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THE INDIAN CONTRACT ACT, 1872

Contract Sec.2(h) an agreement enforceable by law give rise to legal obligation.


Social obligation, no contract.
Agreement Sec.2(e) - every promise and set of promises, forming consideration for
each other. Proposal assent thereto proposal accepted - promise agreement.
Consensus ad idem : meeting of minds in full and final agreement agree upon the
subject matter of the agreement in same sense and at the same time. No consensus ad
idem - no contract.
Example : A offers to sell his old Fiat car to B. B thinks that he is purchasing As new
Scoda car. There is no consensus ad idem and consequently no contract.
Essential characteristics of a valid contract :
1. Offer and acceptance two parties, one making the offer and other accepting
it offer must be definite acceptance must be absolute and unconditional
acceptance must be communicated to the offeror.
2. Intention to create legal relationship intention of parties to the agreement to
create legal relationship must no such intention, no contract social or
domestic agreements do not contemplate legal relationship, as such no
contract.
Balfour v Balfour husband promises to pay household allowance to wife
separated wife sues for allowance domestic agreement no contract.
V.Rao Vs. A. Rao old widow asked her niece to move in with her - promised
to will some property in exchange niece moved in and stayed till widows
death Held, intention to create a legal relationship niece entitled to share in
property.
Rose & Frank Co. v Crompton Bros. agency agreement between R and C clause in agreement stated that agreement not entered into as formal or legal
not subject matter of legal jurisdiction no intention to create legal
relationship - no contract.
3. Lawful consideration - both parties give and get something in return no
consideration, no contract - consideration may be past, present or future in
cash or in kind must be real and lawful.
4. Competent parties must have attained age of majority of sound mind not
disqualified by any law so, minor, lunatic, idiot, drunkard, etc not competent
to contract.
5. Free and genuine consent parties are of same mind when they agree about
the subject matter in same sense and at the same time if induced by coercion,
undue influence, fraud, misrepresentation, etc, there is no free consent - no
contract.
6. Lawful object object must not be illegal, immoral or opposed to public
policy if any legal flaw, not enforceable by law.

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7. Agreement not declared void must not have been declared void by any law
in force.
8. Certainty and possibility of performance terms must be certain and not
vague not possible to ascertain the meaning, it cannot be enforced must be
capable of being performed agreement to do impossible act, no contract.
Example : (a) A agrees to sell 100 bales of cloth to B. There is nothing to
indicate the kind of cloth intended to be sold. The agreement is
void for uncertainty.
Scammel v Ouston purchase of motor van on hire purchase
hire purchase price payable over two years - no rate of interest
or mode of payment indicated Held, the word hire purchase
has not been precisely defined no contract.
9. Legal formalities essential to complete legal formalities to make the
agreement binding e.g. agreement may require payment of stamp duty,
require registration, etc.
Types of contracts :
1. Void contract a contract ceases to be enforceable by law, becomes void
originally valid when entered into by change of law, may subsequently
become void e.g. contract to deal with a foreign country will become void
when war breaks out between the importing and exporting country.
Void agreement agreement which does not create legal rights or obligations
a nullity void ab initio e.g. agreement without consideration.
2. Voidable contract - enforceable at the option of one party and not the other
free consent is missing party whose consent is not free may repudiate/
rescind/avoid/cancel the contract, if so elects remains valid till it is
repudiated.
Contract voidable also in following circumstances
(i)
prevent promisor to fulfil his part of promise voidable at the
option of promisor.
(ii)
Promisor fails to perform his part of obligation voidable at the
option of other party/promise.
3. Illegal contract which is against public policy, is criminal in nature, is
immoral collateral transaction/agreement also becomes illegal all illegal
agreements are void but all void agreements are not illegal.
Example : A enters into an agreement with B to manufacture prohibited goods
A takes loan for the purpose from C who knows about the purpose of the
loan agreement between A and C is collateral to the main agreement between
A and B, which is illegal collateral agreement is also illegal.

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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4. Unenforceable contract cannot be enforced in a Court of law due to technical
defect - may be carried out by the parties, but no legal remedies in case of
breach by either party - e.g. non-registration, non-payment of stamp duty, etc
makes the contract unenforceable.
5. Express contract terms agreed upon at the time of formation - may be written
or oral.
6. Implied contract contract inferred from the act or conduct of the parties
proposal or acceptance made otherwise than by words e.g. when a person
gets into bus, lets a porter carry his luggage at the railway station, takes food
at a restaurant, there is an implied contract.
Upton Rural District Council v Powell - Ps farm did not come under the free
service zone of the fire department - fire at Ps farm P called up Upton Fire
Brigade which arrived and put out the fire Held, P was liable to pay for the
service rendered as implied promise to pay.
7. Quasi contract resembles a contract however, no express offer or
acceptance - legal obligation on a party who is required to perform it
Example : A leaves his goods at Bs place by mistake B consumes the goods
as his own B is bound to pay for the goods to A as there was a quasi contract
under which B was under a legal obligation to return As goods.
8. Executed contract both the parties have performed their respective
obligations.
9. Executory contract may be partly or wholly executory either or both
parties have yet to fulfil his/their part of obligation.
10. Unilateral contract one-sided contract one party has to fulfil his part of
obligation other party has already fulfilled his obligation before or at the
time of formation of the contract also known as contracts with executed
consideration.
Example : A permits a porter to carry his luggage to the railway carriage
contracts comes into existence when the porter places the luggage in the
carriage at that time porter has already fulfilled his obligation A yet to
fulfil his obligation.
11. Bilateral contract- both the parties have yet to fulfil their obligations
contract with executory consideration.
*****

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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Offer - Sec.2(a) a proposal by one party to another to enter into a legally
binding agreement with him willingness to do or to abstain from doing
something intention of obtaining the assent of other.
Offer may be express words or implied.
Express spoken words or written
Implied by conduct of the parties or circumstances of the case.
E.g. Wilkie Vs. London Passenger Transport Board transport company runs bus
service fare charged implied offer by the transport company - acceptance
complete when passenger boards the bus.
Offer may be made to
(i) definite person or class of persons specific offer may be accepted by only
the person(s) to whom the offer is made.
(ii) the world at large general offer may be accepted by anyone having notice
of the offer.
Calill Vs. Carbolic Smoke Ball Co. - company manufactured smoke balls
company advertised in newspapers a reward of 100 to anyone who contracted
influenza after using the smoke balls as per printed instructions Carlill used
smoke balls as per directions contracted influenza Held, general offer Calill
had accepted the offer by using the smoke balls entitled to recover the reward.
Essentials of offer :
1. Must be capable of being accepted and constitute legal relationship must be
such as would constitute a valid contract when it is accepted - a social
invitation is not offer as no intention of legal relationship.
2. Terms must be definite, unambiguous and certain : must not be vague and
indefinite.
Gould Vs. Gould - husband promises to pay maintenance to wife on
separation so long as I can manage it on separation husband and wife could
enter into legal relationship However terms of agreement were vague and
discretionary Held, no offer and hence no contract.
But where provision available for ascertaining the meaning of the vague term,
offer is valid.
Foley Vs. Classique Coaches Ltd. F sold land to C agreement that C
should buy petrol from F at agreed price disputes to be referred to arbitration
No price agreed upon C refused to buy Held, clear avenue for
determining reasonable price by arbitration valid contract.
3. Different from declaration of intention or invitation to offer : Mere
declaration of intention or announcement or advertisement does not constitute
offer E.g. advertisement of auction sale is not an offer.
Display of goods in showcase, quotations, catalogues, advertisements are
invitation to offer and not offer itself the potential customers to make the
offer which will then be accepted - the seller may or may not accept the offer.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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Pharmaceutical Society of Great Britain Vs. Boots Cash Chemists - goods
sold under self service system customer chooses the desired goods makes
payment to cashier display of goods only an invitation to offer actual offer
made by the customer when he offers to make the payment acceptance by
cashier constitutes a contract.
Newspaper advertisement are not offers an exception is a general offer of
reward to public anyone can accept the general offer by fulfilling the
condition - constitutes a contract. E.g. an advertisement to pay a reward for
finding missing son general offer to any one performs the required act acceptor must have knowledge of the offer - constitutes valid contract.
4. Offer must be communicated : Unless communicated, no acceptance mere
act of acceptance without knowledge of the offer does not constitute
acceptance.
Fitch Vs. Snedaker S offered reward for lost dog F ignorant of offer of S
finds the dog Held, F not entitled to reward.
Lalman Vs. Gauri Dutt - G sends servant L to trace lost nephew later
announces reward to finder L finds the nephew Held, ignorant of offer
hence, no acceptance - L not entitled to reward.
5. Intention to obtain the assent : Offer must be made with intention to obtain
assent of other party - must not be declaration of intention to make an offer.
6. Non-compliance of condition not deemed to be acceptance : Must not contain
a term the non-compliance of which may be assumed to be acceptance
E.g. A writes to B offering his horse for Rs.500, adding if you do not reply, I
shall assume you have accepted the offer in case of Bs silence, no specific
acceptance no contract.
7. Declaration of price not an offer : mere statement of price is not an offer to
sell.
Harvey Vs. Facey - H sends telegram to F asking Will you sell us Bumper
Hall Pen? Telegraph lowest cash price.
F replies Lowest price for Bumper Hall Pen 900. H telegraphs to F We agree to buy Bumper Hall Pen for the sum of 900
asked by you.
Held, F only quoted the price and did not answer to first question of Hs first
telegram hence no offer by F to sell.
8. Special terms to contract must be communicated in offer : must be
communicated at the time of proposal cannot be inserted in contract later on
unilaterally must be decipherable (understandable) in reasonable manner.
Olley Vs. Malborough Court Ltd. Notice placed in hotel bed room
exempting the proprietor from liability for loss contract entered into when
client takes key to room - special term intimated later on Held, invalid notice
not affecting the contract.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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Rajpur Transport Company Vs. Ghanshyam - R accepted goods for
transportation without any condition later issued circular limiting its liability
for damage or loss in transit Held, special condition communicated after the
contract has been entered into client not bound by them.
When the words For conditions see back printed on a receipt valid
immaterial whether person reads them or not or is even unable to read.
Parker Vs. S.E. Railway Co. - P deposited baggage in cloak room ticket
issued printed on face See back Condition printed on back limited the
liability in case of loss baggage lost and P filed claim Held, P bound by
condition on the back of the ticket even if not read by him.
Thompson Vs. L.M. & S. Railway Co. T bought a ticket from railway co. T
illiterate On face of ticket written For conditions see back One of the
conditions on back absolves the companys liability for personal injuries to
passengers T injured in railway accident Held, T bound by the conditions
no damages.
If no words on front of a receipt to draw attention regarding conditions printed
on its reverse not binding. Even conditions printed on voucher or receipt
for payment (which do not normally contain the conditions of contract) are not
binding.
Chapleton Vs. Barry Urban District Council C hired deck chair from
Municipal Council issued ticket containing condition The Council will not
be liable for any accident or damage arising from hire of chair C did not
read it chair broke and C injured Held, Council liable for damages as the
ticket issued is a mere receipt and different from a railway ticket which
contains the terms upon which a railway co. agrees to carry passengers.
Henderson Vs. Stevenson - H purchased ticket from carriage company Term
printed on back of ticket absolved the company from liability for losses of any
kind Nothing on face of the ticket to indicate the terms on reverse Held, H
not bound by these terms and conditions.
Ordinarily, acceptance of an offer implies unconditional and absolute acceptance
of all the terms and conditions contained in the offer. However, this is subject to
following exceptions
1. there is misrepresentation or fraud.
2. When the notice of terms is insufficient.
3. where there is nothing to indicate that there are additional terms to the offer.
Cross offers : When two parties when identical offers, in ignorance of each
others offers one cannot be construed as offer nor the other as acceptance no
valid contract.
Counter Offer when acceptance with variation of terms offered by offeror not
valid acceptance no contract - earlier offer cannot be revived.
Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it instead
offered to buy it for 950 turned down by W subsequently H agreed to pay
1000 Held, H gave counter offer, rejecting the previous offer earlier offer
cannot be revived by giving acceptance to it - no contract.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

Acceptance : Sec.2(b) - When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal, when accepted,
becomes a promise.
Acceptance of offer results in contract must be communicated to the offeror may be express or implied when communicated by words (spoken or written) or
some specific act, it is express it is implied by he conduct of the parties or
circumstances.
Example : (a) Strike of the hammer on the table by the auctioneer implied
acceptance.
(b) V.Rao Vs. A. Rao - old widow asked her niece to move in with her
- promised to will some property in exchange niece moved in and
stayed till widows death express acceptance by act valid
contract - niece entitled to property.
Acceptance of particular offer - offer made to particular person can be accepted
by that specific person alone if accepted by any other party, not valid.
Boulton Vs. Jones B purchased goods from H H owed debt to J J placed order on
H B supplied the goods intending to set off his debt against H Invalid acceptance,
as offer not made to B no contract. However, B can recover the goods from J under
quasi-contract.
Acceptance of general offer when made to world at large can be accepted by any
person. E.g. Carlill vs. Carbolic Smoke Ball Co.
Essentials of Acceptance :
1.
Must be absolute and unqualified - must conform to all the terms of the offer
if no ad idem on all terms, no contract
Routledge Vs. Granti offer by R to G - to purchase house with possession on
specific date G accepted the offer, suggesting possession on another date not
valid acceptance.
Neale Vs. Merret M offered to sell land to N at 280 N accepted enclosed
80 with promise to pay balance in instalments of 50 qualified acceptance no
contract.
2.
Communicated to offeror external manifestation in perceptible
(understandable) form mental resolve is no acceptance.
Felthouse Vs.Bindley - F offered to his nephew to buy his horse wrote If I her
no more about it, I shall consider the horse is mine nephew did not respond
told his auctioneer not to sell the horse as sold to his uncle auctioneer
inadvertently sold the horse Acceptance of Fs offer not communicated to him
held no contract F cannot claim damages from auctioneer.

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

8
Brogden Vs. Metropolitan Rail Co. draft agreement for supply of coal sent to
railway co. manager wrote approved over it kept it in his drawer not
communicated to the offeror Held, no contract
However, in cases where acceptance is by conduct it is implied acceptance
need not be specifically communicated to the offeror E.g. Carlill Vs. Carbolic
Smoke Ball Co.
3.

Made in prescribed or reasonable mode - If acceptance not in prescribed or


reasonable mode offeror must intimate acceptor insisting acceptance in
prescribed mode if acceptor not informed, deemed acceptance.
Example : A makes offer to B writes If you accept the offer, reply by wire B
replies by post If A does not insist on acceptance by proper mode, it is valid
acceptance.

4.

Given within a reasonable time if time limit prescribed must be within that
time if no time limit must be within reasonable time.
Ramsgate Victoria Hotel Co. Vs. Montefiore - Offer made by M on June 8 - to
take shares in R Acceptance received on Nov 23 beyond reasonable time no
valid acceptance.

5.

Cannot precede an offer if precedes the offer invalid acceptance


Example : Company allots shares without application ignorant of the allotment,
allottee applies for shares allotment is invalid, as precedes the offer.

6.

Must indicate intention of acceptor to fulfil terms of promise- where


acceptance by some specific act that act must be done e.g. Carlill Vs. Carbolic
Smoke Ball Co.

7.

Must be communicated by person to whom offer has been made acceptance


by other person or unauthorised person is invalid
Boulton Vs. Jones B purchased goods from H H owed debt to J J placed
order on H B supplied the goods intending to set off his debt against H Invalid
acceptance, as offer not made to B no contract.

8.
9.

Must be given before offer lapses or is withdrawn


Cannot be implied by silence :
Felthouse Vs.Bindley - F offered to his nephew to buy his horse wrote If I her
no more about it, I shall consider the horse is mine nephew did not respond
told his auctioneer not to sell the horse as sold to his uncle auctioneer
inadvertently sold the horse Acceptance of Fs offer not communicated to him
held no contract F cannot claim damages from auctioneer.

Acceptance made subject to contract no valid acceptance until contract signed.


Agreement to agree in future no valid contract merely intention
Loftus Vs. Roberts - actress engaged for certain period agreement includes a clause
if show in London, payment of salary to be mutually agreed upon no contract.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

9
Communication of Offer, acceptance and revocation :
Mode of communication - by act or omission must have the effect of
communicating such offer, acceptance or revocation may be communicated by
words (written or spoken) or by conduct.
Example : Installation of weighting machine at railway station is an offer putting of
coin in the slot of the machine is acceptance switching off the machine is revocation
of the offer.
When is communication complete : Sec.4
(i)
Communication of the offer - complete when comes to knowledge
of the offeree.
Example - A posts a letter of offer for sale of house to B on 1 st June received
by B on 5th June communication of offer completes on 5th June.
(ii)

Communication of the acceptance


as against the offeror when put into course of transmission
by offeree/ acceptor so as to be out of his power of recall.
(b)
As against the acceptor - when it comes to the knowledge of
the offeror.
(a)

Example : A sends an offer by post on 1 st June - received by B on 5th June B


sends his acceptance on 10th June reaches A on 14th June - The acceptance is
complete

as against A when B posted the letter on 10th June.

As against B when A received the letter on 14th June.


(iii)

Communication of revocation - means withdrawal of offer or


acceptance revocation is complete
As against the person making it when put into course of transmission
so as to be out of his power of recall.
As against the person to whom it is made when it comes to his
knowledge.
Example A posts his offer to sell goods to B on 11th February reaches B on
14th February A revokes his offer by telegram on 13th February - telegram
received by B on 16th February
Revocation is complete as against A when the telegram is sent
despatched on 13th February.
Revocation is complete as against B when telegram is received by
him on 16th February.
Byrne & Co. Vs. Van Tienhoven - T offered to sell goods to B by post on 1 st
October received by B on 11th October B telegraphs his acceptance on same
day On 18th October, T sent a letter revoking his offer letter of revocation
received by B on 20th October Held, the contract made on 11th October when B
gave his acceptance revocation not communicated before the contract hence
revocation invalid.

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

10

Time of revocation of offer and acceptance : Sec.5


(i)
Revocation of offer - at any time before the communication of acceptance is
complete as against the offeror, but not afterwards.
(ii)
Revocation of acceptance - at any time before communication of acceptance
is complete as against the acceptor, but not afterwards.
Example : A sends his letter of offer by post on 1 st July received by B on 3rd July
B posts his acceptance on 6th July acceptance letter received by A on 8th July.
A can revoke his offer at any time before B posts his acceptance on 6 th
July, but not afterwards.
B can revoke his acceptance at any time before his letter of acceptance
reaches A, i.e. before 8th July, but not afterwards.
# In India the acceptor does not become bound merely by posting his acceptance.
He becomes bound only when his acceptance comes to the knowledge of the proposer.
The gap of time between the posting and the delivery of acceptance can be utilised by
the acceptor for revoking his acceptance by a speedier communication which will
overtake the acceptance.
The peculiarity is that after an acceptance is posted and before it comes to the
knowledge of the offeror, only one party, i.e. the offeror, is bound. The acceptor has
still the right to repudiate the contract by revoking his acceptance.
Loss of letter of acceptance in postal transit : acceptance is complete as against the
offeror when letter posted by acceptor even is the letter gets lost, it is valid
acceptance so long as it is correctly addressed, sufficiently stamped and posted.
Contracts over telephone, telex or oral communication : - telephone and telex have
same effect as oral communication but proper receipt of communication is must
otherwise invalid. Contract deemed to be made at the place where communication of
acceptance is received.
Example : A shouts his offer to B across a river or courtyard - B shouts back his
acceptance A cannot hear Bs reply as aircraft flying overhead No communication
of acceptance no contract.
Entores Vs. Miles Far East Corpn. Offer made from London by telex to party in
Holland acceptance sent by telex telex is a method of instantaneous
communication different from the rule about the post - Held, contract made at the
place where the acceptance is received.
Bhagwandas Goverdhandas Kedia Vs. Girdharilal Parshottamdas & Co. offer made
from Ahmedabad to party at Khamgaon acceptance given Held, conversation
resulted in a contract when acceptance of offer is intimated to the offeror hence
contract entered at Ahmedabad.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

11

Revocation of offer : must be at any time before its acceptance is complete as against
the offeror; revocation must be communicated to the offeree.
1. By communication of notice of revocation - at any time before the acceptance
of offer is complete as against the offeror.
2. By lapse of time : revokes if not accepted within prescribed time period if
no time prescribed, lapses after reasonable time.
Ramsgate Victoria Hotel Co. Vs. Montefiore - Offer made by M on June 8 - to
take shares in R Acceptance received on Nov 23 beyond reasonable time
no valid acceptance.
Head Vs. Diggon - offer to sale of wool made on Thursday three days time
limit for acceptance- offeree sent acceptance on Monday Held, offer had
lapsed.
3. Non-fulfilment of condition precedent :
Example : A offered to sell goods to B condition that agreed price to be paid
before a certain date B fails to pay by specified date Held, the offer stands
revoked.
4. Death or insanity of offeror offeree must have knowledge of it before giving
acceptance if acceptance given in ignorance of offerors death/insanity,
acceptance is valid.
5. Counter offer - offer accepted with modification of terms of offer, or some
new condition qualified acceptance.
Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it instead
offered to buy it for 950 turned down by W subsequently H agreed to pay
1000 Held, H gave counter offer, rejecting the previous offer earlier offer
cannot be revived by giving acceptance to it - no contract.
Tinn Vs. Hoffman offeree agreed to buy half the quantity of goods offered on
the same terms and conditions as applicable to the full contract Held, there
was a counter offer no contract.
6. If not accepted according to prescribed or usual mode provided offeror gives
notice to offeree about the lacunae if offeror keeps quiet deemed to have
accepted the acceptance.
Eliason Vs. Henshaw A offered to buy flour from B specified that
acceptance should be sent by the wagon which brought the offer B sent
acceptance by post thinking it would reach offeror more speedily letter
reached later than the wagon- acceptance not as per prescribed mode no
contract.
In the above case, if the mail had reached earlier than the wagon offeror
would have been bound unless had an exclusive preference for reply by wagon
minor departure from the prescribed mode of communication not to affect
the fact of acceptance provided communication is made in equally expeditious
way.
_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

12

7. Law is changed if contemplated contract becomes illegal or incapable of


performance.
8. Rejection of offer once rejected cannot subsequently be accepted.
May be express or implied.
Express by words, written or oral.
Implied - where counter offer made or conditional acceptance given.
Hyde Vs. Wrench - W offered to sell farm at 1000 H rejected it
instead offered to buy it for 950 turned down by W subsequently
H agreed to pay 1000 Held, H gave counter offer, rejecting the
previous offer earlier offer cannot be revived by giving acceptance
to it - no contract.
Tinn Vs. Hoffman offeree agreed to buy half the quantity of goods
offered on the same terms and conditions as applicable to the full
contract Held, there was a counter offer no contract.
*****

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

13
Consideration : Sec.2(d) when at the desire of the promisor, the promisee or any
other person has done/abstained from doing or promises to do or abstain from doing
something - such act or abstinence or promise is called consideration for the promise.
It means price for which the promise of the other is bought - a valuable consideration
as a price of the promise some of value received by the promisee as an inducement
of the promise quid pro quo ( something in return) may be of some benefit to the
plaintiff or some detriment to the defendant.
Abdul Aziz Vs. Masum Ali a promise to subscribe Rs.500 for re-building a mosque
not fulfilled secretary of mosque committee filed a suit for enforcement of promise
Held, the promise no enforceable as no consideration in the sense of benefit for the
promisor the secretary of the committee suffered no detriment as nothing has been
done to carry out the repairs no contract.
Durga Prasad Vs. Baldeo - On the order of the Collector, plaintiff built shops at own
expense defendants occupied the shops promised to pay him commission on sales
default by defendents plaint rejected - Held, construction by plaintiff not done at
the desire of the defendants so as to constitute consideration.
Kedar Nath Vs. Gauri Mohamed - Commissioner of Howrah Municipality started
collection of funds by public subscription to erect town hall defendant a subscriber
signed his name in subscription book for Rs.100 on the faith of promised
subscriptions, plaintiff entered into a contract with a contractor defendant did not
pay the promised amount Held, the act of the plaintiff in entering into contract with
contractor was done at the desire of the defendant so as to constitute consideration
the promise was In consideration of your agreeing to enter into a contract to erect, I
undertake to supply money for it.
Gousmohoddin Vs. Appasahib - Suit filed by landlord L against tenant T for
possession of premises and arrears of rent suit decreed in favour in execution,
attachment order of movable property of T In consideration of T agreeing not to
appeal against the decree, L allowed one months time to pay Held, valid
consideration valid agreement.
Essentials features of consideration :
1. Must move at desire of promisor if done at instance of third party or without
desire of promisor not good consideration.
Durga Prasad Vs. Baldeo - On the order of the Collector, plaintiff built shops
at own expense defendants occupied the shops promised to pay him
commission on sales default by defendents plaint rejected - Held,
construction by plaintiff not done at the desire of the defendants so as to
constitute consideration it was done at the orders of the Collector.
2.

May move from promisee or any other person - consideration may move
even from a stranger contract cannot be enforced by stranger to contract
even if made for his benefit - but stranger to consideration can sue if party to
the contract (privity to contract).

_____________________________________________________________________
Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

14
Chinnaya Vs. Ramayya old lady A gifted landed property to her daughter
gift deed registered included condition of payment of annuity of Rs.653 per
yer to the plaintiff P (old ladys sister) - daughter D executed an Iqrarnama
(agreement) with P promising to pay the annuity default by D P sued for
recovery Held, consideration had moved from A also concluded that deed
of gift and Iqrarnama executed simultaneously regarded as one transaction
sufficient consideration for that transaction.
3. May be an act or abstinence/forbearance or a return promise act must not be
a legal duty to perform abstaining is consideration in negative form may be
past, present or future one may also be a return promise (executory
consideration)
Forbearance to sue, compromise of a disputed claim, composition with
creditors are valid consideration.
Debi Radha Rani Vs. Ram Dass wife D ready to sue husband for
maintenance husband agreed to pay monthly allowance wife forborne to
sue Held, wifes forbearance to sue is valid consideration for husband.
Compromise of pending suit good consideration for agreement of
compromise essential that dispute is bona fide.
Fanindra Narain Roy Vs. Kacheman Bibi - agreement to accept a new
mortgage in substitution of earlier executed one consideration of not
enforcing the earlier mortgage even though original executed by one person
and substitute by four persons- held to be valid consideration.
4. May be past, present or future may be voluntary or at request.
Examples : 1. A saves B from drowning B later promises reward to A valid
consideration enforceable.
2. A finds Bs purse returns it to him B promises to give A
Rs.50 this is contract.
Upton Rural District Council Vs. :Powell - Ps farm did not come under the
free service zone of the fire department - fire at Ps farm P called up Upton
Fire Brigade which arrived and put out the fire implied promise to pay for
past act.
Sindha Shri Ganpat Singh Vs. Abraham services rendered to a minor at his
request continued after majority at the same request good consideration for
promise to pay.
5. Need not be adequate where consent of the promisor is freely given,
inadequacy of consideration does not make the contract void adequacy of
consideration is for the parties to consider at the time of making the
agreement, and not for the court when it is sought to be enforced.
Haigh Vs. Brooks - B promised to pay certain bills to H if he hand over a
guarantee to him H handed over guarantee later found to be unenforceable
Held, B received what he asked for although guarantee for smaller value
than expected, valid consideration.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

15

6. Must be real and not illusionary - also must be competent and of value
Hall Vs. Cazenove - charter party contract contained clause that particular
ship to sail on specified date - that date already expired when contract entered
into Held, consideration is physically impossible.
Harvey Vs. Gibbons - A owes Rs.1000 to B promises to pay Rs.500 to C,
who is Bs servant C promises to discharge A from debt Legally
impossible as C not competent to give valid discharge for a debt due to his
master.
A engages B for certain work promises to pay reasonable sum promise
unenforceable as consideration uncertain.
Stilk Vs. Myrick - Two crew members of ship deserted mid-way captain
promised to divide salary of deserters among rest of the crew if they worked
the vessel home Held, they were already under obligation to bring the vessel
home the consideration was illusionary no contract.
7. Must be something which promisor not already bound to do : should not under
pre-existing legal or contractual obligation performance of public duty by
public servant is not consideration.
Collins Vs. Godefroy - A received summon for appearance before a trial court
B promised to pay to A compensation for loss of time during attendance in
court Held, A under a duty imposed by law to appear and give evidence
Bs promise was without consideration.
Ramchandra Chintaman Vs. Kalu Raju - promise to pay Vakil an additional
sum if suit successful Held, Vakil under pre-existing contractual to render
the best of his services the promise for additional sum is devoid of
consideration.
Person undertakes to do more than contractual or legal duty valid
consideration for promise.
8. Must not be illegal, immoral or opposed to public policy must not be
unlawful
Napier Vs. National Business Agency Ltd. company employed N - weekly
wages of 13 and weekly expense allowance of 6 Held, the expense
allowance a device to evade tax agreement unlawful.
Nandlal Vs. Thomas - A licensed under Excise Act to run liquor shop Act
forbade sale, transfer or sub-lease of licence or creation of partnership in
running of shop A took B into partnership - Held, agreement void.
Baivijli Vs. Nansa Nagar - money given to married woman to obtain divorce
from her husband lender intended to marry the woman Held, agreement
was immoral.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

16
Doctrine of privity of contract Only parties to contract can sue and be sued on the
contract stranger to contract cannot sue even if contract is for his benefit and he
provided consideration stranger has no right or obligation cannot enforce it.
Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. S bought tyres from
Dunlop Rubber Co. sold them to D, a sub-dealer D agreed not to sell below
Dunlop Rubbers list price to pay Dunlop Rubber 5 for every tyre undersold - D
undersold two tyres Dunlop Rubber sued for breach Held, stranger to contract
cannot recover anything.
Exceptions to the rule stranger to a contract cannot sue :
1. A trust or charge : Beneficiary of a trust or holder of other interest in specific
immovable property can enforce it.
Gandy Vs. Gandy - husband separated from wife executed separation deed
promised to pay to the trustees all expenses for maintenance of wife Held,
agreement created a trust in favour of wife can be enforced by her.
Khwaja Mohd. Khan Vs. Hussaini Begum A agreed for marriage of his son S
with Bs daughter D in consideration of marriage A agreed to pay to D an
allowance of Rs.500 per month in perpetuity created charge on certain
properties for payment conferred power on D to enforce it Held, although
D not a party to agreement, is entitled to enforce it for recovery of allowance.
2. Marriage settlement, partition or other family arrangements : beneficiary can
sue for enforcement.
Daropti Vs. Jaspat Rai Js wife deserted him because of ill treatment J
entered into agreement with his father-in-law to treat her properly or else pay
monthly maintenance subsequently ill-treated and driven out of house
held, wife entitled to enforce the promise made by J to her father.
Shuppu Ammal Vs. Subramaniyam - Partition of joint property brothers
agreed to invest certain sum of money in equal shares for maintenance of their
mother Held, mother entitled to require her sons to make the investment.
3. Acknowledgement or estoppel - where by conduct, promisor acknowledges
himself as agent of third party estopped from denying it later- binding
obligation towards third party.
Example : A receives some money from B to be paid over to C - A admits the
receipt to C C can recover the amount from A who will be considered as
agent of B.
4. Assignment of contract assignee of rights and benefits under contract not
involving personal skills can enforce the contract subject to equities between
original parties e.g. holder in due course of a negotiable instrument can
recover the amount even though no contract between him and payer.

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By Sanjay Banerjee, M.Com., AICWA, LL.B.

17
5. Contract entered through agent : Principal gets rights and obligations under
contracts entered through agent provided agent acts within authority and on
behalf of principal.
6. Covenants running with land : purchaser of immovable property with notice of
covenants (conditions) created by another agreement affecting the property
bound by the covenants although not a party to original agreement.
Smith & Snipes Hall Farm Ltd. Vs. River Douglas Catchment Board - The
Board agreed with certain land-owners adjoining a stream to improve and
maintain the banks landlords paid proportionate costs one landlord sold
land to first plaintiff and he to second plaintiff negligence on part of Board
in maintenance of banks banks burst and land flooded Held, the whole
arrangement for the benefit of land-owners whoever they might be and not
merely the parties to the agreement plaintiff capable to sue the Board.
Contract without consideration is void Exceptions thereto :
Sec.25 Agreement made without consideration is void, unless
(1) it is expressed in writing and registered under the law for the time being in
force, and is made on account of natural love and affection between parties
standing in near relation to each other, or unless
(2) it is promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promisor, or something which the promisor
was legally compellable to do; or unless
(3) it is a promise, made in writing and signed by the person so charged or his
agent, to pay wholly or in part a debt which cannot be enforced for payment
under the law for the limitation of suits.
Explanation : 1. Nothing in this section shall affect the validity, as between the donor
and donee, of any gift actually made.
2. an agreement to which the consent of the promisor is freely given is
not void merely because the consideration is inadequate; but the
inadequacy of the consideration may be taken into account by the
Court in determining the question whether the consent to the promise
was freely given.
1. Love and affection - agreement has to be in writing registered under law
out of natural love and affection parties standing in near relation to each
other.
Ram Dass Vs. Krishan Dev - a family settlement between cousin brother and
sister to resolve disputes regarding family property on account of natural
love and affection Held, binding as cousin brother a near relative.
Venkataswamy Vs. Rangaswamy - Out of natural love and affection for his
brother R, V promises to discharge Rs debt to B registered agreement V
fails to discharge the debt R discharges it and sue V to recover the amount
Held, valid agreement covered under Sec.25.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

18
However, in Rajlukhy Dabee Vs. Bhootnath, nearness of relation does not
necessarily mean natural love and affection.
Husband promised to pay a fixed sum of money to wife every month for her
separate residence and maintenance registered document document
referred to certain quarrels and disagreements between the two Held, no
trace of love and affection between the parties whose quarrels had compelled
them to separate Held, agreement void for want of consideration.
2. Compensation for past voluntary service : a promise to wholly or partly
compensate a person who has already voluntarily done something for
promisor enforceable
Karam Chand Vs. Basant Kaur - goods supplied to minor - promise made
after attaining majority to pay for the supplies Held, enforceable.
3. Promise to pay a time-barred debt must be in writing signed by the debtor
or his specially or generally authorised agent for payment of whole or part of
the debt the debt must have been recoverable but for the law of limitation
not necessary that new promise should expressly mention the time-barred
debt.
Debi Prasad Vs. Bhagwati Prasad acknowledgement of debt promise to
pay with interest Held, agreement with promise to pay within the meaning of
Sec.25.
A take over of the assets and liabilities of a business house does not amount to
a promise to pay a time-barred debt.
4. Completed gift Sec. 25 shall not affect the validity of any gift actually made.
5. Agency - No consideration is necessary to create an agency.
6. Charitable subscription where promisee on the strength of the promise
makes commitments. E.g. Kedar Nath Vs. Gauri Mohamed
*****

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

19
Capacity to contract :
Sec.10 : Parties must be competent to contract. Competence to contract is defined in
Sec.11.
Sec.11 : Every person is competent to contract who
(a)
is of the age of majority;
(b)
is of sound mind; and
(c)
is not disqualified from contracting by any law.
Minors : Indian Majority Act, 1875 Sec.3 specifies that
(1) a minor is a person who has not completed 18 years of age.
(2) In following cases, a person attains majority on completion of 21 years
of age :
(a) where guardian appointed for person or property of minor under
the Guardians and Wards Act, 1890, or
(b) where superintendence of minors property is under Court of
Wards.
Rules regarding agreements with minors :
1.

Agreement with or by minor is void ab initio : minor cannot bind himself by


contract - such agreement is inoperative.
Mohiri Bibi Vs. Dharmodas Ghose - minor mortgaged his property to moneylender to secure loan of Rs.20,000 Out of it, Rs.10500 paid to the minor
Subsequently, minor sued for setting aside the mortgage. Held, the mortgage was
entered into with a minor and hence void Request for repayment of the amount
advanced to the minor as part of consideration also turned down.

2.

Minor can be promisee or beneficiary - can be beneficiary (payee, endorsee or


promisee) such contracts enforceable at the option of the minor
Sharafat Ali Vs. Noor Mohd. A promissory note executed in favour of a minor.
Subsequently, the drawer refused to honour the note on the ground that it being
drawn in favour of a minor, was void. Held, that the contract was for the benefit
of the minor and he can enforce it.

3.

His agreement cannot be ratified by him on attaining age of majority


ratification relates back to date of making of contract therefore, contract which
was then void cannot be made valid by subsequent ratification - Consideration
given during minority is not valid if fresh contract entered into after majority,
fresh consideration to be paid.
Indran Ramaswamy Vs. Anthiappa Chettiar - Minor borrows money and executes
promissory note after attaining majority, executed another promissory note in
settlement of first note - The second note is void for want of consideration.
Smith Vs. King K, a minor, speculated in stock exchange and became liable to
the stockbrokers for 547. On attaining majority, he gave two bills of 50 each in

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

20
satisfaction of the original debt. Held, there was no consideration for the bills and
K was not liable on them.
However, where services rendered at desire of minor during minority and
continued after majority on same request - forms good consideration for
subsequent express promise to pay.
Sindha Shri Ganpat Singh Vs. Abraham services rendered to a minor at his
request continued after majority at the same request good consideration for
promise to pay.
4.

Minor receives any benefit under a void agreement, he cannot be asked to


compensate/pay for it if minor mis-represented his age - can be compelled to
restore it, so long as the same is traceable in his possession - If the goods sold or
converted into money, minor not liable to pay - The doctrine of restitution not
applicable, where infant has obtained cash instead of goods. Sec.65 which
provides for restitution in case of rescission of voidable agreements, not
applicable to agreements with minor, which is absolutely void even no relief
allowed under Specific Relief Act, 1877.
Mohiri Bibi Vs. Dharmodas Ghose - minor mortgaged his property to moneylender to secure loan of Rs.20,000 Out of it, Rs.10500 paid to the minor
Subsequently, minor sued for setting aside the mortgage. Held, the mortgage was
entered into with a minor and hence void Request for repayment of the amount
advanced to the minor as part of consideration also turned down.
Ajudhia Prasad Vs. Chandan Lal - two minors borrowed money under a mortgage
deed. They were over 18 but less than 21 years of age, but fraudulently concealed
the fact that a guardian had been appointed for them. Question was whether the
lender could get a decree for the principal amount or sale of mortgaged property.
Held, where property is not traceable, granting a money decree would tantamount
to enforcing minors pecuniary (monetary) liability under a void contract no
decree under cloak of restitution.

5.

No estoppel against minor - Minor can always plead minority Even if minor
mis-represents his age, he cannot be sued.
Leslie Vs. Shiell A minor succeeded in deceiving some money-lenders by lying
about his age and got them to lend him 400 on the faith of his being adult. On
his refusal to pay, the money lenders sued him for money. Held, where the infant
has sold the goods or converted them, he cannot be made to pay.

6.

No specific performance of agreement if entered into by minor, no specific


performance as void ab initio However, if contract entered into by
parent/guardian/manager within scope of authority and for benefit of minor, such
contract is enforceable.

Srikakulam Subrahmanyam Vs. Kurra Sabba Rao to pay off promissory note
and mortgage of his debt, minor son and his mother sold a piece of land to the
holders of the promissory note and to pay off mortgage debt. He paid off the
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

21
mortgage accordingly and possession of land was given over by him. Afterwards
the minor brought an action to recover back the land. Held, the transaction was
for the benefit of the minor and the guardian had the capacity to contract on his
behalf binding upon the minor.
7.

Cannot enter into partnership but can become a partner in an existing


partnership for a share in the profits only cannot be liable for liabilities of the
firm.

8.

Minor cannot be adjudged insolvent As minor incapable of contracting


debts, he cannot be held liable for any so cannot be adjudged insolvent.

9.

Liable for necessaries supplied - Minor not personally liable Only his
estate liable for necessaries supplied or necessary services rendered to him Things necessary are those without which an individual cannot reasonably exist
articles of luxury are always excluded though luxurious articles of utility are in
some cases allowed considering the fortune and circumstances of the particular
minor liability not on account of contract but out of quasi-contract.
To render minors estate liable, the supplier has to prove that the goods supplied
are necessary for the minor. Two conditions must be satisfied (i) the contract
must be for goods reasonably necessary for his support in his station in life, and
(ii) he must not have already a sufficient supply of these necessaries. Also, loans
incurred by minor to obtain the necessaries binds the minor and is recoverable.
Ryder Vs. Wombwell - minor was supplied a pair of jewelled solitaires and an
antique goblet and though he moved in a high society, he was held not liable as
the plaintiff could not prove that the articles were specially necessary for the
minor.
Nash Vs. Inman - an undergraduate in the Cambridge University, who was amply
supplied with proper clothes according to his position, was supplied by the
plaintiff with number of dresses, including eleven fancy waistcoats. Held, the
waistcoats were not necessaries and hence the price was irrecoverable.
Roberts Vs. Gray - G, a minor, entered into a contract with R, a renowned billiard
player, to pay him certain sum of money to learn the game and play matches with
him during his world tour. R spent time and money in making arrangements for
the matches. Held, G was liable to pay as the arrangement was for necessaries as
it was in effect for teaching, instruction and employment and was reasonable and
for the benefit of the minor.

10.

Minor can be an agent minor binds the principal by his acts without
incurring any personal liability.

11.

Minor is liable in tort (civil wrong) but where tort arises out of a contract,
minor is not liable, as it would indirectly tantamount to enforcing an invalid
contract.

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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*****
Persons of unsound mind : Sec.12 Person said to be of sound mind for the purpose
of making a contract if, at the time when he makes it, he is capable of understanding it
and forming a rational judgement as to its effect upon his interest. There is a
presumption in favour of sanity.
Soundness of mind depends on
(a) capacity to understand the contents of business concerned, and
(b) ability to form a rational judgement as to its effects on own interest.
Person usually of unsound mind, may enter into contract when of sound mind but
person usually of sound mind, may not make a contract when of unsound mind.
Example :
1. Patient in lunatic asylum - may contract during intervals of soundness of mind.
2. Sane man delirious from fever or drunk incapable of forming a rational
judgement as to its effects on his interest cannot contract whilst such
delirium (fever or restlessness) or drunkenness lasts.
Inder Singh Vs. Parmeshwardhari Singh - property worth Rs.25,000 agreed to be
sold for Rs.7,000 sellers mother proved that he was congenital (hereditary) idiot
and mostly wandered about incapable of understanding the transaction Held,
person may to all appearances behave in a normal fashion, but he may be incapable of
forming a judgement of his own as to the effects of the act on his interest in present
case, in capable of exercising own judgement.
Sec.68 estate of persons of unsound mind liable for necessities supplied to them
however, no personal liability.
Persons debarred by law :
1. Alien enemies : During war, contracts made before stand suspended or
dissolved no new contracts during the ward.
2. Foreign sovereigns, diplomatic staff and accredited representatives : require
prior permission of Central Government
3. Corporations : authority regulated by memorandum and articles cannot enter
into contracts of strictly personal nature.
4. Insolvents : Property vests in Official Receiver or Official Assignee - deprived
of power to deal in that property may contract on discharge by Court.
5. Convicts : cannot enter into contract during imprisonment gets power to deal
only on discharge or completion of sentence or pardon Limitation held in
abeyance during period of sentence.
*****

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

23

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


(1)
(2)
(3)
(4)
(5)

coercion as defined in Sec.15, or


undue influence, as defined in Sec.16, or
fraud, as defined in Sec.17, or
misrepresentation, as defined in Sec.18, or
mistake, subject to provisions of Sec.20-22.

When consent to an agreement caused by coercion, undue influence, fraud or


misrepresentation agreement is contract, voidable at the option of the party whose
consent was so caused (Sec.19) If he confirms it, contract is binding on both
parties.
Where consent caused by mistake agreement is void.
Bala Devi Vs. S. Majumdar illiterate woman executed deed of gift in favour of
nephew under impression that it was deed authorising nephew to manage the lands
Evidence adduced that woman never intended to execute such deed nor deed read or
explained to her Held, deed void and inoperative.
Coercion : Sec.15 coercion is committing or threatening to commit - any act
forbidden by IPC - or unlawfully detaining or threatening to detain any property - to
the prejudice of any person with intention to causing such person to enter into an
agreement.
It is immaterial whether IPC (Indian Penal Code) is or is not in force in the place
where the coercion is employed.
Example :
(1) A threatens to shoot B if B does not release him (A) from debt which A owes
to B - B releases A under the threat - The release brought about by coercion.
(2) Chikham Amiraju Vs. Chikham Seshamma By threat of suicide, a Hindu
induced his wife and son to execute a release in favour of his brother in
respect of certain properties which they claimed as their own Held, the threat
of suicide amounted to coercion release deed was voidable.
(3) Ranganayakamma Vs. Alwar - Husband of a young girl of 13 died relatives
of husband prevented the removal of his body for cremation unless she adopts
a boy to inherit the properties of her husband - she consented Held, the
consent was not free but was induced by coercion adoption set aside.
(4) Muthia Vs. Muthu Karuppa an agent refused to hand over the account books
of a business to the new agent unless the principal released him from all
liabilities - principal gave the release deed as demanded Held, release deed
given under coercion voidable at the option of the principal.
(5) Bansraj Vs. Secretary of State T, son of B liable for fine Government gave
threat of attachment of property to B for recovery of fine from T B paid the
fine Held, the contract was induced by coercion.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

24

Sec.72 a person to whom money has been paid or anything delivered by mistake or
under coercion, must repay or return it.
Person who wants to relieve himself of the consequences of the contract onus lies
on him to prove that his consent caused by coercion has also to prove that he would
not have entered into it had coercion not been employed.
What Indian Law calls coercion, is called duress or menace in English Law
duress involves actual or threatened violence or imprisonment of contracting party (or
his wife, parent or child) with a view to obtain consent to the agreement coercion is
much wider than duress and includes the unlawful detention of property also.
Undue Influence : Sec.16 (1): A contract is said to be induced by undue influence
where the relations subsisting between the parties are such that one of the parties in a
position to dominate the will of the other and uses that position to obtain an unfair
advantage over the other.
A person is deemed to be in a position to dominate the will of another
(a) where he holds a real or apparent authority over the other e.g. relationship
between doctor and patient, master and servant.
(b) where he stands in a fiduciary relation (relation of trust and confidence) to the
other e.g. between father and son, solicitor and client, trustee and beneficiary
and promoter and company.
(c) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by age, illness or mental or bodily distress e.g. relationship
between medical attendant and his patient.
The principle applies to every case where influence is acquired and abused, where
confidence is reposed and betrayed. Contracts entered into by undue influence are
voidable at the option of the person whose consent is so obtained.
Examples :
(1) During minority of his son (B), A advanced money to him - upon Bs coming of
age, misuses parental influence obtains a bond from B for a greater amount than
the sum due in respect of the advance Held, A employs undue influence.
(2) Mannu Singh Vs. Umadat Pandey spiritual guru induced his devotee to gift him
the whole of his property in return for promise of salvation (nirvana) Held, the
consent of the devotee was given under undue influence.
(3) Ranee Annapurni Vs. Swaminath poor Hindu widow was persuaded by moneylender to agree to pay 100% rate of interest on money borrowed She needed the
money to establish her right to maintenance Held, consent obtained by undue
influence and the Court reduced the rate of interest to 24%.
(4) Inche Nariah Vs. Sheikh Ali Bin Omar - Illiterate elderly woman made gift of
practically whole of her property to her nephew who managed her affairs Held,
the gift should be set aside on ground of undue influence.
(5) Niko Devi Vs. Kripa - A minor female child who had lost her parents was living
with her cousin brother who was in position of loco-parents (in the place of
parents) Deed executed by her in favour of latter Held, there was undue
influence.
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25
(6) A applies to banker for a loan at a time when there is stringency in the money
market Banker declines to make the loan except at an unusually high rate of
interest - A accepts the loan on these terms This is a transaction in ordinary
course of business and contract is not induced by undue influence.
(7) William Vs. Bayley - son forged his fathers signature on several promissory notes
and paid them into his banking account When truth came to light, the manger of
the bank threatened prosecution of the son and imprisonment to avert this threat,
father agreed to give an equitable mortgage to the bank on his property in return
for the promissory notes Held, the negotiation proceeded upon an understanding
that the agreement to give security for the promissory notes would relieve the son
from the consequences of the criminal act fears of father were stimulated and
operated on to an extent to deprive him of free agency and to exhort an agreement
for the benefit of bankers Held voidable at the option of the father.
In order to avoid a contract on ground of undue influence, the plaintiff has to
establish that
(a) the other party was in a position to dominate his will.
(b) The other party actually used his influence to obtain the plaintiffs consent to
the contract, and
(c) The transaction is unconscionable (unreasonable so as to shock the
conscience)
Relationships which raise presumption of undue influence :
i.
Parent and child
ii.
Guardian and ward
iii.
Trustee and beneficiary
iv.
Religious adviser and disciple
v.
Doctor and patient
vi.
Solicitor and client, and
vii.
Fianc and fiance.
Raghunath Vs. Sarju Prasad Father and son equal owners of a vast joint family
property both quarrelled over it Father instituted criminal proceedings against the
son In order to defend himself, the son borrowed money from the plaintiff at 24%
compound interest and mortgaged his properties In eleven years, the amount
payable magnified more than eleven fold Defendant contended that plaintiff/lender
taking unconscionable advantage of his mental distress and exercised undue influence
- defendant failed to prove that the lender was in a position to dominate his will
Borrower got no relief.
However, no presumption of undue influence in following cases and burden of proof
lies on the party claiming as such i.
Landlord and tenant
ii.
Creditor and debtor
iii.
Husband and wife (wife should not be pardanashin otherwise the presumption
will arise)
Rebuttal of presumption the presumption of undue influence can be rebutted on
following grounds
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Prepared for VIDYASAGAR ACADEMY
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26
(a) full disclosure of facts is made by the influencing party to the party alleged to
have been influenced.
(b) The price is adequate inadequacy of consideration is only an evidence of
undue influence.
(c) The weaker party was in receipt of independent advice, before making the
promise the advise must be shown to be competent and based on knowledge
of all relevant facts
Lloyds Bank Vs. Bundy contractor borrowed money from bank he could not pay it
in time and bank pressed for payment or security Borrower suggested that his father
might mortgage the familys only residential house bank visited the father and
obtained his signatures upon ready-made papers contractor still could not pay
bank sought to enforce the mortgage Held, bank exploited the vulnerability of the
father, caused by his desire to help his son, to such an extent that he charged his house
to his ruin for a very short moratorium (suspension/freeze/halt) which was a highly
inadequate consideration for the mortgage.
Contract with pardanashin woman is presumed to be induced by indue influence a
woman who observes complete seclusion because of custom of particular community
to which she belongs.
Kalibaksh Singh Vs. Ram Gopal Singh about two months before her death, a Hindu
widow (who was a pardanashin woman) gifted half of her landed properties to the son
of her paramour, who was also the manager of her estate Held, she had no
independent advice, and gift was the result of the influence the manager had over the
lady Gift voidable at her option.
However, where a woman goes to Court to give evidence, settles rents with tenants
and collects rents, communicates in matters of business with men other than members
of her family, she is not a pardanashin woman (Shaikh Ismail Vs. Amir Bibi).
Difference between coercion and undue influence
Coercion
Undue Influence
1. The consent is given under the threat of 1. Consent is given by a person who is so
an offence (i.e. committing or
placed in relation to another that the
threatening to commit an act
other person is in a position to
forbidden by IPC or detaining or
dominate his will.
threatening to detain the property
unlawfully)
2. Coercion is mainly of physical nature. 2. Undue influence is of moral character.
It involves physical or violent force.
It involves moral force or mental
pressure.
3. There must be an intention of causing
3. The influencing party must use his
any person to enter into a contract.
position to obtain unfair advantage
over the other party.
4. It involves a criminal act.
4. No criminal act is involved.

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

27

Any statement - wrongly made by one party to the contract - during the course of
negotiations - with a view to induce the other party to enter into a contract is called
misrepresentation. May be made either
(i)
innocently or unintentionally called misrepresentation.
(ii)
Intentionally or deliberately or wilfully with intention to deceive or
defraud the other party called fraud
Misrepresentation Sec.18 - false statement made honestly believing it to be
true or not knowing it to be false includes non-disclosure of material fact without
intent to deceive the other party.
Example :
1. A offers to sell his horse to B telling him that the horse is sound. A genuinely
believes the horse to be sound though he has no sufficient ground for the
belief. Later, B finds the horse to be unsound. The statement made by A is
misrepresentation.
2. Derry Vs. Peek Directors of a company issued a prospectus made a
statement that company had been authorised by a special Act of Parliament to
run tramways by steam or mechanical power actually authority to use steam
was subject to consent of Board of Trade however, no mention was made of
this directors honestly believed that permission would be granted permission was refused consequently company later wound up plaintiff
who had bought some shares, sued the directors for fraud - Held, directors
guilty of misrepresentation not fraud as they honestly believed that one the
Parliament had authorised the use of steam, the consent of the Board was
practically concluded.
Requirements of misrepresentation
(i)
Must relate to material fact mere expression of opinion is not
misrepresentation.
(ii)
Must be wrong but honestly believed to be true by the person making it.
(iii)
Must be made before conclusion of contract made to induce other party
to enter into the contract.
(iv)
Made with intention that it is acted upon by other party.
(v)
Must be actually acted upon by other party must have induced him to
enter into the contract.
(vi)
Need not be made directly to the plaintiff made to third party with the
intention of communicating it to the other party to the contract is also
misrepresentation.
Babul Vs. R.A. Singh A tells his wife that bridegroom proposed for their
daughter was young man - within hearing of the daughter daughter gave
consent to marry believing the statement of her father - actually
bridegroom over 60 years Held, consent was vitiated/ obtained by
misrepresentation and fraud.
Consequences of misrepresentation The aggrieved party can
(a) avoid or rescind the contract; or
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

28
(b) accept the contract but insist that he shall be placed in the position in which he
would have been if the representation had been true.
However, the aggrieved party loses the right to rescind the contract for
misrepresentation if
(i)
he takes a benefit under the contract or affirms it in some other way
- even after becoming aware of misrepresentation or fraud;
Long Vs. Lloyd A induced B to buy lorry false representation
that lorry was in excellent condition when B used it and
discovered it to be in bad shape B wanted to return it A agreed
to bear half the cost of repairs and B agreed to it Later lorry
broke down completely B wanted to rescind the contract Held,
acceptance of As offer to bear half the cost of repairs, implies Bs
final acceptance of the sale contact cannot be rescinded.
(ii)
(iii)
(iv)

where restitution to the original position is not possible e.g.


subject matter either consumed or destroyed.
if contract cannot be rescinded in toto (in whole), it cannot be
rescinded at all.
If a third party has acquired rights in the subject matter of the
contract in good faith and for value.

Fraud Sec.17 Fraud exists when (1) a false representation made


(a) knowingly, or
(b) without belief in its truth, or
(c) Recklessly careless whether it be true or false.
(2) concealment of a material fact or partial statement of fact, so that the
withholding of fact makes the statement made false
(3) promise is made without any intention of performing it.
(4) any other act to deceive.
(5) any act or omission specially declared to be fraudulent.
A false statement must have been made intentionally with an intention to deceive the
other party or to induce him to enter into a contract.
Derry Vs. Peek Directors of a company issued a prospectus made a statement that
company had been authorised by a special Act of Parliament to run tramways by
steam or mechanical power actually authority to use steam was subject to consent of
Board of Trade however, no mention was made of this directors honestly believed
that permission would be granted - permission was refused consequently company
later wound up plaintiff who had bought some shares, sued the directors for fraud Held, directors guilty of misrepresentation not fraud as they honestly believed that
one the Parliament had authorised the use of steam, the consent of the Board was
practically concluded.
Requirements of fraud :
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

29
(1)

there must be false representation however, in few cases even silence


or non-disclosure constitutes fraud.
Peek Vs. Gurney Prospectus did not refer to existence of liabilities gave
impression that company was prosperous Held, non-disclosure amounted to
fraud and investors who had relied upon the prospectus could rescind the
allotment.
If any statement made is true on the date when it is made but becomes untrue
before the contract is actually entered into must be corrected non-correction is
fraud contract can be rescinded.
With Vs. OFlanagan Negotiations for sale of medical practice started in January
representation made that practice was worth 2,000 a year contract concluded
in May when earnings fell to 5 per week due to defendants serious illness
Held, failure to disclose the fall in takings is fraud contract would be rescinded.

(2)

Representation must relate to material fact commentary or hearsay is not representation of fact.

mere opinion,

Bisset Vs. Wilkinson - Certain land sold vendor aware that land required for
sheep farming - Vendor told prospective buyer that in his opinion the land had
carrying capacity of 2,000 sheep land turned out to be unsuitable for sheep
farming Held, there was no misrepresentation as the statement was one of
opinion which was honestly held.
(3)

Representation must be made before conclusion of contract made


with intention to inducing the other party to act upon it.
(4)
Representation must have been made with knowledge of its falsity or
without belief in its truth or recklessly, not caring for its truth or otherwise - can
be made by the party to the contract or with his connivance or his agent.
(5)
The other party must have been induced to act upon the representation.
Smith Vs. Chadwick - A bought shares in a company on faith of prospectus a
false statement contained in prospectus that B was a director in the company B
had never heard of B and therefore statement was immaterial to him Held, the
untrue statement had not induced A to buy the shares A cannot claim damages
on ground of fraud.
(6)

Other party must have relied upon the representation and must have
been deceived.
Horsefull Vs. Thomas T bought a cannon from H cannon was defective but
plugged by H T did not examine the cannon On use, the cannon burst Held,
the plug had not deceived T Hence, contract not vitiated by fraud.

(7)

Other party, on acting upon the representation, must have suffered


some loss fraud without damage does not give rise to action on deceit/cheating.

Consequences of fraud : Contract induced by fraud is voidable at the option of the


party deceived until rescinded, it is valid the defrauded party has following
remedies :
(1)
he can rescind the contract must be within reasonable time if in the
meanwhile, a third party has acquired an interest in the subject matter for value
and good faith, contract cannot be rescinded.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

30
Example A purchases land from B by wilfully making false representation A
sells the goods to C before B rescinds the contract B has lost the right to avoid the
contract as a third party (C) has acquired interest in it.
(2)
He can insist on the performance of contract on the condition that he
be put in the position in which he would have been if the
(3)
representation had been true.
(4)
He can sue for damages.
Contract not necessarily voidable - When consent caused by coercion, fraud or
misrepresentation, contract voidable at the option of party whose consent is so caused
(Sec.19). However, in following cases, the contract is not voidable
(1) where consent caused by mis-representation or fraud but that party could
discover the truth by ordinary diligence.
Example : A mis-represented to B to believe 500 tonnes of indigo made at As
factory B inspected the factory found it could produce 400 tonnes only B
buys the factory Held, contract is not voidable on account of misrepresentation by A.
(2) where plaintiff is ignorant of mis-representation or fraud.
(3) Where before the rescission, third party acquires interest in subject matter of
contract for value and bona fide.
(4) Where the party after becoming aware of his right to rescind, affirms the
contract.
Long Vs. Lloyd A induced B to buy lorry false representation that lorry
was in excellent condition when B used it and discovered it to be in bad
shape B wanted to return it A agreed to bear half the cost of repairs and B
agreed to it Later lorry broke down completely B wanted to rescind the
contract Held, acceptance of As offer to bear half the cost of repairs, implies
Bs final acceptance of the sale contact cannot be rescinded.
(5) Where rescission not made within reasonable time example - thus where
shares allotted on basis of misleading prospectus in July and move to rescind
the contract made in December plaintiff precluded from obtaining the relief
on account of unexplained delay of five months.
Mere silence is no fraud : A contracting party is under no obligation to disclose the
material facts to the other party but he must not make active concealment (like
concealing a crack in a machine by filling it and repainting it)
Keates Vs. Lord Cadogan Before letting a house, landlord did not inform the tenant
that house in ruinous condition Held, landlord nor liable for fraud tenant should
have inspected the house.
Shri Krishan Vs. Kurukshetra University candidate had full knowledge of fact that
he was short of attendance did not mention this fact in his examination form Held,
its is not fraud, it is duty of University to scrutinise forms and to call for verification
or information in case of doubts University failed to do so estopped from
cancelling the examination of the candidate.
However, there are statutory exceptions to the above rule :
(1) where under given circumstances, the person keeping silence is under duty to
speak.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

31
Example A father selling a horse to his son must tell him if the horse is
unsound, as the son is likely to rely upon his father.
The duty to disclose the truth will arise in all cases where one party reposes
and other party accepts, confidence also arises where one party is utterly
without any means of discovering the truth and has to depend on the good
sense of the other party in absence of any such relationship, there is no duty
to speak.
Haji Ahmad Yarkhan Vs. Abdul Gani Khan - plaintiff spent a sum of money to
mark engagement of his son later discovered the girl to be epileptic broke
off engagement sued other party for compensation for loss suffered due to
deliberate suppression of vital fact Held, law imposes no general duty on any
one to broadcast the blemished of his female relations not even to those who
are contemplating matrimony with them no fiduciary relation between
parties - voidable due to mis-representation no compensation as no fraud.
(2) Where silence is equivalent to speech
Example A says to B, If you do not deny it, I shall presume that the horse
that you are selling me is sound. If B says nothing, his silence is equivalent
to speech.
(3) Change of circumstances - where representation true when made, but
becomes false on account of change in circumstances actually acted upon by
other party duty of the person making the representation to communicate the
change of circumstances.
With Vs. OFlanagan Negotiations for sale of medical practice started in
January representation made that practice was worth 2,000 a year
contract concluded in May when earnings fell to 5 per week due to
defendants serious illness Held, failure to disclose the fall in takings is fraud
contract would be rescinded.
(4) Half-truths even where person is under no duty to disclose a fact, he may be
guilty of fraud by non-disclosure if he voluntarily discloses something and
then stops half way a person may keep silence, but if he speaks, a duty arises
to disclose the whole truth.
Junius Construction Corpn. Vs. Cohen plaintiff purchased a tract of land
contract of sale stated that land subject to the right of Borough (local
government in a small town) to open two streets within the area actually the
Borough had the right to open three streets Held, though seller was under no
duty to mention the projected streets at all, but having undertaken or professed
to mention them, he could not fairly stop halfway plaintiff had right to
rescission.
R.C. Thakkar Vs. Gujarat Housing Board false estimates of costs of
construction given in a tender contractor agreed to some reduction on the
belief that the estimate was correct Held, representations contained in tender
were fraudulent no defence that plaintiff could have discovered the true costs
by reasonable efforts.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

32

(5) If seller fails to inform the buyer as to a latent defect (a defect known to the
seller but not apparent on an ordinary inspection), silence amounts to fraud.
(6) If trustee does not make full disclosure of facts to the beneficiary while
entering into a contract with him as to the property of which he is a trustee his silence as to material facts amount to fraud.
Distinction between fraud and misrepresentation
Basis
Intention
Belief

Tort
Rescission
and damages
Discovery of
truth

Misrepresentation
There is no intention to deceive
the other party. It is innocently
made.
The person making the
representation believes to be
true.

Fraud
There is an intention to deceive
the other party. It is deliberate or
wilful.
The person making the
representation does not believe it
to be true or makes it recklessly
without caring as to whether it is
true or false.
Simple misrepresentation is no
It is a cause of action in tort for
tort.
damages.
The aggrieved party can rescind The aggrieved party can rescind
the contract or sue for restitution. the contract and also sue for
However, there can be no suit for damages.
damages.
The aggrieved party cannot
Where there is active
avoid the contract if he had the
concealment, contract is voidable
means to discover the truth by
even though aggrieved party had
ordinary diligence.
the means to discover the truth
with ordinary diligence.

*****

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

33
Mistake : an erroneous belief about something - may be mistake of law or a mistake
of fact.
Sec.20 where both parties are under mistake as to matter of fact essential to the
agreement the agreement is void.
Sec.20 will come into play when
(1) both the parties to an agreement are mistaken;
(2) their mistake is as to a matter of fact;
(3) the fact about which they are mistaken is essential to the agreement.
Sec.21 a contract is not voidable because it was caused by mistake of law of the
country. However, mistake as to law of a foreign country is treated as mistake of fact
and makes the contract void.
Sec.22 a contract is not voidable merely because it was caused by mistake of one
party as to matter of fact.
Mistake of law (a) Mistake of law of the country (ignorantia juris non excusat , i.e. ignorance of
law is not excuse) contract cannot be avoided.
Example : A and B enter into a contract - on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation contract is not voidable.
But where person enters into a contract by making a mistake of law through
inducement of another (whether innocent or otherwise), the contract is voidable.
(b) Mistake of law of a foreign country - treated as mistake of fact contract is void.
Mistake of fact may be bilateral or unilateral.
Bilateral Mistake both the parties are mistaken as to a matter of fact essential to the
agreement agreement is void.
(1) The mistake must be mutual.
Example A agreed to purchase Bs motor car lying in Bs garage Unknown
to both, the garage and car destroyed by fire a day earlier void agreement.
(2) Mistake must relate to matter of fact essential to the agreement as to what
facts are essential to the agreement depends upon the nature of the promise in
each case.
Galloway Vs. Galloway - man and woman entered into separation agreement
under which man to pay weekly allowance to woman both mistakenly
believe themselves to the lawfully married Held, mutual mistake on a point
of fact which was material to the existence of agreement void agreement.
However, an erroneous view as to value of a thing which forms the subject
matter of agreement is not deemed as mistake of fact
Example A buys an old painting for Rs.5000 mistakenly assumed it to be
an antique actually it was new one and worth only Rs.500 Mistake as to
value of the subject matter not voidable.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

34
Bilateral mistakes can be of following types
(1) Mistake as to the subject matter agreement is void
Example A agreed to buy Bs horse unknown to both, the horse was dead
at the time of bargain agreement is void.
Couturier Vs. Hastie H employed by C as del credere agent to sell Cs cargo
of corn which was in transit H sold the cargo to a third person - Unknown to
both, the corn became fermented in transit and already sold by the master of
the ship at an intermediate port buyer repudiated the contract and H was
sued for the price (being del credere agent) Held, as goods had already been
totally lost before the contract was made, the contract void ab initio - H not
liable.
(2) Mistake as to identity of subject-matter happens when one party intends to
deal in one thing and the other intends to deal in another.
Raffles Vs. Wichelhaus W agreed to buy a cargo of Surat Cotton from R to
arrive ex-Peerless from Bombay - actually two ships by that name sailing
from Bombay, one in October and another in December W meant the former
while R meant the latter Held, mutual mistake and hence no contract.
Even if mistake caused by negligence of third party contract void.
Henkel Vs. Pape A inspected fifty rifles in Bs shop Later, wired to B
send three rifles by mistake of telegraph office, the message transmitted as
send the rifles B sent fifty rifles A accepted three rifles and sent back the
rest Held, there was no contract on account of mutual mistake as to identity
of subject matter however, A liable to pay for three rifles on basis of an
implied contract.
(3) Mistake as to quality of subject matter if the subject matter is qualitatively
different from what the parties thought it to be agreement is void.
Nicholson & Venn Vs. Smith Marriot - table napkins sold at auction - by
description with the crest of Charles I and authentic property of that
monarch actually napkins belonged to King George Held, mistake as to
quality of the subject matter agreement void.
(4) Mistake as to quantity of subject matter if mutual mistake as to quantity of
subject matter agreement void.
Cox Vs. Prentice Silver bar sold under a mistake as to its weight Held
agreement is void
(5) Mistake as to title of subject matter if seller intends to sell something which
he is not entitled to sell agreement is void.
Cooper Vs. Phibbs - uncle had told his nephew, not intending to misrepresent
anything but being in fact in error, that he (uncle) was entitled to a fishery
after uncles death, nephew entered into agreement with uncles daughter to
rent the fishery actually fishery belonged to nephew himself Held the lease
was void.
(6) Mistake as to price of subject matter where mutual mistake as to price
agreement is void.
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Prepared for VIDYASAGAR ACADEMY
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35
Webster Vs. Cecil W offered to buy Cs property for 2000 C declined
thereafter C offered to sell the same property for 1250 - W accepted the
offer, knowing that this offer price was a mistake which should have been for
2250 Held, W knew that offer was a mistake contract void.
(7) Mistake as to possibility of performance - impossibility may be due to
(i) Physical impossibility
Griffith Vs. Brymer - contract for hiring of a room for witnessing the
coronation procession of King Edward VII unknown to the parties,
the procession had already been cancelled Held, the agreement void
for impossibility of performance.
(ii) Legal impossibility if subject matter of contract cannot be done as
per law agreement is void.
Unilateral Mistake - Sec.22 agreement not voidable merely because it was caused
by unilateral mistake as to matter of fact however, it can be allowed as defence
where mistake brought about by other partys misrepresentation or fraud.
Smith Vs. Hughes H wanted to buy old oats for his horses S showed him sample
of oats which he had W mistakenly thought that oats were old when they were
actually new Held, though two minds were not ad idem as to age of the oats, they
certainly were ad idem as to the sale and purchase of them H cannot avoid the
contract.
Exceptions In certain cases, when unilateral mistake goes to the root of the
agreement, agreement is void.
(1) Mistake as to identity of person contracted with if one party represents
himself to be some other person, there is mistake as to the identity of the
person contracted with.
Example A intends to contract with B mistakes C to be B and enters into
contract with him (C) no agreement if B was a material element of contract.
Even in cases where A makes an offer to B, C cannot give get any rights under
the contract by accepting the offer if he does so, contract is void.
Boulton Vs. Jones B purchased goods from H H owed debt to J J placed
order on H J accepted goods from B thinking that they were supplied by H
B had supplied the same intending to set off his debt against H Mistaken
identity of the acceptor no contract. However, B can recover the goods from
J under quasi-contract.
Cundy Vs. Lindsay - Blenkarn ordered goods from Lindsay signed the offer
letter in such a way that L believed it came from well-known firm of
Blenkiron & Co. Held, L never intended to deal with Blenkarn, having heard
of him no contract.
This exception holds good only when identity of contracting party is
important.
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

36
Said Vs. Butt S wanted to go to first night of play B, the managing director
of theatre, gave instructions that ticket be not sold to S because in past S had
published virulent (strong) criticism of its production S got his friend to buy
a ticket theatre manager refused admission to S Held, no contract as
theatre never intended to contract with S.
Where the identity of a party is immaterial to the contract contract is not
void attribute of a party does not affect the contract.
Philips Vs. Brooks N bought jewellery from a jewellers shop presented
himself as Sir George Bullough gave a cheque which bounced jeweller
sued for annulment (cancellation) of contract - Held, jeweller contracted to sell
and deliver jewellery to person who came to his shop here mistake not as to
identity but to attribute of the buyer valid contract.
(2) Mistake as to nature of contract - if document signed under mistaken belief
that they are of different class and character altogether - void contract.
Foster Vs. Mackinnon M, an old man of poor sight, endorsed a bill of
exchange had mistakenly thought it to be a guarantee Held, the mind of the
signer did not accompany the signature no contract.
*****

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

37
Legality of Object : Sec.23
The consideration and objects of a contract are lawful, unless it
(1) is forbidden by law any act punishable under criminal law or any special
legislation or regulations.
Example : (a) A promises to obtain for B employment in public service B
promises to pay Rs.1000 to A unlawful consideration void
agreement.
(b) A promises to drop prosecution instituted against B for robbery
B promises to restore the value of things taken unlawful object
void agreement.
Nandlal Vs. Thomas - A licensed under Excise Act to run liquor shop Act
forbade sale, transfer or sub-lease of licence or creation of partnership in
running of shop A took B into partnership - Held, agreement void as it
would defeat the policy of the law if unapproved persons could find their way
into working liquor shops.
(2)

It defeats the provision of any law though not directly forbidden by law.
Fateh Singh Vs. Sanwal Singh accused required under Criminal Procedure
Code to furnish surety of Rs.5000 for his good behaviour he deposits sum with
defendant and persuades him to become surety after period of suretyship is
over, accused sued defendant for the amount Held, the intention in requiring a
surety is that the surety shall at his own risk see to the appearance of the accused
the purpose of agreement defeated by agreement of above sort agreement
void.
Napier Vs. National Business Agency Ltd. company employed N - weekly
wages of 13 and weekly expense allowance of 6 Held, the expense
allowance a device to evade tax agreement unlawful.
Alexander Vs. Rayson A leased flat to R at rent of 1200 a year two separate
agreements entered into, one for lease at 450 and other for services connected
with flat at 750 A sued R for recovery of instalment of 750 Held,
agreement void as object was to deceive the municipal authorities A could not
recover - R entitled to remain in possession of flat for remainder of term of
lease.

(3)

It is fraudulent.
Example : A, B and C enter into agreement for division of profits to be
acquired by them by fraud object is unlawful void agreement.

Ram Nath Misra Vs. Rajendranath Sanyal - two decree-holders against the
debtor one of them, the plaintiff, got debtors property attached and brought to
sale agreed with defendant , a prospective buyer, that he would not bid against
the defendant and defendant would pay him off property sold to defendant at
very low price Held, the object of the arrangement was fraudulent as it
deprived the other decree-holder of his claim amount which he could have got
had the sale been competitive plaintiff could not recover anything from
defendant.
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Prepared for VIDYASAGAR ACADEMY
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38
(4)

It involves or implies injury to person or property of another property


includes both movable and immovable property.
Ram Swaroop Vs. Bansi Mandar B borrowed Rs.100 from R executed bond
promising to work for L without pay for two years in case of default, B to pay
principal plus exorbitant interest at once Held, contract void as it was
indistinguishable from slavery which involved injury to person of B.
Gherulal Parakh Vs. Mahadeo Dass agreement between some persons to
purchase shares in a company intended to deceit to induce other persons to
believe that there was bona fide market for the shares Held, agreement void.

(5)

(6)

Involves immorality
Baivijli Vs. Nansa Nagar - money given to married woman to obtain divorce
from her husband lender intended to marry the woman Held, agreement was
immoral.

Opposed to public policy harmful to public welfare.


(i)
Agreement of trading with enemy
(ii)
Agreement to commit a crime.
W.H. Smith & Sons Vs. Clinton - A promises to indemnify a firm of printers
and publishers of newspapers against consequences of any libel which it
might publish in the newspaper Held, it was an agreement to commit a
crime and indemnity against it - As promise could not be enforced and the
firm liable to pay damages for published libel.
(iii)
Agreement which interferes with administration of justice it is
opposed to public policy Examples agreement to use improper influence
of any kind with the judges and officers of justice agreement not to
prosecute an offender is for stifling (oppressing) prosecution.
(iv)
Agreement in restraint of legal proceedings
- Example prohibiting any party from enforcing his rights under a contract curtailing
(restricting) the period of limitation prescribed by Law of Limitation
however agreement to refer a dispute to arbitration is valid.
(v)
Trafficking in public offices and titles or for procurement of public
recognition like Padma Vibhushan etc. for monetary consideration.
NVP Pandian Vs. MM Roy - R paid Rs.15,000 to N who agreed to obtain a
medical seat for Rs son N failed to get the seat R filed a suit for refund
Held, agreement against public policy void agreement.
(vi)
Agreement tending to create interest opposed to duty anything
against public or professional duty.
Example A directs his agent B to buy particular house for him B tells A
that it cannot be bought for specific reason - buys the house for himself
against professional duty A can compel B to sell it to him at the price B
paid for it.
(vii)
Agreement in restraint of parental rights
(viii)
Agreement restricting personal liberty.
Horwood Vs. Millars Timber & Trading Co. A debtor agreed with moneylender not to leave his job or borrow money or dispose of his property or
change his residence without lenders written consent held, void agreement
as restricting personal freedom.
(ix)
Agreement in restraint of marriage, other than a minor, is void.
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39
Lowe Vs. Peers P promised to marry L only and none else to pay .2,000 to
L if he married someone else P married X - Held, L could not recover the
agreed sum as agreement in restraint of marriage
(x)
Marriage brokerage agreement.
(xi)
Agreements interfering with marital status.
(xii)
Agreement to defraud creditors or revenue authorities.
(xiii)
Agreement in restraint of trade which interferes with liberty to
engage in any lawful trade, profession or vocation Sec.27.
Shaikh Kalu Vs Ram Saran Bhagat - out of 30 comb-makers in Patna city,
29 agreed to sell their output to R only and none else R free to reject the
goods if no market found for them Held, the agreement restrained from
exercising profession void.
Madhav Chander Vs. Raj Coomar - M and R rival shopkeepers in a
locality in Calcutta R agreed to pay a sum of money to M if he would close
his business in consideration M closed down his business R refused to
pay and M filed a suit for recovery Held, the agreement was void even
though the restriction was a partial restriction, a restriction limited to some
place.
Exceptions to the rule that an agreement in restraint of trade is void :
(a)
Sale of goodwill seller of goodwill may be reasonably
restrained from - carrying on similar business - within a specified local
limits - as long as buyer or any other person deriving title from him
carries on like business.
(b)
Partnership four provisions which validate agreements in
restraint of trade
(i) partner not to carry on any business other than that of the firm.
(ii) outgoing partner not to carry on similar business within a specified
period or within specified local limits.
(iii) in anticipation of dissolution, partners may restrain each other
from carrying on similar business within specified period or within
specified local limits.
(c)
Trade combinations regulations as to opening and closing
of business in a market, licensing of traders, supervisions and control
of dealers and mode of dealing are valid, even though in restraint of
trade.
S.B. Fraser & Co. Vs. Bombay Ice Mfg. Co. agreement between ice
manufacturers fixed the minimum price for sale of ice, proportion of
manufacture which each was to bear and of profits each was to receive
some of them restrained from selling at Poona and some others at
steamers Held, whole object to regulate business and not to restrain it
valid.
Bhola Nath Shankar Das Vs. Lachmi Narain rules of an association
of traders and weighmen restrained members from dealing with
outsiders penalty for breach being fine and expulsion Held, such
restriction not disadvantageous to public nor opposed to public policy
valid.
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40
However, where a combination tends to create monopoly and is against
public interest is void.
Kores Mfg. Co. Ltd. V. Kulok Mfg. Co. Ltd. both companies engaged
in manufacturing similar products involving processes in which
employees likely to acquire knowledge of trade secrets and
confidential information agreed that neither would employer any
person who had been the employee of the other anytime during
previous five years, without the written consent of the other Held,
ban was applicable as much to an unskilled manual labourers who
might have been employed even for a single day as to a highly skilled
and long-term employee who might have acquired confidential
knowledge.
(d)
Exclusive dealing agreements reasonable restriction valid negative stipulation nothing but an ordinary incident of or ancillary to
the positive covenant.
Mackenzie Vs. Striramiah - contract to sell all the salt manufactured to
a firm for five years Held valid as seller encouraged to exercise his
business because he is assured of a certain market for the products of
his labour.
(e)
Service contracts restriction from accepting any other
engagement during his employment is valid.
Charlesworth Vs. MacDonald - A was a physician and surgeon
practising in Zanzibar - B agreed to become As assistant for three
years appointment subject to clause against practising B left service
within a year and began to practise there on his own account Held,
agreement to service preventing persons to serve anyone other during
the term of employment is valid.
Where restriction imposed to protect employer against employee
making use of trade secrets learned in course of employment - such
restriction is valid.
Hivac Ltd. Vs. Park Royal - H employed A on a highly skilled work
with access to manufacturing data in his spare time, A worked for P
on similar work in competition with H Held, A in breach of duty
could be restrained from working for R.
However, restriction on similar engagement after termination of
service is void.
Brahamaputra Tea Company Vs. Scarth employees restrained from
taking service or engaging in any similar business for period of 5 years
after termination of service - Held to be void.
Unlawful and illegal agreements :
Unlawful agreement a void ab initio not enforceable by law affects only the
immediate parties but does not affect the collateral agreements.
Illegal agreement void ab initio taints the collateral agreements with illegality void not only as between immediate parties but also makes collateral agreements
void.
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41
Example : A enters into an agreement with B to manufacture prohibited goods A
takes loan for the purpose from C who knows about the purpose of the loan
agreement between A and C is collateral to the main agreement between A and B,
which is illegal collateral agreement is also illegal.
An illegal agreement is actually forbidden by law but every void agreement may not
be forbidden Thus, every illegal agreement is void, but every void agreement is not
necessarily illegal.
Illegal agreements include acts opposed to public morals e.g. agreement for illicit
cohabitation, agreement to defraud the revenue, agreement to commit a crime or
agreement to do something which endangers public safety No action allowed on
illegal agreement depends on two maxims :
(i) Ex turpi causa non oritur action means no action arises from a base cause
law does not approve of any action arising from base action which is illegal.
(ii) In part delicto, potior est condition defendentis means in cases of equal
guilt, the defendant is in a better position.
Example : A promises to pay B Rs.1000 if he kills T - If B actually kills T, he
cannot recover the amount from A if A has already paid the amount and B
does not kill T, A cannot recover the amount.
The effects of illegality are
(i) collateral agreements also becomes tainted with illegality treated as illegal
even though they might be lawful by themselves.
(ii) No action can be taken for
(a) recovery of money paid or property transferred under an illegal agreement.
(b) Breach of illegal contract.
(iii)
In case of equal guilt, defendant is in better position than plaintiff.
However, the plaintiff can sue for recovery of money paid or property transferred in
following cases
(a) where he is not in part delicto (equal guilt) with the defendant e.g. where he
is induced to enter into agreement by fraud, undue influence or coercion.
Fakir Chand Seth Vs. Dambarudhar Bania - payment made in advance for
purchasing a paddy crop not knowing that a control order was being violated
consideration paid allowed to be recovered.
Mistry Amar Singh Vs. Kulubya - land given to an non-African under a lease
in violation of a law for the protection of Africans in Uganda action brought
about by African party for recovery of rent and possession the other party
pleaded illegality Held, the parties are not in pari delicto, the person injured
may bring his action and defeat the contract.
(b) Where he does not have to rely on the illegal transaction.
(c) Where the agreement is still executory - and he is truly and genuinely
repentant.
Taylor Vs. Bowers debtor executed a transfer to deceive his creditors after
executing the transfer, he summoned meeting of his creditors to effect a
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42
compromise no creditor turned up debtor repented his action and sought to
recover back the property allowed to do so.
(d) where the non-illegal part is severable from the rest of the agreement the
Court will enforce the legal part and reject the illegal one if inseparable, the
whole contract is declared illegal.
Aition Vs. Spickermann house leased on rent - subject to condition that
lessee would also purchase certain chattels at premium lessee occupied the
premises but offered to pay only the natural price lessor sought eviction on
ground that the whole agreement unlawful - Held, the two agreements had two
aspects namely, the agreement of lease and the promise to pay a premium
the latter part was unlawful and being severable from the rest, the lease was
valid.
Unlawful agreement involves non-criminal breach of law do not affect public
morals disproved on grounds of public policy e.g. agreements in restraint of trade,
marriage or legal proceedings.
Gherulal Parekh Vs. Mahadeo Das - partner entered into agreement to indemnify his
co-partner for proportionate of the losses suffered by him in entering into wagering
transactions on behalf of firm Held, wagering being only void, the collateral
agreement of indemnity is fully enforceable.
*****

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43
Void agreements
Sec.2(g) : An agreement which is not enforceable by law is called a void agreement.
The following agreements are void ab initio
1. Agreements by incompetent parties (Sec.11)
2. Agreements made under mutual mistake (Sec.29)
3. Agreements with unlawful consideration or object (Sec.23 and 24)
4. Agreements without consideration (Sec.25)
5. Agreements in restraint of marriage (Sec.26)
6. Agreements in restraint of trade (Sec.27)
7. Agreements in restraint of legal proceedings (Sec.28)
8. Agreements the meaning of which is uncertain (Sec.29)
9. Wagering agreements (Sec.30)
10. Agreements contingent on impossible events (Sec.36)
11. Agreements to do impossible acts (Sec.56)
12. In case of reciprocal promises to do things legal and other things illegal, the
second set of reciprocal promises is void agreement (Sec.57)
Agreements the meaning of which is uncertain (Sec.29) :
Uncertainty may be as to
(i)
existence of, or
(ii)
quality of, or
(iii)
quantity of, or
(iv)
price of, or
(v)
title to,
the subject matter.
Example :
(a). A agrees to sell to B 100 tons of oil - There is uncertainty about the kind of oil
intended - The agreements is void.
(b) A, who deals in turpentine oil only, agrees to sell to B 100 tons of oil - The
nature of As trade clarifies the nature of oil intended to be sold agreement is
valid.
(c) A agrees to sell to B all the grain in my granary at Ramnagar the quantity is
capable of being determined agreement is valid.
(d) Guthyng Vs. Lynn - L promised to pay an extra 5 to G if the horse he purchased
from G proved lucky the promise is too vague to be enforced.
(e) A agreed to pay a certain sum to B when he was able to pay the agreement is
void for uncertainty.
Wagering Agreements/ Wager (Sec.30) a to give money or moneys worth upon
the happening of an uncertain event it is essential that each party under it may either
win or lose whether he will win or lose been dependent upon the issue of the event
if either of the parties may win but cannot lose, it is not a wagering contract.
No suit shall be brought for recovering anything alleged to be won on any wager.
Badrinath Kothari Vs. Meghraj Kothari two persons entered into speculative
transactions into shares one becomes indebted to other promissory note executed
for the payment of that debt Held, wager in nature note is not enforceable.
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44
Though wager is void and unenforceable, it is not forbidden by law Hence,
wagering agreement is not unlawful therefore, transactions collateral to the main
transaction are enforceable.
Gherulal Parekh Vs. Mahadeo Das - partner entered into agreement to indemnify his
co-partner for proportionate of the losses suffered by him in entering into wagering
transactions on behalf of firm Held, wagering being only void, the collateral
agreement of indemnity is fully enforceable.
A principal cannot sue his agent for breach of a wagering agreement or recover any
amount paid on its basis. However, the principal can recover the winnings received
by his agent on successful bets made on his behalf.
Essential of a wagering agreement :
1.
Promise to pay money or moneys worth.
2.
Uncertain event generally contemplates a future event but may also relate
to past even provided the parties are not aware of its result or the time of its
happening.
3.
Mutual chances of gain or loss
Babasaheb Vs. Rajaram - Two wrestlers agreed to play a wrestling match
condition that party failing to appear on the day fixed was to forfeit Rs.500 to
opposite party, and winner to receive Rs.1125 out of gate money - defendant
failed to appear in ring plaintiff sued him for Rs.500 Held, in present case
neither side stood to lose according to result of wrestling match stakes did not
come out of pockets of parties, but out of gate money provided by public
wagering agreement.
In Carlill Vs. Carbolic Smoke Ball Co., the company had no chance of winning,
neither Mrs. Carlill any chance of losing not in nature of wager.
Narayana Ayyangar Vs. K.Vallachami Ambalam - A chit fund does not come
within the scope of wager some members stand a chance to gain, but none of
them stands to lose as getting back of actual amount contributed is assured, the
interval of time, however long it may be, is immaterial.
4.
5.

Neither party has control over the event.


No other interest in the event it forms the difference between wager and
contract of insurance - Every contract of insurance requires for its validity the
existence of insurable interest, which means the risk of loss to which the assured
is likely to be exposed by the happening of the event assured against - however, in
wagering agreement, neither party is running any risk of loss except that which is
created by the agreement itself.
Lottery, which is a game of chance, is a wagering agreement.

Exceptions the following agreements are not wager :


1. Crossword competitions involving a good measure of skill for its successful
solution however, where prizes depend upon a chance, that a lottery (a
wager).
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45
2. Games of skill e.g. picture puzzles or athletic competitions.
3. Horse races where the value of plate, prize or sum of money is Rs.500 or
upwards.
4. Share market transactions in which delivery of stocks and shares is intended to
be given and taken.
5. A contract of insurance.
Difference between insurance and wagering agreements :
Sl.
No.
1

Basis

Contracts of Insurance

Insurable interest

The Assured has an


insurable interest in the
subject matter.
Both the parties have
such interest matter.

Interest in
protection of
subject matter
Value of contract

Benefit

Basis of
agreement

Except life insurance, all


insurances are contract of
indemnity (whose value
is unknown).
It benefits the public.
It is based upon scientific
and actuarial calculation
of risks.

Wagering agreements.
There is no interest in the
subject matter, other than that
created by the agreement
itself.
Only one of the parties is
interested in the protection of
the subject matter.
The amount of the contract is
fixed.
It does not benefit anyone
except the winner.
It is a gamble or game of
chance.

Void Contracts
1.

A contingent contract becomes void when the event collateral


to it becomes impossible (Sec.32.)
2.
A voidable contract becomes void when the party whose
consent is not free repudiates the contract.
3.
A contract becomes void by supervening impossibility or
illegality.
Restitution - (Sec.64) - When voidable contract is rescinded, the party rescinding it
must restore any benefit which he has received under it to the person from whom it
was received.
Sec.65 - When a contract becomes void, the party who has received any benefit
under it, must restore it to the other party or compensate the other by the value of the
benefit.
Sec.65 is not applicable to contracts void ab initio or to contracts by incompetent
parties.
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46
Dharmasey Vs. Ahmedbhai - godown hired for twelve months whole rent paid in
advance after seven months, the godown destroyed by fire without anyones fault
tenant claimed refund of proportionate rent Held, entitled to refund of rent for
remaining five months.
State of Orissa Vs. Rajballav - agreement between government and contractor to
construct a godown advance payment made to contractor work not completed by
contractor government terminated contract Held, government could recover the
amount advanced.
Contingent Contracts : Sec.31: A contract to do or not to do something, if some
event which is collateral to such contract, does not happen conditional one
condition is of uncertain nature e.g. contracts of insurance, indemnity and guarantee.
Example: A contract to pay a sum of money on the destruction of a premises by fire is
contingent contract. however, contract to pay a sum of money on the expiry of a
term or on the death of a person is not a contingent contract because these events are
of a certain nature.
Essentials of contingent contracts :
1.
Performance depends on happening or non-happening in future of
an event.
2.
the event must be uncertain.
3.
the event must be collateral, i.e. incidental, to the contract.
Contingent event includes happening or non-happening of a contingency depending
upon the will of a party example, a contract the performance of which depends upon
the promisees marriage is a contingent contract, though his marriage is a contingency
exclusively within his control.
Rules regarding contingent contracts :
1. Contingent contract cannot be enforced until the collateral event has
happened.
2. In case contingent contract dependent upon happening of collateral event,
such contract become void when such event becomes impossible.
3. If contingent contract dependent upon non-happening of collateral event,
performance of the contract can be enforced when the event becomes
impossible.
4. Where contract contingent upon an act of a person, the event shall become
impossible when such person does anything which makes it impossible for
him to do the act within a definite time or otherwise than under further
contingencies.
Example : 1. A agrees to pay B a sum of money if B marries C C marries D
marriage of B to C is now impossible although it is possible that D may die
and C may afterwards marry B.
5. Contract, contingent upon a specified event happening within a definite time,
becomes void if such specified event does not happen or becomes impossible
before the expiry of that time.
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6. Contracts contingent upon happening of impossible event are void.

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Difference between wagering agreement and contingent contract :
Sl.
No.
1

Basis

Reciprocal
promises
Nature

Void or not

Interest in subject
matter.

Game of chance

Future event

Wagering agreement

Contingent Contract

It consist of reciprocal
promises.
It is essentially of
contingent nature.
It is void.

It does not contain


reciprocal promises.
It may not be of wagering
nature.
It is valid.

Parties have no other


interest in subject matter
other than to win or lose.
It is purely a game of
chance.

The parties have other


interest also in the subject
matter.
It is not a game of
chance, though is
dependent upon
happening or nonhappening of a certain
event.
It is only collateral to the
contract.

It is the sole determining


factor.

* * * * * * * * * * * * * * * ** * * * * * * ** * * * * * * ** * * * * * * ** * * * * * *

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Performance of contract
Performance complete when parties fulfil their respective obligations arising under
the contract within time and manner prescribed in the contract actual performance
or offer to perform must unless such performance dispensed with or excused.
Offer to Perform : Sec.38 : tender to performance equivalent to actual performance
promisor excused from further performance entitled to sue promisee for breach of
contract.
Essentials of valid tender :
1.
Must be unconditional when not in accordance with terms of
contract, it becomes conditional.
2.
Must be made for whole quantity contracted for or for whole
obligation if negligible deviation from terms of contract, may be allowed
keeping in view practical aspect.
Shipton, Anderson & Co. V Weil Bros & Co. contract to deliver 4950 tons of
wheat seller delivered 4950 tons 55 lbs. Held, contract duly performed by
seller.
3.
Must be made by promisor or his duly authorised agent.
4.
Promisor must be in position and be willing to perform his promise.
5.
Must be made at proper time and place tender of goods after business
hours or before due date is not valid tender.
6.
May be made to one of several promisees deemed to have effect as if
tender to all of them.
7.
In case of tender of goods, must give reasonable opportunity for
inspection of goods.
Startup Vs. Macdonald contract to sell 10 tons of linseed oil to be delivered
within last 14 days of March - delivery tendered on 31st March at 8.30 pm
defendant refused to accept goods owing to lateness of hour Held, though hours
unreasonable, defendant could accept delivery before midnight.
8.
In case of tender of money, must be in legal tender if creditor refuses
to accept it, debtor not discharged from debt can be set up as defence by the
debtor.
Refusal to perform promise wholly : Sec.39 :
When promisor refuses to perform his promise wholly promisee entitled to
repudiate the contract deemed to have rescinded a voidable contract bound to
restore all benefits received by him under the contract but if promisee gives tacit
(implied) assent in continuance of contract, he cannot repudiate the contract.
Example : A, a singer, enters into contract with B, a theatre manager A to sing at Bs
theatre two nights every week for next two months for Rs.100 per performance A
wilfully absents herself on sixth night B entitled to repudiate the contract but if B
allows A to sing on seventh night, he has signified tacit continuance barred from
repudiating the contract but entitled to sue for damages.
Contracts of which performance not necessary :
1. when its performance becomes impossible contract unlawful and void.
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Example : A contracts to take in cargo for B at a foreign port As government
afterwards declares war against country in which the foreign port situated
contract becomes void when war is declared.
Taylor Vs. Caldwell defendant agreed to let plaintiff use of their music hall
between certain dates for concert before the first day of concert, hall destroyed
by fire without fault of either party plaintiff sued defendant for their loss
Held, performance depended upon the continued existence of hall performance
becomes impossible on perishing of hall without default of the contractor void.
2. when parties agree to substitute a new contract for it or to rescind or alter it.
3. When promisee dispenses with the performance of promise, either wholly or
in part or extends the time of such performance or accepts any satisfaction
for it.
4. When voidable contract rescinded by person entitled to rescind it.
5. When promisee neglects or refuses to afford the promisor reasonable facilities
for performance of his promise.
Example : A contracts B for repair of Bs house B neglects or refuses to
point out the places at which his house requires repairs A excused for nonperformance of contract due to such neglect or refusal.
6. when it is illegal.
Persons entitled to perform the promise :
1. Promisor himself contracts involving exercise of personal skill, volition or
diligence of the promisor, e.g. contract to paint a picture or sing, or founded on
personal confidence between the parties, e.g. contract to marry.
2. Agent duly authorised only when personal consideration is not the
foundation of the contract.
3. Legal representatives contracts other than those involving personal
consideration - liability limited to value of the property inherited.
Contracts involving personal skill of promisor comes to end on death
of the promisor.
4. Third persons when promisee accepts performance of the promise from third
person, he is debarred from afterwards enforcing it against the promisor.
5. Joint promisors any or all of the joint promisors can fulfil the promise
valid discharge.
Rules regarding devolution of joint liabilities :
Unless specified to the contrary, all joint promisors must jointly fulfil the promise if
any promisor dies, his legal representatives liable jointly.
1. Unless express agreement to the contrary, any one of joint promisor may be
compelled to perform means liability is joint and several.
2. Joint promisor compelled to perform may claim contribution from other joint
promisors.
3. Sharing of loss arising from default in case of any joint promisor committing
a default in contribution, remaining joint promisors must bear the loss arising
from such default.
Example : A, B and C jointly promise to pay Rs.3,000 to D C compelled to
pay the whole sum A becomes insolvent As assets sufficient to pay off
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51
one-half of his debts C entitled to recover Rs.500 (one-half of Rs.1000) from
As estate and Rs.1250 (one-half of remaining Rs.2500) from B.
4. Release of one joint promisor does not discharge other joint promisors
released joint promisor continues to be liable to the other joint promisors.
Rules regarding devolution of joint rights :
Unless specified to the contrary, right to claim performance lies with all joint
promisees if any one joint promisee dies, right rests with his legal representatives to
claim jointly with other promisees suit for enforcement must be instituted by all the
joint promisees.
Persons entitled to demand performance :
1. Promisee only.
2. In few cases, third party e.g. beneficiary of a trust, beneficiary of marriage or
family settlement, principal etc.
3. Legal representatives in case of death of promisee.
Time and place of performance : As specified in the agreement.
1. When no application to be made and no time specified promisor to perform
without application by promisee within reasonable time.
2. When time is specified and no application to be made if date or day
specified, promisor to perform without application by promisee during
business hours at place and on day as specified.
3. When application for performance on certain day and place duty of promisee
to apply for performance at proper place and within business hours.
4. Application by promisor to promisee when no place fixed, duty of promisor
to apply to promisee to appoint a reasonable place for performance of promise.
5. Performance in manner and at time specified by promisee.
Reciprocal promises promises which form consideration or part of consideration
for each other. Types are 1. Mutual and independent each party must perform independently.
Example : A agrees to pay the price of goods to B on 1 st January. B promises
to supply the goods on 20th January promises are mutual and independent.
2. Conditional and dependent - where performance of one set of promise is
dependent upon prior performance of the other set.
Example A promises to supply goods to B if B gives him payment in
advance if B does not give the advance, A need not perform his promise.
3. Mutual and concurrent both set of promises to be performed simultaneously
e.g. sale of goods for cash.
Rules regarding performance of reciprocal promises :
1. Simultaneous performance promisor need not perform his promise unless
promisee ready and willing to perform his promise.
2. Order of performance where order expressly specified in contract
performance must be in the specified order if no order specified then in the
order which nature of transaction requires.

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52
3. Effect of one party preventing another from performing his promise contract
voidable at the option of the party so prevented also entitled to sue for
compensation.
4. Effect of default of promise to be performed first cannot claim performance
of promise from the other party other party can sue for compensation.
5. Reciprocal promises to do things legal and also other things illegal if
severable, the legal part is valid while the illegal part is void - if not severable,
then both set of promises are illegal and void.
Time as essence of contract :
Performance of contract within specified time is essential breach entitles the other
party to consider it as repudiation Time is essence or not in following types of
contracts
1. Commercial transactions time is important factor
Mahabir Prasad Rungta V Durga Datt transporter contracted to transport
coal from colliery to railway station colliery owner to keep the road in repair
and arrange for petrol colliery owner to pay for work done by 10 th of next
month transporter rescinded contract on allegation of non performance of
promises by colliery owner Held, in commercial transactions time is
ordinarily of the essence of the contract.
2. Construction contracts being construction a commercial service, time is
essence of contract.
3. Sale transactions courts to determine whether time factor essential or not
depending on facts of each case.
China Cotton Exporters V. Bihari lal Ramchandra Cotton Mills Ltd.
appellants carried on import business contracted to supply quantity of Italian
staple fibre cotton to respondent mill shipment to take place in October or
November contract included remark this contract is subject to import
licence and therefore the shipment date is not guaranteed part of goods
supplied and accepted rest not supplied Held, in spite of shipment date
being not guaranteed, supply within October/November, 1950 was guaranteed
time was essence of contract buyer entitled to avoid the contract.
4. Land and property dealings normally in transactions of immovable property,
time is not essence of the contract intention to be ascertained from other
factors like nature of property, possibility of price fluctuation etc.
5. Sale of shares time is important factor being such transaction of commercial
nature.
6. In non-commercial transactions, ordinarily presumed that time is not of the
essence of contract.

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

53
Appropriation of payments by creditor :
When a debtor owes several debts to a creditor and makes payment insufficient to
satisfy the whole of his indebtedness, the following rules regarding appropriation of
the payment made
(i)
Where the debtor intimates if express intimation at time of actual
payment that payment to be applied towards discharge of particular debt
creditor must do so if no express intimation, circumstances to be looked into
for appropriation.
(ii)
if no express intimation by debtor, and circumstances are not indicative appropriation according to discretion of creditor can also apply to a time
barred debt however, cannot apply to payment of a disputed or unlawful debt
until declaration of appropriation to debtor, creditor can also alter the
appropriation.
Rulia Devi V Raghunath Prasad - unless specified to the contrary, payment to
be first applied to the interest - after interest fully paid off, appropriation
towards the principal.
(iii)
Where debtor does not intimate and creditor fails to appropriate
appropriation in chronological order, i.e. in order of time if debts are of
equal standing, payment to be applied in discharge of each debt
proportionately.
Rule in Claytons Case : applicability where parties have several distinct debts
between them and not to a single debt payable by instalments unless there is a
contrary intention, appropriation in order of date first item on debit side to be
discharged by first item on credit side.
Assignment of contracts - transfer of contractual rights and liabilities to third party
with or without concurrence of the other party to the contract assignment requires
consideration between assignor and assignee if no consideration, assignment
revocable by assignor third party to have same right of rescission against assignee as
he had against assignor notice to debtor must if no notice given to debtor, payment
made by debtor to assignor himself will constitute good discharge.
Example : If A owes Rs. 500 to B and B owes similar amount to C B has right to
receive from A and is under liability to pay C B can ask A to pay directly to C if A
accepts, that will be assignment of Bs right to C.
Assignment by operation of law by either of following two ways
(i)
Death upon death of a party his rights and liabilities devolve on
his heirs and legal representatives (except contracts requiring personal skill or
services)
(ii)
Insolvency on insolvency, rights and liabilities incurred prior to
adjudication pass to Official Receiver or Assignee.
Assignment by act of parties - by wilful assignment.
Assignment of contractual obligations subject to following rules
(i)
Contractual obligations involving personal skill cannot be assigned.
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54
(ii)

Promisor cannot assign his liabilities under a contract promisee cannot


be compelled to accept any other person as the person liable to him on the
promise.
Robson Sharpe V Drummond - D hired carriage from S at yearly rent for
five years S undertook to paint the carriage every and keep it under
repair contract with S alone - S retired from business after three years
R, a partner of S, informed D that he would maintain the carriage and
receive payment D refused to deal with R and returned the carriage Held, D entitled to do so.

(iii)

Contractual obligations can be performed through agent, unless personal


skill involved however, original party remains liable under the contract.

(iv)

Promisor may transfer his liability under consent of promisee and


transferee in such cases, substitution of old contract by a new contract novation takes place only by tripartite agreement between parties.

Assignment of contractual rights : Subject to following rules


(i)
Rights and benefits under contract not involving personal skill may be
assigned subject to all equities between original parties.
(ii)
Actionable claim (e.g. money debt, shares held in a company) can be
assigned must be through an instrument in writing notice to debtor
must.

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

55
Discharge of contract
Discharge/termination of contract all rights and obligations under contract cease
may be discharged by
(i)
By performance
(ii)
By agreement or consent
(iii)
By impossibility of performance
(iv)
By lapse of time
(v)
By operation of law
(vi)
By breach of contract.
1. Discharge by performance both parties fulfil their contractual obligations within time - in prescribed manner if only party fulfils its obligations, only
that party discharged gets right of action against other party for breach.
May be
(a) Actual performance when both parties discharge their obligations.
(b) Attempted or tender performance an offer to perform where
promisor offers to perform, but promisee refuses to accept
performance, tender is equivalent to actual performance, except in case
of tender of money tenderer discharged without prejudice to his
rights.
2. Discharge by agreement or consent a thing may be destroyed in the same
manner in which it is constituted
Various methods are
(a) Novation new contract substitutes existing one either between same
parties or between one of the existing parties and a third party must
take place before expiry of old contract in case new contract
enforceable, parties can fall back upon the old contract.
Example : (i) A owes money to B enters into agreement with B and
gives him mortgage of his (As) estate new contract replaces the old
one.
(ii) Shanker Lal Damodar V A. Ajaipal - existing mortgage discharged
by substitution of new agreement of mortgage new agreement not
enforceable for want of registration Held, parties could fall back
upon the original mortgage.
(b) Rescission when all or some terms of contract are cancelled may be
by mutual consent or on failure to perform by one party party
rescinding a voidable contract has to restore benefits received by him
under the contract.
Rescission may be (i) either total, or
(ii) partial Rescinding some terms of contract
Substituting new terms for old ones.
Adding new terms without modifying
any old terms.
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56

(c) Alteration modification of one or more terms of old contract by


mutual consent old contract deemed to be discharged.
(d) Remission acceptance of lesser fulfilment of promise made e.g.
acceptance of lesser amount than due in discharge of the whole debt
consideration not necessary for remission.
(e) Waiver mutual abandonment of rights by parties to the contract no
consideration necessary for waiver.
(f) Merger when inferior right accruing to a party under contract merges
with superior right accruing to same party under same or other
contract.
Example : P holds a property under a lease agreement later P buys
the said property under a different agreement Ps rights as lessee
merge into his rights as an owner
3. Discharge by impossibility of performance also called pre-contractual or
initial impossibility - may fall into two categories
(a) Impossibility existing at time of agreement void ab initio based on
maxims (i) lexion cogit ad impossibilia, i.e. law does not recognise
what is impossible, and (ii) impossibilium nulla obligato est, i.e. what
is impossible does not create an obligation may be known or
unknown to parties.
Couturier Vs. Hastie H employed by C as del credere agent to sell
Cs cargo of corn which was in transit H sold the cargo to a third
person - Unknown to both, the corn became fermented in transit and
already sold by the master of the ship at an intermediate port buyer
repudiated the contract and H was sued for the price (being del credere
agent) Held, as goods had already been totally lost before the
contract was made, the contract void ab initio due to impossibility of
performance - H not liable.
(b) Impossibility arising subsequent to formation of contract also known
as post contractual or supervening impossibility contract becomes
void such act becomes impossible or unlawful normally parties not
discharged by supervening impossibility and are liable for damages
however, if caused by circumstances beyond their control, parties
discharged from further performance may be due to following
reasons
(i) Destruction of subject matter without fault of parties contract
discharged.
Taylor Vs. Caldwell defendant agreed to let plaintiff use of their
music hall between certain dates for concert before the first day of
concert, hall destroyed by fire without fault of either party plaintiff
sued defendant for their loss Held, performance depended upon the
continued existence of hall performance becomes impossible on
perishing of hall without default of the contractor void.
Nickoll & Knight V Ashton, Edridge & Co. cargo of cotton seed to
be shipped by particular ship before shipping, ship damaged by
stranding loading of cargo impossible Held, contract
discharged.
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57
(ii) Non-existence or non-occurrence of particular state of things also
called frustration of contract.
Example A and B contract to marry each other before date fixed
for marriage, A goes mad contract becomes void.
Krell V Henry H hired flat from K for June 26 and 27, 1902 for
witnessing coronation procession of Kind Edward VII K knew of
Hs purpose coronation procession cancelled due to illness of
King Held, cancellation discharged the contract H excused
from paying the rent of the flat.
(iii)

Death or incapacity for personal service


Robinson V Davison R undertook to perform at concert for
certain price before she could perform, she was taken seriously ill
Held, she was discharged due to illness.

(iv) Change of law


Baily V De Crespigny - D leased land to B agreed to erect a
building on adjoining land subsequently, the adjoining land
acquired by railway company under statutory authority Held, D
excused from performance of contract.
Noor Bux V Kalyan - A agreed to transport Bs goods
subsequently, As trucks requisitioned by government under
statutory power Held, contract discharged
(v) Outbreak of war contract entered into with alien enemy during
war is unlawful and void contracts entered into before outbreak
of war, are suspended during war and may be revived after the war
is over.
In following cases, contract not discharged on grounds of supervening
impossibility
(a) Difficulty of performance may be due to unforeseen events or delays
Blackburn Bobbin Co. V Allen & Sons A sold Finland timber to B - to be
delivered between July and September Before actual delivery, war
breaks out in August transport disorganised A unable to deliver Held,
A not discharged.
Tsakiroglou & Co. Ltd. V Noblee Thori G.m.b.H. A agreed to sell 300
tons of Sudan groundnuts to B c.i.f. Hamburg usual route via Suez Canal
Shipment to be made in November/December, 1956 canal closed on
November 2, 1956 reopened only in following April A refused to ship
goods via Cape of Good Hope pleaded contract frustrated by reason of
closing of Suez Canal Held, contract not frustrated as A could have
transported goods via Cape of Good Hope.
(b) Commercial impossibility contract not discharged on non-realisation of
expected high profits or increase in cost of acquisition because of outbreak
of war or inflation or sudden depreciation of money.
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58
Karl Ettlinger V Chagandas & Co. A promised to send goods from
Bombay to Antwerp in September before shipment, war breaks out
sharp increase in shipping rates Held, contract not discharged.
(c) Impossibility due to failure of third person where non-performance due
to default of third person on whose work the promisor relied contract not
discharged.
Harnandrai Fulchand V Pragdas A entered into contract with B for sale
of certain type of cloth to be produced by C C did not manufacture that
cloth- Held, A liable for damages.
Ganga Saran V Ram Charan A agreed to sell to B specified quantity of
cotton goods to be manufactured by a particular mill time schedule
agreed upon for delivery mill failed to produce goods - A could not fulfil
his agreement with B Held, B entitled to recover damages from A.
(d) Strikes, lock-outs or civil disturbances
Budget V Binnington Unloading of ship delayed beyond date due to
strike by dock workers Held, ship-owners entitled to damages, the
impossibility of performance being no excuse.
Jacobs V Credit Lyonnais A agreed to supply to B certain goods procured
from Algeria goods not produced due to riots and civil disturbance in
Algeria Held, there was no excuse for non-performance of contract.
(e) Failure of one of the objects where contract entered into with several
objects, failure of one of them does not discharge the contract.
Herne Bay Steamboat Co. V Hutton HB agreed to let out boat to H for
viewing a naval review on occasion of coronation of Edward VII and for
sailing around the fleet naval review cancelled due to kings illness but
fleet assembled boat could be used to sail around the fleet Held,
contract not discharged.
4. Discharge by lapse of time due to the performance becoming time barred on
applicability of the Limitation Act, 1963.
5. Discharge by operation of law(i)
by death contracts involving personal skill or ability terminated
on death of promisor in other contracts, rights and liabilities devolve
on legal representatives
(ii)
by merger - when inferior right accruing to a party under contract
merges with superior right accruing to same party under same or other
contract.
Example : P holds a property under a lease agreement later P buys
the said property under a different agreement Ps rights as lessee
merge into his rights as an owner
(iii)
by insolvency person adjudged insolvent discharged from all
liabilities incurred prior to such adjudication.
(iv)
By unauthorised alteration of terms of the written agreement
where a party makes any material alteration without consent of other
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59
party voidable at the option of other party if however alteration is
not material, parties may opt to carry out the common intention.
6. Discharge by breach of contract non-fulfilment of contractual obligation may be either
(i)
Actual breach of contract may take place (a) at the time when performance due one party fails or refuses to
perform his obligation under the contract if time is not essence of
contract, the other party may accept delayed performance subject to
payment of compensation.
(b) During the performance of contract non performance by one party
other party entitled to sue for breach of contract - may be by

Express repudiation either by word or act.


Cort V Ambergate etc. Rly. Co. C contracted with railway
company to supply 300 tons of railway chairs at specified price to
be delivered in instalments after delivery of 1.787 tons
completed, railway company asked C to stop further delivery
Held, railway company liable for breach of contract.

(ii)

Implied repudiation impossibility created by act of a party


to contract tantamounts to breach of contract other party
discharged from further performance.
ONeil V. Armstrong P, a British subject, engaged by Captain of a
warship owned by Japanese government to act as fireman
Japanese government declared war on China P was informed that
the performance of contract would bring him under penalties of
Foreign Enlistment Act P left the ship Held, he was entitled to
recover the wages agreed upon.

Anticipatory breach of contract in executory contract


(performance still due), one party repudiates his obligation under the
contract before the time for performance arrives other party absolved
from performance of his obligation under the contract may also sue for
breach of contract
May be done by
Express renunciation e.g. before date of actual delivery,
supplier intimates the buyer that he is not going to supply the
goods.
Some act so that performance becomes impossible
Lovestock V Franklyn - A promised to assign to B within seven
years, all his interest in a lease for a sum of .140 before
expiry of seven years, A assigned his interest to another person
Held, this was anticipatory breach of contract by implied
repudiation.
Anticipatory breach does not necessarily discharge the contract, unless the
promisee so chooses.

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

60
Hochster V. De La Tour D engaged H on 12th April to enter into his
services as courier to accompany him upon a tour employment to
commence on 1st June on 11th May, D wrote to H telling him that his
services were no longer required H brought a suit for damages although
time for performance had not yet arrived Held, suit of H tenable
entitled to damages.
If promisee refuses to accept repudiation by promisor and treats it as alive,
the consequences may be
(i)
promisor may perform his promise when the time for
performance arrives and promisee is bound to accept the
performance.
(ii)
while the contract is still alive, a supervening impossibility may
discharge the contract promisee loses his right to sue for
damages.
Avery V. Bowden B chartered As ship agreed to load it with
cargo within 45 days at Odessa when ship reached Odessa, B
unable to supply the cargo A did not accept refusal and
continued to demand cargo before expiry of 45 days, war
breaks out rendering performance of contract impossible
Held, contract discharged and A could not sue for damages.
Measure of damages in anticipatory breach of contract
(i)
if contract ended by promisee at once damages will be measured
by difference between price prevailing on the date of breach and
the contract price.
(ii)
If contract kept alive till the date of performance measure of
damages will be difference between price prevailing on the date of
performance and the contract price.
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Prepared for VIDYASAGAR ACADEMY
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61
Law of indemnity and guarantee
Contract of indemnity : contract whereby one party promises to save the other party
from loss caused to him by the conduct of the promisor himself or any other person
a class of contingent contracts - promisor is called indemnifier promisee is called
indemnity-holder or indemnified.
Example : A and B claim certain goods from a railway company as rival owners - A
takes delivery of the goods by agreeing to compensate the railway company against
loss in case B turns to be the true owner contract of indemnity between A and
railway company.
May be express or implied implied contract of indemnity may be inferred from the
circumstances of the case or relationship of the parties.
Example : T instructs A to sell certain cattle belonging to O O held A liable and
recovered damages from him Held, contract of indemnity implied from Ts conduct
in asking A to sell the cattle A entitled to recover the loss from T.
Rights of indemnity-holder when sued - entitled to recover from the indemnifier :
(i)
all damages which he may be compelled to pay in any suit in respect of
any matter to which promise to indemnify applies.
(ii)
All costs which he may be compelled to pay in bringing or defending any
such suit but must have acted prudently.
(iii)
All sums which he may have paid under the terms of any compromise of
any such suit compromise should not be contrary to the orders of the
indemnifier should be prudent or authorised by the indemnifier.
Rights of indemnifier Similar to rights of surety (printed later)
Contract of guarantee : contract to perform the promise or discharge the liability
of a third person in case of his default may be written or oral may be express or
implied can also be inferred from the course of conduct of the parties.
Surety - Person giving the guarantee or the guarantor
Principal Debtor person in respect of whose default the guarantee is given.
Creditor person to whom the guarantee is given.
Essential features of contract of guarantee :
1.
Concurrence requires concurrence of all the three parties,
viz. the principal debtor, surety and the creditor.
2.
Principal Debt guarantee secures payment of a recoverable
debt of no principal debt, there can be no valid guarantee - primarily liability
is that of principal debtor liability of surety is secondary which arises when
there is default by principal debtor.
In following cases guarantee of void debt is enforceable :
(a)
guarantee given by directors of a company securing payment
of their companys loan which was void as being ultra vires - enforceable
against directors.
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62

(b)

3.

Guarantee of minors debt - if debt is void, the contract of


the surety is not collateral but a principal contract - surety liable as
principal debtor himself

Fulfilment of all essentials of a valid contract - consideration


received by principal debtor is sufficient for the surety benefit to the surety
himself is not necessary.
Example : B requests A to sell and deliver to him goods on credit A agrees to
do so provided C will guarantee the payment of the price of the goods C
promises to guarantee the payment in consideration of As promise to deliver the
goods this is sufficient consideration for Cs promise.
Example : A sells and delivers goods to B afterwards C requests A to forbear
to sue B for the debt for a year in return, C promises to pay for them in default
of payment by B A agrees to forbear as requested this is sufficient
consideration for promise.
Example : A sells and delivers goods to B afterwards C, without
consideration, agrees to pay for them in default of B the agreement is void
being without consideration.

4.

Writing not necessary contract of guarantee may be oral or


written may also be express or implied from the circumstances of the case.

Guarantee is not a contract of uberrimae fides or one of absolute faith it does not
require full disclosure of all material facts by principal debtor or creditor to the surety
before the contract is entered into.
Sec 142 : a guarantee obtained by means of misrepresentation made by creditor or
with his knowledge and assent, concerning a material party of the transaction, is
invalid.
Sec.143 : a guarantee obtained by a creditor by means of keeping silence as to
material circumstances is invalid.
Fraud or misrepresentation on the part of principal debtor is not enough to set aside
the contract unless the creditor is a party to it or had knowledge about it in case of
guarantee given to a banker, no obligation lies on banker to inform the intending
surety of circumstances affecting the credit of the principal debtor.
National Provincial Bank of England V Glanusk S guaranteed Ps account with bank
afterwards, P drew on this account and paid off an overdraft he had with another
bank Bank suspicious that P was defrauding S but did not communicate its
suspicions to S Held, bank under no obligation to disclose to the surety guarantee
not discharged.
However, if guarantee is of nature of an insurance (as in fidelity guarantee), all
material facts must be disclosed otherwise voidable at option of surety.
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63
London General Omnibus Co. V Holloway L employed P as clerk to collect money
P misappropriated some receipts L threatened to dismiss P loss made good by
Ps relations - L agreed to retain P in service on having a fidelity guarantee H gave
his guarantee L did not made disclosure of Ps previous dishonesty Held, the surety believed he was making himself answerable for a presumably honest
man, not for a known thief owning to non-disclosure by L, guarantee could not be
enforced against H.
Co-operative Commission Shop Ltd V. Udham Singh fresh guarantees obtained for
the fidelity of a manager of bank without disclosing his previous defalcations
(misappropriation/embezzlement) Held, sureties not liable for further defalcation.
Distinction between a contract of indemnity and a contract of guarantee
Sl.
No.
1

4
5

Basis

Contract of indemnity

Contract of guarantee

No. of
parties

There are two parties the


There are three parties- the
indemnifier (promisor) and the creditor, the principal debtor
indemnified/indemnity-holder and the surety.
(promisee)
Type of
The liability of the indemnifier The liability of the surety to
liability
to the indemnified is primary creditor is collateral/secondary;
and independent.
the primary liability being of
the principal debtor.
No. of
Only one contract, i.e. between There are three contracts : one
contract(s) the indemnified
between the principal debtor
and the creditor, the second
between the creditor and the
surety (guarantee) and the
third between the surety and
the principal debtor
((indemnity).
Request to Not necessary for indemnifier
Surety gives the guarantee at
contract
to act at request of the
the request of the surety.
indemnified.
Arising of Liability of indemnifier arises
The liability of principal
liability
only on happening of
debtor is already there on an
contingency.
existing debt; the liability of
surety arises only on default
by the principal debtor.
Right to
Indemnifier cannot sue a third On discharging the debt of the
sue
party for loss in his own name principal debtor, the surety
unless there is assignment in
steps into the shoes of the
his favour.
creditor and can sue the
principal debtor in his own
right.

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64
Kinds of guarantee - May be
(i)
for repayment of a debt existing or future.
(ii)
for payment of the price of goods sold on credit, or
(iii)
for good conduct or honesty of a person employed in a particular office
(known as fidelity guarantee).
Can also be differentiated as (a) Specific guarantee extends to a single transaction or debt comes to end
when the guaranteed debt is discharged or the promise is performed.
(b) Continuing guarantee : extends to series of transactions liability of surety
extends to all transactions contemplated unless revocation of guarantee may
also cover continuing transactions for a fixed period.
Example : S guarantees payment to C to the amount of Rs.10,000 for any
goods he supplies to P from time to time C supplies P with goods to the
value of above Rs.10,000 P pays for it afterwards C supplies goods to the
value of Rs.20,000 P fails to pay guarantee of S is a continuing one and he
is liable to C to the extent of Rs.10,000.
Kay V Groves - G provides guarantee in following terms I hereby agree to be
answerable to K for the amount of five sacks of flour to be delivered to T,
payable in one month five sacks actually supplied T paid for them further supplies made during the same month for which T failed to pay Held,
it was not a continuing guarantee to cover subsequent deliveries though not
exceeding in the whole five sacks G not liable for various subsequent
parcels.
Revocation of continuing guarantee - revocation can be as to future
transactions only modes :
(i)
By notice of revocation by surety to the creditor.
Offord V Davies S stands surety for P for any amounts which C may
lend to P from time to time in the next 12 months upto a maximum of
Rs.10,000 after 3 months, S revokes the guarantee when C had lent
Rs.3,000 to P S discharged from all liability to C for subsequent
loans but remains liable for Rs.3,000 on default of P.
(ii)

By death of surety however, liability for previous transactions


remain.

(iii)

By other modes novation, variation of terms of contract, release/


discharge of principal debtor, compounding with principal debtor,
creditors act or omission impairing suretys eventual remedy or loss of
security.

Extent of suretys liability :


1. Suretys liability co-extensive with that of principal debtor, unless specified to
the contrary it may be made less than that of principal debtor but never
greater creditor can sue surety without suing the principal debtor.
2. suretys liability may be for a part of the entire debt or for the entire debt
subject to a limit.
3. May be a continuing guarantee - may be unlimited or upto a specified limit.
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65
4. Where original agreement is void or voidable - surety liable as principal debtor
in such cases, suretys liability is principal one and not collateral
5. If creditor does not sue the principal debtor within period of limitation surety
is not discharged.
6. Death of principal debtor or his discharge by law does not release the surety
from his obligations.
Rights of surety :
1. Against the creditor
(i)
Right to require creditor to sue principal debtor first liable to
indemnify creditor for any expense or loss therefrom in case of
fidelity guarantee, he can ask the creditor to dismiss the principal
debtor in case of proven dishonesty.
(ii)
Right to set-off or counter-claim which debtor has against the
creditor.
(iii)
On payment of the guaranteed debt, right to claim from creditor all
the securities which he holds.
(iv)
Right to equities which creditor could have enforced against the
principal debtor or persons claiming through him.
Example : C advances to P Rs,2,000 on guarantee of S C also takes
further security for Rs.2,000 by way of pledge of Ps furniture C
cancels pledge P becomes insolvent S is discharged from liability
to the amount of the value of furniture.
(v)
Right of subrogation after payment of guaranteed debt by surety,
surety steps into shoes of creditor gets right to sue principal debtor
for recovery.
2. Against the principal-debtor
(i)
Right to be relieved from liability before payment becomes due
debt must be ascertained surety can compel principal debtor to
relieve him from guarantee by paying off the debt.
(ii)
Right to indemnity after payment made by surety to creditor,
surety entitled to recover that amount alongwith any damage sustained
from the principal debtor.
Example : P indebted to C S is surety C sues S for recovery of debt
S defends suit having reasonable grounds to do so S compelled to
pay C amount of debt with costs S entitled to recover from P amount
of debt as well as costs paid by him.
3. Against co-sureties
(i)
Right of contribution each liable to contribute equally liability
may be limited to a maximum amount by each one if any one makes
payment to creditor, he is entitled to claim contribution from other cosureties.
(ii)

Right on release of co-surety even though creditor may release


any of the co-sureties from his liability, the released co-surety will
remain liable to others for contribution in event of default.

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Discharge of surety :
1.

Discharge by revocation :
(i)
Revocation by surety by giving notice continuing guarantee can
be revoked as to future transactions by giving notice specific guarantee
cannot be revoked after liability has accrued.
(ii)
Revocation by death continuing guarantee revoked as to future
transactions on death of surety estate not liable for transactions after death
even if creditor has no notice of death.
(iii)
Revocation by novation substitution of new contract for the old
one either between same parties or between any one of old parties and a
new one mutual discharge of old contract forms consideration for the new
one.

2.

Discharge by conduct of the creditor


(i) Variance in terms of contract without the consent of surety immaterial
whether variation prejudicial to surety or not - discharged as to future
transactions where guarantee to perform several obligations, variance in
nature of one will not discharge the rest.
Example : S guaranteed payment for goods supplied by C to P condition
that 18 months credit to be given C gives only 12 months credit S is
discharged.
General Steam Navigation Co. V Rolt P contracted to built ship for C
contract money payable in instalments as work reached certain stages of
completion S became surety for due performance by P C allowed P to
draw large portion of last two instalments before they were due Held, S
discharged from liability.
(ii) Discharge of principal debtor by creditor wilful act or omission by creditor
- surety is also released but surety is not discharged by operation of law
omission of creditor to sue within the period of limitation does not discharge
the surety.
Hewison V Rickets - C let goods to P under hire-purchase agreement S
guaranteed the payment of instalments On instalments being in arrears, C
seized the goods and determined the contract then sued S on his guarantee
Held, as C had determined the contract, he could not recover from S.
Example : P contracts with C to build a house for C within a stipulated time
C has to supply the timber S guarantees performance by P C omits to
supply the timber S discharged from suretyship.
Example : C employs P at one place S stood surety for P this
employment terminated P employed by C at a different place C takes
security bond from another person S is discharged.
(iii) Compounding by creditor with principal debtor contract by which creditor
makes composition with or promises to give time to, or not to sue the
principal debtor surety is discharged unless he assents to such contract.

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67
Midland Motor Showrooms Ltd V Newman - P purchased motor car from C
under hire-purchase agreement S guarantees performance of the contract
for valuable consideration, C gives further time to P for payment of one of
the instalments Held, P discharged from any further liability.
But in the following cases the surety is not discharged :
(a)
where contract to give time to principal debtor is made by
creditor with a third person and not with the principal debtor.
(b)
Mere forbearance on part of creditor to sue the principal or to
enforce any other remedy against him, in the absence of anything to
the contrary in the guarantee.
(c)
Release of one of the co-surety by the creditor does not
discharge the other co-sureties the surety so released is not
discharged from his liability to the other sureties.
(iv) Creditors act or omission impairing suretys eventual remedy against
principal debtor.
General Steam Navigation Co. V Rolt P contracted to built ship for C
contract money payable in instalments as work reached certain stages of
completion S became surety for due performance by P C allowed P to
draw large portion of last two instalments before they were due Held, S
discharged from liability.
Example : S gives guarantee for fidelity of a manager of bank manager
indulges in malpractices directors wilfully ignore it S stands discharged
from obligation by conduct of the directors
(v) Loss of security if creditor loses any security given to him at the time of
contract of guarantee, or parts with it without consent of surety, surety is
discharged to the extent of value of security if separate debts secured by
separate securities, loss of one security does not discharge the other debts.
Example : C advances to P Rs,2,000 on guarantee of S C also takes further
security for Rs.2,000 by way of pledge of Ps furniture C cancels pledge
P becomes insolvent S is discharged from liability to the amount of the
value of furniture.
3.
(i)
(ii)

Discharge by invalidation Guarantee obtained by misrepresentation concerning a material fact


with knowledge or consent of creditor guarantee invalid.
Guarantee obtained by concealment of a material fact is invalid.
London General Omnibus Co. V Holloway L employed P as clerk to
collect money P misappropriated some receipts L threatened to dismiss
P loss made good by Ps relations - L agreed to retain P in service on
having a fidelity guarantee H gave his guarantee L did not made
disclosure of Ps previous dishonesty -

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Held, the surety believed he was making himself answerable for a
presumably honest man, not for a known thief owning to non-disclosure
by L, guarantee could not be enforced against H.
(iii)

Guarantee on contract that creditor shall not act on it until a co-surety


joins guarantee invalid if that other person does not join.
Example : S2 signed a guarantee given to bank though it was intended to
be joint and several guarantee of S 1, S2, S3 and S4 S4 died without signing
bank did not agree with S1, S2 and S3 to dispense with signature of S4
Held, S2 not liable on guarantee.

(iv)

Failure of consideration discharges the surety.


Example : P agrees to pay maintenance to C if C marries A S guarantees
performance of contract A dies S is discharged from surety.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ** * * * * * *

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Remedies for breach of contract remedy is the means given by law for the
enforcement of a right when contract is broken, the injured party has following
remedies :
1.
Rescission : when contract broken by one party, the other
may treat contract as rescinded refuse further performance injured party
absolved of all his obligations under the contract however liable to restore any
benefits he has received under the contract also entitled to compensation for any
damages sustained by him.
Example : A promises to supply goods to B by a specified date - B agrees to pay
the price after receipt of the goods A fails to supply the goods by the specified
date B is discharged from liability to pay the price.
The Court may grant rescission
(i)
where contract is voidable at the option of the plaintiff, or
(ii)
where the contract is unlawful for causes not apparent on its face
and defendant is more to blame than the plaintiff.
The Court may refuse to grant rescission in following cases :
(i) where plaintiff has expressly or impliedly ratified the contract, or
(ii) where owing to changed circumstances (not due to any act of defendant),
parties cannot be restored to their original positions, or
(iii)
where third parties have acquired rights in the subject matter of the
contract in good faith and for value, or
(iv) Where only a part of contract is sought to be rescinded and such part is
not severable from the rest of the contract.
2.

Damages monetary/pecuniary compensation allowed to


injured party by Court for loss or injury suffered by him - injured party entitled to

(a)
damages which arise in usual course of things
for such breach ordinary damages.
(b)
Damages which the parties knew, at the time of
entering into contract, to be likely to result from the breach special damages.
(c)
Damages for breach of quasi contract same as
for any other contract.
However, damages not given for any indirect or remote loss or damage.
Hadley V Baxendale As mill stopped by breakdown of a shaft A delivered
shaft to B, a common carrier, to be taken to manufacturer for repairs A did not
inform B that delay would cause loss in profits due to Bs negligence, delivery
of shaft delayed beyond reasonable time Held, B not liable for loss of profits
during the period of delay as B not intimated that delay in delivery of the shaft
would entail loss of profits.
Rules relating to damages -

Ordinary damages arises naturally and directly from breach in usual


course of things.

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In contract for sale of goods, measure of damages on breach is the difference
between the contract price and the market price on the date of the breach where
goods specially made to order and not marketable, the price of the goods is the
measure of damages.
Example : A contracts to buy rice from B at Rs.950 per quintal no time fixed for
delivery later A informs that he will not buy from B market price on that day
was Rs.930 per quintal B entitled to receive compensation from A at the rate of
Rs.20 per quintal.
Example : A contracts to pay a sum of money to B on a specified day A does not
pay on specified day as a consequence, B is unable to repay his debts and is
totally ruined A is not liable to make good to B anything more than principal
sum he contract to pay together with interest upto day of payment.
If promisee neglects or refuses to afford the promisor reasonable facilities for
performance of his promise, promisor is excused from performance.

Special damages : such damages may reasonably be supposed to have been


in contemplation of both parties as probable result of the breach however,
cannot be claimed as matter of right.
Simpson v London & N.W. Rail. Co. S sent specimen of his goods for exhibition
at agricultural show after show, he entrusted his goods to an agent of railway
company for carriage to another show grounds at New Castle on consignment he
wrote must be at New Castle Monday certain due to negligence of railway
company, goods arrived late for the show Held, S could claim damages for loss
of profit at show.
Madras Rail Co. V Govind Rau - G, a tailor, delivered a sewing machine and
some cloth to railway company to be delivered at a place where a festival was to
be held expected exceptional profits at festival did not bring it to notice of
railway company goods delivered after conclusion of festival Held, G could
not recover the loss of profit.

Vindictive or exemplary damages vindictive/punitive by nature


normally awarded in breach of promise to marry and wrongful dishonour or
cheque by banker.

Nominal damages where injured party has not suffered any loss due to
breach, only nominal damages are awarded only to acknowledge that the
plaintiff has proved his case and won.
Brace V Calder A firm consisting of four partners employed B for a period of 2
years after six months, two partners retired continuing partners refused to
employ B Held, he was only entitled to nominal damages as he had suffered no
loss.

Damages for loss of reputation normally not recoverable exception,


wrongful dishonour of customers cheque by banker inspite of sufficient funds to
the credit of the customer general rule is : smaller the amount of the cheque

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71
dishonoured, the larger is the amount of damages awarded if customer is not a
tradesman, he can recover nominal damages only.

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Damages for physical inconvenience and discomfort measure of damage


not affected by the motive or the manner of breach.
Addis V Gramophone Co. Ltd. A wrongfully dismissed in harsh and humiliating
manner by G from employment Held, A could recover wages for the period of
notice and the commission which he would have earned during that period but
not entitled to anything for his injured feelings or for the loss sustained from the
fact that his dismissal made it more difficult for him to obtain employment.
Hobbs V London & S.W. Rail Co. H, alongwith his wife and children, took
ticket for midnight train for particular place where he lived wrongfully
transported to a wrong place had to walk several miles on a drizzling wet night
his wife caught cold Held, H entitled to recover 8 to compensate him for
inconvenience but nothing for medical expenses of his wife as her catching cold
was too remote a consequence.

Mitigation of damages ; injured party duty bound to take all reasonable


steps to mitigate the loss caused by the breach cannot claim damages for loss
which reasonably could have been avoided.

Difficulty of assessment no bar to recovery of damages Court to


estimate the loss and may take into account a contingency.
Chaplin V. Hicks - H advertised a beauty competition readers of certain
newspapers to select 50 ladies then H was to select 12 out of those 50 selected
12 to be provided theatrical engagements C was one of the 50 selected
however, C was not present at the time of final selection due to Hs breach of
contract Held, C was entitled to damages although it was difficult to assess
them.

Cost of decree aggrieved party entitled to the cost of getting the decree,
in addition to damages allowed at discretion of the Court.

Damages agreed upon in advance in case of breach if contract contains a


stipulation that a certain sum to be paid by way of penalty for failure to perform
the obligations - aggrieved party entitled to receive a reasonable compensation
not exceeding the amount so named.
May be liquidated damages or a penalty liquidated damages represent a sum
(fixed or to be ascertained) which is fair and genuine pre-estimate of the probable
loss caused by breach penalty is disproportionate to the damage and is fixed
only with a view to secure performance of the contract.
Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. S bought tyres from
Dunlop Rubber Co. sold them to D, a sub-dealer D agreed not to sell below
Dunlop Rubbers list price to pay Dunlop Rubber 5 for every tyre undersold D undersold two tyres Dunlop Rubber sued for breach Held, the sum fixed
was a genuine pre-estimate of damage and not a breach.

Payment of interest stipulation regarding payment of interest in case of


default not in the nature of penalty allowed if reasonable higher rate of
interest may be allowed from the date of default if not penal in nature higher rate
never allowed from the date of the contract compound interest at the same rate
as simple interest may be allowed as not penal in nature where lower rate is

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73
charged if certain conditions satisfied, failure to fulfil the conditions may entail
payment of higher (i.e. normal) rate of interest.
3. Quantum Meruit means as much as earned or as much as merited arises
when contract partly performed by one party and then becomes discharged due to
breach by other party party who has performed the work can claim remuneration for
the work done it is claim on quasi-contractual obligation
Arises in following cases
(i)
when agreement discovered to be void person who has received
advantage under the contract is bound to restore it or to make compensation for
it.
Craven-Ellis V. Cannon Ltd. CE employed as managing director in a company
after three months, found that directors were not qualified to appoint him
Held, CE could recover remuneration for the services rendered by him on
quantum meruit.
(ii)

When something done without intention to do so gratuitously.

(iii)

When there is express or implied contract to render service, but no


agreement as to remuneration
Upton Rural District Council v Powell - Ps farm did not come under the free
service zone of the fire department - fire at Ps farm P called up U pton Fire
Brigade which arrived and put out the fire Held, there was implied agreement
between P and fire brigade for the service of the brigade - P was liable to pay
reasonable remuneration for the service rendered.

(iv)

When completion of contract prevented by the act of the other party


Planche V. Colburn - C engaged P to write book on ancient armoury to be
published in instalments in periodical called The Juvenile Library for fee of
100 after few issues, publication of periodical stopped Held, P could
recover on quantum meruit for the work done by him.
De Bernady V Harding P wrongfully revoked his agent As authority before A
could complete his duties Held, A could recover quantum meruit for the work
done by him and the expenses incurred by him in course of his duties.

(v)

When contract is divisible where party not in default has enjoyed the
benefit of part performance, the party in default can sue on quantum meruit

(vi)

When indivisible contract performed completely but badly


Hoenig V. Issacs A agreed to decorate Bs flat for a lump sum of quantum
750 certain requirements laid down A completed the work but B
complained of faulty workmanship it cost B 204 to remedy that defect
Held, A could recover from B 750 less 204.

4. Specific Performance in cases where damages are not adequate remedy, Court
may direct for specific performance also enforced where no standard for
ascertaining the actual damage caused.
5. Injunction where a party is in breach of a negative term of contract, Court may
restrain him from doing what he promised not to do.
Lumley Vs. Wagner - W agreed to sing at Ls theatre agreed not to sing anywhere
else during that period later, W made contract with Z to sing at another theatre and
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refused to perform the contract with L Held, W could be restrained by injunction
from singing by injunction from singing for Z.

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Bailment and pledge
Bailment Sec.148 delivery of goods by one person (bailor) to another person
(bailee) for some purpose contract that upon completion of the purpose, the goods
be returned or otherwise disposed of according to directions of the bailor.
Example : A sells certain goods to B who leaves them in the possession of A
relationship between B and A is that of bailor and bailee.
For finder of goods belonging to another, relationship of bailee and bailee
automatically created between finder and owner.
Basavva K.D. Patil Vs. State of Mysore As ornaments stolen recovered by
the police ornaments disappeared from police custody Held, State was
liable, the contract of bailment having been implied.
Goods mean movable property other than money and actionable claims
though possession handed over, ownership remains with bailor.
Money deposited in bank account (not safe vault) creates relationship of
creditor and debtor no bailment bank not liable to return the very same
money when asked for.
Requisites of bailment
1)
Contract usually created by agreement express or implied - in
exceptional cases, bailment is implied by law as between finder and owner of
goods.
2)

Delivery of possession control and intention to exclude others


necessary may be actual or constructive - goods handed over to servant to
hand over to a third party does not involve delivery of possession delivery of
railway receipt amounts to constructive delivery of goods.
Kaliperumal V. Visalakasmi goldsmith employed by lady to melt her old
jewellery and make new ones out of it every evening she received the
unfinished jewellery and put it in a box kept at goldsmiths premises lady kept
the key to box with herself jewellery stolen from box Held, there was no
bailment as the goldsmith had returned the jewellery bailed to him by her.

3)

For specified purpose if goods delivered by mistake, there is no


bailment.

4)

Return of specific goods or disposal as per directions of bailor - as


soon as purpose is achieved if not returned, there is no bailment however,
alteration in form is allowed, e.g. piece of cloth stitched into a suit.

Examples of bailment
(a) Money deposited in bank safe vault.
(b) Hire purchase agreement involves two aspects initially it is a contract of
bailment on payment of all the instalments, it becomes a contract of sale.
(c) Goods seized by police or other government authorities.
(d) Acceptance of goods by transport or railway company for carriage.
(e) Acceptance of articles by post office as Value Payable Parcel (VPP).
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In contract of bailment, consideration is generally in form of money


payable either by bailor or bailee however, consideration not necessary to
support the promise of bailee to return the goods detriment suffered by bailor in
parting with possession of goods is sufficient consideration in support of contract
of bailment.

Classification of bailments :
1. For the exclusive benefit of bailor e.g. delivery of valuables to neighbour for
safe custody, without charge.
2. For exclusive benefit of bailee e.g. lending of car to a fried for his use,
without charge.
3. For mutual benefit of bailor and bailee e.g. hiring of car or giving it to a
mechanic for repairs both involve consideration.

1 & 2 above are gratuitous bailment as no consideration passes


between bailor and bailee - terminable by bailor at any time even though for
specified time or purpose

3 above is non-gratuitous bailment, as it involves payment of


consideration.

Duties of bailor
1. To disclose known faults about the goods in case of default, bailor is
responsible for any damage suffered by bailee directly from such faults.

In case of goods bailed for consideration, bailor is responsible even for


faults unknown to him.
Read V. Dean A hires motor launch from B for holiday on river Thames
launch caught fire fire fighting equipment out of order A unable to
extinguish fire A got injured and suffered loss Held, B was liable.

In gratuitous bailment, bailor responsible only for the known faults


which are not disclosed.

2. To bear extraordinary expenses of bailment bailee only bound to pay


reasonable and ordinary expenses of bailment.
Example : A lends his horse to B, his friend, for two days feeding charges to
be paid by B but if horse meets with an accident, A will have to repay the
medical expenses incurred by B.

In case of gratuitous bailment, the bailor has to pay all necessary


expenses.
Example : A goes out on holiday - leaves his dog with B B incurred
expenses on feeding the dog A liable to repay B the necessary expenses
incurred by him.

3. To indemnify bailee for loss in case of premature termination of gratuitous


bailment if loss accruing to bailee exceeds the benefit derived by him out of
bailment, the bailor has to indemnify him.
Example : A lends his old discarded bicycle to B gratuitously for 3 months B
incurs Rs.100 on its repairs A asks for return of bicycle after one month A
liable to compensate B for expenses incurred by him in excess of benefit
derived by him.
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4. To receive back the goods if bailor refuses to receive back goods, bailee is
entitled to receive compensation from bailor for necessary expenses of
custody.
5. To indemnify bailee in case bailor has defective title to goods and not
entitled to make bailment or receive back the goods or give directions in
relation to them and bailee suffers some loss as consequence bailor liable to
indemnify the bailee.
Rights of bailor
1.
Enforcement of rights bailor can enforce by suit all the
liabilities and duties of bailee, as his rights.
2.
Avoidance of contract in case of any act by bailee
inconsistent with the terms of bailment, bailor can terminate the bailment.
3.
Return of goods lent gratuitously bailor can demand return
at any time even though bailment for specified time or purpose however, in case
bailee suffers some loss exceeding the benefit derived by him, bailor has to
indemnify the bailee.
4.
Compensation from a wrong-doer if any third person
deprives bailee use or possession of goods bailed or does them any injury, bailor
(also the bailee) entitled to bring a suit against such third person for such
deprivation or injury.
Rights of bailee duties of bailor are the rights of bailee his additional rights are :
1. Return of goods to one of several joint bailors in the absence of any contract
to the contrary.
2. Delivery of Goods to bailor without title if bailee acts in good faith, he is not
responsible to the owner in respect of such delivery
3. Right to apply to Court to stop delivery if any third person claims the goods
bailed, bailee may apply to Court to stop the delivery of goods and to decide
the title to the goods.
4. Right of action against trespassers
5. Bailees lien where lawful charges of the bailee are not paid, he may retain
the goods (particular lien).
Duties of bailee :
1.
To take reasonable care of goods bailed should take care as man of ordinary
prudence would under similar circumstances in case of no return of goods or
their return in damaged condition, onus of proof is on bailee to show that there
had been no negligence on his part.
Coldman Vs. Hill A gives his cattle to B for feeding grass against payment
without any negligence on Bs part, cattle were stolen B did not inform the
owner or the police did not even make any effort to recover them thinking it to
be useless Held, B was liable for the loss.
Martin Vs. London County Council N admitted to hospital her jewellery
handed over to hospital officials for safe custody jewellery was stolen Held,
hospital officials were bailees for reward and failed to exercise care which the
nature and quality of the article required - liable for loss.

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2.

Not to make any unauthorised use of goods : if uses goods in a manner


inconsistent with the terms of contract bailee liable even if not guilty of
negligence and the damage is result of an accident.
Example : A lends horse to B for his riding only B allows C to ride the horse C
rides with care but horse accidentally falls and is injured Held, B is liable to
make compensation to A for injury caused to his horse.

3.

Not to mix the goods bailed with his own goods - if bailee mixes the goods :

With bailors consent both shall have proportionate interest in the


mixture thus produced.

Without bailors consent and


(i)
such goods are separable bailee to bear the expenses of
separation as wells as damage arising from mixture.
(ii)
Such goods are inseparable bailor entitled to
compensation for the loss of goods.
If goods get mixed up by inadvertence or by accident or by act of God or by
unauthorised act of a third party both bailor and bailee have proportionate
interest in the mixture bailee will have to bear the cost of separation.

4.

Not to set up an adverse title : bailee cannot deny the right of bailor to bail the
goods and receive them back if bailee delivers them to a third person, he has to
prove that such person had a right to them as against the bailor.

5.

To return any accretion to the goods - in case of a contract to the contrary,


bailee bound to deliver to bailor any increase or profit accrued from the goods
bailed.
Example : A leaves his cow in custody of B to be taken care of cow gives birth
to a calf B is bound to deliver the calf as well as the cow to A.

6.

To return the goods bailee duty bound to return the goods bailed, without
demand, as soon as purpose of bailment is achieved
Shaw & Co. V. Symmons & Sons A delivered some books to B to be bound A
presses for their return, but B neglects more than reasonable time elapsed
accidental fire at Bs premises books were burnt Held, B was liable for the loss
even though he was not negligent as failure on his part to return the books within
reasonable time.
Lien - right of a person to retain possession of goods belonging to another until some
debt or claim of the person in possession is satisfied.
Possession must be (i) rightful, (ii) not for specific purpose and (iii)
continuous.
Right of lien may arise by (a) statute, (ii) express or implied contract, or
(iii) general course of dealings between the parties in a particular trade.
Extinguished or lost by (i) abandonment (ii) payment or tender of the amount
due, or (iii) loss or surrender of possession of goods.
Types of lien
1. Particular lien

available to the bailee only against those goods in respect of which he


has rendered some service involving exercise of labour or skill.
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Example : A gives a piece of cloth to B, a tailor, to stitch into a suit B is


entitled to retain the coat till he is paid for.
If bailee defaults in completion of work within the agreed time or
reasonable time not entitled to right of lien.
If bailee permits the bailor to regain right of possession without
payment of charges cannot exercise right of lien.
If bailee permits credit to bailor cannot exercise right of lien.
Example : A gives a cloth to B, a tailor, to sew into a coat B promises to
deliver the coat as soon as it is finished allows to give A three months
credit B not entitled to retain the coat.
If goods destroyed or stolen without any fault on part of bailee bailee
is entitled to be paid for services performed upon the goods before their
destruction or theft.

2. General lien a right to retain all the goods or any property (which is in
possession of the holder) of another until all the claims of the holder are
satisfied.

This is right to retain property of other for general balance of account.

Normally available to bankers, wharfingers, attorneys and policy


brokers.
Example : T
wo securities handed over by A to banker for safe-keeping A takes loan
against only one of them banker entitled to retain both the securities until
his claim is satisfied.
Difference between particular lien and general lien
Basis
1. Availability of
right

Particular lien
Available only against those
goods in respect of which skill
and labour has been expended
by the bailee.

2. Reason of lien

For recovery of charge for


labour employed or expenses
incurred upon the goods.

General lien
Available in respect of any
property belonging to other
party and in possession of the
person exercising the right, in
respect of any payment lawfully
due to him.
For a general balance of
account.

Right of bailor and bailee against wrong-doer :


1. Suit against wrong doer : when third party wrongfully deprives the bailee of
use or possession of goods bailed or causes injury to the goods bailee or
bailor may bring a suit against the wrong-doer.
2. Apportionment of relief whatever received by way of relief or compensation
in any suit against wrong-doer, proportionate share of bailor and bailee as per
respective interests.
Finder of goods - person who comes by an article but not entitled to its possession
if he picks it up, he becomes a bailee
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Rights of finder of goods :

Right of lien has right of lien for expenses incurred on the


preservation and for finding out the owner but has not right to sue the owner
for its recovery, as incurred by him voluntarily.

Right to sue for reward finder can sue for specific reward offered by
owner for return of goods may retain the goods until reward received

Right of sale finder can sell the goods if


(i)
owner cannot be found with reasonable diligence, or
(ii)
if found, refuses to pay the lawful charges of finder, or
(iii)
if goods are in danger of perishing or losing the major part of
its value, or
(iv)
if lawful charges of finder exceeds two-third of value of
goods.
Obligations of finder of goods
1. Must take reasonable care of goods if despite such care, if goods are
destroyed, finder not responsible for such loss.
2. Must not use the goods for own purpose.
3. Must not mix the goods with his own.
4. Must try to find out the owner if fails to do so, he is liable as a trespasser.
Termination of bailment
1. On expiry of the period if bailment is for specific period.
2. On achievement of object if bailment is for specific purpose.
3. Inconsistent use of goods if used in manner inconsistent with the terms of
contract.
4. Destruction of subject matter or incapable of use for the purpose of bailment.
5. Gratuitous bailment at any time as per wishes of bailor.
6. Death of bailor or bailee in case of gratuitous bailment.
Pledge bailment of goods as security for payment of a debt or performance of a
promise bailor is called pledger/pawnor bailee is called pledgee/pawnee

Any movable property can be pledged - even a saving bank pass book
may be pledged.

Delivery is necessary may be actual or constructive or symbolic (like


handing over of keys of bank vault)
Revenue Authority V Sudarshan Pictures - producer of film borrowed money
from financier-distributor agreed to deliver the final prints of film when ready
Held, agreement was not pledge, there being no actual transfer of possession.
Difference between pledge and bailment :
Basis
1. Purpose
2. Remedy on
default

Pledge
Bailment
As security for performance
For any purpose.
of a specific promise, like
repayment of a debt
After giving notice to pawnor, Bailee may either retain the goods
pawnee may sell the goods
or sue for his charges.
pledged.

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3. Use for own
purpose

Pawnee has no right to use the Bailee may use the goods bailed
goods pledged with him.
for own purpose if terms of
bailment so provide.

Rights of pawnee
1.
Right of retainer - may retain the goods pledged until his dues
repaid also for interest due and all necessary expenses incurred by him for
possession and preservation of goods has particular lien.
2.
Right of retainer for subsequent advances if pawnee lends
money to same pawnor after date of original pledge gets right of retainer over
goods for subsequent advances also.
3.
Right to extraordinary expenses can only sue for their recovery
no right of retainer
4.
Right against true owner, when pawnors title is defective when
pawnor got possession of goods pawned under a voidable contract, but contract
not rescinded at time of pledge pawnee gets good title if he acts in good faith
and without notice of such defective title.
5.
Pawnees right where pawnor makes default when pawnor
defaults in redeeming the pledge, pawnee may (a)
file suit for specific performance and retain goods as
collateral security.
(b)
Sell the goods after giving reasonable notice to pawnor
(c)
Recover any deficiency arising on sale of goods from the
pawnor also liable to hand over the surplus realised, if any.
Rights of pawnor 1. Right to get back goods after performance of promise or repayment of loan
and interest and necessary expenses, if any.
2. Right to redeem debt if default made in fulfilment of promise, but anytime
before sale of goods pledged by pawnee, pawnor can redeem the goods pledged
and also make payment of interest and expenses, if any.
3. Preservation and maintenance of goods can ask pawnee to preserve and
maintain the goods pledged.
4. Right of an ordinary debtor has right given under various statutes for
protection of debtors.
Pledge by non-owners

Pledge by mercantile agent - in ordinary course of business of


mercantile agent if in possession of goods with consent of owner valid only
if pledgee acts in good faith and without notice of defect of agents title.

Pledge by seller or buyer in possession after sale seller left in


possession after sale or buyer in possession before sale with consent of other
party valid only pledgee acts in good faith and without notice of defect of
pawnors title.

Pledge by pawnor having limited interest - e.g. person having lien over
the goods or a finder of goods may pledge them to the extent of his interest.

Pledge by co-owner in possession one of several co-owners in actual


possession with consent of others can create valid pledge.
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Pledge by person in possession under a voidable contract pledge valid


if made before rescission of the voidable contract and if pledgee acts in good
faith and without notice of defect in pledgors title.

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83
Contract of agency
"Agent" - a person employed to do any act for another, or to represent another in
dealing with third persons intention to bring his principal into contractual relations
with third persons.
Principal - The person for whom such act is done, or who is so represented - any
person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.
Essentials of agency relationship 1.

Agreement between principal and agent contract not necessary no


consideration necessary to create agency
2.
Intention of agent to act on behalf of principal even without a
contract between the parties, if a person intends to act on behalf of another,
agency is created.
Rules of agency
1. Whatever a person can do personally, he can do through an agent subject to
exceptions in case of contract which are personal in character (like marriage)
or annexed to a public office (like magistrate(
2. He who does an act through another does it by himself - (qui facit peralium
facit per se) acts and contracts of agent have effect as if done personally by
principal.

Who may be an agent - As between the principal and third persons, any person
may become an agent - no minor person or of unsound mind can become an
agent - No consideration is necessary to create an agency;

Difference between agent and servant


Basis
1. Legal
relationship
2. Control

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

Agent
Agent can bring the principal
into legal relations with third
persons.
Agent not under direct control
and supervision of principal
but bound to follow all lawful
instructions of principal.
An agent can work for several
principals at the same time.

Servant
Servant ordinarily does not
create legal relations between
his employer and third persons.
Servant acts under direct control
and supervision of principal and
bound to follow all reasonable
instructions of his employer.
Servant can serve only one
master at a time.

Principal liable for wrong-doings Master is liable for wrongs of


of agent done within the scope of his servant if committed in
his authority.
course of his employment.

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Creation of agency
1.

Agency by express agreement - oral or written contract


usually written in form of power of attorney.
2.
Agency by implied agreement arises from conduct,
situation or relationship of parties - to be inferred from the circumstances of the
case, and things spoken or written, or the ordinary course of dealing.
Extent of agent's authority
An agent, having an authority to do an act, has authority do every lawful thing
which is necessary in order to do so such act.An agent having an authority to carry on
a business, has authority to do every lawful thing necessary for the purpose, or usually
done in the course, of conducting such business.
Agent's authority in an emergency
An agent has authority, in an emergency, to do all such acts for the purpose of
protecting his principal from loss and would be done by a person or ordinary
prudence, in his own case, under similar circumstances.
When agent cannot delegate
An agent cannot lawful employ another to perform acts which he has expressly or
impliedly undertaken to perform personally, unless by the ordinary custom of trade a
sub-agent may, or, from the nature or agency, a sub-agent must, be employed.
"Sub-agent" defined A "sub-agent" is a person employed by, and acting undue the
control of, the original agent in the business of the agency.
Representation of
principal by sub-agent properly appointed Where a sub-agent is properly appointed,
the principal is, so far as regards third persons, represented by the sub-agent, and is
bound by and responsible for his acts, as if he were an agent originally appointed by
the principal.Agent's responsibility for sub-agents: The agent is responsible to the
principal for the acts of the sub-agent.Sub-agent's responsibility: The sub-agent is
responsible for his acts to the agent, but not to the principal, except in case of fraud or
wilful wrong.
Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to act as
a sub-agent, the agent stands towards such person in the relation of a principal to an
agent, and is responsible for his acts both to the principal and to third person; the
principal is not represented, by or responsible for the acts of the person so employed,
nor is that person responsible to the principal.
Relation between principal and person duly appointed by agent to act in business of
agency
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85
When an agent, holding an express or implied authority to name another person to
act for the principal in the business of the agency, has named another person
accordingly, such person is not a sub-agent, but an agent of the principal for such part
of the business of the agency as is entrusted to him.
Illustrations
1. A directs B, his solicitor, to sell his estate by auction, and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the
sale. C is not a sub-agent, but is A's agent for the conduct of the sale.
2. A authorises B, a merchant in Calcutta, to recover the moneys due to A
from C & Co. B instructs D, a solicitor, to take legal proceedings
against C & Co. For the recovery of the money. D is not a sub-agent,
but is a solicitor for A.
Agent's duty in naming such person
In selecting such agent for his principal, an agent is bound to exercise the same
amount of discretion as a man of ordinary prudence would exercise in his own case;
and, if he does this, he is not responsible to the principal for the acts of negligence of
the agent so selected.
Illustrations
1. A instructs B, a merchant, to buy a ship for him. B employs a ship-surveyor of
good reputation to choose a ship for A. The surveyor makes the choice
negligently and the ship turns out to be unseaworthy and is lost. B is not, but
the surveyor is, responsible to A.
2. A consigns goods to B, a merchant, for sale. B, in due course, employes an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to
receive the proceeds of the sale. The auctioneer afterwards becomes insolvent
without having accounted for the proceeds. B is not responsible to A for the
proceeds.
Right of person as to acts done for him without his authority-effect of
ratification Where acts are done by one person on behalf of another,but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies
them, the same effects will follow as if they had been performed by his authority.
Ratification may be expressed or implied
Ratification may be expressed or may be implied in the conduct of the person on
whose behalf the acts are done.
Illustrations
1. A, without authority, buys goods, for B. Afterwards B sells them to C
on his own account; B's conduct implies a ratification of the purchase
made for him by A.
2. A, without B's authority, lends B's money to C. Afterwards B accepts
interest on the money from C. B's conduct implies a ratification of the
loan.
Knowledge requisite for valid ratification No valid ratification can be made by a
person whose knowledge of the facts of the case is materially defective.
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86
Effect of ratifying unauthorised act forming part of a transaction
A person ratifying any unauthorised act done on his behalf ratifies the whole of the
transaction of which such act formed a part.
Ratification of unauthorised act
cannot injure third person An act done by one person on behalf of another, without
such other person's authority, which, if done with authority would have the effect of
subjecting a third person to damages, or of terminating any right to interest of a third
person cannot, by ratification, be made to have such effect.
Illustrations
1. A, not being authorised thereto by B, demands, on behalf of B, the
delivery of a chattel, the property of B, from C who is in possession of
it. This demand cannot be ratified by B, so as to make C liable for
damages for his refusal to deliver.
2. A holds a lease from B, terminable on three months' notice. C, an
unauthorised person, gives notice of termination to A. The notice
cannot be ratified by B, so as to be binding on A.

Revocation of authority
Termination of agency An agency is terminated by the principal revoking his
authority, or by the agent renouncing the business of the agency; or by the business of
the agency being completed; or by either the principal or agent dying or becoming of
unsound mind; or by the principal being adjudicated an insolvent under the provisions
of any Act for the time being in force for the relief of insolvent debtors.
Termination of agency, where agent has an interest in subject-matter
Where the agent has himself an interest in the property which forms the subjectmatter of the agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.
Illustrations
1. A, gives authority to B to sell A's land, and to pay himself, out of the
proceeds, the debts due to him from A.A cannot revoke this
authority,nor can it be terminated by his insanity or death.
2. A consigns 1,000 bales of cotton to be, who has made advances to him
on such cotton, and desires B to sell the cotton, and to repay himself
out of the price the amount of his own advances. A cannot revoke this
authority, not is it terminated by his insanity or death.
When principal may revoke agent's authority The principal may, save as is
otherwise provided by the last preceding section, revoke the authority given to his
agent at any time before the authority has been exercised, so as to bind the principal.
Revocation where authority has been partly exercised

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The principal cannot revoke the authority given to his agent after the authority has
been partly exercised, so far as regards such acts and obligations as arise from acts
already done in the agency.
Illustrations
1. A authorises B to buy, 1,000 bales of cotton on account of A and to pay
for it out of A's money remaining in B's hands. B buys, 1,000 bales of
cotton in his own name, so as to make himself personally liable for the
price. A cannot revoke B's authority so far as regards payment for the
cotton.
2. A authorises B to buy 1,000 bales of cotton on account of A, and to pay
for it out of A's money remaining in B' s hands. B buys 1,000 bales of
cotton in A' s name, and so as not to render himself personally liable
for the price. A can revoke B's authority to pay for the cotton.
Compensation for revocation by principal, or renunciation by agent
Where
there is an express or implied contract that the agency should be continued for any
period of time, the principal must make compensation to the agent, or the agent to the
principal, as the case may be, for any previous revocation or renunciation of the
agency without sufficient cause.
Notice of revocation or renunciation
Reasonable notice must be given of such revocation or renunciation, otherwise the
damage thereby resulting to the principal or the agent, as the case may be, must be
made good to the one by the other.
Revocation and renunciation may be
expressed or implied
Revocation or renunciation may be expressed or may be
implied in the conduct of that principal or agent respectively.
Illustration
A empowers B to let A's house. Afterwards A lets it himself. This is an implied
revocation of B's authority.
When termination of agent's authority takes effect as to agent, and as to third
persons The termination of the authority of an agent does not, so far as regards the
agent, take effect before it becomes known to him, or, so far as regards third persons,
before it becomes known to them.
Illustrations
1. A directs B to sell goods for him, and agrees to give B five per cent
commission on the price fetched by the goods. A afterwards by letter,
revokes B's authority. B after the letter is sent, but before he receives
it,sells the goods for 100rupees. The sale is binding on A,and B is
entitled to five rupees as his commission.
2. A, at Madras, by letter directs B to sell for him some cotton lying in a
warehouse in Bombay, and afterwards, by letter, revokes, his authority
to sell, and directs B to send the cotton to Madras. B after receiving the
second letter, enters into a contract with C, who knows of the first
letter, but not o the second, for the sale to him of the cotton. C pays B
the money, with which B absconds. C's payment is good as against A.
3. A directs B, his agent, to pay certain money to C. A dies, and D takes
out probate to his will. B, after A's death, but before hearing of it, pays
the money to C. The payment is good as against D, the executor.
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88
Agent's duty on termination of agency by principal's death or insanity When an
agency is terminated by the principal dying or becoming of unsound mind, the agent
is bound to take on behalf of the representative, of his late principal, all reasonable
steps for the protection and reservation of the interests entrusted to him.
Termination of sub-agent's authority
The termination of the authority of an agent
causes the termination (subject to the rules herein contained regarding the termination
of an agent's authority) of the authority of all sub-agents appointed by him.
Agent's duty to principal
Agent's duty in conducting principal's business
An agent is bound to
conduct the business of his principal according to the directions given by the
principal, or in the absence of any such directions according to the customs which
prevails in doing business of the same kind at the place where the agent conducts such
business. When the agent acts otherwise, if any loss be sustained, he must make it
good to his principal and if any profit accrues, he must account for it.
Illustrations
1. A, an agent engaged in carrying on for B a business, in which it is the
custom to invest from time to time, at interest, the moneys which may
be in hand, on its to make such investment. A must make good to B the
interest usually obtained by such investments.
2. B, a broker in whose business it is not the custom to sell on credit, sells
goods of A on credit to C, whose credit at the time was very high. C,
before payment, becomes insolvent. B must make good the loss to A.
Skill and diligence required from agent
An agent is bound to conduct the
business of the agency with as much skill as is generally possessed by person engaged
in similar business unless the principal has notice of his want of skill. The agent is
always bound to act with reasonable diligence, and to use such skill as he possesses;
and to make compensation to his principal in respect of the direct consequences of his
own neglect, want of skill, or misconduct, but not in respect of loss or damage which
are indirectly or remotely caused by such neglect, want of skill, or misconduct.
Illustrations
1. A, a merchant in Calcutta, has an agent, B, in London, to whom a sum
of money is paid on A's account, with order to remit. B retains the
money for considerable time. A, in consequence of not receiving the
money, becomes insolvent. B is liable for the money and interest, from
the day on which it ought to have been paid, according to the usual
rate, and for any further direct loss as, e.g., by variation of rate of
exchange-but not further.
2. A, an agent for the sale of goods, having authority to sell on credit,
sells to B in credit, without making the proper and usual enquiries as to
the solvency of B. B at the time of such sale, is insolvent. A must make
compensation to his principal in respect of any loss thereby sustained.
3. A, an insurance-broker employed by B to effect an insurance on a ship,
omits to see that the usual clauses are inserted in the policy. The ship is
afterwards lost. In consequence of the omission of the clauses nothing
can be recovered from the underwriters. A is bound to make good the
loss to B.
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89
4. A, merchant in England, directs B, his agent at Bombay, who accepts
the agency, to send him 100 bales of cotton by a certain ship. B, having
it in his power to send the cotton, omits to do so. The ship arrives
safely in England. Soon after her arrival the price of cotton rises. B is
bound to make good to A the profit which he might have made by the
100 bales of cotton at the time the ship arrived, but not any profit he
might have made by the subsequent rise.
Agent's accounts An agent is bound to render proper accounts to his principal
on demand.
Agent's, duty to communicate with principal It is the duty of an
agent in case of difficulty, to use all reasonable diligence in communicating with his
principal, and in seeking to obtain his instructions.
Right of principal when
agent deals, on his own account, in business of agency without principal's consent
If an agent deals on his own account in the business of the agency, without first
obtaining the consent of his principal and acquainting him with all material
circumstances which have come to his own knowledge on the subject, the principal
may
repudiate the transaction, if the case shows, either that any material fact has been
dishonestly concealed from him by the agent, or that the dealings of the agent have
been disadvantageous to him.
Illustrations
1. A direct B to sell A's estate. B buys the estate for himself in the name
of C. A, on discovering that B has bought the estate for himself, may
repudiate the sale, if he can show that B has dishonestly concealed any
material fact, or that the seals has been disadvantageous to him.
2. A directs B to sell A's estate. B, on looking over the estate before
selling it, finds a mine on the estate which is unknown to A. B informs
A that he wished to buy the estate for himself but conceals the
discovery of the mine. A allows B to buy, in ignorance of the existence
of the mine. A, on discovering that B knew of the mine at the time he
bought the estate, may either repudiate or adopt the sale at his option.
Principal's right to benefit gained by agent dealing on his own account in
business of agency If an agent, without the knowledge of his principal, deals in the
business of the agency on his own account instead of on account to his principal, the
principal is entitled to claim from the agent any benefit which may have resulted to
him from the transaction.
Illustration
A directs B, his agent, to buy a certain house for him. B tells A it cannot be
bought, and buys the house for himself. A may, on discovering that B has
bought the house, compels him to sell it to A at the price he gave for it.
Agent's right of retainer out of sums received on principal's account An agent
may retain, out of any sums received on account of the principal in the business of the
agency, all moneys due to himself in respect of advances made or expenses properly
incurred by him in conducting such business, and also such remuneration as may be
payable to him for acting as agent.
Agent's duty to pay sums received for
principal Subject to such deductions, the agent is bound to pay to his principal all
sums received on his account.
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90
When agent's remuneration becomes due
In the absence of any special contract, payment for the performance of any act is
not due to the agent until the completion of such act; but an agent may detain moneys
received by him on account of goods sold, although the whole of the goods consigned
to him for sale may not have been sold, or although the sale may not be actually
complete.
Agent not entitled to remuneration for business misconducted
An agent who is guilty of misconduct in the business of the agency, is not entitled
to any remuneration in respect of that part of the business which he has misconducted.
Illustrations
1. A employs B to recover 1, 00,000 rupees from C, and to lay it out on
good security. B recovers the 1,00,000 rupees and lays out 90,000
rupees on good security, but lays out 10,000 rupees on security which
he ought to have known to be bad, whereby A loses 2,000 rupees. B is
entitled to remuneration for recovering the 1,00,000 rupees and for
investing the 90,000 rupees. He is not entitled to any remuneration for
investing the 10,000 rupees, and he must make good the 2,000 rupees
to B.
2. A employs B to recover 1,000 rupees from C. Through B's misconduct
the money is not recovered. B is entitled to no remuneration for his
services and must make good the loss.
Agent's lien on principal's property
In the absence of any contract to the
contrary, an agent is entitled to retain goods, papers, and other property, whether
movable or immovable of the principal received by him, until the amount due to
himself for commission, disbursements and services in respect of the same has been
paid or accounted for to him.
Principal's duty to agent

Agent to be indemnified against consequences of lawful acts


The employer of an agent is bound to indemnify him against the consequences of
all lawful acts done by such agent in exercise of the authority conferred upon him.
Illustrations
1. B, at Singapore under instructions from A of Calcutta, contracts with C
to deliver certain goods to him. A does not send the goods to B, and C
sues B for breach of contract. B informs A of the suit, and A authorises
him to defend the suit. B defends the suit, and is compelled to pay
damages and costs, and incurs expenses. A is liable to B for such
damages, costs and expenses.
2. B, a broker at Calcutta, by the orders of A, a merchant there, contracts
with C for the purchase of 10 caskes of oil for A. Afterwards A refuses
to receive the oil, and C sues B. B informs A, who repudiates the
contract altogether. B defends, but unsuccessfully, and has to pay
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91
damages and costs and incurs expenses. A is liable to B for such
damages, costs and expenses.
Agent to be indemnified against consequences of acts done in good faith Where
one person employs another to do an act, and the agent does the act in good faith, the
employer is liable to indemnify the agent against the consequences of that act, though
it may cause an injury to the rights of third persons.
Illustrations
1. A, a decree-holder and entitled to execution of B's goods requires the
officer of the court to seize certain goods, representing them to be the
goods of B. The officer seizes the goods, and is sued by C, the true
owner of the goods. A is liable to indemnify the officer for the sum
which he is compelled to pay to C, in consequence of obeying A's
directions.
2. B, at the request of A, sells goods in the possession of A, but which A
had no right to dispose of. B does not know this, and hands over the
proceeds of the sale to A. Afterwards C, the true owner of the goods,
sues B and recovers the value of the goods and costs. A is liable to
indemnify B for what he has been compelled to pay to C, and for B's
own expenses.
Non-liability of employer of agent to do a criminal act
Where one person
employees another to do an act which is criminal, the employer is not liable to the
agent, either upon an express or an implied promise to indemnify him against the
consequences of that Act.
Illustrations
1. A employs B to beat C, and agrees to indemnify him against all
consequences of the act. B thereupon beats C, and has to pay damages
to C for so doing. A is not liable to indemnify B for those damages.
2. B, the proprietor of a newspaper, publishes, at A's request, a libel upon
C in the paper, and A agrees to indemnify B against the consequences
of the publication, and all costs and damages of any action in respect
thereof. B is sued by C and has to pay damages, and also incurs
expenses. A is not liable to B upon the indemnity.
Compensation to agent for injury caused by principal's neglect The principal
must make compensation to his agent in respect of injury caused to such agent by the
principal's neglect or want of skill.
Illustration
A employs B as a bricklayer in building a house, and put up the scaffolding
himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A
must make compensation to B.

Effect of agency on contracts with third persons

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By Sanjay Banerjee, M.Com., AICWA, LL.B.

92
Enforcement and consequences of agent's contract
Contracts entered into through an agent, and obligations arising from acts done by
an agent, may be enforced in the same manner, and will have the same legal
consequences as if the contracts had been entered into the acts done by the principal
in person.
Illustrations
1. A buys goods from B, knowing that he is an agent for their sale, but
not knowing who is the principal. B's principal is the person entitled to
claim from A the price of the goods, and A cannot, in a suit by the
principal, set-off against that claim a debt due to himself from B.
2. A, being B's agent; with authority to receive money on his behalf,
receives from C a sum of money due to B. C is discharged of his
obligation to pay the sum in question to B.

Principal how far bound, when agent exceeds authority


When an agent does more than he is authorised to do, and when the part of what he
does, which is within his authority, can be separated from the part which is beyond his
authority, so much only of what he does as is within his authority is binding as
between him and his principal.
Illustration
A, being owner of a ship and cargo, authorises B to procure an insurance for
4,000 rupees on the ship. B procures a policy for 4,000 rupees on the ship, and
another for the like sum on the cargo. A is bound to pay the premium for the
policy on the ship, but not the premium for the policy on the cargo.

Principal not bound when excess of agent's authority is not separable


Where an agent does more than he is authorised to do, and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not
bound to recognise the transaction.
Illustration
A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for
a sum of 6,000 rupees. A may repudiate the whole transaction.

Consequences of notice given to agent


Any notice given to or information obtained by the agent, provided it be given or
obtained in the course of the business transacted by him for the principal, shall, as
between the principal and third parties, have the same legal consequences as if it had
been given to or obtained by the principal.
Illustrations
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

93
1. A is employed by B to buy from C certain goods, of which C is the
apparent owner, and buys them accordingly. In the course of the treaty
for the sale, A learns that the goods really belonged to D, but B is
ignorant of that fact B is not entitled to set-off a debt owing to him
from C against the price of goods.
2. A is employed by B to buy from C goods of which C is the apparent
owner. A was, before he was so employed a servant of C, and then
learnt that the goods really belonged to D, but B is ignorant of that fact.
In spite of the knowledge of his agent, B may set-off against the price
of the goods a debt owing to him from C.
Agent cannot personally enforce, nor be bound by, contracts on behalf of
principal
In the absence of any contract to that effect an agent cannot personally
enforce contracts entered into by him on behalf of his principal, nor is he personally
bound by them.
Presumption of contract to the contrary: Such a contract shall be presumed to
exit in the following cases1. Where the contract is made by an agent for the sale or purchase of
goods for a merchant resident abroad;
2. Where agent does not disclose the name of his principal;
3. Where the principal, though disclosed, cannot be sued.

Right of parties to a contract made by agent not disclosed


If an agent makes a contract with a person who neither, knows nor has reason to
suspect, that he is an agent, his principal may require the performance of the contract;
but the other contracting party has, as against the principal, the same right as he would
have had as against if the agent had been the principal.If the principal discloses
himself before the contract is completed, the other contracting party may refuse to
fulfil the contract, if he can show that, if he had known who was the principal in the
contract, or if he had known that the agent was not a principal, he would not have
entered into the contract.
Performance of contract with agent supposed to be
principal
Where one man makes a contract with another, neither knowing nor
having reasonable ground to suspect that the other is an agent, the principal, if he
requires the performance of the contract, can only obtain such performance subject to
the right and obligations subsisting between the agent and the other party of the
contract.
Illustration
A, who owes 500 rupees to B, sells, 1,000 rupees worth of rice to B. A is
acting as agent for C in the transaction, but B has no knowledge nor
reasonable ground of suspicion that such is the case. C cannot compel B to
take the rice without allowing him to set-off A's debt.
Right of person dealing with agent personally liable In cases where the agent
is personally liable, a person dealing with him may hold either him or his principal, or
both of them liable.
Illustration
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

94

A enters into a contract with B to sell him 100 bales of cotton, and afterwards,
discovers that B was acting as agent for C. A may sue either B or C, or both,
for the price of the cotton.

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

95
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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

96

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Prepared for VIDYASAGAR ACADEMY
By Sanjay Banerjee, M.Com., AICWA, LL.B.

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By Sanjay Banerjee, M.Com., AICWA, LL.B.