group5_lawreport_indiancontractact1872

Indian Contract Act, 1872

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A REPORT ON

THE INDIAN CONTRACT ACT, 1872

PREPARED FOR:

Mr. Prasen Naithani

PREPARED BY:

VIJAY B D010 SRIRAM D S D017 SUJATHA G D018 MOHIT GUPTA D024 TANVI GUPTA D026 KUMAR K D034 ABHINAY PANATI D041 HEMANTH S D049

25 MARCH 2014


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Table of Contents

INTRODUCTION .............................................................................................................................................................................. 3

FEATURES OF A CONTRACT ...................................................................................................................................................... 3

ESSENTIAL ELEMENTS OF A CONTRACT ............................................................................................................................ 4

KINDS OF CONTRACTS ................................................................................................................................................................ 4

SPECIAL CASE OF QUASI CONTRACT .................................................................................................................................... 6

OFFER - SECTION 2(A) ................................................................................................................................................................. 7

ACCEPTANCE SECTION 2(B) ................................................................................................................................................. 8

CONSIDERATION SECTION 2(D) .......................................................................................................................................... 8

CAPACITY OF PARTIES SECTION 11 ............................................................................................................................... 10

Minor ........................................................................................................................................................................................... 10

Persons of Unsound Mind ................................................................................................................................................... 12

Disqualified Persons.............................................................................................................................................................. 12

FREE CONSENT SECTION 14 .............................................................................................................................................. 14

Coercion ..................................................................................................................................................................................... 14

Undue Influence ...................................................................................................................................................................... 15

Misrepresentation .................................................................................................................................................................. 15

Fraud ............................................................................................................................................................................................ 16

LEGALITY OF OBJECT AND CONSIDERATION ................................................................................................................ 18

Void Agreement....................................................................................................................................................................... 19

PERFORMANCE OF CONTRACT ............................................................................................................................................ 21

DISCHARGE OF CONTRACT .................................................................................................................................................... 23

REMEDIES FOR BREACH OF CONTRACT .......................................................................................................................... 26

INDEMNITY ................................................................................................................................................................................... 27

BAILMENT ...................................................................................................................................................................................... 28

PLEDGE OR PAWN ...................................................................................................................................................................... 30

AGENCY ........................................................................................................................................................................................... 31

CASES ............................................................................................................................................................................................... 33

REFERENCES ................................................................................................................................................................................. 39


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INTRODUCTION

The law relating to contracts in India is contained in Indian Contract Act, 1872. It extends to the whole

of India except J&K. The Act was passed by British India and is based on the principles of English

Common Law.

The law of contract is the foundation upon which business is built. The Indian contract act defines a

contract as such: An agreement enforceable by law. A contract, therefore, is an agreement whose

objective is to create a legal obligation to fulfil a promise/duty. Each contract creates some rights and

duties on the contracting parties. Hence this Indian Contract Act deals with the enforcement of these

rights and duties on the parties in India.

A contract determines the circumstances in which promises made by the parties to a contract shall be

legally binding on them. Law of Contract forms the basis for other enactments like sale of goods,

negotiable instruments, insurance, insolvency, partnership etc. In other words, the contract law lays

down the legal rules relating to promises: their formation, performance and enforceability.

FEATURES OF A CONTRACT

A contract essentially consists of two elements: An Agreement & Legal Obligation.

1. Agreement

A promise is an agreement. Section 2(b) explains a promise as thus: When the person to

whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A

proposal, when accepted, becomes a promise.

An agreement holds the following characteristics:

Plurality of Persons: There must be two or more persons to make an agreement

Consensus-ad-idem: Both parties to an agreement must agree about the subject-matter in the

same sense and same time

2. Legal Obligation

An agreement to become a contract must give rise to a duty enforceable by law. The Act restricts

the use of the word contract to only those agreements which give rise to legal obligations

between parties. All contracts are agreements but not all agreements are contracts. There is a

presumption that the parties involved intend to create legal relations.

Example: Business agreements like sale of wheat bags at a specific agreed price to a person. An

action of breach of contract can be enforced in this case.

Agreements of moral, social nature like a promise to lunch together, date etc. are not a contract.

Also, obligation to maintain wife and child, obligation to observe laws of the land are not under

contract law.


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ESSENTIAL ELEMENTS OF A CONTRACT

To be enforced by law, an agreement must possess the essentials of a valid contract as contained in section 10, 29 and 56. The essentials of a contract are:

01. Offer and Acceptance 02. Intention to create legal relations 03. Lawful Consideration 04. Capacity of Parties 05. Free Consent 06. Lawful object 07. Writing and Registration 08. Certainty 09. Possibility of performance 10. Not expressly declared void

KINDS OF CONTRACTS

Contracts can be classified based on 3 categories.

a) From Point Of View of Enforceability

Valid Contract

It is an agreement enforceable by law when all essential elements are present

Void Contract

Such a contract is not void from its inception but subsequent to its formation becomes invalid and has

no legal effect either due to supervening impossibility or subsequent illegality.

A contract becomes void by impossibility of performance after the formation of the contract.

Example:

A and B contracts to marry each other. Before the time fixed for marriage, A goes mad. The contract to

marry becomes void.

A contract also becomes void by subsequent illegality.

Example:

A agrees to sell B 100 bags of wheat at Rs.650 per bag. Before delivery, the Government bans private

trading wheat. The contract becomes void.

Voidable Contract

According to section 2(i), an agreement which is enforceable by law at the option of one or more of

the parties thereto, but not at the option of the other or others, is a voidable contract. Simply put, it is

an agreement enforceable by law at the option of one of the parties/aggrieved party in case of

coercion, fraud etc.

Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained

by coercion, undue influence, misrepresentation or fraud.

Illegal Contract

Illegal agreement, hence void ab-initio if the object or consideration:

forbidden by law

fraudulent

implies injury to person or property

is immoral/opposed to public policy

defeats provisions of law


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All illegal agreements are void but all void agreements are not necessarily illegal.

Unenforceable Contract

Valid contract but not capable of enforcement due to some technical defect such as absence of

registration etc., or time barred like a bill of exchange or promissory note. For example, an oral

arbitration agreement is unenforceable because the law requires an arbitration agreement to be in

writing.

b) From Point Of View of Mode of Creation

Express Contract

When both the offer and acceptance constituting an agreement enforceable at law are made in words

spoken or written, it is called an express contract. For example, A tells B on telephone that he offers to

sell his car for Rs. 80000 and B replies in affirmative.

Implied Contract

When both offer and acceptance are made otherwise than words i.e., by acts and conduct of parties, it

is called an implied contract.

Example:

A, a coolie in uniform takes up the luggage of B in a railway station without Bs saying so, and B allows

him to do so, it is implied that B agrees to pay A.

Quasi Contract

Such a contract doesnt arise by agreement, but the law recognizes a contract under special circumstances. It is based upon the equitable doctrine of unjust enrichment.

c) From Point Of View of Extent of Execution

Executed Contract

A contract is said to be executed when both parties to a contract have completely performed their

share of obligation. Even when one party has performed their share of obligation and the other is still

to, the contract called executed as there comes into existence a contract.

Executable Contract

A contract in which obligations by both parties are outstanding, wholly or in part, at the time of formation of the contract is called Executable contract.

E.g.: A agrees to tutor B from next month and B promises to pay A an amount of Rs.5000. The contract

is executory because it is yet to be carried out.


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SPECIAL CASE OF QUASI CONTRACT

A quasi contract is a contract recognized by law under special circumstances. Quasi contracts are

certain relations resembling those created by contracts. It is based upon the equitable principle that a

person shall not be allowed to retain unjust benefit at the expense of another.

The Indian Contract Law deals with the following quasi-contractual obligations:

01. Claims for necessaries supplied to a person incapable of contracting or on his account

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

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

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

02. Reimbursement of person paying money due by another, in payment of which he is interested

A person, who is interested in the payment of money which another is bound by law to pay, and who

therefore pays it, is entitled to be reimbursed by the other.

03. Obligation of person enjoying benefit of non-gratuitous act

Where a person lawfully does anything for another person, or delivers anything to him, not intending

to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make

compensation to the former in respect of, or to restore, the thing so done or delivered

04. Responsibility of finder of goods

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

same responsibility as a bailee.

05. Liability of a person to whom money is paid, or thing delivered by mistake or under coercion

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

repay or return it.

Exceptions to Quasi Contracts

This section does not cover a case where money has been paid in payment of a natural obligation.

Thus, when one has paid up a time-barred debt, he cannot recover it. Similarly, this section does not

apply when there is a deliberate disregard of law e.g., where moneys are paid voluntarily knowing

fully well that the contract has become void, it cannot be recovered.


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OFFER - SECTION 2(A)

Definition: When one person signifies to another (person) his willingness to do or abstain from doing

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

A valid offer satisfies the following rules:

1. An offer may be express or implied.

Examples:

A offers to sell apple to B at Rs.50 is an express offer.

A D.T.C bus plying on a route at a scheduled fare is an implied offer to its passengers.

2. An offer may be specific or general

Example: Offers of rewards made by an advertisements is a general offer

3. An offer must contemplate to give rise to legal consequences

Example: A boy asking a girl to come for a date

4. The terms of an offer must be certain

Example: A offers B to sell his bungalow for a handsome amount

5. An invitation to offer is not an offer

Example: Apparel with a price tag in a shop

6. An offer must be communicated to the offeree

Example: A, without having knowledge of a reward declared on a criminal, informs the police about the

criminal. He cannot claim for the reward.

7. An offer should not contain a term, the non-compliance of which would amount to acceptance

Example: A sends a mail to B that if he does not reply to the mail, he will get admission to XYZ College

and will have to pay the fee.

8. An offer can be made subject to any terms and condition

Example: A can ask be to communicate the acceptance of his offer only through mail.

9. Two identical cross- offers do not make a contract

Example: A wrote to B to offer a laptop at Rs.50000 and at the same time B wrote to A to buy the

laptop at Rs.45000

Lapse and revocation of offer

An offer is nullified in the following cases:

1. After stipulated time

2. By not being accepted in the prescribed mode

3. By rejection

4. By death or insanity of the offeror or the offeree before acceptance

5. By revocation

6. Revocation by non-fulfilment of a condition precedent to acceptance

7. By subsequent illegality or destruction of subject matter.


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ACCEPTANCE SECTION 2(B)

Definition: When the person to whom the proposal is made signifies his assent thereto, the proposal is

said to be accepted

An acceptance is valid if it satisfies the following rules:

1. Acceptance must be given only by the person to whom the offer is made.

Example: If A accepts to sell a car for an offer of Rs 3lac from B, C cannot sell the car to B for 3 lac

unless authorized.

2. Acceptance must be absolute and unqualified

Example: If A offers to sells his scooter to B for Rs.14000 as a whole, B cannot accept the scooter by

paying Rs.14000 in part.

3. Acceptance must be expressed in some reasonable manner if the mode is not prescribed. Mental

acceptance will not suffice

Example: A offers to gives a flat on rent to B, B can accept the offer by word of mouth or can express his

acceptance by mail, if specified by A in the terms of offer. Say, if B writes the mail but forgets to send

the mail, the acceptance is not valid.

4. Acceptance must be given within a reasonable time and before the offer lapses and/or is

revoked

5. Rejected offers can be accepted only, if renewed.

6. Acceptance must succeed the offer

Communication of offer, acceptance and revocation

1. Communication of Offer: It is complete when the offeree has the knowledge of the same

2. Communication of acceptance: As against the proposer/As against the acceptor

Example: A decides to accept offer from B in writing and posts it on 9th March and it reaches B on 10th

March. The offer is accepted as against B on 9th and as against A on 10th March

3. Communication of revocation: As against the person who makes it when it is put into course of

transmission. As against the person to whom it is made, when it comes to his knowledge.

CONSIDERATION SECTION 2(D)

Definition: When at the desire of the promisor, the promisee or any other person has done or abstained

from doing, or does or abstain from doing, or promises to do or to abstain from doing, something, such an

act or abstinence or promise is called a consideration for the purpose

Essentials of valid consideration

1. Consideration must move at the desire of the promisor

Example: A sees Bs house on fire and helps in extinguishing it. He cannot demand payment for his

service because B never asked him to come and help

2. Consideration may move from the promisee or any other person

Example: A, an old lady gifted the property to her daughter R, with a direction that R will pay annuity

to her maternal uncle C like A used to do. Also, the same day the daughter executed writing in favor of

her maternal uncle C. Now C has a legal right to demand annuity from R since he is party to the

contract.

3. Consideration can be past, present and future

a) The salary offered at the end of the month is a consideration of past service.

b) Buying goods on credit is present consideration as delivery is executed while the payment is

executory


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c) A contract where payment and delivery are to be made in future is called future

consideration.

4. Consideration must be something of value, need not be adequate but lawful

Example: A might sell his Rs1Lac car at Rs1000 provided his consent is free. At the same time if A pays

Rs.1Lac to B in favor of a murder is not lawful

5. Consideration may be an act to do OR not to do an act ( abstinence ) it may be in cash or in kind:

a) A agrees to sell his car to B for Rs. 2Lac. The consideration received by A is consideration in

cash.

b) A declares a reward in the newspapers for finding his son. The consideration received

by A is consideration in terms of the act of finding his son.

c) A agrees to give his car to B in return of a plot of his land. This is consideration in kind.

d) A agrees to pay money to B provided B does not sell his property. This is a

consideration by way of a promise not to do an act.

Exceptions to the rule No consideration, no contract

1. Case of Love or Gift

Example: A, for natural love and affection, promises to give Rs.1000 to B and puts it in writing. Its a

valid contract. Similarly for gift, it does not require consideration

2. Agreement to compensate for past voluntary service:

Example: A finds Bs purse and gives it to him. B promises to give A Rs.500. Its a contract. B may

deicide otherwise that the consideration was against his desire

3. Case of donation

Example: If Mr. Shah promised to donate Rs.1 Lac for the repair of college. College principal did

nothing for repair. Mr. Shah is not liable because it did not result any loss to promisee. Otherwise if the

principle would have acted on it, Mr. Shah would have been liable.

4. Case of Time Barred Debt

Example: A owes B Rs.1000 but the debt is barred by limitation Act. A signs a written promise to pay B

Rs.500 on account of debt. This is a contract.

5. No consideration is required to create an agency


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CAPACITY OF PARTIES SECTION 11

Section 11 states that Every person is competent to contract who is of the age of majority according to

the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by

any law to which he is subject

A person is incompetent to contract if

a. He is a minor, according to the law he is subject

b. He is of unsound mind

c. He is disqualified from contracting by any law to which he is subject

Each of these is discussed in detail below

Minor

A person, domiciled in India, who is under 18 years of age, is a Minor

Minors Agreements

01. Agreement by a minor is absolutely void and inoperative as against him

Law acts as the guardian of minors and protects their rights. When a minor is charged with obligations

and the other convincing party seeks to enforce those obligations against minor, the agreement is

deemed as void ab initio.

Case: Mohori Bibi vs Dharmo Das

Dharmo Das, a minor executed mortgage for 20,000 rupees and received 8,000 rupees from the

Mohori Bibi, mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for sale

of the property in case of default.

Judgement:

Agreement by a minor was adjudged as absolutely void as against minor and hence the mortgagee

could not recover the mortgage money nor could he have the minors property sold under his

mortgage.

02. Beneficial agreements are valid contracts

An agreement which is of some benefit to the minor and under which he is required to bear no

obligation, is valid. A minor can be a beneficiary i.e., a payee, an endorsee or a promisee. A guardian

can enter into a contract on behalf of a minor and the contract would be binding and enforceable if it is

for the benefit of the minor.

Example:

A promissory note through which a minor is to receive an amount of 2000 is a valid contract as it can

be executed in favour of minor.

03. No ratification on attaining the age of majority

Ratification implies subsequent adoption and acceptance of an act or agreement. Minor cannot ratify

the agreement on attaining the age of majority which he has entered into when he is minor as minors

agreement is considered as void ab-initio and has no existence in the eye of law.

Example:

A gives B (minor) an amount of 5000 rupees during his minority. B makes an agreement to repay after

attaining majority. This agreement would not be enforceable.


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04. Rule of estoppel doesnt apply to a minor

Estoppel is defined as Where one person has, by his declaration, act or omission, intentionally caused

or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his

representative, to deny the truth of that thing.

A minor is not estopped from pleading his infancy where he represents fraudulently that he is of full

age and induces another person to enter into a contract with him, provided an action is founded on the

contract. A minor is not liable to restore the property or goods if the identity of the property or goods

is lost. However, minors can be compelled to restore the goods if they are traceable in his possession.

Example:

A, being a minor, received a sum of 50000 rupees through fraudulent representation and purchased a

motorcycle. In the court of law, the loan transaction is considered invalid but however, minor will be

asked to restore the motorcycle to the lender.

05. Minors liability for necessaries

Section 68 of the Contract Act provides that 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.

A minor is not personally liable but his property is. The minor is liable to pay a reasonable price for the

necessaries supplied to him from his property. In case minor owns no property, the supplier will lose

the price of necessaries. Food, clothing, medical attendance and lodging expenses fall under

necessaries whereas trading doesnt.

06. Specific performance

Specific performance impales the actual carrying out of the contract as agreed. Since an agreement

made by a minor is absolutely void, the court will never direct specific performance of such an

agreement by him. The contract is valid in case guardians entered into a contract on behalf of minor

and if it is

within their authority and

for the benefit of minor

07. Minor partner

A minor cannot be a partner in a partnership firm. However, he can be admitted to benefits of the

partnership with consent of all the partners by an agreement executed through his lawful guardian

with the other partners. He cannot be made personally liable for any obligations of the firm, however,

he may after attaining majority accept them if he thinks fit to do so.

08. Minor agent

A minor can act as an agent. He shall bind the principal by his acts done in the course of such an

agency, but he cannot be held personally liable for negligence or breach of duty as an agent.

09. Minor and insolvency

A minor cant be adjudicated an insolvent, for; he is incapable of contracting debts. Even for

necessaries supplied to him, a minor is not personally liable but his property is liable.

10. Contract by minor and adult jointly

A minor can enter into a contract jointly with an adult. However, minor is not liable and the contract as

a whole enforced against the adult.


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11. Surety for a minor

Where in contract of guarantee, an adult stands surety on behalf of minor, the adult would be liable,

although the minor is not. In fact, in such a case, there cannot be a contract of guarantee in the true

sense.

12. Position of minors parents

The parents of a minor are not held liable for agreements made by minor even in the case of

agreement made for the purchase of necessaries. However, they are held liable only if minor is an

agent for the parents.

13. Minor shareholder

A minor cannot become a shareholder. However, fully paid up shares may be transmitted to him

through his lawful guardian.

14. Minors liability in tort

A tort is a civil wrong for which the ordinary remedy is damages. A minor is held liable unless the tort

in reality is a breach of contract.

Example:

A minor is not held liable where he hired a horse for riding and injured it by over-riding.

Persons of Unsound Mind

According to Section 12 of the 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 understanding it and of forming a

rational judgement as to its effects upon his interests.

The section also states that

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

when he is of sound mind

Example:

A patient in a lunatic asylum may enter into a contract during the intervals of sound mind.

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

contract when he is of unsound mind

Example:

A sane man who is so drunk that he cannot understand the terms of a contract, or form a rational

judgement as to its effect on his interest, cannot contract while such drunkenness lasts.

An agreement entered into by a person of unsound mind is treated on the same footing as that of

minors and therefore it is absolutely void and inoperative as against him but he can derive benefits

under it. However, the property of a person of unsound mind us always liable for necessaries supplied

to him or to anyone whom he is legally bound to support.

Disqualified Persons

The persons disqualified from any law to which they are subject are as follows:

01. Alien enemies

An alien citizen of a foreign country living in India can enter into a contract with Indian citizens

only during peace and that too subject to any restrictions imposed by the Govt. in that respect. On the

declaration of war between his country and India, he becomes an alien enemy and cannot enter into

contracts. Alien friend can contract but an alien enemy cant contract. Contracts enter into before


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the declaration of war stand suspended during war and they can be retrieved once the war is over

provided they havent become time-barred.

02. Foreign sovereigns and ambassadors

While entering into contracts with foreign sovereigns and ambassadors, one has to be cautious as they

can sue others to enforce the contracts entered upon with them but cant be sued without obtaining

prior sanction of the Central Government. They are in a privileged position and are considered to be

incompetent to contract.

03. Convict

A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is

incompetent

- To enter into contracts and

- To sue on contracts before conviction

On the expiry of the sentence, he is in liberty to institute a suit.

04. Married women

Married women are competent to enter into contracts with respect to their separate properties

(Stridhan) provided they are major and are of sound mind. However, they cant enter into contracts

with respect to their husbands properties. But they can act as an agent of her husband and bind her

husbands property for necessaries supplied to her, if he fails to provide her with them.

05. Insolvent

An adjudged insolvent (before an order of discharge) is competent to enter into certain types of

contracts i.e., he can incur debts, purchase property or be an employee but he cant sell his property

which vests in the Official Receiver. Besides these, he suffers from certain disqualifications like he cant

be a magistrate or a director of a company or a member of local body. After the order of discharge, he

is just like an ordinary citizen.

06. Joint-stock company and corporation incorporated under a special Act (like LIC, UTI)

A company or corporation is an artificial person created by law. It cant enter into contracts outside

the powers conferred upon it by its MoA or by the provisions of its special Act. Being an artificial

person, it cant enter into contracts of a strictly personal nature.

Example: Marriage


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FREE CONSENT SECTION 14

Section 13 defines the term consent and lays down that Two or more persons are said to consent

when they agree upon the same thing in the same sense. Hence, consent involves identity of minds or

consensus ad-idem. If there is no consensus ad-idem among the contracting parties, there is no real

consent and hence no valid contract.

Section 14 defines the term free consent and lays down that Consent is said to be free when it is not

caused by

- Coercion (Section 15) or

- Undue Influence (Section 16) or

- Misrepresentation (Section 18) or

- Fraud (Section 17) or

- Mistake (Sections 20, 21 and 22)

In the absence of free consent, the contract may turn out to be either voidable or void depending on

the nature of flaw in consent. When consent is caused by coercion, undue influence,

misrepresentation or fraud, the contract is voidable at the option of the party whose consent was so

caused. But when consent is caused by bilateral mistake as to a matter of fact essential to the

agreement, the agreement is void.

Coercion

Section 15 of the Contract Act defines Coercion as Coercion is the committing or threatening to

commit, any act forbidden by the Indian Penal Code, or the unlawful detaining or threatening to detain,

any property, to the prejudice of any person whatever, with the intention of causing any person to

enter into an agreement.

Example:

A threatens to shoot B, if he does not let out his house to him. B agrees to let out his house to A. The

consent of B has been induced by coercion and the contract is voidable.

The act of coercion may be directed at any person and not necessarily at the other party to the

agreement. It may proceed even from a stranger to the contract.

Example:

A, threatens to shoot B, a friend of C if C does not let out his house to him. C agrees to do so.

A, threatens to shoot B if he does not let out his house to C. B agrees to let out his house to C.

In both the cases, the agreement has been caused by coercion and the contract is voidable.

Threat to commit suicide

Neither suicide nor threat to commit suicide is punishable under the Indian Penal Code; only an

attempt to commit suicide is punishable under it. Threat to commit suicide is deemed to be

forbidden by Indian Penal Code.

Example: Chikkam Ammiraju vs Chikkam Seshamma

Ammiraju threated his wife and son to execute a deed in favour of his brother in respect of some

properties which they claimed as their own. This transaction was set aside on the grounds of coercion

by Madras High Court.

Effect of Coercion

A contract brought out by coercion is voidable at the option of the party whose consent was so caused.

The burden of proof that coercion was used lies on the party who wants to set aside the contract on

the plea of coercion.


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Undue Influence

Section 16(1) defines the term Undue influence as 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 will of the other and

- He uses the position to obtain an unfair advantage over the other

The phrase in a position to dominate the will of the other is clarified by the same section under sub-

section (2) as follows:

- Holding a real or apparent authority over the other (Master & Servant)

- Standing in a fiduciary relation to the other (Father & Son)

- Making a contract with a person whose mental capacity is temporarily or permanently affected

by reason of age, illness or mental or bodily distress (Old illiterate persons)

In the above three cases, the undue influence is presumed to exist and there is no need to prove it.

However, it has to be proved in the following cases:

- Husband & Wife

- Mother & Daughter

- Grandson & Granddaughter

- Landlord & Tenant

- Creditor & Debtor

Effect of Undue Influence

When consent is caused by undue influence, the contract is voidable at the option of the party whose

consent was so caused.

Misrepresentation

A representation means a statement of fact made by one party to the other, either before or at the time

of the contract, relating to some matter essential to the formation of the contract, with an intention to

induce the other party to enter into the contract. A representation when wrongly made, either

innocently or intentionally, is termed as misrepresentation. In law, the former is termed as

misrepresentation and the latter as fraud.

According to Section 18, misrepresentation means and includes

- The positive assertion of unwarranted statements of material facts believing them to be true

- Breach of duty which brings an advantage to the person committing it by misleading the other to

his prejudice

- Causing mistake about subject matter innocently

Essentials of misrepresentation

For alleging misrepresentation, representation should

- Be made innocently

- Relate to facts material to the contract

- Have become untrue

- Have been instrumental in inducing the other party to enter into contract

Effect of misrepresentation

The aggrieved party has two alternative courses open to him

- He can rescind the contract, treating the contract as voidable


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- He may affirm the contract and insist that he shall be put in the position in which he would have

been, if the representation made had been true

Fraud

According to Section 17, fraud means and includes any of the following acts committed by a party to a

contract

- Representation that a fact is true when it is not true by one who does not believe it to be true

- Active concealment of a fact by a person who has knowledge or belief of the fact

- Promise made without any intention of performing it

- Any other act fitted to deceive

- Any such act or omission as the law specially declared to be fraudulent

Mere silence without any legal duty to speak will not amount to fraud except where

- The circumstances of the case are such that, regard being had to them, it is the duty of the person

keeping silence to speak; or

- Silence is, in itself, equivalent to speech

Effect of fraud

A party, who has been induced to enter into a contract by fraud, has the following remedies open to

him:

- He can rescind the contract i.e., he can avoid the performance of the contract; contract being

voidable at his option

- He can ask for restitution and insist that the contract shall be performed, and that he shall be put

in the position in which he would have been, if the representation made had been true

- The aggrieved party can also sue for damages

Mistake

Mistake may be defined as an erroneous belief concerning something. It may be of two kinds

- Mistake of law

- Mistake of fact

Mistake of Law

It may be of two types

- Mistake of law of the country

Everyone is deemed to be conversant with the law of his country and hence the maxim

ignorance of law is of no excuse. Section 21 declares that a contract is not voidable because it

was caused by a mistake as to any law in force in India. Accordingly, no relief can be granted on

the ground of mistake of law of the country.

Example:

A and B make a contract grounded on the erroneous belief that a particular debt is barred by the

Indian Law of Limitation; the contract is not voidable (valid contract)

If one of the parties makes a mistake of law through the inducement, whether innocent or

otherwise, of the other party, the contract may be avoided.

- Mistake of foreign law

It stands on the same footing as the mistake of fact. Here the agreement is void in case of

bilateral mistake only.


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Mistake of Fact

It may be of two types

- Bilateral Mistake

There is a bilateral mistake where the parties to an agreement misunderstood each other and

are at cross purposes. Hence, there is no real correspondence of offer and acceptance, each party

obviously understanding the contract in a different way. In case of bilateral mistake of essential

fact, the agreement is void ab-initio.

Section 20 provides that where both the parties to an agreement are under a mistake as to a

matter of fact essential to the agreement, the agreement is void. Thus for declaring an

agreement void ab-initio, the following three conditions must be fulfilled:

Both the parties must be under a mistake

Mistake must relate to some fact and not to judgement or opinion

The fact must be essential to the agreement

- Unilateral Mistake

When only one of the contracting parties is mistaken as to a matter of fact, the mistake is a

unilateral mistake. Section 22 provides information on the validity that a contract is not

voidable merely because it was caused by one of the parties to it being under a mistake as to a

matter of fact.

Accordingly, in case of a unilateral mistake, a contract remains valid unless the mistake is

caused by misrepresentation or fraud, in which case the contract is voidable at the option of the

aggrieved party.


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LEGALITY OF OBJECT AND CONSIDERATION

Any agreement with an unlawful object or consideration is void. The consideration or the object is unlawful in the following cases:

1. If it is forbidden by law

A) When it is punishable by the criminal law of the country B) When it is prohibited by special legislation

Example: Agreements for sale or purchase above the standard price fixed by the relevant law with regard to a controlled article are illegal and hence void.

2. If it is of such a nature that, if permitted, it would defeat the provisions of any law

Object or Consideration is not directly forbidden by law, but it would indirectly lend to a violation of law

Example: An agreement between husband and wife to live separately is invalid as being opposed to Hindu Law

3. If it is fraudulent

Example: A and B enter into an agreement for the division among them related to gains acquired by them by fraud. The agreement is void, as its object is unlawful.

4. If it involves or implies injury to the person or property of another

Example: An agreement to put certain property to fire is unlawful

5. If it court regards it as immoral

Immorality as explained below:

A. Sexual Immorality

A Gift deed executed in consideration of illicit intercourse has been held void as its object was immoral

B. Furtherance of sexual immorality

A person who knowingly lets out his house for prostitution cannot recover the rent. The landlord many however recover the rent if he did not know the purpose

C. Interference with marital relations

An agreement between a husband and a wife for future separation

D. If the court regards it as opposed to public policy

A few agreements which have been held to be against public policy are stated below:

Trading with an alien enemy Agreements interfering with the course of justice Agreements for stifling criminal prosecution Agreements creating an interest opposed to duty Agreements interfering with parental duties

Example: For monetary consideration, A agrees to place his daughter at the disposal of B to be married as B likes. The agreement is illegal and void as it would interfere with As parental duty to select a

husband in the best interests of the girl.


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Void Agreement

An agreement not enforceable by law is said to be void. Agreement being void in nature does not give rise to any legal proceedings. Following agreements are expressly declared as void.

1. Agreements in restraint of marriage (Sec. 26).

2. Agreements in restraint of trade (Sec. 27).

3. Agreements in restraint of legal proceedings (Sec. 28).

4. Agreements the meaning of which is uncertain (Sec. 29).

5. Agreements by way of wager (Sec. 30).

6. Agreements contingent on impossible events (Sec. 36).

7. Agreements to do impossible acts (Sec. 56).

Other than these 7 there are few more agreements which are considered as void though not expressly declared-

1. Agreement by a minor or person of unsound mind

2. Agreement made under a bilateral mistake of fact which is substantially important to agreement

3. Agreement of which object or consideration is unlawful

4. Agreement without any consideration

Exceptions to Illegal Agreements

It is necessary to mention here that the below agreements are void but not unlawful or illegal.

1. Agreements in restraint of marriage

Section 26 of Indian Contract act states every agreement in restraint of marriage of any person, other

than a minor is void. Marriage is considered as the basis of society and any contract that interferes

with the free choice of man or woman of their wives or husbands is considered as void. Any contract

between husband and wife for present separation are binding but those for future separation are void.

Example: A promises to marry B and if he marries anyone else he will pay B a sum of 10,000. A marries

C and B files case to recover 10,000. Court held that B cannot recover money as the agreement is in

restrain of marriage. [Law Vs Peers(1918)]

2. Agreements in restraint of trade

Section 27 of Indian Contract act states every agreement by which any one is restrained from

exercising a lawful profession, trade or business of any kind, is to the extent void. Every agreement in

restraint of trade is trade is against public policy.

Case: Mahbub Chander vs Raj Koomar 1874

Two shopkeepers A &B entered into an agreement where A will pay B to close his business in that

locality. B closed the business but A refused to pay him. Court held that the agreement was void.

However there are certain exceptions to this act where restraint of trade is considered as valid.

Sale of goodwill: Seller of a good will may agree with the buyer not to carry out the same business in

the specified are for a specified time, provided such limits appear reasonable to the Court considering

the nature of business.

Partners Agreement: An agreement which restricts partners from doing any business other than the

one in which they are. The outgoing partner may be restricted from entering in the same business.

Negative Stipulations in Service Agreement: An agreement that binds an individual to render

his/her services to someone during the term of the agreement is valid. However any agreement that

restricts an individual from taking any occupation for a stipulated time period is void.

3. Agreements in restraint of legal proceedings


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Any agreement which refrain an individual from taking any legal action is termed as void. Section 28

as amended in 1996 declares below agreements as void Agreement which restricts any party

absolutely from taking usual legal proceedings:

Agreement which limits the time within which one may enforce his contract rights

Agreement which provides for forfeiture of any rights arising from a contract

These agreements are held void as they are against the Public Policy. Following points are important in

terms of restraint of legal proceedings:

In case of any dispute between the parties, they may settle their dispute outside the court.

Even if parties agree to nominate a party to the contract as an arbitrator in case of dispute is valid.

Both the parties may decide, in case of dispute which Court will handle the matter.

4. Agreements the meaning of which is uncertain

Section 29 of Indian Contract Act states agreements, the meaning of which is not certain, or capable of

being certain, are void. In case the words use to define the object or the consideration are not certain

or expressed clearly the law cannot enforce the agreement. If the words used by the parties are vague

or indefinite, the law cannot enforce the agreement.

Example

1. A agrees to sell B a shirt, is an uncertain contract. Here the colour and cloth used are not

mentioned.

2. A agrees to sell B a white colour shirt, is an uncertain contract. Here the cloth is not mentioned

3. A agrees to sell B a white colour, cotton shirt of size 32, is a valid contract.

4. Carter promised to pay a certain sum of money on a specified date of the month against the

bank loan. The agreement did not mention the amount of loan and date of repayment and

hence termed as void.

5. Agreements by way of wager

Section 30 of Indian Contract Act states wagering agreement is a promise to give money or moneys

worth upon the determination or ascertainment of an uncertain event. An event is called uncertain if

it is yet to occur of if the event has occurred but the parties are not aware of the outcome.

Essential features of a wage

There must be a promise to pay money or moneys worth.

The promise must be conditional on an event happening or not happening

Event must be uncertain

Each party must stand to lose or gain under the terms of agreement.

Example: X & Y mutually agrees that if India wins the cricket match X will pay Y a sum of 200/- while if

India loses Y will pay X a sum of 200/-. This is a wagering contract since the outcome of the event is

uncertain. However there are some exceptions to this like horse race, speculative transactions, chit-

fund, and lottery (in some states).

6. Agreements contingent on impossible events

Section 36 of Indian Contract Act states agreements of to do or not to do anything, if an impossible

event happens, are void, whether the impossibility of the event is known or not to the parties to the

agreement at the time when it is made. Contingent contract which depends upon future event cannot

be enforced by law unless and until that event has happened.


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Examples

1. Ram makes a contract with Shyam to buy Shyams house if Ram survives Raghu. This contract

cannot be enforced by law unless and until Raghu dies in Rams lifetime.

2. A agrees to pay B 1,00,000/- if B can B can draw a triangle with sum of angles more than 180

degree.

7. Agreements to do impossible acts

Section 56 of Indian Contract Act states an agreement to do an act impossible in itself is void.

Impossibility of performance could be in terms of legal or physical. However it must be differentiated

from difficulty to comply or perform.

According to the act -

Parties may be aware of the impossibility of the event before the contract

Parties to the contract may not be aware of the impossibility of the event before the contract

Contract might have become impossible after it had been made

Example: X agrees to sell his dog to Y for 5000 and Y agrees it, but no one is aware that the dog is

already dead. The contract is void.

X agrees to sell his house to B for Rs 5,00,00 after 6 months. House collapsed after 2 months. The

contract shall be void as soon as the house collapsed.

Causes of impossibility of performance

Change in Law

Destruction of subject matter

Personal incapacity of the promisor

PERFORMANCE OF CONTRACT

Who must perform?

Sec.37 states that The parties to a contract must either perform, or offer to perform their respective

promises, unless such performance is dispensed with or excused under the provisions of this Act, or of

any other law.

Representatives Liability: Promises bind the legal representative of the deceased promisor.

Example 1: A promises to deliver goods to B on a certain day on payment of Rs.1000. A dies before

that day. As representative is bound to deliver the goods to B who in turn is bound to pay the amount

to As representative.

Example 2: A promises to paint a picture for B by a certain day, at a certain price. A dies before the

day. The contract cannot be enforced either by As representative or by B.

What is Tender of Performance?

It is also called offer of performance. It is when the parties to a contract offer to perform their

respective promises.

Essentials of a valid tender of performance:

It must be unconditional: X offers to give his house to Y, if Z permits. Offer is conditional, hence not

a valid tender.

Offer must be made by promisor or representative.

Must be made at reasonable time & place.


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Offer cannot be of the part of performance. For example, a stakeholder not bound to accept less

than what is actually payable.

Promisor is bound by his promise to deliver the same thing and promisee has opportunity to

examine the same.

In case of joint promises, the tender is valid.

It must be made to promisee or his duly authorized agent.

Joint Promises

Several to Single e.g. A,B and C promise to pay D Rs.1000

Single to Several e.g. A promises to pay Rs.1000 to B and C together.

Several to Several e.g. A,B and C promise to pat Rs.1000 to P,Q and R

Example: A is lent Rs.5000 by B& C, and promises to repay them with interest on a day specified. B

dies. The right to claim rests with Bs representative and C till C dies and the right to claim rests with

Bs and Cs representatives.

All promisors must jointly fulfil the promise

Anyone or more of joint promisors maybe compelled to perform e.g. A,B,C jointly promise to pay D

3000. D may compel either A or B or C or all or any two to pay 3000

Right of contribution inter-se between joint promisors e.g. If A is compelled to pay, he can realise

from B and C 1000 each

Sharing of loss by default in contribution

Example: If A is compelled to pay whole and C is unable to pay any, A is entitled to receive Rs.1500

from B. If C can pay Rs.500, they B has to pay Rs.1250

Effect of release of one joint promisor e.g. If promisor is released from promise by promisee, the

others are still liable to pay as per the promise

Reciprocal Promises

Bilateral Contracts A promises to sell certain goods to B and B promises to pay A for those goods.

Mutual and Independent

Example: A promises to deliver goods to B on 10th Apr and B promises to pay the price in advance on

1st Apr. As promise to deliver goods is independent of Bs promise to pay. A must deliver goods on

10th Apr. However A can sue B for payment of price and damages

Mutual and dependant

Example: A contracts with B to execute certain builders work for a fixed price, B supplying the timber

for the work. B refuses to furnish the timber and plan isnt executed. A need not execute the work and

B is bound to pay A compensation for loss caused by non-performance

Mutual and concurrent

Example: A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not

deliver goods unless B is ready and willing to pay on delivery. B need not pay unless A is ready and

willing to deliver them on payment


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Time & Place

Where no application is to be made and no time is specified

Where time is specified and no application is to be made

Application for a performance on a certain day and place

Application by the promisor to promisee to appoint place

Performance in manner or at time prescribed or sanctioned by the promisee

Appropriation of Payments

When a debtor owes several debts to the same creditor, makes payment which is insufficient to satisfy

the whole indebtedness, the question arises as to which of the debts the payment is to be applied.

Debtors express instructions must be followed

Example: A owes B among other debts 1000 upon a promisory note which falls due on 1st June. He

owes B no other debt of that amt. On 1st June A pays 1000 to B. The payment is to be applied to the

discharge of the promissory note

Debtors implied intention must be followed

Appropriation by creditor

Appropriation by law (in order of time)

Example: If no application is stated, the discharge is done in the order of the time when the debt was

started.

When principal and interest both due

Example: If a payment has been made without stating if it for interest or principal, payment is to be

applied to int. first and then principal

DISCHARGE OF CONTRACT

Definition: When the rights and obligations arising out of a contract are extinguished, the contract is

said to be discharged or terminated.

Ways of discharge of contract

1. Discharge by Performance

Actual Performance:

Each party to a contract fulfills obligation arising under the contract within the time and in the

manner prescribed

If one party only performs his promise, he alone is discharged and gets a right of action against the

other party

Attempted Performance or tender

The promisor offers to perform his obligation, but is unable to do so because promisee does not

accept the performance

Tender is not actual performance but only an offer to perform


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Effect of refusal to accept a valid tender

Contract is deemed to have been performed by the promisor

Promisee can be sued for breach of contract

2. Discharge By mutual Consent or Agreement (Sec 62 & 63)

Contract can also be discharged by another agreement between the same parties. The following

methods of discharging a contract by mutual agreement are:

a) Novation -

A new contract is substituted for an existing contract, either between the same

or different parties

If parties are not changed, then the nature of the obligation must be altered substantially in the

new substituted contract.

Eg. - A is indebted to B and B to C. By mutual agreement Bs debt to C and Bs loan to A is cancelled and

C accepts A as his debtor. This is novation involving change of parties

b) Alteration -

Change in one or more of the material terms of the contract

Material alteration alters legal effect of the contract eg. changing the duration of the project

Immaterial alteration has no effect on the validity of the contract e.g. correcting a spelling mistake

in the contract

c) Rescission -

Agreement between the parties to the effect that it shall no longer bind them

Non-performance by both parties for long period - implied rescission

Eg.- A has to deliver 10 kg of rice to B on 15th March but on 10th both agree that contract will not

be performed.

d) Remission -

Acceptance of a lesser sum than what was contracted for

There is no consideration for it

Eg.- A owes B Rs 10,000. But A pays only Rs. 8000 at the time and place at which Rs 10,000 was

payable and B accepts it.

e) Waiver -

Giving up of a right which a party is entitled to under a contract

Eg.- A promises to fix Bs laptop, if B sings a song at As birthday and B accordingly sings the song

but afterwards B forbids A to fix the laptop to which A consents, the contract is terminated.

3. By subsequent or supervening impossibility or illegality

Impossibility at the time of contract

Agreement to do an act impossible in itself is void

It may or may not be known to both the parties at the time when contract is made.

If impossibility is not obvious, the promisor is bound to compensate promisee


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Eg.- A contracts to marry B while being already married to C. A must make compensation to B

Subsequent Impossibility

Act becomes impossible to do after the contract is made due to some event which the promisor

could not prevent

Eg. A and B contract to marry each other but before the time fixed for marriage B goes mad. The

contract becomes void.

Cases where applicable:

- Destruction of subject matter

- Failure of ultimate purpose

- Death of promisor

- Change of law

- Outbreak of war

Cases where not applicable:

- Difficulty of performance

- Commercial impossibility

- Impossibility due to default of a third person

- Strikes and lock-outs

- Failure of one of the objects

4. Discharge By lapse of time

In case of a breach of a contract, legal action should be taken within a specified period called the

Period of Limitation

In simple contracts, period of limitation is 3 years.

5. Discharge By operation of law

Death In contracts of personal nature, death of promisor discharges contract while in other cases

rights and liabilities are passed to the legal heir

Insolvency An insolvent is exonerated from liabilities on debts by the Insolvency Court

Merger eg. A part time employee is made a full-time employee, the former contract stands

discharged

Unauthorized material alteration Material alteration in a written document without the consent

of the other party makes the contract void.

6. Discharge By breach of contract

Anticipatory Breach Breach of contract before the time fixed for performance has arrived.

Eg. A agrees to appoint B as clerk but before the time of performance A refuses. B can sue A

foe damages without waiting until the time fixed for performance.

Actual breach Occurs when a party fails to perform his obligation upon the date fixed for

performance by the contract.


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REMEDIES FOR BREACH OF CONTRACT

Whenever there is a breach of contract, the aggrieved party can resort to the following remedies

against the guilty party:

1) Rescission of the contract (Sec. 75)

Aggrieved party may rescind the contract, not perform his part of the obligation and do not

take any action against the other party

Aggrieved party may sue the guilty party for damages

Necessary to apply to the court for rescission of the contract to claim damages

E.g. - A has to supply 10 kgs of wheat to B on 15th March. If A does not supply wheat on the

scheduled day, B need not pay the price and can either sit at home or apply for damages

2) Suit for Damages (Sec. 73)

Damages as monetary compensation allowed to the aggrieved party for the loss suffered as a

result of the breach of contract.

Different kinds of damages are:

a) Ordinary Damages

They arise naturally and directly in the usual course of things from the breach of contract

Eg.- A has to pay Rs 5,000 on 15th April to B. But he does not pay due to which B is unable to

pay his debts. A is liable to pay only principal amount along with interest applicable.

b) Special Damages

They arise on account of the special or unusual circumstances.

Eg.- A & B enter into a contract for the sale of a painting. The painting is worth Rs 5,000 and B

intends re-sell the painting at Rs 6,000. If A sells the painting to C, B is entitled to special

damages.

c) Exemplary Damages

They are awarded with a view to punish the guilty party and not by the way of compensation

for the loss suffered.

d) Nominal Damages

They are awarded when the aggrieved party has not actually suffered any real damage and

consist of a very small amount of money

3) Suit upon Quantum Meruit (Sec. 65 & 70)

It arises when after part performance by one party, the contract is discovered to be void.

Eg.- A is hired by B to construct a house. But halfway A is stopped from working further. A is

entitled to get compensation for work done.

4) Suit for Specific Performance

In special circumstances, court directs the defendant to actually perform the promise that he

has made

It is granted in cases of land, buildings, rare articles and unique goods

5) Suit for an Injunction

The court may issue an order to restrain a person from doing, what he promised not to do

Eg.- A agreed to provide consultancy services to only B but A later signed a contract with C

and refused to work with A. The court may issue injunction restraining A from working

anywhere else and award B for damages incurred.


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INDEMNITY Definition

A contract, by which one party promises to save the other from loss caused to him by the conduct of

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

Rights of indemnity holder when sued

The following are the rights of the indemnity holder when sued

1. Recovery of all damages

2. Recovery of all costs

3. Recovery of sums paid under the term of any compromise

Time of commencement of Indemnifiers Liability

Indemnity is not repayment after payment but to be paid once the charge is proved; the party to be

indemnified shall never be called upon to pay.

Contracts of Guarantee

Definition

A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person

in case of his default.

The three parties under the contract of guarantee are the debtor, the credit and the surety.

Nature and Extent of Suretys Liability (Section 128)

The nature and extent of the suretys liability are as follows:

The liability of a surety is secondary or contingent

The liability of the surety arises immediately on the default of the principal debtor, unless

otherwise stated

The creditor need not first resort to the debtors securities before suing the surety, unless

otherwise agreed

The surety will not be liable where the creditor has obtained guarantee by misrepresenting a

material part of the transaction or keeping silence as to material circumstance

The law does not treat the surety and the debtor as the same person, i.e., while one may be liable

the other may not.

Continuing Guarantee (Section 129)

The features of continuing guarantee are as follows

A continuing guarantee is not exhausted by the first advance

Whether or not a guarantee is continuing or not depends upon the agreement of the parties,

terms of the contract, circumstances

Continuing guarantee applies to a series of distinct and separable transactions. As such a

guarantee given for an entire consideration not a continuing guarantee

Revocation of Continuing Guarantee (Section 130)

The continuing guarantee can be revoked by the following means


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By notice of revocation of the surety

By death of surety

In the same manner as the surety is discharged, viz., i. Variance in terms of contract, ii.

Release/discharge of debtor, iii. Arrangement with debtor, iv. Creditors action or omission

impairing suretys eventual remedy, v. by loss of security.

Rights of Surety

The rights of surety are as follows

Suretys right against creditors

Right to benefit of creditors securities (Section 141)

Right to claim set-off, if any

Right of subrogation (Section 140)

Right to claim indemnity (Section 145)

Suretys rights against co-sureties (Sections 146-147)

For the same debt for similar amount, both surety owe equal contribution

For the same debt for different sums, the contribution is subject to the limit fixed by his

guarantee

Discharge of Surety

The surety is discharged under the following conditions:

Notice of revocation (Section 130)

Death of surety (Section 131)

Variance in terms of contract (Section 133)

Release or discharge of principal debtor (Section 134)

Arrangement by creditor with principal debtor without suretys consent (Section 135)

Creditors act or omission impairing suretys eventual remedy (Section 139)

Loss of security (Section 141)

Invalidation of the contract of guarantee (Section 143)

BAILMENT

Definition

A bailment is the delivery of goods by one person to another for some purpose, upon a contract that they

shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions

of the person delivering them.

Essential features

It is a delivery of movable goods by one person to another person (not being his servant).

The goods are delivered for some purpose, and not by some mistake

The goods are to be returned in specie or disposed of according to the directions of the bailor

either in their original form or altered form.


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Kinds of Bailment

Bailments are classified under the following types

Kinds from benefit point of view

1. Bailment for the exclusive benefit of the bailor

2. Bailment for the exclusive benefit of the bailee

3. Bailment for the mutual benefit of the bailor and the bailee

Kinds from reward point of view

4. Gratuitous Bailment

Eg: Loaning a book to a friend

5. Non-gratuitous Bailment

Eg: Sending a motor car for repair

Duties of Bailee

The duties of the bailee are as follows

Duty to take reasonable care of goods delivered to him

Duty not to make unauthorised use of goods entrusted to him

Duty not to mix goods bailed with his own goods

Duty to return the goods

Duty to deliver any accretion to the goods

Duties of Bailor

The duties of the bailor are as follows

Duty to disclose faults in goods bailed

Duty to repay necessary expenses in case of gratuitous bailment

Duty to repay any extraordinary payments in case of non-gratuitous bailment

Duty to indemnify bailee

Duty to receive back the goods

Rights of Bailee

The following are the rights of a bailee

Enforcement of bailors duties

Right to deliver goods to one of several joint bailors

Right to deliver goods, in good faith, to bailor without title

Right of lien

- Bailees particular lien

- Bailees general lien

Rights of Bailor

The following are the rights of a bailor

Enforcement of bailees duties

Right to terminate bailment if the bailee uses the goods wrongfully


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Right to demand return of goods at any time in case of gratuitous bailment

Termination of Bailment

A bailment is terminated under the following conditions

Specific period

Specific purpose

Bailee acts inconsistent with terms of bailment

Gratuitous bailment

Gratuitous bailment death of bailee/bailor

Finder of Lost Goods

If a person happens to find any lost good(s), the law bestows him with certain duties

Duties of finder

The duties of the finder are as follows

Right to retain possession

Right to lien over the goods for expenses

Right to sue for reward

Right of sale

PLEDGE OR PAWN

Definition

The bailment of goods as security for payment of a debt or performance of a promise is called pledge.

The bailor in this case is called the pawnor. The bailee is called pawnee.

Rights of Pawnee

The following are the rights of a pawnee

Right of retainer

Right of retainer for subsequent advances

Right to extraordinary expenses

Right to sue the pawnor or sell the goods on default of the pawnor

Duties of Pawnee

The duties of the pawnee are as follows

To make reasonable care of the goods pledged

Not to make any unauthorised use of the goods pledged

Not to mix the goods pledged with his own goods

Not act in violation of the terms of the contract

To return the goods pledged on receipt of his full dues

To deliver any accretion to the goods pledged

Rights of Pawnor


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The following are the rights of a pawnor

Enforcement of pawnees duties

Defaulting pawnors right to redeem

Duties of Pawnor

The duties of the pawnor are as follows

To compensate the pawnee for any extraordinary expanses

To meet his obligation on stipulated date

AGENCY

An agent is a person employed to do any act for another or to represent another in dealings with third

persons. The party who employs the agent is called the principal. The agent enters into the contract on

behalf of the principal and the principal is liable for legal action for violation of any part of the

contract.

General Rules of Agency:

Everything a person competent to contract can do by himself, he can do through agent. However,

acts involving personal skills are not allowed i.e., a person cannot employ an agent to draw a

painting or he cannot employ an agent to marry someone. The principal has to undergo the same

consequences as if the contracts had been entered into and the acts done by the principal in

person

Test of Agency: When the person has authority to act on behalf of other and make contractual

relations with third person, then he is an agency

Difference between Agent and Servant

Other Rules

Any person competent to contract i.e., major and one of sound mind can be a principal. Any

person can become an agent i.e., even a minor or a person of unsound mind can become an agent.

This is because principal will be liable and thus he runs a great risk if he employs a minor or

person of unsound mind as agent. It is not necessary that an agent be given consideration.

However, agents are generally given consideration for their contribution.

Kinds of Agents

A General Agent is employed to do all acts connected with a particular business or employment

He can bind the principal by doing anything which falls within the scope of the business

Agent Servant

Not subject to direct control & supervision

Creates relations between principal & third parties

Subject to direct control & supervision

Cannot create relation. If he does so, then to that extent alone he is an agent


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A Special Agent is employed to do a particular act or represent his principal in some particular

transaction such as selling a car .Principal will not be held liable if they agent signs a contract

outside his authority

A Universal Agent has unlimited authority i.e., he is authorized to do all the acts which the

principal can lawfully do and can delegate. Enjoys extensive powers to transact every kind of

business on behalf of his principal

Other classifications of agents include Classification by nature of work: Mercantile: Factor,

Commission agent, Del credere agent, Broker, Non Mercantile: Attorneys, insurance agent, wife

etc.,

Creation of Agency

This includes the different kinds of agreements to create agencies:

An Express Agreement is an Oral or written agreement by specifying scope of authority Certain

cases such as executing a deed for sale or purchase of land require agent must be appointed by

executing a formal power of attorney on stamp paper

An Implied Agreement is No express agreement, however, agency is implied by the conduct of

parties in different situations Eg: Agency by Estoppel: An agency by estoppel is created when the

alleged principal by his conduct leads willfully the other contracting party into an honest belief

that the supposed agent had authority to act as such and bind the principal

Illustration: B is As agent to sell good X. A instructs B not to sell it below a particular price. C,

unaware of As instructions, buys product at lower price from B. A will be hound by the contract.

Other implied agreements include Holding out and necessity.

An Agency by Ratification is an agency which is created by retrospective effect.

Illustration: A buys 5 bags of wheat on behalf of B but A is not agent of B. But B, upon hearing

may accept or reject it. If he accepts it, the act becomes ratified and A becomes As agent with

retrospective effect

Authorities, Rights and Duties of an Agent

Authorities: The authorities of an agent include actual authority, ostensible or apparent

authority, Delegation of authority, sub-agent, and substituted agent

Duties: Duty to follow principal's directions or customs, to carry out work with reasonable skill

and diligence, to render accounts , to communicate, not to deal on his own account, not to make

profit, not to terminate agency on principals death and not to delegate authority

Rights: Retainer, Lien, Indemnified against consequences of lawful acts, indemnified against

consequences of acts done in good faith, compensation, stoppage of goods in transit

Duties of a principal are indirectly the rights of an agent and vice-versa.

Termination of Agency

Agency can be terminated by an agreement between the two parties or revocation by either of

the parties. In the case of one of the parties opting out of the agreement before the agreement

time is complete, the withdrawing party has to pay proportional compensation.

Agency can also be terminated by an operation of law in the following ways: Completion of

business of agency, expiry of time, death of either party, insanity of either party, insolvency by

principal, Destruction of subject-matter, dissolution of company, either party becomes alien

enemy.


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CASES

1. Percept DMarkr (India) Pvt. Ltd. v. Zaheer Khan & Anr.

Percept DMarkr (Plaintiff) entered into an agreement with Zaheer Khan & Anr (Defendant), to manage its media affairs. As per agreement plaintiff had the first right of refusal. Such that before accepting any proposal from third party defendant has to offer the same proposal to plaintiff, and if rejected by plaintiff, defendant can accept third party proposal. However on termination of this agreement, the defendant entered into an agreement with the third party and plaintiff claims permanent injunction.

Issue: Is the agreement in conjunction of restraint of trade act?

Held: Accepting the plaintiff request would mean forcing the defendant to enter into contract with only plaintiff, even after the lawful termination of the agreement. This will be against the restraint of trade act section 27 of Indian Contract Act.

2. Fateh Chand vs. Balkishan Das

Appellant: Fateh Chand

Respondent: Balkishan Das

According to the contract dated March 21, 1949, the appellant was contracted to sell the leasehold

rights of the land and the building constructed on it to the defendant. The appellant received

Rs.25000/- under the contract and delivered possession of the building and the land to the

defendant, but the sale was not completed before the expiry of the period stipulated in the

agreement, and for this default each party blamed the other.

The trial Judge held that the plaintiff had failed to put the defendant in possession of the land

agreed to be sold and could not therefore retain Rs.25000

The High Court of Punjab modified the decree passed by the trial Court and declared 'that the

plaintiff' was entitled to retain out of Rs.25000/- paid by the defendant under the sale agreement,

a sum of Rs.11250/- being compensation for loss suffered by him and directed that the plaintiff do

get from the defendant compensation for use and occupation at the rate of Rs.265/-per mensem

The appeal was thus filed in Supreme Court against the order that respondent was entitled to

retain out of Rs.25000 paid by appellant under sale agreement a sum of Rs.11250 being

compensation.

The Supreme Court observed that there was no evidence that any loss was suffered by the plaintiff

inconsequence of the default by the defendant by keeping him out of the possession of the

property.

The Supreme Court then ordered that the plaintiff was entitled to retain only a sum of Rs1000 out

of Rs25000 and he was entitled to compensation at the rate of Rs.140 as ordinary damages.

3. State Bank of Saurashtra vs. Chitranjan Rangnath Raja and Anr.

Facts:

The appellant-bank allowed a cash credit facility limited to Rs.75,000/- to the Principal Debtor (PD) on

his pledging 5,000 tin of groundnut oil under the lock and key of the Bank and on personal guarantee

of the Respondent-Surety. However, afterwards when the Bank lost the pledged tins and sued the legal

representative of PD (after the death of PD) and the Surety to repay the debt, Surety contested

discharge of his liability.

Contentions:


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BANK- By Cl.5 of guarantee, surety could not claim discharge from the guarantee contract even when

the Bank had released any other security; such that in instant case, surety remains liable. Moreover,

under Cl.7, Surety cannot claim discharge even if the creditor Bank has any other guarantee, security

or remedy from the principal debtor.

SURETY- The Bank was negligent in parting away with the security such that the Surety was

discharged to the extent of the value of tins of oil.

Held:

Trial Court- The trial court held that there was negligence on the part of the Bank with regard to the

safe custody of the pledged oil tins but as the contract of guarantee entered into by the surety with the

Bank was independent of the pledge of goods given by the principal debtor, the surety is not discharged

from his liability under the guarantee.

High Court- On account of the conduct of the parties, the pledge of the goods and subsequent

contract of guarantee (entered into within the same time frame) were part of the one composite

transaction and they evidenced that the principal debtor had offered two securities, one the pledge of

oil tins and another personal guarantee of the surety: since the bank was utterly negligent in dealing

with the pledged goods leading to their loss, therefore, surety is discharged under Section 139 and 141

of the Indian Contract Act.

Issues:

1. Whether the pledge of the goods and the guarantee contract amounted to one single transaction.

2. Whether Section 141 is applicable here. If yes, to what extent is the Surety discharged?

Judgment:

In order to attract section 141 of the Contract Act, it must be shown that the creditor had taken more

than one security from the principal debtor at the time when the contract of guarantee was entered

into and irrespective of the fact whether the surety knew of such other security offered by the

principal debtor, if the creditor loses or without the consent of the surety parts with the other security,

the surety would be discharged to the extent of the value of the security. The letter of guarantee

executed by the Surety and the pledging of the goods evidenced one composite transaction; such

that, as found by the High Court, the principal debtor had offered two securities, (i) the pledge of

goods, (ii) personal guarantee of the Surety. The Surety himself agreed to give personal guarantee on

the specific understanding and with the full knowledge of the Bank that the principal debtor was

offering another security, namely, pledge of goods. First security, namely, the pledged goods are lost to

the Bank on account of its negligence. As the current market price of 5000 oil tins would have satisfied

the Banks entire claim, the Surety would be released to the whole extent.

With regard to contention upon Cl.5, release of security implies a volitional act on the part of the Bank.

In the present case, the bank had lost the security on account of negligence which cannot be equated

with release. Further, w.r.t Cl.7, the expression any other guarantee, security or remedy therein

mentioned must be security other than the pledged goods

4. Lalman Shukla vs. Gauri Dutt

Gauri Dutt sent his servant Lalman to find his lost nephew. The servant left and after that Gauri Dutt

announced a rew

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