$RW77R82

LAW OF CONTRACTS
(FOR PRIVATE CIRCULATION ONLY)

2019
PROGRAMME COORDINATOR
Mr. Vishal Ranaware
COURSE DESIGN AND REVIEW COMMITTEE

Prof. Dr. Deepa Paturkar Prof. Dr. Shashikala Gurpur
Dr. Rohini Gote Prof. Ujjwala Sakhalkar
Ms. Payal Joshi Prof. Medha Kolhatkar
Ms. Pallavi Kalekar Prof. Amola Darekar
Carolin Dennis
COURSE WRITERS
Prof. Dr. Deepa Paturkar Ms. Pallavi Kalekar
Dr. Rohini Gote Ms. Payal Joshi
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2011 (Revision 02, 2014)
Copyright © 2019 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
It gives us immense pleasure to write the book on Law of Contract for the inquisitive students of SCDL.
This book discusses important principles of Contract Law based upon the Indian Contract Act, 1872.
The modern day contracts offer different challenges in terms of formation, performance and
enforcement. It becomes necessary to analyse and understand the rights and liabilities arising out
of them. The age old principles of Indian Contract Act still form the foundation of any contractual
relationships between the parties.
We have therefore made every attempt to make the book informative, yet simple and interesting. The
intricate points of law have been illustrated by suitable examples. The subject has been dealt with
by topics rather than in the strict order of the sections. It may be observed that wherever needed, the
Indian law is compared with the English Law so as to give the reader wider perspective on the topic
concerned. Indian Law differs on many important aspects from English Law, which is highlighted at
suitable places.
Every attempt has been made to make the book illustrative. Reference to case law is also indispensable
for clear understanding of law and hence it is included in the form of illustrations and examples so as
to make it interesting. Each unit contains a structured arrangement of topics. Each unit is concluded
by the explanation of key points and the summary followed by questions for self-assessment. Special
efforts have been made to make the book comprehensive and student friendly. The self assessment
questions at the end would help the reader to evaluate his/her own understanding of the subject.
We hope that this book will be of great help for the students. We sincerely extend our gratitude towards
the management of SCDL for this opportunity and for displaying the sense of confidence in us. We
thank ILS Law College and its staff for providing all the logistic support. Finally, our heartfelt thanks
to our family members without whose support and encouragement this piece of work would have
been just a dream.
Dr. Rohini Gote

Dr. Deepa Paturkar
Pallavi Kalekar
Payal Joshi
iii
ABOUT THE AUTHOR
Dr. Rohini Gote is working as Associate Professor at Garware College of Commerce, Pune. She
has more than 18 years of teaching experience in reputed Colleges. Her areas of interest include
Business Laws, Corporate laws and Environmental Laws. She is a full time faculty for Business
Regulatory Framework for last fifteen years. She has been associated with Symbiosis Law School for
many years as a visiting faculty. At present she is actively involved in examination and assessment
processes at Symbiosis International University. She has presented research papers at National as well
as International Level.
Dr. Deepa Paturkar is working as Assistant Professor at ILS Law College, Pune. She has more
than 14 years of teaching experience in reputed Law Colleges. Her areas of interest include Business
Laws, Labour Management Relations, Environmental Laws and Medical Jurisprudence. Apart from
her teaching experience she is associated with a Non Governmental Organisation, MASUM (Mahila
Sarvangin Utkarsha Mandal, Pune) in their training programs for more than last 12 years. She has
contributed to articles in the areas of Medical Jurisprudence and Environmental Law at National as
well as International Level. She wants to pursue her academic excellence and research in the field of
Law and Interdisciplinary studies.
Pallavi Kalekar is a Post Graduate in Law from Pune University. She has completed graduation in
Law from Symbiosis Law College. She holds court experience in Corporate, Civil, Criminal, Family,
Trust, DRT, Labour, and Co-Operative Court. She has substantial experience in structuring, drafting and
reviewing commercial contracts, lease of premises, manufacturing / management services, trademark
license agreements, Power of Attorney.
Payal Joshi has completed her B.S.L. LL.B. degree from Symbiosis Society’s Law College. She has
also done her Diploma on Intellectual Property Rights from World Intellectual Property Organization.
She has practiced as a Junior Advocate in Bhopal Civil Court and Consumer Commissions. She has
worked on client counseling, interviewing techniques of clients, handling cases involving consumer
disputes as well as civil and family matters. She was associated with some reputed Law firms like
O.P. Khaitan and Co., Syntel’s Legal Department, etc. under which she looked after matters relating
to Company Laws, FEMA, SEBI, MRTP and Maritime Arbitration.
iv
CONTENTS
Unit No. TITLE Page No.
1 Indian Contract Act, 1872 1-10
1.1 Meaning and Purpose of Law
1.2 Importance of Law
1.3 Sources of Law
1.4 ‘Act’ and ‘Law’
1.5 Branches of Law
1.6 Scope of Business Laws
1.7 Introduction to Contract Law
1.8 History of the Contract Act
1.9 Importance of the Contract
1.10 Object of the Contract
1.11 Definition and Nature of the Contract
1.12 Kinds of Contracts
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Proposal & Acceptance 11-26
2.1 Definition of Proposal and Explanation
2.2 Rules or Conditions of a Legal and Valid Proposal/Offer
2.3 Invitation for Proposal is not a Proposal
2.4 Revocation of a Proposal
2.5 Definition of Acceptance and Explanation
2.6 Rules or Conditions of a Legal and Valid Acceptance
2.7 Rules regarding Communication of Proposal, Acceptance and
Revocation
Summary
Key Words
Suggested Reading
3 Consideration 27-40
3.1 Introduction
3.2 Definition of Consideration
3.3 At the Desire of the Promisor
3.4 Privity of Contract and of Consideration
3.5 Has Done or Abstained From Doing
3.6 Act or Abstinence or Promise
Summary
Key Words
Suggested Reading
v
4 Capacity to Contract 41-52
4.1 Concept of ‘Capacity to Contract’
4.2 Age of Majority or Minor’s Agreement
4.3 Effects of Minor’s Agreement
4.4 Soundness of Mind
4.5 Person should not be Disqualified from Contracting by Any Law to
Which He is Subject
Summary
Key Words
Suggested Reading
5 Free Consent 53-72
5.1 Consent and Free Consent (Section 13 & 14 respectively)
5.2 Coercion (Section 15)
5.3 Undue Influence (Section 16)
5.4 Fraud (Section 17)
5.5 Misrepresentation (Section 18)
5.6 Mistake (Sections 20, 21 and 22)
Summary
Key Words
Suggested Reading
6 Void Agreements (Sec. 25 to 30) 73-82
6.1 Definition, Meaning and Explanation of Void Agreement
6.2 Types of Void Agreement
Summary
Key Words
Suggested Reading
7 Contingent Contracts (Sec. 31 to 36) 83-92
7.1 Definition and Meaning of Contingent Contract
7.2 Essentials of a Valid Contingent Contract
7.3 Rules of Enforcement of Contingent Contracts
7.4 Differences Between Wagering Agreements and Contingent Contracts
Summary
Key Words
Suggested Reading
vi
8 Performance of Contract 93-110
8.1 Meaning of Performance
8.2 Who Must Perform
8.3 ‘Tender’ or Offer of Performance
8.4 Performance of Joint Promises (Sec.42 to 45)
8.5 Time, Place, Manner of Performance (Sec. 46 to 50 & Sec. 55)
8.6 Performance of Reciprocal Promises (Sec. 51 to 54 & 57)
8.7 Appropriation of Payments (Sec. 59,60,61)
Summary
Key Words
Suggested Reading
9 Quasi-Contracts (Sections 68-72) 111-120
9.1 Meaning and Kinds of Quasi-Contracts
9.2 Claim for Necessaries Supplied (Sec.68)
9.3 Reimbursement of a Person (Sec.69)
9.4 Obligation for ‘Non-Gratuitous Act’ (Sec.70)
9.5 Responsibility of Finder of Goods (Sec.71)
9.6 Liability of a Person Receiving Money or things under Mistake or
Coercion (Sec.72)
9.7 Quantum Meruit
9.8 Difference between Contracts and Quasi-Contracts
Summary
Key Words
Suggested Reading
10 Discharge of Contracts 121-142
10.1 Meaning and Concept of Discharge of Contract
10.2 Modes of Discharge of Contracts
10.3 Remedies for Breach of Contract
10.4 Various Remedies for Breach of Contract
10.5 Rescission of the Contract
10.6 Suit for Specific Performance of Contract
10.7 Suit for an Injunction
10.8 Suit on Quantum Meruit
10.9 Suit for Damages (Compensation) (Sec. 73,74)
10.10 Types of Damages
Summary
Key Words
Suggested Reading
vii
11 Indemnity and Guarantee (Section 124 to 147) 143-162
11.1 Introduction
11.2 Contract of Indemnity
11.3 Parties to Indemnity Contract
11.4 Essentials of Contract of Indemnity
11.5 Rights of an Indemnity-Holder
11.6 Contract of Guarantee
11.7 Essentials of Contract of Guarantee
11.8 Difference between Indemnity and Guarantee
11.9 Kinds of Guarantee
11.10 Revocation of Continuing Guarantee
11.11 Rights of a Surety
11.12 Rights of a Creditor against Surety
11.13 Discharge of Surety
Summary
Key Words
Suggested Reading
12 Bailment and Pledge (Section 148 to 181) 163-188
12.1 Introduction, Definition and Meaning
12.2 Essentials of Bailment
12.3 Kinds of Bailment
12.4 Duties of Bailor
12.5 Duties of Bailee
12.6 Rights of Bailor
12.7 Rights of Bailee
12.8 Difference between Particular Lien and General Lien
12.9 Rights of Bailor and Bailee against Wrongdoers
12.10 Finder of Lost Goods
12.11 Termination of Bailment
12.12 Pledge (Sec. 172 to 179)
12.13 Difference between Pledge and Bailment
12.14 Rights and Duties of Pawnee
12.15 Rights and Duties of Pawnor
12.16 Pledge by Non-Owners
Summary
Key Words
Suggested Reading
viii
13 Agency (Section 182 to 238) 189-212
13.1 Introduction, Definition, Meaning of Agency
13.2 Creation of Agency
13.3 Classification of Agents
13.4 Extent of Agent’s Authority
13.5 Duties of an Agent
13.6 Rights of an Agent
13.7 Personal Liability of an Agent
13.8 Rights of Principal
13.9 Duties and Liabilities of Principal
13.10 Termination of Agency (Sec. 201)
Summary
Key Words
Suggested Reading
References 213
ix
x
Indian Contract Act, 1872
UNIT
1
Structure:
1.1 Meaning and Purpose of Law
1.2 Importance of Law
1.3 Sources of Law
1.4 ‘Act’ and ‘Law’
1.5 Branches of Law
1.6 Scope of Business Laws
1.7 Introduction to Contract Law
1.8 History of the Contract Act
1.9 Importance of the Contract
1.10 Object of the Contract
1.11 Definition and Nature of the Contract
1.12 Kinds of Contracts
Summary
Key Words
Suggested Reading
Indian Contract Act, 1872 1

Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the meaning, importance and definition of law
----------------------
• Discuss the concept of law and various types of laws
---------------------- • Analyse the scope of business laws
---------------------- • Define contracts
----------------------
1.1 MEANING AND PURPOSE OF LAW
----------------------
In the ancient period in the state of nature, man was living like an animal.
----------------------
There was no peace, security and no progress. ‘Might is Right’ or ‘Tit for Tat’
---------------------- was the rule that determined existence of man. Gradually, institutions like
family, society and state came into existence. With this evolution law also
---------------------- evolved according to the needs of human being and became essential for the
peaceful working of society.
----------------------
It is very difficult to define law. Law is basically in the form of various
---------------------- rules, regulations or norms of conduct enforced by the State. The State i.e. the
Government regulates the conduct of its people by a system of rules.
----------------------
Such rules of conduct, recognized by the State and enforced by it on its
---------------------- people are termed as laws. As defined by Salmond, a famous English jurist “Law
is the body of principles recognised and applied by the State in the administration
----------------------
of justice.” John Austin defines law as ‘The command of a sovereign which
---------------------- requires obedience and attracts sanctions in case of disobedience.’ Thus, the main
purpose of law is to regulate the relationship between individual and individual
---------------------- and between State and individual. Law tries to bring uniformity, definiteness,
security and stability in the society.
----------------------
----------------------
1.2 IMPORTANCE OF LAW
----------------------
In today’s world, law is inevitable. In the welfare state, family relationship,
---------------------- business relationship and citizen’s relationship with the state are governed by
the law. Rights and duties are created in every kind of relationship and that is
---------------------- the subject matter of law. Therefore law has become a ‘living phenomenon.’ It
is growing and developing all the time. One just cannot live without law. For
----------------------
example taking admissions in colleges, buying a flat, starting a partnership firm,
---------------------- taking premises on rent, purchasing any commodity from shops etc. everywhere
we are governed and regulated by some definite rules i.e. laws.
----------------------
----------------------
----------------------
2 Law of Contracts
1.3 SOURCES OF LAW Notes
There are various sources of laws such as ----------------------
 Customs or traditions, which are followed for a number of years and the ----------------------
usage, are presumed to be laws.
----------------------
 Judge-made laws i.e. precedents - The judicial decisions of the highest courts
are binding on the lower courts in similar cases. ----------------------
 The uncodified laws found in the holy and sacred books of a religion are as ----------------------
good as laws for the people belonging to that religion.
 Acts passed by the legislatures - This is the main source of laws. Acts are ----------------------
also called as statutes or legislations. The Indian Contract Act 1872 falls in ----------------------
this category.
----------------------
1.4 ‘ACT’ AND ‘LAW’ ----------------------
‘Law’ is a generic term, which includes various types of laws such as ----------------------
customs, rules, norms, Acts, precedents etc. Whereas ‘Act’ is a specific type of
law which is made either by the Central legislature or by the State legislature. It ----------------------
is therefore also called as a codified law or a statute or a legislation. ----------------------
As a student of law one must know the basic common features of all the
----------------------
Acts. Every Act consists of several sections. Every Act beings with a ‘object
clause.’ It states in few lines the object behind making that law. Section 1 thus ----------------------
consists of following:-
----------------------
1. Title of the Act i.e. the heading given by the Government to that piece of
legislation. ----------------------
2. Commencement i.e. date from which the Act has come into force. This
----------------------
year shows you as to how recent or how ancient is, that Act.
3. Extent of the Act i.e. the geographical boundaries of the Act, which is called ----------------------
the territorial jurisdiction of the Act. ----------------------
4. Applicability of the Act i.e. given within the geographical boundaries the
Act is applicable to whom, or which persons, Institutes, Companies etc. ----------------------
Then Section 2 is the Interpretation clause, which gives definitions of various ----------------------
terms, used in the Act. Section 3 onwards one can read the actual provisions of
the law. These are the common features of all the Acts. ----------------------
----------------------
1.5 BRANCHES OF LAW
----------------------
The law as a generic term may be classified on the basis of its subject matter
----------------------
such as law of land (lex loci) and personal law. The law of land applies to every
person in the country, irrespective of his race, religion, caste, creed, sex etc. ----------------------
Personal law being based on religion is applied to a limited group of persons.
Law may be also classified as civil law and criminal law. Criminal law aims to ----------------------

Notes define crimes and provides for punishment in case the crime is committed and
proved. Civil law determines the rights and obligations of persons. It also provides
---------------------- for the remedies in case of infringement of those rights or non-fulfillment of
obligations. Law may be either substantive or procedural. Procedural law provides
---------------------- for the procedure to be followed in order to enforce the rights recognized by law.
---------------------- Substantive law elucidates principles which govern relationships between the
persons and the state. Business laws like the Indian Contract Act, The Negotiable
---------------------- Instruments Act, The Sale of Gods Act etc. are examples of substantive law.
----------------------
1.6 SCOPE OF BUSINESS LAWS
----------------------
Business laws are those laws which deal with the rights and duties arising out
---------------------- of a business or trade relations between persons. The term persons mean natural
---------------------- as well as artificial / legal persons such as Companies, Corporations etc. It is not
a single law but a bundle of laws governing the trade, commerce and industry in
---------------------- India. These laws are not only applicable to businessmen but also to a common-
man. Business laws belong to a broader branch of laws known as ‘Mercantile
---------------------- Law’. The term ‘Mercantile’ is derived from the word ‘Merchant’ i.e. a trader,
---------------------- a dealer or a businessman. Mercantile law is a name given to the entire body
of laws which regulates the commercial, business and industrial transactions. A
---------------------- major and important chunk of mercantile law branch is the Business Law.
----------------------
1.7 INTRODUCTION TO CONTRACT LAW
----------------------
With the above background of law, and Mercantile Law, let us start with
---------------------- the foundation of Business Law i.e. the law of contract.
----------------------
The Indian Contract Act, 1872 is the backbone of the entire bulk of
---------------------- Mercantile laws. Even with the development of E-commerce and introduction
of Cyber-laws, the basic law of contract as contained in the Contract Act would
---------------------- not change. The Act is very ancient in origin and was passed in the year 1872
and is applicable to all persons-natural and artificial i.e. Legal persons such as
----------------------
companies, corporations etc. The Act talks about contracts in general i.e. not
---------------------- only amongst the businessmen but also amongst the people in general. The Act
extends throughout India except the State of Jammu and Kashmir.
----------------------
---------------------- 1.8 HISTORY OF THE CONTRACT ACT

---------------------- The British came to India, basically for trade and business. They started
entering into contracts with native traders resulting into disputes regarding the
----------------------
various rights and duties arising out of contracts. There was no uniform law to
---------------------- decide these disputes. People were governed by their respective religious rules
and customs. If parties belonged to different religions the Britishers started
---------------------- applying English laws. However, a necessity was felt to make a uniform law
regulating contracts in India. Therefore, after annexing the political power over
----------------------
4 Law of Contracts
Indian Territory, the British Parliament framed the Contract Act in 1872 which Notes
was based on English Mercantile law, Common law of England and principles
of equity. Later it was adopted by the Indian Government after independence by ----------------------
making few amendments whenever required.
----------------------
1.9 IMPORTANCE OF THE CONTRACT ----------------------
Everyday each one of us enters into a number of contracts knowingly or ----------------------

unknowingly. It is because no man is self-sufficient. In order to satisfy our needs ----------------------
and requirements we are all the time entering into various contractual relations. E.
g. purchasing goods from shop, traveling by bus, train, auto rickshaw etc, filling ----------------------
petrol in vehicles, giving vehicles for servicing, giving clothes to laundry, taking
admissions in colleges, operating bank account, reserving tickets for movies, ----------------------
hiring a coolie on a platform etc. Even in the simplest example of borrowing a ----------------------
pen from your friend, if your return it, it is performance of contract and if you
do not return it, it is breach of contract. ----------------------
----------------------
1.10 OBJECT OF THE CONTRACT
----------------------
The main object to enter into contract is to satisfy our various needs and
requirements. Even companies, corporations, countries enter into contract for ----------------------
their own development and progress. Thus contracts are the backbone of entire ----------------------
trade and commerce. The main object of contract law is to introduce security,
stability and definiteness in the business transactions. Contract law gives an ----------------------
assurance to the parties that the promise shall be performed. In case of breach of
promise, the Contract Law provides a legal remedy. These rights and remedies ----------------------
assured to contracting parties are provided by the Contract Act. This is called ----------------------
enforceability and certainty objective. The Act also brings about uniformity in
business transactions throughout India. ----------------------
----------------------
1.11 DEFINITION AND NATURE OF THE CONTRACT
----------------------
In all the contracts, legal relations are created. These legal relations give
rise to certain rights and duties, which must be honoured and performed. It is ----------------------
with the enforceability of these rights and duties that the contract law is mainly ----------------------
concerned. In short, law of contract means that branch of law, which determines
the circumstances in which a promise shall be legally binding on the parties. ----------------------
According to the eminent author Salmond, “a contract is an agreement ----------------------
creating and defining obligations between the parties.”
----------------------
According to another eminent author Sir Pollock’s, “every agreement and
promise enforceable at law is a contract.” ----------------------
Sir William Anson defines contract as ‘A contract is an agreement
----------------------
enforceable by law, made between two or more persons by which rights are
acquired by one or more to the acts done or forborne on the part of other or ----------------------

Notes others. It is that form of agreement which directly contemplates and creates an
obligation.’
----------------------
The Indian Contract Act, 1872 defines Contract under Section 2(h) as,
---------------------- “An agreement enforceable by Law is a contract.”
---------------------- In short, every contract is basically an ‘agreement’ or a ‘promise’. But all
agreements or all promises are not contracts. ‘An agreement not enforceable by
---------------------- law is said to be void’.
---------------------- If an agreement is legally enforceable then only it is termed as a contract.
In equation form we can say that:
----------------------
Contract: Agreement + Enforceability at law
---------------------- If this enforceability factor is present in an agreement it becomes a
---------------------- contract. Enforceability means a right to legally force the agreement on another.
Everyday we make many promises, which are social or domestic, E.g.
----------------------
promise to go for a party with a friend, promise to go for movie etc. Even if these
---------------------- promises are not fulfilled neither party has any legal remedy i.e. this promise is
not enforceable by law and therefore it is not a contract.
----------------------
Take another interesting example. A promises to pay B Rs. 10 lakhs if B
---------------------- kills C. B. agrees and kills C. B demands the money from A. A. refuses to pay.
---------------------- Can B recover the money legally by filling a case against A? No, because the
agreement between A and B is not enforceable by law. So it is not a contract.
----------------------
Agreement is a very wide and generic term which includes every promise,
---------------------- which may be legal, illegal, social, domestic, or just a casual promise also. Thus
all agreements are not contracts but all contracts are agreements.
----------------------
---------------------- Check your Progress 1

----------------------
Multiple Choice Single Response.
----------------------
1. Which one of the following is correct?
---------------------- i. Indian Contract Act, 1882
ii. Indian Contract Act, 1972
----------------------
iii. Indian Contract Act, 1872
---------------------- iv. Indian Contract Act, 1888
---------------------- 2. An agreement consists of reciprocal promises between at least:
i. Four parties
----------------------
ii. Six parties
---------------------- iii. Three parties
iv. Two parties
----------------------
----------------------
6 Law of Contracts
1.12 KINDS OF CONTRACTS Notes
A) Classification on the basis of enforceability ----------------------
1. Valid Contract ----------------------
A void agreement and contract are two opposite ends of an agreement.
The one end is not enforceable and illegal (Void agreement.). The other ----------------------
end is enforceable, legal and valid-(contract). In short, contract is a name ----------------------
given to a valid agreement. Contract, by itself, therefore means perfectly
legal, valid and enforceable agreement. ----------------------
As per Section 10, an agreement becomes enforceable in the presence ----------------------
of following essential elements:-
----------------------
1. Competent Parties
2. Free Consent ----------------------
3. Lawful Consideration
----------------------
4. Lawful object
5. Not expressly declared to be void by law ----------------------
2. Voidable Contract ----------------------

Sec 2 (i) defines a voidable contract as - ----------------------
‘An agreement which is enforceable by law at the option of one or
----------------------
more of the parties thereto, but not at the option of the other or others
is a voidable contract.’ ----------------------
The word voidable is similar to the word avoidable. An agreement
----------------------
which can be avoided by the aggrieved or suffering party is a voidable
contract. ----------------------
In such contracts, the suffering party is given an option of canceling
----------------------
the contract through the Court of Law. But if it is not cancelled, then
it continues to be perfectly legal and binding contract. Therefore one ----------------------
can say that a voidable contract is perfectly a contract unless set aside
by aggrieved party. ----------------------
3. Void contract ----------------------
Section 2 (j) of the Act defines a void contract as - ----------------------
“A contract which ceases to be enforceable by law becomes void when
----------------------
it ceases to be enforceable”.
From the definition it is clear that a void contract is never void from ----------------------
the beginning, but it becomes void afterwards due to a change in the
----------------------
circumstances.
B) Classification On the basis of Creation ----------------------
1. Express contract ----------------------
Express contract is one which is made by words spoken or written. ----------------------

Notes 2. Implied Contract
When a contract is not made by words but it is inferred from the conduct
----------------------
or behavior of the parties, it is an implied contract.
---------------------- 3. Constructive contract or Quasi-Contracts
---------------------- These are a special type of contracts where law presumes the contracts
in a given situation. They are based on principles of equity.
----------------------
C) Classification on the basis of Execution
---------------------- 1. Executed Contract
---------------------- When both the parties simultaneously execute the contract then the
consideration is immediately completed. Nothing remains to be done.
----------------------
2. Executory contract
----------------------
When both the parties to the contract have promised to perform in
---------------------- future or upon fulfillment of some condition.
----------------------
Check your Progress 2
----------------------
---------------------- Multiple Choice Single Response.

1. _________ of the Indian Contract Act gives the definition of voidable
----------------------
contract
---------------------- i. Section 2(i)
---------------------- ii. Section 2(j)
iii. Section 2(a)
----------------------
iv. Section 2(e)
----------------------
---------------------- Summary
---------------------- ●● Law is an important tool to govern interpersonal relations. It brings
---------------------- uniformity, stability and security in a civilized society. Law originated
from legislatures, customs and usages, judge made law (i.e. precedent)
---------------------- etc. Laws are classified on the basis of its applicability and subject matter.
Mercantile law falls under the category of civil laws. The Indian Contract
---------------------- Act 1872 is the backbone of all mercantile laws. It defines a contract as
---------------------- agreement enforceable by law.
---------------------- Keywords
---------------------- ●● Law: Law is a command of a sovereign which requires obedience and
---------------------- attracts sanctions in case of its disobedience.
●● Act: A statute passed by the legislature.
----------------------
8 Law of Contracts
●● Mercantile Law: A branch of law that regulates business or commerce or Notes
mercantile transactions.
●● Contract: An agreement enforceable by law. ----------------------
----------------------
----------------------
1. What are the various sources of laws?
----------------------
2. What are the various types of law?
----------------------
3. Define contract as per the Indian Contract Act.
----------------------
Answers to Check your Progress ----------------------
Check your Progress 1 ----------------------
Multiple Choice Single Response ----------------------
----------------------
iii. Indian Contract Act, 1872
----------------------
2. An agreement consists of reciprocal promises between at least
iv. Two parties ----------------------
----------------------
Multiple Choice Single Response
----------------------
1. _________ of the Indian Contract Act gives the definition of voidable
contract. ----------------------
i. Section 2(i) ----------------------
----------------------
Suggested Reading
----------------------
1. Beatson, J. 2002. Anson’s Law of Contract. New York: Oxford University
Press. ----------------------
2. Burrows, Andrew. 2009. A Casebook on Contract. Hart Publishing. ----------------------
3. Iyer, T.S. Venkatesa. 2001. The Law of Contract. Hyderabad: Gogia
----------------------
Publication.
4. Row, Sanjiva. 2009. Law of Contract. Delhi Law House. ----------------------
5. Singh, Avtar. 2005. Law of Contract. Lucknow: Eastern Book House. ----------------------
6. Saharay, H.K. 2000. Dutt on Contract. Kolkata: Eastern Law House. ----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
10 Law of Contracts
Proposal & Acceptance
UNIT
2
Structure:
2.1 Definition of Proposal and Explanation
2.2 Rules or Conditions of a Legal and valid Proposal/Offer
2.3 Invitation for Proposal is not a Proposal
2.4 Revocation of a Proposal
2.5 Definition of Acceptance and Explanation
2.6 Rules or Conditions of a Legal and Valid Acceptance
2.7 Rules Regarding Communication of Proposal, Acceptance and Revocation
Summary
Key Words
Suggested Reading
Proposal & Acceptance 11

Notes
Objectives
----------------------
----------------------
• Discuss the meaning, concept and definition of proposal and acceptance
----------------------
• Assess the rules of communication of proposal and acceptance
---------------------- • Explain the rules as to revocation of proposal and acceptance
----------------------
---------------------- 2.1 DEFINITION OF PROPOSAL AND EXPLANATION

---------------------- Proposal is the first stage in the formation of a contract. A contract is nothing
---------------------- but an enforceable agreement. An agreement is defined as ‘every promise and
every set of promises forming consideration for each other.’ A promise is defined
---------------------- as an accepted proposal. Thus, an agreement takes place by a definite ‘Proposal’
and its unconditional ‘acceptance’. ‘Proposal’ under Indian law is same as an
---------------------- ‘offer’ under English law.
----------------------
Section 2(a) of the Indian Contract Act defines a ‘Proposal’ as under:
----------------------
“When one person signifies to another his willingness to do or abstain
---------------------- from doing anything, with a view to obtain the assent of that other to such act
or abstinence, he is said to make a proposal.”
----------------------
Here the person making the offer is called as offeror or proposer, and the
----------------------
person to whom the proposal is made is called as offeree or proposee.
----------------------
The analysis of the definition of proposal brings out following essential
---------------------- ingredients of a proposal-
----------------------  Proposal is an expression of one’s desire to do or not to do something.

----------------------  It must be made known to or addressed to another person and
 The object must be to obtain the consent of another for such act or abstinence.
----------------------
E.g.
----------------------
 A asks B, “Will you sell your house to me for Rs. 10 lakhs?” Here A is said
---------------------- to make a proposal to B.
 A and B are owners of adjoining properties. B used to take water from A’s
----------------------
well. A asks B, “If I pay you Rs. 5000, will you stop taking water from my
---------------------- well?” This is also an offer.
---------------------- However, there are certain communications which look like a proposal but
which do not result in a contract even when accepted by the other party. They
---------------------- are social invitations, these are of mischievous character or the mere expression
of one’s wish etc. For example,
----------------------
12 Law of Contracts
 A asks B, ‘If you put C’s house on fire, I would pay you Rs 10,000/-.’ or Notes
 A asks B, ‘Will you join me for a movie?’ or
----------------------
 In the presence of B, A tells his wife that whosoever buys my car will get
my scooter as well. ----------------------
A proposal under Contract Act must be one which is capable of resulting ----------------------
into a contract. i.e. it must be a legal and valid proposal. Therefore to be a legal ----------------------
proposal it must satisfy all the following conditions.
----------------------
----------------------
----------------------
1. Under Section 2(b), if the person to whom the proposal is made
signifies his assent, the proposal is said to have been ----------------------
i. Accepted ----------------------
ii. Agreed
----------------------
iii. Provisionally agreed
----------------------
iv. Tentatively accepted
----------------------
Activity 1 ----------------------
----------------------
My friend Pratibha invited me for a cultural programme at Kala Mandir
and for a dinner in a hotel. Evaluate whether is it an offer or acceptance. ----------------------
Justify.
----------------------
----------------------
2.2 RULES OR CONDITIONS OF A LEGAL AND VALID
PROPOSAL/OFFER ----------------------
1. Express or Implied Proposal ----------------------
2. Creating Legal Relationship ----------------------

3. Certain, definite, not vague ----------------------
4. Intention to obtain assent
----------------------
5. Positive or Negative act
6. General or Specific Proposal ----------------------
7. Conditional Proposal ----------------------
8. Communication of proposal
----------------------
9. Any act or omission
10. Lapse of offer ----------------------

Notes 1. Express or Implied Proposal
Proposal can be made in two ways, when a proposal is made by words-
----------------------
spoken or written in any form, it is called express proposal.
---------------------- E.g.
----------------------  A asks B, “Will you sell your house for Rs. 20,00,000?”
 A sends an e-mail to B asking him for selling his laptop for Rs. 20,000.
----------------------
These are express offers.
---------------------- When a proposal is inferred from the behaviors, conduct or action of a
---------------------- person it is said to be implied proposal. E.g. The transport buses running on
roads or local trains running on rails etc. is an implied offer made by the transport
---------------------- companies or local Government bodies to carry passengers at specified rates.
Eatables consumed in a self-service canteen is an implied proposal to pay for it.
----------------------
2. Proposal must be capable of creating legal relationship between the
----------------------
parties.
---------------------- There must be an intention to create legal relationship at the time of making
proposal. The intention to create legal relations is inferred from the conduct of
----------------------
the parties. However it is presumed in all the commercial transactions.
---------------------- Therefore in domestic agreements or social promises such as invitations for
dinner, promise to watch a movie etc. there is no intention to create legal relation
----------------------
and hence it is not a valid legal proposal.
---------------------- In an old English case between Balfour Vs Balfour (1919), this point was
highlighted. A was running a business in Ceylon. B was his wife. After a trip to
----------------------
England, B could not return to Ceylon with her husband because of her ill health.
---------------------- Mr. A promised his wife that he would send every month pounds 30 until she
rejoined him. After some time he failed to pay. The wife filed a case against her
---------------------- husband for his breach of contract.
---------------------- The Court held that there was no legal relationship contemplated in A’s
promise. It was a domestic arrangement. Such promises are common amongst
---------------------- relatives. There is no intention to go to court of law in case of breach. Therefore
there was no contract between A & B to pay money.
----------------------
3. Proposal must be certain, definite and not vague
----------------------
The words used in the express proposal or the meaning inferred from the
---------------------- implied proposal should be certain, clear, unambiguous and definite as to the
rights and duties arising out of the contract.
----------------------
The statement should not vague, uncertain or ambiguous. If it is so, then it is not
---------------------- a legal proposal. E.g. A says to B, “I shall sell one of my cars to you for some
price.” This is statement which does not specify the car which he intends to sell.
---------------------- Also, it is not clear as to the price of the car, hence it is not a legal proposal.
---------------------- 4. The intention must be “to obtain assent” of the other person
---------------------- Mere expression of one’s desire is not sufficient. Similarly, mere inquiry is
14 Law of Contracts
not an offer. A casual inquiry about the price of the goods is not a legal proposal. Notes
A statement as to the price is not a proposal to sell the article at that price. If the
inquiry is made with the intention to obtain consent of the other party, then only ----------------------
it is a legal proposal.
----------------------
Similarly a mere statement of intention expressed in the course of
conversation is not a legal proposal. Proposal must be in the form of a request or ----------------------
question to obtain the assent of other party. Therefore mere expression of one’s
----------------------
desire is not enough, even if it is acted upon by the other party. E.g. A father
wrote to his would be son in law that his daughter would have a share of what ----------------------
he left. When the share was claimed, it was held that it was merely a statement
of intention and not a legal proposal. ----------------------
5. Proposal may involve positive or negative act ----------------------
The words used in the definition ‘to do or to abstain from doing’ suggest
----------------------
that a proposal may be to do a positive act or may be in the form of a negative
act i.e. no act at all. A person at times is prohibited from doing something. This ----------------------
is a negative act. Egs.
----------------------
a) A offers B to sell his car for Rs. 10 Lakhs, is a positive proposal.
b) A offers B Rs. 5000 if B does not construct a wall between their adjoining ----------------------
properties, is a negative proposal.
----------------------
6. General or Specific Proposal
----------------------
There are two types of proposals depending on the persons to whom it is
addressed. A proposal made to a definite person or definite group of persons is ----------------------
called a Specific proposal.
----------------------
A proposal made to the people or world at large is a general proposal. The
advertisements or notices about finding out lost articles are general proposals. ----------------------
E.g. A has lost his dog. A advertises a notice that “whoever finds my dog and
----------------------
returns it to me shall be rewarded,” is a general proposal.
7. Proposal can be conditional ----------------------
Proposer may make an offer subject to certain conditions. However such ----------------------
conditions should be put along with the proposal. The conditions added after the
acceptance of the proposal are not effective. The conditions should be notified or ----------------------
communicated to the proposee properly.
----------------------
e.g. A offers B to sell his car for Rs. 1 lakh. A further says that the offer is
open for 10 days only and if B is interested he should pay Rs. 10,000 by cheque ----------------------
within 10 days, is a conditional offer.
----------------------
Conditions with respect to time of acceptatnce, method of acceptance, mode
of payment etc. are quite common in business transactions. Non-fulfillment of ----------------------
conditions amounts to rejection of proposal. E.g. furnishing security, cheque-
payment only, reply by telegram only, payment of deposits etc. can be the various ----------------------
conditions. ----------------------
But proposal should not contain a term, the non-fulfillment of which amounts
----------------------
to acceptance of proposal.

Notes 8. Communication of Proposal
The word ‘signifies’ used in the definition states that the proposal must be
----------------------
communicated to the proposee. A proposal if not communicated to proposee; is
---------------------- not a legal proposal. E.g. A makes an offer to B in a letter. The letter lies in the
cupboard of the proposer and was never posted. It is not a legal proposal.
----------------------
Communication can be expressed i.e. by using words or can be implied
---------------------- through the behaviour of the proposer.
---------------------- Therefore a person who does not know about a proposal i.e. the proposal
is not communicated to him, but he does an act as per the proposal, it does not
---------------------- amount to the acceptance of the proposal. A person doing anything in ignorance
---------------------- of an offer will not be benefited because there was no communication of proposal
to him.
----------------------
The above point was highlighted in the famous old case of Lalman Shukla
---------------------- (L) Vs Gauri Dutt (G) (1913). G’s nephew was missing. G sent his servant L to
find out the missing boy. Afterwards, G published an advertisement announcing
---------------------- a reward for finding his nephew and returning him. This was a General proposal,
---------------------- which was not known to L. Meanwhile L found out the boy and returned him to
G. He came to know about the reward and claimed it. G refused to pay. Therefore
---------------------- L sued G for claiming the reward as a right.
---------------------- The court held that L was not entitled to the reward by way of right because
at the time of finding and returning him, he did not know about the proposal.
---------------------- The proposal cannot be accepted in its ignorance.
---------------------- 9. Possibility of Performance
---------------------- The term ‘anything’ used in the definition means a thing, which is possible
and capable of being performed. It should not be an impossible, illegal or
---------------------- uncertain thing. E.g. finding treasure with magic, showing two parallel lines
meeting each other, devoting one’s life for nation etc. are uncertain and vague
----------------------
concepts which cannot be the subject-matter of a legal proposal.
---------------------- 10 Lapse of Proposal (Sec 6)
---------------------- An offer lapses or comes to an end
---------------------- 1. By communication of notice of termination of offer to the offeree
---------------------- 2. By lapse of the specified or reasonable time

3. By death or insanity of the offeror
----------------------
4. By a counter offer
----------------------
5. By not being accepted according to the prescribed or usual mode
---------------------- 6. By non-fulfillment of a condition precedent.
----------------------
----------------------
16 Law of Contracts
Notes
Activity 2
----------------------
1. A husband and wife withdrew their complaints against each other under ----------------------
the agreement by which the husband promised to pay an allowance
and the wife to refrain from pledging his credit. Is it valid? ----------------------
2. My uncle runs a transport company in the name of Lakhan Singh ----------------------
Transport Company. The buses run from Pune to Mumbai, and Pune
to Akola. There is always a general offer by the company to carry ----------------------
passengers at scheduled times and fares. State when the acceptance of
----------------------
the offer is complete.
----------------------
2.3 INVITATION FOR PROPOSAL IS NOT A ‘PROPOSAL’ ----------------------
An invitation for offer is not the same thing as an offer itself. ----------------------
The object of sending or circulating invitation is merely to circulate information ----------------------

to the public at large. The person sending invitation for proposal is interested in
----------------------
getting proposals from people or customers. Display of goods by a shop keeper
with price tags is not an offer to sell but is merely an invitation to the intended ----------------------
customers to make an offer to buy the goods at the price mentioned on the tag.
Likewise, quotations, call for tenders, catalogues, advertisement in the newspapers ----------------------
for sale of articles by auction are not offers in themselves. In an auction sale, it is
----------------------
the bidder who makes an offer to buy, which the auctioneer may or may not accept.
----------------------
Multiple Choice Single Response. ----------------------

1. A proposal can be accepted: ----------------------
i. By notice of acceptance ----------------------
ii. By performance of condition of proposal
----------------------
iii. By acceptance of consideration for a reciprocal promise
----------------------
iv. All of the above
----------------------
2.4 REVOCATION OF A PROPOSAL ----------------------
----------------------
Proposal can be revoked at any time before its acceptance. Revocation means
cancellation of proposal. The proposer can cancel his proposal. Proposal at times ----------------------
gets revoked due to various methods, which have been explained hereunder in
a separate topic. ----------------------
----------------------

Notes
----------------------
---------------------- 1. A proposal stands revoked
---------------------- i. By communication of notice of revocation by the proposer

ii. By failure of acceptor to fulfil a condition precedent
----------------------
iii. By death or insanity of proposer to the knowledge of acceptor
----------------------
----------------------
---------------------- Activity 3
----------------------
At an auction, Mr. Gaikwad makes the highest bid for Deepak’s goods.
---------------------- However, Mr. Gaikwad withdraws his bid before the fall of hammer. Is the
right of Mr. Gaikwad of revoking the offer before its acceptance complete?
----------------------
----------------------
2.5 DEFINITION OF ACCEPTANCE AND EXPLANATION
----------------------
Acceptance of a proposal is the second stage in the formation of a contract.
---------------------- Until acceptance there is nothing but a revocable offer which binds nobody. After
acceptance only, the contract between the parties can come into existence.
----------------------
Section 2(b) of the Indian Contract Act defines ‘acceptance’ as under -
----------------------
“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.”
----------------------
Acceptance of an offer is the act which completes one of the basic
---------------------- requirements for the formation of a contract. Therefore it can be said that:
---------------------- Proposal + Acceptance = Promise
---------------------- Section 2(c) states that

“The person making the proposal is called the “promisor”, and the person
----------------------
accepting the proposal is called the “promisee”.
---------------------- Once the proposal is accepted the earlier proposer now becomes the promisor
and the proposee becomes the promisee.
----------------------
Acceptance of a proposal converts a proposal into a binding promise. It is
---------------------- therefore rightly said by the English Author Anson that, ‘Acceptance to a proposal
is like a lighted match-stick to a trail of a gun-powder. It produces something
----------------------
which cannot be recalled or undone.’ When the lighted match is brought near
---------------------- the gun-powder it gives the final result and now neither of them remains in the
18 Law of Contracts
earlier state. Similarly if acceptance is given to proposal, neither of them remains Notes
in their earlier state and a promise comes into existance.
----------------------
To constitute a promise, the acceptance under the Contract Act must be
one which is capable of resulting into a contract i.e. it must be a legal and ----------------------
valid acceptance. For acceptance to be legal acceptance it should satisfy all the
following conditions. ----------------------
----------------------
----------------------
1. When, at the desire of the promisor, the promisee or any other person ----------------------
has done or abstained from doing or, does or abstain from doing
----------------------
or promises to do or to abstain from doing something, such act or
abstinence or promise under Section 2(d) is called: ----------------------
i. Reciprocal promise
----------------------
ii. Consideration for the promise
----------------------
iii. Counter offer
iv. Acceptance ----------------------
----------------------
----------------------
Activity 4
----------------------
Mr. Thomas purchased a new flat and he wanted to sell his old furniture.
----------------------
Mr. Thomas offered Mr. Nadkarni the furniture at a price of Rs. 7500.
Mr. Nadkarni accepted the offer of purchasing the furniture of Mr. Thomas ----------------------
at the said price. What kind of offer is this?
----------------------
----------------------
2.6 RULES OR CONDITIONS OF A LEGAL AND VALID
ACCEPTANCE ----------------------
1. Absolute, unqualified Acceptance ----------------------

2. Manner of acceptance-Usual or prescribed ----------------------
3. Express or Implied Acceptance
----------------------
4. Communication of Acceptance
5. Time limit for Acceptance ----------------------
6. Proper Acceptor
----------------------
7. Act in ignorance-of no use
8. Mere Answer to a Question-no Acceptance ----------------------
9. Revocation of acceptance ----------------------

Notes 1. Absolute, Unqualified, Unconditional Acceptance (Sec. 7)
---------------------- Acceptance of a proposal must be absolute and unqualified, Acceptor of the

proposal must accept all the terms of the proposal without changing. If there is
---------------------- any change in the terms of proposal made by the acceptor then it is not a legal
acceptance but amounts to a counter-proposal. Counter-proposal amounts to
---------------------- cancellation of earlier proposal E.g. If A offered to sell his car and scooter to B
---------------------- for a certain price. B accepted the offer for car only. This acceptance is not valid
and binding on A.
---------------------- 2. Manner of Acceptance - Usual or Prescribed
---------------------- The acceptance may be given in any usual and reasonable manner, unless the
manner of acceptance is prescribed in the proposal. If the manner of acceptance is
----------------------
prescribed by the proposer, then acceptance must be given in the same prescribed
---------------------- manner e.g. acceptance only by sending registered post, or telegram or e-mail
or on telephone only etc., can be specified by proposer. But if the proposal is
---------------------- accepted by any other manner, then the proposer may within reasonable time
insist upon the same prescribed manner of acceptance. If he fails to do so, he is
----------------------
said to have accepted the other method of acceptance.
---------------------- 3. Express or Implied Acceptance
---------------------- When acceptance is given or communicated by words-spoken or written
it is an express acceptance. e.g. A proposes to sell his house to B for a certain
---------------------- price. B writes a letter to A accepting his proposal. It is an express acceptance.
---------------------- When acceptance is indicated by conduct, behavior or action of a party, it
is an implied acceptance. Here, the acceptance is inferred from his action.
----------------------
e.g. Transport Buses run on the roads, to carry passengers. If X, a passenger,
---------------------- steps inside the bus, it is an implied acceptance that he shall pay the fare.
---------------------- 4. Communication of Acceptance
Acceptance must be communicated expressly or impliedly to the proposer.
----------------------
Acceptance should be such act which has an effect of creating an evidence or
---------------------- intention to accept. Mere mental acceptance or determination to accept not
communicated by words or conduct is no acceptance at all. Acceptance cannot
---------------------- be implied from mere silence of the proposee.
---------------------- The world ‘signifies’ used in the definition states that the acceptance must
be communicated to the proposer. However, offers of a general nature may be
---------------------- accepted by performing the terms of the offer or by receiving consideration from
the offeror (Section 8).
----------------------
In an old English case of Carlill Vs. Carbolic Smoke Ball Company
---------------------- (1983), the acceptance was given by conduct. The Company had produced
---------------------- a new medicine i.e smoke balls. It advertised that anyone who continues to
suffer from influenza even after consuming the smoke balls as prescribed will
---------------------- be paid 100 pounds as compensation. To show their sincerity in the matter,
it published that it had deposited 1000 pounds in a Bank. Mrs. Carlill used
---------------------- the medicine as prescribed and still suffered from influenza. She claimed 100
20 Law of Contracts
pounds as compensation. The company refused to pay, saying that there was Notes
no express communication of acceptance. The Court held that her conduct
as per advertisement was an implied acceptance which was sufficient, and ----------------------
no express communication was necessary.
----------------------
5. Time Limit for Acceptance
If time for acceptance is specified, then acceptance must be given within ----------------------
the prescribed time limit. Acceptance within prescribed time may be a condition ----------------------
of the proposal. Then it should be strictly followed. But if time is not prescribed
then, acceptance should be given, as early as possible, within a reasonable time ----------------------
limit. What constitutes a reasonable time depends on facts and circumstances of
the case. ----------------------
6. Proper Acceptor ----------------------
A proposal should be accepted only by the person to whom it is made. If a ----------------------
wrong person accepts it, it is not legal acceptance.
e.g. If A makes an offer of selling his car to B for Rs. 2lakhs, Mr. C. accepts ----------------------
the offer. It is not legal and binding acceptance. ----------------------
7. Act in ignorance - of no use
----------------------
The acceptor should be aware of the proposal at the time of giving his
acceptance. If any person unknowingly does an act which amounts to acceptance, ----------------------
it is not a legal and binding acceptance because the person was not knowing the
existence of any proposal at the time of doing that act. ----------------------
This principle was highlighted in the case of Lalman Shukla Vs. Gauri Dutta ----------------------
(1913) (case discussed earlier topic of Communication of Proposal).
----------------------
8. Mere Answer is not an Acceptance
----------------------
A mere question or inquiry is not a proposal. Similarly a mere answer to a
question or a statement providing information cannot be an acceptance. ----------------------
In the famous case of Harvey Vs Facey (1893) there were a series of
----------------------
telegrams sent by parties to each other. A sent a telegram to B (Telegram No.1)
asking,” Will you sell Bumper Hall pen ? Telegraph the lowest cash price.” ----------------------
B replied by telegram (Telegram No.2), “Lowest price for Bumper Hall pen ----------------------
is 900 pounds”.
A replied by telegram (T. No.3) “Price accepted. Ready to buy one.” ----------------------
B did not reply to this telegram. Therefore A sued B for breach of contract. ----------------------
The court held that as telegram No.2 was a mere answer given by B to A’s
question, it was not an acceptance. Therefore there was no contract between ----------------------
A & B. ----------------------
9. Revocation of acceptance
----------------------
Similar to a proposal even acceptance can be revoked, that is taken back or
withdrawn by2 the acceptor. But the revocation of acceptance should be done ----------------------
urgently before the acceptance is communicated to the proposer. The rules related
----------------------
to communication of revocation are explained in the next topic.

Notes Therefore, if all the above rules are satisfied by an acceptance, only then it
can be valid, legal and binding on the parties.
----------------------

----------------------
---------------------- 1. An offer to be valid must:
---------------------- i. Intend to create legal relations
---------------------- ii. Have certain and unambiguous terms
ii. Contain a term the non-compliance of which would amount to
----------------------
acceptance
---------------------- iii. Be communicated to the person to whom it is made
----------------------
---------------------- 2.7 RULES REGARDING COMMUNICATION OF
---------------------- PROPOSAL, ACCEPTANCE AND REVOCATION
---------------------- No difficulty arises as regards the communication of proposals and

acceptances when the parties are face to face discussing the agreement across
---------------------- the table or on telephone. The moment one party speaks, other party listens. So
communication is completed at the same time. But when the parties are at a distance
---------------------- and various other means of communication such as post, telegram, E-mail etc.
---------------------- are used, then the Rules of Communication contained in Sec. 4 to 6 are applied.
Here the communication process starts at one time and ends at another time. The
---------------------- communication of proposal, acceptance or revocation shall be deemed to be made
by any act or omission of the maker by which he intends to communicate.
----------------------
Rules of Communication and Revocation
----------------------
Rule 1: Communication of proposal is complete when - (Section 4)
---------------------- ‘The communication of proposal is completed when it comes to the knowledge
of the person to whom it is made.’ Unless the proposee comes to know about
----------------------
the proposal, the proposal is not said to be communicated in the proper sense
---------------------- of the term.
Following example will illustrate all the Rules. E.g. A makes a proposal to B
----------------------
by letter on 10th January and is received by B on 20th January at 4 p.m. The
---------------------- communication of proposal is complete when B receives the letter i.e. on 20th
January at 4 p.m.
----------------------
Rule 2: Communication of Acceptance is complete when (Section 4)
---------------------- The communication of acceptance is completed -
---------------------- i) As against the proposer - when it is put in a course of transmission to him,
so as to be out of the poser of the acceptor. i.e. when the acceptor posts the
---------------------- letter of acceptance.
22 Law of Contracts
ii) As against the acceptor - when it comes to the knowledge of the proposer Notes
i.e. when the proposer receives the letter of acceptance.
----------------------
e.g. Suppose in the above e.g. of Rule 1, B posts his acceptance letter on
22nd January at 11 a.m. and it is received by A on 27th January at 4 p.m. then ----------------------
communication of acceptance is said to be completed against Proposer A when
the acceptance letter is posted by B ----------------------
i.e. on 22nd January at 11 am and as against Acceptor B - when that letter is ----------------------
received by A i.e. on 27th January at 4 p.m.
----------------------
Rule 3: Communication of a Revocation is complete when (Section 4)
Both proposal and acceptance can be revoked. But revocation of proposal or ----------------------
acceptance should be communicated to the other party by the maker. ----------------------
If proposal is revoked, proposer is the maker and acceptor is the receiver of
revocation. If acceptance is revoked, acceptor is the maker and proposer is the ----------------------
receiver of revocation. The rule for both is common. ----------------------
The communication of a revocation is complete when -
----------------------
i) As against the maker - when it is put into a course of transmission to the
receiver by the maker, i.e. when the maker posts the letter of revocation. ----------------------
ii) As against the receiver - when it comes to his knowledge i.e. when the ----------------------
revocation letter is received by the receiver. ----------------------
e.g. In the above example if A revokes his proposal by telegram the communication
----------------------
of revocation is complete against maker A, when the telegram is dispatched by
him. It is completed against receiver when B receives the telegram. ----------------------
Similarly if B revokes his acceptance by telegram, the communication of ----------------------
revocation of acceptance is complete against maker-B, when he posts the
telegram. It is completed against receiver A, when A receives the telegram. ----------------------
Rule 4: Time limit for Revocation of proposal and acceptance (Section 5) ----------------------
A proposal can be revoked by proposer at any time before the communication ----------------------
of acceptance is complete as against the proposer and not afterwards.
----------------------
The acceptance can be revoked by the acceptor at any time before the communication
of acceptance is complete as against the accepter and not afterwards. ----------------------
e.g. In the above example, A may revoke his proposal before B posts his ----------------------
acceptance letter i.e. before 11 a.m. on 22nd January.
----------------------
Similarly even B may revoke his acceptance before acceptant letter is received
by A i.e. before 4 p.m. on 27th January. ----------------------
Thus the revocation of acceptance must be sent as early as possible, before the ----------------------
acceptance letter itself, because once communication of acceptance is completed, ----------------------
a binding promise come into existence. Neither party can then withdraw its
proposal or acceptance. ----------------------

Notes
----------------------

1. An acceptance can be revoked:
----------------------
i. At any time before the communication of acceptance is complete
---------------------- as against the promisee
---------------------- ii. After its acceptance comes to the knowledge of the promisee
---------------------- iii. Both i. and ii.

iv. Neither i. nor ii.
----------------------
----------------------
Summary
----------------------
●● A proposal is an undertaking by the offeror to be bound in the event of
---------------------- a proper acceptance of the proposal by the proposee. It may be made by
---------------------- express words spoken or written or it may be implied when it is inferred
from the conduct of the offeror or the circumstances of the case. An offer
---------------------- may be specific or general. There are certain legal rules of valid offer.
They are as follows:-
----------------------
1. It must be intended to create legal relations.
---------------------- 2. It must be certain.
---------------------- 3. It must be distinguished from invitation to make an offer.
4. It must be communicated to the person to whom it was made (offeree).
----------------------
5. It must be made with a view to obtain the assent of the offeree.
----------------------
●● Legal rules as to a valid acceptance
---------------------- 1. It must be absolute and unqualified.
---------------------- 2. It must be given by the offeree himself.
3. It must be communicated to the offeror himself and not to any other third
---------------------- party.
---------------------- 4. It must be as per the prescribed or usual mode.
5. A general offer is accepted by anyone who performs the terms of the offer.
----------------------
6. It must be given within the prescribed or reasonable time.
---------------------- ●● Communication of offer and acceptance and revocation
---------------------- The communication of offer is complete when it comes to the knowledge
of the person to whom it is made. The communication of acceptance is
---------------------- complete as against the proposer when it is put into course of transmission
to him so as to be out of the power of the acceptor. As against the acceptor
----------------------
the communication is complete when it comes to the knowledge of the
---------------------- proposer.
24 Law of Contracts
●● The communication of revocation is complete as against the maker, when Notes
it is put in 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, the communication of revocation is complete when it
comes to his knowledge. ----------------------
----------------------
Keywords
----------------------
●● Proposal: When one person signifies to another his willingness to do or
----------------------
abstain from doing anything, with a view to obtain the assent of that other
to such act or abstinence, he is said to make a proposal. ----------------------
●● Acceptance: When the person to whom the proposal is made, signifies
his assent thereto, the proposal is said to be accepted. ----------------------
●● Promise: A proposal when accepted becomes a promise. ----------------------
----------------------
----------------------
1. What is a proposal? What are legal rules for a valid proposal?
----------------------
2. When is a proposal said to be accepted? What are the legal rules for a
valid acceptance? ----------------------
3. Discuss briefly the law related to communication of proposals and ----------------------
acceptance.
4. State the rules for as revocation of proposal and acceptance. ----------------------
5. What are the various types of proposals? ----------------------

6. Distinguish between offer and an invitation to make an offer. ----------------------
7. Under which circumstances does a proposal lapse?
----------------------
----------------------
1. Under Section 2(b), if the person to whom the proposal is made signifies ----------------------
his assent, the proposal is said to have been
----------------------
i. Accepted

1. A proposal can be accepted: ----------------------
----------------------
----------------------

Notes Check your Progress 3
----------------------
1. A proposal stands revoked
----------------------
---------------------- 1. When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing or, does or abstain from doing or promises to
---------------------- do or to abstain from doing something, such act or abstinence or promise
under section 2(d) is called:
----------------------
ii. Consideration for Promise
----------------------
---------------------- 1. An offer to be valid must:
---------------------- i. Intend to create legal relations

----------------------
----------------------
1. An acceptance can be revoked:
---------------------- i. At any time before the communication of acceptance is complete as
---------------------- against the promisee
---------------------- Suggested Reading

----------------------
---------------------- Press.
2. Burrows, Andrew. 2009. A Casebook on Contract. Hart Publishing.
----------------------
---------------------- Publication.
---------------------- 4. Kapoor, N. D. 2010. Elements of Mercantile Law. New Delhi: Sultan
Chand & Sons.
----------------------
5. Row, Sanjiva. 2009. Law of Contract. Delhi Law House.
----------------------
6. Singh, Avtar. 2005. Law of Contract. Lucknow: Eastern Book House.
---------------------- 7. Saharay, H.K. 2000. Dutt on Contract. Kolkata: Eastern Law House.
----------------------
----------------------
----------------------
26 Law of Contracts
Consideration
UNIT
3
Structure:
3.1 Introduction
3.2 Definition of Consideration
3.3 At the Desire of the Promisor
3.4 Privity of Contract and of Consideration
3.5 Has Done or Abstained from Doing
3.6 Act or Abstinence or Promise
Summary
Key Words
Suggested Reading
Consideration 27
Notes
Objectives
----------------------
----------------------
• Explain the meaning of consideration
----------------------
• Analyse the valid essentials of consideration
---------------------- • Compare and contrast past and executor considerations
----------------------
3.1 INTRODUCTION
----------------------
Consideration is essential for the formation of every simple contract. It may
---------------------- consist of a promise to perform a desired act or a promise to refrain from doing an
---------------------- act that one is legally entitled to do. In a bilateral contract, an agreement by which
both parties exchange mutual promises, each promise is regarded as sufficient
---------------------- consideration for the other. In a unilateral contract, an agreement by which one
party makes a promise in exchange for the other’s performance, the performance is
---------------------- consideration for the promise, while the promise is consideration for the performance.
---------------------- Consideration must have a value that can be objectively determined. A
promise, for example, to make a gift or a promise of love or affection is not
----------------------
enforceable because of the subjective nature of the promise.
----------------------
3.2 DEFINITION OF CONSIDERATION
----------------------
A simplistic definition of ‘consideration’ is:
----------------------
Something of value given by one party, in return for the performing of a
---------------------- contract, or for the promise to perform a contract, by the other party.
---------------------- Consideration means a reasonable equivalent or other valuable benefit
passed on by the promisor to the promise or by the transferor to the transferee.
---------------------- In other words it is the price of the promise.
---------------------- Pollock – Consideration is the price for which the promise of the other is
bought, and the promise thus given for value is enforceable.
----------------------
Patterson - Consideration means something, which is of some value in
---------------------- the eye of law. It may be some benefit to the plaintiff or some determent to the
defendant.
----------------------
Calcutta high court- consideration is the price of a promise, a return or
---------------------- quid pro quo, something of value received by the promise as inducement of the
promise.
----------------------
In Section 2(d) of the Indian Contract Act consideration is defined as follows:
----------------------
When, at the desire of the promisor, the promise or any other person had
---------------------- done or abstained from doing or does or abstained from doing or promise to do
or abstain from doing, something, such act or abstinence or promise is called a
---------------------- consideration for the promise.
28 Law of Contracts
The following are the chief elements or requirements of consideration: Notes
 The act or abstinence
----------------------
 At the desire of the promisor
----------------------
 Done by the promisee or any other person
l Act or abstinence may have been already executed or is in the process of ----------------------
being done or may be promised to be done. ----------------------
----------------------
----------------------
1. Identify which one of the following is not an essential of valid
consideration. ----------------------
i. The act or abstinence ----------------------
ii. At the desire of the promisor ----------------------
iii. Done by the promisee or any other person
----------------------
iv. The act of acceptance
----------------------
3.3 AT THE DESIRE OF THE PROMISOR ----------------------
----------------------
The definition clearly emphasises that an act or abstinence which is to be a
consideration for the promise must be done or promised to be done in accordance ----------------------
with the desire of the promisor.
----------------------
For example, in Durga Prasad v. Baldeo, (1880) 3 All 221.
----------------------
The Plaintiff on the order of the Collector of town, built at his own expense,
certain shops in a bazaar. The shops came to be occupied by the defendants who, ----------------------
in consideration of the plaintiff having expended money in the consideration,
promised to pay him a commission on articles sold through their agency in the ----------------------
bazaar. The plaintiff’s action to recover the commission was rejected. ----------------------
Act done at request:
----------------------
Example: A requests B to stitch clothes for A in return of a cup of tea with A.
----------------------
If B agrees then it is considered to be a good consideration, even though it is of
no significance. ----------------------
Promises of charitable nature: ----------------------
Perumal Mudaliar v. Sendanatha Mudaliar, AIR 1918 Mad 311 ----------------------
A promise to pay a subscription becomes enforceable as soon as any definite
----------------------
steps have been taken in furtherance of the object and on the faith of the promised
subscription. ----------------------
Consideration 29
Notes Unilateral Agreements:
A unilateral promise is a promise from one side on only and is intended to
----------------------
induce some action by the other party. When the other party carries out the act
---------------------- desired by the promisor, he can hold the promisor to his promise. His act is at
the same time an acceptance of and consideration for the promise.
----------------------
Errington v. Errington, (1952) 1 KB 290
---------------------- The owner of the house had mortgaged the house. The house was in the
occupation of his son and daughter-in-law. He told them that the house would
----------------------
become their property if they paid off the mortgage debt in installments and
---------------------- they commenced payment. In these circumstances the court felt that it would be
unjust if the promisor could revoke this promise at his pleasure.
----------------------
---------------------- Activity 1
----------------------
My father is a builder. He employed many employees for different work.
---------------------- He appointed an architect for preparing plans for different projects. He
was appointed on a monthly salary of Rs. 10,000. For the architect, his
----------------------
monthly salary was the consideration. What was the consideration for my
---------------------- father?
----------------------
3.4 PRIVITY OF CONTRACT AND OF CONSIDERATION
----------------------
Promisee or any other person:
----------------------
The second important feature of the definition of consideration is that it may
---------------------- be done by “the promisor or any other person”.
---------------------- In other words, as long as there is a consideration for a promise, it is
immaterial who has furnished it.
----------------------
English Law principles:
---------------------- However, English law principal are different, and has laid down two basic
---------------------- principals:
1. Consideration must move from promisee and the promisee only. If it is
---------------------- furnished by any other person, the promisee becomes a stranger to the
---------------------- consideration and, therefore cannot enforce the promise.
2. A person, who is not a party to it, even if it is made for his benefit, cannot enforce
----------------------
a contract. He is stranger to a contract and can claim no rights under it.
---------------------- Twiddle v. Atkinson, 123 ER 762
---------------------- The plaintiff’s marriage was proposed with the daughter of one G and in
consideration of this intended marriage G and plaintiff’s father entered into a
---------------------- written agreement by which it was agreed that each would pay the plaintiff a
sum of money. G failed to do so and the plaintiff sued his executors.
----------------------
30 Law of Contracts
The plaintiff was not allowed to sue as the contract was made with his father Notes
and not with him.
----------------------
The case laid the foundation of doctrine of “privity of contract”.
----------------------
Position in India:
----------------------
There is no provision in the Indian Contract Act either for or against the
rule, as to how far a stranger to the contract can enforce it. ----------------------
In Khwaja Muhammad Khan v. Hussaini Begum, (1910) 37 IA 152 ----------------------
The Privy Council observed that in Indian communities, among whom ----------------------
marriages are contracted for minors by parents and guardians, it might occasion
serious injustice if the common law doctrine was applied to arrangements entered ----------------------
in connection with such contracts.
----------------------
Exceptions to doctrine of “privity of contract”:
----------------------
The courts have introduced a number of exceptions in which a rule of privity
of contract does not prevent a person from enforcing a contract, which has been ----------------------
made for his benefit but without his being a party to it.
----------------------
1. Trust or charge:
----------------------
In Smt. Narayani Devi vs. Tagore Commercial Corporation Ltd. and another,
(AIR 1973 Cal 401) plaintiff’s husband sold shares to the defendant under the ----------------------
agreement providing payment of monthly sum to the plaintiff’s husband during ----------------------
his lifetime and to the plaintiff after his death. It was held that the plaintiff could
sue and enforce the said agreement because an obligation in the nature of trust ----------------------
had been created in her favour.
----------------------
2. Partition of Hindu family, Marriage settlement, partition or other family
arrangements: ----------------------
The courts in India have applied the same principle regarding the maintenance ----------------------
of a female member of Hindu family in the partition of joint family property
----------------------
among the female members. If on the partition of joint-family property among
the male members a provision is made for the marriage expenses of a female ----------------------
member then such a member can sue to enforce the agreement.
----------------------
3. Acknowledgement or estoppel:
----------------------
When a party undertakes an obligation under a contract, to make a payment
to a third party and he acknowledges it to the said third party, though not a party ----------------------
to the contract can enforce the contract. This is probably due to the application
of the principle of estoppel. ----------------------
----------------------
3.5 HAS DONE OR ABSTAINED FROM DOING
----------------------
Consideration is an act, which has already been done at the desire of the
promisor, or is in progress or is promised to be done in future. ----------------------
Consideration 31
Notes Past Consideration:
Under Indian Law, a past consideration is a good consideration. Section
----------------------
25(2) provides that if an agreement is a promise to compensate wholly or in part,
---------------------- a person who has already voluntarily done something for the promisor which
the promisor was legally compellable to do, it shall not be deemed to be void
---------------------- for want of consideration.
---------------------- English law: Since past consideration arises out of a promise “subsequent
to and independent of the transaction,” it is considered to be no consideration at
---------------------- all.
---------------------- Distinction between Executed and Executory Consideration:
---------------------- An executory consideration consists of a promise to do, forbear, or suffer

given in return of a like promise.
---------------------- Thus mutual promises to marry, a promise to do work in return for a promise
---------------------- of payment are illustrations of executory consideration.
Consideration is called executory when the defendant’s promise is made in
---------------------- return for a counter promise from the plaintiff executed when it is made in return
---------------------- for the performance of the act.
It is well settled that consideration can be either past or present or even
----------------------
future.
----------------------

----------------------
---------------------- i. Past consideration is no consideration
---------------------- ii. Consideration can be past, present or future
---------------------- iii. Consideration can only be present

iv. Consideration can only be present and future
----------------------
----------------------
3.6 ACT OR ABSTINENCE OR PROMISE
----------------------
Consideration must be of some value:
----------------------
English common law has always insisted that consdideration must be of
---------------------- some value in the eyes of the law.
White v. Bluett (1853) 23 LJ Ex. 36
----------------------
A father, who gave less property to one of his sons, and was persistently
---------------------- troubled by that son, promised to release him from an outstanding loan if he
---------------------- stopped complaining.
32 Law of Contracts
In India also it has been laid down that consideration shall be something Notes
which is not only the parties regard but the law can also regard as having some
value. ----------------------
But need not be adequate: ----------------------
It is not necessary that consideration should be adequate to the promise. The
----------------------
adequacy of the considearion is for the parties to consider at the time of making
the agreement, not for the court when it sought to be enforced. ----------------------
Example:
----------------------
A agrees to sell a horse worth Rs. 1000 for Rs. 10. A’s consent to the
agreement was freely given. The agreement is a contract notwithstanding the ----------------------
inadequacy of the consideration. ----------------------
Forbearance to sue:
----------------------
Forbearance to sue has always been regarded as valuable consideration. It
means that the plaintiff has a right of action against the defendant or any person ----------------------
and on a promise by a defendant he refrains from bringing the action.
----------------------
Performance of legal obligations:
----------------------
Consideration must be something more than what the promisee is already
bound to do. ----------------------
R Sashannah Chetti vs. P. Ramaswami Chetti, (1868) 4 MHC 7, the Plaintiff ----------------------
had been served with summons requiring him to give evidence before a court
of law. The defendant, who was a party to the case, gave him a promissory note ----------------------
promising to pay a sum of money for his trouble. The note was held to be void
for want of consideration. ----------------------
Under English and Indian law both, the police is under legal obligation to ----------------------
protect the life and property of the people but if a person wants special type of
protection, he must pay for it. For example, if a person has an apprehension of ----------------------
being murdered or assaulted he may approach the police and it is the duty of the ----------------------
police to ensure his safety. But this does not mean that the police is bound to
depute one or two constables to be always with the said person at his desire. If ----------------------
he so desires, he must pay for it.
----------------------
Performance of contractual obligation:
----------------------
Compliance with legal obligations imposed by a contract with the promisor
can be no consideration for a promise. ----------------------
The plaintiff, having accepted a vakalatnama was already bound to render
----------------------
his best service as a pleader. There was no fresh consideration proceeding from
the plaintiff when he obtained the agreement. Ramchandra Chintaman vs. Kalu ----------------------
Raju, (1877) 2 Bom 362.
----------------------
Exceptions to consideration:
Section 25 lays down a general rule that an agreement without consideration ----------------------
is void, however it also provides the exceptions to the general rules as follows: ----------------------
Consideration 33
Notes 1. Natural love and affection:
Section 25(1) provides that an agreement without consideration is void:
----------------------
Unless “it is expressed in writing and registered under the law for the time
---------------------- being in force for the registration of documents and is made on account of natural
love and affection between parties standing in a near relation to each other, the
----------------------
agreement will not be void for want of consideration.”
---------------------- For example: A, for natural love and affection promises to give his son B
Rs. 1,000. A puts his promise to B into writing and registers it. This will not be
----------------------
void for want of consideration and will be valid contract.
---------------------- In order to attract this exception, following essentials must be present:
---------------------- i) The agreement must be in writing;
---------------------- ii) It must be registered under the law for the time being in force for the
registration of documents;
----------------------
iii) It must be out of natural love and affection;
---------------------- iv) The parties must be standing in a near relation to each other.
---------------------- Rajluckhy Debee vs. Bhoothnath Mookerjee, (1900) 4 Cal. WN 488
---------------------- The suit was filed by the wife against her husband to recover the arrears of
the allowance which her husband agreed to pay under the registered agreement.
---------------------- The agreement worded as “I having become inconvenient for you in many
respects to live as aforesaid (and) finding it difficult to live in my family you have
---------------------- claimed proper maintenance and suitable habitation from me, I therefore make
---------------------- the following provision for your maintenance and habitation by this ekrarnama.”
The Court held that the agreement shows the absence of love and affection
---------------------- between the parties. There is no consideration for this agreement moving from
---------------------- the wife, it was voluntary arrangement on the part of the husband, and the present
suit cannot be maintained.
----------------------
2. Promise to compensate for something done voluntarily:
---------------------- According to Section 25(2) an agreement without consideration is void:
---------------------- Unless “it is a promise to compensate wholly or in part, a person who
has already voluntarily done something for the promisor, or something which
---------------------- the promisor was legally compellable to do” will not be void for the want of
consideration.
----------------------
In order to invoke successfully the exception contained in Section 25(2),
---------------------- the following essential elements must be there:
---------------------- i) The act must have been done
---------------------- ii) It must have been voluntarily done
---------------------- iii) It must be done for the promisor or something which the promisor was
legally bound to do
----------------------
34 Law of Contracts
iv) The promisor must be in existence at the time when the act is done Notes
v) The promisor must promise to compensate for the act done
----------------------
A does a work for B without the request or knowledge of B. A demands payment
from B for the work done for B. B is not bound to pay because the work by A was ----------------------
not done at B’s desire. ----------------------
3. Promise to pay time barred debt:
----------------------
Section 25(3) provides that agreement without consideration is void:
----------------------
Unless “it is a promise made in writing and signed by the person to be charged
therewith, or by his agent generally or specially authorized in that behalf, to pay ----------------------
wholly or in part a debt which the creditor might have enforced payment but for
----------------------
the limitation of suits.”
In order to invoke successfully the exception contained in Section 25(3), ----------------------
the following essential conditions must be present:
----------------------
i) The promise to pay must be in writing and signed by the person concerned
or his agent generally or specially authorized in that behalf; ----------------------
ii) The promise may be either for the whole of the debt or part thereof; ----------------------
iii) The promise to pay must be in respect of the debt which the creditor ----------------------
might have enforced payment but the law for the limitation of suits.
----------------------
A owes Rs 5,000 but the debt is barred by the Limitation Act. Nevertheless
A agrees to pay Rs. 5,200. A will be bound to pay if the agreement is in writing ----------------------
and signed by him or his agent generally or specially authorized in that behalf.
----------------------
Section 23- What considerations and objects are lawful:
----------------------
The consideration or object of an agreement is lawful, unless- it is forbidden
by law; or is of such a nature that, if permitted, it would defeat the Provisions of ----------------------
any law; or is fraudulent; or involves or implies injury to the person or property
----------------------
of another or; the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to ----------------------
be unlawful. Every agreement of which the object or consideration is unlawful ----------------------
is void.
----------------------
Illustrations:
(a) A agrees to sell his house to B for 10,000 rupees. Here B’s promise to ----------------------
pay the sum of 10,000 rupees is the consideration for A’s promise to sell
----------------------
the house, and A’s promise to sell the house is the consideration for B’s
promise to pay the 10,000 rupees. These are lawful considerations. ----------------------
(b) A promises to pay B 1,000 rupees at the end of six months, if C, who owes ----------------------
that sum to B, fails to pay it. B promises to grant time to C accordingly.
Here the promise of each party is the consideration for the promise of the ----------------------
other party and they are lawful considerations.
----------------------
Consideration 35
Notes
----------------------

1. Past consideration is valid in
----------------------
i. England only
----------------------
ii. India only
----------------------
iii. Both in England and India
----------------------
iv. Neither in England nor in India
---------------------- 2. A contract without consideration under Section 25 is
---------------------- i. Valid
---------------------- ii. Voidable
---------------------- iii. Void
---------------------- iv. Illegal

3. Contract without consideration made in writing and registered and
----------------------
made on account of natural love and affection is
---------------------- i. Void
---------------------- ii. Voidable
---------------------- iii. Valid
---------------------- iv. Unenforceable
---------------------- 4. Inadequacy of consideration does not make the contract

i. Void
----------------------
ii. Voidable
----------------------
iii. Unenforceable
----------------------
iv. Neither void nor voidable
----------------------
5. Agreement without consideration is valid
---------------------- i. When made out of love and affection due to near relationship
---------------------- ii. When made to compensate a person who has already done
something voluntarily
----------------------
iii. When made to pay a time-barred debt
----------------------
----------------------
----------------------
36 Law of Contracts
Notes
Activity 2
----------------------
Give one example in support of the statement that consideration must be of ----------------------
some value but need not be adequate.
----------------------
----------------------
Summary
----------------------
 The following are the requirements of consideration:
n The consideration must not be past. ----------------------
n The consideration must be sufficient but need not be adequate. ----------------------

n The consideration must move from the promisee. ----------------------
n An existing public duty will not amount to valid consideration.
----------------------
n An existing contractual duty will not amount to valid consideration.
----------------------
n Act or abstinence may have been already executed or is in the
process of being done or may be promised to be done. ----------------------
n The consideration must be at the desire of the promisor

----------------------
 Exceptions to consideration: Section 25 lays down a general rule that
an agreement without consideration is void, however it also provides the ----------------------
exceptions to the general rules as follows: ----------------------
n Natural love and affection
----------------------
n Promise to compensate for something done voluntarily
----------------------
n Promise to pay time barred debt
----------------------
Keywords ----------------------
●● Ekrarnama: Ikrarnana or muhaiyada bai is a deed of sale that is liberally ----------------------
sprinkled with Urdu terms - is “muhaiyada” simply “concerning” or
“regarding”, i.e. Agreement re: a deed of sale ----------------------
●● Estoppel: A bar or impediment (obstruction) which precludes a person ----------------------
from asserting a fact or a right or prevents one from denying a fact. Such
a hindrance is due to a person’s actions, conduct, statements, admissions, ----------------------
failure to act or judgment against the person in an identical legal case.
----------------------
●● Executory: Something not yet performed or done. Examples: an
executory contract is one in which all or part of the required performance ----------------------
has not been done; an executory bequest is a gift under a will which has
not been distributed to the beneficiary. ----------------------
●● Abstinence: The act or practice of abstaining; voluntary forbearance of ----------------------
any action, especially the refraining from something.
----------------------
Consideration 37
Notes ●● Mortgage: A temporary, conditional pledge of property to a creditor
as security for performance of an obligation or repayment of a debt.
---------------------- A contract or deed specifying the terms of a mortgage. The claim of a
mortgagee upon mortgaged property.
----------------------
●● Unilateral: Performed or undertaken by only one side. Obligating only
---------------------- one of two or more parties, as a contract or an agreement.
----------------------
----------------------
1. Define consideration?
----------------------
2. What are chief elements or requirements of consideration?
---------------------- 3. Explain ‘at the desire of the promisor’?
---------------------- 4. What is Unilateral Agreement?
---------------------- 5. What is privity of contract and of consideration?

6. What are exceptions to doctrine of “privity of contract”?
----------------------
7. What is Past Consideration?
----------------------
8. Distinction between Executed and Executory Consideration
---------------------- 9. Explain Performance of legal obligations.
---------------------- 10. Explain Performance of contractual obligation.
---------------------- 11. What are different types of Exceptions to consideration?
12. What considerations and objects are lawful?
----------------------
----------------------
---------------------- Answers to Check your Progress

----------------------
1. Identify which one of the following is not an essential of valid consideration.
----------------------
iv. The act of acceptance
----------------------

----------------------
ii. Consideration can be past, present or future
----------------------
---------------------- 1. Past consideration is valid in
38 Law of Contracts
ii. India only Notes
2. A contract without consideration under section 25 is
----------------------
iii. Void
----------------------
3. Contract without consideration made in writing and registered and made
on account of natural love and affection is ----------------------
iii. Valid ----------------------
4. Inadequacy of consideration does not make the contract
----------------------
i. Void
----------------------
5. Agreement without consideration is valid
iv. All of the above ----------------------
----------------------
Suggested Reading
----------------------
Press. ----------------------

3. Iyer, T.S. Venkatesa. 2001. The Law of Contract. Hyderabad: Gogia ----------------------
Publication.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Consideration 39
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
40 Law of Contracts
Capacity To Contract
UNIT
4
Structure:
4.1 Concept of ‘Capacity to Contract’
4.2 Age of Majority or Minor’s Agreement
4.3 Effects of Minor’s Agreement
4.4 Soundness of Mind
4.5 Person should not be Disqualified from Contracting by Any Law to Which
He is Subject
Summary
Key Words
Suggested Reading
Capacity To Contract 41
Notes
Objectives
----------------------
----------------------
• Explain the concept of capacity under Indian Contract Act
----------------------
• Analyse the essentials of capacity to contract
---------------------- • Assess the effect of minor’s agreement
----------------------
---------------------- 4.1 CONCEPT OF ‘CAPACITY TO CONTRACT’

---------------------- For a contract there must be minimum two parties. Normally the contracts
have two parties and they are called bilateral contracts. But if a contract is entered
---------------------- into by more than two parties, it is called multilateral contract.
---------------------- Each party to a contract must be competent to contract. According to sec. 11
the Act states, “Every person is competent to contract who is of the age majority
---------------------- according to the Law to which he is subject, and who is of sound mind and is not
---------------------- otherwise disqualified from contracting by any Law which to he is subjected.”
In other words sec.11 lays down following essentials. A party is competent to
---------------------- contract if -
---------------------- i. He is a major person,
---------------------- ii. He is of sound mind and
iii. He is not disqualified from contracting by any other Law.
----------------------

----------------------
----------------------
1. Parties are not competent to contract if any of them is
---------------------- i. Minor
---------------------- ii. Insane
---------------------- iii. Declared unqualified
----------------------
2. Two persons have the capacity to contract under Section 11
----------------------
i. If both are major
---------------------- ii. If both are not of unsound mind
---------------------- iii. If none is declared unqualified to contract
---------------------- iv. All of the above
----------------------
42 Law of Contracts
4.2 AGE OF MAJORITY OR MINOR’S AGREEMENT Notes
Every party entering into a contract should be a major person. A minor ----------------------
person cannot enter into a contract.
----------------------
According to Indian Majority Act, 1875, a minor is a person who is under
18 years of age. Therefore, when a person completes his 18 years of age, he ----------------------
is considered to be major and capable to enter into a contract. The Act further
provides that in the following situations a person becomes major only after ----------------------
completing 21 years of age: ----------------------
Exception 1. Where a guardian is appointed for person or property of the
minor under the Guardians and Wards Act, or ----------------------
Exception 2. Where a minor’s property is placed under the superintendence ----------------------

of the Court of Wards.
----------------------
It is necessary to understand the consequences if a minor enter, into an
agreement. Since majority is an essential criterion, such agreement can not ----------------------
be termed as contract. Thus, minor’s agreement is a void agreement and not a
----------------------
contract.
----------------------
Minor’s agreement is declared to be void agreement because the law wants to
protect minors from their own inexperience and from the possible ill - intentions ----------------------
of the major persons who may take undue advantage of minor’s innocence. The
law also wants to protect the major persons from unnecessary hardship in case ----------------------
they deal with minors by mistake.
----------------------
----------------------
----------------------
1. A contract with or by a minor is a
----------------------
i. Valid contract
ii. Void contract ----------------------
iii. Voidable contract ----------------------

iv. Voidable at the option of either party ----------------------
----------------------
4.3 EFFECT OF MINOR’S AGREEMENT
----------------------
Position of a minor under Contract Act is evolved through number of cases
dealt with by various High Courts and Supreme Court. It may be summarized ----------------------
as follows- ----------------------
1. Agreement Void-ab-initio ----------------------
Minor’s agreement is a void agreement. It is void ab-initio i.e. right from
----------------------
Notes its caption the law does not consider it as contract. It is neither a contract nor a
voidable contract. Therefore, an agreement by or with minor is not enforceable
---------------------- by Law and no person can seek any remedy.
---------------------- One has to be therefore very careful while dealing with a minor in any
commercial transaction. Law will always give a special protection to minors in
---------------------- any transaction.
---------------------- The leading case-law on the principle that minor’s agreement is void and
unenforceable is an old case between Mohori Bibi vs. Dharmodas Ghosh (1903).
---------------------- In this case, A, a minor mortgaged his house with B a mortgagee for Rs. 20,000.
---------------------- Out of the total amount, B initially gave Rs. 8000 to A. Subsequently, A sued B
to set aside the mortgage. B claimed the refund of Rs. 8000 A refused to pay.
----------------------
It was held by the Court that since minor’s agreement is void, no right
---------------------- was created by the so called mortgage contract. It was not a contract at all and
therefore minor could not be compelled to return Rs. 8000/- to B as the principle
---------------------- of restitution is not applicable to minors. Thus, the minor A could set aside the
---------------------- mortgage without refunding Rs. 8000/- to B.
2. Restitution not applicable to minors:
----------------------
Sec. 65 of the Contract Act lays down the principle of restitution i.e. when
---------------------- a contract becomes void or in a void agreement if one party has received any
advantage, benefit, advance money etc. from the other party then such party
----------------------
should return it back to the other party. This is restitution (rest it back). But
---------------------- restitution is not applicable to minors and therefore court cannot compel a minor
to return any advantage, benefit to the other party.
----------------------
3. Minor’s limited liability for Necessities:
----------------------
As per sec. 68 of the Contract Act, if any major person has supplied
---------------------- necessaries to a incompetent person or his dependents, then the person supplying
for necessaries should be reimbursed from the property of such incompetent
---------------------- person. It is a very limited liability with respect to the property of the incompetent
person only. There is no personal liability. Therefore, if in case of the minor, if
----------------------
he does not have any property then there is no question of his liability.
---------------------- Necessaries of life include the necessaries suitable to the minor’s life such
---------------------- as providing food, shelter, clothing, education, in case of a girl, her marriage
expenses etc.
----------------------
4. Minor can be a beneficiary:
---------------------- Minor’s incapacity to enter into contract means his incapacity to bind
---------------------- himself personally. There is however nothing which prevents him from becoming
a beneficiary. Thus, a minor can always be at the receiving end. For example,
---------------------- under the Negotiable Instruments Act, a minor can receive money by becoming
a payee, indorsee, promisee of a cheque, promissory - note or bill of exchange.
----------------------
However a minor cannot be the drawer of a cheque but can be the payee of
---------------------- a cheque and receive money.
44 Law of Contracts
5. No Ratification after majority: Notes
There is no provision for ratification by minor after attaining the age of
----------------------
majority. Ratification means subsequently saying ‘yes’ to the past act. Therefore,
an agreement which was entered into during minority cannot be consented to be ----------------------
a contract after attainment of majority. A void agreement later on cannot become
contract by ratification. If at all the parties want to enter into said agreement then ----------------------
a fresh contract should be entered into the minor becomes a major person.
----------------------
6. No Specific Performance remedy:
----------------------
Specific performance of contract remedy means to compel the party to
actually complete the contract and carry out the obligations as per the terms of the ----------------------
contract. It imposes a liability to perform the obligations arising out of contract.
Since minor’s agreement is void a minor can not be put to any hardship by law. ----------------------
Hence, the Specific performance remedy is not available against the minor.
----------------------
7. Minority is a good defense:
----------------------
Minor can always plead minority as a good defense in any case filed by or
against a minor. Law has always given a special protection to a minor. Therefore, ----------------------
a minor can always have his ‘minority’ as a good defense to avoid any liability.
----------------------
8. Minor as a partner:
----------------------
Since partnership is a special type of contract, a minor cannot become a
partner of any firm. But a minor can be admitted to the ‘benefits of partnership’ ----------------------
business. A minor is entitled to get a share in the profits of partnership without
being liable for any losses of the firm. ----------------------
9. Minor as an Agent: ----------------------
Agency is a special type of contract where the Principle and agent enter into
----------------------
a contract. Agent is one who is appointed to represent another in dealing with
the third party. Thus, an agent while acting in the capacity of an agent binds his ----------------------
principal. The agent himself does not incur any liability while representing his
principal. It is the principal who is responsible for the acts of his agent. A minor ----------------------
is regarded as incompetent to appoint an agent but a minor can work as an agent.
----------------------
However, there is a high risk in appointing minor as an agent.
10. Minor cannot be a shareholder: ----------------------
A minor, being incompetent to contract, cannot be a shareholder of a ----------------------

company in his individual capacity, except the share are fully paid up & AOA
does not prohibit. ----------------------
11. Minor never an insolvent: ----------------------

A minor cannot be declared as insolvent because he is incapable of ----------------------
contracting debts. Since he is incapable of contracting there is no question of
him becoming insolvent. ----------------------
12. Minor through his Parent or Guardian: ----------------------
If at all a minor wants to enter into any contract or legal relationship then ----------------------
he can always do so only through his parents or guardian. The contracts entered
Notes by the guardian / parents on behalf any minor, should be for the benefits of the
minor. Thus, the parents/guardian should try to protect the interest of the minors
---------------------- in such contracts.
---------------------- Thus, even though a minor is incompetent to contract personally he can
always function through his parents / guardian.
----------------------
---------------------- Activity 1
----------------------
Mr. Khatpat lost his father when he was a minor. He had two small brothers.
---------------------- Due to some financial reasons Mr. Khatpat borrowed Rs. 25,000 from his
uncle Mr. Mallo. Mr. Khatpat also executed a promissory note in favour
---------------------- of Mr. Mallo. After becoming a major, Mr. Khatpat executed a fresh
---------------------- promissory note in settlement of the first note in favour of Mr. Mallo for
Rs. 25,000. Mr. Khatpat could not pay the amount of Rs. 25,000 due to
---------------------- some financial difficulty. Can Mr. Mallo recover the amount on the second
promissory note?
----------------------
----------------------
4.4 SOUNDNESS OF MIND
----------------------
The second requirement for a competent party is that he should be of sound
---------------------- mind. Section 12 of the Contract Act defines soundness of mind for the purpose
of contracting, as follows-
----------------------
“A person is said to be of sound mind for the purpose of making a contract,
---------------------- if at the time when he makes it, he is capable -
---------------------- i) Of understanding it and
ii) Of forming a rational judgment as to its effect upon his interests.”
----------------------
The concept of soundness of mind under Contract Act is explained only from
---------------------- the point of view of making the contract. This law is concerned with soundness
of mind of each party, only at the time of making the contract and not at any
----------------------
other time.
---------------------- Test of Sound mind - The person is said to be of sound mind if at the time
of contracting he satisfies 2 conditions -
----------------------
1. He is able to understand what he is doing, and
----------------------
2. He is able to understand the effect or impact of his act on his own interests.
---------------------- Thus, Contract Act is very clear about its purpose of sound mind at the time
of contracting. The test of sound mind should be made applicable to the following
----------------------
categories of persons such as –
---------------------- 1. Lunatics or insane persons: The Indian Contract Act is concerned about
---------------------- legal insanity and not medical insanity. According to the Act, if a person is
insane at the time of entering into contract, he is regarded as incompetent
---------------------- to enter into contract. Such persons are at times perfectly normal but at
46 Law of Contracts
times are unable to understand the effect of their own acts. Such persons Notes
when they satisfy the test of sound mind can contract during such period.
There are two postulates to determine soundness of mind in case of such ----------------------
lunatics.
----------------------
a) A person who is ordinarily of sound mind but occasionally of
unsound mind is regarded as incompetent to enter into contract ----------------------
during the period when he is of unsound mind. ----------------------
b) A person who is ordinarily of unsound mind but occasionally of ----------------------
sound mind is regarded as competent to enter into contract during
the interval when he is of sound mind. ----------------------
A person is not regarded as incompetent merely because he is suffering from ----------------------
some mental disorder or disease which may or may not be curable.
----------------------
2. Person under influence of drinks or other intoxicating substances:
Persons who are laboring under the influence of intoxicants are regarded ----------------------
as incompetent to contract as they do not satisfy the test of soundness ----------------------
of mind. Such persons are neither in the position to understand the
consequences of their acts nor can form a rational judgment of their act. ----------------------
The intoxicating substances may include any drug, liquor or any other ----------------------
such substance which has effect of intoxication.
----------------------
3. Seriously ill patients or person delirious from fever etc.: Persons who
are suffering from any serious illness or high fever cannot contract while ----------------------
such illness lasts because they are unable to understand the effects of their
----------------------
actions.
----------------------
Effect of lack of sound mind:
If this essential is missing i.e. if at the time of making a contract if any party ----------------------
is of unsound mind, then the agreement is not a contract but is a void agreement. ----------------------
Examples
----------------------
1. A patient from a lunatic asylum, who is at times of sound mind, may contract
----------------------
during such intervals.
2. A person who is suffering from high fever and is in delirium cannot form a ----------------------
rational judgment and hence cannot contract till such delirium lasts. ----------------------
3. A person is under the influence of drinks. He sells his land to another. It is
----------------------
a void agreement and not a contract.
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
---------------------- State True or False.

1. If a person is insane at the time of entering into a contract, he is
----------------------
regarded as incompetent to enter into a contract.
---------------------- 2. Persons who are labouring under the influence of intoxicants are
regarded as incompetent to contract.
----------------------
----------------------
4.5 PERSON SHOULD NOT BE DISQUALIFIED FROM
----------------------
CONTRACTING BY ANY LAW TO WHICH HE IS SUBJECT
----------------------
Besides minors and persons with unsound mind, there are some other persons
---------------------- who are disqualified from contracting under the provisions of laws to which they
are subjected.
----------------------
Effect - If persons disqualified by law from contracting, enter into agreements,
---------------------- they are void agreements and can not be enforced.
---------------------- Following are the persons disqualified by law from contracting -
---------------------- 1. Alien enemies: An alien is a citizen of foreign country living in India.
An alien may be an alien friend or an alien enemy. Aliens living in India
---------------------- can enter into contracts in India with certain restrictions. But if a war
breaks out between India and that country to which the alien belongs, he
----------------------
becomes an alien enemy and he then is disqualified from contracting. His
---------------------- existing contracts are either stayed or terminated.
2. Foreign Sovereigns and Ambassadors: Foreign Sovereigns,
----------------------
Ambassadors, Ruling Prince, Chief, Envoy of a foreign country etc.
---------------------- are in a privileged position and enjoy exemption from the jurisdiction
of Indian Courts. Therefore, they are considered as incompetent to enter
---------------------- into contracts. One has to be very careful while entering into contracts
with such special persons, because they cannot be sued in Courts without
----------------------
obtaining prior permission of the Central Government. No legal remedy
---------------------- is available against such special persons therefore they are treated as
disqualified from contracting.
----------------------
3. Convicts: A convict is a person who is found guilty of commission
---------------------- of offence. If the convict is imprisoned then during the period of his
imprisonment, he is disqualified to enter into any contract as he is
---------------------- unable to fulfill all the obligations arising out of his contract. He is also
---------------------- disqualified to sue upon contracts made before conviction. After expiry of
his sentence of imprisonment he can enter into contracts or can sue upon
---------------------- contracts. During the period when he is serving the sentence limitation
period remains in abeyance i.e. it is suspended during such period.
----------------------
48 Law of Contracts
4. Insolvents: Insolvent is the person whose assets are insufficient to Notes
meet with his liabilities and hence so adjudicated by the court having
jurisdiction. When a debtor is adjudicated as insolvent by the Court, he ----------------------
is disqualified from making contracts. His property is entrusted to the
official Receiver and the insolvent cannot deal with it on his own. ----------------------
5. Companies and Corporations: Company or a corporation is artificial ----------------------

person created by Law. They are also called as juridical persons. Their
----------------------
contractual capacity is determined by Memorandum of Association and
any statutes creating them. They cannot enter into contracts falling outside ----------------------
the powers conferred by Memorandum or Charter or its statute. Thus,
there is a partial or limited disqualification on companies and corporations. ----------------------
They being artificial persons, they also cannot make contracts of personal
----------------------
nature e.g. marriage.
----------------------
----------------------
1. The following persons are not disqualified by law to enter into certain ----------------------
contracts:
----------------------
i. Alien enemy
----------------------
ii. Foreign sovereigns and ambassadors
iii. Pardanashin women ----------------------
iv. Insolvent ----------------------
----------------------
Summary ----------------------
●● very person is competent to contract who is of the age of majority
E ----------------------
according to the law to which he is subject, who is of sound mind and
not specifically disqualified from contracting by any law to which he is ----------------------
subjected.
----------------------
●● minor is a person who has not completed eighteen years of his age.
A
The age of majority is extended to twenty-one years in case a guardian is ----------------------
appointed by the court of wards.
----------------------
●● The position of minor’s agreement
n Minor’s agreement is altogether void or void ab initio and hence ----------------------
inoperative
----------------------
n He can however be a beneficiary in a contract.
----------------------
n His estate is liable for the necessaries of life (goods or services)
supplied to him or to anyone whom he is legally bound to support. ----------------------
n He may enter into contracts of apprenticeship, education etc. ----------------------
Notes n He can be an agent
n He cannot be a partner. But he can be admitted to the benefits of an
----------------------
already existing firm with the consent of other partners.
---------------------- n If he has received any benefits under the void agreement and he has
consumed the same, he cannot be asked to pay for it.
----------------------
n No specific performance for the minor’s agreement be granted.
----------------------
n Minority is a good defense, i.e. a minor can plead minority at any
---------------------- time.
---------------------- ●● Person of sound mind

Soundness of mind implies capacity to understand the agreement and
---------------------- form a rational judgment as to its effects upon one’s own interests. As
---------------------- per section 12, soundness of mind is required at the time of making the
contract.
---------------------- A person may lose soundness of mind due to age, illness, intoxication etc.
---------------------- ●● Legal Disqualifications
---------------------- Following persons are disqualified by law to enter into certain contracts
n Alien enemy
----------------------
n Foreign sovereigns and ambassadors
----------------------
n Convict
---------------------- n Insolvent
---------------------- n Corporations
---------------------- Keywords
---------------------- ●● Capacity to Contract: As per Sec 11, a person is capable (competent)
---------------------- to contract if he is above the age of majority, possesses sound mind for
the purpose of making a contract and is not disqualified by any law from
---------------------- making the contract.
---------------------- ●● Age of Majority: Age of majority is 18 years. But if the property of the
minor is with the court of wards it is 21 years.
---------------------- ●● Soundness of Mind: Soundness of mind implies capacity to understand
---------------------- the agreement and form a rational judgment as to its effects upon one’s
own interests.
---------------------- ●● Legal Disqualifications: Certain persons like alien enemy, convict,
---------------------- insolvent, corporation etc. are not permitted by law to make certain types
of contracts. To that extent they suffer from legal disqualification.
----------------------
----------------------
----------------------
50 Law of Contracts
Notes
----------------------
1. State briefly the requirements of capacity to contract.
2. What is the effect of minor’s agreement? ----------------------
3. Examine the legal position of minor agent and minor beneficiary. ----------------------
4. What do you understand by the term soundness of mind for the purpose ----------------------
of making a contract?
5. Enumerate the legal disqualifications. ----------------------
----------------------
----------------------
----------------------
----------------------
1. Parties are not competent to contract if any of them is
2. Two persons have the capacity to contract under Section 11 ----------------------
----------------------
----------------------
1. A contract with or by a minor is a ----------------------
ii. Void contract ----------------------
----------------------
----------------------
State True or False.
----------------------
1. True
2. True ----------------------
----------------------
----------------------
1. The following persons are not disqualified by law to enter into certain
contracts: ----------------------
iii. Pardanashin women ----------------------
----------------------
----------------------
Notes
Suggested Reading
----------------------
---------------------- Press.
---------------------- 2. Burrows, Andrew. 2009. A Casebook on Contract. Hart Publishing.
----------------------
Publication.
---------------------- 4. Singh, Avtar. 2005. Law of Contract. Lucknow: Eastern Book House.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
52 Law of Contracts
Free Consent
UNIT
5
Structure:
5.1 Consent and Free Consent (Section 13 & 14 respectively)
5.2 Coercion (Section 15)
5.3 Undue Influence (Section 16)
5.4 Fraud (Section 17)
5.5 Misrepresentation (Section 18)
5.6 Mistake (Sections 20, 21 and 22)
Summary
Key Words
Suggested Reading
Free Consent 53
Notes
Objectives
----------------------
---------------------- After going through this unit, you will be able to:
• Explain the concept of free consent
----------------------
• Compare the five important components of free consent
----------------------
---------------------- 5.1 CONSENT & FREE CONSENT (SEC. 13 & 14

---------------------- RESPECTIVELY)
---------------------- When two or more parties enter into a contract, there must be a mutual
understanding regarding the subject matter of the contract. This understanding
---------------------- is called consent. Consent is defined by Sec. 13 of the Act as follows -
---------------------- “Two or more persons are said to consent when they agree upon the same
thing in the same sense”.
----------------------
When two persons agree to the same thing in the same sense, they are said
---------------------- to be ad idem. If there is no consensus ad idem, there is no contract between
them. In English Law “consent is called as consensus ad idem.”
----------------------
Consent involves identity of minds in respect of each and every fact, term
---------------------- and condition of the contract. But if there is a mistake in understanding the
subject-matter, identity of the party, nature of transaction, price of the goods,
---------------------- etc. then there is no consent in the proper sense of the term.
---------------------- Thus by consent it means all parties, must agree commonly on each fact of
the contract.
----------------------
E.g. If A is selling his ‘Horse No.1’ and B thinks it to be ‘Horse No. 11’,
---------------------- then there is no proper consent because A and B are not agreeing upon the same
subject-matter.
----------------------
Whenever there is such a no meeting of minds, it is not consent and therefore
---------------------- the agreement is null and void i.e. unenforceable. For the formation of contract
there should not only be consent amongst the parties but the consent should be
----------------------
a free consent.
---------------------- Meaning of Free Consent - Free consent is defined by Sec. 14 as under -
---------------------- “Consent is said to be free when it is not caused by -
 Coercion, as defined in Sec. 15, or
----------------------
 Undue influence, as defined in Sec. 16 or
----------------------  Fraud, as defined in Sec. 17 or
----------------------  Misrepresentation, as defined in Sec. 18, or
 Mistake, subject to Sec. 20, 21, and 22
----------------------
Sec. 14 defines free consent in a negative manner. It actually defines what not
----------------------
a free consent is. The requirement for contract is of free consent. Therefore when
54 Law of Contracts
the consent is not caused by any coercion, undue influence, fraud, misrepresentation Notes
or mistake, it is a free consent. Let us consider these vitiating factors i.e. factors
affecting a free consenting mind of a contracting party, one by one. ----------------------
----------------------
5.2 COERCION (SECTION 15)
----------------------
Coercion in simple language means force, compulsion or threat applied by
one person on another. ----------------------
As per Section 15, Coercion means obtaining the consent to a contract by ----------------------
committing any of the following acts -
----------------------
 Committing an act forbidden by Indian penal Code, or
 Threatening to commit an act forbidden by Indian Penal Code, or ----------------------
 Unlawfully detaining any property, or ----------------------
 Threatening to detain any property unlawfully.
----------------------
Explanation
----------------------
 Coercion may proceed from any person and may be directed towards any
person, not necessarily a party to the contract. ----------------------
 Any of the above acts should be committed with the intention of obtaining ----------------------
consent for a contract then only the consent is said to be caused by coercion.
 Consent must in fact be caused only because of such act ----------------------
 The Indian Penal Code may or may not be in force at the place where ----------------------
coercion is caused.
----------------------
Thus, wherever any person commits any crime or threatens to commit a crime
due to which fear is created in the mind of the contracting party and is thus forced ----------------------
to give consent, the consent is obtained by coercion.
----------------------
E.g. A points out a gun towards B and obtains B’s consent to a contract. Due to
fear of instant death, B has given his consent. B’s consent is caused by coercion. ----------------------
Coercion may be applied from one party to other party or it can be applied by any ----------------------
person on behalf of a party towards any other person in whose safety the other
party is interested. This explanation widens the meaning and scope of coercion. ----------------------
E.g. ----------------------
 A kidnaps, B and obtain B’s consent for a contract. Consent is caused by ----------------------
coercion directed from one party towards another.
----------------------
 A wants to enter into a contract with B. B is not ready to accept the terms
of contract. A’s son C kidnaps B’s son D. B is thus forced to give consent. ----------------------
Here coercion proceeds from a third person and is directed towards some
other person, who are not parties to the contract. ----------------------
 A constantly threatens B that if B does not sell his house to A, he would ----------------------
detain B’s valuable goods. B gives his consent under compulsion. Coercion
is applied here even by threat to commit a crime in future. ----------------------
Free Consent 55
Notes Effect of Coercion on Contract
Whenever consent is caused by coercion, the contract is voidable at the option
----------------------
of such injured party whose consent is obtained by coercion.
---------------------- Thus coercion makes the contract a voidable contract which can be set aside
by the suffering or aggrieved party. But if it is not set aside then the contract
----------------------
continues to be legal and binding on both the parties. E.g. In the famous case
---------------------- of Ranganayakamma Vs Alwar Setty,
X a South Indian person died leaving a young widow and a huge property behind
----------------------
him. The relatives of X threatened and forced the widow to adopt a particular
---------------------- boy of one of the relatives, otherwise they would not allow her to cremate X’s
dead body. The widow adopted the boy under fear and coercion. She later on
---------------------- applied for cancellation of the adoption-deed. The Court held that the adoption
was not valid being caused by coercion. The court set aside the adoption-deed.
----------------------
Burden of Proof:- The burden of proving, that the consent caused by coercion,
---------------------- is on the party whose consent is caused be coercion and wants to set aside the
---------------------- contract i.e. the inured party has to prove the coercion applied on him.
----------------------
----------------------
----------------------
1. Consent is free under Section 14 if not caused by
----------------------
i. Coercion and undue influence
----------------------
ii. Fraud and misrepresentation
---------------------- iii. Mistake subject to the provisions of Sections 20, 21 and 22
---------------------- 2. Consent under Section 13 means
i. Agreeing on the same thing in the same sense
----------------------
ii. Agreeing on the same thing at the same time
----------------------
iii. Agreeing on the same thing at different time
---------------------- iv. Agreeing on different things at different times
---------------------- 3. The term consensus ad-idem means
---------------------- i. General consensus
ii. Reaching an agreement
----------------------
iii. Meeting of minds upon the same thing in the same sense
----------------------
----------------------
----------------------
56 Law of Contracts
Notes
4. Coercion which vitiates free consent under Section 15 is
----------------------
i. Committing or threatening to commit any act which is forbidden
by law ----------------------
ii. Committing or threatening to commit any act which is forbidden
----------------------
by Indian Penal Code
iii. Unlawful detaining or threatening to detain any property with ----------------------
an intention to causing any person to enter into an agreement
----------------------
----------------------
----------------------
5.3 UNDUE INFLUENCE (SECTION 16)
----------------------
Undue influence means “too much” of influence on the mind of party due to
----------------------
which he is carried away to such an extent that he give consent to a contract
on his own but later on realizes that there was an unconscionable bargain. This ----------------------
happens when the parties to an agreement are so related to each other that one
of them is able to dominate the will of the other. ----------------------
According to Sec. 16, a contract is said to be induced or caused by undue influence ----------------------
when -
----------------------
 The relation existing between the parties is such that one party is in a dominant
position and can dominate the will of the other subordinate party, and ----------------------
 An unfair advantage is taken by the dominant person of his position and so ----------------------
there is an unconscionable bargain.
Relationship in which one person is deemed to be in a dominant position- ----------------------
 Where there is a real or apparent authority of one over the other e.g. Master- ----------------------
servant, Employer - Employee, Income tax officer in relation to an assessee,
----------------------
a police officer in relation to an accused person etc.
 Where a person stands in a fiduciary relation with the other. For example ----------------------
Parent-child, Guardian-ward, Teacher-student, Doctor-patient, Advocate-
----------------------
client, Guru-Disciple etc. Fiduciary relation is a relation of faith, trust and
confidence. ----------------------
 Where a normal person contracts with a person whose mental capacity is ----------------------
temporarily or permanently affected due to his age, illness or mental or
bodily distress. ----------------------
However this does not mean that all contracts between such parties are caused ----------------------
by undue influence. If the dominant person has not taken any unfair advantage
and if the consideration is adequate then the contract is not affected by undue ----------------------
influence.
----------------------
Both the ingredients of undue influence i.e. (1) relationship (2) unfair advantage,
should be satisfied only then consent is said to be affected by undue influence. ----------------------
Free Consent 57
Notes Whenever there is an unfair advantage taken by the dominant person, the contract
is said to be an unconscionable bargain. Unconscionable bargain means such
---------------------- a transaction which no normal man would make it on one hand, and no honest
man would accept it on the other hand. Undue influence is thus a subtle species
----------------------
of fraud, where mastery is obtained over the mind of the weaker party.
---------------------- E.g. A is a religious Guru and B is his devotee. B sells his house worth Rs. 10
---------------------- lakhs to A for merely Rs. 10,000. This is an unconscionable bargain.
---------------------- Effect of undue influence on Contract: When consent to an agreement is caused

by undue influence, the agreement is a voidable contract which can be set aside
---------------------- at the option of the weaker party whose consent was so caused. The court set
asides the contract absolutely or on such terms and conditions as the court may
----------------------
find just.
---------------------- Burden of Proof in Undue Influence
----------------------  Initially the burden of proving that the contract is caused by undue influence
---------------------- is on the subordinate party whose consent is so caused by undue influence.
Once he proves the relationship of dominance existing between them and
---------------------- that the contract is an unconscionable bargain, the burden of proof shifts.
----------------------  Now the burden shifts on the dominant party to prove that the contract is
not caused by undue influence.
----------------------
Contracts with Pardanashin women:
----------------------
A pardanashin woman is one who by the custom of her country, religion,
---------------------- community, does not appear in public. She observes a complete seclusion as per
her community’s tradition.
----------------------
Legal Presumption: A contract with a pardanashin woman is presumed to be
---------------------- induced by undue influence. Since these women are not allowed to mix up in
---------------------- the society at large they have been given a special cloak of protection by law.
Burden of proof: There in contracts with a pardanashin woman the burden of
----------------------
proof is on the person who enters into a contract with her, to prove that there is
---------------------- no undue influence.
---------------------- Such a person has to satisfy the Court by proving that-
---------------------- Contracts with Pardanashin women:

 The contract was fully explained to her.
----------------------
 That she had full knowledge of the nature and effect of the contract.
----------------------
 That she was allowed to take independent advice in the matter, before
---------------------- entering into the contract.
----------------------
----------------------
58 Law of Contracts
Difference between Coercion and Undue Influence Notes
Coercion Undue Influence ----------------------

1. Parties may not be related to each 1. Parties are related to each other by ----------------------
other. some kind of relationship.
----------------------
2. Consent is obtained by threat of an 2. Consent is induced by dominating
offence or actual commission of an the will of other party, due to the ----------------------
offence. nature of relationship.
----------------------
3. There is a physical force applied 3. There is a moral or mental pressure
on the mind of one party. ----------------------
4. Coercion can be exercised by a 4. Undue influence is exercised only
----------------------
stranger to the contract. by one party on the other party.
----------------------
----------------------
Fill in the blanks.
----------------------
1. Whenever there is an ________taken by the dominant person, the
contract is said to be an unconscionable bargain. ----------------------
----------------------
1. Inadequacy of consideration is relevant in determining the question
of ----------------------
i. Fraud
----------------------
ii. Misrepresentation
----------------------
iii. Undue influence
iv. Free consent ----------------------
----------------------
5.4 FRAUD (SECTION 17) ----------------------
Fraud means to cheat or deceive another person. As per the Contract Act ----------------------
whenever one party cheats other party with the intention to obtain his consent ----------------------
for a contract, the consent is said to be obtained by fraud.
As per section 17 of the Contract Act, fraud means and includes any of the ----------------------
following acts committed by a party or his agent, in order to induce the other ----------------------
party to enter into a contract, or to deceive him -
 Giving a suggestion of a false fact knowing that it is false (suggestio falsi), ----------------------
or ----------------------
 Making an active concealment of a material fact (suppressio versi i.e.
suppression of truth), or ----------------------
Free Consent 59
Notes  A promise made without an intention of performing it, or
 Any other act fitted to deceive, or
----------------------
 Any act which is declared fraudulent by any other law.
---------------------- Fraud is a crime as well as a factor affecting free consent. It comprises of
two things, any of the above acts coupled with the intention to deceive the other
----------------------
party to his disadvantage. Fraud can be committed by the contracting party or
---------------------- his agent.
Intention: The party committing fraud i.e. any of the above acts should have
----------------------
an intention (i) to deceive another party or (ii) to induce another party to give
---------------------- his consent to the contract. If there is no such intention then the consent is not
caused by fraud.
----------------------
Fraud means false representation of a fact either by giving false suggestion
---------------------- or by hiding the truth actively from the other party. The person committing fraud
should be aware of the true facts. It is also necessary that the other party must
---------------------- have relied upon the false representation made to him.
---------------------- E.g. A wants to sell an ordinary utensil to B for a high price. A therefore
says to B that the utensil is an antique piece and its cost is Rs. 1 lakh, knowing
---------------------- that it is not an antique. B relies, on A’s words and purchases, an ordinary utensil
---------------------- for Rs. 1 lakh. Here B’s consent is said to be induced by fraud.
Fraud also includes a casual promise given by one party to another. If the
---------------------- party never intended to perform under the contract then it is treated as fraud.
---------------------- Sometime some other law declares an act as fraudulent, for example Sec.
55 of Transfer of property Act states that if a seller of immoveable property does
----------------------
not disclose the defects in his title to the buyer then it is treated as a fraud on the
---------------------- buyer.
Silence amounting to Fraud -
----------------------
The question is whether silence amounts to Fraud? By remaining silent can
---------------------- a party commit fraud upon the other party?
---------------------- As a general rule the explanation of Sec. 17 states that mere silence of a
party with respect to the facts likely to affect the willingness of a party, is not
---------------------- a fraud i.e. mere silence of a party as to some material facts and circumstances
---------------------- does not amount to fraud. A party to a contract is under no obligation to disclose
the whole truth to another, unless asked for. Whenever there is no duty to speak,
---------------------- silence in such cases does not amount to fraud.
---------------------- E.g.
 A sells to B, by auction, an ordinary gold plated wall-clock for a high price.
----------------------
B asks nothing about the clock or its price. There is no fraud committed.
----------------------  A sells an unsound horse to B. A need not speak anything regarding soundness
of horse unless asked for. This is not fraud in A.
----------------------
However the above general rule is subject to following two exceptions where
---------------------- silence does amounts to fraud -
60 Law of Contracts
A. Contracts of utmost faith: In the uberrimae fidei contracts, i.e. contracts Notes
of utmost faith, the relationship existing between parties is such that there
is a duty to speak the truth. In such cases, by remaining silent, the party is ----------------------
said to commit a fraud upon another.
----------------------
A legal duty to speak arises where one party reposes a trust or confidence in
the other. Whenever the contract is based on trust and faith, there is a duty ----------------------
to disclose all material facts which are within the knowledge of a person.
----------------------
Following are a few examples of contracts of utmost good faith.
 Insurance contracts: The party must disclose all the important facts ----------------------
regarding the subject-matter of contract. If the party / insurer fail to
----------------------
disclose these facts to Insurance Company it is silence amounting to
fraud. ----------------------
 When the relationship between the parties is fiduciary in nature, there
----------------------
arises a duty to disclose all the facts within one’s knowledge. If a father
is selling his unsound horse to his son, knowing that it is unsound, then ----------------------
he must disclose the unsoundness of the horse to his son. Otherwise
his silence would amount to fraud. ----------------------
 The prospectus of a company should disclose all true facts regarding ----------------------
the Company, otherwise the shareholders are likely to be cheated.
----------------------
 Legal duty to speak: In the Contract of Sale of immoveable property,
the seller is under a duty to speak by Section 55 of Transfer of Property ----------------------
Act. He must disclose the defects in his title to the buyer. If he remains
silent, it amounts to fraud. ----------------------
B. Where Silence is in itself equivalent to speech ----------------------

The second exception covers where silence of a party is same as saying ----------------------
something. A person who keeps silence, knowing that his silence is going to
be deceptive, is also guilty of fraud. For example, A sells to B, an ordinary ----------------------
gold-plated wall-clock for a high price. B says to A “If you do not deny it,
----------------------
I shall assume that the clock is of pure gold”. A keeps quiet which gives
an impression to B that the clock is of pure gold. Here A’s silence amounts ----------------------
to fraud.
----------------------
The illustration attached to section 17 is worth noting in this regard. A seller
sells his unsound horse to a buyer, knowing that it is unsound. Buyer says ----------------------
to the seller, “Unless you deny it, I shall assume that the horse is perfectly
sound.” The seller keeps silence. Here, seller’s silence is equivalent to a ----------------------
positive assertion about the soundness of the horse and therefore his silence
----------------------
amounts to fraud.
Effect of Fraud on Contract ----------------------
A. It is a voidable contract and the party whose consent is caused by fraud can ----------------------
rescind (cancel) the contract.
----------------------
However the Court does not cancel or set aside the contract if –
----------------------
Free Consent 61
Notes  The party’s consent is not induced by fraud. (E.g. A falsely induces B
to purchase an ordinary mirror as a “Magic mirror” for Rs. 10,000. B
---------------------- knows that it is an ordinary mirror but still buys it for the high price.
Here B’s consent is not induced by fraud and therefore the contract is
---------------------- not voidable.)
----------------------  In silence amounting to fraud if the suffering party had the means of
discovering the truth with ordinary diligence.
----------------------
B. The suffering party instead of canceling the contract may insist upon its
---------------------- performance, as if the false representation was a true representation. This
remedy is available only in certain cases where substitution is possible.
----------------------
E.g. A sells an ordinary gold-plated wall-clock to B for a high price,
---------------------- representing that it is a pure gold wall-clock. After discovering the fraud B instead
of canceling the contract may insist A to sell a pure gold clock to B.
----------------------
----------------------
----------------------
----------------------
---------------------- 1. Which one of the following does not amount to fraud?

i. Suggestion as a fact which is not true, by one who does not
---------------------- believe it to be true
---------------------- ii. Active concealment of a fact
---------------------- iii. A representation made without knowing it to be false, honestly
believing it to be true
----------------------
iv. A promise made without any intention of performing it
---------------------- 2. A person is deemed to be in a position to dominate the will of another
by undue influence if the mental capacity is affected temporarily or
----------------------
permanently by
---------------------- i. Reason of age
---------------------- ii. Reason of illness
---------------------- iii. Mental or bodily distress
----------------------
----------------------
---------------------- Activity 1
---------------------- A and B being traders enter into a contract. A has private information of
---------------------- a change in price which would affect B’s willingness to proceed with the
contract. Will this amount to fraud?
----------------------
62 Law of Contracts
5.5 MISREPRESENTATION (SECTION 18) Notes
Misrepresentation means a false representation which is made innocently. There ----------------------
is a similarity in fraud and misrepresentation and there is a lot of difference too.
----------------------
A false representation may be made by a person who either knows that it is
false or he himself honestly believes it to be true. If the false representation is ----------------------
known to be false by the person making it then it is called fraudulent representation
or Fraud. ----------------------
But if the false representation is honestly believed to be true by the maker ----------------------
himself then it is a innocent representation or misrepresentation.
----------------------
As per Section 18, misrepresentation is done in any of the following ways-
----------------------
 By making a positive assertion of a false fact by a party who believes it to
be true, or ----------------------
 By doing any breach of duty which gains an advantage to the person
----------------------
committing it, or
 By causing a party to a contract to make a mistake as to the subject-matter ----------------------
of contract. ----------------------
In all the three ways of committing misrepresentation, the intention of the
party is innocent and not to deceive the other party. ----------------------
Thus the object of misrepresentation is not to deceive the other party but the ----------------------
representation made casually or innocently by one party is sufficient to obtain
the consent of the other party. ----------------------
E.g. ----------------------
 A while selling his horse to B, tells him that the horse is perfectly sound. A ----------------------
himself believes it to be sound. Later on B finds that the horse is unsound.
Consent of B is caused by misrepresentation. ----------------------
 A sells a golden wall-clock to B representing it to be of pure gold. A himself ----------------------
believes it to be of pure gold. B relies on representation and buys the clock
for a high price. He afterwards discovers it to be of gold-plated only. Here ----------------------
B’s consent is caused by misrepresentation.
----------------------
 Non-disclosure of un-important or secondary matters in an insurance contract
amounts to breach of duty causing misrepresentation. ----------------------
Effect of Misrepresentation on Contract ----------------------

 Misrepresentation makes the Contract voidable at the option of the party ----------------------
whose consent is obtained by misrepresentation.
----------------------
 However contract is not voidable if the misrepresented party had the means
of discovering the truth by ordinary diligence. ----------------------
 Similarly the contract is not voidable if misrepresentation did not induce the
----------------------
party to enter into the contract. i.e. if misrepresentation was not the reason
behind consenting to the contract. ----------------------
Free Consent 63
Notes  The party misrepresented may insist that the contract shall be performed as
if the false representation was correct i.e. substitution of the contract as if
---------------------- it was a true representation.
---------------------- Difference between Fraud and Misrepresentation
---------------------- Fraud Misrepresentation

1. The false representation is made, 1. The false representation is made,
---------------------- knowing, it to be false. believing it to be true.
---------------------- 2. There is intention to deceive other 2. There is no intention to deceive
party. (innocent intention)
---------------------- 3. Fraud is also a crime and a criminal 3. Misrepresentation is only a civil
case can also be filed against wrong and not a crime.
----------------------
fraudulent party.
---------------------- 4. The civil remedy is dual i.e. the 4. The remedy is only to set aside the
suffering party can set aside the contract.
---------------------- contract and also claim damages
---------------------- for the deceit.
5. The defrauding party cannot take 5. The misrepresenting party can take
---------------------- a defense that the suffering party a defense that the mislead party
could have found out the truth by had means of discovering the truth
----------------------
ordinary diligence. by ordinary diligence.
----------------------

----------------------
---------------------- 1. Misrepresentation under Section 18 means
---------------------- i. A positive assertion, in a manner not warranted by the information
of the person making it, not true but he believes it to be true
----------------------
ii. Any breach of duty, which gains an advantage to the person
---------------------- committing it, by misleading another to his prejudice
---------------------- iii. Causing a party to make an agreement to make a mistake as to

the subject matter of contract
---------------------- iv. All of the abov
----------------------
---------------------- 5.6 MISTAKE (SECTIONS 20, 21, 22)

---------------------- Consent is not a free consent if it is caused by Mistake (subject to section,
20, 21and 22 of the Indian Contract Act). Mistake means an erroneous belief or
---------------------- understanding about something. Consent is said to be wrongly given when the
---------------------- parties intended to do one thing, by error do something else.
----------------------
64 Law of Contracts
Types of Mistake Notes
----------------------
----------------------
Mistake of Fact Mistake of Law (Sec.21)
----------------------
Bilateral Unilateral Of Indian Law Of Foreign Law ----------------------
(Sec.20) (Sec.22) (Sec.21) (Sec.21)
----------------------
Effect (Void) (Not voidable) (Not voidable) (like mistake of Fact)
Agreement) ----------------------
Mistake of Fact: Here the parties commit a mistake in understanding the ----------------------
facts with respect to the contract. Mistake of fact may be committed with respect
to the subject-matter, existence of subject matter, identity of parties, nature ----------------------
of contract, price, quality, quantity of subject-matter etc or the possibility of
----------------------
performance of the agreement.
Mistake of fact can be further classified as – ----------------------
Bilateral Mistake of Fact (Sec. 20) ----------------------
Sec. 20 defines it as follows – ----------------------
“Where both parties to an agreement are under a mistake as to matter of
fact essential to the agreement, the agreement is void.” ----------------------
The essentials of bilateral mistake are – ----------------------

 Both or all parties should commit a mistake, ----------------------
 It must be a mistake of fact,
----------------------
 The fact must be very essential to the existence of the agreement, and then
only the agreement is void and not a contract. ----------------------
However an erroneous or wrong opinion as to the value of a subject matter ----------------------
of contract is not mistake of fact. For example, A purchases a sofa set believing it
to be worth Rs.50, 000/- while in fact it is worth only Rs.10, 000. The contract is ----------------------
not void because it is only a mistake of fact as to the value of the subject matter.
----------------------
Mistake with respect to a fact may be committed when both parties wrongly
understand the subject-matter, quantity of goods, quality or brand of a product ----------------------
etc. The mistake may even be about the existence of the subject matter. For
----------------------
example, A agrees to buy from B all the potatoes grown in B’s field. They find
that the potatoes were already destroyed by heavy rains, though neither party ----------------------
was aware of the fact. The agreement is void.
----------------------
Unilateral Mistake of Fact (Sec. 22)
When only one party makes a mistake as to a fact, it is a unilateral mistake. As ----------------------
per Sec. 22 – ----------------------
“A contract is not voidable merely because it was caused by one of the
parties to it being under a mistake as to a matter of fact.” ----------------------
Free Consent 65
Notes Just because one party commits a mistake of fact, the other party is not made
to suffer. Therefore the unilateral mistake does not make the agreement void not
---------------------- it can be set aside. In case of unilateral mistake of fact, the contract continues to
be perfectly legal and valid.
----------------------
E.g.
----------------------
 A showed a sample of new Basmati rice to B, B agreed to buy it thinking
---------------------- it as old Basmati rice. The contract is not voidable at the option of B.
 A signs a lease-deed with B thinking it to be a mortgage deed. A cannot
----------------------
cancel the contract.
---------------------- However under certain circumstances or where unilateral mistake is of
---------------------- fundamental nature and affects the character of the contract, the innocent party
is protected. When the unilateral mistake is as to the identity of the other party
---------------------- or as to the nature of the contract, the agreement is void. E.g.
 If a blind man signs, a document read over to him wrongly by the other
----------------------
party, contract is voidable.
----------------------  If one party commits a mistake in identifying another party and enters into
---------------------- contract with a wrong person, the innocent party can set aside the contract.
 An old illiterate man was induced to sign a Bill of Exchange. He thought
----------------------
he was signing a mere guarantee. He was allowed to set aside the contract
---------------------- and not liable under the Bill.
Mistake of Law – (Sec. 21)
----------------------
The General rule is “Ignorantia juris non excusat” i.e. ‘Ignorance of law is
---------------------- never an excuse.’
---------------------- A party will not be entitled to get any relief on the ground that he had no
knowledge of law.
----------------------
Sec. 21 of the Contract Act defines Mistake of Law as –
----------------------
“A contract is not voidable because it was caused by a mistake as to any
---------------------- law in force in India, but a mistake as to a law not in force in India has, the same
effect as a mistake of fact.”
----------------------
Thus Section 21 provides for two types of mistakes of law. Parties may
---------------------- commit a mistake as regards the provisions of Indian Law or Foreign Law.
Types of Mistake of Law –
----------------------
1. Mistake as regards Indian Law (Sec.21): It is presumed that every person
---------------------- knows the law of his own country. Therefore ignorance of Indian law is not
---------------------- an excuse. If any party commits a mistake as to the Indian Law, then the
contract is not voidable. It continues to be a contract binding on all parties
---------------------- as per the legal interpretation. The parties are not given any benefit for their
mistake with respect to the legal interpretation. E.g. A and B enter into a
---------------------- contract on the wrong belief that a particular debt is barred by the Indian
---------------------- Law of Limitation. The contract is not voidable.
66 Law of Contracts
2. Mistake as to any Foreign Law (Sec. 21): One is not expected to know Notes
the foreign laws. Therefore mistake as to any foreign Laws is equivalent
to mistake of fact. Thus if there is bilateral mistake of Foreign Law, the ----------------------
agreement is void. If there unilateral mistake of Foreign law, the contract
is not voidable. ----------------------
Effect of Mistake on contract – ----------------------

To sum up, the effect of mistake on contract is as follows: ----------------------
 Bilateral Mistake of Fact - Void agreement.
----------------------
 Unilateral Mistake of Fact - Not Voidable Contract.
----------------------
 Mistake as to Indian Law - Not Voidable Contract.
 Mistake as to Foreign Law - Same as mistake of fact. ----------------------
----------------------
1. An agreement shall be void on account of ----------------------

i. Mistake of fact by one party ----------------------
ii. Mistake of fact by both the parties
----------------------
iii. Mistake of foreign law
----------------------
iv. Both i. and ii.
----------------------
----------------------
Activity 2
----------------------
A by a misrepresentation leads B erroneously to believe that five hundred ----------------------
maunds of indigo are made annually at A’s factory. B examines the accounts
of the factory, which show that only four hundred maunds of indigo have ----------------------
been made. After this B buys the factory. Can the contract be avoided by
B? ----------------------
----------------------
Summary ----------------------
●● ll agreements are contracts if they are made by the free consent of the
A ----------------------
parties. Two or more persons are said to consent when they agree upon
----------------------
the same thing in the same sense. Consent is said to be free when it is not
caused either by coercion, undue influence, fraud, misrepresentation or ----------------------
mistake.
●● hen the consent to a contract is caused by coercion, undue influence,
W ----------------------
fraud or misrepresentation, the contract becomes voidable at the option of ----------------------
the party whose consent is so caused.
Free Consent 67
Notes ●● Coercion is the committing or threatening to commit any act forbidden
by the Indian Penal Code 1860 or unlawfully detaining or threatening
---------------------- to detain any property to the prejudice of any person whatever, with the
intention of causing any person to enter into the agreement.
----------------------
●● A contract is said to be induced by undue influence where the relationship
---------------------- subsisting between the parties is such that one of them is in a position to
---------------------- dominate the will of the other and in fact uses that position to obtain an
unfair advantage over the other. A person is said to be in a dominating
---------------------- position when
---------------------- a) He holds real or apparent authority over the other or
b) Stands in a fiduciary relation with the other or
----------------------
c) Makes a contract with a person whose mental capacity is temporarily
---------------------- or permanently affected by reason of age, illness or mental or bodily
---------------------- distress
●● hen the relationship between the contracting parties is one of dominance
W
---------------------- and the transaction prima facie appears to be an unconscionable bargain,
---------------------- it is presumed that the consent of the weaker party was obtained by undue
influence.
---------------------- ●● Misrepresentation is a misstatement of a material fact made innocently
---------------------- with an honest belief as to its truth or non disclosure of a material fact
without any intention to deceive the other party.
---------------------- ●● Consent is said to be obtained by fraud when
---------------------- a) False statement is made by a person who knows that it is not true
---------------------- b) There is an active concealment of a material fact by a person who

has a knowledge of it
---------------------- c) A promise is made without any intention to perform it
---------------------- d) There is any other act fitted to deceive. This clause covers all tricks
or unfair ways which are used by cunning and clever people to cheat
----------------------
others
---------------------- e) The act or omission is specially declared to be fraudulent by law.
---------------------- ●● ere silence is not fraud unless there is a duty to speak or the silence
M
itself amounts to speech. Similarly half truths can be treated as frauds.
----------------------
●● Mistake is an erroneous belief about something. It may be mistake of fact
---------------------- or mistake of law. Mistake of fact may be bilateral mistake or unilateral
mistake. A bilateral mistake of fact makes the agreement void. A unilateral
---------------------- mistake of fact does not affect the contract unless it is about the identity of
---------------------- the other party or about the nature of the contract. Mistake of Indian law
is not excused. Mistake of foreign law is treated as mistake of fact only.
----------------------
----------------------
68 Law of Contracts
Keywords Notes
----------------------
●● Consent and free consent: Two or more persons are said to consent
when they agree upon the same thing in the same sense. Consent is said ----------------------
to be free when it is not caused either by coercion, undue influence, fraud,
misrepresentation or mistake. ----------------------
●● Coercion: Coercion means use of force. It is committing of an offence or ----------------------
threatening to commit it or unlawful detention of property or a threat to
detain it, to induce consent of a party to the contract. ----------------------
●● Undue influence: It means the abuse or misuse of one’s dominating ----------------------
position to obtain an unfair advantage over the other by inducing him to
enter into the agreement. ----------------------
●● Fraud: Fraud means and includes any of the following acts committed ----------------------
by a party or his agent, in order to induce the other party to enter into a
contract, or to deceive him - ----------------------
a) Giving a suggestion of a false fact knowing that it is false (suggestio ----------------------
falsi), or
b) Making an active concealment of a material fact (suppressio versi ----------------------
i.e. suppression of truth), or ----------------------
c) A promise made without an intention of performing it, or
----------------------
d) Any other act fitted to deceive, or
----------------------
e) Any act which is declared fraudulent by any other law.
●● Misrepresentation: Misrepresentation is done in any of the following ----------------------
ways- ----------------------
a) By making a positive assertion of a false fact by a party who believes
it to be true, or ----------------------
b) By doing any breach of duty which gains an advantage to the person ----------------------
committing it, or
----------------------
c) By causing a party to a contract to make a mistake as to the subject-
matter of contract. ----------------------
●● Mistake: Mistake means an erroneous belief or understanding about ----------------------
something. Consent is said to be wrongly given when the parties intended
to do one thing, by error do something else. ----------------------
----------------------
----------------------
1. Define consent. When is consent said to be free? How is the contract
affected if consent of one of the parties is not free? ----------------------
2. Define consent obtained by coercion. ----------------------
3. Define the term undue influence under the Indian Contract Act.
----------------------
Free Consent 69
Notes 4. State the comparison between coercion and undue influence.
5. Define the term fraud under the Indian contract Act. Distinguish fraud
----------------------
from misrepresentation.
---------------------- 6. What do you mean by ‘mistake’? Classify various types of mistake?
---------------------- 7. What is effect of mistake on validity of contract?
---------------------- 8. Is ignorance of law excused? Explain in the reference of effect mistake of

law.
----------------------
----------------------
----------------------
----------------------
1. Consent is free under section 14 if not caused by
---------------------- 2. Consent under Section 13 means
---------------------- i. Agreeing on the same thing in the same sense
---------------------- 3. The term consensus ad-idem means

iii. Meeting of minds upon the same thing in the same sense
----------------------
4. Coercion which vitiates free consent under Section 15 is
----------------------
----------------------
---------------------- Fill in the blanks.

1. Whenever there is an unfair advantage taken by the dominant person, the
---------------------- contract is said to be an unconscionable bargain.
---------------------- 1. Inadequacy of consideration is relevant in determining the question of
iii. Undue influence
----------------------
----------------------
---------------------- 1. Which one of the following does not amount to fraud?
---------------------- i. Suggestion as a fact which is not true, by one who does not believe
it to be true
----------------------
2. A person is deemed to be in a position to dominate the will of another
----------------------
70 Law of Contracts
by undue influence if the mental capacity is affected temporarily or Notes
permanently by..
----------------------
----------------------
1. Misrepresentation under Section 18 means
----------------------
----------------------

1. An agreement shall be void on account of ----------------------
ii. Mistake of fact by both the parties
----------------------
Suggested Reading ----------------------
1. Beatson, J. 2002. Anson’s Law of Contract. New York: Oxford University ----------------------
Press. ----------------------
2. Andrue Burrow, A Casebook on Contract, 2nd Edition, Hart Publishing,
2009 ----------------------
Publication.
----------------------
4. Kapoor, N. D. 2010. Elements of Mercantile Law. New Delhi: Sultan
Chand & Sons. ----------------------
----------------------
7. Saharay, H.K. 2000. Dutt on Contract. Kolkata: Eastern Law House.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Free Consent 71
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
72 Law of Contracts
Void Agreements (Sec. 25 to 30)
UNIT
6
Structure:
6.1 Definition, Meaning and Explanation of Void Agreement
6.2 Types of Void Agreement
Summary
Key Words
Suggested Reading
Void Agreements (Sec. 25 to 30) 73

Notes
Objectives
----------------------
• Analyse and compare valid and void agreements
----------------------
• Classify the different types of void agreements
----------------------
---------------------- 6.1 DEFINITION, MEANING AND EXPLANATION OF

---------------------- VOID AGREEMENT
---------------------- A void agreement is one which is without any legal effects. Section 2(g)
of the Indian Contract Act defines it as follows- ‘An agreement not enforceable
---------------------- by law is said to be void.’ Void agreement does not create any legal right and
obligation. As per section 10 of the Indian Contract Act, the fifth essential element
----------------------
for a contract is that the agreement should not be expressly declared as a void
---------------------- agreement. Sections 26 to 30 give a list of agreements expressly declared as
void. Besides, there are few other void agreements which are explained below
---------------------- and also under the relevant topics.
---------------------- 1. Agreement by persons who are not competent to contract.(sec.11)
2. Agreement under mutual (bilateral) mistake of fact, material to the
----------------------
agreement.(sec.20)
---------------------- 3. Agreement with unlawful consideration or object.(sec.23)
4. Agreements, the consideration or object of which is unlawful in part.
----------------------
(sec.24)
---------------------- 5. Agreement without consideration.(sec.25)
6. Agreement in restraint to Marriage.(sec.26)
----------------------
7. Agreement in restraint of trade.(sec.27)
---------------------- 8. Agreement in restraint of Legal Proceedings. (sec.28)
---------------------- 9. Agreements the meaning of which is uncertain (Sec 29)
10. Wagering Agreements (Sec 30)
----------------------
11. Agreements to do impossible acts (Sec 56)
----------------------
6.2 TYPES OF VOID AGREEMENT
----------------------
1. Agreement by persons who are not competent to contract.(sec.11)
----------------------
An agreement to which one of the parties is a minor or person of unsound
---------------------- mind or person suffering from any legal disqualification is void.
---------------------- 2. Agreement under mutual mistake of fact material to the agreement.
(sec.20)
----------------------
When consent is based on a bilateral mistake of a material fact, the
---------------------- agreement is void.
74 Law of Contracts
3. Agreement with unlawful consideration or object.(sec.23) Notes
Section 23 provides for five types of objects or considerations which are
regarded as unlawful. Thus if the object or consideration of Agreement is ----------------------
unlawful, the agreement is void. For example An agreement to commit a ----------------------
crime or an agreement to commit fraud upon someone etc.
4. Agreements, the consideration or object of which is unlawful in part. ----------------------
(sec.24) ----------------------
At times in an agreement, there are several considerations or several
objects. If one of the several considerations or objects is unlawful, the ----------------------
agreement is void. E.g. A appoints B as a supervisor for a monthly salary ----------------------
of Rs. 10,000/-. If B has to supervise legal as well as illegal business
of A, then the agreement is void because the object of B’s promise and ----------------------
consideration for A’s promise is partly unlawful.
----------------------
5. Agreement without consideration.(sec.25)
If there is no consideration then there is no contract. There are 3 exceptions ----------------------
to this rule. An agreement without consideration is void, except -
----------------------
 Agreements out of natural love and affection.
----------------------
 Agreements to compensate for something done voluntarily in the past.
 Agreement to pay a time-barred debt. ----------------------
We have already discussed the above rule with exceptions in a separate ----------------------
topic of ‘No consideration - No contract’ in the earlier lesson.
6. Agreement in restraint to Marriage.(sec.26) ----------------------
‘Every agreement in restraint of the marriage of any person (other than ----------------------
a minor) is void’. Sec.26 recognises the right of every adult person to
get married as per his choice. Any agreement restricting such right either ----------------------
wholly or partly is not recognized by law. Restraint of marriage means any ----------------------
restriction or limitation on a person’s right to marry at any time and with
the person of his choice. The section is however not applicable to minors. ----------------------
Therefore minors can be restricted from getting married. Following are
some illustrations:- ----------------------
 A agrees with B not to marry throughout his life for a consideration ----------------------
of Rs. 50,000/- is a void agreement.
----------------------
 A agrees to pay B Rs. 50,000/- if B does not marry with C. It is a
partial restraint and is therefore void. ----------------------
 X promises to marry Y only and to pay Rs. 5000/- in default. X
----------------------
married Z and Y and Y sued X for recovering Rs. 5000/-. It was held
that Y could not recover because the agreement was in restraint of ----------------------
marriage (Lowe Vs. Peers, an old English case-law)
----------------------
 However an agreement between co-widows that if any one of them
remarries, she will forfeit her share in their deceased husband’s ----------------------
estate, was not held to be an agreement in restraint of marriage as
no restraint was imposed upon remarriage of the parties. ----------------------

Notes 7. Agreement in restraint of Trade, is void (Sec. 27)
Sec. 27 provides that every agreement by which any one restrained from
----------------------
exercising a lawful profession, trade or business of any kind, is to that
---------------------- extent void. Every person has a right to choose his own lawful profession,
trade business, employment. Any agreement which puts restrictions on
---------------------- such right completely or partially, is a void. A complete restraint is that
which prevents a party from carrying on any business at all. A partial
----------------------
restraint prevents a person from carrying a business within a particular
---------------------- locality or for a particular time. A partial restraint may be thus in terms
of time, nature of business, geographical area etc. At times, only a certain
---------------------- clause of an agreement is putting restrictions, then the agreement is void
only to that much extent.
----------------------
The section talks about only lawful trade, business etc. Even our
---------------------- Constitution of India, Article 19 (g) recognizes this right of every individual.
It is in the interest of the country that everyone should be free to carry on any
----------------------
lawful trade or occupation. Moreover, the public policy also requires that every
---------------------- man should be at liberty to work for himself and to exercise his powers and
capacities for his own benefits. For example, A is running a laundry in one
---------------------- premise. B wants to run a laundry in the adjacent premises. A agrees to pay Rs.
5 lakhs to B if B does not run a laundry in that premises. The agreement is void
----------------------
and not a contract.
---------------------- Similarly, an agreement to close a mill for three months in a year or an
agreement that one party would sell beef only for fourteen days in a month were
----------------------
held to be void.
---------------------- However this provision is subject to some exceptions.
---------------------- Exceptions: In the following agreements the restrictions are allowed if they
are reasonable -
----------------------
In contract of sale of goodwill: When a seller sells his business along with
---------------------- its goodwill, the buyer can restrict the seller from carrying on a similar business
in the nearby locality for a reasonable period of time. Goodwill of a business
---------------------- is an intangible asset which arises out of the good reputation as to quality of
---------------------- goods sold or services rendered. However, for the application of this restriction,
following conditions must be fulfilled.
----------------------
 The restriction should specify the local limits i.e. the seller can be restrained
---------------------- within certain territorial or geographical limits.
 The restriction must be reasonable. The reasonableness will depend upon
----------------------
various factors. For example, price paid for goodwill, the area within which
---------------------- the goodwill is effectively enjoyed.
 The restriction should apply only for such period for which the business
----------------------
sold is actually carried on by the buyer or by any person who derived his
---------------------- title from the buyer.
----------------------  The restriction should be about carrying on a competing business only.
76 Law of Contracts
 There should be reasonable goodwill to be sold. Notes
Exceptions under the Partnership Act 1932: As per the provisions of this Act,
----------------------
agreement in restraint of trade is enforceable in following situations-
 Agreement restraining a partner from carrying on any business other than ----------------------
the business of the firm.
----------------------
 Agreement restraining an outgoing partner from carrying on a business
similar to that of the firm. ----------------------
 Agreement restraining all partners in anticipation of dissolution from ----------------------
carrying out a business similar to that of the firm.
----------------------
 Upon the dissolution of firm, the partner who accepts the goodwill of the
partnership business, as his share in the assets of the firm, can restrain the ----------------------
other partners from starting a similar business.
----------------------
Service Contracts: Employer can put few restrictions on employee such as
not to accept any job simultaneously provided they are reasonable restrictions. ----------------------
However the restriction must be reasonable.
----------------------
Exceptions under judicial decisions
----------------------
 Restraints in trade combinations - It is a normal practice for traders or
manufacturers to form associations in order to carry out their business in an ----------------------
organized manner and to regulate and promote business. Such associations
aim to eliminate ruinous competition. Thus, an agreement between the ----------------------
manufacturers and traders not to sell the goods below a certain price does
----------------------
not amount to restraint of trade.
 Restraints in sole or exclusive dealing agreements - A producer or ----------------------
manufacturer may agree to sell all his goods to one agent or distributor who ----------------------
in turn agrees not to buy his requirements from any other producer. Such
agreements are upheld by the courts. ----------------------
8. Agreement in restraint of legal proceeding is void (sec.28) ----------------------
Every person has a right to enforce his legal rights. Moreover justice also
requires that one should be free to go to the court of law for the enforcement ----------------------
of his legal rights. An agreement which interferes with the course of justice ----------------------
is void as it is opposed to public policy. Thus in case of breach of contract
by other party, one can file a case or enjoy his right of taking legal action ----------------------
against another.
----------------------
As per Sec 28, if any agreement, prohibits or restricts such person totally
or partly from taking judicial proceedings in respect of any right based on a ----------------------
contract, is a void agreement. Similarly any restriction imposed with respect
----------------------
to time within which the legal action can be enforced is also void agreement.
Examples ----------------------
1. A agrees to sell his house to B with a condition that B will not approach the ----------------------
court if the transaction is not completed by A within two years. The condition
is void. ----------------------

Notes 2. A and B agree that in case of a non performance of promise by any of them,
the other party can approach the court for remedy only within six months.
---------------------- It is a void agreement.
---------------------- Exception: However an agreement by parties to a contract to refer any existing
dispute or future dispute to arbitration is not void. Arbitration is a process in which
---------------------- dispute is determined by a third party of the choice of the contracting parties.
Thus the parties refer their dispute to the arbitrator instead of going to the court.
----------------------
Arbitration forms an exception because it reduces the burden of the judiciary.
---------------------- By making an arbitration provision in the contract, the right of taking legal action
is not curtailed but merely postponed. Reference to an Arbitration proceedings
----------------------
however should be with the consent of all the parties. It may be noted that the
---------------------- right to proceed against arbitrator’s award cannot be excluded by the agreement.
9. Agreement void for uncertainty (Sec 29)
----------------------
Sec. 29 states that ‘Agreement the meaning of which is not certain, or capable
---------------------- of being made certain, are void’. Whenever any agreement is ambiguous,
---------------------- uncertain, vague or is not capable of interpretations is declared as a void
agreement by Contract Act.
---------------------- E.g.
---------------------- 1. A agrees to sell his car to B for Rs 1 lakhs or Rs 2 lakhs. If there is nothing
to show which of the two prices was finalized then the agreement is void
---------------------- for uncertainty.
---------------------- 2. A agrees to sell to B ‘hundred tons of oil’. There is nothing to show which
kind of oil was intended. Then the agreement is void for uncertainty.
----------------------
3. A agrees to sell to B ‘Hundred tons of oil’. If A deals only in coconut oil
---------------------- then the agreement can be made certain and is therefore a contract.
---------------------- 4. A agrees to sell to B ‘all the grain in his warehouse in Pune’. Even though
the quantity is not certain, it can be made certain after weighing the grain
---------------------- and price can be then ascertained. Therefore it is a contract.
---------------------- 10. Wagering Agreements (Sec 30)
---------------------- The term wagering agreement or wager may be defined as an agreement

in which one person agrees to pay a certain amount of money to another
---------------------- person on the happening or non happening of a specified uncertain event.
The wagering agreements are void. The term wager is not defined under the
---------------------- Indian Contract Act but is explained by courts.
---------------------- Essentials of Wager
----------------------  The agreement depends on an uncertain event.
 There are only two parties who profess exactly opposite views about
----------------------
happening or non happening of that uncertain event.
----------------------  Parties have no control on the happening or non happening of the event.
----------------------  There must be an equal probability of its happening and non-happening.
78 Law of Contracts
 There should be an equal chance for a party for winning or losing the bet. Notes
 The parties are not interested in the event as such.
----------------------
 The consideration is always in terms of money or money’s worth.
----------------------
There are certain exceptions to the above rule as follows:-
 Horse racing ----------------------
 Teji mandi agreements (share market transactions) ----------------------

 Skill competition like solving cross word puzzles, competitions like ‘Kaun ----------------------
Banega Karodpati’ etc.
----------------------
 State run lottery
11. Agreements to do an Impossible Act (Sec. 56) ----------------------
It refers to an initial impossibility of performance. As per Sec 56(1) an agreement ----------------------
to do an act impossible in itself is void. For example, A agrees to sell his house
at Ahmedabad to B in ignorance of the fact that the house was destroyed in an ----------------------
earthquake. It is a void agreement as there exists initial impossibility.
----------------------
----------------------
----------------------
----------------------
1. An agreement to remain unmarried is
----------------------
i. Valid
----------------------
ii. Voidable
iii. Void ----------------------
iv. Unenforceable ----------------------
2. An agreement not to pursue any legal remedy to enforce the rights ----------------------
under Section 28 is
i. Valid ----------------------
ii. Voidable ----------------------

iii. Void ----------------------
3. An agreement by way of wager under Section 30 is
----------------------
i. Void
----------------------
ii. Voidable
iii. Valid ----------------------
----------------------

Notes
4. An agreement not to pursue legal remedies but to refer the dispute to
---------------------- the arbitrator under Section 28 is
---------------------- i. Valid
ii. Voidable
----------------------
iii. Void
----------------------
iv. Unenforceable
---------------------- 5. An agreement restraint of trade is valid under Section 27 if relates to
---------------------- i. Sale of goodwill
---------------------- ii. Mutual adjustment
iii. Business contingency
----------------------
iv. None of the above
----------------------
----------------------
Activity 1
----------------------
---------------------- 1. A agrees with B for good consideration that he will not marry C. Is this
a void agreement?
----------------------
2. An agreement to sell all produce to a certain party, with a stipulation that
---------------------- the purchaser was bound to accept the whole quantity, was held valid
because it aimed to promote business and did not restrain it (Mackenzie
---------------------- vs Striramiah). But where in a similar agreement the purchaser was free
---------------------- to reject the goods (i.e., was not bound to accept the whole quantity
tendered), is that a valid agreement?
----------------------
---------------------- Summary
----------------------
A void agreement is one which is not enforceable by law. The following
---------------------- agreements are declared as void.
 Agreement by persons who are not competent to contract.(sec.11)
----------------------
 Agreement under mutual (bilateral) mistake of fact, material to the
---------------------- agreement.(sec.20)
 Agreement with unlawful consideration or object.(sec.23)
----------------------
 Agreements, the consideration or object of which is unlawful in part.
---------------------- (sec.24)
 Agreement without Consideration.(sec.25)
----------------------
 Agreement in restraint to Marriage.(sec.26)
----------------------  Agreement in restraint of Trade.(sec.27)
----------------------  Agreement in restraint of Legal Proceedings. (sec.28)
80 Law of Contracts
 Agreements the meaning of which is uncertain (Sec 29) Notes
 Wagering Agreements (Sec 30)
----------------------
 Agreements to do Impossible Acts (Sec 56)
----------------------
Keywords
----------------------
●● Agreement in restraint of Marriage: If a total or partial restraint is put
on the freedom of marriage of an adult individual, it is an agreement in ----------------------
restraint of marriage. ----------------------
●● Agreement in restraint of Trade: If a total or partial restraint is put on
the freedom of carrying on any lawful occupation, trade or business it is ----------------------
an agreement in restraint of trade ----------------------
●● Agreement in restraint of Legal Proceedings: If a total (and not partial)
restraint is put on the right of a party to file a suit and enforce his claim, it ----------------------
is an agreement in restraint of legal proceedings ----------------------
●● Wagering Agreement: It is of gambling nature. It always has two parties
or two sides taking an exactly opposite view about the happening and non ----------------------
happening of an uncertain event. Parties are not interested in the event. It ----------------------
is a pass time exercise of an empty mind. It is void on grounds of public
policy. ----------------------
Self-Assessment Questions ----------------------
----------------------
1. What are void agreements?
2. What is meant by an agreement in restraint of Marriage? ----------------------
3. An agreement in restraint of Trade is void. Explain this rule and state the ----------------------
exceptions if any.
----------------------
4. An agreement in restraint of Legal Proceedings is void. Elaborate along
with the exception if any. ----------------------
5. What is an Uncertain Agreement? When is it void? ----------------------
6. What do you understand by a wagering agreement?
----------------------
----------------------
----------------------
1. An agreement to remain unmarried is ----------------------

iii. Void ----------------------
2. An agreement not to pursue any legal remedy to enforce the rights under
----------------------
Section 28 is
iii. Void ----------------------

Notes 3. An agreement by way of wager under Section 30 is
i. Void
----------------------
4. An agreement not to peruse legal remedies but to refer the dispute to the
---------------------- arbitrator, under Section 28 is
---------------------- iii. Void
---------------------- 5. An agreement in restraint of trade is valid under Section 27 if it relates to

i. Sale of goodwill
----------------------
----------------------
Suggested Reading
----------------------
---------------------- Press.
---------------------- 2. Iyer, T.S. Venkatesa. 2001. The Law of Contract. Hyderabad: Gogia
Publication.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
82 Law of Contracts
Contingent Contracts (Sec. 31 to 36)
UNIT
7
Structure:
7.1 Definition and Meaning of Contingent Contract
7.2 Essentials of a Valid Contingent Contract
7.3 Rules of Enforcement of Contingent Contracts
7.4 Differences Between Wagering Agreements and Contingent Contracts
Summary
Key Words
Suggested Reading
Contingent Contracts (Sec. 31 to 36) 83

Notes
Objectives
----------------------
• Analyse the contingent contracts
----------------------
• Explain the rules of enforcement of contingent contracts
----------------------
• Distinguish between contingent contracts and wagering agreements
----------------------
---------------------- 7.1 DEFINITION AND MEANING OF CONTINGENT

CONTRACTS
----------------------
A Promise made in a contract is ‘absolute and unconditional promise’.
---------------------- Absolute promise is one which promisor undertakes to perform in any event. A
---------------------- promise is conditional when performance is due only if an event collateral to
the contract does or does not happen or the promise has to be performed after
---------------------- certain period has been elapsed. In case of some contracts, the rights created by
the parties against each other may not be immediately enforceable. Such rights
---------------------- may be enforceable on the happening or not happening of some future event.
---------------------- Such types of contracts are called Contingent Contracts. Contingent Contracts
contain a conditional promise.
---------------------- The Indian Contract Act, in section 31 defines contingent contract as follows:
---------------------- 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.
----------------------
Example of Contingent Contracts
----------------------
 A Contracts to pay Rs. 10,000 to B if his (B’s) house is burnt is a contingent
---------------------- contract that depends upon an uncertain event, that is burning of house.
 All insurance contracts are contingent contracts. If the subject matter insured
----------------------
is damaged or lost, then only the Insurance Company has promised to pay
---------------------- the money.
 A mortgages his house with B for a certain amount. C stands guarantor for
----------------------
A. Here C promises to pay the amount to B if A unable to repay. C’s promise
---------------------- as a guarantor is a contingent promise.
 A takes a loan from a Bank. C & D are sureties for A who promises to repay
----------------------
the loan if A fails to pay. The contract of surety involves contingent promises.
----------------------
---------------------- 7.2 ESSENTIALS OF A VALID CONTINGENT CONTRACT

---------------------- If the legal definition is analysed certain essential elements of a contingent
contract are revealed. They are as follows-
----------------------
1. There must be a valid contract - It is the essential requirement of a valid
---------------------- contingent contract that there must be an agreement that is enforceable by
84 Law of Contracts
law between the parties. In other words, a contract to do or not to do must Notes
be legally valid which fulfills all the requirements of a contract.
----------------------
2. The performance of contingent contract depends on a condition
----------------------
It is an important requirement of a valid contingent contract that its
performance must be conditional. In other words, the performance of a ----------------------
contingent contract must depend upon the happening or non-happening of
----------------------
some condition. This condition is called as contingency.
----------------------
3. The Contingency must be some future event which is uncertain.
Contingency means happening or non- happening of a future uncertain ----------------------
event. The event may happen or may not happen. If the event is certain, ----------------------
it means it is bound to happen, then the contract is not contingent contract.
In a decided case, where A agreed to sell his land to B after obtaining ----------------------
certain necessary permission from the collector. As a matter of course, the
----------------------
permission was generally granted on fulfillment of certain formalities. This
contract was not regarded as contingent contract as the granting of permission ----------------------
is not uncertain event.
----------------------
4. The contingent event must be collateral to the contract:
----------------------
Collateral means subordinate but from the same source, connected but aside
from the mainline. The uncertain event, upon which the performance of the ----------------------
contract depends, must not form a part consideration of the contract. In ----------------------
other words, the event must be independent or ancillary to the contract. For
example, A agreed to purchase a horse from B for Rs.50,000 if the horse ----------------------
proved lucky. It is not a contingent contract as the event (luck of a horse)
----------------------
is directly connected with the contract. Similarly a contract for the sale of
goods to be delivered on arrival is an absolute contract and not contingent ----------------------
contract.
----------------------
5. The event may be an act of the party:
----------------------
It is an essential requirement of the contingent contract that it is dependent
of some future event. The event upon which the performance of the contract ----------------------
depends, may also be an act of a party. What is necessary is that the act is ----------------------
uncertain.
----------------------
6. The event should not be the discretion on the promisor.
It must be noted that ‘mere will or discretion’ of the promisor is ----------------------
not the event for the purpose of the contingent contract. Thus, if ----------------------
the performance of the contract depends upon the sweet will of the
promisor, it is not the contingent contract. Such a contract is void ----------------------
on the ground of uncertainty.
----------------------
----------------------

Notes
----------------------
---------------------- 1. ___________ of the Indian Contract Act defines contingent contract.

----------------------
1. A contingent contract
---------------------- i. Is void
---------------------- ii. Never becomes void
---------------------- iii. Becomes void when the event becomes impossible

iv. Is voidable
----------------------
----------------------
---------------------- Activity 1
----------------------
Mr. Pal contracts to pay Mr. Nath Rs. 1 lakh if Asha’s house is destroyed. Is
---------------------- it a contingent contract or waging contract? Give reasons.
----------------------
----------------------
7.3 RULES OF ENFORCEMENT OF CONTINGENT
CONTRACTS
----------------------
The contingent contracts are perfectly valid and enforceable only upon the
---------------------- happening or non-happening of the uncertain event. The contingent contract
cannot be enforced till the event, on which its performance depends, has arisen.
----------------------
Sections 32 to 36 of the Indian Contract Act, 1972 lay down rules of enforcement
---------------------- of contingent contracts.
Rule 1: Enforcement of contract contingent on happening an event (Section
----------------------
32)
---------------------- Contracts contingent upon happening of an uncertain future event cannot be
---------------------- enforced by law unless and until that event has happened. If the event becomes
impossible, the contract becomes void.
---------------------- For example, A offered to sell his horse to B for Rs. 40,000. Afterwards, A
---------------------- entered into contract with C to sell the same horse to him at Rs.3500 if B refused
to buy it. The contract between A and C is contingent and can be enforced only
---------------------- when B refuses to buy the horse from A.
---------------------- It may be noted that if the event becomes impossible, such contract becomes
void and can not be enforced by law.
----------------------
86 Law of Contracts
Rule 2: Enforcement of contracts contingent on non happening of an event Notes
(Section 33)
----------------------
Contracts contingent upon non-happening of an event, can be enforced when
the happening of that event becomes impossible and not before. In such cases, ----------------------
the contract cannot be enforced when the event takes place.
----------------------
For example, A agreed to pay B Rs. 5000 if a certain ship does not return
to India. If the ship sinks on its way the contract can be enforced. ----------------------
However, if the event happens or does not become impossible, then such
----------------------
contract becomes void and can not be enforced. In the above example, if the
ship returns, the contract becomes void. ----------------------
Rule 3: When event to be deemed impossible (Sec. 34) ----------------------
Sometimes, contracts are contingent upon future conduct of a living person.
The future conduct of a living person is an event for the purpose of the contingent ----------------------
contract. Such an event is considered to be impossible if such person does any ----------------------
act by which it becomes impossible to perform the contract within any definite
time. The Indian Contract Act in Rule 34 provides that- ----------------------
‘If the future event on which the contract is contingent is the way in which ----------------------
a person will act at an unspecified time, the event shall be considered to become
impossible when such person does anything which renders it impossible that ----------------------
he should so act within any definite time, or otherwise than under further
contingencies.’ Since a person’s behavior is unpredictable, the contracts have to ----------------------
be deemed impossible at times. ----------------------
For example, A agrees to pay B a certain amount of money when B marries
----------------------
C. But C marries D. Since, the marriage of B to C becomes impossible, such
contract is deemed impossible. Although it is possible that D may die and C may ----------------------
afterwards marry B. Thus the contract is postponed to a further contingency.
----------------------
Rule 4: Happening of an event within a fixed time (Sec. 35)
This rule is an extension of the 1st Rule. Sometimes, a contingent contract ----------------------
is dependent on the happening of a specified uncertain event within fixed time.
----------------------
In such cases, the contract can be enforced if that event happens within fixed
time. ----------------------
Contracts contingent upon the happening of an event within fixed time, ----------------------
become void if (a) at the expiry of time fixed the event has not happened, or (b)
before the time fixed expires, such event becomes impossible. ----------------------
A promises to sell his old T.V. to B for a certain amount of money, if he ----------------------
gets a new T.V. from Singapore within 6 months. It is a contingent contract. The
contract becomes void if A does not get a new T.V. within six months. ----------------------
Rule 5: Non-happening of an event within a fixed time (Sec. 35) ----------------------
This rule is an extension of the 2nd Rule. Contracts contingent upon the
----------------------
non-happening of an event within fixed time, may be enforced when:
a) the time fixed expires and the event has not happened or ----------------------

Notes b) before the time fixed expires, such event becomes impossible.
A promises to pay B a certain amount of money if a certain ship does not
----------------------
return to India within one year. The contract can be enforced if the ship does not
---------------------- return within one year, or sinks or is destructed within one year.
A agrees to sell his house to B for Rs. 10,000/- if his father did not return
----------------------
from U.S. within three years. It is a contingent contract and can be enforced if
---------------------- A’s father does not return within three years.
Rule 6: Agreement contingent on impossible events is void (Sec. 36)
----------------------
Contingent agreements to do or not to do something, if an impossible event
---------------------- happens, are void, whether the impossibility of the event is known or not known
---------------------- to the parties to the agreement at the time of making it.
The rule involves two situations:
----------------------
1. Where impossibility of event is known to the parties, but still they enter into
---------------------- contract.
---------------------- 2. Where impossibility of event was not known to the parties and they discover
afterwards that the agreement is void.
----------------------
E.g.
---------------------- 1. A agrees to pay B Rs. 1,000 if two parallel lines meet each other. Agreement
---------------------- is void.
2. A agrees to pay Rs. 10,000 to B when B marries C.C. was dead at the time
---------------------- of agreement which the parties did not know. The agreement is void.
----------------------
----------------------

---------------------- 1. A contingent contract to do or not to do anything on the happening of
---------------------- an uncertain future event under Section 32
i. Is never enforceable
----------------------
ii. Becomes enforceable only on the happening of that event
---------------------- iii. Is enforceable since the time of making it
---------------------- iv. Becomes enforceable in the immediate possibility of happening
of that event
---------------------- 2. A contingent agreement based on an impossible event under Section
---------------------- 36
i. Is void
----------------------
ii. Is valid.
---------------------- iii. Is voidable
---------------------- iv. None of the above
88 Law of Contracts
Notes
3. A contingent contract based on the specified uncertain event happening
within a fixed time under Section 35 ----------------------
i. Remains valid even if the event does not happen within that ----------------------
fixed time
ii. Becomes void at the expiration of the time fixed ----------------------
iii. Becomes void if the happening of that event becomes impossible ----------------------
before the expiry of time fixed
----------------------
iv. Both ii and iii.
----------------------
----------------------
Activity 2 ----------------------
My grandfather is fond of horses. He has already got one good horse for ----------------------
running in the race. Mr. Kate has a horse, which has a good record in the
----------------------
race. He wanted to sell his horse due to some financial problem. He already
made an offer to Mr. Prashant to buy his horse. My grandfather entered into ----------------------
a contract to buy Mr. Kate’s horse at a specified price of Rs.5,00,000, if Mr.
Prashant, to whom the horse has been offered, refuses to buy it. Under what ----------------------
circumstances can this contract be enforced by law?
----------------------
----------------------
7.4 DIFFERENCES BETWEEN WAGERING AGREEMENTS
AND CONTINGENT CONTRACTS ----------------------
----------------------
Wagering agreements and contingent contracts are similar with respect to
their dependency on future uncertain event. But there are many differences also. ----------------------
Wagering Agreement Contingent Contract ----------------------

1 It is absolutely void agreement and 1 It is a perfectly valid and can be ----------------------
can not be enforced by law. enforced in the court of law.
----------------------
2 There are reciprocal promises 2 There may or may not be reciprocal
promises ----------------------
3 Future uncertain event is the 3 Future uncertain event is collateral ----------------------
essential element for the agreement to the main purpose of the contract
4 No personal interest of parties 4 The parties are interested in ----------------------
involved except for gambling. happening of the event. e.g. ----------------------
Insurance contracts-Security of
subject matter ----------------------
----------------------
----------------------

Notes Summary
---------------------- ●● contingent contract is a contract to do or not to do something, if some
A
event collateral to such contract, does or does not happen.
----------------------
●● he performance of contingent contract depends upon happening or non-
T
---------------------- happening of some event in future. To be a contingent contract, the future
event must be uncertain and it must be collateral to the contract.
----------------------
●● Rules regarding Contingent Contract:
---------------------- 1. If a contingent contract is to be performed provided an uncertain
---------------------- future event happens, it cannot be enforced until the event has
happened.
----------------------
2. If a contingent contract is to be performed provided an uncertain
---------------------- future event does not take place, the contract cannot be enforced till
the happening of event becomes impossible.
----------------------
3. If a contingent contract depends for its performance for on act of
---------------------- the promisor, the contract becomes void when the performance of
such act becomes impossible.
----------------------
4. If a contingent contract contemplates an act, if a specified event
---------------------- happens within a fixed time, the contract becomes void if the event
does not happen within fixed time.
----------------------
5. If a contingent contract contemplates an act, if a specified event
---------------------- does not happen within a fixed time, the contract becomes void if
the event takes place within fixed time.
----------------------
6. A contingent contract to do or not to do anything, if an impossible
---------------------- event happens is void, whether or not the impossibility is known to
the parties.
----------------------
---------------------- Keywords
---------------------- ●● Contingent Contract: 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.
---------------------- ●● Event: Happening or non-happening or something done, an act or
abstinence; it is either a happening, non-happening or an act or omission
---------------------- of the party.
---------------------- ●● Collateral event: It is an event which is ancillary to the main purpose of
the contract. In the context of contingent contract it is an uncertain future
---------------------- event.
---------------------- ●● Wagering Agreement: An agreement in which one person agrees to pay
certain amount of money (it is called as stake money) to another person
---------------------- on happening or non-happening of a specified uncertain event.
----------------------
90 Law of Contracts
Notes
----------------------
1. What do you understand by the term Contingent Contract?
2. What are the essentials for a valid contingent contract? ----------------------
3. Enumerate the rules of enforcement of the Contingent Contract. ----------------------
4. Distinguish between the Contingent Contract and a Wagering Agreement. ----------------------
5. What is the validity of the contingent contract dependent on-
----------------------
 an impossible event?
----------------------
 the future conduct of the person?
----------------------

Fill in the blanks. ----------------------
1. Section 31 of the Indian Contract Act defines contingent contract.
----------------------
----------------------
1. A contingent contract
iii. Becomes void when the event becomes impossible ----------------------
----------------------
----------------------
1. A contingent contract to do or not to do anything on the happening of an
uncertain future event under Section 32 ----------------------
iv. Becomes enforceable in the immediate possibility of happening of ----------------------

that event
----------------------
2. A contingent agreement based on an impossible event under Section 36
----------------------
i. Is void
3. A contingent contract based on the specified uncertain event happening ----------------------
within a fixed time under Section 35
----------------------
iv. Both ii and iii.
----------------------
----------------------
Suggested Reading
----------------------
Press. ----------------------

Notes 3. Iyer, T.S. Venkatesa. 2001. The Law of Contract. Hyderabad: Gogia
Publication.
----------------------
---------------------- Chand & Sons.
----------------------
----------------------
---------------------- 8. Srivastava, S.C., and Venkoba Rao. 2001. Law of Agency. Butterworths.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
92 Law of Contracts
Performance of Contract
UNIT
8
Structure:
8.1 Meaning of Performance
8.2 Who Must Perform
8.3 ‘Tender’ or Offer of Performance
8.4 Performance of Joint Promises (Sec.42 to 45)
8.5 Time, Place, Manner of Performance (Sec. 46 to 50 & Sec. 55)
8.6 Performance of Reciprocal Promises (Sec. 51 to 54 & 57)
8.7 Appropriation of Payments (Sec. 59,60,61)
Summary
Key Words
Suggested Reading
Performance of Contract 93
Notes
Objectives
----------------------
• Explain the meaning and concept of performance of contract
----------------------
• State the essentials of a valid tender of performance
----------------------
• Evaluate the rules as to time and place of performance
---------------------- • Appraise the components of rules as to performance of joint promises
---------------------- and reciprocal promises
----------------------
8.1 MEANING OF PERFORMANCE
----------------------
After the stage of formation of contract, the next stage is the performance
---------------------- of contract. The contracts are formed for the purpose of performing the promises
---------------------- and completing the contractual duties.
Sec. 37 of the Contract Act states-
----------------------
“The parties to the 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”
----------------------
Every contract creates legal obligations. ‘Performance of Contract’ means
---------------------- carrying out of these obligations. So each party must perform or offer to perform
his promise under the contract, unless it is excused or exempted by any law.
----------------------
---------------------- 8.2 WHO MUST PERFORM

----------------------
It is the promisor who must basically perform the promise. But sometimes
---------------------- a few other persons may also perform.
Following persons can perform the contract:
----------------------
1. Promisor
----------------------
2. Promisor’s agent
---------------------- 3. Legal Representatives of promisor
---------------------- 4. Third Party
---------------------- 5. Joint Promisors
1. Promisor
----------------------
Primarily, every promisor of a promise must perform his promise. Promisor
---------------------- is the first person who is responsible or liable for performance. But at times some
---------------------- other person may perform on his behalf. If it appears from the nature of the
contract that the promise must be performed by the promisor himself, then such
----------------------
94 Law of Contracts
promise must be performed by promisor alone. Normally the contracts involving Notes
personal skill or personal consideration of the promisor must be performed by
promisor himself. ----------------------
Examples:- ----------------------
 A is a renowned painter. A promises to paint a picture for B for a certain ----------------------
amount. Here A‘s promise to paint a picture must be performed by A alone.
----------------------
 X is a famous singer. Y organized X‘s musical performance. Here X must
personally perform his promise. ----------------------
Thus all the Contracts of personal nature involving personal skills of ----------------------
promisor must be performed by promisor alone.
----------------------
E.g. Contracts of singing, painting, marrying, contracts of technical
nature etc. It must be noted that in such contracts, if the promissor dies before ----------------------
performance, the contract comes to an end. Thus in example number 1, if A dies
before the picture was completed, the contract is ended. ----------------------
2. Promisor‘s Agent ----------------------
Except for contracts of personal skills, the promisor can appoint an agent ----------------------
for performance of the contract. However the agent must be a competent person
for the purpose of contract. ----------------------
3. Legal Representatives ----------------------
In case of the death of the promisor, the legal representatives of the promisor ----------------------
must perform unless the contrary intention appears in the contract. Thus legal
representatives enter into the shoes of the promisor only after his death and not ----------------------
before it.
----------------------
However contracts of personal skills cannot be performed by the Legal
representatives. Such contracts come to an end after the death of the promisor. ----------------------
E.g X promises to marry Y. X dies before the marriage was solemnised. X’s ----------------------
legal representative cannot perform this contract.
----------------------
4. Third Party
----------------------
A contract can be performed by a third party who is not a party to the
contract, on behalf of the promisor. Section 41 states that when a promisee accepts ----------------------
performance of the promise from a third person, he cannot afterwards enforce
----------------------
it against the promisor.
5. Joint Promisors ----------------------
Where there are more than one promisors or promisees, it is a joint promise. ----------------------
In a joint promise, all the joint promissors jointly have to perform the promise
or in case of death of any of them, his legal representatives along with surviving ----------------------
joint promisors must perform. ----------------------
----------------------
Notes
----------------------
---------------------- 1. ‘Performance of Contract’ means carrying out of contractual obligations.

---------------------- 1. A promisee can accept the performance
---------------------- i. From the promisor himself
ii. From the representative of the promisor competent to perform
----------------------
iii. From a third person
----------------------
----------------------
----------------------
8.3 ‘TENDER’ OR OFFER OF PERFORMANCE
----------------------
The performance of a contract begins with a ‘tender‘. This word tender
---------------------- is different than the word tender which we normally understand or interpret.
Whenever the performance begins, the promisor shows his willingness to perform
---------------------- by actually performing or offering his part of the contract. This “offer to perform”
---------------------- the contract is called as a ‘tender of performance‘.
Tender is made by the promisor to the promisee. Tender is the expression
---------------------- of promisor‘s desire to perform his part of the contract. Performance of contract
---------------------- begins with the promisor‘s offer to perform (i.e. tender).
However the tender has to be legal and valid in order to be binding on the
----------------------
promisee, for which the tender must satisfy following conditions.
---------------------- Requirements for Legal and valid tender (Section 38)
---------------------- 1. Tender must be unconditional
---------------------- Tender must be absolute and unconditional. A tender putting a new condition
or changing the terms of contract is no tender at all. The terms & conditions of
---------------------- contract once decided, the promisor cannot make any changes in it at the stage
of performance. The performance of the promise must be performance of all
---------------------- terms as they are.
---------------------- A tender becomes ‘conditional‘ when it is not in accordance with the terms
of the contract.
----------------------
E.g.
----------------------
 An offer (tender) to repay only the principal amount of debt to the creditor
---------------------- and not the interest payable on it is not a valid tender by debtor.
 Delivery of part of the goods on the due date is not a valid tender.
----------------------
96 Law of Contracts
2. Tender must be made at a proper time & place Notes
In contracts the tender must be made at a proper time & place of performance
----------------------
as decided in the contract. What is proper time & place depends on the intention
of the parties as reflected in the terms agreed between them or the circumstances ----------------------
of the case.
----------------------
Examples:
 Offering the delivery of goods after the working hours or on a weekly holiday ----------------------
is not a valid tender.
----------------------
 Tender made after the due date of performance or at a place other than agreed
upon, is not a valid tender. ----------------------
3. Reasonable Opportunity to the promisee ----------------------
For a valid tender of performance it is necessary that the promissor is both ----------------------
able and willing to perform his promise. The promisee must be given a reasonable
opportunity to ascertain the ability of the promisor to perform his promise, & also ----------------------
an opportunity of verifying that the things offered are the things agreed under
the contract. ----------------------
----------------------
E.g. A contracts to deliver 100 k g. of Basmati Rice to B‘s storehouse on
1 September. A must bring the 100 kg of Basmati rice on the appointed day &
st
----------------------
at the place agreed upon & under such circumstances that B has a reasonable
opportunity to satisfy himself about the quality and quantity of rice which is ----------------------
offered. Then only it is a valid tender.
----------------------
4. The tender must be of the whole of the obligation
----------------------
The offer to perform only a part of the promise is not a valid tender. The
tender of performance in installments is not a valid tender. E.g. A contracted to ----------------------
deliver B ten tables on 1st of December. A offers only five tables to B on the due
date of performance. It is not a valid tender and B may refuse the same. ----------------------
5. To a Proper Person ----------------------

Tender must be made to the proper person only i.e. to the promisee, or his ----------------------
duly authorised agent. Tender made to a stranger or a wrong person is not valid
tender. If there are several joint promisees, then tender made to any one of them ----------------------
is a valid tender. E.g. A contracted to deliver five hens to B on 1st May. On that
----------------------
date, A offers the hens to C, a friend of B. it is an invalid tender of performance.
6. The tender must be made in a proper form ----------------------
A valid tender of performance must also be made in a proper form. E.g. the ----------------------
tender of money by way of cheque is invalid if the payment was agreed to be
made in cash. ----------------------
Effect of a valid tender ----------------------
A valid tender made by the promisor is considered as equivalent to ----------------------
performance of promisor. Now it is the duty of the promisee to accept the valid
tender, & if he refuses, the contract is deemed to be broken by the promisee. On ----------------------
Notes promisee‘s breach, the promisor can sue the promisee.
Thus legal & valid tender amounts to performance of promise by the promisor.
----------------------
---------------------- 8.4 PERFORMANCE OF JOINT PROMISES (SEC. 42 TO 45)

----------------------
Certain promises are joint promises. When two or more persons make and/
---------------------- or give promises jointly these are joint promises. In joint promises there can be
either joint promisors or joint promisees or both.
----------------------
In any promise, a promisor is subjected to a duty and/or a promisee is entitled
---------------------- to a right. Therefore
A. If there are joint promisors there are joint liabilities (duties) and
----------------------
B. If there are joint promisees there are joint rights.
---------------------- A. Devolution of joint Liabilities
---------------------- When there are joint promisors, the sharing of their joint liabilities is to be
studied.
----------------------
Definition of joint promisors
----------------------
“When two or more persons make a joint promise to another person, the
---------------------- persons making the joint promise are known as joint promisors”.
---------------------- E.g. A, B, & C jointly agree to pay Rs.30,000 to D under a debt. A, B, &
C are joint promisors. Whenever there are joint promisors, the manner in which
---------------------- their responsibility is shared by them, or their Legal Representatives is called as
---------------------- devolution of joint liabilities.
Rules of devolution of joint liabilities.
----------------------
1. Devolution
----------------------
Devolution means passing over from one person to another. In case of death
---------------------- of any one of the joint promisors, his liability shifts upon his legal representatives.
In such case, the surviving joint promisors along with the legal representatives
---------------------- of deceased joint promisor must perform the promise. If all the promisors die,
then liability devolves upon their legal representatives jointly.
----------------------
2. Joint & Several Liabilities
----------------------
In India, the liability of the joint promisors is joint as well as several liability.
---------------------- Each promisor is bound to perform the promise jointly along with other & is also
individually liable to perform whole of the promise if compelled by the promisee.
----------------------
The promisee may compel all joint promisors to complete the whole promise
---------------------- or he may compel any one or few of them to complete the entire promise. Hence
it is called a joint & several liabilities.
----------------------
E.g. A, B &C jointly promise to pay Rs.30,000 to D under a contract. D
---------------------- may compel either A or B or C to pay the entire amount.
---------------------- In England, the liability of joint promisors is only joint & not several.
98 Law of Contracts
Therefore all joint promisors can be sued jointly but not severally by the promisee. Notes
3. Joint Promisors are liable to contribute equally
----------------------
If the promisee compels any one of the joint promisors to perform the entire
promise, then the other joint promisors continue to be liable to contribute in the ----------------------
performance.
----------------------
4. Right to Claim Contribution
----------------------
Where a joint promisor is compelled by promisee to perform the whole
promise, he can compel other joint promisors, to contribute equally to perform ----------------------
the promise.
----------------------
E.g. A, B & C jointly promise to pay Rs.30,000 to D. D compels A to pay
the entire amount. A pays it. Now A can legally recover Rs.10,000 each from B ----------------------
& C.
----------------------
5. Sharing of Loss
----------------------
If anyone of the joint promisors makes a default in such contribution or is
unable to pay, the remaining joint promisors must share the loss equally. ----------------------
E.g. A, B & C are jointly liable to pay Rs.30,000 to D. Their contribution
----------------------
is Rs.10, 000 each towards the debt. Meanwhile if A becomes insolvent and is
unable to pay anything then B & C must contribute 15,000 each. ----------------------
6. Release of one of the joint promisors ----------------------
The release of any of the joint promisors by the promisee, does not amount
to release of the other joint promisors. The remaining joint promisors continue ----------------------
to remain liable to the promisee for the performance of promise. ----------------------
B. Devolution of Joint Rights
----------------------
When there are joint promisees, they share joint rights.
----------------------
Definition of Joint Promisees
“When a person has made a promise to two or more persons jointly, they ----------------------
are called as joint promisees. E.g. A promises to pay Rs. 20,000 to B & C jointly.
----------------------
Here B & C are joint promisees.
Joint Right of Promisees ----------------------
The promisees enjoy the right of demanding performance from the promisor. ----------------------
This right of the joint promisees is joint only & not several. Thus any one of
them independently cannot enforce the performance from the promisor (unless ----------------------
so agreed under their contract). ----------------------
The right to claim performance rests with all the joint promisees jointly. In
case of death of anyone of them the right vests with legal representatives along ----------------------
with the surviving joint promisors jointly. ----------------------
In short, the joint promisees have to take a combined legal action against
----------------------
their promisor for demanding performance of the whole promise.
E.g. A promises to pay Rs. 20,000 to B & C jointly, under a contract. ----------------------
Notes B & C jointly can claim the entire amount of Rs.20,000. If B dies, his legal
representatives along with C have a joint right of claiming performance from A.
----------------------

----------------------
---------------------- 1. In case of joint promise, generally the performance must be by
---------------------- i. All the promisors jointly
---------------------- ii. Any one of them individually

iii. One not authorised to perform
----------------------
---------------------- 2. In cases of joint promise, generally a promisee can compel
---------------------- i. All the joint promisors to perform
ii. Any one of them to perform
----------------------
iii. Some of them to perform
----------------------
---------------------- 3. Generally, the joint promisors can
---------------------- i. Compel each other to contribute equally
ii. Not compel each other to contribute equally
----------------------
iii. Not compel each other to contribute
----------------------
---------------------- 4. In case of death of a joint promisor(s) the promisee
---------------------- i. Can enforce the contract against the survivor(s) of the said joint
promisor(s) along with the joint promisors who are alive
---------------------- ii. Cannot enforce the contract against the survivor(s) of the said
---------------------- joint promisor(s)
iii. Cannot enforce the contract against any of them
----------------------
iv. Both i. and ii.
----------------------
----------------------
---------------------- 8.5 TIME, PLACE AND MANNER OF PERFORMANCE

(Sec.46 TO 50 & Sec.55)
----------------------
The time, place & manner of performance of a contract are matters normally
---------------------- fixed at the desire & convenience of the promisee. If these matters are pre-decided
---------------------- then they can be determined from agreement between the parties to the contract.
----------------------
100 Law of Contracts

The various Rules regarding time & place of performance are: Notes
 When the time for performance is fixed & the promisor has promised to
----------------------
perform it without application by the promisee, then the promisor must
perform it at the time & place fixed in the contract, during business hours. ----------------------
(Sec. 47)
----------------------
 When the time for performance is not fixed & the promisor has promised
to perform it without application by the promisee, then the promisor must ----------------------
perform it within reasonable time. What is a reasonable time is a question
of fact & depends on the nature of contract. (Sec 46.) ----------------------
 When the time is fixed, but 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 & within business hours. (Sec.48) ----------------------
 If place of performance is not fixed, & the promise is to be performed without ----------------------
application (demand) from the promisee, then it is duty of promisor to apply
to promisee for fixing the place. (Sec.49) ----------------------
Examples:- ----------------------
 A owes B Rs.10, 000. B accepts some of A‘s goods in reduction of the debt. ----------------------
The delivery of the goods operates as a part-payment. Thus the manner of
performance is decided by the promise. ----------------------
 A promises to deliver goods at B‘s warehouse on a certain fixed day. On ----------------------
that day A brings the goods at the proper place but after the usual business
hours when the warehouse is closed & they are therefore not received in ----------------------
time. A has not performed his promise.
----------------------
Effect of Failure to perform within Fixed or Stipulated Time (Sec.55)
----------------------
The effect changes depending on whether Time is of essence of contract or not-
1. Contracts where Time is of Essence ----------------------
In certain contracts time factor is very important for the existence of contract. ----------------------
In such contract the parties must perform their contracts within stipulated time.
Whether time is of essence or not depends on the nature of contract, subject- ----------------------
matter of contract, object of the contract, terms decided between the parties etc. ----------------------
Normally in commercial contracts, time is regarded as essence of the contract.
But just because the parties mention time as essence of contract that does not ----------------------
mean that time factor is really of essence.
----------------------
In contracts where time is essence of the contract, if the contract is not
performed within fixed time, the contract becomes voidable at the option of the ----------------------
promisee. The promisee can claim compensation for the loss suffered by him
----------------------
due to non-performance on fixed Time.
However if the promisee accepts performance after the fixed time ----------------------
then promisee is supposed to have waived his right & he then cannot claim
----------------------
compensation for the loss suffered by him. But if he accepts the goods under
protest by giving a notice to promisor then he can claim compensation for the ----------------------
loss suffered by him.
Notes 2. Contract where Time is not Essence of the Contract
In contracts where time is not of essence, failure to perform within fixed
----------------------
time, the promisee is entitled to get compensation for the loss caused to him
---------------------- cannot set aside the contract.
The contract is not voidable at the option of promisee. Therefore promisee
----------------------
has to accept performance after the stipulated time & can claim compensation
---------------------- from promisor.
----------------------
----------------------

1. In a contract not specifying the time for performance, the promisor
----------------------
can perform the contract
---------------------- i. Within any time howsoever long it may be
---------------------- ii. Within the shortest time
---------------------- iii. Within a reasonable time

----------------------
2. The reasonable time for performance of a contract
----------------------
i. Is a question of fact
---------------------- ii. Is a question of law
---------------------- iii. Is a mixed question of fact and law
---------------------- iv. Is a question of prudence
----------------------
---------------------- 8.6 PERFORMANCE OF RECIPROCAL PROMISES

(Sec. 51 to 54 & 57)
----------------------
Definition & Meaning
----------------------
Certain contracts consist of future considerations. They are executory
---------------------- contracts. In such promises, there is a “Promise against a Promise”.
---------------------- Sec.2 (f) of the contract Act defines Reciprocal promises as under:
---------------------- “Promises which form the consideration or part of the consideration for
each other are called reciprocal promises”.
----------------------
A reciprocal promise means each party gives a promise in return of a promise.
---------------------- A promise against a promise is a good consideration. A contract consists of
reciprocal promises when one party makes a promise to do something in future,
---------------------- in consideration of a similar promise (to do something in future), made by the
other party. In commercial transactions, many times there are reciprocal promises
----------------------
made in contracts.

E.g. A promises to sell 100 computer tables to B after 15 days. B promises Notes
to pay the price after receiving the goods. In this contract there are reciprocal
promises. ----------------------
All the reciprocal promises are mutual i.e. exchanged amount the parties ----------------------
to a contract. But they can be of various types depending on their nature or
dependency on each other. ----------------------
Types of Reciprocal Promises ----------------------
1. Mutual & Dependent
----------------------
2. Mutual & Independent
3. Mutual & Concurrent ----------------------
1. Mutual & Dependent ----------------------

When the performance of one party depends on the performance of the ----------------------
other party, the promises are mutual & dependent promises. Thus one party
cannot perform unless the other party has performed his promise. Thus there ----------------------
is a sequence of performance which is either fixed by the parties themselves or ----------------------
which is presumed from the nature of promises.
E.g. ----------------------
 A promises to sell his car to B after one month & B promises to pay on the ----------------------
next day of getting the delivery of the car from A. Here A‘s promise has
to be performed first & then only B‘s promise can be performed. Thus B‘s ----------------------
promise is depending on A‘s promise for performance. ----------------------
 A promises to construct a house for B & B promises to supply the sand,
cement, wood, iron & other raw material required. Here A cannot perform ----------------------
unless B performs. They are mutual dependent promises. ----------------------
2. Mutual & Independent
----------------------
When the promises are to be performed by each party independently, without
waiting for the other party to perform his promise, they are called mutual & ----------------------
independent promises. Here the promises do not depend on each other for their
performance and can be independently performed. ----------------------
E.g. ----------------------
 A promises to sell certain machinery to B on 1st October and B promises to ----------------------
pay the money by installments.
 A promises to paint a picture for B and B promises to pay the money on a ----------------------
certain fixed day. Here both promises can be independently performed. ----------------------
3. Mutual and Concurrent
----------------------
When the promises are to be simultaneously performed, in a contract, they
are called mutual and concurrent promises. ----------------------
E.g. A & B contract that A shall deliver goods to B on 10th October & B ----------------------
promises to pay the price immediately on delivery. Here A & B are going to
perform simultaneously as decided in their contract. ----------------------

Notes Rules Regarding Performance of Reciprocal Promises
The reciprocal promises are to be performed in a certain manner guided by
----------------------
the following rules:
---------------------- 1. Regarding Simultaneous Performance (Sec.51)
---------------------- When a contract consists of reciprocal promises to be simultaneously
performed, a promisor need not perform his promise unless the promisee is ready
---------------------- & willing to perform his reciprocal promise.
---------------------- E.g. A promises to deliver goods to B on a certain day & B promises to pay,
immediately on delivery. Here A need not deliver the goods, unless B is ready
---------------------- & willing to pay the entire price. Similarly B need not pay unless A is ready and
---------------------- willing to deliver the goods on payment.
2. Order of Performance (Sec.52)
----------------------
If the order of performance is fixed by the parties expressly then they have to
---------------------- perform their promises, in the same sequence. If the order is not fixed expressly
then the promises shall be performed in that order which the nature of transaction
---------------------- requires.
---------------------- E.g. A promises to paint a picture for B & B promises to pay the price only
after completion of the picture. Here A should perform first and then only B can
----------------------
perform.
---------------------- 3. Effect of Preventing Performance (Sec.53)
---------------------- If one party prevents the other from performing his promises, the contract
becomes voidable at the option of the party prevented and he is also entitled to
---------------------- claim compensation from the other party for any loss which he has sustained
due to non-performance of contract.
----------------------
E.g. A & B contract that B shall execute certain work for A for Rs.10,000. B
---------------------- starts performing but A prevents him from doing. B has already partly performed.
---------------------- The contract is voidable at the option of B and B can rescind (cancel) the contract
and can claim compensation from A for the loss suffered by him.
---------------------- 4. Effect of Default in Performance (Sec.54)
---------------------- In Mutual and Dependent reciprocal promises, if the promisor of first promise
fails to perform then he cannot claim the performance of the reciprocal promise.
----------------------
He is also liable to compensate the loss of the other party.
---------------------- In mutual and dependent reciprocal promises, there is a sequence of
performance which is fixed. If promisor of 1st promise commits a default then
----------------------
he cannot demand the performance of second promise.
---------------------- E.g. A promises to supply raw material to B and B promises to construct a
house for A. Here A should perform first. A commits a default and therefore B
----------------------
cannot perform. B need not perform and can claim compensation from A for any
---------------------- loss caused to him due to A‘s breach of contract.
----------------------

5. Reciprocal promises to do things legal and illegal (Sec.57) Notes
Where persons reciprocally promise to do certain things legal and under
----------------------
certain circumstances to do certain things illegal, then the first set of promises
is a contract, but the second set of promises is a void agreement. ----------------------
E.g. A landlord lets his houses to a tenant for residence at the rent of
----------------------
Rs.10,000 per month; but if tenant uses it as a gambling house then the rent shall
be Rs.20,000 per month. The first set of promises namely rent for residence is a ----------------------
contract but the second set of promises namely rent for gambling purposes is a
void agreement. ----------------------
----------------------
8.7 APPROPRIATION OF PAYMENTS (SEC.59, 60, 61)
----------------------
Appropriation of payment means application of payment for discharging
----------------------
a particular debt. Whenever a debtor owes two or more debts to one creditor
& makes any payment to him, then how is the payment to be applied towards ----------------------
the various debts? The Rules regarding appropriation of such payments are
contained in Sec.59, 60 & 61 of the Indian Contract Act. These rules are based ----------------------
on the principles laid down in a famous English case known as Clayton‘s case.
----------------------
Rules of Appropriation of Payments
----------------------
Rule 1: Appropriation by debtor‘s Choice (Sec.59)
When the debtor makes any payment to the creditor with an express ----------------------
intimation or under the circumstances implying that the payment is to be applied ----------------------
to the discharge of some particular debt only, then the payment if accepted must
be applied accordingly. ----------------------
The rules cover two situations: ----------------------
1. The debtor sends the money with express instructions to appropriate the
----------------------
amount to a particular debt only, or
2. It is implied from the circumstances that the payment is to be applied to ----------------------
discharge a particular debt only.
----------------------
E.g.
----------------------
 A owes several debts to B. A sends a payment of Rs.1011, with instruction
to apply it towards a Promissory Note dated 1st July 2001. If B accepts the ----------------------
amount he has to apply it accordingly.
----------------------
 A owes several debts to B. There is a promissory note of Rs.2001 which falls
due on 1st December A pays Rs.2001 to B. The payment has to be applied ----------------------
to discharge the promissory note only.
----------------------
Rule 2: Appropriation by Creditor‘s choice (Sec.60)
----------------------
If the debtor does not give express directions to the creditor and if there
are no circumstances to imply as to which debt should be discharged, then the ----------------------
creditor may apply the payment at his discretion to any lawful debt. The creditor
here can apply the payment to even a time-barred debt but not a disputed debt. ----------------------

Notes E.g. A owes several debts to B, one of them is of Rs.5,000 which has become
a time-barred debt. A sends to B Rs. 5,000 without giving any instructions of its
---------------------- appropriation, B may appropriate Rs.5,000 against the time-barred debt, if he
chooses.
----------------------
Rule 3: If neither party appropriates (Sec.61)
----------------------
Where neither debtor nor creditor makes any choice of appropriation, the
---------------------- payment shall be applied in discharge of the debts in order of time, whether or
not they are time-barred by Law of Limitation.
----------------------
If the debts are of equal standing the payment shall be applied in discharge
---------------------- of each proportionately.
---------------------- This rule is applicable in case of running accounts between two parties
where money is being paid & withdrawn from time to time without any specific
---------------------- instructions.
----------------------
Activity 1
----------------------
---------------------- Nisha, a singer, enters into a contract with John, the manager of a theatre, to
sing at his theatre two nights every week during the next two months, and
---------------------- John engages to pay her at the rate of Rs 1,000 for each night. On the sixth
night, Nisha willfully absents herself. With the assent of John, Nisha sings
----------------------
on the seventh night. John has signified his acquiescence in the continuance
---------------------- of the contract. Is John entitled to compensation for damage sustained by
him through Nisha’s failure to sing on the sixth night?
----------------------
----------------------
Summary
----------------------
●● he parties to the contract must either perform or offer to perform their
T
---------------------- respective promises. It is the duty of the promisor to perform the promise
---------------------- given by him. The promise may be performed by the agent or legal
representative or even the third party provided the promisee accepts such
---------------------- performance. However, if the performance requires personal skill or the
personal consideration of the promisor, the promise must be performed
---------------------- by the promisor himself.
---------------------- ●● n offer of performance by the promisor in accordance with the terms
A
of the contract is called the tender of performance. If the promisor
---------------------- gives a valid tender of performance and the promisee does not accept
the performance, the promisor is not responsible for non-performance,
----------------------
nor does he thereby lose his right under the contract. Thus, a tender of
---------------------- performance is equivalent to the actual performance. The tender, in order
to have this effect, must be unconditional, of the whole quantity contracted
---------------------- for, at proper place, time and in the manner specified. If no time or place
----------------------

or manner is specified, it must be made in the usual and reasonable time, Notes
place and manner.
●● hen two or more persons have made a joint promise, then unless
W ----------------------
provided to the contrary in the contract, all such persons must jointly ----------------------
perform the promise. There are separate rules for performance of the joint
promises. ----------------------
●● hen a person has given a promise to several promisees, then unless
W ----------------------
provided to the contrary in the contract, the right to claim performance
rests with all of them. ----------------------
●● ime and place of performance of the contract are to be determined by the
T ----------------------
parties themselves. When no time is specified, the promisor must perform
at a reasonable time and place. ----------------------
●● hen the time of performance is a matter of essence, then the contract must
W
----------------------
be performed within that fixed time. Generally in commercial contracts
time is of essence. Delayed performance in such contracts entitles the ----------------------
promisee to reject the performance. If time was not of essence, a delayed
performance cannot be rejected, but the loss arising out of such delay may ----------------------
be recovered.
----------------------
●● eciprocal promises are promises which form the consideration or part
R
of consideration for each other are called reciprocal promises. When the ----------------------
reciprocal promises have to be simultaneously performed, the promisor
----------------------
is not bound to perform unless he sees the promisee ready and willing to
perform. The reciprocal promises must be performed in an order fixed ----------------------
by the contract. If the reciprocal promises require some definite order of
performance then, the promises shall be performed in that order only. ----------------------
●● ules as to appropriation of payments (Sections 59-61):- The debtor has
R ----------------------
at the time of payment right to choose as to which debt is to be satisfied
first. In case he fails to specify the debt, the choice moves to the creditor. ----------------------
If both of them do not make any choice, the debts are to be satisfied in the
----------------------
same order in which they were drawn.
----------------------
Keywords
----------------------
●● Performance of Contract: Performance of Contract means carrying out
of these obligations. So each party must perform or offer to perform his ----------------------
promise under the contract, unless it is excused or exempted by any law. ----------------------
●● Tender of Performance: Offer to perform the contract is called as a
‘Tender of Performance. ----------------------
●● Joint Promises: When two or more persons make and/or give promises ----------------------
jointly these are joint promises.
----------------------
●● Joint Promisees: When a person has made a promise to two or more
persons jointly, they are called as joint promisees. ----------------------
----------------------

Notes ●● Reciprocal Promises: Promises which form the consideration or part of
the consideration for each other are called reciprocal promises.
---------------------- ●● Devolution: Devolution means passing over from one person to another.
---------------------- ●● Appropriation of payment: Appropriation of payment means application
of payment for discharging a particular debt.
----------------------
---------------------- Self-Assessment Questions
---------------------- 1. What do you understand by ‘Performance of Contract?

2. What are the rules of law related to time and place of performance of a
----------------------
contract?
---------------------- 3. When is time deemed to be essence of contract in the performance of the
contract and what are the consequences if such contract is not performed
----------------------
within that time?
---------------------- 4. Enumerate the rules of performance of reciprocal promises.
---------------------- 5. What are the essential requisites of a valid tender of performance?
---------------------- 6. Under what circumstances a contract need not be performed?
7. State the rules related to appropriation of payments made by the debtor to
----------------------
his creditor.
---------------------- 8. Discuss the liabilities and rights of the joint promisors and the joint
promisees respectively.
----------------------
---------------------- Answers to Check your Progress

---------------------- 1. True
----------------------
1. A promisee can accept the performance
----------------------
----------------------
----------------------
---------------------- 1. In case of joint promise, generally the performance must be by
---------------------- i. All the promisors jointly
---------------------- 2. In cases of joint promise generally a promisee can compel

i. All the joint promisors to perform
----------------------
----------------------

3. Generally, the joint promisors can Notes
i. Compel each other to contribute equally
----------------------
4. In case of death of a joint promisor(s) the promisee
----------------------
i. Can enforce the contract against the survivor(s) of the said joint
promisor(s) along with the joint promisors who are alive ----------------------
----------------------
1. In a contract not specifying the time for performance, the promisor can
perform the contract ----------------------
iii. Within a reasonable time ----------------------
2. The reasonable time for performance of a contract
----------------------
i. Is a question of fact
----------------------
Press.
----------------------
----------------------
Publication. ----------------------
4. Kapoor, N. D. 2010. Elements of Mercantile Law. New Delhi: Sultan ----------------------
Chand & Sons.
7. Saharay, H.K. 2000. Dutt on Contract. Kolkata: Eastern Law House. ----------------------
8. Srivastava, S.C., and Venkoba Rao. 2001. Law of Agency. Butterworths.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Quasi-Contracts (Sections 68-72)
UNIT
9
Structure:
9.1 Meaning and Kinds of Quasi-Contracts
9.2 Claim for Necessaries Supplied (Sec. 68)
9.3 Reimbursement of a Person (Sec. 69)
9.4 Obligation for ‘Non-gratuitous Act (Sec. 70)
9.5 Responsibility of Finder of Goods (Sec. 71)
9.6 Liability of a Person Receiving Money or Things under Mistake or Coercion
(Sec. 72)
9.7 Quantum Meruit
9.8 Difference between Contracts and Quasi-Contracts
Summary
Key Words
Suggested Reading
Quasi-Contracts (Sections 68-72) 111

Notes
Objectives
----------------------
• Discuss the meaning and concept of quasi-contracts
----------------------
• Explain the various types of quasi-contracts
----------------------
• Describe the rules as to quantum merit
----------------------
---------------------- 9.1 MEANING AND KINDS OF QUASI-CONTRACTS

---------------------- QUASI–CONTRACTS
(Of Certain Relations Resembling Those Created by Contract)
----------------------
The term quasi-contract is neither defined nor used by the Contract Act.
---------------------- Hence the title of the chapter dealing with quasi-contract is ‘Of Certain Relations
Resembling Those Created by Contract’. Quasi means ‘similar’ or ‘resembling’.
----------------------
A contractual obligation between the parties is usually voluntarily created. But
---------------------- there are certain situations wherein the persons do not enter into contractual
relationship but there exists a legal nexus between them. Their relationship is
---------------------- similar to contractual relationship. In contracts rights and liabilities are created
by parties. In quasi-contracts, they are created by law. For example, if you forget
----------------------
a valuable at somebody’s house, you feel that he should return it to you. Here
---------------------- law implies a duty to return. Quasi-contracts are thus obligations which are not
voluntarily created by parties but are similar or contractual obligations and are
---------------------- therefore treated as Contracts by Law. Thus it is a not contract of fact but a contract
in the eyes of law. It is also described as ‘constructive contract’ in English Law.
----------------------
Formation of Quasi-contract:- A Quasi-contract is not a usual contract
---------------------- because it is not formed by making a proposal, acceptance etc. Contractual relation
exists between the parties because one person has done something or suffered
----------------------
something for another and therefore law compels the person receiving profit or
---------------------- deriving any gain, to compensate the first person. Law in such circumstances
makes or presumes a contract for the parties.
----------------------
Principle:-The Quasi contracts are based on the principle that “a person
---------------------- will not be allowed to enrich himself unjustly at the expense of the other” Thus
Quasi-contracts are based on the grounds of justice, equity, fairness and good
---------------------- conscience. If someone gets the benefit from another to which he is not entitled,
justice requires that he should either return it or pay for it. Thus the underlying
----------------------
principle is to prevent unjust enrichment.
---------------------- Kinds of Quasi-Contracts (Sec.68 to 72)
---------------------- The Indian Contract Act recognizes following five types of Quasi-contracts
under sections 68 to 72.
----------------------
1. Claim for Necessaries supplied (Sec. 68)
----------------------

2. Reimbursement of a person paying money due by another (sec.69) Notes
3. Obligation of person enjoying benefit of non-gratuitous act (Sec 70)
----------------------
4. Responsibility of Finder of lost goods (sec.71)
----------------------
5. Liability of a person receiving money or thing under mistake or coercion
(Sec.72) ----------------------
Let us consider them one by one as follows: ----------------------
9.2 CLAIM FOR NECESSARIES SUPPLIED (SEC. 68) ----------------------
If any person has supplied necessaries to a person who is incapable of ----------------------

entering into a contract or any of his dependents then the helping person gets a
----------------------
right to be reimbursed from the property of such incapable person. Section 68
provides that ‘ If a person, incapable of entering into contract or anyone whom ----------------------
he is legally bound to support, is supplied by another person with necessaries
suited to his condition of life, the person who has furnished such supplies is ----------------------
entitled to be reimbursed from the property of such incompetent person.’
----------------------
Here, person incapable of contracting includes a minor person, person of
unsound mind and person disqualified from contracting by Law. ----------------------
The term Necessaries includes the necessities suitable to the incapable ----------------------
person’s life such as food, shelter, clothing, education etc.
----------------------
The section includes help provided to the person incapable of contracting
or any of his dependents like parents, children etc. ----------------------
The section talks about a limited right of the helping person which is available ----------------------
only against the property of incapable person. There is no personal liability fixed
on such incapable person to compensate the helping person. Hence if there is no ----------------------
property, there is no question of reimbursement.
----------------------
Conditions for invoking this section:-
----------------------
 The person benefited must be incompetent to enter into contract. It also
applies to those, whom this incompetent person is bound by law to support. ----------------------
 The other person supplies him necessaries suitable to his condition in life. ----------------------
Necessaries are things required to maintain one’s life. These include expenses
incurred for food, clothing, shelter, medical expenses, cost of performing ----------------------
religious rites, cost of filing or defending suits etc.
----------------------
 The person supplying necessaries is compensated from the property of such
incompetent person. ----------------------
E.g. ----------------------
a) A supplies B, a lunatic with necessaries suitable to his condition in life. A
----------------------
is entitled to be reimbursed from B’s property if at all B has any property.
b) A supplies the wife and children of B, a lunatic, with necessaries suitable ----------------------
to their life. A is entitled to be reimbursed from B’s property.
----------------------

Notes The illustrations make it clear that though a minor or lunatic is not entitled
to enter into contract, supply of necessaries for their upkeep or for maintenance
---------------------- of their dependants can be recovered from the property of such incompetent
person.
----------------------
What are necessaries?
----------------------
What constitutes necessaries is a question of facts of each case. Following are
---------------------- held to be necessaries:-
1. Costs incurred in defending a suit on behalf of a minor in which he faces
----------------------
prosecution
---------------------- 2. Food, clothing and education of minor or marriage expenses of a Hindu
---------------------- minor girl.

----------------------
----------------------
1. A quasi-contract is intended to avoid unjust enrichment.
----------------------
----------------------
1. A quasi contract is
----------------------
i. A legal fiction
----------------------
ii. Intended to avoid injustice
---------------------- iii. A promise created by the court
----------------------
---------------------- Activity 1
----------------------
Analyse the case law Bowling v. Sperry, 133 Ind. App. 692, 184 N.E.2d
---------------------- 901 (1962)
----------------------
---------------------- 9.3 REIMBURSEMENT OF A PERSON (SEC. 69)
---------------------- A person, who is interested in the payment of money which another is bound
by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
----------------------
The elements of this section are:
---------------------- 1. There must be a person who is bound by law to make a certain payment but
---------------------- he does not pay; and
2. There is another person who is interested in the payment being done and
---------------------- therefore he pays it on behalf of the first person.

3. Therefore the second person gets a right of reimbursement from the first Notes
person.
----------------------
The other person is interested in the payment of money means the payment
is made in good faith for the protection of his own interest. ----------------------
E.g. ----------------------
a) A is owner of agricultural land and B is his tenant-farmer who cultivates that
----------------------
land. A has not paid certain revenue to the Government. The Government
advertises the sale of land for their recovery of revenue. After sale B’s tenancy ----------------------
would be terminated. Therefore B pays the revenue to the Government on
behalf of A. Here A is bound to reimburse B or else B can enforce his right ----------------------
to recover the money through Courts of Law. ----------------------
b) A is a landlord and B is his tenant. It is agreed between them that A shall
----------------------
pay the electricity charges to the Government, with respect to B’s rented
premises. A does not pay the charges therefore the electricity supply is ----------------------
likely to be cut off. B therefore makes the payment to protect his interest.
A is bound by Law to reimburse B. ----------------------
----------------------
9.4 OBLIGATION FOR NON-GRATUITOUS ACT (SEC. 70)
----------------------
“Where a person (i) lawfully does anything for another person, or (ii) delivers
anything to him, not intending to do so gratuitously, and (iii) such other person ----------------------
enjoys the benefit thereof, the latter is bound to make compensation to the former ----------------------
in respect of or to restore, the thing so done or delivered”. (Sec. 70)
----------------------
The requirements of this section are:
1. There is a person who lawfully does an act or delivers some goods to another ----------------------
person, ----------------------
2. The person doing it has done the act non-gratuitously,
----------------------
3. The other person enjoys the benefits of the act, and therefore is liable to
compensate the first person. ----------------------
Here the question as to whether compensation should or should not be ----------------------
awarded to a person depends on the intention of such person at the time of doing
the act. If the intention was non-gratuitous then only compensation shall be ----------------------
awarded. If the intention was gratuitous then no compensation shall be awarded. ----------------------
E.g.
----------------------
a) A, a trader, keeps his certain goods with B for a certain time. B treats the
goods as his own and uses them. B is bound to compensate A. ----------------------
b) A saves B’s property from fire. A’s intention was gratuitous (i.e. not ----------------------
expecting anything in return) at the time of doing the act. A is not entitled
----------------------
to be compensated from B as a matter of right.
----------------------

Notes 9.5 RESPONSIBILITY OF FINDER OF GOODS (SEC. 71)
---------------------- As per section 71, of the Contract act, a person who finds goods belonging
to another, and takes them into his custody, is subject to the same responsibility
---------------------- as a bailee.
---------------------- ‘Bailee’ is a person to whom the owner delivers the goods for some purpose
and the bailee has to return the goods to the owner after the purpose is executed.
----------------------
E.g. Owner of clothes giving clothes to the laundryman, owner of vehicle has
---------------------- given vehicle to the service-station for repairing. Here laundryman, the service
provider enjoys certain rights. The finder of lost goods is subjected to the same
---------------------- responsibility as a bailee.
---------------------- Normally, a person is not bound to take care of goods belonging to someone
else which are lying on the road or at any place unidentified. But if he takes the
----------------------
goods in his custody then there is a Quasi-contract presumed by law, and the
---------------------- finder has following duties and the corresponding rights:-
---------------------- a) Finder must take as much care of the goods, as an owner would take of his
own goods.
----------------------
b) Finder must take steps to find out the real owner for which he may incur
---------------------- certain expenses in preserving the goods as well.
---------------------- c) If the owner is traced he can recover these expenses incurred for preserving
the goods and finding out the owner. If the owner refuses to pay these
---------------------- expenses, he can retain the goods.
---------------------- d) If any reward is declared for finding out the goods, he can claim that reward.
---------------------- e) If the goods are of perishable nature and are deteriorating, then the finder
can sell the goods.
----------------------
---------------------- 9.6 LIABILITY OF A PERSON RECEIVING MONEY OR

THINGS UNDER MISTAKE OR COERCION (SEC. 72)
----------------------
A person to whom money has been paid, or anything delivered by mistake or
----------------------
under coercion, must repay or return it. Sec.72 covers the mistake committed by
---------------------- a person which may be mistake of fact or mistake of law. So if a person receives
money or things from another person acting under a mistake committed by some
---------------------- other person, or under a coercion applied by him, then such person must repay
---------------------- the money or return the goods back to that other person.
a) A and B jointly owe Rs.10, 000 to C. A pays entire amount to C. B is not
----------------------
aware of this and therefore once again pays Rs.10,000 to C. C is here bound
---------------------- to repay the excess amount of Rs. 10,000 to B
---------------------- b) A forcefully obtain B’s goods from him. A is bound to return the goods
(obtained by coercion) to B.
----------------------

9.7 QUANTUM MERUIT Notes
“Quantum meruit” is a remedy for claiming compensation in case of quasi- ----------------------
contractual relations.
----------------------
The second paragraph of Sec.73 provides that “when an obligation created
by a Quasi-contract is not discharged, the injured party is entitled to receive the ----------------------
same compensation from the defaulter party as if such person had contracted to
discharge it and had broken the contract”. ----------------------
The term ‘quantum meruit’ means ‘as much as is earned’ or ‘in proportion to ----------------------
work done’. Normally, in a contract, unless a person has performed his obligations
in full, he cannot claim performance from the other. But at times when a person ----------------------
has done some work under a contract and either the other party repudiates the ----------------------
contract or further performance becomes impossible, then the party who has
partly performed can claim remuneration for his work done. This right to claim ----------------------
quantum meruit does not arise out of contract as the right of damages, but it is
a claim on the quasi-contractual obligations which the law implies in a case. ----------------------
Claim on Quantum Meruit arises in various cases as follows: ----------------------

1. When something is done without any intention to do so gratuitously (Sec.70). ----------------------
When a person does or delivers something to another, non-gratuitously, and
the other person enjoys the benefits of the act then he must compensate ----------------------
the first person. This is a quasi-contract and the person doing the act non-
----------------------
gratuitously can claim on quantum meruit.
2. Restitution principle (Sec.65). When an agreement is discovered as void or ----------------------
a contract which becomes void, the person who has partly performed can
----------------------
claim compensation on quantum meruit. For example, A promises to sell his
vehicle to B after one month, for Rs.20, 000. B pays Rs. 5,000 as advance ----------------------
money. Meanwhile the vehicle is destroyed by fire. The contract becomes
void but B is entitled to get back Rs.5, 000 from A. ----------------------
3. When one party refuses or abandons to perform the contract. When there ----------------------
is a breach of contract, if the aggrieved party has partly performed, he can
claim compensation on quantum meruit for his part performance. ----------------------
4. Similarly in case of breach of contract, the party at fault can claim on ----------------------
quantum meruit if he had partly performed and the other party has enjoyed
the benefits of his part-performance. ----------------------
5. When there is a contract to render services but there is no agreement as to ----------------------

remuneration, the employee can claim remuneration on quantum meruit
for the work done by him. For example, A was appointed as a Managing ----------------------
Director of a company. He worked for two months. Later on it was found ----------------------
that the Directors did not have authority to appoint the Managing Director.
Here A can claim remuneration for his two months service on the basis of ----------------------
quantum meruit.
----------------------
Therefore one can say that ‘Quasi Contracts’ and ‘Remedy of Quantum
Meruit’ are based on the principles of justice, equity and good conscience. ----------------------

Notes
----------------------

1. An action on quantum merit payment can be made in the following
---------------------- circumstance
---------------------- i. Where the contract is void
---------------------- ii. Where contract has been discharged by breach
iii. Where a service is rendered in contemplation of contract
----------------------
----------------------
---------------------- 9.8 DIFFERENCE BETWEEN CONTRACTS AND QUASI-

---------------------- CONTRACTS
---------------------- 1. Contract is a ‘contract by fact’ and the essentials for formation of contract
are present in it. Quasi-Contract is a ‘Contract by Law’ and the formation
---------------------- procedure is absent.
---------------------- 2. The contractual obligations are created by the parties themselves in a
contract. The contractual obligations are imposed by law in a quasi-contract.
----------------------
3. The remedy for aggrieved party in case of breach is claim for damages.
---------------------- The aggrieved party can claim on the principle of quantum meruit.
----------------------
---------------------- Summary
---------------------- ●● here are many situations in which law as well as justice requires that
T
a certain person be made to perform an obligation although he has not
---------------------- broken any contract. For example a person in whose home certain goods
have been left by mistake is bound to restore them to their owner. The
---------------------- principle is to prevent ‘unjust enrichment’ i.e. enrichment of one at the
---------------------- cost of another.
●● he Indian Contract Act recognizes following five types of Quasi-
T
---------------------- Contracts under sections 68 to 72.
---------------------- 1. Claim for Necessaries supplied (Sec. 68)
---------------------- 2. Reimbursement of a person paying money due by another (sec.69)

3. Obligation of person enjoying benefit of non-gratuitous act (Sec 70)
----------------------
4. Responsibility of Finder of lost goods (sec.71)
----------------------
5. Liability of a person receiving money or thing under mistake or
---------------------- coercion (Sec.72)
----------------------

The remedy for breach of a quasi-contractual obligation is a claim for quantum Notes
meruit.
----------------------
Keywords ----------------------
●● Quasi-Contract: In quasi-contracts, essential elements of a contract like, ----------------------
agreement, free consent are not there. But the law imposes an obligation,
similar to the one arising out of contract, on one of the parties, in the ----------------------
interest of justice.
----------------------
●● Necessaries of Life: apart from food, clothing and shelter, basic education,
medical or legal expenses may be regarded as necessaries of life. What is ----------------------
necessary mostly depends on the economic and social status of the minor.
However articles of mere ornamental nature are never considered to be ----------------------
necessaries even for a rich minor. ----------------------
●● Non-Gratuitous Act: If a person does something for another expecting
to be paid for his services his act is non-gratuitous. ----------------------
●● Quantum Meruit: It literally means as much as earned or quantity that ----------------------
is merited.
----------------------
----------------------
1. What are quasi-contracts? State and explain various kinds of quasi-
----------------------
contracts.
2. Discuss the rights and liabilities of a finder of goods. ----------------------
----------------------
----------------------
----------------------
State True or False. ----------------------
1. True ----------------------
2. A quasi contract is
----------------------
----------------------

1. An action on quantum merit payment can be made in the following ----------------------
circumstance
----------------------
----------------------

Notes
Suggested Reading
----------------------
---------------------- Press.
----------------------
---------------------- Publication.
Chand & Sons.
----------------------
----------------------
---------------------- 8. Srivastava, S.C., and Venkoba Rao. 2001. Law of Agency. Butterworths.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Discharge of Contracts
UNIT
10
Structure:
10.1 Meaning and Concept of Discharge of Contracts
10.2 Modes of Discharge of Contracts
10.3 Remedies for Breach of Contract
10.4 Various Remedies for Breach of Contract
10.5 Rescission of Contract
10.6 Suit for Specific performance of Contract
10.7 Suit for an Injunction
10.8 Suit on Quantum Meruit
10.9 Suit for Damages (Compensation) (Sec. 73,74)
10.10 Types of Damages
Summary
Key Words
Suggested Reading
Discharge of Contracts 121

Notes
Objectives
----------------------
• Analyse the concepts of discharge of contract and breach of contract
----------------------
• Assess the liabilities of the parties in case of discharge of contract
----------------------
• Conclude the effects of breach of contract
---------------------- • Explain the various remedies available in breach of contract
----------------------
---------------------- 10.1 MEANING AND CONCEPT OF DISCHARGE OF

CONTRACTS
----------------------
After the performance of contract is over the next stage is the discharge
---------------------- of contract i.e. contract coming to an end or getting terminated. Discharge of
Contract means termination of the contractual relationship between the parties.
----------------------
However, there are various ways in which a contract ends and the parties
---------------------- are freed from their contractual obligations. Under a contract the parties have to
---------------------- perform duties. The contract is said to be discharged when it ceases to operate that
is, when the rights and obligations created by it come to an end. The Discharge
---------------------- of Contract also sometimes results in creation of some rights and obligations as
far as parties are concerned.
----------------------
---------------------- 10.2 MODES OF DISCHARGE OF CONTRACTS

---------------------- A contract is discharged in a number of ways, as follows:
---------------------- 1. By Performance
---------------------- 2. By Exemption from Performance
3. By Non-acceptance of Tender
----------------------
4. By Breach of Contract
----------------------
5. By Frustration of Contract
---------------------- 6. By Mutual Consent
---------------------- 7. By Remission or Waiver
---------------------- 8. By Accord & Satisfaction
9. By Neglect of Promisee to Provide Facility
----------------------
10. By Operation of Law
----------------------
1. By Performance
----------------------
A contract is said to be discharged by actual performance when the parties
---------------------- perform their respective promises as per terms of the contract. It is an ideal &

best method of discharging a contract. Notes
Since performance is over, nothing remains to be done in the contract and
----------------------
the contract comes to a natural end. The contract is said to be completed by the
parties and they are totally freed from their contractual duties. ----------------------
For example, A contracts to sell 10 computers to B for a certain price. A
----------------------
gives the delivery of computers and B pays the price. The contract is discharged
by performance. ----------------------
The performance of a contract may be actual or attempted performance.
----------------------
 Actual performance is one when both the parties perform their promises &
the contract is discharged. The performance should be complete, precise and ----------------------
according to the terms of the contract. Most of the contracts are discharged ----------------------
by the actual performance of the contract.
 Attempted performance is also called as tender of performance. It is not an ----------------------
actual performance but it is only an offer to perform the obligation under the ----------------------
contract. When the promisor offers to perform his obligation but the promisee
rejects or refuses to accept the performance, tender of performance is regarded ----------------------
as equivalent to that the actual performance. The effect of valid tender is that
the contract is deemed to have been performed by the promisor. The promisor ----------------------
in such case is discharged from the liability for non-performance of the contract ----------------------
without losing any right against the promisee.
2. By Exemption from Performance ----------------------
As per Section 37 of the act, the parties to a contract must perform unless ----------------------
such performance is excused under the provisions of this Act, or any other Law.
----------------------
Sometimes a party may be exempted from performance and is therefore
freed from his contractual obligations. ----------------------
For example, in contracts of personal skill, if the promisor dies, his legal ----------------------
representatives are exempted from completing the promisor‘s promise, & are
freed from the performance of contract. ----------------------
3. By Non-acceptance of Tender ----------------------
As per Sec.38, if a promisor makes a legal and valid tender, then it is ----------------------
performance of promisor which is completed. Now it is promisee‘s duty to
accept legal tender. If the promisee does not accept such legal tender then there ----------------------
is a breach committed by promisee by non-acceptance of Tender.
----------------------
4. By Breach of Contract
----------------------
Breach of contract means committing a default in performance. If the
promisor in a contract fails or neglects or refuses to perform the contract, there ----------------------
is a breach of contract committed by non-performance.
----------------------
Breach is of 2 types depending on the time when it is committed.
----------------------
----------------------

Notes Type of Breach
A. Actual breach
----------------------
B. Anticipatory breach
----------------------
A. Actual breach of Contract
---------------------- Actual breach occurs when a party fails to perform his promise on the due
---------------------- date of performance. It takes place only on the day when performance is due and
not before it. Thus, actual breach is caused actually at the time of performance
---------------------- when the promisor does not perform.
---------------------- For example, A promises to sell his car to B on 1st November for a certain
price, On 1st November if A does not sell his car, there is an actual breach of
---------------------- contract caused by A.
---------------------- B. Anticipatory Breach of Contract (Sec.39)
Anticipatory breach occurs when a party to a contract breaks the contract
----------------------
before the time fixed for performance has arrived.
---------------------- This breach takes place before the due date of performance when the
promisor refuses himself from performing on the due date. Since the breach is
----------------------
caused before the date of performance, the promisee anticipates the breach and
---------------------- knows in advance that the promisor is not going to perform.
---------------------- Anticipatory breach may be caused by promisor in two ways:

1. By expressly canceling (repudiating) the contract by words spoken or written
---------------------- i.e. one party communicates to the other party before the date of performance
---------------------- about his intention of nonperformance on the due date. Here the other party
comes to know in advance about the intended breach.
---------------------- 2. The breach is implied through behavior of one party-when one party by
---------------------- his own voluntary act disables himself from performing the contract,
anticipatory breach is implied through his behavior.
----------------------
For example, A agrees to sell his motorcycle to B on a particular day. Before
---------------------- that day he sells it to some other person. Now from A‘s behavior it is implied
that A has committed breach of contract and he would be unable to perform the
---------------------- contract on the due date. This is anticipatory breach of contract.
---------------------- Effect of Anticipatory Breach
Whenever anticipatory breach takes place by any of the methods, the
----------------------
aggrieved (suffering) party i.e. the promisee has two options-
---------------------- 1. The promisee may treat the contract as at an end and he can immediately
---------------------- rescind (cancel) the contract and sue the promisor for claiming damages
(compensation). Here, when the promisee comes to know about the breach
---------------------- in advance, he immediately takes a legal action of rescinding the contract
& claiming compensation.
----------------------
2. The promisee may treat the contract as still operative and wait till the due
---------------------- date of performance, in hope that the promisor may perform on due date.

On the due date, if the promisor does not perform, the promisee may now Notes
rescind the contract and claim compensation.
For example, A agrees to sell his horse to B for a certain price on 1st ----------------------
November. But on 10th October A changes his mind & writes to B that he will ----------------------
not be able to sell his horse. There is an anticipatory breach of contract. Here,
B may immediately treat the contract as rescinded and sue A for damages or B ----------------------
may wait till 1st November and then afterwards sue A for Breach of contract.
----------------------
5. By Frustration of Contract (Sec.56)
Sec. 56 of the Indian Contract Act lays down the Doctrine of Frustration of ----------------------
contract i.e. ----------------------
Subsequent impossibility making the contract void.
----------------------
Under every contract there is some ‘act’ to be performed. If any agreement is
to do an impossible act then it is a void agreement. But if the act to be performed ----------------------
in the contract becomes impossible or unlawful subsequently, then the contract
becomes a void contract and the parties are freed from their duties to perform ----------------------
it. The section talks about contracts which are perfectly legal and valid when ----------------------
they are made, but due to some reasons, the act promised becomes impossible
or unlawful and therefore the contract becomes void. ----------------------
Here the contract becomes:
----------------------
 Unlawful due to change in laws or
----------------------
 Impossible due to change in the circumstances, beyond the control of the
parties. ----------------------
Under such circumstances, though the contract is enforceable in law at its ----------------------
origin, it becomes unenforceable or impossible in its performance subsequently.
The contract is then said to frustrate and becomes void. This is known as ----------------------
frustration of contract.
----------------------
Frustration of contract takes place only in such cases where neither party
has control over the supervening circumstances. ----------------------
Effect of Frustration on Contract ----------------------
1. Void contract
----------------------
The contract becomes void and cannot be performed. Parties are freed from
their obligations. ----------------------
2. No compensation ----------------------
Neither party can claim any compensation from the other for the loss suffered
due to frustration of contract, because none of them is responsible for the change ----------------------
in the circumstances making the contract void. But if one party was aware about ----------------------
the impossibility or unlawfulness of the act at the time of contract then he should
compensate the other party. ----------------------
3. Restitution shall apply ----------------------
Any party who has received any advantage, benefit, price etc. under the contract
must return it back to the other party after frustration of contract. (Sec.65) ----------------------

Notes Reasons for Frustration of contract
Frustration of contract may take place due to various reasons. However,
----------------------
the reasons should be of independent and uncontrollable nature i.e. neither party
---------------------- should be responsible for causing the frustration of contract.
Few reasons for Frustration of Contract
----------------------
a) Destruction of Subject-matter
----------------------
When the subject-matter of contract gets destroyed before performance of
---------------------- contract, due to any unavoidable circumstances, the contract becomes void. For
example, a Music Hall was agreed to be let out for programs on certain dates.
---------------------- The Hall was destroyed by fire before the program. It was held by the Court
---------------------- that the Contract has become void and there was no question of payment of
compensation. However, the booking-amount had to be returned to the customer.
---------------------- (Taylor Vs Caldwell)
---------------------- b) By Change in Law

If the state has enacted a new law by which the performance is forbidden, then
---------------------- the contract becomes void. For examples, A promised to sell certain liquor bottles
---------------------- to B after 2 months. Both had licenses to deal in liquor business. Meanwhile
Government put a total ban on sale and purchase of liquor. The contract between
---------------------- A & B becomes void.
---------------------- c) By Death or Incapacity of Promisor
In contracts involving personal skill of the promisor, if promisor dies or
----------------------
becomes incapable to perform then the contract becomes void. Examples:
---------------------- a) A agrees to marry B. A dies before the marriage. Now the contract
---------------------- becomes void.
b) A promises to paint a picture for B for a certain price. A meets with an
---------------------- accident and loses his hands. Now the contract is said to frustrate and
---------------------- becomes void.
d) By Non-existence of favorable state of things
----------------------
If certain things necessary for performance cease to exist, then the contract
---------------------- becomes void.
---------------------- For example,
1) A promises to marry B. Before the marriage A becomes mad. Now the
----------------------
contract cannot be performed for want of certain necessities.
---------------------- 2. A promises to manufacture certain goods in his factory and deliver to B
---------------------- after 2 months. Due to an earthquake, the factory is collapsed. The contract
becomes void because the goods cannot be manufactured.
---------------------- e) By out-break of war
---------------------- If war breaks out between 2 countries subsequent to the contract, the parties
to the contract belonging to those 2 countries become alien enemies. The alien
----------------------

enemies are disqualified to contract and hence question of performance of their Notes
promises does not arise. Such contracts are suspended during the war or become
void. ----------------------
For example, A contracts to take certain cargo for B at a foreign port. A‘s ----------------------
Government declares war against the country where the port is situated. The
contract becomes void when the war is declared. ----------------------
However for following reasons the contract does not frustrate: ----------------------
a) Difficulty in performance
----------------------
Just because the parties find the contract difficult to perform, it cannot be
declared void. ----------------------
b) Commercial Impossibility ----------------------

If due to the change in circumstances, the promisor finds that he is going to ----------------------
suffer loss due to the contract, instead of making profits, the contract cannot
be said to frustrate. ----------------------
c) Failure or default of third person ----------------------
If the promisor relied on performance by a third person who failed to perform,
----------------------
it cannot be the reason for frustration of the contract.
d) Strikes, lock-outs, civil disturbances ----------------------
If the promisor is unable to perform due to civil disturbances, it cannot be ----------------------
a good reason for frustration of contract.
----------------------
6. By Mutual Consent (Sec.62)
----------------------
Sec.62 states as under-
‘If the parties to contract agree to substitute a new contract for it or to ----------------------
rescind or alter it, the original contract need not be performed.’
----------------------
If the parties to contract agree to make certain changes in the contract then
the old contract can be discharged by mutual agreement in the following ways: ----------------------
a) Novation (Sec.62) ----------------------
----------------------
Novation means substitution of a new contract in place of the earlier contract.
Novation creates a new contract in place of the old contract. It discharges and ----------------------
extinguishes the old contract. As a result the parties are freed from the contractual
duties of the old contract. ----------------------
Such new contract may be between the same parties or different parties. ----------------------
Novation may take place by 2 methods: ----------------------
1. Substituting old contract with a new contract, with the same parties. Example, ----------------------
A owes B Rs.10,000. A enters into an agreement with B and mortgages
his certain property with B for Rs.10,000. This is a new contract which ----------------------
discharges the old contract.
----------------------

Notes 2. Substituting a new party for an old one, the terms of contract remaining the
same. This arrangement must be done with mutual consent of all parties
---------------------- concerned. Example, A owes certain money to B under a contract. It is
agreed between A, B & C that B shall thereafter accept from C as his debtor
---------------------- instead of A. The old debt of A to B is at an end and a new debt from C to
---------------------- B has been contracted.
---------------------- Effect of Novation: After Novation, an old contract is completely

extinguished & a suit based on the basis of old contract is not maintainable.
----------------------
It is absolutely essential that the new contract replacing the old one is capable
---------------------- of enforcement by law. If it is not so, there is no Novation and the parties can
---------------------- rely on their original contract.
---------------------- b) Rescission
---------------------- Rescission means cancellation of contract. A contract may be rescinded in

any of the following ways:
----------------------
1. By mutual consent (Sec.62)-all the parties may mutually agree to cancel the
---------------------- contract. In such case, the parties are freed from their contractual obligations.
----------------------
2. Where one party commits a breach, the other party can lawfully rescind the
---------------------- contract & claim compensation for loss suffered by him due to the breach.
---------------------- 3. Rescission of voidable contract (Sec.64)- when a person at whose option a

contract is voidable rescinds it, the other party is discharged from liability
---------------------- under the contract.
---------------------- For example, if a party’s consent is not a free consent he can lawfully rescind
---------------------- the contract.
---------------------- c) Alteration (sec.62)
---------------------- Alteration of a contract takes place when one or more terms of the contract
are altered by mutual consent of the parties to the contract.
----------------------
In such case the original contract to the extent of alteration is discharged
---------------------- and the parties are bound by the altered terms of contract.
----------------------
7. By Remission or Waiver (Sec.63)
----------------------
Remission means acceptance of lesser fulfillment of promise made in
---------------------- discharge of the whole of the promise.
---------------------- Waiver means to give up one’s own right. The promisee may waive, or remit
the performance of the promise wholly or partly, or he may extend the time for
---------------------- such performance or he may accept any other satisfaction which he thinks fit.
----------------------

The section provides for waiver by different ways: Notes
1. Waiving the promise wholly, ----------------------
2. Waiving the promise partly,
----------------------
3. Extension of time of performance is also a waiver,
----------------------
4. Receiving some other consideration in place of earlier.
----------------------
Example
----------------------
a) A promises to paint a picture for B. B afterwards stops him to do so. A need
not perform the promise. ----------------------
b) A owes B Rs.5,000. A pays to B and B accepts only Rs.2,000 in satisfaction ----------------------

of the whole debt. The balance debt is discharged. ----------------------
8. Accord and satisfaction ----------------------
It is a type of remission which is used in English Law. In England remission ----------------------
must be supported by a fresh consideration. But in India, promisee may remit
or give-up a party of his claim and a promise to do so is binding on the parties ----------------------
even though there is no separate consideration for it. ----------------------
‘Accord’ means an agreement to accept less than what is due. ‘Satisfaction’ ----------------------
is the consideration which makes the agreement operative.
----------------------
For example, A owes B Rs.10,000. B agrees to accept Rs.4,000 in full
satisfaction of his claim. This promise (accord) is unenforceable. However ----------------------
if A actually pays Rs.4,000 and B accepts it, then only the entire debt will be
----------------------
discharged.
----------------------
9. By Neglect of Promisee to Provide Facility for performance (Sec.67)
----------------------
If any promisee neglects or refuses to afford the promisor reasonable facilities
for the performance, then the promisor is excused by such neglect or refusal for ----------------------
providing facility to perform the promise.
----------------------
In certain types of contracts, it is required that the promisee should provide
----------------------
reasonable facility for performance. If he neglects, then the promisor is excused
from non-performance as a result of such neglect. ----------------------
For example, A contracts to paint B’s house. If B keeps his house locked ----------------------
all the time, then A is excused for the non-performance of the contract, due to
B’s neglect. ----------------------
----------------------
10. By Operation of Law
----------------------
A contract may be discharged due to the operation of some law.
----------------------

Notes Discharge due to operation of law arises in the following situations:
1. By death of the promisor: Contracts involving personal skill of the promisor
----------------------
are discharged due to the promisor’s death.
---------------------- 2. By Insolvency: When a person is declared insolvent he is discharged from
liabilities of his contracts.
----------------------
3. By unauthorized alteration: If any party makes alterations in the contract
---------------------- behind the back of the other party (without the consent of the other party),
the contract comes to an end.
----------------------
4. By merger: In merger, a right is extinguished by reason of its coinciding with
---------------------- another & bigger right in the same person. Here the new contract between
---------------------- the same parties merges a smaller right.
----------------------
----------------------
----------------------
1. Discharge of contract means termination of the contractual relationship
---------------------- between the parties.
---------------------- 1. Anticipatory breach of contract is defined under Section ________of

the Indian Contract Act.
----------------------
i. 37
---------------------- ii. 38
---------------------- iii. 73
---------------------- iv. 39
2. Under frustration of contract, the contract becomes:
----------------------
i. Unlawful due to change in laws
----------------------
ii. Impossible due to change in the circumstances, beyond the
---------------------- control of the parties
iii. Both i. and ii.
----------------------
iv. Neither i. nor ii.
----------------------
----------------------
10.3 REMEDIES FOR BREACH OF CONTRACT
----------------------
Meaning
---------------------- We have understood the meaning of ‘breach of contract’. A breach of contract
---------------------- occurs when any party fails, refuses or neglects to perform his promise under
the contract. Due to breach by one party the other party suffers a loss. Such a
---------------------- suffering party or aggrieved party gets a right to proceed against the defaulted

party. The party who has not committed any default in performance of his Notes
promise, is entitled to some rights. These rights are in the form of ‘remedies’.
A legal remedy means the courses of action available to an aggrieved party for ----------------------
the enforcement of his rights under the contract. The aggrieved party (injured
party) has the following remedies: ----------------------
----------------------
10.4 VARIOUS REMEDIES FOR BREACH OF CONTRACT
----------------------
Whenever there is a ‘Right’, there is a ‘Remedy’. Right and Remedy are
----------------------
two sides of a coin. A right without any remedy is ‘no right’ at all. The Contract
Act gives various rights to the parties of contract. If their rights are violated, the ----------------------
Contract Act provides the following remedies for enforcing their rights.
----------------------
1. Rescission of Contract
2. Specific Performance of Contract ----------------------
3. An Injunction ----------------------
4. Quantum Merit
5. Damages (Compensation) ----------------------
----------------------
10.5 RESCISSION OF THE CONTRACT
----------------------
Rescission means to cancel or set aside the contract. It means a right not to
----------------------
perform obligation. In simple words it means to put a “full stop” to the contract
in a legal way. When a breach of contract is committed by one party, the other ----------------------
party may sue him to rescind the contract. In such case the aggrieved party is
freed from all his contractual obligations. ----------------------
Remedy of Rescission is also available in voidable contracts. The suffering ----------------------
party at whose option the contract is voidable can rescind the contract through
the Court of Law. ----------------------
A party rightfully rescinding the contract can also claim damages for any ----------------------
loss suffered by him due to the other party’s breach.
----------------------
For example, A agrees to supply 100 bags of wheat grains to B on a certain
day. If A fails to supply the goods on that particular day, B need not pay the ----------------------
price of the goods. He can sue A for getting the contract cancelled and claim
compensation for the loss suffered by him due to A’s breach. ----------------------
----------------------
Activity 1 ----------------------
1. Suppose you enter into a written agreement to purchase a person’s ----------------------

house at a specific price and on exact terms. If the seller refuses to sell, ----------------------
regardless of the reason, will you be able to bring a lawsuit to force
him or her to sell at the agreed-upon price? ----------------------
2. Read Patel v Ali [1984] 1 All ER 978. ----------------------

Notes 10.6 SUIT FOR SPECIFIC PERFORMANCE OF CONTRACT
---------------------- When the aggrieved party, instead of demanding cancellation of contract,
insists upon its performance through the Court, this Remedy is called ‘Specific
---------------------- Performance of Contract’ remedy.
---------------------- If the suit is granted the Court directs the party committing breach to
complete his promise specifically as per terms of the contract.
----------------------
However, specific performance remedy is not available in each and every
---------------------- case. In certain cases, where the loss caused to the aggrieved party is incalculable
(irreparable) and therefore the damages are not an adequate remedy, the specific
---------------------- performance is an ideal remedy. Specific performance remedy is normally granted
---------------------- when the subject matter of contract is a unique one, and therefore the injured party
will not be able to get an exact substitute of the subject matter in the market.
----------------------
Thus, specific performance is a special remedy which is not granted in
---------------------- following cases:
1. Where damage is an adequate remedy- i.e. the loss is calculable.
----------------------
2. Where contract is not of personal nature.
----------------------
3. Where court cannot supervise the performance e.g. a building contract.
---------------------- 4. Where one party is a minor- A minor is incapable to contract and therefore
---------------------- specific performance remedy is not available in minor’s agreement.
For example
----------------------
a) X agreed to sell his painting to Y for a certain price. Subsequently, X refused
---------------------- to sell painting. Here, Y may sue X for specific performance of contract.
---------------------- b) A promises to sell an antique piece to B at a high price. B promises to
purchase and pays advance money. Subsequently, A refuses to sell the
---------------------- antique at that price. B may sue A for specific performance of contract
because identical antique is not available in the market. The loss caused to
----------------------
B is incalculable.
----------------------

----------------------
----------------------
1. Specific performance remedy is normally granted when the subject
---------------------- matter of contract is a unique one, and therefore the injured party will
not be able to get an exact substitute of the subject matter in the market.
----------------------
----------------------
10.7 SUIT FOR AN INJUNCTION
----------------------
Injunction means an Order of a Court prohibiting (stopping) a party from
---------------------- doing a certain act which he had promised he will not do. In a contract where one

party has promised he will “not do” (abstain from doing) a certain act, and if he Notes
starts doing that act, the aggrieved party can stop the defaulter by an injunction
Order. ----------------------
Thus, Injunction remedy is similar but exactly opposite of Specific ----------------------
performance remedy with respect to forcing the defaulter to stick to the terms
of his contract. In Specific performance Court compels the defaulter party “to ----------------------
do” something but under Injunction suit the court compels the defaulter party
----------------------
“not to do” something which he has already promised.
Injunction remedy is also available in situations where one person violates ----------------------
the right of another person by doing a certain act. He can be then stopped by an
----------------------
Injunction order.
Under the Injunction suit, the Court at times issues ‘temporary injunction’, ----------------------
‘Status-quo’ or ‘stay’ orders.
----------------------
For example- a) A, a new film star has signed a contract with B – a producer
that A will act only for B’s Films for a period of one year. During the same year ----------------------
A contracted to act for some other producer. B can restrain A by an Injunction ----------------------
Order.
b) A and B are neighbours. A has contracted with B that he will fetch a water ----------------------
from B’s well for which A has already received Rs. 5,000 as consideration. A ----------------------
starts fetching water from B’s well. B can sue A for stopping him from fetching
water from his well. ----------------------
----------------------
10.8 SUIT FOR QUANTUM MERUIT
----------------------
Quantum Meruit means “as much as is earned”. The remedy is explained
in the next chapter of Quasi-Contracts, as a separate topic. Please refer to the ----------------------
same.
----------------------
10.9 SUIT FOR DAMAGES (COMPENSATION) (SEC.73, 74) ----------------------
‘Damages’ means a monetary compensation granted to the aggrieved party ----------------------

for the loss suffered by him as a result of breach of contract. It is an important ----------------------
remedy and is often combined with either of the remedies discussed for breach
of contract. The object of awarding damages is not to punish the defaulting party ----------------------
but is to make good the financial loss suffered by the aggrieved party due to the
breach. ----------------------
Rules of Calculation of Damages (Sec.73.) ----------------------

Sec. 73 lays down 4 important rules for assessment of damages. The Rules ----------------------
are based on the judgment given in an old English case of Hadley Vs Baxendale,
Which is discussed below after the Rules. ----------------------
Rule 1: Ordinary Damages ----------------------
The aggrieved party is entitled to receive compensation for any loss or
----------------------

Notes damage which naturally arose in the usual course of things from such breach.
These are called as “Ordinary Damages”, or “General Damages”.
----------------------
Ordinary damages can be claimed only if following conditions are satisfied:
---------------------- 1. There must be a loss caused due to the breach.
---------------------- 2. Such loss must be directly linked with the breach. The damage must arise
in the normal or usual course of things. Usually the difference between the
---------------------- Market price and contract price are the ordinary damages. To put it in the
form of equation-
----------------------
Ordinary Damages = Market Price of Goods- Contract Price of Goods
----------------------
For example, A contracts to sell certain goods to B on 10th October, For
---------------------- Rs.60,000. A commits a breach on 10th October when the price of the same
goods in the market is Rs.70,000. B can recover Rs.10,000 as Ordinary damages.
---------------------- (Difference between market price and contract price).
---------------------- Rule 2: Special Damages
---------------------- The aggrieved party is entitled to receive compensation for any loss or
damage which the parties knew (when they made the contract), to be likely to
---------------------- result from the breach. These are called as “Special Damages”, because they
arise due to some special circumstances of the case. The special damages can be
----------------------
recovered only if the special circumstances were communicated to the promisor
---------------------- by the promisee at the time of the contract.
Thus, ‘special circumstances’ of a contract give rise to a ‘special loss’ for
----------------------
which ‘special damages’ can be granted.
---------------------- However, it must be noted that, if the promisor was not aware of the special
---------------------- facts of the contract then he is not responsible to pay special damages to the
promise.
---------------------- For example, A, a builder, contracts to construct a house for B till a certain
---------------------- date. B has further contracted to let his house on rent to C from that date. A is
unable to complete the house, due to which B commits a default in his contract
---------------------- with C. B loses the rent. If A was aware of the contract between B & C then A
is liable to pay to B the amount of rent lost by B as special damages.
----------------------
Rule 3: Remote Loss - No Compensation
----------------------
No compensation is to be given for any remote and indirect loss or damage
---------------------- sustained by breach. Damages are estimated on the basis of loss actually suffered
by the party. Therefore, a loss which is indirect or too remote is not considered
---------------------- for paying compensation.
---------------------- Rule 4: Means of Overcoming Inconvenience
In estimation of the loss or damage from a breach, the means which existed
----------------------
for remedying or overcoming the inconvenience caused by the non-performance
---------------------- of the contract must be taken into account. If the promisee had means of
overcoming the loss, but he did not use them; then the amount of compensation
---------------------- is decreased.

For example, Hadley Vs Baxendale: All the above Rules in Sec.73 are based Notes
on the principles laid down in the judgment of this old English case.
----------------------
Facts of the case: H’s mill stopped due to breakdown of a crankshaft. He
delivered the shaft to B, a common carrier, to take it to a manufacturer for making ----------------------
a new shaft. (H had not communicated the importance of the shaft to B. B delayed
the delivery beyond reasonable time and as a result, the mill remained idle for ----------------------
a long time and H lost his new orders and his profits. H sued B to recover the ----------------------
damages for loss of profits caused by the delay.
----------------------
Decision of the Court: B was not held liable for loss of profits during the
period of delay because the special circumstances regarding “any delay would ----------------------
cause loss of profits to H” were not communicated to B. Therefore, it was a remote
loss. Secondly, if H as a mill-owner had kept a spare shaft, the mill would have ----------------------
not remained idle. Hence, B was not liable for any additional damages. This case ----------------------
covers all the Rules of calculating compensation.
----------------------
10.10 TYPES OF DAMAGES ----------------------
Damages are of following types: ----------------------
1. Ordinary Damages ----------------------
2. Special Damages
----------------------
3. Vindictive or Exemplary Damages
----------------------
4. Liquidated Damages and Penalty
----------------------
1. Ordinary Damages
----------------------
We have already discussed them above in Rule 1 of calculation damages.
2. Special Damages ----------------------
We have discussed them above in Rule 2 of calculating damages. ----------------------

3. Vindictive or Exemplary Damages ----------------------
Damages are granted to compensate the aggrieved party. But sometimes ----------------------
heavy damages are granted to the aggrieved party not merely to compensate him
but also to punish the defaulter party. Exemplary damages are therefore in the ----------------------
nature of punishment, and are granted in exceptional cases.
----------------------
For example- a) Breach of contract to marry
----------------------
b) Wrongful dishonor of a cheque etc.
----------------------
4. Nominal Damages
Whenever there is a breach without any loss, then nominal damages are ----------------------
granted. At times, there is no loss or hardly any loss caused due to the breach. ----------------------
Then nominal, small or a token amount is awarded to the injured party.
----------------------

Notes 5. Liquidated Damages and penalty
Sometime, the parties to a contract, at the formation of contract, specify a
----------------------
sum which shall be payable by way of damages, in case of breach of contract, by
---------------------- the defaulter to the aggrieved party. Such amount so mentioned in the contract
may be either Liquidated Damages or Penalty.
----------------------
Liquidated Damages: If the sum mentioned in the contract is a genuine
---------------------- pre-estimation of the loss that is likely to be caused in case of breach then it
is called as liquidated damages. It is an amount no more and no less than the
---------------------- aggrieved party is entitled to recover in case of breach.
---------------------- Penalty: If the sum mentioned in the contract is disproportionate and much
---------------------- more than the pre-estimated loss likely to be caused, then it is called as penalty.
Penalty amount is in the nature of threat held over the parties giving a security
---------------------- that the contract shall be performed.
---------------------- English Law makes a difference between the two and enforces the liquidated
damages but is reluctant to grant penalty amount.
---------------------- Indian Law does not make such distinction between the two. Indian Law
---------------------- gives a combined effect to both under Section 74 of the Contract Act.
As per section 74, if any sum is mentioned in the contract to be paid in
----------------------
case of any breach, the aggrieved party is entitled to receive only a reasonable
---------------------- compensation not more than the amount mentioned in the contract. Thus,
the Courts in India actually calculate the compensation and will grant only a
---------------------- reasonable compensation not exceeding the amount decided by the parties.
---------------------- In the contracts, at times there are various stipulations (conditions) by way
of penalty. Example - Payment of Interest clause by way of penalty. But still
---------------------- only a reasonable compensation shall be granted. To this rule of reasonable
compensation there is an exception.
----------------------
Exception: If any person enters into any bail-bond or such other instrument
---------------------- for the performance of any public duty, he shall be liable, to pay the whole sum
mentioned in the instrument upon breach of contract.
----------------------
Payment of Interest: A stipulation in the contract “to pay the interest” on
---------------------- the sum due, may or may not be a Penalty clause.
---------------------- i. A stipulation (condition) for payment of interest at a reasonable rate, from
the date of default, is not a penalty.
----------------------
ii. Payment of interest at a high rate from the date of default is always in the
---------------------- nature of penalty.
---------------------- iii. Payment of interest at a high rate from the date of default may not be a
penalty always.
----------------------
iv. Payment of compound interest at a higher rate on default is a penalty.
---------------------- v. Payment of compound interest at the same rate as was payable before default
---------------------- is not a penalty.

Notes
Activity 1
----------------------
Mr. Karodimal is a wholesaler of sugar. Mr. Choradia placed an order with ----------------------
Mr. Karodimal for supply of 5 tonnes of sugar. Mr. Karodimal promised to
supply 5 tonnes of sugar to Mr. Choradia on 15th May and Mr. Choradia ----------------------
promised to pay the price on receipt of the sugar. Mr. Karodimal failed
----------------------
to deliver the sugar on the 15th May. Is Mr. Choradia responsible for the
payment of the price of the sugar and what remedy is available to Mr. ----------------------
Choradia?
----------------------
----------------------
Summary
----------------------
The contract is said to be discharged when the obligation created by it come
to an end. The various modes of discharge of contract are as follows: ----------------------
●● Discharge by performance:- When the parties to the contract fulfill ----------------------
their obligations arising under the contract within time and in the manner
prescribed, the contract is said to have been performed and thereby, ----------------------
parties are discharged.
----------------------
●● Discharge by Breach of Contract: - If a party to the contract fails, refuses
or neglects to perform his promise when its performance has fallen due, ----------------------
the party is said to have committed a breach of contract. The breach of
contract may be actual breach or anticipated breach. Actual Breach of ----------------------
contract may occur at the time when the performance is due or during ----------------------
the performance of the contract. Anticipatory Breach of contract occurs
when a party repudiates his liability under the contract before the time for ----------------------
performance falls due or when the party acts in such a manner that the
performance on due date becomes impossible. ----------------------
●● Discharge by agreement or consent: - A contract rests on an agreement ----------------------
of the parties. If the parties agree or with the consent of the parties, the
contract is put to an end and parties may be discharged. The discharge by ----------------------
consent may be express or implied. Discharge by implied consent takes ----------------------
place by –a) novation, that is, when a new contract is substituted for an
existing contract, either between the same parties or between one of the ----------------------
parties and a third party; b) Alteration, that is, when one or more of the
contract is/are altered by the mutual consent of the parties to the contract; ----------------------
c) rescission, that is when all or some of the terms of the contract are ----------------------
cancelled; d) remission, that is acceptance of a lesser fulfillment of the
promise made; e) waiver, that is, intentional relinquishment or giving up ----------------------
of a right by a party entitled thereto under a contract; f) merger, that is
when an inferior right accruing to a party under a contract merges into a ----------------------
superior right, accruing to the same party under the new contract. ----------------------
----------------------

Notes ●● Discharge by Subsequent impossibility to perform: - Impossibility
of performance that has resulted after the contract is made renders the
---------------------- contract void and thereby discharges the parties to the contract. It is called
as frustration of the contract. The supervening impossibility subsequent
---------------------- to contract may occur due to change in circumstances beyond human
control or change in law which renders the performance illegal. However,
----------------------
mere difficulty in performance, failure of third party, commercial
---------------------- impossibility, strikes, lock-outs and civil disturbances are not covered
under supervening impossibility. Hence in such events contracts are not
---------------------- regarded as frustrated and parties to such contract continue to be liable to
each other for the performance of their respective obligations.
----------------------
●● Discharge by operation of Law: - The parties are discharged from
---------------------- liability to perform in case of death (where contract involves the personal
skill of the promisor), merger, insolvency and unauthorized alteration of
---------------------- the terms of contract.
---------------------- Remedies for Breach of Contract
In case of breach of contract, the injured party has various remedies:-
----------------------
●● Rescission: - Where there is breach of a contract by a party, the injured
---------------------- party may sue and rescind the contract. He is also discharged from all his
obligations under the contract.
----------------------
●● Damages: - Damages means monetary compensation awarded to the
---------------------- injured party by the Court for the loss or injury suffered by him. The
foundation of modern law of damages both in India and England is found
---------------------- in the case of Hadley v. Baxendale. Damages may be of four types.
---------------------- n Ordinary contemplation damages: these damages actually arise
in the usual course of things from the breach of the contract.
----------------------
n Special damages: Damages which may reasonably be supposed
---------------------- to have been in the contemplation of both the parties at the time of
entering into the contract are known as special damages.
----------------------
n Vindictive or Exemplary damages: These damages are allowed in
---------------------- case of the breach of a contract as punishment.
n Nominal damages: When the injured party has not suffered any
----------------------
loss by reason of breach of the contract, the court may award a
---------------------- nominal sum as damages. They are called nominal damages.
n Liquidated Damages and Penalty: Liquidated damages represent
----------------------
a sum
----------------------
Keywords
----------------------
●● Discharge: Discharge of Contract means termination of the contractual
----------------------
relationship between the parties.
---------------------- ●● Discharge by Performance: A contract is said to be discharged by actual
performance when the parties perform their respective promises as per
----------------------
terms of the contract.

●● Breach of Contract: If the promisor in a contract fails or neglects or Notes
refuses to perform the contract, there is a breach of contract committed
by non-performance. ----------------------
●● Anticipatory Breach: Anticipatory breach occurs when a party to a ----------------------
contract breaks the contract before the time fixed for performance has
arrived. ----------------------
●● Doctrine of Frustration of Contract: Subsequent impossibility making ----------------------
the contract void.
----------------------
●● Novation: Novation means substitution of a new contract in place of the
earlier contract. ----------------------
●● Rescission: Rescission means cancellation of contract. ----------------------
●● Alteration of a contract: Alteration of a contract takes place when one
or more terms of the contract are altered by mutual consent of the parties ----------------------
to the contract. ----------------------
●● Remission: Remission means acceptance of lesser fulfillment of promise
----------------------
made in discharge of the whole of the promise.
●● Waiver: Waiver means to give up one’s own right. ----------------------
●● Accord: Accord means an agreement to accept less than what is due. ----------------------
●● Satisfaction: Satisfaction is the consideration which makes the agreement
----------------------
operative.
●● Legal Remedy: A legal remedy means the courses of action available to ----------------------
an aggrieved party for the enforcement of his rights under the contract.
----------------------
●● Specific Performance of Contract: When the aggrieved party, instead of
demanding cancellation of contract, insists upon its performance through ----------------------
the Court, this Remedy is called ‘Specific Performance of Contract’ ----------------------
remedy.
●● Injunction: Injunction means an Order of a Court prohibiting (stopping) ----------------------
a party from doing a certain act which he had promised he will not do. ----------------------
●● Quantum Meruit: Quantum Meruit means “as much as is earned”.
----------------------
●● Damages: ‘Damages’ means a monetary compensation granted to the
aggrieved party for the loss suffered by him as a result of breach of ----------------------
contract.
----------------------
●● Ordinary Damages: The aggrieved party is entitled to receive
compensation for any loss or damage which naturally arose in the ----------------------
usual course of things from such breach. These are called as “Ordinary
----------------------
Damages”, or “General Damages”.
●● Special Damages: Special Damages arise due to some special ----------------------
circumstances of the case. ----------------------
----------------------

Notes ●● Liquidated Damages: If the sum mentioned in the contract is a genuine
pre-estimation of the loss that is likely to be caused in case of breach, then
---------------------- it is called as liquidated damages.
----------------------
----------------------
1. What are the various modes of discharge of contract?
---------------------- 2. In what ways parties may get themselves discharged with the help of
consent?
----------------------
3. Discuss the law relating to Novation of Contract.
---------------------- 4. What do you mean by ‘Frustration of Contract”? Explain with illustrations.
---------------------- 5. Under which circumstances, the contract is not regarded as frustrated?
6. Explain what do mean by ‘Breach of Contract’ as one of the modes of
---------------------- discharge.
---------------------- 7. What do you mean by ‘anticipatory breach of contract’? State the right of
promisee in case of anticipatory breach.
---------------------- 8. What do you mean by the term ‘Remedy’?
---------------------- 9. What are the various principles on the basis of which the damages are
awarded to an aggrieved party upon the breach of contract?
---------------------- 10. What do mean by ‘Specific Performance of Contract’? In which
---------------------- circumstances, the specific performance is not granted.
11. Examine critically the rule of Hadley v. baxendale.
---------------------- 12. What do you mean by ‘Damages’? Explain various types of damages.
---------------------- 13. Distinguish between the ‘Liquidated Damages’ and ‘penalty’.
14. Explain the concept of ‘Quantum Meruit’. When does the claim of
----------------------
Quantum Meruit arise?
----------------------
----------------------
----------------------
----------------------
---------------------- 1. True
---------------------- 1. Anticipatory breach of contract is defined under Section _____of the

Indian Contract Act.
---------------------- iv. 39
---------------------- 2. Frustration of contract by
---------------------- iii. Both i. and ii.
----------------------

Check your Progress 2 Notes
----------------------
1. True
----------------------
Press.
----------------------
Publication. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Indemnity and Guarantee (Sections 124 to 147)
UNIT
11
Structure:
11.1 Introduction
11.2 Contract of Indemnity
11.3 Parties to Indemnity Contract
11.4 Essentials of Contract of Indemnity
11.5 Rights of an Indemnity-Holder
11.6 Contract of Guarantee
11.7 Essentials of Contract of Guarantee
11.8 Difference between Indemnity and Guarantee
11.9 Kinds of Guarantee
11.10 Revocation of Continuing Guarantee
11.11 Rights of a Surety
11.12 Rights of a Creditor against Surety
11.13 Discharge of Surety
Summary
Key Words
Suggested Reading
Indemnity and Guarantee (Sections 124 to 147) 143

Notes
Objectives
----------------------
• Explain the concept of indemnity and guarantee
----------------------
• Differentiate between the essentials of contract of indemnity and
---------------------- guarantee
---------------------- • Analyse the rights and liabilities of indemnity holder and indemnifier
---------------------- • Assess the rights of surety

• Describe the provisions for revocation of guarantee and discharge of
---------------------- surety
----------------------
---------------------- 11.1 INTRODUCTION

---------------------- The contract of Indemnity and guarantee are the special contracts. It may be
noted that these contracts form the part of General Law of Contracts. Therefore,
----------------------
they must also have all the essentials of a contract. The specific provisions related
---------------------- to Indemnity are mentioned in sec.124 & 125 of the Act. Specific provisions
related to Guarantee are mentioned from sec. 126 and 147 of the Act. Thus,
---------------------- besides these special provisions, the general principles of contracts (mentioned
in earlier chapters) are also applicable to these special contracts.
----------------------
---------------------- 11.2 CONTRACT OF INDEMNITY

---------------------- The term ‘indemnity may be defined as an act to compensate or protect
against loss. In other words, it means to make good the loss, to compensate the
----------------------
party who has suffered some loss. Section 124 of the Indian Contract Act has
---------------------- defined ‘Contract of Indemnity’ as:
‘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, is called a ‘Contract of Indemnity’.
---------------------- A contract of indemnity is a type of contingent contract or conditional

contract. The contingency upon which the whole contract depends is the
---------------------- “happening of loss to the promisee”. The contract is formed with an object
of protecting the promisee from a contingent anticipated loss. The promisor
---------------------- promises to compensate the loss if it is caused by the promisor’s conduct or by
---------------------- the conduct of any other person.
----------------------
----------------------
----------------------

Notes
----------------------
1. The contract of indemnity has been defined under Section ______ of
----------------------
Indian Contract Act.
2. A Contract of Indemnity is a contract by which one party promises to ----------------------
_________the other from loss caused to him.
----------------------
----------------------
11.3 PARTIES TO INDEMNITY CONTRACT ----------------------
From the definition, it is very clear that there are two parties to this contract. ----------------------
1. Indemnifier: The person who promises to make good the loss is called
----------------------
indemnifier or promisor. He is under a duty, obligation, and liability to be
fulfilled if required. ----------------------
2. Indemnity-holder: The person whose loss is to be made good is called
----------------------
indemnity-holder or promisee or person indemnified. He enjoys a right to
be compensated in case of loss. ----------------------
Examples:
----------------------
 A owed Rs.1000/- to B, however he disputed the claim. A’s friend, C,
contracted to indemnify A against the consequences of any proceedings ----------------------
which B may take against him (A) it is a contract of indemnity. In the event ----------------------
where A is ordered to pay the amount to B, then he can recover the same
from C. In this case, C is indemnifier and A is indemnity holder. ----------------------
 A lost his share certificate. He applied to the concerned Company for issuing ----------------------
a duplicate certificate. The company asked A to execute an indemnity bond in
its favour to protect itself from any claim which may be made subsequently ----------------------
by any person on the basis of original certificate. A executes the indemnity
bond. This is a contract of indemnity between indemnifier A and indemnified ----------------------
Company. ----------------------
It may be noted that the definition given in section 124 of the Indian Contract
----------------------
Act, 1872 is not exhaustive. It rather restricts the scope of indemnity to the
cases where there is express promise to indemnify against the loss caused by, ----------------------
the promisor himself or any other person. It therefore follows that the express
promise to indemnify must be to indemnify against the loss caused by human ----------------------
acts. The definition excludes an implied promise to indemnify and cases of losses
----------------------
arising from accidents and events not dependent on conduct of human beings.
English Law on Contract of Indemnity ----------------------
The English law defines the expression ‘contract of indemnity in a much ----------------------
wider sense. According to English Law, ‘a contract of Indemnity means a
promise to save another harmless from loss caused as a result of a transaction ----------------------

Notes entered into at the instance of the promisor.’ The definition includes a promise
of indemnity against loss arising from any cause whatsoever, either by promisor
---------------------- or the third party or even by an accident or act of God. Thus it is not necessary
that the loss must be caused by human beings. Having regard to this definition,
---------------------- the Indian Courts have always regarded the contracts of fire insurance and the
---------------------- marine insurance as the contract of Indemnity.
---------------------- Activity 1
----------------------
Identify and note down the differences between Indian Law of Indemnity
---------------------- and English Law of Indemnity.
----------------------
---------------------- 11.4 ESSENTIALS OF CONTRACT OF INDEMNITY

---------------------- The following are the various essentials of an indemnity contract:
---------------------- 1. No. of parties
---------------------- 2. Mode of contract

3. Other essentials of contract
----------------------
4. Loss caused to indemnity holder
----------------------
5. Commencement of liability of indemnifier
---------------------- 1. Number of parties: There are essentially two parties to an indemnity
contract. They are indemnifier and indemnity-holder, as explained earlier.
----------------------
Indemnifier promises to indemnity-holder from a certain loss.
---------------------- 2. Mode of contract: A contract of indemnity may be express or implied. It
---------------------- is said to be express, when a person expressly promises to indemnify the
loss. Express promise can be oral or written. A contract of indemnity is
---------------------- said to be implied when it is to be inferred from the conduct of parties or
from circumstances of a case; or by operation of law. For example, in a
---------------------- contract of agency, there is an implied promise to indemnify the agent by
---------------------- the principal.
3. Other essentials of a general contract: All the essentials of a valid
---------------------- contract as per sec.10 of the Indian Contract Act i.e. competent parties,
---------------------- free consent, lawful consideration, lawful object and not a void agreement
are also applicable to a contract of indemnity. For example, A requested
---------------------- B, a journalist, to publish a defamatory statement against C. He further
promises to indemnify B for any loss which he may suffer by way of
---------------------- damages payable to C. It is not a contract as it is opposed to public policy
---------------------- and hence can not be enforceable.
4. Loss caused to the indemnity-holder: The contingency upon which this
----------------------
contract depends is the ‘happening of the loss’ to the promisee. Only when
---------------------- the loss has happened, the contract shall be enforceable. Now what should

be the reason for the loss? The definition makes it very clear that the loss Notes
should be caused to the promisee- (a) by the conduct of the promisor
himself or (b) by the conduct of any other person. Thus, the loss caused ----------------------
by the conduct of the Promisee or an act of god or natural calamity will
----------------------
not be covered. For example, A is appointed as a Cashier in B’s firm at
the request of C. C promises B to make good the losses that he may suffer ----------------------
due to the dishonesty of A. In this case, the contract between B and C is
the contract of Indemnity. ----------------------
But if this definition is strictly applied then a large number of insurance ----------------------
contracts will not be covered by indemnity contract. This was certainly ----------------------
not the intention of the law makers. As stated earlier, the English law
of indemnity is much wider than the Indian law because it covers loss ----------------------
caused by any reason. The Indian courts therefore follow the English law
----------------------
if required. In the case of Gajanan Moreshwar vs. Moreshwar Madan
(1942), the Bombay High Court held that sec.124 & 125 of Indian ----------------------
Contract Act are not exhaustive of law of indemnity and Courts would
apply the principles of English law in this regard. ----------------------
5. Commencement of liability of indemnifier: The time of ----------------------

commencement of liability of indemnifier has long remained a ----------------------
debatable issue. The Indian Contract Act does not provide for the time
of commencement of indemnifier’s liability. The Act is silent as to ----------------------
when the indemnifier becomes liable to pay. On this issue there are
----------------------
differences of opinion. One view was that the liability commences
only after the payment is made by the promisee. The other view ----------------------
was that the liability does not mean repayment (by promisor) of
payment (made by promisee). The later view is generally accepted ----------------------
and it lays down the equitable principle. Now it has been settled that ----------------------
the liability of promisor commences as soon as the liability of the
promisor becomes absolute. That is, if the promisee has incurred a ----------------------
loss even though he has paid nothing, he is entitled to ask the promisor
----------------------
to indemnity. Indemnity is not necessarily given by repayment after
payment. Indemnity requires that the party to be indemnified shall ----------------------
never be called upon to pay. To indemnify does not merely mean to
reimburse in respect of money paid but it means to save from loss in ----------------------
respect of liability against which the indemnity has been given. Thus, ----------------------
if the indemnity holder had incurred an absolute liability, he becomes
entitled to call upon the indemnifier to save him from that liability and ----------------------
pay it off. In other words, the liability of indemnifier commences as
----------------------
soon as the liability of the indemnity holder becomes absolute, clear
and certain. ----------------------
----------------------
----------------------

Notes
----------------------

1. A contract of indemnity may be express or implied.
----------------------
2. The Indian Contract Act does provide for the time of commencement
---------------------- of indemnifier’s liability.
----------------------
---------------------- 11.5 RIGHTS OF INDEMNITY-HOLDER

---------------------- As per Sec.125 of the Act, the promisee is entitled to recover from the promisor:
---------------------- 1. Damages – all damages which the promisee may be compelled to pay in
any with respect to the contract of indemnity. It may however be noted
---------------------- that the indemnity holder must act within the scope of his authority.
[section 125(1)]
----------------------
2. Costs – all costs which the promisee may be compelled to pay in filing
---------------------- or defending the suit with respect to the promise of indemnity arises.
It may however be noted that the indemnity holder must act within the
----------------------
scope of his authority and not contrary to the orders of the indemnifier.
---------------------- Moreover, in bringing and defending the suit he must act in the same way
as a prudent man would have acted under similar circumstances in his
---------------------- own case. The indemnity holder may also recover all the costs of the suit
where he was authorized by the indemnifier to bring or defend the suit.
----------------------
[section 125(2)]
---------------------- 3. All sums – all sums which the promisee may have paid under the terms of
---------------------- any compromise of any suit. In order to avail all these rights, the promisee
must act prudently within the scope of his authority. He should not violate
---------------------- the orders of the promisor.[section 125(3)]
---------------------- The rights of the indemnifier/promisor, though not distinctly mentioned

in the Act, are similar to the rights of a surety, which are discussed in the next
---------------------- chapter. In this regard the observation in Simson v. Thomson, 3 AC 279, is worth
noting- ‘it is well known principle of law that where one person has agreed to
---------------------- indemnify another, he will, 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.’
----------------------
---------------------- Activity 2
----------------------
Collect a format of an Indemnity Bond from a company for issuing a
---------------------- duplicate share certificate. Write your observations pertaining to the same.
----------------------

11.6 CONTRACT OF GUARANTEE Notes
We often hear the terms Bank guarantee, surety with respect to loan ----------------------
transactions. The term ‘guarantee’ may be understood as an undertaking by one
person to pay amount due from another person. A contract of guarantee is usually ----------------------
made with the intention of enabling a person to get a loan or goods on credit
----------------------
from a Bank or a financial institution or any other creditor.
The Indian Contract Act has defined a contract of guarantee under sec.126 ----------------------
as follows- ----------------------
‘A Contract of Guarantee is a contract to perform the promise, or discharge
the liability of a third person in case of his default.’ The analysis of this definition ----------------------
shows that, a contract of guarantee is a contract in which a person promises to ----------------------
discharge the liability of third person in case the third person fails to discharge
his own liability. There are three parties involved in every contract of guarantee. ----------------------
They are -
----------------------
 Creditor is the person to whom the guarantee is given
----------------------
 Surety is the person who gives the promise to discharge the liability of the
third person. ----------------------
 Principal debtor is the person in respect of whose default the guarantee is
----------------------
given.
Thus, a contract of guarantee is a tripartite agreement between surety, creditor ----------------------
and principal debtor. ----------------------
Examples:
----------------------
a) A, a creditor issues a loan of Rs.5 lakhs to B, a debtor, only when C, a surety
promises to A that if B does not repay the loan, he will do so. The contract ----------------------
between A and C is a contract of guarantee with respect to a loan transaction
between A and B. ----------------------
b) X and Y enter Z’s shop. X wants to buy a bulk of goods on credit. Y assures ----------------------
Z that if X does not pay, Y will pay for the goods. This assurance is a contract
----------------------
of guarantee.
----------------------
----------------------
1. The Indian Contract Act defines guarantee under Section ______. ----------------------
i. 124 ----------------------
ii. 126
----------------------
iii. 125
----------------------
iv. 127
----------------------

Notes
2. __________is the person who gives the promise to discharge the
---------------------- liability of the third person.
i. Surety
----------------------
ii. Creditor
----------------------
iii. Principal debtor
---------------------- iv. Principal creditor
----------------------
---------------------- 11.7 ESSENTIALS OF CONTRACT OF GUARANTEE

---------------------- 1. Express contract: Just like any other contract, a contract of guarantee
can also be a contract in writing or oral. It must have all the essentials of
----------------------
a valid contract.
---------------------- 2. Three parties: It is a tripartite contract between 3 distinct parties and 3
distinct agreements between (a) creditor and principal debtor which is the
----------------------
main or principal transaction, (b) creditor and surety- which is the contract
---------------------- of guarantee issued by surety, (c) surety and principal debtor- where the
principal debtor requests the surety to act as surety in case the surety
---------------------- incurs liability. Thus, parties to contract of guarantee must be competent
to contract. However, the incapacity of the principal debtor does not affect
----------------------
the validity of contract of guarantee. It requires that the creditor and the
---------------------- surety must be competent to enter into contract. The principal debtor may
even be a minor. In such case the surety is regarded as principal debtor
---------------------- and is personally liable to pay the debt. Thus, it is a contract between
the creditor and surety is treated as a primary and independent, and not
----------------------
collateral. The surety is also liable if the guarantee is given knowing the
---------------------- minority of the debtor.
3. Existing liability: It is of the essence of a contract of guarantee that
----------------------
there should be a primary liability (existing or future) or a promise
---------------------- whose performance is guaranteed, and such liability or promise must be
enforceable by law. It should be remembered that guarantee can be given
---------------------- only for a liability or promise which is enforceable by law. If a guarantee
is given for a non-enforceable obligation, for example, a time-barred debt,
----------------------
it is not a valid guarantee. However, there is an exception to this rule. The
---------------------- guarantee given to a minor’s debt, is allowed.
---------------------- 4. Secondary and conditional liability: The liability of surety is secondary

and conditional. The primary liability is that of the principal debtor. There
---------------------- must be a conditional promise to be liable on default of the principal
debtor. If he does not perform his part of the contract then only the
---------------------- surety has to perform. Surety’s liability is conditional in the sense that it
---------------------- arises only on default of principal debtor. Any liability, which is incurred
independently of the ‘default’ of the principal debtor, it is not within the
---------------------- scope of guarantee. The determining test whether the contract is one of

guarantee or indemnity is whether the obligation has been undertaken at Notes
the debtor’s request or without any request of the debtor. If it is arising out
of request, it is a contract of guarantee, and if it is without request then the ----------------------
contract is one of indemnity.
----------------------
5. Other essentials of a valid contract: All the essentials of a valid contract
like competent parties, free consent, lawful consideration etc. must also ----------------------
be present in a contract of guarantee. All the 3 parties must be competent
----------------------
to contract. However in exceptional situation if principal debtor is
incompetent then surety’s liability becomes primary liability on behalf of ----------------------
principal debtor. There must be a free consent which is voluntarily given
in a contract of guarantee. A guarantee obtained by misrepresentation or ----------------------
concealment of material facts is invalid. A contract of guarantee should be
----------------------
supported by some consideration. There need not be a direct consideration
between the creditor or something done for the benefit of the principal ----------------------
debtor is considered as a sufficient consideration to make the guarantee
operative. ----------------------
6. Extent of surety’s liability: The liability of a surety is coextensive with ----------------------
that of the principal debtor, unless otherwise provided. It means that
the liability of a surety is the same and equal to that of principal debtor ----------------------
unless something else is agreed. If the parties agree expressly, the surety’s
----------------------
liability can be made less than that of principal debtor, or can be restricted
up to a certain limit expressly. ----------------------
E.g. X gives a loan of Rs.50,000 to Y. Z gives a guarantee for Rs.25,000
----------------------
only. If Y makes a default then Z would be liable only for Rs.25,000.
The liability of surety arises immediately when a default is made by the ----------------------
principal debtor. However, the creditor may sue the surety without suing the ----------------------
principal debtor unless otherwise agreed. If there is a condition precedent for
surety’s liability then the surety would be liable only when such condition is ----------------------
fulfilled.
----------------------
Activity 3 ----------------------
----------------------
X gives a loan of Rs.80, 000 to Y. Z gives a guarantee for Rs.20,000 only.
M gives a guarantee for Rs.10, 000. If Y makes a default then Z would be ----------------------
liable to pay how much amount
----------------------
----------------------
11.8 DIFFERENCE BETWEEN INDEMNITY AND
GUARANTEE ----------------------
----------------------
POINT INDEMNITY GUARANTEE
1. No.of parties Two parties-Indemnifier Three parties –Surety, ----------------------
and Indemnity-holder. Creditor and Principal
debtor. ----------------------

Notes POINT INDEMNITY GUARANTEE
No. of contracts One contract between the Three contracts between
---------------------- parties parties (a) creditor & surety,
(b) c reditor & principal
----------------------
debtor
---------------------- (c) s urety & principal-
debtor (implied)
---------------------- 2. Nature of Indemnifier’s liability is S u r e t y ’s l i a b i l i t y i s
liability primary and independent. secondary and conditional.
---------------------- 3. Nature of Indemnifier undertakes Surety undertakes for the
---------------------- undertaking to save indemnity-holder payment of debts of the
from any future loss. principal-debtor in case of
---------------------- his default.
4. Contingency Liability of indemnifier Liability of surety arises
---------------------- arises only on the happening only n default of the
of the loss to the indemnity- principal-debtor.
----------------------
holder due to his conduct of
---------------------- any other person.
5. Request Indemnifier need not act at Surety acts only because
---------------------- the request of indemnity- of the request of principal-
holder. debtor
---------------------- 6. Object It provides ‘security’. It is It also provides ‘security’
---------------------- basically for reimbursement but moreover a ‘surety’ to
of a contingent loss. the creditor of principal-
---------------------- debtor.
7. Right to sue Indemnifier (after becoming A surety, after discharging
---------------------- liable due to loss caused by the debt of principal-
a third party), cannot sue debtor, can sue principal
----------------------
the third party since there -debtor,for recovering the
---------------------- is no privity of contract debt amount.
between them.
----------------------
---------------------- Activity 4
----------------------
Study the insurance policy you have as it is the best example of Contract
---------------------- of Indemnity.
----------------------
----------------------
11.9 KINDS OF GUARANTEE
---------------------- The Contract of guarantee can be classified into various types based on
various criteria, as follows:
----------------------  Oral and Written Guarantee: The contract Act recognizes only express
---------------------- types of guarantee i.e. either oral or written. A creditor should always prefer
to get the guarantee in writing to avoid any disputes in future. Oral guarantee
---------------------- is very difficult to prove in case of dispute.

 Retrospective and Prospective Guarantee: If a guarantee is given for an Notes
existing debt it is called as retrospective guarantee. If it is given for a future
debt, it is called as a prospective guarantee. ----------------------
 Specific and Continuing Guarantee: A guarantee which is given for a ----------------------
single debt or specific transaction is called a specific/single/simple/ordinary
guarantee. Such a guarantee comes to an end when the debt guaranteed has ----------------------
been paid or discharged. Specific guarantee once given is irrevocable. Eg.
----------------------
A guarantees the repayment of a loan of Rs.50,000 given by B to C. This is
a specific guarantee and cannot be cancelled once given. ----------------------
 Absolute or Conditional Guarantee: An absolute guarantee means a
----------------------
guarantee where the surety unconditionally promises to pay in case of
default of the principal debtor. A conditional guarantee is a guarantee where ----------------------
surety promises to pay in case some event, in addition to the default of the
principal debtor, happens or does not happen. ----------------------
 Fidelity guarantee: A guarantee given for the good conduct or honesty of ----------------------
a person employed in a particular office is called a ‘fidelity guarantee’.
----------------------
A guarantee which extends to a series of transactions is called a continuing/
running guarantee. It extends to a series of distinct and separable transactions. ----------------------
It tries to cover a number of transactions over a period of time. A continuing
guarantee can be revoked regarding future transactions. But it cannot be ----------------------
revoked with respect to transactions that have already taken place. Both ----------------------
specific and contingent guarantees can be restricted to certain limit by
making a contract to that effect. For example, A guarantees to B for C’s credit ----------------------
purchases with a running balance of account not exceeding Rs.20,000/-. This
is a continuing guarantee. ----------------------
----------------------
----------------------

1. Which of the following is not the mode of discharge of surety? ----------------------
i. By mutual consent
----------------------
ii. By variation in contract
----------------------
iii. By creditor’s act or omission
iv. By surety’s wishes ----------------------
----------------------
11.10 REVOCATION OF CONTINUING GUARANTEE ----------------------
Revocation means cancellation of the guarantee. Upon revocation of the ----------------------

continuing guarantee, the liability of the surety comes to an end for the future
----------------------
transactions. A continuing guarantee with respect to future transactions can be
revoked by any of the following methods - ----------------------

Notes 1. By Notice of Revocation :
The surety may revoke at any time a continuing guarantee as to the future
----------------------
transactions by notice to the creditor. However, he remains liable for all
---------------------- transactions prior to the notice.
2. By death of Surety :
----------------------
Unless otherwise agreed, the death of the surety operates as a revocation of
---------------------- a continuing guarantee, for future transactions. However surety’s property
remains liable for the past transactions taken place before his death.
----------------------
3. By modes of discharging the Surety :
----------------------
A continuing guarantee is also revoked under the same circumstances under
---------------------- which surety’s liability is discharged by following modes:
----------------------  By mutual consent – When the parties agree to substitute a new contract
for the old contract or rescind or alter the old contract, the old contract
---------------------- stands cancelled. This is also revocation. These methods are called as
novation, rescission & alteration which we have discussed earlier.
----------------------
 By variation in contract- If any changes have been made in the terms
---------------------- of guarantee without the knowledge or consent of the surety, the consent
of guarantee is revoked.
----------------------
 By release of principal-debtor- The surety’s liability is treated as
---------------------- revoked by any contract of creditors by which he discharges the liability
of the principal debtor. So release of principal-debtor is treated as release
----------------------
of the surety.
----------------------  By creditor’s act or omission – If a creditor does any act or omission of
a duty by which the eventual remedy of the surety against the principal
----------------------
debtor is thereby impaired or weakened, then the surety is discharged.
---------------------- For example, B contracts to build a ship for C for a given sum to be
paid by installments as the work reaches certain stages. A becomes
---------------------- surety to C for B’s performance. C, without knowledge of A, becomes
surety to C for B’s performance. C, without knowledge of A, pre-pays
----------------------
the last 2 installments A is discharged by this repayment.
----------------------  By loss of security – if the creditor loses or without the consent of the
---------------------- surety, parts with the security given to him, the surety is discharged
from liability to the extent of the value of security.
----------------------
11.11 RIGHTS OF SURETY
----------------------
The surety enjoys various rights which can be classified as follows:
----------------------
A. Rights against principal-debtor
----------------------
B. Rights against creditor
----------------------
C. Rights against co-sureties
---------------------- Let us consider them one by one:

A. Surety’s Rights against Principal-Debtor: Notes
 Right of subrogation: The term ‘subrogation’ may be defined as the
----------------------
substitution of one person for another. Here the surety is substituted in
place of the creditor if he pays the debt. After paying the guaranteed ----------------------
debt or completing the guaranteed performance, the surety acquires
all the rights of the creditor against the principal-debtor. The surety ----------------------
thus enters the shoes of the creditor (section140). In other words, the
----------------------
surety gets subrogated to all the rights and remedies available to the
creditor. The surety is entitled to enforce all the rights the creditor had ----------------------
against the principal debtor, if the surety has paid off the guaranteed
debt. For example, A borrowed the sum of Rs. 50,000/- from B under ----------------------
the mortgage to which C was a surety and eventually upon failure to
----------------------
pay the debt by A, B recovered it from C, the surety C steps into the
shoes of B (the creditor) and can enforce a the mortgage against A. ----------------------
 Right to indemnity: The surety is entitled to be indemnified by the
----------------------
principal debtor for all payments ‘rightfully paid’ by him. ‘Rightfully
paid’ means a just and equitable payment. As a matter of fact, in every ----------------------
contract of guarantee, there is an implied promise by the principal
debtor to indemnify the surety (145). Thus upon payment of debt or ----------------------
discharge of liability of principal debtor, the surety becomes entitled
----------------------
to recover from the principal debtor all the amount including interest
and costs, rightly paid to the creditor under the guarantee. However, ----------------------
the amount wrongfully paid can not be recovered. It may be noted that
the surety can recover the amount which has been actually paid to the ----------------------
creditor. For example, A borrowed Rs. 10,000 from and B and C gave
----------------------
a guarantee to B for the payment of the loan. On due date, A refused to
repay the loan. B demanded the payment from C, who also refused to ----------------------
pay. B filed a suit for recovery against C who defended the suit having
reasonable grounds for doing so. However, C was compelled to pay ----------------------
the amount of debt with costs. In this case, C can recover from B the
----------------------
amount of the principle debt along with the amount of the costs paid
by him. However, if C had defended the suit without any reasonable ----------------------
ground then he could not have been entitled to recover the mount of
cost because it would then be the amount paid wrongfully. ----------------------
 Right to compel the principal debtor to perform the promise: The ----------------------
surety has the right to insist the principal debtor to perform the promise,
even before making the payment. However, he can do so only after the ----------------------
debt has become due.
----------------------
 Right as to securities with the creditor: The surety has the right to
proceed against such securities of the principal debtor, as the creditor ----------------------
could himself proceed. ----------------------
B. Surety’s Rights Against Creditor:
----------------------
 Right to request the creditor to sue the debtor: On default of payment
or on the due date of payment the creditor can either sue the principal ----------------------

Notes debtor or surety for recovery. However the surety may ask the creditor
to sue the debtor to collect the due amount.
----------------------
 Right to claim securities: After paying the guaranteed debt, the
---------------------- surety can compel the creditor to transfer him all the securities which
he had against the principal debtor, whether the surety knows of the
---------------------- existence of such security or not. If the creditor has lost or parted
with the security without consent of the surety, then the surety
----------------------
is discharged to the extent of the value of the security. The term
---------------------- ‘security’ in section 141 is not used in technical sense. It includes
all rights, which the creditor had against the debtor’s property at
---------------------- the time of contract of guarantee.
----------------------  Right to claim set off: Set off means a counter claim or deductions
from the amount of loan. The surety after being called upon to pay,
---------------------- can claim a set-off, if any, which the principal debtor had against the
---------------------- creditor.
 Right in case of fidelity guarantee: Fidelity means loyalty, honesty. In
----------------------
case of fidelity guarantee, the surety can direct the creditor to dismiss
---------------------- the debtor’s services, whose honesty he has guaranteed, in case of
proved dishonesty of the debtor. Here the principal debtor is normally
---------------------- an employee whose honesty has been guaranteed by surety. By doing
so, the creditor is saved from further loss.
----------------------
C. Surety’s Right Against Co-Sureties:
----------------------
When a debt is guaranteed by two or more sureties, they are called as co-
---------------------- sureties. As the co-sureties share the liabilities, they also share the right to
the means of recovery. Unless otherwise agreed, the co-sureties are liable
----------------------
to contribute equally to the extent of default of principal debtor. If the
---------------------- co-sureties have agreed to guarantee different sums then they are liable
to contribute equally to the extent of default of principal debtor. If the
---------------------- co-sureties have agreed to guarantee different sums then they are liable to
contribute equally subject to the maximum amount guaranteed by each one
----------------------
of them. Co-sureties are jointly and severally liable.
----------------------  Right to contribution: If a co-surety has paid more than his
---------------------- proportionate share of liability, he has a right to claim contribution
from the other co-sureties. Where there are co-sureties, a release by
---------------------- the creditor of any one of them does not discharge the others neither
does it free the surety so released from his responsibility to the other
---------------------- co-sureties.
----------------------  Right to share the security: If a co-surety obtains any security of
principal debtor, the other co-sureties have a right to share such security.
----------------------
If they are liable in equal amounts, they will be entitled to share equally
---------------------- the securities. In case their liabilities are unequal, they will share the
securities in equal proportions.
----------------------

11.12 RIGHTS OF A CREDITOR AGAINST SURETY Notes
1. Right to sue: Where the liability of the surety arises, the creditor can sue ----------------------
the surety without suing the principal debtor. The liability of surety is
immediate and need not be postponed until the creditor has exhausted his ----------------------
remedies against the principal debtor. ----------------------
2. Right to proceed before utilizing debtor’s securities: Unless otherwise
agreed, a creditor may proceed against the surety before utilizing the ----------------------
debtor’s securities for recovering the amount due. ----------------------
3. Right to proceed simultaneously: A creditor may sue principal debtor
and surety concurrently for recovering his debt. ----------------------
4. Right in case of surety’s insolvency: If the surety becomes insolvent, the ----------------------
creditor has right to recover the dues from the property of the insolvent
----------------------
surety.
5. Right in case of co-sureties: In case of co-sureties, the creditor is free to ----------------------
proceed when he is freed from his obligations As a result, his liability as
----------------------
a surety comes to an end. This can happen in various ways, either by the
conduct of the surety himself or of the creditors or of the principal debtor ----------------------
or by operation of law.
----------------------
11.13 DISCHARGE OF SURETY ----------------------
A surety is said to be discharged when he is freed from his obligations. As a ----------------------
result, his liability as a surety comes to an end. This can happen in various ways,
either by the conduct of the surety himself or of the creditors or of the principal ----------------------
debtor or by operation of law.
----------------------
The various methods of discharge of contract are as follows:
----------------------
1. By payment by Principal Debtor: If the principal debtor pays off his
debt to the creditor, the surety will be discharged. This is the most ideal ----------------------
method of discharging a contract of guarantee.
----------------------
2. By Notice of Revocation: A surety may revoke his continuing guarantee
by giving a notice to the creditor. ----------------------
3. By Death of Surety: Unless otherwise agreed with the death of the surety, ----------------------
the contract of continuing guarantee comes to an end with respect to future
transactions. Surety’s property shall remain liable for past transactions ----------------------
taken place before his death.
----------------------
4. By Novation of Contract: When the parties mutually agree to substitute
a new contract for the old contract, the old contract of guarantee comes to ----------------------
an end and the surety is discharged under the old contract.
----------------------
5. By Variation in Contract: Any changes or variation made in the existing
contract between the creditor and principal debtor, without the knowledge ----------------------
of the surety, discharges the surety as to any subsequent transactions.
----------------------

Notes 6. By Release of Principal Debtor: Sometimes the creditor releases the
principal debtor from the liability. In such case surety is automatically
---------------------- discharged from his liability under the guarantee (section 134). The
creditor may discharge the principal debtor by a fresh contract. The
----------------------
surety is discharged by any contract between the creditor and the debtor
---------------------- by which the principal debtor is released.
---------------------- 7. By Creditor’s Act or Omission: If a creditor does any act or omission

by which the eventual remedy of the surety against the principal debtor is
---------------------- impaired, then the surety is said to be discharged.
---------------------- 8. By Composition with the Principal Debtor (section135): The term
‘composition’ may be understood as the amicable settlement of the
---------------------- accounts. If the creditor enters into a composition agreement with the
---------------------- principal debtor without the consent of the surety, the surety is discharged
from the liability. However, if the surety gives his consent to composition
---------------------- agreement, he is not discharged. Actually, the composition agreement
is nothing but variation in the original contract and hence the surety is
----------------------
discharged.
---------------------- 9. By giving more time to the Principal Debtor (section 135): If without
---------------------- the consent of the surety, the creditor gives more time to the principal
debtor for the repayment of the debt or for performance of the obligation,
---------------------- the surety is discharged from the liability, provided he has not consented
to the extension of the time period for repayment. However, if the contract
----------------------
for giving more time to the principal debtor is made with the third party,
---------------------- the surety is not discharged (section 136).
---------------------- 10. By promise not to sue the Principal Debtor (section135): If without
the consent of the surety, the creditor enters into an agreement with the
---------------------- principal debtor whereby he promises him that he will not file a suit
against the principal debtor, the surety is discharged from his liability.
----------------------
In case the surety has consented to such agreement, his liability does not
---------------------- extinguish. The surety is entitled to require the creditor to call upon the
principal debtor to pay the debt when it is due and this right is affected
---------------------- when the creditor promises not to sue the principal debtor. However, it
may be noted that the creditor may reserve his right against the surety.
----------------------
An agreement not to sue the principal debtor or to give him time with a
---------------------- reservation of the right against the surety would not discharge the surety
from his liability. Where there are co-sureties, a release by the creditor of
---------------------- one of them does not discharge the others neither does it free the surety
---------------------- from their respective liabilities.
11. By Impairing the Surety’s Remedy (section 139): Impairing remedies
----------------------
imply damaging or diminishing the rights of surety. It is the duty of the
---------------------- creditor not to do anything inconsistent with the rights of the surety. If any
act of the creditor deprives the surety of his rights against the principal
---------------------- debtor, the surety is discharged from his liability.

12. By loss of Security: If , at the time of guarantee, the creditor has obtained Notes
some collateral security against the principal debtor and he losses or parts
with that collateral security without the consent of the surety, the surety is ----------------------
discharged from his liability to the extent of the value of the security.
----------------------
Activity 5 ----------------------
----------------------
Collect a format of a Guarantee Bond from a bank. Write your observations
pertaining to contract of guarantee. ----------------------
----------------------
Summary ----------------------
●● Contract of Indemnity: 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 is called contract of Indemnity ----------------------
(section 124). The person who promises to make good the loss is called ----------------------
the indemnifier (promisor) and the person whose loss is made good is
called the (the Promisee) indemnity holder. ----------------------
●● contract of indemnity is a species of the general contract. It must have
A ----------------------
all the essential elements of a valid contract. It may be express of implied.
----------------------
●● ontract of Guarantee: A contract of guarantee is a contract to perform
C
the promise or discharge the liability of a third person in case of his fault. ----------------------
The person who gives the guarantee is called surety and to whom the
promise is given is called the creditor. The person in respect of whose ----------------------
default the guarantee is given is called the principal debtor. A guarantee ----------------------
may be either oral or written(section 126). A contract of guarantee
must have all the essential elements of a valid contract but the principal ----------------------
debtor may be a person suffering from incapacity to contract and it is not
----------------------
necessary that the contract must necessarily result in some benefit to the
surety himself. ----------------------
●● Kinds of guarantee: A guarantee may be given - ----------------------
n For the payment of debt
----------------------
n For the payment of the price of the goods sold on credit
n For the good conduct or honesty of a person employed in a particular ----------------------
office, in which case the guarantee is called as fidelity guarantee. ----------------------
A guarantee may also be specific or simple guarantee (which extends to a
----------------------
single transaction) or a continuing guarantee which extends to a series of
transactions (section 129). ----------------------
●● Surety’s Liability: The liability of the surety is coextensive with that
----------------------
of the principal debtor unless it is otherwise provided by the contract
(section128). ----------------------

Notes Rights of surety
●● As against the creditor-
----------------------
n Before payment of the principal debt a surety can file a suit for
---------------------- declaration that the principal debtor shall be the person to pay the
amount.
----------------------
n On payment of the principal debt, the surety steps in the shoes of
---------------------- the creditor, that is, he is entitled to be placed in the position of the
creditor.
----------------------
●● As against the Principal Debtor
----------------------
The surety, upon payment or performance of all that he is liable for is
---------------------- invested with all the rights which the creditor has against the principal
debtor (section140). He is also entitled to recover from the principal
---------------------- debtor whatever sum he has rightfully paid under the guarantee, but no
sums which has paid wrongfully (section 145).
----------------------
●● As against the co-sureties
----------------------
The co-sureties are, in the absence of any agreement to the contrary,
---------------------- liable to contribute equally (section 146). If they are bound in different
sums, they are liable to pay equally as far as the limits of the respective
---------------------- obligations permit(section 147). As between co-sureties, there is equality
of burden and benefit.
----------------------
●● Discharge of Surety
----------------------
A surety is discharged from the liability
----------------------  By revocation - It includes revocation by, the surety by giving a notice
---------------------- (section 130), death of the surety (131) and novation (62).
 By conduct of the Creditor - The variation in the terms of the contract
---------------------- brought by the creditor (section 133), release or discharge of principal debtor
---------------------- (section 134), compounding by creditor with principal debtor (section 135),
creditor’s act or omission impairing the surety’s eventual remedy (section
---------------------- 139 and loss of security (section 141) would discharge the surety.
 By invalidation of Contract- If the guarantee is obtained by way of
----------------------
misrepresentation or concealment or it is given on the condition that the
---------------------- creditor shall not act upon it until co-surety joins and the co-surety does not
join, a surety is discharged from his liability.
----------------------
---------------------- Keywords
---------------------- ●● Contract of Indemnity: 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.
---------------------- ●● Indemnifier: The person who promises to make good the loss is called
indemnifier or promisor. He is under a duty, obligation, and liability to be
---------------------- fulfilled if required.

●● Indemnity-Holder: The person whose loss is to be made good is called Notes
indemnity-holder or promisee or person indemnified. He enjoys a right to
be compensated in case of 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. ----------------------
●● Surety: Surety is the person to whom the guarantee is given. ----------------------
●● Principal Debtor: Principal debtor is the person in respect of whose
default the guarantee is given. ----------------------
●● Creditor: The person who owes some money or who is entitled to get ----------------------
performance of the promise.
----------------------
●● Continuing Guarantee: A guarantee which extends to a series of
transactions is called a continuing/running guarantee. ----------------------
●● Discharge of surety: To put an end to liability of the surety.
----------------------
●● Novation: To change or to alter the terms of the contract.
----------------------
----------------------
1. What is a contract of indemnity? ----------------------
2. What are the rights of the indemnity holder when sued?
----------------------
3. When does the liability of indemnifier commence?
----------------------
4. What do you mean by contract of guarantee? Who are the parties to the
contract of guarantee? ----------------------
5. Explain and illustrate the distinction between contract of indemnity and
----------------------
contract of guarantee.
6. Discuss the essential and kinds of contract of guarantee. ----------------------
7. ‘Liability of surety is co-extensive with that of the Principal Debtor”- ----------------------
Comment in the context of the Indian Contract Act, 1872.
----------------------
8. What do you understand by ‘discharge of surety’? Discuss the modes of
discharge of surety. ----------------------
9. Discuss various rights of the surety that are given under the contract. ----------------------
10. What is a continuing guarantee? When and how it is revoked?
----------------------

1. The contract of indemnity has been defined under Section 124 of Indian
----------------------
Contract Act.
----------------------

Notes 2. A contract of indemnity is a contract by which one party promises to save
the other from loss caused to him.
----------------------
---------------------- 1. True
---------------------- 2. False
----------------------
----------------------
1. The Indian Contract Act defines guarantee under Section ______.
---------------------- ii. 126
---------------------- 2. __________is the person who gives the promise to discharge the liability
of the third person.
----------------------
i. Surety
---------------------- 1. Which of the following is not the mode of discharge of surety?
iv. By surety’s wishes
----------------------
----------------------

---------------------- 1. Beatson, J. 2002. Anson’s Law of Contract. New York: Oxford University
Press.
----------------------
----------------------
---------------------- Publication.
---------------------- 4. Row, Sanjiva. 2009. Law of Contract. Delhi Law House.

----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Bailment and Pledge (Section 148 to 181)
UNIT
12
Structure:
12.1 Introduction, Definition and Meaning
12.2 Essentials of Bailment
12.3 Kinds of Bailment
12.4 Duties of Bailor
12.5 Duties of Bailee
12.6 Rights of Bailor
12.7 Rights of Bailee
12.8 Difference between Particular Lien and General Lien
12.9 Rights of Bailor and Bailee against Wrongdoers
12.10 Finder of Lost Goods
12.11 Termination of Bailment
12.12 Pledge (Sec. 172 to 179)
12.13 Difference between Pledge and Bailment
12.14 Rights and Duties of Pawnee
12.15 Rights and Duties of Pawnor
12.16 Pledge by Non-Owners
Summary
Key Words
Suggested Reading
Bailment and Pledge (Section 148 to 181) 163

Notes
Objectives
----------------------
• Describe the concept of bailment
----------------------
• Classify the types of bailment
----------------------
• Appraise the rights and duties of bailor and bailee
---------------------- • Assess the provisions in respect to termination of bailment
---------------------- • Explain the concept of pledge
---------------------- • Discuss the concept of pledge by non-owners
• Analyse the rights and duties of pawnor and pawnee
----------------------
• Differentiate between pledge and bailment
----------------------
---------------------- 12.1 INTRODUCTION, DEFINITION AND MEANING
---------------------- After having studied contract of indemnity and guarantee in the earlier unit,
now we are going to study a special contract called as Contract of Bailment and
---------------------- Contract of Pledge. Whereas indemnity and guarantee were contract related
with security and assurance to a party, the contract of bailment and pledge are
----------------------
contracts related with handing over or delivery of goods by one to another with
---------------------- a certain purpose. Contract of bailment and pledge are very common type of
contracts which each one of us are many a times entering into.
----------------------
Sec.148 to 181 of the Act deal with the contract of Bailment, out of which
---------------------- Sec. 172 to 179 are specifically dealing with bailment of Pledge.
---------------------- Sec.148 of Indian Contract Act defines a Contract of Bailment as under:

A Bailment is the delivery of goods by one person to another for some
---------------------- purpose, upon a contract that they shall, when the purpose is accomplished,
---------------------- be returned or otherwise disposed of according to the directions of the person
delivering them.
---------------------- The person delivering goods is called ‘bailor’. The person to whom they
---------------------- are delivered is called the ‘bailee’
From the definition, it is understood that bailment is a very simple contract by
----------------------
which one person delivers goods to another for a certain purpose and expects the
---------------------- goods to be returned or disposed of as per his instructions. The word ‘bailment’
is originated from a French word ‘baillier’ which means ‘to deliver’
----------------------
The most common examples of bailment are:
---------------------- 1. Delivering vehicle to service station for servicing.
---------------------- 2. Giving cloth to the tailor for stitching
---------------------- 3. Giving clothes to a laundry for ironing

4. Hiring a horse for riding Notes
5. Issuing a book from library for reading
----------------------
6. Delivering goods to carrier for the purpose of carrying them from one
place to another. ----------------------
----------------------
12.2 ESSENTIALS OF BAILMENT
----------------------
From the definition it is observed that the following are the basic important
features of a bailment: ----------------------
1. Two parties only ----------------------
2. Delivery of goods
----------------------
3. Purpose
----------------------
4. Returning them one by one
1. Two parties only: ----------------------
From the definition itself it is understood that there are only two distinct ----------------------
parties to a bailment. (i)Bailor and (ii) Bailee. Bailor is the person delivering
----------------------
the goods. He may or may not be the owner of goods. Usually bailor will be the
owner of goods. At times he may be any person with the knowledge of owner ----------------------
who would transfer the possession of goods. Bailee is the person who receives the
goods from bailor. Bailee is normally a person who would provide some service ----------------------
with respect to the goods and then return the goods to bailor who will have to
----------------------
pay for the services provided. For example, where an owner of cloth has given
the cloth to a tailor who stitches clothes and returns them to owner, the owner is ----------------------
bailor and tailor is the bailee.
----------------------
2. Delivery of goods:
Goods are essentially the subject-matter of any contract of bailment. Here, ----------------------
goods mean only movable goods. ‘Money’ is not included in movable goods. ----------------------
Thus a deposit of money with a banker is not a bailment because there is no
agreement to return the ‘same’ money. The delivery of goods should be given ----------------------
voluntarily. A possession which is obtained forcefully or by fraud does not
establish a bailment. ----------------------
Delivery of goods may be actual or constructive, a delivery is said to be ----------------------
actual when the goods are physically handed over by one person to another. For
example, delivering a vehicle to workshop for repairs is an Actual delivery. ----------------------
A delivery is said to be constructive when there is no physical possession ----------------------

but something is done which has the effect of putting the goods in the possession
of the bailee. For example, handing over of a railway receipt to the bailee for ----------------------
obtaining the goods from railways is a constructive delivery. ----------------------
3. Purpose: The definition of bailment specifies that the goods must be
----------------------
delivered for some purpose. If goods are delivered by mistake without any
purpose then there will be no bailment. ----------------------

Notes 4. Returning of goods: The goods are delivered for a certain purpose in a
bailment and when the purpose is accomplished the goods are to be (i) returned
---------------------- or (ii) disposed of as per the bailor’s requirements. The goods are expected to
be returned in specie either in their original form or desired form as per the
---------------------- directions given by bailor.
---------------------- Return of specific goods is an essential feature of bailment. When there is no
obligation to return identical subject-matter in its original or altered form, there
----------------------
can be no bailment. To sum up, when an equivalent and not the same goods are
---------------------- agreed to be returned, there is no bailment.
----------------------
----------------------

1. What type of bailment usually results in borrowing/lending
---------------------- transaction?
---------------------- i. Bailment for sole benefit of bailee
---------------------- ii. Mutual benefit bailment
iii. Bailment for the sole benefit of the bailor
----------------------
iv. Constructive bailment
----------------------
----------------------
12.3 KINDS OF BAILMENT
----------------------
Bailment is of various types. It can be classified as follows on the basis of
---------------------- (I) Benefit and (II) Reward to parties.
---------------------- I. Kinds of Bailment on the Basis of Benefit
---------------------- a) Bailment for the exclusive benefit of the bailor: In such contracts,
only the bailor is benefited but the bailee does not derive any benefit
---------------------- from it. For example, A and B are 2 friends. While going out of town,
A leaves his valuable goods with B for a safe custody.
----------------------
b) Bailment for the exclusive benefit of the bailee: A bailment in which
---------------------- the bailee is exclusively benefited but bailor is not. E.g. A and B are
two friends. B borrows A’s pen for examination purpose.
----------------------
c) Bailment for the mutual benefit of both: Such a contract of bailment
---------------------- gives benefit to both bailor as well as bailee. Most of the bailments are
for mutual benefit of both the bailor and the bailee. E.g. contract of
----------------------
repair, hire etc. benefit both the parties.
---------------------- II. Kinds of Bailment on the Basis of Reward
---------------------- a) Gratuitous bailment: Gratuitous act is a ‘free’ act without anything
in return. Accordingly gratuitous bailment is one in which neither the
---------------------- bailor nor the bailee is entitled to any remuneration. E.g. A and B are

two friends. A leaves his valuable goods with B for a safe custody. Here, Notes
everything depends on intention of parties at the time of contract. If it
is gratuitous, the bailment is gratuitous. ----------------------
b) Non–gratuitous bailment: It is a ‘bailment for reward’, where the ----------------------
parties are entitled to remuneration E.g. clothes given to laundryman,
Repairing, Tailoring contracts etc. Here, usually the bailee gets the ----------------------
reward in the form of monetary charges, fees, service charges etc. and
----------------------
the bailor gets his goods back in the desired form. Contracts of hire,
contract of pledge are also types of bailment which are of non-gratuitous ----------------------
type if based on reward.
----------------------
----------------------
Fill in the blanks.
----------------------
1. Non-gratuitous bailment is a bailment for ________.
----------------------
----------------------
12.4 DUTIES OF BAILOR
----------------------
Bailor is the person who delivers goods to another in a bailment. His duties
are as follows: ----------------------
1. Duty to put bailee into possession (sec.149) ----------------------
2. Duty to disclose defects in the goods (sec.150) ----------------------
3. Duty to bear expenses (sec.158)
----------------------
4. Duty in premature termination of gratuitous bailment (sec.159)
----------------------
5. Duty in case of defective title (sec.164)
6. Duty to receive back the goods ----------------------
Let us discuss them one by one: ----------------------

1. Duty to put bailee into possession (sec.149): The very basis of bailment ----------------------
contract is the delivery of goods by bailor to bailee. So the first and foremost
duty of bailor is to deliver possession of goods to bailee. Possession of goods ----------------------
can be given by ‘actual’ or ‘constructive’ delivery.
----------------------
2. Duty to disclose defects in goods (sec.150): In any type of bailment, there
is always a duty on bailor to disclose all the defects in the goods to the bailee. ----------------------
However, this rule is interpreted and applied separately for gratuitous and non-
----------------------
gratuitous bailment. In case of non-gratuitous bailment, if the bailor for reward
does not disclose the defects, the bailor is held responsible for all defects in the ----------------------
goods bailed whether he was aware of the defects or not. Even if he was ignorant
about certain defects, ignorance of defects is not available to him as a defense. ----------------------
For example, A hires a car from B. The car was unsafe to drive. B was not aware
----------------------

Notes of it and thereby A is injured. B is responsible to A for the injury (Non-gratuitous
bailment). Whereas a gratuitous bailor is bound to disclose all those faults in the
---------------------- goods bailed (i) of which he was aware and (ii) faults which materially interfere
the use of them, or expose the bailee to extraordinary risks. If the bailor fails to
----------------------
do so, he would be liable to pay damages only for loss resulting directly from
---------------------- faults. That means he will not be liable for damages arising from defects of
which he was ignorant. Hence ignorance of defects is good defense available to
---------------------- him incase of need. E.g. A lends his defective ink-pen to B. A does not disclose
---------------------- the defect. The ink spills on his paper while writing. If any damage is caused to
B there by, A can always plead that he was not aware of the defect. (Gratuitous
---------------------- bailment).
---------------------- 3. Duty to bear expenses (sec.158): Whenever goods are delivered to
bailment, the bailee at times incurs certain expenses on bailment. Few expenses
---------------------- are necessary expenses and few are extraordinary expenses incurred by bailee
---------------------- on bailment. In case of non-gratuitous bailment, bailor must repay only the
extraordinary expenses incurred by the bailee. In case of gratuitous bailment,
---------------------- bailor must repay all the necessary expenses incurred by bailee. Example:
---------------------- a) When a car is hired for journey, the bailee will bear the necessary expenses
i.e. filling petrol in the car for using it, for which bailor will not repay.
---------------------- But if bailee needs to change the tyres, the bailor will have to repay it as
---------------------- extraordinary expenses. (Non-gratuitous bailment).
b) A delivered his horse to his friend B for safe custody. B had to spend Rs.500
----------------------
as feeding expenses and Rs.1000 as medical expenses. A is bound to repay
---------------------- Rs.1500 in total as necessary expenses if it was a gratuitous bailment. But if
it was was non-gratuitous bailment, then A is bound to repay only Rs.1000
---------------------- for medical expenses being the extraordinary expenses.
---------------------- 4. Duty in premature termination of gratuitous bailment (sec.159):
Sometimes the goods are delivered by bailor to bailee gratuitously for a certain
----------------------
period or certain purpose. If such bailment is terminated by bailor before the
---------------------- agreed time or before the purpose is accomplished, then the bailor shall indemnify
the bailee for any loss caused to the bailee thereby.
----------------------
5. Duty in case of his defective title (sec.164): The bailor is responsible to
---------------------- the bailee for any loss which the bailee may sustain due to:
---------------------- i) defective title of bailor while making bailment, or
ii) the bailor not entitled to receive back the goods, or
----------------------
iii) the bailor not entitled to give any directions regarding them.
----------------------
6. Duty to receive back the goods: The bailor, who has delivered the
---------------------- goods to bailee, should also take back the goods after bailment. If the bailor
refuses to receive back the goods, the bailee will incur expenses for the safe
----------------------
custody of goods. It is the bailor’s duty to repay such additional expenses
---------------------- incurred by bailee.

12.5 DUTIES OF BAILEE Notes
Bailee is the person to whom the goods are handed over. His duties are as follows: ----------------------
1. Duty to take care of goods (sec.151,152) ----------------------
2. Duty not to make unauthorized use of goods (sec.154)
----------------------
3. Duty not to mix bailor’s goods with his own (sec.155 to 157)
----------------------
4. Duty to return the goods bailed (sec.160,161)
5. Duty to return accretion to the goods (sec.163) ----------------------
Let us discuss them one hereunder: ----------------------
1. Duty to take care of goods (sec.151, 152) : ----------------------
In all types of bailment, the bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would take of his own goods ----------------------
of the same bulk, quality and value as the goods bailed. In short, the bailee must ----------------------
take a reasonable care of goods bailed. The reasonable care is interpreted as the
amount of care an average prudent man would take of his own goods on similar ----------------------
circumstances.
----------------------
In spite of taking reasonable care, if there is a loss caused to the goods then
the rule mentioned in sec.152 shall apply, which is as follows. In the absence of ----------------------
any special contract, the bailee shall not be responsible for the loss, destruction,
----------------------
deterioration of the goods bailed to him if the bailee has taken the reasonable
care of the goods. ----------------------
The bailee has to take utmost care of goods whether bailment is gratuitous
----------------------
or non-gratuitous. For example: A, who was going out of town, delivered his
pet dog to his friend B. The dog became sick but B did not bother about medical ----------------------
treatment of the dog. The dog died. A was liable as he failed to exercise reasonable
care. ----------------------
2. Duty not to make unauthorized use of goods (sec.154) : ----------------------
The bailee must use the goods bailed as per the conditions of bailment. If he ----------------------
do not use the goods bailed to him according to the conditions of bailment then
he is liable to compensate the bailor for any damage arising to the goods from ----------------------
or during such use of the goods. Example: A hires B’s car to drive to Mumbai
from Pune. However he drives it to Goa instead. A drives with due care but still ----------------------
the car is accidentally damaged, A is liable to compensate B. ----------------------
3. Duty not to mix bailor’s goods with his own (sec.155 to 157):
----------------------
The duty of the bailee is not to mix bailor’s goods with his own. If he mixes
it, it gives rise to following 3 situations- ----------------------
a) Mixing of goods with bailor’s consent- If the goods are mixed, then the ----------------------
bailor and bailee shall have an interest to their respective shares in the
mixture thus produced. ----------------------
----------------------

Notes b) Mixing of goods without bailor’s consent and if the goods are distinct
and separable If the goods are mixed which are separable then the bailee is
---------------------- bound to bear the expenses of separation as well as any damage arising from
the mixture. Example: A bails 100 bales of cotton marked with a particular
---------------------- mark to B. B, without A’s consent mixes the 100 bales with other bales of his
---------------------- own, bearing a different mark, A is entitled to bear all the expenses incurred
in the separation of the bales, and any other incidental damage.
----------------------
c) Mixing of goods without bailor’s consent and if the goods are inseparable
---------------------- – If the goods are mixed without the consent of bailor, then the bailor is
entitled to be compensated by the bailee for the loss of the goods. Example:
---------------------- A bails a barrel of flour worth Rs.45 per kg. to B. B without A’s consent
mixes the flour of his own, worth only Rs.25 per kg. B must compensate A
----------------------
for the loss of his flour.
---------------------- 4. Duty to return the goods bailed (sec.160,161): The bailee must return the
bailor’s goods without demand, as soon as the time for which they are bailed
----------------------
has expired or the purpose for which the goods are bailed is over. If he fails to
---------------------- do so, he is responsible to the bailor for any loss, destruction or deterioration
of the goods from that time. If the goods are not returned in time, the bailee is
---------------------- liable even for the loss occurring to goods thereafter, due to natural calamities.
Example: A hires a car from B for 2 days. B does not return the car after 2 days.
----------------------
The car is damaged by floods thereafter. B is liable for the damages due to delay,
---------------------- in addition to the actual loss caused to A.
5. Duty to return accretion to the goods if any (sec.163): Accretion means
----------------------
increase in the volume, quantity or value of the goods. It is the duty of the bailee
---------------------- to deliver to the bailor any increase or profit accrued from the goods bailed,
unless there is a contract to the contrary.
----------------------
Example: A leaves his 5 hens in the custody of B for taking care of them.
---------------------- The hens give birth to 10 chickens. B is bound to deliver back the hens along
with the chickens.
----------------------
---------------------- 12.6 RIGHTS OF BAILOR

---------------------- In any contract, right of any party is the duty of another and vice versa.
Similarly, in a bailment contract, the rights of bailor are actually the duties of
---------------------- bailee, which have been discussed earlier. Enforcement of bailor’s rights- Bailor
can enforce by suit all the duties of the bailee.
----------------------
The various rights of bailor are as under:
----------------------
1. Right to claim damages in case of bailee’s negligence (sec.152)
---------------------- 2. Right in case of unauthorized use of goods (sec.153, 154)
---------------------- 3. Right in case of mixture of goods. (sec.155 to 157)
---------------------- 4. Right to demand return of goods (sec.160, 161)
---------------------- 5. Right to demand accretion of goods (sec.163)

1. Right to claim damages in case of bailee’s negligence (sec.152) Notes
If bailee fails to take a reasonable care of goods bailed to him, then the
----------------------
bailor has a right to claim damages arising out of bailee’s such negligence, for
the loss, destruction or deterioration of the goods bailed. ----------------------
2. Right in case of unauthorized use of goods (sec.153, 154)
----------------------
The bailee has to perform under a bailment as per the conditions of bailment.
If the bailee does any act which is inconsistent with the conditions of bailment, ----------------------
then the bailor has twofold rights:
----------------------
 Bailor can terminate the contract, as it is voidable at the option of the bailor.
This means that when the bailee wrongfully uses or disposes the goods, the ----------------------
bailor can terminate the bailment. ----------------------
 Bailor can also claim compensation for any damage arising to the goods
from or during such unauthorized use of them the bailor is entitled to be ----------------------
compensated. ----------------------
3. Right in case of mixture of goods. (Sec.155 to 157)
----------------------
The bailee’s duty is not to mix bailor’s goods with his own. But if bailee
mixes the goods then: ----------------------
 If mixing is with the consent of the bailor, then bailor can claim proportionate ----------------------
share in mixed goods.
----------------------
 If mixing is without consent of the bailor, and if goods are distinct and
separable, then the bailor can claim expenses of separation and any damage ----------------------
arising from the mixture.
----------------------
 If mixing is without consent of the bailor and if goods cannot be separated
then the bailor is entitled to be compensated by bailee for the loss of the ----------------------
goods.
----------------------
4. Right to demand return of goods (sec.160, 161)
----------------------
The bailor has a right to demand return of goods after the bailment period
is over or after the purpose is over. If the goods are not returned at the proper ----------------------
time then the bailor has a right to claim compensation for any loss, destruction
of the goods. ----------------------
5. Right to demand accretion of goods (sec.163) ----------------------
Unless otherwise agreed, the bailor is entitled to any increase or profit.
----------------------
Bailee’s rights- Bailee can enforce all the duties of bailor, by filing a suit.
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------

1. The kind of bailment created when a package addressed to your
----------------------
neighbour is accidently delivered to you is a
---------------------- i. Bailment for sole benefit of bailee
---------------------- ii. Mutual benefit bailment
---------------------- iii. Bailment for the sole benefit of the bailor

iv. Constructive bailment
----------------------
----------------------
12.7 RIGHTS OF BAILEE
----------------------
The various rights of a bailee are as follows:
----------------------
1. Right to demand delivery of goods bailed (sec.149)
---------------------- 2. Right in case of non-disclosure of defects in goods (sec.150)
---------------------- 3. Right to claim reimbursement of expenses (sec.158)
---------------------- 4. Right in case of premature termination of gratuitous bailment (sec.159)
5. Right in case of bailor’s defective title (sec.164)
----------------------
6. Right in case of bailor’s refusal to take back goods
----------------------
7. Right to deliver goods to one of joint bailors (sec.165)
---------------------- 8. Right to deliver goods, in case of bailor’s defective title (sec.166)
---------------------- 9. Right to lien (sec.170,171)
---------------------- 1. Right to demand delivery of goods bailed (sec.149)
If the bailor fails to deliver the goods either by ‘actual’ or ‘constructive’
----------------------
delivery, the bailee can demand the delivery of goods from bailor.
---------------------- 2. Right in case of non-disclosure of defects in goods (sec.150)
---------------------- There is always a duty of bailor to disclose all defects in the goods to the
bailee. In case of non-gratuitous bailment, if the bailor does not disclose any
---------------------- defects, and if bailee suffers a loss thereby, the bailee can claim damages
---------------------- for non –disclosure of any defects.
In case of gratuitous bailment, if bailor does not disclose the defects known
---------------------- to him and if bailee suffers a loss thereby, then the bailee can claim damages
---------------------- for non-disclosure of defects known to bailor.
3. Right to claim reimbursement of expenses (sec.158)
----------------------
In case of non-gratuitous bailment, the bailee has a right to claim
---------------------- reimbursement of all the extraordinary expenses incurred by the bailee.

In case of gratuitous bailment, bailee can claim reimbursement of all the Notes
necessary expenses incurred by the bailee. (For examples, refer duties of
bailor discussed earlier). ----------------------
4. Right in case of pre-mature termination of gratuitous bailment (sec.159) ----------------------
In a gratuitous bailment, if a bailor demands back the goods before the
----------------------
due time or before the purpose is accomplished, the bailee is entitled to
be indemnified by the bailor in case of any loss caused by pre-mature ----------------------
termination of bailment.
----------------------
5. Right in case of bailor’s defective title (sec.164)
Bailee has a right to be indemnified if he suffers any loss because of defective ----------------------
title of the bailor. ----------------------
6. Right in case of bailor’s refusal to take back goods
----------------------
If the bailor refuses to take back the goods, the bailee has a right to be
indemnified from any loss caused to him due to bailor’s default. ----------------------
7. Right to deliver goods to one of joint bailors (sec.165) ----------------------
Unless otherwise agreed, when goods are bailed by several joint owners
----------------------
joint bailers, the bailee has a right to deliver them to any one of the joint
owners, without the consent of all. ----------------------
8. Right to deliver goods, in case of bailor’s defective title (sec.166) ----------------------
If bailor has no title to goods, then still the bailee can deliver the goods back
to the bailor, in good faith, without incurring any liability towards the true ----------------------
owner. ----------------------
9. Right to lien (sec.170, 171)
----------------------
Lien is a right which can be enjoyed only by a person in possession of
goods which are belonging to another. Lien means to retain or withhold the ----------------------
possession of goods until a debt or a claim is recovered from such person.
----------------------
Lien is a ‘possessory lien’ because it can be enjoyed only if possession is
already there. If possession is lost lien comes to an end. ----------------------
There are two types of Lien. They are as follows:
----------------------
Lien
----------------------
 Particular Lien
 General Lien ----------------------
Particualr lien ----------------------

Sec.170 of Indian Contract Act provides for bailee’s particular line as under: ----------------------
Where the bailee has, in accordance with the purposes of the bailment,
----------------------
rendered any service involving the exercise of labour or skill in respect of goods
bailed, he has, in the absence of a contract to the contrary, a right to retain such ----------------------
goods until he receives due remuneration for the service he has rendered in
respect of them. ----------------------

Notes In short, ‘particular lien’ means the right to retain only that particular property
in respect of which the charges are due.
----------------------
Right of particular lien can be enjoyed by bailee only if following conditions
---------------------- are fulfilled:
1. Service rendered–bailee must have rendered some service in respect of the
----------------------
goods bailed.
---------------------- 2. Labour or skill involved–the service so rendered must have involved the
exercise of labour or skill of the bailee, so as to confer an additional value
----------------------
on the article.
---------------------- 3. Purpose of bailment–the service so rendered must be in accordance with
---------------------- the purpose of bailment.
4. Possession-goods must be in possession of the bailee.
----------------------
5. Remuneration-for the services so rendered, the remuneration must be due.
----------------------
6. No contract to the contrary – there should not be a contract to the contrary,
---------------------- i.e. there must not exist a contract for payment of price in the contrary, i.e.
there must not exist a contract for payment of price in future, or a credit
---------------------- period.
---------------------- If all the above conditions are fulfilled then only the bailee can retain the
possession for the recovery of due remuneration. Right of particular lien can be
---------------------- exercised by a bailee, agent, pawnee, finder of goods, unpaid seller etc. Example:
A gives his clothes to a laundryman B for dry-cleaning. B can retain the clothes
----------------------
till his bill is paid. But he cannot withhold if he has given credit period.
---------------------- General Lien
---------------------- Sec.171 of Indian Contract Act provides for General Lien as under:
---------------------- Bankers, factors, wharfingers, attorneys of High Court and policy brokers
may, in the absence of a contract to the contrary, retain, as a security for general
---------------------- balance of account, any goods bailed to them, but no other person has a right to
retain, as a security for such balance, goods bailed to them, unless there is an
---------------------- express contract to that effect.
---------------------- ‘General lien’ means the right to retain the goods of the other party until all
the claims of the bailee against the party are satisfied. This right entitles a bailee
----------------------
to retain possession of any goods belonging to another for any amount due to
---------------------- him, whether in respect of those goods or any other goods.
General lien is available by law to only specified bailees viz. bankers, factors,
----------------------
wharfingers, Attorneys of High Court, and policy-brokers. However general
---------------------- lien can be made available to others if there is an express contract to that effect.
Example: A has taken two distinct loans from a bank B, against two securities.
---------------------- A repays one of these loans, the banker B may retain both securities until the
other loan is repaid.
----------------------
----------------------

Notes
----------------------
1. The provision in the law that enables the bailee in the bailment for
----------------------
work and services to hold and if necessary to sell the property if the
bailor does not pay for the services or the work done is known as ----------------------
i. Warehouser’s lien
----------------------
ii. Constructive lien
----------------------
iii. Bailor’s lien
iv. Bailee’s lien ----------------------
----------------------
12.8 DIFFERENCE BETWEEN PARTICULAR LIEN AND ----------------------

GENERAL LIEN ----------------------
From the above discussion we can conclude the following difference between ----------------------
particular lien and general lien.
----------------------
POINT PARTICULAR LIEN GENERAL LIEN
1. Goods It can be exercised only It can be exercised against ----------------------
against the goods on which all goods in possession of
----------------------
some remuneration is due bailee whether in respect
of which claims are due ----------------------
or not.
2. Object/purpose It can be exercised only for It can be exercised for a ----------------------
recovery of remuneration general balance of account
----------------------
for services rendered due.
3. What is bailee Available to any bailee in Available only to bailees ----------------------
entitled? absence of contrary specified in sec.171, unless
there is an express contract ----------------------
to that effect.
----------------------
4. Purpose of Goods are delivered to Goods are delivered as
delivery confer an additional value security to bailee usually. ----------------------
on the goods bailed.
----------------------
Activity 1 ----------------------
----------------------
Read the case on balilee’s duties in Coggs v Bernard (1703) 2 Ld Raym
909. ----------------------
----------------------
----------------------

Notes 12.9 RIGHTS OF BAILOR AND BAILEE AGAINST
WRONGDOERS
----------------------
If a third person has wrongfully deprived the bailee of the use or possession
---------------------- of goods bailed, or causes injury to the goods, the bailee is entitled to use such
---------------------- remedies as if he was the owner of goods. Here the bailor and bailee may bring a
suit against the wrongdoer. Whatever is obtained by way of relief or compensation
---------------------- in such suit is to be shared between bailor and bailee as per their respective
interests. Example:A delivered his vehicle to B for repairing and C forcefully
---------------------- took possession of it from B. Here, either A or B may sue C. If B sues, then he
has to return the possession of vehicle to A after deducting his service charges.
----------------------
---------------------- 12.10 FINDER OF LOST GOODS

---------------------- We have already discussed the responsibility of a finder of lost goods in
Quasi-contracts chapter under sec.71 of The Indian Contract Act.
----------------------
Finder is a person who finds lost goods and takes them under his custody.
---------------------- Finder is under no compulsion to take charge of lost goods. But once he takes the
lost goods in his custody, he becomes responsible as that of a bailee in bailment
---------------------- contract.
---------------------- Finder is neither the owner nor a thief. He is given a special privilege under
the contract law. He is subjected to certain duties and simultaneously enjoys
---------------------- certain rights as follows:
---------------------- Duties of Finder of Lost Goods
Finder of lost goods is subjected to the same responsibility as that of a bailee.
----------------------
1. Duty of find the Owner: Finder must take reasonable efforts in finding out
---------------------- the true owner of goods. For this purpose he may incur some expenses in
publishing notices, advertisements etc. which are known as ‘lawful expenses’
----------------------
2. Duty to return the goods: If the owner is found out, the finder must return
---------------------- the goods to him inspite of reasonable search, if the owner is not found out
then the finder gets a right to sell the goods.
----------------------
3. Duty to take reasonable care of goods: The finder must take a reasonable
---------------------- care of the goods found, like the owner would take of his own goods. For
taking a reasonable care, he may incur some expenses which are known as
----------------------
‘lawful expenses’
---------------------- 4. Duty not to use the goods: The finder must not use the goods for his personal
purpose nor mix the goods found with his own goods. He should also not
----------------------
part or transfer or sell the goods unless he gets such right.
---------------------- Rights of Finder of Lost Goods
---------------------- The finder enjoys the following rights:
1. Right to possession: Finder has the right to retain possession of goods
----------------------
against the whole world except the true owner. He can retain the possession
---------------------- till the owner is found.

2. Right to Lien: After finding out the real owner the finder must return the Notes
goods. But he is entitled to claim the ‘lawful expenses’ incurred by him in
preserving the goods or finding out the owner. He can retain the possession of ----------------------
goods i.e. enjoy the right to lien till the owner pays him the lawful expenses.
However the finder cannot sue the owner for recovering such compensation ----------------------
of lawful expenses. ----------------------
3. Right to Reward: If the owner has already declared a reward for finder of
----------------------
lost goods, the finder can claim the reward while returning the goods. He
can also sue the owner for recovering such reward and can also retain the ----------------------
goods till recovering the reward.
----------------------
4. Right to sell: Finder can sell the goods under following circumstances :
a. if the true owner cannot be found after reasonable search, ----------------------
b. if the owner refuses to pay the lawful charges incurred by the finder, ----------------------
c. if the goods are of perishable nature or deteriorating day by day,
----------------------
d. if the lawful charges of finder, in respect of goods, amount to 2/3rd
of its value. ----------------------
12.11 TERMINATION OF BAILMENT ----------------------
A contract of bailment terminates or comes to an end under following ----------------------

circumstances:
----------------------
1. Expiry of specified period: Bailment for a specified period terminates as
soon as the fixed or stipulated period expires. ----------------------
2. Fulfillment of specified purpose: Bailment for a specified purpose ----------------------
terminates as soon as the purpose for which goods are bailed is fulfilled.
----------------------
3. Bailee’s act inconsistent with conditions: If a bailee does any act with
regard to the goods bailed, which are inconsistent with the conditions of ----------------------
bailment, then the bailor can terminate the bailment.
----------------------
4. Gratuitous bailment: May be terminated by the bailor at any premature
time. However the bailor has to indemnify the bailee if the loss due to ----------------------
premature termination exceeds the benefit actually derived by the bailee.
----------------------
5. Death of bailor / bailee: A gratuitous bailment is terminated by the death
of either the bailor or bailee. ----------------------
----------------------
----------------------
1. A gratuitous bailment is terminated by the death of either the bailor or
----------------------
bailee.
2. Bailment for a specified period terminates as soon as the fixed or ----------------------
stipulated period expires.
----------------------

Notes
Activity 2
----------------------
---------------------- Collect a format of lorry receipt. Read the printed terms and conditions.
Write your observations pertaining to the contract of bailment.
----------------------
---------------------- 12.12 PLEDGE (sec.172 to 179)

----------------------
Pledge contract is also known as ‘Pawn contract’. Pledge is a specific type
---------------------- of a bailment contract. Pledge, though similar to a mortgage and hypothecation,
is quite different from them.
----------------------
Pledge is defined by Sec.172 of The Indian Contract Act as under:
---------------------- The bailment of goods as security for payment of a debt or performance of
---------------------- a promise is called “pledge”.
The bailor is, in this case, called the ‘pawnor’.
----------------------
The bailee is called the ‘pawnee’.
----------------------
From the definition, it is found that, there are 3 essential features of a pledge:
----------------------
1. There must be a bailment of goods i.e. delivery of goods,
---------------------- 2. The bailment must be by way of security, and
---------------------- 3. The security must be for payment of debt or a performance of promise.
---------------------- There are 2 parties to a pledge – ‘pawnor’ and ‘pawnee’.
---------------------- Pawnor is the person who delivers the goods as security.

Pawnee is the person to whom the goods are delivered as security for payment
---------------------- of old debt or performance of a promise. Example:A borrows Rs.2 lakhs from a
---------------------- Bank B and he keeps his ornaments as security for payment of the debt. It is a
contract of pledge, where A is the pawnor and B is the pawnee.
----------------------
Advantages of pledge
---------------------- In case of pledge contract the relationship between the pawnor and pawnee
---------------------- is that of a debtor and creditor respectively. To a creditor/pawnee, pledge is
perhaps the safest mode of creating a charge on securities, because:
----------------------
1. The goods are in the possession of the creditor. In case of debtor’s default,
---------------------- they can be disposed of with a proper procedure.
---------------------- 2. Goods cannot be manipulated because they are under pawnee’s control.
3. In case of insolvency of pawnor, pawnee can sell the goods in his custody
----------------------
and recover his debt.
----------------------
----------------------

Notes
----------------------
1. The contract of pledge is defined in the Indian Contract Act under ----------------------
Section ______.
----------------------
i. 172
ii. 170 ----------------------
iii. 171 ----------------------

iv. 173 ----------------------
----------------------
1. Even a non-owner can pledge the goods, and the pledge is still legal
and valid. ----------------------
2. Only the owner of goods can create a valid pledge. ----------------------
----------------------
12.13 DIFFERENCE BETWEEN PLEDGE AND BAILMENT ----------------------
Both pledge and bailment are specific types of contracts. Pledge is a specific ----------------------
type of bailment. Both deal with movable goods only. In both, there is transfer
of possession only and not transfer of ownership. However there are many ----------------------
differences between them, which are as follows.
----------------------
POINT PLEDGE BAILMENT
1. Purpose of Goods are pledged for Goods are bailed for any ----------------------
delivery a specific purpose i.e. purpose.
----------------------
re-payment of a debt or
performance of a promise. ----------------------
2. Object of Goods are pledged as a Goods are bailed for a
contract security. specific purpose or for a ----------------------
particular period of time
----------------------
3. Use of goods Pawnee cannot use the Bailee may use them or
goods. He has to simply provide some services with ----------------------
keep them as a security respect to goods as per the
conditions of bailment. ----------------------
4. Right In case of default by Bailee has right of lien and
----------------------
available in pawnor, pawnee can sell right to sue bailor for dues.
case of default the goods. ----------------------
12.14 RIGHTS AND DUTIES OF PAWNEE ----------------------
Rights of a bailee and pawnee are quite similar. Pawnee enjoys the following ----------------------
rights: ----------------------

Notes 1. Right of retainer (sec.173, 174)
2. Right to recover expenses (sec.175)
----------------------
3. Right on pawnor’s default (sec.176)
----------------------
1. Pawnee’s right of Retainer (sec.173,174)
---------------------- Pawnee gets a right to retain the goods pledged for:
---------------------- a. Payment on the debt and all performance of the promise,
---------------------- b. Interest on the debt
c. All necessary expenses incurred by him in respect of the possession or
----------------------
for the preservation of the goods.
---------------------- Pawnee’s right of retention is that of a particular lien. Unless otherwise
agreed, the pawnee cannot retain the goods for any other debt or promise due.
----------------------
2. Pawnee’s right to recover extraordinary expenses (sec.175)
----------------------
Pawnee is entitled to receive from the pawnor all the extraordinary expenses
---------------------- incurred by him for preservation of goods pledged. But he cannot retain the goods
for recovering such expenses. He can only sue the pawnor for recovering such
---------------------- expenses.
---------------------- 3. Pawnee’s right on pawnor’s default (sec.176)
---------------------- If the pawnor makes a default in payment of the debt or performance of a
promise at the stipulated time then the pawnee has twofold rights:
----------------------
a) A right to sue the pawnor for recovering debt or performance of a
---------------------- promise and can also retain the goods as a collateral security; as
mentioned earlier, and
----------------------
b) A right to sell the goods pledged after giving a reasonable notice of the
---------------------- intended sale, to the pawnor. If the proceeds of such sale are less than
the amount due, the pawnee can recover the balance from pawnor. But
---------------------- if the proceeds of the sale are greater than the amount due then he shall
return the surplus to the pawnor.
----------------------
Duties of Pawnee
----------------------
Duties of pawnee are the same as that of a bailee which have been discussed
---------------------- earlier in this unit.
---------------------- To sum up, they are as under:
1. Duty to take reasonable care of the goods pledged
----------------------
2. Duty not to make unauthorized use of the goods
----------------------
3. Duty not to mix pawnor’s goods with his own
---------------------- 4. Duty to return the goods after recovering dues
---------------------- 5. Duty to return accretion to the goods
----------------------

12.15 RIGHTS AND DUTIES OF PAWNOR Notes
It is to be remembered that duty of one party becomes the right of another ----------------------
party. Therefore all duties of pawnee are the rights of the pawnor, which are as
under: ----------------------
1. Pawnor’s right to enforce pawnee’s duties: The pawnor has the right to ----------------------
get pawnee’s duties enforced by a legal action against him. E.g. Right to
get back his goods, right to receive accretion to the goods etc. ----------------------
2. Pawnor’s right to redeem (sec.177): ‘Redeem’ literally means ‘to get ----------------------
back by paying money’. A pawnor who makes a default in payment of
the debt amount at the stipulated time, has a right to redeem the debt at a ----------------------
subsequent time before the actual sale of goods pledged. But in such case, ----------------------
the pawnor must pay to the pawnee any additional expenses which have
arisen from his default. ----------------------
The most important duties of the pawnor, are as under: ----------------------
1. Pawnor’s duty same as bailor’s duty: The duties of pawnor are similar
----------------------
to that of bailor’s duties which are discussed earlier in this chapter.
2. Pawnor’s duty to comply with the terms of pledge: Whichever terms ----------------------
and conditions of pledge are decided by the parties at the time of contract,
----------------------
should be strictly followed by the pawnor. He must repay the debt or
perform the promise as per the terms decided, at the stipulated time. ----------------------
3. Pawnor’s duty to compensate the pawnee for extraordinary expenses ----------------------
(sec.175): The pawnor must compensate the pawnee for any extraordinary
expenses incurred by him in preserving the goods pledged. If he does not ----------------------
pay, the pawnee can sue him for recovering such expenses.
----------------------
12.16 PLEDGE BY NON-OWNERS ----------------------
The general rule is that, only the owner of goods can create a valid pledge. ----------------------
This means, it is presumed that, in a pledge, the pawnor is the owner of the goods.
In other words, a pawnor should be the owner of the goods. ----------------------
But exceptionally, even a non-owner can pledge the goods, and the pledge is ----------------------
still legal and valid. The following non-owners can pledge the goods in following
circumstances: ----------------------
1. Pledge by mercantile agent (sec.178) ----------------------

2. Pledge by person in possession under voidable contract (sec.178A) ----------------------
3. Pledge by person with limited interest (sec.179)
----------------------
4. Pledge by co-owner in possession
----------------------
5. Pledge by seller in possession after sale
6. Pledge by buyer in possession before sale ----------------------
----------------------

Notes 1. Pledge by Mercantile Agent (sec.178):
A ‘mercantile agent’ is an agent who in the customary course of business
----------------------
as such agent has an authority to sell goods, or to consign goods for the purpose
---------------------- of sale, or to buy goods, or to raise money on the security of goods.
A mercantile agent can make a valid pledge under the following
----------------------
circumstances:
---------------------- a) Mercantile agent was in actual or constructive possession of goods or the
documents of title to the goods,
----------------------
b) Mercantile agent acts with the consent of true owner,
----------------------
c) Mercantile agent acts in the ordinary course of his business. i.e. he must
---------------------- have been entrusted with the goods in his capacity as a mercantile agent.
---------------------- d) Pawnee must have acted in good faith and at the time of pledge had no notice
that the pawnor/mercantile agent had no authority to sell. This means that
---------------------- the pawnee must be such an innocent party that, he in good faith, relies on
that authority posed by the mercantile agent.
----------------------
2. Pledge by person in possession under voidable contract (sec.178A)
----------------------
The pawnor who has obtained the possession of goods pledged under
---------------------- a contract voidable under sec.19, 19A of the Act, can make a valid pledge if
following conditions are satisfied:
----------------------
a) Pledge takes place before the contract is rescinded on the grounds of
---------------------- coercion, undue influence, fraud, or misrepresentation.
---------------------- b) Pawnee has acted in good faith.

c) Pawnee has no notice/knowledge of the pawnor’s defective title to the goods.
----------------------
3. Pledge by person with limited interest (sec.179)
----------------------
Pledge by a person who has only a limited interest in the goods, is valid to
---------------------- the extent of that interest only. E.g. a finder of lost goods, a mortgagee etc. may
make a pledge of goods to the extent of their interest in the goods. The general
---------------------- rule of contract is that “no one can give that, which one does not have”. If one’s
interest in the goods is limited, he passes on only a limited interest to the other,
----------------------
thereby the real owner is protected by law.
---------------------- 4. Pledge by co-owner in possession
---------------------- When there are several joint owners of goods, of which one co-owner is in
possession of the goods, he with the consent of the rest can make a valid pledge
---------------------- of goods.
---------------------- 5. Pledge by seller in possession after sale
---------------------- A seller who is still in possession of goods after sale if makes a pledge of
goods, it will be a valid pledge provided the pawnee has acted in good faith and
---------------------- without knowledge as to the defective title of the pawnor/seller.
---------------------- 6. Pledge by buyer in possession before sale

A buyer who gets the possession of goods under an ‘agreement to sell’ (but Notes
before ‘sale’), if makes a pledge of those goods, the pledge is valid if the pawnee
has acted in good faith and without knowledge as to the defective title of the ----------------------
pawnor/buyer.
----------------------
However a person like a servant who is merely in physical custody of goods
cannot make a valid pledge. ----------------------
----------------------
Summary
----------------------
●● bailment is the delivery of goods by one person to another for a specific
A
purpose, upon a contract, that the goods will be returned or otherwise ----------------------
disposed of according to the instructions by the person delivering them,
when the purpose is accomplished. The person delivering the goods is ----------------------
called ‘bailior’ and the person to whom goods are delivered is called ----------------------
‘bailee’.
----------------------
Essentials of bailment
a) contract ----------------------
b) delivery of possession of goods for some purpose ----------------------
c) return of goods when the purpose is accomplished ----------------------
Classification of bailment
----------------------
n Bailment for reward/ non-gratuitous bailment
----------------------
n Gratuitous bailment
n Bailment for the exclusive benefit of the bailor ----------------------
n Bailment for the exclusive benefit of the bailee ----------------------

n Mutual benefit of bailor and bailee ----------------------
Duties of bailee
----------------------
n Duty to take care of goods bailed
----------------------
n Duty not to make any unauthorized use of goods
n Duty not to mix goods bailed with his own goods ----------------------
n Duty to return the goods along with accretion ----------------------

n Not to set up an adverse title ----------------------
Duties of Bailor
----------------------
n Duty to disclose known faults
----------------------
n Duty to bear extraordinary expenses of bailment
n Duty to receive back the goods ----------------------
n Duty to indemnify the bailee ----------------------

Right to Lien ----------------------

Notes ●● ien means the right of a person to retain possession of goods of another
L
until some debt or a claim of the person in possession is settled.
---------------------- ●● Lien may be a particular lien or a general lien. A particular lien is one
A
---------------------- which is available to a bailee against only those goods in respect of which
he has rendered any service involving the exercise of skill or labour.
---------------------- ●● general lien means a right to retain all the goods or any property of the
A
---------------------- bailor which is in possession of the bailee until all the claims of the bailee
are satisfied. This is a right to retain the property of another for a general
---------------------- balance of accounts.
---------------------- Termination of bailment

The contract of bailment is terminated-
----------------------
 On the expiry of the period
----------------------
 On accomplishment of the purpose
----------------------  On the inconsistent use of goods bailed
---------------------- A gratuitous bailment can be terminated by the bailor at any time even
though the bailment was for specific time or purpose provided the loss accruing
---------------------- to the bailee from such premature termination does not exceed the benefit he has
derived out of the bailment
----------------------
Pledge
----------------------
The bailment of goods as security for payment of a debt or performance of
---------------------- promise is called pledge. The bailor is in this case called the ‘pawnor’ or ‘pledger’
and bailee is called the ‘pawnee’ or ‘pledgee’.
----------------------
Rights of Pawnee
----------------------
 Right to retain goods for debt, interest and expenses, and for subsequent
---------------------- advances
 Right to extraordinary expenses
----------------------
 Right against true owner when the pawnor’s title is defective
----------------------
 Rights when pawnor makes default-
---------------------- a) suit against the pawnor
---------------------- b) retention of the goods as collateral security
---------------------- c) suit for the sale of goods pledged
d) right of sale
----------------------
e) right to recover deficiency on scale
----------------------
Pledge by non-owners
---------------------- The general rule is that it is the owner who can ordinarily create a valid
---------------------- pledge. But in the following cases pledge even by non-owner is valid.
 Pledge by mercantile agent
----------------------

 Pledge by seller or buyer in possession after sale Notes
 Pledge by a person having limited interest
----------------------
 Pledge by a co-owner in possession
----------------------
 Pledge by a person in possession under the voidable contract
----------------------
Keywords
----------------------
●● Bailment: A Bailment is the delivery of goods by one person to another
----------------------
for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the ----------------------
directions of the person delivering them.
----------------------
●● Bailor: The person delivering goods is called ‘bailor’.
●● Bailee: The person to whom they are delivered is called the ‘bailee’ ----------------------
●● Constructive Delivery: A delivery is said to be constructive when there ----------------------
is no physical possession but something is done which has the effect of
putting the goods in the possession of the bailee. ----------------------
●● Gratuitous Bailment: Gratuitous bailment is one in which neither the ----------------------
bailor nor the bailee is entitled to any remuneration.
●● Accretion: Accretion means increase in the volume, quantity or value of ----------------------
the goods. ----------------------
●● Lien: Lien means to retain or withhold the possession of goods until a
debt or a claim is recovered from such person. ----------------------
●● Pledge: The bailment of goods as security for payment of a debt or ----------------------
performance of a promise is called “pledge”.
----------------------
Self-Assessment Questions ----------------------
1. Define Bailment Discuss the essentials of Bailment. ----------------------
2. Discuss various types of Bailment with the help of examples.
----------------------
3. What are the rights and responsibilities of the bailor?
----------------------
4. Explain how a bailment may result without the owner actually delivering
the goods to the bailee. ----------------------
5. What are the rights and duties of the Bailor and a bailee in a bailment for ----------------------
hire and in a bailment by way of pledge?
6. To what extent is a bailee responsible for loss arising from the effective ----------------------
title of the bailor ----------------------
7. Which factors are considered in determining whether or not the bailor
----------------------
took reasonable care of the goods bailed?
8. What are the rights and obligations of a finder of goods? ----------------------
9. What do you mean by lien? Explain various types of the lien. ----------------------

Notes 10. ‘The position of the finder of goods is exactly that of a bailee’ - Comment.
11. Distinguish between general lien and particular lien.
----------------------
12. Distinguish between the bailment and pledge.
----------------------
13. When does the bailment come to an end?
---------------------- 14. Define pledge and what are the respective rights and duties of pawnor and
---------------------- pawnee?
15. When is the pledge created by non-owners is valid?
----------------------
----------------------
----------------------

----------------------
1. What type of bailment usually results in borrowing/lending transaction?
----------------------
ii. Mutual benefit bailment
----------------------

1. Non-gratuitous bailment is a bailment for reward.
----------------------
----------------------
---------------------- 2. The kind of bailment created when a package addressed to your neighbor
is accidently delivered to you is a
----------------------
iii. Bailment for the sole benefit of the bailor
----------------------

---------------------- 1. The provision in the law that enables the bailee in the bailment for work
and services to hold and if necessary to sell the property if the bailor does
---------------------- not pay for the services or the work done is known as____
---------------------- i. Warehouser’s lien
----------------------
----------------------
----------------------

Check your Progress 5 Notes
----------------------
1. True
----------------------
2. True

1. The contract of pledge is defined in the Indian Contract Act under Section ----------------------
____.
----------------------
i. 172
1. True ----------------------
2. True ----------------------
----------------------
Suggested Reading
----------------------
----------------------
Press.
Publication.
----------------------
Chand & Sons. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Agency (Sections 182 to 238)
UNIT
13
Structure:
13.1 Introduction, Definition, Meaning of Agency
13.2 Creation of Agency
13.3 Classification of Agents
13.4 Extent of Agent’s Authority
13.5 Duties of an Agent
13.6 Rights of an Agent
13.7 Personal liability of an Agent
13.8 Rights of Principal
13.9 Duties and Liabilities of Principal
13.10 Termination of Agency (Sec. 201)
Summary
Key Words
Suggested Reading
Agency (Sections 182 to 238) 189

Notes
Objectives
----------------------
• Describe the meaning and concept of agency, agent and principal
----------------------
• Classify the various modes of creation of agency
----------------------
• Identify the types of agents
---------------------- • Assess the rights and duties of principal and agent
---------------------- • List the ways in which an agency is put to an end
----------------------
---------------------- 13.1 INTRODUCTION, DEFINITION, MEANING OF

AGENCY
----------------------
In this unit we are going to study a special type of contract known as
---------------------- “Contract of Agency” and law related to it. It is covered in the last part of Indian
---------------------- Contract Act i.e. from sec. 182 to 238.
The term ‘Agency’ is quite commonly used in day-to-day life. Agent literally
----------------------
means a person who is a ‘representative’. From this, it is understood as a person
---------------------- working on behalf of another or representing another. It is at times difficult for
a person to work himself. So it becomes necessary for him to delegate his work
---------------------- to be performed by his representative. This delegation of work is nothing but a
contract of agency.
----------------------
Definition: Sec. 182 defines an ‘agent’ and ‘principal’ as under:
----------------------
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 contract which creates the relationship of ‘principal’ and ‘agent’ is
---------------------- called an ‘agency’ contract.
There are two parties to a contract of agency:
----------------------
1. Principal - he is the one who employs or appoints an agent
----------------------
2. Agent - he is the one who represents his principal in dealings with third
---------------------- persons.
---------------------- Under an agency contract, the agent is authorized to establish a privity of

contract, between the principal and the third party. In a way, an agent is merely
---------------------- a connecting link between the principal and the third party. Though agent
physically enters into a contract with the third party but actually speaking or
---------------------- legally speaking he establishes a contract between the principal and the third
----------------------

party, as if they have made it themselves. The agent does not incur any personal Notes
liability under this contract.
----------------------
The contract of agency is based upon a Latin maxim - ‘Qui facit per alium
facit per se’ which means ‘He who does through another do by himself’. The ----------------------
concept of ‘master-servant relationship’ is often compared with ‘principal-
agent relationship’. However they are quite different from one another. In both ----------------------
relations though the employer tells as to ‘what type of work is to be done’, ----------------------
but in case of a servant, the master further tells him ‘how to do the work’.
An agent however is free to do the work given to him by his own method. ----------------------
Further a servant acts under a complete control and supervision of his master,
----------------------
unlike an agent. Moreover, the most important difference is that an agent has
the authority to create a contractual relationship between the principal and ----------------------
a third party, which the servant does not have. Further the remuneration of
servant is normally fixed and is called as salary or wages, whereas the agent ----------------------
normally works on commission basis. ----------------------
Who can employ an agent?
----------------------
Sec. 183 states that a person who is a major and who is of sound mind may
employ an agent. In short, a person who is competent to contract can appoint an ----------------------
agent. Thus, a minor or a person of an unsound mind cannot become a principal
----------------------
and cannot employ an agent.
Who can be an agent? ----------------------
Sec. 184 states that as between the principal and the third person, any ----------------------
person may become an agent. It is to be interpreted that even a minor or a
----------------------
person of unsound mind can be appointed as an agent. Even though surprising,
it is only because the act of the agent is actually the act of the principal, and ----------------------
therefore a major principal is made liable to third parties by the act of his
minor agent. ----------------------
However there is a great risk in appointing incompetent persons like a minor ----------------------
and innocent agent or an unsound mind agent in a contract of agency.
----------------------
Test of agency
----------------------
The test of agency is whether a person has the capacity to create contractual
relation between the principal and a third party. If the agent is capable of ----------------------
establishing a privity of contract between his principal and third party, then an
----------------------
agency is said to be created.
So a contract of agency can be express or implied contract. Normally the ----------------------
consideration found in an agency contract is a “promise to work” as against ----------------------
“promise to pay commission/remuneration”. However, consideration is not
necessary to create an agency. E.g. A gratuitous agent may promise to work ----------------------
gratuitously i.e. without remuneration, in a contract of agency.
----------------------
----------------------

Notes
----------------------

1. Agent literally means a person who is a
----------------------
i. Representative
----------------------
ii. Employee
---------------------- iii. Third party
---------------------- iv. Negotiator
---------------------- 2. When two or more persons are appointed as agents by the principal to
act jointly and severally, they are called
----------------------
i. Co-agents
---------------------- ii. Sub-agents
---------------------- iii. Brokers
---------------------- iv. Substituted agents
----------------------
13.2 CREATION OF AGENCY
----------------------
---------------------- Agency can be created in various situations by various methods. The modes
of creation of contract of agency can be broadly classified as under:-
---------------------- Modes of creation of Agency
----------------------
---------------------- I. by Express Agreement II. by Implied Agreement III. by Ratification
----------------------
1. by Estoppel 2. by Holding out 3. by Necessity
----------------------
I. Agency by Express Agreement
----------------------
The authority of an agent is said to be express when it is given by words
---------------------- either spoken or written. Normally written agreement is made by a principal
in transactions. E.g. A Power of Attorney document. Sometimes even oral
----------------------
agreements are made by a principal to appoint an agent.
---------------------- II. Agency by Implied Agreement
---------------------- The authority of an agent is said to be implied when it is inferred from the
conduct of the parties, things spoken or written, by ordinary course of dealings
---------------------- or from the relationship between the parties.
---------------------- Implied agency includes the following modes of creating an agency:
----------------------

1. Agency by Estoppel Notes
It is based on ‘Doctrine of Estoppel’. Estoppel means to legally stop a person
----------------------
from denying the truth of certain facts even though it did not really exist.
When a person has by his conduct induced others to believe that a certain ----------------------
person is his agent, he is estopped from subsequently denying the person’s
authority. E.g. - A, in the presence of B, tells C that he (A) is B’s agent. ----------------------
B keeps quiet and does not object. B will be bound by the transaction and
----------------------
will be estopped from denying the title of A’s agency. Here A’s authority of
agency is created by Estoppel. ----------------------
2. Agency by Holding-out
----------------------
It is based on the ‘Doctrine of Holding out’. It is a type of agency by Estoppel.
In this method also, the principal is bound by the acts of the so called agent, ----------------------
if he has induced third persons to believe that the acts are done with his
----------------------
authority. Agency by holding-out requires some positive or affirmative
conduct by the principal to establish agency subsequently. Holding-out ----------------------
means, falsely leading another to believe something or representing
something which is not true. Here representation i.e. some positive act by ----------------------
the so called principal is required.
----------------------
In a decided case, A has appointed B as his servant to purchase goods on
credit from C on many occasions, and latter on paid the dues. Subsequently, ----------------------
A terminated the services of B. One day B purchases some goods from C ----------------------
in A’s name on credit. Here C can recover the price due from A since A has
held out B as his agent on earlier occasions. ----------------------
3. Agency by Necessity ----------------------
When one is compelled to act as an agent of another without the authority
of that other, such agency is called as ‘agency by necessity’. To give rise to ----------------------
agency by necessity, following conditions are to be satisfied: ----------------------
 there should be a real necessity or an emergency for acting on behalf
----------------------
of the principal.
 it should be impossible to communicate with the principal and obtain ----------------------
his consent.
----------------------
 the so called agent should act bonafide in the interests of the principal.
----------------------
E.g A consigned some fruits from Jammu to Mumbai by a truck. The truck
met with an accident on the way. The fruits being perishable were sold by the ----------------------
transporter B. The sale is binding on A since B became an agent by necessity.
----------------------
III. Agency by Ratification
----------------------
To ratify means to say ‘yes’ or accept a certain thing done in the past.
Ratification means accepting subsequently a past act of a person done on behalf ----------------------
of another. Here the supposed principal accepts the act done by the supposed
agent and thereby an agency is created. Once the act is ratified, a retrospective ----------------------
effect is given to the agency and it relates back to the date when the act was
----------------------

Notes done, and not to the date of ratification. That means, ratification relates back
to the time of contract and amounts to a ‘prior’ authority. E.g. - A, without B’s
---------------------- consent, lends B’s money to C. Here, B may reject the transaction. If B accepts
interest on the money from C, it amounts to ratification of earlier transaction.
---------------------- By ratification A becomes B’s agent.
---------------------- Essentials of a Valid Ratification: Ratification will be valid and binding,
if following conditions are complied with:
----------------------
1. Act on behalf of another: The act must be done by a person on behalf of
---------------------- another.
---------------------- 2. Principal must be in existence: The person on whose behalf the act is
done must be legally in existence at the time of the act. E.g. - acts done
---------------------- prior to incorporation of a company cannot be ratified by the company
afterwards.
----------------------
3. Principal must be competent: The principal must be competent to ratify
---------------------- at the time of ratification and also at the time of contract.
---------------------- 4. Lawful act: The act to be ratified must be a lawful one and capable for
ratification. Ratification of an illegal act does not form any contract.
----------------------
5. Express or implied ratification: Ratification may be express or implied
---------------------- by the conduct of the principal.
---------------------- 6. Full knowledge of facts: At the time of ratification, principal should have
a full knowledge of the material facts of the contract.
----------------------
7. Whole transaction to be ratified: Ratification must be of the whole
---------------------- contract. There cannot be a partial acceptance or partial rejection. If a part
is accepted, it is an implied acceptance of the whole transaction.
----------------------
8. Time of Ratification: Ratification must be given within a reasonable
---------------------- time from the original act done by the agent.
---------------------- 9. Communication: Ratification should not put a third party to any loss.
An act which has the effect of terminating any right or interest of a third
---------------------- person, cannot be ratified.
----------------------
----------------------
----------------------
1. When one is compelled to act as an agent of another without the
---------------------- authority of that other, such agency is called as
---------------------- i. Agency by necessity
---------------------- ii. Agency by estoppel

iii. Agency by holding-out
----------------------
iv. Agency by ratification
----------------------

Notes
2. __________ means accepting subsequently a past act of a person
done on behalf of another. ----------------------
i. Ratification ----------------------
ii. Estoppel
----------------------
iii. Inducement
----------------------
iv. Holding
----------------------
----------------------
Activity 1
----------------------
1. My brother owns many ships. He is engaged in the business of
----------------------
shipbuilding. He appointed Mr. Dilip as his agent to carry on his
business of shipbuilding. Mr. Dilip purchased timber and other material ----------------------
and hired workmen for the purpose of carrying on the business. What
kind of authority does Mr. Dilip have? Explain. ----------------------
2. Mr. Subhash and Mr. Devidas are brothers. Mr. Subhash lives in ----------------------
Mumbai while Mr. Devidas in Pune. Mr. Devidas leases Mr. Subhash’s
property in Mumbai with his knowledge. Mr. Devidas receives the rent ----------------------
of the property leased and remits the same to Mr. Subhash. There is ----------------------
no agreement of appointment of Mr. Devidas as an agent. What is the
nature of agency of Mr. Devidas? ----------------------
3. Mr. Murti appoints Mr. Kaushik as the manager of his shop and ----------------------
authorises him to sell only the goods. Mr. Kaushik orders some goods
from the suppliers in the presence of Mr. Murti and Mr. Murti allows ----------------------
him to do so. Is Mr. Kaushik s order to purchase goods valid within the
authority by holding out? ----------------------
----------------------
13.3 CLASSIFICATION OF AGENTS ----------------------
There are various kinds of agents. They can be classified on basis of: ----------------------
 Authority ----------------------
 Nature of work ----------------------
 Delegation of Authority
----------------------
Let us discuss these classifications one by one-
----------------------
(I) Classification of Agents on the basis of Extent of Authority
Extent of Authority ----------------------
----------------------
(A) Special Agent (B) General Agent (C) Universal Agent ----------------------

Notes A. Special Agent
A special agent or specific or particular agent is one who is appointed to
----------------------
do a specific act on behalf of the principal. His authority ends as soon as the
---------------------- particular act is performed or completed. E.g. - An agent appointed by a Special
Power of Attorney document, to sell a specific property of a principal.
----------------------
B. General Agent
---------------------- A general agent is an agent who is appointed to do all or general acts
concerning a particular trade or business. His authority remains continuous unless
----------------------
terminated. E.g. - An agent appointed by a General Power of Attorney document
---------------------- to act on behalf of the principal to run his business during the principal’s stay
abroad.
----------------------
C. Universal Agent
---------------------- He is an agent whose authority is unlimited. He has authority to do all acts
---------------------- which the principal can lawfully do and delegate. He enjoys unlimited authority
to transact every kind of business on behalf of the principal.
---------------------- (II) Classification of Agents on the basis of Nature of work
---------------------- Nature of work
----------------------
(A) Mercantile Agent (B) Non-mercantile Agent
----------------------
Broker Attorneys
----------------------
Factor Advocates
----------------------
Commission Agent Solicitors
---------------------- Auctioneer Wife
---------------------- Del-credere Agent Insurance Agents
---------------------- Banker Election Agent
Indenter Estate Agent
----------------------
---------------------- A. Mercantile Agent

A mercantile agent is one who has authority to either sell goods, buy goods
---------------------- or to raise money on the security of goods. The various types of mercantile or
---------------------- commercial agents are as under:
1. Broker: He is one who is appointed to make contracts for purchasing and
----------------------
selling goods. He is not given the possession of goods. He makes contracts
---------------------- on behalf of his Principal with third parties. He gets a commission called
brokerage for doing such work.
----------------------
2. Factor: He is one who is entrusted with possession of goods for sale. He
---------------------- has the authority to sell, buy or raise money on security of goods. He has a
general lien on goods.
----------------------

3. Commission Agent: He buys or sells the goods and receives commission. Notes
‘Commission agent’ is a general term which can be used for various other
agents also. He may or may not have possession of goods. ----------------------
4. Auctioneer: He has an authority to sell the goods of his principal in public ----------------------
auction. He has the possession of goods. Initially he acts as the seller’s agent
and after sale, he acts as the buyer’s agent. He has only a particular lien on ----------------------
the goods.
----------------------
5. Del-credere agent: He is an agent who for an extra commission, guarantees
the performance of the third person. His extra commission is called del- ----------------------
credere commission. He gives a guarantee to the principal that 3rd person
----------------------
shall perform his promise i.e. if the third person does not pay, he will pay.
Thus, he acts as an agent as well as a surety to the principal. ----------------------
6. Banker: When a customer opens an accounts with a bank, the relation
----------------------
between them is that of creditor and debtor respectively. But the banker
acts as his customer’s agent when he collects cheques, dividends, drafts or ----------------------
buys or sells securities or when he pays insurance premium from customer’s
account. ----------------------
7. Indenter: He is a commission agent who procures a sale or purchase on ----------------------
behalf of his principal, with a trader in a foreign country.
----------------------
B. Non-Mercantile Agents
They are agents working for non-commercial activities and they include ----------------------
wife, attorneys, advocates, solicitors, insurance agents, election agent etc. ----------------------
(III) Classification of Agents on the basis of Delegation of Authority
----------------------
Delegation of Authority
----------------------
Sub-agent Substituted Agent Co-agent ----------------------
Delegation of authority means to appoint a representative and give him the ----------------------
authority to perform. An agent is himself a representative. So the question is,
can an agent further delegate his authority to anybody else? ----------------------
The general rule is that an agent cannot appoint an agent. Sec. 190 provides ----------------------
that :
----------------------
‘An agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally’. However there are a ----------------------
few exceptions to the rule.
----------------------
An agent exceptionally may delegate his authority when:
----------------------
i) principal has expressly allowed delegation,
ii) principal has impliedly allowed delegation by not objecting the same ----------------------
iii) when custom of the trade allows delegation ----------------------

iv) when nature of agency requires delegation ----------------------

Notes v) when the acts to be delegated do not require any personal skill or discretion
vi) when an emergency requires delegation.
----------------------
To sum up, an agent so appointed in the above exceptional situations is
---------------------- allowed by law of agency.
---------------------- 1. Sub-agent
---------------------- Sec. 191 defines a sub-agent as follows :

 A ‘sub-agent’ is a person employed by, and acting under the control of, the
---------------------- original agent in the business of the agency.
----------------------  From the definition it is clear that when a sub-agent is appointed, the original
agent acts as a principal for the sub-agent. The legal consequences of the
---------------------- appointment of a sub-agent, as between principal and sub-agent and as
---------------------- regards third parties depend on whether the sub-agent is properly appointed
or improperly appointed.
----------------------
Sec. 192 states that, if a sub-agent is properly appointed:
----------------------  The principal is bound and liable to third parties for the acts of the sub-agent
(as if he is an agent).
----------------------
 The agent is responsible to the principal for the acts of the sub-agents,
----------------------
 The sub-agent is responsible for his acts to the agent and not to the principal.
---------------------- In case the sub-agent is guilty of fraud or willful wrong, he is directly liable
---------------------- to the principal. In such case the principal may use the agent or the sub-agent.
Sec.193 states that, if a sub-agent is improperly appointed:
----------------------
 The principal is not liable for the acts of the sub-agent,
----------------------
 The agent is responsible for the acts of sub-agent to the principal as well as
---------------------- to the third parties.
 The sub-agent is not responsible to the principal at all.
----------------------
Sub-agent cannot be held liable by the principal even for fraud or willful
---------------------- wrong. Sub-agent would be responsible for his acts only to the agent and not to
---------------------- the principal.
2. Substituted Agent (sec.1994)
----------------------
When the principal has expressly or impliedly allowed his agent to name
---------------------- another person to act for the principal and the agent names another person
accoringly, then such person is known as a substituted agent.
----------------------
A substituted agent is not a sub-agent, The substituted agent is directly
---------------------- responsible to the principal since there is a privity of contract between them.
E.g. - A directs B, his solicitor, to sell his estate by auction and to employ an
----------------------
auctioneer for the said purpose. B names C as an auctioneer, to conduct an auction
---------------------- sale. C is not a sub-agent but is A’s sustituted agent for the conduct of the sale
by auction.
----------------------

3. Co-agents Notes
When two or more persons are appointed as agents by the principal to act
----------------------
jointly and severally, they are called as ‘co-agents’, Unless the contrary is proved,
they are jointly responsible. ----------------------
Difference between Sub-Agent and Substituted Agent
----------------------
Point Sub-Agent Substituted Agent
1. Whoappoints him An agent employs a sub- An agent simply names a ----------------------
agent on his own. substituted agent as per the
----------------------
instructions given by the
principal. ----------------------
2. Functioning He works under the control He works under the control
of the agent. of the principal. ----------------------
3. Relation He is agent’s agent. Principal will be responsible
----------------------
for acts of negligence of a
substituted agent ----------------------
4. Privity ofcontract There is no privity of There is a direct contract
contract between him and b e t w e e n h i m a n d t h e ----------------------
principal principal
----------------------
5. Negli-gence Agent will be responsible Agent is not responsible
for acts of negligence of a for the negligence of ----------------------
sub-agent substituted agent
----------------------
Start True or False. ----------------------

1. A minor or a person of unsound mind can be appointed as an agent. ----------------------
----------------------
13.4 EXTENT OF AGENT’S AUTHORITY ----------------------
The authority of an agent means his capacity to bind the principal to third ----------------------
parties. The agent can bind the principal only if he acts within the authority
given to him. Principal is not bound by any unauthorized act done by his agent. ----------------------
Principal will be liable only when the agent does an act within the scope of his
----------------------
authority and in the course of his employment.
The authority of an agent may be express or implied. The agent binds the ----------------------
principal for his acts done within the scope of his ‘actual’ or ‘real’ authority. An
----------------------
agent can also bind the principal to third parties by acts done within his ‘apparent’
or ‘ostensible’ authority. Apparent authority is one which the third parties presume ----------------------
to be there with the agent, while dealing with the agent, due to usage of trade.
----------------------
An agent’s authority in normal circumstances extends to:
a) every lawful thing. ----------------------
b) a lawful thing as necessary for the purpose. ----------------------

Notes c) such act which is according to the custom or usage of a particular trade.
An agent’s authority in emergency circumstances extends to do all such
----------------------
acts for the purpose of protecting his principal from loss, as would be done by
---------------------- a person of ordinary prudence in similar circumstances. E.g. - An agent for sale
may have the goods repaired if it is necessary for a better price.
----------------------
---------------------- 13.5 DUTIES OF AN AGENT
---------------------- An agent has various duties in a contract of agency, which are as follows:
1. Duty to follow principal’s directions or customs (sec.211)
----------------------
2. Duty to conduct business with skill and diligence (sec.212)
----------------------
3. Duty to render accounts (sec. 213)
---------------------- 4. Duty to communicate with principal (sec. 214)
---------------------- 5. Duty not to deal on his own account (sec. 215,216)
---------------------- 6. Duty not to make any secret profits (sec. 217,218)
7. Duty on termination of agency by principal’s death, insanity (sec-209)
----------------------
8. Duty not to delegate authority to a sub-agent (sec-190)
----------------------
9. Duty while appointing substituted agent (sec.195)
---------------------- 10. Duty not to disclose confidential information
---------------------- 1. Duty to follow principal’s directions or customs (sec.211)
---------------------- An agent is bound to conduct the business of his principal according to the
directions given by the principal. If no directions or instructions are given then
---------------------- he should conduct the business according to the custom which prevails in doing
that type of business.
----------------------
In case of breach of this duty if any loss occurs then the agent must
---------------------- compensate the loss and if any profit accrues then he must account for it. E.g.
an agent who was instructed to insure the goods, failed to do so. He was held
----------------------
liable to compensate the principal for the resulting loss.
---------------------- 2. Duty to conduct business with skill and diligence (sec.212)
---------------------- An agent is bound to conduct the business with as much skill as possible
and with reasonable diligence. In case of breach of this duty, the agent must
---------------------- compensate the principal for any direct consequences of his own neglect, want
---------------------- of skill or misconduct. He is, however, not responsible for any remote or indirect
consequences.
---------------------- 3. Duty to render accounts (sec. 213)
---------------------- An agent is bound to render proper accounts to his principal on demand. An
agent is under a duty to maintain proper accounts related to agency and show it
---------------------- to the principal from time to time as per the contract or whenever the principal
---------------------- demands.

4. Duty to communicate with principal (sec.214) Notes
It is the duty of an agent, in case of difficulty to use all reasonable diligence
----------------------
in communicating with his principal, and in seeking to obtain his instructions.
----------------------
5. Duty not to deal on his own account (sec.215, 216)
An agent must not deal on his own account without obtaining consent of ----------------------
the principal. If the agent desires to deal on his own account then he is bound ----------------------
to disclose all material circumstances within his knowledge to the principal and
obtain his consent. ----------------------
If the agent violates this rule, the principal may repudiate / cancel the ----------------------
transaction and can also claim any benefit resulting from such transaction.
----------------------
However repudiation is allowed only when it can be shown that any material fact
was knowingly concealed by the agent, or the deal has been disadvantageous to ----------------------
the principal. E.g. - A, directs B to sell A’s estate. B buys the estate for himself in
the name of C. A, on discovering this may cancel the sale, if he can show that B ----------------------
has dishonestly concealed the material fact or that the sale was disadvantageous ----------------------
to him.
----------------------
6. Duty not to make any secret profits (sec.217, 218)
An agent must not make any secret profits out of his agency. He must pay ----------------------
to his principal all money received on his account. However he can deduct all ----------------------
moneys due to himself in respect of his remuneration or expenses incurred by
him. ----------------------
7. Duty on termination of agency by principal’s death or insanity (sec.209) ----------------------

When an agency is terminated due to the principal’s death or becoming of ----------------------
unsound mind, the agent is bound to take (on behalf of the representatives of
his late principal), all reasonable steps for the protection and preservation of the ----------------------
interest entrusted to him. ----------------------
8. Duty not to delegate authority to a sub-agent (sec.190)
----------------------
An agent has to do his duty himself and cannot delegate his authority to a
----------------------
sub-agent unless custom of trade or nature of agency requires.
9. Duty while appointing substituted agent (sec.195) ----------------------
If an agent is instructed by principal to name a person to be a substituted ----------------------

agent, he is bound to exercise his discretion as a man of ordinary prudence would
----------------------
exercise in his own case.
----------------------
10. Duty not to disclose confidential information-
An agent should not disclose any confidential information supplied to him ----------------------
by his principal. Similarly, he shall not use information obtained in the course ----------------------
of agency against the principal.
----------------------

Notes
----------------------
---------------------- Match the following.
---------------------- i. Duty of agent to follow principal’s directions a. Section 212

ii. Duty of agent to conduct business with skill b. Section 211
---------------------- and diligence
iii. Duty of agent to render accounts c. Section 214
----------------------
iv. Duty of agent to communicate with d. Section 213
---------------------- principal
----------------------
---------------------- 13.6 RIGHTS OF AN AGENT
---------------------- An agent enjoys various rights which are as follows:

1. Right of retaining sums (sec.217)
----------------------
2. Right of remuneration (sec. 219, 220)
----------------------
3. Right of lien (sec. 221)
---------------------- 4. Right to indemnity (sec. 222,223)
---------------------- 5. Right to compensation (sec. 225)
---------------------- 6. Right in emergency (sec.189)
7. Right of stoppage in transit
----------------------
1. Right of retaining sums (sec. 217)
----------------------
An agent receives money from third parties on account of principal, in a
---------------------- contract of agency. Out of such money received, he has a right to retain any sums
due to himself in respect of advances made by him, expenses incurred by him
---------------------- or such remuneration due to him from principal.
---------------------- 2. Right of remuneration (sec. 219,220)
---------------------- An agent is entitled to his agreed commission if fixed by the contract and
to a reasonable commission if remuneration is not fixed by the contract. The
---------------------- reasonable commission should be a usual commission as per the custom of the
trade in which he is employed.
----------------------
An agent who is guilty of misconduct in agency is not entitled to any
---------------------- remuneration in respect of that part of the business in which he has committed
misconduct.
----------------------
3. Right of Lien (sec.221)
----------------------
Unless otherwise agreed, an agent is entitled to retain goods, papers and such
---------------------- other movable or immovable property of the principal as a right of lien. However
lien can be exercised only with respect to amount due to him as commission, or as
---------------------- disbursement and service in respect of the same which is payable or due.

4. Right to Indemnity (sec.222, 223) Notes
The agent has the right to be indemnified by the principal against:
----------------------
i) the consequences of all lawful acts done by him in course of his business
----------------------
ii) the consequences of any act done in good faith.
Indemnity covers all losses and expenses incurred by the agent in conduct ----------------------
of the business in good faith. ----------------------
5. Right to Compensation sec.225)
----------------------
The agent has a right to be compensated for injuries sustained by him due
to principal’s neglect or want of skill. ----------------------
6. Right in Emergency (sec. 189) ----------------------
In an emergency situation, agent has the authority to do all such acts for
----------------------
the purpose of protecting his principal from loss, provided he has behaved as a
person of ordinary prudence who would have behaved in similar circumstances. ----------------------
7. Right of Stoppage in transit
----------------------
An agent can enjoy the right of stopping the goods while in transit and get
back the possession in case: ----------------------
i) where he purchased the goods with his own funds or incurring personal ----------------------
liability and meanwhile principal became insolvent, or
----------------------
ii) where he holds himself liable for price of goods sold (e.g. delcredere agent)
and meanwhile the buyer / third party became insolvent. ----------------------
----------------------
----------------------
Match the following. ----------------------

i. Right of an agent for retaining sums a. Section 219 ----------------------
ii. Right of an agent for remuneration b. Section 217
----------------------
iii. Right of an agent for lien c. Section 222
iv. Right of an agent for the indemnity d. Section 221 ----------------------
----------------------
13.7 PERSONAL LIABILITY OF AN AGENT ----------------------
An agent is simply a connecting link between principal and third parties. So, ----------------------
in the absence of a contract to the contrary, an agent cannot personally enforce
any contract entered into by him on behalf of the principal, nor is he personally ----------------------
bound by them.
----------------------
If at all anybody has the right to enforce it or become liable to it, it is only
the principal and not the agent. However, exceptionally, he becomes liable in ----------------------
following situations.
----------------------

Notes Exceptional situations when agent is personally liable-
1. Foreign Principal: When the principal is a merchant residing abroad for
----------------------
whom the agent has agreed to sale or purchase goods.
---------------------- 2. Undisclosed Principal: If the agent does not disclose the name of his
principal or he could not disclose his identity or he acts for an unnamed
----------------------
principal, then the agent will be personally liable to the third party.
---------------------- 3. Principal who cannot be sued: If the agent, though discloses the name of
the principal but if the principal is one who cannot be sued in court, then the
----------------------
agent will be held personally liable. Principal who cannot be sued is the one
---------------------- who is incompetent to contract or disqualified from entering into a contract.
E.g. If principal is a minor or of unsound mind or a foreign sovereign etc.
----------------------
4. Breach of warranty: If the principal does not ratify certain unauthorized
---------------------- acts of the agent due to which a loss is caused to the third party, the agent
would be personally liable. Here, the agent either acts without authority
---------------------- or exceeds his authority. He is deemed to have committed breach of
---------------------- warranty of authority.
5. Usage of Trade: An agent would be held personally liable where there is
---------------------- a trade usage or custom to that effect.
---------------------- 6. Express Agreement: If a contract specifically provides for the personal
liability of the agent, he will be personally liable.
----------------------
7. Fraudulent behavior: If an agent is guilty of fraud or misrepresentation
---------------------- in matters which fall outside his authority, the agent will be personally
liable.
----------------------
---------------------- Activity 2
----------------------
1. Mr. Jagat Singh is a trader in domestic items. I went to him and
---------------------- purchased some goods on credit in my husband’s name. Does the
shopkeeper have a right to recover the price of goods sold to me from
---------------------- my husband?
---------------------- 2. Mr. Right was the managing director of Zham Zham Co. He,
purporting to act as the agent on company’s behalf and without any
---------------------- authority, accepted the offer made by Mr. Yasin. Subsequently, Mr.
---------------------- Yasin withdrew his offer by giving notice to the company. But in the
meanwhile, the company ratified Mr. Right’s unauthorised acceptance.
---------------------- Is Mr. Yasin bound to fulfill the contract?
----------------------
---------------------- 13.8 RIGHTS OF PRINCIPAL

---------------------- The duties of an agent are in fact the rights of the principal. The principal
can enforce all the duties of agent by a suit against him. These have been already
---------------------- discussed earlier.

1. Principal’s Right to repudiate contract Notes
If an agent deals on his own account, without obtaining consent of his
----------------------
principal, or by exceeding his authority, then the principal may repudiate the
agency. However here it is necessary to be shown that some material fact was ----------------------
dishonestly concealed from principal or the dealings were disadvantageous to
him. ----------------------
2. Principal’s Right to claim benefit ----------------------
Principal can claim any secret benefits earned by the agent though can be
----------------------
ratified or disowned by the principal later.
3. Principal’s Right to ratify or disown agent’s acts ----------------------
Any act of the agent which is done without consent of the principal can be ----------------------
ratified or disowned by the principal later.
----------------------
4. Principal’s Right to demand accounts
----------------------
Principal can demand the proper accounts from the agent after stipulated
time period or at any time. ----------------------
5. Principal’s Right to claim profit or loss
----------------------
The principal is entitled to compensation for any loss sustained by him or
to any profits accrued by the agent due to his acts exceeding the authority or due ----------------------
to his neglect or want of skill or misconduct.
----------------------
6. Principal’s Right to refuse remuneration
----------------------
If the agent is found guilty of misconduct in the course of business, then
principal has a right to refuse remuneration ----------------------
7. Principal’s Right to revoke agent’s authority ----------------------
The principal may revoke the agent’s authority by giving him a reasonable
----------------------
notice of revocation before the authority has been exercised so as to bind the
principal. ----------------------
Activity 3 ----------------------
----------------------
1. Mr. Xavior who purports to act as an agent on behalf of Yatin without
any authority, accepts an offer made by Naresh. Naresh withdraws the ----------------------
offer before his principal Mr. Yatin comes to know about that offer. ----------------------
However, Yatin subsequently ratified Xavior’s acceptance. Is there any
contract and are Mr. Naresh and Yatin bound by that contract? ----------------------
----------------------
13.9 DUTIES AND LIABILITIES OF PRINCIPAL ----------------------
The rights of an agent are in fact the duties of the principal. We have already ----------------------
discussed them at length earlier. The principal is liable to third parties for the
acts of his agent. ----------------------

Notes These duties and liabilities have been summarized as follows:
1. Principal’s duty to Indemnify agent
----------------------
The principal is bound to indemnify the agent against consequences of all
---------------------- lawful acts done by him or for all acts done in good faith by him in course of
---------------------- agency business.
2. Principal’s duty to Compensate agent
----------------------
The principal must compensate his agent for any loss suffered by him due
---------------------- to principal’s neglect or want of skill.
---------------------- 3. Principal’s liability to third party
---------------------- The principal is liable for all acts of his agent:
---------------------- i) done within the ‘actual’ and ‘apparent’ authority.
---------------------- ii) acts done in emergencies, which were necessary for protecting the principal.
iii) acts done in good faith,
----------------------
iv) for all lawful acts done by the agent.
----------------------
4. Principal’s liability when agent exceeds authority
----------------------
When agent exceeds authority, the principal may ratify or disown the act.
---------------------- If he ratifies, he becomes liable for those Acts. If he opts to disown them then
the agent shall be liable.
----------------------
5. Principal’s liability for agent’s misrepresentation/fraud
----------------------
The principal is liable for misrepresentation or fraud by agent acting within
---------------------- the scope of his authority during the course of his business. However principal
will not be liable for misrepresentation or fraud committed by agent in matters
---------------------- which fall outside his authority.
---------------------- 6. Principal’s liability of unnamed principal
---------------------- Unnamed principal is the one whose existence is disclosed by the agent but
the name is not disclosed. The legal position of unnamed principal is the same
---------------------- as where the principal is named, unless there is a trade custom making the agent
---------------------- personally liable. That means the unnamed principal is liable for the agent’s acts
within his actual and apparent authority.
---------------------- 7. Principals liability of Undisclosed principal
---------------------- When an agent makes a contract in his own name concealing not only the
name of his principal but also the fact that there is a principal, his principal is
----------------------
called as undisclosed principal. Here the agent represents to the third party as if
---------------------- he himself is the contracting party.
---------------------- Here the principal is not held liable till he remains undisclosed. But once
his existence is disclosed to third party, the party may sue the principal or agent
---------------------- or both.

13.10 TERMINATION OF AGENCY (SEC.201) Notes
Termination is the end of agency, thereby the end of relationship of principal ----------------------
and agent. The various modes of termination of agency are as under:
----------------------
Termination of Agency
----------------------
I. By act of Parties II. By Operation of Law ----------------------
a) by Agreement 1. by death or Insanity ----------------------

b) by Revocation of authority 2. by Insolvency ----------------------
c) by Renunciation 3. by Expiry of fixed period
4. by completion of business ----------------------
5. by destruction of subject matter ----------------------
6. by parties becoming alien enemies
7. by object of agency becoming unlawful ----------------------
I. Termination by Act of Parties ----------------------

In this type of termination, one or both the parties terminate the agency. ----------------------
a) By Agreement: Parties may, any time mutually agree to terminate the
----------------------
agency.
b) By Revocation of Authority: When principal revokes the authority of his ----------------------
agent, the agency is terminated. However, before revocation the principal
----------------------
has to give a reasonable notice in advance to the agent.
c) By Renunciation: The agency is terminated when the agent himself ----------------------
renounces the business of agency. Reasonable notice has to be given ----------------------
by the agent to the principal of such renunciation. Both revocation
and renunciation can be express or implied through the conduct of the ----------------------
respective parties.
----------------------
II. Termination by Operation of Law
An agency comes to an end by a legal principal, in the following cases. ----------------------
1. By Death or Insanity ----------------------

When the principal or agent dies or becomes of unsound mind, the agency ----------------------
is terminated automatically. If the principal or agent is an incorporated
company, the agency ceases to exist on dissolution of the company. ----------------------
2. By Insolvency ----------------------
An agency is terminated by the insolvency of the principal because he ----------------------
becomes incompetent to contract.
3. By Expiry of fixed period ----------------------
If an agency is formed for a fixed period, the expiration of the fixed ----------------------
period puts an end to the agency. Though the business may not have been
----------------------
completed the agency ceases to be the agent of the principal.

Notes 4. By Completion of Business
By Completion of Business
----------------------
5. By Destruction of subject matter
---------------------- If an agency is created to deal with certain subject matter it will be terminated
---------------------- if the subject matter is destructed.
6. By Parties becoming alien enemies
----------------------
If principal and agent are citizens of two different countries and if war breaks
---------------------- out between these 2 countries, then the alien friends become alien enemies
and agency is terminated.
----------------------
7. By Object/ purpose of agency becoming unlawful
---------------------- If by happening of an event, the object of agency becomes unlawful, the
agency is treated as terminated.
----------------------
----------------------
Activity 4
----------------------
Ashish is the owner of a ship and cargo and he authorises Subhash to procure
---------------------- an insurance for Rs. 5,000 on the ship. Subhash procures an insurance policy
---------------------- for Rs. 5,000 on the ship. But, in addition to that, he also procures another
insurance policy for the like sum on the cargo. Is Ashish bound to pay the
---------------------- premium for the ship as well as the cargo, or can he repudiate the policy?
----------------------
---------------------- Summary
---------------------- ●● n agent is a person employed to do any act for another or to represent
A
another in dealing with third persons. The person for whom such act is
---------------------- done or who is so represented is called the principal.
---------------------- Rules of Agency:
a) A person can do anything through an agent that he is competent to
----------------------
do by himself.
---------------------- b) He who does through another, does by himself. The act of an agent,
therefore are the acts of the principal. This is of course subject to
----------------------
certain conditions.
---------------------- Any person who is major and of sound mind may employ an agent. An
agent need not be competent to contract.
----------------------
The relationship of agent an principal may be created by:-
----------------------
1. Express agreement
---------------------- 2. Implied Agreement:-
---------------------- n Agency by Estoppel or holding out
n Agency by necessity
----------------------

n Agency by Ratification Notes
●● Rights of Agent:-
----------------------
1. Right of Retainer
----------------------
2. Right to receive remuneration
3. Right of Lien ----------------------
4. Right to be indemnified ----------------------
5. Right of compensation ----------------------
6. Right of stoppage in transit
----------------------
●● Duties of Agent:-
1. To carry out the work undertaken according to instructions ----------------------
2. To carry out work with reasonable care, skill and diligence ----------------------
3. To render accounts to the principal ----------------------
4. To communicate with the principal in case of difficulty
----------------------
5. Not to deal on his own account
----------------------
6. To pay to the principal the sums received on his behalf
----------------------
7. To protect and preserve the interest of the principal in case of his
death or insolvency ----------------------
8. Not to use information obtained in the course of agency against the
----------------------
principal
9. Not to make secret profits from agency ----------------------
●● Agent’s authority ----------------------
The authority of an agent means the capacity to bind the principal by his
----------------------
acts. This authority may be actual or ostensible. The general rule is that
an agent cannot delegate his authority to another. ----------------------
Termination of agency ----------------------
An agency is terminated in any of the following ways:
----------------------
n By the principal revoking the authority of the agent
----------------------
n By the agent renouncing the business of agency
n By the completion of business of agency ----------------------
n By death or insanity of principal or agent ----------------------
n Insolvency of principal

----------------------
----------------------
----------------------
----------------------

Notes Keywords
----------------------
●● Agent: An ‘agent’ is a person employed to do any act for another or to
---------------------- represent another in dealings with third persons. Agent literally means a
person who is a ‘representative’.
---------------------- ●● Principal: The person for whom such act is done, or who is so represented,
---------------------- is called the ‘Principal’.
●● Agency: The contract which creates the relationship of ‘principal’ and
---------------------- ‘agent’ is called an ‘agency’ contract. The test of agency is whether a
---------------------- person has the capacity to create contractual relation between the principal
and a 3rd party.
---------------------- ●● Estoppel: Estoppel means to legally stop a person from denying the truth
---------------------- of certain facts even though it did not really exist.
●● Holding-out: Falsely leading another to believe something or representing
---------------------- something which is not true.
---------------------- ●● Ratification: Accepting subsequently a past act of a person done on
behalf of another.
----------------------
●● Special Agent: Also known specific or particular agent is one who is
---------------------- appointed to do a specific act on behalf of the principal.
●● General Agent: He is an agent who is appointed to do all or general
----------------------
acts concerning a particular trade or business. His authority remains
---------------------- continuous unless terminated.
●● Mercantile Agent: A mercantile agent is one who has authority to either
----------------------
sell goods, buy goods or to raise money on the security of goods.
---------------------- ●● Universal Agent: He is an agent whose authority is unlimited.
---------------------- ●● Non-Mercantile Agents: These are agents working for non-commercial
activities and they include wife, attorneys, advocates, solicitors, insurance
---------------------- agents, election agent etc.
---------------------- ●● Ostensible or Apparent Authority: It is the authority of an agent as it
appears to the others.
---------------------- ●● Sub-Agent: He is a person employed by, and acting under the control of
---------------------- the original agent in the business of the agency.
●● Substituted Agent: When the principal has expressly or impliedly
---------------------- allowed his agent to name another person to act for the principal and the
---------------------- agent names another person accordingly, then such person is known as a
substituted agent.
---------------------- ●● Co-agents: When two or more persons are appointed as agents by the
principal to act jointly and severally, they are called as co-agents.
----------------------
----------------------
----------------------

Notes
----------------------
1. Define ‘agent’, ‘principal’ and ‘contract of agency’.
2. Discuss the agency of contract of agency. ----------------------
3. Discuss the modes of creation of agency.
----------------------
4. Enumerate different kinds of agents
5. What is meant by agency by ratification? Discuss essentials of valid ----------------------
ratification. ----------------------
6. Explain agency by estoppel or by holding out.
7. Enumerate the rights and duties of an agent. ----------------------
8. Write a note on the extent of authority of an agent. ----------------------
9. Describe various modes of termination of agency.
----------------------
10. Distinguish between a sub agent and a substituted agent.
----------------------

1. Agent literally means a person who is a
----------------------
i. Representative
2. When two or more persons are appointed as agents by the principal to act ----------------------
jointly and severally, they are called
----------------------
i. Co-agents
----------------------
1. When one is compelled to act as an agent of another without the authority ----------------------
of that other, such agency is called
----------------------
i. Agency by necessity
2. It means accepting subsequently a past act of a person done on behalf of ----------------------
another
----------------------
i. Ratification
1. True ----------------------
----------------------
i. – b.
ii. – a. ----------------------
iii. – d.
----------------------
iv. – c.
----------------------

Notes Check your Progress 5
i. – b.
----------------------
ii. – a.
---------------------- iii. – d.
iv. – c.
----------------------

---------------------- 1. Beatson, J. 2002. Anson’s Law of Contract. New York: Oxford University
Press.
---------------------- 2. Burrows, Andrew. 2009. A Casebook on Contract. Hart Publishing.
---------------------- 3. Iyer, T.S. Venkatesa. 2001. The Law of Contract. Hyderabad: Gogia
Publication.
---------------------- Chand & Sons.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

References Notes
1. Chitty on Contracts, Vol. I, 28th Edition, Sweet and Maxwell, London, ----------------------
1998
----------------------
2. Cheshire, Fifoot and Furmston’s Law of Contract, 14th Edition,
Butterworths, 2001 ----------------------
3. Avtar Singh, Law of Contract, 15th Edition, Eastern Book House,
----------------------
2005
4. T.S. Venkatesa Iyer, The Law of Contract, 9th Edition, Godia ----------------------
Publication, 2001
----------------------
5. J. Beatson, Anson’s Law of Contract, 28th Edition, Oxford University
Press, 2002 ----------------------
6. Andrue Burrow, A Casebook on Contract, 2nd Edition, Hart Publishing,
2009 ----------------------
7. H.K. Saharey, Dutt on Contract, Eastern Law House, 9th Edition, 2000 ----------------------
8. Sanjiva Row, Law of Contract, 11th edition, Delhi Law House, 2009
----------------------
9. S.C. Srivastava, Venkoba Rao’s Law of Agency, Butterworths, 2001
10. N. D. Kapoor, Elements of Mercantile Law, Sultanchand & Sons, 2010 ----------------------
11. Dr. Avtar Singh, Law of Contract, Eastern Book Company ----------------------
12. M. S. Pandit, Shobha Pandit, Business Law, Himalaya Publishing
House, 1998 ----------------------
13. P.P.S. Gogna, Textbook of Business Law, S. Chand & Co. Ltd. 1999 ----------------------
14. The Indian Contract Act 1872
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
References 213
Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

$RW77R82

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

$RW77R82

Uploaded by

Copyright:

Available Formats

LAW OF CONTRACTS

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2019 Symbiosis Open Education Society

Dr. Rohini Gote

Indian Contract Act, 1872 1

Indian Contract Act, 1872 3

---------------------- 1.8 HISTORY OF THE CONTRACT ACT

1.9 IMPORTANCE OF THE CONTRACT ----------------------

Everyday each one of us enters into a number of contracts knowingly or ----------------------

Indian Contract Act, 1872 5

---------------------- Check your Progress 1

2. Voidable Contract ----------------------

Indian Contract Act, 1872 7

---------------------- Multiple Choice Single Response.

Indian Contract Act, 1872 9

Proposal & Acceptance 11

---------------------- 2.1 DEFINITION OF PROPOSAL AND EXPLANATION

----------------------  Proposal is an expression of one’s desire to do or not to do something.

1. Express or Implied Proposal ----------------------

2. Creating Legal Relationship ----------------------

Proposal & Acceptance 13

Proposal & Acceptance 15

---------------------- 2. By lapse of the specified or reasonable time

The object of sending or circulating invitation is merely to circulate information ----------------------

Multiple Choice Single Response. ----------------------

2.4 REVOCATION OF A PROPOSAL ----------------------

Proposal & Acceptance 17

---------------------- Multiple Choice Single Response.

---------------------- 1. A proposal stands revoked

---------------------- i. By communication of notice of revocation by the proposer

---------------------- Section 2(c) states that

Multiple Choice Single Response. ----------------------

1. Absolute, unqualified Acceptance ----------------------

Proposal & Acceptance 19

---------------------- Acceptance of a proposal must be absolute and unqualified, Acceptor of the

Proposal & Acceptance 21

---------------------- Check your Progress 5

---------------------- No difficulty arises as regards the communication of proposals and

Proposal & Acceptance 23

---------------------- Multiple Choice Single Response.

---------------------- iii. Both i. and ii.

●● Promise: A proposal when accepted becomes a promise. ----------------------

5. What are the various types of proposals? ----------------------

Answers to Check your Progress ----------------------

Multiple Choice Single Response. ----------------------

Proposal & Acceptance 25

---------------------- i. Intend to create legal relations

---------------------- Suggested Reading

Check your Progress 1 ----------------------

3.3 AT THE DESIRE OF THE PROMISOR ----------------------

---------------------- An executory consideration consists of a promise to do, forbear, or suffer

---------------------- Check your Progress 2

---------------------- Multiple Choice Single Response.

---------------------- iii. Consideration can only be present

---------------------- Multiple Choice Single Response.

---------------------- iv. Illegal

---------------------- iv. Unenforceable

---------------------- 4. Inadequacy of consideration does not make the contract

n The consideration must be sufficient but need not be adequate. ----------------------

---------------------- 5. What is privity of contract and of consideration?

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1