CS Foundation Indian Contract Act, 1872 Notes

CS Foundation Indian Contract Act, 1872 Notes

→ Indian Contract Act is the most important branch of Mercantile or Commercial Law contract is an agreement with specific terms between two or more persons or entities in which there is a promise to do something in return for a valuable benefit known as consideration. According to Salmond, a contract is “An agreement creating and defining obligations between the parties”

  • Section 2(e) defines agreement as “every promise and every set of promises, forming the consideration for each other.”
  • Again Section 2(b) defines promise in these words: “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.”
  • Contract = Agreement + Enforceable by law

→ Essentials of valid contract
A contract is actually an agreement that is entered into voluntarily by two or more parties, with the intention of creating one or more legal obligations among them.

Essential elements of valid contract are:

  • There must be atleast two parties
  • There should be an agreement between the parties
  • There should be a consent between the parties
  • Parties entering into contract should be capable of making contract.
  • A valid contract must be supported by consideration
  • There should be free and fair consent between the parties which are making contract.
  • Contract should be made for lawful purpose only.
  • Contracts are almost always legally binding. In order for an agreement to become a contract, it is expected to meet three conditions:
  • Offer and Acceptance,
  • intention to create legal relation, and
  • consideration.

A. Offer or Proposal and Acceptance:
An offer is something that is communicated by the offeror so that the offeree will know that his acceptance is invited and will complete the agreement. Proposal is defined under section 2(a) of the Indian contract Act, 1872 as “when one person signifies to another his willingness to do or to abstain from doing anything with a view to obtain the assent of that other to such act or abstinence, he is said to make a proposal/offer”. Thus, for a valid offer, the party making it must express his willingness to do or not to do something. But mere expression of willingness does not constitute an offer.

Rules governing offers are:

  • The offer must show an obvious intention on the part of the offerror.
  • An offer must be clear, definite, complete and final.
  • mere declaration of intention and announcement is not an offer.
  • There must be two (or) more persons to an agreement because one person cannot enter into an agreement with himself.
  • The communication of an offer may be made by express words oral or written
  • The communication of offer may be by General Offer which is made to public in general, or. Special Offer. which is made to a definite person.
  • An invitation to treat is not an offer, but an indication of a person’s willingness to negotiate a contract.
  • The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer. The holding of a public auction will also usually be regarded as an invitation to treat.
  • A mere communication of information in the course of business is not offer

→ Lapse of offer (Section 6 of the Act).
A proposal is revoked:

  • by the communication of notice of revocation by the proposer to the other party
  • by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance
  • by the failure of the acceptor to fulfil a condition precedent to acceptance
  • by the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance.
  • The offeree makes a counter offer which amounts to rejaection of offer and the counter offer may be accepted or rejected.
  • An offer may be revoked at time before acceptance.

According to Section 2(b), “When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted.”

Rules governing Acceptance

  • Acceptance must be absolute and unqualified. For example “A” says to “B” “I offer to sell my car for Rs.
    60,000. “B” replies “I will purchase it for Rs. 45,000”. This is not acceptance and hence it amounts to a counter offer.
  • The offer and acceptance should relate to same thing in the same sense.
  • Acceptence may be express i.e. by words spoken, written or implied from the conduct of the parties be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted; and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner and not otherwise; but; if he fails to do so, he accepts the acceptance.
  • Acceptance must be in the mode prescribed. If the acceptance is not according to the mode prescribed or some usual and reasonable mode (where no mode is prescribed) the offeror may intimate to the offeree within a reasonable time that acceptance is not according to the mode prescribed and may insist that the offer be accepted if he prescribed mode only. If he does not inform the offeree, he is deemed to have accepted the offer. For example “A” makes an offer to “B” says to “B” that “if you accept the offer, reply by voice. “B” sends reply by post. It will be a valid acceptance, unless “A” informs “B” that the acceptance is not according to the prescribed mode.
  • Mere silence is no acceptance. Thus offeror cannot frame the contract in such a way that silence of the offeree shows acceptance. Offeree and offeror must have consent

→ Standing order
A standing offer is not a contract. A standing offer is an offer from a potential supplier to provide goods and/or services at pre-arranged prices, under set terms and conditions, when and if required. It is not a contract. Standing offers are used to meet recurring needs when departments or agencies are repeatedly ordering the same goods or services. They may also be used when a department or agency anticipates a need for a variety of goods or services for a specific purpose; however, the actual demand is not known and delivery is to be made when a requirement arises. When a standing offer is issued to your company, you are offering to provide certain goods or services at specified prices over a specified period of time. If and when the call-up against your standing offer, is done, only then do you have a contract for the amount indicated in the call-up.

→ Tickets:
In contract law ticket cases are a series of cases that stand for the proposition that if you are handed a ticket or another document with terms and conditions written on it and you retain the ticket or document, then you are bound by those terms. Whether you have read the terms or not is irrelevant and in a sense, using the ticket is analogous to signing the document. But there is a condition that the notice of the conditions that are related to the contract is existing at the time when contract was made. The person owning the ticket is bound by the conditions printed on the tickets even if he is illiterate.

→ Contracts made by post:

  • A rule of contract law that makes an exception to the general rule that an acceptance is only created when communicated directly to the offeror.
  • An acceptance is binding and the contract is said to be perfected when the acceptor places this acceptance in the mail box. For an offeror the acceptance by the offeree is a contract.

On October 1, an offer to sell was mailed. It was received on October 11 and was accepted by telegram sent on October 11, confirmed by letter mailed October 15. But on October 8, a letter was sent by the offeror revoking the offer (the offeror received the letter of acceptance on October 20).
The court decided that the revocation was inoperative.

→ Contracts over telephone
In the law of contract there are two things. Firstly, one party makes an offer to another party, he is called the offeror and the person to whom he makes the offer is called the offeree. In order for the contract to be concluded and thus be binding on the parties, the offeree has to convey his acceptance of the offer made. It is not enough to say that you find the offer to be “agreeable”; you must “accept” the offer. It must also be brought to the direct attention of the offeror before a valid contract exists.

Thus in case of telephone contracts if the acceptance is given on the phone which is loud and clear and the line goes dead the contract is binding.

B. Intention to create legal relation
Apart from offer, acceptance and consideration, the final ingredient for a contract to be entered into which is enforceable at law is that the parties must have an intention to create legal relations. Without it there is no binding contract. Often, the intention to create legal relations is expressly stated by the contracting parties. In other situations, the law will readily imply the intention, because of the nature of the commercial dealings between the parties. If two persons agree to assist each other by rendering advice, in the pursuit of virtue, science or art, it cannot be regarded as a contract.

Generally it is assumed that in social and domestic type of agreements this type of intention is absent, but parties do intend to create legal relations in commercial agreements

C. Consideration
For a contract to be binding, there must be valid consideration. Consideration is the promise given by both parties as the “price” of entering into the agreement.
Sir Fredrick Pollock has defined consideration “as an act or forbearance of one party, or the promise thereof is the price for which the promise of the other is bought.”

Section 2(d) of the Indian Contract Act, 1872 defines consideration thus: “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 to abstain from going, something, such act or abstinence or promise is called a consideration for the promise”.

For consideration to be valid, it must have a value.

→ Rules of consideration

  • The promise amounts to a gift it is not a consideration.
  • It must move at the desire of the promisor
  • Consideration may be past, present or future.
  • Consideration must be real.
  • An existing public duty will not amount to valid consideration.
  • Consideration need not be adequate, provided it is for some value.

→ Kinds of Consideration:
Consideration may be:

  • Executory or, future which means that it makes the form of promise to be performed in the future
  • Past which means a past act or forbearance, that is to say, an act constituting consideration which took place and is wholly executed before the promise is made.
  • Executed or present in which it is an act or forbearance made or suffered for a promise.

Whether Gratuitous Promise can be Enforced:
A gratuitous promise to subscribe to a charitable cause cannot be enforced, but if the promises is put to some detriment as a result of his acting on the faith of the promisee and the promisor knew the purpose and also knew that on the faith of the subscription an obligation might be incurred, the promisor would be bound by promise (Kedar Nath v. Gorie Mohan 64).

Valid Contract:
A valid contract is a ‘contract which satisfies all the requirements of the Act’. Such a contract creates rights in personam and is legally enforceable.

Void Agreement:
X is an agreement not enforceable by law. It is void ab initio because it lacks one or more of the essentials of a valid contract. Such an agreement does not create any legal relations. However, it is different from unlawful agreements which are forbidden by the law. An illegal agreement must necessarily be void but a void agreement need not be illegal.

The following agreements that have been declared void by the Contract Act:
Agreements by incompetent persons
Section 11 of The Indian Contract Act specifies that every person is competent to contract provided:

  • He should not be a minor i.e. an individual who has not attained the age of majority i.e. 18 years in normal case and 21 years if guardian is appointed by the Court.
  • He should be of sound mind while making a contract. A person who is usually of unsound mind, but occasionally of sound mind, can make a contract when he is of sound mind. Similarly if a person is usually of sound mind, but occasionally of unsound mind, may not make a valid contract when he is of unsound mind.
  • He is not a person who has been personally disqualified by law to which he is subject.

Minors contract:

  • According to the Indian Majority Act, 1875, a minor is a person, male or female, who has not completed the age of 18 years. In case a guardian has been appointed to the minor or where the minor is under the guardianship of the Court of Wards, the person continues to be a minor until he completes his age of 21 years.
  • Things to be remembered in case of minor’s contract
  • Minors (those under the age of 18) lack the capacity to make a contract. So a minor who signs a contract can either honor the deal or void the contract.
  • Since the contract is void ab initio, it cannot be ratified by the minor on attaining the age of majority.
  • A minor is not stopped from doing his previous act thus if a minor has made some contract showing him to be a major then he can deny for that contract as he has the benefit of being minor but there is an exception that the contract should not be made by fraudulent representation.
  • Since a minor is never personally liable, he cannot be adjudicated as an insolvent.
  • An agreement by a parent or guardian entered into on behalf of the minor is binding on him provided it is for his benefit or is for legal necessity.

Lunatics agreement:
A person who is mentally incompetent lunatic lacks the capacity to make a contract. If the person does not have the mental capacity to understand that a contract is being made or the general nature of the contract, the person lacks contractual capacity. A person who is mentally incompetent may ordinarily avoid a contract in the same manner as a minor.

But if he makes a contract when he is ofsound mind, i. e., during lucid intervals, he will be bound by it. The cause of the mental incompetency is immaterial. It can be the result of a mental illness, excessive use of drugs or alcohol, etc.

If a contract entered into by a lunatic or person of unsound mind is for his benefit, it can be enforced (for the benefit) against the other party.

→ Other provisions related to contract are

  • Land Revenue Act provides that where a person in Oudh is declared as a ‘disqualified proprietor’ under the Act, he is incompetent to alienate his property.
  • A person who is not an Indian citizen is an alien. On the declaration of war between his country and India he becomes an alien enemy. A contract with an alien enemy becomes unenforceable on the outbreak of war.
  • In England, barristers-at-law are prohibited by the etiquette of their profession from suing for their fees. So also are the Fellow and Members of the Royal College of Physicians and Surgeons. But they can sue and be sued for all claims other than their professional fees. In India, there is no such disability and a barrister, who is in the position of an advocate with liberty both to act and plead, has a right to contract and to sue for his fees (Nihal Chand v Oilawar Khan, 1933 All. L.R. 417).
  • Foreign Sovereign Governments can enter into contracts through agents residing in India. In such cases the agent becomes personally responsible for the performance of the contracts.
  • A corporation when incorporated can sue and can be sued in its own name but it cannot marry being an artificial person. Further, its capacity and powers to contract are limited by its charter or memorandum of association.
  • In India there is no difference between the contracts made by man or women. A married man and woman both have a right to contract

Void Contract:
contract which ceases to be enforceable by law becomes void. In other words, an agreement may be enforceable initially and due to certain circumstances may become void subsequently. Thus a contract is not void from its inception. Some of such circumstances which makes a contract void are
An agreement without lawful consideration becomes void

  • A contingent contract to do or not to do something on the happening of an event becomes void when the event becomes impossible
  • When the party, whose consent is not free, repudiates the contract, etc.

Voidable Contract:
A voidable contract is ‘an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of other or others’. In such a contract, the consent of one of the parties is not free and the law regards it as an aggrieved party. The aggrieved party has the option to either affirm or rescind the contract within a reasonable time. The other party does not have any such right. However, the aggrieved party is entitled to recover from the other party the damages which it may have suffered but it must restore the benefits received by it.

→ Mistakes
An erroneous belief about something may be termed as a mistake.
Section 20 of the Indian Contract provides:
“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”

Mistake may be of two types:

  1. Mistake of Law
  2. Mistake of Fact (7) Mistake of Law

It is based no the principle of ‘Ignorantia Juris Non Excusat’ which means ignorance of law is no excuse if the contract is of land (India) A party is not entitled to any relief on the plea that an act has been done in ignorance of the law. But mistake of foreign law and mistake of private rights are treated as mistakes of fact and are excusable.

→ Mistake of fact:
It may be either a bilateral mistake or even a unilateral mistake. In an agreement where both the parties are under a mistake as to a matter of fact essential to the agreement, it is deemed to be a case of bilateral mistake. In a contract where only one of the parties has committed a mistake regarding the subject-matter or any legal effect or consequence of such agreement or in understanding or expressing any terms or conditions of the contract, the mistake is said to be a unilateral mistake. ‘

Some common forms of mistake are enumerated herein below:

  • Mistakes as to the quality of the thing contracted for raises difficult questions. In such a case a mistake will not affect assent unless it is the mistake of both parties and as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.
  • There may be a mistake as to quantity or extent of the subject matter which will render the contract void even if the mistake was caused by the negligence of a third-party.
  • Where both parties believe the subject matter of the contract to be in existence but in fact, it is not in existence at the time of making the contract, there is mistake
  • Where the parties are of the confusion regarding the subject of the contract then it is mistake

→ What is a Unilateral Mistake in a Contract?
In a contract setting, a mistake is an error in the meaning of words, laws, or facts which causes one or both parties to enter into the contract without fully understanding the outcomes or responsibilities implied by the contract. A “unilateral mistake” is such an error that is held by only one party and not shared by the other party. It can be

  • Mistake as to identity
  • Mistake as to Nature of the Contract

→ Mistake as to identity:
Mistake as to the identity of the person with whom the contract is made will operate to nullify the contract only if:

  • the identity is for material importance to the contracts; and
  • the mistake is known to the other person
  • Example Cundy v. Lindsay

→ Mistake as to Nature of the Contract:
A mistake may be avoided provided the mistake was due to either
(a) the blindness, illiteracy, or senility of the person signing, or (h) a trick or fraudulent misrepresentation as to the nature of the document.
Example In Foster v. Mackinnon

→ Misrepresentation:
A misrepresentation means a misstatement or an inaccurate statement pertaining to any material fact in the contract. A contract where the consent is obtained by misrepresentation is voidable at the option of the aggrieved party.

Section 18 of the Indian Contract Act states “Misrepresentation means and includes:
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. Any breach of duty which, without any 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; 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.

  • Any party who has entered into a contract by misrepresentation may avoid the agreement
  • insist that the contract be performed

But in the following cases, damages are obtainable

  • From a promoter or director who makes innocent misrepresentation in a company prospectus ‘
  • Negligent representation made by one person to another, like that of a solicitor and client
  • Against an agent who commits a breach of warranty of authority
    Chap. 10 Indian Contract Act, 1872 137

→ Fraud
According to the section 17 of Indian Contract Act, 1872, fraud means and includes of any of the following acts committed by a party to a contract or with his connivance, or by his agent with intend to deceive another party thereto or his agent, or to induce him to enter into the contract.

According to section 17 of Indian contract act 1872, there are some essential of fraud:

  • There should be false statement of fact by person who himself does not believe the statement to be true.
  • The statement should be made with a wrongful intention of deceiving another party and inducing them into enter into an contract.
  • The other party must have suffered the loss.
  • There must be any of the acts of fraud mention in section 17 be performed.

→ Uberrimae Fidei Contract:
In Latin Ubeerrimae Fidei means for, utmost good faith. A contract in which all parties must make full disclosure of material facts in order for the contract to be effective. It is most relevant in insurance, in which the potential policyholder must declare all illnesses, injuries or other facts would change the policy’s level of risk. Other examples are company prospectus, contract for sale of land coercion

→ Coercion:

  • Section 15. Defines coercion as follows – Coercion is committing or threatening to commit an act that is prohibited by IPC, or any unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with an intention of causing any person into entering a contract. It is immaterial whether IPC is in operation at a place where such Act took place.
  • When coercion is employed then contract becomes voidable at the option of aggrieved party.

→ Undue Influence:
Section 16. Defines Undue Influence as follows – A contract is said to be induced by Undue Influence when the relationship between the parties is such that one party is able to dominate his will on the others and uses that position to gain an unfair advantage. A person is deemed to be in the position of dominating the will of the other if-

  • the person holds a real or apparent position of power
  • stands in a fiduciary relationship with the other.
  • the other person is mentally weak because of sickness, disease, or economic distress Parda nishin women

In case of a contract between parda nishin and a person, person has to prove that no undue influence was used and she had independent advice and fully understood the contents of contract.

→ Contracts which are legal:

  • Section 10 of the Indian Contract Act, 1872, provides, “All agreements are contracts if they are made by free consent of parties competent to contract for a lawful consideration and with a lawful object. “
  • Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is lawful unless it is
    • forbidden by law; or,
    • it is of such nature that if permitted it would defeat the provisions of law; or (Hi) is fraudulent; or
    • involves or implies injury to the person or property or another; or
    • the Court regards it an immoral or opposed to public policy

Void Agreement:
It is an agreement not enforceable by law. It is void ab initio because it lacks one or more of the essentials of a valid contract. Such an agreement does not create any legal relations. However, it is different from unlawful agreements which are forbidden by the law. An illegal agreement must necessarily be void but a void agreement need not be illegal.

The following agreements that have been declared void by the Contract Act:

  • Agreements by incompetent persons .
  • Agreements made with persons who are not eligible to contract
  • Agreements wherein consideration and objects are unlawful
  • Agreements which are immoral
  • Agreements in restraint of trade ‘
  • As per section 27 if any agreement restrains from doing any lawful trade or business it is void

→ Wagering Agreements:

  • In India wagering contracts that is betting is void and in Mumbai it is illegal Agreements which are against the public policy
  • Some of the agreements which come under public policy are depriving a person of his parental rights, marriage brokerage, etc.

→ Restitution:
The general term restitution describes the apt of restoration. The basic purpose of restitution is to achieve fairness and prevent the unjust enrichment of a party. For example If A has received some advance from B for some contract which becomes void at a later stage then B is entitled to get back that money advanced to A

→ Contingent Contract:
As per Section 31 “Contingent contract” defined.- A” contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. Illustration A contracts to pay B Rs. 10, 000 if B’s house is burnt. This is a contingent contract.

→ Essential characteristics of Contingent Contract

  • The performance must depend upon the happening or non happening of an event.
  • If the event becomes impossible, the contract becomes void – Section 32.
  • Contingent contract to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of that event becomes impossible and not before. (Sec. 33)
  • Where a contract is contingent upon the way a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies. (Sec. 34)
  • Contract contingent on the happening of an event within a fixed time becomes void if such event does not happen or the event becomes impossible before the time fixed.
  • Contracts contingent on the non-happening of an event within a fixed time may be enforced by law if such event does not happen, or it becomes impossible before the expiry of fixed time. (Sec. 35).
  • Contingent agreements to do or not to do anything if an< impossible event happens are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. (Sec. 36).

→ Quasi contract:
A quasi contract is a contract that exists by order of a court, not by agreement of the parties. Courts create quasi contracts to avoid the unjust enrichment of a party in a dispute over payment for a good or service.

The following types of quasi-contracts have been dealt within the Indian Contract Act
(a) Necessaries supplied to person incapable of contracting or to anyone whom he is illegally bound to support – Section 68.
(b) Suit for money had and received – Sections 69 and 72.
(c) Quantum Meruit (Latin “as much as is earned” ). Courts also use the term quantum meruit to describe the process of determining how much money the charging party may recover in an implied contract.
(d) Obligation of person enjoying benefit of a non-gratuitous act. Section.70
(e) Obligations of a finder of goods

→ Section 71
Discharge of a contract relates to the circumstances in which the contract is brought to an end. Where a contract is discharged, each party is freed from their continuing obligations under the contract. A contract may be discharged in one of the following ways
1. Discharge by Performance

  • A contract becomes discharged through performance where both parties have fully performed their contractual obligations.
  • But if only one party performs his promise, he aloes is discharged and the guilty party may be taken to the task for breach of contract.

Tender of Performance:
In case of some contracts, Where a promisor has made an offer of performance (tender) and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract. A promisee, as well as an assignee of the rights and benefits under a contract, may demand performance by the promisor,

A promisor personally or through his agent, legal representative or third person can fulfill the promise.
“When two or more persons have made a joint promise, all such persons must jointly fullfil the promise, unless a contrary intention appears from it”.

Under Section 43 of the Indian Contract Act when two or more persons made a joint promise, the promisee may, in the absence of an express agreement to the contrary compel anyone or more of such joint promisors to perform the whole of the promise.

To be valid, a tender must fulfil the following conditions
(a) it must be unconditional; .
(b) if must be made at a proper time and place;
(c) it must be made under circumstances enabling the other party to ascertain that the party by whom it is made is able and willing then and there to do the whole of what he is bound, to do by his promise.
(d) if the tender relates to delivery of goods, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver:
(e) tender made to one of several joint promisees has the same effect as a tender to all of them

Section 39 provides that when a party to a contract has refused to perform or disabled himself from performing his promise in its entirety the promisee may put an end to the contract unless he had signified by words or conduct his acquiescence in its continuance.

2. Discharge by mutual agreement or consent
Sections 62 and 63 provide for the following methods of discharging a contract by mutual agreement Novation: “Novation occurs when a new contract is substituted for an existing contract, either between same parties or between different parties, the consideration mutually being the discharge of the old contract.” Alteration: Alteration of a contract means change in one or more of the material terms of a contract.

  • Rescission: A contract may be discharged, before the date performance, by agreement between the parties to the effect that it shall no longer bind them. Such an agreement amounts to ‘rescission’ or cancellation of the contract.
  • Remission: Section 63 lays down that a promise may give up wholly or in part, the performance of the promise made to him and a promise to do so is binding though there is no consideration for it.
  • Waiver: Waiver means the deliberate abandonment or giving up of a right which a party is entitled to under a contract, whereupon the other party to the contract is released from his obligation.

3. Discharge by Lapse of Time:
The Limitation Act provides that a contract should be performed within a specified period i.e. period of limitation. If the contract is not performed and if no legal action is taken by the promisee within the period of limitation, he is deprived of his remedy at law.

4. Discharge by operation of Law:
A contract may be discharged by operation of law when a person is declared insolvent, any party makes any material alteration in the terms of the contract without the approval of the other party, by merger.

5. Discharge by impossibility or frustration:
As per Section 56 an act which is impossible to be performed is void. Thus if the contract is imposible to be performed then it is considered to be discharged. The effects of the impossibility of the performance of a contract may be discussed under the following two heads:
(a) Effects of Initial Impossibility – Initial impossibility means impossibility at the time of formation of the contract.
(b) Effects of Supervining Impossibility – conditions in which discharge is because of supervining impossibility

  • Sometimes a contract is capable of being performed when entered into, but some subsequent event renders the performance impossible.
  • Where the subject -matter of the contract is destroyed before the contract is performed the contract is discharged.
  • On Death or personal incapacity of the parties

(c) Effects of Supervining Illegality
A subsequent change in law may render the contract illegal and in such cases, the contract is deemed discharged.
In the following cases contracts are not discharged on the ground of supervening Impossibility

  • Difficulty of performance
  • Strikes, lock-outs and civil disturbance
  • Commercial impossibilities

6. Discharge by Breach
A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. A breach of contract may occur in the following two ways:
(a) Anticipatory Breach of Contract Anticipatory breach of contract occurs when party declares his intention of not performing the contract before the performance is due.
(b) Actual” Breach’ occurs when a party fails to perform his obligation upon the date fixed for performance by the contract

→ Remedies for Breach
(1) Remedies for Breach of Contracts describes that in any situation in which there is a right, there is also a remedy and a contract gives rise to correlative rights and obligation remedy is the means given by the law for the enforcement of a right.

Remedies for Breach of Contracts include;

  • Damages – as one of the Remedies for Breach of Contracts are monetary compensation allowed to the injured party of the loss for the injures suffered by him or her as a result of the breach of contract
  • Quantum meruit – determines the amount to be paid for services when no contract exists
  • Specific Performance – It means carrying out the contract as agreed.
  • Injection – It is a court order restraining a person from doing a particular act.
  • Rescission – It occurs when the aggrieved party decides not to perform his part of the contract
  • damages for breach of contract – As per Section 73 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 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.

A contracts to buy B’s ship for 60, 000 rupees, but breaks,his promise. A must pay to B, by way of compensation, the excess, if any, of the contract price over the price which B can obtain for the ship at the time of the breach of promise.

These are of 2 types
→ Liquidated and unliquidated damages
Liquidated Damages:
Where the parties agree the level of damages for a breach of contract to be paid then it is enforceable to be paid. Suppose A promises to pay Rs 1000 in case of breach of contract to B then in case of breach A is required to pay that amount to B. Unlike UK where the damages can be recovered only on condition that the purpose of the liquidated damages clause should be compensatory and not a deterrent.

Unliquidated damages:
These are of following types

  • Ordinary Damages: These are restricted to pecuniary compensation to put the injured party in the position he would have been had the contract been performed. For example, in a contract for the sale of goods, the damages payable would be the difference between the contract price and the price at which the goods are available on the date of the breach.
  • Special Damage: Special damages are a specific type of damages available for breach of contract. When a contract is breached, special damages may be awarded to reimburse the non-breaching party for damages that result indirectly from, or that “flow from” the breach. For example, Damage or harm to business reputation
  • Exemplary damages: Vindictive or exemplary damages cannot be awarded under Contract Act. However, these may be awarded by Court under tort under special circumstances e.g. Dishonour of cheque by Bank when there was balance in account, as it causes loss of reputation of credit worthiness of person issuing cheque, Breach of contract to marry, as it hurts both feelings and reputation.
  • Nominal damages: where there may be a breach of contract but with no loss suffered and the damages are nominal, although token award may still be awarded.
  • Specific Performance: Basically a decree requiring the breaching party to perform their part of the bargain in the contract. For example, if one party has paid for delivery of goods, but the other party did not ship them, a specific performance decree might require the goods to be properly delivered.

Specific performance will not be ordered:
(a) where monetary compensation is an adequate remedy;
(b) where the Court cannot supervise the execution of the contract, e.g., a building contract;
(c) where the contract is for personal service; and
(d) where one of the parties is a minor.

(2) Injunction: An injunction is another coercive legal remedy which can be used in some breach of contract cases where a direct order is required to stop a party ftom continuing an ongoing breach, such as misuse of leased premises.

→ Contract of Indeminity:
As per Section 124 It is defined in the following words, “A contract by which one party promises to save the other from the loss caused to him by the contract of the promisor himself or by the conduct of other person.” There are two parties involved in this Contract. A person who gives the indemnity of protection to other person is called indemnifies. On the other hand a person whom protection is provided is called indemnity holder. :


  • A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
  • Insurance contracts are the common examples of indemnity.

→ Rights of Indeminity holder:
Following are the important rights of indemnity holder:

  • A Rights of Loss Recovery A Compromise Cost Recovery
  • A Suit Expenditure Recovery A Rights of Indemnifies
  • A Contract of Guarantee

As per Section 126 a “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor” and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

Differences between Contract of Indemnity and Guarantee

  • Number of Parties:
    In a contract of indemnity only two parties are involved, whereas in a contract of guarantee, three parties are involved.
  • Purpose:
    A contract of indemnity is formed to provide compensation of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money.
  • Nature of Liability:
    In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor. The principal debtor owes the primary liability and the surety owes the secondary liability. ‘

→ Types of Guarantee

  • Specific Guarantee- which is given for specific debt and expires when the debt guarantee is paid.
  • Continuous Guarantee – A continuing guarantee is one which extends to a series of transactions (Section 129). The liability of surety in continuous guarantee extends to all transactions contemplated.

Rights of the Surety:
There are three parties in a contract and there are three contracts. So the parties are the debtor, creditor and the surety. So the surety has got some rights

  • Surety’s Rights Against Debtor – when a surety makes the payment to the creditor and creditor is out of the scene now, therefore now surety will deal with the debtor in a manner as if he is a creditor
  • Rights of a Surety Against Creditor – he can claim certain securities from the creditor. Under Section 141 a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into whether the surety knows of the existence of such security or not; and, if the creditor losses or, without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security.
  • Surety’s rights gains co-sureties – When we say co sureties it means in a contract of guarantee there are more than one surety. Sometime in the contract, it happens that one person does not want to take the coriiplete liability in terms of the surety in a contract. When a surety has paid more than his share of debt to the creditor, he has a right of contribution from the co-sureties who are equally bound to pay with him

→ Discharge of surety

  • Surety will be free from the responsibility by giving a notice to the creditor by death of the surety
  • if debtor and the creditor after entering into a contract change the contract without the consent of the surety
  • when creditor discharges the debtor from the liability if the debtor and the creditor enter into a composition
  • if creditor does something which diminishes the right of the surety, which reduces right of the surety
  • when creditor gives more time to the debtor.

→ Bailment:
Bailment is another type of special contract. Since it is a ‘contract’, naturally all basic requirements of contract are applicable. Bailment means act of delivering goods for a specified purpose on trust. The goods are to be returned after the purpose is over. In bailment, the deliverer of the asset is the bailor and the receiver is the bailee. In a bailment transaction, ownership is never transfered and the bailor is generally not entitled to use the property while it’s in possession of the bailee.

  • Gratuitous bailment – A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to any remuneration
  • Bailment for Reward – This is for the mutual benefit of both the bailor the bailee. Bailee gets the reward.

→ Duties of Bailee

  • Duty to take reasonable care
  • Duty not to make unauthorized use (Section 154)
  • Right of Lien
  • Not to set adverse title to goods
  • To keep his goods separate from bailed

→ Duties of Bailor:

  • To bear extra ordinary expenses of bailment
  • To disclose all the known faults in the goods
  • To indentify the bailee for any cost or costs which the bailee may incur because of the defective title of the bailor of the goods bailed

→ Things relevant to Bailment:
A. Finder of Lost Goods – the finder-of goods in a public or quasi public place is only a bailee; he keeps the article in trust for the real owner. As against everyone else, the property in the goods vests in the finder on his taking possession of it

B. General Lien – a general lien is the right retain the property of another for a general balance of accounts

C. Particular Lien – A particular lien is one which is available only against that property of which the skill and labour have been’ exercised A bailee’s lien is a particular lien.

D. Termination of Bailment – Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may determine the bailment (Section 153.)

E. Carrier as Bailee – A common carrier undertakes to carry goods of all persons who are willing to pay his usual or reasonable rates.

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

→ Law of Agency:
An ‘Agent’ is a person employed to do any act or to represent another in dealings with third persons. The person who employs the agent and for whom such act is done, or who is so represented, is called the ‘principal’. The relation between the agent and the principal is called ‘Agency’. It is only when a person acts as a representative of the other in the creation, modification or termination of contractual obligations, between that order and third persons, that he is an agent. The essence of a contract of agency is the agent’s representative capacity coupled with a power to affect the legal relations of the principal with third persons.

Important Kinds of an Agent:

  • Broker: merchantile agent whose ordinary course of business is to make contract with other parties for commission
  • Factors: who sell goods which are in his possession for his principal.
  • Decredere Agent: receives remuneration for taking guarantee to his principal that a person who has bought on credit will pay
  • Auctioneer: who sells goods by auction.
  • Bankers: relationship is as of debtor and creditor
  • Partners: in partnership firm every partner is agent

→ Rights, Duties and Liabilities between Principal and Agent
An agent’s primary duties are:

  • act on behalf of and be subject to the control of the principal;
  • act within the scope of authority or power delegated by the principal;
  • discharge his/her duties with appropriate care and diligence; and
  • avoid conflict between his/her personal interests

Other duties of an agent include:

  • not to acquire any material benefit from a third party in connection with transactions conducted or through the use of his/her positions as an agent
  • to act with the care, competence and diligence normally exercised by agents in similar circumstances
  • to take action only within the scope of the his/her actual authority
  • to comply with all lawful instructions received from the principal and persons designated by the principal concerning agent’s actions on behalf of the principal
  • to act reasonably and to refrain from conduct that is likely to damage the principal’s enterprise
  • A principal owes certain contractual duties to his/her agent.
  • To compensate the agent as agreed; and ‘
  • To indemnify and protect the agent against claims, liabilities and expenses incurred in discharging the duties assigned by the principal

→ Termination of agency An agency is terminated by

  • the principal revoking his authority; or by the agent renouncing the business of the agency;
  • by the business of the agency being completed
  • by either the principal
  • agent dying or becoming of unsound mind
  • by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors, [section 201],
  • In following cases, an agency cannot be revoked
  • Agency coupled with interest (section 202)
  • Agent has already exercised his authority (section 203)
  • Agent has incurred personal liability, section 204