June 17, 2024

Indian contact act 1872

Indian contact act, 1872

 The Indian Contract Act came into force on 1st September, 1872. The object of the Act is also to introduce definiteness in commercial transactions. It applies to the whole of the country except that State of Jammu and Kashmir. The Act is neither retrospective nor exhaustive. It deals mostly with the general principles embodying contracts.

A contract is an agreement made between two or more parties which the law will enforce . Section 2(h) defines a contract as an agreement enforceable by law.

 An agreement is defined as a set of promises forming consideration for each other under section 2 (e)

Agreement = offer + acceptance

  1. Before there can be an agreement between the two parties there must be consensus ad idem between both the parties. Unless there is consensus ad idem there can’t be a contract.
  2. An agreement to become a contract must give rise to a legal obligation or duty.

Salmond defines a contract as “an agreement creating and defining obligations between the parties”.

Sir William Anson observes, A contract is an agreement enforceable at law made between two or more persons, by which rights are acquired by one or more to acts or forbearances on the part of other or others.

According to Sir Frederick Pollock, “Every agreement and promise enforceable at law is

a contract”.

For example A invites B to a dinner. It is a social agreement not enforceable by law. It does not give rise to any legal or contractual obligation. So it is not a contract.

What are the essential characteristics of a contract?

U/S 10 of the contract act all agreements are contracts if they are made by free consent of the parties who are competent to contract for a lawful consideration and with a lawful object and they are not expressly declared as void under any act.

Essential characteristics

  1. offer and acceptance
  2. legal relationship creation
  3. lawful consideration
  4. capacity to contract
  5. lawful object
  6. free consent
  7. certainty and possibility of contract
  8. Agreement not expressly declared void.


Offer and acceptance:

There must be two parties to the contract. One party making the offer and one party accepting the offer. The terms of the offer must be definite and the acceptance must be absolute and unconditional. Acceptance must also be communicated to the offeror.

 Legal relationship creation:

When two parties enter into the contract it must be with the intention of creating the legal relation between the two. That is why social or domestic contracts are not contracts.


A husband promised to pay the wife Rs 1200 for pocket money and actually could not pay it . The wife can’t take him to a court of law. This contract being a social or domestic thing can’t be solved by the court.

 Lawful consideration:

Consideration means an advantage or benefit moving from one party to another. It is the essence of any bargain. it means something in return. The agreement is enforceable in la w if there is any valid consideration.

Capacity to contract:

The parties to the contract must be capable of entering into a valid contract. Every person is competent to contract if he is

  1. a major
  2. is of sound mind
  3. Is not disqualified from contracting by any law.

A minor, a lunatic, a drunkard is debarred from entering into contract.

Lawful object:

The object of the contract should be lawful. In other words it means that the object must be

  1. a) illegal
  2. b) Immoral
  3. c) Opposed to public policy

If an agreement suffers from any legal flow then it would not be enforceable by law.

Free consent:

There must be free consent to every contract. Without free consent the agreement or the contract becomes defective and not enforceable in law. The consent to the contract should not have been obtained by use of force, coercion, fraud, undue influence and misrepresentation.

Certainty and possibility of contract:

The terms of the contract should not be ambiguous or vague. The terms should be clear and definite. The terms of the contract shall also be such that it should be capable of performing.

Agreement not expressly declared void:

The contract should not expressly be declared as void under any act. If it was declared to be void under any act it can not be enforceable under the contract act.

Contracts which must be registered

(i) A promise made without consideration on account of natural love and affection between parties standing in near relation to each other.

(ii) Documents of which registration is compulsory under Sec.17 of the Registration Act, 1908.

(iii) Contracts relating to the transfer of immovable properties under the Transfer of Property Act 1882.

(iv) Memorandum and Articles of Association, debentures, mortgages and charges under the Companies Act, 1956.



Chapter 2

Offer and Acceptance

An offer is a proposal by one of the parties to another to enter into an agreement which is legally binding.

The person who is making the offer is known as offeror, proposer and the person to whom the offer is made is known as the offeree. When the oferree accepts the offer he is known as the promise under section 2(c).

An offer may be made by express words, spoken or written. This is known as express offer .for example when X say to Z “will you purchase my house for Rs 1, 00,000” is an express offer.

An offer can also be implied from the conduct of the parties or the circumstances from the conduct of the parties or the circumstances of the case. This is known as implied offer.

 For example when a transport company runs a bus on a particular route ,there is an implied  offer by the company to carry passengers ,who are willing to pay the price. The acceptance of offer is complete as soon as the passenger boards the bus.

 When an offer is made to a specific person it is known as specific offer. It can only be accepted by the person to whom such offer is made.

But when an offer is made to the world at large, it is called a general offer. (Share issued by a company through prospectus issued by a limited company is a general offer)

What constitutes an offer?

  1. The offer must show an obvious intention on part of the offeror to be bound by it.
  2. Offer shall be definite.
  3. It must be communicated to the offered.
  4. The offerer should have made the offer with view to obtain the assent of the offeree.

Rules of offer:

  1. Offer must be communicated to the offeree.
  2. Offer must be such that it is capable of being accepted and give rise to a legal relation.
  3. The offerer should have made the offer with view to obtain the assent of the offeree.
  4. An offer should be distinguished from
  5. a) A declaration of intention and an arrangement.
  6. b) An invitation to make an offer to make business.
  7. Offer should not contain a term non compliance of which maybe assumed to amount of acceptance.
  8. A statement of price is not an offer.
  9. The terms of offer should be definite, certain, unambiguous and not vague.


Distinguish between offer and an invitation to offer:

 Display of goods by a shopkeeper in his window with prices marked on them is not an offer but merely an invitation to the public to make an offer to buy the goods at the marked prices. Likewise quotations, catalogues and advertisements in a newspaper for sale of an article do not constitute an offer. They are instead an invitation to the public to make an offer.

Newspaper advertisements are not offers. But there is one general exception. (When there is an offer of general reward to the public)

when a advertises in a newspaper that he would pay Rs 100 to anyone who finds and returns the lost dogs, the offer is addressed to the first person who by performing the required act with knowledge of the offer of reward ,creates an agreements.


Termination of offer : An offer may come to an end under the following circumstances:

  1. When the offerer prescribes a time within which the offer must be accepted, the offer lapses as soon as the time expires.

In case offerer does not prescribe time, offer terminates after the expiry of reasonable time.

  1. An offer lapses by not being accepted in the mode prescribed, or if no mode is prescribed in some usual and reasonable manner.
  2. An offer lapses by the death or insanity of the offerer or of the offeree before acceptance.
  3. An offer lapses by revocation. The offerer may withdraw the offer at any time before it has been accepted.
  4. Standing Offers: A standing offer is in the nature of a continuing offer. A tender or offer for the supply of such goods as may be required, no quantity being specified, is a continuing standing offer. Such an offer is accepted from time to time whenever an order is given for any of the goods specified in tender.



Acceptance is the act of assenting by the the offeree an offer. It is the manifestation by the offeree of his willingness to be bound by the terms of offer. Acceptance may be made by the person to whom such offer is made or the legal representative of such a person.

Acceptance may be express or implied .it is express when it is communicated by words, spoken or written or by doing some required act. It is implied when it is to be gathered from the circumstances surrounding the conduct of the parties.


At an auction sale, S is the highest bidder .the auctioneer accepts the offer by striking the hammer. This is an implied acceptance.


Acceptance of a particular offer can be accepted by the particular person. It can’t be accepted by any other person .suppose A made an offer to B. B alone can accept the offer. B can’t substitute anybody without A’s assent.

But where an offer is made to world at large any person to whom the offer is made can accept the offer.

The acceptance of an offer is very essence of a contract. To be legally effective, it must satisfy the following conditions:

  1. It must be absolute and unconditional and unqualified:

Conditional acceptance is regarded as no acceptance. Acceptance must be exactly the same way as it is provided in an offer.

Example: A offers to sell his horse for Rs 25,000 to B.B says to A that he is willing to purchase it for Rs 23,000.it is not acceptance.

 It must be communicated to the offeror: the acceptance must be communicated to the offeror before it is expired. If it is not properly communicated the acceptance is not binding.

Example: the manager of a railway company received a draft agreement. The manager signed and stamped the document and wrote the word approved. But it was somehow not sent to the other party. Held that it was not a binding contract.


  1. It must be according to the prescribed mode: acceptance should be communicated through a mode which is properly specified by the offeror.it can’t be made in any other mode, because it will not be regarded as good communication.

Example: for example a university invited applications for admission and declared that fees must be paid through demand drafts only. Sitesh sent one properly filled form and paid the fees through cheque.held it was not according to the mode and not valid.

  1. It must be given within a reasonable period of time: reasonable period of time is to be framed depending on the merit of the case. It will be different in each case.
  2. It can’t precede an offer: there can’t be an acceptance before the offer is actually made.

Example: A person who has no knowledge of an offer can’t be said to have accepted it merely because he happened to act just by chance in the manner prescribed by the offer.


  1. It must show an intention on the part of the acceptor to fulfill the terms of the promise: if there is no intention to fulfill the promise it is not an acceptance.


  1. Acceptance must be given by the party to whom such an offer is made: acceptance will be either made by the person to whom such an offer is made or by authorized representatives. it cant be accepted by any other person.


  1. It must be given before the offer lapses: acceptance and its communication must be given before it lapses. It can’t be accepted after it expires. So acceptance must be given in order to be valid before e it is withdrawn.


  1. It can’t be implied from silence: if the 2nd party is silent about the acceptance then it is regarded as rejected not accepted.


Contract through the Post Office

An offer and its acceptance may be made by post. Under Indian Law, an offer is made when the letter containing the offer is delivered to the offeree.

An acceptance is complete against the proposer or offerer when it is posted to him. Acceptance binds the acceptor only when it reaches the offerer.

An offer can be revoked if the letter of revocation reaches the offeree before he posts the letter of acceptance.

An acceptance can be revoked as against the offerer if the letter of revocation reaches the offerer before he receives the letter of acceptance.




Chapter 3


Contracts result only when one promise is made in exchange for something in return. The

something in return is consideration. Its necessity arises because law aims at enforcing the mutual promises of the parties.

Pollock defines it as : “An act or forebearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.” Consideration must be an act or forbearance of some value in the eye of law.

Consideration is one of the essential elements of an agreement or contract. An agreement made without consideration is void ab initio. (Nudum pactum-nude contract)


Section 2(d) defines consideration as follows

“When at the desire of the promisor, promisee or any other person has done any act or abstained from doing any act, such an act or the abstinence is known as Consideration “


Sir Frederick Pollock defines Consideration as

“It is the price for which the promise of the other is bought and the promise thus given for value is enforceable by law”.



  • an act of doing something
  • An act of abstaining from doing some thing.
  • A return promise


Example 1: A offers to sell his house to B for Rs 50,000.B accepts the offer. In this contract for A’s promise, the consideration is a sum of Rs 50, 000, while for B’s promise consideration is the house.

Example 2: A promises B not to file a suit against him if he pays him Rs 5000.so the abstinence of A is the act of not doing something is known as the consideration.

Example 3: a agrees to sell his horse to B for Rs 10,000.here the promise by B to pay Rs 10,000 is the return promise against A,s promise to sell his horse.


Legal rules of consideration:


  1. It must move at the will of the promisor; an act done at the desire of a third party is not consideration.voluntary acts are not consideration in the eyes of the law.

Example: A Mohammedan promised to subscribe Rs 500 to fund to rebuild the mosque and no steps are taken to rebuild the mosque. It was held that the promise was without consideration and that the subscriber was not liable.


  1. it may be an act, an act of abstinence or a return promise:

Example: A and B are brothers. They have some kind of dispute over the use of their common ancestral property.B offers to A to accept Rs 12, 000 per annum in order to let him use the property and sue him. A accepts the offer. This is a contract in which A is being paid for not doing something. (Abstaining from doing some thing).held to be valid.


  1. consideration  may be past present or future:

Past consideration: where the consideration was received before the date of the promise, it is known as past consideration.

Example: A teaches the child of B at B’s request last year and B promised to pay Rs 1,000.this is past consideration as A ‘s promise is finished and B’s promise is still to be fulfilled.

Present consideration: where the promise and the return promise is at the same time it is known as present consideration. (Simultaneous activities)


a agrees to sell his horse to B for Rs 10,000.here the promise by B to pay Rs 10,000 is the return promise against A,s promise to sell his horse.


Future consideration: where the promisor has to receive consideration in future for his promise, it is known as future consideration.

Example: a promise to sell his house to B for a sum of Rs 15,000 after a week .B also promises to pay Rs 15,000 after a week on Tuesday.consideration is future for both the parties.


  1. consideration may not be adequate:

The amount of consideration is not required to be higher, lower or something else. It has just to exist in the eyes of the law.

Example: A has a horse whose market value is 12,000. But A contracted with C to sell it for Rs 13,450.the value does not matter as long as the consideration exist. If there is no value it is not enforceable by law. Consideration is required but not the adequacy.


  1. It must be real not illusory:

Consideration should be a real benefit which can be measured in some terms. If it is not real it is void.

Example: A promise to B if he pays Rs 5, 00,000 to him he will put life into B’s dead wife. Held that it is not real consideration as it is illusory and as such impossible to fulfill.


  1. It must not be something which the promisor is already bound to do: it should not be an old promise which either of the parties are already bound to do.


In Collins V. Godefroy, D. promised to pay P who had received summons to appear at a trial in a civil suit, a certain sum being a compensation for the loss of time during his attendance. It was held that the promise was without consideration because P was in any case bound to appear and give evidence.

  1. It must not be illegal, immoral or opposed to public policy: the amount or the consideration itself should not be illegal, fraudulent or forbidden by law or opposed to public policy.

Every agreement of which the consideration is unlawful is void.


“A contract without consideration is void “– explain the exceptions to the statement.


Without consideration every contract is void. But there are certain exceptions to this rule. Section 25 and 185 deal with the exceptions. In the following cases agreements made without consideration will not be void.


  • love and affection 🙁 section 25(1))

Where an agreement is expressed in writing and registered and in such an agreement some property is sought to be transferred on account of love and affection between the parties, it is valid consideration and no real consideration is required.

Example: A in his seventies sought to transfer Rs 40,000 to his nephew S out of love and puts it in paper .there is no consideration from the part of S but it is valid contract.


  • compensation for voluntary services:( section 25(2))

A promise to compensate a person who has already done some voluntary work for the promisor is enforceable, even though without consideration.

Example: A finds B’s purse which was lost and returns it to B .B promises to pay be a reward of Rs 200 at that time. Later he refuses. The court held that it is enforceable.


  • promise to pay a time barred debt:( section 25(3))


Time barred debt means a debt which cannot be recovered because the time limit for the filing of the suit to recover it has already expired. So it cannot be enforceable in a court of law.

But if the person who was to pay the debt promises now to pay the debt then it can be enforced. So no fresh consideration is required for its validity. It is valid because it is promised.


  • completed gift 🙁 section 25(4))

If a gift is promised to be paid and accepted before it is withdrawn then it is held to be a valid contract even if without considearation.but the gift promised can be withdrawn before it is accepted. After it is accepted it can’t be withdrawn.


  • agency:( section 185)

No consideration is necessary to create an agency.


Stranger to contract


It is a general rule of law that a person who is not a party to a contract cannot sue upon it even though the contract is for his benefit. This means that unless there is privity of contract, a party cannot sue on a contract. This means a contract cannot confer right or impose obligations arising under it on any person other than parties to it.



(1) A person in whose favour a charge or other interest in some specific immovable property has been created may enforce it even though he is not a party to the contract.

(2) Marriage settlement, partition or other family arrangements. Where an agreement is

made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of a person, he may sue although he is not a party to the contract.

(3) Acknowledgement or estopple. Where the promisor, by his conduct, acknowledges or otherwise constitutes himself as an agent of the third party, a binding obligation is thereby incurred towards him.

(4) Assignment of a contract. The assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties.


Chapter 4

Free consent


Section 10 says that all agreements are contracts if they are made with free consent. A contract is valid only when it is the result of the free consent of the parties to it. The consent is said to be free when the parties agree upon the same thing in the same sense and voluntarily do so.

When the consent is absent the contract will turn out to be void. Where there is no real consent, as in the case of a mistake on the part of the parties the contract is void. It is voidable when consent has been influenced by coercion, undue, influence, fraud, misrepresentation or mistake.


Consent means an act of assenting to an contract. Free consent mean when the consent is not obtained by:

  • coercion (section 15)
  • undue influence (section 16)
  • fraud (section 17)
  • misrepresentation (section 18)
  • mistake (section 19)


If there is no consent, there is no contract. if the consent is not ad idem ,there is no contract.

Example: An illiterate woman executed a deed in favour of her nephew under the impression that executing the deed authorizing the nephew to manage the estate on her behalf. But afterwards it was found to be a deed of gift. She did not know what was written and the deed was not read and explained to her. It was held by the courts that the deed was void and inoperative.

This is because it was clearly a case of fraud. Had she known the truth she would not have assented to the deed.


Coercion (section 15)


When a person is compelled to enter into a contract by the use of force by the other party or under a threat – coercion is said to have taken place. So coercion is committing or threatening to commit any act forbidden by Indian penal code. Coercion includes physical compulsion, fear and menace to goods. so consent is said to have taken under the duress of coercion when it is obtained by :

  • committing or threatening to commit any criminal act
  • Unlawfully detaining or threatening to detain the goods belonging to another.


Example: A threatens to kill B’s cattle if he does not supply all his milk and milk produvts to his shop and nobody else.this is coercion.

Example: A threatens to shoot B if he does not lend him Rs 5,000.B lend him the money out of fear. This is coercion.

Example: A young girl of 13 years was forced to adopt a boy whose husband just died,by the relatives of the husband who prevented the removal of his body for cremation until she consented. Consequently the adoption was set aside. Held, the consent was not free but induced by coercion.

The onus of proving that the consent of a party to a contract was caused by coercion and

that he would not have entered into it had coercion not been employed, lies on the party who wants to relieve himself of the consequences of coercion.


Undue influence (section 16)


Some times a party is compelled to enter into an agreement against his will as a result of unfair persuasion by he other party .this happens when a special kind of relationship exist between the persons and one of them is in a position so as to influence the other.


A person is deemed to be in a position to dominate the will of another:

  1. a) Where he holds any real or apparent authority over the other (master and servant, doctor and patient)
  2. b) Where he stands in a fiduciary position to the other. It is supposed to exist for example between father and son, solicitor and client.
  3. c) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of illness ,age .such a relation exist between a medical attendant and his patient.(section 16 {2})


example 1 : A having advanced money to his son  B ,during his minority ,obtains upon B’s coming of age, by misuse of parental influence ,a bond from B for a greater amount than the sum due  in respect of the advance. A employs undue influence.

Example 2: A who is engulfed by disease and is unable to attend to his normal duties is being looked after by B, who takes advantage of this fact and he makes A to agree pay an unreasonable amount of money. B employs undue influence.


The following relationships usually raise a presumption of undue influence :

(i) Parent and child

(ii) Guardian and ward

(iii) Trustee and beneficiary

(iv) Religious adviser and disciple

(v) Doctor and patient

(vi) Solicitor and client


The presumption of undue influence can be rebutted by proving that :

(i) Full disclosure of facts was made at the time of entering into contract.

(ii) The price paid was adequate. The inadequacy of consideration should be too extreme for the reason, inadequacy of consideration is only an evidence of undue influence, it is not a conclusive evidence.

(iii) The weaker party was in receipt of independent advice before making the promise.


Mere getting the advice is not sufficient, it must be shown that the advice was competent and based on relevant facts.


Misrepresentation (section 18)


A representation means a statement or assertion of a fact made by one party to the other,

either before or at the time of the contract, relating to some matter or thing essential to the formation of the contract. It may be expressed by words spoken or written or implied from the acts and conduct of the parties. A representation when wrongly made innocently is a misrepresentation. Wrong representation may be:

(i) innocent representation but made wrongly.

(ii) intentional, deliberate or willful wrong representation with an intent to deceive or defraud the other party.

The former, in legal terminology, is called misrepresentation and the letter fraud.


Misrepresentation is a false statement which the person making it honestly believes it to be or which he does not know to be false. It also includes no disclosure of a material fact or facts without any intent to deceive the other party.




Consequence of Misrepresentation:

The aggrieved party can

  • Rescind or avoid the contract.
  • Accept the contract but insist that he shall be placed in that position in which he would have been placed if the Misrepresentation was not made.


But the aggrieved party would loss the right of rescission

  • If he after becoming aware of the misrepresentation takes a benefit under the contract.
  • If restitution of integrum is not possible (restoration to original position is not possible.).Further if a contract can’t be rescinded in total it can’t be rescinded at all.
  • If a third party has acquired a right in the subject matter of the contract in good faith and for value.

Example 1: A purchases good from B by fraud and pawns them with C.B can’t rescind the contract on learning the fraud as C has acquired the right in good faith and as such B can’t recover the goods.


Fraud (section 17)


According to Section 17, fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent :

(i) The suggestion, that a fact, is true which is not true, by a person who does not believe it to be true;

(ii) The active concealment of a fact by one having knowledge or belief of the fact;

(iii) A promise made without any intention of performing it;

(iv) Any other act fitted to deceive;

(v) Any such act or omission as the law specially declares to be fraudulent.


Fraud exists when it is shown that

  • A false representation has been made knowingly or without belief in its truth or recklessly not caring whether it is true or false.
  • There is a concealment of a material fact or that there is a partial statement of a fact in such a manner that the withholding of what is not stated makes that which is stated as false.


The intention must be to deceive the other party to the contract or induce him to enter into a contract.

Essentials of fraud:

  • There must be a representation and it must be false.


Example 1: the prospectus of a company did not refer to the existence of a document detailing the liability . This gives a wrong impression that the company  was prosperous held non-disclosure amounted to fraud.

  • The representation must relate to a material fact which exists now or existed in the past. A mere opinion, commentary, hearsay is not regarded as misrepresentation.

Example 2:       A sells spoons and makes the following statements.

  1. these spoons are as good as that of X. ( this is a statement of opinion)
  2. The spoons have as much silver in those as that of X. (this is a statement of fact.)


  • Te representation must have been made before the conclusion of the contract with the intention of inducing the other party to act on it. The representation should be false and made with an intention to deceive the other party.
  • The representation or statement must have been made with knowledge of its falsity or without believing it to be true. Further the representation amounting to fraud must have been made either by a party to the contract or with his connivance or by his agent.

Example 3: A company issued a prospectus giving false information about the unbounded wealth of Nevada. A shareholder who had taken shares on the faith of the prospectus wanted to avoid the contract .held he could do so as the false representation in the prospectus amounted to fraud.


  • The other party must have been induced to act upon the representation or assertion .A mere falsehood is not enough to give a right of action .it must have induced the other party to act upon it. The other party could take reasonable care to find truth.

Example: A bought share in a company which stated that Mr. X is one of the directors. This was untrue. But A never knew Mr. X.held that the claim of Mr. X was not tenable.


  • The other party must have relied upon the representation and must have been deceived .A mere attempt to deceive anyone is not fraud unless the other party is actually deceived.
  • The other party, acting on the representation or assertion, must have subsequently suffered some loss. There will be no fraud without damage.


Consequence of fraud:

A contact is induced by fraud is void able at the option of the party defrauded. Until it is avoided, it is valid. The party defrauded has remedies.

  1. a) He can rescind the contract. But where he does so, he must act within a reasonable period of time. If he delays and in the mean time a third party has acquired some interest in the property for value, he can’t rescind the contract.
  2. b) He can sue for damage.
  3. c) He can insist on the performance of the contract on the condition that he shall be put in the position in which he would have been if the representation made had been true.


Note: the intention must be to deceive the other party to the contract or induce him to enter into a contract. If somebody remains silent it is not regarded as fraud under any law.



Mistake (section 19) not in the course.


Mistake may be defined as an erroneous belief concerning something. The parties do not

agree on the same thing in the same sense.

Mistake may be of two kinds:

  • Mistake of law and
  • Mistake of fact.

Mistake of law

in India and mistake as to a law not in force in India, e.g., foreign law. Mistake of Indian law does not affect the contract. Ignorance of law is no excuse. But mistake of foreign law is treated a mistake of fact.

“Where both the parties to an agreement are under a mistake as to a matter of fact essential to agreement, the agreement is void”. To make a contract void on the ground of

mistake of fact, the mistake must be on the part of both parties and it must be as a matter of fact essential to the agreement. A offers to sell his house to B. B agrees to buy A’s house. A meant to sell his house in Delhi while B meant to buy A’s house in Calcutta. There is a mistake of fact and there is no agreement. A mere error or mistake of judgment, though on a material point, will not be sufficient to avoid the contract. For example, if A buys an article thinking that it is worth Rs 100/-, while it is actually worth Rs.50/- the contract is not void on the basis of mistake.

Thus, when one or more of the parties to an agreement suffer from a fundamental error

and the consent, apparently given, is not really there, the agreement is void. Mistake as to the nature of the contract or mistake as to the identity of the person contracted does not result in a contract. A represents falsely that he is the Maharaja of Kapurthala and thus buys goods from B. There is no contract. Mutual mistake as to subject matter of contract will make it void. Such mistake may relate to the existence of the subject matter, its identity, price or quantity.


Distinction between fraud and misrepresentation


  1. Intention: in fraud the intention is to deceive the other party but under misrepresentation the intention is not to deceive but careless misstatement of facts only.
  2. Rights: fraud gives rise to the right of rescission as well as damage but under misrepresentation the party has the right to rescind the contract. Misrepresentation doe not give rise to any damage.
  3. Plea: fraud does not allow the defendant to take the place of the plaintiff if he had the means to discover the truth but under misrepresentation the defendant is allowed to take this plea.
  4. Penalty: fraud is a criminal activity but misrepresentation is not.


Cases on misrepresentation

Smith v Land & House Property Corp (1884)

The plaintiff put up his hotel for sale stating that it was let to a ‘most desirable tenant’. The defendants agreed to buy the hotel. The tenant was bankrupt. As a result, the defendants refused to complete the contract and were sued by the plaintiff for specific performance. The Court of Appeal held that the plaintiff’s statement was not mere opinion, but was one of fact.

Solle v Butcher [1950]

In 1931 a dwelling house had been converted into five flats. In 1938 Flat No. 1 was let for three years at an annual rent of £140. In 1947 the defendant took a long lease of the building, intending to repair bomb damage and do substantial alterations. The plaintiff and defendant discussed the rents to be charged after the work had been completed. The plaintiff told the defendant that he could charge £250 for Flat 1. The plaintiff paid rent at £250 per year for some time and then took proceedings for a declaration that the standard rent was £140. The defendant contended that the flat had become a new and separate dwelling by reason of change of identity, and therefore not subject to the Rent Restriction Acts. This was held to be a statement of fact. (Note: this is a case on Mistake.)

Contracts Uberrimae Fidei

Uberrimae Fidei Contract: Contracts requiring utmost good faith are contracts where the law imposes upon the parties the duty of making a full disclosure of all material facts. In such contracts where one of the parties has any information concerning the subject matter of the contract, which is likely to affect the willingness of the other party to enter into the contract, he is bound to disclose the information.

The contracts which fall within this category are :

  1. Contracts of Insurance: The insured must disclose to the insurer all material facts known to him concerning the risk to be undertaken.
  2. Contracts in which parties stand in a fiduciary relation to other, e.g., contracts between solicitor and client, principal and agent, etc.
  3. Contracts for the sale of immovable property: The seller must disclose any material defect in the property or in the seller’s title to it, of which the seller is aware and the buyer is not, and which the buyer could not, with ordinary care discover.
  4. Issue of company prospectus: Persons who issue the prospectus of a company must disclose all information regarding the company with strict accuracy.
  5. Family settlement: When family disputes are settled by mutual agreements, each party must disclose truthfully all information possessed by him regarding family properties.
  6. Miscellaneous: Good faith between partners is essential, and so partnership is regarded as contract requiring utmost good faith. In a contract of guarantee, the creditor must disclose to the surety all material facts known to him about the principal debtor.


Chapter 5

Capacity to contract

 In general, a valid contract may be made by any person recognized by law as having legal personality that is natural persons.Capacity means competence of the parties to enter into a valid contract. According to section 10 an agreement becomes a contract if it is entered into between, the parties who are competent to contract.

Section 11 of the Contract Act provides that “every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject”.

However, the following classes of persons are in law incompetent to contract, or are only capable of contracting to a limited extent or in a particular manner:

Section 11 declares the followings to be incompetent to contract.

(1) Bankrupts

(2) Minors – The age of majority is 18 years

(3) Persons of unsound mind

(4) Alien

(5) Drunkards

The fact that a party was drunk when he purported to enter into a contract may be a defence to an action on the contract; and it has been said that drunkenness is in this respect on the same footing as unsoundness of mind.

Minors – The age of majority is 18 years

According to section 3 of the Indian contract act, a minor is a person who has not completed 18 years of age.

The general principle is that a contract made by a minor with an adult is binding on the adult but not on the minor. If, after attaining his majority, he ratifies it by an act confirming the promise he made when a minor, he is bound.

There need be no consideration for the act of ratification. A contract by a minor is not void and any money or property transferred by him under the contract can be recovered only if there has been a total failure of consideration. There are three exceptional cases where a minor is to some extent bound.

Minor’s agreement:

1) An agreement with or by a minor is void and inoperative abinitio:

2) A minor can be a beneficiary

A minor is bound to pay for necessaries supplied to him under a contract.

Necessaries” are those things without which a person cannot reasonably exist and include food, clothing, lodging, education or training in a trade and essential services. The “condition of life” of the minor means his social status and his wealth.


A minor is not bound even if he misrepresents. If a minor misrepresents that he is a major then also it is not enforceable against him as the law protects the minor.


If a minor is admitted to a partnership and received profits for some of the years and afterwards refused to share a loss arising in another year, the court held that he can’t be asked to pay.


But minors are not allowed to cheat, because they are protected by law.


Example: A minor took a loan to purchase a car by stating that he is above 18 years of age and then refused to pay for it by saying that he is a minor and nothing can be recovered from him. The rule is actually nothing can be recovered from him but the court can’t allow the minor to take advantage of protection under law. He can be asked to return the car.


  • A minor cant be declared insolvent, even for necessities.
  • A minor cant be the member of a company. But if he is allotted shares, he will not be liable to pay anything to the company for those shares.
  • A minor can be appointed as an agent.
  • A minor can be a beneficiary
  • A minor cant be a partner. But he can be admitted as a partner to an already existing partner ship when all other partners agree to that effect and the minor is represented by a guardian.


If a minor has obtained any benefit under a contract he cannot be asked to compensate.

A minor can always plead infancy, even where he had entered into a contract by falsely representing that he was of full age, when in reality he was a minor.

The exceptions referred to above are :

(i) A minor can always derive a benefit under a contract. He can be a promisee although

he cannot be a promisor.

(ii) The minor’s property is liable for the payment of a reasonable price for ‘necessaries’ supplied to him or to anyone whom-he is legally bound to support according to his station in life in which he is placed. (Section 68)


A loan taken by a minor to obtain necessaries binds him and is recoverable by the lender

as if he had himself supplied these necessaries. It is only the property of minor which is liable for such loans but a minor can never be held personally liable for such loans.


Contracts by idiots, lunatics and drunken persons are also void. But an insane person may make valid contracts during lucid intervals.

These persons are incapacitated because they cannot understand the nature of the contract and they cannot know how their interests will be affected by entering into such a contract.

Contract by Persons Incompetent by Statute

An alien is a citizen of a foreign state. An alien may be a friend or an enemy. Contracts with alien friends are valid. But contracts with alien enemies are void. An alien enemy is one whose country is at war with India. Foreign Sovereigns and Ambassadors cannot be sued in Indian Courts unless they voluntarily submit to our courts.

A convict is incapable of entering into contracts while undergoing sentence.

Corporations: A corporation is an artificial person created by law and has no physical existence. There are some contracts into which it cannot enter, e.g., a contract to marry.

Further, the powers of a corporation to contract are limited by its Statute, Charter or Memorandum of Association. Any contract beyond such powers is void.


Chapter 6

Legality of object or lawful consideration


An agree ment the object or consideration of which is not lawful cant be enforced by law. Under section 23 of this act the consideration or object is lawful unless

  • it is forbidden by law
  • it is fraudulent
  • Involves or implies injury to the person or property of another.
  • The court regards this as immoral.
  • It is opposed to public policy



(a) A and B enter into an agreement for the division between them of gains acquired by them by fraud. The agreement is void as its object is unlawful.

(b) A promises to obtain for B an employment in Government service and B promises to pay Rs.1,000 to A. The agreement is void, as the consideration for it is unlawful.


It is forbidden by law:

Forbidden by law means it is expressly declared to be void.


  • A, B and C enters into a contract for the division of gains acquired by them from a fraudulent activity.this agreement is void and illegal as it’s Forbidden by law.
  • A promises to obtain a publics service job for a consideration of rupees 2, 00,000 for B.it is held that it is Forbidden by law.


It is fraudulent:

When the object of an agreement is to cheat the other party by concealment of any material fact or otherwise, it is said to be fraudulent.

Examples: When the object of an agreement Between A and B was to obtain a contract from the commissionerate for the benefit of both, which could not be obtained for both of them without practicing fraud on the department. Held that the agreement was fraudulent and therefore void.


Involves or implies injury to the person or property of another:

The consideration or object of an agreement is unlawful when it involves or implies injury to the person or property of another.

Examples:  An agreement which compels a debtor to do manual work labour for the creditors as long as the debt is repaid in full is void.


The court regards this as immoral:

The term immoral is dependent on the standards of morality prevailing at a particular time and as approved by courts? In most cases it is restricted to sexual immorality.


  • A landlord can’t recover rent of a property rented knowingly to a prostitute.
  • An agreement to pay maintenance for an illegitimate child is not illegal.
  • A agrees to let her daughter to B for concubinage.the agreement is void, because it is immoral, though the letting may not be punishable under Indian penal code.
  • A Promises to drop a case which he has instituted against B for robbery after B promises to restore the value of the things taken. The agreement is void, as its object is to stifle prosecution.
  • A promises to a purohit to pay Rs 2000 in consideration for procuring a second wife for him. The consideration is illegal.

It is opposed to public policy:

Public policy can’t be defined and is actually not defined under the law.

The following agreements are regarded as opposed to public policy:

  • Trading with the enemy: those contracts which tend either to benefit an enemy country are against public policy. Contracts made before hostilities has to put on hold and continue after the hostilities ends.
  • Agreement interfering with the course of justice:

An agreement for stifling prosecution is unlawful and void. When an offence has been committed by a person, he must be prosecuted. Any agreement which seeks to prevent the prosecution of such a person is opposed to public policy and is unlawful. Similarly, an agreement to vary the statutory period of limitation is void. Also, an agreement for the purpose of using improper influence of any kind with judges or officers of justice are void.

  • Agreements interfering with course of justice:

An agreement for the purpose or to the effect of using improper means to influence judges and other public servants is void. (Bribing, use of force and threat of kidnapping etc)


  • Agreements for sale of public offices:

An agreement to pay a public servant to induce him to retire and thus make way for the appointment of the promisor is virtually a trafficking with reference to an office and thus is void ab initio.


  • Agreements to create monopoly:

Any agreement between businessmen to create monopolies in the market is void ab initio.


  • Agreements in restraint of parenting rights:

A father is the natural guardian of a child. In his absence mother is the guardian. Any agreement to take away these rights from the parents is unnatural and thus is void. This right of guardian ship is in the nature of sacred trust and can’t be bartered away by anybody for anything.


  • marriage brokerage contracts:

An agreement to procure marriage for reward is void. Of course validity of marriage will not be affected but money actually paid can’t be recovered but if not paid cant be recovered under a suit.

  • Agreements restraining personal freedom.

An agreement which unduly restrains personal liberty is void, as against public policy. An agreement by a debtor to do manual work for the creditor so long as the debt is not paid is full is void.




Classification of contracts on the basis of enforceability


Valid Contracts: Contracts which satisfy all the essentials of a valid contract as laid down in Sec. 10, are termed as valid contracts. Only valid contracts are enforceable in a court of law.

Void Contracts: An agreement may be enforceable at the time when it was entered into but later on, due to certain reasons, for example impossibility or illegality of the contract, it may become void and unenforceable. Such contracts are called void contracts. Technically the words “void contracts” are a contradiction in terms. Such contracts can appropriately be termed as “contracts which have become void” in place of “void contracts”.

Example: X, by exercising coercion over Y, makes him agree to sell his house worth Rs.50,000 for a mere sum of Rs. 1,000. The agreement is voidable at the option of Y. In case Y decides to rescind the contract, it becomes void between X and Y.


Classification of contracts on the basis of mode of creation


Express Contracts: Contracts entered into between the parties by words spoken or written, are termed as express contracts. In such contracts, parties make oral or written

declaration of their intentions and of the terms of the transaction.


Implied Contracts: Contracts which come into existence on account of the conduct and acts of the parties are termed as implied contracts. For example, if a person takes a seat

in a bus. His act shows that he has entered into an implied contract that he will pay the specified fare to the bus owner for taking him to his destination.


Classification of contracts on the basis of the extent of execution


Executed contracts: When both the parties to the contract have fulfilled their respective obligations, contract is said to be executed.


Executory contract: When one or both the parties to the contract have still to perform certain things in future, the contract is termed as an executory contract.

For Example: A agrees to sell a radio set to B for Rs.200, B pays the price in advance. The contract is executed as regards B, but executory as regards A, for he is yet to deliver the radio set to B.












Chapter 7

Void Agreements


An agreement which might posses all the essential elements of a valid contract must not have been expressly declared as void by any law in force in the country . The contract act specifically defines and declare certain acts and contracts as void .A void agreement is one which is not enforceable by law.


Void Agreement : A void agreement is one which is deficient in essentials and is, therefore, destitute of legal effect. Sec.2 (g) defines it as, “an agreement not enforceable by law, is said to be void.’ A void agreement is non-existent in the eyes of law. So, it cannot be enforced and confers no rights on either party. All illegal or immoral agreements are void. An agreement with a minor is void.

Example: A agrees with B to draw two parallel lines in such a way so that they cross each

other for consideration of Rs.500. The agreement is impossible to perform and hence void.


The followings have been declared to be void agreements as per law:

  • agreements by incompetent parties – section 11
  • agreements made under mutual mistake of fact – Section 23
  • Agreements in restraint of trade – section 27
  • Agreements the meaning of which is uncertain
  • Agreements contingent upon impossible events
  • Agreements to do impossible acts – section 56
  • Agreements in restraint of legal proceedings- section 28
  • Agreements in restraint of marriage – section 26
  • Agreements having unlawful object or consideration section 24
  • Wagering agreements – section 27


  • agreements by incompetent parties – section 11

Agreements by minors, insolvent are void agreements.

  • agreements made under mutual mistake of fact – Section 23


  • Agreements in restraint of trade – section 27

Every person ha s the right do any business if he is qualified to the business. Nobody in ordinary course has the rightful power to stop him from doing that. So every agreement by which any one is restrained from exercising a lawful profession .trade or business of any kind is to that extent is void.


A wants to start a grocery shop in the local shopping complex.B and C who already owns shops there interferes and drives out A from the copmplex.held by the court that they can’t do so as this agreement between B and C is void.


  1. Trade combinations: persons in same kind of business can form an organization to protect themselves from uneconomic competiotion.if they enter into an agreement not to produce beyond a particular quantity or not to sell below a certain price it is held to be valid agreements.
  2. Contract of service: where an agreement is reached between the employer and an employee that during service contract, the employee shall not undertake any other service, the agreement shall be valid.
  3. Sale of goodwill: so a person who purchases goodwill of a firm can enter into an agreement with the seller of the goodwill not to carry the same business in the same locality and upto a particular no of years, it will be a valid agreement. But the limitation should be reasonable.


  • Agreements the meaning of which is uncertain: (section 29)


Agreements, the meaning of which is not certain, or capable of being made certain, are void. For example, where A agrees to sell to B, “a hundred tons oil,” the agreements is void for uncertainty, for there is nothing to show what kind of oil was intended.

  • Agreements contingent upon impossible events:


  • Agreements to do impossible acts – section 56

An Agreement to do impossible acts is void itself. So impossibility of performance of an act does not give rise to any legal obligation.

Example: A agrees with B to discover treasure by magic is void agreement.


  • Agreements in restraint of legal proceedings- section 28


  • Agreements in restraint of marriage – section 26

Any agreement in restraint of marriage of any person other than a minor is void. Although a person is not bound under any law to marry, his freedom to marry cant be taken away.


  1. Where a Hindu husband agrees not to remarry until his first wife is alive.


  • Agreements having unlawful object or consideration section 24


  •  Wagering agreements – section 27


These agreements are agreements under which one party agrees to pay the other party money or money’s worth if some event happens and the other party agrees to pay the first party if the event does not happen.

Example: A and B bets over phone that if it rains on Sunday A would pay B Rs 40,000 and B would pay the same amount to A if it does not rain on Sunday.


Agreements, by way of wager are void. A wager is an agreement by which money is payable by one person to another on the happening or non happening of a future uncertain event. The essence of gambling and wagering is that one party is to win and the other to lose upon a future event, which at the time of the contract is of an uncertain nature that is to say, if the event turns out one way. A will lose but if turns out the other way he will win. For example, A agrees with B that if it rains on a certain day A will pay Rs.50. This is a Wagering agreement and void.

Commercial transaction and wagers. A commercial transaction may be valid or a wager

according to the intention of the parties. A share of commodity transaction in which there is no intention to give or take delivery of the shares or the commodity and the parties intend to deal only with the differences in prices is a wagering transaction. But where there is a clear intention to give and take delivery it is not a wager but a valid contract.

Lotteries. A lottery is a game of chance. Therefore, an agreement to buy a lottery ticket

is a wagering agreement. But where law has specially made lottery legal transaction it is valid.

Crossword Competitions. A crossword puzzle, in which prizes depend upon correspondence of the competitors’ solution with a previously prepared solution kept with the editor of a newspaper, is a lottery and, therefore, a wagering transaction. But, if for a successful solution a good measure of skill is required, it is not a wager; e.g., picture puzzles, athletic competition.

Contracts of insurances are not wagering agreements.


Essential elements:

  1. event is uncertain
  2. Both parties do not have control over the event.
  3. If one losses, the other one wins and vice versa.
  4. None of the parties has an interest on the happening of the event except winning or loosing.
  5. It is a promise to pay money or money’s worth.

The following agreements are however held not to be wagers or wagering agreements:

  1. Prize competitions, crosswords and quiz shows because they involve considerable skills.
  2. insurance contracts
  3. Games of skill like athletic competitions and wrestling bouts.


Effect of wagering agreements. An agreement by way of wager is void. It will not be enforced by the Courts of law. But, in Bombay Presidency, wagering agreements are, by a

local Statute, not only void but also illegal. The consequence of this difference is that in Bombay, collateral agreements to wagering agreements are also void; while in the rest of India only the wagering agreements are void and transactions collateral to such agreements are not void. Thus, in Bombay, money lent to pay a gambling debt cannot be recovered by the lender, but in the rest of India it can be recovered.
































A contingent contract is a contract to do or not to do something, if some event, collateral

to such contract does or does not happen (Section 31). An insurer contracts to pay B Rs.50,000, if B’s house is burnt. This is a contingent contract. The contract relates to the payment of Rs.50,000, and the uncertain event collateral to the contract is the burning of the house. The promise of A to pay B Rs.50,000 is not absolute, but conditional on B’s house getting burnt.

If the house is not burnt, no payment is to be made.

It follows that a contingent contract has two essential characteristics;

(a) the performance of the contracts depends on a contingency,

(b) the contingency is uncertain (if the contingency is bound to happen, the contract is due to be performed in any case and is not, therefore a contingent contract).


A contract may be contingent on some act of a party to the contract or of a third party.

But if the performance of a promise is contingent upon the mere will and pleasure of the

promisee, there is no contract at all. For example, where A promises to pay B what a third

party C will determine, there is a valid contract contingent on C fixing the amount. But A  promises to pay B for his services whatever A, the promisor, thinks reasonable it is not a



Rules Regarding Contingent Contracts

  1. Contracts contingent upon the happening of a future uncertain event, cannot be enforced by law unless and until that event has happened. If the event becomes impossible such contract becomes void.

A makes a contract with B to buy B’s house if A survives C. This contract cannot be enforced unless and until C dies in A’s lifetime. If the horse dies before the death of C, the

contract becomes void on account of impossibility of performance.

  1. Contract contingent upon the non-happening of an uncertain future event can be enforced when the happening of that event becomes impossible, and not before. For example A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The contract can be enforced when the ship sinks.
  2. If a contract is contingent upon how a person will act at an unspecified time, the event

shall be considered to have become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under further contingencies.

  1. A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must now be considered impossible although it is possible that D may die and that C may

afterward marry B.

  1. A contract contingent upon the happening of an event within a fixed time, becomes void if, at the expiration of the fixed time, such event has not happened or if, before the time fixed, such event becomes impossible.

A promises to pay B a sum of money if a certain ship returns within a year. The contract

may be enforced if the ship returns within the year, and becomes void if the ship is burnt

within the year.

  1. Contracts contingent upon the non-happening of an event within a fixed time may be enforced by law when the time fixed has expired or if it becomes certain that such event will not happen.

A promises to pay B a sum of money if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year.

  1. Contingents agreements to do or not to do anything, if an impossible event happens are void whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.

A agrees to pay B Rs.1,000 if B marries A’s daughter C. C was dead at the time of the agreement. The agreement is void.



In a contract the promisor is under an obligation to the promisee and this obligation is undertaken voluntarily. The contract has all the essential elements of a valid contract, namely offer and acceptance, free consent, legal object and consideration and intention to enter into the contract. But sometimes an obligation may be imposed by law upon a person for the benefit of another person, even though the essential elements of a valid contract are absent.


In fact, in such a case, there is neither an agreement nor a promise. Such an obligation, though not contractual, resembles an obligation as created by contract, and the Court would enforce it as if were a contract. Such obligations are called Quasi Contracts, or relations resembling those of contracts. On the other hand, obligations created by agreements are called contracts.

A quasi Contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. Duty, and not agreement or promise or

intention, defines it. Thus, in the absence of any agreement, the law creates an obligation so that a person in possession of money or property should return it if in justice and fairness he ought not to retain it. For example, if a sum of money is paid by mistake, by A to B, then B is bound to return the money to A. This obligation or duty of B has certainly not arisen out of a contract, because B never agreed to return the money to A. This obligation is imposed upon B by law because he cannot be allowed to keep the money which belongs to A.


Example: An unconscious patient treated by a doctor at the scene of an accident has not agreed (either expressly or by implication) to pay the doctor for emergency services, but the patient would be unjustly enriched by the doctor’s services were the patient not required to compensate the doctor.


Sections 69 to 72 of the Contract Act deal with the cases which are deemed to be quasi-contracts. The quasi-contracts are as follows;

  1. Necessaries supplied to person incapable of contracting (S. 68).
  2. Suit for money had and received (S. 69 and 72).
  3. Quantum Meruit (S. 70)
  4. Obligations of a finder of goods (S. 71).
  5. Obligations of a person enjoying benefit of non-gratuitous act (S. 70).


  1. Claim for necessaries supplied to a person incapable of contracting: We have seen before that a contract with a minor or a person of unsound mind is void; but his estate is liable to reimburse the person supplying him necessaries of life. Thus, if A supplies B, a minor necessaries suited to B’s conditions in life. A can recover price from B’s property. Or, where A supplies necessaries to the wife and children of B, a lunatic, suited to his condition in life, he is entitled to be reimbursed from B’s property.


  1. Suit for money had and received. The right to file a suit to recover money under this head may arise in the following cases:

(a) Where a person paid money to another person under a mistake of fact or mistake of

law or under coercion, the person so receiving the money must pay it back to the person who paid it by mistake of under coercion. A and B jointly owe Rs.1,000 to C. A pays the amount to C and B, not knowing this fact, also pays Rs. 1,000. C must pay back the amount to B. Again where A is caught travelling without ticket on a tram-car and pays on demand by the inspector Rs.5 as penalty to avoid prosecution, he can recover the amount.

(b) In pursuance of a contract the consideration for which has failed. Thus where A paid premium to B for his apprenticeship with B, and before the relationship had started, B died, the money was recoverable.

(c) Payment to third party of money which another is bound to pay. Where A’s goods are attached in order to realise arrears of government revenue due by B, and A pays the amount to save his goods from being sold, he is entitled to recover the amount from B.

(d) Money obtained by a party from third parties. Thus, A, who is an agent of B obtains secret commission from a third party, can recover this amount from A.


  1. Quantum Meruit. The expression quantum meruit means “as much as earned”. It is used where a person claims a reasonable payment for services rendered by him. A claim under quantum meruit generally arises where services are rendered in pursuance of a contract which provides for a lump sum payment after the promise is fully performed, and the party claiming for the part performance is prevented by the other party from completing it. Thus if A has worked for B in pursuance of a contract which has since been discharged by B’s breach, A may obtain reasonable remuneration for his work by sueing B on a quantum merit. The claim on quantum meruit may also arise where work has been done and accepted under a void contract. Thus, A was employed as a managing director by a company under a written contract.


The contract was void and not binding because the directors who made it were not qualified. A rendered the services and sued for remuneration. He was entitled to recover on a quantum meruit.


A party in default may also sue on a quantum meruit for what he has done if the contract

is divisible and the other party has had the benefit of the part which has been performed. A, the ship-owner failed to carry the full cargo. He was held to be entitled to recover the freight in proportion to the cargo carried. But if the contract is not divisible, the party at fault cannot claim the value of what he has done.


  1. Obligations of a finder of goods. A person who finds goods belonging to another and takes them into his custody is subject to the same responsibility as a bailee. The finder of

goods must take reasonable care of the protection and preservation of the goods. The care must be such as would be taken by a man of ordinary prudence of his own goods. He must not appropriate the goods to his own use and, when the real owner is traced, he must return them to the owner. He is entitled to receive from the true owner all expenses incurred by him for protecting and preserving the goods. He has a lien on the goods for the money so spent and he can refuse to deliver unless he is paid. He may sell the goods if they are perishable.


If they are not perishable, he can sell only if the costs and expenses incurred by him amount to two thirds of the value of the goods. Any balance of the proceeds after deducting the costs and expenses must be paid to the owner. It should be noted that only the true owner can recover possession from the finder. If the true owner is not found, the finder can retain the goods and no other person can claim them from him.


  1. Obligations of a person enjoying benefit of a non-gratuitous act. Where a person lawfully does something for another person, or delivers anything to him, without any intention of doing so gratuitously (i.e., without charge or payment) and the other person enjoys the benefit thereof, the latter is bound to compensate the former or restore to him the thing so delivered. Thus where one of the two joint tenants pays the whole rent to the landlord he is entitled to compensation from his co-tenant. Where a tradesman delivers a bag of wheat by mistake at B’s house instead of at C’s, there is an obligation on the part of B to return the bag of wheat or pay its value. Here the parties never intended to enter into a contract, but the law implies a contract.


Void contracts


Void Agreement and Void Contract

Thus, a void agreement is void from the very beginning i.e., void abinitio, while a void contract was valid at the time when it was made but becomes void later on because of certain reasons

An agreement void ab initio or which becomes void subsequently will have these effects:

(i) The agreement shall be unenforceable.

(ii) Money paid or property transferred is recoverable subject to the condition that both the parties were ignorant about the illegal or void nature of the agreement when it was made.

(iii) Collateral transactions shall not become void unless the agreement has also been illegal.

(iv) All lawful promises shall remain valid in case they are severable and can be enforced.


Voidable contract: “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 is a voidable contract.”


A voidable becomes void when the party whose consent is not free repudiates the contract.

Example: A by misrepresenting certain facts to B, enters into a contract with B .B coming to know of the misrepresentation and repudiates the contract. It becomes void.


A voidable contract, unlike a void contract, is a valid contract. At most, one party to the contract is bound. The unbound party may disaffirm the contract, at which time the contract is void.

For example, depending upon jurisdiction, a minor has the right to disaffirm contracts. Any contract with a minor is thus a voidable contract. If a minor were to enter into a contract with an adult, the adult would be bound by the contract, whereas the minor could choose to avoid performing the contract.


3) A contract becomes void by supervening impossibility or illegality under section 56

Example: A contract to take a cargo for B at a foreign port.A’s government afterwards declares war against the country in which the port was situated. The contract becomes void when war is declared.


Illegal agreement:


An agreement is illegal when it is in contravention of a statutory provision of any law for the time being in force in this country. Parties to an illegal agreement can’t get any help from courts of law. Law does not permit the guilty man to take advantage of his guilt.


An agreement is illegal when it is in contravention of a statutory provision. An illegal agreement is destitute of legal effects abinitio—from the very beginning.

All the transactions collateral to illegal agreements become tainted with illegality and are,

therefore, not enforceable.


For example, if A promises to pay a sum of Rs. 100 to B if he (B) gives a good beating to C. B gives a good beating to C and A, in order to pay B borrows from D a sum of Rs.100. D knows the purpose of borrowing. The agreement between A and B being illegal, the collateral transaction between A and D will be void, D cannot recover his debt of Rs.100 from A. Parties to an unlawful agreement cannot get any help from a Court of law, for courts expect a person to come to them with clean hands. Law does not permit a guilty man to take advantages of his guilt.


Unenforceable contracts : Certain contracts become void because they cannot be enforced due to certain technical defects, i.e., non-observance of legal formalities of writing, registration. etc. These contracts are valid in the eyes of law but since they are incapable of proof, law courts will not enforce them. Many of the contracts, in the absence of writing, are quite good but cannot be enforced in a court of law until the written evidence is furnished. Some of them can be enforced if the technical defect is removed.


































Chapter 8

Breach of contract

Breach of contract is a legal concept in which a binding agreement or bargained-for exchange is not honoured by one or more of the parties to the contract by non-performance or interference with the other party’s performance.

Example: A agrees to supply b on the 1st of February 2006, 1000 bags of sugar. On 1st feb 2006 he fails to make the supply. This is actual breach of contract at the time when the performance is due.


Example: A agrees to employ B as secretary the service to begin from first May. On 20th April, he informs B that his services will not be required. On 21st April, A files a suit for damages. He is entitled to do so even though the date of performance of the contract has not arrived.


Remedies for Breach of contract


Parties to a contract are expected to perform their respective promises. But one of the parties may break the contract by refusing to perform his promise. In that event the parties become connected by a new obligation. One of them has a right of action against the other. When a contract is broken, the injured parties become entitled to any one or more of the following reliefs:

1)   Rescission

2)   Specific performance

3)   Injunction

4)   Suit upon quantum meruit

5)   Damages


A contract may be rescinded by agreement between the parties at any time before it is discharged by performance or in some other way. For example, a contract for the sale of goods can be discharged by mutual agreement between the buyer and the seller at any time before delivery of the goods or the payment of the price.

Recision may also take place in the following manner; where a party to a contract fails to perform his obligations, the other party can rescind the contract without prejudice to his rights to receive compensation for breach of contract is a voidable contracts, one of the parties

Specific performance

Specific performance means the actual carrying out by the parties of their contract. In a proper case the Court will order the party breaking the contract to perform what he has promised to do. Generally speaking, specific performance will be ordered only in cases where monetary compensation is not an adequate remedy, for example, in contracts for the sale of a particular house or of some rare article, e.g., an art piece, money compensation is not enough because the injured party will not be able to get an exact substitute in the market. In such cases, specific performance will be ordered. In the following cases specific performance is not ordered :

(1) Where monetary compensation is an adequate remedy.

(2) Where the contract is of personal nature, e.g., a contract to marry, or a contract of personal services such as painting a picture or working as a secretary.

(3) Where one of the parties is a minor.

(4) Where the contract was not certain, fair or just.




However the doctrine of quantum meruit has the following limitations:

  • In a contract which is not divisible into parts and lump sum of money is promised to be paid for the complete work ,past performance will not entitle the party to claim any payment.

Example: A mate was engaged on the term that he would be paid in a lump sum for a complete voyage. He died before the voyage was completed. it was held his representative cant recover the lumpsum ,neither could they sue for the services rendered.

  • A person who himself is guilty of breach of contract, cannot be allowed to claim anything under the doctrine of quantum meruit.



Damages means monetary compensation payable by the defaulting party to the aggrieved party in the event of a breach of contract. the object f providing damages is to put the aggrieved party in the e same position as before ,so far as money can do ,in which he would he would have been ,had the contract been performed.

Types of damages:

  • ordinary damages
  • special damages
  • exmplenary damage
  • nominal damages


  • ordinary damages


Damages which arise in the ordinary course of events from the breach of contract are called ordinary damages. These damages are constitutes the direct loss suffered by the aggrieved party .they are estimated on the basis of circumstances prevailing in the date of the breach of the contract.

  • special damages

They are those damages which result from the breach of the contract under special circumstances. They constitute the indirect loss suffered by the aggrieved party on account of breach of the contract. They can be recovered only when the special circumstances responsible for the special losses were made known to the other party at the time of making the contract.


  • exmplenary damage

They are quite heavy in amount and are awarded only in two cases:

  1. Breach of a contract to marry.
  2. Dishonour of a customers cheque by the bank without any proper reason.

These damage are awarded with the intention of punishing the defaulted. They are of different nature and their object is to prevent the parties from committing breach.in the case of breach of contract to marry damages will includes compensation for the loss of the feelings and the reputation of the aggrieved party.

In the case of dishonour of cheques damages are awarded taking into consideration the loss to the prestige and goodwill of the customer and the general rule is that the smaller the cheque greater is the amount of damages.


  • nominal damages

These damages are quite small in amount. They are never granted by way of compensation for the loss.in such cases usually the actual loss is very negligible. They are awarded simply to recognize the rights of the party of claim damage s for the breach of the contract.



Where the contract is of negative character (a party has promised not to do something and he does it and there by commits a breach of contract ,the aggrieved party may seek the protection of the court and obtain an injunction forbidding the party from committing the braech.an injunction is an order of the court instructing a person to refrain from doing something which has been the subject matter of a contract ,courts at their discretion may grant a temporary or perpetual injunction  for an indefinite period.


Example: A agreed to sing at B’s theatre and to sing nowhere else for a certain period. afterwards a made a contract with X to sing at his place and refused to sing for B.the court refused to give specific performance and ordered an injunction to restrain a from singing elsewhere.


For example, a film actor agreed to act exclusively for Gemini Film Co., for a year. During the year he contracted to act for Prabhat Studio also. He could be restrained by an injunction from acting for Prabhat Studio.


Suit upon Quantum Meruit:

We have already discussed that the term “quantum meruit, means as much as merited or earned”. A person can, under certain circumstances, claim payment for work done or goods supplied where the contract has terminated by breach of contract by one party or has become void for some reason. Thus, where there is a breach of contract the injured party is entitled to claim reasonable compensation for what he has done under the contract.

A contractor is engaged by B to build a house for him. After a part is constructed, B prevents the contractor from working any more. The contractor is entitled to reasonable

compensation for the work done.



























Chapter 9

Indemnity and guarantee 

Contract of indemnityA contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a ‘contract of indem­nity’.  [Section 124].

Illustration – A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20,000 rupees. This is a contract of indemnity.

A contract to indemnify is also a contingent contract. A contract of indemnity can be either express or implied. An implied contract can be inferred from the conduct or behaviour of the parties. A contract of indemnity should have al the essentials of a general contract,

Contract of guarantee: 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 person who gives the guarantee is called the “surety”;

The person in respect of whose default the guarantee is given is called the “principal debtor”,

And the person to whom the guarantee is given is called the “creditor”.

A guarantee may be either oral or written. [Section 126]. – – [Person giving guarantee is also called as ‘guarantor’. However, Contract Act uses the word ‘surety’ which is same as ‘guarantor’]. Three parties are involved in contract of guarantee. Contract between any two of them is not a ‘contract of guarantee’. It may be contract of indemnity.

Primary liability is of the principal debtor. Liability of surety is secondary and arises when Principal Debtor fails to fulfill his commitments. However, this is so when surety gives guarantee at the request of principal debtor. If the surety gives guarantee on his own, then it will be contract of indemnity. In such case, surety has all primary liabilities.

Consideration for guarantee Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for giving the guarantee. Illustration: B requests A to sell and deliver to him goods on cred­it. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

Illustration: A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient considera­tion for C’s promise.

Illustration: A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agree­ment is void. [section 127].

A guarantee may be express or implied .A guarantee may be either oral or written under section 126.An implied guarantee may be inferred from the course of the conduct of the parties concerned.



Distinction between a Contract of indemnity and Contract of guarantee

Contract of indemnity Contract of guarantee
There are two parties to the contract.(indemnifier and indemnified) There are three parties in guarantee(principal debtor ,creditor and surety)
The liability of the indemnifier to the indemnified is primary and independent. The primary liability is of the PD but the secondary liability is of the surety.
There is only one contract in case of the indemnity. between the indemnifier and indemnified There are three contracts in case of the guarantee. One between the PD and creditor. one between creditor and surety and the last one between surety and PD
The liability of the indemnifier arises only on the happening of some event. There is some existing debt which is guaranteed.
It is not necessary that the indemnifier act on being requested by the indemnified It is necessary that the surety gives the guarantee on the request of the PD

What are the rights of the surety? A surety has the following rights:

1) Against the creditors

2) Against the principal creditors

3) Against co-sureties.

1) Against the creditors:

  1. a) Before the payment of the guaranteed debt:

A surety may after the debt has become due and before he has been called upon to pay require the creditor to sue the principal debtor. However he has to repay all the expense of the suit.

  1. b) Right of set off: on being sued by the creditor for the repayment of guaranteed debt the surety can claim a set off any amount which the debtor has against the creditor.
  2. c) On the payment off guaranteed debt: On the payment off guaranteed debt the creditor will have the right of subrogation and he will assume the role of the creditor to the principal debtor.


2) Against the principal creditors

  1. a) Right to indemnity: in every contract of guarantee there is an implied promise by the principal debtor to repay or indemnify the surety. And the surety can recover from the principal debtor all payments properly made. After the principal debtor pays the guarantee he assumes the role of the creditor.
  2. b) Right to be relieved of the liability: Before the payment has been made the surety can compel the principal debtor to repay the amount and relieve from the liability. But before he can do so the debt should be ascertained.


3) Against co-sureties.

  1. a) Co sureties are liable equally: where there are two or more co suretities for the same debt and the principal debtor makes a default all the cosuretites are equally liable if there is no agreement to the contrary.
  2. b) Release of a co surety: where there are two co sureties, a release by the creditor of one of them does not discharge the others, neither does it free the surety so released from his responsibility to the other sureties.

How a surety is discharged?

Discharge means his liability coming to an end.

A surety is discharged by the followings

1) By revocation

2) By conduct of the creditor

3) By Invalidation of the contract


1) By revocation

  1. a) Revocation by the surety by giving a notice: A specific guarantee can’t be revoked by the surety if the liability is has already accrued. But a continuing guarantee can be revoked by giving a notice.
  2. b) Revocation by death: if the surety dies his guarantee is automatically discharged. His legal heirs are not responsible for his sureties given.


2) By conduct of the creditor

  1. a) Variance in the terms of the contract: A surety is liable for what he has specifically guaranteed. When the terms of the contract are altered without informing him or without his assent he can ask to be discharged from the liability.
  2. b) Release or discharge of the debtor by the principal debtor: the surety is automatically discharged from the liability if the creditor discharges the principal on being paid.

Example: C employs P at one place on surety from S.then P is terminated employs P at a different place taking a bond from another person.S is discharged.


3) By Invalidation of the contract

  1. a) Guarantee obtained by misrepresentation: Any guarantee which was obtained by means of misrepresentation made by the creditor or with his knowledge or assent is invalid. Held that the surety can be discharged.
  2. b) Guarantee on contract that creditor will not act until co surety joins: where a person gives a surety upon a contract that the creditor will not call upon him to pay the liability if another surety does not join and the second surety does not join until the default is made. The guarantee is held not to be valid.






















Chapter 10


Bailment – Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable.

Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, possession of goods is transferred, but property i.e. ownership is not transferred.  A “bailment” is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

The person delivering the goods is called the “bailor”. The person to whom they are delivered is called the “bailee”.

Explanation: If a person already in possession of the goods of another, contracts to hold them as a bailee, he thereby becomes the bailee, and owner becomes the bailor, of such goods, although they may not have been delivered by way of bailment. [Section 148].

Thus, initial possession of goods may be for other purpose, and subsequently, it may be converted into a contract of bailment, e.g. seller of goods will become bailee if goods continue in his possession after sale is complete.

Bailment can be only of ‘goods’.  As per section 2(7) of Sale of Goods Act, ‘goods’ means every kind of movable property other than money and actionable claim.

Thus, keeping money in bank account is not ‘bailment’. Asking a person to look after your house or farm during your absence is not ‘bailment’, as house or farm is not a movable property.

Essentials of bailment:

  1. contract
  2. delivery of possession of movable goods
  3. for some purpose
  4. return of specific goods
  5. Consideration – for example a tailor will return the stiched clothes only if he is paid.

Duties of the bailor

  1. to disclose the  known faults
  2. to receive back the goods
  3. to bear the extraordinary expenses

Duties of the bailee

  1. to take reasonable care of the goods
  2. not to mix his own goods with the goods bailed
  3. not to make any unauthorized use of the goods:
  4. to return the goods

Rights of the bailor

  1. enforcement of the rights
  2. avoidance of the contract
  3. return the goods lent gratuitously

Rights of the bailee

  1. delivery of goods to one of several joint bailors
  2. right to appeal to courts to stop delivery
  3. bailees lien

Rules related to lien: lien means the right of a person to retain possession of goods belonging to another person until a due or debt is paid. Liens are of two types:

    • General lien
    • particular lien

A general lien is the right to retain all the goods belonging to another until all the claims are rightfully satisfied. This lien is normally available to bankers. For example if A has taken a loan from a bank of rupees 10, 00,000 against mortgaging a security but another security belonging to him is also with the bank. The bank can detain both the securities until the whole of the due is repaid.

A particular lien is alien exercisable against particular assets. For example A delivers a rough diamond to B to polish it for a sum of 1000 US DOLLAR. Later he refuses to pay.B can recover the amount from the diamond in his possession. So particular lien is a lien which is exercisable by the bailee only against those goods on which some skill and labour has been expended by him.

Bailment of pledges: Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise. Pledge is bailment for security. Common example is keeping gold with bank/money lender to obtain loan. Since pledge is bailment, all provisions applicable to bailment apply to pledge also. In addition, some specific provisions apply to pledge. The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”. [Section 172].

Example: the producer of a film borrowed a sum of money from a financier and agreed to deliver the final prints of the film when ready to him. Held the agreement is not pledge because there was no actual transfer of possession.

Distinction between bailment and pledge

Contract of bailment Contract of pledge
Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over Pledge is special kind of bailment, where delivery of goods is for purpose of security for payment of a debt or performance of a promise
In case of bailment the bailee may sue for his charges or retain the goods In this case the pawnor may after giving notice sell the goods for the recovery of his dues.
In case of bailment the bailee may use the goods if the agreement so provides. In case of the pledge the pawnor has not got the rights to use the goods pledged



Chapter 11

Contract of Agency

Contract of Agency – Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have opportunity or facility to transact business through others like an agent. The principles of contract of agency are (a) excepting matters of a personal nature, what a person can do himself, he can also do it through agent

Example: a person cannot marry through an agent, as it is a matter of personal nature

(b) A person acting through an agent is acting himself, i.e. act of agent is act of Principal. – – Since agency is a contract, all usual requirements of a valid contract are applicable to agency contract also, except to the extent excluded in the Act.

One important distinction is that as per section 185, no consideration is necessary to create an agency.

Agent and principal definedAn “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].

Who may employ AGENT? Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [Section 183].  Thus, any person competent to contract can appoint an agent.

Who may be an agentAs between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [Section 184].

The significance is that a Principal can appoint a minor or person of unsound mind as agent. In such case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to Principal. Thus, Principal will be liable to third parties for acts done by Agent, but agent will not be responsible to Principal for his (i.e. Agent’s) acts.

Consideration not necessaryNo consideration is necessary to create an agency. [section 185]. Thus, payment of agency commission is not essential to hold appointment of Agent as valid.

Authority of agent – An agent can act on behalf of Principal and can bind the Principal.

Creation of an agency:

Agency can be created by the following activities:

  1. By express agreement: normally the authority given by the principal to his agent is an express authority which enables the agent to bind the principal by acts done within the scope of his authority.
  2. By implied agreement: implied agency arises from the conduct, situation or relationship of parties. For example A and B are brothers .A lives in Delhi while B lives in meerut.A with the knowledge of B lease the property belonging to B. he realize the rent and after deducting the expenses sends all the balance to B.A acts as the agent of B even if he was not expressly appointed as such.
  3. By ratification: A person may not be authorized by the principal to act on his behalf. But if the principal coming to know of any act done by the said person wishes to authorize him it is known as ratification.

For example, A insures B’s good without B’s authority. if B coming to know of it authorizes A then this is valid and A becomes a agent.

Ratification may be express or implied by the person on whose behalf such act was done.

Requisites of valid ratification:

  1. The agent must purport to act as agent for the principal who is in contemplation and is identifiable at the time of the contract.
  2. The principal must be in existence at the time of the contract.
  3. The principal must have the contractual capacity both at the time of the contract and at the time of the ratification.
  4. Ratification must be with full knowledge of facts
  5. It must be given with a reasonable period of time
  6. The which is ratified must not bee illegal
  7. Only the whole transaction will be ratified not partially
  8. It must be communicated to the agent
  9. What the principal cant do himself he cant ratify that
  10. Ratification shall not put any third party to damage.

Limitations to the doctrine of ratification

  1. Ratification cant be made without full knowledge of facts
  2. Partial transaction will not be ratified.
  3. It must be communicated to the agent and any third party otherwise void
  4. Ratification shall not put any third party to damage. if it does it is void
  1. operation of law

Sometimes an agency arises by the operation of law. For example in case of formation of joint stock companies its promoters are its agent’s .A partner is also an agent of the partnership firm as a whole.

Agent’s duty to Principal: An agent has following duties towards principal.

  1. Conducting principal’s business as per his directions
  2. Carry out work with normal skill and diligence
  3. Render proper accounts  [section 213]
  4. Agent’s duty to communicate with principal [section 214]
  5. Not to deal on his own account, in business of agency [section 215].
  6. Agent’s duty to pay sums received for principal  [section 218]
  7. Agent’s duty on termination of agency by principal’s death or insanity – [section 209].

Remuneration to Agent – Consideration is not necessary for creation of agency. However, if there is an agreement, an agent is entitled to get remuneration as per contract.

Rights of Principal –

  1. Recover damages from agent if he disregards directions of Principal
  2. Obtain accounts from Agent * Recover moneys collected by Agent on behalf of Principal
  3. Obtain details of secret profit made by agent and recover it from him
  4. Forfeit remuneration of Agent if he misconducts the business.

Duties of Principal –

  1. Pay remuneration to agent as agreed
  2. Indemnify agent for lawful acts done by him as agent
  3. Indemnify Agent for all acts done by him in good faith
  4. Indemnify agent if he suffers loss due to neglect or lack of skill of Principal.

Termination of Agency

An agency is terminated by the principal revoking his au­thority; or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insol­vent debtors. [Section 201].

In following cases however, an agency cannot be revoked –

  1. Agency coupled with interest (section 202)
  2. Agent has already exercised his authority (section 203)
  3. Agent has incurred personal liability.




















Sale of Goods Act, 1930

Sale of Goods Act is one of very old mercantile law. Sale of Goods is one of the special types of Contract. Initially, this was part of Indian Contract Act itself in chapter VII (sections 76 to 123). Later these sections in Contract Act were deleted, and separate Sale of Goods Act was passed in 1930.

The Sale of Goods Act is complimentary to Contract Act. Basic provisions of Contract Act apply to contract of Sale of Goods also. Basic requirements of contract i.e. offer and acceptance, legally enforceable agreement, mutual consent, parties competent to contract; free consent, lawful object, consideration etc. apply to contract of Sale of Goods also.

Contract of Sale A 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 may be a contract of sale between one part-owner and another. [Section 4(1)].

A contract of sale may be absolute or conditional. [Section 4(2)].

Thus, following are essentials of contract of sale –

  1. It is contract, i.e. all requirements of ‘contract’ must be fulfilled
  2. It is of ‘goods’ * Transfer of movable property is required
  3. Contract is between buyer and seller
  4. Sale should be for ‘price’
  5. A part owner can sale his part to another part-owner
  6. Contract may be absolute or conditional.

How Contract of sale is madeA contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by installments, or that the delivery or payment or both shall be postponed. [Section 5(1)]. Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. [Section 5(2)]. Thus, credit sale is also a ‘sale’.  – – A verbal contract or contract by conduct of parties is valid. e.g. putting goods in basket in super market  or taking food in a hotel.

Two parties to contract – Two parties are required for contract. – – “Buyer” means a person who buys or agrees to buy goods. [Section 2(1)]. “Seller” means a person who sells or agrees to sell goods. [Section 2(13)].  A part owner can sale his part to another part-owner. However, if joint owners distribute property among themselves as per mutual agreement, it is not ‘sale’ as there are no two parties.

Contract of Sale includes agreement to sale – Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereaf­ter to be fulfilled, the contract is called an agreement to sell. [Section 4(3)]

An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred. [Section 4(4)]. The provision that contract of sale includes agreement to sale is only for the purposes of rights and liabilities under Sale of Goods Act and not to determine liability of sales tax, which arises only when actual sale takes place.

Transfer of property – “Property” means the general property in goods, and not merely a special property. [Section 2(11)]. In layman’s terms ‘property’ means ‘ownership’. ‘General Property’ means ‘full ownership’. Thus, transfer of ‘general property’  is required to constitute a sale. If goods are given for hire, lease, hire purchase or pledge, ‘general property’ is not transferred and hence it is not a ‘sale’.

Possession and property – Note that ‘property’ and ‘possession’ are not synonymous. Transfer of possession does not mean transfer of property. e.g. – if goods are handed over to transporter or godown keeper, possession is transferred but ‘property’ remains with owner. Similarly, if goods remain in possession of seller after sale transaction is over, the ‘possession’ is with seller, but ‘property’ is with buyer.

Goods – “Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. [Section 2(7)].

Price – “Price” means the money consideration for a sale of goods. [section 2(10)]. Consideration is required for any contract. However, in case of contract of sale of goods, the consideration should be ‘price’ i.e. money consideration.

Ascertainment of priceThe price in a contract of sale may be fixed by the con­tract or may be left to be fixed in manner thereby agreed or may be determined by the course of dealing between the parties. [Section 9(1)]. Where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. [Section 9(2)].

Conditions and Warranties – there are certain stipulations which are essential for main purpose of the contract of sale of goods. These go the root of contract and non-fulfillment will mean loss of foundation of contract. These are termed as ‘conditions’. Other stipulations, which are not essential, are termed as ‘warranty’. These are collateral to contract of sale of goods. Contract cannot be avoided for breach of warranty, but aggrieved party can claim damages. – – A breach of condition can be treated as breach of warranty, but vice versa is not permissible.

A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty. [section 12(1)]. 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. [Section 12(2)]. A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated. [Section 12(3)]. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the con­tract. A stipulation may be a condition, though called a warranty in the contract. [Section 12(4)].

Where a particular stipulation in contract is a condition or warranty depends on the interpretation of terms of contract.

When condition to be treated as warranty: Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warran­ty and not as a ground for treating the contract as repudiated. [Section 13(1)]. Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the con­tract, express or implied, to that effect. [Section 13(2)]. Nothing in this section shall affect the case of any condition or warranty fulfillment of which is excused by law by reason of impossibility or otherwise. [Section 13(3)].

Time of payment is not essence of contract but time of delivery of goods is, unless specified otherwiseUnless a different intention appears from the terms of the contract, stipulations as to time of payment are not deemed to be of the essence of a contract of sale. Whether any other stipula­tion as to time is of the essence of the contract or not depends on the terms of the contract. [Section 11]. As a general rule, time of payment is not essence of contract, unless there is specific different provision in Contract. In other words, time of payment specified is ‘warranty’. If payment is not made in time, the seller can claim damages but cannot repudiate the contract.

Doctrine of Caveat Emptor – The principle termed as ‘caveat emptor’ means ‘buyer be aware’. Generally, buyer is expected to be careful while purchasing the goods and seller is not liable for any defects in goods sold by him. This principle in basic form is embodied in section 16 that subject to provisions of Sale of Goods Act and any other law, there is no implied condition or warranty as to quality or fitness of goods for any particular purpose. As per section 2(12), “Quality of goods” includes their state or condition.

Therefore when a person buys something he must examine it thoroughly before accepting it .if he makes a bad judgement then he can’t blame the seller for this purpose. He can’t be allowed to repudiate the contract because of his own mistakes.

Example: H bought oats from S a sample of which was shown to him. He erroneously thought that the oats are old. The oats are infact new. Held that H can’t repudiate the sale.

Exceptions to the doctrine of caveat emptor:

  1. fitness of buyers purpose
  2. sale under a patent or trade name
  3. merchantable quality

Transfer of property as between seller and buyer – Transfer of general property is required in a sale. ‘Property’ means legal ownership. It is necessary to decide whether property in goods has transferred to buyer to determine rights and liabilities of buyer and seller. Generally, risk accompanies property in goods i.e. when property in goods passes, risk also passes. If property in goods has already passed on to buyer, seller cannot stop delivery of goods even if in the meanwhile buyer has become insolvent. – – – Where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer unless and until the goods are ascertained. [Section 18].

Property passes when intended to passWhere there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. [Section 19(1)].  For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case. [Section 19(2)]. Unless a different intention appears, the rules contained in sections 20 to 24 are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. [Section 19(3)].

Specific goods in a deliverable stateWhere there is an unconditional contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immate­rial whether the time of payment of the price or the time of delivery of the goods, or both, is postponed. [section 20].

Auction saleAuction sale is special mode of sale. The sale is made in open after making public announcement. Buyers assemble and make offers on the spot. Person offering to pay highest price gets the goods. Usually, auctioneer is appointed to conduct auction. Higher and higher bids are offered and sale is complete when auctioneer accepts a bid. In the case of a sale by auction —

(1) Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale;

(2) The sale is complete when the auctioneer announces its completion by the fall of the hammer or in other customary man­ner; and, until such announcement is made, any bidder may retract his bid;

(3) a right to bid may be reserved expressly by or on behalf of the seller and, where such right is expressly so re­served, but not otherwise, the seller or any one person on his behalf may, subject to the provisions hereinafter contained, bid at the auction;

(4) where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale, or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer;

(5) The sale may be notified to be subject to a reserved or upset price;

(6) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer. [Section 64].

Delivery of goods to buyerThe Act makes elaborate provisions regarding delivery of goods to buyer. It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. [Section 31]. Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller shall be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer shall be ready and willing to pay the price in exchange for possession of the goods. [Section 32]. (Note that this is ‘unless otherwise agreed’, i.e. buyer and seller can agree to different provisions in respect of payment and delivery).

Acceptance of goods by buyer – Contract of Sale is completed not by mere delivery of goods but by acceptance of goods by buyer. ‘Acceptance’ does not mean mere receipt of goods. It means checking the goods to ascertain whether they are as per contract.

Where goods are delivered to the buyer which he has not previously examined, he is not deemed to have accepted them unless and until he has had a reasonable opportunity of examining them for the purpose of ascertaining whether they are in conform­ity with the contract. [Section 41(1)].

Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he is bound, on request, to afford the buyer a reasonable opportunity of examining the goods for the purpose of ascertaining whether they are in conformity with the contract. [Section 41(2)].

Who is an unpaid seller?

A seller of goods is deemed to be an unpaid seller when –

1) The whole of the price has not been paid or

2) A bill or instrument issued to him has been dishonoured

Rights of unpaid seller against the goods – After goods are sold and property is transferred to buyer, the only remedy with seller is to approach Court, if the buyer does not pay. Seller has no right to take forceful possession of goods from buyer, once property in goods is transferred to him. However, the Act gives some rights to seller if his dues are not paid.

  • Right against the goods
  • Rights against the buyer personally
  • Right against the goods

Where the property in the goods has passed to the buyer an unpaid seller has the following rights against the goods.

  1. Right of lien: right of lien is available to the unpaid seller of the goods who is unpaid in possession of them where
  • The goods are sold without any stipulation as to credit
  • Goods are sold on credit and terms a of credit has expired..
  • The buyer has become insolvent

Len is exercisable only if goods are in the possession of the seller. If he loses the goods he loses the right of lien also. Lien can only be exercised for the purpose of recovering the unpaid price and not other charges.

  1. Right of stoppage in transit: the right of stoppage in transit is aright of stopping the goods in transit after the unpaid seller has parted with the possession of the goods. It is available to the unpaid seller only
  2. a) When the buyer becomes insolvent
  3. b) When the goods are in transit.
  4. Right of resale: the unpaid seller can resell the goods
  • Where the goods are of perishable nature
  • Where he gives a due notice to the buyer of his intention to sell the goods and the buyer does not respond within reasonable period of time.
  • If there is a loss on the resell, the difference can be claimed as damage from the buyer personally. The seller is not bound to refund the surplus.
  • Rights against the buyer personally: These rights are
    1. Sue the buyer for the recovery of the price.
    2. Where the property has not passed to the buyer the seller still can sue for recovering the price under a contract which exceeded the due date of payment.
    3. In the absence of anything to contrary the court may award the interest to the seller in a suit by him at such rate as it thinks fit for the period of delay in payment.

Suits for breach of the contractUnpaid seller can exercise his rights to the extent explained above. In addition, seller can exercise following rights in case of breach of contract. Buyer has also rights in case of breach of contract.

Measure for compensation and damages – The Sale of Goods Act does not specify how to measure damages. However, since the Act is complimentary to Contract Act, measure of compensation and damages will be as provided in sections 73 and 74 of Contract Act.

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