THE INDIAN CONTRACT ACT, 1872

Indian Contract Act came into to force on the 1st day of September 1872. It is not an
exhaustive code containing the entire law of contracts. The Indian Contract Act may be
divided into two parts.

Sec. I to 75 Deals with the general principles of the Law of Contract.

Sec. 124 to 238 Deals with the special types of Contracts such as:
a) Contract of Indemnity and Guarantee
b) Contract of Bailment and Pledge
c) Contract of Agency

Definition of Contract:
Sec. 2(h) an agreement enforceable by law is a Contract
Contract: 1. An agreement and
2. The agreement must be enforceable by law
Agreement:
Sec. 2 (e) 'every promise and every set of promises forming consideration for each other, is
an agreement.

Promise:
Sec. 2 (b) 'A proposal when accepted, becomes a promise'
AGREEMENT = Offer + Acceptance
An agreement of purely social or domestic nature is not a contract.

Balfour V Balfour (1919)

Husband & wife were residents of Cylon, where husband was employed. They went to
England on 9 months leave. Wife remained there due to illness, husband returned, promised
to send $ 30 every month till she return. Could not send money. Wife sued for the
allowance. It was held that there was no binding contract. She could not recover, as it was a
social agreement and parties did not intend to create any legal relations.

Essential Elements Of A Contract:

According to Sec. – 10 'All agreements are Contracts if they are made by the free consent of
the parties competent to contract, for a lawful consideration and with a lawful object, and
are not hereby expressly declared to be void'.
All Contracts are agreements, but all agreements need not be contracts.
1. Offer & Acceptance.
2. Intention to create legal Relations.
3. Lawful consideration.

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4. Capacity of parties.
5. Free and genuine consent.
6. Lawful object
7. Agreement not declared void.
8. Certainty and possibility of performance.
9. Legal formalities.

Classification of contracts:
Contracts may be classified into the following three main categories:
1. According to enforceability i.e. legal validity:

(i) Valid contract Sec. 10

(ii) Void agreement Sec.2 (g)
(iii) Void contract Sec.2 (j)
(iv) Voidable contract Sec.2 (1)
(v) Illegal Agreement
(v) Unenforceable contract.

II. According to formation i.e. mode of creation

(l) Express contract Sec.9
(2) Implied contract Sec.9
(3) Quasi contract

III. According to performance

1) Executed contract
(2) Executory contract
(3) Unilateral contract
(4) Bilateral contract

Introductory Lecture
 LAW is a body of rules that are used for regulating the conduct of the Members of
Society, and every society frames these rules according to their needs.
 Today’s society is pluralistic – Hindus/ Christians/ Muslims etc.
 Law was periodically refashioned to meet the problems created by Social conditions.
 Customs Usage ---Legislative Acts ---Precedents became the main sources of law.
 Law & Society are very closely related. Law aims at bringing peace and order in the
society. The purpose of law is the administration of Justice.
 Unless peace is attained and maintained a society cannot survive.

Need For Law:

An individual is confronted, almost daily, with situations that demand certain knowledge of
law.

Ignorantia Juris non excusat .

Ignorance of law is no excuse.

The term 'Law' denotes rules and principles either enforced by an authority or self-imposed
by the Members of Society to control and regulate peoples behaviour with a view to securing
Justice, peaceful life and societal security.
» Whatever is not enforceable is not Law
» Branches of Law - Civil Law
Criminal Law
Constitutional Law
Merchantile Law
Labour Laws

Mercantile Law:
Commercial Law – Business Law is that branch of law, which governs and regulates trade
and commerce. Deals with the rights and obligations arising out of transactions between
mercantile persons. In fact it is a branch of Civil Law.

Scope:
Generally include the laws relating to Contracts, Sales of goods, Partnerships, Companies.
Negotiable Instruments, Insurance, Insolvency, carriage of goods and arbitrations etc.

Source Of Mercantile Law:

1.English Mercantile law:
a) The English Common Law/ Un-written
b) Principles of equity
c) Law Merchant or Lex Mercatoria

2.Precedents (past Judicial Decisions of courts

3.Indian Statue law (Act of Indian Legislation)
4.Local customs and usages.

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INDIAN CONTRACT ACT, 1872
The act lays down general principles relating to formulation, performance and enforceability
of contracts and the rules relating to certain special types of contract such as Indemnity,
Guarantee, Bailment, Pledge and Agency.

Agreement:
Every promise and every set of promises, formulating the consideration for each other is an
agreement. When one person consents to another his proposal, and that other person
assents there to, the proposal is said to be accepted becomes a promise.

Contract
An agreement enforceable by law is a contract .In other words, a contract is an agreement
made with an intention to create a legal obligation i.e. duty enforceable by law.

Offer Or Proposal
When one person signifies to another his willing to do or abstain from doing anything with a
view to obtaining the assent of the other the such act or abstinence, he is said to make
proposal sec. 2(a).

Acceptance
When the person to whom the proposal is made signifies his assent there to the proposal is
said to be accepted (sec. 2(b)). In other words acceptance is manifestation by the offeree of
his assent to the terms of the offer.

Consideration
When at the desire of the promisor, the promise or any other person has done or abstained
from doing, or does or abstains from doing, or promises or do or abstain from doing,
something such acts or abstinence or promise is called consideration for the promise-
sec.2(d).

Consent
Two or more persons are said to consent when they agree upon the same thing at the same
sense.

What is a contract?
A) A contract is an agreement enforceable by law-sec.2 (h).
B) All contracts are agreements but all agreements are not necessarily contracts.
C) Agreements not enforceable by law are not contracts.
D) An agreement is a contract if it is made by a free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and is not expressly
declared void-sec.10.
E) The contract must be definite and its purpose should be to create a legal relationship.
F) A contract creates an obligation i.e., duty to cast upon a person by law. When the
parties to the contract exchange promises, its gives rise to a contractual obligation.

Essential Elements Of Contract

1) Minimum two parties

PROPOSAL

PERSON CALLED PROMISER OR

OFFERER
OFFER
TO WHOM OFFER IS MADE ,, OFFEREE

WHO ACCEPTS ,, ACCEPTOR

1) Offer and acceptance.

2) Intention to create legal obligations.
3) Lawful consideration.
4) Competent parties.
5) Free consent.
6) Lawful object.
7) Not expressly declared void.
8) Certainty and possibility of performance.
9) Legal formalities.

Kinds Of Contract

a) Express contract
b) Implied contract.
c) Contingent contract.
d) Quasi contract.
e) Executed contract.
f) Executory contract.
g) Contracts for executed consideration.
h) Valid contracts.
i) Voidable contracts.
j) Void contracts.
k) Unenforceable contracts.
l) Illegal agreements.

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OFFER AND ACCEPTANCE

Offer:
A person is said to have made the proposal when he signifies to another his willingness
to do or to abstain from doing anything with a view to obtaining the assent of that offer
to such act or abstinence Sec.2 (a).

Kinds of offer:
a) Express or Implied
b) Specific or General

Essentials of an Offer:
1. Intentions to create legal obligations.
2. Certainty.
3. To do something or abstain from doing something.
4. An offer must be communicated.
5. An offer must not be ‘negative’ in terms.

Rules relating to offer:

1. An invitation to offer is not an offer.
2. Two identical cross offers do not make a contract.
3. Special terms in an offer.

Lapse of offer:
a) By efflux of time.
b) By wrong mode of acceptance.
c) By rejection.
d) By counter offer or conditional acceptance.
e) By death or insanity of any of the parties.
f) By subsequent illegality or destruction of subject matter.
g) By revocation.

Acceptance:
An acceptance is the act of manifestation by the offeree of his assent to the terms of the
offer. It signifies the offeree’s willingness to be bound by the terms of the proposal
communicated to him. To be valid an acceptance must correspond exactly with the
terms of the offer, it must be unconditional and absolute and it must be communicated
to the offeror. It can be Express or Implied.

Essentials of Valid Acceptance:

1. To be made by the offeree.
2. Communicated to the offeror.
3. After receiving the offer.
4. Before the offer lapse.
5. Mode of communication.
6. Absolute and unqualified.
7. Once rejected it cannot be accepted again unless renewed by the
offeror.
CONSIDERATION

Consideration is one of the essentials elements of a valid contract. It is the price for
which the promise of the other is bought. A contract is basically bargain between two
parties, each receiving something of value or benefit to them. This something is
prescribed in law as consideration. For instance, in a contract of sale of goods, the price
paid for the goods sold. Consideration may be in the form of money, services rendered,
goods exchanged or a sacrifice, which is of value to the other party.

Essential Elements:

1. At the desire of the promisor.

2. Consideration may move from the promisee or any other person.
3. Consideration must be an act, abstinence or promise.
4. Consideration may be past, present or future.
5. Consideration need not be adequate.
6. Consideration must be real and competent.
7. Consideration must be legal.

Consideration when not necessary:

1. Agreement made on account of love and affection.
2. Compensation for past voluntary service.
3. Promised to pay a time barred debt.
4. Gifts.
5. Agency.

Legality of Consideration And Object:

The consideration and objective of a contract must be lawful (Sec. 10. if the
consideration or the object of an agreement is unlawful or opposed to public policy, the
agreement shall be void (sec-23).

a) Forbidden by law
b) Defeats the provisions of law
c) Fraudulent
d) Injurious to person or property of another
e) Immoral agreements
f) Agreements opposed to public policy

The following heads of public policy have been recognized by various courts:
a) Trading with an enemy
b) Trafficking in public offices
c) Interference with the course of justice
d) Stifling prosecution maintenance and champerty
e) Marriage brokerage contracts
f) Unfair and unreasonable dealings
g) Creating interest against public duty

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Agreements where consideration or object is n unlawful in part:
According to section 24, if any part of a single consideration for one or more objects, or
any part of any one of several considerations for a single object is unlawful, the
agreement is void.

Section24 is in effect, an extension of the principle of illegality laid down by section23.

Where the object or consideration is illegal in part and is not sever able from the rest,
the agreement is void as a whole.

CAPACITY TO CONTRACT

According to Sec-10, the parties who enter into a contract must have the capacity to do
so, that is, the parties must be competent to enter into a valid contract.

Further, as per section 11, every person is competent to contract who is of the age of
majority, and who is of sound mind and is not disqualified from contracting by any law to
which he is subject.

Contract with minor:

• Who is a minor
• Minor’s agreement to be void Ab-initio
• Contracts beneficial to minor
• No Ratification
• Doctrine of restitution
• Minor not estopped from pleading minority
• Minor’s liability for necessaries
• Contract of apprenticeship
• Minor partner
• Minor’s liability in Torts

Contract with a Person of Unsound Mind

A person is said to be sound mind for the purpose of making a contract if, at any time
when he makes it he is capable of understanding it and of forming a rational Judgment
as to its effects upon his introits (S-12). A contract with a person of unsound mind
(including a lunatic or a person in drunken state or a person delirious from fever) is
absolutely void.

Contract with an Insolvent

A person may rightfully enter into contract even after the insolvency proceedings
against him have commenced but before adjudication

Contract with Corporations

A corporation is an artificial person created by Law, having a separate legal entity. For
instance, a company incorporated under the companies Act is a Juristic person, capable
of entering into contracts of all sorts however, subject to the limitations laid down in the
‘objects’ clause of Memorandum of Association.

FREE CONSENT

Two or more persons are said to have given their consent when they agree to the same
thing in the same sense. Consent is said to be free when it is not vitiated by coercion,
undue influence, fraud, misrepresentation or mistake.

Coercion:
Means committing or threatening to commit some act is contrary to law. Consent is said
to be obtained by coercion when pressure is exerted by either of the following
techniques
A) Committing or threatening to commit any act forbidden by the IPC, OR
B) Unlawful detaining or threatening to detain any property to the prejudice
of the party whose consent being so obtained (Sec – 15).

Under Influence:
Consent of a person is said to be induced by undue influence, when:
a) The parties to a contract are so related that one party is in a position to dominate
the will of the other; and
b) When such position is used by the former party to obtain an unfair advantage
over the other party – Sec. 16 (1).
A person is deemed to be in dominating position over the other in the following cases
Sec – 16 (2):
• Real or apparent authority
• Fiduciary Relationship
• Mental Incapacity
• Presumption of under influence
• Effect of under influence

Fraud:
Broadly speaking, fraud is intentional mis-representation of facts. A fraud is said to have
been committed when any of the following acts are done by a party to a contract, with
intention to decline the other party or to induce him to enter in to the contract or
a) Suggesting, as a fact, something, which is not true by a person who does not
believe it to be true.
b) Actively concealing a fact by one who has knowledge or belief of the fact
c) Any such act or omission as the law specifically declares to be fraudulent.

• Silence when amounts to fraud

• Effect of fraud
• Limitation to the right of Rescission Termination.

Misrepresentation:
It is an untrue statement of a material fact, which includes the other party, to enter into
an agreement. Misrepresentation may be of the following types
a) Unwarranted Assertions

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 b) Breach of duty
c) Inducing mistake about subject matter.

Mistake:
Where both parties to an agreement are under a mistake as to a matter of fact essential
to the agreement, the agreement is void
• Mistake of Law
• Mistake of Fact
o Mistake as to Identity
o Mistake as to subject matter
• Mistake as to mature and content of the promise

LEGALITY OF OBJECT AND CONSIDERATION

The object and the consideration of an agreement t must be lawful; otherwise, the
agreement is void. The object of an agreement is unlawful in the following cases:

a) If it id for-bidden by law
b) If it defeats the provisions of any law
c) If it is fraudulent
d) If it involves or implies injury to a person or property or another
e) If the court regards it is immoral or opposed to public policy.

Meaning Of Illegal Agreements:

Illegal agreements are those agreements, which are:
a) Void ab-initio i.e. void from the very beginning, and
b) Punishable by the criminal law of the country or by any special legislation /
regulation.

Effects of Illegal Agreements:

a) The collateral transaction to an illegal agreement also become illegal and hence
cannot be enforced.
b) No action can be taken for recovery of money paid or property transferred under
an illegal agreement t and for the breach of an illegal agreement.
c) In case of an agreement containing the promise, some part of which is legal and
other part illegal, the legal position is as under.

CASE PROVISION
If the illegal part cannot be The whole agreement is altogether illegal
separated from the legal part.

If the illegal part can be separated The court will enforce the legal part and
from the legal part reject the illegal part
Void Agreements If Consideration or Objects Unlawful In Part
According to sec 24, if one of the several consideration or objects of an agreement is
unlawful, the agreement is void.

Agreement Opposed To Public Policy

a) Agreement of trading with Enemy.
b) Agreement for stifling prosecution
c) Agreement in nature of maintenance and champerty.
d) Agreement for sale/transfer of public offices and titles.
e) Agreement in restraint of personal rights.
f) Agreement in restraint of personal liberty
g) Agreement tending to create monopoly
h) Agreement interfering with courses of Justice
i) Marriage brokerage Contracts
j) Agreement in restraint of marriage (Sec-26)
k) Agreement in restraint of trade.
l) Agreement in restraint of legal proceeding.

CONTINGENT CONTRACT

Meaning:
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 Sec-31

Essential features:
a) Dependence on a future event.
b) Collateral event.
c) Un-certain event.

Rules regarding contingent contracts:

KINDS OF CONTIGENT CONTRACT RULES REGARDING ENFORCEMENT

1) Contracts contingent upon the Such contracts cannot be enforced by law
happening of an uncertain future event unless and until that event has happened. If
(Sec-32) the event becomes impossible, such
contracts become void.

2) Contracts contingent upon the non- Such contracts can be enforced when the
happening of a certain future event happening of that event becomes
(Sec-33) impossible and not before.

If the uncertain event is the future conduct

3) Contracts contingent upon the future of a living person, such event shall be
conduct of a living person (Sec-34) considered impossible if that such person
does anything by which it becomes
impossible to perform the contract with in
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 any definite time.

4) Contracts contingent upon the Such contracts become void if before the
happening of an uncertain specified expiry of fixed time-
event within a fixed time (Sec-35) a) Such event does not happen, or
b) Such event becomes impossible

5) Contracts contingent upon the non- Such contracts can be enforced by law if
happening of an uncertain specified before the expiry of fixed time.
event within a fixed time (Sec-35) a) Such event does not happen, or
b) It becomes certain that such event
will not happen.

6) Agreements: Contingent upon Such agreements are void whether the

impossible events (Sec-36) impossibility of the event is known or not to
the parties to the agreement at the time
when it is made.

PERFORMANCE OF A CONTRACT

The parties to a contract must either perform or offer to perform their respective
promises, unless such performance is dispensed with or excused under the provisions
of this Act, or of any other law (Sec-3)

Types of performance:
There may be two types of performance as follows:
a) Actual performance: Where promissor has made an offer of
performance and the offer has been accepted by the promisee, it is
called an actual performance.
b) Attempted performance (or tender): where a promissory has
made an offer of performance to the promisee and the offer has not
been accepted by the promisee, it is called attempted performance.
Sec-38

Effects of tender:
There are two effects of tender as under:
a) The promisser is not responsible for non-performance
b) The promissory dos not loose his rights under the contract.

Types of tender:
There can be two types of tender as follows:
Essentials of a Valid Tender

Unconditional At At proper Reasonability To Of exact For Whole

proper place for opportunity proper amount Obligation
time to promisee Person and in
 LEGAL REPRESENTATIVE THIRD PARTY

legal
tender

a) Unconditional: It must be unconditional-tender is said to be unconditional when it

is made in accordance with the terms of the contract.
b) At Proper Time: It must be at proper time, i.e. at the stipulated time (if there is an
agreement as to time) or during business hours (if there is no agreement as to time).
Tender of goods or money before the due date is also not a valid tender.
c) At Proper Place: It must be at proper place, i.e. at the stipulated place (if there is an
agreement as to place) or a promisee’s business place (if there is business) or at
promisee’s residence (if there is no business place).
d) Reasonable Oppurtunity To Promisee: It must give a reasonable opportunity to
the promisee of ascertaining that the goods offered are the same as the promisor is
bound to deliver.
e) For Whole Obligation: It must be for the whole obligation and not for a apart of the
whole obligation. However, a minor deviation from the terms of the contract
may not render the tender invalid.
f) To Proper Person: It must be made to the promisee or his authorized agent.
TYPES OF TENDER MEANING EFFECT

I. Tender of goods or Where the promisor a) Goods or services need not

services offers to deliver the be offered again.
goods or services but the b) Promisor may sue the
promisee refuses to promisee for non-performance
accept the delivery. c) Promisor discharged from
his liability.

II. Tender of money Where the promisor a) Promisor is not discharged

offers o pay the amount from his liability to pay the
but thee promisee amount
refuses to accept the b) Promisor will not be liable for
same interest from the date of a valid
tender
g) Of Exact Amount And In Legal Tender: In case tender of money, it must be of
exact amount and in legal tender.
h) Effect of refusal of party to perform promise wholly:

Party to a contract has refused to perform or disabled himself from performing his
promise in its entirety; the promisee may put an end to the contract, unless he has
signified, by words or conduct, his acquiescence in its continuance.

PERSONS WHO CAN DEMAND PERFORMANCE

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ROMISOR PROMISOR’S AGENT
LEGAL REPRESENTATIVETHIRD PARTYJOINT PROMISSORS

PERSONS WHO MUST PERFORM

Time & place of performance sec. -46 to 50:

The various rules regarding the time and place of performance are given below:

CASE RULE

I. Where the time of performance is The contract must be performed in

not specified in the contract (promisor reasonable time. The question 'What is
undertake to perform without reasonable time' is a question of fact (sec-
application by the promisee)
46)
II. Where the time s specified in the The promise must perform his promise n
contract. (promisor undertake to that particular day during the usual hours of
perform without application by the business and at a place where the promise
promisee)
ought to be performed (sec-47)
III. Where the time of performance is The promisee must apply for performance
specified in a contract and the at a proper place and within usual hours of
promisor has not undertaken to business (sec-48)
perform it without application by the
promisee.
IV. Where the place of performance is The promisor must apply to the promisee to
not specified in a contract and the appoint a reasonable place for the
promise is to be performed without performance and to perform the promise at
application by the promisee.
such place (sec-49)
V. Where the promisee prescribes the The promise must be performed in the
manner or time of performance. manner and at the time prescribed by the
promisee (sec-50)

Time as the Essence of Contract:

Time is the essence of a contract means that it is essential for the parties to a contract
to perform their respective promises within the specified time.
Cases where time is considered to be essence of contract:
In the following cases, time is usually considered to be the essence of contract:
a) Where the parties have expressly agreed to treat the time as the essence of the
contract.
b) Where the non-performance at the specified time operates as an injury to the party.
c) Where the nature and necessity of the contract within the specified time.

Presumption As To Time As Essence Of Contract

IN COMMERCIAL OR MERCHANTILE IN NON-COMMERCIAL OR NON-MERCHANTILE

CONTRACTS CONTRACTS

(a) Time fixed for a delivery of goods is
considered to be the essence of a
contract
(b) Time fixed for the payment of the
price is not considered to be the essence
of a contract
Usually, the presumption is that time is not
the essence of a contract.
For example, n case of the sale of an
immovable property, time is presumed to be
not the essence of a contact.

Consequences Of Non-Prformanceor Contract Within Specified Time (Sec-55)

WHEN TIME IS ESSENCE OF A CONTRACT WHEN TIME IS NOT ESSENCE OF A CONTRACT

a) The contract becomes voidable at the a) The contract does not become voidable at
option of the promisee the option of the promisee
b) If performance beyond the specified is b) The promisee is entitled to claim
accepted, he promisee cannot claim compensation for any loss occasioned to him
compensation for any loss occasioned by non-performance of the promise at the
by the non-performance of the
agreed time.
promisee at the agreed time unless at
the time of such acceptance he gives
notice to the promiser of his intention
to do so

Reciprocal promises:
Promises, which form the consideration or part of the consideration for each other, are
called 'reciprocal promises'

Types:
a) Mutual and independent
b) Mutual and Dependent
c) Mutual and concurrent

Rules:
a) Regarding simultaneous performance (Sec.-51)
b) Regarding order of performance (Sec.-52)
c) Effects of preventing the performance (Sec.-53)
d) Effects of non-performance in case of Mutual and Dependent Reciprocal
promises (Sec.-54)
e) Effects of promise to do legal and legal things (Sec.-57)

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f) Effects of alternative promise being illegal (Sec.-58)

Assignment of contracts:
Assignment of contract means transfer of contractual rights and liabilities to a third party.

Mode:
a) Assignment by act of parties
b) Assignment by operation of law

Appropriation of payment (sec.-59 to 61):

Appropriation of payment means application of payment to a particular debt.

Rules:

CASE RULE

I. Where debt to be discharged The payment, if accepted must be

is indicated i.e. where a applied accordingly.
debtor who owes several
distinct debts to one creditor
either with express
intimation or under
circumstances implying that
the payment is to be applied The creditor has option to apply the
to the discharge of some payment to any lawful debt due from
particular debt. the debtor even if it is a time barred
II. Where the debt to be debt. But he cannot apply to a
discharged is not indicated, disputed debt.
i.e. where the debtor does
not intimate and there are no The payment shall be applied in
circumstances indicating to discharge of the debts in order of time
which debt the payment is to whether or not they are time barred.
be applied.
If the debts are of equal standing, the
III. Where neither party makes
any appropriation payment shall be applied in discharge
of each proportionately.

Rule in clayton’s case:

This rule applies where parties have a running account between them.
According to this rule, in the absence of any contrary, an item of receipt side
must be apportioned against the items of payment side in order of date.
 At The Due Date of Performance
During the Performance
By Express Reputation
Same
Actual By Implied
Anticipatory
Identity Reputation
Actual
ByNovation
Performance MODES
Performance Recession OF
Tender DISCHARGE
Alteration By RemissionOFof CONTRACT
Impossibility Waiver
By Lapse
Performance of Time By Breach
Death Insolvency Mutual Alteration
By Mutual Agreement By Operation of Law
Initial Impossibility
Subsequent Impossibility

DISCHARGE OF A CONTRACT:
Discharge of a contract means discontinuation of the contractual relations between the
parties to a contract. A contact said to be discharged when the rights and obligations of the
Destructionparties under
of subject
Death
matterthe contract
or personal come toofan
incapacity
Declaration end. of
war
Change Cessation
law of a State of Things

QUASI CONTRACT
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Quasi contract are those transactions, which do not actually form contracts between the
parties in the legal sense, but only create certain legal rights and obligations similar to those
created by a contract.

Following transactions, are recognized as ‘quasi-contracts’ under the law.

a) Where necessaries are supplied to a person, who is incompetent to contract (e.g. A

minor or Lunatic) or to someone whom he is legally bound to support, the supplier is
entitled to recover the price from the property of the incompetent person.

b) When a person makes payment of money due by another, in payment of which he is

invested he shall be entitled to be reimbursed by the other.

c) When a person does something to him, not intending to do gratuitously and such other
person enjoys the benefit there of, the latter is obliged to compensate the former in
respect of, or to restore, the thing so done or delivered.

d) A person, who finds goods belonging to another and takes them into this custody, has
the same obligations as that of a bailee.

e) A person to whom money is paid or anything delivered, by mistake or under coersion,

shall be liable to repay or return it.

Compensation for Failure to Discharge Obligations Created By Quasi-Contracts:

Section 73 provides in this regard that “when an obligation resembling those created by
contract has been incurred and has not been discharged, any person injured by the failure to
discharge it, is entitled to receive the same compensation from the party in default, as if
such person had contracted to discharge it, and has broken his contract.”

So according to this section the person failing to discharge a quasi-contractual obligation is

liable to pay some compensation to the other party as is payable in case of breach of
contract. So a person is bound to discharge obligations created by a quasi-contract.

CONTRACT OF INDEMNITY
A contract by which one party promises to save the other from, loss caused to him by the
conduct of any other promisor is called a contract of Indemnity (S – 124). In simple words, a
contract of Indemnity is a contract in which one person promises to protect or compensate
the other for the loss suffered by him due to conduct of the promisor or any other person.
The person who promises to compensate is the Indemnifier and the person who is protected
against loss is known as Indemnity Holder or Indemnified.

Essentials of a contract of indemnity:

A valid contract of Indemnity should fulfill the following conditions:
1. There must be two parties – Indemnifier
and Indemnified.
2. Contract of Indemnity being a species of
contract must have all essentials of a
valid contract like free consent,
competence of parties, consideration
etc.
3. There must be a promise to save the
other party from some loss.
4. The loss may be due to the promisor
himself or any other person.
5. The contract of Indemnity may be
express of implied.

Commencement of the indemnifiers liability:

In the Indian contract Act there is no provision regarding the time of commencement of
Indemnifiers liability under the contract of Indemnity. So, we have to look for the answer in
the observations of courts in various judicial decisions.

Rights of indemnity holder when sued (sec. –125)

The Indemnity Holder is entitled to recover from the Indemnifier the following provided he
has not acted outside the scope of his authority.
1. All damages which the indemnity Holder was compelled to pay in any such suit in
respect of any matter to which the promise to Indemnify applies.
2. All costs which the Indemnity holder may be compelled to pay in any such suit.
3. All sums, which he may have paid under the terms of any compromise of any, such
suit.

Rights of Indemnifier:
There is no provision in the contract Act about Indemnifier’s rights. However, by reading
Sec. – 141, which deals with rights of surety one, conclude that rights of an Indemnifier are
the same as those of the Surety.

By death of surety:
Section 131 provides in this regard ‘the death of the surety operates in the absence of a
contract to the contrary, as a revocation of a continuing guarantee, so far as regards future
transactions’. Guarantee is automatically revoked on surety’s death and no notice of death
is required to be given to the creditor. But for the transactions already entered into the
estate of the surety is liable.

Nature and extent of surety’s liability:

1. Co-extensive: Surety is liable for the whole of the amount for which the principal
debtor is liable and no more contracts to the contrary.
2. Surety’s right to limit his liability: Although the liability of the surety is co-
extensive with that of principal debtor, he may limit his liability. He may expressly
declare his guarantee to be limited to a fixed amount.
3. Surety’s liability arises immediately on default of the principle debtor:
Surety cannot be called upon to pay unless the principal debtor has committed the
default.
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 4. Surety’s liability where the original contract between creditor and principal
debtor is void or voidable: The contract between the surety and the creditor is an
independent contract and not a collateral one, and it is not that surety is liable. Thus
where the original contract between the creditor and the principal debtor is void (e.g.
Where principal debtor is minor) the surety will be liable as if he is the principal
debtor. Similarly where the contract between the creditor and the principal debtor is
voidable, the surety may not be discharged from liability.
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” (S – 126). There is a contract to perform the promise of
another person of another person or discharge his liability in case of his default.

In a contract of guarantee there are three parties.

1. Surety – The person who gives the guarantee is called surety (S-126).

2. Principal Debtor – The party in respect of whose default the guarantee is given (S-
126).

3. Creditor – The person to whom the guarantee is given is called creditor (S-126).

Requisites of a valid guarantee:

1. Requirements of a valid contract – The essentials of a valid contract must be

present to make the contract of guarantee enforceable by law.
2. The contract must be supported by consideration – However, the Law
presumes that consideration received by the principal Debtor is sufficient
consideration for surety. There need not be direct consideration between the surety
and creditor.
3. There must be some one primarily liable – There must be some one liable as a
principal debtor and the surety undertakes to be liable on his default. If that liability
does not exist, there cannot be a contract of guarantee. But a guarantee given for
the Minor’s debt is an exception to this rule.
4. There should be no misrepresentation - A surety ought to be acquired with the
whole contract entered into with his principal. Sec. 142 and 143 declare the
guarantee obtained by means of a misrepresentation or concealment of material
facts by the creditor as invalid.
5. Writing not necessary – A contract of guarantee may be oral in writing (S-126).
6. Concurrence – A contract of guarantee requires concurrence of all the three parties
to it, i.e. the principal debtor, the creditor, and the surety. The surety comes into
picture at the request of the principal debtor.

Kinds of Guarantee:

1. Retrospective and Prospective – A retrospective is one, which is for an existing

debt, where a prospective guarantee is for a future debt.
2. Specific and continuing – Continuing guarantee extends to a series of
transactions. The liability of surety in this case extends to a number of transactions
and he becomes liable for the unpaid balance at the end of guarantee.

Whether a guarantee is continuing or not depends upon the language of guarantee and
the surrounding circumstances.

Revocation of a Continuing Guarantee:

The revocation of guarantee means the cancellation of the guarantee. On revocation the
liability of surety cones to an end. A continuing guarantee may be revoked in any one of the
following ways:
 1. By notice of revocation: A surety may revoke the continuing guarantee by giving
notice of revocation to the creditor. Section 130 of the contract Act provides.
2. A continuing guarantee may at any time be revoked by surety, as to future
transactions, by notice to the creditor. However, surety remains liable for
transactions already entered into before revocation.

Void Contract Of Guarantee:

A contract of guarantee is not enforceable in a court of law in the following cases:
1. If the contract of guarantee does not fulfill the conditions of a valid contract. (Illegal
object, no free consent etc.)
2. If the guarantee is obtained by misrepresentation (S-142)
If creditor makes misrepresentation of a material fact, the guarantee is invalid.

Difference between Indemnity and Guarantee:

1. Parties
2. Number of contracts
3. Nature of liability
4. Purpose of contract
5. Request
6. Existing liability
7. Interest in transaction
8. Right to sue third parties

Rights of surety:
a) Right of surety against principal debtor
1. Right to be subrogated (S – 140) subrogation implies the substitution of one person
for another.
2. Right to Indemnity (S – 145)

b) Right of surety against the creditor

1. Right to claim securities (S – 141)
2. Right of set-off
3. Right to share reduction.

c) Right of surety against Co-sureties

1. Right of contribution
2. Co-sureties bound in different sums.
3. Right of share benefits of security
4. Effect of release of surety (S – 138)

Discharge of Surety:
A surety is said to be discharged from liability when his liability comes to an end. This may
happen in various ways, either by the action of the surety himself or by creditor or by
principal debtor or by both or by operation of law.
1. By revocation S – 130
2. By death of surety S – 131
3. By variation in terms of contract (S – 133)
4. By release or discharge of the principal debtor (S – 134)
5. By composition with the principal surety’s remedy (S – 139)
6. By loss of security (S – 141)

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BAILMENT AND PLEDGE
BAILMENT:

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 disposed of
according of accounting to the directions of the person delivering them.

The person delivering the goods is called the “bailor” and the person to whom the goods are
delivered is called “bailee” Sec – 148.

Example:
1. Delivering a watch for repair.
2. Leave car/scooter at parking stand.
3. Leaving luggage in clock room.
4. Delivering gold to goldsmith for making ornaments.
5. Leaving garments with a dry cleaner.

Essentials of Bailment:
1. A contract of bailment requires two parties, bailor and the bailee.
2. A bailment involves delivery of possession of the goods from bailor to bailee
‘possession’ here must be distinguished from mere ‘custody’.
3. The delivery of goods should be made for some purpose, and under a contract of
bailment, when the goods go into, or remain in the possession of a person without
any contract of bailment the holder of goods can not be held liable as the bailee.
4. Bailment is always subject to the condition that when the purpose is accomplished
the goods will be returned to the bailor or disposed of according to his directions. If
this condition is absent, the contract is not of bailment.

Bailment, Sale and Hire Purchase:

A bailment differs from a sale in the sense that in the latter what is transferred is not mere
possession, but also ownership and therefore the buyer is under no obligation to return.
However, a hire-purchase agreement is a bailment with an option to sale. The hire-purchaser
is in the position of bailee, till he purchases the goods by paying the last installment.

Duty of Bailor:
It is the primary duty of the bailor to disclose, to the bailee, the defaults of defects; in the
goods bailed of which the bailor has knowledge and which might interfere with their use or
expose the bailee to extraordinary risks. If the bailor fails to disclose the defect and the
bailee suffers any loss due to such non-disclosure, the bailor must compensate the bailee.
Where the goods are bailed for hire, the bailor is responsible for any damage caused to the
bailee from the goods, whether or not he was aware of the goods bailed (Sec – 150). The
bailor must examine the goods and remove such defects as reasonable examination would
have disclosed. However, the bailor cannot be held liable for latent defects, whether
discoverable or not.

Duties of Bailee:
1. Reasonable care.
2. Not to make unauthorized use.
3. Not to mix the goods.
4. To return the goods.
5. To return increase.
6. Not to set up an adverse title.

Rights of Bailee:
1. The bailee has a ‘right to claim compensation from the bailor’ S – 164.
 2. Right to be compensated for expenses incurred S – 158.
3. Right of lien over the goods S – 170.
4. Bankers, factors, war fingers, attorney’s of a High Court and policy brokers have a
right to ‘General lien.’
5. Bailee has a right to stop delivery of goods to other than the bailor even under court
order.
6. The bailee is entitled to sue a wrong-doer/third party for damages or compensation.
The amount of damages or compensation will be divided between bailor and bailee
according to their respective interests S- 180, 181.

Rights of Finder of Goods: A finder of lost goods is in the position of bailee and is, a such,
bound to exercise reasonable care with regard to the goods. But he has no right to sue the
owner for compensation fro the trouble and expense voluntarily incurred by him to preserve
the goods and to find the owner. However, a finder has the following rights:

1. To retain the goods against the owner till he receives compensation for trouble and
expense.
2. To sue the owner, where the owner has offered a specific reward for the finder of lost
goods, for such reward and to retain the goods till he receives it Sec – 168.
3. To sell the goods when the owner cannot be found or if he refuses to pay the lawful
charges of the finder, in either of the following cases:
(a) When the goods are perishing; or
(b) When the lawful charges of the finder amount to two-third of the value of
goods S – 169.

Rights Of Bailor: The bailor has a right to terminate the contract of bailment if the bailee
does any act with regard to the goods, inconsistent with the conditions of bailment S – 153.

Termination Of Bailment:
A contract of bailment normally terminates with the return of goods by the bailee to the
bailor or as per his directions and settlement of their mutual rights. Further a contract of
bailment is terminated by the death either of the bailor or of the bailee.

Pledge: A ‘pledge’ is a bailment of goods where in the goods are delivered as a security for
payment of debt or performance of a promise. The bailor is called the ‘pledger’ or ‘pawnor’
and the bailee is called the ‘pledge’ or ‘pawnee.’ A pledge can be of movables and usually
consists of goods capable of actual or constructive delivery.

Rights of Pledge/Pawnee:
1. Right to retain the goods
2. Right to extraordinary expenses
3. Right to sue
4. Right to sell

Rights of Pledger:
(a) A pledgor has the right to recover the goods on payment of the debt or
performance of the promise.
(b) Where pledgor has defaulted in making of the debt, he may redeem the goods
pledged at any subsequent time before their sale.
(c) Pledgor has the right to recover any increase or accreditation period to the
goods occurred during the period of pledge.

Pledge by Mercantile Agent:

A ‘mercantile agent’ is an agent having the authority either to sell goods, or to consign
goods for the purpose of sale, or to buy goods, for the purpose of sale, or to buy goods or to
raise money on the security of goods. Pledge made by a mercantile agent, shall be valid,
provided the pledgee acts in good faith and has no notice of the fact that the agent has no
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notice of the fact that the agent has no authority to pledge. Sec – 178.

AGENCY
An ‘agent’ is person employed to do any act or to represent another in dealings with the
third persons. The person who employs the agent and for whom such act is done, or who is
so represented, is called the “Principal”.

The essence of a contract of agency is the agent’s representative capacity coupled with
power to affect the legal relations of the principal with third persons. It is this, which
distinguishes the relationship between an agent and principal from the relationship between
a master and a servant. It is only when a person acts as a representative of the other in the
creation, modification or termination of contractual obligations between that other and third
persons, that he is an agent.

KINDS OF AGENTS

1. MERCANTILE AGENT(ABCDF)
• Factor
• Broker
• Auctioneer
• Delcredere agent
• Commission agent

2. Non-mercantile agents - agents who represent their principals, in transactions other

than those of sale or purchase of goods, are non-mercantile agent.

E.g.-Directors, company secretaries, & professional advisers

Appointment:
The appointment of an agent may be either express or implied.

An ‘implied agency’ is created by following modes.

• By Estoppel or holding out

• By necessity
• By ratification

 Agents authority
 Actual authority
 Apparent or ostensible authority
 Agent exceeding his authority
 Delegation of agents authority
 Effects of delegation
 Substituted agent
Duties of Agent:

• To follow instructions or customs

• To excise reasonable skill and diligence
• To render proper accounts
• To communicate in emergency
• To avoid conflict of interest
• Not to make secret profits
• To remit sums
 • Not to delegate his authority

PARTNERSHIP
(The Indian partnership Act 1932)

‘Partnership’ is the relation between persons who have agreed to share the profits of a
business carried on by all, or any of them acting for all (Sec-4)

‘Partners’ ‘Firm’ and ‘Firm name’ –persons who have entered into partnership with one
another are called individually as ‘Partners’ and collectively as ‘firm’ and the name under
which they run their business is called the ‘firm name’

Essentials Of Partnership:
1. Agreement (partnership deed)
2. Two or more persons
3. Business
4. Sharing of profits
5. Mutual Agency

RIGHTS OF PARTNERS
DUTIES OF PARTNERS
AUTHORITY OF PARTNERS
LIABILITY OF PARTNERS
LIABILITY FOR WRONGFUL ACTS OF A PARTNER
LIABILITY FOR MISAPPROPRIATION
LIABILITY OF A PERSON NOT BEING A PARTNER (HOLDING OUT)

Admission of a New Partner:

• Who can admitted
• Effects of admission (New partnership deed necessary)
• Liability of a new partner
• Retirement of a partner
• Modes of retirement –
1. By consent
2. By agreement
3. By notice

 Liability of a retired partner

 Rights of a retired partner
 Minor partner
 Rights of a minor partner
 Liabilities of a minor partner
 Position on attaining majority

EXPULSION OF A PARTNER
INSOLVENCY OF A PARTNER
DEATH OF A PARTNER
LIABILITY OF A DECEASED PARTNER
RIGHTS OF A DECEASED PARTNER/HIS LEGAL REPRESENTATIVE

Dissolution of Firm:

1. By agreement
2. Compulsory dissolution

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 3. Contingent dissolution
4. Dissolution by notice
5. Dissolution by court
• Insanity of partner
• Permanent incapacity of a partner
• Misconduct on the part of a partner
• Persistent breach of agreement by a partner
• Transfer of interest by partner
• When the business of a firm cannot be continued except for loss
• Any other just and equitable ground
6. Dissolution Deed
• Public notice of dissolution
• Liabilities after dissolution
• Rights after dissolution

Settlement of Accounts:

1. Losses, including deficiencies of capital, shall be paid.

• First out of profits
• Next out of capital and
• Lastly if necessary, by the partners individually in their profit sharing ratio.

2. Assets, including any sums contributed by the partners to make up deficiencies

Of capital, shall be applied.
• First in paying the debts of the firm to third parties
• Secondly, in paying to each partner proportionately towards any advances
made over and above the capital
• Thirdly, in paying to each partner proportionately towards the capital
contributed by them and
• Lastly, the surplus, if any, shall be shared amongst the parties in their profits
sharing profit.