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INDIAN CONTRACT ACT

Introduction

The law relating to contracts in India is contained in the Indian Contract Act, 1872.
The Act was passed by British India and is based on the principles of English
common law. It is applicable to all the states of India except the state of Jammu &
Kashmir. It determines the circumstance in which promise made by the parties to a
contract shall be legally binding on them. All of us enter into a number of contracts
everyday knowingly or unknowingly. Each contract creates some rights and duties
on the contracting parties. Hence this legislation, the Indian Contract Act 1872,
being of skeletal nature, deals with the enforcement of these rights and duties on
the parties in India.

History of Indian Contract Act

It was enacted mainly with a view to ensure reasonable fulfilment of expectation

created by the promises of the parties and also enforcement of obligations
prescribed by an agreement between the parties. The Third law commission of
British India formed in 1861 under the stewardship of chairman Sir John Romilly,
with initial members as Sir Edward Ryan, R. Lowe, J.M. Macleod, Sir W. Erle
( Succeeded by Sir, W .M. James ) and justice Wills ( succeeded by J. Henderson ),
had presented the report on contract law for India as Draft Contract law (1866). The
Draft Law was enacted as The Act 9 of Indian Contract Act, 1872 on 25 April 1872
and the Indian Contract Act, 1872 came into force with effect from 1 September
1872.

Role of East India Company

Before the enactment of the Indian Contract Act, 1872, there was no codified law
governing contracts in India. In the Presidency Towns of Madras, Bombay and
Calcutta law relating to the contract was dealt with the Charter granted in 1726 by
King George I to the East India Company. Thereafter in 1781, in the Presidency
Town, Act of Settlement passed by the British Government came into force.

Act of settlement required the Supreme court of India that questions of inheritance
and succession and all matters of contract and dealing between party and party
should be determined in case of Hindu as per Hindu law and in case of Muslim as
per Muslim law and when parties to a suit belonged to different persuasions, then
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the law of the defendant was to apply. In outside Presidency Towns matters with
regard to the contract was mainly dealt with through English Contract Laws: the
principle of justice, equity and good conscience was followed.

What is Contract?

According to section 2 (h) of the India Contract Act,’’ An agreement enforceable by

law is a contract ‘.

Thus for the formation of a contract, there must be –

1. An agreement, and
2. The agreement should be enforceable by law.

All agreements are not enforceable by law and therefore, all agreements are not
contracts. Some agreement not enforceable by law.

For example- An agreements to sell a radio set any be a contract, but an

agreement to go to see a movie may be a mere agreement not enforceable by law.

Illustration – if the agreement between the farmer and the tractor owner is given
force under the law, then it becomes a contract.

Agreement

According to section 2 (e) defines agreement as, “Every promise and every set of
promise, forming the consideration for each other, is an agreement.”

In agreement, there is a promise from both sides. For example, A promises to

deliver his watch to B and in return B promises to pay a sum of Rs. 2000 to A, there
is said to be an agreement between A and B.

A promise is a result of an offer (proposal ) by one person and its acceptance by the
other. For example – when A makes a proposal to sell his watch to B for Rs. 2,000
and B accept his proposal, it results from a promise between the two persons.
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Illustration – Such a promise between the tractor owner and the farmer which
involves a consideration of an Rs. 1000 is called an agreement.

The promise in the Indian Contract Act

According to section 2 (b) defines a promise as, When the person to whom the
proposal is made, signifies his assent thereto, the proposal is said to be accepted. A
proposal, when accepted, becomes a promise.’’

Thus, when there is a proposal from one side and the acceptance of that proposal
by the other side, it results in a promise. This promise from the two parties to one
another is known as an agreement. The person who makes the proposal is called
the promisor. The person who accepts such a promise is called the promise.

Illustration – if in the given example, the farmer accepts the proposal of the tractor
owner to transport his produce from the farms to the market, the proposal then
becomes a promise.

“All contracts are agreements but all agreements are not contracts”
because agreements of moral, religious or social nature e.g.., a promise to lunch
together at a friend’s house or to take a walk together is not contracted because
they are not likely to create a duty enforceable by law for the simple reason that
the parties never intended that they should be attended by legal consequences.

In business agreements the presumption is usually that the parties intend to create
legal relation for e.g. An agreement to buy certain specific goods at an agreed price
e.g., 10 bags of wheat at Rs. 500 per bag is a contract because it gives rise to a
duty enforceable by law, and in case of default on the part of either party action for
breach of contract could be enforced through a court provided other essential
elements of a valid contract as laid down in Section 10 are present, namely, if the
contract was made by the free consent of the parties competent to contract, for a
lawful consideration and with a lawful object.

The various agreements may be classified into two categories :

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1. Agreement not enforceable by law (Any essential of a valid contract is not

available )
2. An agreement enforceable by law(All essentials of a valid contract are
available )

Thus we see that an agreement may be or may not be enforceable by law, and so
all agreement does not contract. Only those agreements are contracts, which are
enforceable by law, In short.

Contracts = Agreement = Enforceability by law

Hence, we can conclude “All contracts are agreement, but all agreements are not
contracts .”

Essentials of contract

According to of section 10, as All agreement are contracts if they are made by the
free consent of parties competent to contract, for a lawful consideration and with a
lawful object, and are not hereby expressly declared to be void. Nothing herein
contained shall affect any law in force in India, and not hereby expressly repealed,
by which any contract is required to be made in writing or in the presence of
witnesses, or any law relating to the registration of documents.

ESSENTIALS OF VALID CONTRACT

Offer + Acceptance = Promise + Consideration = Agreement

+Enforceability by law Contract

The essential elements of a valid contract are as follows :

Lawful offer and Acceptance

These must be a ‘ lawful offer ‘ and a ‘ lawful acceptance ‘ of the offer, thus
resulting in an agreement. The adjective ‘ lawful ‘ implies that the offer and
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acceptance must satisfy the requirements of the Indian Contract Act in relation
thereto.

Intention to create legal relation

There must be intention among the parties that the agreement should be attached
by legal consequences and create legal obligations. Agreements of social or
domestic nature do not contemplate legal relations, and as such, they do not give
rise to a contract.

For example:

An agreement to dine at a friend’s house is not an agreement intended to create

legal relations and therefore is not a contract.

An agreement between husband and wife also lack the intention to create a legal
relationship and thus do not result in a contract.

Suraj promises his wife Megha to get her jewellery if she will make a special dish.
Megha made a dish but Suraj did not bring the jewellery for her. Megha cannot
bring an action in a court to enforce the agreement as it lacked the intention to
create legal relation.

CASE LAW: BALFOUR V/S BALFOUR

Where the defendant was a civil servant stationed in Ceylon. He and his wife were
enjoying leave in England. When the defendant was due to return to Ceylon, his
wife could not accompany him because if her health. The defendant agreed to send
her Rs. 300 a month as maintenance expenses during the time they were thus
forced to live apart. She sued for breach of this agreement. Her action was
dismissed on the ground that no legal relation had been contemplated and
therefore, there was no contract.

Lawful consideration

The third essential element of a valid contract is the presence of consideration.

Consideration has been defined as “the price paid by one party for the promise of
the other.” An agreement is legally enforceable only when each of the parties to it
gives something and gets something. The something given or obtained is the price
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for the promise and is called ‘consideration’. But only those considerations are valid
which ‘lawful’.

According to Section 23, the consideration is unlawful if:

1. Law forbids it;

2. It is fraudulent;
3. Involves or implies injury to the person or property of another;
4. It is of such a nature that, if permitted it would defeat the provision of any
law;
5. Is immoral or is opposed to public policy.
6. Capacity of parties

The parties to an agreement must be competent to contract; otherwise, it cannot be

enforced by a court of law. In order to be competent to contract according to
section 11 the parties must be :

A. Of the age of majority;

B. Of sound mind:
C. Must not be disqualified from contracting by any law to which they are
subject.

Thus, if any of the parties to the agreement suffers from minority, lunacy, idiocy,
drunkenness, etc.

Free consent

Consent’ means that the parties must have agreed upon the same thing in the
same sense ( section 13). Free consent of all the parties to an agreement is another
essential element of a valid contract.

There is an absence of ‘free consent’. If the agreement is induced by any of the

following factors:

1. Coercion
2. Undue influence,
3. Fraud
4. Misrepresentation, or
5. Mistake
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If the agreement is vitiation by any of the first four factors, the contract would be
voidable and cannot be enforced by the party guilty of coercion, under influence,
etc. The other party ( i.e., the aggrieved party) can either reject the contract or
accept it, subject to the rules laid down in the act. But, if the agreement were
induced by mutual mistake that is material to the agreement, it would be void.

Lawful object

For the formation of a valid contract, it is also necessary that the parties to an
agreement must agree for a lawful object.

The object for which the agreement has been entered into must be fraudulent or
illegal or immoral or opposed to public policy or must not imply injury to the person
or property of another (section 23 ).

If the object is unlawful for one or the other of the reason mentioned above the
agreement is void.

For example – When a landlord knowingly lets a house to a prostitute to carry on

prostitution, he cannot recover the rent through a court of law.

Oral, Writing and Registration

According to the Indian contract act, a contract may be oral or in writing. But in
certain special cases, it lays down that the agreement, to be valid, must be in
writing or/ and registered.

For example – under section 25 of the act – It requires that an agreement to pay a
time-barred debt must be in writing and an agreement to make a gift for natural
love and affection must be in writing and registered.

Similarly, certain other cats also require writing or/and registration to make the
agreement enforceable by law, which must be observed.
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Illustration – The agreement for a sale of immovable property must be in writing and
registered under the Transfer of Property Act, 1882 before they can be legally
enforced.

Certainty

Section 29 of the contract act provided that, ‘Agreement’, whose meaning is not
certain, or capable of being made certain, are void.’’

In order to give rise to a valid contract, the terms of the agreement must not be
vague or uncertain. It must be possible to ascertain the meaning of the agreement,
for otherwise, it cannot be enforced.

Illustration- A agrees to sell B “a hundred tons of oil”. There is nothing whatever to

show what kind of oil was intended. The agreement is void for uncertainty.

Possibility of performance

Another essentials feature of a valid contract is that must be capable of performing.

Section 56 lays down that, “An agreement to do an act impossible in itself is void.”
If the act is impossible in itself, physically or legally, the agreement cannot be
enforced at law.

Illustration- Ajay agrees with Vijay to discover treasure by magic. The agreement is
not enforceable because it is physically impossible to perform.

Not expressly declared a void agreement

The agreement must not have expressly declared to be void under the Indian
Contract Act. Section 24 – 30 specify certain types of agreements, that will have
expressly declared to be void.
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For example-

1. An agreement in restraint of marriage, ( section 26)

2. The agreement in restraint of trade, and ( section 27)
3. An agreement by way of the wager (section 30)

It is expressly declared as void agreement. We shall discuss each of the void

agreements in detail in the next chapter.

Whereas it is expedient to define and amend certain parts of the law

relating to contract;

it is hereby enacted as follows:

PRELIMINARY

Section 1. Short title.

This Act may be called be the Indian Contract Act, 1872.

Extent, commencement– It extends to the whole of India; and it shall come into
force on the first day of September, 1872. (The words “except the State of Jammu
and Kashmir” omitted by Act 34 of 2019, s. 95 and the Fifth Schedule (w.e.f. 31-10-
2019).)

Enactment repealed:

Saving– Nothing herein contained shall affect the provisions of any Statute, Act or
Regulation not hereby expressly repealed, nor any usage or customs of trade, nor
any incident of any contract, not inconsistent with the provisions of this Act.

Section 2. Interpretation-clause.

In this Act the following words and expressions are used in the following senses,
unless contrary intention appears from the context:
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(a) When one person signifies to another his willingness to do or to abstain from
doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal;

(b) When a person to whom the proposal is made, signifies his assent thereto, the
proposal is said to be accepted. A proposal, when a accepted, becomes a promise;

(c) The person making the proposal is called the “promisor“, and the person
accepting the proposal is called “promisee”

(d) When, at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence or promise is called a
consideration for the promise;

(e) Every promise and every set of promises, forming the consideration for each
other, is an agreement;

(f) Promises which form the consideration or part of the consideration for each
other, are called reciprocal promises;

(g) An agreement not enforceable by law is said to be void;

(h) An agreement enforceable by law is a contract;

(i) An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract;

(j) A contract which ceases to be enforceable by law becomes void when it ceases
to be enforceable.
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Essential elements of a valid contract

According to section 2(g) of Indian contract Act, 1872, “a void agreement is an

agreement which is not enforceable by law”. Thus a void agreement refers to the
agreement that is invalid agreement which cannot be legally binding. In such cases,
the parties are not entitled to the benefits assumed at the time of execution of
agreement.

Section 10 states conditions which are required for a contract to be valid.

Most people assume that once one party has made an offer and the other party has
accepted, a contract has been formed. However, there is more to a valid contract
than this, and it has nothing to do with the formalities of a contract. A contract can
be formal or informal, written or even oral.

There are the 6 elements of a valid contract.

A contract is valid and legally binding so long as the following six essential elements
are present:

1. Offer
2. Acceptance
3. Consideration
4. Intention to create legal relations
5. Legality and capacity
6. Certainty

Let’s define these essential elements one by one :---

Offer

Offer and acceptance analysis form the basis of contract law and the formation of a
valid contract. Developed in the 19th century, the offer and acceptance formula
identifies the point of formation, where the parties are of ‘one mind’.
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An offer is a proposal constituting specific terms for one party to enter into an
agreement with another party, which is essential to the formation of an enforceable
contract.

An offer is the first step in the formation of a contract, it marks the beginning of
contractual obligation between the parties. As is a known fact that Acceptance can
only be made to a prior offer, an offer is essential for the formation of a contract.

An offer is defined under Section 2(a) of The Indian Contract Act (hereinafter, ICA)
as:

When one person signifies to another his willingness to do or to abstain from doing
anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.

The words Proposal and Offer can be used interchangeably for Brevity. The person
who makes the promise is called the “Promisor”, and the person to whom the offer
is made is called the “Promisee”. From the definition itself, it can be construed that
an offer can be both positive as well as negative, i.e.- the doing of an act as well as
the “not doing” of an act.

Types of Offer

An offer can be of many types, ranging across the spectrum. There are basically 7
kinds of offers:

1. Express offer
2. Implied offer
3. General offer
4. Specific Offer
5. Cross Offer
6. Counter Offer
7. Standing Offer

A. Express offer and Implied offer

Section 9 of The ICA defines both of them as: In so far as the proposal or
acceptance of any promise is made in words, the promise is said to be express. In
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so far as such a proposal or acceptance is made otherwise than in words, the

promise is said to be implied.

Therefore, any offer that is made with words, it may be regarded as express. Any
promise that is made otherwise than in words is implied. A bid at an auction is an
example of an Implied offer. A case in this regard is Upton-on-Servern RDC v.
Powell, wherein the defendant called a fire brigade assuming that those services
would be free to him, however it was found that his Farm did not come under that of
Upton. The court held that the truth of the matter is that the Defendant wanted the
services of Upton, he asked for the services of Upton and in response to that they
offered their services and they were rendered on an implied promise to pay for
them.

In Ramji Dayawala & Sons (p) Ltd v. Invest Import, a case between an Indian
and Yugoslavian party the notice for revocation of an arbitration clause in the
contract between the parties was made by the Indian party, to which the other
party gave no reply. It was held that this would amount to an implied acceptance
i.e.- the arbitration clause was deleted from the contract, and a suit would lie in the
court of law. Similarly entering into an omnibus also amounts to implied
acceptance, same as consuming edibles at a self-service restaurant. Therefore in
simpler terms a contract that is entered into because of actions on the offerors part,
may be referred to as an implied offer, any contract entered into otherwise is an
express offer.

B. General Offer

A General Offer is an offer that is made to the world at large. The genesis of a
General Offer came about from the Landmark case of Carlill v. Carbolic Smoke
Ball Co. A company by the name Carbolic Smoke Ball offered through an
Advertisement to pay 100 Pounds to anyone who would contract increasing
epidemic Influenza, colds or any disease caused by cold after taking its Medicine
according to the prescribed instructions. It was also added that 1000 Pounds have
been deposited in Alliance bank showing our sincerity in the matter. One customer
Mrs Carlill used the medicine and still contracted Influenza and hence sued the
company for the reward. The Defendants gave the argument that the offer was not
made with an intention to enter into a legally binding agreement, rather was only to
Puff the sales of the company. Moreover, they also contended that an offer needs to
be made to a specific person, and here the offer was not to any specific person and
hence they are not obliged to the Plaintiff.
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Setting aside the arguments of the Defendant, the bench stated that in cases of
such offers i.e- general offers, there is no need for communication of acceptance,
anyone who performs the conditions of the contract is said to have communicated
his/her acceptance, and moreover, the money deposited by the Defendant in
Alliance Bank clearly shows that they intended to create a legally binding
relationship. Hence the Plaintiff was awarded with the amount. An Indian authority
in this regard is Lalman Shukla v. Gauri Dutt, wherein a servant was sent by his
master to trace his missing nephew. In the meanwhile, he also announced a reward
for anyone finding his nephew, this in itself is an example of an offer that is made to
the world at large and hence a General Offer.

Valid acceptance based on fulfillment of condition

This concept has been given statutory authority under section 8 of the ICA:

Performance of the conditions of a proposal, or the acceptance of any consideration

for a reciprocal promise which may be offered with a proposal, is an acceptance of
the proposal.

This section was applied by YEARS CJ of Allahabad high court in the case of Har
Bhajan Lal v. Har Charan Lal, wherein the father of a young boy who ran from
home issued a pamphlet for a reward for anyone who would find him. The Plaintiff
found him at the railway station and sent a Telegram to his father. The Court held
that the handbill was an offer that was made to the world at large and anyone who
fulfilled the conditions is deemed to have accepted it. In State of Bihar v. Bengal
Chemical and Pharmaceutical Works LTD, the Patna HC held that where the
acceptance consists of an act, e.g- dispatching some goods, the rule that there shall
be no communication of acceptance will come into play.

General offer of continuing nature

When a general offer is of continuing nature, like it was in a carbolic smoke ball
case, it can be accepted by a number of people till it is retracted. However, when a
similar offer requires information regarding a missing thing, it is closed as soon as
the first information comes in.
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C. Specific Offer

A Specific offer is an offer that is made to a specific or ascertained person, this type
of offer can only be accepted by the person to whom it is made. This concept was
seen briefly in the case of Boulton v. Jones, wherein the Plaintiff had taken the
business of one Brocklehurst, the defendant used to have business with
Brocklehurst and not knowing about the change in ownership of business, sent him
an order for certain goods. The Defendant came to know about the change only
after receiving an invoice, at which point he had already consumed the goods. The
Defendant refused to pay the price, as he had a set off against the original owner,
for which the plaintiff sued him.

The Judges gave a unanimous judgement holding the defendant not liable. Pollock
CB held that the rule of law is clear, if you intend to contract with A, B cannot
substitute himself as A without your consent and to your disadvantage. It was also
held that whenever a person makes a contract with a specific personality, a specific
party, so to say, for writing a book, for painting a picture or for any personal service
or if there is any set off due from any party, no one has the authority to come in and
maintain that he is the party contracted with.

D. Cross Offer

When two parties make an identical offer to each other, in ignorance to each other’s
offer, they are said to make cross offers. Cross offers are not valid offers. For
example- if A makes an offer to sell his car for 7 lakhs to B and B in ignorance of
that makes an offer to buy the same car for 7 Lakhs, they are said to make a cross
offer, and there is no acceptance in this case, hence it cannot be a mutual
acceptance.

Basic essentials of a cross offer

Same offer to one another- When the offeror makes an offer to the offeree and the
offeree without prior knowledge makes the same offer to the offeror, then both the
object and the party remain the same.

Offer must be made in ignorance of each other- The two parties must make their
offer in ignorance of each other.
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An important case in this aspect is the English case of Tinn v. Hoffman, the
defendant wrote to the complainant an offer to sell him 800 tons of iron at 69s per
ton, at the same time the complainant also wrote to the defendant an offer to buy
the iron at similar terms. The issue in this case was that, was there any contract
between the parties, and would simultaneous offers be a valid acceptance. The
court held that these were cross offers that were made simultaneously without
knowledge of one another and would not bind the parties.

Here it is imperative to deduce that for a valid contract to be formed there needs to
be an offer and acceptance of the same, whereas in a cross offer there is no
acceptance, but only simultaneous offers being and therefore a cross offer will not
lead to the formation of a contract.

E. Counter offer

When the offeree offers a qualified acceptance of the offer subject to modifications
and variations in terms of the original offer, he is said to have made a counter offer.
A counter offer is a rejection of the original offer. An example of this would be if A
offers B a car for 10 Lakhs, B agrees to buy for 8 Lakhs, this amounts to a counter
offer and it would mean a rejection of the original offer. Later on, if B agrees to buy
for 10 Lakhs, A may refuse. Sir Jenkins CJ in Haji Mohd Haji Jiva v. Spinner, held
that any departure from original offer vitiates acceptance. In other words, an
acceptance with a variation is not acceptance, it is simply a counter proposal which
must be accepted by the original offeror, for it to formulate into a contract.

The Bombay High court gave this decision based upon the landmark judgement of
Hyde v. Wrench, in which an offer to sell a farm for 1000 Pounds was rejected by
the Plaintiff, who offered 950 for it. Subsequently the Plaintiff gave an acceptance to
the original offer. Holding that the Defendant was not bound by a contract, the court
said that the Plaintiff accepted the original offer of buying the farm at the price of
1000 pounds, it would have been a completely valid contract , however he gave a
counter proposal to it, thus rejecting the original offer.

Partial Acceptance

Counter offer also includes within its contours Partial acceptance, meaning that a
party to the contract cannot agree to those conditions of the agreement that favour
him and reject the rest, the acceptance should be of the complete agreement i.e.-
all its parts. In Ramanbhai M. Nilkanth v. Ghashiram Ladliprasad, the plaintiff
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made an application for certain shares in a company with the underlying condition
that he would be made the cashier in its new branch. The Company did not comply
with this and hence the suit. The court held that the Petitioners application for
shares was condition on him being made the cashier and that he would have never
applied for the shares had there been no such condition.

Acceptance of a counter proposal

In Hargopal v. People’s Bank of Northern India LTD, an application for shares

was made on a conditional undertaking by the bank that the applicant would be
made the director of the new branch. The shares were allotted to him without
fulfilling the condition. The applicant did not say anything and took his dividends, a
subsequent suit by him failed as the court held that he through his conduct had
waived the condition. When a counter proposal is accepted the contract arises in
terms of the counter proposal and not in terms of the original contract.

F. Standing offer

An Offer which remains open for acceptance over a period of time is called a
standing offer. Tenders that are invited for supply of goods is a kind of Standing
Offer. In Perclval Ltd. V. London County Council Asylums and Mental
deficiency Committee, the Plaintiff advertised for tenders for supply of goods. The
defendant took the tender in which he had to supply to the company various special
articles for a period of 12 months. In-between this the Defendant didn’t supply for a
particular consignment. The Court held that the Tender was a standing offer that
was to be converted into a series of contracts by the subsequent acts of the
company and that an order prevented pro tanto the possibility of revocation, hence
the company succeeded in an action for breach of contract.

Difference between an offer and Invitation to offer

Although Invitation to Offer is not a type of offer per se, it is imperative to

distinguish both to even construe what an actual offer is. An invitation to offer is an
offer to negotiate, an offer to receive offers, offers to chauffeur. An offer is a final
expression of willingness to get into a contract upon those following terms. The
concept of Invitation to offer was explained in the Privy Council case of Harvey v.
Facey, the Plaintiffs in this asked two questions from the defendant i.e.- Would you
sell me your Bumper Hall pen , telegram me the lowest price? , the Defendant only
gave the answer to the latter question , post which he refused to sell. The Court
held that the defendant was not to sell as he had only answered the second
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question and reserved the same for his first question. Thus, this clearly shows the
distinction between an offer and invitation to offer.

In Adikanda Biswal v. Bhubaneswar Development Authority, when a

development authority made an announcement for allotment of plots on first come
first serve basis on payment of full consideration. An application against this with
full consideration was only considered to be an offer, as the Development authority
only gave an invitation to offer, and the offer can only be formalized into a contract
when it is accepted by the development authority.

Rules regarding display of goods in shops

In Pharmaceutical Society of Great Britain v. Boots Cash Chemists

Southern Ltd., lord GODDARD CJ, said that it would be wrong to say that a
shopkeeper intends to sell everything that is displayed in his shop. Meaning that the
customer makes an offer, to which the shopkeeper has the discretion to accept or
deny. The shopkeeper may say that he doesn’t have enough stock of that good and
therefore may not sell. Similarly, a bankers catalogue of charges is also not an offer,
the auction held by a person is also only an invitation to offer and he may not be
liable for the transportation costs that people may have to pay to come to the place
of auction, in case he cancels at the end moment.

Intention To Create Legal Relationship

Offer should be made with the intention to create a legal relationship. Promisor
intends that he has no intention does not exempt him from his liability. Test to know
‘intention’ can be assessed by knowing the conduct of the parties or what a
reasonable person would think in those surrounding circumstances.

Letter of Intent indicates a party’s intention to enter into a contract on the lines of
the letter.

Case: Balfour vs Balfour 1919

In this case, the husband went with his wife on vacation. At the time of returning
back, the wife got ill and could not accompany the husband. Husband promised to
pay £30 per month as maintenance.
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Husband failed to pay the amount after which this case was filed.

It was held that in this case, there was no intention to create a legal relationship,
and the husband is not liable. It was further held that the same principle is applied
in other close relationships.

Acceptance

Acceptance is an agreement to the specific terms of an offer. Offers do not have to

be accepted through words; they can be accepted through conduct. If someone
purports to accept an offer but accepts on different terms than that of the original
offer, that will constitute a counter-offer rather than an acceptance.

The acceptance must normally be communicated to the offeror – silence cannot be

treated as an acceptance.

The term “Acceptance” has been defined under Section 2(b) of the Indian Contract
Act,1872. According to the Section, an offer or proposal is said to have accepted
when the person to whom the proposal or offer to do or not to do an act is made if
gives his assent to such an act or omission. Therefore, acceptance of the contract is
said to have taken place when the person to whom the offer is made gives his
assent or consent to the terms of the contract. Under the Indian Contract Act,
acceptance can be by following two ways:

1. Implied acceptance:

Acceptance which is not explicitly made by means of speech or writing but, by the
conduct of the person to whom an offer is made. The striking of hammer thrice by
the auctioneer in order to show his acceptance to the offer made by a bidder is an
example of implied acceptance to the offer made by the bidder at an auction to the
auctioneer;

2. Express acceptance:

Acceptance which is made by means of words, oral or written is known as an

express acceptance. For example, A offers B his watch for sale through a mail and A
replies in positive to the offer by email.

Acceptance: absolute and unqualified

Acceptance to be legally enforceable must be absolute and unqualified. Section 7(1)

of the Indian Contract Act provides that in order to turn an offer into an agreement
 20

the acceptance to the offer must be absolute and unqualified. The logic behind the
principle that the acceptance to the offer must be absolute and unqualified is that
when acceptance is not absolute and is qualified it results into a counter offer which
leads to the rejection of the original offer made by the offeror to the offeree. If the
offeree makes any variations in the original terms of the contract proposed to him
and then accepts the contract, such an acceptance would result in the invalidity of
the contract.

For example, if A offers to sell his bike to B for Rupees 10,000. But B persuades A to
sell him the bike for 7,000 rupees to which A denies and if B at any later point of
time agrees to buy the bike for 10,000 rupees. Then A is under no obligations to sell
him the bike as the counteroffer made by B puts an end to the original offer.

It is also important that the acceptance made by the offeree should be in toto, i.e.
acceptance should be given to all the terms and conditions of the offer as
acceptance of only a part of the offer is not a good acceptance under the law. For
example, A makes an offer to B of sale of 30 kg of wheat at Rupees 700 but B
agrees to buy only 10 kg of wheat. Here the acceptance made by B is not in toto
with respect to the terms of the contract and therefore, the acceptance made by B
is no acceptance in the eyes of law and therefore, A is under no obligation to sell
him wheat since there is no contract between them.

Counter proposals

Section 2(a) of the Indian Contract Act defines the meaning of a proposal. According
to the Section, a proposal is signifying of the willingness by a person to another
person to do or abstain from doing an act with the view of obtaining the assent of
another person to such an act or omission. The person who signifies his willingness
to obtain the assent of the other person is said to be an “offeror” and the person to
whom the offer is made is called “offeree”.

Counteroffer or proposal arises when the person to whom an offer is made instead
of accepting it straightway imposes any condition which results in modification or
alteration of the original terms of the contract. The person who makes such
alterations or modifications is said to have made a counteroffer. Counteroffer
results in a rejection of the original offer and as a result, the person who makes the
original offer shall no longer remain bound by the terms of the contract.
 21

Partial acceptance

It is a settled principle of law of contract that the offer which is put before the
offeree should be accepted by him in entirety and he can not accept the offer
partially by agreeing only to the terms of the contract which are favourable to him
while rejecting the rest of the conditions under the offer as an incomplete
acceptance of the offer would result into counter-proposal and therefore, it will not
bind the offeror as there is no binding contract between him and the offeree.

In Ramanbhai M. Nilkanth vs Ghashiram Ladliprasad, an application was

made in a company for certain shares was made on the condition that the applicant
would be appointed as a cashier in the new branch of the company. The company
without fulfilling the condition made an allocation of the shares to the applicant and
demanded the share money from him. The court, in this case, held that the
petitioner’s application for 100 shares was conditional and there was no intention
on the part of the company to accept the terms of the contract in entirety where he
applied for shares until he was appointed as a cashier by the company and
therefore, there was only a partial acceptance of the offer.

Inquiry into terms of proposals

The “Mirror image” rule is the traditional contract law rule under common law.
According to the Rule, the acceptance must be a mirror image of the offer. Attempts
made by the offeree to change or alter the original terms of the offer are treated as
counteroffers as they impliedly indicate the offeree not to be bound by the contract
which is put before him. However, in recent times the attitude of the judiciary
towards the application of the Rule has turned out to be more liberal by holding that
only those variations which directly hit the material terms of the contract are to be
regarded as counteroffer which is a result of the purported acceptance.

Even under the Mirror image rule, no rejection of the offer is considered to have
taken place if the offeree merely inquires the terms of the contract without showing
any intention of rejecting the offer. Practically, differentiating between a
counteroffer and making an enquiry as to the terms of the contract. However, the
fundamental issue which has to be considered while making the differentiation is
whether the offeree objectively indicates his intention of not to abide by the terms
of the contract.

Acceptance with subsequent condition

 22

In the law of contract, the term “condition” is used in a loose sense and it is used
synonymously as “terms”, ‘’condition” or ”clause”. In its proper sense, the term
condition means some operative term subsequent to acceptance and prior to
acceptance, it is a fact on which the rights and duties of the parties to the contract
depend on. The fact can be any act or omission by any of the contracting parties, an
act of the third party or happening or not happening of any natural event.
Conditions are of three types, which are as follows:

1. Express condition: In an express condition, certain facts can operate as

condition as it has been expressly agreed upon by the parties to the contract;
2. Implied condition: When certain facts which operate as a condition are not
expressly mentioned by the parties but can be inferred by the conduct of the
parties to contract is known as an implied condition;
3. Constructive condition: When the court believes that the parties to a contract
must have intended to operate certain conditions because the court believes
that the Justice requires the presence of the condition. These conditions are
known as constructive conditions.

A contract comes into force by the acts or conduct of one party to the other party.
The acts or conduct of the party can be turned into a promise only by meeting of
mind or an agreement between both the parties. An acceptance that carries a
subsequent condition may not have the effect of counter-proposal. Thus, where a
person ‘A’ accepted the terms of the contract for the sale of a good by
accompanying the acceptance with the warning that if money was not delivered to
him by a particular date then, the contract will remain repudiated. The acceptance
of the offer would not be deemed to be a counter-proposal.

Acceptance of counter proposals

In certain cases, the person whose proposal or offer has not been accepted
absolutely or unqualifiedly by the offeree as the offeree attaches a counter-proposal
to the original proposal, the offeror becomes bound by the counter-proposal. If, by
the conduct of the offeror, he indicates that he has accepted the terms of the
counter-proposal laid down by the offeree.

In the case of Hargopal v. People’s Bank of Northern India Ltd., an

application for shares was made with a conditional undertaking by the bank that the
applicant would be appointed as a permanent director of the local branch. The
shares were allotted to the applicant by the Bank without fulfilment of the condition
and the applicant was given his shares and the applicant accepted the same
without any protest regarding the non-fulfilment of the terms of the contract. When
there arose a dispute between the parties in a court of law. The applicant
 23

contended that the allotment was void on the ground of non-fulfilment of the
conditions which were stipulated in the original contract. The court rejected the
contention from the applicant’s side by holding that the same can not be pleaded
by him as he has waived the condition by his conduct.

In Bismi Abdullah and sons v. FCI, the court held that where tenders were
invited subject to the deposit of money. It was open to the tenderers to waive the
requirement and acceptance given to a tender without making the deposit is
binding upon the tenderer.

In D.S. Constructions Ltd v. Rites Ltd, the court held the where the tenderer
made variations to the terms of his tender within the permissible period, but the
variations were only partly accepted by the other side without the tenderer’s
consent lead to repudiation of the contract and so there was no contract at all.
Therefore, the earnest money deposited by the party can not be forfeited.

Provisional Acceptance

Provisional acceptance is the type of acceptance by the offeree which is made

subject to the final approval. A provisional acceptance does not ordinarily bind
either party to the contract until the final approval is given to the provisional
acceptance made by the offeree. Until the approval is given, the offeror is at liberty
to cancel the offer made to the offeree.

In Union of India v. S. Narain Singh, the High Court of Punjab held that where
the condition attached to the auction sale of the liquor was that the acceptance of
the bid shall be subject to confirmation by the Chief Commissioner. The contract will
not be complete till the highest bid is confirmed by the Chief Commissioner and till
the confirmation is made the person whose bid is provisionally accepted is at liberty
to withdraw the bid.

Similarly, in Mackenzie Lyall And Co. vs Chamroo Singh And Co., the bid at an
auction was of provisional acceptance in nature ad the terms of the contract stated
that the bid shall be referred to the owner of the goods for his approval and
sanction.the court in this case also, allowed the person to revoke his bid whose bid
was provisionally accepted.
 24

In Somasundaram Pillai vs The Provincial Government Of Madras, the court

held that the bidder would be at liberty to withdraw his will prior to the final
approval of the provisional acceptance where the terms of the contract expressly
mention that a bid which has been provisionally accepted can not be canceled
subsequently.

When a provisional acceptance is subsequently ratified or accepted then it is the

duty of the offeree to inform the same to the offeror, as it is then when the offeror
becomes bound by the terms of the contract. Acceptance is not complete until it is
communicated by the offeror.

Acceptance and withdrawal of tenders

A Tender is a legal offer or proposal to do or abstain from doing an act and it binds
the party to performance to the party to whom the offer is made. A tender can be
made with respect to money or specific articles. If the tender is not an offer than it
falls in the same category as a quotation of price. When the tender is accepted it
becomes a standing offer. A contract can arise only when an offer is made on the
basis of the tender.

In Bengal Coal Co. v. Homee Wadia & Co., the defendant signed an agreement.
One of the terms of the contract was that the undersigned from the day of signing
the contract has to abide by the condition stipulated by the contract which provides
that they shall be required to provide a certain quality of coal to the other party for
a period of 12 months. The defendant abided by the terms of the contract for some
time but before the expiry of the term of the contract, the defendants refused to
comply with the conditions which were stipulated under the contract. The plaintiff
subsequently sued the defendant for breach of contract. The court held that there
was no contract between the parties and the terms stipulated thereof were just the
part of a standing offer and the successive orders given by the plaintiff was an
acceptance of the offers of the quantity offered by the defendant and therefore the
order given by the plaintiff and the offer of the defendant together constituted a
series of contract. The defendants, in this case, are not free to revoke the offers
which were actually given by them. But barring those offers aside, the defendants
had the complete power of revocation.
 25

In Rajasthan State Electricity Board vs Dayal Wood Work, the purchase

orders were issued in terms of an arrangement of supply. But the purchase offer
itself contained the provision that the tenderer can refuse to supply the goods. The
court, in this case, held that there was no concluded contract that came into force
and therefore, the contractor was at liberty to refund his security deposit.

In a case where the tenderer has on some consideration promised not to withdraw
the tender or where there is a statutory provision restraining the withdrawal of the
tender, the tender becomes irrevocable. Just as the tenderer has the right to revoke
his tender in the same way the acceptor of the tender also has the right to refuse to
place any order.

In Madho Ram vs The Secretary Of State For India, the military authorities
accepted a tender for the supply of certain goods but during the period of tender,
no requisition was ever issued. In an action against the military authorities, the
court held that the military authority was not bound whatsoever by the acceptance
of their offer to purchase any or all the goods specified under the contract without
any covenant to that issue. And so the party giving his assent to the offer may at
any time declare to the tenderer that they no longer want to place an order for the
purchase of goods.

Letter of intent to accept

A letter of intent to accept an offer is sometimes issued prior to the final acceptance
of the offer. Letter of intent does not have any binding effect on any of the parties
to the contract. In Dibakar Swain v. Cashew Development corp. The letter of
acceptance issued by the company only indicated their intention to enter into the
tender. The acceptance was not clearly reduced into writing. The court held that
there was no binding contract entered into by the parties and no work order can be
issued and so the amount which was deposited by the tenderer can not be forfeited.

Liability for failure to consider tender

If a valid tender is opened then it must be duly considered by the inviting authority
because if the valid tender is not duly considered it would be unfairness on the part
of the tenderer. In Vijai Kumar Ajay Kumar v. Steel Authority Of India
Limited, the court of appeal observed that in certain circumstances, the invitation
to tender can give rise to the binding contractual obligation on the part of the
person who invited the tenders who conformed the conditions of the tender.
 26

In A. K. Construction v. State of Jharkhand, the contract was awarded to a

person who was not a qualified tenderer and he was chosen at the cost of a
qualified tenderer who brought an action against the decision of granting the tender
to the unqualified tenderer. The court, in this case, allowed the awardee of the
tenderer to complete his work and also allowed the aggrieved party compensation
of one lakh rupees to be recovered from the salary of the guilty officers who were
guilty of awarding the tender unreasonably.

Non-compliance with requirements

In Vijay Fire Protection Systems v. Visakhapatnam Port Trust And Anr., the
authorities inviting the tender made it clear to the tenderers that only one brand of
pump sets would be accepted. The authorities even gave the last minute
opportunity to the tenderers to change the quotations. The tenderer to whom the
tender for the supply of goods was given refuted to comply with the terms of the
contract. Subsequently, the authorities who invited the tender cancelled the
contract between them and the tenderer thereof. The court held that the decision
made by the authorities was not arbitrary and they were having the right to do so.

In Kesulal Mehta vs Rajasthan Tribal Areas, one of the conditions in the tender
was that the tenderer should have at least one year of work experience in the work
in question. The court, in this case, held that such conditions could be relaxed and
any otherwise competent contractor could be given the tender and he could be at a
later point of time be required to produce the certificate of work.

In KM Pareeth Labha v. Kerala Livestock Development Board, it was held

that where a tender invited the quotations for disposal of trees. The tender should
mention the approximate value of the trees which could be assessed by the
tenderers who can quote their price.

Tender with concessional rate

In Kanhaiya Lal Agrawal vs Union Of India & Ors, in this case, tender offered
firm rates, as well as concessional rate, provided the tender gets finalized within a
shorter period of time than generally followed. The court held that it did not result in
the formation of a conditional offer which hinges on the happening or non-
happening of any event and the condition which was put forth was only meant for
bringing about more expeditious acceptance.
 27

Certainty of terms

An agreement regarding the sale of immovable property should identify the

property with certainty. The agreement should be based on mutuality and should fix
the price. In New Golden Bus Service vs State Of Punjab And Ors. , the tender
was made inviting the tender for hiring services for the vehicle but it did not
stipulate any time period. The lowest tenderer was awarded the tenderer for a
period of three years. The court, in this case, held that there was nothing wrong in it
as an open-ended tender can not be regarded as void because of the reason for its
vagueness. The tender, in this case, specified that the tender can not be issued for
a vehicle that is more than six months old and the tenderer who was awarded the
tender complies with the specified conditions specified under the tender. The
acceptance of substitute vehicles which were of equal efficiency and cost by the
authority inviting the tender was not arbitrary.

Preventing from tendering and blacklisting

In Utpal Mitra vs The Chief Executive Officer, a bidder was prevented by some
elements inside the office from submitting the tender. The authorities carried on the
enquiry confirming the allegations. The person who was so ruled out from the
tender was later on permitted to submit his tender after two intervening holidays
and his tender was later on accepted. The court held that no prejudice was caused
to the other tenderers as the work issued to them was not interfered with.

In Merittrac Services Private v. Post Graduate Institute, it was held that the
provision of blacklisting a contractor arises only when the contract is awarded and
the tenderer fails to perform any conditions stipulated in the contract. For the
purpose of seeking permission for making his proposal, some material facts may be
required from the bidder about his experience.

The party allocating the contracts has the indispensable power of blacklisting the
contractor. But when in cases where the party is the state, the decision to blacklist
is open to judicial review to ensure proportionality and principle of natural justice.

OFFER AND ACCEPTANCE BY TELEPHONE –(CONTRACT WHEN COMPLETE -

ACCEPTANCE COMPLETE WHERE SPOKEN OR WHERE HEARD?)
 28

The Supreme Court of India in Bhagwandas Goverdhandas Kedia Vs. M/S.

Girdharilal Parshottamdas, AIR 1966 SC 543 : 1966 (1) SCR 656 held that :

In the administration of the law of contracts the courts in India have generally been
guided by the rules of English common law applicable to contracts, when no
statutory provision to the contrary is in force.

The courts in the former Presidency towns by the terms of their respective letters
patents, and the courts outside the Presidency towns by Bengal Regulation III of
1793, Madras Regulation 11 of 1802 and Bombay Regulation IV of 1837, and by
diverse Civil Courts Acts were enjoined in cases where no specific rule existed to act
according to ‘law and equity’ in the case of chartered High Courts and elsewhere
according to ‘justice, equity and good conscience’ which expressions have been
consistently interpreted to mean the rules of English common law, so far as they are
applicable to the Indian Society and circumstances.

Facts of the Case

The respondents entered into a contract with the appellants by longdistance

telephone. The offer was spoken by the respondent at Ahmedabad and the
acceptance was spoken by the appellants at Khamgaon. Alleging breach of the said
contract the respondents Mod a suit at Ahmedabad. On the issue of jurisdiction
raised by the appellants, the trial court found that the Ahmedabad Court had
jurisdiction to try the suit. The High Court rejected the appellant’s revision petition
in limine whereupon by special leave, he came to the Apex Court.

Important Observations of the Apex Court

The Judgment of Wanchoo and Shah, JJ. was delivered by Shah, J. Hidayatullah, J.
delivered a dissenting Opinion.

Making of an offer at a place which has been accepted elsewhere does not form
part of the cause of action in a suit for damage, for breach of contract. Ordinarily it
is the acceptance of offer and intimation of that acceptance which result in a
contract. The intimation must be by same external manifestation which the law
regards as sufficient.
 29

Referred to:

1. Baroda Oil Cakes Traders v. Purshattam Naravandas and Anr. I.L.R.

[1954] Bom. 1137
2. Sepulechre Brothers v. Sait Khushal Das Jagjivan Das Mehta, I.L.R.
[1942] Mad. 243
A. On the general rule that a contract is concluded when an offer is accepted
and acceptance is intimated to the offerer, is engrafted an exception based
on grounds of convenience which has the merit not of logic or principle in
support, but of long acceptance by judicial decision. The exception may be
summarised as follows : When by agreement, course of contract or usage of
trade, acceptance by post or telegram is authorised, the bargain is struck and
the contract is complete when the acceptance is put into a course of
transmission the offeree by posting a letter or dispatching a telegram.
B. The rule that applies to acceptance by post of telegram does not however
apply to contracts made by telephone. The rule which applies to contracts by
telephone is the ordinary rule which regards a contract as complete only
when acceptance is intimated to the purchaser. In the case of a telephonic
conversation in a sense the parties are in the presence of each other, each
party is able to hear the voice of the other. ‘Mere is an instantaneous
communication of speech intimating offer and acceptance, rejection and
counter-offer. Intervention of an electrical impulse which results in the
instantaneous communication of messages from a distance does not alter the
nature of the conversation so as to make it analogous to that of an offer and
acceptance through post or by Telegram.
C. It is true that the Posts and Telegraphs Department has general control over
communication by telephone and especially over long distance Telephones,
but that is not a ground for assuming that the analogy of a 657 contract
made by post will govern this mode of making contracts. In the case of
correspondence by post or telegraphic communication, a third agency
intervenes and without the effective intervention of that third agency, letters
or messages cannot be transmitted. In the case of a conversation by
telephone, once connection is established there is in the normal course no
further intervention of another agency. Parties holding conversation on the
telephone are unable to see each other; they are also physically separated in
space, but they are in the hearing of each other by the aid of a mechanical
contrivance which makes the voice of one heard by the other instantaneously
and communication does not depend on external agency.

Relied On

Entores Ltd. v. Miles Far Eastern Corp. [1955] 2 Q.B.D. 327 relied on.
 30

The draftsmen of the Indian Contract Act did not envisage use of the
telephone as a means of conversation between parties separated in space and
could not have intended to make any rule in that behalf. The trial Court was right in
the view which it took that a part of the cause of action arose within the jurisdiction
of the City Civil Court Ahmedabad, where acceptance was communicated by
telephone to the plaintiffs.

Per Hidayatullah, J. (dissenting)

In the Entores case Lord Denning no doubt held that acceptance given by
telephone was governed by the principles applicable to oral acceptance where the
parties were in the presence of each other and that the analogy of letters sent by
post could not be applied. But the Court of Appeal was not called upon to construe a
written law which brings in the inflexibility of its own language. It was not required
to construe the words found in s. 4 of the Indian Contract Act, namely, “The
communication of an acceptance is complete as against the proposer when it is put
in a course of transmission to him, so as to be out of the power of the acceptor.”

Distinguished.

Entores Ltd. v. Miles Far East Corporation. [1955] 2 Q.B.D. 327

1. The law under consideration was framed at a time when telephone, wireless,
Telstar and Early Bird were not contemplated. If time has marched and
inventions have made it easy to communicate instantaneously over long
distance and the language of our law does not fit the new conditions it can be
modified to reject the old principles. But it is not possible to go against the
language by accepting an interpretation given without considering the
language of our Act.
2. The language of s. 4 of the Indian Contract Act, covers a case of
communication over the telephone. Our Act does not provide separately for
post, telegraph, telephone, or wireless. Some of these were unknown in 1872
and no attempt has been made to modify the law. it may be presumed that
the language has been considered adequate to, 658 cover cases of these
new inventions. It is possible today not only to speak on the telephone but to
record the spoken words on a tape and it is easy to prove that a particular
conversation took place. Telephones now have television added to them. The
rule about lost letters of acceptance was made out of expediency ‘because it
was easier in commercial circles to prove the dispatch of letters but very
difficult to disprove a statement that the letter was not received. If the rule
suggested on behalf of the plaintiffs is accepted it would put a very powerful
defence in the hands of the proposer if his denial that he heard the speech
could take awry the implications of our law that acceptance is complete as
soon as it is put in course of transmission to the proposer.
 31

3. Where the acceptance on telephone is not heard on account of mechanical

defects there may be difficulty in determining whether at all a contract
results. But where the speech is fully heard and understood there is It binding
contract, and in such a case the only question is -is to the place where the
contract can be said to have taken peace.
4. In the present case both sides admitted that the acceptance was clearly
heard -,it Ahmedabad. The acceptor was in a position to say that the
communication of the acceptance in so far as he was concerned was
complete when he (the acceptor) put his acceptance in transmission to him
(the proposer) as to be out of his (the acceptor’.,,,) power of recall in terms of
s. 4 of the Contract Act. It was obvious that the word of acceptance was
spoken at Khamgaon and the moment the acceptor spoke his acceptance he
put it in course of transmission lo the proposer beyond his recall. He could
not revoke acceptance thereafter. It may be that the gap of time was so short
that one can say that the speech was heard instantaneously, but if we are to
put new inventions into the frame of our statutory law we are bound to say
that the acceptor by speaking into the telephone put his acceptance in the
resource of transmission to the proposer.
5. The contract was therefore made at Khamaon and not Ahmedabad.

In view of the opinion of the majority the appeal is dismissed with costs

INTENTION TO CREATE LEGAL RELATIONS

An agreement does not need to be worked out in meticulous detail to become a

contract. However, an agreement may be incomplete where the parties have
agreed on essential matters of detail but have not agreed on other important
points. The question of whether the parties have reached an agreement is
normally tested by asking whether a party has made an offer which the other has
accepted. Agreements may not give rise to a binding contract if they are incomplete
or not sufficiently certain. There will usually be no contract if the parties agree
‘subject to contract’ but never quite agree on the terms of the contract. If the
agreement is a stepping stone for a future contract or is an agreement to agree,
then the agreement might be void for a lack of intention to create legal relations.
Moreover, a domestic contract is presumed to not be legally binding in common law
jurisdictions.
 32

There are a few concept of intention to create legal relations. Intention to create
legal relations also means an intention to be serious about agreement significance:

a) The contracting parties mind will be obvious to enter a serious contract

When two parties decided to enter in the environment of a contract, their mind will
understand the contents of the contracts. This is due to their ‘intention’ to be
consenting mind which both of the parties have to agree. If there is no agreement
by both of the parties, it may make the contact being a void agreement. Thus, both
of the contracting parties will enable to be serious into the contract.

b) If there is no intention to create legal relations the contract would not

be enforceable, legal and binding

Intention to create a legal relation is one of the essential elements of contract. So, if
there is no intention to create a legal relation, the contract can be assumed as a not
legal. Due to that, the contract may not being enforceable because there is no
intention to create legal relations at the beginning which not making contracting
parties to be legally binding.

c) Without intention to create legal relations, the parties cannot sue each
other

With no intention to create legal relations, it may cause the contracting parties are
not being legally binding and this circumstances may cause the contract is
enforceable. Therefore, when the contract is enforceable, the contracting parties
cannot sue each other and this will spoil their business crisis. This will make the
contracting parties hard to enquire their justice.

d) Without intention to create legal relations the contract may become a

mere promise
 33

In addition, with no intention to create legal relations, it will make any contract to
become a mere promise. Mere promises simply like a simple promise arise when
there is no intention to create legal relations.

e) Without intention to create legal relations the contract may lack the
binding effect

Besides that, when there is no intention to create legal relations, it will make the
contract or agreement become less powerful due to whether one or both of the
parties does not have a consent mind. So, if the contract lack of binding effect, it
will cause the difficulty to the party involved in future.

Domestic and social agreements of intention to create legal relations can be broken
down into three groups which are firstly commercial or business relations, secondly
social friend’s relations and thirdly family or domestic relations.

a) Commercial or business relations

In term of general rules of commercial or business relations, there is a presumption

or intention to be legally binding. Otherwise in term of exception the presumption is
rebuttable.

Case example: Kleinwort Benson Ltd V Malaysia Mining Corporation Bhd in

year 1989

The case shows the letters of comfort. In this case, the plaintiff (bank) agreed loan
to MMC Metals, subsidiary of MMC. The bank asked MMC to guarantee loan. MMC
said not policy to guarantee loans to subsides offered letter of comfort stating: “It is
our policy to ensure that the business of MMC (Metals) is at all times in a position to
meet its liabilities under the arrangements”. The bank accepted but charged higher
rate of interest and the market collapsed and MMC went into liquidation. The
plaintiffs tried to claim balance from MMC. First instance the court found in favour of
plaintiff, relying heavily on Skyways (1964) ruling overturned on appeal and the
judge said Skyways case not was about promise supported by consideration so not
applicable here. Hence, ruled no intention to create legally binding agreement
statement was not meant to act as guarantee, stating on current position, not
future intention.
 34

b) Social friend’s relations

In term of general rules of social friend’s relations, there is no presumption to be

legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case example: Simpkins V Pays in year 1955

The case shows mutuality. In this case .the defendant, her granddaughter and the
plaintiff (paying lodger) regularly took part in newspaper competition. All
contributed but entered in defendant’s name. There is no set of arrangement that
state payment of postage etc. When entry of the competition is successful,
defendant refused to share with plaintiff. The plaintiff sued for his share. Court ruled
legally binding relationship as sufficient mutuality in the arrangements between
parties.

c) Family or domestic relations

In term of general rules of family or domestic relations, there is no presumption to

be legally binding. Otherwise, in term of exception the presumption is rebuttable.

Case example: Balfour v Balfour in year 1919

The husband brought wife to England from Sri Lanka. The husband had to return but
wife stayed for medical reasons. He promised to pay her £30/month until his return.
When he failed to pay, the wife sued the husband. Wife’s action failed because
there is no consideration moved from her and there is no intention to create legally
binding agreement found. The court stated in husband and wife cases, burden of
proof is on plaintiff to prove intention to create legally binding agreement.

CONSIDERATION

Consideration constitutes something of benefit to the person who has the obligation
or who makes a promise to do something (the promisor). It can also be something
detrimental to the person who wants to enforce the obligation, or who has the
benefit of the promise (the promisee). There is no need for an ‘adequate’ value: if
some value is given for the promise it would be sufficient consideration.
 35

LEGALITY AND CAPACITY

A contract is illegal if the agreement relates to an illegal purpose. For instance, a

contract for murder or a contract to defraud the Inland Revenue Department is both
illegal would therefore be unenforceable. Certain contracts may also be
unenforceable because they are immoral and against public policy. For example,
contracts for sexual services may be unenforceable or even illegal in certain
jurisdictions

CERTAINTY

A valid contract requires reasonable certainty for the essential terms. If the parties
fail to reach an agreement on the essential terms with reasonable certainty, then
the agreement might be void even if all other essential elements are present.

Section 3. Communication, acceptance and revocation of proposals.

The communication of proposals, the acceptance of proposals, and the revocation of

proposals and acceptance, respectively, are deemed to be made by any act or
omission of the party proposing, accepting or revoking, by which he intends to
communicated such proposal, acceptance or revocation, or which has the effect of
communicating it.

Section 3 of Indian Contract Act defines that communication may be conducted

through an act or omission, by which party’s intention is communicated, or which
has the effect of communicating for proposals, acceptance of proposals, and
revocation of proposal and acceptance. “communication of proposals, acceptance of
proposals, and revocation of proposals and acceptances, respectively, are deemed
to be made by any act or omission of the party proposing, accepting or revokes, by
means of which it intends to communicate this proposal, acceptance or revocation,
or which has the effect of communicating it.”

Two methods of communication:

1. Any act: It includes any conduct, words, written (e.g. email, letters,
telegrams, advertisement, etc.) or oral ( e.g. telephone massage).
 36

2. Omission: It includes such conduct or forbearance (voluntarily refraining

from doing something) on one’s part that another party takes it as willingness
or consent. It includes silence as well.

Felthouse v. Bindley[(1862)11CBNS 865]

In this case, Felthouse made a proposal to buy nephew’s horse and added that “if I
hear no more from him I’ll consider the horse mine”. After that, his nephew was
busy in an auction and didn’t communicate to him but nephew told Bindley
(auctioneer) to not present the horse for auction sale as he intended to keep it for
his uncle. Bindley sold the house by mistake. Felthouse sue Bindley for recovery of
horse. Court held that the nephew’s acceptance was not communicated to
Felthouse. So there is no contract regarding this.

Section 4. Communication when complete.

The communication of a proposal is complete when it becomes to the knowledge

of the person to whom it is made.

The communication of an acceptance is complete-

A. as against the proposer, when it is put in a course of transmission to him so

at to be out of the power of the acceptor;
B. as against the acceptor, when it comes to the knowledge of the proposer.

The communication of a revocation is complete-

A. as against the person who makes it, when it is put into a course of
transmission to the person to whom it is made, so as to be out of the power
of the person who makes it;
B. as against the person to whom it is made, when it comes to his knowledge.

Illustrations-

(a) A proposes, by letter, to sell a house to B at a certain price.

The communication of the proposal is complete when B receives the letter.

 37

(b) B accepts A’ s proposal by a letter sent by post.

The communication of the acceptance is complete-

as against A when the letter is posted;

as against B, when the letter is received by A.

(c) A revokes his proposal by telegram.

The revocation is complete as against A when the telegram is dispatched. It is

complete as against B when B receives it.

B revokes his acceptance by telegram.

B’s revocation is complete as against B when the telegram is dispatched, and as

against A when it reaches him.

The communication of an acceptance of a proposal as against the proposer is

complete when it is put in a course of transmission to him so that it is out of the
power of the acceptor whereas the communication of an acceptance of a proposal
as against the acceptor is complete when it comes to the knowledge of the
proposer.

In the Household Fire Insurance Co. V. Grant case , the court ruled that when
an offer is properly accepted by means of a letter or any acceptable way of
communication, the acceptance is complete and a binding contract comes into force
as soon as the letter is posted, even though the letter is lost in the post and never
reaches the offeror.

In Entorse Ltd. V. Miles Far East Corporation case, the plaintiff was a
company in London that made an offer to the defendant, an American company by
telex to sell a certain quantity of meat and the defendants company accepted the
offer by telex itself. The question that arose was where the contract come into place
and in case of any disputes which court would have jurisdiction over the matter. It
was decided that the contract was completed in London since a contract is deemed
to be made at the place where the acceptance is received i.e. at the place of the
offeror.
 38

Lalman Shukla v. Gauri Dutt, 1913 40 ALJ 489.

The defendant’s nephew eloped from his house. The plaintiff (defendant’s servant)
was sent to search for the missing boy. After the plaintiff had left in search of the
boy, the defendant announced a reward to anyone who might find the boy. The
plaintiff, who was unaware of this reward, was successful in getting the boy back.
When he found about the reward declared by the defendant, he brought an action
against the defendant to claim the compensation/prize money, as he had found the
boy for no money in advance. The court held that because the plaintiff did not know
of the reward offer, his act of finding the boy who was lost did not mean he
accepted the offer as he only came to know after finding the boy. Thus, he was not
entitled to claim the reward. An offer can be accepted only after the same has come
to the knowledge of the offeree, as per contract law. It means that the offer has to
be proposed by the offeror, so that there is acceptance by the other party, the
offeree. This case law shows how communication of offer is essential.

Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas and Co.

and Ors., AIR 1966 SC 543

The plaintiffs offered to buy cotton seed cake from the defendants, and the
resultant contract was negotiated over long distance telephone on 22.07.1959 as an
oral contract. The court claimed that the parties are in presence of each other,
indirectly, assuming the callers are the parties, on telephones. The court placed
reliance on the English case law of Entores Ltd. v. Mills Far East Corporation,
(1955) 2 Q.B.D 327, in which it was held that in cases of instantaneous
communication, the contract is only complete when the seller receives a “yes” and
the contract is created according to the place at it is formed, to clear up
jurisdictional issues in case of a breach.

The court contended that with regard to the essential nature of a telephonic
conversation, the parties are in a sense in the presence of each other and
negotiations are concluded by instantaneous communication. They opined that in
cases where contract is to be concluded through instantaneous modes of
communication, the contract will only be concluded when the acceptance of the
offer reaches the offeree, and there will be non-application of exception for modes
of communication that are not immeadiate. This case law shows the significance of
instantaneous communication of offer.

Critical analysis
 39

Lacunae in the specification of the modes of communication

1. The provisions governing digital communication have been delineated in the

Information Technology Act, 2000, but it does not deal with using messaging
tools to create contracts. There are 2 types of modern communication:
instantaneously and non-instantaneously.
2. Although e-mail or Facebook communication is covered under the ambit of
Section 4, no specific rule is constituted whether postal rule or rule of
instantaneous communication will be considered same as “contracts” made
through Facebook/e-mail/Instagram DMs, etc. If someone sends a message
through Facebook or e-mail and opposite party replies instantly, it is
considered as instantaneous communication; but if opposite party does not
reply instantly, then it seems to be non-instantaneous communication in
nature, but this is a rationale assumption, and isn’t verified. Therefore, social
messaging tools are a mix of both forms of modern communication.

Suggestion for application of the rule of communication

1. The transmission of an electronic record, under Section 13 of the Information

Technology Act, 2000, happens when it gains access to a computer resource
outside originator’s control. In the case of e-mail when the message enters
the offeree’s electronic mailbox, there would be a receipt of the offer, so the
contract is formed when the message enters into the mailbox of the person
to whom they are addressing.
2. mode of communications, such as telephone and telex. If a phone line got
disconnected, just before the offeree accepted, it would be incorrect to
assume that the contract was formed and the parties would not have to call
each other back, which applied to telex. London was the place where the
contract was created, since the contract was to be formed when and where
the telex was received.
3. In N.M. Superannuation Pty. Ltd. v. Hughes, the New South Wales
Supreme Court’s decision, the judge held that if a fax was left switched on, its
owner shows, by this action, his preparedness to receive messages on it and
was considered enoguh for a notice to be communicated by fax in this
situation, even though the document might arrive outside normal business
hours. Courts have not tested whether these principles apply to digital means
of communication, so hopefully this will be done in the near future.
4. When the initiative of negotiation is of a non-delayed nature, the
instantaneous communication should be applied, regardless of the
completion of the negotiation’s nature is, and contract is when acceptance
comes to the knowledge of the proposer. When the nature of negotiation is
 40

not instant, there should be application of the postal rule, and the contract is
complete when the acceptance is sent and gone beyond the control of the
acceptor.

Section 5. Revocation of Proposals and acceptance.

A proposal may be revoked at any time before the communication of its acceptance
is complete as against the proposer, but not afterwards.

An acceptance may be revoked at any time before the communication of the

acceptance is complete as against the acceptor, but no afterwards.

Illustration-

A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal
by a letter sent by post. A may revoke his proposal at any time before or at the
moment when B posts his letter of acceptance, but not afterwards. B may revoke
his acceptance at any time before or at the moment when the letter communicating
it reaches A, but not afterwards.

Section 6. Revocation how made.

A proposal is revoked-

(1) by the communication of notice of revocation by the proposer to the other party;

(2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no
time is so prescribed, by the lapse of a reasonable time, without communication of
the acceptance;

(3) by the failure of the acceptor to fulfil a condition precedent to acceptance; or

(4) by the death or insanity of the proposer, if the fact of the death or insanity
comes to the knowledge of the acceptor before acceptance.

Revocation means “cancellation” and it is a type of remedy for buyers when the
buyer accepts a nonconforming good from the seller.
 41

Section 5 of the Indian Contract Act, lays down the rules of revocation of proposals
and acceptances i.e. A proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but not
afterwards. An acceptance may be revoked at any time before the communication
of the acceptance is complete as against the acceptor, but not afterwards.

Illustration: Jay proposes, by a letter sent by a post, to sell his house to Veeru and
Veeru accepts the proposal. In this case, Jay may revoke his proposal at any time
before or at the moment when Veeru posts his letter of acceptance, but not
afterwards. And Veeru may revoke his acceptance to any time before or at the
moment when Veeru posts his letter of acceptance, but not afterwards.

Modes of Revocation

Section 6 : Revocation how made i.e. this section of the Indian Contract Act, 1872
provides various modes of revocation which are as follows:

1). Notice of revocation

In this case, revocation has to be made before the acceptance. The communication
of revocation to be effective must reach the offeree before he mails his acceptance
and makes it out of his power. A revocation is effective only when it is brought to
the mind of the person to whom the offer is made.

In Ramlalsao Gupta v. M.E.R. Malak[AIR 1939 Nag 225], unfortunately the

letter of revocation was reached at wrong address and earlier it was being sent by
fax. The court held that the same to be of no effect.

In the case of Henthorn v. Fraser[(1892) 2 Ch 27], the defendant handed to the

plaintiff a detailed note for the sale of the property at 750 euros with the condition
that within fourteen days the acceptance should be conveyed to the defendant.
Meanwhile that particular offer was considered by another buyer and due to this,
next day defendant informed the plaintiff about the withdrawal of the offer and this
note reached the plaintiff after 5 pm but by that time plaintiff already responed. The
acceptance for the same did not reach to the defendant until the next morning. The
court held that the offer was valid and an order for specific performance made for
750 euros to purchase the property. The postal rule in Adam v. Lindsell would apply,
which stated that it would be reasonable for acceptance of an offer to take place
by post. However, this rule would not apply to the revocation of an offer. Post was a
 42

way of communicating offer acceptance, but the acceptance itself is completed as

soon as it is posted. This was reasonable to expect since both parties lived in
different towns.

In Alfred Schonlank & Anr. V. Muthunayana Chetti[(1892) 2 MLJ 57], the

defendant offered the plaintiff a sale of indigo proposal and also told him that
within eight days he can reply to the proposal. The defendant revoked the offer on
the fourth day on the other hand plaintiff on the fifth day accepted the offer. The
court held that in case there is no consideration for the promise to keep offer open
for a certain time then its nothing but a bare promise only and at the same time
these acceptance was of no use in the eyes of laws.

Thus, it is a settled principle that the notice of revocation by the offeror should
reach the offeree before he has put the acceptance into the course of transmission
which shall then become out of his power. The above principle is further clarified by
the illustration which is attached to Section 5. ‘A’ by means of a letter proposes ‘B’
his house which was for sale. B accepts the proposal by the means of acceptance
sent through a post. In this case, A can revoke his offer at any time before or at the
time when B posts his letter of acceptance.

Section 4 and 5 contains the provisions related to the communication of proposal,

acceptance and revocation. Section 4 of the Indian Contract Act states the following
with respect to the time when communication is complete:

1. The communication of a proposal is complete when the same comes to the

notice of the person to whom it is addressed to;
2. The communication of acceptance as against the proposer is complete when
it is put in the course of transmission addressed to him;
3. The communication of acceptance as against the acceptor or the offeree is
complete when the acceptance comes to the knowledge of the offeror or
proposer;
4. The communication of revocation is complete as against the person who
makes such revocation when it is out in the course of transmission to the
person to whom it is addressed so as to be out of the power of the person
making such revocation;
5. The communication of revocation is complete as against the person to whom
it is made when such communication comes to his knowledge.
 43

Section 5 of the Indian Contract Act contains provisions regarding the revocation of
proposals and acceptance. The Section states that the revocation of the proposal
can be made at any time before the communication of acceptance is complete as
against the proposer but not afterwards. While acceptance may be revoked anytime
before the completion of communication of acceptance as against the acceptor but
the same can not be done afterwards.

Withdrawal before the expiry of a fixed period

In a case where the offeror prescribes a certain time period to the offeree within
which the offeree can accept the offer. The offeror has the authority to withdraw the
offer even before the expiry of the prescribed time period. In Alfred Schonlank
And Anr. vs A. Muthunayana Chetti , the defendant offered the plaintiff a
proposal for sale of indigo and told the plaintiff that he can answer to his proposal
within a period of eight days. However, on the fourth day from making the offer the
defendant revoked the offer. The plaintiff, on the fifth day from the day when a
proposal was made to him, accepted the offer. The Madras High Court held that the
acceptance was of no use in the eyes of laws as it can be made clear both on
principle and authority that in a case where there is no consideration for the
promise to keep the offer open for a certain time period is nothing but nudum
pactum or a bare promise.

When the notice of revocation reaches the offeree’s address it is deemed to be

complete. In Tenax Steamship Co v Owners of the Motor Vessel Brimnes,
the defendant company owned a ship called Brimnes. The defendants agreed to sell
the ship Brimnes to the complainants on the condition that a charter party
agreement will take place between them. The hire payment was made a period
later than which was agreed between the parties under the terms of the contract.
On one fine day, the complainant during the normal office hours gave the defendant
a notice for the withdrawal of the ship from services through telex. However, the
defendant read the letter on a later period and by that time he had already made
the payment for the ships. The question before the appellate court was whether
notice of withdrawal of service had effect before the defendant made the payment
of hire of ships. The court held that the withdrawal was effective when the telex
message was received by the defendant and not when the defendant read the
message. Therefore, this case became the authority for the reasoning that in the
case where the revocation is sent through instantaneous means like telex, the
revocation becomes effective from the time on which the revocation could have
been read and not the time when it was actually read by the person to whom it was
addressed to.
 44

Acceptance of proposal under the voluntary retirement scheme

Under the Voluntary Retirement scheme, the employees were given the right to
apply for voluntary retirement by requesting the same in writing to the authorities.
However, the authorities in these cases had the complete discretion to accept or
reject these requests. The requirement of the employee who requested under the
scheme could take place only once the request has been accepted by the
authorities in writing. The scheme was only an invitation to offer and the application
made by the employee was an offer made to the authorities who were therefore
offeree. The employee being the offeror could withdraw the offer anytime before the
same is accepted by the offeree. The term in the scheme preventing the employee
from the withdrawal of the proposal was held to be non-binding.

In Shashikala Parashar vs State Of Goa & Another , the employee first made
the request for his voluntary transfer but later on, he requested that the request
made by him should be suspended for some time. The Government, however,
accepted the resignation. The employee aggrieved by the government’s decision
moved to the court and the court held that the request made by the employee was
a mere assertion without having any backing of proof or an affidavit. The order of
Government was like an acceptance which was made after the revocation of the
proposal was made and the request to keep the proposal in suspension was not the
same as withdrawal of the proposal.

In K. Appa Rao v. M/s Tungabhadra Steel Products Ltd. & Others , the
plaintiff submitted his resignation which was accepted on 31 March 2003 the
resignation was accepted. However, the resignation offer was to take effect from 23
June 2003 which is after the expiry of the three months of the notice period. The
question before the court was that which date should be considered as the effective
date of resignation. The court held that the effective date of resignation will be the
date on which the employee will be released and not the date of acceptance of the
request made by the employee. Meanwhile, the employee is free to withdraw his
resignation.

The employer is under no obligation to accept the proposal of premature retirement

and therefore no action could lie in any court of law where the employee has
refused to accept such proposal . In Visakhapatnam Port Trust & Others v/s
T.S.N. Raju & Another, a large number of employees in a company filed an
application for voluntary retirement. However, the company decided that it would
not entertain all the application as the number of retirements that the company
 45

could afford had already been exhausted. The Court held that the employer could
not be necessarily bound to accept all the application for resignation.

In New India Assurance Co. Ltd vs Raghuvir Singh Narang & Anr, the
general principles of contract provided that once an employee has made an
application for the resignation under the voluntary retirement scheme he could not
withdraw the same at any time afterwards. The court held that the terms of the
statutory scheme guaranteeing voluntary retirement would prevail over the general
principles of law.

Agreement to keep the offer open for a specified period

Where the offeror proposes an offer to be open for a specified period of time and it
is accompanied by a consideration. The offeror has no discretion to withdraw the
offer before the completion of the specified period. In Mountford and another
v.Scott, the owner of the house who was the defendant is essential that the
communication of revocation should be made by the offeror himself or any agent
who is duly authorized by him. This rule does not apply in England. In England,
Dickinson v. Dodds is the authority on this matter, in this case, the defendant
made an offer to the plaintiff for the sale of the property at a fixed price and the
terms of the proposal also made it clear that the offer could be accepted by the
plaintiff within a specified time period. However, before the expiration of the
specified time, the plaintiff was informed by a party that the offer has already been
revoked as the defendant has already sold the property to some other person.
Despite knowing the fact that the property which was offered to him the plaintiff
before the expiration of the offer gave a letter of acceptance of an offer to the
defendant. The court, In this case, the court held that the offer can be revoked
anytime before the acceptance by the offeree is made and that the sale to the third
party was already in knowledge of the plaintiff and so the plaintiff already knew that
the defendant was not minded to sell the property to him and therefore the
acceptance by the plaintiff at a later point of time when the property had already
been transferred to the other party has no value in the eyes of law.

The defendant in the present case made an offer to the plaintiff for the sale of his
house for ten thousand pound and the offer was made for specified time and was
backed by consideration according to which the plaintiff had the option of paying
one pound to keep the offer of the defendant open for a specified time period. The
court, in this case, held that after the plaintiff deposited one pound to the
defendant, the defendant was not allowed to revoke the offer before the expiry of
the specified period as the effect of the offer made it irrevocable for the specified
 46

time and therefore the offeree is free to accept the offer within the specified time
notwithstanding the offerors purported revocation.

In State Of Haryana & Ors vs M/S Malik Traders , the bid security was
accompanied with a condition that the bid security can not be forfeited by the
bidders in case of withdrawal of the bid before the expiry of its validity period.
However, the court rejected the conditions put by the authorities organizing the bid
by holding them to be invalid and held that the withdrawal of bid before the end of
the validity period even before the acceptance did not put an end to the right of the
offeree to forfeit the bid security.

Communication of revocation of the offer

In India, as suggested by Pollock and Mulla, this rule has no applicability and reason
behind it is the Section 6(1) of the Indian Contract Act, 1872 which mandates that
the revocation could be made only by the offeror and no other person.

Revocation of the general offer

In the case where the offer of general nature is made known to the people through
any media, the withdrawal of the offer should be conveyed through the same
media. The revocation so made would be effective even where any person in
ignorance of the revocation subsequently performs the term of the offer which has
already been withdrawn.

In Shuey v. United States, an announcement was published in the newspaper

announcing reward for the person who reports certain criminals. However, this
announcement was subsequently withdrawn by publishing a subsequent
notification. The plaintiff in this case, after the notification was revoked reported the
criminals in ignorance of the subsequent publication in the newspaper. The person
reporting the crime was held not to be eligible for the reward price as the
announcement was withdrawn through the same channel through which it was
published.

Superseding proposal by a fresh proposal

In a case where the proposal is renewed not in entirety but in some parts before the
acceptance is made to the original offer and the latter appears to supersede the
 47

earlier proposal. Then such a proposal will no longer be available for acceptance by
the offeree. The acceptance could only be of the renewed part which has
superseded the earlier or original proposal.

Cancellation of allotment of land

In Rochees Hotels Pvt. Ltd. And Anr. vs Jaipur Development Authority,

under the order of a Development Authority, an allotment of land was made. The
people to whom the allotment was made deposited the money and signed the
agreement as a result of which a concluded came into effect between the allottees
and the authorities who made the allotment of the land. The subsequent
cancellation made by the authorities was challenged by the allottees in the court.
The court held the subsequent cancellation of the allotment as improper and
arbitrary. It was held that the authorities were bound by the obligation to approve
building plans for the land. The pending criminal investigations regarding the
allotment of land were irrelevant.

Revocation of bid

In a case where the agreement is entered into by auction. The acceptance to the
agreement is signified by knocking down the hammer by the seller. A bid can be
withdrawn before the hammer is knocked down by the seller. In The Rajah Of
Bobbili vs Akella Suryanarayana Rao Garu, the petitioner at an auction made
the highest bid. But before the hammer was knocked down he withdrew his bid on
finding that the property was subject to a mortgage. But even after the retraction
was made by the bidder the auctioneer knocked down the offer signifying the
assent to the offer made by the plaintiff. Later on, the owner of the property sued
the bidder. The court, in this case, held that the bid made by the plaintiff was
nothing more than an offer and he had the discretion of withdrawing the same
before his offer was accepted by the auctioneer.

The principle laid down in the above-mentioned case has been significantly
extended by the High Courts in the subsequent cases which included even those
cases where the bid was provisionally accepted and was subjected to further
confirmation by the higher authorities.

In Union Of India & Ors vs M/S. Bhim Sen Walaiti Ram , in a public auction the
highest bid was made by the plaintiff and therefore he got the liquor shop which
was there for auction. The bid was subject to the consideration of the Chief
 48

Commissioner who had the duty to inquire into the financial condition of the bidder
before granting him the license. According to the rules of the auction which was
conducted the bidder was under the obligation to immediately pay the one-sixth
price of the liquor shop immediately. If he defaults in paying the said amount, the
Government had the power to can such bid and re-auction the shop. In this case,
the plaintiff was unable to pay the amount which was specified and as a result of
which the Chief Commissioner ordered the resale. The subsequent resale proved to
be a loss for the Government since the price bidding realized in resale was much
less than the original bidding. The authorities decided to make the defendant liable
for making good the losses suffered by the authorities. The court, in this case, held
that the defendant is not liable to make good of the losses suffered due to the
resale of the shop as the Chief Commissioner had disapproved the bid made by the
defendant.

In Haridwar Singh vs Bagun Sumbrui, a forest by way of the auction was given
to the bidder even below its minimum price. The confirmation of the bill was still in
the process while the bidder offered to pay the minimum value. The authorities who
were holding the bill accepted it and by the way of telegram sent their acceptance
to the forest officers for carrying on further transactions. The foreign officer due to
some reasons never received the said telegram. Meanwhile, another person offered
a higher price for the forest and the same was accepted by the authorities holding
the auction. Later on, the authorities informed the forest officials about the
acceptance. The acceptance reached the forest officer this time and he passed on
the bid to the new bidder. The earlier bidder challenged the passing of bid. The
court held that there was no concluded contract from the original bid since the
acceptance which was made by the authorities on the earlier bill will be considered
to be still present within the authorities as no communication as to their acceptance
was ever made to the earlier bidder.

The auctioneer has the authority to specify the manner in which the bids can be
revoked by the bidders.

In M. Lachia Setty & Sons Ltd. Etc. Etc vs The Coffee Board, Bangalore , one
of the auction rules in the present case specified that any instructions or bids by
means of telegraph will not be accepted. The defendant made his bid on the spot by
filing the bid form. However, before the result of the bid were to announce the
defendant revoked his bid by means of telegraphic communication. But the bid by
the defendant was accepted by the auctioneer. The defendant later refused to
perform the bid on the grounds that he had already communicated his revocation.
The court, in this case, held that the express mentioning by the auctioneer of no
 49

entertainment of any telegraphic communication with respect to instruction or

anything pertaining to bidding was wide enough to include within its ambit
revocation as well. Therefore, the revocation made by the defendant is not a good
revocation under law.

2). Lapse of time

Where an offer says that it shall remain open for acceptance up to a certain date, it
has to be accepted within that date. It has been suggested by the Calcutta High
Court that in such a case it is enough if the acceptor has “posted the acceptance
before the stipulated time”, even if it reaches the offerer after the stipulated date.

Where time is prescribed

Where in a contract, a fixed time has been prescribed to the offeree to

communicate the acceptance, the offeree is bound to accept the offer within the
fixed time so prescribed because after the expiry of the fixed time the offer lapses.
With regard to this facet of contract law, the Calcutta High Court has suggested that
in a case where the offeree has to communicate his acceptance within a specified
time and he posts his acceptance within the stipulated time period, a binding
contract will be held to have taken place between the parties. The validity of the
offer by the offeree would not be affected if the letter of acceptance so posted
within the stipulated time reaches the offeror after the completion of the specified
time.

In the case of Bruner v. Moore, the offer was stipulated to last till the end of
March. The offeree posted his letter to the offeror on 28th March which reached the
offeree on 30th March. The court, in this case, held that the acceptance was valid.

In R. Vinoth Kumar vs The Secretary, the institution invited the applications for
admission into the institution for a prescribed time by sending the same either
through post or in-person to the institution. The candidate sent the application
through the post before four days of the last date of the stipulated date but the
same reached the institute after the stipulated time period was over. The court, in
this case, held that the candidate was too late in sending the application. The
rationale of the majority of the two judges in the case was that where the mode of
communication can be decided by the acceptor at his free will, the agency whom
the acceptor chooses acts as the agent of the sender, whereas in cases where the
delivery is made through the mode which has been prescribed by the person to
 50

whom the delivery is addressed to, then the agency so prescribed by the addressee
acts as agent of the addressee. In the former case, the delivery to the agency does
not tantamount to delivery to the addressee. But in the latter case the delivery to
the agency tantamounts to the delivery to the addressee. The dissenting judge, in
this case, upheld that when the candidate selects any of the mode prescribed by
the addressee, then the agency which is prescribed by the addressee would act as
the agent of the addressee.

Where no time is prescribed

In the contracts where no time is specified within which the offer should be
accepted it is a settled principle that the offer must be accepted within a reasonable
time. In Shree Jaya Mahal Co-operative Housing Society Ltd. v. Zenith
Chemical Works Pvt. Ltd. and others, the court held that the determination as
to what will be considered as a reasonable time would be decided by the courts on
a case to case basis keeping in view the facts and circumstances of the case. The
definition of “reasonable period” is a question of facts and it depends upon the
circumstances and the situation in which the agreement was entered into.

Contracts which involve precious materials like gold and other precious metals
which are prone to high fluctuating price then in those cases the reasonable period
would be a very short span of time. However, in contracts involving land the
reasonable time period will not be the same as the time period regarded reasonable
in the contracts the precious metals.

By failure to accept a condition precedent

Where the offer is subject to conditions precedent that is some preconditions have
to be complied with before the acceptance is made. If the acceptance is made
without fulfilment of the condition precedent then the offer lapses then and there.

In the State of West Bengal v. Mahendra Chandra Das , a salt lake was offered
by way of a lease with a condition precedent which mandated that the person
accepting the lease has to deposit a certain sum of money within the specified time.
The defendant who was the intended lessee, in this case, did not deposit the
amount of money even after the expiration of the stipulated time. The court held
that the conduct of the defendant clearly indicated that the allotment stood
cancelled.
 51

3). By failure to accept condition precedent

Where some preconditions are there for offer before the acceptance is made, it
lapses if acceptance is made without fulfillment of the particular condition
precedent. In the case of State of West Bengal v. Mahendra Chandra
Das[(1990) 2 Cal LJ 1], a salt lake was offered by way of lease with the condition
that on deposit of a sum of money withn a specified period but the defendant even
after the expiration of the stipulated time didn’t deposit the sum of money. The
court held that this entailed cancellation of the allotment.

4). By death or insanity of offerer

An offer lapse on the death or insanity of the offeror, provided that the fact comes
to the knowledge of the offeree before he makes his acceptance.

MELISH LJ suggested in the case of Dickinson v. Dodds, that after the death of the
offeror an offer cannot be accepted. Earlier in the case of Bradbury v. Morgan,
without the knowledge of the surity’s death, the creditor continued to act on a
guarantee. The court held that with the death of the offeror, an offer is not
terminated necessarily and the same will open until the offeree comes to know the
death of the offeror.

Section 7. Acceptance must be absolute.

In order to convert a proposal into a promise the acceptance must-

(1) be absolute and unqualified.

(2) be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted. If the proposal prescribes a
manner in which it is to be accepted;

and the acceptance is not made in such manner, the proposer may, within a
reasonable time after the acceptance is communicated to him, insist that his
proposal shall be accepted in the prescribed manner, and not otherwise; but; if he
fails to do so, he accepts the acceptance.
 52

Acceptance of an offer must be absolute and unqualified:

It is of the essence of a contract that there should be (expressly or by implication) a

proposal to which an unqualified assent has been given: without such assent there
is no contract as the minds of the contracting parties are not at one. [Dagdu Valad
Jairam v. Bhana Valad Jairam, 28 Bom 420: 6 Bom LR 126.]

It is one of the essentials of an agreement that the acceptance must be a mirror

image of the offer. If the offeree does not agree to the terms of the offer as it has
been proposed the offer lapses. And a new offer comes into place.

The Indian contract Act specifically in sec 7 mentions that:

“In order to convert a proposal into a promise the acceptance must—

(1) be absolute and unqualified;

(2) be expressed in some usual and reasonable manner, unless the proposal
prescribes the manner in which it is to be accepted. If the proposal prescribes a
manner in which it is to be accepted, and the acceptance is not made in such
manner, the proposer may, within a reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted in the prescribed
manner, and not otherwise; but, if he fails to do so, he accepts the acceptance.”

The acceptance of the proposal must be absolute and unqualified [Bishan Pado v.
Chandi Prasad, 42 All 187, 190;] and without condition [Nirod v. Raja Kirtya
Nanda, (1922 Pat. 24: 80 IC 308]. Acceptance must be absolute and unqualified
applies that the terms of the offer cannot be altered nor can there be additions.

In Suraj Besan & Rice Mills vs Food Corporation Of India [AIR 1988 Delhi
224], it was admitted that the plaintiff quoted for the purchase of 13,576.884 M. Ts
of damaged paddy. The defendant, however, placed an order by telegram dated
July 22, 1983, for 6,176.790 M.Ts. The acceptance under the law should be absolute
and unconditional. In the present case, it was neither absolute nor unconditional
because the defendant accepted only part of the offer of the plaintiff by placing an
order for 6,176.790 M.Ts. therefore, it was held that there was no binding contract
between the plaintiff and the defendant.
 53

It implies that there cannot be further negotiations. Its negotiations are going on
between the parties, an agreement cannot be said to have formed until a consensus
has been achieved. The above sec. clear to that point. The sec also mentions that
the acceptance must be expressed in some usual and reasonable manner unless
the proposal prescribes how it is to be accepted. If there is a condition for the
manner in which the offer has to be accepted, the offeree is bound to fulfill that.
However, when no such mode of acceptance or time under which the offer has to be
accepted has been mentioned by the offeror then the offeree can accept it in a
usual manner under a reasonable time.

In a case of Perala Krishnayyan Chettiv vs G. Padmanathan Chettiar, 37

Ind Cas 792, before the Madras High Court, the defendant wrote to the plaintiff on
the 17th of October 1909 to send 15 or 20 bags of areca nuts "at once". The offeree
wrote back that he would send the goods within 15-20 days. The defendant did not
reply to the plaintiff. 25 bags of nuts were finally sent by the plaintiff on the 1st of
December. The defendant refused to take delivery of them. The plaintiff filed for the
breach of contract.

The court held that the acceptance was not absolute and unqualified. It was an
order for immediate supply and the plaintiff understood that time was of the
essence of the contract, because he wrote back to say that he could send the goods
only in 15 or 20 days. he made a counter-proposal which was not accepted by the
defendant. Hence, there was no legal contract in place. If the proposal prescribes
the manner and acceptance is not made in that manner the promisor may require
acceptance in the manner prescribed, but if he does not do so, he will be held to
have accepted the acceptance in the manner that it was made .[ Gaddar Mal vs
Tata Industrial Bank, Ltd.]

The Acceptor must in indicate an intention to fulfill the promise.

Acceptance, in order to be valid, must be made under circumstances which would

show that the acceptor is able and willing to fulfill the promise. If no such intent is
present, the acceptance is not valid.

It must be communicated:

Mere mental acceptance is no acceptance. It must be communicated to the offeror

with a proper mode of communication. There is no requirement of its
 54

communication of the general offer. Similarly, for the offer to be acted upon, no
communication to the offer is necessary.

In Brogden V. Metropolitan Rly. Co. (1877) 2 App Cas 666 case The
complainants, Brogden, were suppliers of coal to the defendant, Metropolitan
Railway. They completed business dealings regarding the coal frequently for a
number of years, on an informal basis. There was no written contract between the
complainant and the defendant. However, the parties decided that it would be best
for a formal contract to be written for their future business dealings. The
Metropolitan Railway made a draft contract and sent this to Brogden to review. The
complainant made some changes to this draft and filled in some blanks that were
left. Brogden sent this amended document back to the defendant. Metropolitan
Railway filed this document, but they never communicated their acceptance of this
amended contract to the complainants. During this time, business deals continued
and Brogden continued to supply coal to the Metropolitan Railway. When a dispute
arose, the issue, in this case, was whether there was a contract between Brogden
and the Metropolitan Railway and if the written agreement they had was valid. The
Court held that there was a valid contract between suppliers, Brogden, and the
Metropolitan Railway. The draft contract that was amended constituted a counter-
offer, which was accepted by the conduct of the parties. The prices agreed in the
draft contract were paid and coal was delivered. Although there had been no
communication of acceptance, performing the contract without any objections was
enough. It was the acceptance by the conduct

It must be in the mode prescribed:

The general rule says that the proposal must be accepted as per the manner
prescribed by the offeror (according to its terms). If no mode is prescribed in which
it can be accepted, then it must be in some usual and reasonable manner.

If the proposal lays down a mode of acceptance, then it must be according to the
mode prescribed. If it is not given in the mode prescribed, the proposer may reject
it and intimate the offeree within a reasonable time. But if he does not inform the
offeree, he is deemed to have accepted it.

Example: If an offer is made to supply goods at certain consideration indicating that

the acceptance is to be communicated by telegram. If the acceptance is sent by
ordinary post then it is not an acceptance according to the mode prescribed and the
 55

offer will be deemed to be not accepted. The offeror need not inform the offeree
that the acceptance is not according to the mode prescribed.

Silence cannot be prescribed as a mode of acceptance:

Mere silence is not an acceptance of the offer. The offeror can prescribe the mode
of acceptance but not the mode of rejection. The offeror cannot frame his offer in
such a way as to make the silence or inaction of the offeree to operate as
acceptance.

Example: A offers to B to buy his house for Rs.5 lakhs and writes “If I hear no more
about it within a week, I shall presume the house is mine for Rs.5 lakhs. “B does not
respond. Here, no contract is concluded between A and B because there is no
communication of acceptance.

In Felthouse V. Bindley [1862] EWHC CP J35 case, the complainant, Felthouse,

had a conversation with his nephew, about buying his horse. After their discussion,
Felthouse replied to a nephew by letter stating that if he didn’t hear any more from
his nephew concerning the horse, he would consider acceptance of the offer done
and he would own the horse. His nephew did not reply to this letter and was busy at
auctions. The defendant, Mr. Bindley, ran the auctions and the nephew advised him
not to sell the horse. However, by accident, he ended up selling the horse to
someone else. Felthouse sued Mr. Bindley in the tort of conversion. The Court held
that there was no contract for the horse between the complainant and his nephew.
There had not been an acceptance of the offer; silence did not amount to
acceptance and an obligation cannot be imposed by another. Any acceptance of an
offer must be communicated clearly. Although the nephew had intended to sell the
horse to the complainant and showed this interest, there was no contract of sale.
Thus, the nephew’s failure to respond to the complainant did not amount to an
acceptance of his offer.

It must be given within the time stipulated or within a reasonable time if time is not
mentioned.

If the offer prescribes the time limit, it must be accepted within the specified time. If
the offer does not prescribe the time limit, it must be accepted within a reasonable
time. Further, acceptance must be given before the offer lapses or before it is
withdrawn.
 56

Example: A applied (offered) for shares in a company in early June. The allotment
(Acceptance) was made in late November. A refused to take the shares. The Court
held that A is entitled to do so as the reasonable time for acceptance had elapsed.

There can be no acceptance before the communication of the offer.

Acceptance cannot precede an offer. A person who has no knowledge of an offer

cannot be said to have accepted it merely because he happened to act just by
chance in the manner prescribed by the offer.

In Lalman Shukla v. Gauri Datt (1913) All LJ 489 case A’s nephew has
absconded from his home. He sent his servant to trace his missing

nephew. When the servant had left, A then announced that anybody who has
discovered the missing boy would be given the reward of Rs.500. The servant
discovered the missing boy without knowing the reward. When the servant came to
know about the reward, he asked for the same from A. A refused to give the reward.
The servant brought an action against A in the court of law to recover the same. But
the court held that when the servant discovered the boy, he was not aware of the
reward. Thus the offer was not communicated to him. Hence he is not liable to get
the reward from A.

Acceptance and its communication must be made by the offeree or his

authorized agent.

Acceptance and communication of acceptance must be made by the offeree or his

authorized agent. If not done so it will not be a contract.

In Powell v. Lee (1908 24 TLR 606) case the plaintiff Powell applied for the post
of a headmaster and his application was accepted by the School Board. Before the
formal appointment, one of the Board members had informed Powell of the decision
which was later rescinded by the Board. Powell sued the School for breach of
contract. The court held that the acceptance was not communicated by someone
authorized by the School Board and thus there was no valid contract.

Acceptance subject to the contract is no acceptance.

 57

Acceptance of the proposal will mean acceptance of all the terms of the offer. When
an offer is accepted by an offeree by “subject to contract” or subject to formal
contract” or “subject to contract to be approved by solicitors,” the matter is known
to be at the negotiation stage and it means the parties do not intend to be bound
until a formal contract is made and signed by them. In such cases, acceptance will
not create a binding contract until a formal contract is prepared and signed by all
the parties

If the proposal is made through an agent, it is sufficient if the acceptance is

communicated to him.

If A sends the offer to B by an agent C, and B give his acceptance to C, the

acceptance is complete resulting in a valid contract. It is immaterial whether C
communications the acceptance of B to his principal A or not.

Who can Give Acceptance?

When an offer is made to a particular person or to a group of persons, it can be

accepted only by that person or member of the group. If it is accepted by any other
persons, there is no valid acceptance.

Example: B sold his business to P without disclosing the fact to his customers. J, who
had a running account with B, placed an order with B for the supply of certain
goods. The new owner without disclosing the fact of himself having purchased the
business executed the order. J refused to pay P for the goods because he, by
entering into a contract with B intended to set off his debt against B. Held, the new
owner of could not recover the price. “The rule of law is that if you promise to make
a contract with A, then B cannot substitute himself for A without your consent and
to your disadvantage, securing to himself all the benefits of the contract”.

When an offer is made generally to the public at large, any person or persons who
have the notice of the offer, may come forward and accept the offer. By doing what
is required to be done under the offer, the offer is said to be as accepted and there
will be a valid contract, (Carlill V. Carbolic Smoke Ball Co. 1893).

Agreement to agree in the future. If the parties have failed to agree upon the
terms of the contract but have made an agreement to agree in the future, there is
no contract,
 58

Example: An actress was engaged by a theatrical company for a certain period. One
of the terms of the agreement was that if the party was, shown in London, she
would be engaged at a salary to be mutually agreed upon. Held, there was no
contract. (Luftus V. Roberts, (1902) 18 T.L.R. 532).

Illustration 1: A offers to sell his Car for ₹1,00,000 to B in cash. B accepted the offer
with a condition that he will pay half of the amount by UPI. Held there was no
contract, as B’s acceptance was not a mirror image of A’s proposal.

Illustration 2: Vishal offers to sell a table to Lakshya for ₹5,000. Lakshya accepts
Vishal’s offer with a condition that he should sell the chair with the table. The offer
lapses since Lakshya puts a condition to it.

Illustration 3: A farmer offers to sell 20 kg of rice at ₹50/kg to a man. But the man
agrees to buy only 10 kg of wheat. Since the man does not accept the offer made
by the farmer without any changes in its terms, the original offer lapses. The
acceptance made by the man is no acceptance and the framer is under no
obligation to sell rice to him.

Partial acceptance

Acceptance should be made in full with respect to the terms of the contract. An
offeree can’t just accept certain terms favorable to him and ignore the others. An
agreement will only be formed when there is acceptance of the whole offer.

In Ramanbhai M. Nilkanth vs Ghashiram Ladliprasad[(1918) 20 BOMLR

692], an application was made in a company for certain shares on the condition
that the applicant would be appointed as a cashier in the new branch of the
company. The company made the allocation of shares to the applicant without
fulfilling the condition and demanded the share money from him.

The court held that the petitioner’s application for 100 shares was conditional and
there was no intention on the part of the company to accept the terms of the
 59

contract in entirety where he applied for shares until he was appointed as a cashier
by the company. Therefore, there was only a partial acceptance of the offer.

Section 8. Acceptance by performing conditions, or receiving

consideration.

Performance of the conditions of proposal, for the acceptance of any consideration

for a reciprocal promise which may be offered with a proposal, is an acceptance of
the proposal.

An implied acceptance is one that is not directly stated but is demonstrated by any
acts indicating a person's assent to the proposed bargain. An implied acceptance
occurs when a shopper selects an item in a supermarket and pays the cashier for it.
In this case while purchasing a product from the buyer, the shopper need not to
show separately that he or she want to accept the product and buy it for the
proposed price. The shopper's conduct indicates that he or she has agreed to the
supermarket owner's offer to sell the item for the price stated on it. If the buyer
again asks for a separate price (bargain) other than the price given by the shopper
then that will lead to interference of the acceptance.

Carlill v. Carbolic Smoke Ball Co., (1893) 1 QBD 256 – The defendant company
advertised that they would pay pound 1,000 to any person who used their carbolic
smoke ball for a certain time any yet contracted influenza. The plaintiff purchased
the medicine, used it for the stated time but contracted the disease. It was held that
the contract was accepted by being acted upon, that the defendant had not
stipulated for any communication of acceptance and therefore the plaintiff was
entitled to recover the amount. It was held that when the offeror, while making the
offer, expressly or impliedly, indicated that there is no need of intimating the
acceptance and only performance of the conditions of offer would be enough, acting
upon the stated conditions would result in a contract. Bowen L.J. stated:

“One cannot doubt that, as an ordinary rule of law, an acceptance of an offer ought
to be notified to the person who makes the offer in order that the two minds may
come together. Unless this is done the two minds may be apart, and there is not
that consensus which is necessary according to the rules of English Law... to make a
contract. But there is this clear gloss to be made upon that doctrine, that as
notification of acceptance is required for the benefit of the person who makes the
offer, the person who makes the offer may dispense with notice to himself if he
thinks it desirable to do so, and I suppose there can be no doubt that where a
 60

person in an offer made by him to another person, expressly or impliedly intimates

a particular method of acceptance as sufficient to make the bargain binding, it is
only necessary for the other person to whom such offer is made to follow the
indicated mode of acceptance; and if the person making the offer, expressly or
impliedly intimates in his offer that it will be sufficient to act on the proposal without
communicating acceptance of it to himself, performance of the condition is
sufficient acceptance without notification.”

M/s. Rakesh Kumar Dinesh Kumar v. U.G. Hotels & Resorts Ltd. – There was
contract for supply of goods by plaintiffs to defendant. Default was made by
defendant in making payment. Defendant had made an offer in writing to pay
certain amount in full and final settlement of dues. It was shown by the conduct of
the parties that plaintiff had impliedly accepted offer and received part of amount.
The receipt of the amount by the plaintiff, it was held, amounted to an acceptance
of the offer.

L.I.C. of India v. R. Vasireddy – The question arising before the Supreme Court
was, whether receipt and retention of the insurance premium and the delay in
replying to the proposal could be treated as the acceptance thereof. In this case the
deceased filed a proposal of insurance on his life for Rs. 50,000 on 27.12.1960. He
issued two cheques for Rs. 300 and 220 respectively, which were got encashed by
the L.I.C. by 11.1.1961. the deceased died the next day i.e., on 12.1.1961. In an
action by the widow of the deceased to claim the amount, the L.I.C. contended that
the contract of insurance had yet to be completed. It was averred that since the
proposal had yet to be accepted by the Division Manager, according to the
prescribed procedure in such cases, the amount of the two cheques had been kept
only in deposit in the suspense account and had not been credited towards the
premium account, and therefore, the L.I.C. was not bound to pay the insured
amount Rs. 50,000. The contention of the L.I.C. was accepted by the Supreme Court
and since the contract had not yet been concluded, the L.I.C. was not liable to pay
the sum claimed. It was observed:

“Though in certain human relationship silence to a proposal might convey

acceptance but in the case of insurance proposal, silence does not mean or denote
consent and no binding contract arises until the person to whom an offer is made
says or does something to signify his acceptance. Mere delay in giving and answer
cannot be construed as an acceptance as prima facie, acceptance must be
communicated to the offeror.”
 61

Bhagvathi Prasad Kumar v. Union of India 2006 (5) SCC 311 - Apex Court has
held Section 8 of the Indian Contract Act provides for acceptance by performing
conditions of a proposal. In the instant case, the Railway made an offer to the
appellant laying down the conditions that if the offer was not acceptable the cheque
should be returned forth with, failing which it would be deemed that the appellant
accepted the offer in full and final satisfaction of its claim. This was further clarified
by providing that the retention of the cheque and/or encashment there of will
automatically amount to satisfaction in full and final settlement of the claim. Thus if
the appellant accepted the cheques and encashed them without anything more, it
would amount to an acceptance of the offer made in the letters of the Railways
dated 7.4.1993. the offer prescribed the mode of acceptance, and by conduct the
appellant must be held to have accepted the offer and therefore, could not make a
claim letter. In the light of the above legal position whether the contention of the
complaint seeking the further compensation tenable or not in the present set of the
facts of the case is to be looked into.

Section 9. Promise, express and implied.

In so far as the proposal or acceptance of any promise is made in words, the

promise is said to be express. In so far as such proposal or acceptance is made
otherwise than in words, the promise is said to be implied.

According to the Indian Contract Act, 1872, a contract is an agreement which is

enforceable by law.[section 2(h)] So, contract = an agreement + it’s enforceability
by law. The very formation of a contract can be express or implied. Offer and
Acceptance are two basic requirements for forming an contract.

Express and Implied Offer

According to Section 2(a), an offer is defined as –

“When one party signifies to another his willingness to do or to abstain from doing
anything,with a view to obtaining the assent of that other to such an act or
abstinence, he is said to make a proposal”

This is the very first step of forming a contract. The term ‘proposal’ in Indian Law is
synonymous to the term ‘offer’ used in English law. The definition clearly states that
there must be an intention to obtain the view of the other party, otherwise it cannot
be termed as a valid offer. For example, A wants to sell his Television to B for Rs/-
 62

10000 and if B wishes to purchase the same, it amounts to proposal by A for the
sale of the television. This intention of obtaining the assent of the other party can
be either implied or express. The Act lays down how the communication of proposal
can be made. Section 3 says – “The communication of proposals, the acceptance of
proposals, and the revocation of proposals and acceptances, respectively, are
deemed to be made by any act or omission of the party proposing, accepting or
revoking, by which he intends to communicate such proposal, acceptance or
revocation, or which has the effect of communicating it.”Hence, the definition
clearly states that an offer may be communicated by the offeror by any act or
omission by which the offeror –

1. Intends to communicate such offer;

2. Which has the effect of communicating the offer.

Therefore, an offer can be made by words spoken, or by writing or conduct in a

manner, which carries the effect of communicating the offer to the offeree. An
express offer is made by some positive act by the offeror or it may also be implied
from the conduct of the offeror. Section 9 further validates the aforementioned
statements. It runs as – “In so far as the proposal or acceptance of any promise is
made in words, the promise is said to be express. In so far as such proposal or
acceptance is made otherwise than in words, the promise is said to be implied.”

Examples of an implied offer

A bid at an auction is an implied offer. Or, when a bus company runs buses on a
particular route inviting passengers over the route at scheduled fares. The offer of
the company is an implied offer.

Acceptance can also be implied or express

When an offer is accepted it results in an agreement. Without acceptance of the

offer a contract between two parties cannot arise. Here is the definition of
acceptance according to the Indian Contract Act, 1872[section 2(b)] – “When the
person to whom the proposal is made signifies his assent thereto, the proposal is
said to be accepted. A proposal, when accepted, becomes a promise.”

Once the offer is made and accepted both the parties become bound by the
agreement and not before that. When the proposal or acceptance is made in any
other way than words then the promise is deemed to be implied.[ section 9]
 63

Acceptance must carry the effect of communication even if it is implied. [section 3]

Acceptance can also be made in words either written or spoken. The most important
thing in either case is that acceptance must be communicated to the offeror either
by the offeree or by some duly authorized agent on his behalf. Also, performance of
the conditions of the proposal is acceptance of the proposal.[ section 8]Under
certain circumstances, offeree’s silence, along with his conduct also amounts to
acceptance. This is known as ‘agreement sub silentio.’

Example of an implied acceptance

When a bus company runs buses on a particular route inviting passengers over the
route at scheduled fares. The offer of the company is an implied offer and
passengers agreeing to pay the fare is implied acceptance.

Express Contracts

The term ‘express contract’ hasn’t been defined in the Indian Contract Act. But the
term ‘express contract’ connotes agreements in which the terms are explicitly
stated by the parties either orally or in writing. These are actually the normal
contracts we come across in day to day life. In this type of contract use of ‘words’ is
mandatory. Example – Lease Agreement.

Implied Contracts

Similar to express contracts, the term ‘implied contract’ is not defined under the
Indian Contract Act. As the term itself suggests, an implied contract is a contract
which is inferred by the conduct and behaviour of the parties to the contract. There
is no usage of words either written or spoken. Such a contract comes into force
after assuming the intention of the parties to the contract. An example of an implied
contract would be a quasi-contract. Quasi-contracts are “certain relations
resembling those created by contract.” It is based on the maxim of equity that no
person should enjoy unjust benefit at the cost of the other irrespective of the fact if
there is any contract or not. No party has an intention to enter into a contract yet a
contractual obligation arises. Quasi-contracts are mentioned under Section 68-72
of the Indian Contract Act. There are 5 types as follows –
 64

1. Claim for necessaries supplied to a person incompetent to contract.[section 68]

2. Reimbursement of money paid, due by another.[ section 69]

3. Obligation of person enjoying benefit of non-gratuitous act.[ section 70]

4. Responsibility of finder of goods.[ section 71]

5. Liability of a person getting benefit under mistake or coercion.[ section 72]

Section 10. What agreements are contracts

All agreements are contracts if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void.

Nothing herein contained shall affect any law in force in India, and not hereby
expressly repealed, by which any contract is required to be made in writing or in the
presence of witnesses, or any law relating to the registration of documents.

Section 10 of the act mentions about what agreements are contracts. It states that
all the agreements are contracts if they are made

1. by a free consent of parties (i.e. their free will) who are competent to
contract,
2. for a lawful consideration and
3. for a lawful object, and
4. are not expressly declared to be void.

The section also mentions that nothing which is contained shall effect any law which
is in force in India, and is not hereby expressly repealed, by which any contract is
required to be made in writing or in the presence of witnesses, or any law relating
to the registration of documents.

As per Section 2(e) of the Contract Act, every promise or a set of promises which
forms the consideration for each other is an agreement. Thus a promise can be said
to be an agreement.

AGREEMENT= OFFER+ACCEPTANCE
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Section 2(h) of the act defines contract as an agreement which is enforceable by

law. A contract can also be said to be an agreement, the object of which is to create
a legal obligation i.e. a duty enforceable by law.

CONTRACT= AGREEMENT+ENFORCEABILITY BY LAW

Agreement is a wider term than contract wherein all contracts are agreements but
all agreements are not contracts. The agreements which satisfy the conditions
mentioned in Section 10 of the Indian Contract Act, 1872 become contracts.

Agreements are classified into two categories:

1. Agreements not enforceable by law– the agreements which do not satisfy

the essentials of a valid contract are not enforced by law, hence cannot be
considered as contracts. According to section 2(g) of the act such
agreements are said to be void. For instance, an agreement entered into by a
minor is held to be void. Section 24-30 of the act mentions about the
agreements that are considered void.

Section 24- agreements are considered as void if considerations and objects are
unlawful.

Section 25- agreement without consideration is held as void unless the agreement
is in writing and registered or is a promise to compensate for something done or is a
promise to pay debt which is barred by limitation law.

Section 26- agreement which is made in restraint of marriage is held as void.

Section 27- agreements which are in restraint of trade are held as void.

Section 28- agreement which is in restraint of legal proceedings is void.

Section 29- uncertain agreements are held as void.

Section 30- agreement by way of wager is held as void.

2. Agreements enforceable by law– the agreements that satisfy the

essentials of a valid contracts are enforceable by law.
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Thus, Sections 2(h) and 10 of the Act state about the essential elements of a valid
contract. If any one of those elements is not satisfied or is present in an agreement,
it will affect the validity and will not form a valid contract.

If we enter into a contract containing prescribed terms and conditions, which is a

must under the statute then that contract becomes a statutory contract. If a
contract incorporates certain terms and conditions in it, which are statutory then,
the said contract to that extent is statutory.

In order to constitute a contract, the parties must consent to the agreement.

Essential elements of a valid contract

1. Offer and acceptance

2. Consensus ad idem

3. Legal relationship

4. Competency of parties

5. Free consent

6. Lawful Consideration

7. Lawful Object

8. Not declared to be void

9. Certainty and Possibility of Performance

10. Legal Formalities

Offer and acceptance

A contract can be evolved in the presence at least two parties one of them making
the offer and the other accepting it. Therefore there must be an offer by one party
and its acceptance by the other party. The offer when is accepted becomes an
agreement. The party which makes the offer is known as offeror and the party to
whom the offer is made is known as offeree.
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Consensus ad idem

The parties that are entering in the contract must have mutual consent i.e. they
should be agreeing upon the same thing in the same sense as it is. It means that
there must exist consensus ad idem (i.e. meeting of minds).

Legal relationship

Parties entering into a contract must intend to constitute a legal relationship. It

arises only when the parties know that if any one of them fails to fulfil his part of the
promise, he would be liable for the failure of the contract.

If there exists no intention to create a legal relationship, there is no contract

between parties. Agreements of a social or domestic nature are not considered as
contracts as they do not contemplate or give rise to a legal relationship.

Competency of parties

According to section 11 of the contract act The parties entering into a contract
would be considered competent if he

1. Has attained the age of majority,

2. Is of sound mind,
3. Is not disqualified to make a contract under a law to which he is subject.

However, the following persons are considered incompetent to contract, or only

capable of contracting to a particular extent. The persons who disqualified from
entering into a contract due to certain reasons may arise from their legal status,
political status or corporate status.

Alien Enemy: An agreement with an Alien Enemy is held to be void.

Foreign Sovereign and Ambassadors: Foreign sovereigns and their

representatives enjoy certain amount of privileges and immunities in every country.
They cannot enter into a contract except through their agents residing in India.

Convicts: A convict while he is undergoing imprisonment, cannot enter into a

contract.

Insolvents: An insolvent person is a person who is said to be unable to discharge

or get off his liabilities and therefore, has applied for being adjudged insolvent or if
such proceedings have been initiated by any one of his creditors.
 68

Company or Statutory bodies: A contract entered into by a corporate body or

statutory body will be valid only to the extent it is within its Memorandum of
Association

In the case of Mohori bibee v. Dharmodas Ghose, wherein Dharmodas Ghose

being a minor mortgaged his property in favour of the defendant Brahmo Dutt, who
was a money lender to secure a loan. At the time of transaction the money lender,
had the knowledge that the plaintiff was a minor. The court held that the
defendant’s contentions were rejected. Minor’s agreement was held void, and it was
held that the minor’s agreement was held void, and it was held that the minor could
not be asked to repay the loan taken by him.

Free consent

According to section 13 of the act two or more persons are said to consent to a
common thing when they agree upon the same thing in the same sense. A consent
is regarded as the most fundamental component of a contract. The next section
talks about free consent which is essential for a valid contract. A consent is said to
be free and valid when it is not caused by:

1. Coercion
2. Undue influence
3. Fraud
4. Misrepresentation
5. Mistake

When consent is caused due to any of such factor, the agreement is voidable at the
option of the party whose consent was so caused. if however the consent is done by
mistake, the agreement is considered to be void.

A consent of a person is affected by a number of factors, of which coercion is the

most noticeable one.

Coercion is defined under Section 15 of the act as committing, or threatening to

commit, any act forbidden by the Indian Penal Code (45 of 1860) or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement. —
Coercion means the committing, or threatening to commit, any act which is
forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or
threatening to detain, any property with the intention of causing any person to
enter into an agreement.”
 69

In the case of Ranganayakamma v. Alwar Setti the issue involved was that a
widow was not allowed to proceed with the cremation of her husband’s dead body
until she adopted the boy. The court held the adoption as invalid because her
consent for adopting was obtained by coercion.

Threat to commit suicide

The act of commiting suicide is prohibited under IPC, and therefore a threat to
commit suicide leads to coercion. The Madras High Court, in the case of Ammiraju
v. Seshamma, where Amiraju threatened to commit suicide to his wife and son if
they did not release some properties in favour of his brother. His wife and son
executed the deed but later took the plea of coercion in the court. The judges took
the view that as threat to commit suicide is an offence punishable under Indian
Penal Code, it commits to coercion.

Effect of coercion in a contract

In cases where a contract is exercised under force by one party, the party which
receives any benefit due to it, must restore it back. If the aggrieved party suffers
from any loss, he can recover it from the other party of the contract.

Section 16 of the act mentions about undue influence wherein a contract is said to
be induced by ‘undue influence’ where the relations subsisting between the parties
are such that one of the party stands in a by which he can dominate the will of the
other party and uses that position to obtain an unfair advantage over the other.

Presumption of undue influence in Unconscionable Bargains

In the cases of unconscionable bargain in between the parties on an unequal

footing, the law raises a presumption of undue influence. When a person is found to
be in a position by which he can dominate the will of the other, or the transaction
appears to be affected due to dominance, the burden of proof that no undue
influence was exercised in the transaction lies on the party who is in a position to
dominate the will of the other.
 70

In such cases, it is for the dominant party to rebut the presumption of undue
influence exercised by the law. If a party has got any gain at the cost of the other
party, he is required to prove that this advantage had not been gained by undue
influence.

In the case of Diala Ram v. Sarga(1927) the defendant was already indebted to
the plaintiff, who was a village money lender. He again took a fresh loan from the
plaintiff and then executed a bond, wherein he agreed to pay some interest. The
court held that the contract was unconscionable and, therefore, the burden of proof
was on the plaintiff to show that there was no undue influence in this case.

Contracts with Pardanashin Woman

A pardanashin woman is one who observes complete seclusion i.e., who does not
come in contact with people other than her family members. Law provides a special
protection to pardanashin woman on the ground of their being ignorant so far as the
worldly knowledge goes. A contract done with a pardanashin woman is usually
presumed to have been induced by undue influence. The burden of proving that no
undue influence was used lies on the other party. The other party will have to prove
that

(i) the terms of the contract were fully explained to her,

(ii) she understood the implications,

(iii) free independent advice was available to her, and

(iv) she freely consented to the contract. This protection is available only to a
woman who observes complete parda. Some degree of parda or seclusion is not
sufficient to entitle her to get special protection.

Section 17 mentions fraud as any act which is done by a party to a contract with
the intention of deceiving another party or to induce him to enter into a contract. It
is considered as a deception in order to gain by another’s loss.

Misrepresentation under section 18 includes:-

(1) The positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true
 71

(2) Any breach of duty which, without an intent to deceive, gains an advantage to
the person committing it, or anyone claiming under him; by misleading another to
his prejudice, or to the prejudice of any one claiming under him;

(3) Causing, however innocently, a party to an agreement, to make a mistake as to

the substance of the thing which is subject of the agreement.

Consent of partners in a partnership firm

The formation of a partnership requires few basic formalities, such as a written

agreement or registration with an agency. All parties that are considered partners
must consent to be such. The consent given by a partner may be express, such as
signing a written partnership agreement or it can be implied by the conduct of the
parties. Parties do not specifically need to agree to form a ‘partnership’, rather their
agreement or conduct must be in such a way that they agree to run a business for
profit. Even if the parties agree that their business will not be labeled a partnership,
the business may be found to be one if it meets the condition of a partnership firm.

Consent of parties in an antenuptial agreement

An antenuptial agreement, also called a prenuptial contract is a contract entered

into by the parties prior to marriage, civil union, or by the people intending to marry
or contract with each other. The content of a prenuptial agreement varies widely,
but commonly it includes provisions for division of property and spousal support in
the event of divorce or dissolution of marriage.It may also include terms relating to
the forfeiture of assets as a result of divorce on the grounds of adultery. In India,
prenuptial agreements are neither legal nor valid under the marriage laws because
they do not consider marriage as a contract but in Goa it is legally enforceable
under Portuguese Civil Code, 1867. A marriage in India is treated as a religious bond
between both the husband and the wife and prenuptial agreements finds no social
acceptance in the country. However, these agreements are governed by the Indian
Contract Act and have as much sanctity as any other contract, either oral or written.

In cases involving the enforcement of a prenuptial contract at divorce, usually it is

found that a husband presents a written prenuptial contract before his wife-to-be for
the first time a few days before the wedding or sometimes even on the day of the
wedding and gives her an ultimatum to sign the contract or else he won’t marry
her. At the time of divorce, the wife’s attorney portrays the husband’s ultimatum as
coercion. But if seen technically, it is not coercion as the husband is not legally
bound to marry and the husband did not create the wife’s need to marry to him.
The ultimatum can simply be considered as a condition precedent to the marriage.
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Lawful consideration and lawful object

According to section 23 of the Indian Contract Act, the following considerations and
objects are not considered as lawful:

1. If it is forbidden by law,
2. If it is against the provisions of other law,
3. If it is fraudulent,
4. If it damages somebody’s person or property,
5. If it is in the opinion of court, immoral or against public policy.

Thus any contract which incorporates such unlawful provisions are not considered
as a valid contract.

Certainty and possibility of performance

The terms of the contract should be certain and not vague. If by any way it is not
possible to ascertain the meaning of the agreement, it cannot be enforceable by
law. An agreements to do any impossible act can never be enforced. For example,
agreement to bring stars from the sky cannot be considered as a valid contract as it
is an impossible act.

Enforceability of oral agreements

If an oral agreement contains the condition of a valid agreement, it will be

considered as a contract. In the case of Sheela Gehlot v. Sonu Kochar & Ors
Delhi High Court observed that oral agreements are valid and enforceable and
there could be no dispute about it, unless there is anything which needs to be
written. Further as in a contract, there has to be some proposal and acceptance
necessarily. The validity of an oral agreement cannot be questioned. A written
agreement is considered important because an oral agreement cannot be produced
as an evidence before the court. The burden of proving the oral agreement lies
upon the party who claims to consider such agreement in existence.

In the famous case of Food Corporation of India v. Vikas Majdoor Kamdar

Sahkari Mandli ltd, the Apex court said that if an oral agreement is pleaded
before the court but is not proved, the person will be entitled to compensation
under Section 70 of the act as Principle of quantum meruit. This principle means
when the work is done beyond the contract and the benefit of the work has been
availed of by the defendant.
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11. Who are competent to contract

Every person is competent to contract who is of the age of majority according to the
law to which he is subject, and who is sound mind and is not disqualified from
contracting by any law to which he is subject.

As per Section 11, competency to contract for any person is as follow:- Every person
is competent to contract who is of the age of majority according to the law to which
he is subject, and who is of sound mind and is not disqualified from contracting by
any law to which he is subject.

Age of majority:

In India the age of majority is regulated by the Indian Majority Act (Act IX of 1875).
Every person domiciled in India attains majority on the completion of 18 years of
age. Except when a guardian of a minor’s person or property has been appointed by
the court, in such case it is 21.

Competency to Contract: Position of Minor’s Agreement

Effects of Minor’s Agreement

1. No estoppel against minor: There can be no estoppel against minor i.e., if a

minor by misrepresenting his age induces another to contract with him , then also
he cannot be made liable.

2. No liability in contract or in tort arising out of contract : A minor is

incapable of giving consent, and the nature of minor’s agreement is a nullity and
cannot be enforced.

3. Doctrine of Restitution: If an infant by misrepresenting his age, obtains

property or goods, then he can be compelled to restore it, but only so long as the
same is traceable in his possession, this is called as the equitable Doctrine of
Restitution. Where the infant has converted or sold the goods, he cannot made to
repay the value of goods as that would lead to enforcing a void contract. When the
infant has obtained the cash instead of goods, then in this case again the Doctrine
of Restitution is not applied.
 74

In Mohori Bibee v. Dharmodas Ghosh[7], a minor Dharmodas Ghosh mortgaged

his immovable property to Brahmo Dutt a money lender to secure a loan of Rs.
20,000. The actual amount was not paid by the plaintiff as he paid Rs. 8000 only
and refused to pay the rest amount. Minor’s mother said that his son is not liable to
pay the sum as he was a minor. The privy council held that the minor contract is
void and accordingly the Brahmo Dutt’s appeal was dismissed.

An agreement entered into by a minor is altogether void:

Contract with or by a minor is altogether void. The Indian Contract Act simply says
that only a person who is a major jas the competency to contract. The main reason
for holding a minor’s agreement void is that a minor is incapable of giving a promise
imposing a legal obligation.

Minor can be a beneficiary:

Though a minor do not have competency to contract, nothing in the Contract Act
prevents him from making the other party bound to the minor. Thus, a promissory
note duly executed in favors of a minor is not void and can be sued upon by him. A
minor cannot become a partner in a partnership firm. However he may, with the
consent of all partners, be admitted to the benefits of partnership (Section 30 of the
Indian Partnership Act, 1932).

Minor can always plead minority:

A minor’s contract being void, any money advanced to a minor on a promissory

note or otherwise cannot be recovered. Even when a minor procures a loan by
falsely representing that he is full age, it will not stop him from pleading his minority
in a suit to recover the amount and the suit will be dismissed.

But where a minor had fraudulently mortgaged and sold certain properties, the
Court held that on the cancellation of the agreement at the instance of the minor
the lender and purchaser must be compensated.

Ratification on attaining majority is not allowed:

As a minor’s agreement is void he cannot validate it by ratification on attaining

majority. For instance, a minor borrows money and executes a promissory note. On
 75

attaining majority, he executes a fresh promissory note in substitution of the one

executed as a minor. The second promissory note is also void being without
consideration. But a person who supplies necessaries of life to a minor or to one
whom the minor is legally bound to support, according to his situation in life, is
entitled to be reimbursed from he property of the minor not on the basis of any
contract but on obligation resembling a contract. However, a minor’s property is
liable for necessaries and no personal liability is incurred by him.

Contract by guardian – how far enforceable:

Though a minor’s agreement void, his guardian can under certain circumstances
enter into a valid contract on the minor’s behalf. Where the guardian makes a
contract for the minor, which is within his competency to contract and which is for
benefit of the minor, there will be a valid contract which a minor can enforce. For
instance, a guardian can make an enforceable contract of marriage for a minor. But
all contracts made by guardian on behalf of a minor are not valid. For instance, the
guardian of a minor has no power to bind the minor by a contract for the purchase
of immovable property. But a contract entered into by a certified guardian
(appointed by the court) of a minor, with the sanction of the court for the sale of the
minor’s property, may be enforceable by either party to the contract.

Competency to Contract: Persons of unsound mind

The agreement with a person of unsound mind in India is void. According to Section
12 of the Indian Contract Act, a person is said to be of a sound mind if at the time of
making the contract, the person is able to understand the contract and is capable of
making a rational decision considering the effects of the same. A person who is
usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind. A person who is usually of sound mind, but occasionally
of unsound mind, may not make a contract when he is of unsound mind. Persons of
unsound mind includes an idiotic, lunatic and intoxicated person.

Sound Mind:

A person is said to be of sound mind for the purpose of making a contract if at the
time when it, he is capable of understanding it and of forming a rational judgment
as to its effect upon his interests.

A person who is usually of unsound mind but occasionally of sound mind may make
a contract when he is of sound mind. Similar is the case with a person who is
generally of sound mind but occasionally of unsound mind.
 76

Contract by a person of unsound mind:

A person of unsound mind too, under the Indian Contract Act, incapable of entering
into a contract. Although a contract by a person who is not of sound mind is void,
such a person can enter into a valid contract during an interval of lucidity. The test
of unsoundness of mind is whether or not the person is capable of understanding
the business and of forming a rational judgment as to its effect upon his interest.
Idiots, lunatics and drunken persons are examples of those having an unsound
mind.

The presence or the absence of the capacity mentioned in this section at the time of
the making the contract is in all cases a question of fact. Where a person is usually
of sound mind, the burden of proving that he was of unsound mind at the time of
execution of a document lies on him who challenges the validity of the contract.

Illustrations:

A patient in a lunatic asylum, who is at intervals of sound mind my contract during

such intervals.

The liability for necessaries of life supplied to person of unsound mind is the same
as for minors (section 68).

Competency to Contract: Persons disqualified by law

Apart from minors and persons of unsound mind, there are also other persons such
as Foreign sovereigns, convicts, alien enemy, insolvents and so on are disqualified
from contracting partly or wholly, do not have competency to contract. Therefore,
contracts by such persons are void.

Contract by disqualified persons:

Besides minors and persons of unsound mind, there are also other persons who are
disqualified from contracting, partially or wholly, so that the contracts by such a
person are void. If by any provincial legislation, a person is declared disqualified
proprietor, he do not competency to contract to enter into any contract in respect of
the property.

Illustrations
 77

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.

(b) A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on
his interests, cannot contract whilst such delirium or drunkenness lasts.

(c) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B’s property.

(d) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B’s property.

Section 64: Consequences of rescission of voidable contract. —

“When a person at whose option a contract is voidable rescinds it, the other party
thereto need not perform any promise therein contained in which he is promisor.
The party rescinding a voidable contract shall, if he have received any benefit there
under from another party to such contract, restore such benefit, so far as may be,
to the person from whom it was received.”

Section 2(i) defines voidable contract as “An agreement which is enforceable by law
at the option of one or more of the parties thereto, but not at the option of the other
or others, is a voidable contract”. It means that a contract which can be terminated
or continued only on the option of one party is a voidable contract.

Section 64 states that if a person on whose option the contract is voidable rescinds
the contract, then he must restore the benefit he has received from the other party
in the contract and the other party is not obliged to perform any promise it had
promised to perform in the contract as a promisor.

In Sinaya Pillai Vs Muniswami Iyyer, [22. Mad. 289,291.] it was postulated

that; “This principle is acknowledged in section 64 of the Indian Contract Act and
generally by the Indian Courts as Courts of Equity and good conscience.”

The Indian Contract Act only provides for the restoration received by the party
rescinding the voidable contract, whereas under The Specific Relief Act there is a
provision for the payment of compensation to which the other party may require.
 78

This provision of The Specific Relief Act is more logical as compared to the provision
in Section 64.

For example: X has received some loan from Y on a voidable contract. It is not
enough to only return the amount borrowed by X but he should also pay some
interest to Y on account of benefit obtained on such a transaction. It is suggested to
amend Section 64 to bring it in line with the provisions of The Specific Relief Act but
strangely the Law Commission recommended no change in it.

Section 33 in The Specific Relief Act, 1963

33. Power to require benefit to be restored or compensation to be made when

instrument is cancelled or is successfully resisted as being void or voidable.—

(1) On adjudging the cancellation of an instrument, the court may require the party
to whom such relief is granted, to restore, so far as may be any benefit which he
may have received from the other party and to make any compensation to him
which justice may require.

(2) Where a defendant successfully resists any suit on the ground—

(a)that the instrument sought to be enforced against him in the suit is voidable, the
court may if the defendant has received any benefit under the instrument from the
other party, require him to restore, so far as may be, such benefit to that party or to
make compensation for it;

(b) that the agreement sought to be enforced against him in the suit is void by
reason of his not having been competency to contract under section 11 of the
Indian Contract Act, 1872 (9 of 1872), the court may, if the defendant has received
any benefit under the agreement from the other party, require him to restore, so far
as may be, such benefit to that party, to the extent to which he or his estate has
benefited thereby.

Section 65 of The Indian Contract Act, 1872

Obligation of person who has received advantage under void agreement, or

contract that becomes 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
 79

to restore it, or to make compensation for it to the person from whom he received
it. 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
received it.”

Illustrations:

(a) A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s

daughter. C is dead at the time of the promise. The agreement is void, but B must
repay A the 1,000 rupees.”

Section 68: Claim for necessaries supplied to person incapable of

contracting, or on his account

“If a person, incapable of entering into a contract, or any one whom he is legally
bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.”[6]

Illustrations

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B’s property.

(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B’s property.

Under section 68, any person would be entitled to reimbursement out of the minor’s
estate for necessaries supplied to him or to his family. Necessaries also include
goods and services. If minor had obtained payment fraudulently by concealment of
age, he may be compelled to restore the payment, but he cannot be compelled for
an identical sum, if any, as it would amount to enforcing a void contract.

Thus, for a valid contract, capacity to contract is an essential element and for that,
Section 11 of the Contract Act defines the persons who are eligible for contract i.e.
competent to contract or who can enter into the contract. The person incompetent
 80

to contract like minor, unsound mind and persons disqualified by law are not eligible
to contract and contract with such type of person is unenforceable by law.

Landmark case laws

Srikakulam Subramaniam v. SubbaRao– To pay off, the promissory note and

mortgage debt of his father, minor and his mother, the minor sold a piece of land to
the holders of the promissory note in satisfaction of the debt. He paid off the
mortgage and got possession of the land. But later the minor claimed that because
of his minority the contract was void, and he demanded the possession of land. But
the court held that this contract was for the benefit of the minor and was entered
into by his guardian; his mother and thus was a valid one.

Suraj Narayan v. SukhuAheer: In the concerned case, a person borrowed some

money during his minority and after attaining the age of majority, he made a fresh
promise to pay that sum and interest thereon, but this contract was not enforceable
due to the reason that consideration received during minority is not a good
consideration.

Kundan Bibee v. Sree Narayan: S, while he was a minor received some goods
from K in connection with his business and was indebted to him, when he attained
majority, he took some more money and executed a bond for paying the total
amount to K. In an action by K to recover the said amount, it was contended by S
that he was not liable to pay as they purported to be in his minority. However, S
was made liable to pay the whole amount since there was a new consideration
attached.

Kuwarlal v. Surajmal: Regarding necessities provided to minors it was held that

the house given to a minor on rent for living in it and to continue his studies is part
of necessities, and therefore he is entitled to payment of rent from minor’s
property.

12. What is a sound mind for the purposes of contracting?

A person is said to be of sound mind for the propose of making a contract, if, at the
time when he makes it, he is capable of understanding it and of forming a rational
judgement as to its effect upon his interest.

A person who is usually of unsound mind, but occasionally of sound mind, may
make a contract when he is of sound mind.
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A person who is usually of sound mind, but occasionally of unsound mind, may not
make a contract when he is of unsound mind.

Illustrations-

(a) A patient in a lunatic asylum who is at intervals of sound mind, may contract
during those intervals.

(b) A sane man, who is delirious from fever, or who is so drunk that he cannot
understand the terms of a contract, or form a rational judgment as to its effect on
his interests, cannot contract whilst such delirium of drunkenness lasts.

Section 13. “Consent” defined.

Two or more person are said to consent when they agree upon the same thing in
the same sense.

Section 14. “Free consent” defined.

Consent is said to be free when it is not caused by-

(1) coercion, as defined in section 15, or

(2) undue influence, as defined in section 16, or

(3) fraud, as defined in section 17, or

(4) misrepresentation, as defined in section 18, or

(5) mistake, subject to the provisions of section 20, 21, and 22.

Consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation, or mistake.

Consent-

Sec 13 of the Indian Contract Act defines Consent as “when two parties entered into
the contract there should agree upon the same thing in the same manner”, there
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should be a meeting of minds between the two parties. Consent occurs when one
person voluntarily agrees to the proposal or desires of another.

Meaning and Definition of Free Consent-

Consent exists when one person voluntarily acknowledges to the proposal or desire
of another person. The definition of Free consent under the Indian Contract Act is
consent that is free from coercion, undue influence, fraud, misrepresentation, or
mistake. According to Section 13, “Two or more persons are said to be in consent
when they agree upon the same thing in the same sense (consensus-ad-idem)”.
Free consent means a consent giving to an individual for the performance of an act
on his will.

Free consent under the Indian Contract Act has been defined in Section 14. The
section says that consent is considered free consent when it is not caused or
affected by following:

Coercion

Undue influence

Fraud

Misrepresentation

Mistake

Importance of Free Consent-

1. Protects the validity and enforceability of an agreement

2. It protect parties from coercion, undue influence, misrepresentation, fraud
and mistake.
3. The principle of consensus-ad-idem is followed.

Illustration –

“A” an old man who stays with “B”, his nephew and he takes care of him. “B”
demanded to get the property of “A” as he was taking care of him and forces him to
sign the papers. Here in this case, “A” is under undue influence.
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Case Law- Nokhia vs State of H.P

In this case it was observed that consent to an acquisition cannot be described as a

real consent. In the absence of these vitiating factors the contract binds and no one
can get rid of it by unilateral action.

Vitiating Factors to Free Consent

The main vitiating factors in the law of contracts are:

1. Coercion
2. Mistake
3. Undue influence
4. Fraud
5. Misrepresentation

Section 15. “Coercion” defined.

“Coercion” is the committing, or threatening to commit, any act forbidden by the

Indian Penal Code or the unlawful detaining, or threatening to detain, any property,
to the prejudice of any person whatever, with the intention of causing any person to
enter into an agreement.

Explanation-

It is immaterial whether the Indian Penal Code is or is not in force in the place where
the coercion is employed.

Illustration-

A, on board an English ship on the high seas, causes B to enter into an agreement
by an act amounting to criminal intimidation under the Indian Penal Code.

A afterwards sues B for breach of contract at Calcutta.

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A has employed coercion, although his act is not an offence by the law of England,
and although Section 506 of the Indian Penal Code was not in force at the time
when or at the place where the act was done.

According to section 15 of the Indian Contract Act , “Coercion is the committing, or

threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement”.

Coercion is said to be where the consent of a person has been caused either by:

1.) There must be either commission or threat of commission of any offence

mentioned under IPC or,

2.) There may be unlawful detention or threat of detention of any property.

3.) This threat of offence or detention of property could be given to the other
contracting party or even a strangers/ third party

4.) Object of threat is to obtain consent of other party to contract.

1.) ACT FORBIDDEN BY THE LAW OR INDIAN PENAL CODE ;

“It says that if any person commit or threatens to commit an act which is violated
by the Indian Penal Code with a view to obtaining the consent of the other party to
an agreement, the consent in that case is to be considered that consent is obtain by
‘Coercion’. For Example, Ram threatens to shoot Shyam, if he does not let out his
house to Ram. Shyam under fear agrees to let his house to Ram. This agreement is
brought under by coercion. Shyam consent was not free. Shyam can avid the
contract, even after agreeing”.

For Coercion, it is not a necessary concept that the IPC should be applicable on that
place where the coercion case has been attempt. The section 15 clear that to
constitute a coercion, “It is immaterial whether the IPC is or is not in force in the
place where the coercion is employed.”

ANALYSIS OF SECTION 15:-

1.) Coercion may proceed from anybody, not necessary contracting party.

2.) It includes physical compulsion, fear and even danger to goods.

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3.) It must be obtained by unlawfully detaining or threatening to detain person or

property.

4.) There must be an intention to cause the other enter into an agreement.

EFFECTS OF COERCION:-

1.) It makes the agreement voidable at the option of the party coerced.

2.) Any money received or goods delivered under coercion must have to be repaid
or returned.

3.) Coerced person may rescind the contract.

In Ranganayakamma v. Alwar Seti , “The question is arise in front of the high

court of Madras was regarding the validity of the adoption of a boy by a widow,
aged 13 years. On the death of her husband, the husband dead body was not
allowed to be removed from her house for funeral, by the relatives of the adopted
boy until she adopted the boy. The court held that adoption was not binding on the
widow as her consent had been obtained by coercion.”

In Chikkam Ammiraju v. Chickam seshamma , In this case, the husband by a

threat of suicide, induced his wife and son to execute a release deed in favor of his
brother in respect of a certain proprieties claimed as their own by the wife and son.
The high court of madras held that to commit suicide amounted to coercion within
the meaning of section 15 of the Indian Contract Act and therefore release deed
was voidable.

2.) UNLAWFUL DETAINING OF PROPERTY:-

According to section 15, “Coercion could also be caused by the unlawful detaining,
or threatening to detain, any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement”. For Example,
if an outgoing agent refuses to hand over the account books to the new agent until
the principal executes release in his favor, it considered as coercion. But if the
detention of property is not unlawful, there is no coercion.

Main points related to unlawful detaining of property:-

1.) Forceable dispossession of property under threat is coercion.

2.) Threat to strike is not coercion because strike may be a lawful weapon for
collective bargaining but gherao is coercion.
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3.) When a contract is made under a statutory compulsion there is no coercion.

4.) Duress (pressure) is not a coercion, it is a part of coercion. It is only regarding for
person, not a property.

Difference between duress and coercion:-

1.) Coercion is restricted by Indian penal code but on the other side duress is not
restricted by IPC.

2.) Coercion threat may be directed against other party or even against strangers
but on the other side duress must be directed against a party to the contract, or his
wife, child, parent, or other near relative.

3.) Coercion may be directed against a person or his property but on the other side
duress is constituted by acts or threats against the person and not against the
property.

4.) Coercion may proceed from a person who is not a party to the contract but on
the other side duress should proceed from a party to the contract or by anyone
acting with his knowledge and for his advantage.

5.) In coercion, no such requisites are necessary in Indian law but on the other side
duress must be such as will cause immediate violence and also unnerve a person of
ordinary firmness of mind.

Askari Mirza v. Bibi Jai kishori

– Bibi Jai Kishori gave a loan to Askari Mirza, later she found that Askari Mirza had
lied to her to getting the loan.

– She thus became anxious and filed a criminal case against Askari Mirza.

– Although they later found an agreement where Askari Mirza was supposed to
give the money back immediately.

– It was said by Askari Mirza that the agreement was secured by coercion
constituting the threat of filing the criminal charges.

– The court thus had to decide whether a threat of filing criminal charges was
coercion within Section 15.

– The court later said that to threaten a criminal prosecution is not per se an act
forbidden by the Indian Penal Code. Such an act could only be one forbidden by the
Indian Penal Code if it amounted to a threat to file a false charge. And so a plaintiff,
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who sets up a plea of coercion based upon a threat of this nature, has to establish
three things, namely, that a threat was uttered, that it was a threat to commit an
act forbidden by the Indian Penal Code, and that the threat was uttered with the
intention of causing the plaintiff to enter into the agreement complained of.

The case of Askari Mirza v. Bibi Jai Kishori cleared the fog around such unknown
topics. One of the most significant being that filing of a false charge or threatening
to file a false charge is an offence under the IPC. The threat of filing a charge for an
offence that a person has indeed committed is not forbidden by the IPC. Consistent
with this, the court noted: ‘Of course if the charge of cheating was a true one, there
is an end to the plaintiff’s case, for a threat to bring such a charge would not be an
act forbidden by the Indian Penal Code.

Amiraju v. Seshamma

Facts: A Hindu husband by threatening the wife and son of committing a suicide and
thereby induced his wife and son to execute a sale deed in favour of his brother in
respect of certain properties. Husband had many vices. Later on wife and son
challenge the validity of deed on ground that the consent was caused by coercion
and therefore consent was not free. Thus, consent and the contract is voidable at
the option of the wife and the sun.

Held: It was held that the defendant husband threatened to commit suicide which is
forbidden by the Indian Penal Code, and therefore the sale deed was not valid.

Andhra Sugars Limited v. State of Andhra Pradesh

As mentioned under the Andhra Pradesh Sugarcane ( Regulation of Supply and

Purchase) Act, 1961, and the rules framed under it, the cane producer in the factory
sector is free to make or not to make an offer of sale of cane to the occupier of the
factory.

But if he makes an offer, the occupier of the factory is bound to accept it. It was
claimed that the agreement was caused by coercion. The Supreme Court ruled:-

The consent of the occupier of the factory to the agreement is not caused by
coercion, undue influence, fraud, misrepresentation or mistake. His consent is free
as defined in Section 14 of the Indian Contract though he is obliged by law to enter
into the agreement. The compulsion of law is not coercion as defined in section 15
of the act. In spite of the compulsion, the agreement is neither void nor voidable. In
the eye go the law, the agreement is freely made.
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The Supreme Court took the position that it would be a case of coercion only if the
contract was entered in by committing or threatening to commit an offence under
the Indian Penal Code. The imposition of the law is not coercion within Section 15.
The position was reiterated in S.S. Sakhar Karkhana Limited v C.I.T.,
Kolhapur. Under the co-operatives of Maharashtra compulsorily took deposits from
its farmer members. The Supreme Court noted on the agreement between the co-
operatives and its members:[8]

“The mere fact that the contract has to be entered in conformity with and subject to
restrictions imposed by law does not per se impinge on the consensual element in
the contract. ‘Compulsion of law is not coercion’ and despite such compulsion, ‘in
the eye of law, the agreement is freely made’, as pointed out in Andhra Sugars Ltd.
v. the State of A.P.”

Section 16. “Undue influence” defined.

(1) A contract is said to be induced by “under influence” where the relations

subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage
over the other.

(2) In particular and without prejudice to the generally of the foregoing principle, a
person is deemed to be in a position to dominate the will of another-

(a) where he hold a real or apparent authority over the other, or where he stands in
a fiduciary relation to the other; or

(b) where he makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of age, illness, or mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters into a
contract with him, and the transaction appears, on the face of it or on the evidence
adduced, to be unconscionable, the burden of proving that such contract was not
induced by undue influence shall be upon the person in a position to dominate the
will of the other.
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Nothing in the sub-section shall affect the provisions of Section 111 of the Indian
Evidence Act, 1872.

Illustrations-

(a) A having advanced money to his son, B, during his minority, upon B’s coming of
age obtains, by misuse of parental influence a bond from B for a greater amount
then the sum due in respect of the advance. A employs undue influence.

(b) A, a man enfeebled by disease of age, is induced by B’s influence over him as
his medical attendant, to agree to pay B an unreasonable sum for his professional
services, B employs undue influence.

(c) A, being in debt to B, the money-lender of his village, contracts a fresh loan on
terms which appear to be unconscionable, It lies on B to prove that the contract was
not induced by undue influence.

(d) A applies to a banker for a loan at a time when there is stringency in the money
market, The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is a transaction in the ordinary
course of business, and the contract is not induced by undue influence.

Types of undue influence

The judgement in Allcard v. Skinner[1] classified the cases on undue influence in

two parts- those in which there is a charge against donee or where there is an
abuse of opportunities which a person got through his duty. The court in above case
further elaborated on the ratio of the judgement and stated that “in the former case
the remedy is given on the principle that no one should be allowed to retain any
benefit that he gets through his fraudulent or illegal activities and in later cases it is
based on the grounds of public policy so that it can prevent the abuse of influence
between the parties by preventing relation between them”.

There are two conditions which are needed to be proved by the person
seeking damages[2]:

A. That the relation between parties is such that one is able to influence the
decision and will of the other, and secondly
B. That the donee or the defendant has abused his position to enrich himself.

But here, a joint discussion of all the cases would be feasible and will prevent the
confusion in understanding them. Mainly, all the cases of undue influence fall
under the following categories:-
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1. Relationship- For a case to fall in this category, it is not mandatory that the
parties are related to each other by blood relation, marriage or through
adoption but what is necessarily required is that one party must be in a
superior position and be able to dominate the will of the other. It does not
restrict itself to strict fiduciary relationships but applies to all varieties of
relationships. However, only the existence of such relationships is not able to
prove undue influence but there must be an exercise of the dominance.[3]
2. Dominating Position- In this category of undue influence, the circumstance
under which the contract was made is taken in the account along with their
relationships. The existence of dominating position along with its use is
mandatory to invoke an action. If once dominance is established, unless any
contrary object appears, it is presumed that there was a use in the particular
instance.
3. Unfair Advantage- In Ganesh Narayan Nagarkar v. Vishnu
Ramchandra Saraf[4], it was stated by the court that, “unfair advantage is
the advantage or enrichment which is obtained through unrighteous or unjust
means”. It comes into existence when the bargain favours the person who
enjoys influence and which proves unfair to others.
4. Real and Apparent Authority- In this type of influence, there is a real
authority like a police officer or an employer who uses his dominance for his
enrichment. Apparent authority is pretending real authority without its
existence.
5. Fiduciary Relationship- This type of relationship is solely based on the
existence of trust between the parties for each other. It is such that one of
the parties naturally reposes its confidence in the other one and with an
increase in that confidence gradually, one party starts influencing the other.
This type of relationship usually exists between doctor and patient, lawyer
and client, parent and child, teacher and student and beneficiary of a trust
(cestui que trust) etc. An example of such type of case was in Mannu Singh
v. Umadat Pande[5] where a guru influenced his disciple to take his
property in gift by promising to secure benefits to him in the next world. The
court set the gift aside as it was not formed with free consent.
6. Parent and Child- As parent fulfil every need of their children and want
them to act on their supervision, there is an inherent influence on children
from their childhood and that follows throughout their life. Thus, when any
benefit is transferred to the parent or any third-party on the expense of the
child, it is considered as jealousy on the part of a parent by the courts of
equity. Thus in every case, children’s age is always taken into account to
determine the extent of parental influence. In Lancashire Loans Ltd v.
Black[6], when a girl just before her marriage entered in a money lending
transaction as surety for her mother, it was held to be entered under undue
influence.
7. Affecting Mental Capacity- It is an established law from Inder Singh v.
Dayal Singh[7] that, “undue influence arises when one party taking the
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advantage of the temporary or permanent advantage of another’s mental

condition executes a contract. But, a mere distressed state of mind cannot
amount to undue influence until the defendant has used this opportunity to
his advantage. Similarly, instigating a person to enter into a contract who has
just attained his majority amounts to undue influence under this category due
to lack of plaintiff’s experience.

Illustration- A entered a contract with B, who is a minor and is unable to understand

the complex terms of the contract. Unless A proves that the contract was entered in
good faith and with adequate consideration, it will amount to undue influence

LETS DISCUSS IN BRIEF

Undue Influence is defined under Section 16 of the Indian Contract Act. At the point
when one party is in a situation to dominate the desire of others and actually
misuses the power or position, at that point it is an instance of undue influence, and
the contract gets voidable. At the point when all the accompanying three conditions
are satisfied then just the circumstance is considered as an undue influence:

1. One individual is in a situation to dominate the will of others.

2. He misuses his position.
3. He acquires an unjustifiable preferred position.

The word undue means superfluous, unwarranted, or more than required. Influence
implies persuading the mind of a counterparty through altering his perspective or
changing his will, however this influence should be undue i.e., it isn’t needed.
Undue influence applies to a relationship which might be blood connection or some
other sort of connection i.e., fiduciary or connection dependent on trust. It implies
the unreasonable utilization of one’s superior position to acquire the assent of an
individual who is in a frail position. For instance, A cop purchased a property worth
Rs 1 lakh for Rs 5000 from Ram, a denounced under his custody. Later this
agreement can be cancelled and it tends to be held as void on the grounds that
there is a mental pressure on an individual.

ABILITY TO DOMINATE THE WILL OF THE OTHER:

The dominant position isn’t characterized in the Indian Contract Act but Section
16(2) gives certain conditions when an individual is in a situation to dominate the
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will of another. Cases, where an individual is in a situation to dominate the desire or

will of others, are as per the following:

There should be a connection between the parties:

Real or apparent authority or connection in which one party can be dominated by

the other party. For instance, father and son.

Fiduciary connection is the connection which is made upon the conviction and trust
between the parties. One party should trust the other. For instance, Advocate and
client, instructor and student, Doctor and patient.

Illustration of real or apparent authority:

Father applies undue influence upon his child to accomplish something on the will of
his father. Else, he will part his connection with a child.

An industrial facility proprietor exerts undue influence upon his representative to

settle on a specific concurrence with him. If not, he (worker) will be drawn from his
work.

Illustration of fiduciary relation:

An advocate asks his client to give him additional cash to fight the case from his
side.

Mental or bodily distress implies the mental ability of an individual is influenced. It

very well may be either permanently or temporarily influenced. The reason for such
condition can be age, ailment, mental or bodily distress.

RELATIONS WHICH INVOLVES DOMINATION:

All situations where there is a active trust and confidence between the parties and
the two parties are not on equivalent balance. The principle of undue influence
applies to all the situations where influence is gained and manhandled. It applies to
all relations where control can be practiced by one party over another. i.e., where
exists a real or apparent authority or fiduciary relationship. In the category of undue
influence, the conditions under which the agreement was made is considered
alongside their connections.
 93

The presence of a dominate relation alongside its utilization is required to summon

an activity. Just a dominant position doesn’t prompt undue influence. It emerges
just when this position is utilized for picking up an unnecessary bit of leeway. Undue
advantage implies any sort of bit of leeway which isn’t justified by conditions in
which the agreement was entered. In the case of Ganesh Narayan Nagarkar Vs
Vishnu Ramchandra Saraf, it was held that unreasonable favourable position is
the bit of leeway or improvement which is gotten through unjust means. It appears
when bargains favour an individual who appreciates influence and which proves
unjustifiable to other people.

REAL OR APPARENT AUTHORITY:

Section 16(2) of the Indian Contract Act states that Undue Influence can emerge
any place the donee remains in a fiduciary relationship to the contributor or donor
and holds a real or apparent authority. In this sort of influence, there is a real
authority like a cop or a business who utilizes his dominance for his improvement.
Apparent authority is imagining as a genuine authority without its existence.

MENTAL DISTRESS:

A lone mental distress perspective doesn’t add up to undue influence until the
respondent has utilized this authority to exploit from another party. Also, instigating
an individual to enter into a contract who has recently attained majority adds up to
undue influence under this class because of an absence of the offended party ‘s
experience.

In the case of Inder Singh Vs Dayal Singh, the court stated that the undue
influence emerges when one party taking the temporary or permanent advantage
of another’s state of mind executes a contract. For instance, A entered into a
contract with B, who is a minor and can’t comprehend the complex terms of an
agreement. It will add up to undue influence except if A proves that the contract
was entered in accordance with good faith and with adequate consideration of B. An
instance of undue influence is set up more effectively when there is proof to build
up to show that the individual affected was of weak intellectual ability or in a feeble
condition of health.

BURDEN OF PROOF:
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Generally, the party bringing a case has the burden of proof the truth of current
facts on which the individual in question is depending. The burden of proof is on the
inquirer to show that undue influence was applied by a strong party over the fragile
party, and the later couldn’t practice free decision when entering the contract.
Notwithstanding, this burden can be shifted to the respondent in an undue influence
case if the offended party can show that a confidential relationship existed between
the departed benefactor and litigant, and that suspicious condition encompassed
the planning and execution of the will. At the point when this happens, the weight
moves absolutely on the respondent to demonstrate that unjustifiable impact didn’t
happen.

MANEKA GANDHI V. UNION OF INDIA

At the point when an individual is discovered to be in a situation by which he can

rule the desire of the other or an exchange seems, by all accounts, to be influenced
because of predominance, the burden of proof that no undue influence was
practiced in the exchange lies on the party who is in a situation to rule the will of
others. In the case of Diala Ram Vs Sarga, the respondent was at that point
obligated to the offended party, who was town moneylender. He again took a new
credit from an offended party and afterward executed a bond, wherein he
consented to pay some intrigue. The court held that the agreement was unseemly
and consequently, the burden of proof was on the offended party to show that there
was no undue influence for this situation.

The burden of prove that the agreement was not instigated by undue influence lies
upon the individual who was in the situation to dominate the will of others if the
transaction gives off an impression of being unjustifiable.

PRESUMPTION OF UNDUE INFLUENCE:

There are a few cases in which the Honorable Courts of India assume the presence
of undue influence between the parties:

Where one of the parties to a contract is in a situation to dominate the will of the
other and contract is prima facie unconscionable i.e., unjustifiable, the court
assumes the presence of undue influence in such cases.

Where one of the parties to a contract is a Pardanashin Woman, the contract is

ventured to be incited by undue influence. Corresponding to Pardanashin Woman,
Bombay High Court made an assessment that a lady becomes Pardanashin in light
of the fact that she is completely absolved from normal social intercourse not on the
grounds that she is the isolation of some degree.
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Section 17. “Fraud” defined.

“Fraud” means and includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agents, with intent to deceive another
party thereto his agent, or to induce him to enter into the contract-

(1) the suggestion as a fact, of that which is not true, by one who does not believe it
to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation-

Mere silence is no fraud.

Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that regard
being had to them, it is the duty of the person keeping silence to speak, or unless
his silence is, in itself, equivalent to speech.

Illustrations-

(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to

B about the horse’s unsoundness. This is not fraud in A.

(b) B is A’s daughter and has just come of age. Here the relation between the
parties would make it A’s duty to tell B if the horse is unsound.

(c) B says to A- “If you do not deny it, I shall assume that the horse is sound”. A
says nothing. Here, A’s silence is equivalent to speech.
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(d) A and B, being traders, enter upon a contract, A has private information of a
change in prices which would affect B’s willingness to proceed with the contract. A
is not bound to inform B.

Section 18. “Misrepresentation” defined.

“Misrepresentation” means and includes –

(1) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true;

(2) any breach of duty which, without an intent to deceive, gains an advantage to
the person committing it, or anyone claiming under him; by misleading another to
his prejudice, or to the prejudice of any one claiming under him;

(3) causing, however innocently, a party to an agreement, to make a mistake as to

the substance of the thing which is subject of the agreement.

LETS DISCUSS BRIEFLY ABOUT FRAUD AND MISREPRESENTATION

Fraud implies and involves any of the following acts committed by a contracting
party or his connivance or his agent with the intention of deceiving or inciting
another party or his agent to enter into the agreement:-

1. The suggestion, as a fact, of that which is not true by one who does not
believe it to be true.
2. The active concealment of a fact by one having knowledge or belief of the
fact.
3. A promise made without any intention of performing it.
4. Any other act fitted to deceive.
5. Any such act or omission as the law specially declares to be fraudulent.

Mere silence as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstance of the case is such that, regard being
had to them, it is the duty of the person keeping silence to speak, or unless his
silence, in itself is, equivalent to speech. Illustration– A sells by auction to B a
horse, which A knows to be unsound, A says nothing to B about the horse’s
unsoundness. This is not fraud in A.
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Section 17 describes fraud and lists the acts that amount to fraud, which are a false
claim, active concealment, promise without the intention of carrying it out, any
other deceptive act, or any act declared fraudulent. To constitute fraud, the
contracting party, or any other individual with his connivance, or his agent, or to
induce him to enter into the agreement, should have performed such acts. The
parties have no duty to speak about facts likely to affect the consent of the other
party to the contract, and mere silence does not amount to fraud unless the
circumstance of the case shows that there is a duty to speak or silence equivalent
to speech.

Fraud and Misrepresentation

The main difference between fraud and misrepresentation is that in the first case
the person making the suggestion does not believe it is true and in the other case
he believes it is true, although in both cases it is a misrepresentation of fact that
misleads the promisee. This was held in Rattan Lal Ahluwalia v Jai Janider
Parshad. Under common law, fraud will not only render the contract voidable at the
option of the party whose consent is so obtained but will also give rise to an action
for damages in respect of deceit.

If a decree is found to have been obtained by fraud, an application moved, even

belatedly, would be maintainable. The court has inherent jurisdiction to grant relief
on such an application and even principles or res judicata would not apply. Fraud is
a conduct either by letter or words, which includes the other person or authority to
take a definite determinative stand as a response to the conduct of the former
either by words or letter. Indeed, innocent misrepresentation may also give reason
to claim relief against fraud.

Ingredients of Section 17

When analysed s 17(1) shows the following ingredients:

1. There should be a suggestion as to a fact;

2. The fact suggested should not be true;
3. The suggestion should have been made by a person who does not believe it
to be true; and
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4. The suggestion should be made with intent either to deceive or to induce the
other party to enter into the contract.

Representation

A representation is a statement of fact, past or present and is distinct from an

opinion statement, although a statement of opinion may be considered as a
statement of fact in certain circumstances. The fraudulent misrepresentation must
be material in order to allow the representative to prevent the agreement, i.e. such
that it would have affected a reasonable man in choosing whether to enter into the
agreement or not. In Lillykutty v Scrutiny Committee, a false certificate was
obtained in order to take unfair advantage. It was held that fraud vitiates every
solemn act. Fraudulent acts are not encouraged by the courts. Any action by the
authorities or by the people claiming a right/privilege under the Constitution of India
which subverts the constitutional purpose must be treated as a fraud on the
Constitution.

False Assertion without Belief in its Truth

To prove a case of fraud, it must be proved that representations made were false to
the knowledge of the party making them. The statement must be false in substance
and in fact. Positive knowledge of falsehood is not a criterion. In order to constitute
fraud, it is necessary that the statement was made by the person concerned with
knowledge of its falsehood, or without belief in its truth. Even mere ignorance as to
the truth or falsehood of material assertion, which, however, turns out to be untrue,
is deemed equivalent to the knowledge of its untruth, as also where the representor
suspected that his statement might be inaccurate, or that he neglected to inquire
into its accuracy. In Jewson & Sons Ltd v Arcos Ltd, giving a false impression
and inducing a person to act upon it, was considered fraud, even if each fact taken
by itself would be literally true.

Reckless Statements

Proof of absence of actual and honest belief is all that is necessary to satisfy the
existence of fraud, whether the representation is made recklessly or deliberately;
indifference or recklessness on the part of the representor as to truth or falsity of
the representation affords merely an instance of absence of such belief. Statements
made without belief in the truth would include statements made recklessly.
Misrepresentation as to title made by vendors recklessly or with gross negligence
cannot escape the charge of fraudulent misrepresentation.
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Ambiguous Statements

Where the representer makes an ambiguous statement, the person to whom it is

made must prove that he understood that statement in the sense that it was in fact
false. The representor will be guilty of fraud if he intended the statement to be
understood in that sense, and not if he honestly believes it to be true, but the
person relying on it understands it in a different sense. Once it is held that the
representation was fraudulent under this clause, the exception in s 19 is of no avail,
and the question whether the person alleging fraud had or had not the means of
discovering the truth with ordinary diligence, is immaterial.

Active Concealment

Mere non-disclosure of some immaterial fact s would not per se five a right to
recission unless it is further found that the consent has been secured by practicing
some deception. Where the seller sold property already sold by him to a third
person, his conduct amounted to active concealment and fraud, and the buyer
could recover the price despite the agreement that the seller could not be
responsible for a defect in title.

Promise without Intention of performing it

Making a promise without the intention of performing it is fraud, though not so

under the English law. To bring the case within this clause, it must be shown that
the promisor had no intention of performing the promise at the time of making it,
and any subsequent conduct or representation is not considered for this purpose.

Silence as Fraud

Silence about fats is not fraud per se. Unless there is a obligation to talk or if it is
equal to expression, mere silence is not fraud. This rule has two skills. First,
suppressing portion of the known facts may mislead the assertion of the remainder,
although literally true as far as it goes. In such a case, the declaration is
substantially incorrect, and fraudulent is the willing rejection that makes it so.
Secondly, commercial use may impose a obligation to disclose specific flaws in
products sold or the like. In such a situation, failure to mention such a defect is
equal to an statement that there is no such defect.

Duty to Speak
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There is no general duty to disclose facts that are or might be equally within the
means of knowledge of both parties. In Bell v Lever Bros, the company agreed to
pay large compensation to two employees, the subsidiary company directors,
whose services were being dispensed with. After paying the money, the company
discovered that the directors had committed breaches of duty, which would have
justified their dismissal without compensation. The House of Lords held that the
directors had not these breaches in mind, and were under no duty to disclose them.

No Fraud

If the party alleging fraud had the facts before it or had the means to know them, it
could not be said to have been defrauded, even if a false statement has been made.
Further, a contract cannot be merely on a trivial and inconsequential mis-statement
or non-disclosure. In Janakiamma v Raveendra Menon , where the plaintiff was
aware of the contents of the Will of her father, the partition of property on the death
of the father and mother was not set aside on the ground of fraud of not disclosing
the contents of the Will; and no fresh partition was ordered.

Evidence and Burden of Proof

In a great majority of cases, fraud is not capable of being established by positive

and tangible proof. It is by its very nature secret in its movements. It is, therefore
sufficient if the evidence given is such as ay lead to interference that fraud must
have been committed. In most cases, circumstantial evidence is the only resource
in dealing with questions of fraud. If this were not allowed, the ends of justice would
be constantly, if not invariably, defeated. At the same time, the interference of
fraud is to be drawn only upon an intentional wrongdoer. Being a restitutionary
remedy, all actual losses flowing from fraud are recoverable, even if they could not
have been reasonably foreseen; subject to the rule of mitigation by the defrauded
party. Nor would the damages be reduced on account of contributory negligence.

Effect of Fraud

A contract, consent to which is obtained by fraud, is voidable under s 19. The party
deceived has the option to affirm the contract and insist that he be put in the
position in which he would have been if the representations were true, or he may
rescind the contract to the extent it is not performed. Upon rescission, he is liable to
restore the benefit received by him under s 64 and may recover damages. The
measure of damages recoverable is essentially that applicable to the tort deceit, ie,
all the actual loss directly flowing from the transaction included by the fraud,
including the heads of consequential loss, and not merely the loss which was
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reasonably foreseeable. Where a document, which was intended to be in favor of a

particular person but, as a result of fraud of the defendant, conveyed to someone
else, the transaction would be also voidable under s 19.

Damages for Fraud

Where a contract is induced by fraud, the representee is entitled to claim rescission,

or damages or both. He would have a remedy by way of such suit, even if restitutio
in integrum is not possible as in Indranath Banerjee v Rooke.

In Firbank’s Executors v Humphreys, the damages for fraudulent

misrepresentation, under the general rule, were arrived at by considering the
difference in the position the plaintiff would have been in, had the representation
been true and in the position he is actually in, in consequence of it’s being true.

The principles applicable in asserting damages for fraudulent misrepresentation

have been stated by Lord Browne-Wilkinson in Smith New Court Ltd v
Scrimgeour Vickers (Asset Management) Ltd:-

1. The defendant is bound to make reparation for all the damage directly
flowing from the transaction;
2. Although such damage not have been foreseeable it must have been directly
caused by the transaction;
3. In assessing search damage, the plaintiff is entitled to recover by way of
damages the full prize faced by him, but he must give credit for any benefits
which he has received as a result of the transaction;
4. As a general rule, the benefits received by him into the market value of the
property acquired at the date of the transaction, but the general rule is not to
be inflexible applied where to do so would prevent him from obtaining full
compensation for the wrong suffered;
5. The plaintiff is entitled to recover consequential losses caused by the
transaction;
6. The plaintiff must take all reasonable steps to mitigate the loss once he has
discovered the fraud.

Derry v Peek (1889) 14 App Cas 337

Facts

In the prospectus released by the defendant company, it was stated that the
company was permitted to use trams that were powered by steam, rather than by
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horses. In reality, the company did not possess such a right as this had to be
approved by a Board of Trade. Gaining the approval for such a claim from the Board
was considered a formality in such circumstances and the claim was put forward in
the prospectus with this information in mind. However, the claim of the company for
this right was later refused by the Board. The individuals who had purchased a
stake in the business, upon reliance on the statement, brought a claim for deceit
against the defendant’s business after it became liquidated.

Issue

It is important to note that the law regarding false misrepresentation was still
developing and this was an important case in doing so. In this case, the court was
required to assess the statement made by the defendant company in its prospectus
to see whether the statement was fraudulent or simply incorrect.

Held

The claim of the shareholders was rejected by the House of Lords. The court held
that it was not proven by the shareholders that the director of the company was
dishonest in his belief. The court defined fraudulent misrepresentation as a
statement known to be false or a statement made recklessly or carelessly as to the
truth of the statement. On this basis, the plaintiff could not claim against the
defendant company for deceit.

Section 19. Void-ability of agreements without free consent.

When consent to an agreement is caused by coercion, fraud or misrepresentation,

the agreement is a contract voidable at the option of the party whose consent was
so caused.

A party to contract, whose consent was caused by fraud or misrepresentation, may,

if he thinks fit, insist that the contract shall be performed, and that he shall be put
on the position in which he would have been if the representations made had been
true.

Exception-
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If such consent was caused by misrepresentation or by silence, fraudulent within

the meaning of section 17, the contract, nevertheless, is not voidable, if the party
whose consent was so caused had the means of discovering the truth with ordinary
diligence.

Explanation-

A fraud or misrepresentation which did not cause the consent to a contract of the
party on whom such fraud was practised, or to whom such misrepresentation was
made, does not render a contract voidable.

Illustrations-

(a) A, intending to deceive B, falsely represents that five hundred maunds of indigo
are made annually at A’s factory, and thereby induces B to buy the factory. The
contract is voidable at the option of B.

(b) A, by a misrepresentation, leads B erroneously to believe that five hundred

mounds of indigo are made annually at A’s factory. B examines the accounts of the
factory, which show that only four hundred maunds of indigo have been made. After
this B buys the factory. The contract is not voidable on account of A’s
misrepresentation.

(c) A fraudulently informs B that A’s estate is free from encumbrance. B thereupon
buys the estate. The estate is subject to a mortgage. B may either avoid the
contract, or may insist on its being carried out and the mortgage-debt redeemed.

(d) B, having discovered a vein of ore on the estate of A, adopts means to conceal,
and does conceal the existence of the ore from A. Though A’s ignorance B is
enabled to buy the estate at an undervalue. The contract is voidable at the option of
A.

(e) A is entitled to succeed to an estate at the death of B, B dies; C having received

intelligence of B’s death, prevents the intelligence reaching A, and thus induces A to
sell him his interest in the estate. The sale is voidable at the option of A.

Section 19A. Power to set aside contract induced by undue influence.

When consent to an agreement is caused by undue influence, the agreement is a

contract voidable at the option of the party whose consent was so caused.
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Any such contract may be set aside either absolutely or, if the party who was
entitled to avoid it has received any benefit thereunder, upon such terms and
conditions as to the Court may seem just.

Illustrations-

(a) A’s son has forged B’s name to a promissory note. B under threat of persecuting
A’s son, obtains a bond from A for the amount of the forged note. If B sues on this
bond, the Court may set the bond aside.

b) A, a money lender, advances Rs.100 to B, an agriculturist, and by undue

influence induces B to execute a bond for Rs.200 with interest at 6 per cent per
month. The court may set the bond aside, ordering B to repay the Rs.100 with such
interest as may seem just.

Section 20. Agreement void where both parties are under mistake as to
matter of fact.

Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement, the agreement is void.

Explanation-

An erroneous opinion as to the value of the things which forms the subject-matter of
the agreement, is not be deemed a mistake as to a matter of fact.

Illustrations-

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain in the ship
conveying the cargo had been cast away and the goods lost. Neither party was
aware of these facts. The agreement is void.

(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of bargain, though neither party was aware of the fact. The agreement is
void.
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(c) A, being entitled to an estate of the life of B, agrees to sell it to C, B was dead at
the time of the agreement, but both parties were ignorant of the fact. The
agreement is void.

Section 21. Effect of mistake as to law.

A contract is not voidable because it was caused by a mistake as to any law in force
in India; but mistake as to a law not in force in India has the same effect as a
mistake of fact.

Illustration-

A and B make a contract grounded on the erroneous belief that a particular debt is
barred by the Indian Law of Limitation; the contract is not voidable.

Section 22. Contract caused by mistake of one party as to matter of fact.

A contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact.

A mistake refers to an incorrect belief that is innocent in nature which leads one
party to misunderstand the other. It usually takes place when the parties to the
contract are not completely aware of the terms of the agreement and understands
the terms in a different sense. Therefore there is no consensus ad–idem i.e meeting
of minds between the parties and thus do not understand the same thing in the
same sense.

The Indian Contract Act,1872 states two kinds of mistakes

1) Mistake of Law(Section 21)

2) Mistake of Fact(Section 20 &22)

Mistake of Law

The Latin maxim ignorantia juris non excusat means that ignorance of the
law is no excuse. Therefore under section 21 of the Indian Contract Act, 1872, a
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contract cannot be said to be voidable due to the mistake of the parties in

understanding any laws that are in force in India. Hence the parties to the contract
cannot claim relief on the grounds that they were unaware of the Indian law.

For Example, A man was caught by a ticket conductor for traveling on a train
without a ticket. The man cannot claim that he was not aware that a ticket is
required while traveling and shall be punished under Section 138 of The Indian
Railways Act, 1989.

Exceptions

1) Mistake with regard to a Foreign Law

Section 21 also specifies that a mistake regarding a foreign law shall be treated as a
mistake of fact. This is because the parties to the contract are not expected to know
all the provisions of the foreign law and their meaning. Therefore in case of a
mistake of the foreign law by both the parties, the contract will be considered void.

For Example, An Indian Company agrees to sell an American Company 200 cans of
a certain mixture containing 45% Sulphuric acid. The law of the country had banned
the purchase and sale of mixtures containing more than 30% Sulphuric acid. This is
considered to be a mistake of foreign law and therefore the contract is said to void.

2) Mistake with regard to a Private Right

The existence of any private right is a matter of fact although depending on the
rules of law because it is not possible for a party to fully know the private rights of
another party.

In the case of Cooper v Phibbs(1867), The plaintiff took a lease of fishery right
from the defendant unaware of the fact that he already had a life interest in the
fishery right. The plaintiff, therefore, brought a suit for the cancellation of the lease
and the defendant argued that this was a mistake of law. It was held that a mistake
as to the general ownership or right stands on the same footing as a mistake of law
and therefore was declared void.

Mistake of Fact
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The maxim Ignorantia Facti Excusat which means that the Ignorance of fact
excuses. Therefore under Section 20 of the Indian Contract Act, 1872, a contract is
said to be void when both the parties to the agreement are under a mistake as to a
matter of fact.

A mistake of Fact can be of 2 kinds-

1) Bilateral Mistake – Section 20

Section 20 will only apply when the following three conditions are fulfilled:

1)The mistake must be committed by both the parties i.e must be mutual

2)The mistake must be regarding some fact.

3)It must relate to a fact which is essential to the contract.

Therefore if the mistake is made regarding the existence of the subject matter or a
fact essential to the contract, it would be a void contract since there is no
consensus ad idem.

But an incorrect opinion regarding the value of the thing which forms the subject
matter of the agreement is not said to be a mistake of fact and is considered
inconsequential to the agreement.

Types of Bilateral Mistakes

1) Mistake regarding the existence of the subject matter

Sometimes the existence of the subject matter of the contract ceases to exist
before the agreement was made and the parties to the contract may not be aware
of this fact. If the subject matter on which the contract exists is not present, it is
considered that the contract has perished and hence the agreement would be
considered void.

In the case of Galloway vs. Galloway(1914), A man and woman believed that
they were married and therefore made a separation agreement but it was later
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discovered that the man’s first wife was alive. It was held that the separation
agreement was void as it had been entered into on the basis of the common
assumption that the parties were married to each other.

2) Mistake regarding the quality of the subject matter

If the parties to the contract are not mistaken regarding the subject matter of the
contract but regarding its quality, the contract would be said to be valid.

In the case of Smith vs Hughes(1870), The plaintiff agreed to buy certain Oats
from the defendant believing that they were old when in reality they were new. It
was held that the defendant cannot avoid the contract on the ground that he was
mistaken as to the oldness of the oats.

3) Mistake regarding the quantity of the subject matter

If both the parties to the contract are under a mistake as to the quantity of the
subject matter, the agreement is said to be void.

For Example, Ankita agreed to buy a car from Prankur based on his letter in which
the price mentioned was 50000 instead of 5 lakhs due to a typing error. The said
agreement is considered void due to a mistake as to the quantity of the subject
matter.

4) Mistake regarding the title of the subject matter

Sometimes the buyer of said property or good may already be the owner of what
the seller wishes to sell. Both the parties here might be under a mutual mistake as
to the title of the said good or property. Since in such a case there is nothing that
the seller can transfer, there is no contract which subsequently becomes void. This
can be explained in the case of Cooper v Phibbs(1867).

2) Unilateral Mistake -section 21

Section 21 of the act says that a contract cannot be said to be voidable just because
one of the parties to the contract was under a mistake as to a matter of fact
concerned to the contract. Therefore a unilateral mistake does not affect the
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validity of the contract and cannot be a ground for setting aside the contract in the
court of law.

In the case of Tapline Vs Jainee(1880), The buyer at an auction brought a

property described with reference to a plan. The buyer was under the assumption
that he was well versed with the property and therefore did not refer to the plan.
Later he discovered that a garden plot which he thought was a part of the property
was not in fact included in the plan. It was held that the buyer cannot revoke the
contract on the grounds of the unilateral mistake made by him and was bound by
the contract.

Exceptions to a Unilateral Mistake

In case of a unilateral mistake, the contract can only be avoided if it is proved that
the contract was caused due to fraud or misrepresentation on the part of one of the
parties to the contract.

1) Mistake by one party as to the nature of the contract

When a mistake is made by one of the parties regarding the very nature of the
contract being entered into and such a mistake is known to the other party, such a
contract is said to be void.

This may happen because while executing a contract, a party may not understand
the nature of the contract he is entering into either due to fraud or
misrepresentation by the other party or due to the old age or ill health of the person
consenting to such a contract.

In the case of Dularia Devi v. Janardan Singh(1990), An illiterate woman put her
thumb impression on two documents thinking that both of them were to gift some
property to her daughters. Later she discovered that the second document was to
defraud her out of more of her property. Although this was a unilateral mistake on
the part of the illiterate woman yet since the consent for the said agreement was
gained by fraud and the woman was not aware of the nature of the transaction, the
contract was held void by the courts.
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2) Mistake by one party regarding the identity of the parties to the

agreement

Generally, the identity of the parties entering into an agreement is not essential to a
contract. But in certain cases, when a unilateral mistake is made regarding the
identity of the parties to the agreement due to misrepresentation by one party who
claims himself to be someone who he really is not, In such cases the agreement is
said to be void

In the case of Cundy v Lindsay (1878), Lindsay & Co were manufacturers of

linen handkerchiefs amongst other things who received an order of 250 Dozen
handkerchiefs from a man named Blenkarn, who imitated the signatures of
“Blenkiron & Co.” a reputed firm located at “123, Wood Street”.The man further
mentioned his address to be at 37, Wood Street, Cheapside. Lindsay and Co
assumed that the order was from the reputed firm located at Wood-street and thus
delivered the order. Later the man sold the goods to an innocent party, Cundy.
When Blenkarn failed to pay for the said order Lindsay & Co sued Cundy for the
goods. Lindsay and Co claimed that since they sold the goods to Blenkarn under the
mistaken assumption that they were selling it to Blenkiron & Co, there was no real
consent to the contract of sale.

It was held that there was a unilateral mistake by the claimants regarding the
identity of the other party making the contract void and hence the title of the goods
did not pass to Blenkarn, and therefore could not have passed to Cundy who was
liable to return the goods back to Lindsay and Co.

Section 23. What consideration and objects are lawful, and what not.

The consideration or object of an agreement is lawful, unless-

A. It is forbidden by law; or
B. is of such nature that, if permitted it would defeat the provisions of any law or
is fraudulent; or
C. involves or implies, injury to the person or property of another; or
D. the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be

unlawful. Every agreement of which the object or consideration is unlawful is void.
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Illustrations-

(a) A agrees to sell his house to B for 10,000 rupees. Here, B’s promise to pay the
sum of 10,000 rupees is the consideration for A’s promise to sell the house and A’s
promises to sell the house is the consideration for B’s promise to pay the 10,000
rupees. These are lawful considerations.

(b) A promises to pay 10,000 rupees at the end of six months, if C, who owes that
sum to B, fails to pay it, B promises to grant time to C accordingly. Here, the
promises of each party is the consideration for the promises of the other party, and
they are lawful considerations.

(c) A promises, for a certain sum paid to him by B, to make goods to B the value of
his ship of it is wrecked on a certain voyage. Here, A’s promises is the consideration
for B’s payment and B’s payment is the consideration for A’s promise, and these are
lawful considerations.

(d) A promises to maintain B’s child, and B promises to pay A 1,000 rupees yearly
for the purpose. Here, the promise of each party is the consideration for the
promise of the other party. They are lawful considerations.

(e) A, B and C enter into an agreement for the division among them of gains
acquired or to be acquired, by them by fraud. The agreement is void, as its object is
unlawful.

(f) A promises to obtain for B an employment in the public service and B promises
to pay 1,000 rupees to A. The agreement is void, as the consideration for it is
unlawful.

(g) A, being agent for a landed proprietor, agrees for money, without the knowledge
of his principal, to obtain for B a lease of land belonging to his principal. The
agreement between A and B is void, as it implies a fraud by concealment, by A, on
his principal.

(h) A promises B to drop a prosecution which he has instituted against B for

robbery, and B promises to restore the value of the things taken. The agreement is
void, as its object is unlawful.

(i) A’s estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which the defaulter is prohibited from purchasing the estate. B, upon
an understanding with A, becomes the purchaser, and agrees to convey the estate
to A upon receiving from him the price which B has paid. The agreement is void, as
it renders the transaction, in effect, a purchase by the defaulter, and would so
defeat the object of the law.
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(j) A, who is B’s mukhtar, promises to exercise his influence, as such, with B in
favour of C, and C promises to pay 1,000 rupees to A. The agreement is void,
because it is immoral.

(k) A agrees to let her daughter to hire to B for concubinage. The agreement is void,
because it is immoral, though the letting may not be punishable under the Indian
Penal Code.

Consideration means something reciprocally it’s actually a price which might be in

sort of some benefits paid by one party for the promise of another party.

Example: A made an agreement with T that he will purchase his flat for 40lac. Here
the consideration of A is house and therefore the consideration of T is 40lac.

For legitimate contract considerations and objects should be lawful. Object means
the aim. Consideration means the worth of the promise. If the object or
consideration is forbidden by law. Example: Smuggling. If it defeats the provisions
of any law. If the object or consideration is fraudulent. Example: getting the
signature of the person on a marriage certificate fraudulently. If it involves injury to
the person or property of others. Example: Agreement to form an injury to an
individual. If the court declares the object or any consideration as immoral.

Section 23 of ICA 1872: What considerations and objects are lawful and what not.-

The consideration or object of an agreement is lawful, unless-

-it is forbidden by law; or

-is of such nature that, if permitted, it might defeat the provisions of any law; or

-is fraudulent; or

-involves or implies injury to the person or property of another or;

-the Court regards it as immoral, or against public policy.

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In each of those cases, the consideration or object of an agreement is claimed to be

unlawful. Every agreement of which the object or consideration is unlawful is void.

The circumstances which might make a consideration also as the object of an

agreement unlawful, are discussed as under

1. Forbidden by Law

Where the object or the consideration of an agreement is that the

performance of an act which is forbidden by law, the agreement is void. Acts or
undertakings forbidden by law are those punishable under any statute also as those
prohibited (expressly or implicitly) by special legislation of Parliament and state
legislatures.

For example, the assembly or sale of excisable articles is prohibited under the
Excise Act except upon a Government license. Sale of liquor without a license is
prohibited for this reason under the Excise Act and is, therefore, illegal. A contract
entered into in contravention of a statutory prohibition is going to be null and void
whether such prohibition is express or implied. To summarize, all agreements
involving breach of laws enacted for the protection or promotion of public interest
are void.

the following are samples of some void agreements.

VoId agreements are forbidden by law

Example 1: A promises B to drop a prosecution which he instituted against B for

robbery, while B promises to revive the worth of the items taken. The agreement is
void, as its object is unlawful.

Example 2: Where a loan was granted to the guardian of a minor to rearrange the
minor’s marriage has been held to be contrary to the enactment (Child Marriage
Restraint Act) and, therefore, void. Therefore the cash advanced can’t be recovered.

2. Defeat the purpose of Provisions of any Law

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Though the thing or consideration for the agreement, sometimes indirectly

forbidden by law, they’re still forbidden if nature defeats the aim of the provision of
law. Agreement with such an object or consideration is void. Where a legislative
enactment provides penalty for an act or promise, the performance of such an act
or promise would amount to the defeat of that enactment, because it is implicit that
the statute intends to forbid that act.

3. Fraudulent

An agreement, the object of which is to defraud others is void. Where the

parties comply with practice a fraud on a 3rd person, not a celebration to the
contract, their agreement is unlawful and void.

To render an agreement unlawful and void on the idea of fraudulent object

or consideration, the fraud, must, however, be established beyond reasonable doubt
and can’t be supported mere suspicion and conjecture.

4. Injurious to Person or Property

Any agreement that suggests or involves injury to person or others property,

it’s deemed unlawful and thus void.

For example, during a person borrowed Rs.100, and in consideration, executed a

bond in favor of the lender, also the plaintiff during this case. The person, within the
bond, promised to figure for him for 2 years failing which he agreed to pay a really
exorbitant rate of interest and therefore the principal amount directly. it had been
held that the contract was void since the promise contained within the bond was
tantamount to slavery on a part of the defendant, which is both injurious to an
individual also as illegal.

5. Immoral

If the object or consideration of an agreement is against morality, it’s void.

the subsequent examples would help understand the purpose better.

Agreements supported immorality also void.

Example 1: A, a landlord, let his house on rent to B, a billboard sex worker, knowing
that it might be used for immoral trafficking. the owner cannot recover the rent.
Here, the thing being immoral, the agreement to pay rent is void.
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Example 2: A agrees to let her daughter to B as a concubine. The agreement is void,

because it’s immoral, though the letting might not be punishable under the Indian
legal code (45 of 1860).

6. Agreements against Public Policy

The term public policy during a wider sense means restriction of freedom of
persons from doing something within the larger interest or for the great of the
community. within the context of the Indian Contract Act, it restricts the liberty of
persons to accept certain areas that are detrimental to public policy. An agreement
is void if the law regards it as against public policy.

In law, the doctrine of public policy covers many heads like the subsequent.

1. trading with an alien enemy

2. Interference with administration of justice
3. Marriage brokerage agreements
4. trafficking publicly offices
5. Unfair or unreasonable dealings

the standard function of the courts is to believe the well-settled heads of

public policy and to use them to varying situations. for instance, A, the manager of
a firm, agrees to pass a contract to B if the latter pays a sum of Rs 5,000 to the
previous privately. The agreement tends to make interest against obligation and is
void on the bottom of trafficking publicly offices.

For the cases coming under Section 23, one has got to examine or see
whether the section invalidates agreement on the bottom of the objects or
consideration is being unlawful. The three matters, as mentioned above, viz. (i)
consideration for the agreement, (ii) object of the agreement and (iii) the
agreement also are required to be kept in mind, and therefore the three principles,
arising from the Section – which are:

(i) An agreement or contract is void if its purpose is that the commission of an

illegal act;

(ii) If it’s expressly or impliedly prohibited by any law, and

(iii) If its performance isn’t possible without disobedience of any law.

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VOID AGREEMENTS

Section 24. Agreements void, if consideration are objects unlawful in part.

If any part of a single consideration for one or more objects, or any one or any part
of any one of several consideration of a single object, is unlawful, the agreement is
void.

Illustrations-

A promises to superintend, on behalf of B, a legal manufacture of indigo, and an

illegal traffic in another articles B promises to pay to A salary of 10,000 rupees a
year. The agreement is void, the object of A’s promise, and the consideration for B’s
promise, being in part unlawful.

Agreements in which a part of consideration or object is unlawful This is mentioned

in Section 24 of the Act. The basic essence of this statement is that if the
consideration, as a whole or in part is unlawful or if the end product of the
agreement is illegal then the agreement is declared void. The contract would,
however, be considered valid after deleting the unlawful clauses. For example, if
there is an agreement between A and B for the exchange of drugs and medicinal
herbs for ₹5000, then the agreement stands void even though the consideration of
the agreement is legal. This is because the object of the agreement is illegal. But in
this case, if we remove the drugs from the object then the agreement would be
termed valid.

Moreover, if transaction which arises out of an unlawful act is such that if they are
separated from the illegal part, then they would count as a valid agreement, then
those transactions hold value in the eyes of law irrespective of the illegality of the
agreement.

Section 25. Agreement without consideration, void, unless it is in writing

and registered or is a promise to compensate for something done or is a
promise to pay a debt barred by limitation law.

An agreement made without consideration is void, unless-

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(1) It is expressed in writing and registered under the law for the time being in force
for the registration of documents, and is made on account of natural love and
affection between parties standing in a near relation to each other; or unless.

(2) It is a promise to compensate, wholly or in part, a person who has already

voluntarily done something for the promisor, or something which the promisor was
legally compellable to do; or unless.

(3) It is a promise, made in writing and signed by the person to be charged

therewith or by his agent generally or specially authorised in that behalf, to pay
wholly or in part debt of which the creditor might have enforced payment but for
the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1-

Nothing in this section shall affect the validity, as between the donor and donee, of
any gift actually made.

Explanation 2-

An agreement to which the consent of the promisor is freely given is not void
merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the Court in determining the question
whether the consent of the promisor was freely given.

Illustrations-

(a) A promises, for no consideration, to give to B Rs.1,000. This is a void agreement.

(b) A, for natural love and affection, promise to give his son B, Rs.1,000. A puts his
promise to B into writing and registers it. This is a contract.

(c) A finds B’s purse and gives it to him. B promises to give A Rs.50. This is a
contract.

(d) A supports, B’s infant son. B promises to pay A’s expenses in so doing. This is a
contract.
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(e) A owes B Rs.1,000, but the debt is barred by the Limitation Act. A signs written
promise to pay B Rs.500 on account of the debt. This is a contract.

(f) A agrees to sell a horse worth Rs.1,000 for Rs.10. A’ s consent to the agreement
was freely given. The agreement is a contract notwithstanding the inadequacy of
the consideration.

(g) A agrees to sell horse of worth Rs.1,000 for Rs.10. A denies that his consent to
the agreement was freely given. The inadequacy of the consideration is a fact which
the court should take into account into considering whether or not A’ s consent was
freely given.

Section 25 of the Contract Act reads- “Agreements without consideration, void

unless it is writing and registered or is a promise to compensate for something or is
a promise to pay a debt barred by limitation law”. This section after defining
consideration in definition clause in Sec. 2(d) declares that “consideration is the
vital part of a valid contract” and also states some exception to the rule that it
establishes and in such exceptions, the contract cannot be rendered void even if it
is without consideration.

The exceptions are:

1. When the contract is in writing and registered

2. When it is for compensating someone for his voluntary services for the
promisor in the past.
3. When it is a promise, signed or made in writing by the person or his agent to
pay whole or part of a debt which is barred by the law of limitation.

Note:

In case of transfer of any gift from one person to another, this section does not
affect its validity.

Mere inadequate consideration in a contract does not render it to be void under this
section. However, inadequacy may be taken into account to check whether the
consent was free or not.

Illustrations

X agrees to sell his bicycle worth Rs. 5000 for Rs. 1000 to Z. The agreement is
lacking adequate consideration but it is not void. However, it may be taken into
account by the court to see whether the consent was free or not.
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A Promises without consideration to give his car to B. This is a void agreement.

However, if A out of natural love and affection promises and writes and registers it,
to give his car to B, this is a contract.

Promises without consideration

According to Privy Council in Siqueria v. Noronha AIR 1934 PC 1934. “Section

25 is exhaustive; and so it is able to cover every agreement within its ambit to
qualify the enforceability of it. If it qualifies the agreement, it will be enforceable
and if does not it will be not enforceable at all”. In addition, a mere duty which is
moral in nature [Firm Gopal Company Ltd v Firm Hazari Lal & Co AIR 1963
MP 372] or a promise to take membership or subscribe to a charitable institution is
void [T v Kameshwar Singh AIR 1953 Pat 231.].

Adequacy of consideration

The simplest agreement which is without consideration is that which is formed out
of pure gratuity. Such a promise is not enforceable. The law on this point regarding
the adequacy of consideration is simple and clear- that the consideration is not
required to be of a particular fixed value or an approximation to the promise for
which it is exchanged but it must be that have some values in the eyes of the law. It
must change promisee’s position after the consideration is acted upon or
transferred from promisee to the promisor.

Agreements on account of natural love and affection under the Indian

Contract Act

With a different line of reasoning in different judgments on similar issues in the

cases on contracts involving love and affection, the courts have shown that the
English doctrine of “Solemnity of the deed” has been never received as it is, in
India. Hence, a mere formal arrangement of a promise does not result in a valid
binding agreement and other factors must be considered in the cases when there is
a contract without consideration, gratuitously.

But, if the agreement emerges out of affection and is registered in written form, it
will amount to a valid contract. When a husband formed and registered an
agreement with his wife that he will give his earrings to her, it was held that there
was a valid agreement.[ Poonoo Bibee v Fyez Buksh (1874) 15 Beng LR App
5.]
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On the Contrary, the existence of the near relation between the parties is not
sufficient to show that there is affection between them. On this line of reasoning in
Rajlukhy Dabee v Bhootnath[(1900) 4 Cal WN 488.], where the husband was
sued for not performing his part of a promise by not giving separate residence and
maintenance to his wife, it was not held to be a valid contract. The court ruled in
favour of the husband stating that “the terms of the arrangement between the
husband and wife clearly show that there was no affection between them and so, it
was without consideration. Thus, it was void ab initio.

As natural love and affection cannot be assumed every time when no other motive
is known, the court presumes by considering the relation between the parties.

In Vijay Ramraj v Vijay Anand[AIR 1952 All 564.], the Court held the contract
enforceable when the promisor who promised to pay a certain amount to his
relative during his life died. The contract was held to be formed out of natural love
and as the document of the contract was registered also, the heirs of deceased
were made liable for specific performance of the terms of the contract by virtue of
Sec. 25(1) and Sec. 37 of the Contract Act as it would have been done by the
promisor if he had lived.

Compensation for voluntary services

This comes as another exception on the principles of English law which states that
past consideration is no consideration at all unless it’s a promise or an act done on
promisor’s request. Section 25 (2) covers this exception and there is no requirement
of consideration if a person does an act or gives his service to the promisor without
the knowledge of the promisor. And in turn, the promisor shows his willingness to
compensate for it by an undertaking.

However, for an exception to fall under this category, some ingredients which are
discussed below need to be fulfilled:

Promise

Existence of promise to compensate in future must be there to form an exception

under this section. If there is no promise, no contract arises in such a situation and
thus suit for specific performance cannot be maintained.
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Voluntary service

In Hyderabad State Bank v Ranganath Roy[AIR 1958 AP 605.], it was stated

by the Court that “the term “voluntarily done” shows the performance of something
based on one’s own impulses, will and choices. There should be no constraint or
pressure or suggestion from anyone”.

Thus, there should be a voluntary service to seek remedy under this section. If
someone else other than the plaintiff has provided the service, such contract is not
enforceable by the plaintiff. In Bachhu Ram v Chunder[AIR 1916 Pat 80.] where
the defendant agreed to pay B for teaching the defendant singing and dancing at
her own cost and when it was discovered that she was B’s sister who had actually
rendered the service, specific performance was not allowed by the court.

Service for the promisor

It is a prerequisite under Section 25 that the act is done or service rendered should
be voluntary in nature and specifically for the promisor- without his knowledge or at
his request. In addition, there must be a promise by the promisor to compensate for
volunteer’s service in the future. It must be also kept in mind that if there is a
request from the promisor to take a service, this will be directly affected by Sections
2 (a) and 2(d) and will be not entertained under Section 25.

Some important points which are to be considered in these cases are as

follows:

The promisor must be competent at the time when he promises to compensate in

the future. If a minor for example, in case of voluntarily done service, promises that
he will repay a sum or will do anything for the plaintiff, such cases cannot be
entertained on the ground that the party to the contract was incompetent and thus
the contract is void ab initio [Suraj Narain Dubey v Sukhu Aheer AIR 1928 All
440.].

When the defendant promises to pay the plaintiff for his voluntary service and
further service is rendered at someone else’s request for which no promise was
made by the plaintiff, such promise could not be supported under this section.[
Durga Prasad v Baldeo (1881) ILR 3 All 221]
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Promise to pay a time-barred debt

This type of no-consideration contract falls under Section 25(3) and for invoking it,
some essentials must be satisfied:

1. There should be a written promise signed by a person or his appointed agent.

2. A promise must be there, either to pay a whole or a part of the debt.
3. The debt must have been enforced by the creditor for the limitation period.
4. A debtor can enter into a written agreement under Section 25 (3) for paying a
part of the complete debt and a suit can lie in such cases when there is a
written promise for paying it.

Debt barred by limitation

The term “debt” denotes an ascertained amount of money which is payable in

respect of money demand and by action, may be recovered. Section 25 (3) only
applies when there is the applicability of the law of limitation and with its aid, the
debt is enforceable against the defendant. Section 25 (3) is not applicable when the
defendant is not bound to pay the debt for other reasons.

The debt of the Promisor

This exception comes into picture only in cases when a promisor is a person liable
for the debt and it does not extend to situations when the promise is to pay the
debts of a third person.[ Tulsibai v Narayan Ajabrao AIR 1974 Bom 72.]. In
addition, a Hindu son’s agreement to pay for his father debts can only be enforced
against the joint family property which he inherited.[ Asa Ram v Karam Singh
AIR 1929 All 586.]

Promise to pay

This is a condition precedent for the application of this section. The promise must
be expressed and it must not be qualified to result in any kind of confusion i.e. it
must be equivocal.[ Girdhari Lal v Vishnu Chand AIR 1932 All 461.] Section 25
(3) is not applicable when there is a suit relating to arrears beyond limitation period,
of a rent. In addition, for an endorsement to comply with the exception under
Section 25 (3), the promissory note must consist of an undertaking to pay.
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Promise in writing

The promise must comply with all the norms under Article 299 of the Indian
Constitution relating to the contractual power of the Government. The promise must
be in written form. A proposal becomes a promise when it is accepted and in this
case, there may be a proposal by the promisor which may be accepted before an
action lie.

To pay wholly or in part

The promise to pay a debt barred by the law of limitation can restrict itself to pay a
part or may extend for the whole debt. But, when only a part of the debt is time-
barred and the promisor takes an undertaking to pay all the arrears, the landlord is
entitled to repayment of the whole amount. [Kapaleeshwarar Temple v
Tirunavukarasu AIR 1975 Mad 164.]

Non-Applicability of Section 25(3)

When by forming an agreement, both the parties to the contract fix a date for
repayment of the loan/debt which is after the period of limitation, in such cases, the
Limitation Act does not acknowledge the debt within the meaning of Section 18 of
the limitation law. In addition, when the offer of performance was not accepted by
one of the parties, it is not considered as a promise within the ambit of Section 25
(3) of ICA.[ Union of India v Bikaner Textiles AIR 1961 Raj 211.]

SECTION 26. AGREEMENT IN RESTRAINT OF MARRIAGE, VOID.

Every agreement in restraint of the marriage of any person, other than a minor, is
void.

Agreements In Restraint Of Marriage: Position In English Law:

Under English Law, agreements which restrain marriage are discouraged as they
are injurious to the increase in population and the moral welfare of the citizens.
Back in 1768, a precedent was set by the Court of King’s Bench in Lowe v. Peers
where the defendant had entered a promise under seal to marry no one but the
promisee, on penalty of paying her 1000 pounds within three months of marrying
anyone else.
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The Court remarked-

“that it was not a promise to marry her, but not to marry anyone else, and yet she
was under no obligation to marry him.” The Court found the contract void as it was
purely restrictive and carried no promise to carry on either side.

In Hartley v. Rice, it was held that a bet between two men that one of them would
not marry within a specified time was void as it gave one of the parties a pecuniary
interest in the man’s celibacy.

Further, under English Law brokage contracts or promises made on the

consideration of procuring or bringing about marriage, are held illegal on several
social grounds.

According to Chitty, a contract whose object is to restrain or prevent a party from

marrying, or a deterrent to marriage in so far it makes any person uncertain
whether he may marry or not, is against public policy. English Law, however, does
not find agreements which partially restrain marriage to be void and in this, it parts
ways with Indian law as stated in the Indian Contracts Act, 1872.

However, the Law Commission had forwarded a suggestion to the government

decades ago to amend the Act and substitute the relevant section. This has been
discussed later.

POSITION IN INDIAN LAW:

In India, contractual relationships between two or more parties are mainly dealt with
by the Indian Contract Act, 1872, enacted by the British imperial government which
exercised control over the country at that time. Section 26 of the Indian Contract
Act of 1872 states that every agreement in restraint of marriage, except those in
restraint of marriage of minors, is void.

The Contract Act was the first law to be placed in India which expressly made any
such agreement, which in its effect would result in restraining the liberty of either of
the parties to marry as per their wish, void. The fundamental idea behind this
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provision was to ensure that the citizens did not lose their right to marry as per
their choice, which is an essential part of a civil society having both personal and
social significance, due to some contractual obligation entered into at any point of
time.

An agreement in restraint of marriage is different from both a marriage brokerage

agreement as well as from a contract of betrothal.

Marriage brokerage contracts, distinguished from agreements in restraint of

marriage, are defined as contracts to pay a third person for negotiating, procuring
or bringing about a marriage. It may be noted here that brokerage of marriage was
prevalent at least amongst the Hindus in Pre-independent India as is noted in The
Hindu Law of

Marriage and Stridhan-

“In the Presidency of Bombay, persons negotiating marriage, if successful, often

receive from 100 to 1,000 rupees according to the difficulty of the case and the
circumstances of the parties; and in Bengal, as you are aware, the Ghataks make
large gains by negotiating marriage”.

However, though the brokerage contracts were fairly popular through the country,
the judiciary did not enforce such agreements.

In Venkatakrishnayya v. Lakshminarayana, the question was referred to the

Full Bench was whether a contract to make a payment to the father in consideration
of his giving his daughter in marriage is to be regarded as immoral or opposed to
public policy within the meaning of Section 23 of the Indian Contract Act. The Full
Bench held that such a contract was immoral and opposed to public policy. The Full
Bench dealt only with a case where it was a promise made to the father to induce
him to give the girl in marriage.

It was held that it is the duty of the father to select the best possible boy and if he is
allowed to enforce a contract of the kind in question it would come into conflict with
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his duty which he owes to the daughter and hence such a contract as opposed to
public policy and illegal.

Brokerage contracts have been denounced as opposed to public policy ever since
by the judiciary throughout. For instance, in Gopi Tihadi v. Gokhei Panda and
Another, a division bench of the Orissa High Court remarked that-

“The consideration or object of an agreement is lawful unless it is expressly

forbidden by law, or the Court regards it as immoral or opposed to public policy.
Under the English law of contract, a contract whereby marriage is brought about in
consideration of money paid is held to be illegal as marriage should be a free union
of the couple… A marriage brokerage contract is a contract to remunerate a third
person in consideration of his negotiating a marriage & as such is contrary to public
policy and cannot be enforced.”

Now, an agreement of brokerage of marriage is fundamentally different from an

agreement in restraint of marriage as it is an agreement necessarily with a third
person, i.e. with a person whose own right of marriage is not being affected while
he intends to influence the marriage of two others.

However, through agreements of brokerage of marriage are different from

agreements in restraint of marriage, they are still void under Section 23 of the
Indian Contract Act of 1872.

Further, an agreement in restraint of marriage is different from a contract of

betrothal.

Betrothment is a promise to give a girl in marriage. It is called ‘vagdan’, or gift by

word, as distinguished from a gift by actual delivery of the bride; and its form is that
of a promise by the father or another guardian of the bride in favor of the
bridegroom, to give him the bride in marriage.

After betrothal, and separated from it by a variable interval, there comes the
marriage ceremony. A betrothal contract entered into by the guardian of a bride
with the bridegroom is, however, not an irrevocable contract. Custom, however,
dictates that such a revocation of promise must be made with a just cause and a
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few centuries ago, such a revocation would entail severe penalties which were to be
paid to the bridegroom. However, Section 21, clause 6 of the Specific Relief Act of
1877 laid down that specific performance of a betrothal contract could not be
enforced.

Now, a Contract of Betrothal too is not considered an agreement in restraint of

marriage within the purview of section 26 of the Indian Contract Act because the
essential difference between an agreement in restraint of marriage and a contract
of betrothal lies in this, that in the latter each party being restrained from marrying
anyone except the other, the restraint virtually operates in furtherance of the
marriage of both.

Thus, a Betrothal Contract is neither in restraint of marriage nor against public

policy as held in Tulshiram v. Roopchand wherein a party had rescinded from the
betrothal contract and had later claimed such a contract was void. The plaintiff’s in
the case where awarded compensation by the court however, for the amount
already spent in anticipation of marriage as well as for the mental torture and lack
of social esteem that ensued.

Partial or Complete Restraint:

Further, unlike Section 28 which makes agreements only in complete restraint of

legal proceedings void, the choice of words of Section 26 keeps its scope rather
general without forwarding a difference between partial or complete restraint of
marriage and has been interpreted to hold an agreement serving to either result as
void.

One may be absolutely restrained from marrying at all or from marrying for a fixed
period or partially restrained from marrying a particular person, or a class of
persons, in any of the above events, the agreement is void. Section 26 does not
differentiate in between absolute restraint and partial restraint upon the freedom of
marriage. This has been strictly followed by the judiciary in various cases.

Abbas Khan and Another v. Nur Khan:

In this case, before the Lahore High Court, a Muslim woman had married a man
without the consent of her nearest male relative. It was contended by the kin that
being part of the Pathan community of ilaqa Makhad, the bridegroom who married
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the woman without the consent of her nearest male relative must pay to the man
an amount called ‘rogha’ or bride-price under customary Muhammadan law.

The lower courts had ascertained that such a practice existed and had allowed the
plaintiff to seek payment from the groom. However, a division bench of justices at
the High Court on the second appeal held that such payment of money for marriage
to an adult woman was not enforceable by law as it was immoral and opposed to
public policy.

Further, Scott-Smith, J. added-

“To enforce such a custom would be tantamount to saying that a woman of full age
cannot marry a man unless the latter pays a large sum, which it may be impossible
for him to do, to her nearest male relative. It would be a custom in restraint of
marriage and opposed to the principle of section 26 of the Contract Act.”

Thus, even though the custom only imposed a partial restraint on marriage subject
to payment of a certain amount, it was found in conflict to Section 26 of the
Contract Act.

The judiciary has since followed this interpretation and thus, any agreement in
restraint of marriage, whether absolute or partial, is held void in India. This is in
contrast to English Law which allows for agreements in partial restraint of marriage.

However, a seeming departure from this interpretation was seen in the matter of
Air India and Others v. Nergesh Meerza and Others:

This suit was filed by the Air Hostesses working at Air India and Indian Airlines,
which were fellow subsidiaries, one catering to domestic flights while the other
catering to international travel. The Air Hostesses had filed the plaint against Air
India Employees Service Regulations, Regulations 46 and 47, and Indian Airline
Service Regulation, Regulation 12.

Under the aforementioned regulations, Air Hostesses retired from service in the
following contingencies:

(a) On attaining the age of 35 years;

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(b) On marriage, if it took place within four years of the service, and

(c) On first pregnancy.

While the Supreme Court directed the companies to change their regulations to
bring parity in the retirement age of the two subsidiaries and also struck down the
rule against first pregnancy finding it in violation of Article 14 of the Constitution, it
however, upheld the restriction on marriage for the first four years of service
keeping in mind the practical needs of the business as well as the society in
general.

It must, however, be noted here that a violation of Section 26 of the Indian Contract
Act of 1872 was not pleaded before the Apex court in this case through a partial
restriction on marriage definitely existed under the service agreement.

It may also be mentioned here that the impugned regulations formerly provided for
restraint on marriage throughout the service period but it was amended by the
company when a suit was filed. If the change would not have occurred, the decision
of the court may well have been different.

In general, however, such an agreement of service is not considered a restraint at

all as it gives freedom to marry on leaving the job. On the other hand, if the
agreement was between A and B and A would promise not to marry till the age of,
say, 35 years in return for a job under B, it would be considered a restraint on
marriage and would be void.

Rao Rani v. Gulab Rani:

A division bench of the Allahabad High Court looked into this case wherein the two
parties were the widows of the same man, Ram Adhar. After the death of their
common husband, a dispute had arisen at the Revenue Court regarding the matter
as to who would inherit a certain zamindari land holdings.

However, the dispute was amicably settled by the two parties by signing a
compromise deed wherein it was stated that both of them would inherit equally but
if anyone would re-marry, the entire right over the property would shift to the other.
 130

Subsequently, Gulab Rani married again and the property came under the complete
control of Rao Rani.

However, years later, Gulab Rani filed a suit to regain ownership of part of that
property and, amongst other contentions, claimed that the compromise deed which
was contractual in nature was void under Section 26 of the Indian Contract Act as it
was in restraint of marriage.

The High Court expressed its serious doubt on whether section 26 of the Contract
Act encompassed partial or indirect restraint on marriage and it was not persuaded
by this argument. Chief Justice Ahmad delivered the judgment stating-

“All that was provided was that if a widow elected to re-marry, she would be
deprived of her rights given to her by the compromise. In other words, no direct
prohibition to re-marry was imposed by the compromise and the compromise was
arrived at in order to preserve the family properties and to ensure their proper
management.”

A similar stance was also taken in A. Suryanarayana Murthi v. P. Krishna

Murthy wherein co-widows had entered into an agreement to forfeit their share on
deceased husband’s property if they remarried and this was held a valid contract as
the agreement did not directly restrain marriage.

EXCEPTION:

Section 26 of the Indian Contract Act is a widely phrased provision with only one
significant exception. It does not hold void any agreement made in restraint, partial
or absolute, of the marriage of a minor. This exception is present as it is against
public policy in general to marry a minor and by exercising restraint on such acts,
the agreement restraining such marriages can be said to further public policy
instead.

Law Commission’s 13th Report, September 1958:

The Law Commission dealt extensively with the Indian Contract Act, 1872 and
suggested several changes by attaching a draft bill as Appendix of the commission
 131

report wherein it proposed the substitution of several sections including Section 26

of the Act, thus, desiring to bring in a change in the law relating to agreements in
restraint of marriage.

The suggested version was-

“26. Agreement in restraint of marriage void in certain cases:

(i) Every agreement in total restraint of the marriage of any person, other than a
minor, is void.

(ii) An agreement in partial restraint of the marriage of any person, other than a
minor, is void if the court regards it as unreasonable in the circumstances of the
case.”

Thus, the Commission envisioned to restrict the purview of the section by terming
void any agreement in total restraint of marriage while allowing partial restraint if
the restraint so agreed upon is found to be reasonable by the court under the
circumstance. This would allow several agreements which could be better for an
individual as well as the society.

For instance, in the present day world, higher education often stretches far after
arriving at the age of majority. Now, if the suggestion of the Commission was
abided by, a parent may enter an agreement with their child to not marry till they
finish their education. This would not only help in attaining full education but would
also allow marriages to be held at a later stage where the parties would be more
mature and the chances of a stable marriage would rise.

Another kind of restraint could have been imposed by allowing marriage only after
the person has started earning their own living. This would ensure that the person is
capable of bearing the responsibility of a family when marriage is entered into,
thus, reducing the burden on the parents of the parties, and the society at large.

Section 27. Agreement in restraint of trade, void.

Every agreement by which anyone is restrained from exercising a lawful profession,

trade or business of any kind, is to that extent void.
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Exception 1-

Saving of agreement not to carry on business of which goodwill is sold- One who
sells the goodwill of a business may agree with the buyer to refrain from carrying on
a similar business, within specified local limits, so long as the buyer, or any person
deriving title to the goodwill from him, carries on a like business therein, provided
that such limits appear to the court reasonable, regard being had to the nature of
the business.

The agreement in restraint of trade has avowed as the agreements made to impede
a person from exercising his liberty to carry out a specific profession or business
with any other people without seeking prior permission from the contracting party
of the agreement. In a slew of cases, Indian courts have expressly held that
suspending someone from proceeding or commencing a particular lawful
profession, trade or business, through the implications of an agreement is void.

Section 27 of the Indian Contract Act broached the subject and states that every
agreement, by which anyone is restrained from exercising a lawful profession,
trade, or business of any kind, is to that extent void. Thus, the agreement, which
debars a person from doing any occupation as per his wish, withal, which aids the
other party to reap the benefit, is void, pursuant to the scheme of Section 27.

In general, every legislation that has been created is ought to be in line with the
Indian constitution, substantially, the underlying bedrock of this provision has been
laid in part XIII of the Indian Constitution.

Articles 301 to 307 of the Constitution guarantee the freedom of trade, commerce,
and exchange. Thus, the same ensures the capability of every Indian citizen to grab
the opportunity of participating in any legal profession or business or trade. Hence,
reiteratively, a person cannot be limited from practicing any sort of legal
exchanges.

Background

This provision on the agreement in restraint of trade has been brought from the D.
Field’s Draft Code for New York, which had its roots in the old England doctrine of
restraint of trade. Though the original draft of the law commission had overlooked
this subject, it has introduced in Indian Contract Act through Section 27, after
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emphasizing its significance by considering the longstanding conflict between the

notions of freedom of market and freedom of contracts.

The rationale for the de-legitimization of these covenants in restraint of trade is to

facilitate the market competition since the supremacy of freedom of contracts
contributes to the anti-competitive agreements that distort competition using an
exclusive dealing within the contract requirements.

Common law

It is pertinent to note that the enactment of statutes in nexus with the restraint of
trade has not nullified the essence of common law upon the subject worldwide.
Indeed, in the case of Standard Oil Company v. the United States,[ 221 U.S. 1
(1910)] the Supreme Court of the United States decided that the term “restraint of
trade” in an Act (The Sherman Act) should be construed as the declaratory of the
common law on the subject.

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC

535] is a notable case since its rationale is the nemine contradicete common law
source. Here, a restrictive covenant of employment was made to curb the petitioner
from engaging in a particular manufacturing profession with people other than the
respondent for 25 years. As far as common law is concerned, the limitations are
substantial if it is sensible. Likewise, the court prescribed the ‘test of reasonability’
after encapsulating the fact as,

Sensu lato, the agreement in restraint of trade is void, but it can be exalted to be
valid, if

1. It is sensible i.e. with the best interest of the involved parties.

2. It seeks to protect a legitimate interest.
3. It is not against the public interest.

Statutory Exceptions
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Section 27 of Indian Contract Act declares all the agreements in restraint of trade
void since it has been drafted in a manner to fortify the competition, disregarding
the reasonableness of such restraint. [Superintendence Co. of India Pvt. Ltd. v.
Krishan Murgai, 1980 SCR (3)1278]

In Gujarat Bottling Co. Ltd. and Ors v. Coca Cola Company and Ors,[ [1995]
SC, 5 (SC)] after analyzing the facts, the Hon’ble Supreme Court of India held that
as like in England, Indian courts are not purposed to enquire into the
reasonableness of the restraint since it is not envisaged by Section 27. However,
the only question that is required to be considered is whether the contract is or is
not in restraint of trade. At the same time, it is noteworthy that these agreements
are void, pro tanto, but not illegal i.e. the agreement by which any person is limited
from exercising the lawful profession of any kind is unenforceable.

The rigidity of the language in Section 27 of the Indian Contract Act has not left
much room for exceptions but mentions only one exception as follows,

Exception 1.― saving of agreement not to carry on business of which goodwill is

sold–

One who sells the goodwill of a business may agree with the buyer to refrain from
carrying on a similar business, within specified local limits; so long as the buyer, or
any person deriving title to the goodwill from him, carries on a like business therein:

Provided that such limits appear to the Court reasonable, regard being had to the
nature of the business. Therefore, the only exception that validates the restraint of
trade agreement is the sale of goodwill, pursuant to Section 27.

Sale of goodwill

Goodwill is a business asset that can be sold and brought just like other assets of a
business. In common parlance, the goodwill of a company is the reputation and the
solid customer base associated with its brand name. Thereby, it holds multiple
values. When a company owner chooses to sell the company, it will be sold along
with its goodwill. Since the transfer of the ownership transfers with a contract, the
seller is allowed to compete with the business unless a non-compete clause has
been included in that contract of sale.
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As per Section 27, the person who sells the goodwill concurs to shun carrying out a
similar business within the specified local limits is valid qua reasonable.

In the case of Chandra Kanta Das v. Parasullah Mullick,[ (1922) 24 BOMLR

602] the plaintiff and the defendant were engaged in a similar business at the
same place. To avoid competition, the plaintiff had bought the defendant’s business
along with the goodwill under a contract that limits the defendant to set up a similar
business in that local area for the following three years. Since the defendant fails to
comply with the terms of the implemented contract, the Bombay High Court settled
the dispute by upholding its validity.

Partnership Contracts

An additional exception to Section 27 of Indian Contract Act has been incorporated

in Partnership Act, 1932, to reinforce the joint venture partnership businesses. Such
exceptions are avowed in sections 11, 36, 54, and 55 of the Act.

1. Continuance of business: Section 11 of the Act authorizes the partners to

determine their common duties and rights through a mutual agreement. Withal, if
the covenant that debars the partners from engaging in their own business as long
as they continue the partnership in a business, is valid. (Under Section 11(2))

2. Cessation of the partnership: Section 36 of the Act provides that when a

partner ceases to be a partner in a firm, even after getting his accounts settled, he
is required to concur not to carry out a similar business for a specified period or
within specified local limits, to protect the interest of other partners.

3. Dissolution of the firm: At the time of firm’s dissolution, some of the partners
may procure an agreement from other partners agreeing not to conduct a similar
business for a specified period or within specified territorial limits. As per Section
54, such agreements are valid.

4. Sale of goodwill: In addition, Section 55 of the Act validates the restraint of

trade on the sale of goodwill.
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Firm Daulat Ram v. Firm Dharm Chand,[ AIR 1934 Lah 110 ] wherein a
partnership agreement between two ice factory owners was held valid by the court,
though it expressly provides that only one factory will be working at a time and the
profit obtained will be shared.

Restrictive Covenants of Employment,

The restrictive covenant is a clause that presumably clashes with the scheme of
Section 27 of Indian Contract Act; that is why it is considered to be the most
contentious issue of all. Usually, these negative covenants are included in an
agreement of service to limits an employee from disclosing the confidential
information of a company, which he was privy to during the tenure of his
employment. At times, these covenants are used to prevent an employee from
seeking employment till a predetermined time after leaving the organization.

Thus, restrictive covenants that are used by the employer for the protection of trade
secrecy and confidentiality are reasonable in the eyes of the law. Niranjan
Shankar Golikari v. Century Spg & Mfg Co. Ltd [1967 AIR 1098] is the case
where the apex court has discussed the restrictive covenant vis-à-vis Section 27 of
Indian Contract Act and affirmed its validity by concluding that ‘a negative covenant
operating in restraint of trade during the term of employment of the employee is
enforceable’.

Therefore, judicial pronouncements of the catena of cases provide that it is an

irrefutable fact that the protection of ‘rights of an employee seeking employment’
ranks above the protection of ‘interests of the employer from the competition.’

But, if once the restrictive covenant comes to an end either naturally or through
abrogation, such covenant is not enforceable, and the party seeking for its
enforcement shall not be entitled to injunctive relief.[ Percept Talent
Management Pvt. Ltd. v. Yuvraj Singh & Globosport India, 2008 (2) BomCR
654]

Wipro Ltd. v. Beckman Coulter International SA[131 (2006) DLT 681] is the
case where the Delhi High Court elucidates the crux of Section 27 of the Indian
Contract Act as,
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1. Negative covenants pertaining to confidentiality, non-disclosure, and non-

solicitation will not be considered as an agreement in restraint of trade unless it
ends up being unreasonable, or one-sided, or unfair.

2. After the termination of a restrictive covenant in employment, the employee is

free to exercise his right to seek placement and cannot be forced to work for the
former employer.

3. The court shall give special importance to the employer-employee contract over
other contracts like partnership or collaboration contracts while determining
whether the contract is in restraint of trade or not. The rationale is that in such
contracts employer is always being authorized over the employee.

However, Article 19 (1) (g) of the constitution confer a right on Indian citizens to
practice any profession, trade, or business. And, Article 21 of the Indian constitution
guarantees the right to livelihood followed by Section 27 of Indian Contract Act,
which de-legitimizes all the agreements in restraint of the trade. But, on the other
end of the spectrum, both Article 19 (g) and Section 27 of Indian Contract Act are
subjected to exceptions and reasonable restrictions, which leads to ambiguities and
uncertainty while endeavoring to categorize what types of restraints are allowed
pursuant to the scheme of Section 27 of Indian Contract Act. Thus, the judiciary
plays a pivotal role in settling the disputes arising out of the agreement in relation
to restraint of trade by analyzing the pertinency of exceptions.

Section 28. Agreements in restrain of legal proceedings, void.

Every agreement-

(a) by which any party thereto is restricted absolutely from enforcing his rights
under or in respect of any contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus enforce his rights; or

(b) which extinguishes the rights of any party thereto, or discharges any party
thereto from any liability, under or in respect of any contract on the expiry of a
specified period so as to restrict any party from enforcing his rights, is void to that
extent.

Exception 1-
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Saving of contract to refer to arbitration dispute that may arise: This section shall
not render illegal contract, by which two or more persons agree that any dispute
which may arise between them in respect of any subject or class of subject shall be
referred to arbitration, and that only the amount awarded in such arbitration shall
be recoverable in respect of the dispute so referred.

Exception 2-

Saving of contract to refer questions that have already arisen: Nor shall this section
render illegal any contract in writing, by which two or more persons agree to refer
to arbitration any question between them which has already arisen, or affect any
provision of any law in force for the time being as to references to arbitration.

It is a well known rule of the English law that “an agreement purporting to oust the
jurisdiction of the courts is illegal and void on grounds of public policy.” Thus, any
clause in an agreement providing that neither party shall have the right to enforce
the agreement by legal proceedings is void. Agreements stipulating no intention to
contract or a gentleman’s agreement which is an agreement that relies upon the
honour of the parties for its fulfilment, rather than being in anyway enforceable by
law is not in violation of s.28.

Section 28 of the Indian Contract Act renders void two kinds of agreement, namely:

1. An agreement by which a party is restricted absolutely from enforcing his

legal rights arising under a contract by the usual legal proceedings in the
ordinary tribunals.
2. An agreement which limits the time within which the contract rights may be
enforced.

Section 28 of the Indian Contract Act 1872 states that:

“Every agreement, –

by which any party thereto is restricted absolutely from enforcing his rights under
or in respect of any contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus enforce his rights;

or

which extinguishes the right of any party thereto, or discharges any party thereto
from any liability, under or in respect of any contract on the expiry of a specified
period so as to restrict any party from enforcing his rights,
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is void to that extent.

Exception 1 – Saving of contract to refer to arbitration dispute that may arise. – This
section shall not render illegal a contract, by which two or more persons agree that
any dispute which may arise between them in respect of any subject or class of
subjects shall be referred to arbitration, and that only the amount awarded in such
arbitration shall be recoverable in respect of the dispute so referred.

Exception 2 – Saving of contract to refer questions that have already arisen – Nor
shall this section render illegal any contract in writing, by which two or more parties
agree to refer to arbitration any question between them which has already arisen,
or affect any provision of any law in force for the time being as to references to
arbitration.

Restraint Of Legal Proceedings

An agreement having for its object the restrain of an individual from enjoying the
fundamental right of resorting to a court of law for redress and relief is invalid.
Section 28 applies to agreements that wholly or partially restrain this right of the
parties. A contract having a clause that no action should be brought up on it is void
since it restricts both parties from enforcing their rights under the contract in a
court of law. An agreement by a servant not to sue for wrongful dismissal is invalid;
so is a condition restraining a transferee from enforcing his rights under the transfer
in anyway. Take the case of Hyman v Hyman. In this case, a covenant in a
separation deed provided that the wife would not apply to the divorce-court for
maintenance and it was held that it was void as being contrary to public policy. In
Nihal Chand Shastri v Dilawar Khan , it was held that a special agreement
between an advocate and his client that the latter would not be sued for fees has
been held void under this section.

It should be noted that an agreement, whereby the parties to a suit bind themselves
before the judgement is passed in the court of first instance, to abide by the decree
of that court and forego their right to appeal, is valid and binding. An important
case in this regard is that of Munshi Amir Ali v Maharani Inderjit Koer. It has
also been followed by the Allahabad High Court in Anant Das v Ashburner & Co..
There are various other cases that stress this point. Some of them include Coringa
Oil Co. v Koegler, Pratap Chunder Dass v Arathoon etc. An agreement by
which the parties agreed to a procedure to be adopted in a court deciding a case on
merits and consenting that the decision will be binding on them was equivalent to
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providing that no right of appeal will be exercised as seen in the case of Bashir
Ahmed v Sadiq Ali. It was also held in this case that an agreement whereby a
judgement-debtor engaged himself not to appeal against him in consideration of the
judgement-creditor giving him time for the satisfaction of the judgement-debt is not
prohibited by this section. In Anant Das’s case, by the agreement not to appeal,
for which the indulgence granted by the respondents was a good consideration, the
appellant did not restrict himself absolutely from enforcing a right under or in
respect of any contract. He forewent his right to question in appeal the decision
which has been passed by an ordinary tribunal. Such an agreement is in our
judgement prohibited neither by the language nor the spirit of the Contract Act, and
an ‘appellate court is bound by the rules of justice, equity, and good conscience to
give effect to it and to refuse to allow the party bound by it to proceed with the
appeal.’

It was held in Rambilas Mehto v Babu Durga Bijai Prasad Singh , it was held
that a clause in an arbitration agreement providing that the award shall be
accepted by the parties and any objection thereto shall be null and void and shall
not be put forth in any court of law was held to be void as imposing a restriction on
the right of the party affected to institute legal proceedings.

Limitation Of Time

An agreement which provides that a suit should be brought for the breach of any
terms or agreement within a time shorter than the period of limitation prescribed by
law is void. The effect of such an agreement is absolutely necessary to restrict the
parties from enforcing their rights after the expiration of the stipulated period,
though it may be within the period of the limitation. According to the Limitation Act,
1963, an action for breach of contract may be brought within three years from the
date of the breach. Hence, a rule under s.35 of the Post Office Act limiting the
liability in respect of sums specified by remittance unless a claim is preferred within
one year from the date of the posting of the article is void as beyond the powers
conferred by the section. And even if it be treated as a contract it is void under s.28
of the Contract Act. In the same way, a clause in a policy of life insurance declaring
that “no suit to recover under this policy of life insurance shall be brought after one
year from the death of the assured” was held void. The same stand was taken by
the judges in the case of Oriental Insurance Co. Ltd. v Karur Vysya Bank Ltd.
and also in Mahajan Silk Mills Pvt. Ltd. v MV MSC Elena.

Cases sometimes occur where parties agree to extend the period of limitation. No
provision is made the section for agreements extending period of limitation for
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enforcing rights under it. There is hardly any doubt that an agreement which
provides for a longer period of limitation than the law allows does not lie within the
scope of this section. There is no restriction imposed upon the right to sue; on the
contrary, it seeks to keep the right to sue subsisting even after the period of
limitation. It would, however be void under s.23, as tending to defeat the provisions
of the Limitation Act 1908, s.3 which provides that every suit instituted after the
period of limitation prescribed by the act shall be dismissed, although limitation has
not been set up as a defence. In Gobardhan v Dau Dayal, a Full bench of the
Allahabad High Court has held that contracts extending the period of limitation are
void under section 23, as defeating the provisions of the Limitation Act.

Agreement Relating To Release Or Forfeiture Of Rights

Before the amendment of s.28 of the Contract Act in 1997, agreements reducing
the period of limitation were distinguished from those which did not limit the time
within which a party might enforce his rights, but which provided for a release or
forfeiture of rights if no suit was brought within the period stipulated in the
agreement. Under s.28, limiting the time for enforcing the rights was void. But a
term in the contract that rights accruing thereunder to party would be forfeited or
released, if the party did not sue within such short a time as given in the contract,
would not fall within s.28. Clauses of this kind are usually found in policies of
insurance.

In Hirabhai v Manufacturers Life Insurance , the Bombay High Court decided

that a clause providing that “no suit shall be brought against the company in
connection with the said later policy than one year after the time when the cause of
action accrues” was held valid. The justification for the court in this regard was that
the effect of the agreement was not to limit the time but to provide for surrender of
rights if no action was brought within that time. This view taken by the Bombay
High Court was affirmed by the Supreme Court in Vulcan Insurance Co. v
Maharaj Singh, where the court observed that “it has been repeatedly held that
such a clause in not hit by s.28 and is valid.” In National Insurance Co. v Sujir
Ganesh Nayak, the court held that “the curtailment of the period of limitation is
not permissible in view of S. 28 but extinction of the right itself unless exercised
within a specified time is permissible and can be enforced. If the policy of insurance
provides that if a claim is made and rejected and no action is commenced within the
time stated in the policy, the benefits flowing from the policy shall stand
extinguished and any subsequent action would be time barred. Such a clause would
fall outside the scope of S. 28 of the Contract Act.”
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Rights to be enforced under the contract should continue to exist even beyond the
shorter period agreed for enforcing those rights, to make such an agreement void
under S.28. If, for example, beyond the shorter period agreed upon the rights under
the contract cannot be kept alive, no limiting of the time to enforce the rights under
the contract arises and hence the agreement putting a time limit to sue will not be
hit by S.28. So, a condition in a contract that the rights thereunder accruing to a
party will be forfeited or released if he does not sue within a time limit specified
therein will not offend S.28. This is because, as per the contract itself, the rights
accrued to the party cease to exist by the expiry of the limited period provided for
in the contract. In such a case, in effect, there is no limiting of the time to sue. So,
an agreement which provides for a simultaneous relinquishment of rights accrued
and the remedy to sue for them will not be hit by S.28. But, at the same time, an
agreement relinquishing the remedy only, by providing that if a suit is to be filed
that should be filed within a time limit-the time limit being shorter than the period
of limitation under the Limitation Act – will be hit by S.28. This is because the rights
accrued continue even beyond the time limit as the same is not extinguished. In
such a case, there is really a limiting of the time to sue prescribed by the Limitation
Act. In Kerala Electrical & Allied Engineering Co. Ltd. v Canara Bank &
Others, it is clear from Clause.6 of Ext. Al guarantee that the liability of the bank
will be alive only for a period of six months after the expiry of the period of duration
of the guarantee. It is also specified in Clause.6 that the plaintiff’s rights under the
guarantee will also be forfeited by the end of that six months. There is an extinction
of the right of the plaintiff under the contract and a discharge of the defendants
from liability. So, the time limit imposed in Clause.6 cannot be hit by S.28 of the
Contract Act.

Clauses found in insurance policies providing that the insurer should not be liable
for loss or damage after expiration of twelve months from the happening of loss or
damage unless a claim was subject to pending action or arbitration or clauses in
bills of lading excluding liability for loss or damage unless the plaintiff brought a suit
within one year from date of delivery did not violate s.28. In short, an agreement
providing for the relinquishment of rights and remedies was valid, and an
agreement for the relinquishment of remedies only fell within the mischief of s.28.

The 1997 Amendment

The amendment of s.28 has brought about the change that all clauses which
reduced the normal period of limitation would be void to that extent. It now
prohibits clauses which seek to extinguish the right of any party thereto, or
discharge any party thereto from any liability, under or in respect of any contract on
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the expiry of a specified period so as to restrict any party from enforcing his rights.
The amendment gave effect to the 97th Report of the Law Commission of India.

Tracing back to the history of the amendment, it is interesting that the Law
Commission of India, in its 13th Report, had deliberated upon this section and had
observed that such clauses hinged not on the interpretation of the section, but on
the construction of the contract, and that ‘the principle itself is well recognised that
an agreement providing for the relinquishment of rights and remedies is valid but
an agreement for relinquishment of remedies only falls within the mischief of s.28′,
and had concluded that no change was necessary in the section as it stood earlier.

But later the Commission took up the matter suo motu and submitted its 97th
Report in 1984. The proposal to disallow prescriptive clauses which extinguished
rights or provided for forfeiture of rights or discharge of liability on failure of to sue
within a certain time rested on the basis of economic justice, avoidance of hardship
to consumers and certainty and symmetry of law. The Commission pointed out that
by giving a clause in an agreement that shape and character of a provision
extinguishing the right and not merely affecting the remedy, a party standing in a
superior bargaining position can achieve something which could not have been
achieved by merely barring the remedy. The amendment was also justified on the
ground that it was necessary to make the law simpler. The Commission found the
existing provision illogical, based on ‘a distinction too subtle.’ The Commission
considered that no provision like s.28 existed in the English law. However, clauses
now prohibited by the amendment are not void under the English law.

The clauses hit by the amendment have been held to have a purpose, especially in
contracts of insurance. They ensure that the claims under the policy are made
early, investigated promptly, thereby avoiding the likelihood of loss of important
evidence. If claims were not made early, the insurers might be unable to meet a
fraudulent claim as seen in Baroda Spg & Wvg Co. v Satyanarayanan Marine
and Fire Insurance Co Ltd.

Agreements Prescribing Jurisdiction

S. 28 makes void only those agreements which absolutely restrict a party to a

contract from enforcing the rights under that contract in ordinary tribunals. But this
section has no application when a party agrees not to restrict his right of enforcing
his rights in the ordinary tribunals but only agrees to a selection of one of those
ordinary tribunals in which ordinarily a suit would be tried. Parties cannot by
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agreement confer jurisdiction on courts to try suits not cognizable under the
ordinary law. The principle that the parties cannot by consent confer jurisdiction on
a court or deprive a court of jurisdiction has been stated to apply to cases of
inherent jurisdiction of a court over the subject matter of the suit, and the question
of territorial jurisdiction as not being a question of inherent jurisdiction. Where,
thus, two courts have jurisdiction to try a case, there is nothing contrary to law in an
agreement between parties that disputes between them should be tried at the one
court rather than the other.

If such contract is clear, unambiguous and explicit and not vague, it is not hit by this
section. But an agreement, however cannot confer jurisdiction on the court which
has no jurisdiction at all to entertain the suit; and if the court mentioned in the
contract has no jurisdiction at all, the jurisdiction of other courts is not barred. In
Continental Drug & Co. Ltd. v Chemoids & Industries Ltd., the contract the
parties had entered into fell under the concurrent jurisdiction of both the Bombay
and Alipore courts, but a clause in the contract provided that “any dispute arising
between the parties, settlement of the same legally or otherwise, will be decided in
Bombay. The court held that ‘if there are two courts which are equally competent to
try the suit, an agreement between the parties that the suit should be instituted in
one of those two courts cannot be said to be an absolute restriction on the right of
taking legal proceedings.’ This view has been affirmed by the Supreme Court in
Hakam Singh v Gammon (India) Ltd. In this case, the court held that ‘it is not
open to the parties by agreement to confer jurisdiction on a court which it does not
possess under the Civil Procedure Code. But where two courts or more have under
the Code of Civil Procedure jurisdiction to try a suit, an agreement between the
parties that the dispute between them shall be tried in one of such courts in not
contrary to public policy. Such an agreement does not contravene s.28 of the
Contract Act.’ The same view has been taken by the courts in National Nut
Company Cashew Exporter v Haridas Damodar Anandji Filhos Ltd. and
Mohammed Kasim Haji Ahamed Kunju v Sree Hanuman Industries . Hence,
where the parties to a contract specifically agree that the courts in Delhi alone shall
have jurisdiction, mere statement in the agreement is not sufficient to confer
jurisdiction on Delhi courts when they lack inherent jurisdiction. Such a clause
restricting jurisdiction applies also to proceedings in courts under the arbitration
law.

Although, it is open to the parties to agree that dispute relating to their contract will
be subject to the jurisdiction of courts in a particular territory, to the exclusion of
other courts, the parties who make their choice of tribunal will be bound by it, the
enforcement in India of such contracts in not imperative where the choices restricts
them to a foreign court. But an Indian citizen making a contract while in India would
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not be able and cannot be permitted to avoid the applicability of the Indian law to
the contract made in India or to be performed in part or whole of India as held in
Lucca v Gorakharam. In Nirmala Balagopal v Venkatesulu Balagopal, the
option was exercised in bi-lateral agreement between parties to exclude Indian
Courts. The parties lived in Connecticut, United States of America. They are very
much having jurisdiction there and it is not as if the petitioner and the respondent
are going to permanently reside in India. It was also manifestly shown that their
inclination and intention was only to reside in United States of America. Hence,
there is nothing wrong in the contract to have chosen except the Courts in India;
thereby including the Courts in United States of America. In Black Sea State
Steamship Line v Minerals and Metals Trading Corporation of India Ltd.,
the bill of lading provided that all disputes would be judged in the USSR according
to the Merchant Shipping Code of the USSR. The plaintiff sued the shipping
company at Madras. The claim was small, the shipping company had its agents at
Madras, and there was no difficulty in collecting facts and applying the law there.
While holding that the courts in Madras had jurisdiction, the court observed that ‘in
case of foreign jurisdiction clause, the question is not so much of freedom of
contracts, and the parties are bound by their choice as of expediency in the light of
what may be called the rule of convenience and the ends of justice in the particular
circumstances of the case.’ It is open to the Court to consider the balance of
convenience, the interest of justice and the circumstances when it decides the
question of jurisdiction of the court in the light of the clause in the agreement
between the parties choosing one of the several courts or forums which were
available to them. Indeed such a consideration is essential in the interest of
international trade and commerce for the better relation between the countries and
the people of the world.

The choice regarding the jurisdiction of courts should be clearly unambiguous and
explicit. The party invoking the clause must strictly prove that the restriction applies
to the proceedings under consideration. It is also necessary that important terms of
this nature must be specifically brought to the notice of the parties whose rights are
sought to be curtailed. The law requires that before making a person bound by any
such clause in the agreement as to exclusive jurisdiction, it must be proved that the
same was brought to the knowledge of the consignor in such a way that it should
seem to be the result of a mutual assent. Where the original contracting party has
been adequately informed, it will be a question of fact in each case whether the
parties subsequently acquiring his rights will also be bound by the notified terms.

A contract between the parties with regard to the exclusion of jurisdiction of a court
is not binding on a third party, unless the attention of such third party is specifically
drawn to such a clause in the contract and he is made aware of the implications.
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Thus, where the suit was filed in the court at Hyderabad by the insurance company
for recovery of damages for short delivery of goods which were delivered at
Hyderabad, it was held that in absence of any evidence that the insurance company
who was a third party was made aware of the implications of the lorry receipt and
since no part of cause of action had arisen in Calcutta, it was not open to say that
the suit could be filed only in the court in Calcutta as stipulated in the lorry receipt.

Exceptions

Exception 1: Reference Of Future Disputes To Arbitration

This exception applies to contracts where the parties have agreed that no action
shall be brought until some question of amount has been decided by the arbitrators.
Thus, in Scott v Avery and Atlantic Shipping and Trading Co. v Louis
Dreyfus & Co., clauses are saved by this exception. The former refers to term in
the contract which provides that, in the event of a dispute arising, it shall be
referred to arbitrators whose award shall be a condition precedent to any right of
action in respect of the matters agreed to be referred is valid. It is a clause which
requires as a condition precedent of the accrual of any cause of action that the
arbitrator shall have made in an award. The latter clause is the one which provides
that no claim shall arise, unless it is put forward in writing and an arbitrator
appointed within a limited period. If a contract were to contain a double stipulation
that any dispute between the parties should be settled by arbitration, and that
neither party should enforce his rights under it in a court of law, that would be a
valid stipulation so far as regards its first branch, that all disputes between the
parties should be referred to arbitration, because that of itself would not have the
effect of ousting the jurisdiction of the courts, but the latter branch of the stipulation
would be void because by that the jurisdiction of the courts would be naturally
excluded.

In order to conform to this exception, the jurisdiction of the courts must be excluded
in all respects except in the matter which is the result of the arbitrator’s award. This
section does not forbid action for damages for breach of such agreement to refer to
arbitration. In Union Construction Co. Pvt. Ltd. v Chief Engineer, Eastern
Command, the court held that a lawful agreement to refer a matter to arbitration
can be made a condition precedent before going to the courts, and it does not
violate s.28. All such cases have to be decided according to the Arbitration and
Conciliation Act 1996. In Rajasthan Housing Board v Engineering Projects
(India) Ltd., the court held that a clause providing for arbitration and declaring
that the Arbitration Act would not apply was held to be void. The arbitration clause
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was held to be valid. The part which excluded the application of the Arbitration Act
being severable from the rest of the agreement was alone struck down. A clause in
an agreement that except where otherwise provided in contract the decision of the
superintending engineer shall be final, conclusive binding and upon certain matters
therein mentioned does not constitute him an arbitrator and the clause is not
contrary to s.28 of the Contract Act and is not hit by s.21 of the Specific Relief Act
as held in State of Bihar v Rama Bhushan Basu. It is also possible to
contemplate an agreement appointing one of the contracting parties as an
arbitrator for matters arising out of a contract. The decision given by such a person
is binding on the party and no party can be heard to say that such decision is not
binding being a decision by a person in his own cause, unless it can be shown to be
arbitrary or otherwise unjust. The parties can also question the finality of such a
decision despite any agreement.

The Law Commission of India, in its 13th Report, recommended amendment to the
exception of substitute the words ‘the parties will be bound by the award’ for the
words ‘only the amount awarded in such arbitration shall be recoverable.’ This
clause was repealed by the Specific Relief Act 1877. Section 21 of that Act, now s.14
(2) of the Specific Relief Act provides that:

‘Save as provided by the Arbitration Act 1940, no contract to refer present or future
differences to arbitration shall be specifically enforced; but if any person who had
made such a contract other than an arbitration agreement to which the provisions
of the said Act apply and has refused to perform it sues in respect of my subject
which he has contracted to refer, the existence of such contract shall bar the suit.’

Exception 2: Reference Of Existing Question To Arbitration

The exception saves any contract in writing by which two or more persons agree to
refer for arbitration any question between them which has already arisen, though
such a contract would now also be dealt with by the law relating to arbitration.

Resolution of disputes is governed by Arbitration and Conciliation Act 1996 under

which parties may by means of an agreement in writing to refer to arbitration
disputes which have arisen between them in a contract. Where the parties agreed
to refer their disputes to arbitration, they were held to be bound to do so. Certain
excuse will not be enough to nullify the arbitration when the parties had accepted
the agreement with full conscience. If a suit is filed in the same subject matter as
the arbitration agreement, the party desirous of reference to arbitration may apply
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to the court seeking reference, which the party must do before submission of the
first statement of substance or dispute in the court. If the suit is in the same matter
as the arbitration agreement, the court shall refer the parties to arbitration. The
Arbitration and Conciliation Act 1996 allows discretion to the court in referring the
matter. Section 77 of that act provides that the parties shall not initiate, during the
conciliation proceedings any arbitral or judicial proceedings in respect of a dispute
that is the subject matter of the conciliation proceedings except where such
proceedings are necessary to preserve his rights.

Section 29. Agreements void for uncertainty.

Agreements, the meaning of which is not certain, or capable of being made certain,
are void.

Illustrations-

(a) A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.

(b) A agrees to sell B 100 tons of oil of a specified description, known as an article of
commerce. There is no uncertainty there not make the agreement void.

(c) A who is a dealer in coconut-oil only, agrees to sell to B “100 tons of oil”. The
nature of A’s trade affords an indication of the meaning of the words, and A has
entered into contract for the sale of one hundred tons of coconut oil.

(d) A agrees to sell to B “all the grain in my granary at Ramnagar”. There is no

uncertainty here make the agreement void.

(e) A agrees to sell to B “1000 maunds of rice at a price to be fixed by C”. As the
price capable of being made certain, there is no uncertainty here to make the
agreement void.

(f) A agrees to sell to B “my white horse for rupees five hundred or rupees one
thousand”. There is nothing to show which of the two prices was to be given. The
agreement is void.

An agreement is void under Section 29 when its terms are vague and uncertain and
thus cannot be made certain. Illustration: A agrees to sell a ton of oil. The
agreement is void for uncertainty as the kind of oil intended cannot be ascertained.
 149

Requirement for Certainty

An agreement may be uncertain either because the terms in it are ambiguous or

vague or because it is incomplete. The general rule is that if the terms of an
agreement are vague or indefinite which cannot be ascertained with reasonable
certainty of the intention of the parties, then there is no contract enforceable by
law.

Section 29 provides the meaning of an agreement that should be clear on the face
of it, as shown in Kovuru Kalappa Devara vs Kumar Krishna Mitter [AIR 1945
Mad 10], but the effect can be provided to the contract if its meaning is found with
reasonable clearness. If this is not possible then the contract would not be
enforceable. Merely difficulty in interpretation will not be considered as vague. The
principle can be formulated as a party who seeks remedy from court for breach of a
contract, the obligation must be able to identify the obligation with sufficient
precision to justify the remedy. The law thus stated is more flexible, and recognizes
that different levels of certainty may be needed for the remedies.

Concluded Contract

As stated in The parties should make their own contract and the court will not
construct a contract for parties when the terms are indefinite or unsettled. The
court must first be satisfied that the parties have a concluded contract, before
seeking to make certain terms.

Capable of Being Made Certain

As given in Bahadur Singh vs Fuleshwar Singh [AIR 1969 Pat 114], a contract
is not void if its terms are capable of being made certain. The meaning of the
contract should not be uncertain and further, it needs to be shown that it is not
capable of being made certain. Mere vagueness or uncertainty which can be easily
removed by proper interpretation does not make a contract void. Even oral
agreements will not be considered vague if its terms are ascertainable with
precision.

A contract out of which more than one meaning, when constructed, can produce in
its application more than one result will not be void for uncertainty. A contract will
be void for uncertainty only if its essential terms are uncertain or incomplete unless
the uncertain part being not essential is severed, leaving the balance of the
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agreement intact. To ascertain what is essential and what is not, one must look into
the intention of the parties. There is no concluded contract when an essential or
critical terin is expressly left to be settled by future agreement of the parties. Also,
there will not be a binding contract where the language is obscure and incapable of
any definite meaning.

An agreement that provides for the future fixation of price by the parties or by a
third party is capable of being certain and is valid under Section 29. Such a contract
will not be void for uncertainty.

Resolving Uncertainty

The courts are reluctant to hold a contract void for uncertainty of any provision that
is intended to have legal effect as given in Brown v Gould [[1972] Ch 53]. It has
been emphasized that it must always be in such a way as to balance matters that,
without violating essential principles, man’s dealings are treated as effectively as
possible and that the law cannot be accused of destroying bargaining.

But the courts will not undertake to supply defects or remove ambiguities according
to its own notions of what is reasonable as it would not be to enforce a contract by
parties but to make a new contract for them.

As Lord Wright said in Scammell v Ouston [[1941] AC 251], the object of the
court is to do justice between the parties and if it is satisfied that there was an
ascertainable and determinate intention to contract then the effect would be given
to intention looking at the form and not the mere form.

Implying Terms

A contract that is intended to be binding may be enforceable even though certain

terms have not been precisely agreed if the nature of the terms can be ascertained
by implication. The courts construe business agreements fairly and broadly and
imply terms to the extent that is necessary to give business efficacy to the
transaction.

Commercial Agreements
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Commercial documents are sometimes expressed in language which does not have
a clear meaning. This was seen in Dhanrajamal Gobindram vs Shamji Kalidas
And Co.[ AIR 1961 SC 1285]. Cases of commercial contracts are different as
there are standards of commercial custom and usage to appeal in deciding what
terms are just and reasonable. Words that are grammatically meaningless may be
found used in a mercantile sense and constructed accordingly. The mere fact that it
is difficult to interpret a commercial contract is not fatal, nor is difficulty
synonymous with ambiguity so long as to any definite meaning can be extracted. A
contract is not necessarily ineffective because it is open to more than one meaning
if the meaning intended can be ascertained.

Custom and Trade Usage

As given in the Indian Evidence Act 1872, vagueness apparent on the face of the
contract may be resolved by reference to the custom or trade usage. A commercial
contract for the sale and purchase of American cotton was not void for vagueness
or uncertainty by reasons of a clause ‘subject to the usual force majeure clause’.

In Ashburn Anstalt v Arnold , an agreement to lease a shop in a prime location

was not uncertain as it could be determined by expert evidence since the phrase is
a commonly used in the particular property trade.

Previous Course of Dealings

In Lani Mia vs Muhammad Easin Mia , a covenant for renewal of lease which did
not specify the period or rent must be presumed to be for the same period and the
rent as the original lease and is not void for uncertainty.

Reasonableness

Where an intention to transact is clear, which is the intention to buy and sell, the
terms can be determined by the standard of reasonable. This may be implied by law
as Section 46 of the Act. When goods are sold without naming a price, the
agreement is understood to be for payable of a reasonable price. Where the
remuneration in a contract of service was to be fixed by the employer, the contract
was enforceable and the rate fixed on basis of what is fair and reasonable. But a
condition for the purchase of a motor van to be partly paid on hire purchase terms
over a period of two years was held to be indefinably too vague to constitute a
binding contract in Scammell v Ouston , it was held that where remuneration in a
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contract service was to be fixed by the employer, the contract was enforceable ,
and the rate fixed on the basis of what was fair and reasonable.

Performance Executed

The degree of certainty required for creating obligations varies according to the
whether the transaction remains wholly executory or has been party formed or
acted upon. Whether the alleged agreement has been wholly or partially executed
that is performed by any party the very fact of the performance being executed
may itself lead to the conclusion that agreement is binding as in Hart v Hart
[(1881) 18 Ch D 670].

For example as in the case of many commercial contracts two parties continue to
send each other counter offers after they comment performance. A Court may
decide that there is a contract one of the following places-

(i)- The terms agreed with the court’s idea of of what are reasonable terms being
supplied to fill all areas of omission or disagreement;

(ii)- The entire contract being constructed on what the court thinks is reasonable,
the terms which the parties have agreed being evidence of what is reasonable in
the circumstances.

Machinery for Ascertainment

A contract would not be vague if it provides machinery for ascertaining a term. In

Damodhar Tukaram Mangalmurtiand v The State Of Bombay [1959 AIR
639], the renewal clause contained a provision which said “subject to such fair and
equitable enforcement as the lessor shall determine”. The clause was not held
vague or uncertain. In Talbot v Talbot [[1967] 2 All ER 920 (CA)], the provision
in a will giving option to the beneficiaries under the will to purchase the farms in
which they live at a reasonable valuation was enforceable.

However the High court of Australia in Hall v Busst [(1960) 104 CLR 206], held
by majority that the words reasonable sum to cover depreciation as uncertain and
therefore unenforceable. In Milnes v Gery [[1803-13] All ER Rep. 369], an
agreement to sell at a fair valuation was also held to be uncertain.
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Severance of Uncertain Part

Where there is agreement on all substantial terms, the court may disregard a
subsidiary term on the grounds that it is meaningless as in Nicolene ltd v
Simmonds. But this rule cannot be applied to a major term, which was seen in
Kingsley & Keith, Ltd. v. Glynn Brothers (Chemicals), Ltd. [[1953] 1 Lloyd’s
Rep. 211], or subject to a war clause or to force majeure conditions, or an option
on terms to be agreed.

Agreements Held Certain

In S.R. Varadaraja Reddiar vs Francis Xavier Joseph Periaria [AIR 1991 Ker
288], it was held that where both the parties were fully aware of the identity of the
property to be conveyed under the agreement, the agreement would not be
uncertain merely because the exact boundaries, survey number or location were
not mentioned in the agreement, if the identity of the property could be reasonably
ascertained there form. In Mithu Khan vs Pipariya wali [AIR 1986 MP 39], an
agreement for sale of land with the name of the land but without its survey number
or are was not void for uncertainty.

In Daulat Ram Rala Ram vs State Of Punjab [AIR 1958 P H 19], a clause in
the arbitration agreement referring the dispute to the superintending engineer is
not vague merely because the reference is to the officer holding the office for the
time being. Use of the term approximate does not make a contract vague as it
means rounding off in the case of money, few pounds to a round figure (Edwards v
Skyways [[1969] 1 WLR 34]). Nor did the words other necessary and
indispensable expenses to be paid besides the purchase price for reconveyance and
the cost of execution. A contract is not uncertain merely because the time for
performance or the terms for delivery, r the maximum quantity of goods to be
purchased is not specified.

Agreements Held Uncertain and Vague

In Deojit v Pitambar [(1875) ILR 1 All 275], where the defendants themselves
as residents of a certain place, executed a bond and hypothecated as security for
the amount “ our property, with all the rights and interest”, the hypothecation was
held too indefinite to be acted upon. The mere fact that the defendants described
themselves in the bond as residents of a certain place was not enough to indicate
their property in that place as the property that was hypothecated. If they had
described themselves as the owners of certain property, it would have been
reasonably to refer the indefinite expression to the description.
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It has been suggested that an agreement is too uncertain to be enforced if no limit

to the time for performance is expressed or can be inferred from the nature of the
case. This does not appear acceptable as a general proposition. A document in
favor of a bank promising to pay a specified amount on or before a certain date and
a similar sum monthly every succeeding month could not be regarded as a
promissory note (Carter v Agra Savings Bank Ltd.), as it did not specify the
period for which it was to subsist and the amount to be paid. An undertaking given
by a party not to enforce payment of cheque till the goods are received by it is void
on the ground of uncertainty as the period when the goods are to be received is not
determined.

In case of an agreement to sell immovable property, if the property cannot be

identified with the certainty and there is no consensus between the parties as
regards the price payable, there could not be no concluded contract between the
prospective purchasers of flats and the builders.

Section 30. Agreements by way of wager, void.

Agreements by way of wager are void; and no suit shall be brought for recovering
anything alleged to be won on any wager, or entrusted to any person to abide the
result of any game or other uncertain event on which may wager is made.

Exception on favour of certain prizes for horse-racing-

This section shall not be deemed to render unlawful a subscription or contribution,

or agreement to subscribe or contribute, made or entered into for or toward any
plate, prize or sum of money, of the value or amount of five hundred rupees or
upwards, to be rewarded to the winner or winners of any horse-race.

Section 294A of the Indian Penal Code not affected-

Nothing in this section shall be deemed to legalise any transaction connected with
horse-racing, to which the provisions of Section 294A of the Indian Penal Code
apply.

Wager, the meaning of this word is “something risked on an uncertain event” and
wagering is a type of gambling, which involves betting on the outcome of an
external event or fact, such as sporting events. The wagering of money or
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something of value (referred to as “the stake”) on an event with an uncertain

outcome, with the primary intent of winning money or material goods. Wagering
thus requires three-element to be present: consideration(an amount wagered), risk
(chance), and a prize. The outcome of the wager is often immediate, such as a
single roll of dice, a spin of a roulette wheel, or horse crossing the finish line but
longer time frames are also common, allowing wagers on the outcome wagers on
the outcome of a future are also common, allowing wagers i=on the outcome of a
future sports contest or even an entire sports season.

Section 30 of the Indian contact Act talks about wagering agreement, which reads
as “agreements by way of wager are void”. The section does not define wager,
section 30 states that “Agreements by way of wager are void, and no suit shall be
brought for recovering anything alleged to be won on any wager, or entrusted to
any person to abide the result of any game or other uncertain event on which any
wager is made”.

The expression “wager” has not been defined in the Indian contract Act. A classic
definition is however available in the case of Carlill v carbolic smoke ball co.
(1891-94 All ER Rep 127). “A wagering contract is one by which two-person,
professing to hold opposite views touching the issue of a future uncertain event,
mutually agree that, dependant on a determination of that event one shall win so
win or lose, there is no other consideration for making of such contract by either of
the parties. If either of the parties may win but cannot lose, or may lose but cannot
win, it is not a wagering contract.”

ESSENTIALS OF WAGERING AGREEMENT

Mutual chances of gain and loss: there must be two parties or two sides, and
mutual chances of gain and loss, i.e one party is to win and others to lose upon the
determination of the event. It is not a where one party may win but cannot lose, or
if may lose but cannot win, or if he can neither win or lose, ‘if one of the parties has
the event in his own hands, the transaction lacks an essential ingredients wager. ‘It
is of the essence of the wager that each side should stand to win or lose according
to the uncertain or unascertained event about which the chance or risk is taken.

Two parties: There must be two persons, either of whom is capable of winning or
losing.
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Uncertain event: Uncertainty in the minds of the parties about the determination
of the event in one way or another is necessary. A wager generally contemplates a
future event, but it may even relate to an event which has already happened in the
past, but it may even relate to an event which already happened in the past, but
the parties are not aware of its result or the time of its happening

No interest other than stake: Neither party has any interest in the happening of
the event other than the sum of the stake he will win or lose. To constitute a wager,
the parties must contemplate the determination of the uncertain event as the sole
condition of their contract. The stake must be the only interest which the parties
have in the contract.

Neither party to have control over the event: Lastly, neither party should have
control over the happening of the even one way or the other. “If one of the parties
has the event in his own hands, the transaction lacks an essential ingredient of a
wager.”

Effect of Wagering Agreement

A wagering agreement is void ab initio, and Section 65 has no application to it.

Money paid directly by a third party to the winner of a bet cannot be recovered from
the loser. Even if loser makes a new promise to pay for his losses in consideration of
his not being posted, the promise cannot be enforced; but if he gives a cheque in
discharge of his liability, the cheque may not be tainted with illegality because of
the winner’s promise not to have the name posted. The cheques will not be
enforceable by the original payee but may be enforced by a third party holder of the
cheque, even he knew of the facts leading up to giving of the cheque.

It has been laid down by the supreme court, in Gherulal Parekh v. Mahadeo Das
that though a wager is void and unenforceable it is not forbidden by law. Hence a
wagering agreement is not unlawful under section 23 of the Indian contract act and
therefore the transaction collateral to the main transaction is enforceable.

EXCEPTIONS TO WAGERING AGREEMENT

As wagering agreement is a void agreement, but there is still certain exemption to

it:

Horse race competition- Section 30 of the Indian contract act, provides that the
agreement based upon the winning or losing of the horse will not be a void
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agreement. The section does not render void a subscription or contribution, or an

agreement to subscribe or contribute, toward any plate, prize, or sum of money, of
the value or amount of five hundred rupees or upwards to the winner or winner of
any horse races. The reason horses are exempted from the list is because horse
races are not only dependent on chance or luck rather it depends more on prior
preparation of the horse that includes practices, food, maintenance. The horse race
is based more on the skill of the horse rather than luck.

State of Andhra Pradesh v. Stayanarayan

In this case, the court differentiated horse racing as “a game not based on chance
rather game based on skills.” And also said that horse racing substantially and
preponderantly depends on skills. And held that rummy is also the game based on
skills as its needs memorizing the fall of cards and skills is required in holding and
discarding cards.

Wagering Agreement is Different From other kinds of agreement

Insurance Agreement v. Wagering Agreement

The insurance agreement is an agreement between two parties i.e insurer and
policyholder, in this insurer promises to pay the benefits to the policyholder if an
uncertain future event happens or affects the policyholder. Whereas a wagering
agreement is an agreement by which two persons, professing to hold opposite
views touching the issue of a future uncertain event mutually agreed dependent
upon the determination of the event that one shall win from the other a sum of
money, neither of the contracting parties having ant other interest. And also
insurance contract is a valid contract and parties have insurable interest whereas
wagering agreement is void and also does not have an insurable interest.in the
insurance agreement, the risk of loss is natural, whereas the wagering agreement is
created by the parties.

Contingent agreement v, Wagering Agreement

Section 31 of the Indian contract act defines contingent contact as a contract to do

or not to do something, if some event, collateral to such contract, does or does not
happen whereas wagering agreement is an agreement which only depends only on
the happening of an event in one way other. In the contingent agreement, the
promisor may have some interest in the event whereas in wagering agreement the
parties only have bet on. The contingent agreement is valid and enforceable
whereas wagering agreement is not.
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Section 31. “Contingent contract” defined.

A “contingent contract” is a contract to do or not to do something, if some event,

collateral to such contract, does or does not happen.

Illustration-

A contracts to pay to B Rs.10,000 if B’s house is burnt. This is a contingent contract.

The word ‘contingent’ means when an event or situation is depends on some other
event or fact. The ‘contingent contract’ means enforceability of that contract is
directly depends upon happening or not happening of an occasion. The word was
used to mean conditional in the Indian Contract Act, 1872. Uncertainty is the
indication of the future.

Estimating the probabilities of an uncertainty becoming certain, calculating the

results if the event doesn’t happen then measuring the potentiality to affect its
consequences are all about contingent contracts. Parties may stipulate that
performance of obligations under a contract depends on a contingency, even
though the contract is validly formed. The parties agreeing to the conditions agree
that the rights are going to be enforced and therefore the obligations are going to
be due on the happening of the contingency on the contracting of a valid contract.

What is a Contingent Contract?

Section 31 of the Indian Contract Act, 1872 describes the term ‘Contingent
Contract’ as:

‘A contingent contract is a contract to do or not to do something, if some event,

collateral to such contract, does or does not happen’.

In simple words, contingent contracts are those where the promisor perform his
obligation only when certain conditions are met. The contracts of insurance,
indemnity, and guarantee are some samples of contingent contracts.
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Illustration: M is a private insurer and enters into a contract with N for insurance of
M’s house. According to the terms, M agrees to pay N an amount of Rs 1 lakh if his
home is burnt against an annual premium of Rs 8,000. This is often contingent
contract.

Characteristics of Contingent contracts

A Contingent Contract must have three essential characteristics. These are:

1. The performance of the contract depends on the happening or non-

happening of a particular event in future. This dependence on a probable
future event distinguishes a contingent contract from a standard contract.
2. This event must be uncertain, meaning happening or non-happening of the
future event isn’t certain, i.e., it might or might not happen.
3. The event must be collateral or incident to the contract.

Relevant legal provisions

Section 32: Where the performance of a contingent depends on the happening of

an uncertain future event, it can’t be enforced till the event takes place. And if the
event’s happening becomes impossible, those contracts become void.

Example- M contracts to sell N, a bit of land if he wins the legal case involving that
piece of land. M loses the case. The contract becomes void.

Section 33: Where the success of a contingent contract depends on a potential

occurrence not occurring, the contract is also enforced if it is difficult to do so.

Example- X agrees to sell his house to Y if M dies. This contract cann’t be enforced
till M is alive.

Section 34: If the contract depends on the way in which an individual will act at an
unspecified time, the event shall be considered to become impossible when such
person does anything that makes it impossible for him to act in such a way in any
definite time or otherwise than in the context of further contingencies.
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Example- A promises to pay B Rs 5,000 if he marries M. However, M marries N. M’s

act thus renders the event of B marrying her impossible.

Section 35: Contingent contract to do or not do anything, if a specified uncertain

event occurs within a hard and fast time, becomes void if the event does not occur
and the time expires or its occurrence becomes impossible before the time expires.

Example- A promises to pay B Rs 10,000 if the ship named ‘Shark’ which leaves on
a dangerous mission returns before July 01, 2020. This contract is legally
enforceable if the ship returns within the prescribed time. But if the ship sinks, then
the contract is void.

Section 35(1): Contingent contract to do or not to do anything, if a selected event

doesn’t happen within a specified time, could also be enforced when the time so
specified expires and such event doesn’t happen, or before the time so specified it
becomes certain that such event will not happen.

Example- A promises to pay B Rs 5,000 if the ship named ‘Shark’ which leaves on a
dangerous mission does not return before July 01, 2020. This contract is enforceable
by law unless the ship returns within the agreed period. Also, if the ship sinks or is
burnt, the contract is enforced by law since the return isn’t possible.

Section 36: Where a contingent contract is dependent on the occurrence or non-

occurrence of an impossible event, such a contract shall be void. This is often no
matter the very fact if the parties to the contract are conscious of the impossibility
or not.

Example- X promises to pay Y Rs 10,000 if the sun rises in the west the subsequent
morning. This contract is void, because it is impractical for the event to happen.

Case Laws

Chandulal Harjivandas, Jamnagar v. Commissioner Of Income-Tax [1967

SCR (1) 921]

In this case all insurance and indemnity contracts would be held to be contingent.
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HPA International v. Bhagwandas Fateh Chand Daswani and Ors.

The contract stipulated that the entire interest in the property of the vendor’s and
reversionary’ property would be transferred, therefore, one single indivisible
contract, subject to the Court’s sanction. Therefore it had been in contemplation of
parties that transfer of entire interest was conditional upon sanction of the Court
been granted, hence, the requirement of vendor to transfer his own title was also
subject to the Court’s sanction, unless the agreement varied.

Rojasara Ramjibhai Dahyabhai v. Jani Narottamdas Lallubhai (Dead) by

Lrs. & Anr. [1986 SCR (2) 447]

It was held that the contract was a contingent one and because the contingency
failed, there was no contract which could be made the idea for a decree for
performance.

In the case of Nandkishore Lalbagh vs. New Era Fabrics Pvt. Ltd.& Ors, an
agreement for the sale of land to a factory was only to be carried out if the labour
unions agreed to the sale and the transfer of land use was permitted by the
competent authority. None of these conditions could be met because neither the
labour union nor the appropriate authority had given their assent. As a result, the
contract could not be enforced against the seller.

In the case of Gian Chand vs Gopala and Ors, there existed an agreement to sell
the land that stipulated for the refund of the earnest money if the land was
designated for acquisition. The land had already been designated, which the parties
were unaware of. On declaration under section 6 of the Land Acquisition Act, the
contract became impossible to fulfil and hence void.

M/S.Ancl & Co. (India) Pvt. Ltd. vs Corporation Bank , it was held that a
contract of guarantee is an independent contract between the Bank and the
beneficiary thereof, and if it is a contract that allows the creditor to invoke the Bank
guarantee upon the occurrence of an uncertain future event, it is a ‘contingent
contract’ as defined by Section 31, and it cannot be enforced by law unless and
until that event occurs, as provided by Section 31. It is only a contract until
anything happens, and it’s unenforceable till then. In the case of a contingent
contract, the beneficiary does not have unrestricted access to the Bank guarantees
and does not have the authority to demand immediate payment. The terms of such
a contract must be properly construed, and if it specifies how performance should
 162

be claimed, it must be determined whether the performance is claimed in the

manner specified. It would be undesirable if the invocation did not follow the terms
and procedures specified. Violation of the terms can be considered a kind of fraud
that disqualifies a recipient from relying on the Bank assurances.

Critical Analysis

The benefits offered by contingent contracts are that they motivate parties to
perform at or above contractually specified levels. That’s the drive behind the
utilization of contingent contracts in all sorts of compensation arrangements, from
sales commissions to stock options. Sports teams and entertainment companies
routinely use contingent contracts to motivate athletes and artists. But contingent
contracts are useful not only for motivating individuals. They can also motivate
companies. By rewarding outstanding results, contingent contracts motivate
outstanding performance.

For a contract to be a contingent contract, certain essential elements need to be

there. These elements form a contingent contract and without them, a contract
won’t be contingent. There must be a legitimate contract to do or not to do
something. The performance of the contract must be conditional. The said event
should be collateral to such contracts and the event should not be at the promisor’s
discretion. These are some rules that need to be followed for a contingent contract
to be enforceable. For instance, on the happening of an occasion, on the event not
happening and on the event not happening within a specified time.

Section 32. Enforcement of Contracts contingent on an event happening.

Contingent contracts to do or not to do anything in an uncertain future event

happens, cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contracts become void.

Illustrations-

(a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot
be enforced by the law unless and until B dies in A’s lifetime.

(b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom

the horse has been offered, refuse to buy him. The contract cannot be enforced by
law unless and until C refuses to buy the horse.
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(c) A contracts to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void.

SC ON WHETHER SECTION 32 OR SECTION 56 OF INDIAN CONTRACT ACT

WOULD APPLY

The Hon’ble Supreme Court, on 22nd April 2020, in the matter of National
Agricultural Cooperative Marketing Federation Of India v. Alimenta S.A.
( May 04, 2020) observed that if a contract contains impliedly or expressly a
stipulation, according to which it would stand discharged on happening of particular
circumstances. The dissolution of the agreement would take place under the terms
of the contract itself. Such cases would be outside the purview of section 56 of the
Indian Contract Act altogether. They would be dealt with under section 32 of the
Contract Act, which deals with contingent contracts.

The Hon’ble Supreme Court observed that:

Section 32 of the Indian Contract Act applies in case the agreement itself provides
for contingencies upon happening of which contract cannot be carried out and
provide the consequences. In case an act becomes impossible at a future date, and
that exigency is not provided in the agreement on the happening of which exigency,
impossible or unlawful, the promisor had no control which he could not have
prevented, the contract becomes void as provided in section 56. However, section
56 also provides liability for a cause where the promisor has agreed to do
something which he knew or with reasonable diligence might have known and
which the promisee did not know to be impossible or unlawful. Such a promisor
must make compensation to such promise and is liable to pay damages. The latter
part of section 56 is applicable when promisee did not know the act to be
impossible or unlawful and that it was not known to the promisor; the action was
impossible or unlawful or with reasonable diligence might have known. (Para 47)

Impossibility and frustration are used as interchangeable expressions. The principle

of frustration is an aspect of the discharge of a contract. In India, the only doctrine
the courts have to go by is that of intervening impossibility or illegality as laid down
in section 56, and the English decisions in this regard may have persuasive value
but are not binding. (Para 49)

If the contract contained impliedly or expressly a stipulation, according to which it

would stand discharged on happening of particular circumstances. The dissolution
of the agreement would take place under the terms of the contract itself. Such
cases would be outside the purview of section 56 of the Contract Act altogether.
 164

They would be dealt with under section 32 of the Contract Act, which deals with
contingent contracts. (Para 49)

Section 33. Enforcement of contract contingent on an event not

happening.

Contingent contracts to do or not to do anything if an uncertain future event does

not happen, can be enforced when the happening of that event becomes
impossible, and not before.

Illustration-

A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk.
The contract can be enforced when the ship sinks.

Section 34. When event on which contract is contingent to be deemed

impossible, if it is the future conduct of a living person.

If the future event on which a contract is contingent is the way in which a person
will act at an unspecified time, the event shall be considered to become impossible
when such person does anything which renders it impossible that the should so act
within any definite time, or otherwise than under further contingencies.

Illustrations-

A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to

C must now be considered impossible, although it is possible that D may die and
that C may afterwards marry B.

Section 35. When contracts become void, which are contingent on

happening of specified event within fixed time.

Contingent contracts to do or not to do anything, if a specified uncertain event

happens within a fixed time, become void, if, at the expiration of the time fixed,
such event has not happened, or if, before the time fixed, such event becomes
impossible.
 165

When contracts may be enforced, which are contingent on specified event not
happening within fixed time-

Contingent contract to do or not to do anything, if a specified uncertain event does

not happen within a fixed time, may be enforced by law when the time fixed has
expired and such event has not happened, or before the time fixed has expired, if it
become certain that such event will not happen.

Illustrations-

(a) A promises to pay B a sum of money if a certain ship returns within the year.
The contract may be enforced if the ship returns within the year; and becomes void
if the ship is burnt within the year.

(b) A promises to pay B a sum of money if a certain ship does not return within a
year. The contract may be enforced if the ship does not return within a year, or is
burnt within the year.

Section 36. Agreements contingent on impossible event void.

Contingent agreements to do or not to do anything, if an impossible event happens,

are void, whether the impossibility of the event is known or not to the parties to
agreement at the time when it is made.

Illustrations-

(a) A agrees to pay B Rs.1,000 if two straight lines should enclose a space. The
agreement is void.

(b) A agrees to pay B Rs.1,000 if B will marry A’s daughter C. C was dead at the
time of the agreement. The agreement is void.

Section 37. Obligations of parties to contract.

The parties to a contract must either perform, or offer to perform, their respective
promises, unless such performance in dispensed with or excused under the
provision of this Act, or of any other law.
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Promises bind the representative of the promisor in case of the death of such
promisors before performance, unless a contrary intention appears from the
contract.

Illustrations-

(a) A promises to deliver goods to B on a certain day of payment of Rs.1,000. A dies

before that day. A’s representatives are bound to deliver the goods to B, and B is
bound to pay the Rs.1,000 to A’s representatives.

(b) A promises to paint picture for B by a certain day, at a certain price. A dies
before the day. The contract cannot be enforced either by A’s representatives or by
B.

Section 38. Effect of refusal to accept offer of performance.

Where a promisor has made an offer of performance to the promisee, and the offer
has not been accepted, the promisor is not responsible for non-performance, nor
does he thereby lose his rights under the contract.

Every such offer must fulfil the following conditions-

(1) it must be unconditional;

(2) it must be made at a proper time and place, and under such circumstances that
the person to whom it is made may have a reasonable opportunity of ascertaining
that the person by whom it is been made is able and willing there and then to do
the whole of what he is bound by his promise to do;

(3) if the offer is an offer to deliver anything to the promisee, the promisee must
have a reasonable opportunity of seeing that the thing offered is the thing which
the promisor is bound by his promise to deliver.

An offer to one of several joint promisees has the same legal consequences as an
offer to all of them.

Illustration-
 167

A contracts to deliver to B at his warehouse, on the first March, 1873, 100 bales of
cotton of a particular quality. In order to make an offer of performance with the
effect stated in this section, A must bring the cotton to B’s warehouse, on the
appointed day, under such circumstances that B may have a reasonable
opportunity of satisfying himself that the thing offered is cotton of the quality
contracted for, and that there are 100 bales.

Section 39. Effect of refusal of party to perform promise wholly.

When a party to a contract has refused to perform, or disabled himself from

performing, his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, by words or conduct, his acquiescence in its
continuance.

Illustrations-

(a) A, a singer, enters into contract with B, the manager of a theatre, to sing at his
theatre two nights in every week during next two months, and B engages to pay her
100 rupees for each night’s performance. On the sixth night A wilfully absents
herself from the theatre. B is at liberty to put an end to the contract.

(b) A, a singer, enters into contract with B, the manager of a theatre, to sing at his
theatre two nights in every week during next two months, and B engages to pay her
at the rate of 100 rupees for each night. On the sixth night A wilfully absents
herself. With the assent of B, A sings on the seventh night. B has signified his
acquiescence in the continuance of the contract, and cannot now put an end to it,
but is entitled to compensation for the damage sustained by him through A’s failure
to sing on the sixth night.

BY WHOM CONTRACTS MUST BE PERFORMED

Section 40. Person by whom promises is to be performed.

If it appears from the nature of the case that it was the intention of the parties to
any contract that any promise contain in it should be performed by the promisor
himself, such promise must be performed by the promisor.

In other cases, the promisor or his representative may employ a competent person
to perform it.
 168

Illustrations-

(a) A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B, or by causing it to be paid to B by another; and if
A dies before the time appointed for payment, his representatives must perform the
promise, or employ some proper person to do so.

(b) A promises to paint a picture of B. A must perform this promise personally.

Section 40 of the Indian Contract Act, 1872 states

If the nature of a contract indicates that either of the parties intended that the
promise contained in the contract must be performed by the promisor himself

1. then the promisor is obligated to perform the promise

2. else the promise can be performed by the promisor or his representatives or
an employed agent.

Let’s look at some examples: Peter promises to pay Rs 50 to John. In this case, Peter
can perform the promise himself by paying the money to John or can ask someone
else to pay him. Also, if Peter dies before fulfilling his promise, then his
representatives are required to perform the promise or employ someone to do the
same.

We will take a look at another example. Peter is a singer and he promises to sing a
song at John’s wedding reception. In this case, the nature of the contract requires
Peter to perform the promise himself. He cannot delegate it to someone. So, there
are three possibilities for the performance of the promise. It can be done by the
promisor, his representatives or his agent, depending on the nature of the contract.

Promisor Performs the Promise

If a contract indicates that the parties intended for the promisor to fulfil the promise
himself, then the promisor is obligated to perform the promise. Usually, these
include promises which involve personal skills, experience, or expertise and are
usually based on trust between the promisor and the promisee.

Example 2 cited above about Peter singing at John’s wedding reception is a good
example of a personal skill being required to perform the promise.
 169

Agent Performs the Promise

If the contract does not require the personal consideration of the promisor, then the
promisor can employ a competent person to perform the promise. Example 1 cited
above is a good example of Peter employing an agent to pay Rs 50 to John.

Legal Representatives Perform the Promise

If the promisor dies before performing the promise, then the legal representatives
become responsible for the same. If the promise involves the utilization of personal
skills or expertise, then the consideration ceases with the death of the promisor.

However, in all other scenarios, the legal representatives are obligated to perform
the promise unless the contract has a contrary intention specified. Also, the liability
of the legal representatives is limited to the value of the property inherited by them.

Peter promises to pay John an amount of Rs 10,000 within one month of delivery of
certain goods. John delivers the goods. However, Peter dies before he can pay the
money to John. Now, it is his legal representative’s responsibility to ensure that John
receives the payment. The representative can pay himself or employ someone for
the same.

Section 41. Effect of accepting performance from this person.

When a promisee accepts performance of the promise from a third person, he

cannot afterwards enforce it against the promisor.

Section 42. Devolution of joint liabilities.

When two or more person have made a joint promise, then, unless a contrary
intention appears by the contract, all such persons, during their joint lives, and,
after the death of any of them, his representative jointly with the survivor or
survivors, and, after the death of the last survivor the representatives of all jointly,
must fulfil the promise.
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Section 43. Any one of joint promisors may be compelled to perform.

When two or more persons make a joint promise, the promise may, in the absence
of express agreements to the contrary, compel any one or more of such joint
promisors to perform the whole promise.

Each promisor may compel contribution: Each of two or more joint promisors may
compel every other joint promisor to contribute equally with himself to the
performance of the promise, unless a contrary intention appears from the contract.

Sharing of loss by default in contribution: If any one of two or more joint promisors
make default in such contribution, the remaining joint promisors must bear the loss
arising from such default in equal shares.

Explanation-

Nothing in this section shall prevent a surety from recovering, from his principal,
payments made by the surety on behalf of the principal, or entitle the principal to
recover anything from the surety on account of payments made by the principal.

Illustrations-

(a) A, B and C jointly promise to pay D 3, 000 rupees, D may compel either A or B or
C to pay him 3,000 rupees.

(b) A, B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to
pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his
debts. C is entitled to receive 500 rupees from A’s estate, and 2,250 rupees from B.

(c) A, B and C are under a joint promise to pay D 3,000 rupees. C is unable to pay
anything and A is compelled to pay the whole. A is entitled to receive 1,500 rupees
from B.

(d) A, B and C are under a joint promise to pay D 3,000 rupees. A and B being only
sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They are
entitled to recover it from C.

JOINT AND SEVERAL LIABILITY; SECTION 42 & SECTION 43 OF THE INDIAN

CONTRACT ACT, 1872
 171

Joint and Several Liability

Joint liability, several liability and joint and several liability are concepts that are all
used by courts in cases where there are more than two parties to a contract. These
concepts essentially establish who is responsible for what act or omission, or as in
case of joint liability all promisors, will be held liable together.

If parties have joint liability, then they are each liable up to the full amount of the
relevant obligation. If one party dies, disappears or is declared bankrupt, the other
remains fully liable

The converse is several liability, and it arises when two or more persons make
separate promises to another, under a single or different instrument.

Joint and several liability is “liability that may be apportioned either among two or
more parties or to only a few select members of the group at the adversaries
discretion. Thus each liable party is individually responsible for the entire obligation,
but a paying party may have a right of contribution and indemnity from non paying
parties.” In this two or more persons in the same instrument, promise jointly to do
the same thing, and also make separate promises to do the same thing. It gives rise
to one joint obligation and as many several obligations as there are joint and
several promisors. As in joint liability the performance by one discharges all.

Section 43 of the Indian Contract act, 1872 states that:

“Anyone of joint promisors may be compelled to perform – when two or more

persons make a joint promise, the promise may, in the absence of express
agreement to the contrary, compel any such of such joint promisors to perform the
whole promise.

Each promise may compel contribution – Each of two or more joint promisors may
compel every other joint promisor to contribute equally with himself to the
performance of the promise, unless a contrary intention appears from the contract.
 172

Sharing of loss by default in contribution – If any one of the two or more joint
promisors makes default in such contribution, the remaining joint promisors must
bear the loss arising from such default in equal shares.”

Section 43 entitles the promise to claim performance from anyone or more of the
promisors. It also provides for a right of one or more promisors to compel
contribution from the others, and the sharing loss in the event of default in
contribution. These provisions though can be altered by providing the contrary in
the contract.

The section makes all joint contracts joint and several. Where Debts are jointly
incurred each promise is liable for the whole amount[Dhanki Mahajan Vs. Rana
Chandubha Vakhasting AIR 1969 SC 69]. A joint contract unenforceable against
one of the joint promisors on the ground of lack of signature or his not having
agreed at all, can be enforced only against the one who signed it[Sonkole Vs.
Badridas AIR 1926 Nag 196]. It has also been held that neither the
minority[Dasarath Gayen Vs. SatyaNarayan Singh AIR 1963 Cal 325] nor
insolvency[BR Nagendra Iyer Vs. RV Subburamachari AIR 1935 Mad 1055] of
one of the joint promisor affects the liability of the others.

If one of the joint promisors dies pending suit, the suit can be proceeded against the
other defendant promisors without bringing his legal representatives on record[Jai
KIshen Das v Ariya Priti NIdhi Sabha AIR 1921 Lah 357].

A slightly different view was taken in Kedar Nath v L Manak Chand[AIR 1961
Punj 555].

In this case the plaintiff, who was an advocate, brought a suit for the recovery of the
sum 1,700/- against Ganesh Dass and Sanwal Dass proprieters. The amount claimed
was in respect of professional fees which remained unpaid by the defendants who
had engaged the plaintiff as their counsel in the year 1941. The present suit was
instituted in 1949-1950. Ganesh Dass died in 1952. An application to bring his legal
representatives on record was made after the period of limitation. Sanwal Dass also
died during the pendency of the suit. The question before the court was whether
only Sanwal Dass or his legal representatives could be held liable without bringing
Ganesh Dass to the suit. The court referring to section 43 and section 44 of the
Indian contract, 1872 act held that Ganesh Dass and Sanwall Dass were jointly and
severally liable. The plaintiff demanded only half the fee against the legal
representatives of Sanwal Dass.
 173

Denying the appeal the court held that, the appellant can not prosecute an appeal
only against Sanwal Dass having renounced his claim against Ganesh Das. Thus the
principle applied in this case was that when a suit against a number of joint
promisors has been dismissed, the plaintiff cannot prosecute an appeal against only
some of them, renouncing his claim against the rest.

The Code of civil procedure 1908, O I , r 6 provides:’

The plaintiff may, at his option, join as parties to the same suit all or any of the
persons severally, or jointly and severally, liable on anyone contract, including
parties to bills of exchange , hundis and promissory notes.

This when read along with section 43 of the Indian Contract Act, 1872, makes the
affect of joint liability arising out of a contract, the same as where the liability is
joint and several. Under this section the lender may sure all or any of the joint
promisors as he may choose[Shankerlal v Motilal AIR 1957 Raj 267].

This section allows the promise to sue such one or several joint promisors as he
chooses, and excludes the right of a joint promisor to be sued only along with his
co-promisors[Jainarain Ram Lundia v Surajmull Sagarmull AIR 1949 FC 211].
If a party is being sued severally, separate from his co-contractors he may apply to
the court, for his co-contractor to be joined in the suit, not because such co-
contractor ought to be party to the suit, but if the court considers it necessary to do
so.

In the case of Joint Family of Mukundas Raja Bhagwandas & Sons Vs. State
Bank Of Hyderabad [AIR 1971 SC 449.10], A bank filed a suit on a promissory
noted against the defendants where the liability was joint and several. The High
Court on equitable grounds directed that the decree must first be realized from one
defendant and for the balance, if any the execution was to be taken against the
other defendant. The Supreme Court held that such a decree requiring one of the
joint promisee’s to pay in the first instance in the first instance and then to proceed
against the others, was bad in law, there being no such equitable principle or
statutory provision and it converted the decree to a joint and several one against all
the defendants.
 174

There is considerable difference of opinion among about the effect of a decree

against only some of the joint promisors, where a judgement has been obtained
against one or only some of the joint promisors. The Calcutta High Court Held that a
decree obtained against one of the several joint makers of a promissory note is a
bar to subsequent action against the others[Hemendro Coomar Mullick Vs.
Rajendrolall Monshee (1878) ILR 3 Cal 353].

In the case of T Radhakrishna Chettiar v K.V. Muthukrishnam Chettiar[AIR

1970 Mad 337]

This case was based on equitable mortgage. The appellant filed a suit as the
respondent did not pay his share of mortgage on land that they had taken for their
company for which they were running jointly. The name of the company was
‘Central Brokers’. Appellant had taken a promissory note from the bank for the
company. The defendant knew that the appellant had taken such a promissory note
on behalf of the company but claimed that as the appellant had taken the note, he
had no personal liability towards the promissory note. Due to this the appellant was
sued for the promissory note. The Allahabad high court viewed the appellant and
respondent had joint and several liability as per section 43 of the Indian Contract
Act, 1872. Thus the respondent and the appellant were both required to pay and
discharge their respective obligations. The principle used in this was opposite to the
Calcutta High Court Judgement[Hemendro Coomar Mullick Vs. Rajendrolall
Monshee (1878) ILR 3 Cal 353]. The principle applied was that if the decree
against some only of the joint promisors remained unsatisfied, a second suit against
other joint contractors was not barred.

The above judgment was also earlier applied by the Allahabad high court, that a
judgement obtained against some of several mortgagors remaining unsatisfied, was
no bar to another suit against joint mortgagors[(1900) ILR 22 AII 307].

This reasoning seems to be conclusive, but until it has been adopted generally by
other high courts, or confirmed by the Supreme Court, the point must be regarded
as open.

When a contract is concluded with a joint venture group, all members are made
jointly and severally liable, even if only one is capable of rendering the service in
question[Asia Foundations & Construction Ltd v State Of Gujarat AIR 1986
Guj 185]. Each of a number of co – tenants under section 43 of the Indian Contract
Act, 1872, separately liable to the landlord for the whole rent[Rama Shankar
 175

Singh Vs. Shyamalata Devi AIR 1970 SC 716], and a suit is maintainable also
against all the heirs of one deceased co – tenant without making the other co –
tenants a party.

In the case of Baria Guman Hamji and Anr. Vs. Rajanikant J. Shah[(1992) 1
GLR 7], the family of a deceased labourer brought a suit against the employer, as
the labourer had died due to injuries sustained in the course of employment. It was
submitted by the plaintiff party that, the deceased was their only son and bread
winner for the family and hence demanded compensation. The defendant
contended that since he was in a partnership, with another company he could not
be held liable. The court opined, that such a partnership fell under the purview of
the section 43 of the Indian Contract Act, 1872. Both the partners were joint and
severally liable, and the plaintiff party could just take action against the defendant
in this case without adding the defendants partner to the suit.

Section 43 speaks about parties making a joint promise and it has no application
where parties are jointly interested by operation of law in a contract made by a
single person[Shaikh Sahed Vs. Krishna Mohan AIR 1917 Cal 829]. Hence the
section does not apply to the case of several heirs of the original debtor, and they
all must be joined as parties to the suit.

Whether a sale deed by a number of vendees makes all vendees jointly liable or
makes each vendee responsible for his own share only, would be a question of fact
depending on the intention of the parties[Sham Lal Vs. Gurbachan Singh AIR
1930 Lah 806]. The burden of showing that under the contract, each promisor is
not separately liable lies on that joint promisor who wished to resist such a suit on
this ground[Raghunath Das Vs. Baleshwar Prasad Chaudhari AIR 1927 Pat
426].

Section 43 includes the word ‘contribution.’ This basically implies under section 43
that if the claimant pursues one defendant and receives payment, that defendant
must then pursue the other obligors for a contribution to their share of the liability.
Contribution in joint and several liability can be defined as ‘ The right that gives one
of the several persons who are liable on a common debt the ability to recover
ratably from each of the others when that one person discharges the debt for the
benefit of all.’ Contribution is between persons equally bound and signifies payment
by each of the parties interested of his share in any common liability. Section 43
gives a promisor compelled to perform a promise a right to compel his co-promisors
 176

to make a contribution.[ Union of India Vs. East Bengal River Streamer

Service Ltd. AIR 1964 Cal 196.] This contract of contribution is independent of
any contract as between the joint promisors and the promise and the latter can not
absolve in anyway the joint promisor from his liability from his liability to
contribution towards other joint promisors, who may have performed the promise.[
Nagendra Chandra Vs. Pushupatty AIR 1949 Ca 12]

In order to claim contribution, one joint promisor must have made payment or
performed or omitted to perform an act as given in the contract, to the promise
either under compulsion or voluntarily. The fact that the promisor claiming
contribution made the contribution without consulting his co–promisor, does affect
his right to contribution[Appna Mahasadasiva Suryanarayana Rao Vs.
Palakurthi Rajalingam AIR 1932 Mad 382].This liability of joint contributors is
primarily to contribute to the performance of the promise.

In the case of Gopendra Narayan Bagchi And Ors. Vs Golokendra Kumar

Chaudhury[AIR 1955 Cal 62], the plaintiff and the defendant were co-sharers of a
Patni –tenure. Both plaintiff and defendant had different proportion of shares in such
tenure. There was a common manager for such an estate. For 2 years the land rent
fell into arrears, and the landlord instituted a suit for the recovery of the same,
against the common manager. The land was to be put up for sale, but the complete
payment was made by the plaintiffs to avert the sale. After the payment was made,
a suit was instituted against the defendant for the recovery for the payment made
by the plaintiff for the defendants share. It was claimed by the defendant, that as he
was not a party to the decree in the rent suit, his interest could not have been
affected by the sale in execution of the decree passed therein and that, therefore,
he was not in any way benefited by the payment made even if it was taken to have
been made by the plaintiffs. It was, accordingly, pleaded that no claim for
contribution could lie in the present case. This defence succeeded in both the courts
below and hence the present second appeal by the plaintiff. This court held that the
plaintiffs claim was sustainable under section 43 of the Indian Contract Act, 1872.
Clearly in this case the defendant along with the plaintiff was liable to pay the
arrears for two years. It was a case of joint and several liability and their position
was as that of joint promisors under that section. When the plaintiffs made the
payment they discharged the liability of their co-promisors as well and became
entitled to contribution from them, in respect of that payment, the cause of action
arising on the date of such payment. The fact that at that date the claim for rent
was barred against the defendant would not be relevant for the purpose of Section
43. The plaintiffs have made the payment and discharged the common liability of
themselves and the defendant. Thus the plaintiff is entitled to contribution under
section 43 of the Indian Contract Act, 1872. The principal applied in this case was
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that a joint promisor can sue another joint promisor for contribution, even though
the claim of the creditor against the latter was barred by limitation, or was
otherwise barred.

In a landmark case decided before the enactment of this Act, it was held that the
mere existence of a decree against one of several joint debtors did not afford
ground for a suit for contribution against other debtors, until he has discharged that
which he says ought to be treated as a common burden, or at any rate done
something towards the discharge of it, he cannot say that there is anything of which
he has relieved his co-debtors, and which he can call upon to share with him.[ Ram
Pershad Singh Vs. Neerbhoy Singh (1872) 11 BLR 76] This principle has been
applied in many cases that followed. One is briefly discussed below.

In the case of Rangoti Mangarao Vs. Chinnadi Kishan Rao [AIR 1965 AP 98],
Venkatarama Reddy, who had an abkari contract, entered into an agreement with
the present plaintiff and defendants 1-3, for the sublease of the contract to the
latter. On the basis of this agreement Venkatarama Reddy filed a suit for recovery
of a sum with interest against the plaintiff and the defendant. This claim was
contested by the present plaintiff as well as the defendants, inter alia, on the
defence that the suit agreement was not executed by them. The High Court of
Hyderabad, before whom the matter went up in second appeal, held that the
agreement was executed by all the four parties i.e., the present plaintiff and
defendants and the plaintiff's claim was enforceable. However, a decree was given
only against the present plaintiff and no relief was granted against the other
defendants as the plaintiff therein had not carried any appeal against the judgment
of the trial court dismissing the suit against them. The present plaintiff then laid the
action giving rise to this appeal in the court of the Subordinate Judge, Karimnagar,
against the defendants for contribution of their share of the amount of the decree
passed against him. Originally, the 2nd defendant remained ex parte; the suit was
defended only by defendants 1 and 3 on the plea that they were not liable to
contribute the responsibility to discharge the debt in question resting only on the
plaintiff. The trial court held in favour of the defendants and rejected the plaint on
the ground that there was no cause of action as against the defendants. The
plaintiff appealed the decision. Again the court held that that the suit was not
maintainable for the reasons that there was no proof that the defendants had
enjoyed the benefits of the agreement referred to above along with the plaintiff,
that the plaintiff took the entire liability on his own shoulders, secondly that there
being no joint decree against him and defendants 1 and 3 and lastly that the
plaintiff had not established that he had paid that amount in respect of which
contribution was sought. During this appeal, the second defendant had written a
letter stating that the plaintiff had not paid the amount due under the decree until
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the date of the institution of a suit, he had no cause of action, which could form the
basis of a suit and the suit was therefore liable to be dismissed

Once again an appeal was made by the plaintiff. One of the questions before the
court was the point whether the plaintiff had satisfied the decree and whether he
could get any relief in the suit without discharging the debt before the institution of
the suit. The question falls under two heads. One is whether the plaintiff had
established that he had discharged the common burden and the other is whether he
could claim contribution, if he had discharged the liability subsequent to the
institution of the suit and not earlier. In order to attract the obligation of a co-
promisor to contribute towards the joint debt, it must be shown that he had paid off
that decree. In this case, there is not difficulty in finding that the plaintiff did satisfy
the decree granted against him. It is beyond dispute that full satisfaction of the
decree was recorded in the execution levied by the said Venkatarama Reddy. There
is no reason why the decree-holder should have full satisfaction recorded without
receiving the amount due to him. It was also contended that the plaintiff the
amount due under the said decree till the date of the institution of a suit. Taking all
these facts into consideration the court held that the plaintiff had discharged the
joint liability and could therefore seek contribution from the defendants who are co-
promisors within the terms of section 43 of the Indian Contract Act. The court
recognized that there was no joint decree against the defendants 1-3, but the
defendants, who are jointly responsible for the discharge of the debt due to
Venkatarama Reddy, are liable to contribute and cannot escape liability
notwithstanding their having been exonerated in the prior proceedings. Thus the
basic principle applied in this case which has been applied on in many other cases is
that co-promisors are liable to contribute to the co-promisor satisfying the decree,
even though they were exonerated in prior proceedings and also a co-promisor can
seek contribution from other co-promisors only after he has satisfied the joint
decree.

Also in a case where two out of three judgement debtors were discharged from their
debt under a statute giving them debt relief and the decree was executed against
the remaining debtor, the latter was nevertheless entitled to contribution from the
other two[Jankibai v Rama Manaji Dhangar AIR 1948 Nag 292].

In the case of Karnail Singh Randhawa Vs. Jagir Kaur & Ors.[ (2008) 149 PLR
519], Randhawa Rice and General Mills was a partnership firm comprising of Karnail
Singh, Bharpur Singh and Harjinder Singh and partners.. The firm had applied for a
loan from Punjab and Sind bank. The firm was later dissolved and one partner
Harjinder Singh was absolved of all his liabilities by a court order. The liability of the
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loan was taken over by remaining partners and guarantors. They failed to pay the
loan and the bank in their capacity sued the partners and guarantors for its
recovery. A preliminary decree was passed by the lower court but the loan was still
not paid. Subsequently a final decree was passed. The loan was still not paid and
the bank filed an execution petition, against Bara Singh one of the guarantors, to
acquire and sell his land. During the pendency of the suit Bara Singh died and his
legal representatives, the plaintiffs were sued. As the plaintiffs inherited the land of
Bara Singh they were required to satisfy the decree passed against him to recover
the land. The plaintiffs satisfied the decree and the land was returned to them. The
filed a suit against the remaining partners for recovery of the amount paid by them
for satisfying the decree. Section 42, 43 & 44 of the Indian Contract Act,1872 were
applied and it was held that the plaintiffs, heirs of Bara Singh, were entitled to
recover contribution from the remaining partners, defendants in this case. Section
42 imposed obligation on joint promisors to fulfill the promise. Section 43 further
holds that anyone of the joint promisors may be compelled by the promisee to
perform the promise. It also envisages that when one of the joint promisors,
executes the promise on his own, he is entitled to claim contribution from the
remaining promisors. Thus it was held by the trial court that the plaintiffs were
entitled to recover the amount from the defendants with interest, as they had
satisfied the whole amount. The Punjab-Haryana high court upheld this decision and
the appeal by the defendants were dismissed.

The principle involved in the above is, a decree holder (promisee) can recover his
decretal debt form one or more or any of the judgement debtors(joint promisors)
and the latter can compel contribution from the other judgement debtors, who have
not been compelled to pay[Shakerlal Vs. Motilal AIR 1957 Raj 267].

Where a decree for costs does not indicate in any proportion in which they are to be
borne, the decree as a rule imposes a joint and several liability on all the judgment
debtors.[ Nandlal Singh Vs. Ram Kirit Singh AIR 1950 Pat 212]

In the case of Meyappa Chettiar Vs. Murugappa Chettiar & Sons[AIR 1960
Mad 117], by a decree in a partition suit, the properties were allotted in equal
shares to 25 persons, but no arrangement was made to discharge a money liability
imposed by a previous final decree. This liability was enforced against the alotteess
of the properties and some had to pay more than their due share. In a suit by these
allottees were bound to contribute, not on the principle of common ownership of
property but the principal which prescribes equality of burden and benefit and
which creates a right of contribution.
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Joint Promisors are liable to contribute equally unless a contrary intention appears
from the contract. If one of the persons liable to contribute is not in a position to
pay his share, then that amount should be divided between the others equally
under the section; but it has been held that the amount may be divided in the
proportion of benefit each has received.[ Padmanabha Kakkothaya Vs. Keshave
Derinjithaya AIR 1951 Mad 239]

Briefly taking up Section 44 of The Indian Contract Act, 1872 states

‘Where two or more persons have made a joint promise, a release of one such joint
promisors by the promise does not discharge the other joint promisor or joint
promisors; neither does it free the joint promisors so released from the
responsibility to the other joint promisor or joint promisors.’

In the case of Devilal Vs. Himatram & Ors.[ AIR 1973 Raj 39], all defendant
parties had taken had jointly taken a contract for construction of a Town Hall of
Udaipur as partners even though the contract was sanctioned by the City
Corporation of Udaipur in the names of defendants Himmatram and Narottam
Swaroop only. Further allegations were that while entering into a subcontract with
the plaintiff-appellant Devilal, the defendant Kanaiyalal acted as an agent for the
rest of the partners. In the relief cause the plaintiff claimed relief that a decree be
passed. The trial court passed the decree but for a less amount than asked and the
amount was reduced further by the district judge. The plaintiff Devilal, therefore,
filed this second appeal. Himmat Ram died during the pendency of the suit, but the
surviving defendants were his partners. The plaintiff has claimed a money decree
against all the defendants jointly and severally for the amount which may be found
due to the plaintiff from the partnership. In view of section 44 of the contract act,
the discharge of one of the promisors from, in this case Himmat Ram due to his
death does not imply that the rest of the defendants are also discharged from
performing their promise. The appeal was allowed and the suit did not abate. The
principal in this case was that abatement of an appeal against one joint debtor or
deathof one joint promisor does not release the other joint promisors.

The same principle has been applied to judgment debtors, and a release by a
decree holder of some of the joint judgment debtors from the liability under the
decree, does not operate as a release of the other judgement debtors.[ Narendra
Chandra Vs. Pushupatti AIR 1949 Cal 242] It also applies to co-mortgagors
jointly and severally liable.[ Krishna Charan Barnab Vs. Sanat Kumar Das AIR
1917 Cal 502]
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Briefly looking into section 42 of the Indian contract Act,1872 which states,

‘When two or more persons have made a joint promise, then unless a contrary
intention appears by the contract , all such persons during their joint lives, and ,
after the death of any of them, his representative jointly with the survivor or
survivors, and after death of the last survivor, the representatives of all jointly must
fulfill the promise.’

Section 42 as the next Section, makes the liability of joint promisors, joint and
several. All promisors in this case are bound to perform the promise and in case of
death of any promisor, the promise must be performed by the surviving promisors
along with the legal representatives of the deceased promisor.

Thus section 42 & 43 of the Indian Contract Act,1872 , deal with contracts when two
or more parties are on one side in a contract. It bifurcates all joint promisors
liability, and makes joint liability joint and several. It provides relief to one of the
joint promisors, in case the others are not party to the suit and sets out a scope for
all joint promisors to demand contribution from their co-promisors and sets out
procedure for contribution in case of death or insolvency of any of the co-promisors.
Hence section 42 & 43 are an integral part of the Indian Contract Act, 1872 in case
of contract where there are joint promisors on either or both sides.

Section 44. Effect of release of one joint promisor.

Where two or more persons have made a joint promise, a release of one of such
joint promisors by the promisee does not discharge the other joint promisor, neither
does it free the joint promisor so released from responsibility to the other joint
promisor or joint promisors.

Section 45. Devolution of joint rights.

When a person has made a promise to two or more persons jointly, then unless
contrary intention appears from the contract, the right to claim performance rests,
as between him and them, with them during their joint lives, and, after the death of
any one of them, with the representative of such deceased person jointly with the
survivor or survivors, and, after the death of the last survivor, with the
representatives of all jointly.
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Illustration-

A, in consideration of 5,000 rupees lent to him by B and C, promises B and C jointly

to repay them that sum with interest on a day specified. B dies. The right to claim
performance rests with B’s representative jointly with C during C’s life; and, after
the death of C, with the representatives of B and C jointly.

The section releases one of the joint promisors however, keeps the other promisors
bound to the promise made by them to the promisee. This is contrary to the idea of
joint liability or joint promise. In joint promises or joint liabilities, the case stands
that if one of the promisors are released from the promise, the others are
automatically discharged as they had jointly taken up the contractual obligation.
Thus, when that obligation comes to an end for one, it ends for all. But this section
clearly portrays a situation where the obligation does not end on all the promisors if
only one of them is released.

The other perspective or point that can be derived from the reading of the section is
that even though the promisor is released from the joint promise, he is not released
from his responsibilities towards the rest of the promisors, along with whom he had
entered into the contractual relationship with the promisee. Thus, it shows that he is
still bound with a sense of responsibility towards his co-promisers by the virtue of
the incidence of a joint responsibility. All the other promisers are not released as
has been mentioned above, and they are the ones towards whom, the released
promisor is responsible.

The above explains the essence of the section 44 of the Indian Contract Act,1872
and gives an account of the two-sided view of the same. However, the idea is to
understand the implication of the section when it comes to the revocation of an
offer and the acceptance of an offer by the promisee. The ways in which this
particular section affects the revocation has to be understood in order to gain a
complete knowledge of the need for its insertion in the Act at all.

REVOCATION: EXPLAINED

Section 6 of the Contract Act, explains the various terms on which the cancellation
of entire contract at all. It puts across four major situations which can call of the
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proposal, eventually calling off the contract in its entirety. The four situations are
furnished below:

1. By the communication of the notice of revocation by the proposer to the

other party

Basically in this situation we observe that the proposer himself cancels or calls off
the proposal by a notice to the promisee, that is, the person to whom the proposal
was made. By this action of the proposer, the contract comes to an end, giving way
to the revocation of the same.

2. By the lapse of the time prescribed in such proposal for its acceptance, or if
no time is mentioned, by the lapse of reasonable time

When an offer is made in order to form a contract with another party, it is important
that the communication of the acceptance be made within the stipulated time span
mentioned in the terms and conditions of the contract or within a reasonable period
of time. If otherwise, it is considered that the proposal has not been accepted by the
concerned party and thus, the proposal has to be cancelled and which actually
indicates the revocation of the entire contract. The aspect of time in a contract has
an importance as no offer is made for eternity and every contract has to have a
binding authority and a sense of rigidity which is derived from Time. Thus, not
abiding by the condition regarding the time of communication of acceptance may
infer the non-acceptance, which in turn compels the cancellation of the contract.

3. By the failure of the acceptor to fulfil the conditions precedent to acceptance

This part introduces us to a situation where the promisee fails to fulfil the condition
precedent to agreeing on the terms and conditions of a contract, implying his
acceptance towards it. It is known that each and every term and condition must be
followed and taken care of in order to give birth and existence to a contract. Thus,
when the promisee fails to abide by the proposed terms, it automatically revokes
the contract.

4. By the death or insanity of the proposer, if the fact of his death or insanity
comes to the knowledge of the acceptor before acceptance
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The death of the proposer turns down the proposal and the contract at all, as that
automatically extinguishes the opportunity for a two way communication and
formation of the contract which is essential for its survival. However, if the acceptor
does not get to know about the same before the communication of the acceptance,
the proposal cannot be revoked as that gives rise to an obligation of the contractual
relationship already before it could be terminated.

Thus, we can conclude that on the basis of the four grounds mentioned in Section 6
of the Indian Contract Act, 1872, a revocation of the contract may take place.
However, the communication of wither the revocation of the offer or the acceptance
has to be made in the right sense, as has been put across by section 5 of the said
Act.

Section 5 clearly mentions the way the communication of the revocation of the offer
and acceptance must happen in order to make the revocation an absolute, binding
and a lawful one. It states the following two ways:

5. The communication of the revocation of the offer must happen before the
communication of the acceptance has been put in course of transmission and
is out of control of the acceptor. Thus, the proposal has to be revoked and let
known to the acceptor before the communication of the acceptance as
against the proposer.

6. On the other hand, the revocation of the acceptance must happen before the
proposer is aware of the acceptance of the proposal or the communication of
the acceptance has reached its destination. Thus, we may say that the
communication of the acceptance may happen as against the acceptor.

In order to fulfil the revocation, the above must be taken care of and looked into.
Also, the postal rules have to be read, however, the crux of Contracts is based upon
the above explained points.

REVOCATION AND SECTION 44

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As we have learnt the modes, methods and the grounds for the revocation to
happen we shall have an understanding of it under the ambit of section 44 which
introduces us to the concept of joint liability under the purview of Contract Law.

Section 44 states that even though a promisor is released, he/she is not released
from his obligations towards the other promisors, along with whom he/she had
agreed upon the contract. That means, even if there is a release on the basis of
death of any of the promisors, it firstly, does not release the rest of the promisors
from the contractual obligations towards the promisee and secondly, does not
release his obligations towards the other joint promisors. However, in case of the
revocation to happen, the death of the promisor has to happen before the acceptor
has already communicated his acceptance, thus, in this case, under section 44, if
any one of the promisor dies, that has to be communicated to the acceptor before
the communication of the acceptance as against the proposer, only then can it
release the deceased promisor from his obligations towards the promisee.

Again, in a situation where we assume that one of the promisors have lost his
sanity, as per the provisions of the section 6 of the Act, there can be a revocation of
the contract. But looking in to the words of section 44 of the Act, it must be
understood that the insane promisor only gets released from the obligation that
arise out of the contract and the rest of the joint promisors still remain in bound by
the words of the contract. On the other hand, again following the words of section
44, the legal representative of the insane promisor is found to be answerable to the
joint promisors in any adverse situation. However, again it has to be noted that the
cancellation or the revocation of the contract can take place only and only if the
communication of the acceptance is not put in course by the acceptor.

In a situation where there is a lapse of time mentioned in the contract for the
communication of acceptance or acceptance made beyond the reasonable time
period, the revocation of the contract happens in a way that it dissolves the offer
itself and it infers that the offer is not accepted. When linking this situation of
revocation of the offer itself, automatically all the joint promisors who had initiated
the offer or the proposal to the acceptor get discharged of their obligation because
of the lack of consent to the acceptance of the proposal, which indicates a decline
of the proposal. Thus, as per the crux of a contract, when there is not acceptance to
the offer, there stands no contract at all.
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Now if, we consider the situation when the proposers themselves communicate the
decline or the revocation of the offer by a notice at the first place, before the
communication of the acceptance as against the proposer, that is before the
acceptor puts his acceptance in the course of transmission, the proposers may
release themselves from the contractual obligation even before it takes place. Thus,
in this case if the revocation notice has to be sent, it cannot be the decision of any
on of the proposers, it has to be a joint decision of all of them as they are
responsible for their offer to the promisee. It does not depend upon the decision of
any one of them, if they decide to revoke it, it has to be a decision of all and
releasing all of them at once.

The acceptor not only has to keep in mind the reasonable time frame but also the
fact that there might be certain terms and conditions which may be a precursor to
the entering into the contract. It is already known that the conduct of the acceptor
itself at times communicates the acceptance and thus, once he agrees to perform
the terms and conditions, the acceptance is assumed to have taken place. But when
arises a situation where the pre conditional terms and conditions are not followed
by the acceptor, that might communicate a gesture which compels the proposers to
bring an end to the contract. Following from section 44, this cancellation, again has
to be a joint decision.

Thus, we can chalk out this fact, that the acceptor may discharge any of the joint
promisors on grounds that may arise however, he still remains obliged to the other
joint proposers and on the other hand we see that whenever there has to be a
revocation of the offer, it always has to be a joint one. This means that the
proposers have an understanding between them which brings them together to
initiate an offer together, towards the concerned acceptor and that is why when it
comes to break that joint decision, when it comes to calling off the entire decision of
the offer, all the joint promisors have to be consulted with and they have to come to
a joint decision regarding the cancellation of the offer. But the acceptor has some
discretion in hand to release any one of the promisors on grounds that compel such
decisions to be taken.

Thus, from the above facts and explanation of the section regarding the concept of
revocation and the joint responsibility, we can derive an understanding on the facts
which cause the revocation and the implications of the revocation of wither the
acceptance or the offer on the contract and on the promisors in a case of joint
promisors as reflected by the section 44 of the Indian Contract Act,1872. It is always
a two-way traffic when it comes to an agreement or a contract and it entirely
depends on the parties who are willing to enter into the contract whether it should
 187

exist, survive or be revoked and its effects also differs from situations to situations.
Also, we can follow from the section 44 of the Act, which actually forms the idea and
substance of section 138 of Indian Contract Act, dealing with the concept of co-
sureties.

TIME AND PLACE FOR PERFORMANCE.

A common feature of construction contracts is a clause stating that "time is of the

essence". In some instances the clause will be inserted as boilerplate or from a
precedent without discussion, while in other cases one or both of the parties will
expressly request the clause be inserted into the contract. Either way, in the
majority of cases little thought is given to the clause or it is often inserted without a
clear understanding of its meaning and effect. Contract drafters should take care as
"time is of the essence" clauses may not operate in the same manner in a
construction contract as they do in other situations, potentially leading to
unexpected results during the project

Explicit stipulation of delivery times is practically universal in contracts. Examples

include labour contracts within firms, sub-contracting of parts of a larger project to
other firms and procurement contracts for large-scale projects such as weapons
systems and infrastructure. In some of these cases, a deadline is determined
exogenously. For example, if a production process involves the use of a perishable
input, failing to meet a production deadline might mean the loss of the input in
question. Another example is a situation in which one of the parties is bound by a
contract with a third party. But in many situations, a deadline is imposed
endogenously by one of the parties

"Time is the essence" is a term in contract law which indicates that the parties to
the agreement must perform by the time to which the parties have agreed. In the
business matter generally time is essence. The business matters depend upon the
intention of the parties. Even where "a specific date is mentioned of the completion
for the contract" time schedule also very essential in the construction contracts
because construction is a commercial service .In a joint venture agreement, one of
the clauses was that the defendants were to perform certain formalities within 5
years, and that, on failure to do so, the agreement was to become null and void. In
the sale transactions time factor is essential to performance. In the sale transaction
the importance of time factor. Time is also an essential part of any contract related
to the land and Property. The parties may make time of the essence either
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expressly in terms which unmistakably provide that they intended to do.

Alternately, making of time as the essence of a contract may be inferre. It is
designed to protect buyers and sellers alike, since if one party fails to meet a
deadline the whole contract can be void. When the promise is to be performed on a
certain day, the promise‟s duty in such a case is to perform the contract during the
usual business hours on such day. If the goods to be delivered are supplied after the
usual closing time, the buyer may reject them. When time is essence of the
contract, non performance of the contract in time would frustrate the purpose which
the parties have in mind, and, therefore, if in such a case, there is delay in the
performance by one party, the other party has a right to avoid the contract.

Scope of time and its importance in each valid contract

A common features of construction a valid contract stating that "Time is the

essence of Contracts"

Time is very essential and importance aspects related to the each valid contract. It
is the basic and importance ingredients of valid contracts. But in the present
scenario the time of valid contracts is depend on the each cases and situation. In
some cases the time is prescribe in the terms and condition of a contract but in
some cases the reasonable time is also play a very important role. The reasonable
time is depend on the nature of the contracts. If a contracts does not specify the
time for performance the law will imply that the parties intended that the
obligations under the contract should be performed within a reasonable time and
the question „What is a reasonable time ‟is in each particular case, a question fact.

If in any case when party to a contracts promise to do certain things at any time or
before specified period of time and fails to do the promise before the period of time
or at a specified time , the contracts become voidable if the intention of the party
that the time is the essence of the contracts.

Contracts of all sorts specify date for performance various obligation and even an
some absent of some specify date there is some usually an implied term calling for
performance within a reasonable time. "Time is of the essence" clauses are used
with regularity in other areas of the law, particularly real estate and sale of goods
where the courts generally apply a strict approach in enforcing this clause.
 189

If any agreement states that a particular act relating to the furtherance of a

contracts is to be done in a particular manner or time , it should be done in that
manner or time and it is not open to the parties to chalk out his own manner or time
performing the his part of contracts.

Meaning of Time:-

Time is the very important fact in the contract. The basic meaning of time is the
period or a limit in which the contracts is fulfil. In the absence of the any expressed
time by the parties to an agreement or contracts, the contract is perform within a
reasonable time

Legal Provision :-

Time and place for performance (Ss.46-50)

Section 46. Time for performance of promise, where no application is to be

made and no time is specified.

Where, by the contract, a promisor is to perform his promise without application by

the promisee, and no time for performance is specified, the engagement must be
performed within a reasonable time.

Explanation-

The question “what is a reasonable time” is, in each particular case, a question of
fact.

Section 47. Time and place for performance of promise, where time is
specified and no application to be made.

When a promise is to be performed on a certain day, and the promisor has

undertaken to perform it without the application by the promisee, the promisor may
perform it at any time during the usual hours of business on such day and at the
place at which the promise ought to be performed.

Illustration-
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A promises to deliver goods at B’s warehouse on first January. On that day A brings
the goods to B’s warehouse, but after the usual hour of closing it, and they are not
received. A has not performed his promise.

Section 48. Application for performance on certain day to be at proper

time and place.

When a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it without application by the promisee, it is the duty of the
promisee to apply for the performance at a proper place within the usual hours of
business.

Explanation-

The question “what is proper time and place” is, in each particular case, a question
of fact.

Section 49. Place for the performance of promise, where no application to

be made and no place fixed for performance.

When a promise is to be performed without application by the promisee, and not

place is fixed for the performance of it, it is the duty of the promisor to apply to the
promisee to appoint a reasonable place for the performance of the promise, and to
perform it at such a place.

Illustration-

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must apply

to B to appoint a reasonable place for the purpose of receiving it, and must deliver
it to him at such place.

Section 50. Performance in manner or at time prescribed or sanctioned by

promise.

The performance of any promise may be made in any manner, or at any time which
the promisee prescribes or sanctions.
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Illustrations-

(a) B owes A 2,000 rupees. A desires B to pay the amount to A’s account with C, a
banker. B who also banks with C, orders the amount to be transferred from his
account to A’s credit and this is done by C. Afterwards, and before A knows of the
transfer, C fails. There has been a good payment by B.

(b) A and B are mutually indebted. A and B settle and account by setting off one
item against another, and B pays A the balance found to be due from him upon
such settlement. This amounts to a payment by A and B, respectively, of the sums
which they owed to each other.

(c) A owes B 2,000 rupees. B accepts some of A’s goods in deduction of the debt.
The delivery of the goods operates as a part payment.

(d) A desires B, who owes him Rs. 100, to send him a note for Rs. 100 by post. The
debt is discharged as soon as B puts into the post a letter containing the note duly
addressed to A.

Case Study:-

In the case of Bishamber Nath Agarwal v. Kishan Chand AIR1990 ALL70. , . It

was held that if any agreement states that a particular act relating to the contracts
is to be done within the particular time or manner , it should be done in that manner
or time and it is not the rights of the parties to perform it is own his manner or time
according to them.

In the case of Haryana Telecom Ltd. V. Union of India AIR 2006 Del 399. , it
was held that one of the clauses of contracts stipulated that deliveries made after
stipulated delivery period will not deprive party of its right to recover liquidated
damage, reading of all clauses showed that time was essence of contract.

In the case of Swarnam Ramchandram v. Aravacode Chakungal Jayapalan

AIR 2000., it was held that the parties , may make time of the essence either
expressly in terms which unmistakably provide that they intended to do so.
Alternatively, making of time as the essence of a contract may be inferred from the
nature of the contract , the property or the surrounding circumstances.

The well known authority is Bhudra Chand v. Betts (19150)22 Cal LJ566:33
IC3347. (.In this case The plaintiff stipulated with the defendant to engage his
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elephant for the purpose of Kheda operations (to capture wild elephants). The
contract provided that the elephant would be delivered on the 1st October ,1910;
but the defendant obtained an extension of time till the 6th October and yet did not
deliver the elephant till the 11th.The plaintiff refused to accept the elephant and
sued for damages for the breach.

In the case of Mahabir Prasad v. Durga Rungta Datt AIR 1961 SC 990 the
Supreme Court held on the facts of the case that time of payment was of the
essence of the contract. The facts of the case were that a transport coal from a
colliery to the railway station. The colliery-owner had to keep the road in repair and
to arrange for petrol. He had also to pay for the transportation of the 10 th of the
next month. It was alleged that these things were not go on with his work. The
transporter rescinded the contract and brought an action for damages. It was held
that in commercial transactions‟s time is ordinarily of the essence of the contract.
In this contract time of payment and of arranging other things was, particularly,
such an important condition of the contract that section 55 could be invoked by the
aggrieved party and the transporter was entitled to rescind the contracts.

In the case of Trailakyanath Maity v. Provabati Santra AIR 1947. ,, the Calcutta
High Court observed: "…..Whether or not the time is the essence fo the contract
must depend on the facts and circumstances of each case having regard to the
provisions of section 25 of the Indian Contract Act. It is well established that the
intention of the parties together with the circumstances has got to be looked into to
ascertain whether the parties intended that in the agreement for sale in question in
a given case the time would be essence of the contract.....even though the
cancellation of the contract is not embodied in the document in so many words, by
the terms provided therein for forfeiture of the earnest money the agreement for
sale in case of such forfeiture would automatically lapse by necessary implications".

In case of sale of immovable property, the general presumption is that time is not
the essence of the contracts. In Mangalram Namasudra v. Permanand
Namsudra AIR 1972., wherein the contract was relating to the sale of land , the
Assam and Nagaland High Court while holding "time was not the essence of the
contract" observed.

In the case of Devender Singh v. State of U.P. AIR 1987 All 306., where an
application for extension of time was rejected after a long gap, the contractor was
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not allowed compensation for the waiting period. In hire installments is of the
essence.

In Present Scenario:-

In the present scenario time of the contract play very wide and important role. In
the present there are several type of contracts in which time is very essential. It is
understand by the matter of several kind of transaction.

In Business of matter time generally essence

– Businessmen attach Importance to Time

The matter depends upon the intention of the parties. Even where "a specific date is
mentioned for the completion of the contract, one has not to look at the letter but at
the substance of the agreement in order to ascertain the real intention of the
parties. "In commercial contracts time is ordinarily of the essence of the contracts".
This is so because the business world requires certainty and also because
"merchants are not in the habit of placing upon their contracts stipulations to which
they do not attach some value and importance. It may also be noted that , simply a
mention of specific date completion of contract including the default clause
imposing penalty in the agreement do not by themselves indicates the intention of
parties to make time of the essence. Such intention may be gathered the
following :-

(1) the language of the agreement,

(2) the nature of the property to be sold ,and

(3) conduct of parties and surrounding circumstances at or before the contracts.

"From an analysis of the above case law it is clear that in the case of sale of
immovable property there is no presumption as to time being the essence of the
contracts. Even if it is not the essence the court may infer that it is to be performed
in a reasonable time if the condition are:

1. From the express terms of contracts;

2. From the nature of the property; and

3. From the surrounding circumstances.

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Above given 3 points are very essential in the matter of the sale of immovable
property related to the importance of time in the contracts.

Construction contracts

Time schedule in a construction contract is likely to be of the essence because

construction is a commercial service. Where 24 months’ time was given to the
builder with a stipulation that if he failed to deliver within the stated time, he would
pay 10% per annum of the purchase price measured by the period of delay, time
was held to be of the essence entitling recovery of the stipulated amount. Similarly,
where a builder’s commitment with a bank was that he would make their building
ready within six months, but could not do so, the bank was allowed to terminate the
contract. The fact that the bank exercised this right after about two months after
the expiry of the stipulated time did not amount to an extension of time.

Sale Transactions:

The court would have to see on the facts of each case involving a sale transaction
weather time factor was essential to performance or not. In a contract of sale of
goods, the time of shipment is of the essence. There is a considerable authority in
support of this rule and it has been recognised and accepted in Bowes v Shand
(1877) .Here in a contract of sale of rice to be shipped at Madras during March on
April, 1874, by a ship of the name of Rajah of Cochin the stipulation in regard to
shipment was held to be a condition of the contract and the contract was held to be
not satisfied by shipment a month earlier, that is, in February.

So the analysis of these cases it is found that the time is the very essential also in
the sale transaction.

Carriage by Air

A complainant under the Consumer Protection Act alleged that his cargo was not
airlifted by the carrier within the time –limit. The National Commission agreed with
the airliner that weighty cargo blocks could not be carried in time because the
safety of the aircrafts was an important factor at all times. The complainant had
failed to establish that time was of the essence of the contracts.

But the time is also important essential in the contracts of carriage by the air.
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Non-Commercial Matters

"In cases other than commercial contracts the ordinary presumption is that time is
not of the essence of the contracts". Accordingly, "In contracts for the sale of
immovable property, time would not be regarded as of the essence unless it is
shown that the parties intended so. The importance of essence of time in the
transaction of immovable property depends on the intention of the parties.

Extension of time

The contract was to provide a rig for a certain period which as to be extended in
case of any breakdown in working .The rig broke down for some time and, without
taking this into account, the owner of the rig wanted to withdraw it on the expiry of
the period. The court said though there cannot be unilateral extension of time, in
this case, there was the agreement that the period would be extended so as to
cover the breakdown period. The owner of the rig could not say that he should be
permitted to withdraw the rig subject to his liability for damages. The machinery in
question was rare and not easily available. Compensation would have served no
purpose.

So the extension of time in the contract is depending on the nature of the contract
and situation of the contracts.

When the time is the essence of the contract, it is expected that the promisor would
perform the contract within the stipulated time. On his failure to do so, the promisor
has a right to avoid the contract. The time is the very essential in each contract it is
found after the analysis of several case laws.

PERFORMANCE OF RECIPROCAL PROMISES.

Reciprocal Promise

Section 2f of the Indian Contract Act 1872 defines reciprocal promises as a form of
the consideration. It generally means promise in exchange of promise. So, it is
merely exchange of promises.
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For example- Deepak bought 10 kilograms of rice from a grocery shop. Instead of
paying the full amount, he promises the seller to pay the due as soon as possible.
The seller in return promises him that if Deepak paid the left amount within 2 days
then seller will give him 2 kilograms of wheat flour for free.

This is a reciprocal promise.

Case- M/S Shanti Builders vs. CIBA Industrial workers, Cooperative

Housing Society Ltd.

In this case, the complainant was promised some portion of land for construction of
building but was not given the same. The Court held that respondent cannot make
the complainant liable for not fulfilling the obligation of a contract.

Even if work was not done builders cannot be held liable because they were ready
to perform their part but it was the respondent who was not. So, complainant was
entitled to remedies by the Court.

Types of Reciprocal Promise

1.Mutual and Independent

In this type of Reciprocal Promise, promises are not dependent on each other. They
are mutual but are independent at the same time.

For example- Aman promised to give 5 Mango Bite candies to Naman and Naman
promised to give 5 Hajmolas to Aman.

Both the promises are independent in nature.

2.Conditional

In this type of Reciprocal Promise, Promise made by one party is dependent on the
fulfilment of the promise by another party.
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For example- A and B entered into a contract in which A paid full amount to B for
making furniture out of wood. A promised him to give wood for the same but A
didn't. When A did not do his part then how will be start making the furniture?

So, B cannot be held liable for not doing the act promised.

3.Concurrent

In this type of reciprocal promise promises are made simultaneously for example

Rekha is an apple seller. Bacchan purchases some apples from her. Rekha asks for
90% of payment for the apples.

Simultaneously, if Bacchan denies then Rekha can break the same contract as well.

Section 51. Promisor not bound to perform, unless reciprocal promisee

ready and willing to perform.

When a contract consists of reciprocal promises to be simultaneously performed, no

promisor need perform his promise unless the promisee is ready and willing to
perform his reciprocal promise.

Illustrations-

(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery. A
need not deliver the goods, unless B is ready and willing to pay for the goods on
delivery.

B need not pay for the goods, unless A is ready and willing to deliver them on
payment.

(b) A and B contract that A shall deliver goods to B at a price to be paid by

instalments, the first instalment to be paid on delivery.

A need not deliver, unless B is ready and willing to pay the first instalment on
delivery.
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B need not pay the first instalment, unless A is ready and willing to deliver the
goods on payment of the first instalment.

Section 52. Order of performance of reciprocal promises.

Where the order in which reciprocal promises are to be performed is expressly fixed
by the contract, they shall be performed in that order, and where the orders is not
expressly fixed by the contract, they shall be performed in that order which the
nature of transaction requires.

Illustrations-

(a) A and B contract that A shall build a house for B at a fixed price. A’s promise to
build the house must be performed before B’ s promise to pay for it.

(b) A and B contract that A shall make over his stock-in-trade to B at a fixed price,
and B promise to give security for the payment of the money A’s promise need not
be performed until the security is given, for the nature of the transaction requires
that A should have security before he delivers up his stock.

Section 53. Liability of party preventing event on which contract is to take

effect.

When a contract contains reciprocal promises and one party to the contract
prevents the other from performing his promise, the contract becomes voidable at
the option of the party so prevented; and he is entitled to compensation from the
other party for any loss which he may sustain in consequence of the non-
performance of the contract.

Illustration-

A and B contract that B shall execute some work for A for a thousand rupees. B is
ready and willing to execute the work accordingly, but A prevents him from doing
so. The contract is voidable at the option of B; and, if he elects to rescind it, he is
entitled to recover from A compensation for any loss which he has incurred by its
non-performance.

Section 54. Effect of default as to the promise which should be performed,

in contract consisting or reciprocal promises.
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When a contract consists of reciprocal promises, such that one of them cannot be
performed, or that its performance cannot be claimed till the other has been
performed, and the promisor of the promise last mentioned fails to perform it, such
promisor cannot claim the performance of the reciprocal promise, and must make
compensation to the other party to the contract for any loss which such other party
may sustain by the non-performance of the contract.

Illustrations-

(a) A hires B’s ship to take in and convey, from Calcutta to Mauritius, a cargo to be
provided by A, B receiving a certain freight for its conveyance. A does not provide
any cargo for the ship. A cannot claim the performance of B’s promise, and must
take compensation to B for the loss which B sustains by the non performance of the
contract.

(b) A contracts with B to execute certain builder’s work for a fixed price, B supplying
the scaffolding and timber necessary for the work. B refuses to furnish any
scaffolding or timber, and the work cannot be executed. A need not execute the
work, and B is bound to make compensation to A for only loss caused to him by
non-performance of the contract.

(c) A contracts with B to deliver to him, at a specified price, certain merchandise on

board a ship which cannot arrive for a month, and B engages to pay for the
merchandise within a week from the date of contract. B does not pay within the
week. A’s promise to deliver need not be performed, and B must take
compensation.

(d) A promises B to sell him one hundred bales of merchandise, to be delivered next
day and B promises A to pay for them within a month. A does not deliver according
to promise. B’s promises to pay need not be performed, and A must make
compensation.

Section 55. Effect of failure to perform a fixed time, in contract in which

time is essential.

When a party to a contract promises to do a certain thing at or before a specified

time, or certain thins at or before a specified time and fails to do such thing at or
before a specified time, and fails to do such thing at or before a specified time, the
contract or so much of it as has not been performed, becomes voidable at the
option of the promisee, if the intention of the parties was that time should be of
essence of the contract.
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Effect of such failure when time is not essential-

If it was not the intention of the parties that time should be of the essence of the
contract, the contract does not become voidable by the failure to do such thing at
or before the specified time; but the promisee is entitled to compensation from the
promisor for any loss occasioned to him by such failure.

Effect of acceptance of performance at time other than agreed upon-

If, in case of a contract voidable on account of the promisor’s failure to perform his
promise at the time agreed, the promisee accepts performance of such promise at
any time other than agree, the promisee cannot claim compensation of any loss
occasioned by the non-performance of the promise at the time agreed, unless, at
the time of acceptance, he give notice to the promisor of his intention to do so.

Sectionn 56. Agreement to do impossible act.

An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful: A contract to do an

act which, after the contract is made, becomes impossible or, by reason of some
event which the promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or

unlawful: Where one person has promised to be something which he knew or, with
reasonable diligence, might have known, and which the promisee did not know to
be impossible or unlawful, such promisor must make compensation to such promise
for any loss which such promisee sustains through the non-performance of the
promise.

Illustrations-

(a) A agrees with B to discover treasure by magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for the marriage, A
goes mad. The contract becomes void.
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(c) A contracts to marry B, being already married to C, and being forbidden by the
law to which he is subject to practice polygamy. A must make compensation to B for
the loss caused to her by the non-performance of his promise.

(d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards
declares war against the country in which the port is situated. The contract
becomes void when war is declared.

(e) A contracts to act at a theatre for six months in a consideration of a sum paid in
advance by B. On several occasions A is too ill to act. The contract to act on those
occasions becomes void.

What is the Doctrine of Frustration?

The general rule of contracts states, that the parties to a contract have to fulfill their
obligations under the contract and in case of breach, the party breaching the
contract has to compensate the other for the damages caused. The doctrine of
frustration is an exception to this rule.

The doctrine of frustration basically talks about the impossibility of performance of

the contract. It means a contract cannot be executed because of an incident beyond
the control of parties. The performance of such a contract becomes frustrated i.e. it
becomes complicated, impossible or even illegal. The frustration of contract can be
due to any unforeseen, impossible events and events out of control of the parties.

History and development of doctrine of frustration

As is the case of most provisions under common law, doctrine of frustration’s

genesis can be traced back to Roman law. It can be traced back to a provision
under Roman Law which stated that parties should be absolved of their contractual
obligations if events transpire which are of no fault of their own and which were not
foreseeable. For example, if a man promised to deliver a slave on a certain day and
that particular slave died before the delivery due to actions unforeseeable and out
of his control the man would have been protected under Roman Law.

Moving past ancient times, the first instance of doctrine of frustration can be traced
back to the Queen bench Judgment in 1863 in the case of Taylor vs. Cardwell. In
this particular case, an opera house was destroyed due to an accidental fire and
consequently was not able to hold the performance of the opera, the plaintiff (a
buyer of the ticket for the opera) sued the defendant for breach of contract.
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However, it was held that the defendant is not liable to pay the damages as the
very object on which the entire fulfillment of the contract was based was destroyed
by no fault of either party hence it was held that the parties were discharged of
their contractual obligations. Prior to this case, it was assumed that the parties
could have provided for such circumstances in their contract if they wished to and
they are only using the circumstance as an excuse to not fulfill their contractual
obligations.

Prior to this, there was a rigidity in common law in matters of frustration as seen in
the landmark ruling of Paradine v. Jane. In this case, a tenant was made liable to
pay the arrears rent even though the circumstances which led to him not paying the
rent were out of his control. This rigidity was, however, changed after the Cardwell
case. However, the reasoning giving for frustration under the Cardwell case was
criticized as the reasoning given was that when the parties enter into a contract
that there is an implied condition that they would be absolved of obligations in case
of an unpredictable and unfortunate event transpire. This reasoning was criticized
by many legal scholars as they believed it to be just a ‘legal fiction’ created in
courts.

It was criticized by the House of Lords under National Carriers Ltd v. Panalpina
(Northern) Ltd as they said individuals not party to the contract are intruding in
the contract. The doctrine of frustration was, however, strengthened when the “loss
of object” theory was given to justify doctrine of frustration, this theory stated when
the main object on which the entire contract surrounds is destroyed by an event
which is not reasonably foreseeable and out of the control of the parties the
completion of the contract becomes impossible and hence, the parties should not
be made liable to pay the damages in such a case. This was a more sophisticated
theory and was firstly used in the landmark case of Krell v Henry. Thus, it can be
observed that the roots of the doctrine of frustration are ancient but it has
developed over time and continues to be extremely relevant till date.

What are the conditions required to prove frustration of contract?

The frustration of contract can be proved upon the fulfillment of the following
conditions-

1. The existence of a valid contract

2. The contract is not performed yet
3. The performance of the contract has become impossible
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4. The impossibility has occurred due to event uncontrollable by both the

parties.

What are the grounds for Doctrine of Frustration?

Following are the grounds for the frustration of a contract-

1. Impossibility of performance

The doctrine of frustration arises from the impossibility to complete an activity. But
the principle cannot be limited to physical impossibilities.

It was held in Satyabrata Ghose vs. Mugneeram Bangurn & Co & Anr., that
the term ‘impossible’ has not been used in section 56 of the Contract Act in the
sense of physical or literal impossibility. It is not necessary that the performance of
act be literally impossible but it may be impracticable and if an event totally
changes the very foundation of the contract, it can be said that the promisor finds it
impossible to do the act which he promised to do. Therefore, when we say the
object of contract is lost, the contract is said to be frustrated.

2. Destruction of subject matter

The doctrine of frustration applies when there is the destruction of the subject
matter of contract.

This was further explained in the landmark judgment of Taylor vs. Caldwell,
where Taylor had entered into an agreement to perform at an event, but on the day
of the event, the hall where the event was to take place burned down. The burning
of the hall depicts the impossibility of carrying forward the contract. This shows that
the destruction of the subject matter of contract will make the contract
automatically frustrated.

The contract would be frustrated if the particular subject matter required for the
performance of the contract is destroyed. For example, in V.L. Narasu v. P.S.V.
Iyer, a contract for screening a movie in a cinema hall became impossible to
perform because the rear wall of the hall collapsed due to heavy rainfall, killing
three people, and the hall’s license was revoked until the building was restored to
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the satisfaction of the chief engineer. There was no obligation on the part of the
owner to rebuild.

The things destroyed need to be the subject matter of the contract; thus, if the
contract was not exclusive to such particular commodities, it could not be
frustrated. In Turner v Goldsmith, the contract of the agency to deliver goods
manufactured by the defendant was not frustrated after the factory was burned
down since the contract was not exclusive to products produced by the defendant
at that specific factory.

3. Death or incapacity of a party

If the contract demands the personal performance of the parties, the death or
incapacity of the party will make the contract void because the contract cannot be
performed anymore.

For example in Robinson v. Davison, the plaintiff and defendant’s wife, an

accomplished pianist, had agreed that she would play the piano at a concert held by
the plaintiff on a specific date. She became ill on the morning of the concert and
was unable to attend. The plaintiff lost funds when the concert had to be
rescheduled. The plaintiff’s claim for breach of contract was dismissed. According to
the court, she was not only excused from playing, but she was also not at liberty to
play if she was deemed unfit and the contract was frustrated.

4. Frustration by legal or government intervention

Where, a law is promulgated after a formation of a contract, making the

performance impossible then the contract becomes void.

5. The frustration of contract due to change of circumstances

This situation occurs when there is no physical impossibility of performance of the

contract, but due to change in circumstances, the main reason for which the
contract was formed is defeated. The changed circumstances dissolve the contract
and the parties are absolved from the performance of the contract.

6. The Intervention of War

The intervention of war makes the performance of contract difficult, thereby making
the contract void.
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What is the effect of the doctrine of Frustration?

A. The contract is frustrated automatically– The general rule is that the

occurrence of the frustrating event puts an end to the contract automatically.
The parties are not required to rescind the contract as the obligations of the
parties get terminated immediately after the contract is frustrated.
B. Further obligations are discharged- Both the parties are discharged from any
obligations after the contract is said to be frustrated.
C. Accrued obligations- The legal rights or obligations already accrued before
the frustrating event occurred are left undisturbed

Initial vs Subsequent Impossibility

Initial impossibility:- The object of making any contract is that the parties to
contract would perform their respective promises, and where the contract is
impossible to perform the parties would never enter into it. Initial impossibility deals
with those cases where the contract was impossible to perform from the very
beginning. For example, If a married man knowing that he cannot marry again
promises to do so, then he is bound to compensate the other party.

Subsequent impossibility:-

It deals with cases where the contract was possible to perform when it was entered
but because of some event, the performance has become impossible or unlawful
and therefore it discharges the party from performing it. For example, If A
purchased Tickets from B for watching a cricket match and he pays 50% as an
advance. If the match is cancelled then A can not recover from B as the cancellation
of match was beyond the control of A.

CASE LAWS:-

Satyabrata v. Mugneeram

This case established the scope of Section 56 under Indian Law. The facts of the
case are as follows: The respondent’s company was involved in purchasing large
plots of lands and subsequently they used to divide these large plots and divide it
into smaller plots for individuals to purchase, individuals were given an incentive to
purchase these plots as the respondents’ company developed roads, tanks, parks
and everything which was necessary for residential purposes. On 30th November
1946, the appellant purchased a plot but the land was requisitioned by the
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Collector. So the respondent offered to give the appellant the amount which he
gave for the purchase of the plot back. The appellant denied this and filed a suit.

The Supreme Court held that reasoning given by English law for frustration is not
applicable to Indian law and “impossibility” not just means physical and literal
impossibility but impossibility under Section 56 means practical impossibility as
well. The court observed that if the fulfillment of the contract becomes impossible
not just due to literal physical impossibility but also when the object of the contract
becomes impractical to fulfill it would be under the ambit of Section 56 of the Indian
Contract Act.

Sushila Devi v. Hari Singh

This case is another case which established that impossibility under Section 56 does
not mean just literal impossibility but practical impossibility as well. The facts of the
case are as follows: The appellants were owners of a village and they leased a
property in the village to the respondent for a period of three years starting from
Jan, 1947 but as the India and Pakistan partition was going on the village became a
part of Pakistan and it was not possible for the respondent to use the land due to
communal reasons. The appellants argue that it was self-imposed frustration but it
was held that if the fulfillment of the contract becomes practically impossible it
would be deemed to be frustrated under section 56 of the Indian Contract Act.

Nirmala Anand v. Advent Corporation Pvt. Ltd

This case held that frustration automatically brings a contract to an end. It held that
the contract stands until the event which frustrates it but after the occurrence of
that event the contract automatically gets frustrated.

“Prior to the decision in Taylor v. Caldwell, (1861-73) All ER Rep 24 the law in
England was extremely rigid. A contract had to be performed, notwithstanding the
fact that it had become impossible of performance, owing to some unforeseen
event, after it was made, which was not the fault of either of the parties to the
contract. This rigidity of the common law in which the absolute sanctity of contract
was upheld was loosened somewhat by the decision in Taylor vs. Caldwell in which
it was held that if some unforeseen event occurs during the performance of a
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contract which makes it impossible of performance, in the sense that the

fundamental basis of the contract goes, it need not be further performed, as
insisting upon such performance would be unjust.

The law in India has been laid down in the seminal decision of Satyabrata Ghose
v. Mugneeram Bangur & Co., 1954 SCR 310.

In M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 this
Court, after setting out Section 56 of The Contract Act, held that the Act does not
enable a party to a contract to ignore the express covenants thereof and to claim
payment of consideration, for performance of the contract at rates different from
the stipulated rates, on a vague plea of equity. Parties to an executable contract are
often faced, in the course of carrying it out, with a turn of events which they did not
at all anticipate, for example, a wholly abnormal rise or fall in prices which is an
unexpected obstacle to execution. This does not in itself get rid of the bargain they
have made. It is only when a consideration of the terms of the contract, in the light
of the circumstances existing when it was made, showed that they never agreed to
be bound in a fundamentally different situation which had unexpectedly emerged,
that the contract ceases to bind. It was further held that the performance of a
contract is never discharged merely because it may become onerous to one of the
parties.

Similarly, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821
this Court went into the English law on frustration in some detail, and then cited the
celebrated judgment of Satyabrata Ghose v. Mugneeram Bangur & Co.
Ultimately, this Court concluded that a contract is not frustrated merely because the
circumstances in which it was made are altered. The Courts have no general power
to absolve a party from the performance of its part of the contract merely because
its performance has become onerous on account of an unforeseen turn of events.

It has also been held that applying the Doctrine of Frustration must always be within
narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd.
v. Noblee Thorl GmbH, 1961 (2) All ER 179 despite the closure of the Suez
canal, and despite the fact that the customary route for shipping the goods was
only through the Suez canal, it was held that the contract of sale of groundnuts in
that case was not frustrated, even though it would have to be performed by an
alternative mode of performance which was much more expensive, namely, that the
ship would now have to go around the Cape of Good Hope, which is three times the
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distance from Hamburg to Port Sudan. The freight for such journey was also double.
Despite this, the House of Lords held that even though the contract had become
more onerous to perform, it was not fundamentally altered. Where performance is
otherwise possible, it is clear that a mere rise in freight price would not allow one of
the parties to say that the contract was discharged by impossibility of performance.

This view of the law has been echoed in ‘Chitty on Contracts’, 31st Edition. In
Paragraph 14-151 a rise in cost or expense has been stated not to frustrate a
contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd Edition, the
learned author has opined, at Paragraph 12-034, that the cases provide many
illustrations of the principle that a force majeure clause will not normally be
construed to apply where the contract provides for an alternative mode of
performance. It is clear that a more onerous method of performance by itself would
not amount to a frustrating event. The same learned author also states that a mere
rise in price rendering the contract more expensive to perform does not constitute
frustration (See, Paragraph 15-158).

Indeed, in England, in the celebrated Sea Angel Case, 2013 (1) Lloyds Law
Report 569 the modern approach to frustration is well put, and the same reads as
under:

‘In my judgment, the application of the doctrine of frustration requires a multi-

factorial approach. Among the factors which have to be considered are the terms of
the contract itself, its matrix or context, the parties’ knowledge, expectations,
assumptions and contemplations, in particular as to risk, as at the time of the
contract, at any rate so far as these can be ascribed mutually and objectively, and
then the nature of the supervening event, and the parties’ reasonable and
objectively ascertainable calculations as to the possibilities of future performance in
the new circumstances. Since the subject matter of the doctrine of frustration is
contract, and contracts are about the allocation of risk, and since the allocation and
assumption of risk is not simply a matter of express or implied provision but may
also depend on less easily defined matters such as “the contemplation of the
parties”, the application of the doctrine can often be a difficult one. In such
circumstances, the test of “radically different” is important: it tells us that the
doctrine is not to be lightly invoked; that mere incidence of expense or delay or
onerousness is not sufficient; and that there has to be as it were a break in identity
between the contract as provided for and contemplated and its performance in the
new circumstances.’”
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Section 57. Reciprocal promise to do things legal, and also other things
illegal.

Where persons reciprocally promise, firstly to do certain things which are legal, and,
secondly under specified circumstances, to do certain other things which are illegal,
the first set of promise is a contract, but the second is a void agreement.

Illustration-

A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it as a
gambling house, he shall pay A 50,000 rupees for it.

The first set of reciprocal promises, namely, to sell the house and to pay 10,000
rupees for it, is a contract.

The second set is for an unlawful object, namely, the B may use the house as a
gambling house, and is a void agreement.

Section 58. Alternative promise, one branch being illegal.

In the case of an alternative promise, one branch of which is legal and other other
illegal, the legal branch alone can be enforced.

Illustration-

A and B agree that A shall pay B 1,000 rupees, for which B shall afterwards deliver
to A either rice or smuggled opium.

This is a valid contract to deliver rice, and a void agreement as to the opium.

APPROPRIATION OF PAYMENTS.

Section 59. Application of payment where debt to be discharged is

indicated.

Where a debtor, owing several distinct debts to one person, makes a payment to
him, either with express intimation, or under circumstances implying, that the
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payment is to be applied to the discharge of some particular debt, the payment if

accepted, must be applied accordingly.

Illustrations-

(a) A owes B, among other debts, 1,000 rupees upon a promissory note, which falls
due on the first June. He owes B no other debt of the amount. On the first June, A
pays to B 1,000 rupees,. The payment is to be applied to the discharge of the
promissory note.

(b) A owes to B, among other debts, the sum of 567 rupees. B writes to A and
demands payment of this sum. A sends to B 567 rupees. This payment is to be
applied to the discharge of the debt of which B had demanded payment.

Section 60. Application of payment where debt to be discharged is not

indicated.

Where the debtor has omitted to intimate, and there are no other circumstances
indicating to which debt the payment is to be applied, the creditor may apply it at
his discretion to any lawful debt actually due and payable to him from the debtor,
whether its recovery is or is not barred by the law in force for the time being as to
the limitations of suits.

Section 61. Application of payment where neither party appropriates.

Where neither party makes any appropriation, the payment shall be applied in
discharge of the debts in order of time, whether they are or are not barred by the
law in force for the time being as to the limitation of suits. If the debts are of equal
standing, the payment shall be applied in discharge of each proportionably.

Appropriation means ‘application’ of payments. In case of a creditor and a debtor,

Section 59 to 61 of the Indian Contract Act, 1872, lay down certain rules regarding
the Appropriation of payments. When a debtor pays an amount to the creditor, the
creditor is to take note of these sections before applying the payment to a
particular debt, because the creditor would be inclined to appropriate payments to
the debt which is not likely to be realized easily. In case both parties do not specify
the appropriation then the law would take the responsibility and appropriate
accordingly.
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A discharge of a contract by agreement, on the other hand, is when the contract is

ended because the conditions are not fulfilled. However, the involved parties can
also terminate a contract when the primary terms and conditions of the said
contract have not been fulfilled. Essentially, the difference between a discharge of a
contract and terminating contract is the reasons why the contract is coming to an
end.

Appropriation by debtor

Under Section 59 of the Indian Contract Act, 1872, it is stated that if the debtor
owes several debts to the creditor, and makes a payment to any of them and later
requests the creditor to apply the payment to the discharge of a particular debt. If
the creditor agrees to this request, he is bound by such appropriation. This section
applies to several distinct debts and not to a single debt, or to various heads of one
debt. This is not applicable where the debt has merged into a decree. The
appropriation may be implied or expressed by the creditor. The basic idea is that
“When money is paid, it is to be applied according to express the will of the payer
and not the receiver. If the party to whom the money is offered does not agree to
apply it according to the will of the party offering it, he must refuse it and stand
upon the rights which the law has given him”

Clayton’s Case

In England, it has been considered a basic rule since the case of Devaynes vs
Noble, also known as Clayton’s case. In this, it was held that the debtor can
request the creditor to appropriate the amount to any of the debt in case he owes
to the creditor several and distinct debts, if the creditor agrees to it, then he is
bound by it.

Several and Distinct Debts

Section 59 applies to the debt which is several and distinct and does not apply in
the cases where there is only one debt even if it is to be paid in installments. The
test to know whether the debts are distinct is the person can sue for it separately.

Intimation by the Debtor

The debtor must at the time of the payment of the debt, must intimate the creditor
that the amount must be paid for the liquidation of a certain debt, and the creditor
has to appropriate it accordingly. The creditor has the right to refuse any conditions
made by the debtor during the payment of the debt. Once appropriation has been
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accepted, then the creditor cannot alter the terms of the appropriation, without the
consent of the debtor.

The debtor should communicate his appropriation either expressly or impliedly,

through the circumstances indicating such intention.

Proof of Intention

Intention about the appropriation of the payment by the debtor must be proved by
circumstances. Where the debtor alleges appropriation in a particular manner then
he must prove it. Moreover, entries in the book of the creditor could be considered
for the proposed appropriation by the debtor.

Contract of Guarantee

The right to appropriate is available to the debtor and not the surety. A surety is
also bound by the creditor’s appropriation. Also, the surety has no right to insist on
the appropriation of any payment to the guaranteed debt, unless the circumstances
of the case are such that they show such intention.

Appropriation by creditor

Under Section 60, the creditor is also competent for appropriation. If the debtor
makes any payment without any appropriation then the creditor can use his
discretion to wipe out any debt which is due. He may use it for the payment of a
time-barred debt or wipe out the debt which is carrying a lower interest rate. The
right of appropriation lies with the creditor until the last moment, even when he is
examined at the trial or before any act which renders him inequitable for him to
exercise this right. The creditor, in this case, has a lot of scope for exercising his
right, he can put himself in the most advantageous position. Moreover, he need not
express himself in express terms while doing so. As long as notice has not been
given in respect of the appropriation of any amount, the creditor can change it and
can appropriate some other claim.

Lawful Debts
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The creditor must establish the existence of a lawful debt actually due. Under this
section, the appropriation cannot be made against any unlawful debt. In several
cases, it was held by the court that a creditor can even appropriate towards an
unenforceable debt due to some defect.

Time-Barred Debts

The creditor, in the absence of any appropriation by the debtor, can appropriate the
amount of a debt barred by the Limitation Act,1963. This usually happens as the
creditor appropriate the amount to a time-barred debt and sue the debtor for the
ones not barred. However, the amount cannot be appropriated to a debt barred by
a statute after an action has been brought and judgment has been delivered.

Principal and Interest on Single Debt

There is a lot of conflict amongst the opinion of the court as to whether the
provisions of this Section would apply to the principal and interest of the debt or
not. In the case of Jia Ram vs Sulakhan Mal (Air 1941 Lahore 386), it was held
that the principal and the interest would not be applicable under this.

As under the common law, the rule that applies is that where the principal and
interest has accrued on a debt, sums paid where interest has accrued must be
applied first to the interest. This rule is based on “common justice” else it would
deprive the creditor of the benefit to which he is entitled under his contract and
would be most unreasonable for him.

Appropriation by law

Section 61 is applied in a situation when neither of the parties makes the

appropriation. To settle this deadlock, then the law gets the right to appropriate. In
such cases, the debt is settled in accordance with the order of the time they have
incurred. In case all the debts are of the same time then the debts would be
discharged proportionately. Under this Section not only the express agreement but
also the mode of dealing between the parties
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CONTRACTS WHICH NEED NOT BE PERFORMED.

Section 62. Effect of novation, rescission, and alteration of contract.

If the parties to a contract agree to substitute a new contract for it, or to rescind or
alter it, the original contract need not be performed.

Illustrations-

(a) A owes money to B under a contract. It is agreed between A, B and C, that B

shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an
end, and a new debt from C to B has been contracted.

(b) A owes B 10,000 rupees. A enters into an agreement with B, and gives B a
mortgage of his (A’s) estate for 5,000 rupees in place of the debt of 10,000 rupees.
This is a new contract and extinguishes the old.

(c) A owes B 1,000 rupees under a contract, B owes C 1,000 rupees. B orders A to
credit C with 1,000 rupees in his books, but C does not assent to the agreement. B
still owes C 1, 000 rupees, and no new contract has been entered into.

Under Section 62 of the Indian Contract Act, 1872, it is given that if the parties to a
contract agree to substitute a new contract for the earlier contract or rescind it all
together then the original contract need not be performed.

Novation

The word “novation” is not used in the section per se but is present in the marginal
notes. It is defined that a contract that is already in existence is substituted by a
new contract and the consideration mutually discharged of the old debt. The outline
principle of novation is “discharge of one debt or debtor and substitution of one
debt or debtor”. Novation cannot be done unilaterally, it has to be with the consent
of both the parties. Novation is the complete substitution of the old contract with
the new contract and not mere variation in the terms of the original contract.
Novation would come into effect when the terms of the new contract are so
inconsistent with the former, that it is impossible to perform the former. In the case
of Vishram Arjun vs Irakulla Shankaraiha, the court held that the essence of
novation does not lie in the complete dissimilarity of the terms but in the intention
of the parties to substitute the original contract with the new one.
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A common instance of the novation of the contract is in the case of a partnership

where on the dissolution if some partners continue to do business and undertake
between themselves and the retiring partner that they will assume and discharge
the liabilities of the business. They give this notice to the creditor and if he gives his
asset to it then a contract and a new firm is formed.

Hence novation of a contract is of two kinds:

1. Novation involving a change of the party.

2. Novation involving the substitution of a new contract in place of the old.

A novation usually takes place:

A. When a new partner is admitted,

B. When a partner retires,
C. The new firm is constituted after the admission or retirement and it accepts
the liabilities of the old firm.

Change of parties

The substituted contract would subsist between the parties of the original contract.
The novation cannot be forced on a party. It has to be considered in every case not
only whether the new debtor has accepted the liability but also if the creditor has
agreed to accept his liabilities in substitution of the original debtor. The discharge of
the original debtor must precede and is distinct from the acceptance of the creditor.
The statutory novation is usually comprised in a single statue or decree of practical
purposes, they function simultaneously but has a distinct legal identity of its own.

Substitution of a new agreement

If A is a debtor, and the creditor agrees to accept B in the place of A as a debtor,

then the previous contract between A and the creditor comes to an end.

For the novation of the contract, the original contract must be substituted by a new
contract and the original contract is now discharged and need not be performed. It
is important that the original contract must be subsisting and unbroken. The
substitution of the contract can not take place if the original contract is breached.
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In the case of Koyal vs Thakur Das Naskar, the plaintiff sued to recover a sum
owed to the defendant. After the due date, the plaintiff agreed to accept a particular
amount in cash and the rest by way of the bond, which was to be paid on the
installment basis. However, the defendant neither paid the bond nor the cash. The
plaintiff subsequently sued him for the original bond. The court held that the
original bond is discharged by the breach and not by novation, hence the plaintiff
has to sue on the basis of breach of contract.

The Supreme Court in Lata Construction vs Rameshchandra Ramniklal stated

that one of the essential conditions of the novation of the contract is that there
should be a complete substitution of the new contract in place of the earlier
contract. In this situation, the original contract need not be performed. Substitution
of the new contract in place of the old which would have the effect of completely
rescinding or altering the terms of the original contract has to be an agreement
between the parties. The substituted contract should extinguish the previous
contract.

It is further necessary that the new agreement should be valid and enforceable.
Thus where an existing mortgage is replaced by a new agreement of mortgage and
the new agreement is not enforceable because of lack of registration, in this case, it
is held that the original contract is still functional.

It is obvious that the presence of consideration in these cases is mandatory, as

unilateral alteration of terms is permissible. The promise of a fresh contract in place
of the original one is also a sufficient consideration in these cases.

Effect of Novation

After a novation, when a new contract is enforceable, then the relationship between
the parties would be governed by the new contract and the obligor will be relieved
of all his pre obligations. The substituted agreement gives rise to a cause of action
and limitation would be counted on the basis of a new promise. Where the parties
release each other from the mutual obligation of each other, then at that point of
time at which such settlement was made would be the time at which the contract
terminates.

No Novation
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However, where the parties had the option to terminate the contract and the parties
by subsequent contract postponed the termination of the contract, then this will not
amount to novation of a contract. Even if the terms of the old contract are kept
alive, even then, it would not amount to proper substitution and hence no novation
will take place. It is important to note that if in the original contract the provision of
arbitration is present then the novation of the contract will have no effect on the
arbitration clause and it would not get discharged.

There would be no novation where the contract itself contains a provision for the
payment by one party of the enhanced rates dependent upon a contingency.
Moreover, to secure a debt by a deed, which will operate only as a mortgage and
would not replace the existing personal liability, then such is not a novation of a
contract.

Formality

A subsequent contract substituting the original contract or rescinding it or altering

it, may be oral or written or even be implied from the conduct of the parties. Section
92 of the Indian Evidence Act 1872, excludes the oral evidence from the purpose of
varying, adding or subtracting from the terms of the contract or any matter required
by law to be in writing. However, the proviso four of that section provides that the
existence of any distinct subsequent oral agreement to rescind or modify such
contract, grant or disposition of property may be proved. But where the original
contract is of such a nature as that the law requires to be in writing or where its
execution has been followed by registration, the only way of proving the
modification the original contract will be by proof of an agreement with a like
formality.

What do a novation contract consist of?

1. Release Clause

It is important that a clause in the novation deed outlines the discharge of both
rights and obligations from the outgoing party. It is important to ensure that the
clause is clear and concise so that there is no scope for confusion.

2. Representations and Warranty Provisions

The deed should also outline that both the outgoing and continuing party have the
full legal capacity to proceed with business, including relevant authorisation. It
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should also evidence that both parties have taken all actions to the best of their
abilities to finalise the novation deed.

3. Insurance/Indemnity Clause

If one is the incoming third party, he or she may want to have an indemnity clause.
This can protect him or her from being liable for the work completed before the
novation date. This again can help to reduce the chances of a conflict.

4. Costs

For various transactions like novated leases etc., parties should calculate and
include the agreed costs.

RESCISSION:

Rescission is an impartial cure and is optional. A court may decay to revoke a

contract in the event that one gathering has attested the contract by his action 1 or
an outsider has gained a few rights or there has been significant execution in
actualizing the contract. Moreover, in light of the fact that rescission should be
forced commonly upon the two sides to a contract, the gathering looking for
rescission regularly should offer to offer back all advantages the person has gotten
under the contract.The harmed party may repeal the contract by pulling it out to
the representatives. Notwithstanding, this isn't generally important as any act
demonstrating disavowal, eg telling the specialists, may do the trick.

Virginia utilizes the expression "cancellation" for impartial rescission. Besides, a

minority of precedent-based law locales, similar to South Africa, utilize the
expression "rescission" for what different purviews call "turning around", "toppling"
or "overruling" a court judgment. In this sense, the term intends to be saved or
made void, on application to the court that allowed the judgment or a higher court.
Applications to cancel a judgment are typically made based on blunder or for great
aim. [Ram Nagina Singh v. Governor General in Council, AIR 1952 Cal 306.]
 219

Most customary law locales dodge this disarray by holding that one repeals a
contract and drops a deed (for example of genuine property), and treats rescission
as a contractual cure instead of a kind of procedural cure against a court judgment.

A contract can't be cancelled to a limited extent. It is crooked to obliterate a

contract in all, 3 when one of the gatherings has inferred an incomplete advantage,
by an exhibition of the arrangement. In such a case, it appears to have been the
practice once in the past to permit the merchant to recuperate the specified cost,
and the vendee to recuperate, by a cross-action, harms for the break of the
contract. Yet, as indicated by the later and more advantageous practice, the
vendee, in such case, is permitted in an action at the cost, to give proof of the
mediocrity of the products in the decrease of harms, and the offended party who
has broken his contract isn't qualified for recuperating more than the estimation of
the advantage the respondent has actually gotten from the merchandise or work;
and when the last has determined no advantage, the offended party can't
recuperate by any means.

ALTERATION:

Alteration of contract means the modification of the terms of the contract with the
consent of both the parties. The elements of the alteration are:

1. The alteration must be done deliberately.

2. The alteration must have been material.

When the instrument which has been altered does not itself contain the obligations
of the parties but is to be relied upon by them for the purpose of carrying out the
contract, the alteration does not necessarily operate to discharge the parties from
their underlying obligations. The effect of alteration of contract is that the new
contract is formed and both the parties have to follow the rules of the new contract.
It is essential to have assent of both the parties when the contract is altered. Also,
in alteration of contract parties do not change. If parties decide to alter or modify
the terms of the contract, then it is necessary that the alteration of the contract
should be done either by express agreement or by necessary implication which
would negate the application of the doctrine of acceptance sub silentio. In the case
of Satya Pal Anand v. State of Madhya Pradesh and Ors., it was stated that
any novation, rescission and alteration of contract, can be made only through
bilaterally and with the amicable consent of both the parties. The terms and
conditions of a contract may be altered but cannot be done unilaterally unless there
exists any provision in the contract, or in any law, or there is an implied acceptance
through silence. In the case of Suresh Kumar Wadhwa v. State of Madhya
Pradesh, it was stated that the party to the contract has no right to unilaterally
 220

alter the terms and conditions of the contract and nor they have the right to add
any additional terms and conditions unless both the parties agree to alter such
terms in the contract. In the alteration of contract, the liability of the parties in the
original agreement is extinguished and the parties become bound by the new
altered agreement.

Effect of alteration of contract through the consent of the parties

The contract is only altered when there is consent by both the parties. If there is no
consent between the parties to alter the contract, then the contract is said to be
void.

Effect of alteration of contract with the consent of parties

Material alteration

An alteration is material which affects the substance of the contract expressed in

the document or which alters the legal effect of the document, which affects the
document itself, at all events where identification may be important in the ordinary
course of business. The alteration is not material if they merely express what was
already implied in the document or add particulars consistent with the document as
it stands. In the Pigot’s case, it was stated that the material alteration of a
document by a party to it after its execution without the consent of the other
parties renders it void and the alteration is not material. Material alteration must
depend upon the nature of the instrument as also upon the changes. If the
alteration causes the contract to operate it differently from the original, then it is
said to be material alteration. An instrument is not discharged by an immaterial
alteration. The alteration is said to be immaterial when it does not alter the legal
effect of the instrument or impose a greater liability on the promisor. Immaterial
alteration does not affect the rights and liabilities under a writing, irrespective of the
person by whom the alteration was made or his purpose in making it. Also,
alteration made by adding or changing a statement of the consideration does not
ordinarily change the legal effect of an obligation is considered as immaterial. In
the Pigot’s case, it was held by Coke that when any deed is altered by any
stranger then the deed is said to be void. The alteration is said to be immaterial if
the alteration in a deed is signed by the parties before its execution so far as those
who have signed have not affected their interests.
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Burden of proof

The burden of proof lies on the promisor that the promise has made the alteration in
the contract without the consent of the promisor. But if it is proved that the contract
is altered then the burden shifts to the promisee and the promisee has to show that
the alteration made is not improper.

Effect of alteration of contract without the consent of parties

If one of the parties alters the contract without the consent of the other party, then
the contract is said to be void. The effect of alteration of contract without the
consent of the parties is not given in the Indian Contract Act but India practice
allows the authorities of the Common Law. If there is unauthorized alteration of
documents or terms and conditions of the contract then the contract is said to be
void. There is no provision given in The Indian Contract Act about the unauthorized
alteration of documents of the contract. The Indian Courts follow the English rule for
the same. Blue Pencil Doctrine is a doctrine which is used by the courts to make
some portions of the contract void or unenforceable and other portions of the
contract enforceable. In Blue Pencil Doctrine, the words which are not binding in
nature or invalid are declared as void and makes other parts of the contract
enforceable. It is also called the doctrine of severability. Sometimes, there is
alteration of contract in which some parts of the contract are altered which is
unauthorized and illegal but with the help of the blue pencil doctrine this alteration
can be declared as unenforceable as it invalid and not binding in nature.

Effect of alteration of contract in business

In business, the businessmen make contracts with other businessmen in which it

includes many sections, terms and conditions which talks about the procedure, how
the business will work, compensation, damages, steps to be taken if some part of
the business has to be changed. If a business wants to change a part of the
business, then the head of the business has to make changes in the contract
through alteration of contract as well. Alteration of contract can only take place if
there is any clause in the original contract and with the consent of both the parties.
The contract made by both the parties in the business can be altered before and
after signing the contract. If the contract has to be altered after signing the
contract, then there should be consent of both the parties. There is a right to
transfer the responsibilities of one party to another party when there is alteration of
contract. If there is a clause to sell to the vendees in the original agreement and
two independent persons are presented as marginal witnesses, then it is not said to
be material alteration and such agreement is said to be void ab initio. Also, in the
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case of life insurance policy, the insured can alter some terms of the policy such as
number of years, mode of payments, etc. with the consent of both the parties.

In business, the parties to a contract can alter some parts of the contract as well as
the whole contract with the consent of both the parties. If two companies or
business entities merge, then a new contract is formed and if the merged
companies want to bring some change in the business then they have to make
changes in the clauses of the contract through alteration. If there are more than two
parties in an agreement, then every party has to pass information to another party
independently. In English law, the employers are allowed to alter the contract which
is signed by the employee when he joins the firm.

In India, the Indian Contract Act does not allow the employers to alter the
employment contract. It is stated in the case of LIC and Ors. v. Sunil Kumar
Mukherjee an Ors that the employee of an insurer whose controlled business has
been transferees and vested in the Corporation and who is employed by the insure
wholly or mainly shall continue to work unless his employment in the Corporation is
terminated or until his remuneration, terms and conditions are duly altered by the
Corporation. On March 26, 2013 M.P Power Management Company had filed a
petition to review the tariff orders and amend the power purchase agreement (PPA).
As the PPA was between the petitioners and the generators and it was noted that
the review was not empowered by the generators. It was stated that the PPA will be
altered only through the mutual consent of both the parties. Now-a-days, many
industries are getting into the Blockchain system so that there is transparency
between the parties in the industry such as manufacturing, logistics, transportation,
retailers, and customers. But if these parties come together on a blockchain then
they are considered to be a part of the same transaction. Any change in the delivery
and supply contracts cannot be made without the entire chain of business agreeing
to alter agreements.

Key Differences Between Novation and Alteration

In the points given below, we have discussed the differences between novation and
alteration in detail:

1. Novation is when all the parties to the contract give their consent for the
substitution of the existing contract for a novel contract. On the other hand,
alteration means changing the terms and conditions of the contract, after all
the parties agree to such changes.
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2. In novation, the fresh contract is between new parties or same old parties or
one new and one old party. As against, in case of alteration, there is no
change in the parties to the contract.
3. In case of novation, the terms and conditions of the contract may or may not
be changed. However, alteration of the contract is always due to the changes
in the terms and conditions of the contract. Further, alteration is a part of
novation.
4. Novation involves the substitution of the new contract with the existing one,
whereas alteration does not always involve substitution of the new contract
with the old one as there may be some changes in the terms and conditions
of the main agreement only.

Section 63. Promise may dispense with or remit performance of promise.

Every promise may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance, or may accept
instead of it any satisfaction which he thinks fit.

Illustrations-

(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no

longer bound to perform the promise.

(b) A owes B 5,000 rupees. A pays to B, and B accepts, in satisfaction of the whole
debt, 2,000 rupees paid at the time and place at which the 5,000 rupees were
payable. The whole debt is discharged.

(c) A owes B 5,000 rupees, C pays to B 1,000 rupees, and B accepts them, in
satisfaction of his claim on A. This payment is a discharge of the whole claim.

(d) A owes B, under a contract, a sum of money, the amount of which has not been
ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction
thereof accepts, the sum of 2,000 rupees. This is a discharge of the whole debt,
whatever may be its amount.

(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an
arrangement with his creditors including B, to pay them a composition of eight
annas in the rupee upon their respective demands. Payment to B of 1,000 rupees is
a discharge of B’s demand.

INTRODUCTION:
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By entering into a contract, both the parties undertake certain obligations with
respect to their considerations. Consequently, both parties have to perform their
part of the consideration for the contract to work successfully. In case any party
under the contract does not perform its part of the consideration, it would amount
to a breach of contract. However, there are certain instances where non-
performance of the contract by a party would not amount to a breach of contract.
Under the Indian Contract Act, 1872, the instances where a contract need not be
performed are given in Sections 62-67. Section 63 which talks about waiver of
contract is explained here in detail

MEANING OF WAIVER:

Waiver is an act by which a person knowingly relinquishes his right or claim to

which he is entitled. Under the Contract Law, waiver is a method by which the
promisee (person to whom a promise was made) with his free consent, extinguishes
the obligations which are to be performed by the promisor (person who makes the
promise). Section 63 of the Indian Contract Act states:

Promisee may dispense with or remit performance of the promise. — Every

promisee may dispense with or remit, wholly or in part, the performance of the
promise made to him, or may extend the time for such performance, or may accept
instead any satisfaction which he thinks fit.

This section provides the promisee with the right to waiver. Under this section, a
promisee may release the promisor from his performance either before or even
after the breach of contract occurs due to the non-performance on the part of the
promisor.

REMISSION OR DISPENSING EITHER IN WHOLE OR IN PART:

1. THE PROMISEE MAY:

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Waive the performance of the contract completely. The promisor now has no
obligations with respect to the promise he had made to the promisee. The promise
stands to be waived off in whole.

Waive only a part or specific parts of the promise. The promisor now has to perform
only the part/parts of the promise which are not waived by the promisee and is
relinquished from fulfilling the parts which are waived off by the promisee.

2. TIME EXTENSION:

The promisee may extend the time for the performance of the promise. The time in
which the promisor was supposed to fulfil the promise now stands void and the
extended time frame now constitutes the duration of the promise. There is no need
for an agreement to extend the time period of the promise. Consequently, there is
no requirement of consideration to be in place for the time period to be extended by
the promisee. However, it is to be kept in mind that there has to be consent from
both parties so if the promisor feels that the extended time frame might hamper the
performance of his promise, he may choose not to accept the extended time. This
principle is explained by the Supreme Court in Keshavlal Lallubhai Patel v/s.
Lalbhai Trikumlal Mills Ltd. where it was held that an extension of time for the
performance of the contract under Section 63 of the Indian Contract Act must be
based upon an agreement between the parties, and it would not be open to the
promisee by his unilateral act to extend the time for performance of his own accord
for his own benefit. Such an agreement need not necessarily be reduced to writing
and can be proved by oral evidence or by evidence of conduct.

3. NO CONSIDERATION REQUIRED FOR WAIVER:

There is no consideration required for the performance to be remitted. The waiver

does not depend upon any consideration or reciprocal consideration for the
promisor to be relieved of his performance. The Supreme Court held in Waman
Shriniwas Kini v/s. Ratilal Bhagwandas and Co . that waiver is the
abandonment of a right which normally everybody is at liberty to waive. However,
the absence of consideration does not mean the absence of intention. The promisor
should have the complete knowledge and intention of waiving his right to a claim
which the promisor is entitled to perform. It is just that the right of waiver should
exist with the promisee at the time of waving his claim.
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The law with regard to waiver in India is very different from the law in England. In
England, the waiver is contractual and there must be an agreement to waive either
supported by consideration or it must be by contract under seal.

4. A WAIVER CAN BE EXPRESSED OR IMPLIED:

There is no new written agreement that is required to be entered into for the
discharge of performance of the promisor. The waiver of performance can be
conveyed either orally or in an implied manner from the conduct of the promisee.
Waiver in an implied manner should be by such conduct or a positive act done
towards waiving off the promisor from his obligations. Generally, mere silence is not
considered a waiver of contract.

5. ACCEPTANCE OF REDUCED AMOUNT OR PERFORMANCE:

As seen in illustration (b) above, when discharge of whole debt is given on a

reduced payment of the amount, it is a valid satisfaction of the debt and the debt
stands discharged. In Hari Chand Madan Gopal and Others vs State of
Punjab, the Supreme Court held that the Government had decided to recover only
40% and no more. The Government’s decision would amount to remitting a part of
the debt due by the appellants. Therefore, the government cannot ask to recover
more than 40%.

Even if there is a performance apart from repayment of the debt, the promisee may
accept a reduced performance of the promise by waiving off the actual performance
which was required to be done by the promisor.

6. REDUCED PAYMENT BY THE THIRD PARTY:

As seen in illustration (c) above, when a third party makes payment or performance
of the promise on behalf of the promisor, the promisee may remit the performance
of the promisor. The payment or performance can either be done of the whole
promised amount or if the promisee may deem fit, even a reduced amount or
performance may satisfy the debt. The Supreme Court in Kapur Chand Godha v/s
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Mir Nawab Himayat Ali Khan Azamjah stated that the promisee having
accepted the payment in full satisfaction of his claim was not entitled to sue.

It is important to note that if acceptance is made under protest by the promisee

regarding the reduced amount of performance, the promisor is liable to pay/
perform the promise and the amount/performance does not stand waived off.

7. PRINCIPLE OF ACCORD AND SATISFACTION:

If the promisor is not able to perform his part of the promise and a breach has
occurred, the parties can enter into an agreement whereby the promisee accepts
some consideration apart from the legal remedy available to him. Thus, when the
promisor performs his obligations with respect to the new agreement, he is
discharged from the liability arising out of the breach of the previous contract. This
discharge is done by accord and satisfaction between the two parties. This principle
is applicable in Section 63 since, by accord and satisfaction, the promisee waives off
his claim arising out of the original contract.

8. REVOCATION OF WAIVER:

The Court of Appeals stated that the party who has waived compliance with a
particular requirement may in circumstances and by giving reasonable notice
withdraw his waiver. However, such notice should be given such that the promisor
has a reasonable opportunity to satisfy the requirement which was waived off by
the promisor. If it is too late or unreasonable, the waiver cannot be revoked and the
parties are bound to the waiver.

9. WAIVER CLAUSE IN A CONTRACT:

It is advised to have a waiver clause in the contract itself. The waiver clause may
include additional details with respect to waiver like, “waiver shall not be inferred
simply from failure to insist on performance” or “waiver shall be done in a written
manner”. The waiver clause cannot state anything contradictory to what is provided
by the law in Section 63 of the Indian Contract Act.
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The waiver is a concept that is ignored many times in the boilerplate clauses of a
contract but it can cause a major effect on the contract. Section 63 of the Indian
Contract Act has developed through judicial pronouncement to provide a
comprehensive meaning of waiver of contract. Hence, we deduce that waiver is the
way by which a promisee remits the performance of the promisor either in whole or
in part or may provide for the time extension. This can either be conveyed
expressly or in an implied manner. Under Indian laws, there is no need for any
agreement or consideration for waiver unlike what we see in English law. Thus, it is
important to cautiously draft the waiver clause in an agreement as it may cause a
lot of loss if there are any loopholes in the clause.

Section 64. Consequence of rescission of voidable contract.

When a person at whose option a contract is voidable rescinds it, the other party
thereto need not to perform any promise therein contained in which he is the
promisor. The party rescinding a voidable contract shall, if he have received any
benefit thereunder from another party to such contract restore such benefit, so far
as may be, to the person from whom it was received.

Section 65. Obligation of person who has received advantage under void
agreement, or contract that becomes 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 received
it.

Illustrations-

(a) A pays B 1,000 rupees, in consideration of B’s promising to marry C, A’s

daughter. C is dead at the time of promise. The agreement is void, but B must repay
A the 1,000 rupees.

(b) A contracts with B to deliver to him 250 maunds of rice before the first of May. A
delivers 130 maunds only before that day, and none after. B retains the 130
maunds after the first of May. He is bound to pay A for them.

(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her
hundred rupees for each night’s performance. On the sixth night, A wilfully absents
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herself from the theatre, and B, in consequence, rescinds the contract. B must pay
A for the five nights on which she had sung.

(d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in
advance. A is too ill to sing. A is not bound to make compensation to B for the loss
of profit which B would have made if A had been able to sing, but must refund to B
the 1,000 rupees paid in advance.

The doctrine of Restitution in Indian Contract act

Section 65 of the Indian contract act 1872 mainly deals with the doctrine of
restitution and it relates to the obligation of the person who has received some
advantage under void agreement or contract. This section starts from the very basis
that there being an agreement or contract and if there was no agreement or
contract then the doctrine of restitution cannot come into play. This doctrine is
based on a very common rule of consideration which means that a person pays
consideration only when he gets something in return.

Provisions of Section 65 apply only when an agreement at a subsequent stage is

discovered to be void or when a contract becomes void later on by one person or
the other. But Section 65 will never come into play if the contract was void-ab-
initio .i.e void from the very beginning. Supreme Court of India in the case of Kujiu
Collieries limited v/s Jharkhand mines ltd held that an agreement which was
discovered to be void at a later stage will invite Section 65 into the picture and in
such a case an advantageous person is bound to restore the disadvantaged party.

Doctrine of restitution includes the key points as follows

1. One party has entered into a contract with another for consideration.
2. There was some consideration involved in the said contract.
3. Both parties were competent to enter into a contract
4. Thereafter one party failed to perform his part of the contract or the contract
became void due to any unforeseen condition.
5. Now the party which has paid any consideration as the advance is entitled to
recover the same from the other party and other party is not entitled to
receive an unfair advantage over it.

Scope of Section 65 of the Contract Act makes a distinction between the agreement
and the contract; according to section 2 of the Contract Act, an agreement which is
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enforceable by law is a contract and an agreement which is not enforceable by law

is said to be void. Therefore, when the earlier part of the section appeals of an
agreement being discovered to be void it means that the agreement is not
enforceable and is therefore not a contract. it means that it was void. It may be that
the parties or one of the parties to the agreement may not have when they entered
into the agreement known that the agreement was in law not enforceable. They
might have come to know later that the agreement was not enforceable. The
second part of the section refers to the contract becoming void. That refers to a
case where an agreement which was originally enforceable and was, therefore, a
contract becomes void due to subsequent happenings.

This section has no application, when the parties entered into a contract which they
knew to be void to start wit. This section deals with 2 matters (i) an agreement
which is discovered to be void and (ii) a contract which becomes void. Further, in
order to attract the provision of this section, the advantage must have been
received under the contract if the advantage is received after the agreement
ceases to be enforceable at law it cannot be said that it is an advantage received
under the contract. Therefore, the section applies only if the advantage is received
before the contract ceases to be a contract by becoming void.

Applicability of section 65 to contract entered into by guardian:

It has been held by the privy council in Mohori Bisbee v. Dhurmodas Ghose
that section 65 has reference only to agreements which have in infact come into
existence but are void. If no agreement actually comes into existence there is no
question of considering whether it is subsequently discovered to be void. The case
before the privy council was one of the minor entering into a contract and the
questions was whether such a contract was to be deemed to have existed at all. If
such a contract does not exist there is no question of invoking section 65. This
cannot be extended to a case where a guardian of a minor or a person who purports
to act as a guardian of a minor enter into contract. So far as that person is
concerned, he being sui juris is entitled to enter into contract, but the contract is
the one to do an act which is impossible, and it is for that reason the contract
becomes void.it cannot be said that in such a case there is no agreement at all and
therefore there cannot be any question of the agreement being discovered to be
void later.

The agreement executed by the defendant is one which comes under section 65 of
the Indian Contract Act 1872 and if the agreement was discovered to be void later
by parties coming to know that it was impossible of performance then defendant
may be liable to disgorge the advantage obtained by him.

Where the instrument provided for liquidated damages or the mode of recovery or
indicated the source from which the loss could be reimbursed those stipulations
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notwithstanding the failure of the conveyance for want of title would be valid and
would be actionable apart from the basis of section 65 of the Contract Act

Exceptions to Doctrine of Restitution

1. Where an agreement is known to be void:- This doctrine will not be applied

for an agreement known to be void e.g, where an agreement is for some
illegal act or an impossible act like an agreement that A will pay B Rs 10,000
if B picks stars from the sky. A pays Rs 500 as security to B, now being an
impossible act to perform A cannot recover even his Rs 500.
2. Where an agreement has been entered into between incompetent persons:-
Contract entered into between incompetent persons like a person suffering
from insanity, intoxication or a minor will not invite this doctrine to play.
3. Where the party is required to give some earnest money as security and later
on defaults:- This provision deals with a situation like paying application
money for a residential scheme. Now if a person fails to future allotment
money then his application money will also be forfeited and he can not claim
his earlier earnest money by revoking the doctrine of restitution.

Section 66. Mode of communicating or revoking rescission of voidable

contract.

The rescission of a voidable contract may be communicated or revoked in the same

manner, and subject to some rules, as apply to the communication or revocation of
the proposal.

Section 67. Effect of neglect or promise to afford promisor reasonable

facilities for performance.

If any promisee neglects or refuses to afford the promisee reasonable facilities for
the performance of his promise, the promisor is excused by such neglect or refusal
as to non-performance caused thereby.

Illustration-

A contracts with B to repair B’s house.

B neglects or refuses to point out to A the places in which his house requires repair.
A is excused for the non-performance of the contract, if it is caused by such neglect
or refusal.
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Section 68. Claim for necessaries supplied to person incapable of

contracting, or on his account.

If a person, incapable of entering into a contract, or anyone whom he is legally

bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person.

Illustrations-

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B’s property.

(b) A supplies, the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B’s property.

Section 68 of the Indian Contact Act, 1872

Supply for necessaries: – If a person supplies necessaries to a minor or a lunatic

person who is incapable of entering into a contract, then reimbursement is allowed
from the property or estate of such incapable person but not from any personal
action.

According to Section 68, reimbursement can be possible only if the following

conditions are satisfied:

1. Necessaries are supplied,

2. to a person who is incapable of entering into a contract

3. to a person who is dependent upon the person who is incapable of entering into a
contract

4. appropriate for the conditions of a person.

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Necessaries does not mean mere necessities of life like food, shelter, cloth but it
includes necessary things which are required to maintain a person i.e. his status
and requirements. Necessaries may differ from person to person. Mere luxurious
items cannot be considered necessaries.

Eg: Funeral expenses of the husband by the infant widow is considered as

necessary for her .

Illustrations

A is 11 year old boy and his parents died in a car accident and B is legal guardian of
A who provides him with necessaries suited to his conditions in life. B can reimburse
from A’s property.

Judicial Pronouncement

In the case of Jai Indra Bahadur Singh v. Dilraj Kaur, a minor being bound to
support his sister, money advanced to a minor for marriage of his sister has been
considered as necessaries under this section and also recoverable from the
property.

Section 69. Reimbursement of person paying money due by another, in

payment of which he is interested.

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-

B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable
by A to the government being in arrears, his land is advertised for sale by the
government. Under the revenue law, the consequence of such sale will be the
annulment of B’s lease. B to prevent the sale and the consequent annulment of his
one lease, pays to the government the sum due from A. A is bound to make good to
B the amount so paid.

Payment by an interested person :- A person who is interested in paying the money

which another person is bound to pay that money by law then the person who has
paid the money is entitled to get the money back from that person.
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Liability arises only if:

1. The plaintiff is interested in paying the money.

2. It is not necessary that the plaintiff should have any legal obligation of paying the
money.

3. Defendant should be bound by the law to pay.

4. Payment should be by one person to another person.

Illustration

When company X agreed to buy certain mills from Y, he was allowed to recover the
amount from Y which he paid as municipal taxes in order to the property from being
sold in execution. X was interested in paying the money in order to safeguard his
property and he was not legally obliged to pay the amount. Y was under legal
obligation to pay the money back to X as he paid the tax on behalf of Y.

Judicial Pronouncement

In the case of Dakshina Mohun Roy v Saroda Mohun Roy Chowdhry , it was
held that money paid by a person while in possession of an estate under the decree
of the court for preventing the sale of the estate for covering the arrears of
government revenue may be recovered by him under this section because Daksina
Mohun Roy paid on behalf of Saroda Mohun Roy Chowdhry.

Section 70. Obligation of person enjoying benefit of non-gratuitous act.

Where a person lawfully does anything for another person, or delivers anything to
him, not intending to do so gratuitously, and such another person enjoys the benefit
thereof, the letter is bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.

Illustrations-

(a) A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his
own. He is bound to pay A for them.
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(b) A saves B’s property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.

Liability to pay for non-gratuitous act- Where a person lawfully does anything for
another person, or delivers anything to him, not intending to do so 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.

Illustration

A leaves his goods by mistake in B’s house . B treats the goods as his own. He is
bound to pay A for them. B is unjustly enriched at A’s expenses.

When parties enter into a contract there is a possibility for the breach of the
contract and breach of a contract can happen due to many reasons. For any breach
of a contract to happen, it is necessary that the remedies should also be made or
should be given by any Court. Out of five remedies which are available to the
aggrieved party, one is a suit upon quantum meruit.

Applying this remedy in a suit requires a thorough understanding and essence of

quantum meruit. Also, one should be aware of the usage of quantum meruit as to
when and where can this be applied or when it can be used by the aggrieved party.

Meaning of Quantum meruit

Quantum meruit is a Latin phrase and is related to the Indian Contract Act, 1872.

It means “what one has earned” or “as much as he has earned”. In simpler terms, it
refers to the actual value of the services rendered or performed.
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Even if there is no specific contract this law implies a promise to pay a reasonable
amount for the labour and material furnished.

The Black Law Dictionary states that quantum meruit means “as much as one
deserves”.

Theory of quantum meruit

Quantum meruit involves cases where someone gets a benefit while the other party
gets nothing. In contracts, this refers to the benefit or enrichment which one party
receives as a result of the other party’s actions.

In other words, it means that the other party who has received the services is
unjustly benefited and must return it to the party who provided such benefit.

For example, ‘S’ is the daughter and ‘M’ is the father. They entered into an
agreement where ‘M’ asked ‘S’ to provide medical care for him while he was sick. In
return, ‘M’ agreed not to write a will and agreed to give his estate to ‘S’ after he
dies with an intent to give her a fair portion for the services rendered. However, ‘M’
soon died, leaving all of the estates for his brother and nothing for ‘S’. Here ‘M’ was
unjustly enriched as he received the services but in return ‘S’ received nothing.

In this example, ‘S’ seeks to recover a portion of “M’s” estate by claiming the
remedy of quantum meruit. This principle is based upon the idea that recovery
should be granted to one party where they have not received the value for the
services they rendered or when another party was unfairly and unjustly enriched.

Suit upon quantum meruit

Quantum meruit is a claim under quasi-contract. The remedy to a party in a breach

of contract is the suit upon quantum meruit. The suit upon quantum meruit arises
where a part of a contract is performed by one party and then there is a breach of
contract or it is discovered that the contract is void or becomes void.
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The aggrieved party may file a suit upon quantum meruit and may claim payment
in proportion to work done or goods supplied in the following cases:-

Where work has been done by one party in the execution of a contract but the other
party refuses to perform his part. Or prevents the person to perform the contract.

For example, Seema was the owner of a music publishing house and she engaged in
a contract with Veer to compose a music series which will be published by the
music publishing house. The first music album was released but before the
publication of the second music album the music publication house was closed.
Here Veer can claim quantum meruit for the part already published. He is entitled to
a claim because he was somehow prevented by the other party to perform his part
and the other party has violated the terms of the contract by not paying him the
amount he deserves.

Section 65 of the Indian Contract Act, 1872 talks about the circumstance that where
work has been done in the execution of the contract but later it is discovered that
the contract is void or it becomes void.

Where a person enjoys the benefit of a non-gratuitous act (given or received

without payment but where the party was obliged to pay) despite the fact that there
is no express agreement between the parties, then the person who has enjoyed the
benefit has to compensate the other party or restore the thing so delivered.

For example, ‘D’ a vendor leaves his goods at “J’s” shop by mistake and ‘J’ treats
them as his own goods without paying anything. Here ‘J’ is bound to pay ‘D’ for the
goods he left.

When the contract is implied or expressed to render services but there is no

agreement with regard to remuneration – In such a case, a reasonable
remuneration is payable and what is a reasonable remuneration will be determined
by the Court and this reasonable remuneration is the quantum meruit. This concept
is explained under Section 70 of the Indian Contract Act,1872.

Where the contract is divisible, and a party to the contract has done its part, he
may sue other parties who have not performed for quantum meruit.

This rule even applies to a person who is claiming quantum meruit and himself is
guilty of the breach of the contract, but the following two conditions should be
fulfilled for that:-
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The contract must be divisible

The other party must have enjoyed the benefit of the part which has been
performed, although he had the option of declining it.

For example, Chena agreed to construct a house for David for ₹10,00,000 but in
midway, she abandoned the contract after having done the work worth ₹4,00,000.
Afterwards, David somehow got the work completed. Here, Chena could not recover
anything for the work she has done, as she was entitled to the payment only on
completion of the work which apparently she could not do.

Where the contract is indivisible and performed in a bad way- the party at default
can claim a lump sum amount and can reduce the amount for the bad work done if
the following conditions are fulfilled:-

1. The contract should be indivisible,

2. The contract should be for a lump sum,
3. The contract should be completely performed and,
4. The contract was performed badly.

For example, Raju agreed to construct a house for Pinku for a lump sum of
₹5,00,000. Raju did complete the work but Pinku complained of fault in the work
done by him. It cost Pinku another ₹1,00,000 as a remedy to the defect. In this
example, Raju could only recover ₹4,00,000 from Pinku by reducing the amount of
bad work done.

Quantum Meruit vs. Unjust Enrichment

It is very common for people to get confused between the two concepts. Both the
concepts discuss the aim of preventing one party to perform the contract and the
person preventing the other takes advantage of the services received without even
paying for their values.

The difference between the two concepts is that the unjust enrichment deals with
issues where there is a failure to pay for the services and quantum meruit deals
with such issues where the fair or reasonable amount should be paid.

To be successful in a suit upon quantum meruit, the service provider i.e. plaintiff
must prove that the receiver of the services i.e. defendant agreed to the provided
services, knowing that he has to pay the plaintiff for the services provided and that
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the defendant was unjustly enriched, which means he received something for
nothing. In simpler terms, it means that he received for the services but did not pay
in return, which was not the agreement.

The amount given in a suit upon quantum meruit, especially where there is no
written contract specifying an amount, is generally based on the fair market value
for the services rendered.

Case laws

Planche vs Colburn [1831] EWHC KB J56

In this case, the plaintiff entered into an agreement to write a book for the
defendant.

On completion of the work, 100 pounds was agreed to be paid. The plaintiff started
writing the book and completed a large portion of it. Afterwards, the defendant
decided not to proceed with the work and refused to pay money to the plaintiff,
even though the plaintiff was ready and willing to perform the work.

It was held that the plaintiff is entitled to claim the money as the defendant has
refused to perform his part of the contract.

Craven-Ellis v. Cannons Ltd [1936] 3 All ER 1066

In this case, Craven Ellis was appointed as the managing director of a company
under an agreement in which his remuneration was fixed. But it was found that the
contract is void because neither Crave Ellis nor the directors seem to execute the
contract as they did not obtain the qualification shares (a share of common stock
that a candidate for a company’s Board of Directions (BOD) is required to own)
within two months after the appointment which was required as per the Articles of
Association.

The plaintiff continued to render the services even though the contract was void.
His suit upon quantum meruit is a valid one as the contract being void does not
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disentitle him to claim for his services rendered. Since the company had accepted
the benefits of services rendered by Craven Ellis knowing that the services were not
intended to be gratuitous, it was held that Craven Ellis, for his services rendered, is
entitled to receive reasonable remuneration.

Sumpter v. Hedges [1898] 1 QB 673

Facts of the case

The plaintiff was a builder. He entered into a contract to build two houses and
stables on the defendant’s land for approx £560. While the buildings were still in an
unfinished state he informed the defendant that he is having no money. Hence, he
refused to work and only approx £300 work was completed. The plaintiff asked for
the money of half of the work done from the defendant. The defendant refused and
the plaintiff filed a case.

Judgement

It was held that the defendant had no choice apart from accepting the building like
this and he couldn’t keep the building like this forever so he completed the work. In
this case, the contract stated that the money had to be paid in lump sum after the
completion of the work and so the plaintiff could not be granted the payment after
only doing part of the work. And also as there was no fresh contract so the plaintiff
cannot recover on the basis of quantum meruit.

The relevance of this case was that a person can only recover a part of his work
when the contract is not a lump sum and the owner freely accepts the work.

Here it was not free, instead, he did not have any choice.

Hoenig v. Isaacs [1952] 2 All ER 176

Facts of the case

The plaintiff is an interior decorator who entered into a contract with the defendant
to perform the decorative and furnishing work. A lump sum of £750 was to be paid
for the work.
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On completion of the work, the outstanding balance was £350 for the contractor’s
work and labour. The defendant refused to pay the balance amount on the grounds
that there were certain defects regarding the wardrobe and bookshelf and the cost
for the defects was £56. The plaintiff brought a suit for the refusal.

Judgement

The Court held that the plaintiff has completed most of the work which was agreed
between the two and was therefore entitled to the remuneration which was agreed
in between them by reducing the price of the defects.

After a proper analysis of the remedy of quantum meruit, it is clear that the law
requires it to be fair and reasonable. The theory supports equality of the parties and
helps to ensure that if a person provides a service or a good, then he should receive
the benefit of the contract and in corollary, if that person receives nothing, then
that person can avail the remedy by filing a suit upon quantum meruit.

Section 71. Responsibility of finder of goods.

A person who finds goods belonging to another, and takes them into his custody, is
subject to the same responsibility as a bailee.

Introduction

A person, who finds the goods of some other person without having the knowledge
of the true owner of the goods, is said to be the finder of the goods. Once the
person finds the goods of another, gets the right to enjoy the possession over the
goods found, till the discovery of the true owner of the goods. Thus, he does not
acquire the absolute ownership of the goods and is defined as a bailee under the
section 71 of the Indian contract act 1872. The act defines the position of the finder
of the goods to arrive out of a quasi-contractual situation, without any direct
contract between the owner of the goods and the finder. Therefore, the finder is
required to perform the same duties and responsibilities as a bailee had to perform.

The first duty that falls upon the finder of the goods is to find out the true owner of
the goods and to take reasonable care of the goods till the true owner is discovered.
During the period of the possession of the goods, such a finder is entitled to the
right of lien, to retain the goods under his possession, even after the discovery of
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the true owner, till he is paid by the true owner and compensated for the care,
protection and custody of the goods just like the true owner of the goods. Thus, the
finder assumes the position of a gratuitous bailee. But this position is contingent
upon the finding of the true owner, and therefore his duties and liabilities as a
bailee comes to an end once the true owner had discovered the goods. The true
owner is also entitled to sue the finder for not taking reasonable care and protection
of the goods during his possession.

Who has a better title?

The person who finds the goods of the other, becomes entitle to the possession of
the goods found, and hence becomes the best owner. He enjoys superior rights over
all the other persons, but one, and that is the owner. Since the finder of the goods
acquires the position of a bailee, thus this means that he acquires the possession
over the goods, but the real ownership still remains intact with the owner, though
not discovered yet. The finder enjoys better title of the goods over all the other
persons, but the owner has the absolute title over the goods. The finder can enjoy
all the rights of the bailee and use the good as a bailee does, but the enjoyment
comes to an end with the discovery of the true owner. Therefore, the finder of the
goods is in no position to transfer the title of the goods to any other person. Thus,
the finder is only the apparent owner of the goods, even though the owner of the
goods is still unknown.

Rights of the finder of goods

It was held in the case of Isaack v. Clark that the finder of the goods assumes the
position of a bailee. This means that he becomes bound by all the duties that a
bailee is required to perform and enjoys all the right that a bailee is entitled to
enjoy. Thereby, accordingly, the finder of the goods is granted his rights as a bailee
under section 168 and section 169 of the Indian Contract Act 1872, which protect
the interest of the finder.

1. Right to sue for specific reward-Section 168

The first right granted under the Contract law is to sue the owner for the specific
reward promised by him. This right is granted by section 168 which states that, The
finder of the goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the
owner; but he may retain the goods against the owner until he receives such
compensation; and where the owner has offered a specific reward for the return of
goods lost, the finder may sue fir such reward, and may retain the goods until he
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receives it. Thus, this means that, when a specific reward for finding the goods and
returning back to the owner has been offered by the owner, and if the finder of the
goods, being informed of this reward, reunites the owner with his lost goods, then in
such a case the finder is entitled to the reward offered by the owner. But if the
owner refuses to grant this reward to the finder, then finder is granted with the
absolute right to sue the owner for the specific reward offered by him.

But this right is available only in the case a specific reward is especially offered by
the owner himself. Now in cases where the finder himself incur expenses and bears
the troubles, voluntarily, for the preservation of the goods, without any offering of
reward by the owner, then in such cases the finder has no right to sue the owner to
get compensated for all the trouble and expensed incurred. This was held by the
courts in the case of Binstead v. Buck . But it is to be noted that once the owner
of the goods agrees to the finder’s demand of compensating for expenses incurred
in his past voluntary services of taking care of his goods, then in such case the
owner becomes bound to pay for such promise and the finder has the right to sue
him for compensation in such case.

2. Right to necessary expenses- section 158

The finder of the goods being granted the position of bailee, and also the contract
with him being a quasi-contract makes the finder eligible to exercise his right to ask
for the repayment of all the necessary expenses incurred by the bailee (the finder)
during the time of keeping the goods under reasonable care and protection. This
right is granted under section 158 of the Act.

3. Right to retain the goods-Right to lien- Section 170

Right to lien refers to the right available to the bailee to retain the goods against
the owner until the lawful charges are paid . Therefore, the finder of the goods has
the right to retain the goods in his custody and not return it to the owner, until he
has been paid compensation for all the troubles and expenses incurred by him,
voluntarily, while keeping reasonable care of the goods. This is the right of
particular lien that is available to the finder. But at the same time, he cannot sue
the owner for the compensation as stated in section 168.

4. Right to sell- Section 169

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The next right available to the finder is the right to sell the goods, provided the
good is commonly a matter of sale. This right is available under section 169 which
states that, When a thing which is commonly the subject of sale is lost, if the owner
cannot with reasonable diligence be found, or if he refuses upon demand, to pay the
lawful charge of the finder, the finder may sell it- 1. When the thing is in danger of
perishing or losing the greater part of its value, 2. When the lawful charge of the
finder, in respect of the thing found the amount to two-third of its value

Thus, if the finder is unable to discover the true owner of the goods, even after
searching for him with due diligence, or if the owner is not ready to pay the lawful
charges that the finder deserves for taking due care of the goods in his absence,
then the finder has the right to sell the goods, provided the goods are a subject
matter of sale. But it has to be noted that not all the to-be-sold goods can be sold
by the finder. He is authorized to use his right to sell the discovered goods only in
two cases. These includes, either the goods are of perishable nature and hence are
at the edge of getting damaged or losing their greater part of their value, or when
the lawful charges to be paid to the finder is almost two-thirds of the total value of
the good found. Thus, though section 169 is in the interest of the finder, but the
right granted by this section comes with the conditions that are to be fulfilled to
avail the benefits.

Duties of the finder of the goods

Since the finder of goods enjoys the rights of a bailee, and some authority over the
goods found as a bailee, then he is also required to perform some duties as a
bailee. As it is said, ‘With authority comes the responsibility’, in the same way, the
finder has to perform certain duties with due diligence in order to enjoy the rights
granted to him as a bailee. If the finder fails to perform these duties in the required
manner, then he deprives himself of the rights that are made available to him.
Therefore, the founder is bound by the responsibility to perform certain duties like a
bailee. These include:

1. Duty to take reasonable care

The bailee, being in possession of the goods of other person, is under a duty to take
all the reasonable care of the goods as a normal prudent man would take. Thereby,
a finder being a bailee is required to perform this duty and take a reasonable
degree of care and protection of the good during the period of keeping the goods
under his custody, in the same manner as any reasonable man would take for the
similar goods and under the similar conditions. This duty is provided under section
151 of the contract act.
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In the case of Blount v. War Office , it was held that in case of voluntary bailment
of goods, that is, in case of gratuitous bailee like the finder of the goods, the bailee
will be liable for loss or damage only in case of gross negligence. Therefore, in the
case of Newman v. Bourne and Hollingsworth , the assistant of the shop was
held liable for not taking proper reasonable care of the coat, left by one of the
customers in the shop, in the absence of the true owner. But at the same time, if
the finder has taken all the reasonable care as described in section 151, then he will
not be liable for any loss or damage of the thing kept under his custody, as
according to section 152 of the Act.

2. Duty not to make unauthorized use

It is the duty of the finder of the goods to use the goods only to the extent to which
he is authorized to use while they are kept under his custody. Any unauthorized use
of the goods would make the finder of the goods absolutely liable for any loss or
damage caused to the goods under his custody as according to section 154 of the
Act. It gives the right to the owner to take the goods back without paying any
necessary expense that were incurred by the finder while keeping the goods.

Thus, if a customer forgets his mobile phone in a shop, and the owner instead of
keeping him in his safe custody and wait for the true owner to return, inserts his
own sim card and uses it for his own purpose will be held liable for the unauthorized
use of the goods under section 154.

3. Duty not to mix

The next duty of the finder of the goods as a bailee is to make sure that he does not
mix the goods found by him with his own goods. It is his duty to ensure to maintain
a separate identity of the goods found. The liability of the finder on the event of
mixing of the goods depends upon three conditions. First, when the mixing of the
goods is done with the consent of the bailor himself, that is the true owner himself
gives direction to carry on with the mixing of the goods, then the mixture thus
produces will be distributed between the both in the proportion of their interests, as
according to section 155. Thus, if the owner forgets a bunch of new mobile phones
in a shop and after discovering the lost phones with the shopkeeper, asks the
shopkeeper to mix the phones with the phones in his shop, then both will get the
mixture in proportion of their shares.
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Second, when the mixing is done without the consent of the owner of the goods,
then in such case, if it is possible to distinguish and separate the goods of the
owner, the finder becomes liable to bear all the expenses incurred in the separation
of the goods and also for the damage that might arise due to separation, as
according to section 156. And third, when the mixing is dine again without the
consent of the owner, but this time if it is impossible to separate the goods of the
owner that were founded by him with his own goods, then in such case, the finder
will be liable for all the loss that has been incurred by the owner due to such mixing,
as according to section 157.

4. Duty to return

The finder is required to perform his duty of returning the goods to the owner when
the owner has been discovered. When the owner has paid all the necessary
expenses incurred in taking care of the goods or in case of a reward, when he has
paid the reward to the finder for finding and taking care of hid goods, then it is the
duty of the finder to return the goods back to owner, according to section 160. If the
finder does not return the goods, and retain them with him even after the owner
has paid all that was demanded, then according to section 161, the finder as a
bailee, will be responsible for any loss or damage caused to the goods from that
time.

5. Duty to return the increase

Section 163 defines another duty of the bailee which is that in the absence of any
contract, to return all the increase or profit to the bailor that the bailee has earned
from the goods bailed to him. The finder being a bailee and also there being an
absence of any expressed contract between the finder of the goods and owner,
therefore, the finder is under a duty to return any profits that he makes out of the
goods kept in his custody till the discovery of the true owner. It was in the case of
Motilal Hirabhai v. Bai Mani that this duty was stated.

Thus, the above analysis shows that the legal position that is granted to the finder
of the lost goods, under the Indian Contract Act 1872, is the position of a bailee. But
the contract with the finder of the lost goods being a quasi-contract is what makes it
different from a proper contract of bailment. Even though there has been no explicit
contract between the owner and the finder of the goods, but due to the situations, a
certain relation resembling those of a contract is created between the two, which
makes the finder to assume the position of a bailee, and hence all the rights as
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granted to a bailee and along with that perform all the duties and take all the
responsibilities while enjoying the possession over the goods.

But when seen in literal sense, it can be said that the position of the finder is that of
a mere custodian only, as he is bound by the law to take proper reasonable care of
the goods found by him without even getting the right to sue the owner for the
expenses incurred to take reasonable care of the goods. Neither he has the right to
put the goods for use for his own good nor does he have the right to transfer the
goods to any other person for any personal gain.

Section 72. Liability of person to whom money is paid, or thing delivered,

by mistake or under coercion.

A person to whom money has been paid, or anything delivered, by mistake or under
coercion, must repay or return it.

Illustrations-

(a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not
knowing of this fact, pays 100 rupees over again to C. C is bound to repay the
amount to B.

(b) A railway company refuse to deliver up certain goods to the consignee except
upon the payment of an illegal charge for carriage. The consignee pays the sum
charged in order to obtain the goods. He is entitled to recover so much of the
charge as was illegally excessive.

Liability of person to whom money is paid, or thing delivered, by mistake or under

coercion- A person to whom money has been paid or anything delivered, by mistake
or under coercion, must repay or return it.

Illustration

X and Y combinedly purchased goods from shop Z. They owe Rs 2000/- to Z. X paid
money to Z but Y is not aware of it and he even paid money to Z. Z is bound to
return Rs 2000/- which is paid by Y.
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Judicial Pronouncement

In the case of Associated Cement Company limited v. Union of India, the

railway authorities by mistake considered that the goods will be carried by longer
route so they charged extra money. They were instructed to return the extra money
which was charged.

Section 73. Compensation of loss or damage caused by breach of contract.

When a contract has been broken, the party who suffers by such breach is entitled
to receive, form the party who has broken the contract, compensation for any loss
or damage caused to him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when they made the contract,
to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss of damage
sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by

contract-

When an obligation resembling those created by contract has been incurred and
has not been discharged, any person injured by the failure to discharge it is entitled
to receive the same compensation from the party in default, as if such person had
contracted to discharge it and had broken his contract.

Explanation-

In estimating the loss or damage arising from a breach of contract, the means which
existed of remedying the inconvenience caused by non-performance of the contract
must be taken into account.

Illustrations-
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(a) A contracts to sell and deliver 50 maunds of saltpetre to B, at a certain price to

be paid on delivery. A breaks his promise. B is entitled to receive from A, by way of
compensation, the sum, if any, by which the contract price falls short of the price
for which B might have obtained 50 maunds of saltpetre of like quality at the time
when the saltpetre ought to have been delivered.

(b) A hires B’s ship to go to Bombay, and there takes on board, on the first of
January, a cargo, which A is to provide, and to bring it to Calcutta, the freight to be
paid when earned. B’s ship does not go to Bombay, but A has opportunities for
procuring suitable conveyance for the cargo upon terms as advantageous as those
on which he had chartered the ship. A avails himself of those opportunities, but is
put to trouble and expense in doing so. A is entitled to receive compensation from B
in respect of such trouble and expense.

(c) A contracts to buy of B, at a stated price, 50 maunds of rice, no time being fixed
for delivery. A afterwards informs B that he will not accept the rice if tendered to
him. B is entitled to receive from A, by way of compensation, the amount, if any, by
which the contract price exceeds that which B can obtain for the rice at the time
when A informs B that he will not accept it.

(d) A contracts to buy B’s ship for 60,000 rupees, but breaks the promise. A must
pay to B, by way of compensation, the excess, if any, of the contract price over the
price which B can obtain for the ship at the time of breach of promise.

(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for
sale at that place, starting on a specified day. The boat, owing to some unavoidable
cause, does not start at the time appointed, whereby the arrival of the cargo at
Mirzapur is delayed beyond the time when it would have arrived if the boat had
sailed according to the contract. After that date, and before the arrival of the cargo,
the price of jute falls. The measure of the compensation payable to B by A is the
difference between the price which B could have obtained for the cargo at Mirzapur
at the time when it would have arrived if forwarded in due course, and its market
price at the time when it actually arrived.

(f) A contracts to repair B’s house in a certain manner, and receives payment in
advance. A repairs the house, but not according to contract. B is entitled to recover
from A the cost of making the repairs conforming to the contract.
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(g) A contracts to let his ship to B for a year, from first of January, for a certain price.
Freights rise, and, on the first of January, the hire obtainable for the ship is higher
than the contract price. A breaks his promise. He must pay to B, by way of
compensation, a sum equal to the difference between the contract price and the
price for which B could hire a similar ship for a year on and from the first of January.

(h) A contracts to supply B with a certain quantity of iron at a fixed price, being a
higher price than that for which A could procure and deliver the iron. B wrongfully
refuses to receive the iron. B must pay to A, by way of compensation, the difference
between the contract price of the iron and the sum for which A could have obtained
and delivered it.

(i) A delivers to B, a common carrier, a machine, to be conveyed, without delay, to

A’s mill, informing B that his mill is stopped for want of the machine. B
unreasonably delays the delivery of the machine, and A, in consequence, loses a
profitable contract with the Government. A is entitled to receive from B, by way of
compensation, the average amount of profit which would have been made by the
working of the mill during the time that delivery of it was delayed, but not the loss
sustained through the loss of the Government contract.

(j) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees a
ton, to be delivered at a stated time, contracts with C for the purchase of 1,000
tones of iron at 80 rupees a ton, telling C that he does so for the purpose of
performing his contract with B. C fails to perform his contract with A, who cannot
procure other iron, and B, in consequence, rescinds the contract. C must pay to A
20,000 rupees, being the profit which A would have made by the performance of his
contract with B.

(k) A contracts with B to make and deliver to B, by a fixed day, for a specified price,
a certain piece of machinery. A does not deliver the piece of machinery, at the time
specified, and, in consequence of this, B is obliged to procure another at a higher
price than that which he was to have paid to A, and is prevented from performing a
contract which B had made with a hired person at the time of his contract with A
(but which had not been communicated to A), and is compelled to make
compensation for breach of that contract. A must pay to B, by way of compensation,
the difference between the contract price of the price of machinery and the sum
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paid by B for another, but not the sum paid by B to the third person by way of
compensation.

(l) A, a builder, contracts to erect and finish a house by the first of January, in order
that B may give possession of it at that time to C, to whom B has contracted to let
it. A is informed of the contract between B and C. A builds the house so badly that,
before the first of January, it falls down and has to be rebuilt by B, who in
consequence, loses the rent which he was to have received from C, and is obliged
to make compensation to C for the breach of his contract. A must make
compensation to B for the cost of rebuilding of the house, for the rent lost, and for
the compensation made to C.

(m) A sells certain merchandise to B, warranting it to be of a particular quality, and

B, in reliance upon this warranty, sells it to C with a similar warranty. The goods
prove to be not according to the warranty, and B becomes liable to pay C a sum of
money by way of compensation. B is entitled to be reimbursed this sum by A.

(n) A contracts to pay a sum of money to B on a day specified. A does not pay the
money on that day. B, in consequence of not receiving the money on that day, is
unable to pay his debts, and is totally ruined. A is not liable to make good to B
anything except the principal sum he contracted to pay together with interest up to
the day of payment.

(o) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a

certain price. B, afterwards, before the first of January, contracts to sell the saltpetre
to C at a price higher than the market price of the first of January. A breaks his
promise. In estimating the compensation payable by A to B, the market price of the
first of January, and not the profit which would have arisen to B from the sale to C,
is to be taken into account.

(p) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows
nothing of B’s mode of conducting his business. A breaks his promise, and B, having
no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to
B by closing of the mill.
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(q) A contracts to sell and deliver to B, on the first of January, certain cloth which B
intends to manufacture into caps of a particular kind, for which there is no demand,
except at that season. The cloth is not delivered till after the appointed time, and
too late to be used that year in making caps. B is entitled to receive from A, by way
of compensation, the difference between the contract price of the cloth and its
market price at the time of delivery, but not the profits which he expected to obtain
by making caps, nor the expenses which he has been put to in making preparation
for the manufacture.

(r) A, a ship owner, contracts with B to convey him from Calcutta to Sydney in A’s
ship, sailing on the first of January, and B pays to A, by way of deposit, one-half of
his passage-money. The ship does not sail on the first of January, and B, after being
in consequence, detained in Calcutta for some time, and thereby put to some
expense, proceeds to Sydney in another vessel, and, in consequence, arriving too
late in Sydney, loses a sum of money. A is liable to repay to B his deposit, with
interest, and the expense to which he is put by his detention in Calcutta, and the
excess, if any, of the passage-money paid for the second ship over that agreed
upon for the first, but not the sum of money which B lost by arriving in Sydney too
late.

Introduction

The term “damage” has been derived from the Latin term “damnum” which means
hurt, loss or injury or damage. Damage is generally understood as any harm or loss
caused either to a person or to his property because of any wrongful act or omission
of a person. In terms of law, damages are the compensation in monetary terms for
the loss or injury that occurred either in person or property.

As per the definition given in Black’s law dictionary, ”damages are any claim that is
made by a person or any claim that is ordered to be paid to a person in the form of
compensation for the loss either in person or property occurred by any act of a
person is known as damage.”

Damages are nothing but compensation in financial or monetary terms ordered to

be paid by a person whose act has caused wrong or harm or loss or injury to a
person.

It is very important to understand that there are two words which may sound similar
but differ in their meanings. On one hand, the word is “damage” and another word
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is “damages”. In a literal sense, these two words look similar but the meaning of the
term “damage” is any loss that is suffered by a person due to either an act or
omission of another person whereas the term “damages” is a certain amount of
money being claimed by a person as a compensation for the loss or injury he has
suffered from the individual whose act or omission caused such harm or loss.
Damages are something considered in the sense of remedy to a person suffering
loss.

Under tort law, in order to understand the claim of damages, there are two maxims
that are required to understand. Those two maxims are “injuria sine damnum”
and “damnum sine injuria”. In “injuria sine damnum”, the plaintiff has suffered
any legal injury but no such actual damage for which he can move to court while in
“damnum sine injuria”, the plaintiff has suffered some actual damage but no there
is no such legal injury for which he cannot move to court.

The term “damages” has not been explained under the Indian Contract Act, 1872
but it is generally considered in regard to “breach of contract”. In the context of the
Indian Contract Act, 1872, the term “damages” is considered as an award in terms
of money to be paid to the person/plaintiff by the defaulting party/ defendant as
compensation for the loss or injury that has been occurred to the plaintiff because
of the non-compliance with the terms & conditions of the contract on the part of the
defendant.

In simple words, damages are the certain amount of money which the defendant
has to pay for breaching the contract or non-compliance with the terms and
conditions of the contract to the plaintiff who has suffered loss because of the
breach. It is a claim which a plaintiff makes for the breach of contract from the
defaulting party.

The Apex court extracted the definition of the term “damages” from paragraph 127
as given by Mc Gregor in the case of Common Cause v. Union of India[1999
(6) SCC 667] which reads as “damages are the pecuniary compensation,
obtainable by success in an action, for a wrong which is either a tort or a breach of
contract, the compensation being in the form of a lump sum which is awarded
unconditionally.”

Essential Elements
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There are some essential conditions that are to be proved by the party claiming the
compensation for the breach of contract which is as follows:

1. A valid contract has to be there for making a successful claim.

2. Another party to the contract must have breached the contract in order to get a
claim.

3. Due to such breach of contract, the party making claim must have suffered some
loss.

4. The loss that occurred due to the defaulting party must be either the direct loss
or the immediate loss to the party claiming compensation.

In the case of Jalpaiguri Zilla Parishad v. Shankar Prasad Halder [AIR 2006
Cal. 1] the Apex Court has observed that damages can only be given for any loss
actually suffered and not for any remote or indirect loss.

We have observed the expression “breach of contract” been used. The expression
“breach of contract” is used to refer to when a person fails to fulfill his responsibility
that has been decided in a contract or when a person fails to fulfill the terms and
conditions of contract because of which the other party has suffered any loss or
damage is known as breach of contract. In other words, when either the party fails
to comply with the terms and conditions of a binding contract which has caused loss
or damage to the other party is known as a breach of contract.

The types of damages in Contract Law are as follows:

1. General damages & Special damages:

It is one type of damages. General damages are considered as those damages that
occur naturally due to the normal course of events. In such case of damages, the
party suffered damage may get the compensation in monetary terms due to the
occurred injuries like inability or disability to perform certain actions.

Special damages are those damages that occur only due to some special
circumstances. Special damages do not occur due to breach of terms and conditions
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on the part of the defendant but because of some special circumstances; the
defendant could not fulfill the terms & conditions of the contract; if the
circumstances were reasonable, the contract may have been fulfilled.

2. Nominal Damages:

If the defendant is found liable for breach of contract, the plaintiff is entitled to
nominal damages even if no actual damage is proven. Nominal damages are
awarded if there is an infringement of a legal right and if it does not give the rise to
any real damages, it gives the right to a verdict because of the infringement.

In the following circumstances, nominal damages are awarded to the plaintiff:

1. The defendant committed a technical breach and the plaintiff himself did not
intend to execute the contract;
2. The complainant fails to prove the loss he may have suffered as a result of
the contract breach;
3. He has suffered actual damage, not because of the defendant’s wrongful act,
but because of the complainants’ own conduct or from an outside event;
4. The complainant may seek to establish the infringement of his legal rights
without being concerned about the actual loss. Where there is no basis for
determining the amount. The view that nominal damage does not connote a
trifling amount is erroneous; nominal damage means a small sum of money.
Nominal damages have been defined as a sum of money that can be spoken
of, but which does not exist in terms of quantity.

Where the loss is small and quantifiable, the damages awarded, although small, are
not nominal damages.

If the market rate on the date of the breach is not proven, the plaintiff shall be
entitled to nominal damages. However, the fact that the buyer does not sustain any
actual loss as a result of the seller’s failure to deliver the goods is no reason to
award the buyer nominal damage..

3. Substantial damages:

n cases where an offense is proven, many authorities may claim substantial

damages even if it is not only difficult but also impossible to calculate the damages
with certainty or accuracy. In all these cases, however, the extent of the breach has
been established. There was a complete failure to perform the contract on one side.
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However, where the breach is partial and the extent of the failure is determined,
only nominal damage is awarded. The plaintiff who can not show that after the
breach he would have had the contract performed, he is in a worse financial
position, usually, recover only nominal damages for breach of contract.

Where a defendant refuses to accept goods sold or manufactured for him, the
plaintiff sells them to a third party on the same terms as the defendant agreed and
makes a similar profit, the plaintiff shall be entitled to nominal damages if the
demand exceeds the supply of similar goods; but if the supply exceeds the demand,
the plaintiff shall be entitled to recover his loss of profit on the defendant’s contract.

4. Aggravated and exemplary damages:

The aggravated damages are compensatory in nature. Aggravated damages are

such types of damages which are ordered to be paid by the defaulter party for the
mental stress or agony that occurred to the plaintiff due to the breach of contract.

Exemplary damages are also referred to as punitive damages. Exemplary damages

are given with the aim to compensating the plaintiff for the loss that occurred to
him but in some exceptional cases, the punishment can also be given to the
defendant. Basically, exemplary damages are applied to punish the defaulting party
in the contract for the breach and also with an object to prevent any such breach in
the future.

5. Liquidated and unliquidated damages:

In the case of liquidated damages, the parties to the contract fix a certain amount
for the compensation in case of certain specific types of damages as liquidated
damages. In other cases where the courts instead of parties to the contract
determine the damages to be paid by the defaulting party; such damages are
known as unliquidated damages.

6. Consequential damage & incidental damages:

Consequential damages are the other type of damages which are consequent or the
result of any physical damage that occurred to the party claiming for the loss. The
term “incidental damages” is referred to the harm or injury that occurred to the
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plaintiff after knowing the breach of contract; for instance- the cost of buying or
replacing or returning the goods came defective.

7. Pecuniary damages & non-pecuniary damages:

Pecuniary damages are those which can be quantifiable by the court by assessing
the loss or injury suffered by the plaintiff. In the case of pecuniary damages, the
question of the amount of compensation in monetary terms is directly related with
the loss. Non-pecuniary damages are those losses or injury which cannot be directly
or clearly quantified or determined because the loss in such cases is more
subjective.

8. Damages for loss of profit/ loss of opportunity:

The idea behind providing for the compensation to this loss is that the plaintiff
should be given compensation for the deprivation of profits that occurred due to
some act of the defendant.

How to measure the damage caused?

The measure of damage or measure of damages is concerned with the legal

principles governing recoverability; the principle of the remoteness of damage
confines the recoverability of damages. Questions of quantum of damages are only
concerned with the amount of damages to be awarded and are, therefore, different
from the measure of damages; the latter involves consideration of the law.

What does the remoteness of damages mean?

The term remoteness of damages refers to the legal test used to determine which
type of loss caused by contract breach can be compensated by awarding damages.
It has been distinguished from the term measure of damages or quantification
which refers to the method of assessing the money the compensation for a
particular consequence or loss which has been held to be not too remote.

How to test the remoteness?

In deciding whether the claimed damages are too remote, the test is whether the
damage is such that it must have been considered by the parties as a possible
result of the breach. If it is, then it can not be considered too remote. The damage
shall be assessed on the basis of the natural and probable consequences of the
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breach. Actual knowledge must be demonstrated that mere impudence and

carelessness is not knowledge.

The defendant is only liable for reasonably foreseeable losses- those who would
have reason to foresee the likelihood of future infringement if a normally prudent
person in his place had this information when contracting.

The remoteness of damage is a matter of fact, and the only guidance that the law
can give is to lay down general principles.

The principle governing the remoteness of damages was elaborated in the landmark
case of Hadley v. Baxendale. The rules stated in this case were that a party
injured by a breach of contract could recover only those damages which were either
to be considered “reasonably as arising naturally, i.e., according to the usual course
of things” from the breach, or could reasonably have been considered by both
parties at the time they entered into the contract as the likely result of the breach.
This is the basis for understanding special damages. In this case, the Court
acknowledged that the defendant’s failure to send the crankshaft for repair was the
only cause for the plaintiffs’ mill to stop, resulting in loss of profits.

Under Indian Contract Act, 1872, there are three sections that are section 73, 74 &
75 which deals with the damages.

Section 73 is applicable in the case where have not specified any amount in their
contract that is required to be paid in case of default or breach of terms and
conditions of the contract. Such types of damages are known as unliquidated
damages which we have dealt with under the head of different types of damages. In
a simple sense, section 73 of the Indian Contract Act, 1872 deals with unliquidated
damages. In the case where the parties have not decided or mentioned any such
clause in their contract that how much amount is required to be paid by the party
who is at default, then the role of the court having jurisdiction of the matter comes
into the picture and decides the amount to be paid to the plaintiff or the claimant
party.
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The marginal note of section 73 reads as – “compensation for the loss or damage
caused by a breach of contract” and the provision of section 73 states that – when
there is a breach of contract or the contract has broken, then the party who suffers
loss or harm or injury due to that breach is entitled to receive compensation for any
such loss or harm from the party who is at default or the party who has broken the
contract; such loss or harm has been arisen due to the general or usual course of
things from the occurred breach or such loss has been known to the parties at the
time of making or entering the contract.

It is to be kept in mind that any such compensation is not to be awarded in the case
where the damages are remote to the incident of the breach or the damages are
indirect to the breach that occurred. An illustration of section 73 reads as – X enters
to a contract with Y which says that X is to repair the house of Y for which he has
received some money in advance. X does so but not as per the terms and
conditions of the contract. Thus, X is bound to pay the cost of making repairs
conform to the contract to Y.

Section 74 of the Indian Contract Act, 1872, deals with liquidated damages.

Section 75 of the Indian Contract Act, 1872 deals with the cases where the plaintiff
is entitled to receive compensation when the contract is rescinded rightfully.

Now there are some questions that arise with the discussion which has to be
answered. Some points are to be kept in mind which are as follows:

1. The measure of damage that occurred has to be determined as per the laws or
legal principles which have been given in order to recover the loss or damages.

2. Section 73 of the Indian Contract Act, 1872 provides for a duty on the claimant
party in order to mitigate the loss or harm from the party who is at default.

3. In order to determine whether the damage or loss is too remote or indirect, the
test is to analyze that whether the damage or harm or injury that occurred is the
consequence of the breach of contract or is the reasonable or possible result of a
breach of terms and conditions of contract. The remoteness of damage depends
upon the probable consequences of the breach of contract. The party at default to
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the contract is only bound to pay for the reasonable or considerable foreseeable
losses.

In the case of Shri Hanuman Cotton Mills v. Tata Aircraft limited [AIR 1970
SC 1986], it has been observed that the awarded compensation may be taken to
measure the damages subject to deduction of the money value of services, time
and energy expended in pursuing claims of compensation and expenditure incurred
by him in litigation culminating in awarding compensation.

In order to attract section 73, it is required by the claimant party to prove the losses
suffered by them as observed in the case of the state of Kerala v. the general
manager, southern railway, Madras [AIR 1976 SC 2538]

In the case of the Union of India v. K.H. Rao[AIR 1976 SC626], the Supreme
Court scaled sown the damages to the extent of the security deposit and the
directed whole of the security deposit to be refunded to the respondent as the
appeal was partly allowed in this particular case.

Conclusively, it can be inferred that the general principle of section 73 of the Indian
Contract Act, 1872 says that the party to the default has to pay the compensation
for the loss that occurred to the plaintiff. It is also inferred by the discussion that the
legality of the award can be challenged on the basis of the question of law but not
the basis of facts. It is suggested to the parties to the contract to take reasonable
steps in order to mitigate the damage or loss.

Section 74. Compensation of breach of contract where penalty stipulated

for.

When a contract has been broken, if a sum is named in the contract as the amount
be paid in case of such breach, or if the contract contains any other stipulation by
way of penalty, the party complaining of the breach is entitled, whether or not
actual damage or loss or proved to have been caused thereby, to receive from the
party who has broken the contract reasonable compensation not exceeding the
amount so named or, as the case may be, the penalty stipulated for.

Explanation-
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A stipulation for increased interest from the date of default may be a stipulation by
way of penalty.

Exception-

When any person enters into any bail bond, recognisance or other instrument of the
same nature or, under the provisions of any law, or under the orders of the Central
Government or of any State Government, gives any bond for the performance of
any public duty or act in which the public are interested, he shall be liable, upon
breach of the condition of any such instrument, to pay the whole sum mentioned
therein.

Explanation-

A person who enters into a contract with the government does not necessarily
thereby undertake any public duty, or promise to do an act in which the public are
interested.

Illustrations-

(a) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a given day.
A fails to pay B Rs. 500 on that day. B is entitled to recover from A such
compensation, not exceeding Rs. 1,000, as the court considers reasonable.

(b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B
Rs. 5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation;
not exceeding Rs. 5,000 as the court considers reasonable.

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in court on
a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent at
the end of six months, with a stipulation that, in case of default, interest shall be
payable at the rate of 75 per cent from the date of default. This is stipulation by
way of penalty, and B is only entitled to recover from A such compensation as the
court considers reasonable.

(e) A, who owes money to B, a money-lender, undertakes to repay him by delivering

to him 10 maunds of grain on a certain date, and stipulates that, in the event of his
not delivering the stipulated amount by the stipulated date, shall be liable to deliver
20 maunds. This is a stipulation by way of penalty, and B is only entitled to
reasonable consideration in case of breach.
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(f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments,
with a stipulation that, in default, of payment of any instalment, the whole shall
become due. This stipulation is not by way of penalty, and the contract may be
enforced according to its terms.

(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five
yearly instalments of Rs. 40, with stipulation that, in default of payment of any
instalment, the whole shall become due. This is a stipulation by way of penalty.

Proof of loss/injury in case of Liquidated Damage

Firstly, irrespective of the nature of damages, breach of contract is the pre-

condition to claim the same. That is, there can be no claim for damages if there is
no breach of contract between the parties. Secondly, to claim damages, the party
making such claim has to establish the loss. It is understood that the reasonable
compensation agreed upon as liquidated damages in case of breach of contract is in
respect of some loss or injury and hence existence of such loss or injury is
indispensable for such claim of liquidated damages. In some cases, the courts have
demanded the parties to prove the degree of loss or damage suffered as a result of
breach of contract.

In the case of Maula Bux, the court has specifically held that the court is
competent to award reasonable compensation in a case of breach even if no actual
damage is proved to have been suffered in consequence of the breach of contract.
The court has, however, also specifically held that in case of breach of some
contracts it may be impossible for the court to assess compensation arising from
breach. In such a case, the sum named by the parties if it be regarded as a genuine
pre-estimate may be taken into consideration as the measure of reasonable
compensation, but not if the sum named is in the nature of a penalty. Where loss in
terms of money can be determined, the party claiming compensation must prove
the loss suffered by him. In the case of Iron & Hardware (India) Co. v. Firm
Shamlal & Bros, it was stated that an automatic pecuniary liability does not arise
in the event of a breach of a contract which contains a clause for liquidated
damages. Till the time, it is determined by the court that the party complaining of
the breach is entitled to damages, the plaintiff shall not be granted compensation
by the mere presence of a liquidated damages clause.

It is however, apparent from the above that this demand to prove the loss suffered,
defeats the very purpose for which liquidated damages clauses are inserted in
contracts. Section 74 of the Act emphasizes on reasonable compensation. Only if
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the compensation in the contract is by way of penalty, consideration would be

different and the party would only be entitled to compensation for the loss suffered.
But if the compensation named in the contract is a genuine pre-estimate of loss,
which the party knew at the time of entering into contract, there is no question of
proving such loss. Burden is in fact on the other party to lead evidence to prove that
no loss is likely to occur by such breach.

In the case of Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd, it was
held that if the terms of the contract are clear and unambiguous stipulating the
liquidated damages in case of the breach of the contract, unless it is held that such
estimate of damages/compensation is unreasonable or is by way of penalty, party
who has committed the breach is required to pay such compensation. However, in
some contracts, it would be impossible for the court to assess the compensation
arising from breach and if the compensation contemplated is not by way of penalty
or unreasonable, court can award the same if it is genuine pre-estimate by the
parties as the measure of reasonable compensation.

In the case of Indian Oil Corporation v. Lloyds Steel Industries Ltd , the court
held that:

"...The guiding principle is 'reasonable compensation'. In order to see what would be

the reasonable compensation in a given case, the Court can adjudge the said
compensation in that case. For this purpose, as held in Fateh Chand (supra) it is
the duty of the Court to award compensation according to settled principles. Settled
principles warrant not to award a compensation where no loss is suffered, as one
cannot compensate a person who has not suffered any loss or damage. There may
be cases where the actual loss or damage is incapable of proof; facts may be so
complicated that it may be difficult for the party to prove actual extent of the loss or
damage."

In the case Construction & Design Services v. Delhi Development Authority ,

the apex court reconfirmed that the court must determine the reasonable
compensation and then grant it to the injured party. It held as follows:

"Applying the above Principle to the present case, it could certainly be presumed
that delay in executing the work resulted in a loss for which the respondent was
entitled to reasonable compensation. Evidence of precise amount of loss may not
be possible but in the absence of any evidence by the party committing breach, the
court has to proceed on guesswork as to the quantum of compensation to be
allowed in the given circumstances. Since the respondent also could have lead
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evidence to show the extent of higher amount paid for the work got done or
produce any other specific material but it did not do so, we are of the view that it
will be fair to award half of the amount claimed as reasonable compensation."

In the case of M/s. Herbicides (India) Ltd. v. M/s. Shashank Pesticides P. Ltd
180 (2011) DLT 243, the court held in case of liquidated damages that "... even if
it does not prove the actual loss/damage suffered by it, is entitled to reasonable
damages unless it is proved that no loss or damage was caused on account of
breach of the contract"

The provisions relating to liquidated damages are required to be drafted with clarity
and one has to prove that the amount is a genuine pre-estimate of loss or injury
suffered. ONGC v. Saw Pipes (2003) 5 SCC 705

Since Section 74 awards reasonable compensation for damage or loss caused by a

breach of contract, damage or loss caused is a sine qua non for the applicability of
the Section. However, as long as it serves a compensatory function, liquidated
damages should be allowed without the requirement to prove exact losses.

Thus, where a sum is named in a contract as a liquidated amount payable by way of

damages, the party complaining of a breach can receive as reasonable
compensation such liquidated amount only if it is a genuine pre-estimate of
damages fixed by both parties and found to be such by the court. In cases where
the amount fixed is in the nature of penalty, only reasonable compensation can be
awarded not exceeding the penalty so stated. In both cases, the liquidated amount
or penalty is the upper limit beyond which the court cannot grant reasonable
compensation.

The expression "whether or not actual damage or loss is proved to have been
caused thereby" means that where it is possible to prove actual damage or loss,
such proof is not dispensed with. It is only in cases where damage or loss is difficult
or impossible to prove, that the liquidated amount named in the contract, if a
genuine pre-estimate of damage or loss, can be awarded. Thus, it is the nature of
the Liquidated Damages clause that needs to be considered, that is, whether it's a
genuine pre-estimate of loss occurred on breach of contract or whether it is in form
of penalty and deterrent in nature. Dunlop Pneumatic Tyre Co. Ltd v. New
Garage & Motor Co Ltd, [1914] UKHL 1
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Section 75. Party rightfully rescinding contract, entitled to compensation.

A person who rightfully rescinds a contract is entitled to consideration for any

damage which he has sustained through the no fulfilment of the contract.

Illustration-

A, a singer, contracts with B, a manager of a theatre, to sing at his theatre for two
nights in every week during the next two months, and B engages to pay her 100
rupees for each night’s performance. On the sixth night, A wilfully absents herself
from the theatre, and B, in consequence, rescinds the contracts. B is entitled to
claim compensation for the damage which he has sustained through the non-
fulfilment of the contract.

CHAPTER VIII (124-147) – INDEMNITY AND GUARANTEE

Section 124. “Contract of indemnity” defined.

A contract by which one party promises to save the other from loss caused to him
by the contract of the promisor himself, or by the conduct of any other person, is
called a “contract of indemnity“.

Illustration-

A contracts to indemnify B against the consequences of any proceedings which C

may take against B in respect of a certain sum of 200 rupees. This is a contract of
indemnity.

The distinctive feature of Contract Law, as compared to other branches of law, is

that in the former the parties make law for themselves within the broad framework
of the Contract Law. The importance of the contract in regulating business and
other social and economic relations is so great that Dot only private enterprise, but
public enterprise units and the Government have resorted to contract as an
instrument of participating in their country’s market economy. In this article, we
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shall study the meaning of indemnity, the contract of indemnity under the Indian
Contract Law, 1872.

Indemnity Under English Law:

The word indemnity means security or protection against a financial liability i.e. it is
a security or protection against loss. In a contract of indemnity one party – i.e. the
indemnifier promise to compensate the other party i.e. the indemnified against the
loss suffered by the other. It is one of the most important forms of commercial
contracts. Several industries, such as the insurance industry, rely on these
contracts. These contracts basically help businesses in indemnifying their losses
and, therefore, reduce their risks. The objective of entering into a contract of
indemnity is to protect the promisee against unanticipated losses. Contract of
indemnity is really a kind of contingent contract.

The English law definition of a contract of indemnity is – “it is a promise to save a

person harmless from the consequences of an act”. Thus it includes within its ambit
losses caused not merely by human agency but also those caused by accident or
fire or other natural calamities.

In Adamson v. Jarvis, (1827) 4 Bing 66, case, Adamson (the petitioner) was an
auctioneer who was given cattle by Jarvis (the defendant) to be sold at an auction.
Adamson followed the instructions and sold the cattle. But Jarvis was not the owner
of the cattle. The real owner of the cattle sued Adams for conversion and was
successful. Adamson had to pay damages and he then sued Jarvis to be indemnified
for the loss that he suffered by way of damages to be paid to the real owner. The
Court held that Adamson carried out Jarvis’s instructions and was entitled to
presume that if anything went wrong as per instructions, he would be indemnified.
Jarvis was ordered to pay damages to Adams.

In Betts v. Gibbins, (1834) 2 Ad. & E. 57 , case the Court held that an
undertaking or promise to indemnify may be implied.

In Toplis v. Grane, 5 Bing. N. C. 636 case, Tindal C.J. observed that when an act
has been done by the plaintiff under the express directions of the defendant which
occasions an injury to the rights of third persons, yet if Such an act is not apparently
illegal in itself but is done honestly and bona fide in compliance with the
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defendant’s directions, he shall be bound to indemnify the plaintiff against the

consequences thereof.

In Dugdale v Lovering, (1875) LR.10 CP196 case, the plaintiffs were in

possession of certain trucks, which were claimed by the defendant, and also by the
proprietors of the K. P. Colliery. A correspondence took place between the plaintiffs
and the defendant, in which the plaintiffs asked for an indemnity if they should
deliver up the trucks to the defendant. The defendant, without giving any answer as
to the indemnity, wrote requiring the plaintiffs to send the trucks back to him, which
they thereupon did. The K. P. Colliery proprietors then brought an action against the
plaintiffs for the conversion of the trucks, and their claim proving well-founded, the
plaintiffs were obliged to pay a sum of money, in settlement of the action, which
they sought to recover from the defendant upon a contract of indemnity. The Court
held that the doctrine laid down in Betts v. Gibbins, (2 Ad. & E. 57) and Toplis
v. Grane (5 Bing. N. C. 636), that there was, under the circumstances of the
case, evidence of implied promise. The Court also held that the principle upon
which in such cases a contract of indemnity is implied is not confined to cases of
principal and agent, or employer and employed

In Sheffield Corp. v. Barclay, 1905 AC 392 case, a corporation, having

registered a transfer of stock on the request of the banker, was held entitled to
recover indemnity from the banker when the transfers were discovered to be
forged.

In Starkey v. Bank of England, (1903) AC 114 (HL) case, a stockbroker

innocently acted upon the power of attorney on which one out of three signatures
were forged. The court allowed the bank to recover indemnity from an agent who
presented the document.

Indeminity Under the Indian Contract Act:

Section 124 of the Indian Contract Act defines a contract of immunity.

A contract by which one party promises to save the other from loss caused to him
by the contract of the promisor himself, or by the conduct of any other person, is
called a “contract of indemnity”.

Illustration
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A contract to indemnify B against the consequences of any proceedings which C

may take against B in respect of a certain sum of 200 rupees. This is a contract of
indemnity.

Section 124 starts with the word ‘contract’, hence the contract of immunity should
have all the ingredients of a valid contract. There are generally two parties in
indemnity contracts. The person who gives the indemnity is called an ‘indemnifier’
and the person for protection it is given is called ‘indemnity holder’ or said to be
‘indemnified’.

For example, X promises to deliver certain goods to Y for Rs. 20,000 every month. Z
comes in and promises to indemnify Y’s losses if X fails to so deliver the goods. This
is how Y and Z will enter into contractual obligations of indemnity. In this case Z is
indemnifier and Y is indemnity holder.

It is kind of contingent contract whereby one promises to save another harmless

from the result of the conduct of the promisor or of any other person. Hence to
invoke contract of indemnity, there must be a loss to promise.

Compare to English definition of ‘indemnity’, the Indian definition is narrower. The

English definition of indemnity is wide enough to include a promise of indemnity
against loss arising from any cause whatsoever, e.g., loss caused by fire or by some
other accident. Thus as per this definition every contract of insurance, other than
life insurance, is contract of indemnity. As per Section 124 of the Act the loss must
have been caused either by the conduct of the promisor or any other person, it does
not include loss caused by natural factors, not involving human factors.

Essential Elements of Contract of indemnity:

1. It should be a valid contract. The principles of the general law of contract

contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to
them.
2. There should be two parties to such a contract. There must be two parties,
namely, promisor or indemnifier and the promisee or indemnified or
indemnity-holder.
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3. It is a promise to compensate for or security against damage, loss or injury.

The loss may be caused due to the conduct of the promisor or any other
person.
4. Every contract of insurance, other than life insurance, is a contract of
indemnity.
5. It is not a collateral but an independent contract.
6. It is a tool for allocating risks contingent liability.
7. To activate the contract of indemnity, the loss to promise is essential.
8. The contract of indemnity may be express (i.e. made by words spoken or
written) or implied (i.e. inferred from the conduct of the parties or
circumstances of the particular case).
9. Consideration and objects of such contract must be lawful.
10.Indemnity clauses, amongst other things, in such contract must be clear,
specific, where possible stipulate the circumstances under which the
indemnity will arise

Enforcement of Contract of Indemnity:

1. A contract of indemnity can be enforced according to its terms and measure

of damages could be up to the extent to which the promisee has been
indemnified
2. Claim of Indemnity holder can include: damages, legal costs of adjudication,
amount paid under the terms of compromise.
3. Indemnifier should ideally be informed of the legal proceedings or should be
joined as third party.
4. There is no onus to show breach or actual loss.

In Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, AIR 1942

Bom 302 case, the plaintiff transfers a plot of land to BMC and BMC agreed to keep
the plot on lease for 999 years. Now the defendant wanted to construct a building
on the piece of land and the owner allowed to do so. Now the plot was in the
possession of the defendant but the owner was the plaintiff. Construction materials
were supplied by a Keshavdas Mohandas. At one point of time, there was a due of
Rs. 5000 but the defendant was unable to pay. So the defendant requested the
plaintiff to a mortgage. So the property was mortgaged to Keshavdas Mohandas and
as a result, now Rs5000 and 10% interest were payable. Again Rs. 5000 was
demanded on supply by Keshavdas Mohandas. The defendant requested now on the
same property charge was put to Keshavdas Mohandas. A date was set for the
return of the principal amount. The defendant had agreed to pay the principal
amount, the interest and to get the mortgage deed released before a certain date.
Now the property was too transferred to the plaintiff, but the title deed was with
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Keshavdas Mohandas and he did not give. The owner now sued for indemnity as he
wanted title deeds as consideration for land transfer. The Stance of the Defendant
was that the plaintiff had suffered no loss and thus could not claim anything under
Sections 124 and 125. The Court held that an indemnity holder has rights other
than those mentioned in the Sections above. If the indemnity holder has incurred a
liability and the liability is absolute, he can turn to the indemnifier to take care of
the liability and pay it off. Thus, the plaintiff was entitled to be indemnified by the
defendant against all liability under the mortgage and deed of charge.

In K.P Ram Kuppam Chettiar v. Sp. Ram swami Chettiar, AIR 1946 Mad 472
case, the Madras High Court laid down the principle that if an act done by A at the
request of B which is not apparently tortuous to the knowledge of A but turns out to
be injurious to right of C and A is held liable to pay C, A is entitled to be indemnified
by B.

Section 125. Right of indemnity-holder when sued.

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit, if in bringing of
defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of indemnity,
or if the promisor authorised him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contract to the orders of the promisor, and was
one which it would have been prudent for the promise to make in the absence of
any contract of indemnity, or if the promisor authorised him to compromise the suit.

Rights of Indemnity Holder

As per Section 125 of the Indian Contract Act, 1872 the following rights are
available to the promisee/ the indemnified/ indemnity-holder against the promisor/
indemnifier, provided he has acted within the scope of his authority.
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Right to recover damages paid in a suit [Section 125(1)]:

When a third party lays down a claim against the indemnity holder, it is well
established the duty to pay the latter arises for the indemnifier at the first place.
The damages would definitely be the end result of the total liability that the
indemnity holder had to carry.

The logical principle is that a person who had acted on the faith of another party
should be indemnified. An indemnity-holder has the right to recover from the
indemnifier all damages which he may be compelled to pay in any suit in respect of
any matter covered in the contract of indemnity.

In Parker v. Lewis, (1873) 8 Ch App 1035 case, the logical principle of providing
the indemnity to a person who had acted on the faith of another party is upheld.
The Court laid down that it would be obvious for the person indemnified, who has
altered his position and faced action for that action, to be indemnified and be
protected by the third party. Once a suit is decided against the indemnified and he,
being the judgment debtor, pays the money to the judgment creditor, or, when in a
compromise, he prudently settles the dispute by paying the damages; indemnifier
becomes absolutely liable to indemnify him (i.e. the decree becomes conclusive for
the purpose of invoking indemnity), notwithstanding that the suit could have been
brought or could have been appealed against. Also, if the indemnifier trusts
indemnified to further appeal against the judgment, he will still be liable to pay
under the indemnity contract to the indemnified, if the latter had paid the decreed
amount under the previous suit. It is only if indemnified finally wins the case, shall
the judgment debtor will pay the decreed amount to the indemnifier.

In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case,

the Court held that the suit, in which the indemnified is roped in, has a binding
effect on the indemnifier in terms of its final result, even though he was not a party
to the contract. This is not an exception to the rule of res judicata rather; it is so
because the claim against which the indemnification had been promised has been
conclusively established.

In Gokuldas v. Gulab Rao, AIR 1926 Nag 108 case, the Court held that the
indemnifier cannot plead that he was not a party to a dispute hence the result
should be implemented upon him.
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In Nallappa Reddi v. Vridhachala Reddi, (1914) 37 Mad 270 case, the Court
held that the indemnifier cannot escape from the responsibility of providing the
damages to the indemnified.

In Anwar Khan v. Gulam Kasam, AIR 1919 Nag 126 case, the Court held that
the measure of damages would depend upon the extent to which the person has
been indemnified, if more than the amount, the indemnifier may refuse as well.

Right to recover costs incurred in defending (Section 125(2)):

When pursuing a suit, in which the purpose or the action of the indemnity is being
involved, the indemnity holder is being provided with the statutory right to claim
costs as well with the damages from the indemnifier provided they are reasonable.

An indemnity-holder has the right to recover from the indemnifier all incidental
costs which he may be compelled to pay in any such suit if, in bringing or defending
it, he did not contravene the orders of the promisor, and acted as it would have
been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit.

In Pepin v. Chunder Seekur Mookerjee, (1880) ILR 5 Cal 811 case, the Court
held that the expenses do arise while reducing or ascertaining or resisting the
claim. Hence, the cost of such a nature can be recovered.

In Gopal Singh v. Bhawani Prasad, (1888) ILR 10 All 531 case, the Court held
that only those costs would be recoverable that are supposed to be incurred by a
prudent man.

Right to recover sums paid under compromise )Section 125 (3)):

This is similar to previous right, but it arises in the case of compromise. An

indemnity-holder also has the right to recover all amounts from the indemnifier
which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which it
would have been prudent for the promisee to make in the absence of any contract
of indemnity, or if the promisor authorized him to compromise the suit.
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In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case,

the court laid down the conditions for the claim by the promisee, to be valid. If the
indemnity holder genuinely wants the amount to be recovered, certain conditions
with respect to the compromise so effected would have to fulfill:

1. The compromise should have been put to effect in a bona fide manner.
2. It has been resolved without any sort of collusion
3. It has not been impeached as an immoral bargain

Right to sue for specific performance:

An indemnity-holder is entitled to sue for specific performance if he has incurred

absolute liability and the contract covers such liability. The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the
promisor

Rights of Indemnifier:

The rights of the indemnifier have not been mentioned expressly anywhere in the
Act. In Jaswant Singh v. Section of State, 14 BOM 299 , it was decided that the
rights of the indemnifier are similar to the rights of a surety under Section 141
where he becomes entitled to the benefit of all securities that the creditor has
against the principal debtor whether he was aware of them or not. Where a person
agrees to indemnify, he will, upon such indemnification, be entitled to succeed to all
the ways and means by which the person originally indemnified might have
protected himself against loss or set up his compensation for the loss.

Section 126. “Contract of guarantee”, “surety”, “principal debtor” and

“creditor”.

A “contract of guarantee” is a contract to perform the promise, or discharge the

liability, of a third person in case of his default.

The person who gives the guarantee is called the “surety“, the person in respect of
whose default the guarantee is given is called the “principal debtor“, and the person
to whom the guarantee is given is called the “creditor“.

A guarantee may be either oral or written.

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Thus, if A says to B, “Lend Rs. 4,000 to C for one year at interest 12

p.c.p.a. If he does not pay this amount with interest at the end of 1 year, I
shall pay it to you.” This is a contract of guarantee.

It involves three parties namely,

1. Surety, who gives the guarantee. In the above example, A is a surety

2. Principal Debtor, in respect of whose default the guarantee is given. In the
above example, C is the principal debtor.
3. Creditor, to whom the guarantee is given. In the above example, B is a
creditor.

Thus three parties are involved in a contract of guarantee. At the same time, there
are three collateral contracts also namely,

As between B and C [B is giving term loan to C who promises that he would pay].

As between B and A [A gives a guarantee that on default on part of C, I will pay].

As between A and C [C indemnifies A in case of C’s default in paying the amount to

B).

Essential Elements of Contract of Guarantee:

1. Should be valid contract:

A contract of guarantee must have all the essentials of a valid contract such as offer
and acceptance, intention to create a legal relationship, capacity to contract,
genuine and free consent, lawful object, lawful consideration, certainty and
possibility of performance and legal formalities.

2. Concurrence of three parties must:

In a contract of guarantee there must be three parties namely, the principal debtor,
the creditor and the surety. In such contract, the surety undertakes his obligation
at the request (express or implied) of the principal debtor. All of them must agree to
make such a contract.

3. Written or Oral Contract:

A contract of guarantee may either be oral or written. It may be express or implied

from the conduct of parties. Contracts of guarantee have to be interpreted taking
into account the relative position of the contracting parties in the backdrop of the
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contract. The court has to consider all the surrounding circumstances and evidence
to come to a finding when the guarantor refutes his liability. It is to be noted that
under English Law (the Statute of Frauds (29 Car. II, c.3) Section 4), a Contract of
Guarantee must always be in writing.

In P. J. Rajappan v Associated Industries (P) Ltd [1990 (1) All India Banking
Law Judgments 321], the guarantor, having not signed the contract of guarantee,
wanted to wriggle out of the situation. He contended that he did not stand surety
for the performance of the contract. Evidence showed the involvement of the
guarantor in the deal, having promised to sign the instrument later. The Kerala High
Court held that a contract of guarantee is a tripartite agreement, involving the
principal debtor, surety and the creditor. In a case where there is evidence of
involvement of the guarantor, the mere failure on his part in not signing the
agreement is not sufficient to demolish otherwise acceptable evidence of his
involvement in the transaction leading to the conclusion that he guaranteed the due
performance of the contract by the principal debtor. When a court has to decide
whether a person has actually guaranteed the due performance of the contract by
the principal debtor all the circumstances concerning the transactions will have to
be necessarily considered. The court cannot adopt a hyper-technical attitude that
the guarantor has not signed the agreement and so he cannot be saddled with the
liability. Due regard has to be given to the relative position of the contracting
parties and to the entire circumstances which led to the contract.

In Mathura Das v Secretary of State (AIR 1930 All 848) and in Nandlal
Chanandas v Firm Kishinchand (AIR 1937 Sindh 50), it was held that contract
of guarantee can be created either by parol or by a written instrument and that it
may be express or implied and may be inferred from the course of the conduct of
the parties concerned. There is overwhelming evidence in this case that the second
defendant had guaranteed the due performance of the contract by the first
defendant, principal debtor. Hence the mere omission on his part to sign the
agreement cannot absolve him from his liability as the guarantor.

4. Liabilities must legally enforceable:

In a contract of guarantee, liability of the surety is secondary i.e., the creditor must
first proceed against the debtor and if the latter does not perform his promise, then
only he can proceed against the surety. A contract of guarantee pre-supposes the
existence of a liability, which is enforceable at law. If no such liability exists, there
can be no contract of guarantee. If the debt, which is sought to be guaranteed is
already time barred or void, the surety is not liable.
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In Manju Mahadev v Shivappa (1918) 42 Bom. 444 case , the Court observed
“The word ‘liability’ in Section 126 of the Indian Contract Act, 1872, means a liability
which is enforceable at law, and if that liability does not exist, there cannot be a
contract of guarantee. A surety, therefore, is not liable on a guarantee for payment
of a debt which is statute-barred.”

In Coutts & Co v Brown Lecky and others [1946] 2 All E.R. 207 court held
that to be legally effective a guarantee must be given for debt which is enforceable.
If the debt is not enforceable, the guarantee will not be enforceable. Thus a minor
not being answerable for a debt he incurs, a guarantee for such debt is likewise
void.

In State of Maharashtra v Dr. M. N. Kaul, AIR 1967 SC 1634 case, the

Supreme Court held that under the law, a guarantor cannot be made liable for more
than he has undertaken; a surety is a favoured debtor and he can be bound “to the
letter of his engagement”.

5. Consideration:

There must be consideration between the creditor and the surety so as to make the
contract enforceable. The consideration must also be lawful. Section 127 of the
Contract Act provides that anything done, or any promise made, for the benefit of
the principal debtor may be a sufficient consideration to the surety for giving the
guarantee. Thus, any benefit received by the debtor is adequate consideration to
bind the surety. A past consideration is no consideration for a contract of guarantee.
There must be a fresh consideration moving from the creditor.

In Sonarlinga v Pachai Naicken, (1913) 38 Mad 680; 22 IC 1 case, the Court

held that consideration is the legal detriment incurred by the promisee at the
promisor’s request and it is immaterial whether there is or is not any apparent
benefit to the promisor

In Ram Narain v Lt. Col. Hari Singh, AIR 1964 Rajasthan 76 case , the Court
held that A contract of guarantee executed after the contract between the creditor
and principal debtor and without consideration is void. It must be contemporaneous
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with the contract of the creditor and principal debtor. The past benefit to the
principal debtor is not a good consideration.

In State Bank of India v Premco Saw Mill, AIR 1984 Gujarat 93 case, the
State Bank gave notice to the debtor – defendant and also threatened legal action
against her, but her husband agreed to become surety and undertook to pay the
liability and also executed a promissory note in favour of the State Bank and the
Bank refrained from threatened action. It was held that such forbearance on the
bank’s part constituted good consideration for a guarantor.

6. Disclosure:

The creditor should disclose to the surety the facts that are likely to affect the
surety’s liability. The guarantee obtained by the concealment of such facts is
invalid. Thus, the guarantee is invalid if the creditor obtains it by the concealment of
material facts.

In Muthukaruppa v Kathappudayan (1914) 27 MLJ 249 case, the Court held

that The mere fact that A lends money to B on the recommendation of C is no
consideration for a subsequent promise by C to pay the money in default of B.

7. No Misrepresentation:

The guarantee should not be obtained by misrepresenting the facts to the surety.

Difference Between Contract of Indemnity and Contract of Guarantee:

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Contract of Indemnity Contract of Guarantee

It is defined in Section 124 of the Indian It is defined in Section 126 of the Indian
Contract Act, 1872 Contract Act, 1872
It refers to a Contract by which one party It refers to a Contract to perform the
promises to save the other from loss promise or discharge the liability of a
caused by conduct of the promisor or third person in case of his default.
another person.
Its purpose is to compensate losses. Its purpose is to give assurance to
creditor
In contract of indemnity there are two In contract of guarantee there are three
parties: indemnifier and the indemnity parties: creditor, the principal debtor and
holder. surety.
In contract of indemnity, the liability of In contract of guarantee, the primary
the promisor is primary. liability is of principal debtor and the
liability of surety is secondary.
Contract between the indemnifier and Contract between surety and principal
the indemnity holder is express and debtor is implied and between creditor
specific. and principal debtor is express.
In Contract of indemnity there is only In contract of guarantee there are three
one agreement i.e. the agreement agreements i.e. agreement between the
between indemnifier and indemnity creditor and principal debtor, the
holder. creditor and surety and surety and
principal debtor.
Liability of indemnifier comes into play Liability of guarantor exists continuously
on contingency of loss happening to
promisee
In Contract if indemnity, the promisor In contract of guarantee, the surety does
cannot file the suit against third person not require any relinquishment for filing
until and unless the promisee of suit. The surety gets the right to file
relinquishes his right in favour of the suit against the principal debtor as and
promisor. when the surety pays the debt.

Section 127. Consideration for guarantee.

Anything done, or any promise made, for the benefit of the principal debtor, may be
a sufficient consideration to the surety for giving the guarantee.

Illustrations-

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises to
guarantee the payment in consideration of A’s promise to deliver the goods. This is
a sufficient consideration for C’s promise.
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(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that, if he does so, C will pay for them in default
of payment by B. A agrees to forbear as requested. This is a sufficient consideration
for C’s promise.

(c) A sells and delivers goods to B. A afterwards, without consideration, agrees to

pay for them in default of B. The agreement is void.

There must be consideration between the creditor and the surety so as to make the
contract enforceable. The consideration must also be lawful. Section 127 of the
Contract Act provides that anything done, or any promise made, for the benefit of
the principal debtor may be a sufficient consideration to the surety for giving the
guarantee. Thus, any benefit received by the debtor is adequate consideration to
bind the surety. A past consideration is no consideration for a contract of guarantee.
There must be a fresh consideration moving from the creditor.

In Sonarlinga v Pachai Naicken, (1913) 38 Mad 680; 22 IC 1 case, the Court

held that consideration is the legal detriment incurred by the promisee at the
promisor’s request and it is immaterial whether there is or is not any apparent
benefit to the promisor

In Ram Narain v Lt. Col. Hari Singh, AIR 1964 Rajasthan 76 case, the Court
held that A contract of guarantee executed after the contract between the creditor
and principal debtor and without consideration is void. It must be contemporaneous
with the contract of the creditor and principal debtor. The past benefit to the
principal debtor is not a good consideration.

In State Bank of India v Premco Saw Mill, AIR 1984 Gujarat 93 case, the
State Bank gave notice to the debtor – defendant and also threatened legal action
against her, but her husband agreed to become surety and undertook to pay the
liability and also executed a promissory note in favour of the State Bank and the
Bank refrained from threatened action. It was held that such forbearance on the
bank’s part constituted good consideration for a guarantor.

Section 128. Surety’s liability.

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The liability of the surety is co-extensive with that of the principal debtor, unless it
is otherwise provided by the contract.

Illustration-

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is

dishonoured by C. A is liable not only for the amount of the bills but also for any
interest and charges which may have become due on it.

SURETY’S LIABILITY

As per section 128 the extent of surety’s liability is co-extensive with that of the
principal debtor i.e. equal to the liability of the principal debtor until and unless the
surety made some provisions against it in the contract of guarantee.

What is Co-extensive liability?

This entails that the surety is directly liable for all that the principal debtor owes to
the creditor and not one penny less or more than that amount. It is the maximum
limit to which the surety can be made liable in regards to his guarantee. In the case
of Maharaja of Benaras v Har Narain Singh under the agreement in this case
and even otherwise, the surety is liable not only for the principal amount but also
for the interest on the principal amount and charges incurred in enforcing this
liability. The court held that the trial court erred in decreeing the suit against the
surety for the only principal amount excluding interest and costs. Therefore, we can
conclude the entirety of the liability of the principal debtor also becomes the liability
of the surety once the debtor defaults in the payment.

It must also be noted that the liability wholly depends upon the terms of the
contract and hence must be followed completely.

Terms of Contract

1. Condition precedent

The surety before entering into the contract of guarantee may put forward some
condition precedent to his liability wherein he would not be held liable until and
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unless such a condition is fulfilled, the surety cannot be held liable. Partial
recognition of this concept is also found in section 144 of the act according to which
if any person gives their guarantee upon a contract that the creditor must not be
allowed to act upon such a contract until another person has joined in it as co-
surety, the guarantee won’t be valid. An example of this point is the National
Provincial Bank of England v Brackenbury. Under this case, the defendant
signed a guarantee which on the face of it was intended to be a joint and several
guarantees of three other persons with him. One of them did not sign. There being
no agreement between the bank and the co-guarantors to dispense with his
signature, the defendant was held not liable.

2. Proceeding against surety without exhausting remedies against the

debtor

Where the liability is otherwise unconditional i.e. co-extensive the creditor cannot
be compelled to exhaust his remedies against the debtor first to be able to or to be
allowed to sue the surety i.e. the creditor can sue the surety for the default made
by the principal debtor without furthering any proceedings against the debtor first.
This was held in the case of Bank of Bihar Ltd v Damodar Prasad under this
case the supreme court ruled in favour of the creditor and held that it makes no
sense or value to the contract of guarantee if the creditor first has to exhaust all his
remedies against the principal debtor to be able to make surety liable for the
default.

Similarly, it must be noted that the creditor can take against the debtor alone as
well and his suit cannot be rejected on the grounds that he did not include the
guarantor as the defendant to the suit or vice versa i.e. the surety can be sued
alone irrespective to the fact that the principal debtor has been added as a
defendant to the suit.

3. Death of principal debtor

The surety is not discharged of his liability towards the creditor under a contract of
guarantee under a situation wherein the principal debtor is dead.

Surety’s right to limit his liability or make it conditional

It is open to the surety to place a limit upon his liability. He may either expressly
declare his guarantee to be limited to a fixed amount. The surety can do this by
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capping the limit to the amount to which he can be held liable or by insisting upon
collateral security to be submitted by the principal debtor to the creditor against the
debt to reduce the burden of liability.

It must also be noted that the surety will not be discharged of his liability wherein
there exists a doctrine of impossibility of performance, as had been held in the case
of Florence Mabel R.J. v State of Kerela.

Section 129. Continuing guarantee.

A guarantee which extends to a series of transaction, is called a “continuing

guarantee“.

Illustrations-

(a) A, in consideration that B will employ C in collecting the rents of B’s zamindari,
promises B to be responsible, to the amount of 5,000 rupees, for the due collection
and payment by C of those rent. This is a continuing guarantee.

b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any tea he

may from time to time supply to C. B supplies C with tea to above the value of £
100, and C pays B for it. Afterwards, B supplies C with tea to the value of £ 200. C
fails to pay. The guarantee given by A was a continuing guarantee, and he is
accordingly liable to B to the extent of £ 100.

(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B

to C and to be paid for in a month. B delivers five sacks to C. C pays for them.
Afterwards B delivers four sacks to C, which C does not pay for. The guarantee
given by A was not a continuing guarantee, and accordingly he is not liable for the
price of the four sacks.

Continuing Guarantee

It must be understood that a guarantee may extend over a series of transactions

under which the surety binds himself to the default in each and every transaction
separately and is liable to the creditor. The concept has been defined in section 129
of the Indian Contract Act. However, it may be revoked with the help of a notice,
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unlike the guarantee which is entered only in terms of a single transaction. The
latter guarantee once entered into by the surety cannot be revoked at any moment
into the contract.

On the other hand, the continuing guarantee may be revoked however, it will
discharge the surety’s liability only in regards to any future transactions and not the
past defaults if any. It must be noted that the surety is liable for the default of the
principal but the situations of and provisions of each contract of guarantee can be
different and hence the contract or agreement must explicitly govern the manner in
which the surety’s liability must be calculated and then dealt with.

Under certain conditions or situations, the surety may also be allowed to discharge
his liability wherein either the debtor is at fault or the creditor by his own fault or
conduct does something which has the effect of discharging surety from his liability
in regards of the contract of guarantee.

Section 130. Revocation of continuing guarantee.

A continuing guarantee may at any time be revoked by the surety, as to future

transactions, by notice to the creditor.

Illustrations-

(a) A, in consideration of B’s discounting, at, A’s request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the extent
of 5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards, at
the end of three months, A revokes the guarantee. This revocation discharges A
from all liability to B for any subsequent discount. But A is liable to B for the 2,000
rupees, on default of C.

(b) A guarantees to B, to the extend of 10,000 rupees, that C shall pay all the bills
that B shall draw upon him. B draws upon C, C accepts the bill. A gives notice of
revocation. C dishonours the bill at maturity, A is liable upon his guarantee.

INTRODUCTION

A contract of guarantee, also called a contract of surety (S.126 of The Indian

Contract Act) can be defined as a contract that is specifically entered into with the
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purpose of promising or discharging a liability incurred by a third person in case of

default. The Kerala High Court in the case of P.J Rajappa vs Associated
Industries, stated that “A contract of guarantee is a tripartite agreement, involving
the principal debtor, surety and the creditor”. The individual who promises the
guarantee is the ‘Surety’, the one who incurs liability in case of default is called the
‘Principal Debtor’ and lastly the person to whom the guarantee is promised to is the
‘Creditor’.

Revocation can be defined as the cancellation or annulment of a legal instrument,

for example, a will, the withdrawal of an offer, power of attorney, etc.

There are two kinds of guarantees:

1)Specific Guarantee – A guarantee that is given in respect of a specific

transaction or debt that comes to an end when the promise is duly performed or the
debt incurred is paid off.

2)Continuing Guarantee (S-129)- A type of guarantee that extends to a series of

transactions and each transaction acts as an individual transaction. In this form of
guarantee , the liability of the surety extends to a number of transactions over a
certain period of time. The surety’s interest is always safeguarded by the court
through equitable principles as a surety is always considered to be a favoured
debtor. The surety is given a choice to end the continuing guarantee by revocation.

There are 6 ways a continuing guarantee could be revoked are:

1)Discharge by notice (Section 130): Revocation can be done by the surety, by

sending the creditor a notice hence ending the promise regarding the future
transactions.

2)Revocation by death (Section 131): A continuing guarantee can be

automatically revoked by the death of the surety unless there is a contract to the
contrary present.

3)Variance of terms (Section133): When terms of the contract are changed

between the principal debtor and creditor without informing or gaining consent from
the surety, the guarantee is revoked.

4)Release or discharge of the principal debtor( Section 134): This section

can be divided into two parts:- 1) when the creditor forms a contract that releases
the principal debtor. 2) Does an act or an omission leading to the discharge of the
principal debtor can lead to revocation of guarantee.
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5)Discharge due to additional time given and promise not to sue debtor
(Section 135): 1) If additional time is given to the principal debtor in order to
perform the promise without the consent of the surety, the guarantee is revoked. 2)
If the surety promises not to sue the principal debtor the surety is discharged.

6)Discharge due to impairing surety’s eventual remedy (Section 139): If

any act or omission done by the creditor impairs the eventual remedy of the surety
against the principal debtor leads to revocation of guarantee.

CRITICAL ANALYSIS

A continuing guarantee is a guarantee that extends to a series of transactions over

a certain period of time. But, if we analyse the concept of payment of rent , in the
case of Hasan Ali vs Wali Ullah , the learned judge of the Allahabad High Court
stated that even though the due payment of rent is done in instalments, it is
considered to be a single transaction hence isn’t a continuing guarantee. In the
case of S.N. Sen vs Bank of Bengal it was contended that employment as
consideration is considered to be a single transaction and not a series of
transactions as the employee continued his job hence was not a continuing
guarantee.

Discharge by notice under section 130 of the Indian Contract Act is a form of
revocation that allows the surety to be discharged from all kinds of liability which
would have been incurred due to future transactions, but he would be still liable for
the transactions which have already been entered into. In the case of Offord vs.
Davies it was held that once the transaction has taken place, the surety’s liability
cannot be revoked.

Section 131 of the Indian Contract Act states “The death of the surety operates, in
the absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions”. In the case of revocation by
death, the surety’s heirs are only liable for the transactions that were undertaken
before the death of the surety unless there was a contract to the contrary. The Heirs
are only liable to the extent of the surety’s property that has been inherited by
them as mentioned in the case of RK Dewan v State of UP.

Variance as mentioned in Section 133 of the Indian Contract Act talks about
changes made in the terms of a contract between the principal debtor and creditor
without the consent of the Surety, which leads to revocation of the contract as seen
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in the illustration D of Section 133. In the case of Chandan Kumar vs The United
Western Bank ltd. And ors, the limit of the loan was extended without informing
the appellant hence the appellant was discharged as a surety. In the case of Lloyds
steel Industries vs Indian oil corp , It was held that consent regarding variance
should be taken either prior or subsequent to the alteration as advance authority
given by the surety in invalid as it goes against the very crux of section 133
according to the case of Central Bank of India vs Ali Mohammed.

It was decided by the courts that ‘substantiality and materiality’ is the factor that
determines the liability of the surety if discharged. It is on the discretion of the
courts to decide whether variance is material in nature or not.

Section 134 of the Indian Contract Act talks about two kinds of releases, express
and implied release, the contract between the creditor and the principal debtor
which results into the surety being discharged is an express release and the act or
omission of the creditor which leads to the discharge of the principal debtor is an
implied release.

If we analyse section 135 and 137, we can see one section contradicting one and
another. Section 135 of the Indian Contract Act talks about discharging the surety if
the creditor promises not to sue the principle debtor but section 137 of the Indian
Contract Act states that forbearance of creditor does not lead to the discharge of
the principal debtor, hence contradicting each other. Continuing guarantee is
extensively used in commercial activities as it is easier for the debtor to get goods
on credit as he does not ready money hence continuing guarantee facilitates
providing cash credit and as granting loans making it useful for traders and co-
operations etc. who want to expand their commercial activities. The English laws on
continuing guarantee mainly focus on the language used by the parties and their
intentions.

Case laws

In P.S. Chakrapani vs Indian Bank, it was established that there was continuing
guarantee and surety has rights of revocation, however inspite of issuing a notice,
revocation was not allowed as the suit was barred by time i.e., not filed within the
period of limitation that is 3 months.
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In Narinder Pal Agarwal of Mumbai, Indian Inhabitant v Saraswat Co-

operative Bank Ltd., A Multi State Co-operative Bank and Others , the
petitioner argued that the terms of contract were varied without surety’s consent,
hence he should be discharged from any liability further, while the defendants
claimed that the terms were only ‘renewed’ and it was consented by the surety
while signing the contract. The court denied the rights of revocation by establishing
the existence of consent here.

In Sita Ram Gupta v Punjab National Bank and Others, the court held that
appellant cannot revoke the guarantee as he agreed to treat this guarantee as
continuing guarantee. Thus, he is also bound by the law which states that there
should be no contrary contract for the notice of revocation to be accepted.

Section 131. Revocation of continuing guarantee by surety’ death.

The death of the surety operates, in the absence of any contract to the contrary, as
a revocation of ma continuing guarantee, so far as regards future transactions.

A continuing contract can be revoked with the death of the surety unless there is a
contract contrary to it with being effective for future transactions only. The heirs of
the surety can be made liable for the transactions already incurred before the death
but only to the extent of property inherited by the heir.

Section 131, dealing with this states that in the absence of any contrary contract,
the death of the surety would operate as revocation of continuing guarantee for
future transactions.

In, Durga Priya Chowdhury v Durga Pada Roy, the terms of the assurance
were to be binding on the surety's heirs and members in the same way as they
were on the surety. In light of this clause, the learned judges held that the surety's
guarantee was not revoked even after his death, and that his heirs were responsible
for any act committed by the debtor during his tenure.

Section 132. Liability of two persons, primarily liable, not affected by

arrangement between them that one shall be surety on other’s default.
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Where two persons contract with third person to undertake a certain liability, and
also contract with each other that one of them shall be liable only on the default of
the other, the third person not being a party to such contract the liability of each of
such two persons to the third person under the first contract is not affected by the
existence of the second contract, although such third person may have been aware
of its existence.

Illustration-

A and B make a joint and several promissory note to C. A makes it, in fact, as surety
for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer, to a suit by C against
A upon the note.

Section 133. Discharge of surety by variance in terms of contract.

Any variance made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.

Illustrations-

(a) A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards, B
and C contract, without A’ s consent, that B’ s salary shall be raised, and that he
shall become liable for one-fourth of the losses on overdrafts. B allows a customer
to over-draw, and the bank loses a sum of money.

A is discharged from his suretyship by the variance made without his consent, and
is not liable to make good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is appointed

by C, and of which the duties are defined by an Act of the Legislature. By a
subsequent Act, the nature of the office is materially altered. Afterwards, B
misconducts himself. A is discharged by the change from future liability under his
guarantee, though the misconduct of B is in respect of a duty not affected by the
later Act.

(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s
becoming surety to C for B’s duly accounting for moneys received by him as such
clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be
paid by a commission on the goods sold by him and not by a fixed salary. A is not
liable for subsequent misconduct of B.
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(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil
supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the
knowledge of A, B and C contract that C shall continue to supply B with oil for ready
money, and that the payments shall be applied to the then, existing debts between
B and C. A is not liable on his guarantee for any goods supplied after this new
arrangement.

(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C
pays the 5,000 rupees to B on the 1st January, A is discharged from his liability, as
the contract has been varied, inasmuch as C might sue B for the money before the
first of March.

Revocation by variance in terms of contract:

Section 133, states that in case of any variance in the contractual terms between
the principal debtor and the creditor, without the consent of the surety will lead to
discharge of the liabilities of the surety for the transactions occurring after such
variance.

Illustration:

X guarantees payment to Y for selling apples costing Rs 100 at the end of every
month to Z. Therefore, Y started supplying it to Z with payment for the same. Later,
Y and Z, without the consent of X decided that the apples must be supplied at the
end of every 2 month that too at Rs 400. Here, there was change in the terms of the
contract without the consent of X.

Thus, X is discharged from any liability arising after the variance.

The judgement of Bonar v Macdonald , cleared that in cases where the fresh
agreement was a substitution of the new agreement, the surety is not liable to
make good the loss.

In cases like where a person guaranteed the payment of rent but it was increased
without surety’s consent, the liability of surety was said to be discharged.

In Anirudhan v Thomco’s Bank Ltd ., for the purpose of securing the loan amount
and interest payable by the principal debtor to the borrower from time to time, a
surety executed a continuing guarantee in the amount of Rs 2,50,000. The debtor
defaulted on the loan, and the principal debtor made subsequent overdraws in the
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same loan account in excess of the limit without the permission of the surety. The
surety was only liable up to Rs 2,50,000, and he was not responsible for any
overdraws made by the bank without the surety's permission.

The difference which arose after the contrary judgements given in Blest v Brown,
and Holme v Brunskill, was cleared out with the rule that if the substantial
altercations were for the benefit of the surety, he won’t be discharged from liability.

Advance Authorization of alteration

In Central Bank of India v Ali Mohd ., the court held that the consent of the
surety must be taken at the time of variance of the terms and consent given in
advance would be contrary to the provisions of Section 134, 135, 139, 141.

Effect of Decree against surety

In Charan Singh v. Security Finance (P) Ltd., it was held that if the liability has
been converted into a decree, the settlement with the principal debtor followed by it
will not discharge the surety from the liability.

Waiver of rights

Whether the surety can give up the benefits which has been given to him through
the provisions has always been debatable. In Sita Ram Gupta v Punjab National
Bank and Others, the Supreme Court held that the plaintiff does not have a right
to give up the benefits given to him and revoke the guarantee any time when he
was bound by the terms of guarantee.

Section 134. Discharge of surety by release or discharge of principal

debtor.

The surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act or omission of the
creditor, the legal consequence of which is the discharge of the principal debtor.

Illustrations-
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(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to

B, and afterwards B becomes embarrassed and contracts with his creditors
(including C) to assign to them his property in consideration of their releasing him
from their demands. Here B is released from his debt by the contracts with C, and A
is discharged from his suretyship.

(b) A contracts with B to grow a crop of indigo on A’s land and to deliver to B at a
fixed rate, and C guarantees A’s performance of this contract. B diverts a stream of
water which is necessary for the irrigation of A’s land , and thereby prevents him
from raising the indigo. C is no longer liable on his guarantee.

(c) A contracts with B for a fixed price to build a house for B within a stipulated
time. B supplying the necessary timber. C guarantees A’s performance of the
contracts. B omits to supply the timber. C is discharged from his’ suretyship.

Release or discharge of the principal debtor

Section 134 of the Indian Contract Act provides for the discharge of the liability of
the surety, in case the principal debtor is released from his liability to repay the
amount.

Interpretation of the relevant section

Therefore, Section 134 deals with the discharge of the secondary liability of the
surety in case the primary liability of the principal debtor is discharged. However,
the converse is not true. This means that if there is a discharge of the liability of the
surety, it will not automatically discharge the liability of the principal debtor. The
section provides two situations which would result in the release of the principal
debtor. These are elucidated as follows:

1. Existence of a contract or laws

In case, the liability of the principal debtor gets discharged, the surety who has the
secondary liability is also discharged from his liability.

However, a distinction must be made by the court in relation to the time when the
surety is discharged from his liability and when it is not. For instance, in the case
where the amount of the principal debtor gets reduced to the application of the
debt relief act, the surety will be liable only for the reduced amount. However, in
case the principal debtor is discharged from the liability in case of insolvency, the
surety is not discharged.
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2. Act or omission

The second case is where there is an act or omission on part of the creditor that
discharged the liability of the principal debtor. In this case, the surety will be
discharged. This can happen when the creditor fails to perform his part of the
promise which discharges the liability of the debtor.

Section 135. Discharge of surety when creditor compounds with, gives

time to, or agrees not to sue, principal debtor.

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

Section 136. Surety not discharged when agreement made with third
person to give time to principal debtor.

Where a contract to give time to the principal debtor is made by the creditor with a
third person, and not with the principal debtor, the surety is not discharged.

Illustration-

C, the holder of an overdue bill of exchange drawn by A as surety for B, and

accepted by B, contracts with M to give to B. A is not discharged.

Compounding by Creditor with Principal Debtor

According to Section 135 of the Indian Contract Act, 1872, a surety can be
discharged of his liability if there is any composition or a new agreement between
the creditor and the principal debtor. Through analysing Section 135 of the Indian
Contract Act, it can be concluded that a surety can be discharged from his liability
in case of three prevailing circumstances. These are:

Composition

Composition refers to variation in the original contract and adding something up

which was not present in the original contract. In case there is a composition in the
contract between the debtor and the creditor without surety’s consent, it would
discharge his liability.
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Promise to give time

The surety is entitled to ask the principal debtor to pay off the debt when it is the
time for repayment. However, if there is a contract between the principal debtor
and the creditor whereby the creditor has agreed to give some more time to pay off
the debt without keeping the surety into consideration, the surety will be
discharged.

Section 137. Creditor’s forbearance to sue does not discharge surety.

Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him, dies not, in the absence of any provision in
the guarantee to the contrary, discharge the surety.

Illustration-

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B
for a year after the debt has become payable. A is not discharged from his
suretyship.

Section 136 of the Indian Contract Act, 1872 provides that, if the creditor enters into
an agreement to give time with a third party, it does not discharge the surety from
his liability.

Section 138. Release of one co-surety does not discharge other.

Where there are co-sureties, a release by the creditor of one of them does not
discharge the others neither does set free the surety so released from his
responsibility to the other sureties.

A Contract of Guarantee is a contract to perform the promise or discharge the

liability of a third person in case of his default. The person who gives the guarantee
is called a surety as defined under Section 126 of the Indian Contracts Act, 1872. It
is possible that a single debt may be guaranteed by more than one person. In such
instances, where the debt has been guaranteed by more than one person, they are
called co-sureties. Thus, in relation to a guarantor, co-surety means any other
person named as ‘guarantor’ or who otherwise guarantees payment of the money.
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Legal Provisions in the Act

The Act contains provisions which lay down the rights and liabilities of the co-
sureties. The co-sureties are jointly and severally liable under the Indian Contracts
Act, 1872. While looking at the provisions regarding co-sureties, it is apparent that
the rights of one co-surety will amount to the liability of the other sureties present
in the contract of guarantee and vice-versa. The various provisions relating to co-
surety rights and liabilities include Sections 138, 146 and 147 of the Act.

Effect of Discharging a Surety

Section 138 of the Act deals with the effect of releasing a surety from his guarantee
and its impact on the remaining co-sureties. It provides that in instances where
there are co-sureties, a release by the creditor of one of them does not discharge
the others.

For instance, if there are three co-sureties A, B and C for a debt and the creditor
releases A from his debt, it will not have the effect of releasing B and C from
fulfilling their liability to the creditor. They will be liable for the whole debt.
Moreover, the section provides that the release of a co-surety by the creditor will
not absolve him from his responsibility to the other sureties.

Thus, in the above-mentioned instance, even if A is discharged by the creditor, he is

still liable for his part to the debt and is obligated to fulfil his responsibility to the
other sureties. This provision has an identical effect to Section 44 of the Act which
deals with the release of a joint promisor.

Section 138 of the Act is significant in that this provision is divergent from the
English law in this regard. In contrast to the Indian position, the English law provides
that when the creditor releases one of the co-sureties who have contracted jointly
and severally, the others are also discharged, the joint suretyship of the others
being part of the consideration of each as held by the King’s Bench in the case of
Jenkins v. Jenkins. The same position was expounded in other landmark
judgements of the English Courts in cases such as North v. Wakefield and
Wilkinson v. Lindo.
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The Indian Contracts Act, 1872 was drafted with the intention to modify this position
in England. From a bare reading of the provision, it is clear that the liability of co-
surety in India is joint and several. It is to be noted that the fact that the surety
bond is enforceable against each surety, severally, and that it is open to the
creditor to release one or more of the joint sureties does not alter the true character
of an adjudication of the court when the proceedings are commenced to enforce the
covenants of the bond against all the sureties. This point clearly enunciated in the
case of Sri Chand v. Jagdish Pershad Kishan Chand[AIR 1966 SC 1427] by
the SC.

The court held that the released co-surety will remain liable to the others for
contribution in the event of default. The Supreme Court held that the mere fact that
the obligation arising under the covenant may be enforced severally against all the
covenantors, does not make the liability of each covenantor distinct. It is true, the
court pointed out, that in the enforcement of the claim of the decree-holder the
properties, belonging to the sureties individually, may be sold separately; but that is
because the properties are separately owned and not because the liability arises
under distinct transactions.

Section 139. Discharge of surety by creditor’s act or omission impairing

surety’s eventual remedy.

If the creditor does any act which is inconsistent with the right of the surety, or
omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.

Illustrations-

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as the
work reaches certain stages. A becomes surety to C for B’s due performance of the
contract. C, without the knowledge of A, prepays to B the last two instalments. A is
discharged by the prepayment.

(b) C lends money to B on the security of a joint and several promissory note made
in C’s favour by B, and by A as surety for B, together with a bill. of sale of B’s
furniture, which gives power to C to sell the furniture, and apply the proceeds in
discharge of the note. Subsequently, C sells the furniture, but, owning to has
misconduct and wilful negligence, only a small price is realized. A is discharged
from liability on the note.
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(c) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity B

promises to his part that he will at least once a month, see that M make up the
cash. B omits to see this done as promised, and M embezzles. A is not liable to be
on his guarantee.

Examples

Ram contracts to build a ship for ghansyam for a given sum, to be paid by
instalments as the work reaches certain stages, shyam becomes surety to
ghansyam for Ram's due performance of the contract. Ghansyam, without the
knowledge of Shyam, prepays to Ram the last two installments. Shyam is
discharged by this pre payment.

Sohan lends money to mohan on the security of a joint and several promissory note
made in Sohan's favour by Mohan, and by Rohan as surety for Mohan, together with
a bill of sale of Mohan's furniture, which gives power to Sohan to sell the furniture,
and apply the proceeds in discharge of the note. Subsequently, Sohan sells the
furniture, but owing to his misconduct and willful negligence, only a small price is
realized. Rohan is discharged from liability on the note.

Ramesh puts ganesh as apprentice to Suresh , and gives a guarantee to Suresh for
ganesh's fidelity. Suresh promises on his part that he will at least once a month, see
Ganesh make up the cash. Suresh omits to see this done as promised, and Ganesh
embezzles. Ramesh is not liable to suresh on his guarantee.

In Radha Kant Pal vs United Bank of India in bench of Justice P. B. Mukherjee at

Calcutta High court, court said ; The surety's liability for the faithful discharge by
another, of his duties depends on the exact terms of that guarantee. The surety is
not discharged from liabilities for which the default of a person whose fidelity has
been guaranteed, on the ground that the default would not have happened if the
creditors had used all the powers of superintending the performance of the debtor's
duty, which he could have exercised because the employer of that servant does not
contract with the surety, that he will use utmost diligence in checking the servant's
work.
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A contract of guaranteed unlike a contracts of a insurance is not one of uberrimae

fidei but a contract strictissima juris. So, court ordered that plaintiff can recover
from defendant No but not from the bank.

As per the apex court of India 's Judgement the surety shall take place of debtor if
the debtor unable to discharges his obligation of repayment of loan and due
interest. It will be up to the creditor to collect the due amount from collateral as
security or the surety and the one may proceed the other. If the creditors has
disposed of the collateral security and not recovered the due amount, the guarantor
has to pay the due amount.

Facts - The case concerns about a contract in the nature of a fidelity bond or a
guarantee. A deceased person executed a security bond in favour of a bank, B, in
consideration of the bank employing N. Later N (a defendant) was found to be guilty
of mismanaging a certain amount of money. Hence, the bank wanted to enforce the
bond and get the money, A's heir ( R) , filed a suit against the bank claiming the
security back as A had been discharged of his liabilities as the bank had continued
to employ N even after findings out the mismanagements without any notices to
him. R also denied any knowledge of the deflactive on breach of duty committed by
N.

A,B and N are defendants in this case and R is Plaintiff in this case.

Section 140. Rights of surety on payment or performance.

Where a guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.

Right of Subrogation

As per section 140, where a guaranteed debt has become due or default of the
principal debtor to perform a duty has taken place, the surety, upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the princpal debtor. This means that the surety steps into the
shoes of the creditor. Whatever rights the creditor had, are now available to the
surety after paying the debt.
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In the case of Lampleigh Iron Ore Co Ltd, Re 1927 , the court has laid down that
the surety will be entitled, to every remedy which the creditor has against the
principal debtor; to enforce every security and all means of payment; to stand in
place of the creditor to have the securities transfered in his name, though there was
no stipulation for that; and to avail himself of all those securities against the debtor.
This right of surety stands not merely upon contract but also upon natural justice.

In the case of Kadamba Sugar Industries Pvt Ltd vs Devru Ganapathi AIR
1993, Kar HC held that surety is entitled to the benefits of the securities even if he
is not aware of theire existence.

In the case of Mamata Ghose vs United Industrial Bank AIR 1987 , Cal HC held
that under the right of subrogation, the surety may get certain rights even before
payment. In this case, the principal debtor was disposing off his personal properties
one after another lest the surety, after paying the debt, seize them. The surety
sought for temporary injunction, which was granted.

Section 141. Surety’s right to benefit of creditor’s securities.

A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship entered into,
whether the surety knows of the existence of such security or not; and if the
creditor loses, or without the consent of the existence of such security or not; and if
the creditor loses, or without the consent of the surety, parts with such security, the
surety, the surety is discharged to the extent of the value of the security.

Illustrations-

(a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also
further security for the 2,000 rupees by a mortgage of B’s furniture. C, cancels the
mortgaged. B becomes insolvent and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture.

(b) C, a creditor, whose advance to B’s is secured by a decree, receives also a

guarantee for that advance from A. C afterwards takes B’s goods in execution under
the decree, and then, without the knowledge of A, withdraws the execution. A is
discharged.
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(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C
gives up the further security. A is not discharged.

This section recognizes and incorporates the general rule of equity as expounded in
the case of Craythorne vs Swinburne 1807 that the surety is entitled to every
remedy which the creditor has agains the principal debtor including enforcement of
every security.

The expression “security” in section 141 means all rights which the creditor had
against property at the date of the contract. This was held by the SC in the case of
State of MP vs Kaluram AIR 1967 . In this case, the state had sold a lot of felled
trees for a fixed price in four equal installments, the payment of which was
guaranteed by the defendent. The contract further provided that if a default was
made in the payment of an installment, the State would get the right to prevent
further removal of timber and the sell the timber for the the realization of the price.
The buyer defaulted but the State still did not stop him from removing further
timber. The surety was then sued for the loss but he was not held liable.

It is important to note that the right to securities arises only after the creditor is
paid in full. If the surety has guaranteed only part of the debt, he cannot claim a
propertional part of the securities after paying part of the debt. This was held in the
case of Goverdhan Das vs Bank of Bengal 1891.

Right of set off

If the creditor sues the surety, the surety may have the benefit of the set off, if any,
that the principal debtor had against the creditor. He is entitled to use the defences
that the principal debtor has against the creditor. For example, if the creditor owes
the principal debtor something, for which the principal debtor could have counter
claimed, then the surety can also put up that counter claim.

Section 142. Guarantee obtained by misrepresentation, invalid.

Any guarantee which has been obtained by means of misrepresentation made by

the creditor, or with his knowledge and assent, concerning a material part of the
transaction, is invalid.
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Section 143. Guarantee obtained by concealment, invalid.

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

Illustrations-

(a) A engages B as clerk to collect money for him. B fails to account for some of his
receipts and A in consequence call upon him to furnish security for his duly
accounting. C gives his guarantee for B’s duly accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

(b) A guarantees to C payment for iron to be supplied by him to B to the amount of

2,000 tons. B and C have privately agreed that B should pay five rupees per tone
beyond the market price, such excess to be applied in liquidation of an old debt.
This agreement is concealed from A. A is not liable as a surety.

Section 144. Guarantee on contract that creditor shall not act on it until
co-surety joins.

Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has jointed in it as co-surety, the guarantee is not valid
that other person does not join.

Section 145. Implied promise to indemnify surety.

In every contract of guarantee there is an implied promise by the principal debtor to

indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but no sums which he has
paid wrongfully.

Illustrations-

(a) B is indebted to C, and A is surety for the debt. C demands payment from A, and
on his refusal sues him for the amount. A defends the suit, having reasonable
grounds for doing so, but he is compelled to pay the amount of the debt with costs.
He can recover from B the amount paid by him for costs, as well as the principal
debt.
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(b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C, the holder of the bill, demands
payment of it from A, and on A’s refusal to pay, sues him upon the bill. A, not
having reasonable grounds for so doing, defends the suit, and has to pay the
amount of the bill and costs. He can recover from B the amount of the bill, but not
the sum paid for costs, as there was no real ground for defending the action.

(c) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied
by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from
A payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot
recover from B more than the price of the rice actually supplied.

Section 146. Co-sureties liable to contribute equally.

Where two or more persons are co-sureties for the same debt or duty, either jointly
or severally, and whether under the same or different contract, and whether with or
without the knowledge of each other the co-sureties, in the absence of any contract
to the contrary, are liable, as between themselves, to pay each an equal share of
the whole debt, or of that part of it which remains unpaid by the principal debtor.

Illustrations-

(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay 1,000
rupees each.

(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a
contract between A, B and C that A is to be responsible to the extent of one-quarter,
B to the extent of one-quarter, and C to the extent of one-half. E makes default in
payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees and
C 500 rupees.

Section 147. Liability of co-sureties bound in different sums.

Co-sureties who are bound in different sums are liable to pay equally as far as the
limits of their respective obligations permit.

Illustrations-
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(a) A, B and C, as sureties for D, enter into three several bonds each in a different
penalties namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in
that of 40,000 rupees, conditioned for D’s duly accounting to E.D makes default to
the extent of 30,000 rupees. A, B and C are each liable to pay 10,000 rupees.

(b) A, B and C, as sureties for D, enter into three several bonds each in different
penalty namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in
that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to
the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and C 15,000
rupees each.

(c) A, B, A and C, as sureties for D, enter into three several bonds, each in a
different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20, 000
rupees, C in that of 40,000 rupees, conditioned of D’s duly accounting to E. D makes
default to the exeunt 70,000 rupees. A,B and C have to pay each the full penalty of
his bond.

CHAPTER IX (148-181) – BAILMENT – INDIAN CONTRACT ACT

Section 148. “Bailment”, “bailor” and “bailee” defined.

A “bailment” is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the direction of the person delivering them.

The person delivering the goods is called the “bailor“. The person to whom they are
delivered is called the “bailee“.

Explanation-

If a person already in possession of the goods of other contracts hold them as a

bailee, he thereby becomes the bailee, and the owner becomes the bailor of such
goods, although they may not have been delivered by way of bailment.
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There are many instances of bailment in our daily lives – when we give our clothes
for laundry, when we use valet parking for our cars. We deliver our goods to another
person or leave them in the power of another person for a purpose and expect to
receive our goods back when the purpose has been achieved.

For example, a man visits a repair shop for getting his television set fixed. The
television set is left at the shop where the repair man examines it and fixes the
problem. Once fixed, the television set has to be returned to its owner. There is a
contract of bailment between the man and the repair-man.

Bailment is a process where the owner of certain goods places them in the
temporary possession of another person. In simple terms, bailment means that a
person delivers his goods to another person or put them in another’s possession for
a specific purpose and there is an express or implied understanding between the
two people that once the purpose has been achieved, the goods will be returned to
the owner – the person who bailed them.

Chapter IX (Section 148 – 181) of the Indian Contract Act, 1872 deals with the
general rules relating to bailment. The Chapter is not exhaustive on the topic of
bailment – there are various other Acts which deal with other types of bailment like
the Carriers Act, 1865, the Railways Act, 1890, the Carriage of Goods by Sea Act,
1925.

DEFINITION OF BAILMENT

The word ‘bailment’ is derived from the French word ‘bailler’ which means ‘to
deliver’. Etymologically, it means any kind of ‘handing over’. In legal sense, it
involves change of possession of goods from one person to another for some
specific purpose.

Section 148 of Indian Contract Act 1872 defines ‘Bailment’ as 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 direction of the person delivering them.
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The person who owns and delivers the goods is called the ‘bailor’. The person to
whom the goods are delivered is called the ‘bailee’.

Example: A man drops off his clothes for dry cleaning. He is the bailor and the
purpose of bailment is to have the particular set of clothes cleaned. The dry cleaner
is the bailee – he is the temporary custodian of the clothes and is responsible for
keeping them safe and to return them to the bailor once they have been cleaned.

Explanation to Section 148 states that if a person already in possession of the goods
of another person contracts to holds the goods as a bailee, he becomes the bailee
even though the goods may not have been delivered to him by way of bailment in
the first place. For example, a seller of goods becomes a bailee if the goods
continue to be in his possession after sale is complete. Here the original possession
of goods was with the seller as the owner of the said goods and after the sale, his
possession is converted into a contract of bailment.

Example: A has a motorcycle that he sells to B who leaves the motorcycle in the
possession of A while he is out of town. Here, A becomes the bailee even though he
was the owner originally.

Justice Blackstone defines Bailment as ‘a delivery of goods in trust, upon contract,

either expressed or implied, that the trust shall be faithfully executed on the part of
the bailee’.

Bailment can also be described as ‘the delivery of goods to another person for a
particular use’.

NATURE OF BAILMENT

Bailment is a type of special contract and thus, all basic requirements of contract
like consent of parties, competency, etc are applicable to any contract of Bailment.
A bailment is usually created by an agreement between the bailor and bailee.
Section 148 specifically talks of bailment via a contract. But a valid bailment can
also arise in absence of express contracts or from invalid or voidable contracts.
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In bailment, neither the property nor the ownership of the goods involved is
transferred at any point. Only the temporary possession of the bailed goods is
transferred and the ownership of such goods remains with the bailor. The bailor can
demand to have the property returned to him at any time.

WHAT MAY BE BAILED

Only ‘goods’ can be bailed and thus, only movable goods can be the subject matter
of bailment. Current money or legal tender cannot be bailed. Deposition of money in
a bank is not bailment as money is not ‘goods’ and the same money is not returned
to the client. But the coins and notes that are no longer legal tender and are more
or less just objects of curiosity, then they can be bailed.

ESSENTIAL FEATURES

Section 148 of the Indian Contract Act, 1872 makes it very clear that there are three
essential features of Bailment, namely:

1) Delivery of Possession

2) Delivery upon Contract

3) Delivery for a purpose and Return of Goods

1. Delivery of Possession: The delivery of possession of goods is essential for

bailment. There must be transfer of possession of the bailed goods from
bailor to bailee and the goods must be handed over to the bailee for
whatever is the purpose of bailment. Here, possession means control over
goods and an intention to exclude others from exercising similar control over
the same goods. Thus, the bailee must have actual physical control of the
property with the intent to possess it for a valid bailment.

As per Section 149, the delivery can also be made to the bailee by doing anything
which has the effect of putting the bailed goods in the possession of the intended
bailee or any person authorized by him for this purpose.
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Thus, the delivery of possession can be actual or constructive. The delivery may
either put the bailee in the actual physical possession of the goods or put the bailee
in a position of power over such goods that may be possessed later. The essential of
a bailment is the delivery of goods for a temporary purpose.

Mere custody of goods is not the same as delivery of possession. A guest who uses
the goods of the host during a party is not a bailee. Similarly, it was held in Reaves
vs. Capper [1838 5 Bing NC 136] that a servant in custody of certain goods by
the nature of his job is not a bailee. Similarly, a servant holding his master’s
umbrella is not a bailee but is a custodian.

Similarly, hiring and storing goods in a bank locker by itself is not bailment thought
there is delivery of goods to the bank premises. The goods are in no way entrusted
to the bank. A bank cannot be presumed to know what goods are stored in any
given locker at all the times. If a bank is given actual and exclusive possession of
the property inside a locker by the person who hired the locker, only then can
bailment under Section 148 can be presumed.

In Atul Mehra vs. Bank of Maharashtra [AIR 2003 P&H 11], it was held that
mere hiring of a bank’s locker and storing things in it would not constitute a
bailment. But the position changes completely if the locker in the safe deposit vault
of the bank can be operated even without the key of the customer.

Example: A hired a locker in a bank and kept some of his valuables in it. He was
given one key to open the locker. But the bank manager of the particular branch
had fraudulently filed the levers of the locks of the lockers. Thus, the lockers could
be opened even without the key of the customers. A’s valuables went missing. A’s
control over the valuables in that locker had gone because the locker could be
operated even without A’s key. The bank was liable for the loss of A’s belongings
from the locker as it became a bailee. This example is similar to the case of
National Bank of Lahore vs. Sohan Lal [AIR 1962 Punj. 534]

Thus, it is clear that the nature of possession is very important to determine

whether a delivery is for bailment or not. If the owner continues to have control over
the goods, there can be no bailment.
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To create a bailment, the bailee must intend to possess and in some way physically
possess or control the bailed goods or property. In a situation where a person keeps
the goods in possession of another person but in fact, continues to have control
over such goods, there is no delivery for the purpose of bailment.

The delivery of possession does not mean that the bailee now represents the bailor
with respected to the bailed goods. The bailee only has certain power over the
property of the bailor with his permission. The bailee has no power to make
contracts on behalf of the bailor or make the bailor liable for his own acts with the
goods bailed.

Example: If a person delivers his damaged car to a garage for repair under his
insurance policy, the insurance company becomes a bailee and the garage a sub-
bailee. If the car is stolen from the garage or destroyed by fire in the garage, both –
the insurance company and the garage will be liable to the owner of the car, the
bailor.

Delivery of possession, as required for bailment, can be made in two ways

– Actual , Symbolic Delivery or Constructive.

a) Actual Delivery: Here, the bailor hands over the physical possession of the
goods to the bailee.

Example: A’s watch is broken. When he leaves his watch at the showroom for
repair, he has given actual delivery of possession of goods to the showroom.

b) Symbolic Delivery: Where no physical transfer takes place but action by a

person resulting in the transfer of possession to another person by any symbol or
sign. Here the goods itself are not delivered, but the means of obtaining possession
of goods is delivered. For example, delivering the keys of the warehouse where the
goods are stored, or the keys of a purchased car to its buyer.

c) Constructive Delivery: Constructive delivery is an action that the law treats as

the equivalent of actual delivery. It can be difficult to deliver intangible

In constructive delivery, the physical possession of the goods may not be handed
over. The possession of the goods may remain with the bailor with the consent or
authorization of the bailee. In constructive delivery, an action on part of the bailor
merely puts the bailee in position of power with respect to the bailed goods. The
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bailor gives the bailee the means of access to taking custody of it, without its actual
delivery.

Example: A has rare coins in a locked safe-deposit box. Delivery of a safe deposit
box is not possible. When he hands over the keys to the box to B, it is taken as
constructive delivery for purpose of bailment.

Section 149 specifically deals with constructive delivery of goods. It states

that anything done which has the effect of putting the goods in the possession of
the intended bailee or any other person authorized to hold them on his behalf is to
be treated as constructive delivery of the goods.

Constructive delivery is legal fiction – thus, a legal delivery is presumed even where
the delivery of the actual goods has not taken place. Even the delivery of a railway
receipt is taken as the equivalent of delivery of the goods.

In Bank of Chittor vs. Narsimbulu [AIR 1966 AP 163], a person pledged

cinema projector with the bank but the bank allowed him to keep the projector so
as to keep the cinema hall functional. It was held that there was constructive
delivery because action on part of the bailor had changed the legal character of the
possession of the projector. Even though the actual and physical possession was
with the person, the legal possession was with the bank, the bailee.

2. Delivery upon Contract: It is necessary that the goods are delivered to the
bailee and returned to the bailor when the purpose is accomplished upon a
contract. This means there should a contract between the two parties for
such transaction of delivery and subsequent return. If there is no contract,
there is no bailment. The contract giving rise to bailment can be express or
implied.

Property deposited in a court under orders is not property delivered under a

contract. Such delivery or transfer does not constitute bailment.
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Exception to the delivery upon contract: A finder of goods is treated as a bailee

even if there is no contract of Bailment or delivery of goods under a contract. A
finder of the goods is a person who finds the goods belonging to some other person
and keeps them under his protection till the actual owner of the goods is found. An
involuntary contract of bailment arises and the finder automatically becomes bailee
even in absence of bailment by the bailor – the owner of the lost goods. Since the
person is in the position of the bailee, he has all the rights and duties of a bailee.

Under English Law: There can be bailment without a contract. If a person deposits
or delivers the goods under stressful circumstance like fire flood, riots or if the
person who is depositing the goods is incapable of appreciating the value of the
action, it is still regarded as bailment despite the absence of a contract. Delivery of
goods to another under a mistake of identity of the person is also treated as
bailment without a contract as long as the bailor took reasonable care to ascertain
the identity.

Present Position in India: The Law Commission of India in its 13th report
suggested that bailment without contract should also be included in the Indian
Contract Act, 1872 but no concrete steps have been taken as yet. Presently, the
Indian Courts have taken the position that bailment can exist without a contract. In
some of these cases, even the government has been held liable as a bailor despite
the absence of a contract.

The case of Lasalgoan Merchants Bank vs. Prabhudas Hathibhai is one the
first where the Courts started imposing the obligations of a bailee even without a
contract. In State of Gujarat vs. Memom Mahomed, the Supreme Court of India
accepted this view and stated that “…Bailment is dealt with by the Contract Act
only in cases where it arises from a contract, but it is not correct to say that there
cannot be bailment without an enforceable contract.”

3. Delivery for a purpose and Return of Goods: There has to be a purpose

for the bailment of goods and it is mandatory that once such purpose is
accomplishes, the goods have to be returned to the bailor or be disposed off
per his instructions. Bailment cannot arise if the goods are not to be specially
accounted for after completion of such task or purpose. This is a feature of
bailment that distinguishes it from other relations like agency, etc.
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The third essential of bailment is twofold –

a) The delivery of goods must be for some specific task or performance. Delivery of
goods in bailment is not permanent. There has to be a purpose for the bailment of
goods and it is mandatory that once such purpose is accomplishes, the goods have
to be returned to the bailor or be disposed off per his instructions. A tailor is given a
cloth for stitching a shirt, a watch repair shop is given a watch to mend it.

b) That the goods must be returned to the bailor or be taken care of as per the
instructions of the bailor. If a person is not bound to return the goods to another,
then the relationship between them is not of bailment. If there is an agreement to
return the equivalent and not the same goods, it is not bailment. An agent who
collects money on behalf of his principal is not a bailee because he is not liable to
return the same money and coins.

Example: A tailor who receives a cloth for stitching is the bailee in this case. The
tailor is supposed to return the finished garment to the customer, the bailor, once
the garment has been stitched.

c) Return of goods in specie is also essential. The same goods that were bailed must
be returned to the bailor in the same condition after the accomplishment of purpose
as they were handed over to the bailee in the beginning. Any accruals to the goods
must also be handed over. If an animal gives birth during the period of bailment,
the bailee must return the animal with the offspring at the conclusion of the
bailment.

The bailor can give other directions as to the disposal or return of the bailed goods.
In case of such agreement or instructions, the bailee must immediately dispose the
goods after completion of purpose as per the directions.

If the goods are not returned or dealt as per the directions of the bailor there is no
bailment. For example, depositing money into bank by a customer does not give
rise to a contract of bailment because the bank is not bound to return the same
notes and coins to the customer. This same point was also made in the case of
Ichcha Dhanji vs.Natha [1888 13 Bom 338]

In Secy of State vs. Sheo Singh Rai [1880 ILR 2 All 756], a man delivered nine
government promissory notes to the Treasury Officer at Meerut for cancellation and
consolidation into a single note of Rupees 48,000 only. The notes were
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misappropriated by the servants of the Treasury Officer. The man sued the State to
hold it responsible as a bailee. But the action failed as there can be no bailment
without delivery of goods and a promise to the return the same. The government
was in no way bound to return the same notes or dispose the surrendered notes in
accordance with the instructions of the man.

Section 149. Delivery to bailee how made.

The delivery to be bailee may be made by doing anything which has the effect of
putting the goods in the possession of the intended bailee or of any person
authorised to hold them on his behalf.

DELIVERY: THE ESSENCE OF BAILMENT

The very essence of a contract of bailment lies upon the delivery of the possession
over the goods to the bailee and is necessary to constitute bailment.

Atul Mehra v. Bank of Maharashtra[AIR 2003 P&H 11 ii]

This very peculiar case discusses the principle of delivery of possession for
bailment.

It is known under this very principle, the hiring of a bank’s locker and storing things
in it would not constitute a bailment. Things kept there are in a way put in a hired
portion of the premises and not entrusted to the bank. The court also found that
there was no proof of the fact that at the time when the bank locker was robbed the
customer had some items of jewellery in the locker. The court further said that it
could not be inferred without proof that the strong room and lockers were not built
according to specifications. The customer was not allowed to claim any damages.

The court said that in order to constitute bailment within the meaning of section
148 it is necessary to show that actual and exclusive possession of the property was
given by the hirer of the locker to the bank. It is only then that the question of
reasonable care and damages would arise. As it was, it was impossible to know the
quantity, quality or the value of the jewellery that was there in the locker. It is also
not a relationship of landlord and tenant. The locker-holder has no direct access to
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his locker, nor can he operate it of his own. He can do so only with the assistance of
a bank.

TYPES OF DELIVERY OF POSSESSION: ACTUAL AND CONSTRUCTIVE

POSSESSION

In order the understand the delivery of possession under bailment in detail we must
understand section 149 of the contract act.

As per section 149, the delivery to be made to the bailee may be made by doing
anything which has the effect of putting the goods in the possession of the intended
bailee or of any person authorized to hold them on his behalf.

It must be noted that a person may exercise actual or constructive possession over
a property i.e. he may not have direct control over the property but holds the
necessary title over it to prevent the claim of another.

ACTUAL POSSESSION

In the case of the first type of transfer of possession, it is the physical possession of
the goods that the bailor passes on to the bailee and hence it is called to be an
actual possession. It is the most common form of transfer of property and is as
easy as handing over a pen to your friend for use.

CONSTRUCTIVE POSSESSION

The second type of transfer of possession takes place when there is no change of
physical possession, with good remaining where they are, but something is done
which has the effect of putting them in possession.

EXAMPLE
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A classic example of constructive transfer of possession could be the title deeds of

the mortgaged property surrendered to the bank for the purpose of obtaining a
loan. The owner remaining the borrower and the property remaining where it exists,
however, the mere act of surrendering the title deeds allows the bank to enjoy the
possession over it and prevents the borrower from selling it until and unless the
loan has been returned. Another example of this might be the delivery of railway
receipt as a proof of delivery of goods in the case of Morvi Mercantile Bank Ltd v
Union of India[AIR 1965 SC 1954].

Bank of Chittoor v Narasimbulu [AIR 1966 AP 163].

We might consider another aspect of this principle as well in this case. Under this
case, a person pledged the projector machinery of his cinema under an agreement
which allowed him to retain the machinery for the use of the cinema; the Andhra
Pradesh High Court observed that there was a constructive delivery to the bank or
delivery by attornment to the bank. As a result, there was a change in the legal
character of the possession of the goods in question i.e. the projector, even though
such delivery was not actual and physical custody over it did not change. And
therefore, even though the bailor continued to remain in possession of the bailor it
was actually in fact under the possession of the bailee.

Faizal v Salamat Rai[(1928) 120 IC 421].

It is another case which must be considered while looking into constructive delivery.
Under this case, the defendant was holding the plaintiff’s mare under the execution
of a decree. The plaintiff satisfied the decree and the court-ordered redelivery of the
mare to the plaintiff. The defendant, however, refused to do so unless his
maintenance charges were also paid. The mare was stolen from his custody.

The court held him liable, it said that after the delivery order had been passed, the
relation of bailor and bailee was established by virtue of the explanation to section
148.

DELIVERY SHOULD BE ONLY UPON CONTRACT

Delivery of the goods is necessary to be made for some purpose and under the
agreement than when the purpose is accomplished the goods shall be returned to
the bailor. When a person’s goods go into the possession of another without any
contract, there is no bailment within the meaning of its definition in section 148.
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Ram Gulam v Govt. of U.P.[ AIR 1950All 206]

A very peculiar situation regarding the same principle arose in this case of wherein
the plaintiff’s ornaments had been stolen but were recovered by the police,
however, were lost again as they were stolen while in police custody. The plaintiff as
a consequence filed a case against the state for the loss suffered by him. The court
dismissed the petition claiming that the obligation of a bailee arises from a contract
of bailment only and hence cannot arise independently of a contract. As the
possession over ornaments had not passed over to the government under any
contract whatsoever, hence the government never occupied the position of bailee
and is not liable as such to indemnify the plaintiffs.

Non-contractual bailments

Under English law, the obligations of a contract may arise without a contract. An
example of this may be situations wherein goods are lent or hired or deposited for
sale custody, or as security for a debt, the delivery will be the result of a contract,
however, this ingredient, though usual, in not essential.

In the case of Lasalgaon Merchants Coop Bank Ltd v Prabhudas

Hathibhai[AIR 1966 Bom 134] wherein Bombay High Court took the lead in
imposing the obligations of bailee without a contract.

Contract may be expressed or implied

The contract may be expressed or implied under a contract of bailment as well as

the obligations arising from such a contract.

DELIVERY SHOULD BE UPON SOME PURPOSE

It is time and again made clear the contract of bailment arises for fulfilment of some
purpose and therefore, the delivery of the goods shall also be in regards for the
completion of that purpose. Consequently, if the person to whom the goods are
delivered is not bound to restore them to the person delivering them or to deal with
them according to his directions, their relationship will not be that of bailor and
bailee.
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SYMBOLIC DELIVERY:

Where the goods are bulky and heavy and it is not possible to physically hand them
over to the buyer, delivery thereof may be made by indicating or giving a symbol.
Here the goods itself are not delivered, but the means of obtaining possession of
goods is delivered.

For example, delivering the keys of the warehouse where the goods are stored, or
the keys of a purchased car to its buyer, bill of lading which will entitle the holder to
receive the goods on arrival of the ship.

The contract of bailment, therefore, revolves around completely around the delivery
of the possession of the goods and forms the very crust of the contract of bailment
and is of utmost importance.

Section 150. Bailor’s duty to disclose faults in goods bailed.

The bailor is bound to disclose to the bailee faults in the goods bailed, of which the
bailor is aware, and which materially interfere with the use of them, or expose the
bailee to extraordinary risk; and if he does not make such disclosure, he is
responsible for damage arising to the bailee directly from such faults.

If such goods are bailed for hire, the bailor is responsible for such damage, whether
he was or was not aware of the existence of such faults in the goods bailed.

Illustrations-

(a) A lends a horse, which he knows to be vicious, to B. He does not disclose the fact
that the horse is vicious. The horse runs away. B is thrown and injured, A is
responsible to B for damage sustained.

(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A
is injured. B is responsible to A for the injury.

Section 150 describes the bailor’s duty to disclose faults in goods bailed. Whether
the goods are bailed gratuitously or not, the bailor is obligated to reveal every
known defect of the goods to the bailee. The bailor is responsible for this. In the
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absence of such a disclosure, the bailor would be obliged to compensate the bailee
directly for any loss caused by that fault.

The following conditions have to be met in order to establish liability of the bailor –

a) He ought to be aware of the deficiency and bailee ought not to be aware of it.

b) The defect in the product must be such that it exposes the bailee to special risk
or interferes considerably with the use of the goods.

However, it should be noted that the bailor is accountable for even those problems
of which he/she is not aware in the case of a gratuitous bailment. The bailor’s
responsibility is far greater in non-gratuitous bailment. He benefits from his
occupation and consequently has the obligation to ensure that the goods he
delivers are reasonably safe for bailment purposes. For him to assert that he was
unaware of the defect is no defence. Section 150 states clearly that “if the goods
are bailed for hire, the bailor is responsible for such damage, whether he was or was
not aware of such faults in the goods bailed”. The bailor is responsible for such
harm. He should evaluate the goods and remove problems that would have been
revealed by reasonable scrutiny.

In Hyman & Wife v Nye & Sons, (1881) LR 6QBD 685., for a specified trip, the
plaintiff rented a carriage, a horse-drawn pair and a driver from the defendant. The
split bar had been dislodged, the carriage disrupted and the plaintiff hurt during the
travel by a crack in the bottom of the rail carriage. Justice Lindley held the
defendant responsible and said: “A person who lets out carriages is not responsible
for all defects discoverable or not; he is not an insurer against all defects. But he is
an insurer against all the defects which care and skill can guard against. His duty is
to supply a carriage as fit for the purpose for which it is hired as care and skill can
render it.”

Similarly in Reed v Dean, (1949) 1 KB 188., for a holiday in the Thames river, the
plaintiffs hired the defendant’s motorboat launch. The launch caught fire, and the
plaintiffs could not extinguish it, because the firefighting system was out of
operation. They had been wounded and lost. The court found that it was assumed
that the launch was fit as well as reasonably safe and operational for the purpose
for which it had been commissioned. The defendant was therefore deemed
responsible.
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If a bailor gives goods to another person for transport or for some other reason and
the items are harmful, the fact should be disclosed to the bailee.

Section 151. Care to be taken by bailee.

In all cases of bailment the bailee is bound to take as much care of the goods bailed
to him as a man of ordinary prudence would, under similar circumstances, take of
his own goods of the same bulk, quantity and value as the goods bailed.

Section 151 lays down this duty in the following terms: “In all cases of bailment the
bailee is bound to take as much care of the goods bailed to him 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.” If the goods are damaged or
destroyed even after reasonable care, the bailee shall not be responsible for the
loss of the goods bailed.

In the case of Blount v War Office, (1953) IWLR 736., the War Office
requested a residence belonging to the plaintiff. In a strong room in the house the
plaintiff was permitted to store some items, which he locked. Of the soldiers that
were stationed there, some broke into the chamber and stole a number of silver
plates. The War Office was deemed responsible. The court said: “There was a
voluntary bailment of the goods to the defendants in the way of deposit and the
standard of care required of them was reasonable care which a man would take of
his own property. It is hard to believe that any reasonable man, who had valuable
property of his own stored in those” “circumstances, would leave it to the tender
mercies of seventy or eighty displaced persons of that type without taking any
precaution. The Ministry was negligent.”

The expected standard of care of a gratuitous bailee is the same as that of a non-
gratuitous bailee. In all cases of bailment, a uniform standard of care is to be
maintained, that is, a level of care that a man of ordinary caution would take of his
own property of the same sort and in similar conditions. If the care dedicated by the
bailee drops below this standard, he will be responsible for loss of or damage to the
property.

The burden of proof is on the bailee to demonstrate that he was reasonably careful
and he is not responsible if he can prove this. If the bailee provides proof that he
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has taken reasonable care to avoid reasonably foreseeable damages, or had taken
all reasonable efforts to avoid reasonably apprehended hazards, he would be
waived from his liability.

Section 152. Bailee when not liable for loss, etc, of thing bailed.

The bailee, in the absence of any special contract, is not responsible for the loss,
destruction or deterioration of the thing bailed, if he has taken the amount of care
of it described in section 151.

Discussion and Analysis

As per the Indian 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 and similarly it defines the person delivering the goods
is called the ‘bailor’ and the person to whom they are delivered is called, the
‘bailee’. In this section, the amount of care expected from a bailee is much as
section 151 i.e. care expected by a prudent man towards his own goods similar to
the same bulk, quality and value as the goods bailed.

No liability for loss if care taken by bailee

Since the standard of diligence expected of a bailee is that of the normal prudent
man, a bailee of goods isn't obligated for loss of the goods by theft in his shop, in
the event that it is indicated that he took as much care of the articles bailed as an
average prudent man would, under comparative circumstances, take of his own
goods of the similar quality and value. For the same reason if A sends jewels to B for
repairs, asking B to return them after repair as a value-payable parcel, and B does
so, B is not liable for the loss of the jewels merely because he failed to insure the
parcel. Failure to insure the jewels isn't evidence of the need of such consideration
as a man of standard prudence would, under comparable conditions, take of his own
goods, uncommonly when the owner himself doesn't insure them when sending
them out for repair as observed in Boseck & Co. v. Maudlestan, (1906 Punj Rec
no 70).

In Lakchmi Narain v. The Secretary of State for India (1923 27 CWN 1017),
it was held that it is negligence with respect to a carrier of goods to send jute in a
boat with twenty or thirty breaks on its side, one or one and a half inches long, and
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keep the goods in the hold of the boat for thirty hours. Similarly in Lakhaji Dollaji
& Co. v. Boorugu (1939 41 Bom LR 6), the negligence is on the carrier where a
commission agent buys silver bars on guidelines and spots them against the mass
of a shop which is unattended and a portion of the bars is lost. The bailee’s duty
does not necessarily come to an end when the goods are lost or stolen. In England a
bailee for remuneration should make such strides, assuming any, as are sensible
and regular with the end goal of recouping the goods. If he fails to do so, the burden
of proof is on him to show that reasonable efforts would not have been successful
as seen in Coldman v. Hill, (1919 1 KB 443).

Section 72 of the Railways Act, 1890 i.e. the ‘Responsibility of Railway

Administration as carriers — Nature and extent of’ states that the responsibility of a
railway administration for loss, destruction or deterioration of goods delivered to be
carried by railway is subject to other provisions of the Act to be that of a bailee
under S. 152 and S. 161 of the Indian Contract Act, 1872. Hence, the Railways can
be held liable as a bailee under this section i.e. section 152 of the Indian Contract
Act. However, in the case of Great Indian Peninsula Railway Co. v.
Chakravarti Sons & Co. (1927-28 32 CWN 53), it was held that the railways
may be considered for responsibility under S. 152, but agreement may be made
limiting that responsibility and an agreement purporting to do so shall, in so far as it
purports to effect such limitation, be void, unless it is in writing signed by or on
behalf of the person sending or delivering to the railway administration the animals
or goods and is otherwise in a form approved by the Governor-General in Council.

Also in the case of Chhotabhai Jethabhai Patel & Co. v. The Union of India
(AIR 1971 Cal 221), it was held that the Railways under the S. 152 that the
relationship is based on the contract of carriage of the consignment in question on
the basis of one railway receipt and the liability of the administration under the S.
72 of the Railways Act, 1890 hence, that the measure of the general responsibility
to a railway administration for loss, destruction or deterioration of goods and other
provisions under S. 152 and S. 161 of the Indian Contrat Act, 1872 and not
applicable for other liabilities.

In the case of Governor-General in Council v. Musaddilal (AIR 1961 SC 725),

it was held in that case that the railway administration in India is not an insurer of
goods, but it is merely a bailee of goods entrusted to it for carriage under the
provisions of both S. 72 of the Railways Act, 1890 and S. 152 of the Indian Contrat
Act, 1872.

In the case of Shantez and Anr v. Applause Bhansali Films Pvt. Ltd.
Company, Mumbai and others (2010 1 CCC 464 ) it was held that under S. 152
of the Indian Contract Act when certain pieces of antique furniture were claimed to
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be damaged in the sets of a film under production and when the Justices of the
Bombay High Court found that as per provisions of S. 152 proper care was taken
and hence the appeal to claim for damages was dismissed.

Section 153. Termination of bailment by bailee’s act inconsistent with

conditions.

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

Illustration-

A lets to B, for hire, a horse of his own riding B drives the horse in his carriage. This
is, at the option of A, a termination of the bailment.

Section 154. Liability of bailee making unauthorised use of goods bailed.

If the bailee makes any use of the goods bailed which is not according to the
conditions of the bailment, he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them.

Illustration-

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

(b) A hires a horse in Calcutta from B expressly to march to Varanasi. A rides with
due care but marches to Cuttack instead. The horse accidentally falls and is injured.
A is liable to make compensation to B for the injury to the horse.

Section 154 describes the liability of a bailee making unauthorized use of the goods
bailed. It states “If the bailee makes any use of the goods bailed which is not
according to the conditions of the bailment, he is liable to make compensation to
the bailor for any damage arising to the goods from or during such use of them.”

The bailee shall utilize the goods only for the purposes for which they were bailed.
The bailee would be entirely accountable for any loss or damage to the goods if the
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goods were used in an unauthorized manner. Even Act of God or inevitable accident
could not be used as a defence.

In the case of Alias v EM. Patil, AIR 2004 Ker 214., a vehicle was transported for
repair to a workshop and the business owner permitted the vehicle to be driven by
an unauthorized employee and caused the death of one person in an accident. As it
was considered an unauthorized usage of the vehicle and the liability was deemed
absolute, the bailee was obliged to recompense the deceased and also the car
owner. The insurer also paid the deceased the compensation and recovered
compensation from the owner of the vehicle.

Section 155. Effect of mixture with bailor’s consent, of his goods with
bailee’s.

If the bailee, with the consent of the bailor, mixes the goods of the bailor with his
own goods, the bailor and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced.

Section 156. Effect of mixture, without bailor’s consent, when the goods
can be separated.

If the bailee, without the consent of the bailor, mixes the goods of the bailor with his
own goods and the goods can be separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to be bear the expense
of separation or division, and any damage arising from the mixture.

Illustration-

A bails 100 bales of cotton marked with a particular mark to B. B, without A’s
consent, mixes the 100 bales with other bales of his own, bearing a different mark;
A is entitled to have his 100 bales returned, and B is bound to bear all the expenses
incurred in the separation of the bales, and any other incidental damages.

Section 157. Effect of mixture, without bailor’s consent, when the goods
cannot be separated.
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If the bailee, without the consent of the bailor, mixes the foods of the bailor with his
own goods in such a manner that it is impossible to separate the goods bailed from
the other goods, and deliver them back, the bailor is entitled to be compensated by
the bailee for the loss of the goods.

Illustration-

A bails a barrel of Cape flour worth Rs.45 to B. B, without A’s consent, mixes the
flour with country flour of his own, worth Rs. 25 a barrel. B must compensate A for
the loss of his flour.

In case of mixture of goods by the bailee: (Sec: 155-157)

i) If the bailee, with the consent of the bailor, mixes the goods of the bailor with his
own goods, the bailor can claim proportionate share in mixed goods.

ii) If the bailee without the consent of the bailor, mixes the goods of the bailor with
his own goods, and the goods can be separated or divided, the bailor can claim
expenses of separating and any damage arising from the mixture.

iii) If the bailee without the consent of the bailor mixes the goods of the bailor with
his own goods, and the goods cannot be separated or divided, the bailor is entitled
to be compensated by the bailee for the loss of the goods.

Section 158. Repayment, by bailor, of necessary expenses.

Where, by the conditions of the bailment, the goods are to be kept or to be carried,
or to have work done upon them by the bailee for the bailor, and the bailee is to
receive no remuneration, the bailors shall repay to the bailee the necessary
expenses incurred by him for the purpose of the bailment.

Section 158 talks about repayment by the Bailor of necessary expenses. This
provision talks about the expenses that are to be borne by the Bailor in cases where
it is not specified in the Contract. A Bailee is to be a custodian of the goods as per
the terms of the contract is entitled to remuneration, irrespective of the fact that
whether or not it is specified in the contract itself, from the Bailor for the necessary
expenses incurred by him for the purposes of Bailment. It is important to note that
this provision also gives rise to the right of lien over the goods to the Bailee. The
Hon’ble Calcutta High Court in the case of Surya Investment Co. v. State
Trading Corporation of India, reported at AIR 1987 Cal 46 , has held that:
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“….. If the Bailee has to incur any expenditure for the preservation of
the goods from deterioration not provided for in the contract of
bailment, the Bailee will be entitled to recover such expenditure from
the owner inasmuch as the owner will derive benefit therefrom if
ultimately the goods are delivered to the owner. A Bailee cannot lose
the possession as well as charges for bailment…. A Bailee’s right of
lien arises out of its possession and is lost with the loss of possession.”

Subsequently, the Hon’ble Court also observed that the Bailee cannot be denied its
claim for storage charges solely on the ground that the Bailee has claimed or
exercised the right of lien and, therefore, it is not entitled to get any charge for
keeping the goods bailed.

Section 159. Restoration of goods lent gratuitously.

The lender of a thing for use may at any time require its return, if the loan was
gratuitous, even through he lent it for a specified time or purpose. But if, on the
faith of such loan made for a specified time or purpose, the borrower has acted in
such a manner that the return of the thing lent before the time agreed upon would
cause him losses exceeding the benefit actually derived by him from the loan, the
lender must, if he compels the return. indemnify the borrower for the amount in
which the loss so occasioned exceeds the benefits so derived.

Section 160. Return of goods bailed, on expiration of time or a

accomplishment of purpose.

It is the duty of the bailee to return, or deliver according to the bailor’s directions,
the goods bailed, without demand, as soon as the time for which they were bailed
has expired, or the purpose for which they were bailed has been accomplished.

Section 161. Bailee’s responsibility when goods are not duly returned.

If by the fault of the bailee, the goods are not returned, delivered or tendered at the
proper time, he is responsible to the bailor for any loss, destruction or deterioration
of the goods from that time.

This section is an extension of Section 160. Section 161 talks about the
responsibility of the Bailee when the goods are not duly returned, delivered or
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tendered at the proper time. In such cases, the Bailee is responsible to the Bailor for
any losses, destruction or deterioration of the goods from that time onwards.
However, it is pertinent to note that the Bailee shall be responsible only for the
damage that has arisen because of his fault or negligence and not for a cause other
than his default. In the case of Annamalai Timber Trust Limited v.
Trippunithura Devaswom, reported at AIR 1954 Tr & Coch 305 , it has been
held that unexplained failure to return the thing bailed is presumed to be by the
Bailee’s default.

It is noteworthy to mention that the remedies of the Bailor in the event the Bailee
did not return the goods have not been specified in this provision. Also, under this
section, the Bailee is responsible only to the Bailor. In case, the Bailor refuses to
accept the goods, he may be liable to compensate the Bailee for any necessary
expenses incurred towards safe custody of the goods depending upon the facts and
circumstances of each case.

Section 162. Termination of gratuitous bailment by death.

A gratuitous bailment is terminated by the death either of the bailor or of the bailee.

Section 163. Bailer entitled to increase or profit from goods bailed.

In the absence of any contract to the contrary, the bailee is bound to deliver to the
bailer, or according to his directions, any increase or profit which may have accrued
from the goods bailed.

Illustration-

A leaves a cow in the custody of B to be taken care of . The cow has a calf. B is
bound to deliver the calf as well as the cow to A.

Section 164. Bailor’s responsibility to bailee.

The bailor is responsible to the bailee for any loss which the bailee may sustain the
reason that the bailor was not entitled to make the bailment, or to receive back the
goods, or to give directions, respecting them.
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Section 165. Bailment by several joint owners.

If several joint owners of goods bail them, the bailee may deliver them back to, or
according to the directions of, one joint owner without the consent of all in the
absence of any agreement to the contrary.

Section 166. Bailee not responsible on redelivery to bailor without title.

If the bailor has no title to the goods, and the bailee, in good faith, delivers them
back to, or according to the directions of the bailor, the bailee is not responsible to
the owner in respect of such deliver.

Section 167. Right of third person claiming goods bailed.

If a person, other than the bailor, claims goods bailed he may apply to the court to
stop delivery of the goods to the bailor, and to decide the title to the goods.

Section 168. Right to finder of goods may sue for specified reward offered.

The finder of goods has no right to use the owner for compensation for trouble and
expense, voluntary incurred by him to preserve the goods and to find out the
owner; but he may retain the goods again the owner until he receive such
compensation; and where the owner has offered a specific required for the return of
goods lost, the finder may sue for such reward, and may retain the goods until he
receives it.

The finder of goods has no right to sue the owner for compensation for trouble and
expense voluntarily incurred by him to preserve the goods and to find out the
owner, but he may retain the goods against the owner until he receives such
compensation, and where the owner has offered a specific reward for the return of
goods lost, the finder may sue for such reward, and may retain the goods until he
receives it.

RIGHT OF LIEN

According to section 168, a finder of goods has no right to sue the owner for
trouble and expenses voluntarily incurred by him to preserve the goods and to find
the owner. He has, however, the right of particular lien in respect of those goods.
He may retain the goods against the owner until he receives compensation for
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trouble and expense voluntarily incurred by him to preserve the goods and to find
the owner

RIGHT OF CLAIMING THE REWARD, IF ANNOUNCED BY THE OWNER

It has been noted above that the finder has the right to retain the goods until he Is
paid compensation for trouble and expense voluntarily incurred by him to preserve
the goods and find the owner. In addition to that, where the owner has offered a
specific reward for the return of goods lost the finder may sue for such reward and
also may retain the goods until he receives it.

If the goods have already been found voluntarily, and then the owner of the goods
promises to compensate the finder for his past voluntary services, the contract is
binding and the owner is bound to pay the promised amount

Section 169. When finder of thing commonly on sale may sell it.

When thing which is commonly the subject of sale is lost, if the owner cannot with
reasonable diligence be found, or if he refuses upon demand, to pay the lawful
charges of the finder, the finder may sell it-

(1) when the thing is in danger of perishing or of losing the greater part of its value,
or

(2) when the lawful charges of the finder, in respect of the thing found, amount to
two-thirds of its value.

When a thing which is commonly the subject of sale is lost, if the owner cannot with
reasonable diligence be found, or if he refuses upon demand, to pay the lawful
charge of the finder, finder may sell it –

1. When the thing is in danger of perishing or losing the greater part of its
value,
2. When the lawful charge of the finder, in respect of the thing found amount to
two-third of its value,

RIGHT TO SELL THE GOODS FOUND (SEC.169)

The finder of the goods has also been given the right to sell the goods found by him
under certain circumstances mentioned in section 169. Such a right is available to
the finder of the lost goods when the following conditions are satisfied:
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1. If the owner of the goods cannot be found; or if he refuses to pay the lawful
charges of the finder, and
2. When the good is in danger of perishing its value; or when the lawful charges
of the founder in respect of the thing found amount to two-third of its value.

DUTIES OF FINDER OF ANY LOST GOODS

If a person finds any lost goods he does not become the actual of those goods. He,
in fact, becomes a special kind of bailee in the sense that he has to take care of the
goods until the actual owner of the goods is found. Thus he possesses same duties
towards the lost goods as of a bailee, and therefore finder’s position has been
considered along with bailment. A finder of the lost goods has to observe following
duties towards the goods he possesses:

1. Duty to take reasonable care of goods (section 151 & 152)

According to Section 151, the finder of goods should take such care of the goods as
a man of ordinary prudence would take of his own goods. If he fails to act like an
ordinary prudent man, he cannot be excused by pleading that he had taken similar
care of his own goods also, and his goods have also been lost and damaged along
with those of the ordinary prudent man.

According to section 152, the finder of goods in the absence of any special contract,
is not responsible for the loss, destruction or deterioration of the goods, if he has
taken the amount of care of it described on section 151.

2. Duty not to make unauthorized use of goods (section 153 & 154)

According to section 153, termination of bailment by finder of good’s act

inconsistent with conditions: – a contract of bailment is voidable at the option of the
actual owner, if the finder of goods make any unauthorized use of the goods found
inconsistent with the condition of the bailment.

According to section 154, liability of finder of goods making unauthorized use of

goods bailed: – if the finder of goods makes any use of the goods found, which is
not according to the conditions of the bailment, he is liable to make compensation
to the owner of goods for any damage arising to the goods from or during such use
of them.

3. Duty not to mix goods (section 155 – 157)

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According to Section 155, effect of mixture with owner’s consent, of this goods with
finder of good’s: – if the finder of goods, with consent of the owner, mixes the goods
of the owner with his own goods, the owner and the finder of goods must shall have
an interest in proportion to their respective shares, in the mixture thus produced.

According to section 156, effect of mixture without owner’s consent when the goods
can be separated: – when the goods mixed can be separated, the finder and the
owner will remain the possessor of their respective shares. But the finder of goods
is bound to bear the expense of separation, and any damage arising from the
mixture.

According to section 157, effect of mixture, without owner’s consent when the
goods cannot be separated: – in case, the nature of the goods is such that the
owner’s cannot be separated from those of the finder’s good, it is deemed to be loss
of goods and the owner cannot recover compensation for the same from the finder
of goods.

4. Duty to return goods (section 160 & 161)

According to section 160, return of goods found on expiration of time period: – it is

the duty of the finder of the goods to return or deliver the goods found to the true
owner as per his directions before the expiration of the time period specified by
him.

According to section 161, finder of goods responsibility when the goods are not duly
returned: – if by the default of the finder of goods, the goods are not returned or
delivered at the proper time, he is responsible to the loss or destruction of goods
from that time.

Section 170. Bailee’s particular lien.

Where the bailee has, in accordance with the purpose of the bailment, rendered any
service involving the exercise of labour or skill in respect of the goods bailed he has
in the absence of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.
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Illustrations-

(a) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is

accordingly done. B is entitled to retain the stone till he is paid for the service he
has rendered.

(b) A gives cloth to B, a tailor, to make into a coat, B promises A to deliver the coat
as soon as it is finished, and to give a three months’ credit for the price, B is not
entitled to retain the coat until he is paid.

Section 170 also contains the term ‘in absence of a contract to the contrary’
thereby signifying that Party Autonomy is paramount for the purposes of this
section. However, when the parties to a contract are silent, then the Bailee has a
right of lien to retain goods for which it has rendered any service until he receives
due remuneration for such services rendered.

What is important to see is that if the Bailor has the right to remove the goods from
time to time, then unless otherwise specified, there is no right of lien vested in the
Bailee. The right of lien would arise only where the Bailee has a right to continuing
possession of the goods. The right of lien does not entitle the Bailee to sell the
goods and recover the dues. The Bailee shall be entitled to exercise lien only to the
extent he has spent his labour and skill in services rendered as per the purpose of
the bailment specified in the agreement and towards any other purpose or goods.

The Allahabad High Court, in the case of Kalloomal Tapeshwari Prasad & Co. v.
Rashtriya Chemicals & Fertilizers Limited, reported at AIR 1990 All 214 , has
provided an understanding of Section 170 in the following manner:

“On an examination of this Section, it will be apparent that the extent of

bailee's lien is in respect of services involving the exercise of labour or skill
rendered by him in respect of goods bailed. It follows that the services which are to
be rendered must be limited to the labour or skill which has been spent by the
bailor over the goods bailed. The lien has nothing to do with any other service
rendered by the bailor in respect of contract of bailment. As a matter of fact, labour
and skill must have been spent firstly in accordance with the purpose of bailment,
must have been so spent so as to improve the goods bailed and thirdly it applies
only to such goods over which the bailee has bestowed his labour and expense and
not to other goods. All these conditions are again subject to a contract to the
contrary. If there be any contract to the contrary the bailee will not be entitled to
enforce his lien under S. 170.”
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Thus we see that mere making arrangement for storage of goods in a warehouse for
payment would not attract this provision since no labour or skill is being exercised
in respect of such goods.

Section 171. General lien of bankers, factors, wharfinger, attorneys and

policy brokers.

Bankers, factor, wharfingers, attorneys of a High Court and policy brokers may, in
the absence of a contract to the contrary, retain as a security for a general balance
of account, any goods bailed to them; but no other person have a right retain, as a
security for which balance, goods, bailed to them, unless is an express contract to
that effect.

‘Lien,’ a right to keep in possession, the movable goods belonging to another

person, till the time the debt owed by that person is realized. It can be classified as
the general lien and particular lien. When one party is entitled to retain the goods
belonging to another party, until all the dues are discharged, is called general lien.
In contrast, particular lien implies the right of retention of specific goods, until the
claims related to those goods are realized.

Lien is tied with possession of goods, i.e. where there is no possession of goods,
there is no lien. Hence, possession is the essence of the lien. Many think that the
two types of the lien are one and the same thing, but there are slight and subtle
differences between general lien and particular lien.

Definition of General Lien

General Lien means the right of an individual to retain or detain as security any
movable property, which belongs to someone else, against a general balance of the
account, until the liability of the holder is discharged. It is described under section
171 of the Indian Contract Act, 1872.

A person can waive the right of lien through a contract. It is commonly available to
bankers, factors, wharfingers, high-court attorneys, etc. who keep the goods bailed
to them, during the course of their profession and does not require any contract to
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that effect. Unless there is an express contract in this regard, no other person can
retain the property of another as the security of the balance due to them.

In general lien, the property on which lien is exercised can only be retained, but
cannot be sold for any payment lawfully due to him.

Definition of Particular Lien

As per section 170 of the Indian Contract Ac, 1872, the particular lien is defined as a
right of a person to retain particular goods bailed to him/her as security, for non-
payment of dues.

In conformity to the objective of bailment, when bailee has employed skill or labor
and improved the goods bailed to him/her. He/she is entitled to consideration for his
service, and if bailor denies paying the amount, then he/she can retain the goods,
against remuneration.

In such a case, the bailee has right of the particular lien until he/she receives
compensation for the services rendered, provided the services are provided in full
within the stipulated time. Moreover, the bailee has no right to sue the bailor.

On the other hand, if the bailee delivers the property belonging to bailor without
any consideration for the services provided, he/she can sue the bailor, and the
particular lien can be waived.

Key Differences Between General Lien and Particular Lien

The points given below describe the difference between general lien and particular
lien in detail:

1. General Lien can be described as the right granted to a person to retain the
possession of goods belonging to another person against the general balance
of the account. On the contrary, the particular lien can be understood as
the right of an individual to keep specific goods bailed, until the dues relating
to those goods are discharged.
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2. A general lien is available for any goods, in respect of which the claims are
not satisfied. Conversely, the particular lien is available only against the
goods in respect of which bailee has expensed skill and labor.
3. General Lien is not automatic but is recognized through an agreement,
whereas particular lien is automatic.
4. The holder of goods has no right to sell the goods to discharge the amount
unpaid, in the case of general lien. On the other hand, in the case of
particular lien the bailee can not sell the goods to realize his/her debts,
however, in special conditions, the right is conferred.
5. General Lien is most commonly exercised by bankers, wharfingers, factors,
policy brokers, attorneys, etc. As against this, the particular lien is
employed by a bailee, unpaid seller, finder of goods, pledgee, partner, agent,
etc.

So far, we’ve discussed all the important facts, details and differences between
general lien and particular lien. The key point which differentiates these two are, a
general lien can be exercised against any goods on which claims are not satisfied.
Unlike particular lien which is exercised only on those items on which bailee has
provided services.

Bailments of pledges.

Section 172. “Pledge”, “Pawnor”, and “Pawnee” defined.

The bailment of goods as security for payment of a debt or performance of a

promise is called “pledge“. The bailor is in this case called “pawnor“. The bailee is
called “pawnee“.

A pledge is only a special kind of bailment, and chief basis of distinction is the
object of the contract. Where the object of the delivery of goods is to provide a
security for a loan or for the fulfilment of an obligation, that kind of bailment is
pledge.[i] Under Indian Contract Act, 1872 the ‘Pledge’ has been defined in section
172 as:

S 172. “Pledge”, “pawnor”, and “Pawnee” defined.-

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The bailment of goods as security for payment of a debt or performance of a

promise is called “pledge”. The bailor is in this case called the “Pawnor”. The Bailee
is called the “Pawnee”.

In case of Lallan Prasad v. Rahmat Ali [AIR 1967 SC 1322], Supreme Court of
India defined Pledge as:

“Pawn or pledge is a bailment of personal property as a security for some debt or

engagement. A pawner is one who being liable to an engagement gives to the
person to whom he is liable a thing to be held as security for payment of his debt or
the fulfilment of his liability”.

The property pledged should be delivered to the Pawnee. Delivery of possession

may be actual or constructive. Delivery of the key of the go down where the goods
are stored, is an illustration of constructive delivery. Where the goods are in the
possession of a third person, who, on the direction of the pledger, consents to hold
them on pledgee’s behalf, that is enough delivery. It is sometimes called delivery by
attornment. Delivery of documents of title which would enable the pledgee to obtain
possession is equally effective to create a pledge. In case of Morvi Mercantile
Bank Ltd v. Union of India [AIR 1965 SC 1954], the Apex Court held that-
“delivery of railway receipts was the same thing as delivery of goods, the pledge
was therefore valid and the pledgee was entitled to sue for the loss”.

Sometimes the goods are allowed to remain in the custody of the pledger for a
special purpose and that constitutes pledge by hypothecation. Thus, in case of
default by the pledger, the Pledgee will have to first take possession of the security
and then sell the same. The best example of this type of arrangement are Car
Loans. In this case Car / Vehicle remains with the pledger but the same is
hypothecated to the bank / financer. In case the pledger defaults, banks take
possession of the vehicle after giving notice and then sell the same and credit the
proceeds to the loan account.

Section 173. Pawnee’s right of retainer.

The pawnee may retain the goods pledged, not only for payment of the debt or the
performance of the promise, but for the interests of the debt, and all necessary
expenses incurred by him in respect to the possession or for the preservation of the
goods pledged.
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Right of Retainer :-

The Pawnee has got a right to retain the goods till the payment of the debt, or any
interest due upon the debt. The right of retention has been given to Pawnee in
Section 173 of the Contract Act.

The Pawnee may retain the goods pledged, not only for payment of the debt or the
performance of the promise, but for the interests of the debt, and all necessary
expenses incurred by him in respect to the possession or for the preservation of the
goods pledged.

The Pawnee has a right to retain the goods pledged for

1. the payment of the debt or the performance of the promise for which the
goods were pledged;
2. the interest of the debt; and
3. All necessary expenses incurred by him in respect of; the possession or for
the preservation of the goods pledged.

The pledgee can retain the goods only for the payment of that particular debt for
which the goods were pledged and not for any other debt or promise unless there is
contract to contrary. He can, however retain the goods for subsequent advances, in
which case such a contract is presumed. Section 174 of the Act describes:

Section 174. Pawnee not to retain for debt or promise other than for which
goods pledged – presumption in case of subsequent advances.

The pawnee shall not, in the absence of a contract to that effect, retain the goods
pledged for any debt or promise of other than the debtor promise for which they are
pledged; but such contract, in the absence of anything to the contrary, shall be
presumed in regard to subsequent advances made by the pawnee.

The provisions of S 171, being a specific provision, overrides the general provisions
of S 174. The Banker’s lien under S 171, will therefore extend to all other pledges
with the bank, and the banker can retain the pledged goods, even if the debtor has
not cleared his amount in connection with another loan.[ State Bank of India v.
Deepak Malviya, AIR 1996 All 165]
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Special and Paramount Interest of Pledgee:

The right of retainer is thus in the nature of a particular lien. Yet lien is different
from pledge. “A lien is merely a personal right, whereas a pledge gives to the
pawnee a ‘special property’ in the goods pledged. A lien gives no power of sale or
disposition of the goods, whereas a pawnee has the power to sell in case of default.
Lien is not transferable, but a pledge is assignable.” The pawnee gets a special
property in the goods pledged. The general property remains in the pawner and
wholly reverts to him on discharge of the debt. The right to property vests in the
pledgee only so far as is necessary to secure the debt. [Sarvopari Investments
(P) Ltd v. Soma Textiles and Industries Ltd, (2003) 4 ICC 604 (Cal)]

Thus so long as the pawnee’s claim is not satisfied no other creditor of the pawner
has any right to take away the goods or their price. In case of Bank of Bihar v.
State of Bihar [(1972) 3 SCC 196], the goods which were under the pledge of a
bank were seized by the State of Bihar. It was held that the seizure could not
deprive the pledgee of his right to realise the amount for which the goods were
pledged and, therefore, the State was bound to indemnify him up to the amount
which would have been realised from the goods. The court also pointed out that the
Indian Law in this respect was not different from the English law.

Hypothecate has no direct right of seizure:

The definition of pledge refers to a ‘bailment’, and hence can be no pledge of goods
unless there is an actual delivery of the goods. A loan however may be secured by a
hypothecation of the goods. Hypothecation is transaction under which goods are
made available as security for a debt without actual transfer of either the property
or the possession thereof to the creditor. The owners are under an obligation to
discharge the debt within the stipulated time and if they fail to do so, the creditor
has the right to recover his dues, if need be, by the sale of the security .[ Bank of
Baroda v. Rubari Bachubhai Hirabhai, AIR 1987 Guj 1.]

Where the pledge is by way of hypothecation, the creditor cannot directly seize the
goods by entering premises or otherwise. He has to do so either with the consent of
the borrower or through a court order. The creditor does not have the right to enter
the premises, lock and seal the same. In Union of India v. Shenthilnathan
[(1977) 2 MLJ 499], the most conspicuous feature of the agreement was that in
case the borrower committed default in payment of the debt as stipulated, the
lender was at liberty to seize the goods. The court held that this power was not
directly exercisable. No possession was delivered on the date when the
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hypothecation deed was entered into. What was contemplated was a future overt
act on the part of the creditor to sequester the goods, if so desired and that too by a
process known to law. At best the right which the plaintiff had under the agreement
was to file a suit on the debt and after obtaining a degree to proceed against the
property specified in realisation of the decree.

Section 175. Pawnee’s right as to extraordinary expenses incurred.

The pawnee is entitled to receive from the pawner extraordinary expenses incurred
by him for the preservation of the goods pledged. For such expenses, however, he
does not have the right to retain the goods. He can only sue to recover them. This
right of recovery is provided in Section 175 of the Act as follows:

The pawnee is entitled to receive from the pawnor extraordinary expenses

incurred by him for the preservation of the goods pledged .

The word used in this section is not ‘retain’, as in two preceding sections, but
‘receive’. A pawnee has therefore, no right of lien for ‘extraordinary’ expenses, as
he has in the case of ‘necessary’ expenses under section 173, but has only a right
of action in respect of them.

Section 176. Pawnee’s right where pawnor makes default.

If the pawnor makes default in payment of the debt, or performance, at the

stipulated time, or the promise, in respect of which the goods were pledged, the
pawnee may bring as suit against the pawnor upon the debt or promise, and retain
the goods pledged as a collateral security; or he may sell the thing pledged, on
giving the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater that the amount so due, the pawnee shall pay over the surplus to the
pawnor.

On the debtor’s default, the pawnee has the right to sell the goods pledged for the
repayment of the debt or the performance of the promise.
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Upon a default being made by the pawner in the payment of the debt or
performance of the promise, the pledgee gets two distinct rights under section 176
of the Act. Firstly, the pledgee may sue upon the debt and retain the goods as a
collateral security [S.K. Engg Works v. New Bank of India, AIR 1987 P&H
90.]. Secondly, he may sell the goods after reasonable notice of the intended sale
to the pawner.[ Mahalinga Nadar v. Ganapathi Subbien, ILR (1903-05) 27
Mad 528.]

The House of Lords in case of Trustees of the Property of Ellis & Co v. Dixton
Johnson[1925 AC 489, at p. 1325], held that:

“If a creditor holding security sues for the debt, he is under an obligation on
payment of the debt to hand over the security, and that if, having improperly made
away with the security he is unable to return it to the debtor he cannot have
judgement for the debt.”

In Lallan Prasad v. Rahmat Ali [AIR 1967 SC 1322]:

The defendant borrowed Rs 20,000 from the plaintiff on a promissory note and gave
him aero scrapes worth about Rs 35,000 as security for the loan. The Plaintiff sued
for repayment of the loan, but was unable to produce the security, having sold it,
and, therefore his action for the loan was rejected.

In Central Bank of India v. Abdul Mujeeb Khan [1997 AIHC 299 (MP)], the
bank took over the possession of the hypothecated truck but thereafter neither sold
it according to the agreed terms nor took care of it, leaving it in open place, the
bank was liable for the extraordinary depreciation in the value of the vehicle.

The pawnee’s two rights, namely the right to sue the pawnor for the personal
recovery or resort to sell the security after the reasonable notice, are disjunctive,
being independent of each other. The fact that a period is prescribed for filing suit
would not mean that the prescribed period would also apply to the alternative
remedy of selling the goods .[ K.M. Hidayathulla v. Bank of India, AIR 2000
Mad 251]

Requirement of Notice:-
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Before making the sale, the pledger is required to give to the pawner, a reasonable
notice of his intention to sell. The requirement of ‘reasonable notice’ is a statutory
obligation and, therefore, cannot be excluded by a contract to the contrary.[xxiii] In
a case of Prabhat Bank v. Babu Ram [AIR 1966 All 134], before the Allahabad
High Court:

One of the terms of an agreement of loan enabled the lending banker to sell the
securities without any notice to the pawner. The pawner defaulted in the payment.
The bank sent a reminder, but the pawner asked for more time. The bank thereupon
disposed of the securities.

The sale was held to be bad in law. The court said, “what is contemplated by section
176, is not merely a notice but a reasonable notice, meaning thereby a notice of
intended sale of the security by the creditor within the certain date so as to afford
an opportunity to the debtor to pay an amount within the time mentioned in the
notice.” The court refused to agree with the bank’s contention that the sale notice
should be inferred from the pawner’s request for time. “A notice of the character
contemplated by section 176 cannot be implied. Such notice has to be clear and
specific in language…”.

If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are
greater that the amount so due, the pawnee shall pay over the surplus to the
pawnor.

When the pawnee sells the pledged goods, he does not do so as full owner, but by
virtue of an implied authority from the pawnee to do so. The sale must be for the
benefit of both the parties. After sale, it is the pawnee’s ordinary right ‘to recover
the balance of the loan unsatisfied on the sale of the pledge’ .[ Jones v. Marshall,
[1889] 24 QBD 269 at 271.] And if there is any surplus amount from such sale, it
must be accounted for and refunded to the pawner. The words ‘such sale’ in the
second paragraph indicate that no liability can be fastened on the pawnor for loss, if
the pawnee does not exercise his right of sale according to section 176 .[ Surilal v.
Shyamlal, AIR 1956 MB 74] Before a sale, the goods are the property of the
pawnor in pawnee’s custody. If there arises dispute regarding the quality of the
goods, the pawnee cannot proceed in the matter without referring to the pawnor. In
such a situation, pawnee is the agent of the pawnor.

Loss of Security due to Pledgee’s Negligence:

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Where goods are lost due to the negligence of the pledgee, the liability of the
pledger is reduced to the extent of the value of such goods which are lost. In a case
of Gurbax Rai v. Punjab National Bank [(1984) 3 SCC 96], before the Supreme
Court:

Certain goods in the go down of a firm were under the pledge of a bank. The go
down was insured against fire. A part of them was damaged by fire. The bank
received insurance money to the extent of the fire.

Sale by Hypothecatee:

A hypothecatee is not in actual possession of the goods. He grants the right of use
to the borrower. He naturally has a right to take possession of the goods if the
borrower makes default. He can then sell them in his capacity as a pledgee.
Intervention of the court is not necessary.

Section 177. Defaulting pawnor’s right to redeem.

If a time is stipulated for the payment of the debt, or performance of the promise,
for which the pledged is made, and the pawnor makes default in payment of the
debt or performance of the promise at the stipulated time, he may redeem the
goods pledged at any subsequent time before the actual sale of them; but he must,
on that case, pay, in addition, any expenses which have arisen from his default.

This provision is supplementary to the earlier section. Even after the time for
payment of the debt or the performance of the promise has expired, the pawnor is
entitled to redeem the goods pledged until they are actually sold; but he must then
also pay any expenses which arise from his default.[xxx] It has been pointed out by
the Supreme Court in a case of Jaswantrai Manilal Akhaney v. State of
Bombay [AIR 1956 SC 575], that:

“The special interest of the pledgee comes to an end as soon as the debt for which
the goods were pledged is discharged. It is open to the pledger to redeem the
pledge by full payment of the amount for which the pledge had been made at any
time if there is no period fixed for redemption, or at any time after the fixed date
and the right continues until the thing pledged is lawfully sold.”

Redemption means the enforcement of the right to have the title to corpus of the
pledged property restored to the pledger free and clear of the pledge. A suit for
redemption has to be filed for exercising this specific remedy and not just for a
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declaration of the right of redemption.[ Nabha Investment (P) Ltd v. Harmishan

Dass Lukhmi Dass, (1995) 58 DLT 285]

Heritable Right:

Certain gold ornaments were pledged with a bank as a security for a gold loan. The
pawnor died. His wife sought to redeem the pledge by repaying the loan. She
produced a ‘will’ of her husband to show her right. The court said that she was
entitled to redeem. The bank could not ask her for submitting a probate of the will
or a succession certificate. Her son and daughter raised no objection. Kamali
Sarojini v. Indian Bank, AIR 2008 AP 71

Premature Redemption:

Where the pawner redeems before expiry of the specified period, he would remain
bound by the terms of the loan, if any, which require that a premium would be
leviable on premature payment.[ Hotel Vrinda Prakash v. Karnataka State
Financial Corporation, AIR 2007 Kant 187]

Statutory Right:

Where the property of an employer was pledged with a bank as security for
repayment of a loan, the court said that it could be attached and sold for recovery
of employee’s Provident Fund dues.[ Maharashtra State Cooperative Bank Ltd
v. Provident Fund Commissioner, (2009) 10 SCC 123] (Section 11(2) of the
Provident fund Act, 1952 operates against mortgage and pledge executed by
employer to give priority to employees Provident Fund claims.)

Section 178. Pledge by mercantile agent.

Where a mercantile agent is, with the consent of the owner, in possession of goods
or the documents of title to goods, any pledge made by him, when acting in the
ordinary course of business of a mercantile agent, shall be as valid as if he were
expressly authorised by the owner of the goods to make the same; provided that
the pawnee acts in good faith and has not at the time of the pledge notice that the
pawnor has not authority to pledge.

Explanation-
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In this section, the expression “mercantile agent” and “documents of title” shall
have the meanings assigned to them in the Indian Sale of Goods Act, 1930.

When a mercantile agent is in possession of the goods with consent of the owner,
any pledge made by him in ordinary course of business will be valid, provided that
the pawnee acts in good faith and that he has no notice of the fact that the pawnor
is not authorized to pawn the goods.

The essential conditions of this rule are

1. he must be a mercantile agent,

2. he must have possession of the goods by consent of the owner, and
3. it must be done in ordinary course of business.
4. Further, the pawnee should act in good faith and he must not have notice
that the pawnor has no authority to pledge.

Section 178A. Pledge by person in possession under voidable contract.

When the pawnor has obtained possession of the other goods pledged by him under
a contract voidable under Section 19 or Section 19A, but the contract has not been
rescinded at the time of the pledge, the pawnee acquired a goods title to the goods,
provided he acts in good faith and without notice of the pawnor’s defect of title.

When the goods are obtained by a person under a contract that is voidable under
section 19 or 19 A, he can pledge the goods if the contract is not avoided at the
time of the pledge. Thus, in Phillips vs Brooks Ltd 1919, a fraudulent person
pretending to be a man of credit induced the plaintiff to give him a valuable ring in
return for his cheque which proved worthless. Before the fraud could be discovered,
he pledged the ring with the defendants. The pledge was held to be valid.

Section 179. Pledge where pawnor has only a limited interest.

Where person pledges goods in which he has only a limited interest, the pledge is
valid to the extent of that interest.
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Section 179 says that where a person pledges goods in which he has only a limited
interest, the pledge is valid to the extent of that interest. Thus, when a car worth
100,000Rs is owned jointly by A and B both having 50% interest in the car, and if A
pledges the car for 60000Rs, the value of the pledge that the pledgee can receive
upon default is only 50% of the value received by sale.

Thus, if a pledgee further pledges the goods, his interest is only the amount for
which the first pledger pledged the goods. For example, if A pledged his car worth
100000Rs for 20000Rs to B. B’s interest in the car is only 20000 Rs. He can further
pledge it but if he pledges it for more than 20000Rs, A will be liable only for
20000Rs.

In Jaswantrai Manilal Akhney vs State of Bombay 1956, a cooperative bank

had an overdraft account with the Exchange Bank, which was secured by the
deposit of certain securities. After many dealing and adjustments the last position of
the account was that the overdraft limit was set at Rs 66150 and the securities
under the pledge of the bank were worth Rs 75000. The cooperative bank did not
make use of this overdraft for a long time and when it attempted to use it, the
Exchange Bank was itself in financial crisis and had pledged the securities first with
Canara Bank and then after having redeemed them, pledged them again with a
private financier. The SC held that the pledge was invalid

Suits by bailees or bailors against wrong-doers.

Section 180. Suit by bailor or bailee against wrong-doer.

If a third person wrongfully deprives the bailee of the use of possession of goods
bailed, or does them any injury, the bailee is entitled to use such remedies as the
owner might have used in the like case if no bailment has been made; and either
the bailor or the bailee may bring a suit against a third person for such deprivation
or injury.

Section 181. Appointment of relief or compensation obtained by such suit.

Whatever is obtained by way of relief of compensation in any such suit shall, as

between the bailor and the bailee, be dealt with according to their respective
interests.
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CHAPTER X (182-238) – AGENCY – INDIAN CONTRACT ACT

AGENCY APPOINTMENT AND AUTHORITY OF AGENTS

Section 182. “Agent” and “principal” defined.

An “agent” is a person employed to do any act for another, or to represent another

in dealing with third persons. The person for whom such act is done, or who is so
represented, is called the “principal“.

In India, the Agent and Principal share a contractual relationship and are thus
regulated by the contract provisions between them. The basic framework of the
laws and regulations, which regulate generally the execution, and development of
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any sort of contract including the agency agreement, is provided in Chapter X of the
Indian Contract Act, 1872. There is a legal connection between two individuals in
agency contracts, in which one person acts for the other person. An Agent is termed
the person on behalf of the other, and the person from whom the Agent has the
power to act is called the Principal.

The connection between them is called an agency when one party delegated some
authority to another and the later acts in a more or less autonomous manner on
behalf of the first party. It is possible to have express or inferred agency. The laws
pertaining to agency are covered in Chapter X of the Indian Contract Act of 1872.
Because almost all commercial transactions in the world are conducted through
agency, it is critical to understand the law surrounding agency. The law of agency is
based on the Latin maxim “qui facit per alium, facit per se,” which means, “He
who acts through another is deemed in law to do it himself” .

All businesses, large and small, use agencies to carry out their tasks. As a result,
laws governing agencies are an essential part of business law. Three major parties
are involved in Principal and Agent relationships: The Principal, the Agent, and a
Third Party.

In Section 182 of the Indian Contract Act of 1872, and Agent’ is defined as a person
hired to perform any act for another or to represent another in dealings with third
parties. The person for whom such an act is performed, or who is so represented, is
referred to as the "Principal" in Section 182. As a result, the Principal will be the one
who has delegated his power.

Creation of Agency

A contract of agency may be express or implied. Consideration is not an essential

element in the agency contract. Agency contract may also arise by estoppel,
necessity or ratification.

Kinds Of Agent:

Following are kind of agent.

(I) Del-credere agent:

A del-credere agent is an agent, who guarantees to his principal that person to

whom he sells will pay for that, if he will not pay, he will be liable. It is a type of
mercantile agent.
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(II) Factor:

A factor is an agent to whom goods are entrusted for sale.

(III) Mercantile agent:

A mercantile agent is the person who has authority to sell the goods or to buy goods
or to raise money on the security of goods.

(IV) Banker:

The relationship between banker and his customer is that of debtor and creditor.

(V) Auctioneer:

An auctioneer is an agent who is authorized to sell goods to the highest bidder at a

public sale for commission.

(VI) Sub-agent:

A sub-agent is a person employed by and acting under the control of the original
agent in the business of agency.

(VII) Broker:

A broker is an agent employed for buying or selling the goods or other property. He
simply acts between the two parties.

(VIII) Indenter:

He is an agent who, busy or sells on behalf of his principal.

(IX) Advocate:

An advocate also acts an agent. He appears on behalf of principal in the court.

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(X) Co-agent:

Who acts jointly is called co-agent.

Types Of Agents

1. General Agent

The general agent possesses the authority to carry out a broad range of
transactions in the name and on behalf of the principal. The general agent may be
the manager of a business or may have a more limited but nevertheless ongoing
role—for example, as a purchasing agent or as a life insurance agent authorized to
sign up customers for the home office.

2. Special Agent

The special agent is one who has authority to act only in a specifically designated
instance or in a specifically designated set of transactions. For example, a real
estate broker is usually a special agent hired to find a buyer for the principal’s land.

3. Agency Coupled with an Interest

An agent whose reimbursement depends on his continuing to have the authority to

act as an agent is said to have an agency coupled with an interest if he has a
property interest in the business.

Types of an Agency Contract

1. Express Agency

A contract of agency can be made orally or in writing. Example of a written contract

of agency is the Power of Attorney that gives a right to an agency to act on behalf
of his principal in accordance with the terms and conditions therein.

A power of attorney can be general or giving many powers to the agent or some
special powers, giving authority to the agent for transacting a single act.
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2. Implied Agency

Implied agency arises when there is any conduct, the situation of parties or is
necessary for the case.

a. Agency by Estoppel (Section 237)

Estoppel arises when you are precluded from denying the truth of anything which
you have represented as a fact, although it is not a fact.

Thus, where P allows third parties to believe that A is acting as his authorized agent,
he will be estopped from denying the agency if such third-parties relying on it make
a contract with an even when A had no authority at all.

b. Wife as Agent

Where a husband and wife are living together, we presume that the wife has her
husband’s authority to pledge his credit for the purchase of necessaries of life
suitable to their standard of living. But the husband will not be liable if he shows
that:

(i) he had expressly warned the tradesman not to supply goods on credit to his wife;
or

(ii) he had expressly forbidden the wife to use his credit; or

(iii) he already sufficiently supplies his wife with the articles in question; or

(iv) he supplies his wife with a sufficient allowance.

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

c. Agency of Necessity (Sections 188 and 189):

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In certain circumstances, a person who has been entrusted with another’s property
may have to incur unauthorized expenses to protect or preserve it. This is called an
agency of necessity.

For example, a sent a horse by railway. On its arrival at the destination, there was
no one to receive it. The railway company, is bound to take reasonable steps to
keep the horse alive, was an agent of the necessity of A.

A wife deserted by her husband and thus forced to live separate from him can
pledge her husband’s credit to buy all necessaries of life according to the position of
the husband even against his wishes.

d. Agency by Ratification (Sections 169-200):

Where a person not having any authority act as agent, or act beyond its authority,
then the principal is not bound by the contract with the agent in respect of such
authority. But the principal can ratify the agent’s transaction and accept liability. In
this way, an agency by ratification arises.

This is ex post facto agency— agency arising after the event. By this ratification,
the contract is binding on principal as if the agent had been authorized before.
Ratification will have an effect on the original contract and so the agency will have
effect from the original contract and not on ratification.

Section 183. Who may employ agent.

Any person who is of the age of majority according to the law to which he is subject,
and who is of sound mind, may employ an agent.

Under Section 183, anybody whose mind is sound and who has reached the age of
majority can appoint an Agent. In other words, anyone able to negotiate may
lawfully designate an Agent. Unhealthy people and minors are unable to designate
an Agent. Similarly, according to Section 184, an individual who reaches the
majority age and is of sound mind can become an Agent. As the Agent is
answerable to the Principal, a sound mind and a mature age are necessary.
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Any person who is of the age of majority according to the law to which he is
subject,and who is of sound mind, may employ an agent. In Shephard v
Cartwright (1935)Ch 728,755 it was observed:

“An infant cannot appoint an agent to act for hum neither by means of a power of
attorney,nor by any other means.If he purports to appoint an agent,not only is the
appointment itself void,but everything done by the agent on behalf of the infant is
also void and incapable of ratification.

Further “there is nothing in the act which prohibits the guardian of a minor from
appointing the agent for him”.

Section 184. Who may be an agent.

As between the principal and third persons, any person may become an agent, but
no person who is not of the age of majority and sound mind can become an agent,
so as to be responsible to the principal according to the provisions in that behalf
herein contained.

Sec.184 lays down the concept of who may be an agent. The agent may not be
competent to contract. As between the principal and the third person any person
may become an agent,but no person who is not of sound mind can become an
agent,so as to be responsible to his principal according to the provisions in that
behalf therein.

Ordinarily,an agent occupies no personal liability while contracting for his principal
and therefore, it is not necessary,that he should be competent to contract.

Thus, a person can contract with a minor agent but the minor agent will not be
responsible to the principal.

Section 185. Consideration not necessary.

No consideration is necessary to create an agency.

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According to Section 185 of Indian Contract Act, Generally an agent is remunerated

by a way of commission for services rendered, but no consideration is immediately
necessary at the time of appointment.

Section 186. Agent’s authority may be expressed or implied.

The authority of an agent may be expressed or implied.

Section 187. Definitions of express and implied.

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

authority is said to be implied when it is to be inferred from the circumstances of
the case; and things spoken or written, or the ordinary course of dealing, may be
accounted circumstances of the case.

Illustration-

A owns a shop in Serampur, living himself in Calcutta, and visiting the shop
occasionally. The shop is managed by B, and he is in the habit of ordering goods
from C in the name of A for the purposes of the shop, and of paying for them out of
A’s funds with A’s knowledge. B has an implied authority from A to order goods from
C in the name of A for the purpose of the shop.

Section 188. Extent of agent’s authority.

An agent, having an authority to do an act, has authority do every lawful thing

which is necessary in order to do so such act.

An agent having an authority to carry on a business, has authority to do every

lawful thing necessary for the purpose, or usually done in the course, of conducting
such business.

Illustrations-

(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A

may adopt any legal process necessary for the purpose of recovering the debt, and
may give a valid discharge for the same.
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(b) A constitutes B his agent to carry on his business of a shipbuilder. B may

purchase timber and other materials, and hire workmen, for the purpose of carrying
on the business.

Section 189. Agent’s authority in an emergency.

An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss and would be done by a person or ordinary
prudence, in his own case, under similar circumstances.

Illustrations-

(a) An agent for sale may have good repaired if it be necessary.

(b) A consigns provision to be at Calcutta, with direction to send them immediately

to C, at Cuttack. B may sell the provision at Calcutta, if they will not bear the
journey to Cuttack without spoiling.

Sub-agents.

Section 190. When agent cannot delegate.

An agent cannot lawful employ another to perform acts which he has expressly or
impliedly undertaken to perform personally, unless by the ordinary custom of trade
a sub-agent may, or, from the nature or agency, a sub-agent must, be employed.

Section 191. “Sub-agent” defined.

A “sub-agent” is a person employed by, and acting undue the control of, the original
agent in the business of the agency.

Section 192. Representation of principal by sub-agent properly appointed.

Where a sub-agent is properly appointed, the principal is, so far as regards third
persons, represented by the sub-agent, and is bound by and responsible for his
acts, as if he were an agent originally appointed by the principal.
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Agent’s responsibility for sub-agent-

The agent is responsible to the principal for the acts of the sub- agent.

Sub-agent’s responsibility-

The sub-agent is responsible for his acts to the agent, but not to the principal,
except in cases of fraud, or wilful wrong.

Section 193. Agent’s responsibility for sub-agent appointed without

authority.

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

Section 194. Relation between principal and person duly appointed by

agent to act in business of agency.

When an agent, holding an express or implied authority to name another person to

act for the principal in the business of the agency, has named another person
accordingly, such person is not a sub-agent, but an agent of the principal for such
part of the business of the agency as is entrusted to him.

Illustrations-

(a) A directs B, his solicitor, to sell his estate by auction , and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not
a sub-agent, but is A’s agent for the conduct of the sale.

(b) A authorizes B, a merchant in Calcutta, to recover the moneys due to A from C &
Co. B instructs D, a solicitor, to take legal proceedings against C & Co. For the
recovery of the money. D is not a sub-agent, but is a solicitor for A.

Section 195. Agent’s duty in naming such person.

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

Illustrations-

(a) A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of

good reputation to choose a ship for A. The surveyor makes the choice negligently
and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is,
responsible to A.

(b) A consigns goods to B, a merchant, for sale. B, in due course, employees an

auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive
the proceeds of the sale. The auctioneer afterwards becomes insolvent without
having accounted for the proceeds. B is not responsible to A for the proceeds.

Ratification.

Section 196. Right of person as to acts done for him without his authority,
effect of ratification.

Where acts are done by one person on behalf of another, but without his knowledge
or authority, he may elect to ratify or to disown such acts. If he ratifies them, the
same effects will follow as if they had been performed by his authority.

Section 197. Ratification may be expressed or implied.

Ratification may be expressed or may be implied in the conduct of the person on

whose behalf the acts are done.

Illustrations-

(a) A, without authority, buys goods, for B. Afterwards B sells them to C on his own
account; B’s conduct implies a ratification of the purchase made for him by A.

(b) A, without B’s authority, lends B’s money to C. Afterwards B accepts interest on
the money from C. B’s conduct implies a ratification of the loan.
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Section 198. Knowledge requisite for valid ratification.

No valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective.

Section 199. Effect of ratifying unauthorized act forming part of a

transaction.

A person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed a part.

Section 200. Ratification of unauthorized act cannot injure third person.

An act done by one person on behalf of another, without such other person’s
authority, which, if done with authority, would have the effect of subjecting a third
person to damages, or of terminating any right or interest of a third person, cannot,
by ratification, be made to have such effect.

Illustrations-

(a) A, not being authorized thereto by B, demands, on behalf of B, the delivery of a

chattel, the property of B, from C who is in possession of it. This demand cannot be
ratified by B, so as to make C liable for damages for his refusal to deliver.

(b) A holds a lease from B, terminable on three months’ notice. C, an unauthorized

person, gives notice of termination to A. The notice cannot be ratified by B, so as to
be binding on A.

Revocation of authority.

Section 201. Termination of Agency.

An agency is terminated by the principal revoking his authority, or by the agent

renouncing the business of the agency; or by the business of the agency being
completed; or by either the principal or agent dying or becoming of unsound mind;
or by the principal being adjudicated an insolvent under the provisions of any Act
for the time being in force for the relief of insolvent debtors.
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Agency means a relationship between one person and another, where the first
person brings the second mentioned person in a legal relationship with others.
There are different modes of the creation of agency and termination of agency.

Termination of Agency

An agent is a person employed to do any act or enter into a contractual relationship

with others (third parties) on behalf of his principal. An agent acts as a connecting
link between his principal and third parties.

While representing his principal, an agent acts in the same capacity as of his
principal. An agent is authorized by his principal to act on his behalf. An agent binds
his principal legally in business transactions with third parties due to their agency
relationship.

According to Section 201 of the Indian Contract Act, 1872, Termination of agency
takes place in the following circumstances: –

1. By revocation of authority by the principal.

2. By renunciation of his authority by the agent.
3. On the performance of the contract of agency.
4. On the death of either principal or agent.
5. By insanity of either principal or agent.
6. With the expiration of time period fixed for the contract of agency.
7. By an agreement made between the principal and his agent.
8. With the insolvency of principal or agent (in few cases).
9. When the principal and his agent is an incorporated company, by its
dissolution
10.With the destruction of the subject matter. (section 56)

Section 201 Termination of agency: An agency is terminated by the principal

revoking his authority, or by the agent renouncing the business of the agency; or by
the business of the agency being completed; or by either the principal or agent
dying or becoming of unsound mind; or by the principal being adjudicated an
insolvent under the provisions of any Act for the time being in force for the relief of
insolvent debtors.

A contract of agency is a species of the general contract. As such, an agency may

terminate in the same way as a contract is discharged except where the agency is
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irrevocable. The relation of principal and agent can only be terminated by the act or
agreement of the parties to the agency or by operation of law. “An agency, when
shown to have existed, will be presumed to have continued, in the absence of
anything to show its termination, unless such a length of time has elapsed as
destroys the presumption”. The agent’s duty to act on behalf of the principal comes
to an end on the termination of an agency. The timeframe for the termination of an
agency can be stipulated by a particular statute or instrument.

In such a case, if the instrument specifies in plain and unambiguous terms that an
agency will terminate without action on the part of the principal or agent upon the
expiration of the time specified in the instrument, the agency will in fact, terminate.
If, after the expiration of the time so stipulated in the contract, the parties continue
their relationship as principal and agent, a rebuttable presumption is raised that
their relations are governed by the original contract and that the contract is
renewed for a similar period. For instance, if the parties entered into a contract for
one year and continued to act under the contractual terms after one year, the court
will presume that the parties in fact intended to keep the contract alive for another
year.

On the other hand, if the parties did not fix any appropriate time for the termination
of contract, the contract is deemed to be terminated after a reasonable time. “What
constitutes a reasonable time during which the authority continues is determined by
the nature of the act specifically authorized, the formality of the authorization, the
likelihood of changes in the purposes of the principal, and other factors”. Moreover,
the burden of proving the termination or revocation of an agency rests on the party
asserting it.

“Parol evidence cannot be admitted to add another term to an agreement even if

the writing contains nothing relating to the particular provision to which the parol
evidence is directed”. Thus, courts will not admit parol evidence while determining
the duration of an agency contract where the written contract is viewed as
integrated, or unambiguous, or both. An agency continuing for a reasonable time
can be terminated by one party only after giving sufficient notice to the other party.

Different ways by which an agency can be terminated:-

1. An agency created for a specific purpose as well as an agency created by a

power of attorney is terminated once the particular purpose for which it was
created was accomplished. After the termination of the agency, the agent is
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free of any fiduciary duty to the principal arising from the agency
relationship.
2. The parties can terminate the agency by mutual agreement. An agency
relationship requires the mutual assent of the parties and both the parties
have the power to withdraw their assent. An agency may not be terminated
by the act of one of the parties and should be done mutually. The mutual
abandonment of an agency is a question of fact since it is a matter of
intention of both the parties. The court will ascertain such intent from the
surrounding facts and circumstances of the transaction as well as implied
from the conduct of the parties.
3. An agency contract may be canceled on the basis of an express stipulation in
the contract. In such a case, the parties will have a right of cancellation at the
will of either party or upon the happening of a contingency or the
nonperformance of some expressed condition. The principal cannot cancel
such an agreement at will so long as the agent fulfills his/her part of the
agreement. However, the principal can cancel the agency contract for any
justifiable cause.
4. An agency may be revoked at the will of the principal when an agency is not
coupled with an interest, and no third party’s rights are involved. The party
terminating the agency must show good cause. Thus, when A enters into a
contract whereby B is to provide A for a stated period of time with goods or
services, which both parties realize are for use in a particular enterprise
owned by A, in the absence of a specific clause so providing, A cannot escape
his obligations under that contract by voluntarily selling his interest in the
enterprise before the expiration of the expressed contract term.
5. Therefore, if the right to cancel an agency contract is dependent upon some
contingency, the cancellation must be justified by establishing the happening
of such contingency. An agency cannot be terminated at will during
certain specific instances. For example, in the matter of distributorship or
sales agency contracts of indefinite duration, an at-will termination is not
feasible.

In such a case, the distributor might have made a substantial investment in

establishing or furthering the distributorship. Hence, the agreement may be
terminated only after a reasonable time has lapsed and reasonable notice of
termination is given. An agency contract to be performed to the principal’s
satisfaction can generally be canceled at will by the principal. Similarly, a power of
attorney constituting a mere agency may be revoked at any time, with or without
cause.
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6. A principal may unilaterally cancel an agency without incurring liability for

breach of contract under the following instances: misconduct or habitual
intoxication of the agent which interferes with his/her employment, the
refusal of the agent to obey reasonable instructions or to permit the principal
to make a proper audit of his/her accounts, serious neglect or breach of duty
by the agent, dishonesty or untrustworthiness of the agent, the agent’s
failure to pay an indebtedness owing to the principal, disloyalty of the agent
like using the agency to make secret profits.
7. Ordinarily, an agent may renounce the agency relationship by expressly
notifying the principal, either orally or in writing. An agent’s cessation of all
relations with the principal and abandonment by the agent may be treated as
a renunciation. However, mere violation of instructions by the agent will not
amount to renunciation.

Although the agency can be terminated at will, the law stipulates that notice must
be given to the party affected by the termination. However, express notice to the
agent that the agency has been revoked, or to the principal that the agency is
renounced, is not always necessary if the affected party actually knows, or has
reason to know the facts resulting in such revocation or renunciation. The principal
shall provide sufficient notice to third parties as to the revocation of the agent’s
authority.

Otherwise, the acts of an agent after his/ her authority has been revoked may bind
a principal as against third persons who rely upon the agency’s continued
existence. This may often happen to transactions initiated by the agent before the
revocation of authority, and the rule is applied in favor of persons who have
continued to deal with insurance agents, purchasing agents, and the like.

There is no need to provide any formal written notice to third persons of the ending
of an agency relationship. Actual notice of termination is sufficient in the case of
third parties and such notice may be shown by a written or oral communication
from the principal or the agent, or it may be inferred from the circumstances. For
instance, a third party is deemed to have actual notice if he/she has knowledge of
the fact that the principal has appointed another agent for the same purpose.

The character of the notice also differs with respect to third parties. Thus, actual
notice must be brought home to former customers who have dealt with the agency
more directly, while notice by publication will be sufficient as to other persons. In
addition, an agency may be terminated by operation of law[x]. The death of the
principal operates as an immediate and absolute revocation of the agent’s authority
unless the agency is one coupled with an interest.
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The rule is the same even if the agency is created with more than one principal.
Where the power or authority is created by two or more principals jointly and one of
them dies, the agency will be terminated unless it is coupled with an interest.
However, an agency may be made irrevocable by statute, notwithstanding the
death of the principal.

8. Regarding the termination of the agency upon the death of the principal, two
views are prevailing. According to one view, unless the agency is one coupled
with an interest, it will terminate on the death of the principal,
notwithstanding the fact that the agent and third person are ignorant of the
fact. Another view is that if the third person dealing with the agent acts in
good faith and in ignorance of the principal’s death, the revocation of the
agency on the death of the principal takes effect only from the time that the
agent receives notice of such death.

In such a case, “the principal’s estate may be bound where the act to be done is not
required to be done in the name of the principal.” Similarly, the death of the agent
will revoke an agency not coupled with an interest and this is the rule when there
are two or more agents. However, in the case where a sub-agent is appointed by
the agent, the authority of a subagent is terminated by the death of the agent,
unless the agent appointed the subagent at the principal’s request. In that event,
the subagent derives his/her authority form the principal and not from the agent.

9. The loss of capacity of a party resulting from temporary or permanent mental

incompetency may result in the termination or suspension of the agency
relationship. Thus, the termination of the agent’s authority due to the loss of
capacity of the principal may not affect the rights of third persons if such
third persons do not have notice of such fact. Also, if the agent’s authority is
coupled with an interest, it is not suspended by the principal’s insanity.

Similarly, the bankruptcy of the principal is a valid reason for the termination of
agency and the agent is divested of any authority to deal with any assets or rights
of property of which the principal was divested by reason of the bankruptcy,
irrespective of whether the agent receives notice of the bankruptcy. A power of
attorney may be terminated by the bankruptcy of the principal. The mere
insolvency of the principal will not automatically terminate the agent’s authority.

10.A change in the value of the subject matter or a change in business

conditions may terminate or suspend the agent’s authority if the agent
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should reasonably infer that the principal would not consent if aware of such
facts. Similarly, a change in the legal identity of, or merger by, the principal is
a valid ground for termination of an agency contract. The loss or destruction
of the subject matter of the agency or the termination of the principal’s
interest is yet another ground for terminating the agent’s authority.

The agent’s authority ceases when the agent has notice of the fact. However,
destruction of subject matter will not always result in the termination of the agency,
especially when the subject matter can be replaced without substantial detriment to
either party.

In addition, a change of law making the required act illegal may terminate an
agency contract. If the authority or power of an agent is coupled with an interest, it
is not revocable by the act, condition, death, or mental incapacity of the principal
before the expiration of the interest, unless there is some agreement to the
contrary. Power is coupled with an interest where the agent receives title to all or a
part of the subject matter of the agency. In order to support a claim of power
coupled with an interest, either legal title or equitable title is sufficient. A power
coupled with an interest will survive to the personal representative of the agent
upon the agent’s death.

R. Sayani v Bright Bros (P) Ltd, AIR1980 Mad 162

Where an agency has been created for a fixed period, compensation would have to
be paid for its premature termination, if the termination is without sufficient cause.
Reasonable notice for premature determination of agency was not given. The agent
was earning Rs. 4000 per month. The court was of the view that at least three
months’ notice should have been given. A compensation of Rs. 12,000 was
accordingly allowed.

Carter v White, (1883) 2 Ch D 666: (1881-85) All ER Rep 921.

A principal owed a sum of money to his agent and gave him an accepted bill of
exchange with an authority to fill in the drawer’s name. The principal died before
the agent could complete the bill. His authority to fill in the drawer’s name was held
not to be terminated.
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Sukhdev v Commr of Endowments, (1998) 1 BC 403 (AP)

An agency comes to an automatic end on the expiry of its term. Where the agency
was to run a petrol pump for a specific period, it was held that the agent was bound
to vacate the premises on expiry of the period. There was no renewal clause, nor in
fact, there was any renewal.

Trueman v Loder (1840) 11 Ad & El 589

Here A traded as B’s agent. With the authority of B, all parties with whom A made
contracts in that business, were held to have a right to hold B liable to them until B
gives notice to the world that A’s authority is revoked and it makes no difference if
in a particular case the agent intended to keep the contract on his own account. The
court repelled the contention that it was very unreasonable to expect that the
principal should inform the whole world that he has canceled the power of attorney
given to his agent and that he cannot be expected to approach everybody with
whom the agent was likely to enter into a contract and inform him of the
cancellation.

Effect of Termination of Agent’s Authority

Sometimes former agents continue to act on their ex-principals’ behalf even though
the agency has ended. Once an agency terminates by any of the means just
described, the agent’s actual authority(expressed and implied) ends as well.
Nonetheless, such “ex-agents” may retain apparent authority to bind their former
principals.

Third parties who are unaware of the termination may reasonably believe that an
ex-agent still has authority. To protect third parties who rely on such a reasonable
appearance of authority, an agent’s apparent authority often persists after
termination. Thus, a former agent may be able to bind the principal under his
apparent authority even though the agency has ended.

Notice To Third Parties

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Apparent authority ends only when the third party receives appropriate notice of
the termination, that is, when it is no longer reasonable for a third party to believe
that the agent has actual authority. Some bases for termination by operation of law
(such as changed circumstances) may provide such notice.

Under the Restatement (Third) of Agency, an agent’s apparent authority may

continue even after the principal’s death or loss of capacity. An agent may act with
apparent authority following the principal’s death or loss of capacity because the
basis of apparent authority is a principal’s manifestation to third parties, coupled
with a third party’s reasonable belief that the agent acts with actual authority.

When third parties do not have noticed that the principal has died or lost capacity,
they may reasonably believe the agent to be authorized. The rule that the
principal’s death does not automatically terminate apparent authority is consistent
with the interest of protecting third parties who act without knowledge of the
principal’s death or loss of capacity.

To protect themselves against unwanted liability, however, prudent principals will

want to notify third parties themselves. The required type of notification varies with
the third party in question.

For third parties who have previously dealt with the agent or who have begun to
deal with the agent, actual notification is necessary. This can be accomplished by-

(1) a direct personal statement to the third party; or

(2) writing delivered to the third party personally, to his place of business, or to
some other place reasonably believed to be appropriate.

For all other parties, constructive notification Usually, these other parties are aware
of the agency but did no business with the agent. Constructive notification normally
can be accomplished by advertising the agency’s termination in a newspaper of
general circulation in the place where the agency business regularly was carried on.
If no suitable publication exists, notification by other means reasonably likely to
inform third parties—for example, posting a notice in public places or at a website—
may be enough.
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Claim For Damages

Apart from the revocation of the agency, the principal may also claim
damages/losses sustained due to the acts/non-acts of the agent by referring the
matter to arbitration as stipulated in the contract of agency. It also is well settled
that the party who has breached the contract and has by his conduct exhibited the
traits of having abandoned or renounced the obligations under the contract will not
be entitled to claim damages from the other side.

In this case, the sole selling agent, having exhibited uncooperative attitude and
conduct and by virtually sabotaging the business of the principal, notwithstanding
his clear obligations both under the agreement and the Contract Act, would have no
case to go before any court and seek damages or compensation – on the contrary,
the principal would be well justified in claiming damages and expenses/costs
against the sole selling agent. In view of the ‘doctrine of necessity’, the dispensing
with prior to six months’ notice would be justified and reasonable – otherwise, to
wait for six months and play into the hands of an untrustworthy agent would only
witness the complete obliteration of the principal’s business.

Section 202. Termination of Agency, where agent has an interest in

subject-matter.

Where the agent has himself an interest in the property which forms the subject-
matter of the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.

Illustrations-

(a) A, gives authority to B to sell A’s land, and to pay himself, out of the proceeds,
the debts due to him from A. A cannot revoke this authority, nor can it be
terminated by his insanity or death.

(b) A consigns 1,000 bales of cotton to be, who has made advances to him on such
cotton, and desires B to sell the cotton, and to repay himself out of the price the
amount of his own advances. A cannot revoke this authority, not is it terminated by
his insanity or death.

Section 203. When principal may revoke agent’s authority.

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The principal may, save as is otherwise provided by the last preceding section,
revoke the authority given to his agent at any time before the authority has
been exercised so as to bind the principal.

Section 204. Revocation where authority has been partly exercised.

The principal cannot revoke the authority given to his agent after the authority has
been partly exercised, so far as regards such acts and obligations as arise from acts
already done in the agency.

Illustrations-

(a) A authorizes B to buy, 1,000 bales of cotton on account of A and to pay for it out
of A’s money remaining in B’s hands. B buys, 1,000 bales of cotton in his own name,
so as to make himself personally liable for the price. A cannot revoke B’s authority
so far as regards payment for the cotton.

(b) A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out
of A’s money remaining in B’ s hands. B buys 1,000 bales of cotton in A’ s name,
and so as not to render himself personally liable for the price. A can revoke B’s
authority to pay for the cotton.

Section 205. Compensation for revocation by principal, or renunciation by

agent.

Where there is an express or implied contract that the agency should be continued
for any period of time, the principal must make compensation to the agent, or the
agent to the principal, as the case may be, for any previous revocation or
renunciation of the agency without sufficient cause.

Section 206. Notice of revocation or renunciation.

Reasonable notice must be given of such revocation or renunciation; otherwise the

damage thereby resulting to the principal or the agent, as the case may be, must
be made good to the one by the other.

Section 207. Revocation and Renunciation may be expressed or implied.

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Revocation and renunciation may be expressed or may be implied in the conduct of

the principal or agent respectively.

Illustration-

A empowers B to let A’s house. Afterwards A lets it himself. This is an implied

revocation of B’s authority.

Section 208. When termination of agent’s authority takes effect as to

agent, and as to third persons.

The termination of the authority of an agent does not, so far as regards the agent,
take effect before it becomes known to him, or, so far as regards third persons,
before it becomes known to them.

Illustrations-

(a) A directs B to sell goods for him, and agrees to give B five per cent commission
on the price fetched by the goods. A afterwards by letter, revokes B’s authority. B
after the letter is sent, but before he receives it, sells the goods for 100rupees. The
sale is binding on A, and B is entitled to five rupees as his commission.

(b) A, at Madras, by letter directs B to sell for him some cotton lying in a warehouse
in Bombay, and afterwards, by letter, revokes, his authority to sell, and directs B to
send the cotton to Madras. B after receiving the second letter, enters into a contract
with C, who knows of the first letter, but not o the second, for the sale to him of the
cotton. C pays B the money, with which B absconds. C’s payment is good as against
A.

(c) A directs B, his agent, to pay certain money to C. A dies, and D takes out
probate to his will. B, after A’s death, but before hearing of it, pays the money to C.
The payment is good as against D, the executor.

Section 209. Agent’s duty on termination of agency by principal’s death or

insanity.

When an agency is terminated by the principal dying or becoming of unsound mind,

the agent is bound to take, on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interests entrusted to
him.
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Section 210. Termination of Sub-agent’s authority.

The termination of the authority of an agent causes the termination (subject to the
rules herein contained regarding the termination of an agent’s authority) of the
authority of all sub-agents appointed by him.

Agent’s duty to principal.

Section 211. Agent’s duty in conducting principal’s business.

An agent is bound to conduct the business of his principal according to the

directions given by the principal, or, in the absence of any such directions,
according to the custom which prevails in doing business of the same kind at the
place where the agent conducts such business. When the agent acts otherwise, if
any loss be sustained, he must make it good to his principal, and, if any profit
accrues, he must account for it.

Illustrations-

(a) A, an agent engaged in carrying on for B a business, in which it is the custom to

invest from time to time, at interest, the moneys which may be in hand, on its to
make such investment. A must make good to B the interest usually obtained by
such investments.

(b) B, a broker in whose business it is not the custom to sell on credit, sells goods of
A on credit to C, whose credit at the time was very high. C, before payment,
becomes insolvent. B must make good the loss to A.

When an agent is appointed to facilitate or negotiate a transaction on behalf of the

principal, the agent owes a duty to the principal to act in the principal’s best
interests within the authority of the agent.

In practice, the duty to act in the best interests of the principal requires the agent to
use his due diligence and skill to negotiate terms of a transaction on behalf of his
principal with a third party to the greatest advantage of his principal in the
circumstances.
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According to Section 211 an agent that an agent is bound to conduct the business
of his principal according to the directions given by the principal and to keep
himself within the confines of his authority.In the absence of directions,the agent
has to follow the custom which prevails in businesses of the same kind and at the
place where the agent conducts such businesses.When the agent acts otherwise,if
any loss be sustained,he must make it good to his principal,and,if any profit
accrues,he must account for it.Thus for example,in Liley v.Doubleday (1881) 7
QBD 510.

An agent was instructed to warehouse his principal’s goods at a particular place. He

placed a part of them at a different warehouse which was equally safe. But the
goods were destroyed without negligence.

The agent was held liable for the loss. Any disobedience, or departure from, the
instructions make the agent absolutely liable for the loss.

Where a principal had given instructions of ambiguous nature which were capable
of two meaning, he was not permitted to argue as against the agent that he should
have read the instruction in the other sense than what he actually did.

In the absence of instructions, business customs must be followed. Where, for

example, the customs of a trade require that goods should not be sold on credit or
in return for a negotiable instrument; the agent should not do so. If he does so, he
would be liable to the principal for any loss resulting from the transaction.

Because an agent acts under the principal’s control and for the principal’s benefit,
she has a duty to act within her actual authority and to obey the principal’s
reasonable instructions for carrying out the agency business.

There are exceptions to the duty to obey instructions. A gratuitous agent need not
obey his principal’s order to continue to act as an agent. Also, agents generally
have no duty to obey orders to behave illegally or unethically. Thus, a sales agent
need not follow directions to misrepresent the quality of the principal’s goods, and
professionals such as attorneys and accountants are not obligated to obey
directions that conflict with the ethical rules of their professions.
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Usually a principal’s instructions are clear and can be easily followed. Sometimes,
however, the instructions are ambiguous. For example, an instruction may have
terms an agent does not understand. Or perhaps a cell phone conversation may be
garbled due to poor signal strength. When a principal’s instructions are unclear, the
agent has a duty to communicate with the principal to clarify the instructions.

Section 212. Skill and Diligence required from agent.

An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the principal
has notice of his want of skill. The agent is always bound to act with reasonable
diligence, and to use such skill as he possesses; and to make compensation to his
principal in respect of the direct consequences of his own neglect, want of skill or
misconduct, but not in respect of loss or damage which are indirectly or remotely
caused by such neglect, want of skill or misconduct.

Illustrations-

(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money

is paid on A’s account, with order to remit. B retains the money for considerable
time. A, in consequence of not receiving the money, becomes insolvent. B is liable
for the money and interest, from the day on which it ought to have been paid,
according to the usual rate, and for any further direct loss as, e.g., by variation of
rate of exchange-but not further.

(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B in
credit, without making the proper and usual enquiries as to the solvency of B. B at
the time of such sale, is insolvent. A must make compensation to his principal in
respect of any loss thereby sustained.

(c) A, an insurance-broker employed by B to effect an insurance on a ship, omits to

see that the usual clauses are inserted in the policy. The ship is afterwards lost. In
consequence of the omission of the clauses nothing can be recovered from the
underwriters. A is bound to make good the loss to B.

(d) A, merchant in England, directs B, his agent at Bombay, who accepts the
agency, to send him 100 bales of cotton by a certain ship. B, having it in his power
to send the cotton, omits to do so. The ship arrives safely in England. Soon after her
arrival the price of cotton rises. B is bound to make good to A the profit which he
might have made by the 100 bales of cotton at the time the ship arrived, but not
any profit he might have made by the subsequent rise.
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Section 212 lays down the standard of care and skill required by an agent.

a. Common law requires an agent to act with due care and skill in performing
his duties. Agents who fail to meet this standard are prima facie negligent.

b. Generally speaking, an agent in a certain profession, trade or calling who

performs his duty with the degree of care and skill expected of a reasonable,
average member of the relevant profession, trade or calling meets the
requisite standard.

The Agent is bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the direct
consequences of his neglect, want of skill or misconduct, but not in respect of loss
or damage which are indirectly or remotely caused by such neglect, want of skill, or
misconduct.

If the principal suffers any loss owing to the agent’s want of care or skill, the agent
must compensate the principal for such loss .An agent is liable to his principal for
the direct consequences. If, for example, an agent fails to send the principal’s
money in time, he may be liable for the money and the loss of interest, but not if
the principal becomes insolvent by that reason.

Keppel v. Wheeler An agent was appointed to sell a house. He received as offer

which he promptly communicated to his principal. The latter accepted it
provisionally “subject to contract”. Subsequently the agent received a higher offer
which he failed to pass on to the principal. This resulted in final acceptance of the
first offer in ignorance of the second. The agent was held liable to make good the
principal’s loss in terms of the difference in the two prices ( Keppel v.Wheeler
(1927) 1 KB 577)

The meaning “direct consequences” has been explained by Pannalal Jankidas v

Mohanlal:

An agent, having been instructed to insure certain goods, failed to do so. The goods
were lost in an explosion at the docks. Even if the agent had taken out a fire
insurance policy in the usual form it would not have covered a loss of this kind, as
fire due to explosion would have been an expected peril. But the Bombay
Government passé an ordinance under which it overtook to pay half loss in cases of
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uninsured goods. Thus the principal got only half of what he would have got if the
goods had been insured.

The agent contended that as the passing of the ordinance could not have been
anticipated, the loss was too remote. But, it was held by a majority, that the loss
was the direct result of the agent’s negligence.

A paid agent must act with the care, competence, and diligence normally exercised
by agents in similar circumstances. Paid agents who represent that they possess a
higher than customary level of skill may be held to a correspondingly higher
standard of performance. Similarly, an agent’s duty may change if the principal and
the agent agree that the agent must possess and exercise greater or lesser than
customary care and skill.

Agent is also under the duty to communicate with the principal- It is the duty of an
agent, in cases of difficulty, to use all reasonable diligence of communicating with
his principal, and in seeking to obtain his instructions. Unless otherwise agreed, an
agent may not use or communicate confidential information of the principal for the
agent’s own purpose or that of a third party.

Confidential information is the principal’s information entrusted by the principal to

the agent for purposes of the agent carrying out her duties. Confidential information
includes facts that are valuable to the principal because they are not widely known
or that would harm the principal’s business if they became widely known. Examples
include the principal’s business plans, financial condition, contract bids,
technological discoveries, manufacturing methods, customer files, and other trade
secrets.

In the absence of an agreement to the contrary, after the agency ends almost all
fiduciary duties terminate. For example, an agent may compete with her principal
after termination of the agency. As the following ABKCO case illustrates, however,
the duty not to use or disclose confidential information continues after the agency
ends. The former agent may, however, utilize general knowledge and skills acquired
during the agency.

Section 213. Agent’s accounts.

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An agent is bound to render proper accounts to his principal on demand.

Section 214. Agent’s duty of communicate with principal.

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in

communicating with his principal, and in seeking to obtain his instructions.

Section 215. Right to principal when agent deals, on his own account, in
business of agency without principal’s consent.

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

Illustrations-

(a) A direct B to sell A’s estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he
can show that B has dishonestly concealed any material fact, or that the seals has
been disadvantageous to him.

(b) A directs B to sell A’s estate. B, on looking over the estate before selling it, finds
a mine on the estate which is unknown to A. B informs A that he wished to buy the
estate for himself but conceals the discovery of the mine. A allows B to buy, in
ignorance of the existence of the mine. A, on discovering that B knew of the mine at
the time he bought the estate, may either repudiate or adopt the sale at his option.

Section 216. Principal’s right to benefit gained by agent dealing on his

own account in business of agency.

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

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

Section 217. Agent’s right of retainer out of sums received on principal’s

account.

An agent may retain, out of any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of advances made or
expenses properly incurred by him in conducting such business, and also such
remuneration as may be payable to him for acting as agent.

Section 218 . Agent’s duty to pay sums received for principal.

Subject to such deductions, the agent is bound to pay to his principal all sums
received on his account.

According to Section 218 of Indian Contract Act, agent is under the duty to remit
sum repay to his principal all sums received on his account. The agent is, however,
entitled to deduce his lawful charges, but subject only to this right, the principal’s
money must be remitted to him even if it has been received in pursuance to a void
or illegal contract.

The agent has to perform this duty even if his earnings for the principal flow out of
void or illegal transactions. “If an agent receives money on his principal’s behalf
under an illegal and void contract, the agent must account to the principal for the
money so received and cannot set up the illegality of contracts as a justification for
withholding payment, which illegality the other contracting party has waived by the
paying the amount.”

The agent has the right to make a counter claim. The Bombay High Court did not
consider it fair or in the interest of justice to compel the agent to deposit the
amount in the court as a measure of protecting his principal, particularly where
there was a claim against the claim.

Duty to maintain Accounts:

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Alan agent who receives any property for his principal or from his principal is bound
to keep such property separate from his own and he is to be treated as a trustee of
such property.

For the reason stated in sub-paragraph (a), an agent has a duty to keep proper
accounts of the property received by him in the course of the agency and to render
such account to the principal on request.

Even after the agency relationship has ceased, the agent’s duty to account to the
principal may continue. Hence, the agent is obliged to return to his principal all
documents and property originally given to the agent by the principal and
documents prepared by the agent on the instruction and at the expense of the
principal.

Agents must keep accurate records and accounts of all transactions and disclose
these to the principal once the principal makes a reasonable demand for them. Also,
an agent who obtains or holds property for the principal usually may not commingle
that property with her own property. For example, an agent ordinarily cannot
deposit the principal’s funds in her own name or in her own bank account.

In Ram All v.Asian Commrel AIR 1933 Lah 483, The High Court observed: “The
right to claim a statement of accounts is an unusual form of relief, only granted in
certain specific cases and is only to be claimed when the relationship between the
parties is such that this is the only relief which will enable the claimant to
satisfactorily assert his legal rights”.

Section 219. When agent’s remuneration becomes due.

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

Section 220. Agent not entitled to remuneration for business

misconducted.
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An agent who is guilty of misconduct in the business of the agency is not entitled to
any remuneration in respect of that part of the business which he has
misconducted.

Illustrations-

(a) A employs B to recover 1,00,000 rupees from C, and to lay it out on good
security. B recovers the 1,00,000 rupees and lays out 90,000 rupees on good
security, but lays out 10,000 rupees on security which he ought to have known to
be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for recovering
the 1,00,000 rupees and for investing the 90,000 rupees. He is not entitled to any
remuneration for investing the 10,000 rupees, and he must make good the 2,000
rupees to B.

(b) A employs B to recover 1,000 rupees from C. Through B’s misconduct the money
is not recovered. B is entitled to no remuneration for his services and must make
good the loss.

Section 221. Agent’s lien on principal property.

In the absence of any contract to the contrary, an agent is entitled to retain goods,
papers, and other property, whether movable or immovable, of the principal
received by him, until the amount due to himself for commission, disbursements
and services in respect of the same has been paid or accounted for to him.

Under Section 221, the agent is given lien property, for recovering the dues from
the principal. The section states that in the absence of any contract, an agent is
bound and entitled to retain the goods, papers and property which can either be
movable or immovable, of the principal amount which was received by him, until
the particular amount due to himself for the commission, disbursements and the
services which have been rendered in respect of the same which have been paid or
had accounted to him.

Therefore, the principal can come to owe the money in two ways that the agent
should have incurred expenses for the agency or it could be for his commission or
remuneration.
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In the case of Gopaldas v. Thakurdas, the High court reviewed the provision of
the agent’s lien. The agent was the firm for the commission of agents who brought
some goods for the principals who were under them. Even the principal supplied the
money for buying the goods. But at some other times, the agent spent the money
from his own pocket. Therefore, the agent sold the goods of the principal to recover
his due amount.

It was observed by the Court that the agent selling the goods of the principal may
not be justified since he didn’t have any authority over the goods of the principal.
However, the agent spent some amount from his own pocket and he is in opposition
as a tacit pledgee to reserve a right to recover as much of his outlay as possible by
selling the goods which belong to his custody.

This particular Section gives the right to the agent so that he can retain the goods,
that would not be a part of the possession until the dues are paid. However, this
doesn’t mean that the agent has a right to sell the goods. If the principal pledges
the goods, then the principal becomes a pawnee. And the lien of such goods is not
governed by Section 221 of the Indian Contract Act, 1872 but under the provisions
of the Bailment and Pledge.

A lien reserves a right only to retain the possession in the property of the principal.
If there is a condition that the rights of the principal are considered to be limited, as
the agents are the third parties to the agreement, then the lien will be also limited.
A lien is lost when the agent actually losses possession. The agent is successful in
delivering the property to the agent, through any of the means, the lien is lost.

Principal’s duty to agent.

Section 222. Agent to be indemnified against consequences of lawful acts.

The employer of an agent is bound to indemnify him against the consequences of

all lawful acts done by such agent in exercise of the authority conferred upon him.

Illustrations-

(a) B, at Singapore under instructions from A of Calcutta, contracts with C to deliver

certain goods to him. A does not send the goods to B, and C sues B for breach of
contract. B informs A of the suit, and A authorizes him to defend the suit. B defends
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the suit, and is compelled to pay damages and costs, and incurs expenses. A is
liable to B for such damages, costs and expenses.

(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for
the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C
sues B. B informs A, who repudiates the contract altogether. B defends, but
unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable
to B for such damages, costs and expenses.

Section 223. Agent to be indemnified against consequences of acts done

in good faith.

Where one person employs another to do an act, and the agent does the act in
good faith, the employer is liable to indemnify the agent against the consequences
of that act, though it causes an injury to the rights of third persons.

Illustrations-

(a) A, a decree-holder and entitled to execution of B’s goods requires the officer of
the court to seize certain goods, representing them to be the goods of B. The officer
seizes the goods, and is sued by C, the true owner of the goods. A is liable to
indemnify the officer for the sum which he is compelled to pay to C, in consequence
of obeying A’s directions.

(b) B, at the request of A, sells goods in the possession of A, but which A had no
right to dispose of. B does not know this, and hands over the proceeds of the sale to
A. Afterwards C, the true owner of the goods, sues B and recovers the value of the
goods and costs. A is liable to indemnify B for what he has been compelled to pay to
C, and for B’s own expenses.

Section 224. Non-Liability of employer of agent to do a Criminal Act.

Where one person employs another to do an act which is criminal, the employer is
not liable to the agent, either upon an express or an implied promise, to indemnify
him against the consequences of that act.

Illustrations-
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(a) A employs B to beat C, and agrees to indemnify him against all consequences of
the act. B thereupon beats C, and has to pay damages to C for so doing. A is not
liable to indemnify B for those damages.

(b) B, the proprietor of a newspaper, publishes, at A’s request, a libel upon C in the
paper, and A agrees to indemnify B against the consequences of the publication,
and all costs and damages of any action in respect thereof. B is sued by C and has
to pay damages, and also incurs expenses. A is not liable to B upon the indemnity.

Section 225. Compensation to agent for injury caused by principal’s

neglect.

The principal must make compensation to his agent in respect of injury caused to
such agent by the principal’s neglect or want of skill.

Illustration-

A employs B as a bricklayer in building a house, and put up the scaffolding himself.

The scaffolding is unskillfully put up, and B is in consequence hurt. A must make
compensation to B.

Effect of agency on contracts with third persons.

Section 226. Enforcement and Consequences of agent’s contracts.

Contracts entered into through an agent, and obligations arising from acts done by
an agent, may be enforced in the same manner, and will have the same legal
consequences, as if the contracts had been entered into and the acts done by the
principal in person.

Illustrations-

(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing
who is the principal. B’s principal is the person entitled to claim from A the price of
the goods, and A cannot, in a suit by the principal, set-off against that claim a debt
due to himself from B.

(b) A, being B’s agent; with authority to receive money on his behalf, receives from
C a sum of money due to B. C is discharged of his obligation to pay the sum in
question to B.
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Section 227. Principal how far bound, when agent exceeds authority.

When an agent does more than he is authorised to do, and when the part of what
he does, which is within his authority, can be separated from the part which is
beyond his authority, so much only of what he does as is within his authority is
binding as between him and his principal.

Illustration-

A, being owner of a ship and cargo, authorizes B to procure an insurance for 4,000
rupees on the ship. B procures a policy for 4,000 rupees on the ship, and another
for the like sum on the cargo. A is bound to pay the premium for the policy on the
ship, but not the premium for the policy on the cargo.

Section 228. Principal not bound when excess of agent’s authority is not
separable.

Where an agent does more than he is authorised to do, and what he does beyond
the scope of his authority cannot be separated from what is within it, the principal is
not bound to recognise the transaction.

Illustration-

A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a
sum of 6,000 rupees. A may repudiate the whole transaction.

Section 229. Consequences of notice given to agent.

Any notice given to or information obtained by the agent, provided it be given or

obtained in the course of the business transacted by him for the principal, shall, as
between the principal and third parties, have the same legal consequence as if it
had been given to or obtained by the principal.

Illustrations-

(a) A is employed by B to buy from C certain goods, of which C is the apparent

owner, and buys them accordingly. In the course of the treaty for the sale, A learns
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that the goods really belonged to D, but B is ignorant of that fact B is not entitled to
set-off a debt owing to him from C against the price of goods.

(b) A is employed by B to buy from C goods of which C is the apparent owner. A

was, before he was so employed a servant of C, and then learnt that the goods
really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his
agent, B may set-off against the price of the goods a debt owing to him from C.

Section 230. Agent cannot personally enforce, nor be bound by, contracts
on behalf of principal.

In the absence of any contract to that effect, an agent cannot personally enforce
contracts entered into by him on behalf of his principal, nor is he personally bound
by them.

PRESUMPTION OF CONTRACT TO THE CONTRARY–

Such a contract shall be presumed to exist in the following cases-

(1) where the contract is made by an agent for the sale or purchase of goods for a
merchant resident abroad;

(2) where the agent does not disclose the name of his principal; and

(3) where the principal, though disclosed, cannot be sued.

Section 231. Rights of Parties to a contract made by agent not disclosed.

If an agent makes a contract with a person who neither knows, nor has reason to
suspect, that he is an agent, his principal may require the performance of the
contract; but the other contracting party has, as against the principal, the same
rights as he would have had as against the agent if the agent had been the
principal.

If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfil the contract, if he can show that, if he had
known who was the principal in the contract, or if he had known that the agent was
not a principal, he would not have entered into the contract.
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Section 232. Performance of contract with agent supposed to be principal.

Where one man makes a contract with another, neither knowing nor having
reasonable ground to suspect that the other is an agent, the principal, if he requires
the performance of the contract, can only obtain such performance subject to the
rights and obligations subsisting between the agent and the other party to the
contract.

Illustration-

A, who owes 500 rupees to B, sells, 1,000 rupees worth of rice to B. A is acting as
agent for C in the transaction, but B has neither knowledge nor reasonable ground
of suspicion that such is the case. C cannot compel B to take the rice without
allowing him to set-off A’s debt.

Section 233. Right of person dealing with agent personally liable.

In cases where the agent is personally liable, a person dealing with him may hold
either him or his principal, or both of them, liable.

Illustration-

A enters into a contract with B to sell him 100 bales of cotton, and afterwards,
discovers that B was acting as agent for C. A may sue either B or C, or both, for the
price of the cotton.

Section 234. Consequence of Inducing agent or principal to act on belief

that principal or agent will be held exclusively liable.

When a person who has made a contract with an agent induces the agent to act
upon the belief that’ the Principal only will be held liable, or induces the principal to
act upon the belief that the agent only will be held liable, he cannot afterwards hold
liable the agent or principal respectively.

Section 235. Liability of pretended agent.

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A person untruly representing himself to be the authorised agent of another, and

thereby inducing a third person to deal with him as such agent, is liable, if his
alleged employer does not ratify his acts, to make compensation to the other in
respect of any loss or damage which he has incurred by so dealing.

Section 236. Person falsely contracting as agent not entitled to

performance.

A person with whom a contract has been entered into in the character of agent, is
not entitled to require the performance of it if he was in reality acting, not as agent,
but on his own account.

Section 237. Liability of principal inducing belief that agent’s unauthorized

acts were authorized.

When an agent has, without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by such acts or obligations,
if he has by his words or conduct induced such third persons to believe that such
act and obligations were within the scope of the agent’s authority.

Illustrations-

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

(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in

violation of private order from A. The sale is good.

Section 238. Effect, on agreement, of misrepresentation or fraud by agent.

Misrepresentations made, or frauds committed, by agents acting in the course of

their business for their principals, have the same effect on agreements made by
such agents as if such misrepresentations or frauds had been made or committed,
by the principals; but misrepresentations made, or frauds, committed, by agents, in
matters which do not fall within their authority, do not affect their principals.

Illustrations-
 382

(a) A, being B’s agent for the sale of goods, induces C to buy them by a
misrepresentation, which he was not authorized by B to make. The contract is
voidable, as between B and C, at the option of C.

(b) A, the captain of B’s ship, signs bills of lading without having received on board
the goods mentioned therein. The bills of lading are void as between B and the
pretended consignor.