Business Law

Shree Medha Degree College Dept of Mgt studies
THE INDIAN CONTRACT ACT, 1872
Module-2 Indian contract Act 1872:
Law of contracts: nature of contracts, offer and acceptance,

consideration, free consent, fraud sections 17 and 18,
misrepresentation (section 18 and 19), agreements declared void
(section 26-30) contingent and quasi contracts, performance of contract
(section 37-67), discharge of contract, indemnity & guarantee, contract
of bailment and pledge, contract of agency.
NATURE OF CONTRACT
The Law of contract: Introduction

As a result of increasing complexities of business environment,
innumerable
contracts are entered into by the parties in the usual course of carrying on
their business. ‘Contract’ is the most usual method of defining the rights
and duties in a business transaction. This branch of law is different from
other branches of law in a very important respect. It does not prescribe so
many rights and duties, which the law will protect or enforce; it contains a
number of limiting principles subject to which the parties may create rights
and duties for themselves. The Indian Contract Act, 1872 codifies the legal
principles that govern ‘contracts’. The Act basically identifies the
ingredients of a legally enforceable valid contract in addition to dealing
with certain special type of contractual relationships like indemnity,
guarantee, bailment, pledge, quasi contracts, contingent contracts etc. All
agreements are not studied under the Indian Contract Act, 1872, as some of
those are not contracts. Only those agreements, which are enforceable by
law, are contracts.
From the Desk of K Ram Kiran Page 1

WHAT IS A CONTRACT?
The term contract is defined under section 2(h) of the Indian Contract Act,
1872 as-
“an agreement enforceable by law”.
The contract consists of two essential elements:

(i) an agreement, and
(ii) its enforceability by law.
(i) Agreement - The term ‘agreement’ given in Section 2(e) of the Act is
defined as- “every promise and every set of promises, forming the
consideration for each other”. To have an insight into the definition of
agreement, we need to understand promise. Section 2 (b) defines promise
as-
“when the person to whom the proposal is made signifies his assent there
to, the proposal is said to be accepted. Proposal when accepted, becomes a
promise”.
The following points emerge from the above definition :
1. when the person to whom the proposal is made
2. signifies his assent on that proposal which is made to him
3. the proposal becomes accepted
4. accepted proposal becomes promise
Thus we say that an agreement is the result of the proposal made by one
party to the other party and that other party gives his acceptance thereto of
course for mutual consideration.
Agreement = Offer/Proposal + Acceptance
(ii) Enforceability by law – An agreement to become a contract must give

rise to a legal obligation which means a duly enforceable by law. Thus
from above definitions it can be concluded that –
Contract = Accepted proposal/Agreement + Enforceability by law
Example: A agrees with B to sell car for `2 lacs to B. Here A is under an

obligation to give car to B and B has the right to receive the car on
payment of `2 lacs and also B is under an obligation to pay `2 lacs to A and
A has a right to receive `2 lacs.
So Law of Contract deals with only such legal obligations which has
resulted from agreements. Such obligation must be contractual in nature.
However some obligations are outside the purview of the law of contract.
Example: An obligation to maintain wife and children, an order of the
court of law etc. These are status obligations and so out of the scope of the
Contract Act.
Difference between Agreement and Contract
Basis of differences Agreement Contract
Meaning Every promise and every set of Agreement enforceable by law.

promises, forming the Agreement + Legal enforceability
consideration for each other. Offer
+ Acceptance
Scope It’s a wider term including both It is used in a narrow sense with
legal and social agreement. the specification that contract is
only legally enforceable
agreement.
Legal obligation It may not create legal obligation. Necessarily creates a legal
An agreement does not always obligation. A contract always
grant rights to the parties grants certain rights to every
party.
Nature All agreement are not contracts. All contracts are agreements.

ESSENTIALS OF A VALID CONTRACT
I. Offer and Acceptance or an agreement: An agreement is the first

essential element of a valid contract. According to Section 2(e) of the
Indian Contract Act, 1872, “Every promise and every set of promises,
forming consideration for each other, is an agreement” and according to
Section 2(b) “A proposal when accepted, becomes a promise”. An
agreement is an outcome of offer and acceptance.
II. Free Consent: Two or more persons are said to consent when they
agree upon the same thing in the same sense. This can also be understood
as identity of minds in understanding the terms viz consensus ad idem.
Further such a consent must be free. Consent would be considered as free
consent if it is not caused by coercion, undue influence, fraud or,
misrepresentation or mistake. When consent to an agreement is caused by
coercion, undue influence, fraud or misrepresentation, the agreement is a
contract voidable at the option of the party whose consent was so caused.
When consent is vitiated by mistake, the contract becomes void.
Example: A threatened to shoot B if he (B) does not lend him `2000 and B
agreed to it. Here the agreement is entered into under coercion and hence
voidable at the option of B.
III. Capacity of the parties: Capacity to contract means the legal ability
of a person to enter into a valid contract. Section 11 of the Indian Contract
Act specifies that every person is competent to contract who
(a) is of the age of majority according to the law to which he is subject and
(b) is of sound mind and
(c) is not otherwise disqualified from contracting by any law to which he is
subject.

A person competent to contract must fulfil all the above three

qualifications.
Qualification (a) refers to the age of the contracting person i.e. the person
entering into contract must be of 18 years of age. Persons below 18 years
of age are considered minor, therefore, incompetent to contract.
Qualification (b) requires a person to be of sound mind i.e. he should be
in his senses so that he understands the implications of the contract at the
time of entering into a contract. A lunatic, an idiot, a drunken person or
under the influence of some intoxicant is not supposed to be a person of
sound mind.
Qualification (c) requires that a person entering into a contract should not
be disqualified by his status, in entering into such contracts. Such persons
are: an alien enemy, foreign sovereigns, convicts etc. They are disqualified
unless they fulfil certain formalities required by law.
Contracts entered by persons not competent to contract are not valid.
IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in

return’. A valuable consideration in the sense of law may consist either in
some right, interest, profit, or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other.
Example:- A agrees to sell his books to B for ` 100, B’s promise to pay `
100 is the consideration for A’s promise to sell his books and A’s promise
to sell the books is the consideration for B’s promise to pay ` 100.
V. Lawful Consideration and Object: The consideration and object of

the agreement must be lawful.
Section 23 states that consideration or object is not lawful if it is prohibited
by law, or it is such as would defeat the provisions of law, if it is fraudulent
or involves injury to the person or property of another or court regards it as
immoral or opposed to public policy.

Example : ‘A’ promises to drop prosecution instituted against ‘B’ for

robbery and ‘B’ promises to restore the value of the things taken. The
agreement is void, as its object is unlawful.
VI. Not expressly declared to be void: The agreement entered into must
not be which the law declares to be either illegal or void. An illegal
agreement is an agreement expressly or impliedly prohibited by law. A
void agreement is one without any legal effects.
Example: Threat to commit murder or making/publishing defamatory

statements or entering into agreements which are opposed to public policy
are illegal in nature. Similarly any agreement in restraint of trade,
marriage, legal proceedings, etc. are classic examples of void agreements.
TYPES OF CONTRACT
I. On the basis of the validity
1. Valid Contract: An agreement which is binding and enforceable is a

valid contract. It contains all the essential elements of a valid contract.
2. Void Contract: Section 2 (j) states as follows: “A contract which ceases

to be enforceable by law becomes void when it ceases to be enforceable”.
Thus a void contract is one which cannot be enforced by a court of law.
Example: Mr. X agrees to write a book with a publisher. After few days, X
dies in an accident. Here the contract becomes void due to the
impossibility of performance of the contract.
Example: A contracts with B (owner of the factory) for the supply of 10

tons of sugar, but before the supply is effected, the fire caught in the
factory and everything was destroyed. Here the contract becomes void.

It may be added by way of clarification here that when a contract is void, it

is not a contract at all but for the purpose of identifying it, it has to be
called a [void] contract.
3. Voidable Contract: Section 2(i) defines that “an agreement which is
enforceable by law at the option of one or more parties thereto, but not at
the option of the other or others is a voidable contract”.
This in fact means where one of the parties to the agreement is in a
position or is legally entitled or authorized to avoid performing his part,
then the agreement is treated and becomes voidable.
T h e d i s t i n c t i o n b e t w e e n a Vo i d C o n t r a c t a n d a Vo i d a b l e C o n t r a c t .
Sl.No. Basis Void Contract Voidable Contract
1 Meaning A Contract ceases to be enforceable by An agreement which is

law becomes void when it ceases to be enforceable by law at the
enforceable. option of one or more of
the parties thereto, but
not at the option of the
other or others, is a
voidable contract
2 Cause A contract becomes void due to change A contract becomes a

in law or change in circumstances voidable contract if the
beyond the contemplation of parties. consent of a party was
not free.
3 Performance of contract A void contract cannot be performed. If the aggrieved party

does not, within
reasonable time,
exercise his right to
avoid the contract, any
party can sue the other
for claiming the
performance of the
contract.
4 Rights A void contract does not grant any right to The party whose consent
any party. was not free has the
right to rescind the
contract.
4. Illegal Contract : It is a contract which the law forbids to be made. The

court will not enforce such a contract but also the connected contracts. All
illegal agreements are void but all void agreements are not necessarily
illegal.

Example: Contract that is immoral or opposed to public policy are illegal

in nature. Similarly, if R agrees with S, to purchase brown sugar, it is an
illegal agreement.
5. Unenforceable Contract: Where a contract is good in substance but

because of some technical defect i.e. absence in writing, barred by
limitation etc. one or both the parties cannot sue upon it, it is described as
an unenforceable contract
II. On the basis of the formation of contract
1. Express Contracts: A contract would be an express contract if the terms

are expressed by words or in writing. Section 9 of the Act provides that if a
proposal or acceptance of any promise is made in words the promise is
said to be express.
Example: A tells B on telephone that he offers to sell his house for ` 2 lacs
and B in reply informs A that he accepts the offer, this is an express
contract.
2. Implied Contracts: Implied contracts in contrast come into existence
by implication. Most often the implication is by law and or by action.
Section 9 of the Act contemplates such implied contracts when it lays
down that in so far as such proposal or acceptance is made otherwise than
in words, the promise is said to be implied.
Example: Where a coolie in uniform picks up the luggage of A to be
carried out of the railway station without being asked by A and A allows
him to do so, it is an implied contract and A must pay for the services of
the coolie detailed by him.
Tacit Contracts: The word Tacit means silent. Tacit contracts are those
that are inferred through the conduct of parties without any words spoken
or written. A classic example of tacit contract would be when cash is
withdrawn by a customer of a bank from the automatic teller machine
[ATM]. Another example of tacit contract is where a contract is assumed to
have been entered when a sale is given effect to at the fall of hammer in an
auction sale. It is not a separate form of contract but falls within the scope
of implied contracts.
3. Quasi-Contract: A quasi-contract is not an actual contract but it

resembles a contract. It is created by law under certain circumstances. The
law creates and enforces legal rights and obligations when no real contract
exists. Such obligations are known as quasi-contracts. In other words, it is
a contract in which there is no intentionon part of either party to make a
contract but law imposes a contract upon the parties.
Example: Obligation of finder of lost goods to return them to the true

owner or liability of person towhom money is paid under mistake to repay
it back cannot be said to arise out of a contract even in its remotest sense,
as there is neither offer and acceptance nor consent. These are said to be
quasi-contracts.
4. E-Contracts: When a contract is entered into by two or more parties

using electronics means, such as e-mails is known as e-commerce
contracts. In electronic commerce, different parties/persons create
networks which are linked to other networks through ED1 - Electronic
Data Inter change. This helps in doing business transactions using
electronic mode. These are known as EDI contracts or Cyber contracts or
mouse click contracts.
III. On the basis of the performance of the contract
1. Executed Contract: The consideration in a given contract could be an

act or forbearance. When the act is done or executed or the forbearance
is brought on record, then the contract is an executed contract.
Example: When a grocer sells a sugar on cash payment it is an executed

contract because both the parties have done what they were to do under the
contract.
2. Executory Contract: In an executory contract the consideration is

reciprocal promise or obligation. Such consideration is to be performed in
future only and therefore these contracts are described as executory
contracts.
Example: Where G agrees to take the tuition of H, a pre-engineering

student, from the next month and H in consideration promises to pay G `
1,000 per month, the contract is executory because it is yet to be carried
out.
Unilateral or Bilateral are kinds of Executory Contracts and are not

separate kinds.
(a) Unilateral Contract: Unilateral contract is a one sided contract in
which one party has performed his duty or obligation and the other party’s
obligation is outstanding.
Example: M advertises payment of are ward of ` 5000 to any one who
finds his missing boy and brings him. As soon as B traces the boy, there
comes into existence an executed contract because B has performed his
share of obligation and it remains for M to pay the amount of reward to B.
This type of Executory contract is also called unilateral contract.
(b) Bilateral Contract: A Bilateral contract is one where the obligation or
promise is outstanding on the part of both the parties.
Example: A promises to sell his plot to B for `1 lacs cash down, but B pays
only ` 25,000 as earnest money and promises to pay the balance on next
Sunday. On the other hand A gives the possession of plot to B and
promises to execute a sale deed on the receipt of the whole amount. The
contract between the A and B is executory because there remains
something to be done on both sides. Executory contracts are also known as
Bilateral contracts.

PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN

CONTRACT ACT, 1872]
Definition of Offer/Proposal:
According to Section 2(a) of the Indian Contract Act, 1872, “when one
person signifies to another his willingness to do or to abstain from doing
anything with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal”.
Essentials of a proposal/offer are-
1. The person making the proposal or offer is called the ‘promisor’ or

‘offeror’: The person to whom the offer is made is called the ‘offeree’
and the person accepting the offer is called the ‘promisee’ or ‘acceptor’.
2. For a valid offer, the party making it must express his willingness ‘to do’
or ‘not to do’ something:
Mere expression of willingness does not constitute an offer.
Example: Where ‘A’ tells ‘B’ that he desires to marry by the end of 2017, it
does not constitute an offer of marriage by ‘A’ to ‘B’. Therefore, to
constitute a valid offer expression of willingness must be made to obtain
the assent (acceptance) of the other. Thus, if in the above example, ‘A’
further adds, ‘Will you marry me’, it will constitute an offer.
3. An offer can be positive as well as negative: Thus “doing” is a positive

act and “not doing”, or “abstinence” is a negative act; nonetheless both
these acts have the same effect in the eyes of law.
Example: A offers to sell his car to B for ` 3 lacs is an act of doing. So in

this case, A is making an offer to B. On the other hand, when A ask B after
his car meets with an accident with B’s scooter not to go to Court and he

will pay the repair charges to B for the damage to B’s scooter; it is an act
of not doing or abstinence.
4. The willingness must be expressed with a view to obtain the assent of
the other party to whom the offer is made.
Classification of offer
An offer can be classified as general offer, special/specific offer, cross

offer, counter offer, standing/open/ continuing offer.
(a) General offer: It is an offer made to public at large and hence anyone
can accept and do the desired act (Carlill v. Carbolic Smoke Ball Co.).
In terms of Section 8 of the Act, anyone performing the conditions of
the offer can be considered to have accepted the offer. Until the
general offer is retracted or withdrawn, it can be accepted by anyone at
any time as it is a continuing offer.
Case Law: Carlill Vs. Carbolic Smoke Ball Co. (1893)
Facts: In this famous case Carbolic smoke Ball Co. advertised in several
newspapers that a reward of £100 would be given to any person who
contracted influenza after using the smoke balls produced by the Carbolic
Smoke Company according to printed directions. One lady, Mrs. Carlill,
used the smoke balls as per the directions of company and even then
suffered from influenza. Held, she could recover the amount as by using
the smoke balls she had accepted the offer.
Case Law: Lalman Shukla v. Gauri Dutt
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing

nephew. He then announced that anybody who traced his nephew would be
entitled to a certain reward. L, traced the boy in ignorance of this
announcement. Subsequently when he came to know of the reward, he
claimed it. Held, he was not entitled to the reward, as he did not know the
offer.
(b) Special/specific offer: When the offer is made to a specific or an

ascertained person, it is known as a specific offer. Specific offer can be
accepted only by that specified person to whom the offer has been made.
[Boulton v. Jones]
Example: ‘A’ offers to sell his car to ‘B’ at a certain cost. This is a specific
offer.
(c) Cross offer: When two parties exchange identical offers in ignorance
at the time of each other’s offer,

the offers are called cross offers. There is no binding contract in such a
case because offer made by aperson cannot be construed as acceptance of
the another’s offer.
Example: If A makes a proposal to B to sell his car for ` 2 lacs and B,

without knowing the proposal of A, makes an offer to purchase the same
car at ` 2 lacs from A, it is not an acceptance, as B was not aware of
proposal made by A. It is only cross proposal (cross offer). And when two
persons make offer to each other, it can not be treated as mutual
acceptance. There is no binding contract in such a case.
(d) Counter offer: When the offeree offers to qualified acceptance of the
offer subject to modifications and variations in the terms of original offer,
he is said to have made a counter offer. Counter-offer amounts to rejection
of the original offer. It is also called as Conditional Acceptance.
Example: ‘A’ offers to sell his plot to ‘B’ for `10 lakhs. ’B’ agrees to buy it
for ` 8 lakhs. It amounts to counter offer. It may result in the termination of
the offer of ’A’. Any if later on ‘B’ agrees to buy the plot for ` 10 lakhs, ’A’
may refuse.
(e) Standing or continuing or open offer: An offer which is allowed to

remain open for acceptance over a period of time is known as standing or
continuing or open offer. Tenders that are invited for supply of goods is a
kind of standing offer.
Essential of a valid offer
1. It must be capable of creating legal relations: Offer must be such as

in law is capable of being accepted and giving rise to legal
relationship. If the offer does not intend to give rise to legal
consequences and creating legal relations, it is not considered as a
valid offer in the eye of law. A social invitation, even if it is accepted,
does not create legal relations because it is not so intended.
2. It must be certain, definite and not vague: If the terms of an offer are
vague or indefinite, its acceptance cannot create any contractual
relationship. Thus, where A offers to sell B 100 quintals of oil, there is
nothing whatever to show what kind of oil was intended. The offer is not
capable of being accepted for want of certainty.
3. It must be communicated to the offeree: An offer, to be complete,

must be communicated to the person to whom it is made, otherwise there
can be no acceptance of it. Unless an offer is communicated, there can be
no acceptance by it. An acceptance of an offer, in ignorance of the offer, is
not acceptance and does not confer any right on the acceptor.
This can be illustrated by the landmark case of Lalman Shukla v.

GauriDutt
Facts: G (Gauridutt) sent his servant L (Lalman) to trace his missing

nephew. He then announced that anybody who traced his nephew would be
entitled to a certain reward. L traced the boy in ignorance of this
announcement. Subsequently when he came to know of the reward, he
claimed it. Held, he was not entitled to the reward, as he did not know the
offer.
4. It must be made with a view to obtaining the assent of the other

party: Offer must be made with a view to obtaining the assent of the other
party addressed and not merely with a view to disclosing the intention of
making an offer.
5. It may be conditional: An offer can be made subject to any terms and

conditions by the offeror. Example: Offeror may ask for payment by
RTGS, NEFT etc. The offeree will have to accept all the terms
of the offer otherwise the contract will be treated as invalid.

6. Offer should not contain a term the non compliance of which would
amount to acceptance: Thus, one cannot say that if acceptance is not
communicated by a certain time the offer would be considered as accepted.
Example: A proposes B to purchase his android mobile for `5000 and if no
reply by him in a week, it would be assumed that B had accepted the
proposal. This would not result into contract.
7. The offer may be either specific or general: Any offer can be made to
either public at large or to the any specific person. (Already explained in
the heading types of the offer)
8.Offer is Different from a mere statement of intention, an invitation

to offer, a mere communication of information, Casual Equity, A
prospectus and Advertisement.
(i) An invitation to make an offer or do business. In case of “an invitation

to make an offer”, the person making the invitation does not make an offer
rather invites the other party to make an offer. His objective is to send out
the invitation that he is willing to deal with any person who, on the basis of
such invitation, is ready to enter into contract with him subject to final
terms and conditions.
Example: An advertisement for sale of goods by auction is an invitation to
the offer. It merely invites offers/bids made at the auction. Similarly, Red
Herring Prospectus issued by a company, is only an invitation to the public
to make an offer to subscribe to the securities of the company.
(ii) A statement of intention and announcement.
(iii) Offer must be distinguished from an answer to a question.
9. The offer may be express or implied: An offer may be made either by

words or by conduct.
Example: A boy starts cleaning the car as it stops on the traffic signal
without being asked to do so, in such circumstances any reasonable man
could guess that he expects to be paid for this, here boy makes an implied
offer.
10. A statement of price is not an offer
ACCEPTANCE
Definition of Acceptance: In terms of Section 2(b) of the Act, ‘the term

acceptance’ is defined as follows: “When the person to whom the proposal
is made signifies his assent thereto, proposal is said to be accepted. The
proposal, when accepted, becomes a promise”.
1. When the person to whom proposal is made - for example if A offers to

sell his car to B for ` 200000. Here, proposal is made to B.
2. The person to whom proposal is made i.e. B in the above example and if
B signifies his assent on that proposal. In other words if B grants his
consent on A’s proposal, then we can say that B has signified his consent
on the proposal made by A.
3. When B has signified his consent on that proposal, we can say that the
proposal has been accepted.
4. Accepted proposal becomes promise.
Legal Rules regarding a valid acceptance
(1)Acceptance can be given only by the person to whom offer is made:

In case of a specific offer, it can be accepted only by the person to
whom it is made. [Boulton vs. Jones (1857)]

(2) Acceptance must be absolute and unqualified: As per section 7 of

the Act, acceptance is valid only when it is absolute and unqualified and is
also expressed in some usual and reasonable manner unless the proposal
prescribes the manner in which it must be accepted. If the proposal
prescribes the manner in which it must be accepted, then it must be
accepted accordingly.
(3) The acceptance must be communicated: To conclude a contract

between the parties, the acceptance must be communicated in some
perceptible form. Any conditional acceptance or acceptance with varying
or too deviant conditions is no acceptance. Such conditional acceptance is
a counter proposal and has to be accepted by the proposer, if the original
proposal has to materialize into a contract. Further when a proposal is
accepted, the offeree must have the knowledge of the offer made to him. If
he does not have the knowledge, there can be no acceptance. The
acceptance must relate specifically to the offer made. Then only it can
materialize into a contract.
(4) Acceptance must be in the prescribed mode: Where the mode of

acceptance is prescribed in the proposal, it must be accepted in that
manner. But if the proposer does not insist on the proposal being accepted
in the manner prescribed after it has been accepted otherwise, i.e., not in
the prescribed manner, the proposer is presumed to have consented to the
acceptance.
(6) Mere silence is not acceptance: The acceptance of an offer cannot be

implied from the silence of the offeree or his failure to answer, unless the
offeree has in any previous conduct indicated that his silence is the
evidence of acceptance.
(7) Acceptance by conduct/Implied Acceptance: Section 8 of the Act

lays down that “the performance of the conditions of a proposal, or the
acceptance of any consideration for a reciprocal promise which may be
offered with a proposal, constitutes an acceptance of the proposal. This
section provides the acceptance of the proposal by conduct as against other

modes of acceptance i.e. verbal or written communication.
COMMUNICATION OF OFFER AND ACCEPTANCE
Communication of offer: In terms of Section 4 of the Act, “the

communication of offer is complete when it comes to the knowledge of the
person to whom it is made”.
Example: Where ‘A’ makes a proposal to ‘B’ by post to sell his house for `
5 lakhs and if the letter containing the offer is posted on 10th March and if
that letter reaches ‘B’ on 12th March the offer is said to have been
communicated on 12th March when B received the letter.
Thus it can be summed up that when a proposal is made by post, its

communication will be complete when the letter containing the proposal
reaches the person to whom it is made.
Mere receiving of the letter is not sufficient, he must receive or read the
message contained in the letter.
He receives the letter on 12th March, but he reads it on 15th of March. In
this case offer is communicated on 15th of March, and not 12th of March.
Communication of acceptance: There are two issues for discussion and

understanding. They are: The modes of acceptance and when is acceptance
complete?
Let us, first consider the modes of acceptance. Section 3 of the Act
prescribes in general terms two modes of communication namely, (a) by
any act and (b) by omission, intending thereby, to communicate to the
other or which has the effect of communicating it to the other.
Communication by act would include any expression of words whether
written or oral. Written words will include letters, telegrams, faxes, emails
and even advertisements. Oral words will include telephone messages.
Again communication would include any conduct intended to

communicate like positive acts or signs so that the other person
understands what the person ‘acting ‘ or ‘making signs’ means to say or
convey.
Communication of acceptance by ‘omission’ to do something. Such
omission is conveyed by a conduct or by forbearance on the part of one
person to convey his willingness or assent. However silence would not be
treated as communication by ‘omission’.
Communication of acceptance by conduct. For instance, delivery of goods

at a price by a seller to a willing buyer will be understood as a
communication by conduct to convey acceptance. Similarly one need not
explain why one boards a public bus or drop a coin in a weighing machine.
The first act is a conduct of acceptance and its communication to the offer
by the public transport authority to carry any passenger. The second act is
again a conduct conveying acceptance to use the weighing machine kept
by the vending company as an offer to render that service for a
consideration.
REVOCATION OF OFFER AND ACCEPTANCE
In term of Section 4, communication of revocation (of the proposal or its

acceptance) is complete.
(i) as against the person who makes it when it is put into a course of
transmission to the person to whom
it is made so as to be out of the power of the person who makes it, and
(ii) as against the person to whom it is made, when it comes to his knowledge.
Contract through post- As acceptance, in English law, cannot be revoked, so

that once the letter of acceptance is properly posted the contract is concluded. In
Indian law, the acceptor or can revoke his acceptance any time before the letter
of acceptance reaches the offeror, if the revocation telegram arrives before or at
the same time with the letter of acceptance, the revocation is absolute.

Contract over Telephone- A contract can be made over telephone. The rules
regarding offer and acceptance as well as their communication by telephone or
telex are the same as for the contract made by the mutual
Modes of revocation of offer
(i) By notice of revocation

(ii) By lapse of time
(iii)By non fulfillment of condition precedent
(iv) By death or insanity
(v)By counter offer
(vi)By the non acceptance of the offer according to the prescribed or usual
mode
(vii) By subsequent illegality
Consideration
WHAT IS CONSIDERATION?
Consideration is the price agreed to be paid by the promisee for the
obligation of the promisor.
“A valuable consideration in the sense of law may consist either in some
right, interest, profit or benefit accruing to one party (i.e. promisor) or
forbearance, detriment, loss or responsibility given, suffered or undertaken
by the other (i.e., the promisee).”
Section 2(d) defines consideration as follows:
“When at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing or promises

to do or abstain from doing something, such an act or abstinence or

promise is called consideration for the promise”.
(1) Consideration is an act- doing something.

Example- Ajay promises Bhuvan to guarantee payment of price of the
goods which Bhuvan wanted to sell on one month credit to Chaitanya.
Here selling of goods on credit by Bhuvan to Chaitanya is consideration
for A’s promise.
(2) Consideration is abstinence- abstain from doing something.
Example- Abhishek promises Bharti not to file a suit against him if he
(Bharti) would pay him (Abhishek) Rs. 1,00,000. Here abstinence on the
part of Abhishek would constitute consideration against Bharti’s payment
of Rs. 1,00,000 in favor of Abhishek.
(3) Consideration must be at the desire of the promisor.
(4) Consideration may move from promisee or any other person.
(5) Consideration may be past, present or future.
Thus from above it can be concluded that:

Consideration = Promise / Performance that parties exchange with each
other
LEGAL RULES REGARDING CONSIDERATION
(i) Consideration must move at the desire of the promisor: Consideration

must be offered by the promisee or the third party at the desire or request of the
promisor. This implies “return” element of consideration. Contract of marriage
in consideration of promise of settlement is enforceable.
An act done at the desire of a third party is not a consideration.
Example: R saves S’s goods from fire without being asked to do so. R cannot
demand any reward for his services, as the act being done voluntary.

(ii) Consideration may move from promisee or any other person: In India,
consideration may proceed from the promisee or any other person who is not a
party to the contract. The definition of consideration as given in Section 2(d)
makes that proposition clear. According to the definition, when at the desire of
the promisor, the promisee or any other person does something such an act is
consideration. In other words, there can be a stranger to a consideration but not
stranger to a contract.
Example: An old lady made a gift of her property to her daughter with a
direction to pay a certain sum of money to the maternal uncle by way of
annuity. On the same day, the daughter executed a writing in favour of the
brother agreeing to pay annuity. The daughter did not, however, pay the annuity
and the uncle sued to recover it. It was held that there was sufficient
consideration for the uncle to recover the money from the daughter. [Chinnayya
vs. Ramayya (1882)]
(iii) Executed and executory consideration: A consideration which

consists in the performance of an act is said to be executed. When it
consists in a promise, it is said to be executory. The promise by one party
may be the consideration for an act by some other party, and vice versa.
Example: A pays ` 5,000 to B and B promises to deliver to him a certain
quantity of wheat within a month. In this case A pays the amount, whereas
B merely makes a promise. Therefore, the consideration paid by A is
executed, whereas the consideration promised by B is executory.
(iv) Consideration may be past, present or future: The words “has done
or abstained from doing” [as contained in Section 2(d)] are a recognition
of the doctrine of past consideration. In order to support a promise, a past
consideration must move by a previous request. It is a general principle
that consideration is given and accepted in exchange for the promise. The
consideration, if past, may be the motive but cannot be the real
consideration of a subsequent promise. But in the event of the services
being rendered in the past at the request or the desire of the promisor, the
subsequent promise is regarded as an admission that the past consideration
was not gratuitous.

Example: ’A’ performed some services to ‘B’ at his desire. After a week,
‘B’ promises to compensate ‘A’ for the work done by him. It is said to be
present consideration and A can sue B for recovering the promised money.
(vi) Performance of what one is legally bound to perform:

(consideration must not be performance of existing duty) The performance
of an act by a person who is legally bound to perform the same cannot be
consideration for a contract. Hence, a promise to pay money to a witness is
void, for it is without consideration. Hence such a contract is void for want
of consideration. Similarly, an agreement by a client to pay to his counsel
after the latter has been engaged, a certain sum over and above the fee, in
the event of success of the case would be void, since it is without
consideration.
But where a person promises to do more that he is legally bound to do,

such a promise provided it is not opposed to public policy, is a good
consideration. It should not be vague or uncertain.
(vii)Consideration must be real and not illusory: Consideration must be

real and must not be illusory. It must be something to which the law
attaches some value. If it is legally or physically impossible it is not
considered valid consideration.
Examples: A man promises to discover treasure by magic. This transaction
can be said to be void as it is illusory.
(viii)Consideration must not be unlawful, immoral, or opposed to

public policy. Only presence of consideration is not sufficient it must be
lawful. Anything which is immoral or opposed to public policy also cannot
be valued as valid consideration.
Example: A agrees with B to sell car for `2 lacs to B. Here A is under an
obligation to give car to B and B has the right to receive the car on
payment of `2 lacs and also B is under an obligation to pay `2 lacs to A and
A has a right to receive `2 lacs.
Other Essential Elements of a Valid Contract
Section 10 of the Indian Contract Act, 1872 provides that an agreement in

order to be a contract, must satisfy the following conditions:
(1) the parties must be competent to contract;
(2) it must be made by the free consent of the parties;
(3) it must be made for a lawful consideration and with a lawful object;
(4) it should not have been expressly declared as void by law.
CAPACITY TO CONTRACT
Meaning: Capacity refers to the competence of the parties to make a

contract. It is one of the essential element to form a valid contract.
Who is competent to contract (Section 11)
“Every person is competent to contract who is of the age of majority

according to the law to which he is subject, and who is of sound mind and
is not disqualified from contracting by any law to which he is subject”.
Analysis of Section 11
This section deals with personal capacity of three types of individuals only.
Every person is competent to contract who-
(A) has attained the age of majority,
(B) is of sound mind and
(C) is not disqualified from contracting by any law to which he is subject.
(A) Age of Majority: In India, the age of majority is regulated by the

Indian Majority Act, 1875.
Every person domiciled in India shall attain the age of majority on the
completion of 18 years of age and not before. The age of majority being 18
years, a person less than that age even by a day would be minor for the
purpose of contracting.
Law relating to Minor’s agreement/Position of Minor
1. A contract made with or by a minor is void ab-initio: A minor is not

competent to contract and any agreement with or by a minor is void
from the very beginning.
In the leading case of Mohori Bibi vs. Dharmo Das Ghose (1903), “A, a
minor borrowed ` 20,000 from B and as a security for the same executed a
mortgage in his favour. He became a major a few months later and filed a
suit for the declaration that the mortgage executed by him during his
minority was void and should be cancelled. It was held that a mortgage by
a minor was void and B was not entitled to repayment of money.
It is especially provided in Section 10 that a person who is incompetent to
contract cannot make a contract within the meaning of the Act.
2. No ratification after attaining majority: A minor cannot ratify the

agreement on attaining majority as the original agreement is void ab initio
and a void agreement can never be ratified.
Example: X, a minor makes a promissory note in the name of Y. On

attaining majority, he cannot ratify it and if he makes a new promissory
note in place of old one, here the new promissory note which he executed
after attaining majority is also void being without consideration.
3. Minor can be a beneficiary or can take benefit out of a contract:

Though a minor is not competent to contract, nothing in the Contract Act
prevents him from making the other party bound to the minor. Thus, a
promissory note duly executed in favour of a minor is not void and can be
sued upon by him, because he though incompetent to contract, may yet
accept a benefit.
A minor cannot become partner in a partnership firm. However, he may

with the consent of all the partners, be admitted to the benefits of
partnership (Section 30 of the Indian Partnership Act, 1932).
Example: A mortgage was executed in favour of a minor. Held, he can get

a decree for the enforcement of the mortgage.
4. A minor can always plead minority: A minor can always plead

minority and is not stopped to do so even where he has taken any loan or
entered into any contract by falsely representing that he was major. Rule of
estoppel cannot be applied against a minor. It means he can be allowed to
plea his minority in defence.
5. Liability for necessaries: The case of necessaries supplied to a minor or

to any other person whom such minor is legally bound to support is
governed by section 68 of the Indian Contract Act. A claim for necessaries
supplied to a minor is enforceable by law. But a minor is not liable for any
price that he may promise and never for more than the value of the
necessaries. There is no personal liability of the minor, but only his
property is liable.
To render minor’s estate liable for necessaries two conditions must be

satisfied.
(i) The contract must be for the goods reasonably necessary for his
support in the station in life.
(ii) The minor must not have already a sufficient supply of these
necessaries.
Necessaries mean those things that are essentially needed by a minor. They
cannot include luxuries or costly or unnecessary articles. Necessaries
extend to all such things as reasonable persons would supply to an infant
in that class of society to which the infant belongs. Expenses on minor’s
education, on funeral ceremonies come within the scope of the word
‘necessaries’.
The whole question turns upon the minor’s status in life. Utility rather than
ornament is the criterion.
6. Contract by guardian - how far enforceable: Though a minor’s

agreement is void, his guardian can, under certain circumstances enter into
a valid contract on minor’s behalf. Where the guardian makes a contract
for the minor, which is within his competence and which is for the benefit
of the minor, there will be valid contract which the minor can enforce.
But all contracts made by guardian on behalf of a minor are not valid. For
instance, the guardian of a minor has no power to bind the minor by a
contact for the purchase of immovable Property. But a contract entered
into by a certified guardian (appointed by the Court) of a minor, with the

sanction of the court for the sale of the minor’s property, may be enforced
by either party to the contract.
7. No specific performance: A minor’s agreement being absolutely void,

there can be no question of the specific performance of such an agreement.
8. No insolvency: A minor cannot be declared insolvent as he is

incapable of contracting debts and dues are payable from the personal
properties of minor and he is not personally liable.
9. Partnership: A minor being incompetent to contract cannot be a partner

in a partnership firm, but under Section 30 of the Indian Partnership Act,
he can be admitted to the benefits of partnership.
10. Minor can be an agent: A minor can act as an agent. But he will not be
liable to his principal for his acts. A minor can draw, deliver and endorse
negotiable instruments without himself being liable.
11. Minor cannot bind parent or guardian: In the absence of authority,

express or implied, an infant is not capable of binding his parent or
guardian, even for necessaries. The parents will be held liable only when
the child is acting as an agent for parents.
12. Joint contract by minor and adult: In such a case, the adult will be
liable on the contract and not the minor. In Sain Das vs. Ram Chand,
where there was a joint purchase by two purchaser, one of them was a
minor, it was held that the vendor could enforce the contract against the
major purchaser and not the minor.
13. Surety for a minor: In a contract of guarantee when an adult stands

surety for a minor then he (adult) is liable to third party as there is direct
contract between the surety and the third party.
14. Minor as Shareholder: A minor, being incompetent to contract cannot

be a shareholder of the company. If by mistake he becomes a member, the
company can rescind the transaction and remove his name from register.
But, a minor may, acting though his lawful guardian become a shareholder
by transfer or transmission of fully paid shares to him.
15. Liability for torts: A tort is a civil wrong. A minor is liable in tort
unless the tort in reality is a breach of contract. Thus, where a minor
borrowed a horse for riding only he was held liable when he lent the horse
to one of his friends who jumped and killed the horse. Similarly, a minor
was held liable for his failure to return certain instruments which he had
hired and then passed on to a friend.
(B) Person of sound mind:
According to section 12 of Indian Contract Act, “a person is said to be of

sound mind for the purposes of making a contract if, at the time when he
makes it is capable of understanding it and of forming a rational judgement
as to its effect upon his interests.”
A person who is usually of unsound mind, but occasionally of sound mind,

may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind,
may not make a contract when he is of unsound mind.
Example 1: A patient in a lunatic asylum, who is at intervals, of sound

mind, may contract during those intervals.
Position of unsound mind person making a contract: A contract by a person
who is not of sound mind is void.
(C) Contract by disqualified persons: Besides minors and persons of

unsound mind, there are also other persons who are disqualified from
contracting, partially or wholly, so that the contracts by such person are
void. Incompetency to contract may arise from political status, corporate
status, legal status, etc. The following persons fall in this category: Foreign

Soverigns and Ambassadors, Alien enemy, Corporations, Convicts,

Insolvent etc
Free Consent
Definition of Consent according to Sec 13:
“two or more persons are said to consent when they agree upon the same
thing in the same sense.”
Definition of ‘Free Consent’ (Section 14) Consent is said to be free when it

is not caused by:
1. Coercion, as defined in Section 15; or

2. Undue Influence, as defined in Section 16; or
3. Fraud, as defined in Section 17; or
4. Misrepresentation, as defined in Section 18 or
5. Mistake, subject to the provisions of Sections 20, 21, and 22.

When consent to an agreement is caused by coercion, fraud,

misrepresentation, or undue influence, the agreement is a contract voidable
at the option of the party whose consent was so caused. When the consent
is vitiated by mistake, the contract becomes void.
ELEMENTS VITIATING FREE CONSENT
(I) Coercion (Section 15)
“Coercion’ is the committing, or threatening to commit, any act forbidden

by the Indian Penal Code or the unlawful detaining, or threatening to
detain any property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.”
Example: Where husband obtained a release deed from his wife and son
under a threat of committing suicide, the transaction was set aside on the
ground of coercion, suicide being forbidden by the Indian Penal Code. The
threat of suicide amounts to coercion within Section 15.
II Undue influence (Section 16)
According to section 16 of the Indian Contract Act, 1872, “A contract is

said to be induced by ‘undue influence’ where the relations subsisting
between the parties are such that one of the parties is in a position to
dominate the will of the other and he uses that position to obtain an unfair
advantage over the other”.
Example 1:
A having advanced money to his son, B, during his minority, upon B’s
coming of age obtains, by misuse of parental influence, a bond from B for
a greater amount than the sum due in respect of the advance. A employs
undue influence

(III) Fraud (Section 17)
Definition of Fraud under Section 17: ‘Fraud’ means and includes any of
the following acts committed by a party to a contract, or with his
connivance, or by his agent, with an intent to deceive another party thereto
or his agent, or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not
believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of
the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
Example 1:
A sells, by auction, to B, a horse which A knows to be unsound, A says
nothing to B about the unsoundness of the horse. This is not fraud by A.
Mere silence is not fraud

A party to the contract is under no obligation to disclose the whole truth to
the other party. ‘Caveat Emptor’ i.e. let the purchaser beware is the rule
applicable to contracts. There is no duty to speak in such cases and silence
does not amount to fraud. Similarly there is no duty to disclose facts which
are within the knowledge of both the parties.
Example: H sold to W some pigs which were to his knowledge suffering
from fever. The pigs were sold ‘with all faults’ and H did not disclose the
fact of fever to W. Held there was no fraud. [Word vs. Hobbs. (1878)].
Silence is fraud:
1. Duty of person to speak: Where the circumstances of the case are such
that it is the duty of the person
observing silence to speak. For example, in contracts of uberrimae fidei
(contracts of utmost good faith).
2. Where the silence itself is equivalent to speech: For example, A says to

B “If you do not deny it, I shall assume that the horse is sound.” A says
nothing. His silence amounts to speech.
In case of fraudulent silence, contracts is not voidable if the party whose
consent was so obtained had the means of discovering the truth with
ordinary diligence (Exception to section 19)
(IV) Misrepresentation (Section 18)
Misrepresentation means and includes -

(1) the positive assertion, in a manner not warranted by the information of
the person making it, of that which is not true, though he believes it to be
true;
(2) any breach of duty which, without an intent to deceive, gains an
advantage to the person committing it, or any one claiming under him; by
misleading another to his prejudice or to the prejudice of any one claiming
under him;
(3) causing, however, innocently, a party to an agreement to make a
mistake as to the substance of the thing which is the subject of the
agreement.
Difference between Coercion and Undue influence:

Basis of difference Coercion Undue Influence
Nature of action  it involves the physical It involves moral or

force or threat. The mental pressure.
aggrieved party is
compelled to make the
contract against its will.

Involvement of criminal It involves committing or No such illegal act is

action threatening to commit committed or a threat is
and act forbidden by given.
Indian Penal Code or
detaining or threatening
to detain property
unlawfully.
Relationship between It is not necessary that Some sort of relationship

parties there must be some sort between the parties is
of relationship between absolutely necessary.
the parties.
Exercised by whom Coercion need not Undue influence is

proceed from the always exercised between
promisor nor need it be parties to the contract.
the directed against the
promisor. It can be used
even by a stranger to the
contract.
Enforceability The contract is voidable Where the consent is

at the option of the party induced by undue
whose consent has been influence, the contract is
obtained by the coercion. either voidable or the
court may set it aside or
enforce it in a modified
form.

Position of benefits In case of coercion where The court has the

received the contract is rescinded discretion to direct the
by the aggrieved party, as aggrieved party to return
per Section 64, any the benefit in whole or in
benefit received has to be part or not to give any
restored back to the other such directions.
party.
Distinction between fraud and misrepresentation:
Basis of difference Fraud Misrepresentation
Intention To deceive the other There is no such

party by hiding the truth. intention to deceive the
other party. 
Knowledge of truth The person making the The person making the
suggestion believes that statement believes it to
the statement as untrue. be true, although it is not
true.
Recission of the contract The injured party can The injured party is
and claim for damages repudiate the contract and entitled to repudiate the
claim damages. contract or sue for
restitution but cannot
claim the damages.

Means to discover the The party using the Party can always plead
truth fraudulent act cannot that the injured party had
secure or protect himself the means to discover the
by saying that the injured truth.
party had means to
discover the truth.
Mistake
Mistake: Mistake may be defined as innocent or erroneous belief which

leads the party to misunderstand the others. Mistake may be either
Bilateral or Unilateral.
Bilateral mistake is when both the parties to a contract are under a mistake.
Unilateral mistake is when only one party to the contract is under a
mistake.
(i) Mistake of Law: A mistake of law does not render a contract void as
one cannot take excuse of ignorance of the law of his own country. But
if the mistake of law is caused through the inducement of another, the
contract may be avoided. Mistake of foreign law is excusable and is

treated like a mistake of fact. Contract may be avoided on such

mistake.
(ii) Mistake of fact: Where the contracting parties misunderstood each

other and are at cross purposes, there is a bilateral or mutual mistake.
Where both the parties to an agreement are under a mistake as to a matter
of fact essential to the agreement, the agreement is void.
Example: A offers to sell his Ambassador Car to B, who believes that A has
only Fiat Car, agrees to buy the car. Here, the two parties are thinking
about different subject matter so that there is no real consent and the
agreement is void.
LEGALITY OF OBJECT AND CONSIDERATION
Which considerations and objects are lawful, and those which are not
(Section 23):
The consideration or object of an agreement is lawful, unless-
1.It is forbidden by law; or
2. Is of such a nature that, if permitted, it would defeat the provisions of

any law; or Is fraudulent; or
3. Involves injury to the person or property of another; or
4. Involves injury to the person or property of another; or
5. The court regards it as immoral; or
6. Opposed to public policy.

In each of these cases, the consideration or object of an agreement is said

to be unlawful. Every agreement
of which the object or consideration is unlawful is void.
VOID AGREEMENTS
Expressly declared Void Agreements
1. Made by incompetent parties (Section 11)

2. Agreement made under bilateral mistake of fact (Sec 20)
3. Agreements the consideration or object of which is unlawful(Sec23)
4. Agreements made without Consideration (Sec 25)
5. Agreements in restraint of marriage (Sec26)
6. Agreements in restraint of trade (Section 27)
7. Agreement in restraint of legal proceedings (Section 28)
8. Agreement the meaning of which is uncertain (Section 29)
9. Wagering Agreement (Section 30)
10. Agreements to do impossible Acts (Section 56)
(1) Agreement in restraint of marriage (Section 26): Every agreement in

restraint of marriage of any person other than a minor, is void. So if a
person, being a major, agrees for good consideration not to marry, the
promise is not binding and considered as void agreement.
(2) Agreement in restraint of trade (Section 27): An agreement by which
any person is restrained from exercising a lawful profession, trade or
business of any kind, is to that extent void.
(3) Agreement in restraint of legal proceedings (Section 28): An
agreement in restraint of legal proceeding is the one by which any
party thereto is restricted absolutely from enforcing his rights under a
contract through a Court or which abridges the usual period for
starting legal proceedings. A contract of this nature is void.
(4) Agreement - the meaning of which is uncertain (Section 29): An
agreement, the meaning of which is not certain, is void, but where the
meaning thereof is capable of being made certain, the agreement is

valid Example: A agrees to sell B “a hundred tons of oil”. There is
nothing whatever to show what kind of oil was intended. The
agreement is void for uncertainty. But the agreement would be valid if
A was dealer only in coconut oil; because in such a case its meaning
would be capable of being made certain.
(5) Wagering agreement (Section 30): An agreement by way of a wager

is void. It is an agreement involving payment of a sum of money upon
the determination of an uncertain event. The essence of a wager is that
each side should stand to win or lose, depending on the way an
uncertain event takes place in reference to which the chance is taken
and in the occurrence of which neither of the parties has legitimate
interest Example: A agrees to pay ` 50,000 to B if it rains, and B
promises to pay a like amount to A if it does not rain, the agreement
will be by way of wager. But if one of the parties has control over the
event, agreement is not a wager.
Essentials of a Wager
1. There must be a promise to pay money or money’s worth.
2. Promise must be conditional on an event happiening or not happening.
3. There must be uncertainty of event.
4. There must be two parties, each party must stand to win or lose.
5. There must be common intention to bet at the timing of making such
agreement.
6. Parties should have no interest in the event except for stake.
Transactions similar to Wager (Gambling)
(i) Lottery transactions: A lottery is a game of chance and not of skill or

knowledge. Where the prime motive of participant is gambling, the
transaction amounts to a wager. Even if the lottery is sanctioned by the
Government of India it is a wagering transaction. The only effect of such

sanction is that the person responsible for running the lottery will not be
punished under the Indian Penal Code. Lotteries are illegal and even
collateral transactions to it are tainted with illegality (Section 294A of
Indian Penal Code).
(ii) Crossword Puzzles and Competitions: Crossword puzzles in which
prizes depend upon the correspondence of the competitor’s solution with a
previously prepared solution kept with the editor of a newspaper is a
lottery and therefore, a wagering transaction.
Case Law: State of Bombay vs. R.M.D. Chamarbangwala AIR (1957)
Facts: A crossword puzzle was given in magazine. Abovementioned clause
was stated in the magazine. A solved his crossword puzzle and his solution
corresponded with previously prepared solution kept with the editor. Held,
this was a game of chance and therefore a lottery (wagering transaction).
Crossword puzzles, picture competitions and athletic competitions where

prizes are awarded on the basis of skill and intelligence are the games of
skill and hence such competitions are valid. According to the Prize
Competition Act, 1955 prize competitions in games of skill are not wagers
provided the prize money does not exceed ` 1,000.
(iii) Speculative transactions: an agreement or a share market transaction

where the parties intend to settle the difference between the contract price
and the market price of certain goods or shares on a specified day, is a
gambling and hence void.
(iv) Horse Race Transactions: A horse race competition where prize

payable to the bet winner is less than ` 500, is a wager.
Transactions resembling with wagering transaction but are not void
(i) Chit fund: Chit fund does not come within the scope of wager (Section
30). In case of a chit fund, a certain number of persons decide to contribute

a fixed sum for a specified period and at the end of a month, the amount so
contributed is paid to the lucky winner of the lucky draw.
(ii) Commercial transactions or share market transactions: In these
transactions in which delivery of goods or shares is intended to be given or
taken, do not amount to wagers.
(iii) Games of skill and Athletic Competition: Crossword puzzles, picture
competitions and athletic competitions where prizes are awarded on the
basis of skill and intelligence are the games of skill and hence such
competition are valid. According to the Prize Competition Act, 1955 prize
competition in games of skill are not wagers provided the prize money
does not exceed ` 1,000.
(iv) A contract of insurance: A contract of insurance is a type of contingent
contract and is valid under law and these contracts are different from
wagering agreements.
PERFORMANCE OF CONTRACT
OBLIGATIONS OF PARTIES TO CONTRACTS-(SECTION 37)
The parties to a contract must either perform, or offer to perform, their

respective promises unless such performance is dispensed with or excused
under the provisions of the Contract Act or of any other law.
Promises bind the representatives of the promisor in case of death of such

promisor before performance, unless a contrary intention appears from the
contract.
Example 1: A promises to deliver goods to B on a certain day on payment
of ` 1,00,000. A dies before that day. A’s representatives are bound to
deliver the goods to B, and B is bound to pay ` 1,00,000 to A’s
representatives.
Performance may be actual or offer to perform.
Actual Performance: Where a party to a contract has done what he had

undertaken to do or either of the parties have fulfilled their obligations
under the contract within the time and in the manner prescribed.
Example: X borrows ` 5,00,000 from Y with a promise to be paid after 1
month. X repays the amount on the due date. This is actual performance.
Offer to perform or attempted performance or tender of performance: It
may happen sometimes, when the performance becomes due, the promisor
offers to perform his obligation but the promisee refuses to accept the
performance.
Example: P promises to deliver certain goods to R. P takes the goods to the
appointed place during business hours but R refuses to take the delivery of
goods. This is an attempted performance as P the promisor has done what
he was required to do under the contract.
BY WHOM A CONTRACT MAY BE PERFORMED (SECTION 40,

41 AND 42)
Person by whom promise is to be performed-Section 40
If it appears from the nature of the case that it was the intention of the
parties to any contract that any promise contained in it should be
performed by the promisor himself, such promise must be performed by
the promisor. In other cases, the promisor or his representatives may
employ a competent person to perform it.
Example 1: A promises to pay B a sum of money. A may perform this

promise, either by personally paying the money to B, or by causing it to be
paid to B by another; and if A dies before the time appointed for payment,
his representatives must perform the promise, or employ some proper
person to do so.
The promise under a contract may be performed, as the circumstances may

permit, by the promisor himself, or by his agent or his legal representative.
1. Promisor himself: If there is something in the contract to show that it

was the intention of the parties that the promise should be performed by
the promisor himself, such promise must be performed by the promisor.
This means contracts which involve the exercise of personal skill or
diligence, or which are founded on personal confidence between the

parties must be performed by the promisor himself.
Example: A promises to paint a picture for B and this must be performed
by the promisor himself.
2. Agent: Where personal consideration is not the foundation of a contract,

the promisor or his representative may employ a competent person to
perform it.
3. Legal Representatives: A contract which involves the use of personal

skill or is founded on personal consideration comes to an end on the death
of the promisor. As regards any other contract the legal representatives of
the deceased promisor are bound to perform it unless a contrary intention
appears from the contract (Section 37, para 2). But their liability under a
contract is limited to the value of the property they inherit from the
deceased.
Example 1: A promises to B to pay ` 100,000 on delivery of certain goods.

A may perform this promise either himself or causing someone else to pay
the money to B. If A dies before the time appointed for payment, his
representative must pay the money or employ some other person to pay the
money. If B dies before the time appointed for the delivery of goods, B’s
representative shall be bound to deliver the goods to A and A is bound to
pay `100,000 to B’s representative.
4. Third persons:
Effect of accepting performance from third person- Section 41When a
promisee accepts performance of the promise from a third person, he
cannot afterwards enforce it against the promisor.
That is, performance by a stranger, if accepted by the promisee, this

results in discharging the promisor, although the latter has neither
authorised not ratified the act of the third party.

Example: A received certain goods from B promising to pay ` 100,000/-.

Later on, A expressed his inability to make payment. C, who is known to
A, pays ` 60,000/- to B on behalf of A. However, A was not aware of the
payment. Now B is intending to sue A for the amount of ` 100,000/-.
As per Section 41 of the Indian Contract Act, 1872, when a promisee
accepts performance of the promise from a third person, he cannot
afterwards enforce it against the promisor. That is, performance by a
stranger, accepted by the promisee, produces the result of discharging the
promisor, although the latter has neither authorised nor ratified the act of
the third party. Therefore, in the present instance, B can sue only for the
balance amount i.e., ` 4000/- and not for the whole amount.
5. Joint promisors: (Section 42)

When two or more persons have made a joint promise, then unless a
contrary intention appears by the contract, all such persons must jointly
fulfill the promise. If any of them dies, his legal representatives must,
jointly with the surviving promisors, fulfill the promise. If all of them die,
the legal representatives of all of them must fulfill the promise jointly.
Example: ‘A’, ‘B’ and ‘C’ jointly promised to pay ` 6,00,000 to ‘D’. Here
‘A’, ‘B’ and ‘C’ must jointly perform the promise. If ‘A’ dies before
performance, then his legal representatives must jointly with ‘B’ and ‘C’
perform the promise, and so on. And if all the three (i.e. ‘A’, ‘B’ and ‘C’)
die before performance, then the legal representatives of all must jointly
perform the promise
TIME AND PLACE FOR PERFORMANCE OF THE PROMISE
The law on the subject is contained in Sections 46 to 50 explained below:

(i) Time for performance of promise, where no application is to be made
and no time is specified - Section 46
Where, by the contract, a promisor is to perform his promise without
application by the promisee, and no time for performance is specified, the
engagement must be performed within a reasonable time.

Explanation to Section 46 - The expression reasonable time is to be

interpreted having regard to the facts and circumstances of a particular
case.
(ii) Time and place for performance of promise, where time is specified
and no application to be made – Section 47
When a promise is to be performed on a certain day, and the promisor has
undertaken to perform it without application by the promise, the promisor
may perform it at any time during the usual hours of business, on such day
and the place at which the promise ought to be performed.
Example: If the delivery of goods is offered say after sunset, the promisee
may refuse to accept delivery, for the usual business hours are over.
Moreover, the delivery must be made at the usual place of business.
(iii) Application for performance on certain day to be at proper time and
place – Section 48
When a promise is to be performed on a certain day, and the promisor has
not undertaken to perform it without application by the promisee, it is the
duty of the promisee to apply for performance at a proper place and within
the usual hours of business.
Explanation to Section 48 states that the question “what is a proper time
and place” is, in each particular case, a question of fact.
(iv) Place for the performance of promise, where no application to be
made and no place fixed for performance - Section 49
When a promise is to be performed without application by the promisee,
and no place is fixed for the performance of it, it is the duty of the
promisor to apply to the promisee to appoint a reasonable place for the
performance of the promise, and to perform it at such a place.
Example: A undertakes to deliver a thousand maunds of jute to B on a
fixed day. A must apply to B to appoint a reasonable place for the purpose
of receiving it, and must deliver it to him at such place.
(v) Performance in manner or at time prescribed or sanctioned by promisee
- Section 50
The performance of any promise may be made in any such manner, or at
any time which the promisee prescribes or sanctions.

DISCHARGE OF A CONTRACT
A contract is discharged when the obligations created by it come to an end.

A contract may be discharged in any one of the following ways:
(i) Discharge by performance: It takes place when the parties to the
contract fulfil their obligations arising under the contract within the time
and in the manner prescribed. Discharge by performance may be
(1) Actual performance; or (2) Attempted performance.
Actual performance is said to have taken place, when each of the parties
has done what he had agreed to do under the agreement. When the
promisor offers to perform his obligation, but the promisee refuses to
accept the performance, it amounts to attempted performance or tender.
Example: A contracts to sell his car to B on the agreed price. As soon as
the car is delivered to B and B pays the agreed price for it, the contract
comes to an end by performance.
(ii) Discharge by mutual agreement: Section 62 of the Indian Contract
Act provides if the parties to a contract agree to substitute a new contract
for it, or to rescind or remit or alter it, the original contract need not be
performed. The principles of Novation, Rescission, Alteration and
Remission are already discussed.
Example: A owes B ` 1,00,000. A enters into an agreement with B and
mortgage his (A’s), estates for ` 50,000 in place of the debt of ` 1,00,000.
This is a new contract and extinguishes the old.
Example: A owes B ` 5,00,000. A pays to B ` 3,00,000 who accepts it in
full satisfaction of the debt. The whole is discharged.
(iii) Discharge by impossibility of performance: The impossibility may
exist from the very start. In that case, it would be impossibility ab initio.
Alternatively, it may supervene. Supervening impossibility may take place
owing to:
(a) an unforeseen change in law;
(b) the destruction of the subject-matter essential to that performance;

(c) the non-existence or non-occurrence of particular state of things, which

was naturally contemplated for performing the contract, as a result of some
personal incapacity like dangerous malady;
(d) the declaration of a war (Section 56).
Example 1: A agrees with B to discover a treasure by magic. The
agreement is void due to initial impossibility.
Example 2: A and B contract to marry each other. Before the time fixed for
the marriage, A goes mad. The contract becomes void.
Example 3: A contracts to act at a theatre for six months in consideration
of a sum paid in advance by B. On several occasions A is too ill to act. The
contract to act on those occasions becomes void.
(iv) Discharge by lapse of time: A contract should be performed within a
specified period as prescribed by the Limitation Act, 1963. If it is not
performed and if no action is taken by the promisee within the specified
period of limitation, he is deprived of remedy at law.
Example: If a creditor does not file a suit against the buyer for recovery of
the price within three years, the debt becomes time-barred and hence
irrecoverable.
(v) Discharge by operation of law: A contract may be discharged by
operation of law which includes by death of the promisor, by insolvency
etc.
(vi) Discharge by breach of contract: Breach of contract may be actual
breach of contract or anticipatory breach of contract. If one party defaults
in performing his part of the contract on the due date, he is said to have
committed breach thereof. When on the other hand, a person repudiates a
contract before the stipulated time for its performance has arrived, he is
deemed to have committed anticipatory breach. If one of the parties to a
contract breaks the promise the party injured thereby, has not only a right
of action for damages but he is also discharged from performing his part of
the contract.
(vii) Promisee may waive or remit performance of promise: Every
promisee may dispense with or remit, wholly or in part, the performance of
the promise made to him, or may extend the time for such performance or

may accept instead of it any satisfaction which he thinks fit. In other

words, a contract may be discharged by remission. (Section 63)
Example: A owes B ` 5,00,000. C pays to B `1,00,000 and B accepts them,
in satisfaction of his claim on A. This payment is a discharge of the whole
claim.
(viii)Effects of neglect of promisee to afford promisor reasonable
facilities for performance: If any promisee neglects or refuses to afford
the promisor reasonable facilities for the performance of his promise, the
promisor is excused by such neglect or refusal as to any non-performance
caused thereby. (Section 67)
(ix) Merger of rights: Sometimes, the inferior rights and the superior
rights coincide and meet in one and the same person. In such cases, the
inferior rights merge into the superior rights. On merger, the inferior rights
vanish and are not required to be enforced.
Example: A took a land on lease from B. Subsequently, A purchases that
very land. Now, A becomes the owner of the land and the ownership rights
being superior to rights of a lessee, the earlier contract of lease stands
terminated.
BREACH OF CONTRACT AND ITS REMEDIES
Breach means failure of a party to perform his or her obligation under a

contract. Breach of contract may arise in two ways:
(1) Actual breach of contract
(2) Anticipatory breach of contract
ANTICIPATORY BREACH OF CONTRACT

An anticipatory breach of contract is a breach of contract occurring before
the time fixed for performance has arrived. When the promisor refuses
altogether to perform his promise and signifies his unwillingness even
before the time for performance has arrived, it is called Anticipatory
Breach.
Anticipatory breach of a contract may take either of the following two

ways:
(a) Expressly by words spoken or written, and
(b) Impliedly by the conduct of one of the parties.
Example 1: Where A contracts with B on 15th July, 2016 to supply 10
bales of cotton for a specified sum on 14th August, 2016 and on 30th July
informs B, that he will not be able to supply the said cotton on 14th
August, 2016, there is an express rejection of the contract.
ACTUAL BREACH OF CONTRACT
In contrast to anticipatory breach, it is a case of refusal to perform the

promise on the scheduled date. The parties to a lawful contract are bound
to perform their respective promises. But when one of the parties breaks
the contract by refusing to perform his promise, he is said to have
committed a breach. In that case, the other party to the contract obtains a
right of action against the one who has refused to perform his promise.
Actual breach of contract may be committed-

(a) At the time when the performance of the contract is due.
Example: A agrees to deliver 100 bags of sugar to B on 1st February 2016.
On the said day, he failed to supply 100 bags of sugar to B. This is actual
breach of contract. The breach has been committed by A at the time when
the performance becomes due.
(b) During the performance of the contract: Actual breach of contract also
occurs when during the performance of the contract, one party fails or
refuses to perform his obligation under it by express or implied act.

Remedies for Breach of Contract
SUIT FOR DAMAGES

Compensation for loss or damage caused by breach of contract (Section
73)
When a contract has been broken, the party who suffers by such a breach is
entitled to receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which
naturally arose in the usual course of things from such breach, or which the
parties knew, when they made the contract, to be likely to result from the
breach of it.
Such compensation is not to be given for any remote and indirect loss or
damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created
by contract: When an obligation resembling those created by contract has
been incurred and has not been discharged, any person injured by the
failure to discharge it is entitled to receive the same compensation from the
party in default, as if such person had contracted to discharge it and had
broken his contract.
Remedy by way of Damages or Kind of Damages
Remedy by way of damages is the most common remedy available to the

injured party. This entitles the injured party to recover compensation for
the loss suffered by it due to the breach of contract, from the party who
causes the breach.
(i) Ordinary damages: When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party who has broken
the contract, compensation for any loss or damage cause to him thereby,
which naturally arose in the usual course of things from such breach, or
which the parties know, when they made the contract, to be likely to result
from the breach of it:
Such compensation is not to be given for any remote and indirect loss or
damage sustained by reasons of the breach
(ii) Special damages: Where a party to a contract receives a notice of

special circumstances affecting the contract, he will be liable not only for
damages arising naturally and directly from the breach but also for special
damages.
Example: ‘A’ delivered a machine to ‘B’, a common carrier, to be
conveyed to ‘A’s mill without delay. ‘A’ also informed ‘B’ that his mill was
stopped for want of the machine. ‘B’ unreasonably delayed the delivery of
the machine, and in consequence ‘A’ lost a profitable contract with the
Government. In this case, ‘A’ is entitled to receive from ‘B’, by way of
compensation, the average amount of profit, which would have been made
by running the mill during the period of delay. But he cannot recover the
loss sustained due to the loss of the Government contract, as ‘A’s contract
with the Government was not brought to the notice of ‘B’.
(iii) Vindictive or Exemplary damages

These damages may be awarded only in two cases -
(a) for breach of promise to marry because it causes injury to his or her
feelings; and
(b) for wrongful dishonour by a banker of his customer’s cheque because
in this case the injury due to wrongful dishonour to the drawer of cheque is
so heavy that it causes loss of credit and reputation to him. A business man
whose credit has suffered will get exemplary damages even if he has
sustained no pecuniary loss. But a non-trader cannot get heavy damages in
the like circumstances, unless the damages are alleged and proved as
special damages. (Gibbons v West Minister Bank)
(iv) Nominal damages: Nominal damages are awarded where the plaintiff
has proved that there has been a breach of contract but he has not in fact
suffered any real damage. It is awarded just to establish the right to decree
for the breach of contract. The amount may be a rupee or even 10 paise.
(v) Damages for deterioration caused by delay: In the case of
deterioration caused to goods by delay, damages can be recovered from
carrier even without notice. The word ‘deterioration’ not only implies
physical damages to the goods but it may also mean loss of special
opportunity for sale.
(vi) Pre-fixed damages: Sometimes, parties to a contract stipulate at the
time of its formation that on a breach of contract by any of them, a certain
amount will be payable as damage. It may amount to either liquidated
damages (i.e., a reasonable estimate of the likely loss in case of breach) or
a penalty (i.e., an amount arbitrarily fixed as the damages payable).
Section 74 provides that if a sum is named in a contract as the amount to
be paid in case of a breach, the aggrieved party is entitled to receive from
the party at fault a reasonable compensation not exceeding the amount so
named (Section 74).
Example: If the penalty provided by the contract is ` 1,00,000 and the
actual loss because of breach is ` 70,000, only ` 70,000 shall be available
as damages, i.e., the amount of actual loss and not the amount stipulated.
But if the loss is, say, ` 1,50,000, then only, ` 1,00,000 shall be recoverable.
Besides claiming damages as a remedy for the breach of contract, the

following remedies are also available:
(i) Rescission of contract: When a contract is broken by one party, the
other party may treat the contract as rescinded. In such a case he is
absolved of all his obligations under the contract and is entitled to
compensation for any damages that he might have suffered.
Example: A promises B to deliver 50 bags of cement on a certain day. B
agrees to pay the amount on receipt of the goods. A failed to deliver the
cement on the appointed day. B is discharged from his liability to pay the
price.
(ii) Quantum Meruit: Where one person has rendered service to another
in circumstances which indicate an understanding between them that it is
to be paid for although no particular remuneration has been fixed, the law
will infer a promise to pay. Quantum Meruit i.e. as much as the party
doing the service has deserved. It covers a case where the party injured by
the breach had at time of breach done part but not all of the work which he
is bound to do under the contract and seeks to be compensated for the
value of the work done. For the application of this doctrine, two conditions
must be fulfilled:
(1) It is only available if the original contract has been discharged.
(2) The claim must be brought by a party not in default.
The object of allowing a claim on quantum meruit is to recompensate the
party or person for value of work which he has done. Damages are
compensatory in nature while quantum merit is restitutory. It is but
reasonable compensation awarded on implication of a contract to
remunerate. Where a person orders from a wine merchant 12 bottles of a
whiskey and 2 of brandy, and the purchaser accepts them, the purchaser
must pay a reasonable price for the brandy.
The claim for quantum meruit arises in the following cases:
(a) When an agreement is discovered to be void or when a contract
becomes void.
(b) When something is done without any intention to do so gratuitously.
(c) Where there is an express or implied contract to render services but
there is no agreement as to remuneration.
(d) When one party abandons or refuses to perform the contract.
(e) Where a contract is divisible and the party not in default has enjoyed
the benefit of part performance.
(f) When an indivisible contract for a lump sum is completely performed
but badly the person who has performed the contract can claim the lump
sum, but the other party can make a deductionfor bad work.
Example 1: X wrongfully revoked Y‘s (his agent) authority before Y could
complete his duties. Held, Y could recover, as a quantum meruit, for the
work he had done and the expenses he had incurred in the course of his
duties as an agent.
Example 2: A agrees to deliver 100 bales of cottons to B at a price of `1000
per bale. The cotton bales were to be delivered in two installments of 50
each. A delivered the first installment but failed to supply the second. B
must pay for 50 bags.
(iii) Suit for specific performance: Where damages are not an adequate
remedy in the case of breach of contract, the court may in its discretion on

a suit for specific performance direct party in breach, to carry out his
promise according to the terms of the contract.
(iv) Suit for injunction: Where a party to a contract is negating the
terms of a contract, the court may by issuing an ‘injunction orders’,
restrain him from doing what he promised not to do.
Example: N, a film star, agreed to act exclusively for a particular producer,
for one year. During the year she contracted to act for some other producer.
Held, she could be restrained by an injunction.
Party rightfully rescinding contract, entitled to compensation (Section 75)
A person who rightfully rescinds a contract is entitled to compensation for
any damage which he has sustained through non-fulfilment of the contract.
Example: A, a singer, contracts with B, the manager of a theatre, to sing at
his theatre for two nights in every week during the next two months, and B
engages to pay her ` 100 for each night’s performance. On the sixth night,
A willfully absents herself from the theatre, and B, in consequence,
rescinds the contract. B is entitled to claim compensation for the damage
which he has sustained through the non-fulfilment of the contract.
CONTINGENT AND QUASI CONTRACTS
Definition of ‘Contingent Contract’ (Section 31)

“A contract to do or not to do something, if some event, collateral to such
contract, does or does not happen”.
Essentials of a contingent contract
(a) The performance of a contingent contract would depend upon the
happening or non-happening
of some event or condition. The condition may be precedent or subsequent.
Example: ‘A’ promises to pay ` 50,000 to ‘B’ if it rains on first of the next
month.
(b) The event referred to is collateral to the contract. The event is not part
of the contract. The event
should be neither performance promised nor a consideration for a promise.

Thus (i) where A agrees to deliver 100 bags of wheat and B agrees to pay
the price only afterwards, the contract is a conditional contract and not
contingent; because the event on which B’s obligation is made to depend is
part of the promise itself and not a collateral event. (ii) Similarly, where A
promises to pay B ` 1,00,000 if he marries C, it is not a contingent
contract. (iii) ‘A’ agreed to construct a swimming pool for ‘B’ for `
200,000. And ‘B’ agreed to make the payment only on the completion of
the swimming pool. It is not a contingent contract as the event (i.e.
construction of the swimming pool) is directly connected with the contract.
(c) The contingent event should not be a mere ‘will’ of the promisor. The
event should be contingent in addition to being the will of the promisor.
Example 1: If A promises to pay B ` 100,000, if he so chooses, it is not a
contingent contract. (In fact, it is not a contract at all). However, where the
event is within the promisor’s will but not merely his will, it may be
contingent contract.
Example 2: If A promises to pay B `100,000 if A left Delhi for Mumbai on
a particular day, it is a contingent contract, because going to Mumbai is an
event no doubt within A’s will, but is not merely his will.
(d) The event must be uncertain. Where the event is certain or bound to
happen, the contract is due to be performed, then it is a not contingent
contract.
Example: ‘A’ agreed to sell his agricultural land to ‘B’ after obtaining the
necessary permission from the collector. As a matter of course, the
permission was generally granted on the fulfillment of certain formalities.
It was held that the contract was not a contingent contract as the grant of
permission by the collector was almost a certainty.

QUASI CONTRACTS
A valid contract must contain certain essential elements, such as offer and
acceptance, capacity to contract, consideration and free consent. But
sometimes the law implies a promise imposing obligations on one party
and conferring right in favour of the other even when there is no offer, no
acceptance, no genuine consent, lawful consideration, etc. and in fact
neither agreement nor promise. Such cases are not contracts in the strict
sense, but the Court recognises them as relations resembling those of
contracts and enforces them as if they were contracts. Hence the term
Quasi –contracts (i.e. resembling a contract). Even in the absence of a
contract, certain social relationships give rise to certain specific obligations
to be performed by certain persons. These are known as quasi contracts as
they create same obligations as in the case of regular contract.
Quasi contracts are based on principles of equity, justice and good
conscience.
A quasi or constructive contract rests upon the maxims, “No man must
grow rich out of another persons loss”.
Example 1: T, a tradesman, leaves goods at C’s house by mistake. C treats
the goods as his own. C is bound to pay for the goods.
Salient features of quasi contracts:

(a) In the first place, such a right is always a right to money and generally,
though not always, to a liquidated sum of money.
(b) Secondly, it does not arise from any agreement of the parties
concerned, but is imposed by the law; and
(c) Thirdly, it is a right which is available not against all the world, but
against a particular person or persons only, so that in this respect it
resembles a contractual right.
Cases deemed as Quasi contracts

(a) Claim for necessaries supplied to persons incapable of contracting

(Section 68): If a person, incapable of entering into a contract, or
anyone whom he is legally bound to support, is supplied by another
person with necessaries suited to his condition in life, the person who
has furnished such supplies is entitled to be reimbursed from the
property of such incapable person.
(b) Payment by an interested person (Section 69): A person who is

interested in the payment of money which another is bound by law to pay,
and who therefore pays it, is entitled to be reimbursed by the other.
(c) Obligation of person enjoying benefits of non-gratuitous act

(Section 70): In term of section 70 of the Act “where a person lawfully
does anything for another person, or delivers anything to him not intending
to do so gratuitously and such other person enjoys the benefit thereof, the
latter is bound to pay compensation to the former in respect of, or to
restore, the thing so done or delivered”.
It thus follows that for a suit to succeed, the plaintiff must prove:
(i) that he had done the act or had delivered the thing lawfully;
(ii) that he did not do so gratuitously; and
(iii) that the other person enjoyed the benefit.
(d) Responsibility of finder of goods (Section 71): ‘A person who finds

goods belonging to another and takes them into his custody is subject to
same responsibility as if he were a bailee’.
Thus a finder of lost goods has:
(i) to take proper care of the property as man of ordinary prudence would
take
(ii) no right to appropriate the goods and
(iii) to restore the goods if the owner is found.
(e) Money paid by mistake or under coercion (Section 72): “A person to

whom money has been paid or anything delivered by mistake or under
coercion, must repay or return it”.
Indemnity
The term ‘Indemnity` Simply means ‘Making Somebody Safe` or ‘Paying
Somebody back`.
Section 124 of contract Act defines that ‘‘A contract by which one party.
Promises to save the other from loss caused to him by the conduct of the
promise himself by the conduct of any other person, is called a conduct of
indemnity”.
The party who gives indemnity or who promises to compensate for or to make
good the loss, is called. Indemnifier and the party for whose protection or safety
the indemnity is given or the party whose loss is made good is called
‘Indemnified’ or ‘indemnity holder’. Important features of an indemnity
contract –
1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied. Loss/damage may be caused by some event,
or accident, or some natural phenomenon or disaster.
Rights of Indemnified (Indemnity-Holder)

1. Rights to claim for all damages/losses.
2. Rights to claim for all costs which is related to contract.
3. Rights to claim for all sums which his may have paid for contract.
Liabilities/Duties of Indemnified
1. Liabilities to pay all damages/losses.
2. Liabilities to pay all costs related to contract.
3. Liabilities to pay all sum which is received by sell for contract from
indemnified.

Guarantee Contract
The object of the contract of guarantee is to enable. A person to obtain an

employment, or a loan, or some goods or service on credit.
According to section 126 of the contract Act ‘‘A contract of guarantee is a
contract to perform the promise, or discharge the liability, of a third person
in case of his default.”
The person who gives the guarantee is called the ‘Surety’ or ‘guarantor’ &
the person in respect of whose default the guarantee is given is called the
principal debtor or he is the party on whose behalf. Guarantee is given and
the person to whom the guarantee is given is called the ‘Creditor’.
Essential features of a Guarantee Contract

1. Three parties
2. Three agreement
3. Concurrence of the three parties
4. Control may be experts or implies
5. It may be oral or written
6. Liability of surety is secondary is dependent on principal debtor’s
default.
7. Guarantee must be in the knowledge of debtor.
8. All essential of a valid contract.
9. Guarantee must not be obtained by means of misrepresentation.
10. Existence of a primary liability.

Kinds of Guarantee
1. Specific or Simple Guarantee: When a guarantee is given in respect
to a single debt or specific transaction is to come to an end when the
guarantee debt is paid or the promise is duly performed. It is called a
specific or simple guarantee.
2. Continuing guarantee: Section 129, of the contract Act defines a
guarantee which towards to a series of transaction, is called a
continuing guarantee, thus, a continuing guarantee is not confined to
a single transaction but keeps on moving to several transaction
continuously.
Revocation of Guarantee
Revocation of guarantee means cancellation of guarantee already

accrued, it may be noted that the specific guarantee cannot be revoked
if the liability has already secured.
A Guarantee may be revoked in any of the following ways-
1. By notice of revocation.
2. By death of surely.
3. By discharge of surely in various circumstances
4. By novation (Sec.62)
5. By variance in terms (Sec. 133)
6. By release/discharge of principal Debtor (Sec.-134)
7. When the creditor events in to an agreement with the principal
debtors (Sec.13..)
8. By creditor act or omission impairing surety’s eventual remedy
(Sec. 139)
9. By loss of security “(Sec. 141)

10. By invalidation of contract (Sec.142,143,144)
Bailment
Sec. 148 defines Bailment as” the delivery of goods by one person to
another for some purpose, upon a contract, that they shall, when the
purpose is accomplished, be returned or otherwise disposed of according
to the directions of the person delivering them”. The person delivering the
goods is called the ‘bailor’ and the person the person to whom they are
delivered is called the ‘bailee’.
1. Agreement
There must be an agreement between the bailor and the bailee.This
agreement may be either express or implied.However,a bailment may be
implied by law also. For example,bailment between a finder of goods and
owner of goods.
2. Delivery of Goods
There must be delivery of goods.It means that the possession of goods
must be transferred.In this this connection,The following points may be
noted:
i. The delivery must be voluntary,for example the delivery of jewellery by
its owner to a thief who shows a revolver,does not create a bailment
because the delivery is not voluntary.
ii. Delivery may be actual or constructive.
3. Purpose

The delivery of goods must be for some intented purpose.For

example,wrong delivery of goods to Jaipur Golden Roadways instead of
Patel Roadways,does not create any bailment.
4. Return of specific Goods
The goods which form the subject matter of a bailment must be returned to
the bailor or otherwise disposed off according to the directions of the
bailor,after the accomplishment of purpose or after the expiry of period of
the bailment.it may be noted that the same goods must be returned in their
original form or desired.
i. On the basis of reward

a) Gratuitous Bailment
It is a contract of bailment where no consideration passes between the
bailor and the bailee.
b) Non-gratuitous Bailment
It is a contract of bailment where some consideration passes between the
bailor and the bailee.
ii. On the basis of Benefit
a) Bailment for the exclusive benefit of the bailor
It is a contract of bailment which is executed only for the benefit of the

bailor and the bailee does not derive any benefit from it.
b) Bailment for the exclusive benefit of the bailee
It is a contract of bailment which is executed only for the benefit of the
bailee and the bailor does not derive any benefit from it.
c) Bailment for the mutual benefit
It is a contract of bailment which is executed for the mutual benefit of
bailor and bailee.
DUTIES OF A BAILOR
• Duty to disclose defects [Section 151]
In case of gratuitous bailment:
The bailor must disclose all the defects in the goods-

1. Which are known to him,and
2. Which materially interfere with the use of them or expose the bailee
to extraordinary risks.
In case of non gratuitous bailment

If the bailee suffers any loss due to any defect in the goods,the bailor is
liable to bailee for such loss whether he knows those defects or not.
• Duty to bear expenses [Section 158]
In case of gratuitous bailment

The bailor must repay to the bailee all the necessary expenses which the
bailee has already incurred for the purpose of bailment.
The bailor must repay to the bailee all the extraordinary expenses which
the bailee has incurred for the purpose of bailment.
• Duty to indemnity the bailee in case of premature termination of
gratuitous bailment [Section 159]
A gratuitous bailment may be terminated by the bailor at anytime even
though the bailment was for a specified time or purpose.The bailor must

indemnify the bailee in case the loss arising due to premature termination
of the bail,ment exceeds the benefits actually derived by the bailee.
• Duty to indemnity the bailee against the defective title of bailor
[Section 164]
The bailor is responsible to the bailee for any loss which the bailee may
suffer because of the defective title of the bailor.
• Duty to receive back the goods [Section 164]
The bailor must receive back the goods when the bailee,in accordance
with the terms of bailment,returns the goods to him.If the bailor refuses to
receive back the goods,he must repay to the bailee all the expenses which
the bailee has incurred for the safe custody of goods.
• Duty to bear the risk of loss [Section 152]
The bailor must bear the risk of loss of goods provided the bailee has
taken all responsible steps to protect the goods from loss.
DUTIES OF A BAILEE
• Duty to take care of the goods bailed [Section 151&152]

The bailee is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would,under similar circumstances take of his
own goods of the same bulk,quality and value as the goods bailed.
• Duty not to make any unauthrosed use of goods [Section 154]
The bailee must use the goods bailed according to the conditions of the
bailment.If he does not use the goods bailed according to the conditions of
the bailment,he is liable to make compensation to the bailor for any
damage arising to the goods from or during such use of them.
• Duty not to mix bailor‘s goods with his own goods [Section 155 to
157]
Rights of a Bailor
• Right to claim damage in case of negligence [Section152]
If the bailee has not taken reasonable care or special care,the bailor has a
right to claim damages for the loss,destruction or deterioration of the
goods bailed.
• Right to terminate the contract in case of unauthorized use [Section

153]
If the bailee does any act in respect of goods bailed,which is inconsistent
with the conditions of the bailment,the bailor has a right to terminate the
contract of bailment.
• Right to claim compensation in case of unauthorized use [Section
154]
If the bailee doest not use the goods bailed according to the conditions of
the bailment,the bailor has aright to claim compensation from bailee for
any damage arising to the goods from or during such use of them.
• Right to claim the separation of goods in case of unauthorized
mixture of goods [Section 156]
If the bailee,without the consent of the bailor mixes bailor’s goods with his
own goods and the goods can be separated,the bailor has a right to claim
his goods after separation.
• Right to claim compensation in case of unauthorized mixture of
goods which canoot be separated[Section 157]
If the bailee,without the consent of the bailor mixes bailor’s goods with his
own goods and the goods cannot be separated,the bailor has a right to
claim compensation from bailee for the loss of the goods.
• Right to demand return of goods [Section 160]
The bailor has a right to demand return of goods after the accomplishment
of the purpose or after the expiry of period of bailment.
• Right to claim compensation in case of unauthorized retention of
goods [Section 161]
If the bailee does not return or deliver the goods according to the bailor’s
directions after the accomplishment of purpose or after the expiry of
period of bailment,the bailor has a right to claim compensation for any
loss,destruction or deterioration of the goods from that time.
• Right to demand accretions to goods[Section 163]
In the absence of contract to the contrary,the bailor has a right to demand
any increase or profit which may have accrued from the goods bailed.

RIGHTS OF A BAILEE
• Right to claim damage [Section 150]
If th ebailor does not disclose the defect in the goods which are known to
him and the bailee suffers dome loss due to such defects,the bailee has a
right to claim damages.
If the bailee suffers any loss due to any defect in the goods,the bailee has a
right to claim damages.
• Right to claim reimbursement of expenses [Section 158]
The bailee has a right to claim reimbursement of all the necessary
expenses which he has already incurred for the purpose of bailment.
In case of non-gratuitous bailment
The bailee has a right to claim reimbursement of all the extraordinary
expenses which the bailee has already incurred for the purpose of
bailment.
• Right to be indemnified in case of premature termination of
gratuitous bailment [Section 159]
Th ebailee has a right to be indemnified in case the loss arising due to
premature termination of th egratuitous bailment exceeds the benefits
actually derived by him.
• Right to recover loss in case of bailor‘s defective title [Section 164]
The bailee has a right to be indemnified in case he suffers any loss because
of the defective title of the bailor.
• Right to recover loss in case of bailor‘s refusal to take the goods back
[Section 164]
The bailor has a right to be indemnified in case he suffers any loss because
of bailor’s refusal to take the goods back.
• Right to deliver goods to any one of the joint bailors [Section 165]
In the absence of any contract to the contrary,the bailee has a right to
deliver back the goods to anyone of the joint owners or may deliver the
goods back according to the directions of one joint owner without the
consent of all.
• Right to deliver goods to bailor in case of bailor‘s defective title

[Section 166]
If the bailor has no title to the goods,the bailee, in good faith,delivers them
back to,or according to the directions of the bailor,the bailee is not
responsible to the owner in respect of such delivery.
• Right to particulars lien [Section 170]
Where the bailee has,in accordance with the purpose of the bailment
rendered any service involving the exercise of labour or skill in respect of
the goods bailed,he has,in absence of a contract to the contrary,a right to
retain such goods until he receives due remuneration for the services he
has rendered in respect to them.
TERMINATION OF BAILMENT
I. Termination of every Contract of Bailment (whether Gratuitous or not)

Every contract of bailment comes to end under the following
circumstances:
a) On the Expiry of Fixed Period
A bailment is terminated on the expiry of fixed period if the goods are
bailed for a fixed period.
b) On fulfillment of the Purpose
A bailment is terminated on the fulfillment of the purpose if the goods are
bailed for a specific purpose.
c) Inconsistent Use of Goods
A bailment may be terminated if the bailee does not use the goods
according to the conditions of the bailment.
d) Destruction of the subject Matter of Bailment
A bailment is terminated if the subject matter of the bailment
1. Is destroyed
2. Becomes incapable of being used for bailment because of some
change in the nature of goods.
II. Termination of Gratuitous Bailment

A contract of gratuitous bailment is terminated in the following

circumstances also.
a) Before the Expiry of fixed Period
A gratuitous may be terminated by the bailor at any time even though the
bailment was for a fixed period.However,the bailor is required to
indemnify the bailee in case the loss due to premature termination exceeds
the benefit actually derived by the bailee.
b) On Death of Bailor/Bailee
A gratuitous bailment is terminated by the death of either the bailor or
bailee.
PLEDGE
Meaning of pledge (or pawn) [Section 172]
The bailment of goods as security for payment of a debt or performance of
a premise is called pledge (or pawn).
Meaning of A pawner (or pledgor) [Section 172)
The person who delivers the goods as security for payment of a debt or
performance of promise is called the pawnor or pledgor. In aforesaid
example X is pawnor
Meaning of Pawnee (or pledge) [Section 172)
The person to whom the goods are delivered as security for payment of a
debt or performance of promise is called the Pawnee or Pledgee
Rights of Pawnee
• Right of retainer [Section 173]
The pawnee may retain the goods pledged
1. For payment of the debt of the performance of the promise,
2. For the interest of the debt,
• All necessary expenses incurred by him in respect of the possession
or for the preservation of the goods pledged.
• Right to claim reimbursement of extraordinary expenses [Section
173]
The pawnee is entitled to receive from the pawnor extraordinary expenses
incurred by him for the preservation of the goods.
• Right to sue pawnor [Section 176]

If the pawnor makes default in payment of the debt or performance of the
promise,the pawnee has a right to sue the pawnor for the recovery of the
amount due or for the performance of the promise sand to retain the goods
pledged as collateral security.
• Right to sell [Section 176]
If the pawnor makes default in payment of the debt or performance of the
promise,the pawnee has a right to sell the goods pledged after giving a
reasonable notice of the intended sale,to the pawnor.Any loss from such
sale is recoverable from the pawnor but profits resulting therefrom is
returnable to the pledgor.
• Right against true owner [Section 178A]
When the pawnor has obtained possession of the goods pledged by him
under a contract voidable under Section 19 or 19A but the contract has not
been rescinded at the time of the pledge,the pawnee acquired a good title
to the goods provided he acts in good faith and without notice of the
pawnor’s defect of title.
Duties of a Pawnee
• Duty to take reasonable care of the goods pledged
• Duty not to make unauthorized use of goods
• Duty not to mix pawnor’s goods with his own goods
• Duty to return goods
• Duty to return accretion to the goods
Rights of Pawnor
• Right to get pawnee’s duties duly enforced
The pawnor has the right to get pawnee’s duties duly enforced(for
example,right to get back the goods pledged,right to receive any accretions
to the goods pledged).
• Right to redeem [Section 177]
• If a time time is stipulated for the payment of the debt,or
performance of the promise,for which the pledge is made and the
pawnor makes default in payment of the debt or performance of the
promise at stipulated time,he may redeem the goods pledged at any

subsequent time before the actual sale of them;but he must;in case’

pay’in addition ,any expenses which have arisen from his default.
Duties of Pawnor
• Duty to comply with the terms of pledge
• Duty to compensate the Pawnee for extraordinary expenses [Section
185}
AGENCY
Meaning of Agency: Agency is relation between an agent his principal

created by an agreement. Section 182 of the Contract Act defines an Agent
as ‘‘A person employed to do any act for another, or to represent another in
dealings with third persons. The person for whom such act is done, or
whom is so represented is called the principal”.
Essential Features of Agency
1. The principal
2. The agent
3. An agreement
4. Consideration not necessary
5. Representative capacity
6. Good faith
7. The competence of the principal
Modes or Methods or Creation of Agency
1. Agency by express agreement[Section 186 and 187]

A contract of agency may be made by express words, whether written or
oral.
2. Agency by implied agreement[Section 187]
‘‘An authority is said to be implied when it is to be inferred from the
circumstances of the case.
(a) Agency by estoppels : When a principal by his conduct or act cause a
third person to believe that a certain person is his authorized agent the
agency is aid to be an agency by estoppels.

(b) Agency by necessity : It mean the agency which comes into existence
when certain circumstances compel a person to act as an agent for an other
without his express authority.
(c) Agency by holding out : When a principal by his active conduct or act
and without any objection permits another to act as his agent, the agency is
the result of principal’s conduct as to the agent.
3. Agency by ratification [Section 196]
Ratification means confirmation of an act which has already been done.
Sometimes, an act is done by a person on behalf of another person but
without another person’s knowledge and authority. If he accepts and
confirm the act, he is said to have ratified it.
4. Agency by operation of law:

In certain circumstances the law treats a person as an agent of another
person.
For example, (a) when a partnership is formed, every partner automatically
becomes agent o another partner. (b) when a company is formed its
promoters are treated as its agents by operation of law
RIGHTS AND DUTIES OF AGENT
Rights of an Agent
1. Right to retain money received on principal’s account.
2. Right to receive remuneration.
3. Right of lien on principal’s property.
4. Right to be indemnified.
5. Right to compensation for injury caused by principal’s neglet.
Duties of an Agent
1. To follow the direction of the principal.
2. To conduct the business of agency with reasonable skill and
diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
6. To pay the amounts received for the principal
7. Not to delegate his authority

8. Not to act in excess of authority
9. Duty on termination of agency by principal’s death or insanity.
TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the
agent the modes of termination of agency may be classified are as :
(a) Termination of Agency by the act of the Parties.
1. By revocation o authority by the principal
2. By renunciation (giving up) of business of agency by the agency
3. By mutual agreement
(b) Termination of agency by Operation of Law
1. Completion of business of agency
2. Death or insanity of principal or agent
3. Insolvency of the principal
4. Destruction of subject matcer
5. Expiry of time
6. Agency subsequently becoming unlawful.
7. Termination of sub agent’s authority

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Shree Medha Degree College Dept of Mgt studies

THE INDIAN CONTRACT ACT, 1872

Module-2 Indian contract Act 1872:

Law of contracts: nature of contracts, offer and acceptance,

The Law of contract: Introduction

From the Desk of K Ram Kiran Page 1

The contract consists of two essential elements:

Agreement = Offer/Proposal + Acceptance

(ii) Enforceability by law – An agreement to become a contract must give

Example: A agrees with B to sell car for `2 lacs to B. Here A is under an

Difference between Agreement and Contract

Basis of differences Agreement Contract

Meaning Every promise and every set of Agreement enforceable by law.

From the Desk of K Ram Kiran Page 3

ESSENTIALS OF A VALID CONTRACT

I. Offer and Acceptance or an agreement: An agreement is the first

When consent is vitiated by mistake, the contract becomes void.

From the Desk of K Ram Kiran Page 4

A person competent to contract must fulfil all the above three

IV. Consideration: It is referred to as ‘quid pro quo’ i.e. ‘something in

V. Lawful Consideration and Object: The consideration and object of

From the Desk of K Ram Kiran Page 5

Example : ‘A’ promises to drop prosecution instituted against ‘B’ for

Example: Threat to commit murder or making/publishing defamatory

I. On the basis of the validity

1. Valid Contract: An agreement which is binding and enforceable is a

2. Void Contract: Section 2 (j) states as follows: “A contract which ceases

Example: A contracts with B (owner of the factory) for the supply of 10

From the Desk of K Ram Kiran Page 6

It may be added by way of clarification here that when a contract is void, it

Sl.No. Basis Void Contract Voidable Contract

1 Meaning A Contract ceases to be enforceable by An agreement which is

2 Cause A contract becomes void due to change A contract becomes a

3 Performance of contract A void contract cannot be performed. If the aggrieved party

4. Illegal Contract : It is a contract which the law forbids to be made. The

From the Desk of K Ram Kiran Page 7

Example: Contract that is immoral or opposed to public policy are illegal

5. Unenforceable Contract: Where a contract is good in substance but

II. On the basis of the formation of contract

1. Express Contracts: A contract would be an express contract if the terms

3. Quasi-Contract: A quasi-contract is not an actual contract but it

Example: Obligation of finder of lost goods to return them to the true

4. E-Contracts: When a contract is entered into by two or more parties

III. On the basis of the performance of the contract

1. Executed Contract: The consideration in a given contract could be an

Example: When a grocer sells a sugar on cash payment it is an executed

2. Executory Contract: In an executory contract the consideration is

Example: Where G agrees to take the tuition of H, a pre-engineering

Unilateral or Bilateral are kinds of Executory Contracts and are not

From the Desk of K Ram Kiran Page 10

PROPOSAL / OFFER [SECTION 2(a) OF THE INDIAN

Essentials of a proposal/offer are-

1. The person making the proposal or offer is called the ‘promisor’ or

3. An offer can be positive as well as negative: Thus “doing” is a positive

Example: A offers to sell his car to B for ` 3 lacs is an act of doing. So in

From the Desk of K Ram Kiran Page 11

An offer can be classified as general offer, special/specific offer, cross