(iv) Specific Relief Act
India Contract Act 1872 (v) Negotiable Instruments Act
Important questions
Q. 1 Discuss briefly the history, object and scope of the Indian Contract Act
1872.
Ans. History of Law of Contract Act :- Law of Contract in the present form has
undertook a long journey. Before passing of any codified law, there were many
customs, usages and practices regarding contractual relations but there was no
uniformity in such customs etc. in different parts of country and therefore courts
in India were facing various difficulties. To overcome this difficulty, by passing
Acts separately of Supreme Court of Calcutta in 1971 and for the Supreme
Courts of Bombay and Madras in 1781, provisions were made that suits relating
to matters of contract were to be decided according to Personal law of parties.
However, necessity was felt to have a separate and comprehensive law on
contractual relations in view of growth of Industry and business. The Indian Law
Commission prepared a bill on Contractual relations on 1866 and thereafter
some modifications and changes were made and then "Indian Contract Act 1872"
was enacted.
Object of the Indian Contract Act :- The main object of law of contract as
evident from the Preamble of Indian Contract Act, 1872, is to provide well defined
uniform rules of law to control all contractual relations, so that no one be able to
get unfair advantage from other.
Scope of the Act :- Indian Contract Act though contains all rules and regulations
on the subject but it is important to point out it is not exhaustive. Section 1 of the
Act makes it clear which says "Nothing herein contained shall effect the
provisions of any statute, Act or Regulation, not hereby expressly repealed, nor
any usage or custom of trade nor any incident of any contract, nor inconsistent
with provisions of this Act."
So Indian Contract Act is not exhaustive as it is practically not possible because
of different aspects of business, and Industrial transactions. Following are some
Acts, provisions of which are in fact supplemental to provisions of Indian Contract
Act :-
(i) Transfer of Property Act.
(ii) Sales of Goods Act
(iii) Indian Partnership Act
(vi) Company Law
Similarly trade customs, usages like (a) Hindu system (b) Carriers system (c)
Rules of Pre-emption etc are not inconsistent with provisions of Indian Contact
Act so equally necessary. Therefore, Indian Contract Act though provided basic,
elementary rules on the subject but are not sufficient in view of wide diversity in
different Contractual relations. Scope of Law of Contract thus is much more than
what is provided in Act, covering inter-connected acts, regulations to control
different situations.
Q. 2 Discuss the following terms as used in Indian Contract Act 1872:-
(1) Proposal (2) Acceptance (3) Promise (4) Promiser and Promisee (5)
Consideration (6) Agreement.
Ans. Proposal. - The word proposal has been defined in Section 2(a) of the
Indian Contract Act as -
"When one person signifies to another his willingness to do or abstain from doing
anything with a view to obtaining the assent of that other person to such act or
abstinence, he is said to make a proposal."
The word `offer' of the English Contract Law is synonymous to the word proposal
of the Indian Contract Act. An offer must contain the following characteristics :
(i) An offer must be intended to create legal obligations and must be capable of
creating legal obligations.
(ii) It must give rise to legal consequence.
(iii) The proposal must be made with a view to obtaining the assent of the party.
(iv) The terms of an offer must be definite and certain or at least capable of being
made definite or certain.
(v) It must be addressed either to the public at large or to a particular person.
(vi) It may be made by words or by conduct.
(vii) It must be communicated to the offeree.
(viii) An invitation for offer is different from a legal offer. So in order that an offer,
after acceptance, can result in valid Contract it is necessary that offer should be
made with an intention to create legal relationship.
In Harvey v. Facey (1893) A.C. 552 the defendants were the owners of a plot
known as "Bumper Hall Pen". Plaintiffs being interested in purchasing the same
sent a telegram to defendants "Will you us Bumper Hall Pen ? Telegraph Lowest
price". Defendant in reply telegraphed - "Lowest price and 900". Plaintiff sent
another telegram, saying. "We agree to buy Bumper Hall Pen for and 900.
Please send us your title deeds."
Plaintiffs contended that the second telegram from defendants quoting lowest
price was an offer and same had been accepted by plaintiffs and the contract
was complete. It was held by Privy Council that exchange of above said
telegrams had not resulted in Contract.
(2) Acceptance - As per Section 2(b) when the person to whom the proposal is
made signifies his assent thereto, the proposal is said to be accepted.
In proposal the necessary requirement is that one person express his willingness
before another and the intention of the person who signifies his willingness is that
the other person should express or signify his willingness which means that the
other person agrees to his desire. It then amounts to acceptance of the officer,
i.e., the proposal stands accepted and other person agrees to do as suggested
or proposed.
Thus when the person before whom the proposal is made agrees to the proposal
he is said to have accepted it. His assent is known as his acceptance to the
proposal. For example when X proposes to Y that he is ready to sell his Hero
Cycle to Y for Rs. 800/- and Y agrees to buy X's Hero cycle for Rs. 800/- then Y's
willingness of purchasing X's Hero Cycle for Rs. 800/- amounts to his acceptance
of the offer made by X and the proposal made by X is said to be accepted.
(3) Promise - Section 2(b) further speaks that "A proposal when accepted
becomes a promise." A promise in law is an accepted proposal. When the offer
made by one to another is accepted by other, it becomes a promise which simply
means that now it is binding on both parties, it now take the scope of an
obligation for both parties.
(4) Promiser and Promisee - Section 2(c) specifies that the person making the
proposal is called the promiser and the person accepting the proposal is called
the promisee.
For the formation of a contract it is essential that there must be at least two
parties to a contract. The party making a proposal which has been accepted is
called the promiser and the person accepting the proposal is called the promisee.
In the case of reciprocal promises each party is at once the promiser and the
promisee.
(5) Consideration - For the formation of a valid contract it is essential that there
should be consideration. Term `consideration' is explained in Section 2(d) as
under :
"When at the desire of the promiser, the promisee or any other person has done
or abstained from doing or does or abstains from doing, or promises to do or to
abstain from doing something, such act or abstinence or promise is called a
consideration for the promise.:
In Kumari Sonia Bhatia v. State of U.P., AIR 1981 SC 1274, it was observed
that "Consideration" means a reasonable equivalent or other Valuable benefit
passed on by the promiser to the promisee or by transferor to the transferee.
Similarly when the word "adequate" it makes consideration stronger so as to
make it sufficient and valuable having regard to the facts, circumstances and
necessities of the case.
So from the definition of "Consideration" u/s 2(d) of Act following essentials are
required for valid consideration :-
(i) Consideration to be given "at the desire of the promiser".
(ii) Consideration to be given "by the promisee or any other person.
(iii) Consideration may be past, present or future.
(iv) There should be some act, abstinence or promise by promisee, which
constitutes consideration for the promise.
6. Agreement. Section 2(e) defines the word agreements follows-
"Every promise or set or promises, forming the consideration for each other, is an
agreement."
An agreement enforced by law is a contract while an agreement not enforceable
by law is said to be valid. Thus every contract is an agreement but every
agreement is not a contract.
The distinction between `agreement' and `contract' made by sub-section (h) is
apparently original, it is convenient, and has been adopted by some English
writers. The conditions required for an agreement are contained in Section 10 of
the Act where it will also be seen that the absence of any such condition makes
an agreement void, and certain defects will make a contract voidable.
Q. 3 What conditions are necessary for converting a proposal into promise, a
promise into an agreement and an agreement into a contract ? Illustrate your
answer.
Ans. Section 2(h) of Indian Contract Act says
"An agreement enforceable by law is a contract." So all agreements does not
result into a contract. Contract arises as a result of an agreement purporting to
create and define right and obligations between the parties. Therefore an
agreement at least between two parties is one of the essentials for creating
contract. An agreement arises by an `offer' or `proposal' by one party and the
`acceptance of such proposal' by the other party.
Section 2(a) of Contract Act defines "Proposal" as:
"When one person signifies to another his willingness to do or to abstain
from doing anything with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal." The person making
the proposal does not become bound thereby until proposal is accepted by other
party. As soon as his proposal is accepted it becomes a promise whereby both
the parties become bound. Section 2(b) says:
"When the person to whom proposal is made signifies his assent thereto,
the proposal is said to be accepted. A proposal when accepted becomes a
promise."
So after the acceptance of an offer, each party becomes legally bound by
promise made through medium of an offer and acceptance of it. According
to Section 2(e) of Contract Act "Every promise and every set of promises
forming the consideration for each other is an agreement." So promises from the
two parties to one another is known as an agreement.
As stated above that an agreement enforceable by law is a contract. All such
agreements which satisfy the conditions mentioned in Section 10 of Act are
contract. Section 10 of Act provides:
"All agreements are contract if they are made by the free consent of parties
competent to contract, for a lawful consideration and with a lawful object
and are not hereby expressly declared to be void."
So following essentials are needed for a valid contract:
(i) An agreement between the two parties. An agreement is the result of
`Proposal' by one party followed by "Acceptance" by the other.
(ii) Agreement should be between parties who are competent to contract.
(iii) There should be a lawful consideration and lawful object of that agreement.
(iv) There should be free consent of the parties, when they enter into the
agreement.
(v) Agreement must not be one, which has been expressly declared to be void.
Q. 4 A sends a price list of goods to B on the latter's request. B places an order on
dealer A for goods specified in the price list on prices quoted in the said list. A
did not execute the order for supply. What is B's remedy if any ?
Ans. At the very outset it is pertinent to mention following important principles of
Indian Contract Act, relevant here:
(a) Offer is distinguished from Invitation to offer.
(b) It is only when offer. It is accepted, then it becomes promise.
Offer, therefore has to be distinguished from invitation to offer. Merely a person
or a book seller sends a catalogue of his books with price mentioned therein, it is
not an offer it is infact an invitation to other to make offer upon the price
mentioned in catalogue. Similarly goods displayed in a departmental store with
price chit.... is a invitation to offer. Customer who carry any goods from store to
purchase makes an offer. Section 2(a) of Indian Contract Act defines `Proposal'
or `Offer' as:
"When one person signifies to another his willingness to do or abstain from
doing with a view to obtaining assent of that another to such act or
abstinence, is said to make proposal."
Similarly when an "offer" as defined under Section 2(a) of the Act is made by
one person to other, it by itself does not create a contract unless such offer is
accepted and communication of such acceptance is not complete. Section 2(b) of
the Act reads as under:
"When the person to whom proposal is made, signifies his assent thereto,
the proposal is said to be accepted. Proposal when accepted becomes
promise."
So it is only when an offer is lawfully accepted, it ripes into a binding agreement
between parties.
Turning now to case in hand, `A' sent a price list of goods to B, that in strict
sense of law is not an offer but infact is invitation to B to make an offer and it is
only when B places order to A for goods specified in the price list, is an offer or
proposal. Upon such offer it is the sweet will of A to accept or reject the offer.
Here by not supplying the goods it implies that A had not accepted the offer of A
and thus when offer is not accepted, it did not result in a contract. Therefore B
has not remedy in this case.
Q. 5 A offered to buy B's bunglow "ML" for Rs. 6000 and B's agent cabled to B,
"Have had offer `ML' Rs. 6,000". The agent received the reply "Won't accept
less than Rs. 10,000". A accepted the price of Rs. 10,000 and confirmed his
acceptance by sending letter to the agent. But B sold the bunglow to some one
else for a higher price. A sues B for specific performance of contract. Can `A'
succeed ?
Ans. Term `Proposal' has been defined in Section 2(a) of Indian Contract Act as
"When one person signifies to another his willingness to do or to abstain from
doing anything with a view to obtain assent of that other to such act or
abstinence, he is said to make proposal."
Section 2(b) of Act then provides "When the person to whom proposal is made
signifies his assent thereto, proposal is said to be accepted. A proposal when
accepted becomes a promise."
So when `Proposal' in its strict sense is made and accepted result into a promise,
it is important to point out that "Proposal" is different from "invitation to treat".
Sometimes a person does not make offer, but only make some statement or give
some information with a view to invite other to make offer on that basis.
In Harvey v. Facey (1893) AC 552 Defendant was the owner of a plot of land
known as "B.H.P.". Plaintiff being interested in purchasing the same, sent a
telegram to the defendant "Will you sell us `B.H.P.' Plot. Telegraph lowest cash
price". Defendant in reply telegraphed "Lower price for B.H.P. plot is 900
pounds." Plaintiff sent reply that "We agree to buy B.H.P. plot for 900 pounds
asked by you, please send your title deed."
In the suit, plaintiff contended that, telegram of defendant quoting lowest price for
plot of land was an `offer' and same was accepted by plaintiff by his second
telegram and thus contract was complete. Defendant on the other hand
contended that quoting the lowest price was not the `offer'. Privy Council held
that exchange of above said telegrams had not resulted in a contract. It was
observed that telegram sent by defendant only quoted the lowest price of plot of
land, it was not "offer" in its strict sense.
In the case in hand, `A' made an offer to purchase B'sBUNGALOW for Rs.
6,000. B's agent cabled this information to B. B in reply told the agent
thatBUNGALOW shall not be sold for less than Rs. 10,000. `A' accepted to
purchase Bungalow for Rs. 10,000. Now B's reply that Bungalow will not be sold
for less than Rs. 10,000 was not a "offer" but was only `invitation to treat' and
thus acceptance of A did not result into any contract. Therefore `A' cannot
succeed in the present suit. Facts are identical to the case Machirson v.
Appanna AIR 1951 SC 184.
Q. 6 `A' makes an offer to `B' by letter. Immediately on receiving the letter `B'
writes letter rejecting the offer. However `B' changed his mind subsequently and
before `A' could receive the letter of rejection, B telephoned his acceptance. Is
acceptance complete to create a valid contract ?
Ans. Section 4 of Indian Contract Act provides:
Communication Of Proposal : Communication of proposal is complete when it
comes to the knowledge of the person to whom it is made.
Communication Of Acceptance : Communication of acceptance is complete:
As Against the Proposer, when it is put in course of transmission to him so as
to be out of the power of acceptor.
As Against the Acceptor, when it comes to the knowledge of proposer.
Section 5 of the Act deals with revocation of proposal and acceptance and
provides that a proposal may be revoked at any time before the communication
of its acceptance is complete as against the proposer but not afterwards and
acceptance may be revoked at any time before the communication of acceptance
is complete as against the acceptor.
So after the perusal of Sections 4 and 5 of contract Act, it is clear that
communication of acceptance of an offer is complete as against the acceptor
when acceptance comes to the knowledge of proposer (offerer). So if a offer is
made to a particular person who initially rejects that offer by sending a letter of
rejection, can still change his mind and accept that offer by communicating the
acceptance in such a speedier mode, so that offerer (proposer) comes to know
about acceptance first.
In the case in hand `A' made an offer to B which was initially rejected by B by
sending rejection letter. Subsequently B changed his mind and accepted the offer
of A telephonically so that fact of acceptance of an offer comes to the knowledge
of A (proposer) first and earlier than reaching letter of rejection and thereby
giving a valid acceptance and resultantly giving rise to a valid contract.
Q. 7 A makes an offer to B for the sale of Radio to B for Rs. 200 only. Next day
he sells the radio to C and this fact comes to the knowledge of B from his friend.
Can B still accept the offer of A ?
Ans. Section 4 of Indian Contract Act says "communication of proposal is
complete when it comes to the knowledge of the person to whom it is made..."
Section 5 of the Act lays down that "A proposal may be revoked at any time
before the communication of acceptance is complete as against the proposer
and not afterwards...."
Section 6 of the Act then provides "A proposal is revoked:
(i) By communication of notice of revocation by proposer to other party.
(ii) By lapse of time prescribed in the proposal for its acceptance and if no time is
prescribed, by lapse of reasonable time without communication of the
acceptance.
(iii) By failure of acceptor to fulfil the conditions precedent to its acceptance.
(iv) By death or insanity of proposer, if the fact of death or insanity of proposer
comes to the knowledge of acceptor before the acceptance."
That being relevant legal provisions, coming now to case in hand. `A' had made
an offer to B to sell him radio for Rs. 200. Next day `A' sells that Radio to `C'.
Now there was no time prescribed in the offer of `A' to `B' for its acceptance nor
`A' sent any communication to `B revoking the offer. It is the next only when `A'
sells the radio to `C', so no reasonable time can be said to have elapsed without
communication of acceptance, so in the eye of law, offer of `A' to B is still
subsisting and B can still accept the offer of `A' although he might have got the
knowledge from his friend that A has sold his radio to C.
Q. 8 "Acceptance is to an offer what a lighted match is to a train of gun powder."
Explain with reference to its condition and incidents as dealt within English and
Indian law.
Ans. A proposal, when accepted results in agreement. It is only after the
acceptance of proposal that a contract between the two parties can arise.
According to Section 2(b) of Contract Act:
"When the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. A proposal, when accepted
becomes a promise."
A contract is created only after an offer is accepted. Before the acceptance is
made neither party is bound thereby. Therefore it is necessary to know when the
communication of an offer and its acceptance is complete and when offer or
acceptance as the case may be revoked. Section 4 provides that
"Communication of a proposal is complete when it comes to the knowledge of the
person to whom it is made. Communication of acceptance is complete: "as
against the proposer, when it is put in course of transmission to him so as to be
out of the power of acceptor as against the acceptor, when it comes to the
knowledge of proposer.."
Section 5 provide as when proposal or acceptance can be revoked and lays
down `A proposal may be revoked at any time before the communication of its
acceptance is complete as against the proposer but not after words, An
acceptance may be revoked at any time before the communication of acceptance
is complete as against the acceptor, but not afterwards.
So when acceptance of a proposal is communicated as per Section 4 of Act so
as to leave no scope of revoking the acceptance, then the moment offer is
accepted it result into binding contract. The effect of acceptance of an offer has
been explained by Anson in "Anson's law of contract" in following words :
"Acceptance is to an offer what a lighted match is to a train of gunpower. It
produces something which cannot be recalled or undone. But the powder may
have laid until it has become damp, or the man who laid the train may remove it
before the match is applied. So an offer may lapse for want of acceptance or be
revoked before acceptance. Also the offeree may decide to reject the offer. Until
an offer is accepted, it creates no legal rights, and it may be terminated at any
time."
Q. 9 `A' offered by letter to buy his nephew F's horse for Rs. 10,000 adding that
`If I hear no more about this I shall consider the horse to be mine at Rs. 10,000."
No answer was returned to this letter but F told B an auctioneer to keep the
horse out of sale of his farm stock, as he intended to reserve it for his uncle A. B
sold the horse by mistake. `A' sues F for breach of contract and claims
compensation. Decide.
Ans. Section 2(b) of Indian Contract Act provides that "When the person to
whom proposal is made signifies his assent thereto, proposal is said to be
accepted. A proposal when accepted becomes a promise."
So from bare perusal of provisions of Section 2(b) Act it is clear that person to
whom `proposal' is made, will signify his assent thereto, then proposal is said to
have accepted. Moreover Section 7(1) of the Act provides that for a valid
acceptance of a proposal it is essential that acceptance should be absolute and
unqualified. Section 7(2) further lays down that an acceptance must be
`expressed in some usual and reasonable manner unless the proposal
prescribes the manner in which it is to be accepted.'
It means that if the manner of acceptance of a proposal has been prescribed,
than the acceptance has to be in that prescribed manner and in the absence of
any prescribed manner, acceptance of a proposal may be made in usual and
reasonable manner. So what Section 7 of Act says that acceptance of a proposal
should be expressed either in prescribed manner or in usual manner, but Section
7 does not say that acceptance can be made without expressing at all or by
keeping silent. In Bhagwandas v. Girdhari Lal and Co. AIR 1966 SC 543. It
was held "In order to create a contract, acceptance of an offer and intimation of
acceptance by some external manifestation, which the law regards as sufficient
is necessary."
Facts of the case in hand have been taken from English case Felthouse v.
Bindley (1863) 7 L.T. 835 in which it was held that since the nephew had not
communicated the acceptance of proposal, so no contract had arisen. So it is
clear that an offer with condition that failure to reply will be deemed acceptance
of an offer and thus no reply will not result into a contract. So A is not entitled to
recover any compensation in this case.
Q. 10 Defendant offered to sell a house on 25-11-89 to plaintiff for 90,000/. On 10-
12-89 plaintiff made offer of 80,000/-. This offer was refused by defendant owner
on 15-12-89. On 20-12-89 plaintiff wrote to defendant that he was now prepared
to pay Rs. 90,000. Defendant owner refused to sell the house. Plaintiff filed suit
against defendant for breach of contract. How would you decide ?
Ans. It is well established that it is only when proposal is accepted it becomes
promise (Section 2(b). Section 7 however says in order to convert proposal into
promise, acceptance must be (1) Absolute or unconditional (2) acceptance must
be in usual manner unless proposal prescribe particular manner in which it is to
be accepted.
So a conditional acceptance is not a valid acceptance. Conditional acceptance
infact is a counter offer which takes the place of original offer. Original offer when
replied in counter offer then it ceases.
Coming now in present case defendant made offer to sell the land to plaintiff for
Rs. 90,000, which was not accepted unconditionally but infact plaintiff made
counter offer to purchase it for Rs. 80,000/- which was not accepted by
defendant. Plaintiff later sent letter to purchase land 90,000/-. Original offer of
defendant to sell the land for 90,000/- had ceased when it was replied by counter
offer of plaintiff. So latter accepting the land to purchase for 90,000/ does not in
the eye of law amount to acceptance as original offer is no longer in existence,
so there was no binding contract between parties and thus plaintiff's action is
liable to be dismissed.
Q. 11 A died intestate on 12-10-61. He filed a proposal for insurance for Rs.
50,000 on 27-12-1960. There was medical examination by Dr. of Insur. Co. of
deceased on 27-12-60. Deceased had issued 2 cheques of Rs. 300/- and 220/-
respectively in favour of Life Insurance Corp. Cheque of Rs. 300/- was encashed
by Insu. Co. and cheque of Rs. 220/- was dishonoured 3 times but was finally
encashed on 11-1-61. Insurance papers were put up by concerned insurance staff
to Divisional Manager but he did not sign the Insu. policy. Divisional Manager
was the competent authority to accept the policy. No communication accepting
proposal of Insur. policy was issued by Insu. Corpo. Widow of A wrote to Insu.
Corpo. on 16.1.61 intimating death of A on 12.1.61 and demanded payment of
Rs. 500/-. Divisional Manager denied liability on 28-1-61 to 23-2-63 wherein wife
of deceased A claimed payment and Insu. Co. denied liability.
Widow of deceased A filed suit on 10-1-64 for recovery of Rs. 50,000/-. Decide.
Ans. At the very outset it is important to mention following legal provisions of
Indian Contract Act which are relevant.
Firstly it is only when the offer is accepted it results in promise, before that
parties are not bound to each other. As Section 2(b) provides "When the
person to whom proposal is made signifies his assent thereto, proposal is
said to be accepted and when proposal is accepted it becomes
promise." Question arises when can a proposal is said to be accepted. Section
7 of Indian Contract Act provides that in order to convert a proposal into promise,
the acceptance must be (1) Absolute and unconditional (2) be expressed in some
usual manner unless proposal prescribes particular manner in which it is to be
accepted. Then Section 8 of Act provide performance of conditions of proposal or
acceptance of any consideration for reciprocal promise which may be offered
with proposal is acceptance of proposal. Coming now to facts of case in hand on
27-12-60. Deceased `A' made proposal for Insurance with Insu. Corp. He had
issued cheques of Rs. 300 and 220, which was also encashed during his life time
by Insu. Corp. By accepting premium by itself does not amount to acceptance so
as to result in a binding promise.
In L.I.C. v. R. Vesi Reddy, AIR 1984 SC 1014 Supreme Court held in certain
human relation, silence to proposal may amount to acceptance but in case of
contract of Insurance policy, silence or retention of premium by Corp. by itself
does not denote acceptance of proposal.
Though in case in hand cheque of Rs. 300 and 220 were accepted by Corp. But
was not credited in premium account of deceased, Divisional Manager who is
Competent Authority to accept the insurance policy had also not accepted the
proposal by signing on insurance paper, during life time of deceased, therefore
there was no binding contract between parties and thus widow can not claim Rs.
50,000/- from Insu. Corp.
Q. 12 Critically discuss the Consequence of absence of consent and free consent.

Ans. Section 10 of the Indian Contract Act provides: "All agreements are
contracts if they are made by the free consent of parties competent to contract,
for lawful consideration and with a lawful object, and are not hereby expressly
declared to be void."
Section 13 of the Act enacts that two or more persons are said to consent when
they agree upon the same thing in the same sense. Section 14 of the Act
provides that consent is said to be free when it is not caused by:
(1) coercion, as defined in Section 15, or
(2) undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake subject to the provisions of Sections 20, 21 and 22.
It further states that consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence, fraud,
misrepresentation or mistake.
Not only consent but free consent is declared by Section 10 of the Indian
Contract Act to be necessary to the complete validity of contract. Section 14 of
the Act defines the term "free consent" as consent is said to be free when it is not
caused by coercion, undue influence, fraud, misrepresentation and mistake. If
the consent is caused by coercion, undue influence, fraud, misrepresentation, the
contract is voidable at the option of the party whose consent has been so
obtained. If the consent is the result of mistake as envisaged by Section 20 to 22
of the Act, the contract would be void.
Q. 13 Discuss the contractual liability of Minor under Indian Contract Act.
Ans. One of the essentials of a valid contract as mentioned in Section 10 of
Indian Contract Act is that the parties to contract should be Competent to make
the contract. Section 11 of Indian Contract Act deals with Competency. Section
11 lays down as under :-
"Every person is competent to contract who is of the age of majority, according to
law to which he is subject and who is of sound mined and is not disqualified from
contracting by any law to which he is subject."
Position of Minor - A person who has not attained the age of majority is a minor.
As per Section 30 Indian Majority Act, a person is deemed to have attained
majority when he completes the age of 18 years, except in case of person for
whose person or property a guardian has been appointed by court, in such case
age of majority is 21 years.
Nature of Minor's Agreement - As is evident from Sections 10 and 11 of Indian
Contract, a Minor is not competent to contract but what will be the position, if a
Minor enter into a contract. Indian Contract Act is silent on this point. In a well-
known case Mohori Bihee v. Dharam Das Ghosh, (1903) 30 I.A. 115 (Privy
Council), it was held that agreement by Minor is void. In this case Plaintiff
Dharamdas Ghosh, while he was minor mortgaged his property in favour of
defendant, Dharam Dutt, a money lender, for loan. At the time of transaction,
attorney of Money lender was aware of the fact that plaintiff was minor.
Thereafter minor brought an action against money lender stating that he was
minor when the mortgage was executed and thus same was void and inoperative
and be called. The defendant (Money lender) inter-alia contended-
(a) the minor fraudulently mis-represented his age and thus law of estoppel
should be applied against him.
(b) If mortgage is cancelled then minor should be directed to refund the amount
of Loan under section 64 or 65 of Act.
While rejecting the contentions of defendant, Privy Council, held agreement of
minor was void and law of estoppel as provided u/s 115 of Indian Evidence Act
cannot be applied because the false statement as to age, was made to a person
who was not misled by untrue statement as he knew real facts. It was also
observed that Section 64 is not applicable because Section 64 is in respect of
voidable contract whereas contract by Minor is void-ab-initio, similarly Section 65
of Indian Contract Act was held to be inapplicable because there never was and
never could have been any contract.
So positio is well-established that contract made by minor is void and can not be
enforced at all.
Ratification of Minor's Agreement - A minor's agreement being void ab-initio, it
is incapable of being validated by subsequent ratification, after minor has
attained the majority. A contract by minor is void. A void contract which is dead
letter cannot be revived and cannot constitute a valid consideration for a
subsequent contract.
In Suraj Narain v. Sukhu Aheer, AIR 1928 All. 440 a person borrowed some
money during minority and then made fresh promise after attaining majority to
repay the sum with interest. It was held that consideration received by a person
during his minority cannot be called consideration within the meaning of section
2(d) and thus can not be valid consideration for fresh promise.
However, contract by minor is void. However a contractual transaction started
during minority of party continued even after attaining majority is binding to
parties for whole of transaction.
As stated above, Contract of minor is void-ab-initio. However for the necessaries
supplied to a minor re-imbursement is permitted to person supplying it. This is
due to quasi-contractual relations as recognised in Section 68 of Indian Contract
Act which lays down as :-
"If a person, incapable of entering into a contract or any one whom he is legally
bound to support, is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person."
Distinction between English and Indian law :
(i) In India a minor on attaining majority can neither sue nor be used on contracts
entered into by him during minority but in England he can sue ok the contract for
the damages.
(ii) In India there can be no specific performance by or against the minor unless it
is a contract entered into by a guardian on behalf of the minor and for the minor's
benefit. In England, there can be no specific performance for want of mutuality in
the contract.
Q. 14 `A' during his minority takes loan of Rs. 20,000 from B and executes a
pronote in favour of B. When A becomes major he writes another pronote in
favour of B in place of old pronote, but fails to pay the debt. B files suit against
`A' for recovery of said amount on the basis of new pronote. Will B succeed ?
Ans. One of the essentials to a valid contract mentioned in Section 10 of Act is
that parties to contract should be competent to make the contract. Section 11 of
Act inter alia says every person is competent to contract who is of the age of
majority. So a contract by minor is a contract void ab initio.
A minor's agreement being void ab initio, it is incapable of being validated by a
subsequent ratification, after the minor has attained the age of majority.
Consideration furnished in respect of a transaction during minority can not be
considered to be valid consideration for subsequent promise after attaining
majority thus no ratification is possible of a promise made during minority.
In Nazir Ahmad v. Jiwan Das AIR 1938 Lahore 159 It was observed "A contract
by minor is void. A void contract which is dead letter cannot be revived and
cannot constitute a valid consideration for a subsequent contract and therefore, a
transaction entered into by minor during minority cannot be ratified."
Facts of the case are identical to case Suraj Narain v. Sukhu Aheer AIR 1928
All. 440. In this case also it was held that consideration received by a person
during his minority cannot be good consideration within the meaning of Sect. 2(d)
of Act for a fresh promise by him after attaining majority. Therefore B will not
succeed in this case for reasons discussed above.
Q. 15 "Undue influence is a subtle form of coercion". Discuss the relationship
between these two contractual concepts in all their aspects and refer to
provisions and decisions.
Ans. Section 10 of Indian Contract Act gives a general rule of law of contract
and provides :
"All agreements are contracts which are by free consent of parties,
competent to contract for lawful object and for lawful consideration and are
hereby not declared expressly to be void." So one of the essential conditions
for enforceability of the contract is that parties must have entered into the
contract by their free consent.
Section 14 of the Act says "Consent is said to be free when it is not caused by:
(a) Coercion as defined by Section 15.
(b) Undue influence as defined by Section 16.
(c) ......
(d) ......
(e) ......"
Coercion : When the consent of any party to contract is caused by coercion,
then consent is not a free consent and then such contract is voidable at the
option of party whose consent is so obtained by the coercion in view of Section
19 of Contract Act. Section 15 of Act defines `Coercion' and says:
"Coercion is committing or threatening to commit, any act forbidden by
Indian Penal Code or the unlawful detaining or threatening to detain, any
property, to the prejudice of any person whatever, with the intention of
causing any person to enter into an agreement." Explanation: "It is
immaterial whether the Indian Penal Code is or is not in force in the place
where the coercion is employed.' In Ranganayakamma v. Alwar Setti I.L.R.
(1889) 13 Mad. 214 question involved was regarding the validity of the adoption
of a boy by a widow, aged 13 years. On the death of her husband, the husband's
dead body was not allowed to be removed from her house, for cremation, by the
relatives of the adopted boy until she adopted the boy. It was held that adoption
was not binding on the widow as her consent has been obtained by coercion.
Section 16 of Indian Contract Act then defines UNDUE INFLUENCE as "(1)
Contract is said to be induced by undue influence when relation subsisting
between the parties are such that one of the parties is in a position to dominate
the will of other and exercise the use of such position to obtain unfair advantage
over the other.
(2) In particular and without prejudice to generality of foregoing principle, a
person is deemed to be in position to dominate the will of other:
(a) When he holds a real or apparent authority over the other or where he stands
on fiduciary relation to the other.
(b) Where he makes a contract with a person whose mental capacity is
temporarily or permanently affected because of age, illness, bodily mental
distress.
(3) Where a person who is in position to dominate the will of other, enters into a
contract with him and transaction appears on the face of it or upon the evidence
to be unconscionable, the burden of proving that contract is not induced by
undue influence lies on that person who hold the position to dominate the will of
other.
In Lakshmi Amma v. Telengala Narayana Bhatta, AIR 1970 SC
1367 Executant of deed of settlement was a person of advanced age and was
suffering from many ailments and whose physical and mental condition was very
weak. He executed the deed settling his entire property in favour of one of his
grandsons to the exclusion of his own issues and other grand children. He did
not make any provision for residence of his wife and also debarred himself from
dealing with the property during his life time. He subsequently applied for
cancellation of deed on account of undue influence. Supreme Court held that
facts and circumstances raised grave suspicion as to genuineness of deed and it
was for grandson, who is settlee of the property, to show that said deed had
been executed voluntarily and without undue influence.
In Ladli Parshad Jaiswal v. Karnal Distillery Co. Ltd., AIR 1963 SC 1279, it
was observed that a transaction may be vitiated on account of undue influence
where relations between the parties are such that one of them is in position to
dominate the will of other and he uses his position to obtain an unfair advantage
over the other. It is menifest that both the conditions have to be established by
person seeking to avoid the transaction, he has to prove (a) that the other party
to a transaction was in a position to dominate the will and (b) that the other party
had obtained an unfair advantage by using that position.
So `Undue Influence' as defined under Section 16 of Act can be termed as
"Moral Coercion" as distinguished from "Physical Coercion" or "Coercion" as
defined in Section 15 of Act. To make out the case of "undue influence" there
must be some relationship between parties which place one party in a position to
dominate the will of other, on the other hand existence of such relationship is not
necessary in case of "coercion".
Q. 16 Distinguish between fraud and misrepresentation.
Ans. Fraud : Section 14 of Indian Contract Act inter alia provides that consent of
party to a contract is said to be free when it is not caused by "fraud" as defined
by Section 17."
So Section 17 defines term "Fraud" as "Fraud means and includes any of the
following acts committed by a party to a contract or with his connivance or by his
agent with the intent to deceive another party thereto or his agent or to induce
him to enter into the contract:
(1) the suggestion as a fact, of that which is not true, by one who does not
believe it to be true.
(2) the active concealment of a fact by one having knowledge or belief of the fact.
(3) a promise made without any intention of performing it.
(4) any other act fitted to deceive.
(5) any such act or omission as the law specially declares to be fraudulent."
Explanation to Section 17 says "Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to them, it is the duty
of the person keeping silence to speak or unless his silence is in itself equivalent
to speech."
MISREPRESENTATION: Section 14 of Act inter alia also says that consent of a
party to contract is said to be free unless it is not caused by "Misrepresentation"
as defined by Section 18 of Act.
Section 18 has defined "Misrepresentation" as:
"Misrepresentation means and includes
(1) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true though he believes it to be true.
(2) any breach of duty which without an intent to deceive gains an advantage to
the person committing it, or any one claiming under him, by misleading another
to his prejudice or to the prejudice of any one claiming under him.
(3) causing, however innocently, a party to an agreement, to make a mistake as
to the substance of the thing which is the subject of the agreement."
So misrepresentation is making false statement without the knowledge of it being
false.
DIFFERENCE BETWEEN `FRAUD' AND `MISREPRESENTATION' (1) In
`fraud' a false statement is made by one who has knowledge of it to be false but
in `Misrepresentation', a false statement is made with the belief that it is true.
(2) In fraud, the intention of person making false statement is to deceive other
whereas not such an intention is there in case of misrepresentation.
 Q. 17 B is A's daughter and has just come of age. A sells to B a horse which A
knows to be of unsound mind. A says nothing to B about horse's unsoundness.
Does A's silence amount to fraud ? If so why ? If not why not ?
Ans. Section 17 of Indian Contract Act defines "Fraud" as: Fraud means and
includes following acts committed by party to contract or with his connivance or
by his agent with intent to deceive other party thereto to induce him to enter into
contract:
(i) suggestion of a fact of that what is not true by one who does not believe it to
be true.
(ii) active concealment of fact by one having knowledge or belief it to be not true.
(iii) promise made without any intention of performing it.
(iv) any other act fitted to deceive.
(v) any such act or omission as law specially declares it to be fraudulent.
Explanation : Mere silence as to fact likely to effect willingness of person to
enter into contract is not fraud unless the circumstances of case are such that
regard being had to them it is the duty of person keeping silence to speak or
unless silence is in itself equivalent to speech.
So mere silence as to any fact which effect the willingness of other party to enter
into contract is not fraud unless circumstances are such that:
(a) It is the duty of person keeping silence to speak or
(b) If his silence is equivalent to speech.
So it depends upon fact and circumstances of each case to see whether the
person keeping silence has implied duty to speak. Generally silence is not fraud
but where party has implied duty to speak or disclose certain facts to other party
which are material and can not be ascertained or known except by former being
told about it and if in such situation if he fails to tell or remain silent it amount
fraud.
In the case in hand relations between parties are such that there was implied
duty of A to disclose to B (his daughter) that horse is of unsound mind. A's
silence about this fact, in circumstances of case amount to fraud and thus
contract is voidable at the option of B.
Q. 18 A person named `A' entered a famous shop of jewellers at Delhi. He
selected a few pieces of ornaments including a Diamond ring. After settling the
price of ornaments he gave a cheque of that amount to the jeweller by putting the
signature of one R, a famous man of Delhi, on the cheque. Thereafter he stated to
the jeweller that all the ornaments were needed to be given in present to his
prospective daughter-in-law in the marriage of his son and therefore they could
be sent to him later, after the jeweller had got the cheque encashed. However, he
expressed the desire to take the diamond ring immediately as the same was to be
given at the time of engagement on that very day. Relying on the statement of `A'
he let him take the diamond ring with him. A pledged that the same day for Rs.
2,000 only with B. Can the jeweller claim the ring from B ?
Ans. It is one of the essentials for creating a valid contract that the consent of
parties should be free consent i.e. consent should not be caused by (i) coercion
as defined in Section 15 (ii) Undue influence as defined in Section 16 (iii) Fraud
as defined in Section 17 (iv) Misrepresentation as defined in Section 18 and (v)
Mistake (Section 14).
Section 17 of Contract Act provides "Fraud" means and includes any of the
following acts committed by party to contract or with his connivance or by his
agent with the intent to deceive other party thereto or his agent or to induce him
to enter into contract:
(a) the suggestion as a fact, of that which is not true, made by person who does
not believe it to be true.
(b) the active concealment of a fact by one having knowledge or belief of the fact.
(c) a promise made without any intention of performing it.
(d) any other act fitted to deceive.
(e) any such act or omission as the law specifically declares to be fraudulent.
In the case in hand "A" entered in famous jeweller's shop and purchased some
ornaments including diamond ring and after settlement of price, `A' posed himself
as one "R" a famous man of Delhi regarding whom jeweller had heard but not
seen. "A" gave the cheque by putting the signature of "R" and stated the jeweller
that all the ornaments may be sent to him when cheque is encashed but he
showed desired to take diamond ring immediately. Jeweller believing `A' to be `R'
and let him to take away diamond ring, later cheque was dishonoured. So `A'
fraudulently took the diamond ring from jeweller by posing himself to be `R' a
famous man of Delhi and also with the knowledge that cheque given to jeweller
will not be honoured. So consent of the jeweller was caused by fraud and thus
contract was voidable.
On similar facts in Phillips v. Brook Ltd. (1919) 2 K.B. 243 Horridge J. held that
agreement was not void on the ground of mistake in so far as plaintiff contracted
to sell and deliver the ring to a person who was present in the shop. The contract
was only voidable on the ground of fraud. It was observed:
"The minds of the parties met and agreed upon all the terms of the sale, the thing
sold, the price and time of payment, the person selling and the person buying.
The fact that seller was induced to sell by the fraud of the buyer made the sale
voidable but not void."
So there was a concluded contract although voidable at the instance of jeweller.
This contract was not rescinded by jeweller at the time when `A' pledged the
diamond ring to B for Rs. 2,000 on same day. Therefore B acquired a good title
to the ring as he acted in good faith without notice of Pawnor's defect of title. B
the pawnee is protected under Section 178A of Indian Contract Act and jeweller
can not recover the ring from B.
Q. 19 Discuss the effect of mistake on contracts. Can a party claim the return of
benefit in case where consent has been given under mistake?
Ans. In some cases, a contract (though complete and valid in all respects) may
be impeached on the ground that the genuineness or consent is affected by the
presence of some vitiating element. It may result from mistake also. It renders
the contract void "ab initio". Mistake may be said to arise when the parties have
not meant the same thing, or one or both, while meaning the same thing, may
have formed untrue conclusion as to some essential element in the agreements.
A contract, where the promisor and the promisee both have laboured under a
mistake as to the existence of a fact, which is so fundamental that if forms the
basis of the contract, is said to be vitiated by common mistake.
Sections 20, 21 and 22 of the Indian Contract Act, deal with the effect of the
mistake of the parties contracting on the contract. Section 20 reads as under:
Where both the parties to an agreement are under a mistake as to a matter of
fact essential to the agreement, the agreement is void.
Explanation : An erroneous opinion as to the value of the thing which forms the
subject matter of the agreement is not to be deemed a mistake as to a matter of
fact.
(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that, before the day of the bargain, the ship
conveying the cargo had been cast away and the goods lost. Neither party was
aware of these facts. The agreement is void.
In order to render a contract void on the ground of mistake, there should exist
three conditions as under:
(i) Both parties to the contract must be under a mistake. The mistake should not
be unilateral.
(ii) Mistake should be one of fact and not of law; and
(iii) Mistake should be essential to the agreement.
Section 21. Effect of mistake as to law : A contract is not voidable because it
was caused by a mistake as to and law in force in India, but a mistake as to a law
not in force in India has the same effect as a mistake of fact.
A and B make a contract grounded on the erroneous belief that a particular debt
is barred by the Indian Law of Limitation. The Contract is not voidable.
Section 22. Contract caused by mistake of one party as to matter of fact. A
contract is not voidable merely because it was caused by one of the parties to it
being under a mistake as to a matter of fact.
Q. 20 Discuss clearly the distinction between void and voidable contracts and
mention the circumstances when contracts are said to be void.
Ans. Void Contract :- Section 2(g) of Indian Contract Act says :-
"An Agreement not enforceable by law is said to be void."
Section 2(J) of Act lays down as :-
"A contract which ceases to be enforceable by law becomes void when it ceases
to be enforceable."
So a contract becomes void when it cannot be enforced in court of law. Validity of
a contract depends on the fact whether it complies with all the conditions of a
valid contract as laid down in Indian Contract Act, if not, it cannot be enforced
and thus void, moreover Indian contract Act has specifically laid down list of
some contracts which are void-ab-initio.
Agreements Void-ab-initio - Following agreements which are void-ab-initio, i.e.,
bad from very beginning -
1. An agreement with a minor.
2. An agreement with a person of unsound mind.
3. An agreement with a foreign sovereign, foreign ambassador and alien.
4. An agreement with a person who has been declared, under any law for the
time being in force, incompetent to enter into a contract., Section 11
5. When both parties to the agreement are under mistake about the fact material
to contract.
6. Agreement made under mistake of foreign law., Section 20
7. Agreement which do not have lawful consideration., Section 21
8. Agreements which are not made for lawful object., Section 23
9. Agreement with consideration of unlawful important, Section 24
10. Agreement with object of unlawful import., Section 24
11. Agreement without consideration., Section 25
12. Agreement in restraint of marriage., Section 26
13. Agreement in restraint of trade., Section 27
(It has some exceptions.)
14. Agreements in restraint of legal proceedings., Section 28
15. Agreements, the meaning of which is not certain or capable of being made
certain., Section 29
16. Agreements by way of wager., Section 30
17. Agreements contingent on the happening or non-happening of an event.,
Sections 32 to 36
18. Agreements contingent on the happening of an event and that happening
becomes impossible., Section 32 to 36
Agreement becoming void-later-on - Such agreements which are not void from
the very beginning but become so afterwards due to some unavoidable reasons
are void and may be described as under :
1. Agreement to do impossible act., Section 56
2. A contract to do an act which after the contract is made, becomes impossible,
is void., Section 56
3. Where persons reciprocally promise, firstly, to do certain things which are legal
and secondly, under specified circumstances to do certain other things which are
illegal, the first set of promises is a contract, but the second is void agreement.
Section 57
Voidable Contracts - Voidable contract means a contract which is an agreement
enforceable at law at the desire of one party and not at the desire of the other
party. An essential ingredient of making an agreement a contract is that the
consent of the other party is free. If the consent is not free and it has been
obtained by use of force or by undue influence or by playing fraud or by
misrepresentation, the agreement is enforceable at law at the option of the
person whose consent is obtained in any one of the modes stated above; it is not
enforceable at the option of the party who obtained consent in any one of the
modes aforesaid.
The term `voidable contract' has been explained in Section 2(i) in following words
- (ii) is of such a nature that if permitted, it would defeat the provision of any law, or
"An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of the other or others, is a voidable contract."
Distinction Between Void and Voidable Contract
Void Contract Voidable Contract
1. A contract becomes void when it ceases to be 1. A contract becomes voidable when consent of
enforceable in court of law parties to it is obtained by coercion
2. A void contract being dead letter does not create 2. A voidable contract continues to be valid, at the
any right or liability to any party option of one party to it, it is the desire of one party
either to rescind it or continue it.
3. Void contract is defined in section 2(J) and such 3. Voidable contract is defined in Section 2(i) and
contracts have been detailed in sections 32, 35 and such contracts have been discussed in section 19
56 of Indian Contract Act and 19-A, 38, 39, 55 and 64 of Indian Contract Act.
4. Void contract being unenforceable, cannot be 4. Voidable contract is not void until rescinded by
validated at all even by consent of parties to it. party at whoseOPTION IT is voidable therefore
continues to be valid until rescinded.
Effect of Flaw In Consent - Section 19 of Indian Contract says :-
"When consent to an agreement is caused by coercion, fraud or mis-
representation, the agreement is contract voidable at the option of the party
whose consent was so caused.
A party to contract whose consent was caused by fraud or mis- representation,
may, if thinks fit, insist that the contract shall be performed and that he shall be
put in the position in which he would have been if the representation made had
been true."
Then Section 19-A of Act says :-
"When consent to an agreement is caused by undue influence, the agreement is
a contract voidable at the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or if party who was entitled
to avoid it, has received any benefit thereunder, upon such terms and conditions
as the court may seem just."
Q. 21 What considerations and objects are Lawful and what not ?
Ans. If the consideration or object of the agreement is not lawful, then as per
Section 23 of the Act, such agreements are void-ab-initio. Even the agreements
of which the object or consideration in part is unlawful the agreement as a whole
is void-ab-initio as per Section 24 of the Act. Therefore, it is necessary to know
as what considerations and objects are lawful and what not. In this connection,
Section 23 specifically lays down as under :
The consideration or object of an agreement is lawful unless :
(i) it is forbidden by law, or
(iii) is fraudulent, or
(iv) involves or implies injury to the person or property of another, or
(v) the court regards it as immoral or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is
void.
(i) A, B and C enter into an agreement for division among them of gains acquired,
or to be acquired by fraud, the agreement is void as object is unlawful.
(ii) A's estate is sold for arrears of revenue under the provisions of an Act, by
which the defaulters prohibited from purchasing the estate. B upon an
understanding with A, upon receiving from him the price which B has paid. The
agreement is void, as it renders the transaction in effect, a purchase by the
defaulter and would so defeat the object of the law.
So in view of Section 23 of the Act in following situations the consideration or
object is unlawful rendering the contract void.
1. Forbidden By Law :- An agreement to do something which is expressly
forbidden by law is void. When a particular act is forbidden by law or declared to
be unlawful then obviously any agreement to do such act can never be lawful
agreement and thus is void.
In Brij Mohan v. Madhya Pradesh State Road Transport Corp., AIR 1987 SC
29 Agreement by corporation with private vehicle owner allowing him to operate
his vehicles under the permit obtained by State Corporation was held to be void
being violative of provisions of the Motor Vehicles Act.
2. Defeat The Provisions Of Any Law :- If the object or consideration of an
agreement is to defeat any provision of law then such agreement is void,
because such object of any agreement can never be lawful.
In Ram Sewak v. Ram Charan, AIR 1982 All. 177 parties agreed to carry on
business in partnership. Agreement provided that they would conceal some part
of their business activity and would not enter certain items in the books of
accounts with a view to evade Income tax and sales tax. One of the partners
brought an action against others for accounts and recovery of due amount. It was
hold that such agreement was aimed to defeat the provisions of Tax Laws and
thus cannot be enforced.
3. Fraudulent Purpose :- If the object of any contract is to defraud some person
or to take undue advantage by fraudulent transaction then such contract is void
because law does not allow to legalize the fraudulent transactions.
4. Agreement Injurious to Person or Property :- If the object or consideration
of an agreement is to cause an injury to the person or property of another, then
such agreement is unlawful and thus void.
5. Immoral or Against Public Policy :- If the consideration or object of an
agreement is regarded by the court to be immoral or opposed to public policy, the
agreement is unlawful and thus declared as `void' u/s 23 of Act.
Expression "IMMORAL" cannot be defined in strait jacket terms it depends upon
the prevailing principles and ethics in the society. In Gherulal Parakh v.
Mahadeo Das Maiya, AIR 1959 SC 781 scope of immorality was discussed and
it was held that wagering contracts cannot be said to be immoral.
Similarly expression "Public Policy" is illusive and Uncertain. In Gherulal Parakh
v. Mahadeo Das Maiya, (supra) it was observed :
"Public policy or the policy of the law is an illusive concept. The primary duty of a
Court of law is to enforce a promise which the parties have made and to uphold
the sanctity of contracts. But in certain cases, the court may relieve them of their
duty on a rule founded on public policy; the doctrine of public policy is extended
not only to harmful cases butt also to harmful tendencies; this doctrine of public
policy is only a branch of common law, and just like any other branch of common
law, it is governed by precedents; the principles have been crystallized under
different heads and though it is permissible for Courts to expound and apply
them to different situations, it should only be invoked in clear and in constable
cases of harm to the public."
Q. 22 A promises to obtain for B an employment in public service and B
promises to pay Rs. 1,000 to A. B secures the employment but fails to pay Rs.
1,000 to A. Can A recover Rs. 1,000 from B ? If so why ?
Ans. Section 23 of Indian Contract Act provides that the consideration or object
of an agreement is lawful unless the Court regards it an immoral or opposed to
public policy.
The term `Public Policy' cannot be defined with any degree of precision. Certain
class of acts are said to be against public policy or against the policy of law when
the law refuses to enforce or recognise them on the ground that they have
mischievous tendency so as to be injurious to the interest of State of public.
Giving or agreeing to give bribe for securing public office is against public policy.
Therefore in case in hand agreement between A and B is void on the ground of
being against public police under Section 23 of the Act and thus A cannot
recover Rs. 1,000 from B.
Q. 23 `A' while his wife `W' as still alive promised to marry X in the event of W's
death. Later "W" died. X sues a for damage for breach of promise to marry her.
Decide.
Ans. In the case in hand, `A' entered into a contract to marry with `X' while A's
wife (W) was still living. Later when `W' died `X' filed suit against `A' for breach of
agreement and for damages. Question for determination first of all is, whether
such agreement between `A' and `X' is enforceable.
Although such contract was contingent one and depending upon the happening
of certain unforeseen future event i.e. death of wife of A (W). Now question
arises whether, after the death of A's wife `W', is this contract enforceable.
Here Section 23 of Indian Contract Act is relevant, which lays down:
"The consideration or object of an agreement is lawful unless:
(a) it is forbidden by law or
(b) is of such nature that if permitted, it would defeat the provision of law.
(c) is fraudulent.
(d) involves or implies injury to a person or property of another.
(e) the court regards it as immoral or opposed to public policy.
In each of these cases consideration or object of an agreement is said to be
unlawful. Every agreement of which object or consideration is unlawful is void."
Coming now to case in hand, making agreement to marry with other woman
during the life time of a wife is prohibited by society as well as by law being
immoral and opposed to public policy. Because it is important that nothing should
be allowed to impair the sanctity or trust of matrimonial relation between a
husband and wife. In view of the above discussion agreement between `A' and
`X' is void being its object is unlawful.
Q. 24 How far is it true that an agreement without consideration is void ?
Ans. Section 10 of Indian Contract Act inter alia says that lawful consideration is
essential for a valid contract. Section 2(d) of Act has defined "Consideration"
as "When at the desire of the promisor, the promisee or any other person
has done or abstained from doing or does or abstains from doing or
promises to do or to abstain from doing something, such act or abstinence
or promise is called a consideration for the promise."
In Currie v. Misa, (1875) L.R. 10 Ex. 162, the term `consideration' has been
defined as `some right', interest, profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken by
any other. The Calcutta High Court observed in the case of Fazaluddin v.
Panchu Das, A.I.R. 1957 Calcutta 92, that "consideration is the price of a
promise a return or quid pro quo something of value received by the promisee as
inducement of the promise. The payment of money is the most common form of
consideration. A mudum pactum (without consideration) promise is not
enforceable. However sacred and binding in honour it may be it is after all purely
gratuitous act and hence cannot create any legal obligation.
Section 25 of Indian Contract Act as a general rule declares that an agreement
without consideration is void. Section 25 of Act, however, mentions three
exceptions, when there is no need of any consideration for the validity of the
contract.
Section 25 of the Contract Act reads as under:
An agreement made without consideration is void, unless
(1) It is in writing and registered : 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 for something done : 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 to pay a debt, barred by limitation law : 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, a
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.
Q. 25 A and B are friends. B treats A during A's illness. B does not accept
payment from A for treatment and A promises B's son X to pay him Rs. 1,000. A
being in poor circumstances, is unable to pay. X sues A for the money. Decide.
Ans. General rule of law of contract is that an agreement without consideration is
void. Section 25 of Indian Contract Act says:
"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 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 a 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."
Section 2(d) of Indian Contract Act defines `consideration' as "When at the
desire of promisor, the promisee or any other person has done or abstained from
doing or does or abstains from doing or promises to do or to abstain from doing
something, such act or abstinence or promise is called a consideration for the
promise". So Indian Contract Act recognise any such consideration which has
been given at the desire of the promisor rather than voluntarily.
In the case in hand, A was treated during his illness by his friend B. Further, B
has refused to accept any payment for such professional services rendered by
him to A. In other words, this act of B was voluntary and gratuitous. It is also
important to note that after treatment, A never made any promise to compensate
B within the meaning of Section 23(2) of the Act. However, A promised B's son X,
to pay him Rs. 1,000. For this promise, there was no consideration at all. In other
words, the promise with X being without consideration does not create any legal
obligation, and is void.
Q. 26 Explain the rule that "Stranger to a contract can neither sue or be sued."
Point out the exceptions to this rule.
Ans. Doctrine Of Privity Of Contract
General rule is that a person stranger to contract or one who is not party to
contract, cannot bring any suit in respect of any such contract. When a contract
is made between two or more parties upon certain terms and conditions, it is only
those parties to contract are entitled to bring suit, complaining breach of any
terms or conditions or for enforcement thereof. So doctrine of privity of contract
means that only those persons who are parties to the contract can enforce the
same. A stranger to the contract cannot enforce a contract even though the
contract may have been entered into for his benefit.
Privity Of Contract and Consideration The doctrine of privity of Contract is
distinguishable from defination of term "Consideration" u/s 2(d) of Indian Contract
Act which says.......
"When at the desire of promiser, the promisee or any other person has done or
abstained from doing......"
So consideration is not confined to only party to contract and may pass from the
promise or any other person. So the rule that a stranger to contract cannot sue
has to be distinguished from the rule that a person who is stranger to
consideration can sue. However, under English Law, consideration can pass only
from promise and not from any other person or stranger as under Indian Law.
Doctrine of Privity of Contract Under English Law Under English Law it is well
settled proposition that only party to contract can enforce it. Well known English
case on the subject is Dunlop Pneumatic Tyre Co.Ltd. v. Selfridge and
Co.Ltd., (1915) A.C. 847 in which it was observed.......
"In the law of England certain principles are fundamental. One is that only a
person who is party to a contract can sue on it......."
Indian Law Doctrine of Privity of Contract is similarly well-established in India.
Under Indian law also only party to a contract can enforce it and a stranger to it is
not entitled to enforce it. In M.C. Chacko v. State Bank of Travancore, AIR
1970 SC 504, it was observed that a person not a party to contract, cannot
subject to certain well-recognized exceptions, enforce the terms of the Contract.
Exceptions To Doctrine Of Privity Of Contract - In following exceptional
circumstances doctrine of privity of contract is not applicable :-
(1) Trust of Contractual rights or beneficiary under a Contract
In case of trust, the property of the trust is for the benefit of the beneficiaries :
they are not parties to the contract of trusts but they have a right to file the suit for
preserving trust property and safeguarding their interests.
In Khawja Muhammad Khan v. Hussaini Begum, I.L.R. (1910) 32 All
410 there was an agreement between fathers of a boy and a girl that if girl
(plaintiff) get married with boy, Boy's father (Dependant) would pay "Kharcha-i-
pandan" (Personal expenses allowances to girl). It was also settled that certain
property was kept aside by father of boy (Defendant) and allowance was to be
paid to plaintiff out of income of that property. Plaintiff married the defendant's
son but defendant failed to pay the allowance as agreed upon. Plaintiff brought
suit claiming said allowance in which defendant contended that contract to pay
allowance was entered into by him with father of plaintiff and plaintiff being
stranger to contract cannot enforce it. It was held that basis of plaintiff's claim
being a specific charge on immovable property in her favour and therefore she is
entitled to claim the same as beneficiary.
(2) Charge - When by parties to the contract a charge is created on some
property for the benefit of a person who is not a party to the contract the person
in whose favour the charge is created has a right to file a suit for ensuring the
benefit from charge irrespective of the fact that he is not party to the contract.
(3) Partition - At the time of partition of the joint Hindu family property, if some
arrangement is made for the marriage or maintenance of a minor or a girl, such
persons can file a suit for their maintenance or for the expenses of marriage
although they have not been the parties to the partition agreement.
(4) Marriage agreement - Where the parents of the bride and bridegroom agree
that the bride will get a definite amount regularly for her expenses (Kharcha-
Pandan), the bride can file a suit for getting the amount if not paid.
(5) When under the contract a promise is made to a person who is not a party to
the contract and the contract is mainly based on such promise that third person
(stranger) can bring a suit for the performance of the contracts if he fails to get
the amount as per promise.
(6) If the court feels that not allowing the stranger to bring an action will amount
to or result in injustice the court may authorise such person to bring an action.
Q. 27 Section 27 of Contract Act provides that an agreement in restraint of trade
is void but Section 36 of Partnership Act provides for restraint in trade by
agreement between partners. How do you reconcile between the two provisions.

Ans. Section 27 of Indian Contract Act reads
"Every agreement by which one is restrained from exercising a lawful profession,
trade or business of any kind, is to extent void."
The Section is more strictly worded than the rule of English Law. The Section
does not make the whole agreement void but void only to the extent that it is
opposed to the policy of law. This would give a discretion to the court to separate
the good part from the bad part of the contract.
Every agreement, by which any one is restrained from exercising a lawful
profession, trade or business of any kind is void. The reason is that, in India,
industry is still in the infancy and requires every protection at the hands of the
law.
The Section declares that all agreements in restraint of trade are void, being
opposed to public policy, because they tend to create monopolies and
discourage industry.
Section 27 has no application in certain exceptional circumstances which are
incorporated in Sections 11(2), 36(2), 54 and 55(3) of Indian Partnership Act
which are being discussed below:
Exceptions : (1) In case of the sale of goodwill of business, an agreement in
restraint of business is valid subject to the following conditions:
(i) the seller can be restrained only from carrying on a similar business;
(ii) the restraint can apply only so long as the buyer is carrying on a similar
business;
(iii) it can operate only within specified limits; and
(iv) such limit must appear to the court to be reasonable regard being had to the
nature of business.
(2) Contracts determining the mutual rights and duties of the partners of a firm
may provide that a partner shall not carry on any business other than that of the
firm while be is a partner. (Section 11 cl. 2 of Partnership Act).
(3) A partner may make an agreement with his partner that on ceasing to be a
partner, he will not carry on any business similar to that of the firm, within a
specified period and within specified local limits provided the restrictions imposed
are reasonable (Section 36 of Partnership Act).
(4) Partners may upon dissolution of the firm, agree by deed that some or all of
them will not carry on a business similar to that of the firm within a specified
period or local limits, and such agreement shall be valid, provided the restriction
imposed seem to the court to be reasonable (Section 54 of Partnership Act).
(5) Any partner may, upon the sale of a goodwill of the firm make an agreement
with the buyer that such partner will not carry or the business similar to that of the
firm within a specified period or specified local limits, and such agreement shall
be valid provided the restrictions imposed are reasonable (Section 55(3) of
Partnership Act).
Section 27 declares a general rule that all agreements in restraint of trade are
void, except in the circumstances stated above, the object being to protect the
trade which is in its infancy in India.
So provisions of Section 27 of Indian Contract Act can be reconciled with
provisions of Indian Contract Act on the ground of legal necessity.
Q. 28 `A' a Dr. employed another Dr. B as assistant for period of 3 years on
salary of Rs. 3,000/- PM. There was an agreement between A and B which
provided that after termination of his employment B shall not practice as a Dr.
within radius of 3 km of A's dispensary for period of 3 years and if B did so, B
should pay Rs. 50,000 as liquidated damages. Immediately after the termination
of his employment B started his practice as De next to A's dispensary. A
thereupon sued B for recovery of Rs. 50,000.
Ans. Section 27 of Indian Contract Act is relevant for the decision of case in
hand which provide: "Any agreement which restrain any person from lawful
exercise of profession, trade or business of any kind, is to that extent, void."
So any agreement which debar any person either partially or completely from
practicing any profession, trade or business which otherwise is lawful, is to that
extent void. When a person under contract of service makes an agreement that
he will serve only his employer only for particular period is valid, though such
agreement involving personal service is not specifically enforceable u/s 41 of
Specific Relief Act, but is valid contract. But any contract which curtail the
freedom to do lawful business, trade or business, that agreement has been
declared to be void by Indian Contract Act.
Coming now to case in hand, any agreement between A and B that B would not
serve any where during his employment to A would have been valid, after the
termination of contract of service A has not lawful authority over B to restrain him
to practice as Dr. within radius of 3 km of his (A's) clinic therefore A's suit for
damages is liable to be dismissed.
Q. 29 Explain that agreements in restraint of legal proceedings are void.
Ans. If the parties enter into an agreement for restraint in legal proceedings,
such an agreement is void. In this connection Section 28 of the Act provides as
under -
"Every agreement by which a party thereto is restricted absolutely from enforcing
his rights under or in respect or 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."
Thus the agreement restricting the rights of the parties of prosecuting legal
proceedings and the agreements limiting the time by which proceedings be
started are void under this section. However, this section has the following two
exceptions :
Exception 1 : This section shall not render illegal a contract by which two or
more persons agree that any dispute which may arise between them in respect
of any subject or class of subjects shall be referred to arbitration and that only the
amount awarded in such arbitration shall be recoverable in respect of the dispute
so referred.
Exception 2 : Now 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 so as to refer to arbitration.
Thus the general rule is that an agreement for restraint in legal proceedings has
two exceptions, i.e., Arbitration agreement for referring any future dispute to
arbitration and arbitration agreement in matter or dispute which has already
arisen.
In ------------------------------AIR 1989 SC 1239, it was held where parties to a
contract agreed to submit the disputes arising from it to a particular jurisdiction of
court, which would otherwise also be a proper jurisdiction under the law, their
agreement to the extent they agreed not to submit to other jurisdiction was not
violative to provisions of Section 28 of Indian Contract Act.
Q. 30 Discuss Wagering Agreement. Explain its essentials.
Ans. Wager :- A wager means a bet, the subject matter of the bet may be
anything. It is a game of chance by which one will either gain or losse wholly
dependent upon some future uncertain event.
According to Sir W. Anson "It is a promise to give money or money worth upon
the determination or ascertainment of an uncertain event."
According to Justice Hawkins - "A wagering contract is one by which two
persons, professing to hold opposite views touching the issue of future uncertain
event, mutually agree that, dependent on the determination of that even, one
shall win from the other and that other shall pay or hand over to him, a sum of
money or other stakes, neither of the contracting parties have any other interest
in that contract that the sum or stake so won or lost, there being no other real
consideration for making of such contract by either of the parties. It is essential to
a wagering contract that each party may, under it, either win or lose, whether he
will win or lose being dependent on the issue of the event, and therefore,
remaining uncertain until that issue is known. If either of the parties may win but
cannot lose, or may lose but can not win, it is not a wagering contract."
Section 30 of Indian Contract Act, 1872 deals with wagering agreements. It says;
Agreement 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 by
the result of any game or other uncertain event on which any wager is made.
Exception in favour of certain prizes for horse racing : This section shall not
be deemed to render unlawful a subscription or contribution, or agreement to
subscribe, 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 awarded to the
winner or winners of any horse race.
So a wagering contract is one by which two persons professing to hold opposite
views touching the issue of a future uncertain event, mutually agree that,
dependant on the determination of that event, one shall pay or hand over to him,
a sum of money or other stake, neither of the contracting parties having any
other interest in that contract that the sum of sake he will so win or lose.
Essentials of Wagering Agreement (1) Opposite views about an uncertain
Event ; First essential of wagering agreement is that performance of it, depends
upon an uncertain future event regarding which one party to it has one view and
other party has opposite view. In Carlill v. Carbolic Smoke Ball (1892) 2 Q.B.
484 it was observed that parties should have opposite views touching the issue
of a "future uncertain event". Such opposite views could be in respect of past or
present fact or event, only thing needed is that there should be uncertainty in the
minds of parties about the determination of the event one way or other.
(2) Chances of gain or Loss to the Parties ; Another important essential of
wager agreement is that parties to it should be at the risk of winning or losing
money or money' worth at the determination of some uncertain future event.
Where there is no such chances of gain or loss, there is no wager.
(3) No other Interest in the Event except the Amount of Bet; In wagering
contract neither of the contracting parties have any other interest in that contract
than the sum or stake he will so win or lose and there is no other real
consideration for the making of such contract by either of the parties.
Q. 31 Are the following wagering contracts ?
(i) Insurance contract (ii) Lottery (iii) Cross-words Puzzles (iv) Teji Mandi
Transactions (v) Speculative transactions.

Ans. (i) Insurance Contract Concept of insurance bears a superficial
resemblance to wagering contracts but they are infact two different transactions.
Insurance is contract of indemnity. Its object is to indemnify the insured from the
loss caused to him whereas wagering agreement's object is not to indemnify any
party to it but it results in gain to one party and loss to other, therefore Insurance
Contract is not wagering contract.
(ii) Lottery :
The lottery business is a wagering transaction. Therefore, sale and purchase of
ticket in a lottery is invalid and if lottery draws a prize, the ticket- holder, if he wins
the prize will not be allowed to enforce his claim for the prize in a court of law.
Where a lottery is authorised by the Government, even then the purchase and
sale of the ticket will not be valid. The only effect of permission of the
Government will be that the holder of the lottery will not be guilty under Section
294-A of the Indian Penal Code.
(iii) Cross-word Puzzles :
A cross-word puzzle competition constitutes a lottery inspite of the fact that the
competitions do exercise a certain amount of skill as the result depends upon the
chance. It was considered to be a literary competition as a sealed solution had
been deposited with the editors and it was mostly a matter of chance with the
competitors, who had to reach nearest to the solution.
(iv) Teji-Mandi Transaction :
A Teji Mandi transaction is a "transaction" which consists of an ostensible sale by
`A' to `B' of double option of becoming either the purchaser from A or seller to
him, certain goods on some future date at a price fixed at the time when
transaction was entered into
For example. - A by paying a certain premium or commission per bag to B is
given an option by B to purchase or sell 100 bags of wheat at Rs. 200 per bag on
Ist January next. If the price of wheat on Ist January comes down i.e. to Rs. 180,
A can exercise the option to sell the wheat at agreed price of Rs. 200 per bag.
On the other hand if price of wheat rises i.e. to Rs. 225 per bag, A may exercise
the option to purchase the same at agreed price of Rs. 200.
In case of such transactions the validity of the contract would depend on the fact
whether the parties intended to actually effect the delivery of the goods or not. If
the intention is to settle by paying the differences only, the agreement would be a
wager and thus void.
(v) Speculative Contracts :
Speculative transactions are generally valid. There is no law against speculation
as there is against gambling. The speculation is with reference to the rise and fall
in the market. If the agreement is for the purchase of certain goods at a particular
rate on a future date, then, the buyer would be entitled to claim the goods on that
date at the speculated price even if the market rate on that day is higher than the
previously agreed price. It is a legitimate business transaction. Such forward
transaction is common in gold, silver, stock etc.
Q. 32 Explain what is a "Contingent Contract". Give a clear account of the
provisions relating to Contingent contracts and their enforceability.
Ans. Section 31 of the Indian Contract Act defines contingent contracts as under
:
"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."
As per this definition, it can be said that the contingent contracts are such
contracts which deal with doing or not doing something on the happening or not
happening of an event; for example, A contracts to pay B Rs. 1,000/- if B's house
is burnt - this is a contingent contract.
So a distinction is to be drawn between a contract under which a present
obligation is created but performance is postpond to a future date and a contract
under which there is no present obligation at all and the obligation is to arise by
reason of some condition being complied with or some contingency arising in
future. When the performance of the contract is not dependent on the happening
of some future uncertain event, collateral to the contract it is an absolute contract
and not a contingent contract.
Following are the essential elements of such types of contract:
1. In such contracts, one party agrees to do or not to do something for the other.
2. Such an act or abstinence is dependent upon happening or not happening of
some future event.
3. The event is collateral to that agreement.
4. The event should not be in the control of the party.
Rules Relating to contingent contracts - Rules relating to contingent contracts
defined in Section 31 of the Act are embodied in Sections 32 to 36, which may be
divided in the following categories :
1. Contract contingent on an event happening. Section 32
2. Contract contingent on an event not happening. Section 33-34
3. CO = act contingent on the future conduct of a living person
4. Contract contingent on an event happening with in fixed time.
5. Contract contingent on event not happening within a fixed time. Section 35
6. Agreement contingent on impossible events.
1. Contract Contingent on an event happening ; Section 32 of Indian Contract
lays down :-
"Contingent contracts to do or not to do anything if an uncertain future event
happens cannot be enforced by law unless and until that event has happened.
If the event becomes impossible, such contract become void."
(i) A makes a contract with B to buy B's house if A survives C. This contract
cannot be enforced by law unless and until C dies in A's life time.
(ii) A makes a contract with B to sell a horse to B at a specified price if C to whom
the horse has been offered refuses to buy him. The contract cannot be enforced
by law unless and until C refuses to buy the horse.
2. Contracts Contingent on the event not happening ; Contingent contracts to
do or not to do anything if an uncertain future event does not happen, can be
enforced when the happening of that event becomes impossible, and not before."
For example, A agreed to pay B a sum of money if a certain ship does not return.
This ship is sunk. The contract can be enforced when the ship sinks."
3. Contract contingent on the future conduct of a living person - If the future
event on which a contract is contingent is the way in which a person will act at an
unspecified time, the event shall be considered to become impossible when such
person does anything which renders impossible that he should so act within any
definite time, or otherwise than under future contingencies.
A agrees to pay B a sum of money if B marries C. C marries D. The marriage of
B to C must now be considered impossible, although it is possible that D may
die, and that C may afterwards marry B.
4. Contracts contingent on happening of specified event within fixed
time. Contingent contracts to do or not to do anything, if a specified uncertain
event happens within a fixed time, become void if, at the expiration of the time
fixed, such event has not happened, or if, before the time fixed, such event
becomes impossible.
Illustration; A promises to pay B a sum of money if a certain ship returns within a
year. The contract may be enforced if the ship returns within the year, and
becomes void if the ship is burnt within the year.
5. Contracts contingent on not happening of specified event within a fixed
time; Contingent contracts to do or not to do anything if a specified uncertain
event does not happen within a fixed time, may be enforced by law when the
time fixed has expired and such event has not happened, or, before the time
fixed has expired, if it becomes certain that such event will not happen.
6. Agreement Contingent On Impossible Event ; Section 36 of Indian Contract
Act says contingent agreements to do or not to do anything if an impossible
event happens are void, whether the impossibility of the event is known or not to
the parties to the agreement at the time when it is made.
Illustration - A agrees to pay B 1,000 rupees if B will marry A's daughter, C. C
was dead at the time of the agreement. The agreement is void.
Q. 33 Who can perform the contract ? When can the contract be performed by a
third party ?
Ans. The parties to a contract shall be discharged from the obligation created by
the contract normally by performance of the obligation of the parties concerned.
Section 37 of the Indian Contract Act reads as under -
"The parties to a contract must either perform, or offer to perform their respective
promises unless such performance is dispensed with or excused under the
provisions of the Act, or of any other law."
The normal method of discharge of a contract is when both the parties perform
their obligation under the contract. Then both the parties are free from further
liability under it and the relationship comes to an end. There must be a complete
and proper performance. According to Section 38 of Act like actual performance
an offer of performance (or tender) by promisor discharges a promisor from his
obligation under the contract.
The parties to contract, however need not be perform their promise, where :-
(a) such performance is dispensed with or
(b) excused under the provisions of this Act or of any other law
Offer Of Performance Or Tender ; When the promisor is willing to perform the
contract and he offers to perform the same, the promisee has duty to accept the
performance of the contract. If the offer of performance is not accepted by
promisee, the promisor can not be blamed for the non-performance of the
contract. Section 38 of Indian Contract Act says in this regard -
"Where a promisor has made an offer of performance to the promisee, and the
offer has not been accepted, the promisor is not responsible for non-
performance, nor does he thereby lose his rights under the contract.
Every such offer must fulfil the following conditions :-
(1) It must be unconditional;
(2) It must be made at a proper time and place, and under such circumstances
that the person to whom it is made may have a reasonable opportunity of
ascertaining that the person by whom it is made is able and willing there and
then to do the whole of what he is bound by his promise to do;
(3) If the offer is an offer to deliver anything to the promisee, the promisee must
have a reasonable opportunity of seeing that the thing offered is the thing which
the promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences as
an offer to all of them."
By Whom Contract Should Be Performed ; Section 40 of Indian Contract Act
contains the general rule, which lays down:-
"If it appears from the nature of the case that it was the intention of the parties to
any contract that any promise contained in it should be performed by the
promisor himself, such promise must be performed by the promisor. In other
cases the promisor or his representatives may employ a competent person to
perform it."
So from Section 40 of Act it is clear that if the performance of contract depends
upon personal volition, talent or upon exercise of personal skill of promisor then it
should be performed by promisor only and nonelse but in any other case contract
can be performed by promisor or his agent. However it is pertinent to mention
that once performance of contract (whatever may be its nature) by other is
accepted by promisee, he cannot thereafter complain that contract should have
been performed by promisor only. Section 41 of Act says :
"When a promisee accepts performance of promise from a third person he
cannot afterward enforce it against the promiser."
Q. 34 Discuss the law relating to time and place for the performance of contract.
Ans. The rules relating to the time and place for the performance of the contract
have been specified in Sections 46 to 50 of the Act as follows :
(1) When no time is specified., Section 46
(2) When day is fixed., Section 47
(3) Performance on a certain day on application., Section 48
(4) When no place is fixed., Section 49
(5) Performance in manner or at time prescribed or sanctioned by promisee.,
Section 50
(1) When no time is specified. - Section 46 of the Act specifies the rule about
the time for the performance of the promise where no application is to be made
by the promisee in this respect and no time is specified in the agreement. The
provision is that where, by the contract, a promiser is to perform his promise
without application by the promisee and no time for performance is specified, the
agreement must be performed within a reasonable time and the question as to
what is a reasonable time is, in each particular case, a question of fact which is
decided by taking into consideration all surrounding circumstances.
(2) When day is fixed - Section 47 of the Act lays down that when a promise is
to be performed on a certain day, and the promiser has undertaken to perform it
without application by the promiser, the promiser may perform it at any time
during the usual hour of business of such day not at the place at which the
promise ought to be performed.
(3) Performance on a certain day on application - Section 48 of the Act lays
down that when a promise is to be performed on a certain day and promiser has
not undertaken to perform it without application by the promisee, it is the duty of
the promisee to apply for performance at a proper place and within the usual
hours of business and explanation to this section makes it clear that the question
as to what is a proper time and place is in each particular case a question of fact
which is to be decided by taking all surrounding circumstance into consideration.
(4) When no place is fixed - The point, about the place for the performance of a
promise in a case where no application is to be made by the promisee and no
place is fixed for the performance can be settled according to the rule laid down
in section 49 of the Act which provides that when a promise to be performed
without application by the promisee and no place is fixed for the performance of
it, it is the duty of the promiser to apply to the promisee to appoint a reasonable
place.
Illustration ; A undertakes to deliver a thousand quintal of jute to B on a fixed
day. A must apply to B to appoint a reasonable place for purpose of receiving it,
and must deliver it to him at such place.
(5) Performance in manner or at time prescribed or sanctioned by
promisee - Section 50 of the Act specifies that the performance of the promise,
in a case where the manner or the time of the performance is presented or
sanctioned by the promisee, must be in accordance with that manner or at that
time.
Section 50 lays down that -
"The performance of any promise may be made in any manner or at any time
which the promise prescribes or sanctions."
The section specifies about the prescribed or sanctioned manner and time. It
may be in any manner as prescribed or sanctioned; similarly it may be at any
time as prescribed or sanctioned.
Q. 35 Explain with the help of decided case "An anticipatory breach of
contract."
Ans. An anticipatory breach of contract means the repudiation of contract by one
of the party to it before the arrival of prescribed date of its performance.
For example : "A agrees to give 100 ton of wheat in bags to B after 3 months
of making agreement with B. After month of contract A refused to supply
above said consignment to B. This is a case of anticipatory breach of
contract."
Section 39 of Indian Contract Act provide regarding anticipatory breach of
contract as:
"When a party to a contract has refused to perform or disabled himself from
performing, his promise in its entirety, the promisee may put the contract
to an end unless he has signified by his words or conduct his
acquiescence in its continuity."
It is important to note that this rule apply only to an executory contract and not to
a case in which time for performance has arrived and there has been a breach
(See Kumaraswami v. Kuruppuswami AIR 1953 Mad. 38).
So following points emerge regarding anticipatory breach of a contract:
(i) Anticipatory breach of contract can be made by promisor either by refusing to
perform his promise under the contract, or
(ii) By disabling himself from performing his part of promise under the contract
before the arrival of date of performance.
(iii) It is only when promisor refuse or disable himself to perform his part of
promise in its entirety, then only there is anticipatory of contract.
(iv) Upon Anticipatory breach of Contract by promisor, promisee has option either
(a) to put the contract to an end immediately before waiting for date of
performance and when promisee so elects he is discharged from performing his
promise under the contract or (b) promisee may not put the contract to an end
but treat it still subsisting and wait for the performance of contract on appointed
date.
Q. 36 Defendant a female agreed to pay Rs. 5,000 to plaintiff in consideration of
latter having the former trained in art of singing and dancing at his own cost. It
was found that plaintiff's sister and not plaintiff himself had rendered those
services. In a suit for recovery of agreed amount, defendant denied her liability
to pay amount to plaintiff under the said agreement. Decide.
Ans. Section 40 of Indian Contract Act is relevant in this case. Section 40 of Act
provides :
"If it appears from the nature of case that it was the intention of parties to
contract that any promise contained in it should be performed by promisor
himself such promise must be performed by the promisor.
In other cases promisor or his representatives may employ a competent
person to perform it." It means that if the contract is one which is based on
personal confidence or involves exercise of personal skill it would be apparent
that intention of parties is that it should be performed by promisor himself and
nobody else.
Section 37 of Act will make intention of legislature more clear which provides that
when a contract is based on personal confidence and skill and promisor dies
before performing the same, the contract comes to end thereby.
So what is very clear that in a contract which involves exercise of personal skill or
confidence, it can be enforced only against promisor. Coming now to case in
hand contract was one for personal service said to be rendered by plaintiffs as
plaintiff himself had done nothing for defendant, there was no consideration for
contract and as such defendant cannot be held liable to pay anything under the
agreement to plaintiff.
Q. 37 X a creditor carrying on business at Delhi wrote to Y, one of its customer
who resided at Chandigarh saying "the favour of a cheque for the due amount
within a week shall oblige." The customer upon such request sent a cheque by
post. Cheque was stolen in the transit and was paid by to the thief. X having not
received the payment sued Y for recovery of amount. Decide.
Ans. Section 50 of Indian Contract Act is relevant to the case in hand. Section
50 of Act provides that "performance of promise shall be made in any manner or
at any time which the promisee prescribes or sanctions. That means in the
absence of any usual manner of performance of promisee, if promisee prescribes
particular manner in which or at any time sanction by promisee promisor must
perform it in such manner or at such time.
Illustration A describes B who owes him Rs. 100 to send him a note for Rs. 100
by post. Debt is discharged as soon as B puts into the post a letter containing the
note duly addressed to A.
In Comm. of Income Tax Bombay v. Ogale Glass Works Ltd., AIR 1954 SC
429 Supreme Court observed : "There can be no doubt that as between sender
and addressee, it is the request of addressee that the cheque be sent by post
that makes post office the agent of addressee. After this request addressee
cannot be heard to say that post office was not his agent therefore loss of
cheque in transit must fall on sender. Apart from it there is another principle
which makes delivery of cheque to post office at the request of addressee a
delivery to him and by posting the cheque in pursuance of request of creditor the
debtor performs his obligation in the manner prescribed and sanctioned by
creditor and thereby discharged the contract by performance."
Underlying principle thus of Section 50 of Act is that when debtor has done in
manner as prescribed by the creditor, then debtor has discharged himself of
contract by the performance. If something afterwards has happened that is not in
the control of debtor and thus debtor cannot be made liable for it. Coming into
case in hand creditor carrying business in Delhi wrote to debtor at Chandigarh
that favour of cheque for due amount within week shall oblige. So necessary
inference which can be drawn from the facts is that creditor require the debtor to
send cheque of due amount by post from Chandigarh to Delhi. If debtor has
performed accordingly and sent the cheque by post to Delhi, from that moment
debtor is discharged from contract by performance. If during transit, cheque is
stolen and misappropriated by some one else, debtor can not be made liable in
view of provision of Section 50 of Act.
Q. 38 What do you mean by discharge of contract ? Discuss when a contract
stands discharged.
Ans. Discharge of Contract Every Contract create certain right in favour of one
party to it and certain obligation upon other party and each party is to perform
this part of obligation. When each party fulfils his promise, the contract is said to
be discharged. There are following ways by which contract is said to be
discharged :-
(i) By performance
(ii) By breach of contract
(iii) By impossibility of performance
(iv) By waiver or Novation
(i) By Performance; As stated above when each party to contract perform its
part of promise, then contract is discharged and each party is satisfied. Section
37 and 38 of Indian Contract Act lays down the rules as to performance of
contract.
(ii) By Breach of Contract ; When a party having duty to perform a contract fails
to do that or does an act by which performance of contract by him becomes
impossible or when he refuses to perform the contract, it is a breach of contract.
When one party to contract commits breach of contract other party is discharged
from performing his part of promise under the contract and he also becomes
entitled to sue the party committing breach of contract for damages for loss
arisen due to breach of contract. Breach of contract may be:-
(A) Actual i.e. refusal to performance of contract on date of performance.
(B) Anticipatory i.e. refusal of performance of contract even before due date of
performance.
(iii) Discharge by Impossibility of Performance ; When the performance of
contract become impossible because of certain reasons beyond the control of
either party to contract then each party to it, stands discharged from performing
their part of promise under the contract. Section 56 of Indian Contract Act deals
with impossibility of performance of Contract which is also known as "Doctrine of
frustration". As per section 56 there can be two kind of impossibility :-
Istly :- Impossibility existing at the time of making of contract
IIndly :- Impossibility of performance which become so, after contract was
entered into, due to some supervening event.
(iv) By Waiver and Novation etc. ; Parties create contract by their agreement
and in the same way, by their agreement, the parties may bring a contract to an
end. This type of ending of the contracts is known as the discharge of the
contract by agreement. The discharge of the contract by agreement may be in
any one of the following ways :
(a) By Waiver,
(b) By Novation,
(c) By alteration in terms of contract.
(a) By Waiver - Where a party to contract having some right, gives up its right,
the other party to the contract stands relieved from its liability and the contract
comes to an end. A party to the contract having certain rights may relieve the
other party by accepting consideration less than the agreed consideration. Thus,
by agreement one party may relieve another party by giving up its right in full or
by accepting less than the agreed consideration.
(b) By Novation - If by an agreement one party is relieved of its liability and its
liability is taken over by the new party, it is said that the old contract has come to
an end. It is known as novation of the contract and the old contract comes to an
end.
(c) By alteration in terms of Contract - If a change in the terms of contract is
made in such a way that a new contract comes into force in place of old one
then, old contract is deemed to have come to an end.
Q. 39 "A" agreed to sell a piece of land to B who paid a part of consideration as
advance and agreement to complete the sale by a specified date executed. `B'
paid further sum and time for executing the sale deed was extended. On the non-
payment of balance consideration by the due date again, the vendor "A" gave
notice cancelling the contract and sold the property to `C'. In a suit filed by `B'
seeking specific performance, plea was taken in defence that time was the essence
of the contract, thus `B' is not entitled to relief. Decide.
Ans. Simple question involved in the case in hand, for determination is that
whether the time is essence of the contract between `A' and `B' or not.
Section 55 of Indian Contract Act is relevant here which reads as under:
"When a party to contract promises to do certain thing at or before
specified time or certain things at or before specified times and fails to do
any such thing at or before specified time, the contract or so much of it as
has not been performed, becomes voidable at the option of the promisee, if
the intention of the parties was that time should be of the essence of
contract."
So when a promisor promises to perform his part of the promise under the
contract at or before specified time but fails to perform at or before such specified
time then such contract becomes voidable at the option of promisee if the
intention of parties are that time is of essence of the contract. Whether time is
essence of contract or not depends upon intention of parties and nature of
transaction. If parties have not expressed their intention then it depends upon
nature of contract and conduct of parties.
In Chand Rani v. Kamal Rani AIR 1993 SC 1742 Supreme Court observed "In
case of sale of immovable property there is no presumption as to time being the
essence of the contract". Similarly recently in Swarnam Ramachandran v.
Aravacode Chakungal Jayapalan AIR 2000 Bombay 410, it was observed
"Ordinarily time is not the essence of a contract for sale of immovable property.
The parties, in a given case, may make time of the essence either expressly in
terms which unmistakably provide that they intended to so. Alternately, making of
time as the essence of contract may be inferred from the nature of the contract,
the property or the surrounding circumstances. A mere stipulation in a contract
lying down the time for performance is not sufficient to make time the essence of
the contract for sale of immovable property. A party to a contract cannot by his
unilateral act make time of the essence unless the circumstances are such as
would establish that the other party to contract had delayed or defaulted in the
performance of his obligation under the agreement."
Turning now to case in hand, it is an admitted fact that although a date was
specified to complete the sale, but after accepting a further amount, the vendor
extended the period for completion of the sale. There was no expressed
stipulation in this regard nor circumstances and conduct of parties are such to
intimate that it was the intention of parties that time was of the essence of
contract. Moreover there was no evidence to show that vendor was badly in need
of money by the stipulated date and he had to tie up his difficulties relying upon
the purchaser nor there is any evidence to show that vendor had to make other
arrangements for securing funds for his immediate needs, under these
circumstances necessary conclusion is that time is not essence of contract and if
the purchaser is otherwise qualified to obtain a decree of specific performance of
contract, his right can not be determined by act of vendor by giving notice of
cancellation of agreement and then selling the immovable property to third party.
Q. 40 `A' a female singer agreed to sing in theatre of `B' for two days in
September 1984. One day before the programme was scheduled, she attended a
party and took lots of icecream. The result was that her voice was cracked and
she was unable to sing on the days agreed upon in B's theatre. B sued A for
damages. Can B succeed ?
Ans. Section 56 (para 2) makes the following provision regarding the validity of
such contracts:
"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."
It means that every contract is based on the assumption that the parties to the
contract will be able to perform the same when the due date of performance
arrives. If because of some event the performance has either become impossible
or unlawful, the contract becomes void.
In Satyabrata Ghose v. Mugneeram AIR 1954 SC 47 Supreme Court observed
"When changed circumstances make the performance of a contract impossible
then parties are absolved from further performance as they did not promise to
perform an impossibility..... the doctrine of frustration is really an aspect or part of
law of discharge of contract by reason of supervening impossibility or illegality of
act agreed to be done and hence comes within the purview of Section 56 of
Contract Act."
In the case in hand, the female singer A took icecream one day earlier to her
scheduled programme, due to which her voice cracked. Taking of icecream is a
normal foodhabit. If A knew that taking of ice cream would result in cracking her
voice, as might have occurred in the past as well, then her act of taking icecream
a day before her scheduled programme would definitely amount to self-induced
frustration, and she would be liable in damages for breach of the contract. But
the facts show that she never knew that such consequences would arise by
taking icecream. At the most it can be said that there was some carelessness or
negligence on her part; but the same cannot be termed as `self-induced
frustration'. Since B has failed to prove that the voice of A was cracked due to her
intentional fault, the defence of frustration succeeds and the contract is
discharged. B is not entitled to recover any damages from A.

Q. 41 `A' agrees to give the use of his hall to B for holding a concert on a
prescribed date. However the hall was destroyed by fire prior to the prescribed
date and B sued A for damages for breach of contract. Will B succeed ?
Ans. Section 56 of Indian Contract Act provides: 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 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...."
Impossibility of performance is one of the modes in which a contract is
discharged. The impossibility may be of such a nature as existing unknown to the
parties at the time of making the contract. If the contract is impossible in itself, it
is void ab initio. It is based on the principle lex non cogit ad impossibilia, i.e., the
law does not compel the impossible.
In Sushma Devi v. Hari Singh AIR 1971 SC 1756 it was observed that to hold
that performance of contract has become impossible, the supervening event
should take away the basis of contract and it should be of such a character that it
strikes at the root of the contract.
In the case in hand `A' agreed to give the use of hall for a concert at a prescribed
date to B but before the arrival of prescribed date hall was destroyed because of
fire. So act agreed to be done under the contract became impossible and thus
contract is void in view of Section 56 of Contract Act and contract is discharged.
Q. 42 Discuss "Novation" and "Accord and Satisfaction".
Ans. Novation : Section 62 of the Indian Contract Act lays down: "If the parties
to a contract agree to substitute a new contract for it, or to rescind or alter it, the
original contract need not be performed."
A owes money to B under a contract. It is agreed between A, B and C that B
shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at
an end, and a new debt from C to B has been contracted.
Where the parties to a contract agree to substitute a new contract for it, it is
known as novation or novatio. It takes place when there being a contract in
existence some new contract is substituted for it either between the same parties
or between different parties, the consideration mutually being the discharge of
the old contract.
In Lata Constructions and other v. Dr. Ramesh Chandra Ramnik Lal Shah
and others, AIR 2000 SC 380 Supreme Court observed: "One of the essential
requirements of `Novation' as contemplated by Section 62 is that there should be
complete substitution of a new contract in place of the old. It is in that situation
that original contract need not be performed. Substitution of a new contract in
place of old contract which would have the effect of rescinding or completely
altering the terms of the original contract, has to be by agreement between
parties."
Accord and Satisfaction : Section 63 of the Indian Contract Act runs as under:
"Every promisee may dispense with or remit, wholly or in part, the performance of
the promise made to him, or may extend the time for such performance, or may
accept instead of it any satisfaction which he thinks fit."
Under this Section the performance, the whole or in part, of a contract may be
effectually dispensed with by the promisee, without either an agreement with the
promisor, or consideration for the dispensation.
A promisee may if he so chooses agree to accept a smaller amount in full
discharge of the whole amount due to him and that no consideration is necessary
for the same; he may remit wholly the performance of the contract. Where a
promisor has paid a smaller amount and the promisee has accepted it, it will be a
question of fact whether the promisee had really agreed to accept the amount in
full satisfaction for the debt. Therefore, where there has been a true accord under
which the creditor voluntarily agrees to accept a lesser sum in satisfaction and
the debtor acts upon that accord by paying the lesser sum and the creditor
accepts it, then it is inequitable for the creditor afterwards to insist upon the
balance. See Union of India v. Kishori Lal Gupta and Bros., AIR 1959 S.C.
1362. It may also be stated that an agreement to remit in future clearly requires
consideration if it is to be a binding contract. See Ramaswami v. Rudrappa, AIR
1939 Mad. 688. See illustrations (b) and (c) to Section 63 of the Act.
Q. 43 Discuss the contribution of the Supreme Court of India on `Quasi
Contracts'. Is the Indian Contract Act 1872, on the subject exhaustive ? Discuss.
Ans. Quasi Contract : Sections 68 to 72 deal with what is called in English Law
as quasi contract. Quasi contracts are exceptional kind of contracts by which one
party is bound to pay money in consideration of something done or suffered by
the other party. They are not founded on actual promises, but one person has
done something or paid money for another and the court comes forward on the
ground of equity saying that the person receiving benefit must make
compensation to the other. In other words, they are certain types of transactions
in which, in fact, there being no contract between the parties the law, by special
rule creates rights and obligations between them which are analogous to those
created by a contract. Quasi contracts are not contracts because the obligation
does not arise from volition of the parties. There is no agreement at all. In the
case of quasi contacts certain obligations are imposed by law on the parties
concerned. They do not result from:
(i) Any express agreement.
(ii) Any agreement which can as a matter of fact, be implied.
This type of relation is commonly known as quasicontract.
The quasi contracts are the following:
(i) a minor's or lunatic's liability to pay for necessaries supplied to him (Section
68);
(ii) Payment of money due to another (Section 69);
(iii) Doing a non-gratuitous act for another (Section 70);
(iv) The case of a finder of goods (Section 71), and
(v) Case of money paid by mistake or coercion (Section 72).
Now we will deal with each head alongwith its relative Section of the Indian
Contract Act.
Section 68. Claim for necessaries supplied to a person incapable of
contracting or on his account: If a person, incapable of entering into a
contract, or any one whom he is legally bound to support, is supplied by another
person with necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the property of such
incapable person.
Section 69. Reimbursement of person paying money due by another, in
payment of which he is interested: A person who is interested in the payment
of money which another is bound by law to pay, and who therefore pays it is
entitled to be reimbursed by the other.
Obligation of person enjoying benefit of non-gratuitous act. Section 70 of
the Indian Contract Act, provides that where a person lawfully does anything for
another person, or delivers anything to him, not intending to do so gratuitously,
and such other person enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of, or to restore, the thing so done or
delivered.
The following three conditions must be established before a right of action under
this Section can arise:
(1) the goods are to be delivered lawfully or anything has to be done for another
person lawfully;
(2) the thing done or the goods delivered is so done or delivered not intending to
act gratuitously; and
(3) the person for whom the act is done or to whom the goods are delivered must
enjoy the benefit thereof. (Union of India v. Sita Ram Jaiswal, AIR 1977 SC
329).
So what Section 70 prevents is "unjust enrichment" and it applies as much to
individuals as to corporations and Government. (Panna Lal v. Deputy
Commissioner, Bhandara, AIR 1973 SC 1174). But in all such cases not only
the two conditions but also the third condition must be fulfilled that the other party
has accepted the thing delivered and has enjoyed the benefit thereof. (State of
West Bengal v. M/s B.K. Mandal and Sons, AIR 1962 SC 779).
Section 71 says about Responsibility of finder of goods "A person who finds
goods belonging to another, and takes them into his custody, is subject to the
same responsibility as a bailee."
Section 72 provides about Liability of person to whom money is paid, or
thing delivered, by mistake or under coercion : "A person to whom money
has been paid, or anything delivered, by mistake or under coercion, must repay
or return it."
Q. 44 (a) Discuss with illustration the principle governing compensation for loss
or damages caused by breach of contract.
(b) `A' was employed by B as a manager of his business at Calcutta at a salary of
Rs. 5,000 per month together with a prescribed rate of commission on trade
done. A could be dismissed by 6 months' notice. B wrongfully dismissed `A' in a
harsh and humiliating manner. How will you determine the damages recoverable
by A ?
Ans. (a) In case of breach of contract by one party, the aggrieved party has
following remedies:
(A) Damages (B) Quantum mruits (C) Specific performance and injunctions.
In case of breach of contract, most common remedy is the compensation on
account of loss or damages caused by such breach of contract. Section 73 of
Indian Contract Act lays down:
"When a contract has been broken, the party who suffers from such breach of
contract is entitled to receive from the party who has broken the contract, the
compensation for any loss or damages which naturally arose in usual course of
things from such breach or which the parties knew when the contract was made
to be likely to result from the breach of it."
Such compensation is not to be given for any remote or indirect loss or damages
caused by breach of contract.
Compensation For Failure To Discharge Obligation Resembling Those
Created By Contract : When an obligation resembling those created by contract
is incurred and has not been discharged then the person who is injured by such
failure is entitled to receive the same compensation from party in default as if
such person has broken the contract.
So from Section 73 of Act following points are clear:
(i) Compensation for breach of contract can be received in respect of only those
losses or damages which arose naturally in usual course of things or
(ii) Compensation for breach of contract may be received in respect of all those
loses or damages which, parties to the contract knew at the time of making of the
contract to be likely result of breach of contract.
(iii) Compensation can not be received for any indirect or remote losses or
damages in consequence of breach of contract.
So in any action brought for damages in respect of breach of contract, court will
decide following issues:
Firstly : Whether the loss or damages resulted by breach of contract is
proximate result of breach of contract or mere remote consequence of breach of
contract. If loss or damages are not special damages arose because of special
circumstances, then court has to see whether such special loss or damages were
in contemplation of parties at the time, when they entered into the contract.
Secondly : Upon determining the first issue the court has to see how damages,
in the facts and circumstances of each particular case, has to be awarded to
meet the end of justice.
The rule with regard to the measure of damages has thus been laid down in the
leading case of Hadley v. Baxemdale, (1854) 9 Ex. 341:
"Where two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be either such as may fairly and reasonably by considering
arising naturally, i.e., according to the usual course of things, from such breach of
contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties at the time they made the contract as the probable
result of the breach of it."
Liquidated Damages And Penalty : Section 74 of the Indian Contract Act
provides for when a contract has been broken, if a sum is named in the contract
as the amount to be paid in case of such breach, or if the contract contains any
other stipulation by way of penalty, the party complaining of the breach is
entitled, whether or not actual damages or loss is proved to have been caused
thereby to receive from the party who has broken the contract reasonable
compensation not exceeding the amounts so named, or as the case may be, the
penalty stipulated for.
In Roshan Lal v. Manohar Lal AIR 2000 Delhi 31, it was observed "Section 74
of the Indian Contract Act deals with measure of damages in two classes of
cases (i) where the contract names a sum to be paid in case of breach and (ii)
where the contract contains any other stipulation by way of penalty. Jurisdiction
of the court to award compensation in case of breach of contract is unqualified
except as to the maximum stipulated but law imposes upon the court duty to
award compensation according to settled principles. The Section undoubtedly
says that the aggrieved party is entitled to receive compensation from the party
who has broken the contract whether or not actual damage or loss is proved to
have been caused by the breach. Thereby it merely dispenses with proof of
"actual loss or damages", it does not justify the award of compensation when in
consequence of breach no legal injury at all has resulted because compensation
for breach of contract can be awarded to make good the losses or damages
which naturally arose in usual course of things or which parties knew when they
made the contract to be likely to result from the breach."
(b) Section 73 of Contract Act guides the court to determine the amount of
compensation payable to aggrieved party by party responsible for breach of
contract. Following principles have to be borne in mind:
(A) Compensation is to be given for only those losses or damages which
naturally arose in usual course of things in consequence of breach of contract.
(B) Compensation may be given for those special losses or damages which were
in contemplation of parties, when they entered into contract, to be likely
consequence of breach of it.
(C) Court will not award compensation for remote or indirect loss or damages
arising by breach of contract.
In Trojan and Co. v. Nagappa Chettiar AIR 1953 SC 235, it was held that in
case of breach of contract of service by employer general damages for
"humiliation" etc. can not be claimed, person aggrieved is entitled only to such
damages as will compensate him for loss suffered to the extent that such loss or
damages were reasonably foreseeable as likely to result."
Therefore in case in hand `A' could have been dismissed only by giving 6 months
notice. But he has been wrongfully dismissed by B in harsh and humiliating
manner, so `A' is entitled to receive remuneration for 6 months to be calculated
as per terms of contract of his employment.
Q. 45 A undertakes to repay B a loan of Rs. 1,000 by 5 equal instalments of
months with the stipulation that in default of payment of any instalment, the
whole sum shall become due. Can the contract be enforced according to its terms
? Give reasons.
Ans. Section 74 of Indian Contract Act is relevant in his case which provides :
"When a contract has been broken, if a sum is named in the contract the amount
to be paid in case of such breach or if contract contains any other stipulation by
way penalty, the party complaining of breach is entitled whether or not actual
damage or loss is proved to have been caused thereby to receive from party who
has broken the contract, reasonable compensation not exceeding the amount so
named or as the case may be penalty so stipulated for."
So Section 74 of Act makes it clear that if in contract parties have before hand
agreed for certain sum to be payable to aggrieved party by way of liquidated
damages or any other stipulation by way of penalty in the event of breach of
contract, Court shall decide reasonable compensation not exceeding amount so
decided or any penalty so stipulated for to aggrieved party irrespective of fact
whether actual damage or loss caused by such breach is proved or not.
So that being legal position case in hand contract is enforceable.
Q. 46 Plaintiff who was tailor delivered a sewing machine and some clothes to
defendant railway co. to be sent to a place where he expected to carry on his
business with special profit by reason of a forthcoming festival. Through the
fault of Company's servants the goods were delayed in transmission and were not
delivered until same days after the conclusion of festival. Plaintiff had given no
notice to company of his special purpose. He claimed as damages the expenses of
his travelling upto the place of festival and loss of profits which he would have
earned. Decide.
Ans. Section 73 of Indian Contract Act is relevant for the case in hand which
provides as under:
"When a contract is broken the party suffers loss by such breach is entitled
to receive from the party who has broken the contract, compensation for
any loss or damages caused to him thereby which naturally arose in usual
course of things from such breach or which the parties knew when they
made contract to be likely to result from breach of it. Such compensation is
not be given for any remote or indirect loss or damages sustained by such
breach."
So following principles can be enunciated from this Section 73 : The party who
sustain loss or damages by breach of contract is entitled to:
(A) Any loss or damages which naturally arose in usual course of things, as a
result of breach.
(B) For loss or damages which were in contemplation of parties when they
entered into contract, to be likely to sustain by breach of it or in other words those
special damages which though ordinarily does not flow because of breach but
because of some special reason have occurred and parties were well aware from
very beginning of such special circumstances.
Section 73 provides aggrieved party will not be entitled to receive compensation
for any remote or indirect loss or damages sustained by breach of contract. Now
question arises which are said to be remote or indirect losses and which are not.
Basic authority in this regard is Handley v. Boxendale (1854) which determine
whether damages are proximate or remote consequence of breach of contract.
"When two parties have made a contract, which one of them has broken, the
other party ought to receive in respect of such breach of contract, such damages
as may fairly and reasonably considered either arising naturally i.e. according to
usual course of things from such breach of contract or such losses as may
reasonably be supposed to be in contemplation of parties at the time of making
of contract."
Coming now to case in hand, Tailor when delivered the sewing machine and
cloths for transmission to railway co. did not tell his special purpose of earning
profit at festival, eventually goods reached at distinction much after the festival
was over and thus plaintiff could not earn that profit. However special purpose of
earning profits during festival was not known to railway co. therefore plaintiff in
view of Section 73 of Act is entitled to compensation only for those loss which he
sustained naturally i.e. in usual course of thing by breach of contract. He cannot
claim that loss of profit which he could have earned, if goods had been reached
at destination well in time.
Q. 47 Define and explain "Contract of Indemnity". What are the rights of an
indemnity holder against his promisor on being sued while acting within the
scope of his authority ?
Ans. In simple words "Indemnity" means protection to a person from loss. It
contemplates a promise from one person to other that in the eventuality of any
loss to latter either because of promisor or third person, promisor will
compensate for such loss.
According to Section 124 of Indian Contract Act
"A contract of indemnity means a contract by which one party promises to save
other from loss caused to him by conduct of promisor himself or by conduct of
any other person."
Illustration ; A contracts to indemnify B against the consequence of any
proceedings which C may take against B in respect of a certain sum of Rs. 200.
This is a contract of indemnity.
Whether "Insurance" is Contract of Indemnity : As provided u/s 124 of Act
contract of indemnity is one whereby promisor promises to promisee to
compensate him for any loss arising out of conduct of promisor or any third
person. Section 124 of Act does not contemplates compensation for any loss not
arising due to human agency. Therefore contract of insurance is not contract of
indemnity because in Insurance Contract promiser promises to pay
compensation for event by fire etc. Such contract is not indemnity.
In contract of indemnity person who promises to indemnify is called "Indemnifies"
and person in whose favour promise is made is called "Indemnifies" or
"Indemnity holder."
Rights of Indemnity Holder When Sued ; Section 125 of Indian Contract Act is
relevant, which provides indemnity holder can bring an action against indemnifier
to recover damages and costs etc. The Indemnity holder acting within the scope
of his authority has following rights :-
(1) An indemnity-holder is entitled to claim all damages which he may have been
compelled to pay.
(2) An indemnity-holder is entitled to recover all costs reasonably incurred in
resisting or reducing or ascertaining the claim. But the party indemnified cannot
recover costs when he has not acted as a prudent man in defending the action
against him or has not been authorised by the indemnifier to defend the suit or
where the costs incurred have been unreasonable in amount.
(3) An indemnity-holder can compromise a claim on the best terms he can and
then bring an action on the contract of indemnity.
Q. 48 What is the contract of guarantee ? Discuss briefly main features of
contract of guarantee. Distinguish between contract of guarantee and indemnity.
Ans. Contract of Gurantee :- Section 126 of Indian Contract Act says-
"Contract of guarantee is a contract to perform the promise or to discharge the
liability of a third person in case of his default.
The person who gives the guarantee is called the "Surety" and person in respect
of whose default the guarantee is given "principal debtor" and the person to
whom guarantee is given is called the "creditor"
So the object of contract of guarantee is to provide additional security for
repayment of loan to creditor.
In Nagpur N.S. Bank v. Union of India, AIR 1981 A.P. 153 it was observed
that.
In every contract of guarantee there are three parties, the creditor, the principal
debtor and the surety. There are three contracts in a contract of guarantee.
Firstly, the principal debtor himself makes a promise in favour of the creditor to
perform a promise, etc. Secondly, the surety undertakes to be liable towards the
creditor if the principal debtor makes a default. Thirdly, an implied promise by the
principal debtor in favour of the surety that in case the surety has to discharge
the liability on the default of the principal debtor, the principal debtor shall
indemnify the surety for the same.
Basic Features of Contract of Guarantee 1. Contract may be either Oral
Written ; Under Indian law, contract of guarantee may be either oral or written,
however under English law contract of guarantee must be in writing and signed
by parties.
2. There should be a Principal debt ; One of essential feature in a contract of
guarantee is existence of principal debt or liability, which at first instance is
required to be discharged by principal debtor. Surety is liable under the contract,
only when principal debtor fails to discharge his obligation. If principal debt is not
there and one party makes promise to other to compensate for loss, it will be a
contract of indemnity and not the contract of indemnity.
3. Benefit to the principal debtor is sufficient consideration. - As in any other
contract, the consideration is also needed for a contract of guarantee. For the
surety's promise it is not necessary that there should be direct consideration
between the creditor and the surety, it is enough that the creditor has done
something for the benefit of the principal debtor. Benefit to the principal debtor
constitutes a sufficient consideration to the surety for giving the guarantee.
4. Consent of the surety should not have been obtained by
misrepresentation or concealment. - The creditor should not obtain guarantee
either by any misrepresentation or concealment of any material facts concerning
the transaction. If the guarantee has been obtained that way, the guarantee is
invalid. The position is explained by Sections 142 and 143 which run as follows :
"142. Guarantee obtained by misrepresentation invalid. - Any guarantee
which has been obtained by means of misrepresentation made by the creditor, or
which his knowledge and assent, concerning a material part of the transaction, is
invalid."
"143. Guarantee obtained by concealment invalid. - Any guarantee which the
creditor has obtained by means of keeping silence as to material circumstance is
invalid."
Distinction Between Contracts of Indemnity and Guarantee (1) There are two
parties in contract of indemnity i.e. indemnifier and indemnity holder. In a contract
of guarantee there are three parties i.e. surety, principal debtor and creditor
(2) Contract of indemnity consists of one contract whereby indemnifier promises
to indemnify the indemnity-holder for certain loss, whereas in contract of
guarantee there are three contracts between parties inter-se. One between
principal debtor and creditor in respect of debt or obligation to be discharged by
principal debtor. Second contract whereby surety undertakes to perform same
obligation if principal debtor fails to perform and third contract, which is implied
one, is between principal debtor and surety whereby principal debtor is bound to
indemnify the surety for payment of debt or discharge of obligation, made by
surety under the contract of guarantee.
(3) The object of contract of guarantee is provide additional security to creditor
for debt or liability. A contract of indemnity is to protect the promisee against
some likely loss.
(4) In contract of guarantee, the liability of surety is only a secondary one and
arises only when principal debtor fails to discharge is obligation under the
contract, but once surety had discharged his liability on behalf of principal debtor
surety steps into the shoes of creditor and can realise the payment made by him
from principal debtor, whereas in contract of indemnity, liability of indemnifier is
primary one and he can not recover amount paid by him from any one.
Q. 49 "Liability of the surety is co-extensive with that of principal debtor" -
Discuss this statement.
Ans. Section 128 of Indian Contract Act lays down -
"The liability of surety is co-extensive with that of principal debtor unless it is
otherwise provided by the contract".
So term "Co-extensive" indicates that Surety and principal debtor stands at par
as far as liability towards creditor is concerned. Surety is as much liable for debt
or any liability as the principal debtor is liable. So if the liability of Principal debtor
is scaled down then liability of surety will also be reduced.
Illustration ; A guaranteed to B the payment of a bill of exchange by C the
acceptor. The bill is dishonoured by C, the acceptor. A is liable not only for the
amount of bill but also for any interest and charges which may have become due
on it.
In Kelappan Nambiar v. Kunbi Raman, AIR 1957 Mad. 176, it has been held
that a surety guarantees a debt by minor, he incurs no liability as his liability is
co-extensive with that of principal debtor, whose contract is void.
So in view of provisions of Section 128 of the Act the liability of surety is joint and
several with the principal debtor, if principal debtor makes a default in
discharging his liability, creditor can enforce it from surety or both. Creditor can
sue surety alone without even exhausting his right to sue principal debtor, unless,
however contrary is agreed upon under the contract.
In Bank of Bihar v. Damodar Persad, AIR 1969 SC 297, plaintiff bank
advanced loan to `D' (Principal debtor) and `P' was surety upon failure of
repayment of loan by `D' and `P'. Bank filled suit for recovery against with
principal debtor and surety (D and P). Suit was decreed with condition that
creditor (Plaintiff) shall enforce its dues against surety only after having
exhausted it's remedies against principal debtor. This condition was challenged
till Supreme Court and Apex Court while accepting the appeal Hon'ble Sh.
Bachawat J. observed -
"Before payment, the surety has no right to dictate terms to creditor and ask him
to pursue his remedies against the principal debtor in the first instance. In the
absence of some special equity, the surety has no right to restrain an action
against him by the creditor on the ground that the principal debtor is solvent or
that creditor may have relief against the principal debtor in some other
proceeding."
So as a general rule liability of surety is co-extensive or joint and several with
principal debtor. However there can be limit on surety's liability upon express
term or condition, under the contract.
Q. 50 Write a short note on "Continuing guarantee".
Ans. Section 129 of Indian Contract Act provides that : A guarantee which
extends to a series of transactions, is called, a continuing guarantee.
A guarantee may be an ordinary guarantee or a continuing guarantee. In case of
ordinary guarantee the surety is liable only in respect of a single transaction but
in case of continuing guarantee the surety is liable in respect of any of the
successive transactions which come within its scope. Thus, in consideration that
B will employ C in collecting the rent of B's zamindari, promises B to the
responsible, to the amount of 5,000/- rupees for the due collection any payment
by C of those rents. This is continuing guarantee.
But it is not always easy to decide whether a guarantee is confined to one
particular transaction only or extends to a series of transactions. In difficult cases
the proper course always is to ascertain the intention of the parties and the
intention is best ascertained by looking at the relevant position of the parties at
the time of the instrument.
Revocation of continuing guarantee. - (1) A continuing guarantee may, at any
time, be revoked by the surety as to future transaction by notice to the creditor.
Example. - A, in consideration of B's discounting, at A's request, a bill of
exchange for C, guarantees to B, for twelve months the due payment of all such
bills to the extent of 5,000 rupees. B discounts bills for C to the extent of 2,000
rupees. Afterwards at the end of three months. A revokes the guarantee. This
revocation discharges A from all liability to B for subsequent discount. But A is
liable to B for the 2,000 rupees on default of C.
(2) The death of surety operates, in the absence of any contract to the contrary,
as revocation of continuing guarantee, so far as future transactions. (Section 13)
Q. 51 When is a surety discharged of his liability ?

Ans. Discharge of Surety from Liability When the liability which surety had
undertaken under the contract is extinguished or comes to an end, he is said to
be discharged from his liability. A surety can be discharged from his liability by
any of following ways :-
(a) Revocation by the surety (Section 130)
(b) Upon Surety's death. (Section 131)
(c) By Variance in terms of the Contract (Section 133)
(d) By release or discharge of principal debtor. (Section 134)
(e) When creditor compounds with Principal debtor (Section 135)
(f) Upon creditor's acts or omission impairing Surety's remedies. (Section 139)
(g) By loss of security by creditor. (Section 141)
134 of Indian Contract Act says -
"The surety is discharged by any contract between the creditor and principal
debtor by which the principal debtor is released or by any act or omission of
creditor, the legal consequence of which is the discharge of principal debtor."
Illustration ; A gives a guarantee to C for goods to be supplied by C to B. C
supplies goods to B and afterwards B becomes embarrassed and contracts with
his creditors (including C) to assign to them his property in consideration of their
releasing him from their demands. Here B is released from his debt by contract
with C and A is discharged from his suretyship.
Delhi High Court in Charan Singh v. Security Finance Pvt. Ltd., AIR 1988
Delhi 130 has held that settlement made between creditor and principal debtor
after passing of joint decree against surety and principal debtor would not
absolve the surety because provisions of Section 133 to 139 apply only when
rights of parties have not crystallised or merged in decree of court of law.
(a) By Revocation by Surety ; As per Section 130 of Indian Contract Act a
continuing guarantee may a any time be revoked by the surety as to future
transactions, by notice to the creditor.
So Section 130 apples in case of continuing guarantee. Surety in such cases can
be discharged under the contract by giving written notice indicating his intention
of revoking his guarantee for future transactions.
(b) By Surety's Death ; According to Section 131 of Indian Contract Act, death
of surety operates as revocation of continuing guarantee, in the absence of any
contract to contrary.
(c) By Variance In terms of Contract ; Section 133 of Indian Contract Act says -
"Any variance, made without the surety's consent in terms of the contract
between principal debtor and the creditor, discharges the surety as to
transactions subsequent to variance."
A variation in the contract between the principal debtor and the creditor without
the consent of the surety would absolve the surety from liability as to transaction
subsequent to the variance. But the variation must be such as materially affects
the position of the surety. But where a surety is responsible for the performance
of several and distinct contracts or duties, a change in one of those contracts or
duties will not affect the surety's liability as to the rest.
Illustration ; A becomes surety to C for B's conduct as 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 1/4th of the losses on over drafts. B allow a
customer to over draw and the bank loses a sum of money. A is discharged from
his suretship by the variance made without his consent, and is not liable to make
good the loss.
(d) By Release or Discharge of Principal debtor ; As Section 128 of Act
provides that liability of surety is co-extensive with that of principal debtor. So if
principal debtor is released or discharged by creditor then creditor can not
enforce the debt from surety. Surety will also be discharged.
(e) When Creditor Compounds with Principal debtor ; Section 135 of Indian
Contract Act says that contract between creditor and principal debtor discharges
the surety -
(i) when the creditor makes composition with the principal debtor,
(ii) when creditor promises to give time to principal debtor
(iii) when the creditor promises not to sue the principal debtor.
(f) Upon Creditor's Acts or Omission Impairing Surety's Remedy As per
Section 139 of Act when acts or omissions of creditor are inconsistent with the
interest of surety or which results in impairing surety's remedy against principal
debtor, then surety will be discharged.
(g) By Loss of Security by Creditor Section 141 of Indian Contract Act says
that surety is entitled to all the securities which the creditor has against principal
debtor, if creditor loses or without consent of surety parts with the security surety
is discharged to the extent of value of security.
Q. 52 Discuss the rights of Surety.
Ans. (1) Rights against the principal debtor. - The surety who pays on default
of the debtor stands in the shoes of the creditor and is invested with all the rights
which the creditor had against the principal debtor. When surety seeks to enforce
his remedy he shall be in the same position as if he were the original creditor still
unpaid.
A surety who discharged the obligation by paying less than the full amount due
can claim only the amount actually paid by him and not the whole amount for
which he is a surety. (Section 140).
(2) Rights against the creditor. - If the surety has paid the debt of the principal
debtor, he is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship was
entered into whether the surety is aware of the existence of the 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.
(Section 141). The equity between the creditor and the surety is that the creditor
not do anything to deprive the surety of that right. [Goverdhandas v. Bank of
Bengal, (1891) 15 Bom. 841].
(3) Rights against co-sureties. - If there are two or more co-sureties and one of
them has paid debt, he can recover from the other the excess of what he has
paid above his share. They are liable to contribute equally provided they are for
the same debt. The fact of their being sureties, jointly or severally, or being, so
under different contracts, or without the knowledge of each is immaterial. They
are to pay as between themselves in equal shares the part left unpaid - subject to
the maximum of their obligation. (Sections 146- 147).
Q. 53 Explain `Bailment'. Discuss main characteristics of Bailment. What are
different kind of bailment ?
Ans. Bailment ; Bailment means handing over or delivery of moveable property
by owner to another for some specific purpose and then return of such moveable
property to it's owner after the purpose is fulfilled. Section 148 of Indian Contract
says :-
"A bailment" is the delivery of goods by one person to another for some purpose
upon a contract that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the "bailor", the person to whom
they are delivered is called the "bailee" Main characteristics of bailment. - The
main characteristics of the bailment are :
(1) It consists in the delivery of goods. Delivery of possession is essential. If there
be a transfer of ownership the transaction may be a sale or exchange but is not a
bailment.
(2) The delivery of possession is temporary but it is for some purpose. The bailor
reserve a right to claim a re-delivery of the goods deposited. Whenever there is a
delivery of property on a contract for an equivalent in money or some other
valuable commodity and not for the return of the identical subject-matter on its
original form, it is a sale.
(3) The goods are delivered to be returned in specie or disposed of according to
the direction of the bailor when the purpose is accomplished.
Only movable properties can be bailed.
Example. - Where lends some ornaments to B to be used in a marriage, the
transaction is one of bailment. In such a case there is an implied contract for the
return of the ornaments within a reasonable time.
In Trustees, Port Trust of Bombay v. Premier Automobiles, AIR 1981 SC
1982 it was observed that if a person assumes the custody of another person's
goods even without any formal arrangement, this is sufficient to constitute
bailment.
Kinds of bailment. - In Coggs v. Burnard, (1704) I Sm. I.C. (12th E.L.D.) 191,
Lord Holt mentioned six kinds of bailment as under :-
(1) Deposit. - A simple bailment of goods by one man to another to keep for the
bailor's use.
(2) Commodatum. - The goods lent to a friend gratis to be used by him.
(3) Hire. - When goods are delivered to the bailee for hire.
(4) Pawn. - When goods are delivered to another by way of security for money
borrowed.
(5) When goods are delivered to be carried or something to be done about these
for reward, to be payable to the bailee.
(6) When goods are delivered to be carried or something to be done about
without rewards.
Q. 54 State the duties and liabilities of the bailor and bailee towards each-other.
Ans. Bailor's Duties and Liabilities Bailor's Duty of Disclosure Section 150
of Indian Contract Act mentions the following duty of a bailor in respect of goods
bailed by him :-
(a) The bailor is bound to disclose to bailee faults in the goods bailed of which
bailor is aware and which materially interfere with the use of them or expose the
bailee to extra-ordinary risks and if he does not disclose such defects, he is
responsible for damage arising to bailee directly from such defects.
(b) If the goods are bailed for bire, the bailor is responsible for such damages,
whether he was or was not aware of existence of such defect in the goods bailed.
Example : `A' lends a horse, which he knows to be vicious, to `B'. He does not
disclose the fact that the horse is vicious. The horse runs away. B is thrown and
injured. `A' is responsible to `B' for damage sustained.
Duties of Bailee ; Bailee has following important duties under the contract of
bailment :-
(i) To take reasonable care of goods bailed (Section 151-152)
(ii) Not to make unauthorised use of goods bailed (Section 153-154)
(iii) Not to mix bailor's goods with own (Section 155-157)
(iv) to return the goods on fulfillment of purpose (Section 159-161, 165-167)
(v) to deliver to bailor profits on goods (Section 163)
(1) To Take Reasonable Care of Goods Bailed ; Section 151 of the Act says
that "In all cases of bailment the bailee is bound to take as much care of goods
bailed to him as a man of ordinary prudence would, under similar circumstances,
take of his own goods of same bulk, quality and value as the goods bailed."
So bailee should take as much care of goods bailed to him, as a man of ordinary
prudence would take of his own goods in similar circumstances.
In Calcutta Credit Corporation Ltd. v. Prince Peter of Greece, AIR 1964 Cal.
374 - it was observed that degree of care needed varies with the kind of
engagement, the words "as a man of ordinary prudence would take of his own
goods" do not mean that if bailee's own goods are lost together with goods
bailed, kept at same place, bailee cannot be blamed for not take due care of
goods bailed.
Section 152 of the Act provides as to when bailee is immune from liability. It says
"The bailee in the absence of any special contract is not responsible for loss,
destruction or deterioration of thing bailed, if he has taken the amount of care of it
described in Section 151."
(2) Not To Make Unauthorised Use of Goods bailed ; Under the contract of
bailment, bailee is bound to use the goods, only for the purpose, for which goods
are delivered to bailee and for no other use. If bailee makes unauthorised of
goods bail, bailor is entitled to :-
(a) terminate the bailment (Section 153)
(b) recover compensation for loss arising due to unauthorised use of goods
(Section 154)
(3) Not To Mix Bailor's Goods with his Own Goods ; If the bailee, without the
bailor's consent, mixes his own goods with that of the bailor, and the goods so
mixed can be separated, e.g., bales of cotton, the bailee is bound to bear the
expense of separation or division, and any damage arising from the mixture.
(Section 156)
When the goods of the bailor and the bailee, which have been so mixed by the
bailee, cannot be separated, e.g., flour of different kinds, the bailor is entitled to
be compensated by the bailee for the loss to the goods. (Section 157)
(4) To Return the Goods On fulfilment of Purpose ; As soon as the time for
which goods were bailed has expired, or the purpose for which they were bailed
has been accomplished, it is duty of the bailee to return or deliver, according to
the bailor's directions the goods bailed, without demand. (Section 160). If, by the
default of the bailee, the goods are not returned, or tendered at proper time he is
responsible to the bailor for any loss, destruction or deterioration of the goods
from that time. (Section 161).
(5) To Deliver to Bailor Profits on Goods Bailed ; According to Section 163 "in
the absence of any contract to the contrary, the bailee is bound to deliver to the
bailor or according to his directions, any increase or profits which may have
accrued from the goods bailed."
In Standard Chartered Bank v. Custodian, AIR 2000 SC 1488 it was held that
if shares or debentures are pledged, bonus shares, dividend or interest thereon
are to be regarded as accretions. Such accretions are to be returned; at the time
of redemption of property.
Q. 55 On B's request, `A' lent gratuitously his scooter to B for his use for one
week. After two days `A' urgently needs his scooter and requires its return from
B. B refuses to return the goods unless he is indemnified for his damages @ Rs.
100 per day, which he would suffer due to premature delivery of scooter. Decide
the rights of A and B in such situation.
Ans. Section 148 of Indian Contract Act says: A "bailment" is the delivery of
goods by one person to another for some purpose, upon a contract that they
shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them. The person delivering
the goods is called the "bailor". The person to whom they are delivered is called
the "bailee". Then Section 159 of the Act provides: "The lender of a thing for use
may at any time require its return, if the loan was gratuitous, even though he lent
it for a specified time or purpose, the borrower has acted in such a manner that
the return of the thing lent before the time agreed upon would cause him loss
exceeding the benefit actually derived by him from the loan, the lender must, if he
compels the return, indemnify the borrower for the amount in which the loss so
occasioned exceeds the benefit so derived."
In view of the provisions of Section 159 reproduced above, A can ask and
compel B to return the scooter, since the lending was gratuitous at the request of
B. However, if B can prove that on the faith of such lending for the specified time
of seven days, he has acted in such a manner that the return of the scooter
before the expiry of the agreed period would cause him loss exceeding the
benefit actually derived by him with the help of the scooter, A is liable to
indemnify B for the loss so occasioned which exceeds the benefit so derived. If
the plea of B is accepted as it is, A is liable to identify B to the extent of Rs. 300
only.
Q. 56 `A' gave some gold to a goldsmith named B. The goldsmith put the gold in
his safe and posted a watchman outside the room. In a raid by dacoits on the

house of goldsmith, along with other property, A's gold was also taken away by
decoits. Is B liable to pay `A' the value of gold ?
Ans. Section 151 of Indian Contract Act says that in all cases of bailment, the
bailee is bound to take as much care of goods bailed to him as a man of ordinary
prudence would under similar circumstances take of his own goods of same bulk,
quality and value as goods bailed.
Section 152 of Act further provides that bailee in the absence of any special
contract is not responsible for any loss, destruction, deterioration of thing bailed,
if he has taken the amount of care as described in Section 151 of the Act.
In the case in hand, Goldsmith had kept the gold in his safe and has taken due
care by posting watchman outside the room in which safe was kept, so goldsmith
took as much care as a man of ordinary prudence would have taken in his own
case under similar circumstances so goldsmith is not liable to pay anything for
Gold of `A' which has been taken away by dacoits along with other properties of
goldsmith.
Q. 57 The plaintiff handed over to the defendant certain Jewels for the purpose
of being melted and utilized for making new Jewels. Every day as soon as the
defendant's work for the day was over, the plaintiff used to receive half made
jewels from the defendants and put them into a box in the defendant's room,
without handing over the key to the defendant. One night the jewels were stolen
from the defendant's room. Discuss the remedy available to plaintiff if any.
Ans. Section 148 of the Indian Contract Act defines `bailment' as: "A
`bailment' is the delivery of goods by one person to another for some purpose,
upon a contract that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the directions of the person delivering
them. The person delivering the goods is called the "bailor". The person to
whom they are delivered is called "bailee". Section 149 provides: "The delivery
to the bailee may be made by doing anything which has the effect of
putting the goods in the possession of the intended bailee or of any person
authorised to hold them on his behalf". Thus, to constitute bailment delivery of
the article to the bailee is essential.
In the present case, the plaintiff remained in possession of the half made jewels
every evening and also control thereof by keeping the key of the box. It is evident
that the plaintiff was in possession and control of the jewels when the same were
stolen. Thus, there was no bailment at that time. The plaintiff is to suffer the loss,
and has no remedy against the defendant.
Q. 58 Discuss the rights of Bailee.
Ans. Under the contract of bailment, baildee of the goods has following rights :-
(a) Right to recover necessary expenses incused on bailment (Section 158)
(b) Right to recover compensation from the bailor (Section 164)
(c) Right of lien on goods bailed (Section 170-171)
(d) Right of suit against a wrongdoer (Section 180) (a) Right To Recover
Necessary Expenses ; Section 158 of Indian Contract Act says :-
"Where by conditions of bailment, the goods are to be kept or be carried or to
have work done upon them by the bailee for the bailor and bailee is to receive no
remuneration the bailor shall repay to the bailee the necessary expenses
incurred by him for the purpose of bailment."
So even when the bailment is gratuitous, the bailee is entitled to recover
necessary expenses incurred by him for the purpose of bailment.
(b) Right To Recover Compensation ; Bailee is entitled u/s 164 of Indian
Contract Act to receive compensation from bailor for any loss to bailee due
failure of bailor to receive back the goods or when bailor was not entitled to make
bailment.
(c) Right of Lien On the Goods Bailed ; Lien is a right of one person to retain
that which is in his possession, belonging to another until certain demands of the
person in possession are satisfied. Section 170 confers on the bailee a lien on
the goods bailed for remuneration due to him for services rendered involving the
exercise of labour or skill in respect of the goods bailed. For example, A delivers
a rough diamond to B a jeweller, to be cut and polished which is accordingly
done. B is entitled to retain the stone till he is paid for the services he has
rendered.
A bailment for custody does not give a right of lien. This right cannot be
exercised unless the service has been performed and the remuneration is due.
The Act recognize two kinds of lien :-
(i) Particular Lien
(ii) General Lien
Particular Lien ; The particular lien extends only to the value of the work done
on the particular thing and not for the general balance of accounts of other
claims, which the bailee may have against the bailor. The bailee's particular lien
may be exercised on all goods delivered under one single contract though at
different times. But it cannot be exercised if the remuneration has not yet become
payable, or if the service has been partly rendered. The particular lien of the
bailee does not extend to remuneration for services other than those rendered for
the goods bailed.
Section 170 of Act says "Where the bailee has in accordance with the purpose of
bailment, rendered any service 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 receives due remuneration for the services he has
rendered in respect to them."
General lien ; A general lien entitles a person in possession of goods to retain
them until all claims or accounts of the persons in possession against the owner
of the goods are satisfied. He can detain goods for a general balance of account.
Section 171 authorises bankers, factors, wharfingers, attorneys of High Court
and policy-brokers to retain goods as a security for a general balance of account.
Section 171 of Act lays down :-
"Bankers, wharfingers, attorneys of a High Court and policy brokers may, in the
absence of a contract to contrary, retain as a security for a general balance of
account any goods bailed to them, but no other persons have a right to retain as
a security for such balance, goods bailed to them, unless there is an express
contract to that effect."
In Board of Trustees v. Shriyansh Knitters, AIR 1983 Bom. 88, it was
observed that it is a right to detain goods belonging to another not only for the
discharge of a debtor's liability incurred in respect of the goods bailed but also for
the general balance of account subsisting between the owner and the person
detaining them.
(d) Right of suit against a wrongdoer ; When the goods have been bailed, if a
third person wrongfully deprives the bailee of their use or possession, or causes
an injury to the goods, such third person can be sued either by the bailee or the
bailor, for such wrongful act done by him. (Section 180)
Q. 59 Discuss the position of a person who find goods belonging to another and
takes them into his custody.
Ans. Position of finder of goods. - The finder of goods occupies the position of
a bailee of the goods, against the true owner. His duty of care and other
responsibilities are the same as those of a bailee. The finder of goods has no
right to sue the owner for compensation for trouble and expenses voluntarily
incurred by him to preserve the goods and to find out the owner; but he may
retain the goods against the owner until he receives compensation for trouble
and expenses voluntarily incurred by him to preserve the goods and to find out
the owner. When the owner of the goods has offered a specific reward, the finder
can sue him for the same, and he can also exercise lien on those goods for
reward. (Section 168) The finder of goods has also a right to sell the goods found
by him if the owner of the goods cannot after reasonable search be found or he
refuses to pay the lawful charges of the finder, or the goods are likely to perish,
or when the lawful charges of the finder in respect of those goods amount to two-
third of their value. (Section 169)
Q. 60 (a) What is pledge ? How does it differ from Bailment ? Discuss the rights
of pledge in regard to the property pledged.
(b) Under what circumstances and to what extent can a person other than true
owner, make a valid pledge to Goods ?
Ans (a). Pledge ; Section 172 of Indian Contract Act says :-
"The bailment of goods as security for payment of a debt or performance of
promise is called "pledge". The bailor is in this case called "pawner". The bailee
is called the "pawnee"
So when goods are delivered by one person to another under the contract of
bailment for purpose of security for payment of loan it is a pledge. There are
following requirements for constituting pledge :-
(a) There should be bailment of goods.
(b) The purpose of such bailment is to make the goods bailed serve as security
for payment of loan or performance of a promise.
Bailment and Pledge Distinguished (a) Bailment is wider expression, under
which, delivery of goods is made from one person to another for some purpose
and upon completion of such purpose, goods are returned back to person who
had originally given the goods, such bailment becomes the "Pledge" when the
purpose of bailment is to treat the goods bailed as security for the payment of
loan or performance of any promise.
(b) In case of bailment, if bailor does not pay the lawful charges due to bailee,
bailee has right of lien over the goods bailed i.e. he is entitled to possession of
goods whereas in "pledge" upon the failure of pawner of not paying back the loan
or to perform promise, the pawnee has right to sell the goods "pledged".
Right of the pawnee in respect of the things pledged :
(1) The pawnee has a right of retainer for the payment of the debt, interest and
cost incurred by him in respect of the possession or for the preservation of the
thing pledged.
(2) He may retain the goods as collateral security pending his own suit for
recovery of the debt.
(3) He may sell the goods pledged on giving the pawner reasonable notice.
(4) Even if the pawner's title is defective under a voidable contract, the pawnee's
title is not affected by it provided he had no notice of the defect.
Normally, the owner of goods, pledges the goods, however in following
exceptional circumstances, persons who are not owner of goods, can pledge the
goods :-
(i) Pledge by a mercantile agent (Section 178)
(ii) Pledge by person in possession under voidable contract (Section 178-A)
(iii) Pledge by person with a limited interest (Section 179)
(iv) Pledge by seller in possession after sale (Section 30(1) of Sales of Goods
Act
(v) Pledge by buyer in possession after sale (Section 30(2) of Sales of Goods Act
(i) Pledge By a Mercantile Agent ; When the pledge is made by the mercantile
agent who is in possession of the goods or document of title with the consent of
the owner and the pledge is made by the mercantile agent while acting in the
ordinary course of business of mercantile agent, and the pawnee acts in goods
faith and without notice that the pawner has no authority to pledge. Section 178
authorises only the mercantile agents and hence a pledge by a mere servant or
wife is not valid even though in possession of goods with the consent of the
owner.
(ii) Pledge By Person in Possession Under a Voidable Contract ; Section
178-A of Indian Contract Act says that a person who has obtained the
possession of goods under a voidable contract u/s 19 or 19-A of Act but contract
has been rescinded at the time of pledge such pledge is legal provided pledge
acting in good faith and without notice of pledger's defect.
(iii) Pledge By a Person With Limited Interest ; According to section 179
where a person pledges goods in which he has only limited interest, the pledge is
valid to the extent of interest of pledger or pawnor.
(iv) Pledge By Seller In Possession After Sale ; Section 30(1) of Sales of
Goods Act provided that if a seller having sold the goods is still in possession
thereof or of document of title pledge by him convey a good title to transferee
provided transferee is acting in good faith and without any notice of previous
sale.
(v) Sale By Buyer In Possession After Sale; Section 30(2) of Sales of Goods
Acts says a buyer who may have obtained the possession of the goods or
document of title of goods but has not yet become the owner of those goods, if
pledges the goods, it will be valid pledge provided pawnee acted in good faith
and without notice of any lien or other rights of original seller over the goods.
Q. 61 (A) Explain the expression "Agent" and "Principal". What are salient
features of Agency ?
(B) What are the different kinds of agents ?
Ans (A). Agent; Section 182 of Indian Contract Act lays down :-
"An `agent' is a person employed to do any act for another or represent another
in dealings with third person. The person for whom such act is done or who is so
represented, is called the "principal".
An agent is a person employed to do any act for another or to represent another
in dealing with third persons. But a person who merely gives advice to another in
matters of business, does not thereby become his agent. The essential point
about an agent's position is his power of making the principal answerable to third
persons. The acts done by the agent within his authority are binding on the
principal who is represented for all lawful purpose of the agency by the agent till
the latter's authority is terminated. So there should be well defined relationship of
Agent and Principal under the contract. Mere use of word `Agency' does not
necessarily mean that there is relationship of agency between parties, as
in Loon Karan v. John and Co., AIR 1967 All. 308 it was observed that "Court
must examine the true nature of agreement and subsequent dealings between
the parties and then to decide whether it established a relationship of agency
under the law......."
Some Features of a Contract of Agency
(1) The principal should be competent to contract (Section 183)
(2) The agent may not be competent to contract (Section 184)
(3) No consideration is necessary to create an agency (Section 185)
1. Principal Should be Competent To Contract ; It is well-established that
parties to the contract should be competent to contract i.e. parties should have
attained age of majority, should be of sound mind and should not be debarred by
law to contract. Section 183 of Act specifically provide for `Principal' as "any
person who is of age majority according to the law to which he is subject and
who is of sound mind, may employ an agent."
2. Agent May Not Be Competent To Contract ; Section 184 of Act says -
"As between the principal and a third person, any person may become an agent,
but no person who is not of the age of majority and of sound mind can become
an agent so as to be responsible to his principal according to the provisions in
that behalf herein contained."
So Section 184 says any person can settle the dealings as between his principal
and third person, even a minor or otherwise incompetent person can do so, but in
order to create binding relation between Agent and principal inter se it is
necessary that agent is competent to contract.
3. No Consideration is Necessary To Create An Agency ; Section 185
provides that no consideration is required to create an agency. By peculiar nature
of Principal-agent relationship, principal will automatically be binding for
permissible acts and conducts of agent.
Ans. (B) Kinds of Agents Keeping in consideration nature of work undertaken
by Agent, following are different kinds of agents :-
(i) Auctioneers :- An auctioneer is an agent who sells the goods of principal by
auction i.e. in open market. He is a mercantile agent within the meaning of
section 2(9) of Sales of Goods Acts.
(ii) Factors : A factor is a mercantile agent who is entrusted with the possession
of the goods for purpose of sale. He has also the power to sell the goods on
credit. If the owner has put a factor in possession of goods or the document of
title without authorising him to sell the goods, according to section 27 of Sales of
Goods Act, the sale of goods by him will convey a good title of a bona fide buyer.
(iii) Broker :- Broker is an agent who has power to negotiate with third party or to
purchase or sell the goods on behalf of principal even if he is not in possession of
goods. He is primary job is make two parties to enter into any transaction or
contract, and for that he charge commission.
(iv) Del credere agent. - A del credere agent is one who for an extra
remuneration, called a del credere commission undertakes the liability to
guarantee the due performance of the contract by the other party. Because he
charges an extra commission he assumes responsibility for the solvency and
performance of their contracts by the other parties and thus indemnifies his
employer against loss. A del credere agent is liable to pay the seller only if owing
to insolvency of the buyer or other analogous cause the seller is unable to
recover the price from the buyer; but not if the buyer though solvent has refused
to pay on the ground that the seller has not duly performed the contract.
Q. 62 How does an agency is created ? Under which situations an agent can bind
the principal by his conducts ?
Ans. Relation of agency i.e. Principal - Agent relationship simply means that
agent deal with third party on behalf of principal and thus acts of agent binds the
principal however, it is not every acts and conducts of an agent bind principal, it
is in following situations agent binds the principal:-
(1) By conferring (either expressly or impliedly) actual authority on agent
(2) By Agent's authority to act in "Emergency" on behalf of Principal
(3) By Creation of agency on the basis of law of Estoppel
(4) By Ratification of Agent's act by principal
(5) By presumption of agency in Husband-Wife relationship
(1) By Conferring Actual Authority on Agent Expressly or Impliedly ; A
principal is bound by acts done by his agent with his authority. Authority to agent
may be expressed or may be inferred by acts and course. Authority is expressed
when it is given by principal by words spoken or written and it is implied when it is
to be inferred from circumstances or course of dealing. (Section 187)
A owns a shop in Serampur, himself living in Calcutta, and visiting the shop
occasionally. The shop is managed by B and he is in the habit of ordering goods
from C in the name of A for the purpose of the shop, and of paying for them out
of A's fund with A's knowledge. B has an implied authority from A to order goods
from C in the name of A for the purpose of the shop.
Section 188 of Indian Contract Act says about extent of agent's authority-
"An agent having an authority to do an act has authority to do every lawful thing
which is necessary in order to do such act. An agent having an authority to carry
on business has authority to do every lawful thing necessary for the purpose or
usually done in course of conducting such business."
Illustration ; A is employed by B residing in London to recover at Bombay a debt
due to B. A may adopt legal process necessary for the purpose of recovering the
debt and may give a valid discharge for the same.
In Harshad J. Shah v. L.I.C., AIR 1997 SC 2459 If an L.I.C. agent is expressly
prohibited from collecting the premium, and the rules also prohibit the same,
collection of premium cannot be considered as necessary for or incidental to the
effective execution of the express authority granted to him.
(2) Agent's Authority In An Emergency ; Section 189 of Act says -
"An agent has authority in an emergency, to do all such acts for the purpose of
protecting his principal from loss as would be done by a person of ordinary
prudence in his own case, under similar circumstances."
Illustration ; A consigns provisions to B at Calcutta, with directions to send them
immediately to C at Cuttack. B may sell the provisions at Calcutta if they will not
bear the journey to Cuttack without spoiling.
It was observed by Baron Park in Hawantazen v. Bourne, 7 M. and W. 595 the
master of a ship can by instrument of hypothecation, pledge the ship, if
necessary during the voyage to guard against accidents, to repair the vessel, and
to provide the means of continuing the voyage to destination. He can without the
owner's knowledge, bind him by contracting a loan for such purposes; but he
must show that the necessity for such step was forced upon him and that he had
no funds belonging to his employers and that he was unable to procure the funds
in any other way than by hypothecation.
(3) Principal bound by estoppel. ; Sometimes, an agent has no authority to act
on behalf of the principal, but the principal by his conduct creates an impression
in the mind of the third person that the agent has an authority to act on his behalf.
In such a case, the principal is liable towards the third person for the acts done
by the agent, on the ground of the application of the law of estoppel. (Section
237) The basis of the action is what appears to the third person to be an authority
i.e., apparent or ostensible authority conferred on the agent.
(4) Principal Bound By Ratification ; When principal has not conferred on
agent actual authority expressly or implied, still principal can be bound by acts
done by agent if principal ratifies those acts of agent, which means when
principal subsequently approves acts done by agent without authority. Section
196 of the Act provides :-
"Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies
them, the same effects will follow as if they had been performed by his authority.
Essentials Of Valid Ratification (a) The Act Should be Done On Behalf of
Another Person - One of the important requirement for valid ratification is that
act ratified must have been done, on behalf of person who subsequently ratify it.
Once acts done by one, are ratified by another on whose behalf it was done,
person who has done the act becomes the agent, even if there was no agency at
the time of doing such act and the person on whose behalf it was done and who
ratify it, becomes principal.
(b) Principal Should Be In Existence and Competent To Contract - When a
principal ratifies an act, the validity of act comes back from the time of doing of
act by agent and becomes as much binding as if it was done with actual
authority, however for proper ratification it is necessary that person who ratify the
act (principal) must have been in existence and competent to contract.
(c) Ratification May Be Expressed or Implied - Ratification may be express or
implied in the conduct of the person on whose behalf the acts are done. (Section
197) For example, A, without authority, buys goods for B. Afterwards, A sells
them to C on his own account. B's conduct implies a ratification of the purchase
made for him by A. [Illustration (a) to section 197]
(d) Ratification with full knowledge of facts. - No valid ratification can be
made by a person whose knowledge of the facts of the case is materially
defective. (Section 198)
(e) Ratification of the whole transaction. - A principal cannot ratify only those
parts of the transaction which are favourable to him, and disown others. If he
makes ratification, it is deemed to be ratification of the whole act. (Section 199)
(f) Ratified act should not be injurious to a third person. - If ratification of an
act done without the authority of a person would result in injury to the interest of a
third person, the ratification would be invalid. (Section 200) For example , A holds
a lease from B, terminable on three months' notice. C, an unauthorised person,
gives notice of termination to A. The notice cannot be ratified by B, so as to be
binding on A. [Illustration (b) to section 200]
(g) Ratification within a reasonable time. - For a valid ratification, it is
necessary that the same must be done within a reasonable time.
(5) Agency In Husband Wife Relationship; The implied authority to the wife to
bind the husband, arises when the husband and wife are cohaliting, if man and
woman are living together as husband wife, wife may receive supply of goods
and services which may be required for domestic use, and husband is bound to
pay for them.
Q. 63 Discuss the relationship of Principal and Agent inter- se.
Or
Discuss the duties and rights of Agents.
Ans. Relationship of Principal and Agent Inter-se Relation of agency is such
that agent can bind the principal for all of his acts (whether legal or not) if done
within purview of his authority. It is therefore essential to fix the rights and
responsibilities of agent and principal, apart from mutual rights and duties as may
be determined by principal and agent by their contract. Law provides following
rights and duties between them.
Duties Of Agent (1) Duty Not to Delegate His Duties - As a general rule, Agent
can not delegate his obligations or in other words Agent can not make sub-agent
for performing his duties on behalf of principal. This rule is contained in maxim
"Delegations non potest delegree" i.e. Agent who has been delegated some
authority cannot further delegate that authority to another person. As a general
rule the maxim delegatus non potest applies so as to prevent an agent from
establishing the relationship of principal and agent between his own principal and
third person; but this maxim when analysed, merely imports that an agent cannot
without authority from his principal devolve upon another an obligation to the
principal, which he has himself undertaken to personally fulfil, and that, inasmuch
as confidence in the particular person employed is at the root of the contract of
agency, such authority cannott be impled as an ordinary incident in the contract.
But the exigencies of business do from time to time render necessary to carrying
out of the instructions of a principal, by a person other than the agent originally
instructed for the purpose; where such is the case, the reason of the thing
requires that the rule should be relaxed, so as, on the one hand, to enable the
agent to appoint what has been termed a "sub-agent" or "substitute agent" and,
on the other hand, to constitute, in the interests and for the protection of the
principal, a direct privity of contract between him and such principal.
Section 190 of Act says "An agent cannot lawfully employ another to perform
acts which he has expressly or impliedly undertaken to perform personally,
unless by ordinary custom of trade a sub-agent may or from the nature of
agency, a sub-agent may be employed."
Section 119 of Act then says that a sub-agent is a person employed by and
acting under the control of, the original agent in business of agency.
Responsibility of Agent and Sub-Agent - If a sub-agent has been properly
appointed, his acts and conducts bind the principal towards third person. Section
192 of Act provides :-
"Where a sub-agent is properly appointed, the principal is, so far as regards third
persons, represented by sub-agent, and is bound by and responsible for his acts,
as if he were an agent originally appointed by the principal.
Agent's Responsibility For Sub-Agent - The agent is responsible to the
principal for the acts of the sub-agent.
The sub-agent is responsible for his acts to the agent, but not to the principal,
except in cases of fraud or wilful wrong."
So there is privity of Contract between :-
(i) Sub-Agent and Agent
(ii) Agent and Principal
Sub-agent is directly responsible to agent and not to Principal and Agent is
directly responsible to principal, there is no direct contract between sub- agent
and principal. When the principal appoints an agent to do some work and agent
prefers to get the work done from the sub-agent it is agent's duty to see that sub-
agent is performing properly for any misconduct of sub-agent, resulting loss to
principal, agent is liable. Section 193 of Act then declares that if agent has
improperly delegated his authority to sub-agent, then agent is liable to principal
as well as to third person with whom sub- agent has made dealing.
Substituted Agent ; tion 194 of Indian Contract Act lays down :-
"Where an agent, holding an express or implied authority to name another
person to act for the principal in business of the agency, has named another
person accordingly, such person is not sub-agent but an agent of the principal for
such part of the business of the agency as is entrusted to him."
A directs B his solicitor, to sell his estate by auction and to employ an auctioneer
for this purpose. B names C an auctioneer, to conduct the sale. C is not a sub-
agent, but is A's agent for the conduct of the sale.
So Agent when having expressed or implied authority, can name a person to act
on behalf of principal, in his place such agent will be substituted agent and not
sub-agent. In selecting a substituted agent, Section 195 of Act declares that
Agent will exercise same amount of discretion and care as a man of ordinary
prudence would exercise in his own case if he does so then he will not be
responsible to principal for the acts of negligence of agent so selected.
(2) Duty to Follow Principal's Directions An agent is bound to conduct the
business of the principal according to the directions given by the principal. In the
absence of any directions, the agent should conduct the business according to
the custom which prevails in doing business of the same kind at the place where
the agent conducts the business. When the agent does not act as stated above,
if any loss is sustained by the principal, he must make it good to his principal,
and if any profit accrues, he must account for it. (Section 211)
If an agent is required by his principal to store the goods in godown `A' but the
agent stores the goods in godown `B', the agent will be liable for even an
accidental loss to the goods while they are in godown `B', and it will be no
defence that the agent was not negligent. (Lilley v. Doubleday).
(3) Duty to Show Proper Skill and Care Section 212 of Indian Contract Act lays
down :-
"An agent is bound to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the
principal has notice of his want of skill. The agent is always bound to act with
reasonable diligence, and to use such skill as he possesses and to make
compensation to his principal, in respect of the direct consequences of his own
neglect, want of skill or misconduct but not in respect of loss or damage which
are indirectly or remotely caused by such neglect, want of skill or misconduct."
(4) Duty to Render Proper Accounts The agent is under a duty to render
proper accounts to the principal on demand. (Section 213) Although the Act does
not specify that the agent can ask the principal to render accounts but if the
accounts are kept by the principal and the commission due to the agent can't be
determined without them, he may ask the principal to render accounts.
(5) Duty to communicate with Principal.
The agent has a duty, in cases of difficulty to use all reasonable diligence in
communicating with his principal, and in seeking to obtain his instructions.
(Section 214)
(6) Duty not to deal on his own Account.
An agent is under a duty not to deal on his own account in the business of
agency, unless the principal consents thereto. If the agent deals on his own
account without the principal's prior consent, the principal may : (i) repudiate the
transaction, by showing either any material fact has been dishonestly concealed
from him by the agent, or that the dealings of the agent have been
disadvantageous to him. (Section 215); (ii) claim from the agent any benefit
which may have resulted to him from this transaction. (Section 216)
(7) Duty to pay sums received for Principal.
Agent is also under a duty to pay to his principal all sums received by him on
principal's account. (Section 218) Before making the payment to his principal, the
agent is entitled to deduct out of the same the sums as are lawfully due to him
(Section 217)
Rights Of Agent And Duties Of Principal 1. Right to Remuneration. - An
agent is entitled to remuneration for the work of agency done by him, but an
agent's remuneration does not become due to him until the completion of the act
assigned to him. This rule is subject to any special contract between the principal
and the agent. (Section 219) If the agent's efforts are the effective cause of
making the contract, he is entitled to his commission.
An agent, who is guilty of misconduct in the businesses of agency, is not entitled
to any remuneration in respect of that part of the business which he has
misconducted. (Section 220)
2. Right to retain sums. - The agent has a duty to pay to his principal all sums
received on principal's account. But he has also a right to retain, out of any sums
received on account of the principal, all moneys due to himself in respect of
advance made on expenses properly incurred by him in conducting such
business, and also such remuneration as may be payable to him for acting as
agent. (Section 217)
3. Right of lien on principal's property. - In the absence of a contract to the
contrary, an agent has a lien on principal's property with him, until commission,
etc. due to him has been paid. (Section 221)
4. Right to be indemnified. - The principal is bound to indemnify an agent
against the consequences of all lawful acts done by such agent in the exercise of
the authority conferred upon him. (Section 222) The agent is also entitled to
indemnity against consequences of act done in good faith, even though the act
causes an injury to the rights of third persons, for example, it is a tort. (Section
223)
Section 224 of Act says where one person employs another to do act which is
criminal, the employer is not liable to the agent either upon an express or an
implied promise, to indemnify him against the consequences of that act.
5. Right To Compensation Due To Principal's Neglect ; According to Section
225 of the Principal must make compensation to his agent in respect of injury
caused to such agent by the principal's neglect or want of skill.
Q. 64 Can principal be held bound by the obligation incurred on his behalf by his
agent to the third person ?
Ans. Obligations of the principal for the contracts of his agent. - A principal
is held bound by the obligations incurred on his behalf by his agent. Sections 226
to 228 lay down the rule of law regarding obligation of the principal for the
contracts of his agent.
Contracts entered into through an agent, and obligations arising from acts done
by an agent, may be enforced in the same manner, and will have the same legal
consequences as if the contract had been entered into and the acts done by the
principal in person.
Illustration ; A being B's agent with authority to receive money on his behalf,
receives from C a sum of money due to B. C is discharged of his obligation to
pay the sum in question to B.
When an agent does more than what he is authorised to do and when the part
what he does, which is within his authority can be separated from the part which
is beyond his authority, the principal is liable only for so much part of what he
does as is within the agent's authority.
For example, A being the owner of a ship and cargo, authorises B to procure an
insurance for 4,000 rupees on his ship. B procures a policy for 4,000 rupees on
the ship, and another for the like sum on the cargo. A is bound to pay premium
for the policy on the ship, but not the premium for the policy on the cargo.
In State Bank of India v. Shyama Devi (AIR 1978 SC 1263) the plaintiff's
husband gave some cash and cheques to his friend, who was an employee in
the defendant bank for being deposited in the plaintiff's account. The amount and
cheques were given to him in his private capacity as a friend were obtained. The
said employee misappropriated the amount. It was held by the Supreme Court
that the employee when he committed the fraud, was not acting in the scope of
the bank's employment and, therefore, the defendant bank could not be made
liable for the same.
Where the excess of the agent's authority is not separable from the transaction,
the principal is not liable for the transaction.
Q. 65 Discuss the rights and liabilities of an undisclosed principal of an agent and
the third party to the contract, in case of such undisclosed principal.
Ans. The ascertainment of rights and liabilities of an agent and principal is done
on the basis of:
(a) disclosure regarding the name and existence of principal by the agent.
(b) non-disclosure of name and existence of the principal.
Where the existence of the principal is disclosed, Section 226 applies. The acts
done by an agent within the course of his employment make the principle liable in
the similar fashion as the act has been done by the principal himself.
Undisclosed principal is a person whose existence is not disclosed by the agent
nor the representative character is expressed by the agent. In such transactions
the agent is personally liable being a party to contract. He may be sued or may
sue the third party. In such cases the principal has a right to come forward to
attain his seat or position as an undisclosed party. Section 230(2) clearly admits
this provision and as an exception agrees that a presumption.