Imperial degree college

Unit2- CONTRACT LAW

Contract Meaning
A contract is a voluntary arrangement between two or more parties that is enforceable by law as a
binding legal agreement.
Contract law concerns the rights and duties that arise from agreements.
A contract is a legally enforceable agreement between two or more parties. It may be oral or written. A
contract is essentially a set of promises. Typically, each party promises to do something for the other in
exchange for a benefit.

Definition of contract
According to Sir John Salmond defines a contract as, “An agreement creating and defining obligations
between two parties.
According to Sir Fredrick Pollock defines, “Every agreement and promise enforceable at law is a
contract”.
The definition of Contract is given under S.2(h) of the Indian Contract Act, of 1872 which provides ‘a
contract is an agreement enforceable by law’. Thus, a contract is an agreement made between two or more
parties which the law will enforce.

Agreement
Section 2(e) of the Indian Contract Act defines Agreement as "Every promise and every set of promises
forming the consideration for each other." From this we can understand that the promise means a proposal
or offer which has been accepted. Example: John offers to sell his Car for Rs. 275000/- to Peter. Peter accepts
this offer. Offer + Acceptance = Agreement.

From the above, it is clear that there must be at least two parties are necessary to form an agreement. One is
to make an offer and the other is to accept that offer.
Enforceability or legal obligation to treat an agreement as a contract, it must have legal obligation. If it is
not enforceable by the law, we cannot call it a contract. There is no legal obligation for moral, religious or
social agreements.

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Essentials elements of a valid Contract

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1. Offer and Acceptance:

Basically, a contract unfolds when an offer by one party is accepted by the other party. The accepted offer
should be without any qualification and be definite. An offer needs to be clear, definite, complete and final.
It should be communicated to the offeree. A proposal when accepted becomes a promise or agreement. The
offer and acceptance must be ‘consensus ad idem’ which means that both the parties must agree on the same
thing in the same sense i.e. identity of wills or uniformity of minds.
Example: A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts this offer,
there is an acceptance. A say to B that he will sell his cycle to him for Rs.2000. This is an offer. If B accepts
this offer, there is an acceptance.

2. Intention to Create Legal Relationship: The intention of the parties to a contract must be to create a
legal relationship between them. Agreements of social nature, as they do not contemplate legal relationship,
are not contracts. For instance, if a father fails to give his daughter the promised pocket money, the daughter
cannot sue the father, because it was purely a domestic arrangement. Thus, it is clear that all agreements,
which do not result in legal relations, are not contracts.
Example:
1. A father promises to pay his son Rs.500 every month as pocket money. Later, he refuses to pay. The son
cannot recover as it is a social agreement and does not create legal relations.
2. A offers to sell his watch to B for Rs.200 and B agrees to buy it at the same price, there is a contract as it
creates legal-relationship between them.

3. Capacity to Contract: If an agreement is entered between parties who are competent enough to contract,
then the agreement becomes a contract.
Example:
1. M, a person of unsound mind, enters into an agreement with S to sell his house for Rs.2 lac. It is not a
valid contract because M is not competent to contract.
2. A, aged 20 promises to sell his car to B for Rs.3 Lac. It is a valid contract because A is competent to
contract.
4. Genuine and Free Consent: Free consent is another essential element of a valid contract. An agreement
must have been made by free consent of the parties. The contract would be void in case of mutual mistakes.
When consent is obtained by unfair means, the contract would be voidable.
Example:
1. A compels B to enter into a contract on the point of pistol. It is not a valid contract as the consent of B is
not free.

5. Lawful Object: Objectives of an agreement should be lawful. It must not be illegal or immoral or opposed
to public policy. It is lawful unless it is forbidden by law. When the object of a contract is not lawful, the
contract is void.
Example: A promise to pay B Rs.5 thousand if B beats C. The agreement is illegal as its object is unlawful.

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6. Lawful Consideration: Something in return is Consideration. In every contract, agreement must be

supported by consideration. It must be lawful and real.
Example: A agrees to sell his house to B for Rs.10 Lac is the consideration for A’s promise to sell the house,
and A’s promise to sell the house is the consideration for B’s promise to pay Rs.10 Lac. These are lawful
considerations.

7. Certainty and Possibility of Performance: The agreements, in which the meaning is uncertain or if the
agreement is not capable of being made certain, it is deemed void. T&C of the contract should always be
certain and cannot be vague. Any contracts that are uncertain. are considered void. The terms of the
agreement must also be capable of performance and should not enforce impossible act.
Example:
A promised to sell 20 books to B. It is not clear which books A has promised to sell. The agreement is void
because the terms are not clear.

8.Possibilities of performance
Example: A agrees with B to discover treasure by magic, the agreement is not enforceable.
A agrees with B to put life into B’s dead brother. The agreement is void as it is impossible of performance

9. Legal Formalities: Legal formalities if any required for particular agreement such as registration, writing,
they must be followed. Writing is essential in order to affect a sale, lease, mortgage, gift of immovable
property etc. Registration is required in such cases and legal formalities in the relevant legislation should be
strictly followed.
Example:
1. A Verbally promises to sell his book to y for Rs.200 it is a valid contract because the law does not require
it to be in writing.
2. A verbally promises to sell his house to B it is not a valid contract because the law requires that the
contract of immovable property must be in writing.

Classifications of Contract

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1. Contracts on the basis of creation\ formation:

a) Express contract: Express contract is one which is made by words spoken or written.
Example No. 1: X says to Y, will you buy a car for ₹. 100000? Y says to X, I am ready to buy your car for ₹.
100000. It is an express contract made rally.
Example No. 2: X writes a letter to Y, I offer to sell my car for ₹. 100000 to you. Y send a letter to Y, I am
ready to buy your car for ₹. 100000. It is an express contract made in writing.

b) Implied contract: An implied contract is one which is made other than by words, spoken or written. It is
inferred from the conduct of a person or the circumstance of the particular case.
Example: X, a coolie in uniform picks up the bag of Y to carry it from railway platform to the railway
compartment without being used by Y to do so and Y allow it. In this case there is an implied offer by the
coolie and an implied acceptance by the passenger. Now, there is an implied contract between the coolie
and the passenger is bound to pay for the services of the coolie.

c) Quasi or constructive contract:

Quasi or constructive contract: It is a contract in which there is no intention either side to make a contract,
but the law imposes contract. In such a contract rights and obligations arise not by any agreement between

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the practice but by operation of law. e.g., where certain books are delivered to a wrong address the addresses
are under an obligation to either pay for them or return them, eg:2 following traffic rules.

4. Tacit Contract A contract is said to be tacit when it has to be inferred from the conduct of the parties. For
example, obtaining cash through automatic teller machine, sale by fall of hammer of an auction sale.

2. Contracts on the basis of execution:

a) Executed contract: It is a contract where both the parties to the contract have fulfilled their respective
obligations under the contract.
Example: X offer to sell his car to Y for ₹. 1 lakh, Y accepts X offer. X delivers the car to y and Y pays ₹. 1
lakh to X. it is an executed contract.

b) Executory contract: It is a contract where both the parties to the contract have still to perform their
respective obligations.
Example: X offers to sell his car to y for ₹. 1 lakh. Y accepts X offer. It the car has not yet been delivered by
X and the price has not yet been paid by Y, it is an Executory contract.

c) Partly executed/. Unilateral Contract: A unilateral contract is a one-sided contract in which only one
party has performed his promise or obligation, the other party has to perform his promise or obligation.
For example, X promises to pay Y a sum of Rs.10,000 for the goods to be delivered by Y. X paid the money
and Y is yet to deliver the goods.

d) Bilateral Contract : A contract is said to be a bilateral contract where the obligations of both the parties
to the contract are pending at the time of formation of the contract. In this type of contract, a promise on one
side is exchanged for a promise on the other.
For example, R offers to sell his fiat car to S for Rs.10,00,000 on acceptance of R’s offer by S, there is a
promise by R to Sell the car and there is a promise by S to purchase the car, there are two promises, but no
promise is fulfilled

3. Contracts on the basis of enforceability:

a) Valid contract: A contract which satisfies all the conditions prescribed by law is a valid contract.
E.g. X offers to marry y. y accepts X offer. This is a valid contract.

b) Void Contract: the term void contract is described as under section 2(j) of I.CA, 1872, A contract which
ceases to be enforceable by law becomes void when it ceases to be enforceable. In other words, a void
contract is a contract which is valid when entered into a contract but which subsequently became void due
to impossibility of performance, change of law or some other reason.
E.g. X offers to marry Y, Y accepts X offer. Later on, Y dies this contract was valid at the time of its formation
but became void at the death of Y.

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c) Void Agreement: According to Section 2(g), an agreement not enforceable by law is said to be void. Such
Contracts are void- ab- initio which means that they are unenforceable right from the time they are made.
E.g. in agreement with a minor or a person of unsound mind is void –ab-initio because a minor or a person
of unsound mind is incompetent to contract.

d) Voidable contract: According to section 2(i) of the Indian contract act, 1872, contract which is
enforceable by law at the option of one or more of the parties thereon but not at the option of the other or
other, is a voidable contract. In other words, A voidable contract is one which can be set aside or avoided at
the option of the aggrieved party. Until the contract is set aside by the aggrieved party, it remains a valid
contract.
For e.g. a contract is treated as voidable at the option of the party whose consent has been obtained under
influence or fraud or misinterpretation.
e) Illegal Contract: An illegal contract is one the object of which is unlawful. Such an contract cannot be
enforced by law. Thus, illegal agreements are always void – ab- initio (i.e. void from the very beginning)
f) Unenforceable contract: It is contract which is actually valid but cannot be enforced because of some
technical defect (such as not in writing, under stamped). Such contracts can be enforced if the technical defect
involved is removed.

Breach of contract
“When on party to the contract, fails to perform his obligation under the contract or does an act which makes
the performance of the contract impossible known as breach of contract.”
Breach means failure of a party to a contract to perform his obligations under a contract.

Definition of Breach of Contract

1. An unjustifiable failure to perform terms of a contract.
2. A violation of contract through failure to perform, or through interference with the performance of the
contractual obligations.

Different ways to breach a contract Types of Breaches

There are four different types of breaches of contract:
1. Actual Breach – It occurs when a party fails to perform his obligation upon the date fixed for
performance by the contract. It is committed either at time when performance is due or during
performance.

2. Anticipatory Breach – It is breach of contract occurring before the time fixed for performance has
arrived. It is expressly by words spoken or written when a party to the contract communicates to the
other party, before the due date of performance, his intention not the perform it. It is implied by the
conduct of the party when a party disables himself from performing the contract.
3. Material Breach A material breach, on the other hand, is a substantial breach in contract terms
usually excusing the non-breaching party from performing and giving her the right to sue for
damages. For example, in a home purchase contract, a seller refusing to give the buyer the keys to
the home after the buyer has completed all contract terms is a material breach.

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Remedies for breach of contract

1. Compensatory damages:
This is the most common breach of contract remedy. When compensatory damages are awarded, a court
orders the person that breached the contract to pay the other person enough money to get what they were
promised in the contract elsewhere.

2. Restitution:
When a court orders restitution, they tell the person that breached the contract to pay the other person back.
In the example above, the court would order the first cleaner to pay you back $100, since that's what you
paid him to clean your house.

3. Punitive damages:
This is a sum of money intended to punish the breaching party, and is usually reserved for cases in which
something morally reprehensible happened, such as a manufacturer deliberately selling a retailer unsafe or
substandard goods.

4. Nominal damages:
A court awards nominal damages when there has been a breach of contract but no party to the contract
suffered any harm.

5. Liquidated damages:
These are damages that the parties agree to pay in the event a contract is breached.

6. Rescission or cancellation of the contract: When one party breaches the contract, the other party can
relocate or cancel the further performance that are agreed to do in the contract. The victim party can
cancel the contract after giving a reasonable notice to the breacher party. The victim party has a right of
demandingcompensation for their loss that is being through the breach of contract

7. Restitution means ‘returning everything to the state as it was before. The parties to a contract have to
return the benefit to each other which was received under the contract. The injured party has the remedies to
destitute the changes, activities, losses as it was before.

8. Specific performance: When any party breaches a contract, the injured party may demand a specific
performance by suit. The court may order the breacher party for a specific performance; such order is made
by the court when other types of compensation do not seem to be adequate. Specific performance is granted
when: -
Money is an adequate remedy
It will be inequitable to either party
The contract is of a personal nature
The court cannot supervise its execution

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9. Injunction: Injunction is a court order that restraints the breacher party from doing wrong or continuing
the wrongful act, complained. Such remedy is appropriate where there is a kind of preventive relief to the
aggrieved party.
For ex: A promise to sell his car to X for 5 lakhs, rather than giving it to A, X intends to sell the car for 6
lakhs to Y. In such condition the court can order restraining X to sell his car to C when it is claimed by A.

10. Suit upon Quantum Meruit: The term "quantum meruit" means, 'as much as is merited' or 'as much as
earned' or ‘payment in proportion to the amount of work done.’ An injured party has the right to sue a
quantum meruit arises where a contract, partly performed by one party, has become discharged by the breach
of another party. Such type of remedy is based on the implied agreement to payment for what has been done
or competed
For example, if the cleaner in the example above had cleaned half the house, and then you decided you didn't
want him to finish, he can demand $50 as quantum meruit. Translated from Latin, the term means "as much
as he deserved."

WHAT DO YOU MEAN BY DISCHARGE OF CONTRACT?

Discharge of contract means termination of the contractual relations between the parties to a contract. A contract is
said to be discharged when the rights and obligations of the contracting parties are extinguished and their relationship
comes to an end

(1) DISCHARGE BY PERFORMANCE OF CONTRACT

Performance of a contract is one of the most usual ways of discharge of a contract when the parties to the
contract fulfill their obligations under a contract, the contract is said to have been performed and the
contract comes to an end.
Performance of contract may be classified as:
a) Actual Performance: A contract is said to be discharged by actual performance when the parties to the
contract perform their promise in accordance with the terms of the contract.
b) Attempted Performance or Tender: A contract is said to be discharged by attempted performance whe the
promisor has made an offer of performance (i.e., a valid tender) to the promisee but it has not been accepted
by the promisee.

(2) DISCHARGE BY AGREEMENT

As contract emerges from an agreement of both parties, it may also be terminated by another agreement or
consent of both parties. A contract can be discharged by mutual agreement in any of the following ways:
a) By novation (Substitution of a new contract): Novation means substituting a new contract for the
existing one, either between the same parties or between different parties, the consideration mutually
being the discharge of the old contract.
The novation may be of the following two types i.e.,
(i) novation involving change of parties, but the contract remaining the same
(ii) novation involving substitution of a new contract, but parties remaining the same.

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b) By alteration: Alteration means change in one or more of the terms of a contract with the consent of all
the parties. If any material alterations are made in the contract, the original contract will come to an end and
in its place a new contract in an altered form comes into existence.
c) By rescission: Rescission means cancellation of the contract. A contract may be rescinded by agreement
between the parties at any time before it is discharged by performance or in some other way.
d) By remission: The term ‘remission’ may be defined as the acceptance of lesser fulfillment of the terms of
the promise, e.g., acceptance of a less sum of money where more is due.
e) By waiver: When both the parties, by mutual consent, agree of abandon their respective rights, the
contract need not be performed and the same is discharged. It is called waiver. To constitute a waiver,
neither an agreement nor consideration is necessary.
f) By merger: It takes place when an inferior right accruing to a party under a contract merges into a
superior right accruing to the same party under the same or some other contract, e.g., a tenant buying the
house in which he is a tenant.

(3) DISCHARGE BY LAPSE OF TIME?

The Limitations Act, 1963 provides that a contract must be performed within the period of limitation. If the
contract is not performed and the promisee fails to take any action within the period of limitation, then the
contract is terminated or discharged by lapse of time.

(4) DISCHARGE BY OPERATION OF LAW

A contract may be discharged by operation of law in the following cases:
a) Death: A contract involving the personal skill or ability of the promisor is discharged automatically on
the death of the promisor.
b) Insolvency: When a person is declared insolvent, he is discharged from his liability up to the date of his
insolvency.
c) Unauthorized Material Alteration: If any party makes any material alteration in the terms of the contract
without the approval of the other party, the contract comes to an end.
d) Merger: Where an inferior right accruing to a party in a contract merges into the superior rights accruing
to the same party, the earlier contract is discharged.

What is contract of Indemnity?

According to Sec. 124 of the Contract Act, the contract of indemnity has been defined as: “A contract by
which one party promises to save the other from loss caused to him by the conduct of the promisor himself
or by the conduct of any other person".
Indemnifier: The person who gives the indemnity, i.e., who promises to compensate for the loss, is known as
indemnifier.
Indemnity-holder: The person, for whose protection the indemnity is given, i.e., who is protected against
loss, is known as indemnity-holder or indemnified.

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Characteristics of a Contract of Indemnity

The important features of an Indemnity Contract are as follows:
1. Essentials of a valid contract: It must have all the essential elements of a valid contract, such as
agreement, free consent, competency of the parties, legality of object and consideration.
2. Compensation of loss: This is the most important element of a contract of indemnity. One party must
promise to save the other party from any loss which he may suffer.
3. Express or Implied: The promise to indemnify a person against the loss suffered by him, may be express
or implied. The express promise is one where a person promises in express terms to compensate the other
from the loss. And the implied promise is one where the conduct of the promisor shows that he promised to
indemnify the other party against the loss suffered by him.

What do you mean by contract of guarantee?

According to Section 126 of the Act, “A contract of guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.”
A contract of guarantee involves three parties, the creditor, the surety and the principal
debtor Surety: The person who gives the guarantee is called the surety.
Principal Debtor: The person in respect of whose default the guarantee is given is called the principal debtor.
Creditor: The person to whom the guarantee is given is called creditor.

What are the CHARACTERISTICS OF A CONTRACT OF GUARANTEE?

The essential features of a contract of guarantee are as follows:
1. Three parties: A contract of guarantee is a tripartite agreement between the principal debtor, creditor and
surety.
2. Consent or Identity of mind: The contract of guarantee requires the identity of mind (concurrence) of all
the said three persons in respect of the subject matter of the contract.
3. Existence of a Liability: There must be an existing liability or a promise whose performance is
guaranteed. Such liability or promise must be enforceable by law.
4. Primary and secondary liability: It is an essential requirement of a contract of guarantee that there must be
someone primarily liable (i.e., liable as principal debtor) other than the surety. A contract of guarantee
presupposes existence of some liability of the principal debtor to the creditor.
5. Essentials of a valid contract: All the essential elements of a valid contract must be present in a contract
of guarantee.
6. No misrepresentation: Any guarantee which has been obtained by means of misrepresentation made by the
creditor, or with his knowledge and assent, concerning a material part of the transaction is invalid.
7. No concealment: Any guarantee which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.
8. Surety's liability must be conditional: The liability of surety should arise only when the principal debtor
makes a 'default'. If surety's liability arises independent of the default of the principal debtor, it is not a
contract of guarantee.

KINDS OF GUARANTEE
1. Specific guarantee: Where a guarantee is given for a single and particular transaction or debt, it is called

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specific or simple guarantee. Such guarantee comes to an end as soon as the transaction is duly performed or
the debt is duly discharged.
2. Continuing guarantee: A guarantee which extends to a series of transactions called a continuing guarantee.
It is not confined to single transactions.
3. Retrospective guarantee: Where a guarantee is given for an existing debt, is called a retrospective guarantee.
4. Prospective guarantee: When a guarantee is given for a future debt, it is called prospective guarantee.
5. Absolute guarantee: It means a guarantee where the surety unconditionally promises to pay in case of
default of the principal debtor.
6. Conditional guarantee: It means a guarantee where the surety promises to pay in case of some event, in
addition to the default of the principal debtor, happens.
7. Fidelity guarantee: A guarantee given for the good conduct or honesty of a person employed in a particular
office is called a fidelity guarantee.
8. Limited or unlimited guarantee: A limited guarantee is one, restricted to a single transaction. An unlimited
guarantee is one which is unlimited either as to time or amount.

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What is bailment?
According to Section 148 of the Contract Act has defined bailment as "the delivery of goods by one person to
another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering them".

The ‘Bailor’ is the person who delivers the commodities, and the ‘Bailee’ is the person who receives the
items for the stated reason.

CHARACTERISTICS OF BAILMENT
The requisites or essential features of bailment can be summed up as under:
1. Delivery of possession goods: It is an essential and important element of the bailment that the possession
of the goods must be delivered by the bailor to the bailee. Delivery may be either actual, or (b) constructive.
a) Actual Delivery: A delivery is said to be actual where the goods are physically handed over by the bailor to

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the bailee. For example, Mr. A delivers a Car for repair to a workshop dealer.
b) Constructive Delivery: It may not always be possible to give physical possession due to difficulty or
inconvenience, or for any other reason. In such cases, delivery may be constructive or symbolic. For example,
delivery of railway receipts.
2. Delivery of goods must be for some purpose and upon a contract: Delivery of goods should be made for
some purpose upon an agreement that when the purpose for which the goods are delivered is completed, the
goods should be returned to the bailor.
3. Return of goods: In bailment the goods are given on the condition that when the purpose for which they are
given, is accomplished they shall be returned to the bailor or disposed of according to his directions. The goods
may be returned in their original form or in an altered form.
4. Movable goods: There can be a bailment of movable properties only but money is not included in the
category of movable goods.
5. No transfer of ownership: In bailment, the bailor is not transferred the ownership to the bailee. Possession
alone is transferred but ownership is retained by the bailor.

What are the DUTIES OF BAILOR?

1. To disclose known defects in the goods: Under Section 150, the duty of bailor to disclose faults in the goods
bailed is different for gratuitous and non-gratuitous bailor. It is described below:
2. To bear ordinary expenses: In a gratuitous bailment, where the goods are to be kept or to be carried, or to
have work done upon them by the bailee for the bailor, the bailor shall repay to the bailee the necessary
expenses incurred by him for the purpose of bailment.
3. To bear extraordinary expenses: In case of non-gratuitous bailment, where the goods are bailed for reward or
remuneration, the ordinary expenses are not to be borne by the bailor, but if there are some extraordinary
expenses incurred, then it becomes the duty of the bailor to pay such extraordinary expenses.
4. To indemnify bailee: The bailor is responsible to the bailee for any loss which the bailee may suffer because
of the defective title of the bailor.
5. To receive back the goods: It is the duty of the bailor to take back the goods when the bailee returns them
after the expiry of period of bailment, or the accomplishment of the purpose for which the goods were bailed.
6. To bear the risks: The bailor must bear the risk of loss of goods provided the bailee has taken all reasonable
steps to protect the goods from loss.

TERMINATION OF BAILMENT Every contract of bailment comes to an end under the following
circumstances:
1. On the achievement of the object: Where the bailment is for a specific purpose, it terminates as soon as the
purpose is achieved.
2. On the expiry of the period: If the contract of bailment is only for particular period, it is terminated on the
expiry of that period.
3. Inconsistent use of goods: Where a bailee does something which is inconsistent with the terms of the
contract, the bailment is terminated.
4. Destruction of the subject matter of bailment: A bailment is terminated if the subject matter of the bailment
(a) is destroyed, or (b) becomes incapable of being used for bailment because of some charge in the nature of
goods.
5. Gratuitous bailment: Where the bailment is gratuitous, the bailor may terminate the bailment even before the

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specified time or before the purpose is fulfilled.

6. Death of the bailor or bailee: A gratuitous bailment is terminates by the death of either the bailor or bailee.

What is Pledge?
Pledge is a legal term that refers to the transfer of a good’s possession to secure a debt. The pledgor gives the
good to the pledgee. The pledgee holds the good until the debtor repays the debt. If the debtor fails to repay,
the pledgee has the right to sell the good. The pledgor bears the risk of loss. This process involves three
parties: the pledgor, the pledgee, and the debtor.
Parties Involved in Pledge
The following parties are involved in pledge:
 Pledgor/ Pawnor: The pledgor is the person who owns the good and transfers its possession to the
pledgee. The pledgor uses the good as security for a debt or obligation.

 Pledgee/ Pawnee: The pledgee is the person who receives the good from the pledgor. The pledgee
holds the good until the debtor repays the debt. If the debtor fails to repay, the pledgee has the right to
sell the good.
 Debtor: The debtor is the person who owes the debt or obligation. The debtor’s repayment of the debt
leads to the return of the good from the pledgee to the pledgor. If the debtor fails to repay, the good
may be sold by the pledgee.

Features of Pledge
A pledge has the following features:

 Transfer of Possession: In a pledge, the pledgor transfers the possession of a good to the pledgee.
 Purpose: The primary purpose of a pledge is to secure a debt or obligation.
 Return of Good: The pledgee returns the good to the pledgor once the debtor repays the debt.
 Right to Sell: If the debtor fails to repay the debt, the pledgee has the right to sell the good.
 Risk of Loss: Loss risk in a pledge falls on the pledgor.
 Three Parties Involved: A pledge involves three parties – the pledgor, the pledgee and the debtor.

What are the RIGHTS OF PAWNEE OR PLEDGEE?

1. Right to retain: The pawnee may retain the goods pledged not only for payment of the debt or the
performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in
respect of the possession or for the preservation of the goods pledged.
2. Right of retainer for subsequent advance: When the pawnee lends money to the same pawnor after the
date of the pledge, it is presumed that the right of retainer over the pledged goods extends to subsequent
advances also.
3. Right to extraordinary expenses: The pawnee is entitled to recover from the pawnor extraordinary
expenses incurred by him for preserving the goods pledged. This right is only a right of action but not a lien.
4. Right in case of default of the pawnor:
(a) To bring a suit on the debt and to retain the goods pledged as a collateral security.
(b) To sell the goods pledged after giving reasonable notice to the pawnor.

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What are the DUTIES OF PAWNEE?

The pawnee has almost the same duties as those of the bailee. His duties as follows:
1. To take reasonable care of the goods pledged;
2. Not to make any unauthorized use of goods;
3. Not to mix goods pledged with his own goods;
4. To return goods; and
5. To return accretions to the goods.

What are the RIGHTS OF PAWNOR ?

1. Defaulting pawnor’s right to redeem: The pawnor has an absolute right to redeem the goods pledged, upon
the satisfaction of the debt. When the time is fixed for the payment of the debt, the pawnor may redeem the
goods even after the expiry of the fixed time.
2. Preservation and maintenance of the goods: It is implied that the pawnee as a bailee is bound to preserve
the goods pledged and properly maintain them.
3. Protection as an ordinary debtor: It is also implied that a pawnor has the rights of protection as an ordinary
debtor by statutes meant for such protection e.g., the Moneylender’s Act.
4. Right to receive the increase: The pawnor has a right to receive any increase of profits from pledged goods.

What are the DUTIES OF PAWNOR? The duties of pawnor are almost similar to those of a bailor which
have already been discussed. However, the following are some additional duties of the pawnor.
a) Duty to repay the loan: If he fails to repay the loan, as per the terms of the contract, the pawnee may bring a
legal action against him for the recovery of the loan.
b) Duty to pay the expenses in case of default: The pawnee must pay the expenses incurred by the pawnee due
to default in repaying the loan at stipulated time.

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Contract of Sale of goods/ sale of act 1872

Introduction
Till 1930, transactions relating to sale and purchase of goods were regulated by the Indian Contract Act,1872.
In 1930, Sections 76 to 123 of the Indian Contract Act, 1872 were repealed and a separate Act called ‘The
Indian Sale of Goods Act,1930 was passed. It came into force on 1st July, 1930.With effect from
22ndSeptember,1963, the word ‘Indian ‘was also removed. Now, the present Act is called ‘The sales of
goods act,1930’. This Act extends to the whole of India except the State of Jammu and Kashmir.

Scope of the Act

The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.” ‘Contract of sale’ is a
generic term which includes both a sale as well as an agreement to sell.

Meaning and Definition of contract of sale What is Contract of Sale of goods?

Contract of sale of goods is a contract, whereby, the seller transfers or agrees to transfer the property in goods
to the buyer for a price. There can be a contract of sale between one part-owner and another.

In other words, under a contract of sale, a seller (or vendor) in the capacity of the owner, or part-owner of
the goods, transfers or agrees to transfer the ownership in goods to the buyer (or purchaser) for an agreed
upon value in money (or money equivalent), called the price, paid or the promise to pay same.
A contract of sale may be absolute or conditional depending upon the desire of contracting parties.

Definition
According to Section 4 of the Sale of Goods Act a contract of the sale of goods is a contract whereby
the seller transfers, or agrees to transfer, the property in (i.e., ownership of) goods to the buyer for a
price.

Essentials elements of a Contract of Sale

The following six features are essential elements of any contract of sale of goods.
Goods
Prices
Two parties
Transfer of ownership
Includes both a ‘sale ‘and ‘an agreement to sell ‘
All essentials of a valid contract

1. Two Parties:
A contract of sale of goods is bilateral in nature wherein property in the goods has to pass
from one party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to
his family, it does not amount to a sale and there is no contract of sale. This is so because the seller and Buyer
must be two different parties, as one person cannot be both a seller as well as a buyer. However, there shall
be a contract of sale between part owners.

2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except

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actionable claims and money is regarded as ‘goods’. Contracts relating to services are not considered as
contract of sale. Immovable property is governed by a separate statute, ‘Transfer of Property Act’

3. Transfer of ownership:
Transfer of property in goods is also integral to a contract of sale. The term ‘property in goods’ means the
ownership of the goods. In every contract of sale, there should be an agreement between the buyer and the
seller for transfer of ownership. Here property means the general property in goods, and not merely a special
property.

4. Price:
The money consideration for the contract of sale is called “Price”. The price must be money. If goods are
exchanged for goods . it is not a sale but a barter. Some time the consideration for the sale of goods may be
partly in goods and partly in money.
Example: 32 bullocks at 6 each were exchanged for 100 quintals of barley the balance is to be paid in cash.
Held that it was a contract of sale.

5. All essentials of a valid contract:

A contract of sale is a special type of contract, therefore, to be valid, it must have all the essential elements
of a valid contract, viz., free consent, consideration, competency of contracting parties, lawful object, legal
formalities to be completed, etc. A contract of sale will be invalid if important elements are missing. For
instance, if A agreed to sell his car to B because B forced him to do so by means of undue influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.

6. Includes both a ‘Sale’ and ‘An Agreement to Sell’:

The ‘contract of sale’ is a generic term and includes both sale and an agreement to sell. The sale is an executed
or absolute contract whereas ‘an agreement to sell’ is an executory contract and implies a conditional sale.
A contract of sale can be made merely by an offer, to buy or sell goods for a price, followed by acceptance
of such an offer. Interestingly, neither the payment of price nor the delivery of goods is essential at the time
of making the contract of sale unless otherwise agreed.
Subject to the provisions of the law for time being in force, a contract of sale may be made either orally or
in writing, or partly orally and partly in writing, or may even be implied from the conduct of the parties.

Types of Goods

The term goods mean every kind of movable property other than actionable claim and money. The term
actionable claim means debt secured by a mortgage of immovable property, Fixed Deposit Receipt,
Dividend Due on Shares, amount due under LIC policy, Claim for rent which falls due in future etc.,

The term good includes shares, stocks, growing crops, grass, things attached to the land or forming part
of the land agreed to be cut off from the land before sale (eg. trees grown on the land agreed to be sold
after harvest), goodwill, copyright, trade mark, patents, water, gas, electricity, power etc., under the
contract of sale.

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1. Existing Goods
Existing goods are those owned or possessed by the seller at the time of contract of sale. Goods
possessed even refer to sale by agents or by pledgers.
Existing goods may be either
(i) Specific Goods
(ii) Ascertained Goods
(iii) Generic or Unascertained Goods

(i) Specific Goods

Specific goods denote goods identified and agreed upon at the time of contract of sale. Foreg. if a buyer
selects a particular variety of saree after examining several other sarees, the selectedone denotes
specific goods.

(ii) Ascertained Goods

The term ‘ascertained goods’ is also used as similar in meaning to specific goods. But this term may
even refer to goods which become ascertained subsequent to the formation of the contract.

(iii) Unascertained or Generic Goods

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These are goods which are not identified and agreed upon
at the time of contract of sale.

For eg. A wants to buy a car from a showroom where

different models at different prices have been displayed.
All these displayed models represents unascertained
goods.

2. Future Goods
These are goods which a seller does not possess at the time of contract of sale but which will be
manufactured or produced or acquired by him after entering into the contract of sale agreement. Eg. ‘A’
contractor agrees to supply 100 bags of rice to ‘B’ for giving marriage feast. It is a case of future goods.
Similarly where the bus company agrees to buy spare parts from a particular supplier, it is an example
of future contract. Future goods represents unascertained goods.

3. Contingent Goods
Contingent goods are the goods, the acquisition of which by the seller depends upon a contingency (an
event which may or may not happen). Contingent goods are a part of future goods. Eg.‘A’ agrees to sell
a particular painting work, provided he gets from ‘C’. In this case, the painting work represents
contingent goods. Similarly a rice merchant agrees to supply 10 bags of basmathi rice from Pakistan if
he get supplies. In this case, basmathi rice representing contingent goods may or may not be available
to the rice merchant.

Conditions and Warranty:

The term condition is defined in section 12 (2) of the sale of Goods Act which reads as under
“A condition is a stipulation essential to the main purpose of the contract, the breach of which gives
rise to a right to treat the contract as repudiated”
Example:
Ram consults shyam a motor car dealer for a car suitable for touring purposes to promote the sale of his
product, shyam suggests Maruti car and shyam accordingly buys it from shyam buys a new car consults buys
it from shyam. If the car is not suitable for touring purpose so ram can reject the car and have refund the
price.

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Warranty:
The term warranty is defined in section 12 (3) of the sale of Goods Act which reads under
“A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives
rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated.”

Example:
A buys a Maruti car from showroom and the car is guaranteed against any manufacturing defect under normal
usage for a period of 1 year from the date purchase. If after six months ram finds horn of the car is not
working he cannot terminate the contract.

Distinguish between Condition and Warranty

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types
Implied Conditions and Warranties:
In every contract of sale, there are certain expressed and implied conditions and warranties. The term
implied conditions means conditions which can be inferred from or guessed from the context of the
contract. Following are the implied conditions:

Implied Conditions

1. Conditions as to Title
In the case of sale, seller has a right to sell the goods. The buyer can assume that the seller has a right
to sell the goods. eg. ‘R’ purchased a motorcar from ‘D’ and used it for 4 months. Later after six months,
true owner came and proved that he is a true owner. In this case, ‘R’ has to return the car to the true
owner and claim the full price paid by him from ‘D’.

2. Conditions as to Description

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In a contract of sale by description, there is an implied condition that goods supplied should agree with
the descriptions made by the seller. eg. ‘A’ has bought a machinery from ‘B’ who described it to be
just one year old. After buying the machinery and using it for a month, ‘A’ came to know that it is very
old machinery. In this case, ‘A’ can return the machinery to ‘B’ on the ground that machinery is not as
per the description i.e. not recent one.

3. Sale by Sample
Where goods are sold by showing samples by the seller eg. foodgrains, cloth, medicine, chemicals etc.,
the bulk of goods supplied by the seller should be similar to the sample shown by the seller. In other
words, where the goods supplied do not match with the samples; the buyer can very well return the
goods subject to the following conditions:
1. The bulk of the goods must correspond with the sample in quality sample and

3. The good must be free from any defect rendering them unsalable.

4. Conditions as to Quality or Fitness

There is no implied condition as to the quality or fitness for any particular purpose of goods. But goods
must be fit for a particular purpose if
(i) The buyer has made known to the seller the particular purpose for which he needs the goods

ii) The buyer relies on the seller’s skill or judgement and

(iii) The goods are of a description which is in course of the seller’s business to supply

eg. ‘A’ bought set of false teeth from a dentist. The set did not fit into A’s mouth. Held that he could
reject the set as the purpose for which it was bought was known to the dentist.

5. Wholesomeness Condition: It means conductive to health. When someone makes a sale of

contract about the eatable goods this condition is applied. If someone supply the goods and it damages
to healththen supplier will be liable for damages.

Example: - Sam’s Food Company supplied food on the marriage party of Mr. Vicky. After eating the
food people were infected and died. The company was held liable in damages.

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Implied Warranties

(i) Quiet Possession

There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods. If the
buyer’s possession is disturbed by a person having a superior right to that of the seller, the buyer is
entitled to claim the damages.
eg. ‘X’ sold a second hand radio to ‘Y’ who spendsRs. 100 on the repairs of the radio. This radio was
seized by the police as it was a stolen one. ‘Y’ filed a suit against ‘X’ for the recovery of damages for
breach of warranty of quiet possession including the cost of repair. ‘Y’ won the case. In other words,
he was held entitled to recover the damages.

(ii) Free from Any Encumbrances

The goods bought must not have been subject to any charge or right in favour of a third party. If the
buyer’s possession is disturbed by reason of the existence of any encumbrance, he is entitled to claim
damages for breach of warranty.eg. ‘X’ borrowed Rs. 50,000 from ‘Y’ and hypothecated his
autorickshaw with ‘Y’ as security. Later on, ‘X’ sold the autorickshaw to ‘Z’ who bought it in good
faith. In this case, ‘Z’ can claim damages from ‘X’ because his possession is disturbed by ‘Y’ having a
encumbrance on the auto.

(iii) Warranty in the case of Dangerous Goods

Where the seller knows that the goods he is selling are dangerous or likely to be dangerous to the buyer
and the buyer is ignorant of the danger, the seller should warn the buyer of the probable danger,
otherwise he will be liable to compensate the buyer in case of any injury.eg. ‘C’ bought from ‘A’ a tin
of disinfectant powder. ‘A’ knew that the lid of the tine was defective and that if it was opened without
special care, it might be dangerous. Yet ‘A’ did not warn ‘C’. ‘C’ opened the tine in the usual way
whereupon the powder flew into her eyes, causing injury. Held that ‘A’ was liable in damage to ‘C’ as
he should warned ‘C’ of the probable danger.

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Rights and duties of Buyer

The following are the rights of a buyer:
1. Right to have delivery as per contract:
The first right of the buyer is to have delivery of the goods as per contract.

2. Right to reject the goods:

If the seller sends to the buyer a larger or smaller quantity of goods than he ordered, the buyer may reject the
whole, accept the whole or accept the quantity to ordered and reject the rest.

3. Right to Repudiate:
The buyer of goods has a right not to accept delivery thereof by installment.

4. Right to notice of insurance:

Unless otherwise agreed where goods are sent by the seller to the buyer by a sea route , the buyer has a right
to be informed by the seller so that he may get the goods insured.

5.Right to examine the goods:

The buyer has right to examine the goods which he has not previously examined before he accepts them. If
the buyer repudiates the contract the seller is entitle to damage from the buyer.

6. Right to verify with sample:

Section 17 provides that when goods are sold by sample the buyer has right to verify the supply of goods
with sample.

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7. Right to reject the goods:

The buyer entitled to reject the goods in the following cases
a. where the seller delivers lesser quantity than the contracted for
b. where the seller delivers larger quantity than that contract for
c. where the seller mixes the contracted goods with goods of a different description.

8. Right to have delivery goods

The buyer has right take delivery of goods on payment of price when delivery of goods and payment of price
are concurrent conditions in the contract of sale.

9. Right to repudiation on breach of contract:

As per section 12, the buyer may repudiate the contract if the seller breaks any conditions, section 13 also
entities him to treat it as a breach of warranty.
Under section 12 and section 59, the buyer may claim for damages or reduction of price in case of breach of
warranty by the buyer.

10. Right to notice of Insurance:

It is the duty of the seller to give notice to the buyer to enable him to insure the goods during the sea transit.
If he fails to do so the buyer is not liable for destruction of goods in transit.

Duties of Buyer:
The buyer in respect to the contract of sale has to perform the following duties.
1. Duty to treat breach of condition as a breach of warranty:
A buyer shall treat a breach of condition as a breach of warranty under certain circumstances.

2. Duty to accept unconditional appropriation

When there is assent of the seller, the buyer has to accept unconditional appropriation of unascertained goods.

3. Duty to pay price and accept the goods:

It is the duty of the buyer to take the delivery of the goods and pay for them in accordance with the terms of
the contract.

4. Duty to apply for delivery:

The seller is not bound to deliver the goods to the buyer applies for delivery. In the absence of any contract
to the country.

5. Duty to demand delivery at a reasonable hour:

As per section 36(4)” Demand or Tender of delivery may be treated as ineffectual unless
made at a reasonable hour. What is reasonable hour is question of fact.

6. Duty against deterioration:

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Unless otherwise agreed the buyer has to take risk of deterioration of the goods incidental to the course of
transit.

7. Duty to accept installment delivery and pay for it:

Where there is contract for the sale of goods to be delivered by stated installments which are to be separately
paid for, it is the duty of the buyer to accept the installment delivery and pay for it.

8. Duty to intimate the seller when reject the goods:

Unless otherwise agreed it is duty of the buyer to inform the seller in case of he refuses to accept the goods.

9. Duty to pay increased tax:

The buyer is liable to pay so much as will be equivalent to the amount paid or payable in respect of such tax
imposed or increase of Tax which may be chargeable at that time of sale in the absence of any contract to
country.

10. Duty to pay price:

Where under contract sale of property in the goods has passed to the buyer and the buyer wrongfully neglects
or refuses to pay the goods according to the terms of the contract, the seller may sue him for the price of the
goods.

11. Duty to pay damages for non acceptance:

Where the buyer wrongfully neglects or refuses to accept and pay for the goods the seller may sue him for
damages for non-acceptance.

Rights of an unpaid seller or What are the Rights of Unpaid Seller?

The seller who has not received price of goods sold or the seller who has got his negotiable instrument
dishonoured will become Unpaid Seller. Sale of goods act, 1930 Section 45 to 55 read about the rights of
Unpaid Seller.

Definition:
A seller or his agent is called as unpaid seller when
a) The full price has not been paid
b) A bill of exchange or any other negotiable instrument has been given as a conditional payment but it has
been dishonored.

Those rights can be classified into two groups. They are as follows.
1. Rights of unpaid seller against Goods
2. Rights of unpaid seller against Buyer

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1) Right of lien: Sec.47 to 49. Lien is a right to retain the possession of gods until the price is paid, If the
goods are partly delivered he can use this right on the remaining goods except when the part delivery made
is to indicate that he has given up this right. (Sec.48)
This right he can use on the whole of goods in his possession and only for the recovery of the price of the
goods sold but not for the recovery of warehouse charges or godown rent.

The right he can use only:

a) When the unpaid seller has the possession of goods
b) When the goods have been sold on credit.
c) When the credit period is over and the price is not paid.
d) When the buyer becomes insolvent. Sec.47(1).

Sec.49: This lien right is lost or he cannot use the right.

a) When the unpaid seller delivers the goods to a carrier or other bailee for the purposes of taking them to
the buyer. (but without reserving the right of disposal)
b) When the buyer or his agent lawfully gets the possession of the goods.
c) When the unpaid seller has given up his right of lien.

2) Right of stoppage of goods in transit: Sec.50 to 52. This is the right of the unpaid seller to stop the goods
when they are in transit. (i.e.in journey).

When the seller has parted with the possession of goods, he may regain such possession by stopping the
goods in transit before it is delivered to the buyer. (Sec.50)
This right is available:
a) When the goods are in transit and
b) When the buyer becomes insolvent.

3) Right of resale(Sec.54) The unpaid seller can re-sell the goods: a) When the goods are perishable (without
notice to buyer)
b) When the goods are not perishable with notice to the buyer of his intention to re sell and Effect of notice
of resale to the buyer.

i) When the unpaid seller makes any profit on resale, he can retain the profit of such resale, if he has given
the notice of resale.
ii) He can claim damages for breach of contract from the original buyer for any loss on the re sale price)

If he does not give such notice of re sale, to the buyer, he must pay back the surplus(profit) to the original
buyer and shall himself bear the loss.
(When the property in goods has not passed)

Right of withholding the delivery Sec.46(2)

The unpaid seller can withhold the delivery of goods when the possession in goods has not passed to the
buyer.

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Rights of Unpaid Seller against Buyer

At times it becomes inevitable choice to exercise rights on buyer for non-payment of price. The unpaid seller
can file suits against the buyer as explained below.

a) Right to sue for price

It is fundamental right of buyer to file a suit for recovery of unpaid price. In the case of sale. Suit will be
made for price balance, but not for compensation.

b) Right to sue to interest

If the buyer makes unreasonable delay for making payment, the seller has right to claim interest also.

c) Right to sue for compensation

When an agreement to sell is breached, the seller can see only for compensation for the breach of Contract.
Under such circumstances he cannot sue for price.

d) Right to Sue for anticipatory contract

When an agreement to sell is breached by buyer before date of performance. It is called anticipatory breach.
Then also seller can sue for compensation.

OFFER:
Meaning:
Offer is nothing but the “Proposal”. The meaning of these two words is same i.e, signifying
the willingness to do or to abstain from doing any act.

Definition:
According to Section 2(a) of ICA 1872, “When one person signifies to another his willingness to do or to
abstain from doing anything with a view to obtaining the assent of the other to such act or abstinence”.

Examples of Offer:
1.A say to B” will you purchase my scooter for Rs 8000?” this is an express offer.
2.A write s a letter to B offering to sell his car for Rs 60000 to him. This an express offer.
3. KSRTC runs special buses on a particular route. This an implied offer from KSRTC to carry the passengers
on the route who are prepared to pay the specified fare. This is an implied offer.

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