legal aptitude booklet # 05

(1) of (14) IC : PTtklla05

Law is order, and good law is good order.

LEGAL APTITUDE BOOKLET # 05

Regd. Office: Indore PT centres spread across India ~ Established 1993

Our motto “Kar Ke Dikhayenge” is delivered through our unique Technology Driven Process Engine (TDpro engine). Email: [email protected] Web: www.PTeducation.com , www.Facebook.com/PTeducation

PT Education, All rights reserved.

THE INDIAN CONTRACT ACT, 1872

R

C

The Law of Contract is that branch of law which determines the circumstances in which promise(s) made by the parties to a contract shall be legally binding on them. All of us, on different occasions, enter into a number of contracts knowingly or unknowingly. Each contract creates some rights and duties upon the contracting parties. Indian Contract Act deals with the enforcement of these rights and duties upon the parties. This Act came into effect from the first of September, 1872. It extends to the whole of India except the state of Jammu and Kashmir.

Best wishes!


Any commercial activity requires 'understanding' among people concerned. This understanding is often reduced into writing to give effect to the intention of the parties. Such formal versions are known as contracts. These contracts define the rights and obligations of var ious parties to facilitate easy performance of the contractual obligations.

The Indian Contract Act, 1872 codifies the legal principles that govern such 'contracts'. The Act basically identifies the ingredients of a legally enforceable valid contract in addition to dealing with certain special type of contractual relationships like indemnity, guarantee, bailment, pledge, quasi contracts, contingent contracts etc.

In terms of Section 10 of the Act, "all agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void".

Thus, in order to create a valid contract, the following elements should be present: 1. Intention to create legal obligation through offer and

acceptance should be present 2. Free consent of the parties is necessary 3. Competency or capacity of parties to enter into

contract must be ensured 4. Lawful consideration & lawful object should be

present, and 5. Agreement not expressely declared to be void.

DEFINITIONS

1. Offer (i.e. Proposal) [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 person either to such act or abstinence, he is said to make a proposal.

2 . Acceptance [section 2(b)]: When the person to whom the proposal is made, s ignifies his assent thereto, the proposal is said to be accepted.

3. Promise [section 2(b)]: A proposal when accepted becomes a promise. In simple words, when an offer is accepted it becomes a promise.

4. Promisor and promise [section 2(c)]: When the proposal is accepted, the person making the proposal is called as promisor and the person accepting the proposal is called as promisee.

5. Consideration [section 2(d)]: When at the desire of the promisor, the promisee or any other person has done or abstained from doing something or does or abstains from doing something or promises to do or abstain from doing something, such act or abstinence or promise is called a consideration for the promise.

THE INDIAN CONTRACT ACT, 1872

Price paid by the one party for the promise of the other is reflected in QUIDPROQUO i.e. something in return.

6. Agreement [section 2(e)]: Every promise and set of promises forming the consideration for each other. In short, agreement = offer + acceptance.

7. Contract [section 2(h)]: An agreement enforceable by Law is a contract.

8. Void agreement [section 2(g)]: An agreement not enforceable by law is void.

9. Voidable contract [section 2(i)]: An agreement is a voidable contract if it is enforceable by Law at the option of one or more of the parties there to (i.e. the aggrieved party), and it is not enforceable by Law at the option of the other or others.

10. Void contract [section 2(g)]: A contract which ceases to be enforceable by Law becomes void when it ceases to be enforceable.

Offer and Acceptance: In the first place, there must be an offer and the said offer must have been accepted. Such offer and acceptance should create legal obligations between parties. This should result in a moral duty on the person who promises or offers to do something. Similarly this should also give a right to the promise to claim its fulfillment. Such duties and rights should be legal and not merely moral.

Consent: The second element is the 'consent' of the parties. 'Consent' means 'knowledge and approval' of the parties concerned. This can also be understood as identity of minds in understanding the term viz consensus ad idem. Further such a consent must be free. Consent would be considered as free consent if it is not vitiated by coercion, undue influence, fraud, misrepresentation or mistake. Wherever the consent of any party is not free, the contract is voidable at the option of that party.

Capacity of the parties: The third element is the capacity of the parties to make a valid contract. Capacity or incapacity of a person could be decided only after reckoning various factors. Section 11 of the Indian Contract Act, 1872 elaborates on the issue by providing that a person who (a) has not attained the age of majority, (b) is of unsound mind, and (c) is disqualified from entering into a contract by any law

to which he is subject, should be considered as not competent to enter into any contract.

Therefore, the law prohibits (a) Minors (b) persons of unsound mind [excluding the lucid intervals] and (c) person who are otherwise disquali f ied l ike an alien enemy, insolvents, convicts etc from entering into any contract.


Consideration: The fourth element is presence of a lawful 'consideration'. 'Consideration' would generally mean 'compensation' for doing or omitting to do an act or deed. It is also referred to as quid pro quo viz. 'something in return for another thing'. Such a consideration should be a lawful consideration.

Not expressly declared to be void: The last element to clinch a contract is that the agreement entered into for this purpose must not be which the law declares to be either i llegal or void. An i llegal agreement is an agreement expressly or impliedly prohibited by law. A void agreement is one without any legal effects.

OFFER AND ACCEPTANCE

The word 'proposal ' and the word 'offer' mean one and the same thing and therefore are used interchangeably. In terms of Section 2(a) of the Act "a person is said to make a proposal when he signifies to another his willingness to do or abstain from doing anything with a view to obtaining the assent of that other to such act or abstinence". It must be appreciated that 'doing an act ' and 'not doing an act ' both have the same effect in the eyes of the law, though one is a positive act and the other is a negative act.

Hence there are two important ingredients to an offer. Firstly, it must be expressions of willingness to do or to abstain from doing an act. Secondly, the willingness must be expressed with a view to obtain the assent of the other party to whom the offer is made.

In terms of Section 2(b) of the Act, "A proposal or offer is said to have been accepted when the person to whom the proposal is made signifies his assent to the proposal to do or not to do something". In short, act of acceptance lies in signifying one's assent to the proposal.

Re la t ionship be tween o ffe r and acceptance : According to Sir William Anson "Acceptance is to offer what a lighted match is to a train of gun powder". The effect of this observation is that what acceptance triggers cannot be recalled or undone. But there is a choice to the person who had the train to remove it before the match is applied. It in effect means that the offer can be withdrawn just before it is accepted. Acceptance converts the offer into a promise and then it is too late to revoke it. This means as soon as the train of gun powder is lighted it would explode. Gun powder [the train] itself is inert, but it is the lighted match [the acceptance] which causes the gun powder to explode. The significance of this is an offer by itself cannot create any legal relationship but it is the acceptance by the offeree which creates a legal relationship.

Once an offer is accepted it becomes a p r omi se and cannot be wi t hd r awn o r revoked. An offer remains an of fer so long as it i s not accepted, bu t becomes a cont ract as soon as i t i s accepted.

LAPSE AND REVOCATION OF OFFER

Lapse of Offer: Section 6 deals with various modes of lapse of an offer. It states that an offer lapses if

1 . it is not accepted within the specified time (if any) or after a reasonable time, if none is specified

2. it is not accepted in the mode prescribed or if no mode is prescribed in some usual and reasonable manner, e.g., by sending a letter by mail when early reply was requested

3. the offeree rejects it by distinct refusal to accept it

4 . e i ther t he of ferer or t he of feree dies before acceptance

5. the acceptor fails to fulfill a condition precedent to a acceptance and

6. the offeree makes a counter offer, it amounts to rejection of the offer and an offer by the offeree may be accepted or rejected by the offeror.

Revocation of Offer by the Offeror: An offer may be revoked by the offeror at any time before acceptance.

Like any offer, revocation must be communicated to the offeree, as it does not take effect until it is actually commun i ca ted t o t h e o f f er ee. Be for e i t s ac t ua l communication, the offeree, may accept the offer and create a binding contract. The revocation must reach the offeree before he sends out the acceptance.

An offer to keep open for a specified time (option) is not binding unless it is supported by consideration.

RULES GOVERNING ACCEPTANCE

The rules governing acceptance are 1. Acceptance may be express i.e. by words spoken or

written or implied from the conduct of the parties.

2. If a particular method of acceptance is prescribed, an offer must be accepted in the prescribed manner.

3 Acceptance must be unqualified and absolute and must correspond with all the terms of the offer.

4. A counter offer or conditional acceptance operates as a rejection of the offer and causes it to lapse, e.g., where a horse is offered for Rs. 1,000 and the offeree counteroffers Rs. 990, the offer lapses by rejection.

5. Acceptance must be communicated to the offeror, for acceptance is complete the moment it is communicated. Where the offeree merely intended to accept but does not communicate his intention to th.e offeror, there is no contract. Mere mental acceptance is not enough.

6. Mere silence on the part of the offeree does not amount to acceptance. Ordinarily, the offeror cannot frame his offer in such a way as to make the silence or inaction of the offeree as an acceptance. In other words, the offeror can prescr ibed the mode of acceptance but not the mode of rejection.


In Felthouse v. Bindley (1865), F offered by letter to buy his nephew's horse for £30 saying: "If I hear no more about him I shall consider the horse is mine at £30". The nephew did not reply, but he told an auctioneer who was selling his horses not to sell that particular horse because it was sold to his uncle. The auctioneer inadvertently sold the horse. Held: F had no claim against the auctioneer because the horse had not been sold to him, his offer of £30 not having been accepted. (a simple illustration)

[ Here Held means the final decision of the court ] 7. If the offer is one which is to be accepted by being

acted upon, no communication of acceptance to the offeror is necessary, unless communication is stipulated for in the offer itself.

Thus, if a reward is offered for finding a lost dog, the offer. is accepted by finding the dog after reading about the offer, and it i s unnecessary before beginning to search for the dog to give notice of acceptance to the offeror.

8. Acceptance must be given within a reasonable time and before the offer lapses or is revoked. An offer becomes irrevocable by acceptance.

An acceptance never precedes an offer. There can be no acceptance of an offer which is not communicated. Similarly, performance of conditions of an offer without the knowledge of the specific offer, is no acceptance. Thus in Lalman Shukla v. Gauri Duff (1913), where a servant brought the boy without knowing of the reward, he was held not entitled to reward because he did not know about the offer.

TYPES OF CONTRACT

Void Contract: Section 2(j) states as follows: "A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable". Thus a void contract is one which cannot be enforced by a court of law.

Voidable Contract: Section 2(i) defines that an agreement which is enforceable by law at the option of one or more parties but not at the option of the other or others is a voidable contract.

This infact means where one of the parties to the agreement is in a position or is legally entitled or authorized to avoid performing his part, then the agreement is treated and becomes voidable. Such a right might arise from the fact that the contract may have been brought about by one of the par t ies by coerc ion , undue inf luence, f raud or misrepresentation and hence the other party has a right to treat it as a voidable contract.

At this juncture it would be desirable to know the distinction between a void contract and a voidable contract. The distinctions lie in three aspects namely definition, nature and rights. These are elaborated hereunder:

Definition: A void contract cannot be enforced at all. A voidable contract is an agreement which is enforceable only at the option of one of the parties but not at the option of the other. Therefore 'enforceability' or otherwise, divides the two types of contracts.

Nature: By nature, a void contract is valid at the time when it is made but becomes unenforceable and thus void on account of subsequent developments or events l ike supervening impossib il ity, subsequent i l legalit y etc., Repudiation of a voidable contract also renders the contract void. Similarly a contingent contract might become void when the occurrence of the event on which it is contingent becomes impossible.

Il legal Contract: Illegal contract are those that are forbidden by law. All illegal contracts are hence void also. Because of the illegality of their nature they cannot be enforced by any court of law. In fact even associated contracts cannot be enforced. Contracts which are opposed to public policy or immoral are illegal. Similarly contracts to commit crime like supari contracts are illegal contracts.

The above discussion shows that illegal contracts are at par with void contracts. The Act specifies several factors which would render an agreement void. One such factor is unlawful nature of contract or the consideration meant for it. Though illegal agreements and void agreements appear similar they differ in many ways.

Express Contracts: A contract would be an express contract if the terms are expressed by words or in writing. Section 9 of the Act provides that if a proposal or acceptance of any promise is made in words the promise is said to be express.

Implied Contracts: Implied contracts, in contrast, come into existence by implication. Most often the implication is by law and or by action. Section 9 of the Act contemplates such implied contracts when it lays down that insofar as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. For instance 'A' delivers goods by mistake at the warehouse of 'B' instead of that of 'C'. Here 'B' not being entitled to receive the goods is obliged to return the goods to 'A' although there was no such contract to that effect.

Tacit Contracts: Tacit contracts are those that are inferred through the conduct of parties. A classic example of tacit contract would be when cash is withdrawn by a customer of a bank from the automatic teller machine [ATM]. Another example of of tacit contract is where a contract is assumed to have been entered when a sale is given effect to at the fall of hammer in an auction sale.

Further classification of contracts is possible on the basis of their performance. They are:

Executed Contract: The consideration in a given contract could be an act or forbearance. When the act is done or executed or the forbearance is brought on record, then the contract is an executed contract.

Executory Contract: In an executory contract the consideration is reciprocal promise or obligation. Such consideration is to be performed in future only and therefore these contracts are described as executory contracts.


1.(A) 2.(A) 3.(A) 4.(B) 5.(A) 6.(C) 7.(D) 8.(C) 9.(B) 10.(B)

11.(A) 12.(D) 13.(B) 14.(B) 15.(B) 16.(B) 17.(C) 18.(D) 19.(A) 20.(B)

21.(C) 22.(D) 23.(C) 24.(A) 25.(D) 26.(C) 27.(A) 28.(C) 29.(C) 30.(C)

31.(C) 32.(D) 33.(A) 34.(B) 35.(A) 36.(A) 37.(D) 38.(C) 39.(C) 40.(B)

41.(A) 42.(A) 43.(B) 44.(D) 45.(D) 46.(A) 47.(B) 48.(B) 49.(A) 50.(A)

Answer key Practice Exercise

Unilateral Contract: Unilateral contract is a one sided contract in which only one party has to perform his duty or obligation.

Bilateral Contract: A Bilateral contract is one where the obligation or promise is outstanding on the part of both the parties.

PRIVITY OF CONTRACT

A stranger to a contract cannot sue both under the English and Indian law for want of privity of contract. The following illustration explains this point.

In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd. (1915) A.C. 847, D supplied tyres to a wholesaler, X, on condition that any retailer to whom X resupplied the tyres should promise X, not to sell them to the public below D's list price. X supplied tyres to S upon this condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not given any consideration for S's promise to X nor was he a party to the contract between S and X.

Another leading English case is Tweddle v. Atkinson (1861). In this case, the father of a boy and the father of a girl who was to be married to the boy, agreed that each of them shall pay a sum of money to the boy who was to take up the new responsibilities of married life. After the demise of both the contracting parties, the boy (the husband) sued the executors of his fatherinlaw upon the agreement between his fatherinlaw and his father. Held: the suit was not maintainable as the boy was not a party to the contract.

Exceptions to the doctrine of privity of contract: Both the Indian law and the English law recognize certain exceptions to the rule that a stranger to a contract cannot sue on the contract. In the following cases, a person who is not a party to a contract can enforce the contract:

1. A beneficiary under an agreement to create a trust can sue upon the agreement, though not a party to it, for the enforcement of the trust so as to get the trust executed for his benefit. In Khawaja Muhammad v. Hussaini Begum, (1910) 32 All. 410, it was held that where a Mohammedan lady sued her fatherinlaw to recover arrears of allowance payable to her by him under an agreement between him and her own father in consideration of her marriage, she could enforce the promise in her favour insofar as she was a beneficiary under the agreement to make a settlement in her favour, and she was claiming as beneficiary under such settlement.

2. An assignee under an assignment made by the parties, or by the operation of law (e.g. in case of death or insolvency), can sue upon the contract for the enforcement of his rights, tittle and interest. But a mere nominee (i.e., the person for whose benefit another has insured his own life) cannot sue on the policy because the nominee is not an assignee.

3. In cases of family arrangements or settlements between male members of a Hindu family which provide for the maintenance or expenses for marriages of female members, the latter though not parties to the contract, possess an actual beneficial right which place them in the position of beneficiaries under the contract, and can therefore, sue.

4. In case of acknowledgement of liability, e.g., where A receives money from B for paying to C, and admits to C the receipt of that amount, then A constitutes himself as the agent of C.

5. Whenever the promisor is by his own conduct estopped from denying his liability to perform the promise, the person who is not a party to the contract can sue upon it to make the promisor liable.

6. In cases where a person makes a promise to an individual for the benefit of third party and creates a charge on certain immovable propertyforthe purpose, the third party can enforce the promise "though, he is stranger to the contract.

CONSIDERATION

Section 2 (d) of the Indian Contract Act, 1872 defines consideration as '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 abstain from doing something, such an act or abstinence or promise is called consideration for the promise'.

From the above definition it can be inferred that, Consideration is doing or not doing something, which the promisor desires to be done or not done. 1. Consideration must be at the desire of the promisor 2. Consideration may move from one person to any other

person 3. Consideration may be past, present or future and 4. Consideration should be real though not adequate.

In most cases the promisor for doing an act or not doing an act derives some benefit by way of consideration. Thus consideration is identified as quid pro quo from the promise or performance of the promisor.


Essentials for valid consideration

1. Consideration must move at the desire of the promisor.

2. Consideration can flow either from the promisee or any other person.

3. Where consideration consists of performance, it is called “executed” consideration. Where it consists only of a promise, it is executory.

4. The Act recognizes past consideration as consideration when it uses the expression in Section 2(d) “has done or abstained from doing”.

5. Consideration need not necessarily be of the same value as of the promise for which it is exchanged. But it must be something which can be inadequate as well.

6 . The performance of an act by a person what he is legally bound to perform, the same cannot be consideration for a contract.

Invalid Considerations:

1. Agreement forbidden by law

2. Consideration defeats the provision(s) of law

3. Consideration that would defeat any rule for the time being in force

4. Where consideration is a fraud

5. Where object or consideration is unlawful because it involves or causing injury to a person or loss of property

6. Where consideration is immoral

7. Where consideration is opposed to public policy.

FREE CONSENT

In terms of section 13 of the Act, two or more persons are said to have consented when they agree upon the same thing in the same manner. This is referred to as identity of minds or “consensusadidem”. Absence of identity of minds would arise when there is an error on the part of the parties regarding (a) nature of transaction or (b) person dealt with or (c) subject matter of agreement. In such cases there would be no consent. However cases of fundamental errors have to be distinguished from cases of mutual mistakes.

FACTORS VIOLATING FREE CONSENT

Coercion (Section 15): “Coercion” is the committing, or threatening to commit any act forbidden by the Indian Penal Code 1860, 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. A person to whom money has been paid or anything delivered under coercion, must repay or return it.

Undue influence (Section 16): A contract is said to be induced by “undue influence” where the relat ions subsisting between the parties are 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 of the other.

A person is deemed to be in a position to dominate the will of the other, when he holds authority, real or apparent over the other, or when he stands in a fiduciary relation to other.

Fraud (Section 17): Fraud means and includes any of the following act committed by a party to a contract or with his connivance or by his agent with intent to deceive another party thereto or his agent or to induce him to enter into the contract.

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

2. The act ive 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; and 5. Any such act or omission as to law specially declared

to be fraudulent.

It is important to note that ‘fraud’ that results in a contract alone is covered by section17 of the Act. If there is a ‘fraud’ but it does not result in a contract, it would not fall within the purview of the Act.

Misrepresentation [Section 18]: “Misrepresentation’ does not involve deception but is only an assertion of something by a person which is not true, though he believes it to be true. Misrepresentation could arise because of innocence of the person making it or because he lacks sufficient or reasonable ground to make it. A contract which is hit by misrepresentation can be avoided by the person who has been misled.

Mistake: The fifth significant element that vitiates consent is ‘Mistake’.

1 . Mistake should be a matter of fact

2. Mistake should not be a matter of law

3. Mistake should be a matter of essential fact

4. Mistake should not be unilateral but of both the parties, and

5. Mistake renders agreement void and neither party can enforce the contract against each other.

CAPACITY TO CONTRACT

Age of majority: In terms of the Indian Majority Act, 1875, every domiciled Indian attains majority on the completion of 18 years of age. However where a guardian is appointed by a court to protect the property of a minor and the court takes charge of the property before the person attains 18 years, then he or she would attain majority on completion of 21 years.

Minor can be a beneficiary: Though a minor is not competent to contract, nothing in the Contract Act prevents him from making the other party bound to the minor. Thus, a promissory note duly executed in favour of a minor is not void and can be sued upon by him, because he though incompetent to contract, may yet accept a benefit.


A minor cannot become partner in a partnership firm. However, he may with the consent of all the partners, be admitted to the benefits of partnership (Section 30 of the Indian Partnership Act,1932).

Minor can always plead minority: Any money advanced to a minor cannot be recovered as he can plead minority and that the contract is void. Even if there had been false representation at the time of borrowing that he was a major, the amount lent to him cannot be recovered.

Ratification of agreement not permitted: A minor on his attaining majority cannot validate any agreement which was entered into when he was minor, as the agreement was void. Similarly a minor cannot sign fresh promissory notes on his attaining majority in lieu of promissory notes executed for a loan transaction when he was minor, or a fresh agreement without consideration.

Liabil ity for necessaries: A person who supplied necessaries of life to a minor or his family, is entitled to be reimbursed from the properties of a minor, not on the basis of any contract but on the basis of an obligation resembling a contract. Necessaries of life not only include food and clothing but also education and instruction. They also include ‘goods’ and ‘services’.

Contract by guardian are valid: Though an agreement with minor is void, valid contract can be entered into with the guardian on behalf of the minor. The guardian must be competent to make the contract and the contract should be for the benefit of the minor. For instance a guardian can make an enforceable marriage contract on behalf of the minor.

Similarly father of bride can enter the contract with the father of bridegroom for payment of certain allowance to the bride.

PERFORMANCE OF CONTRACT

In a contract where there are two parties, each one has to perform his part and demands the other to perform. This obligation is the primary tenet. The parties would be treated as having been absolved only under the provisions of any law or by the conduct of the other party. Until such time, the performance is neither excused nor dispensed with. Not only the promisor has a primary duty to perform, even the representative in the event of death of a promisor, is bound by the promise to perform, unless a contrary intention appears from the contract [Section 37].

The promise under a contract can be performed by any one of the following:

Promisor himself: Invariably the promise has to be performed by the promisor where the contracts are entered into for performance of personal skills, or diligence or personal confidence, it becomes absolutely necessary that the promisor performs it himself.

Agent: Where personal consideration is not the foundation of a contract, the promisor or his representative can employ a competent person to perform it.

Representatives: Generally upon the death of promisor, the legal representatives of the deceased are bound by the promise unless it is a promise for performance involving personal skill or ability of the promisor. However the liability of the legal representative is limited to the value of property inherited by him from the promisor.

Third Person: The question here is whether a total stranger to a contract who is identified as a third person can perform a promise. Where a promisee accepts performance from a third party he cannot afterwards enforce it against the promisor.

Such a performance, where accepted by the promisor has the effect of discharging the promisor though he has neither authorized nor ratified the act of the third party.

Joint promisors: Where two or more persons jointly promise, the promise must be performed jointly unless a contrary intention appears from the contract.

BREACH OF CONTRACT

Where the promisor refuses to perform his obligation even before the specified time for performance and signifies his unwillingness, then there is an anticipatory breach.

Where one of the parties breaches the contract by refusing to perform the promise on due date, it is known as actual breach of contract. In such a case the other party to contract obtains a right of action against the one who breached the contract.

In cases where there is a breach of contract, the promisor who breaches is liable to pay compensation for damages suffered by the promisee. The compensation can be classified as:

1. those for damages that usually arise in the event of breach of contract and

2. those for damages which parties know and anticipated at the time of entering into the contract called special damages. This kind of special damages can be claimed only on previous notice.

However no compensation is payable for any remote or any indirect loss. While assessing the damage the inconvenience caused to the aggr ieved par ty on account of non performance should be assessed carefully, as the party entitled for compensation, he has a duty to take steps to minimise the loss.

The liability to pay damages is of four kinds. They are:

(i) liability for special damages

(ii) liability for exemplary damages

(iii) liability to pay nominal damages and

(iv) liability to pay damages for deterioration caused by delay.


Liability for special damages: Where it is understood between parties that in the event of breach of contract, there would be special damages also in addition to normal damages, then special damages would be payable. In our given example above if the tailor had informed about the special circumstances, special damages would have become payable.

Liability for exemplary damages: These situations may arise mainly in two cases namely (i) breach of promise to marry, and (ii) wrongful dishonour of cheques of customer by bank.

In case of breach of promise to marry, the damages are awarded taking into account the injury or humiliation which the aggrieved person would have suffered.

In case of wrongful dishonour of cheques the damages would depend upon the loss of credit and reputation suffered by the customer. The damages could be very heavy if loss had been suffered by a businessman, when compared to a non businessman customer. For example:

Mrs. G, a nontrader, paid a cheque for £90 and 16 shillings drawn on Westminster Bank to her landlord for rent. The cheque was dishonoured by the bank. But she was awarded damages of only 40 shilling as nominal damages. [Gibbons vs. Westminster Bank (1939) 2 K.B. 882]

Similarly where the value of cheque is small the damages could be very heavy in comparison to a situation where the value of cheque is heavy. This is on the theory that dishonour of a small value of cheque would cause more damages to the honour of the customer.

Liability to pay nominal damages: Nominal damages are awarded in those cases of breach of contract where no damage has been suffered. Such damages are awarded only to establish the right to decree for breach of contract. Such damages are for nominal amounts like ten rupees or even ten paise.

Damages for deter iorat ion caused by de lay : Compensation can be recovered even without notice for damages or ‘deterioration’ caused to goods on account of delay by carriers amounting to breach of contract. Here the word “deterioration” means not only physical damages but also loss of opportunity. In Wilson vs. Lancashire and Yorkshire Railway Company 50 LJCP 232, the plaintiff bought velvet with a view to making it into caps for sale during spring. But due to delay in transit, he was unable to use the velvet for making caps for sale during season.

Remedies for Breach of Contract: Aggrieved party has following remedies on the breach of contract Rescission of the contract, suit for damages, suit for quantum meruit, specific performance and for injunction.

Rescission: Cancellation of a contract by the consent of all parties/ by aggrieved party.

Damages: Monetary compensation payable to the injured party for the loss due to breach of contract by the defaulted party.

Liquidated Damages: Preestimated amount of a damges that are mentioned in a contract and are paid on the breach of contract.

Penalty: Amount specified in a contract which is high and disproportionate from the amount of damages in the event of its breach. This amount is paid as of punishment to avoid the breach of contract.

CONTINGENT AND SPECIAL CONTRACTS

According to the section 31 of the Contract Act 1872, “A Contingent Contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.”

A Contingent contract contains a condition promise. A promise is “absolute” or “unconditional” when the promisor undertakes to perform it in any event. A promise is “conditional” when performance is due only if an even, collateral to the contract, dose or does not happen. “Collateral” means “subordinate but from same source, connected but aside from main line.”

Characteristic of Contingent contracts

From the above discussion it follows that there are two essential characteristics of Contingent contracts

The per formance of such cont racts depends on a Contingency on the happening or nonhappening of the future event.

In a Contingent contract, the event must be collateral incidental to the contract.

The Contingency is uncertain. If the Contingency is bound to happen, the contract is due to be performed in any case and is not therefore a Contingent contract.

Quasi contract: There are certain dealings which are not contracts strictly, though the parties act as if there is a contract. The contract Act specifies the various situations which come within what is called quasi contract.

When one person obtains a benefit at the expense of another and the circumstances are such that he ought, equitably, to pay for it, the law will compel payment, event thought there is no contract between the parties by which payment is promised. The parties will be put in the same position as they would have occupied if there was a contract between them. Such cases are called quasi contract because the relationship between the parties in such cases resembles those created by contract. Sections 6872 of the Contract Act describe the cases which are to be deemed quasi contract.


Rescission of the contract: When one party to a contract breach the contract the other party is entitled to ratification the contract under section 3538 of the specific Relief Act 1877.

Ratification of the contract: When any contractual document is made with fraud or with mutual mistake and which does not express the real intention of the parties, than the affected party to the contract is entitled to the ratification the contract according to there intention under section 3134 of the specific Relief Act 1877.

Damages: When a contract breached by one party the other party of the contract is entitled to get damages for such breach. The amount of the damages is a question of fact and determine according to circumstance.

SPECIFIC PERFORMANCE OF CONTRACT

One of the importances for the breach of contract is specific performance of contract. Here bought parties to the contract are bound to perform there obligation according to contract by the diction of the court. The providing regarding the specific performance of contract is equated by the section 1230 of the specific Relief Act 1877.

Injunction: One of the important remedies for breach of contract is injunction. The providing regarding injunction is equated by the section 5257 of the specific Relief Act 1877. And the under xlv of the code of civil procedure 1908.

Quantum Meruit: The remedies for breach of contract also be given with the rule of “so much remedies as much performance.” It is known as Quantum Meruit by the section 65 of the specific Relief Act 1877.

CONTRACT OF INDEMNITY AND GUARANTEE

Meaning of Indemnity: A contract of indemnity is a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person (Section 124). For example, A contracts to indemnify B against the consequence of any proceedings which C may take against B in respect of a certain sum of 300 rupees. This is a contract of indemnity. The contract of indemnity may be express or imp l i ed , and t he l at er may be i n f er r ed f rom th e circumstances of a particular case, e.g., an act done by A at the request of B. If A incurs any expenses, he can recover the same from B.

The person who promises to indemnify or make good the loss is called the indemnifier and the person whose loss is made good is called the indemnified or the indemnity holder. A contract of insurance: is an example' of a contract of indemnity according to English Law. In consideration of premium the insurer promises to make good and loss suffered by the assured 00 account of the destruction by fire of his property insured against fire.

Under the Indian Contract Act, the contract of indemnity is restricted to such cases only where the loss, promised to be reimbursed, is caused by the conduct of the promisor or of any other person. The loss caused by events or accidents which do not depend on the conduct of any person, it seems, cannot be, sought to be reimbursed under a contract of indemnity,

Rights of Indemnity Holder: When sued under Section 125, the promisee, in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor

1. all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies;

2. all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as if it would have been prudent for him to act in the absence of any cont ract of indemn i ty, or i f the promisor authorised him to bring or defend the suit; and

3. all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders. of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

CONTRACT OF BAILMENT AND PLEDGE

Bailment: A bailment is a transaction whereby one person delivers goods to another person for some purpose, upon a contract that they are, when the purpose is accomplished to be returned or otherwise disposed of according to the directions of the person delivering them (Section 148).

The person who delivers the goods is called the Bailor and the person to whom they are delivered is called the Bailee. The transaction, is called a Bailment (Section 148).

Bailment is a voluntary delivery of goods for a temporary purpose 'on the understanding that they are to be returned in specie in the same of altered form. The ownership of the goods remains with the bailor, the bailee getting only the pos s es s ion . De l ive ry of goods may be ac t ua l o r constructive, e.g., where the key of a god own is handed over to another person, it amounts to delivery of goods in the godown.

Gratuitous Bailment: A gratuitous bailment is one in which neither the bailor nor the bai lee is en tit led to any remuneration. Such a bailment may be for the exclusive benefit of the bailor, e.g., when A leaves his dog with a neighbour to be looked after in A's absence on holiday. It may again to be for exclusive benefit of the bailee, e.g., where you lend your book to a friend or yours for a week. In neither case any charge is made.


A gratuitous bailment terminates by the death of either the bailor or the bailee

Under Section 159 the lender of a thing for use may at any time require its return if the loan was gratuitous, even though he lent it for a specified time or purpose. But if on the faith of such loan made for a specified time or purpose, the borrower has acted in such a manner that the return of the thing lent before the time agreed upon would cause him loss exceeding the benefit actually derived by him from the loan,the lender must, if he compels the return, indemnify the borrower the amount in which the loss so occasioned exceeds the benefit so derived.

Bailment for Reward: This is for the mutual benefit of both the bailor the bailee. For example, A lets out a motor car for hire to B. A is the bailor and receives the hire charges and B is the bailee and gets the use of the car. Where, A hands over his goods to B, a carrier for carriage at a price. A is the bailor who enjoys the benefit of carriage and B is the bailee who receives a remuneration for carrying the goods.

Termination of bailment: Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may determine the bailment (Section 153.)

As soon as the period of bailment expires or the object of the bailment has. been achieved, the bailment comes to an end, and the bailee must return the goods to the bailor (Section 160). Bailment is terminated when the subject matter of bailment is destroyed or by reason of change in its nature, becomes incapable of use for the purpose of bailment.

A gratuitous' bailment can be terminated by the bailor at any time, even before the agreed time, subject to the limitation that where termination before the agreed period causes loss in excess of benefit, the bailor must compensate the bailee (Section 159).

A gratuitous bailment terminates by the death of either the bailor or the bailee (Section 162).

Particular and General Lien: Liens are of two kinds: Particular and General.

A particular lien is one which is available only against that property of which the skill and labour have been' exercised A bailee's lien is a particular lien.

A general lien is a right to detain any property belonging to the other and in tt)\! possession of the person trying to exercise the lien in respect of any payment lawfully due to him.

Thus, a general lien is the right retain the property of another for a general balance of accounts but a particular lien is a right to retain only for a charge on account of labour employed or expenses bestowed upon the identical property detained.

The right of general lien is expressly given by Section 171 of the Indian Contract Act to bankers, factors, warfingers, attorneys of High Court and policybrokers, provided there is no agreement to the contrary.

Finder of Lost Goods: The position of a finder of lost goods is exactly that of a bailee. The rights of a finder are that he can sue the owner for any reward that might have been offered, . and may retain the goods until he receives the reward and may sue for the reward. But where the owner has offered no reward, the finder has only a particular lien and can detain the goods until he receives compensation for the troubles and expenses incurred in preserving the property for finding out the true owner. But he cannot file a suit for the recovery of the compensation [Section 168].

Thus, as against the true owner, the finderof goods in a public or quasi public place is only a bailee; he keeps the article in trust for the real owner. As against everyone else, the property in the goods vests in the finder on his taking possession of it.

The finder has a right to sell the property

1. where the owner cannot with reasonable diligence be found, or

2. when found, he refuses to pay the lawful charges of the finder and (i) if the thing is in danger of perishing or losing

greater part of its value, or (ii) when the lawful charges of the finder for the

preservation of goods and the finding out of the owner amounts to twothirds of the value of the thing (Section 169).

PLEDGE

Pledge or pawn is a contract whereby an article is deposited with a lender of 'money or promisee as security for the repayment of a loan or performance of a promise. The bailor or depositor is called the "Pawnor" and the bailee or depositee the "Pawnee" (Section 172). Since pledge is a branch of bailment the pawness is bound to take reasonable care of the goods pledged with him. Any kind of goods, valuables, documents or securities may be pledged. The Government securit ies, e.g., promissory notes must, however, be pledged by endorsement and delivery.

The following are the essential ingredients of a pledge:'

1 . The property pledged should be delivered to the pawnee.

2. Delivery should be in pursuance of contract.

3. Delivery should be for the purpose of security.

4. Delivery should be upon a condition to return.


Rights of the Pawnee: No property in goods pawned passes to the pawnee, but the pawnee gets a "special property to retain possession even against the true owner until the payment of the debt, interest on the debt, and any other expense incurred in respect of the possession or for preservation of the goods" (Section 173). The pawnee must return the goods to the pawnor on the tender of all that is due to him. The pawnee cannot confer a good title upon a bona fide purchaser for value.

Should the pawnor make a default in payment of the debt or performance of the promise, at the stipulated time, the pawnee may

1. file a suit for the recovery of the amount due to him while retaining the goods pledged as collateral security; or

2. sue for the sale of the goods and the realisation of money due to him; or

3. himself sell the goods pawned, after giving reasonable notice to the pawnor, sue for the deficiency, if any, after the sale.

If the sale is made in execution of a decree, the pawnee may buy the goods at the sale. But he cannot sell them to himself in a sale made by himself under (Hi) above. If after sale of the goods, there is surplus, the pawnee must pay it to the pawnor (Section 176).

Rights of Pawnor: On default by pawnor to repay on the stipulated date, the pawnee may sell the goods after giving reasonable notice to the pawnor. If the pawnee makes an unauthorised sale without giving notice to the pawnor, the pawnor has the following rights.

1. to file a suit for redemption of goods by depositing the money treating the sale as if it had never taken place; or

2. to ask for damages on the ground of conversion.

Pledge by Nonowners: Ordinarily, the owner of the goods would pledge them to secure a loan but the law permits under certain circumstances a pledge by a person who is not the owner but is in possession of the goods. Thus, a valid pledge may be created by the following nonowners.

A mercantile agent: Who with the consent of the owner, in possession of goods or documents of title to goods may, in the ordinary course of his business as mercantile agent, pledge the goods, such a pledge will bind the owner (Section 178).

Seller of buyer in possession after sale: A seller, left in possession of goods sold, in no more the owner, but pledge by him will be valid, provided the pawnee acted in good faith and had no notice of the sale of goods to the buyer (Section 30 of The Sale of Goods Act 1930).

Pledge having limited interest: When the pawnor is not the owner of the goods but has a limited interest in the goods which he pawns, e.g., he is a mortgagee or he has a lien with respect of these goods, the pledge will be valid to the extent of such interest.

Pledge by coowner: One of the jointowners in sole possession of goods, with consent of the others can make a valid pledge.

Pledge by person in possession under a voidable contract: A person may obtain possession under a contract which is voidable at the option of the lawful owner on the ground of misrepresentation,fraud etc. The person in possession may pledge the goods before the contract is avoided by the other party (Section 178A).


¿ Suggested Time : 30 min Total questions : 50

PRACTICE EXERCISE

1. Where a certain amount is deposited as securing for the performance of a contract, it is called (A) Earnest money (B) Cash money (C) Hard money (D) All of these

2. Quantum meruit means (A) As much as is merited (B) As much as is credited (C) As much as is performed (D) None of these

3. The law in India relating to claim for damages is contained in Section (A) 75 (B) 71 (C) 74 (D) 73

4. A Contract of Guarantee is defined in section (A) 125 (B) 126 (C) 128 (D) 129

5. A contract made by mistake about some foreign law, is (A) Void (B) Valid (C) Voidable (D) Illegal

6. A Partnership At Will is one (A) with duration not fixed (B) with duration fixed (C) which can be dissolved at any time (D) which can be dissolved only at the happening of an event

7. Which rights does an unpaid seller have against the goods? (A) Rights of lien (B) Right of stoppage in transit (C) Right of resale (D) All of these

8. Contract in which only one party has to perform his/her promise is known as a/an (A) Executed contract (B) Executory contract (C) Unilateral contract (D) Bilateral contract

9. When the performance of a contract becomes subsequently impossible or unlawful, the contract becomes (A) illegal (B) void (C) invalid (D) voidable

10. Contract for the sale of future goods is a/an (A) Sale (B) Agreement to sell (C) Void (D) Auction sale

11. Reciprocal Promise means (A) a Promise in return for a Promise (B) a Promise in return for a agreement (C) a Promise in return for a contract (D) an accepted Promise

12. When one of the parties to the contract has performed his part of the promise, it is known as (A) Consideration (B) Past consideration (C) Future consideration (D) Executory consideration

13. An agreement made without consideration is (A) Valid (B) Void (C) Voidable (D) Illegal

14. Acceptance in ignorance of the offer is (A) Valid (B) Invalid (C) Void (D) Voidable

15. An agreement to commit a crime is (A) Valid (B) Void (C) Voidable (D) Unenforceable

16. Communication of Proposal is complete when it comes to the knowledge of (A) the Proposer (B) the person to whom it is made (C) the court (D) (A) or (B)

17. An offer made to a specific person is known as (A) Special offer (B) Separate offer (C) Specific offer (D) Standing offer

18. Advertising agent invites a tender it is known as (A) an offer (B) a counter offer (C) an agreement (D) an invitation to offer

19. A general offer may be accepted by (A) any person (B) promise only (C) legal representative only (D) Any of these

20. Moral pressure is involved in the case of (A) Coercion (B) Undue influence (C) Misrepresentative only (D) Any of these


21. In which section of the Indian Contract Act, 1872 is performance to the contract is provided? (A) Section 35 (B) Section 36 (C) Section 37 (D) Section 40

22. Offer of Promise to perform must be made (A) at the Proper Time (B) at the Proper Place (C) at the Proper Form (D) All of the above

23. Assignment of contract may be by (A) Operation of law (B) The act of parties (C) (A) or (B) (D) None of the above

24. Reasonable time for a performance of a contract is a (A) Question of fact (B) Question of prudence (C) Question of law (D) Mixed question of fact and law

25. Whether time is essence of the contract depends on the (A) provisions of law (B) intention of the parties (C) facts and circumstances of each separate case (D) All of the above

26. Contract can be discharged by agreement between parties by the way of (A) Remission (B) Waiver (C) (A) or (B) (D) (A) & (B)

27. The damages awarded by way of punishment is called (A) Vindictive damages (B) Special damages (C) Nominal damages (D) Ordinary damages

28. Anticipatory breach may be (A) Express (B) Implied (C) (A) or (B) (D) (A) & (B) both

29. A finder of lost goods can be treated as a (A) Thief (B) Bailor (C) Bailee (D) True owner

30. Claim for necessaries supplied to an incompetent person is provided in the Indian Contract Act, 1872, in (A) Section 65 (B) Section 67 (C) Section 68 (D) Section 69

31. Under which law is a minor incapable of entering into a contract? (A) Indian Contract Act, 1872 (B) Majority Act, 1875 (C) Guardians and Wards Act, 1890 (D) Contract Labour ((Regulation and Abolition) Act, 1970

32. Which of the following is correct? (A) A Promise is a contract (B) A set of Promises is a contract (C) A Proposal is a contract (D) Agreements enforceable by law is a contract

33. A Promise is defined in the section (A) 2(b) (B) 2(d) (C) 2(e) (D) 2(h)

34. Void agreements are (A) forbidden under law (B) not forbidden under law (C) punishable (D) legal agreements

35. Where two parties make identical offers to each other, in ignorance of each other's offer, the offers are known as (A) Crossoffers (B) An agreement (C) Contracts (D) Promises

36. In the case of specific offers, it can be accepted only (A) by the person to whom it is made (B) by a third party (C) by a stranger (D) by the legal heir

37. A voidable agreements agreement is enforceable by (A) none of the parties (B) only one of the parties (C) all the parties to the contract (D) one or more but not by the other or others

38. An illegal agreement (A) is void ab initio (B) becomes void (C) void ab initio as well as punishable (D) voidable

39. A minor is a person who has not completed (A) 20 years of age (B) 21 years of age (C) 18 years of age (D) 19 years of age

40. A contingent contract is defined in the section (A) 32 (B) 31 (C) 33 (D) 35

41. The Sale of Goods Act, 1930 deals with the (A) movable goods only (B) immovable goods only (C) both immovable and movable goods (D) tangible goods only


Please make sure that you mark the answers in this score sheet with an HB pencil . The marking of answers must be done in the stipulated time for the test. Do not take extra time beyond the given l imit.

1 1 2 3 4 5

2 1 2 3 4 5

3 1 2 3 4 5

4 1 2 3 4 5

5 1 2 3 4 5

6 1 2 3 4 5

7 1 2 3 4 5

8 1 2 3 4 5

9 1 2 3 4 5

10 1 2 3 4 5

11 1 2 3 4 5

12 1 2 3 4 5

13 1 2 3 4 5

14 1 2 3 4 5

15 1 2 3 4 5

16 1 2 3 4 5

17 1 2 3 4 5

18 1 2 3 4 5

19 1 2 3 4 5

20 1 2 3 4 5

21 1 2 3 4 5

22 1 2 3 4 5

23 1 2 3 4 5

24 1 2 3 4 5

25 1 2 3 4 5

26 1 2 3 4 5

27 1 2 3 4 5

28 1 2 3 4 5

29 1 2 3 4 5

30 1 2 3 4 5

SCORE SHEET 31 1 2 3 4 5

32 1 2 3 4 5

33 1 2 3 4 5

34 1 2 3 4 5

35 1 2 3 4 5

36 1 2 3 4 5

37 1 2 3 4 5

38 1 2 3 4 5

39 1 2 3 4 5

40 1 2 3 4 5

41 1 2 3 4 5

42 1 2 3 4 5

43 1 2 3 4 5

44 1 2 3 4 5

45 1 2 3 4 5

46 1 2 3 4 5

47 1 2 3 4 5

48 1 2 3 4 5

49 1 2 3 4 5

50 1 2 3 4 5

42. A party agrees to pay five lakhs to another party if the first party brings to earth a star from sky this is known as a/an (A) Contingent contract (B) Quasi contract (C) Implied contract (D) Wagering contract

43. ..... does not affect the free consent of the parties. (A) Fraud (B) Coercion (C) Incompetence (D) Undue influence

44. Consideration may be (A) Past (B) Present (C) Future (D) All of these

45. When the consent of a party is obtained by fraud, the contract is (A) Valid (B) Voidable (C) illegal (D) Void

46. Registration means getting the partnership firm registered with the (A) Registrar of Firms (B) Registrar of Cooperative societies (C) Registrar of Companies (D) All of these

47. An agreement to share earnings of a smuggling business is (A) Valid (B) Void (C) Voidable (D) Contingent

48. There can be a stranger to a (A) Contract (B) Consideration (C) Agreement (D) Promise

49. The authority of a partner to bind the firm is known as (A) Implied authority (B) Express authority (C) Contractual authority (D) None of the above

50. An actionable claim can always be (A) Assigned (B) Adjusted (C) Noted (D) All of these

legal aptitude booklet # 05

Documents