Indian Contracts Act, 1872 | CMA Inter Syllabus
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Contracts are crucial for carrying on our daily lives. In absence of contracts and its corresponding regulations, there could be anarchy. Opposed to popular belief, contracts are not only used in business deals, but also while carrying out our daily activities like taking the public transport, buying groceries or a cinema ticket or buying anything online, among others.
Contracts are those relationships that lay down rights and obligations of the parties to it which are more often than not negotiated and agreed to by themselves. Contracts exist in every sphere of our lives. These negotiated terms and conditions provide a lucid record of such a transaction which needs to be carried out in good faith. If such obligations are breached, the contracts even mention a way of dispute resolution. A perfect contract is one where all terms and conditions along with all details have been clearly defined leaving nothing to ambiguity or arbitrary construction. Contracts and its corresponding regulations have been a boon to the society for many reasons, economic development being one of the most important out of all.
The Indian Contract Act was enacted in 1872 which enlists provisions that could help the adjudicating authority in deciding the rights and liabilities of the parties.
All essentials of a valid contract, indemnities as applicable, limit of liabilities and grounds for termination are the clauses that the Act essentially deals with among other provisions.
Contracts minimize the risk of commercial transactions by a great deal. They bind the parties to their obligations and reduces the likelihood of breach. Conflict resolution can also be done in a relatively hassle-free way under contract laws.
The laws relating to contract enforce clarity between parties and helps in increasing productivity. From buying shares in a company to working for a company, in whatever capacity, all relationships are governed through contracts. Contracts generally enhance transparency and a well-defined law that governs these relationships help in observance of such contracts in good faith.
Essential elements of a Contract, Offer and Acceptance
To constitute an agreement, it is essential that there exists an offer. Such offer when accepted, gives rise to an agreement. However, to conclude a contract the fulfilment of other pre-requisites of consideration, legality of object, competence of parties and so on, is required. Contracts are legally enforceable. However, every agreement may not be enforceable under law.
In law, an agreement has been defined under Section 2(e) as every promise, and every set of promises, forming the consideration for each other. Whereby as per Section 2(f), promises that form the consideration or part of the consideration for each other are called reciprocal promises.
Contract
Moreover, The Indian Contract Act defines a contract under Section 2(h) as an agreement enforceable by law. As per Section 2(j), a contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.
Example: A offered to sell his book to B for ` 100. B paid A ` 100 and bought the book. A is the offeror, B is the offeree/acceptor, ` 100 is the consideration. Similarly A’s offer to sell the book is his promise, and B’s acceptance to pay the money is his promise. When this aforementioned agreement fulfils Section 10 of the Indian Contract Act, 1872, it becomes a contract.
This brings us to the question of how an offer is defined.
Offer
The term ‘proposal’ is otherwise called as ‘offer’. An offer is a proposal by one person, whereby he expresses his willingness to enter into a contractual obligation in return for promise, act or forbearance. Section 2(a) of the Act defines ‘proposal’ or offer as when one person 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. The person making the proposal is called as ‘offeror’ or proposer’ and the person the proposal is made is called as ‘offeree’.
Therefore, to constitute a valid offer, such an offer:
Example: Ram tells Ghanshyam that he wants to sell his house to him just before he dies. Ram mortgages the house in favour of the State Bank of India for loans. Ghanshyam sues Ram for doing so as there was a contract between Ghanshyam and Ram for the sale of the same house. In this situation, Ram has not told at what price does he want to sell the house to Ghanshyam or the exact time of sale. Hence this cannot be a contract as the offer was unclear, not definite, incomplete and vague.
The offer may be general or specific. If an offer is made to a specific person, it is called specific offer. Such offer can be accepted by such specific person; if an offer is made to the world at large, it is a general offer. It can be accepted by any member of the general public by fulfilling the condition laid down in the offer.
Section 4 of The Indian Contract Act, 1872 lays down provisions relating to communication of offer is complete when it comes to the knowledge of the person to whom it is made. It states an offer which has been communicated properly continues as such until it lapses or revoked by the offer or rejected or accepted by the offeree. An ideal offer should have all the essentials of a valid contract as once it is accepted by the offeree, it becomes a contract.
However, an offer can also be revoked. Section 5 provides that a proposal may be revoked at any time before the communication of acceptance is complete as against the proposer but not afterwards.
Example: A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a letter sent by post. A may revoke his proposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards.
Acceptance
To constitute a promise, the intention of the parties must be communicated. One cannot accept an offer which had not been communicated to him. In general, uncommunicated offer cannot result in a promise.
The term ‘acceptance’ means admitting and agreeing to something to accede to something or to accept something. An offer to enter into legal relations, upon definite terms, to create legal relations, must be followed by an intention of the offeree to accept that offer.
In the case of Thawardar Pherumal vs. Union of India (AIR 1955 SC 468) the Supreme Court held that before an offer can become a binding promise and result in an agreement it must be accepted, either by words or acts.
A person cannot be bound by a one-sided offer which is never accepted particularly when the parties intended that the contract should be reduced in writing. A promise cannot bind its make unless the promise has assented to it. Acceptance must be absolute and unqualified.
Example: Mina tells Tina she wants to sell her scooty for ` 10,000. Tina says she will buy her scooty only if Ukraine wins the war against Russia and lavender trees grow in Japan. This is not a contract as the acceptance is not absolute and unqualified.
Section 4 provides that the communication of an acceptance is complete-
Example: A proposes, by letter, to sell a house to B at a certain price. B accepts A’s proposal by a letter sent by post. The communication of the acceptance is complete, as against A when the letter is posted and as against B, when the letter is received by A.
The following points shall be taken into account in the case of acceptance-
Revocation of acceptance
Section 5 provides that an acceptance may be revoked at any time before the communication of acceptance is complete as against the acceptor but not afterwards.
Example: A proposes, by a letter sent by post, to sell his house to B; B accepts the proposal by a letter sent by post; B may revoke his acceptance at any time before or at the moment when the letter communicates it reaches A, but not afterwards.
Section 4 provides that the communication of a revocation is complete as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the power of the person who makes it and as against the person to whom it is made, when it comes to his knowledge.
Example: B revokes his acceptance by telegram. B’s revocation is complete as against B when the telegram is dispatched and as against A when it reaches him.
As per Section 2(b), when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise.
Section 2(c) defines that the person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”.
Voidable contract
Section 2(i) defines a voidable contract as an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others.
Essentials of a valid contract
Section 10 provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not otherwise expressly declared to be void.
The following are the requirements for a valid contract
Examples:
2.1 Void Agreement
According to Section 2(g), an agreement not enforceable by law is said to be void.
The following agreements are considered to be void:
Considerations and objects unlawful in part
Section 24 provides that if any part of a single consideration for one or more objects or any one or any part of any one of several considerations for a single object is unlawful, the agreement is void.
Example – A promises to superintend, on behalf of B, a legal manufacture of indigo and an illegal traffic in other articles, B promises to pay to A salary of ` 10,000 a year. The agreement is void, the object of A’s promise, and the consideration for B’s promise, being in part unlawful.
This section has no application to a contract which is a single contract and has no contingent part.
2.2 Agreement without consideration
Section 25 provides that an agreement made without consideration is void unless-
In any of these cases, such an agreement is a contract.
Explanation 1 – to this Section provides that nothing in this section shall affect the validity, as between the donor and done of any gift actually made.
Explanation 2 – to this Section provides that an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account, by the Court in determining the question o f whether the consent of the promisor was freely given.
Examples:
The inadequacy of the consideration is a fact which the Court should take into account in considering whether or not A’s consent was freely given.
2.3 Voidable Contract
Section 2(i) defines a voidable contract as an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others.
Agreement in restrain of marriage: Any agreement to restrain the marriage of anyone unless it is that of a minor, is void.
Example: Meenu married Ashish when she was 14 years old. After she turned 18 years, she wants to leave Ashish and get married to someone else. She can opt out of this marriage contract as she was a minor when she entered into the marriage.
Agreement in restraint of trade
Section 27 provides that every agreement by which any one is restrained from exercising a lawful possession, trade or business of any kind, is to that extent void.
The exception to this section is saving of agreement not to carry on business of which goodwill is sold. One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein. Provide that such limits appear to the Court reasonable, regard being had to the nature of business.
Agreements in restraint of legal proceedings
Section 28 provides that every agreement-
Exceptions – The following are the exceptions to this Section:
Example: In a contract between a computer manufacturing company and a customer, there was a clause that the company will not be liable to be sued for damages for anything pertaining to the product in any court of law. Such a contract is void as it restricts the right of the customer to avail legal recourse for enforcing his rights against the company.
2.4 Agreements void for uncertainty
Section 29 provides that agreements, the meaning of which is not certain, or capable of being made certain are void.
Examples:
2.5 Agreement by way of wager
Section 30 provides that agreements by way of wager are void; and no suit shall be brought for recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing – This section shall not be deemed to render unlawful a subscription, or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize, or sum of money, of the value or amount of ` 500 or upwards, to be awarded to the winner or winners of any horse-race.
Section 294A of the Indian Penal Code not affected – Nothing in this section shall be deemed to legalize any transaction connected with horse-racing to which the provisions of Section 294A of the Indian Penal Code, apply.
Example: Mr. X had an agreement with Mr. Y regarding the outcome of India Pakistan match. If Pakistan won he would pay to Mr. Y ` 1 Crore. These kind of agreements are wafering agreements and not enforceable in India.
Section 2(d) of the Act defines the term ‘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 to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise. Consideration is essential for every contract. The following are the fundamental principles for consideration-
In ‘Chinnaya v. Ramaya’ – (1882) Mad. 137 it was held that a lady by a deed of gift made over certain property to her daughter directing her to pay an annuity to the donors brothers as had been done by the donor herself before she gifted the property. On the same day, her daughter executed in writing in favor of the donors’ brother agreeing to pay the annuity. Afterwards the done declined to fulfill her promise to pay her uncle saying that no consideration had moved from him. The court held that the uncle could sue even though no part of the consideration received by the niece moved from him. The consideration from her mother was sufficient consideration.
Types of consideration
Consideration may be of the following three types:
Legal Rules Regarding Consideration
No Consideration - No Contract:
According to Section 25 of The Indian Contract Act, 1872, the general rule is ex-nudopacto non oritur action i.e. an agreement made without consideration is void. For example if A promises to pay B ` 1000 without any obligation from B, this is a void agreement for want of consideration. However, the Act itself provides exceptions to this rule in section 25 itself. As per section 25, an agreement made without consideration is not void in the following circumstances:
Also, an agreement without consideration is not void in the following cases :
Example: Ram told Shyam that he will sell his office space to him if he killed a Union Minister. This
consideration in lieu of office space is an unlawful consideration and hence this will not become a contract.
The object of the contract is the ultimate purpose which the contract sub serves. In contract the subject matter or the agreement is its object.
Section 23 discusses about the legality of the object or consideration. The said section provides that the consideration or object of an agreement is lawful, unless-
Examples:
Electronic contracts are paperless contracts and are in electronic form. It is the change of technology and legal requirements lead the contract to be in electronic form. E-contract is a contract modelled, specified, executed and deployed by a software system. Theyare conceptually very similar to traditional commercial contracts. E-contract also requires the basic elements of a contract. The following are ingredients of the E-contracts-
The main feature of this type of contract is speed, accuracy and reliability. The parties to the contract have to obtain digital signature from the competent authority and they have to affix the digital signature instead of manual signing. The Information Technology Act, 2000 regulates such e-contracts.
In this type of contract the web site of the offeror acts as a display to the world at large. E-mails are used to negotiate and agree on contract terms and to send and agree to the final contract. An email contract is enforceable if the requirements of the contract are fulfilled. Electronically signed contracts cannot be denied because they are in electronic form and delivered electronically.
Example: Anil buys Microsoft Office, online, for his Macbook. Microsoft lays down terms and conditions that will now bind both Anil and Microsoft with respect to the sale of Microsoft Office. When Anil clicks on “I agree to the terms and Conditions” and makes the payment, he is now bound by the e-contract.
6.1 Who are competent to contract?
As per Section 11 every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.
From the above provisions of the section, it means the following types of persons are not competent to contract:
The position of Minor’s agreement and effect thereof is as under:
b. Person of Sound Mind:
What is a Sound Mind for the Purposes of Contracting? (Section 12)
A person is said to be of sound mind for the purposes of making a contract if, at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. A person, who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. A person, who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind.
Illustration:
Solution
Going by the spirit of the section, it is clear that a person is of sound mind if he fulfils the two conditions at the time when he makes it namely :
c. Other Disqualified Persons:
The persons who are disqualified from entering into contract due to certain other reasons may be from legal status, political status or corporate status. Some of such categories of persons are given below:
2.6.2 Free Consent
Consent: ‘Two or more persons are said to consent when they agree upon the same thing in the same sense.’ - [Sec 13]
If the parties have not agreed upon the same thing in the same sense, there is no real consent and hence no contract is formed.
As per section 14 of the Indian Contract Act, 1872 consent is said to be free when it is not caused by:
2.6.2.1 Coercion: [Sec. 15]
The term “Coercion” has been defined in Section 15 of the Act as the committing or threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Explanation: It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed.
From the above definition of coercion given in section 15, consent is said to be caused by coercion, when it is obtained by any one of the following;
Unlawful detaining also amounts to coercion: If a person unlawfully detains or gives a threat to detain any property to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement amounts to coercion.
Effect of coercion
According to section 19 when the consent is caused by coercion, fraud or misrepresentation, the agreement is avoidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party.
It should be noted that threat to commit suicide also amounts to coercion.
Some special cases which are prone to be construed cases of coercion are discussed as under;
2.6.2.2 Undue Influence [Section 16]
Section 16 of the Indian Contract Act defines undue influence as under:
Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of 1872)
There is presumption of undue influence in the following relationships:
Going through the definition of undue influence in section 16 we find that two elements are found in undue influence:
Examples:
Effect of undue influence: Section 19A provides that when the consent is caused by undue influence, the agreement is voidable at the option of the party whose consent was so caused. The aggrieved party may opt to rescind the contract. If the aggrieved party seeks to rescind the contract, he must restore the benefit so obtained under the contract from other party, upon such terms and conditions as to the court may seem just. The following illustrations are appended to the section.
The court has discretion to direct the aggrieved party for giving back the benefit whether in whole or in part or set aside the contract without any direction for refund of benefit.
In a case for avoiding a contract on the ground of undue influence, the plaintiff has to prove that:
The presumption is raised at least in the following cases:
2.6.2.3 Fraud [Section 17]
As per section 17 of the Indian Contract Act:
“Fraud” means and includes any of the following acts committed by a party to a contract, or with hisconnivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:
Explanation: Mere silence as to facts likely to affect the willingness of a person to enter into a contract is notfraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person to keep silence or unless his silence is, in itself is equivalent to speech.
Does silence amount to fraud?
At times one of the parties to a contract be silent to some of the facts relating to the subject matter of contract. The matter on which silence is maintained by party may be material fact. Does this amount to passive fraud under the Indian Contract Act or not depends upon various factors?
Explanation to Section 17 of the Indian Contract Act provides that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud unless the circumstances of case are such that having regard to them, it is the duty of the person keeping silence to speak or unless silence itself is equivalent to speech.
Thus. we can say that there is exception to the rule that mere silence does not amount to silence. These two exceptions are provided in explanation to section 17 and these are as under.
However, in the following two types of cases, silence amounts to fraud, as held by the courts in various cases:
Examples:
Effect of Fraud: According to section 19 when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true.
However, there is one exception to the rule of voidability of contract at the option of aggrieved party. If such
consent was caused by misrepresentation, or by silence, fraudulent within the meaning of section 17, the contact,
nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth
with ordinary diligence.
2.6.2.4 Misrepresentation [Section 18]
A statement of fact which one party makes in the course of negotiation with a view to induce the other party to enter into a contract is known as misrepresentation. It must relate to some fact which is material to the contract. It may be expressed by words spoken or written or implied from the acts and conduct of the parties.
A representation when wrongly made either innocently or unintentionally is a misrepresentation. When it is made innocently or unintentionally, it is misrepresentation and when made intentionally or wilfully it is fraud.
Misrepresentation has been defined in Section 18 of the Act as under:
“Misrepresentation” means and includes—
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.
From the above definition of the term Misrepresentation, the following two types of misrepresentations are noticed:
Effect of Misrepresentation
As per section 19 when consent to an agreement is caused by misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract, whose consent was caused by misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been, if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.
Examples:
2.6.2.5 Mistake [Sections 20, 21 and 22]
Mistake means an erroneous belief about something. It has not been defined in the Indian Contract Act.
Mistake can be –
Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.
Explanation: An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact.
In order to render an agreement void due to bilateral mistake, the following two conditions must be met:-
The various types of mistakes falling under bilateral mistakes are as under:
Impossibility may be:
Examples:
2. Unilateral Mistake as to fact
As per section 22, a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contract unless brought about by another party’s fraud or misrepresentation.
7.1 Quasi-Contracts
Sometimes the law implies a promise imposing obligations on one party and conferring the right in favor of the other even when there is no offer, no acceptance, no consensus ad idem, and in fact, there is neither agreement nor promise. Such cases are not contracts but the court recognizes them as relations resembling those of contracts and enforces them as if they were contracts. Such is called as a quasi-contract.
This type of contract rests on the equitable principle that a person shall not be allowed to enrich himself unjustly in the experience of another. It is obligation which the law creates in the absence of any agreement, when any person is in the possession of one person’s money or its equivalent under such circumstances that in equity and good conscience, he ought not to retain it and which in justice and fairness belongs to another. It is the duty and not an agreement or intention which defines it.
Example: A restaurant owner delivered the food parcel to the neighbour of the family which ordered the food. The receiver neighbour knew that it had been delivered by mistake but made no efforts to return the same, and consumed it. The neighbour is bound by a quasi-contract to replenish the unjust benefits received by them, to the original family which ordered.
In the Act, the following type of quasi contracts are discussed
Section 68 – Claim for necessaries supplied to person incapable of contracting, or on his account.
This section provides that if a person, incapable of entering into a contract, or any one whom he is legally bound to support, is supplied with another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.
Examples:
Section 69 – Reimbursement of persons paying money due by another, in payment of which he is interested – This section provides that a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
Example:
B holds land in Bengal, on a lease granted by A, the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the consequence of such sale will be the annulment of lease. B, to prevent the sale and the consequent annulment of his own lease, pays to the Government the sum due from A. A is bound to make good to B the amount so paid.
Section 70 – Obligation of person enjoying benefit of non-gratuitous act – This section provides that where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered – it is otherwise called as quantum meruit.
Examples:
Section 71 – Responsibility of finder of goods – This section provides that a person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee.
Section 72 – Liability of person to whom money is paid or thing delivered, by mistake or under coercion – This section provides that a person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.
Examples :
2.7.2 Contingent Contracts
Section 31 defines ‘contingent contract’ as a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
The following are the essentials of contingent contract:
Enforcement of contingent contract
Section 32 provides that contingent contracts to do or not to do anything, if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.
Examples:
Section 33 provides for enforcement of contacts contingent on an event not happening. This section provides that contingent contracts to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible, and not before.
Explanation – A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
Section 34 discusses about deemed impossible contract. The said section provides that if the future event on which a contract is contingent is the way in which a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies.
Example: A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C must now be considered impossible; although it is possible that D may die and that C may afterwards marry B.
Section 35 provides for the contracts which are contingent on happening of specified event within fixed time. The said section provides that contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible. Contingent contracts to or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or before the time fixed has expired, if it becomes certain that such event will not happen.
Examples:
Agreements contingent on impossible event void
Section 36 provides that contingent agreement to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.
Example:
2.7.3 Discharge of Contracts
When the rights and obligations created by a contract come to an end, the contract is said to be discharged or terminated. In other words, discharge of contract means termination of contractual relationship between the parties.
Modes of discharge of contracts:
The following are the various modes or methods by which a contract is discharged. Discharge amounts to end of
a contract.
Actual performance is the fulfilment of the obligations arising from a contract by the parties to it, in accordance with the terms of the contract.
Offer of performance is also known as attempted performance or tender of performance. A valid tender of performance is equivalent to performance.
2. Discharge by agreement: The parties may agree to terminate the existence of the contract by any of the following ways:
3. Discharge by lapse of time: Every contract must be performed within a fixed or reasonable period. Lapse of time discharges the contract. The Indian Limitation Act has prescribed the period within which the existing rights can be enforced in courts of law.
Example: If a creditor does not file a suit within three years of debt, the debt becomes time-barred. He is deprived of his legal remedy.
4. Discharge by operation of law: A contract may be discharged by operation of law in the following cases.
5. Discharge by impossibility of performance: Impossibility of performance results in the discharge of the contract. An agreement which is impossible is void, because law does not compel to do impossible things.
6. Discharge by breach: Breach means failure of a party to perform his obligations under a contract. Breach brings an end to the obligations created by a contract.
Example: A and B wanted to marry each other. Before the time fixed for marriage, A goes mad. The
contract becomes void.
2.7.4 Termination of Contract
The proper way, in which the agreement could have been terminated by issuing of a notice to the plaintiff, calling upon to complete the transaction within a particular time, failing which the contract will be treated as cancelled.
That this is the proper way of terminating the contract is cleared from what has been observed in ‘’Narayana Swami Pillai vs. Dhanakodi Ammal’, (1971) 1 Mys. L.J., 245 that when the contract is for the sale of immovable property the vendor must give reasonable notice requiring the performance within a definite time.
Assignment means transfer of contractual rights or liability by a party to a contract to another person who is a stranger to the said contract. Assignments are used to make transactions simpler and expedited. Assignments can take place in various kinds of transactions like in marketplace, in commercial transactions, with respect to intellectual property and so on. Assignment has also been widely used in the context of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, whereby loans have been secured by banks by way of assignment of their contractual rights, as a creditor even with respect to mortgage and so on, to an asset reconstruction company who then undertakes to recover the loan amount from the debtor. When a contract is assignable and there is an assignment of the same in favour of the plaintiff, the plaintiff can sue upon it, and the plea that there is no privity of contract with plaintiff can be of no avail.
Example: if A owes B ` 500 and B owes C a like amount, B has the right to receive from A and is under liability to pay C. B can ask A to pay directly to C and if A accepts, that will be an assignment of B’s right to C.
Section 37 of the Indian Contract Act, 1872 enables parties to dispense with performance by way of assignment. It lays down obligation of parties to contracts. It states that the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract.
Example: Amit, a well-known artist, promises to paint a picture for Sumit by a certain day, at a certain price. Amit dies before the day. The contract cannot be enforced either by Amit’s representatives or by Sumit.
Section 38 of The Indian Contract Act, 1872, discusses the effect of refusal to accept offer of performance. It states that where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract.
Every such offer must fulfil the following conditions
Representations are those statements that are made based on true facts that exist on the day of execution of the contract. Representations induce parties to enter into contracts and inaccurate or false representations are regulated by the Indian Contract Act, 1872. In Indian Contract Act representation has not been defined however, misrepresentations have been explained under Section 18 of the Indian Contract Act, 1872.
Representations have not been defined under The Indian Contract Act, 1872. However, fortunately “misrepresentations” have been defined. Section 18 of The Indian Contract Act, 1872 defines misrepresentation.It states that misrepresentation means and includes:
Section 19 of The Indian Contract Act, 1872 lays down provisions relating to voidability of agreements without free consent.
It states that when consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused. A party to a contract whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to a contract of the party on whom such fraud was practiced, or to whom such misrepresentation was made, does not render a contract voidable .
In the case of National Highway Authority of India vs Pune Solapur Road Development Corporation Ltd (O.M.P. (COMM) 128/2018 & I.A. No. 3857/2018, the Delhi High Court confirmed the award passed by the arbitral tribunal in favour of the Respondent. The Arbitral Tribunal relied upon the clause relating to breach of representations and warranties and awarded damages to the Respondent holding that the Petitioner had represented and warranted that it had full power and authority to deliver and perform its obligations under the agreement and carry out the transaction contemplated therein such as the ones under Clause 7.2 (g) of the agreement, where the Petitioner had warranted that it had complied with the applicable laws in all material aspects and under clause 7.2 (j) where it had warranted that the Petitioner had a good and valid right to the site and had power and authority to grant a license in respect thereof to the concessionaire.
Warranties are the promise of indemnity. Warranty has not been defined under The Indian Contract Act, 1872. However, if warranties are breached, it generally gives rise to indemnification. Section 124 of The Indian Contract Act, 1872 defines contract of indemnity. It states that a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.
Example: Mukil contracts to indemnify Sukil against the consequences of any proceedings which Tukil may take against Sukil in respect of a certain sum of ` 2 Lakhs. This is a contract of indemnity.
Section 125 of The Indian Contract Act, 1872 lays down provisions relating to rights of indemnity-holder when sued:
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:
Section 32 of the Indian Contract Act, 1872 lays down provisions relating to enforcement of contractscontingent on an event happening. It states that contingent contracts to do or not to do anything based on an uncertain future event happening, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.
Examples:
Section 36 of the Indian Contract Act, 1872 states that an agreement contingent on impossible events is void. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.
Whereas, Section 56 of The Indian Contract Act, 1872 states that an agreement to do an act impossible in itself is void.
Contract to do an act afterwards becoming impossible or unlawful: A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
Examples:
Illustration:
Anil and Sunil entered into the contract where Anil promised to deliver 100 labourers for building his house. At the time of making the contract they included the clause “Force Majeure”. But Anil could not deliver the labourers to Sunil due to Covid-19 lockdown. Under this situation Anil is under no obligation to perform the contract - Justify.
Solution
Force Majeure clause is a ground for avoiding obligations emanating out of a contract due to circumstances that are out of control of either of the parties. The pandemic was one such instance when most contracts could not be completed due to the sudden lockdown leading to the invoking of the force majeure clause. The lockdown was pursuant to the directions by the Government. However, many events take place that cannot be controlled that in turn may lead to the impossibility of performance of a contract. Thus, under Section 56 of the Indian Contract Act, 1872, it becomes now impossible for either party to perform its obligations thereby making it void.
A force majeure clause is decided beforehand by parties before the execution of the contract, whereby the parties identify the events, which would attract the applicability of the Force majeure clause. However, the term ‘Force majeure’ is not defined anywhere in The Indian Contract Act, 1872.
Section 62 of the Indian Contract Act, 1872 lays down the effect of novation, rescission, and alteration of contract. It states that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract, need not be performed.
Examples:
To fulfil Section 62, the requirements are that there must be a meeting of minds and there must have been a pre-existing contract between the parties which has now been terminated. In the case of Lata Construction & Ors vs. Dr. Rameshchandra Ramniklal Shah, the court held that novation of a contract leads to substitution of a new contract for the old contract. Such a substitution leads to the discharge of the old contract which no longer has to be performed. A contract of novation requires a party to agree to extinguish or discharge his obligation or debt. Unless this has been accomplished there can be no novation.
For example, in a lease agreement, where the tenant gives the lease to another party and makes him responsible for the obligations and responsibility arising from the lease agreement.
Many kinds of special contracts can be terminated and The Indian Contract Act, 1872 also enlists the authorities who have the power to terminate such contracts. Contracts can also be terminated between parties by rescinding them. Rescission under contract law means a party to the contract can cancel or terminate the contract. Parties can also legally terminate a contract by mutual consent. As per Section 64, consequences of rescission of voidable contract has been laid down. It states that when a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein contained in which he is promisor. The party rescinding avoidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.
Section 66 of The Indian Contract Act, 1872, lays down the mode of communicating or revoking rescission of voidable contract: The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal.
As per Section 75, party rightfully rescinding contract is entitled to compensation:
A person who rightfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfilment of the contract.
For example, A, a waiter, contracts with B, the manager of a hotel, to work at his hotel for two nights in every week during the next two months, and B engages to pay him ` 100 for each night. On the sixth night, A wilfully absents himself from the hotel, and B, in consequence, rescinds the contract. B is entitled to claim compensation for the damage which he has sustained through the non-fulfilment of the contract.
Essentially a tender is construed as an invitation to an offer which invites bids from various contenders. These bids are then construed as offer which when accepted becomes a contract which is binding on both the parties equally. These contracts are usually for the purposes of executing specific work orsupply commodities within specified time schedules.
A tender document may also be called as Request for Tender (RFT). This document usually contains the specifications of the work to be carried out or goods to be supplied, time limit for fulfilment of the work and conditions of contract. These tenders may be floated by companies, organizations or by the Government or its agencies. Interested parties then submit a proposal against the tender which is then evaluated and shortlisted for the contract by those who floated the tender.
Example: The local Government school required installation of fans and light bulbs in its classrooms for which they published a request for tender in the national daily. Many electrical companies submitted their bids according to the specifications mentioned in the tender. Honeywell company was selected out of the bidders who quoted the least price for the installation of the fans and light bulbs. The General Financial Rules (GFR), 2017, by the Department of Expenditure Ministry of Finance, are
a compilation of rules and orders of Government of India to be followed by all while dealing with matters involving public finances. These rules and orders are treated as executive instructions to be observed by all Departments and Organisations under the Government and specified Bodies except otherwise provided for in these Rules. The GFR outlines the procurement procedure, contract management, and financial management principles. Under Chapter 6 of GFR 2017 procurement of goods and services has been discussed. Additionally Delegation of Financial Powers Rules (DFPR) along with the GFR, 2017 deals with governmental procurement and government procurement contracts. Apart from the GFR, 2017, there is no central legislation that governs governmental procurement and contract of tender in India. Every state has its own rules and guidelines with respect to government procurement contracts, based on broader principles of GFR, 2017.
Rule 144 of General Financial Rules (GFRs), 2017, by the Department of Expenditure Ministry of Finance, Government of India, lays down the fundamental principles of public buying (for all procurements including procurement of works). It states:
Every authority delegated with the financial powers of procuring goods in public interest shall have the responsibility and accountability to bring efficiency, economy, and transparency in matters relating to public procurement and for fair and equitable treatment of suppliers and promotion of competition in public procurement. The procedure to be followed in making public procurement must conform to the following yardsticks:-
Also, Rule 145 lays down provision relating to authorities competent to purchase goods:
An authority which is competent to incur expenditure may sanction the purchase of goods required for use in public service in accordance with provisions in the Delegation of Financial Powers Rules, following the general procedure contained in the following rules.
13.1 Contract of Indemnity and Guarantee
Chapter VIII of the Act deals with the contract of indemnity and guarantee. Sections 124 and 125 deal with the contract of indemnity. The other provisions deal with the contract of guarantee.
Contract of Indemnity
Section 124 of the Act defines the expression ‘contract of indemnity’ as 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.
Example: A contracts to indemnify B against the consequences of the proceedings which C may take against
B in respect of a certain sum of ` 2 lakhs. This is a contract of indemnity.
This contract includes indemnifier and indemnity holder. A person who promises to indemnify from losses is called as indemnifier and the person whose loss is made good is called as indemnity holder. To indemnify does not merely means to reimburse in respect of moneys paid, but to save from loss in respect of the liability for which the indemnity has been given.
A contract of indemnity may be either expressed or implied. In ‘Kuppan Chettiar v. Ramaswami Chettiar’ – ILR (1947) Mad.58 it was held that there is implied by law a contract by the person making the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed duty.
In ‘The New India Assurance Co. Limited V. State Trading Corporation of India’ – AIR 2007 (NOC) 517 (Guj) it was held that almost all insurance other than life and personal accident insurances are contracts of indemnity.
In ‘National Overseas vs. Export Credit Guarantee Corporation of India Limited’ Air 2008 All 18 it was held that where export risk policy issued by Export Credit Guarantee Corporation and exporter had consigned shipments to buyer at his own risk without resorting to terms of policy, the corporation is not liable to indemnify loss caused to exporter.
Rights of indemnity holder when sued
Section 125 provides the rights of indemnity holder when sued. This section provides that the promise, in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-
This section is not exhaustive and does not set out all the reliefs which an indemnity holder who has been sued may get. It leaves untouched certain equitable reliefs which he may get. The rights of the indemnity holder are not confined to those mentioned in this section. Even before damage is incurred, it is open to him to sue for the specific performance of the contract of indemnity, provided that it is show, that an absolute liability has been incurred by him and that the contract of indemnity covers the said liability.
In ‘Pepin V. Chandra Seekur’, ILR 5 Cal. 811 it was held that in the case of contract of indemnity, the liability of the party indemnified to a third person is not only contemplated at the time of indemnity, but is the very moving cause of that contract and in case of such a nature, the costs reasonably incurred in resisting or reducing or ascertaining the claim may be recovered.
13.2 Contract of Guarantee
Section 126 defines the expression ‘the contract of guarantee’ as a contract to perform the promise, or discharge the liability of a third person in case of his default. The components of this contract consist of:
A guarantee may be either oral or written. It is a tripartite agreement which contemplates the principal debtor, the creditor and the surety.
Consideration for Guarantee
Section 127 provides that anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving guarantee.
Examples:
This section takes into its fold past consideration also. Like any other contract, a contract of guarantee must be supported by consideration. It is not necessary that the consideration should be received by the surety. Consideration between the principal debtor and the creditor is good consideration for the guarantee given by the surety.
In ‘Rajendra V. Mahila Chandrabai’ – 2012 (1) MPLJ 164 the case is within the purview of example (c). Merely because the appellant made promise to the plaintiff that in this case first and second defendants who were required to pay the sale price to her, fail to pay the same, he would pay the sale price, that promise was without consideration and therefore the said agreement between the plaintiff and third defendant was void. Needless to say that a void agreement cannot be enforced by law and therefore, since the status of the appellant (third defendant) is that of a guarantor, his case is covered under the ambit of example © to Section 127 of the Act and he is not liable to pay the sale consideration or any other amount to the plaintiff on account of the failure in making the payment by first and second defendants.
In ‘United Breweries (Holding) Limited vs. K.S.I.I. & D.C. Limited’ – AIR 2012 (NOC) 154 (Cal.) it was held that it is clear that the question as to whether the deed in question is a deed of guarantee or not depends upon the terms under which the guarantor binds himself. Under law, he cannot be made liable for more than what he has undertaken. There is no ambiguity that the appellant has not undertaken that he would repay the loans of respondent No. 2, in case if respondent No.2 fails to discharge its liability. Therefore, the appellant cannot be made liable for more than what it has undertaken.
13.3 Distinction between Indemnity and Guarantee
The contract of indemnity differs from the contract of guarantee in the aspects shown in the following table:
| Sl.No. | Contract of Identify | Contract of Guarantee |
| 1 | In this contract there are two parties – the indemnifies and the indemnified. | In this contract three parties are involved – principal debtors, surety and creditor |
| 2 | The primary liability is on the indemnifier | The principal liability is on the principal debtors. Secondary liability is on the surety |
| 3 | The indemnifier is not acting at the request of the debtor. | The surety gives contract at the request of the principal debtor. |
| 4 | The possibility of any loss happening is the only contingency against which the indemnifier undertakes to indemnify. | There is an existing debt for which the surety gives guarantee to the creditor on behalf of the principal debtor |
| 5 | The indemnifier cannot sue the third party in his own, unless there is an assignment. | The surety is entitled to proceed against the principal debtor when he is obliged to perform the guarantee. |
| 6 | The contract is between the indemnifier and indemnified. | The contract is between the principal debtor creditor; surety - creditor; principal debtor - surety. |
| 7 | Defined u/s 124 | Defined u/s 126 |
13.4 Liability of surety
The liability of surety arises only when the principal debtor fails to pay the debt to the creditor. Section 128 provides for the liability of surety. The said section provides that the liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise provided by the contract.
Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable, not only for the amount of the bill, but also for any charges which may have become due on it. The liability of the surety is co-extensive with that of the principal debtor and the surety is liable to pay the entire amount his liability being immediate as held in ‘Gouri Prasad V. Rabo India Finance Limited’ – 2013 (2) Mh.L.,J. 195. In ‘Swaminatha Pillai vs. Lakshman Ayya’ – AIR 1935 Mad 748 it was held that there is no authority for the general proposition that a creditor cannot proceed against the surety unless he has first exhausted all his remedies against the principal debtor.
Where the letter of guarantee issued by a guarantor, guarantees repayment of only the principal sum and does not guarantee the payment of any interest, he could not be made liable for the payment of interest as held in ‘S.N. Prasad V. Monnet Finance Limited’ – (2011) SCC 320 .
13.5 Continuing Guarantee
Section 129 of the Act defines the expression ‘continuing guarantee’ as a guarantee which extends to a series of transactions.
Examples:
A guarantee for a future performance may either be restricted to a debtor or liability of a certain amount to be incurred once for all, or it may be continuing. If the liability extends to a single transaction, it is specific. In case it extends to a series of transactions it is continuing. In ‘Gopinathan V. Nedungadi Bank Limited’ – 2013 (3) KLT 115 it was held that on the strength of continuing guarantee, liability of the guarantors continued not withstanding that the personal remedy against the second respondent stood discharged.
Revocation of continuing guarantee
A continuing guarantee can be revoked by two ways
Section 130 provides that a continuing guarantee may at any time revoked by the surety, as to future transactions, by notice to the creditor.
Example:
Revocation of continuing guarantee by surety’s death
Section 131 provides that the death of the surety operates, in the absence of any contract to the contrary, as a revocation of continuing guarantee, so far as regards future transactions.
13.6 Discharge of surety
The liability of the surety is discharged under the following circumstances-
However, in the following circumstances the liability of the surety is not considered to be discharged-
Example: B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.
13.7 Rights of surety
The following are the rights available to the surety under this Act
Examples:
Unless the said two conditions have been fulfilled, the surety cannot call upon the creditor to invest him with all the rights which he had against the principal debtor.
13.8 Invalid Guarantee
The following are considered as invalid guarantee-
Examples:
13.9 Co-surety
Section 144 provides that where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as co-surety, the guarantee is not valid if that other person does not join.
Section 146 provides that the co-sureties are liable to contribute equally. This section provides that where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contracts, and whether with or without the knowledge of each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.
Section 147 of the Act provides that co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
Examples:
13.10 Implied Promise to Indemnify Surety
Section 145 provides that in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he had paid wrongly.
Examples:
13.11 Bailment and Pledge
Chapter IX of the Indian Contract Act, 1872 deals with bailment and pledge.
Bailment
Section 148 defines the term ‘bailment’ as the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The bailment consists of-
If a person, already in possession of the goods of other contracts to hold them as a bailee, he thereby becomes the bailee and the owner becomes the bailor of such goods, although they may not have been delivered by way of bailment.
The following are ingredients of the bailment-
Bailments may be classified into voluntary and involuntary. Voluntary bailments are the outcome of an express contract between the parties. Instances of involuntary bailments are found in cases of finders of good or of goods sent to a wrong place, or in excess of the quantity ordered, or in cases where the bailee dies and the subject of bailment comes into the hands of the bailee’s heirs. Where there is no obligation to return the identical article, either in its original or in an altered form, there is no contract of bailment.
Delivery to Bailee how made
Section 149 provides that the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or any persons authorized to hold them on his behalf.
Bailor’s duty
Section 150 lays down three duties, namely-
Examples:
Care to be taken by Bailee
Section151 provides that in all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value as the goods bailed.
In ‘Nagalinga Chettiyar V. Kayarebana Chettiyar’ –AIR 1915 Mad.80 it was held that where the standard of care prescribed by Section151 is not observed the bailee cannot be exonerated from his liability simply because the bailee’s goods were also lost along with the goods bailed.
In ‘Sirmour Truck Operators Union V. National Insurance Co. Limited’ AIR 2011 (NOC) 389 (HP) it was held that the carrier cannot be exempted from its own negligence or negligence by his agent where goods carried at ‘owner’s risk’ and cannot escape from the liability to make good loss.
Bailee when not liable
Section 152 provides that the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care described in Section 151.
Termination of Bailment
Section 153 provides that a contract of bailment is voidable at the option of the bailor, if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment.
Example: A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is at the option of A, a termination of the bailment.
In ‘Neekram vs. Bank of Bengal’ – ILR 19 Cal. 322 (PV) it was held that this section is intended for the protection of the bailor whose goods are being used by the bailee in a manner inconsistent with the conditions of the bailment. The bailor may put an end to the bailment although it was created for a specified purpose which has not been accomplished or for a prescribed which has not expired. But merely exercising his rights irregularly by the bailee, e.g., a sub pledge or a premature sale by a pledge will not attract the application of the section.
Liability for unauthorized use of bailed goods
Section 154 provides that if the bailee makes any use of goods bailed, which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them.
Example:
In ‘Hafizullah V. Montague’ – 165 IC 354 it was held that where a car was entrusted to the defendant as a bailee and the evidence establishes that he was using the car for his private purposes in contravention of his agreement with the plaintiff, the bailor, it was held that the defendant was liable for the damages arising from such use.
Mixing of the goods
The goods of the bailor may be mixed with the goods of the bailee. This mixing may be done with or without the consent to the bailor. What would be the effect in such cases? Section 155 provides the solution for the same. This section provides that if the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.
What would be the effect if the goods of the bailor are mixed with the goods of the bailee without the consent of the bailor? Section 156 and 157 provide the solution for the same. Section 156 provides the effect of mixture, without bailor’s consent, when the goods can be separated. Section 157 provides the effect of mixture, without bailor’s consent, when the goods cannot be separated.
Section 156 provides that if the bailee, without the consent of the bailor, mixes the goods of the bailor with his own goods and the goods can be separated or divided, the property in the goods remains in the parties, respectively, but the bailee is bound to bear the expenses of separation or division, and any damage arising from the mixture.
Example:
A bails 100 bales of cotton marked with particular mark to B. B, without A’s consent, mixes the 100 bales with other bales of his own, bearing a different mark. A is entitled to have his 100 bales returned, and B is bound to bear all the expenses incurred in the separation of the bales and any other incidental damage.
Section157 provides that if the bailee, without the consent of the bailor, mixed the goods of the bailor with his own goods, in such a manner that it is impossible to separate the goods bailed from the other goods, and deliver them back, the bailor is entitled to be compensated by the bailee for the loss of the goods.
Example:
A bails a barrel of Cap flour worth ` 45 to B. B without A’s consent, mixes the flour with country flour of his own, worth only ` 25 a barrel. B must compensate A for the loss of his flour.
Bailor’s obligation
Section 158 and 164 impose obligation on the bailor. Section 158 provides that where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done upon them by the bailee for the bailor and the bailee is to receive no remuneration, the bailor shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment.
Section 164 provides that the bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the bailor was not entitled to make the bailment, or to receive back the goods, or to give directions respecting them.
Restoration of goods
The bailed goods should be returned after the bailment is over. Section 159 provides for the restoration of goods lent gratuitously and Section 160 provides for return of goods bailed on expiration of time or accomplishment of purpose. Section 161 provides for the responsibility of the bailee when goods are not duly returned.
Section 159 provides that 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 for the amount in which the loss so occasioned exceeds the benefit so derived.
Section 160 provides that it is the duty of the bailee to return, or deliver, according to the bailor’s directions, the goods bailed without demand, as soon as the time for which they were bailed has expired, or for the purpose for which they were bailed has been accomplished.
Non delivery of the goods would amount to breach of contract. This section is silent as to the remedies open to a bailor when the bailee has failed to return the goods on his demand. In ‘Dhian Singh Sobha Singh vs. Union of India’ – AIR 1958 SC 274 the Supreme Court held that a bailor in the event of non-delivery of the goods by the bailee on demand made by him in that behalf was entitled at his election to sue the bailee either for wrongful conversion of the goods or the wrongful detention thereof.
Section 161 provides that if by default of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time.
Section 163 provides that in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the goods bailed.
Example: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as well as the cow to A.
Section 165 provides that if several joint owners of goods bail them, the bailee may deliver them back to, or according to the directions of, one joint owner without the consent of all, in the absence of any agreement to the contrary.
Section 166 provides that if the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or according to the directions of, the bailor, the bailee is not responsible to the owner in respect of such delivery.
Termination of gratuitous bailment by death
Section 162 provides that a gratuitous bailment is terminated by the death either of the bailor or of the bailee.
Right of third person
Section 167 provides that if a person, other than the bailor, claims goods bailed he may apply to the Court to stop the delivery of the goods to the bailor, and to decide the title to the goods.
Right of finder of goods
Section 168 provides that the finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily incurred by him to preserve the goods and to find out the owner; but he may retain the goods against the owner until he receives such compensation; and, where the owner has offered a specific reward for the return of goods lost, the finder may sue for such reward, and may retain the goods until he receives it.
Section 169 provides that when a thing which is commonly the subject of sale is lost, if the owner cannot, with reasonable diligence, be found or if he refuses, upon demand, to pay the lawful charges of the finder, the finder may sell it-
In ‘MJR Steels (P) Limited vs. Chrisomar Corporation’ –AIR 2007 (NOC) 234 (Cal.) it was held that it is not always necessary that sale should be by owner himself; sale by agent or anyone with the consent of owner is valid. Finder of asset can also sale and give good title. There can also sale by estoppels.
Bailee’s lien
Section 170 provides that when the bailee has in accordance with the purpose of the bailment, rendered any service involving the exercise of labor or skill in respect of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the service he has rendered in respect of them.
Examples:
13.12 Pledge
Section 172 of the Act provides that the bailment of goods as security for payment of a debt or performance of a promise is called ‘pledge’. The pledge constitutes-
A pledge is a bailment of moveable property by way of security. The concept of pledge under this Act is dealt with under Sections 172 to 179. In ‘Maharastra State Co-operative Bank Limited vs. Assistant Provident Fund Commissioner’ – (2009) 10 SCC 123 it was held that in a pledge the pledge is in possession of and has a special property in the goods which he is entitled to detain to secure repayment. Unlike a mortgage, a pledge does not have the effect of transferring any interest in the property in favour of the pledge. Delivery of goods is necessary to complete a pledge.
Difference between pledge and bailment
Section 172 of the Act define s a pledge to be the bailment of goods as security for payment of debt or performance of a promise whereas Section 148 provides that a bailment is the delivery of goods by one person to another person for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the persons delivering them.
Rights of pawnee
The rights of the pawnee are described in Section 173, 175 and 176. Section173 provides that the pawnee may retain the goods pledged, not only for the payment of the debt or the performance of the promise, but for the interest of the debt and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged.
Section175 provides that the pawnee is entitled to receive from the pawnor extraordinary expenses incurred
by him for the preservation of the goods pledged.
Section 176 provides that if the pawnor makes default in payment of the debt, or performance at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawner upon the debt or promise and retain the goods pledged as a collateral security, or he may sell the things pledged, on giving the pawner a reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawner is still liable to pay the balance. If the proceeds of the sale are greater than the amounts so due, the pawnee shall pay over the surplus to the pawner.
Retaining of the goods by pawnee
Section174 provides that the pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee.
Pledge by Mercantile Agent
Section 178 provides that where a mercantile agent is, with the consent of the owner, in possession or goods or the documents of the title of goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorized by the owner of the goods to make the same, provided the pawnee acts in good faith and has not at the time of the pledge notice that the pawner has no authority to pledge.
The term ‘mercantile agent’ is defined under Section 2(2) of Sale of Goods Act as an agent having in the course of ordinary business having authority, either to sell goods or to consign goods for the purposes of sale or to buy goods or to raise money on the security of the money.
Pledge in a voidable contract
Section178A provides that when the pawner has obtained possession of the goods pledged by him under a contract voidable under Section 19 or Section19A, but the contract has not been rescinded at the time of pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and without notice of the pawner’s defect of title.
Limited interest of pawner
Section 179 provides that where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.
Suit against wrong doers
Section 180 provides that if a third person wrongfully deprives the bailee of the use of possession of the goods bailed, or does them any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no bailment had been made; and either the bailer or the bailee may bring a suit against a third person for such deprivation or injury.
Apportionment of relief
Section 181 provides that whatever is obtained by way of relief or compensation in any such suit shall, as between the bailor and bailee, be dealt with according to their respective interests.
13.13 Agency
Chapter-X of the Act deals with Agency.
Section 182 provides that an ‘agent’ is a person employed to do any act for another or to represent another in dealing with the third person.
Principal
The person for whom such act is done, or who is so represented is called the ‘principal’.
Provisions regarding to Agent
Section187 defines the terms ‘expressed authority’ and implied authority. An authority is said to be express, when it is given by words spoken or written. An authority is said to be implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the ordinary course of dealing, may be accounted circumstances of the case.
Example: A owns a shop in Serampur, himself living in Calcutta, and visiting the shop occasionally. The shopis managed by B, and he is in the habit of ordering goods from C in the name of A for the purposes of the shop, and of paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods from C in the name of A for purposes of the shop.
Section 184 provides that as between the principal and third persons, any person may become agent, but no person who is not of the age of the majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf.
Section 185 provides that no consideration is necessary to create an agency
Section 188 provides that an agent having an authority to do an act has authority to do every lawful thing which is necessary in order to do such act. An agent having an authority to carry on a business has authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business.
Examples:
Section 189 provides the agent’s authority in an emergency. According to this section, an agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances.
Examples:
Section 190 provides that when agent cannot delegate his authority. An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of a trade a sub-agent may, or from the nature of the agency, a sub-agent must, be employed.
Sub agent
Section 191 defines the term ‘sub-agent’ as a person employed by, and acting under the control of, the original agent in the business of the agency.
Section 192 provides that where a sub agent is properly appointed, the principal is, so far as regard third persons, represented by the sub agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal.
The agent is responsible to the principal for the acts of the sub agent. The sub agent is responsible for his acts to the agent, but not to the principal except in cases of fraud or wilful wrong.
Section 193 provides for the responsibility of the agent for sub agent appointed without authority. Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third persons; the principal is not represented by, or responsible for, the acts of the person so employed, nor is that person responsible to the principal.
Section 194 provides that where an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent but an agent of the principal for such part of the business of the agency as is entrusted to him.
Examples:
Agent’s duty
Section 195 provides that in selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected.
Example:
Ratification
Section 196 provides for right of person as to acts done for him without his authority. Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by this authority.
Section 197 provides that the ratification may be expressed or implied in the conduct of the person on whose behalf the acts are done.
Examples:
Section 198 provides that no valid ratification can be made by a person whose knowledge of the facts of the case is materially defective.
Section 199 prescribes the effect of ratifying any unauthorized act forming part of a transaction. A person ratifying any unauthorized act done on his behalf ratifies the whole of the transaction of which such act formed a part.
Section 200 provides that ratification of unauthorized act cannot injure third person. An act done by one person on behalf of another, without such other person’s authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest which, if done with authority, of a third person, cannot, by ratification, be made to have such effect.
Examples:
Termination of Agency
Section 201 provides for the termination of agency. An agency is terminated by the principal-
Section 202 provides that where the agent has himself an interest in the property which forms the subject matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.
Examples:
Section 208 provides as to the time at which the agent’s authority is terminated as to agent and as to third persons. The termination of the authority of an agent does not, so for as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them.
Example:
Revocation of agent’s authority
Section 203 provides for the revocation of agent’s authority. The principal may, save as is otherwise provided by Section 202, revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal. Section 204 provides that the principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency.
Examples:
Compensation
Section 205 provides for the provision of compensation for revocation by principal or renunciation by agent. When there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause.
Notice of revocation
Section 206 provides that reasonable notice must be given before revocation or renunciation of the agency. Otherwise, the damage thereby resulting to the principal or the agent, as the case may be must be made good to the one by the other.
Section 207 provides that revocation and renunciation may be expressed or implied in the conduct of the principal or agent respectively.
Example: A empowers B to let A’s house. Afterwards A lets it himself. This is an implied revocation of B’s authority.
Agent’s duty on termination of agency
Section 209 provides that when an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of interests entrusted to him.
Termination of sub-agent’s authority
Section 210 provides that the termination of the authority of an agent causes the termination of the authority of all sub agents appointed by him.
Agent’s duty
Section 211 provides that an agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions, according to the custom which prevails in doing business of the same kind at the place where the agent conduct such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal and if any profit accrues, he must account for it.
Examples:
Section 212 provides that an agent is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct.
Examples:
Rights of principal
The rights of principal are described in Sections 215 and 216.
Examples:
Section 216 provides that if an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.
Example: A direct B, his agent, to buy a certain house for him. B tells A that it cannot be bought, and buysthe house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the price he gave for it.
Agent’s right
The rights of agents are described in Section 217 and 219
Section 217 provides that an agent may, retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business and also such remuneration as may be payable to him for acting as agent.
Misconduct of agent
Section 220 provides that an agent, who is guilty of misconduct in the business of the agency, is not entitled to any remuneration in respect of that part of the business which he has been misconducted.
Examples:
Agent’s lien
Section 221 provides that in the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether movable or immovable, of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or account for to him.
Obligation of principal to agent
Section 222 provides that the employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agents in exercise of the authority conferred upon him.
Examples:
Section 223 provides that where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes an injury to the rights of third persons.
Examples:
Section 225 provides that the principal must make compensation to his agent in respect of injury caused to such agent by the principal’s neglect or want of skill.
Example:
Non-liability of principal to agent
Section 224 provides that where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or implied promise to indemnify him against the consequences of that act.
Example:
Agency with third persons
Section 226 provides for the enforcement and consequences of agent’s contracts. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner and will have the same legal consequences, as if the contracts had been entered into, and the acts done by the principal in person.
Examples:
Section 227 provides that when an agent does more than he is authorized to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority, is binding as between him and his principal.
Example: A being owner of a ship and cargo, authorizes B to procure an insurance for ` 4,000 on the ship. B procures a policy for ` 4,000 on the ship, and another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.
Section 228 provides that principal is not bound when excess of agent’s authority is not separable. Where an agent does more than he is authorized to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognize the transaction.
Example: A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one sum of ` 6,000. A may repudiate the whole transaction.
Notice to agent
Section 229 provides that any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal.
Examples:
Enforcement of contract by agent on behalf of principal
Section 230 provides that in the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his principal nor is he personally bound by him. Such a contract shall be presumed to exist in the following cases-
Right of parties to a contract made by agent
Section 231 provides the right of parties to a contract made by agent not disclosed. If an agent makes a contract with person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal the same rights as he would have had as against the agent if the agent had been principal.
If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.
Section 232 provides that where one man makes a contract with another, neither he knowing, nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the rights and obligations subsisting between the agent and the other party to the contract.
Example: A, who owes ` 500 to B, sells ` 1,000 worth of rice to B. A is acting as agent for C in the transaction, but B has neither knowledge, nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set-off A’s debt.
Section 233 provides that in cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable.
Example: A enters into a contract with B to sell him 100 bales of cotton and afterwards discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
Section 234 provides that when a person who has made a contract with an gent induces the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterward hold liable the agent or principal respectively.
Liability of a pretended agent
Section 235 provides that a person untruly representing himself to be the authorized agent of another, and thereby inducing a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing.
Section 236 provides that a person, with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it, if he was in reality acting, not as agent, but on his account.
Section 237 provides that when an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts of obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent’s authority.
Example:
Effect of misrepresentation or fraud by agent
Section 238 provides that misrepresentation made or frauds committed, by agents acting in the course of their business for their principals, have the same effect on agreements made by such agents as if sum misrepresentations or frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents in matters which do not fall within their authority, do not affect their principles.
Examples:
1. Acceptance to be a valid must
Answer: Both be absolute & unqualified
2. A proposal can be accepted
Answer: All of the above reciprocal promise
3. Competency to contract relates to
Answer: Both age and soundness of mind
4. If only a part of the consideration or object is unlawful, the contract under Section 24 shall be:
Answer: Void
5. When the consent is caused by undue influence, the contract under Section 19A is:
Answer: Voidable
1. What are the requirements for a valid contract?
Answer :
2. When an offer may be lapsed?
Answer :
3. Write short notes on-
(a) e-contracts;
(b) Quasi Contracts;
(c) Contingent contracts.
Answer :
1. Discuss the consequences of the absence of consent and free consent.
Answer :
2. Explain the conditions of enforceability of the standard form of contracts.
Answer :
3. What is the difference between an agent and an employee?
Answer :
4. What are the essential elements of a contract?
Answer :
5. Distinguish between illegal and void contracts.
Answer :
6. Minor’s agreement is void. Explain with exceptions.
Answer :
7. Discuss the concept of impossibility of performance of contracts.
Answer :
8. Can a contract be made without consideration? Discuss.
Answer :
1. A intending to deceive B falsely represents that 500 maunds of indigo were made annually at A’s factory and thereby induces B buy the factory. Is the contract valid?
Answer :
2. On B’s request A lent gratuitously his scooter to B for his use for one week. After two days A urgently needs his scooter and requires its return from B. B refuses to return the goods unless he is indemnified for his damages, which he would suffer owing to the premature delivery. Is A liable?
Answer :
Ruchika Saboo
An All India Ranker (AIR 7 - CA Finals, AIR 43 - CA Inter), she is one of those teachers who just loved studying as a student. Aims to bring the same drive in her students.
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