UNIT – I– INDIAN CONTRACT ACT 1872

1. INDIAN CONTRACT ACT 1872: GENERAL PRINCIPLES OF CONTRACT

Contract Act - Definition, Classification - Essentials of a Contract - Offer and Acceptance -

Consideration - Contractual Capacity - Free Consent - Legality of Object- Void agreements -
Performance of Contract - Modes of Discharge of Contract - Remedies for Breach of
Contract.

INTRODUCTION ABOUT LAW

The rule of conduct imposed by a Govt. to maintain order and fairness is called law; laws
are exacted and backed by authority and power of the state.

THE INDIAN CONTRACT ACT, 1872

The law of contract of India is contains in the Indian Contract Act 1872.This act is
based mainly an English common law. It extends to the whole of India (Except the state of
Jammu & Kashmir) and came into force on the first day of September 1872.
The Act is not exhaustive because, it does not deal with all the Branches of the law of
contract. There are separate set which deal with contracts relating to negotiable instruments,
transfer of properly, state of goods, partnerships, Insurance etc.

Scheme of the Act:

1. General principles of the law of the contract(sec1-75)
2. Specific kinds ofcontracts
a) Contracts of indemnity and guarantee(124-147)
b) Contracts of Bailment & Pledge (sec148-181)
c) Contracts of Agency (sec 182-238) Definition of contract:

According to sec 2(h) of the Indian Contract Act, An Agreement enforceable by law is a
contract”. So, it is clear that a contract is an agreement made between two or more parties
which the law will enforce.
 There are two elements in the above definition such as
1. An agreement between twoparties
2. Enforceability

Agreement and two parties:

As per sect 2(e): “Every promise and every set of promises, forming consideration for
each other, is an agreement.” Thus, it is clear that the ‘promises’ is an agreement.
As per sec 2(b): “A proposal, if it is accepted becomes a promise”, this means that an
agreement is an accepted proposal. So, an agreement comes into existence only when one
party makes a proposal (or offer) to the other party and the other gives his acceptance there to.
Agreement= offer+ Acceptance

Enforceability:
An agreement, to become a contract, should create legal obligation or duty. If an
agreement is incapable of creating legal duty, it is not a contract.So, agreement of moral,
religious or social nature are not contracts, because they do not create legal obligations between
the parties.
For eg: inviting a friend to dinner, a father promise to his son for a gift etc. are of social
obligations. As these agreements cannot create legal duties, they cannot become contracts. But
in business agreements, it is assumed that the parties concerned create legal duties, hence they
arecontracts.
So, it is clear that an agreement is a wider term than a contract. “All contracts are
agreements but all agreement are not contracts”. To sum up: Contract = Agreement+
Enforceability

Consensus ad-idem:
The essence of an agreement is the meeting the minds of the parties in all this means that
the parties to the agreement must have agreed about the subject-matter of the agreement in the
same sense and the same time, in other word, there should be consensus ad=idem between the
mind of the parties. Unless there is consensus ad-idem, there should be no contract.
ESSENTIAL ELEMENT OF VALID CONTRACT:

1. Offer andAcceptance:
There must be a lawful offer and a lawful acceptance of the offer. So, there must be two
parties to an agreement. i.e., one party making the offer and the other party accepting it. The
terms of the offer should be definite and acceptance should be absolute.
2. Intention to create legalrelationship:
Where the two parties, enter into agreement, their intention must be to create legal
relationship between them. If there is no such an intention, there is no contract between them.
Agreements of social, religious or domestic nature cannot make the legal relationship between
the parties.
In case of law of balfour vs. balfour (1919) insisted this point. Balfour vs. balfour
1919:The husband promised to pay his wife a household allowance of ₤30 every month. Later,
the husband failed to pay the amount. The wife sued for the allowance. Held, she could not
recover the amount as the agreement did not create any legal relationship; hence, there was no
contract at all.

But, in business agreements it is assumed that parties concerned create a legal

relationship. Thus, an agreement to buy and sell goods intends to create legal relationship,
there is a contract. But, if the parties have expressly declared their intention not creates any
legal relationship even in the business agreement, such type of agreement cannot become a
contract. The case of Rose & Frank co vs. Corruption Bros, in a good illustration on thepoint.
3. Lawfulconsideration:
The term “consideration” means an advantages or benefits moving from one party to
the other. It means “something in return”. The agreement between lawful only when party
gives something to theother party and receives something from the other party. Consideration
need not necessarily be in cash on hand. It may be an act or forbearance not doing something
or promise to do or not to do something. But it must be real and lawful.
4. Capacity of parties:
The parties entering into a contract must have certain capacity. They must be legally
competent to enter into a valid contract. They should not suffer from any incapacity either on
account of status like forgiveness of an account of mutual deficiency like minors, lunatics or
any ground if the parties have no capacity, the contract entered into by them as void of initio.
5. Free and genuineconsent:
It is essential that the parties must be on the same mind and on the same subject. There
should consensus ad-idem between the parties to the contract. The parties should have a free
and genuine willingness in making the contract. The consent should have to been obtained by
force or any other by force or any other coercive methods. The consent is said to be free of it is
not obtainedby,
A. coercion
B. undueinfluence
C. fraud
D. mistakeand E. misrepresentation
6. Lawfulobject:
The act of a contract and consideration should be lawful an object. Lawful if it is not
prohibited by law. An agreement is lawful when it is not.
a) illegal
b) immoral
c) oppose to publicpolicy
7. Certainty and Possibility of Performance:
 The terms of meaning of the agreement must be certain and definite, otherwise the
agreement will not be enforceable. For example, if A agrees to sell to B ten tone of oil; no
contract is there because it is not clear what kind of oil is intended to be sold.

An agreement to do an impossible act is not valid. For example, an agreement between

A and B to construct a house in one day cannot become a valid contract, because, the act of the
agreement is not possible.
8. Agreement not declaredValid:
The agreement should not have been expressly declared void by any law, providing in
the country. 9. LegalFormalities:
The agreement may be in oral or written form. It is in writing, it must comply with the
prescribed legal formalities in regard to writing, registration and attestation. There are some
legal formalities also in order to make an agreement legally enforceable. In some cases the
document in which the contract has been written, should be stamped and registered. Thus the
legal formalities should be complied with. Then only a contract can be enforced in a court of
law.

CLASSIFICATION OF CONTRACTS:

Contracts can be classified according to:

1. On the basis ofValidity:

a) ValidContract:
The contract which is enforceable by law is known as valid contract.Sec.10 of the
Indian Contract act, 1872 explains various legal requirements for a valid contract; they are:
offer and acceptance, capacity of parties, lawful consideration, lawful agreements, free
consent, etc. in short a valid contract is one which posses all the requirements of legal
enforceability.

b) Void Contract and Void Agreement:

It is a contract which has no legal effect. It is unenforceable by law. It is not
enforceable at the option of either party. The void contract is not void ab initio. It is valid at the
time of making it, but it becomes invalid in future. This void contract cannot be enforced by
law.
A valid contract becomes void contract due to the following reasons:
i) Due to impossibility – A valid contract becomes void be impossibility of performance after
the formation of the contract. Illustration: A and B contract to marry each other. But before the
date A goes mad. The contract becomesvoid. ii) Due to subsequent illegality – A contract also
becomes void be subsequent illegality. Illustration: A agrees to sell 100 bottles of wine to B
for Rs.1000 within 15 days. But before delivery, the govt. may prohibit the purchase and sells
of wine, if it happens the contract becomesvoid.
c. Voidable Contract:
An agreement which is enforceable by law at a option of one or more of the parties
thereto, but not at the option of the others, is voidable contract. In short, a voidable contract is
one which is enforceable by law at the option of one of the parties. Until it is avoided or
cancelled by one of the parties, it is a validcontract.
Example: A promises to sell his car to B for Rs.1, 00,000. But his consent has obtained by use
of force. Now the contract is voidable at the option of A. he may cancel it or acceptsit.
Circumstances under which a contract becomes voidable:
a) When the consent of one of the parties to the contract is obtained by coercion, undue
influence, misrepresentation orfraud.
b) When one party prevents the other party from perform his duty, and then the contract
becomes voidable at the option of the party soprevented.
 Example: A contract with B that A shall white wash B house for Rs.100. A
isreally and willing to execute the work accordingly. But B does not entrust his
house for whitewash.
c) When one party fails to carryout promise within the specified period, then the contract
becomes voidable at the option of the promise.
Example: X accepts to sell and deliver 50 days of rice to Y for Rs.10, 000
within one week. But X does not supply the 50 bags of rice within the specified
period. Here, the contract becomes voidable at the option of Y.
d) Illegal or unlawfulagreement:
An agreement is illegal and void if its object or consideration is prohibited by law or is
of fraudulent or it’s against to public policy or morality. An illegal agreement is void ab initio.
e) Unenforceable Contract:
An unenforceable contract is one which cannot be enforced in a court of law because of some
technical defect such as absence of writing or lapse of time, etc.

2. On the basis offormation:

a) Express Contract: If the terms of a contract are expressly agreed upon (whether by words,
spoken or written) at the time of formation of the contracts, it is called as express contract.
Example: A tells B on telephone that he offers to sell his car for Rs.1,00,000 and B in reply
informs A that he accepts the offer. There is an expresscontract.
b) Implied Contract: the contract which is not expressed in written or spoken words, but is
tobe inferred from the conduct of the parties is called as impliedcontract.
Example: There is an implied contract if a person;
i) gets into a publicbus ii)
takes a cup of coffee in ahotel
iii) permits a porter to liftluggage
c) Quasi Contract: A quasi contract is one which resembles a contract but not possess all the
essentials for a valid contract. But quasi contract is valid contract. It is created by law and it
resembles a contract, such a contract does not arise by virtue of any agreement, express or
implied, between the parties but the law infers or recognizes a contract under certain
specialcircumstances.
For example: 1) Obligation of finder of last goods to return them to true owner
2) Liability of a person to whom money is paid under mistake, to repay it back
In the above cases, there are no offer, acceptance, agreement etc. but in the eyes of law
these are considered as quasi contracts. The quasi contract is known as “constructive
contracts”.
d) E-Commerce contract:
An E-Commerce contract is one which is entered into between two parties via internet.

3. On the basis ofperformance:

On the basis of performance, the contract can be classified as follows:
1) Executed contract: an executed contract is one, in which both the parties have fulfilled
their obligations and which are completely carriedout.
2) Executory contracts: an executory contract is one in which both the parties do not
fulfill their obligations. Example: if A makes a contract with B regarding the sales
ofhisscooter. As per the terms and conditions. A will deliver his scooter to B within a
specified time; B will pay the price offer one month. Here, at the time of making the
contract, both the parties have to fulfill the obligation henceforth. This is executory
contract.
3) Unilateral contract: if one party has to be fulfilling his obligation and the other has
already fulfilled his obligation, it is known as unilateralcontract.
4) Bilateral contract: if both the parties have fulfilled their obligation hence, it is known
as bilateralcontract.

OFFER AND ACCEPTANCE

OFFER is the first and foremost requirement to make an agreement. An offer is a

proposal by one party to another to enter into a legally binding agreement with him. By means
of an offer, a person signifies his willingness to do some acts in order to get consent from the
other party. By making an offer, a person shows his willingness to enter into an agreement with
other.
 Ex: ‘A’ says to ‘B’ will you purchase my house for Rs.2, 00,000. ‘A’ in this case, is
making an offer to ‘B’ as he signifies to ‘B’ his willingness to sell his house to ‘B’ for
Rs.2,00,000 in order to get ‘B’s acceptance to buy the house.

The person making the offer is known as the “Offeror”, “Proposer”, “Promisor” and
the person to whom it is made is called the “Offeree”, “Proposee”. If the offeree accepts the
offer he is called the “acceptor” or “Promisee”.The term “offer” is used in English law and it is
known is “proposal” in Indian law.

Types of Offer:
1. ExpressOffer:
An offer, which is express by words, spoken, or written is called an “Express Offer”.
Ex: “M” says or writes to “N” like, “I am ready to sell my house to you for Rs.1, 00,000” This
is an offer.
2. ImpliedOffer:
If the offer is made by the conduct of the parties, it is called as “Implied Offer”.
Illustration: If a transport company runs buses on a particular route, there is an implied offer
by the transport company to carry passengers for a certain fare.
3. SpecificOffer:
Where an offer is made to a definite person it is called a specific offer. It can be accepted
only by the person to whom it is made.
4. GeneralOffer:
A general offer is one which is made to be world at large or public in general and not
to any specific person. Advertisement for tracing a missing person or thing, seeking valuable.
Information relating to a missing person or thing etc., are the best examples for the general
offer. Here the offer can be accepted by anybody if interested in the offer.
The general offer binds the offeror, the leading case on the subject of general offer is
that of Mrs.Carlill vs. carbolic smoke ball co.
Case law:The carbolic smoke ball company issued an advertisement in which the company
offered to pay of $100 to any person who contracts influenza, after having used their smoke
balls three times daily for two weeks, as per the printed directions. Mrs.Carlill, on the faith of
the advertisement, bought and used the balls according to the direction, but she contracted
influenza. She sued the company for the promised reward. Held, she could recover the amount
as by using the smoke balls she had accepted theoffer.
5. Standing Offer orTender:
A tender (in response to the advertisement) is an offer. It may be either a “definite
offer” or a “Standing offer”.
If a person a tender to supply specified goods or to tender specified services to the
person, who invites the tender, such tender is called as a “definiteoffer”.
Ex: ABC Company invites tender for the supply of 100 tables. For this reason, it means
an advertisement (this advertisement inviting tender, is not the offer) JK and TIRESsubmit the
tenders are definite offer. If the company accepts the J’s offer.It is meant that is a binding
contract between ABC co andC.
If the goods or services are required over a certain period, a person may invite tenders.
Such type of tender to supply goods or to tender services over a certain period, the tender are
called as “Standing Offers”.
6. CounterOffer:
When some changes are made by the offeree in the original made by the offeror, it is
called the “Counter Offer”. Here the offeree does not accept the terms and conditions of the
original offer as laid down by the offeror. He wants to make some changes in the original offer.
This counter offer will not become a contract unless the conditions given by the offeree are
accepted by the offeror.
Ex: “A” offers to sell his cycle to “B” for Rs.2000. This is the original offer. “B”
makes a reply offering to purchase it for Rs.1,500. In this case B’s reply is not acceptance, but
it is only a counteroffer.
7. CrossOffer:
If two parties makes an identical offer for the same subject matter to each other, it is
called cross offer. None of them is aware of the fact that the other party is also making the
offer for the same thing. In the case of cross offers they shall not(Institute acceptance of one’s
offer by the other).
Illustration:
 “A” writes to “B”, agreeing to sell his car for Rs.1,50,000 on the sameday, without
knowing this “B” writes to “A”, agreeing to buy A’s car for Rs.1,50,000. Both the parties are
unaware of the letters written by one to the other. This is not regarded as a contract, because it
is meant that both the parties make offers simultaneously; but there is not acceptance at all
moreover there is no consensus add idem.

LEGAL RULES OF A VALID OFFER OR ESSENTIALS:

A valid offer should be in confirming with the following rules:
1. An offer must be capable of creating legalrelationship:
A social invitation, even if it is accepted, does not create legal relationship
because it is not so intended. An offer therefore, must be such as would results in a valid
contract when it is accepted.
2. An offer must contain definite terms andconditions:
Terms of contract must be definite and not lose or vague. If the terms of an offer are
vague or indefinite, it acceptance cannot create any contractual relationship.
3. An offer must be communicated:
An offer to be complete must be communicated to the person to whom it is made.
4. An offer must be made in order to get assent of the other:
An offer must be made with a view to obtain the assent the offer to do something must
be made with a view to obtain the assent of other party addresser and merely with a view to
disclosing the intention of making an offer.
5. A statement of price is not anoffer:
A mere statement of price is not an offer to sell some goods or things.

ACCEPTANCE
Acceptance refers to an act of giving consent by the offeree. If the offer is considered as
the starting point in a contract, acceptance is the concluding point.
Who can accept?
When an offer is made to a particular person, it can be accepted by him alone. If it is
accepted by any other person, it is not a valid acceptance.
 In the case of equal offer, any person can accept it. This was incurred in the case law of
Mr.carlill vs. carbolic smoke ball company.

Essentials/legal rules for a valid acceptance:

The acceptance of an offer must satisfy the following conditions.
1. Acceptance should be absolute andunqualified:
It should be given by the offeree without making any variation or addition to the
original. Offeree, even if there is a slight variation effected by the offeree to the original offer;
it will not be a valid acceptance. If any alteration is made to the original offer unless the
counter offer is accepted by the offered is total, it will not become a valid acceptance.
2. Acceptance should becommunicated:
Acceptance should be communicated to the offers in due course. Mere acceptance by
the offeree without communicating to it the offeror cannot become a valid acceptance. In the
case of general offer, it is not necessary to communicate the acceptance to the offered. Mere
complying with terms and conditions of the offer will amount to a valid acceptance this was
confirmed in the case law of carlill vs. carbolic smoke ballco.
3. It must be given within a reasonabletime
4. It must be in the prescribedmode
5. It must be made by theofferee
6. It must show to fulfill hispromise
7. It cannot precede anoffer
8. It must be made before the lapse or revocation of an offer
9. It must be aware of the proposal at the time of theoffer
10. Silence does not implyacceptance
11. Acceptance must be in contractualintention

Communication of Offer and Acceptance and Revocation of Offer

The two very important aspects of a contract are the offer and the acceptance of the offer.
However, in the practical world of business and economics, the communication of the offer and
the acceptance and the timings of these are also very important factors.
Communication of Offer and Acceptance
Now we have seen previously that an offer cannot be revoked after the offeror has
communicated it to the offeree. Then the offer becomes binding, it creates legal relations
between the two parties.
So when is the communication complete? Effective communication of the offer and a clear
understanding of it is important to avoid misunderstanding between all the parties.
If the parties are talking face-to-face this is not a problem. The communication happens in real
time and the offer and acceptance will be communicated on the spot, creating no confusion. But
often times in business the communication occurs via letters and emails etc. So, in this case, the
timeline of communication is important.
Communication of Offer
Section 4 of the Indian Contract Act 1872 says that the communication of the offer is complete
when it comes to the knowledge of the person it has been made to. So when the offeree (in case
of a specific offer) or any member of the public (in case of a general offer) becomes aware of the
offer, the communication of the offer is said to be complete.
So when two people are talking, face-to-face or via telephone, etc the communication will be
complete as soon as the offer is made. Example if A tells B he will fix his roof for five thousand
rupees, the communication is complete as soon as the words are spoken.
Let us take the same example. A writes to B offering to fix his roof for five thousand rupees. He
posts the letter on 2nd July. The letter reaches B on 4 th July. So the communication is said to
complete on 4th July.
Communication of Acceptance
According to sec.4 of the Indian Contract Act, the Communication of acceptance is complete as
against the acceptor when it comes to the knowledge of the proposer.
Mode of Acceptance
In case of communication of acceptance, there are two factors to consider, the mode of
acceptance and then the timing of it. Acceptance can be done in two ways, namely
A. Communication of Acceptance by an Act: This would include communication via words,
whether oral or written. So this will include communication via telephone calls, letters,
emails, telegraphs, etc.
 B. Communication of Acceptance by Conduct: The offeree can also convey his acceptance
of the offer through some action of his, or by his conduct. So say when you board a bus,
you are accepting to pay the bus fare via your conduct.
Timing of Acceptance
The communication of acceptance has two parts. Let us take a look
A. As against the Offeror: For the proposer, the communication of the acceptance is
complete when he puts such acceptance in the course of transmission. After this it is out
of his hand to revoke such acceptance, so his communication will be completed then. So,
for example, A accepts the offer of B via a letter. He posts the letter on 10 th July and the
letter reaches B on 14th For B (the proposer) the communication of the acceptance is
completed on 10th July itself.
B. As against the Acceptor: The communication in case of the acceptor is complete when
the proposer acquires knowledge of such acceptance. So in the above example, A’s
communication will be complete on 14th July, when B learns of the acceptance.

REVOCATION OF OFFER
The revocation means, “Taking back” or “withdrawal” By means of revocation of an
offer, the offers is withdrawn or cancels by the offeror. The offer can be revoked at any time,
before the offeree posts the letters of acceptance once the letters of acceptance is posted by
offeree, even if it does not reach the offer, the acceptance is over then the offer cannot be
revoked.
Let us take the same example of before. A accepts the offer and posts the letter on 10 th
July. B gets the letter on 14 th July. But for B (the proposer) the acceptance has been
communicated on 10th July itself. So the revocation of offer can only happen before the 10 th of
July.

Circumstances in which the offer is revoked:

In the following circumstances the offer comes to an end either by revocation or laps of
time.
1. Revocation by givingnotice:
 The offeror can revoke his offer before it is being accepted by the offeree. Mere posting
of letters of acceptance is considered as the time of acceptance and revocation should be
pursued before passing the letter of acceptance and not after words. More over the revocation
must be communicated to the offeree.
2. Lapse oftime:
If the offeror has fined any time within which the offeree has to give his acceptance,
the offeree must act so, if he fails to give his acceptance within the time limit the offer is
invoked by the expiry of the time limit.
3. Non-fulfillment ofconditions:
If the offeror has laid down any condition for accepting the offer, the offeree must fulfill
them. If not the after stands revoked.
4. Death orInsanity:
If offeror dies or becomes in same the offer is revoked. But, if the offeror without
having the knowledge of the death or insanity of the offeror gives his acceptance, the executes
of the deceased offered is bound to execute the contract.
5. CounterOffer:
If the offeror makes some changes to the original made by the offeror, it is known as
counter offer. Unless the changes are accepted by the offeror the offer stands revoked.
6. Not following the mode prescribed by theofferor.
If the offeror has prescribed any mode to the offeror to communicate the acceptance the
offered is bound to comply with it. On the contrary, if the offeror chooses a different mode, the
offer is considered as revoked, if the offeror has not prescribed any mode the offeror must
follow the usual or reasonable mode.
Revocation of Acceptance
Section 5 also states that acceptance can be revoked until the communication of the acceptance is
completed against the acceptor. No revocation of acceptance can happen after such date. Again
from the above example, the communication of the acceptance is complete against A (acceptor)
on 14th July. So till that date, A can revoke his/her acceptance, but not after such date.
So technically between 10th and 14th July, A can decide to revoke the acceptance.
 CONSIDERATION
Consideration is a technical term and it means “something in return”. When a party of
an agreement to do something. They must get something in return. This “something in return”
is known as consideration. Ex: ‘A’ wants to sell his car to B for Rs.50, 000. Car is the
consideration for B and the price is the consideration for A.
Sec 2(d) defines consideration as “when at the desire of the promisor, the promise or any other
person has done or abstained from doing, or does or abstains from doing, or promises to do or
to abstain from doing, something, such act or abstinence or promise is called a consideration for
the promise.”
Lawful consideration
Consideration is one of the essential elements of a valid contract. An agreement without
consideration is null and void; such an agreement is not enforceable by law (However sec 25
of the Indian contract act lays down certain exceptions where there is no necessary for the
consideration even for a valid contract a gratuitous promise will not create any legal
obligation. A promise without consideration cannot be enforced bylaw.
The “something in return” may be in the form of cash, any goods or services. In short, the
consideration refers to:
a) An act(or).
b) A returnpromise(or)
c) Some benefit to thepromises.
d) Some detriment or loss, or damage to the promisee.
LEGAL RULES AND ESSENTIALS OF A VALID CONSIDERATION:
1. It is required both for formation and discharge of an agreement orcontract.
2. It must belawful
3. It need not beadequate
4. It must be real and notillusory
5. It must move at the desire of the offeror
6. It must be of some value in the eyes oflaw
7. It may be past, present or future
8. It may be either positive ornegative
9. It may be furnished by the promisee or any other person
 Exceptions to the rule “No consideration No contracts” or “A contract without
consideration is void” – Discuss:
1. Love andaffection:
If any agreement is made, which is expressed in writing and is made out of natural love
and affection between the parties, standing in near relation to each other without consideration
is void.
In short.
i) The contracting parties should be near relatives for eachother.
ii) The agreement should be made out of natural love and affection between oneparty.
iii) The agreement should be in written form and it should be registered under the law
for the time being inforce.
Ex: “A” out of his love and affection, promises to give his daughter “B” Rs.15, 000 this
promise is made in writing and registered. This is a valid contract though there is no
consideration.
2. Compensation for voluntaryservices:
If there is an agreement to compensate wholly or partly for the voluntary acts done by
another for the promisor, the agreement is valid even the consideration is absent.Ex:
i. “A” finds B’s purse and gives it to him. “B” promises to give “A” Rs.50. This is a
contract.
ii. “A” supports “B” infant son. “B” promises to pay A’s expenses in so doing. This is a
contract. It is an important point that the past consideration is not at all a consideration
in English law and it should be either present or future consideration. Under Indian law
the past consideration is a validconsideration.
3. Promise to pay a time-barreddebt
A promise by a debtor to pay a time-barred debt is enforceable provided it is made in
writing and is signed by the debtor or by his agent generally or specially authorized in that
behalf. A debt is barred by limitation if it remains unpaid or unclaimed for a period of three
years. Such a debt becomes legallyirrecoverable.
Ex: D owes C Rs.1,000 but the debt is barred by the Limitation Act. D signs a written promise
to pay C Rs.500 on account of the debt. This is a contract.
 4. CompletedGift
The rule “No consideration, no contract” does not apply to completed gifts.
5. Agency
No consideration is necessary to create an agency.
6. CharitableSubscription
Where the promisee on the strength of the promise makes commitments, i.e., changes
his position to his detriment.
Doctrine of Privity of Contract
The Indian Contract Act clearly states that there cannot be a stranger to a contract. This is
explained through the Doctrine of Privity of a Contract.
Doctrine of Privity of Contract or Stranger to Contract
It is a general rule of law that only parties to a contract may sue and be sued on that contract.
This rule is known as the doctrine of privity of contract. Privity of Contract means relationship
subsisting between the parties who have entered into contractual obligations.
The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to proceed from a
third-party. However, a stranger (third-party) to consideration is different from a stranger to a
contract. The law does not allow a stranger to file a suit on the contract. This right is available
only to a person who is a party to the contract and is called Doctrine of Privity of Contract. Ex.
Peter has borrowed some money from John. Peter owns a property and decides to sell it to
Arjun.Arjun promises to pay John on behalf of Peter.However, if Arjun fails to pay, then John
cannot sue since Arjun is a stranger to the contract. It is important to note that the Doctrine of
Privity has exceptions which allow a stranger to enforce a claim as given below.
Exceptions to the Doctrine of Privity of Contract
A stranger or a person who is not a party to a contract can sue on a contract in the following
cases:
1. Trust
2. Family Settlement
3. Assignment of a Contract
4. Acknowledgement or Estoppel
5. A covenant running with the land
6. Contract through an agent
Trust
If a contract is made between the trustee of a trust and another party, then the beneficiary of the
trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his
estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of
the estate in Ravi’s name, once he becomes 21 years old.
After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied
giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with
Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to
sue upon the contract between Arjun and his father, even though he was not a party to it.
Family Settlement, Partition or other family arrangements
If a contract is made under a family arrangement to benefit a stranger (person not a party to the
contract), then the stranger can sue in his own right as a beneficiary of the contract.
Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as
damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a
case against Peter which was held by the Court since the contract was a family arrangement with
Nancy as the beneficiary.
Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision for her
marriage. Eventually, the family went through a partition and Ritika filed a suit to claim her
marriage expenses. The Court held the case because Ritika was the beneficiary of the provision
despite being a stranger to the contract.
Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract even though he
is not a party to the agreement. It is important to note here that nominees of a life insurance
policy do not have this right.
Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges
it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment
can also be implied.
Peter gives Rs. 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to
Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount.
Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the sale
price, Pankaj was to be paid Rs. 25,000 as his professional charges. Seema promised to pay
Pankaj the amount before taking possession of the property. She made three payments of Rs.
5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held by
the Court because Seema had acknowledged her liability by conduct.
A Covenant Running with the Land
When a person purchases a piece of land with the notice that the owner of the land will be bound
by all duties and liabilities affecting the land, then he can sue upon a contract between the
previous land-owner and a settler even if he was not a party to the contract.
Peter owned a piece of land which he sold to John under a covenant that a certain part of the land
will be maintained as a public park. John abided by the covenant and eventually sold the land to
Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter
came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not
a party to the contract, the Court held him responsible for violating the covenant.
Contract through an Agent
If a person enters into a contract through an agent, where the agent acts within the scope of his
authority and in the name of the person (principal).
CONTRACTUAL CAPACITY
The parties who enter into a contract must have the capacity to do so. All persons
cannot make a valid contract.
Eligible persons:
A person who is of the age of majority, is of sound mind is not disqualified from
contracting by any law, a make a valid contract.
So, the following persons are not competent to contract 1) minor 2) persons of
unsound mind 3) other persons, disqualified by law.
MINOR:
According to sec 3 of the Indian Majority Act, 1875, ‘A minor is a person, who has not
completed 18 years of age’. In the following two situations, he attains majority offer 21 years
of age.
 i. If there is any guardian, appointed by the court(or).
ii. If the properties of minor are in superintendence of the court.
Minor’s agreement: The law regarding minor agreement is as follow 1)
An agreement with or by a minor is void andinoperative:
Generally the agreements entered into by a minor are void and the other party cannot enforce
the claim in a court of law. A party who has advanced money or obtainer mortgage on the
properties of a minor cannot recover the amount and the mortage is void. (Mohiribibi Vs
Dharmados Ghose).
In this case, a minor executed a mortage deed for Rs.20,000 but received only 8,000…later, he
filed a case to cancel the agreement and the creditor (the money lender) claimed the refund of
Rs.8000. Held, the agreement is void and the amount cannot be recovered.
2) Minor can be beneficiary or a promisee or apayee:
In some cases, contracts entered into a minor are voidable and they are enforceable at the
option of the minor and not at time option of the other party. Ex., if a person has advanced
money to a minor it cannot be recovered and the contract is void. On this contrary, if a minor
has advanced any loan to a party, this contract is enforceable at the option of the minor and
the other party cannot refuse to repay the amount. Thus the contract is voidable. Ex. M aged
17 agreed to buy a second-hand bike for Rs.5,000 from S. He paid Rs.200 as advance and
agreed to pay the balance the next day and collect the bike. When he came with money the
next day, S told M that he had changed his mind and offered to return the advance. S cannot
avoid the contract though M may, if he likes.
3) Valid contract in the case ofnecessaries:
Some contracts made by the minor are perfectly valid and they can find the minor, if they are
for their “necessaries”. If a person supplies necessaries to a minor or lends money to the minor
to purchase necessary things, or to meet his educational of medical expenses, such an amount
can be recovered. Hence, the contracts by minor with minor for necessary goods or necessarily
services to mine become valid absolutely. His properties can be held for this purpose, but he is
not personally liable for this case.
4) Notification:
Notification means the act of confirming, or make as valid. The minor cannot satisfy his
agreement after attaining the agreement of majority. For eg: A minor borrows Rs.5000
from”A” and executes a promissory note in favor of “A”. After attaining the age of majority,
he executes another promissory note in settlement of the first note. The secondary promissory
note is void.
5) Norestitution:
The minor cannot be ordered to make compensation for a benefit obtained under a void
agreement. In other words, if he has received only benefit under a void agreement, he need not
return back the benefit; he need not give any compensation for it.
6) He can always pleadminority:
If a minor by misrepresenting this age, makes a contract with another person, he cannot be
sued.Eg: “J” a minor, by fraudulently representing himself to be full age, induced to “L” sends
him for the money. Held, the contract was void and “s” was not liable to repay the amount.
Hence the principle of estoppels is not applicable tominor.
7) No specific performance:
Specific performance means the actual carrying out of the contract as agreed. Since an
agreement by a minor is void, the court will never direct “specific performance” of such an
agreement but a contract entered into by his guardian or his manager of the estates. (Behalf of
the minor) can find the minor, if the following conditions are fulfilled.
a. The contract should be within the authority of the guardian ormanager.
b. It should be for the benefits of theminor.
8) Minor as a partner:
Generally a minor cannot become a partner in a partnership firm. But, he may be admitted to
the benefits of an existing partnership firm as a partner, with the consent of the entire partner.
But, his liability is limited.
9) The minor can acts as an agent.
The acts done by the minor as the agent are binding the principal if they are done within the
scope of authority given tohim.
10) The minor cannot be declared asinsolvent.
a. The partner or guardian, are not capable for agreement. Made by the minor on
though the agreement is fornecessaries.
b. The minor is not liable, if he is a surety in a contract ofguarantee.
 INCAPACITY OF CONTRACT
Thus incapacity makes contracts in valid, and incapacity may be broadly classified into two:
a) Incapacity arising from status.
b) Incapacity arising from mental deficiency.
Incapacity arising from status:
Person is disqualified to make a valid contract because of this position/status, they are as
follows:
I) Foreign Ambassador:
This person enjoys special status. They are competent to enter into a valid contract. But they
can be sued only if they submit themselves to the judicious of the court. Further contract
gouts permissions are also essentials to suit them.
II) Alienenemy:
An alien is a person who is not a subject of the Republic of India. He may be (i) an alien friend
or (ii) an alien enemy
During normal time, trade can be takes place between trades of two different nations, but if
war breaks out, the enemy countries is regarded as alien enemy, and no contract can be
entered into during the time of war with it. Contracts made before the war may either be
suspended or dissolved.
III) Convicts:
Persons who are undergoing imprisonment cannot make a contract during the
convictionsperiod.
IV) Insolvent:
Persons who are adjudicated as insolvents or bankrupt cannot there after enter into a contract
and all the contracts entered previously by them also comes to anend. V) Company:
A company cannot enter into a contract which requires physical capacity or physical entry.
The contract entered into by a company will be valid only if its contractual capacity permits
in objects clause of Memorandum of Association.
VI) Marriedwomen:
Married women are having capacity to make valid contract, they can their husbands for their
basic committees. A married woman may sue or be sued in her own name in respect of her
separate property.
INCAPACITY ARISING FROM MENTAL DEFICIENCY:
Person who is mentally deficient cannot make a valid contract. The following persons are
having mental deficiency and they are disqualified from making contracts. i) Minor:
Minor is a person who has not obtained the age of majority as per 20 c (3) of the Indian
Majority Act 1875. The persons who are below the age of 18 years. A minor is mentally not
matured and he is incompetent to make a valid contract.
ii) Idiots:
A person who has completely lost his mental powers and who is incapable of forming a rational
judgment is called an idiot. Idiocy is a permanent one. An idiot or a natural food is a person
who has no understanding power. All agreement, other than those for necessaries of life with
idiots is absolutelyvoid.
iii) Lunatics:
A person, whose mental powers are due to some mental strain, is called as a lunatic. It is not
armament as in the case of idiocy. The lunatic will suffer from intervals of sanity and
insanity. In other words, lunatics in some intervals will be of sound mind and the said
intervals are called lucid intervals and in some intervals, they will be of unsound mind. They
can enter into a contract during the lucid intervals.
Persons of unsound mind:
One of the essential conditions of competency of parties to a contract is that they should be
sound mind. According to the contract act, the term soundness refers to.
a) Capacity of understanding the contents of agreement (at the time of making
anagreement).
b) Ability to make a national decision regarding the contract at the time of making
anagreement.
If a person is capable of both, he suffers from unsound mind. 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.Cannot
make a contract, when he is of unsound mind.
 FREE CONSENT
Meaning of “consent” and “free consent”:-
Consent, it means acquiescence or act of assenting to an offer. “Two or more persons
are said to consent when they agree upon the same thing in the same sense.”(Sec-13). Free
consent, Consent is said to be free when it is not caused by-
1. Coercion as defined in sec, 15,or
2. Undue influence as defined in Sec. 16or
3. Fraud as defined in sec 17 ,or
4. Misrepresentation as defined in sec 18or
5. Mistake, subject to the provision of sec-20,21,22

Coercion
When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, “coercion” is said to be employed.
Coercion includes fear, physical compulsion and menace to goods.
Example: - A threatens to kill B if he does not lend Rs. 1000 to C. B agrees to lend the amount
to C. The agreement is entered into under coercion.

Undue influence
Sometimes a party is compelled to enter into an agreement against his will as a result
of unfair persuasion by the other party. This happens when a special kinds of relationship
exists between the parties such that one party is in a position to exercise undue influence
over the other.

Difference between coercion and undue influence: -

Coercion Undue influence
The consent is given under the threat of an The consent is given by a person who is so

offence (i.e., committing or threatening to situated in relation to another that the other
commit an act forbidden by the Indian penal person is in a position to dominate his will. In
code or detaining or threatening to detain other words, consent is given under moral
property unlawfully.) influence.
Coercion is mainly of a physical character. It Undue influence is of moral character< It
involving mostly use of physical or violent involves use of moral force or mental pressure.
force.

There must be intention of causing anyperson Here the influencing party uses its positionto
to enter into an agreement. obtain an unfair advantage over the otherparty.

It involves a criminal act. No criminal act is involved.

Misrepresentation and fraud
A representation, when wrongly made, either innocently or intentionally, is a
misrepresentation. Misrepresentation may be-
1. An innocent or unintentional misrepresentation,or
2. An intentional, deliberate or willful misrepresentation with intent to deceive or
defraud the other party.
The former is called “misrepresentation” and the latter “fraud”.
MISREPRESENTATION
Misrepresentation is a false statement which the person making it honestly believes to be
true or which he does not know to be false. It also includes non-disclosure of a material fact
or facts without any intent to deceive the other party.
Example: - A while selling his mare to B, tells him that the mare is thoroughly sound. A
genuinely believes the mare to be sound although he has no sufficient ground for the belief.
Later on B finds the mare to be unsound. The representation made by A is a
misrepresentation.
FRAUD
According to Sec.17”fraud” means and includes any of the following acts committed by a
party to a contract, or with his connivance (intentional active or passive acquiescence), or by
his agent with intent to deceive or to induce a person to enter into a contract:
1. The suggestion that a fact is true when it is not true and the person making the
suggestion do not believe it to betrue.
2. The active concealment of a fact by a person having knowledge or belief of thefact:
3. A promise made without any intention of performingit;
4. Any other act fitted todeceive;
5. Any such act or omission as the law specially declares to befraudulent.
Example: - A sells, by auction, to B a horse which A knows to be unsound. A says nothing to b
about horse’s unsoundness. This is not fraud in A.

MISTAKE
Mistake may be defined as erroneous belief about something. It may be a mistake of law or a
mistake of fact.
1. Mistake of law of the country: - example: - A and B enter into a contract on the
erroneous belief that a particular bet is barred by the Indian Law of Limitation. This
contact is notvoidable.
2. Mistake of law of a foreign country. Such a mistake is treated as mistake of fact and
the agreement in such a case is void.(Sce-21)
MISTAKE OF FACT

1. BILATERALMISTAKE:
When both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement, there is a bilateral mistake. A)
Mistake as to the subject–matter:
Where both the parties to an agreement are working under a mistake relating to the subject
matter, the agreement is void. Mistake as to the subject-matter covers the following cases: i.
Mistake as to the existence of the subject-matter:-
If both the parties believe the subject matter of the contract to be in existence, which
in fact at the time of the contract is non-existent, the contract is void. Example: - A agrees to
buyfrom B a certain house. It turns out that the house was dead at the time of the bargain,
though, neither party was aware of the fact. The agreement is void.
ii. Mistake as to the identity of the subject-matter:-
It usually arises where one party intends to deal in one thing and the other intends to
deal in another. Example: - W agreed to buy from R cargo of cotton “to arrive ex-peerless
from Bombay”. There were two ships of that name sailing. From Bombay”. There were two
ships of that name sailing. From Bombay, one sailing in October and the other in December.
W meant the former ship but R meant the later. Held. There was a mutual or a bilateral
mistake and there was no contract.
iii. Mistakes as to the quality of thesubject-matter:
If the subject-matter is something essentially different from what the parties thought
it to be, the agreement is void. Example: - table napkins were sold at an auction by a
description “with the crest of Charles I and the authentic property of that monarch”. In fact,
the napkins were Georgian. Held, the agreement was void as there was a mistake as to the
quality of the subject- matter.
iv. Mistake as to the quantity of the subject-matter:-
If both the parties are working under a mistake as to the quantity of the subjectmatter,
the agreement is void. Example: - A silver bar was sold under a mistake as to its weight;
There was a difference in value between the weight of the bar as it was and as it was
supposed to be. Held, the agreement wasvoid.
v. Mistake as to the title to the subject-matter:-
Example: - a person took a lease of fishery which, unknown to either party, already
belonged to him. Held, the lease was void. vi. Mistake as to the price of thesubject-
matter:
Example: - C wrote to W offering to sell certain property for $ 1250. He earlier declines an
offer from w to buy the same property for $ 2000. W who knew that this offer of $ 1250 was
a mistake for 2250, immediately accepted the offer. Held, W knew perfectly well that the
offer was made by mistake hence the contract could not be enforced.
vii. Mistake as to the possibility of performing the contract:-
Consent is nullified if both the parties believe that an agreement is capable of being
performed when in fact his is not the case (sec-56, para 1). The agreement, in such a case, is
void on the ground of impossibility.
Impossibility maybe—
a. Physical impossibility: -Example:- A contract for the hire of a room for
witnessing the coronation procession of Edward VII was held to be void because,
unknown to the parties, the procession of Edward VII was held to be void because,
unknown to the parties, the procession had already been cancelled.
b. Legal impossibility. A contract is void if it provides that something shall
be done
which cannot, as a matter of law, bedone.
II. UNILATERALMISTAKE:-
When in a contract only one of the parties is mistaken regarding the subject-matter or
in expressing or understanding the terms or the legal effect of the agreement, the mistake is a
unilateral mistake.
Example: - A buys an article thinking that it is worth Rs.1000 when it is worth only
Rs50. A cannot subsequently avoid thecontract.

LAWFUL OBJECT AND CONSIDERATION

If an agreement is to be enforced in a court of law, both consideration and object of the

agreement must be lawful. When one of consideration or object is unlawful, the contract is void.
In order to constitute a valid contract, both consideration as well as object must be lawful;
otherwise would be void.
According to section 23 “The consideration or object of an agreement is lawful unless it
is forbidden by law; or is of such a nature that if permitted, it would 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 opposed to public policy. In each of these cases, the.consideration
or object of an agreement is unlawful is void”.
Section 2(d) of the Indian Contract Act defines consideration as when at the desire of the
promisor, the promise or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or to abstain from doing something, such act or abstinence or
promise is described a consideration for the promise. Example: A agrees to sell his home to B for
Rs.10,00,000. Here B's promise to pay Rs.10,00,000 is the consideration for A's promise to sell
the home and A's to sell the home is the consideration for B’s promise to pay Rs.10,00,000.

When Consideration or Object is Unlawful

1. If it is forbidden by law:
Law forbids an act for various reasons. If the consideration or the object of an agreement is
doing of such an act which is forbidden by law, the agreement is void. Example: A promises B to
drop a prosecution which he has instituted against B for robbery, & B promise to restore the
value of the things taken. The agreement is void, as its object is unlawful.
2. If it is of such a nature that, if permitted, it would defeat the provisions of law: It
refers to cases where, there being no express statutory prohibition against a particular
type of contract, the nature of the contract is such that it would be against the spirit of a
particular law, whether enacted or otherwise. Examples: (a) An agreement between
husband and wife to live separately is invalid as being opposed to Hindu Law. (b) An
agreement by the debtor not to raise
3. If it is fraudulent:
It refers to contract which are entered into between parties with an object which is fraudulent or
with a purpose which will in effect promote fraud.
Examples: (a) A, promises to pay Rs 200 to B, if B would commit fraud on C. B agrees. B’s
agreeing to defraud is unlawful consideration for A’s promise to pay. Hence the agreement is
illegal and void.
(b) 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. 4. If it involves or
implies injury to the person or property of another:
If the object of an agreement is to cause injury to the persons or property of another, it is
unlawful. Injury means criminal or wrongful harm. An agreement to commit an assault is void.
Examples: (a) An agreement by which a debtor, who borrowed Rs 100, promised to do manual
labour without pay for the creditor, so long as the debt was not repaid in full has been held to be
void, as it involved injury to the person of the debtor.
(b) An agreement between some persons to purchase shares in a company, and thus by fraud &
deceit to induce other persons to believe that there is a bonafide market for the shares, is void.
5. If the court regards it as immoral:
Agreement which are contrary to good morals are illegal and void. If the consideration for the
agreement is an act of sexual immorality the agreement is illegal. Examples: An agreement for
future marriage, after death of first wife is against good morale.
6. Where the court regards it as opposed to public policy:
If the court regards it as opposed to public policy, the agreement is void. Public policy means
the policy of the law at a stated time.
 VOID AGREEMENTS
A void agreement is one which is not enforceable by law (Sec. 2g). Such an agreement
does not give rise to any legal consequences and is void abinitio.
The following agreements have been expressly declared to be void by the Contract Act;
1. Agreements by incompetent parties (Sec. 11)
2. Agreements made under a mutual mistake offact (Sec. 20)
3. Agreements the consideration or object of which is unlawful (Sec. 23)
4. Agreements the consideration or object of which is unlawful inpart (Sec. 24)
5. Agreements made withoutconsideration ((Sec. 25)
6. Agreements is restraint ofmarriage (Sec. 26)
7. Agreements in restraint of trade (Sec. 27)
8. Agreements in restraint of legal proceedings (Sec. 28)
9. Agreements the meaning of which isuncertain (Sec. 29)
10. Agreements by way ofwager (Sec. 30)
11. Agreements contingent on impossibleevents (Sec. 36)
12. Agreements to do impossibleacts (Sec. 56)
13. In case of reciprocal promises to do things legal and also other things illegal, the
second set of reciprocal promises is a voidagreement. (Sec. 57)
WAGERING AGREEMENTS OR WAGER
A wager is an agreement between two parties by which one promises to pay money or
money’s worth on the happening of some uncertain event in consideration of the other party’s
promise to pay if the event does not happen.Ex.A and B enters into an agreement that A shall
pay Rs.100 to B, if it rains on Monday.
Essentials of a wagering agreement
1. Promise to pay money or money’sworth
The wagering agreement must contain a promise to pay money or money’s worth.
2. Uncertainevent
The promise must be conditional on an event happening or not happening. A wager
generally contemplates a future event, but it may also relate to a past event provided
the parties are not aware of its result or the time of its happening.
 3. Each party must stand to win orlose
Upon the determination of the contemplated event, each party should stand to win or
lose. An agreement is not a wager if either of the parties may win but cannot lose or
may lose but cannot win.
4. No control over theevent
Neither party should have control over the happening of the event one way or the
other. If one of the parties has the event in his own hands, the transactions lacks an
essential ingredient of a wager.
5. No other interest in theevent
Lastly, neither partly should have any interest in the happening or non-happening of the
event other than the sum or stake he will win or lose.

The following transactions are, however, not wagers

1. A crossword competition involving a good measure of skill for its successfulsolution.
2. Games ofskill
3. A subscription or contribution or an agreement to subscribe or contribute towards any
plate, prize or sum or money of thevalue
4. Share market transactions in which delivery of stocks and shares is intended to be
given and taken
5. A contract of insurance.
Difference between Contract of Insurance and Wagering Agreement
Sl. No. Contract of Insurance Wagering Agreement
1. The assured has an insurable interest in the There is no such interest
subject matter
2. Both the parties are interested inthe It is only one of the parties who is
protection of the subject-matter interested in its protection
3. Except life insurance, it is a contract of The amount is fixed
indemnity
4. It is beneficial to the public It do not serve any useful purpose

5. It is based on scientific and actuarial It is just a gamble

calculation of risks.
 PERFORMANCE OF CONTRACT
Performance of contract takes place when the parties to the contract fulfill their
obligations arising under the contract within the time and in the manner prescribed. Sec 37
lays down that the parties to a contract must either perform or offer to perform their respective
promises, unless such performance is dispensed with or excused.

Offer to Perform
Sometimes it so happens that the promiser offers his obligation under the contract at
the proper time and place but the promisee does not accept the performance. This known as
“attempted performance” or “tender”. Sec. 38 sums up the position in this regard thus: where
the 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.
Requisites of a valid tender / attempted performance
It must be unconditional. Ex. D a debtor offers to pay to C, his creditor, the amount due
to him on the condition that C sells to him certain shares at cost. This is not a valid
tender.
It must be of the whole quantity contracted for or of the wholeobligation. Ex. D a
debtor offers to pay to C, his creditor, the amount due in instalments and tenders the first
instalment. The tender is not of the whole amount due and hence it is not a valid tender.
It must be by a person who is in a position and is willing to perform thepromise.
It must be made at the proper time andplace. Ex. D owes Rs.1000 C on 1 st of August
with interest. He offers to pay on 1 st July the amount and interest upto 1 st July. This is
not a valid tender.
It must be made to the proper person. i.e. to the promisee or his agent.
It may be made to one of the several jointpromisees
It must give the reasonable opportunity to the promisee for the inspection ofgoods.
CONTRACTS WHICH NEED NOT BE PERFORMED?
A Contract need not be performed—
1. When its performance becomes impossible(sec-56)
 2. When the parties to it agree to substitute a new contract for it or to rescind or alter
it(sec62).
3. When the promise dispenses with or remits, wholly or in part, the performance of the
promise made to him extends the time for such performance or accepts any satisfaction for
it(sec-63)
4. When the person at whose option it is voidable, rescinds it(sec-64)
5. When the promise neglects or refuses to afford the promisor reasonable facilities for the
performance of his promise
6. When it isillegal.
BY WHOM MUST CONTRACT BEPERFORMED
1. Promisorhimself
2. Agent
3. Legalrepresentative
4. Third person
5. Joint person
WHO CAN DEMAND PREFORMANCNCE?
It is only thepromisee who can demand performance of the promise under a contract. It makes
no difference whether the promise is for the benefit of the promisee or for the benefit of any
otherperson.Example:-A promises B to pay C a sum of Rs. 500. A does not pay the amount to
c. C cannot take any action against A. It is only B who can enforce this promise against A.
Death of promisee, In case of death of promise, his legal representatives can demand
performance.
DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual relationship between the

parties. A contract is said to be discharged when it ceases to operate, i.e., when the rights and
obligations created by it come to an end. A contract may be discharged:
1. Byperformance.
2. By agreement orconsent
3. Byimpossibility of performance
4. By lapse oftime
 5. By operation oflaw
6. By breach ofcontract
I. DISCHARGE BY PERFORMANCE
Discharge by performance takes place when the parties to the contract fulfill their
obligations arising under the contract within the time and in the manner prescribed.
a) Actual performance: When both the parties perform their promises, the contract is
discharged. Performance should be complete, precise and according to the terms of the
agreement, most of the contracts are discharged by performance in thismanner.
b) Attempted performance or tender. Tender is not actual performance but is only an offer
to perform the obligation, under thecontract. When the promisor offers to perform his
obligation but promisee refuses to accept the performance.
II. DISCHARGE BY AGREEMENT ORCONSENT
As it is the agreement of the parties which binds them, so by their further agreement or
consent the contract may be terminated. This means a contractual obligation may be
discharged by agreement which may be express or implied.
Example: - A sells a car to B on approval with the condition that it should be returned within
seven days if it is found wanting in efficient functioning. B may return the car within seven
days if it is found wanting. Consent to return the car is given to B at the time of the formation
of the contract.
The various cases of discharge of a contract by mutual agreement are dealt within (Secs-62):
a) Novation takes place when a new contract is substituted for an existing one between the
same parties, or a contract between two parties is rescinded in consideration of a new contract
between thirdparty. Example: - A owes money to B under a contract. It is agreed between A, B
and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is an
end, and a new debt form C to B has beencontracted.
b) Rescission (sec-62): Rescission of a contract takes place when all or some of the terms of
the contract are cancelled. It mayoccur
i. By mutual consent of the parties,or ii. Where one
party fails in the performance of hisobligation.
 Example: - A promises to supply certain goods to B six months after date. By that time, the
goods go out of fashion. A and B may rescind the contract.
c) Alternation (sec-62) Alteration of a contract may take place when one or more of the
terms of the contract is/are altered by the mutual consent of the parties to the contract. In such
case, the old contract is discharged. Example: - A enters into a contract with B for the supply
of 100 bales of cotton at his godown No.1 by the first of the next month. A andB may alter the
terms of the contract by mutualconsent.
d) Remission (sec-63) Remission means acceptance of a lesser fulfillment of the promise
made. Example :-A owes B Rs. 5000 A pays to B and B accepts, in satisfaction of the whole
debt for Rs.2,000paid at the time and place at which Rs.5000 were payable. The whole debt
isdischarged.
e) Waiver: Waiver takes place when the parties to a contract agree that they shall no longer
be bound by the contract. Consideration is not necessary forwaiver.
f) Merger: Merger takes place when an inferior right accruing to a party under a contract
merges into a superior right accruing to the same party under the same or some other
contract.Example:
- P holds a property under a lease. He later buys the property. His rights as a lessee merge into
his rights as an owner.
III. DISHARGE BY IMPOSIBILITY OFPERFORMANCE
If an agreement contains an undertaking to perform an impossibility. It is void.According
toSec-56, impossibility of performance may fail into either of the following categories.
1. Impossibility existing at the time of agreement, the first paragraphs of sec 56 lays down
that “an agreement to do an act impossible in itself ifvoid.
2. Impossibility arising subsequent to the formation of contract. Impossibility which arises
subsequent to the formation of a contract is called post-contractual or supervening
impossibility.
I) DISCHARGE BY SUPERVENING IMPOSSIBILITY:-
1. Destruction of subject-matter ofcontract.
When the subject-matter of a contract, subject-matter of contract, subsequent to its
formation, is destroyed without any fault of the parties to the contract, the contract is
 discharged. Example: - C let a music hall to T for a series of concerts for certain days.
The hall was accidentally burnt down before the date of the first concert. Held, the
contract was void.A contracted to sell a specified quantity of potatoes to be grown on
his farms. The crop largely failed. Held, the contract wasdischarged.

2. Non-existence or non-occurrence of a particular state of things. Sometimes, a

contract is entered into between two parties on the basis of a continued existence or
occurrence of a particular state of things. Example: - Aand B contract to marry each
other, before the time fixed for the marriage, A goes mad. The contract becomesvoid.

3. Death or incapacity for personal service: - Where the performance of a contract

depends on the personal skill or qualification of a party, the contract is discharged on
the illness or incapacity or death of the party. Example:- An artist undertook to perform
at a concert for a certain price. Before she could do so, she was taken seriously ill.
Held, she was discharged due toillness.

4. Change of law or stepping in of a person with statutory authority:- When

subsequent to the formation of a contract, change of law takes place or the government
takes some power under some ordinance or special Act, as for example, the Defence of
India Act, So that the performance of the contract becomes impossible, the contract
isdischarged.

st
Example: - D enters into a contract with P on 1 March for the supply of certain imported
goods in the month of September of the same year. In June by act of Parliament, the
import of such goods is banned. The contract isdischarged.

5. Out break of war:-A contract entered into with an alien enemy during is unlawful and
therefore impossible ofperformance.Example: - 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.
Impossibility of performance –not an excuse:-
Impossibility of performance is, as a rule, not and excuse for non-performance.” In the
following cases, a contract is not discharged on ground of supervening impossibility:
a. Difficulty ofperformance:
 A contract is not discharged by the mere fact that it has become more difficult of
performance due to some uncontemplated events or delays.
Examples: - A sold a certain quantity of Finland timber to B to be supplied between July and
September. Before any timber was supplied, was broke out in the month of August and
transport was disorganized so that a could not bring any timber form Finland. Held, the
difficulty in getting the timber form Finland did not discharge A fromperformance.
b. Commercial impossibility:-
A contract is not discharged merely because expectation of higher profits is not realized, or the
necessary raw material is available at higher profits is not realized, or the necessary raw
material is available at a higher price because of the out break of war, or there is a sudden
depreciation of currency.

Example: - A promised to send certain goods from Bombay to Antwerpin September, before
the foods were sent, war broke out and there was a sharp increase in shipping rates, held, the
contract was notdischarged.
c. Impossibility due to failure of a third person: -
Where a contract could not be performed because of the default by a third person on whose work
the promisor relied, it is not discharged.

Example: - A, a wholesaler, entered into a contract with B for the sale ofa certain type of cloth
to be produced by C, a manufacturer of that cloth. C did not manufacture that cloth. Held, A
was liable to B fordamages.
d. Strikes, lock out and civil disturbances.
Events such as these do not discharge a contract unless the parties have specifically agreed in
this regard at the time of formation of thecontract.

Example: - A agreed to supply to B certain goods to be procured from Algeria. The goods
could not be produced due to riots and civil disturbances in the county, held, there was no
excuse for non performance of thecontract.
e. Failure of one of the objects.
When a contract is entered into for several objects, the failure of one of them does not discharge
thecontract.
Example: - H & B agreed to let out a boat to H fro viewing a naval review on the occasion of
the coronation of Edward VII, and to sail round the fleet. Owing to the king’s illness the naval
review was abandoned but the fleet was assembled. The boat, therefore, could be used to sail
round the fleet. Held the contract was not discharged.

IV. DISCHARGE BY LAPSE OFTIME

The Limitation Act, 1963 lays down that a contract should be performed within a
specified period, called period of limitation, if it not performed, and if no action is taken by the
promise within the period of limitation, he is deprived of his remedy at law. In other words, we
may say that that the contract is terminated.

V. DISCHARGE BY OPERATION OFLAW

A contract may be discharged independently of the wishes of the parties, i.e., by
operation of law. This includesdischarge:

By death
By merge
By insolvency
By unauthorized alteration of the terms of a written agreement. By
right and liabilities becoming vested in the same person

VI. DISCHARGE BY BREACH OFCONTRACT

Breach of contract means a breaking of the obligation which a contract imposes; it
occurs when a party to the contract without lawful excuse does not fulfill his contractual
obligation or by his own act makes it impossible that he should perform his obligation under it.
It confers a right of action for damages on the injureparty.Breach of contract may be:-
1. Actual breach of contract,or
2. Anticipatory or constructive breach ofcontract.
 REMEDIES FOR BREACH OF CONTRACT
When a contract is broken, the injured party (i.e., the party who is not in breach) has one
or more of the following remedies:

1. RESCISSION
When a contract is broken by one party, the other may sue to treat the contract as
rescinded and refuse further performance. In such a case, he is absolved of all his obligations
under the contract
Example: - A promises B to supply 10 bags of cement on a certain day. B agrees to pay the
price after the receipt of the goods. A does not supply the goods. B is discharged form liability
to pay price.
2. DAMAGES
Damages are a monetary compensation allowed to the injured party is the court for the
loss or injury suffered by him by the breach of a contract. a) Damage arising naturally-
ordinary damages:-
When a contract has been broken, the injured party can be recovering form the other
party such damages as naturally arose in the usual course of things from thebreach.
Example: - A contracts to sell and deliver 50 quintals of Farm wheat to B at Rs. 475 per
quintal, the price to be paid at the time of delivery. The price of wheat rise to Rs 500 per
quintal and a refuses to sell the wheat. B claim damages at the rate Rs. 23 per quintal. b)
Damages in contemplation of the parties specialdamages;
 Damage other than those arising form the breach of contract may be recovered if such
damages may reasonable be supposed to have been in the contemplation of both the parties as
the breach of the contract. Such damages, known as special damages, cannot be claimed as a
matter of right.
Example: - P brought from L some copra cake. He sold it to B who sold it to various dealers,
and they in turn sold it to farmers, who used it for feeding cattle. The copra cake was
poisonous and the cattle fed on it died. Claimed against L the damages and costs he had to pay
to B. Cake were to be used for feeding cattle P could claimcompensation. c) Vindictive or
exemplarydamages:-
Damages for the beach of a contract are given by way of compensation for loss
suffered, and not by way of punishment for wrong inflicted. Hence, vindictive or exemplary
damages have no place in the law of contract because they are punitive (involving punishment)
by nature. Butincaseofbreachofpromisetomarry,anddishonorofachequebyabankerwrongfully
when he possesses sufficient funds to the credit of the customer, the court may award
exemplary damages.
d) Nominal damages:- Where the injured party has not in fact suffered any loss by reason of
the breach of a contract, the damage recoverable by him are nominal, i.e., very small, for
example arupee.These damages merely acknowledge that the plaintiff has case and won.
Example: - A firm consisting of four partners employed B for a period of two years. After six
months two partners retired, the business being carried on by the other two. B declined to be
employed damages as he had suffered no loss.
e) Damages for loss of reputation: Damages for loss of reputation in case of breach or
contract are generally not recoverable. An exception to this rule exists in the case of a banker
who wrongfully refuses to honour a customer’s cheque. If the customer happens to be a
tradesman, he can recover damages in respect of any loss to his trade reputation by thebreach.
f) Damages for inconvenience anddiscomfort: Damage can be recovered for physical
inconvenience and discomfort. The general rule in this connection is that the measure of
damages is not affected by the motive or the manner of the breach.Example: - A was
wrongfully dismissed in a harsh and humiliating manner by G from his employment. Held. A
could recover a sum representing his employment. Held, a could recover a sum presenting his
wages for the period of notice and the commission which he would have earned during the
 period; but he could not recover anything for his injured feelings or for the loss sustained
from the fact that his dismissal made it more difficult for him to-obtain employment.
g) Mitigation ofdamages:It is the duty of the injured party to take all reasonable steps to
mitigate the loss caused by the breach he cannot claim to be compensated by the party in
default for loss which he ought reasonable to have avoided that is he cannot claim
compensation for loss which is really due not to the breach but due to his own neglect to
mitigate the loss after the breach.
h) Difficulty of assessment: - Although damages which are incapable of assessment cannot
be recovered, the fact that they are difficult to assess with certainty or precision does not
prevent they aggrieved party from recoveringthem,
i) Cost of decree: The aggrieved party is entitled, in addition to damages to get the cost of
getting the decree for damages. The cost of suit for damages is in the discretion of thecourt.
3) QUANTUM MERUIT
The phrase quantum merit literally means as much as earned. A right to sue on a
quantum merit arises where a contract, partly performed by one party, has become discharged
by the breach of contract by the other party. The right is founded not on the original contract
which is discharged or is void but on an implied promise by the other party to pay for what has
been done.
4) SPECIFICPERFORMACNE
In certain cases of breach of contract, damages are not an adequate remedy. The court
may, in such cases, direct the party in breach to carry out his promise according to the terms of
the contract. This is a direction by the court for specific performance of the contract at the suit
of the party not in breach.
5) INJUNCTION
Were a party is in breach of a negative term of contact (i.e., where he is doing
something which he promised not to do), the court may, by issuing an order, restrain him from
doing what he promised not to do. Such an order of the Court is known as aninjunction”.
Example: - W agreed to sing at L’s theatre and, during a certain period to sign nowhere else.
Afterwards W made contract with Z to sign at another theatre and refused to perform the
contract with L. Held W could be restrained by injunction from singing for Z.
References
1. Goel, P.K., Business Law for Managers, Wiley, 2006.

2. Kapoor, N.D., Elements of Mercantile Law, Sultan Chand & Co. Ltd, 37th Edition, 2015.
3. Shukla, V.N., Constitution of India, Eastern Book Company, 13th Edition, 2017

4. Kuchhal, M.C., Vivek Kuchhal, Business law, Vikas Publication, 7th Edition, 2018.
5. Sheth, T, Business Law, Pearson, 2nd Edition, 2017.

Question Bank
PART A
Sno. Questions CO Blooms
Level
1. “Offer + Acceptance = Contract” – Is it true. Comment on your CO1 L5

answer.
2. “No Consideration No Contract” – Do you agree this statement. CO1 L5
3. State any four essential elements of a Contract. CO1 L2
4. List any four types of Contract. CO1 L2
5. ‘Mere silence does not amount to fraud’ – Examine. CO1 L4
6. Compare and contrast Misrepresentation and Fraud. CO1 L2
7. “Minor is liable to pay for the necessaries supplied to him” – CO1 L5

Justify this statement.

8. Write short note on Coercion and Undue Influence. CO1 L3
9. List out the modes in which a contract may be discharged. CO1 L2
10. State any four ways in which a Contract may get discharged. CO1 L2
11. Explain Quantum Merit. CO1 L2
12. Illustrate Remission. CO1 L2

PART- B

Sno. Questions CO Blooms

Level
1. “An agreement enforceable by law is contract” – Justify this CO1 L5

statement.
2. Illustrate the various classifications of Contract. CO1 L3
3. “All agreements are not contracts but all contracts are CO1 L5
agreements” – Do you agree this statement. Explain with suitable
examples.

4. Illustrate in detail, the legal rules relating to Offer. CO1 L3

5. Explain the legal rules relating to Acceptance. CO1 L2
6. “No Consideration No Contract” – Evaluate the exceptions to this CO1 L5

rule.
7. If a consent is not obtained freely, do the parties in the contract CO1 L5

are having rights to repudiate? Give your comment.

8. Critically examine “whether a minor can enter into a contract”. CO1 L4
9. Differentiate Coercion and Undue influence. CO1 L4
10. Describe in brief about the contractual capacity of the parties to CO1 L2

enter in a contract.
11. Explain the different modes of discharge of a Contract. CO1 L2
12. Describe in detail how the contract is performed. CO1 L2
13. Examine the remedies available for an injured party when there is CO1 L4

a breach of contract.
 II. INDIAN CONTRACT ACT, 1872: SPECIFIC CONTRACTS

Contract of Indemnity and Guarantee - Contract of Bailment and Pledge - Contract of Agency

CONTRACT OF INDEMNITY

A Contract of indemnity is a direct engagement between two parties whereby one

promises to save another from harm. A contract of indemnity means, “a contract by which one
party promises to save the other from loss caused to him by the conduct of the promisor himself
or by the conduct of any other person.”
DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says that,
“whenever one party promises to save the other from loss caused to him by the conduct of the
promisor himself or by the conduct of any other person is called a Contract of Indemnity.” Ex. A
contracts to indemnify B against the consequences of any proceedings which C may take against
B in respect of a certain sum of Rs.200. This is a contract of indemnity.
A and B goes into a shop. B says to the shopkeeper, “let him (A) have the goods, I will see you
paid”. This is a contract of indemnity.

ESSENTIAL ELEMENTS:-A contract of indemnity is a species of the general contract. As

such it must have all the essential elements of a valid contract. The following are the essentials
specific to the Contract of Indemnity:-
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus it is clear that this contract is contingent in nature and is enforceable only when the loss
occurs. A contract of indemnity may be express or implied.
RIGHTS 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 so under Section 125 of the Act defines the rights of an indemnity
holder which are as under:-

2
1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect
of any matter to which the promise of indemnity applies.
2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing
or defending it he did not contravene the orders of the promisor and has acted as it would have
been prudent for him to act in the absence of the contract of indemnity or if the promisor
authorised him in bringing or defending the suit.
3. Right of recovering sums:- All the sums which he may have paid under the terms of a
compromise in any such suite if the compromise was not contrary to the orders of the promisor
and was one which would have been prudent for the promisee to make in the absence of the
contract of indemnity.
In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the
Surveyor. Any settlement at the lesser value is arbitrary and unfair and violates art.14 of the
constitution.

CONTRACT OF GUARANTEE
The contract of guarantee may be an ordinary or some different type of guarantee which
is different from an ordinary guarantee. Guarantee may be either oral or written. Basically it
means that a contract to perform the promise or discharge the liability of third person in case of
his default and such type of contracts are formed mainly to facilitate borrowing and lending
money.
DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge
the liabilities of a third person in case of his default.
i) The person who gives the guarantee is “Surety”.
ii) The person in respect of whose default the guarantee is given is “Principal debtor”
iii) The person to whom the guarantee is given is “Creditor”.
Ex. S promises to a shopkeeper C that S will pay for the items being bought by P if P does not
pay this is a contract of guarantee. In case if P fails to pay, C can sue S to recover the balance.
(Birkmyr v/s Darnell-1704).

ESSENTIALS: - The following are the essential elements of Guarantee:-

3
1. Existence of Creditor, Surety, and Principal debtor: - Existence of all the three parties are
required.
2. Concurrence:- A contract of guarantee requires the concurrence of all the three parties viz. the
principal debtor, the creditor and the surety.
3. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for
the liability of the Principal debtor.
4. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt
barred by Statute of Limitation.
5. Essentials of a valid contract:- A contract of guarantee must have all the essential elements of a
valid contract. But
i) All the parties must be capable of entering into a valid contract, though the principal debtor may
be a person suffering from incapacity to contract. In such a case, the surety is regarded as the
principal debtor and is liable to pay personally even though the principal debtor (ex., a minor) is
not liable to pay
ii) Consideration received by the principal debtor is sufficient for the surety, and it is not necessary
that it must necessarily result in some benefit to the surety himself. The consideration in such
contract is nothing but anything done or the promise to do something for the benefit of the
principal debtor. The section 127 of the Act clarify as under :-
“Anything done or any promise made for the benefit of principal debtor is sufficient
consideration to the surety for giving the guarantee.”
Ex. A agrees to sell to B certain goods if C guarantees for payment of the price of the goods. C
promises to guarantee the payment in consideration of A’s promise to deliver goods to B. This is
sufficient consideration for C’s promise.
6. Writing not necessary: - A guarantee may be either oral or written (sec.126). It may be either
express or implied
7. It should be without misrepresentation or concealment: - Section 142 of the Act specifies that
a guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and
section 143 specifies that a guarantee obtained by concealing a material fact is invalid as well.

4
Ex. 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a
guarantor for further employment. C guarantees B’s conduct but C is not made aware of B’s
previous miss-accounting by A. B afterwards defaults. C cannot be held liable.
Ex. 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment however, C is
not made aware of the fact that A and B had contracted that B will pay Rs.5/- higher that the
market price. B defaults. C cannot be held liable.

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

INDEMNITY GUARANTEE
1. In indemnity there are two, one who is There are three parties, Principal debtor,
indemnified and the other indemnifier. surety and the Creditor.

2. It consists of only one contract under There are three contracts between surety,
which indemnifier promises to pay in the principal debtor and creditor.
event of certain loss.
3. The contract of indemnity is made to The object of contract of guarantee is the
protect the promise against some likely loss. security of the creditor.

4. The liability of the indemnifier in a In guarantee the liability of surety is only a

contract of indemnity is a primary one. secondary, when principal debtor default.

NATURE, RIGHTS AND LIABILITIES OF A SURETY

The surety who is entitled to be reimbursed by the principal debtor for the amount paid by him
on his behalf. The liability of the surety is co-extensive with that of the principal debtor unless it
is otherwise provided by the contract under section 128.

5
NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal
debtor which means that on a default having been made by the principal debtor the creditor can
recover from surety the all what he could have recovered from the principal debtor.
Ex. The principal debtor makes a default in the payment of a debt of Rs.10,000/- the Creditor
may recover from the surety the sum of Rs.10,000/- plus interest becoming due thereon as well
as the amount spent by him in recovering that amount.

LIABILITY OF SURETY:- Section 128 of the Contract Act, it is clear that although, the
liability of a surety is co-extensive with that of the principal debtor, he may limit his liability. A
guarantee for a part of the entire debt and a guarantee for the entire debt subject to a limit.
Ex. P owes to C Rs.8,000 on a continuing guarantee given by S. S may have given this
guarantee in either of
(a) ‘I guarantee the payment of the debt of Rs.5,000 by P to C.’
(b) ‘I guarantee the payment of any amount lent by C to P subject to a limit of Rs.5,000.’

RIGHTS OF SURETY:-The surety has certain rights against the principal debtor, the creditor
and the co-sureties. His right against each one of them are being discussed as under :-
RIGHT AGAINST PRINCIPAL DEBTOR
1. Right of Subrogation
After the payment of the debt to the creditor, the surety is subrogated to the rights of the creditor
i.e., he has the same rights as those of the creditors. Therefore, he can sue the principal debtor to
exercise those rights. Thus if the surety has performed his promise towards the creditor, all the
rights of the principal debtor against the creditor devolve upon him.
2. Right of Indemnity
In every contract of guarantee, there is an implied promise by the principal debtor to indemnify
the surety i.e., to compensate the surety. Therefore, upon the payment of debt of the principal
debtor, the surety becomes entitled to recover from the principal debtor, all the amount including
interest plus costs rightly paid to the creditor under the guarantee. The reason is that the surety is
entitled to full indemnification. 3. Right to be Relieved Earlier
A surety can, even before making any payment, compel the debtor to relieve him from liability
by paying off the debt. But, before doing so, the debt should be ascertained.
6
RIGHTS AGAINST CREDITOR
1. Rights in Case of Fidelity Guarantee
In case of fidelity guarantee i.e., guarantee as to good behaviour, honesty, etc., of the principal
debtor, the surety can ask the employer to dispense with the services of the employee if the latter
is proved to be dishonest.
2. Before the Payment of the Debt Guaranteed
A surety may, after the debt has become due but before he is called upon to pay, require the
creditor to sue the principal debtor to recover the debt. But, in such cases, the surety must
undertake to indemnify the creditor for any risk, delay or expense resulting there from.
3. Right to Claim Securities
After payment of the debt to the creditor or the performance of the promise of the principal
debtor, the surety can recover all the securities which the creditor had with him either before or
after the contract of guarantee was entered into. This right is available to the surety whether or
not he knows about the existence of such security. He is entitled to all of them.
4. Right of Equities
After paying the amount due to the creditor, the surety is entitled to all equities of the creditor
that he had against the debtor as well as any other person with regard to the debt.
5. Right of Set-off
Sometimes, the principal debtor is entitled to certain counter claim or deductions from the loan
obtained from the creditor. In such cases, the surety is entitled to the benefit of such counter
claim or deductions, if the creditor files a suit against the surety.
RIGHTS AGAINST CO-SURETIES
When two or more persons give a guarantee for the same debt, they are called as co-sureties. All
of them are equally liable to the creditor for the payment of the debt to the creditor. The rights of
one co-surety against the other co-sureties are as follows:
1. Right to Contribute Equally
If two or more persons are co-sureties for the same debt either jointly or severally, or whether
under the same or different contracts and whether with or without the knowledge of each other,
the co-sureties in the absence of any contract to the contrary, are liable as between themselves, to

7
pay each, an equal shares of the whole debt, or that part of it which remains unpaid by the
principal debtor.
Sometimes, one co-surety discharges the entire obligations. In such cases, he can obtain equal
contribution from the other co-sureties.
2. Liability of Co-sureties bound in Different Sums
If the co-sureties are bound in different sums, they are liable to pay equally but not more than the
maximum amount guaranteed by each one of them.
Example: A, B and C are sureties for D, enter into three several bonds, each in a different
penalty, such as A in the penalty of Rs.5,000, B in that of Rs.10,000, C in that of Rs.20,000,
conditioned for D’s duly accounting to E. D failed to the extent of Rs.15,000, A, B and C are
each liable to pay Rs.5,000 each.

CONTRACT OF BAILMENT
Contract of bailment means delivery of goods i.e. moveable property by one person who
is generally the owner thereof, to another person for some purpose. The goods are to be returned
to the owner after accomplished the purpose to take further action as per directions of the owner
of the goods. A.T.Trust Ltd., v/s Trippunhura Devaswomi-1954.

DEFINITION:- Section 148 of the Indian Contract Act, A bailment is the delivery of goods by
one person to another for upon a contract that they shall when purpose is accomplished be
returned or otherwise disposed of according to the directions of the person delivering them. In a
contract of bailment, the person who delivers the goods called the “Bailor” and to whom the
goods are delivered is called as “Bailee”.
Ex. 1. A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of
bailment between A and B.
2. A lends a book to B to be returned after the examination. There is a contract of bailment
between A and B.
3. A enters into an agreement with B to deliver his bicycle to him on the condition that it shall
be redelivered to A after two days. It will be a contract of bailment.

ESSENTIAL ELEMENTSCONTRACT OF BAILMENT:-

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1. CONTRACT
The first condition is that there must be a contract between the two parties for the delivery of
goods. Such contract may be express or implied, written or oral.
2. DELIVERY OF GOODS
This contract is for the delivery of some movable goods from one person (bailor) to another
person (bailee) or to his authorized agent. If the goods are immovable the contract will not be a
contract of bailment.
3. CHANGE OF POSSESSION
The possession of goods must be affected by such contract. Mere custody without possession is
not a contract of bailment. Ex. A servant who receives certain goods from his master to take to a
third party has mere custody of the goods; possession remains with the master and the servant
does not become a bailee.
4. PURPOSE OF DELIVERY
The delivery of the goods is for temporary purposes. It may be for safe-custody, repair, carriage
or for gratuitous use by the bailee.
5. NUMBER OF PARTIES
There is two parties under such contract e.g., the bailor and bailee. The person delivering the
goods is called the bailor and the person to whom the goods are bailed is called the bailee.
6. RIGHT OF OWNERSHIP
In a contract of bailment, the right of ownership remains with an owner (bailor) and is not
changed. If the ownership is transferred, the contract will be a contract of sale and is not of
bailment.
7. CHANGE OF FORM
If the goods bailed are altered in form by the bailee, such as cloth is converted into a shirt still,
the contract is one of bailment.
8. REDELIVERY OF GOODS
Under such contract, the goods are redelivered to the bailor or according to his directions upon
the fulfillment of the purpose by the bailee.
9.RIGHT OF REWARD

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In a contract of bailment, both the partiesbailor and the bailee can get a reward but it depends on
the nature of the transaction.

KINDS OF BAILMENT

1. BAILMENT FOR SAFE-CUSTODY

When the bailor delivers his goods to the bailee only for keeping it. in his safe-custody, the
bailment is said to be bailment for safe-custody.
Illustration; A delivers his camera to B to keep it in his safe-custody for six months. This will be
the bailment for safe-custody.
2. BAILMENT FOR USE
If the bailor delivers, the goods to the bailee to use it. The bailment will be the bailment for use.
Illustration; A delivers his bicycle to B to use it for two days. This will be the example of
bailment for use.
3. BAILMENT FOR REWARD OR NON-GRATUITOUS BAILMENT
Where the bailment is for use or for sate-custody and the bailee or bailor can charge for his
services, then it will be the case of bailment for
Illustration: A delivers his bicycle to B to use it for two days for Rs.50 daily. This will be the
bailment for a reward because Bailor (A) will get a reward for the use of a bicycle.
4. GRATUITOUS BAILMENT
Where the bailment is for safe-custody or for use and bailee does not charge anything, the
bailment is a bailment for gratuitous.
Illustration: A delivers his bicycle to his friend B to use it for two days without reward. It will be
the case of gratuitous bailment.
5. BAILMENT FOR LOST GOODS
When a person finds out the lost goods of another has the same responsibilities as the bailee has
against the goods the bailor. Such implied bailment will be the case of bailment of lost goods.
Under such conditions, the bailee is entitled to retain the goods until he receives compensation
for the trouble and expenses he has to bear in order to find but the owner of the lost goods.
Ex. A found the lost horse B and redelivered it to B. It will be the bailment for lost goods.
6. BAILMENT FOR PLEDGE

10
When any moveable goods are given as security for the debt, to creditor by the debtor, it will be
bailment for pledge until the repayment.
Ex. A gets loan from B and hands over his jewels to B as security until the repayment of the loan.
It will be the bailment for pledge.

RIGHTS OF THE BAILOR

1. RIGHT TO GET BACK THE GOODS

The bailor has a right to get back the goods bailed by him as soon as the purpose of bailment is
accomplished. If the bailee fails to do so, he is entitled to get reasonable compensation from the
bailee.
2. RIGHT TO TERMINATE THE CONTRACT
The bailor has a right to terminate the contract of bailment if the bailee does any act with the
goods bailed to him. which is inconsistent with the terms of the contract. For example-bailor
gives his Tonga to bailee for his personal use, but he uses it for carrying passengers.
3. EXPENSES OF SEPARATION
If the bailee has mixed the goods of bailor with someone other goods not belonging to bailor
without the consent of the bailor, the bailor has a right to get from bailee the expenses which he
has to bear for the separation of his goods from others.
4. COMPENSATION FOR GOODS
If the bailee has mixed the goods of the bailor with someone other goods not belonging to bailor
without the consent of the bailor and bailors goods cannot be separated from the other goods, the
bailor has a right to get reasonable compensation from bailee tor his goods.

5. COMPENSATION FOR UNAUTHORISED USE

If the bailee make’s any use of the goods bailed, which is not in accordance to the conditions of
the bailment, the bailor has a right to get Compensation from the bailee for any damage arising to
the goods from or during such unauthorized use of the goods.
6. COMPENSATION FOR DELAY IN TIME

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According to The Contract Act, the bailee is responsible to return, deliver or to tender the goods
to the bailor at a proper time. If he fails to do the bailor has a right to get compensation from
bailee for any loss, destruction or deterioration of the goods due to such delay in time.
7. RIGHT TO SHARE PROFIT
The bailor has a right to share with bailee any profit earned from the goods bailed if it is so
provided by the contract.

DUTIES OF THE BAILOR

1. TO DISCLOSE FAULTS
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
risks; and if he does not make such disclosure, he is responsible for damage arising to the bailee
directly from such faults Sec. 150.
Ex. A lends a horse, which he knows to be vicious to B. He does not disclose the fact that the
horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage
sustained.

2. TO REPAY NECESSARY EXPENSES

Where under the contract of bailment, the goods have been carried by the bailee or he has done
some work upon them for the bailor and the bailee has received no remuneration, the bailor must
repay to the bailee necessary expenses incurred by him for the purpose of bailment.
Ex. A is a friend of B and repairs B’s television set free of cost. On this repair, he bears Rs. 500
actual Expenses due to a replacement of parts. B is bound by law to pay Rs. 500, the actual cost
of repair to A.

3. TO REPAY EXTRA-ORDINARY EXPENSES

When the contract of bailment is for reward but bailee does some work for the benefits of the
bailor and bears extraordinary expenses, the bailor is bound to repay these extraordinary
expenses in excess of the original reward.

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Ex. A keeps his bicycle for safe custody with B for reward the bicycle gets punctured without the
negligence of B and B repairs it. Now A is bound to pay these repair expenses to B in excess of
the original amount.
4. TO INDEMNIFY BAILEE
The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that
the bailor was not entitled to make the bailment, or to receive back the goods, or to give direction
respecting.
Ex. A gives B’s car for use to C without the permission of B. Later on, B gets compensation from
C. Now C’ has legal right to be indemnified by A.

RIGHTS OF BAILEE
1. TO RECOVER DAMAGES
The bailee is entitled to recover all the damages and losses suffered by the bailee due to the
defects in the goods bailed to him with the knowledge of the bailor.
2. RECOVERY OF EXPENSES
The bailee is also entitled to recover all the expenses incurred for the purpose of bailment and for
providing services to the bailor. Ex. A leaves his horse with the neighbour for safe custody for a
week. B is entitled to recover the expenses incurred by him in feeding the horse.

3. RECOVERY OF COMPENSATION
The bailee can also recover compensation from the bailor for any loss caused to him due to any
defect in the bailor’s title.
4. RIGHT OF ACTION AGAINST THE THIRD PARTY
The bailee has a right to take legal action as an owner of the goods, against the third party who
wrongfully deprives the bailee of the use of goods bailed or does them any injury. The
compensation received from such claims must be dealt between the bailor and bailee in
accordance with their respective interests.
5. RIGHT OF LIEN
When the bailee has 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. Sec 170.
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DUTIES AND LIABILITIES OF THE BAILEE

1. TO TAKE CARE OF GOODS

According to section 151, the bailee is bound to take as much care of the goods bailed to him as a
common person takes off his own goods.
2. EXPENSES OF SEPARATION
If the bailee without the consent of the bailor mixes the goods of the bailor with his own goods,
and goods can be separated or divided, the bailee is bound to bear the expenses of separation or
division, and any damage arising from the mixture. Sec 156.
3. UNAUTHORISED USE OF GOODS
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. Sec 154.
4. INCONSISTENT ACT
A contract of bailment is voidable at the option of the bailor, if the bailee does any act with
regard, to the goods bailee inconsistent with the conditions of the bailment. Sec 153.
5. COMPENSATION
If the bailee without the consent of the bailor mixes the goods 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. Sec
157.
6. RETURN OF GOODS
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; Sec. 160.

7. RETURN OF GOODS AT PROPER TIME

The bailee is responsible to return, deliver or tender the goods to the bailor at a proper time. If he
fails to do so, he is responsible to the bailor for any loss, destruction or deterioration of the goods
from that time. Sec 161.

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 8. RETURN OF PROFIT
In the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or
according to his directions, any increase or profit which may have accrued from the goods bailed
Sec 163.

POSITION 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 as provided in sec.71. Since the position of the finder of goods is
that of a bailee. He is supposed to take the same amount of care with regard to the goods as is
expected of a bailee under section 151. He is also subject to all duties of a bailee including a
duty to return the goods after the true owner is found.
Section 168 and 169 confer certain rights on the finder of goods which are as under:
1. May sue for specific reward offered: The finder of goods has no right to sue the owner for
compensation or trouble and expenses voluntarily incurred by him to preserve the goods, but he
may retain the goods until he receives such compensation and a specific reward offered by the
owner for return of the goods. Refer sec. 168 of the Act.
2. If true owner is diligence not found or he refuses to pay the lawful charges of the finder of the
goods, the finder may sell it on the following conditions:-
i) When the thing is in danger of perishing or losing part of its value.
ii)When the lawful charges of the finder, in respect of the found goods amount to two-third of its
value.
iii)Right of Lien: He can retain the Lien on the found goods until his expenses on find goods are
paid.
iv) Right to sell the goods found:- Finder of the goods has the right to sell the goods found by
him under certain circumstances provided in section 169 of the act with a reasonable notice
mentioning the intention to sale the goods found.

TERMINATION OF BAILMENT
1. ACCOMPLISHMENT OF PURPOSE
When the purpose for which goods were bailed” has been accomplished, the contract of bailment
is terminated and goods are returned to the bailor.

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2.EXPIRY OF TIME
When the goods are bailed for a fixed time, the contract of bailment is terminated at the expiry of
the time fixed.
3. DEATH OF THE PARTY
A gratuitous bailment is terminated by the death either of the bailor Sec. 162.
4. BAILEE’S INCONSISTENT ACT
A contract of bailment ‘is voidable (terminated) at the option of the bailee does any act with
regard to the goods bailed’ with the conditions of the bailment.

CONTRACT OF PLEDGE
Section 172 of the Act, pledge is a bailment the delivery of the goods from the ‘pawnor’
to the ‘pawnee’ which is essential. There must be delivery of the goods i.e. the transfer of
possession from one person to another. The delivery however, be either actual or constructive.
Mere agreement to transfer of possession in future is not enough to constitute a Pledge.
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 "pawnee".

ESSENTIALS OF A VALID CONTRACT OF PLEDGE (SEC.172)

Contract: There must be a contract. The contract may be expressed or implied.
Goods: Pledge can be made of goods only.
Delivery: There must be delivery of goods by one person to another person.
Purpose of delivery:
• The goods must be delivered for some purpose.
• The purpose must be to deliver the goods as security for o (a) payment
of a debt; or o (b) performance of a promise.
Return of goods:
• The delivery of goods must be conditional
• The condition shall be that the goods shall be – o – returned (either in
original form or in altered form); or
o – Disposed of according to the directions of the pawnor when the purpose is
accomplished.

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RIGHTS OF PAWNEE (SEC.173 AND 176)
1) Right of Retainer [Sec.173]:
Pawnee may retain the goods pledged for –
• (a) payment of the debt or the performance of promise,
• (b) any interest due on the debt; and
• (c) all necessary expenses incurred by him with respect to possession or for preservation
of goods pledged.
2) Retainer for subsequent advances [Sec.174]
• (a) Where the Pawnee lends money to the Pawnor subsequently, after the date of pledge,
it shall be presumed that the he has a right of retainer over the goods already pledged in
respect of the subsequent lending also.
• (b) This presumption can be made invalid only by an expenses provision to that effect.
3) Reimbursement of Expenses [Sec.175]:
Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with him, he is
entitled to receive such amount from the Pawnor. 4) Rights in case of default by Pawnor
[Sec.176]
• (a) Suit: Pawnee may institute a suit against Pawnor when there is a default in payment
of debt or performance of promise at the stipulated time.
• (b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as collateral
security, or (b) sell the goods pledged by giving a reasonable notice to the Pawnor.
• (c) Surplus / Deficit on Sale :When there is a surplus on sale, Pawnee shall pay the
excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance amount.
• (d) No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor, the
sale is valid, but Pawnee is liable to pay damages to Pawnor.
5) Right against true owner of goods [Sec.178A]
• (a) Where the Pawnor has acquired possession of pledged goods, under a voidable
contract u/s 19 or 19A but contract has not been rescinded at the time of pledge, the
Pawnee acquires a good title to the goods, against the true owner.
• (b) The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s defect
in title and (b) he acts in good faith.

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Reasonable notice u/s 176 means that a notice of intended sale of the security by the Creditor
within a certain date, so as to afford an opportunity to the Debtor to pay the amount within the
time mentioned in the notice. Notice of sale is essential and a clause in the agreement excluding
the requirement of Notice is inconsistent with the Act & is void and unenforceable.

RIGHTS OF A PAWNOR (SEC.177)

1) Redeem the goods pledged
Meaning of redemption: Right to recover back the goods by making payment of the debt or
performance of promise.
Time for redemption: Where time of redemption is fixed, the pawnor may exercise redemption:
• (a) within the time so fixed; or
• (b) even after expiry of time so fixed, provided – o the pawnee has not sold the
good; and o the pawnor pays the pawnee all expenses arising on account of his
default.
2) Enforce pawnee’s duties: The pawnor has the right to enforce the duties of pawnee, if the
pawnee fails to fulfill his duties.
3) Receive increase in goods: The pawnor has the right to recover from pawnee any increase in
goods pledged.

4) Right to receive notice of sales: In case of default by the pawnor to pay the debt or perform
his promise, the pawnee has the right to sell the goods, after giving a reasonable notice to the
pawnor. If the pawnee fails to give notice, the pawnor has the right to recover the loss incurred
by him.

DUTIES OF A PAWNOR (SEC.175)

Pay the debt: The pawnor is liable to pay the debt or perform his promise as the case may be.
Pay deficit on sale: If the pawnee sells the goods due to default by the pawnor, the pawnor must
pay the deficit.
Pay extra – ordinary expenses: The pawnor is liable to pay to the pawnee any extraordinary
expenses incurred by the pawnee for preservation of goods.
Disclose faults in goods: The pawnor is liable to disclose all the faults which
• (a) are material for use of the goods; or

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 • (b) may put the pawnee to extraordinary risks.
Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s title to the
goods, the pawnor must indemnify the pawnee.
DUTIES OF A PAWNEE
1) Not to use the goods: The pawnee has no right to use the goods. However, he may use the
goods, if he has been so authorised by the pawnor.
2) Return the goods: The pawnee must return the goods if the pawnor pays the debt or
performs his promise.
3) Take reasonable care: The pawnee must take such care of goods pledged as a man of
ordinary prudence would take care of his own goods.
4) Not to mix goods: The pawnee must not mix his own goods with the goods pledged. 5)
Return increase in goods: The pawnee must return to the pawnor any accretion to the goods
pledged with him.

DIFFERENCE BETWEEN PLEDGE & BAILMENT

PLEDGE BAILMENT

• Pledge is bailment of goods for a • Bailment may be for purpose other than by
specific purpose, i.e. to provide a way of providing security for a loan or
security for a loan or fulfillment of an fulfillment of an obligation. It may be for
obligation. purpose like repairs, safe custody, etc.

• Pledge is bailment of goods as security • Bailment is a delivery of goods by one

for the payment of debt or for the person to another for some purpose upon a
performance of a promise. contract.

• Moveable property is subject-matter of • In the contract of bailment after the

pledge under the contract Act. accomplishing of the purpose the goods are

Pawnee, i.e. Pledgee has a right of to be returned or otherwise disposed of

sale of goods pledged on default of according to the directions of the Bailor.
• Pawnor. He can do so by giving a • There is no right of sale
notice to the pawnor. to the
Bailee. Bailee may either – (a) retain goods,
Pledgee has no right of using goods
pledged. or (b) sue the Bailor for non – payment of
his dues.
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 • • Bailee can use the goods bailed as per terms
of contract.

CONTRACT OF AGENCY
An agent is a person employed to do any act for another or to represent another in dealing
with third parties. The person for whom such act is done or who is so represented is called the
principal. Where one person mere gives advice to another in matter of business agency does not
arise because of such advice only does not create an Agency. The following are the various ways
in which a relationship of agency is created:-
TYPES OF AN AGENCY CONTRACT
1. By Express Agreement
A contract of agency can be made orally or in writing (Se.186). 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.
2. By Implied Agreement
Implied agency arises from the conduct, the situation or relationship of parties. For ex. Arun and
Prabhu are brothers. Arun lies in Delhi while Prabhu lies in Meerut. Arun with the knowledge of
Prabhu leases Prabhu’s lands in Delhi. Arun realizes the rent and remits it to Prabhu. Arun is the
agent of Prabhu, though not expressly appointed as such. Implied agency includes: a. Agency by
Estoppel (Section 237)
The Doctrine of Estoppel may be stated as where a person by his conduct, or by words spoken or
to act on that belief so as to alter his previous position, he is precluded from denying
subsequently the fact of that state of affairs. For ex. A (Agent) tells T (Third party) within the
hearing of P (Principal) that he (A) is P’s agent. P does not object to this statement of A. Later T
supplies certain goods to A, who pretends to act as an agent of P. P is liable to pay the price to T.
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
20
(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.
Where the wife lives apart: Wife who is deserted by her husband for no fault of her, has authority
to pledge her husband’s credit for necessaries. The husband cannot escape liability by telling his
wife not to pledge his credit nor even by telling the tradesman not to supply necessaries on
credit.
c. Agency of Necessity (Sections 188 and 189):
In certain circumstances, a person who has been entrusted with another’s property may have to
incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.
For example, A sent a horse by railway. On its arrival at the destination, there was no one to
receive it. The railway company, is bound to take reasonable steps to keep the horse alive, was an
agent of the necessity of A.
3. Agency by Ratification (Sections 169-200):
A person may act as an agent on behalf of another without his knowledge or consent, 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. For ex. A may act as P’s agent though he has no prior authority from P. In
such a case P may subsequently either accept the act of A or reject it. If he accepts the act of A,
done without his consent, he is said to have ratified that act and it places the parties in exactly the
same position in which they would have been if ‘A’ had P’s authority at the time he made the
contract.
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.
4. Agency by operation of law
Sometimes an agency arises by operation of law. For ex. (i) when a company is formed, its
promoters are its agents by operation of law, (ii) A partner is the agent of the firm for the purpose
of the business of the firm, and the act of a partner, which is done to carry on, in the usual way,

21
 business of the kind carried on by the firm, binds the firm. In all these cases, agency is implied
by the operation of law.

WHO MAY EMPLOY AS AN AGENT:- No person can employ an agent if he does not
possess capacity to contract. So a minor or person of unsound mind cannot become the agent
under section 183 of the Indian Contract Act.
WHO MAY BE AN AGENT:- According to section 184 of the Act any person can be appointed
as an agent but a person who is not of age of majority and of sound mind cannot be made
personally liable for the act done on behalf of the principal. Minor can create contractual relation
but a minor agent cannot be made personally liable to the principal for the misconduct like an
adult agent.
CONSIDERATION: No consideration is required for the creation of an Agency under section
185 of the Act.
CLASSIFICATION OF AGENTS:-On the basis of provisions available in the Contract Act the
following are kinds of Agent in the business of Agency:-
1. Del-Credere Agent:-A del credere agent is one who, in consideration of an extra commission,
guarantees his principal that the persons with whom he enters into contract on behalf of the
principal, shall perform their obligations. He occupies the position of both a guarantor and an
agent.
2. COMMISSION AGENT:- A commission agent is person who purchases and sells goods in the
market on behalf of his employer on the best possible terms and who gets commission for his
labor.
3. FACTOR:-A factor is a mercantile agent entrusted with the possession of goods for the purpose
of selling them. He is entitled to sell the goods in his own name. A factor has a right to retain the
goods for a general balance of accounts.
4. BROKER:-A broker is an agent who is employed to buy or sell goods on behalf of another. He
is employed primarily to bring a contractual relation between the principal and the third parties.
He is not entrusted with the possession of the goods. He merely brings two parties together and
if the deal is materialized he becomes entitled to the commission.

22
5. CO-AGENT:- Where several persons are expressly authorized with no stipulation that anyone
or more of them shall be authorized to act in name of the whole body. They have a joint
authority and they are called co-Agents.
6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the business of
Agency. He works under the control of original Agent.
7. BANKER
The relationship between the banker and the customer is that of debtor and creditor. But there is a
super-added obligation on the part of the banker to pay when called upon to do so by the draft or
order (in the form of a cheque) of the customer. To this extent, a banker is the agent of his
customer.
8. NON-MERCANTILE AGENTS
These include attorneys, solicitors, insurance agents, clearing and forwarding agents and wife,
etc.
9. SPECIAL AGENT
A special agent is one who is appointed to perform a particular act or to represent his principal in
some particular transaction, for ex. an agent is employed to sell a house.
10. GENERAL AGENT
A general agent is one who has authority to do all acts connected with a particular trade, business or
employment, for ex. the manager of a firm has an implied authority to bind his principal by doing
anything necessary for carrying on the business of the firm.
11. UNIVERSAL AGENT
A universal agent is one whose authority to act for the principal is unlimited. He has authority to act
for the principal is unlimited. He has authority to bind his principal by any act which he does,
provided the act (i) is legal, and is agreeable to the law of the land.

RIGHTS OF AN AGENT

1. Right to remuneration (Sec.219)– an agent is entitled to get an agreed remuneration as

per the contract. If nothing is mentioned in the contract about remuneration, then he is
entitled to a reasonable remuneration. But an agent is not entitled for any remuneration if
he is guilty of misconduct in the business of agency (Sec.220).
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 2. Right of retainer (Sec.217)– an agent has the right to hold his principal’s money till the
time his claims, if any, of remuneration or advances are made or expenses occurred
during his ordinary course of business as agency are paid.
3. Right of lien (Sec.221) – an agent has the right to hold back or retain goods or other
property of the principal received by him, till the time his dues or other payments are
made.
4. Right to indemnity (Sec.222) – an agent has the right to indemnity extending to all
expenses and losses incurred while conducting his course of business as agency.For ex.
B, at Singapure, 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 informs him to defend the suit. B defends the suit, and is
compelled to pay damages and costs, and incurs expenses. A is liable to B for such
damages, costs and expenses.
5. Right to compensation (Sec.225)– an agent has the right to be compensated for any
injury suffered by him due to the negligence of the principal or lack of skill. For ex. A
employs B as a bricklayer in building a house, and puts up the scaffolding himself. The
scaffolding is unskillfully put up, and B is in consequence hurt. A must make
compensation to B.
6. Right of stoppage in transit – where the agent has bought goods for his principal by
incurring a personal liability, he has a right of stoppage in transit against the principal, in
respect of the money he has paid or is liable to pay. This right of the agent is similar to
that of the unpaid seller.

DUTIES OF AN AGENT

1) Agent's duty in conducting principal's business (Sec 211):

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,

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 and, if any profit accrues, he must account for it. For ex. 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.
2) Skill and diligence required from agent (Sec 212):
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.
For ex. A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual inquiries 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.
3) Duty to render proper accounts (Sec 213):
An agent is bound to render proper accounts to his principal on demand.
4) Duty to communicate with principal in case of difficulty (Sec 214):
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.
5) Not to deal on his own Account (Sec. 215):
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.
For ex. A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on
discovering that B has bought the estate for himself, may repudiate the sale, if he can show that
B has dishonestly concealed any material fact, or that the sale has been disadvantageous to him.
6) Not to make Secret Profits (Sec 216):
Section 216 of the Indian Contract Act,1872 reads as - "If an agent, without the
knowledge of his principal, deals in the business of the agency on his own account instead of on

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 account of his principal, the principal is entitled to claim from the agent any benefit which may
have resulted to him from the transaction." An Agent, without the knowledge of his principal,
should not deal in the business of agency on his own to make secret profit.For ex. A directs B, his
agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for
himself. A may, on discovering that B has bought the house, compel him to sell it to A at the
price he gave for it.
7) Duty to pay sums received for principal (Sec 218):
An agent is bound to pay to his principal all sums received on his account.
8) Not to Disclose Secret:
It is duty of an agent to maintain secrecy of the business of agency and should not reveal the
confidential matters.
9) Protect and Preserve the interests of the Principal in case of death or insolvency(Sec
209):
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.
10) Not to delegate authority (Sec 190):
An agent must not, depute another person to do what he has himself undertaken to do.

AUTHORITY OF AGENCY
An agent who acts within the scope of authority conferred by his or her principal binds the
principal in the obligations he or she creates against third parties. There are essentially three
kinds of authority recognized in the law: actual authority (express or implied), apparent authority,
and ratified authority.
1. Actual authority
Actual authority can be of two kinds. Either the principal may have expressly conferred authority
on the agent, or authority may be implied. i) Express actual authority
Express actual authority means an agent has been expressly told he or she may act on behalf of a
principal.
ii) Implied actual authority

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Implied actual authority, also called "usual authority", is authority an agent has by virtue of being
reasonably necessary to carry out his express authority. As such, it can be inferred by virtue of a
position held by an agent. For example, partners have authority to bind the other partners in the
firm, their liability being joint and several, and in a corporation, all executives and senior
employees with decision-making authority by virtue of their position have authority to bind the
corporation. Other forms of implied actual authority include customary authority. This is where
customs of a trade imply the agent to have certain powers. In wool buying industries it is
customary for traders to purchase in their own names.Also incidental authority, where an agent is
supposed to have any authority to complete other tasks which are necessary and incidental to
completing the express actual authority. This must be no more than necessary.
2. Apparent or ostensible authority
Apparent authority exists where the principal's words or conduct would lead a reasonable person
in the third party's position to believe that the agent was authorized to act, even if the principal
and the purported agent had never discussed such a relationship. For example, where one person
appoints a person to a position which carries with it agency-like powers, those who know of the
appointment are entitled to assume that there is apparent authority to do the things ordinarily
entrusted to one occupying such a position. If a principal creates the impression that an agent is
authorized but there is no actual authority, third parties are protected so long as they have acted
reasonably. This is sometimes termed "agency by estoppel" or the "doctrine of holding out",
where the principal will be estopped from denying the grant of authority if third parties have
changed their positions to their detriment in reliance on the representations made.
• Rama Corporation Ltd v Proved Tin and General Investments Ltd [1952] 2 QB 147,
Slade J, "Ostensible or apparent authority... is merely a form of estoppel, indeed, it has
been termed agency by estoppel and you cannot call in aid an estoppel unless you have
three ingredients: (i) a representation, (ii) reliance on the representation, and (iii) an
alteration of your position resulting from such reliance."
• Case. A leading case on this subject is of Lloyds v/s GraceSmith in which it was held that
a principal is liable for the fraud of his agent within the scope of his authority whether the
fraud is committed for the benefit of the Principal or for the benefit of Agent.

PRINCIPALS LIABILITIES TO THIRD PARTIES FOR THE ACT OF THE AGENT

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Rights and Liabilities of Principal and Agent in relation to Third Parties
1. acting for a named principal,
2. acting for an unnamed principal,
3. acting for an undisclosed principal.

I. Agent Acting for a Named Principal

The rights and liabilities of a named principal for the acts of his agent may be discussed as
below:
1. Acts of an Agent within the Scope of his Authority
If an act is carried on by an agent within his authority, his acts are binding on the principal.
However, the act done should be lawful.
Example: A authorized his agent, B, to collect money on his behalf. B received from C a sum of
money due to A. This receipt of money is binding on A, and C is discharged from his obligation
to pay this amount to A.
2. Acts of an Agent Exceeding his Authority
It can be discussed under two heads as shown below:
1. Where the work can be separated – Where an agent exceeds his agency to do the work of
the principal, the principal is bound by that part of the work which is within his authority if it
can be separated from the part of the work which is beyond his authority
Example: A, owner of a ship and cargo, authorizes B to procure an insurance policy for Rs.4,000
on the ship. B procures a policy for Rs.4,000 on the ship and another for Rs.6,000 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.
2. Where the work cannot be separated – When an agent does more than what he is authorized
to do, and such act cannot be separated from that which is within his authority, the principal is
not bound by the transaction. He is in such a case entitled to repudiate the whole transaction.
So if the agent does something in excess of his powers, the transaction is not binding on the
principal.
Example: A authorized B, an agent to buy 500 sheeps. But B purchased 500 sheeps and 200
lambs, for a sum of Rs.6,000. In this case, the principal may repudiate the whole transaction.

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3. Notice Given to Agent
The principal is bound by the notice given to the agent in the course of business. Thus, the
knowledge of the agent is the knowledge of the principal.
However, if the knowledge is not acquired by the agent in the course of his employment, it
cannot be imputed to the principal. Further, if the agent had committed a fraud on the principal,
the rule of this section will not apply.
Example: X engaged Y’s agent to insure him against loss of eye-sight for $500 in case of total
loss of eye-sight and $250 in case of loss of only one eye. At the time of the insurance, it
appeared that X was in fact a one-eyed man. Held, the knowledge of the agent that X was
oneeyed man should be attributed to the company and that X could recover $500 when he lost
the other eye.
4. Liability by Estoppel
The principal is liable for the unauthorized acts of the agent, if the principal has created an
impression on the third party by his conduct, that the agent has the authority to do such acts.
Example: A, an owner of a house held out that B, the auctioneer had authority to sell the house.
B sold the house by auction to a third party for an amount less than the amount authorized by A.
It was held that the purchaser is not affected by A’s instructions to the auctioneer not to sell
below a certain price.
5. Liability for Misrepresentation or Fraud
The principal is liable for the misrepresentation or fraud committed by his agent while acting in
the course of his business. It is immaterial whether the misrepresentation or fraud has been
committed for the benefit of the principal or of the agent himself.
Example: A offered to buy a residential flats consisting of number of flats in it and enquired C,
the property manager of B, whether all the tenants were paying their rents regularly. C informed
A that the tenants were paying rents regularly with immaterial exceptions. This statement turned
out to be false. B was held liable for fraud because his agent (property manager) who knew the
real facts had made a false statement.

II. Agent Acting for an Unnamed Principal

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When an agent contracts, as an agent for a principal but does not disclose his name, the principal
is liable for the contract of the agent. But the unnamed principal should be in existence at the
time of the contract and the acts must be within the scope of agent’s authority.
Example: A appointed B as his agent to purchase some goods. B entered into an agreement with
C for purchasing those goods. B signed the agreement as a broker “to my principal” but did not
disclose the name of the principal. Here, B is not personally liable because he contracted in the
capacity of an agent.
However, the agent is personally liable if he declines to disclose the identity of the principal
when asked by the third parties.

III. Agent Acting for an Undisclosed Principal

In case of an agent acting for an undisclosed principal, the mutual rights and liabilities of the
agent, principal and the third party are as follows:
1. Rights and Liabilities of Agent
Here agent contracts in his own name. So he is bound by the contract. He is personally liable to
the third party also. On such contracts, he can sue and be sued in his own name because in the
eyes of law he is the real contracting party. In such cases, the principal and the agent have their
respective rights against each other.
2. Rights and Liabilities of Third Party
If the third party has discovered that there is a principal, he may file a suit against the principal,
or his agent or both. In such a case, the third party must allow the principal, the benefit of all
payments received by him from the agent.
Example: A sold 100 bales of cotton to B on credit. Afterwards, A discovered that B was acting
as an agent of C. In this case, A may sue either B or C, or both for the performance of the
contract.
3. Rights and Liabilities of Principal
The principal has the right to intervene and require the performance of the contract from the third
party. In such cases, the other party may sue either the principal or the agent or both. The
principal if he likes may also require the performance of the contract from the other party. But in

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such a case, he should allow, the benefit of all payments made by the third party to the agent, to
the third party.
Example: A contracted with B, a shopkeeper, to purchase furniture. A advanced a part payment
of the price to B. Afterwards, A discovered that B is the agent of C. In this case, C may ask A to
perform the contract. But he must account for the advance money received by his agent B.
TERMINATION OF AGENCY
Termination of agency means putting end to the legal relationship between principal and
agent. Section 201 to 210 of the Indian Contract Act 1872 lay down the provision relating to the
termination of Agency. The following may the reasons which can be responsible for the
termination of the Agency:

1) By the act of the parties -

i) By agreement - The Contract of Agency can be terminated at any time by mutual
agreement between the principal and agent ii) By revocation of the principal (Sec. 201) - The
Principal revoke agency at any time
by giving notice to the agent iii) By Renunciation or revocation of an agent (Sec 206) -
Renunciation which means withdrawing from responsibility as Agent. Like Principal, Agent can
also renounce the agency. The agent must give to his Principal reasonable notice of renunciation.
Otherwise, he will be liable to make good for the damage caused to the principal for want of such
notice.
2) By operation of law -

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 i) By the performance or completion of agency (Sec. 201) - Agency can
become to an
end after the completion of work for which the agency is created.
ii) By expiry of the time - Agency can also be terminated by the expiry of time.
if the
agency is created for the specific period, it is terminated after the expiry of the time.
iii) Death or insanity of principal or agent (Sec. 209) - An agent, duty to
terminate the contract of agency on the death of the principal. In other words, Agency comes
to an end on the death or insanity of the principal or agent.
iv) Insolvency of principal (Sec 201) – An insolvent or bankrupt is a person who
is unable to run the business due to Excess of liabilities over assets. In this way, if the
principal becomes an insolvent agency can be terminated.
v) Destruction of the subject matter - If this subject matter of the agency is
destroyed agency comes to an end. For ex. An agency is created for sale of an Airplane if the
Airplane caught fire before the sale the agency comes to an end. In this contract Airplane is
the subject matter.
vi) Principal becoming an alien enemy - If the Principal becomes an alien
enemy the
contract of agency comes to an end.
vii) Dissolution of company or firm - A Firm or company may be regarded as a
Principal in the contract of Agency. If the company or firm is dissolved the agency comes to
an end.
viii) Termination of sub-agent’s authority (Sec. 210) – The termination of an
agent’s
authority puts an end to the sub-agent’s authority.

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