The Indian Contract Act, 1872

The Indian Contract Act, 1872:

Discharge of a Contract
 DISCHARGE OF A CONTRACT
• Discharge of a contract means termination of
the contractual relations between the parties
to the contract.
• The contract may be discharged in the
following six modes.
Mode of discharge of a contract
 By Performance
• By an Actual Performance
– It means the parties to contract have performed
their respective promises under the contract.
• By an Attempted Performance or a Tender
– It means the promisor has made an offer of the
performance of promise but it has not been
accepted by the promisee.
 DISCHARGE OF A CONTRACT BY A MUTUAL
AGREEMENT OR BY AN IMPLIED CONSENT

• A contract can be discharged by mutual agreement in any of

the following ways.
1. Novation
– A new contract is entered into in consideration of the old
contract. The new contract is entered into between the
same parties or the new parties.
– The novation is valid when all the parties must consent it.
– The new contract must be valid and enforceable,
otherwise the old contract will continue valid.
• Example
A owed ` 100 to B, under contract. B owed ` 100 to C. It
was agreed among A, B and C that A would pay ` 100
to C.
 DISCHARGE OF A CONTRACT BY A MUTUAL
AGREEMENT OR BY AN IMPLIED CONSENT
• A contract can be discharged by mutual agreement in any of the
following ways.
2. Alteration
– An alteration of a contract means a change in one or more terms of
the contract with the mutual consent of the parties.
– The alteration discharges the original contract and creates a new
contract. However, the parties to the new contract remain the same.
In case of alteration of the contract, the old terms and conditions need
not to be performed while the new terms and conditions must be
performed.
– Example
– A agreed with B to supply 100 TV sets at a certain price by the end of
October. Subsequently, A and B mutually agree that the supply be
made by the end of November. This is an altercation in the terms of
the contract by consent of both the parties.
3. Rescission
– The rescission of a contract means the
cancellation of the contract by one or all the
parties to contract.
4. Remission
– The remission means the acceptance of a lesser consideration
than what is agreed under the contract. It takes place when the
promisee:
1. Dispenses with a part or whole of the performance of a promise.
2. Extends the time for a performance by the promisor.
3. Promisee accepts a lesser sum – Known as “Accord”; the actual
payment is the “satisfaction”
4. Accepts any other consideration, than agreed in the contract.
– Example
A owes B ` 5000. A pays ` 2000 to B and B accepts the
amount in satisfaction of the whole debt. The whole debt
is discharged.
5. Waiver
– It means the abandonment (i.e., giving up) of right by the party under
the contract. No consideration is necessary for the waiver.
– Example
– A promises to supply goods to Y. Later on, Y exempts A from carrying
out the promise. It amount as waiver of right of performance on part
of Y.

6. Merger
– The conversion of the inferior right into superior right is called as
merger. It is also called as vesting of rights and liabilities in the same
person.
– Example
– A person holds property under lease, purchases the property. On
purchase, his lease agreement is discharged.
 DISCHARGE OF A CONTRACT BY IMPOSSIBILITY OF
PERFORMANCE

• This is based on the principle that law does not recognize

what is impossible. The impossibility of performance may be
of two types, namely (a) the initial impossibility and (b) the
subsequent impossibility.
• SPECIFIC GROUNDS OF SUBSEQUENT IMPOSSIBILITIES (It is
also known as the doctrine of frustration under the English law. In the
following cases, the contract is discharged on the ground of the
supervening impossibility)
– Destruction of Subject–Matter
– Incapacity or Death
– Change in Law or Circumstances
– Declaration of War
• Cases Where A Contract is not Discharged on
The Ground of Supervening Impossibility
– Performance Becomes Difficult
– Commercial Impossibility: or non-profitable
ground
– Impossibility Due to the Conduct of Third Party
– Strikes, Riots or Civil Disturbances
– Self-induced Impossibility
– Failure of Object
DISCHARGE OF A CONTRACT BY LAPSE OF TIME
• Every contract and promise under the contract
should be performed within a time limit. The
contract is discharged, if it is not performed or
enforced within a specified period called as
the period of limitation.
Example
• The period of limitation for recovering the
debt is 3 years and 12 years for the recovery of
immovable property.
DISCHARGE OF A CONTRACT BY BREACH OF CONTRACT

• It means the failure of a party to fulfill his obligation or promise

under the contract. When there is a breach of contract, certain
remedy or consequences are available to the aggrieved party. The
aggrieved party means a party who is not at a fault.
• The aggrieved party is not required to perform his part of the
promise. The aggrieved party is having various remedies depending
upon the type of breach.
1. Actual breach
 An actual breach of contract means any party to contract refuses or
fails to perform his promise on the due date of performance, or
during the performance. The actual breach of contract may take
place expressly or impliedly.
2. Anticipatory breach
 When any party declares his intention of not performing the contract
before the performance is due, it is called as anticipatory breach of
contract.
Following are the consequences of the actual breach of contract:
(i) If time is the essence of the contract
(a) The contract is voidable at the option of the aggrieved party.
(b) The aggrieved party can claim the compensation for the loss for non-
performance.
(c) The aggrieved party cannot claim compensation when he accepts delayed
performance.
(ii) If time is not the essence of the contract
If time is not the essence, the contract is not voidable but the aggrieved party
can claim compensation for any loss caused for non-performance.

Following are the consequence of anticipatory breach.

1. The aggrieved party may treat the contract as alive.
2. The aggrieved party can cancel the contract and claim damages.
Here, the damage will be equal to the difference between the contract price and the
price as on the date of communication.

Note: When a contract becomes void, any benefit received under such
contract is bound to restore such benefit or to make compensation for such
benefit to the person from whom he received it.
The Indian Contract Act, 1872:
Performance of Contract
 Performance of a contract
• Performance of a contract is one of the methods of
discharge of a contract. The performance may be of
two types:
(a) actual performance and
– means performing all the promises and fulfilling all the
liabilities by all the parties
(b) attempted performance.
– means the promisor has made an offer to perform a
promise to the promisee but it has not been accepted. The
attempted performance is known as tenders. If there is a
valid tender, it discharges the party who is not at fault.
 ESSENTIALS OF A VALID TENDER
• An attempt to perform a promise by a promisor is regarded as
a valid tender, when it fulfills all of the following conditions.
– It Must Be Unconditional
– It Must Be at Proper Place
– For Whole Obligation
– In Legal Tender Money (Legal tender money means current
currency notes or coins.)
– It Must Be Made at Proper Time and to a Proper Person
– A reasonable opportunity to the promisee to verify or
examine the goods.
Essentials of a valid tender
 EFFECTS OF A VALID TENDER

• On making a valid tender of performance by the

promisor, it becomes the duty of the promisee to
accept the performance. If the promisee does not
accept the valid tender, the promisor is not
required to perform his promise again. The
promisor is discharged from his obligation. At the
same time, the promisor is not responsible for
the non-performance because the promisee has
not accepted the valid performance. However,
the promisor does not lose his right under the
contract.
 Example

• A agreed to deliver goods, at a specified place

of B, for consideration of ` 5000. As per the
agreement, A takes goods and delivered to B
at the specified place but B rejects the deliver
of goods. Here, A can recover his money or
damage he has sustained.
 TYPES OF TENDERS
1. Tender of Goods and Services
• When a promisor offers the delivery of goods or
services to the promisee it is said to be the
tender of goods or services.
• If the promisee does not accept a valid tender, it
will have the following effects:
1. The promisor is not responsible for the non-performance of
the contract.
2. The promisor is discharged from his obligation under the
contract. Therefore, he needs not to offer again.
3. The promisor does not lose his right under the contract.
Therefore, he can sue the promisee.
 TYPES OF TENDERS
2. Tender of Money
• The tender of money is an offer to make a
payment. In case a valid tender of money is
not accepted, it will have the following effects:
1. The offeror is not discharged from his obligation to pay
the amount.
2. The offeror is discharged from his liability for the
payment of interest from the date of the tender of money.
 CONTRACTS WHICH NEED NOT TO
PERFORM
The purpose of a contract is its performance. However, the
following contracts are not required to be performed:
• Performance Becomes Impossible
• New Contract in Place of Old Contract
• Waiver by Promisee
• Promise Becomes Illegal
• Rejection of Valid Tender When a promisee rejects the valid
tender of performance, the promisor is not liable to perform
it again.
• No Reasonable Facility
 WHO CAN PERFORM CONTRACT?
• At the first instance, a contract should be performed by the
promisor himself. However in certain cases, the contract may
also be performed by persons other than the promisor.
• Legal Representative: The contract which does not involve
any personal skill, may be performed by the legal
representative of the promisor, on the death of the promisor.
However, the liability of the legal representative under the
contract is limited to the value of the property inherited.
• Third Party: The third party may perform the promise if the
promisee accepts the performance. When the promisee
accepts the performance of the promise from a third person,
he cannot afterwards enforce it against the promisor.
 PERFORMANCE OF JOINT PROMISE—
SECTIONS 42–45
• When two or more persons enter into a joint agreement with
one or more persons, in such a case, the promise is known as
a joint promise.
• Promisee May Compell to Perform Any One of Joint Promisor
• The Joint Promisors Are Liable to Contribute Equally
• Joint Promisors Liable to Share Loss Equally
• Effect of Release of Joint Promisor
 KINDS OF RECIPROCAL PROMISE
• The promise exchange for a promise is known as a reciprocal
promise. In the case of a reciprocal promise, each party to
contract is the promisor as well as the promisee.
• Mutual and Independent
– When the promises are to be performed by each party independently
without waiting for the other party to perform his promise, it is called
as it mutual and independent reciprocal promises.
• Mutual and Dependent
– When the performance of one party depends on the prior
performance of the other party, it is known as the mutual and
dependent reciprocal promises
• Mutual and Concurrent
– When the promises are to be performed by both the parties
simultaneously, it is the mutual and concur rent reciprocal promises.
 TIME IS THE ESSENCE OF A CONTRACT

• When time is not essential:

– If it was not the intention of the parties that time should be of the
essence of the contract, the contract does not become voidable by the
failure to do such thing at or before the specified time but the
promisee is entitled to compensation from the promisor for any loss
occasioned to him by such failure.
 ASSIGNMENT AND SUCCESSION OF A CONTRACT
• The assignment of contracts means voluntary transfer of rights, title, interest
or benefit & Liabilities under the contract to the third party.
• While succession to the contract is the process where one person succeeds in
another person’s right, interest, benefit and obligation in the contract by the
process of law.
• Only contracts which are impersonal in nature can be assigned or succeeded.
The contract which is based upon the use of personal skill is a personal
contract which cannot be assigned or succeeded.
• The succession of the contract takes place in the following two situations:
1. In the case of death of the party to contract his legal successor succeeds
to the rights and liabilities under the contract. However, he is liable for
non-personal contract and liable to the extent of property inherited by
him.
2. In the case of insolvency of the party to contract, his rights and
liabilities under the contract are acquired by the official liquidator.
 Assignment of the Contract
• Consideration is must; should be in written
form
• Assignment of the Contract can be in two
ways:
– Act of the Parties
• Personal skills-cant be assigned
• No personal skills involved-Assignment allowed
– Operation of Law
• Happen in case of Death and Insolvency
Bailment & Pledge
 Bailment
• Bailment’ is derived from a French word
‘bailer’ which means ‘to deliver’.
• But in law it refers to the contract which
results from delivery of goods.
• In contract of bailment only possession is
passed on not the ownership.
• There cannot be bailment of immovable
property.
 Contract of Bailment (Sec.148-
Sec.171)
“delivery of goods by one to another person 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 person
delivering them”.
• The person delivering the goods is called the ‘bailor’
• the person to whom the goods are delivered is called
the ‘bailee’.
• Always for MOVABLE Property.
 Bailment: Examples
(i) A delivers some clothes to B, a dry cleaner, for dry
cleaning.
(ii) A delivers a wrist watch to B for repairs.
(iii) A lends his book to B for reading.
(iv) A delivers a suit-length to a tailor for stitching.
(v) A delivers some gold biscuits to B, a jewelers, for
making jewellery.
(vi) Delivery of goods to a carrier for the purpose of
carrying them from one place to another.
(vii) Delivery of goods as security for the repayment of
loan and interest thereon, i.e., pledge.
 Characteristics of Bailment
• Delivery of goods
• Bailment is based on a contract:
– For example, where a watch is delivered to a
watch repairer for repair, it is agreed that it will be
returned, after repair, on the receipt of the agreed
or reasonable charges.
– Exception e.g., the case of a finder of lost goods.
• Return of goods
 Bailment Types
• On the Basis of Consideration
– Gratuitous Bailment: Without consideration
• Eg: A lends his book to B for reading
– Non-Gratuitous Bailment: with consideration
• Eg: A delivers a wrist watch to B for repairs
• On the Basis of Benefits
– Exclusive benefits of Bailor
– Exclusive benefits of Bailee
– Mutual benefits
 Kinds of Bailments
1. Deposit:
Delivery of goods by one person to another for the use of the former,
i.e., bailor;
2. Commodatum:
Goods lent to a friend free to be used by him;
3. Hire:
Goods lent to the bailee for hire, i.e., in return for payment of money;
4. Pawn or Pledge:
Deposit of goods with another by way of security for money borrowed;
5. Delivery of goods for being transported, or something to be done
about them, by the bailee for reward;
6. Delivery of goods as in (5) above, but without reward.
Rights of Bailor = Duties of Bailee
– Bailor can demand back the goods
– Addition in the goods is also demanded
– Pre mature termination can be done

Rights of Bailee = Duties of Bailor

– Damage/loss incurred by bailee may be
demanded
– Title defective loss can be demanded
– Right of lien/right to retain goods (subject to
conditions)
 Duties of a Bailor
• To disclose known faults in the goods
Examples: A lends a horse, which he knows to be
vicious, to B. He does not disclose the fact that the
horse is vicious. The horse runs away. B is thrown
and injured. A is responsible to B for damage
sustained.
• Liability for breach of warranty as to title:
Examples: A gives B’s car to C without B’s
knowledge and permission. B sues C and receives
compensation. A, the bailor, is responsible to make
good this loss to C, the bailee.
 Duties of a Bailor
• To bear expenses in case of gratuitous
bailments: no remuneration
• In case of non-gratuitous bailments: The bailor is
held responsible to bear only extraordinary
expenses.
Example: A car is lent for a journey. The ordinary
expenses like petrol, etc., shall be borne by the
bailee but in case the car goes out of order, the
money spent in its repair will be regarded as an
extraordinary expenditure and borne by the bailor.
 Duties of a Bailee
• To take care of the goods bailed
• Not to make unauthorized use of goods
• Eg: A hires a car in Kolkata from B expressly to drive to
Varanasi. A drives with due care, but drives to Delhi
instead. The car meets with an accident and is damaged.
B is liable to make compensation to A for the damage to
the car.
• Not to mix bailor’s goods with his own
• To return the goods bailed without demand
• To return any accretion to the goods bailed
• Eg: A leaves a cow in the custody of B to be taken care
of. The cow gives birth to a calf. B is bound to deliver the
cow as well as the calf to A.
 Rights of a Bailee
• The duties of the bailor are, in fact, if looked from the
point of view of bailee, the bailee’s rights
• Right of lien: (right to retain)
(i) The person vested with the right of lien is in possession of
the goods or securities in the ordinary course of business.
(ii) The owner (bailor in this case) has a lawful debt due or
obligation to discharge to the person in possession of the
said goods or securities (bailee in this case).
• Eg: A delivers a rough diamond to B, a jeweller, to be cut
and polished, which is accordingly done. B is entitled to
retain the stone till he is paid for the services he has
rendered.
 Termination of Bailment
• On the expiry of the stipulated period
• On the accomplishment of the specified purpose
• By bailee’s act inconsistent with conditions of
bailment
• A gratuitous bailment may be terminated at any
time
• On death of any party
• In case of subject matter destruction
 Finder of Lost Goods
• Finding is not owning.
• A finder of lost goods is treated as the bailee
of the goods found as such and is charged
with the responsibilities of a bailee, besides
the responsibility of exercising reasonable
efforts in finding the real owner.
1. Right to retain the goods
2. Right to sell
Contract Act 1872
Bailment-Pledge
• Examine whether the following constitute
a contract of ‘Bailment’ under the
provisions of the Indian Contract Act,
1872:
(i) V parks his car at a parking lot, locks it, and
keeps the keys with himself.
(ii) Seizure of goods by customs authorities.
Case analysis
(i) No. Mere custody of goods does not mean possession.
For a bailment to exist the bailor must give possession of
the bailed property and the bailee must accept it (Section
148, Indian Contract Act, 1872 is not applicable).

(ii) Yes, the possession of the goods is transferred to the

custom authorities. Therefore bailment exists and section
148 is applicable.
Contract Act 1872
Bailment-Pledge
• Sunil delivered his car to Mahesh for
repairs. Mahesh completed the work, but
did not return the car to Sunil within
reasonable time, though Sunil repeatedly
reminded Mahesh for the return of car. In
the meantime a big fire occurred in the
neighbourhood and the car was destroyed.
Decide whether Mahesh can be held liable
under the provisions of the Indian Contract
Act. 1872.
Case analysis
• It is the duty of the bailee to return or deliver the goods
bailed according to the bailor’s directions, without
demand, as soon as the time for which they were bailed
has expired, or the purpose for which they were bailed
for any loss, destruction of the goods from that time
(Section 161), notwithstanding the exercise of
reasonable care on his part.
• Applying the above provisions in the given case, Mahesh
is liable for the loss, although he was not negligent, but
because of his failure to deliver the car within a
reasonable time.
Contract Act 1872
Bailment-Pledge
• M lends a sum of Rs.5,000 to B, on the
security of two shares of a Limited Company
on 1st April 2007. On 15th June, 2007, the
company issued two bonus shares. B
returns the loan amount of Rs.5,000 with
interest but M returns only two shares which
were pledged and refuses to give the two
bonus shares. Advise B in the light of the
provisions of the Indian Contract Act, 1872.
Case analysis
• In the absence of any contract to the contrary,
the bailee is bound to deliver to the bailor, any
increase or profit which may have accrued from
the goods bailed.
• Applying above rule, the bonus shares are an
increase on the shares pledged by B to M. So
M is liable to return the shares along with the
bonus shares and hence B the bailor, is
entitled to them also (Motilal v Bai Mani ).
Contract Act 1872
Bailment-Pledge
• A hire a carriage of B and agrees to pay
Rs.500 as hire charges. The carriage is
unsafe, though B is unaware of it. A is
injured and claims compensation for
injuries suffered by him. B refuses to pay.
Discuss the liability of B
Case analysis
• Section 150 provides that if the goods are bailed for hire,
the bailor is responsible for such damage, whether he
was or was not aware of the existence of such faults in
the goods bailed.

• Applying the above provisions in the given case B is

responsible to compensate A for the injuries sustained
even if he was not aware of the defect in the carriage.
Agent & Agency
 Agent and Agency
• Agent is “a person employed to do any act for another
or to represent another in dealings with third person”.
• Agent vs principal
• The relationship between Agent and Principal is called
Agency.
• Agent must be distinguished from a servant
• Supervision vs lawful instructions
• Agent may work for several principals at the same time
• No consideration is necessary to create agency
• Who can Employ Agent?
Any person who is of the age of majority
according to the law and is of sound mind
• Who may be Agent?
– Since agent is a mere connecting link or a ‘conduit
pipe’ between the principal and the third party, it is
immaterial whether or not the agent is legally
competent to contract.
– Example: Rahim appoints Kiran, a minor, to sell his car
for not less than ` 90,000.
– Kiran sells it for ` 80,000.
– Rahim will be held bound by the transaction and
further shall have no right against Kiran for claiming
the compensation for having not obeyed the
instructions, since Kiran is a minor and a contract with
a minor is void ab initio.
 Different Kinds of Agencies
• Express Agency
written contract of agency is the power of attorney on a
stamped paper.
• Implied Agency
Implied agency arises from the conduct, situation or
relationship of parties.
1. Agency by Estoppel: by his conduct or statements.
Eg. Anand owns a shop in Serampur, living himself in
Kolkata and visiting the shop occasionally. The shop is
managed by Bharat and he is in the habit of ordering
goods from Cooper in the name of Anand for the
purposes of the shop and of paying for them out of
Anand’s funds with Anand’s knowledge. Bharat has an
implied authority from Anand to order goods from
Cooper in the name of Anand for the purposes of the
shop.
 Different Kinds of Agencies
2. Agency by Holding Out:
• Example: Puran allows his servant Amar to buy goods for him on
credit from Komal and pay for them regularly. On one occasion,
Puran pays his servant in cash to purchase the goods. The servant
purchases good on credit pocketing the money. Komal can recover
the price from Puran since through previous dealings Puran has held
out his servant Amar as his agent.
3. Agency of Necessity:
• There is no express or implied appointment of a person as agent for
another but he is forced to act on behalf of a particular person
• Eg. A horse is sent by rail and at the destination is not taken delivery
by the owner. The station master has to feed the horse. He has
become the agent by necessity and hence the owner must
compensate him.
 Classification of Agents
• Special and General Agents
• Mercantile or Commercial Agents:
– broker, commission agent, auctioneer, banker
• Non-mercantile or Non-commercial Agents
– wife, estate agent, counsels (advocates), attorneys
• Sub-agent and Substituted Agent
1. Amar directs Bharat, his solicitor, to sell his estate by auction and to
employ an auctioneer for the purpose. Bharat names Cooper, an
auctioneer, to conduct the sale. Cooper is not a sub-agent, but is
Amar’s agent for the conduct of the sale.

2. Amar authorises Bharat, a merchant in Kolkata, to recover the money

due to Amar from Cooper and Co. Bharat instructs Dalip, a solicitor to
take proceedings against Cooper and Co. for the recovery of the money.
Dalip is not a sub-agent but is a solicitor for Amar.
 Duties of Agent
• To conduct the business of agency according to the
principal’s directions
• The agent should conduct the business with the skill and
diligence
• To render proper accounts
• To communicate with the principal in case of difficulty
• Not to make any secret profits:
• Not to deal on his own account
• Not entitled to remuneration for misconduct
• Not to disclose confidential information supplied
• To take all reasonable steps for the protection and
preservation of the interests entrusted to him
 Rights of Agent
• Right to remuneration
• Right of retainer
• Right of lien
• Right of stoppage in transit
• Right of indemnification
• Right to compensation for injury caused by
principals neglect
 Termination of Agency
• On revocation by the principal
• On the expiry of fixed period of time
• On the performance of the specific purpose
• Insanity or death of the principal or agent
• Insolvency of the principal
 Power of Attorney
• “a specified person to act for and in the name
of the person executing it”.
• a power of attorney is an instrument or a deed
by which a person is empowered to act for
and in the name of the person executing it.
• The person executing the deed is known as
the Principal or donor and the one in whose
favour it is executed is the agent.
Contract Act 1872
Agency
• R is the wife of P. She purchased some
sarees on Credit from Q. Q demanded
the amount from P. P refused. Q filed a
suit against P for the said amount.
Decide in the light of provisions of the
Indian Contract Act, 1872, whether Q
would succeed?
Case analysis
• Agency may be created by a legal presumption; in a case of
cohabitation by a married woman (i.e. wife is considered as
an implied agent, of her husband). If wife lives with her
husband, there is a legal presumption that a wife has
authority to pledge her husband’s credit for necessaries.
But the legal presumption can be rebutted in the following
cases:
(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or
contracting debts.
(iv) Where the trader has been expressly warned not to give credit to his
wife.
• If the wife lives apart for no fault on her part, wife has
authority to pledge her husband’s credit for necessaries.
This legal presumption can be rebutted only in cases (iii)
and (iv).
• Applying the above conditions in the given case ‘Q’ will succeed.
He can recover the said amount from ‘P’ if sarees purchased by ‘R’
are necessaries for her.
Contract Act 1872
Agency
• P appoints A as his agent to sell his estate. A, on looking
over the estate before selling it, finds the existence of a
good quality Granite-Mine on the estate, which is unknown
to P.
• A buys the estate himself after informing P that he (A)
wishes to buy the estate for himself but conceals the
existence of Granite-Mine. P allows A to buy the estate, in
ignorance of the existence of Mine.
• State giving reasons in brief the rights of P, the principal,
against A, the agent.
• What would be your answer if A had informed P about the
existence of Mine before he purchased the estate, but after
two months, he sold the estate at a profit of Rs. 1 lac?
Case analysis
• Section 215 - if an agent deals on his own account in the business
of the agency, without obtaining the consent of his principal and
without acquainting him with all material circumstances, then the
principal may repudiate the transaction.
• Section 216 - if an agent, without the knowledge of his principal,
acts on his own account in the business of the agency, then the
principal may claim any benefit which may have accrued to the
agent from such a transaction.
• Hence in the first instance, though P had given his consent to A
permitting the latter to act on his own account in the business of
agency, P may still repudiate the sale as the existence of the mine,
a material circumstance, had not been disclosed to him.
• In the second instance, P had knowledge that A was acting on his
own account and also that the mine was in existence; hence P
cannot repudiate the transaction under Section 215. Also, under
Section 216, he can not claim any benefit from A as he had
knowledge that A was acting on his own account in the business of
the agency.
Contract Act 1872
Agency
• Mr. Ahuja of Delhi engaged Mr. Singh as his
agent to buy a house in West Extension area.
• Mr. Singh bought a house for Rs.20 lakhs in the
name of a nominee and then purchased it
himself for Rs.24 lakhs.
• He then sold the same house to Mr. Ahuja for
Rs.26 lakhs. Mr. Ahuja later comes to know the
mischief of Mr. Singh and tries to recover the
excess amount paid to Mr. Singh.
• Is he entitled to recover any amount from Mr.
Singh? If so, how much? Explain.
Case analysis
• Where an agent without the knowledge of the principal,
deals in the business of agency on his own account, the
principal may:
(1) repudiate the transaction, if the case shows, either that the agent
has dishonestly concealed any material fact from him, or that the
dealings of the agent have been disadvantageous to him.
(2) claim from the agent any benefit, which may have resulted to him
from the transaction.
• Therefore, based on the above provisions, Mr. Ahuja is
entitled to recover Rs.6 lakhs from Mr. Singh being the
amount of profit earned by Mr. Singh out of the
transaction.
Guarantee & Indemnity
 Contract of Guarantee
Sec.126-Sec.147
• Purpose of Guarantee
(i)The guarantee is generally made use of to
secure loans. Thus, a contract of guarantee is for
the security of the creditor.
(ii) The contracts of guarantee are sometimes
called performance bonds.
 3 Parties & 3 Contracts
• Principal Debtor
• Creditor
• Surety
– Co-Surety in case of more than one surety are
available
 Examples

• Performance Bonds:
• In the case of a construction project, the builder may have to find a surety
to stand behind his promise to perform the construction contract.

• Fidelity bond:
• Employers often demand a type of performance bond known as a fidelity
bond from employees who handle cash, etc., for the good conduct of the
latter. If an employee misappropriates then the surety will have to
reimburse the employer.

• Bail bonds:
• They are used in criminal law, are a form of contract of guarantee. A bail
bond is a device which ensures, that a criminal defendant will appear for
trial.
• In this way a prisoner is released on bail pending his trial. If the prisoner
does not appear in the court as desired then the bond is forfeited.
Definition: Contract of Guarantee
• “a contract to perform the promise, or discharge
the liability, of a third person in case of his
default”.
• Surety: the person who gives the guarantee
• Principal Debtor: the person for whom the
guarantee is given
• Creditor: the person to whom the guarantee is
given
• A contract of guarantee may be either oral or in
writing.
 Kinds of Guarantees
• Oral or Written Guarantee
• On the basis of time: Retrospective Guarantee &
Prospective Guarantee (based on the time
surety is given
• On the basis of Transaction: Specific and
Continuing Guarantee
– Eg: A guarantees the repayment of a loan of ` 10,000
to B by C (a banker).
– A guarantee which extends to a series of transactions
is called a “continuing guarantee”
 Rights of the Creditor
• Entitled to demand payment from the surety
as soon as the principal debtor refuses to pay.

• Where surety is insolvent, the creditor is

entitled to proceed in the surety’s insolvency
and claim the pro rata basis.
 Obligations of the Creditor
• Not to change any terms of the original contract without seeking the
consent of the surety
• Example: A banker contracts to lend X ` 5,000 on March 4. A
guarantees repayment.
• The banker pays X ` 5,000 on January 1.
• A in this case is discharged from his liability as the contract has been
varied as much as the banker might sue X before March 4, but it cannot
sue A as the guarantee is from March 4.
• Not to release or discharge the principal debtor
• A gives a guarantee to banker C for repayment of the debt granted to
B.
• B later contracts with his creditors (including C, the banker) to assign to
them his property in consideration of their releasing him from their
demands.
• Here B is released from his debt by the contract with C and A is
discharged from his suretyship.
 Discharge of Surety
• By notice of revocation
• By the death of surety
• By variance in terms of the contract without
the surety’s consent
• By release or discharge of principal debtor
 Contract of Indemnity
(Sec.124 & Sec.125)
• Contract of indemnity is a contract whereby one
party promises to save the other from loss caused
to him (the promisee) by the conduct of the
promisor himself or by the conduct of any other
person.
• Example: A contract of General insurance
• Two Parties involved:
– Indemnifier OR Promisor
– Indemnity-Holder OR Promisee
• One contract is formed
 Contract of Indemnity: Forms
(i) An express promise
 Ex Indemnity bond is involved
(ii) Implied
 Contract of Agency (presence of Agents)
 In Partnership
 Rights of the Indemnified
• He is entitled to recover from the promisor:
(i) All damages which he may be compelled to pay
in any suit in respect of any matter to which the
promise to indemnify applies
(ii) All costs of suit which he may have to pay to such
third party, provided in bringing or defending the
suit
(iii) All sums which may have been paid under the
terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the
indemnifier and was one which it would have been
prudent for the promisee to make.
Distinction Contract of Guarantee and
Indemnity
• In a contract of indemnity, there are only two
parties, indemnifier and indemnified & Only 1
contract is formed. In case of a guarantee, on
the other hand, there are three parties, the
‘principal debtor’, the ‘creditor’ and the
‘surety’ & here 3 contracts are formed.
Distinction Contract of Guarantee and
Indemnity
• The liability of a promisor is primary and independent in a contract of
indemnity.

• In a contract of guarantee, the liability of the surety is secondary, the

primary liability being that of the principal debtor.

• In the case of guarantee, there is an existing debt or obligation, the

performance of which is guaranteed by the surety.

• In case of indemnity the possibility of any loss happening is a contingency

against which the indemnifier undertakes to indemnify.

• In a contract of guarantee, after discharging the debt, the surety is entitled

to proceed against the principal debtor in his own name while in case of
indemnity, the indemnifier cannot proceed against third parties in his own
name, unless there be an assignment in his favour.
Contract Act 1872
Indemnity- Guarantee
• A obtains housing loan from LIC Housing
and if B promises to repay. What is the
nature of contract?
Case analysis
• It is contract of guarantee.
– Contract of guarantee is a contract to perform promise or
discharge the liability of third person in case of his default.
B agrees to promise loan if A to whom loan is granted fail
to repay loan to LIC Housing company.
Contract Act 1872
Indemnity- Guarantee
• Ravi becomes guarantor for Ashok for the
amount which may be given to him by Nalin
within six months. The maximum limit of the said
amount is Rs. 1 lakh. After two moths Ravi
withdraws his guarantee. Upto the time of
revocation of guarantee, Nalin had given to
Ashok Rs. 20,000.
(i) Whether Ravi is discharged from his liabilities to
Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the
amount of Rs. 20,000 to Nalin ?
Case analysis
• Section 130 of the India Contract Act, 1872 - a specific
guarantee can’t be revoked by the surety if the liability
has already accrued. A continuing guarantee may, at
any time, be revoked by the surety, as to future
transactions, by notice to the creditor, but the surety
remains liable for transactions already entered into.
• As per the above provisions
(i) Yes, Ravi is discharged from all the subsequent loan because it’s a
case of continuing guarantee.
(ii) Ravi is liable for payment of Rs. 20,000 Nalin because the
transaction has already completed
Contract Act 1872
Indemnity- Gurantee
• Explaining the provisions of the Indian
Contract Act, 1872, answer the following:
(i) A contracts with B for a fixed price to
construct a timber house for B within a
stipulated time. B would supply the necessary
material timber to be used in the construction.
C guarantees A’s performance of the contract.
B does not supply the material as per the
agreement. Is C discharged from his liability ?
Case analysis
(i) According to Section 134 of the Indian Contract Act,
1872, the surety is discharged by any contract between the
creditor and the principal debtor, by which the principal
debtor is released or by any act or omission for the creditor,
the legal consequence of which is the discharge of the
principal debtor. In the given case the B omits to supply the
timber. Hence C is discharged from his liability.