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THE INDIAN CONTRACT ACT, 1872 The Law of Contract Constitutes the most important branch of mercantile or commercial law. It affects everybody, more so, trade, commerce an industry. It may be said that the contract is the foundation of the civili!ed world. The law relatin" to contract is "overned by the Indian Contract #ct, 1872 $#ct %o. I& of 1872'. The preamble to the #ct says that it is an #ct (to define and amend certain parts of the law relatin" to contract(. It e)tends to the whole of India e)cept the *tate of +ammu and ,ashmir. The #ct mostly deals with the "eneral principles and rules "overnin" contracts. The #ct is divisible into two parts. The first part $*ection 1-7.' deals with the "eneral principles of the law of contract, and therefore applies to all contracts irrespective of their nature. The second part $*ections 12/-208' deals with certain special 1inds of contracts, e."., Indemnity and "uarantee, bailment, pled"e, and a"ency. The term contract has been defined by various authors In the followin" manner2 (# contract is an a"reement creatin" and definin" obli"ations between the parties(. -Salmond (# contract is an a"reement enforceable at law, made between two or more persons, by which ri"hts are ac uired by one or more to acts or forbearances on the part of the other or others(. -Anson (3very a"reement and promise enforceable at law is a contract(. -Sir Fredrick Pollock The Indian Contract #ct has defined contract in *ection 2$h' as (an a"reement enforceable by law(. These definitions resolve themselves into two distinct parts. 4irst, there must be an a"reement. *econdly, such an a"reement must be enforceable by law. To be enforceable, an a"reement must be coupled with an obli"ation. # contract therefore, is a combination of the two elements2 $1' an a"reement and . $2'an obli"ation. Agreement #n a"reement occurs when two minds meet upon a common purpose, Le. they mean the same thin" in the same sense at the same time. The meetin" of the minds is called consensus-ad-idem, i.e., consent to the matter. *ection 2$e' of the Indian Contract #ct provides that (every promise and every set of promises formin" the consideration for each other is an a"reement.( Obligaton #n obli"ation is the le"al duty to do or abstain from doin" what one has promised to do or abstain from doin". # contractual obli"ation arises from a bar"ain between he parties to the a"reement who are called the promisor and the promisee. *ection 2$b' says that when the person to whom the proposal is made si"nifies his assent thereto, the proposal is said to be accepted5 and (a proposal when accepted becomes a promise.( In broad sense, therefore, a contract is an e)chan"e of promises by two or more persons, resultin" in an obli"ation to do or abstain from doin" a particular act, where such obli"ation is r6co"nised and enforced by law. Rights and Obligations 7here parties have made a bindin" contract, they have created ri"hts and obli"ations between themselves. The contractual ri"hts and obli"ations are correlative, e."., # a"rees with 8 to sell his car for #s. 19,999 to him. In this e)ample the followin" ri"hts and obli"ations have been created2 $i' # is under an obli"ation to deliver the car to 8. 8 has a correspondin" ri"ht to receive the car. $ii' 8 is under an dbli"ation to pay #s. 19,999 to #. # has a correlative ri"ht to receive #s. 19,999. Agreements which are not Contracts #"reements in which the idea of bar"ain is absent and there is no intention to create le"al relations are not contracts. These are2 $a' Agreements relating to social matters: #n a"reement between two persons to "o to"ether to the cinema, or for a wal1, does not create a le"al obli"ation on their part to abide by it. *imilarly, if I promise to buy you a dinner and brea1 that promise I do not e)pect to be liable to le"al penalties. There cannot be any offer and acceptance to hospitality. $b' Domestic arrangements between husband and wife: In Balfour v. Balfour $1:1:' 2 ,8 .71, a husband wor1in" in Ceylone, had a"reed in writin" to pay a house1eepin" allowance to his wife livin" in 3n"land. ;n receivin" information that she was unfaithful to him, he stopped the allowance2 Held,he was entitled to do so. This was a mere domestic arran"ement with no. intention to create le"ally bindin" relations. Therefore, there was no contract. Three conse uences follow from the above discusson. $i' To constitute a contract, the parties must intend to create le"al relationship. $ii' The law of contract is the law of those a"reements which create obli"ationsand those obli"ations which have their source in a"reement. $iii' #"reement is the "enus of which contract. is the specie and, therefore, all contracts are a"reements but all a"reements are not contracts. ESSENTIAL ELEMENTS OF A ALID CONTRACT *ection 19 of the Indian Contract #ct, 1872 provides that (all a"reements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful obhe parties. $vi' The obs !ontract #ccordin" to the Indian Bas agreement is therefore &oid. But if he makes a contract when he is of sound mind, i.e., during lucid inter&als, he will be bound b) it. A sane man who is delirious from fe&er, or who is so drunk that he cannot understand the terms of a contract, or form a rational $udgement as to its effect on his interests cannot contract whilst such delirium or state of drunkenness lasts. A erson under the influence of h) notism is tem oraril) of unsound mind. 7ental deca) brought b) old age or disease also comes within the definition. Agreement b) ersons of unsound mind are &oid. But for necessaries su lied to a lunatic or to an) member of his famil), the lunatic>s estate, if an), will be liable. 6here is no ersonal liabilit) incurred b) the lunatic. 5f a contract entered into b) a lunatic or erson of unsound mind is for his benefit, it can be enforced 'for the benefit. against the other art) '0ugal /ishore &. !heddu, '+,3?. 5 All. %.0 :?.. Persons Dis4ualified from "ntering into !ontract Some statues dis4ualif) certain ersons go&erned b) them, to enter into a contract. For e#am le, @udh ;%and 1e&enue Act ro&ides that where a erson in @udh is declared as a >dis4ualified ro rietor> under the Act, he is incom etent to alienate his ro ert). Alien "nemies # person who is not an Indian citi!en is an alien. #n alien may be either an alien friend or a forei"ner whose soverei"n or *tate is at peace with India, has usually contractual capacity of an Indian citi!en. ;n the declaration of war between his country and India he becomes an alien enemy. # contract with an alien enemy becomes unenforceable on the outbrea1 of war. 4or the purposes of civil ri"hts, an Indian citi!en of the sub arda-nishin>denotes complete seclusion. Thus, a woman who "oes to a Court and "ives evidence, who fi)es rents with tenants and collects rents, who communicates when necessary, in matters of business. with men other than members of her own family, could notC be re"arded as a arda-nishin woman '5smail 7usafee v. Hafi8 Boo $1:9E' 00 Cal. L@ 770 and 00 I.#. 8E'. The principles to be applied to transactions with arda-nishin woman are founded on e4uit) and good conscience and accordin"ly a person who contracts with arda-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 e)ercised her free will. (The law throws around her a special cloa1 of protection( '/ali Baksh v. 1am *o al '+,+:. L.@. /1 I.#. 20, 28-29, 0E #ll 81, 8:'. Anconscionable transactions: #n unconscionable transaction is one which ma1es an e)orbitant profit of the otherCs distress by a, person who is in a dominant position. Berely the fact that the rate of interest is very hi"h in a money lendin" transaction shall not ma1e it unconscionable. 8ut if the rate of interest is very e)orbitant and the Court re"ards the transaction unconscionable, the burden of provin" that no undue influence was e)ercised lies on the creditor. It has been held that ur"ent need of money on the part of the borrower does not itself place the lender in a position to dominate his will within the meanin" of this *ection 'Sunder /oer v. 1ai Sham /rishen $1:97' 0/ Cal. 1.9, C.@. 0/ I.#. :'. (vii) Legality of Object ;ne of the re uisites of a valid contract is that the obe"al effects alto"ether. #n ille"al contract too has no le"al effect as between the immediate parties to the contract, but has the further effect of taintin" the collateral contracts also with ille"ality. 4or instance # borrows from 8 to @s. 1,999 for lendin" to C a minor. The contract between # and C is void, but 8 can nevertheless recover the money from #, ;n the other hand, if # had borrowed @s. 1,000 from 8 to buy a pistol to shoot C, the uestion whether 8 can recover the money hin"es on whether 8 was aware of the purpose for which money was borrowed. If 8 had 1nowled"e of the ille"al purpose, he cannot recover. Therefore, it may be said that all ille"al a"reements are vM5Nid but all void a"reements are not necessarily ille"al. !onse4uence of 5llegal Agreements $i' $ii' an ille"al a"reement is entirely void5 no action can be brou"ht by a party to an ille"al a"reement. The ma)im is >"# tur i cause non-oritur actio> - from an evil cause, no action arises5 recovered. The ma)im is in arti delicto otier. est conditio defendeties - In $iii' money paid or property transferred under an ille"al a"reement cannot be cases of e ual "uilt, more powerful is the condition of the defendant5 $iv' where an a"reement consist of two parts, one part le"al and other ille"al, and the le"al parts is separable from the ille"al one, then the Court will enforce the le"al one. If the le"al and the ille"al parts cannot be separated the whole a"reement is ille"al5 and $v' any a"reement which is collateral to an ille"al a"reement is also tainted with ille"ality and is treated as bein" ille"al, event thou"h it ,would have been lawful by itself 'Film Prata chand v. Firm /otri 1e. #I@ $1:7.' *.C. 1220'. 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: (a) Where the transfer is not in pari delicto (equally guilty) with the detendant, Le. the transferee. For example, where A is induced to enter into an illegal a"reement by the fraud of 8, # may recover the money paid if he did not now that the contract was ille"al. $b' If the plaintiff can frame a cause of action entirely dependent of the contract. $c' 7here a substantial part of the ille"al transaction not been carried out and the plaintiff is truly and "enuinely repentant. 'Bigos v. Bonstead $1:.1', #ll 3.@. :2'. 5mmoral Agreements #n a"reement is ille"al if its obrine of public policy is not to be e)tended beyond the classes of cases already covered by it and no Court can invent a new head of public policy %ord Halsbur), 0anson v. Driefontien !onsolidated 7ines $1:92' #.C. /8/, /:1. It has been said by the House of Lords that public policy is always an unsafe and treacherous "round for le"al decisions. 3ven if it is possible for Courts to evolve a new head of public policy, it should be done under e)traordinary circumstances "ivin" rise to incontestable harm to the society. The followin" a"reement are void as bein" a"ainst public policy but they are not ille"al2 $a' Agreement in restrain of arental rights: #n a"reement by which a party deprives himself of the custody of his child is void. $b' Agreement in restraint of marriage: #n a"reement not to marry at all or not to marry any particular person or class of persons is &oid as it is in restraint of marria"e. $c' 7arriage brocage or brokerage Agreements: #n a"reement to procure marria"e for reward is &oid. 7here a purohit $priest' was promised @s. 299 in consideration of procurin" a wife for the defendant, the promise was held &oid as opposed to public policy, and the purohit could not recover the promise sum. $d' Agreements in restraint of ersonal freedom are &oid: 7here a man a"reed with his money lender not to chan"e his residence, or his employment or to part with any of his property or to incur any obli"ation on credit without the consent of the money lender, it was held that the a"reement was &oid. $e' Agreement in restraint of trade: #n a"reement in restraint of trade is one which see1s to restrict a person from freely e)eidsin" his trade or profession. A0REEMENTS IN RESTRAINT OF TRADE OID *ection 27 of the Indian Contract #ct states that every a"reement by which any one is restrained from e)ercisin" a lawful profession, trade or business of any 1ind, is, to that e)tent, void. This *ection is not happily worded and has been criticised by many authors. It appears from the wordin" that every 1ind of restraint, whether total or partial falls within the prohibition of this *ection. In 3n"lish law the Courts have held that if a restraint is reasonable, it will be valid. Leadin" case on his point is (ordenfelt&. 7a#im (ordenfelt *uns !o., $18:/' #.C. .0.. % was an inventor and a manufacturer of "uns and ammunition. He sold his world-wide business to B and promised not to manufacture "uns anywhere in the world for 2. 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 bindin". 7hether a restraint is reasonable or not depen6s upon the facts of each case. ;ur courts are not consistent on the point whether reasonable restraints are permitted or not. In 7adhub !hunder&. 1a!oomar'+-D:. 1/ 8an". L.#. 7E. # paid #s. :99 to 8Cs wor1man. 8 undertoo1 to stop his business in a particular locality in Calcutta. He did not 1eep his promise. #Cs suit for the sum was dismissed since the a"reement was void under *ection 27. The reasonableness or otherwise of the restraint was not discussed. However, if a restrictive meanin" is adopted, most of the ordinary mercantile a"reements may be hit. Thus, the Courts have held that if the restraint is one which is really necessary for the carryin" on business, thC0 same is not prohibited. In 7acken8ie v. Sitarmiah, $18:1' 1. Bad. 7:, # a"reed to sell to 8 all the salt he manufactured and 8 a"reed to buy such salt. # further a"reed not to sell salt to third-parties. The Court held that the a"reement was valid. ;ther type of restrains are personal covenants between an employer and his employee whereby the latter a"rees not to compete with the former or serve with any of his competitions after employment. This issue came before the *upreme Court in (iran$an Shanker *olikari v. 6he !entur) S inning and 7anufacturing !o. %td., #I@ 1:E7 *.C. 19:8. In this case % entered into a bond with the company to serve for a period of five years. In case % leaves his s agreements: *ection 11 $2' of the Indian Gartnership #ct 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. $c'*ection 0E$2' and *ection ./ of the Indian Gartnership #ct provide that a partner may ma1e an a"reement with his partners that on ceasin" 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 a"reement shall be bindin" if the restrictions are reasonable. 6rade !ombinations: #n a"reement to obs case.. CONTIN0ENT CONTRACT $*ection 01' #s per *ection 01, a contin"ent contract is a contract to do or not to do somethin", if some event collateral to such contract, does or does not happen. 4or e)ample, # contracts to sell 8 19 bales of cotton for @s. 29,999, if the ship by which they are comin" returns safely. This is a contin"ent contract. I Contract of insurance and contracts of I indemnity and "uarantee are popular instances of contin"ent contracts. R/les regarding contingent contracts The followin" rules are contained in *ection 02-0E2 $a' Contracts contin"ent upon the happenin" 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 - *ection 02. $i' # ma1es a contract to buy 8Cs house if # survives C. This contract cannot be enforced by law unless and until C dies in #Cs lifetime. $ii' # contracts to, pay 8 a sum of money when 8 marries C, C dies without bein" married to 8. The contract becomes void. $b' Contracts contin"ent upon the non-happenin" of an uncertain future event can be enforced when the happenin" of that event becomes impossible and not before - *ection 00. # contracts to pay 8 a certain sum of money if a certain ship does not return. The ship is sun1. The contract can be enforced when the ship sin1s. $c' If a contract is contin"ent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anythin" which renders it impossible that he should so act within any definite time or otherwise than under further con"inencies - *ection 0/. # a"rees to pay 8 @s. 1,999 if 8 marries C. C marries I. The marria"e of 8 to C must now be considered impossible althou"h it is possible that 9 may die and C may afterwards marry 8. $d'Contracts contin"ent on the happenin" of an event within a fi)ed time become void if, at the e)piration of the time, such event has not happened, or if, before the time fi)ed, such event becomes impossible - *ection 0. # promise to pay 8 a sum of money if a certain ship returns with in a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year. $e' Contracts contin"ent upon the non-happenin" of an event within a fi)ed time may be enforced by law when the time fi)ed has e)pired and such event has not happened or before the time fi)ed has e)pired, if it becomes certain that such event will not happen - *ection 0. # promises to pay 8 a sum of money if a certain ship does not return within the year. The contract may be enforced if the ship does not return within the year or is burnt within the year. $f' Contin"ent a"reements to do or not to do anythin" if an impossible event happens, are void, whether the impossibility of the event is 1nown or not 1nown to the parties to the a"reement at the time when it is made - *ection 0E. # a"rees to pay @s. 1,000 to 8 if two strai"ht lines should enclose a space. The a"reement is void. CERTAIN RELATIONS CONTRACTS! %ature of Duasi-Contracts RESEM3LIN0 THOSE OF CONTRACT )42ASI # valid contract must contain certain essential elements, such as offer and acceptance, capacity to contract, consideration and free consent. 8ut sometimes the law implies a promise imposin" obli"ations on one party and conferrin" ri"ht in favour of the other even when there is no offer, no acceptance, no consensus ad idem, and in fact, there is neither a"reement nor promise. *uch cases are not contracts in the strict sense, but the Court reco"nises them as relations resemblin" those of contracts and enforces them as if they were contracts, hence the term uasi-contracts $Le., resemblin" a contract'. # uasi-contract rests on the e uitable principle that a person shall not be allowed to enrich himself un&. Bowden $18.E' 11E 3.@. 1122, # hired 8Cs ship to carry a car"o from @ussia. Later on 8 repudiated the contract. # delayed ta1in" action hopin" 8 would chan"e his mind before the performance date. 7ar bro1e out between @ussia and 8ritain before the performance date, frustatin" the contract Held,. # lost his ri"ht to sue 8 for dama"es by his delay. In Frost v. /night $1872' L.@. 7 3). 111, the law on the subs rights against the creditor: Fnder *ection 1/1 a surety is entitled to the benefit of every security which the creditor has a"ainst the principal debtor at the time when the contract of suretyship is entered into whether the surety 1nows of the e)istence of such security or not5 and, if the creditor losses or, without the consent of the surety parts with such security, the surety is dischar"ed to the e)tent of the value of the security. $b' 1ights against the rinci al debtor: #fter dischar"in" the debt, the surety steps into the shoes of the creditor or is subro"ated to all the ri"hts of the creditor a"ainst the principal debtor. He can then sue the principal debtor for the amount paid by him to the creditor on the debtorCs default5 he becomes a creditor of the principal debtor for what he has paid. In some circumstances, the surety may "et certain ri"hts even before payment. The surety has remedies a"ainst the principal debtor before payment and after payment. In 7amta *hose v. Anited 5ndustrial Bank (AIR 1:87 Cal. 189' where the principal debtor, after findin" that the debt became due, started disposin" of his properties to prevent sei!ure by surety, the Court "ranted an ins rights gains co-sureties: 7hen a surety has paid more than his share of debt to the creditor, he has a ri"ht of contribution from the co-securities who are e ually bound to pay with him. #, 8 and C are sureties to I for the sum of @s. 0,999 lent to 3 who ma1es default in payment. #, 8 and Care liable, as between themselves to pay @s. 1,999 each. If anyone of them has to pay more than @s. 1,999 he can claim contribution from the other two to reduce his payment to only @s. 1,999. If one of them becomes insolvent, the other two shall have to contribute the unpaid amount e ually. Discharge o" S/ret& # surety may be dischar"ed from liability under the followin" circumstances2 $a' 8y notice of revocation in case of a continuin" "uarantee as re"ards future transaction $*ection 109.' $b' 8y the death of the surety as re"ards future transactions, in a continuin" "uarantee in the absence of a contract to the contrary $*ection 101'. $c' #ny variation in the terms of the contract between the creditor and the principal debtor, without the consent of the surety, dischar"es the surety as re"ards all transactions ta1in" place after the variation $*ection 100'. $d' # surety will be dischar"ed if the creditor releases the principal debtor, or acts or ma1es on omission which resultsC in the dischar"e of the principal debtor $*ection 10/'. 8ut where the creditor fails to sue the principal debtor within the limitation period, the surety is not dischar"ed. $e' 7here the creditor, without the consent of the surety, ma1es an arran"ement with the principal debtor for composition, or promises it "ive him time or not to sue him, the surety will be dischar"ed $*ection 10.'. $f' If the creditor does any act which is a"ainst the ri"hts of the surety, or omits to do an act which his duty to surety re uires him to do, and the eventual remedy of the surety himself a"ainst the principal debtor is hereby impaired,the surety is dischar"ed $*ection 10:'. $"' If the creditor loses or parts with any security which at the time of the contract the debtor had "iven in favour of the creditor, the surety is dischar"ed to the e)tent of the value of the security, unless the surety consented to the release of such security by creditor in favour of the debtor. I6 is immaterial whether the surety was or is aware of such security or not $*ection 1/1'. 5llustrations $1' & "uarantees to J to the e)tent of @s. 19,999 that C shall pay all the bills that. 8 shall draw upon him. 8 draws upon C, C accepts the bill. # "ives notice of revocation, C dishonours the bill at maturity. # is liable u on his guarantee $*ection 109'. $2' # becomes surety to C for 8Cs conduct as a mana"er in CCs ban1. #fterwards 8 and C contract without #Cs consent that 8Cs salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. 8 allows a customer to overdraw and the ban1 loses a sum of money. # is dischar"ed from his suretyship by the variance made without his consent, and is not liable to ma1e "ood this loss $*ection 100'. $0' C contracts to lend 8 @s. .,999 on 1 st Barch, # "uarantees repayment. C pays the money to 8 on 1 st of +anuary. # is dischar"ed from his liability. # is dischar"ed from his liability, as the contract has been varied in as much as C mi"ht sue 8 for the money before 1 st of Barch, $*ection 100'. $/' & contracts with 8 to build a house for a fi)ed price within a stipulated time, J supplyin" the necessary timber. L "uarantees &Cs performance. J omits to supply the timber. L is dischar"ed from liability $*ection 10/'. $.' 8 contracts to build a ship for C for a "iven sum, to be paid by instalments as the wor1 reaches certain sta"es. # becomes surety to C for 8Cs due performance of the contract, without the 1nowled"e of #, C prepays to 8 the last two instalments6S # is dischar"ed by this prepayment $*ection 10:'. C CONTRACT OF 3AILMENT AND #LED0E )a! 3ailment # bailment is a transaction whereby one person delivers "oods to another person for some purpose, upon a contract that they are, when the purpose is accomplished to be returned or otherwise disposed of accordin" to the directions of the person deliverin" them $*ection 1/8'. The person who delivers the "oods is called the 8ailor and the person to whom they are delivered is called the 8ailee. The transaction, is called a 8ailment $*ection 1/8'. 8ailment is a &oluntar) deli&er) of goods for a tem orar) ur ose Con the understandin" that the) are to be returned in specie in the same of altered form. The ownership of the "oods remains with the bailor, the bailee "ettin" only the possession. Ielivery of "oods may be actual or constructive, e."., where the 1ey of a "od own is handed over to another person, it amounts to delivery of "oods in the "odown. Gratuitous /ailment # "ratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration. *uch a bailment may be for the e)clusive benefit of the bailor, e."., when # leaves his do" with a nei"hbour to be loo1ed after in #Cs absence on holiday. It may a"ain to be for e)clusive benefit of the bailee, e."., where you lend your boo1 to a friend or yours for a wee1. In neither case any char"e is made. # "ratuitous bailment terminates by the death of either the bailor or the bailee $*ection 1E2'. C Fnder *ection 1.: the lender of a thin" for use may at any time re uire its return if the loan was "ratuitous, even thou"h he lent it for a specified time or purpose. 8ut 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 thin" lent before the time a"reed upon would cause him loss e)ceedin" 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 e)ceeds the benefit so derived. /ailment3 for Reward This is for the mutual benefit of both the bailor the bailee. 4or e)ample, # lets out a motor-car for hire to 8. # is the bailor and receives the hire char"es and 8 is the bailee and "ets the use of the car. 7here, # hands over his "oods to 8, a carrier for carria"e at- a price. # is the bailor who en possession of the person tryin" to e)ercise the lien in respect of any payment lawfully due to him. Thus, a "eneral lien is the ri"ht retain the property of another for a "eneral balance of accounts but a particular lien is a ri"ht to retain only for a char"e on account of labour employed or e)penses bestowed upon the identical property detained. The ri"ht of "eneral lien is e)pressly "iven by *ection 171 of the Indian Contract #ct to ban16rs, factors, warfin"ers, attorneys of Hi"h Court and policybro1ers, provided there is no a"reement to the contrary. Termination of bailment