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A Survey of Indian Law (ASIL)/ASIL/5 LAW OF CONTRACT

ASIL

5 LAW OF CONTRACT
L.C. Saxen<emph type="bf">M.A.

Jaipur.</emph>

5 LAW OF CONTRACT

THIS SURVEY relates to topics which have been dealt with in the Indian Contract Act, 1872. The decided cases have
been discussed under appropriate headings and the minor cases are grouped under the rubric " Miscellaneous " . There is
a drought of the crop of cases on consideration, doctrine of frustration and agency.

I CONCLUSION OF CONTRACT

A contract is concluded by the sequence of offer and acceptance. Sections 3 to 8 enunciate rules in this regard. The
mechanism, however, is not simple. In this age of standard-form contracts, withenormous terms and conditions and option
with the offeror to waive the concerned condition for his benefit the court has to spell out the result with a meticulous sifting
of the correspondence and the conduct of the parties at the relevant time In Mis Bismi Abdullah & Sons v. Regional
Manager, F.CJ., Trivandrum,2Food Corporation of India invited tender for the sale of broken rice. One of the conditions of
sale provided: " Tenders not accompanied by the required amount of security deposit are liable to be rejected summarily " .
The defendant-appellant did not deposit any security money. But his tender was accepted and its acceptance was
communicated to the defendant-appellant. The court rightly held that noncompliance of the security deposit clause did not
establish the non-existence of the contract The corporation had waived the deposit provision. Thus the processes of offer
and acceptance were complete.

In Byomkesh v. Nani Gopal3die plaintiff filed a suit for specific performance of contract and the defendant contested it by
alleging that the latter had made only an invitation to make an offer and the same was not accepted by him. The question
before the court was whether there was a validly concluded contract which could be specifically performed. The plaintiff-
respondent made an offer to buy the defendant-appellant ' s (disputed) land at Rs. 3000/- per hatha. The latter
communicated that he had a higher offer of Rs. 3,250/- per katha and wrote whedier the plaintiff was agreeable to
purchase the land at the higher rate of Rs 3,300/-perkatha in which case he should " send Rs.3,000/- towards advance. "
The plaintiff sent the bank draft as desired, stating that the balance amount will be paid " before or on die execution of the
Sale Deed in his favour. " The same was returned to him by the post office as " unclaimed " , " absent " . The same bank
draft was again sent by die plaintiff witii a letter that this amount was being sent " as advance. "

It was, however, returned witii the postal remarks " refused " . Thereafter, the plaintiff received a letter from the defendant
intimating " that the proposal made by the defendant to the plaintiff stood cancelled. " Under these circumstances, the
processes of offer and acceptance as envisaged in section 4 were held to be clearly completed.4

In Chand Ali v. Mahesh Shikshan Sansthan5 the petitioners entered into a compromise with the other party when the writ
petitions were pending. They withdrew the same after they gave an undertaking that they would not object to the course
already finished in the classes because of their late admission and would pay the prescribed fees by a certain date. It was
held that the present agreement could not be termed as an unconscionable contract between die parties as the petitioners
gave die undertaking out of their ' free will*

Parties may conclude a contract and therein provide terms and conditions which may absolve one party from non-
performance of it under certain circumstances. Thus in Mis Basanti Bastralaya v. River Steam Navigation Co Ltd6 the
liability of the common carrier for delivery of the goods to the plaintiff was governed by their mutual arrangement thus: "
The Company shall not be liable for...any property delivered to be carried...for loss, damage or delay directly or indirecdy
caused by or arising from act of God, state ' s enemies...with or without violence on board or elsewhere " .7

The vessel and cargo were seized by die state ' s enemy and the plaintiff accepted this fact and acted accordingly by
preferring its claims before the Custodian of Enemy Property for India. It was held that the carrier was absolved from his
liabilities under the contract. The question of the application of the doctrine of frustration as such did not arise in this case.

The Supreme Court has held in Swresh Pal v. State of Haryana8 that a course which the students join on the strength of its
recognition by the government could not be derecognized in the midst of the session for it will be unjust to do so. The court

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did not consider the vinculum juris of contractualism.

In Kirloskar Pneumatic Co Ltd v. NTf.Corpn. Ltd9 die court lamented the erosion of the freedom of contract by stating that "
Negotiation as a prominent feature of contract formation is now relegated to the background with the State or State
controlled employers laying down uniform set of terms and conditions and asking the contractors to sign on the dotted line
or not at all " .9

The court opined that Maine ' s dictum in Ancient Law that die movement of progressive societies had been a movement
from status to contract had withered " in modern times " .10 The court concluded that there was no contract between the
National Thermal Corporation Limited (NTPC) and the Kirloskar Penumatic Co Ltd. because the latter had withdrawn the
bid before it was accepted and thus the bid guarantee could not be invoked. An injunction, therefore, could be issued "
restraining the bank from making the payment " . It held that the advertisement by NTPC under the caption " invitation to
bid " was not an offer. It also pointed out that the resulting relation between the parties was " an invitation to treat or an
offer to negotiate or an offer to receive offers or an offer to chaffer " .11

The court also reviewed the concept of firm offers, consideration, detrimental reliance, doctorine of promissory estoppel,
withdrawal of offer, " bid guarantee and contract performance guarantee-co-relation " , rule of contra proferendum and
bank guarantee in the light of applicable law. The courts must scan the chain of correspondence to determine the
contractual relation, if any, between the parties through a sequence of offer and acceptance.

In Chhotey Lai v. Union of India12 decided by the Allahabad High Court, the question was whether the letter of the
government amounted to acceptance or introduction of a new set of conditions so as to amount to counter-offer of the
plaintiff ' s offer. The government invited tender for the supply of stone ballast through an advertisement. The plaintiff
submitted tender which was to remain open until 90 days, i.e., 9 October, 1966. He also deposited earnest money and
security money. On 26 September, the government wrote to the plaintiff " to provide basic labour amenities, qualified
blaster and qualified manager as required under the Mines Act. " The plaintiff met the divisional superintendent and
informed him of his unwillingness to accept the new conditions and demanded refund of his above amounts. By a letter
dated 6 October, he confirmed his refusal to undertake the work because of the " new conditions " . The divisional
superintendent, however, communicated acceptance of the plaintiffs tender.

The trial court decreed the plaintiffs claim for refund of his money on the ground that since the defendant had added new
conditions, no contract was concluded between the parties. The first appellate court accepted the contention of the
defendant that the government ' s letter did not add new conditions and revised the judgment of die court below. The High
Court, on second appeal, restored the judgment and decree of the trial court with variation of interest under section 7 .

The proposition which emerges from the judgment is that the offer becomes dead by counter-offer or rejection thereof. The
subsequent acceptance of the dead offer does not conclude a contract although made witiiin die time-limit within which the
original offer was to remain open.

II DUTY OF NON-DISCLOSURE BY BANK

The relationship between the banker and the customer is tiiat of debtor and creditor. The question, at times, has arisen as
to the extent to which die bank is bound to observe secrecy of its customer ' s account or of the moneys deposited with it.
Is the customer ' s privilege of secrecy absolute or qualified? Under the High Denomination Bank Notes (Demonetisation)
Ordinance, the high denomination notes could be exchanged until a fixed date by making a declaration and filing
particulars with the autiiorised bank. The petitioner in Shankarlal v.

State Bank of India113 deposited along witii the declaration for the exchange of a sum of Rs. 2,61,000/- with the State Bank
of India. The bank informed die income tax authorities instead. The petitioner claimed that he had not to pay any income
tax dues and in fact was entided to a refund of Rs. 3,245/-. He claimed interest for the relevant period until release of his
money, and also that it was wrongful for the bank to inform the tax authorities. The bank claimed that the information was
conveyed in public interest.

The court after quoting die view of Paget approvingly that secrecy is one of the legal, not merely moral duties of die banker
which stems out from the contract held that this duty was qualified and subject to certain exceptions:14

The instances are (a) the duty to obey an order under the Banker ' s Book Evidence Act, (b) cases where a higher duty
than the private duty is involved, as where a danger to the State or public duty may supersede the duty of the agent to his
principal, (c) of a bank issuing a writ claiming payment of an overdraft, stating on the face of it the amount of the draft, (d)
the familiar case where the customer authorises a reference to his banker.

The court, without further elaboration, held that under the circumstances the instant case fell within one of the exceptions.
There is no provision in the chapter on agency in the Act regarding non-disclosure by the agent. But sections 211, 212 and
220 when put together spell out that an agent must act skilfully according to the directions of the principal and by custom.

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He must not be guilty of misconduct in the business of agency. This would involve non-disclosure of confidential
information and other useful information pertaining to the business of the principal which requires secrecy.

Ill UNLAWFUL CONSIDERATION

Section 25 requires consideration for the validity of all agreements, unless excepted. But under section 23 , the
consideration or object of the agreement should be lawful, otherwise it would be void. Section 24 provides that if the
unlawful consideration is not severable, the whole agreement is void; if it is severable, the lawful portion of consideration is
valid and the agreement pertaining thereto can be enforced.

LJ.C. of India, Madras v. Devendrappa15 dealt with the problem whether the consideration for the transaction was one
composite whole or severable in parts. Defendant 1 (die late father) and his one major son made simple mortgage of the
joint family property against a loan of Rs. 30,000/- to an insurance company. Rs. 18,000/- were paid in cash and Rs.
12,000/- were to be made as an interest free deposit with the insurance company for purchase of its shares. The shares
were allotted to defendant 1 and his two brothers. The balance amount was transferred to the share account of the
company.

Hie successor-in-interest of the insurance company, the Life Insurance Corporation of India, claimed the unpaid amount
widi interest and in case of default, the sale of the mortgaged properties and in case of insufficiency of the same a
personal decree against die mortgagors. The district court, inter-allia, held on appeal that the part of the transaction
relating to Rs. 12,000/- was tainted by undue influence of the company. The trial court had decreed the suit, while the
district judge in appeal reversed this decision and dismissed the suit.

The High Court held diat section 6 (b) of the Transfer of Property Act, 1882 provided for application of the principle of
legality of consideration or object of the agreement as contained in section 23 . But section 24 was not applicable to it, i.e.,
to completed transfers of immovable property.

The court emphasised that illegality was a part of the public policy and was not confined to the principles of contract law. It
observed that " the policy is not that the courts are not to be instruments for aiding illegality in contract but may be
instruments for aiding illegality in other branches of the law " .16 This is a sound proposition of law. The court thus affirmed
the decision of the district court but on different grounds.

IV CHOICE OF FORUM

Section 28 voids an agreement in restraint of legal proceedings but subject to two exceptions. The question has arisen in
too many cases whether an agreement of the parties limiting their choice to file suit to one of the competent courts only
was in restraint of legal proceedings or contrary to public policy. The Supreme Court in Hakam Singh v. Mis. Gammon
(India) Ltd17upheld the ouster clause. In subsequent decisions, however, the question has arisen whether the court could
engraft exceptions to it.118

In Indian Rare Earths Ltd. v. Mis Unique Builders Ltd.19 the agreement providedtiiat the courts in the State of Maharashtra
alone would have jurisdiction to try the suit. The work site was in Ganjam (Orissa).The opposite party had received the
unsigned agreement at his Cuttack address and had executed it there. The lower court held that the agreement was "
oppressive, unfair and inequitable " . In revision the Orissa High Court allowed the petition holding that " the stipulation in
the agreement that the courts at Maharashtra without specifying the particulur Court in which the proceeding shall be
initiated is not vague nor unworkable " .20

According to the court die pith and substance of numerous decisions " seems to be that though the parties are bound by
the terms of the contract choosing one of the Court having jurisdiction to be the proper forum but the Court whose
jurisdiction has been ousted by the terms of die agreement can still exercise jurisdiction in the event the said Court after
taking into consideration the entire facts and circumstances of the case is of the opinion that the said stipulation is

unfair, unjust, inequitable or oppressive ignoring the said stipulation and relieve the parties from the operation thereof1.21

V TIME AS ESSENCE OF CONTRACT

Under section 55 provision for timely performance is not regarded as of the essence of contract in all cases. The reason is
that the contract must contain some stipulation as to the period when the contract is to be performed. However, in case of
an omission to fix die time of performance, the agreement will not be declared as null and void. Under section 46 the court
may, in such cases, fix a reasonable time within which the contract must be performed.

In K. M. Jose v. Anantha Bhat,22 the question was whether time was of the essence. There was an agreement to sell
immovable property for Rs. 20,000/-. Of this Rs. 13,000/-was paid as advance and Rs.5,000A was to be paid on or before
30 April, 1981. Within six months thereof, the sale-deed was to be executed. The court held that only die provision for
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payment of Rs 5,000/- was of die essence. The trial court looked to the intention of the parties to determine the question of
the time being of the essence of the contract.

VI REFUND

When the consideration of the agreement fails or the agreement is discovered to be void or becomes void, the party
advancing money to the other would be interested in its refund or reimbursement Section 65 is relevant in this connection.
In Fakir Chand Seth v. Dam Barudhar Bania22 the plaintiff had advanced and the defendant had accepted a sum of Rs.
15,000/- on 19.1.72 for supply of 350 bags of paddy at the stipulated rate by the defendant to the plaintiff. The latter had no
licence in his favour though required under the Orissa Rice and Paddy Control Order, 1965. The trial court heldtiiat die
agreement was void in law. The plaintiff was, therefore, held not entitied to recover his amount under section 65 or 70.
However, the Orissa High Court did not agree with this view and allowed the plaintiffs appeal.23

In Nihat Singh v. Ram Ba24 a Dangi woman, whose son, at 24 " had lost all hopes of marriage " because he could not be
married according to the caste custom at an early age, paid Rs. 4,000/- to defendant to supply a Dangi woman for her son
(to live as his mistress). The plaintiff alleged that the defendant sent a woman who was not Dangi but Bedhni and stayed
for only twenty days. The court below decreed die plaintiffs suit for recovery of the amount The Madhya Pradesh High

Court held that the sale of woman was in violation of article 23 of the Constitution. Referring to the Act it observed:25

Obviously, because, Section 23 of the Act speaks only of ' unlawful* objects and consideration of an agreement and
contemplates further that it would be competent for a Court to regard as not ' immoral ' , or ' opposed to public policy ' any
object or consideration of an agreement. The void agreement, contemplated under Section 65 is evidendy one to which
are attracted die provisions only of Section 24 et al.

The court held that the agreement in the instant case was void ab initio and as such, section 65 was inapplicable.26 The
court thus allowed the defendant ' s appeal and stopped recovery of the amount It, however, observed that " it is
regrettable that dismissal of the suit may be a blessing for the defendant but diat is the price which must be paid for social
reform constitutionally envisaged11.27

Thus, law will not aid a defaulting plaintiff in the restoration of status quo in case of a void ab initio agreement

VII QUASI-CONTRACT

Sections 68 to 72 provide relief to the aggrieved party even when there is no contract. The remedy in such situations
arises because of the equity embodied therein. In P.C. Wadhwa v. State of Punjab28 die defendant applied for the post of
stipendiary probationer for the Superior Forest Course at the Indian Forest College, Dehra Dun. He was selected by the
Punjab Public Service Commission and he completed the training at Dehra Dun. The advertisement had required the
selected candidate to serve the department for at least five years, otherwise to refund the money spent on his training and
education. But, in fact, no bond was signed by him. He prematurely left the college without the government ' s sanction.
The latter sought to recover the amount spent on him. He joined as an IPS officer. The government began to deduct the
amount from his salary. He instituted a suit for declaration that the government was not so entiled. The trial court and the
first appellate court decreed the plaintiffs suit. In second appeal, the state withdrew the suit in order to file a separate suit
for recovery of the amount of Rs. 3,250/-.

The trial court decreed the government ' s suit under section 70 . The first appellate court affirmed the judgment and
decree of the trial court The defendantappellant contended before die High court that section 70 was not applicable on two
grounds : First, the agreement was not executed in writing as required under article 299 of the Constitution; second, he
had received no benefitfrom his training at the college.

The court applied the holding of the Supreme Court in State of West Bengalv. Mis B. K. Mondal and Sons29 and Mulam
Chand v. State of MadhyaPradesh30^) the instant case that section 70 would apply even where article 299 has not been
complied with and diere is no valid agreement, provided the requirements of the section have been squarely met.

Section 70 was held applicable because the government had spent money on the training and college fees of the
defendant-appellant. Furthermore, he had the option to " refuse to have the training " . Thus the training imparted to the
defendantappellant was neither gratuitous nor unlawful under section 70 . The defendantappellant raised die plea of
promissory estoppel that in the earlier case launched by him against die state, die latter had withdrawn the second appeal.
The court held that the principle of promissory estoppel laid down by the Supreme Court in Mis Moti Lai Padampet Sugar
Mills Co Ltd v. State of Uttar Prade31 was not applicable because the state had withdrawn the second appeal at the request
of die defendant-appellant then and had held out no assurances of promissory representations. The appeal was, dius,
dismissed.

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S. Kotralasappa v. The Indian Ba32 dealt widi the situation where the bank had twice credited to the account of its
constituent each time with Rs. 100,000/-. The bank had received a Telegraphic Transfer (TT) to credit to the account of its
customer Rs. 100,000/-. The bank mistakenly considered die confirmation of die TT as a separate item and again credited
to the customer ' s account. The customer wididrew the amount the same day. The mistake was detected only after two
years, and when the bank approached for refund of die amount with interest, the defendant did not repay. The Karnataka
High Court held that the defendant was bound to refund the money under section 72 , which enjoins repayment of money
made under mistake. He was also held liable to pay interest at specific rates under die Interest Act, 1978.

In Indu Mehta v. Sta33 die petitioner was appointed as assistant district government counsel (criminal) of a certain area " in
anticipation of the approval and till final orders were passed by die government " and copy thereof was sent to her for
information and necessary action. She worked on the said post for about two years. During this period, she was paid the
fee at the rate admissible for the post Earlier, she was a criminal lawyer.

The government cancelled die order of the district magistrate and declared it as illegal and required the petitioner to get
only the fees " as was admissible to a penal lawyer " . It claimed recovery of die amount of Rs. 5056/-. The Allahabad High
Court allowed the petition and held tiiat this amount could not be legally recovered from her. Nor could payment of her bills
for acting as a penal lawyer be withheld by die government. The court found that all die ingredients of section 70 had been
satisfied. The petitioner had rendered her services lawfully upon the request of the district magistrate; she did not intend to
serve gratuitously and the government had enjoyed the benefit of her services. It was also held that section 72 did not
apply since there was neither mistake nor coercion to justify recovery of the excess amount In die court ' s view, the
situation created an " implied contract " and the government was bound to compensate the petitioner.

VIII DAMAGES FOR BREACH

Sections 73 to 75 deal with die principles of assessment of damages on breach of contract. A plethora of decisions have
settled the vexed problems which have arisen on the subject. In Mis Bismi Abdullah & Sons v. Regional Manager FCIt
Trivandr34 the court found tiiat die defendant-appellants in their letter had specifically stated their unwillingness to lift the
goods and asked for refund of the earnest money deposit of Rs.1,000/-. The court thus held that the defendants committed
die breach on 17.11.1985 when they sent the letter.

The court after referring to two authoritative decisio35 stated the following two propositions: (i) The damages for the breach
of contract have to be measured as on the date of breach, (ii) The difference between the contract price and the resale
proceeds constitute a criterion for the assessment of damages to the plaintiff.

The court held that since diere was unreasonable delay on the part of the plaintiffs in effecting resale, die sale proceeds
recovered on delayed resale could not afford an acceptable criterion to measure damages. Also the plaintiffs had failed to
prove the price of rice on the date of breach. The court, therefore, awarded only nominal damage36

In Prema v. Mustak Ahmthe36a37 plaintiff appellant (a Hindu) alleged that the defendant respondent (a Muslim) had made
a breach of a promise to marry her and claimed Rs. 1,00,000/- as damages. The lower court found no such promise on
evidence and non-suited the plaintiff. The High Court in appeal disagreed with the appreciation of evidence and held that
the defendant-respondent had made a promise of marriage and had breached it The court approvingly quoted from Anson
' s Law of Contrac38Damages for breach of contract are given by way of compensation for suffered, and not by way of
punishment for wrong inflicted. Hence, die ' vindictive9 or ' exemplary ' damages of the law of tort have no place in the law
of contract. To this rule, however, the action for breach of promise of marriage is an exception; in that case injury to the
feelings of the disappointed party may be taken into account in the assessment of damages.

The court opined that this is the well setded common law in England which applies in India also. The court granted Rs.
60,000/- as damages on the ground of what would be a reasonable sum " commensurate witii the social and economic
status of the husband and wife in case of desertion of the wife by the husband. This the court measured, would " not have
been less than Rs. 500/- per mondi " .

Hie question that arises is what would be the measurement of damages in a supposed case where the breacher is a
female and not a male? Should not the court, then, take into consideration die social conditions in the country and not
merely the mental feelings, if any of the mal39

In State of Karnataka v. Rameshwara Rice Mills, Thirthahat40Hhers was the following provision in the agreement: " .... for
any breach of conditions set forth herein-before, the first party (contractor) shall be liable to pay damages to the second
party (State Govt) as may be assessed by the second party " .40

Dismissing the appeal, the Supreme Court held that the assessment power was " subsidiary and consequential " , and
could be exercised only when the first party admitted breach. The second party could not adjudicate upon the question of
breach as law does not allow it to be an arbiter in his own case. "

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The court, however, examined the question whether one of the parties could assess or quantify damages but did not
express any opinion whether that party had unbridled power to apply any measure of damages or follow the rule of the
thumb. The measure of damages cannot be made bonfire at the altar of a party ' s whim in derogation of the setded
principles of assessment of damages envisaged in sections 73 to 75.

IX PENALTY

Under section 74 the courts are entitled to relieve a party against an unconscionable provision and to order compensation
for breach of contract, " not exceeding the amount so named " in the contract by the parties. However, the explanations
attached to the section do not define the term " penalty " and leave to die judiciary to spell out its parameters in die
situation concerned. In K. P. Subbarama Sastri v. K. S. Raghava41 there was a chit fund (kuri) transaction between the
plaintiffs-appellants and defendants-respondents whereunder the latter (subscriber) bid the amount and was given the
same. He agreed to secure the future instalments without default In case of default, the subscriber was to pay in one lump
sum, with interest at 12 per cent all the future instalments.

The trial court decreed the suit of the plaintiffs. On appeal, the Division Bench modified the decree, holding the interest
unconscionable and unreasonable. The stake-holders were regarded as " unsocial elements " , to be regulated by
legislation. Hie Full Bench of the Kerala High Cour42 however, upheld the transaction. The Supreme Court agreed witii the
view of the Full Bench and dismissed the appeal against it. The Full Bench had, inter alia, held that if the whole amount on
the date of the bond was a due debt and payment in instalments was allowed to the debtor for his convenience, the
creditor could withdraw the concession and the provision for total payment in one lump sum was not penal. Where,
however,

the debt becomes due only on the instalment dates, the above provision would be penjl.

To determine whether or not the provision is penal, die court should look to the nature of the transaction, die provisions
thereof, the relative situation of the parties, tiieir intention in incorporating the terms, the likely result and effect of the
transaction. Thus the term " penalty " is elastic and flexible and not rigid and fixed. Its true import depends upon the
presence of a variety of factors as listed above.

In State v. K. R. Selvamoorthy, die plaintiff, who has made a security deposit for the due performance of the contract with
the defendant, defaulted. He calimed recovery of the security deposit The defendant had neither pleaded nor proved his
loss on the breach. The High Court dismissed the defendant ' s appeal and thus allowed the plaintiff-respondent to recover
his security deposi43

X CONTRACT OF GUARANTEE

Sections 126 to 147 codify the law relating to contract of guarantee. This includes myriad situations like continuing
guarantee, surety ' s discharge and his liability. In this commercial age, banks have been coming forward to perform dieir
function to advance credit for business or help the jobless to purchase vehicles etc. They, therefore, seek to protect their
interest by obtaining a surety bond, with clauses heavily weighed in their favour. The question of validity of some of these
clauses has come before die courts.

R. Lilavati v. Bank ofBaro44raised the question of surety ' s liability for her contracts vis-a-vis the statutory provisions. The
bank granted credit facility to the partners of a firm (defendants 1 to 3), R. Lilavati (defendant 4) contested the suit as a
surety. She contended that die loss of die hypothecated properties discharged her liability and also the acknowledgement
of liability by the remaining defendants without her consent did not bind her for extension of period beyond limitation. The
trial court decreed die plaintiffs claim. In the revision petition, die Karnataka High Court considered the validity and legal
effect of the following clauses of the agreement: " I shall not be entitied to any of the rights conferred on sureties by Sees
133,134 135,139 and 141 of the Contract Act And for all the purposes of this claim die principal is empowered to give
consent on my/our behalf and any consent given by the principal shall be deemed to have been given by me/us and shall
bind me/us in all respects as if die same had been expressly given by me/us in writing45

The surety bond also announced that die guarantee was, in effect, a continuing guarantee. The court considered the
contention of the surety for her discharge under section 141 in the light of the aforesaid bond provision. The petitioner ' s
counsel argued that there was nothing in the section to suggest that the surety could contract out of her liability thereunder.

According to die court, section 128 clearly envisaged that the parties could contract out of their rights and liabilities as
provided in their contract. The absence of the words " notwithstanding anything contained to the contrary etc. " in section
141 did not alter the situation.

As to the provision for acknowledgement, the court said tfiat die petitioner, by her consent, made defendants 1 to 3 as her
agent for extending the period of limitation. In other words, she was held bound by estoppel through her own deed. Again,
the surety bond treated the guarantee as a continuing guarantee. Thus the question of limitation was not materia46
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This case is a step forward in the theory of laisseiz-faire and that until there is a prohibition, the parties would be allowed to
contract out of the statutory provisions.

Mis Mahendra Kumar Chandulal, Ahmedabad v. Central Bank of India, Ahmedab47which concerned the bailee ' s liability
under section 151 was held inapplicable to suretyship cases. The argument that the instant agreement was unlawful under
section 23 is not manifestiy referred to in the judgment. The revision petition was, thus, dismissed. Union Bank of India v.
Manku Naraya48concerned the execution of the decree against die guarantor. The bank had loaned a sum of Rs. 5,100/-
guaranteed by Manku Narayana. The joint family property was also mortgaged by the principal debtor to secure a sum of
Rs. 2,300/- (part of the debt).

The bank had obtained a composite decree against the principal debtor, surety and the mortgaged property. It was held
that under those circumstances the decreeholder bank has to proceed against the mortgaged property first and then
proceed against die guarante49 In the special leave petition, die petitioners had stated that no offer had been received for
the purchase of the mortgaged property although they had made an application for its sale. The Supreme Court found that
in execution of the decree, the creditor had proceeded against both the mortgaged property and the principal debtor and it,
therefore, held that execution against the guarantor was maintaintble. It is to be noted that under section 126 the liability of
the surety arises " in case of his default " , i.e., the principal debtor ' s default.

Bank guarantee

A catena of cases has arisen on this subject, some by die Supreme Court and many by the High Courts, during the last
few year50 In these cases the courts have analysed die factual situations, interpreted the documents including the technical
or commercial terms used by parties, referred to English decisions wherever desirable and laid down legal propositions
consistendy with die banking, commerical or contract law in the country. Law which has emerged from these

cases may be regarded as fairly well-settied. Nevertheless cases continue to come before the courts.

Kudrermukh Iron Ore Company Ltd v. Korula Rubber Co PvL L51invited the question of obligation of the bank to pay the
amount (under the guarantee) when the arbitration proceedings were pending between the parties. Petitioner ' s (Korula
Rubber Co. Ltd) tender offer " to do the work of rubber lining of pipes and fittings and supply die other materials and to do
the work of growing and machining etc, " according to certain rate was accepted by respondent (Kudremukh Iron Ore Co
Ltd (a Government of India undertaking) The contract was subject to certain terms and conditions. The petitioner was to
provide security deposits, workmanship guarantee and life guarante52

There was a dispute between the parties as to the question of breach of contract and die same was referred to arbitration.
The petitioner sought injunction against encashment of die bank guarantee. The trial court granted the injunction "
restraining the respondent No. 1 from realising the bank gurantees till the disposal of the petitions " . In revision before the
High Court it dismissed die petition and confirmed the temporary injunction.

In its judgment, the court referred to Sheldon and Fielder on Law of Banking(regarding die nature of different forms of letter
of credit), sections 124-126 (regarding the meaning and nature of contract of indemnity and contract of guarantee,
decisions of the Supreme Court and High Courts, (regarding the dicta of courts vis-a-vis wordings used in the documents
concerned).

The holdings of the court may be summarised as follows:

(a) " all the five guarantees now sought to the enforced....amount to a contract of indemnity53 (b) In a case of a contract of
indemnity, the beneficiary must show the breach of contract, die loss caused to him thereby and it can be enforced only
after the amount is determined. In a case of a contract of guarantee the enforcement would depend upon the breach of
promise or performance. Again, in a contract of guarantee, there are three parties (principal debtor, creditor and surety)
in a contract of indemnity, the promisor makes " himself primarily liable " to fulfil it when the event occurs as stated under
the section 124 . (c) The conditions of the documents do not show an absolute and unqualified promise to pay the amount
of the guarantee by the bank upon demand by the beneficiary. The provisions when read together, show that die latter
would be entided to the amount only on proof of the breach or breaches. Since the maximum amount mentioned is Rs
2,77,844/- it meant that the full amount would not be paid upon breach. The breach, the loss and its extent must be
proved. Thus the nature of liability depends upon the interpretation of die terms and conditions of the documents, (d) The
alleged demand in writing within the stipulated period did not make " any specific claim or demand as such " under the time
and demand clause, (e) The three concepts of letters of credit, contract of guarantee and contract of indemnity are
different, though there are seemingly similarities. (0 The decision of the Supreme Court in United Commercial Bank v.
Bank of Indi54 dealt with only a letter of credit and not contract of guarantee or indemnity.

The instant case thus serves as a lamp post, warning that the theory of judicial precedent must undergo a strict scrutiny of
the terms and conditions of the documents to be read togetiier to ascertain their legal nature.

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In Mis J. R-Enterprises v. Mis State Trading Corporation of India Lt55 the Delhi High Court was faced widi the question of
issuing a restraining order for the payment of the amount of bank guarantee, pending arbitration petition. The bank
guarantee, was styled as " revolving guarantee " . It provided, inter alia, " The bank do hereby unconditionally and
irrevocably guarantee that if the Agents fail to perform any of their obligations... the Bank shall pay forthwith to the STC
such amount or amounts as the bank may be called upon to pay subject to the maximum of Rs. 10 lakhs....This guarantee
at all times during its currency be valid and enure to the benefit of die STCProvided that the guarantee herein furnished
shall be released and discharged after the expiry of 30 days from die date of the shipment of the last lot of the goods, in
respect of export contracts between the STC and the foreign buyers.56

The bank guarantee had been extended. The court held, inter alia, that although no element offraud exists yet the
guarantee having been invoked after it had primafacie expired, it is a fit case for granting injunction sought for during the
pendency of the suit The court also opined that the amount of the bank guarantee should become due to a party under the
agreement. Otherwise, the bank prima facie will reject the demand.

XI HYPOTHECATION AND PLEDGE

In the commercial world, hypotfiecation, pledge and mortgage serve as security for a debt Section 172 defines pledge and
sections 173-181 deal with die rightsof the pledgor (pawnor) and pledgee (pawnee) etc. Section 58 of the Transfer of
Property Act defines mortgage as a security in relation to immovable property. But neither Act defines hypothecation.

In Bank ofBaroda v. Rabari Bachubhai Haribhait57 question before the High Court was whetiier the hypothecating bank was
liable to pay compensation to the injured for the negligent act of the driver of the offending vehicle for the purchase of
which it had advanced loan to two persons. Under the deed of agreement, the bank secured its right to sell the
hypothecated vehicle in case of nonpayment of the loan while the ownership and die defacto and dejure possession
thereof remained witii the borrowers. The Motor Accidents Claims Tribunal held that the hypothecating bank stepped into
the shoes of die owners of the vehicle and was vicariously liable for die act of the driver. It also held the two owners
vicariously liable. The High Court disagreeing with this view held that the bank was not liable. In its view, die real
relationship between the lending bank and the borrowing persons was that of a creditor and debtor.

The court referred to various works including law lexicons to examine the nature of the hypothecation in die light of the
facts of the case. It held that the transaction was not a pledge since the possession remained with owners, both in law and
in fact. The " pawnors " continued to be owners also. It opined that in case of hypodiecatio58

The tide to the property does not pass to the creditor but the creditor has merely the right to sell the pawn upon default....
The tide in die goods remains with the pledgor, the de jure and de facto possession continues to remain witii him and the
pledgee/creditor has merely theright to recover

the dues.

The court did not refer to judicial precedents nor to any statutory provisions. It stressed on the hallmarks of hypothecation.
Although the court uses the words " a deed of hypothecation executed by and between the parties, " it is not too clear
whether the parties labelled their agreement as a " Deed of Hypothecation " . Nevertheless, in the age of commercial
adventures and the banks ' programmes to help the jobless in die social welfare state, the case is a milestone in the padi
of economic progress. It will encourage the banks to fearlessly discharge their social function of economic assistance.

In Mis SK. Engineering Works, Batala v. New Bank oflnd59 tfte pledgee bank was entided to file die suit for recovery of its
loan amount with interest witiiout first resorting to sale of the goods pledged with it. On recovery of the amount due to it, it
was bound to return the goods, to the pledgor. The court referring to section 170 held that where a pawnee files a suit for
recovery of debt, though he is entitled to retain the goods he is bound to return them on payment of the debt

In Bank of India, Bombay v. Yogeshwar Kant Wadhe60 die question was whether a surety could invoke section 141 when
the amount guaranteed, related to transaction of hypothecation. The bank had loaned various sums to afirm against
guarantee from va61

The High Court scrutinised the nature of the transaction and termed it as hypothecation and no pledge. It then spelt out the
nature of the hypothecation transaction, and die distinction between hypothecation and pledg62 Section 141 was clearly
held inapplicable to hypothecation transaction because " such a question cannot arise in the case of hypodiecation of
goods for the simple reason that when the goods are not in the possession of the hypothecatee there is no question of his
losing or parting with the same63

Obviously, this is the correct interpretation of section 141 . According to the court, the hypothecatee bank had neither
actual nor constructive possession in law or fact. This trend vis-a-vis section 141 is a new one fostered by commercial
situations.

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In Mis Tapanaga Light Foundry v. State Bank of India, Khund64 the High Court of Orissa was confronted with several
questions regarding the interpretation of section 176 :

(0 whether the pawnee could sell the pledged goods during the pendency of the suit for recovery of the amount due; (w)
whether section 176 was mandatory; and (iii) whether the pawnors had notice of die sale -- the last question being a
question of fact The court answered all the three questions in the affirmative and held: " In the ultimate analysis, opposite
party No.l has right to sell the pledged goods during the pendency of the suit The provisions of section 176 are of
mandatory character. The petitioners have sufficient notice of the sale65

It held that the pawnor could not waive die requirement of notice, which must be " clear and specific66This view is of great
importance because section 176 is silent on this point On die other hand, section 141 which uses die term " entided " has
been interpreted to be subject to contract to the contrary because of section 1267

XII LOSS OF BAILEE ' S LIEN

Under section 170 the bailee has a particular lien, unless there is a contract to die contrary. The next section gives general
lien to bankers, factors, wharfingers, attorneys and policy brokers. It is established law that the bailee ' s lien is lost if he
had surrendered the possessio68 In Surya Investment Company v. State Trading Corporation oflndi69 the latter took on hire
a storage tank for storing oil against storage charges from the former. The company sought a declaration that it was
entided to certain storage charges and that it had a lien over the oil stored in the tank. Earlier, a special officer had been
appointed to take possession of the contents of the tank and deliver the same to STC or its nominees or allottees. The
court had no difficulty in holding that by reason of the appointment of special officer and by reason of die delivery being
effected by him the possession of the oil bailed is abandoned and thus the lien is lost Thus whether the possession is lost
voluntarily or involuntarily through the process of law, the bailee ' s lien is lost, though not intended by him.

XIII ADVOCATE ' S LIEN

Damodardass Agarwal v. R. Badril70 dealt with the question whether an advocate had lien in respect of the papers (and
files) belonging to his client for the work done by him. In this case, the client wanted change of the advocate and the latter
sought his fee and lien on die papers (and files) until full payment of his fees.

TTie court referred to sections 170 and 171 and pointed out diat under die former section the lien of the bailee was
particular, while under die latter section the lien of the attorney was a general lien. It also referred to section 217 dealing
widi the agent ' sright of retainer out of sums received on principal ' s account. Referring to the history of case law on die
subject and position under section 171 , it observed that " the solicitor ' s lien in High Courts in India is governed
exclusively by law as it existed in English Courts before the passing of the Solicitors Act, 1860. This is not abrogated by
S.171, Contract Act71 The court emphasised that the Contract Act is not a code and it saves usage and custom of trade.
After a thorough discussion, it laid down the following five proposition72

(0 The common lawright of passive and retaining lien available to a solicitor in England is accepted by courts in India as
part of the law of this country. (//) The said common lawright is not abrogated by section 171 , (Hi) Section 171 enacts a
special rule of lien applicable exclusively to attorneys who are also known as solicitors, (iv) The otiier practitioners, who
discharge the functions of solicitors, are entitled to invoke the common lawrights applicable to solicitors though section 171
is inapplicable to them, (v) The practitioner forfeits theright of retaining lien the moment he discharges himself or by his
client for misconduct This is, indeed, an important case on the subject. In view of proposition (iv) above, it is suggested
that either section 171 be suitably amended or an explanation be added thereto to enlarge the meaning of the term "
attorney " .

XIV AGENCY

Sections 182 and 237 deal with agency. These include provisions relating to sub-agency, revocation of autiiority of agent,
liability of principal to agent and third parties and rights and duties of agent to the principal.

SJ\ & C Consultants Pvt. Ltd v. MIs Fiel Trade73decided by the Calcutta High Court, dealt with the liability of the agent to
his principal for his acts and omission. Here die plaintiff-appellant acted as die agent of the consignor to send goods to the
consignee in New York. The consignor gave certain documents to the agent, including purchase order of die consignee in
the preparation of the air way-bill. The air way-bill contained the agent ' s signature but not tiiat of the consignor. Certain
documents, required to be attached with die air way-bill were not attached. This resulted in the delivery of goods to the
consignee without payment Thus die respondent (consignor) suffered loss. The plaintiff claimed " the freight and other
charges already pre-paid " by him. Dismissing the appeal the court held that it was the duty of the appellant to exercise
due skill and reasonable diligence in preparing die air way-bill and the appellant had not done so. Under section 212 the
agent is bound to compensate die principal for the loss caused due to his negligence.

XV MISCELLANEOUS

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If a tender is invited without imposing any pre-qualifications or conditions, every citizen, as of right, is entitled to offer the
tender and has a right to be considere74 Acceptance or rejection of tender by government is subject to scrutiny by High
Courts under article 226 . If the petitioner ' s tender had to be rejected on the groundtiiat the same was informal, in that
event the tender submitted by the respondent suffers from the said infirmity and the same is liable to bd rejecte75 If the
corporation cannot run its vehicle under a permit issued to it, it must surrender it to die regional transport authorities. It
cannot usurp the function of the latter and nominate third persons for running the vehicle by them under an agreement.
Such an agreement is illegal76

Under the Indian law there can be valid mortgage of moveables. Such a mortgage not accompanied by delivery of
possession is still operative save and except against bona fide purchasers witiiout notic77 Sale of agricultural land to a non-
agriculturist under certain circumstances may be forbidden by an enactment The Act may make such transactions as null
and voi78 The term ' fraud* used in clause (c) of section 12 of the Hindu Marriage Act, 1976 cannot be given the same
meaning as defined under section 17 of the Contract Ac79 A document for registration must be presented by a competent
perso80 The principal is liable to pay die agreed commission to die agent on a rendition of the true accoun81

2 AIR 1987 Ker 56.

3 AIR 1987 Cal 92.

4 Reliance was placed on Bhagwandas v. Girdhari Lai, AIR 1986 SC 543. See also Baroda Oil Cakes Traders v. Purushottam, AIR 1954 Bom
491.

5 AIR 1987 Raj 137.

6 AIR 1987 Cal 271.

7 Id. at 274.

8 AIR 1987 SC 2027.

9 AIR 1987 Bom 308.

10 Id. at 309.

11 Id. at 310.

12 AIR 1987 AU 329.

13 AIR 1987 Cal 29.

14 Id. at 38.

15 AIR 1987 Kant 129.

16 Id. at 137.

17 AIR 1970 SC 740.

18 For detailed discussion of this problem see I.C. Saxena, " Law of Contract " , XX ASIL (1984) at 118-21; XXI ASIL (1985) at 189-91.

19 AIR 1987 Ori 30.

20 Id. at 33.

21 ibid.

22 AIR 1987 Kant 173.

23 AIR 1987 Ori 50. The court relied on Kulu Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892 " as regards the scope of s. 65 and
on Mulamchandv. State of Madhya Pradesh, AIR 1968 SC 1218 as regards the scope of s. 70

24 AIR 1987 MP 126.

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25 Id. at 129.

26 Mohori Bibee v. Dhurmodas Ghose, (1903) ILR 30 Cal. 539 which interpreted 8.65 likewise was not cited in support.

27 Supra note 24 at 132.

28 MR 1987P & H 117.

29 AIR 1962 SC 779.

30 Supra note 23.

31 AIR 1979 SC 621.

32 AIR 1987 Kant 236.

33 AIR 1987 All. 309.

34 AIR 1987 Ker 56.

35 Jamal v. Moola Dawood A Sons, AIR 1915 PC 48; PSNS Ambalavana Chethiar A Co v. Express Newspapers Ltd., AIR 1968 SC 741.

36 Hie court did not refer to any of these cases: Mis. Harish Chandra v. Mis Murlidhar, AIR 1962 SC 366; H.C. Mills v. Tata Aircraft, AIR
1970 SC 1986; Maula Bux v. Union ofIndia, AIR 1970 SC 1955 and Fateh Chand v. Balkrishna, AIR 1963 SC 1405. See also M. S. Desai < ft
Co v. Hindustan Petroleum Corpn Ltd, AIR 1987 Guj 19 dealing with the breach of dealership agreement under administrative law
through writ petition under art 226.

37 AIR 1987 Guj 106.

38 Id. at 111-12.

39 See Lucy Carroll, " The Muslim Women (Protection of Rights on Divorce) Act, 1986: A

Retrogressive Precedent of Dubious Constitutionality " , 364, 28 JILI (1986); also see her views on Indian society and women, ibid.

40 AIR 1987 SC 1359. See also Devendra Singh v. State, AIR 1987 All 306; State of UP. v. Tipper Chand, AIR 1980 SC 1522.

41 AIR 1987 SC 1257.

42 AIR 1987 Mad 171.

43 The court relied on Union of India v. Rampur Distillery and Chemical Co Ltd., AIR 1973 SC 1098; see also Maula Bux, supra note 36.

44 AIR 1987 Kant 2.

45 Id. at 5.

46 Margaret Lalita v. Indo Commercial Bank Ltd, AIR 1979 SC 102 was relied on.

47 AIR 1984 NOC 113 Guj.

48 AIR 1987 SC 1078.

49 Id. at 1080.

50 See XXI ASIL (1985) at 198-202, supra note 18 and numerous cases cited in Kudremukh Iron Co. Ltd v. Kerala Rubber Co. Pvt. Ltd., AIR
1987 Kant 139 at 143.

51 Ibid.

52 Id. at 152-53.

53 Id. at 154.

54 AIR 1981 SC 1426.

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55 AIR 1987 Del 188.

56 Id. at 189-90.

57 AIR 1987 Guj 1.

58 Id. at 3.

59 AIR 1987 P & H 90.

60 AIR 1987 PAH 176.

61 Id. at 177. For hypothecation in the form of a floating charge, see State Bank of India v. Mts.Venkateshwara Stores, AIR 1987 Mad 221.

62 See Union ofIndia v. Ct. Shentilana, 1978 Comp. Cas 640; Bank ofIndia, Bombay, supra note 59.

63 Supra note 59 at 179.

64 AIR 1987 Ori 174.

65 Id at 178.

66 Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644; Haridas Mundra v. National and Grindlays Banks Ltd., AIR 1963 Cal 132;
Wangapally Latchiah v. Peddi Laxmiah, AIR 1960 AP 272 were relied on.

67 See supra notes 43-46.

68 See Eduljee v. Cafe John Bros, (1944) ILR Nag. 37. See Pollock and Mulla, Indian Contract A Specific Relief Acts 679 (Kapur J e & , 9th
ed. 1972).

69 AIR 1987 Cal 46.

70 AIR 1987 AP 254.

71 Id. at 263.

72 W. at 264-65.

73 AIR 1987 Cal 201.

74 SM. Quadri v. Spl. Officer Hyderabad Municipal Corpn., AIR 1987 AP 6 at 10.

75 DJ > . Kumar v. State, AIR 1987 Cal 39 at 45.

76 Brij Mohan v. MfSRT. Corpn., AIR 1987 SC 29 at 32.

77 United Bank of India v. New Glencoe Tea Co Ltd., AIR 1987 Cal 143 at 145.

78 KM Jose v. Anantha Bhat, AIR 1987 Kant 173 at 176.

79 Rajender Singh v. Pomiila, AIR 1987 Del 285 at 298.

80 See Sekar Mudaliar v. Shajatti Bi, AIR 1987 Mad 239 at 243.

81 Saroj Kapur v. Mis Nit in Castings Ltd., AIR 1987 Del 349.

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