1. Business Law
Indian Contract Act 1872 : Meaning and essentials of a valid contract Formation of
contract – Performance of contract – Termination and discharge of contract – Remedies
for breach of contract – Quast contract
Special Contracts : Indemnity of guarantee – Bailment – Agency
Sale of Goods Act, 1930 : Contract of sale – Conditions and warranties – Transfer of
property – Performance of the sale Rights of an unpaid seller
Negotiable Instruments Act, 1881 : Negotiable instruments – Parties to a negotiable
instrument – Material alteration – Crossing of cheques – Endorsement Payment and
collection of cheques
Indian Partnership Act, 1932 : Meaning and test of partnership – Registration of firms
– Relations of partners – dissolution of firms
Arbitration Act, 1940 : Arbitration – Arbitration without intervention of court –
Arbitration in suits
Carriage of Goods : Classification of Common Carriers – Rights duties and liabilities of
common carrier – Carriage by rail – Contract of affreightment – Charter Party – Bill of
Lading – Carriage by air – Documents relating thereto – Liability of the air Carrier
Contract of Insurance : Basic elements – Kinds of Insurance – Fire Insurance –
Marine Insurance
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2. Lesson No. Title
1. Indian Contract Act. 1972
Special Contracts
2. Contract of Indemnity and Guarantee
3. Contract of Bailments
4. Contract of Agency
5. Sale of Goods Act. 1930
6. Negotiable Instruments Act, 1881
7. Partnership Act. 1932
8. Arbitration Act. 1940
9. Common Carriers Act
10 Contract of Insurance
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3. LESSON 1
INDIAN CONTRACT ACT. 1872
MEANING
The law relating to the contracts is contained in the Indian Contract Act. 1872. It is that
branch of law which lays down the essentials of a valid contract, the different modes of
discharging the contract and the remedies available to the aggrieved parts in the case
of breach on contract. It is the most important branch of business law. It is of particular
importance to people engaged in trade, commerce and industry as bulk of their
business transactions are based on contracts.
A contract is an agreement made between two or more parties which the law will
enforce Sec. 1 the of the Indian Contract Act defines it as “An agreement enforceable
by law” Sec 10 lays down 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 hereby – expressly declared to be void.
ESSENTIALS OF A VALID CONTRACTS
A valid contact must have the following essentials
1. Two parties : for a valid contract, there must be two parties
2. Offer and acceptance: There must be an offer and acceptance One party has to
make an offer and the other party has to accept it.
3. Consensus-ad-idem or Identity of Minds: The parties to the contract must
have agreed about the subject matter of the contract at the same time and in the
same sense.
Illustration: A has two houses, one at Chennai and another at Coimbatore. He has
offered to sell one to B. B accepts thinking to purchase the house at Coimbatore, while
A, when he offers, has in his mind to dispose of house at Chennai. There is no
Consensus-as-idem.
4. Consideration: It means “Something in return” Every contract must be
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4. supported by consideration.
Illustration : A offers to sell his watch for Rs. 500 to B and B accepts the offer. Thus Rs.
500 is the consideration for the watch and vice-versa.
5. Capacity; The parties to the contract must be competent to contract. For
example a contract by a minor is void
6. Free Consent: The consent of the parties must be free from any flow – it must
not be caused by a mistake or coercion or undue influence
7. Lawful consideration: The consideration to a contract must be lawful
Illustration: A promises to pay Rs. 500 – to B, in consideration of B murdering C.
The consideration is illegal.
8. The objects of the contact must be lawful
Illustration: A promises to pay Rs. 500 – for letting B’s house for running a
brothel. The objects is illegal. Hence, the contract is void.
Thus, “the essence of legal contract is that there shall be an agreement between
two persons, that one of them shall do something either for the benefit of the
other or for his own detriment and that these persons intend that the agreement
shall be enforceable at law”
CLASSIFICATION OF CONTRACTS
Contracts may be classified according to their validity, formation or performance.
I. Classification According to validity
A contract is based on an agreement. An agreement becomes a contract when all
the essential elements referred to above are present. In such a case, the contract
is a valid contract. If one or more of these elements are missing, the contract is
either voidable, void, illegal or unenforceable.
Voidable Contract
An agreement which is enforceable by law at the option of one or more of the arties
thereto, but not at the option of the other or others, is a voidable contract.
Sec.2(i).
Example : A promises to sell his house to B for Rs. 2,00,000. His consent is
obtained by use or force. The contract is voidable at the option of A. He may
avoid the contract.
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5. Void Contract
A contract which is at enforceable by law is a void contract.
Example : A contract enter4ed into by a minor is void.
Illegal Agreement
An illegal agreement is one which is criminal is nature or which is immoral. Such an
agreement is a void contract. All illegal agreements are void but all more
agreements or contracts are not necessarily illegal.
Unenforceable Contract
An unenforceable contract is one which cannot be enforced in a Court of aw
because of some technical defect, such as absence of writing or where the
remeds has been barred by lapse of time.
II CLASSIFICATIONS ACCORDING TO FORMATION
Contracts may be classified according to the mode of their formation as follows:
Express Contract
If the terms of a contract are expressly agreed upon whether by words spoken or
written at the time of the formation of the contract, the contract is said to be an
express contract.
Implied Contract
An implied contract is one which is inferred from the acts or conduct of the parties or
course of dealings between them. It is not the result of any express promise or
promises by the parties but of their particular act.
Example: A enters into a hotel and takes lunch. It is an implied contract that he has
to pay the cost of lunch after taking it.
III CLASSIFICATION ACCORDING TO PERFORMANCE
These may be classified as Executed contracts or Executory contracts. Unilateral
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6. contracts or Bilateral contracts.
Executed Contracts
An executed contract as one in which both the parties have performed have
performed their respective obligations.
Example: A agrees to supply a watch to B for Rs. 500. When A supplies the watch
and B pays the price, the contracts is said to be executed.
Executory Contracts
An executory contract is one in which both the parties have yet to perform their
obligations. Thus in the above example, the contract is executor if A has not yet
supplied the watch and B has not paid the price.
Unilateral Contract
A unilateral or one-sided contract is one in which only one party has to fulfil his
obligation at the time of the formation of the contract, the other party having
fulfilled his obligation at the time of the contract or before the contract comes into
existence.
Bilateral Contract
A bilateral contract is one in which the obligations on the part of both the parties to
the contract are outstanding at the time of the formation of the contract. In this
sense, bilateral contracts are similar to executor contracts.
OFFER AND ACCEPTANCE
OFFER
An offer is also called a proposal. Sec. 2 (a) of the Indian Contract Act defines a
proposal as, :When one person signifies to another his willingness to do or to
abstain from doing anything. With a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal.” The person making the
proposal is called the “prosper” or “offerer” and the person to whom the proposal
is made is called “offeree”
LEGAL RULES RELATING TO OFFER
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7. 1. It must contain either definite terms or capable of being made definite.
Montreal dfgdfgdfghgdh : It was held in this case, that a clause to favourate consider
the applies that renewal is ambinguous and not binding the compans
2. It must intend to give use to legal consequences
Gdfgjdfkgjdflkgd : A husband promised to pay Rs. 1000/- per month to his wife,
staying away from him. Held that the promise was never intended to b e enforced in
law.
3. It must be distinguished from a quotation or an invitation to offer
Ghdkjdfkgjdkgjdgdfgkj : P offered to buy D’s property for Rs. 6000. D replied, “Won’t
accept less than 10,000” P agreed to pay Rs. 10,000. But D sold it to another
person. It was held that mere statement of price by D contained no implied contract
to sell it at that price.
A catalogue or price list or tenders invited for the supplier to goods are not
proposals.
4. An offer may be made to an individual or addressed to the worlds at large. An
offer is called a specific offer when it is made to a particular person.
Gdfgdfgdfgdfgdf fgdfgd dfgd dfg: The company has offered by advertisement, a
reward of £ 100 to anybody contracting influenza after using their smoke ball
according to their direction. Mrs. Carlill used it as directed but still had an attack
of influenza. So, she sued for the award of £ 100. It was held that she was
entitled to the award since an offer made at large, can ripen itself into a contract
with anybody who performs the terms of the offer.
5. An offer is different from a tender
A offers to supply goods at a particular rate for a particular period from a certai9n
trade. If this offer is accepted by B, it is called a tender. It becomes an
acceptance only when B places an order for a part of the goods.
6. An offer must be communicated to the offeree
Gdfg dfgdf dfg dfg dfg : A’s nephew was missing is who was an employee of A,
volunteered his services to search for the boy. Meanwhile, A had announced a
reward to anybody who could trace the boy. It found the boy and brought him
back to home and sued for the reward. It was held that he was not entitled to the
reward as he was ignorant of the offer.
Section 4 lays down that the communication of an offer is complete only when it
reaches the offeree. So an offer binds the offeror only when the offeree has the
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8. knowledge of an offer.
ACCEPTANCE
Section 2 the of the Indian Contract Act defines acceptances as. When the person to
whom the proposal is made signifies his assent thereto the proposal is said to be
accepted. A proposal when accepted becomes a promise. An offer when
accepted becomes a contract.
An offer can be accepted only by the persons to whom the offer is made.
Boulton Vs Jones A sold his business to B. This sale is not known to V’s customers.
So Jones who is a usual customer of the vendor places an order for goods with
the vendor. A by name B, the new owner receives the order and supplies, the
goods without disclosing the fact of sale of business to him. It was held that the
price could not be recovered as the contract was not entered into with him.
Essentials of Valid Acceptance
1. Acceptance must be communicated in usual and reasonable manner. It may be
made by express words, spoken or written or by conduct of the parties, i.e. by
doing an act which amounts to acceptance according to the terms of the offer or
by the offeree accepting the benefit offered by the offeror.
Any method can be prescribed for the communication of acceptance. But silence
can never be prescribed as a method of communication. Hence, mere mental
assent without expressing it and communicating it may means of word or an act,
is not sufficient.
Brogden Vs Metropolitan Railway Co. The Manager of a railway company simply
wrote on the proposal “approved” and kept it in a drawer. By oversight it was not
communicated. It was held that the acceptance was not communicated and
hence there was no contract.
2. Communication of acceptance may be warved by the offeror : This rule is
established in the case of Carill V’s gdfg gdfg ng gdf where the advertisement
never wanted the communication apart from fulfilling the conditions of offer.
3. Acceptance should be made before the offer lapses or is revoked or is received
4. Acceptance must be absolute and unconditional and should correspond with the
terms of the offeror. Otherwise, it amount to counter offer which may be accepted
or rejected by the offeror. For example, A offeror to sell his car for S. 1 lakh B
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9. asks for Rs. 70,000. It is not an acceptance but a counter offer only.
5. Acceptance once made, concludes the contract
CONSIDERATION
Consideration means “something in return for something”. Section 2 of the Indian
Contract Act defined consideration thus “When at the desire of the promisor, the
promise or any other person has done or abstained from doing, or does or abstains
from doing, or promises to do or abstain from doing something, such act or abstinence
or promise is called a consideration for the promise.”
1. Consideration at the Desire of the Promisor
Consideration must proceed at the request of the promisor. Hence acts done
voluntarily or at the request of third parties do not constitute a valid consideration.
Durga Prasad Vs Baldev : A built a market at the request of the Collector of the
place B promised to pay. A commission on the articles sold in the market. It was
held that B’s promise to pay commission did not constitute a valid consideration
because A did not build the market at the request of B.
2. The Promisee or any other Person
Consideration may move from the promise or any third party. Hence, a stranger to
consideration can sue on the contract.
3. Has done or abstained from doing or does or abstain from doing
a) Consideration may be executed, i.e. an act or forbearance made or suffered for
the promise given, or
b) Consideration may be executor, i.e. a promise to act or abstain from doing in
future, or
c) Consideration may be past, i.e. an act or forbearance already taken place before
the contract was entered into
4. Something
Consideration may not be adequate. But it must be real and lawful. Example : A
agrees to sell a cow worth Rs. 1200 for Rs. 10. He has given his consent freely.
The agreement is a contract though consideration is inadequate.
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10. An agreement made without consideration is void. But the following are exceptions.
(1) An agreement expressed in writing and registered and made on account of
natural love and affection between parties standing in neat relation to each other.
(2) A promise to compensate a person who has already voluntarily done something
for the promisor, or
(3) A promise to discharge a time-barred debt.
CAPACITY TO CONTRACT
The parties who enter into a contract must have the capacity to do so ‘Capacity’ means
competence of the parties to enter into a valid contract. According to Sec. 10, an
agreement becomes a contract if it is entered into between the parties who are
competent to contract. Thus Sec. 11 declares the following person to be incompetent to
contract.
(i) Minors
(ii) Persons of unsound mind, and
(iii) Persons disqualified by any law to which they are subject.
Incapacity to contract
Fgsdklgjfdsklg asdgjsdlkgsdfg sgsdf Mental deficiency
Ing incapacity arising of hdfgdf
1. Foreign Suvereigns and Ambassadors
They may enter into contracts. But they cannot be sued except with the permission
of the Central Government and certified by the Secretary.
2. Alien Enemy
The enemy’s status is to be determined by the place at residence of the
individual, but not by his nationality. If a contract is already entered into into
before the declaration of war, its performance will be suspended during the
period of war and in case the war continues to where period, the contract
becomes void on the ground of impossibility of perticugdfgdf contract.
3. Conviet
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11. He is no competent to contract during the period of sentence.
4. Bankrupt
He cannot enter into contract and bind his property as his property shall be
vested in the official receiver when he is adjudged an insolvent.
5. Artificial Person : Corporation
It is a person in the eye of law. It is a legal entity. It can purchase properties enter
into contracts, sue and be sued on such contracts. Its contractual capacity is
limited. For example, it cannot enter into contract to marry or which is ultra vires
its powers.
(B) INCAPACITY ARISING FROM MENTAL DEFICIENCY
A person is sand to be mentally deficient when (a) he does not attain majority. E.g. a
minor or (b) he is of unsound mind.
1. When he does not attain majority: Minor
A minor is a person who has not completed 18 years of age. He attain majority on
completion of his 21 year in England and 18 year in India. A minor cannot enter
into a valid contract.
2. When he is of Unsound Mind
Section 12 lays down that : A person is said to be of sound mind for the purpose of
making a contract if at the time when he makes it, he is capable of understanding
it and of forming a rational judgement as to tis effect upon his interests. A person
who is usually of unsound mind, but occasionally of sound mind may mase a
contract when he is of sound mind.
Illustration: a patient in a lunatic asylum, who is at intervals of sound mind may
contract during those intervals.
MINOR IN INDIAN LAW
A minor is a person who is not a major. He attains majority on completion of 21 years in
England and 18 years in India. Even in India he attains majority on completion of 21
years when his property is managed by a court of wards or a guardian.
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12. 1. In Indian law, a contract by a minor is void. It cannot be even ratified by him after
attaining majority.
2. A contract entered into by a minor by fraudulently misrepresenting his age is
void. He cannot be stopped from setting up the plea of minority.
3. “Minors can have no privilege to cheat men”, though law protects them, so that
people may not exploit their tender age. So, if a minor receives goods on credit
while payment cannot be enforced goods can be recovered, if restitution is
possible.
4. The property of the minor is liable for the necessaries supplied to him, provided
the goods are suitable tot eh condition of his life and status. Even here, he is not
personally liable, but his estate only is liable.
5. While a sale or mortgage by a minor is void, a sale or mortgage in favour of a
minor is enforceable by him.
6. A contract by a guardian on behalf of the minor is enforceable by or against the
minor, provided the guardian is competent to contract and the contract is
beneficial to the minor. But he cannot purchase immovable property without
obtaining the consent of the court.
7. Under Sec. 3 of the Indian Partnership Act a minor may be admitted to the
benefits of partnership with the consent of all the partners.
CONSENT AND FREE CONSENT
Consent: It means acquiescence or act of assenting to an offer. “Two or more persons
are said to consent when they agree upon the same thing in the same sense”. (Sec.
13)
Free Consent: Consent is said to be free when it is not caused by
(1) Consent as defined in Sed. 15 or
(2) Undue influence as defined in Sec. 16, or
(3) Fraud as defined in Sed. 17, or
(4) Misrepresentation as defined in Sec. 18, or
(5) Mistake, subject to the provisions of Secs. 20, 21, and 22 (Sec. 14)
When there is no consent, there is no contract
Example : A is forced to sign a promissory note at the point of pistol. A knows what he is
signing but his consent is not free. The contract in this case is voidable at this option.
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13. COERCION
When a person is compelled to enter into a contract by the use of force by the other
party or under a threat, “coercion” is said to be employed. Coercion is the committing, or
threatening to commit, any act forbidden by the Indian Penal Code 1860 or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an agreement.
Example: a threatens to kill B if he does lend Rs. 1000 to C. B agrees to lend the
amount to C. The agreement is entered into under coercion.
A threat to commit suicide also amounts to coercion.
EFFECT OF COERCION
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 (Sec. 19)
UNDUE INFLUENCE
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14. Sometimes a party is compelled to enter into an agreement against his will as a result of
unfair persuasion by the other party. This happens when a special kind of relationship
exists between the parties such that one party is in a dominant position to exercise
undue influence over the other.
Sec. 16(1) defines : undue influence” as follows
A contract is said to be induced by undue influence where the relations
subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain an unfair advantage over
the other.
The following relationships usually raise a presumption of undue influence viz.
(i) Parent and child
(ii) Guardian and ward
(iii) Trustee and beneficiary
(iv) Doctors and patient
(v) Solicitor and client, and
(vi) Finance and fiancée
The presumption of undue influence applies whenever the relationship between the
parties is such that one of them is by reason of confidence reposed in him by the
other, able to take unfair advantage over the other.
EFFECT OF UNDUE INFLUENCE
When consent to an agreement is obtained by undue influence, the agreement is a
contract voidable at the option of the party whose consent was so obtained. Any
such contract may be set aside either absolutely or if the party who is entitled to
avoid it has received any benefit thereunder, upon such terms and conditions as
to the Court may seem just and equitable (Sec. 19-A)
DIFFERENCE BETWEENS COERCION AND UNDUE INFLUENCE
S. No. Coercion Undue Influence
1. The consent is given under the The consent is given by a person
threat of an offence who is so situated in relation to
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15. another that the other person is in
a position to dominate his will
2. Coercion is mainly of a physical Undue influence is of moral
character. It involves mostly use character. It involves use of moral
of physical or violent force. force or mental pressure.
3. There must be intention of Here the influencing party uses its
causing any person to enter into position to obtain an unfair
an agreement advantage over the other party
4. It involves a criminal act No criminal act is involved
MISREPRESENTATION AND FRAUD
MISREPRESENTATION
Misrepresentation is a false statement which the person making it honestly believes to
be true or which he does not know to be false. It also includes non-disclosure of a
material fact or facts without any intent to deceive the other party.
Sec. 18 defines “misrepresentation” According to it, there is misrepresentation
(1) When a person positively asserts that a fact is true when his information does not
warrant it to be so, though he believes is to be true.
(2) When there is any breach of duty by a person which brings an advantage to the
person committing it by misleading another to his prejudice.
(3) When a party causes, however innocently, the other party to the agreement to
make a mistake as to the substance of the thing which is the subject of the
agreement.
FRAUD
Fraud exists when it is shown that a false representation has been made (a) knowingly,
or (b) without belief in its truth, or (c) recklessly, not caring whether it is true or false,
and the maker intended the other party to act upon it.
MISTAKE OF LAW
Mistake of law be (1) mistake of law of the country or (2) mistake of law of a foreign
country.
1. Mistake of law of the country: Ignorantta juris non exerts Ex. Ignorice of laws is
no exclause : is a well settled rule of law. A party cannot be allowed to get any
relief on the ground that it had done a particular act in ignorance of law. A
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16. mistake of law is, therefore, no excuse, and the contract cannot be avoided.
Example: A and B enter into a contract on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation. This contract may be voidable.
2. Mistake of law of a foreign country: Such a mistake is treated as mistake of
fact and the agreement in such a case is void. (Sec. 21)
MISTAKE OF FACT
Mistake of fact may be (1) a bilateral mistake, or (2) a unilateral mistake
1. Bilateral Mistake
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, there is a bilateral mistake. In such a case the
agreement is void (sec. 20). The following two conditions have to be fauced for
the application of Sec. 20.
(i) The mistake must be mutual i.e. both the parties should misunderstand each
other and should be at a cross-purposes.
Example: A agreed to purchase B’s motor-car which was lying in B’s garage.
Unknown to either party, the car and garage where completely destroyed by
fire a day earlier. The agreement is void
(ii) The mistake must relate to a matter of fact essential to the agreement. As to
what facts are essential in an agreement will depend upon the nature of the
promise in each case.
Example: A man and a woman entered into a separation agreement under which the
man agreed to pay a weekly allowance to the woman mistakenly believing
themselves lawfully married leld the agreement was void as there was mutual
mistake on a point of fact which was material to the existence of the agreement.
The various cases which fail under bilateral mistake are as follows:
Mistake as to the Subject – Matter:
Where both the parties to an agreement are working under a mistake relating to the
subject-matter, the agreement is void. Mistake as to the subject-matter covers the
following cases.
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17. (1) Mistake as to the existence of the subject-matter: If both the parties believes
the subject-matter of the contract to be in existence, which in fact at the time of
the contract is non-existent, the contract is void.
Example: A agrees to buy from B a certain goat. It turns out that the goat was
dead at the time of the bargain, though neither parts was aware of the fact. The
agreement is void.
(2) Mistake as to the identity of the subject-matter: It usually arises where one
party intends to deal in one thing and the other intends to deal in another.
Example: W agreed to buy from R a cargo on cotton to arrive ex-peerless from
Bombay”. There were two ships of that name sailing from Bombay, one sailing in
October and the other in December. W meant the former ship R meant the latter.
Held, there was a mutual or a bilateral mistake and there was no contract.
(3) Mistake as to the quality of the subject-matter: If the subject matter is
something essentially different from what the parties thought it to be the
agreement is void.
Example: A sells to B a prece of silk B thinks that it is foreign silk. A knows that B
thinks so but knows that it is Indian silk only.
(4) Mistake as to the quantity of the subject-matter: If both the parties are
working under a mistake as to the quantity of the subject-matter the agreement is
void.
Example: A silver bar was sold under a mistake as to its weight. There was a
difference in value between the weight of the bar as it was and as it was
supposed to be Held the agreement was void.
(5) Mistake as to the title to the subject-matter: If the seller as selling a thing
which he is not entitled to sell and both the parties are acting under a mistake,
the agreement is void.
Example: A person took a lease of a fishery which, unknown to either party
already belonged to him. Held, the lease was void.
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18. (6) Mistake as to the price of the subject-matter: if there is a mutual mistake as to
the price of the subject-matter, the agreement is void.
Example: C wrote to D offering to sell certain property for Rs. 15,000. He had
earlier declined an offer from D to buy the same property for Rs. 20,000. D who
knew that his offer of Rs. 15,000 was a mistake for Rs. 25,000, immediately
accepted the offer. Held, D knew perfectly well that the offer was made by
mistake and hence the contract could not be enforced.
Mistake as to the Possibility of Performing the Contract
Consent is nullified if both the parties believe that in agreement is capable of being
performed when in fact this is not the case. The agreement, in such a case, is void on
the ground of impossibility.
Impossibility may be—
(i) Physical Impossibility
Example: A contract for the hire of a room for witnessing the coronation
procession of Edward VII was held to be void because unknown to the parties
the procession had already been cancelled.
(ii) Legal Impossibility: A contract is void if it provides that something shall be
done which cannot, as a matter of law be done.
2. Unilateral Mistake
When in a contract only one of the parties is mistaken regarding the subject
matter or in expressing or understanding the terms or the legal effect of the
agreement the mistake is a unilateral mistake. According to Sec. 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 the mistake is brought about by the other party’s
fraud or misrepresentation.
Example: A offers to sell his house to B for an intended sum of Rs. 44,000. By
mistake he makes an offer in writing of Rs. 40,000. He cannot plead mistake as a
defence.
LEGALITY OF OBJECT
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19. A contract must have a lawful object. The word object means purpose of design. In
some cases consideration for an agreement may be lawful but the purpose for which
the agreement is entered into may be unlawful. In such cases the agreement is void. As
such both the object and the consideration of an agreement must be lawful otherwise
the agreement is void.
The consideration or object of an agreement is unlawful
1. If the object is forbidden by law
Example: A promise to obtain for B an employment in the public service and 18
promises to pay Rs. 1,00,000 to A. the agreement is void, as the consideration is
unlawful.
2. If the object is permitted, it would defeat the provisions of any law
Example: N agreed to enter a company’s service in consideration of a weekly
wage of Rs. 75 and a weekly expense allowance of Rs. 25. Both the parties
knew that the expense allowance was a device to evade tax. Held the agreement
was unlawful.
3. If the object is fraudulent: An agreement which is made for a fraudulent purpose
is void. Thus an agreement in fraud of creditors with a view to defeating their
rights is void.
4. If the Court regards the object as immoral
Example: A agrees to let her daughter to B for concubinage (state of living
together as man and wife without being married. The agreement is unlawful,
being immoral.
5. Where the Court regards it as opposed to public policy.
UNLAWFUL AND ILLEGAL AGREEMENTS
An unlawful agreement is one which, like a void agreement, is not enforceable by law.
An illegal agreement is not only, void as between the immediate parties but has further
effect that the collateral transactions to it also become tainted with illegality.
Example: T lends Rs. 50,000 to B to help him to purchase some prohibited goods from
T, an alien enemy. If B enters into an agreement with T, the agreement will be illegal
and the agreement between B and T shall also become illegal, because it is collateral to
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20. the main transaction. T cannot, therefore, recover the amount.
AGREEMENTS OPPOSED TO PUBLIC POLICY
An agreement is said to be opposed to public policy when it is harmful to the public
welfare. Some of the agreements which are opposed to public policy and are unlawful
are as follows.
1. Agreements of trading with enemy: An agreement made with an alien enemy in
time of war is illegal on the ground of public policy.
2. Agreement to commit a crime: Where the consideration in an agreement is to
commit a crime, the agreement is opposed to public policy. The Court will not
enforce such an agreement.
3. Agreements which interfere with administration of police: An agreement, the
object of which is to interfere with the administration of justice is unlawful, being
opposed to public policy. It may take any of the following forms.
(a) Interference with the course of justice: An agreement which obstructs the
ordinary process of justice is unlawful.
(b) Stifling prosecution: It is in public interest that if a person has committed a
crime, he must be prosecuted and punished.
(c) Maintenance and champerty: Maintenance’ is an agreement to give
assistance, financial or otherwise, to another to enable him to bring or defend
legal proceedings when the person giving assistance has got no legal interest of
his own in the subject-matter.
4. Agreements in restraint of legal proceedings : Sec. 28 which deals with these
agreements.
(a) Agreements restricting enforcement of rights: An agreement which wholly or
partially prohibits any party from enforcing his rights under or in respect of any
contract is void to that extent.
(b) Agreements curtailing period of limitation: Agreements which curtail the
period of limitation prescribed by the Law of Limitation are void because their
object is to defeat the provisions of law.
5. Trafficking in public offices and rules: Agreements for the sale or transfer of
public offices and titles or for the procurement of a public recognition like Padma
Vibhushan or Param Veer Chakra for monetary consideration are unlawful being
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21. opposed to public policy.
Example: R paid a sum of Rs, 2,50,000 to A who agreed to obtain a seat for R’s
son in a Medical College. On A’s failure to get the seat, R filed a suit for the
refund of Rs. 2,00,000. Held, the agreement is void on the ground of public
property.
6. Agreements tending to create interest opposed to duty: If a person enters into an
agreement whereby he is bound to do something which is against his public or
professional duty the agreement is void on the ground of public property.
7. Agreements in restraint of paternal rights: A father, and in his absence the
mother, is the legal guardian of his/her minor child. This rights of guardianship
cannot be bartered away by any agreement.
8. Agreements restricting personal liberty: Agreements which unduly restrict the
personal freedom of the parties to it are void as being against public policy.
9. Agreements in restraint of marriage: Every agreement in restraint of the marriage
of any person, other than a minor, is void (Sec. 26). This is because the law
regards marriage and married status as the right of every individual.
10. Marriage brokerage or brocage agreements: An agreements by which a person
for a monetary consideration, promises in return to procure the marriage of
another is void being opposed to public policy.
11. Agreements interfering with marital duties: Any agreement which interferes with
the performance of marital duties is void being opposed to public policy. Such
agreements have been held to include the following.
(a) A promise by a married person to marry during the lifetime or after the death
of spouse.
(b) An agreement in contemplation of divorce e.g. an agreement to lend money
to a woman in consideration of her getting a divorce and marrying the lender.
(c) An agreement that the husband and wife will always stay at the wife’s
parents’ house and that the wife will never leave her parental house.
12. Agreements to defraud creditors or revenues authorities: An agreement the
object of which is to defraud the creditors or the revenue authorities is not
enforceable being opposed to public policy.
13. Agreements in restraint of trade: An agreement which interferes with the liberty of
a person to engage himself in any lawful trade profession or vocation is called an
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22. agreement in restraint of trade.
VOID AGREEMENTS
A void agreement is one which is not enforceable by law [Sec. 2 ] Such an agreement
does not give rise to any legal consequences and exaused ab initio.
The following agreements have been expressly deciared to be void by the Contract Act.
1) Agreements by incompetent parties (Sec. 11)
2) Agreements made under a mutual mistake of fact [Sec. 20].
3) Agreements the consideration or object of which is unlawful (Sec. 23)
4) Agreements the consideration or object of which is unlawful in part (Sec. 24)
5) Agreements made without consideration (Sec. 25)
6) Agreements in restraint of marriage (Sec. 26).
7) Agreements in restraint of trade (Sec. 27)
8) Agreements in restraint of legal proceedings (Sec. 28)
9) Agreements the meaning of which is uncertain (Sec. 29)
10)Agreements by way of wager (Sec. 30)
11)Agreements contingent on impossible events (Sec. 36)
12)Agreements to do impossible acts (Sec. 56)
13)In case of reciprocal promises to do things legal and also other things illegal, the
second set of reciprocal promises is a void agreement (Sec. 57)
WAGERING AGREEMENTS OR WAGER
A wager is an agreement is an agreement between two parties by which one
promises to pay money or money’s worth on the happening of some uncertain
event in consideration of the other party’s promise to pay if the event does not
happen. Thus if A and b enter into an agreement that A shall pay B Rs. 100 if it
rains on Monday, and that B shall pay A the same amount if it does not rain, it is
a wagering agreement.
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23. Essentials of Wagering Agreement:
(1) Promise to pay money or money’s worth: The wagering agreement must contain
a promise to pay money or money’s worth.
(2) Uncertain event: The promise must be conditional on an event happening or not
happening.
(3) Each party must stand to win or lose: Upon the determination of the
contemplated event, each party should stand to win or lose.
(4) No control over the event: Neither party should have control over the happening
of the event one way or the other
(5) No other interest on the event: Neither party should have nay interest in the
happening or non-happening of the event other gdfgjdg sum or stake he will with
or lose
CONTINGENT CONTRACTS
‘Contingent’ means that which is dependent on something else. A Contingent Contract
is a contract to do or not to do something, if some event collateral to such contract, does
or does not happen (Sec. 31). For example, goods are sent on approval the contract is
a contingent contract depending on the act of the buyer to accept or reject the goods.
There are three essential characteristics of a contingent contract.
1. Its performance depends upon the happening or non-happening in future of
some event. It is this dependence on a future event which distinguishes a
contingent contract from other contracts.
2. The event must be uncertain. If the event if bound to happen, and the contract
has got to be performed in any case it is not a contingent contract
3. The event must be collateral, i.e. incidental to the contract
Contracts of insurance, indemnity and guarantee are the commonest instances
of a contingent contract.
RULES REGARDING CONTINGENT CONTRACTS
1. Contingent contracts dependent on the happening of an uncertain future event
cannot be enforced until the event has happened. If the event becomes
impossible, such contracts become void (Sec. 32)
Example: A contracts to pay B a sum of money when B marries C. C dies without
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24. being married to B. The contract becomes void.
2. Where a contingent contract is to be performed if a particular event does not
happen, its performance can be enforced when the happening of that event
becomes impossible. (Sec. 33)
Example: 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.
3. If a contract is contingent upon how 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, of otherwise than under further contingencies (Sec. 34)
Example: A agrees to pay B a sum of money if B marries C. C marries D. The
marriage of B to C must not be considered impossible, although it is possible that
D may die and that C may afterwards marry B.
4. Contingent contracts to do r onto to do anything, if a specified uncertain event
happens within a fixed time, become void if the event does not happen or its
happening becomes impossible before the expiry of that time.
Example: A promises to pay B a sum of money if a certain ship returns within a
year. The contract may be enforced if the ship returns within the year and
becomes void if the ship is burnt within the year.
5. Contingent agreements to do or not to do anything, if an impossible event
happens are void, whether or not the fact is known to the parties (Sec. 36).
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25. PERFORMANCE OF CONTRACT
Performance of a contract takes place when the parties to the contract fulfil their
obligations arising under the contract within the time and in the manner presented.
OFFER TO PERFORM
Sometimes it so happens that the promisor offers to perform him obligation under the
contract at the proper time and place but the promise does not accept the performance.
This is known as “attempted performance” or “tender”.
REQUISITES OF A VALID TENDER
1. It must be unconditional. It becomes conditional when it is not in accordance with
the terms of the contract.
2. It must be of the whole quantity contracted for or of the whole obligation. A tender
of an installment when the contract stipulates payment in full is not a valid tender.
3. It must be by a person who is in a position, and is willing, to perform the promise.
4. It must be made at the proper time and place. A tender of goods after the
business hours or of goods or money before the due date is not a valid tender.
5. It must be made to proper person, i.e. the promise or his duly authorized agent. It
must also be in proper form.
6. It may be made to one of the several joint promises. In such a case it has the
same effect as a tender to all of them.
7. In case of tender of goods, it must give a reasonable opportunity to the promise
for inspection of goods.
8. In case of tender of money, the debtor must make a valid tender in the legal
tender money.
RECIPROCAL PROMISES
Promises which form the consideration or part of the consideration for each other are
called: reciprocal promises” [Sec. 2(f)]. Where, for example: A promises to do or not to
do something and consideration of B is promise to do or not to do something the
promises are reciprocal.
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26. These promises have been classified is follows:
(1) Mutual and Independent: Where each party must perform his promise
independently and irrespective of the fact whether the other party has performed
or is willing to perform his promise or not the promises are mutual and
independent.
Example: In a contact of sale, B agrees to pay the price of goods on of instant. S
promises to supply the goods on 2nd instant. The promises are mutual and
independent.
(2) Conditional and Dependent: Where the performance of the promise by one party
depends on the prior performance of the promise by the other party the promises
are conditional and dependent.
Example: A promises to remover certain debris lying in front of B’s house
provided B supplies him with the cart. The promises in this case are conditional
and dependent. A need not perform his promise if B fails to provide him with the
cart.
(3) Mutual and Consent: Where the promises of both the parties are to be performed
simultaneously they are said to be mutual and concurrent. The example of such
promises may be sale of goods for cash.
Rules Regarding Performance of Reciprocal Promises
1) Simultaneous performance of reciprocal promises
2) Order of performance of reciprocal promises
3) Effect of one party preventing another from performing promise
4) Effect of default as to promise to be performed first.
5) Reciprocal promise to do things legal and also other things illegal
TIME AS THE ESSENCE OF THE CONTRACT
The expression “time is of the essence of the contract “ means that a breach of the
condition as to the time for performance will entitle the innocent party to consider the
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27. breach as a repudiation of the contract.
Sec. 55 deals with the question of “time as the essence of the contract” and provides.
1. When time is of the essence: In a contract, in which time if of the essence of the
contract, if there is a failure on the part of the promisor to perform his obligation
within the fixed time. The contract (or so much of it as remains unperformed
becomes voidable at the option of the promise (Sec. 55 para 1). If, in such a case
the promise accepts performance of the promise after the fixed time, he cannot
claim compensation for nay loss occasioned by the non-performance of the
promise at the agreed time. But if at the time of accepting the delayed
performance he gives notice to the promisor of his intention to claim
compensation, he can do so (Sec. 55 para 3)
In commercial or mercantile contracts which provide for performance within a
specified time, time is ordinarily of the essence of the contract. This is so
because businessmen want certainty.
Example: In a contract for the sale or purchase of goods the prices of which
fluctuate rapidly in the market, the time of delivery and payment are considered
to be of the essence of the contract.
2. When time is not of the essence: In a contract, in which time is not of the
essence of the contract, failure on the part of the promisor to perform his
obligation within the fixed time does not make the contract voidable, but the
promise is entitled to compensation for any loss occasioned to him by such
failure (Sed. 55 para 2)
Intention to make time as the essence of the contract, if expressed in writing,
must be in a language which is unambiguous and unmistakable. The mere fact
that a certain time is specified in a contract for the performance of a promise
does not necessarily make time as the essence of the contract. If the contract
includes clauses providing for extension of time in certain contingencies or for
payment of fine or penalty for every day or week the work undertaken remains
unfinished on the expiry of time provided in the contract, such clauses are
construed as rendering ineffective the express provision relating to the time being
of the essence of the contract.
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28. TERMINATION AND DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the
parties. A contract is said to be discharged when it ceases to operate, i.e. when the
rights and obligations created by it come to an end.
A contract may be discharged
1. By Performance
2. By Agreement or Consent
3. By impossibility
4. By Lapse of Time
5. By operation of Law
6. By Breach of Contract
1. Discharge by Performance
Performance means the doing of that which is required by a contract. Discharge
by performance takes place when the parties to the contract fulfill then
obligations arising under the contract within the time and in the manner
prescribed.
Performance of a contract is the most usual mode of its discharge. It may be
(1) Actual Performance: When both the parties perform their promises the
contract is discharged. Performance should be complete precise and
according to the terms of the agreement.
(2) Attempted Performance or Perfer: Tender is not actual performance but is
only an after to perform the obligation under the contract.
2. Discharge by agreement or consent
(a) Sec. 62 lays down that if the parties to a contract agree to substitute a new
contract for it or to rescind or to alter it the original contract is discharged and
need not be performed.
The various cases of discharge of contract by mutual agreement are dealt with in
Sec. 62 and 63 are given below.
Rescission Sec. 62: Novation takes place when a new contract is substituted for
an existing one between the same parties.
Example: A owes money to B under a contract. It is agreed between A, B and C
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29. that B shall henceforth accept C as his debtor, instead of A. the old debt of A to B
is at an end and a new debt from C to B has been contracted.
(b) Rescission Sec. 62: Rescission of a contract takes place when all or some of
the terms of the contract are cancelled. It may occur
(i) By mutual consent of the parties or
(ii) Where one party fails in the performance of his obligation in such a case
the other party may rescind the contract without prejudice to his right to
claim compensation for the breach of contract.
Example: A promises to supply certain goods to B six months after date. By that
time, the goods go out of fashion. A and B may rescind the contract.
(c) Alteration (Sec 62): Alteration of a contract may take place when one or more
of the terms of the contract is are altered by the mutual consent of the parties
to the contract. In such a case, the old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales or cotton
at his Godown No. 1 by the first of the next month. A and B may after the
terms of the contract by mutual consent.
(d) Remission Sec. 63) Remission means acceptance of a lesser fulfilment or
the promise made, i.e. acceptance of a lesser sum than what was contracted
for the discharge of the whole of the debt.
Example: A owes B Rs. 50,000. A pays to B and B accepts in satisfaction of
the whole debt. Rs. 20,000 paid at the time and place at which Rs. 50,000
were payable. The whole debt is discharged.
(e) Waver: Waver takes place when the parties to a contract agree that gdfsg
shall no longer be bound by the contract. This amounts to a mutual
thandonment at rights by the parties to the contract.
(f) Merger: Merger tales place when an inferior right accuring to a party under a
contract merger into a superior right accruing to the same party under the
same on some other contract.
Example: P holds a property under a lease. He later buys the property. His
rights as a lessee merge into his rights as an owner.
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30. 3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
If an agreement contains an undertaking to perform an impossibility, it is void ab
initio. This rule is based on the following maxims:
1. Impossibility existing of the time of agreement: Sec. 56 lays down that can
agreement to do an impossible act itself is void”. This is known as pre-contractual
or initial impossibility.
2. Impossibility arising subsequent to the formation of contract: Impossibility which
arises subsequent to the formation of a contract (which could be performed at the
time when the contract was entered into) is called post-contractual or
supervening impossibility.
Discharge by Supervening Impossibility
A contract is discharged by supervising impossibility in the following cases
1. Destruction of subject-matter of contract: When the subject-matter of a contract,
subsequent to its formation, is destroyed without any fault of the parties to the
contract, the contract is discharged.
Example: C let a music hall to T for a series of concerts on certain days. The hall
was accidentally burnt down before the date of the first concert. Held the contract
was void.
2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a
contract is entered into between two parties on the basis of a continued
existence or occurrence of a particular state of things. If there is any change in
the state of things which ought to have occurred does not occur, the contract is
discharged.
Example: A and B contract to marry each other. Before the time fixed for the
marriage, A goes mad. The contract becomes void.
3. Death or Incapacity for personal service: Where the performance of a contract
depends on the personal skill or qualification of a party, contract is discharged on
the illness or incapacity or death of that party. The man’s life is an implied
condition of the contract.
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31. Example: An artist undertook to perform at a concert for a certain price. Before
she could do so, she was taken seriously ill. Held she was discharged due to
illness.
4. Change of law: When subsequent to the formation of a contract change of law
takes place, and the performance of the comerge becomes impossible the
contract discharged.
Example: D enters into a contract with P on 1 st March for supply of ghdkjfg
imported goods in the month of September of the same year in June gdfg fgdf
Parliament the import of such goods is banned. The contract is discharged.
5. Outbreak of war : A contract entered into with an after enems during war is
unlawful and therefore impossible for performance. Contracts entered into before
the outbreak of war are suspended during the war and may be revived after the
war is over.
4. DISCHARGE BY LAPSE OF TIME
The Limitation Act 1963 laws down that a contract should be performed within a
specific period called period of limitation. If it is not performed and if no action is taken
by the promise within the period of limitation he is deprived of his remedy at law. For
example the price of goods sold without any stipulation as to credit should be paid
within three years of the delivery of the goods. If the price is not paid and creditor does
not file a suit against the buyer for the recovery of price within three years the debt
becomes time-barred and hence irrecoverable.
5. DISCHARGE BY OPERATION OF LAW
A contract may be discharged by operation of law. This includes discharge
(a) By Death: In contracts involving personal skill or ability, the contract is terminated
on death of the promissory. In other contracts the rights and liabilities of a
deceased person pass on to the legal representatives of the deceased person.
(b) By Merger: When an inferior right accruing to a party merges into a superior
rights accruing to the same party under the same or some other contract the
inferior right accruing to the party is said to be discharged.
(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all
liabilities incurred prior to his adjudication.
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32. (d) By Authorised Alteration of the terms of a written agreement: Where a party to a
contract makes any material alteration in the contract without the consent of the
other parts, the other parts can avoid the contract. A material alteration is one
which changes in a significant manner the legal identity or character of the
contract or the rights and liabilities of the parties to the contract.
(e) B y Rights and Liabilities becoming visited of the dfgdfg Person: Where the rights
and liabilities under a contract vested in the same person for example when a bill
gets into the hands of the acceptor, the other parties are discharged.
6. DISCHARGE BY BREACH OF CONTRACT
Breach of contract means a breaking of the obligation which a contract imposes.
It occurs when a party to the contract without lawful excuse does not fulfil his
contractual obligation or by his own act makes it impossible that he should
perform his obligation under it. It confers a right of action for damages on the
injured party.
REMEDIES FOR BREACH OF CONTRACT
When a contract is broken, the injured party has one or more of the following remedies:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction
1. RESCISSION
When a contract is broken by one party, the other party may sue to treat the
contract as rescinded and refuse further performance. In such a case, be is
absolved of all his obligations under the contract.
Example: a promises B to supply 10 bags of cement on a certain day. B agrees
to pay the price after the receipt of the goods. A does not supply the goods. B is
discharged from liability to pay the price.
The Court may grant rescission.
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33. (a) Where the contract is voidable by the plamtiff of
(b) Where contract is unlawful to fgdfg but apparent off its face and the defendant is
more to blame thatn the gdfgdf
When a party treats the contracts as rescinded be makes himself liable to restgdf any
benefits he has fgdfg of under the contract to the party from whom such benefits were
received. But if a person rightfully rescinds a contract he is entitled to compersation for
any damage which he has sustained through non-fulfilment of the contract by the other
party.
2. DAMAGES
Damages are a moctars compensation allowed to the injured party by the Court for
the loss or injurs suffered by him by the breach of a contract. The object of
awarding damages for the search of a contract is to put the injured party in the
same position, so far as money am the it, as if he had not been injured, i.e. in the
position in which he would have been had there been performance and not
breach. This is called the doctrine of restitution.
The rules relating to damages may be considered as under
1. Damages arising naturally – Ordinary damanges
When a contract has been broken, the injured party can recover from the other
party such damages as naturally and directly arose in the usual course of things
from the breach. This means that the damages must be the proximate
consequence of the breach of contract. These damages are known as ordinary
damages.
Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.
1000 per quintal, the price to be paid at the time of delivery the price of wheat
rises to Rs. 1200 per quintal and A refuses to sell the wheat B can claim
damages at the rate of Rs. 200 per quintal.
2. Damages in contemplation of the parties – Special damages
Special damages can be claimed only under the special circumstances which
would result in a special loss in case of breach of a contract. Such damages
knows as special damages cannot be claimed as a matter of right.
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34. Example: A. a builder, contracts to erect a house for B by the 1 st of January. The
order that B may give possession of it at that time to C to whom B has contracted
to hfdg it. A is informed of the contract between B and C. A builds the house so
badly that before the 1st January, it falls down and has to be rebuilt by B fgdfg
vonsequence loses the rent which be was to have received from C, and
gdfgdfgdf to make compensation to C fvor the breach of the contract. A must
make cgdfgdfgd to gdfg for the cost of rebuilding the house for the rent lost, and
for the compensation made to.
3. Vindictive or Exemplary damages
Damages for the breach of a contract are given by way of compensation for loss
suffered, and not by way of punishement for wrong inflicted. Hence vindictive or
exemplary’ damages have no place in the law of contract because they are
punitive involving punishment by nature. But in case of (a) breach of a promise to
marry and the dishonor of a cheque by a banker wrongfully when he possesses
sufficient funds by the credit of the customer, the Court may award exemplary
damages.
4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach
of a contract, the damages recoverable by him are nominal. These damages
merels acknowledge that the plaintiff has proved his case and won.
Example: A firm consisting of four partners employed B for a period of two years.
After six months two partners rebred the business being carried on by the other
two B declined to be employed under the continuing partners. Held, he was only
entitled to nominal damages as he had suffered no loss.
5. Damages for loss of reputation
Damages for loss of reputation on case of breach of a contract are generally not
recoverable. An exempuon to this rule exists in the case of a banker who
wrongfully refuses to honour a customer’s cheque. If the customer happens to be
a tradesman, he can recover damages in respect of any loss to his trade
reputation byh the breach. And the rule of law is the smaller the amount of the
cheque dishonoured the larger the amount of damages awarded. But if the
customer is not a tradesman be can recover only nominal damages.
6. Damages for inconvenience and discomfort
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35. Damages can be recovered for physical inconvenience and discomfort. The
general rule in this connection is that the measure of damages is not affected by
the motive or the manner of the breach.
Example: A was wrongfully dismissed in a harsh and humiliating manner by from
his employment. Held (a) A could recover a sum representing his wages for the
period of notice and the commission which he would have earned during that
period but (b) he could not recover anything for his injured feelings or for the loss
sustained from the fact that his dismissal made it more difficult for him to obtain
employment.
7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss
caused by the breach. He cannot claim to be compensated by the party in default
for loss which the ought reasonably to have avoided. That is he cannot claim
compensation for loss which is really due not to the breach, but due to his own
neglect to mitigate the loss after the breach.
8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered the
fact that they are difficult to assess with certainty or precision does not prevent
the aggrieved party from recovering them. The Court must do its best estimate
the loss and a contingences may be taken into account.
Example: H advertised a beauty competition by which gfdgfk of certain
newspapers were to select fifty ladies. He himself was to select twelve out of
these fifty. The selected twelve were to be provided theatrical encagements. C
was one of the fifty and by H’s breach of contract she was not present when the
final section was made. Held C was entitled to damages although it was difficult
to assess them.
9. Cost of Decree
The aggrieved party is entitled in addition to damages to get the cost of getting
the decree for damages. The cost of suit for damages is in the discretion of the
Court.
10. Damages agreed upon in advance in case of breach
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36. If a sum is specified in a contract as the amount to be paid in case of its gdfgdf or
if the contract contains any other stipulation by way of gdfgdfg dfg failure to
perform the obligations the aggrieved party is entiled to gfdgd from the gdfgd has
broken the contract a reasonable compensation not exceeding the fgdfg named.
Example: A contracts with B to pay Rs. 1000 if he fails to pay gdfgdf g given day.
B is entitled to recover from A such compensation not exceeding Rs. Dfgd as the
Court considers reasonable.
Liquidated Damages and Penalty
Sometimes parties to a contract stipulate at the time of its formation that on the breach
of the contract by either of them a certain specified sum gdfgd be payable as damages.
Such a sum may amount to either liquidated damages or a penalty. Liquidated damages
represent a sum fixedc or ascertained by the parties in the contract which is a fair and
genuine pre-estimate of the probable loss that gdfg fgd fg as a result of the breach. If it
takes place. A penalty is a sum named in the contract at the time of its formation, which
is dispropoetionate to the damages likely to fdgdfgd as a result of the breach. It is fixed
up with a view to securing the performance of the contract.
Payment of Interest
The largest number of cases decided under Sec. 74 relate to stipulation if a contract
providing for payment of interest. The following rules are observed with regard to
payment of interest.
1. Payment of interest in case of default.
2. Payment of interest at higher rate
a. From the date of the bond, and
b. From the date of default
3. Payment of compound interest on default
a. At the same rate as simple interest and
b. At the rate higher than simple interest
4. Payment of interest at a lower rate, if interest paid on due date.
3. QUANTUM MERUIT
The phrase quantum meruit ghdfgfdgh much as earned. A right to sue on a
quantum meruit arises where a ggdfg performed by one party has become
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37. discharged to the breach of the contract dghdfghdf party.
4. SPECIFIC PERFORMANCE
In certain cases of breach of contract damages are not an adequate remedy. The
Court may, in such cases direct the party in breach to carry out his promise
according to the terms of the contract.
Some of the cases in which specific performance of a contract may in discretion
of the Court be enforced are as follows:
(a) When the act agreed to be done is such that compensation in money for its
non performance is not an adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused by
the non-performance of the act agreed to be done.
(c) When it is probable that the compensation in money cannot be got for the
non-performance of the act agreed to be done.
5. INJUNCTION
Where a party is in breach of a negativbe term of a contract the where gdfg is
doing something which he promised not to do, the Court may be issuing an order
restrain him from doing what he promised not to do. Such an order of the Court is
known as injunction’.
Example: W agreed to sing at L’s theatre, and during a certain period to sing
nowhere else. Afterwards W made contract with Z to sing at another theatre and
refused to perform the contract with L. Held, W could be restrained by injunction
from singing for Z.
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38. QUASI CONTRACTS
Under certain circumstances, a person may receive a benefit to which the law
regards another person as better entitled, or for which the law considers he
should pay to the other person, even though there is no contract between the
parties. Such relationships are termed quasi-contracts, because, although there
is no contract or agreement between the parties, they are put in the same
position as if there were a contract between them.
A quasi-contract rests on the ground of equity that a person shall not be allowed to
enrich himself unjustly at the expense of another. The principle of unjust enrichment
requires:
That the defendant has been ‘enriched’ by the receipt of a ‘benefit’
That this enrichment is at the expense of the plaintiff, and
That the retention of the enrichment is unjust.
Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a
quasi-contract is not a contract at all. A contract is intentionally entered into. A quasi-
contract, on the other hand, is created by law.
KINDS OF QUASI-CONTRACTS
1. SUPPLY OF NECESSARIES (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally
bound to support, is supplied by another 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.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A
is entitled to be reimbursed from B’s property.
2. PAYMENT OF INTERESTED PERSON (Sec. 69)
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: P left his carriage on D’s premises. D’s landlord seized the carriage as
distress for rent. P paid the rent to obtain the release of his carriage. Held, P
could recover the amount from D.
The essential requirements are as follows:
(a) The payment made should be bonafide for the protection of one’s interest.
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39. (b) The payment should not be voluntary one.
(c) The payment must be such as the other party was bound by law to pay.
3. OBLIGATION TO PAY FOR NON-GRATUITOUS ACTS (Sec. 70)
When 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.
Example: a, a tradesman, leaves goods at B’s house by mistake. B treats the goods
as his own. He is bound to pay for them to A.
Before any right of action under Sec. 70 arises, three conditions must be satisfied.
(a) The thing must have been done lawfully.
(b) The person doing the act should not have intended to do it gratuitously
(c) The person for whom the acts is done must have enjoyed the benefit of the act.
4. RESPONSIBILITY OF FINDER OF GOODS (sec. 71)
A person, who finds goods belonging to another and takes them into his custody, is
subject to the same responsibility as a bailee. He is bound to take as much care
of the goods as a man of ordinary prudence would, under similar circumstances,
take of his own goods of the same bulk, quality and value. he must also take all
necessary measures to trace its owner. If he does not, he will be guilty of
wrongful conversion of the property. Till the owner is found out, the property in
goods will vest in the finder and he can retain the goods as his own against the
whole world (except the owner).
Example: F picks up a diamond on the floor of S’s shop. He hands it over to S to
keep it till true owner is found out. No one appears to claim it for quite some
weeks in spite of the wide advertisements in the newspapers. F claims the
diamond for S who refuses to return. S is bound to return the diamond to F who
is entitled to retain the diamond against the whole world except the true owner.
The finder can sell the goods in the following cases:
• When the thing found is in danger of perishing.
• When the owner cannot, with reasonable diligence, be found out.
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40. • When the owner is found out, but he refuse to pay the lawful charges of the
finder, and
• When the lawful charges of the finder, in respect of the thing found amount to
two-thirds of the value of the thing found. (Sec. 169)
5. MISTAKE OR COERCION (Sec. 72)
A person to whom money has been paid, or anything delivered, by mistake or under
coercion, must repay or return it to the person who paid it by mistake or under
coercion. The word ‘coercion’ is used in Sec. 72 in its general sense and not as
defined in Sec. 15.
Example: A and B jointly owe Rs. 100 to C. A alone pays the amount to C and B, not
knowing this fact, pays Rs. 100 over again to C. C is bound to pay the amount to
B.
QUANTUM MERUIT
‘Quantum meruit’ literally means ‘as much as earned’ or as much as it merited’.
When a person has done some work under a contract, and the other party
repudiates the contract, or some event happens which makes the further
performance of the contract impossible, them the party who has performed the
work can claim remuneration for the work he has already done. Likewise, where
one person has expressly or impliedly requested another to render him a service
without specifying any remuneration, but the circumstances of the request imply
that the service is to be paid for, there is implied a promise to pay quantum
meruit, i.e. so much as the party rendering the service deserves. The right to
claim quantum meruit does not arise out of contract as the right to damages
does, it is a claim on the quasi-contractual obligation which the law implies in the
circumstances.
The claim for quantum meruit arises only when the original contract is discharged. If
the original contract exists, the party not in default cannot have quantum meruit
remedy, he has to take resort to remedy in damages. Further the claim for
quantum meruit can be brought only by the party who is not in default.
The claim for quantum meruit arises in the following cases
(a) When an agreement is discovered to be void (Sec. 65)
(b) When something is done without any intention to do so gratuitously (Sec. 70)
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41. (c) When there is an express or implied contract to render services but there is no
agreement as to remuneration
(d) When the completion of the contract has been prevented by the act of the other
party to the contract
(e) When a contract is divisible
(f) When an indivisible contract is completely performed but badly.
Review Questions
1. Define contract. What are the essentials of a valid contract?
2. What are legal rules relating to offer?
3. What are the rules relating to consideration?
4. Discuss the nature of contract entered into with minors.
5. What are the different modes of discharging the contract?
6. What are the remedies for breach of contract?
7. What are quasi-contracts? Enumerate the instances of quasi-contracts laid down
under the Act.
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42. SPECIAL CONTRACTS
LESSON – 2
INDEMNITY AND GUARANTEE
DEFINITION
Section 124 of the Indian Contract Act defines it 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”. The person who promises is called the
Indemnifier and the person to whom the promise is made is called the Indemnified or
Indemnity Holder.
Illustration: A promises not to construct buildings on a particular site so as to prevent
light and air to B’s house and in case of breach of such promise, to indemnify for the
consequent loss.
This is a contract of indemnity. A contract of insurance is also a contract of indemnity.
RIGHTS OF AN INDEMNITY HOLDER
He is entitled to recover—
All damages
All costs which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnity applies, and
All sums which he may have paid under the terms of any compromise of any
such suit provided, such compromise was not contrary to the orders of the
promisor and was prudent or the promisor authorizes him to compromise the suit.
CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines it as “a contract to perform the promise, or
discharge the liability, of a third person in case of his default”. The person who gives the
guarantee is called the “surety”, the person in respect of whose default, the guarantee is
given is called the “principal debtor”, and the person to whom the guarantee is given is
called the “creditor”.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety which
means that if A does not pay the price of the goods, he will pay. Here, A is the principal
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43. debator, B is the creditor and C is the surety or guarantee.
Distinction between Contract of Indemnity and Contract of Guarantee
Contract of Indemnity Contract of Guarantee
1 There are two parties, namely There are three parties, viz the principal
Indemnifier and the debtor, the creditor and the surety
Indemnified.
2 The liability of the Indemnifier is The liability of the surety is subsidiary
primary
3 The liability of the Indemnifier is The liability of the surety is subsisting
contingent
4 The Indemnifier cannot sue the The surety can sue the principal debtor
third party in his name even in his own name after paying the creditor
after making good the loss
unless there is an assignment
in his favour from the
indemnified.
RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all
those rights which the creditor himself exercises against the principal debtor. This
right of the surety is called “subrogation”.
Illustration: The right of the creditor to receive dividends from the official assignee
when the principal debtor becomes bankrupt, can be exercised by the surety.
2) The surety can proceed against all those securities of the principal debtor, which
the creditor himself can proceed against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.
Illustration: B is indebted to C, and A is surety for the debt. C demands payment
form A, and on his refusal sues him for the amount. A defends the suit, having
reasonable grounds for doing so but is compelled to pay the amount of the debt with
costs. He can recover from B the amount paid by him for costs as well as the
principal debt.
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44. Rights against the Creditor
1) The surety may require the creditor to sue the debtor. But he cannot compel the
creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with
the services of the principal debtor when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have
obtained against the creditor.
4) On payment of the guaranteed debt, ha can require the creditor to assign to him
all the securities held by the creditor in respect of the debt. If the creditor loses or
parts with such securities without the consent of the surety, the surety is
discharged to the extent of the value of the security.
Illustration: C advances to B, his tenant, Rs. 2000 on the guarantee of A. C has also
a further security for the sum of Rs. 2000 by mortgage of B’s furniture. C cancels the
mortgage. B becomes insolvent and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture.
Rights against the Co-Sureties
1) All the sureties shall bear equally, the loss caused by the insolvency of the
principal debtor. If one of them bears the entire loss in the first instance he can
claim contribution from other co-sureties.
2) Where the co-sureties agreed to become liable in different sums, they should
contribute, according to English Law, proportionately.
Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and
40,000 respectively, as sureties for D’s liability. D’s indebtedness was Rs. 30,000.
A,B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law they
shall bear such loss equally but not exceeding the sums which they have agreed to
pay. So, A, B and C will have to pay Rs. 10,000 each.
SURETY DISCHARGED FROM LIABILITY
1. The surety is discharged from liability if the contract of guarantee becomes
void or voidable, on the ground of misrepresentation by the creditor with
regard to a material circumstance, or on the ground that the guarantee was
given on condition that another person will join as a co-surety and that such
other person has not joined as such.
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45. Illustration: A engages B as clerk to collect money for him. B fails to account for
some of his receipts and A in consequence, calls upon him to furnish security for
his accounting. C gives his guarantee for B’s accounting. A does not acquaint C
with B’s previous conduct. B afterwards makes default. The guarantee is invalid.
2. The surety is discharged by revocation as to future transaction in case of
continuing guarantee.
3. The surety is discharged
a. By variance of contract: Any variance in the terms of the contract
between the principal debtor and the creditor without the surety’s consent
discharges the surety.
Illustration: C, contracts to lend B Rs. 5000 on the 1st of March. A
guarantees repayment. C pays Rs. 5000 to B on the 1st of January. A is
discharged from his liability, as the contract has been varied in as much as
C might sue B for the money before the 1st of March.
b. By release or discharge of principal debtor: The surety is discharged
by any contract between the principal debtor and the creditor by which the
principal debtor is discharged or by any act or omission of the creditor, the
legal consequence of which is the discharge of the principal debtor.
Illustration: A, contracts with B for a fixed price to build a house for B within a
stipulated time, B supplying the necessary timber. C guarantees A’s performance of
the contract. B omits to supply the timber. C is discharged from his surety ship.
c. By composition with debtor: The surety is discharged when the
principal debtor and creditor enter into a contract by which the creditor (1)
composition with or (2) promises to give time or (3) promises not to sue
the principal debtor.
d. By act or omission impairing surety’s remedy: The surety is
discharged if the creditor does any act inconsistent with the rights of the
surety or omits to do any act which his duty to surely requires him to do.
Illustration: A puts M as apprentice to B, and gives a guarantee in B for M’s fidelity. B
promises on his part that he will, at least once a month, see M make up the cash.
B omits to see this done as promised and M embezzles. A is not liable to B on
his guarantee.
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46. e. Loss of security: the surety is discharged if the creditor losses or parts
with the securities belonging to the principal debtor, without the consent of
the surety.
The surety is not discharged in the following cases:
1. A surety is not discharged when a contract to give time to the principal debtor is
made by the creditor with a third person and not with the principal debtor.
Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for
B, and accepted by B, contracts with M to give time to B. A is not discharged.
2. Mere forbearance on the part of the creditor to sue the principal debtor does not
discharge the surety.
Illustration: B owes 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 liability.
3. Release of one co-surety does not discharge the other.
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47. LESSON – 3
CONTRACTS OF BAILMENTS
Section 148 of the Indian Contract Act defines that “a bailment is the delivery of goods
by one person to another for some purpose, upon a contract that they shall when the
purpose is accomplished, be returned or otherwise disposed of according to the
directions of the person delivering them.” The person delivering the goods is called the
“bailor”. The person to whom they are delivered is called the “bailee”.
Essentials of Bailments
1. There must be delivery of goods: Such delivery may be actual or constructive.
2. The delivery must be made for some specific purpose.
3. The delivery must be made on condition that the goods shall be returned in
specific when the purpose is over, or disposed of according to the direction of the
bailor.
4. Only possession but not the ownership of the goods is transferred.
Examples: Delivery of a radio for repair.
DUTIES OF A BAILEE
1. To take reasonable care of the goods bailed to him
Section 151 lays down that in all cases of bailment the bailee should take that much
of care which an ordinary prudent man would take of his own goods under similar
circumstances. Section 152 lays down that the bailee is not responsible, in the
absence of any special contract, for the loss, destruction or deterioration of the
thing bailed, if he has taken the amount of care described above.
Illustration: A gives to B, to be made into an ornament. B keeps them in a safe
where he usually keeps his own valuables. B is not liable if the goods are lose by
him.
2. Not to make unauthorized use of goods bailed
The bailee should not make use of goods for purposes inconsistent with the terms of
the contract. If he does so, the bailor is entitled to terminate the contract and
claim damages, if any.
Illustration: A lends a horse to B for his own riding only. B allows C, to ride the horse.
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48. C rides carefully but the horse accidentally falls and is injured. B is liable to
compensate A for the injury caused to the horse.
3. Not to mix the goods of the bailor with his own goods
a) If a bailee mixes the goods of the bailor with his own goods with the consent of
the bailor, both the bailor and the bailee shall have proportionate interest in the
mixture.
b) If the goods mixed by the bailee without the consent of the bailor and the goods
are separable, the bailee is bound to bear the expenses of separation and pay
damages if any.
c) If the goods are mixed by the bailee without the consent of the bailor and the
goods are inseparable, the bailee should compensate the bailor for the loss of
goods.
Illustration: A bails a barrel of Cape flour worth Rs. 45 to B. B without A’s consent,
mixes the flour with country flour of his own, worth only Rs. 25 a barrel. B must
compensate A for the loss of his flour.
4. Not to set up adverse title
The bailee should not deny the bailor’s title. He should not set up his own title or that
of a third party.
5. To return the goods bailed
The bailee should return goods bailed, to the bailor when the fixed period is over or
when the purpose is accomplished. The bailee should also deliver any increase
or profit which may have accrued from the goods bailed.
Illustration: 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.
DUTIES OF A BAILOR
1. To disclose the faults in the goods bailed
The bailor should disclose to the bailee, faults in the goods bailed, of which he is
aware. If he does not disclose, he will be liable for the loss resulting therefrom.
Illustration: A lends a horse which he knows to be vicious to B. He does not disclose
this fact. The horse runs away. B is thrown down and injured. A is responsible to
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49. B for damages sustained.
2. To bear extra-ordinary expenses
While the ordinary expenses are payable by the bailee, extra-ordinary expenses shall
be borne by the bailor.
Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses of
feeding the horse. But in case of the horse becoming sick, the bailor shall have to bear
the necessary expenses for its recover.
3. Responsibility for want of title
The bailor is responsible to the bailee for any loss sustained by he latter by the
reason, that the bailor was not entitled to make the bailment or to receive back
the goods or to give directions respecting them.
RIGHTS OF BAILOR
1. He is entitled to the increase or profit from goods bailed
2. In the case of gratuitous loan, the lender may require the goods to be returned,
even though he lent it for a fixed period for specific purpose. But if such a request
causes loss to the bailee exceeding the benefit he derives, the bailor should
indemnify the borrower.
3. The bailor is entitled to terminate the contract when the bailee does any act
inconsistent with the terms of bailment.
Illustration: A gives a horse to B for hire for his own riding. B drives the horse in his
carriage. The bailment can be terminated at the option of A.
LIEN
Lien is a right of a person, who has possession of goods of another, to return such
possession until a debt due to him has been discharged. This right is called a
“Possessory lien”.
Lien is of two kinds: 1. Particular lien, and 2. General lien
1. A Particular Lien is one which is available only against that property in respect of
which the skill and labour are exercised or any expenses are incurred.
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50. Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain
the watch till he is paid for the services rendered.
The bailees, repairers and unpaid vendors of goods are entitled to particular lein.
2. A General Lien is the right to retain the property of another for a general balance
of accounts. Bankers, can exercise this right for any debt due to them.
The duties and rights of A finder of lost goods
A person who finds an article need not take charge of it. But if he takes them into his
possession, be becomes a bailee.
Duties and Rights
1. He must take as much care of the goods as an ordinary prudent man would,
under similar circumstances, take of his own goods.
2. He cannot sue for remuneration for trouble and expense incurred by him to
preserve the goods or to find out the owner of the goods.
3. He may exercise particular lien against the goods for such remuneration.
4. If a reward has been offered for the return of the goods, he can sue for such
reward.
5. If the goods are the subject of the sale and if the owner is not found or when
found refuses to pay the lawful charges, the finder may sell the goods.
a. When the goods are about to perish or
b. When they lose the greater part of their value of
c. When lawful charges amount to two-thirds of their value
PLEDGE
A pledge is a “bailment of goods as security for payment of a debt or performance of a
promise”. The bailor is called the “pawnor” and the bailee is called the “pawnee”. In the
case of pawn, there is no transfer of property in goods. Only possession of the goods is
transferred. Hence, it is different from mortgage. Pawn is also different from lien, as in
the case of lien, there is not power to sell the article while a pawnee can sell, subject to
some conditions.
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51. Rights of Pawnor
Even after the expiry of a stipulated period, he may redeem the goods pledged at any
subsequent time before the actual sale of the goods pledged. But he must pay
expenses which may have arisen from his default.
Rights of Pawnee
1. He can retain the goods pledged until he recovers the debt, interest and other
expenses incidental to possession or preservation of the goods.
2. He cannot retain the goods for debts other than those for which pawn is made.
3. He is entitled to receive extra-ordinary expenses incurred for the preservation of
goods.
4. If the pawnor makes a default, the pawnee may
a. Bring a suit upon the debt or promise and
b. Retain the goods pledged or
c. Sell the goods by giving a reasonable notice of sale to the pawnor.
If the proceeds of such are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. If the proceeds of the sale
are greater than the amount so due, the pawnee shall pay over the balance to
the pawnor.
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52. LESSON – 4
CONTRACT OF AGENCY
Section 182 of the Indian Contract Act defines an agent as person employed to do any
act for another or to represent another in dealings with third persons. The person for
whom such act is done, or who is so represented is called the “principal”.
ESSENTIALS OF A CONTRACT OF AGENCY
1. The principal and third parties must be competent into contracts
An agent may be even a minor who can effectively bind his principal. But the
principal cannot make the minor agent liable for misconduct or negligence.
Example: P, a principal gives M, a minor, a jewel worth Rs. 100 and instructs fgdgdf
to sell it on credit or for less than Rs. 500. M sells the jewel on credit for Rs. 400.
P cannot make him liable while he is bound by the sale..
Consideration is not essential. That the principal gives his consent to be represented
by the agent is sufficient consideration for the agent gdg dfgd dfgd.
CREATION OF AGENCY
An agency may be created in the following ways:
1. By Express Authority: The authority of any agency may be expressed in words
spoken or written. For example, a contract of agency can be written by means of
power of attorney.
2. By Implied Authority: The authority of an agent can be interred from the
circumstances of the case.
Illustration: A living in Bombay, owns a shop in Madras and he occasionally visits it.
B is managing the shop and is in the habit of ordering goods from C in the name of A
for the purpose of the shop and of paying to 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 the purpose of the shop.
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