LAW OF

CONTRACTS
by Avatar Singh

 CONTENTS
2
Chapter 1: Agreement, Contract & Proposal 5
Types of Contracts 7
Agreement 10
Contract and Proposal 12
Chapter 2: Acceptance 16
Legal Rules as to Acceptance 16
Communication of Offer, Acceptance and Revocation 17
Chapter 3: Consideration 20
Essential elements of valid consideration 20
Chapter 4: Capacity 24
Minors 25
Unsoundness of Mind 28
Chapter 5: Free Consent 29
Violations of Free Consent in the Indian Contract Law 29
Chapter 6: Mistake 34
Mistake of Law 34
Mistake of Fact 36
Chapter 7: Legality of Object 40
Void Agreements 43
Chapter 8: Discharge of Contract 49
By impossibility of performance 51
By lapse of time 52
By Intervention of Legislative Powers 52
By breach of contract 53
Chapter 9: Discharge by Breach 54
Anticipatory Breach 54
What is Breach in Entirety? 57
Chapter 10: Certain Relations Resembling those Created

by Contract 59
Types of Quasi contract 59

Chapter 11: Contract of Indemnity 63 3

Essential Elements of a contract of Indemnity 63
Commencement of Liability 65
Chapter 12: Guarantee 67
Essential Features of a Contract of Guarantee 68
Important Cases on Sureties’ Liability 70
Kinds of Guarantee 71
Revocation of Continuing Guarantee 72
Rights of a surety 74
Discharge of Surety 78
Cases where Surety is Discharged 80
Chapter 13: Bailment 84
Types of Bailments 85
Duties of Bailor 86
Duties of Bailee 87
Right of a Bailor 88
Right of a Bailee 89
Termination of Bailment 91
Chapter 14: Pledge 94
What are the Ingredients of a Pledge? 94
Rights of the Pawnee 96
Rights of the Pawner 96
Who can Pledge? 97
Chapter 15: Agency 99
Some Features of Contract of Agency 100
Different Kinds of Agent 101
Mode of Creation of Agency 104
Ratification: (Section 196-200) 108
Duties of Agent 116
Rights of Agent And Duties of Principal 123
Principal’s duties to Agent 124
 4

Rights of Principal 125

Liability of Principal 126
Personal Liability of an Agent 126
Termination of Agency (Sec- 201- 210) 131
Liability of Agent to Third Parties 133
 AGREEMENT, CONTRACT & PROPOSAL

5
Based on the Principals of English common law, the Indian
contract law was enacted by the British Parliament on 1872. A
contract in itself means a written legal agreement. A contract
in itself holds power because it is something which has been
legally accepted and no adherence of which has its own
repercussions.
An agreement between at least two parties, which is legally
valid, is termed as a contract. However, all contracts are
agreements but not all agreements are contract as contract in
itself carry some more legal terms and conditions which is
generally not present in an agreement. For a contract to be
valid it needs not to be in a written form only. Few basic
elements of a contract are-

1. Agreement
2. Should not be declared as void
3. Should be under free consent
4. Should carry a lawful object
5. There should be some consideration
6. Parties must be competent to contract

1. Agreement- an agreement is in between two or more

parties, which is not void and is legally valid.

2. Not be void- the contract should not be on unlawful terms

and should be legally valid. Under the provision of law
agreements which are void include:
Agreement made under common mistake of fact,
Consideration or object of the agreement which is
unlawful
Agreement made by parties which are incompetent for
ex- minors, person of unsound mind, etc.
Agreement made without consideration.
3. Free consent- as per sec 10, free consent of all the parties
toa contract makes a contract valid. There should not be any 6
kind of coercion or force applied on any parties for their
consent. Consent is said to be free when it is not caused by
any undue influence, coercion, fraud, misrepresentation or
mistake.
When consent is affected by coercion, undue influence, fraud,
misrepresentation then the contract is voidable whereas,
when the consent is affected by mistake then the contract is
void.

4. Lawful object- the object should not be fraudulent or

forbidden by law (for example- smuggling), should not be
opposed to moral values. Therefore, it should not be
defeating provisions of any law otherwise the court will term
the contract as unlawful or void.

5. Consideration- a consideration means something in return.

Without consideration a contract is void. However,
consideration is not necessary when the contract is in
between close parties, for instance blood relatives or their
spouse.
According to sec 2(d) of the Indian contract act, “when at the
desire of the promisor, the promise or any other person has
done or abstained from doing, or does or abstains from doing
something, such act or abstinence or promise is called a
consideration for the promise”. Consideration may be past,
present or future. Consideration need not be adequate.
Consideration must be lawful.

6. Competency to contract- the parties in a contract must be

competent to enter into a contract. Competency here means
should be capable and should not be disqualified under any
law. According to section 11 of the Indian Contract Act, “Every
person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of 7
sound mind and is not disqualified from contracting by any
law to which he is subject. Persons who are incompetent to
enter into a contract are- minors, persons of unsound mind,
persons disqualified under any law to which they are subject.
If any parties want to absolve themselves of the obligations
under a contract on the ground of incompetency, then the
burden to proof is on them to prove that they were
incompetent at the time of contracting.

TYPES OF CONTRACTS

Contracts can be classified on the basis of three things, which

are- validity, formation and performance.

On the basis of validity there are five types of contract-

1. Valid contract- A valid contract is something which is legal,

binding and enforceable. Contract that fulfills the provisions
under section 10 of the Indian Contract Act, 1872 is a valid
contract.

2. Void contract- A contract that is effectively illegitimate and

unenforceable from the start is a void contract. A contract
may be deemed void if it is not enforceable as it was
originally written. Agreements entered into by minors or for
illegal activities may also be rendered void.

3. Voidable contract- A voidable contract unlike void contract

was not illegal or unenforceable from the very beginning. It is
a formal agreement between two parties which can be termed
as invalid due to some reasons.

4. Illegal Agreement- Illegal Agreements in their most

rudimentary form are considered to be those agreements that
violate existing laws in the particular domain and are of 8
criminal nature. Agreements that are immoral and opposed
to public policy also fall under the category of illegal
agreements.

5. Unenforceable- when both the parties or any of the parties

do not have the capacity to understand the terms of the
contract, it becomes unenforceable by nature.

On the basis of formation there are four types of contracts-

1. Express contract- it is a type of contract where the parties

clearly frame the terms of their legally binding agreement
and express their intention to be bound by the contract
terms.

2. Implied contract- A contract which is not expressed orally

or in writing but are reflected in behaviour, attitude of parties
concerned is known as an implied contract. There are two
types of implied contracts: contracts that are implied in-fact
and contracts that are implied at-law.

3. Quasi contract- a contract that is created by court’s order

in absence of any agreement between the parties. A Quasi
contract does not involve any essentials of a valid contract as
defined under Indian Contract Act 1872. There is no prior
agreement, offer and acceptance in a quasi contract. Quasi
contract is a retroactive arrangement between two parties
who have no previous obligations to one another.
Example- ‘A’ orders some food from ‘X’ which is wrongly
delivered to ‘C’, and ‘C’ consumes that. In such case as ‘C’
enjoyed the benefits of the food, the court orders him to pay
‘X’ for the same.
On the basis of performance there are four types of
contracts- 9

1. Executed contract- an executed contract is one where both

the parties have performed their obligations. An executed
contract is an agreement or contract between two or more
parties that has been signed and is binding to all parties
involved. It is a fully implemented contract. The contract is
often made between two or more people, but it can also be
between a person and an entity, or two or more entities.
Example- A entered into a contract with B to buy his car. He
paid for the asked amount and B in return provided him with
the car.

2. Executory contract- an executory contract is where both

parties are yet to perform all of the important obligations of
their contract. An uncompleted services contract or lease
agreement would be two examples of an executory contract.
On contrary, a sale of goods contract where one party has yet
to pay and the goods have been delivered is not an executory
contract, because one party has performed all his obligations.

3. Unilateral contract- a contract agreement in which an

offeror promises to pay after the occurrence of a specified act
is termed as unilateral contract. It is primarily a one-sided
legally binding contract. The unilateral contract is
enforceable when someone chooses to begin fulfilling the act
demanded by the offeror.

4. Bilateral contract- a contract which is promised by both

sides of the party to perform is bilateral contract. It is the
most common type of binding agreement, which involves
concessions or obligations owed by both sides of the contract.
Sales agreement, lease, or employment contract are common
examples of a bilateral contract.
AGREEMENT
10
Section 2(e) of the Indian contract act states that “Every
promise and every set of promises, forming the consideration
for each other is an agreement”. A valid offer accepted
becomes an agreement.
Offer+ Acceptance= Agreement
All agreements do not create legal obligations, such as moral
and social obligations. An agreement is a primary stage of
forming a contract. Thus, agreements enforceable by law are
termed as contracts, whereas not enforceable by law is termed
as void.

Types of agreements

1. Based on obligation: there are two types of agreement

based on obligations, they are-
a. Unilateral agreement- here one side of the party makes an
express promise in exchange for an act by another party.
Here the offeree cannot be force to act because no return
promise has been made by him to the offeror.
b. Bilateral agreement- A bilateral agreement is a reciprocal
arrangement between two parties by which each party
promises to perform an act in exchange for the other party’s
act.

2. Based on mode of creation: there are types of agreement

based on mode of creation, they are-
a. Express agreement- when a proposal or an offer is made
and accepted explicitly, either orally or in written form, is
known as express agreement.
Example- ‘A’ offers to sell his car at rupees 2 lakh to ‘C’ via
telephone, which is accepted by ‘C’. This is an agreement
done in oral form.
b. Implied agreement- agreements which are expressed
neither in written form nor orally, but are reflected in 11
expression or behaviour of parties concerned, is termed as
implied agreement.
Example- ‘A’ enters a hair salon, sits on the chair and asks for
a haircut, which the other party then provides. By asking for
haircut ‘A’ has clearly agreed to pay for the service, whereas,
the other party by beginning to cut the hair has accepted to
provide the service in exchange for monetary compensation.

3. Based on enforceability: there are four types of

agreements based on this-
a. Enforceable agreement- an agreement which is completely
valid and has no fault is termed as an enforceable agreement.
This kind of agreement which is enforceable by law in future
becomes a valid contract.
b. Unenforceable agreement- an agreement which is not
enforceable in court of law. This kind of agreement will be
void or void ab initio or voidable in a court of law. They are
either one which has expired or one with unclear terms.
c. Void agreement- agreement which is unlawful or
unenforceable from the beginning is termed as a void
agreement. Such agreements are void from the very
beginning or are void ab initio.
Example- ‘C’ tries to buy B’s house who is of unsound mind.
Here, the agreement is void ab initio.
d. Voidable agreement- avoidable agreement is a valid
agreement and is binding at the behest of at least one party
involved.

4. Based on law: there are two agreements based on this-

a. Legal agreement- Agreement which has all necessary
aspects of a valid agreement is termed as legal agreement.
b. Illegal agreement- An agreement which is illegal or
immoral in nature is termed as illegal agreement.
5. Based on performance: on this aspect also, there are two 12
types-
a. Executed agreement- agreement where both the parties
have executed or completed their respective obligation.
Example- ‘S’ agrees to buy car from ‘A’ for rupees three lakhs.
When ‘S’ pay rupees three lakhs ‘A’ sells him the car. Both the
parties performed their obligation.
b. Executory agreement- Executory agreement is that where
parties are yet to perform their obligation.
Example- ‘D’ agrees to sell his land to ‘B’ next month after his
transfer. Here the execution is yet to be done.

CONTRACT AND PROPOSAL

According to Indian Contract Act 1872, proposal is defined in

section 2(a) as, “When one person will signify to another
person his willingness to do or not to do something (abstain)
with a view to obtain the assent of such person to such an act
or abstinence, he is said to make a proposal or an offer”.
Proposal or offer is the first step in the formation of a
contract. A person who makes the proposal is known as
‘Offeror’ and the one accepting or adhering to it is known as
‘Offeree’.

Essentials of a valid proposal or an offer-

1. A proposal/offer must be definite and certain- the terms
of the offer must not be uncertain or incomplete or
indefinite, as this will not constitute a valid offer. Both side of
the parties must be completely aware of the conditions of the
proposal and should be on same terms with the intension of
the offer.
Example- Shyam agrees to sell 12kg of mangoes to Rhyan at
some price. Price here is uncertain, and thus it does not
constitute a valid proposal.
Taylor vs. Portington
13
In this case there is a Contract between A and B according to
which A agreed to take B’s house for rent for a period of three
years at the rent of 85 pounds. A demand that the house was
put into through repair and the drawing rooms were
decorated according to present style. Here the word present
style may be different for A and different for B, which makes
the agreement vague. Here, court decides that there is no
Certainty and therefore it is Void.

2. A proposal must be communicated to the offeree- a

proposal can be communicated either orally or in written
form. Mere desire to do or abstain from doing something will
not constitute a valid proposal. The offeror must
communicate or express his desire to do or to abstain from
doing something to the offeree.

Lalman Shukla vs. Gauri Dutt

In this case Gauri Dutt’s nephew was found missing. Lalman

Shukla his servant went for the search of Gauri Dutt’s
nephew. Later Gauri Dutt announce for a reward of rupees
500, for whoever finds him. His servant (Lalman) founds
child but did not know of offer. Later he got to know about
the offer and went to his master and claimed for the reward.
When denied for the reward he went to court. The court held
that Lalman was not aware of the offer, hence there was no
acceptance. Thus, he is not entitled to any reward.

3. A proposal should be made with the intention of creating

a legal obligation- Mere proposal without the intention of
entering into a legal relationship will only be termed as an
invitation. Any kind of social relation does not create legal
obligations.
Example- an invitation to dinner from ‘A’ to ‘B’ is not a valid
proposal.
Kalai Halder vs. Sheikh
14
In this case Kalai invited Sheikh for dinner to which sheikh
accepted. Kalai made all the preparations of food to welcome
Sheikh. However, Sheikh failed to attend the dinner. All the
efforts and food of Kalai got wasted. Kalai sued Sheikh for the
price of the unconsumed food. The court however held that
an invitation to dinner created social obligation and not legal
obligation and thus, Kalai lost the case.

4. An offer/proposal may be general or specific- an offer can

be made to only one person or to the general public. Offer
given to the public at large is known as a general offer,
whereas, offer given to one specific person is known as
specific offer.

Carlill Vs. Carbolic Smoke Ball Co

Carbolic smoke ball, the company, was the defendant and

Carlill was the plaintiff. Carbolic Smoke Ball Co brought one
advertisement for their Carbolic smoke ball. They said that if
someone uses this product according to the given description
they will not be suffering from influenza, cold. If they fail to
do so, as promised they will be providing 100 pounds to the
person. For showing their sincerity they even claimed that
they have already submitted 1000 pounds in alliance bank.
Seeing the advertisement Carlill starts using their Carbolic
smoke ball according to the description, besides she catches
influenza. She therefore, files the case and asks for refund
from the company.
The company argued that their advertisement was vague as
no time limit was set for how long one should be taking the
smoke ball or till how long one will not catch influenza.
Secondly, they claimed that they had no intention to enter
into any legal relationship with the plaintiff. The court said
that this is not a vague offer but a valid offer, as it was the
company only which had said that if anyone while using the
smoke ball catches influenza, they will be compensating for 15
that. The court finally concluded that if someone completely
follows the condition of an offer, it will be called acceptance
only and this acceptance is not needed to be communicated.
The company was however held liable to Carlill as the offer
was general offer and not specific.

5. Intention to obtain acceptance- proposal should be made

with the intention to obtain acceptance, as mere offer does
not constitute legal obligation, and thus no proposal is made.
 ACCEPTANCE

16
According to S. 2(b) of the Indian Contract Act, 1872- “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”. A contract emerges from the
acceptance of an offer. Acceptance is the act of accenting by
an offeree to an offer.
Offer + Acceptance = Agreement
{which is stated in S.2(a)} {which is stated in S.2(b)} {which is
stated in S.2(e)}
This above statement denotes that when an offer is accepted,
it becomes an agreement. It can also be stated by Gun Powder
Theory.
In Gun Powder Theory, offer is a lighted matchstick which
when placed to the train of gun powder (acceptance), it results
in a situation which cannot be undone (explosion). This
means when the offeree signifies his accent to offerer, the
offer is said to be accepted and an offer once accepted
becomes a promise.

Legal Rules as to Acceptance: -

It must be absolute in nature. (S.7)
It must be communicated to the offerer.
It must be according to the mode prescribed or usual or
reasonable mode.
It must be given within a reasonable time.
It cannot precede an offer.
It cannot be implied from silence.
Example- A wrote to B, I offer you my car for ₹10,000. If I
could not or do not hear from you in 7 days, I shall assume
that you have accepted. B did not reply at all. Is there a valid
acceptance? No, there is no valid contract as according to the
legal rules as to acceptance, it cannot be implied from silence.
Acceptance may be expressed or implied-
Example- At an auction sale, S is the highest bidder. The 17
auctioneer accepts the offer by striking the hammer on the
table. Which type of acceptance is this? This is an implied
contract.

Offer and acceptance must be present-

According to the essential elements of a valid contract (S. 10),
Offer and Acceptance must be present, i.e., There must be
two parties to an agreement, one party making the offer and
the other party accepting it. The terms of the offer must be
definite and the acceptance of the offer must be absolute and
unconditional.

COMMUNICATION OF OFFER, ACCEPTANCE AND

REVOCATION

Mode of Communication (S.3)-

Offer, Acceptance or Revocation may be communicated by
words spoken or written (expressed) or by conduct (implied).
According to S. 3 of the Indian Contract Act, 1872- “The
communication of proposals the acceptance of proposals, and the
revocation of proposals and acceptances, respectively, are deemed to
be made by any act or omission of the party proposing, accepting or
revoking by which he intends to communicate such proposal,
acceptance or revocation, or which has the effect of communicating
it”.

When Communication completes (S.4)-

According to S. 4 of the Indian Contract Act, 1872- “The
communication of a proposal is complete when it comes to the
knowledge of the person to whom it is made. The communication of
an acceptance is complete,—
as against the proposer, when it is put in a course of transmission to
him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the
proposer. The communication of a revocation is complete,— as 18
against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the
power of the person who makes it; as against the person to whom it is
made, when it comes to his knowledge”.
Example-
1. A proposes, by letter, to sell a house to B at a certain price.
The letter is posted on 10th July. B receives on 12th July.
When is the communication complete? The communication
of offer will be complete when the letter is received by B on
12th July.
2. B accepts A‟s proposal by a letter sent by post on 13th July.
The letter reaches A on 15th July. When is the communication
of acceptance complete as against A and as against B? The
communication of acceptance will be complete, as against A
on 13th July and as against B on 15th.
3. A proposes by a letter to sell a house to B at a certain price.
The letter is posted on 15th May. It reaches B on 19th May. A
revoke his offer by Telegram on 18th May. The Telegram
reaches B on 20th May. When is the revocation complete as
against A and as against B? The communication of revocation
will be complete, as against A on 18th May and as against B on
20th May.

Time of Revocation of Offer and Acceptance (S.5)-

According to S. 5 of the Indian Contract Act, 1872- “ A
proposal may be revoked at any time before the
communication of its acceptance is complete as against the
proposer, but not afterwards. An acceptance may be revoked
at any time before the communication of the acceptance is
complete as against the acceptor, but not afterwards”.
Example- A proposes, by a letter sent by post, to sell his house
to B. The letter is posted on the first of the month. When can
 19
A. revoke his offer? Before 4th.
B. accepts the proposal by a letter sent by post. When can B revoke
his acceptance? Before 6th.

Various mode of revocation (S.6)-

According to S. 6 of the Indian Contract Act, 1872-
“A proposal is revoked—
(1) by the communication of notice of revocation by the proposer to
the other party;
(2) by the lapse of the time prescribed in such proposal for its
acceptance, or, if no time is so prescribed, by the lapse of a reasonable
time, without communication of the acceptance;
(3) by the failure of the acceptor to fulfil a condition precedent to
acceptance; or
(4) by the death or insanity of the proposer, if the fact of his death or
insanity comes to the
knowledge of the acceptor before acceptance”.
 CONSIDERATION

According to section 2(d) of the Indian Contract Act “when at 20

the desire of the promisor, promisee or any other person has
done or abstained from doing or does or abstains from doing
or promises to do or to abstain from doing something, such
act or abstinence, or promise is called a consideration for the
promise.” Consideration or Quid Pro Quo means something
in return.
Example- A makes a contract to sell his land for rupees
twenty lakhs to B. For A rupees twenty lakhs is the
consideration, whereas for B the land is the consideration.

ESSENTIAL ELEMENTS OF VALID CONSIDERATION

1. Consideration must move at the desire of the promisor

2. Consideration may move from the promisee or any other
person
3. Consideration may be past, present or future
4. Consideration must be lawful
5. Consideration may be an act or abstinence
6. Consideration need not be adequate
7. Consideration must be real and not illusionary

1. Consideration must move at the desire of the promisor-

consideration must move, proceed at the request or desire of
the promisor. If any act or abstinence is at the desire of third
party, or is done without the consent or desire of the
promisor then it is not a consideration. The desire of the
promisor may be express or implied.
Example- X polished Y’s car without any request from Y, so Y
here is not liable. As the work was done without any request
from his side.

Durga Prasad Vs Baldeo

In the given case, party B spent some money on the

construction of a market, at the desire of the collector of the
district. D promised to pay commission to B on articles sold 21
by him in the market in which he occupied a shop. In a suit
by B, it was held that there was no consideration for the
promise made by D and hence no contract as he had not
constructed the market at the instance of D.

2. Consideration may move from the promise or any other

person- consideration is not always necessary to be from the
promise only, it may come from any other person. This
makes it clear that as long as consideration is there for a
promise, it is immaterial who has furnished it.

Dutton Vs Poole

A father decided to cut and sell timber on his estate to

provide for marriage for his daughter. The son asked his
father not to do so and promised him that in return he would
pay 1000 pounds to his sister for her marriage. The father
agreed but the son failed to comply with the promise. The
sister sued him and in his defence the brother said that the
agreement was without consideration. The court held that,
she could recover the money from his brother although she
was stranger to consideration.

3. Consideration may be past, present or future- The Indian

contract act recognises past, present and future
considerations whereas the English law does not recognize a
past consideration.
a. Past consideration- when consideration by a party for a
present promise was given in past (before the date of the
promise), it is called past consideration.
Example- A provides some service to X, as wanted by X.
After a week X promises to pay Rs.2000 for the service. It is a
past consideration and A is entitled to the promised amount.
b. Present consideration- when consideration is given
simultaneously with the promise it is known as present or 22
executed consideration.
Example- Arjun went to a shop to buy his clothes; he
immediately pays for the cloth he bought from there.
c. Future consideration- A promise to do or give something
in return in future for the promise then made is termed as
future or executory consideration.
Example-A has promised to sell his car and B has promised to
pay. Until the car is actually delivered to B under the contract,
the consideration is future in nature.

Kedarnath Vs. Gorie Mohammed

“Any act done at the will of the promisor’s wish is taken as the
fulfilment of consideration of a contract”, this was held by the
court under the contract law in the Kedarnath Bhattacharji Vs.
Gorie Mohammad case.

4. Consideration must be lawful- A consideration which is

against the law or public policy is not valid i.e., it will become
void and unenforceable. Therefore, it is necessary that
consideration should be lawful by nature.
Example- If A promises to pay Rs. 5,00,000 to C for the
murder of X, it would be an illegal consideration for C to
accept.

5. Consideration may be an act or abstinence- At the desire

of the promisor if the promisee either does something (past,
present or future) or, abstains from doing something (in the
past present or future), it is called consideration.

6. Consideration need not be adequate- consideration is

something in return. Something in return need not
necessarily be equal to something given. According to law, the
contract should be supported by a consideration. So long
 23
there is a consideration, the law is not concerned about its
being adequate.

7. Consideration must be real and not illusionary-

Consideration must not be illusionary, it should be factual
one. It must be real and possible. It must have some value in
the eyes of the law. It need not be adequate to the promise for
the validity of an agreement.
Example- If X promises to give an amount of money to Z,
and Z promises to pray for X’s long life, it would be a
consideration which is not real for X.
 CAPACITY

Black’s Law Dictionary defines capacity as “the attribute of a 24

person who can acquire new rights, or transfer rights, or
assume duties, according to the mere dictates of his own will,
as manifested in juristic acts, without any restraint or
hindrance arising from his status or legal condition.
Applied in this sense to the attribute of persons (natural or
artificial) growing out of their status or juristic condition,
which enables them to perform civil acts; as capacity to hold
lands, capacity to devise, etc.”
Capacity to contract can be defined as the legal ability of a
person to enter into a contract. Capacity states that a person
must be competent enough to fulfill all the necessary
elements of a valid contract.
Section 10 of the Indian Contract Act, 1872 provides the
conditions for an agreement to turn into a contract. A valid
contract is only formed when an agreement follows the
following conditions:
Acceptance made through the free consent of the parties
Parties accepting must be of competence to enter a
contract.
Section 11 of the Indian Contract Act, 1872 defines the
capacity of a person in contract law on the basis of three
aspects attributes:
Attaining the age of majority
Soundness of mind
Not being disqualified from contracting by any law to
which he is subject.
Hence, according to Section 11 the three types of persons
incompetent to enter into a contract are:
Minors
Lunatics
Persons deprived by law to enter a contract
Alien enemies
Foreign Sovereigns and Ambassadors
24
 Insolvents
Convicts 25

MINORS

According to Indian Majority Act 1875, a person attains

majority on completion of 18 years of his age. But when a
guardian of a minor person or property has been appointed
by the court, he attains majority on completion of 21 years of
age.
Contracts are made for benefits or profits. Minors lack
maturity and prudence and hence can be exploited/
compelled to enter contracts that are harmful for them.
Nature of contract with minor: void ab initio.

Mohori Bibee v. Dharmodas Ghose

This case brings forth a landmark judgement regarding the

effect of minor’s agreement and solved the issue whether
minor’s agreement is void or voidable. In this case the
plaintiff (Dharmodas Ghose), when he was a minor,
mortgaged his property to a money-lender, the defendant
(Brahmo Dutt) to secure a loan. At that time though, the
attorney of money-lender knew about the fact of his
minority. Money-lender was then, sued by the minor for
asking for repayment of loan. Brahmo Dutt had died by the
time of appeal and it was hence prosecuted by his executors.
In the judgment by the Privy Council Minor’s agreement was
held to be void ab initio.

Rule of Estoppel in a contract with a minor

The rule of estoppel, i.e., stopping the minor from minority

as a defence- cannot be applied as according to Section 11
contract with a minor is void. Since there was no contract,
there can’t be an estoppel. Minors are an exception to the rule
of estoppel as they can plead minority as a defence, even
though at the time of making agreement, they
misrepresented their age. 26

In Vainkuntarama Pillai v Authimoolam Chettiar, the Madras

High Court held that a minor being incapable to contract,
cannot incur any liability and the law of estoppels cannot
overrule this provision.
Restitution in a contract with minor: The doctrine of
restitution is restoring back of goods or property that have
been unjustly enriched by the minor. Restitution is defined in
Section 65 of the Indian Contract Act. There can be no
estoppel against a minor, however, he can be compelled to
make restitution of the benefits received by him. If the minor
is in possession of any property obtained by the fraud, he can
be compelled to restore it to its former owner. If the benefit
consisted of the receipt of money, then there is no restitution
against the minor.
The judgment in Leslie v. Sheill, provided the doctrine of
restitution holding that if an infant obtains property or goods
by misrepresenting his age, he can be compelled to restore it
so long as the same is traceable in his possession. This is
known as equitable doctrine of restitution.
In the case of Ajudhia Prasad v. Chandan Lal, it was held that a
mortgagee cannot recover the money lent by him to a minor
on the Principal of restitution.
However, a different stand was taken by the Full Bench
Decision of the Lahore High Court in Khan Gul v. Lakha Singh,
where the defendant, a minor who concealed his age was
ordered to refund the consideration received by him for the
contract of the sale of land to the plaintiff. It was held that the
doctrine of restitution rests upon the salutary Principal that
an infant cannot be allowed by a court of equity to take
advantage of his own fraud.
BENEFIT OF MINORS IN A CONTRACT
27
Minors can obtain the benefits of the contract but are
excluded from liabilities.
1. Minor as a partner in partnership: A minor cannot be
partner in a firm but with the consent of all the partners of
the firm, he can be included in the benefits. However, a
minor won’t be liable for the losses incurred to the firm.
2. When major and minor co-jointly enter a contract: The
contract cannot be enforced against the minor.
3. Minor being an agent: Minor can be an agent in a contract,
however he won’t be liable for the enforcement of
contract against him

RATIFICATION BY A MINOR

The contract made during minority cannot be ratified when

minor turns major. Since, the contract is void ab initio the
contract cannot be ratified.
Indran Ramaswamy v. Anthiappa Chettiar, in this case the
defendant borrowed some money and executed promissory
note. Later, he executed another promissory note to settle the
first note after attaining majority. The court held that the
promissory note was invalid in the eyes of law.

LIABILITY FOR NECESSITIES

Section 68 of the Indian Contract Act, 1872 states for the

liabilities on a minor in cases where he is presented with
necessities. The definition of necessities is not defined in any
statue however it was ruled by Baron Parke in Peters v.
Fleming, that from the earliest times down to the present, the
word ‘necessaries’ is not confined in its strict sense to such
articles as were necessary to support life, but extended to
articles fit to maintain the particular person in the state,
degree and station in life in which he is; and therefore we
must not take the word “necessaries” in its unqualified sense
but with qualification as above pointed out. 28
In the case Nash v. Inman a tailor provided the defendant
who was a minor with clothing and reclaimed the price for
the cloths stating that clothing is a necessity. However, it was
held that clothing cannot be considered as a necessity since
the defendant already had enough clothing for survival.

UNSOUNDNESS OF MIND

Section 12 of the Indian Contract Act defines unsoundness of

mind. “What is a sound mind for the purposes of contracting —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 of
understanding it and of forming a rational judgment as to its effect
upon his interests. A person who is usually of unsound mind, but
occasionally of sound mind, may make a contract when he is of sound
mind. A person who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when he is of unsound
mind.”
A contract entered into by a person who at the time was of
unsound mind is void. The test of unsoundness of mind is
whether the person is capable of understanding the business
and of forming a rational judgment as to its effect upon his
interest. A person who is sometimes insane may make a valid
contract in a lucid interval.
However, Mere weakness of mind is not sufficient. Although
it is not necessary to prove utter mental darkness or
congenital idiocy, the party alleging unsoundness of mind of
a person must establish that that person was incapable of
understanding business and forming rational judgement as to
its effect.\ Idiocy is the most extreme form of mental
unsoundness. Mere temporary forgetfulness is not sufficient
to indicate want of mental capacity.
 FREE CONSENT

29
“Consent” is defined in Section 13 of the India Contract Act
1872 as “Two or more persons are said to consent when they
agree upon the same thing in the same sense.” It provides that
consent only exists when the parties to a contract agree upon
the “same thing in the same sense”. Consensus ad idem or
meeting of minds must lie at the root of all contracts made
under the law.
In Smith v. Hughes, the Queen’s Bench decided that assent to a
contract can be through the conduct of the other party which
is of such manner that a reasonable man would believe him
assenting to the conditions of the agreement. Therefore, the
party will be bound by the contract.
Free consent is defined in Section 12 of the Indian Contract
Act as “Consent is said to be free when it is not caused by:
Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake.” A contract without free
consent is voidable at the option of the party whose consent
was not free of violations presented in Section 12.

VIOLATIONS OF FREE CONSENT IN THE INDIAN

CONTRACT LAW

Coercion

Coercion is defined in the Section 15 of the Indian Contract

Act as an act of “committing, or threatening to commit, any
act forbidden by the Indian Penal Code (45 of 1860) or the
unlawful detaining, or threatening to detain, any property, to
the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement.”
Coercion not only involves physical harm or threat to cause
physical harm or threat to cause physical harm but also
includes menace to property as well the detention or threat to
detain property.
Coercion may proceed from anybody, even a person who is
not a party to the contract and may be directed against the 30
other contracting party or even person who is not a party.
Intention to cause the other party to enter into a contract
must be the objective in resorting to any such act. IPC need
not be in vogue at the place where the coercive act was
practiced.

The landmark judgment in Askari Mirza v Bibi Jai Kishori

alias Iqbal Rani discussed the essentials requirements for a
plaintiff to establish in a plea for coercion as:
That a threat was uttered;
That it was a threat to commit an act forbidden by the
IPC; and
The threat was uttered with the intention of causing the
plaintiff to enter into the agreement complained of.

The judgment also held that threatening a criminal

prosecution is not coercion per se. It could be coercion if the
threat is to file false charges.
The case of Ammiraju vs. Seshamma is the case primarily
dealing with the question of threat to commit suicide
amounting to suicide. It was seen that there was a threat by
the husband to commit suicide, and he demanded his wife to
release property in name of his brother. It was seen that the
wife was prejudiced and it can't be forbidden by law. So here
the threat to commit suicide by the husband amounts to
coercion on the wife.

UNDUE INFLUENCE

Undue influence is defined in the Section 16 of the Indian

Contract Act 1872 as:
 “A contract is said to be induced by “undue influence” where the
relations subsisting between the parties are such that one of the 31
parties is in a position to dominate the will of the other and uses
that position to obtain an unfair advantage over the other.
In particular and without prejudice to the generality of the
foregoing Principal, a person is deemed to be in a position to
dominate the will of another—
where he holds a real or apparent authority over the other, or
where he stands in a fiduciary relation to the other; or
where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason of
age, illness, or mental or bodily distress.
Where a person who is in a position to dominate the will of
another, enters into a contract with him, and the transaction
appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract was
Fraud.”
Therefore, the essentials of undue influence in a contract are:
a Relationship must subsist that one of the parties is in a
position to dominate the will of the other and that the
dominant party obtains an unfair advantage over the other;
and that the dominant party uses his dominant position to
obtain an unfair advantage.
The presumption of undue influence applies whenever the
relationship between the parties is such that one of them is,
by reason of confidence reposed in him by the other, able to
take unfair advantage over the other
In the case of Subhas Chandra Das Mushib v Ganga Prasad Das
Mushib the role of presumption of undue influence was
discussed by the court. Plaintiff claimed that will deed of his
father conveying the entire property to defendant, plaintiff’s
nephew, was brought about by exercising undue influence
over the donor. The Court observed that no presumption of
undue influence arises in case of gift to a son, grandson, son-
in-law, although made during the donor’s illness or old age.
FRAUD

32
Section 17 of the Indian Contract deals with the consent to a
contract caused by Fraud. Section 17 states that, “Fraud means
and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to
deceive another party thereto of his agent or to induce him to enter
into the contract
the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
the active concealment of a fact by one having knowledge or
belief of the fact;
a promise made without any intention of performing it;
any other act fitted to deceive;
any such act or omission as the law specially declares to be
fraudulent.”
In the case of fraud, it is important to establish that some loss
has been caused due to the fraud committed. There can be no
fraud if there is no damage. Also, the statement made as the
fraud must be a fact and not an opinion. Mere silence is not
fraud unless silence is deceptive or silence is equivalent to
speech.
In Bimla Bai v. Shankarlal, a father called his illegitimate son as
“son” for the purpose of fixing his marriage. It was held that
the father knowingly hid the illegitimacy of the son with the
intention of cheating the parents of the bride, which amounts
to fraud. Various consequences of fraud are: damages,
restitution, rescind the contract or insist on performance of
the contract.

MISREPRESENTATION

In accordance with section 18 of the Indian Contract Act,

misrepresentation can be divided into three types –
 1. When a statement of fact is made which is false but is believed to
be true. 33
2. When the person making the false statement performs breach of
duty, and by doing so gains unjust advantage even though such
wasn’t the intention of the party.
3. When one contracting party behaves in an innocent manner
which leads the other party to commit mistake(s) with regards to
the contents of the contract.

In the case of Nigawa v Byrappa S Hirekurabar, two

important rules of misrepresentation were laid.
1. The Class of acts constituting misrepresentation are
enunciated in the three clauses of the section. It is
immaterial whether those acts have been done
intentionally or innocently. Such acts, must induce the
other party to give the consent.
2. Even if a representation is true when made, but becomes
untrue to the knowledge of the person making it before
the contract is entered into, it would, unless corrected,
amount to misrepresentation.

MISTAKE

Mistake is an error. It is an error relating to a fact. Consent

may be given by either both the parties or by one party
labouring under the mistake. In the former, it is a bilateral
mistake. In the latter, it is a unilateral mistake. Where the
parties contract under a false and fundamental assumption,
which both of them must have in mind at the time they
entered into it is the basis of their agreement, the contract is
void.
 MISTAKE

An incorrect belief that in nature is innocent is termed as 34

mistake. It may be used as a source to make an agreement
invalid in terms of law. Mistake comes under section 20, 21,
22, under Indian Contract Act 1872.
A mistake is of two types: -
1. Mistake of law
2. Mistake of fact

MISTAKE OF LAW

Performance of any contract under ignorance of law, means

mistake of law. Dealing under section 21 of the Indian
Contract Act, mistake of law can be of two types- mistake
about foreign law or mistake about Indian law. The Contract
Act says that no party shall be allowed to claim any relief on
the grounds of ignorance of Indian law. This will also include
a wrong interpretation of any legal provisions.
There are two types of mistake of law-
1. Mistake of Indian law-
A contract caused by a mistake as to any law enforce in India,
is not voidable. Ignorantia Juris non-excusat, i.e., ignorance of
law is no excuse, it implies that the court assumes every
person is aware of the law and hence cannot claim ignorance
of law as an excuse to escape their liability. While entering in
a contract, it is essential to have knowledge of the specific
laws related to that contract. If someone breaks the law, he or
she will be liable even if they claim they were ignorant of the
law being broken.
Example- If A does fraud to B and later claims was ignorant
of the fact that fraud is illegal in the country, he would be
liable for his deed and won’t be spared.

State of West Bengal Vs. Administrator, Howrah Municipality and

Others

In this case it was held that, the assistant divisional manager

of the company-appellant is not an illiterate or so ignorant
who could not calculate the period of limitation. Appeals like 35
these are filed by such companies daily. The fact of this case
clearly shows, as observed earlier, that the mistake is not bona
fide and the appellant has failed to show sufficient cause to
accept the delay.
Exceptions- This Principal was brought with the rationale
behind that, no one would be committing a crime and then
later would claim their ignorance for not having knowledge
about the law. However, it is not possible for anyone, even for
one having career in law to know each and every legal
operation in law. Thousands of laws are brought and enacted
in our country, by the Parliament and State legislature.
There are various fields in law for example- civil law,
criminal law, tax law, family law, etc. having total knowledge
about every legal provision is not possible. Tax laws, for
example in our country is counted as one of the most
complex tax regimes in the Asia region. It is even hard for tax
administrators to understand legal provisions in their correct
form, also it is a hassle for them because of the number of
amendments made to the tax enactments from year to year.
Therefore, under these circumstances it would be a mockery
of law and justice to hold someone responsible for having
knowledge about the law but just acting ignorant of not
knowing the law. Whether the ignorance of law may or may
not constitute a valid excuse for justifying with the provision
of the law will depend on the nature of the default. Thus, the
judgement should be based on the totality of circumstances.

Motilal Padampat Sugar Mills CO. Limited Vs. State of Uttar

Pradesh

In this case the court held that, “It must be remembered that
there is no presumption that every person knows the law, but
that is not a correct statement: there is no such maxim known
to the law.
It was Lord Atkin who properly pointed out the context,
when he said in Evans Vs Bartlam, “The fact is that there is 36
not and never has been a presumption that everyone knows
the law. There is the rule that ignorance of the law does not
excuse, a maxim of very different scope and application.”

2. Mistake of Foreign Law

If someone enters into a contract without knowing the
provisions of foreign law, which is essential for the contract, it
is known as mistake of foreign law. This contract therefore
becomes void as one cannot be expected to know every
foreign law. Under the Indian Contract Act, mistake of
foreign law is treated as mistake of fact.

MISTAKE OF FACT

Ignorantia Facti Excusat is a Latin legal maxim that means

ignorance of a fact is an excuse. a mistake because of error in
understanding, or omission, or ignorance is known as mistake
of fact. When parties enter into a contract with such mistake,
the contract is no longer binding or valid. In State of Orissa v.
Khora Ghasi, the accused while guarding his field, in good
faith, shot an arrow on the moving object thinking it was a
bear, but the shot results in the death of a person. However,
the court made him free from any liability and he got the
immunity under the mistake of fact. In The Indian Contract
Act, 1872, a contract is said to be void when both the parties to
the agreement are under a mistake as to a matter of fact.
Mistake of fact is also of two types-

1. Bilateral Mistake
According to Section 20, of the Indian Contract act, “Where
both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, the agreement is
void”. It means when both sides of the party enter into a
contract, under a mistake of fact essential to the agreement, 37
such mistake is referred as bilateral mistake. Which means
both the parties have not consented to the same thing in the
same sense. However, the mistake of fact should be about
some essential fact which holds importance in a contract.
Example- ‘A’ and ‘B’ entered into a contract, in which a
transaction of 200 TV-sets in return of some amount
involves. But 100 TV sets are sold early by the brother of ‘A’
before the contract could be performed and both the parties
(A and B) were unaware of this fact that only 100 TV sets do
exist. In this case, the contract is void.

Some common mistakes under bilateral mistake are-

Mistake as to the existence of subject matter
Mistake as to the quality of subject matter
Mistake as to the price of subject matter
Mistake as to the quantity of subject matter
Mistake as to the identity of subject matter
Mistake as to the performance of subject matter

Tarsem Singh Vs. Sukhminder Singh (1998)

Here, Tarsem Singh was the owner of 48 kanals of land who

made a contract with Sukhminder Singh to buy his land.
Sukhminder Singh mistakenly believes that Tarsem is taking
about bigha (bigger unit of land) as compared to kanal. Here
the mistake was regarding the measurement of land. Hence
there was mistake of fact and according to section 20, it was
termed as a bilateral mistake, and the contract was termed as
void.

2. Unilateral Mistake
A unilateral mistake is one where only one side of the party is
under a mistake. According to Section 22, a contract is not
voidable merely because it was caused by one of the parties to 38
it being under a mistake as to a matter of fact.
For example, ‘A’ and ‘B’ entered into a contract in which only
‘A’ was under a misbelieve for any product which is in the
agreement. Then, the contract is not voidable for ‘A’ and will
be classified as a valid contract.
However, there are some exceptions, there is a certain case
where the unilateral mistake makes a contract void and
voidable.

A. When unilateral mistake makes a contract void-

1. Unilateral mistake about the nature of Contract: Unilateral
mistake related to the nature of contract makes a contract
void. For instance, if someone mistakenly enters into an
altogether different contract.

Dularia Devi v. Janardan Singh

In this case, an illiterate woman put her thumb impression on

two documents thinking them to be the same. She gave her
thumb impression under the belief of the document to be the
one, according to which she wanted to gift some property to
her daughters. But the other document was a Sale deed and
she mistakenly gave her thumb impression on that which
would be resulting to defraud the women out of more of her
property. This contract was held void by the courts.
2. Unilateral mistake of the identity of the person contracted
with- when ‘A’ wants to enter into a contract with ‘B’ but
mistakenly enters into a contract with ‘C’ believing him to be
‘B’.
Example- If ‘Shyam’ is a regular customer of ‘Suresh’. He
gives order to ‘Suresh’ to deliver some grocery and household
stuff. But he was not aware of the fact that ‘Akash’ is the new
owner of the shop and he makes a contract with ‘Akash’ by
mistake. In this case, the contract will be void.
B. When unilateral mistake makes a contract voidable-
39
If there is induction of fraud or misrepresentation from one
side of the party, then the contract is voidable for the party
who has done the mistake under the contract.
Example- ‘A’ was the buyer and ‘D’ was the seller. ‘D’
fraudulently creates such situation and makes ‘A’ believe
something which is not true. And ‘A’ however falls into the
trap and gets into the contract with ‘D’. Then the contract is
voidable at the option of ‘A’.
 LEGALITY OF OBJECT

Object is the purpose for which the agreement is entered into. 40

E.g., agreement for sale of arms for the purpose of waging
war against the state
Consideration= set of promises
Object= waging war
Agreement is VOID
Thus, if either object /consideration is unlawful = void
agreement
As such both object & consideration must be lawful =
contract.

The object of an agreement is lawful, unless-

1. It is forbidden by law.
Object of an agreement forbidden by law is void. ‘Law’ – law
in force in India, personal laws unwritten Principals of law.
Forbidden means directly prohibited by law.

Nandlal vs Williams

The plaintiff had the license to work on a liquor shop given

under the Excise Act. Now as per the Act, it has forbidden
sale, transfer of the license or taking the partnership to run
the shop. Now, the plaintiff has taken the defendant to run
the shop as a partner into the business. The court held the
partnership as avoid one as it would defeat the objective of
the law if an unapproved person starts to work in an
approved shop, this would be violating the provision of law in
an indirect manner. The objective of the law was to prohibit
sale or transfer of the license, the licensee cannot form the
partnership to work as that would amount to the transfer of
the license to an unauthorized person.

Bhikanbhai vs Hiralal

The plaintiff was a lessee of certain tolls under the Bombay

Tolls Act. One of the conditions of the lease was that the
lessee should not sublet the tolls to any other person without 41
the permission of the Collector. A fine of Rs 200 was payable
for a breach of the condition. The plaintiff contracted with
the defendant to sublet the toll to him without obtaining the
necessary permission.

2. It is of such a nature that, if permitted, it would defeat the

provisions of any law.
Where there is no express statutory prohibition against
particular type of agreement but Nature of the agreement is
such that it would be against the spirit of a particular law.

3. It is fraudulent.
Agreement made for fraudulent purpose is void.

Brown Jenkinson & Co Vs Percy Dalton

The claimants owned a vessel on which the defendants

shipped a cargo of orange juice, packed in barrels which were
old, frail and leaky. The claimants said they would issue a
caused bill of lading stating the defects in the barrels. The
defendants could only sell the juice with a clean bill of lading
stating that the cargo was shipped in apparent good order and
condition. The defendants offered an indemnity to the
claimants for any losses that might result from the issue of a
clean bill. It was found at trial that the claimants believed that
the issue of clean bills in such circumstances was an
acceptable practice permitting the question of the condition
of the cargo to be litigated later. Upon receiving the
indemnity, the claimants issued a clean bill. The claimants
had to pay damages to the buyers of the orange juice for the
loss occasioned by the poor barrels, and they claimed on their
indemnity from the defendants. It was held that contract was
unenforceable because it had as its object the commission of
the tort of deceit.
4. Involves and implies injury to the person or property of
another. 42
‘injury’= criminal / wrongful harm
‘person’= body
‘property’= movable / immovable

5. The court regards it as immoral, or opposed to public

policy.
‘Public policy’ also relates to agreements expressly declared
void (Sec. 26 to 30). Public policy means social Principals or
norms.
Immoral – is not defined but seen through case laws. It
depends on standard of morality prevailing at a particular
time & as approved by court.

In case of Gherulal Vs M. Maiya – scope of the word immoral

by Subba Rao J, ‘In English & Indian law immorality confines
to doctrine of sexual immorality’. He gave e.g., agreements to
pay money for future illicit cohabitation agreement to lend
money to a prostitute to help her trade.

In case of Bai Vijli Vs Nansa Nagar- The plaintiff advanced

loan to the defendant, a married woman, to enable her to
obtain divorce against husband and then marry the plaintiff.
The object of the agreement was held to be immoral and the
plaintiff was not entitled to recover the loan so advanced. An
agreement is opposed to public policy when it is harmful to
the public welfare/interest or against public good.

Agreements by Maintenance & Champerty

Maintenance – agreement to promote a litigation in which
one has no interest of his own
Champerty- maintenance of litigation for share of
proceeds
Under English law both are void but Indian law not make
them absolutely void if object of contract is just to assist other 43
party in making reasonable claim & then to have fair share in
the profit = Valid Contract.

Harilal Nathalal Talati Vs Bhailal Pranlal Shah

In this case the division bench of the Bombay High Court

dealt with an agreement in which a person had agreed to give
half share of the property as he might get whether by a suit or
by private settlement or in any other manner from his
father’s estate. The court held that the agreement was
extortionate and unconscionable and opposed to public
policy.
Trading with alien enemy – in times of war = void
Stifling prosecution

VOID AGREEMENTS

An agreement not enforceable by law is void.

Agreement in which Consideration & object are unlawful in

part – Sec. 24
When part of consideration for an object /more than one
object of an agreement is unlawful= void agreement
Case – Alice Mary Hill Vs William Clark- A promise to pay a
fixed sum of money on monthly basis to a married woman
for living in adultery with the promisor, which is unlawful,
and for keeping his house, which is lawful, the whole
agreement was held to be void because it was impossible to
apportion the single lump sum between the lawful object and
the unlawful one.

Agreement without consideration –Sec. 25

Such agreement is void. There are 3 exceptions-
 1. Written, registered, made out of natural love & affection
between persons standing in near relationship. 44
2. Promise to compensate for a voluntary act done for the
promisor.
3. Promise to pay for time barred debts.

Agreement in restraint of marriage –Sec. 26

Agreement in restraint of marriage (except for a minor) or
which interferes with freedom of choice in marriage is void,
as law regards marriage and married status as the right of
every individual.

Lowe Vs Peers

In this case, the defendant contended that if he marries any

other person except the plaintiff, he would give her 1000
pounds within three months of his marriage. It was held that
such an agreement is void.

Agreement in restraint of trade – Sec. 27

No individual can take away this right to trade by an
agreement.

Madhub Chandra Vs Raj Coomar

In this case, the Defendant faced competition from Plaintiff

due to which he incurred a heavy loss. Consequently, both
parties entered into an agreement. The terms of the contract
state that if the Plaintiff closes his business, then the
Defendant would pay him the money that Madhub Chunder
advanced to his workers. Later on, Rajcoomar refused to pay
the money as promised in the contract. Both the parties of
the present case were involved in businesses established in
Calcutta. As a result, the Plaintiff filed a lawsuit to claim the
amount from the Defendant. It was held that any contract
which falls within the ambit of Section 27 of ICA is void
unless certain exceptions.
Statutory exceptions
Sale of good will
 Exception's under Partnership Act
Case – Parasullah Mallik Vs Chandrakanta Das 45
Hukmichand Vs Jaipur ice & oil mills
Under judicial interpretations
Trade combinations
Case – S.P.Fraser & co Vs Bombay Ice Mfg Co
But a combination which tends to create a monopoly and
which is against public interest is void
Service contracts

Agreement in restraint of Legal Proceedings – Sec- 28

Agreement restricting enforcement of right, wholly /partially
– is void to that extent. E.g. A Clause – neither party has right
to enforce agreement in court is void. Agreement which
curtails period of limitation as prescribed by Law of
Limitation are Void as their object is to defeat provisions of
law. Exceptions to such agreement - Reference of future &
present disputes for arbitration.

Agreements which are Uncertain –Sec. 29

An agreement whose meaning is not certain or is not capable
of being made certain is void. The uncertainty may be as to -
Existence of
Quantity of
Quality of
Price of
Title to - the subject matter

Wagering Agreement
A wager is an agreement between two parties by which one
promises to pay money or money’s worth on happening of
some uncertain event in consideration of the other party’s
promise to pay if the event does not happen. Anson- ‘wager is
a promise to give money or money’s worth upon
determination or ascertainment of an uncertain event’. E.g.,
bet. There is an essence of gambling. 46

Features of Wager –
Uncertain event – (future event or past event)
Mutual chances of gain /loss
Neither party to have control over event
No other interest in the event – except gambling
Intention of Both Parties is to Gamble – Essential Feature

Brodgen Vs Marriott

Mr Brogden, the chief of a partnership of three, had supplied

the Metropolitan Railway Company with coals for a number
of years. Brogden then suggested that a formal contract
should be entered into between them for longer term coal
supply. Each side's agents met together and negotiated.
Metropolitan's agents drew up some terms of agreement and
sent them to Brogden. Brogden wrote in some parts which
had been left blank and inserted an arbitrator who would
decide upon differences which might arise. He wrote
"approved" at the end and sent back the agreement
documents. Metropolitan's agent filed the documents and did
nothing more. For a while, both acted according to the
agreement document's terms. But then some more serious
disagreements arose, and Brogden argued that there had been
no formal contract actually established. It was held that a
contract had arisen by conduct and Brogden had been in
clear breach, so he must be liable.

Rourke Vs Short

Effect – expressly declared void in India

In Maharashtra & Gujarat – declared illegal
No suit for recovering what is won under wager

Are insurance agreements also wagers?

In insurance – there is insurable interest (w- gambling is only
interest) + it’s a contract of indemnity (w- agreement to lose
47
or win) + based on scientific & actual calculation of risks
(wager is a gamble). Thus, common intention of the parties to
enter into a wagering transaction is a sine qua non for a
transaction to be dumped as wager.

Exceptions – following are not wagering-

A crossword competition (according to Prize Competition
Act 1955, prize competitions in games of skill are not
wagers)
Games of skill e.g., picture puzzle, athletic competitions
A subscription or contribution or agreement to subscribe /
contribute towards any plate (cup / other prize)

Illegal Agreement
It is one which transgresses some rules of basic public policy
or which is criminal in nature / is immoral. All illegal
agreements are void but all void agreements are not
necessarily illegal i.e., not enforceable. E.g .to endanger pub
safety/commit crime. It is not only void between the
immediate parties but has further effect that even the
collateral transaction to it becomes tainted with illegality.
E.g.,- A---B (loan agreement to enter into a contract for
import of prohibited goods, A knows about purpose of loan.
Agreement between A & B is collateral to main transaction
and is illegal too). But in void agreements the collateral
transaction is not affected.
E.g., A borrows money from B, to enter into an agreement
with a minor (which is a void agreement), here the transaction
between A---M (Minor) = void. A---B (loan) = valid i.e., can be
enforced in the court of law.

Unlawful Agreement
They are Less rigorous in nature. Involve non-criminal
breach of law. They are simply disapproved by law on ground
of Public Policy. E.g., Agreements in restraint of trade.
Agreement in restraint of Legal Proceedings
48
They are void ab initio & have no legal effect.
 DISCHARGE OF CONTRACT

49
Discharge of contract is defined as the termination of
contractual relationship between the parties. A contract is said
to be discharged when it ceases to operate, i.e., the obligations
and rights provided by the contract cannot be executed any
further. When a contract is discharged, it's no longer binding.
A contract can be discharged through the following ways:
By performance: Discharge by performance takes places
when parties to the contract complete their obligations
within the time limit and manner as provided by the
contractual relationship. Performance of contracts is
discussed in the Chapter VI of the Indian Contract Act,
1872. Sec. 37 elaborates on the obligations of parties in
performing a contract.
By mutual agreement or consent: Discharge by
agreement is executed on the basis of the legal rule-
“Eodem modo quo quid constituitur, eodem modo
destruitur”, i.e., a thing may be destroyed in the same
manner in which it is constituted. Therefore, as
obligations were presented to the parties through an
agreement, the termination of obligations is done through
another agreement that supersedes the previous one.

The various methods of discharge through agreement are

discussed in Sec.62. These methods include:

1. Novation: Discharge through novation takes when either a

new contract supersedes the original contract or the contract
between parties is rescinded in consideration of a new
contract based on same terms having one of the parties and a
third party. The Supreme Court bench in the case of Lata
Construction v. Dr Rameshchandra Ramniklal Shah interpreted
novation stating that “there should be a complete substitution of a
new contract. It is in this situation that the original
contract need not be performed”. Therefore, it was held that
Novation would only be considered when the new contract 50
changes the primary objective or root of the contract.

2. Rescission: Rescission of contract takes places when parties

to a contract agree through mutual consent to forget the
present contract and not form a new contract. Rescission of a
contract can also be implied either through non-performance
of the obligations in the contract or through breach of
contract. The communication or revocation of a rescission to
a contract is elaborated in Sec.66, to which the same terms of
communication or revocation of proposal are applied. As per
Section 64 of the Act, the party rescinding the voidable
contract shall, if he has received any benefit there under from
another party to such contract, restore such benefit, so far as
may be, to the person from whom it was received.

3. Alteration: As the name suggests, alteration takes place

when one or more terms of the contract are altered through
mutual contract. The original contract will be discharged after
alterations. Alteration differs from Novation on two stands.
First, the change in contract is of greater degree in novation,
however in alterations smaller changes are made. Second,
parties may change in novation, but not in alteration.

4. Remission: Remission is the acceptance of a lesser

fulfilment of the consideration made in the contract. The
term remission is additionally utilized in reference to the
absolution or approbation of damage or offence, or the
demonstration through which a fine or punishment is
excused. Under English law, an agreement with remission is
considered to be “nudum pactum” i.e., a contract without
consideration. Hence, a contract of remission would be
considered void under the English law.
5. Waiver: A waiver is a legally binding provision where
either party in a contract agrees to voluntarily forfeit a claim 51
without the other party being liable. It is a unilateral
declaration of renunciation; therefore strictly speaking waiver
is not a method of discharge through mutual agreement.

6. Merger: A contract also stands discharged through a

merger that occurs when an inferior right accruing to party in
a contract integrates into the superior right ensuing to the
same party.

7. Accord and satisfaction: Accord refers to an agreement

whereby a person after there has been a breach of the
contract agrees to accept some valuable consideration in lieu
of the right of action that he has against the other party.
Whereas, satisfaction refers to the discharge of the obligation
formed under the new agreement after the breach has
occurred. Discharge of a contract by accord and satisfaction
means the discharge of the original contract by reason of
performance of the new substituted obligations.

BY IMPOSSIBILITY OF PERFORMANCE

A contract based on obligations that are impossible to

perform in void ab intio. This status of the contract is derived
through the legal maxims:
1. Lexicon cogit ad impossibilia i.e., the law does not recognise
what is impossible and
2. Impossibilium nulla obligato est i.e., what is impossible does
not create obligation.
Under Indian Law, Sec. 56 holds that an agreement to do an
act impossible in itself is void. The section further discuses
subsequent impossibility of a contract. Subsequent
impossibility or the Doctrine of Frustration is the
impossibility, which arises subsequent to the formation of the
contract. It is also known as post-contractual or supervening 52
impossibility. Such impossibility makes the contract void and
the parties are discharged from performing the contract
further. Thus, the contract is discharged.
For a contract to be discharged under subsequent
impossibility it is required that any one of the following
grounds is met:
Destruction of Subject-matter
Change of circumstances
Non-occurrence of contemplated events
Death or incapacity of the party
Government or legislative interventions
Intervention of war

BY LAPSE OF TIME

The Limitation Act, 1963 lays down that a contract should be

performed within a specified period, called period of
limitation. If it is not performed, and if no action is taken by
the promise within the period of limitation. The promise will
be deprived of his remedy at law. The Limitation Act, 1963
lays down a period of three years for most types of rights.
By Intervention of Legislative Powers
A contract can be discharged independently of the consent or
wishes of the parties i.e., by operation of law. These methods
include:
By death of a party to the contract
By insolvency
By unauthorized alteration of the terms of a written
agreement
By rights and liabilities becoming vested in the same
person

BY INTERVENTION OF LEGISLATIVE POWERS

53
A contract can be discharged independently of the consent or
wishes of the parties i.e., by operation of law. These methods
include:
By death of a party to the contract
By insolvency
By unauthorized alteration of the terms of a written
agreement
By rights and liabilities becoming vested in the same
person

BY BREACH OF CONTRACT

Breach of contract means breaking of the obligation which a

contract imposes. It occurs when a party to the contract
without lawful excuse does not fulfill his contractual
obligation or by his own act makes it impossible that he
should perform his obligation under it.
Breach of contract occurs when during the performance of
the contract, one party fails or refuses to perform his
obligation under the contract. This refusal to perform can be
through:
Express repudiation- by word or act
Implied repudiation- Impossibility created by the act of a
party to the contract
Breach may also take place at the time when the performance
is due. It occurs when at the time when performance is due,
one party fails or refuses to perform his obligation under the
contract.
 DISCHARGE BY BREACH

54
A breach of contract occurs when a party thereto renounces
his liability under it, or by his own act makes it impossible
that he should perform his obligations under it totally or
partially fails to perform such obligations. This failure can
occur before the stipulated time of performance or at the
time of the performance.

Anticipatory Breach
An anticipatory breach occurs when the promisor before the
date of performance refuses to perform or accept the contract
and this has some effect upon rights of both the parties.

Effect upon rights

Options for injured party- As the obligations to a contract
come to an end so the innocent party is released from the
performance. It gives the injured party the right to sue
instantly or to wait till the time of performance.
Immediate right of action under anticipatory breach was
granted in Hochester v De La Tour. The plaintiff was a courier
and the defendant engaged him to accompany him to a tour
on June 1, 1852 but only a month before this date the
defendant wrote to plaintiff that he is not going to take him.
The plaintiff sued the defendant for breach but the counsel of
defendant contended that there was no breach as the
performance date was yet to come but the court objected it
and said that there can be no universal rule that if an event is
going to happen at a future date then there is no right of
action to the aggrieved party. Similarly, if a man promises a
woman to marry her in future and marries another woman
before it then he would be instantly held liable for the breach.
Where the performance of a contract is based upon a
contingency i.e. whether the action will take place or not then
also an immediate action for damages lie, only if the
promisor disables from his performance. 55
In case of Frost v Knight where the defendant promised to
marry the plaintiff on the death of his father. The father was
still living and he broke his promise and the plaintiff
immediately brought an action against him. The court held
that when the other party breaches, all obligations are
removed and the damages can be evaluated at an earlier
moment and the consequences can be dealt.
Acceptance of disapproval requires no particular form. It
would be sufficient if the conduct shows the disapproving
party that the injured party is treating the contract at an end.

Effects of aggrieved party waiting for performance

The part disapproving the contact if chooses to perform
when the time of performance is about to come then the
other party have to accept to it. The aggrieved party is not
free from providing his duties under the contract if it is
keeping the contract alive.
If repudiation is done through anticipatory breach and the
other party is involved in the affirmation of the contract then
the disapproving party would not be liable if the other party
is in breach. In case of Fercometal SARL v Meditteranean
Shipping Co SA the charterer refused to load the ship but the
owner affirmed and he failed to load on the day so the owner
was held liable not the charter.
This Principal is also used to deal with premature termination
of a contract of employment. In a case the managing director
was removed before three years and was replaced. The court
said that no injunction could be granted to him but a contract
of personal service which contains both positive and negative
covenant then in that case the negative covenant is followed
i.e. no one will be appointed until the expiry of the plaintiff’s
period.
Negative Injunction is a well settled Principal from the case of
Lumley v Wagner. In this case the defendant agreed that she 56
would sing at plaintiff’s theatre only not elsewhere and this
negative part of covenant was enforced. We can see this type
of situation with many actors and singers where they are not
allowed to engage in any others service during the period of
employment.
Where the contract involved the servant or performer
exercising special skills and have both positive and negative
obligations then the court cannot enforce the performance of
negative obligations if enforcement of it, would result in
forcing the servant to fulfill his positive obligations under the
contract like in case of Waren v Mendy.
Contracts open for performance and events those discharge
the contract not by repudiation but by frustration or any
impossibility (war, heavy rain, pandemic) then the waiting
party cannot sue him as the contract gets ended due to
impossible circumstances even if the contract is open.

Termination of lease
Leases which are prematurely terminated by lessee before
expiry period, the court allowed the lease money for
termination before expiry period by the way of damages.

What leads to repudiation?

For repudiation the whole conduct of the party is considered
to see whether he wants to perform or not. Repudiation is a
refusal which should be clear.
Any minor irregularity to performance cannot be treated as
repudiation. The court has to take into account the whole
consequences of the breach. Like in a contract where the
supplier had to provide 100 tons of flock of government to
the buyer but sixteen deliveries were below standard and the
buyer tried to treat it as repudiation but court said that seller
did not intend to breach the contract and that’s why the buyer
have to remain contended with the damages. 57
Mercantile contracts generally have a long period of delivery
and at a price for which buyer has right to call for delivery
according to his needs but a reasonable notice should be
given earlier. But this option would be of no use if sellers
have the right to deliver whenever they are willing. So the
buyers can put an end to the contract as sellers were in breach
of their contract and can recover damages.
Silence and inaction of the innocent party are generally
treated as affirmation of the contract but it didn’t amount to
repudiation.

Section-39 Effect of refusal of party to perform promise

wholly- When a party to a contract has refused to perform, or
disabled himself from performing his promise in its entirety,
the promisee may put an end to the contract, unless he has
signified, by words or conduct, his acquiescence in its
continuance.

What is Breach in Entirety?

The party to refuse the contract performance must refuse it
wholly or entirely otherwise it would not be justified in doing
that. In the case of Rash Behary Shaha v Nirttya Gopal Nundy. A
agreed to buy 300 tons of sugar from B under two contracts
and the deliveries to be made at different dates. A failed to
take up the deliveries under from first contract, B declared to
cancel the contracts but the court said that there was no
refusal from A’s side to not to perform the contract entirety
so B cannot claim to rescind it.

Partial failure
In case of Sumpter v Hedges there was a contract for the sale of
B Twill and Hessian which are to be delivered in the month
of April, May and June. April and May quota deliveries were
on time and they were paid on time but the rest were
delivered to the mills and the buyer has to take it from there.
The order reached the buyer through several middlemen. 58
They use to put conditions different from contract and that’s
why the buyer refused to accept it and the court held that the
seller was in breach of his contract.

Quantum merit
Where a party leaves a contract before completion then he is
liable to pay the cost of completion but whether he will get
any payment depends on some factors. If the injured party
accepts the partial work then he is bound to pay the party
based on the Principal of quantum merit. In a case where a
building contractor left the work in the middle saying that
due to lack of money he is not able to finish it but the owner
did the remaining work by himself using the material left by
the contractor. The judgment said that owner should provide
the contractor with the money of the material but no money
for work.

Boundation to provide restitution

Aggrieved party after putting an end to contract and bringing
an action for damages is bound to return all the benefits to
the other party. This has been held in Muralidhar Chatterjee v
International Film Co Ltd. Here defendant was a film importer
and he agreed with the plaintiff to provide him film at a fixed
rate, one in a one month. A film was supplied and plaintiff
paid Rs.2000 but there was some exhibition problem so it
was returned. Next month again Rs.2000 were paid but they
received no film. The plaintiff wrote to defendant that due to
delay the contact is cancelled. Defendant accepted the
repudiation and plaintiff sued the defendant in order to
recover the money.
 CERTAIN RELATIONS RESEMBLING THOSE CREATED
BY CONTRACT 59

Quasi contracts are certain relations resembling those created

by contracts. Quasi-contracts are based on the Principal of
“Nemo debet locupletari ex aliena jactura”, which means -No
man should grow rich or get enriched out of another person’s
loss. Quasi contract or constructive contract unlike contracts
does not need presence of essential elements for being legally
valid. Quasi contract is defined under section 68-72.
Quasi contracts are actually not a contract because parties do
not have intention to enter into the contract. They are
formed only because of obligation arising from one side of
the party. Quasi contracts are contracts implied by law.
Example- ‘A’, a tradesman leaves his goods at the house of ‘D’
by mistake. ‘D’ treats the good as his own. Therefore ‘D’ is
bound to pay for the goods, as no one should get benefit from
the expense of other.
Quasi contracts are based on the Principal of justice, equity
and good conscience. Such contracts are not made by the
desire of the parties but are created by the law of the land.

TYPES OF QUASI CONTRACT

Different types of quasi contract are discussed under section

68-72, of the Indian Contract act.

Claims for necessaries supplied (sec 68)

If a person is incapable of entering into a contract or anyone
whom he is legally bound to support, is supplied by another
person with necessaries suited to his condition in life, the
supplier is entitled for the reimbursement from the property
of such incapable person.
Example- ‘B’ is suffering from insanity. ‘A’ supplies ‘B’ with
necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
Payment by an interested person (sec 69)
If a person makes payment for something which initially was 60
the legal duty of another person, then in such case, the one
who made the payment can ask for the recovery of money
from such person who is legally bound to pay.
Example- ‘A’ is a zamindar. He has leased his land to ‘P’, a
farmer. However, ‘A’ fails to pay the revenue due to the
government. After sending notices and not receiving the
payment, the government releases an advertisement for sale
of the land (which is leased to ‘P’). According to the Revenue
law, once the land is sold, John’s lease agreement is annulled.
‘P’ does not want to let go of the land since he has worked
hard on the land and it has started yielding good produce. In
order to prevent the sale, ‘P’, pays the government the
amount due from ‘A’. In this scenario, ‘A’ is obligated to repay
the said amount to ‘P’.

Hazari Lal Vs Naurang Lal

In this case, Hazari Lal was the lease holder of the land that
belonged to Naurang Lal, who had not paid his land revenue
for many years. The state served a notice to Naurang Lal that
unless the arrears of the revenue were paid by him by a
certain date. Otherwise, the state would auction the land to
receive the arrears. According to the legislation Hazari Lal’s
lease would terminate with the sale of the land. Hazari Lal
therefore paid the revenue arrears and later claimed the same
from Naurang Lal. The court here held that Naurang Lal was
liable to pay Hazari Lal the amount he had paid to clear the
arrears.

Obligation of Person enjoying the benefits of a Non-

Gratuitous Act (sec 70)
If a person lawfully does something to someone without the
intention of doing so gratuitously and the other person
enjoys the benefits of the act done. In such a case, the other
61
person is liable to pay compensation to the former for the act,
or goods received. This compensation can be in money or the
other person can, if possible, restore the thing done or
delivered.
Example- ‘A’, a tradesman, leaves goods at B's house by
mistake. ‘B’ treats the goods as his own. He is bound to pay
for them to ‘A’.

Damodar Mudaliar Vs. Secretary of state for India

In this case, the government carried out repairs to an

irrigation tank which was jointly owned by the government
and a zamindar. The zamindar here was sued by the
government for the expenses incurred by the government for
the repairs. It was held that government in carrying out the
repairs had acted lawfully and had not intended to carry them
out gratuitously and the zamindar who enjoyed the benefits
of the repairs was liable to pay for the compensation.

Responsibility of finder of goods (sec 71)

If a person finds somehow goods belonging to another, and
takes them into his custody, is subject to the same
responsibility as a bailee. Such goods do not become the
property of the finder. Until the owner of the goods is not
found, he as a man of ordinary prudence should take care of
the goods. If he has spent some money on the maintenance of
the good or on trying to find the rightful owner, he is legally
entitled for reimbursement for such expenses. The finder can
retain the goods if the owner is found out but refuses to pay
for the expenses or if the expense of the finder is two-third of
the cost of goods and if there is a chance that the good will be
spoiled if kept for long, then the finder has the right to sell
them if the lawful owner refuses to pay him for the expenses
incurred by him.
Hollins Vs. Fowler
62

Here, Hollins was in the shop of Fowler when he saw a

diamond fallen on his floor. He picked up diamond from the
floor and handled over to Fowler to keep it till the owner is
found. In spite of his best effort the true owner could not be
reached. After sometime Hollins offered to Fowler the lawful
expenses incurred by him for finding the true owner and
asked Fowler to hand over the diamond to him, to which
Fowler refused. It was held that Fowler must return the
diamond to Hollins as Hollins was entitled to retain it against
the whole world except the true owner.

Money paid by Mistake or Under Coercion (sec 72)

If a person receives money or goods by mistake or under
coercion, then he is liable to repay or return it.
Example- A and S jointly owe rupees 5000 to D. One day A
alone pays the full amount to D which was unknown to S.
Later, even S pays rupees 5000 to D to clear the loan. Here D
is lawfully bound to repay the amount paid by S.
Similarly, money paid by coercion which includes
oppression, extortion or any such means, is recoverable.
 CONTRACT OF INDEMNITY

63
Special Types of Contracts - The Act as enacted originally
had 266 Sections, it had wide scope. Sections 124-238 deals
with special kinds of contracts, namely contracts of
Indemnity and Guarantee, Bailment, Pledge, and Agency.
Indemnity means making compensation payments to one
party by the other for the loss occurred.
According to the Indian Contract Act S. 124, 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".
Illustration- ‘C’ contracts to indemnify ‘A’ against the
consequences of any proceedings which ‘B’ may take against
‘A’ in respect of a certain sum of 200 rupees. This is a contract
of indemnity.
The only illustration says that if a person promises to save
another from the consequences of a proceeding which may
be commenced against him it is a contract of indemnity. The
person who gives the indemnity is called the "indemnifier"
and the person for whose protection it is given is called the
"indemnity-holder" or "indemnified".

Essential Elements of a contract of Indemnity-

Contract
A contract of Indemnity must follow all the Principals of a
lawful contract. These include offer, acceptance,
consideration, Intention to create legal relations, legality and
capacity and free consent.

Loss
A contract of Indemnity can only be applied if there is a loss
occurred to another person. This loss can be caused by the
promiser himself (direct losses) or by any other person (third
party losses/ indirect losses/ consequential losses).
The section does not include Loss occurred due to accidents
64
or any natural calamity. It must be a result of a human
agency.
However, in recent times, an indemnity holder can claim a
contract of indemnity before an actual loss occurred. The
legal maxim ‘you must be damnified before you can claim for
indemnified’ cannot be applied in recent times. As laid down
in the case of Gajanan Moreshwar Parelkar v Moreshwar Madan
Mantri, the Court was of the opinion that the indemnified
party can compel the indemnifier to pay so that he can meet
a liability without waiting to actually discharge the liability.
This judgement took into consideration the burden that could
be placed on the holder. The court of equity held that if his
liability had become absolute (decided) then he was entitled
either to get the indemnifier to pay off the claim or to pay
into court sufficient money which would constitute a fund for
paying off the claim whenever it was made.

Promise
For a contract of Indemnity, it is essential that the promise
for an indemnity contract is present among the parties. This
promise can be -
Express- Express indemnity is a written agreement where
the term and condition are such that the concerned parties
abide are usually indicated e.g. insurance indemnity
contracts, construction contracts, agency contracts etc.
Implied- In an implied contract of Indemnity, the offer is
not expressly stated in words but due to conduct. In the
case of Secy of State for India in Council v Bank of India
Ltd, the Secretary of State, prosecuted the bank on the
basis of implied indemnity where it was held that the
express indemnity clause is not necessary for face of
implied right to indemnity which is beforehand existing
under the Indian Laws.
The Indian Contract Act does not specifically include a
provision of implied indemnity. However, the scope and 65
extent has been recognised by the privy council in the above-
mentioned case.
Insurance- An insurance contract is a type of indemnity
contract. It is an absolute contract and any violation will
incur liability. Almost all types of insurances other than
life and personal insurances are indemnified. They are
usually signed before the commencement of the contract.
In New India Assurance Co Ltd v State Trading Corpn. of India
, the insurer was held not liable to indemnify the insured
when the cheque insured was dishonored.
In Oriental Insurance Co Ltd v Asha Paul, Sandhya Sah v New
India Assurance Co, a bank providing benefit of insurance to its
customers, no direct contract between customers and insurer.
For any delay in payment of insurance the customer could
proceed only against bank.

Commencement of Liability
S. 125 defines the extent of liability under Indemnity
contracts. It defines the rights of the indemnity holder when
he issues under any specific condition, entitled from the
promiser:

Right to recover damages

The indemnity holder is entitled to recover all the damages
he paid under a contract of indemnity. In Adamson v. Jarvis
the court laid down that the plaintiff has acted upon the
request of the defendant and was ordered to indemnify the
loss and damage to the plaintiff.
The Principal behind this act is that any person who acted on
the good faith of another person should be indemnified.

Right to recover costs

The indemnity holder is provided with the statutory right to
claim costs and damages from the indemnifier. These costs
are expected to be reasonable according to a prudent man.
66
This is only applied in the case of:
The Indemnifier authorized or brought the suit
The indemnity holder acted as it would have been
prudent for him to act in the absence of a contract of
indemnity.

Right to recover sums paid under compromise

This is similar to the previous right, but it arises only in
situations of compromise. An indemnity holder is entitled to
receive all the amounts from the indemnifier if:
If the compromise was not contrary to the orders of the
suit,
It was prudent to make in a contract of indemnity in the
absence of a contract, or
The promisee authorized to compromise the suit.
In Alla Venkataramanna v. Palacherla Manqamma the court laid
down the conditions for the promise to be valid. The
compromise should be in a bona fide manner. It has been
resolved without any collusion. It has not been impeached as
an immoral bargain.
 CHAPTER 12: GUARANTEE

A “contract of guarantee” is a contract to perform the 67

promise, or discharge the liability, of a third person in case of
his default. There are three parties to a contract of Guarantee-
Principal debtor, Creditor and Surety. A guarantee may be
either oral or written.
Principal Debtor [Section 126]: The person in respect of
whose default the guarantee is given is called the 'Principal
debtor'.
Creditor [Section 126]: The person to whom the guarantee is
given, is called the 'creditor'.
Surety [Section 126]: The person who gives the guarantee is
called the 'Surety'.
Consideration for guarantee [Section 127]: What constitutes
consideration in a case of guarantee is an important question
and is laid down in Section 127 of the Act. As per Section 127
of the Act, “anything done, or any promise made, for the
benefit of the Principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.”
Ex: When A requests B to lend `10,000 to C and guarantees
that C will repay the amount within the agreed time and that
on C falling to do so, he will himself pay to B, there is a
contract of guarantee. Here, B is the creditor, C the Principal
debtor and A the surety.
Guarantee is a promise to pay a debt owed by a third person
in case the latter does not pay. Any guarantee given may be
oral or written. From the above definition, it is clear that in a
contract of guarantee there are, in effect three contracts-
A Principal contract between the Principal debtor and the
creditor
A secondary contract between the creditor ad the surety.
An implied contract between the surety and the Principal
debtor whereby Principal debtor is under an obligation to
indemnify the surety; if the surety is made to pay or
perform. The right of surety is not affected by the fact that
the creditor has refused to sue the Principal debtor or that
he has not demanded the sum due from him. 68

ESSENTIAL FEATURES OF A CONTRACT OF

GUARANTEE

Same as all the essentials of a valid contract

The Principal debtor need not be competent to contract.
In case the Principal debtor is not competent to contract,
the surety would be regarded as the Principal debtor and
would be personally liable to pay.
Surety need not be benefited. According to Section 127,
"Anything done, or any promise made, for the benefit of
the Principal debtor, may be a sufficient consideration to
the surety for giving the guarantee."
A guarantee need not be in writing. According to Section
126, a guarantee may be either oral or written.

Guarantee not to be obtained by misrepresentation [section

142]
Any guarantee which has been obtained by means of
misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the
transaction, is invalid.

Guarantee not to be obtained by concealment [section 143]

Any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances is invalid.

Tripartite agreement
A contract of guarantee is a tripartite agreement between the
Principal debtor, creditor and surety. There are three
contracts as under:
Contract between creditor and the Principal debtor out of
which the guaranteed debt arises.
 Contract between surety and the Principal debtor by
which the Principal debtor undertakes to indemnity the 69
surety if surety is required to pay.
Contract between surety and the creditor by which the
surety guarantees to pay the Principal debtor's debt if the
Principal debtor fails to pay.

There must be consent of all the three parties.

Example: - X sells and delivers goods to Y. X afterwards
requests Z to pay in default of Y. Z agrees to do so. Here, Z
cannot become surety without the consent of Y.

Existence of a liability
There must be an existing liability or a promise whose
performance is guaranteed. Such liability or promise must be
enforceable by law. Hence, guarantee can be given only for
liability or promise which is enforceable by law. But there is
an exception to this rule. The exception is a guarantee given
for minor's debt. Though minor's debt is not enforceable by
law, yet the guarantee given for minor's debt is valid.

Nature of surety’s liability [Section 128]

The liability of the surety is co-extensive with that of the
Principal debtor unless it is otherwise provided by the
contract.
The term “co-extensive with that of Principal debtor”
means that the surety is liable for what the Principal
debtor is liable.
The liability of a surety arises only on default by the
Principal debtor. But as soon as the Principal debtor
defaults, the liability of the surety co-extensive with the
liability of the Principal debtor, in the sense that the surety
will be liable for all those sums for which the Principal
debtor is liable.
 Where a debtor cannot be held liable on account of any
defect in the document, the liability of the surety also 70
ceases.
Surety’s liability continues even if the Principal debtor has
not been sued or is omitted from being sued. In other
words, a creditor may choose to proceed against a surety
first, unless there is an agreement to the contrary.
Surety’s liability may be conditional. The surety may
impose certain conditions in the contract of guarantee.
Until those conditions are met, the surety shall not be
liable.
Example: A guarantees to B the payment of a bill of exchange
by C, the acceptor. The bill is dishonored by C. A is liable not
only for the amount of the bill but also for any interest and
charges which may have become due on it.

IMPORTANT CASES ON SURETIES’ LIABILITY

In Bank of Bihar Ltd. v. Damodar Prasad, The Supreme Court

held that the liability of the surety is immediate and cannot
be defended until the creditor has exhausted all his remedies
against the Principal debtor.

In Maharashtra Electricity Board Bombay v. Official Liquidator

and Another, under a letter of guarantee the bank undertook to
pay any amount not exceeding Rs.50000/- to the Electricity
Board. It was held that the Bank is bound to pay the amount
due under the letter of guarantee given by it to the Board.

In Kellappan Nambiar v. Kanhi Raman, if the Principal debtor

happens to be a minor and the agreement made by him is
void, the surety too cannot be made liable in respect of the
same because the liability of the surety is co-extensive with
that of Principal debtor. It has been held that the
guarantee of the loan or an overdraft to an infant is void
because the loan to the infant itself is void. 71

In State Bank of India v. V.N. Anantha Krishnam, that in view of

the provision of section 128 of Act the Presiding officer was
not correct in giving directions to the Bank to proceed against
the property because cash credit facility and the liability of
surety was co-extensive with that of Principal debtor.

In Industrial Financial Corporation of India v. Kannur Spinning &

Weaving Mills Ltd., it was held that the liability of surety does
not cease merely because of discharge of the Principal debtor
from liability.

In a case of Harigobind Aggarwal v. State Bank of India, it was

held that the Principal debtor liability is reduced e.g., after the
creditor has recovered a part of the sum due from him out of
his property the liability of the surety is also reduced
accordingly.

KINDS OF GUARANTEE

Guarantee may be classified under the following two

categories:
Specific guarantee
Continuing guarantee

Specific Guarantee
A guarantee which extends to a single debt or specific
transaction is called a specific guarantee. The liability of the
surety comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed.
Example: - X guarantees payment to Y of the price of the five
bags of flour to be delivered by Y to Z and to be paid for in a
month. Y delivers five bags to Z, Z pays for them. This is a
contract of specific guarantee because X intended to
guarantee only for the payment of price of the first five bags 72
of flour to be delivered at one time. (Kay v. Groves)

Continuing Guarantee
A Guarantee which extends to a series of transactions is called
a 'continuing guarantee'. A surety's liability continues until
the revocation of the guarantee.
Example 1: On A’s recommendation, C employed B for the
collection of rent from his tenants. A promised to make good
any default made by B This is a contract of continuing
guarantee.
Example 2: - A guarantees payment to B, a tea-dealer to the
extent of Rs 100, for any tea he may supply to C from time to
time. B supplies C with tea to the above value of Rs 100, and
C pays B for it. Afterwards, B supplies C with tea to the value
of Rs 200. C fails to pay. The guarantee given by A was a
continuing guarantee, and he is accordingly liable to B to the
extent of Rs 100.
A continuing guarantee may be given for a part of the entire
debt or for the entire debt subject to a limit.

REVOCATION OF CONTINUING GUARANTEE

By Notice of Revocation [Section 130]

A continuing guarantee may at any time be revoked by the
surety as to the future transactions by notice to the creditor.
However, the surety remains liable for the past transactions
which have already taken place.
Example 1: X gives guarantee to the extent of Rs 60,000 for
the loans given from time to time by Y to Z. Y gave a loan of
Rs. 20,000 to Z. Afterwards, X gives notice of revocation. X is
discharged from all liability to Y for any loan granted after
the revocation of guarantee but he is liable to Y for Rs.
20,000 on default of Z.
Example 2: A guarantees to B, to the extent of 100,000
rupees, that C shall pay all the bills that B shall draw upon 73
him. B draws upon C. C accepts the bill. A gives notice of
revocation. C dishonors the bill at maturity. A is liable upon
his guarantee
Lloyd’s v/s Harper it was held that employment of a servant is
one transaction. The guarantee for a servant is thus not a
continuing guarantee and cannot be revoked as long as the
servant is the same employment. Wingfield v/s De St Cron it
was held that a person who guaranteed the rent payment for
his servant but revoked it after the servant left his
employment was not liable for the rents after revocation.

By Death of Surety [Section 131]

In the absence of any contract to the contrary, the death of
surety operates as a revocation of a continuing guarantee as to
the future transactions taking place after the death of surety.
However, the surety's estate remains liable for the past
transactions which have already taken place before the death
of surety.
In the case of Durga Priya v/s Durga Pada It was held by the
court that in each case the contract of guarantee between the
parties must be looked into to determine whether the
contract has been revoked due to the death of the surety or
not. It there is a provision that says that death does not cause
the revocation then the contract of guarantee must be held to
continue even after the death of the surety.

By Modes of Discharging the Surety

A continuing guarantee is also revoked in the same manner in
which the surety is discharged such as:
Novation [Section 62]
Variance in terms of contract [Section 133]
Release or discharge of Principal debtor [Section 134]
When the creditors enter into an arrangement with the
Principal debtor [Section 135]
 Creditor's Act or omission impairing surety's eventual
remedy [Section 139] 74
Loss of security [Section 141] Rights of a Surety

RIGHTS OF A SURETY

Rights of a surety may be classified as under:

Rights against the creditor,
Rights against the Principal debtor
Rights against co-sureties

RIGHTS AGAINST THE PRINCIPAL DEBTOR

1. Right to Subrogation [Section 140]

On payment of the guaranteed debt or performance of the
guaranteed duty; the surety acquires all the rights which the
creditor had against the Principal debtor. Thus, the surety
steps into the shoes of creditor.

2. Right to Indemnity [Section 145]

In every contract of guarantee there is an implied promise by
the Principal debtor to indemnify the surety; and the surety is
entitled to recover from the Principal debtor whatever sum
he has rightfully paid under the guarantee, but not those
sums which he had paid wrongfully.
Example I: - B is indebted to C, and A is surety for the debt. C
demands payment from A, and on his refusal sues him for the
amount. A defends the suit, having reasonable grounds for
doing so, but he is compelled to pay the amount of the debt
with costs. He can recover from B the amount paid by him
for costs, as well as the Principal debt.
Example II: - C lends B a sum of money, and A, at the request
of B, accepts a bill of exchange drawn by B upon A to secure
the amount. C, the holder of the bill, demands payment of it
from A, and on A's refusal to pay sues him upon the bill. A,
not having reasonable grounds for so doing, defends the suit,
and has to pay the amount of the bill and costs. He can 75
recover from B the amount of the bill, but not the sum paid
for costs, as there was no real. ground for defending the
action.
Example III: - A guarantees to C, to the extent of Rs 2,000,
payment for rice to be supplied by C to B. C supplies to B rice
of less amount than Rs 2,000 but obtains from A payment of
the sum of Rs 2,000 in respect of the rice supplied. A cannot
recover from B more than the price of the rice actually
supplied.

RIGHTS OF AGAINST CREDITOR

1. Right to Securities [Section 141]

A surety is entitled to the benefit of every security which the
creditor has against the Principal debtor at the time when the
contract of surety-ship is entered into, whether the surety
knows of the existence of such security or not; and if the
creditor loses, or, without the consent of the surety, parts,
with such security, the surety is discharged to the extent of
the value of the security.
Example I: - C advances to 8 his tenant, Rs 2,000 on the
guarantee of A. C has also a further security for Rs 2,000 by a
mortgage of Bs furniture. C cancels the mortgage. B becomes
insolvent, and C sues A on his guarantee. A is discharged from
liability to the amount of the value of the furniture.
Example II: - C, a creditor, whose advances to 8 is secured by
a decree, receives also a guarantee for that advance from A. C,
afterwards, takes 8's goods in execution under the decree, and
then, without the knowledge of A, withdraws the execution. A
is discharged.
Example III A, as surety for 8, makes a bond jointly with 8 to
C, to secure a loan from C to 8. Afterwards, C obtains from 8
a further security for the same debt. Subsequently, C gives up
the further security. A is not discharged. 76

2. Right to Claim Set Off

The surety has the right to claim set off or counterclaim, if
any, which the Principal debtor had against the creditors in
case the creditors sue him for payment of liability of
Principal debtor.

RIGHTS AGAINST CO-SURETIES

Meaning of Co-sureties: - When the same debt or duty is

guaranteed by two or more persons, such persons are called
as 'co-sureties'.

1. Co-sureties liable to contribute equally (Section 146)

Equality of burden is the basis of Co-suretyship. This is
contained in section 146 which states that “when two or more
persons are co-sureties for the same debt, or duty, either
jointly, or severally and whether under the same or different
contracts and whether with or without the knowledge of each
other, the co-sureties in the absence of any contract to the
contrary, are liable, as between themselves, to pay each an
equal share of the whole debt, or of that part of it which
remains unpaid by the Principal debtor”.
Example 1: A, B and C are sureties to D for the sum of
3,00,000 rupees lent to E. E makes default in payment. A, B
and C are liable, as between themselves, to pay 1,00,000
rupees each.
Example 2: A, B and C are sureties to D for the sum of
1,00,000 rupees lent to E, and there is a contract between A, B
and C that A is to be responsible to the extent of one-quarter,
B to the extent of one-quarter, and C to the extent of one-
half. E makes default in payment. As between the sureties, A
is liable to pay 25,000 rupees, B 25,000 rupees, and C 50,000
rupees.
2. Liability of co-sureties bound in different sums (Section
147) 77
The Principal of equal contribution is, however, subject to the
maximum limit fixed by a surety to his liability. Co-sureties
who are bound in different sums are liable to pay equally as
far as the limits of their respective obligations permit.
Example 1: A, B and C, as sureties for D, enter into three
several bonds, each in a different penalty, namely, A in the
penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in
that of 4,00,000 rupees, conditioned for D’s duly accounting
to E. D makes default to the extent of 3,00,000 rupees. A, B
and C are each liable to pay 1,00,000 rupees.
Example 2: A, B and C, as sureties for D, enter into three
several bonds, each in a different penalty, namely, A in the
penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in
that of 4,00,000 rupees, conditioned for D’s duly accounting
to E. D makes default to the extent of 4,00,000 rupees; A is
liable to pay 1,00,000 rupees, and B and C 1,50,000 rupees
each.
Example 3: A, B and C, as sureties for D, enter into three
several bonds, each in a different penalty, namely, A in the
penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in
that of 4,00,000 rupees, conditioned for D’s duly accounting
to E. D makes default to the extent of 7,00,000 rupees. A, B
and C have to pay each the full penalty of his bond.

Right to Claim Contribution: - If a co-surety pays more than

his proportionate share of liability, he has a right to claim
contribution from the other co-surety or co-sureties.

Right to Share the Security: - If a co-surety obtains any

security of Principal debtor, the other co-surety (or co-
sureties) has (or have) a right to share such security.

Effect of Release of One Co-surety [Section 138]

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 so released from his responsibility to the other 78
sureties. However, under English law the release of one co-
surety shall release all the other co-sureties under English
Law is only joint and not joint and several.

DISCHARGE OF SURETY

A surety is said to be discharged when his Liability as surety

comes to an end.

By Revocation of Contract of Guarantee by Notice [Section

130]
A specific guarantee may be revoked by a surety by notice to
the creditor if the liability of the surety has not yet accrued. A
continuing Guarantee may at any time be revoked by the
surety as to future transactions by notice to the creditor.
However, the surety remains liable for the past transactions
which have already taken place.

By the Death of Surety [Section 131]

In the absence of any contract to the contrary, the death of a
surety operates as a revocation of a continuing guarantee as to
future transactions taking place after the death of surety.
However, the deceased surety's estate remains liable for the
past transactions which have already taken place before the
death of the surety but will not be liable for the transactions
taking place after the death of surety even if the creditor has
no notice of surety's death.

By Novation [Section 62]

A contract of guarantee is said to be discharged by novation
when a fresh contract is entered into either between the same
parties or between other parties, the consideration being the
mutual discharge of the old contract. The original contract of
guarantee comes to an end and the surety under original 79
contract is discharged.

By Variance in Terms of Contract [Section 133]

Any variance, made without the surety's consent, in the terms
of the contract between the Principal debtor and the creditor,
discharges the surety as to transactions subsequent to the
variance.
Example: - C contracts to lend A Rs 5,000 on the first March.
A guarantees repayment. C pays Rs 5,000 to A on the first
January. A is discharged from his liability as the contract has
been varied in as much as C might sue A for the money
before the first of March.
But variation which is not substantial or material or which is
beneficial to the surety will not discharge him of his liability.
In M.S. Anirudhan v. Thomeo's Bank, the surety guaranteed
overdraft provided by the bank to the Principal- debtor only
up to Rs 25,000. Subsequently since the bank was willing to
provide overdraft only up to Rs 20,000, the Principal debtor
reduced the amount in the guarantee form to Rs 2,000. On
default by the Principal debtor the court held the surety liable
as the alteration was beneficial to him and it was not of a
substantial nature.

By Release or Discharge of Principal Debtor [Section 134]

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 omissions of the creditor, the legal
consequence of which is the discharge of the Principal debtor.
Example I A contracts with B for a fixed price to build a house
for A within a stipulated time, B supplying the necessary
timber. C guarantees A's performance of the contract. B omits
to supply the timber. C is discharged from his suretyship.
Example II: A contracts with B to grow a crop of wheat on A's
land and to deliver it to B at a fixed rate, and C guarantees A's 80
performance of this contract. B diverts a stream of water
which is necessary for irrigation of A's land, and thereby
prevents him from raising the wheat. C is no longer liable for
his guarantee.

By Arrangement [Section 135]

A contract between the creditor and Principal debtor, by
which the creditor makes a composition with, or promises to
give time to, or not to sue the Principal debtor, discharges the
surety, unless the surety assents to such contract.

CASES WHERE SURETY IS DISCHARGED

1. Where a contract to give time to the Principal debtor is

made by the creditor with a third person, and not with the
Principal debtor, the surety is not discharged.
Example: - C, the holder of an overdue bill of exchange
drawn by A as surety for B, and accepted by a, contracts with
M to give more time to A. A is not discharged.

2. Mere forbearance on the part of the creditor to sue the

Principal debtor or to enforce any other remedy against
him, does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety.
Example: - B owes to C a debt guaranteed by A. The debt
becomes payable. C does not sue B for a year after the debt
has become payable. A is not discharged from his suretyship.

3. Where there are co-sureties, the release by the creditor of

one of them does not discharge the other nor does it free the
surety so released from his responsibility to the other
sureties. [Section 138]
4. By Creditor's Act or Omission Impairing Surety’s
Eventual Remedy [Section 139]. 81
If a creditor does any act which is inconsistent with the rights
of the surety, or omits to do an act which is his duty to the
surety requires him to do, and the eventual remedy of the
surety himself against the Principal debtor is thereby
impaired, the surety is discharged.

Example I: - B contracts to build a ship for C for a given sum,

to be paid by installments as the work reaches certain stage. A
becomes surety to C for B's due performance of the contract.
C, without the knowledge' of A, prepays to B the last two
instalments. A is discharged by this prepayment.

Example II: - C lends money to B on the security of a joint

and several promissory note, made in Cs favor by B, and by A
as surety for B, together with a bill of sale of Bs furniture,
which gives power to C to sell the furniture, and apply the
proceeds in discharge of the note. Subsequently, C sells the
furniture, but, owing to his misconduct and willful
negligence, only a small price is realized. A is discharged from
liability on the note.

5. Loss of Security [Section 141]

If the creditor loses, or without the consent of the surety,
parts with security given to him, the surety is discharged
from liability to the extent of the value of security.
Example: - A gave a loan to B on the guarantee of C as well as
on the mortgage of Bs furniture. Afterwards, A cancels the
mortgage. B becomes insolvent and A sues C on this
guarantee. C is discharged from liability to the value of
furniture.

BY INVALIDATION OF CONTRACT
1. Guarantee Obtained by Misrepresentation [Section 142]
Any guarantee which has been obtained by means of
misrepresentation made by a creditor or with his knowledge 82
and assent, concerning a material part of the transaction, is
invalid.

2. Guarantee Obtained by Concealment [Section 143]

Any guarantee which a creditor has obtained by means of
keeping silence to material circumstances is invalid

Example: - X employs Y as a clerk to collect money for him. Y

fails to account for some of his receipts and X, in
consequence calls upon Z to furnish security for his duly
accounting. Z gives guarantee for Ys duly account. X does not
inform Z about Ys previous conduct. Y, afterwards, makes
default. Z is not liable because the guarantee was obtained by
concealment of facts.

3. Failure of Co-surety to Join a Surety [Section 144]

Where a person gives a guarantee upon a contract that a
creditor shall not act upon it until another person has joined
in it as co-surety

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

Guarantee
There are three parties, Principal debtor, surety and the
Creditor.
There are three contracts between surety, Principal debtor
and creditor.
The object of contract of guarantee is the security of the
creditor.
In guarantee the liability of surety is only secondary, when
Principal debtor defaults.
The liability arises only on the non- performance of an
existing promise or non-payment of an existing debt.
 The surety acts at the request of the Principal debtor. 83
A surety, on discharging the debt of Principal debtor, can
sue 'the Principal debtor in his own.

Indemnity
In indemnity there are two, one who is indemnified and
the other indemnifier.
It consists of only one contract under which indemnifier
promises to pay in the event of certain loss.
The contract of indemnity is made to protect the promise
against some likely loss.
The liability of the indemnifier in a contract of indemnity
is a primary one.
The liability arises only on the happening of a
contingency.
The indemnifier need not act at the request of indemnity-
holder.
The indemnifier cannot sue a third party in his own name
because of absence of privity of contract between him and
a third party. He can sue the third party in his own name
if there in an assignment in his favor.
 BAILMENT

84
Bailment is French word which means “to deliver”. Bailment
is defined in section 148 of Indian contract act, 1872.

Section 148 – Bailment, bailor and bailee defined, 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 the goods is called the “bailor”. The
person to whom they are delivered is called the “bailee”

Explanation – The delivery of goods by one person to

another for some purpose, when the purpose is completed,
goods should return to the owner of goods and it may dispose
if condition or directions given by the delivery done are not
fulfill. Here the owner of goods is “bailor” who delivering the
goods. And bailee is the person to whom goods given or
delivered.
Example 1: Where ‘X’ delivers his car for repair to ‘Y’, ‘X’ is
the bailor and ‘Y’ is the
bailee.
Example 2: X delivers a piece of cloth to Y, a tailor, to be
stitched into a suit. It is contract for bailment .

ESSENTIALS OF BAILMENT

1. Contract
Bailment is usually created by express or implied agreement
between the bailor and the bailee. In some exceptional cases,
bailment is implied by law as between a finder of goods and
the owner.
2. Delivery of the Goods
Bailment necessarily involves delivery of possession of goods
by bailor to bailee.
3. Possession
Ownership is not transferred, only possession in goods is 85
transferred.
4. Modes of Delivery
Delivering bailee may be made by doing anything which has
the effect of putting the goods in the possession of the
intended bailee or of any person authorized to hold them on
his behalf.
5. Purpose
The delivery of goods must be for certain purpose and the
goods must be returned after the specified purpose is
completed.
6. Consideration
The consideration is generally to the form of money
payment either by the bailor or bailee. The detriment
suffered by the bailor, in parting with possession of the goods
is a sufficient consideration to support the contract of
bailment.

TYPES OF BAILMENTS

Based on Benefit
1. Exclusive Benefit of Bailor
Ex- A neighbor of B agrees to look after B’s pet while he is out
station B is benefited.
2. Exclusive Benefit of Bailee
Ex- A lends a book to B for reading B is benefited.
3. Mutual Benefit of Both
Ex- A furnished furniture from B, by payment of hire
charges. Both A &B benefited.

Based on Reward
1. Gratuitous Bailment
Bailment without reward or consideration. Bailment is not
liable to bailee for loss due to defects in the goods if he does
not know those defects. It is presumed that all expenses are to
be borne by bailor. Bailment can be terminated at any point 86
of time before specified period or specified purpose for
which it was bailed but bailee can take compensation if he
invested on goods and before purpose done. Bailment comes
to ends by death of bailor or bailee.
Ex- A person lends a book to his friend for reading.

2. Non-Gratuitous Bailment
Bailment in which consideration passes between bailor &
bailee. Bailor is liable to bailee for loss due to defects in goods
whether he knows those defects or not. Unless otherwise
agreed upon, only extraordinary expenses are to be borne by
bailor ordinary expenses shall be borne by bailee. Bailment
can be terminated only on the expiry of the specified
purpose. Death of bailor /bailee does not affect the contract.
Ex- A hires a book from a lending library, consideration
being the membership fee or payment as a percentage on
value of book.

DUTIES OF BAILOR

1. Bailor’s duty to disclose fault in goods bailed [Section 150]

Ex- 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.

2. Duty to pay necessary expenses [Section 158]

Ex- A hired a taxi from B for the purpose of going to Gurgaon
from Noida, during the journey, a major defect occurred in
the engine. A had to pay Rs 5000 as repair changes. These are
the extraordinary expenses and it is the bailor’s duty to bear
such expenses. However, the usual and ordinary expenses for
petrol, toll tax etc. are to be borne by the bailee itself.
3. Duty to indemnify the bailee for premature termination
[Section 159] 87
The bailor must compensate the bailee for the loss or damage
suffered by the bailee that is in excess of the benefit received,
where he had lent the goods gratuitously and decides to
terminate the bailment before the expiry of the period of
bailment.

4. Bailor’s responsibility to bailee [Section 164]

Ex- X delivered his car to S for five days for safe keeping.
However, X did not take back the car for one month. In this
case, S can claim the necessary expenses incurred by him for
the custody of the car.

DUTIES OF BAILEE

1. Take care of goods [Section 151 & 152]

Ex- if X bails his ornaments to ‘Y’ and ‘Y’ keeps those
ornament in his own locker at his house along with his own
ornaments and if all the ornaments are lost/stolen in a riot ‘Y’
will not be keep them in a bank, but ‘Y’ keeps them at his
residence, then ‘Y’ would be responsible for the loss (caused
on account of riot).

2. Not to make inconsistent use of good [Section 153 & 154]

Ex- A lends a horse to B for his own riding only. B allows C, a
member of his family, to ride the horse. C rides with care, but
the horse accidentally falls and is injured. B is liable to make
compensation to A for the injury done to the horse.

3. Not to mix the goods [Section 155, 156 and 157]

Ex- A bails a barrel of Cape flour worth 4500 to B. B, without
A’s consent, mixes the flour with country flour of his own,
worth only 2500 a barrel. B must compensate A for the loss of
his flour.
4. Return the goods [Section 160 & 161]
Ex- X delivered books to Y to be bound. Y promised to return 88
the books within a reasonable time. X pressed for the return
of the book. But Y, failed to deliver them back even after the
expiry of reasonable time. Subsequently the books were
burnt in an accidental fire at the premises of Y. In this case Y
was held liable for the loss.

5. Return an accretion from the goods [Section 163]

Ex- A leaves a cow in the custody of B. The cow gives birth a
calf. B is bound to deliver the calf as well as the cow to A.

6. Not to setup Adverse Title [Section 163]

Ex- Bailee must not set up a title adverse to that of the bailor.
He must hold the goods on behalf of and for the bailor. He
cannot deny the title of the bailor.

RIGHT OF A BAILOR

1. Right to terminate the bailment [Section 153]

A contract of bailment is voidable at the option of the bailor,
if the bailee does any act with regard to the goods bailed,
inconsistent with the conditions of the bailment.

2. Premature termination [Section 159]

When the goods are lent gratuitously, the bailor can demand
back the goods at any time even before the expiry of the time
fixed or the achievement of the object.

3. Right to file a suit against a wrong doer [Section 180 & 181]
If a third person wrongfully deprives the bailee of the use or
possession of the goods bailed, or does them any injury, the
bailee is entitled to use such remedies as the owner might
have used in the like case if no bailment had been made; and
either the bailor or the bailee may bring a suit against a third
person for such deprivation or injury.
89
4. Apportionment of relief or compensation obtained by
such suits [Section 181]
Whatever is obtained by way of relief or compensation in any
such suit shall, as between the bailor and the bailee, be dealt
with according to them respective interests.

5. Right to sue the bailee

The bailor has a right to sue the bailee for enforcing all the
liabilities and duties of him. It includes:
Right to claim compensation for loss caused to the goods
by the negligence of the bailee.
Right to claim compensation for unauthorized mixing of
goods
Right to claim damages for unauthorized use of the goods
Right to demand back goods.
Right to any accretion to the goods bailed

RIGHT OF A BAILEE

1. Right to deliver the goods to any one of the joint bailors

[Section 165]
If several joint owners bailed the goods, the bailee has a right
to deliver them to any one of the joint owners unless there
was a contract to the contrary.

2. Right to indemnity [Section 166]

Bailee is entitled to be indemnified by the bailor for any loss
arising to him by reasons that the bailor was not entitled to
make the bailment or to receive back the goods or to give
directions in respect to them. If the bailor has no title to the
goods, and the bailee in good faith, delivers them back to, or
according to the directions of the bailor, the bailee shall not
be responsible to the owner in respect of such delivery. Bailee
can also claim all the necessary expenses incurred by him for 90
the purpose of gratuitous bailment.

3. Right to claim compensation in case of faulty goods

[Section 150]
A bailee is entitled to receive compensation from the bailor
or any loss caused to him due to the failure of the bailor to
disclose any faults in the goods known to him. If the bailment
is for hire, the bailor will be liable to compensate even though
he was not aware of the existence of such faults.

4. Right to claim extraordinary expenses [Section 158]

A bailee is expected to take reasonable care of the gods bailed.
In case he is required to incur any extraordinary expenses, he
can hold the bailor liable for such expenses.

5. Right to apply to court to decide the Title to the goods

[Section 167]
If the goods bailed are claimed by the person other than the
bailor, the bailee may apply to the court to stop its delivery
and to decide the title to the goods.

6. Right of particular lien for payment of service [Section

170]
Where the bailee has
in accordance with the purpose of bailment,
rendered any service involving the exercise of labour of
skill,
in respect of the goods, he shall have
in the absence of a contract to the contrary, right to retain
such goods, until he receives due remuneration for the
services he has rendered in respect of them. Bailee has,
however, only a right to retain the article and not to sell it.
The service must have entirely been formed within the
time
agreed or a reasonable time and the remuneration must have
become due. This right of particular lien shall be available 91
only against the property in respect of which skill and labour
has been used.

7. Right of general lien [Section 171]

General Lien
This is the right to retain any property, which belongs to
other party in respect of any payment due, provided the
property is in the possession of the person exercising the
right. This right to retain any property belonging to the other
party for general balance of account. Bailee is unpaid and
bailee needs not have worked upon the goods bailed. Persons
who entitled are Bankers, Factor, Wharfingers, Attorneys of
high court & policy brokers.

Particular Lien
Bailee is entitled to retain such goods on which he has
worked, i.e., particular goods, until the due remuneration is
paid to him. This aright to retain the goods only for a change
for labor employed or expenses incurred upon the goods.
Bailee has worked upon the goods and remuneration remains
unpaid. Any bailee who has rendered some service by
exercise of his skills and labor in respect of the goods balled.

TERMINATION OF BAILMENT

1. Expiry of specified period

When bailment is for specific period, it terminates on the
expiry specified period.
2. Accomplishment of specified purpose
Where bailment is for a specified purpose, it terminates when
such purpose is accomplished.
3. Bailee’s act inconsistent with conditions
When bailee does some act, which is inconsistent with the 92
terms and condition of bailment the bailor may terminate the
bailment.
4. Destruction of subject matter
When goods bailed are destroyed, bailment ends.
5. Gratuitous bailment
Gratuitous bailment can be terminated at any time. Also, a
gratuitous bailment end by the death of either end by the
bailor or bailee.

CASES LAWS RELATED TO BAILMENT

Hotel Loses Guest’s Valuable Jewelry

At Hotel in Minnesota, a guest left a valuable ring with the
desk clerk, with instructions for the ring to be delivered to a
jeweler. The desk clerk lost the ring, so it was never delivered
to the jeweler, and he never reported to either his employer,
or the guest, that it had been lost.
The guest sued the hotel as the bailee of the ring, as she had
delivered possession of the ring to the hotel’s employee for
the purpose of having it delivered to the jeweler. The guest
proved to the trial court’s satisfaction that, as a bailee, the
hotel was liable for the jewelry, and awarded damages in the
amount of over $2,000.
The hotel appealed the decision to the Minnesota Supreme
Court, arguing that, in order for a bailment to exist, there
must be a mutual agreement between the parties. Since the
hotel had never consented to become a bailee, it cannot be
held responsible. The hotel also argued that, because it did
not know the value of the ring in question, it was not a bailee.
The hotel further argued that it received no consideration or
benefit for taking care of the ring.
The Minnesota Supreme Court affirmed the trial court’s
decision saying:
The hotel’s desk clerk consented to a bailment on behalf
of his employer,
 The hotel’s desk clerk new that he had accepted control of
a valuable ring, 93
The hotel took possession of the ring as part of its regular
business services, and so generated good will and return
guests as a result of those services.

Hyman & Wife vs. Nye & Sons

The plaintiff hired from the defendant for a specific journey

of a carriage, a pair of horses and a driver. During the journey
a bolt in the under-part of the carriage broke, the splinter bar
became displaced, the carriage was upset and the plaintiff
injured. Holding the defendant liable, justice Lindley said: “A
person who lets out carriages is not responsible for all defects
discoverable or not; he is not an insurer against all the defects
which care and skill guard against. His duty is to supply a
carriage as fit for the purpose for which it is hired as care and
skill can render it”.

Reed vs. Dean

The plaintiff hired a motor launch from the defendant for a

holiday on the river Thames. The launch caught fire, and the
plaintiffs were unable to extinguish it, the fire-fighting
equipment being out of order. They were injured and
suffered loss. The court held that there was an implied
undertaking that the launch was as fit for the purpose for
which it was hired as reasonable care and skill could make it.
The defendant was accordingly held liable.

Lyell vs. Ganga Das

Goods consigned without disclosing that they were

combustible. Where a bailor delivers goods to another for
carriage or for some other purpose, and if the goods are of
dangerous nature, the fact should be disclosed to the bailee.
 PLEDGE

Section 172 of the Indian Contract Act, 1872 defines Pledge as 94

a special type of bailment. Similar to a bailment, there is a
delivery of goods but it differs in its object of delivery.

Difference between Pledge and Bailment

Bailment [Section 148]
Transfer of goods for a specific purpose. The person who
delivers the goods is called as ‘bailor’ and the person who
receives such goods is called as ‘bailee’. Consideration may or
may not be there. Bailee has no right to sell the pledged
goods.
Pledge [Section 172]
Transfer of goods as security for repayment of debt. The
person who delivers the pledged goods is called as ‘pawnor’
and the person who receives such goods is called as ‘pawnee’.
Consideration is always there. The pledgee has the right to
sell the goods.

WHAT ARE THE INGREDIENTS OF A PLEDGE?

Delivery of Possession
For a contract of pledge, the most important element is the
delivery of the pledge to the pawnee. This delivery can be in
different forms:
1. Actual Delivery- It is also known as a physical delivery
where the goods are directly handed over to the
buyer/agent in his behalf.
2. Symbolic Delivery- If the goods are heavy or bulky, the
delivery can be made by indicating a signal. In such a case,
the actual delivery is not done but the means of
transferring of possession is done.
3. Attornment/ Constructive Delivery- In constructive
delivery the individual possessing the products (third
person) recognizes that he holds the merchandise for the
benefit of, and at the disposal of the purchaser.
Contract
Pawnor has delivered the possession of goods in pursuance of 95
a contract of pledge. Delivery of possession can be:
Simultaneous with advance
After getting advance
Before the advance
In Blundell leigh v. Attenborough. A gave B a diamond ring for
the purpose of valuation and to let her know and to what
credit can she secure on their value. On the same by B
pledged the ring with C for 1000 pound on the next day B
gave A 500 pounds. It was held that pledge was valid.

Transfer of Ownership
In Morvi Mercantile Bank Ltd V Union of India, the position of
the pledgee was discussed. It was held that while the pledgee
has possession of the goods, it is sufficient to create a pledge.
The majority was of the opinion that the ‘railway receipt’ was
equated in the same relation as ‘delivery of goods.’
Thus, it was held that the ownership will remain with the
pledgor even when the possession is transferred to the
pledgee. This is a temporary possession that is vested with the
pledgee until the loan is repaid.

Security
The pledge contract can only be activated on the condition
that the security (property) shall be returned:
When the loan is repaid
Upon fulfilment of the promise

Bailment
Since pledge is a kind of a bailment, all the essentials of a
bailment must be present. A pledge can be made only for
movable goods.
RIGHTS OF THE PAWNEE

96
The rights of the Pawnee are defined under Section 173 of the
ICA, 1872. These include:

Right of Retainer
Pawnee has a right to retain the goods pledged until payment
of debt, interest and any other expense incurred for
maintenance of such goods. S. 174- “Pawnee not to retain for
debt or promise other than that for which goods pledged:
Presumption in case of subsequent advances.” The pledgee
can retain the goods only for the payment of that particular
debt for which the goods were pledged and not for any other
debt or promise, unless there is a contract to the contrary.
Ex- X pledges his gold jewellery for some loan from a bank.
In such a case bank has all the rights to retain the gold
jewellery not only for adjustment of loan amount but also for
payment of interest accrued on such loan amount.

Right to extraordinary expenses (S.175)

The pawnee is entitled to receive from the pawner,
extraordinary expenses for preservation of the goods
pledged.

Right to Sell (S. 176)

The pawnee has the right to sell the goods after giving
‘reasonable’ notice and time to the pawner. He has the right to
sue the pawner for defaulting of payment and after sufficient
notice can sell the property to recover the money as well.
In Lallan Prasad v Rahmat Ali the pledgee was unable to
return the goods to the pledgor and the Supreme Court held
that there can be no judgement for the debt.

RIGHTS OF THE PAWNER

97
Right to Redeem (S. 177)
Perhaps the most valuable right to the Pawner, he has the
right to redeem his property upon:
Redemption of goods upon making payment of debt- In
Jasivantrai Manilal Akhaney v State of Bombay, the SC held
that it is the right of the pledger to claim for the property
after the due payment of debt. This right is available to the
pledger until the pledgee has lawfully sold the property.
Right to claim for damages and loss upon conversion- The
Pledger has the right to claim for any damage or loss
occurred to the goods under the possession of the pledgee.
In M.R. Dhawan v Madan Mohan, the pledge was of certain
shares in a company that the pledgee had doubled and
increased in profits. It was later held that these shares will
belong to the pledger.

WHO CAN PLEDGE?

S. 178 and S. 179 provide for certain circumstances in which a

person, in the possession of the pledge, can sell the property
without the consent of the owner.

1. Mercantile Agent
A mercantile agent, who is, with the consent of the owner, in
possession of the goods or of the documents of title to goods,
can make a valid pledge of the goods while acting in the
ordinary course of business of a mercantile agent. This type
of pledge can only be activated if the pawnee has acted in
good faith and in the ordinary course of business.

2. Possession under a voidable contract

A person having possession of goods under a voidable
contract can make a valid pledge of the goods so long as the
98
contract is not rescinded.

3. Possession with co- owner

If one of several co-owners is in sole possession of the goods
with the consent of the owners, he can make a valid pledge of
the goods.

4. Pledge by seller/buyer after the sale

A seller, who has got possession of goods even after the sale
can make a valid-pledge, provided the pawnee's act in good
faith.

5. Pledge by buyer in possession of goods before sale

Sometimes, a buyer may obtain possession of the goods with
the consent of the seller before sale.
 AGENCY

"Agent" is defined in Section 182 of the Act in the following 99

words: S. 182. "Agent" and "Principal" defined: 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".
But the above "definition is wide enough to embrace a servant
pure and simple, even a casual employee, a man who is
engaged by me in the street to black my boots; but it cannot
for a moment be contended that they are all to be placed in
the same category."
"The essence of the matter is that the Principal authorised the
agent to represent or act for him in bringing the Principal
into contractual relation with a third person." In legal sense,
The distinguishing feature of an agent is Representative
character and derivative authority. Means an Agent is a
person who represents his Principal and has Authority to
make contractual obligation with third person on behalf of
his Principal.

TEST OF DETERMINING EXISTENCE OF AGENCY

RELATIONSHIP

The test of determining the existence of agency relationship

has been explained by Dhawan J of the Allahabad High Court
in the following words: It has been held in several decisions
that the fact that the parties have called their relationship an
agency is not conclusive, if the incidence of this relationship,
as disclosed by evidence does not justify a finding of agency,
and that the court must examine the true nature of the
relationship and the functions and responsibilities of the
alleged agent.
A person does not become an agent merely because he gives
advice in matters of business. A "procurement agent" has been
held to be not an agent, as he is only a person directed to do
an act on a commission and not to represent another. 100
Similarly, where a person was authorized by the Government
of India to procure rice in Nepal, to have it milled at a
specified mill in Bihar and to dispatch it to different States as
directed, he was held to be an agent of the State.

AGENCY IN HIRE-PURCHASE TRANSACTIONS

Hire Purchase transaction generally involves three parties, the

dealer, who provides the goods; the financier, who provides
money to the dealer and the hirer, who takes the goods and
pays hire-purchase installments to the financier. The Hire
Purchase Act, 1972 (repealed) regards the dealer as an agent
of the financier for some purposes; one of them is that if any
representations are made by the dealer to promote the sale of
the product, he would be deemed to be an agent of the
financier.
In Mercantile Credit Co Ltd v Hatnblin it was stated that the
dealer is a party to the hire-purchase transaction in his own
right and not as a representative of any other party, though
for many purposes he is an intermediary between the two
others. In Financings Ltd v Stimson it was considered that the
dealer is an agent of the finance company for many purposes
of law.

SOME FEATURES OF CONTRACT OF AGENCY

1. The Principal should be competent to contract

Section 183 of Indian Contract Act says, Any person who is of
the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent. It
means that a minor cannot employ an agent. Denning LJ
observed in Shephard v Cartwright, An infant cannot appoint
an agent to act for him neither by means of a power of
attorney, nor by any other means. If he purports to appoint
an agent, not only is the appointment itself void, but 101
everything done by the agent on behalf of the infant is also
void and incapable of ratification.

2. The agent may not be competent to contract

Section 184 of Indian contract Act says, as between the
Principal and third persons, any person may become an
agent, but no person who is not of the age of Majority and of
sound mind can become an agent, so as to be responsible to
his Principal according to the provisions in that behalf herein
contained.
In Mohomedally Ebrahim Pirkhan v Schiller, it was held that
an agent incurs no personal liability while contracting for his
Principal and, therefore, it is not necessary that he should be
competent to contract. Thus a person may contract through a
minor agent, but the minor will not be responsible to his
Principal.

3. No consideration is necessary to create an agency

Section 185 provides that no consideration is necessary to
create an agency. Generally an agent is remunerated by way
of commission for services rendered, but no consideration is
immediately necessary at the time of appointment.

DIFFERENT KINDS OF AGENT

The agents are of various kinds depending on kind of the

authority given to the agent to act on behalf of Principal.

Auctioneers
An auctioneer is an agent whose business is to sell goods or
other property by auction. He has the authority of selling but
not to give warranties on behalf of seller. He is the mercantile
agent under Sec 2(9) of Sales of Goods Act.
Factor
The word 'factor' in India as in England means an agent 102
entrusted with the possession of goods for the purpose of
selling them. He is a mercantile agent whose ordinary course
of business is to dispose of goods, of which he is entrusted
with the possession or control by his Principal.

Brokers
A broker is also a kind of mercantile agent. He is appointed to
negotiate and make contracts for the sale or purchase of
property on behalf of his Principal, but is not given
possession of the goods.

Del credere Agent

It is another type of mercantile agent. Where an agent
undertakes, on the payment of some extra commission, to be
liable to the Principal for the failure of the third party to
perform the contract, he is called del credere agent and his
extra commission for the guarantee is known del credere
commission.
The position of such agent was explained in Hastie v
Couturier. If a third person fails to pay for the goods supplied
to him, the Principal can bring an action against del credere
agent for the same.
The nature of liability incurred by a del credere agent has
been explained by the Allahabad High Court in the following
words:"A del credere agent incurs only a secondary liability
towards the Principal. His legal position is partly that of an
insurer and partly that of a surety for the parties with whom
he deals to the extent of any default by reason of any
insolvency or something equivalent. His liability does not go
to the extent of making him responsible to the Principal
where there can be no profit by reason of any stringency in
the market."
Sub-Agent
103
An agent appointed by an agent. Sub-agency denotes
delegation of power by an agent to a person appointed by
him as sub-agent. Incidentally the agent himself is delegate of
his Principal. The Principal is that ‘a delegate cannot
delegate’. According to this, a person to whom powers have
been delegate cannot delegate them to another.
Section 190 of the Act, contains this Principal. Generally, an
agent cannot lawfully employ another to perform acts, which
he has expressly. But, if by the ordinary custom of trade, a
sub-agent may be employed, the agent may to do so.
A sub-agent, according to section 191, is a person whom the
original agent employs in the business of the agency and who
under the control of the original agent. Thus, the relation of
the sub-agent to the original agent is, as between themselves,
that of the agent and the Principal.
1. In case of proper appointment: The agent is responsible
to the Principal for the acts of the sub-agent. Thus, a
commission agent for the sale of goods who makes a
proper employment of a sub-agent for selling his
Principal’s goods is liable to the Principal for the
fraudulent disposition of the goods by sub-agent within
the course of his employment.
2. In the case of appointment without authority: In term of
Section 193, the Principal is not bound by the acts of the
sub-agent, nor is the sub-agent liable to the Principal. The
agent is the Principal of the sub-agent both to the
Principal and the third party.

Substituted Agent
Substituted agents are different from sub-agents. Section 194
provides that substituted agents are not sub-agents but are in
fact agents of the Principal. Suppose an agent has an implied
authority to name another person to act for the Principal in
the business of the agency, and he has named another person 104
accordingly. In the circumstances, such a named person is not
a subagent he is an agent of the Principal for such part of the
business of the agency as has been entrusted to him.

For Example: A directs B who is a solicitor to sell his estate by

auction and to employ an auctioneer for the purpose. B
names C, an auctioneer, to conduct the sale. In such a
situation, C is not sub-agent, but is A’s agent for the sale.

Co-Agent
Agents together appointed to do an act jointly. When a
Principal appoints two or more persons agents jointly or
severally, such agents are known as co-agents. Their authority
is joint when nothing is mentioned about the exercise of their
authority. It implies that all co-agents concur in the exercise
of their authority unless their authority is fixed. But when
their authority is several any one of the co-agents can act
without the concurrence of other.

MODE OF CREATION OF AGENCY

There are various ways or modes by which the relationship of

Principal and agent may arise.
1. By actual authority being conferred on the agent to act on
behalf of the Principal. Such authority may be either
express or implied.
2. By agent’s authority to act on behalf of the Principal in a
situation of ‘emergency’.
3. By the conduct of the Principal, which creates an agency
on the basis of the law of estoppel.
4. By ratification of the agent’s act by the Principal, even
though the same has been done without the Principal’s
prior authority.
5. By presumption of agency in husband- wife relationship.
105
Acts done with Principals actual authority:
Section 187 defines Express and Implied Authority as –

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

Implied Authority
An authority is said to be Implied when it is to be inferred
from the circumstances of the case. Implied agreements are
unexpressed agreement. Implied agreements/agency arises
from the conduct, situation or relationship of the parties.
It may be inferred from circumstances of the case, Implies
agency may come from different cases.

Implied authority is of four main types:

1. Incidental authority- doing something that is incidental
to the due performance of express authority
2. Usual authority- doing that which is usually done by
persons occupying the same position
3. Customary authority- doing something according to the
pre-established customs of a place where the agent acts
4. Circumstantial authority- doing something according to
the circumstances of the case.

Chairman L.I.C v. Rajiv Kumar Bhaskar

In this case, as per the salary saving scheme of L.I.C, the

employer was supposed to deduct the premium from the
employee’s salary and deposit it with L.I.C. Upon the death of
the employee, it was found by his heirs that the employer has
defaulted in doing so, causing the policy to lapse. A clause in
the acceptance letter was referred to, in which the employer
had said that he would act as the agent of the employee and
not as that of L.I.C. It was held that the employer was acting
as the agent of the company, thereby making the company 106
(L.I.C) responsible as a Principal due to the fault of the Agent
(the employer).

Agents authority in an Emergency

In a situation of necessity, one person can act on behalf of
another to save the person from any loss or damage, without
expressly being appointed as an agent. This creates an agency
out of necessity. (Sections 188 and 189):
In certain circumstances, a person who has been entrusted
with another’s property may have to incur unauthorized
expenses to protect or preserve it. This is called an agency of
necessity.

Ex- A sent a horse by railway. On its arrival at the destination,

there was no one to receive it. The railway company, is bound
to take reasonable steps to keep the horse alive, was an agent
of the necessity of A.
Ex- ‘A’ a common interest carrier carries dairy product of ‘B’
from Kathmanduto Narayan ghat because of landslide, the
carrier sold all dairy product on the way(transit) otherwise
there was chance of damage of all goods. In such case ‘B’
cannot sue against ‘A’ because of no authority. Here ‘A’ is
treated as an agent of ‘B’ by necessity.
In certain urgent circumstance the law confers an authority
on a person to act as an agent for the benefit of another such
agency is called an agency of necessity. In such cases, the
agent must act in good faith and have to protect and preserve
the interest of the Principal. A wife deserted by her husband
and thus forced to live separate from him can pledge her
husband’s credit to buy all necessaries of life according to the
position of the husband even against his wishes.
Conditions for Application of the Agency by Necessity
The conditions which enable a person to act as an agent of 107
necessity of another have been stated by McCardie J in
Prager v Blastpiel Stamp & Heacock Ltd.
Inability to Communicate with Principal.
Act should be reasonably necessary.
Bona fide in the interest of party concerned.

Principal bound by Estoppel (Section 237)

An agency can also be created by estoppel. In a situation
where one person behaves in such a manner in front of a
third person, as to make someone believe he is an authorized
agent on behalf of someone, an agency by estoppel is created.
Principal allows third party to believe agent has
power/authority to act on its behalf. Agent has apparent (also
called “ostensible”) authority. The Principal is estopped
(prevented) from denying that agent had not authority.
If a person represents by words or conduct the transaction
which are favourable to him, and disown others. If he makes
'a ratification, it is deemed to be the ratification of the whole
of the act.

Ratified act should not be injurious to a third person

(Section 200)
If ratification of an act done without the authority of a person
would result in injury to the interest of a third person, the
ratification would be invalid. Section 200 makes the
following provision in this regard:
"200. Ratification of unauthorized act cannot injure third
person.-An act done by one person on behalf of another,
without such other person's authority, which if done with
authority, would have the effect of subjecting a third person
to damages, or of terminating any right or interest of a third
person, cannot, by ratification, be made to have such effect"
Illustrations
A, not being authorized thereto by B, demands on behalf of B,
the delivery of a chattel, the property of B, from C, that
another person is his agent and third party reasonably 108
believes on such representation and enters into an agreement,
the person who represents so is bound by the act of other this
is known as the agency by estoppel. In this case of agency by
estoppel, the third party must act in good faith and must rely
on a representation of the agent’s authority to act as an agent.

Illustration: ‘A’ consigns goods to ‘B’ for sale and gives him
instructions not to sell under a fixed price. ‘C’ being ignorant
of A’s instruction, enters into contract with B to buy goods at
lower price than reserved price. A is bound by contract.

Principal bound by Ratification

When an act of a person, who acted as another person’s agent
(on his behalf) without his knowledge, is later ratified by that
person, this creates an agency by ratification between the two.
As per Section 196 of the Indian Contract Act, agency by
ratification is said to arise when a person, on whose behalf the
acts are done without his knowledge or authority, expressly
or impliedly accept such acts.

RATIFICATION: (SECTION 196-200)

The doctrine of ratification comes into play when a person

has done an act on behalf of another without his knowledge
or consent. Now its up to that person on whose behalf act is
done, whether to ratify that act or to reject it.
This is ex post facto agency— agency arising after the event.
By this ratification, the contract is binding on Principal as if
the agent had been authorized before. Ratification will have
an effect on the original contract and so the agency will have
effect from the original contract and not on ratification.

S. 196. Right of person as to acts done for him without his

authority:
Effect of ratification.-
Where acts are done by one person on behalf of another, but 109
without his Knowledge or authority, he may elect to ratify or
to disown such acts. If he ratifies them, the same effects will
follow as if they had been performed by his authority.
Ratification may be expressed or implied. Section 197
provides: S. 197. Ratification may be expressed or implied.—
Ratification may be expressed or may be implied in the
conduct of the person on whose behalf the acts are done.

Illustrations-
A, without authority, buys goods for B. Afterwards B sells
them to Con his own account; B's conduct implies a
ratification of the purchase made for him by A.
A without B's authority, lends B's money to C. Afterwards
B accepts interest on the money from C B's conduct
implies a ratification of the loan.

Requirements of Ratification

A valid ratification has to fulfil certain conditions. Some of

them are as follows:

1. The act should be done on behalf on another person.

(Section 196)
It is necessary that the act must have been done on behalf of
the person who wants to ratify it. If the agent acts in his own
name and "makes no allusion to agency” his act cannot be
ratified by any other person, even if the agent in his secret
mind intended to act for another. This is the Principal of the
famous case of Keighley Maxseted & Co v Durant.
K.M. &C Co, authorised their agent to buy Karachi wheat at
specified rates on their joint account. Wheat was not
obtainable at those rates. He bought wheat from Durant at a
higher rate. He did so in the hope and confidence that his act
would be adopted by the Principals, but he never mentioned
the Principals and contracted in his own name. The Principals 110
approved the purchase, but, when the price of wheat fell,
refused to take delivery. Durant sued the agent and the
Principals for breach of contract. But the Principals were held
not liable. The agent, having contracted in his own name, his
act was not open to anybody's ratification and, therefore, the
purported ratification was ineffective.

2. Principal should be in existence and competent to

contract
It is necessary that the Principal who purports to ratify must
be in existence at the time of the contract and should also be
competent. It is this Principal which prevents a person from
ratifying a contract made by him during his minority.
Similarly, a company cannot ratify a contract made in its
name before its incorporation.
In Kelner v. Baxter, the promoters of a company, which had
not yet been formed, entered into a contract on behalf of the
company. After the company was formed, it ratified the
contract. Then the company went into liquidation. An action
was brought against the promoters to make them liable on
the contract. They tried to avoid their liability by pleading
that after the contract made by them had been ratified by the
company, their liability was over. It was held that since the
company was not in existence at the time of the doing of the
act, the purported ratification was a nullity, and, therefore,
the liability of the promoters continued in spite of
ratification.
Similarly, a minor's agreement being void ab initio, a minor,
on whose behalf a contract is made, cannot subsequently
ratify the contract and validate it.

3. Ratification may be express or implied: (Section 197)

According to Section 197, ratification may be express or may
be implied in the conduct of the person on whose behalf the 111
acts are done. This may be explained by the following
illustrations:
1. A without authority, buys goods for B. Afterwards, B sells
them to C on his own account B's conduct implies a
ratification of the purchase made for him by A.
2. A, without B's authority, lends B's money to C. Afterwards,
B accepts interest on the money from C. B's conduct
implies a ratification of the loan.

4. Knowledge of facts [S. 198]

S. 198. Knowledge requisite for valid ratification.—No valid
ratification can be made by a person whose knowledge of the
facts of the case is materially defective.
In Savery v. King, A entered into a mortgage agreement on
B's behalf. The agreement was invalid. Without knowing this
fact, B purported to ratify the transaction. It was held that
since B did not know about the invalidity of agreement, the
purported ratification of the same by him, was of no effect.

5. Ratification of the whole transaction (Section 199)

According to Section 199, a person ratifying any unauthorized
act done on his behalf ratifies the whole of the transaction of
which the act formed a part. The object of this provision is
that no Principal may ratify only those parts of the
transaction which are favorable to him, and disown others. If
he makes 'a ratification, it is deemed to be the ratification of
the whole of the act.

6. Ratified act should not be injurious to a third person

(Section 200)
If ratification of an act done without the authority of a person
would result in injury to the interest of a third person, the
ratification would be invalid. Section 200 makes the
following provision in this regard:
112
"200. Ratification of unauthorized act cannot injure third
person.-An act done by one person on behalf of another,
without such other person's authority, which if done with
authority, would have the effect of subjecting a third person
to damages, or of terminating any right or interest of a third
person, cannot, by ratification, be made to have such effect"
Illustrations
1. A, not being authorized thereto by B, demands on behalf
of B, the delivery of a chattel, the property of B, from C,
who is in possession of it. This demand cannot be ratified
by B, so as to make C liable for damage for his refusal to
deliver.
2. A holds a lease from B, terminable on three months'
notice. C, an unauthorized person, gives notice of
termination to A. The notice cannot be ratified by B, so as
to be binding on A.

7. Within reasonable time

A ratification to be effective must come within reasonable
time. If a time is fixed for performance of the contract,
ratification must come before that time otherwise it will be
too late.
For example, a tender for supply of eggs was approved by a
board, but not formally. The time for commencement of
performance was September. Before this date the tender was
withdrawn. The board ratified its approval of the tender on
October 6. It was held this was too late as it was done after the
date fixed for performance.
Similarly, a policy of fire insurance was not allowed to be
ratified after the occurrence of the loss, because the owner
himself could not have insured at that time.

Effects of Ratification
Ratification has the following effects:
113
1. It establishes the relationship of Principal and agent
insofar as the act ratified is concerned between the person
ratifying and the person doing the act.
2. Ratification establishes the relationship of contract
between the Principal and the third party.

Doctrine of Relation Back

The validity of the act relates back to the time of the doing of
the act. In Risbourg v. Bruckner, the act of the agent which
had been done without the Principal's authority was ratified
by the latter. It was held that on ratification, a valid contract
between the Principal and the third person was created from
the date when the agent had done the act, and, therefore, the
agent could not be made personally liable because the agent's
position had become the same as in the case of a previously
authorized act.
The effect of ratification of a contract entered into by the
agent without the Principal's prior authority is that the
contract is deemed to have been made when the agent made
the agreement rather than the date of ratification by the
Principal of that agreement.

Revocation of Offer before Ratification

It has been noted above that upon ratification of a contract by
the Principal, its execution relates back to the time when the
contract was entered into by the agent. If A enters into an
agreement with B (agent) on 1st January, and B's Principal
ratifies the same on 1st February, the date of making of the
contract for all purposes is deemed to be 1st January.
A question has arisen in a number of cases that, if A wants to
revoke his offer before B's Principal has ratified the contract,
can he do so? The question was answered in the negative in
Bolton Partners v. Lambert, and it was held that in spite of the
fact that A seeks to revoke the offer, B's Principal can ratify
the agreement entered into between A and B. In other words, 114
as stated in the above illustration, the contract between A and
B's Principal is deemed to be made on 1st January, and A 115
cannot, therefore, revoke his offer after that.

Agency in Husband-Wife relationship

Generally, there exists no agency between a husband and
wife, except in cases where it has expressly or impliedly been
sanctioned that either of them would do certain acts or
transactions as the agent of the other. That is, a relationship
of agency can come into existence between the two through
contract, appointment, or ratification.
A married woman cohabiting with her husband is presumed
to have the power to pledge the credit of her husband for
necessaries. It means for the domestic use or which may be of
use of her husband, herself or children. If such goods or
services are necessary to the conditions of life of that family,
the husband becomes bound to pay for them. This results in
an agency of necessity where the wife can use her husband’s
credit for what is necessary for her to live. But in cases where
they are separated because of the wife’s own whims or faults,
for no just reason, the husband is not liable for the wife’s
necessaries. If they are living separately, there is presumed to
be no such authority in wife to pledge the credit of her
husband.
This well-known Principal was established in Debenham v
Mellon- The defendant was the manager of a hotel, where his
wife acted as the manageress. They lived together in the same
hotel, but had no domestic establishment of their own. The
wife incurred with a tradesman a debt for clothes, payment
for which was demanded from the husband. But he was held
not liable, the court saying that the mere fact of cohabitation
did not give rise to presumption of agency, unless it was in a
domestic establishment.
Wife as Agent
Where a husband and wife are living together, we presume 116
that the wife has her husband’s authority to pledge his credit
for the purchase of necessaries of life suitable to their
standard of living. In Girdhari Lai v W. Crawford, the
Allahabad High Court held that the husband will not be liable
even if the fact of allowance is not known to the seller. The
husband can negative liability by proving—
1. he had expressly warned the tradesman not to supply
goods on credit to his wife;
2. he had expressly forbidden the wife to use his credit; or
3. he already sufficiently supplies his wife with the articles in
question; or
4. he supplies his wife with a sufficient allowance.

Similarly, where any person is held out by another as his

agent, the third-party can hold that person liable for the acts
of the ostensible agent, or the agent by holding out. Partners
are each other’s agents for making contracts in the ordinary
course of the partnership business.

DUTIES OF AGENT

Duty to execute mandate

The first and the foremost duty of every agent is to carry out
the mandate of his Principal. He should perform the work
which he has been appointed to do.
Thus, for example, in Pannalal Jankidas v Mohanlal: A
commission agent purchased goods for his Principal and
stored them in a godown pending their despatch. The agent
was under instruction to insure them. He actually charged the
premium for insurance, but failed to insure the goods. The
goods were lost in an explosion in the Bombay harbour.
The agent was held liable to compensate the Principal for his
loss minus the amount received under the Bombay Explosion
(Compensation) Ordinance, 1944, under which the 117
Government paid compensation up to fifty percent in respect
of the uninsured merchandise lost in the explosion.

Duty to follow instructions or customs [S, 211]

S. 211. Agent's duty in conducting Principal's business.—An
agent is bound to conduct the business of his Principal
according to the directions given by the Principal, or in the
absence of any such directions, according to the custom
which prevails in doing business of the same kind at the place
where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to
his Principal, and if any profit accrues, he must account for it.

Illustrations
1. A, an agent engaged in carrying on for business, in which)
it is the custom to invest from time to time, at interest, the
moneys which may be in hand, omits to make such
investment. A must make good to B the interest usually
obtained by such investments.
2. B, a broker, In whose business, it is not the custom to sell
on credit, sells goods of A on credit to C, whose credit at
the time was very high. C, before payment, becomes
insolvent. B must make good the loss to A.

In Lilley v Doubleday An agent was instructed to warehouse

his Principal's goods at a particular place. He placed a part of
them at a different warehouse which was equally safe. But the
goods were destroyed without negligence. The agent was held
liable for the loss. Any disobedience of, or departure from,
the instructions makes the agent absolutely liable for the loss.
Duty of reasonable care and skill [S. 212]
S. 212. Skill and diligence required from agent.—An agent is 118
bound to conduct the business of the agency with as much
skill as is generally possessed by persons engaged in similar
business, unless the Principal has notice of his want of skill.
The agent is always bound to act with reasonable diligence,
and to use such skill as he possesses; and to make
compensation to his Principal in respect of the direct
consequences of his own neglect, want of skill or misconduct,
but not in respect of loss or damage which are indirectly or
remotely caused by such neglect, want of skill, or misconduct.

Illustrations
1. A, a merchant in Calcutta, has an agent, B ,in London, to
whom a sum of money is paid on A's account, with orders
to remit. B retains the money for a considerable time. A,
in consequence of not receiving the money, becomes
insolvent. B is liable for the money and interest from the
day on which it ought to have been paid, according to the
usual rate, and for any further direct loss—as e.g., by
variation of rate of exchange—but not further.
2. A, an agent for the sale of goods, having authority to sell
on credit, sells to Bon credit, without making the proper
and usual enquiries as to the solvency of B. B ,at the time
of such sale, is insolvent. A must make compensation to
his Principal in respect of any loss thereby sustained.

Duty to avoid conflict of Interest

S. 215. Right of Principal when agent deals, on his own
account, in business of agency without Principal's consent.—If
an agent deals on his own account in the business of the
agency, without first obtaining the consent of his Principal
and acquainting him with all material circumstances which
have come to his own knowledge on the subject, the Principal
may repudiate the transaction, if the case shows, either that
any material fact has been dishonestly concealed from him
by the agent, or that the dealings of the agent have been 119
disadvantageous to him.

Illustrations
1. A directs B to sell A's estate. B buys the estate for himself
in the name of C.A, on discovering that B has bought the
estate for himself, may repudiate the sale, if he can show
that B has dishonestly concealed any material fact, or that
the sale has been disadvantageous to him.
2. A directs B to sell A's estate. B, on looking over the estate
before selling it, finds a mine on the estate which is
unknown to A.B informs A that he wishes to buy the estate
for himself, but conceals the discovery of the mine. A
allows B to buy in ignorance of the existence of the mine.
A, on discovering that B knew of the mine at the time he
bought the estate, may either repudiate or adopt the sale
at his option.

S. 216. Principal's right to benefit gained by agent dealing on

his own account in business of agency. —if an agent, without
the knowledge of his Principal, deals in the business of the
agency on his own account instead of on account of his
Principal, the Principal is entitled to claim from the agent any
benefit which may have resulted to him from the transaction.

Illustration
A directs B, his agent, to buy a certain house for him .B tells A
it cannot be bought, and buys the house for himself. A may,
on discovering that B has bought the house, compel him to
sell it to A at the price he gave for it.

Duty not to make Secret Profit

Another aspect of this Principal is the duty of the agent not to
make any secret profit in the business of agency. His
relationship with the Principal is of fiduciary nature and this
requires absolute good faith in the conduct of agency. Secret
profit means any advantage obtained by the agent over and 120
above his agreed remuneration and which he would not have
been able to make but for his position as agent.

Duty to remit sums [S. 218]

S. 218. Agent's duty to pay sums received for Principal:
Subject to such deductions, the agent is bound to pay to his
Principal all sums received on his account.

Duty to maintain accounts [S. 213]

S. 213. Agent's accounts: An agent is bound to render proper
accounts to his Principal on demand. Accounts are necessary
for the proper performance of the agent's other duties, for
example, the duty to remit sums to the Principal." There is no
provision in the Act enabling an agent to institute a suit for
accounts against the Principal.
The Supreme Court in Narandas Morardas Gajiwala v
S.P.A.M. Papammal laid down that the provisions of the
Contract Act are not exhaustive in this regard and that the
right of an agent to sue the Principal for accounts is an
equitable right arising under special circumstances. One of
those special circumstances is where all the accounts are in
the possession of the Principal.

Duty not to delegate [S. 190]

S. 190. When agent cannot delegate: An agent cannot
lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally,
unless by the ordinary custom of trade a sub-agent may, or,
from the nature of the agency, a sub-agent must, be
employed.
It was laid down in John McCain and Co v Pow" that unless so
authorised by the Principal, an estate agent has no right to
appoint a sub-agent and delegate to him his powers which
require special skill and care.
S. 191. "Sub-agent" defined.—A "sub-agent" is a person
employed by, and acting under the control of, the original 121
agent in the business of the agency.
When a sub-agent is appointed, what relationship is
constituted between the Principal and the sub-agent and the
agent? The answer depends upon whether the sub-agent has
been properly or improperly appointed.

Improper delegation [S. 193]

S. 193. Agent's responsibility for sub-agent appointed without
authority.—Where an agent, without having authority to do
so, has appointed a person to act as a sub-agent, the agent
stands towards such person in the relation of a Principal to an
agent, and is responsible for his acts both to the Principal and
to third persons; the Principal is not represented by or
responsible for the acts of the person so employed, nor is that
person responsible to the Principal.

Proper delegation [S. 192]

S. 192. Representation of Principal by sub-agent properly
appointed.— Where a sub-agent is properly appointed, the
Principal is so far as regards third persons, represented by the
sub-agent and is bound by and responsible for his acts, as if
he were an agent originally appointed by the Principal.

Agent's responsibility for sub-agent: The agent is responsible

to the Principal for the acts of the sub-agent.

Sub-agent's responsibility: The sub-agent is responsible for

his acts to the agent, but not to the Principal, except in case of
fraud or wilful wrong.

Substituted agent [Ss. 194-195]

S.194. Relation between Principal and person duly appointed
by agent to act in business of agency.—Where an agent,
holding an express or implied authority to name another
person to act for the Principal in the business of the agency,
122
has named another person accordingly, such person is not a
sub-agent but an agent of the Principal for such part of the
business of the agency as is entrusted to him.

Illustrations
1. A directs B, his solicitor, to sell estate by auction, and to
employ an auctioneer for the purpose. B names C, an
auctioneer, to conduct the sale. C is not a sub-agent, but is
A's agent for the conduct of the sale.
2. A authorizes B, a merchant in Calcutta to recover the
moneys due to A from C &Co B instructs D ,a solicitor, to
take legal proceedings against C &Co, for the recovery of
the money. D is not a sub-agent, but is solicitor for A.

S. 195. Agent's duty in naming such person-

In selecting such agent for his Principal, an agent is bound to
exercise the same amount of discretion as a man of ordinary
prudence would exercise in his own case; and, if he does this,
he is not responsible to the Principal for the acts or
negligence of the agent so selected.

Illustrations
1. A instructs B ,a merchant, to buy a ship for him. 6
employs a ship surveyor of good reputation to choose a
ship for A .The surveyor makes the choice negligently and
the ship turns out to be unseaworthy and is lost. B is not,
but the surveyor is, responsible to A.
2. A consigns goods to 6, a merchant, for sale. 6, in due
course, employs an auctioneer in good credit to sell the
goods of A ,and allows the auctioneer to receive the
proceeds of the sale. The auctioneer afterwards becomes
insolvent without having accounted for the proceeds. B is
responsible to A for the proceeds.
RIGHTS OF AGENT AND DUTIES OF PRINCIPAL

123
The following are some of the important rights of an agent:

Right to remuneration [S. 219]

S. 219. When agent's remuneration becomes due: In the
absence of any special contract, payment for the performance
of any act is not due to the agent until the completion of such
act; but an agent may detain moneys received by him on
account of goods sold, although the whole of the goods
consigned to him for sale may not have been sold, or
although the sale may not be actually complete.

Right of Lien [Sec – 221]

If agent is not paid lawful charges remunerations or expenses
by his Principal and of goods of Principal are under his
control he can retain the goods until the lawful charges is paid
by Principal. This right last till the lawful charges are fully
satisfied. Right of Lien on Principal’s property means the
agent has the right to hold (keep with himself) any movable
or immovable property of the Principal until his due
remuneration is paid to him by the Principal. In the absence
of any contract to the contrary, an agent is entitled to retain
goods, papers and other property.

Right to get Indemnity [Sec – 222- 224]

If Principal removes the agent without concrete reason agent
has right to claim compensation from his Principal.
Therefore, agent has also right to continue business
performance until nothing is wrong done by agent. The agent
has the right to be indemnified against all the lawful acts done
by him during the course of conducting the Principal’s
business. Indemnified by Principal, in respect of the contract
and all losses/liabilities, provided that the agent acted within
his authority.
 Indemnity for civil wrong (sec 223)
124
No indemnity in case of criminal offences (sec 224)

Right of retainer [Sec – 217 &218]

An agent has the right to retain any remuneration or
expenses incurred by him while conducting the Principal’s
business.

Right to Compensation [Sec 225]

The Agent has the right to be compensated for any injury or
loss suffered by him due to the lack of skill and competency
of the Principal.

Right of stoppage in transit

Where he has bought goods for his Principal by incurring a
personal liability, he has a right of stoppage in transit against
the Principal, in respect of the money which he has paid or is
liable to pay. Where he is personally liable to the Principal for
the price of the goods sold, he stands in the position of an
unpaid seller towards the buyer and can stop the goods in
transit on the insolvency of the buyer.

PRINCIPAL’S DUTIES TO AGENT

The Principal has duties towards the Agent:

The Principal is bound to indemnify the agent against any
lawful acts done by him in the exercise of his authority as
an agent.
The Principal is bound to indemnify the agent against any
act done by him in good faith, even if it ended up
violating the rights of third parties.
The Principal is not liable to the agent if the act that is
delegated is criminal in nature. The agent will also in no
circumstances be indemnified against criminal acts.
 Compensation - The Principal must make compensation
to his agent if he causes any injury to him because of his 125
own competence or lack of skill. Compensation must be
paid the agent for services rendered, & do so in a timely
manner.
Liability of Principal for Agent’s Fraud or
Misrepresentation - According to Section 238, The
Principal is liable for any fraud or misrepresentation
made by his agent during the course of his business, as if
the fraud or misrepresentation was done by the Principal
himself.
Reimbursement & Indemnification - must reimburse
agent that disburses money at Principal’s request. Must
compensate (indemnify) agent for any costs incurred as a
result of Principal’s failure to perform the contract.
Cooperation - must cooperate with & assist an agent in
performing his duties Provide safe working conditions.
Agent’s Rights & Remedies: has a corresponding right for
every duty of the Principal.
Liability of Principal to Third Parties for The Acts Of
Agent (Sec. 226 to 228) - Principal is liable for the acts of
agent, The Principal is liable for all the acts of an agent
which are lawful and within the scope of agent’s authority.
The contracts entered into by the agent on behalf of the
Principal have the same legal consequences as if these
contracts were made by the Principal himself.
When agent exceeds his authority: Whether the acts done
within the authority are separable from the acts done beyond
authority. If yes – The Principal is not bound for excess acts
done by the agent. If no – The Principal is not bound by the
transaction and the Principal can repudiate the whole
transaction.

RIGHTS OF PRINCIPAL
Right to repudiate the Transaction
 To claim any resulted benefit from Agency
Right to Recover Damages 126
To Resist Agent’s claim for Indemnity
Normal contract & tort remedies, Principal’s Rights &
Remedies; has contract remedies for breach of fiduciary
duties & tort remedies for Main actions available:
1. Constructive trust: imposed by courts when agent
withholds monies that belong to Principal, allows
Principal to get what he deserves
2. Avoidance: Principal may avoid any contract entered into
with agent if agent breaches agency duties
3. Indemnification: Principal can be sued by a third party
for an agent’s negligent conduct, & in certain situations
the Principal can turn around & sue agent for an equal
amount of damages.

LIABILITY OF PRINCIPAL

Sec 226- for contracts relationship between the Principal

and the 3rd persons becomes bound towards a third
person as if he entered into the contract himself.
Principal’s liability when agent exceeds authority-
Principal is not liable.
Position when the authorized and unauthorized acts are
separable sec- 227
Principal’s liability for notice to the agent – sec 299
Principal’s liability for agent’s fraud, misrepresentation
and torts (sec -238)- do not fall within their authority – it
do not affect their Principals.

PERSONAL LIABILITY OF AN AGENT

General Rule – No personal liability [Sec.230], In the

absence of contract to contrary, an Agent cannot:
 1. personally enforce contracts entered into by him, on
behalf of his Principal, 127
2. be held personally liable for them. This is because the
Agent merely acts on behalf of his Principal. Thus, he
enjoys immunity from being personally sued.
Exceptions, i.e. Agent personally as well as Joint & Severally
Liable Sec.106.
The Agent is personally liable in the following cases:
Foreign Principal [Sec.230]: Where the contract is made
by an Agent for the sale or purchase of goods for a
merchant resident abroad.

Undisclosed Principal [Sec.230]: Where the Agent does

not disclose the name of his Principal.

Right of undisclosed Principal to require performance –

Sec 231

Right of third person against undisclosed Principal – sec

232

Liability of pretended agent – sec 235

Principal cannot be sued [Sec.230]: Where the Principal,

though disclosed, cannot be sued, e.g. Principal becoming
of unsound mind, subsequent to appointment of agent.

Acting for a Principal not in existence: Where the Agent

acts for a Principal who is not in existence at the time of
making contracts, he shall be personally held liable e.g.
contracts entered into by Promoters before incorporation
of a Company are made in their personal capacity and
hence personally liable.

Agency coupled with interest [Sec.202]: Where the Agent

has an interest in the subject matter of agency.
Agent guilty of Fraud [Sec.238] : Where an Agent is guilty
of fraud or misrepresentation in matters that are outside 128
the scope of his authority, he is personally liable, and do
not affect his Principal.

Agent exceeds authority & act not ratified: Where an

Agent acts either without any authority or exceeds his
authority, he shall be held personally liable when the
Principal does not ratify his acts.

Agent receives or pays money: Where an Agent receives

or pays money by mistake or fraud to a third party, he
shall be personally liable to such third party. Also he can
personally sue the third party if the fraud or mistake is
accountable to such third party.

Express Agreement for personal liability: Where an

Agent expressly agrees to be personally bound.

Execution of Contract in his own name: Where an Agent

executes a contract in his own name, without disclosing
that he is acting as Agent for a Principal, he 107 shall be
personally liable, e.g. An Agent signs a Negotiable
Instrument without making it clear that he is signing it as
an Agent only, he shall be held personally liable on the
same. He would be personally liable as Maker of P/N, even
though he may be described as Agent.

Trade custom or usage: Where trade usage or custom

makes an Agent personally liable.

Agent with special interest: An Agent with special interest

or with a beneficial interest, e.g. a Factor or Auctioneer,
can sue and be sued personally. [Subramanya v. Narayana]
 Action against Agent or Principal [Sec 233]: Where the
Agent is personally liable, a person dealing with him may 129
hold – (a) either him or (b) his Principal or (c) both of
them liable. The liability of Principal and Agent is “joint
and several”.

Exclusive liability [Sec. 234]: Where a person has made a

contract with an Agent and –Induces such Agent to act
upon it in the belief that only his Principal would be held
liable, Induces the Principal to act upon it in the belief that
only his Agent would be held liable. Such Third person
cannot later on, shift the liability on to –The Agent, or The
Principal, respectively.

Liability for contracts

1. Disclosed / Partially disclosed Principals: liable to a third
party for contract made by the agent.
2. Undisclosed Principals: agent, not the Principal, is liable as
a party on the contract. However, if Principal has a duty to
perform & fails to do so, agent is entitled to
indemnification by Principal if third party seeks
restitution from agent.

Liability for Agent’s Torts: Principal may be liable for

agent’s torts if they result from the following:Sec.108
-Principal’s own tortious conduct
-Principal’s authorization of tortious act
Agent’s unauthorized but tortious misrepresentation (if
representations were made within scope of the agency).

Doctrine of Respondeat Superior: Principal-employer is

liable for any harm caused to a third party by an agent-
employee in the scope of employment. This doctrine
imposes vicarious liability on the employer.
Scope of employment: is employee doing what is normally
expected of him, is employee “on the job” from a time & 130
location standpoint, does the employee’s act benefit the
employer.

Liability for employee’s negligence: act causing the injury

must have occurred within the scope of employment,
employee going to & from work or to & from meals is
usually considered outside the scope of employment
Notice of dangerous conditions: employer has assumed
knowledge of any dangerous conditions discovered by an
employee & pertinent to employment situation.
Liability for employee’s intentional torts: if torts
committed within scope of employment.
Liability for Independent Contractor’s Torts: General
rule is that the employer is not liable.

Test: how much control the employer exerts over the

contractor. Exceptionally hazardous activities (blasting) that
are contracted are an exception in that there is no shield for
the employer.
Liability for Agent’s Crimes: General rule is that a
Principal or employer is not liable for agent’s or
employee’s crime even if agent acted within scope of
authority or employment.
Parties agreed that the agent will act on behalf & instead of
the Principal in negotiating & transacting business with 3rd
persons.
Special: hired for an ltd purpose (CPA, attorney)
General: employer/employee relations (wider affairs
corporate lawyer)
Universal: hired to do everything.
Fiduciary: fundamental to agency, means that trust &
confidence are involved.
Employer-Employee Relations: An employee is someone
whose physical conduct is not entirely controlled, or subject 131
to control, by the employer. Employees who deal with third
parties are typically deemed to be agents.

Employer-Independent contractor Relations: an

independent contractor is not controlled by another or
subject to another’s control with regard to physical conduct.
He may or may not be an agent. Main determinant here is
how much control is exercised over the contractor.

TERMINATION OF AGENCY (SEC- 201- 210)

There are various modes/rules in which the agency can be

terminated. An agency can be terminated or is terminated in
the following different ways and with different rules.
When the agent’s authority is revoked by the Principal
(Revocation by the Principal) (sec 201)
Revocation may be express or implied (sec -207)
Revocation possible before the authority has been
exercised (sec 203)
Revocation when authority has been partly exercised (sec
204)
Principal to compensate, if there is premature revocation
without justification (sec 205)
Principal should give reasonable notice of revocation (sec
206)
When the agent renounces the business of the agency
When the business of the agency is completed (Mutual
Agreement).
By performance- If agency is made for certain purpose on
the completion of achievements of purpose the agency is
terminated.
When either of the parties dies or becomes mentally
disabled. The death of the Principal or agent terminates 132
the contract of agency. (sec 209)
When the Principal is adjudicated an insolvent. Insanity of
Principal or (unsound mind), if the Principal become
insane the contract can be terminated. (Insolvency of
Principal) After the insolvency or bankruptcy of Principal
if agent acts on behalf of Principal, he himself will be
liable for that not the Principal. So, after the insolvency
the contract of agency terminates. Not only principal it
also applies in case of agent as well.
By the act of the parties/ Destruction of the subject matter:
- If the subject matter for which agency was created
destroyed then it terminates the contract of agency.
Rescinding (Cancel) the authority by the Principal
By expiry of time fixed: (sec -208) - If time is fixed for the
agency, whether or not purposes are fulfilled, and the
agency is terminated after expiry of time fixed. If agency
is made for some specific purpose and for a fixed time
period the agency terminates when purposes are achieved
or time is lapse.
By dissolution of company: - If the company dissolves the
agent will have no more authority provided by the
company or Principal, and then contract of agency
terminates.
By operation of law/ by the happening of any event
rendering the agency unlawful: - If subsequent to the
contract, law change in such way which invalidated the
transaction, then the agency also terminates. Subsequent
to the contract, if Principal and agent became alien enemy
the contract of agency also terminated.
On termination of sub-agent’s authority. (sec -210) The
death of one of the joint agents will terminate the agency
only as far as he is concerned, while it will continue to be
valid as regards the other surviving agents in the absence of
contrary intention. 133
On the Principal becoming an alien enemy.

There are certain rules regarding the revocation of an agent’s

authority. It can be revoked any time before the authority has
been exercised. If according to the terms of the contract
between the two, the agency has to continue up-to a certain
time, any prior revocation by the Principal shall be
compensated for, to the agent. The termination does not take
effect before it has been communicated to the agent.
Termination of the authority of an agent terminates the
authority of all the sub-agents under him.

Exceptions
The parties by an agreement can create a contract of agency.
Similarly, by an agreement they can terminate it.

Irrevocable Agency
When an agency cannot be put an end to, it is said to be
irrevocable agency. An agency is irrevocable where the agent
himself has an interest in the property which forms the
subject-matter of the agency. (Sec- 202)

Time when Termination takes Effect

The termination of the authority of an agent does not, so far
as regards the agent, take effect before it becomes known to
him. As regards third persons, it terminates when it comes to
their notice.

LIABILITY OF AGENT TO THIRD PARTIES

Agent is not personally liable for a contract, (the Principal is),

provided he acted within his authority. Agent may be liable to
Third Party if Third Party was unaware of agency but agent
would be entitled to be indemnified by Principal. If Agent
134
acts more than the given authority he will be personally
liable.
According to Black Law’s Dictionary “A fiduciary relationship
created by express or implied contract or by law in which one
party may act on behalf of another party and bind the other
party by words or actions”
The Principal is only responsible up to the extent to which
the agent is assigned rights to do act beyond this boundary
the Principal isn’t responsible but the agent is self-
responsible. While making contract there may be or may not
be consideration. Agency is process of delegating the
authority by a Principal to the agent to act and represent
from his behalf.
The act done and representation made by an agent aren’t the
act of the agent but are regarded as the act of Principal.
Therefore, rights and duties created by agent are the right
and duties of the Principal. However, some acts relating to
personal skill cannot be done through agency.

Following act can be done through Agency:-

To do it for himself.
To run commercial transaction by agent.
To do transaction with third person.
To establish legal relation with Principal and third person.

We may note that the contract relating to agency is legally

recognized in following criteria:-
Whatever a person can lawfully do he may also does the
same through an agent.
He who acts through another is considered to have acted
personally.
All Contracts are agreements but all agreements are not
contracts.