Lesson 1

1.1 INTRODUCTION

The Indian Contract Act was passed in the year 1872 and it also came into force on

the 1st day of September, 1872. The Act extends to the whole of India except the

State of Jammu and Kashmir. It consists of 238 sections. It has been divided into 10

chapters. Chapter VII of the Act is wholly repealed by the India Sale of Goods act,

1930 (vide section 65). The Act deals with particular contracts in separate chapters.

The provisions of the Act do not apply to contracts made before the Act came into

force. Broadly speaking, The Indian Contract Act deals with all facets of contract

more particularly the stages of formation of a contract, the elements of a contract, the

performance of the contract, the breach of the contract and also the available remedies

when there is a breach of contract.

A contract in which two or more countries are involved in respect of its performance,

questions arise as to the law of which country would govern such a contract. In the

first instance, the law which would govern such a contract would be the law expressed

by the parties themselves in the contract. In the absence of an expressed intention, the

rule to apply is infer an intention from the terms and nature of the contract and the

general circumstances of the case. Such circumstances may be (i) the country in

which the Contract was entered into or (ii) where the payment was to be made. In

such a contract, if a payment is to be made, it should be of the legal tender governing

the country in which payment is to be made. [Principle of LexLoci i.e. the law of the

land]

1.2 MEANING AND DEFINITION OF CONTRACT

The meaning and definition of a contract are discussed below with references to some

eminent jurists.

1.2.1 Meaning

An agreement enforceable by law is a contract. An agreement is an accepted proposal.

Thus it can be said that a contract is an agreement; an agreement is a promise and a

promise is an accepted proposal. Every agreement in its ultimate analysis, is the result

of proposal from one side and its acceptance by the other. Hence it is a bilateral

transaction.

Illustration 1: If Prem offers to sell Pummy twenty-five pens for Rs. 20 each to be

delivered on Saturday and Pummy agrees to the deal. It is a valid contract. If one

party fails to offer something of benefit to the other, there is no contract.

1.2.3 Definition

Section 2 (h) of the Indian contract Act of 1872 defines a contract as an agreement

enforceable by law.

According to Section 2(h) of the Act there are mainly two aspects of contract -

(a) An agreement

(b) Agreement enforceable by law

Some eminent jurists have also made an attempt to define the term contract which are

useful for interpretation of the various provisions of the Contract Act. These

definitions are given below:-

• Sir John William Salmond: “An agreement creating and defining obligations

between the parties”.

• Halsbury: “An agreement between two or more persons which is intended to be

enforceable at law and is constituted by the acceptance by one party of an offer made

to him by the other party to do or abstain from doing some act.”

Thus in law a contract means the following:

• Existence of two parties

• Existence of an agreement between two or more parties

• Existence of a legal obligations between parties who enter into an agreement

1.2.4 What is an Agreement?

An agreement is defined in section 2 (e) of the Indian Contract Act of 1872. It states

that every promise and every set of promises forming the consideration for eachother

is an agreement.

1.2.5 What is a promise?

Section 2 (b) of the Indian Contract Act of 1872 defines a promise as: A proposal

when accepted becomes a ‘promise’.

Under section 2 (c) the person who makes the proposal is called the ‘promisor’. The

‘promisee’ is the person that accepts the proposal.

Illustration: Rani makes an offer to sell her plot of residential land for Rs. 50 lakhs

to Malthi. If Malthi accepts this offer, then after the offer is accepted, the acceptance

becomes a promise. The promise between Rani and Malthi is an agreement.Therefore,

agreement consists of offer and acceptance or it can be stated as:

Agreement = Offer / Proposal + Acceptance of Offer / Proposal

When the two parties make an agreement, they have to perform their promise. If

either party defaults in carrying out its obligation there will be a breach of contract if

it is enforceable by law.

Under section 2 (g) an agreement that is not enforceable by law is void.

What is enforceability of agreement?

An agreement can be enforceable by law only if there is some legal obligation.

The law of contracts does not take into consideration any agreement in

which there is no legal obligation.

An obligation is to do, or to restrict, a certain act or activity. The

Contract Act deals with only those agreements where there is an intention to

create a legal obligation.

When there is an agreement that involves some business or commercial

contracts it creates a legal obligation because the parties to the contract have the

intention to create a legal obligation.

However, the parties entering into a contract in domestic, social or religious events

that do not have the intention to create any legal obligations cannot be called as a

legal obligation unless proved otherwise.

1.3 CHARACTERISTICS OF A CONTRACT

Section 10 of the Indian Contract Act, 1872 enumerates certain essential elements of a

valid contract. These are given below:

1.3.1 Agreement:

An agreement constitutes a contract. It consists of two elements. These are:

An offer, or proposal, by a person and acceptance of the offer, by another. Thus a

contract must have two parties. One, who proposes or makes an offer, and another

that accepts the offer.

1.3.2 Legal Relationship

The intention of the two parties should be to create legal relationship. While deciding

if the contract is valid or not, attention should be made to look into the objective and

not subjective nature of the intention to create a legal relationship. It should also take

into consideration what would be a reasonable intention of the person who enters into

a contract. A domestic, religious or a social agreement where there is no intention to

create a legal relationship cannot be called a valid contract. It is presumed that

business dealings and commercial agreements are made with the intention to create a

legal relationship. However social agreements can be enforceable if legality of

relationship is intended and established. Similarly business dealings may not establish

a legal relationship in an agreement and are therefore not enforceable.

Case Law 1

Mr Balfour was a civil engineer, and worked for the Government as the Director of

Irrigation in Ceylon (now Sri Lanka). Mrs Balfour was living with him. In 1915, they

both came back to England during Mr Balfour's leave. But Mrs Balfour got rheumatic

arthritis. Her doctor advised her to stay, because a jungle climate was not conducive

to her health. As Mr Balfour's boat was about to set sail, he promised her £30 a month

until he came back to Ceylon. They drifted apart, and Mr Balfour wrote saying it was

better that they remain apart. In March 1918, Mrs Balfour sued him to keep up with

the monthly £30 payments. In July she got a decree nisi and in December she obtained

an order for alimony. At first instance, Sargant J held that Mr Balfour was under an

obligation to support his wife.

JudgmentThere is no such contract here. These two people never intended to make a bargain

which could be enforced in law. The husband expressed his intention to make this

payment, and he promised to make it, and was bound in honour to continue it so long

as he was in a position to do so. The wife on the other hand, so far as I can see, made

no bargain at all. That is in my opinion sufficient to dispose of the case.

1.3.3 Free Consent

Section 14 of the Indian Contract Act states there should be free consent between the

parties making an agreement. The consent is considered to be free when there is no

coercion, undue influence, mistake, fraud, or misrepresentation in the agreement

prepared by the parties. If the consent is not free, the contract is not valid. Amit gets

his parents to sell the house to his friend forcibly. This is not a valid contract, as the

agreement was not made with free consent. When a contract is made both parties must

understand and agree on all the same thing or all material facts of the agreement. It is

called consensus ad idem when there is a meeting of minds of both the parties. They

should have agreed on all the terms and conditions without any undue influence or

mistake in understanding of the product.

Illustration: Mr. Rajhans is selling his blue sports model car to his secretary.

However his secretary Rita thinks that she is buying the new red sports model car.

There is no meeting of minds and hence there is no valid contract.

1.3.3 Capacity of Parties

The parties entering into a contract should be competent to make an agreement.

According to section 11 of the Act they should have (i) attained the age of majority,

(ii) They should be of sound mind, (iii)They should not have been disqualified to

enter into a contract.

Illustration 1: Meera is a lunatic and gets attacks of lunacy at intervals. Is she

competent to contract? Meera can enter into a contract in those periods when she is

not suffering from lunacy. She is competent to contract when she is not under the

influence of lunacyattack.

1.3.4 Status of other Entities

Any company is competent to enter into a contract according to the legislations under

which they are governed. In this case the Memorandum of Association and Articles of

Association of the company will provide further guidelines in addition to provisions

of Indian Contract Act. Partners are allowed to enter into contracts under Partnership

Act of 1932. Associations of persons are competent to contract subject to their

agreement.

1.3.5 Lawful Consideration

According to Section 2(d), 23 and 25 of the Act a valid contract must have a

consideration. The person making a promise must receive something in return for it. It

may or may not be an adequate return but there has to be some value and it should not

be fraudulent, unlawful, immoral or opposed to public policy. The agreement is

legally binding and enforceable when both parties to an agreement give something

and also get something in return. Consideration may not be in cash only. It can be in

kind. It can also be an act or abstinence from doing something. It can be a promise to

do or not to do something.

Illustration 1: Ali sold 5 fountain pens for Rs. 125 each to Megha with a promise

to receive 12 red roses in return instead of the money in cash. Is this lawful

consideration? This is a lawful consideration as Megha gives roses instead of cash.

Some consideration is being given to Ali. The consideration may not be of equal

value.

1.3.6 Object of an Agreement

According to section 23 of the Indian Contract Act 1872 the object of an agreement

should be within the purview of law. It should not be fraudulent or be forbidden by

law. The object should be legal, moral and according to public policy. It should not

have any legal flaws otherwise it will not be enforceable by law (Section 23).

1.3.7 Formalities of an AgreementThe agreements under the Indian Contract Act may be oral or in writing. Whenever an

agreement is a valid contract and it is made in writing it should be complete with all

legal formalities. If the legal formalities are not complete, law cannot enforce it. The

contract will become void. Some contracts have to be made in writing otherwise they

will not be valid. In the following cases contracts have to be in writing:

• Cheques, bills of exchange, promissory notes and other negotiable instruments.

1.3.8 Valid Agreement but not Enforceable: In many cases even a valid

contracts may not be enforceable by law. If a country declares an agreement void it

cannot be enforced. Hence it is important to know the law of the country in which the

agreement is made otherwise the legal rights cannot be exercised (Sections 24 to 30

and 56).

1.4 CLASSIFICATION OF CONTRACTS

The Indian Contract Act classifies contracts into different categories. Contracts can be

categorized from the point of view of (i) enforceability/legal validity (ii) according to

formation, (iii) according to performance and (iv) according to obligation.

1.5 (A) CLASSIFICATION: ACCORDING TO ENFORCEABILITYA contract that is enforceable can be classified under different categories. Such

contracts may be valid contracts, voidable contracts, void agreements, void contracts,

agreements discovered to be void, unlawful or illegal agreements and unenforceable

contracts.

1. Valid Contract: A valid contract is one, which satisfies the essential elements

described in section 10 of the Indian Contract Act. It must be an agreement in which

an offer is made and accepted. It should have the intention to create legal relations.

There should be lawful consideration and the object should be legal. It should have

clear terms with free consent of both the parties. When all the essential elements are

complete in all respects it is a valid contract and it is enforceable by law.

2. Voidable Contract: If one party to the contract has the option of enforcing a

contract by law, but not at the option of the other or others, it is a voidable contract. In

those cases when the consent is not given freely but coercion has been used the party

has the option to continue with the contract or rescind it. Another example of a

voidable contract is when a person has promised to deliver certain goods on a certain

date and he does not deliver it, it is the option of the buyer to continue or to rescind

the contract (section 55).

Illustration 1: Ruhi wanted to buy a gold chain for her mother’s birthday. The

goldsmith promised to deliver it on the 20th of May. On the due date the chain was

not ready. Ruhi rescinded the contract and decided to buy something else. The

goldsmithwanted compensation. Is he right? The goldsmith is not correct. If he did

not deliver the goods on time Ruhi has the right to rescind the contract.

Thus in a voidable contract the aggrieved party can take benefit of the situation.

He/she may decide to go ahead with the contract as well. Thus in a voidable contract a

flaw can create a benefit for a party. However if the party decides to continue with the

contract, the terms and agreements will continue to be valid and the contract will also

be a valid one.

3. Void Contract: These contracts are enforceable when the agreement is made but

due to certain lapses they become unenforceable at a later date. The agreement

becomes unenforceable for the following reasons:

• According to section 56 if a contract is illegal or impossible to conduct it becomes

void.

• The contract becomes void if it is voidable in nature and the party who could

exercise the option of avoiding it decides to do so.

• Any contract, which has a contingency clause and it, becomes impossible to conduct

it either on the happening or not happening of a particular event is a void contract.

This is explained in (section 32).

Illustration 1: Anil made an agreement with Suman to sell house no P-21 in

Sushant Lok in Gurgaon. The terms and conditions were finalized. Before the due

date for the transaction to take place there was an earthquake and the house fell

down. Anil could not keep his promise because the house did not exist any more. This

contract is void because the agreement was made on the basis of the house in

possession. Since Anil did not have the house after the natural calamity it was a near

impossibility to deliver the goods to Suman.

4. Void agreement: Section 2(g) describes void agreements as those that are

unenforceable from the inception of the agreement. In other words these agreements

are void ab initio. . A mistake between the two parties to an agreement of a material

fact makes the agreement void. Therefore void agreements do not create any legal

rights between the parties to the contract. It also does not create any obligations.

There is a flaw in the agreement itself. The most common example is that of a minor

who does not have the legal rights to enter into an agreement. If he/she does, the

agreement is null and void ab initio.

1.5.1 Void Agreement and Void Contract: Distinction

A void agreement is void ab inito from the beginning of the contract. A void contract

is valid when it is made but due to certain lapses it becomes unenforceable by law

subsequently.

A void agreement will have the following effects:

• It will be unenforceable by law

• If both parties know that the agreement is void money will not be recoverable

if already paid.

• Collateral transaction will be legal unless the agreement itself is illegal.

• All legal promises are enforceable if the agreement can be proved to be

severable.

1.5.2 Void Agreement and Voidable Contract: Distinction

The difference between void agreement and void contract can be discussed on the

basis of (i) enforceability (ii) Compensation and restitution and (iii) the effect on

collateral agreement.

Enforceable: Void agreements are not enforceable from the time of their formation.

They are said to be void ab initio. Void contracts are enforceable when they are

formed but they become unenforceable if the party who has the option to rescind the

contract does so. It is a valid contract if it is not repudiated.

A void agreement is not enforceable at all but a void contract can be enforced if the

parties agree to complete the contract and exercise the option accordingly.

Compensation and restitution: In a void agreement there is no compensation

because the agreement is not enforceable by law. In a voidable contract the person

who exercises the option of rescinding the contract can get compensation if he has

rightly taken the option of not going ahead with the contract.

It follows therefore that restitution is allowed in a voidable contract unless the parties

knew of the illegality of the agreement at the time of formation.

Collateral agreement: An agreement that is void due to illegality has an effect on

collateral agreements as well. Such agreements will be correspondingly void because

of illegality in consideration or object in the agreement.

A voidable contract however has no effect on collateral contracts.

1.6 B. CONTRACTS: ACCORDING TO MODE OF CREATION

Contracts on the basis of mode of creation refer to Express Contracts, Implied

Contracts and Quasi Contracts.

1. Express Contract: When an offer is made in words or in writing and another

person accepts it an express contract is formed. Promise is considered to be express

when it is made in words written or spoken.

Illustration 1: Priya writes to Prem offering to sell her car for a price of Rs.1,00,000.

Prem accepts the offer by responding through an email. This is an express Contract

2. Implied Contract: A contract is said to be implied when it has to be inferred from

the action, gestures or conduct of the parties. It is not a verbal or a written contract. It

has to be implied from circumstances of the case. In the agreement some terms may

be implied or the complete agreement is implied.

Illustration 1: Janaki attended an informal meeting of a company. The company was

glad to receive her suggestions and accepted her presence and took some of her

suggestions. There is an implied contract that Janaki should be paid for her services

because the company allowed her to attend the meeting and also used her suggestions

for the benefit of the company.

The contracts can be of mixed type as well. They can be express and implied contracts

both. Some part of the combination may be express and parts of it may be implied.

Illustration: Ram offers to buy an I pod from Tilak for Rs 10,000. Tilak accepts the

offer by sending the I pod to Ram. Ram’s offer acceptance is implied by his conduct. It

is a mixed type of contract. It combines the characteristics of both express and

implied mode of creation.

3. Quasi Contract: Contracts which are not in actual fact either express or implied but

there is circumstantial evidence to support that they are actually contracts are called

Quasi Contracts or semi contracts. There is actually no contract between the parties as

there is no agreement between the parties but the obligations cited in sections 68 to 72

of the Indian Contract Act provide legality to them.13 These are known as “certain

relations resembling those created by contracts”.

Illustration: Arti leaves her computer in Monica’s house. Monica treats it as her own

and begins to use it for her official purposes. Arti has no agreement with Monica. She

should pay for the use of the computer, which was kept with her for safe- keeping. 1.7

CONTRACTS ACCORDING TO PERFORMANCE

Contracts can be classified according to performance measures. Such contracts are

called executed contracts, executory contracts, unilateral contracts and bilateral

contracts.

1. Executed contract: An executed contract is one where both the parties have

performed and completed their obligations. The contract is completed and executed.

No responsibilities remain from either side of the contract.

Illustration: Rajesh goes to Westside store and buys a shirt for himself. He pays Rs

1450 and the shirt is packed and delivered to him. He leaves the store as the contract

is executed. The obligations of both the parties are complete.

2. Executory Contract: In a contract sometimes one party may carry out his/her

obligation but the other has still to conduct his/her obligation. This obligation will be

performed in future. This type of a contract, which is not yet complete, is called an

executory contract. In some executory contracts both parties decide to complete their

contract in future because of certain important reasons.

Illustration 1: Minna sells her computer to Zara . Immediately Zara sends the

payment for it. Minna has to still deliver the computer. This is partly executed and

partly an executory contract.

3. Unilateral Contract: In some contracts one party has already completed

his/her obligation but now the other party is left to complete his/her part of the

contract. When the other party executes his/her part of the contract that, is still

outstanding, it is called a unilateral contract. These contracts are also called contracts

with executory consideration. When the contract is formed, there is an obligation of

only one party to perform.

Illustration: Murli’s dog was lost while he was taking a morning walk. He offered

a reward of Rs 1,00,000 for bringing back his dog safely. Sashi found the dog and

returned it to the owner. The owner now has a unilateral contract to perform of paying

the reward money as the dog has been found.

4. Bilateral Contract: If both parties to a contract have outstanding obligations

when the contract is formed, it is called a bilateral contract. The contract has been

formed but the obligations will be performed on a future postponed date. The date of

execution is not material for determining the validity of the contract.

Illustration: Puran makes a promise to sell 100 pen-drives to Kamla. The

understanding is that the price will be paid only on delivery of the material required.

This is a bilateral contract. The contract was settled but both delivery and price paid

for it will be made at a future date.

OFFER AND ACCEPTANCE

2.1 WHAT IS AN OFFER / PROPOSAL?

An agreement consists of two parties where one party makes an offer to the other

party and the other party either accepts the offer or rejects it. If the offer is accepted

then only it becomes an agreement otherwise it doesn’t.

Section 2(a) of the Indian contract act defines an offer / proposal as follows: “When a

person signifies to another person his or her willingness to do or abstain from doing

anything, with a view to obtaining the assent of that other to such act or abstinence, he

or she is said to make a proposal.”

Illustration: Savita makes an offer to Priya, she says “Priya would you like to buy my

gold necklace?” Priya rejects the offer thus there is no agreement. If Priya had

accepted the offer to buy the necklace then an agreement would have been formed.

An offer consists of two parties:

1 Offeror- The person who makes an offer or a proposal

2 Offeree- The person to whom the offer or proposal has been made.

Illustration1: Ram says to Raghu ‘Will you buy my bicycle for Rs 3000?’ In this Ram

is an offeror and Raghu is an offeree.

2.11 How is an offer made?

An offer can be made in two ways:

1 Express – Offer is made orally or in written.

2 Implied – Offer is made by conduct of the parties or circumstances of the case.

Express Offer can be of two types:

1 Oral Offer - Offer is made by words spoken.

2 Written Offer - Offer is made in writing

Oral offer can be made in person

Oral offer can be made through a telephone and mobile.

Written offer can be made through letters, telegrams and emails.

Implied offer is not made in words. It is implied from the conduct of the parties or

circumstances of the case. The offeror does not make the offer to the offeree in the

usual mode. That is he/she neither makes an oral offer nor a written offer. The offeror

makes the offer silently by his/her conduct.

Illustration1:

A Metro train in Delhi runs on a particular route. There is an implied offer from the

metro train to carry passengers on the route who pay the specified fare.

2.12 To whom can offer be made?

An offer can be made to a definite person or to the public at large. In the former case

it is called specific offer and the latter is called general offer.

Specific offer: Offer made to a specific person or a particular person and only this

person can accept the offer.

Illustration: Devendra says to Chaitali ‘will you buy my Laptop for 40 thousand

rupees?’ In this case Devendra has made a specific offer and only Chaitali can accept

the offer.

General Offer: Offer is made to the public in general and anyone in the public can

accept the offer.

Illustration: Gangadhar had his son Pankaj missing from school. He placed an

advertisement in the Hindustan Times, which said, anyone who finds my son will be

rewarded with 5 lakh rupees. This is a case of general offer wherein anyone who reads

the paper and finds Gangadhar’s son is entitled to the reward.

Case Law 1

Carllil vs. Carbolic Smoke Ball Co.

In this case A Company by the name of Carbolic Smoke Ball Company prepared a

medicine for influenza. The medicine was called ‘The Carbolic Smoke Ball’ and an

advertisement was paced in a newspaper and magazine saying that anyone who

contracted influenza after having used the medicine according to the printed

directions would be offered hundred pounds. A lady Mrs Carllil bought the medicine

and used it according to the printed directions but she was attacked by influenza. She

sued for hundred pounds and won the case. She won the case because the offer made

by the company was a general offer and anyone who read the advertisement could

accept the offer. As the medicine did not fulfill the condition offered by the company

therefore it was bound to compensate Mrs Carlill.

2.2 CONDITIONS FOR VALID OFFER

There are various rules for valid offer. These rules are mentioned below:

! Offer must give rise to legal relations: The intension of the offeror must be to

create legal relationship with the offeree. An offer, which does not create legal

obligation, does not form a contract. For instance a social invitation even if accepted

will not result in a contract.

Illustration: Sati invited Rati on her birthday party and Rati accepted the invitation.

This is not a valid offer because if Rati fails to attend the birthday party sati cannot

take any legal action of breach of contract.

1 Offer must be definite and certain: The terms of an offer must not be ambiguous

and vague.

2 Offer is different from a mere declaration of intension: A declaration

of intension is a statement made by a person indicating his or her willingness to

make an offer in future.

3 Offer is different from invitation to offer: When a person proposes certain terms

for negotiation with the other party and thereby invites the other party to make offer

on those terms.

4 The offer should not contain a term the non-compliance of which would

amount to acceptance: The person who makes an offer cannot say to the offered that

if he or she does not communicate acceptance by a certain time the offer will be

considered as accepted.

5 Offer must be communicated: An offer must be communicated to the offeree

because acceptance by the offeree can be given only after he or she has come to know

of the offer.

Case Law 8

Lalman Shukla vs. Gauri Dutt

A person sent his servant to trace his missing nephew. After the servant left he

announced that anybody who traced his nephew would be entitled to a reward of

rupees five hundred and one. The servant traced the nephew in ignorance of the

reward. Subsequently when he came to know of the reward, he claimed it. The Court

held that there can be no acceptance unless there is knowledge of the offer and since

the servant did not know about the reward when he found the boy therefore he was

not entitled for the reward.

6 A statement of price is not an offer: A statement of price is just information and

not an offer.

Case Law 9

Harvey vs. Facey22

Harvey sent a telegram to Facey which said ‘will you sell us your Bumper hall Pen?

Telegraph lowest cash price.’ To this Facey sent a telegram which said ‘lowest price

for Bumper Hall Pen Nine hundred pound.’ Harvey again sent a telegram to Facie,

which said ‘ We agree to buy Bumper hall Pen for the sum of nine hundred pound

asked by you.’ Held there is no contract because the first telegram sent by Harvey to

Facie had two questions out of which Facie replied to only one question regarding the

price. He did not reply to the other question, which was for his acceptance to sell.

Thus Facie in his telegram only gave information to Harvey regarding the price of the

product he neither made an offer not accepted the offer made by Harvey.

2.3 WHAT IS AN ACCEPTANCE?

Section 2 (b) defines acceptance as ‘ When the person to whom the proposal is made

signifies his assent thereto, the proposal is said to be accepted.’ Thus acceptance is the

expression of assent for the offer/ proposal. The proposal when accepted becomes a

promise23.

2.31 Who can accept?Only the person to whom the offer has been made has the right to accept. Thus it is

only the offeree who can accept the offer made by the offeror. The person to whom

specific offer is made can only accept the offer on the other hand a general offer made

to the public at large, can be accepted by anyone having knowledge of the offer.

Case Law Boulton vs. Boulton

A sold his business to B without disclosing this fact to his customers. J a customer of

A was not aware of the sale and in ignorance placed an order for the supply of goods.

B supplied the goods. J refused to pay for the goods and so B sued him. It was held by

the Court that J was not liable since J had made an offer to A and not to B and B knew

very well that the offer is not made to him therefore he was not capable of accepting

the offer.

2.4 CONDITIONS FOR VALID ACCEPTANCE

There are various rules for valid acceptance. These rules are mentioned below:

1 Acceptance must be absolute and unqualified: The offeree should accept the

whole of the offer. Accepting few terms of an offer is not a valid acceptance. The

offeree must accept the offer without putting any conditions. Conditional acceptance

is not a valid acceptance. If acceptance is conditional it leads to counter-offer which

may or may not be accepted by the original offeror.

Illustration: Hari offered to sell his car to Ravi for Rs 40,000. Ravi told hari that he

is ready to buy the car for rupees 35000. Ravi’s acceptance is not a valid acceptance

because it is not accepted fully and unconditionally. Instead it is a counter-offer,

which he makes to Hari.

2 Acceptance must be in the mode prescribed or some usual and reasonable

mode: If the offeror prescribes a mode in which the offer has to be accepted and the

offeree uses a different mode of acceptance then the offeror can within a reasonable

time insist that the offer be accepted in the prescribed manner and not otherwise. If

the offeree still does not follow the prescribed mode of acceptance then in that case

the offeror may choose not to be bound by the acceptance.

Illustration: Aruna sends a letter of offer to Awadh Raj asking him to buy her flat

in Delhi for rupees 20 lakhs. She also mentions that if the proposal is acceptable to

him he can send his acceptance through post. Awadh Raj after receiving the offer sent

his acceptance through an email. Aruna on receiving the email insisted that Awadh

Raj send his acceptance only by post and not any other mode. Awadh raj did not send

his acceptance by post. Hence Aruna was not bound by Awadh raj’s acceptance. In

case the offeree follows a different mode of acceptance from the prescribed mode and

the offeror does not insist then the offeror is deemed to have accepted the deviated

acceptance.

3 Silence cannot be a mode of acceptance: The offeror cannot impose on the

offeree a condition like: If you do not reply within a reasonable time then Ishall

consider the offer to be accepted. The offeror cannot take the offeree’s silence as

acceptance of offer.

Illustration: Nisha a seminar coordinator sends an invitation for the seminar to

Ravi through an email. The email also said that if Ravi does not reply within a weeks

time it will assumed that he has accepted the invitation. Ravi does not reply. Hence

Nisha cannot assume that Ravi has accepted the invitation.

4 Acceptance must be given within the time prescribed or a

reasonable time: Acceptance by the offeree must be given within the period

prescribed by the offeror or if the period is not specified then the acceptance must be

given within a reasonable time.

Illustration: Venkat offers to sell his scooter to Rehman and tells him to reply within

a weeks time. Rehman does not reply within a week hence the offer lapses.

5 Acceptance cannot precede an offer: An offeree can give acceptance only

after the offer has been communicated to him / her. A leading case on this point

Illustration: Anita sends a letter of offer to sell her lap top to Geetha for rupees thirty

thousand. Geetha writes a letter of acceptance to buy the lap top but by mistake

forgets to post the letter. Hence the agreement has not been formed.

2.5 COMMUNICATION OF OFFER AND ACCEPTANCE

A contract comes into existence only after the offer has been accepted by the offeree

that is when the acceptance of the offer has been communicated by the offeree to the

offeror. Communication of offer and acceptance is instantly done when the offeror

and the offree are face-to-face. The problem of communication arises when the parties

are separated due to distance. If the parties are at a distance and the offeror makes the

offer through a telephone the contract is concluded as soon as the offror hears the

acceptance from the offeree.

2.51 Communication of Offer

According to Section 4 communication of offer or proposal is complete when it

comes to the knowledge of the offeree that is the person to whom the offer is made. In

case the communication is made by post the communication of offer is complete

when the letter containing the offer reaches the offeree.

Illustration: Neha in Gwalior offers by a letter on 18th June 2008 to sell her house to

Aparna in Delhi for rupees ten lakh. The letter reaches aparna on 21st June 2008.

The communication of offer is complete on 21st June.

2.52 Communication of Acceptance

Communication of acceptance is complete against the offeror and the offeree in two

stages, which are as follows:

Communication of acceptance is complete against the offeror (proposer) when the

letter of acceptance is put in course of transmission by the offeree (acceptor) to the

offeror so as to be out of the power of the offeree (acceptor) to withdraw it.

Illustration: Aparna after receiving the letter of offer from Neha has readily agreed

to accept the offer to buy the house therefore she writes a letter of acceptance to Neha

and posts the letter on 23rd June 2008. The communication of acceptance against the

offeror (Neha) is complete on 23rd June.

Communication of acceptance is complete against the offeree (acceptor) when the

letter of acceptance comes to the knowledge of the offeror.

2.6 COMMUNICATION OF REVOCATION / WITHDRAWAL

Communication of revocation is complete against the person who makes it and the

person to whom it is made in two different ways, which are as follows:

The person making the revocation: The communication of revocation is complete

against the person making the revocation (withdrawal) when he / she sends the letter

of revocation.

Illustration: Neha after posting the letter of offer feels that she no longer wants to

sell her house to Aparna and decides to withdraw her offer. She writes a letter of

revocation of offer on 19th June 2008 and posts it to Neha. The communication of

revocation of offer is complete against Neha on 19th June.

2.7 TERMINATION / LAPSE OF AN OFFERAn offer or proposal can either be accepted, rejected, revoked or it might just lapse.

The offer when accepted becomes a valid agreement. If the offeree does not like the

offer he or she may choose to reject the offer. The offeror also has an option to revoke

or withdraw the offer.

Section 6 of the Indian contract act deals with various circumstances in which the

offer lapses, which are as follows:

1 Rejection of offer: The offeree may choose to reject an offer if he or she does not

like the offer. Once the offer is rejected it comes to an end. The offer once rejected

cannot be revived by the offeree. It is only upto the offeror if he or she wishes to

renew the offer.

Illustration: Aradhna makes an offer to Sadhna she say “Will you buy my computer

for rupees twenty thousand?” Sadhna refuses to buy Aradhna’s computer. Thus the

offer is rejected

2 Counter-offer: This means an offer in response to an offer. Once an offer is made

by the offeror to the offeree it is upto the offeree to accept or reject the offer.

Sometimes the offeree neither accepts nor rejects the offer rather he or she makes his

or her own offer to the offeror. By doing this the first offer which was made by the

offeror lapses or comes to an end. If later the offeree decides to accept the offer he or

she cannot do so.

Illustration: Aradhna offers to sell her computer to Sadhna for rupees twenty

thousand. Sadhna makes a counter offer by saying that she is willing to buy the

computer if Aradhna sells it for rupees fifteen thousand. Thus the offer initially made

by Aradhna comes to an end and now it is upto her to accept or reject the counter

offer made by Sadhna.

3 Revocation of offer: An offer can be withdrawn anytime by the offeror before the

communication of acceptance of offer is complete against him. He cannot revoke or

withdraw his or her offer once the offeree has sent his or her acceptance. A general

offer must be revoked using the same channel and mode in which the original offer

was made.

Illustration: Aradhna offers to sell her computer to Sadhna for rupees twenty

thousand. But before Sadhna could accept the offer Aradhna decided to withdraw her

offer so she sent a notice of revocation of offer to Sadhna.

4 Offer not accepted in the prescribed mode: If the offeror has prescribed a mode

in which the offeree has to accept the offer and the offeree does not give his or her

acceptance in the prescribed mode then the offer comes to an end.

Illustration: Aradhna makes an offer for selling her computer for rupees twenty

thousand to Sadhna in writing and mentions in the offer that if the offer is acceptable

to her then she should give her acceptance in writing only. Sadhna however conveys

her acceptance through telephone. Thus the offer comes to an end.

5 Failure of the acceptor / offeree to fulfill a condition precedent to acceptance:

Sometimes the offeror may ask the offeree to fulfill certain conditions before

acceptance. If the offeree does not fulfill these conditions then the offer comes to an

end.

Illustration: Aradhna makes an offer of selling her computer to Sadhna for rupees

twenty thousand and mentions in the offer that if the offer is acceptable to Sadhna

then she should send an advance cheque of rupees five thousand. Sadhna does not

send the cheque. Thus the offer comes to an end.

6 Death or insanity of the Offeror: If the person who makes the offer dies or

becomes insane after making the offer, and the offeree comes to know of it before

accepting the offer then the offer automatically comes to an end. If the offeree accepts

the offer without the knowledge of the death or insanity of the offeror then the

acceptance is valid and the promise / offer will be executed by the Offeror’s executor.

The act is silent about the effect of death of the offeree. But if the offeree dies or

becomes insane the offer will end because it is only the offeree who has the right to

accept or reject the offer and not the offeree’s executor.

Illustration 1: Aradhna makes an offer to sell her computer to Sadhna for rupees

twenty thousand but before Sadhna could give her acceptance she comes to know that

Aradhna has turned insane. The offer comes to an end.

7 Lapse of time: A proposal may come to an end due to lapse of time. In case the

offeror has given duration within which the offeree has to accept the offer and the

offeree does not give the acceptance within the given duration then the offer will

come to an end. In case the offeror has not specified the duration for acceptance then

the offeree can give the acceptance within a reasonable time and if within the

reasonable time the offeree does not give the acceptance then the offer will come to

an end.

Illustration 2: Bata Shoes gave an advertisement in the newspaper in the month of

December that they are giving 50% discount on shoes for the New Year. Ram visits a

Bata showroom in the month of March and demands for a discount of 50%. He is not

given the discount. This is so because even though the exact duration of the discount

offer is not given but a reasonable period would be till the month of January or may

be the month of February. March is too late to be within the reasonable period to

avail the New Year discount.

CONSIDERATION3.1 DEFINITION OF CONSIDERATION

Section 2(d) of the Contract Act defines consideration as “when at the desire of the

promisor, promisee of any other person has done or abstained from doing, does or

abstains from doing, or promise to do or abstain from doing, something, such an act or

abstinence is called consideration.”

Illustration: Manu promised to give Tina money to study. There was no

consideration attached to it. Manu can revoke the offer as it is not binding in law.

3.2 ESSENTIAL ELEMENTS OF CONSIDERATION

There are five essential elements of consideration.

1. Act or abstinence : Consideration is a promise to do something or to abstain from

doing something (according to section 2d).

Case Law

Curie vs Misa Consideration may be a promise to do something or not to do

something. It may be positive or negative. It is some right, interest, profit or benefit

accruing to one party corresponding to forbearance suffered or undertaken by the

other.

2. It is moved at the desire of the promisor.

The promisor must move the request for consideration. If it is moved at the desire of a

third person it will not form good consideration even if promisor desired it. Therefore

the promisor must first give consideration

Durga Prasad Vs Baldeo: On the order of the collector of a town built some shops

on his own expense in a market. The shopkeepers who occupied these shops promised

to pay to D commission on their sales. D sued the shopkeepers when he did not

receive the commission. The court held that the promise was not supported by any

consideration as the shops were built on the collectors order and not at the request of

the shopkeepers. Therefore there could not be a recovery.

3. It may move by the promisee or another person

When a promisor gives a promise, the promisee or any other person may provide a

valid consideration in return.

Case Law

Chinnaya vs Ramaya An old lady, made an agreement with her daughter that she

would gift her some landed property but the condition was that the daughter would

pay her sister some annual payment regularly as maintenance allowance. The

daughter promised her aunt (mother’s sister), the maintenance money. However, later

on she did not pay the money to her aunt. The aunt filed a case for recovery of the

amount. The decision was in a perfectly genuine consideration. The promisee had

agreed to carry out the instructions of the promisor in return for receiving land.

4. Consideration can be past, present or future.

On of the important elements of consideration is that it can be past, present or future.

Past consideration: When consideration is provided before a person becomes a

promisor.it is called past consideration. Such a situation can arise when a person has

done some work that is desired by another but is compensated later on. He does not

receive the benefit immediately. English Law does not consider past consideration to

be good. However it accepts time barred debts as good past consideration.

Illustration: Sonam goes to a friend’s house. She suddenly has a severe stomachache.

A doctor in the neighbourhood examined her and administered some medicine. At that

time there was no talk of compensation for services of the doctor. Later Sonam went

to the doctor’s clinic expressed her thanks to him and also gave him Rs 500 as his

fees for his services. This is past consideration. The doctor received the fees for

services that were rendered by him earlier.

Present consideration: When an agreement is made and consideration is paid for it or

a promise is made for that work at the time of making the contract it is called present

consideration. This situation arises when the promisor makes an offer and it is

immediately accepted with consideration at that particular time. This is also called

executed consideration.

Illustration Reena offers to sell her old computer to her friend Anjali if she pays Rs

7500 for her old computer at the time that she accepts the offer. Anjali brings the

money immediately and pays Reena the full money. Now Reena should deliver her

computer. Acceptance of the offer and consideration are both in the present.

Future Consideration: When promise is to be executed on a future date it is

called executory consideration or future consideration. In this the promisor makes an

offer for a future date and the promisee promises to accept and execute the contract

after that it is future consideration. In this manner both parties move the consideration

to a future date. The liability becomes outstanding on both parties on a future date.

Illustration: Ruhi promises to sell and deliver a new wristwatch to Rekha after a

week. Rekha accepts the offer and promises to pay after one month of receiving the

watch. This is executory or future consideration.

5. Consideration need not be adequate: Consideration means something in return.

This may not be equal to the value of of the promise that is given. As long as there is

some consideration courts support it and are not concerned about its adequacy. The

parties to the agreement should have been satisfied with the consideration when they

made the contract. The consideration may not be adequate but it should be lawful.

Illustration: Madhu sold her old car to Meera for Rs 25000. The value of the car was

Rs 2,00,000. The consideration was lawful and with the free consent of Madhu who

knew that the market value was much higher. Therefore it was a valid agreement even

though consideration was not adequate.

6. Consideration must be real and not illusory or impossible.

Real consideration means that the consideration should not be physically or legally

impossible. Consideration is not real in the following cases because of physical and

legal impossibility or uncertainty

7. Consideration must be lawful.Consideration should be lawful otherwise the agreement becomes void. According to

section 23 considerations is not lawful in the following situations:

1 When it is fraudulent

2 When it is made of an act forbidden by law.

3 When it causes injury to a person or property of another person.

4 When it is declared as immoral or opposed to public policy.

When a part of the agreement is unlawful the whole agreement will become void

except in those cases when the unlawful part can be separated from the lawful one.

Then the unlawful part will become void and the other part can be carried out.

3.3 STRANGER TO CONSIDERATION AND STRANGER TO CONTRACT

Under the English Law, consideration has to move from the promisee and if any other

person moves it, the promisee becomes a stranger to consideration and cannot

enforce the promise. A person becomes a stranger to a contract when he is not a party

to a contract even though it is made for his benefit. He is a stranger to the contract and

cannot claim any rights under it.

Stranger to consideration and stranger to contract are called Privity of consideration

and Privity of contract. In India Privity of consideration is not applicable because

Section 2(d) has the provision that provides that the promisee or any other person can

move a contract. Accordingly in India a stranger to consideration can sue and enforce

an agreement if he is a party to the contract.

3.4 EXCEPTIONS TO THE RULE OF STRANGER TO CONTRACT

There are certain exceptions to the rule that a stranger cannot sue. In the following

cases the court does not prevent a stranger from enforcing a contract that is made for

his benefit but he is not a party to it.

a) Trust or a charge: In the case of a trust or a charge created in favour of another

person the beneficiary can enforce the rights conferred upon him by the trust even

though he is not a party to the contract between the settler and the trustee.

Illustration: Sunita made a trust for the benefit of her son Sushant and appointed Raja,

Mahesh and Arjun to be the trustees. Sushant was not being given the property by the

trustees. Can he claim all the propertyin his favour?He can claim that was given in his

favour even though he was not a party to the benefits created for him by his mother.

b) Marriage settlement partition or other family issues: When an agreement is

made relating to marriage, partition or any other family issues with some provision for

the benefit of any person, the beneficiary can enforce the agreement. This is possible

even though he is not a party to the agreement.

c) Acknowledgement of payment or estoppel: This is an agreement between two

parties that one of them would give a benefit to a third person. If the promiser

expresses or implies by words or actions and acknowledges that he has a liability

towards a third person it is sufficient for the third person to recover the benefit as his

right.

Illustration: Anu is the subtenant of Prem but she pays the rent directly to Anil. Anu

stops paying the rent. Anil has the right to recover the amount from Anu as this is an

exception to the law of privity of contract.

Contract through agents: The principal can enforce Contracts that are entered into by

agents on behalf of him if the agent has acted within the scope of his duty and in the

name of the principal. The rights of the principal are intact even though he is not party

to the contract.

Illustration. Mr. Jaiswal sold television sets on behalf of L.G. company. He sold 35

television sets to Reena and she did not pay the money. L.G. company went to court

because they could enforce their rights as Jaiswal had acted as an agent of L.G. even

though the company was not directly involved in the contract.

Agreements relating to land: When a person purchases land and he knows that

certain rights and obligations bind the seller, the buyer has to honour the

commitments of any covenants by which the seller is bound. The rule of privity of

contract does not apply in this case. The buyer may not be a party to the contract but

he is bound by the principles relating to immovable property.

Case Law

Smith and Snipe Hall Farm Ltd vs River Douglas Catchment Board: A board

agreed with landowners near the stream to improve the banks of streams and

maintain them in good condition. Landowners paid proportionate costs for

maintenance. Subsequently landowner sold the land to someone who further sold it to

another person. Due to negligence of the board the banks of the stream broke and the

land got flooded. The subsequent owners filed a suit against the board for negligence.

Though they were not party to the contract they were entitled to sue because they

were bound by the original owners agreement with the board.

3.5 “AN AGREEMENT WITHOUT CONSIDERATION IS VOID’-

EXCEPTIONS TO THE RULE

The general rule is “no consideration no contract” or “an agreement without

consideration is void” but there are exceptions to the rule. According to section 25, in

the following cases the rule does not apply

(a) Natural love and affection: A written and registered contract without

consideration, based on natural love and affection by two parties related to each other

is a valid contract. [section 25(1)]

Note: Closeness of relationship need not necessary mean love and affection.

Case Law

Rajlukhy Vs Bhootnath :A husband agreed to pay a fixed sum and maintenance to

his wife for living in a separate residence due to frequent quarrels between them. He

registered the written document. Since he did not pay the amount the wife went to

court .She was unable to get any relief because the agreement was not made with

natural love and affection.

This is an enforceable contract even though there is no consideration.

• Voluntary compensation: A promise to compensate a person wholly or partly for

services done voluntarily, or for doing voluntary services that are legally compellable

is a valid contract even without consideration.[Section 25 (2)]

Illustration: A thief snatched Leela’s gold chain. Meera, an onlooker, rushed to

help,retrieved the chain and gave it back to Leela. On receiving the chain Leela gave

Meera Rs 2000/-. This is a valid contract even without consideration.

Time barred debt: A written and registered document by the debtor signing himself or

his agent with a promise to pay a time barred debt, is a valid contract and does not

require any fresh consideration. [Section 25(3)]43 The intention should be clearly

expressed. It may be the full amount or part of the amount of the debt that is to be

returned.

Note: An oral promise is not acceptable.

Illustration: Sita took a loan of Rs 5000 from Geeta. She could not pay in time and it

became time barred under the Limitation Act. She made a signed and written promise

to Gita that she would return Rs 3000 on account of the debt. This is a valid contract.

No new consideration is required.

Agency: No Consideration is required to create an agency between the principal and

agent according to section 185. If a person volunteers to work on behalf of another

person as his agent without any remuneration, a relationship of agency will be created

even if there is no consideration. The agent can work on behalf of the principal and

bind the principal on any contracts that are taken by the agent on his behalf.

Note: Before the execution of the agreement the contract will be void since there is no

consideration.

Completed gift: No consideration is required between the donor and the donee of any

gifts already made. The person who receives the gift becomes its owner. a gift or a

donation already given cannot be undone on the grounds that there was no

consideration. There is no need for natural love and affection between the parties but

there should not be any prior agreement to give a gift.

Note A promise to give a gift, on a future date is void if it does not have any

consideration.

Illustration: Vibha has gifted a watch to Nirmalya on his birthday. This is a valid

contract even though there is no consideration.

Remission of a promise: A promise by the promisee to the promisor to give a

concession (section 63) in the performance of his obligations is called remission. This

remission of a promise can be without consideration.

CAPACITY OF PARTIESIn India people can make agreements with their friends, neighbors, colleagues but not

all agreements can be termed as contract. An agreement becomes a contract only

when it fulfills the requirements. One of the very important requirements is

competency to contract.

4.1 WHO IS COMPETENT TO CONTRACT?

Section 11 of the Indian contract Act provides that a person is competent to contract

if:

1 He or she is of the age of majority according to the law he or she is subject to

2 He or she is of sound mind

3 He or she is not disqualified by the law he or she is subject to.

Thus in order to enter into a valid contract one has to have all the three requirements

and if any of these requirements is not fulfilled then he or she is incapable to enter

into a valid contract, a contract to be recognized and enforceable by law.

We can now reverse the question and ask-

‘Who is not competent to contract?’

The people who are not competent to contract are:

(a) Minor

(b) Person with unsound mind

(c) Person disqualified by law

4.2 WHO IS A MINOR?

Section 11 of the Indian Contract Act provides that to be competent to contract a

person should be a major. However, section 11 does not say that a minor’s contract is

void. To put it in other words section 11 of the Indian Contract Act is silent about the

legality of minor’s contract. Privy Council in Mohiri Bibi vs. Dharamdas Ghose

clarified this position for the first time

4.2.1 WHAT IS THE POSITION OF AGREEMENTS WITH A MINOR?

The law is quite protective towards the minors. The position of agreements with a

minor are given below:

1 Void Agreement Agreement with a minor is void. An agreement with a minor is not

enforceable by law from the very beginning.

An agreement between two people who are both minors is void.

Both the parties cannot enforce the agreement in the Court of law.

Illustration: Geeta and Priyanka were classmates and Geeta did not have money to

buy her geography textbook so she borrowed rupees two hundred from Priyanka and

promised to return it in a week. After a week when Priyanka asked for her money

Geeta refused to return it. In this case Priyanka cannot sue Geeta for the breach of

contract because the agreement they had between them cannot be enforced in the

Court of law.

An agreement between two people of which one is a major and the other is a minor

is void

In such cases the minor can be a beneficiary or a promisee. The minor can enforce

the contract and if the minor has benefited from the other party then he or she may be

asked to restore (restitute) the benefits he/she has obtained from such agreement to the

other party. However restitution is allowed only if the money or property (benefit)

could be traced. For instance if the minor has borrowed money from a major and used

it all then he/she cannot be asked to restore it.

Illustration1: Ram a seven-year-old boy asked Raghuvansham a cricket coach to

give him coaching classes and Raghuvansham agreed to give coaching. Ram paid in

advance the tuition fee. Raghuvansham gave coaching only for a day and then

discontinued on the pretext that the agreement is void. Ram could enforce the

agreement though void for breach of contract. In this case Ram a minor was a

beneficiary / promissee and therefore had a right to enforce the agreement in the

Court of law

2. Partnership / company Minor cannot enter into a partnership agreement therefore

he / she cannot be made a partner but he / she can be admitted to the benefits of

partnership with the consent of all the partners. Similarly a minor cannot become a

shareholder in a company, as he is incompetent to enter into a contract. In case a

minor inherits shares (fully paid) then he can become a shareholder acting through a

lawful guardian. Here again a minor enjoys only the benefits of shareholding. He

cannot be made liable for payment of call money.

Illustration: Devendra run a business with four partners. Devendra died in a road

accident. A fifteen-year-old son Gajendra survived him. As Gajendra was a minor so

he could not be made a partner in place of his father but with the consent of all the

partners he was admitted to the benefits of the partnership firm. He was entitled to all

the benefits, which accrued to the firm but was not liable for any losses.

3 Ratification Ratification means approval or confirmation. If a minor has entered

into an agreement he or she cannot ratify the same agreement after attaining the age of

majority. It is because an agreement entered into by a minor is void and a void

agreement cannot be made valid after minor has attained the age of majority. If he or

she wishes to continue then they will have to make a fresh agreement with a fresh

consideration.

Illustration: Gajendra a fifteen-year-old boy was admitted into the benefits of

partnership after his father died. After attaining majority Gajendra cannot ratify

thesame agreement or continue with the agreement, which he had entered before

attaining majority. If Gajendra still wants to continue enjoying the benefits of

partnership then he will have to make a fresh agreement.

4 Agency Minor can be appointed as an agent. He is not liable for any of his / her acts

rather it is the principal who would be held responsible to the third party for the acts

of the minor

Illustration: Sylvia a six-year-old girl went with a piece of cloth to the tailor and

asked him to stitch a blouse for her mother. The tailor stitched the blouse but Sylvia’s

mother refused to pay the money on the pretext that the agreement was void. This was

not a void agreement but a contract of agency where the tailor could enforce the

agreement and Sylvia’s mother who was the principal would be liable to pay.

5 Negotiable Instrument Minor can draw a negotiable instrument and can enforce

instrument drawn in favour of him/her. He/she cannot be made personally liable thus

a minor can be a promisee or a payee and he /she can also become indorsee by

transfer of negotiable instruments.

lllustration: Shyam is a sixteen-year-old boy who has been hired by Krishna to clean

his cars every day in the morning. Krishna pays Shyam by drawing a cheque in his

name for rupees 1000. Shyam deposits the cheque in his bank and the bank dishonors

the cheque. Shyam can sue Krishna for dishonoring of the cheque and demand a fresh

one with compensation.

6 Necessaries The Person who has supplied necessaries to a minor or to his/her

dependents is entitled to be reimbursed from the property of the minor. According to

section 68 the term necessaries include goods and services, which are required to

maintain a person in a condition, state and a station in life in which he/she is. Station

in life means the standard of living the person has. Necessaries include food, clothing,

shelter, education and marriage of a female. Minor has to reimburse the supplies of

such necessaries and the loans for such necessaries. Claim for payment for necessaries

can be made against the minor’s property. Minor cannot be held personally liable for

such necessaries.

Education- A Necessity

Education is considered a necessity and therefore a minor is liable for such necessary

however he is not personally liable the payment for such necessaries are made against

his/her property.

Illustration: Priya who lost her parents in an accident studied in a School in Delhi.

She failed to pay her tuition fee for two consecutive months. She was liable to pay her

fee because education is a necessity. However she is not personally liable. She will

pay out of her property.

Medicine- A Necessity

A minor is also liable for any medicinal service he has procured. It can be the doctor’s

consultation fee or it can be the payment for medicines or the treatment .

Illustration: Cindia a fourteen-year-old orphan girl was suffering from appendicitis.

She was taken to the hospital and was operated upon. Cindia was liable to pay the

hospital charges as it was a necessity. Again she was not personally liable. Either her

guardians would pay or it would be paid out of her property.

Shelter- A Necessity

Home is very essential for any human being and a minor is not an exception. He/she

is liable for the payment for his/her shelter. If he/she has taken house on rent he/she is

liable for its rent.

Illustration: Srikant a seventeen-year-old native of Hyderabad came to Delhi and

took admission in Delhi University to do his graduation. Srikant had no hostel in his

college and did not have any relatives so he took a paying guest accommodation and

agreed to pay a monthly rent of Rs. 4000 to his landlady. After staying for three

months Srikant refused to pay the rent. Srikant cannot plead minority here because

home is a necessity and he is liable for the necessity.

7 Torts Minor is held liable for tort (civil wrong). A minor cannot be held liable under

a contract because an agreement with a minor is ab initio void. If a minor has been

negligent in a contract he/she cannot be made liable hence it cannot be treated as a

tort. Tort means a civil wrong whose formation is not on the basis of a contract.

Stealing, abusing and destroying public property is a civil wrong and therefore minor

is liable for it.

Illustration 1: Neha a sixteen-year-old hired a music system for her birthday party

from Ramesh. She promised to use the music system properly and return it to him

once the party was over. Neha used the system negligently and corrupted it. Neha was

not liable for tort.

8 Insolvency Minor can never be declared insolvent because he/she is not capable of

entering into a valid contract. Agreements with a minor are void therefore he/she does

not incur any liability under any agreement.

Illustration: Pradeep a fourteen-year-old boy had taken loan from Satish for paying

his school fees. As this was a necessity therefore he was liable to pay the loan money

back out of his property. He did not have enough property to pay the full amount so

he paid only partly. In this case Satish could not hold Pradeep personally liable for

the unpaid money and therefore Pradeep could not be declared insolvent.

4.3 WHO IS OF UNSOUND MIND?

Lets us first answer the question ‘Who is a person with a sound mind?’

According to section 12 a person is of sound mind when he / she is capable to

(a) Understand the terms of a contract

(b) Form a rational judgment about the effects of the terms of contract on his / her

interest

If a person does not satisfy both the above conditions then he or she is of unsound

mind

Unsoundness of mind can be

Permanent

Temporary

Permanent unsoundness of mind is found amongst

(1) Idiots

Temporary unsoundness of mind is found amongst

(1) Lunatics

(2) Drunkards / persons under intoxication

Who is an idiot?

As per the English dictionary an idiot is an utterly foolish or a senseless person. A

person, who lacks the normal power of thinking and is devoid of a healthy mental

development. He /she has a mental age below three years and generally is unable to

learn connected speech or guard against common dangers. This problem is generally

by birth and its recovery is almost impossible therefore it is considered to be a

permanent unsoundness of mind.

Illustration: Ram and Shyam were twin bothers who were mentally challenged. They

were twenty years old but their minds were that of a three-year-old child. They were

like this right from their birth. Only a miracle could have cured them otherwise in

normal circumstances they could never be cured. As a result they were permanently

incapable to enter into a contract. Any agreement with them would be void.

Position of agreements with an Idiot

An idiot is permanently of an unsound mind therefore he / she is incapable of entering

into any valid contract. Any agreement entered into with an idiot is void.

Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a five

star hotel and ordered a lavish dinner for himself. After the dinner he failed to pay the

bill. Gyaneshwar could not be held liable because he was of unsound mind.

Who is a Lunatic?

As per the English dictionary a lunatic is a person who is mentally ill, dangerous,

foolish or unpredictable. He or she loses the normal power of thinking due to mental

strain, accident or a tragic incident in life. Lunatics are not born insane. They suffer

from intervals of sanity and insanity.

Illustration: Gayatri was a 54-year-old lady who lost her husband in a car accident.

Ever since she lost her husband she went into a depression. Her husband was a

businessman and so during that time she entered into an agreement with one of her

husband’s client. The agreement could be declared void because she signed it while

her mental condition was not normal.

Position of agreements with a Lunatic

A lunatic is incapable of entering into a valid contract. However Lunacy is a curable

ailment therefore after recovering from insanity he / she can enter into a valid

contract. A contract with a person before he / she turned a lunatic is a valid contract

and a contract with a person after he / she recovered from lunacy is also a valid

contract.

Illustration: Gayatri who had lost her husband in an accident went into depression

but after few months she recovered and entered into an agreement to sell her house to

Lakshman. The agreement with Lakshman was valid and was very mush enforceable.

Who is a Drunkard / Person under intoxication?

A drunkard is a person who is under the influence of alcohol and therefore cannot

properly think and make rational judgments. A person is said to be under intoxication

Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a five

star hotel and ordered a lavish dinner for himself. After the dinner he failed to pay the

bill. Gyaneshwar could not be held liable because he was of unsound mind.

4.4 WHOM DOES LAW DISQUALIFY?

There are people who are physically and mentally sound yet they are disqualified by

law to enter into any valid contract. The people who are disqualified by law are the

following:

1 Alien enemy: An alien enemy cannot enter into a contract while his / her country is

at war with our country. A contract with a foreign national is valid but becomes void

as soon as the war starts. These contracts may again be revived after the war ends if

the central government is of the opinion that the contract is not against the public

interest of the country. A new contract can also be entered into with an alien enemy

after the war ends if it is not against public interest.

Illustration: Mir Zafar an Afghani businessman had an American business associate

by the name of Tom. They both entered into a business contract but before they could

execute the contract America attacked Afghanistan. As a result their contract became

void but after the war ended they could easily revive the old contract or could enter

into a new contract because they were no longer alien enemies.

2 Foreign Sovereign and Ambassador: Foreign Sovereigns and their representatives

are citizens of foreign countries. They can be tourists, ambassadors and delegates who

visit our country for a specific purpose and duration.

Illustration: Suzanne is a Canadian ambassador in India. While she was driving in

the streets of Delhi she happened to hit a motorcyclist. As Suzanne was a foreign

national she could not be tried in the Indian Court.

Foreign Sovereigns and Diplomats are free to enter into a valid contract in our

Country and can enforce those contracts in our Courts but the problem is that we

cannot sue them in our Courts without the sanction of the government unless they

wish to submit themselves to the jurisdiction of our Courts. If the foreign national has

entered into a contract through an agent residing in India then in that case the agent

can be held responsible and can be sued in the Court of law.

Illustration: John an American tourist came to India and stayed in a five star hotel

for five days but when he was leaving the hotel he did not have money to pay his bills.

As John was a tourist so he could not be tried in our Court. He could not be sued for

recovery of the bills.

3 Convict: Convict cannot enter into a valid contract while undergoing imprisonment.

As soon as the convict’s tenure of imprisonment finishes he / she is no longer

disqualified to enter into a contract.

Illustration: Radha was found guilty of crime of theft and was undergoing

imprisonment. During the years of imprisonment she was not competent to enter in to

any contract but as soon as her term in the prison gets over she will be competent

toenter into a valid contract.

4 Insolvent: The Court declares those people insolvent who are unable to discharge

their liabilities. Their debts exceed their assets therefore they are unable to pay their

creditors. After the Court declares them insolvent their property stands vested with the

official assignee or an Official receiver.

Illustration: Shambhu a businessman was running into huge losses for the past five

years. He was unable to pay his creditors and so his creditors sued him. The Court

declared Shambhu insolvent and his property was vested with the official assignee.

5 Company: The contractual capacity of a company is normally mentioned in the

object clause of the Memorandum of Association. Any act done outside the purview

of the memorandum is ultra vires and any agreement entered into for the execution of

such an act is void.

Illustration: Ram and Shyam Company was in the business of manufacturing leather

bags. The object clause in the Memorandum of Association provided that the

company is to manufacture leather bags. One day the director of the company entered

into an agreement with a buyer for selling them leather shoes. The agreement was

void because it was beyond the scope of business. The company as per its

memorandum was to sell only leather bags and not leather shoes. Therefore the

agreement was not valid.

Free Consent5.1 MEANING OF CONSENT AND FREE CONSENT

Free Consent is one of the essential elements of a valid contract. The essence of this

requirement is that a person should enter into an agreement of is own interest with a

free as well as an open mind without any fear. If any one has not allowed the other

party the freedom of expression, the agreement will not be fair. No person under law

is compelled to enter into a contract and be bound by any obligations pertaining to it

without his / her free consent.

CONSENT

When two or more persons agree upon something it is said that there is a consensus

between them. According to section 13 this means that the people agree on the same

thing and in the same sense. It also means that there is consent on the acceptance of

an offer. When there is no consent, there cannot be a contract.

Illustration: Braj has two televisions. One is of L.G. make and the other is of Sony

make. His friend Ashu offers to buy the L.G. product. Braj thinks he is selling the

Sony television. This agreement is void ab initio because there is no consent since

both of them have not understood the same thing in the same way. There is no

agreement of minds.

FREE CONSENT

Section 10 of Indian Contract Act, states, that a valid contract should have the free

consent of both the parties, entering into the contract. This means that in a contract

not only should there be consent but it should also be free consent.

‘All agreements are contracts if they are made by the free consent of the parties.’

Free consent according to section 14 is when a contract is made without coercion,

fraud, undue influence, misrepresentation or mistake. Therefore, if a contract is

influenced by any of these elements there cannot be free consent. Salmond has

described this as an error in consensus.

An agreement, which is made by coercion, fraud, undue influence and

misrepresentation, is voidable at the option of that party whose consent was not free

(Section 19).

If there is a mistake in an agreement it becomes a void contract. It is not enforceable

by law. The reason for this is that a mistake means that there is no consensus between

the parties entering into a contract.

When consent is not free it is called error in causa. This makes the contract voidable

at the option of that person whose consent in the contract is not free. However, the

contract continues to be a valid contract until it is repudiated by the person who is

consent is not free.

According to section 15, coercion means to use force to make another person

agree to the terms and conditions while entering into a contract. A contract is caused

by coercion in the following cases:

1. When any act is done that is forbidden by Indian Penal Code.

2. Threatening to commit an act forbidden by Indian Penal Code

3. Unlawful detaining of property by using force or physical pressure on another

person.

4. Threatening another person for detaining the property.

Illustration: The gangster made the property owner sign the papers for his ownership

at pistol point. This is coercion it is forbidden by Indian Penal Code. The contract is

voidable at the option of the property dealer as force was used for obtaining property.

When can coercion be exercised?

Coercion can proceed from any person. It can be directed against another person

including a stranger.

Illustration: Manju threatens to kill Muna, who is Rani’s son if Rani does not give

theentire property to her. The consent given by Rani is due to coercion by Manju. The

coercion is directed against Muna who is a stranger to the contract.

Effects of Coercion

Section 19 and 72 of the Indian Contract Act, deal with the effects of coercion.

According to Section 19 ‘when consent to an agreement is caused by coercion the

agreement is a contract voidable at the option of the party whose consent was so

caused’.

The effects of coercion can be summarized in the following:

! The aggrieved party can rescind the contract as it is voidable at his / her

option. (Section 19)

! The aggrieved party should be restored the benefits by the person who had used

coercion.(Section 64)

! If money has been paid on account of coercion the aggrieved party should be

returned the money by the person who had used coercion for taking it.

! The aggrieved party has to prove that coercion had been exercised and the consent

was not freely made by him / her.

5.3 UNDUE INFLUENCE

Undue influence means using superior power for obtaining the consent of the person

who is weak in position and physical ability.

Section 16 (1) of the Contract Act defines undue influence as

• The relation between parties where one of the parties is in a dominating position

over the will of the others.

• Using the dominating position to take an unfair advantage over the other.

Section 16 (2) of the Contract Act defines the position to dominate the will of the

other in the following manner.

6 Real or apparent authority: Where a person holds some real or apparent authority

over the other. This means that he / she is in some position where he / she has the

power to dominate over the will of another person.

Example:

6.1 Relationship of Employer and Employee

6.2 Relationship of Officer and Peon.

7 Fiduciary Relationship: Where a person is in a fiduciary relation to another. This

means that there is the relationship of mutual trust and confidence amongst the people

making the agreement.

Example:

(4) Relationship of doctor with his patient.

(5) Relationship of mother and daughter.

(6) Relationship of Father and son.

(7) Relationship of Trustee and beneficiary.

8 Agreement with another, having mental incapacity: Where a person makes a

contract with another, whose mental capacity is affected because of his age, illness,

mental or body distress temporarily or permanently.

Example:

! Relationship of normal person with a person temporarily in depression.

! Relationship of a young man with an old and sick person, who suffers from

dementia.

Illustration:

! Mr. Balram used his parental influence by making his son a party to dowry taken by

him at his wedding from the wife’s father. This is a case of undue influence exerted by

a father because of his fiduciary relationship with his son.

The relationships in which undue influence can be exerted over another are the

following.

! Teacher and student.

! Employer and employee.

! Doctor and patient.

! Mother and daughter.

According to law in the following cases there is no presumption of undue influence.

Therefore if someone has exerted undue influence it will have to be proved.

! Creditor and debtor.

! Landlord and Tenant.

! Husband and wife (when wife is not parda-nashin).

Presumptions of Undue Influence 16 (3)

In some cases it is presumed that there is undue influence. These are discussed below:

1. Unconscionable transactions: When it can be proved that the dominating party

entered into an unfair contract with a weaker party, it is assumed by law that undue

influence has been used to exert the contract. Unfair transactions between superior

and weaker party are called unconscionable transactions. An example of such

contracts is when a person makes an unusually high profit and the other party suffers

because of these contracts, in such cases when on the face of the agreement it appears

unconscionable it has to be proved that consent was taken by fair means by the

superior party.

2. Contracts with Parda-Nashin Women: Women who wear a burkha or cover

themselves and are in complete seclusion from the rest of the world are a separate

category in the eyes of the law. If a contract is made with pardanashin women, it is

presumed that undue influence is used. The court grants relief to any unreasonable

demands of the party using undue influence through its discretionary powers.

3. Money Lending Transactions: Unfair agreements are often made in money lending

transactions. Sometimes undue advantages are taken from people who have taken

loans. A high rate of interest charged shows unfair transaction. Also, when a money

lender executes a property in his favour when the borrower cannot repay is also or

transaction of undue influence.

In all the above cases the court presumes that undue influence has been used and

using its discretionary powers it can grant relief to the weaker parties.

Effects of Undue Influence

Under Section 19A, if a person has given his consent due to undue influence exerted

by another person the contract is voidable at the option of that party who had to give

consent under undue influence. Further, the court may also take the decision that a

refund has to be made to a person who is the aggrieved party. The court may also take

a decision to allow the aggrieved party to rescind a part of the contract or the whole

contract as the case may be.

Burden of proof

The burden of proof of undue influence will be on the person who is aggrieved and

wants relief from the court. The court also states that there is a difference between

persuasion and undue influence. A person can be persuaded to do a certain activity

but this does not necessarily mean that undue influence has been used. Therefore,

aggrieved party will have to prove that the superior party was able to influence him

due to his position to dominate his will.

Rebuttal of Presumption

When the weaker party makes a plea in the court that it did not use undue influence it

has to prove the following.

o That full disclosure was made to the weaker party before getting consent and

entering into a contract.

o That the price paid in the contract was in accordance with the requirement and it

was adequate.

o That the weaker party took advice from a competent person before finalizing the

contract with the so called superior party.

5.4 FRAUD

Fraud is false representation of facts made willfully to deceive another person.

Definition of Fraud

Section 17 of the Indian Contract Act states that if any of the following acts are

committed by any party to a contract or with his agent’s connivance, willfully

withintent to deceive or induce another person or his agent to enter the contract it will

result into fraud.

1. It is a suggestion of a fact which is not true by a person who does not believe that it

is true.

2. It is an active concealment of facts by a person who has knowledge or belief of the

facts.

3. It is a promise in which there is no intention of performance of the contract.

4. Any other action which has the intent of deceiving the other person.

5. Any act or omission which is declared fraudulent by law.

Essentials of Fraud

The above description of definition of fraud can be explained through the essentials of

fraud.

1. False Suggestions: Fraud must state facts which are false and the person making

the suggestion knows that he is making a false representation or false statement of

facts. The false suggestion is made intentionally to induce or deceive the other party

to enter into a contract. This is supported by the following case law:

2. Active Concealment of a Fact: Active concealment is when a person has the

knowledge or belief of the fact which he knows is not true. This amounts to fraud.

Passive concealment is when a person makes an incorrect statement thinking that the

statement is correct.

3. Making a Promise without Intention of fulfilling it: If a person makes a promise

but he does not intend to keep it. It is a clear case of fraud because at the outset the

intention was to make a false promise.

4. Any other act fitted to deceive: An act used to trick or chit someone by unfair

means is considered to be fraud. This is an act which is done with the intention of

committing a fraud.

5. Any other act considered by law to be fraudulent: According to the law it is

obligatory that all material facts are disclosed while selling an immovable property.

Otherwise it amounts to fraud.

6. The Party that is misled by Fraud should have suffered some loss: There cannot

be fraud without any damage. The loss must be in terms of money or money’s worth,

or loss of some tangible assets. Fraud without damage does not give rise to any deceit.

8.1.6 Half Truths: When a person speaks a half truth, it means disclosing some

portions of relevant material leaving the other portion undisclosed. According to law a

half truth is worse than full falsehood as it misleads the other person. Therefore if a

person speaks he must give all the facts and not just half truth. Otherwise silence

amounts to fraud.

8.1.7 Change in Situation: Sometimes when a statement is made it is the truth but

circumstances bring a change in situation and when it is actually acted upon, it

becomes false. It becomes the duty of the person to immediately communicate the

change in situation. This is supported by the following case.

Remedies of Fraud

According to Section 19, when consent is taken by fraud from another person he has

the following remedies available to him.

o Rescind the Contract: The party whose consent was received by fraud has the right

to avoid the contract because it is voidable at the option of the person defrauded.

o Performance of Contract: The person defrauded can ask for completion of the

contract but with restitution which means that he would like to be put in that position

in which he would actually be in if the representations were true.

o Compensation: The defrauded party has the right to demand compensation for the

loss that is caused to him by fraud. He has the right to claim damages even if he opts

to continue with the contract.

5.5 MISREPRESENTATION

Misrepresentation is a false or misleading statement that a person honestly believes it

to be true. He makes this statement without any intention to cheat or mislead another

person. The false statement is serious but not as serious as fraud.

According to Section 18 of the contract act misrepresentation the meaning of the

misrepresentation is given below:

1. It is a positive assertion of information by a person which is not true but the person

believes it to be true.

2. It is a breach of duty without any intention to deceive. However, the person gains

an advantage by misleading another person.

3. The statement innocently causes a party to an agreement to make a mistake to the

subject of the agreement.

Misrepresentation occurs in the following cases:

1. Unwarranted Statements: When a party makes a positive assertion that the

information from which he is making a statement is trustworthy he means that he is

making a warranted statement. Unwarranted statement means information from

untrustworthy source. Therefore, when a person believes that the information is true

but it is incorrect. It is misrepresentation. This is supported by the case

Case Law 8

In Oceanic Steam Navigation Company V Soonderdas.61 The plaintiff from whom a

person chartered a ship stated that the ship was of 2800 tonnage register. However,

the ship was 3000 tonnage register. The plaintiff did not have any basis to believe the

fact stated by whom. The contract was the cancelled due to misrepresentation.

2. Breach of Duty: When a party does not intend to cheat another person but the

circumstances show that he has not done his duty correctly because of nondisclosure

of essential information. He has used the situation to his advantage thus bringing him

certain benefits. This type of situation is called constructive fraud. The party making

such statements will be guilty of misrepresentation. This is supported by the following

case.

Case law 9

Bannerman v White 1861.62 The plaintiff wanted to sell the defendant hops on the

understanding that sulphur was not used in their growth. The defendant was clear

that he was not interested in sulfa usage in cultivation of Hops. Although sulfa

wasused in 5 out of 300 acres the plaintiff had forgotten. The court held that the

contractcould be avoided on the ground of misrepresentation although representation

was no

3. Innocent Mistake: If one party leads the other one to make a mistake in the quality

or subject matter it is a case of misrepresentation. This clause includes the cases

where vital facts are suppressed and a mistake has been made.

Essentials of Misrepresentation

Misrepresentation as already stated is a false representation of facts which the person

makes without knowing that it is false. He makes the statements believing them to be

true. The following essentials elements represent misrepresentation.

I. Material Facts: Misrepresentation must be of those facts which are important in the

formation of a contract. Some expressions or passing statements that are not relevant

will not be enough for avoiding a contract.

II. Statement prior to executing the contract: The misrepresentation of facts must be

before the contract is executed by the parties to the contract.

III. Misrepresentation by a party to the contract: Misrepresentation of facts has to be

made by a party or his agent to the contract. A statement made by a stranger to the

contract does not have any effect on the validity of the contract.

IV. Objective of misrepresentation: The statements made by misrepresentation of

facts should be of the intention to deceive the other party and to induce him to enter

the contract.

V. Reaction of other party: As a result of the misrepresentation the other party in the

contract should have acted on the faith of the facts represented.

Effect of Misrepresentation

According to Section 19 of the Indian Contract Act if on the misrepresentation of

statements a person to the contract has been affected, he can avoid the contract

because it becomes a voidable contract at his option.

! The person whose consent has been taken by misrepresentation has the right to

rescind to the contract.

! He has a right to ask for completion of the performance of the contract and ! He can

also ask for being given the position which he would have if the representation of

facts was true at the time of asking for performance of the contract.

The right to rescind the contract is in the following three cases.

1 Time Period: The contract has to be rescinded within a reasonable time otherwise

the right to rescind the contract will be lost.

2 Affirmation: The aggrieved party should not make an affirmation to the contract

otherwise he will lose the right to rescind.

3 Third Party Rights: The aggrieved party should be careful to find out that third

party rights are not acquired while he asks for rescission of the contract.

Exceptions to the Right to Rescind the Contract

In the following cases the party whose consent was received by misrepresentation

cannot get relief of rescinding the contract.

1 Where the affected person had the possibility of finding out the truth with ordinary

diligence.

2 Where the affected party is ignorant that he gave his consent due to

misrepresentation of facts.

3 Where the affected party becomes aware of misrepresentation but still decides to

receive the benefits under the contract.

4 Where a third party innocently enters into benefits of the contract before the

contract was rescinded.

5 Where it is difficult to restore the rights of the affected party to the original position.

5.6 MISTAKE

Mistake can be defined as an incorrect statement which creates misunderstanding

between the parties. Such mistakes take place when the parties to the contract are not

aware of the terms of the contract in agreement with each other. An agreement

between two parties according to the Indian Contract Act is valid only when both the

parties agree upon the same thing and in the same sense. According to section 20 the

agreement becomes void when there is a mistake in agreement. In normal

circumstances law does not give the right to anyone to avoid a contract because he

was mistaken about some fact in the contract. However, some mistakes are

fundamental to the contract in such a manner that the very basis of the formation of

the contract becomes faulty and there is no contract at all. In such cases the agreement

is considered to be void due to consensus ad idem.

Types of Mistake

Mistake can be of two types. These are mistake of facts and mistake of law. (1)

Mistake of fact can be bilateral or unilateral and (2) Mistake of law can be mistake of

law in India and mistake as to foreign law.

1. Mistake of Fact

Mistake of fact can occur when both the parties to the agreement are under a mistake

or only one of the parties is under a mistake to the essential elements of the contract.

When both parties are under a mistake it is called bilateral mistake and when only

oneparty to the contract is under a mistake it is called a unilateral mistake.

" Bilateral Mistake: A bilateral mistake is made in the following cases:

(i) Mistake of existence of subject matter: The agreement is void if it is agreed upon

a subject matter which does not exist and the parties to the agreement do not have any

knowledge about it. This is bilateral mistake because both parties did not know this

material fact at the time of making an agreement.

(ii) Mistake of identity of subject matter: The agreement is void if two parties to the

contract have confusion about the identity of the subject matter. The agreement is

void due to want of consensus.

(iii) Mistake regarding quality / description of subject matter: When two parties

make an agreement they should understand that the quality of the product. If both

parties make a mutual mistake about the description of the product, it is bilateral

mistake and the agreement is void.

1. Mistake regarding title of the product: An agreement of sale is void if there is a

mistake of mistake over the entitlement of goods.

(iv) Mistake regarding substance of subject matter: If both parties to an agreement

make a mutual mistake of facts which is the essential part of the subject matter the

agreement is void.

(v) Mistake regarding quantity of subject matter: If two parties are mistaken about

the quantity of subject matter to be supplied, then the agreement is void. Quantity is

an essential fact of an agreement; if it is not correct the agreement to buy / sell can not

be held.

(vi) Mistake regarding price of the subject matter: Price is an essential feature in the

sale of a product. If there is a genuine mistake regarding price the agreement is void.

(vii) Mistake about possibility of performance: If there is a bilateral mistake

regarding the possibility of performance the agreement is void. Impossibility of

performance can be due to physical reason or legal impossibility.

Effect of Bilateral Mistake: When there is a bilateral mistake in

understanding the essential facts of the agreement, the contract becomes void ab

initio. This agreement is void from the beginning, does not have any legal

significance. It cannot be enforced at the option of any of the parties to the contract.

" Unilateral Mistake: According to section 22, unilateral mistake occurs when

one party to the agreement makes a mistake. The contract is not voidable because one

of the parties to it are under a mistake. However, there are certain exceptions to the

rule. These are due to the following reasons:

! Mistake of identity of a party: A very fundamental mistake occurs if an agreement

is made with a wrong person. When a party desires to deal with a certain person and

he does not do so due to false representation of another person it is an error in

consensus.

! Mistake about nature of transaction: If a person makes a transaction without

understanding nature of the transaction, it cannot be executed. This mistake is

possible when a person does not disclose to the other the true nature of the document

and induces the other person to sign the document which is not correct. The

agreement is null and void. Case law to support this

Effect of Unilateral Mistake: In case of unilateral mistake the contract becomes void.

Under Section 65 a person who has received benefits of the contract has to restore it

by compensating the person from whom the advantages was received. If a person has

received money or any item has been delivered by mistake then according to Section

72 he has to repay or return it.

LEGALITY OF OBJECTSOne of the essential elements of a valid contract is lawful object. The object is he

purpose for which two persons enter into an agreement. For an agreement to be a

contract it is important that the object be lawful. If the object is unlawful then an

agreement can never become a contract. The consideration is some act or abstinence

or reciprocal promise. The consideration should be lawful. An unlawful consideration

will not give rise to a valid contract. Both consideration and object of an agreement

must be lawful. An agreement having an unlawful object or an unlawful consideration

or both is void.

6.1 WHAT OBJECTS AND CONSIDERATIONS ARE UNLAWFUL?

According to Section 23 of the Indian Contract Act the following considerations and

objects are unlawful:

6.1.1 Forbidden by law an agreement to do what law has prohibited is unlawful. Such

acts are punishable either by the criminal law of the country or by a special

legislation. These agreements may also be called illegal agreements.

6.1.2 Defeat the provisions of law: An act may not be forbidden by law but if

permitted it may defeat the provisions of any law. It means that an agreement may not

be of an illegal nature and not directly forbidden by law but if allowed to be executed

it would indirectly violate the law.

Illustration: Rekha a resident of Delhi wanted to own a house in the state of Jammu

and Kashmir. The rule in Jammu and Kashmir is that only the residents of Jammu

and Kashmir can buy property in the state. No other person belonging to other states

of India is eligible to buy property in the state. Rekha asked Namita who was a

resident of Jammu to buy the house and later transfer the property to her. Rekha also

paid consideration to Namita. Later Namita refused to buy the house. Rekha claimed

the consideration back from Namita. Rekha cannot claim the consideration because

the agreement is void.

6.1.3 Fraudulent purpose: An agreement, which is entered into to defraud others is

unlawful. The agreement is entered by one party to cheat the other party therefore the

agreement is void and unlawful right from the beginning.

Illustration 1: Ramaswamy offered to sell his car with a defective engine to Saloni

without disclosing the defect for rupees fifty thousand and Saloni accepted the offer

Hence this is a void agreement, which has been made to defraud Saloni.

6.1.4 Involves injury to person or property of another: An agreement, which is made

with the objective to injure a person or the property of a person is said to be unlawful.

Many times one party enters into an agreement with another with the intension to

harm him/her personally or to harm his /her property such an agreement is unlawful.

Illustration: Sita’s mother who was undergoing an operation needed blood, which

was O negative. Sulochana agreed to donate blood provided Sita agreed to serve for

the rest of her life as a maid in Sulochna’s house. Sita agreed to do so. This is an

unlawful agreement.

6.2 CONSIDERATIONS AND OBJECTS THAT ARE UNLAWFUL IN PART

An agreement having an unlawful object or an unlawful consideration is void. Section

24 of the Indian contract act states that if any part of a single consideration for one or

more objects, or any one or any part of any one of several considerations for a single

object, is unlawful, the agreement is void. However if there are two parts in a contract

and the consideration or the object of one part is unlawful and if that part can be

separated from the other part, which is lawful then the lawful part of the contract is

enforceable in the Court. If the two parts are inseparable and it is not possible to

separate lawful from unlawful then the whole agreement is void.

Each part of Section 24 is explained below:

If any part of a single consideration for one or more objects is unlawful, the

agreement is void. This can be explained with the help of the following illustration:

Cynthia wanted to buy a diamond necklace from Rajni. She agreed to pay rupees two

lakh for the necklace, which she would get from stealing her aunt. The object of the

agreement is valid but the consideration is partly unlawful. It is partly unlawful

because the consideration, which is rupees two lakh would be procured by stealing

and stealing is unlawful. Hence the agreement is void.

If any one or any part of any one of several considerations for a single object is

unlawful, the agreement is void. This is explained with the illustration below:

Cynthia wanted to buy a diamond necklace from Rajni. Rajni agreed to sell the

necklace to Cynthia provided Cynthia paid rupees fifty thousand in cash and slapped

Cynthia’s neighbor Agatha. There are two parts in the consideration. One of the parts

which is slapping the neighbor is unlawful therefore the agreement is void.

If there are two parts in a contract and the consideration or the object of one part is

unlawful and if that part can be separated from the other part, which is lawful then the

lawful part of the contract is enforceable in the Court.

VOID AGREEMENTS7.1 WHAT IS A VOID AGREEMENT?

Section 2 (g) of the Indian Contract Act, states that a void agreement is one, which is

not enforceable by law. A void agreement does not create rights, obligations or duties.

It does not give rise to any legal consequences. Such agreements are void ab initio.

The courts can only enforce those agreements that according to Section 10 fulfill the

conditions of the Indian Contract Act. It should not be declared void by any law in the

country. There is a difference between void agreements and void contracts.

Void Agreement

! A void agreement is not valid.

! The agreement is not enforceable by law.

! It is void from the very beginning of making the agreement.

! The following agreements are expressly declared as void by the Indian Contract Act:

! Agreement by a minor or a person of unsound mind.[Sec(11)]

! Agreement of which the consideration or object is unlawful[Sec(23)]

! Agreement made under a bilateral mistake of fact material to the agreement[Sec(20)]

! Agreement of which the consideration or object is unlawful in part and the illegal

part can not be separated from the legal part [Sec(24)]

! Agreement made. without consideration.[Sec(25)]

! Agreement in restraint of marriage [Sec(26)]

! Agreement in restrain of trade [Sec(27)]

! Agreement in restraint of legal proceedings[Sec(28)]

! Agreements the meaning of which is uncertain [Sec(29)]

! Agreements by way of wager [Sec(30)]

! Agreements contingent on impossible events [Sec(36)]

! Agreements to do impossible acts [Sec(56)]

Void Contract

! Void contract is valid when it is entered into but after it is formed due to some

limitation it becomes non enforceable.

! Void contract is enforceable by law but due to impossibility or illegality it becomes

unenforceable at a later date.

! A void contract remains valid until its validity stops functioning.

7.2AGREEMENT BY MINOR OR A PERSON OF UNSOUND

MIND

A minor can be defined as a person who has not completed his or her 18 years of age.

Law acts as the guardian of minors and protecting their rights, as it is believed that

their mental facilities are not as matured as a person above 18 years of age. A minor

does not have the capacity of judge whether the agreement should be entered into or

what would be his obligations to the contract. Therefore an agreement with a minor

involving his obligations and the other contracting party who requires enforcement of

those obligations is deemed as void.

A person of unsound mind does not have the mental powers or mental condition under

his or her own control. Any agreement entered into by person of unsound mind void

Illustration 1: Madhu made an agreement to buy a house of Rs 80,00000 with Sonu

who is 11 years of age. The agreement is void

7.3AGREEMENT MADE WITHOUT CONSIDERATION

An agreement made without consideration is void, except in the following cases:

(i) It is registered and is in writing under the law enforceable at the time and

registration of(documents), is amongst near relations due to natural love and affection

between parties.

(ii) It is a promise to compensate, another person fully or partly that has already

voluntarily done something for the promisor, or something that the promissory was

legally compellable to do.

(iii) It is a written and signed promise, by the person to be charged or his agent

authorized by him, to pay whole or in part a debt of which the creditor might have

enforced payment but for the law for the limitation of suits.

Illustration 1: Sukrita promises to give Nirmay Rs. 20,000. There was no

consideration and they were not related to each other. This is not a valid agreement.

7.4AGREEMENT IN RESTRAINT OF MARRIAGE

According to Section 26, an agreement that is in restraint of marriage is void.

However, this rule does not apply to restraint of a minor from marriage. Law does not

allow any restriction on the freedom of a person’s choice or freedom in selecting a

marriage partner.

Illustration: Lata agrees to marry Rahul because her parents did not allow her to

marry Kiefer, a foreigner, who is a German gentleman. This is a restriction on choice

of marriage and is a void agreement.

The agreement is void if the restraint to marry another is partial or general. From this

it follows that an agreement to marry a certain person or not to marry at all or to

marry for a particular period of time is a void agreement. However a promise to marry

a certain person is a valid contract and does not depict any restraint in marriage.

Illustsration: Anika wants to marry Gautam only and no one else. This is a choice

and there is no restraint in marriage. This is a valid contract of marriage.

7.5AGREEMENTS IN RESTRAINT OF TRADE

Any agreement that restrains a person from following a lawful profession, trade or

business is void according to section 27 of the Indian Contract Act. Restraints on skill

or talent or work of a person are void contracts. The constitution (Article 19) states

that it is the fundamental right of a person to be at a liberty to work and not deprive

himself, of his fruits of labour by entering into a restraining contract.

The effect of agreements in restraint of trade is that they are always void whether they

are partial or general, qualified or unqualified; whether they are for a limited period or

extend over a particular area of work. However there are certain statutory exemptions.

Case Law 1

Madhub Chander V Raj Coomar.80 In this case two people A and B were

neighbouring shopkeepers. They were rivals. B agreed to pay A an amount of money

for closing his business located near his shop. A closed his business. B refused to pay

the agreed amount. The court held that the agreement was void.

7.5.1 Statutory Exceptions

(a) Sale of goodwill: The seller of a business can put some restrictions on himself. He

may agree not to continue with the same products in business or restrict the area of

operation. The restrictions have to be reasonable. They are applied to protect thebuyer

of the business.

Illustration: Shanti sold her drycleaning business in Sarva priya Vihar to Sushant.

She agreed not do similar business in the same area for 15 years as a condition of the

sale. This is not a reasonable restriction and it can be contested in a court.

(b) Exceptions under Partnership Act: The following exceptions pertain to the Indian

Partnership Act under restraint of trade. These restraints are required to carry out

business or trade. They do not affect the validity of the agreement.

7.5.2 Exceptions under Judicial Interpretations

(a) Trade Combinations: A combination of trade organizations for monopolizing

trade are against public interest and are void but trade combinations that are formed

for regulating business, fixing prices, creating quality in products, standardization and

market timings are not void agreements. If however, these combinations have

unreasonable restrictions on members the combinations will be null and void There

are several judicial cases.

(b) Sole dealing agreements: Manufacturers usually appoint a distributor

or an agent for selling goods in a particular area. The agent stocks only goods of that

particular organization as a part of agreement between them. As long as there is a fair

and reasonable agreement between the two parties it is an understanding of terms of

business and advantages to both the parties to increase their business. However, if it is

detrimental to the interest of one of the parties it becomes objectionable and such

agreements become unenforceable

(c) Restraints upon employees: Some employers prevent them employees from

working in other organization while in employment with them. The employee can be

restrained from carrying on business which is in competition with the employers

company or a servant can be restrained by his master from allowing him to divulge

secrets of his business. There are many forms of restrains between the employer and

employee. As long as these are reasonable, depending on the facts and circumstances

of the case the agreement will not be void because it is justified as it protects the

employer’s goodwill.

7.6 AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS

Every person has a right to take recourse to legal proceedings in a court of law when

there is a conflict with another person. If a party is restricted to use this right the

agreement will be void (Section 28).

Two types of agreements restraining another person from legal proceedings are void.

These are the following:

" Agreements restricting parties from enforcing the legal rights under the contract.

" Agreements limiting the time within which a party can enforce contractual rights.

(a) Agreements on Legal Proceedings: Any agreement which restricts a person from

enforcing his right in the court is void.

Illustration: Sita sold 1000 parker pens to Geeta for Rs. 300 each. She has a right to

receive the payment from Geeta otherwise she has the right to file a suit in the court

to get the payment. If Sita makes an agreement will Geeta that she will never go to

court for receiving the payment even if she is not paid, the agreement is void.

Restraint on legal proceeding should be complete and not partial for making the

agreement void.

(b) Limitation of time: An agreement is declared void when parties restrict the time

within which an appeal can be made. The period of limitation prescribed by law is

three years from the date of breach. If there is a clause that a party cannot go to court

after two years for recourse to a law court the agreement becomes void as it is not in

accordance with the law of limitations.

Illustration: Braj supplied material to Dhanuj. They may an agreement that if Braj

does not receive the payment he can go to court within two years for suing the other

party. Otherwise he will not have a right to go to court. This is a void agreement.

7.6.1 Exceptions to Restraint in Legal Proceedings (Section 28)

In the following to cases in which the agreement is not void when it is in restraint to

legal proceedings.When a reference is made to future disputes for arbitration.

Illustration: Leela entered into an agreement with Mila for supplying 14 computers

every month for six months for Rs. 35,000 per computer. It was agreed that both

parties would have a right to go in for arbitration if there was any dispute regarding

price or quality of the computer. This is a valid agreement. When a reference is made

of existing disputes for arbitration:

7.7 AGREEMENTS WITH UNCERTAIN MEANING

Agreements whose meanings are not clear so that there is uncertainty creating

confusion between people is a void agreement. Section 29 states that agreements the

meaning of which is not certain or capable of being made certain are void.

Illustration: Kamal agrees with Aditya to send 100 tea packets for Rs. 50,000 to

his landlord. Kamal sends green tea because Aditya had not specified any brand.

However, it was unacceptable to the landlord who refused payment stating that he

had asked for some other tea. Since this was an uncertain agreement which did not

state the quantity in terms of kilo weight, not did it state the kind of tea it is a void

agreement. However, if the court can understand the meaning of tea the agreement

will become valid. Therefore, if Kamal was a dealer of green tea only the agreement

would be valid.

An agreement that makes a contract in future is void. The logic of this is that the

agreement is uncertain whether the parties to agreement will able to agree to the terms

of the contract in future.

Illustration: Madhu gave her friend Neelam Rs. 10,000 as payment for her old

computer. However, he went away on a trip to a foreign country without taking the

computer making in agreement that Rs. 10,000 should be treated as a deposit. Later

Madhu wanted her money back to which Neelam refused. What kind of an agreement

is this? This is a void agreement because it is a full of uncertainties about the time,

value and price of the computer to be purchased.

7.8 WAGERING AGREEMENTS

A wager is explained by Sir William Anson as promise to give money or money’s

worth on determining or ascertaining an uncertain event. In a wagering contract it is

necessary that each party should either lose or win depending on a certain event.

Therefore, the event is uncertain and it most affects both the parties, if only one of the

parties is affected it is not a wagering contract.

Wagering agreements have the following essential features;

(a) Uncertain event: A wagering agreement is dependent on an uncertain event that

may or may not happen. It pertains to the happening of some future event. It can also

be dependent on some past event whose result is not known. An example may be of a

possible winner of a cricket team of a match that is still to happen.

(b) Mutual loss or gain: In a wager agreement both the parties have an equal chance

to win or lose. The gain / loss may or may not be equal but it is necessary that both

have the chance. If one of the parties can only win but there is no possibility of its

losing and the other party does not have the same possibility it will not be a wager

agreement.

(c) The event is beyond the influence of the parties: Wagering agreements can not be

influenced by any of the parties to the agreement. If one of the parties knows the

outcome of the event, the agreement is not a wager.

Illustration: Meenu, Rajiv, Suraj and Veena decided to run a 5 Kilometers Cycle

race. Leena promised to give the winner Rs. 5,000. Meenu won and got the prize

money. This is a wagering agreement.

(d) No other interest in the event: The parties to a wagering agreement should only

have the interest in wining or losing. If any of the parties has any other interest in the

agreement it will not be called a wagering agreement.

DISCHARGE OF CONTRACTThe termination of the contractual relationship is called discharge of contract. How

the contract comes to an end or how the contractual relationship in a contract

terminates is explained through the various modes of discharge of contract. The

various modes of discharge are the following:

8.1 DISCHARGE OF CONTRACT BY PERFORMANCE

This is the best way of bringing the contract to an end. Every person who is a party to

a contract is bound to fulfill his/her obligation at the time when he/she has promised

to perform it. The moment the parties execute their promises under the contract the

contract comes to an end. This mode of discharge is called discharge by performance.

The performance can be of two types.

1 Actual performance

2 Attempted performance

8.2 DISCHARGE OF CONTRACT BY MUTUAL AGREEMENT OR

CONSENT

Parties agreeing to terminate the contract can discharge a contract without

performance. They can do it by mutually agreeing to replace the old contract with a

new one. The new contract extinguishes the rights and obligations of the parties under

the old contract.

There are various ways by which the old contract can be replaced by a new one. The

various ways are as follows:

1 Novation: In this the parties to a contract agree to substitute the existing contract

with a new one. The new contract is brought about by either changing the contract

between the same parties or by changing the parties in the same contract.

Illustration 1: Yogita offered to keep Sunita as her maid for rupees two thousand on a

monthly basis. Sunita accepted the offer and promised to start work from the first day

of next month. However Sunita met with an accident and injured her leg. She

approached Yogita and showed her reluctance to join. It was felt that it would take

about two months time for the leg to heal and after a little persuasion from Yogita

Sunita decided to join as maid after two months. In this case the old contract is

substituted with a new one and parties to the contract are the same.

2 Alteration: In this the parties agree to make some changes in one or more terms of

the contract. By doing so the old contract is discharged and the parties are bound by

the changed contract.

Illustration: Yogita offered to keep Sunita as her maid for rupees two thousand on a

monthly basis. Sunita accepted the offer and promised to start work from the first day

of next month. Afterwards Sunita felt that the emoluments were too low and that she

would not like to work at such low rates. She told her unwillingness to Yogita and

after listening to Sunita Yogita decided to increase the emoluments by rupees five

hundred. Sunita happily agreed to work for the additional rupees five hundred offered

by Yogita. In this case the parties to the contract agreed to make some changes in the

terms of contract. By doing so the old contract is discharged and the parties are

bound by the changed contract.

3 Rescission: In this the parties decide to terminate the contract before the contract is

discharged by performance. This can be done in the following circumstances:

Rescission can take place by mutual consent. Here both the parties mutually agree to

terminate the contract.

Illustration 1 Yogita offered to keep Sunita as her maid for rupees two thousand on a

monthly basis. Sunita accepted the offer and promised to start work from the first day

of next month. However Sunita met with an accident and injured her leg. She

approached Yogita and showed her reluctance to join. It was mutually decided to

terminate the contract. Sunita was no longer bound to join as a maid from next

month.

4 Remission: remission means acceptance by the promisee of a lesser fulfillment of

the promise made by the promisor. This can be done in the following three ways:

The promisee can remit wholly or in part the performance of the promise made to

him/her by the promisor. If the promisor has performed less than what he/she had

promised and the promisee accepts it without complaining then this is called

discharge of contract by remission.

5 Waiver: In this case the promisee entitled to claim performance from the promisor

might waive the performance. He no longer wants the promisor to execute his/her

performance and therefore the promisor is no longer under any obligation to perform

his/her promise.

Illustration: Yogita offered to keep Sunita as her maid for rupees two thousand on a

monthly basis. Sunita accepted the offer and promised to start work from the first day

of next month. The very next day Yogita forbade Sunita from working as a maid. Thus

Sunita is no longer under any obligation to perform her promise.

8.3 DISCHARGE BY LAPSE OF TIME

A contract is to be performed within a reasonable period. If the contract is not

performed within that period then the contract comes to an end and no legal action

can be taken by the promisee after that. In case of contracts the period of limitation is

three years. If none of the parties file a suit within this time, the contract becomes

time barred. Once the contract becomes time barred the contract becomes

unenforceable. It cannot be enforced in the Court of law.

Illustration: Jhankar took a loan of rupees ten thousand from Gurmeet on first

January 2005. She was to repay the loan with interest on first January 2006. Gurmeet

went to the United States in October 2005 and Jhankar did not repay the loan money

on first January 2006 to Gurmeet. Three years elapsed and Gurmeet did not take any

legal action against Jahnkar for non-payment of loan. Thus the debt became time

barred.

8.4 DISCHARGE BY OPERATION OF LAW

At times law discharges the contract, i.e. the law regards the contract as terminated. In

the following cases law regards contract as discharged.

1 Death: When in a contract the performance of the contract is to be made personally

by the promisor and his/her skill and knowledge is required for discharging his/her

obligation in such a case if the promisor dies then automatically the contract comes to

an end. Law discharges the contract. If the personal skill and knowledge of the

promisor is not required in discharging the contract then after he/she dies the contract

is not discharged and the rights and liabilities of the deceased promisor passes on to

his/her legal representatives and it is the duty of the legal representatives to discharge

the obligations under the contract.

Illustration: Heeralal promised to make a painting of Santosh on her birthday. Before

Santosh’s birthday Heeralal died of a heart attack. Hence the contract terminated and

Hiralal was discharged of all his liabilities.

2 Insolvency: Once a person has been declared insolvent by the Court of law he / she

is released from all the liabilities. The contracts, which were entered by him / her

before being adjudicated as insolvent are discharged after he/ she becomes insolvent.

Illustration: Jeetendra entered into an agreement with Radhika to buy thousand

shoes manufactured by Radhika in the first week of March. In the month of February

Jeetendra was declared insolvent as a result the contract between him and Radhika is

dissolved and Jeetendra is released from his liability to buy shoes from Radhika.

3 Merger: In this case the contract giving inferior rights to a person merges into a

superior right. The contract giving the inferior right is discharged and is replaced by

the one giving superior right.

Illustration: Ragini mortgaged her gold bangles and took rupees two lakh from

Shambhu. She promised to pay Shambhu rupees two lakh with interest within two

years. Two years expired and Ragini was unable to pay the money. Hence Shambhu

who was a bailee under the contract after the time elapsed became the owner of the

gold bangles. The contract originally entered between Shambhu and Ragini gave the

right of a bailee to Shambhu but after the expiry of two years the contract gave

Shambhu the right of an owner, which was a superior right.

4 Unauthorized material alteration: Any alteration made in the contract by one party

without informing the other party or without the consent of the other party will make

the contract void. The contract will no longer be enforceable in the Court of law.

Illustration: Ram offered to sell his house to Shyam for rupees ten lakh and Shyam

agreed to buy it. without informing Shyam Ram raised the amount from rupees ten

lakh to fifteen lakh. Hence the contract became void.

8.5 DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

It is very important that the contract, which is entered into is capable of performance.

A contract, which cannot be performed, is void. Impossibility of performance is of

two types:

1 Initial impossibility

2 Subsequent impossibility

8.5.1 Situations where the doctrine of supervening impossibility is applied are

as follows:

1 Destruction of subject matter: If the subject matter is destroyed after the formation

of the contract, without the fault or negligence of either of the parties the contract

comes to an end. Once the main objective of the contract has been destroyed it is not

possible for the parties to execute the contract. If the destruction has been due to the

negligence of the parties then the party due to whose fault and negligence the subject

matter has been destroyed is liable to compensate the other party.

Illustration 1: John promised to sell his house to Gangadhar and Gangadhar agreed

to buy the house. But before John could sell it there was an earthquake and the house

collapsed. Thus the contract comes to an end.

2 Non-existence or Non-occurrence of state of things necessary for performance:

Sometimes the subject matter, which is required for performance changes its form or

ceases to exist in the same state in which it was at the time of entering the contract. In

such a case the contract comes to an end.

Illustration: On a very hot day of summer Aishwarya ordered ten bricks of vanilla ice

cream from mother dairy. The salesman at mother dairy agreed to deliver the ice

creams at 6 P.M. in the evening. Aishwarya’s house was five kilometers away from

the mother dairy. The salesman sent a man on the bicycle with five bricks to

Aishwarya’s house. On the way there was traffic jam and the ice creams melted. The

deliveryman reached Aishwarya’s house with melted ice creams. Aishwarya is longer

liable to take delivery of the melted ice creams. Hence the contract becomes void.

3 Death or incapacity of party: Where the nature of contract is such that the

promisor’s personal skill is required and if the promisor dies or becomes incapable of

executing the contract then the contract becomes void. In case the personal expertise

or skill of the promisor is not required then after his/her death the liability of the

promisor will be borne by his/her legal representatives and the contract does not

become void.

Illustration 1: Rajan promised Sarita the director of a play to act as a lead hero in

her play. But just before the play Rajan met with an accident and fractured his limbs.

The contract became void due incapacity of the promisor.

4 Change of law: When the contract is formed between two parties there is nothing

illegal about it but subsequent to the formation of the contract a new law is made or a

change in the existing law is done which makes the implementation of the contract

illegal. Thus the contract becomes void.

Illustration: Azad Singh promised to rent his house to Zakir Hussain to run his

business. Very soon Delhi Government by an order prohibits the residents on that

locality from using the house for any commercial purpose. Hence the contract is void.

5 Outbreak of war: Contracts entered into with citizens of other countries becomes

impossible to perform on the declaration of war with them. Such contracts are either

suspended or are resumed after the war is over. During the war the parties to such a

contract cannot perform their obligations. Hence the contract is void.

Illustration: Soham of Pakistan entered into an agreement with Angela of India to sell

woolen kaftans. Before the Kaftans could be delivered to Angela there was war

between India and Pakistan. Hence the contract was discharged due to impossibility

of performance.

8.6 DISCHARGE BY BREACH OF CONTRACT

If one of the party under a contract does not perform his / her obligation it is called

breach of contract. Breach of contract discharges the contract thus it brings to an end

the obligations created by the contract on the part of each of the parties. The party

who has been breached can sue the other party for the breach.

Illustration: Gupta Sweets took order from Mr Ranjit to prepare thousand ladoos for

the puja and deliver them in the morning on the day of the puja. Guptaji was unable

to deliver the sweets hence the contract is discharged by breach of contract. Mr ranjit

can sue Guptaji was breach of contract.

Contingent ContractsA contingent contract as defined by Section 31 of the Indian Contract Act is a contract

to do or not to do an act depending on an event that is collateral to the contract, which

may or may not happen. If a contract is made between two people to exchange some

goods on the expiry of a period or on the death of a certain person it is not considered

to be a contingent contract because it is based on certainty of event.

9.1.1 Essentials of Contingent Contracts

Contingent contracts consist of important essential elements. These are the following:

1. Uncertain Event: The parties making the contract make an agreement that the

performance of the contract will be dependent on a future uncertain event.

Illustration: Latika participated and won a beauty contest. Another contest may be

held in Mumbai to select Miss India. If she participates she may win the contest. The

uncertain event is that the contest may or may not be held and also she may or may

not win because there will be other contestants as well. Therefore the outcome is also

uncertain.

2. Validity of the Contract: Contingent contracts are valid. Insurance contracts are an

example of contingent contract in which the liability arises when an uncertain event

happens.

Illustration: Nirmeet took an International medical policy as it was mandatory for

her while traveling to the United States of America. If she falls sick, only in that event

the liability of the insurance company will arise and it will have to pay.

3. Conditional Contracts: Contracts can be absolute or contingent in nature. An

absolute contract is one in which the promisor is bound to perform. In a conditional

contract, performance depends on the happening or not happening of an uncertain

event, collateral to the contract. Contingent contracts are conditional in nature. They

can be distinguished from absolute contracts, which give reciprocal promises of a

dependent nature.

Illustration: Naju made an agreement to pay Rs 55,000 to Amrita after delivery of

goods by her on the 16th of October is an absolute contract but Naju will have to pay

Amrita if Aman does not pay is a conditional contract.

4. Event should not be at the discretion of the promisor: The performance of the

contract should not be at the will or pleasure of the promisor. Such contracts do not

constitute a promise at all. However if a third person determines the promise it is

acceptable and it constitutes a promise.

Illustration: Irfan promises to pay Prem Rs 25,000. This is not a contract because the

promisor determines the amount and promise himself. promises to pay Rs 42,000 to

Prem and the amount has been determined by Prabhat, it is a contingent contract

because it is not at the discretion of the promisor but by a third person.It is a valid

promise.

9.2 RULES REGARDING ENFORCEMENT OF CONTINGENT

CONTRACTS

The following are the rules regarding enforcement of contingent contracts. They are

provided in Sections 32 to 36 of the Indian Contract Act.

1. The happening of a future uncertain event: Section 32 of the Act states that a

contingent contract to do or not to do anything on the happening of an uncertain

future event can not be enforced until the event actually happens. If the event

becomes impossible the contract will become void.

2. The non-happening of an uncertain event: Section 33 of the Act states that

contingent contracts to do or not to do can become enforceable only when the hen

Irfan185 event. event becomes impossible. If the event is possible the contract cannot

be enforced.

3. When an event is deemed to be impossible: According to Section 34 when an

uncertain event is dependent on the future conduct of a third party, the event will be

impossible if the person does not act although it is possible for him to do so within a

particular time. In other words when the contract is contingent due to the conduct of

the third person and the performance of the contract depends on the decision or action

of the third person.

4. The happening of an event within a specified fixed time: Section 35 states that

when a contingent contract to do or not to do any thing depends on specified fixed

time and if the event within or before expiry of the time becomes impossible, it

becomes void.

5. Non-happening of an event within a specified fixed time: The same section as

above (Section 35) also states that if an event does not happen and the promise has to

be performed during that fixed time the contract can be enforced only if the event

does not happen within that fixed specified period.

6. Impossible events: A contract which is dependent on an event that is impossible is

void whether the impossible situation was known or un-known to the parties to the

contract when the agreement was made (Section 36).

QUASI CONTRACTA contract is formed by an agreement, which is enforceable by law. However in some

cases contract is formed without any agreement. When there is no offer and

acceptance and the parties have no intension to enter into a contract yet a contract is

formed. Such contracts are called Quasi Contracts.

10.2 TYPES OF QUASI CONTRACTS

The various types of Quasi-Contracts are as follows:

! Supply of Necessaries:

According to section 68 of the Indian contract act if a person has supplied necessary

goods and services to an incompetent person96 or to any one whom the incompetent

person is legally bound to support then the person is entitled to be reimbursed from

the property of the incompetent person.

Illustration: Raunak Ali was a lunatic and his children were studying in school and

their tuition fee had not been paid for the last three months. In this case Raunak Ali is

liable for the payment of his children’s school fee and the fee will be paid from his

property. He cannot be made personally liable for the school fee.

2 Payment by an Interested Person:

According to section 69 a person who is interested in the payment of money which

another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed

by the other.

Illustration 1: Jhumpa had kept her car in Shambhu’s garage as there was renovation

going on in her house. Shambhu took Jhumpa’s car without her consent and hit the

car against the tree. He left the car at the nearest motor station for repair and

informed Jhumpa about it. Jhumpa went to the motor station and paid the bill for

repair amounting to Rs.5000. In this case Jhumpa is entitled to be reimbursed by

Shambhu.

3 Obligation to Pay for Non-gratuitous Acts:

According to section 70 when a person lawfully does anything for another person or

delivers anything to him, not intending to do gratuitously, and such other person

enjoys the benefit thereof, the latter is bound to make compensation to the former in

respect of, or to restore, the thing so done or delivered. If the person does something

for the other gratuitously then the latter is not bound to compensate.

Illustration 1: Runjhun bought vegetables and then went to see her friend Munmun at

her house. While leaving Munmun’s house she forgot to take the vegetables. Munmun

instead of returning the vegetables to Runjhun cooked them and ate them. She is

liable to compensate Runjhun for the vegetables.

4 Responsibility of Finder of Goods

According to section 71 of the Indian contract act a person, who finds goods

belonging to another and takes them into his custody, is subject to the same

responsibility as a bailee99. He is bound to take as much care of the goods as a man

of ordinary prudence would, under similar circumstances, take of his own goods of

the same bulk, quality and value. He must also take all necessary measures to trace its

owner. In case the finder of goods does not try to trace the owner then he/she will be

guilty of wrongful possession of goods. Till the owner is found the finder of goods

can retain the goods as his own property.

Illustration: Liliput was walking on the road and found a purse on the pavement. He

picked it and found two thousand rupees, a driving license and two credit cards in the

purse. It was Liliput’s responsibility and therefore obligation to find the owner of the

purse and return the purse to him or else he could deposit the purse at the nearest

police station but he was at no point in time entitled to retain the purse and its

ingredients as his own. However the finder can retain the goods and use them for

his/her own purpose or even sell them if he/she wishes to. The cases where the finder

has the right to sell the goods are discussed below:

5 Mistake or coercion

According to section 72 a person to whom money has been paid, or anything

delivered, by mistake100 or coercion101, must repay or return it to the person who

paid it by mistake or coercion.

Illustration: Rajbir went for shopping and bought a shirt worth rupees three hundred.

He gave cash to the salesman. He gave 2 hundred rupee notes and 1 five hundred

rupee notes thinking that it was a one hundred rupee note. It was a mistake therefore

the salesman is liable to return the extra money he had to Rajbir.

10.3 QUANTUM MERUIT

Quantum Meruit means “as much as earned” or as much as merited. When a person

has done some work under a contract, and the other party repudiates the contract, or

some event happens which makes the further performance of the contract impossible,

then the party who has performed the work can claim remuneration for the work

he/she has already done. Similarly if a person expressly or impliedly requested

another person to render him/her service without specifying any remuneration, but the

circumstances of the request imply that the service is to be paid for, there is implied a

promise to pay quantum meruit, i.e., so much as the party rendering the service

deserves. The right to claim quantum meruit does not arise out of contract as the right

to damages does; it is a claim on the quasi-contractual obligation, which the law

implies in the circumstances.

The claim for quantum meruit arises only when the contract is discharged and only

the party who is not in default can bring it. In the following cases claim for quantum

meruit can arise:

1. When an agreement or contract is void: When an agreement is discovered to be

void, or when a contract becomes void, any person who has received any advantage

under such agreement or contract is bound to restore it, or to make compensation for

it, to the person from whom he/she received it.

Illustration: Salim was a horse trader from Saudhi Arabia who had come to visit his

friend Raju in India. Raju wanted to buy a horse named Abdula and gave Salim an

advance of rupees twenty thousand for him. After Salim went back to Saudhi Arabia

he found that the horse had died. Hence the contract became void and so Salim was

liable to return twenty thousand rupees to Raju.

2. When something is done without any intension to do so gratuitously:

When a person without any intension to do so gratuitously to another person does a

thing and such other person enjoys the benefit thereof, he/she is bound to make

compensation to the former in respect of, or to restore, the thing so done or delivered.

Illustration: Anita went to visit her friend Ekta and by mistake left her newly bought

jacket at Ekta’s place. Next day Ekta went to Shimla for a ten day vacation and took

the jacket with her. As the jacket was not a gift by Anita to Ekta therefore Ekta was

bound to either return the jacket or pay the price for the jacket to Anita.

3. When there is an express or implied contract to render services but there is no

agreement as to remuneration: If the parties to a contract agree upon something

which is to be done but do not decide about the payment or remuneration for that

work then in such cases a reasonable remuneration is quantum meruit, which is

determined by the Court.

Illustration: Ghanshyam a painter promised to paint Shyam’s house but nothing

about the remuneration was decided. As per the agreement Ghanshyam painted the

house and so was entitled for a reasonable remuneration to be paid by Shyam.

4. When the completion of the contract has been prevented by the act of the

other party to the contract. When two parties enter into a contract and one of them

later prevents the other from executing the contract then in that case the party who has

been prevented is to be compensated for the quantum of work done by him/her.

Illustration: Ghanshyam a painter promised to paint Shyam’s entire house for rupees

thirty thousand. Ghanshyam painted one room and a kitchen and was asked by

Ghanshyam to quit. Ghanshyam was entitled to be paid the remuneration for painting

one room and a kitchen

5. When a contract is divisible: When a contract is divisible and the party not in

default has enjoyed the benefit of the part performance, the party in default may sue

on quantum meruit. But if the contract is not divisible which means that the contract

requires complete performance as a condition of payment, the party in default cannot

claim remuneration on the ground of quantum meruit.

Illustration: Ghanshyam a painter promised to paint Shyam’s car for rupees five

thousand. Ghanshyam painted just half the car and left the work. Hence he was not

entitled for the remuneration because the work was not divisible and the contract

required complete performance

6. When a contract is completely performed but badly: When a contract is

completely performed but badly, the person who performed the contract can claim the

lump sum but the other party can make deductions for bad work.

Illustration: Ramu a cook promised to make food for 20 guests at a party, which was

to be held at Mr Nair’s house for rupees ten thousand. As per the agreement Ramu

cooked food but the food was very bad to taste. There was too much of salt and

pepper in the food as a result the guests left the party without eating much Mr. Nair

had a right to deduct from the remuneration promised to Ramu for the bad

preparation.

Breach of Contract

11.1 What is Breach of Contract?

Breach of contract occurs when one of the parties to the contract refuses to perform

his obligation under a contract. Breach of contract may be either partial or total but

the effect is that one of the parties fails to perform his part of the obligation. When

breach of contract takes place then the aggrieved party is discharged from performing

his part of the obligations of the contract. The aggrieved party also has the right to

take action against the party not performing his commitment under the contract.

Breach of contract is of two types. These are anticipatory breach and actual breach.

11.4 REMEDIES FOR BREACH OF CONTRACT

When a breach of contract occurs, the aggrieved party has certain options available to

him/her. The following course of action is available to the aggrieved party for

enforcing his/her rights if breach occurs:

11.5 RESCISSION OF THE CONTRACT

When there is a breach of contract by one party, the other party has the right to

rescind the contract and also refuse any further performance on the contract. By

rescission of the contract the aggrieved party is also free from discharging his role

under the contract.

The aggrieved party also has the option to sue the party under breach of contract for

damages under Section 75 of the Indian Contract Act. If this option is taken then the

aggrieved party has to file a suit for rescission of the contract. If the court grants the

aggrieved party rescission of the contract then the contract is cancelled. The aggrieved

party may now no longer fulfill his obligations under the contract. He also has the

option to apply for compensation for losses that have occurred to him by breach of the

contract through non completion of the contract by the other party.

11.6 SUIT FOR DAMAGES

Damages are the monetary compensation for any loss that is suffered by an aggrieved

party due to breach of contract. Since the aggrieved party has been inconvenienced

due to breach of the contract the court decides in his favour and compels the party at

fault to accept responsibility for the loss and compensate the aggrieved party. The

damages depend on the amount of loss occurred due to breach of contract. The parties

who have made an agreement can settle the amount of damages themselves when

such a breach occurs. Sometimes conflicts arise and price settlement is difficult

between the two parties. In this case the court makes an assessment of the losses and

the damages have to be paid to the aggrieved party based on this assessment. Section

73 lays down the different types of damages that an aggrieved party can claim. These

are the following:

! General or ordinary damages

! Special damages

! Exemplary damages

! Nominal damages

11.6.1 General or Ordinary Damages

General or ordinary damages arise out of breach in the usual course of the non

performance of the contract. The aggrieve party has the right to claim damages for the

natural or direct losses occurred due to breach of the contract. General losses do not

have any provision for damages in case of indirect and remote losses.

11.6.2 Special Damages

Compensation for special losses is called special damages. Compensation is recovered

only in special circumstances and if it is brought to the notice of the defaulting party.

When a party claims special damages it has to prove that the other party to the

contract, knew at the time of making the contract, that there would be a loss in special

circumstances, in case of breach of contract.

11.6.3 Exemplary damages

Exemplary damages are also called vindictive damages. They are awarded by the

court if a party has suffered mentally or emotionally due to breach of the contract. The

court makes an exception to general principle that damages should be awarded only

for financial loss due to breach of contract.

The law finds it difficult to compensate for mental pressure or suffering or

humiliation of the aggrieved party due to breach of the contract. It usually

compensates for financial losses. In exceptional cases it awards exemplary damages.

11.6.4 Nominal Damages

Nominal damages are awarded when in a breach of contract the aggrieved party does

not have any losses due to the breach. The courts however treat this seriously so that

such types of breach are not made by the parties. Therefore, they award a small token

as compensation to take note of the offence made by the guilty party. A small

compensation may be charged so that the guilty party so that he recognizes his

mistake.

11.6.5 Rules Regarding of Damages

The rules are a guide for the courts to measure the damages for the aggrieved party.

The following are the types of damages awarded by the court:

(1) Compensation: The courts award compensation and not penalty because the

objective is that the aggrieved party should be compensated and not to prove a party

guilty of punishing him for causing breach. Law does not consider breach of contract

to a crime for punishment.

(2) Limited damages: The court awards compensation to the aggrieved party when

the contract is not performed according to agreement. It does not pay damages for

expectations of the aggrieved party or for incidental or remote causes that are not

connected with the contract.

(3) Damages attributed directly to the contract: Damages are awarded by the court

for losses occurring on due course of the contract. Damages may be general or special

depending on the circumstances of the case.

(4) Stipulation for liquidated damages or penalty: The parties to the contract can

themselves stipulate the damages to be given to the aggrieved party either by way of

liquidated damages or penalty. English law and Indian law defined stipulation of

amount of damages differently.

(5) Damages under sale of goods: In sale of goods there are several problems of

breach of contract the aggrieved party will get the difference between the contract

price and the market price on the date of the breach of the contract as damages.

(6) Expenses of the suit: The expenses of conducting a suit in the court can be

recovered from the party who has created a breach to the contract. However, it is the

courts discretion to award the cost of the suit to the guilty party.

Enhanced rate of interest: Section 74 of the Indian Contract Act states that

stipulation for increase interest from the date of breach can be considered as

stipulation by way of penalty. The court can disallow the enhanced rate of interest if it

is exorbitant. The following points may be noted in this regard:

1. Interest can be paid only if there is an express or implied agreement otherwise it

cannot be paid as damages.

2. A stipulation for enhanced rate of interest from the date of default is treated as

penalty if it is too high but if it is reasonable the court allows recovery of the interest

to the aggrieved party.

3. A party may be allowed the payment of compound rate of interest but this is

possible when the interest rate is not enhanced.

Illustration: Amit gives a bond to Sanjit to pay him Rs. 4,000 with interest of 15% per

annum with a stipulation that if there is a breach then the interest will be payable at

45% from the date of default. This is called a stipulation by way of penalty and Sanjit

will be allowed to only recover that amount which the courts consider to be

reasonable.

11.7 SUIT FOR SPECIFIC PERFORMANCE

The court can use its discretion when it is essential to order the party who has made a

breach of a contract to perform what was intended to be done in the contract between

the parties.

Law usually does not insist in performance of the contract that a party has refused to

complete even though the aggrieved party demands justice. The reason for this is that

the court considers compensation as damages to be the right measure for the

aggrieved party. However, in some specific cases courts may order the guilty party to

complete the contract entered into between the parties.

1. When court orders specific performance: In the following cases the court can

grant relief and direct the guilty party in terms of specific performance of the contract:

i) Where there is no standard for quantifying the actual damages that are caused to the

aggrieved party by non-performance of the contract.

ii) Where the monetary compensation is not an adequate measure of the loss of the

aggrieved party. In cases of contracts entered into for sale of immovable property or

special rare antique pieces or certain items which mean a lot to the aggrieved party

and it cannot be replaced.

iii) Where a property of the aggrieved party is held by his agent or trustee and the act

is to be done to perform a trust function.

2. Where courts will not allow specific performance: The courts will not allow relief

for specific performance in the following cases.

1. When the court considers monetary compensation to be adequate for breach of

contract.

2. When contracts are made by trustees or agents who have violated their powers and

breach of contract occurs.

3. In contracts of personal nature especially in the case of contract to marry or a

contract to stage a show.

4. In cases where the courts cannot supervise the performance of the contract because

it involves continuous duty to complete the contract.

5. In cases when the court is of the opinion that enforcement of specific performance

is not possible due to the intricacies of the terms of the contract.

11.8 SUIT FOR INJUNCTION

Injunction is an order of the court where a person is prohibited to do a specific act or

action. Sometimes a party to the contract does some action which he has promised

that he would not do; the court has the right to issue an order to prohibit him to do it.

This action is taken by the court when a party is guilty of breach of some negative

term in the contract. Injunction is therefore a negative order of the court that stops a

party from some action. It is in other words a preventive relief to a party at the

discretion of the court. To give an injunction there are certain requirements of the

court. These are the following:

! The contract between the parties should consist of two parts. One agreement should

be affirmative and the other should be negative in nature.

! The negative part of the agreement should be separate from the positive aspect.

! The person applying for injunction should not have failed in completing the

contract.

.

11.9 SUIT UPON QUANTUM MERUIT

Quantum Meruit means ‘as much as earned’. It is a payment for the proportion of

work that is done when work cannot be measured in terms of money. The doctrine of

quantum meruit is legally applied in some cases when there is a breach of contract. It

is like compensation when the performance of the work is not complete. A reasonable

compensation is given to the extent that the performance has been made. Since no

remuneration was fixed for completion of the work to that incomplete stage, some

amount is paid because further performance has been stopped either because there is a

breach of contract or when an agreement is discovered to be void.

In a following cases quantum meurit can be applied for:

(a) Breach of contract: If a party has completed a part of his performance to the

contract and the other party decides not to complete the contract and work has to be

stopped due to breach of contract, quantum meurit will apply.

(b) Void agreement: When a person in the course of the contract completes some part

of his performance but it is discovered that the agreement is void. He becomes

entitled to some reasonable remuneration.

(c) Implied payment: When a party to the contract performs and the other party

enjoys the benefits of the work, he is bound to compensate the other with the

reasonable sum, even though no agreement for payment was made formally. The

party had performed his part of the work without any intention of doing it

gratuitously.

(d) Divisible and non divisible work: Quantum meurit can be paid only when work is

completed. If it is divisible it will be paid for that part of the work that is completed. If

it cannot be divided the party will not be entitled to claim any compensation.

BAILMENT AND PLEDGE

12.1 DEFINITION

According to Section 148 of the Contract Act “A bailment is the delivery of goods by

one person to another for some purpose, upon a contract that they shall, when the

purpose is accomplished, be returned or otherwise disposed of according to the

directions of the person delivering them”. Some of the examples of bailment are- A

cloth given to a tailor for stitching, a watch given to a shop for repairing, a friend

lending his bicycle to another friend for riding it and jewelry taken on rent for

wearing it to party.

The person delivering the goods is called the ‘Bailor’ and the person to whom the

goods are delivered is called the ‘Bailee’118.

Illustration 1

Ram sends his car to the garage for repair. In this case Ram is the bailor and the

garage owner is the bailee. The garage owner (bailee) has to repair the car and then

hand it over to Ram (bailor).

The following are the essential features of Bailment:

! Movable goods: The goods in bailment are goods as defined in section 2 (7) of the

sale of goods Act, 1930, which means every kind of movable property other than

money and actionable claims. Immovable property like land and buildings are not

considered as goods.

Illustration 1: Ranbir lent his car to Jeetendra for a week for rupees 3500. This is a

case of bailment where Ranbir is a bailor and Jeetendra is a bailee. Jeetendra is

liable to pay Ranbir rupees 3500 and also return the car after a week.

! Delivery of goods: Section 149 of the Indian contract act 1872 explains the mode of

delivery of goods. It states that there may be two modes of delivery. Actual delivery

and constructive delivery. In actual delivery the bailor hands over physical possession

of goods to the bailee and in constructive delivery the bailor does not hand over

physical possession of goods but does something which has the same effect of putting

the goods in possession of the bailee.

Illustration 1: Sita gives a piece of cloth to her tailor for stitching a dress. This is a

case of actual delivery where the bailor has physically delivered the cloth to the

bailee for stitching purpose and once the purpose has been fulfilled the bailee returns

the cloth to the bailor.

! Some purpose: The delivery of goods from bailor to bailee is done to accomplish

some purpose. If goods are delivered by mistake without any purpose then there is no

bailment.

Illustration 1: Mr Rastogi went to the presswala (dhobi) to give his clothes for

ironing. This is a case of bailment where Mr Rastogi is the bailor and presswala is

the bailee and the purpose here is to get the clother ironed.

! Return of goods: After the purpose for which the goods were bailed to the bailee

has been fulfilled the goods have to be returned to the bailor.

Illustration 1: Som had given his shoes to the cobbler for repairing the shoes. After

the shoes were repaired the cobbler was liable to return the shoes to Som. Similarly

Som too was liable to pay the shoe repairing charges to the cobbler.

Kinds of Bailment

Bailment may be classified according to the benefit derived by the parties. These are

as follows:

1. For the benefit of the bailor: When the delivery of goods by the bailor to the

bailee is done for the exclusive benefit of the bailor and the bailee gets nothing in

return that is consideration does not pass between the bailor and the bailee.

Illustration: Rumu gave a cloth piece to her friend Geeta who was a fashion designer

to stitch a shirt. Geeta after stitching the shirt gave it back to Rumu. In this case

Rumu is the bailor and Geeta is the bailee and Geeta stitches the shirt without taking

anything from Geeta.

2. For the benefit of the bailee: When the delivery of goods by the bailor to the

bailee is done for the exclusive benefit of the bailee and the bailor gets nothing in

return. Hence consideration does not pass between bailor and the bailee.

Illustration: Rumu lent her saree to her friend Geeta for a wedding party. In this case

Rumu is the bailor and Geeta is the bailee and Geeta has to return the saree to Rumu

after the function is over.

3. For mutual benefit of both the bailor and the bailee: When the delivery of

goods by the bailor to the bailee is done for mutual benefit of both the parties. In this

case consideration passes between the bailor and the bailee.

Illustration: Rumu gave a cloth piece to the tailor for stitching a shirt for rupees two

hundred. In this case Rumu is the bailor and tailor is the bailee and consideration of

rupees two hundred passes between the bailor and the bailee.

Bailment may also be classified as Gratuitous and Non-Gratuitous Bailment.

1 Gratuitous Bailment: In this case no consideration passes between the bailor and

the bailee. The bailment for the benefit of the bailor and the bailment for the benefit

of the bailee mentioned above are gratuitous bailment.

Illustration: Lucky was going out of station for two days. She had a dog Romeo whom

she gave to Satish her neighbour for safekeeping. This is a case of gratuitous

bailment.

2 Non-Gratuitous Bailment: In this case consideration passes between the bailor and

the bailee. The bailment for mutual benefit of the bailor and the bailee is a non-

gratuitous bailment.

Illustration: Shyama took a necklace on rent from a jeweler for wearing it in a party

for rupees two hundred. This is a case of non-gratuitous bailment.

12.2 RIGHTS AND DUTIES OF BAILOR AND BAILEE

12.2.1 Duties of a Bailor

(1) To disclose known facts: The bailor should disclose the known faults about the

goods, which he/she has bailed to the bailee. If the bailor does not disclose the defects

then he/she is liable for any damage caused to the bailee due to such defects in the

goods.

Illustration: Sangeet went for a horse riding. He took a horse from the stable that was

mad. The horse owner was aware of the horse’s madness but he did not inform

Sangeet about it. Sangeet sat on the horse and the horse threw him off as a result

Sangeet hurt himself. In this case it was the duty of the horse owner to inform Sangeet

about the madness and therefore the owner is liable to compensate Sangeet for the

injury sustained by him.

(2) To incur extraordinary expenses of bailment: The bailee is responsible to bear

ordinary and reasonable expenses of the bailment but for any extraordinary expenses

it is the bailor who is responsible.

Illustration: Rajni use to leave her daughter in a crèche for rupees 100 a day. One

day her daughter became sick and was taken to the hospital by the crèche owner and

the owner paid the medical bills. As this is an extraordinary expense therefore it is the

duty of Rajni to reimburse the owner all the medical expenses.

(3) To indemnify bailee for loss in case of premature termination of gratuitous

bailment: If the gratuitous bailment is terminated by the bailor before the specified

time then any loss the bailee incurs due to such termination shall not be born by the

bailor. However if the loss suffered by the bailee exceeds the benefit he/she has

derived from bailment then in such a case the bailor shall indemnify the bailee.

Illustration: Deepak’s relatives had come to Delhi on vacation. He had no vehicle so

he borrowed his friend’s car for two days. He had filled up the petrol tank for rupees

two thousand. The very next day his friend came to take the car back. Hence the

friend was liable to pay the petrol cost to Deepak as rupees two thousand was the loss

he incurred due to premature termination of the contract of bailment.

(4) To receive back the goods: once the purpose has been fulfilled for which the

goods were bailed out it becomes the duty of the bailor to receive back his/her goods

from the bailee. He cannot refuse to take back the goods. However if the bailor

refuses to take back the goods then the bailee is entitled to receive compensation for

the expenses he/she incurs in custody of goods.

Illustration: Reena had left her cat at her neighbour’s place for two days as she was

going out of station. Once she came back it was her duty to fetch her cat back from

her neighbour’s place.

(5) To indemnify the bailee: If the title of the good is defective and due to that the

bailee suffers a loss then the bailor is responsible to the bailee for the loss suffered by

him/her.

Illustration: Krishna found a watch on the road and picked it up. He sold it to Rani

for rupees hundred. The watch was not in a workable condition so Rani got it

repaired for rupees fifty. Later the real owner of the watch came and claimed back his

watch from Rani. Rani was entilteld to be reimbursed for the loss suffered by her in

purchasing and using the watch from Krishna (the bailor).

12.2.2 Duties of a Bailee

(1) To take reasonable care of the goods: It is the duty of the bailee to take

reasonable care of the goods bailed to him/her by the bailor. According to section 151

of the Indian Contract Act 1872 the bailee is to take care of the goods as a man of

ordinary prudence would, under similar circumstances, take of his own goods of the

same bulk, quality and value as the goods bailed. Section 152 states that if, in spite of

taking all the reasonable care the goods are damaged or destroyed in any way then the

bailee is not liable for the loss, destruction or the deterioration of the goods bailed.

Illustration 1: Roopwati gave her mobile phone for repair to Nikhil at his repair shop.

Nikhil forgot to keep the phone in the drawer and the phone kept lying on the table.

Someone came to the shop and stole the mobile. Later Nikhil found that the mobile

had been stolen. In this case Nikhil is liable to compensate Roopwaiti for the loss as

the loss was due to his negligence.

(2) Not to make any unauthorized use of goods: The bailee is not to use the goods

in a manner, which is inconsistent with the terms of the contract. If he/she uses the

goods in an inconsistent manner then he/she is liable for any loss or damage made to

the goods bailed.

Illustration: Ragini gave a piece of cloth to her tailor for stitching a kurti. After two

days Ragini went to a friends wedding and there she saw her tailor wearing

herstitched kurti. This is not within the terms of the contract of bailment therefore the

tailor has to compensate Ragini for using the kurti for using it for personal purpose.

(3) Not to mix goods bailed with his/her own goods: The bailee is to keep the goods

bailed to him/her separately from his/her own goods. If the bailee mixes the goods

with his/her goods- With Bailor’s consent- in such a case both the bailor and the

bailee shall have a proportionate interest in the mixture produced due to mixing of

goods.

Illustration: Ramvir bought hundred kilograms of rice but due to scarcity of space he

requested Shyam to put the rice in his storehouse. Shyam’s storehouse was already

filled with rice. When Ramvir’s rice was kept in the storehouse the rice got mixed with

Shyam’s rice. Whenever Ramvir gets the rice he will get his share of twenty kilos from

the whole bulk.

(4) To return the goods: The bailee is bound to return the bailed goods to the bailor

once the purpose for which the goods were bailed has been fulfilled.

Illustration: Shilpa had given her car to her friend Sikandar to go to Agra from Delhi.

Sikandar took the car to Agra and came back to Delhi the next day. Hence Sikandar is

bound to return the car to Shilpa.

(5) To return any accretion to the goods: If during the period of bailment any profit

or addition in value has accrued from the goods bailed then it is the duty of the bailee

to return such profit or increase in value to the bailor.

Illustration: Mr Sharma’s family was going for a vacation to Goa so they left their

dog Sherly at their neighbor Mr hussain’s house. During that time Sherly gave birth

to six puppies. It was Mr Hussain’s duty to return Sherly and her puppies to Mr

Sharma once his family came back from Goa.

12.2.3 Rights of Bailor

(1) Duties of a Bailee: The duties of a bailee are the rights of a bailor. The bailor can

enforce by suit all the duties of the bailee as his/her rights121.

(2) Right to terminate the contract: According to section 153 of the Indian Contract

Act the bailor can at anytime terminate the contract of bailment if he/she finds that the

bailee has done an act, which is inconsistent with the terms of the contract of

bailment.

Illustration: Mrs Nagpal had given her cooking gas to her neighbor Mrs Saxena who

had recently shifted in the neighborhood and did not have a gas to cook. Later Mrs

Nagpal found that Mrs Saxena was using the gas for commercial purpose. She was

making sweets and various delicacies and serving the dishes to a restaurant. Hence

Mrs Nagpal had the right to terminate the contract.

(3) Right to demand return of goods at any time in case of gratuitous bailment:

According to section 159 of the Indian Contract Act in case the bailor has lent the

goods gratuitously to the bailee the bailor has a right to terminate the contract anytime

before the expiry of the period. However if the termination causes loss to the bailee

and the loss is in excess of the benefit derived by him/her then the bailor has to

indemnify the bailee’s loss.

Illustration: Anshita was a poor girl and did not have money to buy law book. Her

classmate Mangla had two law books. She lent one to her friend Anshita for

preparing for the exam. As the book was old and worn out mangla got the book bound

for rupees Twenty. Later Mangla lost her law book and so asked Anshita to return the

law book. However Mangla was liable to pay Anshita rupees twenty for the binding

the book.

(4) Compensation from a wrongdoer: According to section 180 of the Indian

Contract Act if a third person wrongfully deprives the bailee from the rightful use or

possession of bailed goods or does them any injury or damage then the bailor or the

bailee can bring a suit against that person for such deprivation or injury.

Illustration: Keshav had visitors at his house so he took ten blankets for one night on

rent from a shop. Keshav’s cousin put blankets in a bucket of water. The bankets got

wet and so could not be used in the night. The cousin deprived Keshav from using the

blanket and so was to compensate Keshav for the loss.

12.2.4 Rights of Bailee

1 Duties of a Bailor: The duties of a bailor are the rights of a bailee. The bailee can

enforce by suit all the duties of the bailor as his/her rights122.

2 Right to deliver goods to one of several joint bailors: According to section 165 of

the Indian Contract Act if the goods have been bailed by several joint owners, the

bailee has a right to deliver them to, or according to the directions of, one joint owner

without the consent of all, in the absence of any agreement to the contrary.

Illustration: Dinesh took the costume of Ravana on rent for playing the part of

Ravana in Ramlila from the shop, which was owned by three brothers Rinku, Pinku

and Tinku. Rinku had given the costume to Dinesh but after the Ramlila was over

Dinesh went to the shop and returned the costume to Pinku.

3 Right to deliver goods, in good faith, to bailor without title: According to

section 166 of the Indian Contract Act the bailee has a right to deliver the goods, in

good faith, to the bailor without title, without incurring any liability towards the true

owner.

Illustration: Sunita took her mother’s cloth piece to a tailor and asked him to stitch a

cushion cover. Later Sunita’a mother visited the tailor and asked him to return the

stitched cushion cover to her. The tailor refused to hand over the cushion cover to her

and instead returned the cover to Sunita. Although the mother was the owner of the

cloth piece however the tailor had a right to deliver it only to Sunita (the bailor).

4 Right of lien: Lien means the right to retain possession of the property or goods,

which belongs to another person until that person pays the dues or claims. The bailee

can exercise the right to lien only till the goods are in his/her custody. As soon as the

bailee loses the possession of goods he/she loses the right to lien.

12.3 FINDER OF GOODS

According to section 71 of the Indian contract Act a person who finds goods

belonging to another and takes them into his/her custody is subject to the same

responsibility as that of a bailee.

The rights of a finder of goods are as follows:

(1) Right of lien: The finder of goods has a right of lien over the goods for his/her

expenses. He /she can retain the goods against the owner until he/she receives the

compensation or expenses but the finder cannot sue the owner for such compensation

or expenses because he/she incurred those expenses voluntarily.

Illustration: Rita found a small puppy that was injured. She took him to a vet and got

his injuries treated. She kept the puppy in her house and after a week the owner of the

puppy came to her house and asked her to return the puppy. Rita claimed for the

expenses she incurred on puppy’s medical treatment, food and bedding. The owner

refused to compensate Rita for the expenses incurred by her so she exercised the right

of lien on the puppy.

(2) Right to sue for reward: The finder can sue for a reward, which the owner has

offered for the return of goods and the finder can also exercise the right of lien till

he/she gets the reward from the owner.

Illustration: Rita found a small puppy but in spite of all her efforts failed to find the

owner of the puppy. Later she found an advertisement in the paper that said that a

puppy was lost and anybody who finds the puppy will be rewarded with a cash prize

of rupees five thousand. Rita contacted the owner and told him about the puppy. The

owner came and found that it was his puppy but he refused to give the promised

reward to Rita. Hence Rita could exercise the right of lien on the puppy.

(3) Right of sale: The finder also has a right to sell the goods

12.4 TERMINATION OF BAILMENT

Termination means the end of a contract or a discharge of a contract. The contract of

bailment can be discharged in the following ways:

(1) On the expiry of the period: When the bailment of good is made for a specific

period and that period expires then the bailment also comes to an end.

Illustration: Mr Gujral took a bike from his neighbor Shrinath for two days as his

bike had gone for repair. He used the bike for two days and then returned the bike to

Shrinath. Thus the contract of bailment came to an end.

(2) On the completion of the task or the achievement of the objective: When

bailment of good is made for a particular purpose and that purpose gets accomplished

then the bailment comes to an end.

Illustration: Jaggu took Manoj’s mobile to make a call. Once the call has been made

the bailment comes to an end and Jaggu has to return the mobile to Manoj.

(3) Inconsistent uses of good by the bailee: When bailment is made and the bailee

does an act, which is inconsistent with the terms of contract then the bailor can

terminate the contract.

Illustration: Rustam borrowed Kavi’s Car to go to Dehradun but instead he took the

car to Kanpur. Hence Kavi terminates the contract due to inconsistent usage of good

borrowed.

(4) Destruction of the subject matter: When the subject matter of the contract gets

destroyed or becomes incapable of use for the purpose of bailment then the bailment

ends.

Illustration: Mr Arora gave his shirts and trousers for dry-cleaning at the dry

cleaning shop. The same night there was fire in the shop and the shirt and trousers of

Mr Arora got burnt. Hence the contract of bailment came to an end.

(5) Gratuitous Bailment: It can be terminated anytime subject to condition laid down

in section 159 (please see gratuitous bailment in this lesson above)

(6) Death of the bailor/bailee: In case any of the parties to the contract of bailment

expires the contract terminates.

Illustration: Geeta had given her saree to Sangita for doing some embroidery work on

the border of the saree. Sangita met with an accident and died the next day. Hence the

contract of bailment came to an end.

12.5 PLEDGE

According to section 172 of the Indian Contract Act when bailment of goods is done

as security for payment of a debt or performance of a promise it is called pledge. In

case of a contract of pledge the bailor is called the pledger or pawner and the bailee is

called the pledgee or pawnee.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender as

a security for payment of debt. In this case Ramnath is the pledger, moneylender is

the pledgee and the cow is the good that has been pledged for the performance of the

promise.

Bailment and other similar Relations: A comparison

An agent who has collected money on his principla’s behalf is not a bailee of the

money. In United Commercial Bank Vs. Hem Chandra Sarkar125. The Honorable

justice Setty made an observation in this respect whereby he clarified the distinction

between bailment and agency. He said, “One important distinguishing feature

between agency and bailment is that the bailee does not represent the bailor. He

merely exercises, with the consent of the bailor (under contract or otherwise) certain

power of the bailor in respect of his property. Secondly, the bailee has no power to

make contracts on bailor’s behalf, nor can ha make the bailor liable, simply as bailee,

for any acts he does.”

A bailment is also different from sale, exchange or barter. In these transactions what

is transferred is not mere possession but also ownership and, therefore, the person

buying is under no obligation to return.

12.6 RIGHTS AND DUTIES OF PAWNOR AND PAWNEE

Rights of a Pawnee/ Pledger

The rights of a Pawnee are as follows:

(1) Right of retainer: According to section 173 the Pawnee has the right to retain the

goods pledged with him /her if the Pawnor / Pledger does not repay the dues or does

not perform the promise. The Pawnee may also retain the goods till the Pawnor pays

the interest due on the debt.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender as

a security for payment of debt. Ramnath failed to return the money on time as a result

the moneylender had a right to retain the cow with him till Ramnath paid back the

loan amount.

(2) Right of retainer for subsequent advances: According to section 174 of the

Indian Contract Act if the pawnee lends money to the same pawner after the date of

the pledge then the pawnee’s right of retention of goods extends to subsequent

advances.

Illustration: Ramnath a farmer took loan for rupees fifty thousand from the

moneylender for his daughters wedding and he kept his cow with the moneylender as

a security for payment of debt for one year. After a year Ramnath paid back all the

money he had taken to the money- lender and also took a fresh loan of rupees twenty

thousand from him. The moneylender retained the cow as a security for the

subsequent loan.

(3) Right to extraordinary expenses: According to section 175 the Pawnee is

entitled to receive from the pawnor extraordinary expenses incurred by him for the

safe keeping of the goods pledged with him. Though he has no right to retain the

goods for non-payment of such expenses but he/she can sue the Pawnor for the

recovery of such expenses.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender.

The cow fell sick and the moneylender had to bear expenses on her medical treatment.

Hence the moneylender had a right to be compensated by Ramnath for the medical

expenses. Though the moneylender did not have the right to retain the cow for

recovery of such expenses however he had the right to sue Ramnath (the pledger) for

recovery of expenses.

(4) Right against true owner, when the Pawnor’s title is defective: According to

section 178-A if the Pawnor has got the possession of goods which he /she has

pledged with the Pawnee under a voidable contract (by fraud, misrepresentation,

undue influence and coercion)126 and the contract has not been rescinded at the time

of pledge, the pawnee acquires a good title to the goods. The pawnee gets a good title

only when he acts in good faith and does not have the knowledge of the Pawnor’s

defect of title.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughters wedding and he kept his cow with the moneylender as

a security for payment of debt. Actually the cow belonged to Ramnath’s elder brother

Shyamnath. The moneylender was ignorant about this. Hence Shyamnath did not have

the right to take the cow back from the moneylender during the period of pledge.

(5) Has a right to recover from the Pawnor any deficiency arising on the sale of

the goods and is liable to the Pawnor to return any surplus, if any, realized on

the sale of goods: In this case if the pawnor fails to repay within the due date then the

pawnee has a right to sell the goods pawned and recover the money from it. In case

the sale proceeds are more than the loan amount then the pawnee is liable to return the

surplus to the pawnor and if the sale proceeds are less than the loan amount then the

pawnee can recover the deficient amount from the pawnor.

Illustration 1: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughters wedding and he kept his cow with the moneylender as

a security for payment of debt for a year. A year lapsed and Ramnath could not pay

back the debt. Hence the moneylender sold the cow to recover his money. After selling

the cow he got rupees ten thousand which was less than the loan money. Hence the

deficient money could be recovered from Ramnath.

Rights of a Pawnor / Pledger

The rights of a Pawnor are as follows:

(1) Right to get back goods: After returning the debt or after performing the promise

the pawnor is entitled to get back the goods.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender as

a security for payment of debt for a year. After a year Ramnath returned the money to

the moneylender and took his cow back.

(2) Right to redeem debt: In case the pledger fails to repay the debt or does not

perform the promise within the stipulated time then he/she may still redeem the goods

pledged at any subsequent time before the actual sale of goods take place however the

Pawnor has to pay any expenses which have arisen due to his / her default.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender as

a security for payment of debt for a year. After a year Ramnath could not pay the loan

money as a result the moneylender decided to sell the cow. Just before the day when

the cow was to be sold Ramnath arranged the money and gave it to the moneylender.

However he had to pay extra money for additional days after the expiry of the loan

period.

(3) Right for preservation and maintenance of goods: The Pawnor has a right

to see that his/ her goods are kept safely with the Pawnee that is that the Pawnee

preserves the goods and properly maintains them.

Illustration: Ramnath a farmer took loan of rupees fifty thousand from the

moneylender for his daughter’s wedding and he kept his cow with the moneylender as

a security for payment of debt for a year. Ramnath had a right to see that his cow was

properly kept with the moneylender.

(4) Rights of an ordinary debtor: The Pawnor apart from having all the rights

mentioned above also has the rights of a debtor127.

INDEMNITY AND GUARANTEE13.1 WHAT IS CONTRACT OF INDEMNITY?

The Indian Contract Act 1872 provides certain special types of contracts. These are

contracts of(1) indemnity,(2) guarantee, (3)bailment and(4) agency. The meaning of

indemnity is to make good the loss that another has suffered or in other words to

ompensate the party who has suffered a loss. Section 124 of the Act defines contract

of indemnity “A contract by which one party promises to save the other from loss

caused to him by the conduct of the promisor himself or by the conduct of any other

person”.

Illustration: Akshay makes the contract to indemnify Neelam against the

consequences of any types of proceedings with respect to a loan of Rs. 2,00,000 lakhs

which Atul may take against her. This is a contract of indemnity.

13.2 ESSENTIALS OF VALID CONTRACTS OF INDEMNITY

The following are the essentials of valid contracts of indemnity:

(a) The contracts of indemnity must be between two parties, the indemnifier and

indemnity holder or indemnified.

(b) A contract of indemnity should contain offer, free consent between parties,

consideration, competency of both parties and legality of object to become a valid

contract.

(c) There should be a promise between two parties whereby one party promises

another to save the other from any losses suffered by him.

(d) The losses may be due to the conduct of the promisor himself or any other person.

(e) Contracts of indemnity can be express or implied. In an express contract of

promise is made by a person to compensate the other person in express terms but in an

implied contract it is the intention of the promisor to indemnify the other party from

losses.

13.3. RIGHTS OF INDEMNITY HOLDER

Section 125 has provided the rights of the indemnity holder. According to it the

indemnity holder has a right to recover from the indemnifier some of the amounts that

he has paid on behalf him, if he has acted within the scope of his authority:

a) Damages in respect of a promise to indemnify the other in case of a law suit.

b) Costs paid by the indemnity holder to defend a suit that was authorized by the

promisor.

c) Any amount paid for compromising in a suit authorized by the promisor, if the

amount has been authorized by the promisor.

13.4 RIGHTS OF INDEMNIFIER

The Act does not provide any rights for the indemnifier. However, it is taken as a

silent acceptance of the rights of the promisor. Therefore, it is made equivalent to the

rights of a surety under Section 141 of the Indian Contract Act. With this explanation

of the Act the rights of the promisor are the same as that of a surety in a contract of

guarantee.

13.6 WHAT IS CONTRACT OF GUARANTEE?

A contract of guarantee according to Section 126 of the Indian Contract Act is a

contract to perform the promise or discharge the liability of a third person in case of

default. The contract of guarantee consists of three parties. These are the surety, the

principal debtor and the creditor.

a. Surety: A surety is a person who gives the guarantee to pay in case of

default.

b. Principal debtor: The person for whom the guarantee has been taken by

the surety is the principal debtors.

c. Creditor: A promise of guarantee is given to the creditor to whom the

payment has to be made.

Illustration 1: Seema gives a loan of Rs. 50,000 to Aditi on the promise that Atul will

repay the loan to Seema if Aditi defaults in her payment. This is a contract of

guarantee.

Seema is the creditor. Aditi is the principal debtor and Atul is the surety or guarantor.

13.7 ESSENTIALS OF CONTRACT OF GUARANTEE

The contract of guarantee can be performed only when certain essential elements of

the contract are fulfilled. The following are the essential requirements of a contract of

guarantee.

a. Valid contract: A contract of guarantee must have all the essentials of the valid

contract like competence of parties, free consent, consideration to make the contract

valid but there are certain exceptions:

a. The principal debtor may not be competent to contract. If he is not competent the

surety will become the principal debtor and will be liable personally to make the

payment.

b. A surety that makes a promise for the benefit of the principal debtor need not be

benefited. Any promise that a surety makes is sufficient consideration for giving a

guarantee.

b. Tripartite agreement: In a contract of guarantee there is the involvement of

three contracts.

a. Contract 1: It is a contract between the principal debtor and the creditor on the

basis of which a guarantee of the debt arises.

b. Contract 2: It is an agreement between the principal debtor and the surety in which

the principal debtor accepts the responsibility to indemnify the surety if the payment

is required to be made by the surety.

c. Contract 3: It has the contract between the creditor and the surety in which the

surety promises to under take the payment of the debt of the principal debtor in case

the principal debtor defaults his payments.

c. Consent: Since the contract of guarantee involves the creditor, principal debtor and

the surety, it is necessary that all the three parties have agreed to the contract.

Illustration: Abu sells 5 air-conditioners to Sara. He later request Sonu to pay if Sara

makes a default in her payment. Sonu cannot become a surety without the consent of

Sara.

d. There should be no misrepresentation of facts: Guarantee should be obtained after

disclosing all the material facts that may affect the degree of responsibility of the

surety. The surety must know all the facts of the case because if he neglects to do his

duty he is responsible for the consequences. Any guarantee that is obtained by

misrepresentation or concealment of facts by the creditor becomes an invalid contract

of guarantee.

e. Contract may be oral or in writing: A contract of guarantee may be either oral or

written as given in section 126 of the Act. The position as per English Law is different

to that of the Indian Law. Under the English Law the contract must be in writing but

the Indian Law does not specify it.

Hence in India both oral and written contracts are acceptable.

f. There should be a principal debt: There has to be a primary liability of a person

who is other than the surety to the contract of guarantee. The surety becomes liable

only if the principal debtor is unable to discharge his obligation. If there is no

principal debtor, there cannot be a contract of guarantee. In situations when there is a

promise by one of the parties for compensating another without involving a third

party it becomes a contract of indemnity.

2. To summarize according to Section 142 of the Act an invalid guarantee is one

which is obtained by the creditor through misrepresentation regarding a material part

of the transaction.

3. Section 143 states that any guarantee in which he creditor maintains silence to the

material facts also makes the contract of guarantee invalid.

4. Under Section 144 when co-surety does not join and it is necessary for him to give

guarantee with the surety the contract of guarantee will not be valid.

5. If there is no consideration between the creditor and the principal debtor, the surety

will be discharged from his liability as the contract will not be valid.

Illustration: Malti employs Meena to make the collections of money on credit sales.

Meena collects Rs. 3,00,000 but does not account for all the receipts. Meena’s friend

accounted for Malti’s misappropriation of funds of her employer. Malti agreed to

retain Meena but expected a guarantee from her friend Atul. Malti did not let Atul

know of Meena’s earlier dishonesty. Atul gave the guarantee. However, this

guarantee cannot be enforced because he does not disclose Meena’s

misappropriation of funds.

13.8 DISTINCTION BETWEEN CONTRACTS OF INDEMNITY &

CONTRACTS OF GUARANTEE

The contracts of indemnity can be distinguished from contracts of guarantee. In a

following matter:

(i) Parties to the contract: Contracts of indemnity comprise of two parties. These are

indemnifier and the indemnity holder whereas contracts of guarantee are made with

three parties. These are the principal debtor, the creditor and the surety.

(ii) Number of contracts: Contracts of indemnity are between the indemnifier and the

indemnity holder. Only one contract is made between them. However, contracts of

guarantee are made out of free contracts. One contract is between the principal debtor

and creditor.

The second contract is between the surety and the creditor and the third is between the

surety and the principal debtor.

(iii) Nature of liability: The indemnifier is independent and has primary liability in

contracts of indemnity but in contracts of guarantee the surety has collateral or

secondary liability where as the primary liability is of the principal debtor.

(iv) Purpose of contract: Contracts of indemnity provide security against losses

whereas contracts of guarantee provide security to creditors against default of the

principal debtors.

(v) Request: In an indemnity contract the indemnifier does not have to act at the

request of the indemnity holder. In contracts of guarantee the surety can act only

when the principal debtor requests him to do so.

(vi) Occurrence of liability: In contracts of indemnity liability will arise on the

happening of the contingency but in contracts of guarantee liability will arise when

and existing promise of payment of a debt is not performed.

(vii) Interest in the contract: In indemnity contracts the promisor usually has his own

interest in the contract but the surety does not have any interest in the transaction

when he makes a contract of guarantee.

(viii) Right to suit third parties: The indemnifier does not have any right to sue a third

party in his own name because he does not have any privty of contract. Only in

transactions where there is an assignment in his favour he may sue third parties in

contracts of indemnity. In contracts of guarantee the surety has the right to sue the

principal debtor in his own made after he discharges his debt.

13.9 KINDS OF GUARANTEE

There are two categories of guarantees. These are called specific guarantees and

continuing guarantees.

1. Specific guarantee

A specific guarantee pertains to a single debt or a single transaction. It is a simple

guarantee or a specific guarantee when the debt is discharged, then the duty is

performed and the contract of guarantee comes to an end. In a specific guarantee if a

new transaction has to be made between two parties a fresh guarantee will have to be

taken as the guarantee on the single debt is completed. Guarantee can be for an

existing debt or for a prospective debt or a future transaction.

Illustration: Purva guarantees the payment of 5 computers to Ali to be delivered to

Khan in March. Ali delivers the computers to Khan and it is paid by him. Purva’s

contract of guarantee ends on the payment. He is not liable for any further contracts

because it is a specific contract pertaining to only five computers. If Khan had not

paid then Purva would be liable to make the payment to Ali.

2. Continuing guarantee

According to Section 129 a continuing guarantee extends to a series of transactions.

The surety is liable for all the transactions as his guarantee extends to all of them until

the guarantee is removed.

Illustration 1: Raju was employed as a driver by Mr. Tiwari on the recommendation

of Shiv for collection of credit payments from Delhi. Shiv guaranteed Raju’s honesty

and promised to pay in case of any default in payments collected by him (Raju). This

is a contract of continuing guarantee.

13.10.1 Rights against the Principal Debtor

The surety has the right of subrogation and the right to claim indemnity from the

principal debtor.

(i) Rights of subrogation: When a surety makes a payment to a creditor on behalf of

the principal debtor in case of default, he acquires the rights of a creditor against the

principal debtor. He can recover the entire amount that he has paid to the creditor.

This is called the right of subrogation.

Section 140 of the Contract Act, states that when a surety has performed the duty or

made a payment on behalf of the principal debtor he acquires the rights of the

creditor. He is entitled to claim all the sums he has rightfully paid to the creditor. He

also gets the benefits of security that were given to the creditor when the contract was

entered into.

(ii) Rights of indemnity: When a contract of guarantee is entered into there is an

implied promise that the principal debtor will indemnify the surety for all the

payments rightfully made by him. If he has made any payments wrongfully he will

not be able to recover any amounts. This has been stated in section 145.

Illustration 1: Rahul has to pay Rs. 2,00,000 to Mahesh. Venkat is the surety for the

debt. Mahesh demands the payment from Rahul on the due date. Rahul fails to pay the

amount. Venkat who is the surety is compelled to make the payment on behalf of

Rahul. Venkat has the right to recover the amount from Rahul with all the benefits

promised to Mahesh as he now acquires the right of a creditor.

Is surety a favoured debtor?

1. The surety’s liability is secondary. If he becomes insolvent he will not have to pay

for the debts of the principal debtor. However, if the principal debtor becomes

insolvent he will still have to pay to the creditor if became insolvent.

2. The surety becomes discharged from his liabilities if there is a variance in the

contract but the principal debtor has the liability to pay to the creditor if he defaults.

3. In case securities are offered a surety has the right to demand a share. However, the

principal debtor can not claim a share if his claim is not satisfied.

4. The surety has to pay for the principal debtor only when there is a default by the

principal debtor. However, the principal debtor will have to pay the amount either to

the creditor on the due date or to the surety in case of default.

13.10.2 Rights against the Creditor

The surety has the following rights against the creditor:

(i) Right to claim securities: According to section 141 of the Act the surety has the

right of subrogation after performing his duty or making a payment to the creditor. All

the rights of the creditor are passed on to the surety. Accordingly the surety gets the

right to the benefit of every security, which the creditor has against the principal

debtor even if he has no knowledge of the existence of such securities. If the creditor

loses the security the surety is discharged of his responsibilities to the extent of the

value of his security.

Illustration: Sunny gives Manju Rs 10,000 on the guarantee of Prem. Sunny has a

further security of Manju’s office table which is made of teak and is of the value of

Rs.4000. Sunny cancels the security. Manju becomes insolvent and cannot pay his

dues. Sunny sues Prem on his guarantee. Prem is discharged of his responsibility to

the value of the office teak table.

(ii) Right of set off: If the creditor sues the surety, he can claim set-off or counter

claim, which the debtor had against the creditor.

Illustration: Deepak took a loan from Sohan for Rs. 8,50,000. Samu guaranteed the

loan. Samu also had a claim on Sohan for Rs. 3,00,000. Somu is liable to pay

5,50,000. Somu will also claim the benefit of this set-off although he does not have

any personal claim on Sohan.

(iii) Right to share reduction: If the surety has paid the amount to the creditor on

behalf of the principal debtor and when he has to recover his amount from the debtor,

the debtor becomes insolvent then the surety can claim from the creditor a reduction

in his liability by the amount of dividend that is claimed by the creditor from the

official receiver of the debtor.

Case Law 4

In Hobson V Bass135J gave a guarantee to B for payment of the goods sold by him to

another person A up to an amount of Rs 1,000. B supplied goods for Rs 2,000. To A. A

became insolvent and B supplied the goods He asked J to pay. J paid him Rs 1000. B

received from the official receiver 25% of Rs 2,000 as dividend in insolvency. It was

held that J was entitled to receive a part of the dividend out of the whole received

that is 50% of Rs 1000. This is Rs. 500

(iv) Right to ask the creditor to terminate debtor’s services: When a person gives a

guarantee for the honest performance of another employee and the employee defaults,

the surety has a right to the demand that the employee is dismissed. Such dismissals

are usually in the case of fidelity contracts for example contracts relating to insurance.

13.11 SURETY’S LIABILITIES

The surety has several liabilities since he has guaranteed the debt. These are discussed

below:

Co-extensive: The nature and extent of a surety’s liability is co-extensive with that of

the principal according to section 128 of the Indian Contract Act. This means that the

surety has the same liability as the principal debtor. If the principal debtor does not

pay on time, the surety will be required to pay to the creditor.

Illustration: Amit has taken a loan of Rs 1,00,000 from Shamit and Sanjeev has

guaranteed it. If Amit fails to pay the amount to Shamit on the due date, Sanjeev will

have to pay the amount to the creditor. If an interest rate has been fixed, Sanjeev is

also liable to pay that amount.

Reduction in liability: When the principal debtors liability is reduced, the liability of

the surety will also be reduced.

Secondary liability: A surety’s liability is secondary and comes into force only when

the principal debtor defaults in his payment. If the surety himself becomes insolvent

before the principal debtor defaults his payment his will not be liable to pay any

amount guaranteed by him if the principal debtor makes a default later.

Liability restricted to valid contract: If a contract of guarantee is valid the surety will

be liable. If the creditor makes a contract with representation or fraud, then the surety

has the right of treating it as a voidable contract at his option.

Liability when original contract between creditor and principal debtor is void or

voidable: The surety and the creditor have a contract that is independent from the

principal debtor. Sometimes the original contract between the creditor and the

principal debtor is not valid but the surety is still liable for the principal debtor. This is

in the event of the principal debtor being a minor; the surety does not get absolved of

his liability. The surety is liable like a principal debtor.

When the contract between the creditor and the principal debtor is voidable the surety

can still be liable. Moreover the liability of the surety continues to exist in the event of

the creditor not making his claim during the period of limitation of 3 years of a debt

the surety is not discharged if the limitation period against the surety exists. But a

surety who guarantees a time barred debt is not liable because according to the

contract of guarantee he is not liable beyond the period of the guarantee contract. If

the principal debtor is discharged from his liability or dies, the surety is discharged

from his liability.

Liability on default of principal debtor: The surety becomes liable immediately on

default of the principal debtor. Before the default the surety does not have to pay as

his liability only begins if the principal debtor does not pay. At the same time, the

principal debtor does not have to send any notice of default to the surety. The creditor

can sue the surety for the amount immediately on default. Procedurally, he is not

required to sue the principal debtor first. He can immediately sue the surety for the

amount owed to him.

13. 12 DISCHARGE OF SURETY

The surety and the so-surety are discharged from their liabilities in the following

circumstances:

Revocation of contract by surety

A contract can be revoked by a surety either by (i) giving notice of revocation or (ii)

by death of the surety or (iii) by novation.

(i) By notice: A specific guarantee can be revoked by the surety by giving notice to

the creditor. However, this is possible only before the liability of the surety accrues. If

action has already been taken, it can be revoked. A continuing guarantee can be

revoked for future transactions but the surety cannot be relived from his liabilities

from transactions that have already taken place (Section 130).

(ii) By death of surety: In the event of death, the surety is not liable to pay for any

transactions entered into by the principal debtor and the creditor after his death. He is

however liable for the past transactions. After his death his property cannot be

attached for any new contracts made by the creditor and the principal debtor. His

liability ceases after his death even though notice is not given. As already stated in a

continuing guarantee the same rule will apply. (Section 131)

(iii) By novation: When a new contract of guarantee is made and it replaces the old

contract either between the same parties of the contract or a continuation between at

least one of the old parties with a new parties, the old contract is discharged. The

contract of guarantee made originally is also discharged.(Section 62)

13.12.2 By Act or Conduct of Creditor

The surety is discharged from his liabilities due to a certain act or conduct of the

creditor.

(a) Variance in contract terms: The liability of the surety extends to the terms of the

contract between the three parties i.e., creditor, principal debtor and the surety. Any

variation in terms and conditions must be approved by the parties concerned. If any

changes take place without the consent of the surety, he will be discharged from his

liability after such changes are made (Section 133).

If the contract of guarantee consists of several distinct different duties and obligations

the surety will be discharged from only those duties where there is a variance in the

contract terms.

In a continuing guarantee the surety need not perform his duties subsequent to the

variance in the contract as it will discharge him from his liabilities.

Illustration: Madhwi is a distributor for consumer products. She employs Munish to

sell the goods on commission. Raju is the surety of Munish to Madhwi for giving the

correct amount of money on sell of goods on which the commission becomes due.

After Munish is employed, Madhwi changes the terms of the contract and begins to

pay a salary to Munish on his request without giving any information to Raju. The

surety (Raju) is discharged from his liabilities.

(b) Release of principal debtor: If the principal debtor is released in a contract by the

creditor, the surety is automatically released from his liabilities or by any act omission

of the creditor which has the effect of discharging him from the principal debtor.

Illustration: Rani makes a contract with Tinu to furnish her office for Rs. 5,00,000

within one month. Rani promised to supply the furnishing material for the office Minu

guarantees the performance of Tinu. Rani does not supply the furnishing material.

Minu is discharged from her liabilities of a surety.

(c) Compounding by creditor with principal debtor: When the principal debtor and

the creditor make a composition with each other without the knowledge of the surety.

This applies to a situation in which a variation takes place from the original contract.

In such a situation the surety is discharged from his liability.

Illustration: Akhil borrows a sum of Rs. 50,000 from Shobha. Nirma is a surety for

the payment by Akhil. Before the date of payment Akhil and Shobha change the terms

of the contract by agreeing that Akhil may pay Rs. 30,000 instead of the whole

amount. Nirma is discharged from his liability.

(d) Act or omission impairing surety’s eventual remedy: The surety’s liability is

discharged when the creditor acts or omits to act in a certain way. This action or its

omission becomes inconsistent with the rights of the surety impairing his eventual

remedy against the principal debtor, (section 139). If the creditor does not do his duty

required towards the surety in the contract of guarantee, the surety can be discharged

from his liability.

(e) Loss of security: The surety is discharged from his liability if the creditor loses

the security given to him by the principal debtor. The surety will be also be

discharged if the creditor parts with his security without the consent. However he

will not be discharged if the security of the creditor is lost due to natural calamities,

or an act of an enemy of a country.

CONTRACT OF AGENCY

The term agency has been referred in previous lessons136. It is important to know

what exactly is agency? Agency is a relationship between two people where one is

called the principal and the other is called the agent.

14.1 DEFINITION

According to Section 182 of the Indian Contract Act 1872 “an agent is a person

employed to do any act for another or to represent another in dealings with third

persons. The person for whom such act is done, or who is so represented, is called the

“principal”.

Illustration: Sukrita a resident of Delhi wanted to buy a house in Shimla so she

approached a property dealer and asked him to purchase a house for her. The

property dealer bought a house from Mr Nagendra in Shimla according to the budget

and the other specifications given by Sukrita. In this case Sukrita is the principal, the

property dealer is the agent and Mr Nagendra is the third party.

Who can be an agent?

One can become an agent even without having the contractual capacity therefore even

a minor or a person of unsound mind can become an agent. Whether the agent has the

contractual capacity or does not have the contractual capacity it is the principal who

would be held liable to the third party for the acts of the agent. However it is the agent

with contractual capacity who would be responsible to the principal for his/her acts

and not the agent without contractual capacity therefore it is in the interest of the

principal to appoint only those agents who have the contractual capacity.

Illustration 1: Badruddin a tailor sent his trainee Ramzan who was twenty one-year

old to his customer Neeta to deliver a kurti. On the way Ramzan lost the Kurti. Hence

it is Badruddin who is responsible to compensate Neeta for her lost Kurti and not

Ramzan however Ramzan is responsible to Badruddin for losing the kurti thus

Badruddin if he wants can deduct from Ramzan’s salary the cost of the Kurti or can

take any other action to penalize Ramzan for his irresponsibility.

Characteristics of Agency

Certain essential elements of Agency are given below:

1 Agreement between principal and agent: It is important that there be an

agreement as agency depends on agreement and not necessarily on contract. A

contract cannot be formed with minor because an agreement with a minor is void but

an agreement of agency with minor is possible because between the principal and the

third person any person may be appointed as an agent whether it be a minor or a

person of unsound mind.

Illustration: Rustam a shoe manufacturer appointed Kapil as his agent to sell shoes.

Kapil was just fifteen-year old therefore the agreement between Kapil and Rustam is

a void agreement as a result it cannot become a contract. However the agreement

between them can be treated as a contract of agency because in an agency the agent

can be a minor.

2 Intention of the agent to act on behalf of the principal: it is important that the

person (agent) intends to act on behalf of another (principal) only then agency may

arise.

Illustration: Prabhu a builder appointed Sooga as his agent to sell houses. The

agreement between them can become a contract of agency only when Sooga gives his

consent to Prabhu to become his agent.

3 Whatever the principal can do personally he/she can do it through his/her

agent: The agent can perform all those activities which the principal is liable to

perform however the agent cannot perform acts which are personal in character or are

annexed to public office such as marriage and duty of a magistrate.

Illustration: Ramlal was going to get married so he appointed Shambhu his cousin

brother as his agent to look after his business and all other personal and business

affairs. Shambhu had the right to run the business on behalf of Ramlal but he did not

have the right to marry on behalf of Ramlal.

4 He who does an act through another does it by himself/ herself: The acts of an

agent are the acts of the principal. The principal is liable to the third party for the acts

done by the agent.

Illustration: Radheylal a creditor appointed Ramu as his agent to recover payments

from his debtors. Ramu was sent by Radheylal to recover rupees fifty thousand from

Sangeeta a debtor. Ramu took rupees fifty thousand from Sangeeta and ran away with

it. Hence Radheylal cannot ask Sangeeta to pay the money again. However if Ramu is

a major then Radheylal can take legal action against him.

5 No consideration required for agency: According to section 185 of the Indian

Contract Act no consideration is necessary to create an agency. The fact that the

principal has agreed to be represented by the agent is a sufficient detriment to the

principal to support the contract of agency.

Illustration: Sangeeta was having a headache so she asked her son to go to the

market and get a tablet of disprin. In this case the relation between the mother and

son is that of a principal and agent and for getting a tablet of disprin Sangeeta gave

nothing in cash or kind to her son. Thus there is a contract of agency without any

consideration.

14.2 CREATION OF AGENCY

Agency can be created in any of the following manner:

The agent gets authority from the principal. The authority can be given in two ways.

Either it can be expressly given or the authority can be implied. Section 187 of the

Indian Contract Act defines express and implied authority as under:

1 Express authority: An authority is said to be express when it is given by words

spoken or written. The authority enables the agent to bind the principal by acts done

within the scope of his/her authority. The written contract of agency is the power of

attorney wherein one person empowers the other to represent him/her, or act in his/her

stead for certain purposes.

Illustration: Phulki was a garment trader in Delhi. She used to buy her garments from

Jodhpur. Once it was not possible for her to go to Jodhpur so she asked her salesman

Farhan to go and buy the merchandise from Jodhpur.

2 Implied authority: An implied authority arises from the conduct, situation or

relationship of the parties. It is inferred from the circumstances of the case. The

agency arises when the principal conducts himself / herself towards the person alleged

to be the agent to the third parties in such a manner, as if the principal had conceded

to the appointment of that person as agent. This form of agency can be formed in any

of the following manner

(a) Agency in Emergency: According to section 189 of the Indian Contract Act an

agent has authority in an emergency, to do all such acts for the purpose of protecting

his / her principal from loss as would be done by a person of ordinary prudence in

his /her own case, under similar circumstances. The agent while protecting the

principal from loss may exceed his / her authority thus giving rise to agency of

necessity provided (1) He / She was not in a position to communicate with the

principal (2) Had taken all reasonable care and necessary steps to protect the interests

of the principal. And (3) had acted bona fide.

Illustration: Salman was a tea merchant who used to export tea. He had kept Balram

as his agent whose duty was to take export orders and then deliver the tea from the

storehouse. One day the storehouse caught fire and Balram poured water to

extinguish the fire. Though this was not a part of the duty assigned to him but as an

agent it was his implied duty to protect his principal from loss.

(b) Agency by Necessity: Sometimes in certain urgent circumstances the law confers

an authority on a person to act as an agent for the benefit of another, there being no

opportunity of communicating with that other. Such agency is called agency of

necessity.

3 Agency by Estoppel: At times the principal by his / her conduct creates an

impression in the mind of a third person that the agent has an authority to act on

his/her behalf. In such case the principal is liable towards the third person for the acts

done by the agent, on the ground of the application of the law of estoppel. The basis

of the action is what appears to the third person to be an authority, i.e. apparent or

ostensible authority conferred on the agent.

Illustration: Pankaj had come from America and for few days came to stay with his

friend Rajinder in Bikaner. Rajinder went with Pankaj to the market and got lunch

packed from a nearby restaurant. While he was getting the lunch packed he told the

restaurant owner that Pankaj was like a brother to him. After a couple of days Pankaj

moved out from Rajinder’s house and started staying somewhere else. One day he

went to the same restaurant and got the lunch packed and the restaurant owner did

not charge him anything as he thought that Pankaj was taking the lunch on Rajinder’s

behalf. Later he charged Rajinder for the price of the lunch.

4 Agency by Holding out: Such an agency is based on the “doctrine of holding out”

which is a part of the law of estoppel. In this case also the alleged principal is bound

by the acts of the supposed agent, if he / she has induced third persons to believe that

they are done with his/her authority. But, unlike an “agency by estoppel” “agency by

holding out” requires some affirmative or positive act or conduct by the principal to

establish agency subsequently.

Illustration: Rajni went to the sweetshop and purchased sweets in the meantime her

neighbour’s eight-year old daughter Harshita happened to visit the place. Rajni out of

affection for Harshita asked the shop owner to serve two hot gulabjammuns to

Harshita. Rajni paid for the gulabjamuns. One day again Harshita visited the sweet

shop and the owner served hot gulabjamuns and mistaking her for Rajni’s daughter

did not ask for the money. Later he recovered the price of gulabjamuns from Rajni.

3 Agency by Ratification: Sometimes a person may act as an agent of someone and

does an act on his/her behalf for which he/she did not have the authority and that

someone binds himself / herself for the acts done by the agent then it is called agency

created by ratification.

Illustration 1: Som had a car, which he wanted to sell. He was not at home when a

buyer came to see the car. Som’s son Rahul showed the car to him and without asking

his father finalized the deal for rupees fifty thousand. After coming home Som gave

his consent to the deal as a result agency was created by ratification.

Some of the essential elements of Ratification are as follows:

(a) The principal must be in existence at the time of the contract: It is very

important that the principal is in existence at the time when original contract is made

because rights and obligations cannot be attached to a non-existent person. Thus

contracts entered into by promoters of a company before the company is incorporated

cannot be ratified by it after it comes into existence.

Illustration: A promoter of a company (to be incorporated) purchased a land on

company’s behalf. He purchased the land only by paying half the amount and

promised that the company would pay the balance once it is formed. At the time of the

contract the company was not in existence therefore the promoter cannot be

considered as the agent of the company and company is not bound to pay the balance

once it comes into existence (incorporated).

(b) The agent must purport to act as agent for a principal who is in

contemplation: The agent must expressly contract with the third party as an agent of

the principal. The principal must be named or must be identifiable.

Illustration: Dr Sanjeev went to a property dealer to buy a house. The property dealer

showed him a house and Dr Sanjeev liked it and showed his willingness to buy it

however the property dealer did not disclose the identity of the owner of the house.

Hence contract of agency could not be formed.

(c) The principal must have the contractual capacity both at the time of the

contract and at the time of ratification: The principal must have the contractual

capacity both at the time of original contract and at the time of ratification.

Illustration: Sapna was suffering from mental sickness and was declared mentally

unsound by the doctors. She went to a property dealer and asked him to sell her

house. The property dealer on her behalf finalized a deal with a buyer. The property

dealer cannot act as an agent of Sapna because Sapna is of unsound mind so she is

incapable to become principal.

(d) Ratification must be with full knowledge of facts: The principal must have full

knowledge of all the material facts of the contract, which he /she is to ratify or the

principal must give an unqualified acceptance where he/she intends to ratify the

contract whatever be the facts.

Illustration: Gunia’s mother wanted a new saree to wear in a party. Gunia who was a

minor went to a showroom and bought a saree on credit. She showed the saree to her

mother and told her the price but the mother did not approve the transaction. Hence

Gunia’s mother did not ratify the agreement of agency and so agreement between

Gunia and the shopkeeper was revoked.

(e) Ratification must be done within reasonable time of the act that is to be

ratified: Ratification to be effective must be made within a reasonable time after the

original contract has been made. If the time has been expressly fixed for the

performance of the contract then ratification must be made within that time.

Illustration: Saroj promised to sell his brother’s house to Mr. Kripashankar and

informed her brother about the deal. Her brother asked her to give him sometime to

think. He gave his approval after four months. The agreement between Saroj and Mr.

Kripashankar had already lapsed because the contract of agency was not ratified

within a reasonable time.

(f) The act to be ratified must be lawful and not void or illegal or ultra vires in

case of a company: It is important that the object and the consideration of the

agreement entered into by the agent and the third party be lawful. The principal

cannot ratify an unlawful agreement.

Illustration: Somnath had a fight with his neighbour and he was very upset about it.

His friend Shyam came to know of his problem and on his behalf hired some goons to

bash up Somnath’s neighbour. Somnath could not ratify the agreement between

Shyam and the goons because the object of the agreement was unlawful.

(g) The whole transaction must be ratified: Ratification must be of the whole

transaction. The principal cannot ratify a part of the transaction and reject the rest of

it. He/she cannot accept the benefits and reject the burdens. Either he/she rejects the

whole transaction or accepts (ratifies) the whole transaction.

Illustration: Roopwati used to sell cosmetics and bags. She hired an agent Neelam to

sell the same in some other locality. Neelam had an agreement with Shalu a buyer

who was ready to buy cosmetics and bags if she was given a discount of forty percent.

Neelam agreed to sell the articles at a discount of forty percent after getting the

approval from Roopwati. Roopwati gave her approval to sell only the cosmetics at the

discounted rate and not the bags. The agreement was not ratified because Roopwati

accepted only one part of the transaction and not the other part.

(h) Ratification must not injure the third party: Ratification cannot be effective

where its effect is to subject a third person to damages, or terminate any right or

interest of a third person.

Illustration: Mr. Singla a sweet shop owner had prepared lots of sweets during

diwali. After diwali lots of sweets were left unsold and some of them had become stale

and unhygienic to eat. Mohan had a party at his house and ordered sweets from Mr

Singla’s shop. Kishan a helper at the shop took Mohan’s order and agreed to send the

required number of sweets. He was sending the stale sweets. Mr Singla was not to

ratify the agreement because it was injurious to Mohan the third party.

(i) Ratification is tantamount to prior authority: ratification relates back to the

date when the act (contract) was done by the agent which means that agency comes

into existence from the moment the agent first acted and not from the time when the

principal ratified the act (contract).

Illustration: Jagan entered into a contract to buy a car from Pawan on behalf of his

brother Chandan on 1st February 2008. Pawan was at that time in Agra and was not

aware of the contract. He returned on 20th February 2008. After coming he ratified

the contract of agency entered into by his brother Jagan. Though Pawan came to

know of the agreement on the 20th February but he ratified the contract from 1st

February 2008.

14.3 AGENT’S AUTHORITY

Authority of an agent means his/her capacity to bind the principal to third parties. The

agent can bind the principal only when he/she acts within the scope of his/her

authority (Section 226). The types of authorities are as follows:

Actual Authority: Actual authority is the acts, which have been assigned to the agent

by the principal either expressly (in words spoken or written) or impliedly (inferred

by circumstances of the case or the ordinary course of dealings) and thereby bind the

principal to third party.

Illustration: Reenu a garment manufacturer in Punjab appointed Mr. Yadav as her

agent to look after her business in the southern states of India. She gave him the

freedom to take decisions only in case of selling the goods for any other case he was

suppose to consult Reenu before taking decision.

Ostensible or Apparent Authority: When an agent is employed for a particular

business, persons dealing with him/her can presume that he/she has authority to do all

such acts as are necessary or incidental to such business. Such authority is called

Ostensible / apparent Authority. If the act of an agent is in excess of his/her actual

authority, but within the scope of his/her ostensible authority, the principal will be

bound by the act of the agent.

Illustration: Reenu a garment manufacturer in Punjab appointed Mr. Yadav as her

agent to look after her business in the southern states of India. She gave him the

freedom to take decisions only in case of selling the goods and for any other matter he

was suppose to consult Reenu before taking decision. For selling the goods Mr. Yadav

had to take a shop on rent and he took the decision of renting a shop without

consulting Reenu. Though renting of a shop was not the actual authority given to Mr

yadav by Reenu but renting was incidental to selling the goods that was within his

actual authority.

Authority in emergency: In an emergency an agent has the authority to do all such

acts for the purpose of protecting his/her principal from loss as would be done by a

person of ordinary prudence in his/her own case under similar circumstances

Illustration: Jaspinder a garment manufacturer in Punjab appointed Mr. Yadav as

her agent to look after her business in the southern states of India. She gave him the

freedom to take decisions only in case of selling the goods and for any other case he

was suppose to consult her before taking decision. However few days later Jaspinder

had a heart attack and she was bed ridden. Mr Yadav had no other option but to take

decisions on all matters which had to do with the running of the business without

consulting Jaspinder.

14.5 RIGHTS AND DUTIES OF AN AGENT

Duties of an agent

The agent has the following duties towards the principal:

(1) Duty to follow principal’s directions or customs: According to Section 211 of

the Indian Contract Act the first duty of every agent is to act within the scope of the

authority conferred upon him/her and performs the agency according to the directions

given by the principal. When the agent acts otherwise and loss is sustained the agent

must make it good to the principal and if any profit accrues then the agent must

account for it.

Illustration: Ram asked his sister Lochina to book rail tickets in second class AC

from Delhi to Assam. Lochina couldn’t get reservation in second class AC so she

booked tickets in First class AC. Ram had not asked her to book tickets in first class

AC therefore Sulochna had the option to either pay the extra money on the ticket from

her pocket or cancel the ticket and bear the loss of cancellation herself.

(2) Duty to carry out the work with reasonable skill and diligence. According to

Section 212 of the Indian Contract Act the agent must carry the work of agency with

reasonable diligence and to the best of his/her skill.

Illustration: Jyotsna asked her friend to help her buy a second hand car. Her friend

without doing much research bought a second hand car without test drive and without

checking the parts of the car. After the purchase the car did not start. Hence Jyotsna

could sue her friend for not working with reasonable diligence and to the best of his

ability while selecting the car.

(3) Duty to render accounts: According to Section 213 of the Indian Contract Act it

is the duty of an agent to keep proper accounts of his/her principal’s money or

property and render them to him /her on demand, or periodically if so provided in the

agreement.

Illustration: Joseph had a business, which was running all over India. He appointed

an agent to look after his business in the eastern part of India. It was the agent’s duty

to keep proper accounts and hand over the money whenever Joseph demanded.

(4) Duty to communicate: According to section 214 in case of any difficulty the

agent should communicate with his/her principal and seek instructions from him/her

before taking any steps in facing the difficulty or emergency.

Illustration: Jyotna wanted to buy a laptop. She asked her brother to buy one for her.

She had given him a budget of rupees fifty thousand. Her brother went to buy the

laptop but couldn’t find any laptop as per his liking within the budget. He liked a

laptop, which was worth rupees seventy thousand. As this was a difficult situation so

he rang up Jyotsna and asked her if he could buy the laptop for seventy thousand.

Jyotna permitted him to buy the laptop. Hence Jyotna is liable to pay her brother the

extra money incurred on the purchase.

(5) Duty not to deal on his/her own account: According to Section 215 and 216 the

agent must not deal on his /her own account that means that he must buy or sell goods

only on behalf of his/her principal. If the agent violates this rule then the principal

may repudiate the transaction and can also claim from the agent any benefit, which

may have resulted to the agent from the transaction.

Illustration: Sonpari had hired an agent to sell purses. The agent was to sell purses

on Sonpari’s behalf. However the agent started selling the purse as her own and

taking the share of profit, which actually belonged to Sonpari. Hence the agent is

liable to return any such monetary profit she made on the transaction to Sonpari.

(6) Duty not to make any profit out of his/her agency except his/her

remuneration: According to section 217 and 218 an agent must not make any secret

profit out of the agency. The agent must pay to his/her principal all money, which

he/she may have received on principal’s account.

Illustration: Jamshed had asked his nephew Rahim to help him sell carpets. Rahim

was selling carpets at a price higher than what Jamshed had quoted. He was keeping

the excess profit with him. In this case Rahim was cheating Jamshed therefore

Jamshed could repudiate the contract and sue Rahim for the profit he made secretly.

(7) Duty on termination of agency by principal’s death or insanity: According to

section 209 when an agency is terminated by the death of the principal or due to

his/her mind becoming unsound, the agent must on behalf of the legal representatives

of the principal take all reasonable steps for the protection and preservation of the

interests entrusted to him/her.

Illustration: Shyamnath had his brother helping him in his firm. Shyamnath got an

attack of paralysis and was bed ridden. It was now the duty of his brother to take all

possible steps to protect and preserve the interests entrusted to him by Shyamnath.

(8) Duty not to delegate authority: According to section 190 subject to certain

exceptions150 an agent cannot delegate his/her authority to another person. He/she

has to perform all the work himself / herself.

Illustration: Rakesh asked his friend Sonu to escort his mother from the railway

station. Sonu asked his brother Monu to get Rakesh’s mother from the station. Sonu

did not have a right to delegate his work to Monu.

Rights of an agent:

The agent has the following rights against the principal:

(1) Right of retainer: According to section 217 of the Indian Contract Act the agent

has the right to retain out of sums received on account of the principal for the money

due to himself/ herself in respect of his /her remuneration or advances made or

expenses properly incurred by him in conducting the business of agency.

Illustration: Rakesh a publisher hired an agent Paul to sell books. Paul was to take a

commission of five percent on every sale. Paul had a right to deduct his commission

from the total sales he made before handing over the proceeds to Rakesh.

(2) Right to receive remuneration: According to section 219 and 220 the agent is

entitled to receive his/her agreed remuneration and if nothing is agreed, to a

reasonable remuneration, unless he/she agrees to act gratuitously. In the absence of

any special contract the right to claim remuneration arises only when the agent has

done what he/she had undertaken to do. The agent can claim remuneration once the

work has been completed even though the contract is not executed on account of

breach either by the principal or the third party.

Illustration: Rakesh a publisher hired an agent Paul to sell books. Nothing was

decided about the terms of remuneration to be given to Paul. Paul was able to sell

fifty books and he returned all the proceeds he had made by selling books to Rakesh.

However Paul had a right to claim a reasonable amount of remuneration from

Rakesh.

(3) Right of lien: According to section 221 of the Indian Contract Act an agent has

the right to retain goods, papers and other property, whether movable or immovable,

of the principal received by him/her until the amount due to himself/herself for

commission, disbursements and services in respect of the same has been paid or

accounted for to him / her. The lien is a particular lien but by a special contract the

agent may have a general lien151.

Illustration: Rakesh a publisher hired an agent Paul to sell books. Nothing was

decided about the terms of remuneration to be given to Paul. Paul was able to sell

fifty books and he returned all the proceeds he had made by selling books to Rakesh.

Rakesh did not pay any remuneration / commission to Paul. Paul had a right to retain

the unsold books till his remuneration was paid.

(4) Right to be indemnified: According to section 222 of the Indian Contract Act an

agent has all the right to be indemnified against the consequences of all lawful acts

done by him/her in exercise of the authority conferred upon him/her. The agent also

has a right to be indemnified against the consequences of acts done in good faith.

Though it turns out to be injurious to the rights of the third persons (section 223).

Illustration: Ramsingh wanted to sell his scooter. He did not have time so he asked

his brother Vishal to sell the scooter. Vishal sold the scooter to Mr. Goswami for

rupees ten thousand. Mr Goswami was not satisfied with the deal and he wanted to

cancel the deal. Vishal did not cancel the deal so Mr Goswami sued Vishal for giving

him a defective scooter. It was the duty of Ramsingh to indemnify his brother’s act.

(5) Right to compensation: According to section 225 the agent has the right to be

compensated for injuries sustained by him/her due to the principal’s neglect or want

of skill.

Illustration: Sangram used to manufacture crackers. Sumeet had taken agency of

selling crackers for Sangram. The crackers, which Sumeet took to his shop from

Sangram were not properly packed. On the way Sumeet lit a cigarette and one of

cracker caught fire. Sumeet received burn injuries. Hence it was Sangram’s duty to

compensate Sumeet for his injuries.

(6) Right of stoppage of goods in transit: An agent has a right to stop the goods in

transit to the principal if he/she has bought goods either with his/her own money or by

incurring a personal liability for the price and the principal has become insolvent.

Illustration: Somnath had taken agency to sell readymade garments from Aloknath.

He used to also buy raw material for making readymade garments on behalf of

Somnath. Aloknath had already made a delivery of raw material by truck to Somnath

when he heard that Somnath had turned insolvent. Aloknath stopped the goods in

transit after hearing the insolvency of Somnath.

14.7 TERMINATION OF AGENCY

An agency can be terminated or can be brought to an end by any of the following

ways:

1 By act of the parties

2 By operation of law

Agency can be terminated by the act of the parties in the following ways:

(1) By Revocation of Agent’s authority: According to section 203 the principal can

revoke the authority of the agent at any time before the agent has exercised his/her

authority so as to bind the principal, unless the agency is irrevocable (agency cannot

be terminated).

Illustration: Aslam took the agency of selling dolls, which Bonney used to make.

Aslam took twenty dolls but before he could sell any dolls Bonney terminated the

agency.

(2) By Agreement: An agency can be terminated at any time by mutual agreement

between the principal and the agent.

Illustration: Aslam took the agency of selling dolls, which Bonney used to make.

Aslam took twenty dolls and was able to sell only two dolls. Bonney wanted to cancel

the agency. He approached Aslam and after paying his share of remuneration for

selling two dolls both of them mutually agreed to terminate the agency.

(3) By Renunciation by the agent: An agency can be terminated by an express

renunciation by the agent because a person cannot be compelled to continue as agent

against his/her will. According to section 206 the agent must give a reasonable notice

of renunciation to the principal otherwise he/she will be liable to compensate the

principal for any damage resulting thereby. If the agency is for a fixed period and the

agent renounces it without sufficient cause before the expiry of the period, he/she will

have to compensate the principal for the resulting loss, if any.

Illustration: Aslam took the agency of selling dolls, which Bonney used to make.

Aslam took twenty dolls and was able to sell only two dolls. After sometime Aslam

wanted to cancel the agency. He approached Bonney and told him that he would not

like to continue with the agency after a month. This was taken as a reasonable

noticeand the agency was duly terminated with mutual consent after a month.

Agency can also be terminated by operation of law in the following circumstances:

(1) By the completion of the business of agency: According to section 201 an

agency automatically terminates when the purpose for which agency was created is

fulfilled.

(2) By expiry of time: If the agency is for a fixed term, the expiration of the term puts

an end to the agency, even though the business of the agency may not have been

completed.

(3) Death and insanity of the principal or the agent: According to section 201 an

agency is terminated automatically on the death or insanity of the principal or the

agent. After coming to know about the principal’s death or insanity although the

agency terminates but the agent must take all reasonable steps for the protection of the

interests of the principal.

(4) By insolvency of the principal: According to section 201 of the Indian Contract

Act agency terminates when the principal becomes insolvent. The section is silent on

the point whether agency terminates or not when the Agent becomes insolvent.

(5) By destruction of the subject matter: when the agency is created to deal with a

subject matter and when that subject matter gets destroyed the agency automatically

terminates.

(6) By dissolution of a company: When the principal or the agent is an incorporated

company, the agency automatically terminates after the company gets dissolved.

(7) Principal or the agent becoming an alien enemy: If the principal and agent are

nationals of two different countries and a war breaks out between the two countries

the agency gets terminated. If they still continue the agency then they would be called

alien enemies and their relationship of agency will be called unlawful.

Irrevocable Agency:

When the authority given to an agent cannot be revoked its called irrevocable agency.

An agency becomes irrevocable in the following circumstances:

(1) Where the agency is coupled with interest: According to section 202 if the agent

has himself / herself an interest in the subject matter of agency, the agency is said to

be coupled with interest. Such an agency is created with the object of protecting or

securing any interest of the agent. It cannot be applied to a case where an agent’s

interest arises after the creation of agency.

Illustration: Vipin had given loan of rupees ten thousand to Sekunder. Sekunder was

unable to pay the loan so in consideration he appointed Vipin as his agent to collect

rents due from his tenants for adjusting the loan amount. In this case the agent Vipin

has an interest in the subject matter of agency (collection of rent). Hence agency

becomes irrevocable.

(2) Where the revocation of agency would cause a personal loss to the agent:

Where the agent has in pursuing his/her authority contracted a personal liability, the

agency becomes irrevocable and the principal cannot revoke the agent’s authority

unilaterally.

Illustration: Narain asked his brother Sindh to buy a sofa set for his new house.

Hepromised to pay the money later. Sindh bought the sofa set and paid the money

from his account. Hence Narain cannot revoke the agency.

(3) When the authority has been partly exercised by the agent: According to

section 204 the principal cannot revoke the authority after the agent has partly

exercised his/her authority, so far as regards such acts and obligations as arise from

acts already done in agency.

Illustration: Sukhmani asked Govind her neighbour to prepare five dishes for the

dinner, which was being hosted at her place. Govind purchased all the ingredients

needed for the preparation and started preparing the dishes. Sukhmani cannot revoke

the contract of agency because the authority has already been partly exercised by

Govind.