504: Regulatory Framework of Business

Unit 1-A: Indian Contract Act, 1872

Unit 1-A: Indian Contract Act 1872

Contract: Meaning-
The Indian Contract Act is one of the oldest mercantile laws of our country. It came into effect on
the 1st of September 1872 and is applicable to the whole of India with the exception of Jammu &
Kashmir. Containing a total of 266 sections it is the principal law regulating contracts in India.
Indian Contract Act frames and validates the contracts or agreements between various parties.
Contract Act is one of the central laws that regulate and oversee all the business wherever there is
a case of a deal or an agreement.

Contract Act
The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as
“An agreement enforceable by law”. In other words, we can say that a contract is anything that is
an agreement and enforceable by the law of the land.
This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in
order to understand a contract in the light of The Indian Contract Act, 1872 we need to define and
explain these two pivots in the definition of a contract.
Agreement:
In section 2 (e), the Act defines the term agreement as “every promise and every set of promises,
forming the consideration for each other”.
Promise:
The Act in its section 2(b) defines the term “promise” here as: “when the person to whom the
proposal is made signifies his assent thereto, the proposal becomes an accepted proposal. A
proposal when accepted, becomes a promise”.
In other words, an agreement is an accepted promise, accepted by all the parties involved in the
agreement or affected by it. This definition says that in order to establish or draft a contract, we
need to initiate some steps:

i. The definition requires a person to whom a certain proposal is made.

ii. The person (parties) in step one has to be in a position to fully understand all the aspects of
a proposal.
iii. “signifies his assent thereto” – means that the person in point one accepts or agrees with
the proposal after having fully understood it.
iv. Once the “person” accepts the proposal, the status of the “proposal” changes to “accepted
proposal”.
v. “accepted proposal” becomes a promise. Note that the proposal is not a promise. For the
proposal to become a promise, it has to be an accepted proposal.
To sum up, we can represent the above information below:
Agreement = Offer + Acceptance.
Difference Between Agreement and Contract:

Contract Agreement

A promise or a number of promises that are not

A contract is an agreement that is
contradicting and are accepted by the parties
enforceable by law.
involved is an agreement.

An agreement must be socially acceptable. It

A contract is only legally enforceable.
may or may not be enforceable by the law.

A contract has to create some legal An agreement doesn’t create any legal
obligation. obligations.

All contracts are also agreements. An agreement may or may not be a contract.

Essentials of a Valid Contract

A contract that is not a valid contract will have many problems for the parties involved. For this
reason, we must be fully aware of the various elements of a valid contract. In other words, here
we shall ponder on all the ramifications of the definition of the contract as provided by The Indian
Contract Act, 1872.

The Indian Contract Act, 1872 itself defines and lists the Essentials of a Contract either directly
or through interpretation through various judgments of the Indian judiciary. Section 10 of the
contract enumerates certain points that are essential for valid contracts like Free
consent, Competency Of the parties, Lawful consideration, etc.

1] Two Parties:
A Valid Contract must involve at least two parties identified by the contact. One of these parties
will make the proposal and the other is the party that shall eventually accept it. Both the parties
must have either what is known as a legal existence e.g. companies, schools, organizations, etc.
or must be natural persons. For Example: In the case State of Gujarat vs Ramanlal S & Co. –
A business partnership was dissolved and assets were distributed among the partners as per the
settlement. However, all transactions that fall under a contract are liable for taxation by the office
of the State Sales Tax Officer. However, the court held that this transaction was not a sale because
the parties involved were business partners and thus joint owners. For a sale, we need a buyer
(party one) and a seller (party two) which must be different people.
2] Intent of Legal Obligations
The parties that are subject to a contract must have clear intentions of creating a legal relationship
between them. What this means is those agreements that are not enforceable by the law e.g. social
or domestic agreements between relatives or neighbours are not enforceable in a court of law and
thus any such agreement can’t become a valid contract.
3] Case Specific Contracts
Some contracts have special conditions that if not observed would render them invalid or void.
For example, the Contract of Insurance is not a valid contract unless it is in the written form.
Similarly, in the case of contracts like contracts for immovable properties, registration of contract
is necessary under the law for these to be valid.
4] Certainty of Meaning
Consider this statement “I agree to pay Mr. X a desirable amount for his house at so and so
location”. Is this a valid contract even if all the parties agree to this term? Of course, it can’t be as
“desirable amount” is not well defined and has no certainty of meaning. Thus, we say that a valid
contract must have certainty of Meaning.
5] Possibility of Performance Of an Agreement
Suppose two people decide to get into an agreement where a person A agrees to bring back the
person B’s dead relative back to life. Even when all the parties agree and all other conditions of a
contract are satisfied, this is not valid because bringing someone back from the dead is an
impossible task. Thus the agreement is not possible to be enforced and the contract is not valid.
6] Free Consent
Consent is crucial for an agreement and thus for a valid contract. If two people reach a similar
agreement in the same sense, they are said to consent to the promise. However, for a valid contract,
we must have free consent which means that the two parties must have reached consent without
either of them being influenced, coerced, misrepresented or tricked into it. In other words, we say
 that if the consent of either of the parties is vitiated knowingly or by mistake, the contract between
the parties is no longer valid.
7] Competency Of the Parties
Section 11 of the Indian Contract Act, 1872 is:
“Who are competent to contract — Every person is competent to contract who is (1) of the age of
majority according to the law to which he is subject, and who is (2) of sound mind and is (3) not
disqualified from contracting by any law to which he is subject.”
Let us see these qualifications in detail:
i. refers to the fact that the person must be at least 18 years old or more.
ii. means that the party or the person should be able to fully understand the terms or promises
of the contract at the time of the formulation of the contract.
iii. states that the party should not be disqualified by any other legal ramifications. For
example, if the person is a convict, a foreign sovereign, or an alien enemy, etc., they may
not enter into a contract.
8] Consideration
Quid Pro Quo means ‘something in return’ which means that the parties must accrue in the form
of some profit, rights, interest, etc. or seem to have some form of valuable “consideration”.
For example, if you decide to sell your watch for Rs. 500 to your friend, then your promise to give
the rights to the watch to your friend is a consideration for your friend. Also, your friend’s promise
to pay Rs. 500 is a consideration for you.
9] Lawful Consideration
In Section 23 of the Act, the unlawful considerations are defined as all those which:
i. it is forbidden by law.
ii. is of such a nature that, if permitted, it would defeat the provisions of any law, or is
fraudulent.
iii. involves or implies, injury to the person or property of another

iv. the Court regards it as immoral or opposed to public policy

These conditions will render the agreement illegal.

Solved Example on Valid Contracts

Q: A agrees to help B build his house since they are friends. Is this a contract?
Ans: No this is not a contract. There is intention between A and B to create a legal relation, which
is an essential of a contract. Hence this is not a contract in the eyes of the law.

Types of Contracts:

Law relating to Contracts in India are governed by the Indian Contract Act, 1872(hereinafter
referred to as “Act”). As per the Act, an agreement enforceable by law becomes a contract. It
is evident that only those agreements which have the support of the law and only those contracts
which do not violate any law are to be called contracts. The Act defines illegal contracts also.
Hence in this post, we deal with the different kinds of contracts mentioned in the Act.
Contracts can be broadly classified on the basis of (A) Creation, (B) Validity, (C) Execution,
(D) Liability.
A. Contracts on the basis of Creation

1. Express Contracts

Section 9 of the Act defines promises which are expressly made. If the proposal or acceptance
of any contract/promise is made by the parties in words, it is said to be express.
Example: The contract of sale of a property is made expressly by using clear words written on
a stamped paper.
The express contract need not be a written one.
Example: If A asks B whether he will purchase his pet dog and B accepts it, it can also be
termed express contract. Oral promise and acceptance, if made clearly, constitute a legal
contract expressly made.
Express contracts reduced into writing are easier to prove in law than oral contracts.

2. Implied Contracts

Again, Section 9 of the Act states that any promise or acceptance which is made otherwise than
in words, they are said to be implied contracts. If a contract can be inferred from the conduct
of the parties or circumstances, they are called implied contracts. When the intention of parties
is known by the specific circumstances or their behaviour, a contract can be implied.
Example: If a person boards a bus, the law implies a promise on his part to pay the fare and
also on the part of the bus operator to carry him safely to the required destination. This is
inferred from the conduct of the parties and is accepted by law in the form of implied contract.

The honourable Supreme Court of India, in Haji Mohammed Ishaque wd S.K.Mohammed and
others versus Mohammed Iqbal and Mohammed Ali and Co[1], dealt with the implied contract.
Short facts of the case are given below: Plaintiffs are registered partnership firm. Defendants
are bidi manufacturers. The plaintiffs supplied 630 bags of tobacco to the defendants.
Defendants paid only part of the price. Rest remaining due and the plaintiff filed a case against
them for recovery of balance payment. There was no mention of an express contract in the
plaintiffs’ case. The defendant’s case was that they had no real business with the plaintiffs. The
defendant usually transacted with one Rahim who helped them get the sale from the plaintiffs.
But the railway consignment receipts showed the plaintiff’s name and one of the plaintiff
partner personally went to the defendant’s office and handed over the receipts and received
some payment. Thus the Court observed that there is an implied contract between the parties
as can be inferred from the conduct of the defendants. Even if Rahim played a major role in
the transactions, the defendants accepted the order and consignment receipts and had given
cheques and money to the plaintiffs. They had not even repudiated any claims, letters from the
part of the plaintiff for payment. This shows that they have agreed to have governed by an
implied contract.

3. Quasi-Contracts

Quasi means “that appears to be something but is not really so” and “partly; almost” [2]. Quasi-
contracts are created by law. These are based on the principle that no one shall be allowed to
be rich at the expense of another. The famous English case Fibrosa SA versus Fairbairn Lawson
Combe Barbour Ltd [3] deals with this principle.
The respondent company in England agreed to sell to the Poland company of appellants some
machinery for a certain sum. One-third of the price was paid. Before the deadline for delivery
of machines, a war was declared by Great Britain on Germany. Gdynia in Poland, to where the
machines were agreed to be despatched, was occupied by Germans. The respondents’ company
in England refused to dispatch the goods. The Poland company claimed the amount paid as
advance. When the Court of Appeal ruled in favor of English company, the Poland company
moved House of Lords. It was held that as there was a total failure of consideration, the
appellants are entitled to recover the sum from the English company.

In India, Section 68 to 72 of the Act deals with Quasi Contracts.

4. Tacit Contracts

The term ‘tacit’ means expressed or carried on without words or speech[4]. Tacit contracts are
again such type of contracts which can be inferred from the conduct of parties.

B. Contracts on the basis of Validity

1. Valid Contract

A contract which meets all the requirements prescribed by law is called a valid contract. For a
valid contract, the requirements mentioned in Section 10 of the Act must be satisfied.
Agreements made by the free consent of parties who are competent to contract are called valid
contracts. Apart from that, it must be made for a lawful consideration with a lawful object.
Further, it should not be expressly declared void by the Act.

2. Void Contract

Void contracts are one which is expressly declared to be void under the Act. Agreements shown
below are void as per the Act:
• An agreement made by an unsound person.
• An agreement made by mistake of fact.
• An agreement made with unlawful consideration.
• An agreement made with an unlawful object.
• An agreement made without consideration.
• An agreement in restraint of marriage.
• An agreement restrains trade or profession.
• An agreement which restrains legal proceedings.
• An uncertain agreement.
• Any wagering agreement.
• Any contingent agreement to do or not to do something in case of happening of an
impossible event.
• An agreement to do an impossible act.
3. Voidable Contract

An agreement which is enforceable by law at the option of one or more of the parties to the
contract, but not at the option of other or others is a voidable contract[5]. Thus it means that
such contracts can become void due to its illegality. But if the suffering party chooses to
continue the contract, it is enforceable by law. Such contracts are voidable ones. In Swiss
Timing Limited versus Commonwealth Games 2010 Organising Committee[6], Supreme
Court observed that contracts mentioned in Section 15(coercion), 16(undue influence),
17(fraud), 18(misrepresentation), et cetera of the Act will come within voidable contracts.

Example: A being the father of B asks him to enter into a contract with C which B believes to
be not worthy. Yet B could continue the contract despite the undue influence of his father A.
Thus the contract is voidable at the option of B as he could repudiate the contract and prove
the undue influence of his father.

If A forced B to enter into a contract, B can choose to repudiate it or continue the contract
despite the compulsion from A.

4. Unenforceable Contracts

Unenforceable contracts are such contracts which are not enforceable in law due to some
technical defects. If the law requires a contract to be in writing, an oral contract in its place
cannot be enforced. For instance, Section 54 of the Transfer of Property Act, 1882 mandates
that sale of tangible immovable property of the value of One Hundred Rupees and upwards can
be made only by a registered instrument. Here it is necessary that the sale agreement must be
in writing. If it is not a written agreement, such contract will be unenforceable.

Another example of the unenforceable contract is one of ‘not duly stamped’ instruments.

Some instances of specifically unenforceable contracts are mentioned in Section 14 of the

Specific Relief Act, 1963. For example, a contract for the non-performance of which
compensation in money is an adequate relief cannot be specifically enforced.

5. Illegal Contract

A enters upon a contract with B to kill C. This is an illegal Contract. This is void ab-initio and
not at all enforceable in law. Money spent on such an illegal contract cannot be claimed with
the help of law. In short, a contract which is immoral or opposed to public policy is illegal.

Example: A enters into an agreement with B to produce a specially brewed liquor which is
banned in the State. Consequently, A cannot claim to enforce such contract or ask to repay the
money paid to B.

C. Contracts on the basis of execution

1. Executed Contract

As the name suggests, an executed contract is a fully completed contract which has met all the
requirements of a contract as per law.

Example: A enters into a contract with B who is a videographer to cover a marriage function.
The payment will be made if B delivers the video footage to A after editing. This is a fully
completed contract which is executed.

Similarly, in the case of purchase of a house, the house owner signs a sale agreement with the
buyer and purchase money is paid in full at the time of execution. This is a fully completed
contract and is called an executed contract.
2. Executory Contract
A want to buy an immovable property of B. A gives token advance and enters into an
‘agreement of sale’ with B to purchase the property on or before a specific date. Here full
obligations are not complete as A has not paid the full amount and B has not delivered the title
to A.

3. A mix of above two (Partly executed and Partly executory)

A enters into a home equipment showroom for purchasing a refrigerator. He doesn’t have the
full amount of money to buy the refrigerator. The shop owner asks him to enter into an
agreement by which he could pay a token amount as advance and take home the refrigerator.
It was specifically agreed that the balance amount has to be paid by A in equated monthly
instalments. This is called a partly executed and partly executory agreement or contract. Here,
one party has fulfilled his promise while the party has to fulfill his part of the contract at a
future date. Thus the contract is not fully complete on the date of purchase.
In short, in a partly executed and partly executory contract, full obligations are not complete.

D. On the basis of liability

Contracts can be further classified on the basis of liability.

1. Unilateral Contract

As the name suggests, a unilateral contract is one-sided. Only one person/group or side has
promised to perform. The other part has not really promised to do the act.

Example: A lost his gold chain and he publishes a newspaper advertisement that he will pay a
certain sum to the finder of his gold chain. Here A has promised to do the act. But the other
part is uncertain. This is a unilateral contract.
2. Bilateral Contract

A bilateral contract is a normal contract where both parties are involved by their respective
promises/offer and acceptance.
Difference between void and voidable agreement:

When dealing with contracts, the terms "void" and "voidable" are often confused. Even though
these two contract types seem similar, they are actually completely different.

A contract that is "void" cannot be enforced by either party., The law treats a void contract as if it
had never been formed. A contract will be considered void, for example, when it requires one party
to perform an act that is impossible or illegal.

A "voidable" contract, on the other hand, is a valid contract and can be enforced. Usually, only one
party is bound to the contract terms in a voidable contract. The unbound party is allowed to cancel
the contract, which makes the contract void.

The main difference between the two is that a void contract cannot be performed under the law,
while a voidable contract can still be performed, although the unbound party to the contract can
choose to void it before the other party performs.

What Are Some Examples of Void and Voidable Contracts?

Void contracts are unenforceable by law. Even if one party breaches the agreement, you cannot
recover anything because essentially there was no valid contract. Some examples of void
contracts include:
 • Contracts involving an illegal subject matter such as gambling, prostitution, or
committing a crime.
• Contracts entered into by someone not mentally competent (mental illness or minors).
• Contracts that require performing something impossible or depends on an impossible
event happening.
• Contracts that are against public policy because they are too unfair.
• Contracts that restrain certain activities (right to choose who to marry, restraining legal
proceedings, the right to work for a living, etc.).

Voidable contracts are valid agreements, but one or both of the parties to the contract can void
the contract at any time. As a result, you may not be able to enforce a voidable contract:

• Contracts entered into when one party was a minor. (The law often treats minors as
though they do not have the capacity to enter a contract. As a result, a minor can walk
away from a contract at any time.)
• Contracts where one party was forced or tricked into entering it.
• Contracts entered when one party was incapacitated (drunk, insane, delusional).

What is a Void Agreement?

An agreement, which is not enforceable by law, is void agreement. A void contract should be
distinguished from void agreement.

Differences between Voidable Contract and Void Agreement

The point of distinction between Voidable Contract and Void Agreement are given below.
1. A voidable contract is voidable at the option of one of the parties thereto. But a void
agreement cannot be enforced by any one of the parties thereto.

2. The defect in the case of voidable contract is curable and may be condoned, whereas a void
agreement is void ab initio, and its defects are not curable.

3. A voidable contract does not become void unless the party at whose option it is voidable
repudiates it. But a void agreement is void ab initio.

4. A voidable contract implies a contract, in which the consent of one of the parties to contract
is not free, whereas a void agreement denotes an agreement, which does not fulfill the essentials
of a valid contract.

5. In case of a voidable contract, a person is entitled to compensation for loss or damages

suffered by him on account of the non-performance of contract. But in a void agreement, as it
is unenforceable at law there does not arise any question of compensation due to the non-
performance of the agreement.
Distinguish between ‘Void’ and ‘Illegal’ agreements:

Despite the similarity between an illegal and a void agreement that in either case the agreement

is void ab-initio and cannot be enforced by law, the two differ from each other in the following

respects:

An illegal agreement is narrower in scope than a void agreement. All illegal agreements are

void but all void agreements are not necessarily

illegal. The object or consideration of an agreement may not be contrary to law but may still is

void. For example, an agreement with a minor is void as again him but not illegal. An illegal

agreement is wider in effect in relation to collateral transaction than a void agreement. When

an agreement is illegal, other agreements which are incidental or collate-rial to it are also

become void. On the other hand, when an agreement is void (but not illegal), agreements which

are collate-rial to it are not invalidated

and remain valid.

Chapter 2: Offer and Acceptance-

Offer and Acceptance

An offer is a promise to do or not to do something in sufficiently clear terms that may be accepted
by another. An offer should be distinguished from an invitation to treat and a mere expression of
intention to do or not to do some act. Offers do not necessarily need to be made to one person –
that may be made to the world at large or to specific groups of people. The significance of an offer
is that when it is accepted, the contract is formed. In addition to being accepted, an offer may be
rejected, a counter-offer may be made, the offer may lapse or the offeror may withdraw the offer,
such that it is no longer available to be accepted.

The acceptance of the offeror’s terms must be unconditional. In many cases this may constitute a
‘yes’ or ‘no’ reply to an offer made. There are situations where such a simple exercise may not be
possible and it requires the courts to give direction as to how acceptance may be established. An
offer may be accepted by conduct; silence, however, can never constitute acceptance.[Smith v
Hughes 1871]
An offer is the first step in the formation of a contract, it marks the beginning of contractual
obligation between the parties. As is a known fact that Acceptance can only be made to a prior
offer, an offer is essential for the formation of a contract.

An offer is defined under Section 2(a) of The Indian Contract Act (hereinafter, ICA) 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 words Proposal and Offer can be used interchangeably for Brevity. The person who makes
the promise is called the “Promisor”, and the person to whom the offer is made is called the
“Promisee”. From the definition itself, it can be construed that an offer can be both positive as
well as negative, i.e.- the doing of an act as well as the “not doing” of an act.

Types of Offer

An offer can be of many types, ranging across the spectrum. There are basically 7 kinds of
offers:

• Express offer
• Implied offer
• General offer
• Specific Offer
• Cross Offer
• Counter Offer
• Standing Offer

Express offer and Implied offer

Section 9 of The ICA defines both of them as: In so far as the proposal or acceptance of any
promise is made in words, the promise is said to be express. In so far as such a proposal or
acceptance is made otherwise than in words, the promise is said to be implied.
Therefore, any offer that is made with words, it may be regarded as express. Any promise that
is made otherwise than in words is implied. A bid at an auction is an example of an Implied
offer. A case in this regard is Upton-on-Servern RDC v. Powell, wherein the defendant called
a fire brigade assuming that those services would be free to him, however it was found that his
Farm did not come under that of Upton. The court held that the truth of the matter is that the
Defendant wanted the services of Upton, he asked for the services of Upton and in response to
that they offered their services and they were rendered on an implied promise to pay for them.

In Ramji Dayawala & Sons (p) Ltd v. Invest Import, a case between an Indian and
Yugoslavian party the notice for revocation of an arbitration clause in the contract between the
parties was made by the Indian party, to which the other party gave no reply. It was held that
this would amount to an implied acceptance i.e.- the arbitration clause was deleted from the
contract, and a suit would lie in the court of law. Similarly entering into an omnibus also
amounts to implied acceptance, same as consuming edibles at a self-service restaurant.
Therefore in simpler terms a contract that is entered into because of actions on the offerors part,
may be referred to as an implied offer, any contract entered into otherwise is an express offer.

General Offer

A General Offer is an offer that is made to the world at large. The genesis of a General Offer
came about from the Landmark case of Carlill v. Carbolic Smoke Ball Co. A company by the
name Carbolic Smoke Ball offered through an Advertisement to pay 100 Pounds to anyone
who would contract increasing epidemic Influenza, colds or any disease caused by cold after
taking its Medicine according to the prescribed instructions. It was also added that 1000 Pounds
have been deposited in Alliance bank showing our sincerity in the matter. One customer Mrs
Carlill used the medicine and still contracted Influenza and hence sued the company for the
reward. The Defendants gave the argument that the offer was not made with an intention to
enter into a legally binding agreement, rather was only to Puff the sales of the company.
Moreover, they also contended that an offer needs to be made to a specific person, and here the
offer was not to any specific person and hence they are not obliged to the Plaintiff.

Setting aside the arguments of the Defendant, the bench stated that in cases of such offers i.e-
general offers, there is no need for communication of acceptance, anyone who performs the
conditions of the contract is said to have communicated his/her acceptance, and moreover, the
money deposited by the Defendant in Alliance Bank clearly shows that they intended to create
a legally binding relationship. Hence the Plaintiff was awarded with the amount. An Indian
authority in this regard is Lalman Shukla v. Gauri Dutt, wherein a servant was sent by his
master to trace his missing nephew. In the meanwhile, he also announced a reward for anyone
finding his nephew, this in itself is an example of an offer that is made to the world at large and
hence a General Offer.

Valid acceptance based on fulfillment of condition

This concept has been given statutory authority under section 8 of the ICA:

Performance of the conditions of a proposal, or the acceptance of any consideration for a

reciprocal promise which may be offered with a proposal, is an acceptance of the proposal.

This section was applied by YEARS CJ of Allahabad high court in the case of Har Bhajan Lal
v. Har Charan Lal, wherein the father of a young boy who ran from home issued a pamphlet
for a reward for anyone who would find him. The Plaintiff found him at the railway station and
sent a Telegram to his father. The Court held that the handbill was an offer that was made to
the world at large and anyone who fulfilled the conditions is deemed to have accepted it.
In State of Bihar v. Bengal Chemical and Pharmaceutical Works LTD, the Patna HC held
that where the acceptance consists of an act, e.g- dispatching some goods, the rule that there
shall be no communication of acceptance will come into play.

General offer of continuing nature

When a general offer is of continuing nature, like it was in a carbolic smoke ball case, it can be
accepted by a number of people till it is retracted. However, when a similar offer requires
information regarding a missing thing, it is closed as soon as the first information comes in.

Specific Offer

A Specific offer is an offer that is made to a specific or ascertained person, this type of offer
can only be accepted by the person to whom it is made. This concept was seen briefly in the
case of Boulton v. Jones, wherein the Plaintiff had taken the business of one Brocklehurst, the
defendant used to have business with Brocklehurst and not knowing about the change in
ownership of business, sent him an order for certain goods. The Defendant came to know about
the change only after receiving an invoice, at which point he had already consumed the goods.
The Defendant refused to pay the price, as he had a set off against the original owner, for which
the plaintiff sued him.

The Judges gave a unanimous judgement holding the defendant not liable. Pollock CB held
that the rule of law is clear, if you intend to contract with A, B cannot substitute himself as A
without your consent and to your disadvantage. It was also held that whenever a person makes
a contract with a specific personality, a specific party, so to say, for writing a book, for painting
a picture or for any personal service or if there is any set off due from any party, no one has the
authority to come in and maintain that he is the party contracted with.

Cross Offer

When two parties make an identical offer to each other, in ignorance to each other’s offer, they
are said to make cross offers. Cross offers are not valid offers. For example- if A makes an
offer to sell his car for 7 lakhs to B and B in ignorance of that makes an offer to buy the same
car for 7 Lakhs, they are said to make a cross offer, and there is no acceptance in this case,
hence it cannot be a mutual acceptance.

Basic essentials of a cross offer

1. Same offer to one another- When the offeror makes an offer to the offeree and the
offeree without prior knowledge makes the same offer to the offeror, then both the
object and the party remain the same.
2. Offer must be made in ignorance of each other- The two parties must make their
offer in ignorance of each other.

An important case in this aspect is the English case of Tinn v. Hoffman, the defendant wrote
to the complainant an offer to sell him 800 tons of iron at 69s per ton, at the same time the
complainant also wrote to the defendant an offer to buy the iron at similar terms. The issue in
this case was that, was there any contract between the parties, and would simultaneous offers
be a valid acceptance. The court held that these were cross offers that were made
simultaneously without knowledge of one another and would not bind the parties.
Here it is imperative to deduce that for a valid contract to be formed there needs to be an offer
and acceptance of the same, whereas in a cross offer there is no acceptance, but only
simultaneous offers being and therefore a cross offer will not lead to the formation of a
contract.

Counter offer

When the offeree offers a qualified acceptance of the offer subject to modifications and
variations in terms of the original offer, he is said to have made a counter offer. A counter offer
is a rejection of the original offer. An example of this would be if A offers B a car for 10 Lakhs,
B agrees to buy for 8 Lakhs, this amounts to a counter offer and it would mean a rejection of
the original offer. Later on, if B agrees to buy for 10 Lakhs, A may refuse. Sir Jenkins
CJ in Haji Mohd Haji Jiva v. Spinner, held that any departure from original offer vitiates
acceptance. In other words, an acceptance with a variation is not acceptance, it is simply a
counter proposal which must be accepted by the original offeror, for it to formulate into a
contract.

The Bombay High court gave this decision based upon the landmark judgement of Hyde v.
Wrench, in which an offer to sell a farm for 1000 Pounds was rejected by the Plaintiff, who
offered 950 for it. Subsequently the Plaintiff gave an acceptance to the original offer. Holding
that the Defendant was not bound by a contract, the court said that the Plaintiff accepted the
original offer of buying the farm at the price of 1000 pounds, it would have been a completely
valid contract , however he gave a counter proposal to it, thus rejecting the original offer.

Partial Acceptance

Counter offer also includes within its contours Partial acceptance, meaning that a party to the
contract cannot agree to those conditions of the agreement that favour him and reject the rest,
the acceptance should be of the complete agreement i.e.- all its parts. In Ramanbhai M.
Nilkanth v. Ghashiram Ladliprasad, the plaintiff made an application for certain shares in a
company with the underlying condition that he would be made the cashier in its new branch.
The Company did not comply with this and hence the suit. The court held that the Petitioners
application for shares was condition on him being made the cashier and that he would have
never applied for the shares had there been no such condition.
Acceptance of a counter proposal

In Hargopal v. People’s Bank of Northern India LTD, an application for shares was made on
a conditional undertaking by the bank that the applicant would be made the director of the new
branch. The shares were allotted to him without fulfilling the condition. The applicant did not
say anything and took his dividends, a subsequent suit by him failed as the court held that he
through his conduct had waived the condition. When a counter proposal is accepted the
contract arises in terms of the counter proposal and not in terms of the original contract.

Standing offer

An Offer which remains open for acceptance over a period of time is called a standing offer.
Tenders that are invited for supply of goods is a kind of Standing Offer. In Perclval Ltd. V.
London County Council Asylums and Mental deficiency Committee, the Plaintiff advertised
for tenders for supply of goods. The defendant took the tender in which he had to supply to the
company various special articles for a period of 12 months. In-between this the Defendant
didn’t supply for a particular consignment. The Court held that the Tender was a standing offer
that was to be converted into a series of contracts by the subsequent acts of the company and
that an order prevented pro tanto the possibility of revocation, hence the company succeeded
in an action for breach of contract.

Difference between an offer and Invitation to offer

Although Invitation to Offer is not a type of offer per se, it is imperative to distinguish both to
even construe what an actual offer is. An invitation to offer is an offer to negotiate, an offer to
receive offers, offers to chauffeur. An offer is a final expression of willingness to get into a
contract upon those following terms. The concept of Invitation to offer was explained in the
Privy Council case of Harvey v. Facey, the Plaintiffs in this asked two questions from the
defendant i.e.- Would you sell me your Bumper Hall pen , telegram me the lowest price? , the
Defendant only gave the answer to the latter question , post which he refused to sell. The Court
held that the defendant was not to sell as he had only answered the second question and reserved
the same for his first question. Thus, this clearly shows the distinction between an offer and
invitation to offer.
In Adikanda Biswal v. Bhubaneswar Development Authority, when a development authority
made an announcement for allotment of plots on first come first serve basis on payment of full
consideration. An application against this with full consideration was only considered to be an
offer, as the Development authority only gave an invitation to offer, and the offer can only be
formalized into a contract when it is accepted by the development authority.

Communication of Offer and Acceptance

One of the fundamentals of contract law is that an offer cannot be revoked after the offeror has
communicated it to the offeree. Thereupon, the offer becomes legally binding on the two
parties. So when is the communication complete? Effective communication of the offer and a
clear understanding of it is important to avoid misunderstanding between all the parties.

No difficulty shall arise when the parties are communicating face-to-face. This is primarily
because communication takes place in no time. The offer and its acceptance is communicated
on the spot, creating no confusion. However, in practically, the situation is quite complex. The
communication takes place via letters, emails etc. So, for these cases, timeline of the
communication is important.

Communication of Offer

Section 4 of Indian Contract Act 1872, states that the communication of the offer is complete
only when it comes to the knowledge of the person it has been made to. So when the offeree
(in case of a specific offer) or any member of the public (in case of a general offer) becomes
aware of the offer, the communication of the offer is said to be complete.

Communication of Acceptance

Mode of Acceptance

In the case of communication of acceptance, there are two factors to consider, the mode of
acceptance and then the timing of it. Let us first talk about the mode of acceptance. Acceptance
can be done in two ways, namely

Communication of Acceptance by an Act: This would include communication via words,

whether oral or written. So this will include communication via telephone calls, letters, e-mails,
telegraphs etc.

Communication of Acceptance by Conduct: The offeree can also convey his acceptance of the
offer through some action of his, or by his conduct. So say when you board a bus, you are
accepting to pay the bus fare via your conduct.
Timing of Acceptance

The communication of acceptance has two parts. Let us take a look

As against the Offeror: For the proposer, the communication of the acceptance is complete
when he puts such acceptance in the course of transmission. After this it is out of his hand to
revoke such acceptance, so his communication will be completed then. So, for example, A
accepts the offer of B via a letter. He posts the letter on 10th July and the letter reaches B on
14th For B (the proposer) the communication of the acceptance is completed on 10th July itself.

As against the Acceptor: The communication in case of the acceptor is complete when the
proposer acquires knowledge of such acceptance. So, in the above example, A’s
communication will be complete on 14th July, when B learns of the acceptance.

Revocation of Offer

The Indian Contract Act lays out the rules of revocation of an offer in Section 5. It says the
offer may be revoked anytime before the communication of the acceptance is complete against
the proposer/offeror. Once the acceptance is communicated to the proposer, revocation of the
offer is now not possible.

Revocation of Acceptance

Section 5 also states that acceptance can be revoked until the communication of the acceptance
is completed against the acceptor. No revocation of acceptance can happen after such a date.

The modes of revocation of offer

Section 6 mentions various modes of revocation of offer. A proposal is revoked

a. By the communication of notice of revocation by the proposer to the other party.

b. By the lapse of time described in such proposal for its acceptance or if no time is so
prescribed, by the lapse of a reasonable time, without communication of the acceptance

c. By the failure of the acceptor to fulfil a condition precedent to acceptance.

d. By the death or insanity of the proposer, if the fact of his death or insanity comes to the
knowledge of the acceptor before acceptance.

Illustrations
Illustration 1: -

If A tells B he will fix his roof for five thousand rupees, the communication is complete as
soon as the words are spoken.

Illustration 2: -

A write to B offering to fix his roof for five thousand rupees. He posts the letter on 2nd July.
The letter reaches B on 4th July. So the communication is said to complete on 4th July.

Illustration 3:

A proposes by a letter sent by post to sell his house to B, B accepts the proposal by a letter sent
by post. B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A but not afterwards.

Illustration 4:

Mr. S wants to sell his furniture. He writes about the same and makes an offer to his friend Mr.
K to buy the same. Mr. K has just bought another house for which this furniture would be
useful. So after going through the details he likes the same, writes to Mr. S stating that he has
accepted the offer, and posts it to him. Mr. K’s family is not OK with this second-hand
furniture. Hence, they convince him to refuse Mr. S’s offer. Mr. K then sends in a fax to Mr. S
stating that he has revoked his acceptance. In normal circumstances, a fax works faster than
regular post. If Mr. S receives the fax first then we say that this is considered as proper, legal
Revocation of Acceptance.

Illustration 5: -

A accepts the offer and posts the letter on 10th July. B gets the letter on 14th July. But for B
(the proposer) the acceptance has been communicated on 10th July itself. So revocation of offer
can only happen before the 10th of July. The communication of the acceptance is complete
against A (acceptor) on 14th July. So till that date, A can revoke his/her acceptance, but not
after such a date. So technically between 10th and 14th July, A can decide to revoke the
acceptance.

Frequently Asked Questions

1. Can an acceptor revoke the acceptance after they have mailed the letter of acceptance?

Yes, the acceptor can revoke the offer until the communication of the acceptance is complete
against the said acceptor. Such a communication is complete when the proposer receives the
letter of acceptance. So, in the time frame between posting the letter and the letter being
received by the proposer, the acceptor can revoke the acceptance.

Lapse of an Offer:

An offer once made cannot be continued for ever. Liability of the party making the proposal
cannot be continued for all times to come. An offer becomes invalid i.e. comes to an end in the
following circumstances.

1. When the stipulated or reasonable time has expired: Example: A offers to sell his
modern table to B for Rs. 5000 and tells him that B must communicate his acceptance within
three days. On fourth day B brings Rs.5000 to buy the table. A refuse. A is not bound because
the offer has lapsed on the third day.

2. Where the offer becomes illegal after it is made: Example: X of Mumbai offers to buy
Peanuts from Y of Chennai. Next day Central Government prohibits inter-state transfer of
Peanuts. The offer lapses by subsequent illegality.

3. Where the offeror or offeree dies or becomes insane before the offer is accepted:
Example: A offers to sell his cow to B. Before B could accept the offer, A dies. B cannot
accept the offer.

4. Where the offeree does not accept the offer in the mode the offerer had prescribed:
Example: A writes to B that he wants to sell his furniture to B for Rs.10,000. He also writes
to B that if B wants to buy the furniture, he (B) should send him (A) a telegram accepting the
offer. B writes a letter to A accepting the offer. If A keeps silence over it, this is a valid
acceptance. But if A informs B that he is not treating this letter as acceptance because the offer
has not been accepted by a telegram, then this letter would not result in acceptance.

5. An offer lapses by counter offer by the offeree: Example: A tells B, “I want to buy your
land for Rs. 10,000”. B says, “I shall sell my land for Rs.15,000.” A refuse to buy it for Rs.
15,000. Then B insists that A should buy it for Rs. 10,000. A refuse to do so. A is not bound
by his offer because the statement of B that ‘I shall sell my land for Rs. 15,000’ is not
acceptance of A’s offer but a counter offer. When a counter offer is made the original offer
lapses and there is nothing for the offeree to accept. But an enquiry should not be mistaken for
a counter offer.
6. An offer comes to an end when the offeror revokes his offer before it is accepted.

Tender (standing offer): A tender is an offer made in response to an invitation to offer. The
party inviting tenders may require a definite quantity of goods or services to be supplied, in
that event the person who responds to that invitation is said to have made a definite offer and
would become bound by it if it is accepted.

Consideration:
Consideration is defined under Section 2d of the Indian Contracts Act, 1872. It is defined as
when the promisee at the request to the promisor has:

• Done or abstained from doing something,

• Does or abstains from doing something,
• Promises to do or abstain from something,

Legal requirements as to consideration

• Must move at the desire of the promisor- Section 2d of the Indian Contract Act, 1872,
clearly mentions that the consideration should be at the desire of the promisor if the
consideration is made at the will of the third person or is not according to the promisor
then it is not a good consideration.

• Can move from the promisee or another person- Unlike English law in which the
consideration must move at the desire of the promisor, in Indian law as long as there is
consideration it is immaterial as to who has furnished it. Moreover, in the case
of Chinnaya vs Rammyya the consideration can also move at the desire of the third
party but only in the condition where he is the beneficiary of the contract.

• Can be an act, abstinence or even a promise- If the promisee does something or abstains
from doing something for the promisor, at his desire, then it will be a good
consideration.
• Can be past, present or future:

PAST- When the consideration is given before the promise was made. For example- A saves
B at the latter’s desire. B after a month promises to pay A. the act of A will amount to past
consideration for the payment made by B.

PRESENT- When the consideration is given at simultaneously to the promise made, then this
is present consideration or executed consideration. For example- cash sales.
 FUTURE- When the consideration of the promise made is to be passed at a future date then
that is called future or executory consideration. For example- A promises to pay B, when the
latter will fetch newspaper for him.

• Consideration need not be adequate- It is not necessary that the consideration is equal or
adequate for the promise made. However, it is mandatory that the consideration should be
something in which the law attaches some value. It is for the parties to decide the value of the
consideration and not a court of law. For example- A sells table to B and B gave him rs 500.
It will be difficult for the court to ascertain the value of the table, so if A is satisfied with the
amount given then the consideration is valid.

• Should be real- although the consideration need not be adequate it should be real and not
illusory. The consideration should not be physically impossible, legally not permissible or
based on an uncertain event or condition.

• Should not be something which the promisor is already bound to do- a consideration to do
something which the promisor is already required to do is not a good consideration. For
example- the public duty done by a public servant.
• Should not immoral, or against the public policy of the state- under Section 23 of the Indian
contract it is given that consideration should not be illegal, immoral or against public policy.
the court should decide the legality of the consideration and if found to be illegal than no
action on the agreement should be allowed.

Stranger to a contract

It is a general principle that the contract can be enforced only at the behest of the parties to the
contract. No third party could enforce it. It arises from the contractual relationship between the
two parties. However, Lord Dennings has criticised this rule a number of times as this rule has
never benefited the third party whose roots go deeper in the contract. This rule has two
consequences-

• No third party could enforce the contract.

• The contract between the parties cannot levy an obligation on any person other than
those party to a contract.

Exception:
There are three exceptions to this rule:
• Marriage settlements- When an agreement is made with regards to marriage, family
settlement or partition and is made in such a way that it benefits another person who is not
a party to the contract then he may sue for the enforcement of the contract.
 • Covenants running with the land- in cases of the contract of property the purchaser will
be bound by all the conditions and covenants of the land, even though he was not a party to
the original contract.
• Acknowledgement of estoppels- in case the terms of the contract require that an agreement
has to be made with the third party, then this has to be acknowledged. This
acknowledgement could be expressed or implied. This exception covers the areas where the
promisor either expressly or by conduct has posed himself to be an agent.

According to Section 2(d) of the Indian Contract Act, 1872, the follows features are essential for a
valid consideration:
(i) Consideration must move at the desire of the promisor

Consideration can be offered by the promisee or a third-party only at the request or desire of the
promisor. If an action is initiated at the desire of the third-party, it is not a consideration.

Peter is going back home from work. On his way, he sees that his neighbour John’s house is on fire.
He immediately arranges for a water hose and manages to douse the fire. Peter cannot claim any
reward for his effort because it was a voluntary act and was not done at the desire of John (promisor).
(ii) Consideration may move from the promisee to any other person

If you look at the definition of consideration according to section 2 (d) of the Indian Contract Act.
1872, it explicitly states the phrase ‘promisee or any other person…’ This essentially means that in
India, consideration may move from the promise to any other person. However, it is important to
note that there can be a stranger to consideration but not a stranger to the contract.

Peter gifted his son, Oliver an apartment in the city with a condition that he pays a fixed amount of
money to his uncle, John, every year. On the same day, Oliver executed a deed to pay a fixed amount
of money to John every year. However, Oliver failed to pay and John filed a suit for recovery. Oliver
pleaded that he was not liable since no consideration had moved from John. However, the court held
the words ‘promisee or any other person…’ and allowed John to maintain his suit for recovery.
(iii) It can be in the past, present or future

a. Past

Since consideration is the price of a promise, it is normally given to induce the promise. However, it
can be given before the promise is made by the promisor. This is past consideration. It is important
to note that past consideration is not considered for a new promise since it is not been given in lieu
of the promise. According to Indian law, ‘past considerations’ is ‘good consideration’ if it was given
at the desire of the promisor.

Peter employs John to work on his field during the months of agricultural harvesting. He promises to
pay John an amount of Rs 5,000 for his services when he sows the new crop in the fields. The services
of John in the past constitute a valid consideration.

a.1. Past Voluntary services

At times, a person might render voluntary services without any request or promise from another. If
the person receiving the services makes a subsequent promise to pay for the services, then such a
promise is enforceable in India under Section 25(2) of the Indian Contract Act, 1872 which states:

‘An agreement made without consideration is void, unless it’s a promise to compensate, wholly or in
part, a person who has already voluntarily done something for the promisor, or something which the
promisor was legally compellable to do; or unless.’

Peter finds John’s wallet on the road. He returns it to him and John promises to pay Peter Rs 500 for
his services. This is a valid contract.

b. Present

If the promise and consideration take place simultaneously then it is present or executed
consideration. An example is Peter goes to a shop, buys a bag of chips and pays for the same on-spot.

c. Future

When the consideration for a promise moves after the contract is formed, it is a future or executor. It
is also valid if it depends on the condition.

Peter promises to create architectural plans for John’s new house. John promises to pay Peter an
amount of Rs 50,000 provided the plans are approved by his wife.
(iv) It must have value in the eyes of the law

While the law allows the parties to decide an ‘adequate’ consideration for them, it must be real and
have value in the eyes of law. While the Court will not consider inadequacy, it will look at it to
determine if the consent was given by the party with free-will or not.
Peter’s wife agrees to withdraw the suit she has filed against him in return for his promise to pay her
a monthly maintenance amount. This is a good consideration and holds value in the eyes of law.
(v) It should be over and above the Promisors’ existing obligations

If the promisor is already obligated either by his promise or law to perform or abstain from a certain
act, then it is not a good consideration for a promise.

Peter receives a summons from the Court to appear before it as a witness for John. John promises to
pay him Rs 10,000 to appear in the Court. This contract is not valid because Peter is obligated by law
to appear in the Court on receiving a summons.
(vi) It cannot be Unlawful

A consideration that is against the law or public policies is not valid.

Doctrine of Privity of Contract:

The doctrine of privity of a contract is a common law principle which implies that only parties to
a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is
allowed to confer obligations upon any person who is not a party to contract even though
contract the contract have been entered into for his benefit. The rule of privity is basically
based on the ‘interest theory’ which implies that the only person having an interest in the contract
is entitled as per law to protect his rights.
Essentials of Privity of contract

1. A contract has been entered into between two parties: - The most important essential
is that there has been a contract between 2 or more parties.
2. Parties must be competent and there should be a valid consideration: - Competency
of parties and the existence of consideration are pre-requisites for application of this
doctrine.
3. There has been a breach of contract by one party: - Breach of contract by one Party
is the essential requirement for the application of the doctrine of privity of contract.
4. Only parties to contract can sue each other: - Now after the breach, only Parties to
a contract are entitled to sue against each other for non-performance of contract.

English law vs Indian Law

As a general rule, both Indian and English law are similar to each other that only parties to
contract can sue each other. In a leading English case of Tweddle v. Atkinson, it was held that
the plaintiff cannot sue as he was both a stranger to the contract as well stranger to
consideration. This concept of privity of contract was again analyzed in the case of Dunlop
Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd. In the Indian context also this concept of
privity of contract is similar, the only difference being that in India a person who is
stranger to consideration can sue whereas in England he cannot.

Exceptions to the Doctrine of Privity of contract

As a general rule only parties to contract are entitled to sue each other, but now with the passage
of time exceptions to this general rule have come, allowing even strangers to contract to
prosecute. These exceptions are

1. A beneficiary under a contract: - If a contract has been entered into between 2 persons
for the benefit of a third person not being a party, then in the event of failure by any
party to perform his part, the third party can enforce his right against the others. For eg.
In a contract between Alex and James, beneficial right in respect of some property may
be created in favor of Robin and in that case, Robin can enforce his claim on the basis
of this right. This concept of a beneficiary under a contract has been highlighted in the
case of Muhammad Khan v. Husaini Begum.
2. Conduct, Acknowledgement or Admission:- There can also be situation in which
although there may be no privity of contract between the two parties, but if one of them
by his conduct or acknowledgment recognizes the right of the other, he may be liable
on the basis of law of estoppel ( Narayani Devi v. Tagore Commercial Corporation
Ltd). For eg., If A enters into a contract with B that A will pay Rs 5000 every month to
B during his lifetime and after that to his Son C. A also acknowledges this transaction
in the presence of C. Now if A defaults C can sue to him, although not being directly a
party to contract.
3. Provision for maintenance or marriage under family arrangement: - These types
of provisions is treated as an exception to the doctrine of privity of contract for
protecting the rights of family members who not likely to get a specific share and also
to give maximum effect to the will of the testator. For eg., If A gives his Property in
equal portions to his 3 sons with a condition that after his death all 3 of them will give
Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails
to obey this.

Exceptions to No consideration, no contract Rule:

Consideration is an integral part of a contract. The rules of consideration state that it is essential to
have consideration for a contract. But there are some specific exceptions to the “No consideration
no contract” rule.
Consideration
Can you make a legal agreement without consideration? No. As per Section 10 and Section 25 of
the Indian Contract Act, 1872, consideration is essential in a valid contract. In simple words, no
consideration no contract. Hence, you can enforce a contract only if there is a consideration.
While considerations are integral to a contract, the Indian Contract Act, 1872 has listed
some exceptions whereby an agreement made without consideration will not be void.

Exceptions to the ‘No Consideration No Contract’ Rule

Section 25 also lists the exceptions under which the rule of no consideration no contract does not
hold, as follows:
Natural Love and Affection
If an agreement is in writing and registered between two parties in close relation (like blood
relatives or spouse), based on natural love and affection, then such an agreement is enforceable
even without consideration.
Example, Peter and John are brothers. In his will, their father nominates Peter as the sole owner
of his entire property after his death. John files a case against Peter to claim his right to the
property but loses the case. Peter and John come to a mutual decision where Peter agrees to give
half of the property to his brother and register a document regarding the same.
Eventually, Peter didn’t fulfil his promise and John filed a suit for recovery of his share in the
property. The Court held that since the agreement was made based on natural love and affection,
the no consideration no contract rule didn’t apply and John had the right to recover his share.
Past Voluntary Services
If a person has done a voluntary service in the past and the beneficiary promises to pay at a later
date, then the contract is binding provided:
• The service was rendered voluntarily in the past
• It was rendered to the promisor
• The promisor was in existence when the voluntary service was done (especially important
when the promisor is an organization)
• The promisor showed his willingness to compensate the voluntary service
Example, Peter finds Johns wallet on the road and returns it to him. John is happy to find his lost
wallet and promises to pay Peter Rs 2,000. In this case, too, the no consideration no contract rule
does not apply. This contract is a valid contract.
Promise to pay a Time-Barred Debt
If a person makes a promise in writing signed by him or his authorized agent about paying a time-
barred debt, then it is valid despite there being no consideration. The promise can be made to pay
the debt wholly or in part.
Example, Peter owes Rs 100,000 to John. He had borrowed the money 5 years ago. However, he
never paid a single rupee back. He signs a written promise to pay Rs 50,000 to John as a final
settlement of the loan. In this case, ‘the no consideration no contract’ rule does not apply either.
This is a valid contract.
Creation of an Agency
According to section 185 of the Indian Contract Act, 1872, no consideration is necessary to create
an agency.
Gifts
The rule of no consideration no contract does not apply to gifts. Explanation (1) to Section 25 of
the Indian Contract Act, 1872 states that the rule of an agreement without consideration being
void does not apply to gifts made by a donor and accepted by a donee.
Bailment
Section 148 of the Indian Contract Act, 1872, defines bailment as the delivery of goods from one
person to another for some purpose. This delivery is made upon a contract that post
accomplishment of the purpose, the goods will either be returned or disposed of, according to the
directions of the person delivering them. No consideration is required to effect a contract of
bailment.
Charity
If a person undertakes a liability on the promise of another to contribute to charity, then the
contract is valid. In this case, the no consideration no contract rule does not apply.
Example, Peter is the trustee of his town’s charity organization. He wants to build a small pond
in the town to enhance greenery and offer the residents a good place to walk around in the
evenings. He raises a charity fund where he appeals to people to come ahead and contribute to
the cause. Many people come forward as subscribers the fund and agree to pay Peter their share
of the amount once he enters into a contract for constructing the pond.After raising half the
amount, Peter hires contractors for building the pond. However, 10 people back out at the last
moment. Peter files a suit against them for recovery. The Court ordered the 10 people to pay the
amount to Peter since he had undertaken a liability based on their promise to pay. Even though
there was no consideration, the contract was valid and enforceable by law.
Capacity of Parties: Chapter 4

Codification of the performance and requisites of contract isn’t a new concept- we can trace it
roots right to the Ancient Era, where the notion of marriage in the monotheistic religions of
Judaism, Christianity and finally Islam. More assertively, scholars such as Locke credited the
formation and evolution of Modern State to “Social Contract” entered into by people and one
single leader long ago. And with the advent of the Industrial Revolution, the focus shifted to
economical growth and development, implying the growing importance of commercial
contracts – they stood records mandating parties to a contract to complete their respective
obligations and punishing the non-compliers, either with a stipulated compensation or the one’s
directed by the Court of Law. This European Phenomena was introduced to India by the British
through the medium of Indian Contract Act, 1872, which primarily defines the necessary
provisions concerning a contract, besides stating the very dos and donts for establishing a valid
contract. Accordingly, when a valid proposal is accepted by a person, a promise arises;
accompanied by a set of consideration, it becomes an agreement and if enforceable, becomes
a valid contract[1]. Furthermore, it describes the obligations of parties to a contract[2] and
mandates the performance of decided provisions within a reasonable period of time[3].
However this Act imposes several restrictions upon those willing to enter into a contract and
reap its fruits, thereby upholding its sanctity with respect to public policy. For instance, it
prohibits the ratification of any contract which is induced through coercion, undue influence,
fraud, misrepresentation, influence and mistake[4]. Likewise, any agreement causing restrain
in marriage, trade and legal proceedings cannot be classified as a contract[5]. But the very crux
of any contract is the nature and the status of the parties entering one- this Act determines the
competency of people to any contract, which has been refined and upheld on several occasions
by the Honorable Indian Judiciary- duly elucidated below:

Competency of Parties to a Contract:

Interestingly, while the Vedic Hindu Law proscribed dependents, minors, Sanyasis, addict to
vices from entering the contract, Muslim women were barred from forming one under the
Islamic Law. Nevertheless, the flexible and broad-minded English Law, after taking into
account the nature of the Indian Society prohibits the following parties from entering a valid
contract:

1. A Minor:

Through the columns of Indian Majority Act, 1875 those below the age of 18 are deemed as
Minors-for those having a guardian appointed to cater their needs, the age of minority extends
to 21[6]. Undoubtedly, the Law assumes that minors are not capable enough to take such crucial
decisions involving casting a vote to decide the country’s government, or indulge into a
consented sexual activity and with respect to the topic at hand, entering a contract. It believes
that the righteous physical and mental growth of any person is complete, only when he or she
18 and applying the same logic, the Act clearly exempt them from entering a contract
individually and declares it void ab initio, as confirmed in a landmark case, Mohiri Bibi V.
Dharmodas Ghosh[7]. A careful read of this judgment reveals that any money advanced to a
minor while the contract with him/her is due, cannot be recovered, since directing the same
would directly amount to the act of enforcing an invalid contract, which would then, be
ambiguous. This would imply that the minors can take undue advantage of such inclination and
by faking his majority, fool people and make money. Eliminating this possibility, the
Honorable High Court of Lahore[8] averred that “an infant though not liable under the
contract, may in equity, be required to return the benefit he has received by making a false
representations as to his age.”[9]

Nonetheless, the Indian Judiciary continues to render its support to minors and permits them to
be beneficiaries to a valid contract[10]. Most importantly, no contract entered into by a person
in his minority can be ratified once he turns major, primarily because the contract made back
then was void and requesting the same would imply the enforcement of an invalid act, which
is unjustified[11]. Lack of knowledge is the primary factor why minors are incapable of directly
entering a contract.

2. Person of Unsound Mind:

“An adult who from infirmity of mind is incapable of managing himself or his affairs”[12], is
deemed as a person of unsound mind. Undoubtedly, an insane, idiot or a lunatic would be
mentally incapable to understand and digest the terms of a contract and attest it further. If not
regulated, opportunists might take undue advantage and satisfy their personal interest at the
expense of these people. Therefore, Section11 of Indian Contract Act, 1872 undertakes the
responsibility to prohibiting unsound minded people from ratifying contract. Nevertheless, the
Indian Courts are loaded with several cases involving insane mortals as parties to a contract
and therefore, imposes responsibility upon the Court to test its validity. This draws our attention
to the state of mind of the person while he/she was in the process of ratifying the contract[13].
And a thorough read of Section 12 reveals that while a person of sound mind, who occasionally
goes unsound may enter a contract, those who are occasionally sound are prohibited from being
a party to one. In essence, it conveys that a person can enter into a contract only if he is able to
understand its terms and conditions and make a rational judgment before assenting to the
same[14]-absence of these elements renders this contract void. Naturally, a contract entered
into by an imbecile person continues to be void, though one entered into by a drunken person
is voidable and may be ratified one’s he/she is sober[15]. Inability to understand the ways of
world seems the very crux for preventing them from entering a contract.

3. Disqualified by Law:

The scope of those disqualified is wide, namely including:

1. Alien Enemy:

“An alien who is the subject or citizen of some hostile state or power”[16], is deemed as an
alien enemy. And through the columns of Indian Constitution and Citizenship Act, the citizens
of the sovereign Indiare naturally under an obligation to devote complete affection and
dedication (which is acknowledged as patriotism) to the country. Acting against its interest
amounts to treason and the offender can be subjected to serious punishment by law.
Accordingly, the Indian Contract law prevents its citizens to form a contract with an alien
enemy, thereby safeguarding national interest. Undoubtedly, forming contract with alien
friends is justified, but once the relations sour and war breaks out, then, such a contract too,
becomes void.

2. Convict:

Once held guilty of any crime/violation by a competent Court of Law the convict cease to lose
many of his/her rights, one of them rightly being the right to ratify a contract. The question of
revival of their rights does not arise in case of a death penalty, but may enjoy this privilege,
once the term of imprisonment is over.

3. Corporations:

“An artificial person or legal entity created by or under the authority of the laws of a state or
nation, composed, in some rare instances, of a single person and his successors, being the
incumbents of a particular oltice, but ordinarily consisting of an association of numerous
individuals, who subsist as a body politic under a special denomination, which is regarded In
law as having a personality and existence distinct from that of its several members, and which
is, by the same authority, vested with the capacity of continuous succession, irrespective of
changes in its membership, either in perpetuity or for a limited term of years, and of acting as
a unit or single individual in matters relating to the common purpose of the association, within
the scope of the powers and authorities conferred upon such bodies by law.”[17]

In simple words, its artificial existence prohibits it from entering a contract. Nonetheless, the
contractual capacity of a company is determined by an “Object Clause” of its Memorandum of
Association.

4. Insolvent:

“One who has not means or property sufficient to pay his debts” is described as an insolvent
person. Once it is brought to the notice of the Court of Law that a person has more debts than
assets, then, it is bound to declare him insolvent. Obviously, the lack of security puts him in a
state, where he/she needs to depend upon some other person even for basic necessities of life-
indirectly, the Indian Contract Act, 1872eliminates insolvent person from entering a contract.

Including Foreign Diplomats and Sovereigns within its ambit, the aforesaid people are
disqualified from entering a contract within the meaning of Indian Contract Law, thereby
placing the interest of the State above everything and everyone.

Legal requirements for a person entering into a contract

Sec.11 of the Indian Contract Act, 1872 lists down the qualifications which enable a person in
India to enter into contracts-
 • A person should have attained the age of majority as per the law of the country of
which he is a citizen.
In India, the age of majority is governed by the Indian Majority Act, 1875. As per Sec. 3 of the
Indian Majority Act, 1875, an Indian citizen is said to have attained the age of majority upon
completion of eighteen years of age. In the USA (the majority of the states) and the UK, the
age of majority is 18 years as well.
However, if a person is below the age of 18 years and a guardian has been appointed for him,
he shall attain majority at the age of 21 years.
• A person should be of sound mind at the time of entering into a contract.
As per Sec. 12 of the Act, a person can be said to be of sound mind when he can assess,
understand his actions and realize the consequences of obligations imposed on him at the time
of entering into a contract.
• A person should not be disqualified under any law to which he is subject.
Disqualifications for entering into a contract
As per the Indian Contract Act, 1872 all persons who do not meet the criteria as per Sec. 11 of
the act are incompetent to contract. Hence, we can deduce that the following category of
persons do not possess the legal capacity to enter into a contract-
Minor
In India, a minor is an Indian citizen who has not completed the age of eighteen years. A minor
is incapable of understanding the nature of the liabilities arising out of an agreement. Hence a
contract with a minor is void ab initio (void from the beginning) and cannot be enforced in a
court of law. The result is that a party cannot compel the minor to perform his part of
obligations as enumerated in the agreement (plead specific performance of an agreement/rule
against estoppel).
Mohori Bibee vs. Dharmodas Ghose
1. The respondent, Dharmodas Ghose, a minor, had mortgaged his property in favor
of the moneylender, Brahmo Dutt for securing a loan amounting to INR 20,000/-.
2. Mr. Brahmo Dutt had authorized Kedar Nath to enter into the transaction through a
power of attorney. Mr. Kedar Nath was informed of the fact that Dharmodas Ghose
was a minor through a letter sent by his mother.
3. However, the deed of mortgage contained a declaration that Dharmodas Ghose was
of the age of majority.
4. The respondent’s mother brought a suit on the ground that the mortgage executed
by his son is void on the ground that her son is a minor.
5. The relief sought by the respondent was granted and an appeal was preferred by the
executors of Brahmo Dutt before the Calcutta high court. The same was dismissed.
6. An appeal was then made to the Privy council. The Privy council held that-
a. A contract with a minor is void-ab-initio.
b. Sec.7 of the Transfer of Property Act, 1882 states that a person competent
to contract is competent to transfer a property.
c. Hence, the mortgage executed by the respondent is void.
However, if a minor enters into a contract and performs his part of obligations, the other party
can be compelled to perform and fulfill its obligations, and, in such instances, the contract
becomes legally enforceable.
A.T Raghava Chariar vs. O.A. Srinivasa Raghava Chariar
1. A minor entered into a contract for mortgage with a person of the age of majority.
2. The minor extended the monetary amount and performed his part of the obligations.
3. The other party refused to honor the agreement.
4. The full bench of the Madras High court had to decide “whether a mortgage
executed in favour of a minor who has advanced the whole of the mortgage money
is enforceable by him or by any other person on his behalf.”
5. The court ruled that-
a. The agreement sought to be enforced is the promise of the mortgagor who
is of full age to repay the money advanced to by the mortgagee.
b. The mortgagee (the minor) has already advanced the money which was
the consideration for the promise of the mortgagor and performed his part
of the obligations. There is nothing pending from his side.
c. Hence, the contract is enforceable.
Additionally, a minor cannot enter into a contract and provide his consent when he attains
majority. This is because a minor’s agreement is void from the beginning. A void agreement
cannot be made legally valid by ratification.

Suraj Narain Dube vs. Sukhu Ahir

1. Suraj Narain lent money to Sukhu Ahir who was a minor. The minor executed a
promissory note against the money borrowed.
2. After four years, when the minor attained majority, he and his mother executed a
second promissory note in favour of Suraj Narain in respect of the original loan plus
the interest accumulated over the years.
3. The court held-
1. The first agreement entered into by the parties is void as a minor is
incompetent to contract. The minor had no liability to pay under this
agreement. However, the minor made a promise and provided the
promissory note, amounting to consideration.
2. A minor has no power to ratify the contracts entered into by him upon
attaining the age of majority.
3. In the second agreement executed by the parties, there was no
consideration from the Plaintiff. The original advance was no
consideration for a second agreement. The second agreement is void due
to want of consideration.
In certain instances, a contract entered into by the minor or by the minor’s guardian for his
benefit is valid in the eyes of law-
1. A contract for marriage entered into by a minor/his guardian.
2. A partnership contract entered into with a minor admitting him to the benefits of a
partnership. However, the minor cannot be held personally liable for the losses
incurred.
3. A contract relating to the minor’s property entered into by his guardian if it is for
the benefit of the minor.
4. A contract of apprenticeship with a minor.
 5. A contract supplying the minors with goods and services necessary for life.
Websites such as YouTube expressly mention in their terms and conditions that any minor
while using its services represents that he has the permission of his parent/ guardian to do so.
Parents and guardians are held liable for the child’s activity on such websites.

Person of unsound mind

• Idiots- An idiot, in medical terms, is a condition of mental retardation where a person
has a mental age of less than a 3-year-old child. Hence, idiots are incapable of
understanding the nature of the contract and it will be void since the very beginning.
• Lunatic- A person who is of sound mind for certain duration of time and unsound
for the remaining duration is known as a lunatic. When a lunatic enters into a
contract while he is of sound mind, i.e. capable of understanding the nature of the
contract, it is a valid contract. Otherwise, it is void.
Illustration- A enters into a contract with B for sale of goods when he is of sound mind. A later
becomes of unsound mind. The contract is valid.
• People under the influence of the drug- A contract signed under the influence of
alcohol/drug may or may not be valid. If a person is so drunk at the time of entering
into a contract so that he is not in a position to understand the nature and
consequences, the contract is void. However, if he is capable of understanding the
nature of the contract, it will be enforceable.
Illustration- A enters into a contract with B under the influence of alcohol. The burden of proof
is on A to show that he was incapable of understanding the consequence at the time of entering
the contract and B was aware of his condition.
Persons disqualified by law
• Alien enemy- An alien enemy is the citizen of a country India is at war with. Any
contracts made during the war period with an alien enemy are void. An Indian
citizen residing in an alien enemy’s territory shall be treated as an alien enemy under
the contract law. Contracts made before the war period either gets dissolved if they
are against public policy or remain suspended and are revived after the war is over,
provided they are not barred by limitation.
Illustration- A, of country X, orders goods from B, of country Y. The goods are shipped and
before they could reach Y, country X declares a war with country Y. The contract between A
and B becomes void.
• Convicts- A convict cannot enter into a contract while he is serving his sentence.
However, he regains his capacity to enter into a contract upon completion of his
sentence.
Illustration- A, is serving his sentence in jail. Any contract signed by him during this period is
void.
• Insolvent- An insolvent is a person who is declared bankrupt/ against whom
insolvency proceedings have been filed in court/resolution professional takes
possession of his assets. Since the person does not have any power over his assets,
he cannot enter into contracts concerning the property.
Illustration- A enters into a contract for sale of goods with B. Before the sale takes place, an
insolvency suit is filed against A. A sell the goods to B during pendency of insolvency
proceedings. The contract is valid.
• Foreign sovereign- Diplomats and ambassadors of foreign countries enjoy
contractual immunity in India. One cannot sue them in Indian courts unless they
submit themselves to the jurisdiction of Indian courts. Additionally, sanction from
the central government is also required in such cases. However, the foreign
sovereign has the authority to enforce contracts against the third person in Indian
courts.
• Body corporate- A company is an artificial person. The capacity of a company to
enter into a contract is determined by its memorandum and articles of association.
Competency of Parties to enter into an e-contract
A party can enter into an e-contract if it satisfies the legal requirements as per Sec. 11 and Sec.
12 of the Indian Contract Act, 1872.
Competency to contract on behalf of another
As per the Indian Contract Act, 1872 a person can employ another who shall enter into contracts
with the third person on his behalf. The person in this instance is known as the principal and
the other person so employed is known as the agent.
Any person may be employed as an agent. However, a minor or a person of unsound mind
cannot be held liable for their acts to the principal.
An agent’s authority may be either-
1. express, i.e. by word of mouth or documented in writing as in Power of Attorney
2. Implied, i.e. it might be deduced from the facts and circumstances of the case
Companies ensure competency of each other while entering into a contract
Most companies while entering into contracts with one another want to make sure that the other
party is competent enough to enter into a contract. This is required to avoid any legal
complications in the future. This is mostly done through the inclusion of a representation clause
in a contract stating that the company, as per its memorandum and articles of association, is
capable of entering into a contract through its authorized representatives.
A copy of the articles of association may be annexed by both parties to confirm the
representations made.
If the memorandum and articles provide otherwise, a condition precedent clause is incorporated
into the agreement stating that the company shall pass necessary board resolutions to alter its
articles of association. A stipulated date called a long stop date is given to the other party to
comply with the conditions precedent failing which the agreement shall stand terminated.
A party might be asked to produce a copy of board resolution so passed/ changes made in the
articles of association to the other party to prove its compliance with the condition precedent.
It is expressly mentioned in the agreement that both the parties indemnify each other from any
suits, proceedings, or liabilities arising from breach of the representation clause.
Conclusion
Competency of parties to contract is one of the most important requirements to make an
agreement valid and enforceable in a court of law.
A contract made by a person who does not possess the mental capacity to understand the nature
and consequences of the contract is void ab initio. On the other hand, contracts with lunatics,
people under the influence of the drug may/may not be void depending upon the circumstances
surrounding the situation.
A person regains the legal capacity to contract upon removal of any of the disqualifications.
Companies while entering into contracts with one another always try to safeguard their
interests. Representation and indemnification are the most commonly used clauses to ensure
that both the parties are competent to contract.

Chapter 5: Free Consent

Consent exist when one person voluntarily acknowledge to the proposal or desire of another
person. Consent is employed in several field like law, medicine, research and relationship. Free
consent means a consent giving to an individual for the performance of an act on his own will.
Here we see the consent and free consent under Law of Contract Act.

Definition Under Contract

The Law of Contract Act 1872 is a law following in India from British rule. It divided into two
parts, they are general principle of Contract from sec 1 to 75 and special kinds of contract from
sec 124 to 238.

As by this Law of Contract all agreements are contracts if they are made by:

• free consent of parties,

• competent to contract,
• lawful consideration,
• with lawful object, and
• Thereby not expressly declared void.

As by above free consent is essential element for valid contract. Here as by section 13 consent
means, when two or more persons are agree upon the same thing within the same sense.

As per section 14 free consent is a consent which is not caused by:

1. Coercion defined in sec – 15 or

2. Undue influence sec – 16 or
3. Fraud under sec- 17 or
4. Misrepresentation sec – 18 or
5. Mistake under sec – 20, 21 and 22.

Void And Voidable Contract

Contract is not valid in the absence of free consent or genuine consent as noted to English Law.
Consent is not said to be free if it is caused by coercion, Undue influence, fraud,
misrepresentation and mistake. The contract render voidable if there is error in cause or the
inducing cause. Mistake is vitiating factor, it is by error in consensus and prevent the meeting
of mind needed for concluding a contract, It render a contract void.
Thus, in case of a mistake the contract is void but in other cases like coercion, Undue influence,
fraud and misrepresentation the contract is only voidable under section 19, 19A, consent was
not free at the option of party.

Coercion Under Sec–15

Coercion is aimed against any person by:

• committing or threatening to commit any act which forbidden by Indian Penal Code
1860.
• Unlawful detaining or threatening to detain any property to the bias of any person.
• The intention of causing any person enter into an agreement.

Consent acquired by such an act amounts to coercion under Indian Contract Act and it is
voidable in nature.

In Ammiraju v. Seshamma the court held that coercion may aim against any person, stranger
and also against a good for example unlawful detention.

Undue Influence
As per section 16 undue influence means a person dominant the will of the other by using the
position to acquire an unfair advantage over the other.

There are certain relationship in which one party is in position to dominate the will of other
party. Such relationship holding a real or apparent authority over the other or standing in a
fiduciary relation to the other and makes a contract with a person whose mental capacity is
temporarily or permanently strained by the reason of age, illness or bodily distress.

Burden of prove the undue influence in the contract of fiduciary relationship is lies on the
dominant party. If the transaction is due to unconscionable the dominant party have to prove
that there is no undue influence. In case of pardanashin women the burden of prove lies on the
person who benefits from such transaction and a full disclosure about the transaction to that
women. For other transaction weaker party prove the influence. This provision can not affect
the provisions of Section 111 of Indian Evidence Act, 1872. Thus a consent by Undue influence
is voidable.

Fraud Sec - 17
The term fraud means a representation of fact willfully to make another person to cheat. As by
the section 17 fraud mean any act committed by party of Contract, abetting, by agent with
intention to deceive another person or his agent or induce him to enter into a contract.

This section is based on Taylor v. Ashton case, in which the court observed that, the defendant
not necessary to show that he knew the fact to be untrue, statement of untrue fact for the
fraudulent purpose consider as a legal and moral fraud.
Essential ingredients of fraud are as follow:

• representation or assertion relating to fact,

• it made with the knowledge that it is false or without belief in its true.
• made other party to act upon his claim
• the person acting is to made loss or damage.

The conduct of representation of fraud must be deliberately dishonest. Active concealment of

fact with the knowledge or belief of the fact is also amounts to fraud. There are certain
exceptions to the general rule “silence not amounts to representation and not amount to fraud”
are Insurance Contracts, Family Settlement, contract for allotment of shares in company,
parents and child, guardian and wards, which are required disclosure and good faith.

Misrepresentation
Simply said misrepresentation is a false representation made innocently without any intention
to deceive other person. It is a false statement made by a person, believe it to be true. As per
section 18 of Contract Act, 1872 Misrepresentation means a positive claim, not guaranteed by
the information of the person who creates it, is not true, be true even if he believes. Consent
obtained by misrepresentation is voidable.

Misrepresentation is two kinds they are:

1. Innocent misrepresentation, in which the assertion is false but the person making it
believes it is true and not know it is false so, damages cannot claimed but the contract
can be rescued.

2. Negligence or fraudulent misrepresentation, in which breach of duty, negligence of a

party make loss to opposite party. it was held in the case Esso Petroleum co. Ltd v.
Mardon that it is actionable and damages are claimed by affected party.

Mistake A Void Contract

As Per section 20 agreement entered by the parties of Contract under mistake of fact, such
agreement is void. When both the parties to the contract are under a mistake of fact on essential,
subject matter, identity, price or any other essential matters of the agreement, no contract arises.
Consent acquired by a mistake is void.

There are two kinds of mistake:

a. Common Mistake, both the parties make the same mistake. Each party know the
intention of the other and accept it, thus the doctrine of common mistake render a
contract void.
 b. Mutual Mistake is a misunderstanding between each other and are at cross-purposes.
Mistake of parties falls going to the root of Contract and essential to an agreement, the
agreement is void and unenforceable.

Conclusion
Consent implicit a meeting of mind. If there is no consent and there is no meeting of mind. If
consent obtained without free of mind here the consent under some influence so free consent
is essential ingredients in contract.
In the Indian Contract Act, the definition of consent is given in Section 14, which states that
“it is when two or more persons agree upon the same thing and in the same sense”.

Example
‘A’ agrees to sell his house to ‘B’. ‘A’ owns three houses and wants to sell his house in Haridwar.
‘B’ thinks he is buying his Delhi house. Here ‘A’ and ‘B’ have not agreed upon the same thing in
the same sense. Therefore, there is no consent and no contract afterwards.
In the case of Raffles v. Wichelhaus, two parties, ‘A’ and ‘B’, entered into a contract for the sale
of 125 cotton bales by a ship named “peerless” from Bombay. There were two ships with the same
name, and while Party ‘A’ was thinking of one ship, Party ‘B’ was thinking of the other ship. The
court held that there was no meeting of minds by both parties. Hence the contract was invalid.
Vitiating factors and their effect
1. Coercion (Section 15)
Section 15 of the Indian Contract Act,1872 states that coercion is committing or threatening to
commit, any act is forbidden by the Indian Penal Code (45 of 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.
Coercion means forcing an individual to enter into a contract. When intimidation or threats are used
under pressure to gain the party’s consent, i.e. it is not free consent.
Coercion may involve the actual infliction of physical and psychological harm in order to enhance
the credibility of a threat. Then the threat of further harm can lead to the threatened person’s
cooperation or obedience.
Example
‘A’ went out for a walk, ‘B’ approaches ‘A’ with a stranger, pulls out his gun and asks ‘A’ to give
all his possessions. The consent of ‘A’ is obtained by coercion here.
Effect
Coercion has the effect of making the contract voidable. It implies that at the discretion of the party
whose consent was not free, the contract is voidable. The aggravated party will, therefore,
determine whether to enforce the contract or to cancel the contract.
Techniques for causing coercion
• Threatening to commit any act which is prohibited by the Indian penal Code.
• Detaining not as per law or even threatening to detain any property, with the sole
intention of compelling a person to enter into a contract.
Acts forbidden by IPC
The word act prohibited by the Indian penal code makes it necessary in a civil action for the court
to decide whether the alleged act of coercion is amount to an offence. A threat of bringing a false
charm with the object of making another do a thing amount to blackmail or coercion. In the case
of Ranganayakamma v Alwar Sett, where the widow was prohibited from removing the corpse of
her husband until she consented for the adoption. The court said that her consent was not free and
it was coerced. It is clear that coercion is committing or threatening to commit any act which is
contrary to law.
Unlawful Detention of property
Consent can be said to be caused by coercion if it is induced because of illegal confining of a
property, or a danger to do as such. With a specific goal of acknowledging the child’s due fine, the
legislature annexed the property both of him and his father having a place, the instalment made by
the father at that stage bearing in mind the ultimate goal of saving the property from being sold was
kept to be made under coercion. Refusal by the government to discharge a temporary worker’s
instalment unless he surrenders his demand for additional rates adds up to intimidation under the
land detention class.
Burden of proof
The burden of proof lies with the party defending the coercion. The burden of proof is heavier on
him. This is because pure probability or fear is not a threat. In order to create coercion, a person
must show that there was a risk that was prohibited by law and that forced him to enter into a
contract that he would not otherwise have.
Difference between Coercion and Duress
The term ‘duress’ corresponds to coercion in English law. However, Coercion under the Indian
Contract law has a wider amplitude than duress under the English law.
Coercion Duress
Duress can be employed only against the life or liability
Coercion can be employed against any
of the other party to the contract or members of his
person
family.
Immediate violence subsequent to
Duress must cause immediate violence.
coercion is not an essential element.
Unlawful detention of goods is a kind of
Unlawful detention is not duress under the English Law.
coercion.
2. Undue Influence (Section 16)
According to Section 16 of the Indian Contract Act, 1872 an influence will be considered as Undue
Influence when:
• One party to the contract is in a position of trust and controls the other party wrongfully.
• Such a person uses his dominant position to gain an unfair advantage over the other.
There are two key elements of undue influence-
1. The relationship- trust, confidence, authority.
2. Unfair persuasion- careful examination of the terms of the contract.
Where one party is in a fiduciary relation to the other party
Fiduciary relationship means a relationship of trust and confidence. When a person imposes faith
and confidence on the other, he expects not to be betrayed. If the other party betrays the confidence
and trust reposed in him and gains an undue influence.
Examples of fiduciary relationship includes:
• Solicitor and client;
• Trustee and trust ;
• Spiritual adviser and devotee;
• Medical attendant and patient;
• Parent and child;
• Husband and wife;
• Master and servant;
• Guardian and ward.
In other words, we can say that Undue influence occurs when the decision of another party to the
transaction can be influenced by one party.
Example
‘A’ sold his gold ring to his teacher ‘B’ for Rs 200 after he had been offered good grades by his
teacher. Here, A’s permission is not given freely, he was influenced by his teacher.
Effect
The effect of undue influence makes an agreement voidable at the option of the party whose consent
was caused. Any such contract can be set aside. Only a party to the contract can avoid or rescind
the contract. This right does not lie in the hands of the third party.
Burden of Proof
If the plaintiff wants to bring an action to stop a contract entered into on the grounds of undue
influence, two issues must be kept in mind. The law has been stated in the Indian Evidence Act,
1872 and Indian Contract Act, 1872. The law states that in order for a plaintiff to prove that he was
under undue influence, two things must be established
1. Not only must the defendant has a dominant position but,
2. He must use it.
It states that it’s not enough for the plaintiff to show the possibility of undue influence that may
have been exercised by the dominant party. It must be certain that a person used his position to
influence the plaintiff. A possibility of the same is not enough for the plaintiff to avoid a contract.
Difference between Coercion and Undue Influence
Basic Coercion Undue Influence
Through coercion, by committing an Under the undue influence, consent is
Nature of
offence or threatening to commit an gained by suppressing other party’s
Action
offence, consent is gained. will.
Coercion is typically physical in nature, in
Undue influence is immoral in nature,
Carried by order to obtain consent, it requires a
using mental pressure to gain consent.
physical force of violent nature.
Coercion includes a criminal act and is Undue Influence requires unlawful act
Criminal
punishable under the IPC by a person who and is not punishable under the IPC by
Action
commits coercion. a person who has done undue influence
Undue influence can only be exerted if
Coercion does not involve a party’s
Relationship there is a relationship between two-
relationship.
party.
When coercion induces consent to an When consent to an agreement is
Agreement
agreement, the agreement is null and void caused by undue influence, it becomes
 at the option of the party whose consent is null and void at the discretion of the
induced. individual whose consent has been so
affected.

3.Fraud (Section 17)

According to Section 17 of Indian Contract Act, Fraud includes any of the following acts
committed by a contracting party or its connivance or its agent in order to deceive or induce a party
or its agent to enter into the contract:
• The effective concealment of a fact by one who is aware of the fact;
• a promise made without any intention to carry it out;
• any other act fitted to deceive;
• any such act or omission as the law considers to be fraudulent.
Mere silence as to facts likely to affect a person’s willingness to enter into a contract is not fraud
unless the circumstances of the case are such that, having regard to them, it is the obligation of the
silent person to speak or unless his or her silence is, in itself, equivalent to speech.
Example
‘A’ sells his horse to ‘B’ by auction, which ‘A’ knows to be unsound, ‘A’ tells ‘B’ nothing about
the unsoundness of the horse. This is a fraud on the part of ‘A’.
Effect
• The contract arising from fraud is a null contract.
• The misled party has the right to withdraw from the contract.
• Due to the fraudulent agreement, the party is responsible for recovering the damages.
Evidence and Burden of proof
In a large majority of cases, fraud cannot be proved by concrete and observable proof. It’s hidden
in its movement by its definition. If the evidence given is such as lead to wrongdoing, it is,
therefore, appropriate that fraud must have been committed. In most cases, the only tool for dealing
with fraud issues is circumstantial evidence. If this were not allowed, the ends of justice would be
constantly, if not invariably, defeated. Simultaneously, fraud involvement is only to be blamed on
a deliberate wrongdoer. As a remedy for restitution, any real damages arising from fraud can be
recovered, even if they could not have been reasonably foreseen subject to the defrauded party’s
mitigation law. Due to contributory negligence, the penalties would not be diminished.
4. Misrepresentation (Section 18)
As per Section 18 of the Indian Contract:
• Misrepresentation means the truth is misrepresented.
• Misrepresentation is the release of deceiving details resulting in the presumption that
the other party will enter into a deal and then lose. Nevertheless, the information
provided by the guilty party is the result of a genuine belief in the matter.
Misrepresentation is said to be committed.
Firstly, when the deceiving person declares that no justified data is misleading a person is some
way.
Secondly, there is a breach of an obligation that has caused the bias of one or the other. Lastly, a
mistake was committed by a person because of the misrepresentation of the act or information.
Example
‘A’ told ‘B’ that his radio is in good condition, because of the confidence he had in ‘A’, ‘B’ bought
the radio from him. The radio did not work properly after some time, ‘B’ thought he was misled by
‘A’, but ‘A’ believed his radio was in good condition and had no intention of deceiving him. So,
here misrepresentation is in the part of ‘A’, because he did not know that the radio is not working
properly.

Effect
If the party that has suffered as a result of the misrepresentation when entering into a contract may
choose to terminate the contract, rescind the contract within a reasonable time under the Specific
Relief Act 1963.
Kinds of Misrepresentation
There are two types of misrepresentation:
Negligent Misrepresentation
• It is considered to be a negligent misrepresentation when the misrepresentation happens
due to lack of any reasonable ground and carelessness;
• Negligent misrepresentation is only known when the representative owed a duty to
represented to handle carefully;
• An individual would only be liable if, in particular, he had ignored the duty specified;
• Even when there is no fiduciary relationship, responsibility exists between the two
parties.
Innocent misrepresentation
• If the portrayal is based on a good reason to believe and there is no error and malicious
motive, then it is said to be an innocent misrepresentation.
• When a person enters into a contract with an innocent misrepresentation, he or she has
the right to withdraw from the contract but is not entitled to damages.
• Unless there are reasonable grounds, a contract will not be void. It would be enough to
prove innocence in misrepresentation to prove the fact.
Burden of Proof
The burden of proof is on the defendant to show that the misrepresentation was not rendered
fraudulently by showing that “He had reasonable grounds to believe that the evidence portrayed
were valid during the time when the contract was made.” The party making the misrepresentation
carries a heavy burden of proof.

The distinction between fraud and misrepresentation

Basis Fraud Misrepresentation
A fraudulent act intentionally Misrepresentation is known as the
committed by one party to induce the representation of an innocent
Meaning
other party to enter into the contract is mistake, which persuades other
referred to as fraud. parties to enter into the contract.
Section 17 of the Indian Contract Act, Section 18 of the Indian Contract
Section
1872. Act, 1872
 In order to mislead
Yes No
the other party
In misrepresentation, the party
In fraud, the party making the making the representation
Variation in extent
representation knows that the considers the statement made by
of truth
declaration is not true. him to be valid, which later turned
out to be false.
The aggrieved party is entitled to claim The aggrieved party has no right to
Claim
damages. sue for damages to the other party.
If the truth can be found with
The contract is voidable even if in
Voidable reasonable diligence, then the
usual diligence the truth can be found.
contract is not voidable.
4. Mistake (Section 20)
There are two forms of mistake under Indian Contract Law:
1. The mistake of Fact,
2. The Mistake of Law.
Mistake of Fact
• A mistake of fact arises when one or both of the contracting parties have misunderstood
a term that is essential to the meaning of the contract;
• Such a mistake may be done due to confusion, negligence or omission, etc;
• A mistake is never intentional, it is an innocent overlooking.
• Such mistakes can be either unilateral or bilateral
Bilateral Mistake (Section 21)
When both the parties to a contract are under a mistake of fact, essential to the agreement, such a
mistake is known as a bilateral mistake. Bilateral mistakes are also sometimes referred to as mutual
or common mistakes. All the parties do not agree to the same thing and in the same way, which is
the concept of consent. Since there is no consent, the contract is null and void.
Example
‘A’, agrees to buy a cow from ‘B’, but it turns out that the cow was dead at the time of the deal,
although the fact was not known to any party. The arrangement is considered invalid.
Unilateral Mistake (Section 22)
A unilateral mistake occurs when only one party to the contract makes a mistake. The contract will
not be void in such a case. It is specified in Section 22 of the Act that the contract will not be void
just because one party made the mistake. So if only one party has made a mistake the contract
remains a valid contract.
Example
‘A’ enters into an agreement with ‘B’ for the purchase of horse which he assumes to be a racing
horse. ‘A’ do not confirm from ‘B’. In actual a horse is not a racing horse. ‘A’ cannot rescind the
contract.
Mistake of law
The mistake may be related to the mistake of Indian laws, or it may be a mistake of foreign laws.
If the mistake applies to Indian laws, the principle is that the law’s ignorance is not a sufficiently
good excuse. This means that either party cannot claim that it is not aware of the law.
The Contract Act states that, on the grounds of ignorance of Indian law, no party can claim any
relief. This will also include an incorrect interpretation of any legal provisions.
However, similar treatment is not given to ignorance of foreign law. Ignorance of foreign law
provides some leeway; the parties are not expected to know foreign law and its meaning. Therefore,
under the Indian Contract Act, an error of foreign law is actually treated as a mistake of fact.
Conclusion
Free Consent is absolutely important to make an agreement with a valid contract. The importance
of free consent cannot be stressed enough. The Party’s consent must be free and voluntarily. It is
necessary to give consent to the contract without any pressure or delusions. It is essential that the
parties’ consent is free, as this may affect the contract’s validity. If the consent has been obtained
or caused by coercion, undue influence, fraud, misrepresentation or mistake, then the aggrieved
person has the right to void the agreement.

Chapter 6: Legality of Object and Void Agreements

Unlawful Agreements: An agreement will not be enforced by the court if its object or the
consideration is unlawful. According to Section 23 of the Act, the consideration and object of
an agreement are unlawful in the following cases:
i. If it is forbidden by law;
ii. ii. If it is of such nature that, if permitted, it would defeat the provision of
law;
iii. If it is fraudulent;
iv. If it involves or implies injury to the person or property of another;
v. If the court regards it as immoral;
vi. If the court regards it as opposed to public policy.

PUBLIC POLICY AND AGREEMENT OPPOSED TO PUBLIC POLICY: Public policies are
those policies which are made by the government authorities for the welfare of common people.
If any agreement is made which is against public policy, that agreement will be void. Following
are some agreements which are opposed to public policies:
1. Trading with the enemy: It is well settled principle of law that an agreement between citizens
of two countries at war with each other is void and inoperative. For example, if Mr.A from
Pakistan, makes an agreement with Mr. B from India during war between the two countries,
the agreement will be void.
2. Agreements interfering with the course of justice Agreements for stifling or hushing up
prosecutions are bad in law. When an offence has been committed, the guilty party must be
prosecuted and any agreement which seeks to prevent the prosecution of such a person is
opposed to public policy and is void. This can take place in the following two ways:

Maintenance and Champerty: When a person agrees to help another by money or otherwise
in litigation in which he is not himself interested, it is called Maintenance. When a person helps
another in litigation in exchange of a promise to hand over a portion of the fruits of the
litigation, if any, it is called champerty.
1. Agreement in restraint of marriage
Any agreement which interferes with the performance of marital duties are void as being
against public policy. Example: An agreement to lend money to a woman in consideration of
her getting a divorce and marrying the lender is void [ Roshan vs. Mohommed].
2.Agreements in restraint of Trade: As per Section 27, every agreement by which any one is
restrained from exercising a lawful profession, trade or business of any kind, is to that extent
void. Example: X and Y carried on business as promoters in a certain locality in Mumbai. X
promised to stop his business in that locality in consideration of Y paying to him Rs.1,00,000
which he had disbursed as advances to his workmen. X stopped his business but Y failed to
pay him the promised money. X filed a suit to recover that money. The court held that the
agreement was void under section 27 and nothing could be recovered on the basis of that
agreement. [Madhav vs. Rajcoomer, (1874)14BLR76.] Exception: But, in the following cases,
an agreement in restraint of trade is valid:
(a). Statutory Exceptions:
i. Sale of Goodwill;
ii. Partner’s competing business;
iii) Rights of outgoing partner;
iv. Partner’s similar business on dissolution;
v. Rights of buyer and seller of goodwill;
(b). Other exceptions:
i. Trade combinations- An agreement between a group of manufacturers or Traders
regarding the conditions of an industry or the price, is binding although it is in restraint
of Trade, provided the agreement is in the interest of the parties themselves.
ii. Negative Stipulation in service contract- A person while in service with another may,
by the terms of his service, be prevented from accepting other engagements. For
example, a doctor employed in a hospital may be debarred from private practice. Such
negative stipulations in service contracts are not considered to be in restraint of Trade
and hence valid.
5. Agreements in restraint of Legal Proceedings: Private persons cannot by agreement
alter their personal law or the Statute law. Section 28 says- every agreement, by which
any party thereto is restricted absolutely from enforcing his rights under or in respect
of any contract, by the usual legal proceedings in the ordinary Tribunals, or which limits
the time within which he may thus enforce his rights, is void to that extent. So, an
agreement which prohibits a person from taking judicial proceedings, in respect of any
right arising from a contract, is void. Similarly, any limitation of the time within which
he may enforce his rights is void. Exceptions: However, the above rules have two
exceptions: (a). In case of future disputes; and (b) In case of Pending disputes [An
agreement in writing to refer a pending dispute to arbitration is not rendered illegal
under section 28].
6. Uncertain Agreements:
Agreements the meaning of which is not certain, or capable of being made certain, are void as
per section 29. Example: (i). A agrees to sell to B “one hundred tons of oil”. There is nothing
whatever to show what kind of oil was intended. Hence, the agreement is void for uncertainty.
7. Wagering Agreements
 A wager is an agreement by which money is payable by one person to another on the happening
or non-happening of a future, uncertain event. Characteristics of wagering agreement: i. The
consideration for the promise under a wagering agreement is to pay or get money; ii. The
money is payable on the happening or the non-happening of an event; iii. The agreement
depends on a future and uncertain event; iv. The essence of gaming and wagering is that one
party is to win and the other party is to lose; v. In this agreement no party has any control over
the event;

Void Agreements:

Void Agreements

According to Section 2(g) of the Indian Contract Act, 1872 "an agreement not enforceable by
law is said to be void”. Section 24 to Section 30 and Section 56 of the Act lay down the
provisions relating to the Agreements, which are declared void are as follows -

(1) Agreements void, if considerations and objects unlawful in part (Section 24)

(2) Agreement without Consideration (Section 25)

(3) Agreement in restraint of marriage (Section 26)

(4) Agreement in restraint of trade (Section 27)

(5) Agreements in restraint of legal proceedings (Section 28)

(6) Agreements void for uncertainty ( Section 29)

(7) Agreements by way of wager (Section 30)

(8) Agreement to do impossible acts (Section 56)

1) Agreements void, if considerations and objects unlawful in part (Section 24) :

If any part of a single consideration for one or more objects, or any one or any part of any one
of several consideration of a single object, is unlawful, the agreement is void.
Illustration:
A promises to superintend, on behalf of B, a legal manufacturer of indigo, and an illegal traffic
in other articles. B promises to pay to A salary of 10,000 rupees a year. The agreement is void,
the object of A’s promise, and the consideration for B’s promise, being in part unlawful.
2) Agreement without consideration (Section 25) :
An agreement made without consideration is void, unless -
(1) it is expressed in writing and registered under the law for the time being in force for the
registration of documents, and is made on account of natural love and affection between parties
standing in a near relation to each other; or unless.
 (2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor, or something which the promisor was legally compellable to do; or
unless.
(3) it is a promise, made in writing and signed by the person to be charged therewith or by his
agent generally or specially authorised in that behalf, to pay wholly or in part debt of which the
creditor might have enforced payment but for the law for the limitation of suits. In any of these
cases, such an agreement is a contract.
Explanation 1:
Nothing in this section shall affect the validity, as between the donor and done, of any gift
actually made.
Explanation 2:
An agreement to which the consent of the promisor is freely given is not void merely because
the consideration is inadequate; but the inadequacy of the consideration may be taken into
account by the Court in determining the question whether the consent of the promisor was freely
given.

Illustrations
(a) A promises, for no consideration, to give to B Rs. 1,000. This is a void agreement.
(b) A, for natural love and affection, promises to give his son, B, Rs. 1,000. A puts his promise
to B into writing and registers it. This is a contract.
(c) A finds B’s purse and gives it to him. B promises to give A Rs. 50. This is a contract.
(d) A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A sign a written promise
to pay B Rs. 500 on account of the debt. This is a contract.
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A’s consent to the agreement was freely
given. The agreement is a contract notwithstanding the inadequacy of the consideration.
(g) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A denies that his consent to the agreement
was freely given. The inadequacy of the consideration is a fact which the Court should take into
account in considering whether or not A’s consent was freely given.

3) Agreement in restraint of marriage (Section 26)

Every agreement in restraint of the marriage of any person, other than a minor, is void.

4) Agreement in restraint of trade (Section 27) :

Every agreement by which anyone is restrained from exercising a lawful profession, trade
or business of any kind, is to that extent void.
Exception 1 :

Saving of agreement not to carry on business of which good will is sold – One who sells
the goodwill of a business may agree with the buyer to refrain from carrying on a similar
business, within specified local limits, so long as the buyer, or any person deriving title to the
goodwill from him, carries on a like business therein, provided that such limits appear to the
court reasonable, regard being had to the nature of the business.
5) Agreements in restraint of legal proceedings (Section 28) :

Every agreement, by which any party thereto is restricted absolutely from enforcing his
rights under or in respect of any contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus enforce his rights, is void to the
extent.

Exception 1:

Saving of contract to refer to arbitration dispute that may arise.This section shall not
render illegal contract, by which two or more persons agree that any dispute which may arise
between them in respect of any subject or class of subject shall be referred to arbitration, and
that only and amount awarded in such arbitration shall be recoverable in respect of the dispute
so referred.

Exception 2:

Saving of contract to refer question that have already arisen – Nor shall this section render
illegal any contract in writing, by which two or more persons agree to refer to arbitration any
question between them which has already arisen, or affect any provision of any law in force
for the time being as to reference to arbitration.

Exception 3 :

This section shall not render illegal a contract in writing by which any bank or financial
institution stipulate a term in a guarantee or any agreement making a provision for guarantee
for extinguishment of the rights or discharge of any party thereto from any liability under or in
respect of such guarantee or agreement on the expiry of a specified period which is not less
than one year from the date of occurring or non-occurring of a specified event for
extinguishment or discharge of such party from the said liability.

Explanation.—

(i) In Exception 3, the expression "bank" means —

(a) a "banking company" as defined in clause (c) of section 5 of the Banking

Regulation Act, 1949 (10 of 1949);

(b) "a corresponding new bank" as defined in clause (da) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);

(c) "State Bank of India" constituted under section 3 of the State Bank of India Act,
1955 (23 of 1955);

(d) "a subsidiary bank" as defined in clause (k) of section 2 of the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959);
 (e) "a Regional Rural Bank" established under section 3 of the Regional Rural Banks
Act, 1976 (21 of 1976);

(f) "a Co-operative Bank" as defined in clause (cci) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);

(g) "a multi-State co-operative bank" as defined in clause (cciiia) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949); and

(ii) In Exception 3, the expression "a financial institution" means any Public financial
institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956).

6) Agreements void for uncertainty (Section 29) :

Agreements, the meaning of which is not certain, or capable of being made certain, are
void.

Illustrations:

(a) A agrees to sell B “a hundred tons of oil”. There is nothing whatever to show what kind
of oil was intended. The agreement is void for uncertainty.

(b) A agrees to sell B one hundred tons of oil of a specified description, known as an article
of commerce. There is no uncertainty here to make the agreement void.

(c) A, who is a dealer in coconut-oil only, agrees to sell to B “one hundred tons of oil”. The
nature of A’s trade affords an indication of the meaning of the words, and A has entered into a
contract for the sale of one hundred tons of coconut-oil.

(d) A agrees to sell B “all the grain in my granary at Ramnagar”. There is no uncertainty
here to make the agreement void.

(e) A agrees to sell to B “one thousand maunds of rice at a price to be fixed by C”. As the
price is capable of being made certain, there is no uncertainty here to make the agreement void.

(f) A agrees to sell to B “my white horse for rupees five hundred or rupees one thousand”. There
is nothing to show which of the two prices was to be given. The agreement is void.

7) Agreements by way of wager (Section 30) :

Agreements by way of wager are void; and no suit shall be brought for recovering anything
alleged to be won on any wager, or entrusted to any person to abide the result of any game or
other uncertain event on which may wager is made. Exception on favour of certain prizes for
horse-racing: This section shall not be deemed to render unlawful a subscription or contribution,
or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or
sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to the
winner or winners of any horse-race.

8) Agreement to do impossible act (Section 56) :

 Section 56 of the Indian Contract Act 1872 says that, An agreement to do an act impossible in
itself is void. Contract to do act afterwards becoming impossible or unlawful: A contract to do
an act which, after the contract is made, becomes impossible or, by reason of some event which
the promisor could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful:

Where one person has promised to be something which he knew or, with reasonable diligence,
might have known, and which the promisee did not know to be impossible or unlawful, such
promisor must make compensation to such promise for any loss which such promisee sustains
through the non-performance of the promise.
Illustrations -

(a) A agrees with B to discover treasure by magic. The agreement is void. (b) A and B contract
to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes
void.

(c) A contract to marry B, being already married to C, and being forbidden by the law to which
he is subject to practise polygamy. A must make compensation to B for the loss caused to her by
the non-performance of his promise.

(d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war
against the country in which the port is situated. The contract becomes void when war is
declared.

(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B.
On several occasions A is too ill to act. The contract to act on those occasions becomes void.

Agreements in Restraint of Trade (Sec-27)

Protection under the Constitution of India

Part XIII of the Constitution of India contains provisions relating to the freedom of trade,
commerce and intercourse within the territory of India. The provisions are laid down in articles
301-307. Just as the Legislature cannot take away individual freedom of trade, wise versa the
individual cannot barter it away by agreement. “The Principle of law is this: Public policy
requires that every man shall be at liberty to work for himself, and shall not be at liberty to
deprive himself, skill or talent, by any contract that he enters into.” So plain meaning of Section
27 is every agreement by which any one is restrained from exercising a lawful profession, trade
or business of any kind, is, to that extent, void.
In Electrosteel Castings Ltd vs Saw Pipes Ltd, (2005) 1 CHN 612, the words “lawful
profession” in Section 27 include both an independent professional and salaried professional.
Self-employment and all modes of economic survival or of earning one’s livelihood are
covered.
Section 27 of Indian Contract Act, 1872 : Agreement in restraint of trade, void Every
agreement by which anyone is restrained from exercising a lawful profession, trade or business
of any kind, is to that extent void.
Exception 1 : Saving of agreement not to carry on business of which good will is sold – One
who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business, within specified local limits, so long as the buyer, or any person deriving title
to the goodwill from him, carries on a like business therein, provided that such limits appear
to the court reasonable, regard being had to the nature of the business.
Madhub Chander vs. Raj Coomar is the first case in which scope of the section came up for
consideration before the Calcutta High Court. Here in this case restraint was only partial as he
was restrained from exercising his profession only in one locality and that such restraints had
been upheld in English law.
The Supreme Court of United States, in the leading decision in Standard Oil Company vs.
United States (6) that as a ‘rule of reason’ that the term “restraint of trade” means that it meant
at common law and in the law of the United States when the Sherman Act was passed and it
covered only those acts or contracts or agreements or combinations which prejudice public
interest by unduly restricting competition or unduly obstructing the due course of trade or
which injuriously restrain trade either because of their inherent nature of effect or because of
their evident purpose.
Section 27 of the Indian Contract Act, 1872 states that an agreement, which restrains anyone
from carrying on a lawful profession, trade or business, is void to that extent. The main reason
behind this section is that agreements of restraint are unfair, injustice as they impose an undue
restriction on the personal freedom of a contracting party. However, as an exception, if a party
sells his goodwill to another, he can agree with the buyer that he will not carry on a similar
business within the specified local limits.
Restriction for long period
The doctrine of restraint of trade has been reconsidered by the House of Lords in Esso
Petroleum Co Ltd. vs. Harper’s Garage Ltd. In this case, their Lordships struck down an
exclusive dealing agreement because it extended to a period of 21 years, which was
unreasonable. A five year period would have been held to be reasonable. They said that the
doctrine applied only if a man contracted to give up some existing freedom which he had.
Zaheer Khan vs. Percept D’mark India (P) Ltd, AIR 2004 Bom 362, a contract restricting the
party’s future freedom to carry on his affairs in a manner he likes and with persons of his
choice, held, unreasonable restraint of trade.
Coca Cola Company, (AIR 1995 SC 2372), where the defendant and the plaintiff used to carry
on the business of ferrying boats and arrived at a business settlement whereby the defendant
promised to pay a certain amount to the plaintiff in order that the plaintiff abstain from carrying
on his boat business for a period of three (3) years, the court held that the agreement was void
as the restraining covenant was a vital part of the agreement and did not fall under the “goodwill
exception” to section 27 of the Indian Contract Act, 1872.
In Petrofina (Great Britain) Ltd. vs. Martin (5), Diplock L.J., a contract in restraint of trade
is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict
his liberty in the future to carry on trade with other persons not parties to the contract in such
manner as he chooses.”
In the same case, Lord Denning M.R. has expressed that: “Every member of the community
is entitled to carry on any trade or business he chooses and in such manner as he thinks most
desirable in his own interests, so long as he does nothing unlawful: with the consequence that
any contract which interferes with the free exercise of his trade or business, by restricting him
in the work he may do for others, or the arrangements which he may make with others, is a
contract in restraint of trade. It is invalid unless it is reasonable as between the parties and not
injurious to the public interests.”
Statutory Exceptions
1. Sale of Goodwill
The only exception mentioned in Section 27 of the Contract Act is related to sale of goodwill.
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on
a similar business, within specified local limits, so long as the buyer, or any person deriving
title to the goodwill from him, carries on a like business therein, provided that such limits
appear to the court reasonable, regard being had to the nature of the business.
Meaning of Goodwill :- There should be real goodwill to be sold. The Goodwill which has
been the subject of sale is nothing more than the probability that the old customer will resort to
old place.
2. Partnership Act
According to Section 11 the Partnership Act,1932 partners during the continuance of the firm
to restrict none of them shall carry on any other business than that of the firm. Section 36 the
Partnership Act,1932 is related to restrain an outgoing partner from carrying on a similar
business within the specified period and specified local limits,
a. The agreement should specify the local limits or the period of restraint, and
b. The restriction imposed must be reasonable.
Firm Daulat Ram vs. Firm Dharm Chand, AIR 1934 Lah 110, where two ice factory owners
constituting a partnership agreed that only one factory will be worked at a time and its profits
distributed among them. The restraint was held to be justified.
3. Restraint upon employees
Restraint during Employment
Agreement of service contain negative covenants is for preventing the employee from working
anywhere during period covered by the agreement. Now a days trade secrets is main contention
for negative covenants. Employer’s wants to protect his trade secrets because of that
employment agreement with negative covenants are generally used. Agreements for protection
of confidentiality and trade secrets are not one sided or unfair or unreasonable. Any breach of
such clauses on the part of employee can be treated as a misconduct.
Restraint during the employment and post-employment this issue was first time discussed by
Supreme Court in Niranjan Shankar Golikar vs. Century Spg & Mfg Co. Ltd. a company
manufacturing tyre cord yarn was offered collaboration by a foreign producer on the condition
that the company shall maintain secrecy of all the technical information from its employees.
The Defendant was appointed for a period of five years, the condition being that during this
period he shall not serve anywhere else even if he left the service earlier. Shelat J held the
agreement to be valid. The defendant was accordingly restrained from serving anywhere else
during the currency of the agreement.
Post-Employment Covenant
According to Indian laws any agreement which is related to restraint of trade and profession
shall not be binding on the parties and the same shall be null and void. By using the term void
ab initio, for such type of agreements it has shown that it has kept such non-compete clause in
 the agreements beyond consideration. Indian courts have also consistently refused to enforce
post termination non-compete clauses in employment contracts as “restraint of trade” is
impermissible under Section 27 of the Indian Contract Act 1872, and have held them as void
and against the public policy because of their potential to deprive an individual of his or her
fundamental right to earn a living.
Covenants that prohibit employees from engaging in a business similar to or competitive with
that of the employer beyond the term of employment or post-employment are invalid.
A non-compete clause is well known under the Contractual Laws as the clause being made out
into any agreement between two parties where one party is the employer and the other party is
the employee. According to this non-compete clause, the employee undertakes and gives his
acceptance as per the condition of the employer that during the course of the employment or
even after post-employment, he will not be the competitor of the employer in the form and
nature of the employment of the employer. The Non-compete clause finds place under the
agreements and contracts throughout the world. According to Indian Contract Act, 1872 the
non-compete clause, it is prohibited.
Pepsi Foods Ltd. & ors. vs. Bharat Coca-cola Holdings Pvt. Ltd. (19), post-employment
restrictions were held to be invalid and violative of Article 19 (1)(g) of the Indian Constitution.
Negative covenant in contract restraining employee from engaging or undertaking employment
for twelve months after leaving the services of plaintiff was held to be contrary and in violation
of Section of the Indian Contract Act, 1872 and injunction was declined.

Difference between wagering agreement and insurance:

Insurance Contract is not a wagering agreement but it is like wagering agreement. Both,
Insurance Contract and wagering agreement depend upon a future uncertain event. There are
differences between the wagering agreement and Insurance Contract are as follows:

No Insurance Contract
Wagering Agreement

Insurance Contract is an agreement Wagering Contract is one by which two persons,

1) between the parties in which one party,
the Insurer accepts significant
insurance risk from another party, the
policyholder to compensate the
policyholder if uncertain future event
impacts the policyholder.
professing to hold opposite views touching the
issue of a future uncertain event mutually agreed
dependent upon the determination of the event that
one shall win from the other a sum of money,
neither of the contracting parties having any other
interest.

2) Insurance Contract is Valid Contract According to Section 30 of the Indian Contract

Act, 1872 wagering agreements are void.
3) Parties will have Insurable interest. In case of Wagering, Agreement parties do not
have insurable interest.

4) In Insurance Contract risk of loss is not In wagering agreement risk of loss or gain is
created but natural. created by the parties.

5) Insurance of Contract Protects the Wagering agreement affects the interest of the
Economic Interest of the Parties. parties.

6) In Insurance Contract the amount In case of wagering agreement, the amount agreed
agreed is enforceable. is not enforceable.

Chapter 7: Contingent Contracts

Contingent Contracts
An absolute contract is one where the promisor performs the contract without any condition.
Contingent contracts, on the other hand, are the ones where the promisor performs his obligation
only when certain conditions are met.
If you look at the contracts of insurance, indemnity or guarantee, they have one thing in common
– they create an obligation on the promisor if an event which is collateral to the contract does or
does not happen.
For example, in a life insurance contract, the insurer pays a certain amount if the insured dies
under certain conditions. The insurer is not called into action until the event of the death of the
insured happens. This is a contingent contract.
Under Section 31 of the Indian Contract Act, 1872, contingent contracts are defined as follows:
“If two or more parties enter into a contract to do or not do something, if an event which is
collateral to the contract does or does not happen, then it is a contingent contract.”
Example: Peter is a private insurer and enters into a contract with John for fire insurance of John’s
house. According to the terms, Peter agrees to pay John an amount of Rs 5 lakh if his house is
burnt against an annual premium of Rs 5,000. This is a contingent contract.
Here, the burning of the house is neither a performance promised as a part of the contract nor a
consideration. Peter’s liability arises only when the collateral event occurs.

Essentials of Contingent Contracts

1] Depends on happening or non-happening of a certain event
The contract is contingent on the happening or the non-happening of a certain event. These said
events can be precedent or subsequent, this will not matter. Say for example Peter promises to pay
John Rs 5,000 if the Rajdhani Express reaches Delhi on time. This is a contingent event.
2] The event is collateral to the contract
It is important that the event is not a part of the contract. It cannot be the performance promised
or a consideration for a promise.
Peter enters into a contract with John and promises to deliver 5 television sets to him. John
promises to pay him Rs 75,000 upon delivery. This is NOT a contingent contract since John’s
obligation depends on the event which is a part of the contract (delivery of TV sets) and not a
collateral event.
Peter enters into a contract with John and promises to deliver 5 television sets to him if Brazil
wins the FIFA World Cup provided John pays him Rs 25,000 before the World Cup kicks-off.
This is a contingent contract since Peter’s obligation arises only when Brazil wins the Cup which
is a collateral event.
3] The event should not be a mere will of the promisor
The event cannot be a wish of the promisor. Say for example Peter promises to pay John Rs 5,000
if Argentina wins the FIFA World Cup provided, he wants to. This is NOT a contingent contract.
Actually, this is not a contract at all.
Peter promises to pay John Rs 50,000 if he leaves Mumbai for Dubai on August 30, 2018. This is
a contingent contract. Going to Dubai can be within John’s will but is not merely his will.
4] The event should be uncertain
If the event is sure to happen, then the contract is due to be performed. This is not a contingent
contract. The event should be uncertain.
Peter promises to pay John Rs 500 if it rains in Mumbai in the month of July 2018. This is not a
contingent contract because in July rains are almost a certainty in Mumbai.

Enforcement of Contingent Contracts

Sections 32 – 36 of the Indian Contract Act, 1872, list certain rules for the enforcement of a
contingent contract.
Rule # 1 – Contracts Contingent on the happening of an Event
A contingent contract might be based on the happening of an uncertain future event. In such cases,
the promisor is liable to do or not do something if the event happens. However, the contract cannot
be enforced by law unless the event takes place. If the happening of the event becomes impossible,
then the contingent contract is void. This rule is specified in Section 32 of the Indian Contract Act,
1872.
Peter promises to pay John Rs 50,000 if he can marry Julia, the prettiest girl in the neighborhood.
This is a contingent contract. Unfortunately, Julia dies in a car accident. Since the happening of
the event is no longer possible, the contract is void.
Rule # 2 – Contracts Contingent on an Event not happening
A contingent contract might be based on the non-happening of an uncertain future event. In such
cases, the promisor is liable to do or not do something if the event does not happen. However, the
contract cannot be enforced by law unless happening of the event becomes impossible. If the event
takes place, then the contingent contract is void. This rule is specified in Section 33 of the Indian
Contract Act, 1872.
Peter promises to pay John Rs 50,000 if the ship named Titanic which leaves on a
dangerous mission does not return. This is a contingent contract. This contract is enforceable by
law if the ship sinks making its return impossible. On the other hand, if the ship returns, then the
contract is void.
Rule # 3 – Contracts contingent on the conduct of a living person who does something to make
the event or conduct as impossible of happening
Section 34 of the Indian Contract Act, 1872 states that if a contract is a contingent upon how a
person will act at a future time, then the event is considered impossible when the person does
anything which makes it impossible for the event to happen.
Peter promises to pay John Rs 5,000 if he marries Julia. However, Julia marries Oliver. Julia’s act
thus renders the event of John marrying her impossible. (A divorce is still possible though but the
happening of the event is considered impossible.)
Rule # 4 – Contracts Contingent on an Event happening within a Specific Time
There can be a contingent contract wherein a party promises to do or not do something if a future
uncertain event happens within a fixed time. Such a contract is void if the event does not happen
and the time lapses. It is also void if before the time fixed, the happening of the event becomes
impossible. This rule is specified in Section 35 of the Indian Contract Act, 1872.
Peter promises to pay John Rs 5,000 if the ship named Titanic which leaves on a dangerous
mission returns before June 01, 2019. This contract is enforceable by law if the ship returns within
the fixed time. On the other hand, if the ship sinks, then the contract is void.
Rule # 5 – Contracts Contingent on an Event not happening within a Specific Time
Contingent contracts might be based on the non-happening of an uncertain future event within a
fixed time. In such cases, the promisor is liable to do or not do something if the event does not
happen within the said time. The contract can be enforced by law if the fixed time has expired and
the event has not happened before the expiry of the time. Also, if it becomes certain that the event
will not happen before the time has expired, then it can be enforced by law. This rule is specified
in Section 35 of the Indian Contract Act, 1872.
Peter promises to pay John Rs 5,000 if the ship named Titanic which leaves on a dangerous
mission does not return before June 01, 2019. This contract is enforceable by law if the ship does
not return within the fixed time. Also, if the ship sinks or is burnt, the contract is enforced by law
since the return is not possible.
Rule # 6 – Contracts Contingent on an Impossible Event
If a contingent contract is based on the happening or non-happening of an impossible event, then
such a contract is void. This is regardless of the fact if the parties to the contract are aware of the
impossibility or not. This rule is specified in Section 36 of the Indian Contract Act, 1872.
Peter promises to pay John Rs 50,000 if the sun rises in the west the next morning. This contract
is void since the happening of the event is impossible.

Differences between Contingent Contracts and Wagering Contracts:

Factors Contingent Contracts Wagering Contract

It is a contract to do or not
It is a promise to give money or
to do something with
money’s worth with reference to an
Meaning reference to a collateral
uncertain event happening or not
event happening or not
happening.
happening.

Reciprocal It may not contain

It consists of reciprocal promises.
promises reciprocal promises.

The uncertain event is the core

Uncertain event The event is collateral.
factor

Contingent contract may A wagering agreement is essentially

Nature of contract
not be wagering in nature. contingent in nature.

Contracting parties has

interest in the subject The contracting parties have no
Interest of parties
matter in a contingent interest in the subject matter.
contract.

Contingent contract is not

Mutuality of loss A wagering contract is a game,
based on the doctrine of
and gain losing and gaining alone matters.
mutuality of loss and gain.

Contingent contract is
Effect of contract A wagering agreement is void.
valid.
Introduction
The word contingent means when an event or situation is contingent, i.e. it depends on some
other event or fact.
For example, making money is contingent on finding a good-paying job.
Now, the ‘contingent contract’ means enforceability of that contract is directly depends upon
happening or not happening of an event.
Section 31 of the Indian Contract Act, 1872 defines the term ‘Contingent Contract’ as
follows:
‘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’.
In simple words, contingent contracts, are the ones where the promisor perform his obligation
only when certain conditions are met. The contracts of insurance, indemnity, and guarantee are
some examples of contingent contracts.
Illustration: - A contracts to pay to B Rs. 20,000 if B’s house is burnt. This is a contingent.
How is it different from wagering agreement?
1. A wagering agreement is absolutely void (S.30) while on the other hand contingent
contract is a valid contract.
2. In a contingent contract, the future uncertain event is merely collateral whereas in a
wagering agreement the uncertain event is a sole determining factor of the
agreement.
3. In a wager, the parties are not interested in the occurrence of the event except for
winning or losing the best amount while in a contingent contract the parties have a
real interest in occurrence or non-occurrence of the event.
4. All wager contracts are contingent contracts, but all contingent contracts are not by
way of the wager.

Essential elements of the contingent contract

After examining the definition of the contingent contract given under section 31 of the Act, the
essentials of the term contingent contract are as follows:

There must be a valid contract to do or abstain from doing something

Section 32 and 33 of the Act talks about enforcement of the contingent contract on the
happening or not happening of the events respectively. The contract will be valid only if it is
about performing or not performing an obligation.
Illustration 1: X makes a contract with Y to buy Y’s dog if X survives Z. This contract cannot
be enforced by law unless and until Z dies in X’s lifetime.
Illustration 2: X agrees to pay Y a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks.

Performance of the contract must be conditional[i]

The condition for which the contract has been entered into must be a future event, and it should
be uncertain. If the performance of the contract is dependent on an event, which is although a
future event, but certain and sure to happen, then it’ll not be considered as a contingent contract.

The said event must be collateral to such contract

The event on whose happening or non-happening of the event on which the performance of the
contract is dependent should not be a part of the consideration of the contract. The happening
or non-happening of the event should be collateral to the contract and should exist
independently.
Illustration: X enters into a contract with Y and promises to deliver 10 books to him. Y
promises to pay Rs. 2000 upon delivery. This is not a contingent contract since Y’s obligation
depend on the event which is a part of the contract(delivery of 10 Books) and not a collateral
event.

The event should not be at the discretion of the promisor

The event so considered as for contingency should not at all to be dependent on the promisor.
It should be totally a futuristic and uncertain event.
Illustration: X promises to pay Y, Rs. 10,000 if Y leaves Delhi for London on 31st March
2019. This is a contingent contract. Going to London can be within Y’s will but is not merely
his will.

Enforcement of contingent contract

Provisions related to the enforcement of the contingent contract are given under section 32 to
36 as follows:

Condition #1- enforcement of contract contingent on the happening of an event

The contingent contracts to do or abstain from doing something if an uncertain future event
happens. However, the contract cannot be enforced by law unless the event takes place. If the
event becomes impossible, such contracts become void. [Section 32]
Illustration: X promises to pay Y, Rs. 100,000 if he marries Z, the prettiest girl in the
neighbourhood. This is a contingent contract. Unfortunately, Z dies in a car accident. Since the
happening of the event no longer possible, the contract is void.

Condition #2- enforcement of contract contingent on an event not happening

The contingent contracts to do or abstain from doing something if an uncertain future event
does not happen can be enforced when the happening of that event becomes impossible. If the
event takes place, then the contingent contract is void.[Section 33]
Illustration: X promises to pay Y a sum of money if a certain ship does not return. The ship
is sunk. The contract can be enforced when the ship sinks. On the other hand, if the ship returns,
then the contract is void.

Condition #3- when an event on which contract is contingent to be deemed impossible if it is

the future conduct of a living person

If a contract contingent upon how a person will act at a future time, the event shall be
considered impossible when such person does anything which makes it impossible for the event
to happen.[Section 34]
Illustration: X agrees to pay Y, Rs. 100,000 if Y marries Z. However, Z marries A. The
marriage of Y to Z must now be considered impossible, although it is possible that A may die
and that Z afterward marry Y.

Condition #4- contracts contingent on an event happening within the fixed time
Contingent contracts to do or not to do anything if a future uncertain event happens within a
fixed time. Such a contract is void if the event does not happen and the time lapses. It is also
void if before the time fixed, the happening of the event becomes impossible.[Section 35(para
1)]
Illustration: X promises to pay Y a sum of money if a certain ship returns before 1st April
2019. The contracts may be enforced if the ship returns within the fixed time. On the other
hand, becomes void if the ship sinks.

Condition #5- contracts contingent on an event not happening within the fixed time
Contingent contract to do or not to do anything if an uncertain event does not happen within a
fixed time may be enforced by law when the fixed time has expired, and such event has not
happened, or before the time fixed has expired, if it becomes certain that such event will not
happen.[Section 35(para 2)]
Illustration: X promises to pay Y a sum of money if a certain ship does not return before 31st
March 2019. The contract may be enforced if the ship does not return before 31st March 2019.
Also, if the ship burnt before the given time, the contract is enforced by law since the return is
impossible.

Condition #6- contract contingent of impossible event void

If an agreement to do or not to do is based on the impossible event, then such agreement is
void, whether the impossibility of the event is known or not to the parties to the agreement at
the time when it is made.[Section 36]
Illustration: X promises to pay Y, Rs 500 if two straight lines should enclose a space. The
agreement is void.

Conditions when a contingent contract becomes void

• Section 32- if the event on the happening of which the contract is contingent
becomes impossible, the contract becomes void.
Illustration: Mohan contracts to pay Ram a sum of Money when Ram marries Geeta. Geeta
dies without being married to Ram. The contract becomes void.
• Section 35- contingent contract to do or not to do something, if a specified uncertain
event happens within a fixed time, becomes void if, at the expiration of the time
fixed, such event has not happened, or if, before the time fixed, such event becomes
impossible.
Illustration: Saurbh promises to pay Servesh if a certain ship returns within the year. The
contract becomes void if the ship is burnt within the year.
• Section 34- if the future event on which a contract is a contingent is the way in
which a person will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it impossible
that he should so act within any definite time, or otherwise than under further
contingencies.
• Section 36- contingent agreement to do or not to do anything, if an impossible event
happens, are void, whether the impossibility of the event is known or not to the
parties to the agreement at the time when it is made.
Illustration: X agrees to pay Y, Rs. 10,000 if Y will marry X’s daughter P. P was dead at the
time of the agreement. The agreement is void.

Commercial applications of contingent contracts

1. Insurance is a contract to do something if the future event occurs that will be
contracted by the parties and liability will be taken by the offeror. In all Insurance
like Life Insurance, Marine Insurance, Fire Insurance, and other Insurances, the
Offeror promises to take the risk of the offeree against the incident to do or not to
do something and for that the offeree agrees to pay a certain amount of money.
2. The contingent contract can be used in the contract of guarantee as well as the
contract of warranty. Contingent guarantees generally are used when a supplier does
not have a relationship with a counterparty.
3. We can use a contingent contract in negotiation. Contingent contracts normally
occur when negotiating parties fail to reach an agreement.
 4. We can use the contingent contract in mergers and acquisitions (M&A) as well.
Depending on the M&A deal, contingent payments such as earn-outs, Seller notes,
and Buyer stock may be part of the Seller’s proceeds. After the deal is finalized,
these contingent payments will need continuous contact between Buyer and Seller.
5. It can also be used in the contract of indemnity.

Quasi-Contract:
• A quasi contract is not a contract at all because one or the other essential elements for
the formation of contract are absent.
• An obligation imposed by law upon a person for the benefit of another even in the
absence of a contract
• It is based on the principle of equity.
Features of quasi-contract-
a) It is imposed by law and does not arise from any agreement
b) The duty of party is the basis of such contract
c) The right under it is always to a right to money
d) The right under it is available against specific person.
A suit for breach may be filed in the same way as a contract.
Kinds of quasi-contract:
1. Right to recover the price of necessaries supplied, Section 68
A supplies B a lunatic with necessaries suitable to his condition in life. A is entitled to be
reimbursed from B’s property.
2. Right to recover money paid for another person, Section 69
The goods belonging to A were wrongfully attached in order to realise arrears of Government
revenue due by G. A paid the amount to save his goods from sale. It was held that A was entitled
to recover the amount from G.
3. Right to recover for non-gratuitous act, Sec 70
Such right to recover arises if the following three conditions are satisfied: a) The thing must
have been done or deliver lawfully
b) The person who has done or delivered the thing must not have intended to do so gratuitously
and
c) The person for whom the act is done must have enjoyed the benefit.
Eg: A, a tradesman leaves goods at B’s house by mistake. B treats the goods as his own. He is
bound to pay A for them.
4. Responsibility of finder of goods, Section 71
A person who finds goods belonging to another and takes them into his custody is subject to
the same responsibility as bailee.
Eg: X a guest found a diamond at a birthday party of Y. X told Y and other guests about it. He
has performed his duty to find the owner. If he is not able to find the owner. If he is not able to
find the owner, he can retain the ring as a bailee.
5. Right to recover from a person to whom money is paid or thing is delivered by mistake or
by coercion, Sec 72
A person to whom money has been paid or anything delivered by mistake or by coercion must
repay or return it.
6. Compensation for failure to discharge obligation, Section 73
When an obligation created by a quasi-contract is discharged the injured party is entitled to
receive the same compensation from the party in default.
Quantum Meruit:
• The term quantum meruit means “as much as merited or as much as earned. It means
payment in proportion to the amount of work done. Generally one cannot claim
performance from another unless one has performed his obligation in full but in certain
cases a person who has performed some work under a contract can claim remuneration
for the work which he has already done.
• The right to claim on quantum meruit does not arise out of a contract but it is claim on
the quasi contractual obligations. The claim for quantum meruit arises only when the
original contract is discharged.
Cases in which claim of quantum meruit arise:
a) In the case of void agreement or contract that becomes void, Sec 65
b) In case of non-gratuitous act, sec 70
c) In case of act preventing the completion of contract
d) In case of divisible contract
e) In case of divisible contract
f) In case of indivisible contract performed completely but badly
- If the contract is indivisible.
- If the contract is lumpsum.
- If the contract is completely performed and
- If the contract is performed badly.
Discharge of Contract:
What is the meaning of discharge of a contract?
 • Discharge of contract means termination of the contractual relations between the parties
to the contract. A contract is said to be discharged when the rights and obligations of
the parties under the contract comes to an end.
• A contract can be discharged by performance in any of the following ways:
- By actual performance: a contract is said to be discharged by actual performance when
the parties to the contract perform their promises in accordance with the terms of the
contract.
- By attempted performance or tender: a contract is said to be discharged by attempted
performance when the promisor has made an offer to the promise and the promise has
not accepted it.
Discharge by mutual agreement:
A contract can be discharged by mutual agreement in any of the following ways:
1. Novation: It means substitution of a new contract for the original contract. Such
contract may be between the same parties or between different parties.
2. Rescission: Rescission means cancellation of contract by any party or all parties to the
contract.
3. Alteration: It means a change in the terms of the contract with mutual consent of the
parties. Alteration discharges the original contract and creates a new contract.
4. Remission: It means acceptance by the promisee of a lesser fulfilment of the promise
made. No consideration is necessary for remission.
5. Waiver: It means intentional relinquishment of a right under the contract. Thus, it
amounts to releasing a person of certain legal obligations under a contract.
Discharge by operation of law:
A contract may be discharged by operation of law in the following cases:
1. By death of the promisor: A contract involving the personal skill or ability of the
promisor is discharged automatically on the death of the promisor.
2. By insolvency: When a person is declared insolvent, he is discharged from his liability
up to the date of his insolvency.
3. By unauthorised material alteration: If any party makes any material alteration in the
terms of the contract without the approval of the other party, the contract comes to an
end.
4. By the identity of the promisor and promisee: When the promisor becomes the
promisee, the other parties are discharged.
Discharge by impossibility of performance:
1. Effects of initial impossibility: Initial impossibility means the impossibility existing at the
time of making the contract.
2. Effects of supervening impossibility: Supervening impossibility means impossibility which
does not exist at the time of making the contract but which arises subsequently after the
formation of contract and which makes the performance of the contract impossible or illegal.
The cases are:
a) Destruction of subject matter: The contract is discharged if the subject matter of the contract
is destroyed after the formation of the contract without any fault of the either party.
b) Death of personal incapacity: The contract is discharged on the death or incapacity or illness
of a person if the performance depends on its personal skill and ability.
c) Declaration of war: The pending contracts at the time of declaration of war are either
suspended or declared.
d) Change of law: The contract is discharged if the performance of the contract becomes
impossible or unlawful due to change in law after the formation of the contract.

Contract is not discharged on the ground of supervening impossibility:

When a person has promised to do something, he must perform his promise unless the promise
becomes absolutely impossible. A contract is not discharged by the supervening impossibility
in the following cases:
a) A contract is not discharged simply on the ground that its performance has become
more difficult, expensive or less profitable.
b) A contract is not discharged simply on the ground of commercial impossibility, i.e.
when the contract becomes commercially unviable or unprofitable.
c) A contract is not discharged if it could not be performed because of the default of the
third party on whose work the promisor relied.
d) A contract is discharged on the grounds of strikes, lockouts and civil disturbances
unless otherwise agreed by the parties to the contract.
Discharge by lapse of time:
A contract is discharged if it is not performed or enforced within a specified period, called
period of limitation.
Period of limitation for exercising right to recover a debt is 3 years and to recover an immovable
property is 12 years.

Discharge by breach of contract:

If any party to the contract refuses or fails to perform his part of the contract or by his act makes
it impossible to perform his obligation under the contract. A breach of contract may occur in
two ways:
a) Anticipatory breach of contract: It occurs when the party declares his intention of not
performing the contract before the performance is due.
b) Actual breach of contract: It occurs in the following two ways:
i) On due date of performance- if any party to a contract refuses or fails to perform his part of
the contract at the time fixed for performance
ii) During the course of performance- If any party has performed a part of the contract and fails
to perform the remaining part of the contract.

Remedies for Breach of Contract:

Anticipatory Breach of Contract:
It occurs when the party declares his intention of not performing the contract before the
performance is due. The two modes of declaring an intention of not performing the contract
are:
1. When a party to a contract has refused to perform his promise
2. When a party to a contract has disabled himself from performing his promise in its
entirety.
There are two options available to aggrieved party:
a) He can rescind the contract and claim for damages for breach of contract without
waiting for the due date
b) He may treat the contract as operative and wait till the due date for performance and
claim for damages if the promise still remains unperformed.
c) Meaning of actual breach of contract:

d) Actual breach of contract may take place in any of the following two ways:

e) 1. On due date of performance: If any party to contract refuses or fails to perform his
part of the contract at the time fixed for performance, it is called an actual breach of
contract on due date of performance.
 f) 2. During the course of performance: If any party has performed a part of the contract
and then refuses to perform the remaining part of the contract, it is called an actual
breach of contract during the course of performance.

Remedies for breach of contract:

• Meaning of remedy: A remedy is the course of action available to an aggrieved party
for the enforcement of a right under the contract.
• The various remedies available to an aggrieved party are as follows:
a) Rescission of contract: Rescission means a right not to perform obligation. In case of
breach of a contract, the promisee may put an end to the contract. In such a case the
aggrieved party is discharged from all obligations under the contract and is entitled to
claim compensation for the damage.
b) Suit for damages: Damages are compensation allowed for loss suffered by the
aggrieved party due to breach of a contract. The object of awarding damages is not to
punish the party at fault but to make good the financial loss suffered by the aggrieved.

Compensation for loss or damage caused by breach of contract, Sec 73

Sec 73 of the Indian Contract Act deals with compensation for loss or damage caused by breach
of contract which states that the aggrieved party may claim the damages as follows:
a) Such damages which naturally arose in the usual course of things from such breach.
b) Such damages which the parties knew when they made the contract that were likely to
breach
c) The aforesaid compensation is not to be given for any remote or indirect loss or damage
sustained
Damages arising from quasi contracts:
a) Ordinary damages: are those damages which naturally arise in the usual course of things
from such breach. These damages can be recovered if the following two conditions are
fulfilled: i) the aggrieved party must suffer by the breach of contract and ii) The
damages must be direct consequence of the breach
b) Special damages: are those which may reasonably be supposed to have been in the
contemplation of both parties as the probable result of the breach of a contract. These
damages can be recovered if the circumstances which would result in a special loss are
communicated to the promisor.
 c) Exemplary or Punitive or Vindictive Damages: are those which are in the nature of
punishment. The court may award these damages in case of i) breach of a promise to
marry ii) wrongful dishonour of a cheque by a banker
d) Nominal Damages: are those which are awarded where there is only a technical
violation of a legal right but the aggrieved party has not in fact suffered any loss. These
damages are very small.
e) Damages for inconvenience and discomfort: If a party has suffered physical
inconvenience and discomfort, the party can recover the damages.

f) f) Liquidated damages and penalty:

g) g) Stipulation for interest: The stipulation for interest may or may not be in the nature
of a penalty. If the stipulation for interest is in the nature of a penalty, the Court may
award reasonable compensation only.

h) h) Forfeiture of security deposit: A clause in a contract which provides for forfeiture of

security deposit in the event of failure to perform is in the nature of penalty. The court
may reward reasonable compensation only.

Suit for Specific Performance:

• Suit for specific performance means demanding the court’s direction to the defaulting
party to carry out the promise according to the terms of the contract.
Cases where suit for specific performance is maintainable:
1. Where actual damages arising from breach are not measurable.
2. Where monetary compensation is not an adequate remedy.
Cases where suit for specific performance is not maintainable:
- Damages are considered as an adequate remedy
- Contract is of personal nature
- Contract is made by a company beyond the powers of MOA
- Court cannot supervise the performance of the contract
- One of the parties is a minor
Contract is inequitable to either party.
Suit for Injunction:
It means demanding court’s stay order. Injunction means an order of the court which prohibits
a person to do a particular act. Where a party to a contract does something which he promised
not to do, the court may issue an order prohibiting him from doing so.
“Suit for Quantum Meruit”
Quantum Meruit means as much as is earned. Right to quantum meruit the right to claim
compensation for the work already done.
Quasi Contracts:
• Meaning of quasi-contract: a) a quasi-contract is not a contract as because one or the
other essential elements for the formation of contract are absent. B) it is an obligation
imposed by law upon a person for the benefit of another even in the absence of a
contract. C) it is based on the principle of equity d) such obligations are called quasi-
contracts because the outcome of such obligations resemble those created by a contract.
• Salient Features of a quasi-contract:
a) It is imposed by law and does not arise from any agreement.
b) The duty of a party and not the promise of any party is the basis of such contract
c) The right is always a right to money
d) The right under it is available against specific person(s)
e) A suit for its breach may be filed in the same way as in case of complete contract.
Contact of Indemnity and Gaurantee:
“Contract of Indemnity” defined (Section 124) : A contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself, or by the conduct
of any other person, is called a “contract of indemnity.” There are two parties in this form of
contract. The party who promises to indemnify/ save the other party from loss is known as
‘indemnifier’, where as the party who is promised to be saved against the loss is known as
‘indemnified’ or indemnity holder.
Example 1 : A may contract to indemnify B against the consequences of any proceedings
which C may take against B in respect of a sum of ` 5000/- advanced by C to B. In consequence,
when B who is called upon to pay the sum of money to C fails to do so, C would be able to
recover the amount from A as provided in Section 124.
Example 2 : X, a shareholder of a company lost his share certificate. He applied for the
duplicate. The company agreed to issue the same on the term that X will compensate the
company against the loss where any holder produces the original certificate. Here, there is
contract of indemnity between X and the company.
Explanation: To indemnify means to compensate or make good the loss. Thus, under a
contract of indemnity the “existence of loss” is essential. Unless the promisee has suffered a
loss, he cannot hold the promisor liable on the contract of indemnity. However, the above
definition of indemnity restricts the scope of contracts of indemnity in as much as it covers
only the loss caused:
 (i) By the conduct of the promisor himself, or
(ii) By the conduct of any other person.
Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not
covered. A contract of indemnity like any other contract may be express or implied. A contract
of indemnity is like any other contract and must fulfill all the essentials of a valid contract like
consideration, free consent, competency of contract, lawful object etc.
Example : A asks B to beat C promising to indemnify him against the consequences. The
promise of A cannot be enforced. Suppose, B beats C and is fined Rs. 1000, B cannot claim
this amount from A because the object of the agreement is unlawful. A contract of Fire
Insurance or Marine Insurance is always a contract of indemnity. But there is no contract of
indemnity in case of contract of Life Insurance.
Rights of Indemnity—holder when sued (Section 125): The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the
promisor/indemnifier—
(1) All damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies;
(2) All costs which he may be compelled to pay in any such suit if, in bringing or defending it.
(3) All sums which he may have paid under the terms of any compromise of any such suit.

Contract of Guarantee “Contract of guarantee”, “surety”, “principal debtor” and

“creditor” [Section 126] Contract of guarantee : A contract of guarantee is a contract to
perform the promise made or discharge the liability, of a third person in case of his default.
Three parties are involved in a contract of guarantee:
Surety - Person who gives the guarantee,
Principal debtor - Person in respect of whose default the guarantee is given,
Creditor- Person to whom the guarantee is given
Example 1: When A requests B to lend `10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C falling to do so, he will himself pay to B, there is
a contract of guarantee. Here, B is the creditor, C the principal debtor and A the surety.
Example 2: Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay LIC
Housing in the event of ‘A’ failing to repay, it is a contract of guarantee.
Example 3: X and Y go into a car showroom where X says to the dealer to supply latest model
of Wagon R to Y. In case of Y’s failure to pay, X will be paying for it. This is a contract of
guarantee because X promises to discharge the liability of Y in case of his defaults.
Explanation: Guarantee is a promise to pay a debt owed by a third person in case the latter
does not pay. Any guarantee given may be oral or written.
From the above definition, it is clear that in a contract of guarantee there are, in effect
three contracts
(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
(iii) A implied contract between the surety and the principal debtor whereby
principal debtor is under an obligation to indemnify the surety; if the surety is
made to pay or perform. The right of surety is not affected by the fact that the
creditor has refused to sue the principal debtor or that he has not demanded the
sum due from him.
Consideration for guarantee [Section 127]: What constitutes consideration in a case of
guarantee is an important issue and is laid down in Section 127 of the Act. As per Section 127
of the Act, “anything done, or any promise made, for the benefit of the principal debtor, may
be a sufficient consideration to the surety for giving the guarantee.”
Example 1: B requests A to sell and deliver to him goods on credit. A agrees to do so, provided
C will guarantee the payment of the price of the goods. C promises to guarantee the payment
in consideration of A’s promise to deliver the goods. This is a sufficient consideration for C’s
promise.
Example 2: A sell and delivers goods to B. C afterwards requests A to forbear to sue B for the
debt for a year, and promises that if he does so, C will pay for them in default of payment by
B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise
Example 3: A sells and delivers goods to B. C afterwards, without consideration, agrees to pay
for them in default of B. The agreement is void.
Essentials of a valid Guarantee:
1. Existence of a principal debt.
2. Benefit to principal debtor is sufficient consideration, but past consideration is no
consideration for a contract of guarantee.
3. Consent of surety should not be obtained by misrepresentation or concealment of a material
fact.
4. Can be oral or written.
5. Surety can proceeded against without proceeding against the principal debtor first.
6. If the co-surety does not join, the contract of guarantee is not valid.
Distinction between a Contract of Indemnity and a Contract of Guarantee:
Point of distinction Contract of Indemnity Contract of Guarantee
Number of parties/ Parties to There are only two parties There are three parties
the contract namely the indemnifier creditor, principal debtor and
[promisor] and the surety.
indemnified [promisee]
Nature of liability The liability of the The liability of the surety is
indemnifier is primary and secondary as the primary
independent liability is that of the
principal debtor.
Time of liability The liability of the Liability is already in
indemnifier arises only on the existence but specifically
happening of a contingency. crystallizes when principal
debtor fails.
Time to Act The indemnifier need not Surety must act by extending
necessarily act at the request guarantee at the request of
of indemnified debtor
Right to sue third party Indemnifier cannot sue a Surety can proceed against
third party for loss in his own principal debtor in his own
name as there is no privity of right because he gets all the
contract. Such a right would right of a creditor after
arise only if there is an discharging the debts
assignment in his favour.
Purpose Reimbursement of loss For the security of the
creditor
Competency to contract All parties must be In the case of a contract of
competent to contract guarantee, where a minor is a
principal debtor, the contract
is still valid.
Number of Contracts Only one original and There are 3 contracts made
independent contract between–
between indemnifier and • Creditor and principal
indemnified. debtor
• Creditor and Surety
 • Surety and Principal debtor
Nature of surety’s liability [Section 128]: The liability of the surety is co-extensive with that
of the principal debtor unless it is otherwise provided by the contract.
Explanation :
(i) The term “co-extensive with that of principal debtor” means that the surety is liable
for what the principal debtor is liable.
(ii) The liability of a surety arises only on default by the principal debtor. But as soon
as the principal debtor defaults, the liability of the surety begins and runs co-
extensive with the liability of the principal debtor, in the sense that the surety will
be liable for all those sums for which the principal debtor is liable.
(iii) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
(iv) Surety’s liability continues even if the principal debtor has not been sued or is
omitted from being sued. In other words, a creditor may choose to proceed against
a surety first, unless there is an agreement to the contrary.
Example : A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonoured by C. A is liable not only for the amount of the bill but also for any interest and
charges which may have become due on it. Nature of Surety’s liability can be summed up as
(a) Liability of surety is of secondary nature as he is liable only on default of principal debtor.
(b) his liability arises immediately on the default by the principal debtor
(c) The Creditor has a right to sue the surety directly without first proceeding against principal
debtor.
Continuing Guarantee Continuing guarantee (Section 129): A guarantee which extends to
a series of transactions is called a “continuing guarantee”. The essence of continuing guarantee
is that it applies not to a specific number of transactions but to any number of transactions and
makes the surety liable for the unpaid balance at the end of the guarantee.
Example 1 : A, in consideration that B will employ C in collecting the rents of B’s zamindari,
promises B to be responsible, to the amount of `5,000 rupees, for due collection and payment
by C of those rents. This is a continuing guarantee.
Example 2 : A guarantees payment to B, a tea-dealer, to the amount of $ 100, for any tea he
may from time to time supply to C. B supplies C with tea to above the value of $ 100, and C
pays B for it. Afterwards B supplies C with tea to the value of $ 200. C fails to pay. The
guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent
of $100.
Example 3 : A guarantees payment to B of the price of five sacks of flour to be delivered by
B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards
B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a
continuing guarantee, and accordingly he is not liable for the price of the four sacks. In the
continuing guarantee, the liability of surety continues till the performance or the discharge of
all the transactions entered into or the guarantee is withdrawn.
Liability of two persons, primarily liable, not affected by arrangement between them that one
shall be surety on other’s default: Where two persons contract with a third person to undertake
a certain liability, and also contract with each other that one of them shall be liable only on the
default of the other, the third person not being a party to such contract, the liability of each of
such two persons to the third person under the first contract is not affected by the existence of
the second contract, although such third person may have been aware of its existence. (Section
132)
Example: A and B make a joint and several promissory note to C. A makes it, in fact, as surety
for B, and C knows this at the time when the note is made. The fact that A, to the knowledge
of C, made the note as surety for B, is no answer to a suit by C against A upon the note.
Discharge of a surety: A surety is discharged from liability on a guarantee under the following
circumstances :
(i) By revocation of the contract of guarantee
(ii) By the conduct of the creditor, or
(iii) By the invalidation of the contract of guarantee.
Modes of discharge:
By revocation of the Contract of Guarantee:
(a) Revocation of continuing guarantee (Section 130) : The continuing guarantee may
at any time be revoked by the surety as to future transactions by notice to the creditors.
Example 1 : A, in consideration of B’s discounting, at A’s request, bills of exchange
for C, guarantees to B, for twelve months, the due payment of all such bills to the extent
of 50,000 rupees. B discounts bills for C to the extent of 20,000 rupees. Afterwards, at
the end of three months, A revokes the guarantee. This revocation discharges A from
all liability to B for any subsequent discount. But A is liable to B for the 20,000 rupees,
on default of C.
Example 2 : A guarantees to B, to the extent of 100,000 rupees, that C shall pay all the
bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of
revocation. C dishonours the bill at maturity. A is liable upon his guarantee.
 (b) Revocation of continuing guarantee by surety’s death (Section 131) : The death of
the surety operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions. The estate of deceased surety
is, however, liable for those transactions which had already taken place during the
lifetime of the deceased. Surety’s estate will not be liable for the transactions taking
place after the death of surety even if the creditor had no knowledge of surety’s death.
By conduct of the creditor
i. By variance in terms of contract (Section 133) : Where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent, it
would discharge the surety in respect of all transactions taking place subsequent to such
variance.
Example 1 : A becomes surety to C for B’s conduct as a manager in C’s bank.
Afterwards, B and C contract, without A’s consent, that B’s salary shall be raised, and
that he shall become liable for one-fourth of the losses on overdrafts. B allows a
customer to overdraw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent, and is not liable to make good this
loss.
Example 2 : A guarantees C against the misconduct of B in an office to which B is
appointed by C, and of which the duties are defined by an Act of the Legislature. By a
subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts
himself. A is discharged by the change from future liability under his guarantee, though
the misconduct of B is in respect of a duty not affected by the later Act.
Example 3 : C agrees to appoint B as his clerk to sell goods at a yearly salary, upon
A’s becoming surety to C for B’s duly accounting for moneys received by him as such
clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be
paid by a commission on the goods sold by him and not by a fixed salary. A is not liable
for subsequent misconduct of B.
Example 4 : A gives to C a continuing guarantee to the extent of 3,00,000 rupees for
any oil supplied by C to B on credit. Afterwards B becomes embarrassed, and, without
the knowledge of A, B and C contract that C shall continue to supply B with oil for
ready money, and that the payments shall be applied to the then existing debts between
B and C. A is not liable on his guarantee for any goods supplied after this new
arrangement.
 Example 5 : C contracts to lend B 5,00,000 rupees on the 1st March. A guarantees
repayment. C pays the 5,00,000 rupees to B on the 1st 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 March.
ii. By release or discharge of principal debtor (Section 134) : The surety is discharged
by any contract between the creditor and the principal debtor; by which the principal
debtor is released, or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.
Example : 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 suretyship.
iii. Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor [Sector 135] : A contract between the creditor and the principal
debtor, by which the creditor makes a composition with, or promises to give time to, or
not to sue, the principal debtor, discharges the surety, unless the surety assents to such
contract.
iv. Surety not discharged when agreement made with third person to give time to
principal debtor [Section 136] : Where a contract to give time to the principal debtor
is made by the creditor with a third person, and not with the principal debtor, the surety
is not discharged.
Example : 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.
v. Creditor’s forbearance to sue does not discharge surety [Section 137] : Mere
forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him does not in the absence of any provision in the guarantee to the
contrary, discharge the surety.
Example : B owes to C a debt guaranteed by A. The debt becomes payable. C does not
sue B for a year after the debt has become payable. A is not discharged from his
suretyship.
vi. Discharge of surety by creditor’s act or omission impairing surety’s eventual
remedy [Section 139] : If the creditor does any act which is inconsistent with the rights
of the surety, or omits to do any act which his duty to the surety requires him to do, and
the eventual remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.
 Example 1 : B contracts to build a ship for C for a given sum, to be paid by instalments
as the work reaches certain stages. A becomes surety to C for B’s due performance of
the contract. C, without the knowledge of A, prepays to B the last two instalments. A
is discharged by this prepayment.
Example 2 : A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity.
B promises on his part that he will, at least once a month, see that 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.
By the invalidation of the contract of guarantee:
(a) Guarantee obtained by misrepresentation invalid [Section 142] : Any guarantee which
has been obtained by means of misrepresentation made by the creditor, or with his knowledge
and assent, concerning a material part of the transaction, is invalid.
(b) Guarantee obtained by concealment invalid [Section 143] : Any guarantee which the
creditor has obtained by means of keeping silence as to material circumstances is invalid.
Example 1 : A engages B as a 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 duly accounting.
C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous
conduct. B afterwards makes default. The guarantee is invalid.
Example 2 : A guarantees to C payment for iron to be supplied by him to B for the amount of
` 2,00,000 tons. B and C have privately agreed that B should pay five rupees per ton beyond
the market price, such excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety.
(c) Guarantee on contract that creditor shall not act on it until co- surety joins (Section
144) : Where a person gives a guarantee upon a contract that the creditor shall not act upon it
until another person has joined in it as co-surety, the guarantee is not valid if that other person
does not join.
Rights of a Surety Rights of a surety may be classified as under :
(a) Rights against the creditor,
(b) Rights against the principal debtor,
(c) Rights against co-sureties.
Right against the principal debtor:
(a) Rights of subrogation [Section 140] : Where, a guaranteed debt has become due, or default
of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment
or performance of all that he is liable for, is invested with all the rights which the creditor had
against the principal debtor. This right is known as right of subrogation. It means that on
payment of the guaranteed debt, or performance of the guaranteed duty, the surety steps into
the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145] : In every contract of guarantee there
is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to
recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but
no sums which he has paid wrongfully.
Example 1 : B is indebted to C, and A is surety for the debt. C demands payment from 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.
Example 2 : C lends B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it from
A, and, on A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds for so
doing, defends the suit, and has to pay the amount of the bill and costs. He can recover from B
the amount of the bill, but not the sum paid for costs, as there was no real ground for defending
the action.
Example 3 : A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be supplied
by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but obtains from A
payment of the sum of 2,00,000 rupees in respect of the rice supplied. A cannot recover from
B more than the price of the rice actually supplied.
Right against the Creditor:
Surety’s right to benefit of creditor’s securities [Section 141] : A surety is entitled to the
benefit of every security which the creditor has against the principal debtor at the time when
the contract of suretyship is entered into, whether the surety knows of the existence of such
security or not; and, if the creditor loses, or, without the consent of the surety, parts with such
security, the surety is discharged to the extent of the value of the security.
Example 1 : C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C has also a
further security for the 2,00,000 rupees by a 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.
Example 2 : C, a creditor, whose advance to B is secured by a decree, receives also a guarantee
for that advance from A. C afterwards takes B’s goods in execution under the decree, and then,
without the knowledge of A, withdraws the execution. A is discharged.
Example 3 : A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to
B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives
the up the further security, A is not discharged.
Rights against co-sureties:
(a) Co-sureties liable to contribute equally (Section 146) : Equality of burden is the basis of
Co-suretyship. This is contained in section 146 which states that “when two or more persons
are co-sureties for the same debt, or duty, either jointly, or severally and whether under the
same or different contracts and whether with or without the knowledge of each other, the co-
sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay
each an equal share of the whole debt, or of that part of it which remains unpaid by the principal
debtor”.
Example 1 : A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay 1,00,000 rupees each.
Example 2 : A, B and C are sureties to D for the sum of 1,00,000 rupees lent to E, and there is
a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the
extent of one-quarter, and C to the extent of one- half. E makes default in payment. As between
the sureties, A is liable to pay 25,000 rupees, B 25,000 rupees, and C 50,000 rupees.
(b) Liability of co-sureties bound in different sums (Section 147) : The principal of equal
contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-
sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit.
Example 1 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
3,00,000 rupees. A, B and C are each liable to pay 1,00,000 rupees.
Example 2 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
4,00,000 rupees; A is liable to pay 1,00,000 rupees, and B and C 1,50,000 rupees each.
Example 3 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent of
7,00,000 rupees. A, B and C have to pay each the full penalty of his bond.
Q.1 M advances to `5,000 on the guarantee of P. The loan carries interest at ten percent per
annum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces the
interest to six per cent per annum and does not sue N for one year after the loan becomes due.
N becomes insolvent. Can M sue P?
Ans. M cannot sue P, because a surety is discharged from liability when, without his consent,
the creditor makes any C
Q.2 What are the rights of the indemnity-holder when sued?
Q.3 Define contract of indemnity and contract of guarantee and state the conditions
whenguarantee is considered invalid ?
Ans. Section 124 of the Indian Contract Act,1872 says that “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself, or
the conduct of any person”, is called a “contract of indemnity”. Section 126 of the Indian
ContractAct says that “A contract to perform the promise made or discharge liability incurred
by a third person in case of his default.” is called as “contract of guarantee”. The conditions
under which the guarantee is invalid or void are stated in section 142,143 and 144 of the Indian
Contract Act are : (i) Guarantee obtained by means of misrepresentation. (ii) creditor obtained
any guarantee by means of keeping silence as to material circumstances. (iii) When contract of
guarantee is entered into on the condition that the creditor shall not act upon it until another
person has joined in it as co-surety and that other party fails to join as such.
Q.4 Mr. X, is employed as a cashier on a monthly salary of `2,000 by ABC bank for a period
of three years. Y gave surety for X’s good conduct. After nine months, the financial position
of the bank deteriorates. Then X agrees to accept a lower salary of `1,500/- per month from
Bank. Two months later, it was found that X has misappropriated cash since the time of his
appointment. What is the liability of Y ?
Ans. If the creditor makes any variance (i.e. change in terms) without the consent of the surety,
then surety is discharged as to the transactions subsequent to the change. In the instant case Y
is liable as a surety for the loss suffered by the bank due to misappropriation of cash by X
during the first nine months but not for misappropriations committed after the reduction in
salary. [Section 133, Indian Contract Act, 1872]. change in the terms of his contract with the
principal debtor, no matter whether the variation is beneficial to the surety or does not
materially affect the position of the surety (Section 133, Indian Contract Act, 1872).
Q.5 A contracts with B for a fixed price to construct a house for B within a stipulated time. B
would supply the necessary material to be used in the construction. C guarantees A’s
performance of the contract. B does not supply the material as per the agreement. Is C
discharged from his liability.
Ans. According to Section 134 of the Indian Contract Act, 1872, the surety is discharged by
any contract between the creditor and the principal debtor, by which the principal debtor is
released or by any act or omission for the creditor, the legal consequence of which is the
discharge of the principal debtor. In the given case the B omits to supply the timber. Hence C
is discharged from his liability.
Contact of Bailment:
Meaning of bailment- The word ‘Bailment’ is derived from French word ‘baillier’ which
means to deliver. According to sec 14, a “Bailment’ is the delivery of goods by one person to
another for some purpose, with a condition to return the goods when the purpose is over or
otherwise disposed off according to the direction of the person delivering them.
Parties in bailment contract:
Bailor- The person delivering the goods is called the bailor.
Bailee- The person to whom the goods are delivered is called the bailee.
Example: - 1. Mr. X who is going out of station delivers a dog to Mr. Y for proper care.
2. Mr. A hires a horse for riding.
3. Mr. A deliver watch for repair.
4. Mr. A gives a cloth to his tailor for stitching.
Essential Elements of a valid bailment:
• Agreement between bailor and bailee
• Delivery of goods
• Ownership not change
• Only movable goods
• Delivery for some purpose
• Change in forms
• Return of goods
a. There must be an agreement between the bailor and bailee. This agreement may be
express or implied. However, a bailment may be implied by law as it happens in the
case of finder of lost goods.
b. In bailment, it is necessary that the goods should be delivered to the bailee. It is the
essence of the contract of bailment. It is further necessary that the possession of the
goods should be voluntarily transferred and is in the accordance with the contract.
 Delivery may be of two types: 1-Actual delivery, 2- constructive delivery.
Example- 1. Delivery of a car for repair to a workshop dealer is an actual delivery.
2. Delivery of the key of a car to a workshop dealer for the repair of car is a constructive
delivery.
c. In a bailment the ownership remains with the bailor and is not transferred to the
bailee or anyone as because if the ownership is transferred then it is not a bailment
contract. It becomes a contract of sale.
d. Bailment is only for movable goods and not for immovable goods.
e. The goods must be delivered to the bailee for some purpose. The purpose could be the
safe custody, use of the goods, transportation of the goods, repair of the goods etc.
f. If the goods which are bailed are changed like a cloth is converted into a shirt than still
the contract remains a bailment.
g. The goods shall be returned to the bailor or disposed off according to his direction.
Example – The amount deposited by a person in various accounts like saving, current
account etc. is note treated as bailment because the bank is not bound to return the same
identical coins or currency notes which are deposited. This has been stated in the
various decisions given by the judges in different cases from time to time. But if a
person keeps of his valuable items like jewelry or money etc. in the bank locker for safe
custody, it is treated as a case of bailment contract.
KINDS OF BAILMENT
On the basis of benefit:
Bailment for mutual benefit of both bailor and bailee
Bailment for the exclusive benefit of the bailee
Bailment for the exclusive benefit of the bailor
On the basis of reward:
Gratuitous bailment- it is the bailment of goods without any charges or reward. The bailee is
not required to pay any charges for the bailment.
Non gratuitous bailment- it is a bailment for some charges or reward. The bailee is required to
pay some charges to the bailor.
Duties of Bailor:
• Duty to disclose all known defects ( sec 150)
• Duty to bear necessary and extraordinary expenses (Sec 158)
• Duty to indemnify loss for premature termination of bailment-Sec(159)
 • Duty to indemnify the bailee against the defective title of the bailor-(Sec164)
• Duty to receive back the goods-(Sec 164)
• Duty to bear a loss (Sec162)
DUTIES OF BAILOR:
1. It is the duty of the bailor to disclose the known defects in the goods. If the bailor fails
to disclose such defects and as a result, if the bailee suffers from any loss. The bailor
should compensate the bailee for such loss.
In case of gratuitous Bailment If the bailor fails to disclose such defect then the bailor
is liable to indemnify bailee for such loss.
In case of non gratuitous bailment. If the bailee suffers any loss Due to any defect in
the goods, the bailor is liable to indemnify Bailee for such loss whether he knows those
defect or not.
The bailor must repay to the bailee all the necessary expenses which the bailee has
already incurred for the purpose of bailment in the case of gratuitous bailment. But in
case of non gratuitous bailment, the bailor is liable to repay the extra-ordinary expenses
incurred by the bailee.
EXAMPLE Mr. X delivers a dog to Mr. Y. Y incurred Rs 100 as feeding expenses and
Rs 200 as medical expenses when the dog become sick. State the legal position (a) if
nothing was charged by either party. (b) If Mr. X charged Rs 500 from Y. Solution: (a)
It is a case of gratuitous bailment where x (the bailor) must repay Rs Mr. X delivered a
Dog to Mr. Y incurred Rs 100 as feeding expenses 300 to Mr. Y (the bailee) because
the bailor is bound to bear all expenses incurred by the bailee for the purpose of
bailment. (b) It is the case of non gratuitous bailment where Mr. X (the bailor) must
repay Rs 200 to Y (the bailee) because the bailor is Bound to bear all extraordinary
expenses (and not ordinary expenses) incurred by the bailee for the purpose of bailment.
2. If the loss caused to the bailee due to premature termination is more than the benefit
obtained by the bailee, it is the duty of the bailor to compensate the bailee for such an
excess loss.
3. If the bailor does not have any title to deliver the goods to the bailee, he would be liable
to indemnify to the bailee for any loss which the bailee has paid to the original owner.
EXAMPLE- A asks his friend B to give him cycle for one hour. B instead of his own
cycle gives C's cycle to A. While A was riding, the main owner of the cycle catches A
 and surrenders him to police custody. A is entitled to recover from B all costs, which A
had to pay in getting out of this situation
4. If the bailor wrongfully refuse to receive back the goods, he shall be liable to pay
necessary expenses incurred by the bailee for keeping this goods safely.
Example: - Mr. X lent a dog to Mr. Y for ten days. On the expiry of ten days, Mr. X
refused to receive back the dog but after five days, he received back the dog. During
these five days, Mr. Y incurred Rs 500 as feeding expenses. Mr. X must repay Rs 500
to Mr. Y.
5. It is the duty of bailor to bear the risk of loss, deterioration and destruction, of the things
bailed, provided that bailee has taken reasonable care to protect the goods from loss.
EXAMPLE: Mr. X lent a dog to Mr. Y for five days. On third day, the dog become sick
and was hospitalized but died. Mr. Y is not liable to Mr. X for this loss.
Rights of a bailor:
• Right to claim damages in case of negligence [section 152]
• Right to terminate the contract in case of unauthorized use of goods [section 153]
• Right of claim compensation in case of unauthorized use of goods [section 154]
• Right to claim the separation of goods in case of unauthorized mixture of goods[section
156]
• Right to claim compensation in case of unauthorized mixture of goods which cannot be
separated [section 157]
• Right to demand return of goods [section160]
• Right to claim compensation in case of unauthorized retention of goods(section 161)
• Right to demand accretion to goods [ section 163]
Rights of a bailor:
1. If the bailee has not taken reasonable care(in the absence of any special contract or
special care) the bailor has a right to claim damages for the loss, destruction, or
deterioration of the goods bailed.
2. If the bailee uses the goods in an unauthorized manner, the bailor can terminate the
contract of bailment before the completion of the bailment. A contract of bailment is
regarded as a voidable contract in such an event the bailee cannot sue the bailor for a
breach of contract.
 3. If the bailee does not use the goods bailed according to the terms and conditions of the
bailment contract, the bailor has a right to claim compensation from bailee for any
damages arising to the goods from or during such use of them.
4. If the bailee, without the consent of the bailor mixes bailors goods with his own goods
and the goods can be separated, the bailor has a right to claim his goods after separation.
5. If the bailee without the consent of the bailor mixes bailors goods with his own goods
and the goods cannot be separated, the bailor has a right to claim compensation from
bailee for the loss of the goods.
6. The bailor has a right to demand return of goods after the completion of the purpose or
after the expiry of period of bailment.
7. If the bailee does not return or deliver the goods according to the bailor’s directions,
after the accomplishment of purpose or after the expiry of period of bailment, the bailor
has a right to claim compensation for any loss, destruction and deterioration of goods
from that time.
8. In the absence of contract to the contrary, the bailor has a right to demand any increase
or profit which may have occurred from the goods bailed. Example:- Mr. A leaves a
cow in the custody of Mr. B to be taken care of. The cow has a calf then Mr. B is bound
to deliver the calf as well as the cow to Mr. A.
Duties of Bailee:
• Duty to take care of the good
• Duty not to make any unauthorized use of goods [section 154]
• Duty not to mix bailors goods with his own goods[section 155 to 157]
• Duty to return the goods[section 160 &161]
• Duty to return accretions to the goods [section 163]
• Duty not to set up any adverse title
Duties of bailee :
1. The bailee should take reasonable care of the goods which are in his possession. The
degree of care required by the bailee is similar to that of a man of ordinary prudence
would take of his own goods under the similar circumstances. If he has taken such care,
he is not liable, even if the goods are lost or damaged. He is also not liable for the
destruction or the loss of goods due to an act of god.
2. The bailee should not use the goods for an unauthorized purpose . He can use the goods
as per the terms and condition of the bailment. If the bailee makes any unauthorized use
 of goods he shall be liable for any loss on any unauthorized use of goods. The bailor
may terminate the contract of bailment. In other words the contract of bailment becomes
voidable.
3. (a) If the bailee, with the consent of the bailor, mixes the goods of the bailor with his
own goods, the bailor and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced
(b) If the bailee, without the consent of the bailor, mixes the goods of the bailor with
his own goods, and the goods can be a separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to bear the expense of
separation or division, and any damages arising from the mixture .
(c) If the bailee, without the consent of the bailor, mixes the goods of the bailor with
his own goods, in such a manner that it is impossible to separate the goods bailed from
the other goods and deliver them back. It was held that the bailor was entitled to refuse
to take delivery and claim compensation for loss or damage.
4. The Bailee must return the goods without waiting for demand from bailor:
• the time specified in the contract has expired or the purpose
• specified in the contract is accomplished, if the goods are not returned, then:
➢ the goods shall be at risk of the bailee,
➢ the bailee shall be liable for any loss or damage, even if such loss is
caused without any fault or negligence of the bailee or due to an act of
god or other unavoidable reasons.
5. In the absence of any contract to contrary, the bailee is bound to return any extra profit
occurred from goods bailed. 6- The bailee must not do any act which is inconsistent
with the title of the bailor. He must not set up his own title or a third parties title on the
goods bailed to him.
Rights of a bailee:
➢ Right to claim damages [section 150]
➢ Right to claim reimbursement of expenses [section 158]
➢ Right to be indemnified in case of premature termination of gratuitous bailment [section
159]
➢ Right to recover loss in case of bailors defective title[ section 164]
➢ Right to recover loss in case of bailors refusal to take the goods back [section 164]
➢ Right to deliver goods to any of the joint bailors[section 165]
 ➢ Right to deliver goods to bailor in case of bailors defective title[section 166]
Finder of goods: The person who finds the goods belonging to some other person and takes
them in his possession is known as the finder of goods. The finder of goods is in a position of
the bailee and therefore, all the duties of the bailee are equally applicable to the finder of goods.
Duties of the finder of goods:
1. The finder of goods must take the reasonable care of goods.
2. The finder of goods must return the goods to the owner.
3. The finder of goods must not use the goods for his own purpose.
4. The goods must not mix with own goods.
5. The goods must return any increase in goods along with the goods.
6. The finder of goods must make a reasonable effort to find the owner.

Right of finder of goods:

1. The finder of goods has a right to retain the goods until he receives the compensation for
trouble and expenses.
2. Where the owner has offered a specific reward for the return of goods lost, the finder has a
right to sue the owner for such reward and to retain the goods until he receive it.
3. A finder of goods has a right to sell the goods found under the following circumstances:
➢ If the owner cannot with reasonable diligence be found; or
➢ If the owner when found refuses to pay the lawful charge of the finder; or
➢ If the goods are in danger of perishing or of losing the greater part of their value; or
➢ If the lawful charges of the finder in respect of goods found amount to two third of its
value.
Termination of bailment:
1. On the expiry of fixed period
2. On fulfillment of the purpose
3. Inconsistent use of goods
4. Destruction of the subject matter of bailment
5. Death of any party
6. Termination by a bailor
Lien: Lien is the right of any person to retain the possession of goods belonging to someone
else until the claims/ charges due to the person in possession of goods are paid. The lien of
goods can be either a particular lien or a general lien.
Types of lien:
 1- Particular lien[section 170]- Where the bailee has, in accordance with the purpose of
the bailment, rendered any services involving the exercise of labour or skill in respect
of the goods bailed, he has, in the absence of a contract to the contrary, a right to retain
such goods until he receive the due remuneration for the services he has rendered in
respect of them. Example- X gives a piece of cloth to Y, a tailor to make a coat. Y
promises X to deliver the coat as soon as it is finished. Y is entitled to retain the coat
till he is paid for(if he has not allowed any credit period) but is not entitled to retain the
coat(if he has allowed one month’s credit for the payment).
2- General lien[section 171]- A general lien is a right to retain all the goods as security for
the general balance of amount until the full satisfaction of the claims due whether in
respect of those goods or other goods. In the absence of a contract to the contrary,
general lien is available only to bankers, factors, wharfinger, attorneys of a high court
and policy brokers. The general lien is available to other persons only when there is an
express contract to that effect. Example- X deposited US 64 units and shares of Reliance
Industries Ltd. as security with Citi Banks and took a loan against the shares of Reliance
Industries Ltd. Citi Bank may retain both the securities until its claims are fully
satisfied.
Pledge[Section 172]: A pledge is a special kind of bailment. Here the goods are delivered as a
security for the payment of debt or for the performance of a promise.
Pledger- The person who delivers the goods as a security for payment of a debt or performance
of a promise is known as pledger(pawnor).
Pledgee-The person to whom the goods are delivered as security for payment of a debt or
performance of a promise is known as pledgee (pawnee). In the pledge there is no change in
the ownership of the property.
EXAMPLE- Mr. A took a loan from the bank against a security of gold. In this case, Mr. A is
a pledger, the bank is a pledgee and gold is the pledged as a security.
Rights of a pawnee:
1- Right of a retainer[section 173&174]- The pawnee can retain the goods pledged with
him until he is paid money in advance, necessary expenses, interest paid on debt by him
in respect of the possession or for the preservation of the goods pledged.
2- Right to claim reimbursement of extraordinary expenses related to the goods from the
pawnor for the preservation of goods pledged by him[section 175]
3- Right to sue pawnor [ section 176]- If the pawnor makes default in the payment of the
debt or performance of the promise the pawnee has a right to sue the pawnor for the
 recovery of the amount due or for the performance of the promise and to retain the
goods pledged as a collateral security.
4- Right to sale[section 176]- If the pawnor makes default in payment of the debt or
performance of the promise, the pawnee has a right to sell the goods pledged after
giving a reasonable notice of the intended sale to the pawnor.
Duties of a pawnee:
1- Duty to take reasonable care of the goods pledged
2- Duty not to make unauthorized use of goods
3- Duty not to mix goods pledged with his own goods
4- Duty to return goods
5- Duty to return accretions to the goods.
Duties of a Pawnor:
1-It is the duty of the pawnor to follow all the terms and conditions related to the goods pawned
like repaying the loan amount within a stipulated period of time.
2-Moreover, the pawnor has the duty to pay the extra cash expenses incurred upon the pawnee
for preserving the goods pawned.
Rights of the Pawnor:
1- Right to redeem- Under section 177 of the Indian Contract Act 1872 the pawnor can
redeem the goods pawned by him to the pawnee anytime, whenever there is a default
in the repayment of the loan but in addition to it he must pay the extra expenses which
have been incurred because of his
2- Right t claim damages- The pawnor can claim the damages for the goods pawned if the
Pawnee mixes the goods pledged with his own goods without the consent of the pawnor.
Contract of Agency:
According to Section 182 of the Contract Act ‘Agent' is a 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'. Thus, it is clear from the definition, that
an agent is a connecting link between his principal and third parties. Merely because one person
gives advice to another in matters of business, the former does not become an agent of the
latter. A company promoter's status is not that of an agent as he is acting for a company which
is yet to come into existence. .4 person employed by another to invest money on his behalf and
to represent him with debtors is an agent within the meaning of Section 132 (Harbans Lal v.
Producer Exchange Corporation). Since an agent is employed mainly to bring about 2 contract
between the principal and third parties, it is absolutely essential that both the principal and the
third party must he persons capable of entering into a contract.
An agent does not act on his own behalf but acts on behalf of his principal. He either
represents his principal in transactions with third parties or performs an act for the principal.
The question as to whether a particular persons is an agent can be verified by finding out if his
acts bind the principal or not.
Definition: Sec 182 of the Indian contract act,1872 defines Agent and Principal as:

▪ Agent: means a person employed to do any act for another or to represent another in
dealing with the third persons and
▪ The principal: means a person for whom such act is done or who is so represented.

Essentials of Agency:

▪ Principal is liable for the acts of agent

▪ The principal is liable for all the acts of an agent which are lawful and within the scope
of agent’s authority.
▪ The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.
▪ Who may employ an agent?
▪ Any person may employ an agent if –
▪ He is of the age of majority; and
▪ He is of sound mind.
▪ Who can be an agent?
▪ Any person may become an agent.
▪ Even a minor or a person of unsound mind can become an agent
▪ Liability of agent
▪ Generally an agent is liable to the principal
▪ An agent is not liable to the principal if he is a minor or is of unsound mind.
▪ Requirement of consideration
▪ No consideration is necessary for creating an agency.

Creation of Agency:

▪ Any person who is of the age of majority and is of sound mind may employ an agent.
(Section 183)
▪ Between the principal and the third persons, any person may become an agent. But no
person who is a minor and of unsound mind can become an agent.(184)
▪ No consideration is necessary to create an agency. (Section 185)
▪ It is not essential that a contract of agency be entered in to. It is sufficient if a person acts on
behalf of another and is accepted by the latter.
▪ An agency can be created either in writing or orally. An oral appointment is a valid
appointment even though the contract of agency by which agent is authorized has to be in
writing.
▪ Agency by Ratification
▪ Agency by Operation of Law
▪ Two types of agreement
▪ Express Agreement
▪ Implied Agreement

Types Of Implied Agency:

▪ Agency by Estoppel or Holding out

▪ Agency by Necessity
▪ Agency in Emergency

Agency by Necessity:

▪ There was an actual and definite necessity for acting on behalf of the principal.
▪ The agent was not in a position to communicate with the principal.
▪ The act was done for the purpose of protecting the interest of his principal.
▪ The agent has exercised such reasonable care as a man of ordinary prudence would have
exercised in his own case.
▪ The act was done bonafide.

Agency by Ratification:
As per Section 196 of the Indian Contract Act, agency by ratification is said to arise when a
person, on whose behalf the acts are done without his knowledge or authority, expressly or
impliedly accept such acts.

Essentials of Ratification:

▪ Full knowledge
▪ Whole transaction
▪ No damage to 3rd parties
▪ Act on behalf of other person
▪ Existence of Principal
▪ Within reasonable time
▪ Lawful acts
▪ Acts within Principal’s power
▪ Communication

Agency by operation of law:

Agency by operation of law arises where the law treats one person as an agent of another.

Kinds of Agents:
Agents are classified in various ways according to the point of view adopted. From the
viewpoint of the authority they have, they can be classified as special agents, general agents
and universal agents. They are classified as mercantile or commercial agents and non-
mercantile or non-commercial agents. There are different various types of kind agents are as
follows.
Sub-Agent: Sub-agency denotes delegation of power by an agent to a person appointed by him
as sub-agent. Incidentally the agent himself is delegate of his principal. The principal is that ‘a
delegate cannot delegate’. According to this, a person to whom powers have been delegate
cannot delegate them to another. Section 190 of the Act. Contains this principle. Generally, an
agent cannot lawfully employ another to perform acts, which he has expressly. But, if by the
ordinary custom of trade, a sub-agent may be employed, the agent may to do so. A sub-
agent, according to section 191, is a person whom the original agent employs in the business
of the agency and who under the control of the original agent. Thus the relation of the sub-
agent to the original agent is, as between themselves, that of the agent and the principal.
(i.) In case of proper appointment: The agent is responsible to the principal for the acts of
the sub-agent. Thus, a commission agent for the sale of goods who makes a proper employment
of a sub-agent for selling his principal’s goods is liable to the principal for the fraudulent
disposition of the goods by sub-agent within the course of his employment.
(ii.) In the case of appointment without authority: In term of Section 193, the principal is
not bound by the acts of the sub-agent, nor is the sub-agent liable to the principal. The agent is
the principal of the sub-agent both to the principal and the third party.
Substituted Agent: Substituted agents are different from sub-agents. Section 194 provides that
substituted agents are not sub-agents but are in fact agents of the principal. Suppose an agent
has an implied authority to name another person to act for the principal in the business of the
agency, and he has named another person accordingly. In the circumstances, such a named
person is not a sub-agent he is an agent of the principal for such part of the business of the
agency as has been entrusted to him.
For Example: A directs B who is a solicitor to sell his estate by auction and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. In such a situation,
C is not sub-agent, but is A’s agent for the sale.
Special Agents: A special agent is also known as a specific or particular agent. Such agent
appointed to perform a particular work or to represents his principal in particular transaction
only. As soon as the said period lapses, the agency stands terminated. Specific agents have a
limited authority and as soon as the entrusted to him is performed, his authority also comes to
an end. A special agent cannot bind his principal in any act other than for which he is specially
appointed. If he dose anything outside his authority, his principal cannot be bound by it. The
third parties that deal with a special agent must ascertain the extent of the authority he has.
General agents: This type of agents has a general authority to do everything in the course of
his agency and he has to perform all the acts in the interest of his principal. Thus, a general
agent is one that has authority to do all acts connected with the business of his principal. A
manager of a branch shop of a firm or a commission agent is instances of general agents.
General agents have an implied authority to bind his principal by doing various acts necessary
for carrying on the business of his principal. Sufficiently wide powers are vested in him to
affect the business deals, enter into trade bargains, to make purchases and also payments of the
purchases, to receive money on behalf of his principal.
Universal Agent: A universal agent has a universal or an unlimited power to act on behalf of
his principal. A universal agent is one whose authority is unlimited and who can do any act on
behalf of his principal provide such act is legal and is agreeable to the law of land. A universal
agent is practically substituted for his principal for all those transactions wherein his principal
cannot participate.
For Example: When a person leaves his country for a long time, he may appoint his son, wife
or friend as his universal agent to act on his behalf in his absence.
Co-Agents: When a principal appoints two or more persons a agents jointly or severally, such
agents are known as co-agents. Their authority is joint when nothing is mentioned about the
exercise of their authority. It implies that all co-agents concur in the exercise of their authority
unless their authority is fixed. But when their authority is several, any one of the co-agents can
act without the concurrence of other.
Auctioneers: An auctioneers is a mercantile agent who is appointed to sell goods on behalf of
the principal i.e., seller and for this function, an auctioneer get a reward in the form of a
commission. An auctioneer conducts auction on behalf of a seller, as he is primarily the agent
of the seller. However, after the sale, he also becomes of the purchaser who gives the highest
bid. An auctioneer has no authority to self-the goods of his principal by private contract or
contracts.
Besides the above mentioned agents, there are other types of agents also such as brokers,
bankers, clearing agents, forwarding agents, underwriter, estate agents, etc. They also play an
important role and perform various functions for and on behalf of their principals.

Types Of Mercantile Agents

▪ Factor
▪ Commission agent
▪ Del credere Agent
▪ Broker
▪ Auctioneer

Rights And Duties Of Parties

▪ It is duty of an agent in cases of difficulty, to use all reasonable diligence in communicating

with his principal and seeking to obtain his instruction (Section 214)
▪ An agent should not set up an adverse title to the goods which he receives from the principal
as an agent.
▪ An agent is duty bond to pay sums received to the principal on his account.
▪ An agent must not use confidential information entrusted to him by his principal for his
own benefit or against the principal.
▪ The agent must not make secret profit from the extract agency. He must disclose any extra
profit that he may make.
▪ An agent must not allow his interest conflict with his duty. For example, he must not
compete with his principal.
▪ An agent must not delegate his authority to as ub-agent . This rule is based on the principle
‘Delegatus non protest delegare‘
▪ Delegate cannot further delegate (Section 190).

Distinction between Agent and Servant

Agent:
▪ He has the authority to create commercial relationship between the principal and the third
party
▪ He may work for several principal at a time
▪ He usually get commission
Servant:

▪ He ordinarily has no such authority

▪ He ordinarily work for only one master at a time
▪ He usually get salary or wages

Rights of Agent

▪ The agent has a right to retain any sums received on account of the principal in the business
of the agency, all moneys due to himself in respect of his remuneration and advances made
or expenses properly incurred by him in conducting such business.
▪ The agent has a right to receive remuneration.
▪ Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain
goods, papers and other property.
▪ The employer of an agent is bound to indemnify him against the consequences of all lawful
acts done by such agent in exercise of the authority conferred upon him.
▪ Where he has bought goods for his principal by incurring a personal liability, he has a right
of stoppage in transit against the principal, in respect of the money which he has paid or is
liable to pay.
▪ Where he is personally liable to the principal for the price of the goods sold, he stands in
the position of an unpaid seller towards the buyer and can stop the goods in transit on the
insolvency of the buyer.

Duties of an Agent

▪ Duty to act according to directions or custom of trade – Sec. 211

▪ Duty to act with reasonable care and skill – Sec. 212
▪ Duty to render account – Sec. 213
▪ Duty to communicate with Principal and to obtain Principal’s instructions – Sec. 214
▪ Duties to disclose all material circumstances and to obtain the Principal’s consent in
dealings – Sections 215 & 216
▪ Duty to pay sum received for Principal – Sections 217 & 218
▪ Duty to protect and preserve the interest entrusted to him – Section 219
▪ Duty not to delegate – Sec. 190

Rights Of Principal

▪ Right to repudiate the Transaction

▪ To claim any resulted benefit from Agency
▪ Right to Recover Damages
▪ To Resist Agent’s claim for Indemnity

Duties Of Principal

▪ To indemnify against consequences of all lawful acts of agent

▪ To indemnify the agent against consequences of acts done in good faith
▪ To pay compensation against agent’s injury
▪ To pay the agent the commission or other remuneration agreed.

Liability of Principal to Third Parties For The Acts Of Agent (Sec. 226 to 228)

▪ Principal is liable for the acts of agent

▪ The principal is liable for all the acts of an agent which are lawful and within the scope of
agent’s authority.
▪ The contracts entered into by the agent on behalf of the principal have the same legal
consequences as if these contracts were made by the principal himself.
▪ When agent exceeds his authority: Whether the acts done within the authority are
separable from the acts done beyond authority.

▪ If yes – The principal is not bound for excess acts done by the agent.
▪ If no – The principal is not bound by the transaction and the principal can repudiate the
whole transaction.

Delegation
General rule: The general rule is that an agent cannot lawfully employ another act, which he
has
expressly or impliedly undertaken to perform personally.
Exceptions

▪ There is a custom or usage of trade to that effect.

▪ Where power of the agent to delegate can be inferred from the conduct of the both the
principle and the agent.
▪ When the principal is aware of the intention of the agent to appoint sub agent by the does
not object to it.
▪ When principle permits appointment of a sub-agent.
▪ If the nature of the agency is such that the sub-agent is necessary

Extent of Agents authority

▪ Lawful Acts
▪ Emergency Authority
▪ Ostensible Authority

Personal Liability of an Agent

General Rule – No personal liability [ Sec.230]
In the absence of contract to contrary, an Agent cannot –

▪ (a) personally enforce contracts entered into by him, on behalf of his Principal,
▪ (b) be held personally liable for them.
This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys
immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –

1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale or
purchase of goods for a merchant resident abroad.
2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of
his Principal.
3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot be
sued, e.g. Principal becoming of unsound mind, subsequent to appointment of agent.
4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is not
in existence at the time of making contracts, he shall be personally held liable e.g. contracts
entered into by Promoters before incorporation of a Company are made in their personal
capacity and hence personally liable.
5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the subject
matter of agency.
6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or misrepresentation
in matters that are outside the scope of his authority, he is personally liable, and do not
affect his Principal.
7. Agent exceeds authority & act not ratified: Where an Agent acts either without any
authority or exceeds his authority, he shall be held personally liable when the principal
does not ratify his acts.
8. Agent receives or pays money: Where an Agent receives or pays money by mistake or
fraud to a third party, he shall be personally liable to such third party. Also ha can
personally sue the third party if the fraud or mistake is accountable to such third party.
9. Express Agreement for personal liability: Where an Agent expressly aggress to be
personally bound.
10. Execution of Contract in his own name: Where an Agent executes a contract in his own
name, without disclosing that he is acting as Agent for a Principal, he shall be personally
liable, e.g. An Agent signs a Negotiable Instrument without making it clear that he is
signing it as an Agent only, he shall be held personally liable on the same. He would be
personally liable as Maker of P/N, even though he may be described as Agent.
11. Trade custom or usage: Where trade usage or custom makes an Agent personally liable.
12. Agent with special interest: An Agent with special interest or with a beneficial interest,
e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs Narayana]
13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable, a
person dealing with him may hold – (a) either him or (b) his Principal or (c) both of them
liable. The liability of Principal and Agent is “joint and several”.
14. Exclusive liability [Sec. 234]

▪ Where a person has made a contract with an Agent and –

▪ Induces such Agent to act upon it in
the belief that only his principal would be held liable,
▪ Induces the principal to act upon it in the belief that only his Agent would be
held liable.
▪ Such Third person cannot later on, shift the liability on to –
▪ The Agent, or
▪ The principal, respectively.

Termination of Agency
According to section 201, an agency is terminated by:
▪ By an agreement between the parties,
▪ By the principal revoking his authority
▪ By the agent renouncing the business of agency
▪ By the business of agency being completed
▪ By either the principal or the agent dying or becoming of unsound mind
▪ By the principal being adjudicated an insolvent under the provisions of any Act for the time
being in force for relief of insolvent debtors.
▪ On expiry of fixed period
Agency May Be Terminated by

▪ Agreement
▪ Revocation of authority by the principal
▪ By operation of Law

Agency Termination By Operation Of Law

▪ On performance of the contract. Where an agent is appointed to perform a specified

transaction, his authority comes to an end on the completion of the said transaction.
▪ On expiry of time.
▪ When the agent or the principal dies or becomes of unsound mind. The death of the agent
terminates his authority.
▪ The death of one of the joint agents will terminate the agency only as far as he is concerned,
while it will continue to be valid as regards the other surviving agents in the absence of
contrary intention.
▪ On the insolvency of the principal
▪ On the destruction of the subject matter.
▪ On the principal becoming an alien enemy.
▪ On the dissolution of a company.
▪ On termination of sub-agent’s authority.

Exceptions

▪ Irrevocable Agency: When an agency cannot be put an end to, it is said to be irrevocable
agency. An agency is irrevocable where the agent himself has an interest in the property
which forms the subject-matter of the agency.
▪ Time when Termination takes Effect: The termination of the authority of an agent does
not, so far as regards the agent, take effect before it becomes known to him. As regards
third persons, it terminates when it comes to their notice.

Contract of Sale of Goods: Unit III

Contract of Sale of Goods

Contract of Sale
Contract of sale of goods is a contract, whereby, the seller transfers or agrees to transfer the
property in goods to the buyer for a price. There can be a contract of sale between one part-
owner and another.
In other words, under a contract of sale, a seller (or vendor) in the capacity of the owner, or
part-owner of the goods, transfers or agrees to transfer the ownership in goods to the buyer (or
purchaser) for an agreed upon value in money (or money equivalent), called the price, paid or
the promise to pay same.
A contract of sale may be absolute or conditional depending upon the desire of contracting
parties.
Essentials elements of a Contract of Sale
The following six features are essential elements of any contract of sale of goods.
• Goods
• Price
• Two parties
• Transfer of ownership
• All Essentials of a Valid Contract of Sale
• Includes both a ‘sale‘ and ‘an agreement to sell‘
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods
has to pass from one party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant
for sale) to his family, it does not amount to a sale and there is no contract of sale. This is so
because the seller and buyer must be two different parties, as one person cannot be both a seller
as well as a buyer. However, there shall be a contract of sale between part owners.
Suppose A and B jointly own a television set, A may transfer his ownership in the television
set to B, thereby making B the sole owner of the goods. In the same way, a partner may buy
goods from the firm in which he is a partner, and vice-versa.
However, there is an exception against the general rule that no person can buy his own goods.
Where a pawnee sells the goods pledged with him/her on non-payment of his/her money, the
pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable
property except actionable claims and money is regarded as ‘goods’. Contracts relating to
services are not considered as contract of sale. Immovable property is governed by a separate
statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale.
The term ‘property in goods’ means the ownership of the goods. In every contract of sale, there
should be an agreement between the buyer and the seller for transfer of ownership. Here
property means the general property in goods, and not merely a special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished
from special property, which is transferred in case of pledge of goods, i.e., possession of goods
is transferred to the pledgee or pawnee while the ownership rights remain with the pledger.
Thus, in a contract of sale there must be an absolute transfer of the ownership. It must be noted
that the physical delivery of goods is not essential for transferring the ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money
consideration for a sale of goods’. Accordingly, consideration in a contract of sale has
necessarily to be in money. Where goods are offered as consideration for goods, it will not
amount to sale, but it will be called barter or exchange, which was prevalent in ancient times.
Similarly, if a person offers the goods to somebody else without consideration, it amounts to a
gift or charity and not sale. In explicit terms, goods must be sold for a definite amount of
money, called the price. However, the consideration can be partly in money and partly in valued
up goods. Furthermore, payment is not necessary at the time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore,
to be valid, it must have all the essential elements of a valid contract, viz., free consent,
consideration, competency of contracting parties, lawful object, legal formalities to be
completed, etc. A contract of sale will be invalid if important elements are missing. For
instance, if A agreed to sell his car to B because B forced him to do so by means of undue
influence, this contract of sale is not valid since there is no free consent on the part of the
transferor.
6. Includes both a ‘Sale’ and ‘An Agreement to Sell’: The ‘contract of sale’ is a generic term
and includes both sale and an agreement to sell. The sale is an executed or absolute contract
whereas ‘an agreement to sell’ is an executory contract and implies a conditional sale.
A contract of sale can be made merely by an offer, to buy
or sell goods for a price, followed by acceptance of such an offer. Interestingly, neither the
payment of price nor the delivery of goods is essential at the time of making the contract of
sale unless otherwise agreed.
Subject to the provisions of the law for time being in force, a contract of sale may be made
either orally or in writing, or partly orally and partly in writing, or may even be implied from
the conduct of the parties.
Distinction between sale and agreement to sell
The distinction between sale and agreement to sell is as follows:

BASIS FOR COMPARISON SALE
Meaning When in a contract of sale,
the exchange of goods for
money consideration
takes place immediately,
it is known as Sale.
Nature Absolute
Type of Contract Executed Contract
Transfer of risk Yes
Title In sale, the title of goods
transfers to the buyer with
the transfer of goods.
Right to sell Buyer
Consequences of subsequent loss Responsibility of buyer
or damage to the goods
Tax VAT is charged at the
time of sale.
Suit for breach of contract by the The buyer can claim
seller damages from the seller
and proprietary remedy
from the party to whom
the goods are sold.
Right of unpaid seller Right to sue for the price.
AGREEMENT TO
SELL
When in a contract of sale
the parties to contract
agree to exchange the
goods for a price at a
future specified date is
known as an Agreement
to Sell.
Conditional
Executory Contract
No
In an agreement to sell,
the title of goods remains
with the seller as there is
no transfer of goods.
Seller
Responsibility of seller
No tax is levied.
Here the buyer has the
right to claim damages
only.
Right to sue for damages.
Sale distinguished from other transactions
Distinction between sale and bailment
The distinction between sale and bailment is as follows:

Sale Bailment

Possession of goods is Possession of goods is

Possession
transferred to the buyer. transferred to the bailee.

Ownership is Ownership resides with the

Ownership
transferred to the buyer. bailor.

The buyer may use the A bailee can use the goods
Usage goods in any way he only according to the
likes. directions of the bailor.

There is no return of The goods are returned after

goods from the buyer to the specified time or
Return
the seller, unless there is accomplishment of the
breach. purpose.

The consideration is an
undertaking to return the
The consideration is the
Consideration goods after the
price in terms of money.
accomplishment of the
purpose.

Charges The question of any The bailor has to repay the

charges to be paid by the charges which the bailee has
 seller to buyer or vise incurred in keeping the
versa does not arise. goods safe.

Final. Once the sale is

Temporary. The bailee has
transacted, the seller
to return the goods to the
Duration keeps the goods until he
bailor once the specified
decides to sell them to
time is passed
another.

Distinction between sale and hire purchase

The main points of distinction between the ‘sale’ and ‘hire-purchase’ are as follows:
1. In a sale, property in the goods is transferred to the buyer immediately at the time of contract,
whereas in hire-purchase the property in the goods passes to the hirer upon payment of the last
instalment.
2. In a sale the position of the buyer is that of the owner of the goods but in hire purchase the
position of the hirer is that of a bailee till he pays the last instalment.
3. In the case of a sale, the buyer cannot terminate the contract and is bound to pay the price of
the goods. On the other hand, in the case of hire- purchase the hirer may, if he so likes,
terminate the contract by returning the goods to its owner without any liability to pay the
remaining instalments.
4. In the case of a sale, the seller takes the risk of any loss resulting from the insolvency of the
buyer. In the case of hire purchase, the owner takes no such risk, for if the hirer fails to pay an
instalment the owner has the right to take back the goods.
5. In the case of a sale, the buyer can pass a good title to a bona fide purchaser from him but in
a hire-purchase, the hirer cannot pass any title even to a bona fide purchaser.

6. In a sale, sales tax is levied at the time of the contract whereas in hire- purchase sales tax is
not leviable until it eventually ripens into a sale.
Distinction between sale and contract for work and labour
A contract of sale of goods is one in which some goods are sold or are to be sold for a price. It
requires the delivery of goods. But there are transactions where there is a contract of exercise
of skill and labour, and the delivery of goods is subsidiary. These are the contracts for work or
labour or the contracts for service. It is the intention of the parties that creates the difference –
whether only delivery of goods is intended or exercise of skill and labour with regard to the
goods has to be delivered.
Example: A commissions B to paint his portrait and supplies him with the material to paint. It
is a contract for work and labour and not a contract of sale because the substance of the contract
is the artist’s skill and not the delivery of the material.
Contract of sale how made
Section 5 lays down the formalities of the contract of sale as under:
(1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of
such offer. The contract may provide for the immediate delivery of the goods or immediate
payment of the price of both, or for the delivery or payment by installments, or that the delivery
or payment or both shall be postponed.
(2) Subject to the provisions of any law for the time being in force, a contract of sale may be
made in writing or by word of mouth, or partly in writing and partly by word of mouth or may
be implied from the conduct of the parties.
Subject matter of contract
(1) The goods which form the subject of a contract of sale may be either existing goods, owned
or possessed by the seller, or future goods.
(2) There may be a contract for the sale of goods the acquisition of which by the seller depends
upon a contingency which may or may not happen.
(3) Where by a contract of sale the seller purports to effect a present sale of future goods, the
contract operates as an agreement to sell the goods.
Effect of destruction of subject – matter
Section 7 and 8 lay down the rules applicable to cases where the subject-matter of a contract
of sale is destroyed before and after the contract.
• Goods perishing before making of contract (section 7) — Where there is a contract for
the sale of specific goods, the contract is void if the goods without the knowledge of
the seller have, at the time when the contract was made, perished or become so damaged
as no longer to answer to their description in the contract.
• Goods perishing before sale but after agreement to sell (section 8)—Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on the
part of the seller or buyer perish or become so damaged as no longer to answer to their
description in the agreement before the risk passes to the buyer, the agreement is
thereby avoided.
The price
Section 9 of sales of goods act deals with ascertainment of price—
(1) The price in a contract of sale may be fixed by the contract or may be left to be fixed in
manner thereby agreed or may be determined by the course of dealing between the parties.
(2) Where the price is not determined in accordance with the foregoing provisions, the buyer
shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent
on the circumstances of each particular case.
Condition and warranty—
(1) A stipulation in a contract of sale with reference to goods which are the subject thereof may
be a condition or a warranty.
(2) A condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated.
(3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of
which gives rise to a claim for damages but not to a right to reject the goods and treat the
contract as repudiated.
(4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case
on the construction of the contract. A stipulation may be a condition, though called a warranty
in the contract.
Differences between Condition and Warranty

Condition Warranty

A warranty is a
1. A condition is a stipulation which is
stipulation which is collateral to the
essential to the main main purpose of the
purpose of the contract. contract.

For the breach of

2. For the breach of warranty, the
condition, the affected affected party can
party can abandon the claim damages
contract of sale. only.

3. A breach of condition
may be treated as a breach A breach of
of warranty. This happens warranty cannot be
if the affected party in any way treated
decides to claim damages as breach of
only. condition.

When condition to be treated as warranty—

 (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer
may waive the condition or elect to treat the breach of the condition as a breach of warranty
and not as a ground for treating the contract as repudiated.
(2) Where a contract of sale is not severable and the buyer has accepted the goods or part
thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach
of warranty and not as a ground for rejecting the goods and treating the contract as repudiated,
unless there is a term of the contract, express or implied, to that effect.
(3) Nothing in this section shall affect the case of any condition or warranty fulfilment of which
is excused by law by reason of impossibility or otherwise.
Implied conditions
I. Condition as to title (Section 14)—
In a contract of sale, unless the circumstances of the contract are such as to show a different
intention, there is—
(a) an implied condition on the part of the seller that, in the case of a sale, he has a right to sell
the goods and that, in the case of an agreement to sell, he will have a right to sell the goods at
the time when the property is to pass;
(b) an implied warranty that the buyer shall have and enjoy quiet possession of the goods;
(c) an implied warranty that the goods shall be free from any charge or encumbrance in favour
of any third party not declared or known to the buyer before or at the time when the contract is
made.
II. Sale by description—
Where there is a contract for the sale of goods by description, there is an implied condition that
the goods shall correspond with the description; and, if the sale is by sample as well as by
description, it is not sufficient that the bulk of the goods corresponds with the sample if the
goods do not also correspond with the description.
III.ImpliedI conditions as to quality or fitness—
Subject to the provisions of this Act and of any other law for the time being in force, there is
no implied warranty or condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale, except as follows:—
(1) Where the buyer, expressly or by implication, makes known to the seller the particular
purpose for which the goods are required, so as to show that the buyer relies on the seller’s
skill or judgment, and the goods are of a description which it is in the course of the seller’s
business to supply (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose:
Provided that, in the case of a contract for the sale of a specified article under its patent or other
trade name, there is no implied condition as to its fitness for any particular purpose.
(2) Where goods are bought by description from a seller who deals in goods of that description
(whether he is the manufacturer or producer or not), there is an implied condition that the goods
shall be of merchantable quality:
Provided that, if the buyer has examined the goods, there shall be no implied condition as
regards defects which such examination ought to have revealed.
(3) An implied warranty or condition as to quality or fitness for a particular purpose may be
annexed by the usage of trade.
(4) An express warranty or condition does not negative a warranty or condition implied by this
Act unless inconsistent therewith.
IV. Sale by sample—
(1) A contract of sale is a contract for sale by sample where there is a term in the contract,
express or implied, to that effect.
(2) In the case of a contract for sale by sample there is an implied condition—
(a) that the bulk shall correspond with the sample in quality;
(b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample;
(c) that the goods shall be free from any defect, rendering them unmerchantable, which would
not be apparent on reasonable examination of the sample.
Implied Warranties
The Act lays down the following implied Warranties in a contract of sale-
I.Warranty As To Undisturbed Possession
Once you buy the goods, they shouldn’t be taken away from you. This warranty means that the
buyer should have and enjoy quiet possession of the goods after having gotten the possession
of the goods. If he is disturbed in his possession, he is entitled to sue the seller for the breach
of the warranty.
For example, A buys a laptop from B. After the purchase, A spends some money on its repair
and uses it for some time. Unknown to the parties, it turns out that the laptop was stolen and
was taken from A and delivered to its rightful owner. B shall be held responsible for a breach
and A is entitled to damages of not only the price but also the cost of repairs.
II.Warranty As To Non-Existence Of Encumbrances
This is an implied warranty which maintains that the goods are free from any encumbrance or
charge from any third party who has not been introduced or known to the buyer at or before
the time of the contract of sale is entered into.
For example, a person A pledges his computer to another person B against a loan of Rs. 30,000.
“A” also promises B that A will produce the laptop and give it to B the next day. Later that
day, A goes on to sell the laptop to C who is unaware of the course of dealings between A and
B. In this case, C can ask A to clear the loan immediately or clear the loan by himself or herself
and then proceed to file a suit against A for the recovery of the money spent including the
interest.
III.Disclosure Of Dangerous Nature Of Goods
In case the goods are inherently dangerous or they are likely to be dangerous to the buyer and
the buyer is ignorant or unaware of the danger, an implied warranty on the part of the seller
emerges. The seller must warn the buyer duly about the dangerous nature of the goods if any.
In case of a breach of this warranty, the seller will be liable in damages.
For example, a person X purchases a bottle of disinfectant from a person Y. Y knows that the
cap of the bottle is defective or cheap and if opened by a novice without care, it may spill and
result in partial burning or other damages of the person. When X opens the bottle, he is injured.
In this case, X is liable in damages to Y as Y should have been duly warned of the probable
danger.
IV.Warranty As To Qualify Or Fitness By Usage Of Trade
An implied warranty as to the quality or the fitness for a particular purpose may be annexed by
the usage of the trade. For example, consider the following example:
A drug was sold through an auction and according to the usage of trade. It was to disclose in
advance any sea-damage, otherwise, it will be taken as a breach of warranty if no such
disclosure has been made and the goods found to be defective.
Caveat Emptor
“Caveat Emptor” is a Latin phrase that translates to “let the buyer beware”. This means it lays
the responsibility of their choice on the buyer themselves.
A seller makes his goods available in the open market. The buyer previews all his options and
then accordingly makes his choice. Now let’s assume that the product turns out to be defective
or of inferior quality.
This doctrine says that the seller will not be responsible for this. The buyer himself is
responsible for the choice he made.
So the doctrine attempts to make the buyer more conscious of his choices. It is the duty of the
buyer to check the quality and the usefulness of the product he is purchasing. If the product
turns out to be defective or does not live up to its potential the seller will not be responsible for
this.
Let us see an example. A bought a horse from B. A wanted to enter the horse in a race. Turns
out the horse was not capable of running a race on account of being lame. But A did not inform
B of his intentions. So B will not be responsible for the defects of the horse. The Doctrine of
Caveat Emptor will apply.
However, the buyer can shift the responsibility to the seller if the three following conditions
are fulfilled.
• if the buyer shares with the seller his purpose for the purchase
• the buyer relies on the knowledge and/or technical expertise of the seller
• and the seller sells such goods.
Exceptions to the Doctrine of Caveat Emptor
The doctrine of caveat emptor has certain specific exceptions. Let us take a brief look at these
exceptions.
1] Fitness of Product for the Buyer’s Purpose
When the buyer informs the seller of his purpose of buying the goods, it is implied that he is
relying on the seller’s judgment. It is the duty of the seller then to ensure the goods match their
desired usage.
Say for example A goes to B to buy a bicycle. He informs B he wants to use the cycle for
mountain trekking. If B sells him an ordinary bicycle that is incapable of fulfilling A’s purpose
the seller will be responsible. Another example is the case study of Priest v. Last.
2] Goods Purchased under Brand Name
When the buyer buys a product under a trade name or a branded product the seller cannot be
held responsible for the usefulness or quality of the product. So there is no implied condition
that the goods will be fit for the purpose the buyer intended.
3] Goods sold by Description
When the buyer buys the goods based only on the description there will be an exception. If the
goods do not match the description then in such a case the seller will be responsible for the
goods.
4] Goods of Merchantable Quality
Section 16 (2) deals with the exception of merchantable quality. The sections state that the
seller who is selling goods by description has a duty of providing goods of merchantable
quality, i.e. capable of passing the market standards.
So if the goods are not of marketable quality then the buyer will not be the one who is
responsible. It will be the seller’s responsibility. However if the buyer has had a reasonable
chance to examine the product, then this exception will not apply.
5] Sale by Sample
If the buyer buys his goods after examining a sample then the rule of Doctrine of Caveat Emptor
will not apply. If the rest of the goods do not resemble the sample, the buyer cannot be held
responsible. In this case, the seller will be the one responsible.
For example, A places an order for 50 toy cars with B. He checks one sample where the car is
red. The rest of the cars turn out orange. Here the doctrine will not apply and B will be
responsible.
6] Sale by Description and Sample
If the sale is done via a sample as well as a description of the product, the buyer will not be
responsible if the goods do not resemble the sample and/or the description. Then the
responsibility will fall squarely on the seller.
7] Usage of Trade
There is an implied condition or warranty about the quality or the fitness of goods/products.
But if a seller deviated from this then the rules of caveat emptor cease to apply. For example,
A bought goods from B in an auction of the contents of a ship. But B did not inform A the
contents were sea damaged, and so the rules of the doctrine will not apply here.
8] Fraud or Misrepresentation by the Seller
This is another important exception. If the seller obtains the consent of the buyer by fraud then
caveat emptor will not apply. Also if the seller conceals any material defects of the goods which
are later discovered on closer examination then again the buyer will not be responsible. In both
cases, the seller will be the guilty party.
TRANSFER OF PROPERTY (OWNERSHIP) :
• The term ‘property in the goods’ may be defined as the legal ownership of the goods.
• Transfer of Ownership means transfer of Risk, Rights and Returns pertaining to the
goods.
• The term ‘property in the goods’ must be distinguished from the term ‘possession of
the goods’. The term ‘property in the goods’ means the ownership’ of the goods,
whereas the term ‘possession of goods’ simply means the custody or physical control
over the goods.
Rules as regards passing of property
Unless a different intention appears, the rules contained in sections 20 to 24 are rules for
ascertaining the intention of the parties as to the time at which the property in the goods is to
pass to the buyer-
1. Specific goods in a deliverable state— Where there is an unconditional contract for the sale
of specific goods in a deliverable state, the property in the goods passes to the buyer when the
contract is made, and it is immaterial whether the time of payment of the price or the time of
delivery of the goods, or both, is postponed.
2.. Specific goods to be put into a deliverable state—Where there is a contract for the sale of
specific goods and the seller is bound to do something to the goods for the purpose of putting
them into a deliverable state, the property does not pass until such thing is done and the buyer
has notice thereof.
3. Specific goods in a deliverable state, when the seller has to do anything thereto in order to
ascertain price.—Where there is a contract for the sale of specific goods in a deliverable state,
but the seller is bound to weigh, measure, test or do some other act or thing with reference to
the goods for the purpose of ascertaining the price, the property does not pass until such act or
thing is done and the buyer has notice thereof.
4. Sale of unascertained goods and appropriation.—(1) Where there is a contract for the sale
of unascertained or future goods by description and goods of that description and in a
deliverable state are unconditionally appropriated to the contract, either by the seller with the
assent of the buyer or by the buyer with the assent of the seller, the property in the goods
thereupon passes to the buyer. Such assent may be express or implied, and may by given either
before or after the appropriation is made
Delivery to carrier—(2) Where, in pursuance of the contract, the seller delivers the goods to
the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of
transmission to the buyer, and does not reserve the right of disposal, he is deemed to have
unconditionally appropriated the goods to the contract.
5. Goods sent on approval or “on sale or return”.—When goods are delivered to the buyer on
approval or “on sale or return” or other similar terms, the property therein passes to the buyer—
(a) when he signifies his approval or acceptance to the seller or does any other act adopting the
transaction;
(b) if he does not signify his approval or acceptance to the seller but retains the goods without
giving notice of rejection, then, if a time has been fixed for the return of the goods, on the
expiration of such time, and, if no time has been fixed, on the expiration of a reasonable time.
Sale by non owner
As a general rule, no man can sell goods and give a good title unless he is the owner. The rule
is expressed by the maxim, “ Nemo Dt Quad Non Habet”, which means that no one can pass a
better title than he himself has. This rule is meant to protect the true owner and the fact of an
innocent and bonafide purchaser from the non-owners cannot remove the claim of the true
owner.

Exceptions to the rule

The following are the various exceptions to the rule-
1. Sale by person not the owner—Subject to the provisions of this Act and of any other law for
the time being in force, where goods are sold by a person who is not the owner thereof and who
does not sell them under the authority or with the consent of the owner, the buyer acquires no
better title to the goods than the seller had, unless the owner of the goods is by his conduct
precluded from denying the seller’s authority to sell:
Provided that, where a mercantile agent is, with the consent of the owner, in possession of the
goods or of a document of title to the goods, any sale made by him, when acting in the ordinary
course of business of a mercantile agent, shall be as valid as if he were expressly authorised by
the owner of the goods to make the same; provided that the buyer acts in good faith and has
not at the time of the contract of sale notice that the seller has not authority to sell.
2. Sale by one of joint owners.— If one of several joint owners of goods has the sole possession
of them by permission of the co-owners, the property in the goods is transferred to any person
who buys them of such joint owner in good faith and has not at the time of the contract of sale
notice that the seller has not authority to sell.
3. Sale by person in possession under voidable contract.—When the seller of goods has
obtained possession thereof under a contract voidable under section 19 or section 19A of the
Indian Contract Act, 1872 (9 of 1872), but the contract has not been rescinded at the time of
the sale, the buyer acquires a good title to the goods, provided he buys them in good faith and
without notice of the seller’s defect of title.
4. Seller or buyer in possession after sale.—(a) Where a person, having sold goods, continues
or is in possession of the goods or of the documents of title to the goods, the delivery or transfer
by that person or by a mercantile agent acting for him, of the goods or documents of title under
any sale, pledge or other disposition thereof to any person receiving the same in good faith and
without notice of the previous sale shall have the same effect as if the person making the
delivery or transfer were expressly authorised by the owner of the goods to make the same.
(b) Where a person, having bought or agreed to buy goods, obtains, with the consent of the
seller, possession of the goods or the documents of title to the goods, the delivery or transfer
by that person or by a mercantile agent acting for him, of the goods or documents of title under
any sale, pledge or other disposition thereof to any person receiving the same in good faith and
without notice of any lien or other right of the original seller in respect of the goods shall have
effect as if such lien or right did not exist.

Delivery
It means voluntary transfer of possession from one person to another. Delivery is a bilateral act
It requires two parties to the act. The essential elements of delivery are-
i. A person has possession
ii. He transfers that possession to another person
iii. He does so voluntarily
Mode of delivery
Delivery of goods may be made in any of the following ways-
1. Actual delivery -When the goods are actually physically delivered to the buyer.
2. Symbolic delivery -When there is a delivery of a thing in token of a transfer of
something else. Example: Handing over car keys, handing over documents of title
3. Constructive delivery - When it is affected without any change in the custody or actual
possession. Example: Where a warehouseman holding the goods of A agrees to hold
them on behalf of B, at A’s request
.Rules regarding delivery
The rules with regard to delivery of goods are as follows-
1. Duties, of seller and buyer.— It is the duty to the seller to deliver the goods and of the
buyer to accept and pay for them, in accordance with the terms of the contract of sale.
2. Payment and delivery are concurrent conditions.—Unless otherwise agreed, delivery
of the goods and payment of the price are concurrent conditions, that is to say, the seller
shall be ready and willing to give possession of the goods to the buyer in exchange for
the price, and the buyer shall be ready and willing to pay the price in exchange for
possession of the goods.
3. Delivery.—Delivery of goods sold may be made by doing anything which the parties
agree shall be treated as delivery or which has the effect of putting the goods in the
possession of the buyer or of any person authorised to hold them on his behalf.
4. . Effect of part delivery.—A delivery of part of goods, in progress of the delivery of the
whole, has the same effect, for the purpose of passing the property in such goods, as a
 delivery of the whole; buta delivery of part of the goods, with an intention of severing
it from the whole, does not operate as a delivery of the remainder.
5. Buyer to apply for delivery.— Apart from any express contract, the seller of goods is
not bound to delivery them until the buyer applies for delivery.
6. Rules as to delivery.— (a)) Whether it is for the buyer to take possession of the goods
or for the seller to send them to the buyer is a question depending in each case on the
contract, express or implied, between the parties. Apart from any such contract, goods
sold are to be delivered at the place at which they are at the time of the sale, and goods
agreed to be sold are to be delivered at the place at which they are at the time of the
agreement to sell, or, if not then in existence, at the place at which they are
manufactured or produced.
(b) Where under the contract of sale the seller is bound to send the goods to the buyer,
but no time for sending them is fixed, the seller is bound to send them within a
reasonable time.
(c) Whether goods at the time of sale are in the possession of a third person, there is
no delivery by seller to buyer unless and until such third person acknowledges to the
buyer that he holds the goods on his behalf:
Provided that nothing in this section shall affect the operation of the issue or transfer of
any document of title to goods.
(d) Demand or tender of delivery may be treated as ineffectual unless made at a
reasonable hour. What is a reasonable hour is a question of fact.
(e) Unless otherwise agreed, the expenses of and incidental to putting the goods into a
deliverable state shall be borne by the seller.
7. Delivery of wrong quantity.—(a) Where the seller delivers to the buyer a quantity of
goods less than he contracted to sell, the buyer may reject them, but it the buyer accepts
the goods so delivered he shall pay for them at the contract rate.
(b) Where the seller delivers to the buyer a quantity of goods larger than he contracted
to sell, the buyer may accept the goods included in the contract and reject the rest, or
he may reject the whole. If the buyer accepts the whole of the goods so delivered, he
shall pay for them at the contract rate.
(c) Where the seller delivers to the buyer the goods he contracted to sell mixed with
goods of a different description not included in the contract, the buyer may accept the
goods which are in accordance with the contract and reject the rest, or may reject the
whole.
(d) The provisions of this section are subject to any usage of trade, special agreement
or course of dealing between the parties.
8. Instalment deliveries.—(a) Unless otherwise agreed, the buyer of goods is not bound to
accept delivery thereof by instalments.
(b) Where there is a contract for the sale of goods to be delivered by stated instalments
which are to be separately paid for, and the seller makes no delivery or defective
delivery in respect of one or more instalments, or the buyer neglects or refuses to take
delivery of or pay for one or more instalments, it is a question in each case depending
on the terms of the contract and the circumstances of the case, whether the breach of
contract is a repudiation of the whole contract, or whether it is a severable breach giving
rise to a claim for compensation, but not to a right to treat the whole contract as
repudiated.
 9. Delivery to carrier or wharfinger.—(a) Where, in pursuance of a contract of sale, the
seller is authorised or required to send the goods to the buyer, delivery of the goods to
a carrier, whether named by the buyer or not, for the purpose of transmission to the
buyer, or delivery of the goods to a wharfinger for safe custody, is prima facie deemed
to be a delivery of the goods to the buyer.
(b) Unless otherwise authorised by the buyer, the seller shall make such contract with
the carrier or wharfinger on behalf of the buyer as may be reasonable having regard to
the nature of the goods and the other circumstances of the case. If the seller omits so to
do, and the goods are lost or damaged in courseof transit or whilst in the custody of the
wharfinger, the buyer may decline to treat the delivery to the carrier or wharfinger as a
delivery to himself, or may hold the seller responsible in damages.
(c) otherwise agreed, where goods are sent by the seller to the buyer by a route involving
sea transit, in curcumstances in which it is usual to insure, the seller shall give such
notice to the buyer as may enable him to insure them during their sea transit, and if the
seller fails so to do, the goods shall be deemed to be at his risk during such sea transit.
10. . Risk where goods are delivered at distant place.—Where the seller of goods agrees to
deliver them at his own risk at a place other than that where they are when sold, the
buyer shall, nevertheless, unless otherwise agreed, take any risk of deterioration in the
goods necessarily incident to the course of transit.
11. . Buyer’s right of examining the goods.—(a) Where goods are delivered to the buyer
which he has not previously examined, he is not deemed to have accepted them unless
and until he has had areasonable opportunity of examining them for the purpose of
ascertaining whether they are in conformity with the contract.
(b) Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he
is bound, on request, to afford the buyer a reasonable opportunity of examining the
goods for the purpose of ascertaining whether they are in conformity with the contract.
12. . Acceptance.—The buyer is deemed to have accepted the goods when he intimates to
the seller that he has accepted them, or when the goods have been delivered to him and
he does any act in relation to them which is inconsistent with the ownership of the seller,
or when, after the lapse of a reasonable time, he retains the goods without intimating to
the seller that he has rejected them.
13. Buyer not bound to return rejected goods.—Unless otherwise agreed, where goods are
delivered to the buyer and he refuses to accept them, having the right so to do, he is not
bound to return them to the seller, but it is sufficient if he intimates to the seller that he
refuses to accept them.
14. Liability of buyer for neglecting or refusing delivery of goods.—When the seller is
ready and willing to deliver the goods and requests the buyer to take delivery, and the
buyer does not within a reasonable time after such request take delivery of the goods,
he is liable to the seller for any loss occasioned by his neglect or refusal to take delivery,
and also for a reasonable charge for the care and custody of the goods:
Provided that nothing in this section shall affect the rights of the seller where the neglect
or refusal of the buyer to take delivery amounts to a repudiation of the contract.

Unpaid seller
A seller will be called ‘unpaid’ if the following conditions are fulfilled:
(1) The whole or part of the price has not been paid or tendered and that the seller has immediate
right of action for the price.
(2) A bill of exchange or other negotiable instrument has been received but the same has been
dishonoured.
RIGHTS OF UNPAID SELLER
(A) Rights against the Goods:
1. Where the ownership of the goods has transferred to the buyer: In this case, the unpaid seller
has the following rights:
(a) Right of lien
i. The right of lien is the right to retain possession of the goods.
ii. This right can be exercised only when the possession of goods is with the seller.
iii. The unpaid seller of goods can retain his possession of goods until payment of the price in
following cases:
a) Where the goods are not sold on credit.
b) Where the goods have been sold on credit, but the term of credit has expired
c) Where the buyer becomes insolvent.
iv. The unpaid seller can retain the goods only for the payment of the price of the goods: He
cannot retain the goods for any other charges, e.g., maintenance, charges for storage of goods
during the exercise of lien etc.
v. The right of lien is indivisible in nature.
vi.Termination of Lien:
a) By delivery of goods to the carrier
b) By delivery of goods to the buyer
c) By waiver of the lien
d) By payment of price by the buyer
(b) Right of stoppage in transit
i.. The right of stoppage in transit is the right to regain possession of the goods.
ii. This right can be exercised only when,
(a) Seller should have parted with the possession
(b) Possession should be with a carrier, &
(c) Buyer has not acquired the possession.
iii. The right of stoppage in transit can be exercised only if the buyer has become insolvent.
iv.. The unpaid seller can stop the goods in transit only for the payment of the price of the
goods.
(c) Right of Resale
The unpaid seller has the direct right to resell the goods in the following circumstances:
1. Where the goods are of perishable nature
2. Where the unpaid seller has expressly reserved his right of resale.
In any other case, the unpaid seller has the right to resell the goods by following the procedure:
1. Unpaid seller should give a notice to the buyer of his intention to resell the
goods plus Additional time for payment
2. If the buyer does not pay the price within a reasonable time, the seller may resell the goods-
a. If the notice of resale is given then in case of loss on resale, it can be recovered and in case
of profit on resale, it can be retained.
b. However the notice of resale is not given, the seller cannot recover the loss suffered on
resale. Moreover, if there is any profit on resale he must return it to the original buyer
2. Where the ownership of the goods has not been transferred to the buyer:
(a) Right of Withholding Delivery- When the ownership of the goods sold is not transferred
to the buyer, if the buyer fails to pay the price, the unpaid seller may refuse to deliver the goods
to the buyer. Such right is known as right of withholding the delivery of the goods.
(b) Any other right - Since ownership and possession of goods is with the seller, seller can use,
gift, resell the goods, etc.
(B) Rights against the Buyer
1. Suit for recovery of price - Where the buyer takes the ownership as well as possession of
goods and the buyer fails to pay the price of the goods, the seller can file a suit against the
buyer for recovery of the price.
2. Suit for damages for repudiation of the contract before the due date of delivery of goods :
Where the buyer repudiates (i.e., puts an end to) the contract before the due date of delivery of
the goods, the seller has the following options:
(i) He may not immediately take any action against the buyer, and treat the contract as
subsisting and wait till the date of delivery of goods.
(ii) He may immediately treat the contract as repudiated and bring a legal action against the
buyer for the recovery of damages. Thus, the option of bringing the action lies with the seller.
He may either wait till
3. Suit for damages - Where the seller is ready and willing to deliver the goods to the buyer,
but the buyer wrongfully neglects or refuses to accept the goods and pay for them, then the
seller may bring a legal action against the buyer for the recovery of damages suffered due to
non-acceptance of the goods.
4. Suit for interest - The court may award the interest from the date of tender of the goods or
from the date when the price is payable. The rate of interest to be awarded is at the discretion
of the court.
Distinguish between Right of Lien and Right of stoppage in transit
1. The essence of a right of lien is to retain possession whereas the essence of stoppage in
transit is to regain possession
2. Seller should be in possession of goods under lien whereas in stoppage in transit, seller
should have parted with the possession, possession should be with a carrier, & ) buyer has not
acquired the possession.
3. Right of lien can be exercised even when the buyer is not insolvent whereas Right of
stoppage in transit can be exercised only when buyer becomes insolvent
4. Right of lien precedes right of stoppage in transit whereas Right of stoppage in transit begins
when the right of lien ends.
EFFECTS OF SUB-SALE OR PLEDGE BY BUYER
The right of lien or stoppage in transit is not affected by the buyer selling or pledging the goods
unless the seller has assented to it.
Exceptions:
(a) When the seller has assented to the sale, mortgage or other disposition of the goods
made by the buyer.
(b) When a document showing title to goods has been transferred to the buyer and the
buyer transfers the documents to a person who has bought goods in good faith and for
value.
RIGHTS OF PARTIES IN BREACH OF CONTRACT
A. Rights of Buyer against Seller
1. Damages for non‐delivery
2. Suit for specific performance
3. Suit for breach of warranty
4. Suit for breach of condition
5. Rescind the Contract
6. Suit for interest
B. Rights of Seller against Buyer
1. Rescind the contract
2. Suit for recovery of price
3. Suit for damages
4. Suit for interest
AUCTION SALES
a. An auction sale is a sale at which the auctioneer, as agent for the seller, invites persons
present to bid for goods sold.
b. Auctioneer acts in a dual capacity-
i.He acts as an agent of the seller till the article is ‘knocked down’ to the bidder.
ii. Subsequently, he acts as an agent of the buyer.
Rules regarding Auction Sales:
1. Where goods are put up for sale in lots, they are deemed to be sold in lots.
2. The sale is complete and ownership is transferred when the auctioneer announces its
completion by the fall of the hammer or in any other customary manner.
3. Bidder may retract his bid anytime before auction sale is complete.
4. The sale may be notified to be subject to a ‘reserve price’ or ‘upset price.’ When the sale is
notified to be subject to a ‘reserve price’, the bidding and knocking down of the article to the
highest bidder are all subject to the condition that the ‘reserve price’ should be reached.
5. If the seller makes use of pretended bidding to raise the price, the sale is voidable at the
option of the buyer.
6. A right to bid may be ‘reserved’ expressly by or on behalf of the seller and, where such right
is expressly so reserved, but not otherwise, the seller or any other person on his behalf, may
bid at the auction.
7. Implied warranties in auction sale: In an auction sale, the auctioneer warrants the following:
• that he has an authority to sell;
• that he is not aware of any defect in the title of the principal;
• that he undertakes to handover the quite possession of the
goods as soon as the price is paid to him.

Unit 3: Assam Co-operative Societies Act, 1949

Assam co-operative societies Act, 1949

Registration of Societies
1. The Registrar of Societies- Authority to register a Society
(1) The State Government may appoint a person to be a Registrar pf Co-operative Societies for
the Province or any portion of it for the registration supervision, assistance, counsel and control
of registered societies and for the development of the co-operative movement and control over
all co-operative education and with such other powers and responsibilities as may be provided
under this Act or rules or bye-laws framed thereunder.
(2) The state Government may also appoint persons to assist the Registrar and may, by general
or special order in writing, delegate to any such person or to any other Government Officer all
or any of the powers of the Registrar under this Act.
(3) The State Government may also appoint non-official helpers with such designations and
functions as prescribed to aid in the organization of Co-operative Societies.

2. Procedure to register a Society

1. Objective- A society which has as its objects the promotion of the economic interests or
general welfare of its members or of the public in accordance with the co operative principles,
or a society established with the object of facilitating the operations of any society may be
registered under this Act with limited liability.
2. Not against the cooperative movement- No society shall be registered if in the opinion of the
Registrar, its declared objects are unlikely to be achieved or if it is likely to be economically
unsound or if it may have an adverse effect upon any registered society or the co-operative
movement as a whole.
3.Age, qualification of a member.
No person may be an individual member of a registered society if he is less than eighteen years
of age; provided that the bye laws of a society may prescribe a higher minimum age.
4. Conditions of registration.
(1) No society, other than a society of which a member is a registered society shall be registered
under this Act which does not consist of at least ten eligible persons and, in case where the
primary object of the society is the creation of funds to be lent to its members, unless such
persons reside in the same town, village or in the same Panchayat Area.
(2) The word "Limited" shall be the last word in the name of every society with limited liability
registered under this Act.
5. Restriction on acquisition of shares in a society.
(1) No member of a registered society shall hold more than such portion of the share capital of
the society as may be prescribed by the rules, or the bye-laws of the society.
(2) No member shall be allowed to acquire an additional share until he has paid in full the value
of the whole or that portion of his share holding which he is required to pay in accordance with
the bye-laws of his society.
6. Power of Registrar to decide certain questions.
All disputes regarding membership for the purpose of the formation, registration or continuance
of a society under this Act shall be decided by the Registrar.
7..Change of liability.
(1) Subject to the proviso to S.4 and to any rules made in this behalf, a registered society may,
with the previous sanction of the Registrar, change its liability from limited to unlimited or
from limited to unlimited or from unlimited to limited :
Provided that:
(i) the society shall give notice in writing of its intention to change its liability to all its members
and creditors;
(ii) any member or creditor shall, notwithstanding any bye-law or contract to the contrary ,
have the option of withdrawing his shares, deposits or loans, as the case may be, within three
months of the service of such notice on him and the change shall not take effect until all such
claims have been satisfied; and
(iii) any member or creditor, who does not exercise his option within the period aforesaid, shall
be deemed to have assent to the change.
(2) Notwithstanding anything contained in the proviso to sub-S. (1) no change shall take effect
at once if all the members and creditors assent thereto.
(3) The Registrar shall register the amendment of the bye-laws consequent on the change of
liability; provided that no person who ceases to be a member of the society before such
amendment is registered shall be adversely affected by the change of liability.
8. Application for registration.
(1) An application for registration shall be made to the Registrar in the prescribed form.
(2) The application shall be signed"
(a) in the case of society of which no promoter is a registered society , by at least ten eligible
persons; and
(b) in the case of a society of which at least one promoter is a registered society , by a duly
authorised person on behalf of such registered society and at least one other individual
promoter or one other duly authorised person on behalf of another registered society.
(3) The application shall be accompanied by four copies of the proposed by-laws of the society
signed on behalf of the promoters by the president of the inaugural general meeting. Promoters
by whom or on whose behalf such application is made shall furnish such information in regard
to the society as the Registrar may require and they shall be liable to the full extent of the share
money which they have undertaken to subscribe with effect from the date of registration of the
society.
9.. Registration.
I. The Registrar shall decide all questions as to whether the application complies with the
provisions of this Act and rules thereunder and whether the objects of the society are in
accordance with S. 4.
II. When he is satisfied that the application is in order under sub-S. (1) and the society and
bye-laws are not contrary thereto, he may register the society and bye- laws ; provided
that the Registrar shall have powers to register the bye laws with such modifications as
 he thinks are necessary to bring about uniformity in the main with provisions of the
bye-laws of societies which have similar objects or functions.
III. The Registrar shall endorse the by-laws in token of registration. Each society shall have
a copy of its by laws so endorsed.
IV. If the Registrar refuses to register a society or an amendment of the by-laws of a
registered society he shall record his reasons in writing and communicate these reasons
and his decision to the promoters or the Secretary of a registered society by a registered
letter to their office. The Registrar may at any time review his orders in this respect.
V. Evidence of registration-A certificate of registration signed by the Registrar shall be
issued to the society and shall be conclusive evidence that the co-operative society
therein mentioned is a co-operative society duly registered under this Act and that its
bye-laws are as attached to the certificate, unless it is proved that the registration of the
society has been cancelled or that amended bye-laws have been registered or that the
society has been cancelled or that amended bye- laws have been registered or that the
society's copy of the certificate or bye-laws has been tampered with.
Rights and liabilities of members of registered societies
1.Member not to exercise rights till due payment made and conditions fulfilled.
No member of a registered society shall exercise the rights of a member unless or until he has
made such payment to the society in respect of membership or acquired such interest in the
society, as may be prescribed by the rules or by-laws.
2. Votes of members.
a) Irrespective of the shares he holds in the society and subject to any temporary
disqualifications from voting which may be prescribed in bye-laws and to the
provisions of S. 31 (2) (b) relating to voting by representatives, a member of a registered
society shall have one vote only in the affairs of the society:
b) Provided that in the case of an equality of votes the Chairman at any meeting shall have
a second or casting vote;
c) Provided further that the by-laws of a society may provide for more than one vote in
the case of an affiliated society.
d) A registered society which is a member of another registered society may appoint one
of its members qualified under any rule or bye-laws to vote in the affairs of such other
society as its representative.
e) Voting by proxy shall not be allowed except as prescribed in a registered society's bye-
laws:
f) Provided that in registering the bye-laws of a society the Registrar shall not permit
voting by proxy except in case, such as those involving a wide area of operation, where
it would be difficult for members to exercise their rights to vote, if voting by proxy
were not permitted.
g) Notwithstanding anything contained in this Act, a registered society may, by specific
provisions made in its by-laws, admit certain class of members without any voting right.
3.. Members of unlimited society to furnish information as to his financial position.
a. A full, true and accurate statement of his assets including his immovable
properties and liabilities shall be furnished -
 i. by an applicant far membership of a registered society with unlimited
liability, together with his application ;
ii. by a member of a registered society with unlimited liability when
required to do so by the Registrar or any person authorized by him in
this behalf or by the affiliating society.
b. No member of a registered society with unlimited liability shall be a member of
more than one such society.
c. A member of a registered society with unlimited liability shall furnish to the
society full, true and accurate information regarding his intention to transfer his
immovable property, in whole or in part by way of sale, mortgage or gift at least
fifteen days before completion of each such transaction.
4.. Loan to be utilised for the purpose for which advanced.
The loan advanced by a registered society to a member thereof shall be utilised by him for the
purpose for which it was advanced and for no other purpose. The society shall have power to
recover the advance as prescribed if the member does not so utilize it.
5.. Restrictions on transfer of share or interest.
a. The transfer or charge of the share or interest of a member in the capital of
registered society shall be subject to such conditions as to maximum holding as
may by prescribed by this Act or by the rules.
b. Except as otherwise provided in this Act no transfer or charge of his share or
interest by a member of society with unlimited liability shall be valid unless-
i. he has held charge or interest for not less than one year; and
ii. the transferee or mortgagee is either a member of such society or a
person whose application for membership has been accepted.
6.. Liability of past member and his estate.
a. The liability of a past member and of the estate of a decased member for the
debts of a registered society as they existed at the date of his ceasting to be a
member or on his death, as the case may be, shall continue for a period of four
years from the said date.
b. No past member of a registered society with unlimited liability shall be eligible
for membership of another such society with unlimited liability except with the
special permission of the Registrar.

7. Share or interest not liable to attachment.

Notwithstanding anything contained in any law for the time being in force but subject to the
provision of S. 44 of this Act, the share or interest of a member in the capital of a registered
society or in any fund under S. 53 shall not be liable to attachment or sale under any decree or
order of a court in respect of any debt or liability incurred by such member nor be subject to
any claim by a receiver under the Provincial Insolvency Act, 1920.

8.Nomination of transferee.
If the bye-laws of a registered society so permit, any member of the society may, in accordance
therewith, nominate a person or persons in whose favour the society shall dispose of the shares
or interest of such member on his death
9.. Transfer of interest on death of a member.
When a member of a registered society dies, his shares and interest in the society shall, subject
to the provisions of this Act, be transferred-
(a) to the person, if any, nominated in accordance with the provisions of S. 23; or
(b) if there be no such nominee or if the nominee is not available or is difficult to be ascertained
by the managing body, or if for any other cause such transfer cannot be made without
unreasonable delay, difficulty to the person as mat appear to the managing body to be the heir
or legal representative of the deceased member; provided that ninety days have elapsed from
the date of the member's death. No new claim shall be entertained after the said prior of ninety
days.
10.. Disposals of shares or interest of ceased members.
When a member of a registered society is expelled for withdrawn or otherwise ceases to be a
member under this Act, rules or bye-laws, his share or interest shall be transferred to another
eligible person, and the value thereon, determined in accordance with the rules, shall be paid
to such ceased member if his share or interest is not forfeited under the provisions of this Act,
rules or bye-laws or if he is insane, to any person appointed to manage his properties under the
Indian Lunacy Act, 1912 (IV of 1912); provided that if there is no eligible transferee and if the
bye-laws of the society so provide the value of his share or interest determined in accordance
with the bye-laws shall be paid to him or, if he is insane, to any person appointed to manage
his properties under the Indian Lunacy Act, 1912.
11. Liability of members on winding up of society.
The members of a registered society shall, in the winding up of the society, be jointly and
severally liable to contribute towards any deficiency in the assets of the society:
(a) in the case of a society with unlimited liability- without limit; and
(b) in the case of a society with limited liability-subject to such limitation of amount as may be
provided in the by-laws.
12. Restriction on transfer of possession of land held under a society.
Notwithstanding anything in any law for the time being in force -
a. a member of a registered society, the object of which is to develop co-operative
or Collective farming, shall not be entitled to transfer his possession or interest
in any land held by him under the society, except to the society or with the
previous approval of the managing body and in accordance with its bye-laws,
to a member thereof or to a person who will be admitted as a member of the
society.
b. On the death of such a member, his possession of an interest in any such land
held by him under the society shall come to his nominee in accordance with the
 provisions of S. 23 or in the first eligible heir according to seniority in age
willing to become a member of the society.
c. If no nominee or heir becomes a member, the possession of an interest in such
land of the deceased, shall vest in the society, which shall pay to the nominee
or the heir, a sum equivalent to the value of the share and interest of the deceased
member and any other sum due from the society as determined in accordance
with this Act or rules framed thereunder after deduction the dues which the
deceased member owed to the society:
d. If there is no person qualified to succeed to the share or interest of the deceased
member the society shall pay to his heir, executor or the legal representative, as
the case may be, a sum equivalent to the value of the share and interest of the
deceased member as determined in accordance with the rules after deduction
the dues of the deceased to the society:
e. When in any other case a member ceases to be a member of such a society under
this Act, rules or bye-laws, his possession of, and interest in, any such land held
by him under the society shall come to the society, if the bye-laws allow and if
the share and interest of the member is not forfeited under this Act or rules
framed thereunder, the society shall pay to the ceased member a sum equivalent
to the value of the share and interest of such member and any other sum due to
him from the society after deduction his debts to the society, if any.
f. No land held under a registered society specified in sub-s. (1) by a member
thereof, or vested under sub. S. (2) in the heir or nominee of such member, shall
be attachable in any suit or proceeding for the recovery of any debt other than a
debt due to the society or to a member thereof;
g. No land shall vest in such a society by reason of the provisions of this section
unless it is owned by the society or has been leased to the society and, if the
society holds the land by lease or contract, the land shall vest in the society only
during the pendency of lease or contract.
Management
A.. General Assembly.
(1) The General Assembly of a registered society shall consist of all those who are eligible to
vote at general meeting of the society.
(2) (a) Every member of a registered society and every ex-officio member of the Administrative
Council or managing body of such society, unless under some temporary disqualification, shall
have the right to attend any general meeting of the society and to exercise his vote at such
meeting; Provided that the bye-laws of a registered society may prescribe-
(i) that a registered society affiliated to such society may have more than one representative
entitled to vote at general meeting of the society ; and
that only one-third of the members of the General Assembly, excluding ex-officio members,
may be individual members, the other two-thirds being representatives of affiliated registered
societies.
(b) When the by-laws of a registered society contain the provision of sub-s. (2) (a) (i), if the
member of individual members exceed one- third of the total membership of the society, the
individual members shall elect at a special meeting, to be called by the Secretary of the society
not more than one month before the annual general meeting in the manner prescribed in the
bye-laws for annual general meetings, those individual members who, as the representatives of
the body of individual members, shall form the one-third membership of the General Assembly
for the purpose of voting at the annual and other meetings of the General assembly during the
ensuing year, only such elected representatives having the right to attend and vote at such
general meetings.
(3) The supreme authority of a registered society shall be vested in the General Assembly:
Provided that during the pendency of any loan or service from the Government or any other
creditor secured at the instance of the Government, the supreme authority in respect of any
matter adversely effecting the interest of the Government or said creditor touching such loan
or service shall be vested in the State Government or the Registrar, as may be provided in the
bye-laws, or any person authorised by them in writing, and may extend to the appointment of
officers to hold any of the offices of the society or any persons to be ex-officio members of the
society even if not members of the society. This supreme authority of the Government or
Registrar may also be exercised in the absence of any loan or service when the Government or
Registrar, as the case may be deem their intervention to be necessary in the interests of the
members of the society or of the co-operative movement in general. The Government or the
Registrar, as the case may be, may fix the salary of any such appointed officer and declare it to
be a charge on the society. They may cancel any such appointments by them.
(4) An annual or special meeting of the General Assembly shall be summoned and shall
exercise its authority and perform its functions in such manner as may be prescribed in the bye-
laws of the society.
B. Annual meeting of General Assembly.
(1) A general meeting to be termed the annual general meeting of the General Assembly of a
registered society shall be held at least once in every co operative year for the purpose of-
(a) electing members to the Administrative Council, managing body and other committees of
the society, the Chairman, Vice-Chairman and other office bearers, as may be provided in the
bye-laws, and fixing such fees, salaries or other remuneration as prescribed in the bye- laws:
(b) electing internal auditor or auditors, who shall not be members of the Administrative
council of governing body, and fixing the remuneration;
(c) considering the annual report of the administrative Council or if there be no Administrative
Council of the managing body, audit report and audited annual accounts and balance sheets
and reviewing the working of the society during the preceding co-operative year;
(d) deciding how profits are to be distributed in accordance with the bye-laws;
(e) passing the annual budget and approving the Programme of work for the ensuing year;
(f) fixing the maximum amount of liability to be incurred during the ensuing year and the
maximum rate of interest payable on deposits; and
(g) considering such other business as may be placed before the meeting in accordance with
the bye-laws;
Provided that notwithstanding anything to the contrary contained in this act or rules made
thereunder or bye-laws of any society, the Registrar may direct that the first annual general
meeting of any registered society shall be held on a date to be fixed by him (which shall be a
date within one hundred and eighty days of the registration of the society) to elect the office
bearers of the society, according to the procedure and manner prescribed in the bye-laws of the
society and the office bearer so elected shall assume office on the conclusion of the general
meeting in which they are elected in replacement of the managing committee elected at the
time of inaugural general meeting of the society.
(2) Such a meeting shall be held within 60 days from the date of expiry of the preceding co-
operative year:
provided that if for any reason the meeting cannot be held within the date fixed by the Registrar,
any society may, be application made within the aforesaid period of 60 days and addressed to
the Registrar, pray for extension of time for holding the meeting stating the grounds for which,
in the opinion of the society, the meeting cannot be held. The grounds for which the Managing
Body should not stand dissolved under sub-S. (4) below should also be stated in the application,
if any made for extension. The period for which the extension is sought for shall also be
specifically stand in the application.
(3) When an application for extension is made under the preceding sub-section, the Registrar
may, if he is of opinion that extension should be granted and that there are good grounds for
which the Managing Body should not stand dissolved under sub-S. (4) below, by order grant
extension for any period not exceeding 30 days from the date of passing the order. If the
Registrar is of opinion that no extension should be granted he shall, by an order passed to that
..,, the order passed shall be communicated . to the society applying for extension.
(4) If any society fails to hold the meeting within the period of 60 days mentioned in sub-S. (2)
or when an application is made for extension under the proviso to sub-S. (2) within the period
so extended or when no extension is granted, before the expiry of 20 days from the date on
which the order rejecting the application for extension is communicated, the Administrative
council and/ or the Managing Body of the society shall stand dissolved from the date of expiry
of the aforesaid period.
(5) When the Administrative Council and/or Managing Body are dissolved under sub-S. (4),
the Registrar may appoint an officer or officers or any ad hoc body to manage the affaires of
the Administrative council and Managing Body till the new Body is elected of formed.
(6) The officer of officers or the ad hoc body appointed by the Registrar under sub-S. (5) shall
arrange to hold the annual meeting of the general assembly, which shall be held within ninety
days of such appointment:
Provided that the State Government may allow in its discretion such further time, as my be
considered necessary but not exceeding one year for holding of such meeting.
C. Special meeting of General Assembly.
(1) A special meeting of the General Assembly shall be called-
(a) at the instance of the Administrative Council or if there be no Administrative Council, of
the managing body;
(b) at the request of the Chairman of the society;
(c) on a requisition signed by one-tenth of the members of the general Assembly or twenty
members, whichever is less; or
(d) at the instance of the Registrar.
(2) The Registrar himself or any person authorized by him in this behalf in writing may, by
special order call a special meeting at the General Assembly at any time and shall call such a
meeting upon the failure of the society to call a meeting on the requisition by the members or
at the instance of the Registrar under sub-S. (1).
(3) Notwithstanding any rule or bye-law prescribing the method of summoning or period of
notice for a General Assemble, the Registrar or any person authorised by him in this behalf,
may specify the time, place, business for the meeting and manner of convening it..

D. Administrative Council.
The management of every registered society shall vest in the managing body of the society,
except in the case of a society, which for administrative convenience necessitated by reasons
such as wide area of operation that responsibility shall vest in Administrative Council. The
Administrative Council, the managing body and committees of a society shall be constituted
in accordance with the bye-laws of the society which shall specify the composition of such
bodies their powers, functions, duties, method of summoning meetings and procedure.

E.Power to depute Government servant to manage the affaires of a society.

The State Government may, on the application of a registered society and on such conditions
as may be determined, depute Government officials to the service If the society for the purpose
of managing its affairs and the officials shall exercise such powers and perform such duties as
may be determined. The Registrar may at any time direct a particular society or a class of
societies to appoint only persons having such qualifications as may be prescribed by him from
time.
F. Dissolution or reconstruction of the Administrative Council, managing body or any
committee of a society.
(1) When the Registrar is satisfied, after an inspection or inquiry under S. 60 or 61 for reasons
to be recorded in writing, that the Administrative Council, managing body or any committee
of a registered society is not functioning properly or according to this Act, rules or bye-laws,
he may, after giving the offending body an opportunity to state its case, direct under CI (d) of
sub-S. (1) of S. 33, that a special general meeting of the General assembly be called within a
time to be specified to dissolve the administrative Council, managing body or committee
concerned and to elect a new one; Provided that, if in the opinion of the Registrar, it is necessary
as an emergent measure to suspend the offending body forthwith, he may do so and shall
appoint a person or persons, on such conditions as prescribed by him to be in full control of the
suspended body until a new body has been elected or action has been taken in accordance with
S. 37.
(2) The Registrar may, for reasons to be recorded, specify in the direction made under sub-s.
(1) that all or any of the outgoing members of the dissolved body shall be disqualified for such
period not exceeding three years as he may determine for election or appointment as an officer
of the society or for service on any of its bodies.
(3) An appeal shall lie to the Provincial Government against an order of the Registrar
disqualifying a member of a society for election or appointment within two months from the
receipt of the order.

F.Dissolution of Administrative Council, managing body or any committee and appointment

of persons to manage the affairs of a society.
If the Administrative Council, managing body or any committee, as the case may be, of a
society is not dissolved and reconstituted within the time specified by the Registrar under S.
36, he may, be order in writing, dissolve such body and shall thereupon appoint a person or
persons, on such conditions as prescribed by him, to manage the affairs of the society for such
period not exceeding one year where he shall arrange for the constitution of a new body to take
the place of the dissolved body. The Registrar may extend this period from time to time as he
may deem fit; provided that the aggregate of such periods shall not exceed three years.

G.Tenure of office of the person appointed under S. 37.

The person appointed under S. 37 shall hold office until the Administrative Council, managing
body or the committee, as the case may be, as reconstituted or his appointment is cancelled by
the Registrar.

H.Powers of person appointed under S. 37.

During the tenure of office of a person appointed under S. 37 such person shall, subject to the
control of the Registrar, exercise all the powers and perform all the functions and duties which
may be exercised or performed by the superseded body under the provisions of this act, rules
or by-laws.
I.(1) Notwithstanding anything contained in this Act, the State Government may, if it is of
opinion that the Administrative Council the managing body, any other Committee or body of
a registered society is not competent to perform or persistently makes default in the
performance of the duties imposed by or under this Act or exceeds or abuses the powers
imposed by or under this Act, any time, after giving an opportunity of showing cause against
the action proposed, remove any such Council, Body or Committee.
(2) The State Government may, at any time, suspend any such Council, Body, Committee
pending its removal under sub-S. (1) from office, if in the opinion of the State Government
immediate action is necessary and the continuance of such Council, Committee or Body in
office is inadvisable any of the grounds on which it could be removed under sub-S. (1) or on
ground of public interest.
(3) When an Administrative Council, managing body, Committee, officer body of a registered
society is suspended under sub-S. (2) the State Government may make such arrangements as
may be deemed necessary for discharging the duties, functions and obligations of the
Administrative Council, Managing Body, Committee or other body so suspended till the
termination of the order of suspension or, when a body or person is removed under sub-S. (1),
till the vacancy is filled up in accordance with the provisions made by or under this Act.
(4) Notwithstanding anything contained in this Act, if the term of office of any Administrative
Council, managing body, committee or other body expires during the continuance of any order
passed under sub-S. (2) placing any such Council, Body or Committee under suspension , such
council ,Body or committee shall cease to function with effect from the date of such expiry and
the arrangement made by the State Government under sub-S. (3) will continue till the vacancies
caused by such expiry are filled up in accordance with the provisions made by or under this
Act.
J.(1) The State Government may, after giving an opportunity of showing cause remove the
Chairman, the Vice-Chairman, the Secretary, and other member or office bearer or employee
of a registered society from the office or membership held by him on any one or more of the
following grounds, namely:
(a) doing any act in violation of the provisions of the Act, the rules framed thereunder, the
registered by-laws of the society and other lawful orders of the Government or of the Registrar
of Co-operative Societies;
(b) doing any act which is prejudicial to the interest of the Co-operative movement;
(c) misuse and defalcation of funds of the society;
(d) misconduct and willful neglect in the discharge of his duties;
(e) refusal to act or incapability of acting.
K. The State Government may, at any time, suspend a Chairman, a Vice-Chairman, a Secretary
or any other member, office bearer or employee of a registered society pending his removal
under sub-S. (1) if the State Government is of opinion that immediate actions are necessary
and his continuance as such Chairman, Vice-Chairman, Secretary, member, office bearer or
employee is inadvisable on any of the grounds for which he may be removed under sub S. (1)
or on the ground of public interest.
When a Chairman, Vice-Chairman or any other member of office bearer or employee is
suspended under sub S. (2) of this section, the State Government may make such arrangements
as may be deemed necessary for discharging the duties, functions and obligations of the person
so suspended till the termination of the order of suspension or, when a person is removed under
sub-S. (1) above, till the election or appointment of a person to the office or membership which
was held by the person so removed.
Notwithstanding anything contained in this act, if the term of office of any Chairman, Vice-
Chairman, member, other office-bearer, or employee of any registered society expires during
the continuance of any order passed under sub-S. (2) of this section placing any such person
under suspension, such person shall cease to function with effect from the date of such expiry
and the arrangements made by the State Government under sub- S. (3) will continue till the
vacancies caused by such expiry are filled up in accordance with the provisions made by or
under this Act.
Duties of Registered Society
1.Address of society.
Every registered society shall have a registered address, to which all notices and
communications may be sent and shall send notice in writing of every change thereof, within
thirty days of such change, to the Registrar and to the affiliating society, if any.
2.Prescription and inspection of documents.
(1) Every registered society shall keep and allow inspection free of charge by any member of
the society and such other persons as may be prescribed at all reasonable times at the office of
the society-
(a) a copy of this Act;
(b) a copy of the rules framed under this Act;
(c) a copy of the by-laws of society;
(d) a copy of all rules framed under the bye-laws of the society;
(e) annual balance sheet authenticated by the Audit Officer; and
(f) such other books, forms, registers or other documents as may be prescribed by the Registrar.
(2) A society shall deliver to every member on payment of a sum prescribed by the society's
by-laws or rules, copies of documents certified to be true copies.
3.. Restriction on borrowing.
A registered society may receive deposits and may borrow from its members and from persons
who are not members to such extent and on such conditions as may be prescribed in the Act
and by-law. The State Government may, by general or special order, direct transfer of any Co-
operative Society from one financing bank to another after prior consultation with these banks
and the society for the purpose of availing finance by the society for its credit and no-credit
operation, on such terms and conditions as my be considered necessary.

4.Power of Government to give financial assistance.

Notwithstanding anything contained in any law for the time being in force, the State
government may grant loans to, take shares in, guarantee the principal or the interest or both in
respect of debentures issued by, or give financial assistance in any other form to, any registered
society, with put forward a satisfactory scheme for the utilisation of the funds so raised. The
State Government may recover from any society out of its net profit in any year all or any part
of such financial assistance.

5. Restriction on loans.
(1) A registered society shall not give loan -
(a) to any person other than a member except with the general or special sanction of the
Registrar; provided that a loan may be given to a depositor of the society out of his deposit; or
(b) to a member in excess either of maximum or of the normal credit determined by the society
for that member in accordance with its bye-laws; provided that in assessing normal credit the
managing body shall take a full statement as to the member's means of earning;
(c) on the security of movable property or future movable property, unless the movable
property is charged, hypothecated or pledged with the society.
(d) on personal security without sureties, unless the borrowing member has unencumbered
immovable property or attachable funded assets sufficient to cover the loan and a full statement
of such securities is submitted by the borrower and the truth of statement is ascertained by the
managing body;
(e) on personal security with sureties unless the borrowing member and his sureties together
have unencumbered immovable property or attachable funded assets sufficient to cover the
loan and a full statement of such securities is submitted by the borrower and the sureties
separately and the truth of the statement of ascertained by the managing body;
(f) on personal security, with or without sureties, unless the loan is for a short period and not
exceeding the time required to reap the benefit of the loan and in no case exceeding three years.
(2)(a) a loan may be given on personal security; provided that the managing body of the society
is satisfied as to the credit of the borrower and has taken from him a scheme for the utilisation
of the loan and has ascertained the truth of the statements contained in the scheme and the bona
fide of the borrowing member.
(b) The resolution of the managing body granting a loan under this section contain the names
of all assenting members; provided that, if such names are omitted from the proceedings of the
meeting, the Chairman and Secretary shall be held jointly and severally responsible for issue
of the loan.
(c) Notwithstanding the provisions of sub-Cls. (1) (b) to (f) and (2) (a) and (b), a registered
society may issue a loan on mortgage or valuable security.
(d) No person shall be accepted as a surety for any borrower unless he is also a member of the
same registered society.
(e) A registelciety, the primary object of which is not the issue of loans, shall open a separate
accounting or finance or banking branch in accordance with its bye-laws and frame rules for
the conduct of business in such branch before it issues any loans and such rules shall first be
approved by the Registrar.
6. Office bearer of a society is required to furnish information and produce documents.
(1) Every office bearer of a registered society shall produce documents and books of account,
cash balance in his custody, and appear before and furnish such information in regard to the
transactions or working of the society as may be required of him by the Registrar, or persons
authorized by the Registrar in this behalf, and audit officer, arbitrator, liquidator or any persons
conduction an inspection or inquiry under the provisions of this Act and the rules made
thereunder.
(2) (a) At any sale of property, movable or immovable, held under this Act or rules framed
thereunder, no office bearer of the registered society concerned or any person having any duty
to perform in connection with such sale, shall either directly or indirectly bid for, acquire or
attempt to acquire, any interest in such property.
(b) Any office bearer of a society or a liquidator may, on behalf of the society, bid and purchase
at a sale of mortgaged property.
Privileges of Registered Societies
Prior claims of a society.
(1) Notwithstanding anything contained in Ss. 60 and 61 of the Code of Civil Procedure, 1908
(V of 1908), any debt or outstanding demand due to a registered society by any member, surety,
past member, or the estate of any deceased member shall be a first charge "
(a) if such debt or demand is due in respect of the supply, or any loan to provide the means of
such supply, of seed, manure labour, fodder for cattle or any other thing incidental to the
conduct of agricultural operations-upon the crops or agricultural produce of such member, past
member, or belonging to the estate deceased member, at any time within two years from the
date of such supply or loan or from the date on which the last installment of such supply or
loan became repayable;
(b) if such debt or demand is due in respect of the supply of, or any loan for the purchase of
cattle, agricultural implements or warehouses for the storage of agricultural produce-in the
manner and to the extent aforesaid upon the crops or agricultural produce of such member, past
member or belonging to the estate of such deceased members and also upon the cattle,
agricultural implements or warehouse thus supplied or purchased wholly or in part from any
such loan;
(c) if such debt or demand is due in respect of the supply of, or any loan for the purchase of
raw materials, industrial implements, machinery, workshop, warehouses or business premises-
upon the raw materials or other things supplied or purchased by such member, past member or
the deceased member wholly or in part from any such loan and also upon any articles
manufactured from raw materials or with implements or machinery so supplied or purchased
wholly or in part from any such loan;
(d) if such debt or demand is due in respect of any loan for the purchase, improvement or
redemption of land or for the purchase or construction of any house, building or any portion
thereof- upon the land purchased, improved or redeemed or the house or building so purchased
or constructed by such member, past member from any such loan.
(2) Notwithstanding anything contained in this Act or any other law for the time being in force-
(a) a member who makes an application for a loan to a Co-operative Society of which the
majority of the members are agriculturists shall, if he owns any land or has any interest in any
land as a tenant, make in such form as may be prescribed a declaration that he thereby creates
a charge upon such land or such interest or such portion thereof, as may be specified in the
declaration for securing the repayment of the loan which the society may make to the members
on the application and of future loans, if any, that may be made to him, from time to time, by
the society together with interest on such loan or loans;
(b) a declaration made under CI. (a) may be varied or cancelled at any time by the members
making it, with the consent of the society in whose favour it is made;
(c) any land or interest in land in respect of which a declaration has been made under CI. (a) or
any part of such land or interest, shall not be sold or otherwise transferred by the member
making the declaration until the entire amount of the loan or loans taken by the member from
the society together with interest thereon is paid to the society:
Provided that nothing in this clause shall apply to any such part of such land or interest as may
have been released from the charge created under this section under the proviso to CI. (d);
(d) subject to any claim of the State Government in respect of land revenue or any sum
recoverable as land revenue or as public demand, there shall be a first charge in favour of the
society on the land or interest in land specified in the declaration made under CI. (a) for and to
the extent of the dues recoverable from the member making the declaration on account of the
loan or loans together with any interest thereon made to him by the society;
Provided that if a part of such dues is paid by the member, the society may, on the application
of the member and with the approval of the financing bank to which it may be indebted release
from the charge such part of the land or interest in the land specified in the declaration made
under CI. (a) as the society may, having due regard to the security of the outstanding amount
of the loan or loans made to the member, deem proper;
(e) every record of rights prepared and maintained under the Assam Land and Revenue
Regulation, 1886, or any other law for the time being in force shall also include the particulars
of every charge on any land or any interest thereon created under CI. (a).
(3). Charge and set off in respect of shares or interest of members.
A registered society shall have a charge upon the share of interest in the capital and on the
deposits of a member or past member or deceased member and upon any dividend, bonus or
surplus payable to a member or past member or the estate of a deceased member in respect of
any debt due from such member or past member or estate of such deceased member to the
society, and may set off any sum credited or payable to a member or past member or estate of
a deceased member in or towards payment of any such debt.

(4) Deduction of dues from salary of members.

If a member of a registered society, who is an employee of the government or any local
authority, takes a loan from a society and contracts to repay it by installments, and authorize
the society to recover such installments by deduction from his salary, the person who disburses
any amount payable to such member as salary or remuneration in respect of such employment
shall, on demand from the society, deduct the amount of such installment from the amount
disbursed to such member as salary and shall forthwith remit to the society the amount so
deducted.

(5) Exemption from compulsory registration and personal attendance for registration of
instruments.
Nothing in Cls. (b) and (c) of sub-S. (1) of S. 17 of the Indian Registration Act, 1908 (XVI of
1908), shall apply to-
a. any instrument relating to shares in a registered society, notwithstanding that
assets of such society consist in whole or in part of immovable property ; or
b. any debenture issued by any such society and not crediting, declaring, assigning,
limiting or extinguishing any right, title or interest to or in immovable property,
except in so far as it entitles the holder to the security afforded by a registered
instrument whereby the society has mortgaged, conveyed or otherwise
transferred the whole or part of immovable property or any interest therein to
trustees upon trust for the benefit of the holder of such debentures; or
c. any endorsement upon or transfer of any debenture issued by any such society;
d. notwithstanding anything contained in the Indian Registration Act, 1908 it shall
not be necessary for any office bearer of a registered society or a liquidator of a
society to appear in person or by agent at any registration office in any
proceeding connected with the registration of any instrument executed by him
in his official capacity or to sign as provided in S. 58 of that Act;
e. where any instrument is so executed, the registering officer to whom such
instrument is presented for registration may, if he thinks fit, refer to such office
bearer or liquidator for information regarding the same and on being satisfied
of the execution thereof, shall register the instrument.
(6) Exemption from registration of mortgage deeds executed in favour of Co-operative Land
Development Bank or Primary Society.
a. Notwithstanding anything contained in the Indian Registration Act, 1908, it
shall not be necessary to register mortgages executed in favour of the Co
operative Land Development Bank or a Primary Society of which the majority
of the members are agriculturists, for the purpose of securing the repayment of
a concerned sends within such time and in such manner, as may be prescribed,
a copy of the instrument whereby immovable property is mortgaged for the
purpose of securing repayment of the loan to the registering officer within the
local limits of whose jurisdiction the whole or any part of the property
mortgaged is situate.
b. On receipt of the copy of the instrument under the preceding sub-section, the
registering authority shall file a copy or copies, as the case may be, in his Book
No. 1 prescribed under S. 51 of the Indian Registration Act, 1908.
c. The mortgages executed in favour of and all other assets transferred to a Co-
operative Land Development Bank or a Primary Society of which the majority
of members are agriculturists, by the members thereof, as security for repayment
of loan, before or after commencement of this Act shall, with effect from the
date of such execution or transfer be deemed to have been executed or
transferred by such society in favour of or to the financing Bank.
(7) Power to remit certain dues, fees, etc.
I. The State Government may, be general or special order in the case of a
registered society or class of registered societies, remit any tax, cess or fee
 payable under any law for time being in force or the rules thereunder in respect
of which they are competent to remit such tax, cess or fee.
II. The State Government may, in respect of any registered society or class of
registered societies, by notification in the official Gazette, remit -
(a) the stamp duty other than stamp duties [26 Geo. 5, Ch. 2] falling within item 91 or item 96
in list 1 in the Seventh Schedule to the Constitution of India in respect of any instrument
executed by, or on behalf of, or in favour of, a registered society or by an officer or on behalf
of a member thereof, and relating to the business of such society or any class of such
instruments, co-operative demand certificates or decisions, awards or orders of Registrar or
arbitrators under this Act, in cases where, but for such remission, the registered society, officer
or member thereof, as the case may be, would be liable to pay the stamp duty chargeable under
any law for the time being in force, in respect of such instrument, and
(b) any fee payable by a registered society under any law for the time being in force for the
registration of documents or of court fee for the time being in force.
Audit
Registrar is responsible for audit.
(1) The Registrar shall audit or cause to be audited by some person authorized by him by
general or special order in writing in this behalf, the accounts or every registered society and
society under liquidation once at least in every year.
(2) The Registrar or the person authorized by him in this behalf shall at all reasonable times
have free access to the books, accounts, documents, securities, cash and other properties
belonging to or in the custody of the society and may summon any person in possession or
responsible for custody of any such books, accounts, documents, securities, cash or other
properties to produce the same and furnish such information in regard to the transactions and
working of the society at any convenient place or at the headquarters of the society or any
branch thereof by the same means and, so far as may be, in the same manner as provided in the
Code of Civil Procedure, 1908 (V of 1908).
(3) In respect of every and audit of the accounts, a registered society shall pay such audit fee
as may be prescribed and such fee shall be deemed to be outstanding dues from the society.
Power of the Registrar to have the accounts written up
If at the time of the audit the account of a registered society are not complete, the Registrar or
with his sanction, the audit officer, may cause the accounts to be written up at the expense of
the society.Such expenses shall at the first instance be met from the grant under the head
"Contingencies" be the Registrar and shall be reimbursed later on from the society concerned
along with audit fee.
Nature of audit.
The audit shall include-
(i) a verification of the balance and securities;
(ii) a verification of the balance at the credit of the depositors and creditors and the amounts
due from the debtors of the society;
(iii) an examination of overdue debts, if any;
(iv) valuation of the assets including stock verifications, and liabilities of the society;
(v) an examination of the statement of accounts and balance sheets to be prepared by the
managing body of the society in such forms as may be prescribed;
(vi) a certification of the realized profits; and
(vii) any other relevant matter.
Audit report.
The audit officer shall, within a week from the date of completion of audit, submit to the
registered society, and to the Registrar, together with the statement of accounts audited, and
audit report including a statement of-
(i) every transaction which appears to him to be contrary to law or to the rules or bye-laws;
(ii) every sum which ought to have been but has not been brought into account;
(iii) the amount of deficiency or loss which appears to have resulted from any negligence or
misconduct or to require further investigation;
(iv) any money or property belonging to the society which appears ton have been
misappropriated or fraudulently retained by any person;
(v) any of the assets which appears to him to be bad or doubtful;
(vi) any irregularity in maintaining account; and
(vii) any other relevant matter.
Rectification of defects
A registered society shall be afforded by the Registrar an opportunity of explaining any defects,
or irregularities pointed out and objected to by the audit officer, and thereafter, the society shall,
within such time and in such manner as the Registrar may direct, remedy such defects and
irregularities and report to the Registrar, the action taken by it thereon.

Inquiry and inspection

Inquiry by Registrar
(1) The Registrar may, at any time, of his own motion or shall at the request of the
administrative hand in charge of the Civil Sub-division or other administrative area, hold an
inquiry or direct some person authorized by him by order in writing in this behalf, to hold an
enquiry into the constitution, working and financial condition of a registered society.
(2) Such an inquiry shall also be held on the application of -
(i) the affiliating society, if any, of which the society is a member and a debtor;
(ii) a majority of the members of the managing body;
(iii) one-third of the members of the society, who shall have deposited such security for costs,
if any, as the Registrar may direct;
(iv) creditors representing not less than one-half of the borrowed capital of the society, who
shall deposit such security for costs, if any, as the Registrar may direct.
(3) The Registrar shall communicate the result of any inquiry under this section to the society
and to the person at whose request such enquiry was made.
Inspection of society
(1) Every registered society shall be liable to inspection at any time by the registrar or any
person authorized by him in this behalf by general or special order; and by any affiliating
society, if so provided in its by-laws.
(2) An inspection of a registered society shall be made by the Registrar or any person authorized
by him in this behalf by an order in writing at any time on the application of a creditor of a
registered society.
Provided that no inspection shall be made under this such-section unless (i) the creditor
deposits with the Registrar such sum as security for the cost of the proposed inspection as the
Registrar may require, and (ii) the creditor satisfies the Registrar that the alleged debt is a sum
then due and that he has demanded payment thereof and has not received satisfaction within a
reasonable time;
Provided further that no inspection shall be conducted under this sub-section without giving
the society an opportunity of being heard.
(3) The result of an inspection under this section shall be communicated to the society and if
held at the instance of a creditor, to the creditor.
Inspection by a financing bank
(i) A financing bank shall have the right to inspect the books of any co-operative society which
has either applied to the bank for financial assistance or is indebted to the bank on account of
financial assistance granted earlier.
(ii) The inspection may be carried out by an officer or any other member of the paid staff of
the financing bank with previous sanction of the Registrar in writing.
(iii) The officer or any other member of the paid staff of the financing bank undertaking such
inspection, shall, at all reasonable times, have access to the books of account, documents,
securities, cash and other properties belonging to or in the custody of the co-operative society
inspected by him, and shall also be supplied by such society such information, statements and
returns as may be required by him to assess the financial conditions of the society and the safety
of the financial assistance to be made to the society or already made to it.

Cost of inquiry and inspection

(1) When an inquiry is held under S. 60 (2) or an inspection i s made under S. 61 (2), the
Registrar may, after giving the parties an opportunity of being heard, apportion the cost or such
part of the cost as he may deem fit, between the society, the members thereof or the affiliating
society or the creditor or creditors applying for such inspection or inquiry, as the case may be,
and the officers, former office, members and past members of the society.
(2) No expenditure from the fund of a registered society shall be incurred for the purpose of
defraying any cost in support of any appeal preferred by any person other than the society itself
against an order under sub-S. (1).
(3) Any person authorized by the Registrar under Ss. 60 and 61 shall have all the powers of the
Registrar when acting under these sections.
(4) Recovery of costs. Any sum awarded by way of cost under this section shall be recoverable
through a Co operative Demand Certificate.
Settlement of disputes of Registered societies
. Reference of dispute.
Any dispute touching the business of a registered society, other than a dispute regarding
disciplinary action taken by a society against an employee of the society, or of the liquidator
of a society shall be referred to the Registrar for decision if the parties thereto are among the
following:
(a) the society, its past or present controlling or managing body, any past or present officer,
agent or employee or the liquidator of the society; or
(b) member, past member or persons claiming through a member, past member or deceased
member or the society; or
(c) a surety of a member, past member or deceased member of a society; or
(d) any other registered society or the liquidator of the society;
(e) a registered society and a financing bank.
Settlement of dispute.
(1) The Registrar shall on receipt of a reference under S. 63 "
(a) decide the dispute himself or authorize any other Government office to decide the dispute;
or
(b) refer it for disposal to an arbitrator appointed by the Registrar or to three arbitrators one to
be nominated by each of the parties to the dispute and the third, who shall be nominated by the
Registrar, to act as Chairman. Where any party to the dispute fails to nominate an arbitrator
within fifteen days after the communication of this notice, the Registrar may himself make the
nomination. No legal practitioner may be nominated as an arbitrator by any party to a dispute
or by the Registrar;
(c) an arbitrator appointed under the previous sub-clause shall be governed by the Indian
Arbitration Act, 1940 (X of 1940), with such statutory re-enactment or modification thereof as
shall, from time to time, be made.
(2) The Registrar may withdraw any reference of such dispute referred to under sub-S. (1) and
may deal with it himself under the said sub-section.
(3) Where the Registrar is satisfied that a party to any reference made to him under S. 63 with
intent to defeat or delay the execution of any decision that may be passed thereon-
(a) is about to dispose of the whole or any part of his property; or
(b) is about to remove the whole or any part of his property from the local limits of the
jurisdiction of the Registrar;
the Registrar may direct the conditional attachment of the said property or such part thereof as
he deems necessary; and such attachment shall have the same effect as if it had been made by
a competent Civil Court.

Dissolution of society
Cancellation of registration.
(1) If the Registrar, on receipt of an application made upon a resolution adopted in a meeting
of the General Assembly by a three-fourth majority of the members present at the meeting
provided that the notice of dissolution was included in the circulated agenda of the meeting, is
of opinion that the society ought to be dissolved, he may, by an order in writing, cancel the
registration of the society.
(2) The Registrar, after an enquiry has been held under S. 60 or after an inspection has been
made under S. 61, may cancel the registration of a society which-
(i) as not commenced working; or
(ii) as ceased working; or
(iii) has ceased to comply materially with any condition as to registration in this Act, rules or
by-laws ; and
(iv) in his opinion to be dissolved
(3) A copy of the order cancelling the registration of a society shall forthwith be published in
the official Gazette by a notice, which shall be commenced to the society and to any affiliating
society concerned by registered post. The notice shall contain the name of the liquidator
appointed under S. 66, who shall take full charge of the society forthwith and shall require all
claims against the said society to be made to the liquidator within two months of the publication
of the notice. All liabilities recorded in the account books of the society shall be deemed ipso
facto to leave so claimed.
(4) When the cancellation of the registration of a society takes effect, the society shall cease to
exist as a corporate body, but shall vest in the liquidator.
(5) Any member of the society may, within two months, from the publication of an order
cancelling the registration, appeal to the State Government from such order.
(6) Where no appeal is presented within two months from the publication of an order canceling
the registration of the society, the order shall take effect on the expiry of that period.
(7) When an appeal is presented within two months of an order of cancellation, the order shall
not take effect until it is confirmed by the State Government and such confirmation is
communicated to the society by registered post.
Winding up.
(1) Where an order of cancellation of the registration of the registration of a society is made by
the Registrar under S. 65, he may appoint any person to be the liquidator of society and may
remove such person and appoint another in his place.
(2) The liquidator appointed under sub-S. (1) shall have power from the date of his appointment
to take immediate possession of all assets, properties, effects and actionable claims of the
society or to which the society is entitled and of all books, records, cash other documents
pertaining to the business of the society and, in the interest of the society, shall hold charge of
the society notwithstanding the provisions of S. 65; provided that no step shall be taken for the
winding up of the society during the pendency of any stay order.
(3) The liquidator shall, under the general control of the Registrar have power, so far as is
necessary for the winding up of the society, on behalf of the society to carry on the business
thereof and to do all acts and execute all documents necessary to such winding up, and in
particular shall exercise the following powers:
(a) to institute, compromise and defend suits and other legal proceedings on behalf of the
society by his name of office;
(b) to make any compromise or arrangement with any person between whom and the society
there exists any dispute;
(c) to determine the debts due to the society by a member, past member of the estate, nominees,
heirs or legal representatives of a deceased member;
(d) to determine from time to time the contribution to be made or remaining to be made by the
members, past members or by the estates or nominees, heirs or legal representatives of
deceased members or by any officers or former officers, to the assets of the society and to
determine the debts due fro such members or persons and the cost of liquidation;
(e) to calculate the cost of liquidation and to determine by what persons and in what proportion
they are to be done;
(f) to investigate all claims against the society and, subject to the provisions of this Act, to
decide questions of priority arising between claimants;
(g) to pay claims against the society including interest up to the date of cancellation of
registration according to their respective priorities, if any, in full or rateably as the assets
including the reserve fund of the society, permit; the surplus, if any, remaining after payment
of claims being applied in payment of interest from the date of such cancellation of the rate
fixed by him but not exceeding the contract rate in any case;
(h) to take step to recover dues according to the provisions of S. 83, if necessary; and
(i) to dispose of the surplus, if any, remaining after paying the claims against the society in
accordance with S. 67 of this Act.
(4) Subject to the provisions of this Act and rules made there under, a liquidator appointed
under this section shall, in so far as such powers are necessary for carrying out the purposes of
this section, have powers to summon and enforce the attendance of the witnesses and to compel
the production of any books, accounts, documents, securities, cash or other properties
belonging to or in the custody of the society by the same means and so far as may be in the
same manner as is provided in the case of a civil court under the Code of Civil Procedure, 1908
(V of 1908).
(5) Notwithstanding anything contained in any law for the time being in force, if any landed
property is held by a liquidator as such the title over the land shall be complete as soon as the
mutation of the name of his office is effaced and no court shall question the title on the ground
of dispossession, want of possession or physical delivery of possession.

Recovery of sums due and enforcement of obligations

Power of Registrar to direct payment of dues
Registrar or such other person as may be authorised by him in this behalf may, on his own
motion or on the written requisition of a registered society or an affiliating society or a
financing bank for the recovery of any loan or any other demand due by a defaulting member,
after making such enquiry as he deems fit, grant a Co-operative Demand Certificate for the
recovery of the amount found to be due.
(1) If any installment of loan or interest payable by a member of a co-operative society or any
part of such installment has remained unpaid for more than 30 days from date on which it fell
due, the managing committee of the society may, in addition to any other remedy available to
it, apply to the Registrar or any other officer authorized by him for the recovery of such
installment of part thereof by distraint and sale of the produce of the charged land including
the standing crop.
(2) On receipt of such application the Registrar or the person authorised by him may,
notwithstanding anything contained in the Transfer of Property Act, 1882 take action in the
manner as prescribed for the purpose of distraining and selling such produce:
Provided that no distraint shall be made after the expiry of twelve months from the date on
which the installment fell due.
(3) The value of the property distrained shall be, as nearly as possible, equal to the amount due
and the expenses of the distraint and the costs of the sale.
Charge and Surcharge.
(1) Where, as the result of an audit under S. 55, or an enquiry under S. 60 or an inspection
under S. 61 or a report made in the course of the winding up of a registered society, it appears
to the Registrar that any member, officer or employee, past or present, of society has at any
time within a period of four years prior to the date of such audit, inspection, inquiry or report,
as the case may be "
(a) Intentionally, whether individually or as an assenting member of any managing or other
controlling body, made or authorised any payment of or granted any loan which is contrary to
the provisions of this Act or to the rules or bye-laws or failed to take timely steps to recover
any loan at the due date or if it was being improperly utilised; or
(b) was grossly negligent in respect of any loss or deficiency; or
(c) failed to bring into account any sum which ought to have been brought into account; or
(d) misappropriated or fraudulently retained any property of the society; or
(e) committed breach of trust in relation to the society;
the Registrar may inquire into the conduct of such or members of the managing other
controlling body.
(2) The Registrar may similarly inquire into the conduct relating to the affairs of the society of
any members, officer or employee, past or present, of a registered society on the application of
the present controlling or managing body of the society, or liquidator, or any creditor, or any
other registered society to which the society is affiliated or any contributory.
(3) Upon such enquiry, after giving such member, officer or employee an opportunity of being
heard and, in the case of payment made contrary to the provisions of this Act or rule or bye-
laws, after affording such member, officer or employee, time to recover the amount of such
payment from the payee and credit it to the funds of the society, the Registrar may by an order
in writing require such member, office or employee to pay such sum with interest at such rate
as the Registrar may direct, to the society by way of compensation in respect of such payment
or loss or to restore such property as the Registrar thinks fit, and to pay such sum as the
Registrar may fix to meet the cost of the proceedings under this section.
(4) Any award made by the Registrar under sub-S. (3) shall be reduced to the form of a co-
operative demand certificate by the officer authorized to issue such certificates.
(5) This section shall apply notwithstanding that such member, officer or employee may be his
act or omission have incurred in addition to criminal liability under this Act or any other law
for time being if force.
(6) An appeal shall lie to the State Government against an order passed under sub-Cl. (1) (a)
within thirty days of the communication of the order.