• Indian Contract Act

• Definition of a contract: Sec. 2(h) :

• "An agreement enforceable by law is a contract.”

• 'Every contract is an agreement but every agreement may not be a contract'

• Essentials of a valid contract:

• Offer and acceptance

• Lawful consideration

• Competent parties

• Free consent

• Consideration and object to be legal

• Definition Of a offer: Sec. 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/offer.

Modes of making an offer

• Express offer: offer made by words (written or oral)

• Implied offer: offer made by conduct• Offer by abstinence: offer made by party

by omission to do something• Specific and General offers: offer can be

made either to (1) a definite person or group of persons, or to (2) the public at large.

EXAMPLES• A real estate company proposes, by a letter

or over telephone, to sell the flat to Rajiv at a certain price

• A company owns a fleet of motorboat for taking people from Mumbai to Goa. The boats are in water at gateway of India.

• Akbar, a creditor, offer not to file a suit against Begum, a debtor, if the latter pays him the amount of Rs 2000 outstanding.

CASE

A patent medicine company advertised that it would give a reward of $100 to anyone who will contact influenza after using smoke balls of the company for a certain period according to printed directions. Mrs Carlill purchased the advertised smoke ball and contacted influenza by using the same according to printed guidelines. She claimed the reward of $100. the company resisted the claim on the ground that advertisement was only invitation to offer and no offer was made to her and she had not communicated her acceptance assuming the advertisement was an offer. She filed the suit for the recovery of reward.

• Rules of a valid offer:

• It must contemplate to give rise to legal relationship.

• Terms must be certain and unambiguous.• Invitation to offer is not an offer.• Offer must be communicated• Special terms must be communicated in a special

manner• Offer should not contain a term the non-

compliance of which would amount to acceptance.

• Definition Of acceptance: Sec. 2(b)

• When a person to whom the offer is made, signifies his assent thereto, the offer is said to be accepted.Rules of a valid acceptance:

• The person to whom the offer is made must give it.• It must be absolute and unqualified.• Example• A offered to sell his land to B for Rs 50,000. B replied

purporting to accept and enclosed Rs 10,000 promising to pay the balance of Rs 40,000 by monthly installment

• A offers to sell his house to B for Rs 5,00,000. B replies, “ I am prepared to buy your house for Rs 5,00,000 provided you purchase my Maruti car for Rs 2,00,000

• A, a real estate company, offers to sell a flat to B and B agrees to purchase it subject to the title of the flat being approved by B’s solicitor.

• Rules of a valid acceptance:

• Mental acceptance is ineffectual.

• It must be expressed in the prescribed manner or

in some usual manner.

• It must be given within a reasonable time.

• It must succeed the offer.

• Consideration: Sec. 2 (d)

• When,

• at the desire of the promisor, the promisee or any other person;

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

• such act or abstinence or promise is called as Consideration for the promise.

• Example

• A agrees to sell his motorcycle to B for Rs 20,000. Here, B’s promise to pay the sum of Rs 20,000 is the consideration for A’s promise to deliver the motorcycle, and A’s promise to deliver the motorcycle is the consideration for B’s promise to pay Rs 20,000.

• Essentials of valid consideration: Consideration must move at the desire of the promisor Consideration may move from the promisee or any other

person It may be past, present or future Consideration need not be adequate Consideration must be real and competent Example: A received summon to appear as a witness at

trial. B, a party to the suit, promises to pay A Rs 1000 in addition to A’s expenses. However, B declined to pay the amount later. Can A enforce the B’s promise.

Consideration must be legal Sec 23 defines illegal agreements as one the consideration

or object of which (1) is forbidden by law (2) defeats the provision of any law (3) is fraudulent (4) involves or implies injury to the person or property of another (5) the court regard it as immoral or opposed to public policy

Voidable contracts

• A voidable contract is one which may be repudiated (i.e., avoided) at the will of one or more of the parties, but not by others.

• Until it is so repudiated it remains valid and binding

• It is affected by a flaw (misrepresentation, fraud, coercion, undue influence), and the presence of any of these defects enables the party aggrieved to repudiate the contract.

Characteristics of voidable contract• Valid and binding on both the parties until avoided by

aggrieved party• Can be avoided only by aggrieved party within a reasonable

time• Example: A purchased certain goods from B by making

misrepresentation of some facts. Later B come to know about the representation made by A. However, B does not within a reasonable time, repudiate the contract. A sells those goods to C.

• The party at whose option the contract is voidable, is not bound to repudiate it

• The party repudiating the contract is entitled to get damages for any loss that he may have suffered

• Aggrieved party has two-fold rights (a) to repudiate the contract and therefore not to be bound there under (b) to carry out the transaction as stipulated in spite of flaw therein.

Void contracts• An agreement which is not enforceable by either of the

parties to it is void. (sec 2 (j))• Sometimes contract is valid at the time of formation, but

may become void afterwards• The act has declared certain type of agreements to be void,

viz., (1) agreements entered into through a mutual mistakes of facts between the parties (s.20) (2) agreements the object or consideration of which is unlawful (s.23) (3) agreements part of the consideration or object of which is unlawful (s.24) (4) agreements made without consideration (s.25) (5) agreements in restraint of trade (s. 27) (6) agreements in restraint of legal proceedings (s. 28) (7) agreements in restraint of marriage (s. 26) (8) uncertain agreements (s. 30) (9) wagering agreements (s.30) (10) impossible agreements (s. 56) (11) an agreement to enter into agreement in future

Distinction between void agreements and voidable contracts

• Legality: a void agreement is without any legal effect, a voidable contract can be enforced by the party at whose option it is voidable

• Enforceability: a void agreement is uneforceable from very beining, whereas voidable contract become unenforceable only when the party at whose option the contract is voidable rescinds it

• Example:• A pays B Rs 10000 in consideration of B’s promise to sell

him some goods. The goods had been destroyed at the time of promise.

• A, a doctor, by exercising undue influence over his patient B induces him to sell his car woth RS 1,50,000 for Rs 1,00,000

Contd…

• Compensation: under voidablee contracts, any person who has received any benefit must compensate or restore it to the other party, however compensation in the event of non performance of void agreement does not arise

• Competency of parties to a contract:

• Sec.10 states:

“Essential ingredient of a valid contract

is that the contracting parties must be

competent”

• Competency of parties to a contract:

• Sec 11 says:

“Every person is competent to contract;

who is of age of majority according to

the law to which he is subject,

and who is of sound mind,

and is not disqualified from contracting

by any law to which he is subject”

Who is a Minor?

• As per Indian Majority Act:

a person below age of eighteen years under normal circumstances

and

a person below age of twenty one years in case of a guardian being appointed for his person or property

• Effects of agreement with or by a minor

• Usually it is Void – ab - initio

(absolutely void and inoperative)

• No ratification on attaining age of

majority

• Effects of agreement with or by a minor

• Minor is however responsible for necessaries provided to him during his minority

• Minor can be admitted to benefits of partnership

• Beneficial agreements are valid

• minor is eligible to get benefits but can not be responsible towards liabilities

• Sound mind: Sec. 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 judgement as to its

effects on his interests”

• Disqualified from contracting:

Alien enemies

Foreign sovereigns

Convicts

Insolvent

As per any other law applicable

• Consent

• i.e. 'Agreeing upon the same thing in the same sense'

• Free Consent: Section 14--

Consent is said to be free when it NOT caused by any one of the following

• Coercion . Undue influence• Misrepresentation . Fraud • Mistake

Coercion: (Sec 15):" It is • a) Committing or threatening to commit, any act

forbidden by Indian Penal Code, or • b) unlawful detaining or threatening to detain any

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

into an agreement“• Example:• A threatens to kill B if he does’nt transfer his

house in A’s favour for a very low price• A threatens to kill B (C’s son) if C does not let his

house to A and thereupon C gives his consent.

Coercion: (Sec 15)

  

• Effect of Coercion:

•  Contract is voidable at the option of the

party whose consent was so obtained

•  Burden of proof that coercion was used

lies on the aggrieved party.

Undue Influence: Sec 16(1)

"A contract is said to be induced by undue influence where,

i) the relations subsisting between the parties

are such that one of the parties is in a

position to dominate the will of the other,

and

ii)he uses the position to obtain an unfair

advantage over the other." 

Undue Influence: Sec 16(1)

Effects of Undue influence

•  Agreement is voidable at the option of the

party whose consent is so caused

• Example: A, a man enfeebled by disease or

age, is induced by B’s influence over him as

his medical attendant to agree to pay B an

unreasonable sum for his professional

service.

• Undue Influence

In a position to dominate the will of the other means:

 a) Where he holds a real or apparent authority over the

other, for eg. lawyer & client, trustee & beneficiary,

master & servant, judge and the accused, doctor and a

patient etc.

b) where he stands in a fiduciary relation to the other

• (fiduciary relation = relation of mutual trust and

confidence) eg. Father & son, Guru & disciple

c) where he makes a contract with a person whose

mental capacity is temporarily or permanently affected

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

Misrepresentation: Sec 18—

 "It means and includes-

a) 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, or

 b) any breach of duty, which without any intent to deceive, gains an advantage to the person committing it, by misleading other person to his prejudice, or

 c) causing, however innocently, a party, to make a mistake as to the substance of the thing which is the subject of the agreement

Fraud: Sec 17—

It means and includes any of the following acts

committed by a party to the contract—

i)The suggestion that a fact is true when it is not

true, by the one who does not believe it to be true

ii)The active concealment of a fact by a person who

has knowledge or belief of the fact

iii)A promise made without any intention of

performing it

iv)Any other act fitted to deceive

 v)Any such act or omission as the law specially

declares to be fraudulent

• Representation =

 

• statement of fact made by one party to

another

•  either before or at the time of contract

• relating to some matter essential to the

formation of the contract

•  with an intention to induce the party to enter

into the contract

An innocent wrong statement

= Misrepresentation

  

A deliberate or intentional statement to deceive the

other = Fraud

Effects of Misrepresentation

 

• The aggrieved party has two options

1. He can rescind the contract, treating it as

voidable

2. He may affirm the contract and insist that he shall

be put in a position in which he would have been,

if the statement was true.

EXAMPLE

• A, by a misrepresentation leads B erroneously to believe that 500 kilos of indigo are made annually at A’s factory. B examines the account of the factory, which shows only 400 kilos of indigo have been made. After this, B buys the factory. Is contract voidable on account of A’s mispresentation.

• Effects of Fraud:

The aggrieved party has three remedies

1. He can rescind (set aside) the contract, treating it as voidable

2. He may affirm the contract and insist that he shall be put in a position in which he would have been, if the statement were true.

 

3. He can also sue for damages, if any, because fraud is a civil wrong and hence compensation is payable

Mistake= erroneous belief concerning something

 Mistake can be of Law Or of Fact

Mistake of law

  |

| |• Mistake of Law Mistake of law

of the country of foreign country

Mistake of Fact

|

| |

Bilateral Unilateral

Mistake Mistake

Mistake of law of one's own country is no excuse.

Mistake of foreign law however stands on the same

footing as mistake of fact

Bilateral mistake =

a) Both parties to an agreement misunderstood each other and are at cross purposes

b)  Mistake relates to a fact and not to judgment or opinion etc.

c)  The fact must be essential to the agreement

• Bilateral mistake:

Ø Mistake as to the existence of the subject matter of the agreement

Ø Mistake as to the identity of the subject matter

 

Ø Mistake as to the title of the subject matter

Ø Mistake as to the quantity of the subject matter

 

Ø Mistake as to the quality of the subject matter

EXAMPLE• A, who owns two fiat cars, offers to sell his white fiat

for Rs 80,000. B accepts the offer thinking A is selling his brown fiat.

• P wrote to H inquiring the price of the rifle of particular make and suggested that he might buy as many as 30. on receipt of the information, he telegraphed, “send three rifles”. But because of the mistake of telegraph authorities message transmitted was “send the rifles”. H dispatched 30 rifles.

• A buys an article thinking it is worth Rs 10,000 while actually it is worth Rs 5,000 only. Later he wants to avoid the agreement on the ground of mistake as to the price of subject matter. Can he avoid.

• A agrees to sell B a specific cargo of goods supposed to be on its way from London to Mumbai. It turns out that before the date of bargain the ship carrying the cargo had been cast away and the goods lost. Neither party was aware of the facts.

• Unilateral Mistake :• only one of the contracting parties is mistaken

as to a fact of material to the contract

  EXAMPLE: A sold rice to B by sample, and B thinking that they were old rice, purchased them. Infact, the the rice were new. Can B avoid the contract.

Effect of Unilateral Mistake:• Contract remains valid unless caused by

misrepresentation or fraud.• Where the mistake is caused by

misrepresentation or fraud the contract becomes voidable at the option of the aggrieved party.

Cases where agreement does not give rise to any

contract in spite of a unilateral mistake:

Ø Mistake as to the identity of the person contracted with, where such identity is important

 

Ø Mistake as to nature and character of the written document.

 • Reason for these two exceptions is that the

mistake is so fundamental as to go to the roots of the agreement

Agreement against public policy• An agreement which conflicts with morals of time and

contravenes any established interest of society is void as being against public policy.

• The agreement declared void as against public policy are:

a) Trading with enemy: all contracts made with alien enemy are illegal unless made with govt. permission

b) Agreements for stifling prosecution: agreement for compounding or suppression of criminal charges and for offences of public nature

Example: A, knowing that B has committed a murder obtains a promise from B to pay A Rs 10,000 in consideration of not exposing B

Contd…c) Contracts in the nature of champerty and

maintenance: Where, a person, having no interest, agrees to maintain a suit on behalf of another against a third party, it is known as maintenance. Champerty is a bargain whereby one party is to assist another in recovering property, and in return, is to share in the proceeds of the action. Champerty and maintenance are not illegal but court refuses to enforce it, when

i. They are found to be extortionate and unconscionable

ii. Not made with the bonafide object of assisting the claims of the person unable to carry on litigation himself.

Example

• A, a financier, promises to spend Rs 30,000 for the consideration that a part of the estate recovered through litigation will be conveyed to him, the value of which amounted to Rs 90,000

• A promises to render services for the conduct of litigation in consideration of payment of 10 percent of the amount recovered through court

Contd..

a) Agreements for the sale of public offices and titles

Example: A promises to pay B Rs 5,000 if B secures him an employment in public office

b) Agreements in restraint of parents right

c) Agreements in restraint of marriage of any person other than a minor

d) Marriage brokerage

e) Agreements in restraint of legal proceedings

f) Agreements interfering with the course of justice: any agreement for the purpose of using any influence of any kind with judges or officers of justice

g) Agreements in restraint of trade

Agreements in restraint of trade• Sec 27 provides that “every agreement by which anyone is

restrained from exercising a lawful profession, trade or business of any kind is void”

• Example• 29 out of 30 manufacturers of combs in the city of Patna

agreed with R to supply him with combs and not to anyone else. Under the agreement R was free to reject the goods if he founds there was no market for them. Is agreement void.

• J, an employee of company, agreed not to employ himself in a similar concern within a distance of 800 miles from Chennai after leaving the company’s service. Is agreement void.

• A and B carried on business of readymade garments in a certain locality in calcutta. A promised to stopped business in that locality if B paid him Rs 900 which he had paid to his workmen as advances. A stopped his business but B did not paid him the promised money. Is agreement void.

Cases in which restraint of trade is valid• Sale of a goodwill of business

Example: S, a seller of imitation jewellery, sells his business to B and promises not to carry on business of imitation jewellery and real jewellery. Is agreement valid?

• Partner’s agreement: partners may agree that1) A partner shall not carry on any business other than that of a

firm while he is a partner2) A partner on ceasing to be a partner will not carry on similar

business to that of the firm within specified period or within specified local limits

3) Partners may , upon or anticipation of the dissolution of firm, make an agreement that some or all of them will not carry on business similar to that of a firm within a specified period or within a specified local limits and such an agreement shall be valid if the restriction imposed are legal

4) A partner, may upon the sale of a goodwill of the firm, make an agreement that such a partner will not carry on any business similar to that of a firm within a specified period or within a specified local limits and such an agreement shall be valid if restriction imposed are legal

Contd…

• Restrictive trade agreements: if restrictive trade agreement is not against public interest, it is valid.

• Service agreements: an agreement of service by which a person binds himself during the term of agreement not to take service with anyone else or directly or indirectly take part in promotion of any business in direct competition with that of his employer.

Wagering agreements• A promise to give money or money’s worth upon the

determination of an uncertain eventExample:

A and B bet as to whether it would rain on aprticular day or not - A promises to pay Rs 100 to B if it rained and B promising an equal amount to A, if it did not.

A borrows Rs 500 from B pay to C, to whom A has lost bet.• Wagering agreements void and not illegal: unless the wager

amounts to a lottery, which is crime under the Indian Penal Code S. 294 A, its not illegal.

• However, supreme court upheld lotteries as legal where prior permission of Govt. is obtained and winner of the lottery has a right to receive the prize and sale of lotteries is subject to the payment of sales tax.

Exceptions• Transactions for the sale and purchase of stocks and

shares

• Prize competitions

• An agreement to contribute a plate or prize of the value of Rs 500 or above to be awarded to the winner of horse race

• Contracts of insurance

Quasi contract

• A situation in which law imposes on one person, on grounds of natural justice, an obligation similar to that which arises from a true contract, although not contract, express or implied, has infact been enterd into by them

• Example• X supplies goods to his customer Y, goods are

delivered by a servant of X to Z, mistaking Z for Y. Is Z liable to pay compensation to X.

CASES WHICH ARE TREATED AS QUASI CONTRACTS

• Claim for necessaries supplied to a person incapable of contracting or on his account

• Examples:A supplies B, a lunatic, with necessaries suitable to

his condition in life. A is entitled to be reimbursed from B’s property.

A who supplies the wife and childrens of B, a lunatic, with necessaries suitable to their conditions in life, is entitled to be reimbursed from B’s property

Contd…• Reimbursement to a person paying money due by another in

payment of which he is interested: A person who is interested in payment of money which another is bound by law to pay, and who, therefore, pays it, is entitled to be reimbursed by the other (S. 69)

• EXAMPLE:• B holds land in Bengal, on lease granted by A, the

Zamindar. The revenue payable by A to the govt being in arrear, his land is advertised for sale by the govt. Under the revenue law, the consequence of such sale will be the annulments of B’s lease. B, to prevent the sale and consequent annulment of his own lease, pays the govt, the sum due from A. A is bound to make good to B the amount so paid.

Contd…• Obligation of person enjoying benefits of non-gratuitous

act: where the person lawfully does anything for another person, or delivers anything to him, not intending to do it gratuitously, and such another person enjoys the benefit thereof, later is bound to make compensation to the former (s. 70)

• Example A, a tradesman, leaves goods at B’s house by mistake. B

treats the goods his own. Is B bound to pay for them. A saves B’s property from fire. Is A entitled to get

compensation from B.• Responsibility of finder of goods: A person who finds

goods belonging to another and take them into his custody, is subject to the same responsibility as bailee.

CONTD…

• Liability of person to whom money is paid or things delivered by mistake or under coercion: A person to whom money has been paid, or thing delivered by mistake or under coercion, must repay or return them

• Example: A and B jointly owe Rs 1,000 to C. A pays the amount to C. Also, B, not knowing this fact, pay Rs 1,000 to C. Is C bound to repay the amount to B.

Contingent Contracts

• A contingent contract is to do or not to do something, if some event collateral to such contract does or does not happen.

• A contingent contract may be contingent upon The happening or not happening of some event within a specified time

• Example: A contract to pay B Rs 10,000 if B’s house is burnt

Performance of Contract

• Performance of contract means carrying out of obligation under it

Who must perform the promise under the contract-a) By promisor himselfb) By his agentc) By his legal representative

Performance of joint promisesa) When two or more person has made a joint promise, all such

persons must jointly fulfill the promiseb) When two or more person make a joint promise, the

promisee may compel any one or more of such joint promisors to perform whole of the promise.

Contd…c) Where, a joint promisor has been compelled to perform the

whole promise, he may compel other joint promisor to contribute equally. If any one of the joint promisor makes default in such contribution, the remaining joint promisor must bear the loss in equal shares.

Examples A, B and C are under joint promise to pay D Rs 3,000. a is

compelled to pay the whole amount. Can A recover the amount from B and C. if yes, how much.

A, B and C are under joint promise to pay D Rs 3,000. C is compelled to pay the whole amount. A is insolvent, but his assets are sufficient to pay half of his debt. Can C recover the amount from B and A. If yes, how much.

A, B and C are under joint promise to pay D Rs 3,000. C is unable to pay anything. And A is compelled to pay the whole amount. B is insolvent, but his assets are sufficient to pay half of his debt. Can A recover the amount from B and C. If yes, how much.

CONTD…d) When a person has made a promise to two or

more persons jointly, the right to claim performance rests with all the joint promisees and after death, with the representative of such a deceased promisee jointly with survivor’s and after death of survivors with representatives of all jointly

• Example:• A, in consideration of Rs 5,000 lent to him by B

and C, promises B and C jointly to repay them that sum with interest on a day specified. B dies. Later on C also dies. Who will claim the right to performance?

Contracts which need not be performed• The parties may mutually agree to substitute the

original contract by a new one or rescind it or alter it• The promisee may dispense with or remit wholly or

in part the performance of the promise made to him or extend the time for such performance or accept any satisfaction for it

• The person at whose option the contract is voidable because of undue influence, fraud, coercion or misrepresentation can rescind it

• The promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise

Rules regarding the time, place and manner of performance of contract

• When the time for the performance has been specified, the promisor must perform on the day fixed during usual business hours and at the place at which promise ought to be performed

• Where a time of performance is not specified, the performance must be made within a reasonable time

• Where a promise is to be performed on a certain day, the promisee must apply for performance at a proper place during usual business hours

• When promise is to be performed and no place is fixed, the promisor must apply to the promisee to appoint a reasonable place for performance

• The performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions

• Remedies for Breach of contract:

 Remedies are available under Indian Contract Act, 1872 and under Specific Relief Act 1963.

Remedies under specific relief act are

1. A decree for specific performance: the court direct the party in breach to carry out his promise according to the term of the contract

2. An injunction: an order of the court prohibiting a person to do something where a party is in breach of negative term of contract

3. A suit on quantum meruit: means as much as merited (earned). A right to sue on a “quantum meruit” arises where a contract partly performed by one party has become discharged by breach of other party.

Remedies under Indian Contract Act, 1872

1. Recession of contract (s. 39)

2. Damages for the loss sustained or suffered

Remedies for Breach of contract:

 

• Rescission of the contract:• When breach of contract is committed by one

party, the other party may treat the contract as rescinded

• Aggrieved party is freed from all the obligation • Example• A promises to supply one bag of rice on a certain

day and B promises to pay the price on receipt of the bag. A does not delivers the bag of rice on the appointed day. 

Damages

Damages are awarded as per rules laid down in Ss. 73-74. As per S.73 -

1. compensations as general damages will be awarded only those losses that directly or naturally results from breach of contract

2. compensation for losses indirectly caused by breach may be paid as special damages

3. aggrieved party should try to take steps to keep the losses to the minimum

S. 74 provides that if the parties agree in their contract that whosoever commits the breach shall pay the agreed amount as compensation, the court has power to award a reasonable amount only, subject to such agreed amount.

• Different kinds of damages:• Ordinary damages: damages which naturally arise in the

usual course of thing from such breach• The measure of ordinary damage is difference between the

contract price and market price at the date of breach• Example: A contracts to deliver 10 bags of rice at Rs 500 a

bag on future date. On the due date he refuses to deliver. The price on that day is Rs 520 a bag. What is the measure of damage?

• Special damages: are claimed in case of loss of profit etc.• When there are certain special circumstances present and

their existence is communicated to the promisor, the non-performance of promise entitles the promisor to not only pay ordinary damages but also other damages that may result therefrom.

• The communication of special circumstances are prerequisite for the claim of damages

Example • A, a builder, contracts to erect and finishes the house by the

1st Jan, in order that B give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between B and C. A builds the house so badly that before 1st Jan it falls down and had to be rebuilt by B, who in consequence losses the rent, which he has to receive from C and is obliged to make compensation to C for the breach of contract. Can B claim for compensation? How much?

• X’s mill was stopped due to breakdown of shaft. He delivered the shaft to Y, a common carier, to be taken to manufacturer to copy it and make a new one. X did not make known to Y that delay would result in loss of profit. By some neglect on the part of Y the delivery of the shaft was delayed in transit beyond a reasonable time. As a result, the mill remain idle for a longer time than otherwise would have been, had the shaft been delivered in time. Is Y liable for loss of profit?

Contd.. • Liquidated damages & Penalty:• The parties to the contract pre-estimate of the loss which

might happen to them in case contract was broken by any of them (Liquidated damages)

• The parties made no attempt to estimate the loss that might happen to them in case of breach but still stipulate a sum to be payable in case of breach with the object of coercing the party to perform the contract (penalty)

• Example: • A contracts with B to pay B Rs 1000 if he fails to pay B 500

on a particular day. A fails to pay Rs 500 on that day. Is B entitled for compensation?

• A contracts with B that if A practices as surgeon in Calcutta, he will pay B Rs 5000. A practices as surgeon in Calcutta. Is B entitled for compensation?

Contd…• Exemplary, punitive or vindictive

damages: awarded to punish the defendant and not solely of awarding compensation to the plaintiff. These have been awarded

a) For breach of a promise to marryb) For wrongful dishonor of the cheque of

the customer by a banker possessing adequate funds of the customer.

• Nominal damages: awarded where there is only technical violation of legal rights but no substantial loss is caused thereby.

Contracts of Indemnity.

   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".

Eg - A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20000/- rupees.  This is a contract of indemnity.

Essentials of Contract of Indemnity.

• It must contain all the essentials of a valid contract.

• The promisee or the Indemnity holder must have suffered loss.

Rights of indemnity holder 1. All damages which he may be compelled to pay in any

suit in respect  of  any matter to  which  the  promise  to indemnify applies.

2. All costs which he may be compelled to pay in any  such suit if, in bringing or defending it, providing he acted prudently or with the authority of promisor

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, or was prudent or authorized by the promisor

Contracts of Guarantee A "contract of guarantee" is a contract to perform

the promise, or discharge the liability, of a third person in case of his default.

Eg – A lends money to B and C promises A that if B fails to repay he will pay the money.

• 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 “.

• The person to whom the guarantee is given is called the "creditor“.

• A guarantee may be either oral or written.

Essentials of a Guarantee

1. There must be a debt existing, which should be recoverable.

2. Existence of 3 parties ie. Principal debtor, creditor & surety.

3. There should be some consideration4. The liability must be legally enforceable.5. The principal debtor must be primarily liable. Surety’s

liability is secondary. 6. There must be a distinct promise, oral or written by the

surety to pay the debt in case of default by principal debtor.

7. All essentials of a contract.

Rights of Surety

• Rights of Subrogation (Right of surety against principal debtor).-

When the surety pays gauranted sum to creditor on behalf of principal debtor, he owns all the rights of the Creditor.

• Rights to indemnity - Surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully

• Rights to benefit of Creditors Securities A  surety is  entitled to the benefit of every security which the  creditor  has against  the  principal  debtor

• To be contributed equally in case where two or more persons are co-sureties.

Contract of Bailment

• A bailment is the transfer of possession of personal property without the transfer of ownership, usually on the understanding that the property will be returned.

• The party who transfers the property is called the bailor, and the party to whom the property is transferred is the bailee.

Types of Bailment

• There are two main types of bailment: contractual and non-contractual.

• Contractual bailment exists where the elements of a bailment are found in a contract.

• Non-contractual bailment exists where the elements of a bailment are present without a contract.

Rights and Duties of a Bailee

• All bailees are under a duty to ensure to take care of the property bailed to them.

• The standard of care varies according to the type of bailment.

• The standard of care is least exacting upon a bailee when the bailment is both gratuitous and for the benefit of the bailor. The standard of care is most exacting on a bailee when the bailment is gratuitous and for the benefit of the bailee.

Pledge • The bailment of goods as a security for payment for debt

or performance of promise is called pledge• Example: A borrows Rs 100 from B and keeps his watch

as security for payment of debt. The bailment of watch is called pledge

Distinction between bailment and pledge1. As to purpose: pledge is bailment of goods for a specific

purpose while no such purpose in case of bailment2. As to right of sail: pledgee has a right of sale in case of

default after giving notice to pledger while there is no such right to sale to bailee

3. As to right of using the goods: pledgee has no rights of using the goods pledged while no such restriction exists for bailee

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Law of Agency• When people do business, they often deal with each other directly

Buyer Seller• However, sometimes they deal with each other using a

“middleman” (or representative or intermediary) Buyer Middleman Seller

• The legal relationship between the middleman and the businessperson is governed by the law of agency

• The legal term for a middleman or representative is an agent• The person who is represented by the agent is called the principal• Therefore, in our exampleBuyer Middleman SellerIf the middleman represents the buyerPrincipal Agent Seller

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Definition of Agency (cont)• Definition:

– An agent is a person who is authorised to represent another person, who is called the principal.

– The agent creates a legal relationship between the principal and a third party.

• Therefore, any contract entered into is between the principal and the third party, even though it is arranged by the agent

• The agent does not usually get any rights or responsibilities under the contract

• Therefore, it is the principal who must have the capacity to contract and not the agent

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Forms of AgencyThere are several different forms of agency• A general agent has the power to act for the principal in all

business matters• A special agent only has the authority of the principal for

one transaction• A del credere agent guarantees to the principal that if the

third party does not pay then the agent will pay. – The agent usually takes a higher commission for this

• A marketing agent has limited authority to introduce potential clients to the principal. He does not have the authority to negotiate or enter into contracts on behalf of the principal

• A distribution agent is appointed by a supplier to arrange for distribution of the supplier’s goods in a particular place.

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Creation of AgencyThe principal/agent relationship can be

created in several ways

• Express Appointment

• Ratification

• Implication

• Necessity

• Estoppel

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Express Appointment• This is the most common way of creating

an agency

• The agent is specifically appointed by the principal for a particular task or a general function

• It can be done by contract, but this is not necessary

• What matters is authority

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Ratification• In this case, a person who does not have the authority of

the principal enters into a contract with a third party on behalf of the principal

• Ratification occurs when the principal expressly accepts the contract later

• The effect of this is to make the earlier actions of the agent valid

The following conditions apply to ratification

1. The principal must have been in existence at the time the agent made the contract with the third party

• This is not a problem where the principal is a real person, but it could apply to companies or partnerships which have not been formed

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Ratification (cont.)2. The principal must have had the legal capacity to contract

at the time the contract was made

3. An undisclosed principal cannot ratify a contract• In other words, when the agent made the contract with the

third party, he must have stated to the third party that he was acting as an agent for a particular person

– Even though the principal had not actually authorised him

• If the agent appeared to be acting for himself, then the principal cannot ratify the contract later.

4. The principal must adopt the whole of the contract

5. Ratification must take place within a reasonable time

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Implication• Agency by implication is where it is assumed that

the principal has authorised the person to act as his agent

• It is assumed that because the agent holds a particular position, then he has the authority of the principal to enter into contracts

• Eg: in Panorama Developments v Fidelis Furnishing Fabrics Ltd, it was held that a company secretary had the implied authority to make contracts in the company’s name for the day to day running of the company

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Necessity• A principal/agent relationship can be created where there

has been no agreement between the parties when there is an emergency and one person acts to protect the interests of another person.

• There are 3 conditions for necessity to apply

1. There must be a genuine emergency• Eg in Great Northern Railway Co v Swaffield, the railway

company transported the defendant’s horse• When no one arrived at the destination to collect it, the

railway company paid to put the horse in some stables• The court allowed the company to recover the costs as

necessity had forced them to pay for the stables

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Necessity (cont.)2. There must also be no practical way of getting further

instructions from the principal• In Springer v Great Western Railway Co, some tomatoes

arrived late at a port because of a storm• The railway company could not transport them to London

immediately because of a strike. The company decided to sell the tomatoes locally before they became rotten

• The court held that the railway company should pay the owner of the tomatoes the difference in the price between the price obtained locally and the (higher) price which would have been obtained in London

• The reason for this is that it was possible for the company to have contacted the owner for instructions before selling the tomatoes locally

3. The person who acted as ‘agent’ must have acted in the genuine interests of the ‘principal’

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Estoppel• This form is also known as agency by holding out• It occurs where there is no actual principal/agent

relationship, but the principal makes a third party think that there is

• In this case the agent has apparent authority and the principal is bound by any contract entered into by the ‘agent’ and a third party who thought there was a proper principal/agent relationship

• There are 2 conditions for estoppel to apply

1. The ‘principal’ must have made a representation that the ‘agent’ had his authority

2. The party who claims there has been estoppel must have relied on the principal’s representation

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Authority of the Agent• In order for the agent to create rights and

responsibilities for the principal in a contract, the agent must act within the authority given to him by the principal

• An agent has two types of authority1. Actual: Actual authority occurs in 2 ways Expressly By implication

2. Apparent

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Actual Authority• Express Actual Authority: This is the authority given by the

principal expressly to the agent• The principal tells the agent what he wants the agent to do and

what powers (or authority) the agent has to do those things • Implied Actual Authority: A third party can assume that

someone has the powers which a person in the agent’s position usually has, whether or not the agent has been given those powers expressly

• For example, in Watteau v Fenwick, the new owners of a hotel employed the previous owner as the manager. They expressly told him that he could not buy certain things, including cigars. However, the manager bought cigars from a third party. The third party sued the owners for payment as the manager was their agent. The court held that buying cigars was within the usual authority of the manager of a hotel. If the owners wanted to limit the manager’s authority in buying things then they would have to tell third parties of the limits of his authority

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Apparent Authority• Apparent authority relates to agency created by estoppel • Apparent authority occurs in 2 ways1. A person makes a representation to a third party that

another person has their authority to act as their agent even though that person has not been appointed as their agent

• In this situation, the person who makes the representation is bound by the actions of their apparent agent

• A person will also be liable if he knows that someone is claiming to be his agent, but he does nothing to stop that person

2. When a principal told a third party in the past that someone was his agent

• If the principal ends the agency but does not tell the third party, then he may still be liable for the actions of his former agent

Sale of Goods Act, 1930• Section 4 (1) of the Sale of Goods Act defines contract of

sale of goods as “a contract by which seller transfers or agrees to transfer the property in goods to the buyer for a price”

Essential characteristics of Contract of Sale of Goods

a) Two parties

b) Transfer or agreement to transfer ownership of goods

c) The subject matter of contract must necessarily be Goods

d) Price is the consideration of contract of sale

e) A contract of sale may be absolute or conditional

f) All other essentials of valid contract

Difference between “sale” and “agreement to sell”• Transfer of property (ownership): In sale property in goods

transfers immediately to the buyer at the time of contract while in “an agreement to sell” there is no transfer of property to the buyer at the time of contract

• Risk of loss: in sale, if goods are destroyed the risk passes to buyer even though the goods may not have come into is possession while in “agreement to sell” such loss has to be borne by the seller

• Consequences of breach: in sale, if buyer wrongfully neglects or refuses to pay the price of the goods, the seller can sue him even though the goods are still in his possession while in “agreement to sell”, if buyer breaks his promise, the seller can only sue for damages and not for price even though the goods are in possession of buyer

Contd… • Right of resale: in sale, the property is with the buyer and as

such the seller can not resell the goods. In “agreement to sell”, the property in goods remain with the seller and as such he can dispose of the goods as he like and the original buyer can sue him for the breach of contract only

• Insolvency of buyer before he pays for the goods: in sale, if buyer is adjudged insolvent before payment of goods, the seller in absence of “right of lien”, must deliver the goods to the official receiver or assignee. In an “agreement to sell”, the seller may refuse to deliver the goods

• Insolvency of seller if buyer has already paid the price: in sale, if seller is adjudged insolvent, the buyer is entitled to recover the goods from official receiver or assignee. In an “agreement to sell”, if buyer has already paid the price and seller is adjudged insolvent, the buyer can only claim a rateable dividend (as a creditor) and not goods

Sale of goods and hire purchase agreement• In sale, property in the goods transferred immediately at the

time of contract, whereas in hire-purchase property in the goods transferred only after the payment of last installment

• In sale, position of buyer is that of owner while in hire purchase position of buyer is similar to bailee till the payment of last installment

• In sale, buyer can not terminate the contract and he is bound to pay the price of goods. In hire purchase, the hirer may terminate by returning the goods to owner without any liability to pay remaining installments

• In sale, seller takes the responsibility of any loss resulting from the insolvency of buyer. In hire-purchase, owner takes no such risk, if hirer fails to pay installments the owner has a right to take back the goods

• In sale, sales tax is levied at the time of contract whereas in hire-purchase sales tax is not leviable until it eventually ripens into sales.

Subject matter of contract of sale of goods

• Goods form the subject matter of contract of sale• Goods may be classified into three types

1. Existing goods

a. Specific goods

b. Unascertained goods

1. Future goods

2. Contingent goods

Contd…1. Existing goods• Goods which are physically in existence and which are in

seller’s ownership or possession, at the time of entering the contract

• Existing goods may be either ‘specific’ or unascertained’• Specific: goods identified and agreed upon at the time of the

making of contract• Example: A agrees to sell B a particular radio bearing a

distinctive number• Unascertained goods: the goods which are not separately

identified or ascertained at the time of making of contract• Example: A agrees to sell B one bag of sugar out of the lot

of one hundred bags lying in the godown

Contd…

2. Future goods: goods to be manufactured, produced or acquired by the seller after the making of contract of sale

• Example: A agrees to sell B all the milk that his cow may yield during the coming year

3. Contingent goods: Goods, the acquisition of which by seller depends upon an uncertain contingency

• Example: A agrees to sell B specific rare painting provided he is able to purchase it from its present owner

Effect of perishing of goods

• Under sec. 7 & 8, perishing not only covers physical destruction but also

1. Damage to goods so that the goods have cease to exist in the commercial sense

2. Loss of goods by theft

3. Where the goods have been lawfully requisitioned by the government

Contd…• Effect of perishing of goods may be discussed under

following heads:

1. Perishing of specific goods at or before making of contract• Incase of perishing of whole of goods: where ‘specific

goods’ form the subject matter of sale, and they without the knowledge of seller perish at or before the time of contract, the agreement is void

• Example: A agrees to sell B a certain horse. It turns out that the horse was dead at the time of bargain

• In case of perishing of only part of the goods: where in ‘specific goods’ only part of the goods perished , the effect of the perishing will depend upon whether the contract is entire (void) or divisible (not void).

Contd…2. Pershing of specific goods before sale but after agreement

to sell: where there is an agreement to sell specific goods , and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided i.e., contract of sale becomes void

• If only part of the goods perish, the contract becomes void if it is indivisible but if it is divisible the parties are absolved from their obligations only to the extent of perishing of goods

3. Effect of perishing of future goods: future goods, if sufficiently identified, are to be treated as specific goods, the destruction of which makes contract void.