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Dr. Mahender Kumar Sharma- K.N.V. Institute of Business Management-Rajkot

KNV Institute of Business Management

Metoda-Rajkot

Subject- Legal Aspect of Business (LAB) CC302

Faculty: Dr. M K Sharma

MBA SEM III

The Indian Contract Act, 1872

Introduction

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

It extends to the whole of except the State of Jammu and Kashmir; and it shall come into force

on the first day of September, 1872.

Prior to the enactment of the Indian Contract act, 1872, English common law was applied in

India.

In English common law there was so many indiscriminately, which led to many inconveniences

so we need a common law which applied on each and every Indian citizen.

Important vocabulary of Indian Contract Act. 1872

PROPOSAL

According to ICA 1872 Section 2(a),” When one person signifies to another his willingness to do

or to abstain from doing anything, with a view to obtaining the assent of that other to such act or

abstinence, he is said to make a proposal”.Acceptance

According to ICA 1872 Section 2(b),” When a person to whom the proposal is made, signifies

his assent thereto, the proposal is said to be accepted.

A proposal, when a accepted, becomes a promise;

Promisor and Promisee

According to ICA 1872 Section 2(c),” The person making the proposal is called the

"promisor“(proposer), and the person accepting the proposal is called "promisee“(offeree).

PROPOSAL + ACCEPTANCE = PROMISE

Consideration

According to ICA 1872 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



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promises to do or to abstain from doing something,

such act or abstinence or promise is called a consideration for the promise”

Agreement

According to ICA 1872 Section 2(e),” Every promise and every set of promises, forming

the consideration for each other, is an agreement;

PROPOSAL + ACCEPTANCE+CONSIDERATION = AGREEMENT

Reciprocal Promises

According to ICA 1872 Section 2(f),” Promises which form the consideration or part of

the consideration for each other are called reciprocal promises.

Void Agreement

According to ICA 1872 Section 2(g), “ An agreement not enforceable by law is said to be

void agreement.

Voidable Contract

According to ICA 1872 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.

Void Contract

According to ICA 1872 Section 2(j), “A contract which ceases to be enforceable by law becomes

void when it ceases to be enforceable.



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CONTRACT & ESSETIAL ELEMENTS OF CONTRACT

Meaning and Definitions of contract

What is contract?

• An agreement enforceable by law is a contract.

• An agreement, the object of which is to create an obligation is a contract.

• When an agreement compels another to do something, it is a contract.

• In conclusion A contract is an agreement enforceable by law, made between at least two

parties by which rights are acquired by one and obligations are created on the part of

another. It the party, which had agreed to do something, fails to do that, and then the

other party has a remedy.

• According to the ICA 1872, Sec.2 (a), “An agreement enforceable by law is a contract.

• According to Salmond J, “A contract is an agreement creating and def ining obligations

between the parties”.

• According to Blackstone, “A contract is an agreement upon a sufficient consideration to

do or not to do a particular thing.

Essential elements of a contract

• Different sections of the Indian Contract Act lay down the essential elements of the

contract. They are as fellows:-

1.

More than one party2. Proposal and acceptance

3. Intention to create legal relations

4. Contractual capacity of the parties

Major

Sound mind

Qualified from contracting by any law to which he is subject

• 5. Consent

• 6. Free consent

Coercion

Under influence

Fraud



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Misrepresentation

Mistake

• 7.Lawful consideration

• 8. Lawful object

Where it is forbidden by law

Where it is of such a nature that it permitted it would defeat the provision of

any law

Where it is fraudulent

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

Where the count regards it as immoral or opposed to public policy

• 9. Certainty

• 10.Possibility of performance

• 11. Agreements must not be expressly declared void.

• 12. Compliance of legal formalities.



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Types of Contracts or Agreement

Types of contracts and agreements are divided in basis:-

On the basis of Validity:

1. Valid contract :

2. Void agreement

3. Void contract

4. Voidable contract

5. Illegal contract :

6. Unenforceable contract :

On the basis of Formation

1. Express contract

A contract is express when the parties state its terms and conditions and show

their assent by words, either oral or written.

2. Implied contract

A contract made otherwise than in words is called implied contract. It is interred

from the acts or conduct of the parties or by their surrounding circumstances but not by the

written or spoken.

3. Quasi- contract

A quasi contract is created by law.

Thus, quasi contracts are strictly not contracts as there is no intention of parties to

enter into a contract.

It is legal obligation which is imposed on a party who is required to perform it.

A quasi contract is based on the principle that a person shall not be allowed to

enrich himself at the expense of another.

On the basis of Performance

Contract may be classified according to extent of execution or performance under two heads:-

1. Executed contract:- A contract in which all the parties to the contract have

performed their respective obligations, is known as executed contract.

2. Executory contract:- An executory contract is one in which all or something

still remains to be performed by the parties.



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On the basis of extent of execution or performance, the contracts can also be classified as

fellows:-

1. Bilateral contract:- A bilateral contract is one in which both the parties

exchange a promise to each other.

2. Unilateral contract:-A unilateral contract is one in which offeror promises to

do something only when the offeree has done his desired task or act.



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PROPOSAL

Every contract needs an agreement and agreement arises when a definite proposal is made by

one party and unconditionally accepted by the other, to whom it is made. Thus, a lawful proposal

and its acceptance is a must for creation of a valid contract.

The term proposal is similar to the term offer of the English law.

The term proposal has been defined in the Indian contract act as under:

"When one person signifies to another his willingness to do or to abstain from

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

said to make a proposal/offer.” [Sec.2 (a)]

The person making the proposal is known as the “proposer” or offeror and the

person to whom it is made is known as “offeree”.

Basic Characteristics of Proposal

A valid proposal is said to be constituted when it possesses the following basic

characteristics:-

1. At least two parties

2. A proposal may be positive or negative

3. A proposal must be made to obtain assent

4. Proposal must be made with an intention to create legal relations.

5. It must be signified or communicated

Types of Proposal

On the basis of mode of offer

• On the basis of mode proposal may be divided into two categories:-

1. Express Offer- An offer made in words, written or spoken, is called as an express

offer or proposal.

2. Implied Offer- An offer made otherwise than in words is known as the implied offer.

Such offer is inferred from the conduct of parties or circumstances.

On the basis of Offerees

• There are two types of offers on the basis of offerees:-

• 1. Specific Offer 2. General offer

• 1.Specific Offer



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An offer made to a specific or a particular or an ascertained person is known as

specific offer. Such an offer can be accepted by the particular or specific to who it has made and

none else. [

Bolton v. Jones ]

• 2. General offer

An offer made to the public at large or to the whole world, is a general offer. Such

an offer may be accepted by any person from among the public who has the knowledge of it. It

does not require any prior acceptance.

[Carllil v. Carbolic Smoke Ball Co.]

On the basis of Nature of Offer

• On the basis of their nature offer may also be classified into three kinds:-

• 1.Cross offer

• 2.Counter offer

• 3.Standing offer

1. Cross Offer

When two parties make identical offers (i.e. similar in terms and conditions etc.)

to each other without having knowledge of each other‟s are k nown as cross offers. Such offers

do not constitute a contract even though both the parities intend to do or not to do the same thing.When one of the parties accepts the offer of the other party, contract comes into existence.

2. Counter offer

When an offer is accepted on the terms and conditions other than set out by the

offeror, it is not an acceptance but a counter offer.

A counter offer is in fact not only a rejection of the original offer but also is a new

offer by the original offeree.

3. Standing offer

A standing offer is an offer which is open for acceptance over a period of time.

This is also known as continuing or open offer.



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Legal rules as to offer/proposal

In order to make a valid offer, certain rules must be followed. These rules have been laid by the

Indian Contract Act as well as by certain law courts while deciding the cases that came before

them. Some of the fundamental rules are summarized as fellows:-

• 1. At least two parties

• 2. Offer may be positive or negative

• 3. View to obtain assent

• 4. An intention to create legal relations

• 5. Offer may be either express or implied

• 6. Offer may be either specific or general.

• 7. Offer must be definite (certain)

• 8. Offer must be communicated

[ Lalman Shukla v. GauriDutt]

• 9. Terms and conditions must be communicated with the offer

• 10. The offer should not bind the other party to reply

• 11. A tender may be an offer or a standing offer

What is not a proposal?

• There are certain communications or document, which resemble as proposals but in fact,

they are not proposal. They are:-• 1. Intention to put a proposal

• 2. Invitation to proposal

Difference between proposal and invitation of proposal

• A proposal should also be distinguished from invitation to proposal or invitation to treat.

The distinction between the two can be drawn as under:-

• Objective

• Creation of agreement

• Obligations

There are a large numbers of statements write-ups or documents which seem to be proposals, but

they are invitations to proposal. A few examples are as follows:-

1. Catalogue or price list 2. Menu card 3.Price tags

4. Time table of carrier



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Acceptance

Acceptance is the assent of the offeree to an offer made to him. It is a communication of his

intention to be bound by the terns of the offer. According to ICA 1872 Sec. 2(b), “when the

person to whom the proposal is made signifies his assent thereto, the proposal is said to be

accepted.”

A proposal when accepted becomes a promise.

• Who accept the proposal

One of the important questions is that who accept the proposal?

• It is depend on the nature of the proposal.

• In case of specific offer the acceptance may be given only by the person to whom the

offer is made.

• In case of general offer every person who know about the offer has right to accept it.

Essential/ legal rules of valid Acceptance

For a valid acceptance of a proposal, certain legal rules must be observed. Some of the rules are

given in the act itself while a few others have been laid down by the courts while deciding the

cases those come before them. Some of the important rules of acceptance are summarized as

under:-

1. Acceptance must be absolute and unqualified and unconditional.

• 2.It must be in prescribed manner

• 3. Acceptance may be given by performance of conditions.

• 4.It may be given by acceptance of consideration

• 5.It may be express or implied

• 6.It must be given within specified or reasonable time

• 7.It must be given while the offer is in force

• 8.It must not precede an offer

• 9.It must be given by the person to whom offer is made

• 10. Acceptance must be communicated.

• 11.Acceptance must be from competent person

• 12.It should be communicated to the offeror himself

When the communication of the proposal is to be completed?

• An offer is complete when it is properly communicated to the offeree.



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• Communication of offer is complete when the offeree comes to knowledge of the person

to whom it is made

When the communication of the Acceptance is to be completed?

• Communication of acceptance of an offer completes at different times as against the

offeror/proposer and offeree. The time of completion of communication of acceptance

against each of them is as fellows:-

• 1.As against the propose/offeror

• 2.As against the acceptor

Revocation of the offer

• Revocation means withdrawing or taking back. Offer as well as acceptance may be

revoked.

• A proposal may be revoked at any time before the communication of acceptance is

complete as against the proposer, but not after wards.

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

complete as against the acceptor, but not afterwards.



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CAPACITY TO CONTRACT

According to Section 10, all agreements are contracts if they are made by the parties competent

to contract. Thus the competence or capacity to contract is one of the essential elements of a

valid contact.

Now the question is that what is the meaning of capacity to contract? and Who are competent to

contract?

Capacity or competence to contract means legal capacity of parties to enter into a contract. In

other words, it is the capacity of parties to enter into a legally binding contract.

Who are competent to contract?

Section 11 specifies the persons who are competent to contract. According to the section 11,

“Every person is competent to contract who is of the age of majority according to the age 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”.

Now we can presumes that every person is legally competent to contract if he fulfils three

conditions or possesses three qualifications namely.

1. He has attained the age of majority;

2. He is of sound mind; and

3. He is not disqualified from contracting by any other law to which he is subject

Conversely, it can be said that the persons falling under the following categories are not

competent to contract:

1. Minors

2. Persons of unsound mind; and

3. Persons disqualified from contracting by any other law of the land.

MINORS

Any person who has not attained the age of majority prescribed by law, is known as “minor”

According to Section 3 of the Indian Majority Act, “a minor is a person who has not completed

eighteen years of age . But the same act also mentions that in the following two cases person

attains majority only after he completes his age of twenty-one years:

A. Where a Court has appointed guardian of a minor‟s person or property or both

B. Where the minor‟s property has been placed under the superintendence of a cou rt of

wards.



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RULES/EFFECTS AS TO OR NATURE OF MINOR’S AGREEMENTS

1. Contracts with minor‟s is absolutely void

2. Minor can be a promise or beneficiary

3. No ratification

4. Restitution /Compensation possible

5. No estoppels and can plead minority

6. No specific performance

7. Contract by parent/guardian/manager

8. No liability of parents

9. Minor agent

10. Minor partner

11. Guarantee for and by minor

12. Minor and insolvency

13. Minor as joint promisor

14. Minor shareholders

15. Minor and Negotiable Instruments Acts

16. Liability for necessaries of life

PERSONS OF UNSOUND MIND

Section 11 requires that in order to be competent to contract, a person must be sound mind

What is a sound mind?

According ICA Section 12, “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 judgment as to its effect upon his interests”.

Thus a person is of a sound mind if he satisfies the following conditions:-

1) The person is capable of understanding the contract at the time of making it; and

2) The person is capable of making a rational judgement as to the effect of the contract upon

his interest.

When soundness of mind is required?

The soundness mind is required only at the time of making a contract.



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PERSONS DISQUALIFIED BY OTHER LAWS - There are certain persons who are

disqualified from contracting by the other laws of our country. They are as under;

1) Alien enemy

2) Foreign sovereigns, diplomatic staff etc.

3) Corporations and companies

4) Insolvents

5) Convicts

6) Women



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FREE CONSENT

All of we know that to constitute valid contract consent of all the parties is necessary and this

consent also must be free.

Now the question is that what is the meaning of consent and when consent is to be known as free

consent?

Consent is an absolute and unconditional assent to an offer given by the Oferee.

According to the ICA1872 Section 13, “Two or more persons are said to consent when they

agree upon the same thing in the same sense.”

FREE CONSENT

Free consent is the consent given by the sweet will of the parties and not caused by any form of

physical or mental force or any kind of mistake.

According to the ICA1872 Section 14, consent is said to be free when it is not caused by-

1. Coercion as defined in Section 15 or

2. Undue influence as defined in Section 16 or

3. Fraud, as defined in Section 17 or

4. Misrepresentation, as defined in Section 18, or

5. Mistake , subject to the provisions of Sections 20,21,and 22

Coercion

Generally speaking coercion means use or threatening to use the physical force against a person

or property, to compel him to enter into a contract.

According to the ICA 1872 Section 15, “Coercion is the committing, or threatening to commit,

any act forbidden by the 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.”

Main Elements of above definition

1. Committing any act forbidden by the IPC

2. Threatening to commit any act forbidden by the IPC

3. Threat to suicide amount to coercion

4. Unlawful detaining of any property

5. Unlawful threatening to detain any property

6. The intention must be to compel the other person to enter into a contract



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Burdon to prove use of coercion: - The Burdon of proving that the consent was obtained by

coercion lies upon the person who wants to avoid the contract on the ground of coercion.

UNDUE INFLUENCE

Undue influence is a kind of moral coercion. It is happens when a dominant party misuses his

influence to dominate the will of the weaker party, to get unfair advantage, in a contract the

contract is said to be influenced by undue influence.

According to the ICA 1872 Section 16(1), “A contract is said to be induced by undue influence

where the relations subsisting between the parties and such that one of the parties is in a position

to dominate the will of the other and uses that position to obtain an unfair advantage over the

other.”


1. The relation between the parties

2. The use of dominant position

3. The dominant party obtains unfair advantage.

Persons in Dominant Position

In the following three cases, a person is deemed or presumed to be in a position to dominate the

will of another:-

1. In case of a real or apparent authority

2. In case of fiduciary relation ( trustful relation)

3. In case of person under mental or bodily stress

Burdon to prove use of undue influence:- in the ordinary cases the burden of proving undue

influence rests on the person who want to set aside the contract. In case of unconscionable

transaction the weaker party is required to prove that at the time of consent undue influence is

used.

FRAUD

Generally speaking, fraud is the intentional misresentation or concealment of material facts of an

agreement by a party to or by his agent with an intention to deceive and induce the other party to

enter into an agreement. Here, to deceive means to induce a person to believe that a fact is true,

which is in fact false.



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According to the ICA 1872 Section 17, “Fraud" means and includes any of the following acts

committed by a party to a contract, or with his connivance, or by his agents, with intent to

deceive another party thereto his agent, or to induce him to enter into the contract;

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

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

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

(4) Any other act fitted to deceive;

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


1. The parties committing fraud

2. The fraudulent acts

-False suggestion or statement

-Active concealment of the fact

-A promise not intended to be performed

-Any other act fitted to deceive

-Declared fraudulent act or omission

3. Intention to deceive or induce

4. The act must have deceived

5. The party must have suffered

6. Generally silence is not a fraud

MISREPRESENTATION

Any innocent or unintentional false statement or assertion of fact made by one party to the other

during the course of negotiation of a contract is called a misrepresentation.

According to the ICA 1872 Section 18, “Misrepresentation" means and includes -

(1) The positive assertion, in a manner not warranted by the information of the

person making it, of that which is not true, though he believes it to be true;

(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person

committing it, or anyone claiming under him; by misleading another to his prejudice, or to the

prejudice of any one claiming under him;

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

of the thing which is subject of the agreement.



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1. Misrepresentation must be or must have become a false statement but the person making

it must honestly believe in it to be true

2. The misrepresentation must have been made without any intention to deceive the other

party

3. It must relate to the material facts of the contract.

4. Misrepresentation may be caused by representing half-truths.

5. The misrepresentation must have been made before conclusion of the contract.

6. The misrepresentation must have been made for the purpose of inducing another party to

make a contract.

MISTAKE

Mistake is a misconception or misimpression or misunderstanding or erroneous behalf about

something.

When the consent of one or both the parties to a contract is caused by these things, the contract is

said to be induced by mistake.

Usually, mistake does not affect the validity of a contract. Mistake may broadly be classified

under two heads

1. Mistake by Law 2. Mistake by fact

Mistake by law may be of two types

(a) Mistake of law of the land

(b) Mistake of foreign law

Mistake by fact is a mistake as to material fact of the contract. Mistake of fact may be of two

types

(a) Bilateral mistake

(b) Unilateral mistake

CONSIDERATION

An agreement to be enforceable by law must be supported by consideration. Generally an

agreement without consideration is void and therefore not enforceable by law. So, consideration

is one of the most essential elements of a valid contract.

Now question is that what do you mean by consideration?

Meaning and definitions of consideration



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Consideration consists of promises or performance that the parties to a contract exchange with

each other. It is, in a sense the „price‟ that the promisee pays for the promise or performance of

the promisor.

According to Blackstone, “Consideration is the r ecompense given by the party contracting to the

other.”

Sir Fredrick Pollock defines consideration “as an act or forbearance of the one party or the

promise thereof is the price for which promise of the other is bought…”

According to ICA 1872, “when at the desire of the promisor, the promisee or any other person

has done or abstained from doing or does or abstains from doing, or promises to do or to abstain

from doing, something, such act or abstinence or promise is called a consideration for the

promise.

An analysis of this definition reveals the following essentials of valid consideration:-

1. The consideration must be at the desire of the promisor.

2. The consideration may consist of some actor abstinence from doing some act.

3. The act or abstinence may relate to past, present or future.

4. The act or abstinence may be by the promisee himself or by any other person on his

behalf.

5. Such an act or abstinence or promise is a consideration for the promise given by the

promisor to the promisee.

Essentials/ Legal Rules as to Consideration

1. Consideration must be at the desire of the promisor

2. It need not benefit the promisor himself

3. It may be given by the promisee or any other person

4. It may be some act or abstinence or promise

5. It may be past, present or future

6. Consideration need not be adequate

7. It must be real, not illusory

8. it must be something more than the promisor‟s existing obligation

9. It must not be unlawful

10. It must be certain and not be impossible



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CONTRACT WITHOUT CONSIDERATION IS VOID

Consideration is an important essential element of a contract. If there is a absence of

consideration than no agreements will be converted into a contract. This is the general rule of

Indian contract Act 1872.

According to the IAC 1872 Section 25, “An agreement without consideration is void subject to

certain exceptions. Following are the exceptional cases under which agreement is valid and

enforceable even without consideration.

1. Agreement on account of natural love and affection :- Where an agreement is made on

account of natural love and affection between the parties it is valid even without

consideration provided following conditions are satisfied:

(a) It is expressed in writing

(b) It is registered under the law

(c) It is made only out of natural love and affection between the parties ; and

(d) The parties are standing in a near relation to each other {25(1)}

2. Promise to compensate voluntary service :- A promise to compensate a person, wholly or

in part, is valid even without consideration in the following cases:- [25(2)]

(a) If the person has already voluntarily done something for the promisor; or

(b) If the person has done something which the promisor was legally compelled to do so.

3. Promise to pay a time-barred debt [25(3)]

4. Gift actually made

5. Promise to charities

6. Contract of agency

7. Contracts of gratuitous bailment

8. Remission



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PERFORMANCE OF CONTRACT

Every contract creates legal obligations between the parties. Therefore, every party is bound to

discharge them. Performance is the natural way of discharging the obligations under a contract.

Meaning of Performance of Contract

Performance of contract means performing all the promises and fulfilling all the obligations

required by the contract.

Modes of Performance

The Contract Act prescribes the modes or types of performance or contracts. Accordingly 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 the Contract Act or of any

other law.

Section37 also makes it clear that a contract may be performed in either of the two ways:-

1. By performing promise means actual performance

2. By offer to perform promise means offer or tender of performance

Actual Performance:- Actual performance takes place when both the parties to a contract

perform their respective promises and nothing remains to be performed in future by them.

Offer or Tender of Performance:- Another way of performing a contract is to make tender or

offer of performance to the promise. When a party offers performance of his obligation to the

other party, it is called a tender of performance.

TYPES OF TENDER OR OFFER

1. Tender of goods and services:- When a promisor offers delivery of goods or service to

the promise, it is said to be tender of goods or services. In case a promise does not accept

a valid tender, it has the following effects;

(a) The promisor is not responsible for non-performance of the contract.

(b) The promisor is discharged from his obligation under the contract. Therefore he need

not offer again.

(c) He does not lose his right under the contract. Therefore he can sue the promise.

2. Tender of money:- Tender of money is an offer to make payment. In case a valid tender

of money is not accepted, it will have following effect:-

(a) The offeror or debtor is not discharge from his obligation to pay the amount.



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(b) The offeror/debtor is discharged from his liability for payment of interest from the

date of the tender of money.

Conditions or essentials of a Valid Tender

Every valid tender must fulfill the following conditions:

1. The offer or tender of performance must be Unconditional.

2. A tender must be for the performance of Whole obligation

3. It must be made at proper time.

4. The tender must be made at proper place

5. The tender gives reasonable opportunity of inspection to promisee

6. The tender must be made by a person who is able and willing there and then to perform

the whole promise

7. A tender of performance must be made to a proper person. (Promisee or authorized

agent)

Person by whom promises is to be performed: If it appears from the nature of the case that it

was the intention of the parties to any contract that any promise contain in it should be performed

by the promisor himself, such promise must be performed by the promisor. In other cases, the

promisor or his representative may employ a competent person to perform it.

Persons Entitled to Demand Performance

1. The Promisee himself

2. The third party

3. Legal Representatives

DISCHARGE OF CONTRACT

The ultimate fate of every contract lies in its discharge. Discharge means “termination” of a

contract.. A contract is discharged when parties to a contract no longer have any obligation

under the contract.

In other words a contract is said to be discharged when both the parties to a contract either

perform or extinguish their respective obligations under the contract. Consequently, the

contractual relations between the parties to a contract come to an end.



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MODES OF DISCHARGE OF CONTRACT

A contract may be discharged in any of the following ways :-

1. By Performance

2. By Agreement or Consent

3. By lapse of time

4. By operation of law

5. By impossibility of performance

6. By breach of contract

1. Discharge by Performance:- If both parties to the contract have performed what they have

agreed to do, the contract is discharged. Performance of obligation by parties to the

contract puts an end to the contract. A contract may be performed either of the following

two ways:-

(a) Actual Performance

(b) Attempted performance or tender

2. Discharge by mutual agreement/ consent:- The parties of the contract may also terminate

or discharge the contract by a fresh agreement by mutual consent. Such an agreement

may be express or implied. Section 62 and 63 of the act provide for various modes of

discharge of existing contract by a fresh agreement. A contract may terminate by mutual

consent in any of the six ways:-

(a) Novation

(b) Rescission

(c) Alternation

(d) Remission

(e) Waiver

(f) Merger

(a) Novation: - Novation means substitution of a new contract for the original one. The new

contract may be substituted either between the same parties or between different parties.

(b) Rescission means cancellation of all or some of the terms of the contract. Where parties

mutually decide to cancel all or some of the terms of the contract, the obligation of the

parties thereunder terminates.



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(c) Alteration: - If the parties mutually are to change certain terms of the contract,. It has the

effect of terminating the original contract. In this case there is no change in the parties of

the contract.

(d) Remission:- It is the acceptance of a lesser sum than what was contracted for or a lesser

fulfillment of the promise made.

(e) Waiver- When a party entitled to claim performance releases the other party from his

obligation to perform it, it is called waiver.

(f) Merger- Merger means merger of two or more rights into one contract. When an existing

inferior right of party merges into a newly acquired superior right by the same party, it is

a merger of rights.

3. Discharge by lapse of Time:- When a contract is to be performed within a stipulated time

period and a party doesn‟t perform it within that time the contract is discharged by

lapse of time fixed for its performance.

4. Discharge by Operation of Law:- A contract is discharged by operation of law in the

following cases:-

(a) Death

(b) Insolvency

(c) Material alteration:-Sometimes a party to a contract `makes material alteration in the

written document of contract without the consent of the other party. In such case the

contract becomes void and stands discharge.

(d) Merger of rights

(e) Rights and liabilities be coming vested in the same person

(f) Loss of evidence of contract

5. Discharge by impossibility of performance: - Where the performance of a contract is

impossible, the contract is void. There are two kinds of impossibility :

(a) Initial impossibility:- Known impossibility unknown impossibility

(b) Subsequent impossibility

Discharge by Breach of Contract

Sometimes a Contract is discharged by its breach. Breach of Contract means refusal or

failure of any one party to perform his contractual obligations under the contract.



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Specifically, a breach of contract occurs when a party to a contract does any of the

following things:

I. Fails or refuses to perform his obligations under the contract.

II. Disables himself from performing his part of the contract.

III. Makes the performance of contract impossible by his own acts.

Types of Breach of Contract

Breach of contract may occur in two ways:-

1) Actual breach; and 2) Anticipatory breach

1. Actual Breach: - Actual breach of contract takes place when a party to a contract

refuses or fails to perform his obligation when it is due. This may also take place in

either of the two ways:

a. On due date of performance

b. During the course of performance of contract :-

a) Express breach

b) Implied breach

2. Anticipatory Breach:- Anticipatory breach of contract occurs when a party to a

contract disables himself from performing or refuses to perform the contract before

the time or date of the performance is due. It is a declaration by one party to a

contract of his intention of not performing the contract prior to the date of

performance. Such a breach is also known as „constructive breach of contract.‟

The effects of anticipatory breach of contract are as follows:-

a. Promisee is excused from performance or from further performance.

b. Thereafter the promisee has two options as to enforcement of his rights under the contract

In first option he may immediately put an end to the contract and treat it as discharged and

can bring an action against the party at default for breach of contract.

In the second option he may treat the contract as alive and wait for performance till the

agreed date or time arrives.

REMEDIES FOR BREACH OF CONTRACT

A breach of contract discharges the promisee from his obligation of performing the contract. At

the same time, the law provides certain remedies to the promise, i.e. the injured party against the

promisor or the party at default to enforce his rights under the contract.



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An injured or aggrieved party has one or more of the following remedies:-

1. Suit for rescission of the contract:- Rescission of contract means cancellation or putting

an end to a contract. If one party has broken his part of the promise under a contract,

the aggrieved party may also rescind the contract. The aggrieved party need not perform

his part of promise under the contract. He is further entitled to compensation for the

damages sustained by him through the non-fulfillment of the promise.

2. Suit for Damages:- the aggrieved party is entitled to file a suit for compensation of

damages caused to him by the breach of contract. Damages are the monetary award

granted to an aggrieved party for the breach of contract. Damages may be ordinary,

special, exemplary or nominal. Usually the court awards ordinary or natural damages

which arise in the usual course of things from breach of contract.

3. Suit on Quantum Meruit:-When an aggrieved party has partly performed a contract he

can sue for the value of such part of performance. In case of breach of contract this suit is

known as suit on quantum meruit i.e. for as much as earned by the party. This remedy is

available only under specific circumstances. This right is available in addition to the right

to damages.

4. Suit for Specific Performance:- where for the breach of contract, damages are inadequate

remedy, the court may order the party for specific performance of the contract. However

the specific performance will not be granted in every case.

5. Suit for Injunction:- An aggrieved party can sue for injunction and court may issue an

injunction against the party to a contract. Injunction prohibits a party from doing or

continuing to do something which amount to breach of contract, it is generally issued to

secure specific performance of negative terms of a contract.

Contracts of Indemnity

Indemnity is a contract entered into with the purpose of saving a person from loss arising from

the conduct of any person.

According to Indian Contract Act 1872, Section 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 by the

conduct of any other person, is called a "contract of indemnity".



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In the contract of Indemnity a security is provided to the promisee against any anticipated loss.

The promisee is protected and assured of being compensated or the loss if any arising out of the

contract.

The person who gives the promise to save any anticipated loss is known as Indemnifier and the

person who received the promise to save any anticipated loss in known as Indemnity-Holder.

All the contracts of general insurance come in contracts of indemnity in which Insurance

Company gives the promise about saving a person from loss. However in the case of insurance

the loss is caused by a contingent event, while in an indemnity, the loss is caused directly by the

conduct of a person.

Essential Elements of Contract of Indemnity

1. Contract of indemnity must contain all the essentials of a valid contract.

2. The promisee of the indemnity-holder must have suffered a loss.

3. Promise to save certain losses as per the contract.

4. Liability of Indemnifier develops when actual loss occurs.

5. Repayment the money up to the actual loss.

6. Contracts of Indemnity may be express, implied or oral.

Rights of Indemnity-Holder

Section 125 of IAC defines the rights of the indemnity-holders. These are as follows:-

1. Claims for Damages

2. Claims for Costs

3. Claims for sum paid

4. Suit for specific performance

Rights of Indemnifier

The act makes no mention of the right of indemnifier. However his rights in such case are similar

to the rights of a surety under section 141, he becomes entitled to the benefit of all the securities

which the creditor has against the principal debtor whether he was aware of them or not.



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CONTRACTS OF GUARANTEE

The law relating to the contracts of guarantee is given in the Indian Contract Act, 1872(Section

126-147).

Now the question is that what is Guarantee? or what do mean by Guarantee?

The definition of the Guarantee is given in the Section 126 of ICA 1872. According to this

Section, “A Contract of Guarantee is a contract to perform the promise, or discharge the

liability of a third person in case of his default.”

The person who gives the guarantee is called the „surety‟, the person in respect of whose default

the guarantee is given is called the „ principal debtor‟, and the person to whom the guarantee is

given is known the „creditor‟.

Essential of the contract of Guarantee

1. Guarantee may be express or implied.

2. The liability of the surety is secondary

3. Accept the liability independently is not a guarantee.

4. Guarantee is given always on the request of principal debtor

5. Three party

6. Three contract

7. Nature of the liability

(a) Cash related liability( loan related)

(b) Goods related liability (to give the goods on credit basic)

(c) Conduct related liability

8. All the essential elements of a valid agreement

KINDS OF GUARANTEE

1. Oral or written Guarantee: - A contract of guarantee may either be oral or in written.

Generally creditors should always prefer to put it in writing to avoid any dispute

regarding the terms. In case of and oral agreement the existence of the agreement itself is

very difficult to prove.

2. Specific Guarantee:- A guarantee is a “specific guarantee‟ if it is intended to be

applicable to a particular debt and thus comes to end on its repayment. A specific

guarantee once given is irrevocable.



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3. Continuing Guarantee:- A guarantee which extend to a series of transactions is called a

„continuing guarantee‟ (Sec.129). A guarantee regarding the conduct of another person is

continuing guarantee. A continuing guarantee can be revoked regarding further

transactions. However, continuing guarantee cannot be revoked regarding transactions

that have already taken place.

Revocation of the Continuing Guarantee or Discharge of Surety

A Continuing Guarantee can be revoked only as to „future transactions‟ in any of the

following ways:-

(1) By Notice (Sec.130)

(2) By the death of the surety (Sec.131)

(3) By variance in terms of the contract (Sec.133)

(4) By release or discharge of principal debtor(Sec.134)

(5) By compounding with, or giving time to or agreeing not to sue, principal debtor

(Sec.135)

(6) By creditor‟s act or omission impairing surety‟s eventual remedy(Sec.139)

(7) Loss of security(Sec.141)

(8) In case of guarantee by misrepresentation (Sec.142)

(9) In case of guarantee by concealment(Sec.142)

(10) When it is against public policy

Rights and Obligations of the Creditor

Right of a Creditor:-

The creditor is entitled to demand payment from the surety as soon as the principal

debtor refuses to pay or makes default in payment. When surety is insolvent, the creditor

entitled to proceed in the surety‟s insolvency and claim to pro rata dividend.

Obligations of a Creditor

1. Not to change any terms of the original contract

2. Not to release or discharge the principal debtor

3. Not to compound or give time to or agree not to sue the principal debtor.

4. Not to do any act inconsistent with the rights or the surety.

Rights of Surety in Guarantee contract

Rights of a surety may be classified under three heads:



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(A) Rights against the creditor

1. Right to acquire security

2. Right of subrogation

3. Right to set- off

4. Right to get dismissed from service in case of fidelity guarantee

(B)Rights against the Principal Debtors

1. Right of subrogation (Sec.140)

2. Right to recover sum paid (Sec.145)

3. Right to claim cost and interest

(C) Right against Co- sureties

1. Right to claim contribution

2. In case of discharged Co-surety

3. Right to share benefits of securities



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BAILMENT

The Indian contract act deals with two special classes of contracts, namely bailment and pledge.

Sections 148 to 171 deal with the law of bailment.

Meaning and Definition of Bailment

The word bailment is derived from the French word „baillier‟ which means to deliver. In daily

life, people deliver goods of things to each other and knowingly or innocently enter into a

contract of bailment.

According to Section 148, “A "bailment" is the delivery of goods by one person to another for

some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or

otherwise disposed of according to the direction of the person delivering them”.

The person who delivering the goods is called the bailor and the person to whom the goods are

delivered under the contract of a bailment is a bailee.

Sometimes there may be a sub-bailee in a bailment. When a bailee with the express or implied

consent of the bailor, again bails the goods to a third party is known as sub-bailee.

Essential Elements of Bailment

Bailment has the following essential elements/features:-

1. Contract

2. Goods

3. Delivery of goods

4. Purpose

5. Return of goods

6. Return of the same goods

Specific cases of Bailment

1. Goods seized by authorities

2. Hire purchase

3. Fair price shop

4. Common carrier

5. Cloak room

6. Post office

No bailment cases

1. Bank deposit



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2. Collection of money by agent

3. Bank locker or safety vault

Modes of Delivery of Goods

According to Section 149 delivery of goods to the bailee may be made by doing anything which

has the effect of putting the goods in the possession of the intended bailee or any person

authorized to hold then on his behalf. Thus, the delivery of goods may take place in any one of

the following ways:-

1. Actual Delivery- When goods are physically handed over by the bailor to the bailee, it is

said to be an actual delivery.

2. Symbolic Delivery- This mode is generally used when the goods are bulky or ponderous

(heavy) and which cannot be handed over manually. Symbolic delivery is the delivery

where goods are not physically handed over but delivered by doing something which has

the effect of putting the goods in the possession of the intended bailee.

3. Constructive Delivery- Constructive delivery takes place when the goods are delivered

by the bailor to any person authorized to hold then on behalf of the bailee.

Types of Bailment- According to the Indian contract act there are two types of bailment on the

basis of reward:

1. Gratuitous Bailment- A gratuitous bailment is one where no consideration or

remuneration passes between the bailor and the bailee. It is a bailment without any charge

or reward.

Rules of Gratuitous bailment- The rules of gratuitous bailment or the duties and rights of

gratuitous bailor are as under:

(1) Duty to disclose known faults (Section 150)

(2) Right to require return of goods

(3) Duty to repay expenses (Section 158)

(4) Duty to indemnify in case of premature terminations (Section 159)

(5) Termination by death (Section 160)

2. Non-Gratuitous Bailment- Non-gratuitous bailment is also known as bailment for

reward. It is a bailment where at least some consideration passes between the bailor and

the bailee.



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Duties or Liabilities of Bailor:-Following are the duties of a bailor:-

1. Duty to deliver the goods

2. To disclose faults in the goods

3. To repay expenses

4. To indemnify in case of premature termination

5. To indemnify the bailee for breach of warranties

6. To pay remuneration or charges to the bailee

7. To receive back the goods or to give direction for its disposal

Duties or Liabilities of Bailee

1. To take care of the goods bailed

2. To indemnify in case of negligence

3. Not to do any act inconsistent with conditions

4. Not to make unauthorized use of goods

5. Not to mix the goods with his own goods

6. To return the goods

7. To return increase or profit from goods

8. Not to set up adverse title



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PLEDGE

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

pledge.

In this case bailor is called the pawnor and bailee is called the Pawnee. The transaction between

pawnor and Pawnee is known as pledge.

In the pledge contract only movable property can be pledged as a security for payment of a debt.

Essentials of Pledge Contracts

1. The goods must be delivered as security for payment of a debt or for performance of a

promise

2. There must be actual or constructive delivery of goods in pledged.

3. The pledge can be made of movable goods only. Movable goods include documents,

shares, or valuable things.

4. Transfer of possession is essential.

Difference between pledge and bailment

pledge Bailment

1) Goods are pledged to ensure repayment

of a debt or for performance of a

promise.

Goods may be bailed for any purpose.

2)

Goods are pledged as a security Goods are bailed for carrying out a specificpurpose or for a particular period of time.

Rights of a Pawnee

1. To retain the goods (Section 173and 174) – the pawnee may retain the goods for---

(a) Payment of the debt or the performance of the promise;

(b) Interest on the debt; and

(c) All necessary expenses incurred by him in respect of the possession or for the

preservation of the goods pledged.

2. To recover extra-ordinary expenses(Section 175)

3. Right on pawnor‟s default (Sec.176)- If the pawnor makes default in payment of the debt,

or performance of a promise at the stipulated time in respect of which the goods were

pledged---



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(a) The pawnee may bring a suit against the pawnor upon the debt or promise;

(b) Retain the goods pledged as a collateral security;

(c) He may sell the goods pledged, on giving the pawnor reasonable notice of the sale.

Rights of a Pawnor

1. Right of redemption

2. Preservation and maintenance

3. To receive back the goods

Pledge by persons other than the true owner

In general goods may be pledged by the owner of the goods. In the following cases, a valid

pledge may be made by a person who is not the true owner of the goods:-

1. Pledge by mercantile agent (Sec.178)

2. Pledge by a person in possession of goods under voidable contract (Sec.178)

3. Pledge by a person with limited interest (Sec.179)

4. Pledge by seller or buyer in sole possession ( Sec. 30 of Sale of Goods Act 1930)



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AGENCY

An agency is the relation between an agent and his principal created by an express or implied

agreement whereby an agent is authorized by his principal to represent him and establish

contractual relations, with third parties.

Essentials of Agency

The essential of an agency are summarized as under:-

1. Name of a relation

2. Agreement, not necessarily a contract

3. Competence of the principal

4. Consideration not necessary

5. Free consent

6. Intention to create contractual relations

7. Other essentials

Who is an Agent?

According to ICA 1872 Section 182, “An agent is a person employed to do any act for another or

to represent another in dealing with third person .

Thus an agent is a person appointed by a principal for establishing his principal‟s contractual

relations with third parties as per the directions and authority given by the principal. The agent is

the connecting link or intermediary between the principal and third party. He is empowered by

the principal to create legal relationship between him and third parties.

Who may be a Principal or who may employ and agent?

According to ICA 1872 Section 182, “A principal is the person who employs an agent. He is the

person for whom some act is done by an agent or who is represented in dealings with third

persons by an agent.”

According to ICA 1872 Section 183, “Any person who is competent to act for himself, may

become a principal. Therefore, any person who is of the age of majority and who is of sound

mind may employ agent.”

An agent is generally appointed by the principal but it is not necessary that only principal can

employ an agent. Any person authorized by law to employ an agent can employ an agent.

Following persons can also appoint agents:-

1. A Corporation or a Company



2. A natural or a Court guardian

3. Several principals may jointly appoint an agent

Who may be an agent?

According to ICA 1872 Section 184, “As between the principal and third persons, any person

may become an agent. Even a minor or a person of unsound mind can be appointed as an agent.

CREATION OF AGENCY

Following are the ways in which an agency may be created:-

1. Agency by express agreement or authority

2. Agency by implied agreement or authority

a) Agency by estoppels

b) Agency by holding out

c) Agency by necessity

3. Agency by ratification

4. Agency by operation of law

lab modual 1

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