CHAPTER INDIAN CONTRACT ACT,1872

This Chapter Includes: Contract, Meaning, Essentials of a Valid Contract, Nature and Performance of Contract, Termination and Discharge of Contract, Indemnity and Guarantee, Bailment and Pledge, Law of Agency.

CHAPTER AT A GLANCE

Introduction:

• It is the most important branch of the mercantile law or commercial law.

• It is not possible to carry on trade or commerce without contract.

• It deals with general principles relating to formation of contracts.

• It extends to whole of India, except the state of Jammu & Kashmir.

• It came into force w.e.f. 1/9/1872.

• It is not a complete law for all types of contracts.

• It determine the circumstances in which promise made by the parties to contract shall be legally

binding on them.

Meaning of Contract:

• Sec. 2(h) of Indian Contract Act defines contract as:

“ An agreement enforceable by law.” Contract = Agreement + enforceability by law

• Contract is made by acceptance of one party of an offer made to him by the other party, to do or

abstain from doing some act.

Contract = Agreement + Obligation

Meaning of Agreement & Promise:

• Sec. 2(e) of Indian Contract Act defines it as,

“Every’ promise or every set of promise, forming the consideration for each other.”

• It has two characteristics:

(i) Two or more persons are required to make an agreement.

(ii) Both parties must agree to same thing in same sense at the same time.(Consensus - ad- idem),

(consent, to the matter).

• Sec. 2(b) of Indian Contract defines promise as, -

“A proposal (offer) when accepted becomes a promise”.

Agreement = Promise

= Accepted Proposal = Offer + Acceptance

Meaning of Obligation:

• It refers to the legal duty to do or to abstain from doing something to obtain the assent what one

has promised to do or abstain from doing.

Rights & Obligations:

• They are created between the parties as a result of a binding contract.

• They are correlative.

Agreements which are not contracts:

• Agreements relating to social matters.

• Domestic arrangements between husband and wife.

• Agreements between family members.

Relevant Case Law:

• Balfour v Balfour

Facts: Mr A promised to pay his wife` 30 every month as house hold

allowance. Later, the husband failed to pay the amount.

Decision: Held, the wife could not claim as there was no intention to create legal obligation and thus, it is

not enforceable by law.

All contracts are necessarily agreements but all agreements need not necessarily be contracts.

Essential elements of a valid contract:

• Sec. 10 of Indian Contract Act says, “All, agreements are contracts if they are made:

(j) by free consent of parties , competent to contract,

(ii) for a lawful consideration,

(iii) with a lawful object, and

(iv) not hereby expressly declared to be “void”.

It includes:

(i) Offer and Acceptance

(ii) Intention to create legal relationship

(iii) Lawful consideration and object

(iv) Capacity to contractual

(v) Free consent

(vi) Lawful object

(vii) Agreement not expressly declared void.

(viii) Consensus -ad- idem i.e. meeting of minds

(ix) Certainty of meaning

(x) Possibility to perform

(xi) Legal formalities

1. Offer or Proposal:

• It refers to a “proposal” by one party to another to enter into a legally binding agreement with

him.

• Sec. 2(a) of the Act defines it as-

“When one person signifies to another his willingness to do or abstain from doing something, with a view

to obtain the assent of that other to such act or abstinence, he is said to make a proposal.’

• Offeror or Promisor: The party making an offer.

• Offeree or Promisee: The party to whom offer is made.

Rules relating to offer

• It must be capable of creating legal relations

• It must be certain, definite and not vague

• It may be expressed or implied

• It must be distinguished from an invitation to offer

• It may be specific or general

• It must be communicated to the offeree

• It must be made with a view to obtain the consent of the offeree

• It may be conditional

• It should not contain such terms, the non compliance of which would amount to acceptance

• Types of offer: General; Specific, Cross, Counter, Open etc.

General & Specific offer:

• Offer made to public at large with or without any time limit is general offer.

• Offer made to a particular and specified person/ persons and that can be accepted by that

specific person/ persons only is specific offer.

Relevant Case Law:

Carlill V. Carbolic Smoke Ball Co.

Facts:

(i) A co. advertised that it would give a reward of £ 100 to anyone who contracted influenza after

using its smoke balls for a certain period according to printed directions.

(ii) Mrs Carlill purchased and used smoke balls as per the printed instructions, even then contracted

influenza.

(iii) She claimed the reward of £100.

(iv) Co. resisted the claim on the ground that offer was not made to her and she had also not

communicated her acceptance to the offer.

Decision: She could recover the reward as she had accepted the co’s offer by complying with terms.

• Similar case Harbhajan Lai V Harcharan Lai

Cross offer:

• It occurs when two persons make identical offers to each other in ignorance of each other’s offer.

• It leads to termination of the original offer.

Counter offer:

• Upon receipt of an offer from an offeror, if the offeree instead of accepting it, straightaway

modifies or varies the offer, he is said to make a counter offer.

• It leads to rejection of original offer.

Standing/ Continuing / Open Offer:

Offer which is made to public at large and kept open for public acceptance for a certain time period.

it refers to a tender to supply goods as and when required.

• Each successive order given creates a separate contract.

• does not binds either party unless and until Such orders are given.

Relevant Case Law:

• Percival Ltd v. L.C.C.

Offer and Invitation to offer:

• Offer is made to get the consent of other party.

Invitation to offer is made to initiate the offer according to the invitation.

• Offer is made with an object {o make a contract.

Invitation to offer does not results in any contract formation.

• E.g of invitation to offer: (i) display of goods in a shop window with prices marked upon them,

(ii) price catalogues, etc.

• Offer is different from a mere statement of intention. E.g.- announcement of a coming auction

sales.

Relevant Case Law:

Harris V. Nickerson

When particular goods are advertised, for sale by auction, the auctioneer does not contract with anyone

who attends the sale and is intending to purchase those goods when they are actually put up for sale.

• Offer is different from a mere communication of information in the course of negotiation. E.g.

price statement considering negotiation.

Relevant Case Law:

• Harvey V. Facey

Only a statement of lowest price at which the vendor would sell, contains no implied contract to sell at

that price to the person making the inquiry.

Acceptance:

• It means giving consent to the offer.

• Sec. 2(b) of the Contract Act , defines it as- “A proposal is said to be accepted, when the person to

whom the proposal (offer) is made signifies his assent thereto.”

Essentials of a valid acceptance:

• It must be absolute and unconditional.

• It must be communicated to offeror.

• It must be in the mode prescribed.

• It must be given within reasonable time.

• Mere silence is not acceptance, offeror can prescribe the mode of acceptance but not the mode of

rejection.

Relevant Case Law:

Felthouse V Bindley Facts-

(i) F offered by letter to buy his nephew’s horse for £ 30 stating “If I hear no more about it, I shall

consider it mine at £ 30.”

(ii) Nephew did not reply , but told the auctioneer not to sell it as he has already sold it to his uncle.

(iii) Auctioneer sold it by mistake.

(iv) F sued the auctioneer.

Decision: F could not succeed as his nephew has not communicated his acceptance.

• It must be given before the offer lapses or is revoked.

• It must emanate from offer.

• If the offer is-one which is to be accepted by being acted upon, no communication of acceptance

to the offeror is necessary, unless communication is stipulated for in the offer itself.

Relevant Case Law:

• Lalman Shukla V Gouri Dutt Facts-

(i) S sent his servant L, to trace his missing nephew.

(ii) Later, S offered a reward for finding out his nephew.

(iii) L traced him ignorant of the-reward.

(iv) L claimed his reward later.

Decision - L was not entitled to the reward.

Communication of offer:

It is complete when it comes to the knowledge of the person to whom it is made.

• It may be communicated either by words spoken or written or may be inferred from conduct of

parties.

• If made by post, it will be completed, when the letter containing offer reached the intended

person.

Communication of acceptance:

• It is complete-

As against the proposer: When it is put in the course of transmission to him so as to be out of power of

the acceptor to withdraw the same. As against the acceptor: When it comes to the knowledge of the

proposer.

• If sent by post, it is complete:

As against the proposer: when the letter of acceptance is posted.

As against the acceptor: when the letter reaches the proposer.

Revocation of offer;

• It means withdrawal or taking back of an offer.

• It can be revoked anytime before its acceptance.

Revocation of acceptance:

• It means withdrawal or taking back of acceptance by the acceptor.

It may be revoked at any time before its communication is completed as against the acceptor, but not

afterwards.

Communication of revocation:

• It is complete-

As against the person who makes it: When it is put into a course of transmission to the person to whom

it is made so as to be out of power of the person who makes it.

By Post -

• Communication of offer when complete: When offer comes into the knowledge of offeree.

• Communication of acceptance when complete: When offeree or acceptor post the letter of

acceptance and it becomes out of power of acceptor to withdraw it.

As against the person to whom it is made: When it comes to his knowledge.

Lapse of offer:

• It means end of an offer.

• Offer should be accepted before it lapses.

• Offer may lapse in following ways:

(i) By Communication of notice of revocation

(ii) By lapse of time

(iii) By failure to accept condition precedent

(iv) By death or insanity of the offeror

(v) By counter - offer by the offeree

(vi) By not accepting the offer, according to prescribed mode

(vii) By rejection of offer by the offeree

(viii) By change in law or circumstances.

Note:

If a passenger receives a railway ticket with the words printed, mis ticket is issued subject to the notices,

regulations and conditions contained in the current time tables of the railway.” He is bound to accept the

terms and conditions whether he has read them or not.

Standing Offer

• It is an offer made to supply specific goods upto a stated quantity or any quantity be required at a

certain, rate, during a fixed period. E.g. Government Tenders.

• It is a nature of continuing offer.

Relevant Case Law;

Percival Ltd. v/s L.C.C.

Pacts:

• P entered into a contract with L to supply some goods.

• P sued L as the total amount of orders were less than his expectation.

• Court Held that L is not bound to make order to P, but P is bound to

supply goods to L if he orders them.

Modes of Contract:

• Generally contracts are in written form agreed upon by the parties face to face. But when it is not

possible for the parties to meet they can enter

• . into the following.

• Contracts By Post: When the parties are located in different cities or states and its not possible

for them to meet then contract is made by sending the documents through post. This is called contract by

post. It is subject to same rules as others along with certain exceptions as already stated.

• Contracts over telephone:

(i) There is a contract as soon as the offer is accepted by the offeree.

(ii) Offeree has to be sure that his acceptance has reached the offeror

' because phone lines may go dead or generate noise during - conversations.

(iii) Thus, offeree should dial again and communicate his acceptance in such doubt.

Relevant case Law:

• Kanhaiyalal V. Dineshwar Chandra

2. Intention to create legal relationship:

• Both the parties must have an intention to go to court, if the other party does not fulfill his

promise.

• Normally, in social and domestic agreements, there is no intention to go to the court.

• In commercial agreements , this intention is always present.

• The test of intention is objective i.e. it depends upon the facts of the case.

• Court may also look into the conduct of parties, wherever necessary.

3. Lawful Consideration:

• The consideration should be something that is lawful.

• A mere promise is not enforceable at law.

It means “Quid Pro gup” i.e. "something in return”.

Relevant Case Law:

• Currie V Misa

• As per Section 2(d),

“When at the desire of the promisor, the promisee or any other person

— has done or abstained from doing, or

— does or abstains from doing , or

promises to do or abstains from doing, such act or abstinence o promise is called as consideration for the

promise.”

• As per Section 2(e),

“Every promise and every set of promises, forming the consideration fo each other, is an agreement.”

• General rule is-

“No consideration, No contract.”

Consideration may move at the desire of the promisor and not at the desire of the third party.

• There may be stranger to consideration but not stranger to a contract

• Under English Law, it must move from the promisee or any other person. Thus, stranger cannot

sue on the contract.

• Under Indian law, however a stranger to consideration can file a suit.

Relevant Case Law:

• Chinnayya V. Ramayya Facts-

(i) A by a gift deed transferred certain property to her daughter, giving her the direction to pay

annuity to A’s brother.

(ii) On the same day, daughter executed a writing in favour of A’s brother, agreeing to pay annuity.

(iii) She declined afterwards stating that no consideration had moved from her uncle.

Decision: Court held that consideration may move from any person .Thus, A’s brother was entitled to file a

suit.

Rules of a valid consideration:

• It must move at the desire of the promisor.

• It may be done by promisee himself or by any other person.

• It may be past, present or future.

• It must be real and not vague.

• It must be legal.

• It need not be adequate. (But if not adequate then consent must be free)

• It must be something more than the promisee is already bound to do for the promisor.

• It may not be an illusory.

Relevant Case Law:

• Stilk v Myrick

Kinds of Consideration

• Past Consideration: It refers to something wholly done, forgone or suffered before making of

agreement.

• Under English law, “Past consideration is no consideration.”

• The consideration which is completed or performed at the time of contract is called present

consideration.

• But past consideration is a consideration as per the Indian Law.

• Present or Executed Consideration: It moves simultaneously with promise. The consideration

which is completed or performed at the time of contract is called present consideration.

• Future or Executory Consideration: It is to be moved at a future date i.e promise is to be

performed in future.

Exceptions to the rules, " No consideration, no contract”:

• An agreement made is valid if:

- expressed in writing and registered under law,

- made on account of natural love and affection,

- between parties standing in a near relation to each other.

• A promise is valid if-

- It is a promise to compensate a person wholly or in part, a person who has already done

something voluntarily for the promisor.

- Something which the promisor was legally compellable to do.

• A promise to pay, wholly or in part, a debt, which is barred by law of limitation can be enforced if:

- it is in writing,

- it is signed by the debtor or his authorised agent.

Note: A debt barred by limitation cannot be recovered , a promise to pay such debt is without any

consideration.

• It does not applies to completed gifts i.e. gift given and accepted.

• Consideration is not required to effect a valid bailment of goods i.e. gratuitous bailment.

• Not required to create an agency.

Relevant Case Laws:

• Poonam Bibi V. Fyaz Buksh

Facts: A husband, by a registered agreement promised to pay his earnings to his wife.

Decision: The agreement, though without consideration, was valid.

• Raj Lakshmi V. Bhootnath

Facts: Where a husband by a registered document, after referring to quarrels and disagreements between

himself and his wife, promised to pay his wife a sum of money for her maintenance and separate

residence.

Decision: Promise was unenforceable as natural love and affection was missing.

• If a person promised to contribute anything to a charity and on his faith,

the promisee undertakes a liability to that extent, the contract shall be valid.

Relevant Case Law:

• Kedarnath V Gorie Mohammad

Gratuitous Promise

• A gratuitous contract is a contract without any consideration.

• A gratuitous promise cannot be enforced.

• However, where a promisor makes a promise for which some other person will be benefitted,

then the promisor will be liable to the promisee.

• E.g:- If X gives a loan to Y and Z gives the guarantee to X on behalf of Y, then Z will be liable to X if

Y does not repay the loan even though Z was not benefitted by giving the guarantee.

Doctrine of Privity of Contract:

• It means that only those persons, who are parties to a contract, can sue and be sued upon the

contract.

• It refers to the relationship between parties who have entered into the contracts.

• The third party cannot sue upon it, even though the contract may be for his benefit.

• Thus, “a stranger to the contract” cannot bring a valid suit under the contract.

• It is different from “stranger to consideration”.

Relevant Case Laws:

• Dunlop Pneumatic Tyre Co.V. Selfridge Ltd.

• Tweddle v Atkinson

Relevant Case Law:

Khwaja Muhammad v Hussaini Begum

Facts-

(i) H sued her father in law K to recover` 15,000 on account of arrears of allowance being payable to

her by K.

(ii) This was under an agreement between K and H’s father consideration being .H’s marriage to K’s

son D.

(iii) Both H and D were minors at the time of marriage.

Decision- Promise can be made enforceable by H.

(ii) Marriage settlement, partition and other family arrangements, and other such agreements when

they are reduced to writing.

(iii) Acknowledgment of liability or by past performance thereof.

(iv) Assignment of a contract. • ’ •

Note: Nominee is not a assignee

(v) Contracts entered into through an agent.

(vi) Covenants running with the land - The purchaser of immovable property is bound by several

conditions created by an agreement affecting the land, even though he is not a party to the original

agreement.

(vii) Where the promisor by his own conduct is estopped from denying his liability to perform the

promise, the person who is not a party to the contract can sue upon to make the promisor liable.

Terms must be certain:

The meaning of an agreement must be certain and capable of being

certain.

• Terms must not be vague.

• If it is not so, then the agreement will not be enforceable by law.

• "A Contract to contract is not a contract”.

Relevant Case Law:

Loftus V Roberts.

Difference between an Agreement and Contract

Agreement Contract

(1) Its elements are offer and acceptance.

(2) It may or may not create legal obligation.

(3) It may not be binding, hence may not be

enforceable.

Its element is an agreement and its enforceability.

Creation of legal obligation is must in contracts.

It is binding on both the parties, hence enforceable.

It necessarily constitutes an agreement.

(4) It may not result in a contract.

• Legal Agreement: An agreement which can be enforced legally.

• Illegal Agreements:

(i) It goes beyond the basic public policy, thus are not enforceable by law.

(ii) It is not only void as between immediate parties but the collateral transactions also become

illegal.

• Its Consequences:

(i) Entirely void

(ii) No action can be brought by or against any party.

(iii) Money paid or property transferred under it cannot be recovered

(iv) If its two parts legal and illegal are separable, only legal part can be enforced by the courts

(v) Agreement collateral to it are also illegal.

Relevant Case Law:

• Firm Pratapchand v Firm Kotri

• As a Contract: It means any agreement enforceable by law.

• Void Agreement:

• Agreements not enforceable by law are void.

• They are not always illegal and its collateral transactions are legal.

• It cannot give rise to any legal consequence

• It is void -ab- initio (i.e- void from very beginning)

• Eg minor’s contract

• No damages for non-performance

• It does not exist in the eyes of law.

Difference between Void and Illegal Agreements

Void Agreements Illegal Agreements

(i) All void agreements are not illegal.

(ii) They are not punishable.

(iii) Collateral agreements are legal.

(iv) Valid contracts sometimes subsequently

becomes void, e.g.-agreement entered with a minor

(i) All illegal agreements are void.

(ii) They may be punishable with fine,

imprisonment or both.

(iii) Collateral agreements are void.

(iv) They are void from very beginning.

e.g.- agreement to murder a person.

Classification of Contracts

Void Contracts:

it is not a contract at all as it is without any legal effect.

Section 2(j) of Indian Contract Act, 1872, defines it as:

“A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.”

Voidable Contracts:

It is an agreement which is binding and enforceable but due to lack of one or more of the essentials of a

valid contract, it may be repudiated.

Section 2(i) of the Indian Contract Act, 1872 defines it as:

“ All agreements which are enforceable by law at the option of any one of the parties, and other party has

no such option, are known as voidable contracts.”

Difference between void and voidable contracts

Void Contracts Voidable Contracts

1. Section 2 (j): Contract which Section 2(i): It may be repudiated

ceases to be enforceable by law at the will of one or more parties

becomes void when it ceases to but not at the will of other or

be enforceable. others.

2. Not enforceable-by any party. Enforceable at the desire of the effected party.

3. It is void from beginning to end. It is valid in the beginning but is subsequently

declared void.

4. Agreement is void only if it is made with the

person having no contractual capacity, without

consideration etc.

Agreement is voidable, when its consent is based on

coercion , fraud etc.

5. Here the contract cannot be executed due to

change in circumstances or in law the agreement

is void.

The contract can be executed if it is declared valid

by the affected party.

Competency/Capacity of Parties to Contract

• It means that parties to the agreement must have capacity to enter into a valid contract.

• Person’s may be either natural or artificial.

• Natural persons means human beings.

• Artificial persons means corporations.

• According to Section 11:

“Every person is competent to contract, who, according to the law to which he is subject to:

(i) is of the age of majority,

(ii) is of sound mind.

(iii) is not disqualified by any other law to which he is subject to”.

• A person is disqualified to enter into contracts if he is-

(i) a minor

(ii) a person of unsound mind

(iii) otherwise disqualified by the law of land to enter into contracts -

(iv) an alien enemy

(v) an insolvent

(vi) a convict undergoing imprisonment.

• In India the age of majority is regulated by the Indian Majority Act, 1875.

• According to it, every person domiciled in India attains Majority on the completion of 18 years of

age.

• If any guardian has been appointed for the minors or minor is under

guardianship of Court of wards , he attains majority on the completion of 21 years of age.

Relevant Case Law:

• Mohiri Bibi v Dharmo Das Ghose

Facts-

(i) Dharmo das Ghose, a minor, entered into a contract for borrowing a sum of` 20,000 out of which

lender paid him` 8,000.

(ii) Minor executed mortgage of property, in favour of lender.

(iii) Minor sued for setting aside mortgage.

(iv) 'Privacy Council had to ascertain the validity of mortgage.

(v) u/s 7 of Transfer of Property Act, every person competent to contract is competent to mortgage.

Decision: Any money advanced to a minor cannot be recovered as Sec. 10 and 11 makes the minor’s

contract absolutely void.

• As per the Transfer of Property-Act, a minor cannot transfer a property but he can be a

transferee.

• Position of minor’s agreement:

(i) An agreement entered into by a minor is altogether void i.e. void ab initio

(ii) Minor can be a promisee or a beneficiary

(iii) Minor can always plead minority

(iv) Minor’s agreement cannot be ratified by him

(v) Contract by guardian, is enforceable if-

(a) It is within his competence and authority,

(b) For the benefit of the minor.

Relevant Case Laws:

• Rose Ferenandez v. Joseph Gonsalves

• Raj Rani v. Prem Adib

(vi) Minor’s property is liable for necessaries.

Necessaries:

“Goods suitable to the condition in life of such an infant or other person, and to his actual requirement at

the time of sale and delivery.”

It Includes:

(i) Necessary goods

(ii) Services rendered

(iii) Loan incurred to obtain necessaries.

(vii) Court can never direct specific performance of the contract.

(viii) Minor cannot be a partner in partnership firm. He can however be admitted to benefits of

partnership firm.

(ix) Minor can act as an agent and bind his principal without incurring any personal liability.

(x) Minor can never be adjudicated as insolvent.

Lunatics Agreement

>As per Section 12 of the Indian Contract Act,

“A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes

it, he is capable of undertaking it and of forming a rational judgement as to its effects upon his interests.”

> A person of unsound mind includes:

(i) Lunatics (ii) idiots, (iii) drunkards Such agreement is void.

> Lunatics estate will be liable for any necessaries supplied to him or his family.

> A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when

he is of sound mind and he will be bound by it.

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

when he is of unsound mind.

Relevant Case Law:

• Jugal Kishore v Cheddu

• Persons disqualified by law from entering into contract:

(i) Alien Enemy: Alien enemy is a foreigner whose state is at peace with India.

• Alien is a person who is not an Indian citizen.

• He becomes alien enemy on declaration of war between India and his country.

• He cannot enter into a contract with an Indian subject.

(ii) Foreign Sovereigns and Ambassadors:

• They enjoy certain special privileges due to which they cannot be legally proceeded against in

Indian courts.

• If contracts are entered into through agents, then agents becomes personally responsible for the

performance of the contracts.

(iii) Convicts:

• Cannot enter into a valid contract while undergoing sentence, nor he can sue.

Note: All of the above points are known as flaws in capacity.

Free Consent:

• As per the Indian Contract Act,

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

(Consensus-ad-idem)

• Free consent means consent given by parties out of their free will, on their own, without any fear,

without any force, without any compulsion or threat from the other party.

As per Section14, consent is said to be free when it is not caused by

(i) Coercion

(ii) Linder influence

(iii) Fraud

(iv) Misrepresentation

(v) Mistake

• In the absence of free consent, contract is usually voidable at the option of the party whose

consent is not free.

(i) Coercion:

• “It is the committing, or threatening to commit, any act forbidden by .the Indian Penal code (IPC), or the

unlawful detaining, or threatening to detain any property, to the prejudice of any person, whatever, with

the intention of causing any person to enter into an agreement.”

• Exceptions of coercion:

The following threats are not coercion-

1. threat to file a suit,

2. Consent given on the basis of legal obligations,

3. Threat by workers,

4. Threat to detain property by mortgager.

Relevant Case Law:

• Ram Chandra v Bank of Kolhapur

• It may proceed from any person and may be directed against any person or goods.

(ii) Undue Influence

• A contract is said to be induced by ‘undue influence’ where the relations subsisting between the

parties are such that one of the parties is in a position to dominate the wifi of the other and uses that

position to obtain an unfair advantage over the other.

• It has following two elements:

(i) a dominant position,

(ii) the use of it to obtain an unfair advantage.

• A person is deemed to dominate the will of another if-

(i) he holds a real or apparent authority over the other ,or

(ii) he stands in a fiduciary relation to the other; or

(iii) he makes a contract with a person whose mental capacity is temporarily or permanently affected

by reason of age, illness or mental or bodily distress.

• Relationships that are presumed to have undue influence includes:

(i) Parent and Child

(ii) Guardian and ward

(iii) Religious/ Spiritual Guru and Discipline

(iv) Doctor and Patient

(v) Solicitor and Client

(vi) Trustee and Beneficiary

(vii) Fiance and Fiancee

• Relationship where dominant position is not presumed but has to be proved by the aggrieved

party;

(i) Creditor and Debtor

(ii) Landlord,and Tenant

(iii) Husband and wife.

• This presumption can be rebutted by showing that:

(i) full disclosure of all material facts was made,

(ii) adequate consideration was there, and

(iii) weaker party was in receipt of independent legal advice.

Relevant Case Law:

• Marim Bibi v. Cassim Abrahim

Differences between coercion and undue influence

Coercion Undue Influence

1. It involves the physical force or threat. It involves moral or mental pressure.

2. It involves committing or threatening to commit

any act forbidden by IPC.

No such illegal act is committed or a threat is

given.

3. Relationship between the parties is not necessary. Some sort of relationship between the parties is

absolutely necessary.

4. It need not be proceeded from the promisor or

directed against the promisor.

It is always exercised between the parties.

5. If the contract is avoided, any benefit received has

to be restored or refunded.

If the contract is avoided, it is at the discretion of

the court to direct the aggrieved party to restore

or refund the benefit received.

(iii) Fraud [Innocent]:

• Also known as wilful (innocent) misrepresentation.

• Fraud means and includes any of the following acts committed by a party to a contract, or with

his connivance or by his agent with intent to deceive another party

thereto or his party, or to induce him to enter into the contract-

1. The suggestion, as to fact, of that which is not true by one who does not believe it be true,

2. The active concealment of a fact by one having knowledge or belief of the fact,

3. A promise made without any intention of performing it,

4. Any other act fitted to deceive,

5. Any such act or omission as to law specially declared to be fraudulent.

• Mere silence as to facts likely to affect the willingness of a person to enter into a contract is no

fraud.

• But silence amounts to fraud in following cases:

(i) Where it is the duty of a person to speak

(ii) Where his silence is equivalent to speech

(iii) When a person discloses only the half truth.

• Following are certain contracts upon which law imposes a special duty to act with the utmost

good faith. (Contracts of Uberrimae fidei):

(i) Insurance contracts

(ii) Prospectus of a company

(iii) Contract for sale of land

(iv) Contracts of family arrangements.

• In all of the above stated contracts, a person has to disclose all the material information.

(iv) Misrepresentation:

• Where a person, asserts something which is not true, though he believes it to be true, his

assertion amounts to misrepresentation.

• Misrepresentation made by a person may be either-

1. innocent, or

2. without any reasonable ground.

• The aggrieved party can avoid the contract, but cannot sue for

damages in normal circumstances.

• Its damages can be obtained in following cases:

(i) from a director or promoter making innocent misrepresentation in company’s prospectus.

(ii) from an agent committing breach of warranty of authority

(iii) from a person who has made a certain statement in the court , relying upon which a party has

suffered damages, is stopped by the court from denying it.

(iv) negligent representation made by one person to another between whom there exits a

confidential relationship.

Differences between fraud and misrepresentation

Fraud Misrepresentation

1 It is made intentionally with a view to deceive. It is made innocently.

2 The person making the wrong statement does not

believe it to be true.

The person making the wrong statement believes it

to be true.

3 The aggrieved party can rescind the contract and

can also claim damages.

The aggrieved party can rescind the contract but

cannot claim damages.

4 Where the consent is caused by active fraud, the

contract is voidable even though the party

defrauded had the means of discovering the truth.

The fact that the other party had the means of

discovering the truth is a good plea.

When the consent is caused by coercion, undue influence, fraud and misrepresentation, though the

agreement amounts to as contract such a contract is voidable at the option of the party whose consent

was so obtained.

(v) Mistake:

• It refers to miscalculation or judgmental error by both or either of the parties.

• It must be a “vital operative mistake.”

Relevant Case Law:

• Leaf v. International Galleries

• When both the parties to an agreement are under a mistake to a matter of fact essential to the

agreement, the agreement is altogether void. •

• Unilateral mistake means mistake on part of only one party.

• Unilateral Mistake is not void.

• Cases when the contract is void if there is a unilateral mistake:

(i) Where the mistake is done as regards the nature of the contract.

(ii) Where the mistake is done as regards the identity of the person contracted with.

• It can be avoided, if it was either due to:

(i) blindness, illiteracy, or senility of a person signing, or

(ii) a trick or fraudulent misrepresentation as to nature of document.

Relevant Case Law:

• Foster V. MacKinnon

Facts- An old illiterate man was made to sign a bill of exchange, by means of false representation that it

was guarantee.

Decision - The contract was void.

• Mistake as to identity of person operates if

(i) Identity is for material importance to the contracts, and

(ii) Mistake is known to the other person.

Relevant Case Law:

• Candy V. Lindsays Co.

Facts -

(i) One Blankarn placed an order with Lindsay & Co. by imitating signatures of Blenkiron, knowing

that Blentiron & Co. was a reputed customers of Lindsay & Co.

(ii) Goods were there after sold to Candy (an innocent buyer)

(iii) Lindsay & Co. filed a suit against candy for recovery of goods. Decision: Candy must return the

goods or make the payment of those goods as there was no contract. Thus, candy did not got a good title.

• Following conditions need to be fulfilled, for mistake to be void:

(i) The fact is material to the agreement.

(ii) There is mistake of fact.

(iii) Both the parties are at mistake.

• If mistake of Indian Law is caused due to inducement by the other party, it has the same effect as

that of fraud and therefore, contract may be avoided, by the party who has induced to enter into

the contract.

• Mutual mistake may relate to the existence, identity, quantity or quality of the subject - matter:

(i) Existence: At the time of making contract both parties believe that subject matter is in existence,

but it is actually not.

Relevant Case Law:

• Couturier V. Hastie

Facts

(i) A agreed to sell a cargo of corn, which was supposed to be in transit

(ii) Corn had become fermented and sold by the master of the ship.

(iii) This was unknown to both the parties.

Decision: The agreement was void.

(ii) Identity: There is no consensus ad idem.

Relevant Case Law:

• Raffles V. Wichelhaus Facts

(i) Contract was made for purchase of bales of cotton which were to arrive by a ship named

Peerless’ from Bombay.

(ii) Two ships of same name had to sail from Bombay.

(iii) Buyer intended to buy cargo of one ship but seller intended to sell that of another.

Decision: Contract was held to be void.

(iii) Quantity: Parties were at mistake as to the quantity or extent of subject matter even if it was

caused by negligence of third party.

Relevant Case Law:

• Henkel V. Pape Facts

(i) P wrote a letter to H enquiring about price of rifles also stating that he might buy 50 rifles.

(ii) On receiving the reply, P telegraphed, “Send three rifles”

(iii) Message was send as “Send the rifles” due to telegraphic mistakes.

(iv) H send 50 rifles.

Decision: There was no contract but P could be held liable to pay for three rifles.

(iv) Quality: It is void only if mistake was on part of both the parties. It follows the general rule:

“A party to a contract does not owes any duty to disclose all the facts in his possession to other party

during negotiations.”

Transaction with pardanashin women

• It means complete seclusion.

• Women fixing and collecting rents from tenants and communicating

business matters with men other than own family members is not a pardanashin women.

Relevant Case Law:

• Ismail Musafer V. Hafiz Boo

• It is founded on equity and good conscience.

• Person entering into a contract with pardanashin women has to prove that:

(i) no undue influence was used

(ii) she had free and independent advice

(iii) she fully understood the contents of the contract.

(iv) she exercised her free will

• She has been given a special cloak of protection by law

Relevant Case Law:

• Kali Baksh V. Ram Gopal

Legality of objects:

• As per Section 23, of the Indian Contract Act,

“An agreement whose object or consideration is unlawful is void.”

• “Consideration or object is unlawful:

(i) If it is forbidden by law, or

(ii) It would, if permitted defeat the provisions of any law or,

(iii) is fraudulent or

(iv) involves injury to the person or property of another, or

(v) is immoral, or

(vi) opposed to public property.”

• Circumstances which makes the consideration or object unlawful:

(i) Forbidden by Law:

It includes the acts which are punishable under any statute as well as prohibited by regulation or orders

made in the exercise of the authority conferred by the legislature.

(ii) Defeat of the provision of law:

• Agreement defeating the provisions of any statutory law, is void

• Law includes any legislative enactment or Rule of Hindu and Muslim law or any other rule for the

time being in force in India.

(iii) Fraudulent:

Agreement with an object to defraud others is void.

(iv) Injury to the person or the property of another:

An agreement having such an object is void.

(v) Immoral:

• Object of any agreement being immoral is illegal

• It is also illegal if its consideration is an act of sexual

immorality.

Relevant Case Law:

• Pearce V. Brookes

• It covers a wide range of topics.

• It is a branch of common law and governed by the precedents.

Relevant Case law:

• Gheru lal Parakh V. Mahadeodas Maiya

• No new Lead can be invented and added by any Court.

Relevant Case Law:

• Lord Hulsbury, Janson V. Driefontien Consolidated Mines •

• It includes the following type of agreement:

(i) Restraint of parental duties

(ii) Restraint of marriage

(iii) Marriage brocage or brokerage agreements

(iv) Restraint of personal liberty

(v) Restraint of trade.

Negative stipulation in service agreement: An agreement of service by which a person bind himself

during the term of the agreement not to take services with anyone else is not in restraint of lawful

profession and it is valid.

Restraint of personal duties:

• Parents are natural guardians

• Any agreement against such right or by which a party deprives himself of the custody of his child

is void.

Restraint of Marriage:

• Any agreement restraining any person, other than minor not to marry at

all or not to marry any particular person is void.

Marriage Brokerage or Brocage contract:

• An agreement to negotiate marriage for reward is void..

• If marriage is performed but the money is not paid , it cannot be recovered in the Court.

Restriction of personal liberty:

• Agreement unduly restricting the personal freedom of a person are void and illegal.

Restraint of Trade (Sec. 27):

• Agreement restraining anyone from exercising a lawful profession, trade or business of any kind,

is void.

• Both total or partial restraint are covered.

• Restraint must be reasonable

Relevant Case Law:

• Nordenfelt V. Maxim Nordenfelt Guns Co.

• Indian Courts are not consistent that whether the reasonable restraints are permitted or not.

Relevant Case Law:

• Madhub Chunder V. Racoomer

• Mackenzie V. Sitarmiah

• In an agreement having two parts which can be separated, only those covenants which are in

restraint of trade would be void.

Relevant Case Law:

• Brahmputra Tea Co Ltd. V. Carth

• Restriction imposed is reasonable depending upon the facts and circumstances of the case.

Relevant Case Law:

• Superintendence Company of India Ltd. V. Krishna Nurgai

• Following agreements are not in restraint of trade:

1. Service agreement by which an employee binds himself, during the term of his agreement, not to

compete with his employer.

Relevant Case Law:

Niranjan Shanker Golikari V. The Century Spinning and Manufacturing Co. Ltd.

2. Agreement by a manufacturer to sell during a certain period his entire production to a wholesale

merchant.

3. Agreement among the sellers of a particular commodity not to sell the commodity for less than a

fixed price.

Relevant Case Law:

• Fraster Co V. Laxmi Narain •

• This rule is subject to following exceptions:

1. If a person sells the goodwill of a business and agree with the buyer to refrain from carrying any

similar business, within specific reasonable local limits, it is a valid agreement.

2. If an outgoing partner makes an agreement with the continuing partners for not to carry on any

similar business within a specified period or within specific local limits, is a valid agreement provided

reasonable restrictions are imposed.

3. Contracts between partners not requiring any partner to carry on any business other than that of

the firm while he is a partner.

Trade combinations: An agreement, the object of which is to regulate business and not to restrain it is

valid. Thus, an agreement is the nature of business combination between trader or manufacturers like not

to sell their goods below as certain price is perfectly valid.

Negative stipulations in service agreement: It refers to an agreement of service by which a person

binds himself during the term of the agreement not to take service with anyone else such an agreement is

valid.

Agreement Expressly Declared Void

• Certain agreements have been expressly declared as void by Contract Act.

• They are void ab initio.

• It includes:

(i) Consideration unlawful in part

(ii) Agreement- meaning of which is uncertain

(iii) Wagering Agreement

(i) Consideration unlawful in part (Sec. 24)

• “If any part of a single consideration for one or more objects, or any one or any part of any one of

several considerations for a single object, is unlawful, the agreement is void.”

• Where the legal part of an contract can be severed from the illegal part, the bad part may be

rejected and the good one can be retained”

• Where the illegal part cannot be severed, the contract is altogether void.

(ii) Agreement the meaning of which is uncertain (Sec. 29)

An agreement, the meaning of which is not certain, is void but where the meaning thereof is capable of

being made certain, the agreement is valid.

(iii) Wagering Agreement (Sec. 30)

• Wager means ‘bet’.

• They are ordinary betting agreements.

• It refers to an agreement between two parties by which one promises to pay money or money’s

worth on the happening of some uncertain event in consideration of the other party’s promise to pay if

the event does not happen.

Relevant Case law:

• Thacker V. Hardy

• Such an agreement is void.

• If one of the parties has control over the event, agreement is not a wager.

• Though wagering contracts are void, transactions incidental to wagering transactions are not

void.

• “Where delivery of the goods sold is intended to be given and taken, it is a valid contract but where only

the differences are intended to be paid, it will be a wagering contract and unenforceable.”

Note: Lottery, being a game of chance, is a Wagering Agreement.

• It is void and illegal thus, collateral transactions are also tainted with illegality.

Speculative transactions: It appears to be similar to that of wagering agreement, but has essentially two

main features:

1. Mutual intention of the contracting parties to acquire or deliver the commodities, and

2. Undertaking of risk arising from movement in prices.

3. They are generally valid.

Restitution (Sec. 65)

• Under a void contract , if any party has received any benefit from the other party, he must restore

it or make compensation for it to the other party.

• There is no restitution where the parties are incompetent to contract e.g minor.

Relevant Case Law:

• Mohiri Bibi V. Dharmodas Ghosh

Contingent Contract (Sec. 31)

• It refers a contract to do or not to do something, if some event, collateral to such contract, does or

does not happen.

• E.g: Contracts of insurance, indemnity and guarantee etc.

Rules regarding its enforcement

Sec. Rules Enforcement

1. Happening of future uncertain event. Cannot be enforced by law unless and until that event

happens. Contract becomes void if event becomes

impossible.

2. Non - happening of an uncertain future

event.

Can be enforced when the happening of that event

becomes impossible and not before.

3. . Behaviour of a person at an unspecified time

in future

Event is considered impossible when that person does

any thing, which renders it impossible that he should

so act within any definite time or otherwise than under

further contingencies.

4. Happening of a specified uncertain event

within a fixed time.

Becomes void if-

(i) at the expiration of the time, such event has

not happen, or

(ii) before the time fixed, such event becomes

impossible.

5. Non- happening of a specified uncertain

event within a fixed time.

Can be enforced by law-

(i) when the time fixed has expired and such

event has not happened, or.

(ii) Before the time fixed has expired, it becomes

certain that such event will not happen.

6. Impossible Event Are void, whether the impossibility of the event is

known or not known to the parties at the time of

making the agreement.

Differences between wagering agreements and contingent contracts

Wagering Agreements Contingent Contracts

1. It is void. It is valid and enforceable until becomes void.

2. It is a game of chance. It is not a game, but contingent upon the

happening or non happening of uncertain future

event.

3. Future event is the primary factor. Future event is only collateral.

4. Consists of reciprocal promises. Do not contain reciprocal

promises.

5. Every wager is essentially Every contingent contract is not

cdntingent in nature. necessarily a wager.

Quasi Contract

• An obligation is imposed by law upon a person for the benefit of another even in the absence of a

contract. They are known as quasi contracts.

• They are based on principles of equity, justice and good conscience.

• They are termed as certain relations resembling those created by contracts.

• - It is also known as Law of Restitution.

• It has following features:

(i) It does not arises from any agreement between the parties but is imposed by law.

(ii) It is a right only available against a particular person or persons and not against the entire world.

• They are of following types:

(i) Supply of necessaries

(ii) Reimbursement of money due

(iii) Obligation to pay for benefit out of non- gratuitous act.

(iv) Responsibility of finder of goods

(v) Persons receiving goods or money by mistake.

(vi) Quantum merit (as much as earned or reasonable remuneration) Supply of necessaries (Sec.

68)

• “If a person, incapable of entering into a contract,- or anyone whom he is legally bound to

support, is supplied by another person, with necessaries suited to his condition in life, the person who has

furnished such supplies is entitled to be reimbursed from the property of such incapable person.”

• If necessaries are supplied to a minor or person of unsound mind, the supplier is entitled to claim

their price from the property of such a person.

• If there is no property, nothing will be realizable.

Reimbursement of money due (Sec. 69)

• A person, who is interested in the payment of money and pays such money, which another is

bound by law to pay, is entitled to be reimbursed by the other.”

• A person who has paid a sum of money which another is obliged to pay, is entitled to be

reimbursed by that other person provided the payment has been made by him protect this own interest.

• Payment must be bonafide.

Obligation to pay for benefit out of non gratuitous act (Sec. 70)

• Where a person lawfully does something for another person or delivers anything to him; not

intending to do so aratuitously and the other person accepts and enjoy the benefits thereof, then he is

bound to make compensation to the other in respect of or to restore the thing so done or delivered.”

Responsibility of finder of goods (Sec. 71)

• “A person who finds goods belonging to another and takes them into custody, is subject to the

same responsibility as a bailee”.

• He should act like a man of ordinary prudence i.e,

(a) he shall take proper care of goods,

(b) he must take reasonable steps to trace the owner

(c) he should sell the goods, that they are in deteriorating condition and remit the proceeds to the

owner.

He is entitled for the reward that may have been, offered by the owner. He is also entitled for the refund

of any expenses he may have incurred in protecting and preserving the property.

Person receiving goods or money by mistake (Sec. 72)

A person to whom money has been paid, or anything delivered by mistake or under coercion, must repay

or return it”

• Mistake need not be unintentional. It may be even intentional.

Performance of Contracts (Sec. 37)

• It is one of the modes of discharging the contract. It is the completion or fulfilment of obligations

by the respective parties to a contract.

As per Sec. 37 of the Indian Contract Act, the parties to the contract must either-

(1) Perform their respective promises, or

(2) Offer to perform the same unless such performance is dispensed with or excused under the

provision of any other law.

Contracts to be performed by whom.

Promisor himself: Sec. 40 states that “if it appears from the nature of the case that it was the intention of

the parties to a contract that any promise contained in it needs to be performed by the promisor himself,

such promise must be performed by the promisor himself. “Contracts involving the exercise of personal

skill or diligence, or which are founded on the personal confidence between the parties need to be

performed by promisor himself.

Agent: If the contract is not found on the personal consideration, the promisor or his representative may

employ a competent person to perform it.

Representatives: Contract involving the use of personal skill or found to be on personal consideration

comes to an end on the promisor’s death. In other cases, the legal representatives of the deceased

partner are bound to perform it unless the contrary intention appears from the contract, but their

liability is limited to the value of the property they inherit from the deceased.

Third persons: As per Sec. 41, “if the promisee accepts the performance of the promise by a third person

, he cannot afterwards enforce if against the promisor.”

Joint promisors: In case of joint promise, promisee may compel or one more of the joint promisors in the

absence of contract to the contrary. If any of them dies, his legal representatives must perform the

promise jointly with the surviving promisors.

• Who Can Demand Performance?

Promisee: Only promisee can demand the performance of the promise irrespective of the fact that it is

for the benefit the promisee or any other person.

Third party: In some cases, like trust, marriage settlements etc. third party can enforce the promise

against the promisor even though he is not a party to the contract.

• Representatives: In case of death of the promisee his representative may ask for the

performance of the promise under a contract.

Types of Performance It is of following two types:

> Actual Performance

The promisor makes all offer of the performance of the promise and the offer to perform is accepted by

the promisee. Thus, when both the parties perform their respective obligations, the contract comes to an

end.

> Attempted Performance (Tender) (Sec. 38)

The promisor makes an offer of performance to the promisee, but the offer to perform is not accepted by

the promisee.

Types of Tender

• Tender of goods: attempted performance of promise to do something.

• Tender of money: attempted performance of promise to pay something.

Essentials of a Valid Tender

• Must be unconditional

• Must be for the whole obligation

• Must be given at a proper time

• Must be given at a proper place

• Must give a reasonable opportunity of inspection

• Party giving tender must be willing to perform his obligation

• Must be made to the proper person

• Must be made for the exact amount of money.

Effect of Refusal of party to perform promise (Sec. 39)

The aggrieved party can-

(i) terminate the contract

(ii) indicate by words or by conduct that he is interested in its continuance. If promisee decides to

continue the contract, he would not be entitled to put an end to the contract on this ground immediately.

In both cases, promisee would be entitled to claim damages that he suffered as a result of breach.

Joint Promise

When, two or more person enter into a joint agreement with one or more persons, it is known as joint

promise.

Joint Promisors

Joint Promisors are promisors where liabilities are joint or several.

Joint promisors

A B C (? 30,000)

Hold ‘D’ they will jointly pay his liabilities.

(i) “D” can compile any one.

(ii) If releases one, then other partners are required to pay whole amount.

(iii) If one pays - Contribution.

(iv) Loss among joint promisors: Even if A becomes insolvent, then B & C will have to pay whole

amount of` 30,000 to D.

(v) In case of Death of joint promisors: Life, if A dies, then his legal representative will contribute

the amount. If all the joint promisors dies then the legal representative of all the partners will become

liable to pay the amount.

Rights of Joint Promisee:

1. Claim rest with all.

2. On death his representative.

3. Death of all their representative.

Devolution

It means to pass over from one person to another - In case of joint promise, two problems arises:

(i) who is liable to perform the promise,

(ii) who can demand such performance.

This problem is solved by devolution.

Liability of Joint Promisors

• Sec. 42: If two or more persons have made a joint promise, ordinarily all of them during their life

time must jointly fulfil the promise.

After the death of any of them, his legal representative jointly with the survivor or survivors should do so.

• Sec. 43:

(1) All the joint promisor are jointly and severally liable. However, the contract between the joint

promisor may provide otherwise.

(2) A joint promisor may claim contribution from other joint promisors, if he is compelled to

perform the whole promise.

(3) A joint promisor may claim contribution from other joint promisors, if any other joint promisor

makes a default in performance of his promise.

• Sec. 44: Where one of the joint promisors is released , other joint promisors shall continue to be

liable.

Rights of Joint Promisees

• U/s Sec. 45:

When a person has made a promise to several persons, then unless a contrary intention appears from the

contract, the right to claim performance rests between him and them during their lifetime.

• When one of the promisees dies, the right to claim performance rests with the legal

representatives jointly with the surviving promisees.

• When all the promisees dies, the right to claim performance rests with their legal representatives

jointly.

Assignment

• Promisee may assign the rights and benefits of contract.

• Assignee will be entitled to demand performance by the promisor.

• It must be made by an instrument in writing .

• Obligation or liability under a contract cannot be assigned.

Differences between Succession and Assignment

Succession Assignment

1 Transfer of rights and liabilities of Transfer of rights by a person to

a deceased person to his legal another person is called

representative is called succession. assignment.

2 It takes place on death of a It takes places during the lifetime

person. of a person.

3 It is not a voluntary act. It is a voluntary act

4 It may take place even without a It requires execution of

written document. assignment deed.

5 All rights and liabilities of a person Only rights of a person are

are transferred. transferred.

6 No notice is required to be given Notice must be given to the

to any person. creditor.

7 No consideration is required. Consideration is required.

Contracts which need not to be performed Sec. 62: If the parties to the contract agrees to.

(i) Substitute a new contract for it, or

(ii) rescind it, or

(iii) alter it.

Sec. 63: If the promisee- ‘

(i) dispenses with or remits, wholly or in part, the performance of the promise made to him.

(ii) extends the time for such performance

(iii) accepts any satisfaction for it.

Sec. 64: If the person at whose option it is voidable rescinds the contract. Sec. 64: If the promisee

neglects or refuses to afford the promisor reasonable facilities for the performance of the promise.

Discharge of Contracts

It means termination of contractual relations between the parties to a contract.

• Modes of Discharge of Contract

1. By performance: It occurs when the parties to the contract fulfil their obligations arising under

the contract within the time and in prescribed manner. It may be:

(i) Actual performance

(ii) Attempted performance.

2. By Mutual Agreement: The parties may enter into a fresh

agreement which provides for the extinguishment of their rights and liabilities of original contract.

Important methods of discharge by a fresh contract:

(i) Novation: It occurs when an existing contract is substituted by a new one, either between same

parties or between the new ones.

(ii) Rescission: It occurs when only the old contract is cancelled and no new contract comes to exist in its

place.

(iii) Alteration: It occurs when the terms of contract are so changed by mutual agreement that have

the effect of substituting a new contract for the old one.

(iv) Remission: It refers to acceptance of lesser fulfilment of the terms of promise.

(v) Waiver: It refers to the abandonment of the rights by the party who is entitled to claim

performance of the contract.

(vi) Acceptance of any other satisfaction: It occurs when the party entitled to claim performance

accepts any other satisfaction instead of the performance of the contract.

3. By Lapse of time: It occurs if a contract is not performed within a specified period as prescribed

by the. Limitation Act, 1963.

4. By operation of law

It occurs when the contract is discharged by operation of law which includes:

(i) Material alteration: Where it is done without the knowledge and consent of the other, contract

can be avoided by other party.

(ii) Insolvency: It can be done under certain particular circumstances.

(iii) Death of a promisor: Contracts involving personal skill or expertise of promisor. When

promisor dies, it cannot be performed by anyone else and hence comes to an end.

(iv) Merger of rights: If an inferior right in a contract is merged into a superior right by the party.

5. (i) By Impossibility of performance / frustration (Sec. 56)

Relevant Case Law:

• Satyabarta Ghose v Mugmiram

(ii) , Discharge by supervening impossibility is done in following ways-

(i) Death or personal incapacity

(ii) Destruction of subject-matter

(iii) Non - existence or non- occurrence of certain essential things

(iv) Change of Law

(v) Declaration of war

(iii) Discharge by supervening illegality

If after making the contract, its performance becomes impossible due to alteration of law or act of any

person, it is discharged.

(iv) Cases not covered by subsequent impossibility

(i) Partial impossibility

(ii) Commercial impossibility

(iii) Difficulty of performance

(iv) Default of a third party.

(v) Strikes, lockouts, etc.

(v) It is also known as frustration under English law.

6. By Breach of contractlt may be-

(i) Actual Breach: If one party defaults in performing his part of the contract on due date.

(ii) Anticipatory Breach: When a person repudiates the contract before the stipulated time for its

performance has arrived.

Let us study breach of contract in detail Breach of Contract

• It means failure of a party to perform his obligations.

• Consequences of Breach

(i) It discharges the aggrieved party from .performing his obligations.

(ii) The aggrieved party is entitled to proceed against the party at fault

• Types of Breach

Anticipatory Breach of Contract

It occurs when the promisor refuses altogether to perform his promise and signifies his unwillingness

even before the time for performance has arrived It may be by:

(1) Express repudiation, or

(2) Party disables himself.

The aggrieved party may exercise either of following two options:

(1) May wait till the due date i.e. it may treat the contract as operative.

(2) May decide not td wait till the due date, but may immediately rescind the contract and bring\an

action for damages.

Relevant Case Laws:

• Hochester v. De La Tour

• Avery V. Bowden Facts -

(i) B chartered A’s ship

(ii) B agreed to load it With a cargo in Odessa within 45 days.

(iii) B was unable to supply the cargo, but A continued to demand it

(iv) Meanwhile a war brokeout, rendering the performance impossible. Decision: Contract was

discharged and A cannot sue for damages.

• Frost v. Knight

Facts -

(i) Defendant promised to marry the plaintiff on the death of hid father.

(II) Defendant broke off the engagement during lifetime of his father.

Decision: Plaintiff could bring an action for damages without waiting for death of defendant’s father.

Remedies available to aggrieved party

• Rescission of contract

• Claim for specific performance of the contract

• Claim for injunction

• Claim for quantum meruit

• Claim for damages.

(i) Rescission of contract: It means right available to aggrieved party to terminate the contract In this

case, the aggrieved party is not required to perform his part of obligation and is entitled to claim

compensation for any loss caused to him.

(ii) Claim for specific performances of the contract:

• In certain cases, when the damages are not adequate remedy, the court may direct the party in

breach for specific performance of the contract and the promise is carried out as per the terms of the

contract.

• Usually granted in contracts connected with land.

• It cannot be granted where-

(a) Monetary compensation is an adequate relief

(b) Contract is of personal nature

(c) It is not possible for court to supervise performance of contract

(d) Contract is ultra virus.

(e) One of the parties is a minor.

(Hi) Claim for injunction: Injunction refers to an order passed by a competent court restraining a person

from doing a particular act. Negative term of contract means doing something, which party has promised

not to do or reasonable remuneration.

Thus, where a party to a contract is negativating the terms of a contract, the court may in its discretion

issuing an order to the defendant restrain him from doing what he promised not to do.

Relevant Case Laws

• Lumley V.Wagner

(iv) Claims for Quantum Meruit

Quantum Meruit” means “as much as is earned” or ‘according to the quantity of work done’ Or reasonable

remuneration.

• Claim by party not at fault - In following cases, party not at fault may claim payment:

(i) One party preventing the other from completion of contract.

(ii) Contract becoming void before its completion.

(iii) Agreement is discovered to be void.

• Claim by party at fault: In following cases, party at fault may claim payment:

(i) Divisible contract partly performed

(ii) Indivisible contract performed completely but badly

(v) Claim for damages: .

• Damages are a monetary compensation awarded by the court to the injured party, for the loss or

injury suffered by him.

• As per Sec. 73, when a contract is broken, the party at loss or damage from the breach is entitled

to receive from the party at fault, compensation for the loss suffered by him.

• The loss or damage should have-

(a) arose naturally in the usual course of things from such breach or

(b) which the parties knew to be the likely result of such breach.

• No compensation for any remote or indirect loss.

Relevant Case Law:

• Hadley v. Barendale

Facts-

(i) X’s mill was stopped due to break down of shaft.

(ii) He delivered the shaft to Y, a common carrier, to be taken to a manufacturer to copy it and make

a new one.

(iii) X did not inform Y that delay would result in loss of profits.

(iv) Due to Y’s neglect, delivery was delayed beyond a reasonable time.

Decision: Y was not liable for loss of profits during the delayed period.

(i) General/ Ordinary Damages:

• It helps putting the injured party in the position that he would have been if the contract was

performed.

• It refers to the estimated amount of loss actually incurred.

• It applies only to proximate consequences of the breach of contract.

(ii) Special Damages:

• It includes those damages other than that arising directly from breach

• It must be known to parties at the time of entering into contract.

(iii) Exemplary/Punitive Damages:

• These are awarded not to compensate the aggrieved party, but as a means of punishment to the

defaulting party.

• It is awarded in 2 cases:

(a) Breach of contract to marry or-promise to marry.

(b) Wrong dishonour of a customers cheque by a banker.

(iv) Nominal Damages:

These are awarded where the plaintiff has proved that there has been a breach of contract but he has not

suffered any loss or damage.

(v) Liquidated Damages & Penalty:

When parties to a contract, specify a certain sum in the contract which will becomes payable as a result of

breach, such specified sum is known as liquidated damages or penalty.

• Under the English law,

(a) If the amount fixed is a genuine pre-estimate of the loss in case of breach - it is liquidated

damages and is allowed.

(b) If the amount is fixed without any regard to probable loss, but is only to frighten the party and

prevent it from committing any breach, it is a penalty and is not allowed.

In Indian law, there is no difference between the two.

Relevant Case Law:

• Union of India v. Raman Iron Foundry

Differences between ordinary and special damages

Ordinary Damages Special Damages

1 Damage which was naturally in the usual course of

things.

Damages which result from the breach of contract

under special

circumstances.

2 Include damages which are due to natural and

probable consequences.

Includes damages which the aggrieved party

suffers due to indirect loss.

Differences between liquidated damages and penalty

Liquidated Damages Penalty Damages

1 If the sum payable by the defaulting party

represents a fair

If the sum payable by the defaulting party is not

based on

and genuine pre-estimate of damages such specified

sum is known as liquidated damages, Thus, they are

based on probable loss.

probable loss, but are disproportionate to the

damages, such specified sum is known as penalty.

2 They are imposed by way of compensation to the

aggrieved party.

It is imposed by way of punishment, so as to

prevent the aggrieved party from committing a

breach.

3 In England, they are awarded in full. In England, no amount is awarded to any party.

Contracts of Indemnity

• As per Sec. 124, A contract by which one party promises to save the other from loss caused to

him by the conduct of the promisor himself or the conduct of any person is called a contract of indemnity.

• Contract of Indemnity are a part of general class of contingent contracts, thus are conditional.

• Parties of Indemnity Contract

(i) Indemnifier: The person who promises to make good the loss.

(ii) Indemnified or Indemnity Holder: The person whose loss is to be made good.

• It does not includes events or accidents, which do not depend upon the conduct of any person.

Eg: Contract of insurance etc. (except life insurance)

• Modes

(i) Expressed

(ii) Implied

• Essential Elements of Contracts of Indemnity

(i) All essential elements of a valid contract must be present.

(ii) A loss should be incurred or loss has become certain.

(iii) Its purpose is to protect the indemnity holder against any loss.

(iv) It must specify that the indemnity holder is protected from loss caused due to;

• 1. action of the promisor himself

2. action of any other person

3. any act, event or accident which is not in the control of parties.

• Rights of Indemnity Holder (Sec. 125)

(i) Right to recover damages

(ii) Right to recover costs

(iii) Right to recover sums paid Contracts of Guarantee (Sec. 126)

• It is a contract to perform the promise or discharge the liability incurred by a third person in

case of his default.

• Parties to the contract

(i) Surety- The person who gives the guarantee.

(ii) Principle Debtor- The person in respect of whose default the guarantee is given.

(iii) Creditor - The person to whom the guarantee is given.

• Essential Elements of Contracts of Guarantee.

(i) Must have all essentials of a valid contract

EXCEPTIONS

(a) Consideration received by the Principal Debtor is a sufficient consideration to the surety for

giving the guarantee.

(b) Contract is valid even if the principal debtor is incompetent to contract.

(ii) The principal debtor is primarily liable.

(iii) Debt must be legally enforceable

(iv) Debt must not be a time barred debt.

(v) Liability of surety is secondary and conditional

(vi) The creditor should disclose all the facts which are likely to affect the surety’s liability.

(vii) Contract may be either oral or written.

• Nature and extent of Surety’s Liability (Sec. 128)

(i) Liability of surety is same as that of principal debtor.

(ii) Where a debtor cannot be held liable on account of any defect in the document, the liability of the

surety also ceases.

(iii) Surety, liability continues even if the principal debtor has not been sued or committed to be sued.

Thus surety’s liability is separate on the guarantee.

Relevant Case law:

• Kashiba V. Shripat

• Kinds of Guarantee:

(i) Specific Guarantee

• It is given for a single debt

• It comes to an end when the debt guarantee has been paid.

(ii) Continuing Guarantee (Sec. 129)

• It extends to a series of transactions.

• Surety’s liability extends to all the transactions contemplated until the guarantee’s is revoked.

Differences between Specific and Continuing Guarantee

Specific Guarantee Continuing Guarantee

1 It is given in relation to a specific transaction. It is provided in relation to a series of transactions.

2 It is limited upto a special transaction. It extends to a series of transaction.

3 It is abblished on the completion of special

transaction.

It is abolished only when all the transactions are

completed.

4 It cannot be revoked by surety. It can be revoked by the surety in relation to future

transaction.

• Revocation of Continuing Guarantee

(i) It may be revoked at any time by the surety as to the future transactions by giving notice to

creditors (Sec. 130)

Relevant Case Law:

• Offord v. Davies

ii) Upon the death of surety, it is revoked for all the future transactions in the absence of the contract to

the contrary. (Sec. 131)

Relevant Case Law:

• Lloyds V. Harper

Rights of Surety Against the principal debtor

(a) Right of indemnity (Sec. 145): Surety is entitled to recover from principal debtor all payment

properly made.

(b) Right of Subrogation (Sec. 140): It means substitution of one person for another. On payment

of a debt, surety shall be entitled to all the rights which the creditor can claim against the principal debtor.

Relevant Case Law:

• Mamta Ghose V. United Industrial Bank

Against the creditor

(a) Right to claim securities (Sec. 141): Surety is entitled to benefit of every security, which

creditor has against the principal debtor, whether surety knows of it or not.

If creditor loses or parts with security without surety’s consent, surety is discharged to the extent of

security’s value.

(b) Right to set off: Surety can ask the creditor to set off or adjust any claim which the debtor has

against creditor. .

(c) Right to share reduction: If the principal debtor becomes insolvent, surety may claim

proportionate reduction in his liability.

Against Co - Sureties

(a) Right to contribution (Sec. 146): All the co- sureties contribute equally except in following

cases:

(1) Co- sureties may fix limits on their respective liabilities.

(2) Contract may provide co-sureties to contribute in some other proportion.’

(b) Right to share benefit of securities:

• Discharge of a surety

Sec. 130: By giving notice to creditor for future transactions in case of continuing guarantee.

Sec. 131: In absence of any contract to the contrary , continuing guarantee is revoked on death of surety.

Sec. 133: Where there is any variance in the term of contract between the principal debtor and creditor

without surety’s consent, it would discharge the surety in respect of all the transactions taking place

subsequent to such variance .

Sec. 134: The surety is discharged, if the principal debtor is discharged by-

(i) a contract

(ii) any act or

(iii) any omission, the result of which is the discharge of principal debtor.

Sec. 135: If the creditor makes an arrangement with the principal debtor for composition, for giving time

or for not suing him without surety’s consent.

Sec. 139: If creditor does any act or omission , there by impairing sureties eventual remedy.

Sec. 141: If the creditor loses or parts with security without surety’s consent, surety is discharged to the

extent of security’s value. Difference between Contracts of Indemnity and Contracts of Guarantee

Contract of indemnity Contract of Guarantee

1 There are two parties-indemnifier and indemnified There are 3 parties-creditor, principal debtor and

surety.

2 Indemnifier’ liability is primary and independent Surety’s liability is secondary.

3 Indemnifier’ liability arises only on happening of a

contingency.

Liability of surety is already in existence but

crystalizes when the principal debtor fails.

4 Indemnifier need not necessarily act at the request of

indemnified.

Surety must act by extending guarantee at the

debtors request.

5 There is only one contract between the indemnified

and Indemnifier.

There are three contracts-

(i) between principal debtor and creditor,

(ii) between creditor and surety,

(iii) between Surety and principal debtor.

6 Indemnifier cannot sue a third party for the loss in

his own name as there is no privity of contract.

Surety can proceed against the principal debtor in

his own name.

Contracts of Bailment

• As per Sec. 148, Bailment is an act whereby the goods are delivered by one person to another for some

purpose, on a contract, that the goods shall, when the purpose is accomplished be returned or otherwise

disposed off according to the directions of the persons delivering them.

• It is a voluntary delivery of goods for a temporary purpose.

• Ownership of goods remains with the bailor.

• Goods should be movable goods.

• Parties

(1) Bailor: The person delivering the goods.

(2) Bailee: The person to whom the goods are delivered.

Essential Elements of Contracts of Bailment

(i) There must be an expressed or implied contract between the parties.

(ii) It can be made of goods only.

(iii) There must be delivery of goods from one person to another.

(iv) Goods must be delivered for some purpose express or implied.

(v) The delivery of goods must be conditional.

(vi) The return of the goods may be in the original form or i.e. in an improved form as agreed

between the bailor and bailee.

• Modes

(i) Actual Delivery

(ii) Symbolic Delivery

(iii) Constructive Delivery.

• Bailment may be gratuitous (without any remuneration or reward) or for reward, (for

consideration)

Classification

• Duties of Bailor

Sec. 150: Bailor must disclose all known defects / faults in the goods bailed. He is responsible for defects

in the goods hired to bailee whether bailor was aware of such defects or not.

Sec. 158:

(a) Where the bailment is gratuitous, he must reimburse the bailee for any expenditure incurred in

keeping the goods.

(b) He should reimburse any expense which bailee may incur by the way of loss in the process of

returning the goods or complying with other directions for returning the goods.

(c) He must compensate the bailee for any loss or damage suffered by bailee in excess of benefit

received.

(d) He is bound to accept the goods after the purpose is accomplished.

• Rights of Bailor

• Right to enforce the duties of the bailee.

• Right to terminate the contract if bailee does any thing which is inconsistent with the conditions

of bailment.

• In gratuitous bailment, he has a right to demand back goods even before expiry of bailment

period.

• Right to claim the increase or profit from the goods bailed which may have occurred from value

of goods.

• Duties of Bailee

Sec. 151: Duty to take reasonable care of goods.

Sec. 152: If he takes care of goods as a man of ordinary prudence, he will not be liable for any loss or

damage of goods bailed.

Sec. 153: Duty not to make authorised use of goods.

Sec. 154: If he makes any unauthorized use of goods , he will be liable to make good the loss.

Sec. 155-157:

(a) Duty not to mix the goods bailed with his own goods without the bailor’s consent. If he does so,

he has to make good the loss.

(b) Duty not to set up an adverse title

Sec. 160: Duty to return the goods on expiration of the bailment period. Sec. 161: If he fails to return, he

will be responsible to the bailor for any loss, destruction or deterioration of goods there after.

Sec. 163:

(a) Duty to return any extra profit occurring from goods bailed.

(b) Duty not to do any thing inconsistent with the bailment conditions.

• Rights of Bailee

(a) Right to claim compensation for any loss arising from non-disclosure of known/unknown defects

in goods.

(b) Right to claim indemnification for any loss or damage as a result of defective title.

(c) Right to deliver back the goods to joint bailors as per the agreement.

(d) Right to deliver goods back to bailor whether has the right to the goods.

(e) Right to exercise his right of lien.

(f) Right to take action against third parties.

• Termination of Bailment

Sec. 153: Where bailee makes unauthorized use of the goods bailment becomes voidable at bailors’

option.

Sec. 159: At bailor’s will -

(a) In non-gratuitous bailment, bailor has a right to take back the goods , after the purpose is over.

(b) In gratuitous bailment, he can take back the goods any time, provided in case of loss in excess of

benefit, bailee must be compensated.

Sec. 160:

(a) When the period or purpose of bailment is over.

(b) Where the subject matter is destroyed or becomes illegal.

Sec. 162: A gratuitous bailment is terminated by the death of the bailor or bailee.

Lien It refers to right of one person to retain the possession of some goods, belonging to other person,

until some debt or liability is discharged.

Types of Lien

(a) Particular Lien:

• It is available only against those goods in respect of which bailee has exercised skill and labour.

• Bailees lien is a particular lien.

• It is available to all.

• Conditions/or exercising Particular Lien

(i) If bailee has exercised his labour and skill on goods bailed.

(ii) When work has been completed on time.

(iii) If the payment is due.

(b) General Lien

• It refers to the right of one person to retain the possession of any goods, belonging to another

person , until some debt or liability is discharged.

• It is available to bankers, factors, warfingers, attorneys of High Court and policy brokers.

Differences between General Lien and Particular Lien

General Lien Particular Lien

1 Right to detain / retain any goods It is exercisable only on such

of the bailor for balance of amount goods in respect of which

outstanding. charges are due.

2 It is recognized through an agreement. It is automatic.

3 It can be exercised against goods It comes into play only when

even without involvement of labour or skill. some labour or skill is involved.

Finder of Goods

• Refers to a person who finds the goods belonging to another person i.e. the goods lost by the true

owner - he enjoys all the rights and carries all the responsibilities of a bailee.

• Though the finder has no right to sell the goods found in the normal course , he may sell the

goods if the real owner cannot be found with reasonable efforts or if the owner refuses to pay the lawful

changes subject to the following conditions -

(1) article is in danger of perishing and losing the greater part of the value,

(2) lawful charges of the finder amounts to two-third of the value of the article found.

Carrier as bailee

• Carrier undertakes to carry goods of all persons safely to its destination He undertakes to make

good all losses unless caused by an act of God or public enemies.

Innkeepers

• Their liability is like that of a bailee with regard to the property of the guests.

Relevant Case Law:

• Jan & Sar V. Caneron Pledge / Pawn

• As per Sec. 172,

it refers “to the bailment of goods as security for payment of debt or performance of a promise.”

• It refers to a contract where by an article is deposited with a money lender as a security for the

loan repayment or for the performance of promise.

• Parties

Pawnor: The person who pledges i.e. bailor incase of pledge Pawnee: The bailee incase of pledge.

• Essential Elements of Pledge

(a) There must be expressed implied contract between the parties.

(b) It can be of goods only

(c) There must be delivery of goods from one person to another.

(d) It must be for some purpose.

Duties of Pawner

(a) Repay the loan or perform the promise

(b) Pay expenses in cases of default

(c) Pay the deficit on sale.

(d) Pay extraordinary expenses incurred for preserving the goods.

(e) Disclose faults in goods which are material for the use of goods or may put pawnee to extra-

ordinary risks.

(f) Indemnify pawnee if he suffers any loss due to defective title of the pawner.

• Rights of Pawner

(a) Sec. 177: Redeem the goods pledged.

(b) Right to sue irt the event of pawnee refusing to return the goods even after payment of debt etc.

(c) Receive any increase in goods.

(d) Receive notice of sale.

• Duties of Pawnee

(a) Not to use the goods unless authorised by pawner

(b) Return the goods to pawnor on payment of debt etc.

(c) Take reasonable care of the goods

(d) Not to mix the goods with his own goods

(e) Return any increase in goods pledged with him

(f) Return any surplus on sale.

• Rights of Pawnee

Sec. 173: Retain the goods pledged only for

(a) the performance of promise, (b) payment of debt, or (c) interest on debt.

Sec. 174: Right of particular lien.

Sec. 175: Seek reimbursement of extra ordinary expenses.

Sec. 176: Right to sue the pawner in the event of pawner failing to redeem the debt or perform the

promise. He can sell the goods after giving a notice of sale

Pledge by non- owners

A valid pledge can be created by following non- owners:

(a) Pledge by Estoppel.

(b) Pledge by a mercantile agent.

(Sec. 178)

Mercantile Agent means an agent of the seller who has been appointed to sell the goods belonging to the

seller.

Conditions for pledging:

(i) Goods came into his possession with the consent of seller/owner of goods.

(ii) Pledge is made by him in the ordinary course of business

(iii) Pawnee acts in good faith.

(c) Pledge by a person in possession under a voidable contract.

(Sec. 178 A) Conditions:

(1) Person acquires goods under voidable contract

(2) Person who acquires the goods pledges such goods

(3) At the time of creation of pledge, voidable contract should not have rescinded

(4) Pledge is made in good faith.

(d) Sec. 179: Pledge by a person having limited interest in the goods. If a person has a limited

interest, he can make a valid pledge to the extent of that interest.

(e) Pledge by a co-owner in possession:

Consent of all joint owners is required, if the goods owned jointly are to be sold or pledged.

Conditions for exception -

(i) Goods are in the soie possession of one joint owners.

(ii) Goods came into his possession with consent of other joint owners.

(iii) Pledge is made in good faith.

(f) Pledge by a seller in possession of goods after their sale.

Conditions:

(1) Ownership of goods has been passed to the buyer

(2) Seller continues to be in their possession, even after their sale

(3) Seller pledges the goods to some other person

(4) Pledge is made in good faith without any notice of the prior sale

(g) Pledge by a buyer who has obtained possession of goods under an agreement to sell.

Conditions

(1) Ownership has not been passed

(2) Buyer has obtained possession with the seller’s consent

(3) Buyer pledges the goods to some other person

(4) Pledge is made in good faith.

Differences between Bailment and Pledge

Bailment Pledge

1 Goods are bailed for purpose Under it, goods are bailed as a

other than those referred under security for loan or performance of

pledge. promise.

2 Bailee generally cannot sell the Pawnee enjoys the right to sell the

goods. goods on pawnor’s default.

3 He can either retain or sue. Pawnee has a right to use the

Bailee can use the goods only if the terms provide

so.

goods.

Differences between Pledge and Lien

Pledge Lien

1 It gives a special property in the things pledged. It gives a right to the creditor to retain a property of

the debtor.

2 It is always created by a contract. It is created by law.

3 Goods are bailed as a security for the payment of

debt or performance of promise.

It is only the right of retainer, no bailment of goods

as security is there.

4 Pledgee has a power to sell. Lienholder has no right to sell.

Law of Agency

• As per Sec. 182,

“ An agent is a person employed -

(i) to do any act for another, or

(ii) to represent in dealing with third persons.”

• Principal is a person for whom such act is done , or who is so represented.

• Agent acts as a mere connecting link between the principal and third party.

• It is based on two rules:

(i) A person can do through an agent, whatever he can do himself.

(ii) The acts of the agent are the acts of the principal.

Essential elements

(i) Two parties are required

(ii) Agreement between parties is necessary.

(iii) No consideration is required.

True test of Agency

If a person has the capacity to bind the principal for the acts done by him, then agency exists and such

person is called an agent.

Modes of creation of Agency

• Sec 187: Express Agency

It is created either by words spoken or in writing Eg- Power of Attorney (it may be general or special)

• Implied Agency: Agency created by conduct of parties. It can be in the following terms:

(a) Sec 237: Agency by Estoppel

It a person by his conduct, words spoken or written leads another to believe that a certain person is

acting as his agent, he is estopped later on from denying such facts.

Eg: Wife as an agent, where a married women lives with her husband, there is a presumption that she has

the authority to pledge his credit for necessaries.

This Presumption is not held where husband shows that -

(i) he had expressly warned the tradesman not to supply goods to his wife on his credit,

(ii) he had expressly forbidden the wife to pledge his goods,

(iii) his wife was already supplied with sufficient articles,

(iv) she was supplied with sufficient allowance.

(b) Agency by Holding out

- Under this the principal plays a positive role.

- It occurs when any one holds himself out as an agent of another

- It happens through a wilful conduct

- Eg: In case of partnerships.

Sec. 189:

Agency by necessity

• In case of emergency, the agents can exceed their powers and can take all the steps to minimise his

principal’s loss.

• Agency by ratification

(a) The principal is not bound by the act of agent if the agent acts:

(i) On behalf of another without his consent or knowledge

(ii) exceeding his authority.

(b) Principal can create it by subsequent ratification.

(c) Also known as ex post facto agency i.e. agency arising after the event.

(d) Principal becomes bound.

Agency by ratification is possible if following conditions are satisfied

(i) The act must have been done on behalf of the named or identifiable principal.

(ii) The principal must be in existence at the time of contract.

(iii) The principal must be competent to contract at the time of making the contract.

(iv) Principal must have full knowledge of the facts.

(v) Contract can be ratified only as a whole.

(vi) It can be done of a lawful contract.

(vii) It must be done within a reasonable time.

(viii) It should not cause any damages to a third party.

Extent of Agent’s Authority

It is governed by two principles:

• Sec. 188: Agents authority in normal circumstances.

Agent has the power and authority to do all the acts lawful and necessary in the normal circumstances in

discharge of his functions.

• Agent’s authority in emergency.

Agent has the authority in an emergency to do all such acts as a man of ordinary prudence for protecting

his principal from losses under similar circumstances. It includes:

(a) Actual / Real Authority.

(b) Ostensible / Apparent Authority.

Sub Agent

Note:

As per Sec. 190,

Sub - agent’s appointment is not lawful as the agent is a delegate and a delegatee cannot further delegate.

As per Sec. 191,

A sub - agent is a person-

(i) employed by, and

(ii) acting under the control of the original agent in the business of agency.

Relationship between principal, agent and sub - agent

• Agent and Sub-Agent have the relation like that of agent and principal.

• Sub- agent is not directly responsible to the principal.

• Agent is responsible for the acts of sub- agent to the principal.

• Principal is responsible to third party for acts of both agent and sub - agent.

Substituted Agent

• As per Sec. 194,

Where-

the principal appoints an agent, and if that agent identifies another person to carry out the acts ordered

by the principal, then the second person is not to be treated as a sub- agent but only as an agent of the

original principal.

Mercantile Agent

• As per Sec. 2 (9) of the Sales of Goods Act, 1930 “Mercantile Agent is an agent having in the

ordinary course of business as such an authority either -

(i) to sell goods, or

(ii) consign goods for the purpose of sale, or

(iii) to buy goods ,or

(iv) to raise money on the security of goods.

• It includes:

(1) Factors

(2) Brokers

(3) Del credere agent

(4) Auctioneers

(5) Partners

(6) Bankers

1. Factors

• Employed to sell goods placed in his possession.

• Contract to buy goods for his principal.

• Can sell and receive payment for the goods.

• • Has an insurable interest in the goods.

• Have general Lien in respect of any claim arising out of agency.

2. Brokers

• Contracts with other for the sale and purchase of goods and securities.

. • Goods and securities are not in his possession.

• Gets commission in return called brokerage.

• Acts in principal’s name.

• Has no lien over the goods.

3. Del Credere Agent

• Gives guarantee to the principal that credit purchasers pay for the goods.

• Gets an extra remuneration in return.

• If third party fails to pay , he is bound to pay the principal, the balance amount.

4. Auctioneers

• Sells goods by auction.

• Cannot warrant his principal’s title to the goods.

• Until sale he is an agent for seller.

• After sale he is an agent for buyer.

5. Partners

• Agent of the firm and his co- partners.

6. Bankers.

• Relationship of debtor and creditor with their customers.

• Agent of customer when he buys or sell securities, collects bills etc on customer’s behalf.

• Has general lien on all goods and securities in his possession.

Duties of Agent ,

(a) Sec. 21: To conduct principal’s business according to his directions.

(b) Sec. 212: He must always act as a person with skill and diligence.

(c) Sec. 213: He has to maintain and render proper accounts to the principal whenever demanded.

(d) Sec. 214: To communicate and obtain instructions in case of difficulty.

(e) Sec. 215: He must not deal on his own account.

(f) Sec. 216: Must not make any secret profit.

(g) Sec. 217 & 218: To account for money received for the principal.

Not to use the information obtained in the course of agency against the principal.

Agent cannot delegate his authority to sub agent generally. The general rule for this is. Delegates non-

protest delegare- a delegate cannot further delegate.

Rights of an Agent

(a) Sec. 217: Rights of Retention.

(b) Sec. 219: Right to receive agreed remuneration.

(c) Sec. 221: Right of lien on principal’s property.

(d) Sec. 222: Right of indemnification for lawful acts.

(e) Sec. 223: Right of indemnification against acts don% in good faith.

Note:

Sec. 224:

Agent cannot be indemnified for any loss caused by criminal act.

(f) Sec 225: Right to be compensated for any injury caused due to principal’s negligence.

Principle’s liability for agent’s act to Third Parties

There are 3 circumstances in which an agent may contract namely -

(i) The agent acts for named principal (disclosed principal)

(ii) The agent acts for an undisclosed principal

(iii) The agent acts for a concealed principal

(a) Sec. 226: Acts within the scope of actual apparent authority., it bounds the principal.

(b) Sec. 227: Acts in excess of agent’s authority is separable, it bounds the principal.

(c) Sec. 228: Acts in excess of agent’s authority is not separable, principal is not bound by it.

(d) Sec. 229: Principal is bound by notice given to the principal.

(e) Sec 238: Principal is bound for any fraud or misrepresentation committed by agent:

(i) During the business hours

(ii) Within his authority

(f) Admission made by agent, is deemed to be admission made by the principal.

(g) Unnamed principal, principal becomes liable on being discovered.

Personal liability of the Agent

(a) It is also known as Doctrine of implied warranty of authority.

(b) It happens under following circumstances:

(1) where the agent signs the negotiable instrument without indicating that he is signing for the

Principal.

(2) where the contract expressly provides so.

(3) where the agent works for foreign principal.

(4) where the agent acts for a Principal who Cannot be used.

(5) where a Government servant enters into a contract on behalf of Union of India.

(6) where according to usage in trade in certain kinds of business, agents are personally liable.

(7) where the agency is coupled with interest

(8) If the agent is working for undisclosed principal.

(9) If the amount is received or paid by agent under mistake or coercion. Note: Agency coupled with

interest (Sec. 202)

It occurs when the agent has an interest in the authority granted to him, or he has an interest in the

subject, matter with which he has to deal.

It cannot be terminated to the prejudice of interest in the absence of contract to the contrary.

It applies on fulfillment of following conditions:

(i) agent’s interest should exist at the time of agency’s creation.

(ii) authority given to agent must be intended for protecting the agent’s interest.

(iii) agent’s interest must be substantial

(iv) agent’s interest should be over and above his remuneration.

Termination of Agency:

Termination of Agency

• Agreement between principal and agent

• Performance of contract

• Revocation of authority by principal

• Expiration of period

• Revocation of authority by agent

• Death/insanity of principal or agent

• Insolvency of principal

• Dissolution of company

• Destruction of the subject-matter When Termination of Agency Takes Effect

(i) Sec 208: As regards agent, when it becomes known to him.

(ii) As regard third parties, when it comes to their knowledge .

Sec. 210: Termination of, the agent’s authority terminates the sub- agents authority

Sec. 209: Agent has a duty to protect his principal’s interest where the principal dies or becomes of.

unsound mind.,

Irrevocable Agency.

Revocation of agency is not possible in following cases:

(a) Sec. 202: where agency is coupled with interest.

(b) Sec. 204: where the authority has been partly exercised.

(c) where the agency has incurred personal liability.

E-Contract

• Electronic contracts are not paper based but rather in electronic form are born out of the need

for speed convenience and efficiency.

• The conventional law relating to contract is not sufficient to address all the issues that arise in

electronic contracts.

• The Information Technology Act, 2000 solves some of the peculiar issues that arise in the

formation and authentication of electronic contracts.

• As in every other contract, an electronic contract also requires the following necessary

ingredients:

An offer needs to be made The offer needs to be accepted.

There has to be lawful consideration.

- There has to be an intention to create legal relations.

- The parties must be competent to contract.

- There must be free and genuine consent.

- The object of the contract must be lawful.

- There must be certainty and possibility of performance.