THE CONTRACT ACT 1872

Contract and
Section 2h defines contract as an agreement enforceable by law is a contract.
Section 2a when one person signifies to another his willingness to do or to abstain from
doing any thing, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.
Section 2b when the 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.
Consensus ad idem:
A contract shall be validly formed only when there is consensus of parties of the same
thing i.e. their minds are meeting in the same sense that they understand the same thing in
the same sense.
Difference between Contract and agreement:
A contract is an agreement between parties that will be legally enforceable.
A simple “agreement” is an arrangement between the parties which may or may not
contain the necessary elements to be enforceable before a court of law.
Sec. 10 of the Contract Act, 1872 defines what agreements are contracts? 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.

A valid contract must contain the seven valid elements which are:
1. Agreement
2. Legal Relationship
3. Free Consent, 13, 14
4. Capacity of Parties ,sec 11
5. Lawful Consideration ,sec 23
Forbidden by law, defeats any provision of law, fraudulent, involves injury to
person property, immoral, opposed to public policy.
 6. Lawful Object, sec 23
7. Not expressly declared void
Restraint of marriage 26, trade 27 , legal proceeding 28, wagering 30
8. Legal Formalities
9. Certainty, sec 29 ,
Agreement ,the meaning of which is not certain or capable of being made certain is
void.
10. Possibility of performance . , sec 56

OR
An agreement is essentially an exchange of promises between two or more parties. A
contract is a written agreement that demonstrates that all parties bound to the agreement
have consented to their respective responsibilities as to the agreement.
In other words, an agreement is an arrangement between parties regarding a course of
action. And a contract is a written expression of that agreement which, when executed
by signature or expressed in other forms of acknowledgement and legally binds the
parties to that agreement.
Or
A contract is an exchange of promises between two or more parties to do, or refrain from
doing, an act which is enforceable in a court of law. It is binding legal agreement.
It is where an unqualified offer meets a qualified acceptance and the parties reach
consensus ad idem.
The parties must have the necessary capacity to contract and the contract must no be
trifling, indeterminate, impossible or illegal.
CLASSIFICATION OF CONTRACTS
1. According to Validity or Enforceability:
a. Valid
b. Voidable
 c. Void
d. Unenforceable
2. According to Formation or Creation:
a. Express
b. Implied
c. Quasi
3. According to Performance:
a. Executed
b. Executory
c. Unilateral
d. Bilateral
Valid Contract:
Valid contract is one which if fully operative in accordance with the intention of parties
and the law.
A valid contract is one which is fully enforceable by law. It must have all the essential
elements required by law. If one or more of these elements are missing then contract is
either Voidable or illegal or unenforceable.
A valid contract may become unenforceable if some rule of law renders it incapable of
proof e.g. promissory note not stamped at all or insufficiently stamped shall not be
enforceable.
Voidable Contract:
Section 2i defines Voidable Contract is an agreement which is unenforceable by law at
the option of the one (or more) of the parties thereto but not at the option of the other
parties.
It means that the contract is binding one the parties unless set aside on the ground that the
transaction was vitiated by:
1. Absence of free consent & undue influence (see section 19 & 19a) fraud
(section 17) or misrepresentation (section 18), or any other circumstances
entitling a party to a contract to void it.
2. prevention of performance (section 53)
 3. failure to perform in time (section 55)
For example a contract falling under section 236 is a Voidable contract i.e. a person
representing as an agent while he actually was no an agent.
Void agreements:
2g an agreement not enforceable by law is said to be void;
For example an agreement with a minor is void.
Void contracts;
2j a contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable.
A void contract, also known as a void agreement, is not actually a contract and does not
create rights.
A void contract cannot be enforceable by law. Void contracts are different from Voidable
contracts, which are contracts that may be (but not necessarily will be) nullified.
So a contract that:
1. Is illegal (inherently void) from the moment it is made.
2. Is legal but declared null (having no legal effect) by the courts because it violates a
fundamental principle such as fairness, or is contrary to public policy?
3. Becomes void due to change in law or in government policy, or
4. Has been fully performed. Lack of capacity to contract (being an infant or minor,
intoxicated, or insane) automatically makes a contract void.
An agreement to carry out an illegal act is an example of a void contract or void
agreement. For example, “a contract between drug dealers and buyers is a void contract
simply because the terms of the contract are illegal.”
Another example of this can given “if a man goes through the form of making a contract
with A through B as A’s agent, and B is not in fact the agent of A, there is no contract
because there is only one party. The promise offered to A has not been accepted by him,
and no consideration has moved from him.”
Effect of Void contract:
In such a case, neither party can go to court to enforce the contract. A void contract is
void ab intito i.e. from the beginning while a Voidable contract can be Voidable by any
of the parties to it.
Section 36 of the contract act 1872 provides that agreements contingent on
impossible events are void…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 to the parties to the agreement at the time when it is made.
Illustrations:
a. A agrees to pay B 1,000 rupees if two straight lines should enclose a space. This
agreement is void.
b. A agrees to pay B 1,000 rupees if B will marry A’s daughter C. C was dead at the
time of the agreement. The agreement is void.
Void Voidable and enforceable agreements:
There can be three different ways in which contracts can be set aside. A contract may be
deemed ‘Void’, ‘Voidable’ or ‘unenforceable’.
Voidness implies that a contract never came into existence. Voidability implies that one
both parties may declare a contract ineffective at their wish. Unenforceability implies that
neither party may have recourse to a court for a remedy. Rescission is a term which
means to take a contract back.
The conditions required for an agreement being enforceable by law are contained in
section 10, below where it will also be seen that absence of any such condition makes an
agreement void, and certain defects will make a contract Voidable.
The duties of parties to a contract are set forth in chap. IV of the act. The manner in
which contract are, it necessary, enforced belongs to Civil procedure.
Sec. 10 of the Contract Act, 1872 defines what agreements are contracts? 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.
Illegal Agreement:
An illegal agreement is that the object of which are not permissible by law or are
prohibited by law.
Unenforceable Contract:
Unenforceable contract is one which can not be enforced in the court because of some
technical defect or lace of evidence such as absence of writing, non registration of
document or being time barred.
Express Contracts:
See section 9 an express contract is one in which the parties have made oral or written
declaration of their intention to agree on terms and conditions of the transaction.
Implied Contracts:
Again see section 9 an implied contract is that the terms of which are inferred from the
conduct of the parties or from the circumstances of the case or course of dealings
between the parties.
Quasi Contract:
A contract which is implied in law or created by law is also called a quasi contract,
because it is not in fact a contract rather, it is a means for the courts to remedy situations
in which one party would be unjustly enriched were he or she not required to compensate
the other.
For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong
house. The owner of the house had learned the previous day that his neighbor was getting
new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at
the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill.
Will the man be held liable for payment?
Executed Contract:
Is one which has been completely performed by both the parties?
Executory Contract:
Is one which is composed of undertaking in which both the parties are under an
obligation to do or not to do certain things.
Unilateral Contract:
In one in which only one party has to perform his part of the obligation at the time of the
formation of the contract. It is also called a one sided contract. In this consideration is
executed.
Bilateral contract:
Is one in which the obligation on the part of both the parties to the contract are
outstanding at the time of formation of the contract.
Elements / ingredients / essentials of valid contract:
In common law systems, the five key requirements for the creation of a contract are: 1.
offer and acceptance (agreement). 2. Consideration. 3. An intention to create legal
relations. 4. Legal capacity. 5. Formalities.
Proposal: acceptance and revocation:
Offer / Proposal- section 2 a when one person signifies to another his willingness to do
or abstain from doing anything, with a view to obtaining the assent of that to such act or
abstinence, he is said to make a proposal.
An offer can be made by express words, spoken or written.
An offer can also be made by conduct of parties.
As an offer can be made to a specific person or group of persons or to the public at large.
Example: A says to B “will you buy my house for Rs. 20,000,000? Here A is making an
offer to B by signifying his willingness to sell his house to B Rs. 20,000,000 with a view
to obtaining assent of B.
Acceptance:
Section 2b when the 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.
Example: if b above agrees to buy A’s house for Rs. 20,000,000, he can be said to have
accepted A’s offer.
Types of offer:
Express Offer: Face to face offer….written offer
Implied Offer: Through conduct of the offeror i.e. bus company, rail service etc.
Specific Offer: Offer to a particular person
General Offer: Offer made to public at large.
Standing Offer: Continuous offer. E.g. mobile phone packages
Cross Offer: Offer made by two different persons to each other.
Counter Offer: Acceptance of offer but subject to some terms and conditions.
Essentials of an Offer:
Offer must be:
i. Made with a view to obtain acceptance. (section 2a)
ii. With the intention of creating legal relations. A social invitation even if accepted
does not create legal relations as the offeror does not intend to create legal
relations. Example: an agreement to go together to picture or for a walk is not an
offer, agreements between husband and wife living together are of social nature.
iii. Clear, unambiguous, definite and certain and must not be loose, vague or
ambiguous (section 29).
iv. Distinguished from (a) mere declaration of intention (b) an invitation to offer or to
treat.
Invitation to offer is merely a circulation of information by a person of his
willingness to treat with any person who on such information is willing to open
negotiation with him and is not an offer. E.g. Prospectus for admission, display of
goods in shelf with price tags, catalogue, quotation, price list, advertisement,
invitation to tenders etc.
v. Free from stress as offer under stress is no offer.
vi. Announcement on speaker
vii. Shelf prices are not offer.
viii. Communicated to the offeree.
ix. Made with terms and conditions on which the offer is being made.
x. In the nature of request.
Acceptance:
Contract is formed when one party makes an offer for an arrangement and another
accepts. This can be called “concurrence of wills” or “ad idem” (meeting of the minds)
of two or more parties.
Acceptance is the expression by the offeree of his willingness to be bound by terms of the
offer.
Section 2b states: when the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal when accepted, become a
promise.
Consensus ad idem:
A contract shall be validly formed only when there is consensus of parties on the same
thing i.e. their minds are meeting in the same sense that they understand the same thing in
the same sense.
Acceptance how made:
Offer and acceptance does not always need to be expressed orally or in writing. Any
mode which can express an intention to agree would be sufficient e.g. by saying yes, ok,
node of head, by performing the act called for etc.
Acceptance Express or Implied:
Acceptance is express when it is communicated by words spoken or written and is
implied when gathered from conduct.
Example:
a. Acceptance by conduct: A trader receives an order from a customer and executes
the order by sending the goods. This is acceptance through conduct.
This can take two forms. A contract which is implied in facts is one in which the
circumstances imply that parties have reached an agreement even though they have not
done so expressly.
For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair
price for the service. If one refuses to pay after being examined, the patient has breached
a contract implied in fact.
b. Implied Acceptance: A enters a bus for traveling to his destination and takes a seat.
This is implied acceptance on the part of A.
c. Surrounding circumstances: A’s car goes out of order, B starts repairing the car
and A lets him do that.
Who can accept offer?
 a. only specific person to whom offer is made.
b. When offer is not made to a specific person rather to general public then any
member of public may accept the offer.
c. Where a product in large quantities is advertised in a newspaper or on a poster, it is
as an offer, however, if the person who is to buy the advertised product is of
importance, for instance because of his personality, etc., when buying land, it is
regarded merely as an invitation to treat.
Essentials of valid Acceptance:
1. Acceptance must be absolute and qualified. Section 7, 1 and without any variation.
Possession date varied.
2. Acceptance must be communicated to offeror.
3. acceptance must be in prescribed manner. Section 7, 2.
4. As per the mode prescribed or stated in the offer.
5. Acceptance should be within the time prescribed.
6. Acceptance can not precede offer i.e. acceptance must be in response to offer.
7. Acceptance must show intention to fulfill promise.
8. Acceptance can not be implied from silence. E.g. sale of car if do not hear you in
seven days, acceptance shall be presumed.
Communication, Acceptance and Revocation:
Section 3. Communication, acceptance and revocation of proposals. The
communication of proposals, the acceptance of proposals, and the revocation of
proposals and acceptances, respectively, are deemed to be made by any act or
omission of .com.comthe party proposing, accepting or revoking, by which he intends
to communicate such proposal, acceptance or revocation, or which has the effect of
communicating it.
For a Valid Offer, Acceptance and Revocation
It is a must that:
a) Offer is communicated to offeree
b) Acceptance is communicated to offeror
c) Revocation of offer must be communicated by the offeror to offeree.
 d) Revocation of acceptance must be communicated by the offeree.
Communication of offer- section 4. Communication when complete. The
communication of a proposal is complete when it comes to the knowledge of a person
to whom it is made.
Communication of Acceptance – The communication of an acceptance is complete,
as against the proposer, when it is put in a course of transmission to him, so as to be
out of the power of the acceptor, as against the acceptor, when it comes to the
knowledge of the proposer.
The communication of a revocation is complete, as against the person who makes it,
when it is put into a course of transmission to the person to whom it is made, so as to be
out of the power of the person who makes it, as against the person to whom it is made,
when it comes to his knowledge.
Illustration:
a) A, proposes, by letter, to sell a house to B. at a certain price. The communication
of the proposal is complete when B receives the letter.
b) B accepts A’s proposals by a letter sent by post. The communication of the
acceptance is complete, as against A, when the letter is posted, as against B, when
the letter is received by A.
c) A revokes his proposal by telegram. The revocation is complete as against A, when
the telegram is dispatched.
d) It is complete as against B, when B receives it.
e) B, revokes his acceptance by telegram. B’s revocation is complete as against B,
when the telegram is dispatched and as against A, when it reaches him.
Revocation of Offer & Acceptance – Section 5 stipulate that a proposal may be revoked
at any time before the communication of its acceptance is complete as against the
proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance
is complete as against the acceptor, but not afterwards.
Revocation how made:
Pursuant to section 6, a proposal is revoked:-
 1. by the communication of notice of revocation by the proposer to the other party.
2. by the lapse of time prescribed in such proposal for its acceptance or if no time is
so prescribed, by the lapse of a reasonable time without communication of the
acceptance.
3. by the failure of the acceptor to fulfill a condition precedent to the acceptance.
4. by the death or insanity of the proposer if the fact of his death or insanity comes to
knowledge of the acceptor before acceptance.
Revocation in contracts made over telephones does not arise.
Consideration

Contract is made with intention to derive or confer some benefit OR promises are
exchanged in return of something in return. That something can be a benefit, right,
interest, profit or it may also be some forbearance, detriment, loss or responsibility upon
other party.

Pollock defines Consideration as … “consideration is the price for which promise is

given and promise for value is enforceable”.

Example: A lends his book to B, who promises to return it after examinations, this results
in a benefit to B and a detriment to A, which is consideration in return of B’s promise to
return the book.

Example: Abdul Aziz v. Masum Ali (1914) A promised to subscribe Rs. 500 for
rebuilding of a mosque but later refused. Secretary of mosque sues A for recovery of Rs.
500. Held the promise to pay was not backed by any consideration on the part of mosque.
So not enforceable.

Consideration is known as 'the price of a promise' and is a controversial requirement for

contracts under common law.

It is not necessary in all common law or civil law systems, and is considered by some to
be unnecessary as the requirement of intention to create legal relations by both parties
meets the same requirement under contract.

The idea is that both parties to a contract must bring something to the bargain, that both
parties must confer some benefit or detriment (for example, money, however in some
cases money will not suffice as consideration - eg when one party agrees to make part
payment of a debt in exchange for being released from the full amount). This can be
either conferring an advantage on the other party, or incurring some kind of detriment or
inconvenience towards oneself.

Three rules govern consideration:-

 Consideration must be real, but need not be adequate but must be lawful. For
instance, agreeing to buy a car for a penny may constitute a binding contract.
 Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the
guardian of a young girl obtained a loan to educate the girl and to improve her
marriage prospects. After her marriage, her husband promised to pay off the loan.
It was held that the guardian could not enforce the promise because taking out the
loan to raise and educate the girl was past consideration.
 Consideration must move from the promisee at the desire of promisor. For
instance, it is good consideration for person A to pay person C in return for
services rendered by person B. If there are joint promisees, then consideration need
only to move from one of the promisees.

CAPACITY TO CONTRACT

Generally, every person is competent to contract and if any one claims to be incompetent
to enter into contract, he must prove such incapacity.

Who is competent to contract?

The conditions required for an agreement being enforceable by law are contained in
Section 10, below, where it will also be seen that the absence of any such condition
makes an agreement void, and certain defects will make a contract voidable.

Sec 10 of the Contract Act, 1872 defines what agreements are contracts? 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.

Sec 11 declares following persons as incompetent to enter into Contracts:

(a) Minor – Section 3 of the Majority Act, 1875 defines minor as a person who
has not completed 18 years of age. Contracts entered into by minors are void.
Any such document can not be ratified by minor even after attaining age of
majority i.e. 21 years because the original agreement is void ab initio. Minor is
not liable to return benefit. A Minor can always plead minority. No specific
performance can be enforced against minor. Minor can not be a partner. Minor
can not be insolvent.
(b) Person of unsound mind – Section 12 provides the tests to determine a sound
mind. “A person is said to be of unsound mind for the purpose of making a
 contract, if at the time when he makes it, he is incapable of understanding it,
and of forming a rational judgment as to its effect upon his interest”.

(c) Persons disqualified by any law to which they are subject

Flaws in capacity

Sometimes the capacity of either natural or artificial persons to either enforce contracts,
or have contracts enforced against them is restricted. For instance, very small children
may not be held to bargains they have made, or delinquent employees or directors may be
prevented from contracting for their company, because they have acted ultra vires
(beyond their power).

Another example might be people who are mentally incapacitated, either by disability or
drunkenness.

When the law limits or bars a person from engaging in specified activities, any
agreements or contracts to do so are either voidable or void for incapacity.

The law on capacity can serve either a protective function or can be a way of restraining
people who act as agents for others.
Consent

Section 13 defines Consent as “Consent means that two or more persons agree upon the
same thing in the same sense”. Meaning thereby Consensus ad idem is present i.e.
meeting of minds is there.

Absence of Consent

Absence of meeting of minds i.e. absence of ad item means there is no agreement

because Consent is absent.

Example: A agrees to sell House No. 1 to B, whereas B thinks that A is proposing to sell
House No. 2. So there is no meeting of mind as consent on same item is missing.

In the case of Bala Devi v. S. Majumdar (1956) an illiterate woman signed a document to
manage assets whereas it was originally a deed of gift which was never read or explained
to her.

Held: the deed was void and inoperative as there was no consent hence no contract.

Free Consent

Pursuant to Section 14, Consent is free when it is not caused by:

(a) Coercion
(b) Undue Influence
(c) Fraud
(d) Misrepresentation
(e) Mistake subject to provisions of Section 20, 21, 22

Consent will not be free if it is given or procured because of above items.

Coercion / Duress

Section 15 Defines Coercion as “Committing, or threatening to commit, any act

forbidden by the Pakistan Penal Code or the 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”.

Coercion / Duress has been defined as a "threat of harm made to compel a person to do
something against his or her will or judgment; especially, a wrongful threat made by one
person to compel an appearance of seeming assent by another person to a transaction
without real volition."
An example is in Barton v. Armstrong, a decision of the Privy Council. Armstrong
threatened to kill Barton if he did not sign a contract, so the court set the contract aside.

Burden of Proof

An innocent party wishing to set aside a contract for duress to the person need only to
prove that the threat was made and that it was a reason for entry into the contract; the
burden of proof then shifts to the other party to prove that the threat had no effect in
causing the party to enter into the contract.

There can also be duress to goods and sometimes, the concept of 'economic duress' is
used to vitiate contracts.

Undue Influence

Section 16 defines Undue Influence. Undue Influence means, “It exists 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 unfair advantage over the
other”.

Undue influence is an equitable doctrine that involves one person taking advantage of a
position of power over another person. Whenever consent to an agreement is caused due
to Undue influence, the agreement is voidable at the option of the party whose consent is
caused due to Undue influence (Section 19-A).

The law presumes that in certain classes of special relationship, such as between parent
and child, or lawyer and client etc., there will be a special risk of one party unduly
influencing their conduct and motives for contracting.

As an equitable doctrine, the court has the discretion to vitiate such a contract. When no
special relationship exists, the general rule is whether there was a relationship of such
trust and confidence that it should give rise to such a presumption. See Odorizzi v.
Bloomfield School District.

Presumptions of Undue Influence when arises

 Position to dominate: where one is in a position to dominate will of the other

party. Mannu Singh v. Umadat Pandey (1890) where spiritual guru forced his
follower to gift his property to Guru.
 Unfair advantage: Dominating party actually uses position to obtain unfair
advantage.
 Real and apparent authority: Master-Servant, Doctor-Patient, Income Tax Officer-
Assessee etc.
  Fiduciary relationship: A relationship of trust and confidence. E.g Father-Son,
Guardian-Ward, Lawyer-Client, Trustee-Beneficiary, Promoter-Company
 Mental distress: Incapacity due to age, illness, mental or bodily distress.

Distinguish Coercion and Undue Influence?

(DO NOT BE SURPRISED, ITS YOU WHO NEED TO MAKE YOUR OWN
NOTES ON THIS). I shall check your knowledge on this during lectures.

Fraud

Section 17 defines Fraud “Fraud means and includes any of the following acts committed
by a party to a contract, or with his connivance, or by his agent, with intent to deceive
another party thereto or his agent, or to induce him to enter into the contract—

(1) The suggestion, as to a fact, of that which is not true, by one who does not believe
it to be true
(2) The active concealment of a fact by one having knowledge or belief of the fact
(3) A promise made without any intention of performing it
(4) Any other act fitted to deceive
(5) Any such act or omission which the law specifically declares to be fraudulent

Fraud is an untrue statement made knowingly, or without belief in its truth, or recklessly,
carelessly whether it be true or false, with intent to deceive. Derry v. Peek (1889)

Essentials of Fraud

(1) False misrepresentation;

(2) Representation must be of fact;
(3) Representation before contract;
(4) Representation with knowledge of falsehood;
(5) Representation must induce other;
(6) Representation must in fact deceive;
(7) Fraud must damage party misled.

There are two types of misrepresentation in contract law, fraud in the factum and fraud in
inducement.

Fraud in the factum focuses on whether the party in question knew they were creating a
contract. If the party did not know that they were entering into a contract, there is no
meeting of the minds, and the contract is void.
Fraud in inducement focuses on misrepresentation attempting to get the party to enter
into the contract. Misrepresentation of a material fact (if the party knew the truth that
party would not have entered into the contract) makes a contract voidable.

According to Gordon v. Selico it is possible to make a misrepresentation either by words

or by conduct, although not everything said or done is capable of constituting a
misrepresentation.

Generally, statements of opinion or intention are not statements of fact in the context of
misrepresentation.

If one party claims specialist knowledge on the topic discussed, then it is more likely for
the courts to hold a statement of opinion by that party as a statement of fact.

Misrepresentation

Misrepresentation means a false statement of fact made by one party to another party and
has the effect of inducing that party into the contract (Section 18).

In dealing with it the first question which arises is whether the representation is, or is not,
part of the contract.

If the contract is in writing and the representation is set out on the face of the paper, it
may be material or immaterial, but the effect of its untruth will be determined on much
the same principles as govern the failure to perform a promise on the same side.

For example, under certain circumstances, false statements or promises made by a seller
of goods regarding the quality or nature of the product that the seller has may constitute
misrepresentation.

A finding of misrepresentation allows for a remedy of rescission and sometimes damages

depending on the type of misrepresentation.

Misrepresentation includes:-

(1) the positive assertion in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true
(2) any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or any one claiming under him by misleading another
to his prejudice or to the prejudice of any one claiming under him
(3) Causing, however, innocently, a party to any agreement to make a mistake as to
substance of the thing which is the subject of the agreement.

Mistake
A mistake is an incorrect understanding by one or more parties to a contract and may be
used as grounds to invalidate the agreement.

Common law has identified three different types of mistake in contract: unilateral
mistake, mutual mistake, and common mistake.
 A common mistake is where both parties hold the same mistaken belief of the facts
essential to the agreement; the agreement is void (Section 20).

Illustration: A agrees to buy from B a horse. It turns out the horse was dead at the
time of making of the bargain, but both the parties were unaware of this fact. The
agreement is void as both the parties are on mistake of fact essential to the
agreement.

This was demonstrated in the case of Bell v. Lever Brothers Ltd., which
established that common mistake can only void a contract if the mistake of the
subject-matter was sufficiently fundamental to render its identity different from
what was contracted, making the performance of the contract impossible.

 A mutual mistake is when both parties of a contract are mistaken as to the terms.
Each believes they are contracting to something different. The court usually tries to
uphold such a mistake if a reasonable interpretation of the terms can be found.
However, a contract based on a mutual mistake in judgment does not cause the
contract to be voidable by the party that is adversely affected. See Raffles v.
Wichelhaus.
 A unilateral mistake is where only one party to a contract is mistaken as to the
terms or subject-matter and the contract will not be voidable because of mistake of
one party to a matter of fact (Section 22).

The courts will uphold such a contract unless it was determined that the non-
mistaken party was aware of the mistake and tried to take advantage of the
mistake.

It is also possible for a contract to be void if there was a mistake in the identity of
the contracting party.

An example is in Lewis v. Avery where Lord Denning MR held that the contract
can only be avoided if the plaintiff can show that, at the time of agreement, the
plaintiff believed the other party's identity was of vital importance. A mere
mistaken belief as to the credibility of the other party is not sufficient.

Contingent contracts
Section 31. of the Contract Act, 1872 defines "Contingent contract" as 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.

Illustration-1

A contracts to pay B Rs. 10,000 if B's house is burnt. This is a contingent contract.

Illustration-2

if I offer a reward for the recovery of lost goods, there is not a contingent contract; there
is no contract at all unless and until some one, acting on the offer, finds the goods and
brings them to me.

Explanation: A promise is said to be absolute or unconditional when the promisor binds

himself to performance in any event, conditional when performance is due only on the
happening of some uncertain event.

All contracts of insurance and indemnity are obviously contingent.

Contingent contracts are enforced on happening of an event (Section 32).

Contingent contracts are not enforced on an event not happening (Section 33).

Contingency basically is dependent on act of party.

PERFORMANCE OF CONTRACTS

Contracts which must be performed

Most contracts only need to contain two elements to be legally valid:

 All parties must be in agreement (after an offer has been made by one party and
accepted by the other).
 Something of value must be exchanged -- such as cash, services, or goods (or a
promise to exchange such an item) -- for something else of value.

Section 37 provides for Obligation of parties to contracts.---The parties to a contract

must either perform or offer to perform, their respective promise, unless such
performance is dispensed with or excused under the provisions of this Act, or of any
other law.
Promises bind the representatives of the promisors in case of the death of such promises
before performances unless a contrary intention appears from the contract.

Illustrations

(a) A promises to deliver goods to B, on a certain day on payment of Rs. 1,000. A dies
before that day. A's representatives are bound to deliver the goods to B, and B is bound to
pay the Rs. 1,000 to A's representatives.

(b) A promises to paint a picture for B by a certain day, at a certain price. A dies before
the day. The contract cannot be enforced either by A's representatives or by B.

A contract, being an agreement enforceable by law (Section 2,) creates a legal obligation,
which subsists until discharged.

Sections (62-67) explain "Contracts which need not be performed."

Time and place for performance

Section 46 provides for Time for performance of promise where no application is to be

made and no time is specified.--- Where, by the contract, a promisor is to perform his
promise without application by the promisee, and no time for performance is specified,
the engagement must be performed within a reasonable time.

Explanation :---The question "what is a reasonable time" is, in each particular case, a
question of fact.

"Engagement."---The word "engagement" is constantly used instead of "agreement" or

"promise." Here it is synonymous with "promise".

Reasonable time.---It is always a question of fact. Where the defendants agreed to supply
coal to the plaintiffs from time to time, as required by the plaintiffs, on reasonable notice
given to them, a notice given by the plaintiffs on the 22nd July, 1898, for the supply of
2,648 tons of coal on or before 31st August, 1898, was held not to be reasonable.

Section 47 lays down Time and place for performance of promise where time is
specified and no application to be made.---When a promise is to be performed on a
certain day, and the promisor has under-taken to perform it without application by the
promisee, the promisor may perform it at any time during the usual hours of business on
such day and at the place at which the promise ought to be performed.

Illustration
A promises to deliver goods at B's warehouse on the 1st January. On that day A brings
the goods to B's warehouse but after the usual hour for closing it, and they are not
received. A has not performed his promise.

Common Law rule.---This section, with the illustration, simplifies the rule. "B, is not
bound to be at the warehouse to receive the goods after the usual hours of business, and if
he is not there A has not performed his promise. If B is there and could receive the goods
before midnight, but' refuses to do so, A has performed his promise."

Question of fact---Question whether there was a concluded contract, is a question of fact

and has to be inferred from evidence led and documents produced by parties.

Absence of time---Mere absence of time in fulfillment of contract, does not rob contract
of its basic characteristics.

Time cannot be made essence of contract by unilateral action---Whenever time is made

essence of contract, court, looks into circumstances of time proposed by one or other
party reasonable one and particularly higher duty devolves where subject-matter is
substantial and very valuable.

Time essence of contract--In cases of sale of land, a party can make time essence of
contract but only by giving a notice of it) other side, in case that other side is guilty of
undue delay in performance of contract in a reasonable time.

48. Application for performance on certain day to be at proper time and place.----When
a promise is to be performed on a certain day, and the promisor has not undertaken to
perform it without application by the promisee, it is the duty of the promisee to apply for
performance at a proper place and within the usual hours of business.

Explanation.---The question "what is a proper time and place" is, in each particular case,
a question of fact.

COMMENTS

The proper place will, of course, be the place named in the contract, if any. Where more
than one place is named, "it is for the person to whom payment is to be made to fix the
place at which he will be paid; until he has selected the place at which he will be paid
there can be no default." The English decision from which we quote would presumably
be followed here.

Agreement to sell immovable property within stipulated time---In case of non-execution

of sale deed within stipulated time, option is given to promisee (purchaser) to rescind
contract---Promisor (vendor) does not have choice of rescinding contract in such case.
49. Place for performance of promise where no application to be made and no place
fixed for performance.---When a promise is to be performed without application by the
promisee, and no place is fixed for the performance of it, it is the duty of the promisor to
apply to the promisee to appoint a reasonable place for the performance of the promise,
and to perform it at such place.

Illustration

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply to B

to appoint a reasonable place for the purpose of receiving it, and must deliver it to him at
such place.

50. Performance in manner or at time prescribed or sanctioned by promisee.---The

performance of any promise may be made in any manner, or at any time which the
promisee prescribes or sanctions.

Illustrations

(a) B owes A, 2,000 rupees. A desires B to pay the amount to A's account with C, a
banker. B, who also banks with C, orders the amount to be transferred from his account
to A's credit, and this is done by C Afterwards, and before A knows of the transfer, C
fails. There has been a good payment by B.

(b) A and B are mutually indebted, A and B settle an account by setting off one item
against another, and B pays A to balance found to be due from him upon such settlement.
This amounts to a payment by A and B, respectively, of the sums which they owed to
each other.

(c) A, owes B 2,000 rupees. B accepts some of A's goods in deduction of the debt. The
delivery of the goods operates as a part payment.

(d) A desires B, who owes him Rs. 100, to send him a note for Rs: 100 by post. The debt
is discharged as soon as B puts into the post a letter containing the note duly addressed to
A.

Performance of reciprocal promises

Section 2 (f) provides for Promises which form the consideration or part of the
consideration for each other are called reciprocal promises:

Section 51 provides that promisor is not bound to perform unless reciprocal promisee
ready and willing to perform.---When a contract consists of reciprocal promises to be
simultaneously performed no promisor need perform his promise unless the promisee is
ready and willing to perform his reciprocal promise.

Illustrations
 (a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.

A need not deliver the goods unless B is ready and willing to pay for the goods
on delivery.

B need not pay for the goods unless A is ready and willing to deliver them on
payment.

(b) A and B contract that A shall deliver goods to B at a price to be paid by

installments, the first installment to be paid on delivery.

A need not deliver unless B, is ready and willing to pay the first installment on
delivery.

B need not pay the first installment unless A is ready and willing to deliver the
goods on payment of the first installment.

In a contract by mutual promises the promises on either side are the

consideration and the only consideration for one another.

But the terms of a promise may express or imply conditions of many kinds and
the other party's performance of the reciprocal promise or at least readiness and
willingness to perform it may be a condition.

It is obviously immaterial whether it is called a condition or not, if in substance

it has that effect.

Readiness and willingness.---In the case of a contract for the sale of shares in a company
it is not necessary, in order to prove that a vendor was ready and willing to perform his
part of the agreement, that he should be the beneficial owner of the shares, or that he
should tender to the purchaser the final documents of title to the shares. It is enough that
he should be able and willing to constitute the purchaser the legal owner of the shares
agreed to be sold. Thus, where the vendor tendered to the purchaser share allotment and
receipt papers, and together with each a transfer paper and an application paper, both
signed in blank by the original allottee, it was held that the vendor was ready and willing
to perform his promise.

Section 52 deals with the order of performance of reciprocal promises.---Where the

order in which reciprocal promises are to be performed is expressly fixed by the contract,
they shall be performed in that order; and, where the order is not expressly fixed by the
contract, they shall be performed in that order which that nature of the transaction
requires.

Illustrations
(a) A and B contract that A should build a house for B at a fixed price. A’s promise to
build the house must be performed before B's promise to pay for it.

(b) A, and B, contract that A shall make over his stock in trade to B at a fixed price; and
B. promises to give security for the payment of money. A's promise need not be
performed until the security is given, for the nature of the transaction requires that A
should have security before he delivers up his stock.

Appropriation of payments

Sections 59 to 61 deals with appropriation of payments.

Where debtor intimates appropriation, then Section 59 provides for application of

payment, where debt to be discharged is indicated then payment should be applied
towards the discharge of that particular debt (Croft v. Lumley 1858). If there is no
express intention on this, then surrounding circumstances will be looked upon by court.

Example: If A pays to B Rs. 10000 to settle a debt against a promissory note then Rs.
10000 must be applied to settle the debt against the promissory note and not otherwise.

Where debt to be discharged is not indicated then Section 60 provides that In that case
the creditor may apply the payment at his discretion to any lawful debt actually due and
payable to him from the debtor. Law of limitation is not applicable.

Where neither party indicates or appropriates then Section 61 provides that the
payment shall be applied in discharge of the earlier debt in order of time.

Where it is not stated that payment is to be applied for settlement of debt due or interest
thereon, then the lender may apply the payment first towards the interest.

Contracts which need not be performed

Performance of a contract may be avoided under the following circumstances:-

1. When performance of contract becomes impossible. Example: an agreement to

double the currency through magic is void and impossibility.
2. Section 62 deals with effect of novation, rescission and alteration of contract. If the
parties to a contract agree to substitute a contract with a new one then the old
contract need not be performed.
3. Section 63 provides that a Promisee may dispense with or remit performance of
promise made to him or may extend the time for such performance. Example: A
 engages B to paint a picture for A, Afterwards A forbids B to paint the picture; B
need not perform the contract.
4. Section 64 allows for non performance of voidable contract which are rescinded at
option of a party then the other party need not perform the contract.
5. Section 65 provides that when an agreement is discovered to be void any person
who has received advantage under void agreement or contract that becomes void is
bound to restore the same to the person from whom he received it.

If the terms of the contract are uncertain or incomplete, the parties cannot have reached
an agreement in the eyes of the law. An agreement to agree does not constitute a contract,
and an inability to agree on key issues, which may include such things as price or safety,
may cause the entire contract to fail.

A contract is void if it is based on an illegal purpose or contrary to public policy.

One example, from Canada, is Royal Bank of Canada v. Newell. A woman forged her
husband's signature on 40 checks, totalling over $58,000. To protect her from
prosecution, her husband signed a letter of intent prepared by the bank in which he agreed
to assume "all liability and responsibility" for the forged checks. However, the agreement
was unenforceable, and struck down by the courts because of its essential goal, which
was to "stifle a criminal prosecution." Because of the contract's illegality, and as a result
voided status, the bank was forced to return the payments made by the husband.

In the U.S., one unusual type of unenforceable contract is a personal employment

contract to work as a spy or secret agent.

This is because the very secrecy of the contract is a condition of the contract (in order to
maintain plausible deniability). If the spy subsequently sues the government on the
contract over issues like salary or benefits, then the spy has breached the contract by
revealing its existence. It is thus unenforceable on that ground, as well as the public
policy of maintaining national security (since a disgruntled agent might try to reveal all
the government's secrets during his/her lawsuit).

Other types of unenforceable employment contracts include contracts agreeing to work

for less than minimum wage and forfeiting the right to workman's compensation in cases
where workman's compensation is due.

Anticipatory breach of contract

It occurs when a party to a contract repudiates the contract before the stipulated time for
performance Or when a party disables himself from performing the contract by doing
some act.
Whenever you have a contract that requires completing something, and a person informs
you before they begin your project that it will not be completed, this is referred to as
anticipatory breach.

Examples:

A promised to marry B as soon as A’s father dies. However, A refused to marry B during
the life time of A’s father. (Frost v. Knight LR Ex 111)

A promised to assign to B, within seven years from the date of promise, all his interest in
a lease for GBP 140. However, he changed his mind and assigned the lease to C.
(Lovelock v. Franklyn 1846).

Actual breach of contract

Actual breach can take place:

(a) At the time when performance is due – Where a party to a contract fails or refuses
to perform his part of the obligation under the contract when the performance is
due. Example: A fails to deliver to B 1000 bales of cotton on 30 March 2008. This
is actual breach of contract.
(b) During the performance of the contract – When during the performance one party
either expressly or impliedly repudiates the contract. The party not in breach can
treat the contract as no longer binding on him and sue for damages. Such breach
can be either express or implied.

Express breach occurs when one party communicates to the other about his
intention either not to perform the contract or after accepting partly performance
from the other party refuses to accept the remaining performance. (Ambergate etc.
Rly. Co 1851) wherein, Ambergate was required to supply 3000 tons of railway
chairs on installments to the Railway Company. B after receiving 1787 asked
Ambergate not to supply remaining chairs. Held, Ambergate could bring an action
for breach of contract.

Implied breach occurs when completion of performance of contractual obligation

is made impossible because of act of a party. In that case the other party is
discharged from its obligations. (O’Neil v. Armstrong 1895) wherein a British
national was employed in a Japanese ship. When the Japan declared war with
China, he was asked to leave the ship. It was held, he was entitled to recover the
agreed wages.

Remedies of breach of contract

A breach of contract is failure to perform as stated in the contract. Where a contract is
breached, the injured party becomes entitled to remedies. There are many ways to remedy
a breached contract assuming it has not been waived.

 Rescission of the contract.

 Typically, the remedy for breach of contract is a suit and consequential award of
money damages.

 When dealing with unique subject matter, specific performance may be ordered.

 Suit for injunction can also be filed.

Followings are the Sections of Contract law that provides for remedies for breach of
Contract.

Section 75 provides that a party rightfully rescinding contract is entitled to compensation.

Example: A, a singer, contracts with B to sing at B’s theatre for two nights during a week
for two months for a price of Rs. 1000. A performs for five nights but fails to turn up on
sixth night. B rescinds the contract and is entitled to compensation.

Rescission can be refused where plaintiff expressly or impliedly ratifies the breach and
contract, third party acquires rights for value and in good faith,

Section 73 provides for compensation for loss or damage caused by breach of contract.

When a contract has been broken, the 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.

Compensation for failure to discharge obligation resembling those created by

contract.---When an obligation resembling those created by contract has been incurred
and has not been discharged, any person injured by the failure to discharge is entitled to
receive the same compensation from the party in default as if such person had contracted
to discharge it and had broken his contract.

Explanation.---In estimating the loss or damage arising from a breach of contract, the
means which existed of remedying the inconvenience caused by the non-performance of
tile contract must be taken into account.

Illustrations

(a) A contracts to sell and deliver 50 maunds of saltpetre to B at a certain price, to be paid
on delivery. A, breaks his promise B is entitled to receive from A by way of
compensation, the sum, if any, by which the contract price falls short of the price for
which B might have obtained 50 maunds of saltpetre like quality at the time when the
saltpetre ought to have been delivered.

There are four different types of damages.

 General Damages General damages are those damages which naturally flow from a
breach of contract.

Hadley v. Baxendale establishes general and consequential damages.

 Compensatory damages which are given to the party which was damaged by the
breach of contract. With compensatory damages, there are two kinds of damages,
consequential damages and direct damages.

Compensatory damages are awarded to put the party in as good of a position as the
party would have been in had the contract been performed as promised.

There must be certainty, not estimates, of what the party could have benefited if
the contract had been performed.

Consequential damages are those damages which, although not naturally flowing
from a breach, are naturally supposed by both parties at the time of contract
formation.

An example would be when someone rents a car to get to a business meeting, but
when that person arrives to pick up the car, it is not there. General damages would
be the cost of renting a different car. Consequential damages would be the lost
business if that person was unable to get to the meeting, if both parties knew the
reason the party was renting the car.

 Exemplary damages which are used to make an example of the party at fault to
discourage similar crimes. Fines can be multiplied by factors of up to 50 for such
damages.

 Liquidated Damages which are damages paid for permission to breach the contract
with no further obligations. Liquidation damages must be expressly stated in the
contract, and must be reasonable (as determined by the courts), depending on the
nature of the contract.
  Nominal damages which include minimal dollar amounts (often sought to obtain a
legal record of who was at fault).

Punitive damages which are used to punish the party at fault. These are not usually given
regarding contracts but possible in a fraudulent situation.

Section 73a provides for compensation for failure to discharge obligation resembling
those created by contract.

Section 74 provides for compensation for breach of contract where penalty is stipulated
for within the terms of a contract.

Specific Performance:

There may be circumstances in which it would be unjust to permit the defaulting party
simply to compensate the injured party with damages.

The court may make an order of what is called "specific performance", requiring that the
contract be performed (Section 19 of Specific Relief Act, 1877).

For example where an art collector purchases a rare painting and the vendor refuses to
deliver, the collector's damages would be equal to the sum paid.

A specific performance is obtainable for the breach of a contract to sell land or real estate
on such grounds that the property has a unique value.

A contract for the sale of real property is a notable exception. In most jurisdictions, the
sale of real property is enforceable by specific performance. Even in this case the
defenses to an action in equity (such as laches, the bona fide purchaser rule, or unclean
hands) may act as a bar to specific performance.

Injunction:

In some circumstances a court will order a party to perform his or her promise (an order
of "specific performance") or issue an order, known as an "injunction," that a party
refrain from doing something that would breach the contract.

Both an order for specific performance and an injunction are discretionary remedies,
originating for the most part in equity.

Neither is available as of right and in most circumstances a court will not normally order
specific performance.

Related to orders for specific performance, an injunction may be requested when the
contract prohibits a certain action. Action for injunction would prohibit the person from
performing the act specified in the contract.
Restitution:

When it is neither possible nor desirable to award damages measured in that way, a court
may award money damages designed to restore the injured party to the economic position
that he or she had occupied at the time the contract was entered (known as the "reliance
measure"), or designed to prevent the breaching party from being unjustly enriched
("restitution").

Doctrine of frustration

Where uncontemplated turn of events has occurred which makes further performance of a
contract impossible or unlawful, the contract becomes frustrated at that point and parties
are discharged from their obligations (Section 56).

Doctrine of frustration makes it impossible to execute a contract without the action of any
party (PLD 1980 SC 122).

Frustration applies only to executory contracts and not to executed contracts.

Frustration of contract---How determined. The question whether frustration of contract

occurs or not depends on the nature of the contract and on the events which have
occurred. The question for consideration is, "what was the common intention and a
common purpose for entering into a contract and whether that purpose and intention has
been frustrated by supervening circumstances".

It is not permissible for a Court of law to imply a term which is not consistent with the
express terms of the contract merely on the ground that parties being reasonable men
must be deemed to have provided for a particular event.

Various discharges of contracts

Parties to a contract may be discharged from their obligations under the contract in
following circumstances:

1. By Agreement

(a) Waiver – Contracts may be discharged by mutual agreement. A party may agree to
waive his rights and the other party is discharged from contract.
(b) Novation or Substitute Agreement – Section 62 provides that parties to a
contract may agree to substitute a new contract in place of an existing contract, or
to rescind it or to alter the original contract, which then need not be performed.
 An existing contract is substituted with a new one between same parties or
different parties against the consideration of mutually discharging of the old
contract.

Effect of Novation is that the original contract need not be performed.

Rules of Novation include that parties to a contract may be same and substitute the
old terms with new ones. Terms may require a new party may be added or
substituted. Substituted contract or the old contract must be valid and enforceable.

2. By Performance

A contract may be performed, thus resulting in fulfilling the obligations under a

contract.

3. By Breach

Breach of contractual terms discharges either party from performance of

contractual terms, which may still be due from him. Discharge by breach can be in
the form of: discharge by renunciation before performance; Impossibility created
by one party before performance becomes due; by reununciation in the course of
performance for example refusing to accept balance quantity of goods after
receiving half of the delivery; by impossibility created by one party during the
course of performance

4. Impossibility

Contract may become impossible to perform by reason of circumstances which

discharge the parties from their respective obligations (Section 56). This includes
agreements to do impossible acts.

Examples: Change of law, destruction of thing contracted for, death of promisor in

contract for services etc.

5. Frustration

If performance of contract becomes impossible by reason of some event which

promisor could not prevent.

Example: A promises to marry B, and before marriage A goes mad.

Force Majeure (French for "superior force") is a common clause in contracts

which essentially frees both parties from liability or obligation when an
extraordinary event or circumstance beyond the control of the parties, such as a
 war, strike, riot, crime, or act of God (e.g., flooding, earthquake, volcano), prevents
one or both parties from fulfilling their obligations under the contract.

6. By Operation of law

This means, some set of circumstances which brings about a discharge of contract.

Example: A company goes bankrupt

Bailment

Bailment is the delivery of goods by one person to another for some purpose, which
goods shall be returned upon completion of such purpose or disposed off according to the
direction of person delivering such goods according to a contract between parties thereto.
The person delivering the goods is called bailor and the person to whom goods are
delivered is called bailee (Section 148).

Main characteristics of Bailment:

1. Delivery of goods and delivery of possession is important (Section 149). If there is

a transfer of ownership, then it will be sale or exchange but not bailment.
2. Bailor must disclose faults in goods to Bailee (Section 150).
3. Delivery of possession is temporary but it is for some purpose. Bailor has the right
to reclaim the goods so delivered.
4. Goods are handled, returned or disposed off according to instructions of Bailor.
5. Only the movable property can be bailed.

Duties of Bailee

1. It is the duty of Bailee to take care of the goods entrusted to him (Section 151).
2. Not to make unauthorized use of goods (Section 154).
3. Not to mix the goods with his own goods (Section 155-157).
4. Not to set up a title in goods adverse to the title of the Bailor.
5. To return the goods upon completion of the purpose or time for which the goods
are bailed to him.

Duties of Bailor

1. Disclose faults in goods to the Bailee

2. Bear any extraordinary expenses (Section 158).
3. Compensate or indemnify the Bailee for any loss which Bailee may suffer by
reason that Bailor was not entitled to make Bailment (Section 164).
Contract of indemnity

A contract of indemnity is a contract by which one party promises to save the other from
loss caused to him by the conduct of the promisor himself, or by the conduct of any other
person (Section 124).

Illustration: A contracts to indemnify B against the consequences of any proceedings

which C may initiate against B in respect of a sum of Rs. 200. This is a contract of
indemnity.

Another example is the case of Goulston Discount Co Ltd. V. Clark (1967). Facts of the
case are that A and B go into a shop. B says to shopkeeper, Let A have the goods, I will
see you paid. Held – The contract is of indemnity.

Contracts of insurance are common examples of Contracts of indemnity.

A contract of indemnity is a class of general contract and is subject to all the rules of
contract e.g. consent, lawful object etc. Contract of indemnity can be express or implied.

Parties in a contract of indemnity: There are two parties. One is indemnifier, who
promises to make good the loss, and the other is indemnified or indemnity holder, the one
whose loss is made good (Section 124).

Rights of Indemnity Holder:

1. Damages are paid – 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. Cost of suit – All costs which he may be compelled to pay brining or defending
such suit.
3. Compromise payment – An indemnity holder can compromise a claim on the best
term he can and then bring an action on the contract of indemnity (Section 125).

Rights of indemnifier:

1. Rights of the indemnifier are analogous to the rights of a surety under Section 141.
2. Indemnifier, on making good the indemnity, be entitled to succeed to all the ways
and means by which the person indemnified might have protected himself against
or reimbursed himself for the loss.

Contract of guarantee

A contract of guarantee is a contract to perform the promise or discharge the liability of a

third person in case of his default.
Example: A requests B to lend Rs. 1000 to C and guarantees if C does not pay the
amount, he will pay. This is contract of guarantee.

A and B go into a shop. A says to shopkeeper C, let B have the goods, if B does not pay, I
will pay. (Birkmyr v. Darnell 1704) Held – This is a contract of guarantee.

Parties to a contract of guarantee

1. Surety – The person who gives guarantee

2. Creditor – The person to whom guarantee is given
3. Principal Debtor – The person in respect of whose default the guarantee is given.

Agreements within Contract of Guarantee

Contract of guarantee comprises of three collateral contracts:

1. Between creditor and principal debtor, there is a contract out of which the
guaranteed debt arises.
2. Between surety and creditor, there is a contract by which surety guaranteed to pay
to creditor, principal debtor’s debt in case of default.
3. Between surety and principal debtor, there is a contract that principal debtor shall
indemnify surety in case surety pays in the event of default by principal debtor.

Essentials of Contract of Guarantee

1. Concurrence of all three parties is necessary and in the absence of consent of any
of them no contract is made.
2. Liability must be legally enforceable. If the liability does not exist, there cannot be
a contract of guarantee. Thus a surety is not liable on a guarantee for the payment
of a debt which is barred by the law of limitation.
3. A contract of guarantee must meet all the requirements of a valid contract. But if a
principal debtor goes mad in that case surety is regarded as the principal debtor and
is liable personally (Kashiba v. Shripat 1895) and consideration must be received
by the principal debtor which need not be of any benefit to the surety himself
(Section 127).
4. Writing is not necessary and it can be oral or written.

YOURSELF PREPARE NOTES ON “DISTINGUISH INDEMNITY AND

GUARANTEE”

Principal and agent

Section 182 defines "Agent" and "principal" in following words---An "agent" is a

person employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done, or who is so represented, is called the
"principal".

The essential point about an agent’s position is his power of making the principal
answerable to third persons. No consideration is necessary to create an agency (Section
185).

Illustration

A owns a shop in Quetta, living himself in Karachi and visiting the shop occasionally.
The shop is managed by B, and he is in the habit of ordering goods from C in the name of
A for the purposes of the shop, and of paying for them out of A’s funds with A’s
knowledge. B has an implied authority from A to order goods from C in the name of A
for the purposes of the shop.

In order to determine whether a party stands in the relation of agent or principal in

reference to the other contracting party, the nature of the agreement and the course of
business have to be taken into account.

The legal relation between a merchant in one country and a commission agent in other is
that of principal and agent, and not seller and buyer. An agent may have, and often has, in
fact, a large discretion, but he is bound in law to follow the principal's instructions
provided they do not involve anything unlawful.

Two or more persons may be employed to act as agents jointly or severally, or jointly and
severally.

An agent who negligently omits to comply with the clear instructions of his principal
must be regarded as guilty or gross negligence.

Who may be an agent?

Section 184 provides for as to who can be an agent. As between the principal and third
persons any person may become an agent, but no person who is not of the age of majority
and of sound mind can become an agent, so as to be responsible to his principal
according to the provisions in that behalf herein contained.

Appointment of a "sole agent" does not preclude the principal from acting himself in the
business of the agency without being accountable to the agent. Only an express
prohibition would have that effect.

Creation of agency

Express Agency
The authority of an agent may be expressed or implied (186). Principal impliedly
ratifying acts of agent cannot disown liability arising there from.

Sometimes an agency is created to represent a person in a particular formal deed of

appointment drawn which is drawn up and signed by the principal.
Implied Agency

An authority is said to be express when it is given by words spoken or written. An

authority is said to be implied when it is to be inferred from the circumstances of the
case; and things spoken or written, or the ordinary course of dealing, may be accounted
circumstances of the case (Section 187).

Implied agency arises from the conduct, situation of parties, necessities or circumstances
of a case.

Example: A & B are brothers. A resides at Karachi and B resides in Hyderabad. B with
the knowledge of A, leases A’s agricultural land at Hyderabad. B realizez the rent and
remits the same to A. B is agent of A, though not expressly appointed as such.

Smith v. Moss (1940), wherein a woman allowed her son to drive a car for her, she
paying all expenses of maintenance and operation. The son met an accident injuring his
wife. Held – Wife can not sue Mother as the son was implied agent of the mother.

Agency by Estoppel

It is created where a person by his conduct or by words spoken or written, leads willfully
another person to believe that a certain state of affairs exists and induces him to act on
that behalf so as to alter his previous position, such person is then precluded from
denying subsequently the fact that state of affairs (Section 237).

Example: B is A’s agent and A instruct him to not to sell goods at a price lower that what
A has fixed. C ignorant of A’s instructions buys goods from B at a price lower than what
A has fixed. A is bound by the contract.

Agency by holding out

Agency by holding out is created by some positive or affirmative act on the part of the
principal.

Example: If A habitually allows his servant B to purchase goods for him from C and
paid C for the goods later on. On one occasion A sent B with cash but B purchased goods
on credit. Held – C can recover from A as he has held out his servant as his agent on prior
occasions.
Agency by necessity

It is created by law, under circumstances, where there is no opportunity of

communicating to one person with the other.

Example: Husband-Wife, wife forced to live separately can pledge her husband’s credit
to buy all necessities of life according to position of her husband even against his wishes.

Agency by ratification

It arises where a person acts on behalf of another without his knowledge or consent and
who afterwards accepts such act.

Example: A insures’ B’s goods and B without his authority and B later on ratifies A’s act.

Ratification can be express or implied.

 Effects of ratification – effect of ratification is to render the acts of agent as

binding on principal (Section 196).

 Requisites of ratification –

1. Agent must expressly act as agent for a principal who in contemplation

and is identifiable at the time of contract.
2. Principal must exist at the time of contract.
3. Principal must have contractual capacity both at the time of contract and
at the time of ratification.
4. Ratification must be with full knowledge of facts (Section 198).
5. Ratification must be within reasonable time.
6. Ratification must be for a lawful act.
7. Whole transaction must be ratified (Section 199).
8. Ratification must be communicated to the party who is liable by the act
done by the agent.
9. Ratification must be of the acts which the principal had power to do.

Classification of Agents

 Special agents

Special agent is one who is appointed to perform a particular act or to represent the
principal in a particular transaction.

 General Agents
 General agent is one who has authority to do all acts connected with a particular
business.
 Universal agents

Universal agent is one whose authority to act for the principal is unlimited. Such agent
has authority to bind his principal by any act which he does.

Kinds of agents

Factor – A factor is an agent who is entrusted with the possession of goods by his
principal with authority to sell the same. Such agent is entitled to sell the goods of his
principal in his own name without disclosing that of his principal. A factor is considered
as Mercantile agent.

Auctioneer – An auctioneer is an agent both for seller as well as purchaser. He advertises

and conducts the sale as agent of the seller. On final call of the hammer he becomes the
agent of the highest bidder i.e. the buyer. He is entitled to recover the price from such
buyer by filing a suit in his own name. He has a particular lien on the goods in his
possession.

Broker – A broker is an agent who buys and sells goods on behalf of another and
receives commission for doing so. He procures contractual relations between the
principal and a third party. He is not entrusted with possession of the goods in which he
deals.

Commission Agent – A commission agent is one who buys or sells in the market on
behalf of his principal as per his instructions. He is liable for the failure of the other party
to the agreement to carry out his part. He cannot charge a price higher to his principal
than that which is charged to or by him.

Del Credere Agent – Is one who in consideration of an extra commission, guarantees his
principal that the person with whom he makes contracts on behalf of the principal shall
perform their obligation.

Duties and rights of an agent

1. Carry out work according to instructions & where no instructions then as per
Custom

An agent is bound to conduct the business of his principal according to the directions
given by the principal, or, in the absence of any such directions, according to the custom
which prevails in doing business of the same kind at the place where the agent conducts
such business. When the agent acts otherwise, if any loss be sustained, he must make it
good to his principal, and, if any profit accrues, he must account for it (Section 211).
Illustrations

(a) An agent, instructed to warehouse goods at a particular place, warehouse a

portion of them at another place, where they are destroyed, without negligence. He
is liable to the principal for the value of the goods destroyed.

(b) A, an agent engaged in carrying on for B, a business, in which it is the custom

to invest from time to time, at interest, the moneys which may be in hand, omits to
make such investments. A must make good to B the interest usually obtained by
such investments.

(c) B, a broker, in whose business it is not the custom to sell on credit, sells goods
of A, on credit to C, whose credit at the time was very high. C before payment,
becomes insolvent. B must make good the loss to A.

2. Skill and diligence required from agent.

An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the principal has
notice of his want of skill. The agent is always bound to act with reasonable diligence,
and to use such skill as he possesses; and to make compensation to his principal in
respect of the direct consequence of his own neglect, want of skill or misconduct, but not
in respect of loss or damage which are indirectly or remotely caused by such neglect,
want of skill or misconduct (Section 212).

Illustrations

(a) A, a merchant in Islamabad, has an agent, B, in London to whom a sum of money is

paid on A's account, with orders to remit. B retains the money for a considerable time. A,
in consequence of not receiving the money, becomes insolvent. B is liable for the money
and interest from the day on which it ought to have been paid, according to the usual rate,
and for any further direct loss---as e.g., by variation of rate of exchange--but not further.

(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual inquiries as to the solvency of B. B, at the
time of such sale, is insolvent. A must make compensation to his principal in respect of
any loss thereby sustained.

(c) A, an insurance broker, employed by B to effect an insurance on a ship, omits to see

that the usual clauses are inserted in the policy. The ship is afterwards lost. In
consequence of the omission of the clauses nothing can be recovered from the
underwriters. A is bound to make good the loss to B.

(d) A, a merchant in England, directs B, his agent at Karachi who accepts the agency, to
send him 100 bales of cotton by a certain ship. B, having it in his power to send the
cotton, omits to do so. The ship arrives safely in England. Soon after her arrival, the price
of cotton rises. B is bound to make good to A, the profit which he might have made by
the 100 bales of cotton at the time the ship arrived, but not any profit he might have made
by the subsequent rise.

3. Render proper agent's accounts

An agent is bound to render proper accounts to his principal on demand (Section 213).

4. Agent's duty to communicate with principal

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in

communicating with his principal, and in seeking to obtain his instructions (Section 214).

5. Right of principal when agent deals, on his own account, in business of agency
without principal's consent

If an agent deals on his own account in the business of the agency, without first obtaining
the consent of his principal, if agent does so, the principal may repudiate the transaction,
if the case shows either that any material fact has been dishonestly concealed from
principal (Section 215).

Illustrations

(a) A directs B to sell A's estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he can
show that B has dishonestly concealed any material fact, or that the sale has been
disadvantageous to him.

6. Principal's right to benefit gained by agent dealing on his own account in business
of agency

It is the duty of an agent to remit any benefit which may have resulted to him from the
transaction to his principal, provided an agent, without the knowledge of his principal,
deals in the business of the agency on his own account instead of on account of his
principal (Section 216).

6. Pay sums received for principal (Sections 217 & 218)

7. Protect and preserve principal’s interest in case of death or insanity
8. Not to use information obtained in the course of agency against the principal
9. Not to make secret profits from Agency.
10.Not to set up adverse title
11.Not to conflict interest and duty.
12.Not to delegate authority
Rights of Agent

1. Agent's right of retainer out of sums received on principal's account - An agent

may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly
incurred by him in conducting such business, and also such remuneration as may be
payable to him for acting as agent.

2. Right to receive remuneration - In the absence of any special contract, payment for
the performance of any act is not due to the agent until the completion of such act; but an
agent may detain moneys received by him on account of goods sold, although the whole
of the goods consigned to him for sale may not have been sold, or although the sale may
not be actually complete (Section 219).

3. Agent's Right of lien on principal's property.---In the absence of any contract to the
contrary an. agent is entitled to retain goods, papers and other property, whether
moveable or immoveable, of the principal received by him, until the amount due to
himself for commission, disbursements and services in respect of the same has been paid
or accounted for to him (Section 221).

4. Agent’s right to be indemnified against consequences of lawful acts - The employer

of an agent is bound to indemnify him against the consequences of all lawful acts done by
such agent in exercise of the authority conferred upon him (Section 222).

Illustrations

(a) B, at Singapore, under instructions from A, of Quetta, 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 for such
damages, costs, and expenses.

(b) B, a broker at Quetta by the orders of A, a merchant there, contracts with C for the
purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B
informs A, who repudiates the contracts altogether. B defends, but unsuccessfully and has
to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs,
and expenses.

Agent has a right to be indemnified for acts done in good faith (Section 223). However,
right to indemnification do not extend to acts which are criminal in nature (Section 224).

5. Right of Compensation to agent for injury caused by principal's neglect - The

principal must make compensation to his agent in respect of injury caused to such agent
by the principal's neglect or want of skill.

Illustration
A employees B as a bricklayer in building a house, and puts up the scaffolding himself.
The scaffolding is unskillfully put up, and B is in consequence hurt. A must make
compensation to B.

Duties and rights of principal scope

Duties

1. Indemnify Agent - The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the authority conferred
upon him (Section 222).

Illustrations

(a) B, at Singapore, under instructions from A, of Quetta, 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 authorises 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 for such damages, costs, and expenses.

(b) B, a broker at Quetta by the orders of A, a merchant there, contracts with C for
the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C
sues B. B informs A, who repudiates the contracts altogether. B defends, but
unsuccessfully and has to pay damages and costs, and incurs expenses. A is liable
to B for such damages, costs, and expenses.

2. Agent has a right to be indemnified for acts done in good faith (Section 223).

3. Indemnify agent for injury caused by principal’s neglect - The principal must make
compensation to his agent in respect of injury caused to such agent by the principal's
neglect or want of skill (Section 225).

4. Pay any commission due to or agreed with agent.

Rights of Principal

1. To recover damages from agent if agent disregards the directions of principal or suffers
loss due to lack of requisite skill, care or diligence on the part of his agent.

2. To recover secret profits made by agent and resist claim of agent for remuneration.

3. Resist claim against indemnity where in any transaction the agent has acted as
principal and not as agent.
4. Principal's right to benefit gained by agent dealing on his own account in business of
agency.

5. Right of principal when agent deals, on his own account, in business of agency without
principal's consent

If an agent deals on his own account in the business of the agency, without first obtaining
the consent of his principal, if agent does so, the principal may repudiate the transaction,
if the case shows either that any material fact has been dishonestly concealed from
principal (Section 215).

Extent and kinds of agent’s authority

Section 226 lays down the acts of an agent which fall within the scope of his authority
which bind his principal. Contracts entered into through an agent, and obligations arising
from acts done by an agent, may be enforced in the same manner, and will have the same
legal consequences as if the contracts had been entered into and the acts done by the
principal in person.

Illustrations

(a) A buys goods from B knowing that he is an agent for their sale, but not knowing who
the principal is. B's principal is the person entitled to claim from A the price of the goods,
and A cannot, in a suit by the principal, set off against that claim a debt due to himself
from B.

(b) A being B's agent, with authority to receive money on his behalf, receives from C a
sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

Authority of agent to bind his principal may be:

a. Actual or real authority

b. Apparent or ostensible authority

Actual Authority (Section 186).

Actual authority of an agent is the authority conferred on him by the principal. It may be
express, incidental or implied.

a. Express authority is that which is given by the principal by words spoken or

written (Section 187).
b. Implied authority is inferred from the relevant circumstances i.e. from an act done
which was necessary for execution of express authority (Section 188).
Apparent or Ostensible Authority

Apparent authority is that which is not real but the principal by his words or conduct
reasonably leads a third party to believe that agent possesses such authority.

Ryan v Pilkington (1959) where an estate agent was instructed by owners to find a
purchaser for a property and accepted deposit as agent. Held: although agent was not
given authority to accept deposit yet, he acted within the scope of his ostensible authority.

Liabilities of principal to third party

Liability when principal is named

1. Acts of agents are acts of Principal - Contracts entered into through an agent,
and obligations arising from acts done by an agent, may be enforced in the same
manner, and will have the same legal consequences as if the contracts had been
entered into and the acts done by the principal in person (Section 226).

Example: A being B's agent, with authority to receive money on his behalf,
receives from C a sum of money due to B. C is discharged of his obligation to pay
the sum in question to B.

2. When Agent exceeds authority - When an agent does more than he is

authorized to do, and when the part of what he does, which is within his authority,
can be separated from the part which is beyond his authority, so much only of what
he does as is within his authority is binding as between him and his principal.

Illustration

A being owner of a ship and cargo, authorizes B to procure an insurance for 4,000
rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.

3. Notice given to Agent is notice given to Principal - Any notice given to or

information obtained by the agent, provided it be given or obtained in the course of
the business transacted by him for the principal, shall, as between the principal and
third parties, have the same legal consequences as if it had been given to or
obtained by the principal.

Illustrations
 (a) A is employed by B to buy from C certain goods of which C is the apparent
owner, and buys them accordingly. In the course of the treaty for the sale, A learns
that the goods really belonged to B, but B is ignorant of that fact. B is not entitled
to set off a debt owing to him from C against the price of the goods.

(b) A is employed by B to buy from C goods of which C is the apparent owner. A

was, before he was so employed, a servant of C, and then learnt that the goods
really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his
agent, B may set off against the price of the goods a debt owing to him from C.

4. Misrepresentation or Fraud of Agent - Misrepresentation made, or frauds

committed, by agents acting in the course of their business for their principals,
have the same effect on agreements made by such agents as if such
misrepresentations or fraud had been made or committed by the principals; but
misrepresentations made, or frauds committed, by agents, in matter which do not
fall within their authority, do not affect their principals.

Illustrations

(a) A, being B's agent for the sale of goods, iduces C to buy them by a
misrepresentation, which he was not authorised by B to make. The contract is
voidable as between B and C at the option of C.

(b) A, the captain of B's ship, signs bills of lading without having received on
board the goods mentioned therein. The bills of lading are void as between B and
the pretended consignor.

Liability when principal is unnamed

If agent contracts but does not discloses name of his principal, such principal is liable. If
the third party is aware about existence of principal, such third party cannot sue the
principal. If Agent refuses to disclose the identity of principal then he becomes personally
liable.

Liability when Principal is undisclosed

(a) Rights of parties to a contract made by agent not disclosed (Section 231) - If an
agent makes a contract with a person who neither knows, nor has reason to suspect, that
he is an agent, his principal may require the performance of the contract; but the other
contracting party has, as against the principal, the same rights as he would have had as
against the agent if the agent had been principal.

If the principal discloses himself before the contract is completed, the other contracting,
party may refuse to fulfill the contract, if he can show that, if he had known who was the
principal in the contract, or if he had known that the agent was not a principal, he would
not have entered into the contract.

(b) Position of agent – As between the principal and agent, an agent has all the rights of
an agent as against the principal. But as regards the third party, he is personally liable on
the contract. The third party may sue the agent on the contract, and the agent has a right
to sue the third party.

(c) Position of third parties – The third party on making a contract with an agent for an
undisclosed principal may elect to sue either the principal or the agent or both of them.

Example: A makes a contract with B for the sale of 100 bales of cotton yarn, where after
A discovers that B is acting as agent for C. A may sue either C or B or both C & B, for
the price of goods.

Personal liability of agent to third party

An agent is personally liable to third parties in the following cases:

1. When contract expressly provides - that a party while contracting with an agent may
expressly stipulate that in case of breach of contract, he would hold the agent personally
liable in case of breach of contract and if the agent agrees to it, he is personally liable.

2. When agent act for a foreign principal - Where the contract is made by an agent for
the sale or purchase of goods for a merchant resident abroad, agent is held personally
liable (Section 230).

3. When agent acts for undisclosed principal - Where the agent does not disclose the
name of his principal, agent is held personally liable (Section 230).

4. When agent signs contract in his own name – when an agent signs a contract in his
own name without disclosing that he is acting as an agent, though known to be an agent is
understood to have contracted personally.

5. When agent acts for a non-existent principal – When the promoters act for a
company yet to be registered, they are personally liable for all such acts.

6. When agent is liable for breach of warranty of authority – when a person acts as an
agent but has no authority from the alleged principal, or exceeds the authority, he is
personally liable.

7. When agent pays or receives money by mistake or fraud – he is personally liable to

the third party.
8. When authority is coupled with interest – When an agent has an interest in the
subject matter of the contract made by him with a third party, his authority is coupled
with interest. He can sue and be sued to extent of his interest.

9. When agent is personally liable under trade usage or customs.

Example: A contracts with B to sell 100 Air conditioners. Later on A discovers that B
was acting as agent for C. A may sue B or C or both for the price of Air Conditioners.

Termination of agency

An Agency can be terminated by:

1. Act of parties
2. Operation of law

1. Termination of Agency by Act of Parties:

Termination of Agency by Act of Parties can be through:

a. Agreement
b. Revocation by the principal
c. Revocation by the Agent

2. Termination of Agency by Operation of Law

Termination of Agency by Operation of Law can be through:

a. Performance of contract:

Where an agreement is for a particular purpose and when the purpose is

accomplished the agreement automatically terminated or when the object of
contract becomes impossible.

Section 201 provides that “an agency is terminated by the principal revoking
his authority; or by the agent renouncing the business of the agency; or by the
business of the agency being completed; or by either the principal or agent
dying or becoming of unsound mind; or by the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force for the
relief of insolvent debtors”.

b. Expiry of time
Where an agent has been appointed for a fixed term, the expiration of the term
puts an end to the agency, whether the purpose of the agency has been
accomplished or not; consequently where an agency for sale has expired by
express limitation, a subsequent execution thereof is invalid, unless the term has
been extended.

c. Death of either of the parties

An agency comes to an end by the death of either Principal or Agent (Section

201). Where the Principal dies, the agent must take on behalf of the
representatives of his late principal all reasonable steps for the protection of the
interest entrusted to him (Section 209).

A power of attorney to an agent to present a document for registration is

revoked by the death of the principal.

d. Insanity of either of the parties

Pursuant to Section 201, either the principal or agent dying or becoming of

unsound mind, agency shall come to an end.

e. Insolvency of either of the parties / Dissolution of a Company

Insolvency of Principal or Agent results in termination of Agency. For example,

a power of attorney, executed by a firm, to sell immovable property stands
terminated by the dissolution of the firm.

f. Destruction of the subject matter

When subject matter of an agency agreement is destructed and agreement

becomes impossibility then agency agreement stands terminated.

Example: A is appointed an agent of B for a particular sale of a horse of B. A

enters into an agreement with C to sell B’s horse. B’s horse dies so performance
of the contract becomes impossible and Agency agreement comes to an end.

g. Principal becoming an alien enemy

If contract of agency is between principal and agent belonging to two different

countries, it is valid as long as their countries are at peace otherwise the
agreement stands terminated.

h. Termination of sub agent’s authority

 The termination of the authority of an agent causes the termination (subject to
the rules herein contained regarding the termination of an agent’s authority) of
the authority of all sub-agents appointed by him (Section 210).

i. Principal revokes Agent’s authority

Agency agreement stands terminated if a principal revokes the authority given

to his agent at any time before the authority has been exercised so as to bind the
principal (Section 203).

In case of revocation of agency by Principal or Renunciation of Agency by Agent,

reasonable notice must be given of such revocation or renunciation; otherwise the
damage thereby resulting to the principal or the agent, as the case may be, must be made
good to the one by the other.

Time from which revocation operates

Revocation by the act of the principal takes effect as to the agent from the time when the
revocation is made known to him; and as to third persons when it is made known to them,
and not before.

Questions to Prepare for Contract Act

Q: Identify and explain various aspects of contracts such as;

 communication, acceptance and revocation of proposals

 essentials of valid contract
 performance,
 discharge,
 breach of contract and
 damages for breach of contract
 contract of bailment

Q: describe how an agency is created

Q: differentiate between contract of Indemnity and Guarantee

Q: explain the classes of agent and describe:

 the agent’s duty to the principal and

 principal’s duty to agent

Q: identify and explain the rights and liabilities of parties to a contract, when principal
is disclosed or undisclosed
Q: describe the ways when an agency is terminated