Documente Academic
Documente Profesional
Documente Cultură
A REPORT ON
THE INDIAN CONTRACT ACT, 1872
PREPARED FOR:
Mr. Prasen Naithani
PREPARED BY:
VIJAY B
SRIRAM D S
SUJATHA G
MOHIT GUPTA
TANVI GUPTA
KUMAR K
ABHINAY PANATI
HEMANTH S
D010
D017
D018
D024
D026
D034
D041
D049
25 MARCH 2014
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Table of Contents
INTRODUCTION .............................................................................................................................................................................. 3
FEATURES OF A CONTRACT...................................................................................................................................................... 3
ESSENTIAL ELEMENTS OF A CONTRACT ............................................................................................................................ 4
KINDS OF CONTRACTS ................................................................................................................................................................ 4
SPECIAL CASE OF QUASI CONTRACT .................................................................................................................................... 6
OFFER - SECTION 2(A)................................................................................................................................................................. 7
ACCEPTANCE SECTION 2(B) ................................................................................................................................................. 8
CONSIDERATION SECTION 2(D) .......................................................................................................................................... 8
CAPACITY OF PARTIES SECTION 11 ............................................................................................................................... 10
Minor ........................................................................................................................................................................................... 10
Persons of Unsound Mind ................................................................................................................................................... 12
Disqualified Persons.............................................................................................................................................................. 12
FREE CONSENT SECTION 14 .............................................................................................................................................. 14
Coercion ..................................................................................................................................................................................... 14
Undue Influence ...................................................................................................................................................................... 15
Misrepresentation .................................................................................................................................................................. 15
Fraud............................................................................................................................................................................................ 16
LEGALITY OF OBJECT AND CONSIDERATION ................................................................................................................ 18
Void Agreement....................................................................................................................................................................... 19
PERFORMANCE OF CONTRACT ............................................................................................................................................ 21
DISCHARGE OF CONTRACT .................................................................................................................................................... 23
REMEDIES FOR BREACH OF CONTRACT .......................................................................................................................... 26
INDEMNITY ................................................................................................................................................................................... 27
BAILMENT ...................................................................................................................................................................................... 28
PLEDGE OR PAWN ...................................................................................................................................................................... 30
AGENCY ........................................................................................................................................................................................... 31
CASES ............................................................................................................................................................................................... 33
REFERENCES................................................................................................................................................................................. 39
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INTRODUCTION
The law relating to contracts in India is contained in Indian Contract Act, 1872. It extends to the whole
of India except J&K. The Act was passed by British India and is based on the principles of English
Common Law.
The law of contract is the foundation upon which business is built. The Indian contract act defines a
contract as such: An agreement enforceable by law. A contract, therefore, is an agreement whose
objective is to create a legal obligation to fulfil a promise/duty. Each contract creates some rights and
duties on the contracting parties. Hence this Indian Contract Act deals with the enforcement of these
rights and duties on the parties in India.
A contract determines the circumstances in which promises made by the parties to a contract shall be
legally binding on them. Law of Contract forms the basis for other enactments like sale of goods,
negotiable instruments, insurance, insolvency, partnership etc. In other words, the contract law lays
down the legal rules relating to promises: their formation, performance and enforceability.
FEATURES OF A CONTRACT
A contract essentially consists of two elements: An Agreement & Legal Obligation.
1.
Agreement
A promise is an agreement. Section 2(b) explains a promise as thus: When the person to
whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A
proposal, when accepted, becomes a promise.
An agreement holds the following characteristics:
Plurality of Persons: There must be two or more persons to make an agreement
Consensus-ad-idem: Both parties to an agreement must agree about the subject-matter in the
same sense and same time
2.
Legal Obligation
An agreement to become a contract must give rise to a duty enforceable by law. The Act restricts
the use of the word contract to only those agreements which give rise to legal obligations
between parties. All contracts are agreements but not all agreements are contracts. There is a
presumption that the parties involved intend to create legal relations.
Example: Business agreements like sale of wheat bags at a specific agreed price to a person. An
action of breach of contract can be enforced in this case.
Agreements of moral, social nature like a promise to lunch together, date etc. are not a contract.
Also, obligation to maintain wife and child, obligation to observe laws of the land are not under
contract law.
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KINDS OF CONTRACTS
Contracts can be classified based on 3 categories.
a)
Void Contract
Such a contract is not void from its inception but subsequent to its formation becomes invalid and has
no legal effect either due to supervening impossibility or subsequent illegality.
A contract becomes void by impossibility of performance after the formation of the contract.
Example:
A and B contracts to marry each other. Before the time fixed for marriage, A goes mad. The contract to
marry becomes void.
A contract also becomes void by subsequent illegality.
Example:
A agrees to sell B 100 bags of wheat at Rs.650 per bag. Before delivery, the Government bans private
trading wheat. The contract becomes void.
Voidable Contract
According to section 2(i), 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. Simply put, it is
an agreement enforceable by law at the option of one of the parties/aggrieved party in case of
coercion, fraud etc.
Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained
by coercion, undue influence, misrepresentation or fraud.
Illegal Contract
forbidden by law
fraudulent
implies injury to person or property
is immoral/opposed to public policy
defeats provisions of law
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All illegal agreements are void but all void agreements are not necessarily illegal.
Unenforceable Contract
Valid contract but not capable of enforcement due to some technical defect such as absence of
registration etc., or time barred like a bill of exchange or promissory note. For example, an oral
arbitration agreement is unenforceable because the law requires an arbitration agreement to be in
writing.
b)
When both the offer and acceptance constituting an agreement enforceable at law are made in words
spoken or written, it is called an express contract. For example, A tells B on telephone that he offers to
sell his car for Rs. 80000 and B replies in affirmative.
Implied Contract
When both offer and acceptance are made otherwise than words i.e., by acts and conduct of parties, it
is called an implied contract.
Example:
A, a coolie in uniform takes up the luggage of B in a railway station without Bs saying so, and B allows
him to do so, it is implied that B agrees to pay A.
Quasi Contract
Such a contract doesnt arise by agreement, but the law recognizes a contract under special
circumstances. It is based upon the equitable doctrine of unjust enrichment.
c)
A contract is said to be executed when both parties to a contract have completely performed their
share of obligation. Even when one party has performed their share of obligation and the other is still
to, the contract called executed as there comes into existence a contract.
Executable Contract
A contract in which obligations by both parties are outstanding, wholly or in part, at the time of
formation of the contract is called Executable contract.
E.g.: A agrees to tutor B from next month and B promises to pay A an amount of Rs.5000. The contract
is executory because it is yet to be carried out.
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If a person, incapable of entering into a contract, or anyone 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.
02.
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.
03.
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
04.
A person, who finds goods belonging to another and takes them into his custody, is subject to the
same responsibility as a bailee.
05.
Liability of a 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.
Exceptions to Quasi Contracts
This section does not cover a case where money has been paid in payment of a natural obligation.
Thus, when one has paid up a time-barred debt, he cannot recover it. Similarly, this section does not
apply when there is a deliberate disregard of law e.g., where moneys are paid voluntarily knowing
fully well that the contract has become void, it cannot be recovered.
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7.
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scooter
by
3.
Acceptance must be expressed in some reasonable manner if the mode is not prescribed. Mental
acceptance will not suffice
Example: A offers to gives a flat on rent to B, B can accept the offer by word of mouth or can express his
acceptance by mail, if specified by A in the terms of offer. Say, if B writes the mail but forgets to send
the mail, the acceptance is not valid.
4.
5.
6.
Acceptance must be given within a reasonable time and before the offer lapses and/or is
revoked
Rejected offers can be accepted only, if renewed.
Acceptance must succeed the offer
c)
A contract where payment and delivery are to be made in future is called future
consideration.
4.
Consideration must be something of value, need not be adequate but lawful
Example: A might sell his Rs1Lac car at Rs1000 provided his consent is free. At the same time if A pays
Rs.1Lac to B in favor of a murder is not lawful
5.
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Minor
A person, domiciled in India, who is under 18 years of age, is a Minor
Minors Agreements
01.
Law acts as the guardian of minors and protects their rights. When a minor is charged with obligations
and the other convincing party seeks to enforce those obligations against minor, the agreement is
deemed as void ab initio.
Case: Mohori Bibi vs Dharmo Das
Dharmo Das, a minor executed mortgage for 20,000 rupees and received 8,000 rupees from the
Mohori Bibi, mortgagee. The mortgagee filed a suit for the recovery of his mortgage money and for sale
of the property in case of default.
Judgement:
Agreement by a minor was adjudged as absolutely void as against minor and hence the mortgagee
could not recover the mortgage money nor could he have the minors property sold under his
mortgage.
02.
An agreement which is of some benefit to the minor and under which he is required to bear no
obligation, is valid. A minor can be a beneficiary i.e., a payee, an endorsee or a promisee. A guardian
can enter into a contract on behalf of a minor and the contract would be binding and enforceable if it is
for the benefit of the minor.
Example:
A promissory note through which a minor is to receive an amount of 2000 is a valid contract as it can
be executed in favour of minor.
03.
Ratification implies subsequent adoption and acceptance of an act or agreement. Minor cannot ratify
the agreement on attaining the age of majority which he has entered into when he is minor as minors
agreement is considered as void ab-initio and has no existence in the eye of law.
Example:
A gives B (minor) an amount of 5000 rupees during his minority. B makes an agreement to repay after
attaining majority. This agreement would not be enforceable.
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04.
Estoppel is defined as Where one person has, by his declaration, act or omission, intentionally caused
or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his
representative, to deny the truth of that thing.
A minor is not estopped from pleading his infancy where he represents fraudulently that he is of full
age and induces another person to enter into a contract with him, provided an action is founded on the
contract. A minor is not liable to restore the property or goods if the identity of the property or goods
is lost. However, minors can be compelled to restore the goods if they are traceable in his possession.
Example:
A, being a minor, received a sum of 50000 rupees through fraudulent representation and purchased a
motorcycle. In the court of law, the loan transaction is considered invalid but however, minor will be
asked to restore the motorcycle to the lender.
05.
Section 68 of the Contract Act provides that If a person, incapable of entering into a contract, or
anyone 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.
A minor is not personally liable but his property is. The minor is liable to pay a reasonable price for the
necessaries supplied to him from his property. In case minor owns no property, the supplier will lose
the price of necessaries. Food, clothing, medical attendance and lodging expenses fall under
necessaries whereas trading doesnt.
06.
Specific performance
Specific performance impales the actual carrying out of the contract as agreed. Since an agreement
made by a minor is absolutely void, the court will never direct specific performance of such an
agreement by him. The contract is valid in case guardians entered into a contract on behalf of minor
and if it is
within their authority and
for the benefit of minor
07.
Minor partner
A minor cannot be a partner in a partnership firm. However, he can be admitted to benefits of the
partnership with consent of all the partners by an agreement executed through his lawful guardian
with the other partners. He cannot be made personally liable for any obligations of the firm, however,
he may after attaining majority accept them if he thinks fit to do so.
08.
Minor agent
A minor can act as an agent. He shall bind the principal by his acts done in the course of such an
agency, but he cannot be held personally liable for negligence or breach of duty as an agent.
09.
A minor cant be adjudicated an insolvent, for; he is incapable of contracting debts. Even for
necessaries supplied to him, a minor is not personally liable but his property is liable.
10.
A minor can enter into a contract jointly with an adult. However, minor is not liable and the contract as
a whole enforced against the adult.
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11.
Where in contract of guarantee, an adult stands surety on behalf of minor, the adult would be liable,
although the minor is not. In fact, in such a case, there cannot be a contract of guarantee in the true
sense.
12.
The parents of a minor are not held liable for agreements made by minor even in the case of
agreement made for the purchase of necessaries. However, they are held liable only if minor is an
agent for the parents.
13.
Minor shareholder
A minor cannot become a shareholder. However, fully paid up shares may be transmitted to him
through his lawful guardian.
14.
A tort is a civil wrong for which the ordinary remedy is damages. A minor is held liable unless the tort
in reality is a breach of contract.
Example:
A minor is not held liable where he hired a horse for riding and injured it by over-riding.
A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind
Example:
A patient in a lunatic asylum may enter into a contract during the intervals of sound mind.
-
A person who is usually of sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind
Example:
A sane man who is so drunk that he cannot understand the terms of a contract, or form a rational
judgement as to its effect on his interest, cannot contract while such drunkenness lasts.
An agreement entered into by a person of unsound mind is treated on the same footing as that of
minors and therefore it is absolutely void and inoperative as against him but he can derive benefits
under it. However, the property of a person of unsound mind us always liable for necessaries supplied
to him or to anyone whom he is legally bound to support.
Disqualified Persons
The persons disqualified from any law to which they are subject are as follows:
01.
Alien enemies
An alien citizen of a foreign country living in India can enter into a contract with Indian citizens
only during peace and that too subject to any restrictions imposed by the Govt. in that respect. On the
declaration of war between his country and India, he becomes an alien enemy and cannot enter into
contracts. Alien friend can contract but an alien enemy cant contract. Contracts enter into before
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the declaration of war stand suspended during war and they can be retrieved once the war is over
provided they havent become time-barred.
02.
While entering into contracts with foreign sovereigns and ambassadors, one has to be cautious as they
can sue others to enforce the contracts entered upon with them but cant be sued without obtaining
prior sanction of the Central Government. They are in a privileged position and are considered to be
incompetent to contract.
03.
Convict
A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is
incompetent
-
Married women
Married women are competent to enter into contracts with respect to their separate properties
(Stridhan) provided they are major and are of sound mind. However, they cant enter into contracts
with respect to their husbands properties. But they can act as an agent of her husband and bind her
husbands property for necessaries supplied to her, if he fails to provide her with them.
05.
Insolvent
An adjudged insolvent (before an order of discharge) is competent to enter into certain types of
contracts i.e., he can incur debts, purchase property or be an employee but he cant sell his property
which vests in the Official Receiver. Besides these, he suffers from certain disqualifications like he cant
be a magistrate or a director of a company or a member of local body. After the order of discharge, he
is just like an ordinary citizen.
06.
Joint-stock company and corporation incorporated under a special Act (like LIC, UTI)
A company or corporation is an artificial person created by law. It cant enter into contracts outside
the powers conferred upon it by its MoA or by the provisions of its special Act. Being an artificial
person, it cant enter into contracts of a strictly personal nature.
Example: Marriage
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Coercion
Section 15 of the Contract Act defines Coercion as Coercion is the committing or threatening to
commit, any act forbidden by the 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.
Example:
A threatens to shoot B, if he does not let out his house to him. B agrees to let out his house to A. The
consent of B has been induced by coercion and the contract is voidable.
The act of coercion may be directed at any person and not necessarily at the other party to the
agreement. It may proceed even from a stranger to the contract.
Example:
A, threatens to shoot B, a friend of C if C does not let out his house to him. C agrees to do so.
A, threatens to shoot B if he does not let out his house to C. B agrees to let out his house to C.
In both the cases, the agreement has been caused by coercion and the contract is voidable.
Threat to commit suicide
Neither suicide nor threat to commit suicide is punishable under the Indian Penal Code; only an
attempt to commit suicide is punishable under it. Threat to commit suicide is deemed to be
forbidden by Indian Penal Code.
Example: Chikkam Ammiraju vs Chikkam Seshamma
Ammiraju threated his wife and son to execute a deed in favour of his brother in respect of some
properties which they claimed as their own. This transaction was set aside on the grounds of coercion
by Madras High Court.
Effect of Coercion
A contract brought out by coercion is voidable at the option of the party whose consent was so caused.
The burden of proof that coercion was used lies on the party who wants to set aside the contract on
the plea of coercion.
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Undue Influence
Section 16(1) defines the term Undue influence as A contract is said to be induced by undue influence
where
The relations subsisting between the parties are such that one of the parties is in a position to
dominate the will of the other and
He uses the position to obtain an unfair advantage over the other
The phrase in a position to dominate the will of the other is clarified by the same section under subsection (2) as follows:
-
Holding a real or apparent authority over the other (Master & Servant)
Standing in a fiduciary relation to the other (Father & Son)
Making a contract with a person whose mental capacity is temporarily or permanently affected
by reason of age, illness or mental or bodily distress (Old illiterate persons)
In the above three cases, the undue influence is presumed to exist and there is no need to prove it.
However, it has to be proved in the following cases:
-
Misrepresentation
A representation means a statement of fact made by one party to the other, either before or at the time
of the contract, relating to some matter essential to the formation of the contract, with an intention to
induce the other party to enter into the contract. A representation when wrongly made, either
innocently or intentionally, is termed as misrepresentation. In law, the former is termed as
misrepresentation and the latter as fraud.
According to Section 18, misrepresentation means and includes
-
The positive assertion of unwarranted statements of material facts believing them to be true
Breach of duty which brings an advantage to the person committing it by misleading the other to
his prejudice
Causing mistake about subject matter innocently
Essentials of misrepresentation
For alleging misrepresentation, representation should
-
Be made innocently
Relate to facts material to the contract
Have become untrue
Have been instrumental in inducing the other party to enter into contract
Effect of misrepresentation
The aggrieved party has two alternative courses open to him
-
He may affirm the contract and insist that he shall be put in the position in which he would have
been, if the representation made had been true
Fraud
According to Section 17, fraud means and includes any of the following acts committed by a party to a
contract
-
Representation that a fact is true when it is not true by one who does not believe it to be true
Active concealment of a fact by a person who has knowledge or belief of the fact
Promise made without any intention of performing it
Any other act fitted to deceive
Any such act or omission as the law specially declared to be fraudulent
Mere silence without any legal duty to speak will not amount to fraud except where
-
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
Silence is, in itself, equivalent to speech
Effect of fraud
A party, who has been induced to enter into a contract by fraud, has the following remedies open to
him:
-
He can rescind the contract i.e., he can avoid the performance of the contract; contract being
voidable at his option
He can ask for restitution and 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
The aggrieved party can also sue for damages
Mistake
Mistake may be defined as an erroneous belief concerning something. It may be of two kinds
-
Mistake of law
Mistake of fact
Mistake of Law
It may be of two types
-
Mistake of Fact
It may be of two types
-
Bilateral Mistake
There is a bilateral mistake where the parties to an agreement misunderstood each other and
are at cross purposes. Hence, there is no real correspondence of offer and acceptance, each party
obviously understanding the contract in a different way. In case of bilateral mistake of essential
fact, the agreement is void ab-initio.
Section 20 provides that 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. Thus for declaring an
agreement void ab-initio, the following three conditions must be fulfilled:
Both the parties must be under a mistake
Mistake must relate to some fact and not to judgement or opinion
The fact must be essential to the agreement
Unilateral Mistake
When only one of the contracting parties is mistaken as to a matter of fact, the mistake is a
unilateral mistake. Section 22 provides information on the validity that 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.
Accordingly, in case of a unilateral mistake, a contract remains valid unless the mistake is
caused by misrepresentation or fraud, in which case the contract is voidable at the option of the
aggrieved party.
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If it is forbidden by law
If it is of such a nature that, if permitted, it would defeat the provisions of any law
Object or Consideration is not directly forbidden by law, but it would indirectly lend to a violation of
law
Example:
An agreement between husband and wife to live separately is invalid as being opposed to Hindu Law
3.
If it is fraudulent
Example:
A and B enter into an agreement for the division among them related to gains acquired by them by
fraud. The agreement is void, as its object is unlawful.
4.
Example: For monetary consideration, A agrees to place his daughter at the disposal of B to be married
as B likes. The agreement is illegal and void as it would interfere with As parental duty to select a
husband in the best interests of the girl.
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Void Agreement
An agreement not enforceable by law is said to be void. Agreement being void in nature does not give
rise to any legal proceedings. Following agreements are expressly declared as void.
1.
2.
3.
4.
5.
6.
7.
Other than these 7 there are few more agreements which are considered as void though not expressly
declared1.
2.
3.
4.
Any agreement which refrain an individual from taking any legal action is termed as void. Section 28
as amended in 1996 declares below agreements as void Agreement which restricts any party
absolutely from taking usual legal proceedings:
Agreement which limits the time within which one may enforce his contract rights
Agreement which provides for forfeiture of any rights arising from a contract
These agreements are held void as they are against the Public Policy. Following points are important in
terms of restraint of legal proceedings:
In case of any dispute between the parties, they may settle their dispute outside the court.
Even if parties agree to nominate a party to the contract as an arbitrator in case of dispute is valid.
Both the parties may decide, in case of dispute which Court will handle the matter.
Example: X & Y mutually agrees that if India wins the cricket match X will pay Y a sum of 200/- while if
India loses Y will pay X a sum of 200/-. This is a wagering contract since the outcome of the event is
uncertain. However there are some exceptions to this like horse race, speculative transactions, chitfund, and lottery (in some states).
6. Agreements contingent on impossible events
Section 36 of Indian Contract Act states agreements of 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. Contingent contract which depends upon future event cannot
be enforced by law unless and until that event has happened.
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Examples
1. Ram makes a contract with Shyam to buy Shyams house if Ram survives Raghu. This contract
cannot be enforced by law unless and until Raghu dies in Rams lifetime.
2. A agrees to pay B 1,00,000/- if B can B can draw a triangle with sum of angles more than 180
degree.
7. Agreements to do impossible acts
Section 56 of Indian Contract Act states an agreement to do an act impossible in itself is void.
Impossibility of performance could be in terms of legal or physical. However it must be differentiated
from difficulty to comply or perform.
According to the act
Parties may be aware of the impossibility of the event before the contract
Parties to the contract may not be aware of the impossibility of the event before the contract
Contract might have become impossible after it had been made
Example: X agrees to sell his dog to Y for 5000 and Y agrees it, but no one is aware that the dog is
already dead. The contract is void.
X agrees to sell his house to B for Rs 5,00,00 after 6 months. House collapsed after 2 months. The
contract shall be void as soon as the house collapsed.
Causes of impossibility of performance
Change in Law
Destruction of subject matter
Personal incapacity of the promisor
PERFORMANCE OF CONTRACT
Who must perform?
Sec.37 states that 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 this Act, or of
any other law.
Representatives Liability: Promises bind the legal representative of the deceased promisor.
Example 1: A promises to deliver goods to B on a certain day on payment of Rs.1000. A dies before
that day. As representative is bound to deliver the goods to B who in turn is bound to pay the amount
to As representative.
Example 2: A promises to paint a picture for B by a certain day, at a certain price. A dies before the
day. The contract cannot be enforced either by As representative or by B.
What is Tender of Performance?
It is also called offer of performance. It is when the parties to a contract offer to perform their
respective promises.
Essentials of a valid tender of performance:
It must be unconditional: X offers to give his house to Y, if Z permits. Offer is conditional, hence not
a valid tender.
Offer must be made by promisor or representative.
Must be made at reasonable time & place.
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Offer cannot be of the part of performance. For example, a stakeholder not bound to accept less
than what is actually payable.
Promisor is bound by his promise to deliver the same thing and promisee has opportunity to
examine the same.
In case of joint promises, the tender is valid.
It must be made to promisee or his duly authorized agent.
Joint Promises
Example: A is lent Rs.5000 by B& C, and promises to repay them with interest on a day specified. B
dies. The right to claim rests with Bs representative and C till C dies and the right to claim rests with
Bs and Cs representatives.
Example: If A is compelled to pay whole and C is unable to pay any, A is entitled to receive Rs.1500
from B. If C can pay Rs.500, they B has to pay Rs.1250
Effect of release of one joint promisor e.g. If promisor is released from promise by promisee, the
others are still liable to pay as per the promise
Reciprocal Promises
Bilateral Contracts A promises to sell certain goods to B and B promises to pay A for those goods.
Example: A promises to deliver goods to B on 10th Apr and B promises to pay the price in advance on
1st Apr. As promise to deliver goods is independent of Bs promise to pay. A must deliver goods on
10th Apr. However A can sue B for payment of price and damages
Example: A contracts with B to execute certain builders work for a fixed price, B supplying the timber
for the work. B refuses to furnish the timber and plan isnt executed. A need not execute the work and
B is bound to pay A compensation for loss caused by non-performance
Example: A and B contract that A shall deliver goods to B to be paid for by B on delivery. A need not
deliver goods unless B is ready and willing to pay on delivery. B need not pay unless A is ready and
willing to deliver them on payment
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Appropriation of Payments
When a debtor owes several debts to the same creditor, makes payment which is insufficient to satisfy
the whole indebtedness, the question arises as to which of the debts the payment is to be applied.
Example: A owes B among other debts 1000 upon a promisory note which falls due on 1st June. He
owes B no other debt of that amt. On 1st June A pays 1000 to B. The payment is to be applied to the
discharge of the promissory note
Example: If no application is stated, the discharge is done in the order of the time when the debt was
started.
Example: If a payment has been made without stating if it for interest or principal, payment is to be
applied to int. first and then principal
DISCHARGE OF CONTRACT
Definition: When the rights and obligations arising out of a contract are extinguished, the contract is
said to be discharged or terminated.
Ways of discharge of contract
1. Discharge by Performance
Actual Performance:
Each party to a contract fulfills obligation arising under the contract within the time and in the
manner prescribed
If one party only performs his promise, he alone is discharged and gets a right of action against the
other party
The promisor offers to perform his obligation, but is unable to do so because promisee does not
accept the performance
Tender is not actual performance but only an offer to perform
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A new contract is substituted for an existing contract, either between the same
or different parties
If parties are not changed, then the nature of the obligation must be altered substantially in the
new substituted contract.
Eg. - A is indebted to B and B to C. By mutual agreement Bs debt to C and Bs loan to A is cancelled and
C accepts A as his debtor. This is novation involving change of parties
b) Alteration
c) Rescission
Agreement between the parties to the effect that it shall no longer bind them
Non-performance by both parties for long period - implied rescission
Eg.- A has to deliver 10 kg of rice to B on 15th March but on 10th both agree that contract will not
be performed.
d) Remission
Eg.- A contracts to marry B while being already married to C. A must make compensation to B
Subsequent Impossibility
Act becomes impossible to do after the contract is made due to some event which the promisor
could not prevent
Eg. A and B contract to marry each other but before the time fixed for marriage B goes mad. The
contract becomes void.
Cases where applicable:
Destruction of subject matter
Failure of ultimate purpose
Death of promisor
Change of law
Outbreak of war
Cases where not applicable:
Difficulty of performance
Commercial impossibility
Impossibility due to default of a third person
Strikes and lock-outs
Failure of one of the objects
In case of a breach of a contract, legal action should be taken within a specified period called the
Period of Limitation
In simple contracts, period of limitation is 3 years.
Death In contracts of personal nature, death of promisor discharges contract while in other cases
rights and liabilities are passed to the legal heir
Insolvency An insolvent is exonerated from liabilities on debts by the Insolvency Court
Merger eg. A part time employee is made a full-time employee, the former contract stands
discharged
Unauthorized material alteration Material alteration in a written document without the consent
of the other party makes the contract void.
Anticipatory Breach Breach of contract before the time fixed for performance has arrived.
Eg. A agrees to appoint B as clerk but before the time of performance A refuses. B can sue A
foe damages without waiting until the time fixed for performance.
Actual breach Occurs when a party fails to perform his obligation upon the date fixed for
performance by the contract.
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INDEMNITY
Definition
A contract, by which one party promises to save the other from loss caused to him by the conduct of
promisor himself or by the conduct of any other person, is called a contract of indemnity.
Rights of indemnity holder when sued
The following are the rights of the indemnity holder when sued
1. Recovery of all damages
2. Recovery of all costs
3. Recovery of sums paid under the term of any compromise
Time of commencement of Indemnifiers Liability
Indemnity is not repayment after payment but to be paid once the charge is proved; the party to be
indemnified shall never be called upon to pay.
Contracts of Guarantee
Definition
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person
in case of his default.
The three parties under the contract of guarantee are the debtor, the credit and the surety.
Nature and Extent of Suretys Liability (Section 128)
The nature and extent of the suretys liability are as follows:
Rights of Surety
The rights of surety are as follows
Suretys right against creditors
For the same debt for similar amount, both surety owe equal contribution
For the same debt for different sums, the contribution is subject to the limit fixed by his
guarantee
Discharge of Surety
The surety is discharged under the following conditions:
BAILMENT
Definition
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.
Essential features
It is a delivery of movable goods by one person to another person (not being his servant).
The goods are delivered for some purpose, and not by some mistake
The goods are to be returned in specie or disposed of according to the directions of the bailor
either in their original form or altered form.
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Kinds of Bailment
Bailments are classified under the following types
Kinds from benefit point of view
1. Bailment for the exclusive benefit of the bailor
2. Bailment for the exclusive benefit of the bailee
3. Bailment for the mutual benefit of the bailor and the bailee
Kinds from reward point of view
4. Gratuitous
Eg: Loaning a book to a friend
5. Non-gratuitous
Eg: Sending a motor car for repair
Bailment
Bailment
Duties of Bailee
The duties of the bailee are as follows
Duties of Bailor
The duties of the bailor are as follows
Rights of Bailee
The following are the rights of a bailee
Rights of Bailor
The following are the rights of a bailor
lien
lien
Termination of Bailment
A bailment is terminated under the following conditions
Specific period
Specific purpose
Bailee acts inconsistent with terms of bailment
Gratuitous bailment
Gratuitous bailment death of bailee/bailor
PLEDGE OR PAWN
Definition
The bailment of goods as security for payment of a debt or performance of a promise is called pledge.
The bailor in this case is called the pawnor. The bailee is called pawnee.
Rights of Pawnee
The following are the rights of a pawnee
Right of retainer
Right of retainer for subsequent advances
Right to extraordinary expenses
Right to sue the pawnor or sell the goods on default of the pawnor
Duties of Pawnee
The duties of the pawnee are as follows
Rights of Pawnor
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Duties of Pawnor
The duties of the pawnor are as follows
AGENCY
An agent is a person employed to do any act for another or to represent another in dealings with third
persons. The party who employs the agent is called the principal. The agent enters into the contract on
behalf of the principal and the principal is liable for legal action for violation of any part of the
contract.
General Rules of Agency:
Everything a person competent to contract can do by himself, he can do through agent. However,
acts involving personal skills are not allowed i.e., a person cannot employ an agent to draw a
painting or he cannot employ an agent to marry someone. The principal has to undergo the same
consequences as if the contracts had been entered into and the acts done by the principal in
person
Test of Agency: When the person has authority to act on behalf of other and make contractual
relations with third person, then he is an agency
Agent
Servant
Other Rules
Any person competent to contract i.e., major and one of sound mind can be a principal. Any
person can become an agent i.e., even a minor or a person of unsound mind can become an agent.
This is because principal will be liable and thus he runs a great risk if he employs a minor or
person of unsound mind as agent. It is not necessary that an agent be given consideration.
However, agents are generally given consideration for their contribution.
Kinds of Agents
A General Agent is employed to do all acts connected with a particular business or employment
He can bind the principal by doing anything which falls within the scope of the business
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A Special Agent is employed to do a particular act or represent his principal in some particular
transaction such as selling a car .Principal will not be held liable if they agent signs a contract
outside his authority
A Universal Agent has unlimited authority i.e., he is authorized to do all the acts which the
principal can lawfully do and can delegate. Enjoys extensive powers to transact every kind of
business on behalf of his principal
Other classifications of agents include Classification by nature of work: Mercantile: Factor,
Commission agent, Del credere agent, Broker, Non Mercantile: Attorneys, insurance agent, wife
etc.,
Creation of Agency
This includes the different kinds of agreements to create agencies:
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CASES
1. Percept DMarkr (India) Pvt. Ltd. v. Zaheer Khan & Anr.
Percept DMarkr (Plaintiff) entered into an agreement with Zaheer Khan & Anr (Defendant), to manage
its media affairs. As per agreement plaintiff had the first right of refusal. Such that before accepting
any proposal from third party defendant has to offer the same proposal to plaintiff, and if rejected by
plaintiff, defendant can accept third party proposal. However on termination of this agreement, the
defendant entered into an agreement with the third party and plaintiff claims permanent injunction.
Issue: Is the agreement in conjunction of restraint of trade act?
Held: Accepting the plaintiff request would mean forcing the defendant to enter into contract with
only plaintiff, even after the lawful termination of the agreement. This will be against the restraint of
trade act section 27 of Indian Contract Act.
2. Fateh Chand vs. Balkishan Das
Appellant: Fateh Chand
Respondent: Balkishan Das
According to the contract dated March 21, 1949, the appellant was contracted to sell the leasehold
rights of the land and the building constructed on it to the defendant. The appellant received
Rs.25000/- under the contract and delivered possession of the building and the land to the
defendant, but the sale was not completed before the expiry of the period stipulated in the
agreement, and for this default each party blamed the other.
The trial Judge held that the plaintiff had failed to put the defendant in possession of the land
agreed to be sold and could not therefore retain Rs.25000
The High Court of Punjab modified the decree passed by the trial Court and declared 'that the
plaintiff' was entitled to retain out of Rs.25000/- paid by the defendant under the sale agreement,
a sum of Rs.11250/- being compensation for loss suffered by him and directed that the plaintiff do
get from the defendant compensation for use and occupation at the rate of Rs.265/-per mensem
The appeal was thus filed in Supreme Court against the order that respondent was entitled to
retain out of Rs.25000 paid by appellant under sale agreement a sum of Rs.11250 being
compensation.
The Supreme Court observed that there was no evidence that any loss was suffered by the plaintiff
inconsequence of the default by the defendant by keeping him out of the possession of the
property.
The Supreme Court then ordered that the plaintiff was entitled to retain only a sum of Rs1000 out
of Rs25000 and he was entitled to compensation at the rate of Rs.140 as ordinary damages.
3. State Bank of Saurashtra vs. Chitranjan Rangnath Raja and Anr.
Facts:
The appellant-bank allowed a cash credit facility limited to Rs.75,000/- to the Principal Debtor (PD) on
his pledging 5,000 tin of groundnut oil under the lock and key of the Bank and on personal guarantee
of the Respondent-Surety. However, afterwards when the Bank lost the pledged tins and sued the legal
representative of PD (after the death of PD) and the Surety to repay the debt, Surety contested
discharge of his liability.
Contentions:
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BANK- By Cl.5 of guarantee, surety could not claim discharge from the guarantee contract even when
the Bank had released any other security; such that in instant case, surety remains liable. Moreover,
under Cl.7, Surety cannot claim discharge even if the creditor Bank has any other guarantee, security
or remedy from the principal debtor.
SURETY- The Bank was negligent in parting away with the security such that the Surety was
discharged to the extent of the value of tins of oil.
Held:
Trial Court- The trial court held that there was negligence on the part of the Bank with regard to the
safe custody of the pledged oil tins but as the contract of guarantee entered into by the surety with the
Bank was independent of the pledge of goods given by the principal debtor, the surety is not discharged
from his liability under the guarantee.
High Court- On account of the conduct of the parties, the pledge of the goods and subsequent
contract of guarantee (entered into within the same time frame) were part of the one composite
transaction and they evidenced that the principal debtor had offered two securities, one the pledge of
oil tins and another personal guarantee of the surety: since the bank was utterly negligent in dealing
with the pledged goods leading to their loss, therefore, surety is discharged under Section 139 and 141
of the Indian Contract Act.
Issues:
1. Whether the pledge of the goods and the guarantee contract amounted to one single transaction.
2. Whether Section 141 is applicable here. If yes, to what extent is the Surety discharged?
Judgment:
In order to attract section 141 of the Contract Act, it must be shown that the creditor had taken more
than one security from the principal debtor at the time when the contract of guarantee was entered
into and irrespective of the fact whether the surety knew of such other security offered by the
principal debtor, if the creditor loses or without the consent of the surety parts with the other security,
the surety would be discharged to the extent of the value of the security. The letter of guarantee
executed by the Surety and the pledging of the goods evidenced one composite transaction; such
that, as found by the High Court, the principal debtor had offered two securities, (i) the pledge of
goods, (ii) personal guarantee of the Surety. The Surety himself agreed to give personal guarantee on
the specific understanding and with the full knowledge of the Bank that the principal debtor was
offering another security, namely, pledge of goods. First security, namely, the pledged goods are lost to
the Bank on account of its negligence. As the current market price of 5000 oil tins would have satisfied
the Banks entire claim, the Surety would be released to the whole extent.
With regard to contention upon Cl.5, release of security implies a volitional act on the part of the Bank.
In the present case, the bank had lost the security on account of negligence which cannot be equated
with release. Further, w.r.t Cl.7, the expression any other guarantee, security or remedy therein
mentioned must be security other than the pledged goods
4. Lalman Shukla vs. Gauri Dutt
Gauri Dutt sent his servant Lalman to find his lost nephew. The servant left and after that Gauri Dutt
announced a reward for the person who finds his nephew. Lalman, who was not aware of Gauri Dutts
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offer found Gauris nephew and brought him back. When Lalman came to know about the offer Gauri
had made, he claimed for the reward.
Judgement:
Lalmans plea for the reward was not accepted since he was not aware of the offer when he left to find
the servant. Since he was not aware of the offer, he was not allowed to accept it after performing the
job.
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Section 182:
Under Section 182 of the Contract Act an agent is defined thus:
"An `agent' is a person employed to do any act for another of to represent another in dealings with
third persons. The person for whom such act is done or who is so represented is called the "principal".
Therefore in the present case, it has to be determined the P were employed by the D to sell their
products i.e. Vespa Scooters and Vespa Commercials to the customers on their behalf or while so
dealing they represented the D in the transaction with third parties i.e. the ultimate purchasers of the
vehicles so as to bring the D in the category of the principal and the P as their agent.
Court Verdict:
Court held that the P had failed to establish that there was any relationship of agent and principal
between the parties and the termination of distributorship was lawful and, therefore, dismissed the
suit of the P except for an amount of Rs. 4419.81 which was admitted by the D
Examining the evidence on record the Court found that there was no material to establish relationship
of principal and agent between the parties and that the documents and the evidence on record
indicated that the P purchased from the respondents the vehicles allotted to them at the net dealer's
price, and retained the difference as their profit
So the relationship between the P and D in respect of sale by the P' was not the relationship of agent
and principal. With these findings the High Court dismissed the appeal but without any order as to
costs.
6. Union of India & Ors. (Plaintiff) vs M/S. Bhim Sem Walaiti Ram
(Defendant)
FACTS
An auction was held for the sale of license of liquor shop and the bid of the defendant which
was the highest was provisionally accepted.
Subject to the confirmation of Chief Commissioner who may reject any bid without assigning
any reasons.
Since defendant failed to deposit the required amount, Chief Commissioner rejected the bid.
The defendant was held liable for the difference between the bid offered by him and the
highest bid accepted in the re-auction, plaintiff started proceedings against him under a statute
of the Delhi Liquor License Rules
Section 7 of the ICA
Under Section 7 of the ICA "the acceptance must be absolute and unqualified, leaving no ground for
doubt or uncertainty. If the acceptance is conditional, no valid contract is formed, and the offer can be
withdrawn at any moment till the absolute acceptance has taken place within reasonable time of such
offer."
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Court Verdict
In this case the contract for sale was not complete till the bid was confirmed by the chief
commissioner and till such confirmation; the bidder was entitled to withdraw the bid. Since there was
never any sale of the license of the liquor shop to the defendant, therefore, he cannot be held liable.
The court dismissed the appeal.
10.
The secretary of a Mosque Committee filed a suit to enforce a promise which the promisor had made
to subscribe Rs. 500 to the re-building of a mosque.
Held: the promise was not enforceable because there was no consideration in the sense of benefit, as
the person who made the promise gained nothing in return for the promise made, and the secretary
of the Committee to whom the promise was made, suffered no detriment as nothing had been done to
carry out the repairs. Hence the suit was dismissed.
REFERENCES
http://judis.nic.in/
http://indiankanoon.org/
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