NOTES ON LAW OF

CONTRACT
-INDIAN CONTRACT ACT,
1872-
-Prepared by Jubair Mohammad
 CONTENTS ❖ Anticipatory and Actual Breach of
Contract
❖ Rights Available to Parties
❖ Remedies for Breach of Contract
❖ What is a Contract?
❖ Suit for Damages
❖ Essentials of a Contract
❖ Liquidated Damages and Penalty
❖ Types of Contracts – Based on
❖ Contingent Contracts
Validity
❖ Quasi Contract
❖ Types of Contracts – Based on
Formation ❖ Agreement with Minor

❖ Types of Contracts – Based on ❖ Contract of Indemnity

Performance ❖ Contract of Guarantee
❖ Proposal/Offer ❖ Rights and Discharge of Surety
❖ Acceptance ❖ Contract of Bailment and Pledge
❖ Communication of Offer and ❖ Duties of Bailee and Bailor
Acceptance and Revocation of Offer
❖ Rights of Pawnee and Pawnor
❖ Legal Rules Regarding Consideration
❖ Creation of Agency
❖ The doctrine of Privity of Contract
❖ Classes of Agents
❖ Agreements without Consideration
❖ Rights and Duties of Agents
❖ Capacity to Contract
❖ Responsibilities of Principal to Third-
❖ Free Consent parties
❖ Mistake of Law and Mistake of Fact ❖ Termination of Agency
❖ Legality of Object and Consideration
❖ Expressly Void Agreement
❖ Who performs the Contract?
❖ Time and Place of Performance of
Contract
❖ Performance of Reciprocal Promise
❖ Discharge of a Contract
 LAW OF CONTRACT
Indian Contract Act 1872
The Indian Contract Act is one of the oldest
mercantile laws of our country. It came into
effect on the 1st of September 1872 and is
applicable to the whole of India including
Jammu & Kashmir after the revocation of
Article 370 from the Indian Constitution –
Section 1 of the Act talks about the
commencement and extension. Containing a
total of 266 sections it is the principal law
regulating contracts in India.
Rights Available to Parties
The commercial world and economy of a nation
heavily dependent on the mercantile law that
prevails in the country. In India, we have the
Indian Contract Act 1872. The rights available to
parties under this act are – Rights in Rem and Rights
in Personam.
1] Rights in Rem or Jus in Rem
As per the law of the land, every person entering
into a contract has rights in rem. This is a right
available to him or her against the entire world. It
protects a person’s property from the entire world.
This is why we call such a right as a negative right.
Because it gives the right to any person to be left
alone. This means that no other person can
interfere with his right.
This specific right (jus in rem) is given via the
freedoms written in Article 19 of the Indian
Constitution with its restrictions. This right in rem is
available to an indefinite or open class of people, i.e.
available to all. Let us see some examples.
❖ Mr. X owns a house. This house exclusively
belongs to him. He has right in rem with
respect to the house. So, nobody can
interfere with his ownership of the house.
No one can disturb his right in rem.
❖ Mr. Y has a suitcase full of cash. This money
belongs to Mr. Y exclusively. The world or
anyone in it cannot take away the money
from him, i.e., they cannot disturb his
possession or interfere with his ownership
of the money.
2] Right in Personam or Jus in Personam
This is the opposite of right in rem. Right in
Personam gives the person rights against one
person or party to the contract. It generally will
correspond with a duty imposed on the said person
or party.
The Indian Contract Act grants rights in Personam
to the parties of a contract. So, the parties of a
contract have these contractual rights only against
each other, i.e., jus in Personam. Let us see some
examples,
❖ A sold his car to B. A has the right to receive
the sale proceeds. This right to receive the
money only belongs to A, so it is a right in
Personam. No other party is involved.
❖ B loaned money to C. The right to recover
the money belongs only to B, not the world
in general.
Q: Does the Indian Contract Act have retrospective
effect?
Ans: No, the Indian Contract Act, 1872 does not
have any retrospective effect. It was effective from
September 1872, and any contracts prior to that
are not governed under the act.
What is a Contract according to Indian
Contract Act?
The Indian Contract Act, 1872 defines the term
“Contract” under its section 2 (h) as
“An agreement enforceable by law”. In
other words, we can say that a contract is anything
that is an agreement and enforceable by the law of
the land.
This definition has two major elements in it viz –
“agreement” and “enforceable by law”. So in order
to understand a contract in the light of The Indian
Contract Act, 1872 we need to define and explain
these two pivots in the definition of a contract.
Agreement
In section 2 (e), the Act defines the term
agreement as “every promise and every set of
promises, forming the consideration for each
other”.
Now that we know how the Act defines the term
“agreement”, there may be some ambiguity in the
definition of the term promise.
Promise
The Act in its section 2(b) defines the term
“promise” here as: “when the person to whom
the proposal is made signifies his assent thereto,
the proposal becomes an accepted proposal. A
proposal when accepted, becomes a promise”.
In other words, an agreement is an accepted
promise, accepted by all the parties involved in the
agreement or affected by it. This definition says
that in order to establish or draft a contract, we
need to initiate some steps:
i. The definition requires a person to whom a
certain proposal is made.
ii. The person (parties) in step one has to be
in a position to fully understand all
the aspects of a proposal.
iii. “signifies his assent thereto” – means that
the person in point one accepts or agrees
with the proposal after having fully
understood it.
iv. Once the “person” accepts the proposal,
the status of the “proposal” changes to
“accepted proposal”.
v. “accepted proposal” becomes a promise.
Note that the proposal is not a promise.
For the proposal to become a promise, it
has to be an accepted proposal.
To sum up, we can represent the above
information below:
Agreement = Offer + Acceptance.
Enforceable By Law
Now let us try to understand this aspect of the
definition as is present in the Act. Suppose you
agree to sell a bike for 30,000 bucks with a friend.
Can you have a contract for this?
Well, if you follow the steps in the previous
section, you will argue that once you and your
friend agree on the promise, it becomes an
agreement. But in order to be a contract as per the
definition of the Act, the agreement has to be
legally enforceable.
Thus, we can say that for an agreement to change
into a Contract as per the Act, it must give rise to
or lead to legal obligations. In other words, must
be within the scope of the law. Thus, we can
summarize it as Contract = Accepted Proposal
(Agreement) + Enforceable by law (defined within
the law)
So, What Is a Contract?
Now we can define a contract and more importantly, understand what is “Not” a contract. A contract is an
accepted proposal (agreement) that is fully understood by the law and is legally defined or enforceable by the
law.
So, a contract is a legal document that bestows upon the party’s special rights (defined by the contract itself)
and also obligations that are introduced, defined, and agreed upon by all the parties of the contract.
Difference Between Agreement and Contract
Contract Agreement
A contract is an agreement that is enforceable by A promise or a number of promises that are not
law. contradicting and are accepted by the parties
involved is an agreement.

A contract is only legally enforceable. An agreement must be socially acceptable. It may

or may not be enforceable by the law.

A contract has to create some legal obligation. An agreement doesn’t create any legal obligations.

All contracts are also agreements. An agreement may or may not be a contract.

What is Proposal? Section 2 (a) Who is Promisor and Who is Promisee?

When one person signifies to another his
willingness to do or to abstain from doing
anything, with a view to obtaining the assent
of that other to such act or abstinence, he is
said to make a proposal.
Section 2(c)
The person making the proposal is called
the “promisor”, and the person accepting
the proposal is called the “promisee”

What is Consideration? Section 2(d) What is Void Agreement? Section 2(g)

When, at the desire of the promisor, the promisee An agreement not enforceable by law is
or any other person has done or abstained from said to be void;
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; What is Voidable Agreement? Section 2(i)

An agreement which is enforceable by

law at the option of one or more of the
When does a Contract becomes Void? Section 2(j) parties thereto, but not at the option of
A contract which ceases to be enforceable by law the other or others, is a voidable
becomes void when it ceases to be enforceable. contract.
Essentials of a Contract
What makes a valid contract? A valid
contract is enforceable by law and if a
contract is not valid it may lead to
obstruction of businesses and unlawful and
insincere dealings. Let us learn about the
essential features of a valid contract:
The Indian Contract Act, 1872 itself defines
and lists the Essentials of a Contract either
directly or through interpretation through
various judgments of the Indian judiciary.
Section 10 of the contract enumerates
certain points that are essential for valid
contracts like Free consent, Competency Of
the parties, Lawful consideration, etc.
‘Section 10’ What agreements are contracts. —
All agreements are contracts if they are made by
the free consent of parties competent to contract,
for a lawful consideration and with a lawful object,
and are not hereby expressly declared to be void.
Other than these there are some we can
interpret from the context of the contract
which is also essential Let us see: -
1] Two Parties
So, you decide to sell your car to yourself! Let
us say to avoid tax or some other sinister
purpose. Will that be possible? Can you have
a contract with yourself? The answer is no,
unfortunately. You can’t get into a contract
with yourself.
A Valid Contract must involve at least two
parties identified by the contract. One of
these parties will make the proposal and the
other is the party that shall eventually accept
it. Both the parties must have either what is
known as a legal existence e.g., companies,
schools, organizations, etc. or must be
natural persons.
For Example: In the case State of Gujarat vs
Ramanlal S & Co. – A business partnership
was dissolved and assets were distributed
among the partners as per the settlement.
However, all transactions that fall under a
contract are liable for taxation by the office
of the State Sales Tax Officer. However, the
court held that this transaction was not a
sale because the parties involved were
business partners and thus joint owners. For
a sale, we need a buyer (party one) and a
seller (party two) which must be different
people.
2] Intent of Legal Obligations
The parties that are subject to a contract
must have clear intentions of creating a legal
relationship between them. What this
means is those agreements that are not
enforceable by the law e.g., social or
domestic agreements between relatives or
neighbors are not enforceable in a court of
law and thus any such agreement can’t
become a valid contract.
3] Case Specific Contracts
Some contracts have special conditions that
if not observed would render them invalid or
void. For example, the Contract
of Insurance is not a valid contract unless it
is in the written form.
Similarly, in the case of contracts like
contracts for immovable properties,
registration of contract is necessary under
the law for these to be valid.
4] Certainty of Meaning
Consider this statement “I agree to pay Mr.
X a desirable amount for his house at so and
so location”. Is this a valid contract even if all
the parties agree to this term? Of course, it
can’t be as “desirable amount” is not well
defined and has no certainty of meaning.
Thus, we say that a valid contract must have
certainty of Meaning.
5] Possibility of Performance of an
Agreement
Suppose two people decide to get into an
agreement where a person A agrees to bring
back the person B’s dead relative back to life.
Even when all the parties agree and all other
conditions of a contract are satisfied, this is
not valid because bringing someone back
from the dead is an impossible task. Thus,
the agreement is not possible to be enforced
and the contract is not valid.
6] Free Consent
Consent is crucial for an agreement and thus
for a valid contract. If two people reach a
similar agreement in the same sense, they
are said to consent to the promise. However,
for a valid contract, we must have free
consent which means that the two parties
must have reached consent without either
of them being influenced, coerced,
misrepresented or tricked into it. In other
words, we say that if the consent of either of
the parties is vitiated knowingly or by
mistake, the contract between the parties is
no longer valid.
7] Competency of the Parties
Section 11 of the Indian Contract Act, 1872
is:
“Who are competent to contract — Every
person is competent to contract who is (1) of
the age of majority according to the law to
which he is subject, and who is (2) of sound
mind and is (3) not disqualified from
contracting by any law to which he is
subject.”
Let us see these qualifications in detail:
i. refers to the fact that the person must
be at least 18 years old or more.
ii. means that the party or the person
should be able to fully understand the
terms or promises of the contract at
the time of the formulation of the
contract.
iii. states that the party should not be
disqualified by any other legal
ramifications. For example, if the
person is a convict, a foreign
sovereign, or an alien enemy, etc.,
they may not enter into a contract.
‘Section 12’ 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.
 Illustrations
(a) A patient in a lunatic asylum, who is at intervals of sound
mind, may contract during those intervals.
(b) A sane man, who is delirious from fever or who is so
drunk that he cannot understand the terms of a contract,
or form a rational judgment as to its effect on his interests,
cannot contract whilst such delirium or drunkenness lasts.
8] Consideration
Quid Pro Quo means ‘something in return’
which means that the parties must accrue in
the form of some profit, rights, interest, etc.
or seem to have some form of valuable
“consideration”.
For example, if you decide to sell your watch
for Rs. 500 to your friend, then your promise
to give the rights to the watch to your friend
is a consideration for your friend. Also, your
friend’s promise to pay Rs. 500 is a
consideration for you.
9] Lawful Consideration
In Section 23 of the Act, the unlawful
considerations are defined as all those
which:
i. it is forbidden by law.
ii. is of such a nature that, if permitted, it
would defeat the provisions of any
law, or is fraudulent.
iii. involves or implies, injury to the
person or property of another
iv. the Court regards it as immoral or
opposed to public policy
These conditions will render the agreement
illegal.
Types of Contracts on The Basis of
Validity
On the basis of validity or enforceability, we
have five different types of contracts as
given below.
1. Valid Contracts
The Valid Contract as discussed in the topic
on “Essentials of a Contract” is an agreement
that is legally binding and enforceable. It
must qualify all the essentials of a contract.
2. Void Contract or Agreement
The section 2(j) of the Act defines a void
contract as “A contract which ceases to be
enforceable by law becomes void when it
ceases to be enforceable”. This makes all
those contracts that are not enforceable by
a court of law as void.
We have already stated examples of these
kinds of contracts in the “Essentials of a
Contract”.
Example: A agrees to pay B a sum of Rs
10,000 after 5 years against a loan of Rs.
8,000. A dies of natural causes in 4 years. The
contract is no longer valid and becomes void
due to the non-enforceability of the agreed
terms.
3. Voidable Contract
These types of Contracts are defined in
section 2(i) of the Act: “An agreement which
is enforceable by law at the option of one or
more of the parties thereto, but not at the
option of the other or others, is a voidable
contract.” This may seem difficult to wrap
your head around but consider the following
example:
Suppose a person A agrees to pay a sum of
Rs. 10,0000 to a person B for an antique
chair. This contract would be valid, the only
problem is that person B is a minor and can’t
legally enter a contract.
So, this contract is a valid contract from the
point of view of A and a “voidable” contract
from the point of view of B. As and when B
becomes a major, he may or may not agree
to the terms. Thus, this is a voidable
contract.
A voidable contract is a Valid Contract. In a
voidable contract, at least one of the parties
has to be bound to the terms of the contract.
For example, person A in the above example.
The other party is not bound and may
choose to repudiate or accept the terms of
the contract. If they so choose to repudiate
the contract, the contract becomes void.
Otherwise, a voidable contract is a valid
contract.
4. Illegal Contract
An agreement that leads to one or all the
parties breaking a law or not conforming to
the norms of the society is deemed to be
illegal by the court. A contract opposed
to public policy is also illegal.
Several examples may be cited to illustrate
an illegal contract. For example, A agrees to
sell narcotics to B. Although this contract has
all the essential elements of a valid contract,
it is still illegal.
The illegal contracts are deemed as void and
not enforceable by law. As section 2(g) of the
Act states: “An agreement not enforceable
by law is said to be void.”
Thus, we can say that all illegal contracts are
void but the reverse is not true. Both the
void contracts and illegal contracts can’t be
enforceable by law. Illegal contracts are
actually void ab initio (from the start or the
beginning).
Also because of the criminal aspects of the
illegal contracts, they are punishable under
law. All the parties that are found to have
agreed on an illegal promise are prosecuted
in a court of law.
5. Unenforceable Contracts
Unenforceable contracts are rendered
unenforceable by law due to some technical.
The contract can’t be enforced against any of
the two parties.
For example, A agrees to sell to B 100kgs of
rice for 10,000/-. But there was a huge flood
in the states and all the rice crops were
destroyed. Now, this contract is
unenforceable and cannot be enforced
against either party.
Types of Contracts – Based on
Formation
1. Express Contract
The Section 9 of the Act defines what is
meant by the term express: “Promises,
express and implied —In so far as the
proposal or acceptance of any promise is
made in words, the promise is said to be
express.”
This means that if a proposal or a promise is
expressed by listing the terms in words – in
writing or orally is said to be an Express
Contract as long as it gets acceptance from
the other party.
The terms of the Express Contract are clearly
stated either orally or in writing. So, the main
aspect of the Express Contract is that the
terms of the contract are expressed clearly.
For example, consider the following:
A person A sends a text from his phone to
person B, proposing to sell their bike for a
cost of Rs. 10,000/-. The person B calls the
first person and agrees to the terms of the
promise.
This is an Express Contract as the terms have
been stated clearly in oral as well as written
form. Note that the communications could
be entirely oral or written.
2. Implied Contracts
The second part of section 9 of the Act
defines what is meant by an implied
contract: “In so far as such proposal or
acceptance is made otherwise than in words,
the promise is said to be implied.”
Going by the definition we can say that a
contract in which the terms of the
agreement are not expressed in written or
oral form is an implied contract. Let us see
an example to understand this.
For example, you board a rickshaw and the
driver starts to drive. You tell the driver the
address where he has to drop you. The driver
stops and you pay him.
As you can see this is a contract but did you
and the driver express any of the terms in
written and oral form? No, the intent was
implied by your conduct and thus there was
an implied contract.
3. Quasi-Contract
They are not contracts in the sense that no
agreements are made between any of the
parties. In fact, there is no contract prior to
some court order. Let us first see an example
and then we will get a clear idea of what we
mean by Quasi-Contract.
For example, a bank mistakenly transfers a
large amount of money into your account.
Now there is no written or oral or any sort of
agreement between you and the bank but
the money doesn’t belong to you.
You will have to return the money even if
you don’t want to. The bank will approach
the court and the court will issue an order to
return the money, which is becoming a
quasi-contract.
So here we see that a quasi-contract is not
agreed upon by the two parties but it comes
into existence by a court order. It is thus
enforced by the law which also creates it.
Most of the times the quasi-contract is
created to stop any of the parties from
taking unfair advantage of the other.
Consider this example. You have a yard and
you commission a person to build a small
door for your car. You come home one day
to find out that the mansion has made a big
door which is very expensive. At the same
time very good for the value of your
property. Now, what would happen if you
both approach the court?
The courts usually enforce what is known as
the “Quantum Merit” which means “as
much as is deserved.” Since the work was
done also increased the value of your
property, it would be immoral if the worker
doesn’t get paid for the extra work and
materials. The payment might be lesser than
the normal cost but the quantum merit will
apply. This is a quasi-contract.
4. E-Contract
When a contract is formed by the use of
electronic devices and means, it is called an
electronic contract or an e-contract. The
electronic means and devices may include
emails, tests, telephones, digital signatures
etc. They are also known as the Cyber
contracts, the EDI contracts or the Electronic
Data Interchange contracts. The terms of the
contract are listed by electronic means or
implied by the actions of the users.
Types of Contracts – Based on
Performance
There are various types of contracts, one
such type are contacts based on their
performance. The basis for this type is
whether the contract is performed or still to
be performed. Accordingly, the two types
are known as executed contracts and
executory contracts.
1. Executed Contracts
A contract between two or more parties is
said to be executed when the act or
forbearance promised in the contract has
been performed by one, both or all parties.
Basically, it means that whatever the
contract stipulated, has been carried out.
Thus, the contract has been executed.
Let us see an example of an executed
contract. Alex goes to the local
coffee shop and buys a cup of coffee. The
barista sells her the coffee in exchange for
the cash payment. So, it can be said that this
is an executed contract. Both parties have
done their part of what the contract
stipulates.
In most executed contracts the promises are
made and then immediately completed. The
buying of goods and/or services usually falls
under this category. There is no confusion
about the date of execution of the contract
since in most cases it is instantaneous.
2. Executory Contracts
In an executory contract,
the consideration is either the promise of
performance or an obligation. In such
contracts, the consideration can only be
performed sometime in the future, hence
the name executory contract. Here the
promises of consideration simply cannot be
performed immediately.
The best example of an executory contract is
that of a lease. All the conditions of a lease
cannot be fulfilled immediately. They are
performed over time. Similarly, say Alex
decides to tutor some students in Physics.
They pay her Rs 2500/- at the start of the
month. But here the contract isn’t executed
since Alex has to still carry out her promise.
So, such a contract is an executory contract.
Now even in executory contracts, there are specified sale price. This is a bilateral
two types, namely unilateral and bilateral contract.
contracts. Let us take a look at both times.
I. Unilateral Contracts
Proposal or Offer
As the name suggests these are one-sided
The whole process of entering into a
contracts. It usually comes into existence
contract starts with a proposal or an offer
when only one party makes a promise, which
made by one party to another. To enter into
is open and available to anyone who wishes
an agreement such a proposal must be
to or can fulfil the said promise. The contract
accepted. Let us take a look at the definition
will only be fulfilled once someone fulfils the
and classification of an offer and the
promise.
essentials of a valid offer.
Let us see an example. Alex lost his bag pack
According to the Indian Contract Act 1872,
on the metro. So, he decided to announce a
proposal is defined in Section 2 (a) as “when
reward of Rs 1000/- to anyone who finds and
one person will signify to another person his
returns his bag with all its contents. Here the
willingness to do or not do something
is only one party to the contract, namely
(abstain) with a view to obtain the assent of
Alex. If someone finds and returns his bag,
such person to such an act or abstinence, he
he is obligated to pay the reward. This is a
is said to make a proposal or an offer.”
unilateral contract.
Let us look at some features or essentials of
II. Bilateral Contracts
such an offer
By contrast, a bilateral contract is one that
• The person making the offer/proposal is
has two parties. It is a traditional type of
known as the “promisor” or the
contract most commonly known and
“offeror”. And the person who may
occurring. Here both parties agree to the
accept such an offer will be the
terms of the agreement and thus enter into
“promisee” or the “acceptor”.
a contract. Hence it is also known as a
reciprocal contract • The offeror will have to express his
willingness to do or abstain from doing
In bilateral contracts, both parties have
an act. Only willingness is not enough. Or
usually agreed to a time frame to carry out
simply a desire to do/not do something
the said contract. Say for example the
will not constitute an offer.
contract of sale of a house. The buyer pays a
down payment and agrees to pay the • An offer can be positive or negative. It
balance at a future date. The seller gives can be a promise to do some act, and can
possession of the house to the buyer and also be a promise to abstain (not do)
agrees to deliver the title against the some act/service. Both are valid offers.
Classification of Offer
There can be many types of offers based on
their nature, timing, intention, etc. Let us
take a look at the classifications of offers.
1. General Offer
A general offer is one that is made to the
public at large. It is not made any specified
parties. So, any member of the public can
accept the offer and be entitled to the
rewards/consideration. Say for example
you put out a reward for solving a puzzle.
So, if any member of the public can accept
the offer and be entitled to the reward if he
finishes the act (solves the puzzle.)
2. Specific Offer
A specific offer, on the other hand, is only
made to specific parties, and so only they
can accept the said offer or proposal. They
are also sometimes known as special offers.
Like for example, A offers to sell his horse to
B for Rs 5000/-. Then only B can accept such
an offer because it is specific to him.
3. Cross Offer
In certain circumstances, two parties can
make a cross offer. This means both make
an identical offer to each other at the exact
same time. However, such a cross offer will
not amount to acceptance of the offer in
either case.
For example, both A and B send letters to
each other offering to sell and buy A’s horse
for Rs 5000/-. This is a cross offer, but it will
be considered as acceptable for either of
them.
4. Counter Offer
There may be times when a promise will
only accept parts of an offer, and change
certain terms of the offer. This will be a
qualified acceptance. He will want changes
or modifications in the terms of the original
offer. This is known as a counteroffer. A
counteroffer amounts to a rejection of the
original offer.
Essentials of a Valid Offer
Here are some of the few essentials that
make the offer valid.
1] Offer must create Legal Relations
The offer must lead to a contract that
creates legal relations and legal
consequences in case of non-performance.
So, a social contract which does not create
legal relations will not be a valid offer. Say
for example a dinner invitation extended by
A to B is not a valid offer.
2] Offer must be Clear, not Vague
The terms of the offer or proposal should be
very clear and definite. If the terms are
vague or unclear, it will not amount to a
valid offer. Take for example the following
offer – A offers to sell B fruits worth Rs
5000/-. This is not a valid offer since what
kinds of fruits or their specific quantities are
not mentioned.
3] Offer must be Communicated to the
Offeree
For a proposal to be completed it must be
clearly communicated to the offeree. No
offeree can accept the proposal without
knowledge of the offer. The famous case
study regarding this is Lalman Shukla v.
Gauri Dutt. It makes clear that acceptance
in ignorance of the proposal does not
amount to acceptance.
4] Offer may be Conditional
While acceptance cannot be conditional, an
offer might be conditional. The offeror can
make the offer subject to any terms or
conditions he deems necessary. So, A can
offer to sell goods to B if he makes half the
payment in advance. Now B can accept
these conditions or make a counteroffer.
5] Offer cannot contain a Negative
Condition
The non-compliance of any terms of the
offer cannot lead to automatic acceptance
of the offer. Hence it cannot say that if
acceptance is not communicated by a
certain time, it will be considered as
accepted. Example: A offers to sell his cow
to B for 5000/-. If the offer is not rejected by
Monday it will be considered as accepted.
This is not a valid offer.
6] Offer can be Specific or General
As we saw earlier the offer can be to one or
more specific parties. Or the offer could be
to the public in general.
7] Offer may be Expressed or Implied
The offeror can make an offer through
words or even by his conduct. An offer
which is made via words, whether such
words are written or spoken (oral contract)
we call it an express contract. And when an
offer is made through the conduct and the
actions of the offeror it is an implied
contract.
Q: A agrees to sell to B 300 liters of oil in
exchange for 500 kg of grains. Is this a valid
offer?
Ans: No, this is not a valid offer. The terms of
the offer are very vague. There is no mention
of what oil A will be selling to B. Is it crude oil,
cooking oil? There is no mention. Also in
exchange, he will get 500 kg of grains but the
specific grain has not been mentioned. Since
the specific terms are not mentioned, this is not
a valid offer.
Acceptance
It is often said that acceptance is to an offer
what a lighted match is to a barrel of
gunpowder. For a successful contract, there
must be a valid offer followed by the offer
being accepted. Let us learn more about the
essentials of a valid acceptance.
The Indian Contract Act 1872 defines
acceptance in Section 2 (b) as “When the
person to whom the proposal has been
made signifies his assent thereto, the offer is
said to be accepted. Thus, the proposal
when accepted becomes a promise.”
So as the definition states, when the offeree
to whom the proposal is made,
unconditionally accepts the offer it will
amount to acceptance. After such an offer is
accepted the offer becomes a promise.
Say for example A offers to buy B’s car for
rupees two lacs and B accepts such an offer.
Now, this has become a promise.
When the proposal is accepted and it
becomes a proposal it also becomes
irrevocable. An offer does not create any
legal obligations, but after the offer is
accepted it becomes a promise. And a
promise is irrevocable because it creates
legal obligations between parties. An offer
can be revoked before it is accepted. But
once acceptance is communicated it cannot
be revoked or withdrawn.
Rules regarding Valid Acceptance
1] Acceptance can only be given to whom
the offer was made
In the case of a specific proposal or offer, it
can only be accepted by the person it was
made to. No third person without the
knowledge of the offeree can accept the
offer.
Let us take the example of the case study of
Boulton v. Jones. Boulton bought
Brocklehurst’s business but Brocklehurst did
not inform all his creditors about the same.
Jones, a creditor of Brocklehurst placed an
order with him. Boulton accepted and
supplied the goods. Jones refused to pay
since he had debts to settle with
Brocklehurst. It was held that since the offer
was never made to Boulton, he cannot
accept the offer and there is no contract.
When the proposal is a general offer, then
anyone with knowledge of the offer can
accept it.
2] It has to be absolute and unqualified
Acceptance must be unconditional and
absolute. There cannot be conditional
acceptance, that would amount to a
counteroffer which nullifies the original
offer. Let us see an example. A offers to sell
his cycle to B for 2000/-. B says he accepts if
A will sell it for 1500/-. This does not amount
to the offer being accepted, it will count as a
counteroffer.
Also, it must be expressed in a prescribed
manner. If no such prescribed manner is
described then it must be expressed in the
normal and reasonable manner, i.e., as it
would be in the normal course of business.
Implied acceptance can also be given
through some conduct, act, etc.
However, the law does not allow silence to
be a form of acceptance. So, the offeror
cannot say if no answer is received the offer
will be deemed as accepted.
3] Acceptance must be communicated
For a proposal to become a contract, the
acceptance of such a proposal must be
communicated to the promisor.
The communication must occur in the
prescribed form, or any such form in the
normal course of business if no specific form
has been prescribed.
Further, when the offeree accepts the
proposal, he must have known that an offer
was made. He cannot communicate
acceptance without knowledge of the offer.
So, when A offers to supply B with goods,
and B is agreeable to all the terms. He writes
a letter to accept the offer but forgets to
post the letter. So, since the acceptance is
not communicated, it is not valid.
4] It must be in the prescribed mode
Acceptance of the offer must be in the
prescribed manner that is demanded by the
offeror. If no such manner is prescribed, it
must be in a reasonable manner that would
be employed in the normal course of
business.
But if the offeror does not insist on the
manner after the offer has been accepted in
another manner, it will be presumed he has
consented to such acceptance.
So, A offers to sell his farm to B for ten lakhs.
He asks B to communicate his answer via
post. B e-mails A accepting his offer. Now A
can ask B to send the answer through the
prescribed manner. But if A fails to do so, it
means he has accepted the acceptance of B
and a promise is made.
5] Implied Acceptance
Section 8 of the Indian Contract Act 1872,
provides that acceptance by conduct or
actions of the promisee is acceptable. So, if
a person performs certain actions that
communicate that he has accepted the offer,
such implied acceptance is permissible. So, if
A agrees to buy from B 100 bales of hay for
1000/- and B sends over the goods, his
actions will imply he has accepted the offer.
Q: Mere silence can amount to acceptance. True or
False? Ans: The statement is false. Mere silence can
never amount to the offer being accepted. Acceptance
has to be communicated to the offeror whether it is
expressed, or implied.Q: What is the reasonable time
to accept a proposal? Ans: The proposal must be
accepted within the time limit given by the offeror. If
no such time limit is prescribed then it must be
accepted within a reasonable time or before the offer
lapses. Now a reasonable time has no definition in law,
it will depend entirely on the situation,
circumstances, and the usual norms.
Communication of Offer and
Acceptance and Revocation of
Offer
We know that two very important aspects of
a contract are the offer and the acceptance
of the offer. However, in the practical world
of business and economics, the
communication of the offer and the
acceptance and the timings of these are also
very important factors. Let us look at this
communication timeline and also learn
about the revocation of an offer.
Now we have seen previously that an offer
cannot be revoked after the offeror has
communicated it to the offeree. Then
the offer becomes binding, it
creates legal relations between the two
parties.
So, when is the communication complete?
Effective communication of the offer and a
clear understanding of it is important to
avoid misunderstanding between all the
parties.
If the parties are talking face-to-face this is
not a problem. The communication happens
in real time and the offer and acceptance
will be communicated on the spot, creating
no confusion.
But often times in business the
communication occurs via letters and emails
etc. So, in this case, the timeline of
communication is important.
Communication of Offer
Section 4 of the Indian Contract Act 1872
says that the communication of the offer is
complete when it comes to the knowledge of
the person it has been made to. So, when the
offeree (in case of a specific offer) or any
member of the public (in case of a general
offer) becomes aware of the offer, the
communication of the offer is said to be
complete.
So, when two people are talking, face-to-
face or via telephone, etc. the
communication will be complete as soon as
the offer is made. Example if A tells B he will
fix his roof for five thousand rupees, the
communication is complete as soon as the
words are spoken.
Let us take the same example. A writes to B
offering to fix his roof for five thousand
rupees. He posts the letter on 2nd July. The
letter reaches B on 4th July. So, the
communication is said to complete on
4th July.
Communication of Acceptance
Mode of Acceptance
In this case of communication of acceptance,
there are two factors to consider, the mode
of acceptance and then the timing of it. Let
us first talk about the mode of acceptance.
Acceptance can be done in two ways,
namely
A. Communication of Acceptance by an
Act: This would include communication
via words, whether oral or written. So,
this will include communication via
telephone calls, letters, e-mails,
telegraphs, etc.
B. Communication of Acceptance by
Conduct: The offeree can also convey his
acceptance of the offer through some
action of his, or by his conduct. So, say
when you board a bus, you are accepting
to pay the bus fare via your conduct.
Timing of Acceptance
The communication of acceptance has two
parts. Let us take a look
A. As against the Offeror: For the
proposer, the communication of the
acceptance is complete when he puts
such acceptance in the course of
transmission. After this it is out of his
hand to revoke such acceptance, so
his communication will be completed
then. So, for example, A accepts the
offer of B via a letter. He posts the
letter on 10th July and the letter
reaches B on 14th For B (the proposer)
the communication of the acceptance
is completed on 10th July itself.
B. As against the Acceptor: The
communication in case of the
acceptor is complete when the
proposer acquires knowledge of such
acceptance. So, in the above example,
A’s communication will be complete
on 14th July, when B learns of the
acceptance.
Revocation of Offer
The Indian Contract Act lays out the rules of
revocation of an offer in Section 5. It says the
offer may be revoked anytime before the
communication of the acceptance is
complete against the proposer/offeror.
Once the acceptance is communicated to
the proposer, revocation of the offer is now
not possible.
Let us take the same example of before. A
accepts the offer and posts the letter on
10th July. B gets the letter on 14th July. But for
B (the proposer) the acceptance has been
communicated on 10th July itself. So the
revocation of offer can only happen before
the 10th of July.
Revocation of Acceptance
Section 5 also states that acceptance can be
revoked until the communication of the
acceptance is completed against the
acceptor. No revocation of acceptance can
happen after such date.
Again, from the above example, the
communication of the acceptance is
complete against A (acceptor) on 14th July.
So, till that date, A can revoke his/her
acceptance, but not after such date. So
technically between 10th and 14th July, A can
decide to revoke the acceptance.
Legal Rules Regarding
Consideration
Enforcing any legal contract requires it to
have an element of consideration included in
it. In simple words, it is nothing but a price
that the promisee agrees to pay to the
promisor. Now, this price can be paid as a
benefit to the promisor and/or a loss or
detriment to the promisee.
Basic Understanding of Consideration
According to Section 2(d) of the
Indian Contract Act, 1872, consideration is
defined as follows:
“When at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, or does or abstains
from doing, or promises to do or abstain
from doing something, such act or
abstinence is called a consideration for the
promisee.”
This is a complex sentence. Let’s break it
down for further understanding and rewrite
it as follows:
At the desire of the promisor if the promisee
either
• Does something (in the past, present
or future) OR
• Abstains from doing something (in the
past, present or future)
Then, this act of doing or abstinence is called
Consideration. Now, it has two aspects,
either doing some act or abstaining from
doing something. Let’s look at some
examples:
Example 1 – Doing something
Peter and John enter into a contract where
Peter promises to deliver 15 curtains to John
in one month’s time. Also, John promises to
pay Peter an amount of Rs 3,000 on delivery.
In this contract, John’s promise to pay Rs
3,000, on delivery, is the consideration for
Peter’s promise. Also, Peter’s promise of
delivering 15 curtains is the consideration of
John’s promise to pay.
Example 2 – Not doing something
Peter has taken a loan from his friend John.
However, he has not repaid the loan yet.
John promises not to file a suit against Peter
if he promises to repay the loan within a
week. In this case, abstinence on the part of
John is due to the consideration of Peter’s
promise of repayment of the loan.
Rules Regarding Consideration
According to Section 2(d) of the Indian
Contract Act, 1872, the follows features are
essential for a valid consideration:
(i) Consideration must move at the desire of
the promisor
Consideration can be offered by the
promisee or a third-party only at the request
or desire of the promisor. If an action is
initiated at the desire of the third-party, it is
not a consideration.
Peter is going back home from work. On his
way, he sees that his neighbor John’s house
is on fire. He immediately arranges for
a water hose and manages to douse the fire.
Peter cannot claim any reward for his effort
because it was a voluntary act and was not
done at the desire of John (promisor).
(ii) Consideration may move from the
promisee to any other person
If you look at the definition of consideration
according to section 2 (d) of the Indian
Contract Act. 1872, it explicitly states the
phrase ‘promisee or any other person…’ This
essentially means that in India,
consideration may move from the promise
to any other person. However, it is
important to note that there can be a
stranger to consideration but not a stranger
to the contract.
Peter gifted his son, Oliver an apartment in
the city with a condition that he pays a fixed
amount of money to his uncle, John, every
year. On the same day, Oliver executed a
deed to pay a fixed amount of money to
John every year. However, Oliver failed to
pay and John filed a suit for recovery. Oliver
pleaded that he was not liable since no
consideration had moved from John.
However, the court held the words
‘promisee or any other person…’ and
allowed John to maintain his suit for
recovery.
(iii) It can be in the past, present or future
a. Past
Since consideration is the price of a promise,
it is normally given to induce the promise.
However, it can be given before the promise
is made by the promisor. This is past
consideration. It is important to note that
past consideration is not considered for a
new promise since it is not been given in lieu
of the promise. According to Indian law,
‘past considerations’ is ‘good consideration’
if it was given at the desire of the promisor.
Peter employs John to work on his field
during the months of agricultural harvesting.
He promises to pay John an amount of Rs
5,000 for his services when he sows the new
crop in the fields. The services of John in the
past constitute a valid consideration.
a.1. Past Voluntary services
At times, a person might render voluntary
services without any request or promise
from another. If the person receiving the
services makes a subsequent promise to pay
for the services, then such a promise is
enforceable in India under Section 25(2) of
the Indian Contract Act, 1872 which states:
‘An agreement made without consideration
is void, unless it’s a promise to compensate,
wholly or in part, a person who has already
voluntarily done something for the
promisor, or something which the promisor
was legally compellable to do; or unless.’
Peter finds John’s wallet on the road. He
returns it to him and John promises to pay
Peter Rs 500 for his services. This is a valid
contract.
b. Present
If the promise and consideration take place
simultaneously then it is present or executed
consideration. An example is Peter goes to a
shop, buys a bag of chips and pays for the
same on-spot.
c. Future
When the consideration for a promise
moves after the contract is formed, it is a
future or executor. It is also valid if it
depends on the condition.
Peter promises to create architectural plans
for John’s new house. John promises to pay
Peter an amount of Rs 50,000 provided the
plans are approved by his wife.
(iv) It must have value in the eyes of the law
While the law allows the parties to decide an
‘adequate’ consideration for them, it must
be real and have value in the eyes of law.
While the Court will not consider
inadequacy, it will look at it to determine if
the consent was given by the party with free-
will or not.
Peter’s wife agrees to withdraw the suit she
has filed against him in return for his promise
to pay her a monthly maintenance amount.
This is a good consideration and holds value
in the eyes of law.
(v) It should be over and above the
Promisors’ existing obligations
If the promisor is already obligated either by
his promise or law to perform or abstain
from a certain act, then it is not a good
consideration for a promise.
Peter receives a summons from the Court to
appear before it as a witness for John. John
promises to pay him Rs 10,000 to appear in
the Court. This contract is not valid because
Peter is obligated by law to appear in the
Court on receiving a summons.
(vi) It cannot be Unlawful
A consideration that is against the law or
public policies is not valid.
Peter offers Rs 10,000 to John to beat up his
business rival. John beats him up but Peter
refuses to pay him. John cannot file a suit for
recovery since the consideration is against
the law.
Doctrine of Privity of Contract
The Indian Contract Act clearly states that
there cannot be a stranger to a contract.
What does this exactly mean? And are there
any exceptions? This is explained through
the Doctrine of Privity of a Contract. Let us
see:
The Indian Contract Act. 1872, allows the
‘Consideration ‘for an agreement to proceed
from a third-party. However, a stranger
(third-party) to consideration is different
from a stranger to a contract. The law does
not allow a stranger to file a suit on the
contract. This right is available only to a
person who is a party to the contract and is
called Doctrine of Privity of Contract.
Let’s understand this with the help of an
example:
• Peter has borrowed some money from
John.
• Peter owns a property and decides to
sell it to Arjun.
• Arjun promises to pay John on behalf of
Peter.
However, if Arjun fails to pay, then John
cannot sue since Arjun is a stranger to the
contract. It is important to note that the
Doctrine of Privity has exceptions which
allow a stranger to enforce a claim as given
below.
Exceptions to the Doctrine of Privity of
Contract
A stranger or a person who is not a party to
a contract can sue on a contract in the
following cases:
1. Trust
2. Family Settlement
3. Assignment of a Contract
4. Acknowledgement or Estoppel
5. A covenant running with the land
6. Contract through an agent
Let’s look at each of them in details:
Trust
If a contract is made between the trustee of
a trust and another party, then the
beneficiary of the trust can sue by enforcing
his right under the trust, even if he is a
stranger to the contract.
Arjun’s father had an illegitimate son, Ravi.
Before he died, he put Arjun in possession of
his estate with a condition that Arjun would
pay Ravi an amount of Rs 500,000 and
transfer half of the estate in Ravi’s name,
once he becomes 21 years old.
After attaining that age when Ravi didn’t
receive the money and asked Arjun about it,
he denied giving him his share. Ravi filed a
suit for recovery. The Court held that a trust
was formed with Ravi as the beneficiary for
a certain amount and share of the estate.
Hence, Ravi had the right to sue upon the
contract between Arjun and his father, even
though he was not a party to it.
Family Settlement
If a contract is made under a family
arrangement to benefit a stranger (person
not a party to the contract), then the
stranger can sue in his own right as a
beneficiary of the contract.
Peter promised Nancy’s father that he would
marry Nancy else would pay Rs 50,000 as
damages. Eventually, he married someone
else, thereby breaching the contract. Nancy
filed a case against Peter which was held by
the Court since the contract was a family
arrangement with Nancy as the beneficiary.
Ritika was living in a Hindu Undivided Family
(HUF). The family had made a provision for
her marriage. Eventually, the family went
through a partition and Ritika filed a suit to
claim her marriage expenses. The Court held
the case because Ritika was the beneficiary
of the provision despite being a stranger to
the contract.
Assignment of a Contract
If a contract is made for the benefit of a
person, then he can sue upon the contract
even though he is not a party to the
agreement. It is important to note here that
nominees of a life insurance policy do not
have this right.
Acknowledgment or Estoppel
If a contract requires that a party pays a
certain amount to a third-party and he/she
acknowledges it, then it becomes a binding
obligation for the party to pay the third-
party. The acknowledgment can also be
implied.
Peter gives Rs 1,000 to John to pay Arjun.
John acknowledges the receipt of funds to
be paid to Arjun. However, he fails to pay
him. Arjun can sue John for recovery of the
amount.
Rita sold her house to Seema. A real estate
broker, Pankaj, facilitated the deal. Out of
the sale price, Pankaj was to be paid Rs
25,000 as his professional charges. Seema
promised to pay Pankaj the amount before
taking possession of the property. She made
three payments of Rs 5,000 each and then
stopped paying him. Pankaj filed a suit
against Seema which was held by the Court
because Seema had acknowledged her
liability by conduct.
A Covenant Running with the Land
When a person purchases a piece of land
with the notice that the owner of the land
will be bound by all duties and liabilities
affecting the land, then he can sue upon a
contract between the previous land-owner
and a settler even if he was not a party to the
contract.
Peter owned a piece of land which he sold to
John under a covenant that a certain part of
the land will be maintained as a public park.
John abided by the covenant and eventually
sold the land to Arjun. Though Arjun was
aware of the covenant, he built a house in
the specific plot. When Peter came to know
of it, he filed a suit against Arjun. Although
Arjun denied liability since he was not a party
to the contract, the Court held him
responsible for violating the covenant.
Contract through an Agent
If a person enters into a contract through an
agent, where the agent acts within the scope
of his authority and in the name of the
person (principal).
Agreements without Consideration
Consideration is an integral part of
a contract. The rules of consideration state
that it is essential to have consideration for
a contract. But there are some specific
exceptions to the “No consideration no
contract” rule. Let us take a look:
Consideration
Can you make a legal agreement without
consideration? No. As per Section 10 and
Section 25 of the Indian Contract Act,
1872, consideration is essential in a valid
contract. In simple words, no consideration
no contract. Hence, you can enforce a
contract only if there is a consideration.
While considerations are integral to a
contract, the Indian Contract Act, 1872 has
listed some exceptions whereby
an agreement made without consideration
will not be void.
Exceptions to the ‘No Consideration No
Contract’ Rule
Section 25 also lists the exceptions under
which the rule of no consideration no
contract does not hold, as follows:
❖ Natural Love and Affection
If an agreement is in writing and registered
between two parties in close relation (like
blood relatives or spouse), based on natural
love and affection, then such an agreement
is enforceable even without consideration.
Example, Peter and John are brothers. In his
will, their father nominates Peter as the sole
owner of his entire property after his death.
John files a case against Peter to claim his
right to the property but loses the case. Peter
and John come to a mutual decision where
Peter agrees to give half of the property to
his brother and register a document
regarding the same.
Eventually, Peter didn’t fulfil his promise and
John filed a suit for recovery of his share in
the property. The Court held that since the
agreement was made based on natural love
and affection, the no consideration no
contract rule didn’t apply and John had the
right to recover his share.
❖ Past Voluntary Services
If a person has done a voluntary service in
the past and the beneficiary promises to pay
at a later date, then the contract is binding
provided:
• The service was rendered voluntarily in
the past
• It was rendered to the promisor
• The promisor was in existence when the
voluntary service was done (especially
important when the promisor is
an organization)
• The promisor showed his willingness to
compensate the voluntary service
Example, Peter finds John’s wallet on the
road and returns it to him. John is happy to
find his lost wallet and promises to pay Peter
Rs 2,000. In this case, too, the no
consideration no contract rule does not
apply. This contract is a valid contract.
❖ Promise to pay a Time-Barred Debt
If a person makes a promise in writing signed
by him or his authorized agent about paying
a time-barred debt, then it is valid despite
there being no consideration. The promise
can be made to pay the debt wholly or in
part.
Example, Peter owes Rs 100,000 to John. He
had borrowed the money 5 years ago.
However, he never paid a single rupee back.
He signs a written promise to pay Rs 50,000
to John as a final settlement of the loan. In
this case, ‘the no consideration no contract’
rule does not apply either. This is a valid
contract.
❖ Creation of an Agency
According to section 185 of the Indian
Contract Act, 1872, no consideration is
necessary to create an agency.
❖ Gifts
The rule of no consideration no contract
does not apply to gifts. Explanation (1) to
Section 25 of the Indian Contract Act, 1872
states that the rule of an agreement without
consideration being void does not apply to
gifts made by a donor and accepted by a
donee.
❖ Bailment
Section 148 of the Indian Contract Act, 1872,
defines bailment as the delivery of goods
from one person to another for some
purpose. This delivery is made upon a
contract that post accomplishment of the
purpose, the goods will either be returned or
disposed of, according to the directions of
the person delivering them. No
consideration is required to effect a contract
of bailment.
❖ Charity
If a person undertakes a liability on the
promise of another to contribute to charity,
then the contract is valid. In this case, the no
consideration no contract rule does not
apply.
Example, Peter is the trustee of his town’s
charity organization. He wants to build a
small pond in the town to enhance greenery
and offer the residents a good place to walk
around in the evenings. He raises a charity
fund where he appeals to people to come
ahead and contribute to the cause. Many
people come forward as subscribers the fund
and agree to pay Peter their share of the
amount once he enters into a contract for
constructing the pond.
After raising half the amount, Peter hires
contractors for building the pond. However,
10 people back out at the last moment. Peter
files a suit against them for recovery. The
Court ordered the 10 people to pay the
amount to Peter since he had undertaken a
liability based on their promise to pay. Even
though there was no consideration, the
contract was valid and enforceable by law.
Q: On the eve of his marriage Rahul’s father gifted
him a house. They went to register the documents,
but such agreement was rejected as there was no
consideration. Is this correct? Or can Rahul take
legal action? Ans: The rule of no consideration no
contract does not apply to gifts. Also. Rahul’s father
was gifting him the house of his natural love and
affection. So, this is an exception and the agreement
can be registered even without consideration.
Capacity to Contract
One of the most essential elements of a valid
contract is the competence of the parties to
make a contract. Section 11 of the Indian
Contract Act, 1872, defines the capacity to
contract of a person to be dependent on
three aspects; attaining the age of majority,
being of sound mind, and not disqualified
from entering into a contract by any law that
he is subject to.
Capacity to Contract
According to Section 11, “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 sound mind and is not
disqualified from contracting by any law to
which he is subject.”
So, we have three main aspects:
1. Attaining the age of majority
2. Being of sound mind
3. Not disqualified from entering into a
contract by any law that he is subject to
1] Attaining the Age of Majority
According to the Indian Majority Act, 1875,
the age of majority in India is defined as 18
years. For the purpose of entering into a
contract, even a day less than this age
disqualifies the person from being a party to
the contract. Any person, domiciled in India,
who has not attained the age of 18 years is
termed as a minor.
Let’s look at certain laws governing a minor’s
agreement:
A Contract made with a Minor is Void
Since any person less than 18 years of age
does not have the capacity to contract, any
agreement made with a minor is void ab-
initio (from the beginning).
Example, Peter is 17 years and 6 months old.
He needs some money to go on vacation
with his friends. He approached a
moneylender and borrows Rs 25,000. As
security, he signs some papers mortgaging
his laptop and motorcycle. Six months later,
when he attains the age of majority, he files
a suit declaring that the mortgage executed
by him when he was a minor is void and
should be cancelled. The Court agrees and
relieves Peter of all liability to repay the loan.
Also, if a minor enters into a contract, then
he cannot ratify it even after he attains
majority since the contract is void ab-initio.
And, a void agreement cannot be ratified.
A Minor can be a Beneficiary of a Contract
While a minor cannot enter a contract, he
can be the beneficiary of one. Section 30 of
the Indian Partnership Act, 1932, also
specifies that while a minor cannot become
a partner in the partnership firm, the
benefits of the firm can be extended to him.
Example, Peter lends some money to his
neighbour, John and asks him to mortgage
his house as security. John agrees and the
mortgage deed is made favoring Peter’s 10-
year-old son – Oliver. John fails to repay the
loan and Peter, as the natural guardian of
Oliver, files a suit against John to recover his
money. The Court holds the case since a
minor can be a beneficiary of a contract.
A Minor is always given the Benefit of being
a Minor
Even if a minor falsely represents himself as
a major and takes a loan or enters into a
contract, he can plead minority. The rule of
estoppel cannot be applied against a minor.
He can plea his minority in defence.
Contract by Guardian
Under certain circumstances, a guardian of a
minor can enter into a valid contract on
behalf of the minor. Such a contract, which
the guardian enters into, for the benefit of
the minor, can also be enforced by the
minor.
However, guardians cannot bind a minor by
a contract for buying immovable property.
But a contract entered into by a certified
guardian of a minor, appointed by the Court,
with approval from the Court for the sale of
a minor’s property can be enforced.
Insolvency
A minor cannot be declared insolvent as he
cannot avail debts. Also, if some dues are
pending from the properties of the minor
and he is not personally liable for the same.
Joint contract by a Minor and an Adult
In case of a joint contract between an adult
and a minor, executed by the guardian on
behalf of the minor, the liability of the
contract falls on the adult.
2] Person of Sound Mind
According to Section 12 of the Indian
Contract Act, 1872, for the purpose of
entering into a contract, a person is said to
be of sound mind if he is capable of
understanding the contract and being able
to assess its effects upon his interests.
It is important to note that a person who is
usually of an unsound mind, but occasionally
of a sound mind, can enter a contract when
he is of sound mind. No person can enter a
contract when he is of unsound mind, even
if he is so temporarily. A contract made by a
person of an unsound mind is void.
3] Disqualified Persons
Apart from minors and people with unsound
minds, there are other people who cannot
enter into a contract. i.e., do not have the
capacity to contract. The reasons for
disqualification can include, political status,
legal status, etc. Some such persons are
foreign sovereigns and ambassadors, alien
enemy, convicts, insolvents, etc.
Q1. Rajiv has been in the lunatic asylum for 10
years. The doctors say that he is improving and
there are times when he communicates and
behaves like a normal person. Also, he is 25 years
old. Does Rajiv have the capacity to contract?
Ans: Rajiv has attained the age of majority. Also, the
doctors state that he is of a sound mind for intervals
of time. Hence, he can enter into a contract during
the period when his mind is sound, i.e when he has
the capacity to contract.
\
Free Consent
In the Indian Contract Act, the definition of
Consent is given in Section 13, which states
that “it is when two or more persons agree
upon the same thing and in the same sense”.
So, the two people must agree to something
in the same sense as well. Let’s say for
example A agrees to sell his car to B. A owns
three cars and wants to sell the Maruti. B
thinks he is buying his Honda. Here A and B
have not agreed upon the same thing in the
same sense. Hence there is no consent and
subsequently no contract.
Now Free Consent has been defined in
Section 14 of the Act. The section says that
consent is considered free consent when it is
not caused or affected by the following,
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake
Elements Vitiating Free Consent
Let us take a look at
these elements individually that impair the
free consent of either party.
1] Coercion (Section 15)
Coercion means using force to compel a
person to enter into a contract. So, force or
threats are used to obtain the consent of the
party under coercion, i.e., it is not free
consent. Section 15 of the Act describes
coercion as
• committing or threatening to commit
any act forbidden by the law in the IPC
• unlawfully detaining or threatening to
detain any property with the intention
of causing any person to enter into a
contract
For example, A threatens to hurt B if he does
not sell his house to A for 5 lakh rupees. Here
even if B sells the house to A, it will not be a
valid contract since B’s consent was
obtained by coercion.
Now the effect of coercion is that it makes
the contract voidable. This means the
contract is voidable at the option of the
party whose consent was not free. So, the
aggravated party will decide whether to
perform the contract or to void the contract.
So, in the above example, if B still wishes, the
contract can go ahead.
Also, if any monies have been paid or goods
delivered under coercion must be repaid or
returned once the contract is void. And the
burden of proof proving coercion will be on
the party who wants to avoid the contract.
So, the aggravated party will have to prove
the coercion, i.e., prove that his consent was
not freely given.
2] Undue Influence (Section 16)
Section 16 of the Act contains the definition
of undue influence. It states that when the
relations between the two parties are such
that one party is in a position to dominate
the other party, and uses such influence to
obtain an unfair advantage of the other
party it will be undue influence.
The section also further describes how the
person can abuse his authority in the
following two ways,
• When a person holds real or even
apparent authority over the other
person. Or if he is in a
 fiduciary relationship with the other
person
• He makes a contract with a person
whose mental capacity is affected by
age, illness or distress. The unsoundness
of mind can be temporary or permanent
Say for example A sold his gold watch for
only Rs 500/- to his teacher B after his
teacher promised him good grades. Here the
consent of A (adult) is not freely given, he
was under the influence of his teacher.
Now undue influence to be evident the
dominant party must have the objective to
take advantage of the other party. If
influence is wielded to benefit the other
party it will not be undue influence. But if
consent is not free due to undue influence,
the contract becomes voidable at the option
of the aggravated party. And the burden of
proof will be on the dominant party to prove
the absence of influence.
3] Fraud (Section 17)
Fraud means deceit by one of the parties,
i.e., when one of the parties deliberately
makes false statements. So, the
misrepresentation is done with full
knowledge that it is not true, or recklessly
without checking for the trueness, this is said
to be fraudulent. It absolutely impairs free
consent.
So according to Section 17, a fraud is when a
party convinces another to enter into an
agreement by making statements that are
• suggesting a fact that is not true, and he
does not believe it to be true
• the active concealment of facts
• a promise made without any intention
of performing it
• any other such act fitted to deceive
Let us take a look at an example. A bought a
horse from B. B claims the horse can be used
on the farm. Turns out the horse is lame and
A cannot use him on his farm. Here B
knowingly deceived A and this will amount
to fraud.
One factor to consider is that the aggravated
party should suffer from some
actual loss due to the fraud. There is no
fraud without damages. Also, the false
statement must be a fact, not an opinion. In
the above example if B had said his horse is
better than C’s this would be an opinion, not
a fact. And it would not amount to fraud.
4] Misrepresentation (Section 18)
Misrepresentation is also when a party
makes a representation that is false,
inaccurate, incorrect, etc. The difference
here is the misrepresentation is innocent,
i.e., not intentional. The party making the
statement believes it to be true.
Misrepresentation can be of three types
• A person makes a positive assertion
believing it to be true
• Any breach of duty gives the person
committing it an advantage by
misleading another. But the breach of
duty is without any intent to deceive
• when one party causes the other party
to make a mistake as to the
subject matter of the contract. But this
 is done innocently and not
intentionally.
Mistake of Law and Mistake of Fact
One important factor of a valid contract is
free consent. Both the parties involved in the
contract must enter the contract willingly
and under no pressure. There are factors
which impair the free consent of either
party. Once such factor is “mistake”, which
includes a mistake of law and mistake of fact.
Let us take a more detailed look into it.
Free Consent
According to section 14 of the
Indian Contract Act 1872, free consent is
defined as “consent is said to be free when it
is not caused by coercion, under influence,
fraud, misrepresentation, and mistake.” In
the previous article about Free Consent, we
have already covered the first four factors.
Here we will be looking at the mistake factor.
A mistake is an erroneous belief that is
innocent in nature. It leads to a
misunderstanding between the two parties.
Now when talking about a mistake, the law
identifies two types of mistakes, namely
i. A Mistake of Law
ii. A Mistake of Fact
Mistake of Law
This mistake may relate to the mistake of
the Indian laws, or it can be a mistake of
foreign laws. If the mistake is regarding
Indian laws, the rule is that the ignorance of
the law is not a good enough excuse. This
means either party cannot simply claim it
was unaware of the 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.
However, ignorance of a foreign law is not
given a similar treatment. Ignorance of the
foreign law is given some leeway, the parties
are not expected to know foreign legal
provisions and their meaning. So, a mistake
of foreign law is in fact treated as a mistake
of fact under the Indian Contract Act.
Mistake of Fact
Then there is the other type of mistake, a
mistake of fact. This is when both the parties
misunderstand each other leaving them at a
crossroads. Such a mistake can be because
of an error in understanding, or ignorance or
omission etc. But a mistake is never
intentional, it is an innocent overlooking.
These mistakes can either be unilateral or
bilateral.
Bilateral Mistake
When both parties of a contract are under a
mistake of fact essential to the agreement,
such a mistake is what we call a bilateral
mistake. Here both the parties have not
consented to the same thing in the same
sense, which is the definition of consent.
Since there is an absence of consent
altogether the agreement is void.
However, to render an agreement void the
mistake of fact should be about some
essential fact that is of importance in a
contract. So, if the mistake is about the
existence of the subject matter or its title,
quality, quantity price etc., then it would be
a void contract. But if the mistake is of
something inconsequential, then the
agreement is not void and the contract will
remain in place.
For example, A agrees to sell to B his buffalo.
But at the time of the agreement, the buffalo
had already died. Neither A nor B was aware
of this. And so, there is no contract at all, i.e.,
the contract is void due to a mistake of fact.
Unilateral Mistake
A unilateral mistake is when only one party
to the contract is under a mistake. In such a
case the contract will not be void. So, the
Section 22 of the Act states that just because
one party was under a mistake of fact the
contract will not be void or voidable. So, if
only one party has made a mistake of fact
the contract remains a valid contract.
However, there are some exceptions to this.
In certain conditions, even a unilateral
mistake of fact can lead to a void or voidable
agreement. Let’s see a few of these
exceptions via some examples and case
studies.
1. When Unilateral Mistake is as to the
Nature of the Contract: In such a case
the contract can be held as void. Let us
see the example of Dularia Devi v.
Janardan Singh. Here an illiterate
woman put her thumb impression on
two documents thinking they were
the same. She thought the document
was to gift some property to her
daughters. But the other document
was a Sale deed to defraud the
women out of more of her property.
This contract was held void by the
courts
2. When the Mistake is regarding the
Quality of the Promise: There was an
auction being held by A to sell hemp
and tow. B thinking the auction was
only for hemp, mistakenly bid for a
tow. The amount bid was on par for
hemp but very high for a tow. Hence
the contract was held as voidable.
3. Mistake of the Identity of the Person
contracted with: For example, when A
wants to enter into a contract with B
but mistakenly enters into a contract
with C believing him to be B.
 Q: A mistake of law always leads to a valid contract.
True or False?
Ans: The statement is False. A mistake of India law if
is regarded as a valid contract since ignorance of the
law is not a good enough excuse. But a mistake of
foreign law is considered as a mistake of fact, and if
such a mistake is bilateral it will lead to a void
contract.
Legality of Object and Consideration
For a contract to be a valid contract two
things are absolutely essential – lawful
object and lawful consideration. So, the
Indian Contract Act gives us the parameters
that make up such lawful consideration and
objects of a contract. Let us take a look at
the legality of object and consideration of a
contract.
Lawful Consideration and Lawful Object
Section 23 of the Indian Contract Act clearly
states that the consideration and/or object
of a contract are considered lawful
consideration and/or object unless they are
➢ specifically forbidden by law
➢ of such a nature that they would defeat
the purpose of the law
➢ are fraudulent
➢ involve injury to any other person or
property
➢ the courts regard them as immoral
➢ are opposed to public policy.
So lawful consideration and/or lawful object
cannot contain any of the above. Let us take
a more in detail look at each of them.
1] Forbidden by Law
When the object of a contract or the
consideration of a contract is prohibited by
law, then they are not lawful consideration
or object anymore. They then become
unlawful in nature. And so, such a contract
cannot be valid anymore.
Unlawful consideration of object includes
acts that are specifically punishable by the
law. This also includes those that the
appropriate authorities prohibit via rules
and regulations. But if the rules made by
such authorities are not in tandem with the
law than these will not apply.
Let us see an example. A received a license
from the Forest Department to cut the grass
of a certain area. The authorities at the
department told him he cannot pass on such
interest to another person. But the Forest
Act has no such statute. So, A sold his
interest to B and the contract was held as
valid.
2] Consideration or Object Defeats the
Provision of the Law
This means if the contract is trying to defeat
the intention of the law. If the courts find
that the real intention of the parties to the
agreement is to defeat the provisions of the
law, it will put aside the said contract. Say for
example A and B enter into an agreement,
where A is the debtor, that B will not plead
limitation. This, however, is done to defeat
the intention of the Limitation Act, and so
the courts can rule the contract as void due
to unlawful object.
3] Fraudulent Consideration or Object
Lawful consideration or object can never be
fraudulent. Agreements entered into
containing unlawful fraudulent
consideration or object are void by nature.
Say for example A decides to sell goods to B
and smuggle them outside the country. This
is a fraudulent transaction as so it is void.
Now B cannot recover the money under the
law if A does not deliver on his promise.
4] Defeats any Rules in Effect
If the consideration or the object is against
any rules in effect in the country for the time
being, then they will not be lawful
consideration or objects. And so, the
contract thus formed will not be valid.
5] When they involve Injury to another
Person or Property
In legal terms, an injury means to a criminal
and harmful wrong done to another person.
So, if the object or the consideration of the
contract does harm to another person or
property, this will amount to unlawful
consideration. Say for example a contract to
publish a book that is a violation of another
person’s copyright would be void. This is
because the consideration here is unlawful
and injures another person’s property, i.e.,
his copyright.
6] When Consideration is Immoral
If the object or the consideration are
regarded by the court as immoral, then such
object and consideration are immoral. Say
for example A lent money to B to obtain a
divorce from her husband C. It was agreed
once B obtains the divorce A would marry
her. But the court passed
the judgement that A cannot recover money
from B since the contract is void
on account of unlawful consideration.
7] Consideration is Opposed to Public Policy
For the good of the community, we restrict
certain contracts in the name of public
policy. But we do not use public policy in a
wide sense in this matter. If that was the
case it would curtail individual freedom of
people to enter into contracts. So, for the
purpose of lawful consideration and object
public policy is used in a limited scope. We
only focus on public policy under the law.
So let us look at some agreements that are
opposed to public policy,
1. Trading with the Enemy: Entering into
an agreement with a person from a
country with whom India is at war, void
be a void agreement. For example, a
trader entering into a contract with a
Pakistani national during the Kargil war.
2. Stifling Prosecution: This is a pervasion
of the natural course of law, and such
contracts are void. For example, A
agrees to sell land to B if he does not
participate in the criminal proceedings
against him.
3. Maintainance and Champerty:
Maintainance agreement is when a
person promises to maintain a suit in
which he has no real interest. And
champerty is when a person agrees to
assist another party in litigation for a
portion of the damages or proceeds.
4. An Agreement to Traffic in Public
Offices
 5. Agreements to create Monopolies
6. An agreement to brokerage marriage
for rewards
7. Interfering with the Courts: An
agreement whose object is to induce
a judicial or state officials to act
corruptly and interfere with legal
proceedings
Expressly Void Agreements
There are certain essential elements of
a valid contract. And if those elements are
not present, the contract would then be void
or voidable. However, there are certain
agreements that are expressly void
agreements. This means these agreements
that are declared void by the law itself. Let
us take a look:
1] Agreement in Restraint of Marriage
Any agreement that restrains the marriage
of a major (adult) is a void agreement. This
does not apply to minors. But if an adult
agrees for some consideration not to marry,
such an agreement is expressly a void
agreement according to the contract act.
So, A agrees that if B pays him 50,000/- he
will not marry such an agreement is a void
agreement.
2] Agreement in Restraint of Trade
An agreement by which any person is
restrained from plying a trade or practicing a
legal profession or exercising a business of
any kind is an expressly void agreement.
Such an agreement violates the
constitutional rights of a person.
However, there are a few exceptions to this
rule. If a person sells his business along with
the goodwill, then the buyer can ask the
seller to refrain from practicing the same
business at the local limits.
So, if according to such an agreement as long
as the buyer or his successor carry on such a
business the agreement to restrain
the trade of the seller will be valid.
Similarly, if an outgoing partner can enter
into such a restraint of a trade agreement
with the partnership firm. Also,
a contract between partners not to carry out
any competing business during the
continuance of a partnership is also a valid
contract.
One point to keep in mind regarding the
above agreements is that the terms of such
an agreement have to be reasonable. Such
reasonable terms are not defined under the
act but are to be judged according to each
unique situation and circumstance.
Let us take for example the case of physician
A who employs B as his assistant for three
years. For this duration of three years, B
agrees not to practice medicine anywhere
else. This is a valid agreement even though it
is in restraint of trade.
But say A a lawyer sells his legal practice to B
along with the goodwill. And A agrees never
to practice as a lawyer anywhere in the state
for the next 20 years. This is not a valid
agreement since the terms are completely
unreasonable.
3] Agreement in Restraint of Legal
Proceedings
An agreement that prevents one party from
enforcing his legal rights under a contract
through the legal process (of courts,
arbitration, etc.) then such an agreement is
expressly void agreement.
However, there are exceptions like, if the
agreement states that any dispute between
parties will be referred to arbitration and the
amount awarded in such arbitration will be
final will be a valid contract.
Also, if the parties agree that any dispute
between them in the present or the future
will be referred to arbitration, then such an
agreement is also valid. But such a contract
has to be in writing.
4] An Agreement Whose Meaning is
Uncertain
An agreement whose meaning is uncertain
cannot be a valid agreement, it is a void
agreement. If the essential meaning of the
contract is not assured, obviously the
contract cannot go ahead. But if such
uncertainty can be removed, then the
contract becomes valid.
Say for example A agrees to sell to B 100 kg
of fruit. This is a void contract since what
type of fruit is not mentioned. But if A
exclusively sells only oranges, then the
agreement would be valid because the
meaning would now be certain.
5] Wagering Agreement
According to the Indian Contract Act, an
agreement to wager is a void agreement.
The basis of a wager is that the agreement
depends on the happening or non-
happening of an uncertain event. Here each
side would either win or lose money
depending on the outcome of such an
uncertain event.
The essentials of a wagering agreement are
as follows. If all elements are met then the
agreement will be void.
• Must contain a promise to pay money
or money’s worth
• Is conditional on the happening or non-
happening of a certain event
• The event must be uncertain. Neither
party can have any control over it
• Must be the common intention to bet at
the time of making the agreement
• Parties should have no other interest
other than the stake of the bet
The following agreements are not
considered wagering agreements,
i. Chit Fund
ii. Commercial Transactions, i.e.,
Transactions of the Share Market
iii. Athletic Competition and
Competitions involving Skills
iv. Insurance Contracts
Who Performs the Contract?
There are at least two parties to a contract,
a promisor, and a promisee. A promisee is a
party to which a promise is made and a
promisor is a party which performs the
promise. Three sections of the
Indian Contract Act, 1872 define who
performs a contract – Section 40, 41, and 42.
In this article, let us take a look at the
following sections to understand the
concept of the performance of a contract
better.
Section 40
Section 40 of the Indian Contract Act, 1872
states
If the nature of a contract indicates that
either of the parties intended that the
promise contained in the contract must be
performed by the promisor himself
• then the promisor is obligated to
perform the promise
• else the promise can be performed by
the promisor or his representatives or
an employed agent.
Let’s look at some examples: Peter promises
to pay Rs 50 to John. In this case, Peter can
perform the promise himself by paying
the money to John or can ask someone else
to pay him. Also, if Peter dies before fulfilling
his promise, then his representatives are
required to perform the promise or employ
someone to do the same.
We will take a look at another example.
Peter is a singer and he promises to sing a
song at John’s wedding reception. In this
case, the nature of the contract requires
Peter to perform the promise himself. He
cannot delegate it to someone. So, there are
three possibilities for the performance of the
promise. It can be done by the promisor, his
representatives or his agent, depending on
the nature of the contract.
Promisor Performs the Promise
If a contract indicates that the parties
intended for the promisor to fulfil the
promise himself, then the promisor is
obligated to perform the promise. Usually,
these include promises which involve
personal skills, experience, or expertise and
are usually based on trust between the
promisor and the promisee.
Example 2 cited above about Peter singing at
John’s wedding reception is a good example
of a personal skill being required to perform
the promise.
Agent Performs the Promise
If the contract does not require the
personal consideration of the promisor,
then the promisor can employ a competent
person to perform the promise. Example 1
cited above is a good example of Peter
employing an agent to pay Rs 50 to John.
Legal Representatives Perform the Promise
If the promisor dies before performing the
promise, then the legal representatives
become responsible for the same. If the
promise involves the utilization of personal
skills or expertise, then the consideration
ceases with the death of the promisor.
However, in all other scenarios, the legal
representatives are obligated to perform the
promise unless the contract has a contrary
intention specified. Also, the liability of the
legal representatives is limited to the value
of the property inherited by them.
Peter promises to pay John an amount of Rs
10,000 within one month of delivery of
certain goods. John delivers the goods.
However, Peter dies before he can pay the
money to John. Now, it is his legal
representative’s responsibility to ensure
that John receives the payment. The
representative can pay himself or employ
someone for the same.
Section 41
If the promisee accepts the performance of
a promise from a third person, then he
cannot enforce it against the promisor at a
later date. Hence, the performance of the
promise by a third-party discharge the
promisor of his obligations even if he has not
authorized the third-party to perform the
promise.
Peter promises to pay John an amount of Rs
10,000 for painting his house. John finishes
the job but Peter is unable to pay him. Oliver,
a common friend of Peter and John, offers Rs
6,000 to John on behalf of Peter, which he
accepts. Eventually, John files a suit for
recovery against Peter.
The Court holds that:
• John accepted Rs 6,000 from a third-
person.
• Peter has not authorized the third-
person.
• Hence, John’s act has discharged Peter
of his liability to pay the entire amount.
• John can only claim Rs 4,000 from Peter
now.
Section 42
If the promisors agree to perform a promise
together – joint promise – then they are
jointly obligated to fulfil the promise, unless
the contract specifies a contrary intention.
Also, if any of the promisors die, then their
legal representatives must fulfil the promise
jointly with the surviving promisors. If all the
promisors die, then the legal representatives
of each of them must perform the promise
jointly.
Peter, John, and Oliver jointly promise to pay
Rs 9,00,000 to Rita. However, Peter dies
before paying the money. In this case,
Peter’s representative – Jack, is now jointly
responsible along with John and Oliver to
pay Rita the amount.
Unfortunately, before Rita receives her
money, all the three promisors, i.e. Peter,
John, and Oliver die. In this case, Jack –
Peter’s representative, Tony – John’s
representative, and Sam – Oliver’s
representative must jointly pay the amount
to Rita.
Q: Peter and John are childhood friends. Peter is a
painter and agrees to paint John’s c for a payment of
Rs 20,000. However, he is in urgent need and
requests John to pay him in advance. John obliges
and they enter into a contract for the same. Peter
starts making John’s portrait. However, before he
can finish, he dies in a car accident. Jack inherits
Peter’s property. Can John file a suit for recovery
since he had already made the payment but did not
get his portrait in return? Ans: Since the
contract was based on personal consideration, that is
Peter’s painting skills and there was no clause in the
contract regarding a refund if Peter fails to deliver the
portrait, John cannot file a suit for recovery of his
money.
Time and Place of Performance of
Contract
As a promisor and promise are essential to a
contract, so are the time and place of the
performance of contract. If a time and place
for the performance of contract are agreed
upon, then the promisor should perform the
promise accordingly. If not, then it should be
performed at a reasonable place and time.
The Indian Contract Act, 1872, specifies
some rules regarding the time and place for
the performance of contract under sections
46 – 50.
❖ When no application to be made and no
time specified (Section 46)
Imagine a contract where the promisor has
to perform his promise without any
application by the promisee and there is no
time specified for the performance of the
same. In such a scenario, the promisor
should perform the contract at a reasonable
time.
While the term ‘reasonable’ can have
different interpretations, the section
specifies that it the circumstances of every
case will determine the definition of
reasonable for the parties involved.
Example: Peter promises to pay John Rs
5,000 in cash at his house, within six months,
as a repayment of the loan he had taken
from John. Peter leaves for work at six in the
morning which is when John returns home
from his night shift job. As per the
circumstances, the only time when Peter and
John can meet is at six in the morning.
Hence, the time and place for the
performance of contract is 6 a.m. at John’s
house.
❖ No Application to be made but Time is
Specified (Section 47)
If there is a contract where the promisee is
not required to make an application but the
promisor needs to perform the contract only
on a Sunday, then the promisor should
perform the promise during
regular business hours, unless the time is
specified in the contract too.
Example: Peter promises to deliver certain
goods to John on payment of an advance of
Rs 5,000. John makes the payment and asks
Peter to deliver the goods on a Sunday. Since
the time is not specified, Peter should deliver
it between 9 am and 6 pm, assuming those
are the regular business hours in the place
they live.
If Peter attempts delivery after the business
hours, then John has the right to not accept
the goods and ask Peter to deliver again
during business hours.
❖ Application by the Promisee required
(Section 48)
Let’s say that there is a contract where the
promisee necessarily needs to make an
application for the performance of a
contract, then the promisee needs to ensure
that the application is made at a proper
place and time. In this case, the phrase
‘proper place and time’ can have different
meanings in different cases.
Example: Peter and John enter a contract
where Peter promises to fix John’s car
whenever he asks him to. Peter also takes an
advance payment for the same. When John
asks Peter to fix his car, he must ensure that
he doesn’t ask Peter to go a lot out of his
way. Also, he must preferably ask for repairs
during business hours.
❖ No Application to be made but the Place
of Performance is not Specified (Section
49)
Imagine a contract where the promisee is
not required to make an application for the
performance of contract. Also, the place of
performance is unspecified. In such a
scenario, it is the responsibility of the
promisor to apply to the promisee asking
him to appoint a reasonable place for the
performance of the promise.
Example: Peter promises to deliver
5 television sets to John on a fixed day and
time. However, the contract does not
mention an address. It is Peter’s
responsibility to apply to John and ask him to
appoint a reasonable place where he can
safely accept the delivery of the goods.
❖ Performance as prescribed by the
Promisee (Section 50)
There can also be a contract where the
promisor agrees to perform the promise in a
manner and at a place and time prescribed
or sanctioned by the promisee.
Example: John’s son is in the hospital. He
needs money for his son’s operation. Peter
owes money to John and agrees to repay him
in cash/cheque at any place or time decided
by John. In this case, John has the liberty to
ask for the performance of the promise in
any manner and at any place or time suited
to him.
Q1. Peter owes Rs 5,000 to John. According to
the agreement between them, John doesn’t need
to make an application for Peter to repay the loan.
Also, there is no specification for the place and
time. Further, Peter has agreed to repay
the money in a manner and at a place and time
prescribed by John.
One day John visits Peter’s house and takes a liking
for a new painting made by Peter. He asks Peter to
give him the painting in lieu of the loan. Peter
obliges and does the necessary paperwork. Has
Peter repaid his loan?
Ans: According to Section 50 of the Indian Contract
Act, 1872, Peter has performed his promise in a
manner and at a place and time prescribed by the
promisee, John.
John asked for the painting as a repayment of the
loan. He exercised his right to determine the manner
of the performance of the promise. Since Peter
obliged, he had fulfilled the contract and was no
longer liable to pay any further money to John.
Performance of Reciprocal Promise
In a contract, the promisor and the promisee
both undertake certain obligations towards
each other. These obligations can also be in
the form of a reciprocal promise or a
promise in exchange of a promise. The
Indian Contract Act, 1872, provides for the
law on reciprocal promises in Sections 51-58.
We will look at the provisions of each of
these sections in detail:
❖ Simultaneous Performance of a
Reciprocal Promise (Section 51)
Some contracts consist of a reciprocal
promise or promises which are to be
performed simultaneously. In such cases,
there is no obligation on the promisor to
perform his promise unless the promisee is
willing to perform his reciprocal promise.
Example: When you go to a shop, the
shopkeeper agrees to give you the product
in exchange for money. This is an example of
a reciprocal promise where you promise to
pay the value of the product and the
shopkeeper promises to give you the goods
on receipt of the payment. If either of you is
unwilling to perform your promise, then the
other can treat the contract ended.
❖ A Sequence of Performance of a
Reciprocal Promise (Section 52)
When a contract includes a reciprocal
promise, the parties might agree upon the
order in which the promises are performed.
If that is the case, then the order, as
mentioned in the contract should be
followed.
However, if the contract does not specify any
such order, then the order of performance of
the reciprocal promises is determined based
on the nature of the transaction.
Example: Peter promises to help John find a
house in lieu of John’s promise to pay him
a commission for the same. The contract
does not specify the order of performance of
the promise. However, the nature of the
transaction suggests that Peter should first
help John get a house before he expects him
to perform his promise of paying him the
commission.
❖ One party preventing the other from the
Performance of the Promise (Section 53)
In a contract consisting or reciprocal
promises, if one party prevents the other
from performing the promise, then the
prevented party has the option of voiding
the contract.
Also, the prevented party can claim
compensation from the obstructing party for
any loss that he might sustain due to non-
performance of the contract.
Example: Peter and John entered into a
contract where Peter promises to paint
John’s house. In exchange, John promises to
pay Peter Rs 10,000 and clear the house of
all furniture before Peter begins. However,
when Peter starts painting, he finds that
John has not cleared the furniture as
promised and does not accede to his
requests too. Peter can void the contract and
claim the money since John obstructed him
from performing his promise.
❖ Reciprocal and Dependent Promises
(Section 54)
Imagine a contract where the reciprocal
promises are dependent on each other. If
the promisor who is supposed to perform his
promise before the other, fails to perform it,
then he cannot claim the performance of the
reciprocal promise.
He is also liable to compensate the other
party for any loss that he might sustain due
to non-performance of the contract.
Example: Peter hires a car for a month and
promises to pay the car rental company a
certain amount. The company promises to
send the car to his house within 24 hours of
receiving the advance payment. Peter does
not make the payment and fails to perform
his promise. The company does not send the
car either.
Peter cannot claim the performance of the
company’s promise since he was supposed
to perform his promise first. He will also
have to compensate the company for the
losses sustained by them due to him not
paying the advance.
❖ Failure to perform within the stipulated
time in a time-sensitive contract
(Section 55)
In a contract, where the intention of both
the parties is that time is of the essence and
that the promisor should perform the
promise within a specific time, and the
promisor fails to do so, then he is liable to
pay compensation to the promisee for any
loss sustained by him due to the failure.
It is important to note that in every contract,
the terms can help you understand the
intention. A share trade, in essence, is a
contract where shares are provided in
exchange for money.
In such contracts, time is of the essence since
the price of the share can fluctuate with
time. In other contracts, like the sale of land,
while time might not be of the essence, it
can be made so by expressing it in so many
words in the contract.
If time is not of the essence, then the
contract cannot be voided on grounds that
the time for performance of promise has
expired. In such cases, the promisee is only
entitled to compensation from the promisor
for any loss caused by the delay.
However, if the promise is not performed at
a reasonable time, then the promisee can
void the contract even if time is not of the
essence in the case. The promisee also has
the option to waive his right to void the
contract if the promisor fails to perform it
within a reasonable time in a time-sensitive
contract.
He can accept the performance of promise
at any other time. However, he cannot claim
any compensation from the promisor for
non-performance of the promise within the
agreed time, unless he gives a notice of his
intention to claim compensation to the
promisor when he accepts performance of
the contract.
Example: In a contract, Peter promises to
pay John’s college fees for the next academic
year. Although the contract does not
mention a date, he needs to ensure that he
pays the fees before the last date stipulated
by the institution. In this case, time is of
essence and Peter’s failure to perform his
promise before the last date can cause
losses to John.
❖ Impossible or Unlawful Act (Section 56)
If two parties enter a contract, where the
promisor agrees to do an impossible or
unlawful act, then the contract is void.
The act can be impossible or unlawful at the
time the contract was made or subsequent
events can make a possible act impossible.
Let’s look at both the scenarios:
Initial Impossibility
If both the promisor and promisee are aware
that the act is impossible or unlawful, then
the contract is void
Example: Peter promises to travel from India
to the US in four hours and deliver goods to
John. Since it is impossible to travel this
distance within four hours, the contract is
void. Even if neither the promisor nor the
promisee is aware of the fact that the act is
impossible or unlawful, the contract is void.
If the promisor, enters a contract with a
promisee for doing an act which he knows is
impossible or unlawful, then the promisor
has to compensate the promisee’s losses
sustained due to non-performance of the
contract. It is important that the promisee is
not aware that the act is unlawful or
impossible in these cases.
Subsequent Impossibility
It is possible that when the contract was
made, the promise was possible and lawful.
However, subsequent events made it
impossible or unlawful and the promisor
could not prevent it. In such cases, the
contract is void from the moment the act
becomes impossible.
Example: Peter promises to deliver 100
kilograms of thin plastic bags to John.
However, the State passes a law which bans
all plastic bags. Peter could not prevent it
and due to the recent law, he cannot
perform his promise. Hence, the contract is
void.
❖ Reciprocal Promise of Legal and Illegal
Acts (Section 57)
Imagine two or more people entering a
contract consisting of a reciprocal promise,
where they first do certain things which are
legal and then, under certain circumstances,
agree to do acts which are illegal. In such
cases, the first set of promises is a valid
contract but the second set is void.
Example: Peter agrees to sell his house to
John for Rs 30 lakh. Further, they agree that
if John opens a gambling den in the house,
then John will pay him an additional amount
of Rs 20 lakh. In this case, the first promise
of buying the house for Rs 50 lakh is a legal
and valid contract. However, the second
promise is based on unlawful grounds and is
hence void.
❖ Alternative Promise of Legal and Illegal
Acts (Section 58)
It is possible to make a contract with an
alternative promise. If one branch of the
alternative promise is legal and the other is
illegal, then only the legal branch can be
enforced.
Example: Peter and John enter a contract
where Peter agrees to pay off John’s
outstanding loan of Rs 20 lakh taken from
Oliver. If Peter cannot repay the amount
them, he will kill Oliver. In this case, the
contract is valid for Peter’s promise of
repaying the loan. However, the alternative
branch is illegal and hence, void.
Q: A promises to sell to B 100kgs of potato by the end of
the month. Unfortunately, there was a flood and the
potato crop of the entire state was destroyed. Can B
enforce the contract? Ans: No B cannot enforce the
contract. This is a case of subsequent impossibility. The
contract becomes void from the point in time the contract
becomes impossible to carry out, i.e., when the floods
happened.
Discharge of a Contract
1] Discharge by Performance
When the parties to a contract fulfil the
obligations arising under the contract within
the time and manner prescribed, then
the contract is discharged by performance.
Example: Peter agrees to sell his cycle to
John for an amount of Rs 10,000 to be paid
by John on the delivery of the cycle. As soon
as it is delivered, John pays the promised
amount.
Since both the parties to the contract fulfil
their obligation arising under the contract,
then it is discharged by performance. Now,
discharge by the performance of a contract
can be by:
1. Actual performance
2. Attempted performance
As shown in the example above, actual
performance is when all the parties to a
contract do what they had agreed for under
the contract. On the other hand, it is possible
that when the promisor attempts to perform
his promise, the promisee refuses to accept
it. In such cases, it is called attempted
performance or tender.
2] Discharge by Mutual Agreement
If all parties to a contract mutually agree to
replace the contract with a new one or annul
or remit or alter it, then it leads to a
discharge of the original contract due to a
mutual agreement.
Example: Peter owes Rs 100,000 to John and
agrees to repay it within one year. They
document the debt under a contract.
Subsequently, he loses his job and requests
John to accept Rs 75,000 as a final
settlement of the loan. John agrees and they
make a contract to that effect. This
discharges the original contract due to
mutual consent.
3] Discharge by the Impossibility of
Performance
If it is impossible for any of the parties to the
contract to perform their obligations, then
the impossibility of performance leads to a
discharge of the contract. If the impossibility
exists from the start, then it is impossibility
ab-initio. However, the impossibility might
also arise later due to:
• An unforeseen change in the law
• Destruction of the subject-
matter essential to the performance
• The non-existence or non-occurrence of
a particular state of things which was
considered a given for the performance
of the contract
• A declaration of war
Example: Peter enters into a contract with
John to marry his sister Olivia within one
year. However, Peter meets with an accident
and becomes insane. The impossibility of
performance leads to a discharge of the
contract.
4] Discharge of a Contract by Lapse of Time
The Limitation Act, 1963 prescribes a
specified period for performance of a
contract. If the promisor fails to perform and
the promisee fails to take action within this
specified period, then the latter cannot seek
remedy through law. It discharges the
contract due to the lapse of time.
Example: Peter takes a loan from John and
agrees to pay instalments every month for
the next five years. However, he does not
pay even a single instalment. John calls him
a few times but then gets busy and takes no
action. Three years later, he approaches the
court to help him recover his money.
However, the court rejects his suit since he
has crossed the time-limit of three years to
recover his debts.
5] Discharge of a Contract by Operation of
Law
A contract can be discharged by operation of
law which includes insolvency or death of
the promisor.
6] Discharge by Breach of Contract
If a party to a contract fails to perform his
obligation according to the time and place
specified, then he is said to have committed
a breach of contract.
Also, if a party repudiates a contract before
the agreed time of performance of a
contract, then he is said to have committed
an anticipatory breach of contract.
In both cases, the breach discharges the
contract. In the case of:
• an actual breach, the promisee retains
his right of action for damages.
• an anticipatory breach of contract, the
promisee cannot file a suit for damages.
It also discharges the promisor from
performing his part of the contract.
7] Discharge of a Contract by Remission
A promisee can waive or remit the
performance of promise of a contract,
wholly or in part. He can also extend the time
agreed for the performance of the same.
In example 3 above, Peter only repays a part
of the money he owes to John. However,
John agrees to accept it as a final settlement
of the debt. John’s act of remission
discharges the contract.
8] Discharge by Non-Provisioning of Facilities
In many contracts, the promisee agrees to
offer reasonable facilities to the promisor for
the performance of the contract. If the
promisee fails to do so, then the promisor is
discharged of all liabilities arising due to
non-performance of the contract.
Example: Peter agrees to fix John’s garage
floor provided he keeps his car out for at
least 6 hours. Peter approaches him a few
times but John is reluctant to get his car out.
John fails to provide reasonable facilities to
Peter (an empty floor). This discharges him
of all obligations arising under the contract.
9] Discharge of a Contract due to the
Merger of Rights
In some situations, it is possible that inferior
and superior right coincides in the same
person. In such cases, both the rights
combine leading to a discharge of the
contract governing the inferior rights.
Example: Peter rents John’s apartment for
two years. One year into the contract, he
offers to buy the property from John, who
agrees. The enter a sale contract and Peter
becomes the owner of the apartment. Here
Peter has two rights; one accorded by
the lease agreement making him the renter
and second by the sale agreement making
him the owner. The former being an inferior
right merges with the superior one and
discharges the lease contract.
Anticipatory and Actual Breach of
Contract
A breach is a failure by a party to fulfil the
obligations under a contract. It is of two
types, namely, anticipatory breach and
actual breach. In this article, we will focus on
understanding both types of breaches with
the help of some examples.
❖ Anticipatory Breach of Contract
As the name suggests, an anticipatory
breach is a breach of contract before the
time of performance. So, if
a promisor denies to perform his promise
and signifies his unwillingness before the
time for performance, then it is an
anticipatory breach of contract.
The promisor can convey his unwillingness
either by:
• Expressing it in words (spoken or
written)
• Implying it by his conduct
Let us look at an example. Peter enters into
a contract with John on May 30, 2018. In the
contract, Peter agrees to sell his house to
John provided he receives a token amount of
Rs 5,00,000 from John on or before June 30,
2018. However, on June 15, 2018, John
informs Peter that he will not be able to
provide the token amount on the said date,
thereby expressing rejection of the contract.
Here is another example. Peter enters into a
contract with John on June 01, 2018. As per
the contract, Peter agrees to sell his guitar to
John on June 10, 2018, for an amount of Rs
5,000. However, he sells this guitar to Oliver
on June 07, 2018. Hence, it is an anticipatory
breach of contract due to Peter’s conduct.
The anticipatory breach of contract is
specified under Section 39 of the Indian
Contract Act, 1872. It states: “When a party
to a contract has refused to perform or
disable himself from performing, his promise
in its entirety, the promisee may put an end
to the contract, unless he has signified, but
words or conduct, his acquiescence in its
continuance.”
When a promisor refuses to perform his
promise leading to an anticipatory breach of
contract, the promisee is excused from
performance or from further performance of
his obligations. Also, he can either:
• Treat the contract as cancelled and file a
suit against the other party for damages
arising from the breach. This suit can be
filed immediately without waiting until
the date of performance specified in the
contract.
OR
• Choose not to cancel the contract but
treat it as an operative and wait until the
time of performance has passed before
holding the other party responsible for
the damages caused due to non-
 performance. However, he will need to
keep the contract alive for the benefit of
all parties involved.
❖ Actual Breach of Contract
While an anticipatory breach is before
the time of performance, an actual breach of
contract is on the scheduled time of
performance of the contract. An actual
breach of contract can be committed either:
1] At the time when the Performance of the
Contract is Due
Peter enters into a contract with John
promising to deliver 50 bags of cotton to him
on June 30, 2018. However, on the
scheduled day, he fails to deliver the same.
This is an actual breach of contract. Also, this
breach is at the time the performance of the
contract is due.
2] During the Performance of the Contract
An actual breach of contract can also occur
when one party fails to perform his
obligation, during the performance of the
contract. This refusal can be expressed
in words or by action.
Q1. Peter is a singer. He enters into a contract with
John who is the manager of a music club. As per the
terms of the contract, Peter promises to sing every
Friday and Saturday night for two hours during the
next six months, in exchange for a payment of Rs
2,000 per hour. On the fifth night, Peter wilfully
absents himself. Can John end the contract?
Answer: Yes. John can end the contract and file a suit
for damages since Peter has sown his unwillingness to
perform the contract through his conduct.
Q2. In the same case above, John allows Peter to
sing on the sixth night despite his unplanned
absence on the fifth night. Can John end the contract
and sue Peter for damages?
Answer: In this case, since John expresses his consent
for the continuance of the contract through his
actions, he cannot end the same. However, he is
entitled to compensation for the damages sustained
by him arising due to Peter’s unavailability on the fifth
night.
Remedies for Breach of Contract
When a promise or agreement is broken by
any of the parties, we call it a breach of
contract. So, when either of the parties does
not keep their end of the agreement or does
not fulfil their obligation as per the terms of
the contract, it is a breach of contract. There
are a few remedies for breach of contract
available to the wronged party. Let us take a
look.
1] Recession of Contract
When one of the parties to a contract does
not fulfil his obligations, then the other party
can rescind the contract and refuse the
performance of his obligations.
As per section 65 of the Indian Contract Act,
the party that rescinds the contract must
restore any benefits he got under the said
agreement. And section 75 states that the
party that rescinds the contract is entitled to
receive damages and/or compensation for
such a recession.
2] Sue for Damages
Section 73 clearly states that the party who
has suffered, since the other party has
broken promises, can claim compensation
for loss or damages caused to them in the
normal course of business.
Such damages will not be payable if the loss
is abnormal in nature, i.e., not in the
ordinary course of business. There are two
types of damages according to the Act,
• Liquidated Damages: Sometimes the
parties to a contract will agree to the
amount payable in case of a breach. This
is known as liquidated damages.
• Unliquidated Damages: Here the amount
payable due to the breach of contract is
assessed by the courts or any appropriate
authorities.
3] Sue for Specific Performance
This means the party in breach will actually
have to carry out his duties according to the
contract. In certain cases, the courts may
insist that the party carry out the agreement.
So, if any of the parties fails to perform the
contract, the court may order them to do so.
This is a decree of specific performance and
is granted instead of damages.
For example, A decided to buy a parcel of
land from B. B then refuses to sell. The courts
can order B to perform his duties under the
contract and sell the land to A.
4] Injunction
An injunction is basically like a decree for
specific performance but for a negative
contract. An injunction is a court order
restraining a person from doing a particular
act.
So, a court may grant an injunction to stop a
party of a contract from doing something he
promised not to do. In a prohibitory
injunction, the court stops
the commission of an act and in a mandatory
injunction, it will stop the continuance of an
act that is unlawful.
5] Quantum Meruit
Quantum meruit literally translates to “as
much is earned”. At times when one party of
the contract is prevented from finishing his
performance of the contract by the other
party, he can claim quantum meruit.
So, he must be paid a reasonable
remuneration for the part of the contract he
has already performed. This could be the
remuneration of the services he has
provided or the value of the work he has
already done.
Suit for Damages
A contract is a legal promise to perform
certain obligations. When a party breaks a
promise, then the other parties to the
contract might suffer losses due to non-
performance of the obligation. The Indian
Contract Act, 1872, has laid down some
specific rules for filing a suit for damages in
such cases. In this article, we will look at the
various types of damages and the different
scenarios under which a party can file a suit
for compensation.
Compensation for Losses or Damages
caused by a Breach of Contract
This section of the Indian Contract Act, 1872,
lays down certain rules to determine the
amount of compensation upon the breach of
a contract. The ground rule is, on the breach Types of Damages
of a contract, it is the entitlement of the
Sections 73-75 of the Indian Contract Act,
suffering party to receive compensation
1872, define remedy by way of damages as
from the party who breaks the contract for
the entitlement of the suffering party to
losses sustained due to the breach. Here are
recover compensation for losses suffered
some rules:
due to non-performance of the contract. The
• The suffering party can claim damages can be of the following types:
compensation for any loss arising
1] Ordinary damages
naturally in the usual course of events.
On the breach of a contract, the suffering
• Even if the party knew that on the breach
party may incur some damages arising
of the contract, they might suffer certain
naturally, in the usual course of events. Even
losses, he can claim compensation.
if the suffering party knew about the likely
• Special damages, if any, can be claimed damages if the contract was breached, he
only if the suffering party has given notice can claim compensation for such losses.
about it earlier. Also, the party suffering
Peter agrees to sell and deliver 10 bags of
a loss is expected to take reasonable
potatoes to John for Rs 5,000 after two
steps to minimize it.
months. On the date of delivery, the price of
• The suffering party cannot claim potatoes increases and Peter refuses to
compensation for indirect or remote perform his promise. John purchases 10
losses/damages. bags of potatoes for Rs 5,500. He can receive
Rs 500 from Peter as ordinary damages
Also, while estimating the loss incurred, all
arising directly from the breach.
the means which existed to remedy the
inconvenience caused by the non- 2] Special Damages
performance of the contract should be
A party to a contract might receive a notice
considered.
of special circumstances affecting the
Example: Peter agrees to sell and deliver 50 contract. In such cases, if he breaches the
kilograms of rice to John for Rs 5,000. The contract, then he is liable for the ordinary
amount is to be paid on delivery. However, damages plus the special damages.
Peter fails to perform the promise. John buys
Peter hired the services of John, a goods
50 kilograms of rice from a neighborhood
transporter, to deliver a machine to his
trader for Rs 6,000. John can claim
factory urgently. He also informed John that
compensation from Peter. The
his business has stopped for want of the
compensation amount is the additional
machine. However, John delayed the
amount that John had to pay to procure the
delivery of the machine by an unreasonable
same quantity of rice of similar quality from
amount of time. Peter missed out on a huge
the market. In this case, it is Rs 1,000.
order since he didn’t have the machine with
him.
In this case, Peter can claim compensation
from John. The compensation amount will
include the amount of profit he could have
made by running his factory during the
period of delay. However, he cannot claim
the profits that he would have made if he got
the contract since John was not made aware
of the same.
3] Vindictive or Exemplary Damages
There are two scenarios for awarding
vindictive or exemplary damages:
• Breach of a promise to marry because it
causes injury to his/her feelings
• Wrongful dishonor of cheque by a banker
because it causes loss of reputation and
credibility.
In case of a wrongful dishonor of cheque
from a businessman, the compensation will
include exemplary damages even if he has
not suffered any financial loss. However, a
non-trader is not awarded heavy
compensation unless the damages are
alleged and proved as special damages.
Example: Peter is a farmer. He issues a
cheque for procuring seeds for his next crop.
He has sufficient funds in his account but the
bank erroneously dishonors the cheque.
Peter files a suit claiming compensation for
damages to his reputation. The Court awards
a nominal amount as damages since Peter is
not a trader.
4] Nominal Damages
If a party to a contract files a suit for losses
but proves that while there has been a
breach of contract, he has not suffered any
real losses, then compensation for nominal
damages is awarded. This is done to
establish the right to a decree for a breach of
contract. Also, the amount can be as low as
Re 1.
5] Damages for Deterioration caused by
Delay
In cases where goods are being transported
by a carrier and he delays the delivery of
goods causing them to deteriorate, the
affected party can file a suit for damages for
deterioration by the delay. Deterioration can
mean physical damage to the goods and/or
loss of a special opportunity for sale.
6] Pre-fixed damages
During the formation of a contract, the
parties might stipulate payment of a certain
amount as compensation upon the breach of
the contract. This amount can be a
reasonable estimate of the likely loss in case
of a breach or a penalty.
Under Section 74 of the Indian Contract Act,
1872, it is specified that if an amount is
mentioned in a contract as the sum to be
paid in case of a breach, then the suffering
party is entitled to reasonable
compensation, not exceeding the amount
specified.
Q: If the contract specifies the penalty
amount as Rs 100,000 and the actual loss
due to the breach is Rs 70,000. What will be
the damages?
Ans: If the contract specifies the penalty
amount as Rs 100,000 and the actual loss
due to the breach is Rs 70,000, then the
compensation awarded to the suffering
party is Rs 70,000. On the other hand, if the
suffering party sustains a loss of Rs 150,000,
the compensation awarded will be Rs
100,000 and NOT the actual loss sustained.
Liquidated Damages and Penalty
When a breach of contract occurs, liquidated
damages and/or penalty is payable. While
the terms, penalty and liquidated damages
might sound similar, there is a clear line of
distinction between them. In this article, we
will look at the laws that govern the
compensation payable in the event of a
breach of contract.
If the parties to a contract specify the
amount of compensation payable in case of
a breach of contract, then will the Court
accept this figure as a measure of damage?
This scenario is handled differently by the
English and Indian laws. Let’s look at each of
them:
English Law
As per the English law, the amount specified
can be interpreted either as liquidated
damages or penalty.
• Liquidated damages: If the amount fixed
by all parties is a genuine estimate of the
loss by a future breach of contract, then
it is liquidated damages. Thus, all parties
to the contract agree that the amount is
fair compensation for the breach.
• Penalty: If the amount fixed by all parties
is unreasonable or used to force the
performing party to fulfill the obligation,
then it is a penalty. In such cases, the
amount is disregarded and the suffering
party cannot claim more than the actual
loss.
Indian Law
The Indian law makes no distinction
between liquidated damages and penalty.
The compensation awarded cannot exceed
the amount mentioned in the contract.
According to Section 74 of the Indian
Contract Act, 1872, if the parties fix the
damages, the Court will not allow more.
However, it may award a lesser amount,
depending on the case. Hence, the suffering
party gets reasonable compensation but no
penalty.
There is an exception to Section 74 which
states that if a party enters into a contract
with the State or Central government for the
performance of an act in the interest of the
general public, then a breach of such a
contract makes the party liable to pay the
entire amount mentioned in the contract.
How to differentiate between Liquidated
Damages and Penalty?
Here are some principles to help you
distinguish between a penalty and liquidated
damages:
• If the sum payable is far in excess of the
probable damage on breach of the
contract, then it is a penalty.
• If a contract mentions an amount payable
at a certain date and an additional
 amount if a default happens, then the
additional sum is a penalty. This is
because a mere delay in payment is
unlikely to cause damage.
• Even if the contract specifies a sum as
‘penalty’ or ‘damages’, the Court needs
to discern from the facts of the case if the
amount mentioned therein is, in fact, a
penalty or liquidated damages.
• The crux of the penalty is the payment
of money as a terrorem of the defaulting
party. Liquidated damages, on the other
hand, are the true pre-estimate of the
damage.
• While the English law distinguishes
between a penalty and liquidated
damages, in India, there is no such
distinction. The Indian Courts focus on
awarding a reasonable compensation to
the suffering party which does not
exceed the amount fixed in the contract.
Other Remedies Available
Interestingly, claiming damages is not the
only remedy for a breach of contract. Here
are some other remedies available to
suffering parties:
1] Rescission of Contract
Rescission means revocation, cancellation,
or repeal of a law, order, or agreement. If
one party breaches the contract, then the
other party can treat the contract as
rescinded. Also, he is discharged of all
obligations under the contract. Further, he
can claim compensation for damages, if any.
Example: Peter agrees to deliver 50 bags of
cement to John on July 01, 2018. John agrees
to pay Rs 10,000 on receipt of the same.
However, Peter fails to deliver the cement
on the specified date. Hence, John is
absolved of his obligation to pay the price.
Further, he can claim compensation for
losses suffered in procuring the cement from
another seller.
2] Quantum Meruit
Quantum Meruit means a reasonable sum of
money paid to a person
for services rendered when the amount is
not specified in a legally enforceable
contract.
In such cases, the law infers a promise to pay
since the service rendered indicates an
understanding between both parties.
Quantum Meruit covers a case where the
party who provides the service has
completed part, but not all of the work that
he was bound to do and seeks compensation
for the value of the work done. There are
two important conditions that must be met
for this rule to be applied:
• Contract is discharged
• The claim is brought by the party who
has not defaulted.
In simple words, Quantum Meruit allows
compensating a party for the value of work
done or services rendered. While damages
are compensatory in nature, Quantum
Meruit is restitutory since it is a reasonable
compensation awarded on the implication of
a contract to remunerate.
A Quantum Meruit claim arises in the
following cases:
• When an agreement is found to be void
or it becomes void
• If a party does some work or renders
services without the intention of doing
so ‘free of charge’.
• If there is a contract to render services
(express or implied) but there is no
mention of remuneration.
• When one party refuses to perform a
contract.
• The contract is divisible and the party
who has not defaulted has enjoyed the
benefit of the part-performance.
• The contract is indivisible and for a lump
sum but the performance is not proper.
In such cases, the party performing the
contract can claim the lump sum and the
other party can deduct a certain amount
for the bad work done.
3] Suit for Specific Performance
There are cases where damages are not an
adequate remedy upon the breach of a
contract. In such cases, the Court may, in its
discretion on a suit for specific performance,
instruct the defaulting party to perform the
promise as per the terms of the contract.
4] Suit for Injunction
If a party has promised not to do something
vide a contract but is negating these terms,
then the Court can issue an injunction order
to restrain the party from doing what he has
promised not to do.
Example: Peter is a famous Bollywood actor.
He signs a contract with John, a producer. In
the contract, he agrees to work exclusively
for him for the next 2 years. However, he
enters into a contract with Oliver, another
producer, to act in his upcoming movie. The
Court can issue an injunction order
restraining Peter from working with any
other producer.
Section 75 of the Indian Contract Act, 1872
According to this section, if a party rightfully
rescinds a contract, then he can claim
compensation for any losses or damages
sustained due to non-performance of the
contract.
Example: Peter is a drummer and enters into
a contract with John, a nightclub owner.
According to the contract, Peter agrees to
play at John’s club every Friday and Saturday
night. The agreement is for the next two
months against a payment of Rs 5,000 per
night. On the fourth night, Peter wilfully
absents himself from the club and John
rescinds the contract.
Since he does so rightfully, John can claim
compensation for the damages sustained
due to Peter’s non-fulfillment of his promise.
Q: Peter and John entered into a contract under which
Peter promises to deliver 100 bags of rice to John at Rs
500 each. He also promises to deliver these bags in
two installments of 50 each. He delivers the first batch
of 50 bags but fails to supply the second. Will John
have to pay for the first 50 bags?
Ans: Yes, according to the Quantum Meruit John has to
pay for the 50 bags that he has received even though
Peter has not performed the complete obligation.
Contingent Contracts
Contracts are of different types. Since
people can get into various kinds of
agreement for performance or non-
performance of certain acts. One way of
understanding contracts is by dividing them
into two types: Absolute and Contingent. Let
us take a detailed look at contingent
contracts.
An absolute contract is one where the
promisor performs the contract without any
condition. Contingent contracts, on the
other hand, are the ones where the promisor
performs his obligation only when certain
conditions are met.
If you look at the contracts of insurance,
indemnity or guarantee, they have one thing
in common – they create an obligation on
the promisor if an event which is collateral to
the contract does or does not happen.
For example, in a life insurance contract, the
insurer pays a certain amount if the insured
dies under certain conditions. The insurer is
not called into action until the event of the
death of the insured happens. This is a
contingent contract.
Under Section 31 of the Indian Contract Act,
1872, contingent contracts are defined as
follows: “If two or more parties enter into a
contract to do or not do something, if an
event which is collateral to the contract does
or does not happen, then it is a contingent
contract.”
Example: Peter is a private insurer and
enters into a contract with John for fire
insurance of John’s house. According to the
terms, Peter agrees to pay John an amount
of Rs 5 lakh if his house is burnt against an
annual premium of Rs 5,000. This is a
contingent contract.
Here, the burning of the house is neither a
performance promised as a part of the
contract nor a consideration.
Peter’s liability arises only when the
collateral event occurs.
Essentials of Contingent Contracts
1] Depends on happening or non-happening
of a certain event
The contract is contingent on the happening
or the non-happening of a certain event.
These said events can be precedent or
subsequent, this will not matter. Say for
example Peter promises to pay John Rs 5,000
if the Rajdhani Express reaches Delhi on
time. This is a contingent event.
2] The event is collateral to the contract
It is important that the event is not a part of
the contract. It cannot be the performance
promised or a consideration for a promise.
Peter enters into a contract with John and
promises to deliver 5 television sets to him.
John promises to pay him Rs 75,000 upon
delivery. This is NOT a contingent contract
since John’s obligation depends on the event
which is a part of the contract (delivery of TV
sets) and not a collateral event.
Peter enters into a contract with John and
promises to deliver 5 television sets to him if
Brazil wins the FIFA World Cup provided
John pays him Rs 25,000 before the World
Cup kicks-off. This is a contingent contract
since Peter’s obligation arises only when
Brazil wins the Cup which is a collateral
event.
3] The event should not be a mere will of the
promisor
The event cannot be a wish of the promisor.
Say for example Peter promises to pay John
Rs 5,000 if Argentina wins the FIFA World
Cup provided he wants to. This is NOT a
contingent contract. Actually, this is not a
contract at all.
Peter promises to pay John Rs 50,000 if he
leaves Mumbai for Dubai on August 30,
2018. This is a contingent contract. Going to
Dubai can be within John’s will but is not
merely his will.
4] The event should be uncertain
If the event is sure to happen, then the
contract is due to be performed. This is not a
contingent contract. The event should be
uncertain.
Peter promises to pay John Rs 500 if it rains
in Mumbai in the month of July 2018. This is
not a contingent contract because in July
rains are almost a certainty in Mumbai.
Enforcement of Contingent Contracts
Sections 32 – 36 of the Indian Contract Act,
1872, list certain rules for the enforcement
of a contingent contract.
Rule # 1 – Contracts Contingent on the
happening of an Event
A contingent contract might be based on the
happening of an uncertain future event. In
such cases, the promisor is liable to do or not
do something if the event happens.
However, the contract cannot be enforced
by law unless the event takes place. If the
happening of the event becomes impossible,
then the contingent contract is void. This
rule is specified in Section 32 of the Indian
Contract Act, 1872.
Peter promises to pay John Rs 50,000 if he
can marry Julia, the prettiest girl in the
neighborhood. This is a contingent contract.
Unfortunately, Julia dies in a car accident.
Since the happening of the event is no longer
possible, the contract is void.
Rule # 2 – Contracts Contingent on an Event
not happening
A contingent contract might be based on the
non-happening of an uncertain future event.
In such cases, the promisor is liable to do or
not do something if the event does not
happen. However, the contract cannot be
enforced by law unless happening of the
event becomes impossible. If the event takes
place, then the contingent contract is void.
This rule is specified in Section 33 of the
Indian Contract Act, 1872.
Peter promises to pay John Rs 50,000 if the
ship named Titanic which leaves on a
dangerous mission does not return. This is a
contingent contract. This contract is
enforceable by law if the ship sinks making
its return impossible. On the other hand, if
the ship returns, then the contract is void.
Rule # 3 – Contracts contingent on the
conduct of a living person who does
something to make the event or conduct as
impossible of happening
Section 34 of the Indian Contract Act, 1872
states that if a contract is a contingent upon
how a person will act at a future time, then
the event is considered impossible when the
person does anything which makes it
impossible for the event to happen.
Peter promises to pay John Rs 5,000 if he
marries Julia. However, Julia marries Oliver.
Julia’s act thus renders the event of John
marrying her impossible. (A divorce is still
possible though but the happening of the
event is considered impossible.)
Rule # 4 – Contracts Contingent on an Event
happening within a Specific Time
There can be a contingent contract wherein
a party promises to do or not do something
if a future uncertain event happens within a
fixed time. Such a contract is void if the event
does not happen and the time lapses. It is
also void if before the time fixed, the
happening of the event becomes impossible.
This rule is specified in Section 35 of the
Indian Contract Act, 1872.
Peter promises to pay John Rs 5,000 if the
ship named Titanic which leaves on a
dangerous mission returns before June 01,
2019. This contract is enforceable by law if
the ship returns within the fixed time. On the
other hand, if the ship sinks, then the
contract is void.
Rule # 5 – Contracts Contingent on an Event
not happening within a Specific Time
Contingent contracts might be based on the
non-happening of an uncertain future event
within a fixed time. In such cases, the
promisor is liable to do or not do something
if the event does not happen within the said
time. The contract can be enforced by law if
the fixed time has expired and the event has
not happened before the expiry of the time.
Also, if it becomes certain that the event will
not happen before the time has expired,
then it can be enforced by law. This rule is
specified in Section 35 of the Indian Contract
Act, 1872.
Peter promises to pay John Rs 5,000 if the
ship named Titanic which leaves on a
dangerous mission does not return before
June 01, 2019. This contract is enforceable
by law if the ship does not return within the
fixed time. Also, if the ship sinks or is burnt,
the contract is enforced by law since the
return is not possible.
Rule # 6 – Contracts Contingent on an
Impossible Event
If a contingent contract is based on the
happening or non-happening of an
impossible event, then such a contract is
void. This is regardless of the fact if the
parties to the contract are aware of the
impossibility or not. This rule is specified in
Section 36 of the Indian Contract Act, 1872.
Peter promises to pay John Rs 50,000 if the
sun rises in the west the next morning. This
contract is void since the happening of the
event is impossible.
 Differences between Contingent Contracts and Wagering Contracts
Factors
Meaning
Reciprocal promises
Uncertain event
Nature of contract
Interest of parties
Mutuality of loss and gain
Effect of contract
Contingent Contracts Wagering Contract
It is a contract to do or not to
It is a promise to give money
do something with reference or money’s worth with
to a collateral event reference to an uncertain
happening or not happening. event happening or not
happening.
It may not contain reciprocal It consists of reciprocal
promises. promises.
The event is collateral. The uncertain event is the
core factor
Contingent contract may not A wagering agreement is
be wagering in nature. essentially contingent in
nature.
Contracting parties has The contracting parties have
interest in the subject matter no interest in the subject
in a contingent contract. matter.
Contingent contract is not A wagering contract is a
based on the doctrine of game, losing and gaining
mutuality of loss and gain. alone matters.
Contingent contract is valid. A wagering agreement is
void.

Quasi Contract
The word ‘Quasi’ means pseudo. Hence, a Quasi contract is a pseudo-contract. When we talk
about a valid contract, we expect it to have certain elements like offer and
acceptance, consideration, the capacity to contract, and free will. But there are other types of
contracts as well.
There are cases where the law implies a promise and imposes obligations on one party while
conferring rights to the other even when the basic elements of a contract are not present. These
promises are not legal contracts, but the Court recognizes them as relations resembling a
contract and enforces them like a contract.
These promises/ relations are Quasi contracts. These obligations can also arise due to different
social relationships which we will look at in this article:
The core principles behind a Quasi Contract are justice, equity and good conscience. It is based
on the maxim: “No man must grow rich out of another persons’ loss.
Let’s look at an example of a Quasi contract:
Peter and Oliver enter a contract under
which Peter agrees to deliver a basket of
fruits at Oliver’s residence and Oliver
promises to pay Rs 1,500 after consuming all
the fruits. However, Peter erroneously
delivers a basket of fruits at John’s residence
instead of Oliver’s. When John gets home, he
assumes that the fruit basket is a birthday
gift and consumes them.
Although there is no contract between Peter
and John, the Court treats this as a Quasi-
contract and orders John to either return the
basket of fruits or pay Peter.
Features of a Quasi Contract
1. It is usually a right to money and is
generally (not always) to a liquated sum
of money
2. The right is not an outcome of an
agreement but is imposed by law.
3. The right is not available against
everyone in the world but only against a
specific person(s). Hence it resembles a
contractual right.
Sections 68 – 72 of the Indian Contract Act,
1872 detail five circumstances under which
a Quasi contract comes to exist. Remember,
there is no real contract between the parties
and the law imposes the contractual liability
due to the peculiar circumstances.
Section 68 – Necessaries Supplied to
Persons Incapable of Contracting
Imagine a person incapable of entering into
a contract like a lunatic or a minor. If a
person supplies necessaries suited to the
condition in life of such a person, then he can
get reimbursement from the property of the
incapable person.
John is a lunatic. Peter supplies John with
certain necessaries suited to his condition in
life. However, John does not have
the money or sanity and fails to pay Peter.
This is termed as a Quasi contract and Peter
is entitled to reimbursement from John’s
property.
However, to establish his claim, Peter needs
to prove two things:
1. John is a lunatic
2. The goods supplied were necessary
for John at the time they were sold/
delivered.
Section 69 – Payment by an Interested
Person
If a person pays the money on someone
else’s behalf which the other person is
bound by law to pay, then he is entitled to
reimbursement by the other person.
Peter is a zamindar. He has leased his land to
John, a farmer. However, Peter 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 John). According to the Revenue
law, once the land is sold, John’s lease
agreement is annulled.
John 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, John pays the government
the amount due from Peter. In this scenario,
Peter is obligated to repay the said amount
to John.
Section 70 – Obligation of Person enjoying
the benefits of a Non-Gratuitous Act
Imagine a person lawfully doing something
or delivering something to someone without
the intention of doing so gratuitously and
the other person enjoying the benefits of the
act done or goods delivered. In such a case,
the other 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.
However, the plaintiff must prove that:
• The act that is done or thing delivered
was lawful
• He did not do so gratuitously
• The other person enjoyed the benefits
Section 71 – Responsibility of Finder of
Goods
If a person finds goods that belong to
someone else and takes them into his
custody, then he has to adhere to the
following responsibilities:
• Take care of the goods as a person of
regular prudence
• No right to appropriate the goods
• Restore the goods to the owner (if
found)
Peter owns a flower shop. Olivia visits him to
buy a bouquet but forgets her purse in the
shop. Unfortunately, there are no
documents in the purse to help ascertain her
identity. Peter leaves the purse on the
checkout counter assuming that she would
return to take it.
John, an assistant at Peter’s shop finds the
purse lying on the counter and puts it in a
drawer without informing Peter. He finished
his shift and goes home. When Olivia returns
looking for her purse, Peter can’t find it. He
is liable for compensation since he did not
take care of the purse which any prudent
man would have done.
Section 72 – Money paid by Mistake or
Under Coercion
If a person receives money or goods by
mistake or under coercion, then he is liable
to repay or return it.
Let us see an example. Peter misunderstands
the terms of the lease and pays
municipal tax erroneously. After he realizes
his mistake, he approached the municipal
authorities for reimbursement. He is entitled
to be reimbursed since he had paid the
money by mistake.
Similarly, money paid by coercion which
includes oppression, extortion or any such
means, is recoverable.
Q: Peter and Oliver enter a contract under
which Peter agrees to deliver a basket of
fruits at Oliver’s residence and Oliver
promises to pay Rs 1,500 after consuming all
the fruits. However, Peter erroneously
delivers a basket of fruits at John’s residence
instead of Oliver’s. When John gets home he
assumes that the fruit basket is a birthday
gift and consumes them. Does John have to
pay for the goods?
Ans: Yes, John has to pay for the fruit basket.
Although there is no contract between Peter
and John, the Court treats this as a Quasi
contract and orders John to either return the
basket of fruits or pay Peter.
Agreement with Minor
The Indian Contract Act, 1872 is
important legislation in the field of
commercial law in India. It is basically
responsible for regulating contractual
relationships and obligations. A
common legal complexity often arises
when an agreement with minor parties
takes place. This is problematic
because the Act does not permit such
agreements outrightly.
Contractual Capacity
Section 11 of the Indian Contract Act,
1872 explains the requirements of
competency for entering
into contracts. Individuals or entities
can create contracts only if they meet
these requirements. The very first such
requirement is that of majority age.
The general rule of contracts is that
every person, whether natural or
artificial, can enter into contractual
obligations.
Section 11, however, lays down certain
exceptions. For example, minors,
persons of unsound mind and those
whom the law specifically disqualifies
are the exceptions.
The rationale behind Section 11 is that
all parties to a contract must be
competent to understand their
obligations. Since a mature mind is
important for this purpose,
the law prohibits agreement with
minor parties.
This is because minors would find it
difficult to comprehend and fulfil their
obligations. Hence, the law itself
prohibits them from creating
contracts.
Agreement with Minor parties
Section 11 states that only persons
who have attained majority according
to the law are competent to contract.
Therefore, there must be a law that
defines the age of majority.
In India, the Indian Majority Act, 1875
declares the age of majority of all
persons to be 18 years. If a minor has a
guardian or Court of Ward looking
after him, his age of majority becomes
21 years. Hence, any contract with a
party below the age of 18 years is
invalid as per the Act.
A very important case that had
explained this issue is Mohiri Bibi v.
Dharmodas Ghose. In this case, a minor
had borrowed some money from a
money-lender by mortgaging his
house.
The money-lender moved to
take possession of the minor’s house
when he defaulted payment. The
court, however, said since an
agreement with minor parties is void,
the money-lender could not enforce
this contract.
Indian courts have repeatedly used
this judgment to abrogate minors from
contractual obligations. Hence, minors
cannot enter into agreements unless
some legal provisions allow them.
For example, a minor cannot transfer
property as per the Transfer of
Property Act. He can, however, receive
property from other persons under a
legal contract.
Rules relating to Agreement with
Minor Parties
Although, as a general rule, a contract
with minors is void, we must keep in
mind the following rules as well:
1) A contract with a minor is void and,
hence, no obligations can ever arise on
him thereunder.
2) The minor party cannot ratify the
contract upon attaining majority
unless a law specifically allows this.
3) No court can allow specific
performance of a contract with minors
because it is void altogether.
4) The Partnership Act also prohibits
minors from becoming partners in a
firm. They can, however, receive the
benefits of partnership and ratify the
same upon attaining majority.
5) The rule of estoppel under evidence
law does not apply to minors under
contractual obligations. In other
words, even if a minor forms a contract
claiming majority age, legal obligations
cannot arise against him.
6) Parents or guardians of minors can
name them in contracts only if it
benefits them. But even in this case,
the minor cannot be personally liable.
Contract of Indemnity
A contract of indemnity is one of the most
important forms of commercial contracts.
Several industries, such as the
insurance industry, rely on these contracts.
This is because of the nature of these
contracts. They basically help businesses in
indemnifying their losses and, therefore,
reduce their risks. This is extremely
important for small as well as large
businesses.
Contract of Indemnity
A contract of indemnity basically involves
one party promising the other party to make
good its losses. These losses may arise either
due to the conduct of the other party or that
of somebody else.
To indemnify something basically means to
make good a loss. In other words, it means
that one party will compensate the other in
case it suffers some losses.
For example, A promises to deliver certain
goods to B for Rs. 2,000 every month. C
comes in and promises to indemnify B’s
losses if A fails to so deliver the goods. This
is how B and C will enter into contractual
obligations of indemnity.
A contract of insurance is very similar to
indemnity contracts. Here, the insurer
promises to compensate the insured for his
losses. In return, he
receives consideration in the form of
premium. However, the Contract Act does
not strictly govern these kinds of
transactions. This is because the Insurance
Act and other such laws contain
specific provisions for insurance contracts.
Parties under Indemnity Contracts
There are generally two parties in indemnity
contracts. The person who promises to
indemnify for a loss is the Indemnifier. On
the other hand, the person whose losses the
indemnifier promises to make good is the
Indemnified. We can also refer to the
Indemnified party as the Indemnity Holder.
For example, in the earlier example, C is the
Indemnifier and B is the Indemnity Holder.
Nature of Indemnity Contracts
An indemnity contract may be either express
or implied. In other words, parties may
expressly create such a contract as per their
own terms. The nature of circumstances may
also create indemnity obligations impliedly.
For example, A does an act at the request of
B. If B suffers some losses and A offers to
compensate him, they impliedly create an
indemnity contract.
Rights of an Indemnity Holder
When parties expressly make a contract of
indemnity, they can determine their own
terms and conditions. However, sometimes
they may not do so. In such a case, the
indemnity holder can enforce the following
rights against the indemnifier:
1) The indemnifier will have to pay damages
which the indemnity holder will claim in a
suit.
2) The indemnity holder can even compel
the indemnifier to pay the costs he incurs in
litigating the suit.
3) If the parties agree to legally compromise
the suit, the indemnifier has to pay the
compromise amount.
Contract of Guarantee
Apart from indemnity contracts, the
Contract Act also governs contracts of
guarantee. These contracts might appear
similar to indemnity contracts but there are
some differences between them.
In guarantee contracts, one party contracts
to perform a promise or discharge
a liability of a third party. This will happen in
case the third party fails to discharge its
obligations and defaults. However, the
burden of discharging the burden will first lie
on the defaulting third party.
The person who gives the guarantee is the
Surety. On the other hand, the person for
whom the Surety gives the guarantee is the
Principal Debtor. Similarly, the person to
whom he gives such a guarantee is the
Creditor.
Differences between Indemnity and
Guarantee
There are some important differences
between the contracts of indemnity and
guarantee.
Firstly, there are just two parties in
indemnity, while there are three in contracts
of guarantee.
Secondly, in a guarantee, there is an existing
debt/duty which the surety guarantees to
discharge. On the other hand, liability in
indemnity is contingent and may not arise at
all.
Thirdly, an indemnifier might act without
the debtor’s behest, while a surety always
waits for the principal debtor’s request.
Finally, the liability of an indemnifier
towards the indemnity holder is primary.
Whereas, in guarantee, the surety’s liability
is secondary. This is because the primary
liability lies on the principal debtor himself.
Contract of Guarantee
Contract of Guarantee means a contract to
perform the promises made or discharge the
liabilities of the third person in case of his
failure to discharge such liabilities.
As per section 126 of Indian Contract Act,
1872, a contract of guarantee has three
parties: –
Surety: A surety is a person giving a
guarantee in a contract of guarantee. A
person who takes responsibility to pay a sum
of money, perform any duty for another
person in case that person fails to perform
such work.
Principal Debtor: A principal debtor is a
person for whom the guarantee is given in a
contract of guarantee.
Creditor: The person to whom the
guarantee is given is known as the creditor.
For example, Mr. X advances a loan of 25000
to Mr. Y and Mr. Z promise that in case Mr. Y
fails to repay the loan, then he will repay the
same. In this case of a contract of guarantee,
Mr. X is a Creditor, Mr. Y is a principal debtor
and Mr. Z is a Surety.
Contract of Indemnity
It is a contract in which one party promises
to save the other from the loss caused to him
by the acts of promisor or by any other
person.
In a contract of indemnity, there are two
parties namely indemnifier (promisor) and
indemnified (promisee).
Differentiation between contract of
indemnity and contract of guarantee
There is a difference between the two
special types of contracts, contract of
indemnity and contract of guarantee which
is as follows: –
1. In a contract of guarantee, there are
three parties to a contract namely surety,
principal debtor and creditor whereas in
case of indemnity there are only two
parties to a contract, promisor, and
promisee.
2. In case of the contract of guarantee, the
liability of the surety is secondary
whereas in a contract of indemnity the
liability of promisor is primary.
3. Surety provides guarantee only when
requested by the principal debtor in a
contract of guarantee. Indemnifier is not
required to act at the request of the
debtor, in a contract of indemnity.
4. In a contract of guarantee, there is an
existing liability for debt or duty, surety
guarantees the performance of such
liability. In a contract of indemnity, the
possibility of incurring a loss is contingent
against which indemnifier undertakes to
indemnify.
5. Surety is eligible to proceed against the
principal debtor on payment of debt, in
case principal debtor fails to pay the debt.
Indemnifier cannot sue third parties in his
own name.
Surety’s Liability
According to section 128 of Indian Contract
Act, 1872, the liability of a surety is co-
extensive with that of principal debtor’s
unless the contract provides.
Liability of surety is same as that of the
principal debtor. A creditor can directly
proceed against the surety. A creditor can
sue the surety directly without sueing
principal debtor. Surety becomes liable to
make payment immediately when the
principal debtor makes default in such
payment.
However, primary liability to make payment
is of the principal debtor, surety’s liability is
secondary. Also, where the principal debtor
cannot be held liable for any payment due to
any defect in documents, then surety is also
not responsible for such payment.
Kinds of Guarantees
A contract of guarantee may be for an
existing liability or for future liability. A
contract of guarantee can be a specific
guarantee (for any specific transaction only)
or continuing guarantee.
1. Specific Guarantee: A specific guarantee
is for a single debt or any specified
transaction. It comes to an end when
such debt has been paid.
2. Continuing Guarantee: A continuing
guarantee is a type of guarantee which
applies to a series of transactions.
A continuing guarantee applies to all the
transactions entered into by the principal
debtor until it is revoked by the surety. A
continuing guarantee can be revoked
 anytime by surety for future transactions
by giving notice to the creditors.
However, the liability of a surety is not
reduced for transactions entered into
before such revocation of guarantee.
Revocation of Guarantee
1. By surety by giving a notice of revocation
for future transactions.
2. On the death of surety. A continuing
guarantee is revoked for all the future
transactions due to the absence of a
contract. However, his legal
representatives will continue to be liable
for transactions entered into before
his death.
Discharge of a surety
• By giving notice of revocation for future
transactions (section 130).
• In case of death of surety, the guarantee
is revoked for all the future transactions
(section 131).
• When there is a change in terms and
condition of the contract between the
creditor and principal debtor without
obtaining the consent of surety. The
surety will be discharged of all the
transactions taking place after such
change in terms and condition (section
133). For example – Q rents his house to
R at a fixed rent, P becomes surety for
rent payable by R to Q. R and Q agree on
a higher rent for which they do not
obtain P’s consent. In such a case P will
be discharged as a surety after such
change in contract.
• In case the creditor releases the debtor
or makes any omission due to which
results in the discharge of principal
debtor’s liability (section 134).
• When the principal debtor makes
payment of debt.
• When the creditor enters into an
arrangement with the principal debtor
for not to sue him or to provide extra
time for payment of debt, the surety will
be discharged (section 135).
• The surety will be discharged when the
creditor does any act which is
inconsistent with the rights of surety.
Rights and Discharge of Surety
A contract of guarantee refers to a contract
to perform the promise or discharge the
liability of a third person in case of any
default by him. Surety is the person giving
the guarantee. The person for whom the
guarantee is given is the Principle Debtor.
The person to whom the surety gives the
guarantee is the Creditor. A guarantee may
be oral or in writing. Here we will discuss the
Discharge and Rights of Surety:
A contract of guarantee shall also satisfy all
the necessary conditions or elements of a
valid contract. As per section 127, anything
is done or any promise made for the benefit
of the principal debtor provides sufficient
consideration to the surety for giving the
guarantee to the creditor.
For example, Bharat asks Anil to sell goods to
him on credit and deliver them. Anil agrees
to it on a condition that Charu will guarantee
the payment of the price of the goods. Charu
guarantees the payment in consideration of
Anil’s promise to deliver the goods. This is
sufficient consideration for Charu’s or
Surety’s promise.
Rights of a Surety
A surety has the following rights:
1. Rights against the Creditor
As per section 141, a surety is eligible to the
benefit of every security which the creditor
has against the principal debtor. This holds
true even if at the time of entering into the
contract of guarantee the surety was
unaware of the existence of such a security.
Also, when the creditor losses or parts with
such security without the consent of the
surety, this discharges the surety to the
extent of the value of such security.
2. Rights against the Principal Debtor
Once the surety discharges the debt, he
obtains the rights of a creditor against the
principal debtor. He can now sue the
principal debtor for the amount of debt paid
by him to the creditor due to the default of
the principal debtor.
In a case where the principal debtor on
discovering that the debt has become due,
starts disposing of his properties in order to
prevent seizure by the surety, the surety can
compel the debtor to pay the debt and
discharge him from his liability to pay.
3. Surety’s rights against the co-sureties
When a surety pays more than his share to
the creditor, he has a right
of contribution from the co-sureties, who
are equally liable to pay. For example,
Anthony, Barkha, and Chaya are the co-
sureties to David for a sum of ₹30000 lent to
Erwin who made default in payment.
Thus, Anthony, Barkha, and Chaya are liable
to pay ₹10000 each as between them. So, in
this case, if anyone of them pays more than
₹10000, he can claim the excess from the
other two co-sureties so as to reduce his
payment to ₹10000 only. However, if one of
the co-sureties becomes insolvent, the other
co-sureties shall contribute his share
equally.
Discharge of a Surety (Sec.130 – 141)
A surety is discharged from his liability on:
1. The death of a surety as regards future
transactions in case of a continuing
guarantee in the absence of a contract to
the contrary.
2. Notice of revocation as regards future
transactions in case of a continuing
guarantee. For example, Anu gives a
guarantee to Bela to the extent of
₹50000, that Freida will pay all the bills
that Bela will draw upon her. Bela
draws bills on Freida and she accepts the
bill. Anu gives notice of revocation. Freida
dishonors the bill at maturity. Anu is
liable as it was a transaction before the
notice of revocation.
3. Any variation in the terms of the contract
between the principal debtor and the
creditor without surety’s consent.
4. If the creditor releases the principal
debtor, the surety also automatically
discharges.
5. When the creditor makes an
arrangement for composition or
promises to give time or not sue the
principal debtor without surety’s
consent, the surety will be discharged.
6. Any act or omission to do an act by the
creditor which results in harming the
rights of the surety, and also impairs the
eventual remedy of the surety himself
against the principal debtor, discharges
the surety.
7. Where the creditor loses or parts with
any security which he receives from the
principal debtor without the consent of
the surety, this discharges the surety to
the extent of the value of such security.
Contract of Bailment and Pledge
Contract of bailment and pledge are
different from each other. According
to section 148 of The Indian Contract Act,
1872, Bailment means delivery of goods
from one person to another person for some
purpose. On the accomplishment of such
purpose, the person receiving the goods
returns or otherwise disposes of them as per
the instructions of the person delivering
them. The person who delivers the goods is
known as bailor. The person to whom such
goods are delivered is known as bailee.
Contract of Bailment and Pledge
Bailment is a delivery of goods for some
purpose on an understanding that they are
to be returned after the achievement of such
purpose. In case of a contract of bailment,
there is only the change of possession and
not ownership.
Bailor remains the owner of the goods;
bailee only gets the possession of such
goods. There may be actual delivery or
constructive delivery of goods.
Gratuitous Bailment
In this type of bailment, neither the bailor
nor the bailee receives any remuneration.
Such a bailment may be for the exclusive
benefit of either the bailor or the bailee.
However, it terminates on the death of
either the bailor or the bailee.
Section 159 states that in the case of the
gratuitous bailment, the bailor or the lender
may require the bailee to return the goods
at any time, even before the expiration of
the period of lending. Also, he can do so even
before the fulfilment of the purpose of
bailment.
However, if the bailee or the borrower incurs
any loss due to this act of the bailor, the
bailor needs to indemnify him for the loss or
damages.
Bailment for Reward
It is for the mutual benefit of both the bailor
and the bailee. For example, A hands over his
goods to B for transporting them to Delhi. A
has the benefit of transportation and B
gets transportation charges. Thus, both of
them are benefitted.
Pledge
It is a special type of bailment. It is a bailment
of goods as security for payment or
performance of duty. The person who
pledges the goods (or bailor) is the pledgor
or pawner. The person to whom such goods
are deposited is known as pledgee or
pawnee (section 172).
It is the duty of the Pawnee to take care of
the goods pledged. In a contract of pledge,
any type of documents, goods, securities can
be pledged. Government securities should
be pledged by endorsement and delivery.
Pawnee has a right to sell the goods pledged
in some exceptional situations.
There are some important ingredients of the
pledge: –
• The property should be handed over
(delivered) to Pawnee.
• Delivery should be in accordance with
the contract of pledge.
• Delivery of goods should be only as
security.
• There should be a condition to return
such goods.
Duties of Bailee and Bailor
As per the section 148 of the Indian Contract
Act, 1872, a bailment is a contract where one
person delivers goods to another person for
some purpose. The person delivering the
goods is the Bailor and the person receiving
the goods is the Bailee. After the
accomplishment of the purpose, the Bailee
needs to return these goods to the Bailor or
dispose of them according to the directions
of the Bailor. Let us now discuss the duties of
bailee and bailor.
Duties of Bailee and Bailor
Bailment refers to the voluntary delivery of
goods. Also, such delivery is for a temporary
purpose and after the fulfilment of which the
bailee shall either return the goods in the
same or altered form or dispose of them.
In the contract of bailment,
the ownership of the goods remains with
the Bailor and only the possession transfers
to the bailee. Such delivery of goods may be
actual or constructive.
For example, when A hands over the keys of
a godown to B, it amounts to the delivery of
goods in the godown. Also, A is the bailor
and B is the bailee.
Duties of a Bailee
Duties of a bailee in respect of goods are as
follows:
1. Take proper care of goods
According to section 151, it is the duty of a
bailee to take care of goods bailed to him.
Bailee should take care of these goods as an
ordinary man will take care of his goods of
the same value, quality, and quantity.
Thus, if the bailee takes due care of goods
then he will not be liable for any loss,
deterioration of such goods. Also, the bailee
needs to take the same degree of care of
goods whether the bailment is for reward or
gratuitous.
However, the bailee is not liable for any loss
due to the happening of any act by God or
public enemies though he agrees to take
special care of the goods.
2. Not to make unauthorized use
As per section 153, the Bailee shall not make
any unauthorized use of goods bailed. In
case he makes any unauthorized use, then
bailor can terminate the bailment.
Bailor can also claim for damages caused to
goods bailed due to unauthorized use as per
Section 154.
3. Keep goods separate
The bailee needs to keep the goods
separately from his own goods. He should
not mix the goods under bailment with his
own goods. In case bailee mixes the goods
with his own goods without the consent of
the bailor, then:
i. Bailor also has an interest in
the mixture.
ii. If the goods can be separated or
divided, the property in the goods
remains with both the parties. But,
the bailee bears the expenses
of separation or any damages arising
from the mixture.
iii. If it is not possible to separate the
goods, the bailee shall compensate
the bailor for the loss of goods.
4. Not set adverse title
A bailee must not set an adverse title to the
goods bailed.
5. Return Goods
The duty of the bailee is to return the goods
without demand on the accomplishment of
the purpose or the expiration of the time
period. In case of his failure to do so, he shall
be liable for the loss, destruction,
deterioration, damages or destruction of
goods even without negligence.
6. Return increase or profits
A bailee shall return the goods along with
any increase or profit accruing to the goods
to the bailor, in the absence of any contract
to the contrary.
For example, A leaves a hen in the custody of
B. The hen gets a chick. B shall deliver the
hen along with the chick to A.
Duties of a bailor
Duties of a bailor are as follows:
1. It is the duty of a bailor to disclose all
faults. If bailor fails to disclose such faults,
then he will be responsible for the
damage caused to goods or loss suffered
by the bailee.
2. Also, the bailor is under the duty to pay
the extraordinary expenses incurred by
the bailee for such bailment.
3. It is the duty of the bailor to accept the
goods after the purpose for which such
goods were bailed is accomplished.
4. It is the duty of the bailor to indemnify
the bailee for the cost incurred due to the
 defective title of goods bailed to the
bailee.
Rights of Pawnee and Pawnor
As per section 172 of the Indian Contract
Act, 1872, a Pledge is a contract where a
person deposits an article or good with a
lender of money as security for the
repayment of a loan or performance of a
promise. Pledge is also known as a pawn.
The depositor or the bailor is the Pawnor
and the bailee or the depositee is the
Pawnee. The Pawnee is under the duty to
take reasonable care of the goods pledged
with him. Let us learn about the Rights of
Pawnee and Pawnor.
Rights of Pawnee and Pawnor
Key features of Pledge are:
1. The property under pledge shall be
delivered to the Pawnee.
2. Such delivery shall be in the pursuance
of the contract.
3. This delivery shall be for the purpose
of security.
4. Also, delivery of articles shall be upon
a condition to return.
Rights of Pawnee
Pawnee has the following rights:
• Pawnee has a right to retain the goods
pledged until payment of debt, interest
and any other expense incurred for
maintenance of such goods. For
example, X pledges his gold jewelry for
some loan from a bank. In such a case
bank has all the rights to retain the gold
jewelry not only for adjustment of loan
amount but also for payment of interest
accrued on such loan amount.
• Pawnee has a right to file a suit for
recovery of debt while retaining the
goods pledged as security.
• He has a right to sue for the sale of goods
pledged and the payment of money due
to him.
• Pawnee has a right to seek
reimbursement of
extraordinary expenses incurred.
However, he cannot retain goods with
him in such a case.
• Pawnee has a right to sell the goods after
giving reasonable notice and time to
pawnor. Pawnee can sue pawnor for
deficiency, if any, after the sale of such
goods. Also, if there is any surplus on
sale of goods pawnee must return it to
pawnor.
Rights of Pawnor
In case pawnee makes any unauthorized sale
of goods pledged without giving proper
notice and time to pawnor than pawnor has
following rights:
• Right to file a suit for redemption of
goods by making payment of debt.
• Right to claim for damages and loss on
the ground of conversion.
What do you understand by ‘Pledge by Non- When a co-owner in possession of the goods
owners’? with the assent of all the other co-owners
pledges them, it is a valid pledge.
Ans.
5. Possession under a voidable contract:
Usually, the owner of the goods pledges
them to secure a loan. But, under certain A person may get the possession of the
circumstances, the law permits a non-owner goods under a contract that is voidable at
who is in the possession of the goods to the option of the lawful owner. The contract
pledge the goods. Thus, the following non- is voidable on the grounds of fraud,
owners may create a valid pledge: misrepresentation, etc. The pledge by the
person in possession of goods is valid until
1. Mercantile Agent:
the contract is void.
A mercantile agent who is in the possession
of the goods or the documents to the title of
the goods with the consent of the owner can Creation of Agency
pledge these goods while acting in the
Agency system is very popular in the current
ordinary course of business. This pledge is as
business scenario. There are two parties in
valid as if the owner of the goods expressly
the agency system one is the principal and
authorizes him to do so. But, this pledge is
another the agent. An agent is a person
valid only when the Pawnee acts in good
acting on behalf of his principal. It’s a
faith and at the time of pledge is unaware of
connecting link between the principal and
the fact that the mercantile agent did not
the third party. Herein we will discuss the
have the authority to pledge.
creation of agency under the Indian Contract
2. Pledge by seller or buyer in possession of Act, 1872.
goods after the sale:
Creation of Agency
A pledge by a seller who is in the possession
A contract of agency may be express or
of the goods after the sale is valid only when
implied. Consideration is not
the Pawnee acts in good faith and at the time
an essential element in the agency contract.
of pledge is unaware of the sale of goods to
Agency contract may also arise by estoppel,
the buyer.
necessity or ratification.
3. Limited interest:
Types of an Agency Contract
When the pawnor not being the owner of
1. Express Agency
the goods and having limited interest
pledges the goods, the pledge is valid only to A contract of agency can be made orally or
the extent of such limited interest. in writing. Example of a written contract of
agency is the Power of Attorney that gives a
4. Pledge by a co-owner:
right to an agency to act on behalf of his
principal in accordance with the terms and
conditions therein.
A power of attorney can be general or giving
many powers to the agent or some
special powers, giving authority to the agent
for transacting a single act.
2. Implied Agency
Implied agency arises when there is any
conduct, the situation of parties or is
necessary for the case.
a. Agency by Estoppel (Section 237)
Estoppel arises when you are precluded
from denying the truth of anything which
you have represented as a fact, although it is
not a fact.
Thus, where P allows third parties to believe
that A is acting as his authorized agent, he
will be estopped from denying the agency if
such third-parties relying on it make a
contract with an even when A had no
authority at all.
b. Wife as Agent
Where a husband and wife are living
together, we presume 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. But the husband will
not be liable if he shows that:
(i) he had expressly warned the tradesman
not to supply goods on credit to his wife; or
(ii) he had expressly forbidden the wife to
use his credit; or
(iii) he already sufficiently supplies his wife
with the articles in question; or
(iv) 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.
c. Agency 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.
For example, 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.
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.
d. Agency by Ratification (Sections 169-200):
Where a person not having any authority act
as agent, or act beyond its authority, then
the principal is not bound by the contract
with the agent in respect of such authority.
But the principal can ratify the agent’s
transaction and accept liability. In this way,
an agency by ratification arises.
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.
Classes of Agents
As per section 182, an agent is a person who
brings his principal into the contractual
relations with the third parties. The principal
appoints or employs an agent under
the contract of agency. Thus, an agent is the
link that connects the principal to the third
parties. An agent binds the principal by his
acts. In other words, a principal is
responsible for the acts of the agent to the
third parties. When an agent acts for his
principal, he has the capacity of his principal.
There are 3 classes of agents: General agent,
Special agent and Mercantile agent.
Classification of Agents
• General Agent
• Special Agent
• Mercantile Agent
1. General Agent:
The principal appoints a general agent to do
anything within his authority in
all transactions or in all transactions relating
to a specific trade, business or matter. The
principal grants the authority to the agent to
act on his behalf.
It may be assumed by the third party that
such an agent has the authority to do all that
is usual for a general agent to do. Any private
restrictions on the agent’s authority do not
affect the third party.
2. Special Agent:
He is the one who is appointed or employed
to do or perform only a specific act, task or
function. Outside of this special act, task or
function, he has no authority or power. In
this case, the third party cannot assume that
the agent has unlimited authority. Thus, any
act of the agent outside his authority cannot
bind the principal.
3. Mercantile Agent:
As per section 2(9) of the Sale of goods act,
1930, a mercantile agent is a person who in
the customary course of business has an
agent’s authority either to sell or consign the
goods for the purpose of sale or to buy goods
or to raise money on the security of goods.
Thus, this definition covers the following:
a. Factors:
A factor is a person who is appointed to sell
goods which are put in his possession or to
buy goods for his principal. He is the evident
owner of the goods in his custody and can
thus sell them in his own name and receive
payment for them.
He also has an insurable interest in the goods
in his custody and a general lien regarding
any claim that he may have to arise out of
the agency.
b. Brokers:
A broker is a person whose business is to
make contracts with the other parties for the
sale and purchase of goods or securities for
brokerage.
He does not have the possession of the
goods and acts in the name of the principal.
Also, he has no lien over goods because he
has no possession of goods.
c. Del Credere Agent:
A del credere agent is a person who ensures
or guarantees his principal that the creditors
of goods will pay for the goods they buy for
extra remuneration. In the case of failure to
pay by the third party, he needs to pay the
due amount to his principal.
d. Bankers:
The relation between a banker and a
customer is basically that of a debtor and
creditor. However, when a banker buys or
sells securities or collects cheque, dividends,
interests, bills of exchange or promissory
notes on behalf of his customer, he becomes
the agent of his customer. Thus, he has a
general lien on all the securities in his
possession regarding the general balance
due to him by the customer.
e. Partners:
As per the Partnership Act, every partner is
an agent as well as the principal of every
other partner in a Partnership firm. Also,
every partner is the agent of the firm for the
business of the firm.
f. Auctioneers:
An auctioneer is a person who sells the
goods by auction. An auction is a process by
which goods are sold to the highest bidder in
a public competition. He cannot warrant his
principal’s title to the goods.
He is the agent of the seller until the goods
are auctioned or knocked down. However,
after the knockdown, he becomes the agent
of the buyer. Also, he is evidence that the
sale took place.
Who is a Sub-agent?
As per section 191, a sub-agent is a person
employed by and acting under the control of the
original agent. Thus, a sub-agent is the agent of
the original or the primary agent. The
original agent appoints a sub-agent and
delegates the work of the principal to him. The
relationship between a sub-agent and the
original agent is that of the agent and principal.
A sub-agent is confined by all the duties of the
original agent. However, he is not directly
responsible to the principal except for
committing any fraud and willful wrong. But he
is directly responsible to the original agent
appointing him. Also, the original agent is
responsible for the acts of the sub-agent to the
principal. In the case of third parties, a sub-
agent represents the principal and binds the
principal for all his acts as if he is an original
agent.
Rights and Duties of Agents
In a contract of agency, the principal
appoints an agent to perform some specific
task or business on his behalf. The principal
is bound by the acts of his agent and is thus,
responsible for his acts to the third parties.
Let us now understand the Rights and Duties
of Agents.
Rights of agents
1. Right to Remuneration
As per section 219, an agent has a right to
receive the agreed remuneration or in
absence of agreement, a reasonable
remuneration for rendering the services to
the principal that are not voluntary or
gratuitous. He becomes eligible to receive
the remuneration as soon as he completes
the work that he undertook.
2. Lien on Goods
Some agents who have the possession of
goods, securities or properties of their
principal also have a lien on these goods,
securities or properties regarding their
remuneration and also for any expenses or
liabilities that they incur. When he is
an unpaid seller, he has a right to stop the
goods in transit.
3. Right to be Indemnified
An agent represents his principal to the third
parties. As per sections 222 and 223, an
agent has a right to be indemnified by his
principal for all charges, expenses,
and liabilities that he incurs during the
course of the agency.
Duties of agents
A principal has a right to sue his agent for
damages in case of breach of duty by the
agent. The duties of agents are:
1. As per section 211, an agent shall act
within the scope of authority that his
principal confers upon him. Also, he shall
strictly follow the directions of his
principal. However, in the absence of
express instructions from his principal, he
shall follow the custom prevailing at the
place where he carries out his business, in
a similar type of business.
2. Section 212 states that he shall work with
reasonable skill and diligence. Also,
where the nature of the agent’s
profession requires him to possess a
special skill, he shall exercise the skill that
a member of that profession will exercise.
3. An agent shall disclose properly any
material information to his knowledge to
the principal that can influence the
making of the contract.
4. As per section 213, an agent shall is under
the duty not to disclose any confidential
information of his principal.
5. Section 215 states that an agent shall not
compete with his principal. In other
words, his interest shall not conflict with
his duty.
6. It is the duty of the agent to keep true and
fair accounts and prepare them on a
reasonable notice to render them.
7. An agent shall not make any secret profit
and shall disclose any extra profit he
makes to the principal. Where the
principal finds that the agent is making
secret profits, he may dismiss the agent
without notice, recover the amount of
profit and also refuse to pay him his
remuneration. He may also repudiate a
contract where a third party is also
involved in the fraud and recover the
damages.
8. He shall not appoint a sub-agent.
Exceptions to the principle of Delegates
non-protest delegate
The above principle means that a delegate
cannot further delegate. Therefore, an agent
cannot appoint a sub-agent. However, there
are the following exceptions to this principle:
1. When the principal allows delegation.
2. Where it is the custom or usage of trade
to delegate.
3. When delegation is necessary for proper
and efficient performance.
4. Where it becomes essential due to some
emergency
5. When the principal knows that the
agent’s intention is to delegate.
6. Where the work is ministerial.
What is the extent of an agent’s authority?
Ans. The extent of an agent’s authority depends on
the terms of the agent’s appointment or the
circumstances of the case. The contractual
authority of an agent is the real authority. But,
implied authority means all that is incidental to
carry out the contractual authority. Thus, implied
authority is the apparent or ostensible authority.
Hence, an agent who has an authority to do a
certain act also has the authority to do all that is
lawful to perform this act. Also, an agent has an
authority to do anything that prevents the principal
from any loss or damages.
Responsibilities of Principal to Third-
parties
In a contract of agency, an agent deals with
the third parties on behalf of his principal. He
enters into contracts with the third parties
and is responsible for his acts to the
principal. However, there are also some
Responsibilities of Principal to Third-parties
for the acts of the agent.
Responsibilities of Principal to Third-parties
The effect of a contract that an agent makes
differs according to the situations under
which the agent contracts. The agent may
contract under the following three
situations:
1. Disclosed Principal
Where the name of the principal is disclosed
and an agent enters into a contract on his
behalf, he usually incurs no rights
and liabilities under such contract. He drops
out of the contract as soon as it is made.
Thus, the contract is between the principal
and the third party and also the rights and
obligations arise between them only. The
legal effect of such a contract is the same as
if the principal himself directly contracts
with the third party.
The legal effect implies that all the acts of the
agent within the actual or ostensible
authority bind the principal. It is noteworthy
here that the acts though out of the scope of
the actual authority of a general agent but
within his apparent authority are binding on
the principal. Thus, any
secret restrictions on the powers of the
agent do not bind the third party.
2. Undisclosed Principal
In this case, where the agent discloses that
he is only an agent but hides the identity of
his principal, he is not liable personally. Thus,
the principal when discovered is liable for
the contract made by his agent and is also
responsible for the acts of the agent.
3. Concealed Principal
Where an agent seems to be contracting in
his own capacity without disclosing that he
is an agent or the name of his principal, he
becomes personally liable. In this case, the
third party may sue the agent or the
principal on discovering him or both.
However, if the third party sues the principal
and not the agent, then he shall allow the
principal the benefit of all payment that he
made to the agent. He is also eligible to
obtain the benefit of anything that he pays
to the agent under the contract.
In a case where the principal discloses
himself before the completion of the
contract, the third party may refuse to fulfill
the contract if he shows that:
1. If he knew the principal he would have
not entered into the contract.
2. If he knew that the agent is not the
principal he would have not entered into
the contract.
Principal Liable for Agent’s Misconduct
When an agent commits a wrong or tort or
fraud while acting within his actual or
ostensible authority, the principal is liable
for his acts.
An agent is also personally liable in this case
and can be sued also. Even if the agent
commits such fraud for his benefit and
against the interests of the principal, it
renders the principal liable.
When is an agent personally liable to the
third parties?
Ans. An agent is personally liable to the third
party in the following cases:
1. He agrees to be personally liable to the
third parties.
2. He acts for a principal who resides
abroad.
3. When he signs a negotiable instrument in
his own name without disclosing that he
is merely an agent.
4. Where a principal cannot be sued e.g., a
minor
5. When he contracts as an agent
without authority
6. Where he commits any kind of tort.
Termination of Agency
Agency means a relationship between one
person and another, where the first person
brings the second mentioned person in a
legal relationship with others. There are
different modes of the creation of
agency and termination of agency.
Termination of Agency
An agent is a person employed to do any act
or enter into a contractual relationship with
others (third parties) on behalf of his
principal. An agent acts as a connecting link
between his principal and third parties.
While representing his principal,
an agent acts in the same capacity as of his
principal. An agent is authorized by his
principal to act on his behalf. An agent binds
his principal legally in business transactions
with third parties due to their agency
relationship.
According to Section 201 of the Indian
Contract Act, 1872, Termination of agency
takes place in the following circumstances: –
1. By revocation of authority by the
principal.
2. By renunciation of his authority by the
agent.
3. On the performance of the contract of
agency.
4. On the death of either principal or agent.
5. By insanity of either principal or agent.
6. With the expiration of time period fixed
for the contract of agency.
7. By an agreement made between the
principal and his agent.
8. With the insolvency of principal or agent
(in few cases).
9. When the principal and his agent is an
incorporated company, by
its dissolution
10.With the destruction of the subject
matter. (Section 56)
When an Agency is Irrevocable
When the agency cannot be terminated, it is
known as an irrevocable agency. There are
some situations when revocation of an
agency by the principal is not possible, as
follows: -
1. When the agency is coupled with interest
then this is a case where an agent has
interest in the subject matter of such
agency. Where the agency is coupled
with an interest, it does not come to an
end even in the case of death or insanity
or insolvency of the principal.
2. When an agent has incurred personal
liability, then the principal cannot revoke
the agency, the agency becomes
irrevocable. For Example – P appoints Q
as his agent. Q purchases some wheat as
per the instructions of P in his personal
name. Now, in such a case P cannot
revoke the agency.
3. Where the agent has partly exercised the
authority, and it is irrevocable with
regard to liabilities which arises from the
acts performed. (Section 204) For
Example – Mr. X appoints Mr. Y as his
agent. On Mr. X’s direction, Mr. Y
purchases 100kg cereals in the name of
his principal ‘Mr. X’. Now, in such a case
Mr. X cannot revoke the agency.
When Termination takes Effect
Termination of an agency takes its effect
when it becomes known to an agent. When
the principal revokes the agency, it comes
into effect only when it is known to the
agent. However, in the case of third parties,
termination comes into effect only when
such termination of agency comes to their
knowledge.
According to Section 210 of the Indian
Contract Act, 1872 termination of an agent’s
authority also terminates the sub-agents
authority appointed by the agent. A per
Section 209 of Indian Contract Act, 1872 it is
the duty of an agent to protect his principal’s
interest in case his principal becomes of
unsound mind or dies.
It is the duty of an agent that on the
termination of an agency due to death of the
principal or his becoming insane, to take all
the reasonable steps on behalf of his late
principal or dying principal to protect the
interest that the latter entrusts to him.
Write the features of an agency.
Ans: – Features of an agency are as follows:
1. Basis: – The basic quality of an ‘agency’ is
that the principal is bound by the acts of
his agent. Also, the principal is
answerable to third parties.
2. Consideration: – In a contract of agency,
there is no need for any consideration.
3. Capacity to employ an agent: – the
principal should be of sound mind and
competent to contract.
4. Capacity to act as an agent: – an agent
should be of sound mind and should have
attained majority.