Unit 2

The Indian Contract Act, 1872

THE INDIAN CONTRACT ACT, 1872
 The law relating to contracts.
(1)General principles –
1. Different stages of formation of contract
2. Essential elements
3. Performance ,Breach and Remedies
(2) Special contracts only -
1. Indemnity and Guarantee
2. Bailment and Pledge
3. Agency
Some contracts are not dealt with like, Partnership, Sale
of goods, negotiable instruments, insurance etc. These
have separate acts.
 Definitions under The Indian Contract Act , 1872

 Section 2(h) defines Contract as: “Agreement enforceable by

law’ - Contract
Contract = Agreement + Legal Obligation

 Section 2(c) defines agreement as : “ Every promise and

every set of promises, forming the consideration for each
other”
 Section 2(b) defines promise as : “ A proposal, when
accepted, becomes a promise”
Promise = accepted offer
Agreement and its enforceability :
Consensus ad idem – meeting of minds of the parties in full and
final agreement. In other words, agreeing the subject matter of the
agreement in the same sense and at the same time.

Example: A, owns 2 horses names Rajhans and Hansraj, is selling horse Rajhans
to B, B thinks he is purchasing horse Hansraj. There is no consensus ad idem an
consequently no contract.

Obligation – legal tie which imposes upon a definite person or

persons the necessity of doing or abstaining from doing a definite act or
acts.

Example : A agrees to sell his car to B for Rs.10,000/-.B agrees to pay 10,000/- to
A on the delivery of the car. This agreement is contract, when both A and B have
their obligations to fulfill which is legal.

Therefore, to form an agreement there must be offer by one party and

acceptance by the another.
 All agreements are not contracts But all contracts are
agreements.
 An agreement may be social agreement or a legal agreement.
Eg. A invites B to a dinner and B accepts. It is a social agreement.

 A social agreement does not give rise to contractual obligations and it is

not enforceable by law.

 It is only those agreements which are enforceable in court of law which

are contracts.
Eg. 1. A invites his friend B to come and stay with him for a week. B accepts the invitation but
when he comes to A, A cannot accommodate his as his wife had dies the day before. B cannot
claim compensation from A as the agreement is a social agreement.
2. A father promises to pay Rs. 100/- to his son every month as pocket allowance. Later
he refuses to pay. The son cannot recover as it is a domestic agreement and there is no intention
on the parties to create legal relations.

Thus, all the contracts are agreements but all agreements are not necessarily contracts.
ESSENTIALS OF VALID CONTRACT

1.Agreement - Offer and Acceptance

2.Legal purpose - intention to create lgal relationship
3.Lawful Consideration
4.Capacity to contract
5.Consent to contract
6.Lawful object
7.Certainty
8.Possibility of Performance
9.Not expressly declared void
10.Legal formalities like Writing, Registration
1. Offer and acceptance –

 2 parties required
 One party – to make offer
 Another party – to accept the offer
 Offer must be definite and the acceptance
must be communicated to the offeror.

2. Legal purpose –
 Intention of 2 parties must be to create legal purpose.
 Social or domestic agreement is not a contract.
Eg. Husband promises to pay his wife a household allowance of 30 Euros every month. Later they
got separated and he refused to pay. Wife sued her husband. Such agreements were outside the
realm of the court [ Balfour Vs. Balfour]

3. Lawful consideration –
 Something in return
 A promise to do something and get nothing
in return is not enforceable by law.
 It need not necessarily be cash or kind.
4. Capacity to contract -
-Competency

a) Age of majority
b) Person of sound mind
c) Person disqualified by law

5. Consent to contract -
-Free and genuine consent only when the following are absent :
a) Coercion
b) Undue influence
c) Fraud
d) Misrepresentation
e) mistake

6. Lawful object -
- It should not be
f) Illegal
g) Immoral
7. Certainity -
- It should not be Vague or indefinite
Eg. 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.

8. Possibility of performance -
- agreements impossible to perform cannot b performed
Eg. A agrees to put life into B s dead wife, the agreement is void as it is impossible to perform

9. Not expressly declared void -

- By any law in the country

10. Legal formalities –

- agreements may b oral or in writing
- In the interest of the parties it must be
in writing
- Stamped , incorporated or stamped
-
 Types of Contracts

1. CLASSIFICATION ACCORDING TO VALIDITY

On the basis of enforceability, contracts may be classified as :
 Valid contract: It is a contract which satisfies all the legal requirements
provided for under Sec. 10
 Void contract: Section 2(j) of the Act: “A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable”.
Eg. A agrees to pay B Rs.10,000 and B promises to bring A, stars from heaven
 Voidable Contract : Section 2(i) of the Act: “An agreement which is enforceable
by law at the option of one or more of the parties thereto, but not at the option
of the other or others, is a voidable contract.”
Eg. A agrees to pay a sum of Rs. 10,0000 to a person B who is a minor, for an
antique chair. This contract would be valid, the only problem is that person B is a
minor and can’t legally enter a contract.
 2. Illegal Contracts and Unenforceable Contracts
 Illegal contract: An agreement is illegal when it is against the law of the land.
- an agreement to commit fraud, crime. –Unlawful
Eg. B borrows Rs. 5000/- from a and enters into contract with an alien to import
prohibited goods. A knows the purpose of the loan. The transaction between A and B is
collateral to the main agreement. It is illegal since the main agreement is illegal.

 Unenforceable contract: An unenforceable contract is one which is valid but for

certain technical reasons such as want of proof . If there is lapse of time in the
contract then such contracts even if fulfilled cannot be enforced in the court of law.
Eg. A enters into contract with B, who holds an exhibition of sale of antique pieces from
Jan 20th , 2020 to Feb 20th, 2020. A advances Rs.50,000/- as rent on this view.
A wont turn up during the period but comes to B on Feb 28 th,2020 with the antique pieces.
Since the time has lapsed the performance is not possible. A is not entitled to the legal
remedies.
 3. CLASSIFICATION ACCORDING TO FORMATION
 Express Contracts: words spoken or written
 Implied Contracts: by course of dealings, by conduct – Eg. getting into bus, takes
a cup of tea in restaurant
 Quasi Contracts : Constructive by Law – Eg. 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.
4. CLASSIFICATION ACCORDING TO PERFORMANCE
 Executed contracts: Performed in full
 Executory Contracts: unperformed, due & outstanding
 Unilateral Contracts: one party obligation- one sided contract - Eg. Coolie
carries the baggage of passengers in railway station.by the time already the coolie has
performed his duty, the passenger has to pay the reasonable charge to the coolie.
 Bilateral Obligation: Both the party – obligation by both parties are
outstanding. Just like executory contracts.
5. E – Contracts
Practise of buying and selling of goods, services and information online
 OFFER
Section 2(a) – “When one person signifies his willingness to do or
to abstain from doing anything, with a view to obtaining the
assent of that other to such an act or abstinence, he is said to
have made a proposal”.

 Expression of readiness to do or not to do something

 Made to another person and not to himself
 Made with intention that the other person accepts it.
 Characteristics of valid Offer
 Offer may be express or implied:
 Offer may be specific or general:
 Offer must give rise to legal obligation: not social invitation
 Terms of an offer must be definite and certain:
 Offer must be distinguished from an invitation to offer: display of goods in shop
 Offer must be distinguished from a mere declaration of intention
 offer may b made in future and not now
 Offer must be communicated:
 Communication of Special Terms
 Offer must be made with a view to obtaining the consent of the other party to do or
to abstain from doing the act
 Offer should not impose an unnecessary obligation to communicate non-acceptance
 Offer must be distinguished from

(i) Mere invitation to an offer.

Example: A shopkeeper displays goods for sale in a shop with price tags
attached to each article. This is only an invitation to an offer. The
shopkeeper cannot be compelled to sell the goods at the price mentioned.

(ii) Newspaper advertisements are not offers.

Example: When A advertises in a newspaper that he would pay Rs.100 to
anyone who finds and returns her dog, the offer is addressed to the first
person who by performing the required act with knowledge of offer of
reward , creates an agreement.

(iii) A declaration of intention and an announcement.

A declaration made is nothing but an offer which may be mad in the future.
An advertisement for auction sale does not amount to offer.
 Types of Offer
1. Express offer and Implied offer – oral or written
2. Specific offer and general offer- made to specific
person or a group of person
3. Cross offers- identical offers
4. Standing offer- open for acceptance for period of
time
5. Counter offer – alternative proposal by offeree
 ACCEPTANCE
Section 2(b) –“when the person to whom the proposal is made
signifies assent thereto, the proposal is said to be accepted. A
proposal when accepted becomes a promise”

 It may be oral
 It may be written
 It may be implied by conduct
 Mere silence is not acceptance
 Legal rules governing a valid acceptance

 Acceptance can only be given to whom the offer can be

accepted only by the person to whom it is made
 Acceptance should be unconditional and absolute
 Acceptance should be communicated
 Acceptance should be according to the prescribed form/
mode
 Acceptance must be provoked by offer
 Acceptance must be given before the offer lapses or is
revoked
 Provisional acceptance is no acceptance
 Consideration
Section 2(d)-“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 act or
abstinence is called a consideration for the promisee.”
Legal rules governing Consideration
(i) Consideration must move at the desire of the promisor
(ii) Consideration may move from the promisee to any other person
(iii) It can be in the past, present or future
(iv) It must have value in the eyes of the law
(v) It should be over and above the Promisors’ existing obligation
(vi) It cannot be Unlawful
(vii) Consideration need not be adequate, but it must be sufficient.
(viii) Contract must be supported by consideration1
 Legality of object
Section 23 of the Indian Contract Act – “Every agreement of Which the object
or consideration is unlawful is void”.

It states that the consideration and/or object of a contract are considered lawful
consideration and/or object unless they are
 forbidden by law
 of such a nature that they would defeat the purpose of the law
 fraudulent
 involve injury to any other person or property of another
 the courts regard them as immoral
 opposed to public policy.
-trading with alien
-Interference with administration of justice
- marriage brokerage agreements
-trafficking in public offices
-unfair or unreasonable dealings
 Capacity/Competency 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.”

Competency means ability to enter into contractual

relationships

The following are incompetent:

1. Minor
2. Persons of unsound mind
3. Persons disqualified by law
1. Minor

 A Contract made with a Minor is Void abinitio

 A Minor can be a Beneficiary of a Contract
 A Minor is always given the Benefit of being a Minor
 Contract by Guardian
 Joint contract by a Minor and an Adult
 Minor and Partnership
 Minor and shares
 Minors liability for supply of necessaries
 Contract of Apprenticeship by the guardian of a Minor
2. Person of Sound Mind
According to Section 12 of the Indian Contract Act, 1872, for the
purpose of entering into a contract, a person is said to be of sound
mind if he is capable of understanding the contract and being able
to assess its effects upon his interests.

 Agreements with persons of unsound mind

 Agreements by idiots – no lucid intervals
 Agreements by Lunatics – by mental strain/personal experience
 Agreements by intoxicated persons
 3. Disqualified Persons

 foreign sovereigns and ambassadors,

 alien enemy,
 convicts,
 Insolvents
 Joint Stock Companies and Statutory Corporations
Consent should be Free and genuine consent(Sec.13 &14)
Consent is said to be free if it is not caused by-
1. Coercion – CRIMINAL LIABILITY – Section 15
Consent is said to be caused by coercion when it is obtained by pressure exerted by either
(a) committing or threatening to commit an act forbidden by the Indian Penal Code or
(b) unlawfully detaining or threatening to detain any property
Examples:
i. A threatens to kill B if he does not lend Rs. 1000 to C.
B agrees to lend the amount to C.
The agreement is entered into under coercion.
ii. A young girl of 13 years was forced to adopt a boy
to her husband who had just died by the relatives of the husband
who prevented the removal of his body from cremation until she
consented. Held the consent was not free but was induced by coercion.
Consequently the adoption was set aside [ Ranganayakamma Vs. Alwar Setty, (1889 13 Mad. 214]
iii. The Government gave a threat of attachment against the property of P for the recovery of the fine due
from T, the son of P. P paid the fine. Held the contract was induced by coercion [ Bansaraj Vs. The secretary
of the state, (1939) ]
2. Undue influence – Moral coercion – NO CRIMINAL LIABILITY - Section 16
A contract is said to be induced by “undue influence” where the relation subsisting between the parties are such that
one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair
advantage over the other.

 Master and servant

 Father and son
 Doctor and patient

Examples:
i. A having advanced money to his son, B, during his minority, obtains upon B s coming of age, by misuse of parental influence. A bond from B
for a greater amount than the sum due in respect of the advance . A employs undue influence.
ii. A spiritual guru induced his devote to gift him the whole of his property in return of a promise of salvation of the devotee. Held the consent
of the devote was given under undue influence. [ Mannu singh Vs. Umadat Pandey, 1890]
iii. A minor female child who had lost her parents was living with her cousin brother who was in the position of loco parentis. A deed was
executed by her in favour of the latter. Held, there was undue influence. [Niko Devi Vs. Kripa, A.I.R (1989) H.P. 51]
iv. A, a man enfeebled by disease or age, is induced by B’s influence over him as his medical attendant, to agree to pay to B an unreasonable
3. Fraud – CRIMINAL LIABILITY- Section 17
Means and includes the following acts done with the intention to deceive or to induce a person to
enter into a contract.
I. the suggestion that a fact is true when it is
not true and the person making the suggestion
does not believe it to be true
II. active concealment of a fact by a person
who has knowledge or belief of the fact,
III. promise made without the intention of performing it.
IV. other act fitted to decieve
V. Any such acts or ommissions as the law spcifically
declared to be fraudulant

Examples:
i. Not disclosing the liabilities of the company in the prospectus . Public purchased shares assuming the
company to be prosperous. Later fraud was proved and the contract was avoided. (case law)
ii. A promisess to buy the goods from B, after delivery of the same A refuses to buy saying he doesn’t want. A has
commited fraud.
iii. A buys Horse from B . B conceals the fact that the horse is of unsound mind. B s intentions are fraudulant.
4. Misrepresentation – NO CRIMINAL LIABILITY - Section 18
 When a person positively asserts that a fact is true when his information does not warrant it to
be so, though he believes it to be true, it is misrepresentation.
 A breach of duty which brings an advantage to the person committing it by misleading the
other to his prejudice is also a misrepresentation.
 An innocent or unintentional misrepresentation.

Requirements of misrepresentation
1. It must be misrepresntation of material facts and not mere expression
2. It must be made before the contract ends
3. It must be made with the intention to act upon by th parties.
4. It must be wrong but the person making it must have honestly belived it.
5. It must be made wihtout any intention to decive
6. It need not be made directly to the plaintiff, the wrong statement may
be made to the third party with the intention of communicating it to the plaintiff.

Example:
i. A buys Horse from B . B says A that horse is of sound mind. B belives that the horse is of sound mind. But
after delivery of horse to A, the fact that horse is unsound comes to light. Here, B s intentions are not
5. Mistake – Section 20, 21, 22
It is an erroneous belief about
something. May be

1. Mistake of fact or
2. Mistak of Law

IGNORANTIA JURIS NON EXCUSAT – Ignorance of law is no excuse.

Types:
3. Unilateral mistake, i.e. the mistake in the mind of only one party does not affect the validity of the
contract. Agreement here is not voidable by mere fact that only one party has mistake.
Example:

A offers to sell his house to B for an intended sum of Rs. 44,000/- . By mistake he makes an offer in writing of Rs.
40,000/-.

2. Bilateral Mistake, i.e. both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement. Agreement here becomes void.
Example:

A agrees to purchase B’s motor car. Unknown to the either party, the car and the garrage completely destroyed by fire
a day earlier.
 BREACH OF CONTRACT
Breach means to break.

Breach of Contract means breaking of the obligation which a contract imposes.

It occurs when a party to the contract without lawful excuse dos not fulfill
his contractual obligation or by his own act makes it impossible that he
should perform his obligation under it.

It confers a right of action for damages on the injured party.

 Types of Breach of contract
1. Actual breach of contract – it may occur
A agrees to deliver B. 5 kgs of wheat on 1st
(1) At time when the performance is due – Eg :
Jan. he does not deliver the wheat . on that day. There is breach of contract.

(2) During the performance of the contract

(a) C contracted with a railway company to supply it 3000

Express repudiation – Eg:
tons of railway chairs at a certain price, to be delivered in installments.
After 1,787 tons had been supplied, the railway company asked C to
deliver no more. Held, C could bring an action for breach of contract
[ Cort v. Ambergate etc.Rly. Co.]
(b) Implied repudiation - impossibility created by the act of the parties to the contract.
2. Anticipatory or constructive breach of contract
- it many occur when a party to an executory contract declares his intention of not performing the
contract before the performance is due

(1) By expressly renouncing his obligation – Eg: A agrees to deliver B. 5 kgs of wheat
on 1st Jan. A informs B that he is not going to deliver the wheat on that day.
There is Anticipatory breach of contract by express repudiation
(2) By doing some act where performance becomes impossibl e – Eg: A promised to
assign B, within 7 years from the date of promise, all his interest in a lease.
Before the end of 7 years he assigned his interest to another person. Held,
this was anticipatory breach of contract by implied repudiation . [Lovelock
v. Franklyn]
 Discharge of contract
Discharge of contract means termination of the contractual obligations/relationship
between parties.
A contract gets discharged when the parties fulfill their respective obligations and the
parties are no more liable to each other, Liability comes to an end, rights & obligations
arising out of contract will come to an end.
Modes of discharge :
1. By performance- actual or attempted.
2. By agreement or Mutual consent (agreement-by novation, alteration or recession
(Sec.62), remission or waiver (Sec.63).
3. By subsequent or supervening impossibility or illegality
4. By Lapse of time
5. By Operation of law
6. By Breach of contract
1.Discharge by performance :
 Duly performed by both the parties
Where both the parties have either carried out or tendered (attempted) to
carry out their obligations under the contract, is referred to as discharge of
the contract by performance.
1.Actual performance is when each party fulfils obligations & performed within
time and manner specified- contract ends
2.Attempted performance is when promisor offers to perform but the promisee
refuses to accept the performance
2. Discharge by mutual consent or agreement
 A contract may be terminated through or with the help of new agreement .
 Eodem modo quo quid constituitur, eodem modo destruitur ie., a thing
may be destroyed in the same manner in which it is constituted.
 It may be express or implied.

Ex. A sells a car to B on approval with the condition that it should be returned
within seven days if it is found wanting in efficient functioning. B may
return the car within 7 days if it was found wanting. Consent to return the
car is given to B at the time of formation of the contract.

Discharge of contract by mutual consent are dealt in sections 62 and 63 of the

Act :
(a)Novation-A new contract is substituted for an existing one
substitution by same parties or different parties and there
should be a mutual consent.
1.Novation involving change of parties but the contract
remaining the same in such cases contract between original
parties gets discharged and all parties must give mutual
consent
2.Novation involving substitution of new contract but parties
remaining the same
Sometime the parties agree to substitute the existing
contract for new one ,in such cases original contract gets
discharged and need not be performed
b) Rescission –Before date of performance all terms of contract gets cancelled and no
longer binding.
c) Alteration- When terms of contract are altered by mutual consent but parties continue
to be the same
d) Remission- Acceptance of lesser fulfillment of promise made is called remission
e) Waiver - Deliberate or intentional giving up of a right mutually as a result the other
party to contract is discharged from his obligation
f) Merger : When an inferior right accruing to a party merges into superior right of the
same party.
 3. Discharge by Impossibility of Performance

Sometimes after a contract has been established, something

might occur, though not at the fault of either party, which can
render the contract impossible to perform, or illegal, or
radically different from that originally undertaken.
then the courts will, generality, state that the contract has
become impossible to perform. If that happens then the
contract is discharged and neither party will have any liability
under it.
Ex. A and B agreed to marry each other ,before the time fixed
for marriage A goes mad. The contract becomes void. This is a
post contractual impossibility.
It means impossibility of performance due to subsequent event
it is also known as “Doctrine of Frustration”.
Contracts discharged by supervening impossibility in following cases
1. Destruction of the subject matter :Sometimes the subject matter of the contract is
destroyed after the contract it leads to discharge of contract
Taylor Vs. caldwell – music concert hall was burnt on the day of concert.Contract was held
Void.
2. By Death of the Promisor A contract involving the personal skill or ability of the
promisor is discharged on the death of the promisor.
Robinson Vs. Davison – Artist who had to perform a concert falls ill on the day of
performance. She was held discharged.
3. Non existence or non occurrence of a particular state of things: The performance of
contract becomes extremely impossible,the performance becomes impossible.
( contract of frustration)
4. Change of law or government policy :special laws or ordinances of government.
Bally Vs. De Crespigny – land was acquired by railway company under statutory powers.
Contract of building a building was discharged
5. Outbreak of war : Contract entered into with an alien enemy during war is unlawful.
4. Discharge by lapse of time: Limitation act 1963 says that a contract should be
performed within 3 years and no action or remedy lies

5.Discharge by operation by law

Death : A contract based on skill or ability

Insolvency : When court declares insolvent

Merger :

Unauthorized alteration of terms of the contract : without consent of the other

party.

6.Discharge by breach of contract

Breach of contract occurs when a party to contract does not fulfill his
contractual obligations without lawful excuse.
 Remedies for breach of contract
The aggrieved/ injured party may claim one or more of following
remedy(need not be one alone)
1. Rescission of the contract - Cancel the contract which will relieve him
from all contractual obligations.
2. Suit for damages - recover from the breaching party
3. Suit upon Quantum Meruit - recover from the breaching party for the
work done
4. Suit for specific performance
5. Suit for injunction.
1.Rescission (cancellation of contract)

 If one party breaks a contract ,Both the parties are absolved from their
contractual obligations, without prejudice to the injured party’s right to claim
damages
 Ex . A promises B to supply 10 bags of cement on certain day .B agrees to pay
the price after the receipt of goods .A does not supply the goods .B is
discharged from the liability to pay the price
The court may grant rescission -
a. Where the contract is voidable at the option of the plaintiff
b. Where the contract is unlawful and where there will be
blame on defendant more than the plaintiff
 The court may refuse to grant rescission -
a. Where the plaintiff has expressly or impliedly ratified the
contract or
b. Where owing to change of circumstances , the parties cannot
be restored to their original positions or
c. Where the third parties have, during the subsistence of the
contract, acquired rights in good faith or for value or
d. Where only a part of the contract is sought to be rescinded
and such part is not severable from the rest.
2. Damages

Damages means monetary compensation allowed to injured party for the losses
or costs incurred due to another's wrongful act.
Damages are granted to a party as compensation for the damage, loss or injury
he or she has suffered through a breach of contract called as “Doctrine of
Restitution”
The language of a contract will usually call for a specific penalty if the contract
terms are not completed on an agreed-upon date.
 Smith v Greens :
A cow was sold with warranty that it was free from any disease ,but later it
was found that it had foot and mouth disease , it was infectious ,as a result
other cows of buyer were attacked by disease and died , the buyer then
filed a suit against the seller for damages for loss of all cows
 It was held that direct cause for death of all cows was breach of warranty
and the guilty party should pay ordinary damages to the agrieved party for
loss
 Hadley Vs Baxendale :
X’s mill was stopped by breakdown of shaft( a tool) ,he delivered the shaft to
Y a common carrier to be taken to manufacturer for making new one, X
did not make to known to Y that delay would result in loss of profits. ,due
to delay in transit the shaft could not be delivered on time
 Conclusion : The court held that Y was not responsible for loss of profits
because the circunstamces showed to him did not communicate him that
delay in delivery of the shaft would result in loss of profits .
 3. Suit upon Quantum Meruit
 As much as earned
 A reasonable sum of money to be paid for services
rendered or work done when the amount due is not
stipulated in a legally enforceable contract.
 General rule- unless person performed in full can’t
claim performance from other. But part performed
later became impossible or refused.
 Example
Singer
Painter badly …….
Director
 When contract is discovered to be unenforceable : It is void or becomes
void any person who has received any benefit is bound to restore
 When there is breach from one side the other side can claim reasonable
compensation
Ex. A is engaged by B to write a book and to be published in installments in a
magazine ,the magazine is abandoned after few weeks ,here A
Can recover on quantum meruit for the services rendered by him
4. Suit for specific performance
The Specific Relief Act, 1963 gives the court discretionary powers to order
specific performance instead of or in addition to damages. The powers are
subject to Sec.14 of the Specific Relief Act
Some of the following situations include:
 Only when Monetary compensation is inadequate
 When there is no standard for ascertaining damages
 When probable compensation amount is not got for non performance

E.g. Rare or unique goods of special value. Cant get substitute in market

 When there is no specific performance

 Damages are adequate remedy , contract is not certain , revocable

 When court cant supervise, or compensation is adequate, contract for

personal service , not enforceable etc
5.Suit for Injunction

 Injunction is an order of the court restraining a person from doing something

which he promised not to do.
 This remedy is available where the contract contains a negative stipulation. E
.g singer, painter, Actor – Warner bros vs. Nelson
Lumley V s Wagnar: W agreed to sing at L’S theatre and no where else
after some time W made a contract with Z to sing at other places and
refused to perform contract with L ,it was held that W could be
restrained by injunction
 CONTRACTS OF INDEMNITY AND GUARANTEE
(SECTIONS 124-147 OF THE INDIAN CONTRACT ACT,1872)

Indemnity – Section 124 & 125

 Means to make good the loss
 To compensate for loss

Sec.124: A contract by which one party promises to save the other from the loss caused
to him by the conduct of the promisor himself , or by the conduct of any other person,
is called as “Contract of Indemnity”
 Indemnifier Indemnity Holder
(Promisor) (Promisee)
Agent – Loss incurred – During lawful
conduct

2. Insurance company – General Insurance –Losses compensate

Insurance Policy Holder –

House Fire/destroy
3. Transfree (Shares) –makes share transfer request/ loss of share Certificate –
Indemnity Bond - Express

Company – loss/ other

person claim

The person who promises to make good the
loss is called as ‘ Indemnifier’.
 The person whose loss is to be made good is
called as the ‘Indemnity holder’.
 Life insurance contracts are not contracts of
Indemnity.
 The contract of indemnity must have all the
essentials of a valid contract.
A contract of Indemnity is really a class of
contingent contracts.
A contract of Indemnity may be express or
implied.
 Commencement of Indemnifiers liability

Indian Contract Act, 1872 does not provide the time of

the commencement of the indemnifier's liability under the contract of
indemnity. But different High Courts in India have held the following rules in
this regard:
Indemnifier is not liable until the indemnified has suffered the loss.

1. Liverpool Insurance Co. case : “…..To indemnify does not merely man to
reimburse in respect of moneys paid, but to save from loss in respect of
liability against which the indemnity has been given… if it be held that
payment is a condition precedent to recovery, the contract may be of little
value to the person to be indemnified, who may be unable to meet the
claim in the first instance”.
2. Moreshwar V. Moreshwar Madan, A.I.R (1942) Bom.302, that “ If the
indemnified had incurred a liability and that liability is absolute, he is
entitled to call upon the indemnifier to save him from the liability and pay
it off”.
 Rights of Indemnity Holder when sued
1. All damages – Court Case – Compensation
Eg – 1. Director – loss due to misconduct- deducted from salary .
2. Company – loss – Indemnity Insurance – new sections in Companies Act 2013
3. Case on Telecom Co., had to pay damages- Insurance Company will pay
4.Public Liability Insurance Act- Hazardous substances – Insurance Company shall pay

2. All costs – Court case cost when filed on IH.

3. All sums – Compromise with third party
Eg – Property seller files case on agent, then if agent compromises and agrees to pay
some amount, such sum will be paid by the Principal.
 Guarantee – Sec 126 -147

 To make good the loss by the third person

Sec 126: A ‘Contract of Guarantee’ is a contract to perform the promise, or discharge

the liability, of third person in case of his default.

Eg- S requests C to lend Rs.500 to P and guarantees that if P fails to pay the
amount, he will pay. This is a Contract of Guarantee.
So herein :


 S- Surety – the person who gives the guarantee – secondary liability

 P – Principal Debtor - the person who defaults – primary liability
 C- Creditor- the person to whom the guarantee is given
 3 contracts - P and C, P and S, S and C.
 Contract of Indemnity + Contingent Contract = Contract of Guarantee
 Can have more than 1 surety – Co surety
 All the essentials of a valid contract must be present.
 Contract of guarantee may be oral or written
 Contract of guarantee may be express or implied
 Contract of Indemnity Contract of guarantee
1. 2 parties – Indemnifier and Indemnity 3 parties – Principal debtor, Creditor and
Holder Surety

2. 1 contract – b/w I and ID 3 contracts – b/w P and C, P and S, S and

C.

3. Indemnifiers liability is primary Surety’s liability is secondary

4. It is not necessary for the indemnifier It is necessary that the surety should give
to act at the request of the the guarantee at the request of the
indemnified debtor

5. The liability of the indemnifier arises There is usually an existing debt or duty,
only on the happening of a the performance of which is guaranteed
contingency by the surety

6. An indemnifier cannot sue a third A surety , on discharging the debt due by

party for loss in his own name, the principal debtor, steps into the shoes
because there is no privity of contract. of the creditor. He can proceed against
He can do so only if there is an the principal debtor in his own right.
assignment in his favour.
T Specific Guarantee – only for specific
Y transaction/ single debt
P BASIS OF TRANSACTION
E
S Continuous Guarantee – No. of
transactions
O
F

G
U
A Retrospective – for the loan which is
R Guarantee already given
A
N BASIS OF TIME
T
E Prospective – for future loan
E Guarantee
 Requisites of valid guarantee
1. Concurrence – 3 parties- the principal debtor, the
creditor and the surety
2. Primary liability in some person- primary liability with
debtor-secondary with the surety - only when PD
defaults – no liability, no contract of guarantee
3. Essentials of valid contract – in case minor is the
principal debtor then it is an exception – Kashiba
v.Shripat,(1895), 19 I.L.R, Bom. 697.
4. Writing not necessary – oral or written – express or
implied
 Guarantee is not a contract of uberrimae fidel

uberrimae fidel means “Utmost good faith”

 Not necessary to Full disclosure of all material facts by the principal
debtor or creditor to the surety before the contract is entered into.
 When a guarantee is given to the banker, there is no obligation on the
banker to inform the surety regarding the matters of credit or any
circumstances
 Fraud on the part of the principal debtor is no enough to set aside the
contract.
But uberrimae fidel is must in case of :
 Contract of insurance
 Company prospectus
 Seller of land
 Family management
 Marriage engagements
 Nature and extent of surety’s liability.

 Co –extensive – sec 128

 General rule :
 Surety is liable for All the debts payable by PD to C.
 Interest, damages, costs
Eg. A – PD, B- Surety, C- Creditor – Bill of exchange accepted by A. A does
not pay and bill gets dishonored. basic amount of bill, interest, cost,
damages all shall be paid by B
 Surety is liable for what principal debtor is liable.
SURETY LIABILITY = PRINCIPAL DEBTOR LIABILITY
 Surety's liability is not beyond the liability of
principal debtor
 Commencement – only and immediately on default by the PD
 Document is defective, Liability of surety also ceases
 Surety may be sued before or even after not suing the principal debtor
 Not required to sue PD first unless stated in the contract
 Surety is liable for continuous transactions – may be limited by amount or limited
by time
 Surety can impose conditions in the contract, until met ,cannot be held liable

Summary : Surety's liability

1) Secondary
2) On default
3) General rule - all debts
4) Contract – conditional
5) Allowed to sue surety first
 Rights of Surety – Sec.140 -147
1.Right against creditor –

a) Right to claim securities – sec 141

- Surety's right to benefit of creditors securities
- whether surety knows about the securities or no
- if the creditor loses
- Surety discharged to the extent of the value of the security
Ex. C advances to B, his tenant,2000 rupees on the guarantee of A.C has also a further
Security for the 2000 rs by a mortgage of B’s furniture,. C cancels the mortgage. B
becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the
amount of the value of the furniture.

b) Right to set off – on being sued by the creditor, the surety can rely on any
setoff or counter claim which debtor has against the creditor.
2. Right against the principal debtor

a) Right of subrogation – Section 140

- Subrogate mans act of substitution – to substitute
- A guaranteed debt is due or default
- Surety steps into the shoes of Principal Debtor

b) Right to indemnity – Section 145

- Implied promise
- Needn't be included in the contract
- To claim back from PD, S will step into the shoes of C
- Entitled to recover all payments (interest and damages too)
- Principal debtor to indemnify the surety
3. Right against the co-sureties
When debt is guaranteed by two or more sureties, they are called as co-
sureties

a) Right of contribution – section 146

- Co-sureties liable to contribute equally

- Doctrine founded not on contract but on equity
- I.e. there is equal burden and benefit as between co-sureties

Eg. S1, s2 and s3 are sureties to C for the sum of Rs.30,000/- lent to P.P
makes default in payment. S1, s2 and s3 are liable as between
themselves to pay 10,000/- each
a) Liability of co-sureties bound in different sums - section 147

Eg. S1, s2 , s3 and s4 are sureties to P for the amount 1cr, enter into three
different bonds each in different penalty, namely s1 in the penalty of
Rs.10 lakhs, s2 in that of Rs.20 lakhs, s3 in that of 30 lakhs and s4 of 40
lakhs.
If default within the bond then equal share in debt, if more than the limit
then till the bond limit.
If full default, then the bond amount only
 Discharge of surety
The surety is said to be discharged when his liability comes to an end.
1.Ordinary Law
MODES OF DISCHARGE OF SURETY
1.Ordinary Law

BY REVOCATION BY THE CONDUCT OF BY INVALIDATION OF

THEofCREDITOR
Modes discharge : CONTRACT

BY DEATH OF
SURETY SURETY NOVATION MISREPRESENTA CONCEALM FAILURE FAILURE
TION ENT OF CO- OF
SURETY CONSIDER
TO JOIN ATION

RELEASE OR COMPOUNDING BY CREDITORS ACT OR

VARIANCE IN TERMS OF DISCHARGE OF CREDITOR WITH OMMISSION IMPAIRING LOSS OF SECURITY
CONTRACT PRINCIPAL DEBTOR PRINCIPAL DBTOR SURETYS EVENTUAL
REMEDY