Law of Contract

THE INDIAN CONTRACT ACT, 1872 Contract Sec.2(h) an agreement enforceable by law give rise to legal obligation.
on. Social obligation, no contract. Agreement Sec.2(e) - every promise and set of promises, forming consideration for each other. Proposal assent thereto proposal accepted - promise agreement. Consensus ad idem : meeting of minds in full and final agreement agree upon the subject matter of the agreement in same sense and at the same time. No consensus ad idem - no contract. Example : A offers to sell his old Fiat car to B. B thinks that he is purchasing As new Scoda car. There is no consensus ad idem and consequently no contract. Essential characteristics of a valid contract : 1. Offer and acceptance two parties, one making the offer and other accepting it offer must be definite acceptance must be absolute and unconditional acceptance must be communicated to the offeror. 2. Intention to create legal relationship intention of parties to the agreement to create legal relationship must no such intention, no contract social or domestic agreements do not contemplate legal relationship, as such no contract. Balfour v Balfour husband promises to pay household allowance to wife separated wife sues for allowance domestic agreement no contract. V.Rao Vs. A. Rao old widow asked her niece to move in with her - promised to will some property in exchange niece moved in and stayed till widows death Held, intention to create a legal relationship niece entitled to share in property. Rose & Frank Co. v Crompton Bros. agency agreement between R and C clause in agreement stated that agreement not entered into as formal or legal not subject matter of legal jurisdiction no intention to create legal relationship - no contract. 3. Lawful consideration - both parties give and get something in return no consideration, no contract - consideration may be past, present or future in cash or in kind must be real and lawful. 4. Competent parties must have attained age of majority of sound mind not disqualified by any law so, minor, lunatic, idiot, drunkard, etc not competent to contract. 5. Free and genuine consent parties are of same mind when they agree about the subject matter in same sense and at the same time if induced by coercion, undue influence, fraud, misrepresentation, etc, there is no free consent - no contract. 6. Lawful object object must not be illegal, immoral or opposed to public policy if any legal flaw, not enforceable by law.
2 7. Agreement not declared void must not have been declared void by any law in force. 8. Certainty and possibility of performance terms must be certain and not vague not possible to ascertain the meaning, it cannot be enforced must be capable of being performed agreement to do impossible act, no contract. Example : (a) A agrees to sell 100 bales of cloth to B. There is nothing to indicate the kind of cloth intended to be sold. The agreement is void for uncertainty. Scammel v Ouston purchase of motor van on hire purchase hire purchase price payable over two years - no rate of interest or mode of payment indicated Held, the word hire purchase has not been precisely defined no contract. 9. Legal formalities essential to complete legal formalities to make the agreement binding e.g. agreement may require payment of stamp duty, require registration, etc. Types of contracts : 1. Void contract a contract ceases to be enforceable by law, becomes void originally valid when entered into by change of law, may subsequently become void e.g. contract to deal with a foreign country will become void when war breaks out between the importing and exporting country. Void agreement agreement which does not create legal rights or obligations a nullity void ab initio e.g. agreement without consideration. 2. Voidable contract - enforceable at the option of one party and not the other free consent is missing party whose consent is not free may repudiate/ rescind/avoid/cancel the contract, if so elects remains valid till it is repudiated. Contract voidable also in following circumstances (i) prevent promisor to fulfil his part of promise voidable at the option of promisor. (ii) Promisor fails to perform his part of obligation voidable at the option of other party/promise. 3. Illegal contract which is against public policy, is criminal in nature, is immoral collateral transaction/agreement also becomes illegal all illegal agreements are void but all void agreements are not illegal. Example : A enters into an agreement with B to manufacture prohibited goods A takes loan for the purpose from C who knows about the purpose of the loan agreement between A and C is collateral to the main agreement between A and B, which is illegal collateral agreement is also illegal. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
3 4. Unenforceable contract cannot be enforced in a Court of law due to technical defect - may be carried out by the parties, but no legal remedies in case of breach by either party - e.g. non-registration, non-payment of stamp duty, etc makes the contract unenforceable. 5. Express contract terms agreed upon at the time of formation - may be written or oral. 6. Implied contract contract inferred from the act or conduct of the parties proposal or acceptance made otherwise than by words e.g. when a person gets into bus, lets a porter carry his luggage at the railway station, takes food at a restaurant, there is an implied contract. Upton Rural District Council v Powell - Ps farm did not come under the free service zone of the fire department - fire at Ps farm P called up Upton Fire Brigade which arrived and put out the fire Held, P was liable to pay for the service rendered as implied promise to pay. 7. Quasi contract resembles a contract however, no express offer or acceptance - legal obligation on a party who is required to perform it Example : A leaves his goods at Bs place by mistake B consumes the goods as his own B is bound to pay for the goods to A as there was a quasi contract under which B was under a legal obligation to return As goods. 8. Executed contract both the parties have performed their respective obligations. 9. Executory contract may be partly or wholly executory either or both parties have yet to fulfil his/their part of obligation. 10. Unilateral contract one-sided contract one party has to fulfil his part of obligation other party has already fulfilled his obligation before or at the time of formation of the contract also known as contracts with executed consideration. Example : A permits a porter to carry his luggage to the railway carriage contracts comes into existence when the porter places the luggage in the carriage at that time porter has already fulfilled his obligation A yet to fulfil his obligation. 11. Bilateral contract- both the parties have yet to fulfil their obligations contract with executory consideration.
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_____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
4 Offer - Sec.2(a) a proposal by one party to another to enter into a legally binding agreement with him willingness to do or to abstain from doing something intention of obtaining the assent of other. Offer may be express words or implied. Express spoken words or written Implied by conduct of the parties or circumstances of the case. E.g. Wilkie Vs. London Passenger Transport Board transport company runs bus service fare charged implied offer by the transport company - acceptance complete when passenger boards the bus. Offer may be made to (i) definite person or class of persons specific offer may be accepted by only the person(s) to whom the offer is made. (ii) the world at large general offer may be accepted by anyone having notice of the offer. Calill Vs. Carbolic Smoke Ball Co. - company manufactured smoke balls company advertised in newspapers a reward of 100 to anyone who contracted influenza after using the smoke balls as per printed instructions Carlill used smoke balls as per directions contracted influenza Held, general offer Calill had accepted the offer by using the smoke balls entitled to recover the reward. Essentials of offer : 1. Must be capable of being accepted and constitute legal relationship must be such as would constitute a valid contract when it is accepted - a social invitation is not offer as no intention of legal relationship. 2. Terms must be definite, unambiguous and certain : must not be vague and indefinite. Gould Vs. Gould - husband promises to pay maintenance to wife on separation so long as I can manage it on separation husband and wife could enter into legal relationship However terms of agreement were vague and discretionary Held, no offer and hence no contract. But where provision available for ascertaining the meaning of the vague term, offer is valid. Foley Vs. Classique Coaches Ltd. F sold land to C agreement that C should buy petrol from F at agreed price disputes to be referred to arbitration No price agreed upon C refused to buy Held, clear avenue for determining reasonable price by arbitration valid contract. 3. Different from declaration of intention or invitation to offer : Mere declaration of intention or announcement or advertisement does not constitute offer E.g. advertisement of auction sale is not an offer.
5 Display of goods in showcase, quotations, catalogues, advertisements are invitation to offer and not offer itself the potential customers to make the offer which will then be accepted - the seller may or may not accept the offer. Pharmaceutical Society of Great Britain Vs. Boots Cash Chemists - goods sold under self service system customer chooses the desired goods makes payment to cashier display of goods only an invitation to offer actual offer made by the customer when he offers to make the payment acceptance by cashier constitutes a contract. Newspaper advertisement are not offers an exception is a general offer of reward to public anyone can accept the general offer by fulfilling the condition - constitutes a contract. E.g. an advertisement to pay a reward for finding missing son general offer to any one performs the required act acceptor must have knowledge of the offer - constitutes valid contract. 4. Offer must be communicated : Unless communicated, no acceptance mere act of acceptance without knowledge of the offer does not constitute acceptance. Fitch Vs. Snedaker S offered reward for lost dog F ignorant of offer of S finds the dog Held, F not entitled to reward. Lalman Vs. Gauri Dutt - G sends servant L to trace lost nephew later announces reward to finder L finds the nephew Held, ignorant of offer hence, no acceptance - L not entitled to reward. 5. Intention to obtain the assent : Offer must be made with intention to obtain assent of other party - must not be declaration of intention to make an offer. 6. Non-compliance of condition not deemed to be acceptance : Must not contain a term the non-compliance of which may be assumed to be acceptance E.g. A writes to B offering his horse for Rs.500, adding if you do not reply, I shall assume you have accepted the offer in case of Bs silence, no specific acceptance no contract. 7. Declaration of price not an offer : mere statement of price is not an offer to sell. Harvey Vs. Facey - H sends telegram to F asking Will you sell us Bumper Hall Pen? Telegraph lowest cash price. F replies Lowest price for Bumper Hall Pen 900. H telegraphs to F We agree to buy Bumper Hall Pen for the sum of 900 asked by you. Held, F only quoted the price and did not answer to first question of Hs first telegram hence no offer by F to sell. 8. Special terms to contract must be communicated in offer : must be communicated at the time of proposal cannot be inserted in contract later on unilaterally must be decipherable (understandable) in reasonable manner.
6 Olley Vs. Malborough Court Ltd. Notice placed in hotel bed room exempting the proprietor from liability for loss contract entered into when client takes key to room - special term intimated later on Held, invalid notice not affecting the contract. Rajpur Transport Company Vs. Ghanshyam - R accepted goods for transportation without any condition later issued circular limiting its liability for damage or loss in transit Held, special condition communicated after the contract has been entered into client not bound by them. When the words For conditions see back printed on a receipt valid immaterial whether person reads them or not or is even unable to read. Parker Vs. S.E. Railway Co. - P deposited baggage in cloak room ticket issued printed on face See back Condition printed on back limited the liability in case of loss baggage lost and P filed claim Held, P bound by condition on the back of the ticket even if not read by him. Thompson Vs. L.M. & S. Railway Co. T bought a ticket from railway co. T illiterate On face of ticket written For conditions see back One of the conditions on back absolves the companys liability for personal injuries to passengers T injured in railway accident Held, T bound by the conditions no damages. If no words on front of a receipt to draw attention regarding conditions printed on its reverse not binding. Even conditions printed on voucher or receipt for payment (which do not normally contain the conditions of contract) are not binding. Chapleton Vs. Barry Urban District Council C hired deck chair from Municipal Council issued ticket containing condition The Council will not be liable for any accident or damage arising from hire of chair C did not read it chair broke and C injured Held, Council liable for damages as the ticket issued is a mere receipt and different from a railway ticket which contains the terms upon which a railway co. agrees to carry passengers. Henderson Vs. Stevenson - H purchased ticket from carriage company Term printed on back of ticket absolved the company from liability for losses of any kind Nothing on face of the ticket to indicate the terms on reverse Held, H not bound by these terms and conditions. Ordinarily, acceptance of an offer implies unconditional and absolute acceptance of all the terms and conditions contained in the offer. However, this is subject to following exceptions 1. there is misrepresentation or fraud. 2. When the notice of terms is insufficient. 3. where there is nothing to indicate that there are additional terms to the offer. Cross offers : When two parties when identical offers, in ignorance of each others offers one cannot be construed as offer nor the other as acceptance no valid contract. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
7 Counter Offer when acceptance with variation of terms offered by offeror not valid acceptance no contract - earlier offer cannot be revived. Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it instead offered to buy it for 950 turned down by W subsequently H agreed to pay 1000 Held, H gave counter offer, rejecting the previous offer earlier offer cannot be revived by giving acceptance to it - no contract. Acceptance : Sec.2(b) - When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise. Acceptance of offer results in contract must be communicated to the offeror may be express or implied when communicated by words (spoken or written) or some specific act, it is express it is implied by he conduct of the parties or circumstances. Example : (a) Strike of the hammer on the table by the auctioneer implied acceptance. (b) V.Rao Vs. A. Rao - old widow asked her niece to move in with her - promised to will some property in exchange niece moved in and stayed till widows death express acceptance by act valid contract - niece entitled to property. Acceptance of particular offer - offer made to particular person can be accepted by that specific person alone if accepted by any other party, not valid. Boulton Vs. Jones B purchased goods from H H owed debt to J J placed order on H B supplied the goods intending to set off his debt against H Invalid acceptance, as offer not made to B no contract. However, B can recover the goods from J under quasi-contract. Acceptance of general offer when made to world at large can be accepted by any person. E.g. Carlill vs. Carbolic Smoke Ball Co. Essentials of Acceptance : 1. Must be absolute and unqualified - must conform to all the terms of the offer if no ad idem on all terms, no contract Routledge Vs. Granti offer by R to G - to purchase house with possession on specific date G accepted the offer, suggesting possession on another date not valid acceptance. Neale Vs. Merret M offered to sell land to N at 280 N accepted enclosed 80 with promise to pay balance in instalments of 50 qualified acceptance no contract. 2. Communicated to offeror external manifestation in perceptible (understandable) form mental resolve is no acceptance.
8 Felthouse Vs.Bindley - F offered to his nephew to buy his horse wrote If I her no more about it, I shall consider the horse is mine nephew did not respond told his auctioneer not to sell the horse as sold to his uncle auctioneer inadvertently sold the horse Acceptance of Fs offer not communicated to him held no contract F cannot claim damages from auctioneer. Brogden Vs. Metropolitan Rail Co. draft agreement for supply of coal sent to railway co. manager wrote approved over it kept it in his drawer not communicated to the offeror Held, no contract However, in cases where acceptance is by conduct it is implied acceptance need not be specifically communicated to the offeror E.g. Carlill Vs. Carbolic Smoke Ball Co. 3. Made in prescribed or reasonable mode - If acceptance not in prescribed or reasonable mode offeror must intimate acceptor insisting acceptance in prescribed mode if acceptor not informed, deemed acceptance. Example : A makes offer to B writes If you accept the offer, reply by wire B replies by post If A does not insist on acceptance by proper mode, it is valid acceptance. 4. Given within a reasonable time if time limit prescribed must be within that time if no time limit must be within reasonable time. Ramsgate Victoria Hotel Co. Vs. Montefiore - Offer made by M on June 8 - to take shares in R Acceptance received on Nov 23 beyond reasonable time no valid acceptance. 5. Cannot precede an offer if precedes the offer invalid acceptance Example : Company allots shares without application ignorant of the allotment, allottee applies for shares allotment is invalid, as precedes the offer. 6. Must indicate intention of acceptor to fulfil terms of promise- where acceptance by some specific act that act must be done e.g. Carlill Vs. Carbolic Smoke Ball Co. 7. Must be communicated by person to whom offer has been made acceptance by other person or unauthorised person is invalid Boulton Vs. Jones B purchased goods from H H owed debt to J J placed order on H B supplied the goods intending to set off his debt against H Invalid acceptance, as offer not made to B no contract. 8. Must be given before offer lapses or is withdrawn 9. Cannot be implied by silence : Felthouse Vs.Bindley - F offered to his nephew to buy his horse wrote If I her no more about it, I shall consider the horse is mine nephew did not respond told his auctioneer not to sell the horse as sold to his uncle auctioneer _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
9 inadvertently sold the horse Acceptance of Fs offer not communicated to him held no contract F cannot claim damages from auctioneer. Acceptance made subject to contract no valid acceptance until contract signed. Agreement to agree in future no valid contract merely intention Loftus Vs. Roberts - actress engaged for certain period agreement includes a clause if show in London, payment of salary to be mutually agreed upon no contract. Communication of Offer, acceptance and revocation : Mode of communication - by act or omission must have the effect of communicating such offer, acceptance or revocation may be communicated by words (written or spoken) or by conduct. Example : Installation of weighting machine at railway station is an offer putting of coin in the slot of the machine is acceptance switching off the machine is revocation of the offer. When is communication complete : Sec.4 (i) Communication of the offer - complete when comes to knowledge of the offeree. Example - A posts a letter of offer for sale of house to B on 1st June received by B on 5th June communication of offer completes on 5th June. (ii) Communication of the acceptance (a) as against the offeror when put into course of transmission by offeree/ acceptor so as to be out of his power of recall. (b) As against the acceptor - when it comes to the knowledge of the offeror. Example : A sends an offer by post on 1st June - received by B on 5th June B sends his acceptance on 10th June reaches A on 14th June - The acceptance is complete as against A when B posted the letter on 10th June. As against B when A received the letter on 14th June. (iii) Communication of revocation - means withdrawal of offer or acceptance revocation is complete As against the person making it when put into course of transmission so as to be out of his power of recall. As against the person to whom it is made when it comes to his knowledge. Example A posts his offer to sell goods to B on 11th February reaches B on 14th February A revokes his offer by telegram on 13th February - telegram received by B on 16th February Revocation is complete as against A when the telegram is sent despatched on 13th February. Revocation is complete as against B when telegram is received by him on 16th February. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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Byrne & Co. Vs. Van Tienhoven - T offered to sell goods to B by post on 1st October received by B on 11th October B telegraphs his acceptance on same day On 18th October, T sent a letter revoking his offer letter of revocation received by B on 20th October Held, the contract made on 11th October when B gave his acceptance revocation not communicated before the contract hence revocation invalid.
Time of revocation of offer and acceptance : Sec.5 (i) Revocation of offer - at any time before the communication of acceptance is complete as against the offeror, but not afterwards. (ii) Revocation of acceptance - at any time before communication of acceptance is complete as against the acceptor, but not afterwards. Example : A sends his letter of offer by post on 1st July received by B on 3rd July B posts his acceptance on 6th July acceptance letter received by A on 8th July. A can revoke his offer at any time before B posts his acceptance on 6th July, but not afterwards. B can revoke his acceptance at any time before his letter of acceptance reaches A, i.e. before 8th July, but not afterwards.
# In India the acceptor does not become bound merely by posting his acceptance. He becomes bound only when his acceptance comes to the knowledge of the proposer. The gap of time between the posting and the delivery of acceptance can be utilised by the acceptor for revoking his acceptance by a speedier communication which will overtake the acceptance. The peculiarity is that after an acceptance is posted and before it comes to the knowledge of the offeror, only one party, i.e. the offeror, is bound. The acceptor has still the right to repudiate the contract by revoking his acceptance. Loss of letter of acceptance in postal transit : acceptance is complete as against the offeror when letter posted by acceptor even is the letter gets lost, it is valid acceptance so long as it is correctly addressed, sufficiently stamped and posted. Contracts over telephone, telex or oral communication : - telephone and telex have same effect as oral communication but proper receipt of communication is must otherwise invalid. Contract deemed to be made at the place where communication of acceptance is received. Example : A shouts his offer to B across a river or courtyard - B shouts back his acceptance A cannot hear Bs reply as aircraft flying overhead No communication of acceptance no contract. Entores Vs. Miles Far East Corpn. Offer made from London by telex to party in Holland acceptance sent by telex telex is a method of instantaneous _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
11 communication different from the rule about the post - Held, contract made at the place where the acceptance is received. Bhagwandas Goverdhandas Kedia Vs. Girdharilal Parshottamdas & Co. offer made from Ahmedabad to party at Khamgaon acceptance given Held, conversation resulted in a contract when acceptance of offer is intimated to the offeror hence contract entered at Ahmedabad.
Revocation of offer : must be at any time before its acceptance is complete as against the offeror; revocation must be communicated to the offeree. 1. By communication of notice of revocation - at any time before the acceptance of offer is complete as against the offeror. 2. By lapse of time : revokes if not accepted within prescribed time period if no time prescribed, lapses after reasonable time. Ramsgate Victoria Hotel Co. Vs. Montefiore - Offer made by M on June 8 - to take shares in R Acceptance received on Nov 23 beyond reasonable time no valid acceptance. Head Vs. Diggon - offer to sale of wool made on Thursday three days time limit for acceptance- offeree sent acceptance on Monday Held, offer had lapsed. 3. Non-fulfilment of condition precedent : Example : A offered to sell goods to B condition that agreed price to be paid before a certain date B fails to pay by specified date Held, the offer stands revoked. 4. Death or insanity of offeror offeree must have knowledge of it before giving acceptance if acceptance given in ignorance of offerors death/insanity, acceptance is valid. 5. Counter offer - offer accepted with modification of terms of offer, or some new condition qualified acceptance. Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it instead offered to buy it for 950 turned down by W subsequently H agreed to pay 1000 Held, H gave counter offer, rejecting the previous offer earlier offer cannot be revived by giving acceptance to it - no contract. Tinn Vs. Hoffman offeree agreed to buy half the quantity of goods offered on the same terms and conditions as applicable to the full contract Held, there was a counter offer no contract. 6. If not accepted according to prescribed or usual mode provided offeror gives notice to offeree about the lacunae if offeror keeps quiet deemed to have accepted the acceptance. Eliason Vs. Henshaw A offered to buy flour from B specified that acceptance should be sent by the wagon which brought the offer B sent _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
12 acceptance by post thinking it would reach offeror more speedily letter reached later than the wagon- acceptance not as per prescribed mode no contract. In the above case, if the mail had reached earlier than the wagon offeror would have been bound unless had an exclusive preference for reply by wagon minor departure from the prescribed mode of communication not to affect the fact of acceptance provided communication is made in equally expeditious way. 7. Law is changed if contemplated contract becomes illegal or incapable of performance. 8. Rejection of offer once rejected cannot subsequently be accepted. May be express or implied. Express by words, written or oral. Implied - where counter offer made or conditional acceptance given. Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it instead offered to buy it for 950 turned down by W subsequently H agreed to pay 1000 Held, H gave counter offer, rejecting the previous offer earlier offer cannot be revived by giving acceptance to it - no contract. Tinn Vs. Hoffman offeree agreed to buy half the quantity of goods offered on the same terms and conditions as applicable to the full contract Held, there was a counter offer no contract.
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13 Consideration : Sec.2(d) when at the desire of the promisor, the promisee or any other person has done/abstained from doing or promises to do or abstain from doing something - such act or abstinence or promise is called consideration for the promise. It means price for which the promise of the other is bought - a valuable consideration as a price of the promise some of value received by the promisee as an inducement of the promise quid pro quo ( something in return) may be of some benefit to the plaintiff or some detriment to the defendant. Abdul Aziz Vs. Masum Ali a promise to subscribe Rs.500 for re-building a mosque not fulfilled secretary of mosque committee filed a suit for enforcement of promise Held, the promise no enforceable as no consideration in the sense of benefit for the promisor the secretary of the committee suffered no detriment as nothing has been done to carry out the repairs no contract. Durga Prasad Vs. Baldeo - On the order of the Collector, plaintiff built shops at own expense defendants occupied the shops promised to pay him commission on sales default by defendents plaint rejected - Held, construction by plaintiff not done at the desire of the defendants so as to constitute consideration. Kedar Nath Vs. Gauri Mohamed - Commissioner of Howrah Municipality started collection of funds by public subscription to erect town hall defendant a subscriber signed his name in subscription book for Rs.100 on the faith of promised subscriptions, plaintiff entered into a contract with a contractor defendant did not pay the promised amount Held, the act of the plaintiff in entering into contract with contractor was done at the desire of the defendant so as to constitute consideration the promise was In consideration of your agreeing to enter into a contract to erect, I undertake to supply money for it. Gousmohoddin Vs. Appasahib - Suit filed by landlord L against tenant T for possession of premises and arrears of rent suit decreed in favour in execution, attachment order of movable property of T In consideration of T agreeing not to appeal against the decree, L allowed one months time to pay Held, valid consideration valid agreement. Essentials features of consideration : 1. Must move at desire of promisor if done at instance of third party or without desire of promisor not good consideration. Durga Prasad Vs. Baldeo - On the order of the Collector, plaintiff built shops at own expense defendants occupied the shops promised to pay him commission on sales default by defendents plaint rejected - Held, construction by plaintiff not done at the desire of the defendants so as to constitute consideration it was done at the orders of the Collector. 2. May move from promisee or any other person - consideration may move even from a stranger contract cannot be enforced by stranger to contract even if made for his benefit - but stranger to consideration can sue if party to the contract (privity to contract).
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Chinnaya Vs. Ramayya old lady A gifted landed property to her daughter gift deed registered included condition of payment of annuity of Rs.653 per yer to the plaintiff P (old ladys sister) - daughter D executed an Iqrarnama (agreement) with P promising to pay the annuity default by D P sued for recovery Held, consideration had moved from A also concluded that deed of gift and Iqrarnama executed simultaneously regarded as one transaction sufficient consideration for that transaction. 3. May be an act or abstinence/forbearance or a return promise act must not be a legal duty to perform abstaining is consideration in negative form may be past, present or future one may also be a return promise (executory consideration) Forbearance to sue, compromise of a disputed claim, composition with creditors are valid consideration. Debi Radha Rani Vs. Ram Dass wife D ready to sue husband for maintenance husband agreed to pay monthly allowance wife forborne to sue Held, wifes forbearance to sue is valid consideration for husband. Compromise of pending suit good consideration for agreement of compromise essential that dispute is bona fide. Fanindra Narain Roy Vs. Kacheman Bibi - agreement to accept a new mortgage in substitution of earlier executed one consideration of not enforcing the earlier mortgage even though original executed by one person and substitute by four persons- held to be valid consideration. 4. May be past, present or future may be voluntary or at request. Examples : 1. A saves B from drowning B later promises reward to A valid consideration enforceable. 2. A finds Bs purse returns it to him B promises to give A Rs.50 this is contract. Upton Rural District Council Vs. :Powell - Ps farm did not come under the free service zone of the fire department - fire at Ps farm P called up Upton Fire Brigade which arrived and put out the fire implied promise to pay for past act. Sindha Shri Ganpat Singh Vs. Abraham services rendered to a minor at his request continued after majority at the same request good consideration for promise to pay. 5. Need not be adequate where consent of the promisor is freely given, inadequacy of consideration does not make the contract void adequacy of consideration is for the parties to consider at the time of making the agreement, and not for the court when it is sought to be enforced. Haigh Vs. Brooks - B promised to pay certain bills to H if he hand over a guarantee to him H handed over guarantee later found to be unenforceable _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
15 Held, B received what he asked for although guarantee for smaller value than expected, valid consideration. 6. Must be real and not illusionary - also must be competent and of value Hall Vs. Cazenove - charter party contract contained clause that particular ship to sail on specified date - that date already expired when contract entered into Held, consideration is physically impossible. Harvey Vs. Gibbons - A owes Rs.1000 to B promises to pay Rs.500 to C, who is Bs servant C promises to discharge A from debt Legally impossible as C not competent to give valid discharge for a debt due to his master. A engages B for certain work promises to pay reasonable sum promise unenforceable as consideration uncertain. Stilk Vs. Myrick - Two crew members of ship deserted mid-way captain promised to divide salary of deserters among rest of the crew if they worked the vessel home Held, they were already under obligation to bring the vessel home the consideration was illusionary no contract. 7. Must be something which promisor not already bound to do : should not under pre-existing legal or contractual obligation performance of public duty by public servant is not consideration. Collins Vs. Godefroy - A received summon for appearance before a trial court B promised to pay to A compensation for loss of time during attendance in court Held, A under a duty imposed by law to appear and give evidence Bs promise was without consideration. Ramchandra Chintaman Vs. Kalu Raju - promise to pay Vakil an additional sum if suit successful Held, Vakil under pre-existing contractual to render the best of his services the promise for additional sum is devoid of consideration. Person undertakes to do more than contractual or legal duty valid consideration for promise. 8. Must not be illegal, immoral or opposed to public policy must not be unlawful Napier Vs. National Business Agency Ltd. company employed N - weekly wages of 13 and weekly expense allowance of 6 Held, the expense allowance a device to evade tax agreement unlawful. Nandlal Vs. Thomas - A licensed under Excise Act to run liquor shop Act forbade sale, transfer or sub-lease of licence or creation of partnership in running of shop A took B into partnership - Held, agreement void. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
16 Baivijli Vs. Nansa Nagar - money given to married woman to obtain divorce from her husband lender intended to marry the woman Held, agreement was immoral. Doctrine of privity of contract Only parties to contract can sue and be sued on the contract stranger to contract cannot sue even if contract is for his benefit and he provided consideration stranger has no right or obligation cannot enforce it. Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. S bought tyres from Dunlop Rubber Co. sold them to D, a sub-dealer D agreed not to sell below Dunlop Rubbers list price to pay Dunlop Rubber 5 for every tyre undersold - D undersold two tyres Dunlop Rubber sued for breach Held, stranger to contract cannot recover anything. Exceptions to the rule stranger to a contract cannot sue : 1. A trust or charge : Beneficiary of a trust or holder of other interest in specific immovable property can enforce it. Gandy Vs. Gandy - husband separated from wife executed separation deed promised to pay to the trustees all expenses for maintenance of wife Held, agreement created a trust in favour of wife can be enforced by her. Khwaja Mohd. Khan Vs. Hussaini Begum A agreed for marriage of his son S with Bs daughter D in consideration of marriage A agreed to pay to D an allowance of Rs.500 per month in perpetuity created charge on certain properties for payment conferred power on D to enforce it Held, although D not a party to agreement, is entitled to enforce it for recovery of allowance. 2. Marriage settlement, partition or other family arrangements : beneficiary can sue for enforcement. Daropti Vs. Jaspat Rai Js wife deserted him because of ill treatment J entered into agreement with his father-in-law to treat her properly or else pay monthly maintenance subsequently ill-treated and driven out of house held, wife entitled to enforce the promise made by J to her father. Shuppu Ammal Vs. Subramaniyam - Partition of joint property brothers agreed to invest certain sum of money in equal shares for maintenance of their mother Held, mother entitled to require her sons to make the investment. 3. Acknowledgement or estoppel - where by conduct, promisor acknowledges himself as agent of third party estopped from denying it later- binding obligation towards third party. Example : A receives some money from B to be paid over to C - A admits the receipt to C C can recover the amount from A who will be considered as agent of B. 4. Assignment of contract assignee of rights and benefits under contract not involving personal skills can enforce the contract subject to equities between _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
17 original parties e.g. holder in due course of a negotiable instrument can recover the amount even though no contract between him and payer. 5. Contract entered through agent : Principal gets rights and obligations under contracts entered through agent provided agent acts within authority and on behalf of principal. 6. Covenants running with land : purchaser of immovable property with notice of covenants (conditions) created by another agreement affecting the property bound by the covenants although not a party to original agreement. Smith & Snipes Hall Farm Ltd. Vs. River Douglas Catchment Board - The Board agreed with certain land-owners adjoining a stream to improve and maintain the banks landlords paid proportionate costs one landlord sold land to first plaintiff and he to second plaintiff negligence on part of Board in maintenance of banks banks burst and land flooded Held, the whole arrangement for the benefit of land-owners whoever they might be and not merely the parties to the agreement plaintiff capable to sue the Board. Contract without consideration is void Exceptions thereto : Sec.25 Agreement made without consideration is void, unless (1) it is expressed in writing and registered under the law for the time being in force, and is made on account of natural love and affection between parties standing in near relation to each other, or unless (2) it is promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless (3) it is a promise, made in writing and signed by the person so charged or his agent, to pay wholly or in part a debt which cannot be enforced for payment under the law for the limitation of suits. Explanation : 1. Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made. 2. an agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent to the promise was freely given. 1. Love and affection - agreement has to be in writing registered under law out of natural love and affection parties standing in near relation to each other. Ram Dass Vs. Krishan Dev - a family settlement between cousin brother and sister to resolve disputes regarding family property on account of natural love and affection Held, binding as cousin brother a near relative.
18 Venkataswamy Vs. Rangaswamy - Out of natural love and affection for his brother R, V promises to discharge Rs debt to B registered agreement V fails to discharge the debt R discharges it and sue V to recover the amount Held, valid agreement covered under Sec.25. However, in Rajlukhy Dabee Vs. Bhootnath, nearness of relation does not necessarily mean natural love and affection. Husband promised to pay a fixed sum of money to wife every month for her separate residence and maintenance registered document document referred to certain quarrels and disagreements between the two Held, no trace of love and affection between the parties whose quarrels had compelled them to separate Held, agreement void for want of consideration.
2. Compensation for past voluntary service : a promise to wholly or partly compensate a person who has already voluntarily done something for promisor enforceable Karam Chand Vs. Basant Kaur - goods supplied to minor - promise made after attaining majority to pay for the supplies Held, enforceable. 3. Promise to pay a time-barred debt must be in writing signed by the debtor or his specially or generally authorised agent for payment of whole or part of the debt the debt must have been recoverable but for the law of limitation not necessary that new promise should expressly mention the time-barred debt. Debi Prasad Vs. Bhagwati Prasad acknowledgement of debt promise to pay with interest Held, agreement with promise to pay within the meaning of Sec.25. A take over of the assets and liabilities of a business house does not amount to a promise to pay a time-barred debt. 4. Completed gift Sec. 25 shall not affect the validity of any gift actually made. 5. Agency - No consideration is necessary to create an agency. 6. Charitable subscription where promisee on the strength of the promise makes commitments. E.g. Kedar Nath Vs. Gauri Mohamed
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19 Capacity to contract : Sec.10 : Parties must be competent to contract. Competence to contract is defined in Sec.11. Sec.11 : Every person is competent to contract who (a) is of the age of majority; (b) is of sound mind; and (c) is not disqualified from contracting by any law. Minors : Indian Majority Act, 1875 Sec.3 specifies that (1) a minor is a person who has not completed 18 years of age. (2) In following cases, a person attains majority on completion of 21 years of age : (a) where guardian appointed for person or property of minor under the Guardians and Wards Act, 1890, or (b) where superintendence of minors property is under Court of Wards. Rules regarding agreements with minors : 1. Agreement with or by minor is void ab initio : minor cannot bind himself by contract - such agreement is inoperative. Mohiri Bibi Vs. Dharmodas Ghose - minor mortgaged his property to moneylender to secure loan of Rs.20,000 Out of it, Rs.10500 paid to the minor Subsequently, minor sued for setting aside the mortgage. Held, the mortgage was entered into with a minor and hence void Request for repayment of the amount advanced to the minor as part of consideration also turned down. 2. Minor can be promisee or beneficiary - can be beneficiary (payee, endorsee or promisee) such contracts enforceable at the option of the minor Sharafat Ali Vs. Noor Mohd. A promissory note executed in favour of a minor. Subsequently, the drawer refused to honour the note on the ground that it being drawn in favour of a minor, was void. Held, that the contract was for the benefit of the minor and he can enforce it. 3. His agreement cannot be ratified by him on attaining age of majority ratification relates back to date of making of contract therefore, contract which was then void cannot be made valid by subsequent ratification - Consideration given during minority is not valid if fresh contract entered into after majority, fresh consideration to be paid. Indran Ramaswamy Vs. Anthiappa Chettiar - Minor borrows money and executes promissory note after attaining majority, executed another promissory note in settlement of first note - The second note is void for want of consideration. Smith Vs. King K, a minor, speculated in stock exchange and became liable to the stockbrokers for 547. On attaining majority, he gave two bills of 50 each in _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
20 satisfaction of the original debt. Held, there was no consideration for the bills and K was not liable on them. However, where services rendered at desire of minor during minority and continued after majority on same request - forms good consideration for subsequent express promise to pay. Sindha Shri Ganpat Singh Vs. Abraham services rendered to a minor at his request continued after majority at the same request good consideration for promise to pay. 4. Minor receives any benefit under a void agreement, he cannot be asked to compensate/pay for it if minor mis-represented his age - can be compelled to restore it, so long as the same is traceable in his possession - If the goods sold or converted into money, minor not liable to pay - The doctrine of restitution not applicable, where infant has obtained cash instead of goods. Sec.65 which provides for restitution in case of rescission of voidable agreements, not applicable to agreements with minor, which is absolutely void even no relief allowed under Specific Relief Act, 1877. Mohiri Bibi Vs. Dharmodas Ghose - minor mortgaged his property to moneylender to secure loan of Rs.20,000 Out of it, Rs.10500 paid to the minor Subsequently, minor sued for setting aside the mortgage. Held, the mortgage was entered into with a minor and hence void Request for repayment of the amount advanced to the minor as part of consideration also turned down. Ajudhia Prasad Vs. Chandan Lal - two minors borrowed money under a mortgage deed. They were over 18 but less than 21 years of age, but fraudulently concealed the fact that a guardian had been appointed for them. Question was whether the lender could get a decree for the principal amount or sale of mortgaged property. Held, where property is not traceable, granting a money decree would tantamount to enforcing minors pecuniary (monetary) liability under a void contract no decree under cloak of restitution. 5. No estoppel against minor - Minor can always plead minority Even if minor mis-represents his age, he cannot be sued. Leslie Vs. Shiell A minor succeeded in deceiving some money-lenders by lying about his age and got them to lend him 400 on the faith of his being adult. On his refusal to pay, the money lenders sued him for money. Held, where the infant has sold the goods or converted them, he cannot be made to pay. 6. No specific performance of agreement if entered into by minor, no specific performance as void ab initio However, if contract entered into by parent/guardian/manager within scope of authority and for benefit of minor, such contract is enforceable. Srikakulam Subrahmanyam Vs. Kurra Sabba Rao to pay off promissory note and mortgage of his debt, minor son and his mother sold a piece of land to the _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
21 holders of the promissory note and to pay off mortgage debt. He paid off the mortgage accordingly and possession of land was given over by him. Afterwards the minor brought an action to recover back the land. Held, the transaction was for the benefit of the minor and the guardian had the capacity to contract on his behalf binding upon the minor. 7. Cannot enter into partnership but can become a partner in an existing partnership for a share in the profits only cannot be liable for liabilities of the firm. 8. Minor cannot be adjudged insolvent As minor incapable of contracting debts, he cannot be held liable for any so cannot be adjudged insolvent. 9. Liable for necessaries supplied - Minor not personally liable Only his estate liable for necessaries supplied or necessary services rendered to him - Things necessary are those without which an individual cannot reasonably exist articles of luxury are always excluded though luxurious articles of utility are in some cases allowed considering the fortune and circumstances of the particular minor liability not on account of contract but out of quasi-contract. To render minors estate liable, the supplier has to prove that the goods supplied are necessary for the minor. Two conditions must be satisfied (i) the contract must be for goods reasonably necessary for his support in his station in life, and (ii) he must not have already a sufficient supply of these necessaries. Also, loans incurred by minor to obtain the necessaries binds the minor and is recoverable. Ryder Vs. Wombwell - minor was supplied a pair of jewelled solitaires and an antique goblet and though he moved in a high society, he was held not liable as the plaintiff could not prove that the articles were specially necessary for the minor. Nash Vs. Inman - an undergraduate in the Cambridge University, who was amply supplied with proper clothes according to his position, was supplied by the plaintiff with number of dresses, including eleven fancy waistcoats. Held, the waistcoats were not necessaries and hence the price was irrecoverable. Roberts Vs. Gray - G, a minor, entered into a contract with R, a renowned billiard player, to pay him certain sum of money to learn the game and play matches with him during his world tour. R spent time and money in making arrangements for the matches. Held, G was liable to pay as the arrangement was for necessaries as it was in effect for teaching, instruction and employment and was reasonable and for the benefit of the minor. 10. Minor can be an agent minor binds the principal by his acts without incurring any personal liability. 11. Minor is liable in tort (civil wrong) but where tort arises out of a contract, minor is not liable, as it would indirectly tantamount to enforcing an invalid contract. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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***** Persons of unsound mind : Sec.12 Person said to be of sound mind for the purpose of making a contract if, at the time when he makes it, he is capable of understanding it and forming a rational judgement as to its effect upon his interest. There is a presumption in favour of sanity. Soundness of mind depends on (a) capacity to understand the contents of business concerned, and (b) ability to form a rational judgement as to its effects on own interest. Person usually of unsound mind, may enter into contract when of sound mind but person usually of sound mind, may not make a contract when of unsound mind. Example : 1. Patient in lunatic asylum - may contract during intervals of soundness of mind. 2. Sane man delirious from fever or drunk incapable of forming a rational judgement as to its effects on his interest cannot contract whilst such delirium (fever or restlessness) or drunkenness lasts. Inder Singh Vs. Parmeshwardhari Singh - property worth Rs.25,000 agreed to be sold for Rs.7,000 sellers mother proved that he was congenital (hereditary) idiot and mostly wandered about incapable of understanding the transaction Held, person may to all appearances behave in a normal fashion, but he may be incapable of forming a judgement of his own as to the effects of the act on his interest in present case, in capable of exercising own judgement. Sec.68 estate of persons of unsound mind liable for necessities supplied to them however, no personal liability. Persons debarred by law : 1. Alien enemies : During war, contracts made before stand suspended or dissolved no new contracts during the ward. 2. Foreign sovereigns, diplomatic staff and accredited representatives : require prior permission of Central Government 3. Corporations : authority regulated by memorandum and articles cannot enter into contracts of strictly personal nature. 4. Insolvents : Property vests in Official Receiver or Official Assignee - deprived of power to deal in that property may contract on discharge by Court. 5. Convicts : cannot enter into contract during imprisonment gets power to deal only on discharge or completion of sentence or pardon Limitation held in abeyance during period of sentence. *****
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Free consent : Sec 14 consent said to be free when not caused by

(1) (2) (3) (4) (5) coercion as defined in Sec.15, or undue influence, as defined in Sec.16, or fraud, as defined in Sec.17, or misrepresentation, as defined in Sec.18, or mistake, subject to provisions of Sec.20-22.
When consent to an agreement caused by coercion, undue influence, fraud or misrepresentation agreement is contract, voidable at the option of the party whose consent was so caused (Sec.19) If he confirms it, contract is binding on both parties. Where consent caused by mistake agreement is void. Bala Devi Vs. S. Majumdar illiterate woman executed deed of gift in favour of nephew under impression that it was deed authorising nephew to manage the lands Evidence adduced that woman never intended to execute such deed nor deed read or explained to her Held, deed void and inoperative. Coercion : Sec.15 coercion is committing or threatening to commit - any act forbidden by IPC - or unlawfully detaining or threatening to detain any property - to the prejudice of any person with intention to causing such person to enter into an agreement. It is immaterial whether IPC (Indian Penal Code) is or is not in force in the place where the coercion is employed. Example : (1) A threatens to shoot B if B does not release him (A) from debt which A owes to B - B releases A under the threat - The release brought about by coercion. (2) Chikham Amiraju Vs. Chikham Seshamma By threat of suicide, a Hindu induced his wife and son to execute a release in favour of his brother in respect of certain properties which they claimed as their own Held, the threat of suicide amounted to coercion release deed was voidable. (3) Ranganayakamma Vs. Alwar - Husband of a young girl of 13 died relatives of husband prevented the removal of his body for cremation unless she adopts a boy to inherit the properties of her husband - she consented Held, the consent was not free but was induced by coercion adoption set aside. (4) Muthia Vs. Muthu Karuppa an agent refused to hand over the account books of a business to the new agent unless the principal released him from all liabilities - principal gave the release deed as demanded Held, release deed given under coercion voidable at the option of the principal. (5) Bansraj Vs. Secretary of State T, son of B liable for fine Government gave threat of attachment of property to B for recovery of fine from T B paid the fine Held, the contract was induced by coercion. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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Sec.72 a person to whom money has been paid or anything delivered by mistake or under coercion, must repay or return it. Person who wants to relieve himself of the consequences of the contract onus lies on him to prove that his consent caused by coercion has also to prove that he would not have entered into it had coercion not been employed. What Indian Law calls coercion, is called duress or menace in English Law duress involves actual or threatened violence or imprisonment of contracting party (or his wife, parent or child) with a view to obtain consent to the agreement coercion is much wider than duress and includes the unlawful detention of property also. Undue Influence : Sec.16 (1): A contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. A person is deemed to be in a position to dominate the will of another (a) where he holds a real or apparent authority over the other e.g. relationship between doctor and patient, master and servant. (b) where he stands in a fiduciary relation (relation of trust and confidence) to the other e.g. between father and son, solicitor and client, trustee and beneficiary and promoter and company. (c) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by age, illness or mental or bodily distress e.g. relationship between medical attendant and his patient. The principle applies to every case where influence is acquired and abused, where confidence is reposed and betrayed. Contracts entered into by undue influence are voidable at the option of the person whose consent is so obtained. Examples : (1) During minority of his son (B), A advanced money to him - upon Bs coming of age, misuses parental influence obtains a bond from B for a greater amount than the sum due in respect of the advance Held, A employs undue influence. (2) Mannu Singh Vs. Umadat Pandey spiritual guru induced his devotee to gift him the whole of his property in return for promise of salvation (nirvana) Held, the consent of the devotee was given under undue influence. (3) Ranee Annapurni Vs. Swaminath poor Hindu widow was persuaded by moneylender to agree to pay 100% rate of interest on money borrowed She needed the money to establish her right to maintenance Held, consent obtained by undue influence and the Court reduced the rate of interest to 24%. (4) Inche Nariah Vs. Sheikh Ali Bin Omar - Illiterate elderly woman made gift of practically whole of her property to her nephew who managed her affairs Held, the gift should be set aside on ground of undue influence. (5) Niko Devi Vs. Kripa - A minor female child who had lost her parents was living with her cousin brother who was in position of loco-parents (in the place of _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
25 parents) Deed executed by her in favour of latter Held, there was undue influence. (6) A applies to banker for a loan at a time when there is stringency in the money market Banker declines to make the loan except at an unusually high rate of interest - A accepts the loan on these terms This is a transaction in ordinary course of business and contract is not induced by undue influence. (7) William Vs. Bayley - son forged his fathers signature on several promissory notes and paid them into his banking account When truth came to light, the manger of the bank threatened prosecution of the son and imprisonment to avert this threat, father agreed to give an equitable mortgage to the bank on his property in return for the promissory notes Held, the negotiation proceeded upon an understanding that the agreement to give security for the promissory notes would relieve the son from the consequences of the criminal act fears of father were stimulated and operated on to an extent to deprive him of free agency and to exhort an agreement for the benefit of bankers Held voidable at the option of the father. In order to avoid a contract on ground of undue influence, the plaintiff has to establish that (a) the other party was in a position to dominate his will. (b) The other party actually used his influence to obtain the plaintiffs consent to the contract, and (c) The transaction is unconscionable (unreasonable so as to shock the conscience) Relationships which raise 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, and vii. Fianc and fiance. Raghunath Vs. Sarju Prasad Father and son equal owners of a vast joint family property both quarrelled over it Father instituted criminal proceedings against the son In order to defend himself, the son borrowed money from the plaintiff at 24% compound interest and mortgaged his properties In eleven years, the amount payable magnified more than eleven fold Defendant contended that plaintiff/lender taking unconscionable advantage of his mental distress and exercised undue influence - defendant failed to prove that the lender was in a position to dominate his will Borrower got no relief. However, no presumption of undue influence in following cases and burden of proof lies on the party claiming as such i. Landlord and tenant ii. Creditor and debtor iii. Husband and wife (wife should not be pardanashin otherwise the presumption will arise) _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
26 Rebuttal of presumption the presumption of undue influence can be rebutted on following grounds (a) full disclosure of facts is made by the influencing party to the party alleged to have been influenced. (b) The price is adequate inadequacy of consideration is only an evidence of undue influence. (c) The weaker party was in receipt of independent advice, before making the promise the advise must be shown to be competent and based on knowledge of all relevant facts Lloyds Bank Vs. Bundy contractor borrowed money from bank he could not pay it in time and bank pressed for payment or security Borrower suggested that his father might mortgage the familys only residential house bank visited the father and obtained his signatures upon ready-made papers contractor still could not pay bank sought to enforce the mortgage Held, bank exploited the vulnerability of the father, caused by his desire to help his son, to such an extent that he charged his house to his ruin for a very short moratorium (suspension/freeze/halt) which was a highly inadequate consideration for the mortgage. Contract with pardanashin woman is presumed to be induced by indue influence a woman who observes complete seclusion because of custom of particular community to which she belongs. Kalibaksh Singh Vs. Ram Gopal Singh about two months before her death, a Hindu widow (who was a pardanashin woman) gifted half of her landed properties to the son of her paramour, who was also the manager of her estate Held, she had no independent advice, and gift was the result of the influence the manager had over the lady Gift voidable at her option. However, where a woman goes to Court to give evidence, settles rents with tenants and collects rents, communicates in matters of business with men other than members of her family, she is not a pardanashin woman (Shaikh Ismail Vs. Amir Bibi). Difference between coercion and undue influence Coercion 1. The consent is given under the threat of an offence (i.e. committing or threatening to commit an act forbidden by IPC or detaining or threatening to detain the property unlawfully) 2. Coercion is mainly of physical nature. It involves physical or violent force. Undue Influence 1. Consent is given by a person who is so placed in relation to another that the other person is in a position to dominate his will.
2. Undue influence is of moral character. It involves moral force or mental pressure. 3. There must be an intention of causing 3. The influencing party must use his any person to enter into a contract. position to obtain unfair advantage over the other party. 4. It involves a criminal act. 4. No criminal act is involved. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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Any statement - wrongly made by one party to the contract - during the course of negotiations - with a view to induce the other party to enter into a contract is called misrepresentation. May be made either (i) innocently or unintentionally called misrepresentation. (ii) Intentionally or deliberately or wilfully with intention to deceive or defraud the other party called fraud Misrepresentation Sec.18 - false statement made honestly believing it to be true or not knowing it to be false includes non-disclosure of material fact without intent to deceive the other party. Example : 1. A offers to sell his horse to B telling him that the horse is sound. A genuinely believes the horse to be sound though he has no sufficient ground for the belief. Later, B finds the horse to be unsound. The statement made by A is misrepresentation. 2. Derry Vs. Peek Directors of a company issued a prospectus made a statement that company had been authorised by a special Act of Parliament to run tramways by steam or mechanical power actually authority to use steam was subject to consent of Board of Trade however, no mention was made of this directors honestly believed that permission would be granted permission was refused consequently company later wound up plaintiff who had bought some shares, sued the directors for fraud - Held, directors guilty of misrepresentation not fraud as they honestly believed that one the Parliament had authorised the use of steam, the consent of the Board was practically concluded. Requirements of misrepresentation (i) Must relate to material fact mere expression of opinion is not misrepresentation. (ii) Must be wrong but honestly believed to be true by the person making it. (iii) Must be made before conclusion of contract made to induce other party to enter into the contract. (iv) Made with intention that it is acted upon by other party. (v) Must be actually acted upon by other party must have induced him to enter into the contract. (vi) Need not be made directly to the plaintiff made to third party with the intention of communicating it to the other party to the contract is also misrepresentation. Babul Vs. R.A. Singh A tells his wife that bridegroom proposed for their daughter was young man - within hearing of the daughter daughter gave consent to marry believing the statement of her father - actually bridegroom over 60 years Held, consent was vitiated/ obtained by misrepresentation and fraud. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
28 Consequences of misrepresentation The aggrieved party can (a) avoid or rescind the contract; or (b) accept the contract but insist that he shall be placed in the position in which he would have been if the representation had been true. However, the aggrieved party loses the right to rescind the contract for misrepresentation if (i) he takes a benefit under the contract or affirms it in some other way - even after becoming aware of misrepresentation or fraud; Long Vs. Lloyd A induced B to buy lorry false representation that lorry was in excellent condition when B used it and discovered it to be in bad shape B wanted to return it A agreed to bear half the cost of repairs and B agreed to it Later lorry broke down completely B wanted to rescind the contract Held, acceptance of As offer to bear half the cost of repairs, implies Bs final acceptance of the sale contact cannot be rescinded. (ii) (iii) (iv) Fraud Sec.17 Fraud exists when (1) a false representation made (a) knowingly, or (b) without belief in its truth, or (c) Recklessly careless whether it be true or false. (2) concealment of a material fact or partial statement of fact, so that the withholding of fact makes the statement made false (3) promise is made without any intention of performing it. (4) any other act to deceive. (5) any act or omission specially declared to be fraudulent. A false statement must have been made intentionally with an intention to deceive the other party or to induce him to enter into a contract. Derry Vs. Peek Directors of a company issued a prospectus made a statement that company had been authorised by a special Act of Parliament to run tramways by steam or mechanical power actually authority to use steam was subject to consent of Board of Trade however, no mention was made of this directors honestly believed that permission would be granted - permission was refused consequently company later wound up plaintiff who had bought some shares, sued the directors for fraud Held, directors guilty of misrepresentation not fraud as they honestly believed that _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B. where restitution to the original position is not possible e.g. subject matter either consumed or destroyed. if contract cannot be rescinded in toto (in whole), it cannot be rescinded at all. If a third party has acquired rights in the subject matter of the contract in good faith and for value.
29 one the Parliament had authorised the use of steam, the consent of the Board was practically concluded. Requirements of fraud : (1) there must be false representation however, in few cases even silence or nondisclosure constitutes fraud. Peek Vs. Gurney Prospectus did not refer to existence of liabilities gave impression that company was prosperous Held, non-disclosure amounted to fraud and investors who had relied upon the prospectus could rescind the allotment. If any statement made is true on the date when it is made but becomes untrue before the contract is actually entered into must be corrected non-correction is fraud contract can be rescinded. With Vs. OFlanagan Negotiations for sale of medical practice started in January representation made that practice was worth 2,000 a year contract concluded in May when earnings fell to 5 per week due to defendants serious illness Held, failure to disclose the fall in takings is fraud contract would be rescinded. (2) Representation must relate to material fact hearsay is not representation of fact. mere opinion, commentary or
Bisset Vs. Wilkinson - Certain land sold vendor aware that land required for sheep farming - Vendor told prospective buyer that in his opinion the land had carrying capacity of 2,000 sheep land turned out to be unsuitable for sheep farming Held, there was no misrepresentation as the statement was one of opinion which was honestly held. (3) Representation must be made before conclusion of contract made with intention to inducing the other party to act upon it. (4) Representation must have been made with knowledge of its falsity or without belief in its truth or recklessly, not caring for its truth or otherwise - can be made by the party to the contract or with his connivance or his agent. (5) The other party must have been induced to act upon the representation. Smith Vs. Chadwick - A bought shares in a company on faith of prospectus a false statement contained in prospectus that B was a director in the company B had never heard of B and therefore statement was immaterial to him Held, the untrue statement had not induced A to buy the shares A cannot claim damages on ground of fraud. (6) Other party must have relied upon the representation and must have been deceived. Horsefull Vs. Thomas T bought a cannon from H cannon was defective but plugged by H T did not examine the cannon On use, the cannon burst Held, the plug had not deceived T Hence, contract not vitiated by fraud. (7) Other party, on acting upon the representation, must have suffered some loss fraud without damage does not give rise to action on deceit/cheating.
30 Consequences of fraud : Contract induced by fraud is voidable at the option of the party deceived until rescinded, it is valid the defrauded party has following remedies : (1) he can rescind the contract must be within reasonable time if in the meanwhile, a third party has acquired an interest in the subject matter for value and good faith, contract cannot be rescinded. Example A purchases land from B by wilfully making false representation A sells the goods to C before B rescinds the contract B has lost the right to avoid the contract as a third party (C) has acquired interest in it. (2) He can insist on the performance of contract on the condition that he be put in the position in which he would have been if the (3) representation had been true. (4) He can sue for damages. Contract not necessarily voidable - When consent caused by coercion, fraud or misrepresentation, contract voidable at the option of party whose consent is so caused (Sec.19). However, in following cases, the contract is not voidable (1) where consent caused by mis-representation or fraud but that party could discover the truth by ordinary diligence. Example : A mis-represented to B to believe 500 tonnes of indigo made at As factory B inspected the factory found it could produce 400 tonnes only B buys the factory Held, contract is not voidable on account of misrepresentation by A. (2) where plaintiff is ignorant of mis-representation or fraud. (3) Where before the rescission, third party acquires interest in subject matter of contract for value and bona fide. (4) Where the party after becoming aware of his right to rescind, affirms the contract. Long Vs. Lloyd A induced B to buy lorry false representation that lorry was in excellent condition when B used it and discovered it to be in bad shape B wanted to return it A agreed to bear half the cost of repairs and B agreed to it Later lorry broke down completely B wanted to rescind the contract Held, acceptance of As offer to bear half the cost of repairs, implies Bs final acceptance of the sale contact cannot be rescinded. (5) Where rescission not made within reasonable time example - thus where shares allotted on basis of misleading prospectus in July and move to rescind the contract made in December plaintiff precluded from obtaining the relief on account of unexplained delay of five months. Mere silence is no fraud : A contracting party is under no obligation to disclose the material facts to the other party but he must not make active concealment (like concealing a crack in a machine by filling it and repainting it) Keates Vs. Lord Cadogan Before letting a house, landlord did not inform the tenant that house in ruinous condition Held, landlord nor liable for fraud tenant should have inspected the house. Shri Krishan Vs. Kurukshetra University candidate had full knowledge of fact that he was short of attendance did not mention this fact in his examination form Held, _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
31 its is not fraud, it is duty of University to scrutinise forms and to call for verification or information in case of doubts University failed to do so estopped from cancelling the examination of the candidate. However, there are statutory exceptions to the above rule : (1) where under given circumstances, the person keeping silence is under duty to speak. Example A father selling a horse to his son must tell him if the horse is unsound, as the son is likely to rely upon his father. The duty to disclose the truth will arise in all cases where one party reposes and other party accepts, confidence also arises where one party is utterly without any means of discovering the truth and has to depend on the good sense of the other party in absence of any such relationship, there is no duty to speak. Haji Ahmad Yarkhan Vs. Abdul Gani Khan - plaintiff spent a sum of money to mark engagement of his son later discovered the girl to be epileptic broke off engagement sued other party for compensation for loss suffered due to deliberate suppression of vital fact Held, law imposes no general duty on any one to broadcast the blemished of his female relations not even to those who are contemplating matrimony with them no fiduciary relation between parties - voidable due to mis-representation no compensation as no fraud. (2) Where silence is equivalent to speech Example A says to B, If you do not deny it, I shall presume that the horse that you are selling me is sound. If B says nothing, his silence is equivalent to speech. (3) Change of circumstances - where representation true when made, but becomes false on account of change in circumstances actually acted upon by other party duty of the person making the representation to communicate the change of circumstances. With Vs. OFlanagan Negotiations for sale of medical practice started in January representation made that practice was worth 2,000 a year contract concluded in May when earnings fell to 5 per week due to defendants serious illness Held, failure to disclose the fall in takings is fraud contract would be rescinded. (4) Half-truths even where person is under no duty to disclose a fact, he may be guilty of fraud by non-disclosure if he voluntarily discloses something and then stops half way a person may keep silence, but if he speaks, a duty arises to disclose the whole truth. Junius Construction Corpn. Vs. Cohen plaintiff purchased a tract of land contract of sale stated that land subject to the right of Borough (local government in a small town) to open two streets within the area actually the Borough had the right to open three streets Held, though seller was under no _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
32 duty to mention the projected streets at all, but having undertaken or professed to mention them, he could not fairly stop halfway plaintiff had right to rescission. R.C. Thakkar Vs. Gujarat Housing Board false estimates of costs of construction given in a tender contractor agreed to some reduction on the belief that the estimate was correct Held, representations contained in tender were fraudulent no defence that plaintiff could have discovered the true costs by reasonable efforts. (5) If seller fails to inform the buyer as to a latent defect (a defect known to the seller but not apparent on an ordinary inspection), silence amounts to fraud. (6) If trustee does not make full disclosure of facts to the beneficiary while entering into a contract with him as to the property of which he is a trustee his silence as to material facts amount to fraud. Distinction between fraud and misrepresentation Basis Intention Misrepresentation There is no intention to deceive the other party. It is innocently made. The person making the representation believes to be true. Fraud There is an intention to deceive the other party. It is deliberate or wilful. The person making the representation does not believe it to be true or makes it recklessly without caring as to whether it is true or false. Simple misrepresentation is no It is a cause of action in tort for tort. damages. The aggrieved party can rescind The aggrieved party can rescind the contract or sue for restitution. the contract and also sue for However, there can be no suit damages. for damages. The aggrieved party cannot Where there is active avoid the contract if he had the concealment, contract is voidable means to discover the truth by even though aggrieved party had ordinary diligence. the means to discover the truth with ordinary diligence.
Belief
Tort Rescission and damages
Discovery of truth
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33 Mistake : an erroneous belief about something - may be mistake of law or a mistake of fact. Sec.20 where both parties are under mistake as to matter of fact essential to the agreement the agreement is void. Sec.20 will come into play when (1) both the parties to an agreement are mistaken; (2) their mistake is as to a matter of fact; (3) the fact about which they are mistaken is essential to the agreement. Sec.21 a contract is not voidable because it was caused by mistake of law of the country. However, mistake as to law of a foreign country is treated as mistake of fact and makes the contract void. Sec.22 a contract is not voidable merely because it was caused by mistake of one party as to matter of fact.
Mistake of law (a) Mistake of law of the country (ignorantia juris non excusat , i.e. ignorance of law is not excuse) contract cannot be avoided. Example : A and B enter into a contract - on the erroneous belief that a particular debt is barred by the Indian Law of Limitation contract is not voidable. But where person enters into a contract by making a mistake of law through inducement of another (whether innocent or otherwise), the contract is voidable. (b) Mistake of law of a foreign country - treated as mistake of fact contract is void. Mistake of fact may be bilateral or unilateral. Bilateral Mistake both the parties are mistaken as to a matter of fact essential to the agreement agreement is void. (1) The mistake must be mutual. Example A agreed to purchase Bs motor car lying in Bs garage Unknown to both, the garage and car destroyed by fire a day earlier void agreement. (2) Mistake must relate to matter of fact essential to the agreement as to what facts are essential to the agreement depends upon the nature of the promise in each case. Galloway Vs. Galloway - man and woman entered into separation agreement under which man to pay weekly allowance to woman both mistakenly believe themselves to the lawfully married Held, mutual mistake on a point of fact which was material to the existence of agreement void agreement. However, an erroneous view as to value of a thing which forms the subject matter of agreement is not deemed as mistake of fact
34 Example A buys an old painting for Rs.5000 mistakenly assumed it to be an antique actually it was new one and worth only Rs.500 Mistake as to value of the subject matter not voidable. Bilateral mistakes can be of following types (1) Mistake as to the subject matter agreement is void Example A agreed to buy Bs horse unknown to both, the horse was dead at the time of bargain agreement is void. Couturier Vs. Hastie H employed by C as del credere agent to sell Cs cargo of corn which was in transit H sold the cargo to a third person Unknown to both, the corn became fermented in transit and already sold by the master of the ship at an intermediate port buyer repudiated the contract and H was sued for the price (being del credere agent) Held, as goods had already been totally lost before the contract was made, the contract void ab initio - H not liable. (2) Mistake as to identity of subject-matter happens when one party intends to deal in one thing and the other intends to deal in another. Raffles Vs. Wichelhaus W agreed to buy a cargo of Surat Cotton from R to arrive ex-Peerless from Bombay - actually two ships by that name sailing from Bombay, one in October and another in December W meant the former while R meant the latter Held, mutual mistake and hence no contract. Even if mistake caused by negligence of third party contract void. Henkel Vs. Pape A inspected fifty rifles in Bs shop Later, wired to B send three rifles by mistake of telegraph office, the message transmitted as send the rifles B sent fifty rifles A accepted three rifles and sent back the rest Held, there was no contract on account of mutual mistake as to identity of subject matter however, A liable to pay for three rifles on basis of an implied contract. (3) Mistake as to quality of subject matter if the subject matter is qualitatively different from what the parties thought it to be agreement is void. Nicholson & Venn Vs. Smith Marriot - table napkins sold at auction - by description with the crest of Charles I and authentic property of that monarch actually napkins belonged to King George Held, mistake as to quality of the subject matter agreement void. (4) Mistake as to quantity of subject matter if mutual mistake as to quantity of subject matter agreement void. Cox Vs. Prentice Silver bar sold under a mistake as to its weight Held agreement is void (5) Mistake as to title of subject matter if seller intends to sell something which he is not entitled to sell agreement is void. Cooper Vs. Phibbs - uncle had told his nephew, not intending to misrepresent anything but being in fact in error, that he (uncle) was entitled to a fishery after uncles death, nephew entered into agreement with uncles daughter to rent the fishery actually fishery belonged to nephew himself Held the lease was void. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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(6) Mistake as to price of subject matter where mutual mistake as to price agreement is void. Webster Vs. Cecil W offered to buy Cs property for 2000 C declined thereafter C offered to sell the same property for 1250 - W accepted the offer, knowing that this offer price was a mistake which should have been for 2250 Held, W knew that offer was a mistake contract void. (7) Mistake as to possibility of performance - impossibility may be due to (i) Physical impossibility Griffith Vs. Brymer - contract for hiring of a room for witnessing the coronation procession of King Edward VII unknown to the parties, the procession had already been cancelled Held, the agreement void for impossibility of performance. (ii) Legal impossibility if subject matter of contract cannot be done as per law agreement is void. Unilateral Mistake - Sec.22 agreement not voidable merely because it was caused by unilateral mistake as to matter of fact however, it can be allowed as defence where mistake brought about by other partys misrepresentation or fraud. Smith Vs. Hughes H wanted to buy old oats for his horses S showed him sample of oats which he had W mistakenly thought that oats were old when they were actually new Held, though two minds were not ad idem as to age of the oats, they certainly were ad idem as to the sale and purchase of them H cannot avoid the contract. Exceptions In certain cases, when unilateral mistake goes to the root of the agreement, agreement is void. (1) Mistake as to identity of person contracted with if one party represents himself to be some other person, there is mistake as to the identity of the person contracted with. Example A intends to contract with B mistakes C to be B and enters into contract with him (C) no agreement if B was a material element of contract. Even in cases where A makes an offer to B, C cannot give get any rights under the contract by accepting the offer if he does so, contract is void. Boulton Vs. Jones B purchased goods from H H owed debt to J J placed order on H J accepted goods from B thinking that they were supplied by H B had supplied the same intending to set off his debt against H Mistaken identity of the acceptor no contract. However, B can recover the goods from J under quasi-contract. Cundy Vs. Lindsay - Blenkarn ordered goods from Lindsay signed the offer letter in such a way that L believed it came from well-known firm of _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
36 Blenkiron & Co. Held, L never intended to deal with Blenkarn, having heard of him no contract. This exception holds good only when identity of contracting party is important. Said Vs. Butt S wanted to go to first night of play B, the managing director of theatre, gave instructions that ticket be not sold to S because in past S had published virulent (strong) criticism of its production S got his friend to buy a ticket theatre manager refused admission to S Held, no contract as theatre never intended to contract with S. Where the identity of a party is immaterial to the contract contract is not void attribute of a party does not affect the contract. Philips Vs. Brooks N bought jewellery from a jewellers shop presented himself as Sir George Bullough gave a cheque which bounced jeweller sued for annulment (cancellation) of contract - Held, jeweller contracted to sell and deliver jewellery to person who came to his shop here mistake not as to identity but to attribute of the buyer valid contract. (2) Mistake as to nature of contract - if document signed under mistaken belief that they are of different class and character altogether - void contract. Foster Vs. Mackinnon M, an old man of poor sight, endorsed a bill of exchange had mistakenly thought it to be a guarantee Held, the mind of the signer did not accompany the signature no contract.
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37 Legality of Object : Sec.23 The consideration and objects of a contract are lawful, unless it (1) is forbidden by law any act punishable under criminal law or any special legislation or regulations. Example : (a) A promises to obtain for B employment in public service B promises to pay Rs.1000 to A unlawful consideration void agreement. (b) A promises to drop prosecution instituted against B for robbery B promises to restore the value of things taken unlawful object void agreement. Nandlal Vs. Thomas - A licensed under Excise Act to run liquor shop Act forbade sale, transfer or sub-lease of licence or creation of partnership in running of shop A took B into partnership - Held, agreement void as it would defeat the policy of the law if unapproved persons could find their way into working liquor shops. (2) It defeats the provision of any law though not directly forbidden by law. Fateh Singh Vs. Sanwal Singh accused required under Criminal Procedure Code to furnish surety of Rs.5000 for his good behaviour he deposits sum with defendant and persuades him to become surety after period of suretyship is over, accused sued defendant for the amount Held, the intention in requiring a surety is that the surety shall at his own risk see to the appearance of the accused the purpose of agreement defeated by agreement of above sort agreement void. Napier Vs. National Business Agency Ltd. company employed N - weekly wages of 13 and weekly expense allowance of 6 Held, the expense allowance a device to evade tax agreement unlawful. Alexander Vs. Rayson A leased flat to R at rent of 1200 a year two separate agreements entered into, one for lease at 450 and other for services connected with flat at 750 A sued R for recovery of instalment of 750 Held, agreement void as object was to deceive the municipal authorities A could not recover - R entitled to remain in possession of flat for remainder of term of lease. (3) It is fraudulent. Example : A, B and C enter into agreement for division of profits to be acquired by them by fraud object is unlawful void agreement. Ram Nath Misra Vs. Rajendranath Sanyal - two decree-holders against the debtor one of them, the plaintiff, got debtors property attached and brought to sale agreed with defendant , a prospective buyer, that he would not bid against the defendant and defendant would pay him off property sold to defendant at very low price Held, the object of the arrangement was fraudulent as it deprived the other decree-holder of his claim amount which he could have got _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
38 had the sale been competitive plaintiff could not recover anything from defendant. (4) It involves or implies injury to person or property of another property includes both movable and immovable property. Ram Swaroop Vs. Bansi Mandar B borrowed Rs.100 from R executed bond promising to work for L without pay for two years in case of default, B to pay principal plus exorbitant interest at once Held, contract void as it was indistinguishable from slavery which involved injury to person of B. Gherulal Parakh Vs. Mahadeo Dass agreement between some persons to purchase shares in a company intended to deceit to induce other persons to believe that there was bona fide market for the shares Held, agreement void. (5) Involves immorality Baivijli Vs. Nansa Nagar - money given to married woman to obtain divorce from her husband lender intended to marry the woman Held, agreement was immoral. (6) Opposed to public policy harmful to public welfare. (i) Agreement of trading with enemy (ii) Agreement to commit a crime. W.H. Smith & Sons Vs. Clinton - A promises to indemnify a firm of printers and publishers of newspapers against consequences of any libel which it might publish in the newspaper Held, it was an agreement to commit a crime and indemnity against it - As promise could not be enforced and the firm liable to pay damages for published libel. (iii)Agreement which interferes with administration of justice it is opposed to public policy Examples agreement to use improper influence of any kind with the judges and officers of justice agreement not to prosecute an offender is for stifling (oppressing) prosecution. (iv) Agreement in restraint of legal proceedings - Example - prohibiting any party from enforcing his rights under a contract curtailing (restricting) the period of limitation prescribed by Law of Limitation however agreement to refer a dispute to arbitration is valid. (v) Trafficking in public offices and titles or for procurement of public recognition like Padma Vibhushan etc. for monetary consideration. NVP Pandian Vs. MM Roy - R paid Rs.15,000 to N who agreed to obtain a medical seat for Rs son N failed to get the seat R filed a suit for refund Held, agreement against public policy void agreement. (vi) Agreement tending to create interest opposed to duty anything against public or professional duty. Example A directs his agent B to buy particular house for him B tells A that it cannot be bought for specific reason - buys the house for himself against professional duty A can compel B to sell it to him at the price B paid for it. (vii) Agreement in restraint of parental rights (viii) Agreement restricting personal liberty. Horwood Vs. Millars Timber & Trading Co. A debtor agreed with money-lender not to leave his job or borrow money or dispose of his _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
39 property or change his residence without lenders written consent held, void agreement as restricting personal freedom. (ix) Agreement in restraint of marriage, other than a minor, is void. Lowe Vs. Peers P promised to marry L only and none else to pay .2,000 to L if he married someone else P married X - Held, L could not recover the agreed sum as agreement in restraint of marriage (x) Marriage brokerage agreement. (xi) Agreements interfering with marital status. (xii) Agreement to defraud creditors or revenue authorities. (xiii) Agreement in restraint of trade which interferes with liberty to engage in any lawful trade, profession or vocation Sec.27. Shaikh Kalu Vs Ram Saran Bhagat - out of 30 comb-makers in Patna city, 29 agreed to sell their output to R only and none else R free to reject the goods if no market found for them Held, the agreement restrained from exercising profession void. Madhav Chander Vs. Raj Coomar - M and R rival shopkeepers in a locality in Calcutta R agreed to pay a sum of money to M if he would close his business in consideration M closed down his business R refused to pay and M filed a suit for recovery Held, the agreement was void even though the restriction was a partial restriction, a restriction limited to some place. Exceptions to the rule that an agreement in restraint of trade is void : (a) Sale of goodwill seller of goodwill may be reasonably restrained from - carrying on similar business - within a specified local limits - as long as buyer or any other person deriving title from him carries on like business. (b) Partnership four provisions which validate agreements in restraint of trade (i) partner not to carry on any business other than that of the firm. (ii) outgoing partner not to carry on similar business within a specified period or within specified local limits. (iii) in anticipation of dissolution, partners may restrain each other from carrying on similar business within specified period or within specified local limits. (c) Trade combinations regulations as to opening and closing of business in a market, licensing of traders, supervisions and control of dealers and mode of dealing are valid, even though in restraint of trade. S.B. Fraser & Co. Vs. Bombay Ice Mfg. Co. agreement between ice manufacturers fixed the minimum price for sale of ice, proportion of manufacture which each was to bear and of profits each was to receive some of them restrained from selling at Poona and some others at steamers Held, whole object to regulate business and not to restrain it valid. Bhola Nath Shankar Das Vs. Lachmi Narain rules of an association of traders and weighmen restrained members from dealing with outsiders penalty for breach being fine and expulsion Held, such _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
40 restriction not disadvantageous to public nor opposed to public policy valid. However, where a combination tends to create monopoly and is against public interest is void. Kores Mfg. Co. Ltd. V. Kulok Mfg. Co. Ltd. both companies engaged in manufacturing similar products involving processes in which employees likely to acquire knowledge of trade secrets and confidential information agreed that neither would employer any person who had been the employee of the other anytime during previous five years, without the written consent of the other Held, ban was applicable as much to an unskilled manual labourers who might have been employed even for a single day as to a highly skilled and long-term employee who might have acquired confidential knowledge. (d) Exclusive dealing agreements reasonable restriction valid - negative stipulation nothing but an ordinary incident of or ancillary to the positive covenant. Mackenzie Vs. Striramiah - contract to sell all the salt manufactured to a firm for five years Held valid as seller encouraged to exercise his business because he is assured of a certain market for the products of his labour. (e) Service contracts restriction from accepting any other engagement during his employment is valid. Charlesworth Vs. MacDonald - A was a physician and surgeon practising in Zanzibar - B agreed to become As assistant for three years appointment subject to clause against practising B left service within a year and began to practise there on his own account Held, agreement to service preventing persons to serve anyone other during the term of employment is valid. Where restriction imposed to protect employer against employee making use of trade secrets learned in course of employment - such restriction is valid. Hivac Ltd. Vs. Park Royal - H employed A on a highly skilled work with access to manufacturing data in his spare time, A worked for P on similar work in competition with H Held, A in breach of duty could be restrained from working for R. However, restriction on similar engagement after termination of service is void. Brahamaputra Tea Company Vs. Scarth employees restrained from taking service or engaging in any similar business for period of 5 years after termination of service - Held to be void. Unlawful and illegal agreements : Unlawful agreement a void ab initio not enforceable by law affects only the immediate parties but does not affect the collateral agreements. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
41
Illegal agreement void ab initio taints the collateral agreements with illegality void not only as between immediate parties but also makes collateral agreements void. Example : A enters into an agreement with B to manufacture prohibited goods A takes loan for the purpose from C who knows about the purpose of the loan agreement between A and C is collateral to the main agreement between A and B, which is illegal collateral agreement is also illegal. An illegal agreement is actually forbidden by law but every void agreement may not be forbidden Thus, every illegal agreement is void, but every void agreement is not necessarily illegal. Illegal agreements include acts opposed to public morals e.g. agreement for illicit cohabitation, agreement to defraud the revenue, agreement to commit a crime or agreement to do something which endangers public safety No action allowed on illegal agreement depends on two maxims : (i) Ex turpi causa non oritur action means no action arises from a base cause law does not approve of any action arising from base action which is illegal. (ii) In part delicto, potior est condition defendentis means in cases of equal guilt, the defendant is in a better position. Example : A promises to pay B Rs.1000 if he kills T - If B actually kills T, he cannot recover the amount from A if A has already paid the amount and B does not kill T, A cannot recover the amount. The effects of illegality are (i) collateral agreements also becomes tainted with illegality treated as illegal even though they might be lawful by themselves. (ii) No action can be taken for (a) recovery of money paid or property transferred under an illegal agreement. (b) Breach of illegal contract. (iii) In case of equal guilt, defendant is in better position than plaintiff. However, the plaintiff can sue for recovery of money paid or property transferred in following cases (a) where he is not in part delicto (equal guilt) with the defendant e.g. where he is induced to enter into agreement by fraud, undue influence or coercion. Fakir Chand Seth Vs. Dambarudhar Bania - payment made in advance for purchasing a paddy crop not knowing that a control order was being violated consideration paid allowed to be recovered. Mistry Amar Singh Vs. Kulubya - land given to an non-African under a lease in violation of a law for the protection of Africans in Uganda action brought about by African party for recovery of rent and possession the other party pleaded illegality Held, the parties are not in pari delicto, the person injured may bring his action and defeat the contract. (b) Where he does not have to rely on the illegal transaction. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
42 (c) Where the agreement is still executory - and he is truly and genuinely repentant. Taylor Vs. Bowers debtor executed a transfer to deceive his creditors after executing the transfer, he summoned meeting of his creditors to effect a compromise no creditor turned up debtor repented his action and sought to recover back the property allowed to do so. (d) where the non-illegal part is severable from the rest of the agreement the Court will enforce the legal part and reject the illegal one if inseparable, the whole contract is declared illegal. Aition Vs. Spickermann house leased on rent - subject to condition that lessee would also purchase certain chattels at premium lessee occupied the premises but offered to pay only the natural price lessor sought eviction on ground that the whole agreement unlawful - Held, the two agreements had two aspects namely, the agreement of lease and the promise to pay a premium the latter part was unlawful and being severable from the rest, the lease was valid. Unlawful agreement involves non-criminal breach of law do not affect public morals disproved on grounds of public policy e.g. agreements in restraint of trade, marriage or legal proceedings. Gherulal Parekh Vs. Mahadeo Das - partner entered into agreement to indemnify his co-partner for proportionate of the losses suffered by him in entering into wagering transactions on behalf of firm Held, wagering being only void, the collateral agreement of indemnity is fully enforceable. *****
43 Void agreements Sec.2(g) : An agreement which is not enforceable by law is called a void agreement. The following agreements are void ab initio 1. Agreements by incompetent parties (Sec.11) 2. Agreements made under mutual mistake (Sec.29) 3. Agreements with unlawful consideration or object (Sec.23 and 24) 4. Agreements without consideration (Sec.25) 5. Agreements in restraint of marriage (Sec.26) 6. Agreements in restraint of trade (Sec.27) 7. Agreements in restraint of legal proceedings (Sec.28) 8. Agreements the meaning of which is uncertain (Sec.29) 9. Wagering agreements (Sec.30) 10. Agreements contingent on impossible events (Sec.36) 11. Agreements to do impossible acts (Sec.56) 12. In case of reciprocal promises to do things legal and other things illegal, the second set of reciprocal promises is void agreement (Sec.57) Agreements the meaning of which is uncertain (Sec.29) : Uncertainty may be as to (i) existence of, or (ii) quality of, or (iii) quantity of, or (iv) price of, or (v) title to, the subject matter. Example : (a). A agrees to sell to B 100 tons of oil - There is uncertainty about the kind of oil intended - The agreements is void. (b) A, who deals in turpentine oil only, agrees to sell to B 100 tons of oil - The nature of As trade clarifies the nature of oil intended to be sold agreement is valid. (c) A agrees to sell to B all the grain in my granary at Ramnagar the quantity is capable of being determined agreement is valid. (d) Guthyng Vs. Lynn - L promised to pay an extra 5 to G if the horse he purchased from G proved lucky the promise is too vague to be enforced. (e) A agreed to pay a certain sum to B when he was able to pay the agreement is void for uncertainty. Wagering Agreements/ Wager (Sec.30) a to give money or moneys worth upon the happening of an uncertain event it is essential that each party under it may either win or lose whether he will win or lose been dependent upon the issue of the event if either of the parties may win but cannot lose, it is not a wagering contract. No suit shall be brought for recovering anything alleged to be won on any wager. Badrinath Kothari Vs. Meghraj Kothari two persons entered into speculative transactions into shares one becomes indebted to other promissory note executed for the payment of that debt Held, wager in nature note is not enforceable. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
44
Though wager is void and unenforceable, it is not forbidden by law Hence, wagering agreement is not unlawful therefore, transactions collateral to the main transaction are enforceable. Gherulal Parekh Vs. Mahadeo Das - partner entered into agreement to indemnify his co-partner for proportionate of the losses suffered by him in entering into wagering transactions on behalf of firm Held, wagering being only void, the collateral agreement of indemnity is fully enforceable. A principal cannot sue his agent for breach of a wagering agreement or recover any amount paid on its basis. However, the principal can recover the winnings received by his agent on successful bets made on his behalf. Essential of a wagering agreement : 1. Promise to pay money or moneys worth. 2. Uncertain event generally contemplates a future event but may also relate to past even provided the parties are not aware of its result or the time of its happening. 3. Mutual chances of gain or loss Babasaheb Vs. Rajaram - Two wrestlers agreed to play a wrestling match condition that party failing to appear on the day fixed was to forfeit Rs.500 to opposite party, and winner to receive Rs.1125 out of gate money - defendant failed to appear in ring plaintiff sued him for Rs.500 Held, in present case neither side stood to lose according to result of wrestling match stakes did not come out of pockets of parties, but out of gate money provided by public wagering agreement. In Carlill Vs. Carbolic Smoke Ball Co., the company had no chance of winning, neither Mrs. Carlill any chance of losing not in nature of wager. Narayana Ayyangar Vs. K.Vallachami Ambalam - A chit fund does not come within the scope of wager some members stand a chance to gain, but none of them stands to lose as getting back of actual amount contributed is assured, the interval of time, however long it may be, is immaterial. 4. Neither party has control over the event. 5. No other interest in the event it forms the difference between wager and contract of insurance - Every contract of insurance requires for its validity the existence of insurable interest, which means the risk of loss to which the assured is likely to be exposed by the happening of the event assured against - however, in wagering agreement, neither party is running any risk of loss except that which is created by the agreement itself. Lottery, which is a game of chance, is a wagering agreement. Exceptions the following agreements are not wager : _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
45 1. Crossword competitions involving a good measure of skill for its successful solution however, where prizes depend upon a chance, that a lottery (a wager). 2. Games of skill e.g. picture puzzles or athletic competitions. 3. Horse races where the value of plate, prize or sum of money is Rs.500 or upwards. 4. Share market transactions in which delivery of stocks and shares is intended to be given and taken. 5. A contract of insurance. Difference between insurance and wagering agreements : Sl. No. 1 Basis Insurable interest Contracts of Insurance The Assured has an insurable interest in the subject matter. Both the parties have such interest matter. Except life insurance, all insurances are contract of indemnity (whose value is unknown). It benefits the public. It is based upon scientific and actuarial calculation of risks. Wagering agreements. There is no interest in the subject matter, other than that created by the agreement itself. Only one of the parties is interested in the protection of the subject matter. The amount of the contract is fixed.
Interest in protection of subject matter Value of contract
4 5
Benefit Basis of agreement
It does not benefit anyone except the winner. It is a gamble or game of chance.
Void Contracts 1. A contingent contract becomes void when the event collateral to it becomes impossible (Sec.32.) 2. A voidable contract becomes void when the party whose consent is not free repudiates the contract. 3. A contract becomes void by supervening impossibility or illegality. Restitution - (Sec.64) - When voidable contract is rescinded, the party rescinding it must restore any benefit which he has received under it to the person from whom it was received. Sec.65 - When a contract becomes void, the party who has received any benefit under it, must restore it to the other party or compensate the other by the value of the benefit.
46 Sec.65 is not applicable to contracts void ab initio or to contracts by incompetent parties. Dharmasey Vs. Ahmedbhai - godown hired for twelve months whole rent paid in advance after seven months, the godown destroyed by fire without anyones fault tenant claimed refund of proportionate rent Held, entitled to refund of rent for remaining five months. State of Orissa Vs. Rajballav - agreement between government and contractor to construct a godown advance payment made to contractor work not completed by contractor government terminated contract Held, government could recover the amount advanced. Contingent Contracts : Sec.31: A contract to do or not to do something, if some event which is collateral to such contract, does not happen conditional one condition is of uncertain nature e.g. contracts of insurance, indemnity and guarantee. Example: A contract to pay a sum of money on the destruction of a premises by fire is contingent contract. however, contract to pay a sum of money on the expiry of a term or on the death of a person is not a contingent contract because these events are of a certain nature. Essentials of contingent contracts : 1. Performance depends on happening or non-happening in future of an event. 2. the event must be uncertain. 3. the event must be collateral, i.e. incidental, to the contract. Contingent event includes happening or non-happening of a contingency depending upon the will of a party example, a contract the performance of which depends upon the promisees marriage is a contingent contract, though his marriage is a contingency exclusively within his control. Rules regarding contingent contracts : 1. Contingent contract cannot be enforced until the collateral event has happened. 2. In case contingent contract dependent upon happening of collateral event, such contract become void when such event becomes impossible. 3. If contingent contract dependent upon non-happening of collateral event, performance of the contract can be enforced when the event becomes impossible. 4. Where contract contingent upon an act of a person, the event shall become impossible when such person does anything which makes it impossible for him to do the act within a definite time or otherwise than under further contingencies. Example : 1. A agrees to pay B a sum of money if B marries C C marries D marriage of B to C is now impossible although it is possible that D may die and C may afterwards marry B. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
47 5. Contract, contingent upon a specified event happening within a definite time, becomes void if such specified event does not happen or becomes impossible before the expiry of that time. 6. Contracts contingent upon happening of impossible event are void.
48 Difference between wagering agreement and contingent contract : Sl. No. 1 2 3 4 Basis Reciprocal promises Nature Void or not Interest in subject matter. Game of chance Wagering agreement It consist of reciprocal promises. It is essentially of contingent nature. It is void. Parties have no other interest in subject matter other than to win or lose. It is purely a game of chance. Contingent Contract It does not contain reciprocal promises. It may not be of wagering nature. It is valid. The parties have other interest also in the subject matter. It is not a game of chance, though is dependent upon happening or nonhappening of a certain event. It is only collateral to the contract.
Future event
It is the sole determining factor.
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49 Performance of contract Performance complete when parties fulfil their respective obligations arising under the contract within time and manner prescribed in the contract actual performance or offer to perform must unless such performance dispensed with or excused. Offer to Perform : Sec.38 : tender to performance equivalent to actual performance promisor excused from further performance entitled to sue promisee for breach of contract. Essentials of valid tender : 1. Must be unconditional when not in accordance with terms of contract, it becomes conditional. 2. Must be made for whole quantity contracted for or for whole obligation if negligible deviation from terms of contract, may be allowed keeping in view practical aspect. Shipton, Anderson & Co. V Weil Bros & Co. contract to deliver 4950 tons of wheat seller delivered 4950 tons 55 lbs. Held, contract duly performed by seller. 3. Must be made by promisor or his duly authorised agent. 4. Promisor must be in position and be willing to perform his promise. 5. Must be made at proper time and place tender of goods after business hours or before due date is not valid tender. 6. May be made to one of several promisees deemed to have effect as if tender to all of them. 7. In case of tender of goods, must give reasonable opportunity for inspection of goods. Startup Vs. Macdonald contract to sell 10 tons of linseed oil to be delivered within last 14 days of March - delivery tendered on 31st March at 8.30 pm defendant refused to accept goods owing to lateness of hour Held, though hours unreasonable, defendant could accept delivery before midnight. 8. In case of tender of money, must be in legal tender if creditor refuses to accept it, debtor not discharged from debt can be set up as defence by the debtor. Refusal to perform promise wholly : Sec.39 : When promisor refuses to perform his promise wholly promisee entitled to repudiate the contract deemed to have rescinded a voidable contract bound to restore all benefits received by him under the contract but if promisee gives tacit (implied) assent in continuance of contract, he cannot repudiate the contract. Example : A, a singer, enters into contract with B, a theatre manager A to sing at Bs theatre two nights every week for next two months for Rs.100 per performance A wilfully absents herself on sixth night B entitled to repudiate the contract but if B allows A to sing on seventh night, he has signified tacit continuance barred from repudiating the contract but entitled to sue for damages. Contracts of which performance not necessary : 1. when its performance becomes impossible contract unlawful and void. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
50 Example : A contracts to take in cargo for B at a foreign port As government afterwards declares war against country in which the foreign port situated contract becomes void when war is declared. Taylor Vs. Caldwell defendant agreed to let plaintiff use of their music hall between certain dates for concert before the first day of concert, hall destroyed by fire without fault of either party plaintiff sued defendant for their loss Held, performance depended upon the continued existence of hall performance becomes impossible on perishing of hall without default of the contractor void. 2. when parties agree to substitute a new contract for it or to rescind or alter it. 3. When promisee dispenses with the performance of promise, either wholly or in part or extends the time of such performance or accepts any satisfaction for it. 4. When voidable contract rescinded by person entitled to rescind it. 5. When promisee neglects or refuses to afford the promisor reasonable facilities for performance of his promise. Example : A contracts B for repair of Bs house B neglects or refuses to point out the places at which his house requires repairs A excused for nonperformance of contract due to such neglect or refusal. 6. when it is illegal. Persons entitled to perform the promise : 1. Promisor himself contracts involving exercise of personal skill, volition or diligence of the promisor, e.g. contract to paint a picture or sing, or founded on personal confidence between the parties, e.g. contract to marry. 2. Agent duly authorised only when personal consideration is not the foundation of the contract. 3. Legal representatives contracts other than those involving personal consideration - liability limited to value of the property inherited. Contracts involving personal skill of promisor comes to end on death of the promisor. 4. Third persons when promisee accepts performance of the promise from third person, he is debarred from afterwards enforcing it against the promisor. 5. Joint promisors any or all of the joint promisors can fulfil the promise valid discharge. Rules regarding devolution of joint liabilities : Unless specified to the contrary, all joint promisors must jointly fulfil the promise if any promisor dies, his legal representatives liable jointly. 1. Unless express agreement to the contrary, any one of joint promisor may be compelled to perform means liability is joint and several. 2. Joint promisor compelled to perform may claim contribution from other joint promisors. 3. Sharing of loss arising from default in case of any joint promisor committing a default in contribution, remaining joint promisors must bear the loss arising from such default. Example : A, B and C jointly promise to pay Rs.3,000 to D C compelled to pay the whole sum A becomes insolvent As assets sufficient to pay off _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
51 one-half of his debts C entitled to recover Rs.500 (one-half of Rs.1000) from As estate and Rs.1250 (one-half of remaining Rs.2500) from B. 4. Release of one joint promisor does not discharge other joint promisors released joint promisor continues to be liable to the other joint promisors. Rules regarding devolution of joint rights : Unless specified to the contrary, right to claim performance lies with all joint promisees if any one joint promisee dies, right rests with his legal representatives to claim jointly with other promisees suit for enforcement must be instituted by all the joint promisees. Persons entitled to demand performance : 1. Promisee only. 2. In few cases, third party e.g. beneficiary of a trust, beneficiary of marriage or family settlement, principal etc. 3. Legal representatives in case of death of promisee. Time and place of performance : As specified in the agreement. 1. When no application to be made and no time specified promisor to perform without application by promisee within reasonable time. 2. When time is specified and no application to be made if date or day specified, promisor to perform without application by promisee during business hours at place and on day as specified. 3. When application for performance on certain day and place duty of promisee to apply for performance at proper place and within business hours. 4. Application by promisor to promisee when no place fixed, duty of promisor to apply to promisee to appoint a reasonable place for performance of promise. 5. Performance in manner and at time specified by promisee. Reciprocal promises promises which form consideration or part of consideration for each other. Types are 1. Mutual and independent each party must perform independently. Example : A agrees to pay the price of goods to B on 1st January. B promises to supply the goods on 20th January promises are mutual and independent. 2. Conditional and dependent - where performance of one set of promise is dependent upon prior performance of the other set. Example A promises to supply goods to B if B gives him payment in advance if B does not give the advance, A need not perform his promise. 3. Mutual and concurrent both set of promises to be performed simultaneously e.g. sale of goods for cash. Rules regarding performance of reciprocal promises : 1. Simultaneous performance promisor need not perform his promise unless promisee ready and willing to perform his promise. 2. Order of performance where order expressly specified in contract performance must be in the specified order if no order specified then in the order which nature of transaction requires. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
52 3. Effect of one party preventing another from performing his promise contract voidable at the option of the party so prevented also entitled to sue for compensation. 4. Effect of default of promise to be performed first cannot claim performance of promise from the other party other party can sue for compensation. 5. Reciprocal promises to do things legal and also other things illegal if severable, the legal part is valid while the illegal part is void - if not severable, then both set of promises are illegal and void. Time as essence of contract : Performance of contract within specified time is essential breach entitles the other party to consider it as repudiation Time is essence or not in following types of contracts 1. Commercial transactions time is important factor Mahabir Prasad Rungta V Durga Datt transporter contracted to transport coal from colliery to railway station colliery owner to keep the road in repair and arrange for petrol colliery owner to pay for work done by 10th of next month transporter rescinded contract on allegation of non performance of promises by colliery owner Held, in commercial transactions time is ordinarily of the essence of the contract. 2. Construction contracts being construction a commercial service, time is essence of contract. 3. Sale transactions courts to determine whether time factor essential or not depending on facts of each case. China Cotton Exporters V. Bihari lal Ramchandra Cotton Mills Ltd. appellants carried on import business contracted to supply quantity of Italian staple fibre cotton to respondent mill shipment to take place in October or November contract included remark this contract is subject to import licence and therefore the shipment date is not guaranteed part of goods supplied and accepted rest not supplied Held, in spite of shipment date being not guaranteed, supply within October/November, 1950 was guaranteed time was essence of contract buyer entitled to avoid the contract. 4. Land and property dealings normally in transactions of immovable property, time is not essence of the contract intention to be ascertained from other factors like nature of property, possibility of price fluctuation etc. 5. Sale of shares time is important factor being such transaction of commercial nature. 6. In non-commercial transactions, ordinarily presumed that time is not of the essence of contract.
53 Appropriation of payments by creditor : When a debtor owes several debts to a creditor and makes payment insufficient to satisfy the whole of his indebtedness, the following rules regarding appropriation of the payment made (i) Where the debtor intimates if express intimation at time of actual payment that payment to be applied towards discharge of particular debt creditor must do so if no express intimation, circumstances to be looked into for appropriation. (ii) if no express intimation by debtor, and circumstances are not indicative appropriation according to discretion of creditor can also apply to a time barred debt however, cannot apply to payment of a disputed or unlawful debt until declaration of appropriation to debtor, creditor can also alter the appropriation. Rulia Devi V Raghunath Prasad - unless specified to the contrary, payment to be first applied to the interest - after interest fully paid off, appropriation towards the principal. (iii) Where debtor does not intimate and creditor fails to appropriate appropriation in chronological order, i.e. in order of time if debts are of equal standing, payment to be applied in discharge of each debt proportionately. Rule in Claytons Case : applicability where parties have several distinct debts between them and not to a single debt payable by instalments unless there is a contrary intention, appropriation in order of date first item on debit side to be discharged by first item on credit side. Assignment of contracts - transfer of contractual rights and liabilities to third party with or without concurrence of the other party to the contract assignment requires consideration between assignor and assignee if no consideration, assignment revocable by assignor third party to have same right of rescission against assignee as he had against assignor notice to debtor must if no notice given to debtor, payment made by debtor to assignor himself will constitute good discharge. Example : If A owes Rs. 500 to B and B owes similar amount to C B has right to receive from A and is under liability to pay C B can ask A to pay directly to C if A accepts, that will be assignment of Bs right to C. Assignment by operation of law by either of following two ways (i) Death upon death of a party his rights and liabilities devolve on his heirs and legal representatives (except contracts requiring personal skill or services) (ii) Insolvency on insolvency, rights and liabilities incurred prior to adjudication pass to Official Receiver or Assignee. Assignment by act of parties - by wilful assignment. Assignment of contractual obligations subject to following rules (i) Contractual obligations involving personal skill cannot be assigned. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
54 (ii) Promisor cannot assign his liabilities under a contract promisee cannot be compelled to accept any other person as the person liable to him on the promise. Robson Sharpe V Drummond - D hired carriage from S at yearly rent for five years S undertook to paint the carriage every and keep it under repair contract with S alone - S retired from business after three years R, a partner of S, informed D that he would maintain the carriage and receive payment D refused to deal with R and returned the carriage Held, D entitled to do so. Contractual obligations can be performed through agent, unless personal skill involved however, original party remains liable under the contract. Promisor may transfer his liability under consent of promisee and transferee in such cases, substitution of old contract by a new contract novation takes place only by tripartite agreement between parties.
(iii)
(iv)
Assignment of contractual rights : Subject to following rules (i) Rights and benefits under contract not involving personal skill may be assigned subject to all equities between original parties. (ii) Actionable claim (e.g. money debt, shares held in a company) can be assigned must be through an instrument in writing notice to debtor must.
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55 Discharge of contract Discharge/termination of contract all rights and obligations under contract cease may be discharged by (i) By performance (ii) By agreement or consent (iii) By impossibility of performance (iv) By lapse of time (v) By operation of law (vi) By breach of contract. 1. Discharge by performance both parties fulfil their contractual obligations within time - in prescribed manner if only party fulfils its obligations, only that party discharged gets right of action against other party for breach. May be (a) Actual performance when both parties discharge their obligations. (b) Attempted or tender performance an offer to perform where promisor offers to perform, but promisee refuses to accept performance, tender is equivalent to actual performance, except in case of tender of money tenderer discharged without prejudice to his rights. 2. Discharge by agreement or consent a thing may be destroyed in the same manner in which it is constituted Various methods are (a) Novation new contract substitutes existing one either between same parties or between one of the existing parties and a third party must take place before expiry of old contract in case new contract enforceable, parties can fall back upon the old contract. Example : (i) A owes money to B enters into agreement with B and gives him mortgage of his (As) estate new contract replaces the old one. (ii) Shanker Lal Damodar V A. Ajaipal - existing mortgage discharged by substitution of new agreement of mortgage new agreement not enforceable for want of registration Held, parties could fall back upon the original mortgage. (b) Rescission when all or some terms of contract are cancelled may be by mutual consent or on failure to perform by one party party rescinding a voidable contract has to restore benefits received by him under the contract. Rescission may be (i) either total, or (ii) partial Rescinding some terms of contract Substituting new terms for old ones. Adding new terms without modifying any old terms. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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(c) Alteration modification of one or more terms of old contract by mutual consent old contract deemed to be discharged. (d) Remission acceptance of lesser fulfilment of promise made e.g. acceptance of lesser amount than due in discharge of the whole debt consideration not necessary for remission. (e) Waiver mutual abandonment of rights by parties to the contract no consideration necessary for waiver. (f) Merger when inferior right accruing to a party under contract merges with superior right accruing to same party under same or other contract. Example : P holds a property under a lease agreement later P buys the said property under a different agreement Ps rights as lessee merge into his rights as an owner 3. Discharge by impossibility of performance also called pre-contractual or initial impossibility - may fall into two categories (a) Impossibility existing at time of agreement void ab initio based on maxims (i) lexion cogit ad impossibilia, i.e. law does not recognise what is impossible, and (ii) impossibilium nulla obligato est, i.e. what is impossible does not create an obligation may be known or unknown to parties. Couturier Vs. Hastie H employed by C as del credere agent to sell Cs cargo of corn which was in transit H sold the cargo to a third person - Unknown to both, the corn became fermented in transit and already sold by the master of the ship at an intermediate port buyer repudiated the contract and H was sued for the price (being del credere agent) Held, as goods had already been totally lost before the contract was made, the contract void ab initio due to impossibility of performance - H not liable. (b) Impossibility arising subsequent to formation of contract also known as post contractual or supervening impossibility contract becomes void such act becomes impossible or unlawful normally parties not discharged by supervening impossibility and are liable for damages however, if caused by circumstances beyond their control, parties discharged from further performance may be due to following reasons (i) Destruction of subject matter without fault of parties contract discharged. Taylor Vs. Caldwell defendant agreed to let plaintiff use of their music hall between certain dates for concert before the first day of concert, hall destroyed by fire without fault of either party plaintiff sued defendant for their loss Held, performance depended upon the continued existence of hall performance becomes impossible on perishing of hall without default of the contractor void. Nickoll & Knight V Ashton, Edridge & Co. cargo of cotton seed to be shipped by particular ship before shipping, ship damaged by _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
57 stranding loading of cargo impossible Held, contract discharged. (ii) Non-existence or non-occurrence of particular state of things also called frustration of contract. Example A and B contract to marry each other before date fixed for marriage, A goes mad contract becomes void. Krell V Henry H hired flat from K for June 26 and 27, 1902 for witnessing coronation procession of Kind Edward VII K knew of Hs purpose coronation procession cancelled due to illness of King Held, cancellation discharged the contract H excused from paying the rent of the flat. (iii) Death or incapacity for personal service Robinson V Davison R undertook to perform at concert for certain price before she could perform, she was taken seriously ill Held, she was discharged due to illness. (iv) Change of law Baily V De Crespigny - D leased land to B agreed to erect a building on adjoining land subsequently, the adjoining land acquired by railway company under statutory authority Held, D excused from performance of contract. Noor Bux V Kalyan - A agreed to transport Bs goods subsequently, As trucks requisitioned by government under statutory power Held, contract discharged (v) Outbreak of war contract entered into with alien enemy during war is unlawful and void contracts entered into before outbreak of war, are suspended during war and may be revived after the war is over. In following cases, contract not discharged on grounds of supervening impossibility (a) Difficulty of performance may be due to unforeseen events or delays Blackburn Bobbin Co. V Allen & Sons A sold Finland timber to B - to be delivered between July and September Before actual delivery, war breaks out in August transport disorganised A unable to deliver Held, A not discharged. Tsakiroglou & Co. Ltd. V Noblee Thori G.m.b.H. A agreed to sell 300 tons of Sudan groundnuts to B c.i.f. Hamburg usual route via Suez Canal Shipment to be made in November/December, 1956 canal closed on November 2, 1956 reopened only in following April A refused to ship goods via Cape of Good Hope pleaded contract frustrated by reason of closing of Suez Canal Held, contract not frustrated as A could have transported goods via Cape of Good Hope. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
58 (b) Commercial impossibility contract not discharged on non-realisation of expected high profits or increase in cost of acquisition because of outbreak of war or inflation or sudden depreciation of money. Karl Ettlinger V Chagandas & Co. A promised to send goods from Bombay to Antwerp in September before shipment, war breaks out sharp increase in shipping rates Held, contract not discharged. (c) Impossibility due to failure of third person where non-performance due to default of third person on whose work the promisor relied contract not discharged. Harnandrai Fulchand V Pragdas A entered into contract with B for sale of certain type of cloth to be produced by C C did not manufacture that cloth- Held, A liable for damages. Ganga Saran V Ram Charan A agreed to sell to B specified quantity of cotton goods to be manufactured by a particular mill time schedule agreed upon for delivery mill failed to produce goods - A could not fulfil his agreement with B Held, B entitled to recover damages from A. (d) Strikes, lock-outs or civil disturbances Budget V Binnington Unloading of ship delayed beyond date due to strike by dock workers Held, ship-owners entitled to damages, the impossibility of performance being no excuse. Jacobs V Credit Lyonnais A agreed to supply to B certain goods procured from Algeria goods not produced due to riots and civil disturbance in Algeria Held, there was no excuse for non-performance of contract. (e) Failure of one of the objects where contract entered into with several objects, failure of one of them does not discharge the contract. Herne Bay Steamboat Co. V Hutton HB agreed to let out boat to H for viewing a naval review on occasion of coronation of Edward VII and for sailing around the fleet naval review cancelled due to kings illness but fleet assembled boat could be used to sail around the fleet Held, contract not discharged. 4. Discharge by lapse of time due to the performance becoming time barred on applicability of the Limitation Act, 1963. 5. Discharge by operation of law(i) by death contracts involving personal skill or ability terminated on death of promisor in other contracts, rights and liabilities devolve on legal representatives (ii) by merger - when inferior right accruing to a party under contract merges with superior right accruing to same party under same or other contract.
59 Example : P holds a property under a lease agreement later P buys the said property under a different agreement Ps rights as lessee merge into his rights as an owner (iii) by insolvency person adjudged insolvent discharged from all liabilities incurred prior to such adjudication. (iv) By unauthorised alteration of terms of the written agreement where a party makes any material alteration without consent of other party voidable at the option of other party if however alteration is not material, parties may opt to carry out the common intention. 6. Discharge by breach of contract non-fulfilment of contractual obligation may be either (i) Actual breach of contract may take place (a) at the time when performance due one party fails or refuses to perform his obligation under the contract if time is not essence of contract, the other party may accept delayed performance subject to payment of compensation. (b) During the performance of contract non performance by one party other party entitled to sue for breach of contract - may be by Express repudiation either by word or act. Cort V Ambergate etc. Rly. Co. C contracted with railway company to supply 300 tons of railway chairs at specified price to be delivered in instalments after delivery of 1.787 tons completed, railway company asked C to stop further delivery Held, railway company liable for breach of contract. Implied repudiation impossibility created by act of a party to contract tantamounts to breach of contract other party discharged from further performance. ONeil V. Armstrong P, a British subject, engaged by Captain of a warship owned by Japanese government to act as fireman Japanese government declared war on China P was informed that the performance of contract would bring him under penalties of Foreign Enlistment Act P left the ship Held, he was entitled to recover the wages agreed upon. (ii) Anticipatory breach of contract in executory contract (performance still due), one party repudiates his obligation under the contract before the time for performance arrives other party absolved from performance of his obligation under the contract may also sue for breach of contract May be done by Express renunciation e.g. before date of actual delivery, supplier intimates the buyer that he is not going to supply the goods. Some act so that performance becomes impossible Lovestock V Franklyn - A promised to assign to B within seven years, all his interest in a lease for a sum of .140 before expiry of seven years, A assigned his interest to another person _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
60 Held, this was anticipatory breach of contract by implied repudiation. Anticipatory breach does not necessarily discharge the contract, unless the promisee so chooses. Hochster V. De La Tour D engaged H on 12th April to enter into his services as courier to accompany him upon a tour employment to commence on 1st June on 11th May, D wrote to H telling him that his services were no longer required H brought a suit for damages although time for performance had not yet arrived Held, suit of H tenable entitled to damages. If promisee refuses to accept repudiation by promisor and treats it as alive, the consequences may be (i) promisor may perform his promise when the time for performance arrives and promisee is bound to accept the performance. (ii) while the contract is still alive, a supervening impossibility may discharge the contract promisee loses his right to sue for damages. Avery V. Bowden B chartered As ship agreed to load it with cargo within 45 days at Odessa when ship reached Odessa, B unable to supply the cargo A did not accept refusal and continued to demand cargo before expiry of 45 days, war breaks out rendering performance of contract impossible Held, contract discharged and A could not sue for damages. Measure of damages in anticipatory breach of contract (i) if contract ended by promisee at once damages will be measured by difference between price prevailing on the date of breach and the contract price. (ii) If contract kept alive till the date of performance measure of damages will be difference between price prevailing on the date of performance and the contract price. * * * * * ** * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
61 Law of indemnity and guarantee Contract of indemnity : contract whereby one party promises to save the other party from loss caused to him by the conduct of the promisor himself or any other person a class of contingent contracts - promisor is called indemnifier promisee is called indemnity-holder or indemnified. Example : A and B claim certain goods from a railway company as rival owners - A takes delivery of the goods by agreeing to compensate the railway company against loss in case B turns to be the true owner contract of indemnity between A and railway company. May be express or implied implied contract of indemnity may be inferred from the circumstances of the case or relationship of the parties. Example : T instructs A to sell certain cattle belonging to O O held A liable and recovered damages from him Held, contract of indemnity implied from Ts conduct in asking A to sell the cattle A entitled to recover the loss from T. Rights of indemnity-holder when sued - entitled to recover from the indemnifier : (i) all damages which he may be compelled to pay in any suit in respect of any matter to which promise to indemnify applies. (ii) All costs which he may be compelled to pay in bringing or defending any such suit but must have acted prudently. (iii) All sums which he may have paid under the terms of any compromise of any such suit compromise should not be contrary to the orders of the indemnifier should be prudent or authorised by the indemnifier. Rights of indemnifier Similar to rights of surety (printed later) Contract of guarantee : contract to perform the promise or discharge the liability of a third person in case of his default may be written or oral may be express or implied can also be inferred from the course of conduct of the parties. Surety - Person giving the guarantee or the guarantor Principal Debtor person in respect of whose default the guarantee is given. Creditor person to whom the guarantee is given. Essential features of contract of guarantee : 1. Concurrence requires concurrence of all the three parties, viz. the principal debtor, surety and the creditor. 2. Principal Debt guarantee secures payment of a recoverable debt of no principal debt, there can be no valid guarantee - primarily liability is that of principal debtor liability of surety is secondary which arises when there is default by principal debtor. In following cases guarantee of void debt is enforceable : _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
62 (a) guarantee given by directors of a company securing payment of their companys loan which was void as being ultra vires - enforceable against directors. (b) Guarantee of minors debt - if debt is void, the contract of the surety is not collateral but a principal contract - surety liable as principal debtor himself 3. Fulfilment of all essentials of a valid contract - consideration received by principal debtor is sufficient for the surety benefit to the surety himself is not necessary. Example : 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 As promise to deliver the goods this is sufficient consideration for Cs promise. Example : A sells and delivers goods to B afterwards C requests A to forbear to sue B for the debt for a year in return, C promises to pay for them in default of payment by B A agrees to forbear as requested this is sufficient consideration for promise. Example : A sells and delivers goods to B afterwards C, without consideration, agrees to pay for them in default of B the agreement is void being without consideration. 4. Writing not necessary contract of guarantee may be oral or written may also be express or implied from the circumstances of the case. Guarantee is not a contract of uberrimae fides or one of absolute faith it does not require full disclosure of all material facts by principal debtor or creditor to the surety before the contract is entered into. Sec 142 : a guarantee obtained by means of misrepresentation made by creditor or with his knowledge and assent, concerning a material party of the transaction, is invalid. Sec.143 : a guarantee obtained by a creditor by means of keeping silence as to material circumstances is invalid. Fraud or misrepresentation on the part of principal debtor is not enough to set aside the contract unless the creditor is a party to it or had knowledge about it in case of guarantee given to a banker, no obligation lies on banker to inform the intending surety of circumstances affecting the credit of the principal debtor. National Provincial Bank of England V Glanusk S guaranteed Ps account with bank afterwards, P drew on this account and paid off an overdraft he had with another bank Bank suspicious that P was defrauding S but did not communicate its suspicions to S Held, bank under no obligation to disclose to the surety guarantee not discharged. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
63 However, if guarantee is of nature of an insurance (as in fidelity guarantee), all material facts must be disclosed otherwise voidable at option of surety. London General Omnibus Co. V Holloway L employed P as clerk to collect money P misappropriated some receipts L threatened to dismiss P loss made good by Ps relations - L agreed to retain P in service on having a fidelity guarantee H gave his guarantee L did not made disclosure of Ps previous dishonesty - Held, the surety believed he was making himself answerable for a presumably honest man, not for a known thief owning to non-disclosure by L, guarantee could not be enforced against H. Co-operative Commission Shop Ltd V. Udham Singh fresh guarantees obtained for the fidelity of a manager of bank without disclosing his previous defalcations (misappropriation/embezzlement) Held, sureties not liable for further defalcation. Distinction between a contract of indemnity and a contract of guarantee Sl. No. 1 Basis No. of parties Contract of indemnity Contract of guarantee
There are two parties the There are three parties- the indemnifier (promisor) and the creditor, the principal debtor indemnified/indemnity-holder and the surety. (promisee) 2 Type of The liability of the indemnifier The liability of the surety to liability to the indemnified is primary creditor is collateral/secondary; and independent. the primary liability being of the principal debtor. 3 No. of Only one contract, i.e. between There are three contracts : one contract(s) the indemnified between the principal debtor and the creditor, the second between the creditor and the surety (guarantee) and the third between the surety and the principal debtor ((indemnity). 4 Request to Not necessary for indemnifier Surety gives the guarantee at contract to act at request of the the request of the surety. indemnified. 5 Arising of Liability of indemnifier arises The liability of principal liability only on happening of debtor is already there on an contingency. existing debt; the liability of surety arises only on default by the principal debtor. 6 Right to Indemnifier cannot sue a third On discharging the debt of the sue party for loss in his own name principal debtor, the surety unless there is assignment in steps into the shoes of the his favour. creditor and can sue the principal debtor in his own right. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
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65 Kinds of guarantee - May be (i) for repayment of a debt existing or future. (ii) for payment of the price of goods sold on credit, or (iii) for good conduct or honesty of a person employed in a particular office (known as fidelity guarantee). Can also be differentiated as (a) Specific guarantee extends to a single transaction or debt comes to end when the guaranteed debt is discharged or the promise is performed. (b) Continuing guarantee : extends to series of transactions liability of surety extends to all transactions contemplated unless revocation of guarantee may also cover continuing transactions for a fixed period. Example : S guarantees payment to C to the amount of Rs.10,000 for any goods he supplies to P from time to time C supplies P with goods to the value of above Rs.10,000 P pays for it afterwards C supplies goods to the value of Rs.20,000 P fails to pay guarantee of S is a continuing one and he is liable to C to the extent of Rs.10,000. Kay V Groves - G provides guarantee in following terms I hereby agree to be answerable to K for the amount of five sacks of flour to be delivered to T, payable in one month five sacks actually supplied T paid for them further supplies made during the same month for which T failed to pay Held, it was not a continuing guarantee to cover subsequent deliveries though not exceeding in the whole five sacks G not liable for various subsequent parcels. Revocation of continuing guarantee - revocation can be as to future transactions only modes : (i) By notice of revocation by surety to the creditor. Offord V Davies S stands surety for P for any amounts which C may lend to P from time to time in the next 12 months upto a maximum of Rs.10,000 after 3 months, S revokes the guarantee when C had lent Rs.3,000 to P S discharged from all liability to C for subsequent loans but remains liable for Rs.3,000 on default of P. (ii) By death of surety however, liability for previous transactions remain. (iii) By other modes novation, variation of terms of contract, release/ discharge of principal debtor, compounding with principal debtor, creditors act or omission impairing suretys eventual remedy or loss of security. Extent of suretys liability : 1. Suretys liability co-extensive with that of principal debtor, unless specified to the contrary it may be made less than that of principal debtor but never greater creditor can sue surety without suing the principal debtor. 2. suretys liability may be for a part of the entire debt or for the entire debt subject to a limit. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
66 3. May be a continuing guarantee - may be unlimited or upto a specified limit. 4. Where original agreement is void or voidable - surety liable as principal debtor in such cases, suretys liability is principal one and not collateral 5. If creditor does not sue the principal debtor within period of limitation surety is not discharged. 6. Death of principal debtor or his discharge by law does not release the surety from his obligations. Rights of surety : 1. Against the creditor (i) Right to require creditor to sue principal debtor first liable to indemnify creditor for any expense or loss therefrom in case of fidelity guarantee, he can ask the creditor to dismiss the principal debtor in case of proven dishonesty. (ii) Right to set-off or counter-claim which debtor has against the creditor. (iii) On payment of the guaranteed debt, right to claim from creditor all the securities which he holds. (iv) Right to equities which creditor could have enforced against the principal debtor or persons claiming through him. Example : C advances to P Rs,2,000 on guarantee of S C also takes further security for Rs.2,000 by way of pledge of Ps furniture C cancels pledge P becomes insolvent S is discharged from liability to the amount of the value of furniture. (v) Right of subrogation after payment of guaranteed debt by surety, surety steps into shoes of creditor gets right to sue principal debtor for recovery. 2. Against the principal-debtor (i) Right to be relieved from liability before payment becomes due debt must be ascertained surety can compel principal debtor to relieve him from guarantee by paying off the debt. (ii) Right to indemnity after payment made by surety to creditor, surety entitled to recover that amount alongwith any damage sustained from the principal debtor. Example : P indebted to C S is surety C sues S for recovery of debt S defends suit having reasonable grounds to do so S compelled to pay C amount of debt with costs S entitled to recover from P amount of debt as well as costs paid by him. 3. Against co-sureties (i) Right of contribution each liable to contribute equally liability may be limited to a maximum amount by each one if any one makes payment to creditor, he is entitled to claim contribution from other cosureties. (ii) Right on release of co-surety even though creditor may release any of the co-sureties from his liability, the released co-surety will remain liable to others for contribution in event of default. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
67 Discharge of surety : 1. Discharge by revocation : (i) Revocation by surety by giving notice continuing guarantee can be revoked as to future transactions by giving notice specific guarantee cannot be revoked after liability has accrued. (ii) Revocation by death continuing guarantee revoked as to future transactions on death of surety estate not liable for transactions after death even if creditor has no notice of death. (iii) Revocation by novation substitution of new contract for the old one either between same parties or between any one of old parties and a new one mutual discharge of old contract forms consideration for the new one. 2. Discharge by conduct of the creditor (i) Variance in terms of contract without the consent of surety immaterial whether variation prejudicial to surety or not - discharged as to future transactions where guarantee to perform several obligations, variance in nature of one will not discharge the rest. Example : S guaranteed payment for goods supplied by C to P condition that 18 months credit to be given C gives only 12 months credit S is discharged. General Steam Navigation Co. V Rolt P contracted to built ship for C contract money payable in instalments as work reached certain stages of completion S became surety for due performance by P C allowed P to draw large portion of last two instalments before they were due Held, S discharged from liability. (ii) Discharge of principal debtor by creditor wilful act or omission by creditor - surety is also released but surety is not discharged by operation of law omission of creditor to sue within the period of limitation does not discharge the surety. Hewison V Rickets - C let goods to P under hire-purchase agreement S guaranteed the payment of instalments On instalments being in arrears, C seized the goods and determined the contract then sued S on his guarantee Held, as C had determined the contract, he could not recover from S. Example : P contracts with C to build a house for C within a stipulated time C has to supply the timber S guarantees performance by P C omits to supply the timber S discharged from suretyship. Example : C employs P at one place S stood surety for P this employment terminated P employed by C at a different place C takes security bond from another person S is discharged. (iii) Compounding by creditor with principal debtor contract by which creditor makes composition with or promises to give time to, or not to sue the principal debtor surety is discharged unless he assents to such contract. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
68 Midland Motor Showrooms Ltd V Newman - P purchased motor car from C under hire-purchase agreement S guarantees performance of the contract for valuable consideration, C gives further time to P for payment of one of the instalments Held, P discharged from any further liability. But in the following cases the surety is not discharged : (a) where contract to give time to principal debtor is made by creditor with a third person and not with the principal debtor. (b) Mere forbearance on part of creditor to sue the principal or to enforce any other remedy against him, in the absence of anything to the contrary in the guarantee. (c) Release of one of the co-surety by the creditor does not discharge the other co-sureties the surety so released is not discharged from his liability to the other sureties. (iv) Creditors act or omission impairing suretys eventual remedy against principal debtor. General Steam Navigation Co. V Rolt P contracted to built ship for C contract money payable in instalments as work reached certain stages of completion S became surety for due performance by P C allowed P to draw large portion of last two instalments before they were due Held, S discharged from liability. Example : S gives guarantee for fidelity of a manager of bank manager indulges in malpractices directors wilfully ignore it S stands discharged from obligation by conduct of the directors (v) Loss of security if creditor loses any security given to him at the time of contract of guarantee, or parts with it without consent of surety, surety is discharged to the extent of value of security if separate debts secured by separate securities, loss of one security does not discharge the other debts. Example : C advances to P Rs,2,000 on guarantee of S C also takes further security for Rs.2,000 by way of pledge of Ps furniture C cancels pledge P becomes insolvent S is discharged from liability to the amount of the value of furniture. 3. Discharge by invalidation (i) Guarantee obtained by misrepresentation concerning a material fact with knowledge or consent of creditor guarantee invalid. (ii) Guarantee obtained by concealment of a material fact is invalid. London General Omnibus Co. V Holloway L employed P as clerk to collect money P misappropriated some receipts L threatened to dismiss P loss made good by Ps relations - L agreed to retain P in service on having a fidelity guarantee H gave his guarantee L did not made disclosure of Ps previous dishonesty - Held, the surety believed he was making himself answerable for a presumably honest man, not for a known
69 thief owning to non-disclosure by L, guarantee could not be enforced against H. (iii) Guarantee on contract that creditor shall not act on it until a co-surety joins guarantee invalid if that other person does not join. Example : S2 signed a guarantee given to bank though it was intended to be joint and several guarantee of S1, S2, S3 and S4 S4 died without signing bank did not agree with S1, S2 and S3 to dispense with signature of S4 Held, S2 not liable on guarantee. (iv) Failure of consideration discharges the surety. Example : P agrees to pay maintenance to C if C marries A S guarantees performance of contract A dies S is discharged from surety. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ** * * * * * *
70 Remedies for breach of contract remedy is the means given by law for the enforcement of a right when contract is broken, the injured party has following remedies : 1. Rescission : when contract broken by one party, the other may treat contract as rescinded refuse further performance injured party absolved of all his obligations under the contract however liable to restore any benefits he has received under the contract also entitled to compensation for any damages sustained by him. Example : A promises to supply goods to B by a specified date - B agrees to pay the price after receipt of the goods A fails to supply the goods by the specified date B is discharged from liability to pay the price. The Court may grant rescission (i) where contract is voidable at the option of the plaintiff, or (ii) where the contract is unlawful for causes not apparent on its face and defendant is more to blame than the plaintiff. The Court may refuse to grant rescission in following cases : (i) where plaintiff has expressly or impliedly ratified the contract, or (ii) where owing to changed circumstances (not due to any act of defendant), parties cannot be restored to their original positions, or (iii) where third parties have acquired rights in the subject matter of the contract in good faith and for value, or (iv) Where only a part of contract is sought to be rescinded and such part is not severable from the rest of the contract. 2. Damages monetary/pecuniary compensation allowed to injured party by Court for loss or injury suffered by him - injured party entitled to (a) damages which arise in usual course of things for such breach ordinary damages. (b) Damages which the parties knew, at the time of entering into contract, to be likely to result from the breach special damages. (c) Damages for breach of quasi contract same as for any other contract. However, damages not given for any indirect or remote loss or damage. Hadley V Baxendale As mill stopped by breakdown of a shaft A delivered shaft to B, a common carrier, to be taken to manufacturer for repairs A did not inform B that delay would cause loss in profits due to Bs negligence, delivery of shaft delayed beyond reasonable time Held, B not liable for loss of profits during the period of delay as B not intimated that delay in delivery of the shaft would entail loss of profits. Rules relating to damages Ordinary damages arises naturally and directly from breach in usual course of things.
71 In contract for sale of goods, measure of damages on breach is the difference between the contract price and the market price on the date of the breach where goods specially made to order and not marketable, the price of the goods is the measure of damages. Example : A contracts to buy rice from B at Rs.950 per quintal no time fixed for delivery later A informs that he will not buy from B market price on that day was Rs.930 per quintal B entitled to receive compensation from A at the rate of Rs.20 per quintal. Example : A contracts to pay a sum of money to B on a specified day A does not pay on specified day as a consequence, B is unable to repay his debts and is totally ruined A is not liable to make good to B anything more than principal sum he contract to pay together with interest upto day of payment. If promisee neglects or refuses to afford the promisor reasonable facilities for performance of his promise, promisor is excused from performance. Special damages : such damages may reasonably be supposed to have been in contemplation of both parties as probable result of the breach however, cannot be claimed as matter of right. Simpson v London & N.W. Rail. Co. S sent specimen of his goods for exhibition at agricultural show after show, he entrusted his goods to an agent of railway company for carriage to another show grounds at New Castle on consignment he wrote must be at New Castle Monday certain due to negligence of railway company, goods arrived late for the show Held, S could claim damages for loss of profit at show. Madras Rail Co. V Govind Rau - G, a tailor, delivered a sewing machine and some cloth to railway company to be delivered at a place where a festival was to be held expected exceptional profits at festival did not bring it to notice of railway company goods delivered after conclusion of festival Held, G could not recover the loss of profit. Vindictive or exemplary damages vindictive/punitive by nature normally awarded in breach of promise to marry and wrongful dishonour or cheque by banker. Nominal damages where injured party has not suffered any loss due to breach, only nominal damages are awarded only to acknowledge that the plaintiff has proved his case and won. Brace V Calder A firm consisting of four partners employed B for a period of 2 years after six months, two partners retired continuing partners refused to employ B Held, he was only entitled to nominal damages as he had suffered no loss. Damages for loss of reputation normally not recoverable exception, wrongful dishonour of customers cheque by banker inspite of sufficient funds to the credit of the customer general rule is : smaller the amount of the cheque dishonoured, _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
72 the larger is the amount of damages awarded if customer is not a tradesman, he can recover nominal damages only.
73 Damages for physical inconvenience and discomfort measure of damage not affected by the motive or the manner of breach. Addis V Gramophone Co. Ltd. A wrongfully dismissed in harsh and humiliating manner by G from employment Held, A could recover wages for the period of notice and the commission which he would have earned during that period but not entitled to anything for his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him to obtain employment. Hobbs V London & S.W. Rail Co. H, alongwith his wife and children, took ticket for midnight train for particular place where he lived wrongfully transported to a wrong place had to walk several miles on a drizzling wet night his wife caught cold Held, H entitled to recover 8 to compensate him for inconvenience but nothing for medical expenses of his wife as her catching cold was too remote a consequence. Mitigation of damages ; injured party duty bound to take all reasonable steps to mitigate the loss caused by the breach cannot claim damages for loss which reasonably could have been avoided. Difficulty of assessment no bar to recovery of damages Court to estimate the loss and may take into account a contingency. Chaplin V. Hicks - H advertised a beauty competition readers of certain newspapers to select 50 ladies then H was to select 12 out of those 50 selected 12 to be provided theatrical engagements C was one of the 50 selected however, C was not present at the time of final selection due to Hs breach of contract Held, C was entitled to damages although it was difficult to assess them. Cost of decree aggrieved party entitled to the cost of getting the decree, in addition to damages allowed at discretion of the Court. Damages agreed upon in advance in case of breach if contract contains a stipulation that a certain sum to be paid by way of penalty for failure to perform the obligations - aggrieved party entitled to receive a reasonable compensation not exceeding the amount so named. May be liquidated damages or a penalty liquidated damages represent a sum (fixed or to be ascertained) which is fair and genuine pre-estimate of the probable loss caused by breach penalty is disproportionate to the damage and is fixed only with a view to secure performance of the contract. Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. S bought tyres from Dunlop Rubber Co. sold them to D, a sub-dealer D agreed not to sell below Dunlop Rubbers list price to pay Dunlop Rubber 5 for every tyre undersold D undersold two tyres Dunlop Rubber sued for breach Held, the sum fixed was a genuine pre-estimate of damage and not a breach. Payment of interest stipulation regarding payment of interest in case of default not in the nature of penalty allowed if reasonable higher rate of interest may be allowed from the date of default if not penal in nature higher rate never allowed from the date of the contract compound interest at the same rate as simple interest may be allowed as not penal in nature where lower rate is charged if _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
74 certain conditions satisfied, failure to fulfil the conditions may entail payment of higher (i.e. normal) rate of interest. 3. Quantum Meruit means as much as earned or as much as merited arises when contract partly performed by one party and then becomes discharged due to breach by other party party who has performed the work can claim remuneration for the work done it is claim on quasi-contractual obligation Arises in following cases (i) when agreement discovered to be void person who has received advantage under the contract is bound to restore it or to make compensation for it. Craven-Ellis V. Cannon Ltd. CE employed as managing director in a company after three months, found that directors were not qualified to appoint him Held, CE could recover remuneration for the services rendered by him on quantum meruit. (ii) When something done without intention to do so gratuitously. (iii) When there is express or implied contract to render service, but no agreement as to remuneration Upton Rural District Council v Powell - Ps farm did not come under the free service zone of the fire department - fire at Ps farm P called up U pton Fire Brigade which arrived and put out the fire Held, there was implied agreement between P and fire brigade for the service of the brigade - P was liable to pay reasonable remuneration for the service rendered. (iv) When completion of contract prevented by the act of the other party Planche V. Colburn - C engaged P to write book on ancient armoury to be published in instalments in periodical called The Juvenile Library for fee of 100 after few issues, publication of periodical stopped Held, P could recover on quantum meruit for the work done by him. De Bernady V Harding P wrongfully revoked his agent As authority before A could complete his duties Held, A could recover quantum meruit for the work done by him and the expenses incurred by him in course of his duties. (v) When contract is divisible where party not in default has enjoyed the benefit of part performance, the party in default can sue on quantum meruit (vi) When indivisible contract performed completely but badly Hoenig V. Issacs A agreed to decorate Bs flat for a lump sum of quantum 750 certain requirements laid down A completed the work but B complained of faulty workmanship it cost B 204 to remedy that defect Held, A could recover from B 750 less 204. 4. Specific Performance in cases where damages are not adequate remedy, Court may direct for specific performance also enforced where no standard for ascertaining the actual damage caused. 5. Injunction where a party is in breach of a negative term of contract, Court may restrain him from doing what he promised not to do. Lumley Vs. Wagner - W agreed to sing at Ls theatre agreed not to sing anywhere else during that period later, W made contract with Z to sing at another theatre and _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
75 refused to perform the contract with L Held, W could be restrained by injunction from singing by injunction from singing for Z.
76 Bailment and pledge Bailment Sec.148 delivery of goods by one person (bailor) to another person (bailee) for some purpose contract that upon completion of the purpose, the goods be returned or otherwise disposed of according to directions of the bailor. Example : A sells certain goods to B who leaves them in the possession of A relationship between B and A is that of bailor and bailee. For finder of goods belonging to another, relationship of bailee and bailee automatically created between finder and owner. Basavva K.D. Patil Vs. State of Mysore As ornaments stolen recovered by the police ornaments disappeared from police custody Held, State was liable, the contract of bailment having been implied. Goods mean movable property other than money and actionable claims though possession handed over, ownership remains with bailor. Money deposited in bank account (not safe vault) creates relationship of creditor and debtor no bailment bank not liable to return the very same money when asked for. Requisites of bailment 1) Contract usually created by agreement express or implied - in exceptional cases, bailment is implied by law as between finder and owner of goods. 2) Delivery of possession control and intention to exclude others necessary may be actual or constructive - goods handed over to servant to hand over to a third party does not involve delivery of possession delivery of railway receipt amounts to constructive delivery of goods. Kaliperumal V. Visalakasmi goldsmith employed by lady to melt her old jewellery and make new ones out of it every evening she received the unfinished jewellery and put it in a box kept at goldsmiths premises lady kept the key to box with herself jewellery stolen from box Held, there was no bailment as the goldsmith had returned the jewellery bailed to him by her. 3) For specified purpose if goods delivered by mistake, there is no bailment. 4) Return of specific goods or disposal as per directions of bailor - as soon as purpose is achieved if not returned, there is no bailment however, alteration in form is allowed, e.g. piece of cloth stitched into a suit. Examples of bailment (a) Money deposited in bank safe vault. (b) Hire purchase agreement involves two aspects initially it is a contract of bailment on payment of all the instalments, it becomes a contract of sale. (c) Goods seized by police or other government authorities. (d) Acceptance of goods by transport or railway company for carriage. (e) Acceptance of articles by post office as Value Payable Parcel (VPP).
77 In contract of bailment, consideration is generally in form of money payable either by bailor or bailee however, consideration not necessary to support the promise of bailee to return the goods detriment suffered by bailor in parting with possession of goods is sufficient consideration in support of contract of bailment. Classification of bailments : 1. For the exclusive benefit of bailor e.g. delivery of valuables to neighbour for safe custody, without charge. 2. For exclusive benefit of bailee e.g. lending of car to a fried for his use, without charge. 3. For mutual benefit of bailor and bailee e.g. hiring of car or giving it to a mechanic for repairs both involve consideration. 1 & 2 above are gratuitous bailment as no consideration passes between bailor and bailee - terminable by bailor at any time even though for specified time or purpose 3 above is non-gratuitous bailment, as it involves payment of consideration. Duties of bailor 1. To disclose known faults about the goods in case of default, bailor is responsible for any damage suffered by bailee directly from such faults. In case of goods bailed for consideration, bailor is responsible even for faults unknown to him. Read V. Dean A hires motor launch from B for holiday on river Thames launch caught fire fire fighting equipment out of order A unable to extinguish fire A got injured and suffered loss Held, B was liable. In gratuitous bailment, bailor responsible only for the known faults which are not disclosed. 2. To bear extraordinary expenses of bailment bailee only bound to pay reasonable and ordinary expenses of bailment. Example : A lends his horse to B, his friend, for two days feeding charges to be paid by B but if horse meets with an accident, A will have to repay the medical expenses incurred by B. In case of gratuitous bailment, the bailor has to pay all necessary expenses. Example : A goes out on holiday - leaves his dog with B B incurred expenses on feeding the dog A liable to repay B the necessary expenses incurred by him. 3. To indemnify bailee for loss in case of premature termination of gratuitous bailment if loss accruing to bailee exceeds the benefit derived by him out of bailment, the bailor has to indemnify him. Example : A lends his old discarded bicycle to B gratuitously for 3 months B incurs Rs.100 on its repairs A asks for return of bicycle after one month A liable to compensate B for expenses incurred by him in excess of benefit derived by him. 4. To receive back the goods if bailor refuses to receive back goods, bailee is entitled to receive compensation from bailor for necessary expenses of custody. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
78 5. To indemnify bailee in case bailor has defective title to goods and not entitled to make bailment or receive back the goods or give directions in relation to them and bailee suffers some loss as consequence bailor liable to indemnify the bailee. Rights of bailor 1. Enforcement of rights bailor can enforce by suit all the liabilities and duties of bailee, as his rights. 2. Avoidance of contract in case of any act by bailee inconsistent with the terms of bailment, bailor can terminate the bailment. 3. Return of goods lent gratuitously bailor can demand return at any time even though bailment for specified time or purpose however, in case bailee suffers some loss exceeding the benefit derived by him, bailor has to indemnify the bailee. 4. Compensation from a wrong-doer if any third person deprives bailee use or possession of goods bailed or does them any injury, bailor (also the bailee) entitled to bring a suit against such third person for such deprivation or injury. Rights of bailee duties of bailor are the rights of bailee his additional rights are : 1. Return of goods to one of several joint bailors in the absence of any contract to the contrary. 2. Delivery of Goods to bailor without title if bailee acts in good faith, he is not responsible to the owner in respect of such delivery 3. Right to apply to Court to stop delivery if any third person claims the goods bailed, bailee may apply to Court to stop the delivery of goods and to decide the title to the goods. 4. Right of action against trespassers 5. Bailees lien where lawful charges of the bailee are not paid, he may retain the goods (particular lien). Duties of bailee : 1. To take reasonable care of goods bailed should take care as man of ordinary prudence would under similar circumstances in case of no return of goods or their return in damaged condition, onus of proof is on bailee to show that there had been no negligence on his part. Coldman Vs. Hill A gives his cattle to B for feeding grass against payment without any negligence on Bs part, cattle were stolen B did not inform the owner or the police did not even make any effort to recover them thinking it to be useless Held, B was liable for the loss. Martin Vs. London County Council N admitted to hospital her jewellery handed over to hospital officials for safe custody jewellery was stolen Held, hospital officials were bailees for reward and failed to exercise care which the nature and quality of the article required - liable for loss. 2. Not to make any unauthorised use of goods : if uses goods in a manner inconsistent with the terms of contract bailee liable even if not guilty of negligence and the damage is result of an accident.
79 Example : A lends horse to B for his riding only B allows C to ride the horse C rides with care but horse accidentally falls and is injured Held, B is liable to make compensation to A for injury caused to his horse. 3. Not to mix the goods bailed with his own goods - if bailee mixes the goods : With bailors consent both shall have proportionate interest in the mixture thus produced. Without bailors consent and (i) such goods are separable bailee to bear the expenses of separation as wells as damage arising from mixture. (ii) Such goods are inseparable bailor entitled to compensation for the loss of goods. If goods get mixed up by inadvertence or by accident or by act of God or by unauthorised act of a third party both bailor and bailee have proportionate interest in the mixture bailee will have to bear the cost of separation. 4. Not to set up an adverse title : bailee cannot deny the right of bailor to bail the goods and receive them back if bailee delivers them to a third person, he has to prove that such person had a right to them as against the bailor. 5. To return any accretion to the goods - in case of a contract to the contrary, bailee bound to deliver to bailor any increase or profit accrued from the goods bailed. Example : A leaves his cow in custody of B to be taken care of cow gives birth to a calf B is bound to deliver the calf as well as the cow to A. 6. To return the goods bailee duty bound to return the goods bailed, without demand, as soon as purpose of bailment is achieved Shaw & Co. V. Symmons & Sons A delivered some books to B to be bound A presses for their return, but B neglects more than reasonable time elapsed accidental fire at Bs premises books were burnt Held, B was liable for the loss even though he was not negligent as failure on his part to return the books within reasonable time. Lien - right of a person to retain possession of goods belonging to another until some debt or claim of the person in possession is satisfied. Possession must be (i) rightful, (ii) not for specific purpose and (iii) continuous. Right of lien may arise by (a) statute, (ii) express or implied contract, or (iii) general course of dealings between the parties in a particular trade. Extinguished or lost by (i) abandonment (ii) payment or tender of the amount due, or (iii) loss or surrender of possession of goods. Types of lien 1. Particular lien available to the bailee only against those goods in respect of which he has rendered some service involving exercise of labour or skill. Example : A gives a piece of cloth to B, a tailor, to stitch into a suit B is entitled to retain the coat till he is paid for. If bailee defaults in completion of work within the agreed time or reasonable time not entitled to right of lien. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
80 If bailee permits the bailor to regain right of possession without payment of charges cannot exercise right of lien. If bailee permits credit to bailor cannot exercise right of lien. Example : A gives a cloth to B, a tailor, to sew into a coat B promises to deliver the coat as soon as it is finished allows to give A three months credit B not entitled to retain the coat. If goods destroyed or stolen without any fault on part of bailee bailee is entitled to be paid for services performed upon the goods before their destruction or theft. 2. General lien a right to retain all the goods or any property (which is in possession of the holder) of another until all the claims of the holder are satisfied. This is right to retain property of other for general balance of account. Normally available to bankers, wharfingers, attorneys and policy brokers. Example : T wo securities handed over by A to banker for safe-keeping A takes loan against only one of them banker entitled to retain both the securities until his claim is satisfied. Difference between particular lien and general lien Basis 1. Availability of right Particular lien Available only against those goods in respect of which skill and labour has been expended by the bailee. General lien Available in respect of any property belonging to other party and in possession of the person exercising the right, in respect of any payment lawfully due to him. For a general balance of account.
2. Reason of lien
For recovery of charge for labour employed or expenses incurred upon the goods.
Right of bailor and bailee against wrong-doer : 1. Suit against wrong doer : when third party wrongfully deprives the bailee of use or possession of goods bailed or causes injury to the goods bailee or bailor may bring a suit against the wrong-doer. 2. Apportionment of relief whatever received by way of relief or compensation in any suit against wrong-doer, proportionate share of bailor and bailee as per respective interests. Finder of goods - person who comes by an article but not entitled to its possession if he picks it up, he becomes a bailee Rights of finder of goods : Right of lien has right of lien for expenses incurred on the preservation and for finding out the owner but has not right to sue the owner for its recovery, as incurred by him voluntarily. _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
81 Right to sue for reward finder can sue for specific reward offered by owner for return of goods may retain the goods until reward received Right of sale finder can sell the goods if (i) owner cannot be found with reasonable diligence, or (ii) if found, refuses to pay the lawful charges of finder, or (iii) if goods are in danger of perishing or losing the major part of its value, or (iv) if lawful charges of finder exceeds two-third of value of goods. Obligations of finder of goods 1. Must take reasonable care of goods if despite such care, if goods are destroyed, finder not responsible for such loss. 2. Must not use the goods for own purpose. 3. Must not mix the goods with his own. 4. Must try to find out the owner if fails to do so, he is liable as a trespasser. Termination of bailment 1. On expiry of the period if bailment is for specific period. 2. On achievement of object if bailment is for specific purpose. 3. Inconsistent use of goods if used in manner inconsistent with the terms of contract. 4. Destruction of subject matter or incapable of use for the purpose of bailment. 5. Gratuitous bailment at any time as per wishes of bailor. 6. Death of bailor or bailee in case of gratuitous bailment. Pledge bailment of goods as security for payment of a debt or performance of a promise bailor is called pledger/pawnor bailee is called pledgee/pawnee Any movable property can be pledged - even a saving bank pass book may be pledged. Delivery is necessary may be actual or constructive or symbolic (like handing over of keys of bank vault) Revenue Authority V Sudarshan Pictures - producer of film borrowed money from financier-distributor agreed to deliver the final prints of film when ready Held, agreement was not pledge, there being no actual transfer of possession. Difference between pledge and bailment : Basis 1. Purpose Pledge As security for performance of a specific promise, like repayment of a debt After giving notice to pawnor, pawnee may sell the goods pledged. Pawnee has no right to use the goods pledged with him. Bailment For any purpose.
2. Remedy on default 3. Use for own purpose
Bailee may either retain the goods or sue for his charges. Bailee may use the goods bailed for own purpose if terms of bailment so provide.
Rights of pawnee _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
82 1. Right of retainer - may retain the goods pledged until his dues repaid also for interest due and all necessary expenses incurred by him for possession and preservation of goods has particular lien. 2. Right of retainer for subsequent advances if pawnee lends money to same pawnor after date of original pledge gets right of retainer over goods for subsequent advances also. 3. Right to extraordinary expenses can only sue for their recovery no right of retainer 4. Right against true owner, when pawnors title is defective when pawnor got possession of goods pawned under a voidable contract, but contract not rescinded at time of pledge pawnee gets good title if he acts in good faith and without notice of such defective title. 5. Pawnees right where pawnor makes default when pawnor defaults in redeeming the pledge, pawnee may (a) file suit for specific performance and retain goods as collateral security. (b) Sell the goods after giving reasonable notice to pawnor (c) Recover any deficiency arising on sale of goods from the pawnor also liable to hand over the surplus realised, if any. Rights of pawnor 1. Right to get back goods after performance of promise or repayment of loan and interest and necessary expenses, if any. 2. Right to redeem debt if default made in fulfilment of promise, but anytime before sale of goods pledged by pawnee, pawnor can redeem the goods pledged and also make payment of interest and expenses, if any. 3. Preservation and maintenance of goods can ask pawnee to preserve and maintain the goods pledged. 4. Right of an ordinary debtor has right given under various statutes for protection of debtors. Pledge by non-owners Pledge by mercantile agent - in ordinary course of business of mercantile agent if in possession of goods with consent of owner valid only if pledgee acts in good faith and without notice of defect of agents title. Pledge by seller or buyer in possession after sale seller left in possession after sale or buyer in possession before sale with consent of other party valid only pledgee acts in good faith and without notice of defect of pawnors title. Pledge by pawnor having limited interest - e.g. person having lien over the goods or a finder of goods may pledge them to the extent of his interest. Pledge by co-owner in possession one of several co-owners in actual possession with consent of others can create valid pledge. Pledge by person in possession under a voidable contract pledge valid if made before rescission of the voidable contract and if pledgee acts in good faith and without notice of defect in pledgors title.
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83 Contract of agency
"Agent" - a person employed to do any act for another, or to represent another in dealing with third persons intention to bring his principal into contractual relations with third persons. Principal - The person for whom such act is done, or who is so represented - 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. Essentials of agency relationship 1. Agreement between principal and agent contract not necessary no consideration necessary to create agency 2. Intention of agent to act on behalf of principal even without a contract between the parties, if a person intends to act on behalf of another, agency is created. Rules of agency 1. Whatever a person can do personally, he can do through an agent subject to exceptions in case of contract which are personal in character (like marriage) or annexed to a public office (like magistrate( 2. He who does an act through another does it by himself - (qui facit peralium facit per se) acts and contracts of agent have effect as if done personally by principal. Who may be an agent - As between the principal and third persons, any person may become an agent - no minor person or of unsound mind can become an agent - No consideration is necessary to create an agency;
Difference between agent and servant Basis 1. Legal relationship 2. Control Agent Agent can bring the principal into legal relations with third persons. Agent not under direct control and supervision of principal but bound to follow all lawful instructions of principal. An agent can work for several principals at the same time. Servant Servant ordinarily does not create legal relations between his employer and third persons. Servant acts under direct control and supervision of principal and bound to follow all reasonable instructions of his employer. Servant can serve only one master at a time.
3. No. of principals/ employers 4. Liability of employer
Principal liable for wrong-doings Master is liable for wrongs of of agent done within the scope of his servant if committed in his authority. course of his employment.
84
Creation of agency 1. Agency by express agreement - oral or written contract usually written in form of power of attorney. 2. Agency by implied agreement arises from conduct, situation or relationship of parties - to be inferred from the circumstances of the case, and things spoken or written, or the ordinary course of dealing. Extent of agent's authority An agent, having an authority to do an act, has authority do every lawful thing which is necessary in order to do so such act.An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business. Agent's authority in an emergency An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss and would be done by a person or ordinary prudence, in his own case, under similar circumstances. When agent cannot delegate An agent cannot lawful employ another to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature or agency, a sub-agent must, be employed. "Sub-agent" defined A "sub-agent" is a person employed by, and acting undue the control of, the original agent in the business of the agency. Representation of principal by sub-agent properly appointed Where a sub-agent is properly appointed, the principal is, so far as regards third persons, represented by the sub-agent, and is bound by and responsible for his acts, as if he were an agent originally appointed by the principal.Agent's responsibility for sub-agents: The agent is responsible to the principal for the acts of the sub-agent.Sub-agent's responsibility: The sub-agent is responsible for his acts to the agent, but not to the principal, except in case of fraud or wilful wrong. Agent's responsibility for sub-agent appointed without authority Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his acts both to the principal and to third person; the principal is not represented, by or responsible for the acts of the person so employed, nor is that person responsible to the principal. Relation between principal and person duly appointed by agent to act in business of agency _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
85 When an agent, holding an express or implied authority to name another person to act for the principal in the business of the agency, has named another person accordingly, such person is not a sub-agent, but an agent of the principal for such part of the business of the agency as is entrusted to him.
Illustrations 1. A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent, but is A's agent for the conduct of the sale. 2. A authorises B, a merchant in Calcutta, to recover the moneys due to A from C & Co. B instructs D, a solicitor, to take legal proceedings against C & Co. For the recovery of the money. D is not a sub-agent, but is a solicitor for A.
Agent's duty in naming such person In selecting such agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case; and, if he does this, he is not responsible to the principal for the acts of negligence of the agent so selected. Illustrations 1. A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of good reputation to choose a ship for A. The surveyor makes the choice negligently and the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is, responsible to A. 2. A consigns goods to B, a merchant, for sale. B, in due course, employes an auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the proceeds of the sale. The auctioneer afterwards becomes insolvent without having accounted for the proceeds. B is not responsible to A for the proceeds. Right of person as to acts done for him without his authority-effect of ratification Where acts are done by one person on behalf of another,but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority.
Ratification may be expressed or implied Ratification may be expressed or may be implied in the conduct of the person on whose behalf the acts are done.
Illustrations 1. A, without authority, buys goods, for B. Afterwards B sells them to C on his own account; B's conduct implies a ratification of the purchase made for him by A. 2. A, without B's authority, lends B's money to C. Afterwards B accepts interest on the money from C. B's conduct implies a ratification of the loan.
86 Knowledge requisite for valid ratification No valid ratification can be made by a person whose knowledge of the facts of the case is materially defective. Effect of ratifying unauthorised act forming part of a transaction A person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which such act formed a part. Ratification of unauthorised act cannot injure third person An act done by one person on behalf of another, without such other person's authority, which, if done with authority would have the effect of subjecting a third person to damages, or of terminating any right to interest of a third person cannot, by ratification, be made to have such effect.
Illustrations 1. A, not being authorised thereto by B, demands, on behalf of B, the delivery of a chattel, the property of B, from C who is in possession of it. This demand cannot be ratified by B, so as to make C liable for damages for his refusal to deliver. 2. A holds a lease from B, terminable on three months' notice. C, an unauthorised person, gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.
Revocation of authority 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. Termination of agency, where agent has an interest in subject-matter Where the agent has himself an interest in the property which forms the subjectmatter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest.
Illustrations 1. A, gives authority to B to sell A's land, and to pay himself, out of the proceeds, the debts due to him from A.A cannot revoke this authority,nor can it be terminated by his insanity or death. 2. A consigns 1,000 bales of cotton to be, who has made advances to him on such cotton, and desires B to sell the cotton, and to repay himself out of the price the amount of his own advances. A cannot revoke this authority, not is it terminated by his insanity or death.
When principal may revoke agent's authority The principal may, save as is otherwise provided by the last preceding section, revoke the authority given to his _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
87 agent at any time before the authority has been exercised, so as to bind the principal.
Revocation where authority has been partly exercised The principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency.
Illustrations 1. A authorises B to buy, 1,000 bales of cotton on account of A and to pay for it out of A's money remaining in B's hands. B buys, 1,000 bales of cotton in his own name, so as to make himself personally liable for the price. A cannot revoke B's authority so far as regards payment for the cotton. 2. A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it out of A's money remaining in B' s hands. B buys 1,000 bales of cotton in A' s name, and so as not to render himself personally liable for the price. A can revoke B's authority to pay for the cotton.
Compensation for revocation by principal, or renunciation by agent Where there is an express or implied contract that the agency should be continued for any period of time, the principal must make compensation to the agent, or the agent to the principal, as the case may be, for any previous revocation or renunciation of the agency without sufficient cause. Notice of revocation or renunciation Reasonable notice must be given of such revocation or renunciation, otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made good to the one by the other. Revocation and renunciation may be expressed or implied Revocation or renunciation may be expressed or may be implied in the conduct of that principal or agent respectively.

Illustration A empowers B to let A's house. Afterwards A lets it himself. This is an implied revocation of B's authority.
When termination of agent's authority takes effect as to agent, and as to third persons The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them.
Illustrations 1. A directs B to sell goods for him, and agrees to give B five per cent commission on the price fetched by the goods. A afterwards by letter, revokes B's authority. B after the letter is sent, but before he receives it,sells the goods for 100rupees. The sale is binding on A,and B is entitled to five rupees as his commission.
88 2. A, at Madras, by letter directs B to sell for him some cotton lying in a warehouse in Bombay, and afterwards, by letter, revokes, his authority to sell, and directs B to send the cotton to Madras. B after receiving the second letter, enters into a contract with C, who knows of the first letter, but not o the second, for the sale to him of the cotton. C pays B the money, with which B absconds. C's payment is good as against A. 3. A directs B, his agent, to pay certain money to C. A dies, and D takes out probate to his will. B, after A's death, but before hearing of it, pays the money to C. The payment is good as against D, the executor. Agent's duty on termination of agency by principal's death or insanity When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound to take on behalf of the representative, of his late principal, all reasonable steps for the protection and reservation of the interests entrusted to him. Termination of sub-agent's authority The termination of the authority of an agent causes the termination (subject to the rules herein contained regarding the termination of an agent's authority) of the authority of all sub-agents appointed by him. Agent's duty to principal Agent's duty in conducting principal's business An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions according to the customs which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal and if any profit accrues, he must account for it.
Illustrations 1. A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to time, at interest, the moneys which may be in hand, on its to make such investment. A must make good to B the interest usually obtained by such investments. 2. B, a broker in whose business it is not the custom to sell on credit, sells goods of A on credit to C, whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the loss to A.
Skill and diligence required from agent An agent is bound to conduct the business of the agency with as much skill as is generally possessed by person engaged in similar business unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill, or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill, or misconduct.
Illustrations 1. A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A's account, with order to remit. B retains the money for considerable time. A, in consequence of not receiving the money, becomes insolvent. B is liable for the money and interest, from
89 the day on which it ought to have been paid, according to the usual rate, and for any further direct loss as, e.g., by variation of rate of exchange-but not further. 2. A, an agent for the sale of goods, having authority to sell on credit, sells to B in credit, without making the proper and usual enquiries as to the solvency of B. B at the time of such sale, is insolvent. A must make compensation to his principal in respect of any loss thereby sustained. 3. A, an insurance-broker employed by B to effect an insurance on a ship, omits to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In consequence of the omission of the clauses nothing can be recovered from the underwriters. A is bound to make good the loss to B. 4. A, merchant in England, directs B, his agent at Bombay, who accepts the agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship arrives safely in England. Soon after her arrival the price of cotton rises. B is bound to make good to A the profit which he might have made by the 100 bales of cotton at the time the ship arrived, but not any profit he might have made by the subsequent rise. Agent's accounts An agent is bound to render proper accounts to his principal on demand. Agent's, duty to communicate with principal It is the duty of an agent in case of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain his instructions. Right of principal when agent deals, on his own account, in business of agency without principal's consent If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.
Illustrations 1. A direct B to sell A's estate. B buys the estate for himself in the name of C. A, on discovering that B has bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed any material fact, or that the seals has been disadvantageous to him. 2. A directs B to sell A's estate. B, on looking over the estate before selling it, finds a mine on the estate which is unknown to A. B informs A that he wished to buy the estate for himself but conceals the discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his option.
Principal's right to benefit gained by agent dealing on his own account in business of agency If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account to his principal, the _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
90 principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.

Illustration A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought, and buys the house for himself. A may, on discovering that B has bought the house, compels him to sell it to A at the price he gave for it.
Agent's right of retainer out of sums received on principal's account An agent may retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting such business, and also such remuneration as may be payable to him for acting as agent. Agent's duty to pay sums received for principal Subject to such deductions, the agent is bound to pay to his principal all sums received on his account. When agent's remuneration becomes due In the absence of any special contract, payment for the performance of any act is not due to the agent until the completion of such act; but an agent may detain moneys received by him on account of goods sold, although the whole of the goods consigned to him for sale may not have been sold, or although the sale may not be actually complete. Agent not entitled to remuneration for business misconducted An agent who is guilty of misconduct in the business of the agency, is not entitled to any remuneration in respect of that part of the business which he has misconducted.
Illustrations 1. A employs B to recover 1, 00,000 rupees from C, and to lay it out on good security. B recovers the 1,00,000 rupees and lays out 90,000 rupees on good security, but lays out 10,000 rupees on security which he ought to have known to be bad, whereby A loses 2,000 rupees. B is entitled to remuneration for recovering the 1,00,000 rupees and for investing the 90,000 rupees. He is not entitled to any remuneration for investing the 10,000 rupees, and he must make good the 2,000 rupees to B. 2. A employs B to recover 1,000 rupees from C. Through B's misconduct the money is not recovered. B is entitled to no remuneration for his services and must make good the loss.
Agent's lien on principal's property In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other property, whether movable or immovable of the principal received by him, until the amount due to himself for commission, disbursements and services in respect of the same has been paid or accounted for to him. Principal's duty to agent _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
91
Agent to be indemnified against consequences of lawful acts The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
Illustrations 1. B, at Singapore under instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses. 2. B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of 10 caskes of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses.
Agent to be indemnified against consequences of acts done in good faith Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it may cause an injury to the rights of third persons.
Illustrations 1. A, a decree-holder and entitled to execution of B's goods requires the officer of the court to seize certain goods, representing them to be the goods of B. The officer seizes the goods, and is sued by C, the true owner of the goods. A is liable to indemnify the officer for the sum which he is compelled to pay to C, in consequence of obeying A's directions. 2. B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C, and for B's own expenses.
Non-liability of employer of agent to do a criminal act Where one person employees another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise to indemnify him against the consequences of that Act.
Illustrations 1. A employs B to beat C, and agrees to indemnify him against all consequences of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for those damages.
92 2. B, the proprietor of a newspaper, publishes, at A's request, a libel upon C in the paper, and A agrees to indemnify B against the consequences of the publication, and all costs and damages of any action in respect thereof. B is sued by C and has to pay damages, and also incurs expenses. A is not liable to B upon the indemnity. Compensation to agent for injury caused by principal's neglect The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill.

Illustration A employs B as a bricklayer in building a house, and put up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B.
Effect of agency on contracts with third persons
Enforcement and consequences of agent's contract Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into the acts done by the principal in person.
Illustrations 1. A buys goods from B, knowing that he is an agent for their sale, but not knowing who is the principal. B's principal is the person entitled to claim from A the price of the goods, and A cannot, in a suit by the principal, set-off against that claim a debt due to himself from B. 2. A, being B's agent; with authority to receive money on his behalf, receives from C a sum of money due to B. C is discharged of his obligation to pay the sum in question to B.
Principal how far bound, when agent exceeds authority When an agent does more than he is authorised to do, and when the part of what he does, which is within his authority, can be separated from the part which is beyond his authority, so much only of what he does as is within his authority is binding as between him and his principal. Illustration A, being owner of a ship and cargo, authorises B to procure an insurance for 4,000 rupees on the ship. B procures a policy for 4,000 rupees on the ship, and _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.

93 another for the like sum on the cargo. A is bound to pay the premium for the policy on the ship, but not the premium for the policy on the cargo.
Principal not bound when excess of agent's authority is not separable Where an agent does more than he is authorised to do, and what he does beyond the scope of his authority cannot be separated from what is within it, the principal is not bound to recognise the transaction.

Illustration A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for a sum of 6,000 rupees. A may repudiate the whole transaction.
Consequences of notice given to agent Any notice given to or information obtained by the agent, provided it be given or obtained in the course of the business transacted by him for the principal, shall, as between the principal and third parties, have the same legal consequences as if it had been given to or obtained by the principal.
Illustrations 1. A is employed by B to buy from C certain goods, of which C is the apparent owner, and buys them accordingly. In the course of the treaty for the sale, A learns that the goods really belonged to D, but B is ignorant of that fact B is not entitled to set-off a debt owing to him from C against the price of goods. 2. A is employed by B to buy from C goods of which C is the apparent owner. A was, before he was so employed a servant of C, and then learnt that the goods really belonged to D, but B is ignorant of that fact. In spite of the knowledge of his agent, B may set-off against the price of the goods a debt owing to him from C.
Agent cannot personally enforce, nor be bound by, contracts on behalf of principal In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them.
Presumption of contract to the contrary: Such a contract shall be presumed to exit in the following cases1. Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; 2. Where agent does not disclose the name of his principal; 3. Where the principal, though disclosed, cannot be sued.
94 Right of parties to a contract made by agent not disclosed If an agent makes a contract with a person who neither, knows nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same right as he would have had as against if the agent had been the principal.If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract. Performance of contract with agent supposed to be principal Where one man makes a contract with another, neither knowing nor having reasonable ground to suspect that the other is an agent, the principal, if he requires the performance of the contract, can only obtain such performance subject to the right and obligations subsisting between the agent and the other party of the contract.

Illustration A, who owes 500 rupees to B, sells, 1,000 rupees worth of rice to B. A is acting as agent for C in the transaction, but B has no knowledge nor reasonable ground of suspicion that such is the case. C cannot compel B to take the rice without allowing him to set-off A's debt.
Right of person dealing with agent personally liable In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable.

Illustration A enters into a contract with B to sell him 100 bales of cotton, and afterwards, discovers that B was acting as agent for C. A may sue either B or C, or both, for the price of the cotton.
Consequence of inducing agent or principal to act on belief that principal or agent will be held exclusively liable When a person who has made a contract with an agent induce the agent to act upon the belief that the principal only will be held liable, or induces the principal to act upon the belief that the agent only will be held liable, he cannot afterwards hold liable that agent or principal respectively. Liability of pretended agent A person untruly representing himself to be the authorised agent of another, and thereby including a third person to deal with him as such agent, is liable, if his alleged employer does not ratify his acts, to make compensation to the other in respect of any loss or damage which he has incurred by so dealing. Person falsely contracting as agent, not entitled to performance A person with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it, if he was _____________________________________________________________________ Prepared for VIDYASAGAR ACADEMY By Sanjay Banerjee, M.Com., AICWA, LL.B.
95 in reality acting, not as agent, but on his own account. Liability of principal inducing belief that agent's unauthorised acts were authorised When an agent has, without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or conduct induced such third person to believe that such acts and obligations were within the scope of the agent's authority.
Illustrations 1. A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B's instruction, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract 2. A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private order from A. The sale is good.
Effect, on agreement, of misrepresentation or fraud by agent Misrepresentation made or fraud committed, by agent acting in the course of their business for their principals, have the same effect on agreements made by such agents as if such misrepresentations of frauds had been made or committed by the principals; but misrepresentations made, or frauds committed, by agents, in matters which do not affect their authority, do not affect their principals
Illustrations 1. A, being B's agent for the sale of goods, induces C to buy them by a misrepresentation, which he was not authorised by B to make. The contract is voidable, as between B and C, at the option of C. 2. A, the captain of B's ship, signs bills of lading without having received on board the goods mentioned therein. The bills of lading are void as between B and the pretended consignor.
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What are the essential elements for a valid contract?

What are the different types of contracts?

THE INDIAN CONTRACT ACT, 1872 Contract Sec.2(h) an agreement enforceable by law give rise to legal obligation.

Free consent : Sec 14 consent said to be free when not caused by

Tort Rescission and damages

Interest in protection of subject matter Value of contract

Benefit Basis of agreement

It is the sole determining factor.

2. Remedy on default 3. Use for own purpose

3. No. of principals/ employers 4. Liability of employer

Effect of agency on contracts with third persons

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