretion) is estopped from denying a statement he has made where he
made a positive statement intending that it should be relied upon and the innocent party did rely upon it and
thereby suffered damages;
4. Negligent representation made by one person to another between whom a confidential relationship, like
that of a solicitor and client exists.
Wilful Misrepresentation or Fraud (Section 17)
Fraud is an untrue statement made knowingly or without belief in its truth or recklessly (irresponsible), carelessly,
whether it be true or false with the intent to deceive. The chief ingredients of a fraud are:
1. a false representation or asser-tion (initiate or pursue),
2. of fact (and not a mere opinion),
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3. made with the intention that it should be acted upon,

4. the representation must have actually induced the other party to enter into the contract and so deceived (to
make someone believe something that is not true) him,
5.the party deceived must thereby be indemnified (compensated), for there is no fraud without damages, and
6. the statement must have been made either with the knowledge that it was false or without belief in its truth
or recklessly without caring whether it was true or false.
It is immaterial whether the representation takes effect by false statement or with concealment. The party
defrauded can avoid the contract and also claim damages.
Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless silence
is in itself equivalent to speech, or where it is the duty of the person keeping silent to speak as in the cases of contracts
uberrimaefidei- (contracts requiring utmost good faith).
Contracts Uberrimae Fidei (contracts requiring utmost good faith).

There are contracts in which the law imposes a special duty to act with the utmost good faith i.e., to disclose all
material information. Failure to disclose such information will render the contract voidable at the option of the
other party.
Contracts uberrimae fidei are:

1. Contract of insurance of all kinds: The assured must disclose to the insurer all material facts and whatever he
states must be correct and truthful.
2. Company prospectus: When a company invites the public to subscribe for its shares, it is under statutory
obligation to disclose truthfully the various matters set out in the Companies Act. Any person responsible for non-
disclosure of any of these matters is liable to damages. Also, the contract to buy shares is voidable where there is
a materially false statement or non- disclosure in the prospectus.
3. Contract for the sale of land: The vendor is under a duty to the purchaser to show good title to the land he
has contracted to sell.
4. Contracts of family arrangements: When the members of a family make agreements or arrangements for the
settlement of family property, each member of the family must make full disclosure of every material fact within
his knowledge.
Difference between Fraud and Innocent Misrepresentation

1. Fraud implies an intent to deceive, which is lacking if it is innocent misrepresentation.
2. In case of misrepresentation and fraudulent silence, the defendant can take a good plea that the plaintiff had
the means of discovering the truth with ordinary diligence. This argument is not available if there is fraud (Section
19- exception) (Aggrieved - affected party cannot claim damages (Section 19).
3. In misrepresentation the plaintiff can avoid or rescind the contract. In fraud, the plaintiff can claim damages
as well.
4. If there is fraud, it may lead to prosecution for an offence of cheating under the Indian Penal Code.
Coercion: defined in Section 15

Coercion (கட்டாயப் படுத்துதல் ) means “the committing or threatening to commit any act forbidden by the Indian
Penal Code, or unlawful detaining or threatening to detain, any property to the prejudice of any person whatever with
the intention of causing any person to enter into an agreement”. Simply stated, the doing of any act forbidden by the
Indian Penal Code is coercion even though such an act is done in a place where the Indian Penal Code is not in force.
If A at the point of a pistol asks B to execute a promissory note in his favor and B to save his life does so he can avoid
this agreement as his consent was not free. Even a threat to third-party, e.g., where A compels B to sign a document
threatening to harm C, in case B does not sign would also amount to coercion.
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It has been held that mere threat by one person to another to prosecute him does not amount to coercion. There
must be a contract made under the threat and that contract should be one sought to be avoided because of coercion
(Ramchandra v. Bank of Kohlapur, 1952 Bom. 715). It may be pointed out that coercion may proceed from any person
and may be directed against any person, even a stranger and also against goods, e.g., by unlawful detention(reserving)
of goods.
Undue Influence: Sec 16

Under Section 16 of the Indian Contract Act, 1872, a contract is said to be produced by undue influence “where the
relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage over the other”.
Sub-section (2) of Section 16 provides that a person is deemed to be in a position to dominate the will of another—
 A contract is said to be induced by “undue influence” where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of the other and uses that
position to obtain an unfair advantage of the other.
 A person is deemed to be in a position to dominate the will of the other, when he holds authority,
real or apparent over the other, or when he stands in a fiduciary relation to other.
Following types of relations are judicially held to be of trust and confidence:’
(a) Lawyer and client.
(b) Doctor and patient.
(c) Spiritual adviser and devotee.
(d) Parents and child, etc
 Mental force is involved
 Can be exercised between same parties only as relationship is required.
 The effect of undue influence is that it makes the contract voidable at the option of the party
whose consent is obtained by undue influence, i.e., such party can put an end to the contract
if he so chooses
DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE:

Coercion Undue Influence
1. The consent is given under the threat of an 1. The consent is given by a person who is so
offence forbidden by Indian Penal Code or situated in relation to another that the other
detaining or threatening to detain property position to dominate his will.
unlawfully.
2. It is not necessary that some sort of relationship 2. In case of undue influence, there is bound to be
must exist between some sort of relationship.
parties.
3. Coercion need not proceed from 3. Undue influence is always exercised
parties to the contract. between parties to the agreement.
4. Coercion is mainly of physical nature. 4. Undue influence is of moral/mental
nature.
FRAUD
 The term ‘fraud’ may be defined as an intentional, deliberate or willful misstatement of facts, which
are material for the formation of a contract.
 Fraud means and includes any of the following acts committed by a party to a contract with intent
to deceive another party thereto or to induce him to enter into the contract:
1. The active concealment of a fact by one having knowledge or belief of the fact;
2. A promise made without any intention of performing it;
3. Any other act fitted to deceive;
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4. Any such act or omission as the law specially declares to be fraudulent.

5. Person making the statement does not believe it as true
 Example: A, intending to cheat B, falsely represented that five tonnes of ice was manufactured daily
in his factory. And thereby, induced B to buy the factor. In fact, the production was 3.5 tonnes per
day. The contract is voidable at the option of B, as his consent is obtained by fraud.
 Mere silence does not amount to fraud. But when silence is equivalent to speech or when there is a
duty to speak and the person does not speak, it amounts to fraud.
 The effect of fraud is that it makes the contract voidable at the option of the party whose consent
was obtained by fraud i.e., such party may put an end to the contract if he so chooses. Aggrieved
party can claim damages.
Illustration:
A parent stands in a fiduciary relation (take carer) towards his child and any transaction between them by which
any benefit is procured by the parent to himself or to a third party, at the expense of the child will be viewed with
jealousy by Courts of Equity and the burden will be on the parent or third-party claiming the benefit of showing
that the child while entering into the transaction had independent advice, that he thoroughly understood the
nature of transaction and that he was removed from all undue influence when the gift was made [Marim Bibi v.
Cassim Ebrahim (1939) 184 I.C. 171 (1939) A.I.R. 278].
Where there is a presumption of undue influence, the presumption can be rebutted (prove to be wrong) by
showing that
1. full disclosure of all material facts was made,
2. the consideration was adequate, and
3. the weaker party was in receipt of independent legal advice.
Transaction with parda-nishin women

The expression ‘parda-nishin denotes complete sec-lusion(keeping apart from others). Thus, a woman who goes to a
Court and gives evidence, who fixes rents with tenants and collects rents, who communicates when necessary, in
matters of business, with men other than members of her own family, could not be regarded as a parda-nishin woman
[Ismail Musafee v. Hafiz Boo (1906) 33 Cal. LR 773 and 33 I.A. 86]. The principles to be applied to transactions with
parda-nishin woman are founded on equity and good conscience and accordingly a person who contracts with parda-
nishin woman has to prove that no undue influence was used and that she had free and independent advice, fully
understood the contents of the contract and exercised her free will. “The law throws around her a special cloak of
protection” [Kali Baksh v. Ram Gopal (1914) L.R. 41 I.A. 23, 28-29, 36 All 81, 89].
Un-con-scion-able transactions: An unconscionable (Unethical/Unfair) transaction is one which makes an exorbitant
(excessive/ too high) profit of the others distress by a person who is in a dominant position. Merely the fact that the
rate of interest is very high in a money lending transaction shall not make it unconscionable. But if the rate of interest
is very exorbitant and the Court regards the transaction unconscionable, the burden of proving that no undue influence
was exercised lies on the creditor. It has been held that urgent need of money on the part of the borrower does not
itself place the lender in a position to dominate his will within the meaning of this Section [Sunder Koer v. Rai Sham
Krishen (1907) 34 Cal. 150, C.R. 34 I.A. 9].
Legality of Object
One of the requisites of a valid contract is that the object should be lawful. Section 10 of the Indian Contract Act,
1872, provides, “All agreements are contracts if they are made by free consent of parties competent to contract for
a lawful consideration and with a lawful object” Therefore, it follows that where the consideration or object for
which an agreement is made is unlawful, it is not a contract.
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Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is
1. lawful unless it is forbidden by law; or
2. it is of such nature that if permitted, it would defeat the provisions of law; or
3. is fraudulent; or
4. involves or implies injury to the person or property of another; or
5. the Court regards it an immoral or opposed to public policy.
In each of these cases the consideration or object of an agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful is void.
Illustration:
1. X, Y and Z enter into an agreement for the division among them of gains acquired by them by fraud. The
agreement is void as its object is unlawful.
LESSON 16
2. X promises to obtain for Y an employment in the Government service and Y promises to pay Rs. 1,500 to X.
The agreement is void, as the consideration for it is unlawful.
3. X promises to Y to drop a prosecution which he has instituted against Y for robbery, and Y promises to
restore the value of the things taken. The agreement is void as its object is unlawful.
4. A who is B’s mukhtr (head person) promises to exercise his influence, as such, with B in favor of C and C
promises to pay Rs. 1,000 to A. The agreement is void because it is immoral.
5. An agreement by the proprietors of a newspaper to indemnify (compensating) the printers against claims
arising from libels printed in the newspaper is void as it implies or involves injury to the person of another.
Void and Illegal Contracts

A void contract is one which is destitute (fit for nothing) of legal effects altogether. An illegal contract too has no legal
effect as between the immediate parties to the contract, but has the further effect of tainting (damage/ harmful) the
collateral contracts also with illegality.
For instance, A borrows from B Rs. 1,000 for lending to C a minor. The contract between A and C is void, but B can
nevertheless recover the money from A, On the other hand, if A had borrowed Rs. 1,000 from B to buy a pistol to
shoot C, the question whether B can recover the money hinges on whether B was aware of the purpose for which
money was borrowed. If B had knowledge of the illegal purpose, he cannot recover. Therefore, it may be said that all
illegal agreements are void but all void agreements are not necessarily illegal.
Consequence of Illegal Agreements

1. an illegal agreement is entirely void;
2. no action can be brought by a party to an illegal agreement. The maxim is “Ex turpi cause non-oritur action” -
from an evil cause, no action arises;
3. money paid or property transferred under an illegal agreement cannot be recovered. The maxim is in parti
delicto potierest condition defendeties- In cases of equal guilt, more powerful is the condition of the defendant;
4. where an agreement consists of two parts, one part legal and other illegal, and the legal parts is separable from
the illegal one, then the Court will enforce the legal one. If the legal and the illegal parts cannot be separated the
whole agreement is illegal; and
5. any agreement which is collateral to an illegal agreement is also tainted with illegality and is treated as being
illegal, even though it would have been lawful by itself [Film Pratapchand v. Firm Kotri Re. AIR (1975) S.C. 1223].
20
Exception to General Rule of no Recovery of Money or Property

In the following cases, a party to an illegal agreement may sue to recover money paid or property transferred:
1. Where the transfer is not in pari delicto (equally guilty) with the defendant, i.e. the transferee. For example,
where A is induced to enter into an illegal agreement by the fraud of B, A may recover the money paid if he did
not know that the contract was illegal.
2. If the plaintiff can frame a cause of action entirely dependent of the contract.
3. Where a substantial part of the illegal transaction has not been carried out and the plaintiff is truly and
genuinely repentant (regret for sin or wrongdoing). [Bigos v. Bonstead (1951), All E.R. 92].
Agreements Void as being Opposed to Public Policy

The head public policy covers a wide range of topics. Agreements may offend public policy by tending to the prejudice
of the State in times of war, by tending to the abuse of justice or by trying to impose unreasonable and inconvenient
restrictions on the free choice of individuals in marriage, or their liberty to exercise lawful trade or calling.
The doctrine of public policy is a branch of Common Law and like any other branch of Common Law it is governed
by the precedents [Gherulal Parakh v. Mahadeodas Maiya (1959) 2 S.C.R. (Suppl.) 406; AIR 1959 S.C. 781]. The
doctrine of public policy is not to be extended beyond the classes of cases already covered by it and no Court can
invent a new head of public policy [Lord Halsbury, Janson v. Driefontien Consolidated Mines (1902) A.C. 484, 491]. It
has been said by the House of Lords that public policy is always an unsafe and treacherous (crime) ground for legal
decisions. Even if it is possible for Courts to evolve a new head of public policy, it should be done under extraordinary
circumstances giving rise to in-contest-able harm to the society.
The following agreements are void as being against public policy but they are not illegal:
1. Agreement in restrain (something under control) of parental rights: An agreement by which a party deprives
(to remove or withhold something) himself of the custody of his child is void.
2. Agreement in restraint of marriage: An agreement not to marry at all or not to marry any particular person or
class of persons is void as it is in restraint of marriage.
3. Marriage brokerage or brokerage Agreements: An agreement to procure marriage for reward is void. Where a
purohit (priest) was promised Rs. 200 in consideration of procuring a wife for the defendant, the promise was held
void as opposed to public policy, and the purohit could not recover the promised sum.
4. Agreements in restraint of personal freedom are void: Where a man agreed with his money lender not to
change his residence, or his employment or to part with any of his property or to incur any obligation on credit
without the consent of the money lender, it was held that the agreement was void. Example: A obtained a loan
from B, (a money lender) and agreed with B that, without B’s consent in writing, he would not leave his job, or
borrow money, or dispose of his property, or change his residence. It was held that the agreement was void.
5. Agreement in restraint of trade: An agreement in restraint of trade is one which seeks to restrict a person
from freely exercising his trade or profession.
Agreements in restraint of trade void

Section 27 of the Indian Contract Act states that every agreement by which any one is restrained from exercising a
lawful profession, trade or business of any kind, is, to that extent, void.
This Section is not happily worded and has been criticised by many authors. It appears from the wording that every
kind of restraint, whether total or partial falls within the prohibition of this Section.
In English law the Courts have held that if a restraint is reasonable, it will be valid.
21
Leading case on his point is Nordenfelt v. Maxim Nordenfelt Guns Co., (1894) A.C. 535. N was an inventor and a
manufacturer of guns and ammunition. He sold his world-wide business to M and promised not to manufacture guns
anywhere in the world for 25 years. The House of Lords held that the restraint was reasonable as it was no more
than is necessary for the protection of the company, the contract was binding. Whether a restraint is reasonable or
not depends upon the facts of each case.
Our courts are not consistent on the point whether reasonable restraints are permitted or not.
if the restraint is one which is really necessary for the carrying on business, the same is not prohibited.
In Mackenzie v. Sitarmiah, (1891) 15 Mad. 79, A agreed to sell to B all the salt he manufactured and B agreed to buy
such salt. A further agreed not to sell salt to third-parties. The Court held that the agreement was valid.
Other type of restrains is personal covenants between an employer and his employee whereby the latter agrees not
to compete with the former or serve with any of his competitors after employment. This issue came before the
Supreme Court in Niranjan Shanker Golikari v. The Century Spinning and Manufacturing Co. Ltd., AIR 1967 S.C. 1098.
In this case N entered into a bond with the company to serve for a period of five years. In case, N leaves his job earlier
and joins elsewhere with company’s competitor within five years, he was liable for damages. N was imparted the
necessary training but he left the job and joined another company. The former employer instituted a suit against N.
The Supreme Court, held that the restraint was necessary for the protection of the company’s interests and not such
as the Court would refuse to enforce.
In other case, it has been reiterated that the restriction should be reasonable taking into account the facts and
circumstances of the case. In Superintendence Company of India Ltd. v. Krishna Murgai [(1981) 2 SCC 246], the
Supreme Court laid down that a restraint beyond the term of service would be void and the only ground on which
it can be justified is by showing it is necessary for the protection of the employer’s goodwill.
The words “to the extent” in Section 27 make it clear that if in an agreement there are some covenants which are
prohibited whereas the others are not and if the two parts can be separated then only those covenants which operate
as restraint of trade would be void and not whole of the agreement itself. To illustrate, in Brahmputra Tea Co. Ltd. v.
Scarth(1885) I.L.R. Cal. 545, the employee agreed with the employer firstly, not to compete with latter after leaving
the job and, secondly, not to injure employer’s interest during employment. The Court held that the first condition is
a restraint of trade but the second is binding.
Example: A & B entered into contract in which A will not engage in the business of selling spices in Delhi. B paid Rs.
5,00,00/- as consideration to this agreement. Is this agreement void?
Yes, this agreement is void pursuant to section 27 of Indian Contract Act, 1872.
When Contracts in Restraint of Trade Valid

Prima facie (first impression) every restraint of trade is void, but certain exceptions to this general rule are
recognised. If a partial and reasonable restraint falls under any of the following exceptions, the contract will be
enforceable:
1. Sale of goodwill: Where the seller of the goodwill of a business undertakes not to compete with the
purchaser of the goodwill, the contract is enforceable provided the restraint appears to be reasonable as to
territorial limits and the length of time.
2. Partners agreements: Section 11(2) of the Indian Partnership Act permits contracts between partners to
provide that a partner shall not carry on any business other than that of the firm while he is a partner.
3. Section 36(2) and Section 54 of the Indian Partnership Act provide that a partner may make an agreement with
his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within
specified period or within specified limits. The agreement shall be binding if the restrictions are reasonable.
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Trade Combinations: An agreement, the object of which is to regulate business and not to restrain it is valid. Thus, an
agreement in the nature of a business combination between traders or manufactures e.g. not to sell their goods below
a certain price, to pool profits or output and to divide the same in an agreed proportion does not amount to a restraint
of trade and is perfectly valid [Fraster& Co. v. Laxmi Narain, (1931) 63 All 316].
Negative stipulations in service agreements: An agreement of service by which a person binds himself during the
term of the agreement not to take service with anyone else is not in restraint of lawful profession and is valid.
Wagering Agreements
The literal meaning of the word “wager” is a “bet”. Wagering agreements are nothing but ordinary betting
agreements. For example, A and B enter into an agreement 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. This is a wagering agreement and nothing can be recovered by
winning party under the agreement.
The essence of gaming and wagering is that one party is to win and the other to lose upon a future event which at the
time of the contract is of an uncertain nature that is to say, if the event turns out one way A will lose; but if it turns
out the other way he will win [Thacker v. Hardy, (1878) 4 OBD 685].
Wagering Agreements Void

In India except Mumbai, wagering agreements are void.
In Mumbai, wagering agreements have been declared illegal by the Avoiding Wagers (Amendment) Act, 1865.
Therefore, in Mumbai a wagering agreement being illegal, is void not only between the immediate parties, but taints
(act or result of spoiling) and renders void all collateral agreements to it.
 Thus, A bets with B and losses, applies to C for a loan, who pays B in settlement of A’s losses.
 C cannot recover from A because this is money paid “under” or “in respect of” a wagering transaction which
is illegal in Mumbai.
 But in respect of India such a transaction (i.e., betting) being only void, C could recover from A.
 Of course, if A refused to pay B the amount of the bet that he has lost, B could not sue A anywhere.
 Again, where an agent bets on behalf of his principal and loses and pays over the money to the winner, he
cannot recover the money from his principal, if the transactions took place in Mumbai,
 but elsewhere he could recover.
 But if the agent wins, he must pay the winnings to the principal, as this money was received on behalf of the
principal.
Sometimes, commercial transactions assume the form of wagering contracts. The sample test to find out whether a
particular transaction is a wager or a genuine commercial transaction is: “Where delivery of the goods sold is
intended(to do something) to be given and taken, it is valid contract, but where only the differences are intended
to be paid, it will be a wagering contract and unenforceable”.
In a wagering contract there must be mutuality in the sense that the gain of one party should be loss to the other on
the happening of an uncertain event which is the subject matter of the contract.
LESSON 16
Void Agreements
The following types of agreements are void under Indian Contract Act:
1. Agreement by or with a minor or a person of unsound mind or a person disqualified to enter into a contract -
Section 11.
2. Agreement made under a mistake of fact, material to the agreement on the part of the both the parties -
Section 20.
3. An agreement of which the consideration or object is unlawful - Section 23.
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4. If any part of a single consideration for one or more objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is void - Section 24.
5. An agreement made without consideration subject to three exceptions provided to Section 25 [Natural Love
and Affection, Past Voluntary Services, promise to pay a Time-Barred Debt, Creation of an Agency, Gifts,
Bailment (delivering goods to a bailee for a particular purpose, without transfer of ownership) and Charity].
6. An agreement in restraint (to prevent from doing) of marriage - Section 26.
7. An agreement in restraint of trade - Section 27.
8. An agreement in restraint of legal proceedings - Section 28.
9. Agreements, the meaning of which is not certain, or capable of being made certain - Section 29.
10. Agreement by way of wager- Section 30.
11. An agreement to enter into an agreement in the future.
12. An agreement to do an act impossible in itself - Section 56(1)
When contract becomes void

An agreement not enforceable by law is void ab initio - Section 2(g).
 A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable - Section
2(j)
 A contract becomes void when, by reason of some event which the promisor could not prevent, the
performance of the contract becomes impossible, e.g., by destruction of the subject- matter of the contract
after the formation of the contract.
 A contract becomes void by reason of subsequent illegality. A in India agrees to supply goods to B in Pakistan.
After the formation of the contract war breaks out between India and Pakistan and the supply of goods to
Pakistan is prohibited by legislation. The contract becomes void.
 A contingent contract (includes terms) to do or not do to anything if an uncertain future event happens
becomes void if the event becomes impossible.
 Where a contract is voidable at the option of the aggrieved party, the contract becomes void when the option
is exercised by him.
Restitution: (Giving back / refund / reimbursement)

 When a contract becomes void, it is not to be performed by either party.
 But, if any party has received any benefit under such a contract from the other party, he must restore it or
make compensation for it to the other party.
A agrees to sell to B after 6 months a certain quantity of gold and receives Rs. `500 as advance. Soon after the
agreement, private sales of gold are prohibited by law. The contract becomes void and A must return the sum of Rs.
500 to B.
Restitution is also provided for by Section 65 where an agreement is discovered to be void. A pays Rs. 500 in
consideration of B’s promising to marry, C, A’s daughter C is dead at the time of the promise. The agreement is
discovered to be void and B must pay back Rs. 500.
But there is no resolution where the parties are wholly incompetent to contract, e.g., where one of the parties is a
minor. The minor cannot be asked to restore the benefit, e.g., a minor borrowed Rs. 1,000 from B, he cannot be asked
to pay back Rs. 1,000 to B because the contract is void (Mohori Bibis case).
CERTAIN RELATIONS RESEMBLING THOSE OF CONTRACT (QUASI CONTRACTS)
Nature of Quasi-Contracts
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 A valid contract must contain certain essential elements, such as offer and acceptance, capacity to contract,
consideration and free consent.
 But sometimes the law implies a promise imposing obligation on one party and conferring right in favor of the
other even when there is no offer, no acceptance, no consensus ad idem, and in fact, there is neither
agreement nor promise.
 Such cases are not contract in the strict sense, but the Court recognises them as relations resembling those
of contracts and enforces them as if they were contracts, hence the term quasi- contracts (i.e., resembling a
contract).
 A quasi-contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly
at the expense of another.
 In truth, it is not a contract at all. It is an obligation which the law creates, in the absence of any agreement,
when any person is in the possession of other persons money, or its equivalent, under such circumstances
that in equity and good conscience he ought not to retain it, and which in justice and fairness belongs to
another.
 It is the duty and not an agreement or intention which defines it. A very simple illustration is money paid
under mistake. Equity demands that such money must be paid back.
Quasi-Contracts or Implied Contracts under the Indian Contract Act
The following types of quasi-contracts have been dealt (Dealing with/ assigned with) within the Indian Contract
Act—
1. Necessaries supplied to person incapable of contracting or to anyone whom he is illegally bound to support -
Section 68.
2. Suit for money had and received - Section 69 and 72.
3. Quantum Meruit.
4. Obligations of a finder of goods - Section 71.
5. Obligation of person enjoying benefit of a non-gratuitous act - Section 70.
Example:
 R and S enter a contract under which R agrees to deliver Groceries at S’s residence and S promises to pay Rs.
15,000 end of the month. However, R erroneously delivers the groceries at T’s residence instead of S’s. When
T gets home, he assumes that the groceries was send by his uncle and consumed. In this case, even there is
no contract between T and R, it may be treated as Quasi contract and T is Liable to pay for the groceries.
1. Necessaries - Section 68
Contracts by minors and persons of unsound mind are void.
However, Section 68 of the Indian Contract Act provides that their estates are liable to reimburse the trader, who
supplies them with necessaries of life.
2.Suit for money had and received - Section 69 and 72
The right to file a suit for the recovery of money may arise
1.Where the plaintiff paid money to the defendant (i) under a mistake, (ii) in pursuance of a contract the
consideration for which has failed, or (iii) under coercion, oppression, extortion or other such means.
2. A debtor may recover, from a creditor the amount of an over-payment made to him by mistake. The mistake
may be mistake of fact or a mistake of law.
3. Payment to third-party of money which another is bound to pay.
Section 69: A person who makes a payment on behalf of another party is obligated to pay the money according
to law.
For example, where A’s goods are wrongfully attached in order to realise arrears of Government revenue due by
B, and A pays the amount to save his goods from being sold, he is entitled to recover the amount from B.
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4. Money obtained by defendant from third-parties.

For example, where an agent has obtained a secret commission or a fraudulent payment from a third-party, the
principle can recover the amount from the agent.
3. Quantum Meruit
 The expression “Quantum Meruit” literally means “as much as earned” or reasonable remuneration. It is
used where a person claims reasonable remuneration for the services rendered by him when there was no
express promise to pay the definite remuneration, Thus, the law implies reasonable compensation for the
services rendered by a party if there are circumstances showing that these are to be paid for.
 The general rule is that where a party to a contract has not fully performed what the contract demands as a
condition of payment, he cannot sue for payment for that which he has done. The contract has to be
indivisible and the payment can be demanded only on the completion of the contract.
 But where one party who has performed part of his contract is prevented by the other from completing it,
he may sue on a quantum meruit, for the value of what he has done.
 The claim on a quantum meruit arises when one party abandons (give-up/turning back) the contract, or
accepts the work done by another under a void contract.
 The party in default may also sue on a “quantum meruit” for what he has done if the contract is divisible and
the other party has had the benefit of the part which has been performed. But if the contract is not divisible
(not separable), the party at fault cannot claim the value of what he has done.
4.Obligations of finder of lost goods - Section 71.

 The liability of a finder of goods belonging to someone else is that of a bailee.
 This means that he must take as much care of the goods as a man of ordinary prudence (being careful) would
take of his own goods of the same kind.
 So far as the real owner of the goods is concerned, the finder is only a bailee and must not appropriate (use)
the goods to his own use.
 If the owner is traced, he must return the goods to him.
 The finder is entitled to get the reward that may have been offered by the owner and also any expenses he
may have incurred in protecting and preserving the property.
5.Obligation of a person enjoying benefit of non-gratuitous act - Section 70.

Reference: Gratuitous(done free of cost), non-Gratutious (done for payment)
Section 70 of the Indian Contract Act provides that

 where a person lawfully does something for another person or delivers anything to him without any intention
of doing so gratuitously (free) and the other person accepts and enjoys the benefit thereof, the latter must
compensate the former or restore to him the thing so delivered.
 For example, when one of the two joint tenants pay the whole rent to the landlord, he is entitled to
compensation from his co-tenant, or if A, a tradesman, leaves goods at B’s house by mistake and B treats the
goods as his own, he is bound to pay A for them.
Discharge or termination of contracts

A contract is said to be discharged or terminated when the rights and obligations arising out of a contract are
extinguished (Stopped/came to end).
Contracts may be discharged or terminated by any of the following modes:
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(a) Performance of Contracts (Section 37)

Section 37 of the Act provides that the parties to a contract must either perform or offer to perform their respective
promises, unless such performance is dispensed (executed) with or excused under the provision of the Indian Contract
Act, or any other law. In case of death of the promisor before performance, the representatives of the promisor are
bound to perform the promise unless a contrary intention appears from the contract.
Tender of Performance (Section 38)
In case of some contracts, it is sometimes sufficient if the promisor performs his side of the contract. Then, if the
performance is rejected, the promisor is discharged from further liability and may sue for the breach of contract if he
so wishes. This is called discharge by tender.
To be valid, a tender must fulfil the following conditions
1. it must be unconditional;
2. if must be made at a proper time and place;
3. it must be made under circumstances enabling the other party to ascertain(discover) that the party by whom
it is made is able and willing then and there to do the whole of what he is bound, to do by his promise;
4. if the tender relates to delivery of goods, the promisee must have a reasonable opportunity of seeing that
the thing offered is the thing which the promisor is bound by his promise to deliver;
5. tender made to one of the several joint promisees has the same effect as a tender to all of them.
Who can demand performance?
Generally speaking, a stranger to contract cannot sue and the person who can demand performance is the party to
whom the promise is made. But an assignee of the rights and benefits under a contract may demand performance
by the promisor, in the same way as the assignor, (i.e., the promisee) could have demanded.
Effect of refusal of party to perform wholly
Section 39 provides that when a party to a contract has refused to perform or disabled himself from performing his
promise in its entirety, the promisee may put an end to the contract unless he had signified by words or conduct his
acquiescence (consent/ Approval) in its continuance.
LESSON 16
By whom contract must be performed
Under Section 40 of the Act, if it appears from the nature of the case that it was the intention of the parties to a
contract that it should be performed by the promisor himself such promise must be performed by the promisor
himself. In other cases, the promisor or his representative may employ a competent person to perform it.
Example:
1. X promises to pay Rs. 1,000 to Y. X may either personally pay the money to Y or cause it to be paid to Y by
another. If X dies before making payment, his representatives must perform the promise or employ some proper
person to do so.
2. X promises to paint a picture for Y. X must personally perform the promise.
Devolution of Joint Liabilities

 Under Section 42 of the Indian Contract Act, where two or more persons have made a joint promise then,
unless a contrary intention appears from the contract all such persons should perform the promise. If any
one of them dies, his representatives jointly with the survivor or survivors should perform. After the death
of the last survivor, the representatives of all jointly must fulfil the promise.
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 Under Section 43 of the Indian Contract Act when two or more persons made a joint promise, the promisee
may, in the absence of an express agreement to the contrary(against) compel any one or more of such joint
promisors to perform the whole of the promise. Each of two or more joint promisors may compel every other
joint promisor to contribute equally with himself to the performance of the promise unless a contrary
intention appears from the contract. If any one of two or more promisors make default in such contribution,
the remaining joint promisors should bear the loss arising from such default in equal share.
 Under Section 44 of the Act, where two or more persons have made a joint promise, a release of one of such
joint promisors by the promisee does not discharge the other joint promisor(s); neither does it free the joint
promisor so released from responsibility to the other joint promisor or joint promisors.
Note: if agreed by both promisee and other joint promisors then, it is allowed.
Devolution of Joint Rights

A promise may be made to two or more persons. The promisees are called joint promisees.
For example, X may give a promise to repay Rs. 1,000 given by Y and Z jointly.
In such case, in the absence of a contrary intention, the right to claim, performance rests with Y and Z.
If Y dies, Y’s representative jointly with Z may, demand performance. If Z also dies, the representatives of Y and Z may
demand jointly performance from X.
Assignment
The promisee may assign rights and benefits of contract and the assignee will be entitled to demand performance by
the promisor. But the assignment to be complete and effectual, must be made by an instrument in writing.
An obligation or liability under a contract cannot be assigned.

For example, if A owes (have to pay) B Rs. 500 and A transfers the liability to C i.e. asks C to pay the sum to B, this
would not bind B, and B may not consent to this arrangement, as he may know nothing of C’s solvency. But if B
consents to accept performance by C, there is a substitution of new contract and the old contract is discharged and
all rights and liabilities under it are extinguished. This is technically called novation.
(b) Discharge by Mutual Agreement or Consent (Sections 62 and 63)

A contract may be discharged by the agreement of all parties to the contract, or by waiver or release by the party
entitled to performance.
Methods stipulated under Sections 62 and 63 of the Indian Contract Act for discharging a contract by mutual
consent are:
 Novation – when a new contract is substituted for existing contract either between the same parties or
between different parties, the consideration mutually being the discharge of the old contract.
 Alteration – change in one or more of the material terms of a contract.
 Rescission – by agreement between the parties at any time before it is discharged by performance or in some
other way. (to the process of cancelling or undoing a contract)
 Remission – acceptance of a less-er sum than what was contracted for or a lesser fulfilment of the promise
made. Example: where 'A' owes 'B' Rs. 5,000 and 'B' directs 'A' to pay just Rs. 2000 instead of the full amount
at the time and place where Rs. 5000 were to be paid, 'A' is discharged from his obligation by paying just the
amount accepted by 'B' in satisfaction of the full contract.
 Waiver – deliberate abandonment or giving up of a right which a party is entitled to under a contract, where
upon the other party to the contract is released from his obligation.
(c) Discharge by Lapses of Time

The Limitation Act, in certain circumstance, affords a good defense to suits for breach of contract, and in fact
terminates the contract by depriving (taking away) the party of his remedy to law.
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For example, where a debtor has failed to repay the loan on the stipulated date, the creditor must file the suit against
him within three years of the default. If the limitation period of three years expires and he takes no action he will be
barred from his remedy and the other party is discharged of his liability to perform.
(d) Discharge by Operation of the Law

Discharge under this head may take place as follows:
1. By merger: When the parties embody(include) the inferior contract in a superior contract.
2. By the unauthorised alteration of items of a written document: Where a party to a written contract makes
any material alteration without knowledge and consent of the other, the contract can be avoided by the other
party.
3. By insolvency: The Insolvency Act provides for discharge of contracts under particular circumstances.
For example, where the Court passes an order discharging the insolvent, this order exonerates or discharges him
from liabilities on all debts incurred previous to his adjudication.
4. Discharge by Impossibility or Frust-ration (beyond the control) (Section 56).
 A contract which is entered into to perform something that is clearly impossible is void.
For instance, A agrees with B to discover treasure by magic. The agreement is void by virtue of Section 56
para 1 which lays down the principle that an agreement to do an act impossible in itself is void.
 Sometimes subsequent impossibility (i.e. where the impossibility supervenes after the contract has been
made) renders the performance of a contract unlawful and stands discharged;
for example, where a singer contracts to sing and becomes too ill to do so, the contract becomes void. In this
connection, para 2 of Section 56 provides that a contract to do an act, which after the contract is made,
becomes impossible or by reason of some event which the promisor could not prevent, unlawful, becomes
void when the act becomes impossible or unlawful.
 If the impossibility is not obvious and the promisor alone knows of the impossibility or illegally then existing
or the promisor might have known as such after using reasonable diligence, such promisor is bound to
compensate the promisee for any loss he may suffer through the non-performance of the promise in spite of
the agreement being void ab-initio (Section 56, para 3).
In Satyabarta Ghose v. Mugnuram A.I.R. 1954 S.C. 44 the Supreme Court interpreted the term ‘impossible
appearing in second paragraph of Section 56. The Court observed that the word ‘impossible has not been
used here in the sense of physical or literal impossibility. The performance of an act may not be literally
impossible but it may be impracticable and useless from the point of view of the object and purpose which
the parties had in view; and if an untoward event or change of circumstances totally upsets the very
foundation upon which the parties rested their bargain; it can very well be said that the promisor found it
impossible to do the act which he promised to do.
In this case, A undertook to sell a plot of land to B but before the plot could be developed, war broke out and
the land was temporarily requisitioned by the Government. A offered to return earnest money to B in
cancellation of contract. B did not accept and sued A for specific performance. A pleaded discharge by
frustration. The Court held that Section 56 is not applicable on the ground that the requisition was of
temporary nature and there was no time limit within which A was obliged to perform the contract. The
impossibility was not of such a nature which would strike at the root of the contract.
(e) Discharge by Supervening Impossibility

A contract will be discharged by subsequent or supervening (change that situation) impossibility in any of the
following ways:
1. Where the subject-matter of the contract is destroyed without the fault of the parties, the contract is
discharged.
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2. When a contract is entered into on the basis of the continued existence of a certain state of affairs, the
contract is discharged if the state of things changes or ceases to exist.
3. Where the personal qualifications of a party are the basis of the contract, the contract is discharged by the
death or physical disablement of that party.
Discharge by Supervening Illegality
A contract which is contrary to law at the time of its formation is void. But if, after the making of the contract, owing
to alteration of the law or the act of some person armed with statutory authority the performance of the contract
becomes impossible, the contract is discharged. This is so because the performance of the promise is prevented or
prohibited by a subsequent change in the law.
Example: A enters into contract with B for cutting trees. By a statutory provision cutting of trees is prohibited except
under a license and the same is refused to A. The contract is discharged.
Cases in which there is no supervening impossibility
In the following cases contracts are not discharged (can’t excused) on the ground of supervening impossibility–
1. Difficulty of performance: The mere fact that performance is more difficult or expensive than the parties
anticipated does not discharge the duty to perform.
2. Commercial impossibilities do not discharge the contract. A contract is not discharged merely because
expectation of higher profits is not realised.
3. Strikes, lockouts and civil disturbance like riots do not terminate contracts unless there is a clause in the
contract providing for non-performance in such cases.
Supervening impossibility or illegality is known as frust-ration under English Law.
(f) Discharge by Breach

Where the promisor neither performs his contract nor does he tender (offer to do or perform) performance, or where
the performance is defective, there is a breach of contract.
The breach of contract may be (i) actual; or (ii) anticipatory.
 The actual breach may take place either at the time the performance is due, or when actually performing the
contract.
 Anticipatory breach means a breach before the time for the performance has arrived. This may also take
place in two ways – by the promisor doing an act which makes the performance of his promise impossible or
by the promisor in some other way showing his intention not to perform it.
Anticipatory Breach of Contract

Breach of contract may occur, before the time for performance is due. This may happen where one of the parties
definitely renounces the contract and shows his intention not to perform it or does some act which makes
performance impossible. The other party, on such a breach being committed, has a right of action for damages.
He may either sue for breach of contract immediately after repudiation or wait till the actual date when performance
is due and then sue for breach. If the promisee adopts the latter course, i.e., waits till the date when performance is
due, he keeps the contract alive for the benefit of the promisor as well as for his own. He remains liable under it and
enables the promisor not only to complete the contract in spite of previous repudiation, but also to avail himself of
any excuse for non- performance which may have come into existence before the time fixed for performance.
 In Hochester v. De La Tour (1853) E.R. 922, A hired B in April to act as a courier commencing employment
from 1st June, but wrote to B in May repudiating the agreement, B sued A for breach of contract
immediately after repudiation. A contended that there could not be breach of contract before June 1. Held,
B was immediately entitled to sue and need not wait till 1st June, for his right of action to accrue.
 In Avery v. Bowden (1856) 116 E.R. 1122, A hired B’s ship to carry a cargo from Russia. Later on B
repudiated the contract. A delayed taking action hoping B would change his mind before the performance
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date. War broke out between Russia and Britain before the performance date frustrating the contract.
Held, A lost his right to sue B for damages by his delay.
 In Frost v. Knight (1872) L.R. 7 Ex. 111, the law on the subject of anticipatory breach was summed up as
follows:
“The promisee if he pleases may treat the notice of intention as inoperative and await the time when the contract
is to be executed and then hold the other party responsible for all the consequences of non-performance: but in
that case he keeps the contract alive for the benefit of the other party as well as his own; he remains subject to all
his own obligations and liabilities under it, and enables the other party not only to complete the contract, if so
advised, notwithstanding his previous repudiation of it, but also to take advantage of any supervening
circumstances which would justify him in declining to complete it.”
REMEDIES FOR BREACH OF CONTRACT

Where a contract is broken, the injured party has several courses of action open to him. The appropriate remedy in
any case will depend upon the subject-matter of the contract and the nature of the breach.
Remedies for Breach of Contract

In case of breach of contract, the injured party may:
1. Rescind (cancel)the contract and refuse further performance of the contract; LESSON 1
2. Sue for damages;
3. Sue for specific performance;
4. Sue for an injunction to restrain the breach of a negative term; and
5. Sue on quantum meruit.
(i) Rescind and Refuse of Contract:

When a party to a contract has broken the contract, the other party may treat the contract as rescinded (canceled)
and he is absolved (free) from all his obligations under the contract.
 Under Section 65, 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.
 Under Section 75 of the Indian Contract Act, if a person rightfully rescinds a contract, he is entitled to a
compensation for any damage which he has sustained through the non-fulfilment of the contract by the other
party.
 Section 64 deals with consequences of rescission(cancelation) of voidable contracts,
i.e., where there is flaw in the consent of one party to the contract. Under this Section when a person at whose option
a contract is voidable rescinds, the other party thereto need not perform any promise therein contained in which he
is the promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder, from another
party to such contract, restore such benefit so far as may be, to the person from whom it was received.
(ii) Damages for Breach of Contract:

Under Section 73 of the Indian Contract Act, when a contract has been broken, a party who suffers by such breach is
entitled to receive, from the party who has broken the contract, compensation for any loss or damage, caused to him
thereby, which naturally arose in the usual course of things from such breach or which the parties knew, when they
made the contract to be likely to result from the breach of it. Such compensation is not to be given for any remote
and indirect loss or damage sustained by reason of the breach.
The foundation of the claim for damages rests in the celebrated case of Hadley v. Baxendale, (1854) 9 Ex. 341.
The facts of this case were as follows:
There was a breakdown of a shaft in A’s mill. He delivered the shaft to B, a common carrier to be taken to a
manufacturer to copy and make a new one. A did not make known to B that delay would result in loss of profits. By
some neglect on the part of B, the delivery of the shaft was delayed in transit beyond a reasonable time. As a result,
the mill was idle for a longer period than it would otherwise have been, had there been no such delay. It was held, B
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was not liable for the loss of profits during the period of delay as the circumstances communicated to A did not show
that the delay in the delivery of the shaft would entail loss of profits to the mill. In the course of the judgement it was
observed:
 “Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract should be such as may fairly and reasonably be
considered either arising naturally,
 i.e., according to the usual course of things from such breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation (give importance) of both parties at the time they made the
contract as the probable result of the breach of it.
 Now, if the special circumstances under which the contract was actually made were communicated by the
plaintiffs to the defendants and thus known to both the parties, the damages resulting from the breach of
such a contract which they would reasonably contemplate (study both side amicably), would be the amount
of injury which would ordinarily follow from a breach of contract under these special circumstances so known
and communicated.
 But, on other hand, if these special circumstances were wholly unknown to the party breaking the contract,
he at the most could only be supposed to have had in his contemplation, the amount of injury which would
arise generally and in the great multitude (being many numbers) of cases not affected by any special
circumstances from such breach of contract.
 For, had the special circumstances been known, the parties might have specially provided for the breach of
contract by special terms as to damages in that case and of this advantage it would be very unjust to
deprive(exclude) them.”
Liquidated and Unliquidated damages:

 Where the contracting parties agree in advance the amount payable in the event of breach, the sum
payable is called liquidated damages.
 Where the amount of compensation claimed for a breach of contract is left to be assessed by the Court,
damages claimed are called unliquidated damages.
Unliquidated Damages:
Those are of the following kinds:
1. general or ordinary damages,
2. special damages,
3. exemplary or punitive damages, and
4. nominal damages.
1. General (or) Ordinary Damages:

These are restricted to pecuniary (money related) compensation to put the injured party in the position he would
have been had the contract been performed. It is the estimated amount of loss actually incurred. Thus, it applies only
to the proximate consequences of the breach of the contract and the remote consequences are not generally
regarded. For example, in a contract for the sale of goods, the damages payable would be the difference between the
contract price and the price at which the goods are available on the date of the breach.
2. Special Damages:
Special damages are those resulting from a breach of contract under some peculiar circumstances. If at the time of
entering into the contract, the party has notice of special circumstances which makes special loss the likely result of
the breach in the ordinary course of things, then upon his-breaking the contract and the special loss following this
breach, he will be required to make good the special loss.
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For example, A delivered goods to the Railway Administration to be carried to a place where an exhibition was being
held and told the goods clerk that if the goods did not reach the destination on the stipulated date, he would suffer a
special loss. The goods reached late. He was entitled to claim special damages.
3. Exemplary or punitive Damages:
These damages are awarded to punish the defendant and are not, as a rule, granted in case of breach of contract. In
two cases, however, the court may award such damages, viz.,
1. breach of promise to marry; and
2. wrongful dishonor of a customer’s cheque by the banker.
In a breach of promise to marry, the amount of the damages will depend upon the extent of injury to the party’s
feelings. In the banker’s case, the smaller the amount of the cheque dishonored, larger will be damages as the credit
of the customer would be injured in a far greater measure, if a cheque for a small amount is wrongfully dishonored.
4. Nominal Damages:
Nominal damages consist of a small token award, e.g., a rupee of even 25 paise, where there has been an infringement
(going against) of contractual rights, but no actual loss has been suffered. These damages are awarded to establish
the right to decree for breach of contract.
LESSON 16
Liquidated Damages and Penalty
Where the contracting parties fix at the time of contract the amount of damages that would be payable in case of
breach, in English law, the question may arise whether the term amounts to “liquidated damages” or a “penalty”?
The Courts in England usually give effect to liquidated damages, but they always relieve against penalty.
The test of the two is that where the amount fixed is a genuine pre-estimate of the loss in case of breach, it is liquidated
damages and will be allowed. If the amount fixed is without any regard to probable loss, but is intended to frighten
the party and to prevent him from committing breach, it is a penalty and will not be allowed.
In Indian law, there is no such difference between liquidated damages and penalty. Section 74 provides for
“reasonable compensation” up to the stipulated amount whether it is by way of liquidated damages or penalty. For
example, A borrows Rs. 500 from B and promises to pay Rs. 1,000 if he fails to repay Rs. 500 on the stipulated date.
On A’s failure to repay on the given date, B is entitled to recover from A such compensation, not exceeding Rs. 1,000
as the Court may consider reasonable. (Union of India v. Raman Iron Foundry, AIR 1974 SC 1265).
(iii) Specific Performance:

It means the actual carrying out by the parties of their contract, and in proper cases the Court will insist upon the
parties carrying out this agreement. Where a party fails to perform the contract, the Court may, at its discretion, order
the defendant to carry out his undertaking according to the terms of the contract.
A decree for specific performance may be granted in addition to or instead of damages.
Specific performance is usually granted in contracts connected with land, e.g., purchase of a particular plot or house,
or to take debentures in a company. In case of sale of goods, it will only be granted if the goods are unique and cannot
be purchased in the market, e.g., a particular race horse, or one of special value to the party suing by reason of
personal or family association, e.g., an heirloom (valuable that has belonged to the same family for many years).
Specific performance will not be ordered:
 where monetary compensation is an adequate (enough for what you need) remedy;
 where the Court cannot supervise the execution of the contract, e.g., a building contract;
 where the contract is for personal service; and
 where one of the parties is a minor.
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Injunction:
An injunction, is an order of a Court restraining a person from doing a particular act. It is a mode of securing the
specific performance of a negative term of the contract, (i.e., where he is doing something which he promises not to
do), the Court may in its discretion issue an order to the defendant restraining him from doing what he promised not
to do. Injunction may be prohibitory or mandatory. In prohibitory, the Court restrains the commission of a wrongful
act whereas in mandatory, it restrains continuance of a wrongful commission.
In Lumley v. Wagner (1852) 90 R.R. 125. W agreed to sing at L’s theatre and nowhere else. W, in breach of contract
with L entered into a contract to sing for Z. Held, although W could not be compelled to sing at L’s theatre, yet she
could be restrained by injunction from singing for Z.
CONTRACT OF INDEMNITY AND GUARANTEE (SECTIONS 124 TO 147)
Meaning of Indemnity:
A contract of indemnity is a contract by which one party promises to save the other party from loss caused to him by
the conduct of the promisor himself, or by the conduct of any other person (Section 124).
Example:
A contract to indemnify B against the consequence of legal proceedings which C may take against B in respect of
3 lakh rupees. This is a contract of indemnity. The contract of indemnity may be express or implied.
 The person who promises to indemnify or make good the loss is called the indemnifier and the person whose
loss is made good is called the indemnified or the indemnity holder. A contract of insurance is an example of
a contract of indemnity according to English Law. In consideration of premium, the insurer promises to make
good the loss suffered by the assured-on account of the destruction by fire of his property insured against fire.
 Under the Indian Contract Act, the contract of indemnity is restricted to such cases allowed only where the
loss promised to be reimbursed, is caused by the conduct of the promisor or of any other person. The loss
caused by events or accidents which do not depend on the conduct of any person, it seems, cannot be sought
to be reimbursed under a contract of indemnity.
Rights of Indemnity Holder when Sued:

Under Section 125, the promisee in a contract of indemnity, acting within the scope of his authority, is entitled
to recover from the promisor—
1. all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to
indemnify applies;
2. all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene
the orders of the promisor, and acted as if it would have been prudent (wise) for him to act in the absence of
any contract of indemnity, or if the promisor authorised him to bring or defend the suit; and
3. all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was
not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to
make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.
Meaning of Contract of Guarantee:
In the contract of guarantee there are three parties involved. The parties in contract of guarantee are the following:
1. Creditor (கடன் ககொடுத்தவர்)– The creditor is the person who lends money to the principal debtor and
is entitled to receive the loan back as the specified time period expires.
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2. Principal debtor (முக்கிய/ தலலக்கடனாளி) – The principal debtor is the person who receives the
loan from the creditor and it is the primary liability of the principal debtor to return the money back.
3. Surety (பிலை/ உத்தரவொதமொன நபர்) – The surety is a person who takes the guarantee that the
principal debtor will return the money back. The surety is also called a guarantor. If the principal debtor fails
to pay the loan amount then the creditor can ask the surety to repay the loan.
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his
default.
 The person who gives the guarantee is called the Surety,
 The person for whom the guarantee is given is called the Principal Debtor, and
 The person to whom the guarantee is given is called the Creditor (Section 126).
A guarantee may be either oral or written, although in the English law, it must be in writing.
Illustration:
 B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the
payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise
to deliver the goods. This is sufficient consideration for C’s promise.
 A sell and delivers goods to B. C afterwards requests A to forbear (Decline/Delay/avoid) to sue B for the
debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees
to forbear as requested. This is sufficient consideration for C’s promise.
Like a contract of indemnity, a guarantee must also satisfy all the essential elements of a valid contract. There is,
however, a special feature with regard to consideration in a contract of guarantee. The consideration received by the
principal debtor is sufficient for surety. Section 127 provides that anything done or any promise made for the benefit
of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.
Distinction between Indemnity and Guarantee

A contract of indemnity differs from a contract of guarantee in the following ways:
 In a contract of indemnity there are only two parties: the indemnifier and the indemnified. In a contract of
guarantee, there are three parties; the surety, the principal debtor and the creditor.
 In a contract of indemnity, the liability of the indemnifier is primary. In a contract of guarantee, the liability
of the surety is secondary. The surety is liable only if the principal debtor makes a default, the primary liability
being that of the principal debtor.
 The indemnifier need not necessarily act at the request of the debtor; the surety gives guarantee only at
the request of the principal debtor. In the case of a guarantee, there is an existing debt or duty, the
performance of which is guaranteed by the surety,
 whereas in the case of indemnity, the possibility of any loss happening is the only contingency against
which the indemnifier undertakes to indemnify.
 The surety, on payment of the debt when the principal debtor has failed to pay is entitled to proceed
against the principal debtor in his own right, but the indemnifier cannot sue third-parties in his own name,
unless there be assignment. He must sue in the name of the indemnified.
Example:
 Indemnity – X agree to Pay Y Rs. 50000/- in case of loss to any property of later during the use by former.
 Guarantee - Z agree to Pay Y in case of loss to any property of later during the use by X.
Extent of Surety’s Liability:
 The liability of the surety is co-extensive (as same/equal) with that of the principal debtor unless the contract
otherwise provides (Section 128).
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 A creditor is not bound to proceed against the principal debtor. He can sue the surety without suing the
principal debtor. As soon as the debtor has made default in payment of the debt, the surety is immediately
liable.
 But until default, the creditor cannot call upon the surety to pay. In this sense, the nature of the surety’s
liability is secondary.
 Section 128 only explains the quantum of a surety’s obligation when terms of the contract do not limit it.
 Conversely it doesn’t follow that the surety can never be liable when the principal debtor cannot be held
liable.
 Thus, a surety is not discharged from liability by the mere fact that the contract between the principal debtor
and creditor was voidable at the option of the former, and was avoided by the former. Where the agreement
between the principal debtor and creditor is void.
Example in the case of minority of principal debtor, the surety is liable as a principal debtor; for in such cases the
contract of the so-called surety is not collateral, but a principal contract [Kashiba v. Shripat (1894) 19 Bom. 697].
Kinds of Guarantees:
A contract of guarantee may be for an existing debt, or for a future debt. It may be a specific guarantee, or it may be
a continuing guarantee.
 A specific guarantee is given for a single debt and comes to an end when the debt guaranteed has been paid.
 A continuing guarantee is one which extends to a series of transactions (Section 129). The liability of surety
in case of a continuing guarantee extends to all the transactions contemplated until the revocation of the
guarantee.
As for instance, S, in consideration that C will employ P in collecting the rents of C’s Zamindari, promises C to
be responsible to the amount of Rs. 5,000 for the due collection and payment by P of these rents. This is a
continuing guarantee.
Revocation of Continuing Guarantee:

A continuing guarantee is revoked in the following circumstances:
1. By notice of revocation by the surety (Section 130): The notice operates to revoke the surety’s liability as
regards future transactions. He continues to be liable for transactions entered into prior to the notice [Offord v.
Davies (1862) 6 L.T.S. 79].
2. By the death of the surety: The death of the surety operates, in the absence of contract [Lloyds v. Harper (188)
16 Ch. D. 290] as a revocation of a continuing guarantee, so far as regards future transactions (Section 131). But
for all the transactions made before his death, the surety’s estate(asserts)will be liable.
Rights of Surety:
A surety has certain rights against the creditor, (Section 141) the principal debtor (Sections 140 and 145) and the
co-securities (Sections 146 and 147). Those are—
Rights against the creditor

(i) Right to securities with the creditor:
Section 141 of the Indian Contract Act,1872 has mentioned the right of surety to get a share in the security which
has been kept while entering into the contract of guarantee. The place of surety is the same as the place of the
creditor in terms of security. It is a compulsion on a creditor to share the security with the surety; it is irrelevant
whether the surety was aware of the security or not. If the principal debtor defaults in the payment and the surety
has cleared the dues, it makes the surety entitled for a share.
(ii) Loss of securities without creditor’s negligence:
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Under this circumstance the creditor takes the security of the principal debtor in case of default of payment. The
surety has the right to set-off the claim in respect to the value of security from the debt of the principal debtor.
Illustration– A being the creditor gave a loan to B of Rs 2,00,000 on the surety of C. While B has kept his house on
security in respect to the loan borrowed from A. B was in default to pay the loan of A. If A files a case against C for
the repayment of the due amount, then C can claim discharge of the amount from the security which was
recovered.
2. Rights against the principal debtor: After discharging the debt, the surety steps into the shoes of the creditor or is
subrogated (forming a new contract to recover the debt) to all the rights of the creditor against the principal debtor.
He can then sue the principal debtor for the amount paid by him to the creditor on the debtor’s default; he becomes
a creditor of the principal debtor for what he has paid.
In some circumstances, the surety may get certain rights even before payment. The surety has remedies
against the principal debtor before payment and after payment.
In Mamta Ghose v. United Industrial Bank (AIR 1987 Cal. 180) where the principal debtor, after finding that
the debt became due, started disposing of his properties to prevent seizure by surety, the Court granted an
injunction to the surety restraining the principal debtor from doing so. The surety can compel the debtor, after
debt has become due to exonerate him from his liability by paying the debt.
3. Surety’s rights gains co-sureties: When a surety has paid more than his share of debt to the creditor, he has a right
of contribution from the co-securities who are equally bound to pay with him.
A, B and C are sureties to D for the sum of Rs. 3,000 lent to E who makes default in payment. A, B and C are between
themselves to pay Rs. 1,000 each. If any one of them has to pay more than Rs. 1,000 he can claim contribution from
the other two to reduce his payment to only Rs. 1,000. If one of them becomes insolvent, the other two shall have to
contribute the unpaid amount equally.
Discharge of Surety
A surety may be discharged from liability under the following circumstances:
1.By notice of revocation in case of a continuing guarantee as regards future transaction (Section 130).
2.By the death of the surety as regards future transactions, in a continuing guarantee in the absence of a
contract to the contrary (Section 131).
3.Any variation in the terms of the contract between the creditor and the principal debtor, without the consent
of the surety, discharges the surety as regards all transactions taking place after the variation (Section 133).
4.A surety will be discharged if the creditor releases the principal debtor, or acts or makes an omission which
results in the discharge of the principal debtor (Section 134). But where the creditor fails to sue the principal
debtor within the limitation period, the surety is not discharged.
5.Where the creditor, without the consent of the surety, makes an arrangement with the principal debtor for
composition, or promises to give time or not to sue him, the surety will be discharged (Section 135).
6.If the creditor does any act which is against the rights of the surety, or omits to do an act which his duty to the
surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged (Section 139).
7.If the creditor loses or parts with any security which at the time of the contract the debtor had given in favor of
the creditor, the surety is discharged to the extent of the value of the security, unless the surety consented to the
release of such security by creditor in favor of the debtor. It is immaterial whether the surety was or is aware of
such security or not (Section 141).
CONTRACT OF BAILMENT AND PLEDGE
(A) BAILMENT:
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A bailment is a transaction whereby one person delivers goods to another person for some purpose, upon a contract
that they are, when the purpose is accomplished to be returned or otherwise disposed of according to the directions
of the person delivering them (Section 148). The person who delivers the goods is called the bailor and the person to
whom they are delivered is called the bailee.
Bailment is a voluntary delivery of goods for a temporary purpose on the understanding that they are to be returned
in specie in the same or altered form. The ownership of the goods remains with the bailor, the bailee getting only
the possession. Delivery of goods may be actual or constructive, e.g., where the key of a go-down is handed over to
another person, it amounts to delivery of goods in the go-down.
Gratuitous(free) Bailment
A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration. Such a bailment
may be for the exclusive benefit of the bailor,
e.g., when A leaves his dog with a neighbor to be looked after in A’s absence on a holiday. It may again be for exclusive
benefit of the bailee,
e.g., where you lend your book to a friend of yours for a week. In neither case any charge is made.
A gratuitous bailment terminates by the death of either the bailor or the bailee (Section 162).
 Under Section 159 the lender of a thing for use may at any time require its return if the loan was gratuitous,
even though he lent it for a specified time or purpose.
 But if on the faith of such loan made for a specified time or purpose, the borrower has acted in such a manner
that the return of the thing lent before the time agreed upon would cause him loss exceeding the benefit
actually derived by him from the loan, the lender must, if he compels the return, indemnify the borrower the
amount in which the loss so occasioned exceeds the benefit so derived.
Bailment for Reward

This is for the mutual benefit of both the bailor and the bailee.
For example,
 A lets out a motor-car for hire to B. A is the bailor and receives the hire charges and B is the bailee and gets
the use of the car.
 Where, A hands over his goods to B, a carrier for carriage at a price, A is the bailor who enjoys the benefit of
carriage and B is the bailee who receives a remuneration for carrying the goods.
Duties of Bailee
The bailee owes the following duties in respect of the goods bailed to him:
1.The bailee must take as much care of the goods bailed to him as a man of ordinary prudence would take under
similar circumstances of his own goods of the same bulk, quality and value as the goods bailed (Section 151).
If he takes this much care, he will not be liable for any loss, destruction or deterioration of the goods bailed
(Section 152). The degree of care required from the bailee is the same whether the bailment is for reward or
gratuitous.
Of course, the bailee may agree to take special care of the goods, e.g., he may agree to keep the property safe
from all perils (occurring dangers) and answers for accidents or thefts. But even such a bailee will not be liable
for loss happening by an act of God or by public enemies.
2. The bailee is under a duty not to use the goods in an unauthorised manner or for unauthorised purpose (Section
153). If he does so, the bailor can terminate the bailment and claim damages for any loss or damage caused by
the unauthorised used (Section 154).
3. He must keep the goods bailed to him separate from his own goods (Sections 155-157).
If the bailee without the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and
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the bailee shall have an interest, in production to their respective shares, in the mixture thus produced. If the
bailee without the consent of the bailor, mixes the goods of the bailor with his own goods, and the goods can be
separated or divided, the property in the goods remains in the parties respectively; but the bailee is bound to
bear the expenses of separation, and any damages arising from the mixture.
If the bailee without the consent of the bailor mixes, the goods of the bailor with his own goods, in such a manner
that it is impossible to separate the goods bailed from the other goods and deliver them back, the bailor is entitled
to be compensated by the bailee for the loss of goods.
4. He must not set up an adverse (making difficult) title to the goods.
5. It is the duty of the bailee to return the goods without demand on the expiry of the time fixed or when the
purpose is accomplished (Section 160). If he fails to return them, he shall be liable for any loss, destruction or
deterioration of the goods even without negligence on his part (Section 161).
6. In the absence of any contract to the contrary, the bailee must return to the bailor any increase, or profits
which may have accrued from the goods bailed; for example, when A leaves a cow in the custody of B to be taken
care of and the cow gets a calf, B is bound is deliver the cow as well as the calf to A (Section 163).
LESSON 16
Bailees Particular - Lien (collateral security) (Section 170)
Where the goods are bailed for a particular purpose and the bailee in due performance of bailment, expands his skill
and labor, he has in the absence of an agreement to the contrary a lien on the goods, i.e., the bailee can retain the
goods until his charges in respect of labor and skill used on the goods are paid by the bailor.
A gives a piece of cloth to B, a tailor, for making it into a suit, B promises to have the suit ready for delivery within a
fortnight, B has the suit ready for delivery. He has a right to retain the suit until he is paid his dues.
The section expresses the Common Law principle that if a man has an article delivered to him on the improvement of
which he has to bestow trouble and expenses, he has a right to detain it until his demand is paid.
The right of lien arises only where labor and skill have been used so as to confer an additional value on the article.
Example
A gave clothes to B for Laundry. A denies to make full payment. B denied to return the clothes. Can B deny to
return the goods?
Yes, he can deny to return the goods as a bailee.
Particular and General Lien

Lien is of two kinds: Particular lien and General lien.
 A particular lien is one which is available only against that property of which the skill and labor have been
exercised. A bailee’s lien is a particular lien.
 A general lien is a right to detain any property belonging to the other and in the possession of the person
trying to exercise the lien in respect of any payment lawfully due to him.
Thus, a general lien is the right to retain the property of another for a general balance of accounts but a particular lien
is a right to retain only for a charge on account of labor employed or expenses bestowed upon the identical property
detained.
The right of general lien is expressly given by Section 171 of the Indian Contract Act to bankers, factors, war fingers,
attorneys of High Court and policy-brokers, provided there is no agreement to the contrary.
Duties of bailor
The bailor has the following duties:
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1. The bailor must disclose all the known faults in the goods; and if he fails to do that, he will be liable for any
damage resulting directly from the faults (Section 150).
For example, A delivers to B, a carrier, some explosive in a case, but does not warn B. The case is handled without
extraordinary care necessary for such articles and explodes. A is liable for all the resulting damage to men and
other goods.
In the case of bailment for hire, a still greater responsibility is placed on the bailor. He will be liable even if he
did not know of the defects (Section 150).
For example, A hire a carriage of B. The carriage is unsafe though B does not know this. A is injured. B is
responsible to A for the injury.
2. It is the duty of the bailor to pay any extraordinary expenses incurred by the bailee.
For example, if a horse is lent for a journey, the expense of feeding the house would, of course, subject to any
special agreement be borne by the bailee. If, however the horse becomes ill and expenses have been incurred
on its treatment, the bailor shall have to pay these expenses (Section 158).
3. The bailor is bound to indemnify the bailee for any cost or costs which the bailee may incur because of the
defective title of the bailor of the goods bailed (Section 164).
For example, A lends his car to B, (a customer) for a week as B has to go out of town for a family gathering. B
has already paid an advance of Rs 5000 to A. However, after 4 days, the police seized the car from B as it was
stolen and belonged to C. B had to arrange a new car for the same purpose and has to pay a higher rent. B can
claim from the amount he has already paid and also the higher rent he had to pay for the new car.
Termination of bailment
Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may terminate the bailment (Section 153).
Example: A bailed his horse to B for his own riding only. B allowed C to ride the horse, violating the terms of bailment.
A can terminate bailment.
As soon as the period of bailment expires or the object of the bailment has been achieved, the bailment comes to
an end, and the bailee must return the goods to the bailor (Section 160). Bailment is terminated when the subject
matter of bailment is destroyed or by reason of change in its nature, becomes incapable of use for the purpose of
bailment.
A gratuitous bailment can be terminated by the bailor at any time, even before the agreed time, subject to the
limitation that where termination before the agreed period causes loss in excess of benefit, the bailor must
compensate the bailee (Section 159).
A gratuitous bailment terminates by the death of either the bailor or the bailee (Section 162).
Finder of Lost Goods
The position of a finder of lost goods is exactly that of a bailee. The rights of a finder are that he can sue the owner
for any reward that might have been offered, and may retain the goods until he receives the reward. But where the
owner has offered no reward, the finder has only a particular lien and can detain the goods until he receives
compensation for the troubles and expenses incurred in preserving the property for finding out the true owner. But
he cannot file a suit for the recovery of the compensation [Section 168].
Thus, as against the true owner, the finder of goods in a public or quasi-public place is only a bailee; he keeps the
article in trust for the real owner. As against every-one else, the property in the goods vests in the finder on his taking
possession of it.
The finder has a right to sell the property—
1. where the owner cannot with reasonable diligence be found, or
2. when found, he refuses to pay the lawful charges of the finder and—
a. if the thing is in danger of perishing or losing greater part of its value, or
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b. when the lawful charges of the finder for the preservation of goods and the finding out of the
owner amounts to two-thirds of the value of the thing (Section 169).
Carrier as Bailee
A common carrier undertakes to carry goods of all persons who are willing to pay his usual or reasonable rates. He
further undertakes to carry them safely, and make good all loses, unless they are caused by act of God or public
enemies. Carriers by land including railways and carriers by inland navigation, are common carriers. Carriers by Sea
for hire are not common carriers and they can limit their liability. Railways in India are now common carriers.
Inn-keepers: The liability of a hotel keeper is governed by Sections 151 and 152 of the Contract Act and is that of an
ordinary bailee with regard to the property of the guests.
Example: C stayed in a room in a hotel. The hotel-keeper knew that the room was in an insecure condition. While C
was dining in the dining room, some articles were stolen from his room. It was held that the hotel-keeper was liable
as he should have taken reasonable steps to rectify the insecure condition of the rooms (Jan & San v. Caneron (1922)
44 All. 735).
(B) PLEDGE:
Pledge or pawn is a contract whereby an article is deposited with a lender of money or promisee as security for the
repayment of a loan or performance of a promise. The bailor or depositor is called the “Pawnor” and the bailee or
depositee the “Pawnee” (Section 172).
Since pledge is a branch of bailment, the pawness is bound to take reasonable care of the goods pledged with him.
Any kind of goods, valuables, documents or securities may be pledged. The Government securities, e.g., promissory
notes must, however, be pledged by endorsement and delivery.
The following are the essential ingredients of a pledge:

1. The property pledged should be delivered to the pawnee.
2. Delivery should be in pursuance of a contract.
3. Delivery should be for the purpose of security.
4. Delivery should be upon a condition to return.
Rights of the Pawnee:
No property in goods pawned passes to the pawnee, but the pawnee gets a “special property to retain possession
even against the true owner until the payment of the debt, interest on the debt, and any other expense incurred in
respect of the possession or for preservation of the goods pledged” (Section 173).
The pawnee must return the goods to the pawnor on the tender of all that is due to him. The pawnee cannot confer a
good title upon a bona fide purchaser for value.
Should the pawnor make a default in payment of the debt or performance of the promise at the stipulated time, the
pawnee may-
1. file a suit for the recovery of the amount due to him while retaining the goods pledged as collateral security;
or
2. sue for the sale of the goods and the realisation of money due to him; or
3. himself sell the goods pawned, after giving reasonable notice to the pawnor, sue for the deficiency, if any,
after the sale.
If the sale is made in execution of a decree, the pawnee may buy the goods at the sale.But he cannot sell them to
himself in a sale made by himself under (iii) above. If after sale of the goods, there is surplus, the pawnee must pay it
to the pawnor (Section 176).
Rights of Pawnor:
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On default by pawnor to repay on the stipulated date, the pawnee may sell the goods after giving reasonable notice
to the pawnor. If the pawnee makes an unauthorised sale without giving notice to the pawnor, the pawnor has the
following rights—
1. He can file a suit for redemption of goods by depositing the money treating the sale as if it had never taken
place; or
2. He can ask for damages on the ground of conversion.
Pledge by Non-owners:
Ordinarily, the owner of the goods would pledge them to secure a loan but the law permits under certain
circumstances a pledge by a person who is not the owner but is in possession of the goods. Thus, a valid pledge may
be created by the following non-owners.
1. A mercantile agent: Where a mercantile agent is, with the consent of the owner, in possession of goods or
the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a
mercantile agent, is as valid as if he were expressly authorised by the owner of the goods to make the same.
But the pledge is valid only if the pawnee acts in good faith and has not at the time of the pledge notice that
the pawnor has not the authority to pledge (Section 178).
2. Pledge by seller or buyer in possession after sale: A seller, left in possession of goods sold, is no more the
owner, but pledge by him will be valid, provided the pawnee acted in good faith and had no notice of the sale of
goods to the buyer (Section 30 of The Sale of Goods Act 1930).
3. Pledge where pawnor having limited interest: When the pawnor is not the owner of the goods but has a limited
interest in the goods which he pawns, e.g., he is a mortgagee or he has a lien with respect of these goods, the
pledge will be valid to the extent of such interest.
4. Pledge by co-owner in possession: One of the several co-owners of goods in possession thereof with the
assent of the other co-owners may create a valid pledge of the goods.
5. Pledge by person in possession under a voidable contract: 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 contract is avoided by the other party (Section 178A).
LAW OF AGENCY
Definition of Agent (Section 182)
An agent is a person who is employed to bring his principal into contractual relations with third-parties. As the
definition indicates, an agent is a mere connecting link between the principal and a third-party. But during the
period that an agent is acting for his principal, he is clothed with the capacity of his principal.
Creation of Agency
A contract of agency may be express or implied, (Section 186) but consideration is not an essential element in this
contract (Section 185). Agency may also arise by estoppel (denying his own statement made previously), necessity
or ratification (formal confirmation).
1. Express Agency: A contract of agency may be made orally or in writing. The usual form of written contract of agency
is the Power of Attorney, which gives him the authority to act on behalf of his principal in accordance with the terms
and conditions therein. In an agency created to transfer immovable property, the power of attorney must be
registered. A power of attorney may be general, giving several powers to the agent, or special, giving authority to the
agent for transacting a single act.
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2. Implied Agency: Implied agency may arise by conduct, situation of parties or necessity of the case.
3. Agency by Estoppel (Section 237): Estoppel arises when you are precluded from denying the truth of anything
which you have represented as a fact, although it is not a fact.
Example, where P allows third- parties to believe that A is acting as his authorised agent, he will be estopped from
denying the agency if such third-parties relying on it make a contract with an even when A had no authority at all.
4. Wife as agent: Where a husband and wife are living together, the wife is presumed to have her husband’s authority
to pledge his credit for the purchase of necessaries of life suitable to their standard of living. But the husband will not
be liable if he shows that
(a) he had expressly warned the trade man not to supply goods on credit to his wife; or
(b) he had expressly forbidden the wife to pledge his credit; or
(c) his wife was already sufficiently supplied with the articles in question; or
(d) she was supplied with a sufficient allowance.
Similarly, where any person is held out by another as his agent, the third-party can hold that person liable for the
acts of the ostensible agent (illusionary agent), or the agent by holding out (believing agent). Partners are each
other’s agents for making contracts in the ordinary course of the partnership business.
5. Agency of Necessity (Sections 188 and 189): In certain circumstances, a person who has been entrusted with
anothers property, may have to incur unauthorised expenses to protect or preserve it. Such an agency is called an
agency of necessity.
For example, A sent a horse by railway and on its arrival at the destination there was no one to receive it. The railway
company, being bound to take reasonable steps to keep the horse alive, was an agent of necessity of A.
For example, A wife deserted by her husband and thus forced to live separate from him, can pledge her husband’s
credit to buy all necessaries of life according to the position of the husband even against his wishes.
6. Agency by ratification (Sections 169-200) (Legal Approval): Where a person having no authority purports to act as
agent, or a duly appointed agent exceeds his authority, the principal is not bound by the contract supposedly based
on his behalf.
But the principal may ratify the agent’s transaction and so accept liability. In this way an agency by ratification arises.
This is also known as ex post facto agency— agency arising after the event.
The effect of ratification is to render the contract binding on the principal as if the agent had been authorised
beforehand. Also, ratification relates back to the original making of the contract so that the agency is taken to have
come into existence from the moment the agent first acted, and not from the date the principal ratified it.
Ratification (Legal Approval) is effective only if the following conditions are satisfied –
 The agent must expressly contract as agent for a principal who is in existence and competent to contract.
 The principal must be competent to contract not only at the time the agent acted, but also when he ratified
the agents act.
 The principal at the time of ratification has full knowledge of the material facts, and must ratify the whole
contract, within a reasonable time.
 Ratification cannot be made so as to subject a third-party to damages, or terminate any right or interest of
a third person.
 Only lawful acts can be ratified.
Classes of Agents
Agents may be special or general or, they may be mercantile agents:
1. Special Agent: A special agent is one who is appointed to do a specified act, or to perform a specified function. He
has no authority outside this special task. The third-party has no right to assume that the agent has unlimited
authority. Any act of the agent beyond that authority will not bind the principal.
2. General Agent: A general agent is appointed to do anything within the authority given to him by the
principal in all transactions, or in all transactions relating to a specified trade or matter. The third-party may assume
that such an agent has power to do all that is usual for a general agent to do in the business involved. The third party
is not affected by any private restrictions on the agent’s authority.
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3. Sub-Agent:
A person who is appointed by the agent and to whom the principal’s work is delegated to known as sub-agent. Section
191 provides that “a sub-agent is a person employed by, and acting under the control of the original agent in the
business of the agency.” So, the sub-agent is the agent of the original agent.
As between themselves, the relation of sub-agent and original agent is that of agent and the principal. A sub-agent is
bound by all the duties of the original agent. The sub-agent is not directly responsible to the principal except for fraud
and willful wrong. The sub-agent is responsible to the original agent. The original agent is responsible to the principal
for the acts of the sub-agent. As regards third persons, the principal is represented by sub-agent and he is bound and
responsible for all the acts of sub-agent as if he were an agent originally appointed by the principal.
4. Mercantile Agent:( functional middlemen)

Section 2(9) of the Sale of Goods Act, 1930, defines a mercantile agent as “a mercantile agent having in the customary
course of business as such agent authority either to sell goods or consign goods for the purposes of sale, or to buy
goods, or to raise money on the security of goods”.
This definition covers factors, brokers, auctioneers, commission agents etc.
 Factors: A factor is a mercantile agent employed to sell goods which have been placed in his possession or
contract to buy goods for his principal. He is the apparent owner of the goods in his custody and can sell
them in his own name and receive payment for the goods. He has an insurable interest in the goods and also
a general lien (Legal Right/Claim) in respect of any claim he may have arising out of the agency.
 Brokers: A broker is a mercantile agent whose ordinary course of business is to make contracts with other
parties for the sale and purchase of goods and securities of which he is not entrusted with the possession
for a commission called brokerage. He acts in the name of principal. He has no lien (Legal Right/Claim) over
the goods as he is not in possession of them.
 Del Credere Agent: A del credere agent is a mercantile agent, who is in consideration of an extra
remuneration guarantees to his principal that the purchasers who buy on credit will pay for the goods they
take. In the event of a third-party failing to pay, the del credere agent is bound to pay his principal the sum
owned by third-party.
 Auctioneers: An auctioneer is an agent who sells goods by auction, i.e., to the highest bidder in public
competition. He has no authority to warrant his principals title to the goods. He is an agent for the seller but
after the goods have been knocked down, he is agent for the buyer also for the purpose of evidence that
the sale has taken place.
 Partners: In a partnership firm, every partner is an agent of the firm and of his co-partners for the purpose
of the business of the firm.
 Bankers: The relationship between a banker and his customer is primarily that of debtor and creditor. In
addition, a banker is an agent of his customer when he buys or sells securities, collects cheques dividends,
bills or promissory notes on behalf of his customer. He has a general lien (Legal Right/Claim) on all
securities and goods in his possession in respect of the general balance due to him by the customer.
LESSON 16
Duties of the Agent:

An agent’s duties towards his principal are as follows (which give corresponding rights to the principal who may sue
for damages in the event of a breach of duty by the agent):
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1. An agent must act within the scope of the authority conferred upon him and carry out strictly the
instructions of the principal (Section 211).
2. In the absence of express instructions, he must follow the custom prevailing in the same kind of business at
the place where the agent conducts the business (Section 211).
3. He must do the work with reasonable skill and diligence whereby the nature of his profession, the agent
purports to have special skill, he must exercise the skill which is expected from the members of the profession
(Section 212).
4. He must disclose promptly any material information coming to his knowledge which is likely to influence
the principal in the making of the contract.
5. He must not disclose confidential information entrusted to him by his principal (Section 213).
6. He must not allow his interest to conflict with his duty, e.g., he must not compete with his principal
(Section 215).
7. The agent must keep true accounts and must be prepared on reasonable notice to render an account.
8. He must not make any secret profit; he must disclose any extra profit that he may make.
Where an agent is discovered taking secret bribe, etc., the principal is entitled to (i) dismiss the agent without
notice, (ii) recover the amount of secret profit, and (iii) refuse to pay the agent his remuneration. He may
repudiate the contract, if the third-party is involved in secret profit and also recover damages.
9. An agent must not delegate (consent to act like him) his authority to sub-agent. A sub-agent is a person
employed by and acting under the control of the original agent in the business of agency (Section 191). This
rule is based on the principle: Delegatus non-potest delegare — a delegate cannot further delegate (Section
190).
But there are exceptions to this rule and the agent may delegate (i) where delegation is allowed by the principal, (ii)
where the trade custom or usage sanctions delegation, (iii) where delegation is essential for proper performance, (iv)
where an emergency renders it imperative, (v) where nature of the work is purely ministerial(Govt.Rule), and (vi)
where the principal knows that the agent intends to delegate.
Rights of Agents:
Where the services rendered by the agent are not gratuitous or voluntary, the agent is entitled to receive the agreed
remuneration, or if none was agreed, a reasonable remuneration. The agent becomes entitled to receive
remuneration as soon as he has done what he had undertaken to do (Section 219).
Certain classes of agents, e.g., factors who have goods and property of their principal in their possession, have a lien
on the goods or property in respect of their remuneration and expense and liabilities incurred. He has a right to stop
the goods in transit where he is an unpaid seller.
As the agent represents the principal, the agent has a right to be indemnified by the principal against all charges,
expenses and liabilities properly incurred by him in the course of the agency (Sections 222-223).
Example:
B, at Singapore, under instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not
send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend
the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B (as an
agent) for such damages, costs and expenses.
Extent of Agent’s Authority:
The extent of the authority of an agent depends upon the terms expressed in his appointment or it may be implied
by the circumstances of the case. The contractual authority is the real authority, but implied authority is to do
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whatever incidental to carry out the real authority. This implied authority is also known as apparent (true but may
not be) or ostensible (not real) authority, Thus, an agent having an authority to do an act has authority to do
everything lawful which is necessary for the purpose or usually done in the course of conducting business.
An agent has authority to do all such things which may be necessary to protect the principal from loss in an emergency
and which he would do to protect his own property under similar circumstances.
Example: Where butter was becoming useless owing to delay in transit and was therefore sold by the station master
for the best price available as it was not possible to obtain instructions from the principal, the sale was held binding
upon the principal.
Responsibilities of Principal to Third-parties:
The effect of a contract made by an agent varies according to the circumstances under which the agent contracted.
There are three circumstances in which an agent may contract, namely—
o the agent acts for a named principal;

o the agent acts for an undisclosed principal; and
o the agent acts for a concealed principal.
1. Disclosed principal: Where the agent contracts as agent for a named principal, he generally incurs neither
rights nor liabilities under the contract, and drops out as soon as it is made. The contract is made between
the principal and the third-party and it is between these two that rights and obligations are created. The legal
effect is the same as if the principal had contracted directly with the third-party.
The effect is that the principal is bound by all acts of the agent done within the scope of actual, apparent or ostensible
authority. This ostensible authority of the agent is important, for the acts of a general agent are binding on the
principal if they are within the scope of his apparent authority, although they may be outside the scope of his actual
authority. Therefore, a private or secret limitation or restriction of powers of an agent do not bind innocent third-
party.
2. Undisclosed principal: Where the agent disclose that he is merely an agent but conceals the identity of his
principal, he is not personally liable, as he drops out in normal way. The principal, on being discovered, will
be responsible for the contract made by the agent.
3. Concealed principal: Where an agent appears to be contracting on his own behalf, without either contracting
as an agent or disclosing the existence of an agency (i.e., he discloses neither the name of the principal nor his
existence), he becomes personally liable. The third-party may sue either the principal (when discovered) or
the agent or both.
If the third-party chooses to sue the principal and not the agent, he must allow the principal the benefit of all
payments made by him to the agent on account of the contract before the agency was disclosed.
The third-party is also entitled to get the benefit of anything he may have paid to the agent. If the principal discloses
himself before the contract is completed, the other contracting party may refuse to fulfil the contract if he can show
that, if he had known who the principal in the contract was, or if he had known that the agent was not the principal,
he would not have entered into the contract.
Principal Liable for Agent’s Torts (Section 238)

If an agent commits a tort or other wrong (e.g., misrepresentation or fraud) during his agency, whilst acting within
the scope of his actual or apparent authority, the principal is liable. But the agent is also personally liable, and he
may be sued also. The principal is liable even if the tort is committed exclusively for the benefit of the agent and
against the interests of the principal.
Personal Liability of Agent to Third-party

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An agent is personally liable in the following cases:

1. Where the agent has agreed to be personally liable to the third-party.
2. Where an agent acts for a principal residing abroad.
3. When the agent signs a negotiable instrument in his own name without making it clear that he is signing it
only as agent.
4. When an agent acts for a principal who cannot be sued (e.g., he is minor), the agent is personally liable.
5. An agent is liable for breach of warranty of authority. Where a person contracts as agent without any authority
there is a breach of warranty of authority. He is liable to the person who has relied on the warranty of authority
and has suffered loss.
6. Where authority is one coupled with interest or where trade, usage or custom makes the agent personally
liable, he will be liable to the third-party.
7. He is also liable for his torts committed in the course of agency.
Meaning of Authority Coupled with Interest (Section 202)

The term 'coupled with interest' is used to describe a type of power of attorney that gives the agent the authority
to handle not only the principal's property but also any interests which may result from such authority.
An agency is coupled with an interest when the agent has an interest in the authority granted to him or when the
agent has an interest in the subject matter with which he is authorised to deal. Where the agent was appointed to
enable him to secure some benefit already owed to him by the principal, the agency was coupled with an interest.
For example, where a factor had made advances to the principal and is authorised to sell at the best price and recoup
the advances made by him or where the agent is authorised to collect money from third-parties and pay himself the
debt due by the principal, the agencies are coupled with interest. But a mere arrangement that the agent’s
remuneration to paid out of the rents collected by him, it does not give him any interest in the property and the
agency is not the one coupled with an interest. An agency coupled with interest cannot be terminated in the absence
of a contract to the contrary to the prejudice of such interest.
The principal laid down in Section 202 applies only if the following conditions are fulfilled:
1. The interest of the agent should exist at the time of creation of agency and should not have arisen after the
creation of agency.
2. Authority given to the agent must be intended for the protection of the interest of the agent.
3. The interest of the agent in the subject matter must be substantial and not ordinary.
4. The interest of the agent should be over and above his remuneration. Mere prospect of remuneration is not
sufficient interest.
Termination of Agency
An agency comes to an end or terminates—
1. By the performance of the contract of agency; (Section 201)
2. By an agreement between the principal and the agent;
3. By expiration of the period fixed for the contract of agency;
4. By the death of the principal or the agency; (Section 201)
5. By the insanity of either the principal or the agent; (Section 201)
6. By the insolvency of the principal, and in some cases that of the agent; (Section 201)
7. Where the principal or agent is an incorporated company, by its dissolution;
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8. By the destruction of the subject-matter; (Section 56)

9. By the renunciation (abandoning/giving up) of his authority by the agent; (Section 201)
10. By the revocation of authority by the principal. (Section 201)
When Agency is Irrevocable

Revocation of an agency by the principal is not possible in the following cases:
1. Where the authority of agency is one coupled with an interest, even the death or insanity of the principal
does not terminate the authority in this case (Section 202).
2. When agent has incurred personal liability, the agency becomes irrevocable.
3. When the authority has been partly exercised by the agent, it is irrevocable in particular with regard to
obligations which arise from acts already done (Section 204).
Example:
1. A gives authority to B to sell A’s land, and to pay himself, out of the proceeds, the debts due to him from A.
A cannot revoke this authority, nor can it be terminated by his insanity or death.
2. A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out of A’s moneys remaining in
B’s hands. B buys 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A
cannot revoke B’s authority so far as regards payment for the cotton.
When Termination Takes Effect:

 Termination of an agency takes effect or is complete, as regards the agent when it becomes known to the
agent.
 If the principal revokes the agent’s authority, the revocation will take effect when the agent comes to know
of it.
 As regards the third-parties, the termination takes effect when it comes to their knowledge (Section 208).
 Thus, if an agent whose authority has been terminated to his knowledge, enters into a contract with a third-
party who deals with him bona fide, the contract will be binding on the principal as against the third-party.
 The termination of an agent’s authority terminates the authority of the sub-agent appointed by the agent
(Section 210).
 The revocation of agency as regards the agent and as regards the principal takes effect at different points of
time.
 Section 209 charges the agent with duty to protect the principal’s interest where the principal dies or becomes
of unsound mind. It provides that when an agency is terminated by the principal dying or becoming of unsound
mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for
the protection and preservation of the interest entrusted to him. So, it is the duty of the agent to take all steps
to protect the interest of his deceased principal on his death.
International business professionals use the term “modes of entry” to describe the different methods and
approaches available to enter markets and conduct business in other countries.
One mode of entry is the joint venture where two or more organizations join together in a cooperative effort to
further their business goals.
 The joint venture is one of the most common and effective means of conducting business internationally.
 The joint venture documents and agreements are critical to the success of the venture.
 The joint venture agreement forms the basis of the understanding between and among the parties. It is relied
upon to ensure that all parties understand their roles, rights, responsibilities, and remedies in the conduct of
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the venture. Organizations enter into joint ventures in good faith but closely scrutinize the joint venture
documents if anything goes awry.
The importance of the documents and the purpose of this part is to cover, step by step, the critical elements to
consider and include in joint venture agreements.
 Equity participation, for example, may or may not be as important as operational control.
 Technical participation in the venture may or may not be as important as the intellectual property rights that
may result from the venture.
A key to developing joint venture agreements is to determine goals and objectives in advance and ensure that the
interests are reflected in the agreement.
Selection of good local partner is the key to success of any joint venture. Personal interviews with a prospective joint
venture partner should be supplemented with proper due diligence. Once a partner is selected generally the parties
highlighting the basis of the future joint venture agreement sign a memorandum of understanding or a letter of intent.
Before signing the joint venture agreement, the terms should be thoroughly discussed to avoid any misunderstanding
at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.
It is difficult to prepare a set frame of the terms and conditions. The conditions may differ according to the
requirements.
While drafting a foreign collaboration agreement, the following factors should be kept in mind:
1. Capability of the collaborator and the requirements of the party are clearly indicated.
2. Clear definitions of technical terms are given.
3. Specify if the product shall be manufactured/sold on exclusive or non-exclusive basis.
4. Terms and conditions regarding nature of technical know-how, disclosure of drawings, specifications and other
documents, furnishing of technical information in respect of processes with flow charts etc., plant outlay list of
equipment, machinery and tool with specification have to be provided.
5. Provisions for making available the engineers and/or skilled workers of the collaborator on payment of
expenses relating to their stay per diem etc. are given.
Details regarding specification and quality of the product to be manufactured are given.
1. Quality control and trademarks to be used are also specified.
2. Responsibility of the collaborator in establishing or maintaining assembly plants should be clearly determined
and provided for.
3. If sub-contracting of the work is involved, clarify if there would be any restrictions.
4. The rate of royalty, mode of calculation and payment etc. Also, make provision as to who will bear the
taxes/cess on such payments.
5. Use of information and industrial property rights should also be provided for in the agreement.
6. A clause on force majeure should be included.
7. A clause that the collaborating company has to train the personnel of Indian company within a specified period
should be incorporated The clause should also specify the terms and conditions of such assistance, place of
training, period of training and fees payable.
8. A comprehensive clause on arbitration containing a clear provision as to the kind of arbitrator and place of
arbitration should be included.
9. There should be provision in the agreement for payment of interest on delayed payments.
E-CONTRACT
Electronic contracts are not paper based but rather in electronic form are born out of the need for speed, convenience
and efficiency. In the electronic age, the whole transaction can be completed in seconds, with both parties simply
49
affixing their digital signatures to an electronic copy of the contract. There was initially an apprehension amongst the
legislatures to recognize this modern technology, but now many countries have enacted laws to recognize electronic
contracts. The conventional law relating to contracts is not sufficient to address all the issues that arise in electronic
contracts. The Information Technology Act, 2000 solves some of the peculiar issues that arise in the formation and
authentication of electronic contracts
As in every other contract, an electronic contract also requires the following necessary ingredients:
1. An offer needs to be made
2. The offer needs to be accepted
3. There has to be lawful consideration
4. There has to be an intention to create legal relations
5. The parties must be competent to contract
6. There must be free and genuine consent
7. The object of the contract must be lawful
8. There must be certainty and possibility of performance.
Basic Type of e-contracts

1. Shrink wrap agreements: In these types of agreements the product is wrapped. Terms and Conditions
are placed with the product itself. These are End user License Agreements. Example: purchase of Anti-Virus.
2. Clickwrap Agreements: These agreements require the users to accept the proposal by clicking the “I
agree”. User agree by clicking on the agree button. Example: Creation of email id.
3. Browse Wrap Agreements: These agreements are entered by continued use of the website. By using
the website, the user is deemed to have accepted the conditions. Example: Sale and Purchase on online
platforms.
4. Scroll Wrap Agreements: In these agreements, where users are required to scroll to the complete terms
and conditions of the documents and give their implied consent. Example: Few mobile applications requires
the user to scroll down.
5. Sign-In Wrap Agreements: In these agreements, user agree by signing in to a particular website or mobile
application. User agree with the terms and conditions by Signing in.
E-contracts are binding only if they have all the essentials required under Indian Contract Act. If any term or
condition are not in accordance with the law than the agreements are valid.
Case Laws:
Trimex International FZE Ltd. Dubai (Petitioner) vs. Vedanta Aluminum Ltd., India (Respondent) on 22nd January,
2010
This case may be referred to understand the position of law relating to contract concluded by emails. In this case,
the court has held that a contract may be concluded by exchange of emails. It was stated:
As rightly pointed out by the learned senior counsel for the petitioner, when Mr A of Trimex opened the email of
Mr. B of Vedanta at 3:06 PM on 16.10.2007, it came to his knowledge that an irrevocable contract was concluded.
Apart from this, the mandate of Section 7 of the Indian Contract Act stipulated that an acceptance must be absolute
and unconditional has also been fulfilled. It is true that in the first acceptance conveyed by the respondent
contained a rider, namely, cancellation after 2 shipments which made acceptance conditional. However, taking note
of the said condition, the petitioner requested the respondent to convey an unconditional acceptance which was
readily done through his email sent at 3:06 PM with the words “we confirm the deal for 5 shipments”, which is
unconditional and unqualified.
*************INDIAN CONTRACT ACT,1872 -END************
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INDIAN CONTRACT ACT,1872 - JIGL- CS EXECUTIVE

Indian Contract Act, 1872 - Lesson 16

 When you order food at a restaurant, you enter into a contract.

The Law of Contract is governed by Indian Contract Act, 1872.

The Act can be divided into two parts

Contract Agreement / Promise / Proposal

Now, the next question is what is an agreement?

Now the next question is what is a promise?

Next we need to understand what is a proposal?

Difference between Contract & Agreement

Rights and Obligations

Agreements which are not Contracts (not enforceable by law):

Intention to Create Legal Relations

Other Important Types of Contracts

Rules regarding contingent contracts

Law relating Other Important Types of Contracts

ESSENTIAL ELEMENTS OF A VALID CONTRACT

Offer/Proposal[sec2(a)] & Acceptance:

Rules governing Offers / Rules for a Valid Offer:

 it is accepted does not create legal relations because it is not so intended

Rules Governing Acceptance

 Acceptance by Offeree or Authorised person: Acceptance should be communicated by the offeree or by an

Essential Elements of a Valid Consideration

1. Consideration at the desire of the promisor:

4.The consideration must be real and not illusionary.

Exception to the general rule of 'No Consideration, No Contract'

Written and Promise to Promise to Completed Agency Gratuitous

An • A promise •A debt 'No • No •Consideration

and part, a debt is accepted. agent, he is Gratuitous

Terms Must be Certain

The consideration that will move after the formation of agreement

Doctrine of Privity of Contract and of Consideration

Doctrine of Privity of Contract:

Only parties of contract can sue - Privity of Contract:

Consequences of Privity of Contract:

Stranger to Contract cannot sue:

Privity of consideration in India:

(a) Void Agreement

(b) Voidable Contract

(c) Illegal Agreement

Capacity (or) Competency to contract (section-11)

Minors Contract: Is Invalid / void

Lunatics Agreement: Is in Valid / Void

Other Persons qualified and disqualified from contracting: Is in Valid / Void

Mistake (Sections 20 and 21)

Mistake as to Nature of the Contract:

Misrepresentation (Section 18)

Damages for Innocent Misrepresentation

Wilful Misrepresentation or Fraud (Section 17)

3. made with the intention that it should be acted upon,

Contracts Uberrimae Fidei (contracts requiring utmost good faith).

Contracts uberrimae fidei are:

Difference between Fraud and Innocent Misrepresentation

Coercion: defined in Section 15

Undue Influence: Sec 16

DIFFERENCE BETWEEN COERCION AND UNDUE INFLUENCE:

4. Any such act or omission as the law specially declares to be fraudulent.

Transaction with parda-nishin women

Void and Illegal Contracts

Consequence of Illegal Agreements