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Lesson 1 law
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Lesson 1 law

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  • 1. Lesson 11.1 INTRODUCTIONThe Indian Contract Act was passed in the year 1872 and it also came into force onthe 1st day of September, 1872. The Act extends to the whole of India except theState of Jammu and Kashmir. It consists of 238 sections. It has been divided into 10chapters. Chapter VII of the Act is wholly repealed by the India Sale of Goods act,1930 (vide section 65). The Act deals with particular contracts in separate chapters.The provisions of the Act do not apply to contracts made before the Act came intoforce. Broadly speaking, The Indian Contract Act deals with all facets of contractmore particularly the stages of formation of a contract, the elements of a contract, theperformance of the contract, the breach of the contract and also the available remedieswhen there is a breach of contract.A contract in which two or more countries are involved in respect of its performance,questions arise as to the law of which country would govern such a contract. In thefirst instance, the law which would govern such a contract would be the law expressedby the parties themselves in the contract. In the absence of an expressed intention, therule to apply is infer an intention from the terms and nature of the contract and thegeneral circumstances of the case. Such circumstances may be (i) the country inwhich the Contract was entered into or (ii) where the payment was to be made. Insuch a contract, if a payment is to be made, it should be of the legal tender governingthe country in which payment is to be made. [Principle of LexLoci i.e. the law of theland]1.2 MEANING AND DEFINITION OF CONTRACTThe meaning and definition of a contract are discussed below with references to someeminent jurists.1.2.1 MeaningAn agreement enforceable by law is a contract. An agreement is an accepted proposal.Thus it can be said that a contract is an agreement; an agreement is a promise and apromise is an accepted proposal. Every agreement in its ultimate analysis, is the resultof proposal from one side and its acceptance by the other. Hence it is a bilateraltransaction.
  • 2. Illustration 1: If Prem offers to sell Pummy twenty-five pens for Rs. 20 each to bedelivered on Saturday and Pummy agrees to the deal. It is a valid contract. If oneparty fails to offer something of benefit to the other, there is no contract.1.2.3 DefinitionSection 2 (h) of the Indian contract Act of 1872 defines a contract as an agreementenforceable by law.According to Section 2(h) of the Act there are mainly two aspects of contract -(a) An agreement(b) Agreement enforceable by lawSome eminent jurists have also made an attempt to define the term contract which areuseful for interpretation of the various provisions of the Contract Act. Thesedefinitions are given below:-• Sir John William Salmond: “An agreement creating and defining obligationsbetween the parties”.• Halsbury: “An agreement between two or more persons which is intended to beenforceable at law and is constituted by the acceptance by one party of an offer madeto him by the other party to do or abstain from doing some act.”Thus in law a contract means the following:• Existence of two parties• Existence of an agreement between two or more parties• Existence of a legal obligations between parties who enter into an agreement1.2.4 What is an Agreement?An agreement is defined in section 2 (e) of the Indian Contract Act of 1872. It statesthat every promise and every set of promises forming the consideration for eachotheris an agreement.1.2.5 What is a promise?Section 2 (b) of the Indian Contract Act of 1872 defines a promise as: A proposalwhen accepted becomes a ‘promise’.Under section 2 (c) the person who makes the proposal is called the ‘promisor’. The‘promisee’ is the person that accepts the proposal.Illustration: Rani makes an offer to sell her plot of residential land for Rs. 50 lakhsto Malthi. If Malthi accepts this offer, then after the offer is accepted, the acceptance
  • 3. becomes a promise. The promise between Rani and Malthi is an agreement.Therefore,agreement consists of offer and acceptance or it can be stated as:Agreement = Offer / Proposal + Acceptance of Offer / ProposalWhen the two parties make an agreement, they have to perform their promise. Ifeither party defaults in carrying out its obligation there will be a breach of contract ifit is enforceable by law.Under section 2 (g) an agreement that is not enforceable by law is void.What is enforceability of agreement?An agreement can be enforceable by law only if there is some legal obligation. The law of contracts does not take into consideration any agreement in which there is no legal obligation. An obligation is to do, or to restrict, a certain act or activity. The Contract Act deals with only those agreements where there is an intention to create a legal obligation. When there is an agreement that involves some business or commercial contracts it creates a legal obligation because the parties to the contract have the intention to create a legal obligation.However, the parties entering into a contract in domestic, social or religious eventsthat do not have the intention to create any legal obligations cannot be called as alegal obligation unless proved otherwise.1.3 CHARACTERISTICS OF A CONTRACTSection 10 of the Indian Contract Act, 1872 enumerates certain essential elements of avalid contract. These are given below:1.3.1 Agreement:An agreement constitutes a contract. It consists of two elements. These are:An offer, or proposal, by a person and acceptance of the offer, by another. Thus acontract must have two parties. One, who proposes or makes an offer, and anotherthat accepts the offer.1.3.2 Legal RelationshipThe intention of the two parties should be to create legal relationship. While decidingif the contract is valid or not, attention should be made to look into the objective andnot subjective nature of the intention to create a legal relationship. It should also takeinto consideration what would be a reasonable intention of the person who enters into
  • 4. a contract. A domestic, religious or a social agreement where there is no intention tocreate a legal relationship cannot be called a valid contract. It is presumed thatbusiness dealings and commercial agreements are made with the intention to create alegal relationship. However social agreements can be enforceable if legality ofrelationship is intended and established. Similarly business dealings may not establisha legal relationship in an agreement and are therefore not enforceable.Case Law 1Mr Balfour was a civil engineer, and worked for the Government as the Director ofIrrigation in Ceylon (now Sri Lanka). Mrs Balfour was living with him. In 1915, theyboth came back to England during Mr Balfours leave. But Mrs Balfour got rheumaticarthritis. Her doctor advised her to stay, because a jungle climate was not conduciveto her health. As Mr Balfours boat was about to set sail, he promised her £30 a monthuntil he came back to Ceylon. They drifted apart, and Mr Balfour wrote saying it wasbetter that they remain apart. In March 1918, Mrs Balfour sued him to keep up withthe monthly £30 payments. In July she got a decree nisi and in December she obtainedan order for alimony. At first instance, Sargant J held that Mr Balfour was under anobligation to support his wife.JudgmentThere is no such contract here. These two people never intended to make a bargainwhich could be enforced in law. The husband expressed his intention to make thispayment, and he promised to make it, and was bound in honour to continue it so longas he was in a position to do so. The wife on the other hand, so far as I can see, madeno bargain at all. That is in my opinion sufficient to dispose of the case.1.3.3 Free ConsentSection 14 of the Indian Contract Act states there should be free consent between theparties making an agreement. The consent is considered to be free when there is nocoercion, undue influence, mistake, fraud, or misrepresentation in the agreementprepared by the parties. If the consent is not free, the contract is not valid. Amit getshis parents to sell the house to his friend forcibly. This is not a valid contract, as theagreement was not made with free consent. When a contract is made both parties mustunderstand and agree on all the same thing or all material facts of the agreement. It iscalled consensus ad idem when there is a meeting of minds of both the parties. They
  • 5. should have agreed on all the terms and conditions without any undue influence ormistake in understanding of the product.Illustration: Mr. Rajhans is selling his blue sports model car to his secretary.However his secretary Rita thinks that she is buying the new red sports model car.There is no meeting of minds and hence there is no valid contract.1.3.3 Capacity of PartiesThe parties entering into a contract should be competent to make an agreement.According to section 11 of the Act they should have (i) attained the age of majority,(ii) They should be of sound mind, (iii)They should not have been disqualified toenter into a contract.Illustration 1: Meera is a lunatic and gets attacks of lunacy at intervals. Is shecompetent to contract? Meera can enter into a contract in those periods when she isnot suffering from lunacy. She is competent to contract when she is not under theinfluence of lunacyattack.1.3.4 Status of other EntitiesAny company is competent to enter into a contract according to the legislations underwhich they are governed. In this case the Memorandum of Association and Articles ofAssociation of the company will provide further guidelines in addition to provisionsof Indian Contract Act. Partners are allowed to enter into contracts under PartnershipAct of 1932. Associations of persons are competent to contract subject to theiragreement.1.3.5 Lawful ConsiderationAccording to Section 2(d), 23 and 25 of the Act a valid contract must have aconsideration. The person making a promise must receive something in return for it. Itmay or may not be an adequate return but there has to be some value and it should notbe fraudulent, unlawful, immoral or opposed to public policy. The agreement islegally binding and enforceable when both parties to an agreement give somethingand also get something in return. Consideration may not be in cash only. It can be inkind. It can also be an act or abstinence from doing something. It can be a promise todo or not to do something.Illustration 1: Ali sold 5 fountain pens for Rs. 125 each to Megha with a promiseto receive 12 red roses in return instead of the money in cash. Is this lawful
  • 6. consideration? This is a lawful consideration as Megha gives roses instead of cash.Some consideration is being given to Ali. The consideration may not be of equalvalue.1.3.6 Object of an AgreementAccording to section 23 of the Indian Contract Act 1872 the object of an agreementshould be within the purview of law. It should not be fraudulent or be forbidden bylaw. The object should be legal, moral and according to public policy. It should nothave any legal flaws otherwise it will not be enforceable by law (Section 23).1.3.7 Formalities of an AgreementThe agreements under the Indian Contract Act may be oral or in writing. Whenever anagreement is a valid contract and it is made in writing it should be complete with alllegal formalities. If the legal formalities are not complete, law cannot enforce it. Thecontract will become void. Some contracts have to be made in writing otherwise theywill not be valid. In the following cases contracts have to be in writing:• Cheques, bills of exchange, promissory notes and other negotiable instruments.1.3.8 Valid Agreement but not Enforceable: In many cases even a validcontracts may not be enforceable by law. If a country declares an agreement void itcannot be enforced. Hence it is important to know the law of the country in which theagreement is made otherwise the legal rights cannot be exercised (Sections 24 to 30and 56).1.4 CLASSIFICATION OF CONTRACTSThe Indian Contract Act classifies contracts into different categories. Contracts can becategorized from the point of view of (i) enforceability/legal validity (ii) according toformation, (iii) according to performance and (iv) according to obligation.1.5 (A) CLASSIFICATION: ACCORDING TOENFORCEABILITYA contract that is enforceable can be classified under different categories. Suchcontracts may be valid contracts, voidable contracts, void agreements, void contracts,agreements discovered to be void, unlawful or illegal agreements and unenforceablecontracts.1. Valid Contract: A valid contract is one, which satisfies the essential elementsdescribed in section 10 of the Indian Contract Act. It must be an agreement in whichan offer is made and accepted. It should have the intention to create legal relations.There should be lawful consideration and the object should be legal. It should have
  • 7. clear terms with free consent of both the parties. When all the essential elements arecomplete in all respects it is a valid contract and it is enforceable by law.2. Voidable Contract: If one party to the contract has the option of enforcing acontract by law, but not at the option of the other or others, it is a voidable contract. Inthose cases when the consent is not given freely but coercion has been used the partyhas the option to continue with the contract or rescind it. Another example of avoidable contract is when a person has promised to deliver certain goods on a certaindate and he does not deliver it, it is the option of the buyer to continue or to rescindthe contract (section 55).Illustration 1: Ruhi wanted to buy a gold chain for her mother’s birthday. Thegoldsmith promised to deliver it on the 20th of May. On the due date the chain wasnot ready. Ruhi rescinded the contract and decided to buy something else. Thegoldsmithwanted compensation. Is he right? The goldsmith is not correct. If he didnot deliver the goods on time Ruhi has the right to rescind the contract.Thus in a voidable contract the aggrieved party can take benefit of the situation.He/she may decide to go ahead with the contract as well. Thus in a voidable contract aflaw can create a benefit for a party. However if the party decides to continue with thecontract, the terms and agreements will continue to be valid and the contract will alsobe a valid one.3. Void Contract: These contracts are enforceable when the agreement is made butdue to certain lapses they become unenforceable at a later date. The agreementbecomes unenforceable for the following reasons:• According to section 56 if a contract is illegal or impossible to conduct it becomesvoid.• The contract becomes void if it is voidable in nature and the party who couldexercise the option of avoiding it decides to do so.• Any contract, which has a contingency clause and it, becomes impossible to conductit either on the happening or not happening of a particular event is a void contract.This is explained in (section 32).Illustration 1: Anil made an agreement with Suman to sell house no P-21 inSushant Lok in Gurgaon. The terms and conditions were finalized. Before the duedate for the transaction to take place there was an earthquake and the house felldown. Anil could not keep his promise because the house did not exist any more. This
  • 8. contract is void because the agreement was made on the basis of the house inpossession. Since Anil did not have the house after the natural calamity it was a nearimpossibility to deliver the goods to Suman.4. Void agreement: Section 2(g) describes void agreements as those that areunenforceable from the inception of the agreement. In other words these agreementsare void ab initio. . A mistake between the two parties to an agreement of a materialfact makes the agreement void. Therefore void agreements do not create any legalrights between the parties to the contract. It also does not create any obligations.There is a flaw in the agreement itself. The most common example is that of a minorwho does not have the legal rights to enter into an agreement. If he/she does, theagreement is null and void ab initio.1.5.1 Void Agreement and Void Contract: DistinctionA void agreement is void ab inito from the beginning of the contract. A void contractis valid when it is made but due to certain lapses it becomes unenforceable by lawsubsequently.A void agreement will have the following effects:• It will be unenforceable by law• If both parties know that the agreement is void money will not be recoverableif already paid.• Collateral transaction will be legal unless the agreement itself is illegal.• All legal promises are enforceable if the agreement can be proved to beseverable.1.5.2 Void Agreement and Voidable Contract: DistinctionThe difference between void agreement and void contract can be discussed on thebasis of (i) enforceability (ii) Compensation and restitution and (iii) the effect oncollateral agreement.Enforceable: Void agreements are not enforceable from the time of their formation.They are said to be void ab initio. Void contracts are enforceable when they areformed but they become unenforceable if the party who has the option to rescind thecontract does so. It is a valid contract if it is not repudiated.A void agreement is not enforceable at all but a void contract can be enforced if theparties agree to complete the contract and exercise the option accordingly.
  • 9. Compensation and restitution: In a void agreement there is no compensationbecause the agreement is not enforceable by law. In a voidable contract the personwho exercises the option of rescinding the contract can get compensation if he hasrightly taken the option of not going ahead with the contract.It follows therefore that restitution is allowed in a voidable contract unless the partiesknew of the illegality of the agreement at the time of formation.Collateral agreement: An agreement that is void due to illegality has an effect oncollateral agreements as well. Such agreements will be correspondingly void becauseof illegality in consideration or object in the agreement.A voidable contract however has no effect on collateral contracts.1.6 B. CONTRACTS: ACCORDING TO MODE OF CREATIONContracts on the basis of mode of creation refer to Express Contracts, ImpliedContracts and Quasi Contracts.1. Express Contract: When an offer is made in words or in writing and anotherperson accepts it an express contract is formed. Promise is considered to be expresswhen it is made in words written or spoken.Illustration 1: Priya writes to Prem offering to sell her car for a price of Rs.1,00,000.Prem accepts the offer by responding through an email. This is an express Contract2. Implied Contract: A contract is said to be implied when it has to be inferred fromthe action, gestures or conduct of the parties. It is not a verbal or a written contract. Ithas to be implied from circumstances of the case. In the agreement some terms maybe implied or the complete agreement is implied.Illustration 1: Janaki attended an informal meeting of a company. The company wasglad to receive her suggestions and accepted her presence and took some of hersuggestions. There is an implied contract that Janaki should be paid for her servicesbecause the company allowed her to attend the meeting and also used her suggestionsfor the benefit of the company.The contracts can be of mixed type as well. They can be express and implied contractsboth. Some part of the combination may be express and parts of it may be implied.Illustration: Ram offers to buy an I pod from Tilak for Rs 10,000. Tilak accepts theoffer by sending the I pod to Ram. Ram’s offer acceptance is implied by his conduct.It is a mixed type of contract. It combines the characteristics of both express andimplied mode of creation.
  • 10. 3. Quasi Contract: Contracts which are not in actual fact either express or implied butthere is circumstantial evidence to support that they are actually contracts are calledQuasi Contracts or semi contracts. There is actually no contract between the parties asthere is no agreement between the parties but the obligations cited in sections 68 to 72of the Indian Contract Act provide legality to them.13 These are known as “certainrelations resembling those created by contracts”.Illustration: Arti leaves her computer in Monica’s house. Monica treats it as her ownand begins to use it for her official purposes. Arti has no agreement with Monica. Sheshould pay for the use of the computer, which was kept with her for safe- keeping. 1.7CONTRACTS ACCORDING TO PERFORMANCEContracts can be classified according to performance measures. Such contracts arecalled executed contracts, executory contracts, unilateral contracts and bilateralcontracts.1. Executed contract: An executed contract is one where both the parties haveperformed and completed their obligations. The contract is completed and executed.No responsibilities remain from either side of the contract.Illustration: Rajesh goes to Westside store and buys a shirt for himself. He pays Rs1450 and the shirt is packed and delivered to him. He leaves the store as the contractis executed. The obligations of both the parties are complete.2. Executory Contract: In a contract sometimes one party may carry out his/herobligation but the other has still to conduct his/her obligation. This obligation will beperformed in future. This type of a contract, which is not yet complete, is called anexecutory contract. In some executory contracts both parties decide to complete theircontract in future because of certain important reasons.Illustration 1: Minna sells her computer to Zara . Immediately Zara sends thepayment for it. Minna has to still deliver the computer. This is partly executed andpartly an executory contract.3. Unilateral Contract: In some contracts one party has already completedhis/her obligation but now the other party is left to complete his/her part of thecontract. When the other party executes his/her part of the contract that, is stilloutstanding, it is called a unilateral contract. These contracts are also called contractswith executory consideration. When the contract is formed, there is an obligation ofonly one party to perform.
  • 11. Illustration: Murli’s dog was lost while he was taking a morning walk. He offereda reward of Rs 1,00,000 for bringing back his dog safely. Sashi found the dog andreturned it to the owner. The owner now has a unilateral contract to perform of payingthe reward money as the dog has been found.4. Bilateral Contract: If both parties to a contract have outstanding obligationswhen the contract is formed, it is called a bilateral contract. The contract has beenformed but the obligations will be performed on a future postponed date. The date ofexecution is not material for determining the validity of the contract.Illustration: Puran makes a promise to sell 100 pen-drives to Kamla. Theunderstanding is that the price will be paid only on delivery of the material required.This is a bilateral contract. The contract was settled but both delivery and price paidfor it will be made at a future date. OFFER AND ACCEPTANCE2.1 WHAT IS AN OFFER / PROPOSAL?An agreement consists of two parties where one party makes an offer to the otherparty and the other party either accepts the offer or rejects it. If the offer is acceptedthen only it becomes an agreement otherwise it doesn’t.Section 2(a) of the Indian contract act defines an offer / proposal as follows: “When aperson signifies to another person his or her willingness to do or abstain from doinganything, with a view to obtaining the assent of that other to such act or abstinence, heor she is said to make a proposal.”Illustration: Savita makes an offer to Priya, she says “Priya would you like to buy mygold necklace?” Priya rejects the offer thus there is no agreement. If Priya hadaccepted the offer to buy the necklace then an agreement would have been formed.An offer consists of two parties:1 Offeror- The person who makes an offer or a proposal2 Offeree- The person to whom the offer or proposal has been made.Illustration1: Ram says to Raghu ‘Will you buy my bicycle for Rs 3000?’ In this Ramis an offeror and Raghu is an offeree.2.11 How is an offer made?An offer can be made in two ways:1 Express – Offer is made orally or in written.2 Implied – Offer is made by conduct of the parties or circumstances of the case.
  • 12. Express Offer can be of two types:1 Oral Offer - Offer is made by words spoken.2 Written Offer - Offer is made in writingOral offer can be made in personOral offer can be made through a telephone and mobile.Written offer can be made through letters, telegrams and emails.Implied offer is not made in words. It is implied from the conduct of the parties orcircumstances of the case. The offeror does not make the offer to the offeree in theusual mode. That is he/she neither makes an oral offer nor a written offer. The offerormakes the offer silently by his/her conduct.Illustration1:A Metro train in Delhi runs on a particular route. There is an implied offer from themetro train to carry passengers on the route who pay the specified fare.2.12 To whom can offer be made?An offer can be made to a definite person or to the public at large. In the former caseit is called specific offer and the latter is called general offer.Specific offer: Offer made to a specific person or a particular person and only thisperson can accept the offer.Illustration: Devendra says to Chaitali ‘will you buy my Laptop for 40 thousandrupees?’ In this case Devendra has made a specific offer and only Chaitali can acceptthe offer.General Offer: Offer is made to the public in general and anyone in the public canaccept the offer.Illustration: Gangadhar had his son Pankaj missing from school. He placed anadvertisement in the Hindustan Times, which said, anyone who finds my son will berewarded with 5 lakh rupees. This is a case of general offer wherein anyone who readsthe paper and finds Gangadhar’s son is entitled to the reward.Case Law 1Carllil vs. Carbolic Smoke Ball Co.In this case A Company by the name of Carbolic Smoke Ball Company prepared amedicine for influenza. The medicine was called ‘The Carbolic Smoke Ball’ and anadvertisement was paced in a newspaper and magazine saying that anyone whocontracted influenza after having used the medicine according to the printed
  • 13. directions would be offered hundred pounds. A lady Mrs Carllil bought the medicineand used it according to the printed directions but she was attacked by influenza. Shesued for hundred pounds and won the case. She won the case because the offer madeby the company was a general offer and anyone who read the advertisement couldaccept the offer. As the medicine did not fulfill the condition offered by the companytherefore it was bound to compensate Mrs Carlill.2.2 CONDITIONS FOR VALID OFFERThere are various rules for valid offer. These rules are mentioned below:! Offer must give rise to legal relations: The intension of the offeror must be tocreate legal relationship with the offeree. An offer, which does not create legalobligation, does not form a contract. For instance a social invitation even if acceptedwill not result in a contract.Illustration: Sati invited Rati on her birthday party and Rati accepted the invitation.This is not a valid offer because if Rati fails to attend the birthday party sati cannottake any legal action of breach of contract.1 Offer must be definite and certain: The terms of an offer must not be ambiguousand vague.2 Offer is different from a mere declaration of intension: A declarationof intension is a statement made by a person indicating his or her willingness tomake an offer in future.3 Offer is different from invitation to offer: When a person proposes certain termsfor negotiation with the other party and thereby invites the other party to make offeron those terms.4 The offer should not contain a term the non-compliance of which wouldamount to acceptance: The person who makes an offer cannot say to the offered thatif he or she does not communicate acceptance by a certain time the offer will beconsidered as accepted.5 Offer must be communicated: An offer must be communicated to the offereebecause acceptance by the offeree can be given only after he or she has come to knowof the offer.Case Law 8Lalman Shukla vs. Gauri Dutt
  • 14. A person sent his servant to trace his missing nephew. After the servant left heannounced that anybody who traced his nephew would be entitled to a reward ofrupees five hundred and one. The servant traced the nephew in ignorance of thereward. Subsequently when he came to know of the reward, he claimed it. The Courtheld that there can be no acceptance unless there is knowledge of the offer and sincethe servant did not know about the reward when he found the boy therefore he wasnot entitled for the reward.6 A statement of price is not an offer: A statement of price is just information andnot an offer.Case Law 9Harvey vs. Facey22Harvey sent a telegram to Facey which said ‘will you sell us your Bumper hall Pen?Telegraph lowest cash price.’ To this Facey sent a telegram which said ‘lowest pricefor Bumper Hall Pen Nine hundred pound.’ Harvey again sent a telegram to Facie,which said ‘ We agree to buy Bumper hall Pen for the sum of nine hundred poundasked by you.’ Held there is no contract because the first telegram sent by Harvey toFacie had two questions out of which Facie replied to only one question regarding theprice. He did not reply to the other question, which was for his acceptance to sell.Thus Facie in his telegram only gave information to Harvey regarding the price of theproduct he neither made an offer not accepted the offer made by Harvey.2.3 WHAT IS AN ACCEPTANCE?Section 2 (b) defines acceptance as ‘ When the person to whom the proposal is madesignifies his assent thereto, the proposal is said to be accepted.’ Thus acceptance is theexpression of assent for the offer/ proposal. The proposal when accepted becomes apromise23. 2.31 Who can accept?Only the person to whom the offer has been made has the right to accept. Thus it isonly the offeree who can accept the offer made by the offeror. The person to whomspecific offer is made can only accept the offer on the other hand a general offer madeto the public at large, can be accepted by anyone having knowledge of the offer.Case Law Boulton vs. BoultonA sold his business to B without disclosing this fact to his customers. J a customer ofA was not aware of the sale and in ignorance placed an order for the supply of goods.
  • 15. B supplied the goods. J refused to pay for the goods and so B sued him. It was held bythe Court that J was not liable since J had made an offer to A and not to B and B knewvery well that the offer is not made to him therefore he was not capable of acceptingthe offer.2.4 CONDITIONS FOR VALID ACCEPTANCEThere are various rules for valid acceptance. These rules are mentioned below:1 Acceptance must be absolute and unqualified: The offeree should accept thewhole of the offer. Accepting few terms of an offer is not a valid acceptance. Theofferee must accept the offer without putting any conditions. Conditional acceptanceis not a valid acceptance. If acceptance is conditional it leads to counter-offer whichmay or may not be accepted by the original offeror.Illustration: Hari offered to sell his car to Ravi for Rs 40,000. Ravi told hari that heis ready to buy the car for rupees 35000. Ravi’s acceptance is not a valid acceptancebecause it is not accepted fully and unconditionally. Instead it is a counter-offer,which he makes to Hari.2 Acceptance must be in the mode prescribed or some usual and reasonablemode: If the offeror prescribes a mode in which the offer has to be accepted and theofferee uses a different mode of acceptance then the offeror can within a reasonabletime insist that the offer be accepted in the prescribed manner and not otherwise. Ifthe offeree still does not follow the prescribed mode of acceptance then in that casethe offeror may choose not to be bound by the acceptance.Illustration: Aruna sends a letter of offer to Awadh Raj asking him to buy her flatin Delhi for rupees 20 lakhs. She also mentions that if the proposal is acceptable tohim he can send his acceptance through post. Awadh Raj after receiving the offer senthis acceptance through an email. Aruna on receiving the email insisted that AwadhRaj send his acceptance only by post and not any other mode. Awadh raj did not sendhis acceptance by post. Hence Aruna was not bound by Awadh raj’s acceptance. Incase the offeree follows a different mode of acceptance from the prescribed mode andthe offeror does not insist then the offeror is deemed to have accepted the deviatedacceptance.3 Silence cannot be a mode of acceptance: The offeror cannot impose on theofferee a condition like: If you do not reply within a reasonable time then Ishall
  • 16. consider the offer to be accepted. The offeror cannot take the offeree’s silence asacceptance of offer.Illustration: Nisha a seminar coordinator sends an invitation for the seminar toRavi through an email. The email also said that if Ravi does not reply within a weekstime it will assumed that he has accepted the invitation. Ravi does not reply. HenceNisha cannot assume that Ravi has accepted the invitation.4 Acceptance must be given within the time prescribed or areasonable time: Acceptance by the offeree must be given within the periodprescribed by the offeror or if the period is not specified then the acceptance must begiven within a reasonable time.Illustration: Venkat offers to sell his scooter to Rehman and tells him to reply withina weeks time. Rehman does not reply within a week hence the offer lapses.5 Acceptance cannot precede an offer: An offeree can give acceptance onlyafter the offer has been communicated to him / her. A leading case on this pointIllustration: Anita sends a letter of offer to sell her lap top to Geetha for rupees thirtythousand. Geetha writes a letter of acceptance to buy the lap top but by mistakeforgets to post the letter. Hence the agreement has not been formed.2.5 COMMUNICATION OF OFFER AND ACCEPTANCEA contract comes into existence only after the offer has been accepted by the offereethat is when the acceptance of the offer has been communicated by the offeree to theofferor. Communication of offer and acceptance is instantly done when the offerorand the offree are face-to-face. The problem of communication arises when the partiesare separated due to distance. If the parties are at a distance and the offeror makes theoffer through a telephone the contract is concluded as soon as the offror hears theacceptance from the offeree.2.51 Communication of OfferAccording to Section 4 communication of offer or proposal is complete when itcomes to the knowledge of the offeree that is the person to whom the offer is made. Incase the communication is made by post the communication of offer is completewhen the letter containing the offer reaches the offeree.Illustration: Neha in Gwalior offers by a letter on 18th June 2008 to sell her house toAparna in Delhi for rupees ten lakh. The letter reaches aparna on 21st June 2008.The communication of offer is complete on 21st June.
  • 17. 2.52 Communication of AcceptanceCommunication of acceptance is complete against the offeror and the offeree in twostages, which are as follows:Communication of acceptance is complete against the offeror (proposer) when theletter of acceptance is put in course of transmission by the offeree (acceptor) to theofferor so as to be out of the power of the offeree (acceptor) to withdraw it.Illustration: Aparna after receiving the letter of offer from Neha has readily agreedto accept the offer to buy the house therefore she writes a letter of acceptance to Nehaand posts the letter on 23rd June 2008. The communication of acceptance against theofferor (Neha) is complete on 23rd June.Communication of acceptance is complete against the offeree (acceptor) when theletter of acceptance comes to the knowledge of the offeror.2.6 COMMUNICATION OF REVOCATION / WITHDRAWALCommunication of revocation is complete against the person who makes it and theperson to whom it is made in two different ways, which are as follows:The person making the revocation: The communication of revocation is completeagainst the person making the revocation (withdrawal) when he / she sends the letterof revocation.Illustration: Neha after posting the letter of offer feels that she no longer wants tosell her house to Aparna and decides to withdraw her offer. She writes a letter ofrevocation of offer on 19th June 2008 and posts it to Neha. The communication ofrevocation of offer is complete against Neha on 19th June. 2.7 TERMINATION / LAPSE OF AN OFFERAn offer or proposal can either be accepted, rejected, revoked or it might just lapse.The offer when accepted becomes a valid agreement. If the offeree does not like theoffer he or she may choose to reject the offer. The offeror also has an option to revokeor withdraw the offer.Section 6 of the Indian contract act deals with various circumstances in which theoffer lapses, which are as follows:1 Rejection of offer: The offeree may choose to reject an offer if he or she does notlike the offer. Once the offer is rejected it comes to an end. The offer once rejectedcannot be revived by the offeree. It is only upto the offeror if he or she wishes torenew the offer.
  • 18. Illustration: Aradhna makes an offer to Sadhna she say “Will you buy my computerfor rupees twenty thousand?” Sadhna refuses to buy Aradhna’s computer. Thus theoffer is rejected2 Counter-offer: This means an offer in response to an offer. Once an offer is madeby the offeror to the offeree it is upto the offeree to accept or reject the offer.Sometimes the offeree neither accepts nor rejects the offer rather he or she makes hisor her own offer to the offeror. By doing this the first offer which was made by theofferor lapses or comes to an end. If later the offeree decides to accept the offer he orshe cannot do so.Illustration: Aradhna offers to sell her computer to Sadhna for rupees twentythousand. Sadhna makes a counter offer by saying that she is willing to buy thecomputer if Aradhna sells it for rupees fifteen thousand. Thus the offer initially madeby Aradhna comes to an end and now it is upto her to accept or reject the counteroffer made by Sadhna.3 Revocation of offer: An offer can be withdrawn anytime by the offeror before thecommunication of acceptance of offer is complete against him. He cannot revoke orwithdraw his or her offer once the offeree has sent his or her acceptance. A generaloffer must be revoked using the same channel and mode in which the original offerwas made.Illustration: Aradhna offers to sell her computer to Sadhna for rupees twentythousand. But before Sadhna could accept the offer Aradhna decided to withdraw heroffer so she sent a notice of revocation of offer to Sadhna.4 Offer not accepted in the prescribed mode: If the offeror has prescribed a modein which the offeree has to accept the offer and the offeree does not give his or heracceptance in the prescribed mode then the offer comes to an end.Illustration: Aradhna makes an offer for selling her computer for rupees twentythousand to Sadhna in writing and mentions in the offer that if the offer is acceptableto her then she should give her acceptance in writing only. Sadhna however conveysher acceptance through telephone. Thus the offer comes to an end.5 Failure of the acceptor / offeree to fulfill a condition precedent to acceptance:Sometimes the offeror may ask the offeree to fulfill certain conditions beforeacceptance. If the offeree does not fulfill these conditions then the offer comes to anend.Illustration: Aradhna makes an offer of selling her computer to Sadhna for rupees
  • 19. twenty thousand and mentions in the offer that if the offer is acceptable to Sadhnathen she should send an advance cheque of rupees five thousand. Sadhna does notsend the cheque. Thus the offer comes to an end.6 Death or insanity of the Offeror: If the person who makes the offer dies orbecomes insane after making the offer, and the offeree comes to know of it beforeaccepting the offer then the offer automatically comes to an end. If the offeree acceptsthe offer without the knowledge of the death or insanity of the offeror then theacceptance is valid and the promise / offer will be executed by the Offeror’s executor.The act is silent about the effect of death of the offeree. But if the offeree dies orbecomes insane the offer will end because it is only the offeree who has the right toaccept or reject the offer and not the offeree’s executor.Illustration 1: Aradhna makes an offer to sell her computer to Sadhna for rupeestwenty thousand but before Sadhna could give her acceptance she comes to know thatAradhna has turned insane. The offer comes to an end.7 Lapse of time: A proposal may come to an end due to lapse of time. In case theofferor has given duration within which the offeree has to accept the offer and theofferee does not give the acceptance within the given duration then the offer willcome to an end. In case the offeror has not specified the duration for acceptance thenthe offeree can give the acceptance within a reasonable time and if within thereasonable time the offeree does not give the acceptance then the offer will come toan end.Illustration 2: Bata Shoes gave an advertisement in the newspaper in the month ofDecember that they are giving 50% discount on shoes for the New Year. Ram visits aBata showroom in the month of March and demands for a discount of 50%. He is notgiven the discount. This is so because even though the exact duration of the discountoffer is not given but a reasonable period would be till the month of January or maybe the month of February. March is too late to be within the reasonable period toavail the New Year discount. CONSIDERATION3.1 DEFINITION OF CONSIDERATIONSection 2(d) of the Contract Act defines consideration as “when at the desire of thepromisor, promisee of any other person has done or abstained from doing, does or
  • 20. abstains from doing, or promise to do or abstain from doing, something, such an actor abstinence is called consideration.”Illustration: Manu promised to give Tina money to study. There was noconsideration attached to it. Manu can revoke the offer as it is not binding in law.3.2 ESSENTIAL ELEMENTS OF CONSIDERATIONThere are five essential elements of consideration.1. Act or abstinence : Consideration is a promise to do something or to abstain fromdoing something (according to section 2d).Case LawCurie vs Misa Consideration may be a promise to do something or not to dosomething. It may be positive or negative. It is some right, interest, profit or benefitaccruing to one party corresponding to forbearance suffered or undertaken by theother.2. It is moved at the desire of the promisor.The promisor must move the request for consideration. If it is moved at the desire of athird person it will not form good consideration even if promisor desired it. Thereforethe promisor must first give considerationDurga Prasad Vs Baldeo: On the order of the collector of a town built some shopson his own expense in a market. The shopkeepers who occupied these shops promisedto pay to D commission on their sales. D sued the shopkeepers when he did notreceive the commission. The court held that the promise was not supported by anyconsideration as the shops were built on the collectors order and not at the request ofthe shopkeepers. Therefore there could not be a recovery.3. It may move by the promisee or another personWhen a promisor gives a promise, the promisee or any other person may provide avalid consideration in return.Case LawChinnaya vs Ramaya An old lady, made an agreement with her daughter that shewould gift her some landed property but the condition was that the daughter wouldpay her sister some annual payment regularly as maintenance allowance. Thedaughter promised her aunt (mother’s sister), the maintenance money. However,later
  • 21. on she did not pay the money to her aunt. The aunt filed a case for recovery of theamount. The decision was in a perfectly genuine consideration. The promisee hadagreed to carry out the instructions of the promisor in return for receiving land.4. Consideration can be past, present or future.On of the important elements of consideration is that it can be past, present or future.Past consideration: When consideration is provided before a person becomes apromisor.it is called past consideration. Such a situation can arise when a person hasdone some work that is desired by another but is compensated later on. He does notreceive the benefit immediately. English Law does not consider past consideration tobe good. However it accepts time barred debts as good past consideration.Illustration: Sonam goes to a friend’s house. She suddenly has a severe stomachache.A doctor in the neighbourhood examined her and administered some medicine. Atthattime there was no talk of compensation for services of the doctor. Later Sonam wentto the doctor’s clinic expressed her thanks to him and also gave him Rs 500 as hisfees for his services. This is past consideration. The doctor received the fees forservices that were rendered by him earlier.Present consideration: When an agreement is made and consideration is paid for it ora promise is made for that work at the time of making the contract it is called presentconsideration. This situation arises when the promisor makes an offer and it isimmediately accepted with consideration at that particular time. This is also calledexecuted consideration.Illustration Reena offers to sell her old computer to her friend Anjali if she pays Rs7500 for her old computer at the time that she accepts the offer. Anjali brings themoney immediately and pays Reena the full money. Now Reena should deliver hercomputer. Acceptance of the offer and consideration are both in the present.Future Consideration: When promise is to be executed on a future date it iscalled executory consideration or future consideration. In this the promisor makes anoffer for a future date and the promisee promises to accept and execute the contractafter that it is future consideration. In this manner both parties move the considerationto a future date. The liability becomes outstanding on both parties on a future date.
  • 22. Illustration: Ruhi promises to sell and deliver a new wristwatch to Rekha after aweek. Rekha accepts the offer and promises to pay after one month of receiving thewatch. This is executory or future consideration.5. Consideration need not be adequate: Consideration means something in return.This may not be equal to the value of of the promise that is given. As long as there issome consideration courts support it and are not concerned about its adequacy. Theparties to the agreement should have been satisfied with the consideration when theymade the contract. The consideration may not be adequate but it should be lawful.Illustration: Madhu sold her old car to Meera for Rs 25000. The value of the car wasRs 2,00,000. The consideration was lawful and with the free consent of Madhu whoknew that the market value was much higher. Therefore it was a valid agreement eventhough consideration was not adequate.6. Consideration must be real and not illusory or impossible.Real consideration means that the consideration should not be physically or legallyimpossible. Consideration is not real in the following cases because of physical andlegal impossibility or uncertainty7. Consideration must be lawful.Consideration should be lawful otherwise the agreement becomes void. According tosection 23 considerations is not lawful in the following situations:1 When it is fraudulent2 When it is made of an act forbidden by law.3 When it causes injury to a person or property of another person.4 When it is declared as immoral or opposed to public policy.When a part of the agreement is unlawful the whole agreement will become voidexcept in those cases when the unlawful part can be separated from the lawful one.Then the unlawful part will become void and the other part can be carried out.3.3 STRANGER TO CONSIDERATION AND STRANGER TO CONTRACTUnder the English Law, consideration has to move from the promisee and if any otherperson moves it, the promisee becomes a stranger to consideration and cannotenforce the promise. A person becomes a stranger to a contract when he is not a partyto a contract even though it is made for his benefit. He is a stranger to the contract andcannot claim any rights under it.
  • 23. Stranger to consideration and stranger to contract are called Privity of considerationand Privity of contract. In India Privity of consideration is not applicable becauseSection 2(d) has the provision that provides that the promisee or any other person canmove a contract. Accordingly in India a stranger to consideration can sue and enforcean agreement if he is a party to the contract.3.4 EXCEPTIONS TO THE RULE OF STRANGER TO CONTRACTThere are certain exceptions to the rule that a stranger cannot sue. In the followingcases the court does not prevent a stranger from enforcing a contract that is made forhis benefit but he is not a party to it.a) Trust or a charge: In the case of a trust or a charge created in favour of anotherperson the beneficiary can enforce the rights conferred upon him by the trust eventhough he is not a party to the contract between the settler and the trustee.Illustration: Sunita made a trust for the benefit of her son Sushant and appointed Raja,Mahesh and Arjun to be the trustees. Sushant was not being given the property by thetrustees. Can he claim all the propertyin his favour?He can claim that was given in hisfavour even though he was not a party to the benefits created for him by his mother.b) Marriage settlement partition or other family issues: When an agreement ismade relating to marriage, partition or any other family issues with some provision forthe benefit of any person, the beneficiary can enforce the agreement. This is possibleeven though he is not a party to the agreement.c) Acknowledgement of payment or estoppel: This is an agreement between twoparties that one of them would give a benefit to a third person. If the promiserexpresses or implies by words or actions and acknowledges that he has a liabilitytowards a third person it is sufficient for the third person to recover the benefit as hisright.Illustration: Anu is the subtenant of Prem but she pays the rent directly to Anil. Anustops paying the rent. Anil has the right to recover the amount from Anu as this is anexception to the law of privity of contract.Contract through agents: The principal can enforce Contracts that are entered into byagents on behalf of him if the agent has acted within the scope of his duty and in thename of the principal. The rights of the principal are intact even though he is not partyto the contract.Illustration. Mr. Jaiswal sold television sets on behalf of L.G. company. He sold 35television sets to Reena and she did not pay the money. L.G. company went to court
  • 24. because they could enforce their rights as Jaiswal had acted as an agent of L.G. eventhough the company was not directly involved in the contract.Agreements relating to land: When a person purchases land and he knows thatcertain rights and obligations bind the seller, the buyer has to honour thecommitments of any covenants by which the seller is bound. The rule of privity ofcontract does not apply in this case. The buyer may not be a party to the contract buthe is bound by the principles relating to immovable property.Case LawSmith and Snipe Hall Farm Ltd vs River Douglas Catchment Board: A boardagreed with landowners near the stream to improve the banks of streams andmaintain them in good condition. Landowners paid proportionate costs formaintenance. Subsequently landowner sold the land to someone who further sold it toanother person. Due to negligence of the board the banks of the stream broke and theland got flooded. The subsequent owners filed a suit against the board for negligence.Though they were not party to the contract they were entitled to sue because theywere bound by the original owners agreement with the board.3.5 “AN AGREEMENT WITHOUT CONSIDERATION IS VOID’-EXCEPTIONS TO THE RULEThe general rule is “no consideration no contract” or “an agreement withoutconsideration is void” but there are exceptions to the rule. According to section 25, inthe following cases the rule does not apply(a) Natural love and affection: A written and registered contract withoutconsideration, based on natural love and affection by two parties related to each otheris a valid contract. [section 25(1)]Note: Closeness of relationship need not necessary mean love and affection.Case LawRajlukhy Vs Bhootnath :A husband agreed to pay a fixed sum and maintenance tohis wife for living in a separate residence due to frequent quarrels between them. Heregistered the written document. Since he did not pay the amount the wife went tocourt .She was unable to get any relief because the agreement was not made withnatural love and affection.This is an enforceable contract even though there is no consideration.
  • 25. • Voluntary compensation: A promise to compensate a person wholly or partly forservices done voluntarily, or for doing voluntary services that are legally compellableis a valid contract even without consideration.[Section 25 (2)]Illustration: A thief snatched Leela’s gold chain. Meera, an onlooker, rushed tohelp,retrieved the chain and gave it back to Leela. On receiving the chain Leela gaveMeera Rs 2000/-. This is a valid contract even without consideration.Time barred debt: A written and registered document by the debtor signing himself orhis agent with a promise to pay a time barred debt, is a valid contract and does notrequire any fresh consideration. [Section 25(3)]43 The intention should be clearlyexpressed. It may be the full amount or part of the amount of the debt that is to bereturned.Note: An oral promise is not acceptable.Illustration: Sita took a loan of Rs 5000 from Geeta. She could not pay in time and itbecame time barred under the Limitation Act. She made a signed and written promiseto Gita that she would return Rs 3000 on account of the debt. This is a valid contract.No new consideration is required.Agency: No Consideration is required to create an agency between the principal andagent according to section 185. If a person volunteers to work on behalf of anotherperson as his agent without any remuneration, a relationship of agency will be createdeven if there is no consideration. The agent can work on behalf of the principal andbind the principal on any contracts that are taken by the agent on his behalf.Note: Before the execution of the agreement the contract will be void since there is noconsideration.Completed gift: No consideration is required between the donor and the donee of anygifts already made. The person who receives the gift becomes its owner. a gift or adonation already given cannot be undone on the grounds that there was noconsideration. There is no need for natural love and affection between the parties butthere should not be any prior agreement to give a gift.Note A promise to give a gift, on a future date is void if it does not have anyconsideration.Illustration: Vibha has gifted a watch to Nirmalya on his birthday. This is a validcontract even though there is no consideration.
  • 26. Remission of a promise: A promise by the promisee to the promisor to give aconcession (section 63) in the performance of his obligations is called remission. Thisremission of a promise can be without consideration. CAPACITY OF PARTIESIn India people can make agreements with their friends, neighbors, colleagues but notall agreements can be termed as contract. An agreement becomes a contract onlywhen it fulfills the requirements. One of the very important requirements iscompetency to contract.4.1 WHO IS COMPETENT TO CONTRACT?Section 11 of the Indian contract Act provides that a person is competent to contractif:1 He or she is of the age of majority according to the law he or she is subject to2 He or she is of sound mind3 He or she is not disqualified by the law he or she is subject to.Thus in order to enter into a valid contract one has to have all the three requirementsand if any of these requirements is not fulfilled then he or she is incapable to enterinto a valid contract, a contract to be recognized and enforceable by law.We can now reverse the question and ask-‘Who is not competent to contract?’The people who are not competent to contract are:(a) Minor(b) Person with unsound mind(c) Person disqualified by law4.2 WHO IS A MINOR?Section 11 of the Indian Contract Act provides that to be competent to contract aperson should be a major. However, section 11 does not say that a minor’s contract isvoid. To put it in other words section 11 of the Indian Contract Act is silent about thelegality of minor’s contract. Privy Council in Mohiri Bibi vs. Dharamdas Ghoseclarified this position for the first time4.2.1 WHAT IS THE POSITION OF AGREEMENTS WITH A MINOR?The law is quite protective towards the minors. The position of agreements with aminor are given below:
  • 27. 1 Void Agreement Agreement with a minor is void. An agreement with a minor is notenforceable by law from the very beginning.An agreement between two people who are both minors is void.Both the parties cannot enforce the agreement in the Court of law.Illustration: Geeta and Priyanka were classmates and Geeta did not have money tobuy her geography textbook so she borrowed rupees two hundred from Priyanka andpromised to return it in a week. After a week when Priyanka asked for her moneyGeeta refused to return it. In this case Priyanka cannot sue Geeta for the breach ofcontract because the agreement they had between them cannot be enforced in theCourt of law.An agreement between two people of which one is a major and the other is a minoris voidIn such cases the minor can be a beneficiary or a promisee. The minor can enforcethe contract and if the minor has benefited from the other party then he or she may beasked to restore (restitute) the benefits he/she has obtained from such agreement to theother party. However restitution is allowed only if the money or property (benefit)could be traced. For instance if the minor has borrowed money from a major and usedit all then he/she cannot be asked to restore it.Illustration1: Ram a seven-year-old boy asked Raghuvansham a cricket coach togive him coaching classes and Raghuvansham agreed to give coaching. Ram paid inadvance the tuition fee. Raghuvansham gave coaching only for a day and thendiscontinued on the pretext that the agreement is void. Ram could enforce theagreement though void for breach of contract. In this case Ram a minor was abeneficiary / promissee and therefore had a right to enforce the agreement in theCourt of law2. Partnership / company Minor cannot enter into a partnership agreement thereforehe / she cannot be made a partner but he / she can be admitted to the benefits ofpartnership with the consent of all the partners. Similarly a minor cannot become ashareholder in a company, as he is incompetent to enter into a contract. In case aminor inherits shares (fully paid) then he can become a shareholder acting through alawful guardian. Here again a minor enjoys only the benefits of shareholding. Hecannot be made liable for payment of call money.Illustration: Devendra run a business with four partners. Devendra died in a roadaccident. A fifteen-year-old son Gajendra survived him. As Gajendra was a minor so
  • 28. he could not be made a partner in place of his father but with the consent of all thepartners he was admitted to the benefits of the partnership firm. He was entitled to allthe benefits, which accrued to the firm but was not liable for any losses.3 Ratification Ratification means approval or confirmation. If a minor has enteredinto an agreement he or she cannot ratify the same agreement after attaining the age ofmajority. It is because an agreement entered into by a minor is void and a voidagreement cannot be made valid after minor has attained the age of majority. If he orshe wishes to continue then they will have to make a fresh agreement with a freshconsideration.Illustration: Gajendra a fifteen-year-old boy was admitted into the benefits ofpartnership after his father died. After attaining majority Gajendra cannot ratifythesame agreement or continue with the agreement, which he had entered beforeattaining majority. If Gajendra still wants to continue enjoying the benefits ofpartnership then he will have to make a fresh agreement.4 Agency Minor can be appointed as an agent. He is not liable for any of his / her actsrather it is the principal who would be held responsible to the third party for the actsof the minorIllustration: Sylvia a six-year-old girl went with a piece of cloth to the tailor andasked him to stitch a blouse for her mother. The tailor stitched the blouse but Sylvia’smother refused to pay the money on the pretext that the agreement was void. This wasnot a void agreement but a contract of agency where the tailor could enforce theagreement and Sylvia’s mother who was the principal would be liable to pay.5 Negotiable Instrument Minor can draw a negotiable instrument and can enforceinstrument drawn in favour of him/her. He/she cannot be made personally liable thusa minor can be a promisee or a payee and he /she can also become indorsee bytransfer of negotiable instruments.lllustration: Shyam is a sixteen-year-old boy who has been hired by Krishna to cleanhis cars every day in the morning. Krishna pays Shyam by drawing a cheque in hisname for rupees 1000. Shyam deposits the cheque in his bank and the bank dishonorsthe cheque. Shyam can sue Krishna for dishonoring of the cheque and demand a freshone with compensation.6 Necessaries The Person who has supplied necessaries to a minor or to his/herdependents is entitled to be reimbursed from the property of the minor. According tosection 68 the term necessaries include goods and services, which are required to
  • 29. maintain a person in a condition, state and a station in life in which he/she is. Stationin life means the standard of living the person has. Necessaries include food, clothing,shelter, education and marriage of a female. Minor has to reimburse the supplies ofsuch necessaries and the loans for such necessaries. Claim for payment for necessariescan be made against the minor’s property. Minor cannot be held personally liable forsuch necessaries.Education- A NecessityEducation is considered a necessity and therefore a minor is liable for such necessaryhowever he is not personally liable the payment for such necessaries are made againsthis/her property.Illustration: Priya who lost her parents in an accident studied in a School in Delhi.She failed to pay her tuition fee for two consecutive months. She was liable to pay herfee because education is a necessity. However she is not personally liable. She willpay out of her property.Medicine- A NecessityA minor is also liable for any medicinal service he has procured. It can be the doctor’sconsultation fee or it can be the payment for medicines or the treatment .Illustration: Cindia a fourteen-year-old orphan girl was suffering from appendicitis.She was taken to the hospital and was operated upon. Cindia was liable to pay thehospital charges as it was a necessity. Again she was not personally liable. Either herguardians would pay or it would be paid out of her property.Shelter- A NecessityHome is very essential for any human being and a minor is not an exception. He/sheis liable for the payment for his/her shelter. If he/she has taken house on rent he/she isliable for its rent.Illustration: Srikant a seventeen-year-old native of Hyderabad came to Delhi andtook admission in Delhi University to do his graduation. Srikant had no hostel in hiscollege and did not have any relatives so he took a paying guest accommodation andagreed to pay a monthly rent of Rs. 4000 to his landlady. After staying for threemonths Srikant refused to pay the rent. Srikant cannot plead minority here becausehome is a necessity and he is liable for the necessity.7 Torts Minor is held liable for tort (civil wrong). A minor cannot be held liable undera contract because an agreement with a minor is ab initio void. If a minor has been
  • 30. negligent in a contract he/she cannot be made liable hence it cannot be treated as atort. Tort means a civil wrong whose formation is not on the basis of a contract.Stealing, abusing and destroying public property is a civil wrong and therefore minoris liable for it.Illustration 1: Neha a sixteen-year-old hired a music system for her birthday partyfrom Ramesh. She promised to use the music system properly and return it to himonce the party was over. Neha used the system negligently and corrupted it. Neha wasnot liable for tort.8 Insolvency Minor can never be declared insolvent because he/she is not capable ofentering into a valid contract. Agreements with a minor are void therefore he/she doesnot incur any liability under any agreement.Illustration: Pradeep a fourteen-year-old boy had taken loan from Satish for payinghis school fees. As this was a necessity therefore he was liable to pay the loan moneyback out of his property. He did not have enough property to pay the full amount sohe paid only partly. In this case Satish could not hold Pradeep personally liable forthe unpaid money and therefore Pradeep could not be declared insolvent.4.3 WHO IS OF UNSOUND MIND?Lets us first answer the question ‘Who is a person with a sound mind?’According to section 12 a person is of sound mind when he / she is capable to(a) Understand the terms of a contract(b) Form a rational judgment about the effects of the terms of contract on his / herinterestIf a person does not satisfy both the above conditions then he or she is of unsoundmindUnsoundness of mind can bePermanentTemporaryPermanent unsoundness of mind is found amongst(1) IdiotsTemporary unsoundness of mind is found amongst(1) Lunatics(2) Drunkards / persons under intoxicationWho is an idiot?
  • 31. As per the English dictionary an idiot is an utterly foolish or a senseless person. Aperson, who lacks the normal power of thinking and is devoid of a healthy mentaldevelopment. He /she has a mental age below three years and generally is unable tolearn connected speech or guard against common dangers. This problem is generallyby birth and its recovery is almost impossible therefore it is considered to be apermanent unsoundness of mind.Illustration: Ram and Shyam were twin bothers who were mentally challenged. Theywere twenty years old but their minds were that of a three-year-old child. They werelike this right from their birth. Only a miracle could have cured them otherwise innormal circumstances they could never be cured. As a result they were permanentlyincapable to enter into a contract. Any agreement with them would be void.Position of agreements with an IdiotAn idiot is permanently of an unsound mind therefore he / she is incapable of enteringinto any valid contract. Any agreement entered into with an idiot is void.Illustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a fivestar hotel and ordered a lavish dinner for himself. After the dinner he failed to paythebill. Gyaneshwar could not be held liable because he was of unsound mind.Who is a Lunatic?As per the English dictionary a lunatic is a person who is mentally ill, dangerous,foolish or unpredictable. He or she loses the normal power of thinking due to mentalstrain, accident or a tragic incident in life. Lunatics are not born insane. They sufferfrom intervals of sanity and insanity.Illustration: Gayatri was a 54-year-old lady who lost her husband in a car accident.Ever since she lost her husband she went into a depression. Her husband was abusinessman and so during that time she entered into an agreement with one of herhusband’s client. The agreement could be declared void because she signed it whileher mental condition was not normal.Position of agreements with a LunaticA lunatic is incapable of entering into a valid contract. However Lunacy is a curableailment therefore after recovering from insanity he / she can enter into a validcontract. A contract with a person before he / she turned a lunatic is a valid contractand a contract with a person after he / she recovered from lunacy is also a validcontract.
  • 32. Illustration: Gayatri who had lost her husband in an accident went into depressionbut after few months she recovered and entered into an agreement to sell her house toLakshman. The agreement with Lakshman was valid and was very mush enforceable.Who is a Drunkard / Person under intoxication?A drunkard is a person who is under the influence of alcohol and therefore cannotproperly think and make rational judgments. A person is said to be under intoxicationIllustration: Gyaneshwar a twenty-year-old man was born an idiot. He went to a fivestar hotel and ordered a lavish dinner for himself. After the dinner he failed to paythebill. Gyaneshwar could not be held liable because he was of unsound mind.4.4 WHOM DOES LAW DISQUALIFY?There are people who are physically and mentally sound yet they are disqualified bylaw to enter into any valid contract. The people who are disqualified by law are thefollowing:1 Alien enemy: An alien enemy cannot enter into a contract while his / her country isat war with our country. A contract with a foreign national is valid but becomes voidas soon as the war starts. These contracts may again be revived after the war ends ifthe central government is of the opinion that the contract is not against the publicinterest of the country. A new contract can also be entered into with an alien enemyafter the war ends if it is not against public interest.Illustration: Mir Zafar an Afghani businessman had an American business associateby the name of Tom. They both entered into a business contract but before they couldexecute the contract America attacked Afghanistan. As a result their contract becamevoid but after the war ended they could easily revive the old contract or could enterinto a new contract because they were no longer alien enemies.2 Foreign Sovereign and Ambassador: Foreign Sovereigns and their representativesare citizens of foreign countries. They can be tourists, ambassadors and delegates whovisit our country for a specific purpose and duration.Illustration: Suzanne is a Canadian ambassador in India. While she was driving inthe streets of Delhi she happened to hit a motorcyclist. As Suzanne was a foreignnational she could not be tried in the Indian Court.Foreign Sovereigns and Diplomats are free to enter into a valid contract in ourCountry and can enforce those contracts in our Courts but the problem is that we
  • 33. cannot sue them in our Courts without the sanction of the government unless theywish to submit themselves to the jurisdiction of our Courts. If the foreign national hasentered into a contract through an agent residing in India then in that case the agentcan be held responsible and can be sued in the Court of law.Illustration: John an American tourist came to India and stayed in a five star hotelfor five days but when he was leaving the hotel he did not have money to pay his bills.As John was a tourist so he could not be tried in our Court. He could not be sued forrecovery of the bills.3 Convict: Convict cannot enter into a valid contract while undergoing imprisonment.As soon as the convict’s tenure of imprisonment finishes he / she is no longerdisqualified to enter into a contract.Illustration: Radha was found guilty of crime of theft and was undergoingimprisonment. During the years of imprisonment she was not competent to enter in toany contract but as soon as her term in the prison gets over she will be competenttoenter into a valid contract.4 Insolvent: The Court declares those people insolvent who are unable to dischargetheir liabilities. Their debts exceed their assets therefore they are unable to pay theircreditors. After the Court declares them insolvent their property stands vested with theofficial assignee or an Official receiver.Illustration: Shambhu a businessman was running into huge losses for the past fiveyears. He was unable to pay his creditors and so his creditors sued him. The Courtdeclared Shambhu insolvent and his property was vested with the official assignee.5 Company: The contractual capacity of a company is normally mentioned in theobject clause of the Memorandum of Association. Any act done outside the purviewof the memorandum is ultra vires and any agreement entered into for the execution ofsuch an act is void.Illustration: Ram and Shyam Company was in the business of manufacturing leatherbags. The object clause in the Memorandum of Association provided that thecompany is to manufacture leather bags. One day the director of the company enteredinto an agreement with a buyer for selling them leather shoes. The agreement wasvoid because it was beyond the scope of business. The company as per itsmemorandum was to sell only leather bags and not leather shoes. Therefore theagreement was not valid.
  • 34. Free Consent5.1 MEANING OF CONSENT AND FREE CONSENTFree Consent is one of the essential elements of a valid contract. The essence of thisrequirement is that a person should enter into an agreement of is own interest with afree as well as an open mind without any fear. If any one has not allowed the otherparty the freedom of expression, the agreement will not be fair. No person under lawis compelled to enter into a contract and be bound by any obligations pertaining to itwithout his / her free consent.CONSENTWhen two or more persons agree upon something it is said that there is a consensusbetween them. According to section 13 this means that the people agree on the samething and in the same sense. It also means that there is consent on the acceptance ofan offer. When there is no consent, there cannot be a contract.Illustration: Braj has two televisions. One is of L.G. make and the other is of Sonymake. His friend Ashu offers to buy the L.G. product. Braj thinks he is selling theSony television. This agreement is void ab initio because there is no consent sinceboth of them have not understood the same thing in the same way. There is noagreement of minds.FREE CONSENTSection 10 of Indian Contract Act, states, that a valid contract should have the freeconsent of both the parties, entering into the contract. This means that in a contractnot only should there be consent but it should also be free consent.‘All agreements are contracts if they are made by the free consent of the parties.’Free consent according to section 14 is when a contract is made without coercion,fraud, undue influence, misrepresentation or mistake. Therefore, if a contract isinfluenced by any of these elements there cannot be free consent. Salmond hasdescribed this as an error in consensus.An agreement, which is made by coercion, fraud, undue influence andmisrepresentation, is voidable at the option of that party whose consent was not free(Section 19).If there is a mistake in an agreement it becomes a void contract. It is not enforceableby law. The reason for this is that a mistake means that there is no consensus betweenthe parties entering into a contract.
  • 35. When consent is not free it is called error in causa. This makes the contract voidableat the option of that person whose consent in the contract is not free. However, thecontract continues to be a valid contract until it is repudiated by the person who isconsent is not free.According to section 15, coercion means to use force to make another personagree to the terms and conditions while entering into a contract. A contract is causedby coercion in the following cases:1. When any act is done that is forbidden by Indian Penal Code.2. Threatening to commit an act forbidden by Indian Penal Code3. Unlawful detaining of property by using force or physical pressure on anotherperson.4. Threatening another person for detaining the property.Illustration: The gangster made the property owner sign the papers for his ownershipat pistol point. This is coercion it is forbidden by Indian Penal Code. The contract isvoidable at the option of the property dealer as force was used for obtainingproperty.When can coercion be exercised?Coercion can proceed from any person. It can be directed against another personincluding a stranger.Illustration: Manju threatens to kill Muna, who is Rani’s son if Rani does not givetheentire property to her. The consent given by Rani is due to coercion by Manju. Thecoercion is directed against Muna who is a stranger to the contract.Effects of CoercionSection 19 and 72 of the Indian Contract Act, deal with the effects of coercion.According to Section 19 ‘when consent to an agreement is caused by coercion theagreement is a contract voidable at the option of the party whose consent was socaused’.The effects of coercion can be summarized in the following:! The aggrieved party can rescind the contract as it is voidable at his / heroption. (Section 19)! The aggrieved party should be restored the benefits by the person who had usedcoercion.(Section 64)
  • 36. ! If money has been paid on account of coercion the aggrieved party should bereturned the money by the person who had used coercion for taking it.! The aggrieved party has to prove that coercion had been exercised and the consentwas not freely made by him / her.5.3 UNDUE INFLUENCEUndue influence means using superior power for obtaining the consent of the personwho is weak in position and physical ability.Section 16 (1) of the Contract Act defines undue influence as• The relation between parties where one of the parties is in a dominating positionover the will of the others.• Using the dominating position to take an unfair advantage over the other.Section 16 (2) of the Contract Act defines the position to dominate the will of theother in the following manner.6 Real or apparent authority: Where a person holds some real or apparent authorityover the other. This means that he / she is in some position where he / she has thepower to dominate over the will of another person.Example:6.1 Relationship of Employer and Employee6.2 Relationship of Officer and Peon.7 Fiduciary Relationship: Where a person is in a fiduciary relation to another. Thismeans that there is the relationship of mutual trust and confidence amongst the peoplemaking the agreement.Example:(4) Relationship of doctor with his patient.(5) Relationship of mother and daughter.(6) Relationship of Father and son.(7) Relationship of Trustee and beneficiary.8 Agreement with another, having mental incapacity: Where a person makes acontract with another, whose mental capacity is affected because of his age, illness,mental or body distress temporarily or permanently.Example:! Relationship of normal person with a person temporarily in depression.
  • 37. ! Relationship of a young man with an old and sick person, who suffers fromdementia.Illustration:! Mr. Balram used his parental influence by making his son a party to dowry taken byhim at his wedding from the wife’s father. This is a case of undue influence exerted bya father because of his fiduciary relationship with his son.The relationships in which undue influence can be exerted over another are thefollowing.! Teacher and student.! Employer and employee.! Doctor and patient.! Mother and daughter.According to law in the following cases there is no presumption of undue influence.Therefore if someone has exerted undue influence it will have to be proved.! Creditor and debtor.! Landlord and Tenant.! Husband and wife (when wife is not parda-nashin).Presumptions of Undue Influence 16 (3)In some cases it is presumed that there is undue influence. These are discussed below:1. Unconscionable transactions: When it can be proved that the dominating partyentered into an unfair contract with a weaker party, it is assumed by law that undueinfluence has been used to exert the contract. Unfair transactions between superiorand weaker party are called unconscionable transactions. An example of suchcontracts is when a person makes an unusually high profit and the other party suffersbecause of these contracts, in such cases when on the face of the agreement it appearsunconscionable it has to be proved that consent was taken by fair means by thesuperior party.2. Contracts with Parda-Nashin Women: Women who wear a burkha or coverthemselves and are in complete seclusion from the rest of the world are a separatecategory in the eyes of the law. If a contract is made with pardanashin women, it ispresumed that undue influence is used. The court grants relief to any unreasonabledemands of the party using undue influence through its discretionary powers.
  • 38. 3. Money Lending Transactions: Unfair agreements are often made in money lendingtransactions. Sometimes undue advantages are taken from people who have takenloans. A high rate of interest charged shows unfair transaction. Also, when a moneylender executes a property in his favour when the borrower cannot repay is also ortransaction of undue influence.In all the above cases the court presumes that undue influence has been used andusing its discretionary powers it can grant relief to the weaker parties.Effects of Undue InfluenceUnder Section 19A, if a person has given his consent due to undue influence exertedby another person the contract is voidable at the option of that party who had to giveconsent under undue influence. Further, the court may also take the decision that arefund has to be made to a person who is the aggrieved party. The court may also takea decision to allow the aggrieved party to rescind a part of the contract or the wholecontract as the case may be.Burden of proofThe burden of proof of undue influence will be on the person who is aggrieved andwants relief from the court. The court also states that there is a difference betweenpersuasion and undue influence. A person can be persuaded to do a certain activitybut this does not necessarily mean that undue influence has been used. Therefore,aggrieved party will have to prove that the superior party was able to influence himdue to his position to dominate his will.Rebuttal of PresumptionWhen the weaker party makes a plea in the court that it did not use undue influence ithas to prove the following.o That full disclosure was made to the weaker party before getting consent andentering into a contract.o That the price paid in the contract was in accordance with the requirement and itwas adequate.o That the weaker party took advice from a competent person before finalizing thecontract with the so called superior party.5.4 FRAUDFraud is false representation of facts made willfully to deceive another person.Definition of Fraud
  • 39. Section 17 of the Indian Contract Act states that if any of the following acts arecommitted by any party to a contract or with his agent’s connivance, willfullywithintent to deceive or induce another person or his agent to enter the contract it willresult into fraud.1. It is a suggestion of a fact which is not true by a person who does not believe that itis true.2. It is an active concealment of facts by a person who has knowledge or belief of thefacts.3. It is a promise in which there is no intention of performance of the contract.4. Any other action which has the intent of deceiving the other person.5. Any act or omission which is declared fraudulent by law.Essentials of FraudThe above description of definition of fraud can be explained through the essentials offraud.1. False Suggestions: Fraud must state facts which are false and the person makingthe suggestion knows that he is making a false representation or false statement offacts. The false suggestion is made intentionally to induce or deceive the other partyto enter into a contract. This is supported by the following case law:2. Active Concealment of a Fact: Active concealment is when a person has theknowledge or belief of the fact which he knows is not true. This amounts to fraud.Passive concealment is when a person makes an incorrect statement thinking that thestatement is correct.3. Making a Promise without Intention of fulfilling it: If a person makes a promisebut he does not intend to keep it. It is a clear case of fraud because at the outset theintention was to make a false promise.4. Any other act fitted to deceive: An act used to trick or chit someone by unfairmeans is considered to be fraud. This is an act which is done with the intention ofcommitting a fraud.5. Any other act considered by law to be fraudulent: According to the law it isobligatory that all material facts are disclosed while selling an immovable property.Otherwise it amounts to fraud.6. The Party that is misled by Fraud should have suffered some loss: There cannotbe fraud without any damage. The loss must be in terms of money or money’s worth,or loss of some tangible assets. Fraud without damage does not give rise to any deceit.
  • 40. 8.1.6 Half Truths: When a person speaks a half truth, it means disclosing someportions of relevant material leaving the other portion undisclosed. According to law ahalf truth is worse than full falsehood as it misleads the other person. Therefore if aperson speaks he must give all the facts and not just half truth. Otherwise silenceamounts to fraud.8.1.7 Change in Situation: Sometimes when a statement is made it is the truth butcircumstances bring a change in situation and when it is actually acted upon, itbecomes false. It becomes the duty of the person to immediately communicate thechange in situation. This is supported by the following case.Remedies of FraudAccording to Section 19, when consent is taken by fraud from another person he hasthe following remedies available to him.o Rescind the Contract: The party whose consent was received by fraud has the rightto avoid the contract because it is voidable at the option of the person defrauded.o Performance of Contract: The person defrauded can ask for completion of thecontract but with restitution which means that he would like to be put in that positionin which he would actually be in if the representations were true.o Compensation: The defrauded party has the right to demand compensation for theloss that is caused to him by fraud. He has the right to claim damages even if he optsto continue with the contract.5.5 MISREPRESENTATIONMisrepresentation is a false or misleading statement that a person honestly believes itto be true. He makes this statement without any intention to cheat or mislead anotherperson. The false statement is serious but not as serious as fraud.According to Section 18 of the contract act misrepresentation the meaning of themisrepresentation is given below:1. It is a positive assertion of information by a person which is not true but the personbelieves it to be true.2. It is a breach of duty without any intention to deceive. However, the person gainsan advantage by misleading another person.3. The statement innocently causes a party to an agreement to make a mistake to thesubject of the agreement.Misrepresentation occurs in the following cases:
  • 41. 1. Unwarranted Statements: When a party makes a positive assertion that theinformation from which he is making a statement is trustworthy he means that he ismaking a warranted statement. Unwarranted statement means information fromuntrustworthy source. Therefore, when a person believes that the information is truebut it is incorrect. It is misrepresentation. This is supported by the caseCase Law 8In Oceanic Steam Navigation Company V Soonderdas.61 The plaintiff from whom aperson chartered a ship stated that the ship was of 2800 tonnage register. However,the ship was 3000 tonnage register. The plaintiff did not have any basis to believe thefact stated by whom. The contract was the cancelled due to misrepresentation.2. Breach of Duty: When a party does not intend to cheat another person but thecircumstances show that he has not done his duty correctly because of nondisclosureof essential information. He has used the situation to his advantage thus bringing himcertain benefits. This type of situation is called constructive fraud. The party makingsuch statements will be guilty of misrepresentation. This is supported by the followingcase.Case law 9Bannerman v White 1861.62 The plaintiff wanted to sell the defendant hops on theunderstanding that sulphur was not used in their growth. The defendant was clearthat he was not interested in sulfa usage in cultivation of Hops. Although sulfawasused in 5 out of 300 acres the plaintiff had forgotten. The court held that thecontractcould be avoided on the ground of misrepresentation although representationwas no3. Innocent Mistake: If one party leads the other one to make a mistake in the qualityor subject matter it is a case of misrepresentation. This clause includes the caseswhere vital facts are suppressed and a mistake has been made.Essentials of MisrepresentationMisrepresentation as already stated is a false representation of facts which the personmakes without knowing that it is false. He makes the statements believing them to betrue. The following essentials elements represent misrepresentation.I. Material Facts: Misrepresentation must be of those facts which are important in theformation of a contract. Some expressions or passing statements that are not relevantwill not be enough for avoiding a contract.
  • 42. II. Statement prior to executing the contract: The misrepresentation of facts must bebefore the contract is executed by the parties to the contract.III. Misrepresentation by a party to the contract: Misrepresentation of facts has to bemade by a party or his agent to the contract. A statement made by a stranger to thecontract does not have any effect on the validity of the contract.IV. Objective of misrepresentation: The statements made by misrepresentation offacts should be of the intention to deceive the other party and to induce him to enterthe contract.V. Reaction of other party: As a result of the misrepresentation the other party in thecontract should have acted on the faith of the facts represented.Effect of MisrepresentationAccording to Section 19 of the Indian Contract Act if on the misrepresentation ofstatements a person to the contract has been affected, he can avoid the contractbecause it becomes a voidable contract at his option.! The person whose consent has been taken by misrepresentation has the right torescind to the contract.! He has a right to ask for completion of the performance of the contract and ! He canalso ask for being given the position which he would have if the representation offacts was true at the time of asking for performance of the contract.The right to rescind the contract is in the following three cases.1 Time Period: The contract has to be rescinded within a reasonable time otherwisethe right to rescind the contract will be lost.2 Affirmation: The aggrieved party should not make an affirmation to the contractotherwise he will lose the right to rescind.3 Third Party Rights: The aggrieved party should be careful to find out that thirdparty rights are not acquired while he asks for rescission of the contract.Exceptions to the Right to Rescind the ContractIn the following cases the party whose consent was received by misrepresentationcannot get relief of rescinding the contract.1 Where the affected person had the possibility of finding out the truth with ordinarydiligence.2 Where the affected party is ignorant that he gave his consent due tomisrepresentation of facts.
  • 43. 3 Where the affected party becomes aware of misrepresentation but still decides toreceive the benefits under the contract.4 Where a third party innocently enters into benefits of the contract before thecontract was rescinded.5 Where it is difficult to restore the rights of the affected party to the original position.5.6 MISTAKEMistake can be defined as an incorrect statement which creates misunderstandingbetween the parties. Such mistakes take place when the parties to the contract are notaware of the terms of the contract in agreement with each other. An agreementbetween two parties according to the Indian Contract Act is valid only when both theparties agree upon the same thing and in the same sense. According to section 20 theagreement becomes void when there is a mistake in agreement. In normalcircumstances law does not give the right to anyone to avoid a contract because hewas mistaken about some fact in the contract. However, some mistakes arefundamental to the contract in such a manner that the very basis of the formation ofthe contract becomes faulty and there is no contract at all. In such cases the agreementis considered to be void due to consensus ad idem.Types of MistakeMistake can be of two types. These are mistake of facts and mistake of law. (1)Mistake of fact can be bilateral or unilateral and (2) Mistake of law can be mistake oflaw in India and mistake as to foreign law.1. Mistake of FactMistake of fact can occur when both the parties to the agreement are under a mistakeor only one of the parties is under a mistake to the essential elements of the contract.When both parties are under a mistake it is called bilateral mistake and when onlyoneparty to the contract is under a mistake it is called a unilateral mistake." Bilateral Mistake: A bilateral mistake is made in the following cases:(i) Mistake of existence of subject matter: The agreement is void if it is agreed upona subject matter which does not exist and the parties to the agreement do not have anyknowledge about it. This is bilateral mistake because both parties did not know thismaterial fact at the time of making an agreement.(ii) Mistake of identity of subject matter: The agreement is void if two parties to thecontract have confusion about the identity of the subject matter. The agreement isvoid due to want of consensus.
  • 44. (iii) Mistake regarding quality / description of subject matter: When two partiesmake an agreement they should understand that the quality of the product. If bothparties make a mutual mistake about the description of the product, it is bilateralmistake and the agreement is void.1. Mistake regarding title of the product: An agreement of sale is void if there is amistake of mistake over the entitlement of goods.(iv) Mistake regarding substance of subject matter: If both parties to an agreementmake a mutual mistake of facts which is the essential part of the subject matter theagreement is void.(v) Mistake regarding quantity of subject matter: If two parties are mistaken aboutthe quantity of subject matter to be supplied, then the agreement is void. Quantity isan essential fact of an agreement; if it is not correct the agreement to buy / sell can notbe held.(vi) Mistake regarding price of the subject matter: Price is an essential feature in thesale of a product. If there is a genuine mistake regarding price the agreement is void.(vii) Mistake about possibility of performance: If there is a bilateral mistakeregarding the possibility of performance the agreement is void. Impossibility ofperformance can be due to physical reason or legal impossibility.Effect of Bilateral Mistake: When there is a bilateral mistake inunderstanding the essential facts of the agreement, the contract becomes void abinitio. This agreement is void from the beginning, does not have any legalsignificance. It cannot be enforced at the option of any of the parties to the contract." Unilateral Mistake: According to section 22, unilateral mistake occurs whenone party to the agreement makes a mistake. The contract is not voidable because oneof the parties to it are under a mistake. However, there are certain exceptions to therule. These are due to the following reasons:! Mistake of identity of a party: A very fundamental mistake occurs if an agreementis made with a wrong person. When a party desires to deal with a certain person andhe does not do so due to false representation of another person it is an error inconsensus.! Mistake about nature of transaction: If a person makes a transaction withoutunderstanding nature of the transaction, it cannot be executed. This mistake ispossible when a person does not disclose to the other the true nature of the document
  • 45. and induces the other person to sign the document which is not correct. Theagreement is null and void. Case law to support thisEffect of Unilateral Mistake: In case of unilateral mistake the contract becomes void.Under Section 65 a person who has received benefits of the contract has to restore itby compensating the person from whom the advantages was received. If a person hasreceived money or any item has been delivered by mistake then according to Section72 he has to repay or return it. LEGALITY OF OBJECTSOne of the essential elements of a valid contract is lawful object. The object is hepurpose for which two persons enter into an agreement. For an agreement to be acontract it is important that the object be lawful. If the object is unlawful then anagreement can never become a contract. The consideration is some act or abstinenceor reciprocal promise. The consideration should be lawful. An unlawful considerationwill not give rise to a valid contract. Both consideration and object of an agreementmust be lawful. An agreement having an unlawful object or an unlawful considerationor both is void.6.1 WHAT OBJECTS AND CONSIDERATIONS ARE UNLAWFUL?According to Section 23 of the Indian Contract Act the following considerations andobjects are unlawful:6.1.1 Forbidden by law an agreement to do what law has prohibited is unlawful. Suchacts are punishable either by the criminal law of the country or by a speciallegislation. These agreements may also be called illegal agreements.6.1.2 Defeat the provisions of law: An act may not be forbidden by law but ifpermitted it may defeat the provisions of any law. It means that an agreement may notbe of an illegal nature and not directly forbidden by law but if allowed to be executedit would indirectly violate the law.Illustration: Rekha a resident of Delhi wanted to own a house in the state of Jammuand Kashmir. The rule in Jammu and Kashmir is that only the residents of Jammuand Kashmir can buy property in the state. No other person belonging to other statesof India is eligible to buy property in the state. Rekha asked Namita who was aresident of Jammu to buy the house and later transfer the property to her. Rekha alsopaid consideration to Namita. Later Namita refused to buy the house. Rekha claimedthe consideration back from Namita. Rekha cannot claim the consideration because
  • 46. the agreement is void.6.1.3 Fraudulent purpose: An agreement, which is entered into to defraud others isunlawful. The agreement is entered by one party to cheat the other party therefore theagreement is void and unlawful right from the beginning.Illustration 1: Ramaswamy offered to sell his car with a defective engine to Saloniwithout disclosing the defect for rupees fifty thousand and Saloni accepted the offerHence this is a void agreement, which has been made to defraud Saloni.6.1.4 Involves injury to person or property of another: An agreement, which is madewith the objective to injure a person or the property of a person is said to be unlawful.Many times one party enters into an agreement with another with the intension toharm him/her personally or to harm his /her property such an agreement is unlawful.Illustration: Sita’s mother who was undergoing an operation needed blood, whichwas O negative. Sulochana agreed to donate blood provided Sita agreed to serve forthe rest of her life as a maid in Sulochna’s house. Sita agreed to do so. This is anunlawful agreement.6.2 CONSIDERATIONS AND OBJECTS THAT ARE UNLAWFUL IN PARTAn agreement having an unlawful object or an unlawful consideration is void. Section24 of the Indian contract act states that if any part of a single consideration for one ormore objects, or any one or any part of any one of several considerations for a singleobject, is unlawful, the agreement is void. However if there are two parts in a contractand the consideration or the object of one part is unlawful and if that part can beseparated from the other part, which is lawful then the lawful part of the contract isenforceable in the Court. If the two parts are inseparable and it is not possible toseparate lawful from unlawful then the whole agreement is void.Each part of Section 24 is explained below:If any part of a single consideration for one or more objects is unlawful, theagreement is void. This can be explained with the help of the following illustration:Cynthia wanted to buy a diamond necklace from Rajni. She agreed to pay rupees twolakh for the necklace, which she would get from stealing her aunt. The object of theagreement is valid but the consideration is partly unlawful. It is partly unlawfulbecause the consideration, which is rupees two lakh would be procured by stealingand stealing is unlawful. Hence the agreement is void.If any one or any part of any one of several considerations for a single object isunlawful, the agreement is void. This is explained with the illustration below:
  • 47. Cynthia wanted to buy a diamond necklace from Rajni. Rajni agreed to sell thenecklace to Cynthia provided Cynthia paid rupees fifty thousand in cash and slappedCynthia’s neighbor Agatha. There are two parts in the consideration. One of theparts which is slapping the neighbor is unlawful therefore the agreement is void.If there are two parts in a contract and the consideration or the object of one part isunlawful and if that part can be separated from the other part, which is lawful then thelawful part of the contract is enforceable in the Court. VOID AGREEMENTS7.1 WHAT IS A VOID AGREEMENT?Section 2 (g) of the Indian Contract Act, states that a void agreement is one, which isnot enforceable by law. A void agreement does not create rights, obligations or duties.It does not give rise to any legal consequences. Such agreements are void ab initio.The courts can only enforce those agreements that according to Section 10 fulfill theconditions of the Indian Contract Act. It should not be declared void by any law in thecountry. There is a difference between void agreements and void contracts.Void Agreement! A void agreement is not valid.! The agreement is not enforceable by law.! It is void from the very beginning of making the agreement.! The following agreements are expressly declared as void by the Indian Contract Act:! Agreement by a minor or a person of unsound mind.[Sec(11)]! Agreement of which the consideration or object is unlawful[Sec(23)]! Agreement made under a bilateral mistake of fact material to the agreement[Sec(20)]! Agreement of which the consideration or object is unlawful in part and the illegalpart can not be separated from the legal part [Sec(24)]! Agreement made. without consideration.[Sec(25)]! Agreement in restraint of marriage [Sec(26)]! Agreement in restrain of trade [Sec(27)]! Agreement in restraint of legal proceedings[Sec(28)]! Agreements the meaning of which is uncertain [Sec(29)]! Agreements by way of wager [Sec(30)]! Agreements contingent on impossible events [Sec(36)]! Agreements to do impossible acts [Sec(56)]
  • 48. Void Contract! Void contract is valid when it is entered into but after it is formed due to somelimitation it becomes non enforceable.! Void contract is enforceable by law but due to impossibility or illegality it becomesunenforceable at a later date.! A void contract remains valid until its validity stops functioning.7.2AGREEMENT BY MINOR OR A PERSON OF UNSOUNDMINDA minor can be defined as a person who has not completed his or her 18 years of age.Law acts as the guardian of minors and protecting their rights, as it is believed thattheir mental facilities are not as matured as a person above 18 years of age. A minordoes not have the capacity of judge whether the agreement should be entered into orwhat would be his obligations to the contract. Therefore an agreement with a minorinvolving his obligations and the other contracting party who requires enforcement ofthose obligations is deemed as void.A person of unsound mind does not have the mental powers or mental condition underhis or her own control. Any agreement entered into by person of unsound mind voidIllustration 1: Madhu made an agreement to buy a house of Rs 80,00000 with Sonuwho is 11 years of age. The agreement is void7.3AGREEMENT MADE WITHOUT CONSIDERATIONAn agreement made without consideration is void, except in the following cases:(i) It is registered and is in writing under the law enforceable at the time andregistration of(documents), is amongst near relations due to natural love and affectionbetween parties.(ii) It is a promise to compensate, another person fully or partly that has alreadyvoluntarily done something for the promisor, or something that the promissory waslegally compellable to do.(iii) It is a written and signed promise, by the person to be charged or his agentauthorized by him, to pay whole or in part a debt of which the creditor might haveenforced payment but for the law for the limitation of suits.Illustration 1: Sukrita promises to give Nirmay Rs. 20,000. There was noconsideration and they were not related to each other. This is not a valid agreement.7.4AGREEMENT IN RESTRAINT OF MARRIAGE
  • 49. According to Section 26, an agreement that is in restraint of marriage is void.However, this rule does not apply to restraint of a minor from marriage. Law does notallow any restriction on the freedom of a person’s choice or freedom in selecting amarriage partner.Illustration: Lata agrees to marry Rahul because her parents did not allow her tomarry Kiefer, a foreigner, who is a German gentleman. This is a restriction on choiceof marriage and is a void agreement.The agreement is void if the restraint to marry another is partial or general. From thisit follows that an agreement to marry a certain person or not to marry at all or tomarry for a particular period of time is a void agreement. However a promise to marrya certain person is a valid contract and does not depict any restraint in marriage.Illustsration: Anika wants to marry Gautam only and no one else. This is a choiceand there is no restraint in marriage. This is a valid contract of marriage.7.5AGREEMENTS IN RESTRAINT OF TRADEAny agreement that restrains a person from following a lawful profession, trade orbusiness is void according to section 27 of the Indian Contract Act. Restraints on skillor talent or work of a person are void contracts. The constitution (Article 19) statesthat it is the fundamental right of a person to be at a liberty to work and not deprivehimself, of his fruits of labour by entering into a restraining contract.The effect of agreements in restraint of trade is that they are always void whether theyare partial or general, qualified or unqualified; whether they are for a limited period orextend over a particular area of work. However there are certain statutory exemptions.Case Law 1Madhub Chander V Raj Coomar.80 In this case two people A and B wereneighbouring shopkeepers. They were rivals. B agreed to pay A an amount of moneyfor closing his business located near his shop. A closed his business. B refused to paythe agreed amount. The court held that the agreement was void.7.5.1 Statutory Exceptions(a) Sale of goodwill: The seller of a business can put some restrictions on himself. Hemay agree not to continue with the same products in business or restrict the area ofoperation. The restrictions have to be reasonable. They are applied to protect thebuyerof the business.
  • 50. Illustration: Shanti sold her drycleaning business in Sarva priya Vihar to Sushant.She agreed not do similar business in the same area for 15 years as a condition of thesale. This is not a reasonable restriction and it can be contested in a court.(b) Exceptions under Partnership Act: The following exceptions pertain to the IndianPartnership Act under restraint of trade. These restraints are required to carry outbusiness or trade. They do not affect the validity of the agreement.7.5.2 Exceptions under Judicial Interpretations(a) Trade Combinations: A combination of trade organizations for monopolizingtrade are against public interest and are void but trade combinations that are formedfor regulating business, fixing prices, creating quality in products, standardization andmarket timings are not void agreements. If however, these combinations haveunreasonable restrictions on members the combinations will be null and void Thereare several judicial cases.(b) Sole dealing agreements: Manufacturers usually appoint a distributor or anagent for selling goods in a particular area. The agent stocks only goods of thatparticular organization as a part of agreement between them. As long as there is a fairand reasonable agreement between the two parties it is an understanding of terms ofbusiness and advantages to both the parties to increase their business. However, if it isdetrimental to the interest of one of the parties it becomes objectionable and suchagreements become unenforceable (c) Restraints upon employees: Some employers prevent them employees fromworking in other organization while in employment with them. The employee can berestrained from carrying on business which is in competition with the employerscompany or a servant can be restrained by his master from allowing him to divulgesecrets of his business. There are many forms of restrains between the employer andemployee. As long as these are reasonable, depending on the facts and circumstancesof the case the agreement will not be void because it is justified as it protects theemployer’s goodwill.7.6 AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGSEvery person has a right to take recourse to legal proceedings in a court of law whenthere is a conflict with another person. If a party is restricted to use this right theagreement will be void (Section 28).Two types of agreements restraining another person from legal proceedings are void.These are the following:
  • 51. " Agreements restricting parties from enforcing the legal rights under the contract." Agreements limiting the time within which a party can enforce contractual rights.(a) Agreements on Legal Proceedings: Any agreement which restricts a person fromenforcing his right in the court is void.Illustration: Sita sold 1000 parker pens to Geeta for Rs. 300 each. She has a right toreceive the payment from Geeta otherwise she has the right to file a suit in the courtto get the payment. If Sita makes an agreement will Geeta that she will never go tocourt for receiving the payment even if she is not paid, the agreement is void.Restraint on legal proceeding should be complete and not partial for making theagreement void.(b) Limitation of time: An agreement is declared void when parties restrict the timewithin which an appeal can be made. The period of limitation prescribed by law isthree years from the date of breach. If there is a clause that a party cannot go to courtafter two years for recourse to a law court the agreement becomes void as it is not inaccordance with the law of limitations.Illustration: Braj supplied material to Dhanuj. They may an agreement that if Brajdoes not receive the payment he can go to court within two years for suing the otherparty. Otherwise he will not have a right to go to court. This is a void agreement.7.6.1 Exceptions to Restraint in Legal Proceedings (Section 28)In the following to cases in which the agreement is not void when it is in restraint tolegal proceedings.When a reference is made to future disputes for arbitration.Illustration: Leela entered into an agreement with Mila for supplying 14 computersevery month for six months for Rs. 35,000 per computer. It was agreed that bothparties would have a right to go in for arbitration if there was any dispute regardingprice or quality of the computer. This is a valid agreement. When a reference is madeof existing disputes for arbitration:7.7 AGREEMENTS WITH UNCERTAIN MEANINGAgreements whose meanings are not clear so that there is uncertainty creatingconfusion between people is a void agreement. Section 29 states that agreements themeaning of which is not certain or capable of being made certain are void.Illustration: Kamal agrees with Aditya to send 100 tea packets for Rs. 50,000 tohis landlord. Kamal sends green tea because Aditya had not specified any brand.However, it was unacceptable to the landlord who refused payment stating that he
  • 52. had asked for some other tea. Since this was an uncertain agreement which did notstate the quantity in terms of kilo weight, not did it state the kind of tea it is a voidagreement. However, if the court can understand the meaning of tea the agreementwill become valid. Therefore, if Kamal was a dealer of green tea only the agreementwould be valid.An agreement that makes a contract in future is void. The logic of this is that theagreement is uncertain whether the parties to agreement will able to agree to the termsof the contract in future.Illustration: Madhu gave her friend Neelam Rs. 10,000 as payment for her oldcomputer. However, he went away on a trip to a foreign country without taking thecomputer making in agreement that Rs. 10,000 should be treated as a deposit. LaterMadhu wanted her money back to which Neelam refused. What kind of an agreementis this? This is a void agreement because it is a full of uncertainties about the time,value and price of the computer to be purchased.7.8 WAGERING AGREEMENTSA wager is explained by Sir William Anson as promise to give money or money’sworth on determining or ascertaining an uncertain event. In a wagering contract it isnecessary that each party should either lose or win depending on a certain event.Therefore, the event is uncertain and it most affects both the parties, if only one of theparties is affected it is not a wagering contract.Wagering agreements have the following essential features;(a) Uncertain event: A wagering agreement is dependent on an uncertain event thatmay or may not happen. It pertains to the happening of some future event. It can alsobe dependent on some past event whose result is not known. An example may be of apossible winner of a cricket team of a match that is still to happen.(b) Mutual loss or gain: In a wager agreement both the parties have an equal chanceto win or lose. The gain / loss may or may not be equal but it is necessary that bothhave the chance. If one of the parties can only win but there is no possibility of itslosing and the other party does not have the same possibility it will not be a wageragreement.(c) The event is beyond the influence of the parties: Wagering agreements can not beinfluenced by any of the parties to the agreement. If one of the parties knows theoutcome of the event, the agreement is not a wager.
  • 53. Illustration: Meenu, Rajiv, Suraj and Veena decided to run a 5 Kilometers Cyclerace. Leena promised to give the winner Rs. 5,000. Meenu won and got the prizemoney. This is a wagering agreement.(d) No other interest in the event: The parties to a wagering agreement should onlyhave the interest in wining or losing. If any of the parties has any other interest in theagreement it will not be called a wagering agreement. DISCHARGE OF CONTRACTThe termination of the contractual relationship is called discharge of contract. Howthe contract comes to an end or how the contractual relationship in a contractterminates is explained through the various modes of discharge of contract. Thevarious modes of discharge are the following:8.1 DISCHARGE OF CONTRACT BY PERFORMANCEThis is the best way of bringing the contract to an end. Every person who is a party toa contract is bound to fulfill his/her obligation at the time when he/she has promisedto perform it. The moment the parties execute their promises under the contract thecontract comes to an end. This mode of discharge is called discharge by performance.The performance can be of two types.1 Actual performance2 Attempted performance8.2 DISCHARGE OF CONTRACT BY MUTUAL AGREEMENT ORCONSENTParties agreeing to terminate the contract can discharge a contract withoutperformance. They can do it by mutually agreeing to replace the old contract with anew one. The new contract extinguishes the rights and obligations of the parties underthe old contract.There are various ways by which the old contract can be replaced by a new one. Thevarious ways are as follows:1 Novation: In this the parties to a contract agree to substitute the existing contractwith a new one. The new contract is brought about by either changing the contractbetween the same parties or by changing the parties in the same contract.Illustration 1: Yogita offered to keep Sunita as her maid for rupees two thousand on amonthly basis. Sunita accepted the offer and promised to start work from the first dayof next month. However Sunita met with an accident and injured her leg. Sheapproached Yogita and showed her reluctance to join. It was felt that it would take
  • 54. about two months time for the leg to heal and after a little persuasion from YogitaSunita decided to join as maid after two months. In this case the old contract issubstituted with a new one and parties to the contract are the same.2 Alteration: In this the parties agree to make some changes in one or more terms ofthe contract. By doing so the old contract is discharged and the parties are bound bythe changed contract.Illustration: Yogita offered to keep Sunita as her maid for rupees two thousand on amonthly basis. Sunita accepted the offer and promised to start work from the first dayof next month. Afterwards Sunita felt that the emoluments were too low and that shewould not like to work at such low rates. She told her unwillingness to Yogita andafter listening to Sunita Yogita decided to increase the emoluments by rupees fivehundred. Sunita happily agreed to work for the additional rupees five hundred offeredby Yogita. In this case the parties to the contract agreed to make some changes in theterms of contract. By doing so the old contract is discharged and the parties arebound by the changed contract.3 Rescission: In this the parties decide to terminate the contract before the contract isdischarged by performance. This can be done in the following circumstances:Rescission can take place by mutual consent. Here both the parties mutually agree toterminate the contract.Illustration 1 Yogita offered to keep Sunita as her maid for rupees two thousand on amonthly basis. Sunita accepted the offer and promised to start work from the first dayof next month. However Sunita met with an accident and injured her leg. Sheapproached Yogita and showed her reluctance to join. It was mutually decided toterminate the contract. Sunita was no longer bound to join as a maid from nextmonth.4 Remission: remission means acceptance by the promisee of a lesser fulfillment ofthe promise made by the promisor. This can be done in the following three ways:The promisee can remit wholly or in part the performance of the promise made tohim/her by the promisor. If the promisor has performed less than what he/she hadpromised and the promisee accepts it without complaining then this is calleddischarge of contract by remission.5 Waiver: In this case the promisee entitled to claim performance from the promisormight waive the performance. He no longer wants the promisor to execute his/her
  • 55. performance and therefore the promisor is no longer under any obligation to performhis/her promise.Illustration: Yogita offered to keep Sunita as her maid for rupees two thousand on amonthly basis. Sunita accepted the offer and promised to start work from the first dayof next month. The very next day Yogita forbade Sunita from working as a maid. ThusSunita is no longer under any obligation to perform her promise.8.3 DISCHARGE BY LAPSE OF TIMEA contract is to be performed within a reasonable period. If the contract is notperformed within that period then the contract comes to an end and no legal actioncan be taken by the promisee after that. In case of contracts the period of limitation isthree years. If none of the parties file a suit within this time, the contract becomestime barred. Once the contract becomes time barred the contract becomesunenforceable. It cannot be enforced in the Court of law.Illustration: Jhankar took a loan of rupees ten thousand from Gurmeet on firstJanuary 2005. She was to repay the loan with interest on first January 2006. Gurmeetwent to the United States in October 2005 and Jhankar did not repay the loan moneyon first January 2006 to Gurmeet. Three years elapsed and Gurmeet did not take anylegal action against Jahnkar for non-payment of loan. Thus the debt became timebarred.8.4 DISCHARGE BY OPERATION OF LAWAt times law discharges the contract, i.e. the law regards the contract as terminated. Inthe following cases law regards contract as discharged.1 Death: When in a contract the performance of the contract is to be made personallyby the promisor and his/her skill and knowledge is required for discharging his/herobligation in such a case if the promisor dies then automatically the contract comes toan end. Law discharges the contract. If the personal skill and knowledge of thepromisor is not required in discharging the contract then after he/she dies the contractis not discharged and the rights and liabilities of the deceased promisor passes on tohis/her legal representatives and it is the duty of the legal representatives to dischargethe obligations under the contract.Illustration: Heeralal promised to make a painting of Santosh on her birthday. BeforeSantosh’s birthday Heeralal died of a heart attack. Hence the contract terminatedandHiralal was discharged of all his liabilities.
  • 56. 2 Insolvency: Once a person has been declared insolvent by the Court of law he / sheis released from all the liabilities. The contracts, which were entered by him / herbefore being adjudicated as insolvent are discharged after he/ she becomes insolvent.Illustration: Jeetendra entered into an agreement with Radhika to buy thousandshoes manufactured by Radhika in the first week of March. In the month of FebruaryJeetendra was declared insolvent as a result the contract between him and Radhika isdissolved and Jeetendra is released from his liability to buy shoes from Radhika.3 Merger: In this case the contract giving inferior rights to a person merges into asuperior right. The contract giving the inferior right is discharged and is replaced bythe one giving superior right.Illustration: Ragini mortgaged her gold bangles and took rupees two lakh fromShambhu. She promised to pay Shambhu rupees two lakh with interest within twoyears. Two years expired and Ragini was unable to pay the money. Hence Shambhuwho was a bailee under the contract after the time elapsed became the owner of thegold bangles. The contract originally entered between Shambhu and Ragini gave theright of a bailee to Shambhu but after the expiry of two years the contract gaveShambhu the right of an owner, which was a superior right.4 Unauthorized material alteration: Any alteration made in the contract by one partywithout informing the other party or without the consent of the other party will makethe contract void. The contract will no longer be enforceable in the Court of law.Illustration: Ram offered to sell his house to Shyam for rupees ten lakh and Shyamagreed to buy it. without informing Shyam Ram raised the amount from rupees tenlakh to fifteen lakh. Hence the contract became void.8.5 DISCHARGE BY IMPOSSIBILITY OF PERFORMANCEIt is very important that the contract, which is entered into is capable of performance.A contract, which cannot be performed, is void. Impossibility of performance is oftwo types:1 Initial impossibility2 Subsequent impossibility8.5.1 Situations where the doctrine of supervening impossibility is applied areas follows:1 Destruction of subject matter: If the subject matter is destroyed after the formationof the contract, without the fault or negligence of either of the parties the contract
  • 57. comes to an end. Once the main objective of the contract has been destroyed it is notpossible for the parties to execute the contract. If the destruction has been due to thenegligence of the parties then the party due to whose fault and negligence the subjectmatter has been destroyed is liable to compensate the other party.Illustration 1: John promised to sell his house to Gangadhar and Gangadhar agreedto buy the house. But before John could sell it there was an earthquake and the housecollapsed. Thus the contract comes to an end.2 Non-existence or Non-occurrence of state of things necessary for performance:Sometimes the subject matter, which is required for performance changes its form orceases to exist in the same state in which it was at the time of entering the contract. Insuch a case the contract comes to an end.Illustration: On a very hot day of summer Aishwarya ordered ten bricks of vanillaicecream from mother dairy. The salesman at mother dairy agreed to deliver the icecreams at 6 P.M. in the evening. Aishwarya’s house was five kilometers away fromthe mother dairy. The salesman sent a man on the bicycle with five bricks toAishwarya’s house. On the way there was traffic jam and the ice creams melted. Thedeliveryman reached Aishwarya’s house with melted ice creams. Aishwarya is longerliable to take delivery of the melted ice creams. Hence the contract becomes void.3 Death or incapacity of party: Where the nature of contract is such that thepromisor’s personal skill is required and if the promisor dies or becomes incapable ofexecuting the contract then the contract becomes void. In case the personal expertiseor skill of the promisor is not required then after his/her death the liability of thepromisor will be borne by his/her legal representatives and the contract does notbecome void.Illustration 1: Rajan promised Sarita the director of a play to act as a lead hero inher play. But just before the play Rajan met with an accident and fractured his limbs.The contract became void due incapacity of the promisor.4 Change of law: When the contract is formed between two parties there is nothingillegal about it but subsequent to the formation of the contract a new law is made or achange in the existing law is done which makes the implementation of the contractillegal. Thus the contract becomes void.Illustration: Azad Singh promised to rent his house to Zakir Hussain to run his
  • 58. business. Very soon Delhi Government by an order prohibits the residents on thatlocality from using the house for any commercial purpose. Hence the contract is void.5 Outbreak of war: Contracts entered into with citizens of other countries becomesimpossible to perform on the declaration of war with them. Such contracts are eithersuspended or are resumed after the war is over. During the war the parties to such acontract cannot perform their obligations. Hence the contract is void.Illustration: Soham of Pakistan entered into an agreement with Angela of India to sellwoolen kaftans. Before the Kaftans could be delivered to Angela there was warbetween India and Pakistan. Hence the contract was discharged due to impossibilityof performance.8.6 DISCHARGE BY BREACH OF CONTRACTIf one of the party under a contract does not perform his / her obligation it is calledbreach of contract. Breach of contract discharges the contract thus it brings to an endthe obligations created by the contract on the part of each of the parties. The partywho has been breached can sue the other party for the breach.Illustration: Gupta Sweets took order from Mr Ranjit to prepare thousand ladoos forthe puja and deliver them in the morning on the day of the puja. Guptaji was unableto deliver the sweets hence the contract is discharged by breach of contract. Mr ranjitcan sue Guptaji was breach of contract. Contingent ContractsA contingent contract as defined by Section 31 of the Indian Contract Act is a contractto do or not to do an act depending on an event that is collateral to the contract, whichmay or may not happen. If a contract is made between two people to exchange somegoods on the expiry of a period or on the death of a certain person it is not consideredto be a contingent contract because it is based on certainty of event.9.1.1 Essentials of Contingent ContractsContingent contracts consist of important essential elements. These are the following:1. Uncertain Event: The parties making the contract make an agreement that theperformance of the contract will be dependent on a future uncertain event.Illustration: Latika participated and won a beauty contest. Another contest may beheld in Mumbai to select Miss India. If she participates she may win the contest. Theuncertain event is that the contest may or may not be held and also she may or may
  • 59. not win because there will be other contestants as well. Therefore the outcome is alsouncertain.2. Validity of the Contract: Contingent contracts are valid. Insurance contracts are anexample of contingent contract in which the liability arises when an uncertain eventhappens.Illustration: Nirmeet took an International medical policy as it was mandatory forher while traveling to the United States of America. If she falls sick, only in that eventthe liability of the insurance company will arise and it will have to pay.3. Conditional Contracts: Contracts can be absolute or contingent in nature. Anabsolute contract is one in which the promisor is bound to perform. In a conditionalcontract, performance depends on the happening or not happening of an uncertainevent, collateral to the contract. Contingent contracts are conditional in nature. Theycan be distinguished from absolute contracts, which give reciprocal promises of adependent nature.Illustration: Naju made an agreement to pay Rs 55,000 to Amrita after delivery ofgoods by her on the 16th of October is an absolute contract but Naju will have to payAmrita if Aman does not pay is a conditional contract.4. Event should not be at the discretion of the promisor: The performance of thecontract should not be at the will or pleasure of the promisor. Such contracts do notconstitute a promise at all. However if a third person determines the promise it isacceptable and it constitutes a promise.Illustration: Irfan promises to pay Prem Rs 25,000. This is not a contract because thepromisor determines the amount and promise himself. promises to pay Rs 42,000 toPrem and the amount has been determined by Prabhat, it is a contingent contractbecause it is not at the discretion of the promisor but by a third person.It is a validpromise.9.2 RULES REGARDING ENFORCEMENT OF CONTINGENTCONTRACTSThe following are the rules regarding enforcement of contingent contracts. They areprovided in Sections 32 to 36 of the Indian Contract Act.1. The happening of a future uncertain event: Section 32 of the Act states that acontingent contract to do or not to do anything on the happening of an uncertainfuture event can not be enforced until the event actually happens. If the eventbecomes impossible the contract will become void.
  • 60. 2. The non-happening of an uncertain event: Section 33 of the Act states thatcontingent contracts to do or not to do can become enforceable only when the henIrfan185 event. event becomes impossible. If the event is possible the contract cannotbe enforced.3. When an event is deemed to be impossible: According to Section 34 when anuncertain event is dependent on the future conduct of a third party, the event will beimpossible if the person does not act although it is possible for him to do so within aparticular time. In other words when the contract is contingent due to the conduct ofthe third person and the performance of the contract depends on the decision or actionof the third person.4. The happening of an event within a specified fixed time: Section 35 states thatwhen a contingent contract to do or not to do any thing depends on specified fixedtime and if the event within or before expiry of the time becomes impossible, itbecomes void.5. Non-happening of an event within a specified fixed time: The same section asabove (Section 35) also states that if an event does not happen and the promise has tobe performed during that fixed time the contract can be enforced only if the eventdoes not happen within that fixed specified period.6. Impossible events: A contract which is dependent on an event that is impossible isvoid whether the impossible situation was known or un-known to the parties to thecontract when the agreement was made (Section 36). QUASI CONTRACTA contract is formed by an agreement, which is enforceable by law. However in somecases contract is formed without any agreement. When there is no offer andacceptance and the parties have no intension to enter into a contract yet a contract isformed. Such contracts are called Quasi Contracts.10.2 TYPES OF QUASI CONTRACTSThe various types of Quasi-Contracts are as follows:! Supply of Necessaries:According to section 68 of the Indian contract act if a person has supplied necessarygoods and services to an incompetent person96 or to any one whom the incompetentperson is legally bound to support then the person is entitled to be reimbursed fromthe property of the incompetent person.
  • 61. Illustration: Raunak Ali was a lunatic and his children were studying in school andtheir tuition fee had not been paid for the last three months. In this case Raunak Ali isliable for the payment of his children’s school fee and the fee will be paid from hisproperty. He cannot be made personally liable for the school fee.2 Payment by an Interested Person:According to section 69 a person who is interested in the payment of money whichanother is bound by law to pay, and who therefore pays it, is entitled to be reimbursedby the other.Illustration 1: Jhumpa had kept her car in Shambhu’s garage as there was renovationgoing on in her house. Shambhu took Jhumpa’s car without her consent and hit thecar against the tree. He left the car at the nearest motor station for repair andinformed Jhumpa about it. Jhumpa went to the motor station and paid the bill forrepair amounting to Rs.5000. In this case Jhumpa is entitled to be reimbursed byShambhu.3 Obligation to Pay for Non-gratuitous Acts:According to section 70 when a person lawfully does anything for another person ordelivers anything to him, not intending to do gratuitously, and such other personenjoys the benefit thereof, the latter is bound to make compensation to the former inrespect of, or to restore, the thing so done or delivered. If the person does somethingfor the other gratuitously then the latter is not bound to compensate.Illustration 1: Runjhun bought vegetables and then went to see her friend Munmun ather house. While leaving Munmun’s house she forgot to take the vegetables. Munmuninstead of returning the vegetables to Runjhun cooked them and ate them. She isliable to compensate Runjhun for the vegetables.4 Responsibility of Finder of GoodsAccording to section 71 of the Indian contract act a person, who finds goodsbelonging to another and takes them into his custody, is subject to the sameresponsibility as a bailee99. He is bound to take as much care of the goods as a manof ordinary prudence would, under similar circumstances, take of his own goods ofthe same bulk, quality and value. He must also take all necessary measures to trace itsowner. In case the finder of goods does not try to trace the owner then he/she will beguilty of wrongful possession of goods. Till the owner is found the finder of goodscan retain the goods as his own property.Illustration: Liliput was walking on the road and found a purse on the pavement. He
  • 62. picked it and found two thousand rupees, a driving license and two credit cards in thepurse. It was Liliput’s responsibility and therefore obligation to find the owner of thepurse and return the purse to him or else he could deposit the purse at the nearestpolice station but he was at no point in time entitled to retain the purse and itsingredients as his own. However the finder can retain the goods and use them for his/her own purpose or even sell them if he/she wishes to. The cases where the finder hasthe right to sell the goods are discussed below:5 Mistake or coercionAccording to section 72 a person to whom money has been paid, or anythingdelivered, by mistake100 or coercion101, must repay or return it to the person whopaid it by mistake or coercion.Illustration: Rajbir went for shopping and bought a shirt worth rupees three hundred.He gave cash to the salesman. He gave 2 hundred rupee notes and 1 five hundredrupee notes thinking that it was a one hundred rupee note. It was a mistake thereforethe salesman is liable to return the extra money he had to Rajbir.10.3 QUANTUM MERUITQuantum Meruit means “as much as earned” or as much as merited. When a personhas done some work under a contract, and the other party repudiates the contract, orsome event happens which makes the further performance of the contract impossible,then the party who has performed the work can claim remuneration for the workhe/she has already done. Similarly if a person expressly or impliedly requestedanother person to render him/her service without specifying any remuneration, but thecircumstances of the request imply that the service is to be paid for, there is implied apromise to pay quantum meruit, i.e., so much as the party rendering the servicedeserves. The right to claim quantum meruit does not arise out of contract as the rightto damages does; it is a claim on the quasi-contractual obligation, which the lawimplies in the circumstances.The claim for quantum meruit arises only when the contract is discharged and onlythe party who is not in default can bring it. In the following cases claim for quantummeruit can arise:1. When an agreement or contract is void: When an agreement is discovered to bevoid, or when a contract becomes void, any person who has received any advantage
  • 63. under such agreement or contract is bound to restore it, or to make compensation forit, to the person from whom he/she received it.Illustration: Salim was a horse trader from Saudhi Arabia who had come to visit hisfriend Raju in India. Raju wanted to buy a horse named Abdula and gave Salim anadvance of rupees twenty thousand for him. After Salim went back to Saudhi Arabiahe found that the horse had died. Hence the contract became void and so Salim wasliable to return twenty thousand rupees to Raju.2. When something is done without any intension to do so gratuitously:When a person without any intension to do so gratuitously to another person does athing and such other person enjoys the benefit thereof, he/she is bound to makecompensation to the former in respect of, or to restore, the thing so done or delivered.Illustration: Anita went to visit her friend Ekta and by mistake left her newly boughtjacket at Ekta’s place. Next day Ekta went to Shimla for a ten day vacation and tookthe jacket with her. As the jacket was not a gift by Anita to Ekta therefore Ekta wasbound to either return the jacket or pay the price for the jacket to Anita.3. When there is an express or implied contract to render services but there is noagreement as to remuneration: If the parties to a contract agree upon somethingwhich is to be done but do not decide about the payment or remuneration for thatwork then in such cases a reasonable remuneration is quantum meruit, which isdetermined by the Court.Illustration: Ghanshyam a painter promised to paint Shyam’s house but nothingabout the remuneration was decided. As per the agreement Ghanshyam painted thehouse and so was entitled for a reasonable remuneration to be paid by Shyam.4. When the completion of the contract has been prevented by the act of theother party to the contract. When two parties enter into a contract and one of themlater prevents the other from executing the contract then in that case the party who hasbeen prevented is to be compensated for the quantum of work done by him/her.Illustration: Ghanshyam a painter promised to paint Shyam’s entire house for rupeesthirty thousand. Ghanshyam painted one room and a kitchen and was asked byGhanshyam to quit. Ghanshyam was entitled to be paid the remuneration for paintingone room and a kitchen5. When a contract is divisible: When a contract is divisible and the party not indefault has enjoyed the benefit of the part performance, the party in default may sue
  • 64. on quantum meruit. But if the contract is not divisible which means that the contractrequires complete performance as a condition of payment, the party in default cannotclaim remuneration on the ground of quantum meruit.Illustration: Ghanshyam a painter promised to paint Shyam’s car for rupees fivethousand. Ghanshyam painted just half the car and left the work. Hence he was notentitled for the remuneration because the work was not divisible and the contractrequired complete performance6. When a contract is completely performed but badly: When a contract iscompletely performed but badly, the person who performed the contract can claim thelump sum but the other party can make deductions for bad work.Illustration: Ramu a cook promised to make food for 20 guests at a party, which wasto be held at Mr Nair’s house for rupees ten thousand. As per the agreement Ramucooked food but the food was very bad to taste. There was too much of salt andpepper in the food as a result the guests left the party without eating much Mr. Nairhad a right to deduct from the remuneration promised to Ramu for the badpreparation. Breach of Contract11.1 What is Breach of Contract?Breach of contract occurs when one of the parties to the contract refuses to performhis obligation under a contract. Breach of contract may be either partial or total butthe effect is that one of the parties fails to perform his part of the obligation. Whenbreach of contract takes place then the aggrieved party is discharged from performinghis part of the obligations of the contract. The aggrieved party also has the right totake action against the party not performing his commitment under the contract.Breach of contract is of two types. These are anticipatory breach and actual breach.11.4 REMEDIES FOR BREACH OF CONTRACTWhen a breach of contract occurs, the aggrieved party has certain options available tohim/her. The following course of action is available to the aggrieved party forenforcing his/her rights if breach occurs:11.5 RESCISSION OF THE CONTRACTWhen there is a breach of contract by one party, the other party has the right torescind the contract and also refuse any further performance on the contract. By
  • 65. rescission of the contract the aggrieved party is also free from discharging his roleunder the contract.The aggrieved party also has the option to sue the party under breach of contract fordamages under Section 75 of the Indian Contract Act. If this option is taken then theaggrieved party has to file a suit for rescission of the contract. If the court grants theaggrieved party rescission of the contract then the contract is cancelled. The aggrievedparty may now no longer fulfill his obligations under the contract. He also has theoption to apply for compensation for losses that have occurred to him by breach of thecontract through non completion of the contract by the other party.11.6 SUIT FOR DAMAGESDamages are the monetary compensation for any loss that is suffered by an aggrievedparty due to breach of contract. Since the aggrieved party has been inconvenienceddue to breach of the contract the court decides in his favour and compels the party atfault to accept responsibility for the loss and compensate the aggrieved party. Thedamages depend on the amount of loss occurred due to breach of contract. The partieswho have made an agreement can settle the amount of damages themselves whensuch a breach occurs. Sometimes conflicts arise and price settlement is difficultbetween the two parties. In this case the court makes an assessment of the losses andthe damages have to be paid to the aggrieved party based on this assessment. Section73 lays down the different types of damages that an aggrieved party can claim. Theseare the following:! General or ordinary damages! Special damages! Exemplary damages! Nominal damages11.6.1 General or Ordinary DamagesGeneral or ordinary damages arise out of breach in the usual course of the nonperformance of the contract. The aggrieve party has the right to claim damages for thenatural or direct losses occurred due to breach of the contract. General losses do nothave any provision for damages in case of indirect and remote losses.11.6.2 Special DamagesCompensation for special losses is called special damages. Compensation is recoveredonly in special circumstances and if it is brought to the notice of the defaulting party.
  • 66. When a party claims special damages it has to prove that the other party to thecontract, knew at the time of making the contract, that there would be a loss in specialcircumstances, in case of breach of contract.11.6.3 Exemplary damagesExemplary damages are also called vindictive damages. They are awarded by thecourt if a party has suffered mentally or emotionally due to breach of the contract. Thecourt makes an exception to general principle that damages should be awarded onlyfor financial loss due to breach of contract.The law finds it difficult to compensate for mental pressure or suffering orhumiliation of the aggrieved party due to breach of the contract. It usuallycompensates for financial losses. In exceptional cases it awards exemplary damages.11.6.4 Nominal DamagesNominal damages are awarded when in a breach of contract the aggrieved party doesnot have any losses due to the breach. The courts however treat this seriously so thatsuch types of breach are not made by the parties. Therefore, they award a small tokenas compensation to take note of the offence made by the guilty party. A smallcompensation may be charged so that the guilty party so that he recognizes hismistake.11.6.5 Rules Regarding of DamagesThe rules are a guide for the courts to measure the damages for the aggrieved party.The following are the types of damages awarded by the court:(1) Compensation: The courts award compensation and not penalty because theobjective is that the aggrieved party should be compensated and not to prove a partyguilty of punishing him for causing breach. Law does not consider breach of contractto a crime for punishment.(2) Limited damages: The court awards compensation to the aggrieved party whenthe contract is not performed according to agreement. It does not pay damages forexpectations of the aggrieved party or for incidental or remote causes that are notconnected with the contract.(3) Damages attributed directly to the contract: Damages are awarded by the courtfor losses occurring on due course of the contract. Damages may be general or specialdepending on the circumstances of the case.
  • 67. (4) Stipulation for liquidated damages or penalty: The parties to the contract canthemselves stipulate the damages to be given to the aggrieved party either by way ofliquidated damages or penalty. English law and Indian law defined stipulation ofamount of damages differently.(5) Damages under sale of goods: In sale of goods there are several problems ofbreach of contract the aggrieved party will get the difference between the contractprice and the market price on the date of the breach of the contract as damages.(6) Expenses of the suit: The expenses of conducting a suit in the court can berecovered from the party who has created a breach to the contract. However, it is thecourts discretion to award the cost of the suit to the guilty party.Enhanced rate of interest: Section 74 of the Indian Contract Act states thatstipulation for increase interest from the date of breach can be considered asstipulation by way of penalty. The court can disallow the enhanced rate of interest if itis exorbitant. The following points may be noted in this regard:1. Interest can be paid only if there is an express or implied agreement otherwise itcannot be paid as damages.2. A stipulation for enhanced rate of interest from the date of default is treated aspenalty if it is too high but if it is reasonable the court allows recovery of the interestto the aggrieved party.3. A party may be allowed the payment of compound rate of interest but this ispossible when the interest rate is not enhanced.Illustration: Amit gives a bond to Sanjit to pay him Rs. 4,000 with interest of 15% perannum with a stipulation that if there is a breach then the interest will be payable at45% from the date of default. This is called a stipulation by way of penalty and Sanjitwill be allowed to only recover that amount which the courts consider to bereasonable.11.7 SUIT FOR SPECIFIC PERFORMANCEThe court can use its discretion when it is essential to order the party who has made abreach of a contract to perform what was intended to be done in the contract betweenthe parties.Law usually does not insist in performance of the contract that a party has refused tocomplete even though the aggrieved party demands justice. The reason for this is thatthe court considers compensation as damages to be the right measure for theaggrieved party. However, in some specific cases courts may order the guilty party to
  • 68. complete the contract entered into between the parties.1. When court orders specific performance: In the following cases the court cangrant relief and direct the guilty party in terms of specific performance of the contract:i) Where there is no standard for quantifying the actual damages that are caused to theaggrieved party by non-performance of the contract.ii) Where the monetary compensation is not an adequate measure of the loss of theaggrieved party. In cases of contracts entered into for sale of immovable property orspecial rare antique pieces or certain items which mean a lot to the aggrieved partyand it cannot be replaced.iii) Where a property of the aggrieved party is held by his agent or trustee and the actis to be done to perform a trust function.2. Where courts will not allow specific performance: The courts will not allow relieffor specific performance in the following cases.1. When the court considers monetary compensation to be adequate for breach ofcontract.2. When contracts are made by trustees or agents who have violated their powers andbreach of contract occurs.3. In contracts of personal nature especially in the case of contract to marry or acontract to stage a show.4. In cases where the courts cannot supervise the performance of the contract becauseit involves continuous duty to complete the contract.5. In cases when the court is of the opinion that enforcement of specific performanceis not possible due to the intricacies of the terms of the contract.11.8 SUIT FOR INJUNCTIONInjunction is an order of the court where a person is prohibited to do a specific act oraction. Sometimes a party to the contract does some action which he has promisedthat he would not do; the court has the right to issue an order to prohibit him to do it.This action is taken by the court when a party is guilty of breach of some negativeterm in the contract. Injunction is therefore a negative order of the court that stops aparty from some action. It is in other words a preventive relief to a party at thediscretion of the court. To give an injunction there are certain requirements of thecourt. These are the following:! The contract between the parties should consist of two parts. One agreement shouldbe affirmative and the other should be negative in nature.
  • 69. ! The negative part of the agreement should be separate from the positive aspect.! The person applying for injunction should not have failed in completing thecontract..11.9 SUIT UPON QUANTUM MERUITQuantum Meruit means ‘as much as earned’. It is a payment for the proportion ofwork that is done when work cannot be measured in terms of money. The doctrine ofquantum meruit is legally applied in some cases when there is a breach of contract. Itis like compensation when the performance of the work is not complete. A reasonablecompensation is given to the extent that the performance has been made. Since noremuneration was fixed for completion of the work to that incomplete stage, someamount is paid because further performance has been stopped either because there is abreach of contract or when an agreement is discovered to be void.In a following cases quantum meurit can be applied for:(a) Breach of contract: If a party has completed a part of his performance to thecontract and the other party decides not to complete the contract and work has to bestopped due to breach of contract, quantum meurit will apply.(b) Void agreement: When a person in the course of the contract completes some partof his performance but it is discovered that the agreement is void. He becomesentitled to some reasonable remuneration. (c) Implied payment: When a party to the contract performs and the other partyenjoys the benefits of the work, he is bound to compensate the other with thereasonable sum, even though no agreement for payment was made formally. Theparty had performed his part of the work without any intention of doing itgratuitously.(d) Divisible and non divisible work: Quantum meurit can be paid only when work iscompleted. If it is divisible it will be paid for that part of the work that is completed. Ifit cannot be divided the party will not be entitled to claim any compensation. BAILMENT AND PLEDGE12.1 DEFINITIONAccording to Section 148 of the Contract Act “A bailment is the delivery of goods byone person to another for some purpose, upon a contract that they shall, when thepurpose is accomplished, be returned or otherwise disposed of according to the
  • 70. directions of the person delivering them”. Some of the examples of bailment are- Acloth given to a tailor for stitching, a watch given to a shop for repairing, a friendlending his bicycle to another friend for riding it and jewelry taken on rent forwearing it to party.The person delivering the goods is called the ‘Bailor’ and the person to whom thegoods are delivered is called the ‘Bailee’118.Illustration 1Ram sends his car to the garage for repair. In this case Ram is the bailor and thegarage owner is the bailee. The garage owner (bailee) has to repair the car and thenhand it over to Ram (bailor).The following are the essential features of Bailment:! Movable goods: The goods in bailment are goods as defined in section 2 (7) of thesale of goods Act, 1930, which means every kind of movable property other thanmoney and actionable claims. Immovable property like land and buildings are notconsidered as goods.Illustration 1: Ranbir lent his car to Jeetendra for a week for rupees 3500. This is acase of bailment where Ranbir is a bailor and Jeetendra is a bailee. Jeetendra isliable to pay Ranbir rupees 3500 and also return the car after a week.! Delivery of goods: Section 149 of the Indian contract act 1872 explains the mode ofdelivery of goods. It states that there may be two modes of delivery. Actual deliveryand constructive delivery. In actual delivery the bailor hands over physical possessionof goods to the bailee and in constructive delivery the bailor does not hand overphysical possession of goods but does something which has the same effect of puttingthe goods in possession of the bailee.Illustration 1: Sita gives a piece of cloth to her tailor for stitching a dress. This is acase of actual delivery where the bailor has physically delivered the cloth to thebailee for stitching purpose and once the purpose has been fulfilled the bailee returnsthe cloth to the bailor.! Some purpose: The delivery of goods from bailor to bailee is done to accomplishsome purpose. If goods are delivered by mistake without any purpose then there is nobailment.Illustration 1: Mr Rastogi went to the presswala (dhobi) to give his clothes forironing. This is a case of bailment where Mr Rastogi is the bailor and presswala is
  • 71. the bailee and the purpose here is to get the clother ironed.! Return of goods: After the purpose for which the goods were bailed to the baileehas been fulfilled the goods have to be returned to the bailor.Illustration 1: Som had given his shoes to the cobbler for repairing the shoes. Afterthe shoes were repaired the cobbler was liable to return the shoes to Som. SimilarlySom too was liable to pay the shoe repairing charges to the cobbler.Kinds of BailmentBailment may be classified according to the benefit derived by the parties. These areas follows:1. For the benefit of the bailor: When the delivery of goods by the bailor to thebailee is done for the exclusive benefit of the bailor and the bailee gets nothing inreturn that is consideration does not pass between the bailor and the bailee.Illustration: Rumu gave a cloth piece to her friend Geeta who was a fashion designerto stitch a shirt. Geeta after stitching the shirt gave it back to Rumu. In this caseRumu is the bailor and Geeta is the bailee and Geeta stitches the shirt without takinganything from Geeta.2. For the benefit of the bailee: When the delivery of goods by the bailor to thebailee is done for the exclusive benefit of the bailee and the bailor gets nothing inreturn. Hence consideration does not pass between bailor and the bailee.Illustration: Rumu lent her saree to her friend Geeta for a wedding party. In this caseRumu is the bailor and Geeta is the bailee and Geeta has to return the saree to Rumuafter the function is over.3. For mutual benefit of both the bailor and the bailee: When the delivery ofgoods by the bailor to the bailee is done for mutual benefit of both the parties. In thiscase consideration passes between the bailor and the bailee.Illustration: Rumu gave a cloth piece to the tailor for stitching a shirt for rupees twohundred. In this case Rumu is the bailor and tailor is the bailee and consideration ofrupees two hundred passes between the bailor and the bailee.Bailment may also be classified as Gratuitous and Non-Gratuitous Bailment.1 Gratuitous Bailment: In this case no consideration passes between the bailor andthe bailee. The bailment for the benefit of the bailor and the bailment for the benefitof the bailee mentioned above are gratuitous bailment.Illustration: Lucky was going out of station for two days. She had a dog Romeo whom
  • 72. she gave to Satish her neighbour for safekeeping. This is a case of gratuitousbailment.2 Non-Gratuitous Bailment: In this case consideration passes between the bailor andthe bailee. The bailment for mutual benefit of the bailor and the bailee is a non-gratuitous bailment.Illustration: Shyama took a necklace on rent from a jeweler for wearing it in a partyfor rupees two hundred. This is a case of non-gratuitous bailment.12.2 RIGHTS AND DUTIES OF BAILOR AND BAILEE12.2.1 Duties of a Bailor(1) To disclose known facts: The bailor should disclose the known faults about thegoods, which he/she has bailed to the bailee. If the bailor does not disclose the defectsthen he/she is liable for any damage caused to the bailee due to such defects in thegoods.Illustration: Sangeet went for a horse riding. He took a horse from the stable that wasmad. The horse owner was aware of the horse’s madness but he did not informSangeet about it. Sangeet sat on the horse and the horse threw him off as a resultSangeet hurt himself. In this case it was the duty of the horse owner to inform Sangeetabout the madness and therefore the owner is liable to compensate Sangeet for theinjury sustained by him.(2) To incur extraordinary expenses of bailment: The bailee is responsible to bearordinary and reasonable expenses of the bailment but for any extraordinary expensesit is the bailor who is responsible.Illustration: Rajni use to leave her daughter in a crèche for rupees 100 a day. Oneday her daughter became sick and was taken to the hospital by the crèche owner andthe owner paid the medical bills. As this is an extraordinary expense therefore it istheduty of Rajni to reimburse the owner all the medical expenses.(3) To indemnify bailee for loss in case of premature termination of gratuitousbailment: If the gratuitous bailment is terminated by the bailor before the specifiedtime then any loss the bailee incurs due to such termination shall not be born by thebailor. However if the loss suffered by the bailee exceeds the benefit he/she hasderived from bailment then in such a case the bailor shall indemnify the bailee.Illustration: Deepak’s relatives had come to Delhi on vacation. He had no vehicle sohe borrowed his friend’s car for two days. He had filled up the petrol tank for rupees
  • 73. two thousand. The very next day his friend came to take the car back. Hence thefriend was liable to pay the petrol cost to Deepak as rupees two thousand was the losshe incurred due to premature termination of the contract of bailment.(4) To receive back the goods: once the purpose has been fulfilled for which thegoods were bailed out it becomes the duty of the bailor to receive back his/her goodsfrom the bailee. He cannot refuse to take back the goods. However if the bailorrefuses to take back the goods then the bailee is entitled to receive compensation forthe expenses he/she incurs in custody of goods.Illustration: Reena had left her cat at her neighbour’s place for two days as she wasgoing out of station. Once she came back it was her duty to fetch her cat back fromher neighbour’s place.(5) To indemnify the bailee: If the title of the good is defective and due to that thebailee suffers a loss then the bailor is responsible to the bailee for the loss suffered byhim/her.Illustration: Krishna found a watch on the road and picked it up. He sold it to Ranifor rupees hundred. The watch was not in a workable condition so Rani got itrepaired for rupees fifty. Later the real owner of the watch came and claimed backhiswatch from Rani. Rani was entilteld to be reimbursed for the loss suffered by her inpurchasing and using the watch from Krishna (the bailor).12.2.2 Duties of a Bailee(1) To take reasonable care of the goods: It is the duty of the bailee to takereasonable care of the goods bailed to him/her by the bailor. According to section 151of the Indian Contract Act 1872 the bailee is to take care of the goods as a man ofordinary prudence would, under similar circumstances, take of his own goods of thesame bulk, quality and value as the goods bailed. Section 152 states that if, in spite oftaking all the reasonable care the goods are damaged or destroyed in any way then thebailee is not liable for the loss, destruction or the deterioration of the goods bailed.Illustration 1: Roopwati gave her mobile phone for repair to Nikhil at his repairshop.Nikhil forgot to keep the phone in the drawer and the phone kept lying on the table.Someone came to the shop and stole the mobile. Later Nikhil found that the mobilehad been stolen. In this case Nikhil is liable to compensate Roopwaiti for the loss asthe loss was due to his negligence.
  • 74. (2) Not to make any unauthorized use of goods: The bailee is not to use the goodsin a manner, which is inconsistent with the terms of the contract. If he/she uses thegoods in an inconsistent manner then he/she is liable for any loss or damage made tothe goods bailed.Illustration: Ragini gave a piece of cloth to her tailor for stitching a kurti. After twodays Ragini went to a friends wedding and there she saw her tailor wearingherstitched kurti. This is not within the terms of the contract of bailment therefore thetailor has to compensate Ragini for using the kurti for using it for personal purpose.(3) Not to mix goods bailed with his/her own goods: The bailee is to keep the goodsbailed to him/her separately from his/her own goods. If the bailee mixes the goodswith his/her goods- With Bailor’s consent- in such a case both the bailor and thebailee shall have a proportionate interest in the mixture produced due to mixing ofgoods.Illustration: Ramvir bought hundred kilograms of rice but due to scarcity of space herequested Shyam to put the rice in his storehouse. Shyam’s storehouse was alreadyfilled with rice. When Ramvir’s rice was kept in the storehouse the rice got mixedwithShyam’s rice. Whenever Ramvir gets the rice he will get his share of twenty kilos fromthe whole bulk.(4) To return the goods: The bailee is bound to return the bailed goods to the bailoronce the purpose for which the goods were bailed has been fulfilled.Illustration: Shilpa had given her car to her friend Sikandar to go to Agra from Delhi.Sikandar took the car to Agra and came back to Delhi the next day. Hence Sikandarisbound to return the car to Shilpa. (5) To return any accretion to the goods: If during the period of bailment anyprofitor addition in value has accrued from the goods bailed then it is the duty of the baileeto return such profit or increase in value to the bailor.Illustration: Mr Sharma’s family was going for a vacation to Goa so they left theirdog Sherly at their neighbor Mr hussain’s house. During that time Sherly gave birthto six puppies. It was Mr Hussain’s duty to return Sherly and her puppies to MrSharma once his family came back from Goa.12.2.3 Rights of Bailor
  • 75. (1) Duties of a Bailee: The duties of a bailee are the rights of a bailor. The bailor canenforce by suit all the duties of the bailee as his/her rights121.(2) Right to terminate the contract: According to section 153 of the Indian ContractAct the bailor can at anytime terminate the contract of bailment if he/she finds that thebailee has done an act, which is inconsistent with the terms of the contract ofbailment.Illustration: Mrs Nagpal had given her cooking gas to her neighbor Mrs Saxena whohad recently shifted in the neighborhood and did not have a gas to cook. Later MrsNagpal found that Mrs Saxena was using the gas for commercial purpose. She wasmaking sweets and various delicacies and serving the dishes to a restaurant. HenceMrs Nagpal had the right to terminate the contract.(3) Right to demand return of goods at any time in case of gratuitous bailment:According to section 159 of the Indian Contract Act in case the bailor has lent thegoods gratuitously to the bailee the bailor has a right to terminate the contract anytimebefore the expiry of the period. However if the termination causes loss to the baileeand the loss is in excess of the benefit derived by him/her then the bailor has toindemnify the bailee’s loss.Illustration: Anshita was a poor girl and did not have money to buy law book. Herclassmate Mangla had two law books. She lent one to her friend Anshita forpreparing for the exam. As the book was old and worn out mangla got the bookboundfor rupees Twenty. Later Mangla lost her law book and so asked Anshita to return thelaw book. However Mangla was liable to pay Anshita rupees twenty for the bindingthe book.(4) Compensation from a wrongdoer: According to section 180 of the IndianContract Act if a third person wrongfully deprives the bailee from the rightful use orpossession of bailed goods or does them any injury or damage then the bailor or thebailee can bring a suit against that person for such deprivation or injury.Illustration: Keshav had visitors at his house so he took ten blankets for one night onrent from a shop. Keshav’s cousin put blankets in a bucket of water. The bankets gotwet and so could not be used in the night. The cousin deprived Keshav from using theblanket and so was to compensate Keshav for the loss.12.2.4 Rights of Bailee1 Duties of a Bailor: The duties of a bailor are the rights of a bailee. The bailee can
  • 76. enforce by suit all the duties of the bailor as his/her rights122.2 Right to deliver goods to one of several joint bailors: According to section 165 ofthe Indian Contract Act if the goods have been bailed by several joint owners, thebailee has a right to deliver them to, or according to the directions of, one joint ownerwithout the consent of all, in the absence of any agreement to the contrary.Illustration: Dinesh took the costume of Ravana on rent for playing the part ofRavana in Ramlila from the shop, which was owned by three brothers Rinku, Pinkuand Tinku. Rinku had given the costume to Dinesh but after the Ramlila was overDinesh went to the shop and returned the costume to Pinku.3 Right to deliver goods, in good faith, to bailor without title: According tosection 166 of the Indian Contract Act the bailee has a right to deliver the goods, ingood faith, to the bailor without title, without incurring any liability towards the trueowner.Illustration: Sunita took her mother’s cloth piece to a tailor and asked him to stitch acushion cover. Later Sunita’a mother visited the tailor and asked him to return thestitched cushion cover to her. The tailor refused to hand over the cushion cover to herand instead returned the cover to Sunita. Although the mother was the owner of thecloth piece however the tailor had a right to deliver it only to Sunita (the bailor).4 Right of lien: Lien means the right to retain possession of the property or goods,which belongs to another person until that person pays the dues or claims. The baileecan exercise the right to lien only till the goods are in his/her custody. As soon as thebailee loses the possession of goods he/she loses the right to lien.12.3 FINDER OF GOODSAccording to section 71 of the Indian contract Act a person who finds goodsbelonging to another and takes them into his/her custody is subject to the sameresponsibility as that of a bailee.The rights of a finder of goods are as follows:(1) Right of lien: The finder of goods has a right of lien over the goods for his/herexpenses. He /she can retain the goods against the owner until he/she receives thecompensation or expenses but the finder cannot sue the owner for such compensationor expenses because he/she incurred those expenses voluntarily.Illustration: Rita found a small puppy that was injured. She took him to a vet and gothis injuries treated. She kept the puppy in her house and after a week the owner of the
  • 77. puppy came to her house and asked her to return the puppy. Rita claimed for theexpenses she incurred on puppy’s medical treatment, food and bedding. The ownerrefused to compensate Rita for the expenses incurred by her so she exercised the rightof lien on the puppy.(2) Right to sue for reward: The finder can sue for a reward, which the owner hasoffered for the return of goods and the finder can also exercise the right of lien tillhe/she gets the reward from the owner.Illustration: Rita found a small puppy but in spite of all her efforts failed to find theowner of the puppy. Later she found an advertisement in the paper that said that apuppy was lost and anybody who finds the puppy will be rewarded with a cash prizeof rupees five thousand. Rita contacted the owner and told him about the puppy. Theowner came and found that it was his puppy but he refused to give the promisedreward to Rita. Hence Rita could exercise the right of lien on the puppy.(3) Right of sale: The finder also has a right to sell the goods12.4 TERMINATION OF BAILMENTTermination means the end of a contract or a discharge of a contract. The contract ofbailment can be discharged in the following ways:(1) On the expiry of the period: When the bailment of good is made for a specificperiod and that period expires then the bailment also comes to an end.Illustration: Mr Gujral took a bike from his neighbor Shrinath for two days as hisbike had gone for repair. He used the bike for two days and then returned the bike toShrinath. Thus the contract of bailment came to an end.(2) On the completion of the task or the achievement of the objective: Whenbailment of good is made for a particular purpose and that purpose gets accomplishedthen the bailment comes to an end.Illustration: Jaggu took Manoj’s mobile to make a call. Once the call has been madethe bailment comes to an end and Jaggu has to return the mobile to Manoj.(3) Inconsistent uses of good by the bailee: When bailment is made and the baileedoes an act, which is inconsistent with the terms of contract then the bailor canterminate the contract.Illustration: Rustam borrowed Kavi’s Car to go to Dehradun but instead he took thecar to Kanpur. Hence Kavi terminates the contract due to inconsistent usage of goodborrowed.
  • 78. (4) Destruction of the subject matter: When the subject matter of the contract getsdestroyed or becomes incapable of use for the purpose of bailment then the bailmentends.Illustration: Mr Arora gave his shirts and trousers for dry-cleaning at the drycleaning shop. The same night there was fire in the shop and the shirt and trousers ofMr Arora got burnt. Hence the contract of bailment came to an end.(5) Gratuitous Bailment: It can be terminated anytime subject to condition laiddown in section 159 (please see gratuitous bailment in this lesson above)(6) Death of the bailor/bailee: In case any of the parties to the contract of bailmentexpires the contract terminates.Illustration: Geeta had given her saree to Sangita for doing some embroidery workonthe border of the saree. Sangita met with an accident and died the next day. Hencethecontract of bailment came to an end.12.5 PLEDGEAccording to section 172 of the Indian Contract Act when bailment of goods is doneas security for payment of a debt or performance of a promise it is called pledge. Incase of a contract of pledge the bailor is called the pledger or pawner and the bailee iscalled the pledgee or pawnee.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender asa security for payment of debt. In this case Ramnath is the pledger, moneylender isthe pledgee and the cow is the good that has been pledged for the performance of thepromise.Bailment and other similar Relations: A comparisonAn agent who has collected money on his principla’s behalf is not a bailee of themoney. In United Commercial Bank Vs. Hem Chandra Sarkar125. The Honorablejustice Setty made an observation in this respect whereby he clarified the distinctionbetween bailment and agency. He said, “One important distinguishing featurebetween agency and bailment is that the bailee does not represent the bailor. Hemerely exercises, with the consent of the bailor (under contract or otherwise) certainpower of the bailor in respect of his property. Secondly, the bailee has no power to
  • 79. make contracts on bailor’s behalf, nor can ha make the bailor liable, simply as bailee,for any acts he does.”A bailment is also different from sale, exchange or barter. In these transactions whatis transferred is not mere possession but also ownership and, therefore, the personbuying is under no obligation to return.12.6 RIGHTS AND DUTIES OF PAWNOR AND PAWNEERights of a Pawnee/ PledgerThe rights of a Pawnee are as follows:(1) Right of retainer: According to section 173 the Pawnee has the right to retain thegoods pledged with him /her if the Pawnor / Pledger does not repay the dues or doesnot perform the promise. The Pawnee may also retain the goods till the Pawnor paysthe interest due on the debt.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender asa security for payment of debt. Ramnath failed to return the money on time as a resultthe moneylender had a right to retain the cow with him till Ramnath paid back theloan amount.(2) Right of retainer for subsequent advances: According to section 174 of theIndian Contract Act if the pawnee lends money to the same pawner after the date ofthe pledge then the pawnee’s right of retention of goods extends to subsequentadvances.Illustration: Ramnath a farmer took loan for rupees fifty thousand from themoneylender for his daughters wedding and he kept his cow with the moneylender asa security for payment of debt for one year. After a year Ramnath paid back all themoney he had taken to the money- lender and also took a fresh loan of rupees twentythousand from him. The moneylender retained the cow as a security for thesubsequent loan.(3) Right to extraordinary expenses: According to section 175 the Pawnee isentitled to receive from the pawnor extraordinary expenses incurred by him for thesafe keeping of the goods pledged with him. Though he has no right to retain thegoods for non-payment of such expenses but he/she can sue the Pawnor for therecovery of such expenses.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender.
  • 80. The cow fell sick and the moneylender had to bear expenses on her medicaltreatment.Hence the moneylender had a right to be compensated by Ramnath for the medicalexpenses. Though the moneylender did not have the right to retain the cow forrecovery of such expenses however he had the right to sue Ramnath (the pledger) forrecovery of expenses.(4) Right against true owner, when the Pawnor’s title is defective: According tosection 178-A if the Pawnor has got the possession of goods which he /she haspledged with the Pawnee under a voidable contract (by fraud, misrepresentation,undue influence and coercion)126 and the contract has not been rescinded at the timeof pledge, the pawnee acquires a good title to the goods. The pawnee gets a good titleonly when he acts in good faith and does not have the knowledge of the Pawnor’sdefect of title.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughters wedding and he kept his cow with the moneylender asa security for payment of debt. Actually the cow belonged to Ramnath’s elder brotherShyamnath. The moneylender was ignorant about this. Hence Shyamnath did nothavethe right to take the cow back from the moneylender during the period of pledge.(5) Has a right to recover from the Pawnor any deficiency arising on the sale ofthe goods and is liable to the Pawnor to return any surplus, if any, realized onthe sale of goods: In this case if the pawnor fails to repay within the due date then thepawnee has a right to sell the goods pawned and recover the money from it. In casethe sale proceeds are more than the loan amount then the pawnee is liable to return thesurplus to the pawnor and if the sale proceeds are less than the loan amount then thepawnee can recover the deficient amount from the pawnor.Illustration 1: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughters wedding and he kept his cow with the moneylender asa security for payment of debt for a year. A year lapsed and Ramnath could not payback the debt. Hence the moneylender sold the cow to recover his money. Afterselling the cow he got rupees ten thousand which was less than the loan money.Hence the deficient money could be recovered from Ramnath.Rights of a Pawnor / PledgerThe rights of a Pawnor are as follows:
  • 81. (1) Right to get back goods: After returning the debt or after performing the promisethe pawnor is entitled to get back the goods.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender asa security for payment of debt for a year. After a year Ramnath returned the money tothe moneylender and took his cow back.(2) Right to redeem debt: In case the pledger fails to repay the debt or does notperform the promise within the stipulated time then he/she may still redeem the goodspledged at any subsequent time before the actual sale of goods take place however thePawnor has to pay any expenses which have arisen due to his / her default.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender asa security for payment of debt for a year. After a year Ramnath could not pay the loanmoney as a result the moneylender decided to sell the cow. Just before the day whenthe cow was to be sold Ramnath arranged the money and gave it to the moneylender.However he had to pay extra money for additional days after the expiry of the loanperiod.(3) Right for preservation and maintenance of goods: The Pawnor has a rightto see that his/ her goods are kept safely with the Pawnee that is that the Pawneepreserves the goods and properly maintains them.Illustration: Ramnath a farmer took loan of rupees fifty thousand from themoneylender for his daughter’s wedding and he kept his cow with the moneylender asa security for payment of debt for a year. Ramnath had a right to see that his cow wasproperly kept with the moneylender.(4) Rights of an ordinary debtor: The Pawnor apart from having all the rightsmentioned above also has the rights of a debtor127. INDEMNITY AND GUARANTEE13.1 WHAT IS CONTRACT OF INDEMNITY?The Indian Contract Act 1872 provides certain special types of contracts. These arecontracts of(1) indemnity,(2) guarantee, (3)bailment and(4) agency. The meaning ofindemnity is to make good the loss that another has suffered or in other words toompensate the party who has suffered a loss. Section 124 of the Act defines contractof indemnity “A contract by which one party promises to save the other from losscaused to him by the conduct of the promisor himself or by the conduct of any other
  • 82. person”.Illustration: Akshay makes the contract to indemnify Neelam against theconsequences of any types of proceedings with respect to a loan of Rs. 2,00,000 lakhswhich Atul may take against her. This is a contract of indemnity.13.2 ESSENTIALS OF VALID CONTRACTS OF INDEMNITYThe following are the essentials of valid contracts of indemnity:(a) The contracts of indemnity must be between two parties, the indemnifier andindemnity holder or indemnified.(b) A contract of indemnity should contain offer, free consent between parties,consideration, competency of both parties and legality of object to become a validcontract.(c) There should be a promise between two parties whereby one party promisesanother to save the other from any losses suffered by him.(d) The losses may be due to the conduct of the promisor himself or any other person.(e) Contracts of indemnity can be express or implied. In an express contract ofpromise is made by a person to compensate the other person in express terms but in animplied contract it is the intention of the promisor to indemnify the other party fromlosses.13.3. RIGHTS OF INDEMNITY HOLDERSection 125 has provided the rights of the indemnity holder. According to it theindemnity holder has a right to recover from the indemnifier some of the amounts thathe has paid on behalf him, if he has acted within the scope of his authority:a) Damages in respect of a promise to indemnify the other in case of a law suit.b) Costs paid by the indemnity holder to defend a suit that was authorized by thepromisor.c) Any amount paid for compromising in a suit authorized by the promisor, if theamount has been authorized by the promisor.13.4 RIGHTS OF INDEMNIFIERThe Act does not provide any rights for the indemnifier. However, it is taken as asilent acceptance of the rights of the promisor. Therefore, it is made equivalent to therights of a surety under Section 141 of the Indian Contract Act. With this explanationof the Act the rights of the promisor are the same as that of a surety in a contract ofguarantee.13.6 WHAT IS CONTRACT OF GUARANTEE?
  • 83. A contract of guarantee according to Section 126 of the Indian Contract Act is acontract to perform the promise or discharge the liability of a third person in case ofdefault. The contract of guarantee consists of three parties. These are the surety, theprincipal debtor and the creditor.a. Surety: A surety is a person who gives the guarantee to pay in case ofdefault.b. Principal debtor: The person for whom the guarantee has been taken bythe surety is the principal debtors.c. Creditor: A promise of guarantee is given to the creditor to whom thepayment has to be made.Illustration 1: Seema gives a loan of Rs. 50,000 to Aditi on the promise that Atul willrepay the loan to Seema if Aditi defaults in her payment. This is a contract ofguarantee.Seema is the creditor. Aditi is the principal debtor and Atul is the surety orguarantor.13.7 ESSENTIALS OF CONTRACT OF GUARANTEEThe contract of guarantee can be performed only when certain essential elements ofthe contract are fulfilled. The following are the essential requirements of a contract ofguarantee.a. Valid contract: A contract of guarantee must have all the essentials of the validcontract like competence of parties, free consent, consideration to make the contractvalid but there are certain exceptions:a. The principal debtor may not be competent to contract. If he is not competent thesurety will become the principal debtor and will be liable personally to make thepayment.b. A surety that makes a promise for the benefit of the principal debtor need not bebenefited. Any promise that a surety makes is sufficient consideration for giving aguarantee.b. Tripartite agreement: In a contract of guarantee there is the involvement ofthree contracts.a. Contract 1: It is a contract between the principal debtor and the creditor on thebasis of which a guarantee of the debt arises.
  • 84. b. Contract 2: It is an agreement between the principal debtor and the surety in whichthe principal debtor accepts the responsibility to indemnify the surety if the paymentis required to be made by the surety.c. Contract 3: It has the contract between the creditor and the surety in which thesurety promises to under take the payment of the debt of the principal debtor in casethe principal debtor defaults his payments.c. Consent: Since the contract of guarantee involves the creditor, principal debtor andthe surety, it is necessary that all the three parties have agreed to the contract.Illustration: Abu sells 5 air-conditioners to Sara. He later request Sonu to pay if Saramakes a default in her payment. Sonu cannot become a surety without the consent ofSara.d. There should be no misrepresentation of facts: Guarantee should be obtained afterdisclosing all the material facts that may affect the degree of responsibility of thesurety. The surety must know all the facts of the case because if he neglects to do hisduty he is responsible for the consequences. Any guarantee that is obtained bymisrepresentation or concealment of facts by the creditor becomes an invalid contractof guarantee.e. Contract may be oral or in writing: A contract of guarantee may be either oral orwritten as given in section 126 of the Act. The position as per English Law is differentto that of the Indian Law. Under the English Law the contract must be in writing butthe Indian Law does not specify it.Hence in India both oral and written contracts are acceptable.f. There should be a principal debt: There has to be a primary liability of a personwho is other than the surety to the contract of guarantee. The surety becomes liableonly if the principal debtor is unable to discharge his obligation. If there is noprincipal debtor, there cannot be a contract of guarantee. In situations when there is apromise by one of the parties for compensating another without involving a thirdparty it becomes a contract of indemnity.2. To summarize according to Section 142 of the Act an invalid guarantee is onewhich is obtained by the creditor through misrepresentation regarding a material partof the transaction.3. Section 143 states that any guarantee in which he creditor maintains silence to thematerial facts also makes the contract of guarantee invalid.
  • 85. 4. Under Section 144 when co-surety does not join and it is necessary for him to giveguarantee with the surety the contract of guarantee will not be valid.5. If there is no consideration between the creditor and the principal debtor, the suretywill be discharged from his liability as the contract will not be valid.Illustration: Malti employs Meena to make the collections of money on credit sales.Meena collects Rs. 3,00,000 but does not account for all the receipts. Meena’s friendaccounted for Malti’s misappropriation of funds of her employer. Malti agreed toretain Meena but expected a guarantee from her friend Atul. Malti did not let Atulknow of Meena’s earlier dishonesty. Atul gave the guarantee. However, thisguarantee cannot be enforced because he does not disclose Meena’smisappropriation of funds.13.8 DISTINCTION BETWEEN CONTRACTS OF INDEMNITY &CONTRACTS OF GUARANTEEThe contracts of indemnity can be distinguished from contracts of guarantee. In afollowing matter:(i) Parties to the contract: Contracts of indemnity comprise of two parties. These areindemnifier and the indemnity holder whereas contracts of guarantee are made withthree parties. These are the principal debtor, the creditor and the surety.(ii) Number of contracts: Contracts of indemnity are between the indemnifier and theindemnity holder. Only one contract is made between them. However, contracts ofguarantee are made out of free contracts. One contract is between the principal debtorand creditor.The second contract is between the surety and the creditor and the third is between thesurety and the principal debtor.(iii) Nature of liability: The indemnifier is independent and has primary liability incontracts of indemnity but in contracts of guarantee the surety has collateral orsecondary liability where as the primary liability is of the principal debtor.(iv) Purpose of contract: Contracts of indemnity provide security against losseswhereas contracts of guarantee provide security to creditors against default of theprincipal debtors.(v) Request: In an indemnity contract the indemnifier does not have to act at therequest of the indemnity holder. In contracts of guarantee the surety can act onlywhen the principal debtor requests him to do so.
  • 86. (vi) Occurrence of liability: In contracts of indemnity liability will arise on thehappening of the contingency but in contracts of guarantee liability will arise whenand existing promise of payment of a debt is not performed.(vii) Interest in the contract: In indemnity contracts the promisor usually has his owninterest in the contract but the surety does not have any interest in the transactionwhen he makes a contract of guarantee.(viii) Right to suit third parties: The indemnifier does not have any right to sue athird party in his own name because he does not have any privty of contract. Only intransactions where there is an assignment in his favour he may sue third parties incontracts of indemnity. In contracts of guarantee the surety has the right to sue theprincipal debtor in his own made after he discharges his debt.13.9 KINDS OF GUARANTEEThere are two categories of guarantees. These are called specific guarantees andcontinuing guarantees.1. Specific guaranteeA specific guarantee pertains to a single debt or a single transaction. It is a simpleguarantee or a specific guarantee when the debt is discharged, then the duty isperformed and the contract of guarantee comes to an end. In a specific guarantee if anew transaction has to be made between two parties a fresh guarantee will have to betaken as the guarantee on the single debt is completed. Guarantee can be for anexisting debt or for a prospective debt or a future transaction.Illustration: Purva guarantees the payment of 5 computers to Ali to be delivered toKhan in March. Ali delivers the computers to Khan and it is paid by him. Purva’scontract of guarantee ends on the payment. He is not liable for any further contractsbecause it is a specific contract pertaining to only five computers. If Khan had notpaid then Purva would be liable to make the payment to Ali.2. Continuing guaranteeAccording to Section 129 a continuing guarantee extends to a series of transactions.The surety is liable for all the transactions as his guarantee extends to all of them untilthe guarantee is removed.Illustration 1: Raju was employed as a driver by Mr. Tiwari on the recommendationof Shiv for collection of credit payments from Delhi. Shiv guaranteed Raju’s honestyand promised to pay in case of any default in payments collected by him (Raju). Thisis a contract of continuing guarantee.
  • 87. 13.10.1 Rights against the Principal DebtorThe surety has the right of subrogation and the right to claim indemnity from theprincipal debtor.(i) Rights of subrogation: When a surety makes a payment to a creditor on behalf ofthe principal debtor in case of default, he acquires the rights of a creditor against theprincipal debtor. He can recover the entire amount that he has paid to the creditor.This is called the right of subrogation.Section 140 of the Contract Act, states that when a surety has performed the duty ormade a payment on behalf of the principal debtor he acquires the rights of thecreditor. He is entitled to claim all the sums he has rightfully paid to the creditor. Healso gets the benefits of security that were given to the creditor when the contract wasentered into.(ii) Rights of indemnity: When a contract of guarantee is entered into there is animplied promise that the principal debtor will indemnify the surety for all thepayments rightfully made by him. If he has made any payments wrongfully he willnot be able to recover any amounts. This has been stated in section 145.Illustration 1: Rahul has to pay Rs. 2,00,000 to Mahesh. Venkat is the surety for thedebt. Mahesh demands the payment from Rahul on the due date. Rahul fails to paytheamount. Venkat who is the surety is compelled to make the payment on behalf ofRahul. Venkat has the right to recover the amount from Rahul with all the benefitspromised to Mahesh as he now acquires the right of a creditor.Is surety a favoured debtor?1. The surety’s liability is secondary. If he becomes insolvent he will not have to payfor the debts of the principal debtor. However, if the principal debtor becomesinsolvent he will still have to pay to the creditor if became insolvent.2. The surety becomes discharged from his liabilities if there is a variance in thecontract but the principal debtor has the liability to pay to the creditor if he defaults.3. In case securities are offered a surety has the right to demand a share. However, theprincipal debtor can not claim a share if his claim is not satisfied.4. The surety has to pay for the principal debtor only when there is a default by theprincipal debtor. However, the principal debtor will have to pay the amount either tothe creditor on the due date or to the surety in case of default.13.10.2 Rights against the Creditor
  • 88. The surety has the following rights against the creditor:(i) Right to claim securities: According to section 141 of the Act the surety has theright of subrogation after performing his duty or making a payment to the creditor. Allthe rights of the creditor are passed on to the surety. Accordingly the surety gets theright to the benefit of every security, which the creditor has against the principaldebtor even if he has no knowledge of the existence of such securities. If the creditorloses the security the surety is discharged of his responsibilities to the extent of thevalue of his security.Illustration: Sunny gives Manju Rs 10,000 on the guarantee of Prem. Sunny has afurther security of Manju’s office table which is made of teak and is of the value ofRs.4000. Sunny cancels the security. Manju becomes insolvent and cannot pay hisdues. Sunny sues Prem on his guarantee. Prem is discharged of his responsibility tothe value of the office teak table.(ii) Right of set off: If the creditor sues the surety, he can claim set-off or counterclaim, which the debtor had against the creditor.Illustration: Deepak took a loan from Sohan for Rs. 8,50,000. Samu guaranteed theloan. Samu also had a claim on Sohan for Rs. 3,00,000. Somu is liable to pay5,50,000. Somu will also claim the benefit of this set-off although he does not haveany personal claim on Sohan.(iii) Right to share reduction: If the surety has paid the amount to the creditor onbehalf of the principal debtor and when he has to recover his amount from the debtor,the debtor becomes insolvent then the surety can claim from the creditor a reductionin his liability by the amount of dividend that is claimed by the creditor from theofficial receiver of the debtor.Case Law 4In Hobson V Bass135J gave a guarantee to B for payment of the goods sold by him toanother person A up to an amount of Rs 1,000. B supplied goods for Rs 2,000. To A.Abecame insolvent and B supplied the goods He asked J to pay. J paid him Rs 1000. Breceived from the official receiver 25% of Rs 2,000 as dividend in insolvency. It washeld that J was entitled to receive a part of the dividend out of the whole receivedthat is 50% of Rs 1000. This is Rs. 500(iv) Right to ask the creditor to terminate debtor’s services: When a person gives aguarantee for the honest performance of another employee and the employee defaults,
  • 89. the surety has a right to the demand that the employee is dismissed. Such dismissalsare usually in the case of fidelity contracts for example contracts relating to insurance.13.11 SURETY’S LIABILITIESThe surety has several liabilities since he has guaranteed the debt. These are discussedbelow:Co-extensive: The nature and extent of a surety’s liability is co-extensive with that ofthe principal according to section 128 of the Indian Contract Act. This means that thesurety has the same liability as the principal debtor. If the principal debtor does notpay on time, the surety will be required to pay to the creditor.Illustration: Amit has taken a loan of Rs 1,00,000 from Shamit and Sanjeev hasguaranteed it. If Amit fails to pay the amount to Shamit on the due date, Sanjeev willhave to pay the amount to the creditor. If an interest rate has been fixed, Sanjeev isalso liable to pay that amount.Reduction in liability: When the principal debtors liability is reduced, the liability ofthe surety will also be reduced.Secondary liability: A surety’s liability is secondary and comes into force only whenthe principal debtor defaults in his payment. If the surety himself becomes insolventbefore the principal debtor defaults his payment his will not be liable to pay anyamount guaranteed by him if the principal debtor makes a default later.Liability restricted to valid contract: If a contract of guarantee is valid the surety willbe liable. If the creditor makes a contract with representation or fraud, then the suretyhas the right of treating it as a voidable contract at his option.Liability when original contract between creditor and principal debtor is void orvoidable: The surety and the creditor have a contract that is independent from theprincipal debtor. Sometimes the original contract between the creditor and theprincipal debtor is not valid but the surety is still liable for the principal debtor. This isin the event of the principal debtor being a minor; the surety does not get absolved ofhis liability. The surety is liable like a principal debtor.When the contract between the creditor and the principal debtor is voidable the suretycan still be liable. Moreover the liability of the surety continues to exist in the event ofthe creditor not making his claim during the period of limitation of 3 years of a debtthe surety is not discharged if the limitation period against the surety exists. But asurety who guarantees a time barred debt is not liable because according to thecontract of guarantee he is not liable beyond the period of the guarantee contract. If
  • 90. the principal debtor is discharged from his liability or dies, the surety is dischargedfrom his liability.Liability on default of principal debtor: The surety becomes liable immediately ondefault of the principal debtor. Before the default the surety does not have to pay ashis liability only begins if the principal debtor does not pay. At the same time, theprincipal debtor does not have to send any notice of default to the surety. The creditorcan sue the surety for the amount immediately on default. Procedurally, he is notrequired to sue the principal debtor first. He can immediately sue the surety for theamount owed to him.13. 12 DISCHARGE OF SURETYThe surety and the so-surety are discharged from their liabilities in the followingcircumstances:Revocation of contract by suretyA contract can be revoked by a surety either by (i) giving notice of revocation or (ii)by death of the surety or (iii) by novation.(i) By notice: A specific guarantee can be revoked by the surety by giving notice tothe creditor. However, this is possible only before the liability of the surety accrues. Ifaction has already been taken, it can be revoked. A continuing guarantee can berevoked for future transactions but the surety cannot be relived from his liabilitiesfrom transactions that have already taken place (Section 130).(ii) By death of surety: In the event of death, the surety is not liable to pay for anytransactions entered into by the principal debtor and the creditor after his death. He ishowever liable for the past transactions. After his death his property cannot beattached for any new contracts made by the creditor and the principal debtor. Hisliability ceases after his death even though notice is not given. As already stated in acontinuing guarantee the same rule will apply. (Section 131)(iii) By novation: When a new contract of guarantee is made and it replaces the oldcontract either between the same parties of the contract or a continuation between atleast one of the old parties with a new parties, the old contract is discharged. Thecontract of guarantee made originally is also discharged.(Section 62)13.12.2 By Act or Conduct of CreditorThe surety is discharged from his liabilities due to a certain act or conduct of thecreditor.
  • 91. (a) Variance in contract terms: The liability of the surety extends to the terms of thecontract between the three parties i.e., creditor, principal debtor and the surety. Anyvariation in terms and conditions must be approved by the parties concerned. If anychanges take place without the consent of the surety, he will be discharged from hisliability after such changes are made (Section 133).If the contract of guarantee consists of several distinct different duties and obligationsthe surety will be discharged from only those duties where there is a variance in thecontract terms.In a continuing guarantee the surety need not perform his duties subsequent to thevariance in the contract as it will discharge him from his liabilities.Illustration: Madhwi is a distributor for consumer products. She employs Munish tosell the goods on commission. Raju is the surety of Munish to Madhwi for giving thecorrect amount of money on sell of goods on which the commission becomes due.After Munish is employed, Madhwi changes the terms of the contract and begins topay a salary to Munish on his request without giving any information to Raju. Thesurety (Raju) is discharged from his liabilities.(b) Release of principal debtor: If the principal debtor is released in a contract by thecreditor, the surety is automatically released from his liabilities or by any act omissionof the creditor which has the effect of discharging him from the principal debtor.Illustration: Rani makes a contract with Tinu to furnish her office for Rs. 5,00,000within one month. Rani promised to supply the furnishing material for the office Minuguarantees the performance of Tinu. Rani does not supply the furnishing material.Minu is discharged from her liabilities of a surety.(c) Compounding by creditor with principal debtor: When the principal debtor andthe creditor make a composition with each other without the knowledge of the surety.This applies to a situation in which a variation takes place from the original contract.In such a situation the surety is discharged from his liability.Illustration: Akhil borrows a sum of Rs. 50,000 from Shobha. Nirma is a surety forthe payment by Akhil. Before the date of payment Akhil and Shobha change the termsof the contract by agreeing that Akhil may pay Rs. 30,000 instead of the wholeamount. Nirma is discharged from his liability.(d) Act or omission impairing surety’s eventual remedy: The surety’s liability isdischarged when the creditor acts or omits to act in a certain way. This action or itsomission becomes inconsistent with the rights of the surety impairing his eventual
  • 92. remedy against the principal debtor, (section 139). If the creditor does not do his dutyrequired towards the surety in the contract of guarantee, the surety can be dischargedfrom his liability.(e) Loss of security: The surety is discharged from his liability if the creditor losesthe security given to him by the principal debtor. The surety will be also bedischarged if the creditor parts with his security without the consent. However hewill not be discharged if the security of the creditor is lost due to natural calamities,or an act of an enemy of a country. CONTRACT OF AGENCYThe term agency has been referred in previous lessons136. It is important to knowwhat exactly is agency? Agency is a relationship between two people where one iscalled the principal and the other is called the agent.14.1 DEFINITIONAccording to Section 182 of the Indian Contract Act 1872 “an agent is a personemployed to do any act for another or to represent another in dealings with thirdpersons. The person for whom such act is done, or who is so represented, is called the“principal”.Illustration: Sukrita a resident of Delhi wanted to buy a house in Shimla so sheapproached a property dealer and asked him to purchase a house for her. Theproperty dealer bought a house from Mr Nagendra in Shimla according to the budgetand the other specifications given by Sukrita. In this case Sukrita is the principal, theproperty dealer is the agent and Mr Nagendra is the third party.Who can be an agent?One can become an agent even without having the contractual capacity therefore evena minor or a person of unsound mind can become an agent. Whether the agent has thecontractual capacity or does not have the contractual capacity it is the principal whowould be held liable to the third party for the acts of the agent. However it is the agentwith contractual capacity who would be responsible to the principal for his/her actsand not the agent without contractual capacity therefore it is in the interest of theprincipal to appoint only those agents who have the contractual capacity.Illustration 1: Badruddin a tailor sent his trainee Ramzan who was twenty one-yearold to his customer Neeta to deliver a kurti. On the way Ramzan lost the Kurti. Hence
  • 93. it is Badruddin who is responsible to compensate Neeta for her lost Kurti and notRamzan however Ramzan is responsible to Badruddin for losing the kurti thusBadruddin if he wants can deduct from Ramzan’s salary the cost of the Kurti or cantake any other action to penalize Ramzan for his irresponsibility.Characteristics of AgencyCertain essential elements of Agency are given below:1 Agreement between principal and agent: It is important that there be anagreement as agency depends on agreement and not necessarily on contract. Acontract cannot be formed with minor because an agreement with a minor is void butan agreement of agency with minor is possible because between the principal and thethird person any person may be appointed as an agent whether it be a minor or aperson of unsound mind.Illustration: Rustam a shoe manufacturer appointed Kapil as his agent to sell shoes.Kapil was just fifteen-year old therefore the agreement between Kapil and Rustam isa void agreement as a result it cannot become a contract. However the agreementbetween them can be treated as a contract of agency because in an agency the agentcan be a minor.2 Intention of the agent to act on behalf of the principal: it is important that theperson (agent) intends to act on behalf of another (principal) only then agency mayarise.Illustration: Prabhu a builder appointed Sooga as his agent to sell houses. Theagreement between them can become a contract of agency only when Sooga gives hisconsent to Prabhu to become his agent.3 Whatever the principal can do personally he/she can do it through his/heragent: The agent can perform all those activities which the principal is liable toperform however the agent cannot perform acts which are personal in character or areannexed to public office such as marriage and duty of a magistrate.Illustration: Ramlal was going to get married so he appointed Shambhu his cousinbrother as his agent to look after his business and all other personal and businessaffairs. Shambhu had the right to run the business on behalf of Ramlal but he did nothave the right to marry on behalf of Ramlal.
  • 94. 4 He who does an act through another does it by himself/ herself: The acts of anagent are the acts of the principal. The principal is liable to the third party for the actsdone by the agent.Illustration: Radheylal a creditor appointed Ramu as his agent to recover paymentsfrom his debtors. Ramu was sent by Radheylal to recover rupees fifty thousand fromSangeeta a debtor. Ramu took rupees fifty thousand from Sangeeta and ran away withit. Hence Radheylal cannot ask Sangeeta to pay the money again. However if Ramu isa major then Radheylal can take legal action against him.5 No consideration required for agency: According to section 185 of the IndianContract Act no consideration is necessary to create an agency. The fact that theprincipal has agreed to be represented by the agent is a sufficient detriment to theprincipal to support the contract of agency.Illustration: Sangeeta was having a headache so she asked her son to go to themarket and get a tablet of disprin. In this case the relation between the mother andson is that of a principal and agent and for getting a tablet of disprin Sangeeta gavenothing in cash or kind to her son. Thus there is a contract of agency without anyconsideration.14.2 CREATION OF AGENCYAgency can be created in any of the following manner:The agent gets authority from the principal. The authority can be given in two ways.Either it can be expressly given or the authority can be implied. Section 187 of theIndian Contract Act defines express and implied authority as under:1 Express authority: An authority is said to be express when it is given by wordsspoken or written. The authority enables the agent to bind the principal by acts donewithin the scope of his/her authority. The written contract of agency is the power ofattorney wherein one person empowers the other to represent him/her, or act in his/herstead for certain purposes.Illustration: Phulki was a garment trader in Delhi. She used to buy her garmentsfrom Jodhpur. Once it was not possible for her to go to Jodhpur so she asked hersalesman Farhan to go and buy the merchandise from Jodhpur.2 Implied authority: An implied authority arises from the conduct, situation orrelationship of the parties. It is inferred from the circumstances of the case. Theagency arises when the principal conducts himself / herself towards the person allegedto be the agent to the third parties in such a manner, as if the principal had conceded
  • 95. to the appointment of that person as agent. This form of agency can be formed in anyof the following manner(a) Agency in Emergency: According to section 189 of the Indian Contract Act anagent has authority in an emergency, to do all such acts for the purpose of protectinghis / her principal from loss as would be done by a person of ordinary prudence inhis /her own case, under similar circumstances. The agent while protecting theprincipal from loss may exceed his / her authority thus giving rise to agency ofnecessity provided (1) He / She was not in a position to communicate with theprincipal (2) Had taken all reasonable care and necessary steps to protect the interestsof the principal. And (3) had acted bona fide.Illustration: Salman was a tea merchant who used to export tea. He had kept Balramas his agent whose duty was to take export orders and then deliver the tea from thestorehouse. One day the storehouse caught fire and Balram poured water toextinguish the fire. Though this was not a part of the duty assigned to him but as anagent it was his implied duty to protect his principal from loss.(b) Agency by Necessity: Sometimes in certain urgent circumstances the law confersan authority on a person to act as an agent for the benefit of another, there being noopportunity of communicating with that other. Such agency is called agency ofnecessity.3 Agency by Estoppel: At times the principal by his / her conduct creates animpression in the mind of a third person that the agent has an authority to act onhis/her behalf. In such case the principal is liable towards the third person for the actsdone by the agent, on the ground of the application of the law of estoppel. The basisof the action is what appears to the third person to be an authority, i.e. apparent orostensible authority conferred on the agent.Illustration: Pankaj had come from America and for few days came to stay with hisfriend Rajinder in Bikaner. Rajinder went with Pankaj to the market and got lunchpacked from a nearby restaurant. While he was getting the lunch packed he told therestaurant owner that Pankaj was like a brother to him. After a couple of days Pankajmoved out from Rajinder’s house and started staying somewhere else. One day hewent to the same restaurant and got the lunch packed and the restaurant owner didnot charge him anything as he thought that Pankaj was taking the lunch onRajinder’sbehalf. Later he charged Rajinder for the price of the lunch.
  • 96. 4 Agency by Holding out: Such an agency is based on the “doctrine of holding out”which is a part of the law of estoppel. In this case also the alleged principal is boundby the acts of the supposed agent, if he / she has induced third persons to believe thatthey are done with his/her authority. But, unlike an “agency by estoppel” “agency byholding out” requires some affirmative or positive act or conduct by the principal toestablish agency subsequently.Illustration: Rajni went to the sweetshop and purchased sweets in the meantime herneighbour’s eight-year old daughter Harshita happened to visit the place. Rajni outofaffection for Harshita asked the shop owner to serve two hot gulabjammuns toHarshita. Rajni paid for the gulabjamuns. One day again Harshita visited the sweetshop and the owner served hot gulabjamuns and mistaking her for Rajni’s daughterdid not ask for the money. Later he recovered the price of gulabjamuns from Rajni.3 Agency by Ratification: Sometimes a person may act as an agent of someone anddoes an act on his/her behalf for which he/she did not have the authority and thatsomeone binds himself / herself for the acts done by the agent then it is called agencycreated by ratification.Illustration 1: Som had a car, which he wanted to sell. He was not at home when abuyer came to see the car. Som’s son Rahul showed the car to him and without askinghis father finalized the deal for rupees fifty thousand. After coming home Som gavehis consent to the deal as a result agency was created by ratification.Some of the essential elements of Ratification are as follows:(a) The principal must be in existence at the time of the contract: It is veryimportant that the principal is in existence at the time when original contract is madebecause rights and obligations cannot be attached to a non-existent person. Thuscontracts entered into by promoters of a company before the company is incorporatedcannot be ratified by it after it comes into existence.Illustration: A promoter of a company (to be incorporated) purchased a land oncompany’s behalf. He purchased the land only by paying half the amount andpromised that the company would pay the balance once it is formed. At the time of thecontract the company was not in existence therefore the promoter cannot beconsidered as the agent of the company and company is not bound to pay the balanceonce it comes into existence (incorporated).
  • 97. (b) The agent must purport to act as agent for a principal who is incontemplation: The agent must expressly contract with the third party as an agent ofthe principal. The principal must be named or must be identifiable.Illustration: Dr Sanjeev went to a property dealer to buy a house. The propertydealershowed him a house and Dr Sanjeev liked it and showed his willingness to buy ithowever the property dealer did not disclose the identity of the owner of the house.Hence contract of agency could not be formed.(c) The principal must have the contractual capacity both at the time of thecontract and at the time of ratification: The principal must have the contractualcapacity both at the time of original contract and at the time of ratification.Illustration: Sapna was suffering from mental sickness and was declared mentallyunsound by the doctors. She went to a property dealer and asked him to sell herhouse. The property dealer on her behalf finalized a deal with a buyer. The propertydealer cannot act as an agent of Sapna because Sapna is of unsound mind so she isincapable to become principal.(d) Ratification must be with full knowledge of facts: The principal must have fullknowledge of all the material facts of the contract, which he /she is to ratify or theprincipal must give an unqualified acceptance where he/she intends to ratify thecontract whatever be the facts.Illustration: Gunia’s mother wanted a new saree to wear in a party. Gunia who was aminor went to a showroom and bought a saree on credit. She showed the saree to hermother and told her the price but the mother did not approve the transaction. HenceGunia’s mother did not ratify the agreement of agency and so agreement betweenGunia and the shopkeeper was revoked.(e) Ratification must be done within reasonable time of the act that is to beratified: Ratification to be effective must be made within a reasonable time after theoriginal contract has been made. If the time has been expressly fixed for theperformance of the contract then ratification must be made within that time.Illustration: Saroj promised to sell his brother’s house to Mr. Kripashankar andinformed her brother about the deal. Her brother asked her to give him sometime tothink. He gave his approval after four months. The agreement between Saroj and Mr.Kripashankar had already lapsed because the contract of agency was not ratifiedwithin a reasonable time.
  • 98. (f) The act to be ratified must be lawful and not void or illegal or ultra vires incase of a company: It is important that the object and the consideration of theagreement entered into by the agent and the third party be lawful. The principalcannot ratify an unlawful agreement.Illustration: Somnath had a fight with his neighbour and he was very upset about it.His friend Shyam came to know of his problem and on his behalf hired some goons tobash up Somnath’s neighbour. Somnath could not ratify the agreement betweenShyam and the goons because the object of the agreement was unlawful.(g) The whole transaction must be ratified: Ratification must be of the wholetransaction. The principal cannot ratify a part of the transaction and reject the rest ofit. He/she cannot accept the benefits and reject the burdens. Either he/she rejects thewhole transaction or accepts (ratifies) the whole transaction.Illustration: Roopwati used to sell cosmetics and bags. She hired an agent Neelam tosell the same in some other locality. Neelam had an agreement with Shalu a buyerwho was ready to buy cosmetics and bags if she was given a discount of forty percent.Neelam agreed to sell the articles at a discount of forty percent after getting theapproval from Roopwati. Roopwati gave her approval to sell only the cosmetics at thediscounted rate and not the bags. The agreement was not ratified because Roopwatiaccepted only one part of the transaction and not the other part.(h) Ratification must not injure the third party: Ratification cannot be effectivewhere its effect is to subject a third person to damages, or terminate any right orinterest of a third person.Illustration: Mr. Singla a sweet shop owner had prepared lots of sweets duringdiwali. After diwali lots of sweets were left unsold and some of them had become staleand unhygienic to eat. Mohan had a party at his house and ordered sweets from MrSingla’s shop. Kishan a helper at the shop took Mohan’s order and agreed to sendtherequired number of sweets. He was sending the stale sweets. Mr Singla was not toratify the agreement because it was injurious to Mohan the third party. (i) Ratification is tantamount to prior authority: ratification relates back to thedate when the act (contract) was done by the agent which means that agency comesinto existence from the moment the agent first acted and not from the time when theprincipal ratified the act (contract).Illustration: Jagan entered into a contract to buy a car from Pawan on behalf of his
  • 99. brother Chandan on 1st February 2008. Pawan was at that time in Agra and was notaware of the contract. He returned on 20th February 2008. After coming he ratifiedthe contract of agency entered into by his brother Jagan. Though Pawan came toknow of the agreement on the 20th February but he ratified the contract from 1stFebruary 2008.14.3 AGENT’S AUTHORITYAuthority of an agent means his/her capacity to bind the principal to third parties. Theagent can bind the principal only when he/she acts within the scope of his/herauthority (Section 226). The types of authorities are as follows:Actual Authority: Actual authority is the acts, which have been assigned to the agentby the principal either expressly (in words spoken or written) or impliedly (inferredby circumstances of the case or the ordinary course of dealings) and thereby bind theprincipal to third party.Illustration: Reenu a garment manufacturer in Punjab appointed Mr. Yadav as heragent to look after her business in the southern states of India. She gave him thefreedom to take decisions only in case of selling the goods for any other case he wassuppose to consult Reenu before taking decision.Ostensible or Apparent Authority: When an agent is employed for a particularbusiness, persons dealing with him/her can presume that he/she has authority to do allsuch acts as are necessary or incidental to such business. Such authority is calledOstensible / apparent Authority. If the act of an agent is in excess of his/her actualauthority, but within the scope of his/her ostensible authority, the principal will bebound by the act of the agent.Illustration: Reenu a garment manufacturer in Punjab appointed Mr. Yadav as heragent to look after her business in the southern states of India. She gave him thefreedom to take decisions only in case of selling the goods and for any other matterhewas suppose to consult Reenu before taking decision. For selling the goods Mr.Yadavhad to take a shop on rent and he took the decision of renting a shop withoutconsulting Reenu. Though renting of a shop was not the actual authority given to Mryadav by Reenu but renting was incidental to selling the goods that was within hisactual authority.
  • 100. Authority in emergency: In an emergency an agent has the authority to do all suchacts for the purpose of protecting his/her principal from loss as would be done by aperson of ordinary prudence in his/her own case under similar circumstancesIllustration: Jaspinder a garment manufacturer in Punjab appointed Mr. Yadav asher agent to look after her business in the southern states of India. She gave him thefreedom to take decisions only in case of selling the goods and for any other case hewas suppose to consult her before taking decision. However few days later Jaspinderhad a heart attack and she was bed ridden. Mr Yadav had no other option but to takedecisions on all matters which had to do with the running of the business withoutconsulting Jaspinder.14.5 RIGHTS AND DUTIES OF AN AGENTDuties of an agentThe agent has the following duties towards the principal:(1) Duty to follow principal’s directions or customs: According to Section 211 ofthe Indian Contract Act the first duty of every agent is to act within the scope of theauthority conferred upon him/her and performs the agency according to the directionsgiven by the principal. When the agent acts otherwise and loss is sustained the agentmust make it good to the principal and if any profit accrues then the agent mustaccount for it.Illustration: Ram asked his sister Lochina to book rail tickets in second class ACfrom Delhi to Assam. Lochina couldn’t get reservation in second class AC so shebooked tickets in First class AC. Ram had not asked her to book tickets in first classAC therefore Sulochna had the option to either pay the extra money on the ticket fromher pocket or cancel the ticket and bear the loss of cancellation herself.(2) Duty to carry out the work with reasonable skill and diligence. According toSection 212 of the Indian Contract Act the agent must carry the work of agency withreasonable diligence and to the best of his/her skill.Illustration: Jyotsna asked her friend to help her buy a second hand car. Her friendwithout doing much research bought a second hand car without test drive andwithoutchecking the parts of the car. After the purchase the car did not start. Hence Jyotsnacould sue her friend for not working with reasonable diligence and to the best of hisability while selecting the car.
  • 101. (3) Duty to render accounts: According to Section 213 of the Indian Contract Act itis the duty of an agent to keep proper accounts of his/her principal’s money orproperty and render them to him /her on demand, or periodically if so provided in theagreement.Illustration: Joseph had a business, which was running all over India. He appointedan agent to look after his business in the eastern part of India. It was the agent’s dutyto keep proper accounts and hand over the money whenever Joseph demanded.(4) Duty to communicate: According to section 214 in case of any difficulty theagent should communicate with his/her principal and seek instructions from him/herbefore taking any steps in facing the difficulty or emergency.Illustration: Jyotna wanted to buy a laptop. She asked her brother to buy one for her.She had given him a budget of rupees fifty thousand. Her brother went to buy thelaptop but couldn’t find any laptop as per his liking within the budget. He liked alaptop, which was worth rupees seventy thousand. As this was a difficult situation sohe rang up Jyotsna and asked her if he could buy the laptop for seventy thousand.Jyotna permitted him to buy the laptop. Hence Jyotna is liable to pay her brother theextra money incurred on the purchase.(5) Duty not to deal on his/her own account: According to Section 215 and 216 theagent must not deal on his /her own account that means that he must buy or sell goodsonly on behalf of his/her principal. If the agent violates this rule then the principalmay repudiate the transaction and can also claim from the agent any benefit, whichmay have resulted to the agent from the transaction.Illustration: Sonpari had hired an agent to sell purses. The agent was to sell purseson Sonpari’s behalf. However the agent started selling the purse as her own andtaking the share of profit, which actually belonged to Sonpari. Hence the agent isliable to return any such monetary profit she made on the transaction to Sonpari.(6) Duty not to make any profit out of his/her agency except his/herremuneration: According to section 217 and 218 an agent must not make any secretprofit out of the agency. The agent must pay to his/her principal all money, whichhe/she may have received on principal’s account.Illustration: Jamshed had asked his nephew Rahim to help him sell carpets. Rahimwas selling carpets at a price higher than what Jamshed had quoted. He was keepingthe excess profit with him. In this case Rahim was cheating Jamshed thereforeJamshed could repudiate the contract and sue Rahim for the profit he made secretly.
  • 102. (7) Duty on termination of agency by principal’s death or insanity: According tosection 209 when an agency is terminated by the death of the principal or due tohis/her mind becoming unsound, the agent must on behalf of the legal representativesof the principal take all reasonable steps for the protection and preservation of theinterests entrusted to him/her.Illustration: Shyamnath had his brother helping him in his firm. Shyamnath got anattack of paralysis and was bed ridden. It was now the duty of his brother to take allpossible steps to protect and preserve the interests entrusted to him by Shyamnath.(8) Duty not to delegate authority: According to section 190 subject to certainexceptions150 an agent cannot delegate his/her authority to another person. He/shehas to perform all the work himself / herself.Illustration: Rakesh asked his friend Sonu to escort his mother from the railwaystation. Sonu asked his brother Monu to get Rakesh’s mother from the station. Sonudid not have a right to delegate his work to Monu.Rights of an agent:The agent has the following rights against the principal:(1) Right of retainer: According to section 217 of the Indian Contract Act the agenthas the right to retain out of sums received on account of the principal for the moneydue to himself/ herself in respect of his /her remuneration or advances made orexpenses properly incurred by him in conducting the business of agency.Illustration: Rakesh a publisher hired an agent Paul to sell books. Paul was to take acommission of five percent on every sale. Paul had a right to deduct his commissionfrom the total sales he made before handing over the proceeds to Rakesh.(2) Right to receive remuneration: According to section 219 and 220 the agent isentitled to receive his/her agreed remuneration and if nothing is agreed, to areasonable remuneration, unless he/she agrees to act gratuitously. In the absence ofany special contract the right to claim remuneration arises only when the agent hasdone what he/she had undertaken to do. The agent can claim remuneration once thework has been completed even though the contract is not executed on account ofbreach either by the principal or the third party.Illustration: Rakesh a publisher hired an agent Paul to sell books. Nothing wasdecided about the terms of remuneration to be given to Paul. Paul was able to sellfifty books and he returned all the proceeds he had made by selling books to Rakesh.However Paul had a right to claim a reasonable amount of remuneration from
  • 103. Rakesh. (3) Right of lien: According to section 221 of the Indian Contract Act an agent hasthe right to retain goods, papers and other property, whether movable or immovable,of the principal received by him/her until the amount due to himself/herself forcommission, disbursements and services in respect of the same has been paid oraccounted for to him / her. The lien is a particular lien but by a special contract theagent may have a general lien151.Illustration: Rakesh a publisher hired an agent Paul to sell books. Nothing wasdecided about the terms of remuneration to be given to Paul. Paul was able to sellfifty books and he returned all the proceeds he had made by selling books to Rakesh.Rakesh did not pay any remuneration / commission to Paul. Paul had a right to retainthe unsold books till his remuneration was paid.(4) Right to be indemnified: According to section 222 of the Indian Contract Act anagent has all the right to be indemnified against the consequences of all lawful actsdone by him/her in exercise of the authority conferred upon him/her. The agent alsohas a right to be indemnified against the consequences of acts done in good faith.Though it turns out to be injurious to the rights of the third persons (section 223).Illustration: Ramsingh wanted to sell his scooter. He did not have time so he askedhis brother Vishal to sell the scooter. Vishal sold the scooter to Mr. Goswami forrupees ten thousand. Mr Goswami was not satisfied with the deal and he wanted tocancel the deal. Vishal did not cancel the deal so Mr Goswami sued Vishal for givinghim a defective scooter. It was the duty of Ramsingh to indemnify his brother’s act.(5) Right to compensation: According to section 225 the agent has the right to becompensated for injuries sustained by him/her due to the principal’s neglect or wantof skill.Illustration: Sangram used to manufacture crackers. Sumeet had taken agency ofselling crackers for Sangram. The crackers, which Sumeet took to his shop fromSangram were not properly packed. On the way Sumeet lit a cigarette and one ofcracker caught fire. Sumeet received burn injuries. Hence it was Sangram’s duty tocompensate Sumeet for his injuries.(6) Right of stoppage of goods in transit: An agent has a right to stop the goods intransit to the principal if he/she has bought goods either with his/her own money or byincurring a personal liability for the price and the principal has become insolvent.Illustration: Somnath had taken agency to sell readymade garments from Aloknath.
  • 104. He used to also buy raw material for making readymade garments on behalf ofSomnath. Aloknath had already made a delivery of raw material by truck to Somnathwhen he heard that Somnath had turned insolvent. Aloknath stopped the goods intransit after hearing the insolvency of Somnath.14.7 TERMINATION OF AGENCYAn agency can be terminated or can be brought to an end by any of the followingways:1 By act of the parties2 By operation of lawAgency can be terminated by the act of the parties in the following ways:(1) By Revocation of Agent’s authority: According to section 203 the principal canrevoke the authority of the agent at any time before the agent has exercised his/herauthority so as to bind the principal, unless the agency is irrevocable (agency cannotbe terminated).Illustration: Aslam took the agency of selling dolls, which Bonney used to make.Aslam took twenty dolls but before he could sell any dolls Bonney terminated theagency.(2) By Agreement: An agency can be terminated at any time by mutual agreementbetween the principal and the agent.Illustration: Aslam took the agency of selling dolls, which Bonney used to make.Aslam took twenty dolls and was able to sell only two dolls. Bonney wanted to cancelthe agency. He approached Aslam and after paying his share of remuneration forselling two dolls both of them mutually agreed to terminate the agency.(3) By Renunciation by the agent: An agency can be terminated by an expressrenunciation by the agent because a person cannot be compelled to continue as agentagainst his/her will. According to section 206 the agent must give a reasonable noticeof renunciation to the principal otherwise he/she will be liable to compensate theprincipal for any damage resulting thereby. If the agency is for a fixed period and theagent renounces it without sufficient cause before the expiry of the period, he/she willhave to compensate the principal for the resulting loss, if any.Illustration: Aslam took the agency of selling dolls, which Bonney used to make.Aslam took twenty dolls and was able to sell only two dolls. After sometime Aslamwanted to cancel the agency. He approached Bonney and told him that he would not
  • 105. like to continue with the agency after a month. This was taken as a reasonablenoticeand the agency was duly terminated with mutual consent after a month.Agency can also be terminated by operation of law in the following circumstances:(1) By the completion of the business of agency: According to section 201 anagency automatically terminates when the purpose for which agency was created isfulfilled.(2) By expiry of time: If the agency is for a fixed term, the expiration of the term putsan end to the agency, even though the business of the agency may not have beencompleted.(3) Death and insanity of the principal or the agent: According to section 201 anagency is terminated automatically on the death or insanity of the principal or theagent. After coming to know about the principal’s death or insanity although theagency terminates but the agent must take all reasonable steps for the protection of theinterests of the principal.(4) By insolvency of the principal: According to section 201 of the Indian ContractAct agency terminates when the principal becomes insolvent. The section is silent onthe point whether agency terminates or not when the Agent becomes insolvent.(5) By destruction of the subject matter: when the agency is created to deal with asubject matter and when that subject matter gets destroyed the agency automaticallyterminates.(6) By dissolution of a company: When the principal or the agent is an incorporatedcompany, the agency automatically terminates after the company gets dissolved.(7) Principal or the agent becoming an alien enemy: If the principal and agent arenationals of two different countries and a war breaks out between the two countriesthe agency gets terminated. If they still continue the agency then they would be calledalien enemies and their relationship of agency will be called unlawful.Irrevocable Agency:When the authority given to an agent cannot be revoked its called irrevocable agency.An agency becomes irrevocable in the following circumstances:(1) Where the agency is coupled with interest: According to section 202 if the agenthas himself / herself an interest in the subject matter of agency, the agency is said tobe coupled with interest. Such an agency is created with the object of protecting orsecuring any interest of the agent. It cannot be applied to a case where an agent’sinterest arises after the creation of agency.
  • 106. Illustration: Vipin had given loan of rupees ten thousand to Sekunder. Sekunder wasunable to pay the loan so in consideration he appointed Vipin as his agent to collectrents due from his tenants for adjusting the loan amount. In this case the agent Vipinhas an interest in the subject matter of agency (collection of rent). Hence agencybecomes irrevocable.(2) Where the revocation of agency would cause a personal loss to the agent:Where the agent has in pursuing his/her authority contracted a personal liability, theagency becomes irrevocable and the principal cannot revoke the agent’s authorityunilaterally.Illustration: Narain asked his brother Sindh to buy a sofa set for his new house.Hepromised to pay the money later. Sindh bought the sofa set and paid the moneyfrom his account. Hence Narain cannot revoke the agency.(3) When the authority has been partly exercised by the agent: According tosection 204 the principal cannot revoke the authority after the agent has partlyexercised his/her authority, so far as regards such acts and obligations as arise fromacts already done in agency.Illustration: Sukhmani asked Govind her neighbour to prepare five dishes for thedinner, which was being hosted at her place. Govind purchased all the ingredientsneeded for the preparation and started preparing the dishes. Sukhmani cannot revokethe contract of agency because the authority has already been partly exercised byGovind.

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