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CONTRACT LAW
Master in Business Laws - Part I
Law of Contract
Course No: I
Module No: I-IX
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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CONTENTS
TOPICS
1. Contract: Concept and its Role in Developing Society (Module I) .............................................. 3
2. Capacity and Consideration (Module II)........................................................................................41
3. Free Consent and Public Policy (Module III).................................................................................75
4. Public and Government Contract
Engineering Contract and Quasi Contract (Module IV)............................................................... 108
5. Discharge of Contract (Module V) ................................................................................................. 142
6. Breach of Contract and Remedies (Module VI) ............................................................................ 181
7. Representative Contracts (Module VII) ......................................................................................... 212
8. Special Contracts (Module VIII)............................................................................................ 268
9. Digital Contract (Module IX) ............................................................................................... 326
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Contract: Concept & Its
Role in a Developing Society
Master in Business Laws
Law of Contract
Course No: I
Module No: I
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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Materials Prepared By :
1. Prof. N.L. Mitra M.Com., LL.M., Ph.D.
2. Mr. S.V. Joga Rao B.Com., LL.M., M.Phil.
Materials Checked By :
1. Mr. T. Devidas LL.M.
2. Ms. Sudha Peri LL.M.
Materials Edited By :
1. Dr. P.C. Bedwa LL.M., Ph.D.
2. Mr. V. Vijaykumar M.A., LL.M., M.Phil.
3. Mr. Harihara Ayyar LL.M.
4. Mr. P.P.R. Nair
National Law School of India University
Published by
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
Printed at
National Printing Press, Koramangala, Bangalore - 95
Ph: 5710658
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INSTRUCTIONS
Basic Readings
The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics
included in the course. Experts in the area have collected the basic information and thoroughly analysed the same
in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative
provisions are also included. Care has been taken to communicate basic information required for decision making
in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading
information provided are to be selected by making marginal notes using markers. The first reading, therefore,
necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the
implications of those informations. In the second reading the reader has to critically analyse the material supplied
and jot down in a separate note book points stated in the material as well as the critical comments on the same. A
third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving
problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at
every stage.)
Supplementary Reading
Several supplementary readings are suggested in the materials. It is suggested that the reader should register with
a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National
Library, any University Library where externals are registered for the purpose of library reading, any commercial
library or any other public library run by Government or any private institution. Readers in Metropolitan and other
big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept
in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking
notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her
place may request the Course Coordinator to photocopy the material and send it by post for which charges at the
rate of .50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in
advance. The Course Coordinator shall take prompt action on receiving the request and the payment.
Case Law
The course material includes some case materials generally based upon decided cases. These cases are to be
studied several times for,
(a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified
It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis
of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and
practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/
appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter
arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done
one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary
often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the
decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few
exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence.
Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On
receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the
experts comment to the students. Through these exercises one can build up an effective dialogue with the experts
of the Distance Education Department (DED).
Problems and Responses
After reading the whole module which is divided into several topics and sub-topics the reader has to solve the
problems specified at the end of the module. The module is designed in such a manner that a reader can take about
a weeks time for completing one module in each of the four courses. It is expected that after finishing the module
over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit
is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the
problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the
candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared.
After completing the exercise the student is directed to send the same to Course Coordinator for evaluation.
Though there is no time stipulation for sending these responses a student is required to complete these exercises
before he/she can be given the certificate of completion to appear for final examination.
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Contract : Concept and its Role in a
Developing Society
TOPICS
1. Genesis of Contract..................................................................................... 7
2. Contract : How to make............................................................................ 11
3. Justification for Contract............................................................................ 19
4. Types of Contract......................................................................................... 23
5. Terms of a Contract.................................................................................... 26
6. Contract in the Changing Society.............................................................. 29
7. Relevant Provisions of the Act................................................................... 33
8. Case Law...................................................................................................... 34
9. Problems....................................................................................................... 36
10. Supplementary Readings............................................................................. 40
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1. GENESIS OF CONTRACT
SUB - TOPICS
1.1 Introduction
1.2 Early history of Contract Law
1.3 Contract as a method of creating new rights
1.4 How is a contract made?
1.5 Definitions
1.1 INTRODUCTION
A modern industrial society is primarily built upon the fabric of
contract. The relational integration and determination of mutual
rights and obligations to a great extent, are dependent on ex
contractum (out of contract) terms. There is contract around,
between employer and the employees, producers and
distributors, vendors and the customers, carrier and the buyer
of services and the like. Even family relations also start with
contract, marriage being either a contractual relation or similar
to it. The very basic principle of market functioning in the early
period of mercantalism and industrialisation was laid down on
the efficient functioning of contractual relation by relative
assessment of rights and duties arising out of a contract. In a
modern state, government is also becoming a very important
party in contractual relations. It is, therefore, necessary to
understand how and when parties enter into such a contract in
order to examine their mutual rights and obligations, and the
time of origination of such rights and obligations. In order to
correctly evaluate these aspects, one has to understand the
following:
1. Whether the parties have agreed to make any binding right
and obligation for themselves?;
2. How they have made it?;
3. What are their mutual advantages and obligations?;
4. How they intended to perform their mutual duties and
when?;
5. What are the conditionals? and
6. What happens if one of the parties is unable to fulfil his/her
obligations?
Here we shall try to explain you why, when, and how a contract
is made.
1.2 EARLY HISTORY OF CONTRACT LAW
Generally speaking history of human civilization has experienced
several legal systems. Some of which are still in vogue in pure or
moderated form. Leading legal systems are:
1. Ecclesiastical/religious system is based on the religious,
textual and customary processes inducted through religious
faith and belief;
2. Romana-Germanic system is based on growing codification
on logical foundation as well as clear customary practices
which are secular in character. One of the earliest code was
Justenian code;
3. Civil law system based on a well structured constitutional
legal regime with inquisitorial procedural system. Western
European countries follow this system;
4. Socialist system with high public interest involved specially
on the issue of freedom of contract; and
5. Common law system which provided golden opportunity
for mercantilism and capitalism to develop with rapid
industrialisation. Besides, more than half of the globe was
under the domination of this common law system under
the British in eighteenth, nineteenth and early twentieth
centuries.
In Common law, Law of Contract was carved out of the law of
tort in the fourteenth and fifteenth centuries. Initially, three
writs' (Writ is a specific order/direction by the court to act in
a manner specified) used to play a very important key role. In
case of agreements of loan and credit Writ of debt was issued.
In clear cases of agreements, especially in writing, on transfer
of landed properties writ of covenant was issued asking the
party to perform his part and a writ of trespass was issued in
the event of any party to the contract of quasi contractual
situation transgressing the rights acquired by the other party.
Another writ to provide remedy in the event of a party to the
contract committing breach, known as Writ of deceit was also
issued. Trespass was issued in the event of physical injury to
person and property and deceit was issued in wide range of
cases. Similarly a composite writ of debt-debtenu used to be
issued in a situation where the defendant used to unjustly detain
something, on which, the plaintiff had the claim or was entitled
to possess. Of course the functional distinction between the
writs could not be very clearly stated now. One can, of course,
start carefully tracing the history.
The basic principle of action on civil wrong was based upon
three clear actions or inactions on the part of the defendant.
For example a person could have done something which is per
se wrong. In law it is known as Misfeasance. Such as, A agreeing
to sell to B something on which A has no right of title and
possession, and consequently B cannot acquire title or
possession. Secondly, a right act could be wrongly done, which
in law is termed as Malfeasance. Such as, A by use of coercion
forces B to sell his land to A. Here, A has used foul means
which he could rightly do as well i.e., without the use of force.
On the other hand, a right thing not done at all is known in law
as Nonfeasance. Such as, A not paying back the amount of
loan taken from B. In all these above cases the plaintiff could
seek justice against the action or inaction of the defendant. The
court used to issue writs in order to deliver justice to the plaintiff
by appropriately designing a simple or compound writ. But as
matters got complicated during the period of mercantilism at
the early part of industrialisation, different theoretical
foundations were necessary to legally bind parties in different
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contractual situations. In early sixteenth century the court of
Kings Bench formulated another remedy known as Assumpsit.
One could trace the conflict of ideas on remedying in the event
of breach of contract between court of Kings Bench and court
of Common pleas. Anyway, according to the court of Kings
Bench under every executory contract the parties used to assume
or promise to pay an amount or deliver goods. Thus action on
assumpsit was held to be more appropriate than the limited
applications of writs. Writs had pigeon-hole application
whereas contract required a wider legal remedies, especially
when contract of services were also involved during the period
of early industrialisation. In actions of assumpsit during the
earlier period there was scope for speculation as to the matter
of promise gratuitously made. Gradually, English courts held
that a quid pro quo would be required in all cases of promises
to be legally binding excepting where a promise is ipso facto
made binding under courts seal [This is explained in detail
subsequently on consideration]. With the rapid growth of
industrialisation in the last hundred and fifty years, importance
of contract could not be over estimated in all legal systems.
Moral foundations of a promise to make it legally binding in
religious or ecclesiastical systems, could not hold the system.
The principle of Pacta Sunt Servanda of Romano-Germanic
system meaning thereby, promise once made is binding or one
must observe ones words given to other, else he takes the curse
of the God, a principle of the ecclesiastical system could not
hold the test of time. Rapid industrialisation required more
transparancy in the legal system. Gradually more and more
countries started codification of the law of contract. India
however, has its codified contract law enacted in 1872. One
can easily understand the benefits of codification, viz.,
1. transperency of law at any given point of time;
2. easy public accessibility; and
3. amendability with the change of time and need.
The argument made by common law advocates against
codification is that it makes law more rigid as compared to the
judge made law, is untenable. Judges by their nature of training
and work, tend to become rigid and Status quoist (meaning
person supporting status quo). Hence Common Law system
based upon case law became mostly non-dynamic specially
before Karl Marx came on to the scene. Legislative process,
on the other hand, is bound to respond quickly to the requirement
of time. Members of the legislature as represent the people so
they understand well the need of the time and the people in a
better way.
In fact with rapid globalization of economic production
relations and quicker communication links, a uniform
commercial code is bound to come for the whole world in the
long run. The movement is already felt strongly. Through
multi-lateral treaties and conventions many areas of the
commercial contract have already been globally codified.
Marine contracts, contracts of transnational services, tele-
communication contracts, contracts of exports and imports,
international commercial arbitration, technology use contracts,
contracts on Intellectual properties etc. are either already under
some sort of globalised code or under high globalisation. One
can, at this stage, note the growing number of global legislations
in the area of contract. Sir Henry Maine (Friedman, Law in a
Changing Society, 119-120) is perhaps right when he said that
codification is a test of modernisation of the legal system. One
may further add to it by suggesting that universalisation and
secularisation are perhaps other two attributes of the most
advanced legal culture.
1.3 CONTRACT AS A METHOD OF CREATING NEW
RIGHTS
Contract is the method through which individuals make law
for themselves by creating rights and obligations ex contractas.
As a human being, a person shall have some rights, duties and
obligations ex factum i.e., by mere fact of being a person in the
society. For example, basic human rights or fundamental rights
or family rights like right of parenthood, right of succession,
right of paternal or maternal names etc., are rights ex factum.
But each individual is an economic being as well as a social
identity. As an economic being he/she takes rational economic
decisions to enter into contracts with others to derive better
social, economic and other pleasures, through such relations
by creating new rights and obligations. A person understands
that his/her factual social existence shall be more meaningful if
he/she takes economic decisions rationally. By entering into a
new contractual relation and thereby altering his/her position
in relation to creation of wealth. Contract is the sole method
of altering factual situations and raising more and more wealth
and economic satisfaction. Without contractual relations
society would have remained static. Through contract wealth
of a person is increased, so also of societys and society is made
dynamic.
1.4 HOW IS A CONTRACT MADE ?
A contract is made between two or more parties where-
a. An agreement is made through one party making an offer
and the other accepting the same; an offer accepted
becomes a promise;
b. The agreement being legally enforceable in so far as it fulfills
the following conditions:
(i) parties must be willing to enter into a legal relation;
(ii) parties must be competent to enter into a contract
that results in legally enforceable rights, duties and
obligations;
(iii) parties must have given free consent to the terms of
the contract;
(iv) there is a lawful object and consideration;
(v) the agreement is not against public policy or morality;
and
(vi) the agreement is not otherwise void in the eyes of
law.
c. Once an agreement fulfills the above conditions it becomes
a legally binding contract.
All these conditions require critical analysis.
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1.5 DEFINITIONS
In order to understand the law and technicalities of contract
specially as to when and how a contract is made, we are required
to have a clear understanding of denotative (area of application)
and connotative (quality and attribute) definitions of some of
the terminologies we use in this course.
(a) Proposal
In English common law a proposal is known as an offer. In
every contract one party, generally speaking, is required to take
initiative for proposing or offering a term which other party
may accept if interested to make an agreement. A proposal or
offer can be defined as an intimation by words or conduct, of
a willingness to enter into a legally binding contract, and which
in its terms expressly or implicitly indicates that it is to become
binding on the offer or as soon as it has been accepted by an
act, forbearance or return promise on the part of the person to
whom it is addressed. (Guest, A.G, Ansonss Law of Contract,
(24th Edn, LPE), p.28) According to sec. 2(a) of the Indian
Contract Act (ICA) when a person signifies to another his
willingness to do or to abstain from doing anything, with a view
to obtaining the assent of the other to such act or abstinence, he
is said to make a proposal. [See sec. 2 (a)]
(b) Acceptance
According to sec. 2(b) of the Indian Contract Act, when the
person to whom the proposal or offer is made signifies his assent
thereto, the proposal is said to be accepted.
(c) Promise
According to sec 2(b) a proposal when accepted becomes a
promise. Suppose A offers to sell his horse to B, and B accepts
the offer, there is a promise.
(d) Agreement
To make a contract there has to be an agreement. An offer and
acceptance constitute the agreement. According to sec.2(e) of
the Indian Contract Act, every promise and every set of
promises, forming the consideration of each other, is an
agreement. Suppose A offers Rs.1,00,000/- for Bs plot of
land and B accepts the offer, there is an agreement between A
and B.
(e) Contract
According to some juristic writers of the nineteenth century,
contract is an agreement between free and consenting minds.
In this subjective sense, the concept is very near to the Roman
idea of consensus ad idem, i.e., the meeting of two minds.
There are obvious difficulties in accepting this definition
because individual liberty and freedom of contract - the two
essential notions necessary for consenting minds, are two ideal
classical notions that have cased to have idealistic attraction in
an acquisitive society of modern times. For example, a young
boy of 13 or 14 years, Ram Kishan, ran away from his home at
Baheri on the 9th of June 1993. The father offered a reward of
Rs.500 to anybody who traces the boy and brings him home.
On July 19, Mr. Harbhajan was at Dharmshala of Bareilly
Railway station. There he saw the boy, overheard part of the
conversation of the boy and realised that he was Ram Kishan.
He promptly took the boy to the Railway Police station where
he made a report and sent a telegram to the boys father. Could
Mr. Harbhajan be entitled to the reward? In this example, it is
immaterial to argue whether the extent of Mr. Harbhajans liberty
to trace the boy is of paramount consideration, or the extra
effort to undertake the liability of finding out the boy. Rather
objectivists try to define the term more positively by defining
the contract as a promise enforceable by law. This positive
definition has also certain demerits of irreconcilability with
questions of morality and ethics at times. Suppose, the father
came to know that Mr. Harbhajan traced the boy but just before
he could take the boy to police station and sent the telegram he
withdrew the proposal for reward. Is this not an immoral or
unethical act for him to do? In fact, at times some subjective
considerations become essential on the issue of legality and
illegality. For example, in the above situation, the question
whether Mr. Harbhajan did fulfil all conditions of the offer for
reward was the issue in consideration. For the time being let us
take the advice of Anson, that certain legal concepts are
defeasible. These are capable of being withered or defeated
in a number of different contingencies but if no such
contingency arises, the import remains intact. The Indian
Contract Act 1872, has tried to define the term in Sec. 2(h) in
the same positive manner as an agreement enforceable by law
is a contract'.
(f) Void agreements
An agreement which is not enforceable by law at all is an
agreement void ab initio i.e., from the very beginning. This
means that such agreements do not create any rights or
obligations in favour of or against the agreementing parties.
The second marriage of a Hindu spouse, while the first marriage
subsists, does not create any rights in favour of the second
spouse, and hence there is no necessity of a decree of divorce.
In other words, if a party to an agreement, agrees to do an act
which he is forbidden by law to do, no contractual rights or
obligations arise. Such an agreement cannot be the basis of
any further agreement, because all those consequential or
collateral agreements also become void ab initio. For example,
A agrees to sell a property to B to which he has no title or right
of possession. This agreement therefore cannot create any right
in favour of B, nor an obligation against A. Now suppose,
relying on the validity of this agreement B agrees to sell the
same property to C, that agreement is also void ab initio. In
Cundy v. Lindsay [(1878) 3 App.C.459]. The plaintiff received
an order for handkerchiefs from Blenkarn who gave his address
as, 37 Woodstreet, Cheapside. He signed his name to make it
look like Blenkiron & Co. a respectable firm known by
reputation to the plaintiffs and carrying on their business at
123, Woodstreet. The plaintiff sent the goods to Blenkiron &
Co, 37 Woodstreet, where Blenkiron took possession of them.
He later sold them to the defendants. It was held that there was
no contract between the plaintiffs and Blenkarn, as the plaintiff
had never intended to deal with him. So the property in the
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handkerchiefs did not pass to Blenkarn, and, consequently, he
could pass none to the defendant. So plaintiff was entitled to
take the whole lot of handkerchiefs from the defendant, and the
defendants argument that they had purchased the goods
bonafide, for value consideration was not deemed a valid
defence.
(g) Void Contracts
A contract which is valid at the time of entering into it, but
becomes void at the time of performing the contract due to
change of circumstances is known as void contract. That is, if
a contract is enforceable by law at the time of entering into it,
but becomes unenforceable at the time of execution, such
contract is known as void contract. A contract collateral to a
void contract is not necessarily void. For example, suppose
Suresh has landed property in Bombay. He received a notice
of acquisition on 1-1-1994. He thought that in order to
substantiate the market rate of the land or a reasonable value he
could resort to an agreement of sale of the land. So he offered
his land for sale to Dinesh for Rs.50 lakhs. Dinesh was unaware
of the notice of acquisition. This agreement is void ab initio
and no importance is to be given to the existence of agreement
while computing the compensation. Whether Dinesh had paid
any advance on the agreement need not also be considered.
But suppose Suresh and Dinesh had entered into the agreement
for sale - purchase of land before the issuance of notice of
acquisition to Suresh. In such a case, consideration could be
given while computing compensation about the existence of
that contract, which had become void on the service of the
notice. We can take another example to this point. Manish, a
minor, sold a property to Dinesh, who later on sold part of the
property to Harish. Here both the sales are void, because the
agreement between Manish and Dinesh is void ab initio, and
consequently the later agreement between Dinesh and Harish
is also void. But suppose, Manish is an adult person and he
agrees to sell the property to Dinesh because Dinesh has
threatened to kill his brother unless Manish agrees to sell the
property. Now suppose the sale did take place, and thereafter
Dinesh sold part of it to Harish. After sometime Manish applied
to the court and did prove that he had to agree because of the
threats from Dinesh. The Court gives the decree of avoidance
i.e., declares the contract between Manish & Dinesh void. Here
Manish will not be able to get the part of the property sold to
Harish, because the contract between Dinesh and Harish was
valid and could not be terminated on grounds of avoidance of
contract due to Coercion, unless of course Harish was also a
party to that coercion or Harish had purchased the property
with knowledge of the coercion.
(h) Voidable Contracts
A contract which is avoidable at the option of a party is known
as voidable contract. In other words, a voidable contract is one
where one party can go to the court on justifiable plea and can
avoid the contract under the direction of the Court. Such a
contract remains absolutely valid until the court gives the order
of avoidance. As per sec. 19(a) & (b) of the Indian Contract
Act, a contract is voidable by the party suffering from the
consequences of coercion (S.15), undue influence (S.16), fraud
(S.17), and misrepresentation (S.18). Once the court gives the
order, the contract becomes void.
(i) Illegal agreement
An illegal agreement is one where, if the agreement is performed
parties would violate the provisions of some law. For example,
A offers to pay Rs.1,00,000 to B if B murders C. This agreement
is illegal. Such an agreement itself is an act of conspiracy. If B
murders C, B will be prosecuted for murder and A on charge of
murder or abetment of murder. All illegal agreements are void,
but all void agreements are not illegal.
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2. CONTRACT : HOW TO MAKE
SUB TOPICS
2.1 Introduction
2.2 Proposal
(a) Various methods of making a proposal
(b) Buyer is the offeror in the common law system
(c) Proposal must not be confused with invitation to treat
(d) Proposal must be communicated
(e) Counter offer
(f) Proposal to be made to a person
(g) Withdrawal or revocation of a proposal
2.3 Acceptance
(a) Acceptance must be in toto
(b) When is acceptance made?
(c) Silence is no acceptance
(d) Acceptance by conduct
(e) Revocation of acceptance
2.4 Where is the contract made?
2.5 Proposal and acceptance in three forms
2.6 Types of Agreement
2.7 Contract : A final comment
2.1 INTRODUCTION
According to the provisions of Indian Contract Act, 1872, an
agreement enforceable by law is a contract. So to make a
contract there has to be (i) an agreement and (ii) it must be
enforceable by law. An agreement is a promise or a set of
promises. A proposal when accepted becomes a promise.
Formation of contract can be explained by the following chart.
CONTRACT
(S. 2h) Agreement enforceable by law
(S. 2e) Promise/Set of promises
(S. 2a) Proposal + (S. 2b) Acceptance
Note: From the above, it is clear that the basis of contract is a
proposal made by one person and an acceptance of the
same by another.
2.2 PROPOSAL
The following are the ingredients in a proposal : (i) two persons
are necessary for a proposal - One to make it and the other to
receive it. If A wants to sell a house, there has to be another
person B, who would be willing to buy the house i.e., A cannot
sell the house to himself; (ii) the proposer must signify his/her
willingness; (iii) to do something or to abstain from doing; and
(iv) the proposal requires the consent of the other person. Let
us take an example. A proposes to sell his land for Rs. 50,000
and signifies it to B, which B may accept. This is a proposal.
But one must not confuse desire of a person with intention to
do or abstain from doing a thing. For example, A has a desire
to become Prime Minister of the country, which he tells to B.
This is not a proposal in the legal sense of the term.
2.2.1 Various methods of making a proposal
Proposal or offer can be made in various ways. A bus plying in
a route is an offer by conduct. Any intending passenger getting
into the bus, accepts the service. But that is not so in the case
of plying a train. Train fare has to be tendered in the counter
proposing the destination and the ticket must be obtained.
Proposing the place for journey and tendering the fare is the
proposal and issue of tickets is the acceptance, the railway ticket
itself being the formal document of acceptance. A railway time-
table or a book list or a menu chart are not proposals. These are
mere documents of information available to the intending buyer.
Proposal may be given in writing. In some cases a proposal is
required to be in writing. For example, a government contract,
a contract of significant resource mobilization or a contract for
transfer of immovable property are given in writing. On the
other hand, in innumerable contracts in our daily life proposal is
made orally. When parties are situated at a distance, an oral as
well as a written proposal is generally made through the use of
tele-communication system like telephones, telex, teleprinter,
telegram, fax or through letters.
2.2.2 Rules for ascertaining the offeror:
1. Labelling Method
In the common law system a buyer is generally the proposer.
In a modern agreement, the proposal is given in a clear form
and conditionalities of it often become transparent over a series
of dialogue which is required to be taken together to formulate
the final proposal. Sellers often stipulate conditionalities but
these are not the proposals. It is the buyer who formulates his
proposal on the conditionalities stipulated in such a form that
the seller can accept the proposal. For example, a person requires
a project loan from a bank. He makes an enquiry. The bank
stipulates that the project papers are required to be given in a
stipulated form specifying certain informations required to be
certified by a recognised chartered engineer and the loan can
be sanctioned on some definite terms and conditions. Whatever
the bank has stipulated would be considered as mere
information and the person seeking that information cannot say
I accept your terms and hence the bank would be liable to
provide a loan. It is upon the person seeking the loan to prepare
all papers as per the conditionalities and submit the proposal
which the bank may or may not accept.
Conceptually speaking, this principle of suggesting that a buyer
is always the proposer can be said to be a labelling process
i.e., the buyer is labelled as the offeror. In this labelling process
the court generally starts its calculation from the behaviour of
the customer in order to locate what is his offer and what are
the terms and when it is made in its entire form. Thus the court
makes the forward calculation as to what has happened one
after the other from the point of buyer giving his proposal.



12
2. Back Calculation Method
Some of the authors suggested a different inquisitorial method
of back calculation (meaning the court goes back to the first
instance giving rise to the contract to ascertain the rights and
liabilities of the parties. In this method the courts do not start
with the presumption that the buyer is the offeror) in which the
proximate action of the defendant is examined for determination
of plaintiffs remedy and then back-calculate the chain of
actions according to the approximation of remedy. Whereas
the former has a question of moral hurdle involved, the latter
has a principle involved in decision making. To make things
clear, suppose, a seller has marked a packet of dozen table
tennis balls at say, Rs.100.00 in the self-service counter. A
possible customer picks the packet up and tenders Rs.100.00
which the seller in the counter refuses to sell. In the labelling
method, buyer being the proposer, proposes the packet to the
seller at Rs.100.00. The seller may or may not accept it. Since
seller does not accept it, there is no remedy. The question
involved here is that how far the seller displaying the packet in
the self-service shelf stipulating a price and thereafter refusing
to sell it, is morally justified? Has he not ditched the buyer?
According to this argument the court has to critically look into
the behaviour pattern of the seller which has immediately caused
the grievance. Suppose the court finds the action of refusal to
sell as unjustified and unreasonable, it may back calculate and
decide that the price stipulation is itself a proposal. Suppose,
the packet is already sold and is inadvertantly placed in the
shelf, then the court may decide the action of the seller to be
justified and placement of the article and stipulation of the price
to be not an offer. Here the certainty in law is at stake.
Labelling makes decision making definite whereas the back
calculation meets the need for variations to be taken into
decision-making in each individual case but sacrificing
certainty. Business world prefers certainty than judicial
discretion and uncertainty.
In Mc Pherson v. Appanna, (AIR 1951 SC 184) the owner of
a house property had two local representatives for two
properties. Both were told to look after a particular property to
be sold. One customer wanted to pay for the house rupees six
thousand and the caretaker of the property sent the information
to the owner communicating the offer of rupees 6,000 by
telegram. The owner, in return, sent a telegram to the caretaker
stating Wont accept less than ten thousand. Caretaker
informed the proposer about the content of his masters telegram.
The same proposer immediately accepted whatever was
stipulated by the owner of property as the counter-offer and
later on sent a letter communicating his acceptance of the term
of paying Rs 10,000 for the property. Meantime, the other
representative sent another offer of Rs.11,000 which the owner
accepted and asked his representative to complete the sale-deed.
The earlier person filed a suit for breach of contract. Here the
court tried to examine the nature of the telegram of the owner
suggesting that he would not accept anything less than
Rs.10,000/-. This according to the court was not a counter
offer which could be accepted. Incidentally, it may be noted
that an offer cannot be conditionally accepted. If any condition
is attached to the acceptance, it becomes a counter offer. But
in this case it was not a counter offer since there was no definite
proposal in the telegram. It was merely an information that
anything less than Rs.10,000 would not be accepted. There was
no definite proposal. The earlier persons accepting to pay Rs
10,000 was itself the proposal which was never accepted by the
owner. Hence there was no agreement and, as such, no breach
of contract by the owner.
2.2.3 Proposal must not be confused with invitation to treat
Proposal and invitation, information and intention to propose
must be distinguished. The following examples would illustrate
the same:
i. The Secretary of a school advertised inviting applications
for the post of headmaster. X, an applicant was interviewed
for the post. The board of managers interviewed the
candidates and selected X for the post. A manager in his
individual capacity informed X about the selection. But X
did not get any letter of appointment. The court held that
there was no contract. The fact remains that there was no
offer. Advertisement for the post was merely intention to
offer. Application for the post was information. Interview
as the preparatory step for the possible offer. The letter of
appointment would only be the offer. (See Powell v. Lee
(1908) 99 L.Y. 284)
ii. A through telegram communicated to B, will you sell us
your Bangalore house ? Telegraph at what price. B replied
by telegram, `lowest price of the Bangalore house rupees
nine lakhs. A communicated back by telegram accepted
your offer of nine lakhs. It is not a contract because Bs
telegram of `lowest price is simply an information and
not a definite proposal. (See Harvey v. Facey ((1893) A
C 552-59) IE & E. 295, 309)
(iii) A advertised in the newspapers that an auction shall take
place at an address on a stipulated day and time. B reaches
the spot but finds the auction withdrawn without notice.
No action can be taken because it is an invitation to offer
and not an offer. (See Harris v. Nickerson [(1873) L.R.8
Q.B. 286]
The three examples given above relating to intention,
information and invitation to contract show the common law
situation of invitation to treat to be distinguished from the
offer or proposal. In civil law system things are not very
different. But in civil law system, for example in France, a
group of lawyers (Notably, Baudry Lacantinerie et Barde, 1,30.)
consider catalogues or trade circulars as conditional offers, i.e.,
offer open until the stock is exhausted. Goods displayed in the
shop window or on a counter with a price attached are also
legally analysed in the same way. According to them this is the
natural way. Ofcourse other section of the jurists as well as the
courts seems to be inclined in interpreting in the common law
way. They consider it only as an invitation to treat without
attaching any liability to the seller on the statements made. (See
Planiol et Ripert, 6,n
o
127,ni; Req. 29.4.1923 D 1904.1.136 et
al.) Ofcourse, as against the later there is a very strong objection
that this is to impute artificially the initiative to the wrong party
[See Carbomier, 2 (100)].
In most of the commercial contracts parties go through a chain
of events. In case everything goes well there is no problem.
But once a problem arises the whole process of the contract
requires a thorough scrutiny, in order to understand wherefrom
the offer started and upto what situation is simply remains as
13
an invitation to treat. It has already been stated earlier that the
common law system (followed in India) and the civil law system
of France and Germany have different ways of approach.
Whereas, in common law the identification is based upon the
buyer and seller, and the buyer makes the offer unless it is clearly
provided otherwise; in civil law the point of origin of the right of
promise, is taken as the first point of origin of the contract i.e.,
the offer. Upto that point, the dialogue between the parties in
exchanging information remains as an invitation to treat. Often
the offer itself crystallises after a long dialogue, containing
several enquiries, information, identification of subject matter,
offer of trade and cash discounts etc. Until the total offer
crystallises, there is no question of any acceptance. It means
that before the subject matter of the agreement is determined a
lot of information passes between the parties, and only then,
the buyer identifies the article he intends to buy. After a course
of dialogue and exchanges the buyer comes to understand the
reasonable price that he can offer. And, finally, they talk of a
lot of other issues like terms of sale, guarantees and warranties
and the after sales service. It may appear to the onlooker that
there are innumerable number of offers and acceptances
constituting the whole deal, but that is not so. In fact, when
everything crystallises and the buyer is in a position to propose
comprehensively, the offer is said to be made. Upto that level,
all that is thought to be various offers and acceptances are only
in reality invitation, intention and information necessary for
making an offer. Due to this complexity in modern commercial
contract, European law on contract started becoming codified
according to the common law practice of the buyer being the
offeror unless otherwise intended by the parties.
(d) Proposal must be Communicated
According to sec.3 of the Indian Contract Act, offer must be
communicated to the offeree in the manner intended by the
offeror. Uncommunicated offer is no offer and it cannot be
accepted. In Lalman Sukla v. Gouri Dutt,[(1913) ALJ 489]
the plaintiff was an employee of the defendant. He agreed to
go to Haridwar to search for the missing nephew of the
defendant and finally found the boy without knowing that the
defendant had announced some reward for the work. The issue
was could he demand the reward ! The court held that being
under the obligation, which he had incurred before the reward
in question was offered, he cannot claim the amount. A person
ignorant of the offer cannot be said to have accepted it only
because he has done something which the offer has stipulated.
Anson has rightly observed a person who does an act for which
a reward has been offered in ignorance of the offer cannot say
either that there was a consensus of wills between him and the
offeror, or that his act was done in return for the promise offered.
(Guest Ansonss Law of Contract 24 Edn, LPE, p.34).
Communication of offer is essential for its consequent
acceptance. A pair of cross offers with same terms from opposite
parties do not make an agreement unless one is made with
reference to the other. For example, suppose X intends to
purchase 800 tons of coal at Rs.700 per ton and writes to Y and
Y at the same time writes to X for selling 800 tons at Rs.700
per ton. These are known as cross offers where one crosses the
other at the transit. This is not a contract. (Tim v. Hoffman LC
(1873) 29 L.T. 271)
Terms of offer must also be communicated to bring out the
terms and conditions within the offer. This is very important
specially in the case of standard form agreements (Standard
form agreement is one where conditions are standardised by
the sale of goods and services in the form of information based
on which terms the proposer has to submit his proposal). For
example, a customer intending to get power connection has to
submit his proposal or application for power connection on the
basis of terms and conditions stipulated by the Board or in the
offer where terms and conditions are written elsewhere.
Suppose, the terms and conditions in a laundry are stated on
the backside of the bill. The notice of the customer must be
attracted to those conditions. In such a case it will be sufficient
if the proposal gives a reasonable notice of the contractual terms.
Suppose the front side of the document refers to vide reverse
or turn back or conditions given overleaf, such a notice is
enough to bring those conditions within the fold of the offer.
But if no notice is given and the conditions are kept outside the
promise, then the offer is not complete.
A proposal made through a telephone but not heard does not
become a proposal or offer. A teleprinter or a fax not bringing
the total proposal does not constitute any offer or proposal.
According to sec. 4 of the Indian Contract Act, the
communication of proposal is complete only when it comes to
the knowledge of the person to whom it is made.
(e) Counter-offer
If the offer is not accepted in its original terms and conditions
and is accepted with different terms or new terms stipulated,
the original offer is rejected and it stands terminated. Afterwards
the same cannot be activated. The acceptance with new terms
or suggestion of new terms becomes a counter-offer. For
example, A offers to sell a farm to B for Rs.10,00,000. B wants
to pay Rs.9,50,000. This is a counter-Offer. Suppose A refuses
it. B afterwards wanting to pay Rs.10,00,000 would not be
able to accept As earlier proposal because that proposal has
been terminated or cancelled with the counter-offer. Bs offer
is to be termed as a new proposal, i.e., a counter-offer.
Sometimes in a business contract it becomes very difficult to
identify the proposal in its entire form with conditionalities,
because the proposal crystallises over a bilateral dialogue. If
the dialogue is through correspondence or is made orally, the
whole of it must be viewed in its entirety according to the
intention of the parties in order to determine the proposal in its
entire form.
(f) Proposal to be made to a person
Proposal or offer must be made to another person. In one sense
it means that offer must not be made to self. For example, a
stock brokers offer for buying and selling the same share
benami, shall not constitute a proposal at all. The second
meaning is that offer requires two persons, one to make it and
another to whom it is made. A proposal made by the Managing
Director of a limited company for and on behalf of that company
to the Managing Director but acting in his private capacity, is a
good proposal. Here the proposer is the limited company since
it is a legal person. The other person is the MD, acting in his
private capacity. But it is not necessary that offer has to be made
to a definite person. Offer not made to anyone in particular
i.e., one which may be accepted by anyone, is a general offer.
14
When offer is made to a specific person it is a specific offer. For
example, if a reward is declared to anyone who finds the lost
dog, it is a general offer, but Xs offer to purchase Ys law
books for Rs.50,000/- is a specific offer. The third meaning is
that a person to make an offer and to receive it must be either
a person-in-fact or a person-in-law. The corporate bodies are
person-in-law and can make or receive offer, ofcourse, within
the scope of its terms of incorporation. These principles are
same or similar in all other legal systems.
(g) Withdrawal or revocation of proposal
Offer or proposal may be withdrawn at anytime before it is
accepted. This is the general principle of revocation of offer in
common law as well as in civil law. In India the codified law is
more detailed, because the law relating to acceptance was not
the same earlier in India as it was in the common law or in the
civil law system. According to sec.5 of the Indian Contract
Act, proposal can be revoked at anytime before the
communication of acceptance is complete as against the
proposer but not afterwards. Suppose X proposes to buy Bs
motor car for rupees one lakh on 1.1.92. The letter reaches X
on 5.1.92. The offer is made on 5.1.92. Now suppose B agreed
to sell the car and sends the letter on 8.1.92. The communication
of acceptance is complete against X on 8.1.92. So if X wants
to withdraw or revoke the offer, he has to do it before 8.1.92.
Suppose X agrees to be the guarantor if Y discount bills with
State Bank of India for a period of twelve months. This is
known as a standing offer for twelve months against acts of
discounting bills. On every bill being discounted, the offer or
proposal turns into a promise. Suppose after three months X
revokes his guarantee giving notice, he shall not be liable for
further discounting of bills. (See Offord v. Davies (1862) 12 N.S.
748. A Statutory law, or a law passed by the legislative system
of a country and promulgated on the people is known as a
codified law. So Indian Contract Act, 1872 is a codified law).
In unilateral contracts (Unilateral contract is a promise for an act
e.g. reward for an act) the revocation of the proposal becomes
sometimes a complicated issue. Suppose X proposes a reward
of Rs.1000 if anyone brings back his lost dog. Here if X is
allowed to withdraw his offer before the finder of the lost dog
brings it to him, there may be a miscarriage of justice. Suppose
X comes to know that B has found his lost dog and is about to
come with it and X withdraws his offer. This will be against
fairness and natural justice. In order to prevent such miscarriage
of justice Lord Denning held that when the other party started
to execute the act, the acceptance is complete and hence it cannot
be withdrawn thereafter. In Errington v. Errington, [(1952)
1 KB 290] a father promised that if his son and daughter-in-
law paid up the mortgage amount on the property, the property
would be theirs. They started paying off the mortgage amount
in instalments. Lord Denning held that the promise could not
be withdrawn thereafter though the execution of the promise
could be done only when the payment is made. Some authors
argue that acceptance must be distinguished from performance
of the act. To the parties who have already commenced
execution, the proposer is obligated to keep the offer open for a
reasonable time. But there are contradictory decisions on this
issue. For example, The House of Lords in Morrison
Steamship Co. Ltd v. The Crown ((1924) 20 U.L.R. 283)
held that commencement of execution of an act does not convert
offer into a promise. It may only entitle the party for an action
for damages on quantum merit.
According to sec.6 of the Indian Contract Act, revocation may
be (a) by way of notice; (b) by lapse of time; (c) by failure of the
acceptor to fulfil condition precedent to acceptance; and (d) by
incapacity or death of the acceptor.
Distinction must be made between lapse of an offer and
revocation. Though effect is same, revocation is by the deliberate
action of the proposer. He withdraws it by notice. But a proposal
is dampened due to lapse of time. A proposal standing for a
specific time limit, becomes automatically withdrawn at the end
of the time unless it is renewed. Infact, such a withdrawal does
not require a notice to be served. If it is to be renewed, then
only a notice is to be served again. Similarly, if the acceptor is
unable to fulfil prior condition, the proposal is automatically
withdrawn. A proposes to pay B Rs.500 if B marries C. B marries
D. The proposal is automatically withdrawn.
Death or incapacity automatically revokes the proposal, if the
other party comes to know of it before acceptance. In civil law,
such as French law, death or insanity of the proposer
automatically terminates the proposal provided it happens
before acceptance. Knowledge of the acceptor is immaterial.
(Req. 21.4.1891 D.1892.1.181) It seems that French law in this
regard is more logical than the common law on which statutory
law in India is framed. Similarly, a proposal open for a definite
period, according to French law cannot be retracted but in
common law, so also in Indian law, proposal for definite or
indefinite period can be revoked with notice.
2.3 ACCEPTANCE
A proposal becomes a promise only when it is accepted by the
other party to whom the proposal is made. For example, a traveller
intending to go to a place by train tenders the fare at the railway
counter. This is a proposal made to the railways for going to a
place by train. When the ticket is issued to the proposer, it is
said to be accepted. Once accepted the proposal becomes a
promise. Acceptance can be formal through written documents.
For example, suppose A writes to B, offering to purchase Bs
plot of land for Rs. 50,000. B writes back accepting the proposal.
This is a formal acceptance. But acceptance may also be made
orally or by conduct. Suppose A advertised in the newspaper
announcing that anyone who contracts influenza within a
fortnight of taking the antiflu tablet made by the proposer
would be given a thousand rupees. If B takes the tablets after
seeing the advertisement and gets the flu within a fortnight, B
would be entitled to the money because Bs taking, of the antiflu
tablet is his acceptance of the proposal. (See Carlill v. Carbolic
Smoke Ball Co). Similarly, if B gets into a plying route-bus, he
is bound to pay the fare since he has accepted by his conduct
to travel in the bus. (See Derry v. Peak) Thus acceptance may
be in the form of (a) an act ; or (b) a promise. If A proposes to
give his daughter in marriage to B and B accepts, B is actually
promising to marry As daughter on the stipulated date and
time.
According to sec.2 (b) of the Indian Contract Act, when the
person to whom the proposal is made signifies his assent
15
thereto the proposal is said to be accepted. As such, a
proposal to be accepted requires (a) assent of the promise;
and (b) of the actual proposal in its entire form.
(a) Acceptance must be in toto
A offers B his horse in harness for 30e. B accepts it in
double harness. (Jordon v. Norton) This is no acceptance.
This is only a counter-offer. Acceptance in order to convert a
proposal into a promise must be absolute and unqualified.(U.P.
State Electricity Board v. Goel Electric Stores, AIR 1977 All
494) Any alteration of terms or changing of conditions of the
proposal by the acceptor while accepting will make the
acceptance a counter-offer. Counter-offer is the new offer which
now the original proposer is to consider for acceptance. Suppose
A proposes to purchase Bs house for Rs.60,000 and B says he
may consider a proposal not below Rs. 1,00,000. Bs statement
is not a counter-proposal. Bs statement amounts to (1) rejection
of As proposal out right and (2) information to A that B is
likely to consider any proposal unless it is Rs. 1,00,00 or more.
So far as manner of acceptance is concerned the acceptor is
to accept the proposal in some usual and reasonable manner.
But if the proposal prescribes a manner in which it is to be
accepted, and the acceptance is not made in such manner, the
proposer may, within a reasonable time after the acceptance is
communicated to him, insist that his proposal shall be accepted
in the prescribed manner not otherwise, but if he fails to do so,
he is deemed to have accepted the acceptance. For example, A
writes to B offering to purchase Bs house for rupees nine lakhs
and requires acceptance by post. Suppose B meets him and
communicates his acceptance orally. A may insist that B write
his acceptance. If he does not insist, it will be presumed that A
has accepted his acceptance.
(b) When is acceptance made?
Unless the proposer dispenses with communication of
acceptance, for example by proposing that find out my lost
dog I will pay you rupees two hundred, acceptance is made
when it is communicated. According to sec.4 of Indian Contract
Act, acceptance is complete.
(a) as against the proposer when it is put into the course of
transmission so as to be out of the power of acceptor, and, (b)
as against the acceptor when the proposer receives the
acceptance. For example, A accepts by a letter or by a telegram,
Bs proposal of offering Rs. 6 lakhs for As house, as per As
instruction. As soon as the letter is posted or the telegram is
despatched, the communication of acceptance is complete
against the proposer and the acceptance is complete as against
the acceptor as soon as the letter or the telegram reaches B. In
England acceptance is complete against both acceptor and the
proposer as soon as the acceptance is put into the course of
transmission. That is, acceptance once made cannot be taken
back because it is complete and binding against both the parties
as soon as it is put in the course of transmission. According to
the principles of law in England, the course of transmission is
stipulated by the proposer and therefore, the course of
transmission becomes agent of the proposer. Suppose if the
proposer stipulates either post or, telegram or telephone or Fax,
as the course of transmission, the communication media
becomes the instrumentality of the proposer, or in other words
the agent of the proposer. As such, a letter posted with proper
stamp and correct address, or telephone made or a telegram
sent or a letter sent by fax must be taken as complete against
both the parties. But a cut-off communication or a dead letter
box or a disconnected fax system or a dead telephone line cannot
set the acceptance in the course of transmission. Such as, a
proposal orally made and accepted orally with a disturbed sound
on account of an overflying aeroplane and not being heard by
the proposer is not a communication, as Lord Denning tries to
explain. If a modern course of communication is inoperative,
one cannot say that the acceptance is complete when the acceptor
puts the acceptance in the inoperative system. But if the fax
machine is operative and the message is received, the proposer
cannot take a defence by saying that there was no staff in the
office to send the message to the defendants. On the contrary,
if the fax machine does not receive the message or suddenly
stops taking the message in full without communicating the
exact position, the acceptance is not made at all.
(c) Silence is no acceptance
Silence is no indicator in a positive legal system such as ours.
Justice Macnaughten once observed that human mind is a trait,
even the devil does not know what is in the mind, what to talk
about a poor judge ! Positive law requires clear positive
indication of acceptance. So long the matter is confined to the
self of the acceptor, it is not regarded as acceptance. Besides,
no one can compel another to consider his/her proposal and
therefore to speak. Suppose X makes a proposal to Y. X cannot
compel Y to consider the proposal and to speak on it. Y has the
right to completely disregard it and maintain his silence. So
silence cannot be presumed as a mode of acceptance because if
it is allowed, a person is compelled to speak. Suppose X
proposes to Y and suggests if you remain silent I will take it
as acceptance. It means now Y has to say no if she does not
intend to marry X and as such cannot ignore Xs proposal. This
is unreasonable and an infrigment on the right of a person.
But that does not mean that conduct cannot be prescribed as a
means of acceptance. Suppose a pharmaceutical company
advertises reward to anyone contracting influenza within a
fortnight of using the anti-flu tablet manufactured and sold by
the firm, the firm has to give the amount to anyone who
purchases the pill, uses it and has an attack of flu within the
time. This is not a mental acceptance only because
communication of acceptance is not made i.e., swallowing the
pill was not informed to the company. Acceptance may not
be communicated if the proposer dispenses with the
communication. If swallowing the pill is enough prescription,
no further communication is needed. If one follows the
instructions printed in the prescription of the company, as in
the instant case, that would constitute acceptance and no
communication to the company is necessary. Acceptance may
be made either by a Promise to act in future or immediately.
The nature and manner of acceptance is determined by the
proposer. In a case where a proposal was made to supply coal
at a price to a railway company and the manager of the railway
company wrote the letter of acceptance but kept the same in his
drawer, it was held there was no communication of acceptance
and hence no contract. (Brogdan v. Metropolitan Railway
Company). It was almost similar to a mental acceptance and
not allowed in a positive legal structure. Ofcourse under old
16
Hindu law in India silence used to be treated as acceptance.
However under our present contract laws, this principle does
not find a place.
(d) Acceptance by conduct
Acceptance can be validly made by conduct if conduct is
prescribed by the proposer to accept an offer. As for example,
any proposal to reward against an act by the offeree can only
be accepted if the offeree does that act. Suppose a
pharmaceutical company gives an advertisement for paying
Rs.10,000 to any person who takes the anti-flu tablet for 7
days continuously and yet contacted with flu within a month
after taking the tablets. Now suppose Mrs. X purchased the
tablets and consumed those tablets for 7 days and then suffered
an attack of flu within 15 days, can she demand Rs.10,000 from
the company? Can the company refuse payment because Mrs.X
did not inform them about her taking the tablets and thereby
accepting their offer? Can the company take a plea that it was
only inviting offers for taking the tablets manufactured by the
company?
Here the advertisement of the Company cannot be treated as
information to treat. In an information to treat a response is
needed for making a proposal. Here no such reaction is needed.
As such, it is a proposal by itself. The proposal stipulated the
action of taking the anti-flu tablet for 7 days and contacting flu
within one month. It did not prescribe that the proposer had to
communicate acceptance before taking the tablet. Hence
fulfilment of the prescription by the company is quite a valid
acceptance. It is acceptance by conduct.
(e) Revocation of acceptance
In English common law acceptance once made cannot be
revoked. But as suggested earlier in English law over the years
two rules of communication transpired. One for oral
communication of offer and acceptance in which the
communication of acceptance to the offer is emphasised, i.e.,
acceptance is made only when acceptance is communicated to
the offeror. The other for the acceptance in writing and sending
it by post where communication is complete as soon as it is put
into the course of transmission. Here in the second case, whether
the offeror really got the communication of acceptance or not
cannot be the issue at all. In both the cases, common law is
based upon the premise that acceptance once made cannot be
revoked or withdrawn. According to Anson, acceptance is like
a lighted match-stick to a train of gun-powder. Once the lighted
match-stick is thrown, there is no escape from explosion.
A lighted match-stick cannot operate explosion unless the gun
powder is dampened by operation of time or by counter-offer.
It can also not operate if the gun-powder is removed i.e., the
offer is revoked before the acceptance. Otherwise, acceptance
once made, makes the proposal a contract which is a complete
fusion between a proposal and acceptance.
In India, the law is different. Here acceptance can be withdrawn
at anytime (sec. 4 and 5 of ICA) before the acceptance is
complete as against the acceptor i.e., before the acceptance is
actually communicated to the proposer. Suppose A accepted
through a letter a proposal from B. As soon as A puts the letter
of acceptance in the post box, it is binding on B and he cannot
thereafter withdraw his proposal. But as far as A is concerned
it is still not binding because as against A the acceptance is
complete only when the letter reaches B. If A sends another
letter through speed post and that letter reaches B earlier than
the letter of acceptance, the second letter withdrawing the
acceptance is valid and binding. According to sec.5 letter of
revocation is complete against the revoker as soon as it is posted
and against the other party when it reaches. So, As withdrawal
letter is required to be posted before his letter of acceptance
reaches B.
The reason for giving an opportunity of revoking the acceptance
is perhaps an equitable one. While the proposer has a
reconsideration time between his proposing the issue and
acceptors putting in his acceptance, acceptor is given a
breathing and rethinking time between putting in a letter of
acceptance and its reaching the proposer. This is perhaps, a
demand of equality of opportunity.
In India therefore there can be a situation where the acceptance
is complete against the proposer, because the communication
of acceptance is put in the course of transmission, but the
acceptance is not complete against the acceptor himself even
though he puts the acceptance letter into the communication
line. Apparently it looks illogical, because, the proposer is
bound by the contract though he does not know when was the
communication put into the course of transmission and he is
not in receipt of the same. He cannot take the plea that since he
has not received the communication of acceptance, he is not
bound by it. Lord Justice Macnaughten explained this apparent
contradiction. According to him, while making the offer usually
the offeror stipulates the media of communication. So if the
acceptor has correctly and in time puts the acceptance in
transmission as per the offerors directions, has he not done
everything what he is required to do? So on account of any
fault in the media of transmission if either party has to suffer it
is illogical that the proposer should suffer instead of the acceptor.
Ofcourse Justice Macnaughten did not take into account
mechanical faults of the communication media in his principles
of communication but by and large his logic is sound. According
to some authors, this rule of communication of acceptance is
full of dichotomy, because, even with knowledge that the
acceptance has been made the acceptor himself is not bound by
the contract until the letter reaches the proposer. In defence of
the statutory provision it can be said that the Statute wanted to
extend similar opportunity of revocation to both the offeror and
acceptor; because, the offeror can revoke his offer until the
acceptance is put in course of transmission. Hence the
opportunity to rethink is also given to the acceptor also, and,
he can withdraw the acceptance before the acceptance is
received by the proposer.
Those who argue for the dichotomy, offer and acceptance
according to them are made in two places, which makes the
problem of jurisdiction of the court very complicated. This is
explained in the next issue.
2.4WHERE IS THE CONTRACT MADE
The question where is the contract made, is a very important
issue because (a) it determines the time of forming the contract;
(b) it stipulates the jurisdiction of the court; and (c) it affixes the
rights and obligations of the parties. A contract is made as
soon as it is accepted. Under the common law system, as per
17
the postal rules acceptance is complete as soon as acceptance
letter is put into the course of transmission. So if the acceptance
letter is put into the course of transmission in Rai-Bareilly,
acceptance is complete there at Rai-Bareilly, and the District
court there will have jurisdiction. In England once the letter of
acceptance is put in the course of transmission, the acceptance
is complete against both the parties and the contract is
immediately formed. Sir William Anson gave a simili for
acceptance in the lighted match-stick to a train of gun-powder
example. In this logic the media of communication acts as the
agent of the proposer. In India we do not follow the same rule in
totality. Acceptance is complete, as already stated, against
proposer, when the letter is posted. Hence, in so far as formation
of the contract is concerned, the time and place of posting the
acceptance letter in transmission is decisive, the acceptor also
gets an equitable opportunity to withdraw his acceptance till
the letter reaches the proposer. The media of communication is
treated independent and not as an agent of the proposer. The
postal rule is clear and easily applicable in cases where
conventional communication method is followed. But in case
of modern communications the difficulty arises. For example, if
acceptance letter is posted at Bangalore, acceptance is complete
in Bangalore and Bangalore city court shall have the jurisdiction.
But suppose it is faxed from Bangalore to Delhi. Where is the
contract made? Lord Denning explained the situation in Entores
Ltd v. Miles Far East Corporation [ (1955) 2 ALL ER]. According
to him there is no clear rule about contracts made by telephone
or by telex. Communication by these means are virtually
instantaneous and stand on a different footing. Lord Denning,
therefore, rejected the postal rule and decided that it is not until
the message is received that the contract is made. In essence
original offer was faxed by the defendant firm, Miles Fax East
Corporation of Amsterdam, against which, the London firm being
the plaintiff made a counter offer. As such the court decided
that since the acceptance through fax was received in London,
the London court has the jurisdiction in deciding the case. Thus
according to this decision, in all cases where telephone, telex or
fax is used, the place of receipt of the message is construed as
the place of contract.
This rule is against the postal rule and Indian law regarding
communication. According to this age-old principle, as soon
as the acceptance is put into the course of transmission at its
place, acceptance is complete (in case of India, of course against
the proposer). So the place of dispatching fax or telex or
telegram should be the place determining the jurisdiction, not
the place of receipt of the message. As such decision in Entores
is just the reversal of the common law principle, acceptance is
effective when and where it enters the channel of
communication. Justice Shaw also noticed that the views of
state courts in the US which enforced this old Common law
principle. According to the state courts in the US by the
technical law of contracts the contract is made in the district
where the acceptance is spoken (See Traders & Co. v. Arnold
Gin Co. Tax Civ App 225 SW. 29 1011). Justice Hidayatullah
had very rightly doubted the justiciability of the `ratio in
Entores and held that the language of sec.4 of the Indian
Contract Act could cover the case of communication over the
telephone, as well.(Bhagwandas Goverdhandas Kedia v.
Girdharilal Purshottamdas & Co. & others, AIR 1966 SC
543).
2.5 PROPOSAL AND ACCEPTANCE IN THREE FORMS
Proposal and acceptance can take shape in three ways, viz,
promise for a promise or bilateral promise ; promise for an action
or unilateral promise ; and action for an action or bilateral action.
A bus plying on a route and an intending traveller makes a
contract by bilateral action i.e., plying of the bus is the proposal
and getting into it is the acceptance. A promise of a reward for
an act is a unilateral promise, e.g., a promise of a reward for
finding a lost child is a unilateral promise. A promise to buy a
land is a bilateral promise because there are two promises one
proposes to buy the land and the other accepts it. Contract may
be executory or executed. For example, a promise to pay railway
fare for a travel takes the form of a contract only when the
promise to pay the fare is executed. This is an executory contract,
but a land deal remains an executory promise for long because
execution of the contract takes place after a long time. This is
an executory contract. A unilateral promise is binding only when
the other party has acted according to the demand of the
promise.
2.6 TYPES OF AGREEMENT
A proposal accepted becomes an agreement. Such agreements
may be either expressed by words spoken or written or it may
be implied i.e., not spoken or written in words. For example X
sits in Ys shop and sells goods in the presence of Y. There is
deemed to be a contractual relation between X and Y authorising
X to sell goods. (sec 9) An agreement may be reciprocal in
nature. Bilateral promises are reciprocal promises. For example,
a contract between A and B that A will deliver goods and B will
pay on delivery of the goods. This is a reciprocal promise (sec
8 & 51). An agreement may be a joint promise by two or more
promisors or by two or more promisees. In an agreement there
can be an alternate promise, as well. For example, A promises
his home X or Y to B for Rs. 51,00,000. This is an alternate
promise. Agreements may be contingent depending upon a
future uncertain event or conditional, based on conditions,
expressed or implied.
2.7 CONTRACT : A FINAL COMMENT
An agreement enforceable by law is contract. Therefore, to be
a contract there has to be (a) agreement as explained above and
(b) such an agreement must be enforceable by law. Sec.10 of
the Indian Contract Act stipulates that an agreement to be
enforceable by law :
(i) must be entered into by persons capable of entering into
the contract (Ss. 10, 11 and 12);
(ii) must be a product of free consent i.e., consent free from
coercion, undue influence, fraud, misrepresentation or
mistake (Ss, 15 to 22) ;
(iii) must have valid consideration and lawful objects (Ss. 23,
24 and 25); and
(iv) must not be otherwise void under Ss. 26 to 30.
Ofcourse, contract is to be entered into by parties intending to
create a legal relation. Social agreements are kept out of the
realm of contract because otherwise social relations shall be
vitiated by stringent legal provisions. In Balfour v. Balfour,
Lord Justice Atkin opined that in respect of such social and
domestic promises each home is a domain into which Kings
18
writ does not seek to run, and to which his officers do not seek
to be admitted. In this case a husband promised to send 30
monthly to run the household to his wife who remained in
England on medical grounds whereas the husband returned to
his place of work at Ceylon. The Court held that the promise
here was not intended by either party to be attended by legal
consequences.
A flow chart of agreement and the revocation of offer and
acceptance is given below :
Against 'A' Against 'B'
Offeror Acceptor
1-1-94 10 a.m. (Posted) 7-1-94 at 1 p.m (Reached)
7-1-94 at 10 a.m. (Posted) 14-1-94 at 2 p.m. (Reached)
23-1-94 at 6 p.m. (Reached) 14-1-94 at 4 p.m. (Posted)
27-1-94 at 10 a.m. (Reached) 22-1-94 at 1 p.m. (Posted)
Explanation of Chart
On 1-1-94, A dropped a letter of offer to B which reached B on
7-1-94 at 1 p.m. In the meanwhile A had sent another letter
withdrawing the offer on 7-1-94 at 10 a.m. B had despatched
his letter of acceptance on 14-1-94 at 4 p.m., which reached A
on 23-1-94 at 6 p.m. Before the letter of acceptance reached A,
B had sent his letter revoking the acceptance on 22-1-94 at 1
p.m. which reached A on 27-1-94. In the light of these facts, let
us ascertain whether a valid contract has been achieved between
the parties applying the principles governing communication
and revocation of offer and acceptance.
The sequence of events relating to communicatin and revocation
of offer and acceptance against A and B may be explained as
follows:
Communication of offer is complete on
Revocation of offer is complete on
Communication of acceptance complete
Revocation of acceptance complete
Now the questions are:
1) Is there a valid offer and acceptance?
2) Is there a valid revocation of offer?
3) Is there a valid revocation of acceptance?
4) Ultimately, what is the effect of correspondence?
Communication of offer is
valid acceptance. In effect, there cannot be a binding contract.
Similarly the letter of revocation of offer is valid because it has
reached the acceptor before the letter of acceptance is posted.
Letter of acceptance is not valid against 'A' because it reached
him on 23-1-94 by which time, the offer was withdrawn and
came into effect against 'A' on 7-1-94 itself. Revocation of
acceptance is not significant and effective as there was no valid
offer, nor acceptance existing on 22-1-94.
Since the letter of acceptance is posted at 4 p.m. on 14-1-94, by
which time the offer is already withdrawn, there cannot be a
Figure 1: Flow Chart of Agreement & Revocation
19
SUB-TOPICS
3.1 Introduction
3.2 Sociological Reasons
3.3 Political Reasons
3.4 Economic Reasons
3.5 Towards building of a Legal Theory
3.1 INTRODUCTION
Contract is a method through which individuals make law for
themselves by creating rights and obligations through mutual
understanding and contract. As a human being a person enjoys
some rights and at the same time he is liable to discharge certain
duties and obligations ex factum, i.e., by mere fact of being a
person in the society. For example, some human rights or
fundamental rights or family rights like right to parenthood,
right of succession, etc, these are rights ex factum. But each
individual is also a social, political and economic being having
a distinct identity. Thus each one of us design and acquire
some rights or are subject to certain duties and obligations by
mutual understanding for making a society developed and
progressed. Contract is the sole method of altering factual
situations through the process of give and take. Without this
contractual relations society would have remained static. This
contractual phenomenon is explained by different people in
different ways. Several theories are formulated to explain why
a contract is a dynamic process of building up of a society.
According to the theoretical justifications the reason why a
contract is made is explained in the following paragraphs.
3.2 SOCIOLOGICAL REASONS
Society progresses through the process of contract. Contract
brings various sections of the society closer through interacting
processes which make the culture uniform and standardise the
practice. Through the instrument of contract, Hobbs explained,
that there is a constant mix in the society. Some sociologists
term it as a hot-pot in which there is a constant movement of
social institutions. According to Durkheim through the process
of mutual give and take a social equilibrium is arrived at.
Contract is a modality through which individuals as well as
social institutions reach at a consensual goal. Even the patterns
of contract depends upon the structure of society. As for
example, the patterns of a contract in a pre-feudal or feudal
society are different from that of an industrial society. The
technique of contract, therefore, differs on a basis of social
mores. In a feudal society the personalised variations in the
contractual paradigm is more visible than in an industrial society.
In an industrial society on the other hand, there has to be a
growing standardization, and therefore, the span of individual
choice or action is limited. Obviously, why contract, what
contract, and how contract - all these questions are dependent
upon the social structure and the social system. According to
Max Weber in a capitalist society social institutions have
conflicting interests. Necessarily, therefore, people involved
in those social institutions have conflicting interests. Such
conflicting interests are constantly at friction by their respective
positions and through their respective strengths and weaknesses.
These conflicting strengths and weaknesses are adjusted through
the method of contract. Therefore according to him there is no
presumption of equality in the status of contract. Contract brings
those conflicting social interests at an optimal balance beyond
which the system cannot be stretched. Hence, contract is a
limited modality of interest adjustments.
3.3 POLITICAL REASONS
Various political theoreticians tried to explain the emergence
of the state through a system of multi partite contract between
people living over a geographical location with a distinct identity
of a common language, culture and ethos. According to Hobbes,
state is a product of a social contract of all persons in a given
geographical location with distinct identity in a situation of utter
chaos and confusion which Indian philosophers described as
Matsyanyaya, and the French philosopher called it leviathan
i.e., anarchy. In such a desperate situation, people who wanted
to put an end to the chaos and confusion argeed to transfer all
their rights to a ruler/sovereign who in turn would protect all
individuals. Thus according to Hobbes the state, authority and
kingship originated. The other French philosopher propounding
the social contract theory gave another version. According to
Locke people of a given area having distinct identity agreed
amongst themselves not in a stage of chaos but at a stage of
understanding and mutual cooperation to transfer, one most
important power in them to a person or a group of persons.
This important right was the right of interpretation of law of
nature. Thus contract was the method through which one right
of all the individuals, viz, the right to interpret the law of nature
was reposed to their Sovereign. In fact, the Constitution of
India has also followed the same pattern of social contract
process and that is the reason why the preamble declares that
the people of India gave to themselves this Constitution.
According to the political theoreticians contract is a mutual
agreemental process through which a party acquires a right,
interest or a profit or a benefit as against duty, responsibility,
loss or detriment. Whereas the power of a person is acquired
initially by factual situation like strength, force, etc, and
consequently been limited by the terms of agreement. The
alteration of this power is possible through collective processes
which may be bi-partite, tripartite or multipartite. These mutual
consultations, understandings and give and take make the whole
socio-political system dynamic with substantial moral
foundation. Thus positivists who believe contract being a
process of regulation of inter-personal relations through
understanding which can be explained through right duty
correlation. Naturalists explain the basis of contract through
3. JUSTIFICATION FOR CONTRACT
20
the moral foundation of mutual understanding, faith and trust.
This type of theoretical foundation of contract is explained by
Stoics in their rule of pacta sunt servanda. On the other hand,
a positivist political philosopher would try to explain the
foundation of contract through an Hohfeldian process.
According to the contract emanates from power to determine
right of a person as against duty to another. It is a process of
empowering one and disempowering the other. It involves a
kind of immunity to one as against liability to another. It is
therefore seen as a distinct political process. In fact the citadel
of democracy through adult franchise is based upon the political
justification of contractual social living. Of course such a kind
of political justification of contractual power is based upon
certain assumptions. For example, all human beings are equal,
each of them has the minimum level of conscience to determine
and regulate inter-personal and intra-societal rights and duties,
immunity and liability, empowerment and disability.
Citgwick in his Element of Politics (1879) said, Performance of
contract presents itself as the chief positive element, protection
of life and property been the chief negative element. Withdraw
contract suppose that no one can count upon the fulfilment
of any engagement and the members of a human community
are atoms that cannot effectively combine; the complex
cooperation and division of employments that are the essential
characteristics of modern industry cannot be introduced among
such beings. Suppose contracts are freely made and effectively
sanctioned, and the most elaborate social organisations become
possible, at least in a society of such human beings as the
individualistic theory contemplates; gifted with mature reason
and governed by enlightened self-interest. Of such beings it is
prima facie plausible to say that, when once their respective
relations to the surrounding material world have been determined
so as to prevent mutual encroachment and secure to reach the
fruits of his industry, the remainder of their positive mutual rights
and obligations ought to depend entirely on that coincidence
of their free choices, which we called contract (p.82). Thus the
very basic political foundation of industrial society is based on
the principle of contract. Sir George, Jessel, M.R., observed in
Printing and Numerical Registering Company v. Sampson, that
it is that men of full age and competent understanding shall
have the utmost liberty of contracting, and that their contracts
entered into freely and voluntarily shall be held sacred and shall
be enforced by courts of justice. This is how the moral
philosophy of a liberal society has been built up.
3.4 ECONOMIC REASONS
Economic theoreticians try to explain contract as an economic
means of acquisition of wealth. If there is no contract between
parties for mutual exchange of goods and services the society
shall remain as primitive and static. According to them the
productivity of the whole society depends upon the individuals
right to mutually exchange their economic resources to the
maximum exploitation of utilities. The economists rely on
certain basic presumptions. As for example, according to them
every human being is an economic rational being. This rational
human being constantly attempts to maximise his material
satisfaction through exchange of economic goods and services
and while doing this the person takes the decision on the pure
consideration of the quality of the goods that can maximise his
satisfaction. And of course every economic being is a dis-
satisfied identity having insatiable demands. The function of
economics depends upon the triangle of scarcity, choice and
exchange. Material goods and services are scarce, and that is
why there is always an existence of a person whose demand is
more than the others. Therefore, he tries to acquire the goods.
The peaceful way of getting the goods is achieved through
exchange. Here comes the importance of contract. Suppose in
As family there is a patient and the doctor has advised A to
give oranges to the patient. As demand for oranges would go
up because utility of the orange to the patient has become very
high. Suppose A is mentally prepared to offer one rupee for an
orange. The market price is 75paise per orange, then there is no
difficulty for A to contract for orange with the supplier. A then
thinks of having the second orange for which he may be ready
to pay not more than 90 paise, third one for 80 paise and the
fourth one say 70 paise. A has to stop his purchasing after third
orange because seller is not in a position to give him at less than
75 paise per orange. That is, why a person enters into a contract
for what thing, and in what quantity depends upon his need
and the utility of goods to him, and at what stage his marginal
utility and suppliers marginal cost is same as the supplier cannot
sell at a price below his marginal cost.
Utilitarians like Bentham would explain the reason of contract
through the concept of pain and pleasure. According to him
every person while entering into contract with another person
makes a comparative assessment between the pleasure that he
would enjoy by acquiring goods or services from another person
and the pain that he is going to sustain on account of losing
goods or services or money. Therefore this exchange is going
to be the key work in the contract. Through this exchange
process individuals maximise their satisfaction of their utilities
and the state attains their highest gross national income.
Therefore, economist will always try to explain the basis of a
contract through assessment of comparative advantage.
Economists who belong to the critical, analytical thought explain
contract through relative improvement of capital building
process. According to Pareto, a change in the betterment of an
individual without injuring the interest of any one is an
improvement in the economic standing of the parties. This
improvement is known as Pareto improvement. If all individuals
in a given society through the process of contract make
improvements to their lot without any detriment to another, the
total improvement thus arrived at is known as Pareto optimality.
For example in the following two diagrams we find that the price
of a commodity in a competitive market is Rs.10/-, in which A
and B are two operators. Their marginal cost curve is as follows:
21
In this diagram the vertical line represents price and the
horizontal base is the number of commodity produced by A and
B. Whereas MM is the marginal revenue curve of firm A and
firm B. The two figures show that As marginal revenue equals
the price in the market while the production is at 20 and the price
is at Rs. 5. In the above example, if A produces 21st unit, his
marginal revenue shall be less than Rs. 5. In case of B, if B
produces one less, his marginal revenue is higher than Rs. 5.
Now if A produces the 21st unit and sells it to B at Rs.5/- and
suppose B in a year could produce only 5 units and purchases
the additional unit from A, B will have no profit no loss situation
because had he produced the 15th unit his marginal cost would
have been Rs.5/-. This is a situation where one party improves
the position but not at the cost of the other. This is known as
Pareto improvement. In a perfect competitive market Pareto
optimality is reached at a point when marginal utility of the
consumers becomes equal to the marginal cost of the producers.
After that point further Pareto improvement is not possible. So
people resort to contract and mutually exchange either goods
and services or money in order to arrive at this Pareto optimality,
provided there is a free competitive market.
According to Posner, if contract is allowed to operate resources
it will gravitate their most valuable use. If A owns a good that
is worth only $ 100 to him but $150 to B, both will be made
better-off by exchange of As goods for Bs money at any price
between $ 100 or $ 150 ... By making both of them better-off
the exchange will also increase the wealth of the society (of
which they are members), assuming the exchange does not reduce
the welfare of non-parties more than it increases As and Bs
welfare. Before the exchange which, let us say, takes place at a
price of $ 125 A had goods worth $ 100 to him and B had $ 125 in
cash a total $ 225. After the exchange, A has $ 125 in cash and
B has a good worth $ 150 to him, a total of $ 275. The exchange
has increased the wealth of society by $ 50 (ignoring, as we
have done, any possible third party effects). [Economics of
Contract Law, p.1]
According to Marxian economists the production relation of a
society which is the fundamental economic relation determines
its political structure. Individual freedom which is talked about
in market-contract society is essentially based upon the status
of the contracting party. As such a contract society is based
upon the dynamics of inequality and exploitative exercise. Thus
Marxians economists are against contract society. Whether such
a society is possible or not is a matter of conjecture where each
one will be equal to others and each will have rights and
obligations on all material sections of the society. Naturally
Marxians economists also believe that contract is the method
through which individuals make alteration to their material
relation.
Figure 2
22
3.5 TOWARDS BUILDING A LEGAL THEORY
After carefully appreciating the various social, political and
economic explanations and theories on contract one may try to
build up a legal theory of contract. For example, a positivist
(one who believes that law is and not `ought ; there is a
cause and effect relationship in legal application to fact and
decision and there has to be a sanction element in the instrument
of law.) would try to theorise contract as a mutual agreement
between the parties which law as public instrument will enforce
and therefore it has to take care of a private agreement. Such a
theory is based upon the concept of right, duty, correlation.
The definition of contract in the Indian Contract Act as an
agreement enforceable by law is, therefore, based upon the
principle of legal positivism. This type of theorisation is
independent of the concept of morality. But when issues arise
out of the question of inconceivable gain in an agreement with
a pardanashin woman or an agreement against public policy or
morality, should law enforce such a type of agreement ? Basic
requirement of judgement based upon law and justice are not
co-equal. Therefore often a positivist approach faces a limitation.
Lewellyn in one of his articles [1931, 40 Yale L.J. 704] attempted
a realist approach in answering the question why contract?
According to him contract is a social and legal machinery
appropriate to arranging affairs in any specialized economy which
relies on exchange rather than tradition (the manner) or authority
(the army, the USSR) for apportionment of productive energy
and of product. It is a machinery which like status, but in contrast
to torts, makes it easy to insist on affirmative action. Contract
in the strict sense is the specific legal machinery appropriate
when such an economy moves into the phase of credit
meaning or connoting thereby future dealings in general; in
which aspect, the mutual reliance of two dealers on their
respective promises comes of course into major importance.
This machinery of contract applies in general to the market for
land, goods, services, credit or for any combination of these ....
Thus one can see the distinction in approach in the theoretical
perspective as well. Whereas positivist theory emphasizes the
political foundation of contract, i.e., the character of
enforceability, realists look from multidisciplinary angle with
more emphasis on the economic relations, of course without
minimizing the utility of legal enforcement of promises.
23
4. TYPES OF CONTRACT
SUB-TOPICS
4.1 Introduction
4.2 Types of contract on the basis of parties
4.3 Types of contract on the basis of time
4.4 Types of contract on the basis of function
4.5 Types of contract on the basis of nature
4.6 Standard form of contract
4.1 INTRODUCTION
Contract may be of different types based upon its nature, parties,
time and function.
4.2 TYPES OF CONTRACT ON THE BASIS OF PARTIES
A contract essentially involves more than one party. It has
already been pointed out earlier that such contract can be formed
in three ways, viz., promise for an act. Therefore, there cannot
be a contract which involves either an act or promise of one
party alone. There can be a situation where a unilateral contract
involving only one partys promise or an act can be treated as
contract. For example, if A promises to donate Rs.10,000/- to
the commissioner of a municipality for the construction of a
town hall, such promise of donation cannot be a contract because
there is no reciprocity of either promise or action. That means A
in exchange does not receive any right or benefit for the promise.
This type of promise is known as promise without consideration
and therefore not a valid contract. But suppose based upon
that promise of A, the Commissioner of municipality undertakes
the construction work and incurs the liability for paying the
construction bill. A shall be liable for his promise of donation,
based upon the principle of promissory estoppel. (Kedar Matt
v. Gouri Mohammed) This is an equitable principle which we
will discuss in the chapter on consideration. This type of
unilateral promise can be called as unilateral contract, is specified
in sec. 25(1) of the Indian Contract Act.
Almost all commercial contracts are bilateral in nature. Where
two parties enter into a contract each promising to do some act
for the other, such contracts are known as bilateral contracts.
For example, in a contract for the construction of a bridge the
contractor promises to construct the bridge against the promise
of government or local bodys promise for payment. All contracts
for sale of movable and immovable properties and other contracts
for lease, rent, mortgage etc are bipartite contracts. In fact most
of the contracts are bilateral, determining rights and obligations
of the two parties to the contract.
In a multilateral contract, there are several parties determining
their rights and duties under the contract. For example GATT
(General Agreement on Tariff and Trade) is a multipartite contract.
4.3 TYPES OF CONTRACTS ON THE BASIS OF TIME OF
PERFORMANCE
In a contract one party generally agrees to perform an act for
another. Such contracts shape the rights and obligations of the
parties in reference to that contract within a reasonable time,
provided that, the execution of the contract is completed. Such
contracts where both parties have fulfilled their obligations are
known as Executed contracts. But if both the parties are yet to
execute the contract, the contract is known as executory. Time
is a very important factor in the capital market contracts (Stock
Exchange Contracts). A contract which is to be performed
within one day from the date of entering into the contract, is
known as Spot contract. A contract which is to be performed
within a reasonable time though no time limit is mentioned is
known as Ready contract. On the other hand if a contract is
to be performed on a future date, i.e., if the contracting parties
agree that on a future date the stock shall be transferred and the
payment shall be made it is known as future contract.
4.4 TYPES OF CONTRACT ON THE BASIS OF
FUNCTION
When private parties enter into a contract to determine their
mutual rights and duties, it is known as private contract. All
mercantile contracts, property contracts, service contracts, etc
are private contracts. On the other hand contracts entered into
by the state or the government or by any instrumentality of the
state are known as public contracts. There is distinction between
private contract and public contract in so far as procedure in
making the contract itself is concerned. This will be discussed
in detail in the chapter on government contracts.
4.5 TYPES OF CONTRACT ON THE BASIS OF
NATURE
Contract may be written or oral. Most of the commercial
contracts are entered in writing, but contracts made by common
people in their daily life are oral. Contracts may be express or
implied. Oral contracts or written contracts are express contracts.
But sometimes contracts may be made impliedly. For example, if
A allows B to sit in his shop and transact business in his absence,
in the eye of law it shall be deemed that there is a contract of
employment or agency between A and B.
A contract made between parties based upon mutual promise is
known as reciprocal promise. For example, A agrees to deliver
goods to B as against Bs promise of paying the money on
delivery. Here both the parties promise to perform an act. This
type of contract consisting of mutual promises/acts is known
as reciprocal contract.
A contingent contract is one to perform or not to perform an
act, if some future uncertain event, collateral to such contract
does or does not happen. As for example, A contracts to pay B
Rs.10,000/- if Bs house is burnt. This is a contingent contract
(sec.31), because burning of Bs house is an uncertain event
24
which cannot, under normal circumstances, be controlled by
the parties to the contract.
A contract is conditional if the performance or non performance
of a contract depends upon a condition. For example, A agrees
to take Bs house on rent at Rs.5,000/- per month provided the
house is re-furnished. This condition may be either prefixed or
suffixed. Conditions are said to be prefixed, if the performance
of the contract depends upon prior fulfilment of the condition.
A suffixed condition on the other hand is one where contract
terminates on happening of the condition after the contract is
performed. For example, A transfers his house to B on condition
that B will not marry C. The house will remain with B only till he
refrains from marrying C. The moment he marries C, the contract
is terminated and A gets his house back.
4.6 STANDARD FORM OF CONTRACT
The impact of industrial civilization in realm of contract is felt
mostly through the process of standardization. For example, a
seller selling two sets of the same model of TV cannot sell them
at different terms to two customers at a given point of time. The
terms of sale are standardized for all possible customers. Any
variation in the terms is treated as unfair trade practice. Standard
form of contract is, therefore, one where terms of the contract
are all standardized and generally printed. These terms are often
determined by trade association for the use of its members either
contracting inter se or with outside public. The basic idea behind
standard form contract is that a trader of uniform goods cannot
discriminate between his customers. The argument of buyer
being the offeror shall not insulate the seller for discriminating
between the buyers of the same or similar commodities in so far
as price, quality and services are concerned. To make it clear
suppose X approaches a dry cleaning shop with some of his
garments. The charges are fixed according to the nature of
clothes. The condition of the service and the delivery are all
printed at the back side of the bill. Therefore, the customer has
no other option excepting agreeing to terms and conditions so
fixed. The philosophy that like must be treated alike is the
outcome of the culture of industrial civilization. Therefore the
shopkeeper cannot argue that since the customer was willing to
pay more and offered more he accepted a price higher than
what was fixed. Standard form contract, therefore, is a contract
where the customer after being fully aware of price, terms and
conditions i.e., conditions of delivery and terms of payment
opts to enter the contract. The Standard form contract, therefore,
is philosophically against the principle of buyer being always
the offeror.
Standard form contracts save time and make several types of
contract based on risk assumptions and risk distributions quite
possible. As for example, contract of insurance, carriage, banking
and the like. It is also a device to clearly exclude liability by
express provision where under normal circumstances a liability
would arise. Ofcourse taking this plea a person cannot avoid
the professional risk. Standard form contracts have the
following pattern:
(i) Conditions of the contract, like subject matter, services, price,
delivery, payment, etc. are clearly stated
(ii) Prefixed or suffixed conditions either binding the contract
or terminating the contract are stipulated
(iii) Rights and duties of the parties are specifically outlined, if
not positively atleast by negative statements commonly
called as Exemption Clauses; and
(iv) Consent of the parties are indicated either by signature or
by reference.
Standard form contract has certain basic principles:
(i) Knowledge presumed
A signatory to the contract cannot argue that the contents of the
agreement have not been communicated, or that these were not
read or not explained. Suppose X gives her clothes to a dry
cleaner and in the bill it is printed that if the goods are not
taken delivery off within a week from the delivery date indicated
in the bill the dry cleaner shall not be responsible for any damage
caused. In such a case suppose the goods are not taken delivery
off within a week and the goods are kept open on the floor, and
are partly damaged by rats, the shopkeeper may refuse to accept
liability. X cannot take the plea that she is ignorant about the
condition. Of course liability from negligence cannot be
exempted through any exemption clause like this. For example,
X takes a cycle on rent from a shop. The standard form receipt
states that for personal injuries the shop shall not be liable. But
if the injury is caused to X on account of the cycle being not fit
for riding the shop shall be responsible. (White v. Warwrick
& Co Ltd [(1953)1 WLR 1285]
The exemption clause is one where insulation is provided against
negligence. For example, if X undertakes to decorate Bs
premises at the sole risk of B as regards loss or damage by fire,
howsoever it may be caused. Under such circumstances even
if the house is damaged by fire due to negligence, X is not
liable to compensate, especially when X urges Y to take an
insurance against fire.(J. Archdele Ltd v. Com Services Ltd
(1954)1 WLR 459)
At present consumers are generally protected against loss on
account of negligence inspite of such exemptions, provided
these exemptions can even remotely be connected with unfair
trade practices.
(ii) Notice of Exemption
The exemption is required either to be printed in the document
of contract or clearly mentioned in it. Suppose X asks her niece
to buy a railway excursion ticket for her. The ticket on the face
of it had the printed words see back and on the back a
statement that it is issued subject to the conditions set out in the
companys time table which one could buy for Rs.12/-. If one
of those conditions exempt the railway company from liability
of personal injury, can X being injured in the trip claim damages
on the plea that she is illiterate and could not get the notice
from the ticket nor had she enough money to buy the time table?
In a similar situation the British court held that as the notice was
25
clear and as the ticket was a common form document the railway
was not liable (Thompson v. L.M & S Rly [(1930) 1 K.B 41]).
Similarly if X purchases an air ticket and puts his baggage in the
carrier for which he is given a ticket containing a clause that
damages rule as per the conditions stipulated in the ticket. In
the ticket the rule is printed in very small words which X knows
to be printed but cannot read. A clause so printed stipulates
that for loss of the baggage a compensation of $ 40 only is
payable per bag unless a higher value is declared and higher
freight is paid. Can the traveller in such situations, claim the
higher compensation on the plea that such a small printing
cannot be properly read ? Such an important condition is
required to be directly brought to notice. In a similar case it was
held by a British court that the defendants would have to show
that they gave a reasonable notice that the writing contains
conditions.(Burnett v. Westminister Bank Ltd [(1965)3 WLR
863]). Presently this type of notice is critically reviewed by the
judiciary from the point of view of public interest. If any small
indication of notice goes against the consumers interest then
the courts generally started ignoring such exemption clause.
In an interesting case, the plaintiff booked a room in the
defendants hotel, and nothing special was told to her at the
reception desk where the contract was made. She later saw a
notice in her bedroom exempting the defendant from liability
of articles lost or stolen unless handed to the management for
safe custody. It was held that such a notice in the bedroom
cannot be said to have been incorporated in the contract because
the contract was made at the reception desk, where no
instructions were given to see notices provided in the bedroom.
(iii) Exemption clauses are strictly interpreted :
It is a well settled rule of construction that if one party puts
forward a printed form of words for signature by the other, and
afterwards it is found that these words are inconsistent with the
main object.... of the transaction as disclosed by the terms
specially agreed, the court will limit or reject the printed words
so as to ensure that the main object of the transaction is achieved.
[New Chatel Asphalte Co v. Bernett (1957)]. An example
may be taken from Glynn v. Margetson [(1893) A.C 351 1
WLR 356]. A bill of lading provided for shipment of oranges
by a ship lying in the port Malaga and bound for Liverpool with
liberty to proceed to and stay at any port or ports in any station
in the Mediterranean, Black Sea or Adreatic or on the coasts of
Africa, Spain, Portugal, France, Great Britain or Ireland for the
purpose of delivery of coal, cargo or passengers or for any
other purposes whatsoever. The ship went east of Malaga,
retraced her course and then reached Liverpool. As a result of
the delay the oranges deteriorated. The carrier was held liable
despite the deviation clause because the court limited the import
of the general words of the exception with reference to the main
object or intent.
(iv) Exclusion from fraud, misrepresentation, fiduciary
obligation or natural justice cannot be made:
No standard form contract can contain a clause excluding a
party from the liability arising out of misrepresentation, fraud
or fiduciary obligations or natural justice. Lord Denning in
several cases also held that the rules of a union purporting to
oust rules of natural justice would be void. Similarly a Director
or a promotor of a company has a fiduciary duty to the company
not to make a profit without disclosing his self interest. He
cannot opt out of such a duty by providing any exemption clause
in a contract between him and the company.
(v) Exemption clause should not be unreasonable :
The Common Law principle is that the exemption clause is not
invalid merely because it is unreasonable [Luddit v. Ginger
Cooti Airways Ltd (1947) AC 233]. But inherent inconsistency
and unreasonableness or irrelevance for the main purpose of
the contract shall vitiate exemption clause. Similarly a lawfully
bound duty cannot be obliterated by an exemption clause.
(vi) No fundamental breach can be covered up by an
exemption clause :
In Woolmer v. Delmer Price Ltd, [(1955)1 Q.B. 291] the
defendants agreed to store the plaintiffs fur coat at customers
risk. The coat was lost in some unexplained way. It was held
that the defendant could not rely on the exemption clause as
the coat might have been lost as a result of a fundamental breach.
Government contracts or big turn key contracts are examples
of standard form contract. Standard form contracts have several
advantages. They are :
(i) It shifts the risk of contract from buyer to the seller as far
as fixation of terms of contract is concerned. So buyers
option is either to enter into the contract or not to enter into
the contract;
(ii) Standard form contract saves buyers from exploitation;
(iii) All conditions of contract are certain and definite; and
(iv) The complexity of the burden of proof and evidences are to
a great extent simplified.
Example of a Standard Form Contract :
All insurance policies are standard form contracts. When a
person wants to insure his life, he has to accept the terms and
conditions specified by the Insurance company. He himself
cannot make any changes in the contract. It is a take it or leave
it contract, i.e., there is no compromise or special considerations
for anyone, and, even if some of the conditions result in hardship
to the person he cannot complain. Some other examples of
standard form contracts are : a cloak room ticket ; a laundry/dry
cleaners bill; a telephone bill etc.
26
5. TERMS OF CONTRACT
SUB-TOPICS
5.0 Introduction
5.1 Terms of Representation
5.2 Test of Contractual intention
5.3 Conditions and Warranties
5.4 Implied Terms
5.5 Construction of Terms
5.6 Exception Clauses
5.0 INTRODUCTION
The rights & obligations of contracting parties arise on account
of the express and implied contracts and warranties. In order to
enforce these rights and obligations, one must look into the
facts and context of each case, the intention of the parties etc.
Let us now examine the principles pertaining to the
interpretation of terms of contract.
5.1 TERMS OF REPRESENTATION
A commercial contract generally contains various terms in the
contract. All these terms are determined through a detailed
discussion over a period of time. Sometimes it becomes
necessary to analytically examine the whole affair of the contract
in order to understand what are the terms and conditions of the
whole contract. Some of these terms are expressedly stipulated
by the parties, but some other terms remain hidden and implied.
Some terms though stipulated are not essential but some other
terms though not expressly stipulated are treated as being very
important for the existence and performance of the contract.
Justice Williams explained these terms in Behn v. Burness
[(1863), 3 B.45.751] in the following terms:
Properly speaking a representation is a statement, or assertion,
made by one party to the other, before or at the time of the
contract, of some matter or circumstance relating to it. Though
it is sometimes contained in the written statement, it is not an
integral part of the contract; and consequently the contract is
not broken though the representation proves to be untrue.
In order to explain such type of representations, Anson has cited
two cases [Contract, pg.125]. In the first case, a private seller
sold a motor car to a firm of dealers. He told them that the car
was of 1948 model. The log book showed that it was first
registered in 1948. But, in fact, the car was a 1939 model and
the log book had been altered by some unknown person. The
court held that it was a mere representation, not giving rise to
any action for breach of contract.
In the second case, a motor dealer stated to a private purchaser
that the car has done only 20,000 miles, based on the reading
of the milometer whereas the fact was that the car had already
done 1,00,000 miles. The court held that the term was a
contractual one, and therefore, the contract was terminated. The
court distinguished the above two cases on the ground that, in
the first case the seller honestly believed what was stated,
whereas in the second case the fact stated should be within the
knowledge of the seller. The above distinction shows that some
terms in the contract become an essential part of the contract,
whereas others remain as representations.
Therefore, terms of contract are divided into two groups : (1)
those which form, the basic core of the contract, denial of which
will either amount to denial of contract or entitlement of
substantial damages. These types of stipualtions/statements
are called contractual terms or conditions; (2) those statements
which are innocent in formation, stated bonafidely, but are not
fundamental to the conception of the contract are mere
representations.
5.2 TEST OF CONTRACTUAL INTENTION
The main test as to whether a statement in a contract is a
representation or a contractual term is based upon the intention
of the parties, which is to be identified in the totality of the
evidence collected. As for example, take the following instances.
Raman offered hops for sale to Rahim. Rahim asked him whether,
sulphur has been used in the treatment of that years growth as
brewers were refusing hops contaminated with sulphur. To
this enquiry Raman said no. Rahim was very particular about
the condition and said that he would not even ask for the price
if sulphur was not used. On Ramans saying no, the parties
determined the price, and Rahim agreed to purchase the hops
based upon the sample given to him. After that the hops were
delivered to his warehouse, weighed and the amount due on
purchase determined. Rahim afterwards repudiated the contract
on the plea that the hops contained sulphur. It was proved that,
sulphur had been used over 5 acres, though the entire growth
consisted of 300 acres. It was proved that, Raman did not make
the false statement wilfully, because he forgot that sulphur was
used in only 5 acres.
In this example it is clearly shown that Rahim wanted to purchase
the hops only if sulphur was not used in the growth. Therefore,
Ramans assurance was a contractual term on which the contract
was specifically made, hence Rahim was justified in refusing the
contract.
Anson stipulates four probable factors in determining such a
representation or contractual terms. According to him, time is a
very important factor in determination of representations. If
interval between the time of making the statement and the final
manifestation of the agreement is a long one, it point to
representation instead of a contractual term. Secondly,
importance of the statement in the minds of both the parties
indicates the status of the statement. Thirdly, if the statement
was followed by the execution of a formal written contract it will
probably be regarded as a representation if the statement is not
incorporated in the written document. Finally, where the maker
of the statement is in a better position to ascertain the accuracy
of the statement, according to Anson, courts will tend to regard
it as a contractual term.
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5.3 CONDITIONS AND WARRANTIES
Terms of contract, has various grades of importance. Parties to
the contract may regard some of these terms as vital and others
as subsidiary or collateral to the main purpose of the contract.
As for example, A wants to purchase a car from B. B makes a
statement that the identified car goes 15 Km/Lt. After the deal
was entered into, A finds that the car goes only 12Km/Lt. Here,
the statement of B migh have been relied by A, which finally
motivated him to select the car. This situation can be
distinguished from the following fact. Here, A approaches B
to purchase a car, stating that he did not want to purchase any
car giving less than 15 Km/Lt. Now if B identified a particular
car and suggests that it would go 15 Km/Lt which prompted A
to finalise the contract. A afterwards comes to know that the
car goes only 12 Km/Lt, could rescind the contract. Here, the
statement of B, that the car goes 15 Km/Lt was a vital statement
for the formation of the contract. In the earlier instance, the
statement was a collateral one.
A term which is essential and vital to a contract, the denial of
which would entitle the innocent party to treat himself from
any liability is known as condition. But, the term which is
only collateral or subsidiary to the contract is known as
warranty ; its failure can only give rise to an action for such
damages as is actually suffered by a party on the failure of the
term.
In Glaholm v. Hays [(1841)2 M.N.G. 257], a vessel was
chartered to go from England to Trieste, and, there load a cargo.
The charter party contained this clause: the vessel to sail from
England on or before 4th of February next. The vessel did not
sail for some days, after the 4th Feb. and on its arrival at Trieste,
the charterer refused to load the cargo and repudiated the
contract. While holding the action of the charterers as justified,
the Court of Common pleas, held that, whether a particular clause
in a charter party shall be held to be a condition upon the non
performance of which by one party .... or it amounts to an
agreement only is the breach whereof is to be recompensed, to
be collected ... depends upon the intention of the parties to the
contract as specified in the terms of the contract.
Conditions maybe promissory conditions, contingent
conditions, condition precedent or a condition subsequent.
A promissory condition is one which is an essential undertaking
in the contract, whereby one party promises to the other. If it is
not made good, not only will the other party be entitled to treat
as discharged, but it can also sue for damages for breach.
A contingent condition is a provision, that a contract shall not
take effect unless and until the condition is fulfilled. In Trans
Trust S. P.R. L. v. Danubien Trading Co. Ltd [(1952)2 Q.B.
297], the distinction between promissory and contingent
conditions was brought into by Lord Denning. In this case, a
stipulation concerning the sale of goods relating to the opening
of the buyer of the bankers estoppel credit in favour of the
seller. Lord Denning held, sometimes it is a condition precedent
to the formation of a contract, i.e., it is a condition which must
be fulfilled before any contract is concluded at all. In those
cases the stipulation subject to the opening of credit is rather
like a subject to the contract. If no credit is provided, there is
no contract between the parties. In other cases, a contract is
concluded, and a stipulation for credit is a condition which is an
essential term of the contract. In those cases, the provision of
the credit is a condition precedent, not to the formation of a
contract, but to the obligation of the seller to deliver the goods.
If the buyer fails to provide the credit, the seller can treat himself
as discharged from any further performance of the contract, and
can sue the buyer for damages for not providing the credit.
Condition is subsequent when the parties agree that the contract
is to be immediately binding, but on happening of certain events
either the contract would cease to bind or one party is to have
the option to cancel the contract.
Warranty on the other hand, is collateral or subsidiary term, not
as vital as a condition. For example, suppose B enters into a
contract with G a director of an opera, to sing in the Opera
concerts for a period of 3 months. Suppose, one of the terms of
the contract is that B has to report to Bombay, 6 days before the
commencement of engagement for rehearsals. Now if B arrives
only 2 days before for the rehearsals, can G refuse to go with
the contract?
In a similar case, the court held that, in such a contract the term
is not a condition, but merely a warranty, its breach does not
operate as discharge of contract, but only entitles the party to
demand compensation for damages.
5.4 IMPLIED TERMS
Sometimes in a contract, many of the contractual terms remain
implied. As for example, in the business world, there are many
customs of trade. These customs are not required to be
repeatedly stated in the contract. Such customs require express
stipulation for exclusion. In sale of goods, there are implied
conditions such as (a) implied undertakings as to the title to the
goods to be sold; (b) in a sale of description, goods shall
correspond to the description; (c) goods have quality or fitness;
(d) bulk of goods correspond to the sample and description; (e)
if the purpose is stated, the goods are suitable for the purpose;
(f) goods are marketable. An example can be taken from Wallie
v. Russel [(1902)2 I.Rep.585]. A girl brought from a fishmonger,
two nice fresh crabs for tea. The crabs were not fresh; indeed
they were highly poisonous. The fishmonger was held liable for
damages for breach of this implied condition. Similarly in Gotley
v. Perry [(1960)1 WLR 9], a 6yr. old boy brought from a retailer,
a plastic toy catapult. It was made of cheap, brittle polysterene,
and while the boy was fixing a stone from it, the catapult
fractured, and he lost the sight in one eye. In an action by the
boy against the retailer for damages, the court held that there
was a breach of implied condition as to merchantable quality.
5.5 CONSTRUCTION OF TERMS
The court has a responsibility of construction of the contractual
terms in accordance with the intention of parties. It means that,
the court has to discover the intention of the parties by looking
at the terms of the contract. In a written contract, the task is
easier. The court generally explains the terms of the contract in
plain and literal meaning. In the event that two meanings are
possible, court takes that meaning which would make the
instrument valid, and avoids one which would make the
28
instrument void or ineffectual. Where there is an express mention
in the instrument of a certain thing, it would exclude any other
thing of similar nature [expressio unius est exclusio Alterius].
5.6 EXEMPTION CLAUSES
Often in commercial contracts we find a party taking shelter
under an exemption clause, express or implied. Exemption
clause is one which stipulates one party to be exempted from
certain liabilities in certain events. This type of exemption
clause is evident in standard form contract.
Anson very rightly suggested that one of the most important
developments in the sphere of contracts during the last 100 years,
has been the appearance of standard form contracts or
contracts of adhesion as it is sometimes called. These types
of contracts have clear provisions delimiting the liabilities of
the parties. Each time an individual travels on a bus/train, takes
his clothes to the dry cleaners, receives gas, electricity, water
from the municipal supply, deposits his luggage in the railway
cloakroom, takes the lease of a house/flat, he will receive a
standard form of contract. He has to either accept it in toto or
go without it. He does not have any other alternative. The court
in such situations applies ordinary principles of contract law
and examines the fairness and reasonability of the stipulation.
An unfair stipulation is struck down, and all reasonable
considerations are taken for the purpose of protecting
consumers interests.
If the terms are written in a contract and parties to it sign the
document, they are bound by the terms, even though they have
not actually read the stipulations. The problem is where the
document is not signed by the customer, but it has merely been
delivered to him. In such cases problem arises, as to whether
the terms of the contract were adequately brought to his notice
or not, at the time of entering into contract. In Ouey v.
Marlborough Court Ltd. [(1949) 1 K.B. 532)] the plaintiff and
her husband, were accepted as guests in a hotel. They paid
their weeks board and lodging in advance as required by the
rules of the hotel, over the counter. After that they were given
the key of the room. In the room, they found another notice
which stipulated that the proprietors of the hotel would not be
liable for articles lost or stolen from the room. Owing to the
negligence of the hotel staff a thief gained access to the room
and stole some articles. The Court of Appeal held that, the
notice in the room did not form part of the contract, since the
plaintiff could not have seen it until after the contract was made.
A previous course of dealings between the parties generally
does not validate an implied exemption clause. In British
Crane Hire Corp. v. Ipswich Plaint Hire Ltd. [(1974)2 WLR
856], it was observed that an exemption clause may be implied
where each party has led to the other reasonably to believe that
he intended that their rights and liabilities should be ascertained
by reference to the terms of a document which had been
consistently used by them in previous transactions.
Notice of such exemptions is strictly interpreted, with a view to
objectively determine whether the parties to the contract arrived
at a consensus with full knowledge. If a customer of a dry
cleaning shop receiving the receipt, did not see or note that
there was anything written in the receipt, he is not bound by the
condition. But if he knew or believed that exemption clauses
were contain or conditions were specified in writing though he
himself did not read it, he is bound by the clause. As for example,
A deposited his bag in the cloakroom of a railway station. He
received a paper ticket which said on its face vide reverse and
on the backside there were a number of printed conditions
including a clause limiting the liability for the loss of any package
to $ 20. If As bag is lost, he can claim only
$ 20.
The notice must be reasonable. Whether a notice is reasonable
and adequate or not is a matter of fact. In Union Steamship v.
Barnes [(1956)5 DLR 2 535 (Canada)], the plaintiff tendered the
passage money to a steamer company and purchased a ticket.
The ticket was folded and given back to the plaintiff. The plaintiff
knew that something was written on the ticket, but did not open
the ticket to see it. One of the conditions was limiting the
companys liability for any lost/damaged goods to $ 100. The
court held that sufficient notice was not given because the ticket
was delivered in a folded condition, and conditions were
obliterate in part by a stamping red ink.
Exemption clauses are very strictly interpreted. In most of the
cases, consumer forum interprets these exemption clauses in a
very narrow sense to give adequate protection to the consumer.
One of the hotly debated issues is whether the defendant can
exclude himself from tortious liability for negligence. According
to common law, the defendant can protect himself, his servants
and agents, with a clear provision of exemption. In Rutter v.
Palmer [(1922) 2 K.B.87], the plaintiff left his car at the
defendants garage for sale on commission. One of the terms of
the contract was that, defendants drivers would drive the run
test if required by the customer. On such a test run, there was
a collision and the car was damaged. It was held that the
defendant was not liable to pay compensation because of the
clear terms of the contract.
One of the fundamental principles of common law is that a third
party can not acquire any right on a contract. In Scrutions Ltd.
v. Midland Silicones Ltd. (1962 AC 446), a drum of chemicals
was shifted from New York to London, was consigned to the
respondents upon the terms of bill of lading which exempted
the carriers from liability, in excess of $ 500 per package. In the
course of being handled in a warehouse, the drum was damaged
by the negligence of the appellants, a lim of Stevedores employed
by the carriers and the damage amounted to $ 593 (or nearly $
2500). Though the appellants were not a party to the bill of
lading, not expressly mentioned therein they claimed to be
entitled to the benefit of the clause limiting liability. The majority
of House of Lords held that, the appellants could not claim the
benefit of an exemption clause in a contract to which they were
not a party. Of course Lord Denning, in his minority judgement,
considered that the appellants were protected since the
respondents had assented to the limitation of liability.
29
SUB-TOPICS
6.1 Introduction
6.2 Essential assumptions in a contract
6.3 Critical review of assumptions
6.4 Conditions in the changing society
6.5 Contract in changing society
6.6 Concluding remarks
6.1 INTRODUCTION
According to Sir Henry Maine the progressive society has
developed from status to contract. Friedman took this argument
further by stating that as against a legal status determined by
ties and conditions outside personal decisions, contract allows
the individual to change his country or employment (Law in
the changing Society, 1996). A feudal Society of serfs and
slaves was a static society where things used to be determined
by status of the individual. In order to evolve a progressive
society an ideological conflict was inevitable, which we find
evident in the American civil war when South tried to defend
a farm society of serfs and slaves and the North aspired for a
free economic society to develop commerce and industries.
According to a section of sociologists the domination of caste
and class in Indian society, is a point in evidence of Indian
society being backward, static, immobile and feudal. A mobile
society always aspires for change and progress. It demands
freedom of every individual being to determine his/her course
of action.
6.2 ESSENTIAL ASSUMPTIONS IN A CONTRACT
A contract-society is one which is based on certain essential
assumptions. Some of these basic assumptions are:
1. Equality of status Unless there is a freedom of contract an
individual does not have the liberty of determining his economic
destiny through the contractual process. Thus, equality and
freedom of contract are interchangeable assumptions of a
contract society. Friedman opined that lack of freedom, to make
or unmake a contract, or to bargain on his terms, also implies
lack of equality (1970 - 93). In a contract society the fundamental
issue, therefore, is that each party to the contract must be equal
to the other party in so far as his or her bargaining ability and
stipulating terms are concerned. It is, therefore, necessary that
there shall be no social or political restraints which may stand in
the way of individual contractors to assume a position of
equality. According to John Stuart Mill every human being has
the right to determine what he should do and what he should
not do. Bentham in his Utilitarian thesis explained the
contractual ability of a person through his/her relative
understanding of marginal utility of the fruits of his action. The
Constitution of India has guaranteed this right to equality in so
far as dealings of the state with the citizens is concerned.
Ofcourse this concept of equality has undergone several
6. CONTRACT IN THE CHANGING SOCIETY
interpretations in an open market and a socialist economic
transactions. But the basic issue of equality of the parties and
their right to determine terms and conditions in the contract on
different considerations, specially the economic consideration
of transaction costs, is presumed in democratic functioning of
the state.
2. Freedom of choice Economists are of the view that essential
conditions of success in a contract society depends upon its
market conditions. A market which cannot be determined either
by an individual buyer/seller achieves perfection of a contract
society. Such a market condition therefore essentially requires:
(a) alternate actions; and (b) freedom of choice. A buyer may be
compelled to buy a thing at a dictated price because of the
absence of either of the conditions or both. Such a structure
leads towards the status, more than the ability. This is an anti-
thesis to a contract society.
3. Free exchange Contract envisages exchange through
volition. The concept of exchange has of course undergone a
systematic change from the days of barter-economy to the
present days of money economy. Presently exchange is
circuitous i.e., commodities/services are exchanged for money,
and money in turn is exchanged for commodities/services. Any
regulative mechanics preventing exchange either in the stage
for money or for goods tends to create an obstacle to the
development of a contract society.
6.3 CRITICAL REVIEW OF ASSUMPTIONS
1. Equality A contract society is growingly made equivalent
to capitalism, whereas, a regulated society is termed as
socialistic. This political overtone on economic relations may
not always signify the truth. In a capitalist society of high
industrial growth, the equality of bargaining between an
employer and employee becomes a myth, specially in the context
of populace developing countries. (In any country number of
employers are less than the number of employees seeking jobs.)
However, employees uniting themselves may strengthen their
bargaining capacity; and so may the employers unite themselves
to create a monopoly. In several countries anti-monopoly or
anti-trust laws prohibit any attempt of creating monopoly and
cornering of the market. The same logic is now growingly used
against the state action of allowing trade unionism. If the state
does not allow trade unionism and also does not stipulate the
minimum wages, the inequality of status in fact between the
employer-employee especially in the developing world will reduce
the wages to be paid to the employees to sub human levels. It
would further encourage the unethical competition of wage
reduction between existing employees and unemployed people
(the unemployed persons in their eagerness to become
employed, would be willing to accept very low wages, and, the
employers would be in a position to exploit this situation to
their own advantage, paying scant regard to the rights of the
employees). It is true that in a democratic country with a free
economy the state has to confine its role in regulating activities
30
by (1) recognising all players; (2) ensuring the rule of the
game; (3) seeing that all possible unevenness in playing
conditions are avoided; and (4) strictly policing so that none
can disturb the situation.
It is, therefore, argued that creating unevenness in the field of
contract by prescription of minimum wages or payment of bonus
etc amounts to disturbing the economic operations and
conditions of inequality. These in fact, as argued by some,
prevent employers from increasing the productivity and creating
job opportunities.
Therefore two different types of arguments are clear. Firstly,
that equality itself becomes a myth in economic operations like
employer-employee relationship. The mere capital movement
itself creates inequality in the playing conditions which the state
cannot overlook. Secondly, state cannot allow the economically
weaker section of its population exploited by stronger section
of its population in any manner, whatever be the form of
exploitation i.e., social, economic or political. Based on these
two arguments, a third opinion emerges. That is, the state has
to ensure minimum public welfare and a sound public policy.
The concept of contract as a vehicle of exploitation cannot be
allowed in a democratic set-up.
On the other hand protagonists of colonialism argue, firstly that
the state intervention in the freedom of contract violates the
basic moral and political issues of democratic governance.
Secondly, it effects the efficiency of the economic system by
increasing the transaction cost (one of the noble bureaucrat of
recent times has attributed credit to system of slavery in rising
American economy.) Thirdly, state intervention in the area of
freedom of contract prevents growth and restricts employment
opportunities. Fourthly, social welfare must not be confused
with hard-core economic rules, which regulate the price for
factors of production on demand and supply. More supply of
labour would reduce the cost of labour, encourage more
investment creates more job opportunities and ultimately
increase the wage structure, thus, striking a balance of
investment, productivity and employment.
In fact the dynamics of society revolves around this question
of balancing the interests of various sections of society.
Accordingly over the years we see the change in the nature and
formation of contract itself from individual contract i.e.,
parties to the contract determining terms & conditions, we
entered into a concept of the state regulating terms & conditions,
i.e., a third party directing the conditions of contract. This brings
into various forms of contract as well as principles, for example,
the standard form of contract is one in which all terms and
conditions are stipulated by one party either on its own (since it
is in fact the powerful party) or because of the state intervention
(since the state is concerned in protecting the public interest).
The other party to the contract has to submit to it. A basic
principle has arisen out of this form of contract which ideally
suits mass production in an industrial setup. The principle is
that the seller cannot stipulate different prices for similar
products to different customers. In some countries this principle
is covered under unfair trade practices and in some other
countries it is taken as against business ethics.
2. Choice Freedom of choice is dependent upon many
macro-level policy concerns of the state, for example, the people
want more choice in motor cars, more import of machineries
and technology is needed, as well as need for more roads. So
where the capital of the country is limited and there are multiple
needs it may be necessary for the state to regulate the capital
deployment to some avenues more than the other. Necessarily,
therefore, in short supply choices are restricted. In a socialist
society, private satisfaction does not take a leading role specially
because supply of the essential commodities is limited and free
choice would lead to disaster. Free choice is possible when
there are several alternatives, each having sufficient supplies
and all people have contracting abilities (according to Marshall
need is not demand. A person having the purchasing power
and ability to go to the market and to place the order according
to his/her ability for the product, is the demand). State as the
friend of the people determines what is the essential need of
the people, how to meet the essential need and what amount of
capital is to be deployed in producing that.
In the changing society which tends to globalize economists of
the free market variety, argue that state is not required to be
engaged in the production and distribution level operations.
Free entrepreneurs from any part of the globe shall look after
the peoples interest and design their standard of living.
According to them, choice is not merely to be free in the national
context, it has to be free in the international context. The
question, therefore, shall influence the building up of
international transactions and regulations at the cost of the
national system. The concept of freedom is itself questionable.
Even where choice is unlimited like the choice of hire and fire,
raises many questions of wider interest. Some people argue
that having such a policy of hire and fire only because there is
an abundant labour supply can become dangerous to a country.
It may create huge unemployment which the national economy
cannot absorb. It will encourage destabilization and ultimately
lead to de-industrialization. Open market protagonists on the
other hand argue that conditions of efficiency can only be
maintained by providing freedom of choice. State interference
in this area will lead to an immobile society. The question of
choice has not remained an individual issue any longer. Choice
involves a risk. Suppose A chooses to purchase a couple of
bullocks for his cultivation it bears a risk to the life of the
bullocks. It means that people having similar choice run a
similar risk. In modern times this risk sharing amongst all those
who have similar choice has become an essential part of the
transaction. It is even absorbed in the cost of an article.
3. Free exchange This is seldom allowed totally in any
country. Lack of foreign exchange, adverse balance of payment,
regulated imports, all these are evidences of restrictions imposed
on exchanges. In a chronically short supply of market price
regulation by the state is often practised. Restrictions on free
exchanges are often recognised by the common law courts in
various parts of the world. Restrictive covenants are generally
held valid in sale of business good-will.
31
6.4 CONDITIONS IN THE CHANGING SOCIETY
Friedman has mentioned four factors that are mainly responsible
for transformation in the function and substance of the contract
(Changing Society, p.97). They are:
(1) Localization of Industry, trade and commerce with
corresponding urbanization and standardization of life.
This results in a standard form of contract or a contract of
adhesion;
(2) Increasing collectivisation. This results in collective
bargaining, consumer movement and various forms of
interference by the state;
(3) Tremendous expansion of welfare and social service
functions of the state. This results in multitude of statutory
terms of contract, wide expansion of government
departments for regulation and control; and
(4) Economic security aspects of contract de-emphasized in
the wide range of state interference. This results in
frustration of contract and extension of legal excuses for
non performance.
The society is growing very fast. The above four factors
responsible for transformation of the substance of contract in
one direction especially in the post war free world. In the
nineties we are experiencing some other factors in the socio-
economic and political movement requiring transformation of
function and substance of contract in the opposing direction.
They are :
(i) Globalization of market. This requires unrestricted free
movement of capital which will necessarily require the
dismantling of the national regulatory system and exposing the
national interest to be subjective to the global regulation. It
may, therefore, herald a new era of international regulations
and practices influencing the national system. This will weaken
the public control on terms and conditions of contract, dismantle
public authorities for regulation of contracts, and reduce
national authority to its police role ;
(ii) Prolific growth of Multi-National Corporations [MNCs]
and adaptation of different techniques of MNC functioning.
Transnational and multinational companies are gradually
gaining ground and the days are not far off when these Trans-
National Corporations [TNCs] and MNCs will take over a
significant control of the economic affairs of the global
economy. This will change various forms of contracts between
holding - subsidiary relations and other organisational and
managerial techniques. The growth of their occupation in
relation to agriculture shall necessarily commercialise the whole
area of land-tenancy system, production structure, seed,
patenting and the like. Growing strength of these TNCs and
MNCs shall weaken the role of state in contractual situations.
It will, therefore, mean de-emphasizing public interest and
reduce the realm of contract as essential instrument of
determining private interest ; and
(iii) Wide scale de-regulation of public control. In the last
fifty years the argument of public policy and consequently the
public control were built up both statutorily as well as through
judicial pronouncements. In India the activist judiciary started
expanding the right to life and including in it almost everything
under the sun like health, education, shelter, etc., (Olga Tellis,
Mohini Jain, Asiad Workers case, M.C. Mehta (environment
case). This has necessarily developed a system of government
with a distinct policy of governance. This policy of governance
can be said to be social policy of the government. As a result
there have been several implications of this type of governance
specially effecting the realm of contract in the following manner:
(a) Government used to regulate the terms and conditions of the
contract to protect the disadvantaged groups and the interest
of the public. For eg., a wage structure was imposed through
Minimum Wages Act. The collective bargaining of the workers
was strengthened by encouraging trade union movement, the
prices were determined by a strong price policy etc.;
(b) If countries like India being predominantly agricultural formed
a very strict regulatory land holding and tenancy system, any
type of land alienation through contract affecting this
fundamental policy was made unconstitutional and illegal.
Commercialization of land holdings was prevented at all costs;
(c) Workers and employees were considered as protective area
of the state and therefore, several regulatory and welfare statutes
were passed directly the employer to ensure their statutory
obligations;
(d) There was a growing tendency of private agreemments being
scrutinised through public law arguments. Questions like
reservations were taken into the functioning of all government
companies and corporations discharging only commercial
functions. The concept of instrumentality of State was
growingly used by the judiciary and as a result the responsibility
of the state became all pervasive; and
(e) The state took the responsibility on itself to regulate control
and involve itself in the capital movement and had built up a
strict regulative framework through license, permissions and
certification.
Consequently many public authorities were constituted to
oversee the legal regime as well as its economic operations. A
mixed economic model started being managed on the principle
of public enterprise leadership.
Presently under the globalization scheme the whole structure
of this public control mechanism is debased involving
deregulation, delicensing, de public sector monopolisation,
depublic control and obviously dismantling the public interest
logic.
6.5 CONTRACT IN CHANGING SOCIETY
In the above paragraphs we have attempted to explain that the
function and substance of contract changes with the changing
society. No human society is static in nature - even status
society like a nomadic society was never static in character.
Similarly a contract society could also develop certain static
characters. This is a sociological and anthropological question
and not within our realm of discussion.
32
Function and substance of contract in early industrial
civilizations were based upon the assumptions already discussed
i.e., equality of status, freedom of choice and free exchange.
But soon it was realized that all were not equal, all do not have
absolute freedom of choice and liberty of exchange is also
controllable. With this understanding both trade union
movements and cartelisation of organisations started to wriggle
out power. After all money begets power, therefore, those who
were employers were more powerful. In order to counteract
them, trade union movements started collective bargaining.
Initially discounted, rejected and confronted by the state,
ultimately the state had to yield to the movement for the sake of
promoting welfareism. Gradually welfare state started dictating
terms to both the parties in the democratic setup of governance.
Prescription of minimum wages by the state which was declared
as ultra-vires, was ultimately accepted as a norm of good
governance. The welfare state, therefore, enforced conditions
in a contractual relationship between parties in the name of
social welfare, public policy and equity. Free market contracts
were taken over by public distribution system contracts i.e.,
freedom to choose customers/sellers, commodities and price
was substituted by fair price shop, rationing definite quantity
at definite price. Freedom of contract is substituted by direction
and order. An offer is replaced by a petition and an acceptance
by license. The performance of contract became equal to
execution of an order. Though the society in that welfare state
did not become a society full of status in the form of capitalists
and labourers, the state nevertheless brought itself within the
interactive centre for capital and labour. State became
essentially a friend of the people against all types of exploitation.
In India we followed mixed economy for more than 40 years and
developed a system of governance with restrictive control and
rigid administration. Naturally we established a legal regime for
the function and substance of contract as indicated below:
1) Government contracts outnumbered the private contracts,
courts started interpreting the government contracts with
increasing reliance on natural justice disregarding the freedom
of contract. In one of the leading cases the court held that in a
contract where one party was the government or any
instrumentality of the State, conditions of natural justice must
be observed upto the threshold of the contract. This has been
explained in a later chapter on government contracts;
2) Public policy has been attempted to be enshrined even in
private contracts. An agreement between a money lender and
a farmer could be struck down on the grounds of public policy.
Sale of land to a non-agriculturist was stipulated as unlawful.
The public policy became so much dominant that a form of
standardization started developing in contracts; and
3) Various public control systems that are regulatory in nature
were introduced. Necessarily the private law area of contract
was increasingly challenged by public law reasoning. This was
most evident in cases on frustration of contract. Before the war
the common law courts used to apply the principle of frustration
in order to what is just and reasonable in the new situation. But
as Lord Denning would say the courts went to exercise their
power even when there was no frustrating event but only an
uncontemplated turn of events took place. Friedman tried to
explain this transaction as the mixture of heterogenous factors
that make up the complex picture of modern contract and have
turned it into something, rather different from chief commercial
guarantee of a private enterprise society, which is best illustrated
by problem of sanctions. The controversy whether the primary
sanction of contract is actual performance or a promise to make
preparation for non-performance is of old standing. Holmes
long ago proposed a view the only universal consequence of a
legally binding promise is that of the law making the promisor
pay damages if the promised even doesnt come to pass. This
view has been widely criticised, mainly on the ground that the
law does not leave the promisor, the freedom to choose between
performance and the payment of damages where he is able to
perform. The history of common law tends to support Holmes
view...... (Changing society, p.113) in both common and civil
laws only in a very few contracts where equity demands an
additional or alternative remedy to damages like specific
performance/injunction is awarded. The proportion of public/
private elements in a contract determines the degree to which
traditional sanctions of contract apply..... (ibid p.114). In a contract
where public are substantially interested like the Bethelham Steel
Case (315 US 289), the US government alleged that the contract
was exploitative in character on account of war time emergency
and the government was compelled to accept the terms of the
countrys leading ship builders. In a minority judgement
Frankfurter J., held that the court should not permit Bethelham
steel to recover these unconscionable profits thereby making
the courts instruments of injustice. This 1942 dissenting
judgement became a landmark guide afterwards in the judicial
history for computation of public interest.
The situation is again rapidly changing in favour of an argument
for the state to withdraw from all economic transactions on the
argument of achieving pareto optimanity. It shall mean that in
future, state shall not take any active role in regulating,
controlling, devising, any terms of contracts. Freedom of contract
shall be allowed on the presumption of equality of status between
the contracting parties. State shall not interfere in hire and fire
principles of TNCs and MNCs. In the name of reducing the cost
of governance and increasing democracy a lot of area considered
under public interest and hence susceptible to regulation shall
now become open to the private players to mutually bargain.
Forms of contract, therefore, change, with the changes in society.
6.6 CONCLUDING REMARKS
It can therefore be seen very clearly that the course of form and
substance of contract has not been same and straight throughout
the course of history. Though contract is an instrument for
determining private rights and obligations it cannot always
remain mutually exclusive from the domain of public interest.
As a result not only the methodology of contract started
changing throughout the course of history but its functions and
impacts have also been constantly subjected to review under
public policy. At times of course the degree of such public
policy scrutiny varied. In the coming ages the free market
advocates are going to de-emphasize the states role and
emphasize freedom for the MNCs to globally operate on
agreements of efficiency and lowering costs.
33
Section 2 : Interpretation-clause:- In this Act the following words
and expressions are used in the following senses, unless a
contrary intention appears from the context :-
(a) When one person signifies to another his willingness to do
or to abstain from doing anything, with a view to obtaining
the assent of that other to such act or abstinence, he is said
to make a proposal;
(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;
(c) The person making the proposal is called the promisor,
and the preson accepting the proposal is called the
promisee;
(d) When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called
a consideration for the promise;
(e) Every promise and every set of promises, forming the
consideration for each other, is an agreement;
(f) Promises which form the consideration or part of the
consideration for each other, are called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
(h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option of
one or more of the parties thereto, but not at the option of
the other or others, is a voidable contract;
(j) A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable.
Section 3. Communication, acceptance and revocation of
proposals- The communication of proposals, the acceptance
of proposals, and the revocation of proposals and acceptances,
respectively, are deemed to be made by any act or omission of
the party proposing, accepting or revoking by which he intends
to communicate such proposal, acceptance or revocation, or
which has the effect of communicating it.
Section 4. Communication when complete- The communication
of a proposal is complete when it comes to the knowledge of the
person to whom it is made.
The communication of an acceptance is complete, -
as against the proposer, when it is put in a course of transmission
to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the
proposer.
7. RELEVANT PROVISIONS OF THE ACT
The communication of a revocation is complete, -
as against the person who makes it, when it is put into a course
of transmission to the person to whom it is made, so as to be out
of the power of the person who makes it;
as against the person to whom it is made, when it comes to his
knowledge.
Section 5.- Revocation of proposals and acceptances.- A proposal
may be revoked at any time before the communication of its
acceptance is complete as against the proposer, but not
afterwards.
An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the
acceptor, but not afterwards.
Section 6. Revocation how made- A proposal is revoked -
1. by the communication of notice of revocation by the
proposer to the other party;
2. by the lapse of the time prescribed in such proposal for its
acceptance, or, if no time is so prescribed, by the lapse of a
reasonable time, without communication of the acceptance;
3. by the failure of the acceptor to fulfil a condition precedent
to acceptance; or
4. by the death or insanity of the proposer, if the fact of his
death or insanity comes to the knowledge of the acceptor
before acceptance.
Section 7.- Acceptance must be absolute.- In order to convert a
proposal into a promise, the acceptance, must -
1. be absolute and unqualified;
2. be expressed in some usual and reasonable manner, unless
the proposal prescribed the manner in which it is to be
accepted. If the proposal prescribes a manner in which it is
to be accepted, and the acceptance is not made in such
manner, the proposer may, within a reasonable time after the
acceptance is communicated to him, insist that his proposal
shall be accepted in the prescribed manner, and not
otherwise; but if he fails to do so, he accepts the acceptance.
Section 8. Acceptance by performing conditions, or receiving
consideration.- Performance of the conditions of a proposal, or
the acceptance of any consideration for a reciprocal promise
which may be offered with a proposal, is an acceptance of the
proposal.
Section 9. Promises, express and implied.- In so far as the
proposal or acceptance of any promise is made in words, the
promise is said to be express. In so far as such proposal or
acceptance is made otherwise than in words, the promise is
said to be implied.
34
8. CASE LAW
1. Balfour v. Balfour [(1919) 2 KB 571]
Mr. & Mrs. Balfour residents of Ceylon moved to London when
Mr. Balfour was on leave. On expiry of his leave Mr. Balfour
returned to Ceylon whereas Mrs. Balfour remained in England
on medical advice. Mr. Balfour promised to send 30 every
month. Mr. Balfour did not send the money. Later on they
decided to live apart. Mrs. Balfour sought to recover the promise
money in the court of law. The main issue for decision was,
whether a promise of domestic nature between a husband and
wife could be binding ? It was held that, the promise between
the parties was not intended by them to be legally binding.
Hence, Mrs. Balfour could not enforce the payment.
2. Jones v. Padavatton [(1969)2 All ER 616]
The daughter of a Trinidad resident was employed at a
satisfactory salary with pension rights. Though unwilling to
do so, she accepted the offer from her mother to leave her job,
go to England and study for the Bar with an intention of
practising in Trinidad. In return her mother promised to pay
her fees & a monthly allowance; but nothing was recorded in
writing of the arrangement and of the period of arrangement.
After sometime the daughter was asked to purchase a house for
her own residence as also for taking in lodgers, the rent from
which could be applied towards her maintenance. Once again,
nothing was put in writing. The mother paid off the cost of the
house in several instalments. The daughter moved in, took in
lodgers and rents started arriving. The mother never received
any rent nor was she supplied with accounts. After about 2
years she issued summons claiming possession of the house
from the daughter, who counter claimed for 1,655 18s 9d.
said to have been paid in respect of the house. The main issues
involved were : 1. Could the daughter claim that the arrangement
between herself and her mother was to continue indefinitely;
and 2. Could the mother be presumed to have waived all her
rights over the house only because of the fact that the daughter
was in possession of the house and was the person receiving
rents? It was held that, the mother was entitled to the house as
against her daughter, because (1) the arrangement between the
two of them was throughout a family arrangement depending
on the good faith of the parties in keeping the promises made
and not intended to be a rigid binding agreement & the
arragnment was far too vague and uncertain to be enforceable
as contract; 2. a reasonable time was implied for the original
agreement of payment of allowance, because completion of
daughters study for Bar could not possibly exceed 5 years, the
daughter could not claim to be entitled to anything beyond that
period.
3. Carlill v. Carbolic Smoke Ball Co [(1893)1QB 256]
The defendants issued an advertisement in the newspapers,
offering a reward of 100 to any person who contracted
influenza, cold etc. after using their smoke balls thrice a day
for 2 weeks according to the printed directions. It was further
stated that, 1000 has been deposited in the Bank showing our
sincerity. The plaintiff used the balls as per the directions, but
still contracted influenza. She filed a suit claiming the reward
announced by the company. The defendants argued that as it
was an offer made to the public, there was no contract between
the plaintiff and themselves and hence they were not liable.
The main issues involved were, is notification of acceptance to
the offeror essential to constitute a binding offer? And what
was the consideration for this contract? It was held that, a
person who makes an offer in an advertisement impliedly
indicates that he does not require notification of the acceptance
of the offer. In such cases performance of the condition is
sufficient acceptance without express notification of it. Further,
the very fact that the plaintiff took the trouble of using the smoke
balls was enough consideration to support the contract. The
plaintiff was entitled to the reward.
4. Lalman Shukla v. Gauri Dutt [(1913) 11 ALJ 489]
The defendants nephew absconded from home and could not
be traced. The plaintiff who was his servant, was sent to
Haridwar to look for the boy. Meanwhile the defendant offered
a reward of Rs. 501/- to the finder of the boy. The plaintiff
traced the boy, and wired the defendant, who went and brought
the boy back; giving some money to the plaintiff as a reward
who did not ask for more. The plaintiff was dismissed six
months later, and he then filed a suit claiming the remaining
reward amount. It was held that, as the plaintiff was in the service
of the defendant at that time, and having incurred the obligation
to search for the missing boy he could not claim the reward;
because when there is a subsisting obligation performance of
an act cannot be regarded as a consideration for the defendants
promise.
5. Household Fire Insurance Co v. Grant Court of Appeal
[(1879) 4 Ex.D 2161]
Kendrick was the agent of a company in Glamorgan. The
defendant handed to him an application in writing for shares in
the company, which stated that the defendant had paid to the
bankers of the company 5, being a deposit of 1s. per share,
and requesting an allotment of 100 shares. Kendrick forwarded
the application of the plaintiffs in London and the secretary of
the company made out a letter of allotment in favour of the
defendant and posted it addressed to the defendant. The letter
never arrived. The defendants name was entered on the register
of shareholders. The company then went into liquidation and
the liquidator sued for 94.15s. being the balance due upon
the 100 shares. The main issue involved was, whether a contract
by correspondence could be deemed to have been concluded
even though the letter of acceptance was not received by the
offeror? It was held that, the contract is actually made when the
letter is posted, and not when it is received, because, the
acceptor, in posting the letter, puts it out of his control and
does an extraneous act which clinches the matter and shows
beyond doubt that each side is bound. Grant was thus held
liable for the unpaid amount.
35
6. Jawaharlal Barman v. Union of India [AIR 1962 Supreme
Court 378]
The respondent Union of India, filed a petition against the
appellant. M/s. J. Burman and Co., through its proprietor
Jawahar Lal Burman under Ss. 33 and 28 of the Act. The
respondent alleged that a concluded contract had been entered
into between the parties on August 31, 1949, for supply of 170/
2 Cwt. of coconut oil by the appellant to the respondent. The
respondent had advertised in the Indian Trade Journal for the
said supply and the appellant had submitted its tender No. SM-
1/104524. This tender was accepted by the respondent which
concluded a contract between the parties. The respondents
case was that the said contract was governed by general
conditions of contract Form WS.B. 133. These conditions
included an arbitration agreement. Disputes arose between the
parties regarding the said contract and so, in pursuance of the
arbitration agreement they were referred to the two arbitrators
appointed by the parties. After the arbitration proceedings had
gone on for a considerable time before the arbitrators the
appellant objected to their jurisdiction on the ground that there
was no concluded contract between the parties. This plea made
it necessary for the respondent to move the court for decision
on the question about the existence and validity of the arbitration
agreement. It was on these allegations that respondent in its
petition claimed that it may be held that there was a concluded
contract between the parties containing a valid arbitration
agreement. The petition having been made under S.28 along
with S.33 the respondent prayed that suitable extension of time
be granted to the arbitrators for making the award. The appellant
pleaded in defence that no concluded contract had been made
between the parties and that there was no jurisdiction of the
court to grant extension under S.28. It was held that the general
conditions of the contract prescribed by Form W.S.B.133 were
made part of the tender, and the contract itself was intended to
be executed expeditiously. The tender shows that the appellant
represented that the earliest date by which delivery could be
effected would be within twenty days from the date of the receipt
of the order and it also said that full quantity of coconut oil
required was held by it. Therefore, to begin with the tender
treated the security deposit as a subsequent condition, the
contract was for the immediate supply of goods and the
acceptance purports to be in accordance with the relevant
government rules. Therefore reading the letter as a whole it
would not be possible to accept the appellants argument that
the letter was intended to make a substantial variation in the
contract by making the deposit of security a condition precedent
instead of a condition subsequent.
7. M/s Suraj Besan and Rice Mills v. Food Corporation of
India [AIR 1988 Delhi 224]
The plaintiff firm is registered with defendant. It is alleged that
under this registration, the annual requirement of the plaintiff
has been assessed at 1500 M.Ts. As such plaintiff can quote
only for this registered quantity. Regional Office of defendant
at Chandigarh invited tenders for the purchase and removal of
damaged food grains declared fit for cattle/poultry feed etc.
Plaintiff submitted their tenders, but it was not signed by all the
partners. The tenders were opened on 29.06.83. The tender of
plaintiff was not valid if accepted beyond the annual assessed
capacity of 1500 M.Ts. However, the tender of plaintiff was
accepted and an acceptance telegram was issued by defendant
on July 22, 83 which was received by plaintiff on July 24, 83. It
is alleged in the plaint that plaintiffs offer was only for 1500
M.Ts, but to the surprise of plaintiff, telegram dated July 22, 83
placed an order for stock of about 6200 M.Ts of damaged paddy
for purchase. According to plaintiff, the aforesaid acceptance
did not bring about a valid, legal, and binding contract between
the parties, as it was a counter offer to the original offer of the
plaintiff for 1500 M.Ts. As there was no binding contract
between them the plaintiff did not furnish the security deposit.
There was a threat on behalf of the defendant for selling the
stocks of 6200 M.Ts of damaged paddy at the risk and cost of
plaintiff and to take steps for the cancellation of the certificate
and various benefits and privileges which plaintiff has been
enjoying. The main issue in this case was, whether the contract
entered between the parties as per the tender dated 28-6-83 is
valid and binding on the plaintiff? If so, to what effect? It was
held that, under law the plaintiff was entitled to withdraw or
modify their offer before the communication of the acceptance
was complete as against the plaintiff. Thus, the letter dated July
8, 1983 amounted to modification of offer. Hence acceptance
issued by telegram on 22.7.1983 did not result in a concluded
agreement between the parties as, there was no offer in existence
at the time when defendant accepted tender of plaintiff. Hence
there is no legal and binding contract for the sale and purchase
of 6,176.790 M.Ts of damaged paddy as per the telegram of
22.7.83.
36
Tenders can be obtained from the office of Chief Engineer, 6th
floor, WCL H.Qrs, Civil Lines, Nagpur - 10. Completed tenders
may be sent by post, deposited in the box kept outside the Chief
Engineer's Office before 3.00 pm on 2.5.94. WCL reserves the
right to accept/reject any or all of the tenders.
The above tender accepted in 8 national newspapers on 15.4.94.
In response to the notice, Mr. Chawla sent a draft for Rs.230/-
drawn in favour of WCL, Nagpur alongwith an application for
a set of tender documents on 16.4.94. The application was
received on 20.4.94 and the documents were duly dispatched
to him at 4.00 pm on the same day. This fact is recorded in the
dispatch register. Mr. Chawla deposited the duly filled
documents at 2.50 pm on 2.5.94, and as the rates quoted by him
were the lowest he was awarded the tender on 4.5.94 a formal
letter was sent to Mr. Chawla informing him that his tender had
been accepted and that he was required to deposit a Bank
Guarantee for Rs.5,00,000/- within 30 days from date of letter.
This letter failed to reach Mr. Chawla, WCL meanwhile after
waiting the prescribed 30 days, decided to start legal proceedings
against Mr. Chawla on ground of non-receipt of Bank Guarantee
and failure to start the work resulting in a breach of contract.
Structure arguments for and against WCL based on the above
facts, taking into consideration one additional fact, viz : that in
response to a Government regulation forbidding the undertaking
of any work over the value of Rs.5,00,00/- till the end of 1994,
the Chief Engineer has instructed the Supdt. Engineer to keep
the decision in abeyance even though Mr.Chawlas tender had
been formally accepted.
9. PROBLEMS
Instructions for answering Problems:
While answering problems in any module, the student should
thoroughly read and ascertain important facts. Then
1. he/she should narrate brief facts of the case;
2. identify relevant issue/s in the problem;
3. discuss about the position of law as per relevant statute/s
and judicial decision;
4. apply the above position of law to the facts and
circumstances of the case/problem in hand; and
5. finally give the decision on the issue/s.
Besides the above, one should refer basic text (both Indian and
English), hint cases (if any given), important Journals and
Reports for ascertaining the law on given issue/s.
The answering in each subjects should be neatly typed
computerised and should be sent in a spiral bound format.
1. Western Coal fields of India Limited
Tender Notice
T.Mo. 486/94-95 : Sealed, superscribed tenders are invited from registered civil contractors for the following
Job Description Approx EMD Time of Tender Tender Tender
Value Completion Cost Availability Opening
Construction of Rs.80 Rs. 1 Yr. from Rs.200 From 20.4.94 2.5.94
600 Type B Qrs Lakhs 80,000 date of Rs.30/- to 1.5.94 at
Kamptee Colliery tender extra between 3.00pm
opening if 10.00 am
required to 1.00 pm
by post
2. In the above fact situation presume that the letter from WCL
reached Mr.Chawla on 10.5.94. In the meanwhile Mr.Chawla
has written a letter dated 4.5.94 revoking his offer which reached
the WCL office on 12.5.94, WCL now wants to start a breach
of contract proceeding against Mr.Chawla. Argue for and
against WCL.
3. M/s Mosegay & sons, manufacturers of a nasal spray
advertised that, any patient from any kind of respiratory
problems, would be cured for life provided he used the spray
as per directions. The spray was to be used once a day
continuously for two months. It was specifically stated that the
spray was to be used only after sunset and in open air. A reward
of Rs.1,00,000 was announced for any person whose disease
continued after the use of spray in the recommended manner.
A patient of chronic asthama, started using the spray as per the
directions. After about a month, he suffered a mild attack of
flu and was confined to his room for a few days, but he continued
the use of the spray. After the scheduled 2 months, he found
that his asthma was still very much there and that in addition he
has developed a permanent rash around his nose. He sues the
company for the announced reward and Rs.3,00,000/- in addition
as damages for the rash. The MD of the company has come to
you with the case. Advise him, taking support from decided
cases.
4. A the owner of four thoroughbred horses, employed two
trainers to look after them. Of these horses Toofan a 3 year
old Stallion was the pride of the stable. Being in dire financial
straits, A decided to sell Toofan, and accordingly informed
37
his trainers to look out for prospective buyers. B approached
the first trainer and offered Rs.1,50,000/- for Toofan. This
price was telegraphed to A on 1.4.94. On 12.4.94 A sent a
reply that he wont accept less than Rs.4,00,000/-, which was
received on 15.4.94. On 17.4.94 B telegraphed his acceptance
of the price. Meanwhile on 12.4.94 the other trainer sent another
offer of Rs.4,25,000/- which reached A on 19.4.94. A had
already sent a letter of acceptance to B on 18.4.94, so he sent a
telegram dated 19.4.94 revoking his acceptance and another to
his other trainer accepting the second offer. B didnt receive
the telegram but the other party did. Now both of them claim
that they have a right to buy Toofan. Decide.
5. A proclamation by the government offered a reward for
information leading to the arrest of certain murderers and a
pardon to an accomplice who gave the information. A saw the
proclamation in January 1992. On Feb. 6th he gave false
information to protect the murderers. On March 10th he gave
information which led to their conviction. He admitted that his
only object in doing so was to clear himself of a charge of murder
and that he had no intention of claiming the reward at that time.
However, after a considerable period of time, A filed a suit
against the government for the reward. Decide in the light of
Indian and English cases.
6. A carried on business at Ludhiana under the style A & Co.
dealing in motors and accessories. R of Bangalore wrote to A
asking him to send a complete catalogue of motors and
accessories and also full particulars of an electric machine and
oil engine shown in an old catalogue published by A. In reply
to this letter of R, A wrote on July 14, 1992 giving him full
particulars of an electric machine which he had at hand. The
closing passage of his letter was as follows :
All the above things are ready for fittings ; price Rs.7500 only,
nett, for the outfit including all the articles mentioned above. I
recommend you the above outfit very strongly so if you are to
have it, kindly wire me at once to reserve it for you. I have got
only one set left.
R sent a telegram to A stating Reserve the set for me. A s
telegram followed :
Send Rupees one thousand in advance for balance will send
engine dynamo complete by V.P.
R sent Rupees one thousand. A sent in due course the machine
packed by rail. R took delivery of the packet from the railway.
R, thereafter, found that the machine was broken when it arrived
and that it was second hand and did not answer the description
given by A. R filed a suit for a breach of contract in the
Bangalore Munsif Court. A pleaded that the suit was not
maintainable at Bangalore. Decide the case giving reasons as
to place of completion of offer and acceptance and
maintainability or otherwise of the suit. Critically review the
Indian law on the issue both statutory and judicial decisions.
7. On 14th December, 1992, the Indian Express carried the
following Tender Notification.
NATIONAL MINERAL DEVELOPMENT
CORPORATION LTD.
10-3-311/A CASTLE HILLS
MASAB TANK HYDERABAD - 500 028
No. HqMM/III/Ferro Silicon/92 26.11.92
GLOBAL TENDER NOTICE
Sealed tenders in triplicate are invited from manufacturers on
their agents for supply of around 100 tonnes per year of Milled
Ferro-Silicon meeting the following standards and specifications
for use in 50 TPH Heavy Media Diamond Mining Project,
Panna, Madhya Pradesh State (Nearest Rly. Station : Satna).
SPECIFICATIONS :
Silicon : 14-16%
Carbon : 1.3 Max
Iron : 80% Min
Sulphur : 0.05% Max.
SIZE DISTRIBUTION
Micron : WT%
106 : 0.1
75 : 0.3
Tender must be accompanied by Earnest Money Deposit of
Rs.25,000/- or US $ 1,000 by way of demand draft or bank
guarantee in favour of N.M.D.C. Ltd., Hyderabad, payable at
Hyderabad & valid for six months from the date of tender
opening. Tenders not accompanied by EMD are liable for
rejection.
The offer should be valid for six months from the date of tender
opening and should clearly specify all technical details
(pamphlets/catalogues), basis of price, tax structure, showing
prevailing rates, packing and forwarding, delivery time
(preferably by April 1993), clients list (to whom already
supplied), payment terms and other commercial details.
Tender superscribing the tender notice number, date and date
of opening should be addressed to Chief Materials Manager,
NMDC Ltd., 10-3-311/A, Khanji Bhavan, Masab Tank,
Hyderabad - 500 028, so as to reach on or before 2P.M. of the
date of tender opening. Tender will be opened on 20.1.1993 at
3.00P.M. in the presence of tenderers who choose to be present.
Only authorised representatives of the tenderers will be allowed.
The Corporation reserves the right to accept (in full or in part)
or reject any or all the tenders without assigning any reason
thereof.
CHIEF MATERIALS MANAGER
38
M/s.ABC Ferro Alloys Corporation, Bangalore, in response to
the above tender notification, have applied for a tender
application through their letter dated 16.12.92 (vide Ref.No.
118A/Ten./92). The Chief Materials Manager received their
letter on 25.12.92 and immediately the tender application was
posted to M/s. ABC Ferro Alloys Corporation. After two days,
they have posted the filled in application to the Chief Materials
Manager. On 20.1.93, the Chief Materials Manager, after
perusing all the filled in tender applications, in view of the fact
that many tenderers have quoted the same price, has reserved
his decision. After waiting a period of over 3 months, M/s.ABC
Ferro Alloys Corporation in their letter dated April 10, 1993
(Ref.No.219B/Ten./93) posted on April 12, 1993 addressed to
the Chief Materials Manager have enquired about the fate of
their tender application. They have also demanded for refund
of E.M.D. if their tender application is rejected. After receiving
this letter, the Chief Materials Manager made some trade
enquiries about the commercial credibility of M/s. ABC Ferro
Alloys Corporation and decided to accept their offer. Thereafter
he instructed his officer to send the acceptance letter to M/s.
ABC Ferro Alloys Corporation. Accordingly, he posted the
letter of acceptance dated April 23, 1993. Around that time,
M/s. ABC Ferro Alloys Corporation, as they have not received
any reply to their letter dated April 10, 1993, decided to revoke
their offer. Thereafter on April 24, 1993, they have posted their
letter of revocation, which reached the Chief Materials Manager
on April 26, 1993. When the Chief Materials Manager read
the contents of the letter, decided not to reply, as they have
already posted the letter of acceptance which has reached M/s.
ABC Ferro Alloys Corporation on April 25, 1993. After
perusing the contents of the letter of acceptance, M/s. ABC
Ferro Alloys Corporation, decided not to reply, as they have
posted their letter of revocation by that time. The Chief
Materials Manager, after waiting a period of 21 days has initiated
legal proceedings against M/s. ABC Ferro Alloys Corporation
on the ground of non-supply of materials.
You are required to write a brief for and on behalf of both the
parties, namely, the Chief Materials Manager, N.M.D.C. Ltd.,
Hyderabad and M/s. ABC Ferro Alloys Corporation, Bangalore,
in the light of the following issue also. (Besides the issue raised
in the text).
Assuming that M/s. ABC Ferro Alloys Corporation have
submitted the filled in tender application without depositing
EMD/Bank Guarantee as given in the tender notification and
was accepted by the Chief Materials Manager by waiving the
clause of EMD. After receiving the letter of acceptance, in
view of the steep increase in the market price of the materials,
(much more than the price quoted in the tender), M/s. ABC
Ferro Alloys Corporation have decided to invoke their offer,
particularly on the ground that their offer was not in accordance
with the terms of the tender, thereby no valid acceptance could
be made by the Chief Materials Manager.
8. The following tender notification has appeared in the Deccan
Herald dated December 13, 1993.
KARNATAKA ELECTRICITY BOARD
TENDER NOTIFICATION
Sealed tenders in duplicate in the prescribed forms subscribing
the name of the work on the cover, duly signed by the registered
contractors, are invited from the party/firm upto 4 P.M. on
24.12.93 along with the previous experience certificate. Sl.No.1:
Name of the work : Providing experience K.V. S.C. Tap line for a
distance of 11.6 K.M. for 66.11 K.V. Halavagalu Power
Distribution Station, Harpanahalli taluk, Bellary District.
Approximate amount put to tender : Rs.14.00 lakhs. E.M.D. :
at 2.5% : Rs.35,000/-. Time limit for completion of work :
three months. Sl.no.2 Name of the work : Erection of Station
Towers and Laying foundation for them at 220KV power
receiving station at Lingasugur. Approximate amount put to
tender : Rs.3.29 laksh. E.M.D. at 2.5% Rs.8.225/-. Time limit
for completion of work : Three months.
Cost of tender form per set (non refundable) : Rs.216/- for the
work at Sl. No. 1 and Rs.108/- for the work at Sl.No.2. The party/
firm who have previous experience certificate may submit
requisition for blank tender documents to this office from
20.12.93 to 22.12.93 upto 4 P.M. E.M.D. may be paid by cash
at the undersigned office or furnished in the form of Demand
Draft drawn in favour of the Executive Engineer (Electrical)
M.W. Division, KEB, Raichur. Tenders not accompanied by
E.M.D. will be rejected. Further details may be obtained from
the office of the undersigned during office hours. The competent
authority reserves the right to accept or reject any or all tenders
wihtout assigning any reason.
RAICHUR
Executive Engineer
K.E.B.
a) M/s. ABC Contractors, Bangalore have obtained the
relevant tender documents from K.E.B with a view to
respond to the tender notification. After hectic discussions,
they have decided to apply only for the work given under
Sl.No.1. Accordingly, they have filed their tender
documents with K.E.B. in time. After about one month,
M/s. ABC Contractors received a letter from Executive
Engineer, K.E.B, stating that their application has been
rejected on the ground that their application was not
absolute. M/s. A.B.C. Contractors seek your advice.
b) Assuming that the tender application filed by M/s. ABC
Contractors has been selected and both the parties entered
into a formal contractual relation. With a view to expediate
the work progress, M/s. ABC Contractors have appointed
M/s. XYZ Co. as sub-contractors to conduct part of the
agreed work. However, the construction work could not
be completed owing to certain problems. Thereafter
Executive Engineer, K.E.B. filed a suit against M/s. XYZ
39
Co. for failure to complete the work within a stipulated
period of three months. Advise M/s. XYZ Co.
c) Assume that there is a valid contractual relation between
Executive Engineer and M/s. ABC. & Co. The party could
not complete the construction work because of acute
shortage of raw material. In view of recurring power failure
and continuous labour unrest, the production of raw material
for the construction activity has been severely hampered.
Executive Engineer files a suit against M/s. ABC Contractors
for non-completion of work.
Identify the issues with regard to above fact situation. Advance
arguments for and on behalf of both the parties and decide.
d) At the time of construction, Executive Engineer, K.E.B, has
realised that M/s. ABC Contractors is not a registered
contractor. He seeks your advice to rescind the contract.
9. H brought a horse from T. The contract of sale provided
among others, these two terms: that the horse was warranted to
have been hunted with the Bicester Hounds, and that if it did
not answer to its description, I should have the liberty to return
it by the evening of the fourth day of sale. The horse did not
answer to its description and had never been hunted with
Bicester Hounds. It was returned on the day mentioned in the
contract, but in the meantime, the horse had been injured
accidently through no fault of H. T demanded the price for the
horse, or an adequate compensation for the injury to the horse.
Decide explaining the nature of the condition. Give reasons.
[Note: Specify your name, ID No. and address while sending answer papers]
40
1. Avtar Singh, (1989) Law of Contract, Eastern Book Co.,
Lucknow.
2. Anson, (1984), Law of Contract, English Language Book
Society & Oxford University Press, London.
3. Athiya, P.S. (1986), Essays on Contract, Oxford University
Press, London.
4. Cheshire and Fiefoot, (1986), Law of Contract, Butter
Worths, London.
5. Cheshire and Fiefoot, (1977), Cases and materials on
Contract, Butter Worths, London.
6. Friedman, (1996), Law in the changing society, University
Book House, Delhi.
7. Joga Rao, S.V. (1991), Cases and materials on contract, NLSIU
Publication.
10. SUPPLEMENTARY READINGS
8. Kronman and Posner, (1979), Economic analysis of contract
law, 13 Stanford L.R.
9. Llewellyn, (1941), Nature and functions of contract, 13
Standford L.R.
10. Macneil, Economic analysis of contractual relations, 13
Standford L.R.
11. Puri and Ponuswamy, (1974), Cases and materials on
contract, Eastern Book Co., Lucknow.
12. Trietal, G. H. (1966), Law of contract, Steven & Sons,
London.
13. Venkatesh Iyer, (1987), Law of contract, Asia Law House,
Hyderabad.
41
Master in Business Laws
Law of Contracts
Course No : I
Module No : II
CAPACITY AND CONSIDERATION
Distance Education Department
National Law School Of India University
(Sponsored by the Bar Council of India and established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 080-3217858
E-mail: mbl@nls.ac.in
42
Materials prepared by:
Ms. Sudha Peri, M.A., LL.M.
Prof. N.L. Mitra, M.Com., LL.M., Ph.D.
Materials checked by:
Prof. P.C. Bedwa, LL.M., Ph.D.
Materials edited by:
Prof. T. Devidas, LL.M.
Prof. V. Vijayakumar, M.A., LL.M., M.Phil.
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072
43
Instructions
In module I we have discussed how a contract is entered into. A contract is an agreement enforceable by
law. In fact, if you read module I carefully, we have discussed how an offer being accepted makes an
agreement. Now, if this agreement is enforceable by law, it becomes a contract. Contract is a design
through which persons create rights and duties through promise. One may wonder, if contract is a private
realm, why State has to spend so much of resources to settle private disputes! Of course, some political
scientists argue that State has to provide the facility to arbitrate in all dispute resolution situations. This
is a sovereign function of the State. As such, whether an agreement is enforceable by law or not is a decision
State has to take on the basis of certain objective conditions. Moralists argue that giving the consent is
enough consideration for making the contract enforceable by law, unless the agreement is against the public
morality. But those who argue that law is a norm, formulate some objective conditions validating the
norm. Utilitarians like Bentham and Mill argued that morality is a matter of individual judgement for
evaluation of utility of anything beneficial to the individual. As such, utilitarians gave much emphasis on
certain assessment criteria in justifying the legal enforcement. Anyway, excepting the classical moralists,
all other legal theoreticians stipulate some objective criteria for legal enforceability of an agreement.
In the next two modules we shall examine these objective criteria for enforcing an agreement. In some
countries the need for legal enforceability is a judicial policy. But in India, objective conditions are
prescribed in the Statute itself. As for example, according to Section 10 of the Indian Contract Act an
agreement in order to be legally enforceable nust be: (a) entered between parties competent to enter into
a contract as per this provision of Sections 11 and 12, (b) for a lawful object as per Sections 23-24, (c)
against a valid consideration as per Section 25, (d) both the parties having consented freely as specified
in Sections 13 to 22 and (e) not otherwise invalid under expressed statutory provision specified in Sections
26-30. With these, some common law basic principles are also attached like parties must intend to create
legal relation, a social agreement being kept out of the jurisdiction of law of contract.
The present module shall deal with the role played by capacity and consideration in an agreement. Issues
on capacity may be both factual and legal. As for example, mental capacity is a factual question but issue
like insolvency is a legal question. We shall try to explain exhaustively all possible factual and legal
situations. But, it is always advisable to refer to some of the supplementary readings for comprehensive
understanding. Similarly, we have discussed consideration in all its theoretical and practical details. But
it would be encouraging if you could resort to some extra-readings specially some American text books
in order to compare the position there with the present Indian Legal Situation. I am sure you will take
maximum advantage from this basic material.
Dr. N. L. Mitra
Course Co-ordinator
44
Capacity and Consideration
Topics
1. Essential conditions of a valid contract........................................................................... 45
2. Capacity.............................................................................................................................. 47
3. Consideration..................................................................................................................... 61
4. Case Law............................................................................................................................. 71
5. Problems............................................................................................................................. 73
6. Supplementary Readings.................................................................................................. 74
45
SUB TOPICS
1.1 Introduction
1.2 Essential elements of a contract
1.3 Intention to create legal relations
1.1 INTRODUCTION
In module 1 we have come to understand that an agreement
enforceable by law is a contract (Sec.2h). We have also noted
that an agreement is made when an offer is accepted. As such
when an offer or a proposal made by one party is accepted by
another party, the agreement is made by the parties. The offer
(or proposal) and acceptance can take place in three ways i.e.,
it may take the form of a promise by one party against a promise
made by another; a promise by one party against an act by
another; an act by one party for an act of another. In the first
case, a set of promises forming the consideration for each other
form the agreement. In the second case, it is a promise against
an act of another, called as unilateral promise like promising a
reward for finding a lost dog. In this case, the acceptance takes
the form of an action. In the third case, i.e, bilateral action one
acts in a manner expecting from another person a definite act,
like plying of a bus on a public route by one person, and another
1. ESSENTIALS OF A VALID CONTRACT
getting into it. Once the agreement is formed, then one has to
see whether the agreement is enforceable by law or not. Sec. 10
of the Contract Act stipulates the conditions that makes the
agreement lawfully building and hence a contract. These
conditions are essential to make the agreement binding in law.
1.2 ESSENTIAL ELEMENTS OF CONTRACT
So, basically there are two essential elements of a contract, viz.
1. An agreement (under section 2b)
2. Enforceability by law (under section 10)
Two essential elements of an agreement are:
- an offer (2a); and
- an acceptance (2b)
According to Sec 10 of the Act the following conditions must
be fulfilled by an agreement to make it a contract:
- parties are required to be legally competent to enter into the
agreement (Ss 11 & 12);
- parties must have exercised free consent (Ss 13-22)
- there must be lawful object and consideration (Ss 23-25)
- the agreement must not be otherwise void (Ss 26-30)
Otherwise
not void
(ss. 26-30)
Lawful
object
(ss. 23-24)
Free consent
(ss. 13-14)
Consideration
(ss. 23-25)
Capacity
(ss. 11-12)
Minor
(s.11)
Unsound mind
Lunatics
Legal incapacity
(under particular laws like
Insurance, Company Law
Banking etc.)
An agreement :
A promise or set of promises [s 2b]
An Offer Acceptance (s 2b)
Enforceable by law (s. 10)
Contract (s 2h)
Coercion
(s. 15)
(s.16)
Undue
Influence
Fraud
(s.17)
Misrepresentation
(s. 18)
Mistake
(s.20)
of both parties
(s.20)
of law
(s. 21)
of fact
(ss.20,22)
of one party
(s.22)
in restraint of marriage
(s. 26)
in restraint of trade
(s.27) (s.28)
in restraint of legal
proceedings (s.2a) ambiguous agreement
to do impossible act (s. 36)
Wagering agreement (s. 30)
Flow Chart
Essential Elements of a Contract
Given below is a flow chart enumerating the essential elements of a contract as per the definitions given under
sec. 2(b) and sec. 10 of the Act.
46
1.3 INTENTION TO CREATE LEGAL RELATIONS
The making and performance of agreements flourish in our
society. Consider how many agreements a person is a party to
at any given moment. Generally a person has an agreement
with his employer, with his land lord, and so many others.
The reason why agreements are so widespread in our society is
complex. One explanation is specialization of labour, which
because of its efficiency creates the need for exchange
behaviour. As individuals specialize, they become less self-
sufficient and more dependant on others goods and services,
which they must secure through agreements. [Summers,
Hillman, p.31]
But this does not mean that all agreements one enters into are
contracts. Consider, an agreement to go to a movie with a friend.
Is this a contract ? If your friend does not go with you, can you
go to the court claiming damages for breach of contract?
Obviously not. So how would you differentiate an agreement
leading to a contract and an agreement not leading to a contract?
The basic ingredient which converts an agreement into a
contract is the intention of the parties to create a legal relation.
It is only when the parties to an agreement intend their agreement
to become legally enforceable that a contract comes into picture.
In the absence of such an intention, an agreement remains a
mere agreement and recourse to the courts cannot be had on
its breach. For example, in Balfour v. Balfour [(1919)2 KB 571]
Mrs & Mr. Balfour residents of Ceylon moved to London when
Mr. Balfour was on leave. On expiry of his leave Mr. Balfour
returned to Ceylon whereas Mrs. Balfour remained in England
on medical advice. Mr. Balfour promised to send 30 every
month for her expenses. He did not send the money after a few
months. Later on both of them decided to live apart. Mrs.
Balfour sought to recover the promised money in the court of
law. The main issue for decision was, whether a promise of
domestic nature between a husband and wife could be binding?
The court held that, the promise between the parties was not
intended by them to be legally binding. Hence Mrs. Balfour
could not enforce payment.
47
SUB TOPICS
2.1 What is capacity
2.2 Physical incapacity
2.3 Mental Incapacity
2.3(A) Minors
2.3(B) Unsound Mind
2.4 Legal Incapacity
2.4(A) Of Natural Persons
2.4(B) Of Legal Persons
2.1 WHAT IS CAPACITY?
According to Sec.10 of the Act, an agreement made between
parties competent to enter into a contract shall be enforceable
by law provided certain other conditions are fulfilled. Persons
may be either person in fact i.e., natural person or person in
law i.e., legal person or juristic person. Whereas natural
persons have unlimited power of capacity to enter into contract,
2. CAPACITY
the juristic persons capacity is limited for the purpose and object
for which the personality is conferred on a group of individuals
to constitute a distinct legal personality through registration or
incorporation under various statutes like company law, trust
law, society law or special law passed by the legislature.
Therefore in the case of a natural person there is no question of
ultravires but in case of a legal person the first issue that the
other party to the contract has to ensure is whether the juristic
person has the capacity to enter into the contract for a particular
purpose, else the contract becomes ultravires for the juristic
person.
In case of natural persons incapacity may be either latent or
patent. A latent incapacity is one which is due to inherent
incapacity on account of various reasons like infancy,
unsoundness of mind, lunacy etc. Patent incapacity may be
due to application of laws like insolvency law nationality laws
etc. The following flow-chart shall depict various types of
incapacities to which a person may be subjected to in the realm
of contracts.
Contract is the main instrument through which acquisitive market
society acquires and distributes wealth and income. As such
the limitations on the capacity has to be very rigidly constituted.
The essential ingredients of a contract are freedom of choice,
consideration and exchange. In most of the developing world,
limitations caused by way of certain physical disabilities like
illiteracy and very low economic capacity are apparent. As
such, a vast majority of people remain outside the parameter of
the freedom of contract. As a result of this, contract as an
instrument of right - duty correlation can operate within a very
limited portion of the population. These physical restrictions
on capacity necessarily restrict the area of operation of contract.
Even if freedom of contract is available to everybody the market
remains limited. This is one of the reasons why foreign
investment is not opening up in India in the desired manner.
According to the Act capacity of a natural person in its latent
sense means that the person who enters into an agreement has
to understand the nature of the agreement and be able to form a
rational judgement as to whether what he is doing or is about to
do is to his interest. Though minority is fixed by statute but the
basic philosophy of incapacity lies in the explanation to Sec.12
Legal reasons Mental reasons
Of Natural Person
due to
Physical
reasons
Ultra Vires
Unsoundness of
mind
Due to Drugs/Alcohol
Visually
impaired
Oldage Pardanashin Woman
Insolvency Foreign National Alien enemy
Lunacy
Minor
Incapacity
Of Juristic Person
due to
Winding Up Any other
disease
48
of the Act. Legal incapacities of a natural being are all laid down
by specific statutes.
Juridical persons have a fixed capacity the jurisdictional limits
of which are stipulated in the constitutional documents of the
body. The common law courts very strictly interprets the vires
specifically created by the constitutional document of the
concern. Anything which is not mentioned in this document is
taken to be something the person is not authorised to do. This
principle is known as the doctrine of ultra vires. Of course
the present tendency of the corporate courts throughout the
world is to liberally interpret the vires and extend it as far as is
reasonably possible to facilitate wider range of activities
beneficial to carry on the main objective of the juristic person.
This matter is widely discussed in module-2 of the Corporate
Law. A contract entered into by a representative of a juridical
person, which is ultra vires does not bind the juridical person
but may be enforced against the representative in his personal
capacity. The various incapacities to which a natural or juristic
person is subjected to in the realm of contract are discussed
below.
2.2 PHYSICAL INCAPACITY
In general a physical incapacity does not act either as a privilege
or a burden for a person entering into a contract. The Contract
Act itself does not impose any disability on a physically
handicapped person [section 11]. But in certain situations, law
may have to extend a special protection to such persons to see
that because of their handicap they are not taken advantage of
by some unscrupulous persons. Some of such handicapped
persons to whom law extends a helping hand are discussed
below.
1. Visually Impaired Person
Blindness or weak eye sight by itself is no bar to enter into a
contract. But a blind person may be placed in a disadvantageous
position if the other party to the contract intentionally misleads
the person as to the nature of transaction. In such cases the
defence of non est factum enables a person who has signed a
contract to say that it is not his document because he signed it
under some mistake. This defence was evolved by the courts
to relieve illiterate or blind people from the effect of a contract
which they could not read and which was not properly explained
to them. For example, in Foster v. Mackinnon [(1869)LR
4CP 704] a person was induced to sign at the back of a paper,
the face of which was not shown to him, and he was told that it
was an ordinary guarantee the like of which he had signed before
and under which no liability attached to him, when, in fact, the
paper was a bill of exchange and he was sued by a holder in
due course as an indorser. The court held, that the defendant
never intended to sign that contract or any such contract. He
never intended to put his signature to any instrument that then
was or thereafter might become negotiable. He was deceived
not merely as to the legal effect, but as to the actual contents of
the document. It was as if he had written his name on a sheet of
paper for the purpose of franking a letter, or in a ladys album,
or an order for admission to the Temple or Church, or on the fly
leaf of a book, and there had already been, without his
knowledge, a bill of exchange or a promissory note payable to
order inscribed on the other side of the paper. Explaining the
principle governing such cases, Byles J. held, It seems plain,
on principle and on authority, that, a blind man, or a man who
cannot read, or who for some reason (not implying negligence)
forbears to read, has a written contract falsely read over to him,
the reader misreading it to such a degree that the written contract
is of a nature all together different from the contract pretended
to be read from the paper which the blind or illiterate man
afterwards signs; then, at least if there be no negligence, the
signature so obtained is of no force. And it is invalid not merely
on the ground of fraud, where fraud exists, but on the ground
that the mind of the signer did not accompany the signature; in
other words, that he never intended to sign and therefore in
contemplation of law never did sign, the contract to which his
name is appended.
2. Aged Person
Sometimes old age may result in a physical incapacity due to
lack of strength and resultant loss of mobility. A person so
enfeebled may have to depend more and more on others for the
discharge of their day to day functions. Such dependance may
result in an unscrupulous persons taking advantage of the
feebleness of the old person. In such cases, the old person can
avoid the contract, by taking the plea either of undue influence,
non est factum, or fraud etc. For example, in Wajid Khan v.
Raja Ewaz Ali Khan [(1891)18 IA 144] an old and illiterate
woman, incapable of any business, conferred on her confidential
managing agent, without any valuable consideration, an
important pecuniary benefit under the guise of a trust. It was
held by the Privy Council that, all the facts of the case go to
show that there was active undue influence. The onus is on the
grantee to show conclusively that the transaction is honest,
bonafide, well understood the subject of independent advice
and free from undue influence.
This protection is generally needed where old age is coupled
with illiteracy, so that the person is totally at the mercy of one
on whom he or she reposes confidence.
3. Pardanashin Women
At the very outset it should be clarified that being a woman
(even a pardanashin woman) is not deemed to be a handicap
under the Indian law especially in the realm of Contract law.
There is absolutely no bar in our legal system prohibiting any
woman from entering into a contract. Further, a pardanashin
woman cannot be technically called a physically incapacitated
person' but for the sake of better understanding this topic is
being dealt here.
Though the legal status of the women in India may be equal to
the men, their social status is something entirely different. A
large number of women in our society are so brought up and
conditioned that they are incapable of independent thought
and action or of exercising a rational judgement in their own
best interest. It is to protect this section of women from persons
49
wanting to take advantage of their position, that law makes
special provisions.
Under sec.16 of the Act, a prima facie presumption of undue
influence arises in any contract entered into with a pardanshin
woman. She can avoid the contract unless the other party can
show that it was her intelligent and voluntary act. There is,
however, no statutory definition of the term pardanashin
woman and to understand the term recourse will have to be
taken to judicial interpretation of the word. In Shaikh Ismail
v. Amir Bibi [(1902) 4 Bom LR 146], a lady appeared before
the Registrar for registration of certain documents, that she stood
as a witness in the box in a suit, that she put in tenants and fixed
and recovered rents from them in respect of her house. The
Court held that, she could not be treated as a pardanashin lady.
A woman does not become pardanashin simply because she
lives in some degree of seclusion. The concept probably means
a woman who is totally secluded from ordinary social
intercourse.
Once it is shown that the contract was entered into with a
pardanashin woman, the law presumes undue influence. The
burden lies on the other party to show that no undue influence
was used, that the contract was fully explained to her and that
she had freely consented to it. The entire scope of this concept
was explained by the Privy Council in Kalibaksh Singh v. Ram
Gopal Singh [(1913)41 IA 23]. In this case, 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 (mukhtar) of her estate.
It was contended that combined with the fact that she had no
independent advice, was sufficient to show that the gift was the
result of the influence the mukhtar had over the lady. Their
Lordships held, In the first place, the lady was a pardanashin
lady, and the law throws around her a special cloak of protection.
It demands that the burden of proof shall in such a case rest, not
with those who attack, but those who found upon the deed, and
the proof must go so far as to show affirmatively and
conclusively that the deed was not only executed by, but was
explained to, and was really understood by the grantor. In such
cases it must also, of course, be established that the deed was
not signed under duress, but arose from the free and independent
will of the grantor. The possession of independent advice, or
the absence of it, is a fact to be taken into consideration and will
be weighed on a review of the whole of the circumstances
relevant to the issue of whether the grantor thoroughly
comprehended, and deliberately and of her own free will carried
out the transaction. If she did, the issue is solved and the
transaction is upheld.
The protection afforded to pardanashin women can be extended
to ladies of similar class who though not pardanashin technically
are similarly placed in that they are illiterate and sometimes old
and sick and have lack of understanding and appreciation of
the transaction without independent advice and are helpless and
thus exposed to the danger of entering into unfair deals. The
emphasis should be on the factual understanding of the
transaction entered into and not the disability presumed in the
case of pardanashin ladies on the ground of mere status [K.M.
Vati v. K. Raghunath Singh (1976) A.H. P.41]
2.3 MENTAL INCAPACITY
It has to be understood in the very beginning itself that when
we talk of mental incapacity we do not use the word in the
medical sense. A person may be medically sound, but the law
may presume him to be lacking in the mental capacity necessary
to enter into a contract (ex: a minor). So, the term mental capacity
or incapacity in this section is used to denote the legal
incompetence of the person rather than his medical fitness.
Section 11 of the Act, lays down that, every person is competent
to contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind ..... Thus, the
Contract Act disqualifies two categories of persons from
entering into a contract, viz:
(a) the minors; and
(b) those of unsound mind. Each of these will be dealt in detail.
2.3 (A) MINORS
POSITION IN INDIA
The term minors is nowhere defined in the Contract Act. But
taking into consideration the wordings of the section, a minor is
a person who has not attained the age of 18 years. The age of
majority of a person is regulated by sec.3 of the Indian Majority
Act, 1875. But where a guardian has been appointed to the
person or property of a minor by a court or when the minors
property is under the supervision of a Court of wards, the age of
majority of such a person is 21 years and not 18 years.
Sec.11 of the Act expressly forbids a minor from entering into a
contract. The effect of this express prohibition is that, any
contract entered into by a minor is void ab initio regardless of
whether the other person was aware of his minority or not.
Prior to 1903, it was felt that the proposition, no person is
competant to contract who is not of the age of majority .....
was capable of two interpretations, viz:- (i) that a minor is
absolutely incompetent to contract, in which case his agreement
is void ab initio; or (ii) that he is not liable on the contract only
in the sense that he is not liable on the contract though the
other party is, in which case there is a voidable contract.
Formerly, the Indian courts favoured the second interpretation
and it was held that just as in England, even in India, a minors
contract was voidable at his option.
But in 1903 in the case of Mohoribibi v. Dharmodas Ghose [30
IA 114:30 Cal 539 (1903)], the Privy Council ruled that, the Act
makes it essential that all contracting parties should be
competent to contract, and especially provides that a person
who by reason of infancy is incompetent to contract cannot
make a contract within the meaning of the Act. It was accordingly
held that a mortgage made by a minor was void, and a money-
lender who has advanced money to a minor on the security of
the mortgage is not entitled to repayment.
50
Any other rule would have made the law asymmetrical, leaving
it to the whim of a child to pick and choose between agreements
made by him as to which he will and which he will not enforce.
A child may show poor judgement in making a particular
contract, and it is a protection against his own ignorance and
immaturity - not merely fraudulent manipulation by others -
that the law affords. The general presumption that every man
is the best judge of his own interests is suspended in the case of
children [A.T. Kronman, p.786]
The law dealing with minors agreements is based on two
principles, viz:
(i) that the law must protect the minor against his own
inexperience, which may enable an adult to take unfair
advantage of him, or to induce him to enter into a contract
which, though in itself is fair, is simply imprudent [for ex: if
the minor for a fair price buys something which he cannot
afford]; and
(ii) that the law should not cause unnecessary hardship to adults
who deal fairly with minors [Trietal, p.416].
In modern society, it does not seem possible and much less
desirable for law to adhere to the categorical declaration that a
minors agreement is always absolutely void. Minors are
appearing in public life today more frequently than ever before.
A minor has to travel, to get his dresses tailored, or cleaned, to
visit cinema halls and deposit his cycle at a stand. He has to
deal with educational institutions and purchase so many things
for the facility of life and education. If, in any one of these
cases, the other party to the contract could brush aside the minor
on the ground that the engagement is void, the legal protection
against contractual liability would be too dear to minors.
Keeping in mind this fact, even the Privy Council changed its
stand latter to a more equitable one. For example, in
Srikakulam Subrahmanyam v. Kurra Subha Rao [ILR 1949
Mad 141 PC], in order to pay off the promissory note and the
mortgage debt of his father, the minor son and his mother sold
a piece of land to the holders of the promissory note in
satisfaction of the note and he was also able to pay off the
mortgage debt, and regain possession of the land. Afterwards
the minor brought an action to recover back the land. It was
found as a fact that the transaction was for the benefit of the
minor and the guardian (his mother) had the capacity to contract
on his behalf. Lord Morton said that, section 11 and the
Mohoribibi case leave no doubt that a minor cannot contract
and that if the guardian had taken no part in this transaction it
would have been void. But, the contract being for the benefit
of the minor and within the power of the guardian was held to
be binding upon him.
Effects of Minors Agreement
A minors agreement being void, ordinarily it should be wholly
devoid of all effects. If there is no contract, there should, indeed,
be no contractual obligation on either side. Consequently all
the effects of a minors agreement must be worked out
independently of any contract.
1. No Estoppel against a Minor
If a minor procures a loan or enters into any other agreement by
representing that he is of full age, is he estopped by sec.115 of
the Indian Evidence Act, 1872 from setting up that he was a
minor when he executed the mortgage? In other words, can he
be precluded from disclosing his true age in any subsequent
litigation resulting from the contract? The point was raised but
not decided in Mohoribibis case, where the Privy Council said,
the Courts below seem to have decided that this section does
not apply to infants; but their Lordships do not think it necessary
to deal with that question now. They consider it clear that the
section does not apply to a case like the present, where the
statement relied upon is made to a person who knows the real
facts and is not misled by the untrue statement. There can be
no estoppel where the truth of the matter is known to both the
parties, and their Lordships hold, in accordance with English
authorities, that a false representation, made to a person who
knows it to be false, is not such a fraud as to take away the
privilege of infancy. There were later many conflicting
decisions on whether a minor could be estopped by a false
representation as to his age. But the point has been settled in
Sadik Ali Khan v. Jai Kishore [AIR 1928 All P.C.152], where
the Privy Council observed that, ` a deed executed by a minor
is a nullity and incapable of founding a plea of estoppel. The
principle underlying the decision being, `there can be no
estoppel against a statute.
Thus, the position now is, that even if a minor has entered into
a contract by misrepresenting his age, he can at any later stage
plead minority and avoid the contract. Minority in India is a
fact and not a privilege (as in England) and this fact can be
proved at any stage of the proceedings, regardless of the
surrounding circumstances.
2. No Liability in Contract
A minors agreement is of course, in principal devoid of all
legal effects. A minor is in law incapable of giving consent,
and, there being no consent, there could be no change in the
character or status of the parties [Padma Vithoba v. Mohd.
Multani, AIR 1963 SC 70]. In England, as early as in 1665 in
Johnson v. Pye [2 ER 1091] it was held that, an infant who
obtains a loan of money by falsely representing his age cannot
be made to repay the amount of loan in the form of damages for
deceit.
3. No ratification
A minors agreement being void ab initio, there can be no
ratification of the agreement on his reaching the age of majority.
Ratification can only be of acts which are valid in law at the
time of commission and also at the time of ratification. Since
an agreement entered into by a minor, during his minority is
not valid in law, he cannot on his reaching the age of majority
ratify it - as in the eyes of law the agreement does not exist at all.
4. Limited application of restitution
If a minor obtains property or goods by misrepresenting his
age, he can be compelled to restore it, but only so long as the
51
same is traceable in his possession. This is known as the
equitable doctrine of restitution. Where the minor has sold the
goods or converted them, he cannot be made to repay the value
of the goods, because that would amount to enforcing a void
agreement. So also, the doctrine will not apply where the minor
has obtained cash instead of goods. In Leslie (R) Ltd v. Sheill
[(1914) 3 KB 607] a well known authority on this issue, it was
held that, .... the money was paid over in order to be used as
the defendants own and he has so used it and, suppose, spent
it. There is no question of tracing it, no possibility of restoring
the very thing got by the fraud, nothing but compulsion through
a personal judgement to repay an equivalent sum out of his
present and future resources .... I think this would be nothing
but enforcing a void contract.
Section 41 of the original Specific Relief Act, 1877 authorised
the courts to order any compensation that justice required to be
paid by the party at whose instance a contract was cancelled.
The first landmark case decided under this section was
Mohoribibis case where it was held that, This section no
doubt gave a discretion to the court; but the court of first instance
and subsequently the Appellate Court, in the exercise of such
discretion, came to the conclusion that under the circumstances
of this case justice did not require them to order the return by
the respondent of the money advanced to him with full
knowledge of his infancy, and their Lordships see no reason
for interfering with the discretion so exercised.
Second landmark case on this issue was Khan Gul v. Lakha
Singh [AIR 1928 Lah 609], where the defendant while still a
minor, fraudulently concealing his age, contracted to sell a plot
of land to the plaintiff. He received the consideration of
Rs.17,500 and then refused to perform his part of the bargain.
The plaintiff prayed for recovery of possession or refund of
consideration. There could be no question of specific
enforcement, the contract being void ab initio. The only
question therefore was : Can a minor who has entered into a
contract by false representation refuse to perform the contract
and at the same time retain the benefit he may have received
therefrom? The court held that, ..... There is no real difference
between restoring the property and refunding the money, except
that the property can be identified but cash cannot be traced ....
It must be remembered that, while in India all contracts made
by infants are void, there is no such general rule in England.
There should therefore be a greater scope in India than in
England for the application of the equitable doctrine of
restitution.
Referring to sections 39 & 41 of the Specific Relief Act, 1877,
the court further said : The doctrine of restitution is not however
confined to cases covered by those sections. The doctrine rests
upon the salutory principle that an infant cannot be allowed by
a court of equity to take advantage of his own fraud. The
court therefore ordered the refund of the money.
The Law Commission of India, in its 9th report also supported
this view. The matter now is codified in section 33 of the new
Specific Relief Act, 1963. The net result of the amendment is
as follows :
(i) Where a void or voidable contract has been cancelled at
the instance of a party thereto, the court may require him
to restore such benefits as he has received under the
contract and to make any compensation to the other party
which justice may require; and
(ii) Where a defendant successfully resists any suit on the
ground that the contract, by reason of his being
incompetent, is void against him, he may be required to
restore the benefits, if any, obtained by him under the
contract, but only to the extent to which he or his estate
has benefited thereby.
But the court will not compel any restitution by a minor even
when he is a plaintiff, where the other party was aware of the
minority so that he was not deceived [Bhim Mandal v.
Mangaram Corain, AIR 1961 Pat 21] or where the other party
has been unscrupulous in his dealings with the minor [Mohd.
Said v. Bishamber Nath, AIR 1924 All 156] or where the
other party lays no material before the court for coming to the
conclusion that justice requires return of the money paid to the
minor [Kampta Prasad Singh v. Sheo Goapl Lal, (1904) 26
All 342] etc.
Section 33(1) of the Specific Relief Act, 1963, does not alter
the earlier law. If the minor comes to the court as a plaintiff, he
can be compelled to disgorge his gains under the agreement.
Sub-section (2) however makes this difference that if a minor
is brought before the court as a defendant, he can be compelled
to account for such portion of the money or other benefits
received by him as has gone to benefit him personally, such as
education or training or has resulted in an accretion to the estate.
Effect of Contracts Beneficial to Minors
The law declared in Mohoribibis case that a minors agreement
is absolutely void has been generally followed, but it has
been growingly confined to cases where a minor is charged
with obligations and the other contracting party seeks to enforce
those obligations against the minor [Raghavachariar v.
Srinivasa (1916) 40 Mad 308]. It was further held in the same
case that, what is meant by the proposition that an infant is
incompetent to contract or that his contract is void is that the
law will not enforce any contractual obligations of an infant.
Thus, a minor is allowed to enforce a contract which is of some
benefit to him and under which he is required to bear no
obligation. In the above case, a full bench of the Madras High
Court unanimously decided, that, a mortgage executed in favour
of a minor, who has advanced the whole of the mortgage money,
is enforceable by him or any other person on his behalf.
This and a number of later cases proceeded on the principle
that the minor has already given the full consideration to be
supplied by him and there is nothing that needs to be done by
him under the contract. He is now a mere promisee and prays
the court for recovering the benefit stipulated. But where the
contract is still executory or the consideration is still to be
supplied, the principle in Mohoribibis case would thwart any
action on the contract. For example, in Raj Rani v. Prem Adib
[AIR 1949 Bom 215], the plaintiff, a minor, was allotted by the
52
defendant, a film producer, a role in a film. The agreement was
made with the father. The defendant subsequently allotted that
role to another artist and terminated the contract with the
plaintiffs father. It was held that, neither the plaintiff nor her
father could sue on the promise. If it was a contract with the
plaintiff, she being a minor, it was a nullity. If it was a contract
with her father it was void for being without consideration.
The promise of a minor girl to serve, being unenforceable against
her, cannot furnish any consideration for the defendants promise
to pay her a salary.
The Indian Apprentices Act, 1850 provides for contracts in the
nature of contracts of service which are binding on minors.
The Act was passed, as the preamble shows: For better
enabling children, and specially orphans and poor children
brought up by public charity to learn trades, crafts and
employments, by which, when they come to full age, they may
gain a livelihood. Section 9 of the Act requires such contracts
to be made by a guardian on behalf of the minor.
Another contract which is prima facie for the benefit of the
minor, is a contract of his/her marriage. It is customary amongst
most of the communities in India for parents to arrange
marriages between their minor children and the law has to adapt
itself to the habits and customs of the people [Khimji Kuverji
v. Lalfi Karamsey, AIR 1941 Bom 129]. It is therefore well
established that, while the contract of marriage could be
enforced against the other contracting party at the instance of
the minor it cannot be enforced against the minor.
A minor has the option of retiring from a contract in beneficial
nature on attaining majority provided that he exercises the option
within a reasonable time.
Liability of Minor for Necessaries
Section 68 of the Act provides for the liability for necessaries
supplied to persons incompetent to contract as: If a person
incapable of entering into a contract, or any one whom he is
legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has
furnished such supplies is entitled to be reimbursed from the
property of such incapable persons.
This section is applicable only to the supply of necessaries,
but this term has not been defined any where in the Act. To
ascertain the meaning of the word necessaries, we may turn
to the judicial decisions to determine its meaning and scope.
For example, in Chappel v. Cooper [(1844)13 M & W 252] :
Things necessary are those without which an individual cannot
reasonably exist. In the first place, food, raiment, lodging and
the like. About these there is no doubt. Again, as the proper
cultivation of mind is as expedient as the support of the body,
instruction in art or trade, or intellectual, moral and religious
education may be necessary also ..... Then the classes being
established, the subject and extent of the contract may vary
according to the state and condition of the infant himself. His
clothes may be fair or coarse according to his rank, his education
may vary according to the station he is to fill; and the medicines
will depend on the illness with which he is afflicted, and the
extent of his probable means when of full age ... But in all these
cases it must first be made out that the class itself is one in
which the things furnished are essential to the existence and of
reasonable advantage and comfort of the infant contractor. Thus
articles of mere luxury are always excluded, though luxurious
articles of utility are in some cases allowed.
Thus, What is necessary is a relative fact to be determined
with reference to the fortune and circumstances of the particular
minor. Hence an article (for ex : a Gold Watch) may be an
article of necessity in one case and an item of luxury in another,
depending on the status of the minor. The importance of making
this differentiation is that, the seller would be able to recover
the cost of the watch in the first case and he will have to suffer
a loss in the second case, i.e., the seller cannot recover the cost
of (merely) luxurious items.
Even when the cost is awarded, he can recover it only from the
property of the minor. A minor, in India, can never be made
personally liable for any goods supplied to him. If he does not
have property sufficient to satisfy the debts, the seller will have
to suffer a loss.
To render a minors estate liable for necessaries two conditions
must be satisfied, namely:
(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.
The supplier thus has to prove, not only that the goods supplied
were suitable to the condition in life of the infant, but that he
was not sufficiently supplied with the goods of that class. This
principle was laid down in Nash v. Inman [(1908)2 KB 1],
where an undergraduate in Cambridge University, who was
amply supplied with proper clothes according to his position,
was supplied by the plaintiff with a number of dresses, including
eleven fancy waist coats. The price was held to be irrecoverable.
Status of Minor in Certain Other Indian Laws
Just as the Indian Contract Act has made special provisions
relating to a minor, certain other laws in force in India have
also made certain provisions for minors either confering some
benefits or special privileges on them or prohibiting them from
entering into certain transactions. Some of these provisions
are discusssed below.
Minor as a Shareholder
Under the Indian Companies Act, a minor is barred from holding
any shares in his own name. Even if his name is entered in the
register of members, he will not be treated as a member and his
name will be struck off from the register. But a guardian can
purchase shares on behalf of a minor, which he will then hold
as a trustee for the minor.
Minor as a partner
Under section 30 of the Indian Partnership Act, a minor can be
made a partner to the benefits of a firm, with the consent of all
the partners. A minor partner is entitled to a specified share of
the profits but cannot be made liable for the partnership losses.
53
Within six months of his attaining majority or his becoming
aware of his status as a minor partner firm whichever is later,
he is required to elect from two options : whether he would like
to continue as the partner of the firm or else would like to opt
out. If he decides to opt out, then he ceases to be a partner from
the day of the election and would no longer be entitled to the
share in partnership profits.
If he decides to continue as a partner, then his decision will
have a retrospective effect i.e., he will be deemed to be a full
fledged partner from the day he had first entered the firm (as a
minor). He then becomes liable for all the acts and losses of
the firm during this period.
This retrospective effect seems to be against the spirit of contract
Act, since in effect it means that the minor had entered into a
valid contract of partnership during his minority. This is in
conflict with sec.11 of the Contract Act, which specifically lays
down that a minors contract is void ab initio. This anomaly is
extremely unfortunate and may have arisen because the Indian
Partnership Act follows the English Partnership Act to the dot,
and in England unlike India a minors contract may be valid,
void or voidable depending on the nature of the contract. The
legislature in framing this section seems to have failed in taking
notice of this basic difference between the contract laws of these
two countries.
Minor as a transferee
Under the Transfer of Property Act, 1872, Ss 13, 14 and 127
deal with transfer of property for the benefit of a minor. Ss 13
and 14 deal with the rule against perpetuity and state that
property can be transferred to an unborn person via the media
of a living person i.e., first the property goes to a person living
at the time of transfer and after his death to a person who is
unborn at the time of the first transfer. This (unborn) person
should be atleast conceived at the time when the first interest
comes to an end and he acquires full interest in the property on
his attaining majority.
Section 127, deals with onerous gift to a minor person. An
onerous gift is one which has both burden and benefit attached
to it (for ex: a mortgaged house). In such cases the minor is
given an option on his attaining majority either to accept the
gift or to reject it. If he accepts the gift, he will be liable for the
burdens attached to the gift, but if he rejects it then he cannot
be made liable for any obligations arising out of the gift. A
minor has to make his election within a reasonable time of his
attaining majority.
Minor as a Trade Union Member
A minor over the age of 15 years but below 18 years can be a
member of a registered trade union, and can enjoy all rights
and privileges available to such members. But a minor cannot
form a registered trade union, though there is a proposal to the
effect that minors should be allowed to form their own trade
unions and to get it registered as this would help in a better
protection of their rights.
Minor Under Insolvency Act
A minor in India cannot be declared insolvent or bankrupt, nor
can his properties be attached.
Minor under various Labour Laws:
Under the Factories Acts 1948 (sec 67); Mines Act 1952 (Sec
40) and Plantation Act 1951 (sec 25) a minor above the age of,
14, 18 and 12 years (since withdrawn by Amemdment Act,
1986) can be employed as factory, mines and plantation worker
respectively. These provisions seem to be in conflict with the
Contract Act. In order to make a minor a worker at that age
requires a contract of employment. Does it mean that a minor
above the age as mentioned earlier in those respective industrial
legislations, can enter into a valid service contract as is
prescribed in England? Or does it mean that the minor at that
age could be a worker on the basis of a contract made between
the minors guardian and the occupier of the Factory/Mines/
Plantation Unit? The former course of action is more logical
than the latter because the agreement relates to services of the
minor in person. As such, the occupier shall be liable to pay
the minor worker personally and not through the guardian.
Though the law relating to a minor in India and his/her position
vis-a-vis a contract, is not based upon the Common law in
England but in some cases as above, it may be necessary to
refer to English law. So, let us examine the English law in this
regard.
POSITION IN ENGLAND
Till recently persons below the age of majority were called as
infants. But now the term minors is generally used to
describe persons who are below the age of 18 years [sec.1 of
Family Law Reform Act, 1969]. Contracts made by minors
are governed by the rules of common law as altered by the
Infants Relief Act, 1874 and Minors Contracts Act, 1987.
The Infants Relief Act, 1874 declares the following categories
of minors agreement to be absolutely void :
(i) agreement for repayment of money lent or to be lent; or
(ii) agreement for goods supplied or to be supplied (other than
necessary); and
(iii) agreement for accounts stated.
Apart from the above three categories, the rest of the categories
of contracts entered into by minors may be either valid contracts
or voidable contracts depending on the subject-matter of the
contract.
Valid Contracts
Under certain circumstances the agreement entered into by a
minor is deemed to be a valid contract. Some of these situations
are discussed below.
(1) Necessaries
A contract for necessaries is binding not for the benefit of the
tradesman who may trust the infant, but for the benefit of the
infant himself [Ryder v. Wombwell (1868)L.R.4 Ex.32]. It
54
is assumed, rightly or wrongly, that the tradesman would not
give credit to the minor unless the law imposed liability. It
should be noted, that parents are not liable on their childs
contract unless the child acts as their agent [Blackburn v.
Mackey (1823)1 C & P.1], and that in English law a minors contract
cannot be validated by the consent or authorisation of his
parent or guardian.
Necessaries include goods supplied and services rendered to a
minor. He is only bound by a contract for necessaries if it is on
the whole for his benefit; not if it contains harsh and onerous
terms. Nor is he bound by an indivisible contract comprising
of necessaries and non-necessaries [Stock v. Wilson [1913] 2
KB 235].
(2) Service Contracts
A minor is bound by a contract of service if it is on the whole
for his benefit, though some of the clauses of the contract be to
his disadvantage.
In deciding whether a service contract is on the whole beneficial,
the court is entitled to look at surrounding circumstances. For
example, a service contract with a minor may contain a covenant
in restraint of trade, such a covenant, if otherwise valid, does
not invalidate the contract if the minor could not have got work
on any other terms. But it would invalidate a service contract
with a minor if it was of a kind that was not usually found in
service contracts in that trade and locality. These principles
also apply to contracts connected with service contracts. Thus
they determine the validity of contracts to carry minors to work,
of compromises of industrial injury claims, and of agreements to
dissolve service contracts. These principles also determine the
validity of contracts under which a minor makes a living by the
exercise of some profession, ex: as an entertainer or author or
athlete.
Voidable Contracts
Under four different circumstances, a minors contract is voidable
i.e., it binds both parties but the minor can escape liability by
repudiating before majority or within a reasonable time thereafter,
but the other party can never repudiate it. These cases are:
1. Contracts concerning land
A lessee who is under age is liable for rent unless he repudiates
it. The same principle applies to purchase of freehold land,
letting or sale of land by a minor, whether the terms of
conveyance be advantageous to him or not.
2. Shares in a Company
A minor who agrees to subscribe for shares in a company or
buys shares which are not fully paid, is liable for calls unless
he repudiates. A mere plea that he has not ratified the transaction
does not relieve him from liability [North Western Railway v.
M Michael, (1850) 5 Ex.114]. Once he repudiates he ceases
to be liable and can have his name removed from the companys
register.
3. Partnership
A minor can become a partner and is to some extent bound by
the partnership agreement. He cannot be sued during minority
by persons who give credit to the firm, or be made liable for its
losses. But he is liable if after attaining majority fails to put an
end to the partnership. He is not entitled to any share in the
profits or assets of the partnership until its liabilities have been
paid off.
4. Marriage Settlements
Formerly it was thought that a marriage settlement by a minor
was binding to the extent to which it benefitted him; but was
not otherwise binding unless ratified after majority [Simon v.
Jones (1831) 2 Russ & Rly. 365]. The present view is that all
such settlements bind the minor unless he repudiates it [Duncan
v. Dixon (1890) 444 Ch.D 211].
A voidable contract can be repudiated during minority but such
a repudiation can be withdrawn by the minor before, or within
reasonable time on attaining majority. If he repudiates during
minority itself, he needs to take no further steps to escape
liability on reaching full age.
If the minor does not repudiate during minority, he must do so
within a reasonable time on reaching full age; even if he did not
know of his right to repudiate, and even if his obligation under
the contract had not yet matured. In Edwards v. Carter
[(1893)A.C. 360] it was held that a settlement could not be
repudiated nearly five years after the majority of the settlor,
although he was far most of that time ignorant of his right to
repudiate.
Before the Minors Contracts Act 1987, a minor could be held
liable to restore certain benefits received by him under a contract
which did not bind him. Such liability was imposed in equity if
the minor was guilty of fraud, and at common law in certain
cases of quasi-contracts. Section 3(1) of the 1987 Act now
gives the court a discretion to order the minor to transfer to the
adult party any property acquired by the minor under such a
contract, or any property representing it.
Section 3(2) of the Act, provides that nothing in section 3 shall
be taken to prejudice any other remedy available to the adult
party to the contract : thus in cases which fall outside
sec. 3(1), or in which the court declines to exercise its discretion
under that sub-section, it remains open to the adult to seek
restitution under the old rules of equity or common law.
DISTINCTION BETWEEN THE INDIAN LAW AND
ENGLISH LAW
a) Nature of minors contract
In India, any agreement with a minor is void ab initio under all
circumstances.
In England, a contract with a minor may be valid, voidable or
void depending on its contents.
55
b) Liability for necessaries
In India, a person who has supplied necessaries to the minor
can be reimbursed from the property of the minor only [Sec.68].
In England, the minor is personally liable for the necessaries
supplied to him, because a contract for necessaries is a valid
contract.
c) Insolvency proceedings
In India, a minor cannot be declared insolvent. In England, a
minor can be declared insolvent for trade debts.
d) Service Contracts
In India, a minor cannot enter into any contract. However, it has
been seen earlier that industrial laws in India, by and large,
provide for young workers above 15 years of age. This indicates
that a service contract is valid. In England, a service contract
with a minor is a valid contract.
In conclusion it may be said that the basic difference between
the Indian and English Law with respect to the law relating to
minors is that, in India minority is a fact which is treated as
law. Hence, the protection granted to a minor is absolute and
extends to all situations regardless of his duplicity in the
transaction. (eg: misrepresentation of his age). But in England,
minority is a privilege which is granted to the minor only in
certain situations. Hence, the protection granted is conditional
or restricted and depends upon the subject matter of the contract.
All the remaining differences in the treatment of a minors
contract follow naturally from this fundamental difference.
AMERICAN POSITION
Under the American Law, those below the age of majority
[18 in most jurisdictions, 21 in some] are responsible for their
torts and crimes, but are allowed to disaffirm the contracts they
make. To disaffirm, the minor simply indicates (even in an
informal way) that he or she no longer wants to be bound by
the contract. If the minor reaches majority, the period of
disaffirmation continues for a reasonable period of time and
even thereafter unless the other side relies on the infants
apparent `ratification of the contract.
The minor (sometimes called infant) may not disaffirm a contract
for necessaries [i.e., food, clothing, shelter etc.] nor one signed
by the infants legal guardian. In all jurisdictions special statutes
deprive infants of the power to disaffirm certain contracts: bail
bonds, military service, bank accounts etc.
All the states in America hold the view [either by application
of statute or Common Law principle] that the infants must return
the consideration they received from the other side if it is
possible to do so. In some of the states, there seems to be a
definite leaning towards holding an infant liable for benefits
received even though they are not necessaries and even though
the benefits cannot be returned in kind. In Porter v. Wilson
[106 N.H. 270] the New Hampshire court, stating this rule cited
with approval a passage from Williston on Contract : In some
states the ordinary rule prevailing in regard to necessaries has
been extended so far as to hold an infant bound by his contracts,
where he fails to restore what he has received under them to the
extent of the benefit actually derived by him from what he has
received from the other party to the transaction. This seems to
offer a flexible rule which will prevent imposition upon the
infant and also tend to prevent the infant from imposing to any
serious degree upon others.
Though this rule requiring the minor to account for any benefit
he has received, may be the minority opinion there is a growing
feeling in the States that this is definitely a better rule. The
reason for this changed opinion has been well stated by the
Court of Appeals of Ohio in Haydocy Pontiac Inc. v. Lee
[19 Ohio App. 2d1 217] at a time when we see young persons
between 18 and 21 years of age demanding and assuming more
responsibilities in their daily lives; when we see such persons
emancipated, married, and raising families; when we see such
persons charged with the responsibility for committing crimes;
where we see such persons being sued in tort claims for acts of
negligence; when we see such persons subject to military
service; when we see such persons engaged in business and
acting in almost all other respects as an adult, it seems timely to
re-examine the case law pertaining to contractual rights and
responsibilities of infants to see if the law as pronounced and
applied by the courts should be redefined.
Despite this and other decisions of a like nature, the general
opinion relating to a minors contract is that, he is liable (i.e.,
personally) on contracts for necessaries but on others he is not.
This position of a minor seems to be analogous to the position
of a minor in England where also a minor can be made
personally liable on some contracts, whereas on others he cannot
be held liable at all.
Concluding Remarks
One can only speculate on the reasons as to why in India a
minors agreement is treated as void ab initio [so much so that
even for the supply of necessaries, it is only his property which
can be made liable and not the minor himself] whereas, both in
England and America a minors contract may be valid or void
depending on the nature of the contract. One of the plausible
reasons may be the difference in the social and cultural
environment between India and the other two countries. Here,
till the child is married he/she remains under the effective control
of the parents (in general) regardless of his age and earning
capacity. So also, we do not find parents encouraging their
children (below 21 years) to take independent decisions in
matters concerning them. Right from what the child should
eat, wear etc..... to what he should study and where, is decided
for the child by the parents. It maybe this over protective attitude
towards our children, which finds a reflection in our Contract
Act also. In contrast, in the West, a child is encouraged to take
independent decisions from an early age, so that the child is
able to act more naturally and independently as compared to
his counterpart in the east. This attitude of imposing
responsibilities on a child from an early age is reflected in the
Contract Acts of UK & USA. After all, law for the most parts
is a reflection of social norms and ideals.
56
2.3(B) UNSOUND MIND
Section 11 of the Act specifies that, every person is competent
to contract .... who is of sound mind. Thus, unsound mind is
a disqualification which would if proved make the contract void
ab initio. Unsoundness of mind maybe either temporary or
permanent and may occur due to numerous reasons. Some of
the categories of persons who may suffer from unsound mind
are :
a) Persons with an advanced age or illness affecting mental
ability
b) Person under the influence of alcohol and drug
c) Persons having mental incapacity on account of attacks of
lunacy
Each of these, will now be dealt in brief.
Aged persons
Old age may not necessarily result in senility or diminished
mental capacity, but it may. When an old persons mental
faculties weaken, law throws a protective cloak around him, to
prevent any unscrupulous person (generally someone close to
such old person, maybe a relative, or his doctor or a friend)
from taking undue advantage of the person.
A contract entered into by such an old person may be avoided
on any one of the following two grounds, viz:
a) Undue Influence
Such contracts can be avoided under sec.16 of the Act provided
that the old person could prove that the other party to the contract
was in a position to unduly influence his decision. For example,
in Abdur Rauff v. Aymona Bibi [1937 A. Cal.492], an aged
father executed deeds of gift and a wakfnama at a time when he
was in a weak state of mind as the result of a long drawn out
illness. These transactions were brought about at the instance
of his son and had the effect of depriving the other members of
the family of their just share of the inheritance. As it was proved
that the son was in a position to dominate the will of the father
and that he used that position to his own advantage, the deeds
of gift and the wakfnama were set aside.
Once undue influence is pleaded the defendant has to prove :
(i) that no undue influence was used; (ii) that the contract was
fully explained to the plaintiff; and (iii) the plaintiff freely
consented to the transaction.
If undue influence is proved, the contract becomes voidable
and can be rescinded at the option of the aged person but not at
the option of the other party to the contract.
b) Unsound mind
The second ground on which an aged person (or someone on
his behalf) can avoid a contract is by proving, that at the time
the contract was entered he (i.e., the old person) was not in
possession of his full mental faculties, as a result of which he
was unable to grasp the full consequences of his act. If
unsoundness can be proved to the satisfaction of the court,
then the contract is treated as void ab initio.
Drunkards
The second part of section 12 says : a person who is usually of
sound mind, but occasionally of unsound mind, may not make a
contract when he is of unsound mind.
A person under the influence of alcohol, drugs or such other
intoxicating substances, is presumed for the purposes of
Contract Act to come under this definition of occasionally of
unsound mind. If it can be proved that at the time when the
plaintiff had entered into the contract he was so intoxicated
that he had no control over his mental faculties and was
incapable of understanding it and of forming a rational
judgement as to its effects upon his interest, the agreement he
has entered into may be declared by the Court as void ab initio,
regardless of whether the defendant was aware of the plaintiffs
state of intoxication or not. It is interesting to note that this
part of the section is given in a negative proposition though the
former part is in positive form. It is because here the court
presumes that the person has a sound mind, and hence the
agreement valid. Anyone challenging this presumption must
prove mental incapacity by proving beyond doubt that at the
time of entering into the agreement the person was so intoxicated
that he/she could not understand the personal benefit, only in
that case the agreement can be negatived. [Prove negation of
mental capacity to negate the agreement]. So the proposition
is negative.
The English law relating to contracts, with drunkards is different
from the Indian Law. In England, if a person enters into a
contract while drunk, he may, when sober, elect to avoid the
contract or to affirm it [Mathews v. Baxter, (1873) LR 8Ex
132]. Thus, under the English Law, a contract with an intoxicated
person is merely voidable at his option and not absolutely void
as in India.
Lunatics
Whenever a person is incapable of forming a rational judgement
in his best interests, we call him jurisprudentially insane or
legally insane. In medical science, insanity is a disease of mind
which impairs the mental faculty of a human being. It may
have various grades and stages but at all these grades and stages
a person is not necessarily incapable of forming judgments in
his own interest. As for example, mental obsession is a disease
and therefore may come within the scope of medical terminology
of insanity, but in such cases the person is not necessarily
incapable of forming judgments in his best interests and as such
will not be jurisprudentially insane. Any impairment of
cognative faculty which injures the capacity of reason comes
within the medical definition but not the jurisprudential one.
But if the cognitive faculty is so damaged as to render the person
incapable of understanding the nature and consequences of his
act, the insanity is said to be jurisprudential. In Q.E. v. Keder
Nasayer Shah [(1896)23 Cal 604] the Calcutta High Court
explained the jurisprudential insanity as one, which materially
impairs the cognitive faculties of mind so much so that it would
make the person incapable of knowing the nature of the act.
In civil laws the test is whether the person can form a rational
57
judgement as to his interest in the given situation, say in case of
contract - in case of the given contract.
In case of criminal law the test is even more rigid. In order to get
an exemption under criminal law such impairment of cognitive
faculties of the accused should be such that the accused has
become incapable of knowing the nature of his act, and that he
does not understand that what he is doing is wrong or contrary
to law. For long Indian criminal courts used to apply
McNaghtens rule [State v. McNaghten (1833)10 Clark &
Finnelly 200] which prescribed that, the accused in order to
get exemption from criminal responsibility on the ground of
insanity, must prove that, owing to a defect of reason, due to a
disease of mind, he did not know the nature and quality of his
act, or, if he did know this, that he did not know that he was
doing wrong. The civil court on the other hand does not apply
this test. In other words, the civil court applies a test of rational
judgement in the interest of the self. In both the cases, however
the origin of `insanity is taken as 'sane i.e., impairment of
cognitive domain which injures the faculty of reasoning. For
obvious reasons the degree of test in criminal law is tougher
than in civil law, though the methodology is almost the same.
Section 12 of the Contract Act specifies the meaning of sound
mind for the purposes of contracting as:
A person is 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 of forming a rational judgement as to its
effect upon his interests.
A person who is usually of unsound mind, but occasionally of
sound mind, may make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of
unsound mind, may not make a contract when he is of unsound
mind.
This section consists of three different parts .
First Part : This lays down the general principle for competence
to contract. A person may enter into a contract if he, (a) is
capable of understanding the full import of the contract; (b)
anticipates the effect of the contract on his interests; and (c)
exercises a rational judgement keeping in mind all the
circumstances.
It has to be noted here, that law only wants the person to fully
understand the consequences of his action before undertaking
it. If a person voluntarily and with full understanding enters
into a contract which may not be in his best interest, the law
will not interfere to save him from his own folly. For example,
A freely and voluntarily wants to sell his house worth
Rs.1,00,000/- to B who is a friend for a mere Rs.25,000/-. In
the absence of other vitiating factors (like coercion, undue
influence etc) law will not interfere with this transaction. The
sale is perfectly valid, though the price is much below the market
value. In such cases, A is deemed to be the best judge of his
interests.
Second Part : There are certain persons who are usually of
unsound mind i.e., they do not normally fulfil the criteria of
sound mind given in first part of sec.12. The unsoundness of
mind may be due to any reason (for ex: genetic disorder,
psychotic disorder, congenital diseases etc). It is the fact of
unsoundness which is important and not the cause of it. A
contract entered into by such persons is void ab initio, unless it
can be proved that at the time when the contract was entered
into he was of sound mind i.e., he was capable of understanding
the consequences of his act and to exercise a rational judgement.
It is interesting to note that the construction of this second part
is positive in character though that of the third part is negative.
This has something to do with the presumptive character and
the burden of proof. Suppose, a lunatic who was in an asylum
during January to September and then again between
November-December of the same year contracts of marriage in
the month of October. He can enter into the contract in the
month of October provided that he is of sound mind during that
period. Here anyone who is inducing the court to believe that,
the person attained a lucid interval (excepting in congenital
lunacy in all other types of insanity there are strikes of attack of
insanity from time to time. The interval between two strikes is
known aslucid interval when the person attains clear
understanding just like a normal man and his cognitive domain
functions properly) during the month of October has to prove
that the person at that time could take a conscious resolution
about his interest. On his proving that fact the court shall validate
the marriage. Therefore the general presumption is that the
person is unsound and the agreement invalid. On proving
the soundness of mind, the validity of the agreement shall be
declared. This is known as proof-positive i.e., to take a positive
conclusion. The positive structure of the law indicates a leaning
towards this burden of proof and presumption. Generally
speaking in an adversorial system (we follow in India the
common law adversorial system) a person who goes to the court
(i.e., the plaintiff) must prove his case. But here, the person
who induces the court to believe that the insane person had
attained a lucid interval has to prove that assertion whether he
be the plaintiff or the defendant.
Third Part : The last part (as already discussed above) applies
to those who are usually of sound mind but may suffer from
occasional unsoundness of mind (may be due to emotional
shock, alcohol, drugs etc.)
A contract entered into by such persons is valid, unless it can
be proved that at the time, when the contract was entered into
he was of unsound mind i.e., he was incapable of either
understanding the consequences of his act or of exercising a
rational judgement. If he can prove the unsoundness the
contract would then become void ab initio.
A person may have temporary unsoundness of mind due to
several reasons. It may be on account of mental pressure, or
addiction, or pressures of age, or on account of impulses. This
is therefore a temporary phenomenon. As for example, A who
signed a promissory note challenging the validity of it on the
ground that he had made it while his mental faculties were
impaired on account of drunkenness. In such a situation, the
person has to prove that the consumption of liquor was so high
58
that the cognitive faculty of mind was impaired, during which
time he had signed the promissory note. The proof over here is
of a negative character, i.e., the person pleading the unsoundness
has to conclusively prove the absence of soundness, in order to
obtain a decision about the absence of a contract. The general
presumption is that a person is of sound mind and the contract
valid. Only on proving the negation is the agreement negated.
It is also to be noted, that though the third proposition is written
in a negative form but the proposition is written in a particular
negative form using the phrase may not. If this phrase may
not is used in a particular sense it may mean that some may
enter into the contract. This construction is inconsistent and
incongruent. Therefore, the word may in the negative form
has to mean must. Thus, though the proposition apparently
in this particular negative form, it really means a universal
negative construction - meaning thereby, that persons with
occasional unsound mind must not enter into a contract when
the mind is unsound. Therefore, any agreement made when
the mind is unsound is invalid.
Inder Singh v. Parmeshwardhani Singh [AIR 1957 Pat. 491]
is a case which deals with the scope and extent of sec.12. Here,
a property worth Rs.25,000/- was agreed to be sold by a person
for Rs.7000/- only. His mother proved that he was a congenital
idiot, incapable of understanding the transaction and that he
mostly wandered about. Holding the sale to be void, Sinha J.
held, According to this section, therefore, the person entering
into the contract must be a person who understands what he is
doing and is able to form a rational judgement as to whether
what he is about to do is to his interest or not. The crucial
point, therefore, is to find out whether he is entering into the
contract after he has understood it and has decided to enter into
that contract after forming a rational judgement in regard to his
interest .... It does not necessarily mean that a man must be
suffering from lunacy to disable him from entering into a
contract. A person may to all appearances behave in a normal
fashion, but, at the same time he may be incapable of forming a
judgement of his own, as to whether the act he is about to do is
to his interest or not. In the present case (he) was incapable of
exercising his own judgement.
In England, a person of unsound mind is competent to contract,
although he may avoid his contract if he satisfies the court that
he was incapable of understanding the contract and the other
party knew it. The contract is only voidable at his option and
not void ab initio as in India.
2.4 LEGAL INCAPACITY
Apart from the Indian Contract Act, there are certain other laws
which impose partial or total restrictions on a persons right to
enter into a contract. Some of these laws are discussed below.
2.4 (A) OF NATURAL PERSONS
The contractual capacity of natural persons is sometimes
subjected to reasonable restrictions imposed by various laws
of the land. In general, these restrictions apply to a person
placed in special circumstances. Some of these laws which
limit the contractual capacity of an individual are discussed
below.
Insolvency Act
An insolvent person cannot enter into any contract, especially
into contracts relating to his property. In general, there is no
prohibition against a contract by an insolvent after the
insolvency proceedings have commenced but before
adjudication. Insolvency does not determine a contract, nor
per se operate as rescission thereof [Rama Raju v. Official
Receiver, (1964)A.Ap.299]. Once a person has been adjudged
an insolvent, his property vests in the Official Receiver. This
vesting of property is for the benefit of the creditors and so
does not purport to affect the transactions between the insolvent
and other persons except in so far as they affect the
administration of the insolvents estate for the benefit of the
creditors. As far as the parties to the transaction are concerned
the transaction is binding on them.
Prison Laws
In some countries, a convict cannot enter into a contract under
the prison laws of that country. In India, there is no such
prohibition imposed on the convicts. The Contract Act itself
specifies in section 11 that, Every person is competent to
contract who is of the age of majority according to the law to
which he is subject, and who is of sound mind, and is not
disqualified from contracting by any law to which he is subject.
Thus, it is seen that there is no express bar on convicts entering
into a contract.
Despite this, certain limitations do come in the way of a convict
wanting to contract. Every letter which he writes or every deed
he executes is only with the express permission of the jailor
and these documents are subject to the jailors scrutiny. Under
these circumstances, the concept of freedom of contract is
negated as the convict is not free in the real sense of the word,
to enter into any contract he wants, with whoever he wants to
and on whatever terms and conditions which he wishes. His
will (to contract) is subject to the jailors wish. Though no
express bar is laid down on a convict entering into a contract,
restrictions by implications are definitely imposed.
Alien Enemy
A person can enter into a contract with any person he wants to,
regardless of whether the other party to the contract is a citizen
of India or not. But this freedom of contract with aliens is
available only during the times of peace. Once a war is declared,
any contract between the citizens of the warring countries comes
to an end. This provision is present (either through express
statute or by means of judicial interpretation) in almost all the
countries of the world. The embargo on contracts imposed
during war time is as a matter of public policy, and it is felt that
in the interest of the nation, an individuals private right to
freedom of contract must be sacrificed. Once the war comes
to an end, the freedom of contract is either restored (fully or
partially) or completely suspended depending on the
governments policy.
2.4 (B) OF LEGAL PERSONS
There are a number of bodies, organisations associations of
persons, objects (ex: idols) etc. on which law throws a cloak
59
of humanity and treats them as persons for certain limited
purposes. These artificially created persons are known as legal
or juristic persons. The rights and liabilities to which these
legal persons are subjected to are prescribed and proscribed by
law itself. We would now consider the limits imposed on the
contractual capacity of some of these legal persons.
COMPANIES
A company registered under the relevant company law assumes
a separate legal personality distinct from the persons forming
or running the company. In the guise of this legal personality a
company can enter into a contract in its own name, and can sue
or be sued on such contracts. But this power of the company to
enter into a contract is not an absolute one but a restricted one.
The restrictions on the contractual capacity of a company can
be imposed through the object clause of the memorandum or
during the winding up procedure, as discussed below.
Limitation through Memorandum
A company can enter into a contract only within the scope and
powers set out within its memorandum of association, or within
such powers as are reasonably incidental to or consequential
upon the operation that it is authorised to perform. Section 13
of the Companies Act provides that in the case of companies to
be registered after 1965, the object clause must state separately:
(a) Main objects - to be pursued by the company on its
incorporation and objects incidental or ancillary to the
attainment of main object.
(b) Other objects - all other objects which have not been
specifically stated in the above clause.
If a company enters into a contract which is beyond its powers,
then, such a contract is void ab initio as being ultra vires its
powers. Such contracts cannot be validated even by the
unanimous consent of all the shareholders of the company.
This doctrine of ultra vires was firmly established in the case
of Ashbury Railway Carriage Co. v. Riche [(1875)LR 7 HL
653]. Here, the objects of the company as stated in the
memorandum was to make, sell or lend on hire, railway
carriages and wagons, and all kinds of railway plant, fittings,
machinery and rolling stock; to carry on the business of
mechanical engineers and general contractors; to purchase, lease
and sell mines, minerals, land and buildings; to purchase and
sell as merchants, timber, coal, metals or other materials and to
buy and sell any such materials on commission or as agents.
The directors of the company agreed to assign to a Belgian
company a licence which they had bought for the construction
of a railway line in Belgium. It was held that, as this agreement
related to the construction of a railway, a subject matter not
included in the memorandum, was ultra vires and that not even
the subsequent assent of the whole body of shareholders could
make it binding. Therefore, an action brought by the Belgian
company to recover damages for breach of contract necessarily
failed.
At present, however, this doctrine of 'ultra vires has become
practically obsolete, because of the ingenious manner in which
the memorandums are formulated. What is now done is that the
clause (ii) of the object clause is broadly phrased that it is able
to cover almost any activity. Hence whatever activity is
undertaken by the company can never be ultra vires as it is
never beyond the objects and powers of the company.
Limitations during winding up
The term winding up of a company means the end of a
companys affairs and operations. All the assets of the company
are sold and debts are paid out of the proceeds. If there is any
surplus left it is divided among the different members of the
company in proportion to the interest they hold in the company.
Winding up may be one of the following kinds :
(i) Compulsory winding up under the order of the court
(Sec.433)
(ii) Voluntary winding up by the members or creditors (sec.484)
(3) Winding up subject to supervision of the court.
Once a company goes in for winding up, the assets of the
company are taken control of by the liquidator of the company
appointed either by the court or by the company itself. The
powers of the Board of Directors is terminated. No suit or
legal proceeding pending against the company can be proceeded
with after the order of winding up without the leave of the court.
Any debts payable in future become immediately payable on
the issue of the winding up order. The only contracts which
can be entered into during this period are for the sale of the
companies assets, or realization of debts etc., and only the
liquidator of the company has the power to act on behalf of the
company and he has to exercise this power in a manner which
he feels would be in the best interest of all parties concerned.
Idols
It is a unique feature of Hindu law that when property is
dedicated to debutter it is not the dedicated property which is
personified but it is the deity, the idol, the principal part of the
endowment, which is personified as a legal person and it is the
deity which stands as the material symbol and embodiment of
the pious purpose of the debutter to which the settlor intended.
In 1888 West, J. observed in the case of Manohar v. Lakshmi
[ILR 12 Bom 247] Hindu law recognises not only corporate
bodies with rights vested in the corporation apart from its
individual members but also juridical subjects or persons called
foundations":
An idol as a juristic person embodies the following
characteristics, viz:
(a) since ownership in the primary sense connotes the capacity
to enjoy and deal with property at ones pleasure, a deity or
idol cannot hold and enjoy property like a human being,
the deity is not the owner of the dedicated property in the
primary sense.
(b) Ownership to the deity is attributed in the secondary and
ideal sense. This is a fiction of law but not a mere figure of
speech; it is a legal fiction - else the deity cannot be
described as an owner even in the secondary sense.
60
(c) The fictitious ownership imputed to the deity is either based
upon or conferred by the express intentions of the founder,
that is to say, the dedicated property cannot be made use of
for any purpose other than that which is indicated by the
founder.
(d) The actual possession and management of the debutter
property, vests in a human agency who is variously called
as the shebait, dharmakarta, or manager of the debutter.
This manager has to use the property in accordance with
the wishes of the founder. He can alienate or transfer the
property only in the following two cases:
(i) for legal necessity; and
(ii) for the benefit of the endowment
An alienation made for any other purpose is not binding and an
alienee who does not make proper and bonafide inquiries is not
protected. Such an alienation is voidable during the lifetime of
the manager but becomes void on his death.
61
3. CONSIDERATION
SUB TOPICS
3.1 Consideration: A definitional understanding
3.2 Why consideration? The theoretical base.
3.3 No consideration no Contract
3.4. Adequacy of consideration
3.5 Role of a third party in consideration
3.6 Past consideration
3.7 Promissory Estoppel
3.1 CONSIDERATION : A DEFINITIONAL
UNDERSTANDING
The English Common law of contract historically grew out of
actions of 'debt' and 'assumpsit'. In the former the plaintiff could
succeed only on the proof of a quid pro quo and in the latter
the plaintiff could succeed if he had undertaken some charge
i.e., suffered some detriment in reliance of the defendants
promise. Thus grew a definition of consideration in Carrie v.
Misa [(1875)LR 10 Ex 153 at p.162], A valuable consideration,
in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance,
detriment, loss or responsibility given, suffered or undertaken
by the other. Thus the common law took a turn from the
complete moral Roman Code of pacta sunt servanda. A word
given must be performed. Consideration cannot be the reason
for performing the contract. Carrie v. Misa assimilated the moral
approach of Roman Code with utilitarian approach. The
definition conceptualises both the aspects. As such, the
nineteenth century moralists who attached obligation in the form
of consideration, extended their logic of assumpsit by
emphasising the idea of detriment with which one buys the
promise from the other party. On the other hand, the political
economists emphasised the structure of right acquired from
the promise. It is argued that the basis of contract is mutual
benefits for both the parties in relation to their earlier position.
Consideration is gain in absolute terms and, as such, through
contract, social wealth of a country has to increase.
American realists turned to the 'law merchant' to build up their
theory of bargain and a definition of consideration accordingly.
s71 of the Restatement (second) defined consideration as
follows: (1) To constitute consideration, a performance or a
return promise must be bargained for. (2) A performance or
return promise is bargained for if it is sought by the promisor in
exchange for his promise. (3) The performance may consist of:
(a) an act other than a promise, or (b) a forbearance, or (c) the
creation, modification, or destruction of a legal relation. (4)
The performance or return promise may be given to the promisor
or to some other person. It may be given by the promisee or by
some other person.
The historical developments and needs of the early colonists in
USA compelled the settlers to resort to more practical and
universal law merchants instead of the common law. As a
result, the overtone of the moralist obligation thesis did not
cloud the American understanding of consideration as the basis
of contract.
In comparison, the utilitarian approach to consideration in
Indian law is quite understandably nearer to the American
defintion. According to Sec. 2(d) of the Indian Contract Act
consideration means, when at the desire of the promisor, the
promisee or anyother person -
(i) has done or abstained from doing, or
(ii) does or abstains from doing, or
(iii) promises to do or abstain from doing, something,
such act, or abstinence or promise is called a consideration for
the promise. The Indian definition conforms to the two basic
characteristics of consideration as enunciated by Lord
Mansfield. According to him consideration was only
evidentiary and that the existence of a previous moral
obligation was sufficient. The Indian definition emphasised
the functional character of consideration in the form of act,
abstinence or promise and not the substance of it through right,
benefit or duty. The nearness of the Indian definition to the
American approach is evident; both are evidential, both are
relationally direct and both are positive in character. But the
American definition emphasised bargain and the Indian
definition still has the moralist code of assumpsit. As such,
in Indian definiton, the act, abstinence or promise is to be
done at the instance of the promisor.
A positive legal structure requires a causal relation. Every
contract must be based on consideration (i.e., the answer to the
question why a person enters into a given contract). But a
Common law culture asks for a moral base of human behaviour
because the Common law tradition is built up on the citadel of
canonical laws. Definition of a legal proposition is related to
deeper theoretical understanding of the need for consideration.
3.2 WHY CONSIDERATION? : THE THEORETICAL
BASE
Contract is the legal means of enrichment with cause. Through
contract individuals may increase their world of rights and
duties. Through contracts a human being, as an economic
rational entity, can possess, own, dispossess, disown and dispose
of any economic substance, in exchange of what the economic
entity indicates. This is the way in which economic activities
originated and survived in the world. As such, in the economic
and social relation the means of exchange has become the
focal point. According to Anson at an early stage in the history
of the action of assumpsit, there must have been some
speculation as to whether all promises were binding, even if
gratuitous, but the exact origin of consideration is by no means
clear. The first step out of the canonical code was taken by
Lord Mansfield when he emphasised on the evidential
exposition of a moral obligation in 1756. In 1778 Justice
Skymer,E.B took a further positive step in Rann v. Hughes
62
[(1778), 4 Brown PC.27] requiring consideration in every contract.
According to him It is undoubtedly true that every man is by
the law of nature bound to fulfil his engagements. It is equally
true that the law of this country supplies no means nor affords
any remedy, to compel the performance of an agreement made
without sufficient consideration. Such an agreement is nudum
pactum ex quo non oritur actio; and whatsoever may be the
sense of this maxim in the civil law, it is the last mentioned sense
only that it is to be understood in our law ......
It is really difficult to understand the subsistence of a contract
without consideration in law of nature as understood by
Western philosophers to be reason which cannot be self-
destructive. In fact in debt the Roman Law prescribed quid
pro quo which fits well with consideration principle to subsist
mercantile contracts. In fact contract is the legal base in
attempting maximisation of utilities in a society. It is quite
understandable that judges of a positive economic society
would discover a satisfactory theory of consideration in order
to submit contracts because consideration only can provide a
positive legal base for the realm of contracts. For a few centuries
British judges tried to continue with the moral base of assumpsit
but this had to be abandoned because the thesis could not
provide the minimum political economic input necessary for a
legal structure in a positive framework. Ultimately British judges
come to the conclusion that consideration is necessary for the
formation of every single contract.
Professor Braucher of USA built up an alternative but
complementary thesis to assumpsit. According to him, the
requirement that a promise or performance must be bargained
for (emphasis added) benefits the community by providing
opportunities for freedom of individual action and exercise of
judgment and as a means by which productive energy and
product are appropriated in the economy. In USA this bargain
theory is the generally accepted idea of consideration. This
concpet of bargain is formulated in the application of practical
reasoning in reality by O.W. Holmes. According to Holmes the
root of the whole matter is the relationship of conventional
inducement, each for the other, between consideration and
promise.
Many sociologists attribute the historical reasons for the
emphasis given to the bargain theory. In his History of American
Law, Professor Lawrance Friedman suggested that the colonists
brought considerably less of the Common law to America than
is usually supposed. Instead, many turned to the bargain
oriented customs and practices of the law merchant, which had
not yet been fully absorbed in the Common law. Economic
growth and sustenance was the conscious objective during the
period in the land far away from the mother lands of the
colonists. The contract as a bargain process was used as an
important means to that end. According to R.E. Scott & D.L.
Leslie (Contract: Law and Theory, p.33) as an operating
principle, the bargain theory of consideration (1) provided a
natural formality to channel human conduct and ensure
deliberation ; (2) protected and structured the important market
transaction; (3) extended legal protection by supporting the
executory exchange, a promise for a promise, and shielding the
creative or idiosyncratic bargainee from later claims that the
agreed exchange was disproportionate ; and (4) permitted fully
a development of remedies that protected the plaintiffs
expectation interest that is the value to the plaintiff of the agreed
exchange.
In the common law explanation of consideration there is an
approximation between the subjective moral base and objective
indebitous reliance, and hence a confusion as well. As for
example, English courts will not ask whether the thing which
forms the consideration does in fact benefit the promisee or a
third party, or is of any substantial value to any one. It is enough
that something is promised, done, forborne, or suffered by the
party to whom the promise is made as consideration for the
promise made to him (Anson, p.63). The bargain theory does
not have any such difficulties. It is in consonance with the
natural instincts and behaviour of human being though
apparently it looks only of limited import.
As such, section 25 of the Indian Contract Act, stipulated the
general Common law principle an agreement without
consideration is void. But the definition of consideration in
Sec. 2(d) of the Indian Contract Act, more appropriately fits
with the bargain concept than the common law principle of
assumpsit. According to the Indian definition, consideration is
either an act, or promise or forbearance which provides
subsistence to the promise given.
Ancient Indian philosophy created a different structure or legal
order based upon obligation. As such, even in a private
relational affair, a social view would have been taken consistent
with the moral code. The British rule had to ultimately introduce
British Common law principles in India but in a codified form
because the framers of Indian Codes were utilitarians and
followers of Benthem. Besides a Code was necessary to protect
the mercantile interest in India.
3.3 NO CONSIDERATION, NO CONTRACT
In English Common law a contract can either be made under
seal or for consideration. Seal is required only in the case of a
gratuitous promise. The validity of the contract under seal is
due to its form and the seal. The most important example of a
contract under seal is a Deed. A deed is required to be in
writing in a form and written or printed on specified paper or
parchment. It is done between parties by being signed, sealed
and delivered. The deed is written in contractual form in definite
paper with stamps and the Court allows its seal to validate the
document and the transaction. Initially a ceremony was attached
to it but presently such ceremonies are matters of the past. The
delivery may be conditional on the fulfilment of which the
document is delivered. Gift or gratuitous payment to some
charity are common examples of contract under seal. In India,
the law of contract does not provide any special groups of
contract to be allowed under seal. As such, according to
Indian law, all contracts must have consideration. According to
63
Sec.25 of the Indian Contract Act, all agreements without
consideration are void ab initio.
Contracts with considerations may either be in writing or orally
made. According to English Common law the following
contracts are bound to be in writing according to statutes:
(a) negotiable instruments;
(b) marine insurance;
(c) credit agreements like lease, hire purchase, loan agreements;
(d) a bill of sale;
(e) a guarantee agreement; and
(f) sale or disposition of immovable properties under the
Property Act.
In these agreements the validity of the contract does not depend
on the consideration but it depends upon the form in which the
contract is to be made and allowed. In India, under the Stamp
Act certain agreements must be put into writing and registered
under the law in force and the written document must bear
specified stamp duties. According to the Negotiable Instrument
Act and the Stamp Act, all negotiable instruments must be in
writing and adequately stamped. All contracts relating to
transfer of property under the Transfer of Property Act must
also be made in writing. The Insurance Act provides for all
insurance agreements (indemnity contracts and life assurance)
to be in writing and to be adequately stamped. Unlike English
law, Indian law of Contract does not require a contract of
guarantee to be in writing.
In India, all contracts, whether in writing and registered or orally
made, require consideration for its validity. Exceptions are
specified in sec. 25 only as follows:
(a) It is expressed in writing and registered under the law for
the time being in force for the registration of documents,
and is made on account of natural love and affection
between parties standing in a near relation to each other.
(b) It is a promise to compensate, wholly or in part, a person
who has already voluntarily done something which the
promisor was legally compellable to do.
(c) It is a promise, made in writing and signed by the person to
be charged therewith, or by his agents generally or specially
authorised in that behalf, to pay wholly or in part a debt of
which the creditor might have enforced payment but for
the law for the limitation of suits.
(d) According to sec.185 no consideration is necessary to create
an agency.
An agreement without consideration is void
Beside the above four exceptions all agreements require
consideration to be enforceable by law. A purely gratuitous
promise has no legal force. A promise for donation is a gratuitous
one and not enforceable. A mere moral duty to perform a promise
given to a party does not constitute consideration [See, Goapal
Co. Ltd v. Hazarilal Co. AIR 1963 MP 37]. In Kirksey v. Kirksey
[8 Ala 131] the defendant wrote to his sister-in-law, the plaintiff
- If you come down and see me, I will let you have a place to
raise your family and I have more open land than I can tend, and
on account of your situation and that of your family, I feel like I
want you and the children to do well. The plaintiff on those
words left her home and moved her family to the residence of
the defendant who gave her the house and the land only to
request her to leave after two years. The court held that her
leaving her place with her family was not a consideration against
the defendants promise to give house and land. It was only a
gratuitous promise and not binding.
Sometime litigation arises on account of complicated questions
of law as to what constitutes a forbearance worth being called a
consideration. Can a cause of action to which there is a complete
defence, be of any value in the eye of law? Suppose a man
bargains for an amount in consideration of his abandonment of
such a cause of action, is it a good consideration? It is not
enrichment without any cause. On the otherhand, if an
intending litigant bona fide forbears a right to litigate a question
of law or fact which it is not vexatious or frivolous to litigate,
he does give up something of value. It is already a settled
principle that a duty which is created under a general law or by
a specific obligation, a promise to discharge that duty cannot
be a consideration. A person served with a subpoena is legally
bound to attend and give evidence in a court of law, and a
promise to compensate him for loss of time is void for want of
consideration.
Exception I : Natural Love and affection
A promise made on the basis of natural love and affection is
binding though there is no consideration provided the promise
is (1) written and (2) registered under the law - the Registration
Act. In Poonoo Bibee v. Fyez Buksh [(1874)15 B.L.R. App
5] a registered promise to give his earnings to his wife, was
held to be written under Sec.25(1). In Rajlukhy Dubee v.
Bhootnath [(1900)4 CWN 488], a hindu husband executed a
registered deed in favour of his wife, whereby after refering to
quarrels and disagreement between the parties, the husband
agreed to pay for a separate residence and maintenance, and
there was no consideration moving from the wife. The recitals
of the promise made clearly show that the agreement was not
based on natural love and affection. Hence the Calcutta High
Court held the agreement void on account of absence of
consideration. A, the husband, promises to give his property to
his wife. The agreement is registered. This agreement is binding
because, the promise is made between parties standing in a near
relation to each other and obviously on the basis of natural
love and affection. The formal requirement of the agreement
being in writing and registered under the law in force is also
fulfilled. Now suppose A proves that B used to have a relation
with C before marriage and was keeping the illicit connection
even after marriage, A can certainly make a plea that the
instrument is not valid because there is lack of natural love and
affection. Natural love and affection is a two way traffic. As
such, if it can be proved that the husband or the wife, as the
case may be, is not faithful at the time of making the promise,
the instrument is unenforceable. Such a promise must be made
on the basis of natural love and affection between the parties.
64
The nearness of relation is again a matter of contention. A
blood or social relation is only a proof of near relation unless
proved otherwise. Nearness of relation and natural love and
affection both must co-exist in such types of agreements.
Where the relation is near, natural love and affection can be
presumed unless otherwise proved. It is not necessary that this
nearness of relation is to be found only in blood or marital
relation. A friend may be a near relation of a friend.
Exception 2: Compensation for voluntary services
This exception came out of the Common law principle of equity.
The person who has voluntarily done something which the
promisor was bound to do, requires an equitable treatment
for what he has done voluntarily. In Raja of Venkatagiri v.
Sri Krishnayya [50 Bom. L.R. 517] X agreed to give his son
in adoption, if Y agreed to advance money to defray the expenses
of defending any suit challenging the adoption. There was a
challenge to the adoption and Y advanced money towards the
expenses incurred. After Ys death his son advanced money to
the adopted son against which the adopted son issued a
promissory note on the assurance that if the adopted son fails
to succeed in the Privy Council, the Note would not be enforced.
When the adopted son succeeded in the Privy Council, demand
was made against the Note. On the refusal of payment against
the note, Ys son filed a suit to realise the money against the
loan. It was held that the promissory note did not have
consideration and the payment by Ys son was not voluntary
but was paid due to the undertaking made by Y in the original
contract. In Sindhia v. Abraham [(1895)20 Bom. 755] the
court explained the necessary conditions as where a person
without the knowledge of the promisor or otherwise than at his
request does the latter some service, and the promisor undertakes
to recompense him for it.
Exception 3: Promise to pay time barred debt
A barred debt is a good and valued consideration of a promise
to pay the debt. But the debt must be valid and payable to the
promisor in the absence of application of law of limitation. But
a debt which is not binding on account of any reason of
invalidity, even without application of law of limitation cannot
be the basis of a promise validating a time barred debt. As
such, a loan given to a minor cannot afterwards be promised to
be paid on attaining majority. In such a case the debt does not
subsist. A debt subsists even when its payment is not legally
compellable due to application of the law of limitation. As
such, a promise to pay such a debt is a good consideration. A
christian son has no pious obligation. So a pro-note executed
by the son for the debts due from the father is without
consideration and void. In Tulsi Ram v. Some Singh
[(1981)A.D. 165] it was held that two time barred pro-notes
were endorsed stating those were valid for three years, shall
not validate those notes under Sec.25(3). It requires specific
promise to pay. In order to be within apply Sec. 25(3) the
following conditions are required to be fulfilled :-
(i) there must be a debt which the creditor but for the
application of law of limitation, could have enforced;
(ii) there must be a clear promise to pay for the above debt;
and
(iii) such a promise is required to be in writing signed by the
debtor or his duly appointed agent.
According to Sec.18 of the Limitation Act, an acknowledgement
of the debt may also be a method of extending liability of the
debtor after the limitation period. Similarly a promise under
Sec. 25(3) also makes a barred debt binding. The difference
between the two provisions is that the acknowledgement is
required to be made in writing before the debt becomes barred
by limitation. But a promise under Sec.25 (3) is required to be
made in writing only after the debt becomes bad in law, on
application of limitation. An unconditional acknowledgement
is consistently held to imply a promise to pay for the purpose
of Sec.19 of the law of limitation. But promise under Sec.25(3)
is required to be clearly in writing; no implied promise is
sufficient [Giridharilal v. Bishnuchand (1932)54 All 506].
Promise to pay a debt, clearly means an ascertained sum of
money to be paid. Any promise to pay an unascertained sum,
like a promise to pay the amount that may be found due to the
arbitrator is not a promise to pay a debt under Sec. 25(3).
[Sheobachan v. Madhu Saran 1952 All 73] Another important
issue is required to be kept in mind. A promise to pay a debt
after an insolvent obtained his final discharge is not a promise
of paying time barred debt. This promise of paying a debt after
securing its discharge is a promise without consideration, and
hence void [Naoraji v. Kazi Sidick (1896) 20 Bom 636].
Exception 4: Appointment of an agent
According to Sec 185 of the Indian Contract Act, no
consideration is necessary to create an agency. A Common
law principle is that no consideration is necessary for reposing
any authority on another person. But it is a very questionable
proposition. A gratuitous employment or authority does not
require the agent to do anything.
Exception 5: Gift
According to Explanation 1 to Sec. 25, a gift actually made is
valid. Promise for a donation is not a gift. As such a promise
for a donation is invalid for want of consideration.
3.4 ADEQUACY OF CONSIDERATION
NEED CONSIDERATION BE ADEQUATE? According to
Ansons Law of Contract (p. 99) consideration need not be
adequate to the promise, but it must be of some value in the eye
of law. This basic principle of the common law system is
different from the Roman Law of Sale. In the Continental
system which is based on Roman Law, the price had to be a
fair and serious one. If the price is not a fair one, the seller
could rescind the contract unless the buyer was willing to come
upto the fair price. The principle of Laesio enormis does not
form part of Common Law. In Haigh v. Brooks [(1839) 10 A
& E 309] the consideration of a promise to pay certain bills
was the surrender of a document by way of a guarantee. The
document turned out to be of doubtful validity. The Court held
65
that doubt on the worth of the document could not be a defence
to an action on the promise.
The Indian legal position is based on the Common law principle
as provided in Explanation II of Sec. 25. According to the
provision an agreement to which the consent of the promisor is
freely given is not void merely because the consideration is
inadequate. Of course the inadequacy of the consideration may
be considered in determining the question of free consent.
This Explanation II to Sec. 25 gives two general principles of
the Common law:
(a) consideration need not be adequate; and
(b) inadequacy can be a ground to examine whether consent is
free or not.
In Grarely v. Barnard [(1874) 18 Eq. 518] it was observed
that, the Court is not a valuer and it will not inquire into the
adequacy of the consideration. It is enough, according to the
Court, if the consideration has some value. In fact, according
to Indian Law abstaining or promising to abstain by the
promisee is an adequate consideration for the promise.
Though American law of contract is also based on the common
law tradition, the bargain theory on consideration explains
assumpsit with more mercantile rationale than the customary
moral explanation supplied by the Common law principle.
Academicians in USA are divided on the question whether
nominal consideration should be sufficient to enforce a promise.
The conflict is quite vivid between two groups of academicians,
one lead by Fuller and the other Havighurst. Fuller emphasised
form which relate to the manner in which the promise was
made. According to him form served three functions, viz.,
(1) evidentiary, (2) cautionary and (3) channeling. According
to him, decision upholding nominal consideration is to be valid
because it would seem to be that the desiderata underlying the
use of formalities are here satisfied by the fact that the parties
have taken the trouble to cast their transaction in the form of an
exchange. Here according to Fuller form provides a means
to give a legally effective expression of intention [41 Colum
L.R. 806]. Havighurst on the other hand, stated that courts
usually do not enforce a contract for nominal consideration.
According to him if consideration is present as a natural element
in the transaction, it suffices. Havighurst argues this does not
suggest that the reasons for the requirements of consideration
and of form are similar.
Fuller emphasises the argument of private autonomy as the
power to bring about changes in their legal relations. The court
while enforcing the contract gives legal sanctions to rights and
duties already established by the parties. Patterson on the
otherhand refutes the argument. According to him that a
contract is binding upon a party because it expressed his will,
is wholy inadequate because it does not explain why he may
not will today the exact opposite of what he willed yesterday.
Intent of the party is not sufficient to enforce a contract. The
Court has to look for something more.
There must be a satisfactory answer to the question, why should
promises be enforced? This question is a part of the wider issue
'why should public institutions like, courts, indulge in the area
of private relations?' Private parties are free to create alternative
arrangements themselves. Cohen tries to conceptualise the
various possible answers. According to him, The simplest
answer is that of the institutionists, namely, that promises are
sacred per se, that there is something inherently despisable
about not keeping a promise, and that a properly organised
society should not tolerate this ...... But such an answer seems
to him inadequate though it may have certain truth. Cohen
argued No legal system does or can attempt to enforce all
promises. Not even the Canon law held all promises to be sacred
and when we come to draw a distinction between those promises
which should be and those which should not be enforced, the
institutionist theory, that all promises should be kept, gives us
no light or guiding principle [46 Harv. L. Rev. 572-74].
A nominal promise for illustrative purpose is put in an American
Law Review thus : A wishes to make a binding promise to his
son B to convey to B blackacre, which is worth $ 5000. Being
advised that a gratuitous promise is not binding, A writes to B
an offer to sell Blackacre for $ 1. B accepts. Bs promise to pay
$ 1 is sufficient consideration. This is Common law Blackacre
- for - a - dollar hypothetical. As a strategy to avoid the delivery
requirements of gift law, the purpose of nominal consideration
is understandable. But a modern lawyer is not satisfied with
such a contradictory of moral fabric. It is for this reason the
Court is rendering a decision on the enforceability of a promise;
it should advance some `social interest which conforms to the
ethical standard of that society (Murphy et al, 347). Havighurst
explained that in the absence of a satisfactory standard an
attempt was made by Common law courts to argue `indebitous
reliance. According to him these explanations ultimately
weakened ethical norms.
There is a lack of case law on the validation of nominal
consideration. But the debate on the question of adequacy of
consideration is still very strong in USA. The two opposite
opinions are quite visible, one arguing the traditional assumpsit
principle which relies on evidentiary, cautionary and channeling
arguments; the other arguing invalidity of institutionalism
because of weakness in the arguments. The 'bargain' theory of
consideration calls for adequacy of consideration; a nominal
consideration is invalid on this logic.
In India the law is made abundantly clear by the explanation II
of Sec. 25 which suggested that merely for inadequacy, a
consideration is not invalid. But inadequate consideration can
be argued in cases of absence of free consent. On account of
validation of promises without consideration in Sec. 25(1) the
contradictory moral argument of blackacre-a-dollar does not
arise in India. In a situation of bargain, inadequacy of
consideration or a very high consideration can be questioned
on the ground of absence of free consent. As such, if the price
is extra ordinarily high, it can be a ground of restrictive trade
practice. Similarly too low a price given by the creditor to the
share cropper is an undue influence or unconsionable gain.
66
CONSIDERATION MUST BE REAL
According to the Common law principle consideration may not
be adequate but must be real. It means that the consideration
must be something which is of some value' in the eye of law in
different ways. It is enough that something is promised, done,
foreborne or suffered by the party to whom the promise made
to him. In general, a waiver of any legal right at the request of
another party is a sufficient consideration for a promise.
In Hamer v. Sideray [124 NY 538] the promise of the uncle to
give $ 5000 to the nephew if he refrains from drinking, using
tobacco and playing cards or billiards for money until he
becomes 21 is questioned after the death of the uncle. The
court held that surrender of a right though it is beneficial to the
promisee himself, is a sufficient consideration. Consideration
must not be confused with motive. According to Anson
consideration must be given in return for the promise; but the
motive of the promisor must be to obtain a legally recognizable
return for the obligation incurred.
An act impossible in itself cannot be a valid consideration. As
for example, a covenant in a charter party that a ship would sail
on a date which was already past at the time of contract was
held to be void of unreality of consideration furnished (see
Anson p.102). Too vague a consideration is also not permissible.
An agreement to reserve a passage to moon in a possible flight
is invalid because according to the state of knowledge of the
day, the consideration is absurd. According to the definition of
consideration in sec.2(d), an abstinence (forbearance) is also a
good consideration. As such, a promise to forbear a suit on
claim, even for a shorter time, can be a valid consideration, at
the desire of the promisor.
Compromise is a very common transaction in which sometimes
consideration may apparently seem to be doubtful. As for
example, a cause of action not yet decided either way may be
only a probability. Sometimes the level of probability may also
be very low, if there is any. In such a case can there be a valid
consideration? Is it not really getting something out of nothing?
The answer to this question is that abstaining or promising to
abstain from doing anything which one would otherwise be
lawfully free to do or not to do is a good consideration. Every
man who honestly thinks he has a claim deserving to be
examined, and brings that before the proper court, can also
forbear to continue the litigation as a consideration for a promise
of compromise.
ACCEPTING LESSOR AMOUNT AS CONSIDERATION
Though consideration may not be adequate and the Common
law court does not enter into the question of valuation of
consideration, a part performance against the promise to accept
as full satisfaction, is not a sufficient consideration to support
the promise. The promisor can nevertheless insist subsequently
to perform the contract in entirety. This is established in the
Primel case (Anson, 111). Primel brought an action on a bond
against Cole for payment of 8-10s. Cole pleaded that on the
Primel promise of treating the payment in full and final payment
against the same debt, he paid 5, 2s 2d. The court held the
following promise of part performance to be treated as full
performance was no satisfaction. The creditor has the right to
enforce the full payment. But the Court held that the creditor
could have accepted in full satisfaction gift of a horse, hawk
or robe. The possible explanation is that the utility of the horse,
hawk or robe could be more beneficial to the creditor than the
money in respect of some circumstances. In Vanbergan v. St
Edmunds Properties Ltd [(1933) 2 KB 223] it was stated
that a new element cannot be introduced merely to oblige the
debtor and without any independent benefit to the creditor. It
may be noted that the common law courts continuously went
on deciding on debt cases against the interest of the debtor. A
promise not to sue if the principal amount is paid does not
preclude the creditor to subsequently claim the interest because
the promise does not have any corresponding benefit/interest
to the creditor.
While explaining this principle, Jessel M.R. observed in Couldery
v. Bartrum [(1881)19 Ch.D 394] that a creditor might accept
anything in satisfaction of his debt except a less amount of
money. He might take a horse ..... but ..... he could not take 19s
6d in the pound. The rigidity of the rule that a gratuitous
promise is not enforceable for want of consideration and that a
part payment cannot be accepted in full satisfaction of the debt
led to the equitable principle of promissory estoppel in the
twentieth century in clear terms.
3.5 THIRD PARTYS ROLE IN CONSIDERATION
Two basic principles determine the position of a third party in a
contract, viz.,
(i) Consideration must move from the promisee; and
(ii) Two persons cannot impose a liability on a third party by
their contract.
These two principles must not be confused. The first principle
is based upon the general principle of consideration and the
second upon the privity of contract. But both these principles
speak about the place of interest of the third party in a contractual
framework.
(i) Consideration must move from the promisee:
According to Ansons Law of Contract, (p.77) a party who
wishes to enforce a contract must be able to show that he himself
furnished consideration for the promise of the other party. In
Tweddle v. Atkinson [(1861)1B & S.393] H and W married.
After the marriage X and Y their respective fathers promised
that each would pay a sum of money to H and that H should
have power to sue for the sums. After the deaths of X and Y, H
sued the executors of Y for the money promised. It was held
that no action would lie because no consideration has moved
from H the promisee, and so the promise was gratuitous to him.
Though the consideration must move from the promisee, it need
not necessarily flow to the promisor. As such a guarantor
becomes liable to pay as soon as the bank advances the money
to the principal debtor. Though essence of consideration is
the detriment suffered by the promisee but the promisee may
confer a benefit to the promisor without having suffered any
67
detriment. In Boltan v. Madden [(1873)L.R 9 Q.B.55] the plaintiff
and defendant were subscribers to a charity and entitled to vote
on the disposition of its funds. The plaintiff promised to vote at
one meeting for a person whom the defendant wished to benefit
for a similar reciprocal promise by the defendant. In an action to
enforce defendants promise it was argued that there was no
consideration for the promisee as the plaintiff had incurred
neither trouble nor was he prejudiced. The Court rejected the
plea on the ground that the consideration moved from the
plaintiff simply because he had at the defendants request
conferred benefit at a third party.
In India according to Sec 2(d) consideration may move from the
promisee or any other person at the instance of the promisor.
One may notice the imprint of the principle laid down in Dulton
v. Poole [(1688)2 Lev 210]. In this case, a father was about to
fell timbers on his estate so as to provide a marriage portion for
his daughter. The eldest son at that time assured the amount to
be paid to her. On this promise the father did not proceed with
the cutting of timbers on his estate. On the death of the father,
the estate with timbers descended to the eldest son. But the
eldest son now refused to pay the promised amount to his sister
on the plea that no consideration had moved from her. It was
held in this case that the daughter could maintain an action
because having regard to the near relationship between the
plaintiff (daughter) and the party from whom the consideration
moved (father), the plaintiff might be considered a party to the
consideration. That is to say, a stranger to the consideration
could, by construction of law, be regarded as a party to it, if he
was closely related to the person from whom the consideration
actually proceeded. In Tweddle v. Atkinson, this principle was
overruled. But according to Indian Law, the rule in Dulton v.
Poole is quite evidently covered. At the instance of the promisor
consideration may move from a third party. As such the
`forbearance of the fahter could be justified consideration of
the sons promise to his sister. The principle laid down in Tweddle
v. Atkinson that third party cannot sue on a contract is a
confirmed common law principle in England which was followed
later on in several cases like Dunlop Pneumatic Tyre Co. Ltd v.
Selfridge & Co. [1915 AC 847] and Scruttons Ltd v. Midland
Silicones Ltd [1962 AC 446].
One can of course distinguish Dulton and Twiddle. In Dulton
the felling of timber was to provide marriage portion for the
daughter. As such fathers forbearing to do this was in fact an
injury to the daughter against which the son promised to pay
the amount. In Tweddle the son-in-law did not offer any other
benefit against the promise of the father-in-law. The promise
of the father-in-law was obtained against the promise of the
father. In India, of course, Common Law is not applicable
because of the clear provision of the Contract Act in Sec.2(d).
In Chinmaya v. Ramayya [(1881)4 Mad 137] A by a deed of
gift, made over certain property to her daughter with a direction
that the daughter should pay an annuity to her uncle, As brother.
The daughters refusal to pay after As death on the plea that no
consideration moved from the uncle, was not accepted by the
Court. It was held that consideration indirectly moved from
the brother. Privy Council refused to apply the Common Law in
promises connected with marriage under Muslim Law. In Khwaja
Muhammad v. Husaini Begum [(1890)37 1A 152] the father-in-
law promised to pay the bride Rs.500 for her betel-leaf expenses
(Kharcha-i-pandan) every month in perpetuity from the date of
marriage. She used to live with her husband till 1896 when she
left the husbands family and started living separately in
Muradabad. The payment was stopped. The Privy Council
noted that the betel-box expenses as a promise of personal
expenses of the bride was customary practice amongst
Mohamedan families. The Privy Council affirmed the decision
of the High Court holding that she had a clear right to sue under
the agreement. In Narayani Devi v. Tagore Commercial
Cooperation Ltd [AIR 1973 Cal 401] Calcutta High Court, of
course, made a cautionary remark. It was stated that even
though under the contract Act the definition of consideration is
wider than in English law, yet the Common law principle is
generally applicable in India with effect that only a party to the
contract is entitled to enforce the same. This is in fact more a
concept of privity than that a consideration to be moved
from the promisee.
(ii) Privity of Contract:
Two persons cannot by any contract impose liability upon a
third party. In Dunlop Pneumatic Tyre Co Ltd v. Selfridge
& Co Ltd [(1915)AC 847] the plaintiff sold a number of their
tyres to Dew & Co on terms that Dew & Co would not re-sell
them below certain scheduled prices and that, in the event of a
sale to trade customers, they would extract from the latter a
similar undertaking. Dew & Co sold the tyres to Selfridge &
Co, who, by their contract with Dew, undertook to observe the
restriction and to pay to M/S Dunlop the sum of 5 for each
tyre sold in breach of this agreement. Selfridge infact sold
two tyres to its customers at a lower price. Dunlop brought an
action against Selfridge for recovering two sums of 5 each as
liquidated damages. It was held that there was no privity of
contract between the plaintiff and the defendant. The plaintiff
cannot claim any enforceable right in the absence of any
contractual relation between them.
This principle of privity of contract is still binding. Of course
according to the 'Resale Prices Act 1964' in England, there has
to be compulsory registration by a supplier of goods of any
scheme which imposes resale price maintenance, i.e., fixed or
minimum prices to be charged on the resale of the goods, and
for the examination of the scheme by the Restrictive Practices
Court.
The doctrine of privity means that a third party cannot acquire
rights or be subjected to a liability under a contract to which he
is not a party. A rigid application of the rule may create many
legal and equitable dilemmas. As for example in Shanklin
Pier v. Detel Products Ltd [(1951) 2 KB 854] the plaintiff
employed contractors to paint a pier and instructed them for his
purpose to buy and use paint manufactured by the defendants.
The instruction was given in reliance on the representation made
by the defendants to the plaintiff that the paint would last for at
least seven years. The contractor purchased the paint from the
defendant and used it. In fact, it only remained for a few months.
68
The plaintiff sued for damages and the defendants plea was
absence of privity. In this case the Court applied the logic of
collateral agreement between the plaintiff and the defendant.
Same logic is applied in case of guarantee given by the
manufacturer, hire purchase agreement, agency contract, and
corporate agreements. Similarly in the following situations the
privity of contract is not applied.
(a) Contract relating to land : It was held in Tulk v. Moxhay
[(1848)2 Ph.774) that if a restrictive convenant is attached to a
land by its freehold owner, the convenant would bind all
subsequent owners. In fact, in land contracts, the convenant
attached to the land shall go with the land. No buyer
subsequently could plea that in so far as he is concerned, there
is no privity of contract.
(b) Charter party contracts: In Stratheonia Steamship Co. Ltd
v. Dominian Coal Co. Ltd [(1926) AC 108] the respondents
had a long term time charter-party of a ship. The owners sold
the ship which eventually came in the hand of the appellants.
They did not honour the agreement and took a plea that there
was no privity of contract between them. It was held that the
decision of the Courts in Nova Scotia granting the respondents
an injunction to restrain acts inconsistent with the charter party
should be affirmed. Where a man .... acquired a property from
another, with knowledge of previous contract, lawfully and for
valuable consideration made by him with a third person .... the
acquirer shall not ..... use and employ the property in a manner
not allowable to the giver or seller, Lord Bruce held. But the
principle decided in Stratheonia has a limited application. It
only applies `where there is actual knowledge of the subsequent
purchaser at the time of purchase of the Charters rights.
Charters right is to be ensured only by way of injunction and
not by way of specific performance.
(c) Accrued benefit to third party : Inspite of Lord Dennings
view that privity of contract was only a procedural plea which
could be overcome if the third party joins the promisee as a
party to the action, the House of Lords confirmed the rule that
no stranger to the contract could sue, unless it is qualified by
equity principle. [Beswick v. Beswick (1968) AC 58]. In this
case Peter Beswick, owner of a small business, wishing to retire,
transferred the business to his nephew, who would pay an
annunity of 5 a week to Beswick's widow. After his death the
nephew failed to honour the condition. The widow brought an
action against him in her personal capacity as a beneficiary and
also in her capacity as administrator of her deceased husbands
estate. The House of Lords held that although she was not
entitled to enforce the obligation in her personal capacity since
she was a stranger to the contract, she could, as personal
representative of her husband, obtain specific performance of
the promise. Of course, specific performance, as a remedy, has
limited application. It is allowed only when damages are
inadequate to compensate the loss.
(iv) Trust : The promisee may create a trust of the right either
at the time when he enters into a contract or thereafter, to which
he is entitled in favour of a third party (see 15 Harvard Law
Review, p.767). This right is enforceable in equity. In Re Flarell
[(1883)25 Ch.D 89] partnership articles provided that, in the event
of the death of one of the partners, his widow should be entitled
to the payment of an annuity out of the firms net profits each
year. It was held that the executors of the deceased partner
were trustees for the widow under the contract and that she was
entitled to be paid the promised sum.
(v) Third party insurance : Contract of insurance made for the
benefit of third party is valid if a trust is created. Of course,
this is now enforced under statutory laws.
(vi) Commercial practice : Bankers irrevocable credit
facilitates finance contracts for the sale of goods and under
commercial banking practices are binding. Similarly under
commercial practice, negotiable instrument bind the
promisor to all subsequent holders and holder-in-due
course.
The principle of privity of contract has been severly criticised.
In USA's law of Contract, 'privity of contract' is not relied on as
an important principle though the basic feature of contract that
parties to the contract create laws and obligations for themselves,
is still a valid proposition in an open economy. A rigid
application of this principle may create many misgivings in
rational application of law. As for example, what is the liability
of the manufacturer for his products; what is the responsibility
of a trustee; what legal duty should a mercantile agent perform
and what is his responsibility ? In course of time, we invented
product liability, equitable duty of a trustee or application of
estoppel in merchantile agreements. All these legal principles
are indirect derivation from the privity of contract, some in the
positive way and some in the negative.
According to Anson abolition (of the principles of privity) is
desirable because it is doubtful whether the doctrine serves any
useful function whatsoever. This is a practical solution of the
problem of third parties having interest in a contract, but it does
not negative the basic logic in the law of contract. Contract
cannot be a weapon to affix liability on a third party. To this
extent privity of contract has a decisive role. In case of
conferring right, a third party may be included as a necessary
party in the contract in equity. That will solve the problem of
third parties.
3.6 PAST CONSIDERATION
Another age-old Common law principle on consideration is that
consideration must not be past. Anson explained this principle
thus :
if A saves B from drowning, and B later promises A a reward,
A cannot rely on his action as consideration for Bs promise for
it is past in point of time.
A past consideration does not create any legal relation and as
such, parties are not bound by the promise. It is like a promise
without a consideration. But past consideration must not be
confused with executed consideration. Consideration may be
executory in nature, i.e., it is a promise for a promise. But in
the case of an act for a promise, the consideration has to be
executed. Suppose A promises to draw a picture of Bs wife
for which B promises to pay him a sum of money. It is a promise
69
for a promise. The promise of paying the sum is the consideration
on As promise of drawing the picture.
But suppose A declares a reward for finding his lost dog, one
can accept the promise only by finding the lost dog. As such,
here the consideration has to be executed in order to make the
promise a contract. An executed consideration, therefore, is a
valid consideration. An act done earlier or a forbearance made
on an earlier occasion cannot be turned into a consideration for
a promise made afterwards. There are only three exceptions to
this rule; viz.,
(a) acts done at the instance of the promisor may be made a
supportive consideration for a future promise. As for
example, X requests Y to secure a pardon for him from the
President. Suppose in doing so Y meets certain expenses
upto Rs.10,000/- for the trouble. This is a valid
consideration [See Astley Industrial Trust Ltd. v.
Grimston Electric Tools Ltd. [(1965) 109 SJ 149].
Similarly a journey undertaken by the plaintiff at the request
of the defendant on which defendant promises to pay an
amount, is a valid contract though the consideration is past.
In India sec.25(2) is based on this principle, though it is
shown as a contract valid without consideration.
(b) A time barred debt may validly form consideration of a
promise to pay the debt. In India sec.25(3) provides the
same principle but as if such a promise is without any
consideration.
(c) A negotiable instrument in the form of a bill may be valid if
it is drawn on the basis of an antecedent debt or a
consideration sufficient to support a simple contract. For
example, if A negotiates a cheque to his banker with which
A has an overdraft, the banker becomes a holder for value
of the cheque, as the debt of A to the bank is the
consideration for the instrument.
3.7 PROMISSORY ESTOPPEL
Justice Denning applied this principle in Central London
Property Trust Ltd v. High Trees House Ltd [(1947) KB
130]. The plaintiff company let a block of flats to the defendant
company for a nintynine years term at a rent of 2500 per
year. In 1940, during the war time, the plaintiff found letting
out of the flats very difficult and the plaintiff company agreed
to reduce the rent to 1250 p.a. In 1945 after the war was over,
the situation changed and flats were rented out in full. A receiver
for the debenture holders of the plaintiff company brought an
action claiming full original rent for the future starting from
last two quarters of 1945. Justice Denning held that the action
of the plaintiff should succeed. But the most interesting part
of the judgment lies in his contention that, had the plaintiff
sued for the full rent between 1940 to 1945, they would have
been estopped by their promise from asserting their strict legal
right to demand payment in full. A conventional Common
law court could have applied here the old Primel rule. This
how Justice Denning introduced Promissory estoppel.
Of course Justice Dennings decision attracted much criticism.
In Ansons Law of Contract (pp.114-115) two criticisms are levied
against the principle of promissory estoppel, viz.,
(a) that it violated the rule laid down by the House of Lords in
Jordan v. Money [(1854) HLC 185] which stipulated that
only a representation of existing or past fact, and not one
relating to future conduct, will ground as estoppel.
(b) that the dictum of Denning was inconsistent with the
decision of the House of Lords. Lord Cair described the
principle thus it is the first principle upon which all courts
of Equity proceed, that if parties who have entered into
definite and distinct terms involving certain legal results
- certain penalties or legal forfeiture - after by their own
acts or with their own consent enter upon a course of
negotiation which has the effect of leading one of the
parties to suppose that the strict rights arising under the
contract will not be enforced.
Accordingly, promissory estoppel is to be applied according to
the above two cases, only in representation to existing or past
facts. In order to apply it, the estoppel must be specifically
pleaded between parties who stand together in a contractual or
other similar legal relationship when one of them makes to the
other a promise to waive, suspend or modify his strict legal
rights.
Subsequently in a number of cases estoppel was applied.
Ansons Law of Contract explains five principles (pp.115-121)
for the application of promissory estoppel.
(i) The promise must be clear and unequivocal. No estoppel
can arise if the language of the promise is indefinite or not
precise [See Woodhouse (1972) AC 741]
(ii) It only applies to the modification or discharge of the
existing obligation, and not to the formation of a new
contract.
Lord Denning puts the principle thus:
Seeing that the principle never stands alone as giving a
cause of action in itself, it can never do away with the
necessity of consideration when that is an essential part of
the cause of action. The doctrine of consideration is too
firmly fixed to be overthrown by a side-wind. It is a `shield
and not a sword.
(iii) It must be inequitable for the promisor to go back on his
promise and insist on his strict legal right. In D & C
Builders v. Rees [(1966)2 Q.B. 617] the defendant owed
482 to the plaintiffs, a small firm of builders, in respect
of work done for him. He delayed payment for several
months, and then offered them 300, stating in effect that
if they did not accept this sum they would get nothing. As
the plaintiffs were in desperate financial straits, they
accepted the 300 in full settlement of the debt. They then
sued the defendant for the balance. Lord Denning took the
view that in the situation it was not inequitable for the
plaintiff to go back on their promise; the settlement was
not truely voluntary.
(iv) The promisee must have altered his position in reliance
on the promise made to him [McCathie v. McCathie
(1971) N.Z.L.R. 1126]. It must be shown that the person
70
to whom the representation is made, acted to his detriment
in reliance on it. It means if the promise is allowed to be
revoked or not applied, then the promisee shall be in distinct
disadvantage because the promisee has already been
prejudiced.
(v) Promissory Estoppel only serves to suspend, and not
wholly to extinguish the existing obligation; the promisor
may, on giving due notice, resume the right which he has
waived and revert to the original terms of contract.
Pomeroy in his A Treatise on Equity Jurisprudence (5th Ed;
p.180) explained promissory estoppel thus :
The vital principle [of equitable estoppel] is that he who by his
language or conduct leads another to do what he would not
otherwise have done, shall not subject such person to loss or
injury by disappointing the expectation upon which he acted.
Similarly in Dickerson v. Colgrove [100 US 578] the judge
defined it as a promise which the promisor should reasonably
expect to induce action or forbearance of a definite and
substantial character on the part of the promisee and which does
induce such action or forbearance is binding if injustice can be
avoided only by enforcement of the promise. Equitable
estoppel thus arises from the conduct of the party.
In Kedarnath v. Gorie Mohamed [ILR 14 Cal 64 (1887)] the
defendant signed his name in the subscription book agreeing to
subscribe Rupees hundred towards construction of Howrah
Municipal Town Hall. Based upon those promises the plan was
approved and the contract was given. On his refusal to pay the
plaintiff appellant filed a petition with the Small Causes Court.
The Small causes Court held the promise to be without
consideration, and hence void. On appeal the judge held that
the promise in effect could stand as follows: In consideration
of your agreeing to enter into a contract to collect the money to
pay up for it. It was held to be a good contract with
consideration. The best reason to decide the case perhaps would
be application of promissory estoppel. Since the plaintiff-
appellant undertook the liability to pay for the construction based
on the promise of the subscribers, they are bound to pay for it.
But had the liability not been undertaken in placing the contract
with the contractor, the promise of donation would be rightly
without consideration, and hence void. In Mckeon v. City of
Council Bluffs (206 lowa 556) it was held that estoppel can
never arise unless there has been reliance.
In USA charitable subscription is held binding on public policy
argument in many cases without requiring the showing of
consideration or a detrimental reliance. In Salsbury v.
Northwestern Bell Telephone Co. [(1994) 221 N.W. 609] it
was held that charitable subscriptions often serve the public
interest by making possible projects which otherwise could
never come about ..... However, where a subscription is
unequivocal the pledger should be made to keep his word.
71
4. CASE LAW
Chinnaya v. Venkataramaya, [ILR 4 Mad 137 (1881)]
An old lady, gave as gift certain lands to her daughter (the
defendant in this case). One of the terms of the registered gift
deed was, that, an annuity of Rs.653 should be paid every year
to the plaintiff, who was the old ladys sister. The defendant on
the same day executed an Iqrarnama in favour of the plaintiff,
promising to give effect to the stipulation. The annuity was
however not paid, and the plaintiff sued to recover it.
Here, the only consideration for the defendants promise to pay
the annuity was the gift of certain lands by the old lady to the
defendant. So, the defendant contended that the plaintiff had
furnished no consideration.
It was held that, the failure to keep the promise would deprive
the plaintiff of an amount which she was already receiving,
and it is a legal common parlance that if a promise causes some
loss to the promisee, that is sufficient consideration for the
promise. Thus, the plaintiff had given a consideration, and was
hence entitled to the annuity.
Cowern v. Nield, [1911-13 All ER Rep 425]
A minor was carrying on business as a hay and straw merchant.
He received a cheque from the plaintiff for the supply of clover
and hay. He delivered the clover which was rejected as bad,
and, he failed to deliver the hay. The plaintiffs action for
recovering back the amount of cheque failed. It was held that,
contracts which can be brought within certain categories and
are also for the benefit of the infant can be supported. A trading
contract does not come within any of these categories. The
only contracts of an infant which can be enforced are those
relating to the infants person, as contracts by which he provides
himself with clothes, food or lodging or contracts of marriage,
apprenticeship and service.
Dunlop Pnuematic Tyre Co. Ltd v. Selfridge & Co. Ltd,
[(1915) A.C. 847]
The plaintiffs sold a number of tyres to one D, on the condition
that D will not sell them below the scheduled price. D in turn
sold the tyres to the defendants on the same condition, and
further said that they would have to pay M/s Dunlop 5 for
each tyre sold below the scheduled price. The defendants sold
2 tyres below the price, and the plaintiff filed (this) suit to recover
10 as damages and also asked for an injunction to restrain the
defendants from further breach of agreement.
The main issue was, could Dunlop sue the defendants, though
they had furnished no consideration for the defendants promise.
It was held that, under English Law certain principles are
fundamental, viz : (1) only a person who is a party to the contract
can sue on it; (2) if a person, with whom a contract not under
seal has been made is to be able to enforce it, consideration
must have been given by him to the promisor or to some other
person at the promisors request ; and (3) a principal not named
in the contract may sue upon it if the promisee really contracted
as his agent and not on his own. Here, D was acting on his own,
in his capacity as a principal, he agreed to give the defendants
a discount on his own, and Dunlops were in no way involved in
the contract between D and the defendants. Hence, the plaintiffs
were held not entitled to sue on the contract.
Kedarnath Bhattacharjee v. Gorie Mohammed, [ILR 14 Cal
64(1887)]
A town hall was proposed to be constructed at Howrah, provided
sufficient funds could be generated. The municipality set about
the task by public subscription. The defendant signed his name
in the subscription book promising Rs.100/-. On the faith of
the promised subscriptions, the plaintiff entered into a contract
with a contractor for the purpose of building the hall. The
defendant failed to pay the amount. His main contention was
that there was no consideration for his promise.
He was held liable for the amount. It was held that, the promise
was, In consideration of your agreeing to enter into a contract
to erect, I undertake to supply money for it. Plaintiffs entering
into contract with the contractor was entered into at the desire
of the defendant (the promisor) so as to constitute consideration
u/s.2(d) of the Act.
Lampleigh v. Brathwait, [80 ER 255]
The defendant, having committed a murder, requested the
plaintiff to labour and to do his endeavour to obtain pardon
from the King. The plaintiff did his best to obtain the Kings
pardon, riding and journeying at his own expense. Afterwards
the defendant promised the plaintiff to give 100 and then
refused to pay. He was however held liable. The court observed:
A mere voluntary courtsey will not have consideration to uphold
as assumpsit. But if the courtsey were moved by a request of
the party that gives the promise, it will bind, for the promise,
though it follows, yet it is not naked, but it couples with the suit
before.
Note : Assumpsit is a form of action (now abolished) from
which the law of contracts originated.
M. Ramiah v. Sankaranarayana, [AIR 1958 Ker 246]
Three depositors of a bank refrained from demanding payment
of their deposits, although they had matured and become
payable, as the director of the bank had given them a written
agreement, undertaking personal liability to return the amount
with interest at 6% within 12 months.
This forbearance to withdraw the amount press for its repayment
was held to be sufficient consideration for the agreement within
the meaning of sec.2(d).
Mohori Bibee v. Dharmodas Ghose, [PC(1903)30 IA 114]
The respondent, a minor, had mortgaged his house in favour of
the plaintiff, a money-lender, to secure a loan of Rs.20,000. A
part of this amount was actually advanced to him while
considering the proposed advance, the money lenders attorney
72
received information that the defendant was still a minor.
Subsequently, the minor instituted this suit, stating that he was
under-age when he executed the mortgage, and the same should,
therefore be cancelled.
The plaintiff contended that: (1) as the respondent had
fraudulently misrepresented his age, the mortgage should not
be cancelled; and (2) even if it was cancelled, the respondent
should be compelled to repay the advance paid to him.
The Privy Council granted the cancellation of mortgage under
sec.39 of the Specific Relief Act, 1877. They further held that
restitution of any benefit accruing under a contract, arose only
in case of voidable contracts, and, not to contracts void ab
initio. Hence, the money lender was held not entitled to return
of the advance paid to the minor.
Smith et al v. River Douglas Catchment Board, [(1949)All ER
179]
The defendants had agreed with certain land owers adjoining a
stream, to improve the banks of the stream and to maintain them
in good condition. The land lords on their part paid proportionate
costs. Subsequently, one of the land lords sold his land to the
first plaintiff, who in turn sold it to the second plaintiff. There
was negligence on the part of the Board in maintaining the banks,
which burst and the land was flooded.
Both the plaintiffs were strangers to the agreement with the
Board, but even so the Court of Appeal allowed them to sue the
Board for breach of contract, for the whole arrangement was
for the benefit of the land owners whoever they might be and
not merely the parties to the agreement.
Tweddle v. Atkinson, [(1861),1 B & S. 393]
The plaintiff was to marry the daughter of one G, and in
consideration of this intendend marriage, G and the plaintiffs
father, entered into a written agreement, whereby each one of
them agreed to pay certain sums of money to the plaintiff, before
21-8-1855. This agreement was ratified by the plaintiff and his
wife. As neither G nor his executor had paid the agreed sum,
plaintiff filed the suit to recover the amount. The main issue
was, could a stranger to the consideration of contract sue a party
to the contract?
It was held that, consideration must move from the party entitled
to sue upon the contract. A person cannot be a party to the
contract for the purpose of suing upon it for his own advantage
and not be a party to it for the purpose of being sued. Hence
the action was held not maintainable.
73
5. PROBLEMS
1. Raj had given a promissory note for money his father had
lent him. When sued on the note by his fathers executor
he pleaded that he had just grounds to complain about his
fathers distribution of property among his children; and
that his father, admitting this, had promised that if Raj
stopped complaining he would discharge Raj from his
liability on the promissory note. Discuss the validity of
Rajs contention.
2. Mrs. Menon deserted her husband on 24.1.52 and on
26.4.52, they both signed a maintenance agreement having
the following three clauses : (i)Mrs.Menon will be paid
Rs.500/- pm so long as she continued to lead a chaste life ;
(ii) she would support herself out of this sum and further
indemnify her husband against any debts which may be
incurred by her in future; (iii) she shall not commence/
prosecute her husband under any matrimonial proceedings
(except for dissolution of marriage) so long as he was
regular in his payments, but if failed to pay her the
maintenance regularly she was entitled to pursue any
remedy available to her.
In October 1955 the divorce was made absolute. In this
proceeding she also claimed for maintenance @ Rs.500/-
pm for the period between September 54 (when he stopped
paying) to October 55. The husband disputes the claim on
the ground that there was no consideration for his promise.
Clause (ii) he says is worthless and (iii) unenforceable.
Decide.
3. A the commander of a ship Jalrani promised to pay his
seamen an additional amount of Rs.1000/- each, if they
would do some extra work and see to it that the ship reached
port safely. On reaching ashore, B a seaman filed a suit
against A for the promised sum. Decide.
4. Parties to the contract agreed that the plaintiff surveyors
would plan and supervise some alterations estimated to cost
some Rs.60,000/-, for a fee of Rs.3000/-. Later the
defendant decided to make the alterations more extensive
and the total cost was Rs.2,25,000/-. The plaintiffs
supervised the work and claimed an additional fee (in fact
a scale fee) of Rs.25,000/-. The defendant refused to pay.
Decide.
5. If in the above problem, on the plaintiffs broaching the
matter of additional fee, the defendant had agreed to pay
Rs.15,000/-, and then refused to pay it, would the decision
of the case differ.
6. Akshay had given Sandeep a promissory note for Rs.12,000/-
which he owed to Sandeeps brother. On Sandeeps death,
his wife took possession of the bond as his executrix. She
felt that Akshay had been badly treated, and frequently
stated that she would never enforce the bond, repeating
this particularly when Akshays prospective parents-in-law
expressed concern about his financial position. In reliance
on her statement, Akshay married, and then sought a
declaration that the debt owned by him to Mrs.Sandeep
was now abondoned, and a release from the promissory
note. Mrs. Sandeep resists the declaration. Decide.
7. Karan wanting to take possession of Sunils property plied
him with drinks, and while Sunil was under the influence of
alcohol made him sign the deed of transfer in his favour.
On realising what he has done, Sunil comes to you for
advice.
8. Mrs.Pillai suffers from periodic attacks of insanity. She had
a 32yr.old son Ravi who is a congenital idiot. Ravi sold of
his property worth Rs.1,00,000/- to Surya for Rs.25,000/-
only. On becoming aware of this, Mrs.Pilai filed a suit to
have the sale declared void. Surya resisted the suit on two
grounds :- (1) He was not aware that Ravi was a congenital
idiot; (2) Mrs. Pillai was suffering from an insanity attack
when she filed the suit and so the suit should be dismissed.
Decide.
9. The plaintiffs father entered into a contract of service on
his behalf with the defendant Mr. Kapoor who was a
renowned (stage) director. The plaintiff was a minor at the
time of contract, which provided that he should attend
rehearsals punctually whenever required, and in return he
would be paid Rs.2000/- pm for a period of 2 years.
Originally the agreement was made orally, but later reduced
to writing and signed by plaintiff, his father and the
defendant. The defendant stopped paying the promised
sum after a period of 6 months, and the plaintiff filed a
suit. The defendant contended that as the plaintiff was a
minor, the agreement was void and so unenforceable.
10. In the same fact situation above, would the decision differ
if the plaintiff had attained majority at the time of filing the
suit.
[Note: Specify your Name, Address and I.D. No. while sending your answer papers]
74
1. Avtar Singh, Law of Contract, (1985), Eastern Book Co. Lucknow.
2. Anson, Law of Contract, (1984), English Language Book Society and Oxford University Press, London.
3. Atiyah, P.S., Introduction to Law of Contract, (1986), Claendon Press, Oxford, London.
4. Cheshire and Fifoot, Law of Contracts, (1987), Butterworth, London.
5. Crandall T.D and Whaley D.J., Cases, Problems and Materials on Contracts, (1987), Brown & Company, Boston.
6. Joga Rao, S.V., Cases and Materials on Contract, (1991), NLSIU Publication, Bangalore.
7. Kromman, A.T., Paternalism and the Law of Contract, (1988)92 Yale LJ p.763.
8. Pollock and Mulla, Indian Contract and Specific Relief Act, (1986), J.L. Kapur (ed.), N.M. Tripathi Pvt. Ltd., Bombay.
9. Puri and Ponuswamy, Cases and Materials on Contract, (1974), Eastern Book Company, Lucknow.
10. Summers, R.S., & Hillman, R.A., Contract and related obligations: Theory, Doctrine and Practice, (1987), West Publishing
Co., St.Paul, Minnesotta.
11. Subrahmanyan, E.S., Law of Minors, (1968), Law Book Company, Allahabad.
12. Trietal, G.H., Law of Contract, (1966), Stevensons, London.
13. Venkatesh Iyer, Reprint, Law of Contract, (1987), Asia Law House, Hyderabad.
6 SUPPLEMENTARY READINGS
75
FREE CONSENT
AND PUBLIC POLICY
Master in Business Laws
Law of Contracts
Course No: I
Module No: III
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
76
Materials Prepared By:
1. Mr. S.V. Joga Rao, B.Com., M.L., M.Phil.
2. Prof. N.L. Mitra, M.Com., LL.M., Ph.D.
Materials Checked By:
1. Ms. Sudha Peri, LL.M.
2. Mr. Suprio Dasgupta
Materials Edited By:
1. Dr. P.C. Bedwa, LL.M., Ph.D.
2. Mr. T. Devidas, LL.M.
National Law School of India University
Published by:
Distance Education Department
National Law School of India University,
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
77
INSTRUCTIONS
Basic Readings
The materials given in this course are calculated to provide exhaustive basic readings on topics and sub-topics
included in the course. Experts in the area have collected the basic information and thoroughly analysed the same
in topics and sub-topics. Lucid/supportive illustrations and leading cases are also provided. Relevant legislative
provisions are also included. Care has been taken to communicate basic information required for decision making
in problems likely to arise in the course-area. The reader is advised to read atleast three times. In the first reading
information provided are to be selected by making marginal notes using markers. The first reading, therefore,
necessarily has to be very slow and extremely systematic. While so reading the reader has to understand the
implications of those informations. In the second reading the reader has to critically analyse the material supplied
and jot down in a separate note book points stated in the material as well as the critical comments on the same. A
third reading shall be necessary to prepare a Check List so that the check list can be used afterwards for solving
problems like a ready reckoner. (The reader is required to purchase a Bare Act and refer to the relevant sections at
every stage.)
Supplementary Reading
Several supplementary readings are suggested in the materials. It is suggested that the reader should register with
a nearby public library like the British Council Library, the American Library, the Max Muller Bhavan, the National
Library, any University Library where externals are registered for the purpose of library reading, any commercial
library or any other public library run by Government or any private institution. Readers in Metropolitan and other
big cities may have these facilities. It is advised that these basic materials be photocopied, if necessary, and kept
in the course file. Supplementary readings are also required to be read more than once and marginal notes, marking
notes, analytical notes and check lists prepared. Any reader requiring any extra readings not available in his/ her
place may request the Course Coordinator to photocopy the material and send it by post for which charges at the
rate of .50 paise per page for photocopying and the postage charge shall be sent either by M.O. or by Draft in
advance. The Course Coordinator shall take prompt action on receiving the request and the payment.
Case Law
The course material includes some case materials generally based upon decided cases. These cases are to be
studied several times for,
(a) understanding the issues to be decided (b) decisions given on each issue (c) reasoning specified
It is advised that while reading a case the reader should focus first on the facts of the case and make a self analysis
of the facts. Then he/she should refer the check list prepared earlier for appropriate information relating to law and
practice on the facts. Then the student should prepare a list of arguments for and on behalf of the plaintiff/
appellant. Keeping the arguments for the plaintiff/appellant in view of the reader should try to build up counter
arguments on behalf of the defendant/respondent. These exercise can take days. After these exercises are done
one has to prepare the arguments for or against and then decide on the issues. While deciding it may be necessary
often to evolve a guiding principle which also must be clearly spelt out. Subsequently the reader takes up the
decision given in the case by the judge and compare his/her own exercise with the judgment delivered. A few
exercise of this type shall definitely sharpen the logical ability, the analytical skill and the lawyering competence.
Though it is not compulsory, the reader may send his/ her exercises to the Course Coordinator for evaluation. On
receiving such request the Course Coordinator shall get the exercises evaluated by the experts and send the
experts comment to the students. Through these exercises one can build up an effective dialogue with the experts
of the Distance Education Department (DED).
Problems and Responses
After reading the whole module which is divided into several topics and sub-topics the reader has to solve the
problems specified at the end of the module. The module is designed in such a manner that a reader can take about
a weeks time for completing one module in each of the four courses. It is expected that after finishing the module
over a period of a week the student solves these problems from all possible dimensions to the issue. No time limit
is prescribed for solving a problem though it would be ideal if the reader fixes his/her own time limit for solving the
problem - which may be half an hour per problem - and maintain self discipline. While solving the problems the
candidate is advised to use the check list, the notes and the judicial decisions - which he/she has already prepared.
After completing the exercise the student is directed to send the same to Course Coordinator for evaluation.
Though there is no time stipulation for sending these responses a student is required to complete these exercises
before he/she can be given the certificate of completion to appear for final examination.
78
Free Consent & Public Policy
TOPICS
1. Free Consent: Meaning and Dimension ................................................................ 79
2. Coercion ..................................................................................................................... 81
3. Undue Influence ........................................................................................................ 83
4. Fraud ......................................................................................................................... 87
5. Misrepresentation ..................................................................................................... 88
6. Mistake ...................................................................................................................... 90
7. Role of Public Policy in Contracts ......................................................................... 96
8. Void Agreements ....................................................................................................... 101
9. Concluding Remarks ............................................................................................... 102
10. Bare Text of the Relevant Sections of the Act ...................................................... 103
11. Case Law ................................................................................................................... 105
12. Problems .................................................................................................................... 106
13. Supplementary Readings ......................................................................................... 107
79
SUB TOPICS
1.1 Introduction
1.2 Free Consent: scope and ambit
1.3 Consequences of the absence of free consent
1.1 INTRODUCTION
Having examined the nature and significance of contractual
obligations in a commercial or industrial society, rules relating
to the formation of contract and its select essential elements
like consideration and capacity of contracting parties in the
earlier modules, it is proposed to deal with the remaining
essentials namely, 'Free consent' and 'Public policy' in this
module. The objectives of this module are -
a. to examine the significance of 'Free consent' as an essential
ingredient in constituting a valid contract;
b. to examine the scope, ambit and interpretation of various
factors which vitiate free consent in the light of common
law perspectives, statutory principles and judicial decisions
of both English and Indian origin;
c. to critically analyse the statutory remedies;
1. FREE CONSENT: MEANING AND DIMENSION
d. to examine the scope and significance of 'freedom of
contracting parties and public policy notions'; and
e. to analyse the policy and judicial interpretation of statutory
provisions pertaining to 'Void Agreements' enshrined in
Sections 23-30 of the Indian Contract Act, 1872.
1.2 FREE CONSENT: SCOPE AND AMBIT
According to Section 10 of the Indian Contract Act, 1872
(hereinafter 'the Act') 'Free Consent' is an essential ingredient
required to constitute a valid contract. The expression 'consent'
is defined in section 13 which reads: "Two or more persons are
said to consent when they agree upon the same thing in the
same sense". According to Sec. 14 the consent is said to be
free, when it is not caused by-
a. Coercion (S. 15);
b. Undue Influence (S. 16);
c. Fraud (S. 17);
d. Misrepresentation (S. 18); and
e. Mistake (Ss. 20, 21 and 22)
A Flow Chart regarding Consent follows:
FLOW CHART ON CONSENT
Consent Not vitiated by
Coercion Undue Influence Misrepresentation Mistake
(S. 15) (S. 16) (Ss. 20, 21 & 22)
Innocent (S. 18) Fraudulent (S. 17)
of law of fact
Indian Law Foreign Law Private as to nature as to identity of as to subject
(ignorance (ignorance treated right of facts contracting matter of
not an excuse) as mistake of fact) parties contract
Existence Title Identity Price Quality Quantity
With regard to the significance of 'consent' late Lord Hannen in
Raffles v. Wichelhaus [(1913) 3 KB. 564] observed that: "It is
essential to the creation of a contract that both parties should
agree to the same thing in the same sense. Thus if two persons
enter into an apparent contract concerning a particular person
or ship and it turns out that each of them, misled by a similarity
of name, had a different person or ship in his mind, no contract
would exist between them". The expression 'same thing' occurring
in section 13 indicates the whole content of the agreement,
whether it consists wholly or in part, of delivery of material
objects or payment or other executed acts or promises. [Pollock
& Mulla, p. 134]
Mere consent is not enough to constitute a valid contract; it
should be free and voluntary, so that the contracting persons
can subject themselves to the binding obligations that are
created by the contract. Normally, whenever the consent is
vitiated the contract is void; the possible exception is, it would
result in a voidable contract. A voidable contract is an agreement
which is enforceable by law at the option of one party whose
consent is vitiated [Sec. 2(i)]. In other words, in a given
contractual relation if the consent is not free, it is upto the
aggrieved contracting party to decide about the future. If the
party decides in favour of enforcement, the agreement becomes
80
enforceable, thereby resulting in a valid contract; otherwise the
agreement becomes unenforceable.
In the case of other essential elements like consideration, the
statute itself declares that if there is no consideration, an
agreement is void ab initio, with certain exceptions. But in the
case of free consent, the law in its wisdom felt that it should be
left to the aggrieved party to decide, by exercising the right of
choosing either of the options, namely, to enforce the agreement
or to avoid it.
According to English law the foundation of a contract is upon
the 'privity of contract' between the parties. In Cundy v. Lindsay
[(1878) 3 App. C 459] and Bailley's Case [(1898) 1 Ch 110],
the Court held that the absence of a free consent vitiates the
fundamental basis of the contract. Since, through contract,
parties create their own rights and obligations, it is necessary
that the parties to the contract, agree upon the same thing in the
same sense, out of their own volition. Parties must have absolute
freedom to mutually assess their own interests, and, to make
appropriate promises. Such rational appreciation is not merely
vitiated by the incapacity of the parties i.e. on account of the
party being a minor or of unsound mind; it may also be vitiated
by the parties not consenting to the same thing in the same
sense.
1.3ABSENCE OF FREE CONSENT: CONSEQUENCES
Free consent is an essential element of a contract. Therefore, if
there is no free consent there should be no contract. But, in
fact, the law does not provide so. According to Sec. 19, if the
consent is vitiated by coercion, fraud or misrepresentation
perpetrated by one party over the other, the suffering party may
avoid the contract. Such contracts which are vitiated by coercion
etc. are only voidable in nature, and not void. Similarly use of
undue influence makes the contract voidable u/sec. 19(a). But,
according to sec. 20, a bilateral mistake of essential facts relating
to an agreement makes the agreement void. Under sec. 22, a
unilateral mistake does not make the contract voidable, merely
because it was caused by one of the parties to the agreement
being under a mistake of fact. Thus, the consequences of the
absence of free consent is as follows:
(a) In the absence of free consent due to coercion, fraud or
misrepresentation the contract is voidable at the option of
the suffering party (S. 19);
(b) In the absence of free consent due to use of undue influence,
the contract is voidable at the option of the party whose
consent was so induced [S. 19(a)];
(c) In the absence of free consent on account of bilateral
mistake of essential facts or of foreign law (if knowledge
of foreign law is essential), the agreement is void ab initio
(Ss 20, 21)
(d) a unilateral mistake added with some other vitiating factors
may make the contract voidable or void depending upon
the circumstances (S. 22).
Thus it is clear that, absence of free consent due to any one of
the several vitiating factors does not make the contract void ab
initio; it only creates a special right in favour of the party who
has already suffered on account of the compulsion of giving
the consent due to various circumstances as explained in
coercion, undue influence, fraud or misrepresentation. This
apparently seems to be a peculiar logic, because the two
statements free consent is an essential element of contract
and absence of free consent does not vitiate the contract ab
initio seem to be irreconcilable, but it is not so. If, in absence of
free consent, a contract is made void ab initio, the party
influencing the consent will not have any obligation of
performance. This is a situation of double jeopardy. An example
will make it clear. Suppose A has forced B to sell his land to A by
threatening to kidnap Bs son if B does not give his consent,
here Bs consent is vitiated by coercion. Now suppose after the
making of the contract, A comes to know that the land is going
to be acquired by the government, A may refuse to give the
money and take the land if the contract is made void ab initio.
Here, B suffers twice - firstly his consent is forcefully taken, and
secondly, he is not going to get the advantage of the price
stipulated by B for the land in case of evaluation of
compensation. One of the cardinal principles of law is that, the
law has to save parties from double jeopardy. As against Bs
double jeopardy, if the contract is made void ab initio, A can
derive double benefit. Firstly, he has obtained the consent by
force, and secondly, he himself pleading coercion gets out of it.
Law cannot allow this contradictory behaviour of a party and,
that is why in evidence we have the principle of Estoppel (sec.
115 of Indian Evidence Act). A person cannot be allowed to
exercise coercion in order to obtain consent, and then take a
plea that since there was use of coercion, he/she is not obliged
to perform the contract. Therefore, the law has created an
additional right in favour of the party who had already suffered,
to elect, either to abide by the contract or to avoid the contract.
On the other hand it has rigidified the obligation of the party
inflicting the vitiating factor on free consent by saddling him
with the obligation to performing the contract. Thus, the suffering
party has an additional right and the dominating party has an
extraordinary obligation. This makes the contract voidable at
the option of the party suffering from absence of free consent.
In this manner the law equates the position of the parties to the
contract.
In bilateral mistakes however, if the fact is essential, or knowledge
of foreign law is essential, mistake of such fact or foreign law
shall make the agreement void ab initio, i.e., such an agreement
does not attain the status of a contract at any stage.
81
2. COERCION
SUB TOPICS
2.1 Definition
2.2 Distinguished from duress
2.3 Subjective and objective elements in coercion
2.4 Burden of proof
2.5 Ex-territoriality
2.1DEFINITION
Section 15 defines coercion as committing or threatening to
commit any act forbidden by the Indian Penal Code or the
unlawful detaining, or threatening to detain any property, to
the prejudice of any person whatsoever, with the intention of
causing any person to enter into an agreement.
Consent is said to be vitiated by coercion, when it is obtained
by force or pressure exerted by either of the following methods:
a. committing or threatening to commit any act forbidden by
the Indian Penal Code or
b. unlawfully detaining or threatening to detain any property.
This externally manifested act has to be committed with a view
to causing prejudice to any person whatsoever, with an intention
of forcing him to enter into an agreement. .
2.2 DISTINGUISHED FROM DURESS
Duress is the English version of coercion. In Cumming v. Ince.
[(1947) l QB 112] it was decided that duress means and includes
actual or threatened physical violence to, or unlawful constraint
of, the person of the contracting party. In Latter v. Bradell
[(1981) 50 LJQB 448] a housemaid was ordered by her mistress
to submit to a medical examination on a suspicion of pregnancy
which turned out to be unfounded. She cried and protested, but
submitted to the examination. Her claim for damages failed,
because she had consented to the examination. Such a rigid
approach to duress, therefore, creates a situation where a threat
to prosecute the other contracting party for a criminal offence
does not amount to duress. Of course in equity a relief can be
given.
The concept of coercion is much wider than duress. A
comparative analysis of the two is as follows:
a. Coercion may be aimed at any person, even a stranger (this
can be deduced from the words 'to the prejudice of any
person whatsoever' occurring in Sec. 15) and also against
goods, for example, 'unlawful detention'. However,
according to English law, duress must be aimed against the
contracting party or members of his or her family;
b. In the case of coercion, the scope is so wide that it may
proceed from any person meaning thereby even a stranger
to the contract. But English law mandates that it should
proceed from either the contracting party or members of
his or her family.
c. Coercion under Indian law does not require any immediate
violence, whereas for duress under English law it is
necessary to show that the act must be such as to cause
immediate violence.
2.3 SUBJECTIVE AND OBJECTIVE ELEMENTS IN
COERCION
It can thus be inferred from the definition that to constitute
'coercion', there is a requirement of both objective and subjective
elements, namely, externally manifested act (which includes
threat) and the prejudicing of any person thereby to enter into
an agreement. One without the other would not result in
coercion. For example, X threatens to assault Y (objective
element), with a view of causing him to enter into a particular
agreement. The crucial question at this juncture is whether the
externally manifested act which is forbidden by law, did in fact
influence or prejudice Ys mind (subjective element) or not? If
Y is not prejudiced, the mere fact that he entered into an
agreement, does not entitle him to exercise any option
subsequently. Similarly in a given fact situation, a particular
act may prejudice a persons mind but unless and until the act
is either prohibited by the Indian Penal Code [IPC] or amounts
to unlawful detention of property, or threat to detain property,
it does not amount to coercion.
It is quite pertinent here to refer to Ranganayakamma v. Alwar
Chetty under [(1889) 13 Mad 214] threat of preventing the body
from being removed for cremation. In this case, a young girl
aged 13 years was forced to give her consent under threat of
preventing the body from being removed for cremation to the
adoption of a boy to her husband who had just then died. In a
suit to set aside the adoption, the court had no hesitation in
holding that the consent was not a free consent but one induced
by coercion, within the meaning of Sec. 15 since any person
who obstructs a dead body from being removed would be guilty
of an offence under Sec. 297 of IPC.
In another landmark case Chikkam Ammiraju and others v.
Chikkam Seshamma and others [(1917) 41 Mad 33] a release
deed was obtained by a person from his wife and son under a
threat of committing suicide. In a suit to set aside the transaction,
the Court was divided as to whether the threat amounted to
coercion, since suicide was not an offence punishable by the
IPC. On Letters Patent Appeal two of the three judges held that
though suicide was not punishable under the IPC, yet it was
one forbidden by IPC since an attempt to commit suicide was
punishable. The reason why suicide was left without any
punishment was obvious for the dead could not be punished
and therefore, the consent obtained by such a threat to commit
suicide was one obtained by coercion.
2.4 BURDEN OF PROOF
In a plea of coercion, the same adversorial procedure of burden
of proof is followed in so far as the objective part of coercion is
82
concerned. Anyone going to the court and asking the court to
believe that coercion has been perpetrated is required to prove
the act of coercion, i.e., the act which is forbidden by IPC, or the
unlawful detention of property or the threat of such detention
of property. But in so far as the subjective part of coercion is
concerned, the burden of proof is negative and it swings back
to the defendant, who has to prove - (a) that such an act was not
intended for the purpose of obtaining consent; and (b) such an
act in fact did not influence the other party to give consent.
Here the quantum of time difference between the act of coercion
and of the actual consent given has an inverse relation to the
probity of subjective force, i.e., if the interval of time is short
or proximate there is a high probity of subjective force; on the
other hand if the interval of time is long and the distance between
force and consent is more, the probity of subjective force is
low. Performance of such a contract after the alleged coercive
act is lifted out of taint makes both the parties bound by the
contract. It means that the option of avoiding the contract must
be exercised as soon as, or very closely after, the coercive act
is done. If more and more time is allowed to elapse without the
plaintiff seeking redressal, especially after the coercive force is
lifted, it would make his case weak.
2.5 EX-TERRITORIALITY
Generally speaking, the Indian Contract Act applies to all
contracting parties provided the place of contract is in India,
or, where the place of contract is not in India, the parties agree
to be governed by Indian law. In view of the explanation given
to sec. 15 and the illustration given thereunder, it is clear that
sec. 15 has a global reach. The explanation provides that it is
immaterial whether the IPC is or is not in force in the place
where the coercion is employed. It means that the plaintiff has
only to prove that the act of coercion complained of is an act
prohibited by IPC. In order to substantiate his claim he does
not have to show that at the place of coercion the IPC was in
force. Illustration given to the section is as follows:
A on board an English ship on the high seas causes B to enter
into an agreement by an act amounting to criminal intimidation
under S. 506, IPC. Here, the high sea is beyond the territory
of India and so Indian law is not applicable there, and, since it
is an English ship English law is the law applicable between
the parties. In England, there is no criminal intimidation
equivalent to what is covered by Sec. 506 IPC. A afterwards
sues B at Calcutta for breach of contract and B pleads coercion,
and thereby seeks to avoid the contract. The decision is that A
had employed coercion and so B can avoid the contract. This
shows that if the parties are in India, or the property relating to
the contract is in India, an Indian court can admit a suit pleading
absence of free consent due to coercion, even though the place
of coercion is much beyond the normal jurisdiction of the lndian
courts. Sec. 15 therefore has an extra-territorial application.
83
3. UNDUE INFLUENCE
SUB TOPICS
3.1 Definition
3.2 Undue influence vis-a-vis coercion
3.3 Essential elements
(a) Position of domination
(b) Fiduciary relations
(c) Contracts with persons having impaired mental
capacity
3.4 Burden of Proof
(a) General
(b) For Pardanashin Woman
3.1 DEFINITION
The doctrine of undue influence under the Common Law was
evolved by the courts in England for granting protection against
transactions procured by the exercise of insidious forms of
influence, either spiritual or temporal. In the words of Sir
Frederic Pollock, undue influence means "any influence brought
to bear upon a person entering into an agreement, or consenting
to a disposal of property which, having regard to the age and
capacity of the party, the nature of the transaction, and all the
circumstances of the case, appears to have been such as to
preclude the exercise of free and deliberate judgement"
[Venkatesh Iyer, p. 201].
Lindley L.J. in his judgment in Allcard v. Skinner [(1887) 36 Ch.
D. 145] has stated in the following terms the object of the doctrine
of undue influence. "To protect people from being forced, tricked
or misled in any way by others into parting with their property is
one of the most legitimate object of all laws and the equitable
doctrine of undue influence has grown out of and been developed
by the necessity of grappling with insidious forms of spiritual
tyranny and with the infinite varieties of fraud. This is not a
limitation placed on the action of the donor, it is a fetter placed
on the conscience of the recipient of the gift and one which
arises out of public policy and fair play".
Section 16 defines Undue Influence as:
(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 is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage
over the other.
(2) In particular and without prejudice to the generality of the
foregoing principle, 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, or where he stands in a fiduciary relation to the
other; or
(b) where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by reason of age, illness or mental or bodily
distress; or
(c) where a person who is in a position to dominate the
will of another, enters into a contract with him, and
the transaction appears, on the face of it or on the
evidence adduced, to be unconscionable: the burden
of proving that such contract was not induced by
undue influence shall lie upon the person in a position
to dominate the will of the other.
According to clause (1) of Section 16, if the following two
conditions are fulfilled, the contract is said to be vitiated by
undue influence:
(a) where the subsisting relations are such that one party is in
a position to dominate the will of the other; and
(b) such person uses that position to obtain an unfair advantage
over the other.
3.2 UNDUE INFLUENCE VIS-A-VIS COERCION
According to Anson, the term undue influence has sometimes
been used by the courts to describe the equitable doctrine of
coercion. The distinction that makes undue influence different
from coercion remains in the character of force used. In case of
coercion, as we have already seen, one party uses a force
forbidden by IPC or that party confines or threatens to confine
property, in order to put an external pressure by force on the
mind of the other party to come to terms. In England of course,
the property element is not taken into consideration in duress,
i.e. confining of property or threat to confine property does not
constitute duress in the legal sense. Of course, Williams v. Bailey
[1866 L.R.I H.L. 200] was one case where the mortgage of a
property was set aside by the court as being made under duress.
Here, the defendants son forged his (fathers) signature on
several promissory notes in order to collect money from the
Bank. The banker made it clear to the defendant that the Bank
had the power to prosecute his son for forgery. In order to protect
his son from prosecution the defendant had to execute the
mortgage. This case, decided in equity, extended relief because
the contract was entered into because of one partys threat to
prosecute the other on a criminal offence. By and large, both in
India and England a criminal force, applied or threatened for
purpose of obtaining consent, constitutes coercion.
In undue influence, on the other hand, the force that is used by
one party is not a patent one (i.e., an obvious one) as used in
coercion, but it is a latent one (i.e. a hidden one) which emanates
out of the comparative position of the parties, one being in a
dominant position as compared to the other. The force used
here is more directly psychological and moral, rather than
external and physical. But the end result in both the cases is the
same, i.e., in both the cases one party dominates the will of the
other. In coercion it is done by a physical force, whereas in
undue influence it is done by a psychological force possible
because of the physical relation between the parties. In coercion
84
a physical force is required to be converted into a psychological
force which is termed as the subjective force in coercion. In
undue influence, however, that psychological force is directly
applicable. An example will make it clear. In the poem Do
Beegha Jameen [Two Beeghas of land] Tagore has given a
classical example of undue influence. According to the story,
the feudal Lord of the village (Babu) asks his tenant (Upen) to
sell his land to him (i.e. Babu) stating that, I shall purchase
that land. This makes the intention of the landlord very clear.
Here, the relation between the parties was such that one could
dominate the will of the other. But a modern landlord in Bombay
can engage a few mercenaries or goondas, to compel the tenant
to leave the house. Here, the psychological force is a derivative
one, which is patently created by an external force. This is
coercion. In the earlier example the psychological force is latent
in the relation between the parties.
Similarly, in coercion, undue influence has to occur. As has
already been said, unless the psychological force is created by
a physical force there is no coercion; mere use of objective
force is not enough. Once that psychic force is present the
position between the parties becomes such that the person
causing coercion is in a position to dominate the will of the
other. Therefore, in every coercion there is undue influence,
but the converse is not true, because in undue influence, there
is never any necessity for the use of criminal force; the
psychological and moral force is enough to constitute undue
influence.
To sum up, in coercion there is a patent force and in undue
influence there is latent force. In coercion, a party by virtue of
use of force becomes dominant over the other, whereas in undue
influence the relation between the parties is such that one can
automatically dominate the will of the other. In coercion, an
unconscionable gain is not essential, but in undue influence, an
unconscionable gain is necessary to shift the burden of proof.
But, the remedy available against the use of either force is based
upon the same philosophy, viz., of law being against the use of
any kind of force in the realm of contract.
3.3 ESSENTIAL ELEMENTS
According to Anson, the two situations in which an undue
influence may occur are:
(1) where the party charged to have exercised undue influence
in the sense of domination over the other party; or
(2) where there is an abuse of the duty of care and confidence
which may be imposed on one party towards another as a
result of a particular relationship which emerges from the
special circumstances of their association.
Anson further suggested that in the former, evidence of express
influence must be adduced by the parties seeking to impeach
the transaction, whereas, in the latter, undue influence is
presumed by the law in the absence of evidence to the contrary
[Allcard v. Skinner (1887) 37ChD 145].
(a) Position of domination
When can we say that in a given relationship one person is in a
position to dominate the will of the other? Normally, it is difficult
to say or generalise unless it is proved factually. However, taking
into consideration the object of 'undue influence and the need
for protecting innocent persons, the English Common Law
Courts have evolved a presumption to that effect in the following
relationships. The list is merely illustrative in nature:
a. parent and child
b. guardian and ward
c. trustee and beneficiary
d. solicitor and client
e. doctor and patient
f. spiritual advisor and disciple
Apart from the above mentioned relationships, there may be
infinite varieties of human relationships in which one person is
in a position to dominate the will of another [Rama Pattar v.
Manikkam (1934) 58 Mad 454]. As rightly pointed out by the
Privy Council in Poosathurai v. Kannappa Chettiar, AIR 1920
PC 65 "it is a mistake to treat undue influence as having been
established by a proof of the relations having been such that
the one naturally relied upon the other for advice and the other
was in a position to dominate the will of the first. Upto that
point influence has been made out; such influence may be
used wisely, judiciously and helpfully. But, both under the law
of India and the law of England, more than mere influence must
be proved so as to render the influence, in the language of the
law, "undue.
That is the reason why, unless and until it is shown that the
influence is exercised to obtain unfair advantage, such influence
does not amount to 'undue influence.
The leading case on this vitiating factor is that of Allcard v.
Skinner [(1887) 36 Ch.D. 145]. In 1862, the plaintiff Ms. Allcard
joined a sisterhood of which the defendant was the religious
superior. The plaintiff in course of time made several gifts to
the sisterhood and transferred to it the bulk of her properties. In
1879, the plaintiff left the sisterhood and in 1885 she repudiated
these transactions of gift and brought the suit. The court was of
the opinion that, the relationship between the defendant and
the plaintiff was such as to raise the presumption of undue
influence, but held that, in view of the plaintiff's conduct
subsequent to 1879 when she left the sisterhood down to 1885,
taking into account the period of time that had elapsed and also
the fact that during all this interval, she had independent and
disinterested advice, her conduct must be construed as an
election to affirm the gifts made by her. This case is an authority
on two points, namely:
(i) that a contract induced by undue influence is only voidable
and therefore could be affirmed expressly or by conduct.
(ii) that the party in such cases should seek to avoid the
transaction at the earliest possible point of time and could
succeed in doing so only if the parties could be restored to
their original position.
According to clause (ii) of sec. 16, in addition to the principle
enshrined under clause (i), a person is deemed to be in a position
to dominate the will of another
85
(a) if he holds real or apparent authority; or
(b) if he stands in a fiduciary relation to the other; or
(c) where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason
of age, illness or mental or bodily distress.
Undoubtedly, a person in authority would be able to dominate
the will of the other. For example, persons like income-tax
officers, police officials and advocates etc. belong to this
category of persons of real authority. This kind of authority
may either be conferred by a statute or by a contract. Apparent
authority means show of authority, which in reality does not
exist.
(b) Fiduciary relations
Whenever any relation is founded on trust, faith or confidence,
such a relation is known as fiduciary relation. While examining
the parameters of fiduciary relationship in a given fact situation
Scrutton L.J. in Moody v. Cox & Hatt [(1917) 2 Ch. 71] went
on record by saying:
"Generally when you have made a legal contract and
correctly expressed it in writing, and it has not been
obtained by any misstatement of facts, innocent or
fraudulent, the contract stands, and the fact that one party
or the other knows facts about which he says nothing,
which made the contract an unprofitable one to the other
party, is of no legal consequence. But there are certain
relations and certain contracts in which a higher duty is
imposed upon the parties and they must not only tell the
truth, but they must tell the whole truth so far as it is
material, and they must not only not misrepresent by
words, they must not misrepresent by silence if they
know of something that is material. Some of those cases
depend on the relationship between the parties, and,
generally speaking, are cases where the relation is such
that there is confidence reposed by one party and
influence exercised by the other. In that class of relation
of parties you may get the duty, first of all, that the party
who has the influence must not make a contract with the
party over whom he has influence unless he can satisfy
the Court that the contract is an advantageous one to the
other party".
This principle applies to every case where influence is acquired
and abused, where confidence is reposed and betrayed. Thus in
Tate v. Williamson [(1866) L.R. 2 Ch. App. 55], an Oxford
undergraduate, T, aged twenty-three, was being pressed to pay
his college debts, which amounted to some 1000. Being
estranged from his father, he asked his great-uncle to advise
him how he should find the means to pay. The great-uncle was
unable to advise in person owing to ill health, but he deputed
the defendant, his nephew, to do so. Conversations took place
between T and the defendant in which T expressed the desire
to sell part of his estate, upon which the defendant offered to
buy it for 7000. Before the sale was completed, the defendant
obtained a report from a surveyor on the property, and this
valued it at 20000. The defendant did not disclose this fact to
T but proceeded with the purchase. Excessive drinking led to
T's death one year later.
It was held that the purchase must be set aside. The defendant,
having been asked to give advice, stood in a confidential
relationship to T, and this prevented him from becoming a
purchaser of the property, without the fullest communication
of all material information which he had obtained as to its value.
(c) Contracts with persons having impaired mental capacity
Similarly, under sub-clause (c) of Section 16, a person is deemed
to be in a position to dominate the will of the other, if such
person enters into a contractual relation with another whose
mental capacity is temporarily or permanently affected by reason
of age, illness or mental or bodily distress. In fact, this clause
takes within its fold a wide range of circumstances wherein the
presumption plays a significant role. For example, a poor Hindu
widow, who was in great need of money to establish her right
to maintenance, was persuaded by a money lender to agree to
pay 100% rate of interest. The court did not hesitate to declare
this as an instance of undue influence exerted upon a person in
distress. In fact this clause takes within its fold the principle of
unconscionable bargain.
3.4BURDEN OF PROOF
(a) General
Clause (3) of Section 16 speaks about 'burden of proof'.
According to it, where a person who is in a position to dominate
the will of another, enters into a contract with him, and the
transaction appears, on the face of it or on the evidence adduced,
to be unconscionable the burden of proving that such contract
was not induced by undue influence shall lie upon the person
who is in a position to dominate the will of the other.
While examining the scope and ambit of burden of proof the
Madras High Court in P. Saraswati Ammal v. Lakshmi Ammal
alias Lakshmi Kantham [AIR 1978 Mad. 361] observed that:
"The primary ground on which the plea of undue
influence is founded is based on relationship. It is
axiomatic that mere proof of relationship, however near
it may be, is not sufficient for a court to assume that one
relation was in a position to dominate the will of the
other. Such bonds of kinship which are universally felt
should not be mistaken as equivalent to saying that one
kinsman could unduly influence the other in the circuit
of such bondage. Even if any advice is given it may be
influence but not undue influence. The important and
salient feature which ought to be established on materials
pleaded and acts established is that the bargain is tainted
by undue influence, and it is so unconscionable that it
could reasonably be said that the person sought to obtain
unfair advantage for himself and so as to cause injury to
the person relying upon his authority or aid. It is only
after such particulars are made available and a reasonable
proof thereof has been given, the onus probandi would
shift to the so called person of domination. Until then
the burden is on the complainant to establish it so.
86
According to Anson, in case of a special relationship emerging
out of the special circumstances attending the association of
parties, the burden of proof lies on the defendant. Lord Selborne
held in Earl of Aylesford v. Morris [1873 L.R. 8 Ch. 484 at
p.490] that "........ raise from the circumstances and conditions
of the parties contracting - weakness of one side, usury on the
other, or extortion or advantage taken of that weakness - a
presumption of fraud. Fraud here does not mean deceit or
circumvention; it means an unconscientious use of the power
arising out of these circumstances and conditions; and when
the relative position of the parties is such as prima facie to raise
this presumption, the transaction cannot stand unless the person
claiming the benefit of it is able to repel the presumption by
contrary evidence, proving it to have been in point of fact, fair,
just and reasonable.
(b) Pardanashin Woman
A Pardanashin Woman is one who is considered to be
secluded from ordinary social intercourse'. There is no statutory
definition to this effect. She enjoys a cloak of legal protection.
If any other person enters into a contract with a pardanashin
woman, the presumption of undue influence arises. In Kalibaksh
Singh v. Ram Gopal Singh [(1913) 41 I A. 23] the Privy Council
observed that, "In the first place, the lady was a pardanashin
lady, and the law throws around her a special cloak of protection.
It demands that the burden of proof shall in such a case rest, not
with those who attack, but those who found upon the deed, and
the proof must go so far as to show affirmatively and
conclusively that the deed was not only executed by, but was
explained to, and was really understood by, the grantor. In such
cases it must also, of course, be established that the deed was
not signed under duress, but from free and independent will of
the grantor".
Summing up, it can be stated that in the case of pardanashin
woman, there is a prima facie presumption of undue influence.
At this juncture one particular fact needs to be clarified. Namely,
sub-clause (c) of clause (iii) of Section 16 speaks only about
presumption about "persons position to dominate the will of
the other" in the light of select relationships, but in the case of
'pardanashin woman the presumption, though not statutory in
nature would deal with undue influence itself.
Justice Subba Rao in Kharbuja Kuer v. Jangbahadur Rai (AIR
1963 SC 1203), held that, "The burden shall always rest upon
the person who seeks to sustain a transaction entered into with
a paradanshin lady to establish that the said document was
executed by her after clearly understanding the nature of the
transaction. It should be established that it was not her physical
act but also her mental act. The burden can be discharged not
only by proving that the document was explained to her and
that she understood it but also by other evidence direct and
circumstantial".
The protection afforded to pardanashin ladies can be extended
to other ladies of similar class who though not technically
pardanashin are similarly placed in that they are illiterate and
sometimes old and sick and have lack of understanding and
appreciation of the transaction without independent advice and
are helpless and thus exposed to the danger of enmeshment
into unfair deals. The emphasis should be on the factual
understanding of the transaction entered into and not the
disability presumed in the case of pardanashin ladies on the
ground of mere status. The protection given to the pardanashin
extends to illiterate rustic village woman [Pollock & Mulla, p.
171].
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4. FRAUD
SUB-TOPICS
4.1 Definition and essential elements
4.2 Constituent elements of fraud
4.1 DEFINITION AND ESSENTIAL ELEMENTS
The Writ of deceit of the law of torts applied in a contractual
situation which ultimately results into a fraud, which gives a
party the right to demand and recover damages.
In English law fraud was defined in a landmark decision of
the House of Lords in Derry v. Peek [(1889) 14 App. Cases
337] which runs as follows:
Fraud is proved when it is shown that a false representation has
been made
1. knowingly, or
2. without belief in its truth, or
3. recklessly careless whether it be true or false.
In this case the established facts were: A Companys prospectus
contained a representation that the company had been authorised
by a special Act of Parliament to run trams by steam or
mechanical power. The authority to use steam was, in fact,
subject to the approval of the Board of Trade, but no mention
was made of this. The Board refused consent and consequently
the company was wound up. The plaintiff, having bought some
shares, sued the directors for fraud but they were held not liable
in view of their honest belief.
Section 17 of the Contract Act defines fraud. The analysis of
Section 17 reveal the following essential ingredients:
a. there should be a suggestion as to a fact;
b. the fact suggested should not be true;
c. the suggestion should have been made by a person who
does not believe it to be true; and
d. the suggestion should be made with intent either to deceive
or to induce the other party to enter into the contract.
4.2 CONSTITUENT ELEMENTS OF FRAUD
Thus Indian law very much resembles the British law of deceit
which is generally based upon the three basic principles:
(i) making a false statement knowingly, that the statement
made is not true which amounts to suggestio falsi. In Davis
v. London Prudence and Marine Insurance Co. [(1878) 8
ch. D. 469], it was held that a statement which is believed
to be true when made, and which is subsequently discovered
to be false by the party making the statement, will be
considered to be fraudulent, if the mistake is not
communicated to the other person before he acted on it.
(ii) The representation must be made with an intention to
deceive the other party, i.e. with an intention of obtaining
wrongful gain from or to inflict wrongful loss on another. In
Paul Hacel v. Walter [(1832) 3 B and A.D. 114], a
representation was made by the defendant that he could
accept the bill, knowing fully well that in fact he had no
such authority. The bill being dishonoured at maturity
would make the defendant liable to compensate the loss of
an endorsee who had given value for the bill on the strength
of the defendants representation.
(iii) Though mere suppression of a fact is not a fraud, but where
an oral statement is warranted, a suppression would indicate
a falsehood the knowledge of which is with the defendant.
Such a suppression also constitutes fraud. A suppresio veri
in such a case amounts to a suggestio falsi if not an allegatio
falsi.
Silence is not fraud
Under the common law system there is no general duty imposed
on one party to a contract, to apprise the other of facts unknown
to him and which might affect his inclination to enter into the
contract (Anson, 227). This principle is generally known as
caveat emptor. In Keats v. Lord Cadogan [(1851) 10 C.B 591],
the plaintiff sued the defendant demanding damages on account
of fraud because the defendant was aware while letting his house
that the plaintiff would want to occupy it immediately and that
the house was in a ruinous condition and therefore unfit for
occupation. According to Jervis, C.J., mere silence does not
constitute misrepresentation. Of course in some cases there may
be a duty of disclosure. As for example, if the parties to the
contract are so related that there is a duty of utmost good faith
[uberrimae fidei] like family relations, doctor and patient,
advocate and client, and so on, parties are bound to disclose
what they think to be of material importance for taking a decision
on a contract.
Explanation to sec. 17 of the Contract Act puts forth the Indian
position clearly. It states that mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not
fraud unless the circumstances of a case are such that regard
being had to them, it is the duty of the person keeping silent to
speak, or unless his silence is in itself equivalent to speech, as
already suggested earlier in suppressio veri, suggestio falsi.
Misrepresentation to induce the contract
In order to establish fraud it must be shown that the
misrepresentation had in fact induced the other party to conclude
the contract. Lord Blackburn had said that "if it is proved that
the defendants with a view to induce the plaintiff to enter into a
contract made a statement to the plaintiff of such a nature as
would be likely to induce a person to enter into a contract, and
it is proved that the plaintiff did enter into a contract, it is a fair
inference of fact that he was induced to do so by the statement.
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5. MISREPRESENTATION
Misrepresentation in Common Law
In English Common Law negligent misrepresentation made by
a party also entitles the other party to rescind the contract as in
the case of fraud. After passing of the Misrepresentation Act of
1967, a party suffering from negligent misrepresentation may
now claim damages [Hadley Byrnes Case (1964) A.C. 465].
In this case the House of Lords extended liability for damages
to negligent misstatement and held that duty of care could exist
where there was a special relationship between the persons
making the statement and the person to whom it was made.
Innocent misrepresentation on the other hand could not be
pleaded as a defence or be made a ground of rescission in
Common Law. Of course the rigour of this Common Law
principle was softened by the application of equity and allowing
the party suffering from innocent misrepresentation to rescind
the contract. The following are the four principles of general
rule on misrepresentation in Common Law.
(i) Misrepresentation as to contractual terms: If the
misrepresentation relates to a term of contract which is not
a condition the injured party can only claim damages but
cannot rescind the contract. In case the contractual term is
a condition misrepresentation may empower the injured
party to rescind the contract.
(ii) Mistake: An innocent misrepresentation induces the other
party to the contract to commit a mistake. If such a mistake
happens to be related to an essential term or condition of
the contract the agreement is void, so that either party can,
on returning whatever gaoms he got under the contract
recover back had given.
(iii) Contracts uberrimae fidae: In contracts of insurance etc.
innocent misrepresentation or non disclosure are good
grounds of rescission, under Common Law.
(iv) Limited duty of disclosure: Where there is a limited duty
of disclosure failure to disclose is a good defence, and
rescission is allowed.
In fact the common law principle of contractual
misrepresentation giving rise to rescission, is a product of
equitable doctrine. As a normal rule rescission must be
communicated to the other party but where a seller of goods
has a right to avoid the contract for fraud or misrepresentation
and he sufficiently exercises his election at once on discovery
of the fraud or misrepresentation by taking all possible steps to
regain the goods a formal notice may not be insisted upon. In
Car and Universal Finance Co. Ltd. v. Caldwell [(1961) 1 QB
525], the defendant was fraudulently induced to sell a motor
car to a purchaser in return for a cheque. When the cheque was
dishonoured the defendant immediately informed the police and
the automobile association. The purchaser deliberately
absconded and could not be traced. He subsequently sold the
car to the plaintiff who bought it in good faith. The Court of
Appeal held that the defendant had effectively rescinded the
contract, though he could not communicate the notice of
rescission to the purchaser. The title to the car had vested in the
defendant on rescission and so the plaintiff had no claim to the
vehicle.
Indian law on Misrepresentation
Section 18 of the Contract Act defines Misrepresentation. It
means and includes:
a. When a person positively asserts that a fact is true when
his information does not warrant it to be so, though he
believes it to be true;
b. Any breach of duty which brings an advantage to the person
committing it by misleading the other to his prejudice.
Sometimes this is also called as constructive fraud.
c. Causing, however innocently, a party to an agreement to
make a mistake as to the substance of the thing which is
the subject of the agreement.
It is now pertinent to note the distinction between fraud and
misrepresentation.
a. Basically fraud requires an intention to deceive, whereas
misrepresentation may be innocent.
b. Fraud in addition to rendering the contract voidable, is a
cause of action in tort for damages. Simple
misrepresentation is not a tort but under section 75 of the
Contract Act, a person who rightfully rescinds a contract
is entitled to compensation for any damage which he has
sustained through the non-fulfilment of the contract."
c. Lastly, a person complaining of a misrepresentation can be
met with the defence that he had, the means of discovering
the truth with ordinary diligence", but excepting in case of
fraud by silence, it does not lie in the mouth of the person
committing fraud to say that his victim was too easily
deceived or had the means of discovering the truth "Fools
have to be protected against knaves" [Venkatesh Iyer, p.
227].
Remedies
Before we take up the examination of the most significant of
the vitiating factors, namely, mistake, it is desirable to learn
about the consequences of such contract wherein the consent is
vitiated by coercion, undue influence, fraud or
misrepresentation. In this regard section 19 provides that, when
consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused (section 19A
specifically deals with undue influence). However, a fraud or
misrepresentation which is not the direct cause of the consent
given by the other party would not render a contract voidable.
Similarly, if such consent was caused by misrepresentation or
by silence which is fraudulent within the meaning of section
17, the contract nevertheless is not voidable, if the party whose
consent was so caused had the means of discovering the truth
with ordinary diligence. Section 19 also provides that, a party
89
to a contract, whose consent was caused by fraud or
misrepresentation, may, if he thinks fit insist that the contract
shall be performed, and that he shall be put in the position in
which he would have been if the representations made had been
true. Thus, basically, section 19 confers the right of rescission
on the party whose consent is vitiated. However, the right of
rescission in such cases is always subject to section 64 of the
Contract Act which recognises the concept of restitution.
According to section 64, when a person at whose option a
contract is voidable rescinds it, the other party thereto need not
perform any promise therein contained in which he is promisor.
The party rescinding a voidable contract shall, if he has received
any benefit thereunder from another party to such contract,
restore such benefit, so far as may be, to the person from whom
it was received. At the same time, S. 75 recognises a right to
claim compensation on the part of the person rescinding the
contract, provided he rightfully rescinds it.
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6. MISTAKE
SUB-TOPICS:
6.1 Mistake in Common Law
6.2 Mistake in Indian Law
6.3 Mistake of both the parties
6.4 Mistake of fact and law
6.5 Mistake of essential fact
(i) Nature and content of the promise
(ii) Identity of the parties
(iii) Mistake as to subject matter.
6.1 MISTAKE IN COMMON LAW
Unlike other vitiating factors of consent like coercion, undue
influence, fraud and misrepresentation, mistake attacks the very
root of the contract. In the other vitiating factors the vitiating
element is external either in the form of force, status or
intentional or non-intentional misrepresentation by one party
over the other. But mistake relates to internalities of the contract.
Therefore, the very foundation of privity of contract is
questioned. In Bell v. Lever Bros Ltd. [(1932) A.C. 161], the
respondent entered into two agreements with the appellants,
the first one being a service contract by which appellant Bell &
Snelling were appointed to the Board of the Niger Co., a
subsidiary of Lever Bros. for a period of 5 years at a salary of
8000 and 6000 respectively. The second agreement was a
compensation contract by which Lever Bros. promised to pay
a compensation of 30,000 and 20,000 respectively in the
event of the respondents been asked to retire before the expiry
of the service period. While in service Bell and Snelling secretly
entered on their own account into speculative transactions in
Cocoa, a course of conduct which would have given the Lever
Bros. the right to dismiss them without paying compensation.
It was in ignorance of this fact that Lever Bros had entered into
the compensation contract and paid the sum therein promised.
They now sought rescission of the contract and recovery of the
money on the ground that it had been paid under mistake of
fact. While delivering his judgement Lord Atkin observed: "If
mistake operates at all, it operates so as to negate or in some
case to nullify consent". Thus in Common Law mistake either
negatives the consent or nullifies it. In the first it negatives the
consent because there is no real consensus between the parties
and therefore, there is no basis for the contract. In the second, it
nullifies the consent because of an error in consent on account
of mistake in expression relating to the terms of contract. Of
course in both the cases the agreement is void.
In Lever Bros. Ltd., the majority decision of the House of Lords
posed some apparently contradicting and confusing
propositions. Before we go into that let us examine the case
from the trial stage. The facts of the case as examined by the
jury would reveal that Bell and Snelling did not have in mind
their breaches of duty while they entered into the compensation
agreement nor had the Lever Bros. contemplated that they had
the right to terminate the contract of service of the appellant
without paying compensation. The jury observed that there was
no fraud on the part of the appellants. Therefore the agreement
of compensation was a nullity from the beginning due to the
mistake and belief of both the parties. The Court of Appeal
upheld the contention that the agreement was void ab-initio.
The House of Lords reversed the decision holding by majority
that the contract was valid and binding.
The first proposition coming out of this decision is that there is
no such doctrine of mistake rendering a contract void ab initio.
Lord Denning explained this principle with more clarity in Solle
v. Butcher [(1951) K.B. 671)]. According to him "once a contract
has been made, i.e., once the parties, whatever their inmost states
of mind, have to all outward appearances agreed with sufficient
certainty in the same terms on the same subject matter, then the
contract is good unless and until it is set saide for failure of
some condition on which the existence of the contract depends,
or for fraud, or on all such equitable ground. Neither party can
rely upon his own mistake to say that it was a nullity from the
beginning, no matter that it was a matter which to his mind was
fundamental, and no matter that the other party knew that he
was under a mistake, a fortiori, if the other party did not know
of the mistake but shared it". The second proposition is that the
agreement is void in law only if some term can be implied in
both offer and acceptance which prevents the contract from
coming into operation. According to Anson this is a fiction.
But as Lord Atkin pointed out it takes us far in the enquiry to
establish whether a contract contains such a term. Though there
can be no test to be laid down to determine whether a situation
would thus arise, Anson marshalled the fact situation into four
categories where such a position may arise, preventing the
contract from coming into operation. Lord Atkin perhaps
covered these issues in nullity of contract.
(a) mistake as to existence of the subject matter of the contract;
(b) mistake as to title,
(c) mistake as to the quality of the thing contracted for; and
(d) a false and fundamental assumption going to the roof of
the contract.
(a) Mistake as to the existence of the subject matter:
In Lever Bros Lord Atkin observed: "the agreement of A and B
to purchase a specific article is void if in fact the article had
perished before the date of sale. In this case, though the parties
in fact agreed about the subject matter, yet a consent to transfer
or to take delivery of something not in existence is deemed
useless; the consent is nullified. It is not difficult to see that
such non-existence of the subject matter is a total failure of a
consideration.
(b) Mistake as to title:
According to Lord Atkin "Corresponding to mistake as to the
existence of the subject matter is mistake as to title in cases
where unknown to the parties, the buyer is already the owner
91
of that which the seller purports to sell to him. Suppose A agrees
to take from B a lease of land of which, contrary to the belief of
both parties at the time of contract, A is already tenant-in-tail,
the agreement is void for absence of title with the seller. An
agreement on a mistaken belief of the title of the seller is a
valid contract and the seller is liable to pay damages for not
having the title; it is only where the buyer agrees to purchase
his own property there can be no warranty and the agreement is
a nullity.
(c) Mistake as to the quality of the thing:
This type of mistake has much more complexity. Such a mistake
generally does not affect the contract unless the mistake is of
both the parties and as to some quality which "makes the thing
without the quality essentially different from the thing as it was
believed to be". As for example, F buys from K a car which
both believe to be a 1948 model but actually it is 1939 model
and very much less valuable. There is no mistake at common
law as held in Oscar Chess Ltd. v. Williams [(1957) 1 W.L.R.
370]. Similarly, if A agrees to buy from B '100 bales of Calcutta
Kapok, Sree brand', both the parties believe that this particular
brand is pure Kapok consisting of Sree cotton. On a subsequent
discovery that the Kapok contains an admixture of bush cotton
and is commercially inferior, the contract cannot be avoided.
[Harison and Jones Ltd v. Bunten and Landcaster Ltd. [(1953)
l Q.B. 646].
(d) False and Fundamental Assumption
Where in the contract both the parties entered into the agreement
on false fundamental assumptions going to the root of the
contract the contract may be void. Lord Atkin termed such type
of avoidance of as a nullity. In Sheikh Bros v. Ochsner [(1957)
A.C. 136], the appellant contracted with the respondent to grant
him a licence to cut, process and manufacture all sisal grown
on a particular estate in Kenya of which they were the lessee.
In return the respondent deposited a certain sum of money, and
undertook to deliver each month to the appellants 50 tonnes of
sisal fibre, manufactured by him. The estate was in fact not
capable of producing such requirement. It was held that the
agreement was void on the false fundamental assumptions.
6.2 MISTAKE IN INDIAN LAW
Indian Law on mistake is different from the Common law.
According to Sec. 20 of the Indian Contract Act mistake has
been defined as mistake of both the parties to an agreement on
a fact essential to the agreement : This mistake makes the
agreement void. Thus to be a mistake in Indian Law,
(i) it has to be mistake of both the parties,
(ii) it must be mistake of fact, and
(iii the fact must be essential and not incidental or subsidiary.
6.3 MISTAKE OF BOTH THE PARTIES
In order to make the contract void ab initio both the parties
must commit the mistake. As for example in Griffith v. Brymer
[(1903) 19 T.L.R. 434] an agreement for hire of a room overlooking
the route of Edward VIIs coronation procession was held void
because both the parties did not know the cancellation of the
procession. In India all mistakes to be covered under Sec. 20 to
make the agreement a nullity is required to be bipartite. A single
partys mistake cannot suffice.
Mistake of One Party: Whereas in England one partys mistake
can also make the agreement void ab initio subject to the
explanation of mistake as given by Lord Denning noted earlier,
unilateral mistake in India can result in a nullity under Sec. 22
of the Contract Act which stipulates that a contract is not
voidable merely because it was caused by one of the parties to
it being under a mistake as to a matter of fact. It means that if
mistake is compounded by some other vitiating factors unilateral
mistake can also become a ground for nullity. The position may
be intricate in the absence of any Indian law on the issue; It is
difficult to predict the attitude of Indian judiciary on this matter.
Take for example in Cundy v. Lindsay [(1873) 3 A. C. 459] one
Blenkarn by imitating the signature of a reputable firm called
Blenkiron & Co., induced Lindsay to supply him goods on
credit, which he afterwards sold to Cundy, an innocent purchaser
for value consideration. In a suit by Lindsay against Cundy for
recovery of the goods, the Court of Appeal held that as Lindsay
never intended to contract with Blenkarn, there was no contract
between them and even an innocent buyer of the goods from
Blenkarn did not get a good title and must return them to
Lindsay. The English court in this case relied on the principle
consensus ad idem, and therefore, mistake of Lindsay as to the
identity of the party with whom he was entering into the contract
vitiates the very foundation of the agreement and therefore the
agreement is a nullity. If there is a nullity of the agreement, a
party can take the plea of its own mistake. In Indian situation
perhaps the court has to read Sec. 22 with Sec. 17 or 18 and
make it as a compounding vitiating factor in which case the
court may make the agreement a nullity. In that event the position
of Cundy would be very interesting in India according to Indian
Law. He is a bonafide purchaser for valued consideration
deriving the possession of the goods from a merchant. As such,
with Secs. 2, 17 and 18 of the Contract Act the Indian court
may read Sec. 27 and 29 of the Sale of Goods Act as well. In
that case Cundy obtaining the possession of goods in a sale
transactions completed before the nullity of the basic agreement
between Lindsay and Blenkarn was declared by the Court will
have valid and continuing title. Therefore, Lindsay will not be
able to get back the materials from Cundy. Unless such a case
came up before the highest judiciary in India it is difficult to
predict all consequences arising out of compounding unilateral
mistakes. Another interesting case on impersonation is Philips
v. Brooks [(1919) 2 K.B. 243]. A man, North, called in person
at a jewellers shop and chose some articles of jewellery. On
some of the articles he made payment by a cheque signing as
Sir G.B. a person of credit. Thereupon the jeweller allowed
him to take away a valuable ring for which he promised to pay
soon. North thereafter pledged that ring to Brooks. In a suit for
recovery of the ring the court held that Brooks a pawn broker,
had a good title to the ring, because the contract between the
92
jeweller and North was good until the jeweller disaffirmed it.
Here in this case the judge applied the principle of fraud and
not the principle of unilateral mistake as to the identity of the
party contracted with. According to the court the impersonation
was made not at the stage of making the contract but only at the
stage of delivery of goods. The fraud did not compel the jeweller
to enter into the contract because at the stage of contracting,
the misrepresentation was not made. The jeweller was ready to
sell the goods to any person, unlike in Cundy v. Lindsay where
the misrepresentation started at the very beginning of the
agreement thus vitiating the very foundation of the agreement.
Therefore, in a compounding unilateral mistake the court has to
critically look into the fact situation and the stage at which the
mistake is committed. The Court has also to look into the role of
such mistake in the overall framework of the agreement. In every
fraud and misrepresentation there is a mistake on the part of the
suffering party. Therefore that does not automatically bring
fraud or misrepresentation under mistake.
6.4 MISTAKE OF FACT AND LAW
Mistake of the parties must relate to mistake of fact and not
mistake of law. Whereas mistake of fact is excusable, ignorance
of law is no excuse [Ignoratio juris non excusit]. According to
Sec. 21 of the Contract Act a contract is not voidable because it
is caused by mistake as to any law in force in India. As for
example, A and B make a contract grounded on the erroneous
belief that a particular debt is barred by Indian Law of limitation;
the contract is not void or voidable. Mistakes which relate to
the existence of a subject matter, title of goods, quality of the
thing contracted for, terms of contract and identity of the party
are mistakes of facts.
But often it is difficult to understand and distinguish the mistake
of fact from mistake of law. As for example, a debt barred by
limitation is apparently shown as a mistake of fact just as a bad
debt. But since the bad debt is due to application of law it is
considered as mistake of law. Whether a person is a minor or
not may be apparently a question of fact but since minority is
determined and protected by law the issue on minority is often
treated as matter of law.
Mistake of Law
It is already pointed out that a mistake relating to law is not a
mistake. There can be two questions involved - the first, what
is a mistake of law and the second, can the question of law be a
mixed question of law and fact?
According to Sec. 21, mistake of law of our country is
considered as mistake of law whereas mistake of foreign law
i.e. law of any foreign country is a mistake of fact. Mistake of
International law in India is considered as mistake of fact
because unless specifically adopted, international law does not
govern the relation of nationals. Of course there are countries
where international law is considered as superior law of the
land and hence mistake relating to that is mistake of law. But
the whole question on mistake of law or fact is not that simple.
On several issues, the line of demarcation between mistake of
law and fact is very thin. As for example, in the case of liquidation
of a bank the liability of the bank to pay off depends upon
whether the bank holds the fund as the agent for collection or
as a banker. This question is both of fact as well as of law. If the
agreement between the parties is clear on the issue the status of
the bank becomes a matter of fact. Often the relationship between
the banker and the customer determines their legal relation. In
such situations the matter is both a matter of fact as well as a
matter of law.
6.5 MISTAKE OF ESSENTIAL FACT
Mistake must relate to the essential and not an incidental or
subsidiary fact. Broadly speaking the following facts are
considered to be essential in every agreement:
(i) nature and content of the promise itself;
(ii) identity of the contracting parties; and
(iii) identity and nature of the subject matter.
(i) Nature and content of the promise
Normally, it is expected that the agreement reflects the intention
of the parties. However, the possibilities of gaps cannot be ruled
out. The decision of the Court of Appeal in Hartog v. Colin
and Shields [(1939) 3 All. E.R. 566] has appropriately
illustrated this point. In this case, the defendants contracted to
sell to the plaintiff 3000 Argentine hare skins, but by a mistake
they offered the goods at so much per pound instead of so much
per piece. The price per piece was roughly one-third that of a
pound. The negotiations preceding the agreement took place
on the basis of price per piece and that was also the usual practice
of the trade. The buyers sued for the goods. Singleton L.J.
observed that it was a mistake on the part of the defendants
which caused the offer to go forward in that way, and I am
satisfied that anyone with any knowledge of the trade must have
realised that there was a mistake. The offer was wrongly
expressed and the defendants by their evidence, and by the
correspondence, have satisfied me that the plaintiff could not
have reasonably supposed that the offer contained the offerors
real intention.
The Calcutta High Court in New Delhi Rubber Works Pvt. Ltd.
v. Oriental Fire & General Insurance Co. Ltd., [(1969) 1 Comp.
L. J. 153 (Cal)] followed the same principle. The facts in this
case were as follows: A policy of insurance, which had expired,
covered risks arising out of fire, riot and strike. The Company
sent a renewal form to the assured showing the premium for
the above risks. The assurance sent a lesser amount sufficient
to cover the fire risk only. The company issued a policy in the
usual terms covering the risks arising out of fire, riot and strike.
The factory was destroyed by fire due to riot. The company
contended that as the policy purported to cover the risks of riot
and strike also, it was void for mistake.
The court held that the defence of mutual mistake can be raised
even where the document had become redundant by reason of
the occurrence of the loss and there was nothing left to be
rectified, for otherwise the assured would in effect be allowed
to take advantage of a mistake, which if pointed out, would
have been rectified at the proper time.
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Defence of non est factum
The plea of non est factum (that is not my deed) was an ancient
common law defence to actions on specialities, permitted at a
time when illiteracy was frequent enough to demand special
protection. Not withstanding execution, the executant could
plead that the deed as executed was not his deed in the sense
that it did not represent his intention and was not what he had
in mind to do that in truth he did not consent to what he had
done. In modern times this plea has been extended to cases
other than illiteracy, as justification of this plea has been replaced
by want of consent as a justification. The intention of the
mistaken party became the crucial factor, not the means by which
the result was brought about. While for a long time the plea
was permitted only where the mistake related to the nature of
the document and not to its contents, the distinction is now
rejected. No matter what the document in question be;
negligence or carelessness on the part of the executant excludes
defence of non est factum.
In Gallie v. Lee, [(1969) 2 Ch 17] a leading case in this area, the
plaintiff Mrs. Gallic a widow of 78 years of age and issueless
decided to assign by way of lease her house to her nephew
Walter Parkin. The latter had an impecunious friend Lee. One
day Lee asked Mrs. Gallie to sign a document alleging that it
was a deed of gift assigning the lease to her nephew but which
in fact was a deed of sale to Lee. Mrs. Gallie did not read the
document as she had broken her glasses and signed it. Lee
mortgaged the house subsequently to Anglia Building Society
and used the money to pay off his own debts.
While responding to the defence of non est factum, Lord
Denning M.R. went on record by observing:
Whenever a man of full age and understanding who can read
and write, signs a document which is put before him for
signature ..... a document which it is apparent on the face of it
is intended to have legal consequences, then if he does not take
the trouble to read it but signs as it is, relying on the word of
another as to the character, contents or effect he cannot be heard
to say that it is not his document.
Lord Denning also rejected the distinction drawn between the
nature of a document and its contents as irrational and held that
a mistake as to the contents of the document may be no less
fundamental than one relating to the nature or character of a
contract.
(ii) Mistake as to Identity of contracting parties
In our ordinary buying and selling contracts, the question as to
who the supplier is or who pays for it is immaterial, provided
the supply is effected and payment made. But when the goods
are sold on credit, the identity of the buyer assumes importance.
In a credit sale, the seller parts with his goods only when he has
satisfied himself about the buyers honesty and financial
capacity to pay for the goods. The identity of the buyer assumes
particular importance where the rights of the innocent third
parties are also likely to be affected. For example, a person
may give a fraudulent name belonging to a person who is known
to be credit worthy and receive goods on credit under a contract.
Then he may sell the goods to an innocent third party who
purchases them bonafide. The seller after realising his mistake
as to the identity of the buyer, may try to recover either the
goods or the price from the third party. If the contract with the
impersonator is void, the innocent third party could not get any
title to the goods; but if it is voidable the third party could get a
good title to the goods. And the contract being voidable or void
depends on the identity of the buyer. Thus, the importance of
the 'identity of the contracting party' even when both the parties
to the contract are face to face cannot be overstated [1990
C.U.L.R., p. 33].
In view of the fact that Indian decisions are scanty in this regard,
select English judgments have been considered for analysis.
Hardman v. Booth (1863) 1 H & C 803
In this case, the plaintiffs meaning to deal with Thomas Gandell
& Sons, went to their office and took an order from a person
who represented himself to be a partner in the firm. He told the
plaintiffs that the goods should be sent in the name of Edward
Gandell & Sons. He received the goods, carried them away
and sold them to the defendant, a bonafide buyer. The plaintiffs
sued the defendant to recover their goods.
Pollock C.B. while explaining the principle observed that:
"There are some cases in which it is very clear that there
is no contract at all; and the present case seems to be
one of those cases. It is argued that the contract was
made personally with the particular individual who made
the communication, it is very true that the words were
uttered by and to him; but what they imported was a
contract with Gandell & Co., the facts being that he was
not a member of the firm, and had no authority to act as
their agent, and Gandell & Co, therefore, were not the
buyers; and consequently, at no time were there two
consenting minds drawn together to the same
agreement".
Phillips v. Brooks (1919) 2 ICB 243
In this case, a man, called North, entered the plaintiff shop and
selected some pearls and some rings worth 3000. He produced
a cheque book and wrote out a cheque for the amount. In signing
it he said "you see who I am. I am Sir George Bullough". The
plaintiff after referring to a directory and ascertaining that Sir
George Bullough did reside at the mentioned address, let the
defendant have a ring. He promised to come for the other articles
after the cheque was cleared. Before the fraud was discovered
he pledged the ring with the defendants who advanced money
bonafide, and without notice. The plaintiff sued the defendants
for the ring or its value.
On these it was held by Horridge J., that although the plaintiff
believed the person to whom he was handing the ring was Sir
George Bullough, he in fact had contracted to sell and deliver it
to the person who had come into his shop.
His intention was to sell to the person present, identified by
sight and hearing. The contract, therefore was not void on the
ground of mistake, but only voidable on the ground of fraud,
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and therefore the defendants had acquired a good title to the
ring.
This decision created an impression that there could be no
operative mistake as to identity of the contracting party in
contracts inter praesentes because when two parties contract
with each other face to face, the proper inference would normally
be that each one of them intended to contract with the other and
not with some one else [1990, CULR, p 33].
However, Prof. A.L. Goodhart [57 LQR, p 228] has questioned
the basic tenet of this decision, in the following words:
"Did the shop keeper believe that he was entering into a
contract with Sir George Bullough and did North know
this? If both answers are in the affirmative then it is
submitted that there was no contract. If a blind man
makes an offer to A, who is present, in the mistaken
belief that he is B, can A, who is aware of the mistake,
accept the offer?.... The law must have lost all touch
with reality if it holds that under such circumstances
there is a contract. Mere presence by itself cannot have
so remarkable an effect".
Ingram v. Little (1960) 3 All ER 332
In answer to an advertisement of a car being for sale, a swindler
called on two sisters who along with a third person were joint
owners of the car, and agreed with one of the sisters, E who
negotiated on behalf of the owners, to purchase the car for
717. On her categorically refusing to accept a cheque in
payment, he tried to convince her that he was a reputable person
and said that he was Mr. P.G.M. Hutchinson. While the
discussion was going on, the other sister went to the local post
office and returned to say that she had checked the name and
address in the telephone directory. They thereupon decided to
accept the cheque, on which the swindler wrote the name and
address of Hutchinson, and the owners gave the car to him.
The cheque was dishonored and the man, who was not Mr.
P.G.M. Hutchinson, disappeared. In an action by the owners to
recover the car or its value from a bonafide purchaser to whom
the swindler had sold it, within a few days of obtaining it, the
court held that the defendant was liable. In the opinion of the
court the decision must depend upon the intention of the ladies.
The question was with whom did they intend to contract, with
the man present in their drawing room or with real Hutchinson?
Did the identity of Hutchinson or the physical presence of the
man in the room preponderate? Can it be said that the prima
facie predominance of the physical presence of the false
Hutchinson identified by sight and hearing was over borne by
the identity of the real Hutchinson on the facts of the present
case? In answer to these questions the court said that there could
be no doubt that the offer which the plaintiffs made was one
made solely to, and one which was capable of being accepted
only by, the honest Hutchinson. So far as the rogue was
concerned there was no offer made to him and consequently
there could be no contract with him. His right to the car was no
more than that of a thief or a finder and he could not convey a
good title to the defendant.
Lewis v. Averay [1971] 3 All ER 907
Lewis a young man was a post graduate student of chemistry.
He had a car to sell. A man described in the judgment as "rogue"
came along and introduced himself as Richard Green, a famous
film actor. He tested and liked the car and offered a cheque.
The plaintiff was reluctant to give him the car till the cheque
was cleared, but the defendant managed to persuade him
otherwise. As a last resort, he demanded proof of identity. The
rogue produced a special pass of admission to a film studio
which showed his photograph and the official stamp. This
convinced the plaintiff and he allowed the car to be taken away
against the cheque. The rogue lost no time in selling off the car
to an innocent buyer, the defendant in this case. The worthless
cheque came back and the plaintiff sued the defendant to recover
his car.
Lord Denning M.R. held that: "For instance, in 'Ingram v. Little',
the majority of the Court suggested that the difference between
Phillips v. Brooks and Ingram v. Little was that in Phillips v.
Brooks, the contract of sale was concluded before the rogue
made the fraudulent misrepresentation, whereas in Ingram v.
Little the rogue made the fraudulent misrepresentation before
the contract was concluded. My own view is that in each case
the property in the goods did not pass until the seller let the
rogue have the goods. Again it has been suggested that a mistake
as to the identity of a person is one thing; and a mistake as to
his attributes is another. A mistakes as to identity it is said avoids
a contract, whereas a mistake as to attributes does not. But this
is a distinction without a difference. A man's very name is one
of his attributes. It is also a key to his identity. If then, he gives
a false name, is it a mistake as to his identity? or a mistake as to
his attributes? These fine distinctions do no good to the law....
As I listened to the arguments in this case, I felt it wrong that an
innocent purchaser (who knew nothing of what passed between
the seller and the rogue) should have his title depend on such
refinements. After all he has acted with complete circumspection
and in entire good faith; whereas it was the seller who let the
rogue have the goods and thus enabled him to commit the fraud.
I do not therefore accept the theory that a mistake as to identity
renders a contract void".
Thus, one would infer inconsistency as to judicial interpretation
with regard to 'mistake as to identity of contracting parties'.
(iii) Mistake as to subject matter
Similarly, mistake as to the subject matter also needs to be
examined as it would throw light on the presence of consensus
ad idem as to the subject matter in question. This kind of mistake
takes within its fold the following aspects:
(a) Different subject matters in mind:
If the parties to the agreement have different subject matters in
their mind while contracting, the agreement deserves to be
declared as void, for want of consensus ad idem.
For instance in Raffles v. Wichelhaus [(1864) 2 H & C. 906] the
defendant bought of the plaintiff a quantity of Surat Cotton "to
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arrive ex Peerless from Bombay". Two ships with the name
Peerless sailed from Bombay, one in October, which the defendant
had in mind and the other in December which the plaintiff had in
mind. On the ground of mistake as to subject matter, the court
held that there was no consensus ad idem.
(b) Existence of subject matter:
Mistake as to the existence of subject matter might prove fatal
to the creation of a valid contract. In Conturiev v. Hastie [(1856)
10 ER 1065], the contract was to purchase Indian corn described
as having been shipped from Salomica on board a chartered
ship to England. But a fortnight before the contract, the cargo
had become damaged owing to heat and had to be discharged
at an intermediate port and sold at the best price available.
Neither of the parties were aware of this fact at the time of the
contract. The court held that the contract was vitiated by mistake.
(c) Quality
Mistake as to quality of thing contracted for, raises much more
difficult questions. In Re Taylor [(1948) 11 Mod L.R. 257], it
has been suggested that distinction should be drawn between
mistake as to substance on one hand and mistake as to quality
on the other. A mistake of the former type would avoid the
contract whereas the mistake of the latter type would not. In
Kennedy v. Panama New Zealand and Australian Royal Mail
Co. Ltd., [(1867) L.R. 2 Q.B. 580], the plaintiff tool shares in a
further issue of capital by the defendant company, relying on a
statement in the prospectus that the defendant hand a contract
with the New Zealand Govt. for the carriage of mail. As a matter
of fact, the contract of the company was with an agent of the
New Zealand Govt. which the company generally believed to
be valid. Later on, after the agent had entered into the contract
with the company, the New Zealand Govt. refused to ratify it.
As a result the value of the shares fell greatly, and the plaintiff
filed a suit for rescission of the contract. The court held that the
contract was valid, as the plaintiff had got the very shares which
he had bargained for, and as his mistake did not affect the
substance of the whole transaction, the contract could not be
avoided. Similarly in Leaf v. International Gallaries [(1950) 2
K.B. 86] E bought from F a picture which both of them believed
to have been painted by Constable. Several years later, when E
tried to sell the picture he found that it was not painted by
Constable at all. The mistake though fundamental did not result
in avoidance of contract.
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SUB TOPICS
7.1 Introductory note
7.2 Application of public policy principles to contracts
(a) Forbidden by law
(b) Defeating the provisions of law
(c) Fraudulent
(d) Injurious to person and property
(e) Immoral
(f) Public policy of the State
7.3 Agreements void on account of public policy
(a) In restraint on marriage
(b) In restraint on trade
(c) Restraining legal proceedings
(d) Wagering agreements
7.1 INTRODUCTORY NOTE
The law of contract gives an opportunity of creating new rights
and obligations to every individual. Such rights and obligations
ex contractu create rights and obligating in personam. Contract
therefore creates a legal infrastructure for a capitalist and
mercantile society. In a capitalist framework each individual
has absolute freedom to design his or her rights and obligations
vis-a-vis other persons in the society, simply through the legal
instrument of contract. Thus contract subserves the principle
of private interest maximization. Generally speaking the
question of public policy cannot operate in the sphere of private
interests. The law of contract has to essentially operate within
the constitutional framework of a country, and hence the private
interest can not conflict with that higher constitutional public
interest. A few examples may not be out of place here. No
contract can be made between parties, with a view to obstructing
the discharge of the State functions, either Executive,
Legislative, or Judicial. A contract to opt out of the State
jurisdiction of the country is against public policy. Therefore,
parties to a contract can not prescribe that they shall be governed
by the English law, instead of the Indian law. Any private
contract, defacing any part of the constitutional regime is per
se void. Similarly, there cannot be a contract with unlawful
consideration, or for a criminal purpose. Public laws are always
considered to be the higher laws vis-a-vis the contract laws. As
such, while interpreting any contract, it has to be so interpreted,
that no part of the contract infringes on any public law, viz.
constitutional law, criminal law, or administrative law.
7.2 APPLICATION OF PUBLIC POLICY
TO CONTRACTS
It is evident that contract serves private interests. But it is the
responsibility of the state to see that while serving the private
interest through contracts, it does not conflict directly or
indirectly with any other private or public interests. It means
7. ROLE OF PUBLIC POLICY IN CONTRACTS
that, while individuals are free to create rights and obligations
in between themselves, it is always necessary for the state to
protect such new rights and duties of individuals, so as not to
affect the existing rights and duties towards the society or the
social interest. When an individual crosses that boundary, and
interferes with the rights of a third party or the society, such
agreements are specifically made void. Some of these public
interest policies, which invalidate any private agreement,
making them unlawful, are incorporated in Sec 23 of the
Contract Act. According to it, the consideration or object of an
agreement is lawful unless (a) it is forbidden by any law or (b)
is of such nature that, if permitted, it would defeat the provision
of any law or (c) is fraudulent or (d) involves injury to the
person or property of another or (e) the courts regard it as
immoral or opposed to public policy.
In each of these cases the consideration or object of an
agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful, is void.
At this stage it is proper to examine the meaning and scope of
illegal and void agreements. It is necessary to bear in mind that
in Sec. 23, the expressions like, unlawful or forbidden by law
etc. have been used. According to Anson, the subject of illegality
is one of great complexity and the effects of illegality are by no
means uniform. The reason for this is not hard to find. The
extent of illegality is not the same in all cases. Illegal objects
may range from those which are tainted with gross moral
turpitude e.g., murder, to those where the harm caused is
relatively small. It is not surprising, therefore, that there are
gradations in the degree of enthusiasm with which the judges
are prepared to assist a person who has an illegal object in view
or is a party to an illegal transaction. Attempts have been made
to distinguish between illegal agreement and void agreements.
In the former case, it is said that the law will refuse to aid in any
way a person who bases his cause of action upon such an
agreement. In the latter case, the law simply says that the
agreement will not have any legal effect. Undoubtedly some
agreements can be thus classified, but it is both impractical and
impossible to apply this classification to the whole subject.
Moreover, confusion is created by the fact that the judges have
on many occasions treated the terms as interchangeable. It seems
better to use the single word illegality, to cover the multitude of
instances where the law, either because of public policy or as a
result of an express prohibition, denies to one or both of the
parties the rights to which he would otherwise be entitled.
Let us now examine the interpretation of each clause of section
23 in the light of judicial decisions.
(a) Forbidden by law: According to this clause, the consideration
or object of an agreement becomes unlawful when it is forbidden
by law. Such unlawful agreements are void. For example, in
Bhikanbhai v. Hiralal [(1900) 24 Bom 622], the plaintiff was a
lessee of certain tolls under the Bombay Tolls Act, 1875. One of
the conditions of the lease was that lessee should not sublet
97
the tolls to any other person without the permission of the
collector. A of Rs. 200/- was payable for a breach of condition.
The plaintiff contracted with the defendant to sublet the toll to
him without obtaining the necessary permission. The question
was whether the agreement to sub-lease was void. The court
while negating such plea observed that, the object of statute
was not to forbid such transactions but only to regulate. As
such the transaction may be void as against the collector, but
between the parties it stands.
(b) Defeating the provisions of any law: In some cases the
enforcement of a particular agreement though not apparently
or directly forbidden by law, but would, if permitted defeat the
provisions of some law. For example, in Ram Sewak v. Ram
[AIR 1962 All 177] the agreement between the partners of a
firm to conceal income in certain respects so as to evade income-
tax has been held to be unlawful.
(c) Fraudulent: In a given agreement whenever an element of
fraud or intention to deceive creeps in, it would become a void
agreement. For example, A being an agent for a landowner,
agrees for money, without the knowledge of his principal to
obtain for B, a lease of land belonging to his principal. The
agreement between A and B is void, as it implies a fraud by
concealment, perpetuated by A on his principal.
(d) Injurious to person or property: If the object of an
agreement involves injury to a person or property, per se the
agreement becomes unlawful and thereby void. For example,
in Kanklal v. Pambayan (AIR 1927 Mad. 531) a bond to pay an
exorbitantly high rate of interest, in case the borrower left the
lender's service, has been held to be void.
(e) Immoral: While explaining the scope of the expression
'immoral' in Gherulal v. Mahadeodas (AIR 1959 SC 781) Justice
Subba Rao observed that: "The case law both in England and
India confines the operation of the doctrine to sexual immorality.
To cite only some instances, settlements in consideration of
concubinage, contracts of sale or hire of things to be used in
brothel or by a prostitute for purposes incidental to her
profession, agreements to pay money for future illicit
cohabitations, promises in regard to marriage for consideration
or contracts facilitating divorce are held to be void on the ground
that the object is immoral.
(f) Public Policy: According to this clause, whenever the object
of an agreement is opposed to public policy, it becomes a void
agreement. The crucial task of a judge in this regard is to
interpret what is public policy. In the words of Justice Subba
Rao in Gherulal's case.
"The doctrine of public policy may be summarised thus: public
policy or the policy of the law is an illusive concept, it has been
described as an 'untrustworthy guide', variable quality, 'untruly
horse', etc; the primary duty of a court of law is to enforce a
promise which the parties have made and to uphold the sanctity
of contract which forms the basis of society; but in certain cases,
the court may relieve them of their duty on a rule founded on
what is called the public policy; for want of better words Lord
Atkin describes that something done contrary to public policy
is a harmful thing; but the doctrine is extended not only to
harmful cases but also to harmful tendencies; this doctrine of
public policy is only a branch of common law, and just like any
other branch of common law, it is governed by precedents; the
principles have been crystallised under different heads and
though it is permissible for courts to expound and apply them
to different situations, it should only be invoked in clear and
incontestable cases of harm to the public; though the heads are
not closed and though theoretically it may be permissible to
evolve a new head under exceptional circumstances of a
changing world, it is advisable in the interest of stability of
society not to make any attempt to discover new heads in these
days".
The following heads of public policy have been consistently
invoked and interpreted by the Courts, in this regard.
1. Trading with an enemy.
2. Trafficking in public offices.
3. Interference with administration of justice.
4. Marriage brokerage contracts.
7.3 AGREEMENTS VOID ON ACCOUNT
OF PUBLIC POLICY
Several agreements are specifically made void on account of
public policy. As for example, an agreement in restraint of
marriage is against the natural rights of a person, i.e. the right
to family. None can deprive another by virtue of a contract to
have/not to have family relations. Even in the absence of a clear
positive prescription, agreements in restraint of marriage cannot
be held valid. Under Sec. 26 of the Contract Act, an agreement
in restraint of marriage of any person, other than a minor, is
void. Similarly, an agreement in restraint of trade, is totally
against the fundamental freedom of trade, commerce, industry
and profession. No one, including the State can take away these
rights by virtue of a contract. Under Sec. 27 of the Contract Act
such agreements are void. Some other agreements declared to
be void as being against public policy are discussed below.
Void agreements enumerated in sections 24-30
Sections 24-30 deal with specific void agreements. They are as
follows:
a. Agreements void, if considerations and objects unlawful
in part - (S.24)
b. Agreements without consideration - (S.25) (has been
explained in the earlier module)
c. Agreements in restraint of marriage (S.26)
d. Agreements in restraint of trade (S.27)
e. Agreements in restraint of legal proceedings (S.28)
f. Ambiguous agreements (S.29)
g. Wagering agreements (S.30)
Section 24 merely reiterates the principle enshrined in Section
23. The important feature of this provision is that, in case, if
98
part of the agreement only takes within its fold either unlawful
consideration or object, that part alone would become void,
provided in such agreements; such demarcation is possible.
(a) Agreements in restraint of marriage:
According to section 26, every agreement in restraint of
marriage of any person, other than a minor is void.
It seems that the policy is in favour of discouraging agreements
which restrict freedom of marriage. In an earlier case i.e., Rao
Rani v. Gulab Rani (AIR 1942 All 351) there was an agreement
between two co-widows that if any of them remarried she should
forfeit her right to her share in their deceased husband's property.
This agreement was upheld, because as the Court pointed out,
no restraint on their remarriage had been imposed on either of
the widows. The restraint was only with reference to enjoyment
of property rights.
(b) Agreement in restraint of trade:
The basic public policy principle underlying this provision is
that, every person shall be given the liberty of trade, occupation
etc. so as to exercise his powers either for his own benefit or
for community interest.
In Nordenfelt v. Maxim Nordenfelt Guns & Ammunition Co.
[(1894) A.C. 535] the House of Lords for the first time
interpreted this principle. In this case the appellant, Nordenfelt,
was a maker and inventor of guns and ammunition. He sold his
business to the respondent company for 287,500 and entered
into a covenant (later to be repeated in a contract of service)
that he would not for twenty-five years 'engage... either directly
or indirectly in the trade or business of a manufacture of guns,
gun mountings or carriages, gunpowder explosives or
ammunities or in any business competing or liable to compete
in any way with that for the time being carried on by the
Company, but expressly reserved the right to deal in explosives
other than gunpowder, in torpedoes or submarine boats, and in
metal castings or forgings. After some years Nordenfelt joined
the business of a rival company dealing with guns and
ammunition, and the respondents sought an injunction to restrain
him from doing so.
It is clear that the restraint entered into by Nordenfelt was of a
general, and not merely of a partial, nature, since there was no
limit placed on the area to which it was to extend. Nevertheless,
the House of Lords held that this did not, of itself, mean that
the covenant was void. They were of the opinion that the
covenant not to compete with the company in any business
competing or liable to compete in any way with that for the
time being carried on by the Company was unreasonable, as it
attempted to protect not only the business as it was when sold,
but any future activities of the company, and it was therefore
void; but this clause was distinct and severable from the rest of
the agreement. As for the remainder of the restraining condition,
in so far as it was for the protection of the business actually
sold, it was reasonable between the parties, because Nordenfelt
not only received a large sum of money, but also by his
reservation retained scope for the exercise of his inventive and
manufacturing skill. Moreover the wide area over which the
business extended necessitated a restraint co-extensive with that
area for the protection of the respondents. Finally it could not
be said to be contrary to the public interest since it transferred
to an English Company, the manufacture of guns and
ammunition for use in foreign lands. The restraint was therefore
valid.
From the above judgement one can infer the following
propositions:
(i) All restraints of trade, in the absence of special justifying
circumstances, are contrary to public policy and therefore
void.
(ii) Whether special circumstances do or do not justify the
restraint is a question of law, and the court interprets it very
strictly.
(iii) The restraint can only be justified if it is reasonable
(a) in the interest of the contracting parties; or
(b) in the public interest.
(iv) The burden of proof relating to reasonableness of restraint
is on the person who pleads it.
According to Sec. 27 of the Contract Act every agreement by
which, any one is restrained from exercising a lawful profession,
trade or business of any kind, is to the extent of restraint void.
Accordingly in India all agreements in restraint of trade whether
general or partial, qualified or unqualified are void. As such
the Indian Law is different from Law in England. [See
Khemchand v. Dayal Das, AIR 1942 Sind 114]. In Sheikh Kalu
v. Ram Sharan Bhagat [(1909) 13 CNN 388], 29 out of 30
makers of combs in the city of Patna agreed with the defendant
to supply him all the combs manufactured by them, and not to
sell their combs to anyone else. But the defendant had the right
to reject the goods if he found that there was no market for
them in Patna, Calcutta, or elsewhere. The court held the
agreement to be void. So also, in case of an employer and
employee there cannot be a restraint of trade after the term of
the employment is over. In Oakes & Co v. Jackson [(1876)1
Mad 134], an employee of the company agreed not to employ
himself in any similar concern within a distance of 800 miles
from Madras after leaving the company service. The restraint
was held void. The Indian Court is not supposed to go into the
question of reasonableness or otherwise. Any restraint on the
employee after the tenure of service is void in India. In this
case however English Courts would also have come to the same
decision because of unreasonableness. Restriction can however
be imposed during the term of employment. As for example, if
A takes a whole time employment in B's factory the restriction
imposed upon joining another employment at the same time is
entirely valid. An agreement of service by which a person binds
himself during the term of employment from taking any other
service is valid. As for example, in Charles v. Mcdonald [(1899)
23 Bom 103], A agreed to become an assistant for 3 years to B
who was a doctor practising in Zanzibar. It was agreed that
during the term of agreement A was not to have his own practice.
After one year A left B's job and began to practise on his own.
99
It was held that the agreement was valid and A was restrained
by injunction from practising. But in case the employee is
wrongfully dismissed, the employee becomes free from the
restrictive covenant.
In this connection one has to examine the legality of cartelization
and trade agreements to form monopoly. Sec 27 of the Indian
Contract Act does not take away the right of a trader to regulate
his business according to his own discretion and choice.
In Daulat Ram v. Dharachand [1934 Lah 170] the court held
that an agreement for trade combination for the purpose of
avoiding competition is not necessarily unlawful. But where
the agreement is clearly not for the mutual benefit of the parties
but is an attempt to create a monopoly it would be void as against
public policy.
There are exceptions to this agreement in restraint of trade being
void. These are:
(i) Sale of goodwill: According to exception to sec 27, a buyer
of a good will may impose reasonable restrictions as to time
and place on the seller of good will of a business. As for example
A buys the right to ply ferries from B with a restriction that B
shall not start a ferry service within 10 miles for a period of 5
years. This restriction is reasonable and valid. [See Chandra v.
Mallik (1921) 48 Cal 1030].
(ii) Partners' agreements: (a) Under the Partnership Act
Partners may agree not to carry on any other business, other
than the firm business, while being a partner [Sec. 11(2)(b)]. A
retiring partner may agree not to carry on business, similar to
that of the firm within specified time period and local limits
[Sec. 36(2)(c)]. Partners may, upon the dissolution of the firm,
or in anticipation make an agreement not to carry on similar
business within given local limits or a specified time period
[Sec. 54(d)]. While selling the goodwill of the firm, a partner
may agree, not to carry on similar business within a specified
local limit and for the specified period [Sec. 55(3)].
(c) Agreement in restraint of Legal Proceedings
According to Sec. 28 any agreement by which a party is
restricted absolutely from enforcing his rights under or in respect
of any contract, by the usual legal proceedings, or which
decreases the time limit within which he may thus enforce his
rights is void to that extent. Right to legal remedies is a
constitutional right and therefore any restriction on it is against
public policy. As for example, if A agrees to buy B's plot of
land at less than the market value, further agreeing that he shall
not go to the court on B's failure to give a better title, the second
part of the agreement of not going to the court is void under
sec. 28. There are of course some exceptions to this rule. These
are:
(i) Parties agreement to refer a matter to arbitration and not to
have recourse to the courts shall not make the contract
invalid.
(ii) Similarly a contract to refer to the existing system of
arbitration is also valid, if the written agreement between
the parties, restrains them from taking recourse to the court.
Reference to M/s. Kerala Electrical and Allied Engineering
Co. Ltd v. Canara Bank and Others (AIR 1980 Ker. 151)
would not be out of place at this juncture. In this case a
clause in a bank guarantee is subjected to judicial scrutiny.
The said clause runs as follows:
"This guarantee will remain in force for a period of one
year from the date hereof and unless a suit or action to
enforce claim under the guarantee is filed against us within
six months from the date of expiry of (the guarantee) all
your rights under the said guarantee shall be forfeited and
we shall be relieved and discharged from all liability
thereunder"
While interpreting the clause in question, the court went on
record by saying:
"Section 28 makes two kinds of agreements void. What
we are concerned in this case is the second of the two kinds,
namely an agreement which limits the time within which a
party thereto may enforce his rights under or in respect of
a contract be the usual legal proceedings in the ordinary
tribunals. It is the limiting of the time within the rights are
to be enforced that is made void. So it goes without saying
that rights to be enforced under the contract should continue
to exist even beyond the shorter period agreed for enforcing
those rights, to make such an agreement void under the
section. If, for example, beyond the shorter period agreed
upon the rights under the contract cannot be kept alive, no
limiting of the time to enforce the rights under the contract
arises and hence the agreement putting a time limit to sue
will not be hit by S. 28".
(d) Wagering agreements
A wagering agreement is one in which there is a promise to pay
money or its worth upon the determination or ascertainment of
an uncertain future event. According to sec 30 of the Contract
Act, all agreements by way of wager are void and no suit shall
be brought for recovering anything alleged to be won by any
wager, or entrusted to any person to abide the result of any
game or other uncertain event in which a wager is made.
Hawkins, J., beautifully explained the term wagering in Carlill
v. Carbolic Smoke Ball Co. [(1892) 2 Q.B. 484], a wagering
contract is one by which two persons, professing to hold
opposite views touching the issue of a future uncertain event,
mutually agree that, "dependant on the determination of that
event, one shall win from the other, and that other shall pay or
handover to him, a sum of money or other stake; neither of the
contracting parties having any other interest in that contract
other than the sum or stake he will so win or loose, their being
no other real consideration for the making of such contract by
either of the parties. It is essential to a wagering contract that
each party may under it either win or loose ..... If either of the
parties may win but cannot loose but may loose and cannot
win, it is not wagering". Therefore the following are the
characteristics of a wagering agreement:
(i) It must be a promise to pay money or money's worth.
(ii) The promise is conditional on the happening of an uncertain
future event.
100
(iii) One party should win and the other should loose.
(iv) Both the parties cannot loose or both the parties cannot
win.
(v) Both the parties have an equal chance in the game.
(vi) There is no other consideration.
In Gherulal v. Mahadeodas (AIR 1959 SC 781) it was held that
a wagering agreement is struck down not on the ground of
public policy but because it is void under sec 30 of the Indian
Contract Act. The State, in which gaming or gambling is illegal,
a wagering agreement is also illegal. As for example wagering is
illegal in Bombay. In England wagering is both void and unlawful
on ground of public policy.
Sometimes it is very difficult to understand the distinction
between genuine commercial transaction and a wagering
agreement. Suppose A & B enter into an agreement of future
sale and purchase of wheat at Rs. 280/- per bag to be delivered
after three months it is very difficult to understand whether it is
a good commercial transaction with an object of delivering the
goods or it is a wagering agreement speculating on the price
and payment of the difference. In a wagering agreement neither
party would intend to perform the contract but pay only the
differences [Ram Krishan Das v. Musaddilal (AIR 1942 All
170)]. Option dealings in a stock exchange is not necessarily a
wager unless it can be positively proved that both the parties
intended not to give and take delivery. Of course recent
directions of SEBI prohibit option dealings in securities.
Lotteries are both void and illegal because of application of sec
294 A of IPC. Where the Govt. authorizes the holding of a
lottery, for developmental purposes, persons conducting the
lottery will not be punished, as the agreement is made valid by
prescription of law. Similarly prizes for horse racing or an
agreement to subscribe or contribute towards any plate, price
or sum of money of the value of Rs. 500/- or more shall not be
deemed to be unlawful.
101
8. VOID AGREEMENTS
SUB-TOPICS
8.1 Introductory Note
8.2 Grounds of Void agreement
8.3 Uncertain agreement
8.1 INTRODUCTORY NOTE
An agreement is void if it is unenforceable by law. A void
agreement is different from a void contract, in the sense that
void agreement is void ab initio. It is void per se and therefore
parties need not agitate over the issues in the court of law. A
void contract on the other hand is a contract becoming
unenforceable due to various reasons. As for example:
(i) By a decree of nullity in the court of law
(ii) Parties entitled to avoid opted for avoiding the contract
(iii) Due to change of circumstances, the performance of the
contract has become impossible. The performance of void
agreements may be necessarily be illegal. Only when the
performance would involve an illegal act, would it be a
punishable offence. A void agreement is merely
unenforceable, and not generally punishable.
8.2 GROUNDS OF VOID AGREEMENTS AT A
GLANCE
In the following cases an agreement is void ab initio:
(i) agreement entered into by a minor or a person incapable
of entering into it (secs. 11, 12)
(ii) an agreement vitiated by mistake of both the parties of an
essential fact (sec 20).
(iii) An agreement having unlawful object or unlawful
consideration (sec. 24)
(iv) An agreement without consideration (sec 25)
(v) An agreement in restraint of marriage (sec 26)
(vi) An agreement in restraint of trade (sec 27)
(vii) An agreement in restraint of legal proceedings (sec 28)
(viii) An uncertain agreement (sec 29)
(ix) An agreement by way of wager (sec 30)
(x) An agreement to do an act impossible in itself (sec 36)
Most of these agreements which are void ab initio as indicated
have already been explained in the previous topic. Some of the
other void agreements are discussed in module II concerning
consideration and capacity. Therefore, let us examine the one
which is left out, viz., uncertain agreements.
8.3 UNCERTAIN AGREEMENTS
An agreement which is uncertain is void. An uncertain
agreement means an agreement where any terms of an
agreement is not certain or capable of being certain. Some
illustrations of an uncertain agreement where some term is not
certain or capable of being certain can now be taken. A agrees
to sell to B 100 tonnes of oil. There is nothing to show what
kind of oil is intended. This agreement is void. But suppose A
agrees to sell 100 tonnes of oil with a brand name there is no
uncertainty; or suppose A who is a dealer in mustard oil only,
agrees to sell 100 tonnes of oil there is no uncertainty here as
well. A issues a cheque without specifying any amount. This is
not uncertain because the person who receives the cheque may
fill in the blank. This is simply empowering the payee to name
the amount. Suppose A wants to sell his white horse for Rs.
7000/- or Rs. 8000/- there is nothing to show as to the price he
actually wants. Therefore there is uncertainty and the agreement
is void.
102
When an agreement is void or the contract becomes void any
party receiving any benefit under such agreement or contract is
bound to restore it, to compensate the person from whom he
received it. Suppose A pays B Rs. 1000/- in consideration of B
promising to marry C, but C is dead at the time of the promise,
the agreement is void. So B must pay back Rs 1000/- to A. Or
say A gives B Rs. 1000/- for promising not to marry. The
agreement is void so B has to return the money to A. According
to Sec. 65 of the Indian Contract Act the person who has
received advantage under void agreement or void contract has
9. CONCLUDING REMARKS
the obligation of returning the advantage. This is known as
principle of restitution. Sec 65 is not applicable if the parties
are wholly incompetent to contract. A minor cannot be asked
to restore the benefit Mohori Bibi v. Dharmodas Ghose [(1903)
ILR 30 Cal. 539] but in Daviah v. Shivamma (AIR 1959 Mad
188), it was held that the court may on equitable grounds order
a minor representing himself to be a major while entering into
an agreement, to restore the benefit received. Where the benefit
cannot be restored the party must be asked to compensate.
103
Sec 13. "Consent" defined - Two or more persons are said to
consent when they agree upon the same thing in the same sense.
Sec 14. "Free consent" defined - Consent is said to be free
when it is not caused by -
(1) coercion, as defined in Section 15, or
(2) undue influence, as defined in Section 16, or
(3) fraud, as defined in Section 17, or
(4) misrepresentation, as defined in Section 18, or
(5) mistake, subject to the provisions of Sections 20, 21 and 22.
Consent is said to be so caused when it would not have been
given but for the existence of such coercion, undue influence,
fraud, misrepresentation or mistake.
Sec. 15 - "Coercion" defined - "Coercion" is the committing, or
threatening to commit, any act forbidden by the Indian Penal
Code, or the unlawful detaining, or threatening to detain, any
property, to the prejudice of any person whatever, with the
intention of causing any person to enter into an agreement.
Explanation - It is immaterial whether the Indian Penal Code is
or is not in force in the place where the coercion is employed.
Sec. 16 "Undue influence" defined - (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 is in a position
to dominate the will of the other and uses that position to obtain
an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the
foregoing principle, 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 or where he stands in a fiduciary relation to the
other; or
(b) where he makes a contract with a person whose
mental capacity is temporarily or permanently
affected by reason of age, illness, or mental or bodily
distress.
(3) Where a person who is in a position to dominate the will of
another enters into a contract with him, and the transaction
appears, on the face of it or on the evidence adduced, to be
unconscionable, the burden of proving that such contract
was not induced by undue influence shall lie upon the
person in a position to dominate that will of the other.
Nothing in this sub-section shall affect the provisions of Section
111 of the Indian Evidence Act, 1872.
Sec. 17 "Fraud" defined - "Fraud" means and includes any of
the following acts committed by a party to a contract, or with
his connivance, or by his agent, with intent to deceive another
party thereto or his agent, or to induce him to enter into the
contract:-
(1) the suggestion, as a fact, of that which is not true, by one
who does not believe it to be true;
10. BARE TEXT OF THE RELEVANT SECTIONS
(2) the active concealment of a fact by one having knowledge
or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specifically declares to
be fraudulent.
Explanation - Mere silence as to facts likely to affect willingness
of a person to enter into a contract is not fraud, unless the
circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or
unless his silence is, in itself, equivalent to speech.
Sec. 18 "Misrepresentation" defined - "Misrepresentation"
means and includes -
(1) the positive assertion, in a manner not warranted by the
information of the person making it, of that which is not
true, though he believes it to be true;
(2) any breach of duty which, without an intent to deceive,
gains an advantage to the person committing it, or any one
claiming under him, by misleading another to his prejudice
or to the prejudice of any one claiming under him;
(3) causing, however innocently, a party to an agreement to
make a mistake as to the substance of the thing which is
the subject of the agreement.
Sec. 19 Voidability of agreement without free consent - When
consent to an agreement is caused by coercion, fraud, or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or
misrepresentation, may, if he thinks fit, insist that the contract
shall be performed, and that he shall be put in the position in
which he would have been if the representations made had been
true.
Exception - If such consent was caused by misrepresentation
or by silence, fraudulent within the meaning of Section 17, the
contract, nevertheless, is not voidable, if the party whose consent
was so caused had the means of discovering the truth with
ordinary diligence.
Explanation - A fraud or misrepresentation which did not cause
the consent to a contract of the party on whom such fraud was
practised, or to whom such misrepresentation was made, does
not render a contract voidable.
Sec. 19A Power to set aside contract induced by undue influence
- When consent to an agreement is caused by undue influence,
the agreement is a contract voidable at the option of the party
whose consent was so caused.
Any such contract may be set aside either absolutely or, if the
party who was entitled to avoid it has received any benefit
thereunder, upon such terms and conditions as to the Court may
seem just.
Sec.20 Agreement void where both parties are under mistake
as to matter of fact - Where both the parties to an agreement are
104
under a mistake as to a matter of fact essential to the agreement,
the agreement is void.
Explanation - An erroneous opinion as to the value of the thing
which forms the subject-matter of the agreement is not to be
deemed a mistake as to a matter of fact.
Sec.21 Effect of mistake as to law - A contract is not voidable
because it was caused by a mistake as to any law in force in
India; but a mistake as to a law not in force in India has the
same effect as a mistake of fact.
Sec.22 Contract caused by mistake of one party as to matter of
fact - A contract is not voidable merely because it was caused
by one of the parties to it being under a mistake as to a matter
of fact.
Sec.23 What considerations and objects are lawful and what
are not - The consideration or object of an agreement is lawful,
unless -
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the
provisions of any law; or
is fraudulent; or
involves or implies injury to the person or property of another,
or the Court regards or it immoral, or opposed to public policy.
In each of these cases, the consideration or object of an
agreement is said to be unlawful. Every agreement of which
the object or consideration is unlawful is void.
Sec. 24 Agreements void, if considerations and objects unlawful
in part - If any part of a single consideration for one or more
objects, or any one or any part of any one of several
considerations for a single object, is unlawful, the agreement is
void.
Sec. 26 Agreement in restraint of marriage void - Every
agreement in restraint of the marriage of any person, other than
a minor, is void
Sec.27 Agreement in restraint of trade void - Every agreement
by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void.
Saving of agreement not to carry on business of which goodwill
is sold.
Exception 1 - One who sells the goodwill of a business may
agree with the buyer to refrain from carrying on a similar business,
within specified local limits, so long as the buyer, or any person
deriving title to the goodwill from him, carries on a like business
therein, provided that such limits appear to the Court reasonable,
regard being had to the nature of the business.
Sec. 28 Agreements in restraint of legal proceedings void -
Every agreement, by which any party thereto is restricted
absolutely from enforcing his rights under or in respect of any
contract, by the usual legal proceedings in the ordinary
tribunals, or which limits the time within which he may thus
enforce his rights, is void to that extent.
Saving of contract to refer to arbitration dispute that may arise.
Exception 1 - This section shall not render illegal a contract, by
which two or more persons agree that any dispute which may
arise between them in respect of any subject or class of subjects
shall be referred to arbitration, and that only the amount awarded
in such arbitration shall be recoverable in respect of the dispute
so referred.
Saving of contract to refer questions that have already risen.
Exception 2 - Nor shall this section render illegal any contract
in writing, by which two or more persons agree to refer to
arbitration any question between them which has already arisen,
or affect any provision of any law in force for the time being as
to references to arbitration.
Sec. 29 Agreements void for uncertainty - Agreements, the
meaning of which is not certain, or capable of being made
certain, are void.
Sec. 30 Agreements by way of wager void - Agreements by
way of wager are void; and no suit shall be brought for
recovering anything alleged to be won on any wager, or
entrusted to any person to abide the result of any game or other
uncertain event on which any wager is made.
Exception in favour of certain prizes for horse-racing - This
section shall not be deemed to render unlawful a subscription
or contribution, or agreement to subscribe or contribute, made
or entered into for or toward any plate, prize or sum of money,
of the value or amount of five hundred rupees or upwards, to
be awarded to the winner or winners of any horse-race.
Section 294A of the Indian Penal Code not affected - Nothing
in this section shall be deemed to legalize any transaction
connected with horse-racing, to which the provisions of Section
294A of the Indian Penal Code apply.
105
11. CASE LAW
Raghunath Prasad V. Sarju Prasad AIR 1924 PC 60
In this case, the defendant and his father were equal owners of
a vast joint family property over which they had quarrelled.
Consequently the father had instituted criminal proceedings
against the son. The defendant in order to defend himself,
mortgaged his properties to the plaintiff and borrowed from
him about ten thousand rupees on 24% compound interest. In
eleven years this rate of interest had magnified the sum covered
by the mortgage more than elevenfold. The defendant contended
that the lender had by exacting high rate of interest, taken
unconscionable advantage of his mental distress and, therefore,
there should be presumption of undue influence.
While negativing such plea, the court held that the borrower
failed to prove that the lender was in a position to dominate his
will. The only relation between the parties that was proved was
simply that they were lender and borrower. The first requirement
of section 16 was, therefore, not fulfilled and, therefore, the
borrower was not entitled to any relief.
Schroeder Music Publishing Co. v. Macaulay (1974) 1 WLR
1308
In this case there was an agreement between a young song writer
and a Music Publishing Co. The arrangement was to remain in
force for 5 years and was to be automatically extended for
another five years should the royalty from the boy's musical
work reached the figure of 5,000. The Company could
terminate the agreement at any time by giving a month's notice.
The boy had no such right and he wanted to get out of it. The
House of Lords ordered his liberation from the bond. The
contract was on the terms of Company's standard terms and
was, therefore, the result of the company's dictation.
Said v. Butt (1920) 1 KB 497
In this case the plaintiff knew that on account of his adverse
criticism of some members of a theatre, he would not be allowed
to be present at the first performance of a play at the theatre. A
ticket was obtained for him by his friends without disclosing
that it was for him. But the defendant, the managing director of
the theatre, refused him admission on the night in question.
The plaintiff sued him for inducing breach of contract.
It was held that there was no contract between him and the
theatre. While elaborating the court went on record by observing:
"The non-disclosure of the fact that the ticket was bought
for the plaintiff prevented the sale of the ticket from
constituting a contract, the identity of the plaintiff being
in the circumstances a material element in the formation
of the contract."
Gurumukh v. Amar Singh (1991) 3 SCC 79
In this case the court, held that where two bidders had agreed
to supplement one anothers' bids at an auction without any
intention to lower the price of the item or to defraud the
government, the object of the agreement was lawful and valid.
V. Parthasarathy v. Controller of Capital Issues (or the
Larsen Toubro Case) AIR 1991 SC 1420
In this case the court held that although a company may purchase
another's shares in the open market, if the transaction is done
surreptitiously, with a malafide intention and by using a public
financial institution in a clandestine manner, the transaction
would be void as contrary to public policy by reason of section
23 of Contract Act.
Reddiar v. Periara AIR 1991 Ker. 388
In this case an agreement for sale did not state the exact survey
numbers or precise limits of the property to be sold. The
agreement was thus challenged as void for uncertainty. The
court held that as there was only one item of property that could
be legally conveyed and this item of property approximated
that referred to in the agreement and so both parties were well
aware of the property to be conveyed, there was no uncertainty.
106
12. PROBLEMS
1. The appellant a jeweller was insured by a company against
loss by theft with the exception of jewellery "entrusted to a
customer". Mrs. E posing as the wife of a wealthy customer
made a few purchases from the appellant to inspire
confidence, and then was allowed to take away two pearl
necklaces of considerable value 'on approval' to show her
supposed husband. She made away with the necklaces and
the jeweller demanded compensation from the insurance
company. The insurance company refused stating that this
was covered by exceptions. Decide. Give reasons.
2. A plaintiff was induced to purchase a lorry by the
defendant's representation that it was in an excellent
condition. On the first journey after the sale, the dynamo
broke and the plaintiff noticed several other serious defects.
When the plaintiff informed this to the defendant he offered
to pay half the cost of repairs. On the next long journey,
the lorry broke down completely and the plaintiff realised
that it was in a deplorable condition. He claimed to rescind
the contract. Decide with reasons.
3. The Commonwealth Disposal Commission invited tenders
for the purchase of a wrecked vessel described as 'an oil
tanker on the Jurmaund Reef approximately 100 miles north
of Samarai in New Guinea'. The plaintiff Merae's tender
was accepted and he thereupon fitted out a salvage
expedition at considerable expense. He came to now on
this expedition that there was no oil tanker in the locality
indicated, nor was there such a Reef called as Jurmaund
Reef. The plaintiff brought an action claiming damages.
The defendant argued that the agreement was based upon
mutual mistake as to the existence of subject matter,
therefore, void ab initio as such the defendant was not bound
to pay any damages. Decide. Give reasons.
4. 'X' has entrusted cotton yarn for despatch to the 'Associated
Transport Corporation Ltd' to the identified consignee in
Delhi. The United India Insurance Company has covered
these assignments. The goods reached Delhi. But the
consignee refused to take delivery of 5 bales of cotton yarn
since they were found to be in a damaged condition. The
damaged yarn was re-booked through the Delhi office of
the carrier on the request of the consignor. They were taken
delivery off by the consignor in a damaged condition. The
damage was assessed by the surveyor. The consignor
submitted a claim to the insurer. The claim was settled at
Rs. 10,89480 and paid by the insurer. The insurer became
subrogated to the rights of the consignor. Thereafter, the
insurance company filed the suit for recovery of damages
from the carriers alleging negligence. The consignment
contained printed words 'subject to Bombay jurisdiction
alone' and also the following clause: "The goods required
to be collected from the depot within six months from the
date of arrival, otherwise the goods would be forfeited."
Examine the validity of these two clauses.
5. 'X' Company has entered into an agreement with M/s. ABC
& Co. a firm dealing with retail sales of certain products.
The agreement contains a clause which inter alia places
restriction on M/s. ABC & Co. to exclusively deal with the
products of X Co only for a minimum period of two years.
Decide the validity of the clause.
6. X & Co has entered into an agreement with Y & Co whereby
X was to supply a generating set. In the process of entering
into such agreement the Manager of X & Co observed that
his Company's generating set can work without any
mechanical defect for a continuous period of 5000 hours
from the moment of installation. In fact the set has no such
proven record. Assuming that Y & Co has agreed to
purchase, examine under what circumstances, Y & Co may
withdraw from the contractual relations.
7. 'X' has entered into an agreement with Y & Co. The object
of the agreement is to lobby the government, so that some
favourable decisions may be taken in favour of Y & Co.
The agreement provides for consultancy charges. Examine
the validity of such agreement.
8. X, a student of St. Xaviers College has entered into an
agreement with his own professor Y. The agreement is to
sell his motorbike for Rs. 25,000/-. However, his father
wants to challenge the contract. Advise him.
9. X took employment as clerk-cum-typist in a University and
agreed not to serve in that capacity for anyone else in any
part of India. Examine the validity of the agreement.
[ Note: Specify your name, ID no. and address while sending answer papers]
107
13. SUPPLEMENTARY READINGS
1. Avtar Singh (1985) Law of Contract, Eastern Book Co., Lucknow, pp. 126-158.
2. Anson (1984) Law of Contract, English Language Book Society and Oxford University Press, London, pp. 179-289.
3. P.S. Atiyah (1986) Introduction to Law of Contract, Claendon Press, Oxford, London.
4. Cheshire and Fifoot (1986) Cases and materials on Contract, Butterworth, London, pp. 129-225.
5. Cheshire and Fifoot (1987) Law of Contract, Butterworth, London.
6. A.L. Godhart, Mistake as to identity in the Law of Contract, 57 LQR, 1941, pp 221-235.
7. Joga Rao. S.V. (1991) Cases and materials on contract (NLSIU Publication).
8. Kesava Rao (1990) Contract Inter Praesentes - Mistake in Identity, C.U.L.R. 33.
9. Pollock and Mulla (1986) Indian Contract and Specific Relief Acts, J.L. Kapur (ed), Tripathi, Bombay, pp 126-166.
10. Puri and Ponuswamy (1974) Cases and materials on contract, Eastern Book Co., Lucknow.
11. Trietal, G.H. (1966) Law of contract, Stevensons, London, pp 107-235.
12. Venkatesh Iyer (1987), (Reprint) Law of contract, Asia Law House, Hyderabad, pp. 140-142 and 308-314.
108
PUBLIC & GOVERNMENT CONTRACT
ENGINEERING CONTRACT & QUASI CONTRACT
Master in Business Laws
Law of Contracts
Course No: I
Module No: IV
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
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109
Materials Prepared By:
1. Prof. V.S. Mallar
2. Prof. N.L. Mitra
Materials Checked By:
1. Ms. Sudha Peri
2. Ms. Archana Kaul
Materials Edited By:
1. Prof. P.C. Bedwa
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
110
Instructions
In the Third World Countries the government plays an important role in using contract for generating public goods
as well as distribution of the same. Even under capitalism state has a distinct role in economic operations. The
famous economist Keynes himself attributed a big role to the state, especially at the time of inflation or stagflation.
State has to take at that time a direct role in welfare activities, so that, money can percolate through the economic
system, in order to generate public response to the market. These are all done by the government in the name
of the state through the medium of contract. So whether it be in a developing economy or a developed economy
state makes various types of contracts and manages them.
An individual when he enters into a contract, is not accountable in any way for any thing outside the purview
of the contract. But that is not so in the case of government and public contracts. As a result, state bureaucracy
has to function within the framework of detailed rules and regulations because in the government contracts several
issues beyond the contract can be raised. As for example, authority to enter into the contract itself can be
challenged, the decision of finalising a specific party can be questioned, or the very methodology of the whole
exercise itself can be debated. That makes government and public contracts a special category of study by itself.
In this module, the intention is to acquaint you all with the basic framework of government and public contracts.
In many cases even the big private enterprises also follow a detailed procedure for big contracts, especially
engineering contracts. The main issue at this level is not the question of what is the contract, but relates to how
is the contract made? As such many management issues are also concerned. The general rule of contract can
explain things within the framework of a contract, because it is confined to the individual parties, who are
themselves masters in designing their rights and duties through the instruments of contract. But representative
contracts be it governmental or not, can be related to many constitutional issues, such as, authority, manner of
making the contract, principles of natural justice, so on and so forth. In representative contract therefore,
procedure plays a very important role at every stage, and hence it is our intention to bring out in preliminary orders
such procedures.
A paper on Contract Administration, by H.B. Mirchandani has been briefly referred to in this module. Many
other authors have also been referred to. It is advisable for those of you who want to know more details, and whose
job deals with government and public contracts, to refer to the books mentioned in the supplementary readings.
I am sure you will be benefitted by this module.
N. L. Mitra
Course Co-ordinator
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Public & Government Contract, Engineering Contract
& Quasi Contracts
TOPICS
1. Public & Government Contract .......................................................................................... 112
2. Engineering Contract ............................................................................................................ 123
3. Quasi Contract ........................................................................................................................ 130
4. Case Law .................................................................................................................................. 133
5. Problems .................................................................................................................................. 139
6. Supplementary Readings ...................................................................................................... 141
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SUB TOPICS
1.1 Introduction
1.2 Constitutional Framework
1.3. Constitutional Limits and Limitations
1.4. Personal Liability in Government Contract
1.5. Nature of Contractual Relation
1.6. Diverse Types of Contracts
1.7. Selection of Contractor
1.8. Public Law Remedy in Government Contracts
1.9. Statutory Discretion and Government Contracts
1.10. Financial Control
1.1 INTRODUCTION
It is true that Contract is the device through which people
create rights and duties privately in between themselves. In a
free market economy, the role of the state is limited to provide
facilities for creating and implementing these rights and duties
mutually agreed upon. Excepting that, state does not have any
other role. But, in case of a Welfare State, the state has the
power of intervention in order to ensure welfare of the people
and also to see that no private agreement stands in the way of
individual and societys interst. On the other hand, in a socialist
country, the state is a necessary party in all contracts between
two or more citizens. Any private agreement can be made
unenforceable on the plea of public interest. In a mixed
economy, contract as a method of creating private right and
duty, is accepted but the state creates a ring around the free
contract area. Only parties obtaining licence, quota or permit
from the appropriate authority can enter into the area of freedom
of contract.
1. PUBLIC & GOVERNMENT CONTRACT
Protective line
on the logic of
public policy &
public interest
<
Area of freedom
of contract
>
Entry through
licence, quota, and
permit
State itself is a corporate body and can enter into a contract in
order to carry on its functions. There are two types of contracts
entered into by a state. Firstly, in order to perform its external
obligations and protecting national interest, the state has to enter
into various bilateral and multipartite contracts. These contracts
are regulated by international bodies in international legal regime.
Secondly, in order to discharge sovereign functions of a State,
it has to enter into several types of contracts inside the state.
These contracts are formally entered into by the Government in
the name of the Sovereign (symbolic political sovereign). As
for example, according to Article 299 of the Constitution of India,
all contracts made in the exercise of the executive power shall be
expressed to be made by the President. These contracts are
generally known as government contracts. In a welfare State
or a Socialist State, state enters into many types of contracts.
India is theoretically a socialist state and, as such, state plays
an active role in regulating this private legal area in the name
of public duty and public interest. Besides, in India the
concept of State has been given a liberal interpretation by Article
12 of the Constitution. According to Art.12, the State includes
the Government and Parliament of India, and the Government
and the Legislature of each of the States and all local or other
authorities within the territory of India or under the control of
the Government of India. In the International Airport
Authority case, (AIR 1979 SC 1628) the Supreme Court has
given a very expanding meaning to state in order to include
all public sector bodies in the concept of local bodies and other
authorities. As such, the area of government contracts has
widened. A government company, under such an interpretation,
is an instrumentality of the State. Government contracts are
treated as public contracts. But all public contracts are not
government contracts. Various public bodies enter into contracts
which may not be governmental in character.
Sometimes, some contracts between private persons may
involve huge dimensions, so much so that interest of a large
number of people may be concerned, for example, several types
of engineering contracts or service contracts. Such huge
contracts require detailed procedure both at the formational stage
as well as implementation stage, so that interest of all parties
are adequately protected. These contracts are also of various
types like lump-sum contracts, commissioning contracts,
turnkey contracts, labour contracts, etc.
Sometimes, in a given situations, we have to construct a
contractual relation due to application of principle of equity
and justice. This construction of contractual obligation is known
as fictional, constructive or quasi contract.
1.2 CONSTITUTIONAL FRAMEWORK
The province of Government contract has become increasingly
significant in the modern world. The Government is constantly
impelled to deal with the public at large by giving employment,
by issuing license, entering into contract or some benefits.
Although contract is fundamentally a matter of private law, the
government contract partakes the dual character of administrative
and contractual powers. The Government contract has become
today a matter of public law. The Government has become
subject to public law discipline in the contractual arena and
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problems of estoppel, principles of natural justice, limitations in
terms of fundamental rights and the applicability of the writ
jurisdiction of the superior courts have increasingly been
considered in the context of giving a good-bye to the earlier
purely private law approach. The judicial approach has been to
emphasise administrative aspects more than purely contractual
aspects. The judicial shift from purely private approach to
functionally public law approach thereby implying the
applicability of the fundamental principles of administrative law
and the constitutional law has been both instructive and
interesting.
The Government, while exercising diverse commercial activities
will have to resort to numerous contracts. Thus, Governments
are parties to construction contracts, procurement contracts,
repairing contracts, research and development contracts,
licensing contracts and service contracts. The cardinal feature
of the governmental contracts consists in the public
accountability and constitutional responsibility in the
negotiation, formation, conclusion, performance and
termination. In India, for the purpose of power and capacity of
the government to enter into contract and essential preliminaries
for the formation of such contract the relevant article is Art.299
of the Constitution of India. Of course, Art 299 confines itself
to contract in the exercise of executive power of the appropriate
state. If Government enters into the contract in the exercise of
statutory power, the relevant statute also becomes the
appropriate guide for determining its validity.
No doubt, Art.299 specifies the triple conditions which the
contract made by the Government should fulfill:
1. Such contracts must be expressed to be made by the
President/Governor as the case may be.
2. Such contracts are to be executed by such a person in such
a manner as the President/Governor may authorise.
3. Such contracts are to be executed on behalf of the President/
Governor as the case may be.
Art.299 clearly lays down specific procedural essentials for the
exercise of the contractual power by the State. The fundamental
purpose and function of Art. 299 appear to be that the
Government should not be saddled with the consequences
arising from unauthorised contracts, for this would place public
funds in jeopardy. At the same time, it is extremely inconvenient
and practically impossible to insist that each and every contract
must be in the prescribed manner or in a particular form. The
judicial approach to Art. 299 has sought to balance the aforesaid
two competing interests. The Courts have held that Art. 299 is
mandatory and therefore there cannot be estoppel against
Government contracts or ratification of such contracts in
contravention of Art. 299. If such claims are entertained, it
would result in repeal of a paramount provision in the
constitution which is intended for protection of the public
interest.
It must be borne in mind that the power to enter into contract is
an exercise of executive power. Art.298 makes it abundantly
clear that the executive power extends to the making of
contracts. Art. 298 in its original form reads thus The executive
power of the union and each of the state shall extend, subject to
any law made by the appropriate legislature, to the grant, sale,
disposition or mortgage of any property held for the purposes
of the union or of such state, as the case may be, and to the
purchase or acquisition of property for these purposes
respectively and to the making of contracts. After the
amendment of Art.298 by the Constitution (Seventh
Amendment Act) 1956, the power of the appropriate
Government to enter into the contract is not conditioned by the
scheme of distribution of legislative power.
The exercise of the contractual power is as important as the
existence of such power. A party interested in contracting with
the government is deemed to be fully aware of the variety of
requirements as to the procedure and form of the contract. These
procedural requirements are in the nature of conditions
precedent for the constitutionality of a contract, the
contravention of which renders the contract invalid. These
procedural requirements are required to be distinguished from
the terms and the conditions of the contract which regulate the
performance of the contract after it is made.
The formal requirements embodied in Art. 299 of the
Constitution require some clarification:
1. The contract must be in writing: There are a number of
interpretations in this area of government contract as to
whether the written document should be formal or informal.
If a formal contract deed or contract culminates from the
consolidated correspondence and is not expressed through
a formal deed it would suffice. The preponderance of the
judicial decisions has been in favour of the proposition that
it should be valid and binding contract between the parties
despite the fact that it is not formally made and has been
entered through correspondence. The word execute in
Art.299(1) should not necessarily mean the execution of a
formal document of contract. It simply conveys the
meaning that it should be in writing. [K.P. Choudhury v.
State of MP AIR 1967 SC 203; Union of India v. N.K.
Pvt. Ltd. AIR 1972 SC 915].
2. The contract expressed to be made by the President/
Governor as the case may be: The aforesaid constitutional
requirements insist that the contract be expressed as having
been made in the name of the President/Governor. Hence
no valid document can be executed in the name of the
Central Government or State Government and such
contracts will not be valid and binding. It was held by the
Kerala High Court in K.N. Vidyadharan v. State of Kerala
[AIR 1980 Ker 212] that a contract made by the
Government of Kerala is not a contract made on behalf
of the Governor and therefore there is no valid contract in
the contemplation of the constitution.
3. The contracts must be entered into in such a manner as the
President/Governor may direct: No specific law, rule,
resolution or otherwise has been made to prescribe the
manner in which contract be executed. However, all the
114
requirements which are prescribed by the constitution
cannot be dispensed with or waived by any law made by
the Parliament or the State legislature or by the consent of
the parties to the contract. But, a supplemental law is not
however forbidden. A Parliamentary law or a law made
by the State legislature may provide for some more formal
requirements in addition to those already enumerated in
Art.299 sub clause (1) of the Constitution.
In Karamshi v. State of Bombay, [AIR 1964 SC 1714], a contract
between the Minister of Public Works Department (PWD) and
the appellant firm was repudiated by the Government of Bombay
on the solitary defense that the contract was not expressed in
the name of the Governor who constitutionally represents the
State. The reliefs sought by the appellant were specific
performance of the contract or in the alternative damages for
the breach of the contract. The Supreme Court dismissed the
appeal on the singular preliminary ground of the failure to comply
with the mandatory requirements of Art. 299(1).
The Courts have more often than not adopted a pragmatic
attitude in this area realising fully well that the insistence of too
rigid postures and observance of all the conditionalities
embodied in Art. 299 would be highly impracticable and greatly
inconvenient from the administrative point of view. Hence the
judicial approach to Art. 299 has sought to reconcile and
harmonize two conflicting requirements:
1. to safeguard the interest of the government from
unauthorised contracts.
2. to protect the bonafide contracting parties who enter into
the contracts with the governments without complying with
all or some of the formalities mentioned in Art. 299. A
strict and rigid compliance would result in inequitable
consequences as far as private parties are concerned. Hence
the courts have softened the rigours of the formalities
prescribed in Art. 299 by judicial interpretation taking into
account fact situations. This equitable protective umbrella
has been applied by the Supreme Court in respect of
government contracts in the following cases.
In the State of West Bengal v. B.K. Mandal, [AIR 1972 SC
77], the contract did not comply with the formalities found in
Art. 299 but the contractor was ordered to be restored back any
advantage received by the government applying Section 65 of
the Indian Contract Act 1872. Likewise, where the contract
for the supply of goods have been found to be void for non-
compliance of Art. 299 but goods had already been delivered
to the government by the contractor under such void contract
the statutory obligation under Section 70 of the Indian Contract
Act was applied with full vigor.
It is also suggested that the contravention of the Art. 299 would
nullify the contract. Consequently, therefore the acceptance of
the application of the doctrine of estoppel or recognition of
ratification of such contract have been refused by the Supreme
Court. Before 1968, the judicial view was expressed that
although informal contracts could not impose liability,
government by ratifying such contracts could accept
responsibility. But Mulam Chand v. MP [AIR 1968 SC 1218], the
Supreme Court adopted the rigid procedure and posture. No
doubt the judicial view vacillated between liberal and rigid
interpretation of Art. 299 depending upon the peculiar facts and
circumstances of the cases.
1.3 CONSTITUTIONAL LIMITS AND LIMITATIONS
Earlier the judicial tendency was to grant large amount of
discretion to the government, to choose the party with whom it
would enter into contractual relations, on the premise that the
government enjoyed the same freedom as the private party in
the matters of entering into contract. The Court shrugged its
shoulders when asked to interfere with the governmental
discretion in the matter of awarding contracts. This purely private
law approach of the Supreme Court could be seen in acute form
in an early case in C.K.Achuten v. State of Kerala, [AIR 1959 SC
490]. The petitioner in this case had contracts for the supply of
milk at the government hospital over a considerable period of
time. In 1957, the petitioner along with others submitted tenders
and the same was scrutinised and the tender of the petitioner
was accepted on 20th January 1958. After sometime, the
petitioner was informed that the policy of government in the
supply of milk to Government medical institutions was to be
given to the co-operative milk supply union. The government
invoked clause 20 of the conditions of the tender which
empowered it to cancel a contract after giving a months notice.
There upon the contract of the petitioner was cancelled. The
bone of contention in this case was not the rejection of tender
but a contract which was duly entered into. Hence a writ petition
was filed before the Kerala High Court challenging the
cancellation of contract as unconstitutional but the High Court
dismissed the writ petition on the ground that it was a case of
breach of contract if any, by the Kerala government, the
appropriate forum was ordinary civil court of competent
jurisdiction and the petitioner was advised to file a civil suit and
not to proceed under Art. 226. A letters patent appeal was also
dismissed. It is interesting to note that the petitioner instead of
approaching the Supreme Court through special leave petition
invoked the jurisdiction of the Supreme Court under Art. 32
raising the contention that he was denied equality before law
by subjecting him to hostile discrimination as regards third
respondent. He invoked the constitutional guarantees under
Articles. 14, 16(1), 19(1) (g) and 31.
With regard to Art. 14, the Supreme Court opined that there was
no substance in the allegation of discrimination because the
choice of the person to fulfil a particular contract must be left to
the government which like any other private individual could
prefer any contractor over another. Hence, claim for the
protection of guarantee under Art.14 was not well founded.
It was alleged by the petitioner that he was entitled to equal
opportunity of employment under Art.16 of the constitution.
The Supreme Court distinguished the contract for supply of
goods from a contract of employment and pointed out Art.16
(1) has reference to employment in service rather than as
contractors. There is no master and servant relationship between
115
the petitioner and the first respondent. Hence the second
contention with regard to attraction of Art.16 in the instant
case was rightly repelled by the Supreme Court.
The court further held that the rejection of a tender or for that
matter even the breach of contract does not tantamount to
deprivation of the right of the petitioner to practise any
profession or to carry on any occupation, trade, or business
contained in Art.19(1)(g) of the Constitution. It also refused to
invoke Art.31 to prevent the cancellation of the contract in the
exercise of powers conferred by the terms of the contract per
se. After all, a contractual right is not a property within the
meaning of Art.31. The rationale behind the holding of the
court seems to rest on the assumption, that the parties to the
contract must accept the burdens of the contract along with its
benefits. A mere breach of the contract cannot be remedied by
the courts under the supervisory or visitorial jurisdiction. Hence
in the Milk Supply case the Supreme Court refused to issue a
writ of Mandamus because the contract merely produces private
right and not public right.
The ratio in Milk Supply Case was affirmed in Punnan
Thomas v. Kerala, [AIR 1969 Ker. 81], where the question for
consideration was whether any contractor could be blacklisted
from submitting any tender or taking any government work for
ten years. The challenge of the contractor was negatived by
the Kerala High Court on the ground that no one had a
fundamental right to insist that the government should enter
into a contract with a particular person. The dissenting
judgement of Justice Mathew, which became a forerunner of
future judicial policy, struck down the government decisions
as invalid for failure to observe principles of natural justice.
The action of black listing not only involves economic loss but
also a loss of reputation and any democratic government should
not lay down arbitrary and capricious standards in the matter
of choice of person with whom alone the government would
deal.
The aforesaid judicial decisions distinctly and clearly conceded
extenuated powers to the Government in the matter of choice
of persons as the other party to the contract. The analogy
between Government and a private trader was over-emphasised.
Governmental contractual power was not subject to fair and
non-discriminatory norms.
In the province of the Government Contracts, nowadays, Art.14
is invoked frequently. Wrongful and arbitratory rejection of
tenders, arbitrary cancellation of tenders, tenders awarded by
showing undue preference to others, unfair and wilful
blacklisting of the contractors disabling them from entering into
a contract with government in future coupled with concomitant
result of considerable loss to the Exchequer are the usual
allegations raised under Art. 14. Originally, the court took the
view that the formation of the contract is a commercial function
and not governmental function and the question of
discrimination does not arise. The government like a private
party can enter into contract with any individual at its sweet
will and pleasure and the challenge under Arts. 14, 19 and 31
does not arise, all that an aggrieved party could do was to ask
the court to award damages or seek specific performance of the
contract. The affected person cannot complain of constitutional
contravention in the field of contract where there is no vested
rights in any person. The compulsion to the effect that the
government should enter into any contract with any particular
individual has been negatived by the Supreme Court in Milk
Supply case.
However, a ray of hope was seen in Eurasian Equipment case,
[AIR 1975, SC. 266] in which broad and all pervasive contractual
power was sought to be subjected to a salutary restriction viz.,
government is bound to give a fair hearing to a person who was
being blacklisted from entering into a contractual relation with
it. Failure to do so would attract Art.14. The Supreme Court,
rejecting the private law approach held that the public contracts
are subject to Art.14. In the instant case the order of blacklisting
contractor was served for the alleged reason that the contractor
had infringed some of the provisions of Foreign Exchange
Regulation Act, 1947 and the pendency of consequential
proceedings against him. The Supreme Court, rejecting the
private law approach, held that the public contracts are subject
to Art.14. The government has to follow equality before law
and cannot choose to exclude any person in a discriminatory
manner. The State need not enter into contract with any one,
but if it does, it has to be in accordance with fair procedure.
Hence the Supreme Court struck down the blacklisting order for
failure to issue the prior notice.
The above proposition was reiterated by the Supreme Court in
Vilangandan v. Executive Engineer, [AIR 1979 Supreme Court
1628], where blacklisting of a contractor was done without
observance of principles of natural justice which would prevent
the concerned person from advantage of a lawful relationship
with government for gain. Hence blacklisting under such
circumstances did raise problems under Art.14. But the
application of Art.14 was invoked only at the threshold of a deal
to protect the legitimate expectation of the citizen. It was
unfortunately not extended to the stage of termination of contract
by the government.
A writ petition is always tenable to flay discrimination at the
threshold when the contract is awarded as it inevitably involves
the question of infraction of Art.14. The government must act
fairly and impartially, granting equal opportunity to one and all.
In Radha Krishna Agarwal v. Bihar, [AIR, 1977 SC 1496], certain
forest lands were leased out for a specified period to collect and
exploit certain seeds, on payment of a royalty. The cancellation
of the contract for breach of certain conditions thereof was
sought to be questioned by the appellants through a writ
petition. The main plank of argument of the petitioners was that
the obligation imposed by Art.14 could not be avoided by the
State in the contractual field. The Supreme Court, rejecting the
writ petition, said that Art.14 would be applicable at the very
threshold or at the time of entering into a contract because at
this stage, the State exercised executive power, but once a
contract is created, the relations between parties would be
116
determined by the terms of contract and Art.14 does not hold
the sway under such circumstances. This ruling of the Supreme
Court kept away the application of Art.14 for the enforcement of
performance of the contract or its cancellation.
However, judicial attitude has undergone a sea change with the
epoch making decision of the Supreme Court in R.D. Shetty v
I.A.A.I. [AIR 1979 SC 1628] where the governments were
compelled to follow certain standards and norms which are
rational, relevant and reasonable in the matter of invitation of
tenders. In the instant case, the Supreme Court was highly
critical of the International Airport Authority of India, an agency
or instrumentality of the Government of India, for entering into
a contract for carrying on cafeteria at the airport with a person,
who admittedly did not fulfil the conditions contained in the
notification inviting tenders. The principle of reasonableness
and non-arbitrariness of governmental action was heralded by
the Supreme Court as the touchstone of Art.14. The public law
limitations in terms of Arts.14 and 19 could enter, where the
terms of the contract vest arbitrary and unreasonable power in
the state. Therefore, State is bound to give equal opportunities
to all those potential candidates who could offer themselves as
contracting parties.
The Supreme Court reiterated the same principle in Kasturilal
v. J&K, [AIR 1980 SC 1992] speaking through Justice
Bagawathi J. and held that there are two limitations imposed
by law on the discretion of the government to deal with the
public whether by way of entering into contract, or by way of
giving jobs or permitting any other category of largess: (1) the
terms and conditions on which largess might be granted; and
(2) parties might be recipients or beneficiaries of such largess.
The court is duty bound under the Constitution to assure and
ensure that the terms and conditions are not detrimental to the
public interest and choice of the party is not arbitrary and
unreasonable by denying equal opportunities for all those who
were potential competitors for government contracts.
The Supreme Court entered with vehemence into the
reasonableness and non-arbitrariness of terms of a valid contract
which determines the rights and obligations of parties inter se
in Central Inland Transport Corporation Ltd. v. Brojanth,
[AIR 1986 SC 1571], wherein a rule constituting a part of the
contract of employment between the corporation and its
permanent employees came under scrutiny. The Supreme Court
emphasized that it will not enforce and will strike down an unfair
and unreasonable clause in a contract entered into between the
parties because Art.14 is now considered as fountain head of
audi alterem partem. The perplexing problems of contractual
powers and its exercise in the context of constitutional
limitations came in for further formulation and elaborate
elucidation in Kumari Shri Lekha Vidhyarthi v. State of U.P
and others [AIR 1991 SC 537]. The immediate problem for
consideration in the instant case was the validity of an omnibus
circular which embodied the decision of the State Government
to terminate the engagement of all the Government counsels
engaged through the State of U.P. at the district level, however
so designated and it equally applied to all the Government
counsels irrespective of their tenure. In view of the formidable
effect of this Circular, the Additional Advocate General of the
State of U.P. strenuously contended on behalf of the State of
U.P. that the relationship of the appointees to the offices of the
Government counsel in the district, is purely contractual on the
terms of the contract and is in essence an engagement of a
counsel by a private party who can be changed anytime at the
sweet will and pleasure of the litigant, without there being a
corresponding right in the counsel to insist on continuance of
the engagement. Further, it was contended that the appointment
of a District counsel is only professional engagement terminable
at will on either side and not appointment to a post under the
government and hence, logically, there is a power vested with
the government to terminate the appointment at any time without
assigning any cause. This supra-distinction between
professional engagement and appointment to a post under
the government was deliberately made with a view to get out
of the constitutional limitations to which a power-holder is
subject to. The acceptance of the aforesaid attractive argument
of the Additional Advocate General would, in effect and
substance, involve unwarrantable assumption that the
appointment may be terminated even during currency of the
contract even without the existence of any cogent and
convincing cause. This construction would result in conferring
arbitrary power of termination to the government. The Supreme
Court went in depth into the facts of the case and after thorough
and threadbare analysis reached the following conclusion:
Applicability of Art.14 to the executive action of the State being
settled and for the same reason its applicability at the threshold
to the making of a contract in exercise of the executive power
being beyond dispute, can it be said that the State can thereafter
cast off its personality and exercise unbridled power unfettered
by the requirements of Art.14 in the sphere of contractual
arrangements and claim to be governed therein only the private
law principles applicable to private individual whose rights flow
only from the terms of the contract without anything more? We
have no hesitation in saying that the personality requiring
regulation of its conduct in all spheres by requirements of Art.14
does not undergo such a radical change after making of a
contract merely because some contractual rights accrue to the
other party in addition. It is not as if the requirements of Art.14
and contractual obligations are alien concepts, which cannot
co-exist.
The aforesaid statement clearly and categorically brings out the
judicial philosophy underlying the mandate of Art.14 is to be
attending not only at the threshold of entering into the contract
but also after the valid contract is entered into between a legal
entity and any agency or instrumentality of Government. This
is in view of the fact that an additional contractual obligation
cannot divest the claimant of the guarantee under Art.14 of non
arbitrariness at the hands of the State in any of its actions. The
Supreme Court therefore clearly and categorically pointed out
that once Art.14 is applicable, the existence of contractual
obligation cannot be an excuse for non-performance of
constitutional obligation.
117
Sterling Computers Ltd. v. M.N. Publishers [1993(1) SCALE
36], repeated and reiterated judicial dicta perceived in Kumari
Shrilekha Vidhyarthis case and expressed the limits and
limitations of the powers of the Government and the authority
of the courts to interfere and intervene in the exercise of the
executive power. The State takes into account objective
considerations of the interest of the State and the public, and
the Court cannot substitute its own decision for the decision of
the authority entering into contract, for the court is not an
appellate authority. However, Art.14 eschews arbitrariness and
if the contract clearly violates Art.14, the claim of the State for
some latitude or liberty in contractual matters cannot be upheld
on the plea that it tantamounts to an encroachment of the
exclusive right of the executive to decide one way or another.
A carspectus of catena of cases clearly demonstrate the judicial
policy that openness, impartiality and fairness are required to
be observed not only while entering into contract but also in
the terms and stipulations of the performance of contracts as
well as its breach.
1.4 PERSONAL LIABILITY IN GOVERNMENT
CONTRACT
Article 299 (2) exempts the President and the Governors of the
States from the personal liability in respect of the government
contracts made by the union of India or the appropriate State.
The personal immunity conferred on the President or the
Governor as the case may be does not confer any immunity in
the case of appropriate governments in respect of any
consequential proceedings against them as mentioned in Art.
300 of the Constitution. In fact, the Bombay High Court in
P.V. Rao v. Kushal Das [AIR 1949 Bom 277] held that
Governor and the state government are two different legal
entities. Hence immunity granted to the Governor cannot be
extended to the state government. Hence the Governor cannot
be held personally or vicariously liable. Merely because all
executive actions have to be taken in the name of the Governors
does not necessarily fasten them with personal liability.
As far as the personal liability of the contracting officers signing
on behalf of the state government is concerned Art. 299(2)
provides for exemption from personal liability in respect of such
contracts. In Chathurbhuj v. Moreswar [AIR 1954 SC 236]
the Supreme Court was indirectly concerned with application
of Section 230 (3) of the Indian Contract Act 1872 in respect of
a government contract which was not in proper form. Hence
difficulty arose as to whether the principal could be sued. The
question was whether Section 230(3) of Indian Contract Act is
applicable under such circumstances. The constitutionality of
the government contracts nor the attention of the court was
invited to the exemption of the personal liability embodied in
Art. 299(2). The government was also not impeded in this case
which arose out of an election dispute between two citizens.
Therefore, the observation of the Supreme Court in
Chathurbhuj v. Moreswar indirectly suggesting the invocation
of Section 230(3) of the Indian Contract Act can be considered
as not laying down the law correctly. A statutory provision
like Sec.233 of the Indian Contract Act cannot go contrary to
Art. 299(2) of the Indian Constitution. Hence a statute cannot
fasten a liability contravening the exemption accorded by Art.
299(2). If the contract is void and therefore legally
unenforceable against the government, Section 230(3) cannot
be given effect to. In State of U.P v. Murali Lal [AIR 1971
SC 2210], an attempt was also made to apply personal liability
on the strength of Section 235 of the Indian Contract Act. The
Supreme Court rightly rejected the contention and held that
Section 235 would be applicable only if a valid contract is in
existence. A void contract is incapable of ratification because
whatever is applicable to Section 230 will also with equal
strength be applied to Sec 235. Hence, from the aforesaid case
the conclusion emerges that the contracting officer will not be
liable personally in respect of a contract entered into on behalf
of the government whether or not requirements of Art. 299 are
complied with.
1.5 THE NATURE OF CONTRACTUAL RELATION
When government enters into the contract with governments
of other countries for various purposes, such contracts are made
in the exercise of sovereign power of State. Such contracts
need not be necessarily made only for the pursuance of
commercial activities, but also for the purpose of promotion of
general welfare, and protection of international peace. These
contracts are known as treaties or pacts which may be bi-lateral
or multi-lateral and such are governed by the principles of
international law.
There are also contracts made by the government in the exercise
of statutory powers. The government in India can carry on any
business or trade or acquire any property or enter into any
contract by making a law or without making a law. The power
to contract is expressly vested in Art. 298 of the Constitution.
Article 298 of the Constitution categorically makes it clear that
it is an exercise of an executive power. However, the
Constitution of India commands that under special
circumstances a law is required for the purpose of certain types
of exercise of executive power. Even without constitutional
commands, the legislature may enact a law to enable the
government to carry on avowed functions and consequently
regulate such function and any exercise of such function must
be in accordance with law. Any contract entered into in
accordance with such law is known as the contract made under
statutory power. For example, some of the State legislatures in
India, have enacted laws for sale or option of the right to collect
forest produce. The contract for aforesaid purposes made under
the statute or the prescribed rules are contracts made in the
exercise of statutory powers. Contract in order to be valid must
satisfy each and every provision in the statute. However,
Parliament has so far not made any law to regulate the contract
of the Union of India. Once contracts are made under a statute,
any infringement of statutory conditions can compel the
government to act in accordance with law at the instance of the
aggrieved party who might approach the court for the discharge
of statutory duty by way of writ of mandamus. The last type of
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contracts are those which are made in exercise of executive power
of the State. Most of the contracts of the government of India
fall under this category.
It must be clearly understood that Arts. 298 and 299 refer to
only government contracts namely contract made by union of
India or States which are the units of Indian Federation. A
statutory authority, local authority or any agency or
instrumentality of the government could be a State for the
purposes of the enforcement of fundamental right under Art.
12, but they are not subject to the procedural limitation imposed
by Art. 299.
The contractual relationship between the government and other
legal entities including individuals, comprehends a variety of
dealings. For the sake of clarity they can be conveniently
classified under the following heads:
1. Where the government acts as a supplier, manufacturer,
producer of commodities and services. The persons are
buyers or users and consumers. These include water,
electricity, telephone, carriage of passengers and goods by
railways, posts and telegraphs. Supplies and disposal of
commodities and services are controlled by appropriate
statutes. However, the supply of such services and
commodities are given effect to mostly through contracts
express and implied made between the consumers and the
government.
2. The governmental contracts may include contracts made
by them for the disposal of surplus goods and unserviceable
stores. Such contracts are generally made through the
process of auction. The sale of natural produce from the
forest comes under the same category. The right to collect
the produce from the forest as well as the right to catch
fishes are sold through process of auction. Some of the
States have made appropriate statutes and naturally
contracts entered by them do fall in the province of statutory
contracts.
3. The third category of contracts refers to cases where the
government itself is a consumer of goods and services and
therefore the biggest buyer. The following contracts come
under this category.
a. Procurement contracts : The modern government
purchases many things ranging from ordinary
stationery to supersonic jet. The contracts made for
the aforesaid purpose can be grouped under this head.
b. Construction contracts : These types of contract
include new construction, addition and alteration to
the existing property, replacement or remodelling of
bridges, buildings, roads etc. Although there are
Public Works Departments (PWD) at the government
levels they neither have the capacity nor sufficient
expertise for such massive construction and hence
they award contracts to the experts in the field for
which detailed procedure is followed.
c. Repairing contract : They are entered into for the
purposes of repairing, reconditioning, maintaining
buildings, plants, machinery, bridges and roads etc.
d. Development and Research contracts : Such types
of contracts are for the purpose of conducting studies
and research in the field of natural and applied
sciences, social sciences etc., which may have bearing
on the development of the State concerned.
e. Licensing contracts : These are contracts meant for
securing the performance of various services, running
liquor shops, fair price shops etc. The inability of the
government to carry on commercial activities by itself
necessitates the issue of license to the persons
concerned. All the ingredients of a contract could be
found in the license. The governments in order to
raise resources for the developmental activities are
constrained to issue securities and bonds. Although
these loans are governed by the respective statutes,
these bonds inevitably constitute the contractual
relations between the State and the citizens advancing
the money.
f. Service Contracts : It is highly doubtful whether a
contract of service with government, can under
ordinary circumstances be considered as a contract
between the person so employed and the government
and further whether such service contracts can be
declared void for non-compliance under the
provisions of Art. 299. This is because of the fact
that once a person is appointed to government service,
the government servant acquires a status, and his
rights and obligations are no longer determined by
the contract but by the statutory rules framed by the
government or law made by the appropriate legislature
and relevant constitutional principles. No formal
document is executed between the government and
the servant and issuance of the letter of appointment
by the government and acceptance by the servant is
the focal point of the commencement of the
government service and the view has developed that
such contracts are outside the scope of Art. 299.
1.6 DIVERSE TYPES OF CONTRACT
There are different varieties of government contracts. The nature
of supplies or services would determine what type of contract
is required in a given situation. The difficulties are heightened
because there is no statute or set of rules defining or regulating
the diverse types of contracts. In commercial practice the
following types of contract are in vogue.
(1) Single Transaction or Fixed Price Contract
Most of the government contracts fall under this category. It is
known as Fixed Quantity Contract or Lump-sum Contract.
Under this type of contract, the quantity of the materials to be
supplied and the price and the time are fixed. Generally, the
contractor is not entitled to raise additional expenses for any
reason whatsoever. But variation in the price of the goods by
the contractor may be permitted if there is escalation clause.
The remarkable feature of this type of contract is the inherent
incentive to the contractor to perform the contract as early as
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possible. It promotes efficiency. But the assessment of the
price must be realised; otherwise under assessment or over
assessment of the price might affect the contracting parties.
(2) Rate Contract
In a contract for supply of services for a sufficiently long yet
specified period of time this type of contract is usually resorted
to. In this category of contract an offer to supply goods at a
fixed rate by a party is accepted by the other. The acceptance is
not legal acceptance in the eye of the law. The offer is a standing
offer and an order is placed in response to that standing offer,
such order constitutes a fresh contract leading to and resulting
in a binding obligation between the parties.
(3) Running Contract
Under this contract the contractor is required to supply an
approximate quantity of goods at certain fixed intervals. The
price is fixed and it remains so throughout the pendency of
contract subject to price variation clause in which case increase
in the price is allowable. The purchaser agrees to purchase a
fixed minimum and the contract contains a clause permitting to
buy an additional quantity of the goods upto a fixed percentage.
During the currency of contract the condition forming part of
the contract would empower the contractor to increase or
decrease quantity of goods to be purchased under the terms of
the contract.
(4) Cost plus Percentage of Cost
Under this type of contract, contractor gets actual cost incurred
in the performance of the contract and the percentage of actual
total cost as profit or fixed amount as determined on some
rational basis. The actual cost would include the amount spent
by the contractor on raw materials, taxes, duties, labour charges,
depreciation and other establishment charges. If the contract is
for the supply of goods for a long period, actual cost will rise
with the increase in the inputs of different instalments, as the
same goods are liable to be priced in different way. To obviate
this difficulty the contract could provide for periodic revision
of the prices. There will be stipulation in these types of contracts
for the production of books of accounts for the inspection,
periodic submission of certificates with regard to prevailing
prices of raw materials etc. There is no incentive to the
contractor to perform contract in time.
(5) Cost plus Fixed Fee Contract
This is an innovative version of the above type of contract.
The actual cost incurred by the contractor is reimbursed whether
it be incurred for supply of the goods, or rendering of services
along with a fixed amount as fee. The profit of the contractor
in this case is not linked with the cost. It is a sum which is
mutually agreed and irrespective of the cost incurred he gets
the fee. In repair or maintenance work, this type of contract is
often pressed into service. Time is the only incentive for the
contractor. The earlier the performance the quicker he gets
money.
1.7 SELECTION OF CONTRACTOR
The two processes generally employed for the initiation of
government contracts are -
1. Competitive tendering
2. Negotiative or non-competitive tendering
The process of auction may also be resorted to. The choice of
a particular process in a given situation depends on diverse
considerations.
The 'competitive tendering' is the usual method of entering into
contract. Through the medium of competition, the supply of
goods and services is possible at the most economical price.
There is openness, impartiality and fairness in the selection of
contractor. But, sometimes in view of constant competition
prices are cut down and parties may try to avoid contractual
obligation at the slightest pretext and on flimsy grounds. The
quality may consequently suffer. But there are innumerable
instances where the contracts have not been awarded to the last
tenderer. There is not much rigid reliance on the rule of
acceptance of the last tenderer. The acceptance of the slightest
higher tender in genuine cases may result in increased cost. If
there are reasons for doing so, the court would be shy to interfere.
The competitive tendering is of two types :
a. Open competitive tendering
All invitation to tenderers are advertised, and everyone who
considers himself as competent can submit his/her offer.
Invitation to tenderers are issued to limited tenderers who are
on the approved list. Those who are not on the approved list
cannot submit tenders.
b. Non competitive tendering
The other method of entering into contract is known as non-
competitive tendering by process of negotiation. If a particular
brand of commodity or a product of the particular manufacture
is required this type of method is resorted to so as to ensure that
the price is fair and is not excessive. This is suitable for the
procurement of stores. In India, the sole manufacturers are
required to submit quotations. They are examined by the
designated officials who are empowered to visit the place of
manufacture to inspect the books of accounts and to gather such
information as they deem fit. Afterwards, taking overall factors
into consideration a tentative price is fixed. Then stage is set
for negotiation and a compromise price is arrived at. The
government has added in all these types of contract a concise
condition as to post costing rights which empowers the
government the right to refix prices under the negotiated contract
after the contract have been completed. The said condition has
become a part of the standard contract.
When the government has to sell certain goods, or the right to
collect the forest produce, catching of fishes in government
fisheries, tolls, excise and licence, the contract is entered into
through the process of auction. An auction sale may be either
'open competitive' or 'non competitive' depending on the mode
of conducting the auction. In an auction sale, where a
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government is not a party to the contract, a valid and binding
contract comes into existence vide S.64(2) Sale of Goods Act,
1930. This provision may be applicable in an auction sale in
which the government is the auctioneer or in an auction which
is conducted on behalf of the appropriate governments. Even
if after the hammer falls both the offer and acceptance are oral
and such oral agreement are beyond the purview of Art. 299 of
Constitution of India. Hence a critical and crucial question
which falls for consideration is as to when can a binding contract
be said to have concluded with the government through the
processes of auction.
This matter was considered by the Supreme Court in K.P.
Choudhury v. State of Madhya Pradesh & Others, [AIR
1967 SC 203], where the appellant, a forest contractor agreed
to bid for certain contracts for auction of diverse contract in
that division in pursuance of a notification issued by the
divisional forest officer. Every bidder was required to deposit
earnest money as a condition of auction. The appellant gave
bids for two contracts and his bid being the highest, the hammer
fell in his favour. The amount of contract being more than
what divisional forest officer could accept, the matter was
referred to the Chief Conservator of Forest. Before the Chief
Conservator could accept, dispute arose between the bidder
and the government. When the matter finally came on appeal,
the Supreme Court held that there was no contract between the
government and the appellant before he bid at the auction nor
was there any contract between them after the auction was over
as required under Art. 299 because Art. 299 in effect rules out
all implied contracts. In view of the above holding, an auction
is held on or behalf of government. A contract entered into
through auction comes into existence not at the fall of the
hammer but when it is signed by the competent authority. Hence
until it is approved by such competent authority no valid or
binding contract comes into existence. This is a definite
departure from the rule applicable to contract made through
auction between private individuals. [State of Assam v. K.P.
Singh, AIR 1953 SC 309]. It is also mentioned that if statute
provides for oral contract, a valid contract comes into existence
on the fall of the hammer. If however a contract is not made in
pursuance of statute, it must satisfy the provisions embodied in
Art. 299. This is on the assumption that Art. 299 will apply
only in respect of contracts entered into in the exercise of
executive powers and not those contracts made in the exercise
of statutory powers.
1.8 PUBLIC LAW REMEDY IN GOVERNMENT
CONTRACTS
The contractors are inclined to invoke writ jurisdiction to enforce
contractual obligation against the government. The writ of
Mandamus can be issued by the superior courts only if the
following conditions are cumulatively complied with: (1) the
petitioner must have a legal right to the performance of the
legal duty, (2) the legal duty must be of public nature (3) the
right must be subsisting on the date of the writ petition, and (4)
petitioner must have demanded the performance of the duty
and the authority must have refused to do so.
The Supreme Court in an appeal, refused to concede a writ
petition under Art.226 by holding that it is not maintainable to
enforce a liability arising out of the breach of the contract. A
contractual obligation cannot be enforced through a writ as the
violation of the contractual obligation is not a breach of duty
imposed by law. Any person affected by the exercise of a
constitutional or statutory power by the government alone can
seek redress by way of writ. The remedy lies some where else.
The problem of enforceability of contractual obligation through
the writ petition came in before the Calcutta High Court even
before the commencement of the Constitution in P.K. Banerjee
v. L.J. Simonds [AIR 1947 Cal.315]. In this case, the contract
of the petitioner was cancelled on some valid grounds. The
subject matter of the contract was the supply of iron scrap.
Auction of the said iron scrap was advertised in a news paper
subsequently, whereupon the contractor filed an application for
an order directing the government to forbear from advertising
for the sale of iron scrap. The attractive argument on behalf of
the contractor was that by entering into a contract, a statutory
duty had been created under S.31 of the Sale of Goods Act,
1930. And the refusal of the government to deliver the goods
of the appellant as per the statutory duty amounted to breach of
statutory duty imposed by Sec.31 of Sale of Goods Act, 1930.
The Court repelled the contention and said that the contractual
obligation cannot be enforced through a machinery created by
Sec.45 of the Specific Relief Act. The identical argument was
repeated with vehemence before the Calcutta High Court after
the commencement of the constitution in C.M.W.M. Co. v.
H.M.Jagtiani, [AIR 1952 Cal. 315]. It was contended in the
instant case that the writ jurisdiction of the High Court under
Art. 226 of the constitution is very wide. The writ could be
issued to any person and for any other purpose. Hence
writ of mandamus could be issued to enforce the obligation
arising out of the contract. The High Court held that the duty
imposed by the terms of the contract could not be considered
as a duty of a public nature and hence the remedy was refused.
If there had been a constitutional or statutory duty and there
had been a failure to discharge aforesaid duties, writ of
mandamus would be issued.
In Venkata Subbayya v. Government of A.P. [AIR 1965 A.P.
425], the State Text Book Committee selected Hindi Text Book
of the petitioner for the use of students. The Director of Public
Instruction communicated that the petitioners books have been
ordered to be prescribed during the year 1964-65 subject to the
fulfilment of twin conditions: (a) the deposit of specified sum of
money in the Government treasury; (b) execution of the
agreement by the petitioner in favour of the Government. After
some time D.P.I. informed the petitioner that the earlier
communication is to be kept in abeyance. Afterwards, a third
communication informed that the order prescribing the text
books was cancelled. The subject matter of judicial scrutiny
was the third communication. It was argued on behalf of the
petitioners that they had sufficient interest emanating to file a
writ as they have accrued a specific right by the first
communication from the respondent. The court came to the
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conclusion categorically that the concluded contract had not
come into being. An interest is something inferior to a right in
fact, it is merely a chance. It is inchoate right or incipient interest
which cannot be the foundation for the exercise of writ
jurisdiction under Art.226.
The legal proposition that a writ of mandamus will neither lie to
enforce the contractual obligation nor breach of contract is
subject to some exceptions. While making a contract or at the
time of breach thereof, if there is violation of the fundamental
rights of the contractor or violation of the statutory provision
under the pre-existing contract a writ of mandamus could lie.
Moreover rights and liabilities may owe its genesis to the
contract but may not be purely contractual but partly contractual
coupled with statutory flavour, a writ of mandamus might lie.
A breach of contract could take place in any one of the three
ways:
(a) where a contract is entered into in the exercise of the
statutory powers under certain enactments and/ or the rules
made there under and there is a reasonable allegation with
regard to breach of the aforesaid statutory conditions on
the part of the government;
(b) where there is a genuine grievance that there has been a
breach of promise or an assurance made by the government
in pursuance of which the other party has acted to his
detriment, but the agreement is short of Art.299 of the
Constitution of India; and
(c) where the contract entered into by the government and the
affected party is non-statutory in character and purely
contractual; the rights and the obligations are fully governed
by the terms and conditions of the contract and the breach
of the contract by the state is the subject matter of the
challenge.
In cases coming under the purview of the third category, no
writ is maintainable to prevent a breach of contract. The
remedies are the ordinary remedies either by way of suit for
damages or for an injunction to restrain the breach of contract.
In respect of cases covered by the second category the obligation
arising against the State out of its representation amounting to
a promise may be enforced ex-contractu by a person who acts
upon its promise. This is out of equity, the courts have issued
a writ of mandamus to compel the government to fulfil the
promise or assurance on the ground of equity. [Union of India
v. Anglo Afghan Agencies, AIR 1968 Sc. 718].
As far as the cases covered under the first category are
concerned, the problems may arise for the alleged violation of
the fundamental rights or statutory rights. In both the cases the
origin of the right is in a contract. In Rashbihari Panda v.
State of Orissa [AIR 1961 SC 108], the State of Orissa created
its monopoly in the trade, government with a view to implement
a monopoly scheme contemplated under the Act, entered into
with agreement for the sale of kendu leaves after inviting tenders
from the traders. One of the terms of the tender notice permitted
renewal of the appointment for one year on mutually agreed
terms and conditions between the parties. In 1968, the
government agreed to review the leases on fulfilment of the
terms. Under the scheme, the government offered these leases
to those who have worked satisfactorily in any previous year
and made no default in the matter of payment. The writ petitions
were filed challenging the legality of the fresh offers made by
the government on the ground that while inviting tenders the
government offered these leases only to certain old contractors
which in effect and substance shut out existing business men
and new entrants in the field. It was therefore ex facie
discriminatory and unreasonable. Hence the Supreme Court
refused to uphold the validity of the scheme and adjudged the
same in the light of Art.14 and 19(1)(g) of the Constitution.
Similarly the Allahabad High Court struck down an auction as
ultra vires Art.14 and 19(1)(g) for the property of the State cannot
be used in such a manner so as to enrich a particular category
of persons to the detriment of the other citizens. [Rajendra
Singh v. State of U.P. AIR 1973 All. 37]
In State of Assam v. Thulsi Singh [(1964) 1 SCJ. 42], a rule
framed under Northern India Ferries Act, 1878 provided that
the sale shall be through auction generally to the highest bidder,
and provided that there can be a deviation from the rule, if the
competent authority gives sufficient reasons to be recorded in
writing. Acting under the aforesaid rule, the Executive Engineer
was reported to have rejected the highest bid of the appellant
and accepted the next bid. The respondent challenged the order
of the Executive Engineer rejecting his bid. The question for
consideration before the Supreme Court on appeal was whether
the settlement of the ferry rights by the Engineer was in
accordance with the Act and the rules made thereunder. The
court held in this particular case it was merely enforcing a
statutory position and not an obligation arising out of contract.
Sometimes, the courts have issued a writ of mandamus to
provide succor to the harassed contractors. In Shaifulla v. State
of U.P. [AIR 1961 All. 485], the government proceeded to
recover the contractual dues as arrears of land revenue, which
was an exclusive remedy available to the government, in the
exercise of sovereign power and not as a contracting party. In
this case, admittedly there was no enforcement of any statutory
provision; but the court directed the government not to resort
to special provisions of revenue recoveries for recovering
damages for the breach of contracts, but merely to pursue the
ordinary remedies available to the contractors.
1.9 STATUTORY DISCRETION AND GOVERNMENT
CONTRACTS
The executive power of the government to make a contract is
not uncontrolled and unlimited. A contract can be varied or
even abrogated by the legislature acting within its plenary power.
It is a fundamental principle of law that a public authority which
is empowered by a statute with a discretionary power meant to
be exercised for the promotion of the public welfare by entering
into a contract in general terms, cannot fetter itself in the exercise
of such discretion. This is called the 'principle of non-fettering'
of statutory discretion by a contract. The rationale for the
aforesaid principle stems from the fact that the power of the
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legislature to make the law is plenary and such power cannot be
fettered.
The pertinent question is whether the government could incur
this ability by virtue of a contract which is statutory discretion
came in for consideration before the courts more than once. In
B.K. Das v. State of Assam, [AIR 1956 Assam 23], where the
appellant firm was appointed as a distributor of certain
controlled commodities including salt, subject to certain terms
and conditions contained in the letter of appointment. One of
the pre-conditions for the appointment was that of keeping in
stock a specified quantity fixed by the government for such
controlled commodity. The agreement could not be executed
in the formal form. The government, in the exercise of the
statutory power decontrolled the salt. Consequently the price
of the salt came down, and as a result the firm incurred a huge
loss which they tried to recover from the government. The
contentions before the High Court was that the distributor was
required to have a specified quantity of stock of salt till the date
of decontrol, and the decontrolling of commodity resulted in
the reduction of price and accumulation of loss. Rejecting the
contention the court held that agreement between two parties
could not control the statutory power of the government to
remove control over controlled commodity. It was done by the
governmen in different capacity. The power to control or
decontrol vested in the statute could be exercised at any time
by the government not withstanding any thing said in the
contract to the contrary.
This principle has been reiterated by the A.P. High Court in
Secretary to Government, P.W. & T Department, A.P. v.
Adoni Ginning Factory [AIR 1959 A.P. 538]. In this case the
government entered into agreements with consumers in the State
for supply of energy in bulk at specified rates for 10 years.
There was no provision in the agreement to enhance the rate
during the currency of the agreement. The government in
exercise of the powers vested in it by virtue of Sec.3 of Madras
Temporary Powers Act, 1949 issued two orders enhancing the
rate contracted between the parties and imposing fuel surcharge.
Being aggrieved by this action of the government, a consumer
who is the party to the agreement also objected to the unilateral
enhancement of the rate and challenged the legal validity of
action. But the Division Bench of the Andhra Pradesh High
Court held that enhancement of rate was done by the government
not in the exercise of executive powers but in the exercise of
statutory powers. The court further added that if the action of
the government had caused any detriment to contracting party,
the government will not be saddled with costs and
consequences. However, where the Electricity Board was given
a special statutory power to fix the tariffs by agreement with
the consumers by virtue of special circumstances, the Supreme
Court in Indian Aluminium Co. v. K.S.E. Board, [AIR 1975 SC.
1967], held that the Board could not override the terms made in
such agreement making use of the power to prescribe uniform
tariffs specified in another section of the Act.
The judicial scrutiny on contractual powers has expanded
considerably in view of inevitable fact that the government
contracts are standard forms of contract and are therefore one-
sided. In the normal commercial contracts the citizens have
hardly any discretion to settle the terms of the contract. If any
citizen would like to carry on commercial activities he will have
no option but to agree to the terms of the contract to be entered
into with the government.
1.10 FINANCIAL REGULATIONS
The Constitution of India provides for the government accounts
of the States and the Centre to be kept in three parts, viz.,
(a) Consolidated Fund
(b) Public Accounts Fund
(c) Contingency Fund
Expenditures from Consolidated Fund are stipulated in Art.
112(3). The expenditure relating to all contracts of supplies
and services are not a charge on the consolidated fund. These
are to be included in various estimates of the claims of respective
Ministries. Once the demands of grants are made and presented
to the House, these are admitted to voting. Due to enormous
increase in the governmental activities, effective direct
parliamentary control has become physically impossible. Many
of such activities are presently regulated by number of Standing
or Adhoc Committees. Some of such committees relating to
finance are Estimate Committee, Committee on Public
Undertakings & Public Accounts Committee. Finance Ministry
regulates the periodical needs. The Comptroller and Auditor
General is responsible for examining all financial transactions
in the country. The audit conducted by him ensures:
(a) that all expenditures are incurred according to the provisions
of the Constitution, laws and financial rules and regulations;
(b) that proper sanctions and authorities exist;
(c) that the expenditure is within the prescribed limit;
(d) that supported documents and vouchers are kept; and
(e) that the expenditure has been properly accounted for.
Again, Public Accounts Committee ensures that the amount
has been spent on the items for which it was granted. The
Committee has to satisfy itself that the money shown in the
accounts as having been disbursed was legally available for
and applicable to, the service or purpose to which they have
been applied or charged. As such all government and public
contracts are subjected to all forms of Parliamentary Control.
These are to be scrutinised by the Public Accounts Committee
and externally audited by the Comptroller and Auditor General.
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2. ENGINEERING CONTRACTS
SUB TOPICS
2.1 Introduction
2.2 Types
2.3 Stages of Engineering Contracts
2.4 Tender Procedure
2.5 Management of Engineering Contracts
2.6 Special Contractual Features
2.1 INTRODUCTION
Engineering contracts are given a special focus of study on
account of the importance of such types of contracts both in the
public as well as in the private sector. Most of the engineering
contracts either directly involve public interest or indirectly
touch the public interest. From the point of view of size, money
involved and the need for huge labour inputs, all engineering
contracts attract public notice in several ways. Everyday when
we open newspapers we find several notices, informations and
reports about these types of contracts. There are variety of
engineering contracts, namely civil engineering contracts,
mechanical, electrical and other types of installation contracts
and service and maintenance contracts. An engineering contract
can be defined as one where the promisor (builder contractor,
installer, architect) promises to construct building (civil
engineering) or install (mechanical / electrical/
telecommunication/electronics) a bridge, workshop or machine
against consideration, at the site of the promisee. Alfred
Hudson, Kings Counsel defined an engineering contract as one
under which .... a person .... called variously the builder or
contractor undertakes for reward to carry out for another person,
variously referred to as the building owner or employer, works
of a building or civil engineering character. In the typical case
the work will be carried out upon the land of the employer or
building owner ..... Following the example of the definition
any mechanical/electrical/telecommunication contract can also
be defined.
2.2 TYPES OF ENGINEERING CONTRACT
Engineering contracts may have different types in formulating
the contracts. Common types are:
(i) Item Rate Contract (measured contract)
(ii) Schedule Contracts (percentage rate contract)
(iii) Lump-sum Contract
(iv) Cost Plus Contract
(v) Cost Plus Fixed Fee Contract
(vi) Petty Labour Contracts
(vii) Turn-key Contracts
(viii) Sub Contract
(a) back-to-back sub contract
(b) other sub contract
Some of these types of contracts are explained in specific terms
in the chapter on government contracts in this module. You
have to take into account that explanation as well.
(i) Item Rate contract: This is one of the most common civil
contracts in India. In this system a schedule of items, quantities
and rates form the conditionalities in the tender form, keeping
rate column blank. The entire project work is broken into minutest
constituent items which are described in detail keeping no doubt
in work specification. The list is made in a schedule enclosed in
the tender documents. The tenderer has to only specify the
rate and then the total item-cost based on the rate. Since the
quantities in each item is accurately measured at the end of the
performance of the contract to make the final bill notwithstanding
the measurement given in the schedule, it is also known as
measured contract. This type of tender documents can only
be prepared by professional architect who can calculate itemwise
detail specification. If there is error in the specification the
result can be disastrous. An error in the load capacity calculation
may lead to irrepairable consequences.
(ii) Schedule contracts or percentage rate contract : This is a
type of item rate contract with a difference that in the schedule
an ideal rate per item and the cost calculated on that are specified.
The tenderer has to quote a certain percentage either above or
below the scheduled rate. Generally speaking, Public Works
Committee of the Central and the State government specifies
item-wise ideal rate within a local limit. These CPWD/PWD
rates are quoted item-wise in the tender document. The tenderer
has the information about the ideal rate as calculated by CPWD/
PWD so that he can quote his rate percent in view of his own
calculation. The rate percent may be specified item-wise or on
the overall calculation. Item-wise percentage quotation (either
above and below) requires itemwise calculation, whereas overall
rate percent is easier to calculate on the overall ideal cost
mentioned.
(iii) Lump-sum contract : In Lump-sum contract the whole
work is expressed in one single figure of cost. In this system,
the parties require to know the drawings of work including cross-
section drawings and all other general drawings of, minor
changes required. A schedule of deviation is also agreed upon.
In a lump-sum contract, parties are not engaged in controversies
on each step of the construction or installation which arise in
item-rate contracts. Lump-sum contracts are suitable in
stereotyped building works.
(iv) Cost Plus contracts : These contracts generally have two
components: (a) the cost of the work done, and (b) profits
stipulated in the contract. Whereas part (a) is based upon actuals,
part (b) may either be expressed in fixed amounts or as
percentage of the cost. Percentage of profits may be either
fixed or may be stipulated in a sliding scale [rate of profit is
variable depending on the cost of project]. This type of
contract is generally preferred by the contractors, because in
any case on account of increasing cost structure the contractors
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interest is not hampered. But, it is very difficult for the employers
to regulate this type of contract because higher the cost
involved, greater is the profit for the contractor. As such, there
is no auto regulation by the contractors to keep the cost at a
minimum.
(v) Cost plus fixed fee contract: This mode of contract is already
explained above. These are contracts where the profits remain
fixed regardless of any increase or decrease in the cost.
(vi) Petty Labour contracts: In case of minor construction or
maintenance works, the employer carries on the work under his
own supervision with the help of labour contracts. In such
contracts, the labour contractors who are also called Sardars
supply the labour, but the labour contractor is required to receive
a pre-determined portion of work either daily, weekly or
fortnightly. He is paid on the basis of actual measurement of
the work done on the basis of pre-determined rates. He is
personally responsible for paying the labourers. Although the
employer does not have any contract with the labourers on which
the employer-employee relationship depends, but for purpose
of many statutes, like Minimum Wages Act, Payment of Wages
Act etc, he is deemed to be the principal employer bound to
fulfil statutory requirements.
(vii) Turn-key contracts: Turn-key contracts are basically those
where the contractor is himself required to design the project
and execute the same. In all other forms of contract, the design
is the job of an architect, or consulting engineer, or a designer,
or of the in-house engineer. In turn-key contracts, the employer
does not prepare the design of the project in detail. It is left to
the contractor, either wholly or in bulk. As for example, in case
of a building contract, the employer prepares the site-plan and
an outline of the building, but leaves the detailed planning,
architecturing, and the execution to the contractor. Therefore,
in these contracts, the contractor is not only required to
construct the work, but he is also accountable as a project
expert, an architect and a designer as well. Turn-key
contracts are generally suitable for high value jobs and can be
done by highly professional and competent firms having multi-
disciplinary membership from various sections of engineering.
(viii) Sub contract: A sub contract is one where the contractor
enters into a further contract with another person known as a
sub-contractor for some part of the work undertaken or
sometimes even for the whole work. In the contract of agency,
the sub-contractors are called as sub-agents. Generally
speaking, an agreement of contract, authorises the contractor
to do a specific job. He may do it either by himself or by
appointing sub contractors. Unless specifically prevented in
all engineering contracts sub contracting is an accepted
phenomena. As for example, in the construction work there
are several specialized works to be done,which are done through
sub contractors, like plumbing, mosaic cutting wood work,
painting etc. Sub-contracts are generally of the following two
categories, viz :
(a) Back to back: These are those sub contracts in which the
prime contractor passes on the burden of execution of a specific
issue of the contract to the sub-contractor almost on the same
terms and conditions as exist between him and his employer. As
for example, in a building contract the job relating to plumbing
on the basis of item rate contract may be delegated to a plumber
almost on the same terms and conditions. Since the terms and
conditions are the same, this type of sub-contracting is known
as back to back.
(b) Other Sub contracts: There may be various other types of
sub contracts, on the basis of different conditions, for example,
item rate, lump sum, schedule plus or cost plus. In case of huge
construction or installation works the sub-contracting may even
be on turn-key basis.
2.3 STAGES OF ENGINEERING CONTRACT
Engineering contracts specially those in vogue in various
government departments as well as large private concerns have
the following distinct parts:
1) tender notice;
2) conditionalities in tender;
3) general and special specifications;
4) schedules for the purpose of billing;
5) payment schedule;
6) tender drawings; and
7) memorandum of agreement.
1) Tender notice
Tender notice is a simple notice published in newspapers or
sent individually to prospective tenderers. The notice may be
local, regional, national or global based upon the size,
importance and technology involved. The notice contains the
work descriptions and call for collection of tender form. Tender
documents are sold from a definite centre. Sometimes tender
notice includes along with the nature of the work some
information about the details of the work, time for completion,
and approximate value of the work. The tender notice is the
invitation to make an offer. But tender notice does not contain
details of the works to be completed and the rates and offered
amounts. The tender documents are obtainable by paying a
fee and contain all those details.
2) Conditionalities in tender
The tender documents contain three types of conditionalities
namely:
(i) Standard form conditionalities: Generally government
works as well as works of big private institutions have a standard
form contract with some uniform conditionalities either
expressed in some regulation or guidelines. The tender
documents may only refer to those rules, regulations or
guidelines without specifying those in the document itself. In
Jawaharlal Burman v. Union of India [AIR 1962 SC 378] it
was held that the reference to such rules and regulations in the
tender documents is enough for binding those conditionalities
against the contractor even though in reality a copy of such a
rule and regulation is not available.
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(ii) General conditionalities: Apart from standardised ones
which may include force majeure clause, escaclation clause,
security clause and arbitration clause.
(iii) Special conditions: These may be work specific location
specific and contract specific. Some of these conditions are
drawings, materials to be made available, special provisions
for payment, sale contracts, third party indemnity, and liquidated
damages. Some of these conditions require a brief explanation.
(a) Material issue clause
In some cases the contractor is supplied with some materials
on certain terms. The contractor is required to account for the
material according to the guideline issued, as for example, in
the cement issue clause it may be stipulated as to how much
cement to be issued to the contractor at what time and from
which site. The terms and conditions of issue of such materials
are stipulated in this clause.
(b) Force majeure clause
Force majeure clause protects the contractor from certain acts
of God and acts of human being. This force majeure clause
sometimes are specially designed for locational needs. As for
example, an earthquake Richeter scale 2 may be a force majeure
in Calcutta but may not be so in Garwal hills. Sometimes this
clause also includes protection against strike and lockout.
(c) Escalation clause
In engineering or supply contract there may be an automatic
adjustment provision in the contractual consideration based
upon the market price fluctuations.
(d) Bank guarantee clause
Construction contract requires long time for performance. As
such the employer often requires some kind of assurances for
the timely performance of the contract, financial stability and
security on the advance paid by the employer. This is often
done through bank guarantee. in which the banker certifies the
financial standing of the contractor. But such a bank guarantee
does not make the bank bound as a surety. In order to make a
specific guarantee a contract of guarantee is required to be
entered into by the creditor with the surety, according to which
the surety specifically undertakes to compensate the creditor in
case of failure of principal debtor. Sometimes for obtaining
bank guarantee of this nature some marginal money is required
to be deposited and kept in the bank.
(e) Recovery clause
Sometime the contract includes recovery clause empowering
the employer to withhold any amount of money on account of
failure of the contractor to perform certain warranties
(warranties are conditions but not essential for the purpose of
contract, the breach for which shall make the employer entitled
to claim compensation).
(f) Arbitration clause
In all inter-country agreements based on the issue of global
tender arbitration clause is to be compulsorily included in the
contract. But a local regional contract may not have the clause.
This is always advisible for the contracting parties to keep an
arbitration clause in order to create an alternative forum for
adjudication of disputes. If both the parties agree, they may
have one arbitrator named in the clause to whom all matters of
disputes between the parties are to be referred for decision.
Alternatively each party may retain the right of appointing a
separate arbitrator. In which case the arbitrator in their first
meeting shall appoint an umpire.
3) General and special specification
In engineering contracts there may be several general and special
specifications. These are based upon drawings of the super-
structure like framework, shuttering, centering etc. Sometimes
special specifications are given for the purpose of load bearing
capacity and terminal requirements.
4) Schedule of billing
This clause includes the schedule containing finally negotiated
and accepted rates of tenderer, and the modalities of periodically
billing sometimes based upon the progress of the work or on
the basis of time or both.
5) Schedule of payment
The schedule of payment indicates payment to be made at
various stages on the basis of schedule or bill of quantities
submitted.
6) Tender drawings
Tender drawings form the basis of contractors pricing.
Engineering contracts often cannot be communicated in
language. These are generally done through drawings. So the
employer expresses his demands to the tenderer through the
specification of drawings. Since the contractual rates and
calculations are based upon these drawings a strict observation
of the drawings is always necessary.
7) Memorandum of agreement
The memorandum of agreement is the summary of the agreement
reached between the employer and contractor which is required
to be signed by both the parties on acceptance of the tender.
2.4 TENDER PROCEDURE
An engineering contract can be entered into either through direct
negotiation between the parties or through tender. Tender is
infact a bidding process. The difference between tender and an
auction is that, an auction is an oral bidding in the hearing of
everybody whereas tender is a confidential bidding in writing
without having any knowledge about the other bidders bidding.
The tender notice as was already stated is an invitation to offer
as well as information for an offer. A tender is an offer by the
tenderer and the communication of acceptance of tender through
the memorandum agreement or otherwise is the acceptance.
Tendering is made in four stages as follows :
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(i) Preparation of tender documents;
(ii) Receiving tenders;
(iii) Processing and comparing the tenders; and
(iv) Selection and communication of acceptance.
(i) The preparations of tender papers is a very important task.
Based upon the types & nature of the tender, tender
documents are prepared as e.g., in item rate tender or
schedule contracts, detailed issues are laid down along with
plans, standard form drawings of the work standard
schedules are prepared; besides the standard form contract
special conditions are drafted in the tender document.
Tender may be open or limited. Where it is capable of being
responded to by any one it is open, where there are
prequalifications laid down and previous enlistment is
necessary the tender is said to be limited. In most of the
government contracts a previous enlistment is made on the
basis of capacity of investment, work experience and
technical competency. The enlisted contractors have
various grades and they are capable of submitting tender
within the capacity of listed grade of contractors specified
by the govt. order. Once the documents are prepared the
second stage of the work starts.
(ii) In the second stage a notice of tender is published in daily
newspapers as well through direct communication. Govt.
contracts require these notices to be published under Public
Notification Act, as such the tender notice is to be published
in at least two local dailies of which one must be in the
local language and the other in English. After the notice is
published tender documents are sold from a notified address
within the specified time period. The tenderers based upon
the type of tender submit their offer enclosed in a sealed
cover within the specified time and date. A receipt of
receiving the tender may also be given. Immediately after
the close of the tender, the tendering officer shall open the
tender letters in front of the tenderers present at the time.
The tender documents are checked, verified and signed by
the tendering officer. Sometimes prospective tenderers may
be required to visit the sight in order to effectively workout
the tender offers. With the opening of the tender the second
stage is complete.
(iii) At the third stage, details of the tender documents submitted
by the tenderers are checked and comparative tables
prepared. If it is turn-key project comparative tables are
prepared for each separate work required to be completed.
Sometimes a meeting is called in which a negotiation is
attempted by asking the tenderers their last turn. Such
meeting may be general or individual. This is known as
best bargain effort. The tenderer may withdraw his tender
at any time before the tender is accepted. At the completion
of the third step a complete comparative table is made based
on which the final decision is arrived at.
(iv) At the fourth stage the tendering officer takes a decision
which is commonly known as acceptance of tender. He
makes a decision on the most comparative advantage which
may be based on cost of the project, time of completion,
quality of the work, reliability of the firm etc. Generally
speaking, in govt. contract, best bargain is the lowest tender
but it is not always necessary that the lowest tender has to
be accepted. The deciding officer has to take an objective
view of the comparative advantage.
Once the decision is taken the contract paper is signed by the
parties and the work order given.
2.5 MANAGEMENT OF ENGINEERING CONTRACT
Once the contract is formulated, it is necessary that there is
complete internal and external control mechanism at various
stages. The following stages require a very careful
considerations :
1. arranging bank guarantee and drawal of advances;
2. receiving mobilisation and other grant advance;
3. site makeover and initial development of the site;
4. planning of the work in different phases;
5. monitoring turn over in different phases;
6. work assessment and quality monitoring;
7. change in the constitution of the firm or company of the
contractors (this is one of the most critical and litigative
situation which requires a very careful monitoring); and
8. engaging sub contractors.
Besides the internal control, there has to be on job controls, in
order to have a balanced progress. The management has to
identify the serious crisis points and locate insilnent failures.
Of course payment of dues is the most controversial and
litigative situation. In Hadley v. Baxendale it was decided
that in a situation where the contractor has performed a part of
the contract and he is unable to proceed further, he is entitled
to the proportionate payment for the job he has already
accomplished. This is known as quantum meruit.
In the engineering contract, there are interactions of several
line and vertical laws as for example, in order to construct a
factory, one has to be careful about not only the contract law
but also the Factories Act. A contractor is of course subjected
to many other laws like Minimum Wages Act, Payment of
Wages Act, Guarantee and Indemnity etc.
Stages of Management:
Given below are the various stages in the management of
engineering contracts.
(a) Work Plan
The task of preparation of a work plan for a contract has to
commence immediately after the award of the contract.
Depending upon the nature and scope of the contract, it is first
necessary to establish a task group to prepare the work plan.
This group is entrusted with the collection of all available data
relating to the work, the terrain, the environment, and all the
internal or external factors which may affect all the three. The
process of data collection and preparation of work plan is
interactive and continuous and may also continue throughout
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the execution of the contract. For large sized works, setting up a
small team to update the data and point out glaring discrepancies
from the initial data and its impact on the work plan is well worth
the effort and the expense involved.
The work plan has to be comprehensive and yet concise. A
typical plan for a large civil engineering work may contain the
following information (suitably abbreviated):
(a) Description and scope of work
(b) Mobilisation - phases
(c) Construction survey and detailed construction programme
(d) Preparatory works for installation of the plant complex
(e) Basis for plant selection and design
(f) Individual plants - description in brief
(g) Deployment of plant
(h) Production process of plant complex
(i) Sequence/methodology of work
(k) Quality assurance
(l) Safety programme
(m) Construction schedule, PERT net work.
(n) Drawings/plates
(o) Requirement of funds
This work plan becomes the basis for the mobilisation and
implementation of the contract.
(b) Records
The execution of a contract is a one-off activity, which varies
with each work depending upon its scope, location, environment
in which it is to be executed, and the personalities involved.
The term environment in this context includes the client's
organisation, distribution of functional responsibilities within
the organisation, working methods and procedure, and the
culture of the organisation, in particular, its decision making
process, and pace at which these decision are implemented in
practice.
Over the years, efficient record keeping techniques have been
evolved and implemented in large organisation. Good contract
administration depends upon data. For data to be useful, it must
be accessible and to be accessible, it must be recorded whether
on paper or on a computer. For this purpose, it is preferable to
derive check lists for critical aspects/issues and decide type of
records to be maintained. Useful records may be maintained as
under:
(a) A complete and up to date copy of the contract along with
all changes (finalised and in process) such as amendments,
variations, interpretations, or decisions given in terms of
the contract.
(b) Contract files - either a continuous file - containing the
correspondence in chronological sequence - with each page
numbered and in parts - each containing 100 pages.
(c) Topic wise files - dealing with different stages or topics,
such as, pre-tender, negotiations, agreement, mobilisation,
execution, price and cost estimates, bills - variation -
equipment - materials - manpower - schedules - record of
meetings held with client or the officer designated in the
contract.
Every contract manager tends to adopt his or her own system -
the key test being how quickly the required and correct data
and details can be produced for taking timely decisions at every
significant stage of the contract.
(c) Claims
As per L.J. Duncan Wallace, contractor's claims arise out of
two principle basis:-
1) Damages for breach of contract by employer (client)
These are sub-divided into:
(i) Breaches affecting the performance of the contract, which
nevertheless proceeds to completion;
(ii) Breaches resulting in termination or recision of the contract
before completion;
(ii) Breaches of employer's payment obligations.
(2) Additional Payment due under one or the other of contract
provision, sub-divided into:-
(i) Sums due to variations (referred to as 'Deviations' in India).
(ii) Sums due to measurement in unit-price contract.
(ii) sums due to miscellaneous provisions in contract under
changed physical conditions, variation in prices or other
compensatory clauses in the contract.
Mr. G.A.N. Rajan in his book - Law of Engineering Contracts -
Construction disputes and Remedies - analyses the relevant
provisions of a claim for damages as arising when:
a) A contract must have been broken by the other party.
b) The other party should have suffered a loss or damage on
this account. (if not, only nominal loss may be granted).
c) The losses and damages must have occurred in the usual
course of events from such a breach.
d) The parties knew at the time of the signing of the contract,
that in such a kind of breach, they would have to pay losses
and damages to the other party, who has suffered by the
said breach.
e) No loss or damage is to be paid for any remote or indirect
consequences.
f) The party claiming losses and damages should have taken
steps to minimise it in the given circumstances.
g) In case of termination or recision of contract by employer,
the contractor has to prove that this was unjustified.
Let us now refer to the categories given above and briefly
illustrate the possible basis of preparing the claim:
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Breach Likely causes Possible Scope of claim
1. Breach occurs, - Delay in handing - Increased costs
but work pro- over of site or arising out of
ceeds to completion change in site or the cause incl.
site conditions losses or damages
- Delay in fixing claimed by sub-
orientation or contractor/sub-
change in orientation supplier (if any)
- Late supply of design, - Idling of labour/
drawing of essential equipment
- Delay in clearances
- Delay by other
contractors
- Unreasonable rejection
of work
- Defects or shortage
of employer's supply
materials
- Suspension of work
for causes not attri-
butable to contractor
- Excessive quantity
variations
- Delay in payment
2. Breach occurs - Non-availability - Loss of profit
before the commen- of site which the contract-
cement and work - Non-payment of or would have
cannot be advance earned from the
commenced - Failure of employer contract
to obtain sanction to
start work, or
necessary funds
3. Breach occurs - stoppage of work - Fair and reasonable
during the work due to causes not value of work
and the contract attributable to executed plus loss
is terminated contractor suffered on account
of termination/
- unjustified recession
termination of
contract
- continuing
suspension or
force majeure
2.6 SPECIAL CONTRACTUAL FEATURES
Engineering contracts are of several types, such as
(i) civil construction contract;
(ii) supply contract;
(iii) erection contract;
(iv) mechanical/instrumentation contract like contract for testing
and commissioning a plant or machinery;
(v) maintenance contract, etc.
These contracts have several special features. Some of these
features are discussed below:
(a) Time is of essence to the contract : In engineering contracts
time of performance plays a very important role. Generally
speaking the stipulation is provided in the tender papers.
According to Sec.55 of the Contract Act if time is of essence
to the contract and the executing party does not fulfil his
part of the contract within the stipulated time, the balance
of the work not performed becomes voidable at the option
of the other party. In case, promisee accepts the
129
performance after the stipulated time, he is said to have
waived his condition and is not entitled to any other
compensation. But if the time is not essential according to
the intention of the parties to the contract, the promisee is
entitled to some compensation but cannot repudiate the
contract in case the contract is not executed in full within
the stipulated time. The standard form contract in
government departments, like Railway, CPWD, MES etc.
time is mentioned in the respective rules as essence of
contract with a proviso that authority may extend the time
in appropriate cases.
In Hind Construction Contractors v. State of Maharashtra
[AIR 1979 SC 720] the contract was for the construction of
an aquduct. The work was to commence on 5.7.55 and
completed on 4.7.56. Terms and conditions, inter alia,
included that (i) time shall be deemed to be of the essence
of the contract (ii) In case of failure to commence or complete
the work in time the contractor shall have to pay
compensation per diem. (iii) in case of compensation payable
by the contractors amounting to the full amount of security
deposit, or in case of abandonment of the work by the
contractor, the Executive Engineering shall be entitled to
rescind the contract. (iv) in pursuance of an application by
the contractor the time for performance could be extended
at the discretion of the Executive Engineer. The contractor
failed to complete the work within 4.7.56. The Executive
Engineer in a letter dated 27.8.56 rescinded the contract
w.e.f. 16.8.56 when the per diem compensation for delay
accumulated and exceeded the security deposit. In this
case, Court held that all the stipulations read together, and
regard being had to the provision for penalty course per
deim and the extension clause, the time was not intended to
be of the essence of the contract. The Court further held
that there was a case for extension due to onset of monsoon,
absence of proper road at the site and other reasons as
pleaded. A notice should have been given fixing a stipulated
time for completion of the work failing which the contract
could be rescinded. In the absence of the notice, the action
was arbitrary and illegal. In English law unless 'the time as
an essense of contract is clearly stipulated by the parties in
the contract, time is rarely held as essence in a building and
engineering contract. One may compare the position of the
above Supreme Court decision with another Supreme Court
decision in State of Maharastra v. Digambar Balwant
Kulkarni [AIR 1979 SC 1339].
(b) Bankers status report is not guarantee : A bankers
certificate of status report about a contractor is not to be
treated as a bank guarantee. According to Sec. 12 of the
Contract Act a contract of guarantee is one in which a party,
called the surety, undertakes to perform the promise of or
discharge the liability of the principal debtor to the promisee.
A bank guarantee is obtained against either a margin money
deposit kept with the bank or against an overdraft facility
with a limit. Sometimes bank also asks for counter-guarantee.
On the other hand, a status report is one in which bank
certifies the financial standing of the contractor with the
bank on a particular date. It contains no guarantee.
(c) Fair practice in acceptance :A contract is a method of
establishing private relationship through offer and
acceptance. An acceptor is free to accept any proposal he
has received against his offer notice. He is not accountable
generally to any one, far less the proposer, to explain why
he has accepted the particular proposal, but in a
representative status where an official takes the decision
of acceptance he is accountable to explain why he has
accepted a proposal to the institution or person whose
representative he is. It is therefore, understandable that a
public official having the responsibility of accepting a
proposal is accountable to the public to justify his stand on
certain objective criteria in order to show that his acceptance
is for the best bargain. This is quite understandable but in
govt. contract the public official accepting the proposal is
required to have a fair play while accepting the proposal
and he is bound to the proposer to explain absence of
arbitrariness and favouritism. In several writ applications,
courts have taken a position that there has to be a fair
practice on objective criteria in accepting a proposal.
Therefore govt departments, statutory undertakings, and
even big industrial houses lay down stringent rules and
procedures to ensure that there is a fair practice. In case of
deviations specially in the situations of not accepting the
lowest tender the bonafide of the decision has to be
established according to the procedure established by law.
d) Rules of Interpretations: Odgers construction of deeds
and statutes provided rules of construction of contracts,
specially engineering contracts. Supreme Court in Delhi
Development Authority v. Durga Chand recognised
Odger's rules of constructions listed below :
Rule 1 : Meaning of a document or of a particular part of it is
to be sought from the document itself.
Rule 2 : Intention of the parties shall be understood from the
document itself, unless otherwise clear.
Rule 3 : Words must be given literal meaning.
Rule 4 : Literal meaning depends on the circumstances of the
parties.
Rule 5 : The contract has to be construed as a whole.
Rule 6 : Technical terms will have technical meaning.
130
3 QUASI CONTRACT
SUB TOPICS
3.1 Theoretical Foundation
3.2 Indian Instances
3.3 Concluding Remark
3.1 THEORETICAL FOUNDATION
Quasi contract or contract in fiction is an equitable concept
arising out of the application of principle of equity in the realm
of interpersonal relations. Chapter V of the Indian Contract
Act relates to such type of interpersonal relations. The Chapter
heading indicates the character of this type of relation. The
heading of chapter V is of certain relations resembling those
created by contract. It therefore suggests that there may be
some situations when the law can construct a contract from the
similarity of the position of the parties with that of contractual
relations. This idea of fictional contract is a product of common
law jurisprudence in England. According to Anson (p.617)
circumstances must occur under any system of law in which it
becomes necessary to hold one person to be accountable to
another, without any agreement on the part of the former to be
so accountable, on the ground that otherwise he would be
retaining money or some other benefit which has come into his
hands to which the law regards the other person as better entitled
or on the ground that without such accountability the other
would unjustly suffer loss. The law of quasi contract exists to
provide remedies in circumstances of this kind. Anson of
course, did not think the term quasi contract to a happy one
though he is clear about the existence of such a situation where
justice demands creation of accountability by one to the other.
According to him distinctive marks of quasi contracts are:
(i) Such a right is always a right to money mostly a liquidated
sum though may not always be so.
(ii) It does not arise out of contract between parties, but is
imposed by law.
(iii) This right is unlike tort, right against only a specific person.
Anson has also examined the two views about quasi contracts.
The traditional view is that it rests upon a hypothetical contract
which is implied by the law. According to this view quasi
contract has to be a branch of Law of contract and hence subject
to some limitations. On the other hand modern view is that the
liability in quasi contract is not connected with contract at all.
Obligations are imposed by the law in the situation when one
person unjustly enriched himself at the cost of another. It cannot
be taken into the realm of tort because the remedy is not in rem.
Historically, the situation has arisen out of the action of Account.
The action was used against bailees, receivers and guardian in
soakages, as they were called upon to account for money or
other goods committed to their charge. The writ also came into
use where money had been paid under a mistake or upon an
executory consideration which had wholly failed or also where
it had been extorted by fraud or duress. In 1602, in Slades
Case [4 COREP 91] the full court of exchequer chamber held
that an indebitatus assumpsit could be brought in circumstances
in which the debt was really the proper action as for example
there can be a quantum meruit to be awarded against the person
who had not performed his contract.
Lord Mansfield is said to be the real founder of the modern law
of quasi contract. In his judgement in Moses v. Macferlan
[(1760)2 Burr 1005], Mansfield explained the judicial basis of
such an action. Moses received from Jacob four promissory
notes of 30s each. He endorsed these to Macferlan who, by a
written agreement, contracted that he would not hold Moses
liable on the endorsement. Subsequently Macferlan sued Moses
on the notes in a Court of Conscience. The Court refused to
recognise the agreement and Moses was forced to pay. Later,
Moses brought an action against Macferlan in the Kings bench
for the money. Lord Mansfield allowed the prayer holding this
kind of equitable action to recover back money, which ought
not in justice to be kept, is very beneficial, and therefore much
encouraged. It lies only for money which, ex acquo et bono,
the defendant ought to refund: It does not lie for money paid by
the plaintiff, which is claimed of him as payable in point of
honour and honesty, although it could not have been recovered
from him by any course of law; as in payment of a debt barred
by the Statute of limitations, or contracted during his infancy,
or to the extent of principal and legal interest upon an usurious
contract, or, for money fairly lost at play : because in all these
cases, the defendant may retain it with a safe conscience, though
by positive law he was barred from recovering. But it lies for
money paid by mistake; or upon a consideration which happens
to fail; or for money got through imposition (express or implied);
or extortion; or oppression; or an undue advantage taken of the
plaintiff situation, contrary to laws made for the protection of
persons under those circumstances. In one word, the gist of
this kind of action is, that the defendant, upon the circumstances
of the case, is obliged by the rules of natural justice and equity
to refund the money. This opinion of Lord Mensfield gave
rise to the modern theory of fiction of law which was finally
confirmed by Lord Haldane in Sinclare V. Brougham [(1914)AC
398] when he said so far as proceedings, in personam are
concerned, the Common law of England really recognises
(unlike the Roman Law) only actions of two classes, those
founded on contract and those founded on tort. When it speaks
of actions arising quasi ex contractu it refers merely to a class
of action in theory based on contract which is imputed to the
defendant by a fiction of law.
The next principle that is presented is known as restitution.
Any unjust enrichment at the cost of another is required to be
restituted. According to Anson, the principle includes the
tortious action of conversion and also a proprietory remedy by
which an owner can follow his property into the hands of any
person into which it may come. In equity, the principle of
restitution includes both a personal action similar to, but not
identical with, the action for money had and received (Re
Diplock [(1948)Ch 465] and also the proprietory remedy of
tracing.
131
3.2 INDIAN INSTANCES
The instances of quasi contract in Indian law are based upon
common law principles to a great extent. These are:
(1) Supply of necessaries : According to Section 68 of the
Contract Act (the Act) if a person is incapable of entering
into a contract or any one whom he is legally bound to
support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished
such supplies is entitled to be reimbursed from the property
of such incapable person. This provision is explained by
two illustrations:
(a) A supplies B, a lunatic, with necessaries suitable to
his condition in life. A is entitled to be reimbursed
from Bs property.
(b) A supplies the wife and children of B, a lunatic, with
necessaries suitable to their condition in life. A is
entitled to be reimbursed from Bs property.
The essense of this provision is protecting the interests of
the voluntarily supplier on the ground of equity without
making any personal liability as happens in the case of
contract. Essential ingredients are :
(i) incapacity of the beneficiary to enter into a formal
contract for the supply;
(ii) the supply must form necessary to the conditions of
the life of the beneficiary;
(iii) the supplier to be reimbursed from the estate of the
beneficiary.
This is known as a equitable compensation in the case of
the agreement being void on the ground of the incapacity
of the party. In England, this principle is applied in a very
wide context. This type of quasi contractual remedy is
available when the consideration totally fails or where the
agreement is void due to any reason. As for example, supply
has been made by the contractor in an agreement found
subsequently void. A supplier shall receive the money.
(2) Payment by an interested person : According to Section
69 of the Act a person who is interested in the payment of
money which another is bound by law to pay, and who
therefore, pays it, is entitled to be reimbursed by the other.
As for example, B holds land in Bihar, on a lease granted
by A, the zamindar. The revenue payable by A to the
government being in arrear, his land is advertised for sale
by the government. Under the revenue law, the
consequence of such sale will be the annulment of B's lease.
B, to prevent the sale and consequent annulment of his own
lease, pays to the government a sum due from A. A is
bound to make good to B the amount so paid. The
conditions of liability under this section may arise on the
fulfilment of following conditions :
(i) The plaintiff is not under legal compulsion to pay but
he has only interest in the payment. Under the
statutory provision court authorities are bound to pay
compensation to the injured workman employed by
its contractors. Under workman compensation Act
the contractor is liable to pay the compensation due.
In Port Trust Madras v. Bombay Co., [AIR 1967
Mad 318] the Port authority was statutorily held liable
to pay injured workman and had to pay him the
compensation. So, when the Port Trust asked the
contractor to reimburse the said amount, the Court
held that it could not recover from the defendant, the
contractor, whose negligence has caused the injury
because the Port authority was statutorily liable to
pay the compensation.
(ii) The defendant is lawfully bound to make payment.
As for example, in Govindram v. State of Gondal
[AIR 1950 PC 99] the buyer of the property from
Maharaja of Gondal had to pay the arrears of
municipal taxes in order to save the society from being
sold, it was held that he is entitled to the money.
(iii) Plaintiff must have paid the amount. The plaintiff must
have made the payments to another person. He himself
must not be the creditor or the claimant. He must be a
third party who has interests in the payment of money.
In Secretary of State for India v.Fernandes [(1907) 30
Mad 375], the government was a tenant of a land and
premises from a landlord who defaulted paying land
revenue to the government. The government realised
the amount from the rent payable to the owner. It was
held that the government cannot realise the amount
from the land lord.
(3) Liability to pay for non gratuitous acts : According to
Section 70 of the Act, where a person lawfully does
anything for another, or delivers anything to him, not
intending to do so gratuitously, and such other person
enjoys the benefit thereof, the latter is bound to make
compensation to the former in respect of or to restore, the
thing so done or delivered. As for example, A tradesman,
leaves goods at Bs house by mistake. B treats the goods
as his own. B is bound to pay A for them. According to
justice Gajendragadkar, there are conditions to be satisfied
for application of this provision. These conditions are:
(i) the person should lawfully do something for another
person or delivers something to him;
(ii) he must not intend to act gratuitously; The recipient
of the goods or service must himself be benefitted.
[See State of West Bengal v. B.K. Mandal & Sons'
AIR 1962 SC 779 for details].
(iii) the basic philosophy of this section is based upon
compensating an innocent supplier for his act of
subsistence.
It must be remembered at the same time that the receiver of the
benefit is not bound to accept the service or the goods. He has
every right to either reject the goods supplied or services
rendered or enjoy its benefits. Section 70 is applicable only
when a person enjoys the benefits. By accepting the enjoyment
of the goods or services, he has tacitly undertaken the obligation
132
of paying for the same. Therefore, it comes within the purview
of implied contracts. In Secretary of State v. G.T. Sareen &
Co. [ILR 11 Lah 37], it was held that a person without an
enforceable contract in his favour supplying goods to
government department is entitled to a money equivalent of
the goods delivered assessed at the market rate prevailing on
the date on which the supplies were made". So a Contractor
who has under oral instruction done something, he is entitled
to the money u/S 70 even though he fails to prove the oral
contract.
The services that are rendered, or the goods that are supplied
must be lawfully done. It must be remembered that Section 70
is based upon a principle of equity for compensating an innocent
supplier, therefore one who comes to the equity must come
with clean hands.
A person who has kept some goods of another and is not legally
competent to do so cannot demand compensation. As such a
finder of goods cannot ask for compensation for the goods kept
in the house of another person who used the same.
(4) Finder of goods: According to Section 71 of the contract
Act, a person who finds goods belonging to another and takes
them into his custody, is subject to the same responsibility as
the bailee. A finder of goods therefore becomes a bailee in
case of need. He is therefore responsible for the restoration of
the property to the owner. A finder has a better title on those
gods against everyone excepting the true owner of these goods.
(5) Mistake or Coercion: According to Section 72 a person to
whom money had been paid or anything delivered, by mistake
or under coercion, must repay or return it. As for example, A &
B jointly owe rupees 100/- to C, A alone gives the amount to C,
and B not knowing this fact pays rupees 100/- over again to C,
C is bound to repay the amount to B. Money paid under mistake
of law is also recoverable under this section as decided by the
Privy Council in Sri Sri Shiva Prasad Singh v. Maharaja
Srishchandra Nandi [(1949)76 I.A.44 (P.C)]. In English
Common law money paid under mistake of law is not
recoverable.
Money paid under coercion is subject to the option of the person
on whom the coercion has been perpetrated. If he elects to
avoid the contract, the money thus paid is refundable. Of course
the word coercion has a wider import in Section 72. Money
received in any condition of duress including under the pressure
of circumstances makes Section 72 applicable.
3.3 CONCLUDING REMARK
Quasi Contracts are instances of the application of equity
principles in certain factual situations in order to construct a
contractual obligation. Therefore, one who comes for equity
must come with clean hands. If no factual situation the person
who seeks equity shall be justified in one type of argument like
no one can be enriched without a cause. He has also to
substantiate the bona fide innocence, intention or justification
of self actions. In this sense, a quasi contract is different from
a tortious action. In quasi contract, a bipartite situation of benefit
flow and obligation process is required to be established as if
the benefit flows out of a constructive contract. As such, such
an obligation cannot originate from a violation of right in rem.
In such a case, the compensation question shall be related to
tort. By and large, Indian instances of quasi-contract are based
upon the same English common law principles.
133
4. CASE LAW
1) Charles Rickards Ltd v. Oppenheim [(1950) 1
All E.R. 420 C.A.]
By a contract made between the plaintiffs and the defendant,
the plaintiffs agreed to supply a motor car chassis to the
defendant and to have a body built on to it within seven months,
time being the essence of the contrct. The plaintiffs gave the
work of building the body to sub-contractors and authorised
them to accept instructions in regard to the work direct from the
defendant. The sub-contractors failed to complete the work
within the time stipulated. The defendant waived the original
condition in regard to time but some months later, he gave a
notice requesting delivery within a stated time. The car was
not delivered within the time stipulated by the notice and the
defendant cancelled the contract. The plaintiffs brought an
action against him, claiming the price of the body work and he
counterclaimed for chassis or its value.
The court held that as there was an initial stipulation making
time the essence of the contract, the defendant after waiving
that initial stipulation was entitled to give a reasonableness
notice making time the essence of the matter, whether the
contract was for the sale of goods or for work and labour. The
reasonableness of the notice had to be judged at the time at
which it was given, and it could not be held to be bad because,
after it was given, there were unanticipated difficulties in making
delivery.
The court further held that on the facts of the case, the notice
was reasonable, and it was good notice to the plaintiffs even
though it was given by the defendant only to the sub-contracts.
Waiver of the notice could be inferred only from conduct which
showed an intention to affect the legal relations of the parties
and therefore, the defendants failure to reply to a letter from
the plaintiffs in which they assumed that he would take delivery
of the car at a later date, did not amount to a waiver of the
notice, and the defendant was entitled to rescind the contract
and to receive the chassis or be repaid its value.
2) Fateh Chand (Appellant) v. Balkishan Dass,
(Respondent) [AIR 1963 SC 1405]
In this case, the leasehold rights in the land together with
building were sold to Balkishan Das (plaintiff). The plaintiff
contracted to sell his rights in the land and the building to Fetch
Chand (Defendant). The plaintiff received money and delivered
possession of the building and the land in his occupation to the
defendant, but the sale of the property was not completed before
the expiry of the period stipulated in the agreement. Alleging
that the agreement was rescinded because the defendant had
committed default in performing the agreement, the plaintiff
brought an action claiming a decree for possession of the land
and building and a decree for compensation for use and
occupation of the building.
The trial judge held that the plaintiff had failed to put the
defendant in possession of the land agreed to be sold and
therefore could not retain the money received by him under the
agreement.He accordingly directed that on the plaintiff
depositing Rs. 25,000/- less 1400/-(being the amount of mesne
profits prior to the date of the suit) the defendant do put the
plaintiff in possession of the land and the building, and awarded
to the plaintiff future mesne profits at the rate of Rs.140/- per
mensum from the date of the suit until delivery of possession.
In appeal, the High Court modified the decree passed by the
trial court and declared that the plaintiff was entitled to retain
out of Rs.25,000/- paid by the defendant under the sale
agreement, a sum of Rs.11,250/- being compensation for loss
suffered by him and directed that the plaintiff to get from the
defendant compensation for use and occupation. The defendant
filed an appeal to the Supreme Court.
The Supreme Court held that in the absence of any proof of
damage arising from the breach of the contract, the amount of
Rs.1000/- (earnest money) which has been forfeited and the
advantage that the plaintiff must have derived from the
possession of the remaining sum of Rs.24,000/- during all this
period would be sufficient compensation for him. The plaintiff
has separately claimed mesne profits for being kept out of
possession for which he has got a decree and therefore the fact
that the plaintiff was out of possession cannot be taken into
account in determining damages. The Court set aside the decree
passed by the High Court awarding Rs.11,250/- as damages to
the plaintiff. The Supreme Court modified the decree and
ordered that the plaintiff is entitled to retain out of Rs.25,000/-
only Rs.1000/- received by him as earnest money, and that he
is entitled to compensation at the rate of Rs.140/- per mensum
and interest on that sum at the rate of six percent as it accrues
due month after month till the date of delivery of possession
subject to the restriction prescribed by O20R12(1) of the CPC.
3) Gambhirmull Mahabir Prasad (Plaintiff) v. The Indian
Bank Ltd and another [AIR 1963 Cal 163]
Defendants 1 & 2 had their branch office at Rangoon. The
plaintiff instructed the defendant Bank in Calcutta (defendant
No.1) to arrange for the immediate re-shipment of the goods,
lying in Rangoon to Calcutta and if re-shipment was not possible
to arrange for insurance and storage of the goods. The
Defendant No.2 offered to re-ship the goods on receipt of a
deposit of Rs.400/- and certain documents. This letter was
handed over by the plaintiff to the Defendant Bank (Defendant
No.1) for further action. Thereupon the defendant bank wrote
to defendant No.2 to arrange for re-shipment through its agent
at Rangoon. Defendant No.2 agreed to reship the goods through
its Rangoon Agents upon the deposit being made. The defendant
bank paid to the defendant No.2 the said sum and accordingly
the defendant No.2 communicated to its Rangoon Agent
instructions for re-shipment. The plaintiff filed a suit against
the defendant bank alleging that the defendant bank committed
breaches of its agreement and of its duties as an agent of the
plaintiff and conducted the business undertaken by it negligently
and without skill and diligence.
134
The court held that it is essential to a cause of action that the act
complained of should be the real or effective cause of the injury
or loss sustained. The law disregards such subtleties and
niceties, as to causes and possibilities, and it acts upon the
intelligible ground that where there has been misconduct or
negligence in the agent, all losses and damages occuring
afterwards to which the property would not be exposed but for
such misconduct or negligence, are fairly attributable to it, as a
sufficiently proximate cause, although not necessarily the
immediate or nearest cause of the loss or damage. The doctrine,
too, may be vindicated upon the broader ground of public policy,
that no wrongdoer ought to be allowed to apportion or qualify
his own wrong; and that, as a loss has actually happened, whilst
his wrongful act was in operation and force, which is fairly
attributable to his wrongful act he ought not to be permitted to
set up, as a defence, that there was a more immediate cause of
the loss, acting upon the subject matter at the same time, or a
bare possibility of loss, if his wrongful act had not been done.
The measure of damages in an action by a Principal against his
agent for negligence or any other breach of duty by the agent in
course of the agency is the loss actually sustained by the
Principal, provided that it was the nature and probable
consequence of the breach or such loss as in the particular
circumstances the agent might reasonably have expected to
result from such negligence or breach of duty.
4) Jawahar Lal Barman v. Union of India [AIR 1962 SC 378]
The principal point which this appeal by special leave raises for
our decision related to the construction of Ss. 32 and 33 of the
Arbitration Act, 1940 (hereafter called the Act). The respondent,
Union of India, filed a petition in the Court of the First Class
Sub-Judge at Delhi against appellant M/s. J. Burman and Co.,
through its proprietor Jawahar Lal Burman under Ss. 33 and 28
of the Act. The respondent alleged that a concluded contract
had been entered into between the parties on August 31, 1949,
for supply of 1701/2 Cwt. of coconut oil by the appellant to the
respondent. The respondent had advertised in the Indian Trade
Journal for the said supply and the appellant had submitted its
tender No.SM-I/104524. This tender was accepted by the
respondent which concluded a contract between the parties.
The respondents case was that the said contract was governed
by general conditions of contract Form W.S.B. 133. These
conditions included an arbitration agreement. Disputes arose
between the parties regarding the said contract, and so in
pursuance of the arbitration agreement they were referred to the
two arbitrators appointed by the parties. After the arbitration
proceedings had gone on for a considerable time before the
arbitrators, the appellant objected to their jurisdiction to deal
with the disputes on the ground that there was no concluded
contract between the parties. This plea made it necessary for
the respondent to move the court for decision of the question
about the existence and validity of the arbitration agreement. It
was on these allegations that respondent in its petition claimed
that it may be held that there was a concluded contract between
the parties containing a valid agreement. The petition having
been made under S.28 along with S.3 the respondent prayed
that suitable extension of time be granted to the arbitrators for
making the award. The appellant pleaded in defence that no
concluded contract had been made between the parties and
that there was no jurisdiction in the Court to grant extension
under S.28.
The quetion as to whether there was a concluded contract
between the parties or not requires careful consideration. We
have noticed that in response to the advertisement published
by the respondent in the Indian Trade Journal the appellant
submitted its tender. It is common ground that the tender thus
submitted was subject to the conditions of contract governing
the Department of Supply Contracts which were set out in the
Government Publication Form W.S.B.133, Clauses 4(a) and (b)
of these conditions are relevant. They deal with the security
deposit. Clause 4(a) provides that on acceptance of the tender
the contractor shall at the option of the Secretary, Department
of Supply and within the period specified by him, deposit with
him a security deposit therein specified. Clause 4(b) provides
that if the contractor is called upon by the purchaser to deposit
security and the contractor fails to provide the security within
the period, such failure will constitute a breach of the contractor
and the Secretary, Department of Supply, shall be entitled to
make other arrangements at the risk and acceptance of the
contractor. It is thus obvious that the tender offered by the
appellant submitted to these terms and that on these terms
security deposit is a condition subsequent and not a condition
precedent is not disputed; but Mr.Din Dayal contends that this
position has been substantially varied by the Form in which the
appellants tender was accepted by the respondent. His
argument is that the material words used in the acceptance letter
changed the pre-existing position and made the security deposit
a condition precedent to the acceptance itself. If this contention
is right it would necessarily mean that there was no concluded
contract. Thus the decision of this point depends upon the
construction of the letter of acceptance issued by the respondent
to the appellant after receiving its tender.
In this letter written on August 31, 1949, the respondent stated
as follows :
Dear Sirs,
Ref : Your Tender No & Date Nil.
Your offer is hereby accepted for a quantity of 1704 Cwts & 2
qrs. of Coconut oil conforming to specification No.IM.1370(d)
at Rs.89/6- (Rupees eighty-nine and annas six only) per Cwt.
packed in non returnable sound, strong 45 gallon drums delivery
ex-godown at Calcutta by 30-9-49 or earlier possible subject to
your depositing 10 per cent as security.
The security money which comes to Rs.15,230/- should please
be deposited immediately into a Government Treasury in favour
of the Deputy Accountant General, I & S., Akbar Road, New
Delhi and the Treasury Receipt forwarded to this office. This
security money will be refunded to you after the completion of
the contract.
135
The contract is concluded by this acceptance and a formal
acceptance of Tender will follow immediately on receipt of
Treasury Receipt Kindly acknowledge receipt
Yours etc. etc.
The whole argument is founded on the use of the clause
subject to your depositing 10 percent as security. Prima facie
this clause may justify the argument that it is intended to make
the security deposit a condition precedent; but in construing
the true effect of this clause we must look at the whole of the
letter bearing in mind the fact that it has been written not by a
lawyer or in consultation with a lawyer but by a Government
officer in the ordinary course of the discharge of his duties. The
first sentence in the first paragraph clearly shows that the offer
was accepted for the quantity therein specified amount is
deposited immediately into the Government Treasury. This
paragraph is more consistent with Cl.4(a) of the general
conditions. It reads as if having accepted the tender the appellant
is reminded that it has to deposit the amount under the relevant
condition, and the letter ends with the categorical statement
that the contract is concluded by this acceptance. Mr. Din
Dayal is right when he contends that S.7 of the Contract Act
requires that the acceptance of the offer must be absolute and
unqualified, it cannot be conditional; but reading the letter as a
whole we do not think that the Courts below have erred in coming
to the conclusion that this letter amounts to an absolute and
unqualified acceptance of the tender or offer made by the
appellant. While dealing with this question it may be pertinent
to recall that the general conditions of the contract prescribed
by Form W.S.B 133 are made a part of the tender, and the contract
itself was intended to be executed expeditiously. The tender
shows that the appellant represented that the earliest date by
which delivery could be effected would be within twenty days
from the date of the receipt of the order and it also said that full
quantity of coconut oil required was held by it. Therefore, to
begin with the tender treated the security deposit as a
subsequent condition, the contract was for the immediate supply
of goods and the acceptance purports to be in accordance with
the relevant government rules and uses the expression that the
contract was concluded by the said acceptance. Therefore, in
our opinion, reading the letter as a whole it would not be possible
to accept the appellants argument that the letter was intended
to make a substantial variation in the contract by making the
deposit of security a condition precedent instead of a condition
subsequent.
In the result the appeal fails and is dismissed with costs.
Appeal dismissed.
5) Union of India and Others v. Messrs. Bhim Sen Walaiti
Ram [(1963) 3 SCC 146].
An auction was held for the sale of licence of country liquor
shop in Bela Road, Delhi for the year 1949-50, on March 23,
1949. The respondent offered the biggest bid of Rs.4,01,000/-
for the shop. Under the Excise Rules, the bidder was required
to deposit one sixth of the price within seven days of the auction
but the deposit was not made by the respondent. In these
circumstances, the Chief Commissioner did not confirm the bid
of the respondent and resale of the Excise Shop was rendered.
On May, 3, 1949, the shop was again auctioned when Messr.
Daulat Ram Amar Singh offered the highest bid of Rs.2,20,000/
- which was confirmed by the Chief Commissioner on July 7,
1949. Holding the respondent liable for the loss of Rs.1,81,000/
- being the difference between the bid of the respondent and of
Messrs, Daulat Ram Amar Singh the Collector of Delhi started
proceedings for the recoveryof Rs.1,81,000/- Thereupon the
respondent filed a suit in the Court of the Senior Subordinate
Judge, Delhi, praying a permanent injunction restraining the
appellant from taking any proceedings to recover the suit
amount. The trial Judge decreed the suit holding that the sale
was subject to confirmation by the Chief Commissioner under
Clause 33 of the conditions of auction and since the auction in
favour of the respondent was not accepted by him there was no
concluded contract between the parties. The decree of the Trial
Court was upheld by the lower appellate court. In the second
appeal, Falshaw J of the Circuit Bench of the Punjab High
Court at Delhi, took the view that Clause 33 was not in
consonance with the statutory rules and the contract came into
existence when the bidding was closed in favour of the
respondent on March 23, 1949. The respondent therefore was
held liable to make good the loss which the Government
sustained in resorting to the resale of the excise shop. In the
Letters Patent Appeal, the decision of the single Judge was
reversed and that of the Trial Court. The appellant contended
that the respondent was under a legal obligation to pay one-
sixth of the price within seven days of the auction under Clause
21 of Rule 5.34 of the Excise Rules and it was due to his default
that a re-sale of the excise shop had to be ordered; and under
Clause 22 of Rule 5.34,the respondent was liable for the
deficiency in price and all expenses of resale which was caused
by his default.
This appeal is brought by certificate from the judgment of the
Division Bench of the Punjab High Court.
2. An auction was held for the sale of license of country liquor
shop in Bela Road for the year 1949-50" ExD-23 Clauses 31
and 33 of the conditions were to the following effect ;
31. The Chief Commissioner is under no obligation to grant
license until he is assured of financial status of the bidder. At
the conclusion of the auction an enquiry will be made into the
financial position of any bidder not known to the excise staff
and any such bidder shall if necessary be called upon to furnish
security for the observance of the terms of his licence as required
by sub-section (2) of Section 34 of the Punjab Excise Act 1 of
1949, as extended to Delhi Province.
33. All final bids will be made subject to the confirmation by
the Chief Commissioner who may reject any bid without
assigning any reasons. If no bid is accepted for any shop, the
Chief Commissioner reserves the right to dispose it off by tender
or otherwise as he thinks fit...
3. The respondent offered the highest bid of Rs.4,01000/- for
the shop, Under the Excise Rules the bidder had to deposit one-
136
sixth of the purchase price within seven days of the auction but
the deposit was not made by the respondent. In these
circumstances the Chief Commissioner did not confirm the bid
of the respondent and resale of the excise shop was ordered.
On May, 3, 1949, the shop was again auctioned when Messers
Daulat Ram Amar Singh offered the highest bid Rs.2,20,000/-
which was confirmed by the Chief Commissioner, on July 7,
1949. Holding the respondent liable for the loss of
Rs.1,81,000-. On July, 22, 1949, the respondent filed a suit in
the Court of Senior subordinate Judge, Delhi, praying for
permanent injunction restraining the appellants from taking any
proceedings to recover the amount. The trial judge decreed the
suit holding that the sale was subject to confirmation by the
Chief Commissioner under Clause 33 and since the auction in
favour of the respondent was not accepted by him, there was
no binding obligation between the parties. The decree of the
Trial Court was upheld by the lower appellant court. In second
appeal Falshaw J took the view that Clause 33 was not in
consonance with the statutory rules and the contract came into
existence when the bidding was closed in favour of the
respondent on March 23, 1949. The respondent was therefore
held liable to make good the loss which the Government
sustained in resorting to the resale of the excise shop. The
respondent preferred an appeal under Letters Patent. The
Division Bench allowed the appeal reversing the decision of
the Single Judge and restored that of the Trial Court.
Clause 21 of Rule 5.34 states:
A person to whom a shop has been sold shall pay one-sixth of
the annual fee within seven days of the auction (any deposits
already made shall be credited to future payments) by the 7th
of the month in which he begins his business under his license
and by the 7th of every subsequent month the licensee shall
pay one twelfth of the annual fee till the whole fee is paid. But
he may at any time pay the whole amount due if he wishes. If
the total amount due is less than Ra.100 it shall be payable in
one sum unless the Collector on special reasons, allows payment
to be made in instalments. If any person whose bid has been
accepted by the officer presiding at the auction fails to make
the deposit of one-sixth of the annual fee, or if he refuses to
accept the license, the Collector may resell the license, either
by public auction or by private contract, and any deficiency in
price and all expenses of such resale or attempted resale shall
be recoverable from the defaulting bidder in the manner laid
down in Section 60 of the Punjab Excise Act I, of 1914, as
applied to the Delhi Province.
Rule 22 states:
When a license has been cancelled, the Collector may resell it
by public auction or by private contract and any deficiency in
price and all expenses of such resale or attempted resale shall
be recoverable from the defaulting licensee in the manner laid
down in Section 60 of the Excise Act as applied to the Delhi
Province.
4. On behalf of the appellants it was contended by Dr. Syid
Muhammad that the respondent was under a legal obligation to
pay one sixth of the annual fee within seven days of the auction
under Clause 21 of Rule 5.34 and it was due to his default that a
resale of the excise shop was ordered. Under Clause 22 of Rule
5.34 the respondent was liable for the deficiency in price and all
expenses of such resale which was caused by his default. We
are unable to accept this argument. The first portion of Clause
21 requires the Person to whom the shop has been sold to
deposit one-sixth of the total annual fee within seven days. But
the sale is deemed to have been made in favour of the highest
bidder only on the completion of the formalities before the
conclusion of the sale. Clause 16 of Rule 5.34 states that all
sales are open to revision by the Chief Commissioner. Under
Clause 18, the Collector has to make a report to the Chief
Commissioner where in his direction he is accepting a lower bid.
Clause 33 of the Conditions, Ex D-28, states that all final bids
will be made subject to the confirmation by the Chief
Commissioner who may reject any bid without assigning any
reasons. It is, therefore, clear that the contract of sale was not
complete till the bid was confirmed by the Chief Commissioner
and till such confirmation the person whose bid has been
provisionally accepted is entitled to withdraw his bid. When
the bid is so withdrawn before the confirmation of the Chief
Commissioner the bidder will not be liable for damages on
account of any breach of contract or for the shortfall on the
resale. An acceptance of an offer may be either absolute or
conditional. If the acceptnace is conditional the offer can be
withdrawn at any moment until absolute acceptance has taken
place. This view is borne out by the decision of the Court of
Appeal in Hussey v. Hornepayne [1878(8)CHD670 at 676]. In
that case V offered land to P and P accepted `subject to the title
being approved by my solicitors. `V later refused to go with the
contract and the Court of Appeal held that the acceptance was
conditional and there was no binding contract and that V could
withdraw at any time until Ps solicitors had approved the title.
Jossel M.R., observed at p.626 of the report as follows:
The offer made to the plaintiff of the estate at the price was a
simple offer containing no reference whatever to title. The
alleged acceptance was an acceptance of the offer, so far as
price was concerned, 'subject to the title being approved by our
solicitors. There was no acceptance of that additional term,
and the only question which we are called upon to decide is,
whether that additional term so expressed amounts in law to an
additional terms or whether it amounts, as was very fairly
admitted by the counsel for the respondents, to nothing at all,
that is, whether it merely expresses what the law would otherwise
our solicitors appears to me to be plainly an additional term.
The law does not give a right to the purchaser to say that the
title shall be approved by any one, either by his solicitor or his
convening counsel, or any one else. All that he is entitled to
require is what is called a marketable title, or, as it is sometimes
called a good title. Therefore, when he puts in subject to the
title being approved by our solicitors, he must be taken to
mean what he says, that is, to make a condition that solicitors of
his own selection shall approve of the title.
137
It was submitted on behalf of the appellant that the phrase
Person to whom a shop has been sold in Clause 21 of Rule
5.34 means a person whose bid has been provisionally
accepted. It is not possible to accept this argument. As we
have already shown the first part of Clause 21 deals with a
completed sale and the second part deals with a situation where
the auction is conducted by an officer lower in rank than the
Collector. In the latter case the rule make it clear that if any
person whose bid has been accepted by the officer presiding at
the auction fails to make the deposit of one-sixth of the annual
fee, or if refuses to accept the license, the Collector may resell
the license, either by public auction or by private contract and
an deficiency in price and all expenses if such resale shall be
recoverable from the defaulting bidder. In the present case the
first part of Clause 21 applies it is not disputed that the Chief
Commissioner has disapproved the bid offered by the Clause
33 of Ex.D-23 the auction sale in favour of the respondent would
have been a completed transaction and he would have been
liable for any shortfall on the resale. As the essential pre-
requisites of a completed sale are missing in this case there is
no liability imposed on the respondent for payment of the
deficiency in the price.
5. For these reasons we hold that the judgment of the Punjab
High Court is correct and this appeal must be dismissed with
costs.
6) M/s. Timber Kashmir Pvt. Ltd v. The Conservator of Forests,
Jammu [AIR 1977 SC 151]
The Jammu and Kashmir Government had filed three
applications under Sec.20 of the Jammu and Kashmir
Arbitration Act, 2002, to refer disputes arising out of three
agreements between it and the appellant Company to arbitration
under the arbitration clauses of agreements between the parties.
The applications had been dismissed by the learned Single Judge
on the ground that the arbitration clause was, in each case, a
part of an agreement which was not duly executed in accordance
with the provisions of Section 122(1) of the Constitution of
Jammu and Kashmir which correspond to those of Article 299
(1) of the Constitution of India. The Division Bench had allowed
the appeals of the Conservator of Forests, Jammu Circle, after
holding that the provisions of Section 122 (1) of the Constitution
of Jammu and Kashmir could not be said to have been infringed
if contracts were signed by the Conservator of Forests in
compliance with an order of the Government.
The main stay of the case of the appellant company was an
instruction or rule contained in the book of Financial Powers
which reads as follows:
5.13. The power to sanction or cancel the terms of instruments,
leases, agreements is delegated in the following cases :
Sr. No. Nature of Power To Whom Delegated Extent
1 2 3 4
9. To sell forest produce Chief Conservator Upto Rs.7,000/- in
and to enter into of Forests. value in each case
contract for the same provided the highest
tender is accepted.
Conservators of Upto Rs.3,000/- in
Forests. each case provided the
highest tender is
accepted.
Divisional Forest Upto Rs.1,000/- in
Officer each case provided
the highest tender is
accepted.
This rule existed prior to coming into force of the Constitution
of Jammu and Kashmir. It may also be pointed out that this
rule deals with the powers to sanction or cancel leases,
agreements, and other instruments which was delegated to the
officers mentioned there with limitations on their powers
specified there. But, the Constitutional provision, relied upon
on behalf of the appellant, relates to the manner of the execution
of the formal document containing the contract after its sanction.
It is true that the contract could not be executed with out the
sanction. Nevertheless, if the sanction could be either expressly
or impliedly given by or on behalf of the Government, as we
think it could, and if some acts of the Government could fasten
some obligations upon the Government the lessee could also
be estopped from questioning the terms of the grant of the
sanction even where there is no written contract executed to
bind the lessee.
In this case, we have agreements from which the appellant
company has derived benefits. And, these are contracts validly
executed on behalf of the Government of Jammu and Kashmir
by the Conservator of Forests. It is true that, if the appellant
138
could take up the legal plea that the contracts were not duly
executed, in accordance with Section 122(1) of the Constitution
of Jammu and Kashmir, it could urge that they did not have any
effect at all as contracts whatever other legal consequences its
acts or conduct may have had. But this does not mean that, if a
party obtains benefits on the understanding that it would abide
by certain conditions, as the appellant company had done, it
could not be compelled to observe those condition to refer
disputes to arbitration.
The threee leases, containing the arbitration clauses which the
appellant wants to avoid, were executed on 27th February, 1963
and 28th February, 1963 and 19th March, 1963, after the
notification mentioned above. The leases were duly signed by
Conservators of Forests, who were expressly authorised, without
any limits imposed on the valuation of the leases, to sign and
execute them on behalf of the Government. The delegation of
power made prior to the Jammu and Kashmir Constitution
related to grants of sanction and their cancellation. It did not
expressly refer to powers to execute leases which is a separate
matter. The notification of 1957, however, is specifically related
to the execution of formal documents including leases. Hence,
it will cover the three leases before us even if the former rules
relating to the limits of the authority of Forest Officers to give
or cancel certain sanctions could be said to be in existence at
all after the enactment of the new Constitution of Jammu and
Kashmir and the notification of 23rd February, 1957, cited
above.
The Jammu and Kashmir Government had tried to remove the
doubts it entertained about the validity of past leases executed
by the Conservator of Forests. It, therefore, passed two orders:
one of 14th April, 1965, and the other of 29th April, 1971. The
order of 14th April, 1965, ran as follows :
In suppression of previous orders regarding signing of
lease agreement it is ordered that the Conservator of
Forests will sign agreements relating to all cases of
Forests leases and appropriation of forest products and
Chief Conservator of Forests will act as the arbitrator as
provided under Cl.44 of the agreement.
By order of the Government of Jammu and
Kashmir.
Sd/- Bharat Bhusan
Secretary to Govt. Forest Department.
The order of 29th April, 1971, runs as follows :
Government Order No.FST-31 dated 14-4-65 shall be deemed
to have taken effect from 29-1-63 and all actions taken by the
Conservators of Forests in executing the lease agreements by
virtue of the said order are hereby regularised.
By order of the Government of Jammu and
Kashmir.
Sd/- R.C. Bhargava,
Secretary to Government, Agricultural
Department.
7. The learned Chief Justice had observed that these orders,
purporting to ratify the leases which were valid, did not have
any legal effect whatsoever and were unnecessary. If there had
been any question to be decided as to whether the Government
had sanctioned the leases, its actions, apart from the execution
of leases, could be considered. But, once there has been a valid
execution of leases by duly authorised officers, the documents
would be the best evidence of sanction also. That was one of
the objects of prescribing a formal mode of execution of
instruments on behalf of the Government apart from the need
to protect its interests against mala fide and other unauthorised
acts of its servants or agents.
The only question which needed decision here was whether
formal execution of the leases by duly authorised officers had
been proved. We are of opinion that the Conservator of Forests
was, for the reasons given by us. duly authorised to execute
the leases. Accordingly we affirm the orders of the Division
Bench so that matters in dispute between the parties could be
validly referred to Arbitration under the appropriate clauses of
the agreements
These appeals are, therefore dismissed with costs.
139
5. PROBLEMS
1. Moti & Sohan Lal were bus owners who ran bus service
and carried passengers for hire on different routes in the
State of Uttar Pradesh. After the Constitution came into
existence some of the persons were denied the permit to
operate their buses on certain routes by the State transport
authorities. This was done in pursuance of the policy of
the State Govt. to run buses of their own on some of these
routes.
Does the exercise of the executive power of the Union and
the States under Art. 298 of the Constitution to carry on
any trade or business activity to enter into contracts require
any legislative sanction? Give reasons.
2. A tender was not accepted within a stipulated time. At the
request of the govt. the tenderer agreed to keep it open
upto 19.12.88. However on 30.12.88 he withdrew his tender
offer. The govt. after giving him an opportunity of being
heard, blacklisted the tenderer.
a) Can a contractor be blacklisted for committing a
breach of contract?
b) Can a tenderer be blacklisted if he is not informed
previously that such a penalty can be imposed if he
withdrew the offer?
c) Can govt. insert a new condition of blacklisting not
previously known to the tenderer with retrospective
effect in the invitation to tender?
3. A contractor had entered into a contract with the Union of
India for supply of certain goods. A dispute arose between
the parties and the same was referred to arbitration. Before
the arbitrator, the contractor claimed a sum of Rs. 2,35,000
from the Union of the India on account of breach of the
contract by it. The Union of India filed a counter claim
against the contractor for a sum of Rs. 2,28,000 on account
of loss suffered by it as general damages. When the matter
was pending before the arbitrator, the Union of India asked
the contractor to pay the said sum failing which, he was
threatened that it will be recovered from his pending bills
without any further reference to him. This action was
proposed to be taken pursuant to clause 12 of the conditions
of contract. The contractor approached the court under Sec.
41(b) of the arbitration Act, 1940.
a) Discuss the issue involved in the case.
b) Prepare a brief for the contractor.
4. Mr. Murthys firm is registered with Mr. Sohan. Under this
registration, the annual requirement of Mr. Murthy has been
assessed at 15,000 quintals. As such Mr. Murthy can quote
only for this registered quantity. Regional Office of Mr.
Sohan at Chandigarh invited tenders for the purchase and
removal of damaged food grains declared fit for cattle/
poultry feed etc. Mr. Murthy submitted his tenders through
Sri. Niranjan Lal in the prescribed form. The tender
submitted by Mr. Murthy, was not signed by all the partners
of his firm. Tenders were submitted and opened on June 29,
'93. However the tender of Mr. Murthy was accepted and an
acceptance telegram was issued by Sohan on July 22, '93
which was received by Mr. Murthy on July 24, '93. The
telegram dated July 22, '93 placed an order for stock of about
6200 M.Ts of damaged paddy for purchase. Mr. Murthy did
not furnish the security deposit sum.
Explain:
a) Whether the contract between the parties is valid and
binding on Mr. Murthy? If so, to what effect.
b) Whether Mr. Murthy could quote only for the
registered quantity of 1500 metric tonnes? What is
the effect of capacity assured for registration on the
contract entered into between the parties?
c) Whether the contract could be executed by an
authorised person on behalf of Mr. Murthy? If not,
why?
5. The Govt. of U.P. had grown a large quantity of bhabar
grass suitable for manufacturing paper. The Conservator
of Forest was authorised on behalf of the govt to sell the
grass and enter into contracts with regard to it on behalf of
the govt. The Conservator of Forests invited tenders for a
leased sale of the said grass. It was stated in the invitation
to tender that the exact terms of the contract will be subject
to settlement, but approximate terms can be ascertained
before submission of tenders. Devi Prasad submitted a
tender which did not reach in time. However the
Conservator of Forest invited Devi Prasad to submit a fresh
tender in which he offered to pay a royalty of rupees one
lakh per year and agreed to take the lease for a period of
ten years. He also agreed to deposit any amount by way of
security as may be mutually agreed upon. Thereafter, a
number of letters were exchanged between the parties
negotiating the various terms and agreeing on many of them.
Subsequently Devi Prasad without any valid reason refused
to execute the leased sale and proceeded against the govt.
for the recovery of security money which was forfeited.
a) Is Devi Prasad entitled to recover the security money
because it was a condition of the contract that a formal
deed would be executed later on embodying the
contract?
b) Did Devi Prasad have an option not to go on with it
as the contract was not complete until such deed was
executed?
6. Chief Director of purchases, Food Department. Govt. of
India invited tenders for selling the American cigarettes
lying with the department. Rallia Ram submitted his tender
offering to purchase the entire stock for Rs. 39 lakhs. Some
correspondence took place between the govt and Rallia Ram
and finally the tender of Rallia Ram was accepted by the
govt. Rallia Ram took delivery of about 30 thousand packets
of cigarettes and paid for the same. On inspection he found
140
that these cigarettes were mildewed and were unfit for use.
The govt of India appointed a Board of Survey who after
inspection reported that the cigarettes of the value of Rs.
6.5 lakhs wholly unfit for use and for the remaining
cigarettes the Board recommended a reduction of price at a
certain rate. Rallia Ram refused to accept the goods on the
revised terms. The Govt cancelled the contract and offered
to take back such cigarettes as were in the original packing.
Afterwards a dispute arose as to the loss suffered on the
cigarettes not in the original packing and interest. Matter
was referred to arbitration. Arbitrator gave award in favour
of Rallia Ram. Govt of India files an appeal on the ground
that the award is liable to be set aside as there was no valid
arbitration agreement in confirmity with Sec. 175(3) of the
Govt. of India Act, 1935 which authorised the umpire to
make his award. Decide.
7. There was an advertisement for the sale of govt property.
Mr. Joshi submitted his tender for the same. The govt.
issued the acceptance to Mr. Joshi by a telegram. The
telegram stated as follows:
..... your tender for purchase of Government Gram sanctioned
as follows(.) .... FOOD SUP.
Not to be telegraphed
Sd/- R.L. Soni,
for Director of Food & Civil Supplies
M.P.
Index 5.1.74
Is there a valid and binding contract between the parties?
Explain with reasons.
8. B agreed to erect a house for the plaintiff according to a
plan by certain date. The defendants were Bs sureties. After
partly completing, B ceased work, and the plaintiff, after
giving notice to the sureties, entered and completed and
sued the sureties for damages. Discuss with reasons if
plaintiff is entitled to any relief.
9. The plaintiff agreed to build a house for the defendant using
a special type of pipe. A different sort of pipe in fact was
used, and the defendant refused to pay the final instalment
of Rs. 50000/-. To replace the pipe would involve virtual
demolition of the house and the substitute pipe was just as
efficacious. Under this situation what is the liability of
defendant towards the petitioner?
10. The plaintiff agreed to erect certain buildings on the
defendants land for 1000. He failed to complete the
contract. The defendant there upon completed the building
himself using materials left at the site by the plaintiff. The
plaintiff brought an action to recover the value of the work
done and also claimed in respect of the building material
used. Explain the liability of the defendant.
[Note: Specify your name, ID No. and address white sending answer papers]
141
6. SUPPLEMENTARY READINGS
1. Avtar Singh, Law of Contracts, (1985), Eastern Book Co. Lucknow.
2. Anson, Law of Contract, (1984), English Language Book Society & Oxford University Press, London.
3. Agarwal Y.K., Government Contracts Law and Procedure, (1984), Eastern Book Corporation, Delhi.
4. Friedman, Law in Changing Society, (1984), University Book House, Delhi.
5. Iyer, Venkatesh, Law of Contract, (1987), Asia Law House, Hyderabad.
6. Jain M.P. & Jain S.N., Principles of Administrative Law, (1986), N.M. Tripathi Pvt. Ltd., Bombay, pp.808-889.
7. Rao, S.V.J., Contract Law, (General Principles) Cases and Materials, (1991), NLSIU, Bangalore.
8. Laxmi Narain and Murthy, B.S., Public Enterprises and Fundamental Rights, (1984), N.M. Tripathi Pvt. Ltd., Bombay.
9. Puri, K.K., Australian Government Contracts Law and Practice, (1978), CCH Australia Limited, North Ryde, N.S.W.
10. Puri and Ponnuswamy, Cases and Materials on Contract, (1974), Eastern Book Co., Lucknow.
142
DISCHARGE OF CONTRACT
Master in Business Laws
Law of Contracts
Course No: I
Module No: V
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
143
Materials Prepared By:
Prof. S. Jagapathy, B.Com., (Hons), B.L., Advocate.
Materials Checked By:
Ms. Sudha Peri, M.A., LL.M.
Ms. Archana Kaul, B.Sc., LL.M.
Materials Edited By:
Prof. N. L. Mitra, M.Com., LL.M., Ph.D.
Prof. P.C. Bedwa, LL.M., Ph.D.
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore - 560 072.
144
Instructions
According to H.L.A. Hart law is a rule and in a legal system there are structures of various types of rules. To him
the rule of governance i.e., rule of power management of the State craft is known as secondary rule of recognition
whereas people are bound by primary rule of conduct which make the society possible. This primary rule of
conduct is known as primary rule of evidence. There can be at least two types of primary rules of obedience. Firstly,
involuntary and autonomous primary rule and secondly, voluntary and individual specific primary rule of
conduct. Constitutional lawyers call the first as realm of public law of regulation and second as private law of
conduct. Contract falls under the second category. Here two individuals entering into a specific contract among
themselves create and determine mutual rights and obligations. Suppose A takes loan from B, A is obligated to
pay it back. This principle of obligation discharge which neutralizes the contractual rights and obligations is
covered in this module. The neutral position of the parties in the pre contract situation is shaped into a relational
obligation which is again neutralized by certain action or inaction of the parties, thus discharging the contract.
We have discussed various types and forms of contractual relations in the previous module. In this module we
shall discuss about various ways of discharging the contract and ending the contractual relationship. If A takes
loan from B, the easiest way is of course payment of the loan amount by A. But suppose B cannot be found despite
all reasonable enquiry how long should A be bound to pay. The contract may itself provide a time period. The
law of a country also provides a time period under the rule of limitations, at the expiry of which time the contract
is discharged. If the government prohibits the payment A need not pay and he is discharged. So these are several
of the ways through which the contractual obligations may be neutralized.
You have to first determine as to what is the type of the contract which you are examining, who are the involved
parties, what are their mutual rights and obligations either for demanding discharge or performing the role to
discharge the contractual obligations. Then only you can observe various ground rules for discharging the
contract. It is better for you to make a detailed marginal notes as you read the module and then prepare a check
list of information given stating the ground rule of discharge. The relevant sections of the Indian Contract Act
have to be analyzed in all cases.
N. L. MITRA
Course Co-ordinator.
145
Discharge of Contract
TOPICS
1. Discharge of Contract at a Glance ............................................................ 146
2. Discharge by Performance ........................................................................ 151
3. Discharge by Agreement ............................................................................ 159
4. Impossibility of Performance ..................................................................... 163
5. Bare Text of the Relevant Sections ............................................................ 171
6. Case Law ................................................................................................... 175
7. Problems .................................................................................................... 179
8. Supplementary Readings .......................................................................... 180
146
SUB TOPICS
1.1 Introduction
1.2 A Flow Chart
1.3 Types of Contracts
1.1 INTRODUCTION
As contract has been formed by the creation or sometimes
transfer of enforceable rights and obligations arising out of
agreement between or among parties, the legal relationship can
be brought to an end only by the Discharge of the Contract.
Discharge of contract terminates the vinculum juris or legal tie
that became the binding element between the parties.
Discharge of Contract may take place in various ways as follows,
by
1. Performance
2. Attempted Performance or Tender
3. Impossibility of Performance
4. Agreement
5. Breach of Contract
6. Operation of Law
7. Lapse of time
When contract is discharged fully, the original rights and
obligations get extinguished. However, different consequences
follow the different modes of discharge of contract. There is
cessation of legal ties in the more natural ways of discharge.
There is nothing more to it between the parties. But when
discharge takes place in certain other ways, the original rights
and obligations no doubt terminate, but other rights and
obligations arise between the parties out of the very process of
discharge. The law has to follow the logical consequences of
the new rights and obligations that have arisen even though the
original contract is at the end.
Let us illustrate this by antithetical examples : When contract
is discharged by Performance which is what the parties
originally intended, the mutual rights and obligations are
extinguished as they have been fulfilled. But, when contract is
discharged by Breach of Contract, or in other words when it is
broken by the promisor by non-performance, the original mutual
rights and obligations inside the contract are no doubt ended
but the law takes its course by foisting between promisee and
promisor, remedial rights and obligations of claiming damages
or specific performance, as the case may be.
The juridical basis of the last-mentioned situation is not limited
to contract. It rests on the fundamental legal principle that as
legal rights and obligations have to be enforced, their violation
should lead to some suitable remedial rights and obligations.
The general principle is expressed in the legal maxim, Ubi
jus ibi remedium - where there is a legal right, there is a
remedy : so far as law of contract is concerned, the breach of
1. DISCHARGE OF CONTRACT AT A GLANCE
contractual obligations will lead to the remedial rights to damages
or specific performance, as the case may be.
Taking an overview of the various ways in which discharge of
contract may take place:
Performance is the logical fulfilment of contractual obligations.
It is doing what the parties intended to do when they entered
into the contract and what they are bound to do under S.37 of
the Contract Act. Performance is actual performance when the
contractual obligations are fully and properly carried out. The
contract is discharged.
Attempted Performance or Tender will also discharge the
contract. It is the legitimate attempt on the part of the promisor
to perform his obligations under the contract at the proper time
and place and unconditionally. But if the promisee unjustifiably
either does not allow or accept the performance, the law treats
the attempted performance or valid tender as equivalent to actual
performance and deems the contract as discharged. This is the
effect of S.38. Any rights accruing to promisor against the
promisee inside the contract are not prejudiced by the discharge
of his own obligations. The word tender came to be
synonymous with attempted performance because of its
English law association with the actual payment of the money
in contract of debt by debtor to creditor.
When dealing with Performance, various aspects connected with
performance arise.
Who are the persons obliged to perform contracts? Primarily
they are the promisors. S.37 is the crucial enforcing section
in the Contract Act. However, under S.40, where suitable,
there can be vicarious performance by agents or other competent
persons. Promises also normally bind the legal representatives,
[see S.37]. They may have to perform such promises in case of
death of promisor. Sometimes there may be joint promisors
(Ss.42 to 44). Whether there can be assignment or transfer of
contractual obligation has to be considered.
Who are the persons entitled to claim performance? Prima
facie, promisees or their legal representatives in suitable cases.
A stranger to the contract cannot enforce performance except
in exceptional cases considered in the Module on
Consideration. There may be joint promisees under S.45.
There can be assignment or transfer of contractual rights subject
to certain conditions and the assignees can claim performance
from promisors.
Issues on time and place of performance are provided from
S.46 to S.50. When we are on sequence of mutual performance,
we turn aside and consider in this Module, the performance of
Reciprocal Promises treated from S.51 to S.58. The important
question as to when time of performance is deemed of the
essence has to be considered. It is dealt in S.55 of the Act.
This question has also special reference to commercial contracts
with its crop of case law. What is the effect of failure to perform
on time when time is of the essence? S.55 also treats of this. The
law of appropriation of payments found in Sections 59 to 61
147
adjoins this area because it is a mixed question of time and place
of performance.
From the point of view of performance contracts can be classified
generally in to absolute contracts including conditional contracts
and what are truly contingent contracts dependant on a
contingency, for example, a contract of insurance. The rules
relating to performance of contingent contracts are contained
in Sections 32 to 36 and the topic is considered adjoining
performance.
Discharge of Contract may take place by Agreement or Consent
including Waiver. As it is agreement which binds the parties
they can loosen themselves from it by another agreement which
may be express or implied or between them and a fresh party or
parties. This mode of discharge of contract vests on the legal
principle Eodem modo quo quid constitutor eodem modo
destruitur, - a thing may be destroyed in the same manner in
which it is constituted. Discharge by agreement are covered in
Indian law by Ss.62 and 63 of the Contract Act. S.62 deals with
Novation or the substitution of a new agreement in the place of
the old, S.62 also covers Rescission in which parties may agree
to cancel all or some of the terms in the contract. S.62 also
covers Alteration in which parties may agree to alter all or some
of the terms in the contract. S.63 deals with Remission in which
the promisee accepts a lesser fulfilment of the promise giving
up the balance or extends the time or accepts a lesser satisfaction
or wholly dispenses with the performance called Waiver such
that the parties rights are abandoned. The difference between
the English and Indian law is intricate, in this regard.
Discharge of contract may take place by Impossibility of
performance. Impossibility of performance may be - (a)
impossibility apparent on the very face of the contract, intrinsic
or absolute impossibility, as for example, an agreement to
discover a treasure by magic, which certainly must be taken to
be known to the parties themselves, so that the agreement is
void ab initio. The contract may be said to be still born. Or,
when making the agreement the parties may have been ignorant
of its impossibility, as in the case of mutual mistake of fact as
to the very existence of the subject matter when on discovery
of the impossibility, the contract becomes void. On other hand,
in practice, the more material kind of impossibility is that which
arises subsequent to the formation of the contract which is called
Supervening Impossibility or subsequent impossibility. S.56
of the contract covers both kinds of impossibility.
Supervening impossibility as a ground of discharge was evolved
by the English law on the basis of different sets of judicial
theories. The old rule of English law was that impossibility of
performance is no excuse as laid down in Paradine v. Jane
[(1647) Aleyn 26]. called the do or die theory. But the rigor
of such a view was modified by one line of judicial decisions
that courts may read into a contract an implied provision even
in the absence of an express one that the parties themselves
contemplated that under the circumstances that have arisen
rendering the performance of the contract impossible the
contract would stand discharged. This theory is known as the
doctrine of implied term. Another line of judicial decisions
in English cases developed the view that the doctrine of implied
term is really a positive rule of law which requires the court to
import into the contract, irrespective of the intention of the
parties, in the circumstances that have arisen a term that there
is such an impossibility that the contract justifiably is discharged.
This theory is known as that of a positive rule of law of
supervening impossibility. The English courts applied the
principle of frustration as the result of either theory to various
classes or categories of cases (reviewed in detail in the Module)
including frustration in commercial contracts. These classes
of cases are also recognised in Indian law.
However, there are limitations to the doctrine of frustration of
which the most important one is that frustration should be self-
induced.
The Indian law of supervening impossibility is grounded in
S.56 of the Act. It is closer to the second English theory of
doctrine of positive rule of law. The Supreme Court of India
held in the leading case of Satyabrata Ghose v. Mugneeram
Bangur & Co. [AIR 1954 SC 44] that S.56 lays down a positive
rule of law of supervening impossibility and it is the function
and duty of the court to come to a conclusion whether in the
changed circumstances on any of the recognizable grounds a
contract has been discharged by supervening impossibility.
What are the consequences of discharge by supervening
impossibility or frustration? The older position in English law
in Chandler v. Webster [(1904) 1 KB 493] was that any loss
must lie where it fell was overruled by the House of Lords in
Fibrose Spolka Akejsna v. Fairbairn Lawson Coombe
Barbour Ltd [(1943) AC 32], by holding that as far as may be
restitution had to be made as between the parties to a frustrated
contract. The English law was consolidated by the Law Reform
(Frustrated Contracts) Act of 1943. It is interesting to note
that the position reached in English law by the above statute is
already secured in the Indian law by S.65 of the Act with respect
to the consequences of frustration.
Discharge of contract by Breach will be treated in the next
module in detail as it has many ramifications.
It remains to briefly refer to discharge of contract by operation
of law and by lapse of time. It is not necessary to treat them in
any greater detail in this Module.
A contract may be discharged independent of the intention or
wishes of the parties by operation of law. This happens in the
following situations:
(a) Death: Death of party in a contract involving personal skill
or ability. It is only in other contracts the rights and liabilities
can devolve on the legal representatives.
(b) Merger: Merger takes place when rights accruing to a
party under a contract get absorbed into certain other rights
accruing to the same party under the same or some other
contract. For example, T holds property under a contract of
lease. Later, he enters into a contract with the lessor to buy the
same property and buys it and becomes its owner. Another
good example is when the acceptor of a bill of exchange
becomes its holder by a subsequent endorsement eventually.
148
(c) Insolvency: In Insolvency, when an order of discharge has
been obtained from the court, the insolvent is discharged from
all debts and contracts subject to certain exceptional debts. In
insolvency, the estate of the insolvent vests in the insolvency
authorities who also exercise all his rights ex-contractu, arising
from contract.
(d) Unauthorised Alteration in Contract Deed: Where a party
to a deed or contract in writing makes any alteration in it without
the consent of the other party, and the alteration is in a material
part of the contract which depends on the character of the
instrument, and it changes in a significant way the rights and
liabilities of the parties, the other party can avoid the contract.
According to S.87 of the Negotiable Instruments Act, a material
alteration of a negotiable instrument renders the same void
against persons who were parties thereto before such alteration
unless they have consented to the alteration. The Act exempts
in specific sections certain material alterations necessary for
the operation of instruments. For example, the crossing of
cheques.
A contract may get discharged by lapse of time. The law of
limitation which in India is codified in the Limitation Act, 1963,
lays down that a contract should be performed within a specified
period, failing which, if no action is taken by the promisee within
the period of limitation, the remedy at law is deprived. This, in
effect amounts to discharge of the contract. The period of
limitation for simple contracts, in India, is three years. S.5 of
that Act provides for extension of time in proper cases.
1.2 A FLOW CHART
Discharge of Contract
Types of Contract
Contingent Contract Reciprocal Contract Alternate Contract
(S.31) (S.51) (S.58)
Positive Contingency Negative Contingency
(S.32) (Ss.33-34)
Rule of Discharge
By performance By non performance
Who Where When How Appropriation
(Ss.37 (S.49) (Ss.46-48, (Ss.50 of payment
38,39) 55) -54,57,58) (Ss.59-61) By consent (Ss.62-65)
Single Joint
promisor promisor
(Ss.40,41) (Ss.42,45)
Novation Rescission Alternate Revocation of
Rescission
cannot be performed Breach of Contracts (Ss. 73-75)
(Supervening impossibility)
Destruction of Death War Change Constructive Actual
subject matter of circumstances Breach Breach
149
1.3 TYPES AND NATURE OF CONTRACTS AND
PERFORMANCE
The rule of discharge of contract is dependant upon the nature
and type of contract because these rules are to address both
general and specific situations and may be both substantive and
procedural. Substantive general principles as well as procedural
in case details regarding discharge of a contract are based upon
the following enquires:
1. What is the nature of the contract?
2. What are the conditionalities of the contract which
determine the performance of the contract by the promisor?
3. When is performance needed or not needed?
4. On what factors time and place of performance are
determined?
5. What regulates inter-personal relation between the promisor
and promisee, as well as between the joint promisor and
joint promisee?
6. In case of several contractual relation between the same
parties what should be the general or particular principle
in appropriation of advances and payments?
Therefore, the immediate necessity is to understand the nature
and time between the parties in order to appreciate rules of
discharge.
Contingent Contract
From the point of view of performance, a general classification
of contracts could be made as (a) absolute contracts and (b)
Contingent contracts.
An absolute contract is one in which the promisor binds himself
to performance without any condition external to the contract.
There may be a condition which is internal to the contract itself,
as for example, when the performance of one party is conditional
on the readiness or willingness to perform of the other party.
For instance, S agrees to deliver hundred bags of rice to B and
B agrees to pay the price afterwards. Here the performance of
B is conditional upon the performance of A. Nevertheless it is
an absolute contract.
But a contingent contract, as defined in S.31, is a contract to do
or not to do something, if some event, collateral to such contract
does or does not happen. Here, the condition for performance
is collateral to the contract. For example, N promises to pay the
value of the car of M if it is destroyed by fire. The contingency
on which performance is dependent is collateral and external
to the contract. Such a contingency may be an event in the
external world or even an act entirely within the will of the
promisor but not the mere will of the promisor. Thus, if A
promises to B that he will pay to him Rs.1,000 if A leaves
Madras for Calcutta, it is a contingent contract as going to
Calcutta is an act within the will of A. But if A promises to B
that he will pay Rs.1,000 if he so chose, it is not a contingent
contract because the contingency is the mere will of the
promisor. In fact there is no contract at all. Thus in Roberts v.
Smith [(1859) 4 H & N 315], there was a promise that for a
certain service the promisor will pay whatever he himself thinks
right or reasonable. Held, there was no promise.
Contracts of insurance, contracts of indemnity and contracts of
guarantee are all contingent contracts because the condition is
collateral to the contract. A wagering agreement is contingent
but unlawful. In Ranchhodas v. Nathmal Hirachand & Co
[(1949) 51 Bom. LR 491], there was a contract for a sale of
American parachute cloth by S to B. The goods were to be
delivered when they arrived. S failed to give delivery. B sued
for breach. S pleaded that the contract was a contingent one
and as the goods had not arrived there was no obligation to
give delivery. But, held the contract was not a contingent one
and the obligation was absolute.
Contingent contracts may be classified as follows :
(a) Contingent on future event happening. S.32
(b) Contingent on future event not happening. S.33
(c) Contingent on future event happening within a fixed time.
S.35
(d) Contingent on future event not happening within a fixed
time. S.35
(e) Contingent on the future conduct of a living person. S.34
(f) Contingent on impossible events. S.36
(a) Contingent on future event happening:
According to S.32, a contingent contract to do anything if an
uncertain future event happens cannot be enforced by law unless
and until that event has happened. If the event becomes
impossible, such contract becomes void.
Illustration: U agrees with N to pay her a sum of money when
she marries X. The sum becomes payable on N marrying X.
The agreement becomes void if X happens to die without
marrying N.
It should be noticed that the collateral condition is a positive
condition precedent to the enforcement. Thus in Anjali Das v.
Bidyut Sarkar [(1992)1 Cal LT 166], a sale was subject to
approval by a co-operative society in accordance with its by-
laws. On the happening of the approval, held specific
performance of the contract can be demanded.
If the event does not happen in the way contemplated by the
contract, the contract cannot be enforced. In V.P. Desa v. Union
of India, [AIR 1958 MP 297], a car was insured against loss
in transit. The car was damaged without being put in course of
transit. Held, the insurer was not liable.
(b) Contingent on future event not happening:
According to S.33, a contingent contract to do or not to do
anything if an uncertain future event does not happen can be
enforced when the happening of that event becomes impossible,
and not before.
Illustration: M agrees to pay O a sum of money if a certain ship
does not return. The ship is sunk. The contract can be enforced.
It may be noticed that there is a negative condition subsequent
to which the contract becomes enforceable.
150
(c) Contingent on future event happening within a fixed time :
According to S.35, a contingent contract to do or not to do
anything if a specified uncertain event happens within a fixed
time, becomes void if, within such fixed time such event has
not happened, or if, before the fixed time such event becomes
impossible.
Illustration: M promises to O a sum of money if a certain ship
returns within the year. The contract is enforceable if the ship
returns within the year. If, within the year, the ship is sunk
without returning, the agreement becomes void.
(d) Contingent on future event not happening within a fixed
time.
According to S.35, a contingent contract to do or not to do
anything, if a specified uncertain event does not happen within
a fixed time may be enforced by law when the fixed time is
over and such event has not happened or before such fixed
time it becomes certain that such event will not happen.
Illustration: M promises to O to pay a sum of money if a certain
ship does not return within a year. The contract may be enforced
if the ship does not return within the year or is sunk within the
year.
(e) Contingent on the future conduct of a living person:
According to S.34, if the future event on which a contract is
contingent is the way in which a person will act at an unspecified
time, such event shall be considered impossible when such
person does anything which renders it impossible that he should
so act within any definite time, or otherwise than under further
contingencies.
In Frost v. Knight [1872 LR 7 Exch 111], D promised to marry
P on the death of his father. D married X while the father was
still alive. Held, P can sue D for breach of contract.
(f) Contingent on impossible events:
According to S.36, Contingent agreements to do or not to do
anything, if an impossible event happens, are void, whether the
impossibility is known or not to the parties to the agreement at
the time when it is made.
Illustration 1: A and B agreed that A will pay Rs.1,000 to B if
he brings back to life a dead person C. The agreement is void.
Illustration 2: A and B agreed that A will pay a sum of money
to B if a certain ship returns to port. Unknown to both the
parties at the time, the ship is already sunk. The agreement is
void.
Reciprocal Promise:
A promise for a promise forming the contract is a reciprocal
promise (see S.8). Such a reciprocal promise may expressly
provide the order of performance. In some cases the nature of
the contract may indicate the order of performance. As for
example, A and B contract that A shall build the house of B at
a fixed price and at each stage of billing on the basis of
constructions work done, B shall pay 80% of the bill. Here, in
this contract, A shall first construct the building and B has to
pay later (S.52). Where in reciprocal promises both the parties
are required to simultaneously perform their promise, no promisor
need perform his promise unless other party is willing to perform
his promise. As for example, A agrees to supply B against
payment be made on delivery, A is not bound to deliver the
goods unless B is ready and willing to pay for the goods when
delivered (S.51). Where in case of reciprocal promise one party
prevents the other from performing his promise, the contract
becomes voidable at the option of the party who is so prevented.
He is also entitled to compensation from the other party for any
loss which he may sustain in consequence of the non
performance of the contract. As for example, A and B contract
that B shall execute certain work for A for Rs.1000/- B is ready
and willing to execute the work, but A does not allow to get the
possession of the land on which the work is to be done. B may
now rescind the contract and recover compensation from A for
any loss which he has sustained (S.53). Similarly, where in a
reciprocal promise one party cannot perform his promise until
the other performs his part or where the second party cannot
claim the performance from the first party unless he performs
his part, and the second party fails to perform it, the second
cannot claim performance of the reciprocal promise from the
first party and must make compensation for any loss which the
first party may sustain due to non performance. As for example,
A hires Bs ship to take in and convey, from Calcutta to
Mauritious, a cargo to be provided by B, B receiving a certain
freight for this conveyance. A does not provide cargo for the
ship. A cannot claim the performance of Bs promise, A must
make compensation to B for the loss which B sustains for the
non performance of the contract. Similarly suppose A contracts
B to deliver to him, at a specified price, certain merchandise on
board a ship which cannot arrive for a month, and B engages to
pay for the merchandise within a week from the date of contract.
B does not pay within a week. As promise to deliver need not
be performed and B must make compensation (S.54).
In a set of reciprocal promises, if one part is legal and other
illegal, the part which is legal is contract and the part which is
illegal is void. As for example, A and B agree that A sell B a
house for Rs.10,000/-, but, that if B uses it as a gambling house,
he shall pay a Rs.50,000/- for it. The first set of reciprocal
promise that is the selling the house for 10,000 is lawful and
the contract is valid but the second set is for unlawful object
making the agreement void (S.57). But in such cases those set
of reciprocal promises legal or illegal must be clearly
identifiable and divisible. If the whole set of reciprocal promises
has any unlawful element which is not separable the total
agreement fails.
Alternate Promise :
An alternate promise is one where parties have alternate options
either for alternate promise or for alternate consideration or
may be both. In such a case if one alternative is legal and the
other is illegal, the legal part is only enforceable. As for
example, A and B agree that A shall pay Rs.10,000/- to B for
delivering smuggled opium or failing, rice produced in his farm.
Here the agreement for delivery of rice is a valid contract but
not the opium. Here also the alternative must be clear, identified
and divisible, otherwise the whole agreement fails.
151
SUB TOPICS
2.1 Introduction
2.2 Persons obliged to perform
2.3 Who can demand performance
2.4 Time and place of performance
2.5 Appropriation of payment
2.6 Tender of performance
2.1 INTRODUCTION
Contract may be discharged by Performance. S.37 of the
Contract Act imbibes in itself the entire sanction behind the
law of contract by laying down:
The parties to a contract must either perform or offer to perform
their respective promises, unless such performance is dispensed
with or excused under the provisions of this Act, or any other
law.
Thus it is clear that the obligation of performance rests on
promisors except in certain extenuating circumstances, on
performance, the contract would stand discharged.
S.37 itself allows the promisor in the alternative to actual
performance to offer to perform which is called tender of
performance. Provided such offer to performance fulfils the
conditions laid down in S.38 to constitute a valid tender, it is
for the promisee to accept the performance. Failing which, the
promisor is not responsible for non-performance, the contract
having been discharged by attempted performance or tender,
nor does he thereby lose his rights under the contract. Tender
will be considered at its proper place.
About Performance itself various aspects arise as follows :
Questions arise by whom is a contract to be performed and
who can demand the performance of a contract, time and place
of performance and whether time is of the essence.
2.2 PERSONS OBLIGED TO PERFORM
1. Promisors, agents and legal representatives:
Prima facie, performance should be by the promisor (S.37),
and the obligation binds the legal representatives unless a
contrary intention appears (S.37). S.40 requires that if parties
intended that the promise should be performed by the promisor
himself, it should be performed only by the promisor himself.
For example, A promises to paint a picture for B. Obviously A
himself must paint it. According to S.40, in other cases the
promisor or his representative may employ a competent person
to perform it. This is called vicarious performance. S.41 goes
a step further and lays down that where a promisee accepts
performance from a third peron, he cannot afterwards enforce
it against the promisor.
According to S.37, unless a contrary intention appears from
the contract, promises build the representatives of the promisor
in case of death of the promisor before performance. A contract
2. DISCHARGE BY PERFORMANCE
involving the use of personal skill or which is founded on
personal considerations is ended at the death of the promisor
following the rule of law actio personalis moritur cum
persona, a personal action dies with the promisor. If the
contract is otherwise, the legal representative of the deceased
promisor is bound to perform it, unless a contrary intention
appears. For example, A promised to paint a picture for B.
Obviously, if A dies, his legal representative cannot be
compelled to do so. But if A had borrowed Rs.1000/- from B,
and A dies, B can recover the amount from the legal
representative of A from his estate. Here again, the liability of
a legal representative under a contract is limited to the value of
the property inherited from the deceased [New India Motors
(P) Ltd v. Smt. S.P. Duggal (1982) Comp Cas 352)].
2. Joint Promisors:
Sometimes there may be joint promisors. The Indian law laid
down in Sections 42 to 44 is at variance with the English law.
In English law, joint promise and joint and several promise are
two diferent things with respect to liability and devolution of
liability. But in Indian law, joint promise is also joint and several
promise.
According to S.42, unless contrarily intended, joint promisors
must jointly fulfil the promise. However, according to S.43,
unless contrarily intended, the promisee may compel any one
or more of several joint promisors to perform the whole of the
promise. For example, D1, D2 and D3 jointly promise to repay
a debt of Rs.3000 to C. Though they are bound to repay jointly,
C may compel all or any of them to repay the entire amount.
According to S.42, after the death of a joint promisor, unless
contrarily intended, his representative along with the survivors,
and after the death of the last survivor, the representatives of
all jointly must fulfil the promise.
S.43 gives the performing joint promisor the right to claim equal
contribution from the others. And where one of them defaults,
the others must bear the deficiency in equal proportion.
Illustration: D1, D2 and D3 have jointly promised to repay a
debt of Rs.3000 to C, C compels D3 to pay the whole. D1 is
insolvent but his assets are sufficient to pay half of his debts.
D3 may receive Rs.500 from D1s estate and Rs.1250 from
D2. According to S.44, the release of any joint promisor or
promisors by the promisee does not discharge the others from
the liability nor does it free such joint promisor or promisors
from liability for contribution.
3. Assignment of Contractual Liability:
Assignment of contractual right by the promisee to another
person has been fully discussed at its proper place. Here, we
are concerned with the question whether there can be an
assignment of contractual liability by the promisor to another
person. Assignment means transfer.
Both in English and Indian law, there cannot be an assignment
of a contractual liability by a promisor to another person without
the consent of the promisee.
152
In the leading English case of Robson & Sharpe v. Drummond
[(1831) 109 ER 1156], D agreed to take from S, coach builders,
carriages on hire for five years, S being bound to look to their
excellent conditon. After three years, S assigned his business
to R. D refused to be bound further by the contract. Held, S
cannot compel D to have the work done by R, D had entered
into the contract by virtue of personal confidence in S.
If, however, there is a transfer of a contractual liability by the
promisor to another person with the consent of the promisee,
there is really a Novation or a new contract shifting the liability
to another with the consent of the promisee. Venkatarama Iyer
J. of the Supreme Court explained this in Khardah Co. Ltd v.
Raymon & Co. Ltd [(1963) 3 SCR 183] thus: As a rule
obligations under a contract cannot be assigned except with
the consent of the promisee, and when such consent is given, it
is really a novation resulting in a substitution of liabilities.
Novation is discussed later.
According to S.40, where it is not the intention of the parties
that the promise should be performed by the promisor himself,
the promisor or his representative may employ a competent
person to perform it. Such vicarious performance is not
assignment. In such a case, the liability of the promisor subsists
and he is responsible for the performance by his agent. In
practice, this may be true of many contracts. This was
recognised by Lord Greene MR in Davis v. Collins [(1945) 1
AER 247], when he said, In many contracts all that is stipulated
for is that the work shall be done and the actual hand to do it
need not be that of the contracting party himself ; the other
party will be bound to accept performance carried out by
somebody else. The contracting party of course, is the only
party who remains liable.
It may also be mentioned that there is nothng to prevent the
parties to a contract themselves from making the liability under
it assignable if they so wish. Thus in Tolhurst v. Associated
Portland Cement [(1903) A.C. 414], the House of Lords
construed a contract as one between the parties named in it and
their respective assigns. Here, the assignment of liability arises
inside the contract itself and must be so distinguished from the
general position that the liability under a contract cannot be
assigned.
2.3 PERSONS ENTITLED TO CLAIM
PERFORMANCE
1. Promisee and legal Representatives :
Primarily it is the promisee who can demand performance under
a contract. This is so whether the promise is for the benefit of
the promisee or any other person. For example, A promises B
to pay Rs.1000 to C. It is only B who can enforce the promise
of A. In case of the death of the promisee, his legal
representative can enforce the promise in suitable cases.
It is a general rule of law of Contract that a stranger to a contract
cannot enforce the contract. This is known as the doctrine of
privity of contract. This rule and the exceptional cases in which
a person not a party to the contract namely not the promisee
may enforce a contract have already been discussed in the
module on Consideration.
2. Joint Promisees :
According to S.45 of the Contract Act when a promise is made
to more than one person jointly, unless a contrary intention
appears from the contract, the right to claim performance rests
with them during their joint lives and on the death of any of
them, with the representatives of such deceased person jointly
with the survivors, and after the death of the last survivor with
all the representatives jointly. Thus the devolution of joint rights
in contract is on the same principle as the devolution of joint
liabilities. The partners of a firm, the members of a Hindu joint
family, co-owners and mortgagees are all joint promisees with
respect to any debt in their favour.
3. Assignees of Contractual Rights:
Whether a contractual liability can be assigned, and if so, what
are the qualifications has been discussed earlier. Here, we shall
consider the assignment of contractual rights by promisees.
In English law, a contractual right is regarded as chose-in-action
as distinct from a chose in possession. It means it is a species
of movable property being non-corporeal over which lawful
possession can be exercised only by legal action and not physical
possession like a thing. A chose-in-action has been defined by
Channel. J. in Trokintan v. Magee [(1902) 2 K.B 427] thus -
A chose-in-action is a known legal expression used to describe
all personal rights of property which can only be claimed or
enforced by action, and not by taking physical possession.
Originally, in English common law, rights under a contract as
chose-in-action could not be transferred at all by assignment
but only by novation. If A owes 100 to B and B owes 100
to C, it may be agreed between all the three that A shall pay C
instead of B.
Only certain special contractual rights, or benefits, or rights of
action on contract, could be transferred by the customs and
usages of the Law Merchant, as for example, negotiable
instruments.
Equity permitted the assignment of chose-in-action including
contract rights. If the right was equitable, such as a share in a
trust, the procedure was direct and easy in a court of equity.
But if the chose was legal such as a contract right, the court of
equity required the assignor to lend his name to the action of
the assignee before it could enforce it. This position continued
down to the passing of the Judicature Acts in the latter nineteenth
century which unified common law and equity courts.
Equity as stated above, allowed the assignment of contractual
rights. No particular form was necessary. It need not even be
in writing. If the intention to assign a contractual right which
lends itself to such assignment is clear, it is valid in equity called
an equitable assignment. Thus in Brandts Sons and Co. v.
Dunlop Rubber Co. [(1905) A.C. 454.], A agreed with B
who funded him that the prices of all goods sold by A should
be paid to B. A sold some goods to X to whom B gave notice
to pay the price to him, B. and not to A. But X ignored it and
153
paid to A. Held, there was an equitable assignment of the price
in favour of B, and X was liable to B not withstanding his
payment of the price to A.
All rights ex-contractu except where personal confidence or
personal qualifications of one party was of the essence of the
contract could be assigned. Thus in Kemp v. Baerselman
[(1906) 2 K.B. 604], B undertook to supply K with all the eggs
he shall require for manufacturing for one year. K undertook
not to buy eggs elsewhere so long as B is ready to supply them.
Held, K cannot assign his right to be supplied with eggs to X.
Secondly, because of the rules in English law against maintenance
and champerty, a mere right to sue, for damages for breach of
contract, cannot be assigned.
Assignment of contractual right, was however, subject to certain
features affecting the rights of the assignee, as follows :
(a) As between assignor and assignee consideration was
necessary for an agreement to assign a chose-in-action, but
if it is transferred without consideration as a gift and the
transaction completed, the question of consideration does
not arise. In modern practice, the doubtful position whether
this would extend also to the assignment of a legal chose-
in-action provided it is completed, has been resolved in
favour of the better view that consideration is not necessary
between assignor and assignee whether the chose-in-action
assigned is equitable or legal. The view is adopted by
Alkinson J. in Holt v. Heather Field Trust [(1942) 2 KB1],
and supported by the court of appeal in Re Mc Andle (1951)
1 AER 905.
(b) The assignment will not bind the promisor until he has
received notice, not necessarily in writing although binding
assignor and assignee from the time made.
(c) The assignee takes subject to equities between the promisor
and the assignor. In other words, the assignor cannot give
a better title than what he has.
As seen above, the Judicature Acts in the latter nineteenth
century allowed statutory exception to the Common law rule
that a chose-in-action is not assignable. The Law of Property
Act, 1925, in S.136 re-enacted the statutory exceptions allowing
assignment of legal chose-in-action. The statute is
supplementary and does not supplant the existing law in equity.
Under the Act, the assignment must be (a) absolute and not by
way of charge, (b) must be in writing signed by assignor, (c)
express written notice must be given to the promisor, and (d)
the assignee takes subject to equities. The Law of Property
Act, 1925 substitutes the term thing in action for the term
chose-in-action.
Assignment of contractual rights may also take place under the
special laws of insurance, marine insurance and companies etc.
Assignment of contractual rights may also take place by
operation of law in intestate and testamentary succession,
bankruptcy, and in property.
The assignee of a contractual right is in a position to claim
performance from the promisor.
In Indian law, an actionable claim is defined in S.3 of the
Transfer of Property Act as, a claim to any debt, other than a
debt secured by mortgage or hypothecation or pledge, or a claim
to any beneficial interest in movable property not in the
possession, either actual or constructive of the claimant, which
the civil courts recognise as affording grounds for relief, whether
such debt or beneficial interest be existent, accruing, conditional
or contingent.
An actionable claim in Indian law is therefore similar in many
respects to a chose-in-action of English law. It includes most
contractual rights which are capable of being transferred. It
was held in Jaffar Mehar Ali v. Budge Budge Jute Mills Co.
[34 Cal 289] that the right to claim the benefit of the contract
or the right on certain conditions for delivery of goods in a
contract is an actionable claim being a conditional or contingent
beneficial interest in movable property.
An actionable claim can be assigned and transferred in Indian
law under S.130 of the Transfer of Property Act. It must be
made by an instrument in writing executed and signed by the
transferor or duly authorised agent. The assignment must be
absolute and not by way of charge and it should be of the entire
right. If debt, it should be of the whole debt. No registration is
necessary. The transfer may be made with or without
consideration. On such assignment, all the rights and remedies
of the transferor vest in the transferee whether any notice of
such transfer is given or not. However, notice to the promisor
has an important bearing on the transferees right because so
long as proper notice is not served the debtor is not directly
liable to the transferee and any payment or performance by
him to the transferor or other authorised person would be proper
discharge as against such transferee as also any other dealings
by him. S.131 requires every notice of transfer of an actionable
claim to be in writing signed by the transferor or his agent, or
by the transferee or his agent. According to S.132, the transferee
of an actionable claim takes it subject to all liabilities and equities
of the transferor.
Negotiable instruments are exempted from the chapter on
transfer of actionable claims for obvious reasons.
All contractual rights, in general, except where personal
confidence or personal consideration of parties are of great
importance, can be assigned. Rights under a contract are
assignable unless the contract is personal in its nature or the
rights are incapable of assignment either in law or under
agreement between the parties, according to the Supreme Court
in Khardah Co. Ltd. v. Raymon & Co. Ltd. [(1963) 3 SCR
183].
Rights under a contract can be assigned, but not the right to sue
for compensation or specific performance on breach of the
contract.
Assignment of contractual rights may also take place under the
special laws of insurance, bills of lading etc. Negotiable
instruments are transferable in the exceptional ways
contemplated under that Act.
154
Assignment of contractual rights may also take place not by act
of parties but by operation of law such as by devolution on
intestate or testamentary succession, or in insolvency.
It should not also be forgotten that even in India, equitable
assignment without recourse to the Transfer of Property Act,
may also take place in exceptional circumstances such as
creation of trusts and be enforced by courts of law.
2.4 TIME AND PLACE OF PERFORMANCE
Questions of time of performance arise in contracts. According
to S.46 of the Contract Act, where no time for performance is
specified and a promisor is to perform the promise without
application by the promisee, the promise must be performed
within a reasonable time. S.46 adds that what is a reasonable
time is, in each particular case, a question of fact. It may depend
on the intention of the parties, the usage of the trade or any
special circumstances of the case. A contract to keep a ship
insured was held broken by delay of three days but in a contract
of sale of shares two months time was held reasonable for
completion.
According to S.47 when a promise has to be performed on a
certain day, without application by the promisee, the promisor
may perform it during the usual hours of business on such day.
Where the day fixed happens to be a public holiday, so far as
the Negotiable Instruments Act is concerned, performance
should be offered on the prior day. In other cases it may depend
on the usages of the trade.
According to S.48, when a promise is to be performed on a
certain day and the promisee has to apply for performance, it is
the duty of the promisee to apply for performance within the
usual hours of business and at a proper place. Here again, what
is proper time and place is a question of fact in each particular
case.
According to S.49, where a promise is to be performed without
application by the promisee, and no place is fixed, it is the duty
of the promisor to apply to the promisee to appoint a reasonable
place and perform at such place. According to the illustration
to the Section, A undertakes to deliver a thousand maunds of
jute to B on a fixed day. A must apply to B to appoint a
reasonable place and deliver it at such place.
It is an ordinary rule of common law that a debtor should seek
the creditor and repay the loan.
In L.N. Gupta v. Taramani [AIR 1984 Delhi 49], a promissory
note stated that it would be payable at the place of its execution
or at any place in India. The payee settled at some other place
and demanded payment there. Held, under S.49 it was the duty
of the debtor to seek his creditor and pay him there.
According to S.50, the performance of any promise may be
made in any manner, or any time which the promisee prescribes
or sanctions. This section enables the parties to leave the entire
time and manner of performance to the promisee if they so
desired. An illustration to the section gives the following
examples. B owes Rs.2000 to A. A asks B to pay the amount
into As account with C a bank. B also has an account in the
Bank X. B directs C to transfer the amount from his account to
As account and this is done. Before A is aware of the transfer,
the bank C fails. There has been a good payment by B. Further
illustrations to the section state where two persons are mutually
indebted and agree to set off their debts and net balance is paid
by one to the other both stand discharged from their liabilities.
Performance of Reciprocal Promises :
According to S.2, promises which form the consideration or
part of the consideration for each other are called reciprocal
promises. Questions may arise of the sequence of performance
of such promises.
Lord Mansfield in Jones v. Barkley [4 Douglas 659] has
classified such promises as follows :
(a) mutual and independent
(b) mutual and dependent
(c) mutual and concurrent
According to S.52, where the order in which reciprocal promises
are to be performed is expressly fixed they shall be performed
in that order, and where the order is not expressly fixed they
shall be performed in that order which the nature of the
transaction requires. For example, if in a contract of sale B
agrees to pay the price of the goods on 10th and S agrees to
supply the goods on 20th. But if A and B agree that A shall
build a house for B at a contract price, A must build the house
before B has to make payment for it. Thus in Hashman v.
Lucknow Improvements Trust [(1927) 101 IC 847], a person
took a lease of land from a municipality on condition that he
will pay Rs.630 for levelling charges and possession was to be
given after levelling. When the question arose whether the
amount was to be paid before or after levelling, the agreement
being silent on the point, the Allahabad High Court came to the
conclusion in the ordinary course of business work is not
usually paid for before it is done.
According to S.51, where a contract consists of reciprocal
promises to be simultaneously performed, no promisor need
perform his promise unless the promisee is ready and willing
to perform his reciprocal promise. For example, S and B agree
that S shall deliver goods to B at a price by instalments the first
instalment to be paid on delivery. S need not deliver unless B
is ready and willing to pay the first instalment.
According to S.54, when a contract consists of reciprocal
promises, such that one of them cannot be performed, or its
performance cannot be claimed till the other has been performed,
and the promisor of the last mentioned promise fails to perform
it, he cannot claim the performance of the reciprocal promise,
and must make compensation for any loss sustained by such
non-performance. For example, A hires Bs ship to convey
from Calcutta to the Mauritius a cargo provided by A and B to
receive a certain freight. A does not provide the cargo. A
cannot claim performance from B. A must compensate B for
loss which B may sustain by the non-performance of A.
155
Thus in Ubroy Mohindar Singh v. State of Haryana [(1991)
2 SCC 362], a contract for quarrying off the river Yamuna, the
contractor was prevented from performing his part, because of
the failure of the Flood Control Department to give no objection.
Held, the contractor was entitled to refund the deposit money.
According to S.53, in a contract of reciprocal promises, if one
party prevents the other from performing his promise, the
contract becomes voidable at the option of the party so prevented
and such party is entitled to compensation from the other for
any loss as a result of the non-performance. Thus in Kleineri v.
Aboisso. Gold Mining Co [(1913) 59 SOL JO 45], an appeal
from the Gold Coast before the Privy Council, in order to get
his mine cleared of a rock, B had to supply a crusher. The
crusher supplied was inadequate. Held, A was prevented from
his performance and he was allowed to recover expenses and
loss of profits. The inadequacy of the crusher was sufficient
obstruction to performance.
According to S.57, where persons make reciprocal promises,
firstly to do certain things which are legal, and secondly under
specified circumstances, to do certain other things which are
illegal, the first set of promises is a contract, but the second is
void. For example, A and B agree that A shall sell his house to
B for Rs.50,000, but if B uses it for a gambling club he shall
pay a price of Rs.1,00,000. The agreement to sell the house for
50,000 is a contract but the other agreement is void.
According to S.58, in the case of an alternative promise, one
branch of which is legal and the other illegal, the legal branch
alone is enforceable. For example, A and B agreed that A shall
pay Rs.1,000 and B shall deliver either rice or smuggled opium
of equal value. There is a valid contract only for the purchase
of rice.
When is time essence
As seen above parties to a contract may specify the time for its
performance. The parties are expected to perform at the
stipulated time. But if one of them failed to do so, the question
arises as to what is the effect on the contract. The answer
depends on whether it was the intention of the parties that time
should be of the essence.
According to S.55, when there is a promise to do a certain thing
or certain things at or before a specified time, and the promisor
fails to perform before the specified time, the contract or so
much of it as has not been performed becomes voidable at the
option of the promisee, if the intention was that time should be
of the essence of the contract. If such was not the intention, the
contract does not become voidable, but the promisee is entitled
to compensation for any loss. If, in such a voidable contract
the promisee accepts performance at any time other than agreed,
he cannot claim compensation for any loss unless at the time he
accepts performance he gives the promisor notice of his intention
to so claim.
Whether time is of the essence of the contract is a mixed question
of law and fact [Municipal Corporation of Delhi v. Jagan
Nath Ashok Kumar, (1987) 4 SCC 497].
Time is generally considered to be of the essence where the
parties expressly agreed so, or where delay operates as injury,
or where the nature and necessity of the contract requiries it to
be so construed.
In Indian law, Bhudra Chand v. Betts [(1915) 22 Cal. LJ 566 33
IC 347] is a well known authority. P stipulated with D to engage
his elephant for khedda operation to capture wild elephants and
that the elephant should be delivered on 1 October 1910. D
obtained an extension of time till 6 October 1910. Yet he did not
deliver the elephant till 11 Octover 1910. P refused to accept the
elephant and sued for damages for breach. Held, P was entitled
to recover as parties had intended time should be of the essence.
Mookerjee J. said, this conclusion is confirmed by the
circumstances that D obtained an extension of the time.
Commercial Contracts:
Generally, in business contracts which provide for performance
within a specified time, time is ordinarily presumed of the
essence. In commercial contracts time is ordinarily of the
essence [China Cotton Exporters v. B.R.C. Mills. AIR 1961
SC 1295]. In this case, A carrying on import business at
Bombay promised to supply to R a quantity of Italian staple
fibre cotton. The shipment was to be in October or November.
The contract contained a remark `this contract is subject to
import licence therefore the shipment date is not guaranteed.
A part of the goods was supplied but the rest not supplied in the
specified time. R wanted to avoid the contract. Held, the remark
that shipment date was not guaranteed was qualified by the
word `therefore in its natural grammatical meaning, and
remembering that in commercial contracts ordinarily time is of
the essence the shipment in October or November was any way
guaranteed apart from delay in import licence, and as failure
was due to sellers own failure to supply in time, R was entitled
to avoid the contract on the ground that time is of the essence.
Similarly, in Mahabir Prasad Rangta v. Durga Datt [AIR
1961 SC 1990], there was a contract to transport coal from a
colliery to the railway station. The colliery owner had to keep
the road in repair and arrange for petrol. He also had to pay for
the work done on the 10th of the next month. It was alleged
that these things were not done in time and the other party could
not go on with the work. He rescinded the contract and sued
for damages. The Supreme Court held that in commercial
transactions ordinarily time is of the essence. In this contract
the time of payment and the time of arranging other things was
so important that S.55 was invocable. It held the contract could
be rescinded and compensation claimed. In contracts for sale
or purchase of goods prices of which fluctuate rapidly, the time
of delivery, and payment are considered to be of the essence.
Time may be made of the essence even by a subsequent notice,
but such notice ought to fix the longest time that could
reasonably be required for performance of acts remaining to be
done [(Crawford v. Tooqwood, 13 Ch. 153]. It means the
subsequent notice making time of the essence ought to fix a
reasonably long time for the other party to perform.
In contracts of sale of goods, the time of shipment is of the
essence [Bowes v. Shand (1877) 2 AC 455 HL]. In a contract
of sale of rice to be shipped at Madras during March or April of
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a year by the ship Rajah of Cochin, the contract was held not
satisfied by shipment made a month earlier in February.
However, the matter depends upon the intention of the parties.
Even where a specific date is mentioned one has not to look at
the letter but at the substance of the contract to ascertain the
real intention of the parties. In Hind Construction Contractors
v. State of Maharashtra, [AIR 1971 SC 720], it was held that
where a contract includes clauses for extention of time or fine
or penalty for every day or week, the work remains unfinished
on the expiry of the time fixed in the contract, such clauses
render ineffective the express position that time is of the essence.
Any application for extension of time does not take effect unless
accepted, and extension may not amount to a waiver within the
meaning of S.53 of the right to insist on the stipulated time. In
a Gujurat High Court case,the undertaking was to ship by a
particular ship in August. The party failed to do so and requested
extension of time to September 10. The party failed to ship
even within the extended time. The other side repudiated the
contract. The defaulting party sued for breach. Bhagwati J.
held time of shipment was of the essence and it was the plaintiff
and not the defendant who had committed breach of contract.
The Supreme Court of the United States laid down in
Norrington v. Wright (1855) that, in the contracts of
merchants time is of the essence.
Construction Contracts :
Since construction is a commercial service, time may be of the
essence.
Land and Property Contracts :
When there is a contract for the sale of land or other immovable
property there is a presumption, that time is not of the essence.
This is the English law and many decisions of the Supreme
Court have held that the law under S.55 is not different. Though
if it is shown that the intention of the parties was that time
sould be of the essence it would be considered so [Indira Kaur
v. Sheo Jal Kapoor [AIR 1988 SC 1074]. The mere
incorporation of a clause imposing penalty in case of default
does not by itself show an intention to make time of the essence
[Gomathi Nayagam Pillai v. Palaniswamy Nadar [(1967) 1
SCR 227, 231-32]. In such cases the intention of the parties
has to be gathered from factors like the nature of the property,
the possibility of the price fluctuation, the need for the contract,
the conduct of parties before and after the contract and other
circumstances.
But the renewal of a lease, or an option for the purchase or
repurchase of a property must be exercised strictly within the
time limited for the purpose, otherwise it will lapse. The reason
is that such rights are privileges which must be exercised within
the limited time. In such cases, relief is not given in equity
except on very unusual ground like fraud, unavoidable accident,
inequitable preclusion by the lessor and the like.
Sale of Shares :
Sale of Shares is of a commercial nature. The time of completion
of the transaction is an important factor. According to S.113 of
the Companies Act 1956, every company shall within two months
after the application for the registration of the transfer of any of
its shares, debentures or debentures stock, deliver in accordance
with procedure laid down in the Act, the certificates of the shares,
debentures and debentures stock. But the Company Law Board
may on application by the company extend the period to a further
period not exceeding nine months if satisfied that it is not
possible for the company to deliver within the said period.
Transfer here means a valid transfer and excludes any transfer
which the company is for any reason entitled to refuse to register
and does not register. Thus in Company Law a statutory rule
regulates effective time of valid transfers of shares, debentures
and debentures stock.
Where there was an agreement for the sale of shares of unquoted
private companies trading in a violative market, it was held in
British and Common Wealth Holdings pie v. Quadres
Holdings [(1989) 3 AER 492 CA], that if a completion date
had been named in the agreement that would have been of the
essence provided a reasonable time.
Effect of Failure
According to S.55, where time is of the essence, and
performance fails, the contract becomes voidable at the option
of the promisee. But if it was not the intention of the parties
that time should be of the essence, the contract does not become
voidable but the promisee may sue for any loss caused by the
delay. If time is not of the essence delay by itself does not put
an end to the contract. The innocent party will have to accept
performance even if delayed but can sue the other party for
loss caused by the delay. This does not however mean the
performance can be indefinitely delayed. Such delay would
discharge the contract itself by lapse of time in case the
aggrieved party does not take action within the period of
limitation prescribed for such contracts by the law of limitation
which is codified in the Limitations Act, 1963. For example,
the price of goods sold without stipulation of credit should be
paid within three years of the delivery of the goods. If the
seller does not take action for recovery of price within the period,
the debt would become barred by time and irrecoverable. The
effect of this is to discharge the contract by lapse of time.
2.5 APPROPRIATION OF PAYMENTS
When considering questions of time and place of performance,
we may in fitness of context consider the law relating to
apropriation of payments since this is a mixed question of both
place and time of performance. The rule in common law is that
a debtor has to seek out the creditor and repay the debt which
rule thus has a bearing on place of performance. It has been
held even under S.49 that this rule of common law applies as to
place of performance. When a debtor owes several distinct debts
to a creditor and makes payment or payments insufficient to
discharge all the debts, the question arises to which particular
debt a payment is to be applied. Obviously this involves the
question of time of performance.
The rules are laid down in sections 59 to 61 of the Contract Act
and incorporates the law laid down in the leading English case
called Claytons case [(1816) 1 Men 572].
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157
According to S.59, where a debtor owing several distinct debts
to one creditor, makes a payment to him either expressly or under
certain circumstnaces impliedly intimating that the payment is
to be applied to the discharge of some particular debt, the
payment must be applied accordingly.
To illustrate, D owes to C among other debts some of which
were borrowed earlier, a sum of Rupees 567 borrowed on a
later date. D sends to C a sum of Rs.567 and directs that the
debt of that sum should be discharged. The payment has to be
applied accordingly. As Lord Campbell stated in Craft v.
Jumley [(1858) SE & B 648], there is an established maxim
of law that, when money is paid, it is to be applied according to
the expressed will of the payer, not of the receiver.
According to S.60, where the debtor has omitted to intimate,
and there are no circumstances indicating to which debt the
payment is to be applied, the creditor may apply it at his
discretion to any lawful debt due payable to him from the debtor
including any debt whose recovery may be barred by the law
of limitation for the time being in force.
The creditor has a right until he has declared the appropriation
to the debtor, to alter the appropriation [Simson v. Inqham
(1823) 2 B & Co 65]. However, the creditor cannot appropriate
to a disputed or unlawful debt. The creditor is not also bound
to appropriate the payment immediately. He may wait till a last
moment. He may appropriate even during the pendency of a
suit concerning the payment [Uthup v. Kathanar, 1960,
Ker.90].
It is generally also a rule, subject to contract to contrary, that a
payment when appropriated should first be applied to the interest
and after interest is fully paid off to the principal [Rulia Devi v.
Raghu Nath Prasad, AIR 1979 Pat. 115]. The procedure has
been extended to interest and costs also before application to
the principal [See for details (1970)1 SCR 523].
According to S.61, where neither party makes any appropriation,
the payment shall be applied in discharge of the debts in order
of time, whether barred or not by the law of limitation in force
for the time being. If the debts are of equal standing, the payment
shall be applied in discharge of each proportionately. It means
when neither the debtor nor the creditor appropriates the court
should appropriate the payment or payments towards one debt
after another in the order of time not withstanding that some of
them are barred by limitation. Where any debts are of equal
standing in such order of priority, the amount should be
distributed among them proportionately.
To illustrate, D owes to C the following debts, Rs.1000 due in
1990, Rs.2000 due in 1991, Rs.3000 and another Rs.6000 due
in 1992, and Rs.4000 due in 1993. In 1994 D makes the
following payments, Rs.2000, Rs.3000 and then Rs.4000.
Neither D nor C make any appropriation. The Court also finds
that the debt of Rs.1000 due in 1990 is barred by limitation.
The Court has to apply the payments as follows Rs.1000 out of
payment of Rs.2000 to the time barred debt of Rs.1000 due in
1990. The balance of Rs.1000 plus Rs.1000 from the second
payment of Rs.3000 to the debt of Rs.2000 due in 1991. The
balance Rs.2000 and the next payment of Rs.4000 have to be
applied as follows, Rs.2000 to the debt Rs.3000 due in 1992 and
Rs.4000 to the debt of Rs.6000 due in 1992. As a result, Rs.1000
in the debt of Rs.3000 due in 1992 and Rs.2000 in the debt of
Rs.6000 due in 1992 will remain unpaid. The debt of Rs.4000 due
in 1993 will also remain unpaid.
The rule has been applied to current accounts between banker
and customer as follows. The presumption is that the sum first
paid was drawn out, and the first item on the debit side is reduced
by first item on the credit side [Deeley v. Lloyds Bank Ltd
(1912) AC 756, see also Claytons case (1816) 1 Mer 529].
A firm of bankers had five partners. The senior partner died.
The surviving partners carried on the business of banking under
the same name. The executors of the deceased partner objected
to the use of his name in the firms name. After a year the firm
became bankrupt. Various creditors of the firm placed claims
against the estate of the deceased partner.
Clayton was one of those creditors who had continued to deal
with the surviving firm by making payments and receiving
payments. At the time of the death of the senior partner,
Claytons balance was 1,713. During the next few days he
withdrew several times and the balance was reduced to 453.
There after the surviving partners paid more than 1,713 to
him and subsequently his deposits exceeded the amounts
withdrawn by him. Thus his credit balance at the time of the
bankruptcy was larger than the amount due to him at the time
of the death of the senior partner. Clayton claimed that the
amount of 453 was due to him from the estate of the deceased
partner. His contention was, the withdrawals from the account
after the death of the senior partner were paid out of deposits
made in the same period and therefore the credit balance
standing at the time of that partners death was recoverable from
his estate.
Sir William Grant, Master of the Rolls, rejected the contentions
of Clayton and his claim and laid down the since famous Rule
in Claytons case as follows : this is the case of a banking
account where all the sums paid in blend in one fund the parts
of which no longer have any distinct existence. In such a case
there is no room for any other appropriations that which arises
from the order in which the receipts and payments take place
and are carried into the account. Presumably, it is the sum first
paid in that is first drawn out. It is the first item on the debit
side that is discharged or reduced by the first item on the credit
side.
This is the reason why banks close the old account of a firm
and open a new account in the name of any reconstituted firm.
There by the liability of any deceased, retired or insolvent
partner, as the case may be is determined at such time and the
bank may hold him liable for the same. Thus banks take care
to avoid the operation of the Rule in Claytons case.
2.6 TENDER OF PERFORMANCE
As seen, according to S.37, the parties to a contract must either
perform or offer to perform, their respective promises. Such
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offer to perform is called tender of performance or attempted
performance.
According to S.38, where a promisor has made an offer of
performance to the promisee, and the offer has not been
accepted, the promisor is not responsible for non-performance
nor does he thereby lose his rights under the contract. Thus
tender of performance is equal to actual performance and
discharges the contract. However, a valid tender requires certain
conditions to be fulfilled, as follows :
(a) Tender must be unconditional :
According to S.38(1), it must be unconditional. This means an
offer to perform must be completely in accordance with the
terms of the contract. For example, many cases have held that
tender of an amount less than what is due under the contract is
not an effective tender. Even payment by cheque will not
constitute valid tender unless the other party has agreed to such
payment. It is this aspect of valid tender of payment which
created historically the statutory rules of currency notes and
coins constituting legal tender money according to certain laws
of the land. A tender of a debt before the due date is not a valid
tender and will not prevent the accrual of interest on the loan.
(b) Tender must be at proper time and place :
The rule under S. 38(2) was established as early as Startup v.
Macdonald [(1843) 64 RR 810]. D brought from P 10 tons of
linseed oil to be delivered within the last 14 days of March. P
tendered on the last of the 14 days at 9o clock at night. D
refused to accept. But, held there was time for D to have taken
in and weighed the goods before mid-night. There was a valid
tender.
In Afovos Shipping Co. v. R. Pagnan [(1982) 1 Lloyds Rep
562 (CA)], in an international trade contract, the agreement
was that payment should reach on 14th of the month. Held, that
defendant should have waited upto the mid-night of 14th before
repudiating the contract.
(c) Tender must be of the whole quantity or of the whole
obligation according to the contract :
Further it must be under circumstances that the other party gets
a reasonable opportunity of ascertaining whether the person
tendering is able and willing to fulfil the whole of his obligation.
In case of tender of goods, there must be a reasonable
opportunity for the promisee to inspect the goods. According
to S.38(3), if the offer is to deliver anything, the promisee must
have a reasonable opportunity of seeing that the thing is what
the promisor is bound to deliver. Cases have held that if the
goods tendered are not of the contract description, the tender is
not valid. However, where the deviation from the terms of
contract is microscopic, that is, very negligible, Courts have
held the tender valid. in Shipton, Anderson & Co. v. Weil
Bros & Co. [(1912) 1 K B 574], a contract required delivery of
4,950 tons of wheat. The seller delivered 4,950 tons and 55
lbs. The buyer was not allowed to avoid the contract.
(d) Tender to one of several joint promisees has the same
effect as tender to all of them :
According to S.38(3), an offer to one of several joint promisees
has the same legal consequences as an offer to all of them. It
may be recalled here that, on the contrary, according to S.45
when a person has made a promise to two or more persons
jointly, unless a contrary intention appears, the right to claim
performance rests with them jointly during their lives. In this
regard there is a contrast between the right to claim performance
and the tender of performance with respect to contracts entered
with joint promisees.
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3. DISCHARGE BY AGREEMENT
SUB TOPICS
3.1 Introduction
3.2 Novation
3.3 Rescission and alteration
3.4 Remission
3.1 INTRODUCTION
As contract arises out of agreement of parties that binds them,
it may also be discharged by further agreement or consent
between them or between them and others. It may also be
discharged by the parties giving up their mutual rights and duties
by consent which is known as Waiver. Such process is based
on the rule of law Eodem modo quo quid constituiter codem
modo destruitur, that is, a thing may be destroyed in the same
manner in which it is constituted. Discharge by agreement may
be express or implied.
Discharge by agreement may be by (a)Novation, or by
(b)Remission or Waiver.
3.2 NOVATION
According to S.62, if the parties to a contract agree to substitute
a new contract for it, or to rescind or alter it, the original contract
need not be performed.
Lord Selborne explained novation in the well known case Scarf
v. Jardine [(1882)7 App Cas, 345], "there being a contract in
existence, some new contract is substituted for it either between
the same parties or between different parties, the consideration
mutually being the discharge of the old contract. A common
instance of it (occurs) in partnership cases. In this case a firm
consisted of A, B and C. C retired without notice to creditors.
A new partner D joined the firm. A creditor advanced money
to the firm after the retirement of C. He sued A, B, C, and D for
recovery. Held, that he could either on the principle of estoppel
sue A, B and C having no notice of the retirement of C Or, he
could sue A, B and D who now were the actual partners there
having been a novation by which the firm had become
reconstituted before he advanced the money.
Novation may take place by (a) a new contract being substituted
for an existing contract between the same parties, or (b) the
contract between the parties being rescinded in consideration
of a new contract on the same or similar terms between some
or all of the parties and a new party or parties.
Illustration: (a) D owes to C Rs.10,000. D enters into a new
contract with C by which he gives a mortgage of his estate of
Rs.5,000 to C in place of the previous debt. The new contract
extinguishes the old contract.
Illustration: (b) D owes Rs.1,000 to C. It is agreed between D,
C and N that D may repay this sum as a debt to N. By this new
contract the old debt of D to C is ended and a new debt of D to
N is created.
When novation takes place by substitution of a new contract
for the old, between the same parties, the original contract is
discharged and need not be performed. For such a novation
two things are necessary.
One is the original contract must be subsisting when the novation
takes place. Novation is not possible when the original contract
is broken. In an early case, Manohar Koyal v. Thakur Das
Nasker [(1888) 15 Cal 319], P sued D to recover Rs.1173 due
on a bond. After the due date P agreed with D to accept Rs.400
in cash and a new bond for Rs.700 payable in instalments.
Subsequently D neither gave Rs.400 nor the bond. P sued D
on the original bond. When novation was pleaded the Calcutta
High Court held that the original contract was discharged not
by novation but by breach and P was entitled to sue for such
breach of the original bond.
Secondly, the new agreement should be valid and enforceable.
Thus, where an existing mortgage was replaced by a new
mortgage which was not enforceable for want of registration, it
was held the parties were still bound by the original mortgage.
Novation betwen the same and the new parties often takes place
in reconstitution of partnership firms. Often a new partner is
admitted into an existing firm. Sometimes an old partner retires
and by public notice or agreement with creditors the liabilities
of the old firm are assumed by the new firm which has become
reconstituted. In this connection it may be pointed out that
according to the Partnership Act, 1932, a firm is reconstituted
by admission of a new partner, retirement, expulsion, insolvency
or death of a partner, or transfer of a partners share. A
dissolution of a firm takes place only where there is dissolution
of partnership between all the partners of the firm. In other
cases there is only a reconstitution of the firm which involves
an express or implied novation. Novation is not confined to
partnership. It may take place in any contest and it may be as
already stated express or implied. In re European Assurance
Society [(1876) 3 Ch D 391], a person insured his life with X
Co. Subsequently X Co. amalgamated with Y Co. A
memorandum was endorsed on the policy that Y Co. would be
liable for the policy. Held, there was novation and the policy
money could be recovered from Y Co. In this connection it
must be recollected that generally there cannot be an assignment
of a contractual liability except with express or implied consent
of the promisee which makes it really a novation.
3.3 RESCISSION AND ALTERATION
According to S.62, the parties to a contract may agree to rescind
or alter it, when the original contract will be discharged.
Rescission may take place by mutual consent of parties by which
they may cancel all or any of the terms of a contract. They may
also substitute new terms for some terms which are rescinded.
A party to a contract may also rescind it without prejudice to
his right to claim compensation for breach when the other party
fails in the performance of his obligations if the contract lends
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itself to such a rescission. For example, S agrees to supply
certain goods to B by 15th and B agrees to pay the price on
30th, S fails to supply the goods on 15th. B need not pay the
price and may procure the goods even the next day from any
other source and claim compensation for any loss that may have
been sustained. In Syed Israr Masood v. State of Madhya
Pradesh [(1981) 4 SCC 289], there was a contract for sale of
forest coupes. There was a substantial variation between the
quantity and quality of timber held out at the time of auction
and the timber actually available. The Supreme Court allowed
rescission under S.62 and allowed refund of his deposit to the
contractor. No compensation was allowed only because there
was a clause against such compensation in the contract.
According to S.67 if a promisee neglects or refuses to afford
the promisor reasonable facilities for the performance of his
promise, the promisor is excused by such neglect or refusal, as
to any non-performance, thereby.
Illustration: A agreed with B to repair Bs house. B neglects or
refuses to point out to A the places in his house requiring repairs.
A is excused for non-performance if caused by such neglect or
refusal. This means A is allowed to rescind the contract under
such circumstances.
According to S.66, the rescission of a voidable contract may be
communicated or revoked in the same manner, and subject to
the same rules, as apply to the communication or revocation of
a proposal.
According to S.64, when a person rescinds a voidable contract,
the other party need not perform any promise therein on his
part. The party rescinding a voidable contract, shall, if he has
received any benefit from any party to such contract, restore
such benefit, so far as may be, to the person from whom
received. The principle behind this section had been explained
in Clough v. L.& N.W.R. [(1871) L R 7 Ex 27], no man can
at once treat the contract as avoided by him ............ and at the
same time keep the money or other advantage which he has
obtained under it.
According to S.62, parties to a contract may agree to alter it. If
so the original contract need not be performed. Alteration may
be of all or some or any terms of a contract. The effect will be
accordingly. Alteration can be made only by mutual agreement.
There cannot be any unilateral alteration of a contract. In
Magnum Films v. Golcha Properties Limited [AIR 1984 Del
162], the parties had fixed by mutual agreement the rates of
hiring a cinema hall. One of them was not allowed to alter the
rates unilaterally. If any party makes any alteration which is
material in a contract without the consent of the other party, the
result would be that the other party would be discharged with
respect to the contract. The alteration should be material that is
one which alters the legal affect of the contract. Thus where
the date of a bond was altered, in an early case, the Calcutta
High Court held that the bond was avoided. Similarly an
alteration on a bill of exchange from Documents against
payment to Documents against acceptance was held to avoid
the contract. It may be noted here that under S.87 of the
Negotiable Instruments Act, a material alteration of negotiable
instrument will discharge persons who become parties to it prior
to such alteration subject to statutory exceptions under that Act.
3.4 REMISSION
According to S.63, every promisee may dispense with or remit,
wholly or in part, the performance of the promise, or may extend
the time for such performance, or may accept instead of it any
satisfaction which he thinks fit.
The Indian Law of Remission is at complete variance with the
corresponding part of the English law of contract where in the
doctrine of Accord and Satisfaction obtains in this regard.
According to the English law, consideration is necessary not
only for the information of a contract but as well as for the
discharge of a contract for all parol contracts which are not
specialities, namely signed, sealed and delivered by formal deed.
Accordingly, in English law where a promisee wants to waive
and discharge a promisor from performance, consideration is
necessary from the other side in order to sustain the promise to
waive. Otherwise, the waiver is not effective and he can still
hold the promissor liable for non-performance.
Even according to the English law if a contract is wholly
executory and subsisting as reciprocal promises, it can be
discharged by mutual waiver or consent because the waiver of
each is sustained by the consideration of the waiver of the other.
Thus the mutual promises to waive are locked in consideration
and satisfy the common law requirement that consideration is
necessary also for the discharge of parol or simple contract.
However, if a contract is executed by one of the parties having
done his part and the other remains liable, if the promisee were
to waive the obligation of the promisor, in simple and parol
contract a fresh consideration is necessary from the other side
to sustain the promise of waiver. There must be some new
satisfaction from the promisor. This rule of the English law is
called the doctrine of Accord and Satisfaction. Accord is the
consent to waive and satisfaction is some consideration to
support it. There must be some consideration or satisfaction be
it a pepper corn. Such waiver could be valid only if it were
reduced to a speciality. Otherwise if it were only simple and
parol, some satisfaction is necessary.
At one time in the English common law, it was also required
that accord executed is satisfaction but not accord executory.
This meant that the contract could be discharged by waiver
only if the promisor whose promise is to be remitted does
something else in return to make the release binding on the
promisee but if he only promises to do something else in return
the release would not be binding on the promisee and he may
nevertheless enforce the promise. But in modern cases this
question is regarded as only one of construction of the
agreement. In Morris v. Baron [(1918) A C 135], the House
of Lords held that the promise only, as distinct from the actual
performance of it, may be a good satisfaction and discharge the
contract which has been waived, if it clearly appears that the
parties so intended. The judgement of Lord Atkinson was
affirmed in British Russian Gazette v. Associated
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161
Newspapers [(1933) 2 K B 643]. English law stands modified
about this qualification to the doctrine of Accord and
Satisfaction.
However, there is another qualification to the doctrine known
as the Rule in Pinnels case [5 Co Rep117], which had laid
down that the part payment of a debt can never amount to a
satisfaction of the whole debt. If along with a part payment
anything of a different specie is delivered and accepted there
would be satisfaction and the waiver would be valid. It was
remarked thus in Pinnels case, the gift of a horse, a hawk or
a robe, in satisfaction is good ................ or otherwise the plaintiff
would not have accepted it in satisfaction. The rule in Pinnels
case was approved by the House of Lords in Foakes v. Beer [9
A C 605]. In this case the plaintiff who had previously accepted
from the defendent instalment payments of the principal amount
in full satisfaction of a decree for principal and interest
subsequently was held entitled to take out execution for the
interest.
The rule in Pinnels case has however been criticised especially
as running counter to commercial practice. When taken in
conjunction with the rule that the law will not go into the
adequacy of consideration, the result may be absurd. As Jessel
M.R. stated, a creditor might accept anything, any satisfaction
of his debt except a less amount of money. He might take a
tomtit if he choose, and that was Accord and Satisfaction; but
he could not take 19 s 6 d in the pound. There is a tendency to
circumvent the rule in recent cases by applying possible
principles of equity.
As stated above, S.63 allows a promise to dispense with or
remit wholly or partly the performance of a promise, or extend
the time for it or accept instead of it any satisfaction. Thus the
Indian law of remission has no place for the doctrine of Accord
and Satisfaction.
In Matthew Henry Abraham v. The Lodge Goodwill
[(1910) 34 Mad 156],P was the holder of a promissory note
executed in his favour by D and agreed to abandon his claim if
the Lodge Goodwill which was burnt was resuscitated. The
building was resuscitated. P made a subsequent claim upon
the promissory note. Dismissing the claim, the Madras High
Court explained that S.63 differs from the English law in that it
does not require consideration to support a release while under
English law a release without consideration is a nudum pactum.
Similarly in Manohar Koyal v. Thakur Dass Naskar [ILR
(1888) 15 Cal 319], the Calcutta High Court had already stated
that it is quite clear that S.63 not only modifies but is in direct
antagonism to the law in England. It was pointed out, they
said, in Foakes v. Beer [LR 9 AC 605] that for nearly 300
years it has been law in England that if A owes B 500 pounds
and B consents to take 200 pounds in payment of the debt there
is a nudum pactum and B can subsequently claim the unpaid
300 pounds. They said the law in this country is different by
virtue of S.63.
Thus, in Kapur Chand Godha v. Mir Nawab Himayatali
Khan [(1963) 2 SCR 168], there was a liability of above twenty
seven lakhs rupees before the princely state of Hyderabad was
taken over. A committee was appointed to clear certain matters
and it offered twenty lakhs to the creditor in full satisfaction
and he accepted it. Afterwards, the creditor sued for the balance.
S.K. Das J. of the Supreme Court held that the facts are
completely covered by S.63 and that the creditor having
accepted payment in full satisfaction of his claim was not entitled
to sue. Similarly, in Harichand Madan Gopal v. State of
Punjab [AIR1973 SC 381], where the Government had decided
to recover only forty percent and nothing more, held it would
amount to remitting a part of the debt due and the Government
cannot thereafter ask to recover more than forty percent. It is
not necessary that there must be some consideration for the
remission of a part of the debt. However, there must be proof
that the lesser sum has been accepted. In Union of India v.
Gangaram Bhagwandas [AIR 1977 MP 215], the railways
sent a cheque for an amount less than the claim by a party. The
party retained the cheque but did not issue any receipt that he
was accepting it in full satisfaction. Neither did he stop pursuing
the matter. It was held there was no agreement to accept a
lesser sum.
Under S.63, dispense with means waiver. Waiver is the
abandonment of a right or rights. In W.I.Alan & co. Ltd. v. El
Nasr Export and Import Co., [(1972) 2 Q B 189], Lord
Denning explained waiver as an application of estoppel. Waiver
may be implied. If a party, by his conduct leads another to
believe that strict rights arising under the contract will not be
insisted on, intending that the other should act on that belief,
and he does act on it, then the party will not afterwards be
allowed to insist on the strict legal rights when it would be
unequitable for him to do so. In this case, a contract for the
sale of goods contained a stipulation for bank credit for the
price in a certain manner. But the offer made by the confirming
bank varied in several respects with what the sellers were entitled
to require. For example, the bank offered sterling currency.
The sellers accepted by sending invoices and drafts. Afterwards
sterling was devalued but Tanzanian currency was not. The
sellers wanted to enforce their right to payment in Tanzanian
currency. But they were not allowed. it was observed that it
was not a concession which the sellers could thereafter
unilaterally abrogate any more than the buyers would have been
entitled to alter the terms of the credit if the relative values of
the currencies had changed in the opposite way.
There is a distinction between waiver and extension of time by
mutual consent. This distinction was sharply outlined in M.
Sham Singh v. State of Mysore [(1973) 2 SCC 303]. M was
granted state scholarship for higher studies in the United States
on a bond that he would serve the state on his return provided
the state offered him a job within six months of his return failing
which the bond was to be taken as waived. If M failed to comply
he was to refund the money. On his request, the state agreed to
extend his stay for one year for practical training. During this
year he came home on a domestic visit but was allowed by the
state to rejoin his practical training. On completion of training
he took up service in the United States. The state claimed refund.
M pleaded there had been a waiver by the state. The Supreme
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Court held there was nothing to show any such intention on the
part of the state and there was no waiver whatever. There had
only been an extension agreed mutually. M was liable to refund.
It may also be noticed that waiver of compliance with a
requirement of the contract may in some circumstances be
withdrawn by giving reasonable notice. In Charles Rikards
Ltd. v. Oppenheim [(1950) 1 A E R 420], there was a contract
to supply a car chassis and build a body on it within seven
months time stated to be of the essence. The body work was
directly entrusted to a third person who was to take instructions
directly from the buyer. There was no delivery within time.
The buyer extended time liberally but after about two months he
gave notice that if the car was not delivered in 4 weeks he would
not accept it. Delivery was offered 3 months afterwards but he
declined. Held, he had again by reasonable notice made time of
the essence after waiving it and he was now entitled to damages
for breach.
Under S.63, a promisee may before breach gratuitously release
the promisor from the obligation to perform the promise. The
promisee may also after breach gratuitously release the promisor
from his liability arising on such breach.
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163
SUB TOPICS
4.1 Introduction
4.2 General Principles of Frustration
4.3 Grounds of Frustration
4.4 Limitations of the doctrine of Frustration
4.5 Consequences of Frustration
4.1 INTRODUCTION
A contract may be discharged by impossibility of performance
which may occur at any stages of the contract. In a contingent
contract the parties may stipulate a contingency which may be
impossible itself and cannot happen. In section 36 it is provided
that where such a contingency is provided in the agreement,the
agreement is itself void. As for example, A agress to pay B
Rs.1000/- if two straight lines enclose a space. This is a void
agreement. Similarly certain contingency become impossible
to happen but parties to the agreement may commit mistakes
about such contingencies. Such an agreement is void due to
the mistake of parties. As for example, A agrees to pay B
Rs.1000/- if B will marry As daughter C, C was dead at the
time of agreement not to the knowledge of both parties.
Therefore the contingency is impossible to happen. Therefore
section 20 read with section 36 makes the agreement void ab
initio.
Sometimes an impossibility may be supervened after the
contract is entered into, but before its performance. In such
cases this impossibility may be either due to act of God or due
to change of circumstances on account of acts of a party
including a third party but not on the fault of anybody. It is
simply a situation of frustration that both the parties suffer from
either due to accident or an act of God called in law supervening
impossibility or due to act of any person including the act of
state but not due to the fault of the parties, known in law as
subsequent impossibility. The following flow chart shall give
a wider perspective of the doctrine of frustraton which is
substantively followed in India in absence of wide gap in the
Indian legal system. In India section 56 deals with such a
situation. According to this section a contract to do an act which,
after the contract is made, becomes impossible, or by reason of
some event, which the promisor could not prevent, unlawful,
becomes void when the act becomes impossible or unlawful.
The first part of the section indicates to the supervening
impossibility whereas the later part the subsequent impossibility.
But where in the agreement parties under a mistake of belief
stipulated a contingency on which the performance of the
agreement dependable, such agreements are void ab initio
provided the contingency is impossibility in itself from the very
beginning [S.36]. Again where one person promised to do
something knowing on reasonable diligence might have known
that it is impossible or unlawful to peform the agreement which
other party was not aware, the party aware of the impossibility
has to pay compensation for the loss sustained by the other
party. This is an equitable principle. As for example, A agrees
to marry B being already married to C and forbidden by law to
practice polygamy. Here A may compensate B for the loss
sustained by her due to non peformance of his promise. Out of
the four illustrations given in section 56 one relates to
supervening impossibility and two to subsequent impossibility.
Anyway the flow chart of the doctrine of frustration is as
follows:
Doctrine of Frustration
Impossibility at the beginning Impossibility of Per-
of the agreement formance
Contingency Mistake of Supervening Subsequent
impossible itself essential fact impossibility impossibility
(S.36) (S.20)
Death of a party Destruction of subject matter Incapacity
of parties by
accident
frustration War Non fulfilment of Change of Legislative or
through of conditions circumstances Executive
Commercial intervention
practice
4. IMPOSSIBILITY OF PERFORMANCE
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4.2 GENERAL PRINCIPLES OF FRUSTRATION
A contract may be discharged by Impossibility of Performance.
Impossibility of performance may appear on the face of the
contract, or may exist, unknown to the parties at the time of
making the contract, or may arise after the contract is made.
If an agreement contains a promise to perform something which
is ex facie impossible, it is void ab initio. The rule is based on
two legal maxims. One, lex non cogit ad impossibilia, that is
the law does not recognise what is impossible. Second,
impossibilium nulla obligato est, that is, what is impossible
does not create an obligation.
S.56 embodies these rules by laying down that an agreement to
do an act impossible in itself is void. Illustration: A and B
agree to discover treasure by magic. The agreement is void.
Sometimes, the contract may be impossible unknown to the
parties at the time of making the contract. This could happen,
for example, by mutual mistake of fact, as in Couturier v.
Hastie [(1856) 5 H L C. 673] : There was a contract between a
buyer and seller for a cargo of corn supposed to be on ship on a
voyage from Salonica to England. Infact, unknown to the
parties, the cargo had already become so heated that it was
unloaded at Tunis and sold for what is worth. Thus the
destruction of the subject matter unknown to the parties at the
time of contract resulted in rendering the contract void. In this
instance, it was a mutual mistake of fact which according to
S.20 would render contract void as it was impossible to perform
it though such impossibility was unknown to the parties when
they made the contract.
However, if when making the contract the promisor alone knew
the impossibility, he shall have to compensate the promisee for
any loss caused though the non-performance of such promise.
S.56 lays down the law in its third paragraph as follows- that
where a person promises to do something which he knew, or,
with reasonable diligence, might have known, and which the
promisee did not know to be impossible or unlawful, such
promisor must compensate such promisee for any loss caused
by non-performance of such promise. Illustration: A, already
married to C, promises to marry B who does not know of the
marriage of A to C. A is subject to the law against bigamy. A
must compensate B for the non-performance of the promise for
any loss caused.
Where parties have made a contract to do or not to do anything
if an uncertain future event happens, but such event becomes
impossible, such contract becomes void. This is laid down by
S.32 and is a contingent contract becoming void by
impossibility.
The law of discharge of contract has to deal with another kind
of impossibility of performance, namely supervening
impossibility or impossibility arising subsequent to the
formation of the contract. The modern English law has
meaningfully struggled to recognise such supervening
impossibility by different theories of construction of such a
contract including the application of supervening impossibility
to commercial contracts called frustration. The Indian law
though persuaded by these theories has found more direct
ground in the words of S.56 paragraph two as adumburated by
the Supreme Court in a leading decision. Both English and
Indian law has had also to deal with the consequences of
discharge of contract by supervening impossibility.
According to the earlier English law impossibility arising
subsequently to the formation of a contract does not excuse a
promisor from performance. The rule was laid down in
Paradine v. Jane K.B. [(1647) Aleyn 26]. Paradine sued Jane
for rent due upon a lease. Jane pleaded that a certain German
prince by name Prince Rupert an alien born enemy to the kins
and kingdom invaded the realm and with force entered on
possession and expelled the defendant and held him out of
possession so that he could not take the profit and pay the rents.
The Court held that this was no excuse. It said if there is a
covenant to repair a house, though it be burnt by lightning, or
thrown down by enemies yet he ought to have repaired it,
because he might have provided against it in the contract. This
rule came to be known as the do or die rule and was followed
in a line of English cases down to the early part of this century
whenever the Courts thought that the contract entered into by
the parties was an absolute one and gave no room to any express
or implied condition that it could be discharged by supervening
impossibility. As observed by Scrutton L.J. in Ralli Bros. v.
Compania Naviera etc [(1920) 2 K B 287], Impossibility of
performance, as a rule, is not an excuse for non-performance.
But subsequently the English law developed the theory that
even though parties to a contract have not expressly made a
condition that a supervening impossibility would discharge the
contract, there are cases in which though there is no such express
provision, the Courts will interpret the contract as containing
such a provision by implication. This is known as the doctrine
of implied term and was explained by Lord Loreburn in
Tamplin v. Anglo - Mexican Coys case [(1916) 2 AC 397]
A Court ought to examine the contract and the circumstances
in which it was made not to vary but only to explain it, to see
whether or not it can infer from the nature of the contract and
the surrounding circumstances that a condition which was not
expressed was a foundation on which the parties contracted
.............'if that happens, of course, it is over between us ......,
in most of the cases there was an implied condition in the
contract which operated to release the parties from performing
it ..................What, in fact, was the true meaning of the
contract?.
The exposition of the doctrine of implied term in Tamplin v.
Anglo Mexican Co., case is accepted by judicial opinion in
many latter English cases as the true principle underlying the
law of impossibility of performance. No court has an absolving
power but can infer from the nature of the contract and
surrounding circumstances that a condition which was not
expressed was a foundation on which the parties agreed that if
the altered circumstances are such that if the parties thought of
them they would have freed themselves from the contract and
that it is therefore a question of ascertaining the true meaning
of the contract. The theory was confirmed as latter as in British
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165
Movietone Ltd v. London and District Cinemas Ltd [(1957) 1
KB 190] by the House of Lords and the observation of Lord
Loreburn that no court has an absolving power was approved.
Viscount Simon said that the principle remains the same though
particular application of it may vary greatly. He said in his
view it is a question of construction.
But there has been another view and theory in English cases
that the doctrine of implied term was really a positive rule of
law requiring the court to import into the contract, irrespective
of the intention of the parties, in the circumstances that have
arisen a term that there is such an impossibility that the contract
is discharged. There is a line of English cases which emphasise
that the implied term is a legal fiction courts have to import as
a positive rule of law in the changed circumstances. Thus in
Russkoe v. Strik [(1922) 10 Lloyds L.R 214], Alkin L.j. stated
there are many positive rules of law imposed upon on contracts
quite independent of the intention of parties. According to him
when the contract is terminated consequences follow as a matter
of positive law and not from any express or implied agreement
of the parties.
Goddard J. took a similar view in Tatem v. Gamboa [(1939) 1
KB 132]. Lord Wright in Denny, Moth & Dickson v. Fraser,
[(1944) AC 275] thought the courts have formulated the rule
by virtue of their inherent jurisdiction just as they have
developed the rules of liability for negligence, or for the
restitution of the money where otherwise there would be unjust
enrichment. The theory of positive rule of law was also
supported by Denning L.J. (though unsuccessfully in the House
of Lords) in the British Moveitone Ltd case when he said the
court really exercises a qualifying power - a power to qualify
the absolute, literal or wide terms of the contract - in order to
do what is just reasonable in the new situation. The day is done
when we can excuse an unforseen injustice by saying to the
sufferer it is your own folly. As Lord Wright said in Joseph
Constantine Steamship Line Ltd. v. Imperial Smelting
Corporation Ltd, [(1942) AC 154] In ascertaining the
meaning of the contract and its application to the actual
occurrences, the court has to decide not what the parties actually
intended but what as reasonable men they should have
intended.
Thus there are two views of the doctrine of implied term in
English law. One that it is a question of construction of the
contract in the changed circumstances, the other that it is a
positive rule of law obliging the court to import such a term in
the changed circumstances. Whatever be the basis of theory,
the English courts have applied the theory of frustration to
various circumstances which have been classified as particular
classes of cases.
4.3 GROUNDS OF FRUSTRATION
The principle of impossibility of performance, or frustration of
contract is applicable to a great variety of contracts. It is
therefore not possible to lay down an exhaustive list of situations
in which the doctrine is going to be applied to excuse
performance. This view is expressed in the Harvard Law
Review. Yet certain grounds of frustration are well established
as follows :
1. Destruction of subject matter
2. Death or incapacity for personal service
3. Non-existence or non-occurrence of a particular state of
things
4. Intervention by legislative or executive authority
5. Intervention of war
6. Change of circumstances or of particular state of things
7. Frustration in commercial contracts
In this module it is only possible to examine a few authorities
for each variety of cases.
1. Destruction of subject matter of contract
In Taylor v. Caldwel [(1863) 3 B & S 826] D had agreed to
give P the use of a music - hall for certain concerts. The music
hall was destroyed by fire through no fault of D before the date
of the first concert. P sued D for breach of contract. Held, the
contract is subject to an implied condition that performance
become impossible if the thing perishes without default of the
promisor.
Similarly in Howel v. Coupland [(1876) A.B.D. 258] there
was a contract for sale of 200 tons of potatoes to be grown in a
particular field. The crop failed as it was destroyed by a disease.
Mellish L.I., excused a non-delivery of 126 tons.
In V.L. Narasu v. P.S.V. Iyer [ILR 1953 Mad 831] there was
a contract to exhibit a film in a cinema hall. On account of
heavy rains the rear wall of the hall collapsed and licence was
cancelled until the building was reconstructed to the satisfaction
of the authorities. The building was demolished. The picture
could be continued to be exhibited only if the building was
reconstructed which the owner was under no liability to do and
even if done as Venkatarama Iyyar J. pointed the attraction of
film being ephemeral it would lose it appeal. The Madras High
Court held the contract discharged.
2. Death or disablement of party to do personal service
The well known authority is Robinson v. Davison. There was
a contract between P and Mrs. Davision who was the wife of D
and an eminent pianist that she would play at a concert to be
given by P on a particular day. On that morning she was too ill
and informed P that she could not play. P lost a sum of money
by the postponement of the concert . P sued D for damages. It
was held that the illness of Mrs. Davison excused her from
playing and performing the contract.
In this connection Illustration (c) to S.56 of the contract Act in
the Indian law may be noticed. A contracts to act at a theatre
for six months in consideration of an advance by B. On several
occasions A is too ill to act. The contract becomes void on
those occasions.
In Stubbs v. Holywel Railway Co. [L.R. 2 Exch 311] it was
held that a contract for personal services was put an end to by
the death of the party. Martin, B. stated, the mans life was an
implied condition of the contract.
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On the otherhand, there could be circumstances when a contract
of service could be held not frustrated by illness and incapacity.
Thus in Storey v. Frulham Steel Works Co. Ltd [(1907) 24
TLR 89] S was employed as a works manager under a five
year contract. After two years he became ill and was absent
from work for five months. After four months absence the
company terminated the employment. S sued for breach of
contract. It was held a five year contract of service could not
be considered terminated by frustration by five months illness.
The application of the doctrine to industrial relations was
examined by the English National Industrial Relations Court
in Marshal v. Horland & Wolff Ltd [(1972) 2 AER 175]. M
was in the employment of a company since 1946. He fell ill in
1969 and did not attend till 1971. The company retrenched
him after giving usual benefits. M had still to undergo an
operation before he could resume work. The court held the
contract of service had not been frustrated. It said in considering
whether further performance has become impossible, regard
must be had to the terms of employment, the nature of the illness,
its duration and prospects of recovery, and the period of the
past employment. On the facts of this case for which the court
gave the details, it held the contract had not become frustrated.
3. Non existence or non occurrence of a particular state of
things
The rule of implied term laid down in Taylor v. Caldwell was
not limited to contracts de certo corpore where the existence
of a specific thing as subject matter was involved. It was
extended in Krell v. Henry [(1903) 2 KB 740], one of a series,
known as the Coronation cases, to the non existence or non
occurrence of a particular state of things forming the foundation
of a contract. D agreed to hire the rooms of P for June 26 and
27. The coronation of King Edward VIIth and the procession
was to take place but the contract contained no reference to it.
The coronation took place but the procession which was to pass
by that flat was cancelled by the illness of the King. P sued D
for the rents. The court came to a conclusion that it was obvious
that there were rooms to view the procession and as it did not
take place the substance of the contract the existence or
occurrence of a particular state of things was gone. It held the
contract discharged by frustration and no rents were payable.
However, unless the foundation of the contract has been
destroyed the rule cannot be applied. In Henry Bay Steam
Boat Co. v. Hutton [(1903) 2 KB 683 (CA)] also one of the
coronation cases, D chartered a steam boat for two days to take
out passengers for viewing the naval review and a cruise round
the fleet for a day. There was unpaid balance for hire. The
Royal Navy Review was cancelled. D had no use for the ship.
Yet the court held that in this case the naval review was not the
foundation of the contract. It is a little difficult to reconcile the
later decision with the earlier on the nice distinction that naval
review was not the real object of both the parties as basis of the
contract. It was held D was liable to pay the unpaid balance of
hire less the profit of the owner of the ship in the ordinary course.
4. Intervention by Legislative or Executive Authority
The performance of a contract is sometimes made impossible
by a change in the law or by executive action. The principle
was recognised in Baily v. De Crespingny [(1869) 4 AB 180].
P was lessee to D for a term of eighty nine years of a plot of
land. D retained the adjoining land and covenanted that neither
he nor his assigns would during the term erect any buildings on
it. A Railway Company acting under statutory powers took
the land compulsarily and built a station on it. P sued D on the
convenant. It was held Legislative compulsion had created a
new kind of assignee of the land for whose acts D could not be
held responsible.
In Metro politon Water Board v. Dick Kerr & Co. Ltd
[(1918) AC 119], there was a contract by a firm in 1914 with
the Water Board to construct a reservoir within six years. But
they were asked to stop the work in 1916 by a notice under the
Defence Acts and Rules. They claimed that the contract was
put an end to and could not be resumed after the War. The
House of Lords held that the interruption by the executive
authorities and its duration until the War ended was of such a
character that the contract if resumed would be a different
contract from the contract broken off and therefore it has been
discharged by impossibility.
In the Indian law, S.56 lays down in paragraph two a positive
rule of law on the discharge of contract by supervening
impossibility. This appears to be nearer the second and later
English theory of the doctrine of implied term being a positive
rule of law. The Supreme Court of India in a landmark decision
in the leading case of Satyabrata Ghose v. Mugneeram
Bangur & Co. [AIR 1954 SC 44] has clarified that the law of
supervening impossibility is self-contained in S.56 of the Act
as a positive rule of law and discharge by frustration is only an
interchangeable term and the English theories of implied term
need not concern us as S.56 lays down a positive rule of law.
Mukherjea J. in an illuminating judgement in the said case laid
down the following points of Indian law :
1. The Indian law of frustration which term is interchangeable
with supervening impossibility is embodied in S.56 as a
positive rule of law which does not leave the matter to the
intention of the parties and casts the duty on the court to
decide whether a contract is ended by frustration.
2. To the extent the Indian Contract Act deals with a particular
matter it is exhaustive and it is not permissible to import
English principles de hors the provisions in the Act. The
English decisions have a persuasive value but the several
theories of frustration of English law do not bind us.
3. When the whole purpose or basis of a contract is frustrated
by the intrusion or occurrence of an unexpected or change
of circumstances beyond contemplation of the parties, it is
the duty of the court to give relief and hold the contract
frustrated and ended as it is really a rule of positive law
under S.56.
4. As S.56 lays down a rule of positive law, not dependent on
the intention of the parties, the belief, knowledge and
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167
intention of the parties are evidence, but only evidence,
and the court has to form its own conclusion by examining
the contract and the circumstances.
5. When there is frustration, the contract is dissolved
automatically and does not depend on rescission or
repudiation or breach or choice or election of either party,
and the court has to decide expost facto.
The aforesaid point five is in direct line with the important
decision of the Privy Council in Hirji Mulji v. Chenoy Yue
Steamship Co. [(1926) AC 497] that once there is frustration
there is an automatic dissolution of the contract.
5. Intervention of War
Intervention of war or war like conditions have raised questions
of impossibility of performance of contract. A good illustration
is Horlock v. Beal [(1916) 1 AC 486], A ship owner engaged
a seaman under articles for two years. While the articles were
running, the ship was seized by Germany in a Belgian port and
the crew interned for an indefinite period. The contract was
held to be discharged and the ship owner under no obligation
to continue the payment of the seamans wages.
In an Indian case Basanti Bastralaya v. River Steam India
Navigation [AIR 1987 Cal. 271], in a contract of carriage by
river, the enemy seized the boat along with the cargo during
hostilities between India and Pakistan. The plea of impossibility
of performance was allowed.
But if war prevents only one of the many ways of performing a
contract, and that way was in the mind of one of the parties
only and had not been made the basis of the contract as known
to the other party, the doctrine of frustration cannot be invoked.
Thus in Twentsche Overseas Trading Co. Ltd. v. Uganda
Sugar Factory Ltd [AIR 1945 PC 144], there was a contract
for the supply of Krupps steel rails. The appellant claimed
that the rails specified were to be obtained from a German firm
and that firm only. They could not deal with alien enemies due
to the outbreak of the Second World War. The performance of
the contract became illegal and impossible. But the Privy
council held the reference to Krupps was merely a
specification of the rails. The appellants no doubt intended
Germany as the source of supply but it was not made the basis
or foundation of the contract as known to the other party. There
were other sources of supply. The appellant could not invoke
the doctrine of frustration.
Similarly, in Tskiorglou & co. Ltd. v. Noblee & thorl G. m.
b. H. [(1962) AC 93], the appellants agreed to sell three hundred
tons of Sudan groundnuts c.i.f. Hamburg. The usual and normal
route was the Suez canal. The shipment was to be in November/
December, 1956. On November 2, 1956, the Suez Canal was
closed because of the Anglo-French War with Egypt. It was
reopened only in April, 1957. The appellants said it was an
implied term that shipment should be through Suez. As that
was not possible, there was frustration. But the House of Lords
held that no such term could be implied. The customary or
usual route was no doubt closed, S.32 of the English Sale of
Goods Act required shipment by a reasonable and practical
route. The appellants might have been put to greater expense
to ship the goods via the Cape of Good Hope. But that was no
reason to claim frustration of the contract.
6. Frustration in Commercial Contracts
Originally, the doctrine of implied term was called frustration
of the adventure in commercial contracts and the term
frustration was reserved for such contracts. The modern usage
is to use the term frustration to cover all classes of cases of
subsequent impossibility. The principle was applied in Jackson
v. Union Marine Insurance Co. [L.R. 10]. Ps ship was
chartered to proceed to New Port and load a cargo for San
Francisco. On the way to New Port the ship ran aground. After
some weeks the charterers chartered another ship and P lost the
freight under the charter-party by perils of the sea. The question
of total loss depended on whether the charterers found the
contract impossible without waiting for the ship to be repaired
which would have taken a long time. Bramwell B. said, the
adventure was frustrated by perils of the sea. Both parties were
discharged. A loading of the cargo after repairing the ship would
have been a new adventure, a new agreement. In the result,
the insures had to pay a total loss to P.
In the case Bank Line v. Capel Co. Ltd [(1919) AC 535] the
ship had been chartered for twelve months. Before the ship
had been handed over, a few months earlier to the concerned
date, the ship was requisitioned by the Government but released
within the period of the charter. The charterers called on the
owners to deliver her or pay damages. The owners pleaded
frustration of the charter. Lord Summer discussed the principles
of frustration in a valuable way and said in cases of such delay
the question must be considered by the court as it had to be
considered by the parties at the time they came to know the
cause and probabilities of the delay and had to decide what to
do. He said, rights ought not to be left in suspense to hang on
the chances of subsequent events. The contract binds or does
not bind. The law ought to be that the parties can gather the
facts then and there. He held that the charter party was
discharged.
7. Change of Circumstances
As Lord Sumner remarked in the case Bank Line v. Capel,
the doctrine of frustration ought not to be extended but to cases
that really fall within the rule it must be applied as a matter of
course even under novel circumstances.
The courts have to apply the rule carefully to change of
circumstances which make the performance of the contract
impossible.
In Joseph Constantine Steamship Line Ltd. v. Imperial
Smelting Corporation Ltd. [(1942) AC 154], a ship was
chartered to load a cargo. But on the day before she could have
proceeded to her berth an explosion occurred in the auxillary
boiler. It was impossible for her to undertake the voyage at the
stated time. The House of Lords held that frustration had taken
place by the change of circumstances.
Though every change of circumstances cannot become
frustration as held in many cases especially regarding abnormal
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rises or falls in prices, or a sudden depreciation of currency, or
revision of prices, yet when the new circumstances are extreme,
a court may have to come to a conclusion of frustration. This
happened in Essan Engineering Co. Ltd. v. Fertilizers and
Chemicals (Travancore) Ltd. [AIR 1991 Mad. 158], where
certain transformers were to be supplied on a firm basis at certain
prices. Owing to a war there was a 40% escalation of prices.
The court held the contract ended.
However, there are changes of circumstances which may create
commercial hardship but cannot be recognised by courts as
frustrating and discharging a contract. A good illustration
occurred in Davis Contractors Ltd. v. Fareham Urban
District Council [(1956) AC 696 HL]. There was a contract
to build certain houses for the council for a fixed price to be
completed within eight months. Bad weather and labour strikes
intervened. It was completed in twenty two months at a cost
much more than contract price. The contractor claimed the
original contract was discharged by frustration by change of
circumstances. He claimed payment on a quantum meruit action
of the actual cost for the work done. The House of Lords did
not agree. Lord Radcliffe explaining the law of frustration said
that it occurs when the law recognises a contract becomes
impossible because without fault of either party change in
circumstances render performance of a thing radically different
from that undertaken. This must be decided from the terms
and conditions read in the light of the surrounding circumstances
and on the other hand the events which have occurred. It is not
hardship or material loss itself which calls the principle of
frustration into play.
The Supreme Court of India recognised the same principle in
Alopi Parshad & Sons Ltd. v. Union of India [(1960) 2 SCR
793], P acting as agents to the Government of India purchased
ghee for the army. P was to be paid on cost basis for the work.
The work was in progress. Second World War intervened. The
rates fixed in peace time were totally altered by the war time
conditions. The agents demanded revision of rates. They
received no replies. They kept up the supplies. The Government
terminated the contract in 1945. The agents claimed payment
at enhanced rates. They did not succeed. The Supreme Court
said there is no general liberty for the courts to absolve a party
from liability to perform the contract merely because on account
of an uncontemplated turn of events the performance may
become onerous.
Courts have taken the view that the alteration of circumstances
must be such as to upset altogether the purpose of the contract.
As Lord Loreburn said in the Anglo Mexican Co. case some
delay or some change is very common in all human affairs. So
commercial hardship will not by itself support frustration and
excuse performance. In Sachindra Nath v. Gopal Chandra
[AIR 1949 Cal 240], P let certain premises to D for a restaurant
at a higher rent as British troops were stationed in Calcutta. A
clause in the contract stated it will be in force so long as the
British troops remain in the city. D agreed to pay the higher
rent. After some months, the locality was declared out of bounds
for the British troops. Henderson J. at the Calcutta High Court
held that the situation like this is one of commercial hardship
and did not frustrate the contract.
The Madras High Court followed the same principle in Samuel
Fitz & Co. v. Standard Cotton Co. [AIR 1945 Mad 291], D
placed orders with P for supply of tapestries of a certain kind
stating they intended to sell them in Australia. But the Australian
Government prohibited the import of such goods. D lost the
market and therefore cancelled the orders. P sued for breach.
Horwill J. held that it was not possible to say that the foundation
of the contract was that the goods should be resold in Australia.
As Lord Simonds said in the Fareham Urban District Council
case, disappointed expectations do not lead to frustrated
contracts.
4.4 LIMITATIONS OF THE DOCTRINE OF
FRUSTRATION
There are the following limits to the doctrine of frustration apart
from the constraints imposed by the courts in particular classes
of cases:
Firstly, according to English law as the doctrine of implied term
was based on the presumed intention of the parties (see Anglo
Mexican Co case) no term can be implied which would be
inconsistent with any express terms of the contract. As Viscount
Simon L.C. stated in Constantine S.S. Line v. Imperial
Smelting Corporation [(1942) A.C. 163], there can be no
discharge by supervening impossibility if the express terms of
the contract bind the parties to performance not withstanding
that the supervening event may occur.
Secondly, according to English law doctrine of implied term,
the presumed intention must be common to both the parties.
The principle was illustrated in Blackburn Bobbin Co. v. Allen
[(1918) 1 K.B. 540]. There was a contract for the sale and
delivery at Hull of Finnish Birch Timber. The War broke out.
The vendor intended to ship the timber from a Finnish port to
Hull. The buyer was unaware that Finnish timber had to be got
only like this as timber merchants in England did hold stocks.
The out break of the War made it impossible for the vendor to
perform the contract. What had happened was an unforeseen
event but not provided for in the contract. It was held for the
contract to be dissolved there must have been a failure of a
basis which was in the intention of both the parties which was
not so in this case.
There must be a failure of something which was the basis of
the contract in the minds of both the parties but not in the mind
of only one of the parties. This was also demonstrated clearly
in Twentsche Overseas Trading Co. Ltd v. Uganda Sugar
Factory Ltd. [AIR 1945 PC 144].
Thirdly, and most important of all, it is well established that the
doctrine of frustration cannot be applied where the frustration
is self-induced. If the event alleged to frustrate a contract arises
from an act or election of a party, the doctrine cannot be applied.
In Maritime National Fish Ltd. v. Ocean Travelers Ltd.
[(1935) AC 524 (PC)], A hired Rs trawler, the St. Cuthbert
to be employed in the fishing industry. Both parties knew that
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169
the trawler could be used only under a licence from the Canadian
Government. A was using five trawlers. They therefore applied
for five licences. The Canadian Government granted three
licences and asked to A to name three trawlers. A named three
trawlers other than St.Cuthbert. When R sued for hire A
repudiated the charter and pleaded frustration. But the Privy
Council held that the frustration in this case was self-induced.
It was the result of As own choice of excluding Rs trawler
from the licences. Therefore, A was not discharged from the
contract.
However, self-induced frustration can come into play only where
the act of a party amounts to a breach of duty owed to the other
party under the contract. If such an act were not intentional but
merely negligent, it is unlikely to be construed as a self-induced
frustration. Anson, the authority on contract, thinks so, and the
dicta of Lord Russell in the Constantine S.S. Line case that
the default might range to the thoughtlessness of a primadonna
who sits in a draught and loses her voice, only confirms this
qualification.
Fourthly, the English law may be said to be still not finally
settled on the application of the doctrine of frustration to leases.
In the leading case Cricklewood Property and Investment
Trust v. Leightons Investment Trust [(1945) AC 221], the
House of Lords, on the facts of the case, held frustration cannot
arise in the lease which was for 99 years. A building lease was
executed for 99 years. More rent was payable after the erection
of certain buildings. But under the Defence Regulations the
building operations could not be continued. The lessors sued
for rent. The lessees pleaded that the lease had been frustrated.
But the House of Lords unanimoulsy held that as the lease had
still more than 90 years to run and the interruption may cover
only a small part of that period, there had been no frustration in
this case. Lord Russell pointed out that a lease is more than a
contract. It vests an estate in the land for the lessee. The contract
obligations are only incidental to the relation of landlord and
tenant. Even if some of them become impossible the lease
would remain. But Viscount Simon L.C also said that because
a lease is more than a contract and amounts to an estate it cannot
be said it can never end prematurely by frustration. He gave
examples of a complete natural calamity or a permanent
legislative preclusion making any operation of the lease
unlawful.
So the English law will allow frustration of a lease only in very
exceptional cases. Such a view was reiterated in National
Carriers Ltd v. Panalpina (Northern) Ltd. [(1981) 2 WLR
45 HL], A warehouse was demised to D for ten years. The
premises were not to be used for any other purpose except as
warehouse without consent of the lessors. The only access by
vehicles was by one street. The local authority closed the street
because of the dangerous condition of an old Victorian
warehouse opposite to the one under demise. The period
between the closure and opening of the street after the demolition
of the old warehouse was likely to be twenty months. During
such period the warehouse under demise was useless for D. D
refused to pay any further rent and claimed the lease as
frustrated. But D was held liable. According to the House of
Lords, the nature of the transaction and the duration after the
interruption did not significantly damage the contract and the
lease to apply the doctrine of frustration.
The law is the same in India. In Raja Dhruv Dev Chand v.
Raja Harmohiner Singh [AIR 1968 SC 1024], there was a
lease of agricultural land for one year. The rent was paid and
the lessee was given possession. Before any crops could be
raised the partition of the country left the land in Pakistan. The
parties migrated to India. The action was to recover the rent
paid. The Supreme Court took the view that S.56 of the Contract
Act is not applicable to rights and obligations of parties under a
transfer of property under a lease. They said completed transfers
are outside the scope of S.56. No recovery was allowed.
However, where the demise has not taken place but there is
only an agreement the principle of frustration can be applied.
Thus in Sushila Devi v. Hari Singh [(1971) 2 SCC 288], there
was an agreement to lease but the parties could not go to Pakistan
to give or take possession because of partition. The Supreme
Court held that the agreement came within the scope S.56 and
there was frustration of contract.
4.5 CONSEQUENCES OF FRUSTRATION
English law : The question arose in some of the coronation
cases (See Krell v. Heury) as to what are the remaining rights
of parties once there is frustration. It was decidecd in Chandler
v. Webster [(1904) 1 KB 493] that on frustraton any loss must
lie where it has fallen. In this case where the rent of the rooms
was payable in advance and 100 had been paid on account of
it was held that not only could it not be recovered back but the
balance due 141 sh 15 must also be paid. The reason given
by Romer L.J. was that the contract could not be considered
void ab initio. This line of decisions caused hardship.
But the House of Lords in the leading case of Fibrosa Spolka
Akeysna v. Fairbairn Lawson Combe Barbour Ltd [(1943)
AC 32] overruled Chandler v. Webster and the line of
decisions. English sellers agreed to make and deliver certain
machinery to Polish buyers, part of the price to be paid in
advance. 1000 was paid. Performance became impossible
as the Second World War broke out and Germany occupied
Poland. It was held the contract was frustrated and discharged
by War. Lord Russell of Killowen thought Chandler v.
Webster was wrongly decided. It was held that because of
total failure of consideration on a contract that had ceased to
exist, the action by the sellers for the recovery of the advance
sum paid was not an action on the contract, as supposed in
Chandler v. Webster. It was an action in quasi-contract and
the money was recoverable. Lord Simon drew a distinction
between a promise being consideration in the law of formation
of contract and in the law of discharge of contract by failure of
consideration and quasi-contract. The performance of the
promise being the consideration that has failed.
Even after the decision in Fibrosas case, the law was
considered unsatisfactory regarding the adjustment of rights of
parties of frustrated contracts. The party prepaid may have
incurred expenses or be left with goods of no value.
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Therefore, the Law Reform (Frustrated Contracts) Act of 1943
was passed. The Act provides that where a contract has become
impossible of performance or otherwise frustrated and the
parties are discharged from further performance:
(a) all sums paid or payable to any party before the discharge
shall if paid be recoverable as money had and received for
the use of the party who has so paid, or if payable cease to
be so payable,
(b) but if the party who has received such payment or to whom
payable, has incurred expenses before the discharge the
Court may allow him to retain or recover the whole or part
of it considers just,
(c) where a party has obtained a valuable benefit other than
money, before the discharge, the other party may recover
such sum not exceeding the value of the benefit, as the
court considers just,
(d) the Act will not apply if there is an agreement to the contrary,
(e) the Act does not apply to freight paid in advance under a
voyage charter party which is not recoverable by custom
even if the completion of voyage is frustrated.
Indian law : The position reached in English law after the
decision in Fibrosas case and the above Act of 1943, is already
secured in the Indian Law by s.65 of the Contract Act.
According to S.65 when an agreement is discovered to be void,
or when a contract becomes void, any person who has received
any advantage under such agreement or contract is bound to
restore it, or to make compensation for it, to the person from
whom he received it.
Illustration d to S.65 explains the position. A contracts to
sing for B at a concert for Rupees thousand which is paid in
advance. A is too ill to sing. A is bound to compensate B for
loss of profits at the concert. But A must refund to B the advance
of Rupees thousand.
S.65 covers agreements which never amounted to contracts
being void ab initio but discovered to be so at a later stage.
This wll cover benefits passed under a contract found void by
initial mutual mistake. Indian decisions have consistently held
that the intention of S.65 is to prevent a party to a void agreement
to retain benefits received under it. S.65 will also cover contracts
becoming void, that is, valid at inception but subsequently
becoming void.
The principle has been applied by the Indian courts even in
cases where a contract is void by reason of unlawful object
unknown to the parties and therefore the parties are not in pari
delicto that is not equally at fault. In effect, both are not at
fault.
Indian law also allows under S.65 actions on Quantum Meruit
which is a well settled quasi contractual claim. Quantum Meruit
literally means as much as earned. The principle of quantum
meruit is well illustrated in Craven Ellis v.Cannon Ltd [(1936)
2 K.B. 403], CE was employed as managing director in a
company. After three months, it was discovered that the
directors were not qualified to appoint him. Held, CE could
recover remuneration for the services rendered by him. A claim
on quantum meruit allowed in Indian law under S.65 is a remedy
of restitution. It is not a compensatory remedy for damages. It
is available only to a party who himself has not discharged the
contract by breach but who may have partly performed or passed
benefits to the other party which party has now put an end to
the contract and therefore the first mentioned party has elected
to be no longer bound for futher performance.
The Supreme Court has explained the correct application of
S.65 in State of Rajasthan v. Associated Stone Industries
[(1985) 1 SCC 575], By stating that it is not as if S.65 works in
one direction only. Any restoration of advantage and payment
of any compensation, if any, have necessarily to be mutual. It
approved the decision of the Privy Council in Govindram
Seksaria v. Edward Radbone [AIR 1948 PC 56]. that the
result of S.65 was that each of the parties was bound to restore
to the other any advantage which the restoring party had
received under the contract. The facts in the Supreme Court
case were as follows : There was a contract for the grant of a
quarry by the state to the other party. It was found to be void
because the parties were mistaken about the application of
income tax laws in the area. The Supreme Court said the state
could recover from the contractor the value of the rough stone
excavated but make good the expenses incurred in the quarring
operations. The net profits realised by the company could not
be the measure of compensation under S.65.
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STATUTORY LAW: INDIAN CONTRACT ACT 1872
(EXTRACTS)
31. Contingent contract defined. A Contingent
contract is a contract to do or not to do something, if some
event, collateral to such contract, does or does not happen.
32. Enforcement of contracts contingent on an event
happening - Contingent contracts to do or not to do anything
in an uncertain future event happens, cannot be enforced by
law unless and until that event has happened.
If the event becomes impossible, such contracts become void.
33. Enforcement of contracts contingent on an event not
happening - Contingent contracts to do or not to do anything
if an uncertain future event does not happen, can be enforced
when the happening of that event becomes impossible and not
before.
34. When event : on which contract is contingent to be
deemed impossible, if it is the future conduct of a living
person - If the future event on which a contract is contingent is
the way in which the person will act at an unspecified time, the
event shall be considered to become impossible when such
person does anything which renders it impossible that he should
so act within any definite time, or otherwise than under further
contingencies
35. When contracs become void which are contingent on
happening of specified event within fixed time - Contingent
contracts to do or not to do anything, if a specified uncertain
event happens within a fixed time, become void if, at the
expiration of the time fixed, such event has not happened, or if,
before the time fixed, such event becomes impossible.
When contracts may be enforced, which are contingent on
specified event not happening within fixed time- Contingent
contracts to do or not to do anything, if a specified uncertain
event does not happen within a fixed time, may be enforced by
law when the time fixed has expired, and such event has not
happened, or, before the time fixed has expired, if it becomes
certain that such event will not happen.
36. Agreements contingent on impossible events, void -
Contingent agreements to do or not to do anything, if an
impossible event happens, are void, whether the impossibility
of the event is known or not to the parties to the agreement at
the time when it is made.
37. Obligation of parties to contract - The parties to a contract
must either perform, or offer to perform their respective
promises, unless such performance is dispensed with or excused
under the provisions of this act, or of any other law.
Promises bind the representation of the promisors in case of
death of such promisers before performance, unless a contrary
intention appears from the contract.
38. Effect of refusal to accept offer of performance - Where
a promisor has made an offer of performance to the promisee,
and the offer has not been accepted, the promisor is not
responsible for non-performance, nor does he thereby losse his
rights under the contract.
Even such offer must fulfil the following conditions :
(1) it must be unconditional
(2) it must be made at a proper time and place, and under such
circumstances, that the person to whom it is made may have
a reasonable opportunity of ascertaining that the person by
whom it is made is able and willing there and then to do
the whole of what he is bound by his promise to do ;
(3) if the offer is an offer to deliver anything to the promisee,
must have a reasonable opportunity of seeing that the thing
which the promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal
consequences as an offer to all of them.
39. Effect of refusal of party to perform promise wholly-
When a party to a contract has refused to perform, or disabled
himself from performing, his promise in its entirety, the promise
may put an end to the contract, unless he has signified, by words
or conduct, his acquiescence in its continuance.
40. Person by whom promise is to be performed - If it
appears from the nature of the case that it was the intention of
the parties to any contract that any promise contained in it should
be performed by the promisor himself, such promise must be
performed by the promisor. In other cases, the promisor or his
representatives may employ a competent person to perform it.
41. Effect of accepting performance from third person -
When a promisee accepts performance of the promise from a
third person, he cannot afterwards enforce it against the
promisor.
42. Devolution of joint liabilities - When two or more persons
have made a joint promise, then, unless a contrary intention
appears by the contract all such persons, during their joint lives,
and, after the death of any of them, his representative jointly
with the survivor or survivors, and, after the death of the last
survivor, the representatives of all jointly, must fulfill the
promise.
43. Any one of joint promisors may be compelled to perform
- When two or more persons make a joint promise, the promisee
may, in the absence of express agreement to the contrary, compel
any [one-or more] of such joint promisors to peform the whole
of the promise.
Each promisor may compel contribution - Each of two or
more joint promisors may compel every other joint promisor to
contribute equally with himself to the performance of the
promise, unless a contrary intention appears from the contract.
Sharing of loss by default in contribution - If any one of two
or more joint promisors makes default in such contribution, the
remaining joint promisors must bears the loss arising from such
default in equal shares.
5. BARE TEXT OF THE RELEVANT SECTIONS
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Explanation - Nothing in this section shall prevent a surety from
recovering form his principal, payments made by the surety on
behalf of the principle, or entitle the principal to recover anything
from the surety on account of payments made by the principal.
44. Effect of release of one joint promisor - Where two or
more persons have made a joint promise, a release of one of
such joint promisors by the promisee does not discharge the
other joint promisor or joint promisors, neither does it free the
joint promisors so released from responsibility to the other joint
promisor or joint promisors.
45. Devolution of joint rights - When a person had made a
promise to two or more persons jointly, then, unless a contrary
intention appears form the contract, the right to claim
performance rests, as between him and then with them during
their joint lives, and after the death of any of them, with the
representative of such deceased person jointly with the survivor
or suvivors and, after the death of the last survivor, with the
representatives of all jointly.
46. Time for performance of promise, where no application
is to be made and no time is specified. - Where, by the contract,
a promisor is to perform his promise without application by the
promisee, and no time for performance is specified the
engagement must be performed within a reasonable time.
Expalanation : The question what is a reasonable time is, in
each particular case, a question of fact.
47. Time and place for performance of promise, where time
is specified and no application to be made - When a promise
is to be performed on a certain day, and the promisor has
undertaken to perform it without application by the promisee,
the promisor may perform it at any time during the usual hours
of business on such day and at the place at which the promise
ought to be performed.
48. Application for performance on certain day to be at
proper time and place. When a promise is to by performed
on a certain day, and the promisor has not undertaken to perform
it without application by the promisee, it is the duty of the
promisee to apply for performance at a proper place and within
the usual hours of business.
Explanation : The question what is a proper time and place
is, in each paticular case, a question of fact.
49. Place for performance of promise, where no application
to be made and no place fixed for performance When a
promise is to be performed without application by the promisee,
and no place is fixed for the performance of it; it is the duty of
the promisor to apply to the promisee to appoint a reasonable
place for the performance of the promise, and to perform it at
such place.
50. Performance in manner or at time prescribed or
sanctioned by promisee The performance of any promise
may be made in any manner, or at any time which the promisee
prescribes or sanctions.
51. Promisor not bound to perform, unless reciprocal
promisee ready and willing to perform - When a contract
consists of reciprocal promises to be simultaneously performed,
no promisor need perform his promise unless the promisee is
ready and willing to perform his reciprocal promise.
52. Order of performance of reciprocal promises - Where
the order in which reciprocal promises are to be performed is
expressly fixed by the contract they shall be performed in that
order; and where the order is not expressly fixed by the contract,
they shall be performed in that order which the nature of the
transaction requires.
53. Liability of party preventing event of which contract is
to take effect. When a contract contains reciprocal promises,
and one party to the contract prevents the other from performing
the promise, the contract becomes voidable at the option of the
party so prevented; and he is entitled to compensation from
the other party for any loss which he may sustain in consequence
of the non-performance of the contract.
54. Effect of default as to that promise which should be
first performed, in contract consisting of reciprocal promises
- When a contract consists of reciprocal promises, such that
one of them cannot be performed, or that its performance cannot
be claimed till the order has been performed, and the promisor
of the promise last mentioned fails to perform it, such promisor
cannot claim the performance of the reciprocal promise, and
must make compensation to the other party to the contract for
any loss which such other party may sustain by the non-
performance of the contract.
55. Effect of failure to perform fixed time, in contract in
which time is essential - When a party to contract promises to
do a certain thing at or before a specified time, or certain things
at or before the specified time, the contract, or so much of it as
has not been performed becoems voidable at the option of the
promisee, if the intention of the parties was that time should be
of the essence of the contract.
Effect of such failure when time is not essential - If it was
not the intention of the parties that time should be of the essence
of the contract, the contract does not become voidable by the
failure to do such thing at or before the specified time; but the
promisee is entitled to compensation from the promisor for any
loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that
agreed upon- If in case of a contract voidable on account of
the promisors failure to perform his promise at the time agreed,
the promisee accepts performance of such promise at any time
other than that agreed, promisee cannot claim compensation
for any loss occassioned by the non performance of the promise
at the time agreeed, unless at the time of such acceptance, he
gives notice to the promisor of his intention to do so.
56. Agreement to do impossible Act - An agreement to do an
act impossible in itself is void.
Contract to do act afterwards becoming impossible or
unlawful - A contract to do an act which, after the contract is
made, becomes impossible, or, by reason of some event which
the promisor could not prevent, unlawful, becomes void when
the act becomes impossible or unlawful.
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Compensation for loss through non-performance of act known
to be impossible or unlawful Where one person has promised
to do something which he knew, or with reasonable diligence,
might have known, and which the promisee did not know, to be
impossible or unlawful, such promisor must make compensation
to such promisee for any loss which such promisee sustains
through the non performance of the promise.
57. Reciprocal promise to do things legal, and also other things
illegal- Where persons reciprocally promise, firstly, to do certain
things which are legal and secondly, under specified
circumstance, to do certain other things which are illegal, first
set of promises is a contract but the second is a void agreement.
58. Alternative promise, one branch being illegal- In the
case of an alternative promise, one branch of which is legal and
the other illegal, the legal branch alone can be enforced.
59. Application of payment where debt to be discharged is
indicated- Where a debtor, owing several distinct debts to one
person, makes a payment to him, either with express intimation,
or under circumstances implying, that the payment is to be
applied to the discharge of some particular debt, the payment,
if accepted must be applied accordingly.
60. Application of payment where debt to be discharged is
not indicated-Where the debtor has omitted to intimate, and
there are no other circumstances indicating to which debt the
payment is to be applied, the creditor may apply it at his
discretion to any lawful debt actually due and payable to him
from the debtor, whether its recovery is or is not barred by the
law in force for the time being as to the limitation of suits.
61. Application of payment where neither party
appropriates- Where neither party makes any appropriation
the payment shall be applied in discharge of the debts in order
of time, whether they are or are not barred by the law in force
for time being as to the limitation of suits. If the debts are of
equal standing, the payment shall be applied in discharge of
each proportionately.
62. Effect of novation, rescission and alteration of contract-
If the parties to a contract agree to substitute a new contract for
it, or to rescind or alter it, the original contract need not be
performed.
63. Promise may dispense with or remit performance of
promise- Every promisee may dispense with or remit, wholly
or in part, the performance, or may accept instead of it any
satisfaction which he thinks fit.
64. Consequences of rescission of voidable contract. - When
a person at whose option a contract is voidable rescinds it, the
other party there to need not perform any promise therein
contained in which he is promisor. The party rescinding a
voidable contract shall, if he has received any benefit there under
from another party to such contract, restore such benefit, so far
as may be, to the person from whom it was received.
65. Obligation of person who has received advantage under
void agreement or contract that becomes void- When an
agreement is discovered to be void, or when a contract becomes
void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make
compensation for it, to the person from whom he received it.
66. Mode of communicating or revoking rescission of a
voidable contract- The rescission of a voidable contract may
be communicated or revoked in the same manner, and subject
to the same rules, as apply to the communication or revocation
of a proposal.
67. Effect of neglect of promisee to afford promisor
resonable facilities for performance- If any promisee neglects
or refuses to afford the promisor reasonable facilities for the
performance of his promise, the promisor is excused by such
neglect or refusal as to any non-performance caused thereby.
68. Claim for necessaries supplied to person incapable of
contracting, or on his account- If a person, incapable of
entering into a contract, or any one whom he is legally bound
to support, is supplied by another person with necessaries suited
to his condition in life, the person who has furnished such
supplies is entitled to be reimbursed from the property of such
incapable person.
69. Reimbursement of person paying money due by another,
in payment of which he is interested. A person who is
interested in the payment of money which another is bound by
law to pay, and who therefore pays, it is entitled to be reimbursed
by the other.
70. Obligation of person enjoying benefit of non-gratuitous
act - Where a person lawfully does anything for and her person
or delivers anything to him, not intending to do so gratuitously,
and such other person enjoys the benefit there of, the latter is
bound to make compensation to the former in respect of, or to
restore, the thing so done or delivered.
71. Responsibility of finder of goods. - A person who finds
goods belonging to another, and takes them into his custody, is
subject to the same responsibility as a baile.
72. Liability of person to whom money is paid, or thing
delivered, by mistake or under coercion. - A person whom
money has been paid or anything delivered, by mistake or under
coercion, must repay or return it.
73. Compensation for loss or damage caused by breach of
contract.- When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party
who has broken the contract, the compensation for any loss or
damage caused to him thereby, which naturally arose in the
usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from
the breach of it.
Such compensation is not to be given for any remote and indirect
loss or damage sustained by reason of the breach.
Compensation for failure to discharge obligation resembling
those created by contract. - When an obligation resembling
those created by contract has been incurred and has not been
discharged, any person injured by the failure to discharge it is
entitled to receive the same compensation from the party in
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default, as if such person had contracted to discharge it and
had broken his contract.
Explanation - In estimating the loss or damage arising from a
breach of contract, the means which existed of remedying the
inconvenience caused by the non-performance of the contract
must be taken into account.
74. Compensation for breach of contract where penalty
stipulated for.- When a contract has been broken, if such is
named in the contract as the amount to be paid in case of such
breach, or if the contract contains any other stipualtion by way
of penalty, the party complaining of the breach is entitled,
whether or not actual damage or loss is proved to have been
caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount
so named or, as the case may be, the penalty stipulated for.
Explanation : A stipulation for increased interest from the date
of default may be stipulation by way of penalty.
Exception : When any person enters into any bailbond,
recognizance or other instrument of the same nature or under
the provisions of any law or under the orders of the [Central
Government] or of any [State Government] gives any bond for
the performance of any public duty or act in which the public
are interested, he shall be liable, upon breach of the condition
of any such instrument, to pay the whole sum mentioned therein.
Explanation ; A person who enters into a contract with
Government does not necessarily thereby undertake any public
duty, or promise to do an act in which the public are interested.
75. Party rightfully rescinding contract entitled to
compensation : A person who rightfully rescinds a contract
is entitled to compensation for any damage which he has
sustained through the non-fulfillment of the contract.
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6 CASE LAW
1. AERIAL ADVERTISING CO V. BATCHELORS PEAS,
LTD (MANCHESTER) [(1938)2 ALL ER 788]
The plaintiff agreed to advertise the defendants' products by
flying in an aeroplane over various towns trailing the words
Eat Batchelors' Peas. The plaintiffs aeroplane flew over
Manchester on the Armistice day while Armistice service was
in progress and over the crowded main square in Manchester
during the 2 minutes silence. There was such a vigorous
denunciation and boycott of defendants' goods that the
defendants had to apologise in the papers and stop the aerial
advertising. Petitioners filed suit for advertising charges already
earned and the defendants filed counter claim for damages, for
wrongful performance.
The Court held the defendants were discharged from further
performance of the contract by reason of the conduct of the
plaintiffs' pilot, as it was not possible to fly anywhere near
Manchester thereafter and though the period had not elapsed
the same contract cannot be carried out reasonably from a
business point of view, and awarded damages to the defendants.
The basis of the doctrine of frustration was held to be that the
parties have impliedly agreed that in case the contract when
performed would be different from the contract as agreed to be
performed, then the contract need not be performed.
2. CHARLES RICKARD V. OPPENHEIM
[(1950) 1 ALL ER 420 (CA)]
The defendant had agreed to buy a Rolls-Royce chassis, which
was to be fitted with a coach-built body and delivered to him
by 20 March 1948. The car was not delivered on time, but the
defendant pressed for delivery. On 29 June the defendant gave
notice that if the car was not delivered within four weeks he
would not accept it. The car was ready in October, and the
defendant refused to take it.
The main point at issue before the Court of Appeal was whether
defendant was justified in refusing to take delivery.
The Court held from the fact and circumstances of the case it is
found that the original contract made time of the essence. In
this case not only the defendant press continually delivery, not
only was he given promise of speedy delivery, but, on the very
day before he gave the notice, he was told by the sub contractors
manager, who was in charge of the work, that it would be ready
within two weeks. He then gave four weeksnotice. The judge
found that it was a reasonable notice and, in my judgment there
is no ground on which this court could in any way differ from
that finding. The reasonableness of the notice must, of course,
be judged at the time at which it is given. It cannot be held to
be a bad notice because, after it is given, the suppliers find
themselves in unanticipated difficulties in making delivery. The
notice of June 29, 1948 was therefore, a perfectly good notice
so as to make time of the essence of the contract. Appeal
dismissed.
3. D & C BUILDERS LTD V. REES
[(1966) 2 Q B 617 (CA)]
The plaintiffs were a two-man firm of jobbing builders, who
had done work on the defendants premises. The account for
this came to some 732, of which the defendant had paid only
250. The plaintiffs were facing bankruptcy if they were not
paid the balance, but the defendants wife, who was acting for
him, refused to pay more than 300, alleging that the
workmanship was bad. Because of their financial straits, which
the defendants wife allegedly knew about, the plaintiffs
reluctantly accepted a cheque for 300, marked in completion
of account. They later brought an action for the balance. On
a preliminary issue of whether there was a binding settlement,
the trial judge held that there was not, and the defendant
appealed.
Danckwerts L.J. Foakes v. Beer, applying the decision in
Pinnels Case settled definitely the rule of law that payment of
a lesser sum than that the amount of a debt due cannot be a
satisfaction of the debt, unless there is some benefit to the
creditor added so that there is an accord and satisfaction.
In Foakes v. Beer, Lord Selborne, while approving Cumber v.
Wane, did not overrule the cases which appear to differ from
Cumber v Wane, saying:
All the authorities subsequent to Cumber v. Wane, which were
relied upon by the appellant at your Lordships Bar (such as
Sibree v Tripp, Curlewis v Clark and Goddard v. OBrien) have
proceeded upon the distinction, that, by giving negotiable paper
or otherwise there had been some new consideration for a new
agreement, distinct from mere money payments in or towards
discharge of the original liability.
Lord Selborne was distinguishing those cases before the House.
But the giving of a cheque of the debtor for a smaller amount
than the sum due is very different from the gift of a horse,
hawk, or robe, etc mentioned in Pinnels Case. I accept that
the cheque of some other person than the debtor, in appropriate
circumstances, may be the basis of an accord and satisfaction,
but I cannot see how in the year 1965 the debtors own cheque
for a smaller sum can be better than payment of the whole
amount of the debt in cash. The cheque is only conditional
payment, it may be difficult to cash, or it may be returned by
the bank with the letters RD [Refer to Drawer] upon it, unpaid.
I think that Goddard v OBrien, either was wrongly decided or
should not be followed in the circumstances of to day.
I agree also that, in the circumstances of the present case, there
was no true accord. The Rees really behaved very badly. They
knew of the plaintiffs financial difficulties and used their
awkward situation to intimidate them. The plaintiffs did not
wish to accept the sum of 300 in discharge of the debt of
482, but were desperate to get some money. It would appear
also that the defendant and his wife misled the plaintiffs as to
their own financial position. Rees, in his evidence, said : In
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June (1964) I could have paid 700 odd. I could have settled
the whole bill. There is no evidence that by August, or even
by November, their financial situation had deteriorated so that
they could not pay the 482.
In my views the country court judge was right in applying the
rule in Foakes v. Beer, and I would dismiss the appeal.
4. FOAKES V. BEER [(1884) [1881-5] All ER Rep 106 (HL)]
Julia Beer got a decree against Foakes for 2,090-19-0 with
interest. the defendant paid 2,090-19-0 in instalments and it
was accepted in full satisfaction. But nevertheless the plaintiff
took out execution for the interest.
In view of the doctrine of frustration having been definitely
extended to the discharge of the contract, the House of Lords
gave judgement in favour of Mrs. Beer for the amount of interest.
Earl Selbourne, L.C. said :
The doctrine laid down in Pinnels case has since the 16th
century been accepted as law, It so, I cannot think that your
Lordships of Appeal proceeding upon a doctrine which has been
accepted as a part of the law of England for over 280 years
5. KRELL v. HENRY [(1900-03)All ER Rep 20 (CA)]
The plaintiff, Paul Krell, sued the defendant, C.S. Henry to
recover 50, being the balance of a sum of 75, at which price
the defendant had agreed to hire from the plaintiff some rooms
at 56A, Pall Mall, London, of which the plaintiff was tenant,
on June 26 and 27, 1902, to view the processions which it had
been intended to hold on those days in connection with the
coronation of His Majesty King Edward VII. The defendant
denied that he was liable to pay the 50, and counterclaimed
for the return of 25 which he had paid as a deposit, on the
ground that, the processions not having taken place owing to
the illness of the King, there had been a total failure of
consideration for the contract entered into by him. On August
11, 1902, the action came on for trial before Darling J, sitting
without a jury, when the learned judge gave judgment for the
defendant on both claim and counterclaim. The plaintiff
appealed.
The question for decision whether contract could be enforced
and the rent due under it could be recovered when the contract
did not contain any clause as to the object with which it was
entered into
The court held that the rooms of themselves had no value for
the parties who had hired them and both parties had contracted
on the underlying and fundamental assumption, that the
processions would take place on the said dates. In other words,
the contract was for two rooms to view the processions and
since they ceased to be rooms from which the processions
could be viewed the contract became impossible of
performance. Hence Appeal dismissed.
6. MARITIME NATIONAL FISH LTD V. OCEAN
TRAWLERS LTD [(1935)PC 128]
The appellants hired the respondents trawler, called
St.Cuthbert to be employed for in fishing industry only. Both
parties knew that the trawler could be used for that purpose
only under a licence from the Canadian Government. The
appellants were using five trawlers and, therefore, applied for
five licences. Only three were granted and the Government
asked the appellants to name three trawlers and they named
trawlers other than 'St.Cuthbert'. They then repudiated the
charter and pleaded frustration in response to the respondents'
action for the hire :
The judicial committee of the Privy Council held that the
frustration in this case was the result of the appellants' own
choice of excluding the respondents trawler from the licence
and, therefore, they were not discharged from the contract. Lord
Wright in decreeing the claim observed :
If there was frustration of the adventure, it resulted from the
deliberate act of the appellants in selecting three trawlers for
which they desired licences to be issued ..... The essence of
frustration is that it should not be due to the act or election of
the party .... a self inducted frustration
7 M/S CHINA COTTON EXPORTERS V. BEHARILAL
RAMACHARAN COTTON MILLS LTD
[AIR 1961 SC 1295]
The appellants who carried on import business at Bombay
contracted to supply to the respondent mill a quantity of Italian
staple fibre cotton. The shipment was to take place in October
or November. The contract concluded with the remark :This
contract is subject to import licence and therefore the shipment
date is not guaranteed. A part of the goods were supplied and
accepted, but the rest were not supplied in the time mentioned.
The appellant averred in his written statement that the non supply
of goods arose by reason of intermediary parties failing to
supply and deliver goods to the defendant and also of the
circumstnaces beyond his control. Appellants further pleaded
that the shipment time mentioned was not guaranteed and the
time of shipment was not of the essence of the contract : The
trial judge held that shipment time was guaranteed, except so
far as delay in shipment might be due to delay in obtaining
licence, which however was obtained in good time. The time
of shipment was of the essence of the contract and there is no
case here of the intermediary parties without having any specific
provision in the contract to this effect. Hence the trial court
held that there had been wrongful breach of the contract which
entitles the plaintiff for damages. Appeal at the High Court by
the defendant also fails and thus this is an appeal in the Supreme
Court.
It was held that inspite of the remark that shipment date was
not guaranteed, time was the essence and the buyer was entitled
to avoid the contract. Dass Gupta J said :
Remembering, as we must, that in commercial contracts time
is ordinarily of the essence of the contract and giving the word
therefore its natural grammatical meaning, we must hold that
what the parties intended was that to the extent that delay in
obtaining licence stands in the way of keeping to the shipment
date October/November, 1950, this shipment date was not
guaranteed, but with this exception, October/November, 1950
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was guaranteed. The sellers contended that the parties were
mentioning only one of the many reasons which might cause
delay in shipment and the conjunction therefore was used
only to show the connection between one of the many reasons
- by way of illustration and a general agreement that the
shipment date was not guaranteed. We do not consider this
explanation of the use of the word therefore acceptable. If
the parties intended that quite apart from delay in obtaining
import licence, the shipment date was not guaranteed, the natural
way to expressing such intention would be to say : The contract
is subject to import licence and the shipment date was not
guaranteed. The ordinary rules of grammar would not use the
word therefore in such a context except to mean that only to
the extent that dealy was due to delay in obtaining import
licence, shipment time was not guaranteed.
The delay in this case was due to the failure of the sellers own
supplier to supply in time. This cannot be a defence unless it
was condition of the contract that the goods would be supplied
when received from the sources of supply. Hence the appeal
was dismissed.
8. OCEAN TRAMP TANKERS CORPN. V. SOVRACHT,
THE EUGENIA [(1964)1 All ER 161(CA)]
By a charter party dated 8 September 1956, the Eugenia, which
was then in Genoa, was let to the charterers for a trip out to
India via the Black Sea. Both parties realized at the time of
the negotiations that there was a danger of the Suez Canal being
closed, but they came to no agreement on that eventuality. On
25 October the Eugenia, having loaded, sailed from Odessa.
At that time the customary route to India was still via Suez. By
the time the vessel reached the vicinity of the canal it had become
a dangerous zone, but in breach of contract the charterers failed
to take steps to prevent the ship entering Port Said. The ship
entered the canal on 31st October, and became trapped when
the canal was closed. The charterers claimed that the contract
had been frustrated by the closure of the canal.
It was held that the closure of the normal route for transport of
goods after the contract was made thereby necessitating resort
to a larger route entailing much delay and heavy expenditure
will not constitute such a fundamental change in the contractual
obligation as would justify a plea for frustration for non
performance. Hence the appeal was allowed.
9. REILLY V. THE KING [(1934) AC 176]
Reilly, a member of the Quebec Bar, was appointed in August
1928 by Letters Patent a member of the Federal Appeal Board
for a term of five years on a specified salary, but he was
subsequently dismissed in October 1930 as the office was
abolished by Statute. Reilly filed Petition of Right and claimed
Damages for breach of Contract.
It was held that so far as the rights and obligations rested on
contract, further performance of the contract had been made by
statute impossible, and the contract was discharged. It is perhaps
unnecessary to add that discharge means put an end to and does
not mean broken. Hence Reilly is not entitled for damages.
10. SATYABRATA GHOSE V. MUNGEERAM BANGUR
& CO [(1954) SCR 310]
M & Co. started a scheme for the development of a large area
of land for residential purposes. They divided it into plots for
sale. A small part of the price was accepted as earnest money
on agreement, and after the company developing the plot, within
one month, the purchaser was to complete the conveyance by
paying one third price on registration and the balance within
six years at 6% interest. Time was deemed of the essence. B
entered into the contract with M & Co. in 1940 and later assigned
it to Satyabrata Ghose. Shortly before such assignment, the
land was requisitioned for military purposes under the Defence
of India Rules. M & Co. informed B that as there was no
knowing how long the government would retain possession,
they could not take up development during the War and possibly
for many years afterwards. They asked B either to cancel the
contract and take back the earnest money, or complete the
conveyance within one month by paying balance of price, the
company under taking to develop the plots after the War as
possible.
They also said if B did not choose either alternative, the contract
would be deemed cancelled and earnest money forfeited. B
passed on the letter to the assignee S. S refused to accept either
alternative and sued for a declaraton that the 1940 contract was
subsisting and M &Co. should proceed on the same terms with
him. M & Co. contended that the contract had been discharged
by frustration by supervening impossibility.
The Court of first instance rejected the plea of frustration. So
also the court of first appeal. The Calcutta High Court on second
appeal upheld the plea of frustration. But the Supreme Court
held that having regard to the terms of the contract, the war
time conditions when it was entered, the extent of work involved
in the development scheme, and the absence of any definite
period of time in the contract for the completion of the work,
the contract cannot be said to have been frustrated by
performance becoming impossible. Accordingly, they reversed
the decision of the High Court and upheld the decree of the
lower courts.
11. SHANKARLAL DAMODHAR V. AMBALAL
AJAIPAL [AIR 1946 NAG 260]
On 21st December 1932 the defendant and his father executed
a document described as a conditional deed of sale of
immovable property in favour of the plaintiff for a consideration
of Rs.700. Certain creditors had obtained a decree in a mortgage
suit against the defendant and his father, and the plaintiff had
paid this decree by payment of Rs.700. According to the terms
of this deed, the defendant and his father sold a house to the
plaintiff subject to the conditions that if they paid off the
principal sum without interest within two years they would be
the owners of the house and if they failed to pay off this principal
sum within the time the plaintiff was to be the owner of the
house. It is admitted that the plaintiff was never placed in
possession, and it was alleged in the plaint and not denied by
the defendants that on 22nd December 1932, the defendant and
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his father agreed to pay rent for the house at the rate of Rs.10
per mensem and executed on that date a pronote in respect of
that interest.
Subsequently the matter was referred to arbitrators who gave
an award on 9th January 1935. They treated the transaction as
a mortgage, and it is conceded that it was a mortgage. They
calculated that Rs.831 was due on this mortgage including Rs.10
per mensem by way of interest, and they decided that the
plaintiff should take a portion of the mortgaged house by way
of payment of Rs.600 and that the remaining amount should
remain a mortgage charge on the southern half portion of the
house and should carry interest at the rate of 1 percent per
mensem. They further directed that the defendant and his father
should pay off this principal and interest within four years and
if they failed to do so the southern portion-
shoud be put into the possession of the plaintiff after the same
being foreclosed. The plaintiff should, according to the above
condition, get a preliminary decree passed for the amount in
the proper court.
This award was filed in Court, and a decree was passed on 29th
April 1935 of which the relevant portion is :
There remains a balance of Rs.231 due to the defendant (i.e.,
the present plaintiff). For this amount there shall be lien of
mortgage on the remaining share on the southern side of the
house which is now in possession of the plaintiffs 1 and 2 (i.e.,
the present defendant and his father). The amount shall carry
interest at 1p.c./p.m. and repayable in four years. If plaintiffs 1
and 2 failed to repay the amount in fixed period the defendant
can get it foreclosed.
Subsequently the plaintiff applied to have this decree amended
on the ground that it was not in accordance with the award and
that it ought to be a preliminary decree for foreclosure. The
Court held on 25th February 1938 that the decree was in
accordance with the award, that it was not intended that this
should be a preliminary decree for foreclosure, that the decree
could at most be treated as a mortgage deed and that the
defendant (i.e., the present plaintiff) had only a right to bring a
suit on this mortgage. There was a second application to amend
and the Court held on 20th March that its previous order was
conclusive, and the condition in the award was made to create
a mortgage, and that the defendant (i.e., the present plaintiff)
had a right to bring a suit on the mortgage, and then claim the
preliminary and final decrees. An application to this Court in
revision was dismissed.
It has been suggested that the plaintiff could at least have sued
on the decree to enforce a personal liability, but when the
plaintiff applied for amendment of the decree it was held that
the decree could at most be treated as a mortgage decree and he
had only a right to bring a suit on that mortgage. It has also
been contended that there was no agreement in the so called
deed of sale to pay interest, but it was pleaded and not denied
that there was an agreement to pay interest at the rate of Rs.10
per mensem. Interest at 7 per cent per annum is claimed.
I, therefore, agree with the lower appellate Court that the plaintiff
is entitled to fall back on the original mortgage. At the time of
the award he accepted a portion of the mortgaged property in
lieu of Rs.600 and he is now claiming the balance with interest
at the rate of 7 per cent per annum. To that, in my opinion he is
entitled, and the appeal will, therefore, be dismissed with costs.
There will be a fresh preliminary decree for foreclosure in the
usual form, allowing time for payment upto 15th February 1946.
The amount then payable will include interest up to that date.
Counsels fee Rs.25. Appeal dismissed.
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7. PROBLEMS
1. A entered into a contract with C whereby C had to construct
a certain line of five shops as a frontage to a vacant plot.
Six months time was allowed. Time was mentioned as of
the essence. However, a clause was inserted that after
watching the execution for a month, the additional work of
constructing a house in the plot would be allotted to the
same contractor, which was done. C could finish all the
work only in nine months. After two months, A seeks your
advice to repudiate the contract. Advise with reasons.
2. P, a shoe import company, entered into a contract to supply
A, a national shoe chain store company, a certain quantity
of a certain design and quality of ladies shoes made in
Italy. Shipment was to take place from Italy in June and
July. The contract stated it is subject to import licence and
therefore the shipment date is not guaranteed. Only a third
of the goods were supplied on time. A wanted to repudiate
the contract. P contended that as the shipment date was
guaranteed, the delay which was really caused by the failure
of the sellers own supplier, was protected. Decide with
reasons.
3. A, B & C, jointly undertake a municipal contract to
construct a new bus stand. A leaves the country and is
untraceable but sends rupees fifty thousand to C. B neglects
to attend to the contract. C builds the bus stand at a cost of
rupees six lakhs. He seeks your advice how much he can
recover from B by suit. Advise quoting the section and
stating the law
4. Two professors in the same faculty of a university were
given a contract by a publishing firm to co-author a book
on a certain subject of their speciality. One of them received
an invitation from a university abroad to come as a visiting
professor. He wrote to the publishers that in his absence,
his colleague will write the entire book. The colleague
made the manuscript ready in a reasonable time but the
publishers refused to accept it. What is the legal position ?
Explain clearly.
5. There was a contract for the supply of timber to make
furniture for a Government Department. The timber had
to be approved by the Superintendent of the Government
furniture making factory. The supplier supplied correct
quality samples. But the Superintendent did not approve
the timber. The supplier sued the Government for breach
of contract. Decide with cogent reasons.
6. N owned a factory constructed on agricultural land
nominally held in the name of his brother. N sold the factory
to P. P paid half the price at once and was put in possession.
The balance was payable at a fixed date. P defaulted. N
rescinded the contract and sued for recovery of possession.
What is the defence of P ? Explain with reasons.
7. D owed the following debts to C Rs.10,000 due in 1989.
Rs.30,000 due in 1990. Rs.40,000 due in 1991. Two debts
of Rs.5,000 and Rs.20,00 of equal standing in 1992.
After selling his estate, D made the following payments to
C in 1993. Rs.20,000 in January, Rs.30,000 in March, and
Rs.40,000 in July. Neither the debtor nor the creditor made
any appropriation before the matter came to court. The
debt of Rs.10,000 due in 1989 is barred by limitation. How
should the court make the appropriation ? Give the solution
explaining the legal grounds.
8. There was a partnership firm consisting of the partners X,
Y and Z. Z retired without notice to creditors. A new parter,
Q was admitted to the firm. A creditor C advanced a loan
to the firm after the retirement of Z. The loan became
overdue. C sued X, Y, Z and Q together having learnt of
the changes in the firm. Explain what is the decision and
what are the principles of law involved in the facts of this
case.
9. S, fruit importers, agreed to sell to B 100 tons of Arabian
dates c.i.f.Bombay, May, 1994. S made arrangements for
shipment from Aden in April/May, 1994. But the civil war
in Yemen broke out and made the shipment impossible.
Arabian dates could however be shipped from Muscat. B,
who had entered into consequential contracts for supply of
Arabian dates to Bombay fruiterers, sued S for
compensation for breach of contract. S pleads discharge
by frustration. Decide explaining the law in the requisite
depth.
10. T, a tourist agency, hired from O, omnibus owners, in
October, 1993, their luxury omnibus Dream for six
months from January, 1994. O owned five omnibuses
including Dream. Both parties knew at the time that
licences of omnibuses had to be renewed before January.
O applied for renewal of licences of their five buses. The
Government stated renewal in January would be given for
three and asked them to specify three buses. O left out
"Dream. O stated to T in January that Dream was not
available as licence was refused for five buses. Meanwhile,
T had booked parties and suffered loss. T sued O for
compensation for breach of contract. O pleads discharge
by frustration. Decide with reasons.
[Note: Specify your name, ID no. and address while sending answer papers]
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8. SUPPLEMENTARY READINGS
1. Avtar Singh, Law of Contract, (1994), Eastern Book Company, Lucknow.
2. Anson, Law of Contract, (1986), English Language Book Society Press and Oxford Press, London.
3. Beale, H.G. Biship W.I.,Furmstorn, M.P., Conract Cases and Materials, (1990), Butterworths, London, Edinburgh.
4. Chitty, on Contracts, (Vol.II 1983), Sweet and Maxwell, London.
5. Cheshire and Fifoot, Law of Contract, (1986), Butterworths, London.
6. Iyer, Venkatesh, The Law of Contracts, (1987), Asia Law House, Hyderabad.
7. Joga Rao S.V. Contract Law General Principles, (1991),NLSIU, Bangalore.
8. Kapur, J.L. (etd), Mulla's Contract Act and Specific Relief Acts, (1986), N.M. Tripathi Private Ltd. Bombay.
9. Puri and Ponusmay, Cases and Material on Contract, (1974), Eastern Book Co., Lucknow.
10. Trietal, G.K., Law of Contracts, (1966), Steven & Sons, London
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181
BREACH OF CONTRACT
AND REMEDIES
Master in Business Laws
Law of Contracts
Course No: I
Module No: VI
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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Materials Prepared By:
1. Prof. S. Jagapathy, B.Com. (Hons), B.L., Advocate.
Materials Checked By:
1. Ms. Sudha Peri, M.A., LL.M.
2. Ms. Archana Kaul, B.Sc., LL.M.
Materials Edited By:
Prof. N. L. Mitra, M.Com., LL.M., Ph.D.
Prof. P.C. Bedwa, LL.M., Ph.D.
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore-560 072.
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183
INSTRUCTIONS
In the previous module we have given a flow chart regarding discharge of contract. Breach of contract is
mentioned there as one of the grounds of discharge. In that module we have also explained what is a discharge.
When a party either does not perform his part of the contract or refuses to perform, it is said that a party has
committed a breach of contract. Some times a party may by act or omission induce another party to believe that
former is not interested to perform the respective part of the contract. In such situations, the latter party may also
treat the contract as breached. The question may arise as to why a party after entering into the contract may be
interested in not performing it. There are various reasons for that. The most important reason is perhaps eco-
nomic reason. When the economic background of the contract changes in such a way that a party by not
performing the contract will sustain less loss than by performing the contract he prefers to commit breach of
contract... as for example, A promised on 1.1.94 to supply 100 bags of rice to B at 1000 rupees per bag. The rice
is to be supplied say in the middle of March. Suppose due to failure of Khariff season the price of rice has gone
very high and A thought that price could be further high during March. In the early February itself, A refuses to
perform the contract. In fact, A has two options in February. Firstly, to wait till March and to procure rice at the
market price and perform the contract sustaining a loss of rupees 600 per bag, assuming the price by the time is
raised to rupees 1600 per bag. His second option is to commit the breach as soon as he feels that he will sustain
more loss by performance than by committing a breach. This is of course an economic explanation of commis-
sion of breach. There may be other reasons as well. But business community take their course of action basi-
cally on economic reasons. In case of a breach of contract a person is expected to reasonably compensate the
opposite party.
In calculating the reasonable compensation courts take into consideration various factors for committing the
breach as on the day of commission of the breach of contract. In countries like U.K. or France the court relies
upon the liquidated damages as stipulated by the parties. But in India the court itself evaluates the loss and
awards reasonable compensation only. In several case laws the reasonableness and the basic principles of
calculating compensations are laid down. In this module these issues will be discussed thread bare in such a
way that you can acquire the skill of calculating the amount of damages in specific fact situations. It is neces-
sary for you to carefully examine the reasoning given in those cases for determining the amount of compensa-
tion. One has to critically look at this stage the various grades of losses sustained by the other party. Some are
immediately due to the breach of contract and some may be remotely connected. A judicial application of mind
in processing these losses is what one should aim at. I hope after reading the material you will apply your mind
in this regard to solve the problems given at the end of the module.
N. L. Mitra
Course Co-ordinator
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Breach of contract and remedies
TOPICS
1. Breach of Contract ......................................................................................................... 185
2. Consequences of Breach ................................................................................................ 191
3. Remedies of Breach........................................................................................................ 192
4. Case Law......................................................................................................................... 207
5. Problems.......................................................................................................................... 210
6. Supplementary Readings ............................................................................................... 211
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185
SUB TOPICS
1.1 Introduction
1.2 Forms of Breach of Contract
1.3 Renunciation or Repudiation
1.4 Anticipatory Breach
1.5 Restitution
1.6 Actual Breach or Breach When Performance Due or During
Performance
1.1 INTRODUCTION
We have seen in Module V that one of the ways in which a
contract may be discharged is Breach of Contract. We have
also noted that Breach is the antithesis of Performance;
nevertheless it may result in Discharge. However, Discharge
by Breach brings in its wake other consequences. It gives rise
to remedial rights resting on the fundamental juridical principle
that where a right is broken, there must be a remedy, Ubi jus
ibi remedium, Discharge by Breach of contract gives rise to
Remedies for the innocent party.
The most common form the Remedy may take is a right to claim
compensation. There may also be circumstances of Breach
which entitle the innocent party to treat himself as discharged
from any performance due from him. However, not every
breach operates as a discharge. When the party at default has
repudiated his obligations or made himself unable to perform
or failed to perform this is usually the effect.
There is a qualification to the principle of breach by default of
a party. The default does not strictly itself discharge the
contract. It enables the innocent party, if he chooses, to absolve
himself as discharged from performance or further performance
on his side. He may be said to have accepted the repudiation.
Acceptance here, of course, is used in an entirely different
sense from acceptance of a proposal. He may, on the other
hand, choose to consider the contract as not discharged and
continue to insist on performance, and carry on his part. Such
a situation is illustrated in White and Carter (Councils) Ltd
v. Mc Gregor [(1962) A.C. 413]. Appellants, advertising
contractors, agreed with respondents, garage proprietors, to
display advertisements for the garage for three years. Same
day, respondents refused to perform and requested cancellation
of the contract. But the appellants refused so to do and elected
to treat the contract as subsisting. They displayed
advertisements as agreed and sued for full amount due.
Respondents argued that appellants were not entitled to do so
but only to claim damages. The House of Lords rejected the
argument and held appellants entitled to the full sum.
But it is clear even from the judgment in this case that the party
not in breach will not always thus be entitled to carry on with
the contract and sue for full money. Firstly, a contract cannot
be carried on without the co-operation of the other party. For
example, an employee wrongfully dismissed cannot claim
employment and salary but only damages. Secondly, unless
the party has a legitimate interest, financial or otherwise, in
performing rather than claiming damages, which normally
should be an adequate remedy, he cannot be allowed to do so
but only to claim compensation.
Another limitation occurs when there is failure of performance
by one party which goes to the root of the contract. The contract
is not determined by the breach. It is open to the innocent party
to treat the contract as continuing or accept defective
performance when tendered. When he does so he is said to
have affirmed the contract and not treated it as discharged for
himself also. He retains, however, the right to claim damages.
Affirmation may be express or implied, but must be total and
cannot be partial. It is a voluntary act and requires knowledge
of the breach waived. It is also subject to estoppel.
When repudiation is accepted by the innocent party, he is
absolved from all further contractual obligations. So also the
primary obligations of the party in default are discharged.
However, there arises on his part the secondary obligation to
compensate in damages for the breach. The replacement of the
primary obligations by the secondary obligation is by operation
of law and cannot be obviated.
The nice chain of consequence thus linking the primary and
secondary obligations was argued out and brought out well in
the judgment in Moschi v. Lep Air Services Ltd. [(1973) A.C.
331]. Rolloswin Investments Ltd was indebted to respondent
for 40,000 and had agreed to pay atleast 6,000 a week.
Appellants were guarantors of the obligation to the respondents.
The company defaulted at the very outset. After three weeks
they paid 10,000 out of 18,000 then due. Respondents
elected to treat the default as a repudiation. The company went
into liquidation. Respondents sued the appellants as guarantors
for both accrued and future instalments. The appellants
advanced the argument that since the repudiation had been
accepted, the companys obligation to pay future instalments
came to an end and so their obligation also came to an end.
The House of Lords put aside this argument and held there was
liability on the guarantee. Firstly, the repudiation being treated
as such, though the companys primary obligation to pay future
instalments came to an end, it was replaced by operation of law
by a secondary obligation to pay damages for breach. Secondly,
the appellants who were guarantors of the performance of the
obligation were now in breach of their contract of guarantee.
The measure of the damages for which they were liable was
the unpaid balances of instalments.
1.2 FORMS OF BREACH OF CONTRACT
Discharge of contract as understood above may arise in three
ways :
(a) A party renouncing his obligations under the contract.
(b) A party by his own act making it impossible that he should
fulfil his obligations under the contract.
(c) A party may fail to perform what he has promised.
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The first two ways of breach may take place in the course of
performance or even when performance is not yet due by either
party. In such a case it is called anticipatory breach . The
last way of breach can take place only at or during the time of
performance.
Authors classify breach in a general way as (a) Actual breach
or present breach, and (b) Anticipatory breach. In this, the
stress is on the time of breach in the life of a contract. The
more scientific classification is to approach breach in the three
ways as above.
A working definition of breach was given in an American case,
Associated Cinemas of America, Inc. v. World Amusement
Co. (sup. Court of Minnesota) [(1937) 201 Minn. 94], A
breach of contract occurs when a party thereto renounces his
liability under it, or by his own act makes it impossible that he
should perform his obligations under it or totally or partially
fails to perform such obligations.
To give a summed-up view of Breach -
Breach by any one party always gives rise to right to claim
damages by the innocent party. However, whether it would
also enable the party not in default to absolve himself from
further performance, depends. A long line of authorities have
recognised that the party in default has such a right only in two
circumstances :
Firstly, where the party in default has repudiated the contract
before performance is due (called anticipatory breach), or before
it has been fully performed.
Secondly, where the party in default has committed what in
modern judicial parlance is called a fundamental breach'. This
has also been expressed for the last nearly one and a half
centuries of English law as breach going to the root of the
contract.
To constitute fundamental breach two tests have been
developed by English law. One had always been to determine
whether the part of the contract broken is such as has been
attached sufficient importance by the parties depending on the
true construction of the contract as a whole as to conclude
that it is a major term that could be viewed as a condition. Or,
whether it is only of a relatively minor term which could be
viewed as a warranty.
The other and more useful test may be, after the exposition of
the law in this regard in Hongkong Fir Shipping Co. Ltd v.
Kawasaki Kisen Kaisha Ltd. [(1962) 2 QB 26], and the
reconsideration of the whole question in The Mihalis angelos
[(1971) 1 QB 164], to consider both the term and the breach
together in the light of the seriousness of the consequences that
have resulted. The two tests are not however really necessarily
alternative, it may be more correct to describe them as alternate
to be applied as necessary according to the nature of the breach
and the circumstances of the case.
1.3 RENUNCIATION OR REPUDIATION
Renunciation takes place when one of the parties shows the
intention not to go on with the contract. This amounts to
repudiation of the contract on his part. If there is an express
and unqualified refusal the intention will be clear and obvious.
But, it may also be implied by conduct. Then the test is whether
the party has acted in such a way as to lead a reasonable person
to the conclusion that he does not intend to fulfil his part of the
contract. The establishment of such intention is important. Only
then will it entitle the other party to treat himself as discharged
from any further performance of his obligations. Otherwise, it
will not justify the other party in repudiating his part of the
contract.
Thus, in Freeth v.Burr [(1874) L.R. 9 C.P. 208], there was a
failure on the part of the buyer to pay for one instalment of
several deliveries of iron, under a mistaken impression that he
was entitled to withhold payment as a set-off against damages
for non-delivery of an earlier instalment. It was held the seller
was not thereby discharged.
Similarly, in Mersey Steel and Iron Co. v. Naylor, Benzon &
Co. [(1884) 9 A.C. 434], respondent bought from appellant
company 5,000 tons of steel to be delivered at the rate of 1,000
tons each month from January, 1881, payment to be made within
three days of receipt of shipping documents. The company
delivered part of the first instalment, and another in February.
Shortly before payment was due, a petition was presented for
winding up of the company. The respondents wrongly advised
not to pay without leave of the court, refused payment. The
appellant company informed them that they would treat this as
breach. But the respondents expressed their willingness to take
delivery and make payments if possible. The House of Lords
held the appellants were not entitled to treat themselves as
discharged.
On the other hand, an unequivocal refusal by words or conduct
to perform the contract will entitle the other party to treat himself
as discharged from further performance by himself. Thus in
sale of goods, an instalment buyer who has agreed to pay cash
but demands credit in future deliveries, enables the seller to
refuse further delivery [Withers v. Reynolds (1831) 2 B. &
A. 882]. In a contract of employment, a school teacher who
refuses to supervise school meals when required to do so, may
be terminated by the employer [Gorse, v. Durham County
Council (1971) 1 W.L.R. 775].
Default or Act of Party Making Performance Impossible
Even though a party has not by his words or conduct renounced
(repudiated) a contract, if by his own act or default he makes
performance or further performance impossible, the other party
will be discharged. Repudiation is easier to establish. But such
default of a party as to make his performance impossible is an
independent ground of discharge.
Such default is illustrated in Universal Cargo Carriers
Corporation v.Citati [(1957) 2 QB 401] P chartered a ship to
D who agreed to nominate a berth and a shipper, and to provide
a cargo, all before a certain day. Three days before the due date
he had done none of the things. He remained willing to perform
if he could. But P cancelled it and found another charterer.
Devlin. J, held that though D had not renounced the contract he
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could not perform before such delay as to defeat the commercial
purpose of it and this entitled P to treat his obligations
discharged.
1.4 ANTICIPATORY BREACH
The repudiation may be explicit or implicit even before the
performance is due.
A leading case on explicit repudiation is Hoschster v. De la
Tour [(1853) 2 E & B 687]. Defendant engaged the plaintiff
on 12 April to enter into his service and accompany him on a
tour. The sevice was to commence on 1 June. On 11 May
itself, the defendant wrote to the plaintiff and informed him his
services would not be required. Plaintiff sued for breach
immediately without waiting for the time for performance. It
was held there had been an anticipatory breach by the
defendant and the plaintiff was entitled to bring the action
immediately.
It could be implicit even where the performance was contingent.
The leading authority is Frost v. Knight [(1872) L.R. 7 Ex.111].
D, a bachelor, promised to marry P on the death of his father.
Even during his fathers lifetime D broke off the engagement.
Cockburn C.J. held that what apparently is anticipatory breach
is really in such cases, a present breach of an obligation to keep
the contract subsisting until the time for performance. He
explained that this is the principle of anticipatory breach so
called. He allowed P to sue immediately for damages. (Action
for breach of promise to marry has since been abolished by the
Law Reform (Miscellaneous Provisions) Act 1970 but the
principle of the above decision is still of general application.)
A breach of contract, therefore by repudiation before the time
for performance, is anticipatory breach. The innocent party
is entitled to treat the contract as discharged and sue for damages
immediately. It is also open for him not to treat the contract as
repudiated until the time for performance arrived. If he does
so, the contract is subsisting. The status quo ante remains.
It has been held that in that case he keeps the contract alive not
only for his own benefit whatever he expects but also for the
benefit of the other party as well. The other party can therefore
not only change his mind and proceed with performance at the
due time but also take advantage of any supervening
developments that may discharge the contract otherwise than
by breach.
This has been laid down and demonstrated in the leading case
Averry v. Bowden [(1855) 5 E & B. 714].
P chartered his ship to D. The ship was to sail to the Black Sea
port of Odessa and receive a cargo from the agents of P to be
loaded in forty five days. The vesel reached Odessa. The
agent was not able to supply the cargo. The master of the ship
continued to remain in port demanding the cargo. Before the
specified number of days had elapsed, the Crimean War broke
out. Performance became impossible in law. P sued D for
breach. It was held the contract had been discharged not by
breach but by impossibility of performance by out-break of war.
However, it is not as if all anticipatory breaches will entitle the
other party to treat the contract as at an end. The case Afovos
Shipping Co. Sa v. Pagnan [(1983) 1 AER 449] has found as
per Lord Diplock that if one party states to the other in advance
that he will not perform a particular primary obligation, the
question whether the other may treat it as a repudiation depends
on the non performance having the effect of depriving
substantially the whole benefit which was intended he should
obtain from such primary obligation.
Following up anticipated breach further, a refusal to treat such
breach as discharge may some times operate to disadvantage
of the party in default. In Roper v. Johnson [(1873) LR 8 CP
167], Michael v. Hart [(1902) 1 KB 482], and Jai Hing Cotton
Mill Ltd v. Kamsing Knitting Factory [(1979) AC 91], where
in a contract for sale of goods for delivery at a certain time, the
seller announces in advance that he will not make delivery, but
the buyer does not accept the repudiation and finally sues for
breach at or after date of performance, the measure of damages
has been held to depend on the market price of the goods not at
the date of repudiation but the time of performance, and if the
market price is then higher the damages will be higher.
Another possibility is that where there is refusal to treat an
anticipatory breach as a discharge, and the affirming party is
subsequently in breach, the repudiating party may escape
liability. In Fercometal SARL v. Mediterranean Shipping
Co. SA. [(1988) 2 A.E.R. 742], the charterer refused to load
the ship. But the owner affirmed that the contract was still
alive. He failed to make the ship ready to loan on the specified
date. It was held the owner had become liable for breach.
The making of commercial performance of the contract
impossible by a party by his own act or default even though he
has not renounced it and thereby entitling the other party to
discharge himself, may also take place before performance, and
is another form of anticipatory breach.
If the promisor, before the time for performance, makes it
impossible that he should perform the promise, the effect is the
same as repudiation. The aggrieved party may sue at once.
The classic authority is Lovelock v. Franklyn [(1846) 8 AB
371]. D promised to assign to P within seven years all his
interest in a lease for the sum of 40. Before seven years, he
assigned the interest to another person. It was held P need not
wait for seven years to sue for breach.
Similarly, in Omnium D Enterprises v. Suthurland [(1919)
1 KB 618], D chartered a ship to P to be placed at his disposal
as soon as she was released from Government service in which
engaged at the time. D sold her to another person before the
release. Held, the contract was then at an end and P may bring
his action for breach forthwith.
Indian Law
S.39 of the Indian Contract Act embodies the principles of
anticipatory breach. It lays down :
When a party to a contract has refused to perform, or disabled
himself from performing, his promise in its entirety, the promisee
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may put an end to the contract, unless he has signified, by words
or by conduct, his acquiescence in its continuance.
S.39 provides two illustrations as follows :
(a) A, a singer, enters into a contract with B, the manager of a
theatre, to sing at his theatre two nights in every week during
the next two months, and B engages to pay her 100 rupees
for each nights performance. On the sixth night A wilfully
absents herself from the theatre. B is at liberty to put an
end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a
theatre, to sing at his theatre two nights in every week during
the next two months, and B engages to pay her at the rate
of hundred rupees for each night. On the sixth night, A
wilfully absents herself. With the assent of B. A sings on
the seventh night. B has signified his acquiescence in the
continuance of the contract, and cannot now put an end to
it, but is entitled to compensation for damages sustained
by him through As failure to sing on the sixth night.
S.39 requires that the promisor must have repudiated his
obligations in entirety to enable the other party to put an end to
the contract.
Indian cases have held that where this is not so the other party
cannot put an end to the contract. By way of illustration, even
as early as 1878 in Sooltan Chund v. Schiller [(1875) 4
Cal.252], there was a contract for sale of 200 tons of linseed
oil in April and May to be paid for on delivery. Some deliveries
were made. Plaintiffs made part payment but withheld the
balance for adjustment of claims. The defendants taking that
as an anticipatory breach refused further supplies. The plaintiffs
sued them for breach. It was held that the withholding of a part
payment under a bonafide claim cannot be regarded as refusal
to perform the contract in its entirety. It appears as if the decision
is at variance with the illustration a to S.39 above. But Garth
C.J. explained that the illustration is perhaps not a happy one
because it may be mistaken. The singer by wilfully absenting
herself on one night refused to perform an integral and essential
part of her contract. Thereby she could not perform her contract
in its entirety. But in this case the plaintiff never refused to
perform any part of the contract. They were willing to pay the
due sum as soon as a cross claim was adjusted.
1.5 RESTITUTION
When there is an anticipatory breach, the aggrieved party may
put an end to the contract. He may sue for breach. Meanwhile,
he may have received benefits under the contract. What about
them ? S.64 of the Contract Act requires that a party rescinding
a voidable contract shall restore any benefit received thereunder
from any party to it, as for as may be, to such party. When
under S.39, the aggrieved party sets aside a contract, what is
the position ?
This question was answered by the Privy Council in
Muralidhar Chatterjee v. International Film Co. [AIR 1943
PC 34]. D, a firm of film importers agreed with P to supply
them films at the rate of one a month. P were to pay a fixed
amount of rent and some other charges. One film was supplied
and a sum of Rs.2000 was paid against it. Due to the exhibition
difficulties, the film was returned. Later another sum of Rs.2000
was paid against which no film was supplied. P wrote to B that
for breach of contract they would stop dealings. B accepted
the repudiation. P sued them for refund of money.
Sir George Rankin explaining the relationship between S.39
and S.64 said the contract which may be put an end to under
S.39 is voidable. The right to recover damages for a contract
rescinded as it has been rendered voidable by the wrongful act
of a party is given by statute. This is no objection to apply s.64
to a contract rescinded under S.39 and the liability to make
restitution attaches. It was held the amount was refundable
under S.64. The case was referred back to the High Court to
determine the damages.
1.6 ACTUAL BREACH OR BREACH WHEN
PERFORMANCE DUE OR DURING
PERFORMANCE
Renunciation or Repudiation
If at the time performance is due, a party by words or conduct
makes known his intention not to perform his part of the
contract, the question whether the other party can treat himself
as discharged from his obligations depends on whether time is
of the essence in the contract. The right for damages is there.
In English law, the common law generally regarded time fixed
as of the essence. Equity did not originally so regard a condition
as to time. But the Judicature Acts of the nineteenth century
fused the rules of common law and equity. In mercantile
contracts time will be normally assumed to be of the essence.
In contracts for sale of land or other immovable property it will
be presumed that time is not of the essence.
The provisions in Indian law is S.55 of the Contract Act
regarding voidability for failure of performance of a contract
in which time is of the essence has been discussed under time
of performance in Module V, 'Discharge of Contract'.
If during the performance of a contract one of the parties by
words or conduct (expressly) refuses to perform the contract,
there is breach, and the other side is forthwith released from
obligation for further performance and is entitled to sue at once
for damages.
In Cort v. Ambergate etc Railway Co. [(1851) 17 QB 127], P
contracted with D company to supply 3,900 tons of railway
chairs on a certain price, to be delivered in certain quantities at
specified dates. 1,787 tons had been delivered. The company
now requested him to deliver no more as they would not be
wanted. P sued for breach averring he was ready and willing to
complete performance but D had prevented it. The court
rejected the argument for D that P should have proved actual
delivery of the entire lot. It held as the contract had been
repudiated by D, P could sue for breach.
Impossibility created by Act of One Party
If during the performance of a contract, one party, by his own
act or default, makes further and complete performance
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impossible, there is breach, and the other side is forthwith
released from obligation for further performance and is entitled
to sue at once for damages. Thus the rule is similar in this case
also.
In ONeil v. Armstrong [(1895) 2 QB 418], P, as British subject,
was engaged by the captain of a war-ship belonging to Japan to
act as a fireman on a voyage from Tyne to Yokohama. During
the voyage, Japan declared war on China. P was informed that
the performance would bring him under penalties of law. P
therefore left the ship. P sued the master for the wages agreed.
It was held he was entitled to succeed for the action of Ds
principals, the Japanese Government had made his performance
of the contract legally impossible.
Discharge by breach will occur not only where one party
disables himself from performing the contract, but also where
he prevents completion of the contract by the other. Courts are
ready to imply a term in contracts that each party undertakes to
do all that is necessary to secure performance. For example, if
a licence is required for the export of goods, and the buyer fails
to provide the seller with the information necessary to obtain
the licence, the buyer cannot sue the seller for non-delivery
[Kyprianou v. Cyprus Textiles Ltd. (1958) 2 Loyds Rep.
60].
Failure of Performance
Failure of performance, which may be total or partial, is the
most common ground for the discharge of a party by breach.
Failure of performance obviously can occur only during
performance.
It is not every failure of performance by one party which entitles
the other to be discharged from his own obligations under it.
In order to determine when this would result we have to look at
the contract and the failure in the following ways :
(a) Are the mutual promises independant or interdependant or
concurrent ?
(b) Is the obligation subject to failure an entire one or
divisible ?
(c) Is the broken part a term of condition ?
(d) Does the breach go to the root of the contract ?
(a) Relationship between the mutual promises
Way back, Lord Mansfield in Jones v. Barkley [4 Doug. 659]
classified reciprocal promises in contracts as :
1. Mutual and independant
2. Mutual and dependant
3. Mutual and concurrent.
The usefulness of the classification holds good even today.
There are certain contracts in which the obligations of each
party may be independant of each other in the sense that neither
party can claim to be released from his promise by the failure
of the other to perform his part. For example, in the contract
covering a lease, the covenant of the tenant to pay rent is
independant of the covenant of the landlord to repair. Rent
cannot be withheld on the ground that the landlord has failed to
repair the premises [Taylor v. Webb (1937) 2 K.B. 283], Courts
tend against construing contracts as containing independant
promises but the structure of some contracts as such.
Ordinarily, in the structure of most contracts, the obligations of
each party are interdependant. For example, an employee is
not bound to observe a covenant in restraint of trade that would
have applied on termination of service when he has been
wrongfully dismissed by his employer [General Billposting
Co. Ltd. v. Atkinson (1909) A.C. 118]. The clearest example
is offorded when the parties have agreed that performance of
their promises shall be simultaneous each to be ready and willing
to perform at the same time. This makes the mutual promises
concurrent. For example, under the law of Sale of Goods (both
in England and in India), unless otherwise agreed, delivery of
the goods and payment of the price are concurrent conditions.
This is what is intended in most transactions of sale of goods
for cash across shopping counters. Failure to tender the goods
discharges the buyer from payment of the price and failure to
tender the price discharges the seller from delivery of the goods.
(b) Entire obligation and divisible obligation
Certain contracts can only be entire contracts in the sense that
the liability of one party is dependant upon the complete
performance of obligations by the other. For example, when a
suit of clothes is given to a tailor to be stitched in return for a
promise to pay the charges, nothing less than a completed suit
of clothes is expected. Complete performance is subject to the
doctrine of substantial performance. In such cases, when failure
of complete performance comes about whether by abandonment
or negligence or even misfortune it results in discharging the
other party from obligation. The case Culter v. Powell [(1795)
6 TLR 320] was decided on this basis. A seaman was engaged
as a second mate on a voyage from Jamaica to Liver pool and
30 guineas was to be paid as a single payment on completion of
the voyage. Unfortunately when the ship was 19 days from
Liverpool the second mate died. The widow sued to recover a
proportion of the sum but failed. But since then the Law Reform
(Frustrated Contracts) Act 1943 has been passed. If that case
were to be decided now, under S.1 of that Act, a proportionate
sum may be recoverable by the widow as compensation. But
the case is still used as an illustration for individual obligation.
A modern example, occurs in Bolton v. Mahadeva [(1972) 2
AER 1322]. P contracted to install a certain heating system in
Ds house for 800. He installed the system but it worked
inefficiently. D refused to pay anything. The Court of Appeal
held P could recover nothing. In 1983, the Law Commission
(in England) proposed legislation to change the position since
in such cases the defendant is left with an unwarranted profit.
Such 'entire' contracts are the exception rather than the rule.
Most contracts are divisible. A contract may be a complex
one with different undertakings with different importance. A
failure by a party to precisely perform an obligation will no
doubt give a right for an action but will not necessarily discharge
the other party from his own obligations
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(c) Broken part of the contract being a term of condition
Assuming that a contract is divisible, the next question arises
whether the particular term which has been broken is a condition
of the contract. Here, it may be stated that a term in a contract
will be considered a condition according to its importance in
the contract and the effect of its breach. A term will be classified
as a condition if fixed by statute or recognised by judicial
decision, or if the parties have so agreed in their contract
expressly or by implication. A term will be a condition by its
import and not description. A breach of a condition entitles the
innocent party to be discharged from the contract. Right to
claim damages remains.
The imputation of condition to a term, whether it is precedent,
subsequent, or concurrent to or with liability in a contract
depends on the contractual intention of the parties. In
Bannerman v. White [(1861) 10 CB NS 844], B offered hops
to W for sale. W asked if sulphur had been used in growing
them as brewers did not want such hops. B told W that sulphur
was not used. W purchased the crop of that year. The crop was
weighed in Ws warehouse to calculate the price. W now
repudiated the contract on the ground that the hops contained
sulphur. B sued W for the price. It was found that sulphur had
been used in five out of three hundred acres for trying new
machine and B had forgotten or thought the matter not important.
But the court concluded that a condition of a contract had been
broken and W would reject the hops and B could not claim the
price. In this case the condition happened to be a condition
precedent.
After the decision in Hongkong Fir Shipping Co. Ltd v.
Kawasaki Kisen Kaisha Ltd. [(1962) 2 QB 26], some terms
of a contract may be classified as intermediate terms the breach
of which will not necessarily entitle the innocent party to be
discharged from his obligations in the contract. An intermediate
term may perhaps be described as more than a warranty but
less than a condition.
(d) Breach going to the root of the contract
If the term broken is not a condition proper, but an intermediate
term, the discharge of the innocent party from further
performance depends upon the nature and consequences of the
breach. To ground this, courts have sought after different
metaphors from time to time. But as Sachs L.J. said in Decro-
Wall International SA v. Practitioners in Marketing Ltd
[(1971) 2 AER 216], "at the risk of being dubbed old-fashioned
his preference is for the expression goes to the root of the
contract. This has been the favourite expression for the last
one and a half centuries. The question whether the breach goes
to the root is for the court to decide on the facts of the case.
Other phrases used by courts more recently are that the breach
must be fundamental, that the breach must affect the very
substance of the contract, or frustrate the commercial purpose
of the venture. However called the substance the judges have
had in mind is the same. It is that the breach must be far reaching
in effect to justify discharge. The test laid down in Hangkong
Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd. [(1962)
2 QB 326], is, does the breach deprive the other party of
substantially the whole benefit which it was the intention of the
parties that he should obtain as consideration for performing
his undertaking ?.
Facts : P chartered to D the vessel Hongkong Fir for twenty
four months that she was in every way fitted for ordinary cargo
service. The vessel was old. P did not provide proper engine
room staff. The chief engineer was addicted to drink. There
were many break downs in machinery. The ship was only eight
and half weeks at sea in the first seven months. The rest of the
time was spent to make the ship seaworthy which was at last
achieved. D refused to continue with the charter party. The
court held on the facts that the delays and the steps taken to
make the ship seaworthy considered together would not deprive
D of substantially the whole benefits which it was the intention
of parties that he should obtain from further use of the ship. D
could not treat the contract as repudiated.
The root of the contract approach has been adopted to contracts
to deliver and pay for goods in instalments. The breach may
amount to express or implied repudiation under the sale of goods
law. But if there is a failure of performance it must go to the
root of the contract in order to justify discharge. In Maple
Flock Co. Ltd v. Universal Furniture products Ltd [(1934)
1 KB 148], there was a contract to supply 100 tons of flock of
certain standard to be delivered by instalments. The sixteenth
delivery was below standard. The buyer wanted to treat it as
repudiation. But the seller wanted to continue. Lord Hewart
C.J. held that two tests, one the ratio quantitatively which the
breach bears to the contract as a whole, and second, the degree
of probability that such a breach will be repeated, must be
applied. On the facts, the sixteenth delivery was only 11/2 tons
out of 100 tons. 20 satisfactory deliveries had been made both
before and after. It was held, therefore that the buyer could not
discharge the contract, but only claim damages.
It follows that the further the parties have proceeded with the
performance, the less likely it is that one party will be able to
claim discharge by a single breach in such contracts. But if it is
going to the root it will discharged. Thus in Munro & Co.
Ltd. v. Meyer [(1930) 2 KB (312)], in a contract for supply of
1500 tons of bonemeal by instalments, nearly half was delivered
but found seriously adulterated. Held, the buyer was entitled
to be discharged.
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SUB TOPICS
2.1 General Principles
2.2 A Flow Chart
2.1 GENERAL PRINCIPLES
When there is such a breach of a contract by one party that the
other party is entitled to discharge himself and does so, he is
released from further performance. He is not also obliged to
accept any further performance from the party in breach. The
duty of the party in breach as well as his right of further
performance comes to an end. The secondary liability to
compensate in damages arises. So also the right of the injured
party to claim damages.
Traditionally, the main consequence has been described as
rescission of the contract. Also as termination of the contract.
However, these terms are not of sufficient accuracy. The
rescission here is different from the rescission ab initio as for
example, when there is a flaw in consent like misrepresentation
or mistake.
Here, it may be more accurate to say that the injured party can
absolve himself from further performance, per Lord Porter in
Heymans v. Darvin Ltd. [(1942) AC 356], approved
unanimously by the House of the Lords in Johnson v. Agnew
[(1980) AC 367]. Vendors agreed to sell a house and some
grazing lands. The properties were separately mortgaged. The
purchase price was sufficient to pay them off and also a bond
loan which vendors had secured to buy another property. The
purchaser failed to complete on the agreed date. A fortnight
later vendors issued notice making time of the essence and fixed
21 January 1974. The purchaser failed to complete on this date.
It was clear that vendors were entitled to terminate the contract.
But instead they sued for specific performance and obtained it
on 27 June 1974. but before the order was entered, both
mortgagees of house and grazing land took possession and sold
the properties for much less than purchaser had agreed. Vendors
there upon applied to court to proceed against purchaser in
damages for breach.
The House of Lords held that the vendors in suing for specific
performance had not made a final election and it was open to
the court to allow them to sue for damages if it appeared
equitable. Lord Wilberforce stated that it is necessary to clear
a confusion. when an injured party is said to rescind a contract
the rescission is quite different from rescission ab initio as may
arise for flaw in consent. In those cases the contract is treated
in law as never having come into existence. In the case of a
repudiatory breach being accepted, it is now quite clear, under
the general law of contract, there is no rescission ab initio but
the contract has come into existence and has been put on end to
or discharged.
The contract is not set aside from the beginning. Rights and
obligations which arise from its partial execution and causes of
action which have accrued from its breach whether in favour
of the innocent or the guilty party alike continue unaffected.
Thus, if a time charter party of a ship is repudiated by the
charterer, the ship owner can recover arrears of hire due up to
the date of acceptance of repudiation. If building work is to be
paid for by instalments, any instalment due but unpaid at the
time of discharge can be recovered. If an employee repudiates
a contract of employment, he can nevertheless recover wages
already earned by him. If money has been paid by one party to
the other under the contract, the money may be recoverable in
restitution as money had and received. The Indian law is the
same.
When goods have been supplied or services performed under
such a contract the innocent party can sue for the reasonable
value of a quantum valebant or a quantum meruit claim, or
include the value in the claim for damages for breach. Whether
the party in breach can make any claim will depend on whether
the contract is divisible. If divisible, he may be entitled to claim
for completed part of performance, subject always to the counter
claim for damages for loss suffered by the breach.
The one consequence which is in common for every kind of
breach is the secondary obligation that arises of the party in
breach to pay compensation to the injured party in damages in
respect of loss suffered by the breach. And that leads us to the
next section, Remedies for Breach of Contract.
2.2 A FLOW CHART
Consequence of Breach of Contract
Types of Breach
Renunciation or Anticipatory or Restitution Actual
Repudiation Constructive Breach
Consequences
Contractual Remedies Statutory Remedies Equitable Remedies
(Ss.73-75)
Rescission of Liquidated
contract damages &
penalty
Unliquidated other statutory unliquidated-
damages/ remedies penalty
reasonable (Ss.55-61 sale of
Compensation Goods Act)
Injunction
(Ss 34-37 of Specific Relief Act) Specific performance
Ss. 9-15, and Ss.20-25 of
Specific Relief Act)
2. CONSEQUENCE OF DISCHARGE
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3. REMEDIES OF BREACH
SUB TOPICS
3.1 Introduction
3.2 Contractual remedy
3.3 Common Law and Statutory remedy
3.4 Equitable remedy
3.1 INTRODUCTION
As seen above, where there is breach of contract, the primary
obligations of the party in breach are replaced by the secondary
obligation to compensate the other party in damages for loss in
respect of the breach. This is irrespective of whether the injured
party is entitled to absolve himself from performance of his
part or not as a result of the breach. When he is able to do so,
his claim for damages is in addition to it. Even otherwise the
claim to damages remains, as for example, when a minor term,
called traditionally a warranty is broken, and loss has been
caused to him.
Apart from the remedy of damages, which the common law of
England allowed for breach of contract, the courts of equity
developed the remedies of specific performance and injunction
as discretionary remedies in suitable cases only. After the
Judicature Acts of the nineteenth century, both the common
law remedy of damages, and the equitable remedies are
administered by all the courts. In India, statutory provisions
for damages are made in the Contract Act itself, and the equitable
remedies are provided for in the Specific Relief Act 1963 (which
has replaced the earlier Act of 1877). In India, from the
beginning, the same heirarchy of courts administer both the
legal and equitable remedies.
3.2 CONTRACTUAL REMEDY
Very often the parties to the contract stipulate the remedies in
the event of breach of contract. One can find a clear exposition
about the rights and duties of the parties in case one party
commits a breach in any Contract drafted in America by an
U.S. Lawyer. In USA law is taken as the tool of management
of the whole affair. So, from the initial stage of the contract
itself, parties to the contract take the help of specialist lawyers
to clearly draft the contract document, in its entire form
including all conditionalities, so that parties themselves in all
situations solve their problems either directly or through
mediators and arbitrators. Seldom parties keep any space for
litigation to landup in the Court because of high cost of litigation
and the uncertainty involved. But, in common law countries,
especially in India, parties entering into the contract are in the
'honeymoon' stage. As such, they keep away their advocates
and solicitors from the site of the contract. As a result, the
contract document is often prepared by lay man with serious
loopholes keeping many issues untouched specially issues
arising out of breach of contract. Parties at the Honeymoon
stage hate to think about breach of contract by any party. The
absence of clear provisions and understanding, in such cases,
compel the parties to landup in the court. Like commercial
contracts, breach of contract in commercial cases are also
determined by complicated, economic and market forces. If it
is economically prudent and commercially viable a party to the
contract often commits breach in a disperate bid to salvage his
or her economic interests. It is therefore advisable that in all
contracts particularly in commercial projects conditionalities
must include position of parties in case of breach of contract,
so that cost of mediation and arbitration becomes easy.
Contractual remedies shall include :
(1) Right to rescind the contract by the other party at a definite
situation of breach of contract.
(2) Quantum of damages or the method of calculation of
damages. When the parties determine the quantum of
damages to be paid by the party committing the breach it
is known as liquidated damages. It may be difficult for the
parties to stipulate the amount specially in international
agreements. In some countries under their municipal law
liquidated damages are not allowed. What is allowed is
reasonable compensation. This statutory provision makes
an inroad in to the power of the parties to the contract.
Indian legal position is also like that which shall be
discussed at the appropriate place.
(3) Parties may even determine and stipulate a penalty clause
in the contract. In such cases penalty becomes liquidated.
As in the case of liquidated damages in some countries
liquidated penalty is also not considered. We will discuss
the situation at the appropriate place.
(i)Rescission of Contract
As already seen earlier when a contract is breached by one party,
the other party may have the right to rescind the contract and
treat himself as absolved from his obligations and hold the
defaulting party liable in damages. The remedy of rescission
may also be available in a contract which is voidable at the
option of one of the parties. A party who has a right of rescission
may, if necessary, sue for the remedy of rescission under the
Specific Relief Act, 1963.
According to S.27(1) of the Act, on a suit for rescission of a
contract, the court may adjudge such rescission in any of the
following cases :
(a) where the contract is voidable or terminable by the plaintiff,
(b) where the contract is unlawful for causes not apparent on
the face of it and defendant is more to blame than the
plaintiff.
Thus the remedy of rescission is available to a party who is
entitled to avoid or put an end to the contract or where the
contract is unlawful and the plaintiff and defendant are not in
pari delicto. The remedy of rescission is subject to certain
important limits.
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According to S.27(2) the court may refuse to rescind the contract
in the following cases :
(a) where the plaintiff has expressly or impliedly ratified the
contract.
The right to rescission is lost when the plaintiff has affirmed
the contract. Affirmation may have been express or implied.
(b) Or, where, owing to change of circumstances which has
taken place since the making of the contract (not being due
to any act of the defendant), the parties cannot be
substantially restored to the position in which they stood
when the contract was made.
The right of rescission is lost when the position of the parties
is altered such that restoration to status quo ante is not
possible. For example, one party may have consumed
goods or resold goods.
(c) Or, where third parties have, during the subsistance of the
contract, acquired rights in good faith for value without
notice.
The right of rescission is lost where the rights of third parties
have intervened as for example, a bonafide buyer buying
the goods for value without notice from a first buyer who
obtained the goods by fraudulent misrepresentation.
(d) or, where only a part of the contract is sought to be rescinded
and such part is not severable from the rest of the contract.
The right of rescission cannot be exercised when the
concerned part of the contract cannot be severed from the
rest of the contract.
(Regarding S.27, contract means a contract in writing, in
territories to which the Transfer of Property Act, 1882, does
not apply).
S.28 deals with rescission in certain circumstances of contracts
for the sale or lease of immovable property, in which specific
performance has been decreed.
According to S.27, rescission of contract cannot be adjudged
for mere mistake, unless the party against whom it is adjudged
can be restored to substantially the same position as if the
contract had not been made. This means that though rescission
is possible on the ground of mistake without any other vitiating
elements, it will not be allowed unless the parties can be restored
to the status quo ante, or where a third party has in good faith
without notice and for value acquired any interest under the
contract.
Restitution on Rescission
According to S.30, on adjudging the rescission of a contract,
the court may require the party to whom the relief is granted to
restore, so far as may be, any benefit which he may have
received from the other party and to make any compensation to
him which justice may require.
This provision gives effect to the principle that he who seeks
equity must do equity and is in keeping with S.64 of the Contract
Act.
Rectification of Instruments
Another remedy provided by the Act is the rectification of
instruments including written contract. According to S.26(1),
when through fraud or mutual mistake, a written contract (not
being articles of association of a company) does not express
their real intention, then -
(a) either party or his representative - in- interest may sue to
have the instrument rectified, or
(b) the plaintiff, in any suit in which any right under it is in
issue, may claim that the instrument be rectified, or
(c) a defendant in any such suit, in addition to any other
defence, may ask for rectification of the instrument.
According to S.26(2), the court on finding in such suit on such
pleading that the instrument through fraud or mistake does not
express the real intention of the parties, may, in its discretion
direct rectification so far as can be done without prejudice to
rights acquired by third parties in good faith and for value.
According to S.26(3), a contract in writing may first be rectified
and then if the court thinks fit may be specifically enforced.
For rectification, the true question is what was the intention of
the parties at the time of writing the contract and executing it if
necessary. There must have been mutual and not unilateral
mistake or fraud. The mistake may be either of fact or of law
although if a mistake of law relief will not be given unless it
has resulted in inequity.
Thus, where the final draft of a contract mentioned the price in
weight when in fact it was agreed to be in count, rectification
was granted. In New India Rubber Works (p) Ltd v. Oriental
Fire and General Insurance Co. [(1969) 1 Comp. LJ 153
Cal.], riot risk was mentioned in an insurance cover by
mistake. Rectification was allowed under S.26.
Cancellation of Instruments
Sections 31 to 33 of Act provide for the relief of cancellation
of instruments including written contracts in suitable cases.
According to S.31, any person against whom a written
instrument is voidable, and who has reasonable apprehension
that such instrument if outstanding may cause him serious injury,
may sue to adjudge it void or voidable and the court in its
discretion may so order it to be cancelled.
Under this section, it is not necessary that the plaintiff must be
a party to the contract. A suit is maintainable by a person against
whose interest the instrument is. S.31 rests on the principle of
protective justice and quia timel or reasonable apprehension
(fear) of injury.
According S.32, the court may, in suitable cases cancel an
instrument in part and allow the remaining part to stand.
According to S.33, the relief of restitution may be given
following the relief of cancellation of a written contract whether
for the plaintiff or the defendant in the suit for the cancellation.
Restitution under this section may also extend to compensation.
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(ii) Liquidated Damages and Penalty
(a) English Law
Parties to a contract some times assess the damages to one or
both of them which a breach will cause or estimate it or fix it
and introduce it into the terms of the contract. By doing so,
however they cannot exclude the application of the rule that
damages are to compensate the plaintiff for actual loss. It is a
question of the proper construction of the contract to decide
whether a sum so fixed is a genuine attempt to liquidate the
prospective damages and therefore recoverable, or , howsoever
the parties describe it is a penalty and therefore irrecoverable.
English law does not allow penalty though some legal systems
may do so. The court will accept the sum fixed by the parties if
it is a genuine pre-estimate of the damages likely on breach.
The question is one of construction to be judged as at the time
of making the contract not the time of breach. Even if parties
have reduced the probable damages it will be accepted by the
court. On the otherhand, if the sum fixed is interrorem, it will
be considered a penalty and will not be enforced. The court
will look to the real intent and not the form of expression.
A leading case on penalties is Dunlop Pnuematic Tyre Co.
Ltd v. New Garage & Motor Co.Ltd [(1915) AC 79] A,
makers of motor tyres and tubes sold goods to R who agreed
not to resell or offer to sell at a price below the manufacturer's
listed prices. R further agreed to pay 5 as liquidated damages
for every breach. R sold tyres at less than listed prices and was
sued for damages. The House of Lords held that the sum fixed
was not a penalty. Lord Dunedin laid down the following rules:
1. If the sum is extravagant compared to the greatest loss that
could happen it is a penalty.
2. If the breach is in not paying money and the sum is greater
than the sum which should have been paid it is a penalty.
3. There is a presumption that when a single sum is payable
as compensation on one or more events some serious some
trifling in damage it is a penalty.
4. Even if the consequences of the breach make precise pre-
estimate impossible, it is no obstacle to a sum being a
genuine pre-estimate.
In English law the sum of liquidated damages is recoverable.
But if it is interrorem and amounts to a penalty it is not
recoverable. Damages will be calculated according to ordinary
principle.
An illustration of penalty is available in Ford Mottor Co. v.
Armstrong [(1915) TLR 2671]. A retailer received from P
supplies of cars and parts agreeing not to sell below listed prices.
For every breach, 250 was payable as agreed damages. The
Court of Appeal held this was a penalty as a part may be sold in
breach which is of lesser value.
Another illustration is London Trust Co. Ltd. v. Hurel
[(1955)1 AER 839]. A car was purchased on hire purchase.
The total price was 558. If the purchaser returned the car, or
if on default the seller retook it, 425 including instalments
paid must be given. The purchaser paid 302 and defaulted.
The seller retook the car and resold it for 270. He sued for
recovering ( 425 - 302) = 123. The court rejected it as a
penalty and not a genuine pre-estimate. Lord Denning L.J. said
that 425 is three quarter of the price. Such a figure is inserted
by hire-purchase companies as a rule of thumb. Supposing the
car was to be taken back in a month would the hire or
depreciation go up to 425 ?
The House of Lords in Bridge v. Campbell Discount Co. Ltd
[(1961) 1 AER 385] further held where 2/3 of the price is made
payable on default it is a penalty. Cases have held that where
the full amount or a fixed amount is payable whether the default
takes place in the beginning or towards the end it is a penalty.
So also where a sum of money is payable and on default a large
sum is payable it is a penalty. In an old case Kemble v. Farren
[(1829) 6 BING 141] where an artiste was to act as chief
comedian at a theatre for a fixed period for 3 1/2 a night but
on default was to pay 1000 it was held a penalty.
Where a figure fixed by parties is sensible whether reasonable
or not it will be a ceiling and nothing more is recoverable. In
Cellulose Acetate Silk Co. Ltd. v. Widness Foundry Ltd.
[(1933) AC 20], certain machinery was to be erected by a certain
day. 20 was to be paid for everyday of default. There was
default of 30 days. The liquidated damages was 600. 5850
was claimed as actual loss suffered but the House of Lords
allowed only 600 as liquidated damages though under-
estimated by the parties.
(b) Indian Law
The Indian law on liquidated damages and penalties differs
slightly from the English law in terms of the rule laid down in
S.74 of the Indian Contract Act, 1872.
S.74 states : Compensation for breach of contract where
penalty stipualted for - When a contract has been broken, if a
sum is named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other stipulation by
way of penalty, the party complaining of the breach is entitled,
whether or not actual damage or loss is proved to have been
caused thereby, to receive from the party who has broken the
contract reasonable compensation not exceeding the amount
so named or, as the case may be, the penalty stipulated for.
Explanation - A stipulation for increased interest from the date
of default may be a stipulation by way of penalty
Please see illustrations a to g to S.74 in the Act.
In Indian law where a sum is named in the contract as amount
to be paid for breach, whether it is a penalty or not, the injured
party is entitled to receive reasonable compensation but not
exceeding the named amount. Thus a court should allow
reasonable damages for the breach in the circumstances of the
case upto but not exceeding the sum stipulated by the parties.
The court must award reasonable damages not beyond the fixed
limit.
The distinction between liquidated damages and penalty is not
absent in the Indian law. Firstly, if reasonable damages fall
short of the stipulated sum that sum will be reduced to that
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195
extent as penalty. If it exceeds, only the stipulated sum is
recoverable being liquidated damages. Secondly, the
Explanation describes a stipulation for increased interest from
date of default as a penalty. It may therefore be not allowable if
excessive.
Thirdly, courts have decided that where parties have provided
for damages expressly, a right to claim any other damages under
the general law is excluded by the liquidated damages.
But it is clear that the Indian law as contained in S.74 is different
from the English law in this regard.
The words in S.74 whether or not actual damage or loss is
proved to have been caused thereby should not mislead to think
that actual loss is not necessary. S.74 is governed by the earlier
section 73. The Supreme Court in Maula Bax v. Union of
India [(1969) 2 SCC 554] said if no loss is proved both S.73
and S.74 are not attracted. The above referred words in S.74
are confined to cases in which it is not possible to prove the
monetary value of the loss and therefore reasonable
compensation even as fixed by the parties may be allowed.
Where the loss in money can be determined it must be proved.
This is the correct position in the Indian law. The principle of
the decision was re-affirmed by the Supreme Court in Union
of India v. Rampur Distillary & Chemical Co. Ltd. [(1973)
1 SCC 649] when it refused to allow any compensation by
forfeiture of deposit or otherwise when the breach caused no
loss to the Government.
In India, many cases on penalty have arisen in stipulations for
interest. Where for a loan at 12% interest payable biennially,
on default 75% interest is payable it is a penalty. Compound
interest at the same rate on default is not penalty per se. But
compound interest at a rate exceeding the rate of interest may
well be in the nature of penalty. Where a sum is borrowed
payable by reasonable instalments and the bond provides that
on a default the whole becomes due it is not a penalty. But
where a sum is borrowed and the bond is given for double the
sum and provides that in default of an instalment the whole
becomes due, it is a penalty. Thus, in Subharama Sastri v.
Raghavan [(1987) 2 SCC 424], where a sum of Rs.16,000
was advanced and a sum of Rs.28,000 had to be paid back in
instalments under a chit fund scheme, and on a single default
the whole was payable, the Supreme Court held it a penalty.
There is a statutory power in India under the Usurious Loans
Act, 1989 to releave a borrower from exhorbitant interest.
Cases involving application of S.74 to forfeiture clauses for
earnest money and security deposits have also arisen. In
Fatechand v. Balkishan Das [(1964) 1 SCR 515], there was
an agreement for sale of a land and bungalow for Rs.1,12,500.
Buyer was to pay Rs.1,000 as earnest money and Rs.24,000 on
delivery of possession. This was done. The agreement further
provided that if buyer failed to pay balance and get registration
by a certain date Rs.25,000 would be forfeited. Buyer defaulted.
Seller forfeited the sum and sued for possession and
compensation. The Supreme Court allowed forfeiture of
Rs.1,000 as earnest money. It allowed the retention of Rs.24,000
not as forfeiture but as compensation for use. It distinguished
between earnest money which can be forfeited and a security
deposit whose forfeiture will be a penalty.
This view was reaffirmed by the Supreme Court in Maula Bux
v. Union of India [(1969) 2 SCC 554]. P agreed to supply
food materials to Uttar Pradesh military head quarters for one
year and deposited Rs.18,500 for due performance. P
persistently defaulted. The Government of India rescinded the
contract and forfeited the deposit. The High Court of Allahabad
held the deposit was an earnest money and did not amount to a
penalty under S.74. But the Supreme Court held every deposit
is not necessarily an earnest money. It quoted from the
dictionary of English law by Earl Jowitt that it is only giving
the vendor a nominal sum that is a token that the parties are in
earnest. It also quoted the Privy Council in Chiranjit Singh v.
Harswaroop [AIR 1926 PC 1] that earnest money is part of
purchase price when the transaction goes forward but is forfeited
when it falls through by default of the vendee. It ruled that
Indian High Courts decisions that S.74 does not apply to
forfeiture of deposits is no longer good law. It held if a forfeiture
is in the nature of a penalty S.74 applies. It held the deposit
cannot be forfeited.
Identical facts came up again before the Supreme Court in Union
of India v. Rampur Distillary & Chemical Co. Ltd [(1973) 1
SCC 649] for supply of rum. The Supreme Court did not alllow
the security deposit to be forfeited holding that it was a penalty.
Statutory damages If compensation is payable under a
statutory provision, the Supreme Court has held that the
provision at the time of the cause of action and not at the time
of the contract is to be applied. In Padma Srinivasan v.
Premier Insurance Co. Ltd. [(1982) 1 SCC 613], Ps husband
was killed by a lorry which was insured with D Insurance Co.
At the time of the policy the statutory compensation for loss of
life under the Motor Vehicles Act, 1939, was Rs.20,000. The
Act was amended and the compensation was raised to Rs.50,000
before the accident occurred. The Supreme Court allowed the
revised figure and stated it did not amount to giving retrospective
effect because the fatal accident had taken place after the
Amendment.
3.3 COMMON LAW AND STATUTORY REMEDY
(i) Common Law remedy
Damages in the event of breach of contract is both a common
law and a statutory remedy. The law relating to damages through
Common law courts is explained here.
The principles of damages for breach of contract was not fully
considered by the courts until the leading case of Hadley v.
Baxendale [(1854) 9 Ex 341]. The principles laid down in
that great decision have been followed, expounded and affirmed
again and again. These principles entered the Indian Contract
Act in S.73 when it was codified in 1872.
As damages are also awarded in tort, the question of the radius
of its reach in contract which though sharing a common remedy
with tort is essentially different in many respects, faced the
courts of law in the nineteenth century.
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In Hadley, plaintiffs mill at Gloucestor was stopped by a broken
crank shaft. It had to be sent to the makers at Greenwich as a
pattern for a new one. Defendant, a common carrier, promised
to deliver it at Greenwich on the following day. The only
information given to him was that the thing to be carried was
the broken shaft of a mill and that the plaintiffs were the millers.
Owing to neglect, it was unduly delayed in transit. As a result
the mill remained idle for longer than it would have been if the
contract of carriage had not been breached. Plaintiffs lost profits
and sued for damages to recover the same.
Alderson B. in the Court of Exchequer laid down the foundation
of the law of damages for contract. He laid down that when a
party has broken a contract the damages the other party may
receive should be such as may fairly and reasonably be
considered either arising naturally according to the usual course
of things from such breach or such as reasonably may be
supposed to have been in the contemplation of both parties, at
the time they made the contract, as the probable result of its
breach.
This statement of the law is known as the rule in Hadley v.
Baxendale. The rule has been codified in S.73 of the Indian
Contract Act, 1872, as follows :
Compensation for loss or damage caused by breach of
contract - When a contract has been broken, the party who
suffers by such breach is entitled to receive, from the party
who has broken the contract, compensation for any loss or
damage caused to him thereby, which naturally arose in the
usual course of things from such breach, or which the parties
knew, when they made the contract, to be likely to result from
the breach of it.
Such compensation is not to be given for any remote and indirect
loss or damage sustained by reason of the breach.
Please see the Act for a number of Illustrations a to r.
Alderson B. went on to state that if the special circumstances
were communicated by the plaintiffs to the defendants, and thus
known to both parties, the damages they would reasonably
contemplate would be the amount of injury so known and
communicated. On the other hand, if these special
circumstances were unknown to the party breaking the contract,
he could only have had in his contemplation the amount of
injury which would arise generally and in the great multitude
of cases not affected by any special circumstances.
Applying the principles, Alderson B. disallowed the loss of
profits of the mill in this case.
There are two branches in the rule in Hadley v. Baxendale.
The two branches are inter related. They may also be considered
as two branches of a single general principle.
Asquith L.J. deciding Victoria Laundry (Windsor) Ltd. v.
Newman Industries Ltd. [(1949) 2 KB 528], gave what is
considered a classic exposition of the test of remoteness of
liability laid down by Alderson B. He said the loss actually
resulting from the breach as was at the time of the contract
reasonably foreseeable as liable to result from the breach was
recoverable. What was reasonably forseeable depends on the
knowledge then possessed by the party who later commits the
breach. For this purpose, knowledge is of two kinds, one
imputed, the other actual. Every one, as a reasonable person, is
taken to know what loss is likely to result in the ordinary course
of things. This is the first branch of the rule. This knowledge
is assumed. In a particular case, there may be knowledge of
special circumstances as would be likely to cause more loss.
This is the second branch of the rule making such loss
recoverable.
In this case, an engineering firm delivered a boiler on 8
November which they should have delivered on 5 June to a
certain launderers and dyers being made known full well that
the business was to be extended and exceptionally profitable
contracts were to be got by using the new boiler. Damages by
loss of profit at 16 a week for extension and 262 a week of
loss of profits of contracts were claimed. The Court of Appeal
was of the opinion that the defendants with their engineering
knowledge and knowledge of facts could not contend that the
loss of business was beyond their vision. The case was referred
to the Official Referee to ascertain the amount of both the
damages to be allowed in this case.
However, there has been criticism of the way in which Asquith
L.J recast the general principle. The principle of remoteness of
damage expressed in terms of reasonable foresight of loss
liable to result may confuse the rule with the rule in tort where
there will be liability for all damages which can be reasonably
foreseen.
The House of Lords differed from the use of the phrase
reasonable foresight by Asquith L.J. in the Heron II, Koufos
v. C. Czarnikow Ltd [(1969) 1 AC 350]. They stated the real
question is not whether the damages should have been foreseen
by the defendant but whether its probability should have
reasonably been in the contemplation of both the parties at the
time the contract was made. The law of contract and tort differ
in this respect. A tort feasor is liable for any damage which
should have been foreseen by a reasonable man. Intention of
parties is irrelevant there. The party to whom answerable would
generally be a stranger. But in contract it is only fair the
assessment of damages should depend on the assumed common
knowledge and contemplation of the parties who dealt with each
other and at that time. When the same case was before the
Court of Appeal before it went to the House of Lords, Sellers
L.J. had remarked that the words and phrases of Hadley v.
Baxendale have been hallowed by long usage and the ideas
and factors conveyed by them are clear enough. Heron II has
not laid to rest the exposition in the Victoria Laundry case
except to clarify the test of liability and revitalise the rule of
remoteness of damages laid down in Hadley v. Baxendale.
Facts of the Heron II
Respondents, a firm of sugar merchants, chartered the ship
Heron II from appellants to carry a cargo of sugar from Costanza
to Basrah. The ship deviated on the voyage. The cargo was
delayed by nine days. As the sugar market fell at Basrah,
respondents obtained 3,800 less than the price obtainable when
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it should have been delivered. Appellant contended he had no
special knowledge of the seasonal fluctuations of the sugar
market. But the House of Lords held a shipowner must be
presumed to know that prices in a commodity market would
fluctuate.
The relationship between the rule for damages in tort and in
contract for remoteness of damage was considered further by
the Court of Appeal in Parsons (H.) (Livestock) Ltd v. Uttley
Iugham & Co. [(1978) QB 791].
Facts. D agreed to supply and erect on Ps pig farm a bulk
good storage hopper for storing pignuts for the top grade pig
herd. D failed to ensure that a ventilator at the top of the hopper
supplied was open. The pignuts became mouldy. P fed them
to the pigs thinking no harm would result. The pigs suffered an
attack of E. coli, an intestinal infection. 254 pigs died.
The decision in the first instance of Stanwick J. that the damage
was not within the reasonable contemplation of the parties was
reversed by the Court of Appeal. It held D liable for the loss of
the pigs but not for loss of profits from future sale of pigs. Lord
Denning M.R felt that where there is physical injury the test
should be the same as in tort and he wanted to distinguish the
economic loss from the physical injury. But the other judges
did not agree with this view. The case may be said to have
decided that reasonably forseeable and reasonable
contemplated mean much the same and the test is that of
contract only and not the same in tort.
At this context, it is useful to summarise that in damages, the
first question is that of what kind of damages governed by the
principle of remoteness, stated in the rule in Hadley v.
Baxendale. The law must draw a line on the ground of
remoteness. As Lord Wright stated in a tort case in [(1933) AC
449], the law cannot take note of everything ....... some
subsequent matters are outside the scope of its selection because
it were infinite for the law to judge the consequences of
consequences. This question concerns ordinary and special
damages.
The second question, distinct from the first, is the measure of
damages. It is the attempt at its monetary quantification. Courts,
atleast dating back to 1845, Robinson v. Harman [(1848) 1
Ex 850], had already adopted a basis for damages in the principle
restitutio in integrum, namely that when an injured person has
suffered damage, he must, so far as money can do it, be restored
to the position before he suffered it. This principle has always
been reaffirmed, in contract as for instance in Sunley Ltd v.
Cunward White Store Ltd [(1940) 1 KB 740], where a party
sustains loss by reason of a breach of contract, he is, so far as
money can do it, to be placed in the same situation with respect
to damages, as if the contract had been performed.
In this connection, a terminology had been used first in the
Yale Law Journal which attracted much attention, and was
welcomed in Anglia Television Ltd v. Reed [(1972) 1 QB 60]
and in many other cases. The Yale Law Journal article
distinguished between expectation loss and reliance loss.
Expectation loss is that which the plaintiff would have received
if the contract had been properly performed. Of this the most
obvious is the loss of profit that would have been made on the
contract. This may be quite speculative in many cases. This is
not to say no loss has at all been suffered. Plaintiff relying on
the contract being honoured would have been incurred expenses
now wasted. Thus the two concepts are useful to assess the
loss claimed.
In Anglia Television Ltd v. Reid [(1972) 1 Q 60], P engaged
D, an American actor, to appear in a film they were making for
television. At the last moment, he repudiated the contract. P
could not find a replacement. The project was abandoned. P
claimed not the profits they would have made on the film as
that could only be speculated in advance but the money spent
in operation such as hiring other actors, engaging a script writer,
looking for locations and so on. In other words, P quantified
the loss not on expectation but on reliance basis. The claim
2700 was allowed on this basis in this case.
Thus damages for breach of contract are meant to compensate
the plaintiff for the loss suffered. If no loss has been in fact
suffered, plaintiff may yet be given a verdict but the damages
awarded will be purely nominal. In England it is usually 2.
An illustration can be had in Charter v. Sullivan [(1957) 2
QB 117, D], having agreed to buy a Hillman car from a dealer,
refused to buy. The car was sold to another within a week.
Indeed, the dealer was able to sell as many cars as he wanted.
So no loss was suffered. Even so, he sued for damages. The
Court of Appeal held he was only entitled to nominal damages
and 40 shillings was awarded.
Nominal damages is allowed in India also in suitable cases.
Since damages are meant to compensate, they will not be
awarded to punish the defendant. Penal or punitive damages
cannot be awarded in contract. As the Amercian Restatement
of Law of Contract states in S.342, punitive damages are not
recoverable for breach of contract. Vindictive or examplary
damages have no place in law of contract except in two
situations.
Difficulty in accessing the measure of damages should not deter
a court from making an attempt in the circumstances of the
case Thus in Chaplin v. Hicks [(1911) 2 KB 786], D, a theatre
manager, agreed with P that she would attend a meeting with
forty nine other actresses, at which twelve out of fifty would be
selected and employment given. D did not give her the
opportunity to attend the meeting. D pleaded in the action by P
that only nominal damages were payable as P would have had
only a chance of one in four of being successful and there were
other imponderables. But the Court of Appeal upheld the award
of 100 given by the jury.
Cases on the Two Rules in Hadley v. Baxendale : General
or Ordinary Damages and Special Damages if in
Contemplation.
Damages as may fairly and reasonably be considered arising
naturally according to the usual course of things from the breach
as its probable result alone will be awarded unless any special
damages by special circumstances are in the knowledge and
contemplation of the parties.
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Horne v. Midland Railway Company [(1876) LR 8 CP 131],
P was to deliver military shoes in London for the French Army
at a very high price by a particular date. P gave them to D to be
carried with notice of his contract only as to date of delivery.
The carrier delayed the shoes and they were rejected by the
purchasers. P sought to recover the difference between the
price the shoes were sold and the high price at which they would
have been sold if delivered on the particular day. It was held
such damages were not recoverable as the carriers were not
informed of the exceptional loss. Ordinary loss for the delay
was allowed.
British Columbia Saw Mill Co. Ltd. v. Nettleship [(1868)
LR 3CP 499] P shipped on Ds vessle certain cases of machinery
intended for the erection of a saw mill at Vancouver. D failed
to deliver one of the cases but was not aware that it contained a
material part of the machinery without which the saw mill could
not be erected at all. P claimed damages not only for replacing
the lost part but also the loss for the time work was stopped by
machinery remaining useless. The Court held the measure of
damages could be only the cost of replacng the lost machinery
at Vancouver.
Please also see the Victoria Laundry Case and the Heron II
case.
Damages will not be too remote if they flow from the normal
business position of the parties as the court assumes that this is
known to both of them.
In Monarch Steamship Co. Ltd v. Karlshamns Oljefabriker
[(A/B) (1949) AC 196], a British ship was chartered in April
1939 to load soyabeans in Japan and discharge at Karlshamns
in Swedan. The ship should have reached normally in July.
But the boilers were defective and she was unseaworthy and
reached European waters only in September. By the time War
broke out and she was ordered to discharge at Glasgow. The
respondent, a Swedish company who required the beans in
Sweden incurred expenses in forwarding the cargo in neutral
ships. The House of Lords allowed the expenses and said the
possibility of the War must have been known and the damages
were not too remote a consequence of the unseaworthiness of
the ship.
In India, the decision of the Privy Council, in Jamal v. Moola
Dawood Sons & Co [(1916) AC 17 states S.73] is declaratory
of the common law of damages. So also the Supreme Court of
India in Pannalal Jankidas v. Mohandas [AIR 1951 SC 145]
stated the party in breach must compensate the direct
consequences flowing from the breach and not loss or damage
indirectly or remotely caused.
Under S.73 of the Act, an early illustrative case is Madras
Railway Co. v. Govinda Rau [(1898) 21 MAD. 172] P, a tailor,
delivered a sewing machine and cloth to the Railway consigned
to a place where he expected to make special profit at a
forthcoming festival. The goods were delayed in transit and
delivered only some days after the festival concluded. P had
not given notice of his special purpose. P claimed expenses
and loss of profits he would have earned. The Court held the
loss of profit was too remote.
Such damages as may reasonably be supposed to have been in
the contemplation of both parties, at the time they made the
contract, as the probable result of it even, if they be special
losses, may be allowed. Simpson v. London and North
Western Railway Co. [(1876) 1 Q.B.D. 274] is a good
illustration. P, was sending specimens of his goods for
exhibition to agricultural shows. After a show at Bedford he
entrusted samples to the railway company for carriage to a show
at Newcastle. The companys agent had knowledge of the
special circumstance that the samples were meant for the show.
P had written on consignment note must be at Newcastle
Monday certain. By default, the samples arrived late for the
Newcastle show. P claimed damages for loss of profits at the
show. It was held the Railway was liable.
Some times the breach may be a very unusual type not normally
contemplated but that is immaterial because parties contemplate
performance not breach. In Banco de Portugal v. Waterlow
& Sons Ltd [(1932) AC 452], a firm agreed to print for the
Bank of Portugal a quantity of banknotes. They negligently
delivered to M the head of an international criminal band some
5,80,000 of these notes and they were subsequently put into
circulation in Portugal. On discovery, the Bank ordered
withdrawal from circulation of the notes and exchanged them
for others. The Bank claimed from the printers the value of the
notes exchanged and the cost of printing genuine notes. The
House of Lords held the losses recoverable.
Damages for Mental Pain and Suffering
Damages may be recovered for substantial physical suffering
arising from breach of contract. In Hobbs v. L. & S.W. Railway
[(1875) L.R. 10 QB 111] a man and family were transported to
the wrong station with the result they had to walk home several
miles on a drizzling wet night. Damages were allowed. In
Bailey v. Bullock [(1950) 2 AER 1167], P, his wife and child
wre forced to live for two years in discomfort with the wifes
parents owing to failure of a solicitor to take steps to obtain
possession of a house. Damages were recovered for the physical
inconvenience.
Ordinarily, in commercial contracts damages are not allowed
for mental suffering.
Damages, in principle cannot be recovered in a contract for
injury to reputation. In Addis v. Gramaphone Co. Ltd [(1909)
AC 488], A was employed by R as manager of their business
in Calcutta with salary and commission. R wrongly dismissed
A without giving the required six months notice. The House of
Lords allowed salary and commission for the period but no
damages for the way of dismissal. they listed the three
exceptions to the general rule (a) wrongufl dishonour of cheque,
(b) breach of pomise to marry, and (c) vendor of real estate
failing to make title.
The same principle was also followed in Watts. v. Morrow
[(1991) 4 AER 937]. As a result of a negligent survey report a
house was purchased at a higher price than it was worth and
considerable time and money was spent to make it livable. But
the Court of Appeal held that damages cannot be given for
mental distress and awarded only 750 for physical discomfort
cutting down 4000 awarded by the trial court.
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It was thought in Haynes v. Dodd [(1990) 2 AER 815] that
damages for mental distress in contract are limited to a certain
class of cases namely where the contract itself is to provide
peace of mind and not in commercial contracts.
But it is now clear that in contract such damages may be allowed
in every proper case as known from the wedding cases and
holiday and other cases
The American Restatement also says in S.341 such damages
may be allowed in suitable cases.
They may be allowed in special cases. In a Scottish case, Diesen
v. Sampson [(1971) SL 749], a photographer having agreed to
take photographs at a wedding failed to turn up. As a result the
bride had no photograhs of her wedding. She was allowed
damages for injury to feelings.
In Hotson & Hotson v. Pazne [1988 CLY 1047], a motel was
booked for Ps daughters wedding reception to which 105
guests were invited. The motel cancelled the booking 48 hours
before the wedding. The only alternative was a small room at
a public house. It was held on only daughters wedding
reception is unique for a parent. General damages of 750
were awarded for mental factors and special damages 265 for
extra expenses incurrred.
Similarly, damages have been awarded where contracted
holidays have been deprived. In Jarvis v. Swans Tours Ltd.
[(1973) QB 233], P, a solicitor paid for a two week holiday
with Christmas winter sports at a hotel in Switzerland on the
faith of the attractive promises in the brochure of D. But the
trip and stay was a complete disappointment. The Court of
Appeal allowed damages of the amount paid and an additional
sum of 60 for the disappointment. Lord Denning MR said
the principle that damages cannot be recovered for mental pain
is out of date.
In Western v. Olathe State Bank [(1925) 78 Colo 217], D, a
bank agreed to lend P money with sums he may need for a trip
to California by crediting his account after reaching his
destination. P reached California but D refused to give the
credit. The Supreme Court of Colorado awarded damages for
mental suffering.
Thus, the principle is now extended to all suitable cases. In
Heywood v. Wellers [(1976) 1 AER 300] P engaged a firm of
solicitors to obtain an injunction against a man who was
harassing her. The solicitors obtained an injunction. But they
failed to bring the man before the court. When he molested her
again, P was allowed damages from the firm for the mental
anguish.
Similarly, in Fraser and Others v. Thames Television Ltd.
[(1983) 2 AER 101] three actresses formed a rock group. They
negotiated with a television company to produce a television
serial based on their experiences contrasting their individual
and collective character. A written agreement was entered into
for their remuneration and forbidding the company from using
the idea unless they were given an opportunity to act. The
company without giving the opportunity produced their
programme with great success. The company was held liable
in damages for breach of confidence.
Mitigation of Damages
Another general principle which has a bearing on damages is
the duty to mitigate damages. A person suffering loss from
breach of contract must take any reasonable step available to
him to mitigate the extent of damage. It is not exact to say the
plaintiff is under a legal duty to mitigate his loss, but he cannot
act unreasonably and hold defendant liable to loss. Whether
plaintiff has used reasonable opportunities is a question of fact
in each case and the burden of proof is on defendant.
The principle of mitigation could be viewed as yet another
dimension of the rule against remoteness of damages. The
substance of the principle was expressed by Lord Haldane in
British Westing House Electric & Manufacturing Co v.
Underground Electric Railway Co. of London [(1912) AC
673], as that the first principle of compensation for the pecuniary
loss naturally flowing from the breach is qualified by a second
which imposes a duty of taking all reasonable steps to mitigate
the loss consequent on the breach and debars the plaintiff from
claiming any part of the damage which is due to his neglect to
take such steps.
S.73 of our Act states in the Explanation the rule of mitigation:
In estimating the loss of damage arising from a breach of
contract, the means which existed of remedying the
inconvenience caused by the non-performance of the contract
must be taken into account.
The explanation to S.73 does not create an independent
actionable duty to mitigate but a factor to be taken into account
in assessing the damages naturally flowing from the breach.
Mitigation often has application in contract for sale or purchase
of goods. On buyers refusal to take delivery, the seller should
resell the goods at market price and may recover the difference
if any between the price realised and the contract price
[Ambalavana Chettiyar and Co. Ltd. v. Express Newspapers
Ltd (1968) 2 SCR 239]. For the proposition that only difference
at time of breach is recoverable, the well-known authority is
the Privy Council decision in Jamal, A.K.A.S v. Moola
Dawood Sons & Co [(1916) 43 IA 6]. P agreed to sell to D
23,500 shares, delivery and payment on 30 December 1911.
On that date D declined to take delivery or pay. The shares
would have then realised Rs.1,09,218 less than contract price.
But P sold the shares only after February and realised only
Rs.79,862 less than contract price as the market was rising. D
contended that they were liable only for that loss but it was
held D was liable for Rs.1,09,218. Lord Wrenbury said the
loss to be ascertained is the loss at the date of the breach.
The Supreme Court of India has followed the same principle.
In Muralidhar Chiranjilal v. Harishchandra Dwarakadas
[(1962) 1 SCR 653], the contract was for supply of canvas to
be consigned to Calcutta f.o.r. Kanpur. Transport charges to be
borne by buyer. Seller failed to supply. Buyer claimed
difference of prices of Calcutta. But Wanchoo J. held the seller
failed to deliver the goods at Kanpur and he only knew they
were to be booked to Calcutta from which it cannot be inferred
he knew they were for resale at Calcutta. He distinguished the
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Victoria Laundry case, and held the difference in prices at
Kanpur should have been proved which was not and therefore,
on the evidence, no damages arose in the usual course.
Similarly, where seller breaches, the buyer should buy the goods
from any alternative sources and cannot recover any further
loss due to his own neglect.
In Payzu Ltd. v. Saundars [(1919)2 KB 581], the goods were
to be delivered by instalments, payment within a month of each
delivery less discount. The buyers failed to make punctual
payment for first instalment. The seller treated contract
repudiated but offered to continue deliveries at contract price
for cash. The buyers rejected the offer. The price of the goods
rose. The buyers sued. Scrulton L.J. held seller liable in
damages for unwaranted repudiation but also that the damages
were only the loss the buyer would have suffered if he had
accepted the sellers offer which he should have. Buyer had
failed to mitigate the loss.
In Sotiros Shipping Inc. v. Samerat Solholt [(1981) Com.
LR 201], in a contract for a sale of ship, where the seller
defaulted but offered an alternative ship which the buyer refused,
it was held the buyer had unreasonably failed to mitigate the
loss. Where the injured party instead of mitigating increases
the loss unreasonably, defendant cannot be held liable,
Derbishire v. Warren [(1963) 3 AER 310]. Ps car was
damaged due to Ds negligence. P got the car repaired at a cost
double the value of an equally good new car. The Court of
Apppeal allowed only the difference between the insurance
money and the market value of a new car but not between the
insurance money and the cost of repair. But in O Grady v.
Westminister Scalffolding Ltd, [(1962) 2 LLoyds Rep. 238]
the plaintiff was allowed the cost of repairing his car
considerably exceeding its market price because the car was
unique and could not be replaced. This case was distinguished
in the aforesaid case.
Mitigation also finds applications in the Contract of
employment. In Brace v. Calder [(1895) 2 QB 253], a
partnership of four agreed to employ P as a manager for two
years. After five months the partnership dissolved by retirement
of two partners. The other two continued and offered to employ
P on the same terms. P refused and sued for salary for balance
of two years. Held, he should have accepted the offer and only
nominal damages was allowed. But where no alternative
employment of equal standing is available, Indian High Courts
have awarded as compnesation the renumeration the person
would have earned but for the wrongful termination. Neither
can an employee be expected to take up any available job of
lesser status nor of different kind of work or go to a different
part of the country.
The duty of mitigation cannot impose any burden of an unusual
nature. In Radford v. De Froberwille [(1978) 1 AER 33], P
owned a house in a large garden. The house was divided into
flats let to tenants who could use the garden. P got permission
to build a house on a plot in the garden and sold the plot to D.
D agreed to develop the plot and build a brick wall as a boundary.
D failed to do either and sold the plot to T who covenanted to
do both but failed to do it. P sued D for damages for failure to
build the wall. D argued that P should have mitigated the loss
by building the cheapest wall as a boundary. But held in the
circumstances it was reasonable for B not to have built any
wall (though he intended to build one as boundary) before
decision in the case and damages allowed.
(ii) Other Statutory remedies
(a) Compensation in Quasi-Contract
According to S.73 of the Act, damages by way of compensation
may be allowed in Quasi contract on the same basis as in
contract.
S.73 lays down the law as follows :
Compensation for failure to discharge obligation
resembling those created by contract: When an obligation
resembling those created by contract has been incurred and has
not been discharged, any person injured by the failure to
discharge is entitled to receive the same compensation from
the party in default, as if such person had contracted to discharge
it and had broken his contract.
(b) Tax Elements in Damages
As damages are to compensate for actual loss and no more, the
liability of the plaintiff to pay tax may have to be taken into
account. In British Transport Commission v. Gourley [(1956)
AC 185], in a claim for loss of earnings arising out of
negligence, the House of Lords held damages to be awarded to
the plaintiff on the basis of his gross earnings ( 37,720) before
tax could be reduced by the amount he had to pay as tax. The
net amount was 6,695. Though a decision in tort, it has been
applied to contract cases generally. However, the principle is
subject to two conditions:
1. The earnings or profits of the claim must be subject to tax.
2. The sum awarded should not be subject to tax in the
plaintiffs hands.
Remedies Under Law of Sale of Goods
The law relating to sale of goods in India is contained in the
Sale of Goods Act, 1930 and case law. Sale of Goods is a
special contract. The Act provides in itself certain special
remedies for breaches of the contract of sale of goods apart
from the general remedies available in law of contract. The
remedies in sale of goods law are outlined below.
The following are the remedial rights of the buyer against the
seller in breach:
(1) suit for damages under S.57,
(2) suit for recovery of the price in some cases,
(3) suit for specific performance under S.58,
(4) suit for breach of warranty under S.59,
(5) repudiation of contract before due date and damages under
S.60 when seller is in anticipatory breach, and
(6) suit for interest under S.61.
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The remedial rights of the seller are available against the buyer
personally and in the case of unpaid seller against the goods.
The following are the rights of the seller against the buyer in
breach :
(1) suit for price under S.55,
(2) suit for interest under S.61,
(3) suit for damages for non-acceptance under S.56, and
(4) repudiation of contract before the due date and damages
under S.60 when buyer is in anticipatory breach.
The special remedies provided in the Act for an unpaid seller
against the goods are as follows :
(a) right of withholding delivery under S.46 where the property
has not passed,
(b) right of lien under S.46 and S.47 when goods still in
possession after property has passed,
(c) right of stoppage in transit under S.46 and S.50 when the
goods are in transit to buyer, and
(d) right of resale under S.46 and S.54.
The following is an illustrative case for the exercise of one of
the special remedial rights of an unpaid seller of goods under
the sale of Goods Act, namely the right of stoppage in transit.
G.I.P. Railway Co. v. Hanumandas [ILR (1889) 14 Bom 57]
Goods consigned to buyer under R.R. reached the station of
destination. The R.R was cleared by the agent of the buyer and
the goods were being loaded into carts in the railway yard when
the station master received telegraphic intimation from the
unpaid seller of the exercise of right of stoppage in transit by
notice to carrier. But, held the right could not be execised as
the transit was at an end since the goods had passed from the
intermediate possession of the carrier to the possession of the
agent of the buyer.
3.4 EQUITABLE REMEDIES
As seen above apart from damages, equitable remedies may be
available for breach of contract in suitable cases.
As Indian law makes no distinction between legal and equitable
rules, many of the principles of equity are found embedded in
various statutes including the Indian Contract Act, 1872. So
also the equitable remedies in contract are found in the Specific
Relief Act, 1963 (replacing the Act of 1877). Among the
remedies are the Specific Performance of the contract, the
remedy of Injunction, the Rectification and Cancellation of
Instruments and Rescission of contracts.
(i) Specific Performance
Specific performance is an equitable relief which may be given
by the court in suitable cases of breach of contract by a
judgement that the defendant is to actually perform the contract
or a part of the contract according to terms and stipulations.
When Specific Performance May Be Enforced
S.10 of the Specific Relief Act states the cases in which specific
performance may be enforced.
According to S.10, in the discretion of the court, and except as
otherwise provided, specific performance may be enforced-
(a) where there is no standard for ascertaining the actual
damage caused by the non-performance, or
(b) When compensation in money for the non-performance
would not afford adequate relief.
S.10 also explains that unless and until the contrary is proved,
the court shall presume that -
(1) the breach of a contract to transfer immovable property
cannot be adequately compensated in money, and
(2) the breach of a contract to transfer movable property can
be so compensated except where -
(a) It is not an ordinary article of commerce, or of special
value or interest to the plaintiff or consists of goods
which are not easily obtainable in the market,
(b) it is held by defendant as the agent or trustee of the
plaintiff.
For example, B agrees to buy and S agrees to sell a rare painted
picture or a rare china vase. B may compel S to specifically
peform the contract.
Unreasonable delay by the plaintiff in performing his part of
the contract operates as a bar to obtaining specific performance
provided that -
(1) time was originally an essential element of the contract, or
(2) time was made an essential element by subsequent notice,
or
(3) the delay has been so long and unreasonable that it amounts
to abandonment of the contract.
S.11 (1) provides another case in which specific performance
may be enforced.
According to S.11(1), except as otherwise provided, in the
discretion of the court, specific performance may be enforced,
when the act is in the performance wholly or partly of a trust.
Any person having an interest under a contract which relates to
a trust may specifically enforce its performance. Such contract
may be specifically enforced at the instance of the beneficiaries
or trustees.
S.11(2) however provides that a contract made by a trustee (a)
in excess of powers, or (b) in breach of trust, cannot be
specifically enforced. The first is ulra-vires. The second is
unlawful.
S.12 provides for specific performance of part of a contract.
According to S.12(1), as a general rule a court shall not grant
the specific performance of a part of a contract. However
S.12(2) to (4) provide certain exceptions to this rule, as follows:
(1) According to S.12(3) where a party to a contract is unable
to peform the whole of his part and the part of a contract
left unperformed either -
(a) forms a considerable part of the whole, though
admitting compensation in money, or
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(b) does not admit compensation in money, the court, at
the suit of either party, may direct the party in default
to specifically perform so much of his part of the
contract as he can perform, if the other party -
(i) in a case falling under clause a, pays or has paid the
agreed consideration for the whole contract reduced
by the consideration for the part which must be left
unperformed, and in a case falling under clause b,
the consideration for the whole contract without any
abatement, and
(ii) in either case, relinquished all claims to the
performance of the remaining part and all right to
compensation either for the deficiency, or loss or
damage.
The party in default is not entitled to obtain a decree for specific
performance against the other party.
(2) According to S.12(4) when a part of a contract which, taken
by itself can and ought to be specifically performed stands
on a separate and independant footing from another part of
the same contract which cannot or ought not to be
specifically performed, the court may direct specific
performance of the former part.
(3) According to S.12(2) where a party to a contract is unable
to perform the whole of his part, but the part unperformed
bears only a small proportion to the whole in value and
admits compensation in money, the court at the suit of either
party, may direct the specific performance of so much as
can be performed, and award the compensation in money
for the deficiency.
The Explanation to S.12 states that a party to a contract shall be
deemed unable to perform the whole of his part if a portion of
its subject matter existing at the date of the contract has ceased
to exist at the time of performance.
According to S.13, when there is a contract for the sale or lease
of immovable property but the seller is found having no title or
imperfect title, the buyer or lessee may compel the seller or
lessor to specifically perform the contract when he is
subsequently in a position to do so in certain circumstances.
Defences Open to Defendant
According to S.9 of the Act, except as provided in Setions 9 to
25, all defences open to a defendant under the law of contract
are open to to him where any relief is claimed under Sections 9
to 25 in respect of a contract. This means that matters such as
the validity and enforceability of the contract, its uncertainity,
incapacity of parties, coercion, undue influence, fraud,
misrepresentation, mistake and similar matters under the
Contract Act could be grounds of defence against a party sueing
for specific performance and other reliefs under Sections 9 to
25.
Thus in Mayawanti v. Kausalaya Devi [(1990) 3 SCC 1], the
contract was for sale by a principal seller and a co-seller and
was in an alternative form. If the co-seller failed to sign the
sale deed the principal seller would execute the sale deed of
her one of two shares. Otherwise she had to pay back the
advance and compensation in the same amount. The co-seller
did not sign. The seller had either to sell her share or pay
compensation. Her share was not defined and therefore the
promise to sell her share was void for uncertainity and could
not be specifically enforced. If she opted for compensation
there was no breach and no question of specific performance.
The Supreme Court therefore refused to grant the relief of
specific performance in this case.
When Specific Performance Cannot Be Enforced
S.14 of the Act states the contracts which cannot be specifically
enforced, namely -
(1) (a) a contract for non-performance of which
compensation in money is an adequate relief,
(1) (b) a contract which runs into such minute or numerous
details or which is so dependant on the personal
qualifications or volition of the parties, or otherwise
it is from its nature such that the court cannot enforce
specific performance of its material terms,
(1) (c) a contract which is in its nature determinable,
(1) (d) a contract the performance of which involves the
performance of a continuous duty which the court
cannot supervise.
Thus a contract of marriage, contracts of employment, personal
service, artistic skill, literary skill and such cannot be specifically
enforced. but an employee wrongfully removed may be re-
instated. A contract to publish a piece of music or build a house
may be specifically enforced. Building can be decreed if the
work is precisely defined, damages will not be adequate and
defendant is in possession of the land so that plaintiff cannot
get the work done by another builder. Thus in Jeune v. Queens
Cross Properties Ltd [(1974) Ch.97], the landlord was ordered
to restore a collapsed balcony in performance of a repairing
covenant. Regarding a contract of determinable nature, the
repealed Act of 1877 provided the following illustration based
on the English case Scott v. Rayment [(1868) LR Equ. 1912]
: A and B agreed to become partners in a certain business not
specifying the duration of the partnership. The contract could
not be specifically enforced because, it were ordered, either A
or B might at once dissolve the partnership. Regarding a contract
whose performance involves constant supervision by the court,
courts have refused to specifically enforce contracts to have a
porter at a service flat constantly in attendance, to cultivate a
farm in a particular manner, for the obligation of a ship owner
under a charter party and in Dowty Boulten Paul Ltd v. Walver
Rampton Corporation [(1971) WLR 204], a contract to keep
an airfield in operation. The above are illustrative examples
only of various such instances.
According to S.14(2), except as provided by the Arbitration
Act, 1940 no contract to refer present or future differences to
Arbitration shall be specifically enforced. But if a person has
made such a contract (other than an arbitration agreement to
which that Act applies) and has refused to perform it, and sues
in respect of any subject so contracted to refer, such suit shall
be barred by such contract.
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Some Exceptional Cases When Specified Performance May
Be Enforced
According to S.14(3), a court may specifically enforce the
following contracts not withstanding S.14(1).
(a) (1) a contract to execute a mortgage or furnish any other
security for securing the repayment of a loan the
borrower is not willing to repay at once, provided
where only a part of the loan has been advanced the
lender is willing to advance the remaining part under
such contract, or
(a) (2) a contract to take up and pay for any debentures of a
company.
(b) (1) to execute a formal deed of a partnership the parties
having commenced to carry on the business of the
partnership, or
(b) (2) the purchase of a share of a partner in a firm,
(c) for the construction of any building or the execution
of any work on land provided -
(1) the building or other work is described in the contract
sufficiently precisely for the court to determine its
exact nature,
(2) the plaintiff has a substantial interest in the
performance and compensation in money is not an
adequate relief, and
(3) the defendant has, under the contract obtained
possession of the whole or any part of the land on
which such work is to be executed.
Discretion of Courts to Grant or Refuse Specific
Performance
S.20 of the Act lays down that the jurisdiction of courts to decree
specific performance is discretionary and it is not bound to give
such relief merely because it is lawful to do so. But such
discretion shall not be exercised arbitrarily. Its exercise should
be guided by judicial principles and open to correction by a
court of appeal.
S.20 lists certain circumstances in which the court in its
discretion may refuse specific performance, as follows :
(1) where the contract gives an unfair advantage to the plaintiff
over the defendant. The unfair conduct may appear from
the terms of the contract, from the conduct of the parties
when entering into it or other surrounding circumstances.
It is not necessary that the contract should be voidable.
Thus, in Beyfus v. Lodge [(1925) Ch 350], the seller in a
contract to sell a lease hold estate, suppressed information that
the landlord had served notice for repair of a dilapidated portion.
Specific performance was denied to the seller although the
suppression was not sufficient in itself to allow rescission to
the buyer.
In P.V. Josephs son Mathew v. N.Kuruvilas son [AIR 1987
SC 2328], A purchased rights to property of B. Before the
execution of the sale deed B died. A acquiesced in the sale of
the property by W, Widow of B, to T another person. Further,
A disposed of his right under the contract to Y yet another
person. Y asked for specific performance from W. The
Supereme Court did not decree specific performance. It said A
had lost or waived his rights by acquiescence to W. Y had no
better rights than A. Y can recover only the advance.
(2) where the enforcement of the contract would cause
unforeseen considerable hardship to the defendant whereas
no such hardship would be caused to the plaintiff by non-
performance.
Thus, where it involved litigation with uncertain results to enable
the defendant to perform [Wroth v. Tyler (1974) Ch.30], and
where the cost of performance to the defendant was wholly out
of proportion to the benefits to the plaintiff [Morris v. Redland
Bricks Ltd (1979) AC 652], specific performance was not
granted. Similarly in Denny v. Light [(1857) 26 LJ Ch 459],
it was not granted where the buyer of a land for farming purposes
found it to be landlocked from all sides without any right of
way.
Ordinarily, the fact that performance would cause severe
hardship to the defendant has to be considered on the basis of
facts at the time of the contract. But the explanation to S.20(2)
says that where the plaintiff has cuasd the hardship by his
subsequent conduct that would also have to be taken into
account.
(3) where the circumstances of the contract are such that though
they do not make the contract voidable, they render the
enforcement by specific performance inequitable. For
example, a contract may be one sided, an imposition by
one upon the other or the parties may not be on equal
footing.
The repealed Act of 1877 gave the following illustraton : D
agrees to buy from the factory of S all the goods of a certain
class used by him in his trade. S cannot be granted specific
performance by B as B may be ruined if S does not supply him
the goods.
(4) according to S.20(3), where a party has already
substantially performed his part of a contract or suffered
losses, the court may properly exercise the discretion to
grant specific performance by the other party if the contract
is capable of specific performance.
(5) according to S.20(4), the court shall not refuse specific
performance to a party merely on the ground that the
contract is not enforceable at the instance of the other party.
It was at one time thought that the court will not order specific
performance at the suit of one party unless it could do so at the
suit of the other party. The Privy Council in Mir Sarwarjn v.
Fakkruddin Mohammad [(1912) 39 Cal. 232 PC], held that
a contract to buy land on behalf of a minor was not specifically
enforceable at his instance because it could not be enforced
against him. There was no mutuality. It was also the English
law. But the Privy Council allowed specific performance in
suitable cases even where there was no mutuality of remedy
starting with the case Srikakulam Subramanyam v. K. Subba
Rao [(1948) IA 115]. The doctrine of mutuality ceased to have
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force. S.12 also has taken away the requirements of mutuality.
in English law also, as Chitty On Contracts says the number
and importance of the exceptions to the requirements of
mutuality has given rise to a doubt as to its existence.
Power of Court to Award Compensation
According to S.21, relief of compensation may be claimed either
in addition to or in substitution of specific performance. If the
court is of opinion that specific performance ought not to be
granted, it may award compensation. If the court should find
that specific performance by itself would not be sufficient relief,
it may in addition award compensation. Compensation would
be assessed according to S.73 of the Contract Act.
The Act of 1877 gave the following illustration: A sues for
specific performance of a resolution passed by the directors of
a public company under which he is entitled to have certain
shares allotted to him, and for compensation. All the shares
have already been allotted to others. The court may award
compensation for non-performance.
Liquidation of Damages no Bar
According to S.23, where the parties have fixed compensation
for default, this would be no bar for the relief of specific
performance. The court may allow specific performance if the
contract did not fix the compensation as an option to the
defaulting party for performance. If specific performance is
granted, the payment of fixed compensation cannot be ordered
in the same decree.
Application to Certain Awards
According to S.25, the provisions of Sections 9 to 25 apply to
awards to which the Arbitration Act does not apply.
(ii) Declaratory Decrees
Sections 34 and 35, state the law relating to the relief of
declaratory decrees. A declaratory decree is one which is
declaratory of a legal right to which the plaintiff is entitled
provided that he being able to seek a further relief does not
ommit to do so. The object of such a decree is to clear the legal
character of the plaintiff and maintian it against any person
denying or interested to deny his title to such character or right.
A declaratory decree is not a matter of right but discretionary
by the court. Legal character of a person is the position
recognised by law. It may include rights under a contract. A
person asking for a declaratory decree need not ask for a further
relief. But, where a person being able to seek further relief
than a mere declaration of title, ommits to do so, no court shall
make any such declaration. This is to avoid multiplicity of
suits. Negative declaration will not be allowed. For example,
that the plaintiff did not infringe the defendants trade mark.
Injunctions
Lord Halsbury has defined the equitable remedy of injunction
as a judicial process where by a party is ordered to refrain from
doing a particular act or thing or to do a particular act or thing.
It is a discretionary remedy. It is a remedy which acts only in
personam. It does not run with the subject matter or the property.
An injunction may be issued in favour of a plaintiff against the
defendant whether an individual or incorporated body or a public
body or even the state. The law of injunctions is the same in
India as in English law. But most of the rules have been codified
in India in the Specific Relief Act, 1963 (which replaced the
Act of 1877), and some rules are found in the Code of Civil
Procedure, 1908.
Injunctions may be:
(a) Temporary, or (b) Perpetual,
(a) Preventive, or (b) Mandatory.
Injunctions will not be issued where damages are the appropriate
remedy and where the contract cannot be specifically enforced.
S.37(1) defines a temporary injunction as one to continue until
a specified time, or until the further order of the court and that
may be granted at any stage of a suit (interlocutary injunction)
and as regulated by the Code of Civil Procedure, 1908.
Under Order XXXIX Rule 2 of the Civil Procedure, in a suit
for restraining the defendant from committing a breach of
contract or other injury of any kind, whether any compensation
is claimed in the suit or not, the plaintiff may, at any time after
the commencement of the suit, and either before or after
judgement, apply to the court for a temporary injunction to
restrain the defendant from committing the breach of contract
or injury complained of or any breach of contract or injury of a
like kind arising out of the same contract or relating to the same
property or right.
S.36 of the Act states that preventive relief is granted at the
discretion of the court by temporary or perpectual injunctions.
The English case Lumley v. Wagner [(1852) 5 De GM & G
604], is considered illustrative of the remedy of injunction
against breach of contract, in that where a court may not be
able to compel a person to do a promised thing, but if there is
also a term not to do something which will go against the
promisee the court may restrain him from doing such a thing,
in the hope that it may induce him to do the promised thing.
The facts were:
W agreed to sing at Ls theatre and to sing nowhere else during
a certain period. But afterwards W entered into a contract with
Z to sing at another theatre and refused to perform the contract
with L. The court restrained W by an injunction from singing
for Z.
In Warner Brothers v. Mrs Nelson [(1937) 1 KB 209[, Mrs.
Nelson (whose professional name was Bettie Davies) a film
actress, agreed to act in films exclusively for Warner Brothers
for a year and for no one else. But during the year she entered
into a contract to act for Z. The Court restrained her from acting
for Z by an injunction.
Thus injunction may be issued in breach of contract to enforce
a negative term which has the effect of leaving the party without
any diversion from carrying out the positive term.
But there may be limits even to such an injunction. In Warren
v. Mendy [(1989) 3 AER 103 CA], there was a contract for the
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services of a boxer to a manager as a performer. The boxer was
bound by both positive and negative obligations. He was not
to enter into any agreement with any other master or manager.
The facts showed the contract of service contained obligations
of mutual trust and confidence between performer and manager.
The facts also showed that the boxer had lost the mutual trust
and confidence in the master or manager genuinely. A third
party, another manager induced the boxer to leave the service
and join him. The master or manager sought a long term
injunction against the boxer and the other manager. The court
thought that enforcement of the negative term would bring
compulsion psychologically and materially on the servant and
performer to fulfil the positive term. It should not be also always
assumed that damages were an inadequate alternative remedy
for injunction. The court refused to grant injunction in this
case.
The Court may order such injuction on such terms including
duration as the court thinks fit. Disobedience will entail
attachment of property or civil prison and sale of property and
compensation from the proceed to the other party.
An injunction was issued to restrain breach of confidence in
Attorney General v. Barker [(1990) 3 AER 257 CA]. The
first defendant was employed in the British royal house hold
between 1980 and 1983. The contract of service included
undertakings not to disclose, publish or reveal any incident
concerning any member of the royal family or any visitor or
guest which come to his knowledge during his employment.
The undertaking was perpectual and worldwide. The second
defendant a Canadian Company controlled by the first defendant
planned to publish in the United Kingdom a book written by
him about his service in the royal household. The Attorney
General applied for worldwide injunction against the first and
second defendants restraining publication of the book.
The Court of Appeal held that the negative covenant in the
contract which was not limited in territory or time was
enforceable provided it was not illegal or against public policy
as a restraint of trade, which it was not. The balance of justice
required that an interlocutory injuction having extra territorial
effect should be issued against both the defendants.
S.37(2) defines a Perpetual injunction as one which can only
be granted by the decree made at the hearing upon the merits of
the suit, enjoining the defendant perpetually from the assertion
of the right, or from the commission of an act which would be
contrary to the rights of plaintiff.
In other words a permanent injuction can be prayed for only a
regular suit in which the rights in issue would be heard on merits
and finally decided and such injunction may be granted by
means of decree.
S.38 states the circumstances in which a permanent injunction
can be granted. It provides that subject to the other provisions
in this regard, a perpetual injunction may be granted to the
plaintiff to prevent the breach of an obligation existing in his
favour whether expressly or by implication, and when such
obligation arises from contract, the court shall be guided by the
rules and provisions contained in Sections 9 to 25 of the Act.
S.38 is based on S.54 of the Original Act of 1877. S.54 of that
Act carried, inter alia, the following Illustrations (slightly
adapted) :
(c) the directors of a public company are about to pay dividend
out of capital or borrowed money. Any share holder may
sue for an injunction to restrain them.
(d) the directors of a fire insurance company are about to engage
in marine insurance. Any share holder may sue for an
injunction to restrain them.
(1) A,B and C are partners in a partnership at will. A
threaten to do an act of destruction of some
partnership property. B and C may sue for an
injunction to restrain him.
(u) A infringes Bs patent. B may obtain an injunction
to restrain the infringement if the court is satisfied
that the patent is valid and has been infringed.
(v) A pirates Bs copyright. B may obtain an injunction
to restrain such piracy unless the work for which the
copyright is claimed is libellous or obscene.
(w) A improperly uses the trade mark of B. B may obtain
an injunction to restrain the user.
(x) A, a businessman, holds out B as his partner against
his wish and without his authority, B may sue for an
injunction to restrain A from doing so.
When Perpetual Injunction may be refused
According to S.41, Perpetual injunction will be refused by the
court in the following circumstances, inter-alia :
(e) to prevent the breach of contract the performance of
which would not be specifically enforced,
(g) to prevent a continuing breach in which the plaintiff
has acquiesced,
(h) when equally efficacious relief can certainly be
obtained by any other usual mode of proceeding
except in case of trust,
(i) where the conduct of the plaintiff or his agent has
been such as to disentitle him to the assistance of the
court, (he who comes to equity must come with clean
hands is the principle in this clause).
According to S.42, where a contract comprises a positive
agreement to do a certain act coupled with a negative agreement
not to do a certain act, whether expressly or impliedly, the fact
that the positive part is not capable of specific performance
will not preclude the court from enforcng the negative part of
the agreement by means of injunction provided the plaintiff
performs his part of the contract [see the cases Lumley v.
Wagner and Warner Brothers v. Mrs. Nelson].
An injunction which commands the defendants to do something
(positive) is called a mandatory injunction. According to
Salmond, a mandatory injunction is an order requiring the
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defendant to do a positive act for the purpose of putting an end
to a wrongful state of things created by him, or otherwise in
fulfilment of his legal obligations. For example, an order to
pull down a building which the defendant has erected in
obstruction of rights of the plaintiff.
S.39 of the Act defines a mandatory injunction as follows :
when to prevent the breach of an obligation it is necessary to
compel the performance of certain acts which the court is
capable of enforcing, the court may in its discretion grant an
injunction to prevent the breach complained of, and also to
compel performance of the requisite acts .
S.55 of the old Act carried, inter alia, the following Illustration:
(g) the court can order the destruction of books produced by
infringement of another persons copyright, documents
consisting infringement of a trade mark or patent and
communications made in professional confidence when there
is a threat to misuse them.
Mandatory injunction will not be granted in the following cases:
(1) where compensation in terms of money would be an
adequate relief to the plaintiff,
(2) where the plaintiff has shown acquiescence in the wrongful
acts of the defendant,
(3) where the balance of convenience is in favour of the
defendant.
(4) where a mandatory injunction instead of restoring status
quo would create a new state of things.
Damages in lieu of or in addition to injunction
According to S.40 of the Act, in a suit for perpetual injunction
under S.38, or mandatory injunction under S.39, the plaintiff
may claim damages either in addition to, or in substitution for,
such injunction and the court may, if it thinks fit, award such
damages.
Damages may be awarded in lieu of injunction even where the
injury is threatened though not yet caused. In Leads Industrial
Co-operative Society Ltd v. Black [(1924) AC 851], the House
of Lords allowed damages to a person whose tenement was
sure to suffer loss of right to light when a planned building
structure came up. In an Indian case,Tilok Chand v. Dhundiraj
[AIR 1957 Nag 2] , a person happened to raise his building to
encroach on the land of his neighbours up to three inches. The
court allowed the neighbour compensation instead of an order
for demolition of the building.
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4. CASE LAW
HOPKINS V. NORCROSS PLC [(1993) L ALL ER 565]
The plaintiff was employed by the defendant company for 27
years and was the Chairman of one of its divisions when he
was wrongfully dismissed on 12th September 1989 at the age
of 58. The plaintiff was a member of the companys pension
scheme, not having opted out when employees became entitled
in 1986 to make provision for their pensions in schemes other
than those run by their employers. Under the terms of the
scheme the plaintiff was entitled on leaving employment for
whatever reason over the age of 50 and before the age of 60 to
an immediate pension calculated as a proportion of the pension
that he would have been entitled to had he retired on his 60th
birthday. There were no provisions in the scheme modifying
the plaintiffs absolute entitlement to the pension and since he
was unable to find any alternative employment the benefits he
received by way of pension were equivalent to the loss of his
salary for the period between the date of his dismissal and the
date of his 60th birthday. In an action by the plaintiff for
wrongful dismissal the defendants admitted liability and
damages were assessed as being the loss of salary for the period
between the date of dismissal and the date of normal retirement.
The question arose whether the pension arising out of the
termination of employment should be set off against the damages
to which the plaintiff was entitled for wrongful dismissal. The
defendants contended that, since it was a basic principle in the
assessment of damages for breach of contract that the plaintiff
was to be placed in the same position as if the contract had
been performed, failure to take into account the pension money
would provide the plaintiff with double the amount to which he
was entitled under his contract of employment because if he
had not been dismissed he would have continued to earn his
salary up to 1st October 1991 and since he had received precisely
the same sum by way of pension, which would not have been
payable but for the termination, he had lost nothing.
Held - In a claim for damages for wrongful dismissal pension
benefits received by a plaintiff as a result of that dismissal were
not, in the absence of any term in the contract of employment
or pension rules expressly prohibiting payment in such
circumstances, to be set off against the damages to which the
plaintiff was entitled, because there was no relevant distinction
between damages for lost earnings arising out of a claim in
contract for wrongful dismissal and damages arising out of a
claim in tort for lost earning capacity as a results of injury, where
it was established law that money payable under a pension, be
it a disability or retirement pension, was not deductible, and it
would not be satisfactory if the answer to the question whether
a pension was to be deducted depended on the way in which
the claim was formulated. Furthermore, since the plaintiff could
have opted out of the company pension in 1986 but chose not
to, and since it was accepted that any pension that he would
have received as a result would not have been deductible, it
would be unjust for there to be different result merely because
the pension was provided by the employer. It followed that the
pension payments received by the plaintiff were not deductible
from the figure which had been agreed as the damages for
wrongful dismissal.
Jagdish Singh v Natthu Singh AIR (1992)1 SCC 647
The respondent sold two plots of land to the appellant for a
consideration of Rs.15,000/-. On the same day another
agreement was entered into between the parties whereunder
appellant agreed to re-convey the said properties to the
respondent against payment of Rs. 15,000/- within two years.
Well within the stipulated period of two years respondent
instituted the suit for specific performance alleging that despite
offer of performance and tendering the price, appellant, with
the dishonest intention of appropriating the properties to himself
refused re-conveyance. The appellant contested the suit
principally on the ground that respondent was never ready and
willing to perform the contract and that respondent himself was
in breach. The trial court dismissed the suit finding that the
respondent was not ready and willing to perform the contract.
Respondents first appeal was also dismissed. However the High
Court in the second appeal reversed the findings of the two
courts below and allowing the appeal held that the respondent-
plaintiff was ready & willing to perform the contract; that the
appellant was party in breach; and that, therefore, respondent
was entitled to a decree. The decree was available before the
Supreme Court. It had also happened that during the pendency
of second appeal the State had initiated acquisition proceedings
against the suit lands making specific performance impossible.
Modifying the decree the Supreme Court held;
When the plaintiff by his option has made specific performance,
impossible, section 21 does not entitled him to seek damages.
The position is common to both English Law and Indian Law.
But in Indian Law where the contract for no fault of the plaintiff
becomes impossible of performance, section 21 of the Specific
Relief Act, 1963 enables award of compensation in lieu of
substitution of performance.
Lal Chand and another v Chandigarh Administration [AIR
Punjab and Haryana 194]
In this petition under Articles 226 and 227 of the Constitution,
the point involved is very short, that is, as to whether the
Chandigarh Administration can cancel the allotment of a site if
the allottee has failed to abide by the terms and conditions of
allotment and there being no clause in the agreement
empowering the authorities to forfeit the earnest money
deposited by the allottee, can the earnest money be forfeited as
a consequence of cancellation of allotment and resumption of
site.
Briefly stated, the Notified Area Committee, Manimajra, in the
Union Territory, Chandigarh, allotted two Shop-cum-Flats
bearing nos. 24 and 26 (commercial sites), on free-hold basis
in the Motor Market and Commercial Complex at Manimajra,
in 1977 in favour of the petitioners. The petitioners had already
deposited a sum of Rs.2,000/- each as earnest money along
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with the application for allotment. But instead of paying the
balance, they approached this Court in 1977 by way of C.W.P.
No. 3553 of 1977 and got stay of recovery of further instalments
beyond 25 per cent. In the said writ petition, the petitioners
had pleaded that as the respondent-Notified Area Committee,
Manimajra, had failed to develop the area, the petitioners were
not obliged to take possession of the sites in dispute and
complete construction thereon within the stipulated period. In
reply thereto, the respondents had stated that the Motor Market
and Commercial Complex had been fully developed and roads
had been constructed, water pipes had been laid and sewerage
and drainage had been provided. Consequently, the writ petition
was dismissed by S.S. Sandhawalia, C.J., as his Lordship then
was, on 13th July, 1979. However, his Lordship taking a
compassionate view of the matter, granted a period of one year
from the date of the judgment to the petitioners to complete the
construction. Thereafter, the Notified Area Committee,
Manimajra, issued a number of notices to the petitioners
requiring them to deposit the instalments within the stipulated
period failing which the allotment of sites would be canceled
and plots resumed, besides forfeiting the amount already
deposited. Despite this nothing was done by the petitioners
and ultimately on 24th October, 1979, the allotment of the sites
in dispute was cancelled in accordance with the terms and
conditions of allotment as the petitioners failed to comply with
the terms of the notice served on them on 5th September, 1979,
and the earnest money deposited earlier was forfeited.
Aggrieved against this order, the petitioners have approached
this Court by way of the present writ petition challenging the
cancellation of allotment and resumption of plots as also
forfeiture of the earnest money deposited by them, mainly on
the ground that the respondents had no jurisdiction to cancel
allotment and resume the plots, much less to forfeit the earnest
money, for breach of the terms and conditions of the allotment.
In reply, the respondents have pleaded that the principle of
constructive res judicata was attracted in the case and otherwise
also the matter in dispute being purely contractual, the writ
petition under Art.226 of the Constitution was not maintainable.
After hearing the learned counsel for the parties and having
gone through material on the record, I am of the view assuming
for the sake of argument that the writ petition was maintainable
and was not barred by the principle of constructive re judicata,
still the respondents were well within their rights to cancel the
allotment of plots, resume the sites and forfeit the earnest money
already deposited by the petitioners, as they had clearly violated
the terms and conditions of allotment. In this regard, C1.7 of
the terms and conditions of the allotment attached to the
application for allotment (Annexure P.6), is reproduced below:-
In case any installment is not paid by the allottee by the 10th
of the month following the month in which it falls due, a notice
shall be served on the allottee calling upon him to pay the
instalment within a month together with a sum not exceeding
such amount as may be determined by the President by way of
penalty for delayed payment. If the payment is not made within
the said period or such extended period as may be allowed by
the President, not exceeding three months in all, from the date
on which the instalment was originally due, the President may
proceed to cancel the allotment and resume the plot. The notice
shall be served on the allottee either personally or by affixation
on a prominent part of the site or building erected thereon or by
beat of drum.
From a bare look on the aforesaid clause, it would be evident
that violation of the terms and conditions of allotment would
certainly entail cancellation of allotment and resumption of plot,
necessarily followed by forfeiture of the earnest money. In any
case, if the petitioners are only interested in refund of the
amount, the request could be considered had the petitioners
approached the respondents for that purpose. This having not
been done, I do not find any merit in the writ petition.
Consequently, this writ petition is dismissed with no order as
to costs.
Shaukat Ali Khan v. Babu Khan, AIR 1991 Del 190
In this case one of the parties to the contract was a foreign
resident. None of the parties to the contract was aware of the
fact that the agreement would be void. Later on when one of
the parties filed suit for the recovery of his share money and
profits, it was noticed for the first time that the agreement
executed was void for the want of approval of the Reserve Bank
of India, under the provisions of Foreign Exchange Regulation
Act. Thus the agreement was attracted by the section 85 of the
Contract Act (1872) as the invalidity was discovered at the later
stage in the court. So the plaintiff was entitled to the
compensation with interest.
The court said that there is nothing to show that the plaintiff or
even the defendant were aware and thus, it has to be held that
the Contract has been discovered to be void only when this suit
has been filed. If that is so, the plaintiff becomes entitled to be
compensated for the amount given to the defendant by virtue
of the contract which has been discovered to be void later on.
So the plaintiff is entitled to have a decree for recovery of the
amount in suit from the defendant.
Surrey Country Council and another v. Bredero Homes Ltd
[(1992) 3 All ER 302]
The two plaintiff councils were the respective registered freehold
owners of two adjoining parcels of land totalling 12.33 acres in
area which had been acquired originally for road purposes. By
1980 the land was no longer required for those purposes and
the councils, acting together, decided to offer the entire site for
development as a housing estate. The councils subsequently
accepted an offer by the defendant development company which
in the councils view represented the best balance of the amount
offered and development scheme submitted. By a contract in
writing dated 28th November 1980 the councils agreed to sell
the entire site to the defendant for Pound 1.52m, subject to the
defendant obtaining planning permission for the development
of the site in accordance with the councils development brief
and the scheme for the development of the site. The defendant
duly obtained the necessary planning permission and by
transfers dated 22 January 1981 the councils transferred the
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209
land to it. Under Cl.2 of each transfer the defendant covenanted
with each council that it would carry out the development of
the housing estate in accordance with the terms of the planning
permission and the approved scheme. The defendant
subsequently obtained fresh planning permission which enabled
it to build more houses on the site than the number specified in
the approved scheme and it completed the development
covenants. The development was thus more profitable than
that originally authorised. The councils, although aware of the
breach of the covenants in the transfers, did not seek an
injunction or specific performance to compel the defendant to
develop the housing estate in accordance with the development
covenants. However, after the defendant had disposed of all
the houses on the estate, the councils brought proceedings
against it for damages for breach of the covenants equal to the
payment that might have been extracted from the defendant in
return for agreed modifications to the covenants so as to
authorise the more profitable development which had in fact
been carried out. The defendant accepted that it was in breach
of the covenants, but denied that the councils were entitled to
recover anything more than nominal damages, contending that
the correct measure of damages for the breach was the aim of
money which would restore the councils to the position in which
they would have been if the covenants had been performed,
with the result that the court was concerned only with the
councils loss and not with any profit made by the defendant
by reason of the breach of the covenants and that the councils
had not suffered any loss and were not entitled to recover
substantial damages.
Held - Where a party sustained loss by reason of a breach of
contract he was, so far as money could do so, to be placed in
the same position as he would have been in if the contract had
been performed in full. Accordingly, in assessing damages for
a breach of covenant the court was only concerned with the
extent of that partys loss and would not award him a share of
the profit which the other party had made as a result of not
performing the covenant. There was no justification for the
assessment of damages on an alternative basis by reference to
such sum of money as might reasonably have been demanded
by the party affected by the breach of covenant in return for
relaxing the terms of the covenant because an injunction could
no longer be granted. When the position of the plaintiff councils
was considered by reference to what their position would have
been if the development covenants had been performed it was
clear that the councils had not suffered any loss, since none of
their property had been diminished in value and it could not be
said that the defendants breach had destroyed the value of the
covenants obtained by the councils, and if the value of the
covenants had been diminished that loss had occurred because
of a deliberate decision by the councils not to seek equitable
relief and did not in itself result from the defendants breach of
covenant. It followed that, although the defendant was liable
to each council for breach of covenant, the councils were only
entitled to recover nominal, as distinct from substantial, damages
at common law. Moreover, since there were no grounds on
which the court could grant an injunction or specific
performance in respect of the housing estate development it
had no jurisdiction to award damages in equity in substitution
for such relief.
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5. PROBLEMS
1. C chartered a ship of O for three years. One of the terms
was that if she was requisitioned by the Government under
any emergency hire would not be payable for that period.
She was requisitioned by the Government in the second
year for six months to carry food supplies to an African
country for famine relief. O sold the ship away during that
period. At the end of the six months, C sued O for damages
for breach of the charter party. Analyse and decide with
reasons.
2. Southern Railway ordered 300 platform ticket issue machines
from Southern Automatic Machinery Ltd. Price and
specified dates and numbers of delivery were fixed in the
contract. The company had delivered 175 machines. There
was no complaint of quality of performance. The General
Manager wrote to the company that no more machines
would be required. Advise the Company for legal action
with grounds.
3. An air conditioning firm entered into a contract to instal air
conditioning system for Ps house at Madras for a certain
amount. The system was installed but it worked very
inefficiently. P refused to pay anything. The firm sued P.
Decide with correct reasons as to what kind of breach had
taken place with what result.
4. P, a hotel, agreed with D that a film a week should be supplied
by D for screening at the hotel auditorium for Rs.1,000/- a
week for one year. Films were supplied for six weeks and
payments made. An advance of Rs.6000 was paid. But
no film was supplied. After two weeks P wrote to D that
on account of the delay there was a breach of contract and
further dealings were stopped. D accepted the repudiation.
P sued D for refund of Rs.6000. Decide on the proper
grounds.
5. P, a big fruit merchant at Cochin chartered a ship Hamsa
of D to carry a cargo of mangoes from Kakinada to Cochin.
The ship deviated to Visakha patnam and delayed the
delivery of the cargo at Cochin by four days. The monsoon
had broken out a day before and the mango market came
down and P incurred a loss of Rs.8,000/-. P sued D for
damages. D contended he had no special knowledge that
onset of monsoon would slump the mango market. Give
your decision on correct grounds.
6. A firm of film producers signed on a famous actress to play
heroine in a new film called Shangri La Again to be shot
in the Himalayan region. They got the script written, hired
players, arranged locations and made other arragements.
At the last minute, the leading lady repudiated the contract.
As a proper replacement could not be made the project
was abandoned. They calculated they would have lost
Rupees Three Lakhs initial profits and had incurred Rupees
One Lakh Twenty Five Thousand actual expenses of
preparation. Advise them on what to sue the actress for
and why.
7. A businessman from Hyderabad booked a cargo of crackers
by road from Sivakasi to be delivered one week before
Deepavali and informed the carriers that the cargo was
required for Deepavali sales. The cargo carriers delayed
the transit and the crackers were delivered one week after
Deepavali. What rights of suit has the businessman against
the carriers ? Explain the grounds.
8. B agreed to buy a house from S for Rs.3 lakhs. B paid
Rs.10,000 as earnest money. B paid Rs.75,000 on being
put in possession. B also agreed that if he did not pay the
balance before six months and get registration a sum of
Rs.85,000 would be forfeited. B defaulted. S forfeited
Rs.85,000 and sued for possession and compensation. The
fair rental value of the house was assessed at Rs.3000 per
month. By the time the Court gave judgment it was one
year. what is the correct decree the Court has to give and
why ?
9. Sothebys, London had entered into contract with a Bangalore
art dealer to buy an original Roerich canvas which was
lawfully his property. But he later refused to part with it
and offered a suitable amount as compensation. But
Sothebys wished to auction the canvas at London. What
can they do ? Explain the grounds.
10. T was making and selling Mexican Balm as a remedy of
rare medical efficacy. R, a rival trader started selling a
balm under the same name. T moved the court for a
permanent injunction against R. The court found on
evidence that the Mexican Balm sold by T did not contain
any special medicinal properties. The court gave the
injunction. R goes on appeal on a point of law to vacate
the injunction. Would you as appellate judge confirm or
vacate the injunction? What would be the grounds for your
decision?
[Note: Specify your Name, I.D. No., and Address while sending answer papers]
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211
SUPPLEMENTARY READINGS
1. Avtar Singh, Law of Contract, (1994), Eastern Book Company, Lucknow.
2. Anson, Law of Contract, (1986), English Language Book Society and Oxford Press, London.
3. Beale,N.G., Bishop, W.D., Furmston,M.P.,Contract Cases and materials, (1990), Butterworths, London, Edinburgh.
4. Chitty, On Contracts, (Vol-II, 1983), Sweet and Maxwell, London.
5. Cheshire and Fiefoot, Law of Contract, (1986), Butterworths, London.
6. Iyer, Venkatesh, The Law of Contracts, (1987), Asia Law House, Hyderabad.
7. Joga Rao, S.V., Contract Law - General Principles, (1991), NLSIU, Bangalore.
8. Puri and Ponuswamy, cases and material on contract, (1974), Eastern Book Co., Lucknow.
9. Trietal, G.K., Law of Contract, (1966), Steven & Sons, London.
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REPRESENTATIVE CONTRACTS
Master in Business Laws
Law of Contracts
Course No: IV
Module No: VII
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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213
Materials Prepared by:
Prof. P.C. Bedwa
Ms. Archana Kaul
Ms. Srividya
Materials Checked by:
Ms. Sudha Peri,
Materials Edited by:
Prof. N. L. Mitra,
Prof. T. Devidas
National Law School of India University
Published By:
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
214
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Instructions
Mercantile agents are the key players in the trade and commerce today. A general agent does everything for
his principal starting from procuring of birth certificate to arranging for the cremation of dead bodies. There
is nothing under the sun which a general agent does not do. As such it is necessary for everybody in the trade
and commerce to understand the philosophical and legal basis of functioning of agents. Though 'agency' is
a very age-old practice for a person to get things done for and on his/her behalf, the principle of agency
came very handy in the success of mass production and disposition of grades and series in industrial
civilization. An industry requires a very wide market for selling its articles at the same time and at various
markets. So it can be done only through agents. As a matter of fact anyone can multiply his/her personal
rights and duties through appointing agents. The general principle in agency is that done one who does
something through another does it oneself.' In ancient Indian Law he was called "pratinidhi' (or
representative).
Agency is a creation of a contract. The principal enters into a contract with an agent in order to empower
the later to act on his/her behalf. In doing so the agent has to work within the stipulated terms and conditions
as laid down in the contract. But an agent also has the power to breach these terms and conditions acting
bona fide for the protection of the Principal's interest. It is necessary for us to critically look at the law and
practice in order to appreciate the needs of the business community. There are several types of agents based
upon the need of trade and commerce.
While you go through this module try to prepare a check-lists of every issue, like, how to appoint an agent,
what are his function, what points does he have, in what situation is he liable to whom for what and other
matters. In India, a big section of our trading activities are done by partnership. Partnership form of business
is also based upon the principle of agency. As such a section of partnership law and practice is also included
in this chapter. You can try and understand the basic similarity and dissimilarity between these two forms of
authority i.e., agency authority and partnership authority. A good understanding of theory and practice of
agency will enable you to properly appreciate the functions of many other authorities like, company
management, public officials and administrative authorities of other forms of business and commerce.
It is very easy for you to understand this module because most of you are directly or indirectly involved with
some form of agency work or the other. A good understanding of the subject will be beneficial even in your
personal life.
N. L. Mitra
Course Co-ordinator
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215
Representative Contracts
TOPICS
A) Agency
1. Introduction .................................................................................................................... 216
2. Creation of Agency......................................................................................................... 220
3. Authority of an Agent .................................................................................................... 224
4. Duties of Agent ............................................................................................................... 227
5. Rights of Agent ............................................................................................................... 230
6. Undisclosed Principal .................................................................................................... 233
7. Termination of Agency................................................................................................... 235
B) Partnership
8. Agency Principle in Partnership................................................................................... 239
9. Minor Partner ................................................................................................................ 242
10. Authority of a Partner ................................................................................................... 246
11. Rights and Liabilities of a Partner ............................................................................... 252
12. Relevant Sections of the Bare Act ................................................................................. 260
13. Case Law......................................................................................................................... 264
14. Problems.......................................................................................................................... 266
15. Supplementary Readings ............................................................................................... 267
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1. INTRODUCTION
SUB-TOPICS
1.1. Agency & Authority: Definitional Delimitation
1.2. Agent vis-a-vis other offerers
1.3. Classification of agents
1.4. Who can be an agent
1.1 AGENCY & AUTHORITY: DEFINITIONAL
DELIMITATION
The principle of agency is based upon a contractual relation
between two parties through which one delegates some authority
to another on which the other acting on behalf of the first person
can lawfully bind him. This principle is very old both in Eastern
and Western jurisprudence. Roman Law Justinian Code
contains the basic principle of appointment of an agent by any
person. According to the rule, qua facit per alium facit per
se, i.e., one who does something through another does it
oneself. In Hindu Law Prothinidhi is also almost an identical
principle. Of course, in course of time, the principle gathered
all moral and legal support. The appointment of prothinidhi
has always been a well accepted principle in all walks of life.
With the industrial revolution setting in motion in the
seventeenth century the appointment of an agent through the
delegation of authority has become very handy in market
development for commodities produced in large quantities in
industries. Over the years the definitional approach changed.
In Common Law agency is taken as employing a person for
creating legal relations between the employer and third party.
'American Re-statement' has given a technical definition as an
agreement to represent another in an act.
Bowstead defined agency and authority on the basis of
Restatement (1,7 & 8) thus -
(1) Agency is the relationship which exists between two
persons, one of whom expressly or impliedly consents that
the other should represent him or act on his behalf and the
other of whom similarly consents to represent the former
and to so act. The one who is to be represented or on
whose behalf the act is to be done is called the principal.
The one who is to represent or act is called the agent. Any
person other than the principal and the agent may be referred
to as a third party.
(2) In respect of the acts which the principal expressly or
impliedly consents that he shall do, the agent is said to have
authority to act, and this authority constitutes a power to
affect the principals legal relations with third parties.
(3) Where the agents authority results from a manifestation
of consent that he should represent or act for the principal
expressly or impliedly made by the principal to the agent
himself, the authority is called actual authority, express or
implied [Bowstead, p.1].
According to Prof. Friedman, agency is the relationship that
exists between two persons when one, called the agent is
considered in law to represent the other, called the principal in
such a way as to be able to affect the principals legal position
in respect of strangers to the relationship by the making of
contracts or the disposition of property [Fridman, p.8].
There are several advantages derived out of the system of
agency. Through the appointment of agents, a person, called
the principal can engage himself in entering into several
contracts and bind himself at the same time with different
persons at different places. Efficiency in operation of scale can
be enjoyed only because the principal can appoint agents of
various types suitable for various specified tasks. Agents are
not servants because agent can take policy decisions and act on
behalf of the principal as if he is the principal himself, but a
servant can only do an act as directed by the principal.
According to section 182 an 'agent' is a person employed to do
any act for another or to represent another, in dealings with
third person. The person for whom such act is done or who is
so represented is called the principal. So the agent has the
authority to do an act on behalf of the principal binding the
principal personally for the work.
1.2 AGENT VIS-A-VIS OTHER OFFERERS
There are several distinctive features of contract of agency which
become clear if the institution of agency is distinguished from
some other types of contracts. These distinguishing features
are given below on the basis of relative assessment.
(a) Agent and servant: The Supreme Court has tried to
distinguish an agent from a servant in Laxmi Narain Ram
Gopal and Sons v. Hyderabad Government (AIR 1954
sc 364).
1. The agent can act on behalf of the principal for creating
contractual obligations for third party which a servant
cannot.
2. The servant acts under the direct supervision and control
of master and must conform to all reasonable orders..
But an agent is not subject to direct control and
supervision of the principal though he exercises his
authority in accordance with the lawful instructions.
3. A servant has to be remunerated with salary or wages
which must conform to all laws made by the state in
that context but there is no consideration required for
an agent. An agent is generally remunerated with a
commission as agreed between the parties.
4. A principal is liable for the wrong committed by an
agent within the scope of the authority. If the wrong
committed is on matters ultra-vires, the principal is not
responsible. A master is liable for the wrongful act of
the servant in the course of employment even if such
act be outside the parameter of the job for which the
servant is employed.
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217
5. An agent may serve different principals at the same
time whereas a servant cannot serve more than one
master at a time.
6. An agent is not a servant, but a servant or an employee
may be deemed to be an agent of the master, eg., A
has appointed B to work in his shop on a monthly
remuneration of Rs.500/-. B while selling the
commodity to C represents his master in the
contractual relation between the master and customer.
Often servants get this type of authority while serving
the master.
(b) Agent and Independent Contractor: In modern times
independent contractors are appointed in many turn key
mega construction contracts. In such cases a contractor is
appointed to accomplish whole or a part of the whole
contract, eg., in building contracts the main contractor may
appoint a sub-contractor for electricity installations or for
plumbing work. A sub-contractor generally is appointed
with a contract which contains job specifications and
contract amount. A sub-contractor is not under the control
and management of his principal contractor. He is not
remunerated on the basis of any specific job. For any wrong
committed by sub-contractor the principal contractor is not
bound. The sub-contractor or the independent contractor
does not take the direction from the principal contractor
for his day to day work nor is he accountable for that.
(c) Agent and Trustee: Institution of agency and trusteeship
both are the creation of equity and as such there are some
converging characters. Maitland suggested that law of trusts
and law of agency have a common origin in the early
doctrine of usages (Maitland, p.226). Both agency and
trust create legal relations between principal or beneficiary
on the one hand and third party on the other, eg., agent
selling goods on behalf of his principal can also transfer
the ownership. Similarly a trustee selling the property to a
third party may also transfer the title. But in spite of
resemblances there are important distinctions. Agency is
creation of a contract with the consent of both the parties
but an institution of trust may not be the creation of a
contract. It also does not require the consent of beneficiary.
A trustee can never be said to be a representative of
beneficiary, for the act of the trustee the beneficiary is not
responsible but on the other hand agent is the representative
of the principal and for all his acts the principal is
responsible.
In Kalipada v. Haridasi Dasi [AIR 1938 Cal 673], the Court
pointed out that there is a well marked distinction between the
relation in agency and that of trusts. But in many cases the
agent is involved in a relation of trust and confidence.
(d) Agent and Bailee: A bailee is an independent contractor
for service. An agent though in possession of his principals
goods is not a bailee because he is not required to do any
service or act on those goods before returning them to the
principal, as in case of bailment. He has to dispose those
off on behalf of the principal. The bailee has no power to
make contracts on behalf of the bailor nor can he make
bailor liable by his acts or omissions.
1.3 CLASSIFICATION OF AGENTS
Ramachandran has given a comprehensive classification of
agents as follows:
i) Public Agents (attributed to servants of the Crown or State).
ii) Private Agents (representing individuals or companies)
iii) Home Agents (inside country)
iv) Foreign agents (outside country)
v) General Agents (on all matters pertaining to a trade or
profession)
vi) Special Agents (to act in a particular transaction)
vii) Mercantile Agents or Commercial Agents, e.g. Brokers,
Factors,
Auctioneers, Del Credere Agents and Insurance Agents.
viii)Non Commercial Agents, e.g. Commission Agents, Estate
Agents,
House Agents, Law Agents.
ix) Co-Agents (to act along with an agent)
x) Sub Agents (employed by and acting under the control of
an Agent).
1. Public Agents: Public officials in discharging their public
duties function as an agent of the chief executive. Therefore,
while discharging the duties, a public official is generally
immune from personal liability. Of course, the extent of this
immunity is subjected to many other principles of administrative
law.
2. Private Agents: Agents appointed by any person including
the corpa juris fall under this category. These agents may be
concerned with commercial and industrial activities or non-
commercial and individual affairs. As for example a jobber or
a broker is an example of a commercial agent but a person may
be representing another person in all private affairs simply with
the authority given by a power of attorney. He is a private
agent.
3. Home Agents: Home agents are those who are authorized
to operate within the home country of the principal. As such
their authority does not extend beyond the territory of home
country. As for eg., a clearing agent operates in the port of the
home country of the importer.
4. Foreign Agents: Foreign agents are those who operate in a
foreign country outside the country of the principal. As for
eg., shipping agents operating in ports of foreign countries are
foreign agents of the importer.
5. General Agent: General agents are very common in the
commercial sector specially in wholesale and retail trading.
These agents are authorized to represent the principal in all
transactions relating to the trade, commerce and industry.
General agents have unlimited power, of course within the nature
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of the trade business and commerce. In Jacobs v. Moris
[(1902)1 Ch. 816]; it was stated that:
A general agent has the full apparent authority due to his
employment or position and the principal will be bound by
his acts within that authority though he may have imposed
special restrictive limits which are not known to the other
contracting party.
An individual can also appoint a general agent to represent him
in all events either under a general power of attorney or with
implied authority exercised by a person on behalf of another.
6. Special Agents: A special agent is generally appointed by a
person for a specific purpose. The authority is strictly confined
to specified limits. The agent cannot exceed that limit and bind
the principal. If X has appointed Y for the specific job of selling
his Delhi property, the agent cannot bind the principal with a
contract entered into for the sale of his principals Bangalore
property.
7. Mercantile Agents: There are various types of mercantile
agents based upon nature of work. In the capital market agents
are known as jobbers and share brokers. In commodity market
there are factors and brokers. In trade and commerce there are
del credre agents. A broker functions as a middleman between
the seller and the buyer either as an agent of the seller or of the
buyer and sometimes of both. A broker does not generally do
any business on his own account. A broker in a share market is
prevented from entering into any contract on his own account,
though he is not compelled to disclose the identity of the
principal at the very beginning of the contract. A jobber, on
the other hand, sells or buys stocks in his own account. An
equivalent agent in commodity market is known as factor. A
factor in the commodity market [in mandis] can enter into a
contract on his account. In Bombay these types of agents are
known as pacca adatia who act like a principal. A kaccha
adatia on the other hand is a person who exclusively functions
like an agent on behalf of a Mofusil (rural) principal. A pacca
adatia is also a del credre agent. A del cedre agent is one who
not only sells the commodity in cash and credit but also takes
the responsibility of realizing the credit against a special
commission known as del credre commission, and unless an
agent has a special contract to deal with the credit, he does not
have any responsibility for realization of the credit in case he
sells the commodity on credit. Therefore, if he sells in cash
and credit the commodities of his principal, he is responsible to
pay the entire amount to the principal even if the part of the
debt becomes bad provided the agent has a del credre contract.
Auctioneers: Auctioneers are market agents taking the
responsibility of realizing money from public auction.
Auctioneers are generally not mercantile agents. They are agent
for public auction specifically responsible for selling of asset
through public auction. The auctioneer has a lien over the goods
on which his charges are not yet paid. Auctioneer's lien is a
particular lien, thus until the auctioner is paid, he can retain the
goods which he has auctioned on behalf of his principal. An
auctioneer can become a public auctioneer if he is notified as
such under the law to which he is subject.
Other commercial agents: In transportation, carriage and
international trade, several types of agents work on the basis of
commission, for example, wharfinger, collection agents,
clearing agents, bonded warehouse owners, etc., who are the
agents for importers and exporters of goods. Some work on
the movement of commodities from a point to a point, or loading
and unloading of the goods, upkeep of the goods in transit and
in warehouse, clearing the goods from port authorities after
paying due charges and duties, transporting those goods to the
principal. These are specialized agents for specific jobs and
one does not undertake the work of other, i.e., a wharfinger
will not undertake the job of a clearing agent or vice-versa.
Amongst the other specialised commercial agents in the
insurance business there are insurance agents who secure
insurance business for and on behalf of the Insurance
Companies. Similarly there are commission agents in industries
and trade who are ready to do anything lawful for the principal
on commission. Commission agents do all multifarious
activities on behalf of the principal for which they charge a
commission. Recently real estate has become an important field
of commerce. Of course, in the advanced countries there is a
booming business in land. The transactions in land are generally
conducted through real estate agent who facilitate a contract
between the buyer and the seller and charge a commission. They
also do other business like leasing of properties. Similarly in
building contracts there are several types of agents who operate
and whose work is different from that of the independent
contractors. These agents like labour contractor or plumber,
work under the supervision and control of the principal
contractor and do not work for profit but for commission. Two
distinctions are to be remembered between the agents operating
in building and other construction works with the independent
contractors working in the same field. Firstly, agents work for
commission and not for profit. Secondly, an agent is not
responsible for the work done as in the case of independent
contractor.
8. Non-commercial Agents: Operation through an agent is a
very old practice in every walk of life. Therefore it is needless
to show that in every aspect of our life a person depends upon
another person who works as his/her agent. Sometimes this
power of agency originate by status, as for example the wife is
the agent of her husband. Any one can appoint another person
for a specific work or for any work in general. Any agency
under the Transfer of Property Act is entered through power of
attorney. In service sector the best example of a professional
agent is a Solicitor and a Chartered Accountant Firm who
undertake agency functions through offering services.
9. Co-agents: When a principal appoints two agents for
discharging the same job or one agent to discharge the job along
with the principal, the agents are called co-agents. In big
commercial projects instances of co-agents are many. In bridge
contracts, agents may be appointed for the approach road on
both the sides jointly with the bridge contractors due to their
expertise in various fields, or in structure building many agents
may be appointed on account of their speciality in one or the
other type of services. These are all co-agents.
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10. Sub-agents: Generally speaking an agent cannot delegate
his work further, delegatus non-potest delegare i.e., once
delegated can not be further delegated. But in the commercial
world unless it is prohibited, sub-delegation is quite normal.
Of course when a specific agent is appointed for a specific
personal service that cannot be further delegated. A broker can
appoint a sub-broker or a clearing house may appoint a sub-
agent to do a specific job. Therefore sub-agents are those who
are assigned a task by the agent against commission. In so far
as the principal is concerned the sub-agent also becomes an
agent for all practical purposes.
1.4 WHO CAN BE AN AGENT
According to Section 184 of the Indian Contract Act any person
can be appointed as an agent at the risk of the principal. Agency
is an outcome of a contract, therefore, as per section 10 of the
Contract Act a person can enter into a contract if he has attained
the age of majority under the law to which he is subject and is
not a lunatic or of unsound mind at the time of entering into a
contract, or is not otherwise incapacitated under any other law
to which he is subjected.
Position of Minor: Section 184 apparently contradicts with
the provisions of sections 10 and 11 of the Contract Act. If
one reads section 10 and 11 together it becomes clear that a
minor is incompetent to enter into a contract in India unlike
U.K. In England a minor can enter into a contract for services.
This is not possible in India as per the clear provision in section
11. Section 184 allows a minor to be appointed as an agent on
a stipulation that he is not responsible to the principal for
anything i.e., that a principal cannot attach any liability to the
minor. Presumably the position can be explained according to
British law where appointment of an agent is a contract of
service. Therefore in England a minor can be appointed as an
agent without attaching a personal liability. In India, there is
no distinction made between any type of agreements in so far
as minor is concerned. All agreements made by him are void
ab initio. According to section 184 the contract of agency made
with a minor appointing him as an agent is valid in law without
any detriment to minor. The contradiction is apparent but since
there is no litigation on the issue a clear judicial opinion is not
available. But in some of the cases judiciary has indirectly
reconciled to the position, eg., in Gopimal Durga Das v. Jain
Bank of India Ltd. [AIR 1918 Lah 269], the court held that a
minor purchasing share for the firm he represents can bind the
firm to pay for it. An analogy of this case with a British
Judgement is Gudi v. Harison [(1821), 5B & ALD 147] which
held that an infant partner can bind the firm by his act' is
unfounded because in India a minor cannot be a partner as he
cannot accept any agreement of service or appointment. But
even with the Law Commission suggestion, the contradiction
still exists. 13th Report of the Law Commission observed in
para 133 as follows:
Section 184 permits a minor (as well as a person of unsound
mind) to become an agent as between the principal and third
persons without being responsible to his principal. There may
be cases where an agent may incur a personal liability upon the
contract towards third persons. But in our opinion an agent
who is a minor or a person of unsound mind should be
exonerated from such liability. According to Bowstead, the
personal liability of the agent upon the contract of agency and
upon any contract entered into by him with any third person is
dependent on his capacity to contract on his own behalf. We
agree with this view and recommend that Section 184 should
be modified accordingly.
The Commission suggested redrafting of Section 184 as
follows:-
184. Who may be an agent: As between the principal and
third persons any person may become an agent, but no person
who is not of the age of majority and of sound mind can become
an agent -
a) so as to be responsible to his principal, or
b) so as to be personally bound to third persons in respect of
contracts entered into by him on behalf of his principal,
according to the provisions in that behalf here in contained.
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2. CREATION OF AGENCY
SUB-TOPICS
2.1. Agency by agreement
2.2. Agency by ratification
2.3. Agency by operation of law
2.4. Agency by estoppel
2.5. Agency by holding out
2.1 AGENCY BY AGREEMENT
Agents are generally appointed by contract. The principal
appoints the agent under express terms and conditions to which
the agent is required to give his consent. This is the most
common method of appointing an agent in the commercial as
well as non-commercial world. This type of contracts generally
outline the authority delegated, the task to be accomplished,
and the terms and conditions relating to the principal and agent
determining their rights and duties.
It was held in Freeman & Lockyer v. Buckhurst Park
Properties Ltd. [(1964)2Q.B.480] that an actual authority is
a legal relationship between principal and agent created by a
consensus agreement to which they alone are parties. Its scope
is to be ascertained by applying ordinary principles of
construction of contracts including any proper implications from
the express words used, the usage of the trade or the course of
business between the parties.
Express Agreement: In the non-commercial field a person is
appointed as an agent by the letter of authority or a power of
attorney which specifically stipulates the extent of authority
delegated,the task to be completed and the terms and conditions
between the parties. Agents are appointed in the commercial
sector through letter of appointment which is also subjected to
trade and commercial practices. The terms and conditions are
often determined by communications over a period of time. In
order to determine who is the offeror and who is the acceptor
one has to examine the whole correspondence. Generally
speaking, appointment of agency is a service contract.
Therefore, the principal makes the offer through his letter of
appointment to which the agent gives his consent either by
factually resuming the work or by communicating a consent
letter or by both.
Implied Agreement: Very often the relation between a principal
and his agent is required to be ascertained from the fact situation
because most of the things are not in writing. It was rightly
observed in Branwhite v. Worcestor Works Finance Ltd.
[(1969) 1 AC 552] that while agency must ultimately be derived
from consent, the consent need not necessarily be expressed in
writing, but may be gathered from facts and circumstances of
the case. If A is a partner of B, A has the implied authority of
representing B in all activities of the partnership firm. In general
trade and commerce, agents are very often seen to exercise
implied authority even where there is a written agreement.
Status has a very important role in agency functioning, both in
the case of public agents as well as in the case of private agents.
Even in family life wife acts as the agent of the husband having
implied authority to do so, and vice-versa .
2.2 AGENCY BY RATIFICATION
The general principle for agency by ratification in common law
is based upon the Roman Law principle of Omino Ratihabitio
Retrorahitur et manditio aquiparatur apriori, an act when
ratified takes effect as if it was a mandate from the very
beginning. It generally means that if a person does a work on
behalf of another but without having any authority to do it, he
may be justified in doing it and binding the other provided the
other ratifies the action after the work is done. In such a case,
in the eye of law, it shall be treated as if he has done the act with
prior authority. It means that there is no discrimination so far
as legal effect is concerned between an act done with prior
authority or subsequent authority excepting that in case of
subsequent authority the principal is required to be fully
informed before he exercises the power of ratification.
The ratification can be made subject to the following
conditions:-
1. Ratificattion only of acts which principal is capable of doing:
An act can be ratified only when the principal can himself do it
A minor or a lunatic cannot ratify an act done on their behalf
when they were minor or lunatic after attaining majority or
lucidity. It is because when the act is done the principal himself
was incapable of doing the same. Similarly a company which
is yet to be registered cannot formally appoint any authorized
agent for doing promotional work on its behalf nor can it ratify
such promotional activities undertaken by the promoters before
the company is registered. In Surendro and Co. v. The
Liquidator, Punjab Tannery Co. [AIR 1923, Lah. 100] it was
held and rightly so, that a company can not ratify, or adopt a
contract which was entered into by the promoters on its behalf
before its incorporation.
2. Ratification can be made only with full knowledge of acts
done: It has already been stated that ratification can bind the
principal only when he is fully aware of the material
circumstances in which the act is done. If A ratifies an act of B,
it shall be presumed that A has all material information
communicated by B. Therefore, if A can subsequently prove
that the ratification was made without having material
information or some material information has been withheld
the ratification shall be ineffective. But the principal will be
liable on ratification even though he has no knowledge of the
legal effect of the act ratified or of collateral matters affecting
the nature of work.
3. The ratifier must be competent to ratify: No one can ratify
an act done by another on his behalf unless he can do it himself.
So a minor cannot ratify an act done on his behalf. An act done
by a de facto guardian is required to be done again by the minor
after he attains the age of majority in order to bind himself.
[Tukaram v. Madras Row (AIR 1948 Nag. 293)].
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4. Act should be done on behalf of ratifier: A contract can
only be ratified by a person on whose behalf it was purportedly
made [Chitty, Vol.2 p.8]. If a person acts in his own name and
makes no allusion to agency his act cannot be ratified by another.
This principle is laid down in the famous case of Keighley
Maxeted & Co. v. Durant [(1901) AC 240]. In this case K.M.
& Co. authorized their agent to buy Karachi wheat at specified
rates on their joint account. Wheat was not obtainable at those
rates. He brought wheat from Durant at a higher rate. He did
so in the hope and confidence that his act would be adopted by
the principals but he never mentioned their name while
contracting and contracted in his own name. The principals
approved the purchase, but when the price of wheat fell, refused
to take delivery. Durant sued the agent and principals for breach
of contract.
But the principals were not held liable. The court held that the
agent having contracted in his own name, his act was not open
to anybodys ratification and therefore, the purported ratification
was ineffective. The rationale of the judgments is succinctly
summarized by Lord Macnaghtens remark that civil
obligations are not to be created by or founded upon undisclosed
intentions. Lord James said :
To establish that a mans thoughts unexpressed and
unrecorded can form the basis of a contract so as to bind
other persons and make them liable on a contract they never
made with persons they never heard of seems a somewhat
difficult task.
5. Ratification must be made within a reasonable time: It is
essential that the person who ratifies the act of another does it
within a reasonable time. It may be noted that in commercial
contracts time is often a very significant factor. In Prince v.
Clark [(1823) 1 B & C 186], this principle has been explained
as that the principal has no right to pause and wait for the
fluctuation of the market, in order to ascertain whether the
purchase is likely to be beneficial. Similarly in Madhura
Municipality Case [AIR 1931 Mad 957] it was held that an
option of ratification could be held to be capable of being
exercised within a reasonable time of the act purported to be
ratified and not after the expiry of the period for which the
option was open.
6.No illegal or void act can be ratified: As for example,
dividend cannot be declared out of capital. Even if it is done
with all the shareholders approval, it can not be ratified. A
lease by a minor cannot be ratified. An act done by a director
outside the parameter of the memorandum of the company
cannot be ratified. No criminal act can be ratified. In Premila
Devi v. Peoples Bank, Northern India Ltd. [AIR 1938 PC
284], the Privy Council explained the rule thus; there can be
in truth no ratification without an intention to ratify and there
can be no intention to ratify an illegal act without knowledge
of illegality. A voidable contract can of course be ratified
subsequently.
7. Ratification must be communicated: Ratification is required
to be communicated to the agent. Unless he communicates the
same he cannot derive the benefit of the agents act or be liable
for the same. Ratification may of course be expressed or
implied.
Effect of Ratification
It has already been stated that ratification takes retrospective
effect as if the authority has been vested in the agent from the
very beginning. In Surendranath v. Kedar Nath Bose [AIR
1936 Cal 87] the Court held that by the very nature of the act of
ratification the thing ratified has a clearly retrospective effect.
In Wilson v. Tunman [Man. 9. 36] Chief Justice Tindal
observed:
an act done, for another, by a person, not assuming to act for
himself, but for such other person, though without any precedent
authority whatever, becomes the act of the principal if
subsequently ratified by him...In that case the principal is bound
by the act whether it be for his detriment or his advantage and
whether it be founded on a test or a contract, to the same effect
as by, and with all consequences which follow from the same
act done by his previous authority.
According to section 196 and 199 of the Indian Contract Act
an act done by one person on behalf of another but without his
knowledge or authority may be ratified by that other, and if
that other so elects the same effect will follow as if the act was
performed by that other.
According to section 195 the following are the basic
requirements of ratification and general implications:
1) A person acts on behalf of another;
2) Without the latters knowledge and authority;
3) The other may elect to ratify or disown and
4) Once it is ratified it shall be deemed to be have been done
with principals prior authority.
2.3 AGENCY BY OPERATION OF LAW
Status
Most of the personal laws provide special status between
spouses as long as they live together. It is true that business
laws are presently codified and secularized but the religious
texts dealing with personal laws still bear a very important role
in so far as the interspouse relationship and power of agency.
According to Christian law there is identity of interest.
Therefore, husband and wife can mutually represent each other
specially in contracts relating to household. Any spouse has a
general power of representation on all matters of common
interest in the household. Of course, this power is not extended
to any one of their individual status created by a contract with
any other party as for example, wife does not have an automatic
power of representation in the business affairs of the husband
or the husband does not have any authority to represent the
wife in her service contract with others. In so far as the family
and household interest is concerned husband and wife are
considered having identity of interest and mutual right of
representation. In Hindu law, of course, the situation is slightly
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different. A wife can represent the husband in all family
proprietary interest of the husband she is taken as a general
agent of the husband. But the husband does not have any
automatic power of agency in dealing with the Stridhan of the
wife. In Islamic law, the position is not much different excepting
that the wife by way of status has a limited power of agency in
comparison to the husbands power.
A guardian can represent the interest of the minor. Here, though
the power is analogous to the power of an agent, the guardian
is really not an agent. In tax laws the guardian is himself the
assessee and can be individually punished for non payment of
tax as the guardian of the minor. Generally speaking an agent
is never personally liable for any act done on behalf of the
principal. There are many similarities in the rights and
obligations of a guardian dealing with the properties of a minor
and that of an agent dealing with the properties of his principal.
A guardian simply represents the interest of a minor and in that
broad sense is an agent.
A corporate being cannot function itself. Therefore, some
people represent the corporate identity. They are generally
called directors. Directors working through the board represent
the company. In section 291 of the Companies Act this general
power of the board for representing the company is stated.
According to this section the board of directors of the company
shall be entitled to exercise all such powers, and to do all such
acts and things, as the company is authorised to exercise and
do. The restrictions to this general power are: (1) exclusive
statutory or constitutional power given to the general meeting,
(2) restriction imposed by general meeting through a resolution.
Chakraborti in Taxmans Company Law has rightly held that
for considering the validity or otherwise of the acts of a director
in many a situation, the law of agency in so far dealing with the
question of the principal being bound by the acts of his
agent...would apply [Chakraborti, p.8]. This general principal
of agency is not only applicable against the directors but also
applicable against all officers of the company. The Court applies
the principle with a larger coverage as for e.g., in Freeman
and Lockyer v. Buckhurst Park Properties [Mangal Ltd.
[(1964) 2 QBD 480], the Court held that an act done by a director
does not become invalid on account of mere fact that there is a
defect in the appointment of the director. The company is bound
by the act.
In partnership the partners have an implied authority to represent
the firm and other partners. By mere fact that A is a partner of
B, A can do an act binding both the partnership firm and other
partners. Of course he has to be within the frame work of the
business. There are certain restrictions on the implied authority
of a partner which is also statutarily prescribed by the Section
19 of the Partnership Act.
Necessity
A person may be held responsible as a principal or as an agent
due to an act of necessity. There are innumerable instances of
such type of agency in case of necessity. Marine adventure in
order to tackle unforeseen emergencies is one such example.
The master of the ship is given certain powers he may sell the
goods in order to save the goods from destruction.
In Hawtayne v. Bourne [(1841)7 M & W 595], Baron Parke
gave two instances where agency of necessity could clearly be
said to arise, Viz:
(1) where a bill of exchange was accepted for the honour of
the drawee by some one not already liable on the bill. The
person so accepting is then subrogated to the rights of the
holder, as regards the person for the sake of whose honour
he accepts and pays.
(2) The case of the master of a ship, who has wide powers in
relation to the ship or its cargo if either is in danger. If the
cargo is in danger of perishing, or the ship needs repairs or
is otherwise incapable of being used on the voyage then
the master may sell or otherwise deal with the cargo, or the
ship itself, and the acts of the master, though not expressly
authorized will bind the owner as his principal. But there
must be some urgent necessity, caused by accident or
otherwise, for this form of agency to arise. In the absence
of necessity there is no such agency.
The agency in case of necessity is a power that arises out of
need of circumstances, as for eg., in Sims & Co. v. Midland
Railway Co. [(1913) 1 K.B. 103]. The railway was carrying
perishable goods. As a result of strike there was delay in
delivery of the goods and as a consequence the commodity
started deteriorating. The railway sold them to avoid further
loss. It was held that the railway was not liable for breach of
contract. It only discharged its agency functions in case of
necessity.
In Prager v.Blatspiel Stamp and Heacock Ltd. [(1924) K.B,
566], it was decided that the doctrine of necessity in case of
agency is capable of extending to cover any new situations
provided that the requirements of the doctrine are fulfilled.
Necessity here is always looked from the point of
compulsiveness of a person to treat the goods he is charged
with as if they were his own.
2.4 AGENCY BY ESTOPPEL AND HOLDING OUT
a) Estoppel
In law of evidence, an equitable principle has been included as
one of the cardinal principle of proof. The principle is generally
laid down in section 115 of the Evidence Act. It stipulates that
any one inducing another to believe by his act, mission or
conduct, that a fact is true, though it is not true, he is held
responsible as if the fact is true. He is estopped from denying
the truth of the fact. This concept gives rise to two types of
agency i.e., authority arising out of a positive or negative
assertion. As for e.g., if a person allows another to believe that
he is an agent of somebody or a principal of another he can be
estopped from denying his liability as an agent or the principal
as the case may be. In Mac-Fisheries v. Harrisen [(1924) 93
JKB 811] Lord Halsbury explained the principle of estoppel
thus: estoppel arises where you are precluded from denying
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223
the truth of anything which you have represented as a fact
although it is not a fact. The situation may arise (a) on account
of the agent acting ultra-vires but ostensibly for the benefit of
the principal and the principal enjoys the benefit with knowledge
or knowingly the principal does not prevent the agent to operate
beyond the jurisdiction. (b) there is no agency relationship
between the two but one gets the authority due to the behaviour
of the other. As for e.g., A a friend of B often comes to his
shop and help B over the selling counter. In the absence of B
oneday, A sells goods on credit to C. It shall be deemed in law
that B has a power of agency because A is estopped to deny the
authority.
The requirements for agency by estoppel were summed up by
Slade, J., in Rama Corporation Ltd v.Proved Tin and
General Investments ltd. [(1952) 1 All E.R. 554]. He says
that there had to be :
(i) a representation; (ii) a reliance on a representation and (iii)
an alteration of a partys position resulting from such
reliance.
Such an authority therefore, may arise if (a) there is a
representation in the normal course of events to another person
to believe that express or implied authority of representation is
given to a person; (b) the representation is made to a person
who relies upon it and acts accordingly, (c) the representation
may be made intentionally or negligently; (d) the representation
must be the proximate cause leading the other party to commit
mistake.
(b) Holding out
The principle of holding out is just an extension of the principle
of estoppel. Estoppel is applied to the detriment of the principal
by way of withholding his right to come out with truth that
there is no right of representation. It really validates the act of
the agent as if he had the right of representation though in reality
there is no authority of representation given to the person.
Holding out on the other hand is holding a person liable as if he
is the principal. In effect both are same, though in application
of the rule one arises out of a negative action whereas the other
arises out of the positive assertion of the law. A allows his wife
B to manage his property and to mortgage it, A is bound by the
act of his wife [Maung R. Sein v. Ma Myit AIR 1933 Rang.
361].
A has allowed his servant to collect amount against credit sale.
Debtors are discharged by paying the amount to the servant.
He is estopped to deny the authority of the servant.
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3. AUTHORITY OF AN AGENT
SUB TOPICS
3.1 Introduction: extent and authority
3.2 Express and implied authority
3.3 Customary authority
3.4 Apparent and presumed authority
3.5 Sub-delegation
3.1 INTRODUCTION; EXTENT AND AUTHORITY
The nature, extent and quantum of authority of an agent depends
upon various internal and external factors. According to section
188 the extent of an agents authority has been made co-
extensive with principal himself. It is provided that an agent,
having an authority to do an act, has authority to do every lawful
thing which is necessary in order to do such act. Similarly an
agent having an authority to carry on a business, has authority
to do every lawful thing necessary for the purpose, usually done
in the course of conducting such business. In case of emergency
the authority is further extended by section 189. According to
the section, an agent has authority, in an emergency to do all
such acts for the purpose of protecting his principal from loss
as could be done by a person of ordinary prudence, in his own
case under similar circumstances. Justice Shah, explained the
extent of agents authority in Kucawar Lime and Stone
Company v. Dehri Rahtas Light Railway and Company
Limited [AIR 1969 SC 1993]. According to him normally
the liability for payment for demurrage charges lies upon the
consignee for whose convenience the wagon is detained. The
same is the principle laid down in Halsburys, Laws of England
the party primarily liable to pay the demurrage is the party for
whose convenience the wagons are detained. In the said case
coal was consigned to the appellant company by the colliery,
under the Colliery Control Order 1955 by the order of the Coal
Commissioner. As the company refused to take delivery, the
railway company sold the coal and sued the company for
demurrage. It was held in this case that under section 56 of the
Railways Act, a railway could sell the consignment after serving
notice on the owner. The position of the railway becomes that
of a bailee qua the company and therefore it was bound to
minimize the loss. It could not unnecessarily detain the wagons
and claim demurrage. It could have unloaded the coal and put
the wagons to use. In that case the consignee would be liable
only for the wharfage. An agent can do every lawful thing but
cannot exercise his power beyond reasonability and act
arbitrarily. As for example, if A is employed by B, in London,
to recover at Bombay a debt due to B, A may adopt any legal
process necessary for the purpose of recovering the debt and
may give a valid discharge on the receipt of debt amount.
In trade and commerce often the extent of this authority comes
to debate. It differs from trade to trade on the basis of business
practice. Therefore the extent of agents authority depends upon:
(i) nature of the act or business, (ii) things incidental to the
business that are usually carried out, and (iii) usual trade, custom
and practice. The agent has authority to do all lawful acts to
achieve this purpose which according to him is necessary to do
to perform his job.
The extent of this authority is therefore based upon bonafide
exercise of the power.
3.2 EXPRESS AND IMPLIED AUTHORITY
Agents authority may be express or implied. According to
section 187 an authority is said to be express where it is given
by words spoken or written. An authority is said to be implied
where it is to be inferred from the circumstances of the case. It
is express according to Fridman when it is given by express
words, such as when a board of directors passed a resolution
which authorized two of their members to sign cheques [Haly-
Hutchinson v. Brayhead Ltd. Co. (1967)3 All ER 48]. A
power of attorney is a formal grant of power with express and
clear terms. In such case the strict rule of interpretation is
applicable and if the agent does an act holding it within the
authority, though not-covered under express terms, he has to
prove necessary implication so that he can claim power. As for
example, authority given to demand and receive all moneys
due to the principal on any account whatsoever and to use all
means for the recovery thereof, to appoint attorneys to bring
action and to revoke such appointments, and to all other
business, was held to mean all other business necessary for the
recovery of money and was not-authority to endorse a bill of
exchange [(Harpar v. Godsell (1870) L.R. 5 QB 422,].
Implied authority is what is necessary for or incidental to the
effective execution of express authority. As for example, A is
authorized to receive and sell certain goods and to pay himself
a debt out of the proceeds. He has an implied authority to bring
an action against a third person wrongfully withholding
possession of the goods [Bowstead, p.80].
Implied authority extends to doing of any act in an emergent
situation to protect the principals interest.
3.3 CUSTOMARY AUTHORITY
Customary authority is based upon trade practices. In Bayliffe
v. Butterworth [(1987)1 Ex 425] the principal authorised his
broker to sell shares for him. The broker sold them to X who
was another broker, but could not deliver the shares at the time
of the settlement of the account. X bought same quantity of the
share of the said company at the market price for his client and
claimed the difference from the broker. Amongst the Liverpool
brokers there was a custom to pay such differences in case one
failed to settle the accounts at the time of execution. The broker
paid the difference and demanded the money from the principal.
It was held in this case that if there is, at a particular place, an
established usage in the matter of dealing and making contracts,
a person who is employed to deal or make a contract there has
an implied authority to act in the usual way.
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The custom of course is required to be reasonable and lawful
and be known to the principal. Sometimes customs in maritime
trade is expressly written in the contract because of variation of
trade practices in different countries. Some of the trade customs
are interesting to note. A factor is entitled to sell the goods
entrusted to him in his own name unless he has been specifically
instructed to sell the goods in the name of the principal. An
auctioneer has an implied authority to sign a contract on behalf
of both the vendor and the purchaser, but of course he does not
warrant the goods he sells as a factor does. A shipmaster has
number of implied authorities. He can do all necessary things
for the due and proper progress of the voyage. He may pledge
the goods or may even throw the goods in the ocean if safe
return of the ship to the shore does require it. Similarly an
estate agent has implied authority to receive deposit from the
prospective purchaser [(Ryan v. Pilkington [(1959)1 All E.R.
676]. Solicitors may receive payment on the debt for the clients.
3.4 APPARENT AND PRESUMED AUTHORITY
Apparent authority is usually that which is actually given to the
agent by his principal expressly or by necessary implication.
More often it is the authority which is actually not given to an
agent, though a third party presumes that he has it. This is also
known as ostensible authority.
In Hely Hutchinson v. Brayhead Ltd. [(1967)3 All E.R. 98],
Lord Denning explained the apparent authority of an agent in
the following words:
Ostensible or apparent authority is the authority of an agent as
it appears to others. It often coincides with actual authority.
Thus, when the board (of directors) appoints one of their
members to be a Managing Director they invest him not only
with implied authority but also with ostensible authority to do
all such things as fall within the usual scope of that office. Other
people who see him acting as Managing Director are entitled to
assume that he has the usual authority of a Managing Director.
In the Freeman case [(1964)1 All E.R. 630], Diplock L.J., went
on to explain that an apparent or ostensible authority was
a legal relationship between the principal and the contractor
created by a representation, made by the principal to the
contractor, intended to be and in fact acted on by the contractor,
that the agent has authority to enter on behalf of the principal
into a contract of a kind within the scope of the apparent
authority, so as to render the principal liable to perform any
obligations imposed on him by such contract.
An apparent authority is generally an authority delegated by
the principal. This authority is either actual or ostensible. As
for e.g., a hotel manager buying cigar on credits from the
suppliers was supposed to have ostensible authority and the
principal was bound to pay for the same. [Watteu v. Fenwick
(1893)1 Q.B. 346)]. Similarly in Ishaq v. Madan Lal [AIR
1965 All. 34], the Court held that in a case in which an agent is
authorized by his principal to go to another place and take
delivery of and to sell goods there at any price which he chooses,
the agent would have implied authority to accept the price either
wholly in terms of ready cash or part of it in terms of cash
together with abandonment for a claim for remaining money
by the principal against the purchaser.
Apparent authority once created continues to exist until notice
is served to the third parties about termination.
Presumed authority is one which is not an outcome of express
consent. Given the facts and circumstances the third party can
presume that there is the authority of the agent to do the act.
Such authority does not come from any positive representation
but arises on account of situations. As for e.g., A sends his
servant to the local shop to buy goods on his behalf on credit
and pays for them on several occasions. As behaviour now
induces the shopkeeper to believe that the servant has authority
to buy on credit for the master. This is presumed on the basis
of the behaviour of the master. Such type of presumptions are
induced by act or omission of the principal, and as such the
principal is estopped to deny the authority of the servant.
Presumed authority may not always be created by estoppel as
in the above case. As for example, A makes B his agent to
carry his business of a furniture manufacturer, B will have power
to purchase timber and other materials, hire workmen and
carpenters, to manufacture the furniture.
3.5 SUB-DELEGATION
The general principle is delegatus non potest delegare i.e.,
once delegated cannot be further delegated. A person who
receives an authority by virtue of delegation of authority by
another cannot sub delegate it to yet another person and get it
done by him. According to section 190 such a sub delegation
is possible only ifthere is an ordinary custom of trade to that
effect, or from the nature of agency a sub-agent can be
employed. In the commercial world appointment of sub-agents
in ordinary business contract is generally allowed. Even in
service contract a concern entering into a contract with a person
to provide services can get it done by any one unless the contract
specifically mentions otherwise. In the following situations a
sub-contract is held to be quite valid:
1. Where the job to be performed is purely ministerial and
does not require any discretional judgement.
2. Where the principal knows that the work to be done would
require appointment of sub-agents. For example, in
building contracts principal knows that the contractor shall
appoint several types of sub-agents for plumbing, electrical,
mosaic laying sub-contracts and the like.
3. Where it is a business custom and practice to appoint sub-
agents, i.e., wholesalers to retailers, to market the
commodities belonging to the principal.
4. Where the authority conferred is such that experts from
different fields are necessary to execute the program.
5. Where the personal services of the agents is not required to
execute the work.
According to section 190 exceptions are only two, namely:-
1. nature of the agency demands or permits sub-agents, and
2. ordinary custom of trade allows appointment of sub-agents.
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1. Nature of agency demanding sub-agents: Where the owner
of a house appointed a bank to be its agent to lease his
house, it was held that the bank was not expected to search
for the tenant. It could certainly appoint a sub-agent for
the work [Mohindar Das v. Mohan Lal, AIR 1939 All
188]. In building contracts as has already been said or in
turnkey projects the nature of the work is such that several
specialized agencies are required to execute the project.
Therefore appointing of other agents is natural.
2. Commercial practices: In the commercial world sub-agency
has become essential part of the game excepting in such
cases where the customer demands personal services like
services of a lawyer or a doctor.
Relation between sub-agent, agent and the principal
A sub-agent is a person employed by and acting under the
control of the original agent in the business of agency. A sub
agent must not be confused with a substitute agent. Where an
agent holding an authority named another person to act for the
principal, he is not a sub-agent. He becomes an agent of the
principal by substituting the first agent. The agent is responsible
to the principal for the acts of the sub-agents. But the principal
is responsible to the third party for the acts of the sub-agent as
if he is the agent of the principal.
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4. DUTIES OF AN AGENT
SUB-TOPICS
4.1 Introduction
4.2 Duty to follow instructions
4.3 Duty to follow trade customs
4.4 Duty to communicate
4.5 Duty to exercise care and skill
4.6 Duty to render accounts
4.7 Duty to remit money
4.8 Duty not to delegate
4.9 Conflicting interests
4.10 Confidentiality
4.1 INTRODUCTION
Though sections 211 to 221 of the Contract Act are stipulated
to prescribe duties of an agent, yet the duties are not exhaustively
covered by those sections. Often the courts have to refer to
Common Law in order to settle issues in the matter. Section
211 provides the basic code in this matter.
Section 211 postulates the essential functions of an agent to be:
(i) to conduct the business of the principal according to his
directions;
(ii) where there are no such directions to act according to the
custom that prevails in doing business of the same kind at
the place where the agent conducts the business.
(iii) if agent acts contrary he is liable to the principal for the
loss sustained; and
(iv) the agent must account for the profits, if any, to the principal.
All other duties generally evolve out of this basic code.
4.2 DUTY TO FOLLOW INSTRUCTIONS
As to the agents duty to obey principals instructions, Chitty
observes :-
If the agency contract is for consideration the agent must do
what he has undertaken to do; he must, in performance of his
duties, carry out any express instructions given to him by the
principal even though he may reasonably believe that in
departing from them he would be promoting his principals
interests. If, however, his instructions are susceptible of two
meanings he incurs no liability by interpreting them in the sense
not intended by the principal. An agent who fails, whether
deliberately or negligently to carry out his orders, has no right
to remuneration or indemnity. But where the act which the
agent is employed to perform is one which by law is void (such
as the making of a wagering contract) the principal cannot
recover damages for the failure to perform it."
It is the duty of the agent to use all reasonable diligence in
communicating with his principal and to obtaining his
instructions. So agents duty involved in this regard are firstly
to observe the principals instructions and secondly to seek
instruction where they are not given at the earliest opportunity.
In so far as obeying the instructions of the principal, he has to
be diligent. In Lilly v. Double Day [(1881) 7 QBD 510] the
principal instructed the agent to keep his goods in As
warehouse. The agent kept the goods in Bs warehouse which
was equally good but cheaper. Bs warehouse was destroyed
by fire. It was held that the agent was to compensate the
principal for not following his instructions. In this case, the
agent did act diligently and in the interest of the principal with
a view to reduce the warehousing cost, therefore a rigid
interpretation of the instructions perhaps cannot be made. In
such a case therefore the decision ought to be different.
The instructions of the principal has to be clear, unambiguous
and lawful. The British courts in most of the cases interpreted
the agents duty to follow the instructions most rigidly. That is
why it has been held in number of cases that agents duty is
only to follow instructions and not customs otherwise he is liable
to compensate the principal. Indian courts have sometimes
emphasized on the principle of diligence. As for example, where
an agent is entrusted with the duty of investing principals
money, he has a clear duty to invest in a security only after
proper valuation of the assets in which he is investing. Therefore
if the agent acts on his own general valuation, he runs the risk
of being liable to the principal [William v. Frederick AIR 1932
P. C. 94]. Similarly, where A engaged B to sell gas cylinders
with instructions to return the empty cylinders to A, A was
entitled to a decree for the value of these cylinders from B,
because B did not follow the instructions [Fraunjee
Shaparjee v. M. S. Karan Devi (1966) I C 446].
4.3 DUTY TO FOLLOW TRADE CUSTOMS
An agent has to discharge his duties according to the terms of
the contract with his principal. In case the instructions are not
given in detail the agent has to adhere to the commercial customs
and trade practices. If the principal stipulates anything contrary
to commercial practice it is preferable for him to get back to the
principal and inform him that the commercial practice was
different from his instructions, but an agent cannot defy the
instructions in order to go for the customary practices on his
own. Of course, where there is neither any custom nor any
instructions to follow, the agent can exercise his own honest
judgement to protect the principals interest. In Soloman v.
Broker [(1862) 2 F&F 726] the broker was entrusted to sell
goods which he did at an inadequate price without previously
estimating the value in accordance with the custom of the
particular trade. It was held that the agent had to compensate
the principal.
4.4 DUTY TO EXERCISE CARE AND SKILL
An agent is bound to display such care and skill in discharging
his duties as if he is managing his own affairs. (Avery v. Salie
[(1972)25 DLR 495]). A professional agent is required to take
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highest degree of care and skill as is required from such a
professional person. An insurance broker is required to use his
professional skill to protect the interest of his principal (Claude
R. Ogden & Co v. Reliance Fire Sprinkler Ltd [(1975)1
Lloyds Rep. 52]. According to sec. 212 of the Contract Act an
agent is bound to conduct the business of the agency with as
much skill as is generally possessed by persons 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 only remotely caused by such
neglect, want of skill or misconduct.
A, a merchant in England directs B, his agent in Bombay to
send 100 bales of cotton by certain ship. B having it in his
power to send the cotton omits to do so. Here B is negligent.
Therefore B has to compensate A by making good the loss
sustained by A soon after the arrival of the ship in England.
This can be easily calculated on the basis of the price of the
cotton in England when the ship reaches.
The degree of skill and care required by the principal is based
upon the circumstances of the case. In some cases requisite
skill attracts implied warranties. In Storys Treatise of an
Agency, the author made it clear that where a skilled labourer,
an artisan or an artist is employed there is on his part an implied
warranty that he has a skill to reasonably undertake the work or
art as the case may be. The principal can always expect a high
skill and care from a professionally competent person. As for
example, a Solicitor instituting a suit in a court which does not
have jurisdiction has to compensate the principal. Section 211
obligates the agent to exercise reasonable and expected skill.
The phrase in the section unless the principal has notice of
want of his skill stipulates that the principal expects from the
agent his natural skill but if the principal is aware about the
lack of skill of the agent, he can only blame himself. If the
principal wants his agent to buy some goods, the agent is bound
to use reasonable care to buy goods worth buying in view of
quality. But where a broker is asked to buy scrap iron, he is not
required to choose between scraps. He can chose between the
prices. [Lambret v. Hath 15 MNW 486]. If the agent fails to
exercise reasonable diligence and fails to use skills he in fact
possesses, he is liable to compensate the principal [Narain Deo
v. Hanumantha, AIR 1950 Orissa 241]. If inspite of the
instructions of the consignor, the consignee does not take
insurance cover for the goods and the goods are destroyed by
fire against which consignee recovers half the worth the goods,
the consignee must compensate the consignor full value of it
[Panna Lal Janki Dass v. Mohanlal, AIR 1951 SC 144].
4.5 DUTY TO COMMUNICATE
According to sec. 214, an agent is required to use all diligence
in communicating with his principal in case of a difficulty, and
obtaining his instructions. Whenever there is some doubt or
difficulty, the agent has to act according to his principals wishes,
rather than do whatever he feels like. Though, under sec. 189,
he can act in a manner which would minimize the loss accruing
to his principal and may in some exceptional cases even
disregard the instuctions of the principal, yet as far as possible
he should get in touch with the principal and follow his
instructions as far as practicable. In case he fails to do so, the
principal may repudiate the unauthorized act of the agent and
hold him liable for neglect of duty. An agent can act according
to his own discretion only when he feels either that it is
practically impossible for him to seek instructions from the
principal or that it would result in immeasurable loss to the
principal if he delayed the taking of action any further, but in
all such cases the action taken should be proportional to the
needs of the situation.
4.6 DUTY TO RENDER ACCOUNTS
According to section 213 an agent is bound to render proper
accounts to his principal on demand. According to the normal
equitable principle an agent is bound to keep his principals
money separate from his own and also maintain an up-to-date
and correct account on the principals behalf. In K. Chetty v.
R. Chetty [AIR 1927 Mad 478] an agent lent some money to a
third party out of the money of the principal without any
necessity or authority. It was held that principal can sue on an
ordinary money accounts for the recovery of the money lent by
the agent.
4.7 DUTY TO REMIT MONEY
It has already been said that the agent has a duty to give details
of the accounts of transactions entered into by the agent on
behalf of the principal. An agent is not bound to realize the
credit in the event of his selling the goods on credit on behalf
of the consignor unless the agent is also a del credre agent.
According to section 218 an agent is bound to pay all sums
received by him on behalf of the principal, of course subject to
such deductions as the agent is entitled to. This obligation
subsists in common law even if the money received is for void
or illegal agreement. If any money is received wrongfully the
amount can be recovered from the agent if and only if the agent
has not repatriated the money to the principal. The agent is not
liable to repay the money on the plea that the principal cannot
be sued for realizing the money as he is a foreign sovereign
[Rahimtulla v. Nizam of Hyderabad, AIR 1958 SC 379]. But
if the agent represents himself as a principal, he is personally
liable for refunding the money. In such a case there is no value
of the proof that he has already transmitted the money or
accounted for it to another [Baylis v. Bishop of London, (1913)
1 Ch 127].
If the liability arises subsequently, say, on the ground of breach
of contract, the principal is the proper person to demand the
money back, even though the amount is still with the agent. In
Burt v. Claude Cousins & Co Ltd [(1971) 2 QB 426] the
court held that where the agent acts as pre or post contract stake
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229
holder, the agent would be personally liable for failure to comply
with his delegations. In case of post-contract situation the
principal is also liable.
Some times personal privilege granted to a party, like an export
licence or quota could be unlawfully transferred to another
party through an agent though such privilege could not be
alienated. The agreement is opposed to public policy and
therefore the principal cannot realize the amount from the agent
(following the rule of exturpi causa).
4.8 DUTY NOT TO DELEGATE
An agent cannot sub-delegate his authority unless he is so
permitted by the specific contract with the principal or by
established trade practice. The principle is explained under
delegatus non potest delgare. In the commercial world however
there are established sub-agency system. The agent is fully
liable to the principal for the acts of the sub-agents. Sub-agent
must not be confused with substitute agents as has already been
mentioned.
4.9 CONFLICTING INTERESTS
In common law the agent has a fiduciary relation with the
principal which compels him not to involve himself in a position
where his duty to the principal can conflict with his own interest
or the duty to any other principal. Suppose that a managing
director of a company approaches a land dealer to acquire a
plot of land adjacent to its factory. Realizing that the offer is
extremely beneficial he leaves the companys job and purchases
the land himself. Here though apparently the rule is not violated
but if one pokes deeper into the incident one realizes that the
information received as a agent for and on behalf of the company
is itself a bargaining situation. As such the bargain is against
the principle of fiduciary relation. An agent who deals with
different principals having conflicting business interests may
be placed in a similar situation because he is trading in goods
of competing firms. In such a case a clear waiver is necessary
to save the agent against the violation of the principal. So where
a large trading company carrying on a state agency and building
business was employed to sell property and was subsequently
authorized to inspect the drains on behalf of the purchaser it
was held that the company committed a breach of duty by
accepting agency of adversarial parties. While functioning as
an agent, an agent is bound to disclose his interest in the
transaction entered into on behalf of the principal. According
to sec. 299 of the Companies Act, Directors are bound to disclose
their personal interests in the transaction entered into on behalf
of the company. A further consequence of the fiduciary relation
is that the agent cannot make a secret profits for himself while
acting as an agent or using principals property or through
confidential information received as an agent [Schering
Chemicals Ltd v. Falkman (1982) QB 1]. In Reading v.
Attorney General (1951) AC 507] an army surgeon was held
accountable to the crown for an amount which he allegedly
made in Egyptian black market by using his rank and uniform
to ensure that lorries on which he was travelling were not
searched by military police. An agents duty not to misuse his
position or property or information of his principal may extend
beyond the period of agency on the basis of contract or in special
situations.
4.10 CONFIDENTIALITY
An agent is required to be trustworthy on the basis of his specific
duty of confidentiality. He can not use any confidential
information for any other purpose except for which the
information was passed. If he uses the information otherwise,
he has to return the profits so improperly made [Brown v. I RC
(1965) AC 244]. The agent has also an additional duty not to
set up adverse title.
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5. RIGHTS OF AN AGENT
SUB TOPICS
5. 1. Introduction
5. 2. Rights against principal
5. 3. Rights against property
5. 1 INTRODUCTION
Actually speaking, the Contract Act itself does not deal with an
agents rights separately, in much detail but mentions only two
specific rights, i.e., right to retainer and right of lien. But
the general presumption which applies to the law of agency is
that the duties of a principal are the rights of an agent and
vice-versa. Thus apart from the above mentioned specific
rights, we would also deal with those rights of an agent which
are actually in the nature of duties owed by the principal towards
the agent. Further, these rights can be sub-divided into two
categories, those which an agent has against the principal
personally and those which he has against the property of the
principal. The following flow chart will give an idea of the
various rights of an agent.
We will now deal with each of these rights.
5. 2 RIGHTS AGAINST PRINCIPAL
A] Right to remuneration
A contract of agency does not need any consideration to support
it, i.e., a principal need not pay any remuneration to the agent
for the work executed by him, unless there is an express or
implied contract to the contrary. Thus, whether an agent is
entitled to payment or not depends on the facts and
circumstances of each case.
Once it is ascertained that an agent is entitled to a remuneration,
then the question arises - when does such remuneration become
due ? Section 219 of the Act states that, remuneration of an
agent becomes due to him on completion of the task assigned
to him. This again is subject to a contract to the contrary, i.e.,
though in general an agent is entitled to payment only on
completion of a job, the principal may agree to make an advance
payment or to make the payment in installments. Thus, in
Saraswati Devi v. Motilal [AIR 1982 Raj 108], the plaintiff
being an estate agent was engaged by the defendant to find a
customer for his house - the condition being that if such a
customer could be found, the plaintiff would become entitled
to a commission. The plaintiff found a person who was willing
to purchase the house and also paid Rs.30,000/- as advance
purchase price. Later, the defendant refused to sell the house
to this person and consequently refused to pay the agent a
commission since no sale had taken place. The agent filed a
suit. It was held that, according to the nature of this agreement
the remuneration was payable to the plaintiff when he found a
purchaser who was ready, willing and able to purchase the
property and since he had done that he was entitled to his
commission. But if a contract has come into being without any
effort on the agents part, then he does not become entitled to
remuneration [G.T.Hodges and Sons v. H.P.Residential Hotel
Ltd., (1939)4 All ER 347].
It is equally not necessary that every time a remuneration is
fixed, an agent becomes entitled to it. Under section 220 of the
Act, whenever an agent misconducts himself, or is not true to
the principal or acts in breach of his duties etc., then he ceases
to be entitled to remuneration. Misconduct of an agent thus
includes the omission to perform any act/duty specified under
sections 211-216. This particular principle can be better
understood in the words of Lord Alverstone, in Andrews v.
Ramsay and Co. [(1903)2 KB 635]: A principal is entitled
to have an honest agent and it is only the honest agent who is
entitled to any commission. In my opinion, if an agent directly
or indirectly colludes with the other side, and so acts in the
opposition to the interests of his principal, he is not entitled to
any commission.
B] Right to retainer
The right to retainer given under section 217 is similar to a
parallel right given to a bailee under sections 170-171. If the
agent has in his possession any amount belonging to the
principal, then, before returning the money he can retain out of
it - (a) any sum due to him in respect of advances made or
expenses incurred during the course of agency, and (b) any sum
due to him as remuneration. An agent can retain money only
for expenses incurred during the transaction in question - he
cannot retain any money for his past/previous dues. Similarly,
an agents right of retainer does not affect the full right of the
principal over that amount, who can still exercise control over
it subject to the agents rights over it. If the agent returns the
entire amount to the principal, then he loses his right of retainer
- as this right is a possessory right and is available only so
long as possession remains with the agent.
C) Right to compensation
Section 225 of the Act provides that, the principal is liable to
compensate an agent in respect of any injury caused to him
either because of the principals neglect or want of skill. For
Rights of an Agent
Against the Principal Against the Property
Right to Lien
Right to Right to Right to Right to
remuneration retainer indemnity compensation
General Lien Specific or
Particular Lien
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example, A employs B to whitewash his house and puts up the
scaffolding himself. The scaffolding is unskilfully/negligently
put, and moment B climbs on it it breaks and falls to the ground.
As a consequence B is injured. A must compensate B. Such
compensation can be claimed under Tort Law rather than under
Contracts. If the agent himself is guilty of contributory
negligence, then he cannot claim compensation or if the court
feels it just then it may apportion the compensation between
the agent and the principal, i.e., if an agent would have been
entitled to Rs.5000/- as compensation if no blame attached to
him, then he will receive only Rs.2500/- or Rs.3000/- when he
is guilty of contributory negligence.
D] Right to indemnity
Section 222 of the Act embodies the principle of indemnity as,
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. For the
application of this section, two conditions are necessary, namely:
a) The agent should act lawfully.
b) The act should be done in the course of agency business.
If both these conditions are fulfilled, then he is entitled to be
indemnified by the principle for all consequences which may
flow from such an act. In Thacker v. Harday [(1874)4 QBD
685], it was held, An agent is entitled to indemnity from his
principal against liabilities incurred by the agent in executing
the orders of his principal unless these orders are illegal or unless
the liabilities are incurred in respect of some illegal conduct of
the agent himself or by reason of his default.
This provision of an agent not being entitled to indemnity for
any criminal or wrongful act has been incorporated in section
224 wherein it is stated that, where one person employs 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.
The right to be indemnified extends not only to consequences
following from lawful acts, but also to acts done in good faith
by him even if such act results in an injury to a third person
[section 223]. For example, B at As request sells some horses
in possession of A but which A had no right to sell. B unaware
of As not having this right, sells the horses and hands over the
proceeds to A. Later, C the true owner of the horses files a suit
against B for the value of horses and costs. A is liable to
indemnify B for any amount which he has been compelled to
pay to C alongwith any legitimate expenses incurred by B in
the process.
But, where an agent willfully and with full knowledge commits
an unlawful act, he cannot claim an indemnity from the
principal. If A asks B to burn Cs house, and B is caught in the
process and is made to compensate C for the damage suffered
by him he cannot ask A to indemnify him for the amount which
he is compelled to pay to C.
5.3 RIGHTS AGAINST PROPERTY
Apart from the rights which an agent has as against the principal
personally, he has a right of lien under section 221 over any
property belonging to the principal which is in his possession.
Right of lien is a right of retainer exercisable over movable
property or goods (not being money) for legitimate expenses
incurred over those goods. Lien is generally of two kinds, viz:
a) General Lien - This is provided for under section 171 of the
Act and provides that a person may retain all goods belonging
to another for a general balancing of accounts. This type of
lien is available to bankers, factors, attorneys, wharfingers etc.
For example, suppose a person takes a loan from bank against
security of some gold ornaments. The bank is entitled to retain
those ornaments not only till the said loan is returned but also
till all other amounts due from him to the bank are also paid up
by him.
b) Particular Lien - This is a lien which is available to bailees
and agents in general. In this lien, a person can retain goods
belonging to another for all expenses incurred by him in respect
of those goods. For example, a tailor may retain the dresses
made by him till his tailoring charges against those dresses are
paid to him. But he cannot retain those dresses for any amount
due to him from the customer for some dresses he had made in
the past.
In Pestonji Bhicaji v. Raviji Javerchand [AIR 1933 Sind 235]
the essential conditions of a valid lien under this section were
laid down as follows:
a) The agent should be in a lawful possession of the goods;
b) His right to exercise lien over them should not be
inconsistent or in contravention of any arrangement or
agreement between him and the principal;
c) As far as the agent knows the property should be that of
the principal (i.e., an agent cannot exercise lien over goods
not belonging to the principal);
d) He should have received the goods as an agent during lawful
transaction of agency business; and
e) He should be holding the goods expressly/impliedly on
behalf of his principal and not for or on account of some
third party.
The extent of lien has been well stated by Khan,J., in Gopaldas
v. Thakurdas [AIR 1957 MB 22] as follows:
The agents lien does not give unrestricted authority to the
agent to deal with the property in any manner the agent may
like. The right is limited in nature. It enables the agent to
retain the property till his dues are paid. But this confers no
authority on the agent to sell or otherwise dispose of the property
without the consent of the owner.
Extinction of Lien
An agents right to lien is lost in the following situations, viz:
1] by the principal paying him his dues;
2] by the agents entering into an agreement or acting in a
manner inconsistent with the exercise of lien (for example,
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his returning the goods back to the principal
unconditionally);
3] by waiver, i.e., by the agent giving up his right of lien;
Lien being a possessory right cannot be exercised once the
possession of the goods is lost by the agent, unless the manner
of his losing possession is consistent with his ritht i.e., though
he loses possession the loss is temporary and he intends to get
the possession back (for example, a tailor wanting to exercise
his right of lien can still give the dress for trial - since his
intention is to regain possession of the dress and then retain it
till his dues are paid).
Sub-agents right to lien
Wherever an agent has an authority to appoint a sub-agent, such
sub-agent also acquires a right of lien over the principals goods
(section 221). But where the agent has no authority to make
such appointment, the sub-agent does not acquire any right of
lien even for his dues. The reason for this differentiation is
simple - lien is a right granted to a person for recovery of lawful
dues. An unauthorized act cannot result in lawful dues, and so
right of lien cannot be granted for their recovery.
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6. UNDISCLOSED PRINCIPAL
SUB TOPICS
6.1. Kinds of principals
6.2. Doctrine of undisclosed principal
a) Rights of undisclosed principal
b) Rights of a third party
6.1 KINDS OF PRINCIPALS
As seen earlier a principal is the person who appoints an agent
to act on his behalf. There are four kinds of principals generally
recognized, viz:
i) Named Principal - He is one whose identity (i.e., name)
has been revealed to the third party by the agent. In these
cases, the third party knows that the agent is acting on behalf
of some person X and not on his own behalf.
ii) Unnamed/Disclosed Principal - Sometimes an agent may
inform the third party that he is acting on behalf of someone,
but does not reveal the identity of the person. Such principal
whose existence is known to the third party but not his
identity is known as unnamed or disclosed principal.
iii) Undisclosed Principal - In certain situations, an agent
portrays himself to be the contracting party, i.e., he does
not reveal either the existence or the identity of the principal
to the third party. The third party in these cases are
absolutely unaware that the agent is acting on behalf of
someone else and take him (i.e., the agent) to be the
contracting person.
iv) Foreign Principal - As the name itself suggests, this is a
person who is an alien and appoints an agent (usually a
native of the country where he wants to do business) to
execute some job for him in his country. Thus, if a Pakistani
national appoints an Indian to look after his business
interests in India, then such Pakistani national would be
deemed to be a foreign principal. Unless otherwise stated,
as far as the third parties are concerned, they are entitled to
treat the agent as the principal and ignore the existence of
a foreign principal. This is because, if a dispute arose,
such third party would find it very difficult to file a suit/
enforce a contract against such foreign nationals. Hence,
for the sake of convenience, they can file a suit against the
agent who can claim an indemnity from his (foreign)
principal.
6.2 DOCTRINE OF UNDISCLOSED PRINCIPAL
Under law a person is not really required to disclose whether
he is acting on his own or on someone elses behalf. So also, a
third party is not required to make inquiries as to whether the
person contracting with him is an agent or a principal. The
entire doctrine of undisclosed principal is thus based on this
principle of no need to know or inform. Thus, any person
entering into a contract has to take the risk that the person before
him may in all probability be acting on behalf of an undisclosed
principal, and he has contracted not with a person A but with
some person B of whose existence also he was unaware.
As the agent in these situations the agent contracts in his own
name, he is personally liable on the contract and can sue and be
sued in his own name. This raises an interesting question - can
a undisclosed principal sue the third party in such cases ? The
answer to this lies in the rights available to an undisclosed
principal with which we will now deal.
(a) Rights of an Undisclosed Principal
Though an agent in such cases contracts in his own name, the
agent is personally aware of the fact that he is acting on someone
elses behalf, irrespective of the third partys ignorance of the
fact. This existence of agency relation gives the principal the
right to interfere at any time of the contract and disclose himself
to the third party (section 231). After so disclosing himself, he
can continue with the performance of the contract, and can sue
or be sued in his own name. But, this right of an undisclosed
principal to abruptly take over the reigns from his agent are
subject to certain restrictions or qualifications, which we will
discuss later.
(b) Rights of a Third Party
The sudden disclosure of an undisclosed principal may come
as a rude shock to the third party, who in all innocence has
continued with the contract thinking that the agent was acting
on his own behalf. To compensate the third party for any
inconvenience which may be caused to him due to such
disclosure, sections 231 and 232 provide certain rights to the
third party which act as a qualification to an undisclosed
principals right to disclose himself with a view to participating
personally in the concerned transactions. These qualifications
are as follows:
i) The third party can claim against the principal the same
rights and privileges which he had against the agent. For
example, suppose A acting as an agent of an undisclosed
principal P, lends Rs.5000/- to T. After some time A
borrows for his personal use Rs.1000 from T. Now T has a
right of set-off against A i.e., when time to return the loan
comes T needs to pay only Rs.4000/- to A instead of
Rs.5000/-. If now P discloses himself and compels T to
return the money to him instead of to A, T can insist on
paying only Rs.4000/- to P i.e., the amount he would have
to pay if A was the principal. When such set off is claimed,
the principal can recover the deficit amount from his agent
but can under no circumstances deny the right of set off to
the third party.
ii) If the principal discloses himself before the performance
of the contract, then apart from the above right, a third party
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also has the right to avoid the contract if he can conclusively
show that he would never have entered into the contract if-
1) he had known who the principal was; or
2) he had known that the person contracting with him was an
agent acting on behalf of someone
3) Once the principal discloses himself, the third party has a
right to sue either the principal, or the agent or both of
them together. If he opts to sue only one of them (i.e.,
either the principal or the agent) he is deemed to have
waived his right against the other.
For application of section 231 and 232, it is essential that the
third party actually believes the agent to be the principal i.e., he
has no suspicion of the existence of an undisclosed principle.
This position is different from the one in England, where mere
belief/suspicion of the third party that the agent is the principal
is sufficient for him to exercise his rights against the principal.
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7.2 TERMINATION BY ACT OF PARTIES
a) Revocation by Principal
An authority once given can be revoked at any time. A
principal can revoke the authority of his agent any time he wants
by giving an express or implied notice (section 203). Express
notice is when the principal either in writing or orally informs
the agent that his services will no longer be needed. Implied
notice is when from the conduct of the principal the only logical
inference which follows is that he has revoked the authority of
the agent. For example, if a principal appoints a person to
look for a tenant for his house, but later lets out the house himself
- the authority of the agent is automatically (though impliedly)
revoked.
Under section 206 the principal/agent (as the case may be) is
required to give a reasonable notice of termination, else he would
be liable for damages for unjust termination to the other party.
Whether a particular notice period is reasonable or not depends
on the facts and circumstances of each case, though normally a
months notice would be deemed sufficient.
Limitations on the Right
Though the principal has been given a general power of
revocation, this right is subject to certain qualifications, i.e.,
there are certain situations in which an agents authority cannot
be revoked. These situations are as follows:
i) Where authority is partly exercised - When the agent has
partly exercised his authority, i.e., he has done some work
on behalf of his principal, then his authority cannot be
revoked so as to effect obligations incurred through acts
already done (section 204). Thus a principals right to fully
revoke an agents authority, exists only so long as the agent
has not exercised. Once he has - the principal can revoke
the authority only with prospective effect i.e., for acts to be
done in future. Such power cannot have a retrospective
effect. The reason for this qualification was explained in
Read v. Anderson [(1884)13 QBD 779} as, where an
agent has incurred a personal liability vis-a-vis third parties,
the agency becomes irrevocable, as the principal cannot be
permitted to withdraw exposing the agent to the risk of
liability incurred.
7. TERMINATION OF AGENCY
SUB-TOPICS
7.1. Classification
7.2. Termination by act of parties
7.3. Termination by operation of law
7.4. Effects of termination
7.5. Agents duty on termination
7.1 CLASSIFICATION
Termination as the word implies means coming to an end.
There are various situations under which an agency comes to
an end. Some of these situations arise because of the act of the
parties and others due to the operation of law. The following
flow chart gives a classification at a glance of the various forms
of termination of agency.
Termination
By act of parties By Operation of Law
Revocation Renunciation Agreement Performance
Efflux Death of Insanity of Insolvency of Destruction of Agency
of time P or A P or A P or A subject matter business
becoming
unlawful
termination of
agents authority
Note: P - Principal
A - Agent
We would now deal with each of these in detail.
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(ii) Agency coupled with interest - If by the terms of the agency
agreement, an agent has a personal interest coupled with
the agency, then his authority cannot be revoked, unless
there is a contract to the contrary (section 202). For
example, P owes some money to A. He appoints A as his
agent for the purpose of selling his (i.e., Ps) house, and
tells him that A can retain the amount due to him from the
sale proceeds of the house. Here, P cannot revoke As
authority. In Smart v. Sanders [(1848)5 C.B. 895] the
rule was laid down as, where an agreement is entered into
on a sufficient consideration, whereby an authority is given
for the purpose of securing some benefit to the donee of
the authority, such an authority is irrevocable.This is what
is usually meant by agency coupled with interest.
This section comes into play only when, the interest of the agent
existed at the time of creation of agency. In the words of Wilde,
C.J., in the Sanders case .....This doctrine applies only to
cases where the authority is given for the purpose of being a
security, or...as a part of the security; not to cases where the
authority is given independently, and the interest of the donee
of the authority arises afterwards, and incidentally only.
Further, if the basic intention of agency is to secure/recover
something for the principal, and the agents rights also are
incidentally protected through such act, then that agency is
revocable. Thus, the mere fact that an agents salary or
commission is to be paid out of the proceeds of the (agency)
transaction, will not make it an agency coupled with interest.
But once it is ascertained that an agency is irrevocable because
of this factor, death, insanity or insolvency of the principal
cannot effect the irrevocability.
b) Renunciation by Agent
Just as the principal can revoke an agents authority by giving
a notice so also the agent can give up his authority by giving a
reasonable notice to the principal, except in cases where the
agency is itself for a fixed or definite duration. A notice by an
agent may be either express or implied. Implied notice is
presumed when from the conduct of the agent it is apparent
that he no longer wants to continue with the agency, as for
example, when he ceases to transact agency business or he sets
up an adverse title to that of the principal etc. When an agent
renounces his agency he makes himself liable for paying a
compensation to the principal if:
i. the agency is for a fixed duration, and he ends it
prematurely; or
ii. the renunciation is without a just and reasonable cause and
has resulted in an injury to the principal (section 205); or
iii. he fails to give a reasonable notice of his intention to
renounce (Section 206).
In the following cases he can renounce without incurring any
liability, viz:
a) the principal expects him to perform an illegal or unlawful
act; or
b) the conduct of the principal is such that it justifies
renunciation; or
c) the principal refuses to pay remuneration to the agent
without a reasonable cause; or
d) the principal refuses to indemnify the agent from the
consequences of all or any lawful act(s) done by him during
the course of agency; or
e) the principal makes it difficult or impossible for the agent
to continue with his work under the agency agreement.
c) Agreement
An agency comes into force through an agreement and can be
brought to an end by an agreement. If both the principal and
the agent agree to end the agency, then the agency will cease to
exist from the date of agreement or such other future date on
which they may agree upon.
d) Performance by the Agent
If the agency is for a specific purpose, and the agent has
performed the job entrusted to him, the agency comes to an
end, as the agent becomes a functus officio unless there is a
contract to the contrary. In Khil Dhish v. Moolchand [(1969)3
SCC 411] the Supreme Court observed that, whether an agency
is terminated or not in a question of fact and has to be determined
from the facts and circumstances of each case.
7.3 TERMINATION BY OPERATION OF LAW
a) By efflux of time
Whenever an agency is for a fixed duration, it comes to an end
the moment that duration is over, regardless of whether the
agency business has been completed or not. But, under certain
cases an agency may continue beyond the specified time period,
as for example, in cases where there is a contract to the contrary
or there is an agency by holding out etc.
b) Death of the parties
Unless a contrary intention appears from the circumstances of
the particular case, the general rule of law is that on the death
of either the agent or the principal the agency comes to an end.
If there are joint principals or joint agents, then, death of one of
them does not result in the termination of agency, unless there
is a contract to the contrary. Unless such an intention clearly
appears, death of one of the joint-parties results only in the
termination of the agreement so far as the deceased is concerned.
Thus, in Bhagirath v. Premchand [17 CLJ 201] it was
observed, If the agency is strictly a joint agency, that is, if it is
the intention of the parties that the work of the agency must be
done jointly by all the agents acting together and not
individually, the work must be done by all of them jointly and
consequently upon the death of one of such agents, as the agency
can no longer be carried on the manner intended by the parties,
it must be presumed to have terminated.
c) Insanity of the parties
Where either the principal or the agent become insane, the
agency comes to an end as between them, but such termination
does not effect the rights and obligations of the third parties,
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who remain unaffected by it unless they had notice of the
insanity of the principal. Since an agent has the authority to
bind the principal in a legal relation, the principal has to be
always of a sound mind (as defined in section 12 of the Contract
Act) because a person of unsound mind cannot enter into a
contract. But by a liberal interpretation of section 184 even an
insane person can be an agent but he will not be responsible to
the principal for his acts although the principal himself would
be bound by such an (insane) agents acts. Hence, it is in the
interests of the principal to have as an agent only a person who
is a major and of sound mind - and to terminate the agency if
the agent becomes of unsound mind. According to Story, there
can be no doubt that if the agent is insane, the agency gets a
closure for it is the fundamental reliance of the principal on the
agents skill, intelligence and trust worthiness [Ramchandran,
p.342].
d) Insolvency of the parties
If the principal is declared an insolvent under the relevant laws
the agency is automatically terminated, though formal/routine
acts done in completion of a transaction before he became
insolvent, can be completed by the agent. Acts done by the
agent bona fide and in good faith before he had notice of his
principals insolvency are valid and for this reason an agents
authority is deemed to be subsisting till he receives notice. So
far as insolvency of an agent is concerned a similar interpretation
as above [i.e., as in case of insolvent agent] can be given, but
under the English Law, an agency is terminated on an agents
insolvency.
e) Destruction of subject-matter, etc.
In case, there is a substantial destruction of the subject matter
for which the agency was constituted, the agency would come
to an end. For example, if P appoints A to sell his house. The
house is totally destroyed in a fire. The agency is terminated.
Similarly, if the principal looses his interest in the subject matter
in question, the agency is terminated. For example, P appoints
A to collect rents from his tenants in his building. Later P sells
off the building to T. The agency is terminated.
f) Agency business becoming unlawful
If after the creation of an agency, a subsequent law or executive
order is passed making the relevant business unlawful, the
agency comes to an end. For example, a person P in Bangalore,
employs A, resident of Hyderabad as a distributor for his liquor
company. Due to the prohibition laws in Andhra Pradesh,
distribution or sale of liquor is unlawful in that state. The agency
automatically comes to an end.
g) By termination of agents authority
If the agent has appointed a sub-agent, then the agency between
the agent and sub-agent comes to an end, the moment the
primary agency between the principal and agent comes to an
end for any of the above reasons.
The 13th Law Commission Report in 1958 (p.66) made the
following recommendations regarding the termination of
agency, namely:
157. There is conflict of authority on the question as to when
the business of the agency of sale of goods is completed i.e.
whether on payment to the principal of the price released by
the agent, or on completion of the sale and receipt of the price
of the agent. The Allahabad and Calcutta High Courts take the
former view while the Madras High Court has taken the latter
view. We are of opinion that the view of the Madras High Court
represents the law correctly and we consider that agency is
determined when the agent ceases to represent the principal,
though his liability in respect of acts done by him or by his
agent continues. Under the English law the agent becomes
functus officio on the completion of the contract of sale. That
this was the intention of the Legislature appears to us to be
clear from the heading of the sub-chapter in which the section
occurs which is revocation of authority. We do not,
accordingly, consider any legislative change necessary.
158. This section is not, however, exhaustive of the cases when
the authority of an agent is determined and the agency is
terminated. The following should also be included in the section
as circumstance in which the authority of agent is determined:
1. Destruction of the subject-matter of the agency.
2. The happening of any event rendering the agency unlawful
or upon the happening of which it is agreed between the
principal and agent that the authority shall determine.
3. Insolvency of agent.
4. Dissolution of the firm, corporation or company where the
principal is a firm, corporation or registered company.
There are good reasons for providing for termination of agency
on the agent becoming an insolvent. The credit in the market
of a person who is adjudicated insolvent is affected and in many
cases such an agent is not in a position to fulfill the object of
the contract of agency.
Under the Insolvency Law where a commission agent has sold
the goods and realized the money, such money, on his
adjudication as insolvent, is not treated as trust money and it
goes to the Official Assignee or Receiver.
Section 201 - For section 201 of the principal Act, the following
shall be substituted, namely:-
201 Termination of agency - An agency is terminated -
a) by the principal revoking his authority;
b) by the agent renouncing the business of the agency;.....
c) by the business of the agency being completed;.....
d) by either the principal or agent dying or becoming of
unsound mind;......
e) by either the principal or agent dying or becoming of
unsound mind;......
f) by expiry of the period of agency, if any;
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g) by the destruction of a material part of the subject-matter
of the agency;
h) by the happening of any event which renders the agency
unlawful or upon the happening of which it is agreed
between the principal and the agent that the authority shall
determine; or
i) by dissolution of the principal, where the principal is a firm
or a company or other corporation.
The above amendments are salutary but we submit they are not
exhaustive yet. We may add the following:
j) by impossibility occasioned by:
i) death or loss of capacity of the third party with whom the
agent has to deal;
ii) cessation of principals interest in the subject-matter of the
agency;
iii) by agency being rendered unlawful
i) by change of law,
ii) by war,
iii) by change in status of principal and agent.
Agents disloyalty may be good reason for revocation but that
should be proved. It can be preceded by notice of revocation.
If the term of the contract is that the agency shall last till the
happening of a contingency, the happening of that contingency
will also terminate the agency. This again may be solved by
implementing the term of the contract itself. It appears proper
to protect the principal and third parties from an insolvent
agents machinations. Section 201 speaks only of insolvency
of the principal. It may be even appropriate if the insolvency
of the agent is also included.
The recommendations havent been legislatively incorporated
in the relevant sections, though the judiciary has taken note of
these recommendations under suitable circumstances.
7.4 EFFECT OF TERMINATION
Once an agents authority is revoked, an agency comes to an
end, and he can no longer represent his principal in any matter.
The question that arises is - when does an termination of agency
take effect. Section 208 of the Act provides that, revocation of
agents authority takes effect as follows:
i) Vis-a-vis the agent - Termination is effective, the moment
he has a notice of it. The notice may be actual or
constructive. Thus for example, an agent is appointed to
sell certain goods. The principal sends a letter to him
revoking his authority. After the letter is sent but before it
is received by the agent, he sells the goods. The sale is
binding on the principal, and the agent is entitled to a
commission.
ii) Vis-a-vis the third parties - Termination is effective with
regard to third parties, when they come to know of it. If a
third party enters into a contract with an agent whose
authority has been revoked but which fact is not known to
such third party, the contract is binding on the principal.
His only recourse in such cases (if he suffers a loss) is to
make the agent personally liable. For example, P appoints
A to sell his horse but by a later letter revokes the authority.
A sells the horse to C despite the second letter. C knowing
that A is the agent of P, in good faith pays the money to A,
who absconds with the money. The sale is binding on P,
who can only recover the money and interest etc., from A.
Thus the general rule seems to be that revocation of authority
takes effect only when it is brought to the notice of the concerned
person (be it the agent or the third party). Acts entered into by
such concerned party before notice of such revocation are
binding on the principal.
As Williston puts it: In order to free the principal from possible
liability to third persons for further acts of the agent, within the
apparent continuing scope of his original authority, notice must
be given to such third persons either of the remuneration or of
revocation in order that the principal may not be bound by the
agent in accordance with his continuing power. [Ramachandran,
Pp.396-397].
7.5 AGENTS DUTY ON TERMINATION
Section 209 states that, when an agency is terminated by the
principal dying or becoming of unsound mind, the agent is
bound to take, on behalf of the representatives of his late
principal, all reasonable steps for the protection and preservation
of the interests entrusted to him.
It is clear from this section that an agents duty or liability
towards his principal does not cease immediately on the death
or insanity of his principal. He is still required to take all possible
steps to protect the interests of his principal (or in certain cases
of his legal representatives). This power of the agent continues
till his authority is revoked by the legal heirs of the principal.
Section 109 does not create a new agency as such but merely
imposes a duty on the agent, But in case of death of the principal,
an agent cannot act in any matter not covered under section
209 without a fresh power of attorney, i.e., an agent is only
required to take all possible steps for a successful winding up
of the business originally entrusted to him but he cannot
undertake any fresh work etc., on behalf of such deceased or
insane principal unless expressly authorized to do so by the
legal representatives of the principal. Since this section only
speaks of agents duty in case of death or insanity of the
principal, by implication it would mean that the provisions of
this section will not apply in other kinds of termination, unless
the special circumstances of the cases require the agent to wind
up the business in hand in the best possible manner.
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SUB-TOPICS
8.1. Partner as agent
8.2. Binding nature of partners authority
8.3. Factum of being partner and burden of proof
8.4. Partners authority in trading firm
8.5. Single partner appearing in a suit
8.6. Who may question the act of a partner
8.7. Relation between partners.
8.8 Minor partners
8.1 PARTNER AS AGENT
Partnership has been defined in sec. 4 of the Indian Partnership
Act, 1932, as "the relation between persons who have agreed
to share the profits of the business carried on by all or any of
them acting for all".
From this definition it appears that words acting for all have
been inserted to emphasize that partners are agents, and not
merely principals. One essential element of partnership, as is
shown in the definition , is that there should be agency. One
partner can always bind another partner in any matter which
falls within the scope of the partnership business, subject to
any limitation under the Act (eg. sec.20), and if the relationship
construed between parties in respect of a particular matter does
not expressly or by necessary implication involve the right of
one party to pledge the other as an agent, then there is no
partnership [Chimanram v. Jayantilal, AIR 1939 Bom 410].
Hence the doctrine of partnership necessarily involves mutual
agency between the partners. It is worth noticing that while the
relation between the partners are governed by the fundamental
norm of good faith, their relations to the outside world are
governed by the rules and principles of agency. The law of
partnership has often been described as nothing but an extension
of the law of agency. A maximum use has been made of this
concept in regulating the relations of the partners with persons
dealing with them. This is what has been specifically laid down
in section 18 of the Act thus :
Subject to the provisions of this Act, a partner is the agent
of the firm for the purpose of the business of the firm.
The principle of agency has been enunciated in the section in
such general terms that it becomes almost as a natural legal
incidence of the very creation of a firm that every partner
becomes vested with the position of an agent for the business
purposes of the firm. The very act of forming a partnership
with certain persons is a declaration to the world that the partners
are the agents for implementation of the projected business of
the firm. The Calcutta High Court in Chandi Charan Dutt v.
Eduljee Cowasji [(1981)8 Cal. 678] after holding that the
authority of a partner as an agent of the firm can be terminated
in the same manner as that of an ordinary agent, namely, by
due notification, observed:
The law which regulates the liability of the partners for
the acts of their co-partners is a branch of the law of agency;
and in the absence of any specific rule upon the subject
under the head of partnership, we must look to the law of
agency for the solution for our present question. Each
partner is the agent of his co-partners for the purpose of
contracting debts and obligation in the usual course of
partnership business.
Thus every partner is an accredited or acknowledged agent of
the firm and all other partners. Consequently he binds all the
other partners by his acts in all matters which are within the
scope and objects of the partnership [V.Perumal v. A.
Muhammad, AIR 1958 Ker. 257]. Each individual partner
makes the others his agents for the purpose of entering into all
contracts for him within the scope of partnership concern, and
consequently is liable to the performance of all such contracts
in the same manner as if entered into personally by himself.
[Fox v. Cliffton (1830) 31 RR 544].
This position of agency is occupied by the partners in reference
to the outsiders, but not as between themselves. This is what
has been explained in Hoshiar Singh v. Udai Ram Singh (AIR
1929 All. 542). Here:
The plaintiff was one of the several partners in the firm.
Two of the members of the firm executed a promissory
note in plaintiffs favour agreeing to pay him a certain
amount as being the amount due to the plaintiff on taking
partnership accounts. The plaintiff sued not only the
executants of the promissory note, but the other partners.
The question before the court below was whether the
promissory note given by two of the five partners bound
the other two defendant partners. The court below has
answered the question in the negative and we are of the
opinion that the court below was right. The learned council
for the plaintiff appellant had taken his stand on section
249, 251, 263, Contract Act (old Act). They do not lay
down that one of the partners, as between themselves,can
bind another partner where the dealing is not with a third
party. The authority which a partner holds on behalf of
other partners to deal with third persons is the subject matter
of legislation in those sections. But as between the partners
and the outside world (whatever may be their private
relations between themselves) every partner is the unlimited
agent of every other in everything connected with the
partnership.....
While partners are the agents of the firm for business purposes,
they are not agents outside there purposes nor of their co-
partners in any personal and individual capacity. The result,
for example, is where payment is made to an acting partner for
a sum of money due to the firm, it is a good discharge to the
payer. But when payment is made to a partner for a personal
debt due to one of his co-partners, it will not be a good discharge
8. AGENCY PRINCIPLE IN PARTNERSHIP
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to the party paying. Payment to one of two joint creditors is a
good discharge of a joint debt. A partner has no implied
authority to receive payment of a debt due to a co-partner in
individual capacity. {Powell v.Brodhursta, (1901)2 Ch.160].
But a payment to one of several partners is a perfect answer to
an action by all; and if one partner sues and recovers the verdict
in that action would be a legitimate ground of defence in any
subsequent action by the firm for the same demand [Cowan v.
Dast, (1848)10 LT 466; Mathura Nath v. Bangeswari Rani,
AIR 1928 Cal. 56].
8.2 BINDING NATURE OF PARTNERS AUTHORITY
The authority which a partner holds on behalf of other partners
to deal with third persons is the subject matter of the legislation.
So any representation by one of the partners will not bind the
other partners. A firm always operates through one or more of
its partners. Each partner is the agent of the firm. Therefore
each partner has got the authority to do all acts which are
necessary for the benefit of the partnership firm, in particular
to keep its business running [Sarabhai Hathisingh Firm v.
Shah Ratilal Nathalal, AIR 19799 Guj. 110].
The authority of a partner in a mercantile firm to draw and
accept bills on behalf of the firm is well recognised. In Banarsee
Dass v. Ghulam Hossein [(1869) M.I.A.,358] the principles
affecting the matters were stated in the following terms:
Everyone of the partner in a mercantile firm of ordinary trading
partnership is liable upon a bill drawn by a partner in the
recognised trading name of the firm, for a transaction incident
to the business of the firm, although his name does not appear
upon the face of the instrument and although he be a sleeping
and secret partner.
In order to take a case out of these principles of the general
law, it must be shown that the holder of the bill knew at the
time he received it that the transaction was the private affair of
a single partner.
A third party who in respect of a private debt of a partner accepts
from him any paper of his firm with knowledge that the partner
himself is negotiating the same takes it at his own peril and will
not be able to hold the firm liable unless he rebuts the prima
facie inference or presumption that the proceeding was irregular
and unauthorised [Sundredas Sobhraj v. Liberty Pictures,
AIR 1956 Bom. 618.
If the two partners of a firm are brothers they are equally entitled
to participate in the management of the business of that firm
and it is in the fitness of things that either of them may at all
opportune times attend to the business and, do all that is needful.
In Gulam Muhammad v. Sohanmal [AIR 1927 Lah.325] the
firm had to realize the decretal debt and it was the business of
the firm and of nobody else to realise it. it is obvious that one
of the two brothers must have received payment of money
rendered by the judgment - debtors, and in doing so no liability
was incurred, that is to say, the firm was not placed under any
obligation. The debt was realized on behalf the firm and if the
brothers had not fallen out subsequently, another partner could
not have taken any objection to the act of the partner who had
received payment of the money on behalf of the firm, appeared
in the executing court and certified that he had done so. The
executing court having recorded the payment and recognized it
the decree stood satisfied. Therefore it was held that he was an
agent of his partner. The general rule is that, each partner is an
agent only in and for the business of the firm and, therefore, his
acts beyond the business will not bind the firm. Lord Justice
James said: as between the partners and the outside world,
whatever may be their private arrangements between themselves
each partner is the unlimited agent of every other in every matter
which is partnership business or which he represents as
partnership business and not being in its nature beyond the scope
of the partnership."
8.3 FACTUM OF BEING PARTNER AND BURDEN OF
PROOF
Section 109, Evidence Act provided that when the question is
whether persons are partners, landlord and tenant or principal
and agent and it had been shown that they have been acting as
such, the burden of proving that they do not stand or have ceased
to stand each other in these relationships respectively is on the
person who affirms it. There is no doubt that in the first instance
it is for the plaintiff to prove either (1) that the defendant is
partner in the said firm , or (2) that the defendant has been
acting as such [Bharat Spinning & Weaving Co. v. Manilal
Lallubhai, AIR 1935 P.C. 175 at pp. 179-180].
8.4 PARTNERS AUTHORITY IN TRADING FIRM
The Privy Council's decision in Bank of Australia v. Breill'at
[(1847) Moore, (P.C.) 152] is an authority for the proposition
that any partner in a trading firm has an implied authority to
borrow money for the purposes of the business on the credit of
the firm. But the firm must be a trading firm. A firm would be
a trading firm if its business consists in buying and selling.
Where, however, the business is not of a commercial nature,
e.g. where it is a professional business, or even the business of
a farmer, or a quarry worker, where there is no buying and selling
of goods, or any auction, no partner can borrow or pledge the
partnership property, so as to bind his co-partners. Where a
firm is a trading firm, one partner can borrow money for the
purpose of the business on the credit of the firm, no duty is cast
on the person advancing the money to make any further
inquiries.
8.5 SINGLE PARTNER APPEARING IN A SUIT
When a firm is sued, the partners appear individually in their
own names according to the provisions of Order XXX, rule 6
of Civil Procedure Code and under the provisions, after
appearance all steps in the suit must be in the name of the firm.
Moreover, it is clear that though the appearance in such
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241
circumstances is individual by each partner, that appearance is
an appearance on behalf of the firm. But if a suit is not brought
in the name of a firm all partners must be impleaded [Ghisulal
v. Gumbhirmull, AIR 1938 Cal. 377; Tikkaram v. Durga
Parshad, AIR 1934 Lah. 459].
8.6 WHO MAY QUESTION THE ACT OF A PARTNER
Each partner is an agent of the others. How far a transaction
entered into by one partner on behalf of the firm binds the other
partners is a question which can properly be raised by other
partners. If they by their acts and conduct assent to the
transaction the third party who himself enters into the transaction
cannot question it. The law must be taken to be as stated in
Lindley, on partnership at p.345 that -
In an action against a firm.... one partner has no authority
to bind the firm by consenting to an order for judgement
against it.
The statement suggests that it will apply where the judgement
is called in question by the other partners. For example, in
Ram Bharose v. Kallu Mal [(1900)22 All 135] it was held
that the partner has no authority to bind the firm by a submission
to arbitration, and in Ram Niwas v. Diwan Chand [AIR 1931
Lah. 618], the question was raised in a proceedings under Order
XXIII, rule 3, C.P.C. in which a compromise said to have been
effected on behalf of a firm by one of its partners was repudiated
by another partner and it was held that the compromise in order
to be lawful within the meaning of Order XXIII, rule 3 must be
assented to by all the partners.
8.7 RELATION BETWEEN PARTNERS
In Bank of Australia v. Breillat [(1847)6 Moore (P.C.) 152]
on the relation between partners it was observed:
Every partner is, in contemplation of law, the general and
accredited agent of the partnership, or, as it is sometimes
expressed, each partner is praepositus negotiis societatis,
and may, consequently, bind all the other partners by his
acts, in all matters which are within the scope and objects
of the partnership. Hence, if the partnership be of a general
commercial nature, he may pledge or sell the partnership
property; he may buy goods on account of the partnership,
he may borrow money, contact debts, and pay debts on
account of the partnership, he may draw, make, sing ,
endorse, accept, transfer, negotiate, and procure to be
discounted, promissory notes, bills of exchange, cheques
and other negotiable paper in the name and on account of
the partnership.
The above observation has been followed in the Saremal
Punanchand v. Punamchand [AIR 1924 Bom. 260] and was
held that a firm would be a trading firm if its business consists
of buying and selling and that in a trading firm any partner has
an implied authority to borrow money for the purpose of the
business on the credit of the firm and the other partners also are
liable for the amount so borrowed by him.
To sum up, the conception of mutual agency lies at the root of
partnership. The law laid down in section 18 of the Act simply
states the general proposition that a partner is agent of the firm
for purposes of the firm's business, but prefaces it with the words
subject to the provision of the Act. As observed by Garth,
C.J., in Chunder Churn Dutt v. Eduljee [(1882)8 Cal. 678],
the law which regulates the liability of partners for the acts of
their co-partners is a breach of the law of agency. The partner
embraces the character of both a principal and agent. In other
words, a partner transacts business for himself as principal, and
also as an agent for the other partners even though any of the
partners is a sleeping partner. The principle of mutual agency
in partnership, therefore, is that if two or more agree that they
should carry on, trade, and share the profits of it, each is a
principal, and each is an agent for the other, and each is bound
by the others contract in carrying on the trade, as much as a
single principal would be by the act of an agent, who was to
give the whole of the profits to his employer.
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9. MINOR PARTNER
SUB-TOPICS
9.1. Minors Legal Position
9.2. Rights of Minor
9.3. Liabilities of Minor
9.1 MINORS LEGAL POSITION
Section 30(1) of the Law of Partnership (hereinafter the Act),
1932 reads-
A person who is a minor according to the law to which he
is subject may not be a partner in a firm, but, with the
consent of all the partners for the time being, may be
admitted to the benefits of partnership.
This clearly indicates that a person under the age of majority
cannot be a partner by contract and he cannot be one of that
group of persons called firm. Obviously neither there can be a
partnership of minors, as they cannot enter into a contract nor
of one adult and all other minors.
A minor is incompetent to contract and, therefore, a contract of
partnership cannot be entered into with a minor [Lachmi Narain
v. Beni Ram, AIR 1931 All 327]. A minor even cannot become
a full fledged partner in an existing firm. He is not a partner
even if he is so described in the partnership agreement. A
partnership deed that tries to make a minor a full fledged partner
is invalid to that extent [Income-Tax Commissioner v. Shah
Mohandas, AIR 1966 SC 15]. The only concession that section
30(1) gives to the minor is that he may be admitted to the benefits
of partnership and that too with the consent of all the partners
for the time being. Under this sub-section minor can be admitted
to the benefits of partnership if the firm is in existence, as section
4 of the Act specifically lays down that there must be an
agreement between two or more adults before a partnership
comes into being. The proposition enunciated in section 30(1)
that a minor may be admitted to the benefits of a partnership
presupposes the existence or coming into existence of a
partnership apart from the minor for the simple reason that he
cannot enter into a partnership with another and thereby form a
partnership. That is why he can be admitted to the benefits of
a partnership when there are atleast two major partners who
constitute a firm already or are going to form a partnership. To
sum up the section applies only where a minor is admitted to
the benefits of a subsisting partnership, and is not in terms
applicable to a case in which a person is the sole proprietor of a
business. So where A and B were partners in equal shares of a
confectionery business, B died leaving a minor son. After Bs
death, A carried on business under the old name with the
partnership funds which be retained in his hands. The minor
son alleged that after his fathers death, he be admitted to the
benefits of the partnership. It was held that though A was bound
to render account of profit of the partnership to the minor son
for employing the partnership capital since the death of B, the
minor son could not be admitted to the benefits of partnership
as no partnership existed after Bs death nor could the plaintiff
being a minor enter into a contract with A to form partnership
[Lachmi Narain v. Beniram , AIR 1931 All. 327]. There must
be at least two partners before a minor can be admitted to the
benefits of the partnership. [A.A. Khan v. Amer Karium, AIR
1952 Mys. 131].
9.2 RIGHTS OF MINOR
Section 30(2) of the Act reads:
Such minor has a right to such share of the property and
of the profits of the firm as may be agreed upon, and he
may have access to and inspect and copy any of the accounts
of the firm.
Thus this indicates that when a minor is admitted to the benefits
of the partnership, he acquires a quasi contractual right to enjoy
benefits. If he has the right, a court of equity would afford him
the remedy to enforce the right. He enjoys all the normal rights
of a partner, for example, he has a right to his agreed share of
profit and property and also access to books of account of the
firm and to inspect them and make copies. However his right
has been curtailed in two respects. Firstly his rights to have
access to books is confined to books of account only. It means
that he has no right of access to other books of the firms which
do not contain matter of accounts. Account books of a business
are in a way public documents for they have to be filed in public
offices, like income tax and sales tax departments and therefore
they can be shown to minors too. But other books of the firm
containing business secrets may not be desirable to trust children
with as it cannot be ruled out that they may disclose the business
secrets of the firm which may harm the firm. The second
curtailment is to be found in the provisions of sub-section (4)
which reads :
Such minor may not sue the partners for an account or
payment of his share of the property or profits of the firm,
save when severing his connection with the firm, and in
such case the amount of his share shall be determined by a
valuation made as far as possible in accordance with the
rules contained in Section 48.
This section contains rules for the final settlement of accounts
upon the dissolution of a firm. Thus a minors suit for accounts
and share is likely to involve acts which are usual to a
dissolution. That is why the provisio to the sub section says
that either all the partners acting together or any partner who is
entitled to dissolve the firm by notice, may elect, upon the
minors suit to dissolve the firm. The court has then to proceed
with the suit as though it were a suit for dissolution and final
settlement of accounts between the partners, and the amount of
the minors share will naturally be determined along with the
shares of partners. Thus a minor cannot sue merely for a
rendition of accounts. His suit will inevitably involve his
severance with the firm and, if the other partners so decide,
dissolution of the firm also. But the minor has the right to sue
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243
only for accounts and his share and not for dissolution. Decision
in Tulsidas v. Gangaram [AIR 1925 Sund. 272] explains the
rationale behind this rule thus:
The Contract Act deals not only with contractual
obligations but also with quasi-contractual obligations.
Section 68 permits a party supplying necessaries to a minor
to enforce his claim against the property of the minor .
Sections 247 and 248 [now section 30(1), (3) and (5) of
the Act], on the other hand, are intended to provide for the
quasi-contractual rights and obbligations of a minor
admitted to the benefits of partnership. Section 247 [now
30(1), and (3)] declares that minor may be admitted to the
benefits of partnership. When so admitted, he acquires a
quasi-contractual right to enjoy such benefit. If he has the
right, the court of equity would afford him the remedy to
enforce.
If an extreme instance be taken, where a scientist seventeen
years old is promised a share in a concern which yields
considerable profit in consequence of his scientific skill and
labour, it is difficult to see how the defendants can avoid liability
to account to him for his promised share of the profits on the
plea of minority.
In passing it may be observed that section 247 [now 30(1) and
(3)] refers to the benefits of the partnership and may fairly be
interpreted to mean benefits which the minor would have
enjoyed by being made a partner if he were sui juris [Avtar
Singh, pp. 290-91]."
Where an agreement of partnership provides for arbitration in
reference to all the affairs of the firm, including dissolution,
the position of a minor under such an agreement was explained
by the Allahabad High Court in Satya Narain v. Juggal
Kishore [AIR 1958 All 312]. The court said that where the
firm is dissolved, as was done in this case, by all the partners
acting together, the amount of the share of the minor shall be
determined along with the share of the partners. Accordingly,
the minor would be as much a necessary party to the arbitration
as the partners themselves.
Thus, in brief, the rights of minor in a firm under section 30(1),
(2), (4) and (8) are :
(1) May be admitted to the benefits of partnership with the
consent of all the partners for the time being [sec. 30(1)].
(2) Has a right to such share of the property and of the profits
of the firm as agreed upon and has a right to inspect and
copy any of the accounts of the firm [sec.30(2)].
(3) Has a right, on severance, to sue for accounts [sec.30(4)].
(4) On attaining majority may elect to become partner, and he
will be entitled to the share to which he was entitled as a
minor [sec. 30(5)]
(5) On attaining majority may elect not to become partner, in
which case his share is not liable for any acts of the firm
done after the date of the public notice that he has elected
not to become a partner [sec.30(8)].
9.3 MINORS LIABILITIES
Liabilities of minor in a firm have been set in section 30(3),
(5), (7)(a) and (9) of the Act and these read :
30(3). "Such minors share is liable for the acts of the firm but
the minor is not personally liable.
30(5). "At any time within six months of his attaining majority,
or of his obtaining knowledge that he had been admitted to the
benefits of partnership whichever date is later, such person may
give public notice that he has elected to become or that he has
elected not to become a partner in the firm and such notice
shall determine his position as regards the firm.
Provided that if he fails to give such notice, he shall become a
partner in the firm on the expiry of the said six months.
30(7)(a). "Where such person becomes a partner, his rights
and liabilities as a minor continue up to the date on which he
becomes a partner, but he also became personally liable to third
parties for all acts of the firm done since he was admitted to the
benefits of partnership, and ...........
30(9). "Nothing in Sub-section (7) and (8) shall affect the
provisions of section 28
[Section 28(1) reads : Any one who by words spoken or written
or by conduct represents himself, or knowingly permits himself
to be represented, to be a partner in the firm, is liable as a partner
in that firm to anyone who has on the faith of any such
representation given credit to the firm, whether the person
representing himself or represented to be a partner does or does
not know that the representation has reached the person to give
credit........]
Hence the liabilities of the minor in a firm are :
(1) May have his share in the firm attached for the acts of the
firm [sec.30(3)].
(2) Unless with in six months of his attaining majority he elects
not to become a partners, he will be liable as a partner
[sec.30(5)].
(3) Where a minor on attaining majority has elected to become
a partner, he becomes personally liable to third parties for
all acts of the firm done since he was admitted to the benefits
of partnership [sec. 30(7)(a)].
(4) After attaining majority, he may be liable for holding
himself out as a partner [sec. 30(9)].
Under section 30 of the act, the liabilities of minor can be put
into two parts i.e. liability during minority and liability after
attaining the age of majority. Thus hereunder we may discuss
in detail the liability under both the heads:
(1) Liability during minority
A person who is under the age of majority cannot become a
partner by contract. He cannot, therefore, be one of the group
of persons who are called the firm as defined by section 4,
Indian Partnership act, 1932. He may be admitted to the benefits
of a firm but cannot be made personally liable for any obligations
of the firm. His share in the property of the firm is liable for the
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obligations of the firm [sec. 30(3)]. The liability of the minor
is thus confined to what belongs to him as his share in the profits
and property of the firm. Neither is he personally liable, nor is
his private property. In this regard Andhra Pradesh High Court
in Addepally Nageswara Rao v. C.I.T. [(1971) 79 ITR 306]
observes:
In case he contributes capital or is entitled to get benefit in the
benefit in the profit of the firm, it is to that extent that liability
can be fastened on the minor. But in no case the person of the
minor or his other property which he has not brought into the
assets of the partnership can be held liable. That is the purport
and scope of section 30(3) of the Partnership act.
The basic propositions touching this kind of liability were stated
in Sanyasi Charan Mandal v. Asutosh Ghose [(1915) 42 Cal.
225], by the Calcutta High Court. The case arose out of an
application to have the partners of a firm adjudicated as
insolvents. One out of five brothers, who inherited their father's
business was still a minor. The question was whether an infant
who has been admitted to the benefits of a partnership could be
adjudicated as insolvent and his share seized by the receiver.
The court dismissed the arguments that a minor in a firm could
be adjudicated insolvent as fallacious :
As regards the infant partner, the creditors of the firm are not
entitled to proceed against him personally. They are restricted
to a special fund, namely, the interest in the property of the
firm. If the value of such interest is not sufficient for the
satisfaction of the dues of the creditors, it cannot be maintained
that the infant is unable to pay his debts which must be the true
foundation of all proceedings in insolvency against him. The
remedy of creditors is restricted in its scope, and if that remedy
is partial, it cannot be maintained that the person against whom
the limited remedy is available is liable to be declared insolvent.
Indeed, he may have ample funds other than the partnership
assets, though such funds cannot be reached by the creditors of
the firm, simply because under the law they cannot hold him
personally liable to satisfy the obligations of the firm. We are
of opinion that the law under the Indian Contract Act does not
in this respect differ from the English Law on the subject and
that here, as in England, an infant partner of a firm cannot, as
much be adjudicated an insolvent.
The court also added that even under Hindu Law an infant, on
whose behalf a family trade is carried on, is not personally liable
for the debts incurred in such a trade, but his share therein is
alone liable.
To the same effect, in Jafferali v. Standard Bank of South
Africa [(1928) 30 Bom. 762], their Lordships of the Privy
Council observed : The profits of the business were divided
among all the six sons. The effect was that in accordance with
section 247 (now 30(1) and (3) of the Act) of the Contract Act,
which is applicable to Zanzibar, the two sons who were minors
were admitted to the benefits of the partnership; and as the result
of that admission, while they could not before they came of age
be made personally liable for the obligations of the firm yet
their shares in the partnership property were liable.
The share of the minor which, like that of other partners is liable
under section 30(3) means the amount which would fall to his
share after all its obligations have been paid off [Sanyasi
Charan Mandal v. Krishnadhan Banerjee, (1922)49 Cal.560,
at p. 570]. In the case of insolvency of the firm, the whole of
the property of the firm including minors share in it, will vest
in the official assignee. If any part of it has gone to the
possession of the minor the assignee has the right to recover
from him, because his share is liable under a statutory provision.
Liability for Torts
As the privilege of infancy is only to be used as a shield and
not a sword, an infant is always liable for tort. An action
arising in contract however cannot be changed into an action in
tort to fasten a liability on the infant. The rule is that 'if the tort
is directly connected with the contract and is the means of
effecting it and is a parcel of the same transaction, the minor is
not liable in tort' [Dharma Dass Ghose v.Brahmo Dutt
(1898)25 Cal.616]. But where the tort is independent of the
contract, the mere fact that a contract is also involved, will not
absolve the infant from liability. Thus where an infant borrowed
a mare for riding only, he was held liable when he lent her to
one of his friends who jumped and killed her [Burnard v.
Haggis, (1863) 8 LT 328]. To sum up minors liability to
compensate the injured party for fraud on him is outside the
purview of the law of contract. An infant who is guilty of fraud
or misrepresentation as to his age, and who thereby acquires an
advantage is liable to return the advantage.
(2) Liability after attaining Majority
Under section 30(5) minor is given six months time to decide
whether he should leave the firm or continue in it by becoming
a full fledged partner. This is known as minors option', namely,
the right to opt out of the firm or become a full fledged member.
The six months period starts running, either from the date of
attaining majority, or from the date on which he acquires
knowledge that he had been admitted into the firm as a full
fledged partner which ever is later. If he knows of his admission
then he has six months from the date of majority. If he does not
know of his admission, he has six months from the date of
knowledge. Burden lies upon him to show that he did not know
of his admission. If he fails to prove that, six months will start
running from the date of majority.
It is clear that if a minor attaining majority elects to continue as
a partner, the partnership does not come to an end, the
partnership continues, and the minor having become a partner
he is entitled to his profits as computed at the end of the year
regulated by the partnership deed. On the other hand if the
minor elects not to be a partner, it is equally clear that he severes
all his connections with the partnership and he becomes entitled
to whatever amount is due to him at the date when he makes
the election not to become a partner. Therefore, where as in the
first case there is no break, in the continuity of the partnership
and there is no need to make up any account otherwise than in
the ordinary course, in the latter case there is a break in the
partnership and accounts have to be made up as of a particular
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date because the minor who has become a major has the right
to claim a specific amount as due to him on a particular date.
Whatever decision the minor takes, he is required to give public
notice of it, and then such notice will determine his position as
regards the firm. The proviso to section 30(5) adds that where
no public notice is given, he will automatically become a partner
in the firm on the expiry of six months. It means that if he
wants to stay in the fim he needs to make no public
announcement. The lapse of six months time without notice
puts him by operation of law, into the firm as a partner. Public
notice is really needed only when he wants to quit the firm. Or
we can say public notice is required to terminate the operation
of section 30(5) which makes him partner on the expiry of six
months.
During the period of six months his position remains the same,
namely, that of a minor admitted, to benefits but without any
personal liability. Where a suit against the firm, which had a
minor partner, was instituted during the period of six months,
the minor having not yet exercised his option, Kerala High Curt
in Kunchachumma v. Chalapuram Bank [AIR 1958 Kel 318]
held that the minor was not personally liable and it was
immaterial that by the time the suit was decided, six months
option period had already expired. Further, there would be no
occasion left for the option to be exercised where, before the
expiry of the vital six months, the firm comes to be dissolved.
The minor would remain what he was, that is, a partner with
his share committed to liability, but no personal liability. This
appears from the decision of Supreme Court in Shivagouda
Ravji Patil v. Chandrakant [AIR 1965 SC 212], where Subba
Rao, J, said :
But in the present case the partnership was dissolved before
the first respondent became major; from the date of the
dissolution of the partnership, the firm ceased to exist
though under section 45 of the Act, the partners continued
to be liable as such to third parties for the acts done by any
of them which would have been the acts of the firm if done
before the dissolution until public notice was given of the
dissolution. Section 45 proprio vigore applies only to
partners of the firm. When the partnership itself was
dissolved before the first respondent became a major, it is
legally impossible to hold that he had become a partner of
the dissolved firm by reason of his inaction after he became
a major within the time prescribed by section 30(5). Section
30 presupposes the existence of partnership....It is implicit
on the terms of sub section (5) that the partnership is in
existence. A minor after attaining majority cannot elect to
become a partner of a firm which has ceased to exist. The
notice issued by him also determines his position as regards
the firm. Sub-section (7) which describes the rights and
liabilities of a person who exercises his option under sub-
section (5) to become a partner also indicates that he is
inducted from that date as a partner of an existing firm
with co-equal rights and liabilities along with other partners.
The entire scheme of section 30 posits the existence of a
firm and negatives any theory of its application to a stage
when the firm ceased to exist. One cannot become or remain
a partner of a firm that does not exist.
Section 30(7) gives the two effects of the minor becoming a
partner. Firstly, his rights and liabilities will remain the same
as they were during minority and up to the date on which he
becomes a partner, but, in addition, he becomes personally liable
for all acts of the firm done since he was first admitted to the
benefits of partnership. The effect of the provision is that
personal liability commences not from the date of majority, but
right from the date of admission to the benefits of the firm.
The election to become a partner is, as it were, an automatic
ratification by the minor of all the acts of the firm done since
his admission. He can get rid of liability for such acts only by
electing not to become a partner.
Liability under the applications of doctrine of 'holding out'
Under section 30, if a minor, after attaining majority, does in
fant act as a partner before giving public notice, he will be liable
to third parties on the principles of holding out [section 28 of
the act}. To be precise the rule is that if a minor after attaining
majority represents, or allows others to represent him to third
parties to be a partner in a firm, he is responsible as a partner
according to section 28 of the Act. The essentials for the
application of the doctrine of holding out are (1) there must
be a representation made or suffered to be made by the person
holding out, (2) it must have been relied on by the other person.
it is immaterial whether the person making the representation
does or does not know that it has reached the person so giving
credit, (3) credit must have been given to the partnership on the
faith of representation.
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10. AUTHORITY OF A PARTNER
SUB-TOPICS
10.1. Implied authority
10.2. Essentials
10.3. Partners authority to bind firm
10.4. No authority
10.1 IMPLIED AUTHORITY
The power of a partner as an agent to represent the firm for its
business purposes is called his implied authority, so called
because it arises by implication of law as a legal incidence of
the formation of a firm and need not be expressly conferred.
Section 18 of the Act bestows every partner with the authority
of an agent and states only that he is an agent for business
purposes. Section 19 goes a step further in the same direction
and tries to see what those business purposes could be and thus
delimits the authority of a partner more specifically. Section
19 reads as under -
(1) Subject to the provisions of section 22, the act of a
partner which is done to carry on, in the usual way, business
of the kind carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by
this section is called his implied authority.
Section 19 tries to locate the scope of a partners implied
authority. It also charges the other partners with liability for
the acts of the partners if they fall within the scope of authority.
The scope of authority is thus linked with the kind or nature of
the business and the usual manner of carrying it on. In the
words of [Pollock, p. 31] : The acts of a partner done in the
name of a firm will not find the firm merely because they are
convenient or prudent, or even necessary for the particular
occasion. The question is what is necessary for the usual
conduct of the partnership business; that is the limit of each
partners general authority; he is the general agent of the firm,
but he is not more.
10.2 ESSENTIALS
Under section 19(1), in order that a partners acts may bind the
firm, the following conditions must be satisfied :
1. The act must have been done by the partner in his capacity
as partner. A member of a firm must enter into a contract
with a third party, in relation to a matter which is both within
the scope of the partnership business, and within the scope
of his actual or implied authority in his character of a partner
in order to bind the firm. In case he enters into contract as
principal and not as an agent for the firm, in such a case his
act would not bind the firm. As observed by Scrutton,L.J.
in Underwood v. Bank of Liverpool [(1924) 1 KB 775],
In my view, you cannot rely on the apparent authority of
an agent who did not profess in dealing with you to act as
agent. Thus an act done by a partner before he becomes a
member of the firm will not bind the firm. The cases of
Saville v. Robertson [(1792) 100 ER 1264] and
Gouthwaite v. Duckworth [(1810) 104 ER 174] furnish
illustrations of this principle. In both these cases goods
were ordered by a person who had agreed to become a
partner, and were in fact supplied and used for the
partnership adventure. But as the order was given before
the partnership was formed, no liability could be fixed on
the other partners.
2. The act must have been done on behalf of the firm and not
on the partners own behalf.
3. The act must relate to a matter which is within the scope of
the business of the firm. If the matter is outside the business
of the firm, it must be proved either -
(i) that the particular transaction had been authorised,
or
(ii) that the other partners subsequently ratified it.
4. The act must be done in the firm name.
5. The act must be done to carryon the business in the usual
way. On this point, the observations of Lindley on
partnership, [p.176] are worth quoting -
The question whether a given act can or cannot be
said to be done in carrying on a business in the way
in which it is usually carried on must evidently be
determined by the nature of the business and by the
practice of persons engaged in it. Evidence on both
these points is therefore readily available....An act
which is common in the prosecution of one kind of
business in the ordinary way may not be required for
carrying on an other business of a different character.
Consequently no answer of any value can be given to the abstract
question - can one partner bind his firm by such and such act
unless, having regard to what is usual in business, it can be
predicted of the act in question either that it is one without which
no business can be carried on or that it is one which is not
necessary for carrying on any business whatever.
10. 3 PARTNERS AUTHORITY TO BIND FIRM
The power to do usual acts is called the implied authority.
The implied authority here referred to is one enabling the partner
to do certain acts with third parties. In this connection, one
great distinction has been drawn by courts between trading and
non trading firms, the decisions holding that in the former a
partner has a greater extent of right than in the latter. A trading
firm has been held to be one whose principal business is that of
buying and selling [Higgins v. Beauchamp, (1914)3 K.B. 1192
at p. 1195]. In the latter class of cases it has been held in England
that, unless there is usage in the particular trade allowing a
partner to draw, accept, make or endorse promissory notes or
bills of exchange in the firm name, a partner has no such
authority. The following kinds of firms have been held to be
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247
non-trading firms for this purpose viz. (i) solicitors; (ii) farmers;
(iii) mining adventures; (iv) quarry workers; (v) auctioneers;
(vi) commission agents; (vii) cinema firms.
Even in this class a partner may have all or some of the implied
authorities which a partners in a trading firm has, so far as they
are necessary or incidental to the main purpose of the firm
[Nicholson v. Rickeets, (1860)2 E &E 497]. The position is
not different in India. Broadly we may discuss the implied
authority of the partner as under :
In an ordinary partnership, every partner has the authority to
bind the firm by any of the following acts :
(1) Authority to purchase and sell
Every partner of an ordinary trading partnership has the implied
authority to purchase on the credit of the firm goods necessary
for carrying on its business in the usual way [Hyatt v. Hare,
(1698)90 ER 543]. The case of Bond v. Gibson [(1808) 170
ER 923], in which one member of a partnership of harness-
makers bought a number of bits on the credit of the firm, but
pawned them for his private use, and the firm was held liable,
is an example of this. This authority to purchase on the credit
of the firm is available in case of non trading firms. Likewise
any partner is authorised to sell any of the partnership goods
[Lambert's case, (1614) 78ER 142].
(2) Power to recover money due to firm
Payment of debt to one partner is good as against the other
partners. But at the same time it must be noted that a set off of
a private debt due from a partner against a debt due to the firm
is not valid. Nor can a partner accept in payment of a debt due
to the firm, shares in a company, even if fully paid up. [Niemann
v. Niemann, (1880)43 Ch.D. 198]. It is within the authority of
a partner to release and give a valid receipt for a debt due to the
firm, provided there is no fraud on the other partners. This
authority extends even after dissolution [Diwan Chand v. Ram
Dass, AIR 1931 Lah. 270]. And in the absence of collusion
between the partner and the debtor such release will be valid
and binding. Similarly a partner can settle an account between
the firm and a third person. He may also strike balances in the
firm account. [Ram Rattan v. Sobha Ram AIR 1929 Lak.
512]. Similarly he can assign a debt due to the firm [Exparte
Wright, (1906)2 KB 209].
(3) Authority to engage servants and lawyers
A partner may engage servants for the purposes of the business.
The power to appoint includes the power to remove and,
therefore, removing a servant in accordance with business
exigencies is also within implied authority, though a single
partner cannot dismiss a servant against the wishes of the other
partners.
Partner has also the implied authority to engage lawyers to
defend actions against the firm.
(4) Authority to insure firm goods
A partner has an implied authority to insure the firm's goods
and also goods entrusted to the firm [Hooper v. Luspy,
(1814)171 ER 22].
In the case of partnership of a general, commercial or trading
nature, any partner may bind the firm by any of the following
acts :
(a) Borrow money on the credit of the firm
The sudden exigencies of commerce render it absolutely
necessary that a power to borrow should exist in the members
of a trading partnership. This power was recognised as early
as in 1692 in Lane v..Williams, [(1692) 23 ER 779] in a English
case. But it exists only where the business is of such a kind that
it cannot be carried on in the usual way without such a power
i.e. the partnership should be a trading partnership. In Higgins
v. Beauchamp [(1914) 3 KR 1992], it has been pointed out
that a trading business is one which involves the buying and
selling of goods, and that it will be too much to say that every
business which necessarily involves the expenditure of money
is a trading business. In this case A and B were carrying on the
business of cinematographic theatre proprietors in partnership.
A was a sleeping partner and B managed the business. The
partnership deed provided that no partner should contract any
debt on account of the partnership without the consent of the
other partner except in the usual and regular course of business.
B borrowed money from the plaintiff stating that the money
was to be used for the partnership business. But he
misappropriated it. The lender sued A. He was held to be not
liable.
Where however, money has been borrowed by a partner without
authority, but has been applied to the legitimate business needs
of the firm, the firm would become bound by the act of the
partner though without authority. The scope of the implied
authority of a partner in a business of trading nature has been
summed up by Story thus : If the partnership be of a general
commercial nature, he may pledge or sell the partnership
property, he may buy goods on accounts of the partnership, he
may borrow money, contract debts and pay debts on account of
the partnership, he may draw, make, sign, endorse, accept,
transfer, negotiate and procure to be discounted, promissory
notes, bills of exchange, cheques and other negotiable papers
in the name and on account of the partnership. Hence in Bank
of Bengal v. Ramanathan Chetty [(1915) 43 Cal. 527], in the
case of a money lending firm, authority to borrow was held to
be implied. Likewise in Kani Ravutar v. Somasundaram
[(1908) 31 Mad. 206], it was held that a managing partner has
power of borrowing as incidental to the power of trade. In
brief, a trading firm had been held in Higgins case, to be one
whose principal business is that of buying and selling. Thus it
is obvious that a partner in a trading firm has the implied
authority to borrow money on behalf of the firm and no duty is
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cast on the person advancing the money to make any further
enquiries and the other partners are liable though the borrowing
partner may misappropriate the money.
(b) Acknowledgement of debt
In the case of a mercantile firm, each partner is as if entrusted
by his copartners with general authority to do any act necessary
for, or usually done, in carrying on the business of such
partnership, a partners authority extends to making an
acknowledgement of debt so as to bind his partners. So in a
running mercantile firm an acknowledgement by one partner
would ordinarily bind the other, specially where no
circumstances have been shown to the contrary. Hence in the
case of mercantile firm, it is presumed that a partner who has
the implied authority to borrow will also have the authority to
acknowledge liability of the firm. In Ganda Singh v. Bhag
Singh Bhagwan Singh [AIR 1926 Lah. 616] it was held that
in a going mercantile concern a partner has an implied authority
to make an acknowledgement on behalf of the other partners
and this is sufficient to save limitation in spite of the provisions
of section 20 of the Limitation Act, 1963. In case one of the
partners was through out acting on behalf of the firm and made
acknowledgements from time to time the acknowledgement by
him is sufficient to save limitation. [Gulsaran Das v. Brij
Mohan [AIR 1939 Lah. 397 at pp. 397-98]. Similarly in
Kuljav Ram v. Wishan Singh [AIR 1932 Lah. 456], where a
father and his three sons carried on business as partners and
contracted debts for the purpose of business. One of the sons
signed an acknowledgement in favour of the creditor for the
amount due from his firm. The creditors suit would have been
barred by time but for the acknowledgement so made. It was
held that acknowledgement by the partner would ordinarily bind
the others i.e. firm. In Chegamull Suganmull Sowear v.
Govindaswami Chetty [AIR 1928 Mad. 972 at p. 975], it has
been held that an acknowledgement of a payment by a partner
without special authority is binding upon the other partner.
Under section 20 of the Limitation Act, a partner ipso facto has
no authority to acknowledge or to make a part payment; but if
he has general authority to contract debts or make payments he
has implied authority to keep the debt alive and it is unnecessary
to make out special authority.
But where an acknowledgement is made after the firm has
ceased to be a going concern would not be affective against the
other partners. In Prem Ji Ludha v. Dossa Doongersey [(1886)
10 Bom 358] defendants firm had traded in rice, but at the end
of a particular year all active business was stopped, and since
that time the partners had been engaged in recovering
outstandings and in winding up the affairs of the firm. In the
cause of the winding up it became necessary to raise money to
meet liabilities, and the suit was brought to recover these
moneys, the original loan being time barred, but the bar of
limitation being sought to be avoided by an acknowledgement
signed by one of the partners within three years of the date of
suit. Scott, J held that as the firm had stopped all trading, the
business being closed and the partnership at an end for trading
purposes, the agency which would be presumed as any ordinary
rule in a going mercantile concern, did not, exist, and that thus
it was necessary to show that in point of fact the partner who
signed the acknowledgement was authorised by the other
partners to do so.
In such cases public notice about dissolutions is necessary. Thus
we can say desolution does not bind the old customers until
they have the notice and, consequently an acknowledgement
made after dissolution and before notice binds the firm. The
principle has been applied in number of cases where interest
on a loan of the firm had been paid by a partner after the date of
dissolution, but before the creditors had notice of it and that
was held to be sufficient to extend the period of limitation
[Mahadeva Aiyar v. Ramakrishna Reddiar, (1926)30 Mad
LJ 67; see also Lalta Prasad v. Balik Prasad, (1910)32 All
51].
(c) Authority to bind by negotiable instruments
In the case of partnership of a general, commercial or trading
nature, a partner may accept, make and issue bills and other
negotiable instruments in the name of the firm. In trading firms
every partner has implied authority to bind the firm if there is
no agreement to the contrary. However a non trading firm is
not bound unless the issue of negotiable instruments by one
partner is shown to be necessary or usual in the particular
business. In the case of non-trading firm, the implied authority
to bind his co-partners depends on the nature of the business of
the partners. When a negotiable instrument is regularly drawn
by a partner in a trading firm in a transaction incident to the
firms business, another partner is not the less liable because
his name does not appear on the face of the instrument [See
Bunarsee Das v. Gholam Hoosein, (1870)13 MIA 358;
Chandanlal v. Aurinchand, AIR 1960 Punj. 500;
Raghavaveera Sons v. Padmarah, AIR 1978 Mad. 81].
As said earlier, every member of an ordinary trading partnership
has implied authority to bind the firm by drawing, accepting or
endorsing bills of exchange or by making and endorsing
promissory notes in its name and for the purpose of the firm in
the ordinary course of business. The liability of the firm on
negotiable instruments made by a partner is founded on the
principle of agency, and the test to be applied as to the binding
character is, as has been well put, the apparent authority of the
partner then the actual necessity of the firm. So, a bona fide
holder for value, without knowledge of any infirmity, can
exercise in full all rights under the instrument. In a Privy Council
case, Motilal Monucha v. Unao Commercial Bank [(1930)
59 MLJ 661 (PC)], it was held that in a mercantile trading firm
a partner has implied authority to draw and accept bills of
exchange or hundis on behalf of the firm and that such authority
will be negative only on proof that the holder of the bill knew
that it was a private affair of the partner.
For the liability of the firm thus the rule is that a bill of exchange
or a promissory note will not be binding on a firm unless the
name of the firm or names of all its members appear on the
instrument. Even where the executant describes himself in the
body of the pronote and while signing it as a partner of another,
yet the partner would not be liable. Lord Buckmaster, expressed
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249
his views in this regard in Sedasukh Janki Das v. Kishan
Pershad [461 A 33 (PC)] thus :
It is not sufficient that the principals name should in some
way be disclosed; it must be disclosed in such a way that
on any fair interpretation of the instrument his name is the
real name of the person liable upon the bill.
Where the contract is made by the partnership but the promissory
note is signed by a partner in his own name, and not in the
name of the partnership, nevertheless, the other partners will
be liable. But the partnership would not be liable for a loan by
a partner in his personal capacity, though the partnership may
have had the benefit of it [Ramchandra v. Kasemkhan, AIR
1925 Cal. 29]. It has been held that where a partner executes a
promissory note in his individual capacity and not on behalf of
the firm, he alone will be liable on the note. But where one
partner borrows money on any promissory note executed by
him alone but the money is borrowed for the partnership
business, and is used in such business, all the partners will be
liable for the debt [Mahendra Chandra v. Labanya Kumar,
AIR 1934 Cal. 755].
(d) Authority to pledge and mortgage
It was held that a power to pledge or mortgage partnership
property is incidental to a authority to borrow for partnership
purposes [General Auction Estate etc. v. Sumith (1891) 3
Ch. 432]. The implied authority to pledge is also extended to
pledges for antecedent debts. But at the same time it is worth
mentioning that a partner having implied authority to pledge or
mortgage the properties of the firm must necessarily have the
concomitant right of redeeming the same on behalf of the firm
[Harper v. Godsell, (1870)5 QB 422].
(e) Authority to hire
A partner has the implied authority to hire on the credit of the
firm any goods of a kind used in business. A partner hired an
elephant to trap wild elephants and one of the terms was that
the hirer should pay Rs.5000, if the elephant died during the
period of hire. The elephant died and the other partners denied
all knowledge about the transaction. Even so it was held that
the other partners were bound by that term [Mathura Nath v.
Sreejukta Begeshwari, AIR 1928 Cal. 57].
10.4 NO AUTHORITY
Section 19(2) imposes certain restrictions upon the scope of a
partners implied authority. They are statutory restrictions and
are distinguishable from those which can be imposed under
section 20 by an agreement of the partners. Statutory restrictions
are binding upon all persons dealing with partnership firms.
They cannot say that they were not aware of them. It is their
duty to know and ignorance is no excuse. For example, one of
the restrictions envisaged by the sub section (g) is that a partner
cannot transfer any immovable property of the firm. A person
who contracts to purchase such property of a partnership firm
from a single partner and without the concurrence of his co-
partners, gets no right over the property. On the other hand
where the implied authority is restricted by an agreement of the
partners u/s 20, the restrictions will be ineffective as against a
person who contracted with a partner without knowledge of
the restriction. Here we may discuss section 19(2) of the Act
which reads:
In the absence of any usage or custom of trade to the
contrary, the implied authority of a partner does not
empower him to -
(a) submit a dispute relating to the business of the firm to
arbitration,
(b) open a banking account on behalf of the firm in his own
name,
(c) compromise or relinquise any claim or portion of a claim
by the firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm,
(f) acquire immovable property on behalf of the firm,
(g) transfer immovable property belonging to the firm, or
(h) enter into partnership on behalf of the firm.
All the above restrictions are subject to the custom or usage of
the trade. The term usage of trade is to be understood as
referring to a particular usage to be established by evidence
[see section 92(5) of the Indian Evidence Act, 1872]. To prove
such a usage, there need not be either the antiquity, the
uniformity, or the notoriety of custom in its technical sense;
usage may still be in course of growth, and may require evidence
for its support in each case. [Jagmohan Ghose v.
Manickchand, (1859)7 MIA 263]. Custom of trade refers
to a general custom of merchants which has been ratified by
decision of courts and adopted as settled law [Pathak, p.171].
To be precise the usage or custom in question should be so
much an established part of the routine of a business, that it can
reasonably be supposed to be within the knowledge of persons
carrying on business in that trade. Where the action of a partner
falls within the forbidden categories, it does not bind his co-
partners. But they can take the advantage of the action by
ratifying it. For every principal has the power to ratify the
unauthorised acts of his agent. One thing must be noted that
the restrictions have been imposed for the benefit of and in the
interests of the partners and no absolute legal bar has been
imposed by the law against the partners in acting contrary to
the provisions of sub-section (2) and it is certainly open to the
partners to relax or waive the restrictions [S.N. Soni v. Taufiq
Farouk, AIR 1976 Delhi 63]. Hence we may discuss in brief
the prohibitions laid down in section 19(2) on the implied
authority of the partner.
Reference to arbitration [sec. 19(2)(a)]
One partner has no implied authority to bind his copartners to a
submission to arbitration respecting the matters of the
partnership. Submission to arbitration by a partner can bind
the copartners only upon proof that they have authorised it
before hand or have subsequently adopted or ratified it. This
has been explained by the Allahabad High Court, in R.B.
Thakur v. Thakur Das [AIR 1958 All 522] thus :
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Partners will only be bound by a submission to arbitration
upon proof that they have either expressly authorised it
before hand, or have subsequently adopted and ratified it,
or unless upon the terms of the submission it can be implied
that the arbitration was within the normal scope of the trade
or business of the partnership. Such authorisation need
not be in writing or otherwise formal, but it must be actual
and the authority will only extend to matters to which it
relates and will not be construed to covering other questions.
In the present case the other partners did not come forward
before the court at any stage to repudiate submission that
had been made by Kundan Dass (partner) in his application
under section 34 of the Arbitration Act. It will therefore
be construed that they by their act or conduct or atleast by
their acquiscnce have ratified the act of Kundan Dass.....
It has however been held that a submission to arbitration though
signed only by a managing member of a partnership firm is
valid [Bishamhar v. Ganga, AIR 1923 Lah. 212] and that the
special authority to refer to arbitration may be either express or
implied from the circumstances of the case.
Opening of Bank Account [S.19(2)(b)]
A partner under this clause cannot open a account in the bank
in his own name. This clause owes its origin to the declaration
in Alliance Bank Ltd. v. Keavsley [(1871) 6 CP 433] that in
the absence of evidence of usage, a partner has no implied
authority by law to bind his copartner by a bank account opened
by him in his own separate name, instead of in the name of the
firm, although such account be for the purposes of the firm.
Where the account is in the firm name, one partner has implied
authority to bind the firm by cheques drawn on the bankers of
the firm in the partnership name [Laws v. Rand, (1857)140
ER 812]
Compromise or relinquish any claim or portion of a claim
[sec.19(2)(c)]
An authority to give discharge for debt on payment, does not
include power to compromise or settle in any way a partner
likes. Similarly acknowledgement of the liability of firm in
respect of subsisting debt made by a partner on behalf of the
firm cannot amount to compromising or relinquishment a claim
or a portion thereof [Sarabhai Hathi Singh v. Shah Ratilal
Nathalal, AIR 1979 Guj. 110].
In the ordinary course of business where a firm deals in purchase
or sale of goods according to orders of its customers and the
goods supply happen to be of an inferior quality or short in
weight and the mistake is pointed out by the customer, the
partner who is dealing with the matter must necessarily have
the power of correcting the mistakes, otherwise the day-to-day
business of the firm cannot be carried on. The case contemplated
in S.19(2)(c) is a case of a claim made by the firm which was
due and realizable by the firm from the debtor. Where a certain
amount is validly due to the firm, one partner has no implied
authority, unless there is custom or usage to the contrary, to
relinquish a portion of that claim by compromise or otherwise.
The claim here referred to is a claim which is lawfully due and
not an obvious error in a bill or other document made out on
behalf of the firm by its servants or partners.
One partner can release a partnership liability is well established
[Bishwanath v. Jagannath, AIR 1956 All 11]. The
relinquishment by the defendant of his claim would undoubtedly
form good consideration for the withdrawal of their claim by
the plaintiff.
Therefore it is not possible to laydown a rule which will
generally empower all partners to bind the other members of
the partnership by a compromise or a rule to prohibit all partners
from so binding their fellow partners. The question as the courts
take it is in each case whether the act done by a partner is one
which is usual or necessary for the business of the partnership,
it would be held that actually litigating and managing partners
have authority to bind the other partners by settlement.[Mangal
Sen v. Firm of Bhagwandas parmanand, AIR 1925 Sind 61].
A partner cannot compromise a claim unless express authority
has been given [Chainraj Ramchand v. Narayanaswamy,
AIR 1982 Mad. 326].
Withdraw a suit [sec. 19(2)(d)]
It would be unreasonable to say that a partner cannot
compromise a claim by the firm but that he can withdraw a
suit. It is the accepted law that a partner has no implied authority
to withdraw a suit filed on behalf of the firm. Where proceedings
are launched by a partnership firm, it is quite natural that no
single partner can reserve to himself the liberty to nullify such
serious act of the firm. Proceedings started by the firm can be
withdrawn only with the authority of all the partners or
according to the custom or usage of a particular trade. Where a
clause in the deed of partnership provides that in all matters
majority opinion shall prevail, there a majority can, in good
faith, withdraw a suit [House Ltd Agency v. Panits & Lecquess
Ltd., AIR 1954 Cal.409].
Admit liability against the firm [sec.19(2)(e)
The implied authority of a partner does not empower him inter
alia to admit any liability in a suit or proceeding against the
firm. Similarly acknowledgement of the liability of the firm in
respect of subsisting debt made by a partner on behalf of the
firm does not amount to admission of any liability in a suit or
proceeding as against the firm. [Sarabhai v. Shah Ratilal
Share Broker, (1979)20 Guj 484 at p. 489]. Clause (e) ows its
origin to the declaration in Hambridge v. Dc. La
crouce[(1846)3 CB 742] that one partner has no implied
authority to consent to an order for a judgement in an action
against himself and his co-partners.
Acquisition of immovable property [sec.19(2)(f)]
Under this sub-clause (f) one partner has no authority to acquire
immovable property on behalf of the firm in the absence of any
usage or custom to the contrary, possibly because the liquid
capital of the firm will get locked up in permanent immovable
property which is not always easily capable of being converted
into money, whenever necessary. But if the fim is formed for
the purpose of acquiring immovable property with a view to
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selling it later on small or big lots, it may be necessary to vest a
partner with such a power. Generally, in such cases, such a
power would be contained in the articles themselves; if not a
partner can have such power according to the section only by
usage or custom of the trade.
Transfer of immovable property of the firm [sec.19(2)(g)]
No partner has authority by himself to transfer any immovable
property belonging to the firm under this sub-clause (g). The
transfer may be of any kind whether it be by way of sale,
mortgage, lease or gift, all fall within the scope of the clause.
Such transaction affecting the immovable property of the firm
can be made either with the prior authority of all the co-partners
or by their conduct of subsequent ratification.
Partnership on behalf of the firm [sec.19(2)(h)]
Partnership firms can and at times do enter into contracts with
one of the partners but this can may be with the consent and
knowledge of all the partners. A partner without the knowledge
and consent of his other partners cannot on behalf of the firm
enter into a contract with himself. Partners may in any particular
case may permit this to be done or acquiesce in it. It is a totally
different matter, whenever a partnership is entered into, it is to
be deemed that the partnership was entered into between the
individual members of the firms as it is the definite policy of
the law to validate if possible, the accomplished fact. [Ghisulal
v. Smt. Abhey Kanwar, AIR 1956 Ajmer]
At the same time it is worth noticing that engaging the firm in a
single transaction with another person with a view to sharing
its profits is something different from entering into partnership.
This was pointed out in Man v. Darey [(1968)1 WLR 893 which
has been discussed earlier].
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SUB TOPICS
11.1 Rights of partners
11.2 Liabilities of Partners
11.1 RIGHTS OF PARTNERS
Mutual rights and liabilities of partners depend upon the
provisions of their agreement,the law confers the following
rights upon all partners :
1. Right to take part in business [sec.12(a)]
Lord Eldon observed in Peacock v. Peacock [(1809) 170 ER
1076] that good faith of the partners is pledged mutually to
each other that business shall be conducted with their actual
personal interposition so that each may see that the other is
conveying on for their mutual advantage. This is the basic
principal underlying section 12(a) of the Act which confers the
right to take part in the management of the business in each
partner thus -
Every partner has the right to take part in the conduct of
business of the firm.
The privilege of participation must be used for promoting the
interest of the firm and not for damaging it. In Suresh Kumar
v. Amrit Kumar [AIR 1982 Del.131}, Delhi High Court issued
an injunction against a partner, who in order only to undermine
the position of the Managing partner, wrote to the principals of
the firm not to supply motor vehicles and to bankers not to
honour cheques. But since the provisions of section 12 operate
only subject to an agreement between the partners, it is open to
partners to agree that one or more of them shall not participate
in the management of the firm. When there is an agreement of
this kind, the partners excluded from management cannot
complain of it. They are not competent to say that important
decisions concerning the business were taken without consulting
them. Partnership agreements usually provide for the execution
of the right to take part in the management of the business in
the case of some partners. In the absence of any agreement if
one partner excludes another unjustly from management, the
former can be restrained by injunction.
2. Right to express opinion [sec.12(c)]
Under section 12(a) every partner has a right to take part in the
conduct of the business and it is only where difference arises as
to ordinary matters concerning the business of the firm that the
same has to be decided by majority of partners under section
12(c) of the act which reads
any difference arising as to ordinary matters connected
with the business may be decided by a majority of the
partners, and every partner shall have the right to express
his opinion before the matter is decided, but no change be
made in the nature of the business without the consent of
all the partners.
However, this statutory scheme is alterable by agreement.
Partnership articles may stipulate that all matters whether
fundamental or ordinary shall be decided by majority opinion
or that they may require the consent of all the partners. Where
all matters are left at the disposal of majority, the majority
becomes all powerful with in the organisation of partnership.
Under section 12(c) distinction must be made between ordinary
matters connected with the business and special matters affecting
the nature of business. Where difference of opinion arise in
regard to ordinary matters, e.g. taking an apprentice or
appointment or dismissal of servants, the verdict of the majority
will prevail, provided that every partner is previously consulted
before the final decision is made and the decision of the majority
is arrived at bonafide. In the absence of such consultation, the
act of the majority will be invalid. As Lord Eldon said in Const
v. Harris [(1824)24 RR 108] :
For a majority of partners to say, we do not care what one
partner may say; we being the majority, will do what we
please is what a court of equity will not allow
Again, where powers are conferred on a majority present at a
meeting of not less than a certain number, unless such meeting
is duly convened, and the required number be present, the power
cannot be exercised, for there is no majority as contemplated
[Suresh Kumar v. Amrit Kumar, AIR 1982 Del 131]. Where
in respect of such matters, the partners are equally divided, those
who forbid a change will have the say in consonance with the
maxim un re communi potior est conditio prohibentis. For
example, where one of the two partners had regularly given a
weeks notice to a servant to leave the service, but the other
authorised him to continue, the latter opinion would prevail.
Dismissal of a servant required a partnership decision and
partners being equally divided one who opposed removal had
his way [Donaldson v. Williams, (1883) 147 ER 432].
As to a matter of fundamental nature the most important among
them being the nature of business, it has all along been held
that no new business can be undertaken against the will of even
a single partner. The profitability of the new business is not
material or relevant factor. But where difference of opinion
relates to a matter of fundamental importance, consent of all
partners becomes necessary. Fundamental matters include the
question of any alteration of, or addition to, the business of
the firm and the admission of a new partner. As said earlier the
partnership deed may, however, provide that in all matters
majority opinion shall prevail. The manner in which majority
power should be exercised was explained in Blisset v. Daniel
[(1853)90 RR 454]. The plaintiff was working in partnership
with certain persons. It was proposed to appoint one of the
partners son as a co-manager of the firm. The plaintiff objected.
The aggrieved father complained to his partners behind the back
of the plaintiff and persuaded them to sign and serve upon the
plaintiff a notice of expulsion. This was done in the exercise of
a power which authorised a majority to expel any partner without
11. RIGHTS & LIABILITIES OF PARTNERS
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giving any reason. The plaintiff contested the validity of the
expulsion and it was set aside. The court pointed out that powers
are given to the majority so that in case of need they may be
exercised in good faith for the benefit of the firm, it is no doubt
for the partners to decide what is in the interest of the firm but
they must do so in good faith. Majority powers should not be
used for base or unworthy purposes or merely to injure a
copartner [Avtar Singh, p.491].
3. Right to access to books [sec. 12(d)]
Section 12(d) provides the right to all partners to inspect and
copy the books of the firm thus -
Every partner has a right to have access to and to inspect and
copy any of the books of the firm.
Every person may either in person or through an unobjectionable
agent inspect and copy the books of the firm. Where the
inspection is conducted by an agent he may be made to give an
undertaking to that effect. The inspection can be made, whatever
be the motive, but not for an improper measure [Trego v. Hunt,
(1896) AC 7; Deavan v. Webb, (1901)2 CH 39]. Thus all
books, accounts and papers of the firm are accessible to all
partners or their legal representatives as a matter of right. Even
the legal representatives of partners have that right as this right
to access the books of the firm, continues even after dissolution
of the firm. In this regard the findings in the case Re Martindale
ex p. Truman [(1832)1 Dcac & Ch 464] are worth noticing.
Ten years after a firm had been dissolved and accounts settled
with books left in the custody of a partner, a former partner
became bankrupt and the bankruptcy commissioner called for
the books to examine the former dealings of the bankrupt. The
suit was resisted on the ground that the partner concerned had
himself never called for the books for a whole decade. It was
held that in respect of the books both partners continued as
tenants in common and the length of time did not affect that
relationship.
Furthermore there is no restriction upon the number of times
that a partner can examine books etc. He cannot be told that he
should see them only once in a year. At the same time a partner
will be bound by an agreement to accept as correct the balance
sheet prepared by the other partners. But where an agreement
made on dissolution is based on a false account, it may be set
aside [Chandler v. Dorsett, (1970)23 ER 225].
An assignee of partners share has no right during the
continuance of the partnership, to require any accounts of the
partnership transaction or to inspect the books of accounts
[S.29]. In Goa Petha v. N.H. Moss [(1931)10 Pat 792], the
Patna High Court held that the assignee or mortgagee of a
partners share is not entitled to accounts of the partnership
transactions before dissolution or interfere in any way with the
management or administration of the partners.
A minor who has been admitted to the benefits of the firm has
a right to examine the books of account, but not other papers or
books. Perhaps the legislation did not think it proper that a
minor should come to know any of the business secrets of the
firm. He may not be able to digest or retain them.
The right to inspect books/papers, however, does not include
the right to carry them without the consent of the other partners,
to any other place [Floydd v. Cheney, (1970) Ch. 602].
4. Right to remuneration [sec. 13(a)]
A partner is entitled to nothing extra for any inequality of
services rendered by him as compared with that rendered by
his co-partners. Unequal services are presumed to have been
rendered without expectation of reward. This conclusion flows
from the principle that as each partner is clothed with all the
powers of the firm, each is burdened with all the duties of it.
But this general rule denying any remuneration to a partner for
services rendered by him to the partnership firm does not prevail
when there is agreement for such compensation. This
compensation may be express or fairly implied from the acts of
the partners or from the course of business between them, or
from the circumstances under which extra services are rendered
by a partner for which compensation is claimed. To this right
of the partner, the legal position has been summarized in the
following passage of Lindleys Treatise of Partnership, at p.480
thus :
Under the ordinary circumstances the contract of
partnership excludes any implied contract for payment of
services rendered for the firm by any of its members.
Consequently in the absence of an agreement to that effect,
one partner cannot charge his co-partners with any sum for
compensation, whether in the shape of salary, commission,
or otherwise, on account of his own trouble in conducting
the partnership business.
The principle propounded above has received statutory
recognition in India under section 13(a) of the Act, which makes
it clear that if the contract so provides, a partner may receive
compensation for taking part in the conduct of the partnership
business. Indeed a stipulation that an active partner shall receive
a fixed salary is by no means uncommon in partnership
agreements. When a partnership agreement recites that one of
the partners will receive a salary for the services rendered by
him to the partnership business the contract is regarded as a
contract of partnership and is not designated as a contract of
service. An agreement to share both profit and losses in addition
to a salary points to the existence of a partnership and an
agreement to share profits only in addition to a salary indicates
the relationship of master and servant or principle and agent
[Bhagwan Singh v. Commissioner of Income Tax, AIR 1959
Punj.594; V.D. Dhamsvatay v. Commissioner of Income Tax,
MP, AIR 1968 SC 683]. It is now well settled proposition of
law that partners in the firm stand in the same position as co-
promisors or co-contractors [Finance Centre v. Ram Parkash,
1977 Kash. LJ 218]. Hence a partner has a right to claim
remuneration for taking part in the conduct of business only
when there is an agreement to that effect.
5. Right to Profits [sec.13 (b)]
Except in firms which earn purely by intellectual work, not
requiring any investment of appreciable capital for its work,
such as that of solicitors, and also in firms which do merely a
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sort of agency business, like that of brokers, all other firms
require some sort of capital, not only to begin their work, but
also to conduct it in the first few years of existence. If the firm
prospers, further capital would be necessary not only for its
extension but also for opening its branches in other places. As
regards subscribing either to the original or subsequent
additional capital, the partners sought to agree either that each
and every one of them should contribute equally or unequally,
or that one or some need not contribute any capital at all, but
may contribute instead skill and labour. To give an example of
the last class, a capitalist may take with him as partner an
inventor of a new process, or a new patentee; and the two might
agree to work in partnership. In the absence of an express or
implied agreement partners with even unequal capital must share
the capital, profits and losses only equally and the onus of
proving the contrary is on him who sets it up. This is what has
been laid down in section 13(b) of the act, which says that
partners are entitled to share equally in the profits earned, and
shall contribute equally to the losses sustained by the firm. In
the absence of any agreement the presumption of equality
stands. It is not at all necessary to prove that the partners agreed
to share profits and losses equally. An equality in this respect
between the partners is taken for granted [Robinson v.
Anderson, (1855) 109 RR 362]. In this case two solicitors
were jointly retained to defend certain action and there was no
satisfactory evidence to show in what proportion they were to
divide their remuneration. It was held that they were entitled
to share it equally although they had been paid separately and
had done unequal amounts of work. The provisions of section
13(b) of the Act are analogous to section 34(1) of the English
Partnership Act, 1890 and Lord Lindley stated the law thus -
It is not unreasonable to infer, in the absence of evidence
to the contrary that the partners have agreed to consider
their contribution as of equal value, although they may have
brought in unequal sums of money, or be themselves
unequal as regards skill, connection or character. Whether,
therefore, partners have contributed money equally or
unequally, whether they are or are not at par as regards
skill, connection or character, whether they have or have
not laboured equally for the benefit of the firm, their shares
will be considered as equal, unless some agreements to the
contrary can be shown to have been entered into.
The same principals apply in India. In Mansa Ram v. Tej
Bhan, [AIR 1958 Punj 5], it was argued that because the
contribution of one partner in the capital of the firm was little
or three times than that of the other partner and that this ratio
had been maintained from the very inception of the partnership
to its end and that, therefore, an agreement should be deduced
that profits would be distributed in the proportion of their capital
contribution. The court rejected this contention and held that
their shares will be considered as equal, unless some agreement
to the contrary could be shown to have been entered into.
An agreement to the contrary can be inferred from the
circumstances of the case. In Delhi Veopar Mandal v. I.T.
Commissioner [AIR 1967 Punj. 255], a partnership was
constituted with a view to disposing of the plots of land
mentioned in the document creating the firm. The duration of
the partnership was fixed as until this plot of land and any
other plots of land purchased are disposed of after
development. There was no mention of the way in which
profits were to be shared, but the interest of each partner in the
partnership property was fixed. This was held to be an evidence
of an agreement that the interest of the partners in profits and
losses would be the same as their interest in the property.
At the same time we should note one thing that where a change
occurs in the constitution of a firm and no new agreement is
made, the ratio of profits sharing will remain the same to the
extent to which it is consistent with the altered composition of
the firm. In Dawood Sahib v Sheik Mohiuddin Sahib [AIR
1938 Mad. 5] where two partners of a firm were sharing profits
in a certain proportion, one of them died. His son joined the
firm and the business was continued on the same lines as before.
No new agreement was made as to any thing whatever. The
court had that the profits sharing proportion between them must
remain the same. The same principle is applicable on the
retirement of a partner. If there is no agreement to the contrary
between the remaining partners, their profit sharing ratio will
remain the same, though there will have to be some numerical
adjustments. In Hiralal v. Chaganmal [AIR 1950 MB 56], of
the three partners in a firm two were receiving profits to the
extent of 5 annas each and the remaining 6 annas belonged to
the third. Thus the ratio roughly was 30:30:40. The partner
who was receiving six annas retired. It was held that the
reallocated share of the remaining would be half each. Both of
them also being equal before the retirement. But where a
business which was admittedly commenced with unequal
shares, on the retirement of one and the death of the other, the
value of the shares of remaining partner and the deceased cannot
be equal. [Mohammad Abdul Satar Baig v. Hafija Bibi, AIR
1944 Mad. 346].
For example, where A, B and C were partners having profit
sharing arrangement in the ration of 50:25:25 respectively, C
retires A & B continued business and accumulated more
properties . Partnership dissolved due to ones death and the
surviving partner continued business with the total assets. The
question is whether the survivor partners and the deceased
partners share would be equal or in the proportion 1:2 as their
share was in the old partnership? There share would be in 1:2
ratio.
Whereas a partner has a right to profits of the business, at the
same time he is also liable to contribute to the losses of the
firm. In the absence of any indication to the contrary, where
the partners have agreed to share the profits in certain
proportions, the presumption is that the losses are also to be
shared in the same proportion [M. Govindu & Co. v. C.I.T.
(A.P), (1976) 102 ITR 2284].
6. Right to interest on capital [sec. 13 (c)]
Unless otherwise agreed, partners are not entitled to any interest
on their contributions to the capital. Even where the partner is
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255
given the right to receive interest on his subscribed capital, such
interest shall be payable only out of the profits. Section 13(c)
so provides in the following words:
Where a partner is entitled to interest on the capital
subscribed by him, such interest shall be payable out of
profits.
Noting the effect of this part of the clause, Rajasthan High Court
in Bhagchand v. Kaluram [AIR 1966 Raj. 21], refused to allow
interest where only losses were shown and said:
Both the lower courts have awarded interest to the plaintiffs
on their investments on the ground that there was a
stipulation in the partnership deed that this interest was
payable irrespective of the fact whether there was profit or
less. Unless there is such stipulation, section 13(c) of the
Partnership Act comes into play, and interest is payable
only out of profits. The deed of partnership provided for
payment of interest on the capital to a partner which only
means that plaintiff's became entitled to interest on capital
subscribed by them but that interest was payable only out
of profits, as there was no contract to the contrary.
Ordinarily partners are entitled to simple interest, compound
interest can be allowed only when there is an express or implied
agreement to that effect or a practice adopted by the partners in
keeping their account amounting in effect to the payment of a
compound interest. Thus the Madras High Court in
Sivagananahammal v. S.V. Nallaperumal [AIR 1935 Mad.
165] allowed compound interest , where the partners were
crediting to the capital account the interest due on their capital.
Usually the courts allow interest only under exceptional
circumstances where, there is an express or implied agreement
to that effect. At the same time, it is worth mentioning that it is
well established that where interest on capital is payable between
the partners, it stops running from the date of dissolution unless
otherwise agreed. So, in taking accounts of the partnership,
interest after the date of dissolution will not generally be allowed
to the partners on their respective capital, though interest is
allowed by agreement during the partnership [P. Chandriah
Chetti v. Velehi Madhaviah, AIR 1961 Mad. 478 at p. 480].
7. On advances [sec.13(d)]
An amount in fact contributed by a partner as capital does not
become an advance merely because under the partnership deed
there is no compulsion on the partner to contribute or maintain
any capital with the firm. There is a material distinction between
capital contribution of a partner and advances made by him to
the firm. The distinction is made clear under 13(c) and 13(d)
of the act which read :
(c) mentioned earlier
(d) a partner making for the purpose of the business any
payments or advance beyond the amount of capital he has agreed
to subscribe, is entitled to interest thereon at the rate of 6 % per
annum.
This implies that though as a general rule interest is not allowed
between partners unless there is an agreement or trade custom,
but this rule is subject to an important qualification, viz., that
interest is payable to a partner on money paid or advanced by
the partner for partnership purposes beyond the capital he has
agreed to subscribe. Where the plaintiff did agree to subscribe
any capital it is only fair that he should be allowed interest on
the sum, which has been utilized by the partnership. In drawing
up accounts between partners, the court is not necessarily limited
to the limited measure of relief which was claimed by the
plaintiff in the plaint. If the equitable right to interest is
established there appears to be no reason why interest should
not be allowed. In Iqbal Mohammad v. Ralla Ram [AIR 132
Lah 389], the court found an evidence that goods were purchased
by the plaintiff with his own money and these goods were
supplied by him to the partnership, in addition to his own
contribution towards the capital. It was held this sum (price of
goods) being in the nature of a loan by the plaintiff to the
partnership, there can be no doubt that he is entitled to get
interest thereon.
The statutory right to interest on advances emphasizes the fact
that a partner in a firm can have dual capacity - one as a partner
and second as a creditor. Such advances must be treated as
advances made by a third party, that is to say, the partner in his
other capacity. The Nagpur High Court in Govind v.Thakur
Gajraj Singh [AIR 1921 Nag 45 at p. 46] stated the final effect
of these words : He can then as the promisee of the firm exact
payment from the partners jointly or severally under the first
paragraph of section 43 of the Contract Act. But he fills a dual
capacity. He is not only a promisee of the firm, but he is also
one of the joint promisors to himself, and under the accord
paragraph of section 43 of the Contract Act, he can only call
upon each of the joint promisors to contribute equally to the
payment to be made to himself as promisee.
At the same time it should be noted that while interest on capital
account ceases to run on dissolution, the interest on advances
keeps running even after dissolution and up to the date of
payment [See Swaminatha Chettiar v. Nagalingam, AIR 1952
Mad. 769].
8. Right to Indemnity [sec. 13(e)]
The right to recover indemnity from the firm is provided in
section 13(e) of the Act thus :
The firm shall indemnify a partner in respect of payments made
and liabilities incurred by him ,
(i) In the ordinary and proper conduct of business, and
(ii) In doing such act, in an emergency, for the purpose of
protecting the firm from loss, as would have been done by
a person of ordinary prudence in his own case, under similar
circumstances.
I) In the ordinary and proper conduct of the business
On the principal of mutual agency which underlines the notion
of partnership, it would follow that the firm must reimburse a
partner as to payments made or liabilities incurred by such
partner in the ordinary and proper conduct of the partnership
business. For example, where the working partners of a firm
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had taken a lease of certain premises in their own name but for
the partnership purposes and one of them having died, the arrears
of rent were recovered from his estate, his executors were held
entitled to recover contribution from the other partners in respect
of the loss [Mathews v. Ruggles Brise, (1911) 1 Ch 194]. And
this right to indemnity subsists even though the expense may
turn out to have been useless provided the same has been
acquiesced in by the other partners. Nor is it lost because the
partner who incurred the liability was more to blame than, the
other partners. Of course, the indemnity will not extend to
cases where the liability is in regard to a matter outside the
scope of the business, or where it is incurred fraudulently or by
willful neglect to the prejudice of the firm. The "words in the
ordinary and proper conduct of the business" have been
explained in Thomas v. Atherton [(1877) 10 Ch.D. 185]. T,
the managing partner of a colliery, received notice from L, an
adjoining owner, that the workings were being carried on beyond
the boundry. T insisted that he was entitled to the disputed
ground, and carried on his working . The matter having been
referred to arbitration, he was held liable to pay 6,000 as
damages for the trespass. His claim for contribution from his
ex-partners failed as the loss was not suffered in the ordinary
and proper conduct of the business. It was held that :
He worked beyond the limits of the partnership colliery
without proper inquiry as to limits and had acted with gross
negligence and recklessness in continuing his working after
notice and without consulting his partners, when it was
evident that his right to work in the disputed area was
extremely doubtful.
Indemnity and Dissolution
The right of indemnity is not lost by the dissolution of the firm
and it also does not matter that there is or has been no settlement
of accounts. In Sadhu Narayan Aiyangar v. Ramaswami
[ILR 32 Mad. 203] it was laid down that a partner who, after
the dissolution of partnership, has been compelled to pay a debt
due by the partnership, can maintain a suit for contribution
against his co-partners, even though a suit for the general
account of partnership and share therein is barred by limitation.
The defendant, however, will in such a case be entitled to show
that in a settlement of accounts he will not be liable, or that his
liability would be reduced.
Illegal transaction
No contribution is allowed to be recovered in respect of
transactions which are illegal. If, for example, the money in
respect of which contribution is claimed was collected for or
applied to an illegal purpose, the court will not help the plaintiff.
But where the plaintiff was not aware of the illegal purpose,
and his ignorance was in the circumstances, justifiable, he may
be allowed to recover. Again, the court can help him in all
cases where he can seek recovery without bringing in the
illegality of the transaction [Avtar Singh, Law of Contract
p.161].
II) In an emergency
The second kind of indemnity is recoverable when a partner
has done an act involving expenditure in order to protect the
firm from a loss threatened by an emergency. It is necessary
that the partner concerned should have acted in a manner in
which a reasonable person would have acted in his own case.
This provision is supplemented by that in section 21 of the Act
which says that every partner has authority, in an emergency ,
to do all such acts for the purpose of protecting the firm from
loss as would have been done by a person of ordinary prudence
in his own case.
11.2 LIABILITIES OF PARTNERS
Every partner is liable, jointly with all the other partners and
also severally, for all acts of the firm done while he is a partner
[sec.25].
The section declares that every partner is liable jointly with his
co-partners as well as individually for any act of the firm
done while he is a partner. The section does not talk of liability
for any act in particular; it rather talks of a general principle of
liability and lays stress upon three main points:
1. The liability of the partners is 'joint as well as several'.
2. They are liable only for the 'acts of the firm'.
3. A partner is liable only if lthe act was done 'while he is still
a partner'.
We may here under discuss these points.
Joint and several liability
All the partners are jointly and severally liable on any contract
entered into by any of the partners. While in English law, the
liability of partners is a joint liability in the case of contracts,
and a joint and several liabiliity in cases of torts. The Indian
Partnership Act, following the Indian Contract Act, has made
all liability joint and several. So every partner would be liable
for the obligation of the firm incurred in the usual course of
business of the firm by the other partners. The principle behind
section 25 is that a member who does the act is held out to the
world as one for whose acts they are responsible [Iyer, p.749].
The position of the partners is that of joint promisors and is
therefore to be regulated for the purpose of contract by section
43 of the Contract Act and the section lays down three rules.
Firstly, when joint promise is made, and there is no express
agreement to the contrary, the promisee may compel any one
or more of the joint promisors to perform the whole of the
promise [Ram Shankar Singh v. Shyamlata Devi, AIR 1970
SC 716]. In its application to partners, the rule means that if a
firm owes a sum of money to a person, the latter may recover
the whole of the amount from a single partner, or all of them.
Secondly, a joint promisor who has been compelled to perform
the whole of the promise, may require his co-promisors to make
an equal contribution to the performance of the promise. In its
application to partners the rule means that if a single joint
promisor has been compelled to pay the whole of the amount
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due on a promissory note, he can recover equal contribution
from his copartners.
Thirdly, if any one of the promisors makes a default in such
contribution, the remaining joint promisors must bear the
deficiency in equal shares. In its application to partners the
rule means that if the whole of the amount has been recovered
from a single partner, and he is not able to recover anything
from one of the partners because of his insolvency or otherwise,
the deficiency will have to be shared by the rest of the partners
equally. [Avtar Singh, p. 248].
Section 43 allows an action to be brought against any one of
the joint promisors without impleading the others as defendants.
In this situation if he fails to recover anything from him can he
subsequently sue the others ? According to Allahabad High
Court [Mohamed Ashari v. Radhe Ram Singh, (1900)22 All
307] subsequent suit agains the other promisors should be
allowed to proceed, but the Calcutta and Bombay High Corts
disallowed such action. At the same time where a creditor
discharges one of the partners, the latter may not be liable to
creditor, but as between partners his liability to make an equal
contribution will remain intact.
In cases where strangers are partners the members of the family
who are not actively engaged in the business have no contractual
relation either with the stranger partners or with the cdreditors
of the firm and unless they have been admitted to the benefits
of the partnership they cannot be made liable [Mangulal v.
Mannilal, AIR 1933 All 311]. But where managing partner
stands surety in the name of the firm in the manner mentioned
in section 22 of the Act, the other partners are liable under
section 25 of the Act. [Suwalal Vemichand v. Fazle Hussain,
AIR 1939 Nag 31].
Note: Sec.22 - In order to bind a firm, an act or instrument
done or executed by a partner or other person on behalf
of the firm shall be done or executed in the firm name,
or in any manner expressing or implying an intention to
bind the firm.
Acts of the firm
The liabilities that the partners incur is only for such acts of the
partner as qualify themselves to be the acts of the firm. The
expression act of the firm is defined in section 2(a) of the Act
thus -
an act of the firm means any act or omission by all the
partners or by any partner or agent of the firm which gives
rise to a right enforceable by or against the firm.
In Jatinder Kumar Dass v. Dhirajlal Varajlal Kanakia [AIR
1975 Cal 123] where the partners of the firm were joint tenants
of the plaintiff in respect of the godown, the defendant was
liable to pay the rent in respect of the said godown as a joint
tenant i.e., a joint promisor or partner. The admitted failure of
the firm to pay rent to the plaintiff is held to be an act within the
meaning of section 25 of the Indian Partnership act read along
with section 2(a) there with.
The effect of section 2(a) read with the fourth chapter is that if
an act falls within any of the principles of liability stated in
section 18 to 30, it will be an act of the firm and it will either
create a right in favour of the firm, or a liability against it.
Section 18 vests every partner with the position of an agent of
the firm for the purposes of business. The expression business
purposes means, in term of section 19, the requirements of
business when it is done in the manner in which that type of
business is usually carried on. These two provisions thus lay
down the foundation of contracts of the firm. Such authority
can be restricted or extended by agreement under section 20
and it is automatically extended under section 21 in cases of
emergency. As envisaged under section 22 a contract which is
made in the firm name and within the limits of the firm, all
partners are then jointly and severally liable under it and are
also entitled to enjoy the rights created by it. To refer, for
example, to Re Briggs & Co. [(1906) 95 LT 61]. A father and
son were the two partners in the firm. A creditor was pressing
for payment, but the firm was not able to pay. Son without his
father's information consented to an assignment to the creditor
of the book debts of the firm in consideration of the creditor
giving time to the firm. The deed of assignment was made out
by the son in his own name and that of his father. The firm
having become bankrupt, the trustee in bankruptcy sought to
set aside the deed as having been signed by one partner. But
the deed was held to be an instrument binding upon the firm.
Act done while still partner
A person incurs liability as a partner only for such acts as have
been done while he is a partner. It follows that he is not liable
for acts done before he joined the firm as a partner or after be
ceased to be a partner. This is, however subject to the principle
of liability of an incoming and out going partners. The emphasis
of section 25 is that the liability should have arisen at a time
when the person sought to be charged was a partner. Thus a
claim against the partner must fail where the debt was incurred
after the firm has ceased to exist. Where the business of the
new firm was carried on by a partner under its old name, the
retiring partners cannot be made liable for any transaction enter
into after the dissolution. In the case of Rahimatulla Ishak v.
Jhamatmal Chainrai [(1909)31C 445], it was held that where
A & B carried on business as partners under the name and style
of AB and B consequently retired from the partnership, but the
business was carried on in the old name, did not make B liable
for the transactions subsequent to his retirement. Likewise in
Mathura Nath Choudhury v. Sreejukta Bageswari Rani
[AIR 1928 Cal. 57] where two persons carried on the business
of catching wild elephants and it was alleged that one of the
partners and his servant hired an elephant for the purpose of
employing him in their business, and the elephant died and a
suit was brought for the recovery of Rs. 5000/- it was held that
the other partner was also liable under the agreements made
between the hirer and the partner.
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To sum up, a suit can be maintained against some of the partners
for the liability is joint and several. In a suit upon a contract
made by a partner on behalf of the partnership the promisee
can compel all or any one of such partners to perform the whole
of the promise, and that non-joinder of a copromisor is no
ground of defence to such a suit.
Liability for acts done upto retirement
A retired partner remains liable to the creditors of the firm for
all the acts of the firm done before and upto the date of
retirement. One may retire from the firm but one cannot retire
from subsisting liabilities. Partners are joint promisors. These
liability is contractual and no one can retire from a contract
which he has made. Thus notwithstanding the retirement the
existing creditors can still sue, that the retired partner continues
to be liable. Even if the retiring partner makes an arrangement
with the co-partners under which he is released from liability
for outstanding debts, he will remain liable to creditors [Court
v. Berlin, (1897)2 QB 396 CA]. The active partner in a firm
consisting of himself and two dormant partners retained a
solicitor to conduct an action for the recovery of a debt due to
the firm. While the action was pending, the partnership was
dissolved, and the dormant partners retired from the business.
No notice was given to the solicitor. It was, therefore, held that
the retiring partners were liable to the solicitor for the costs of
the action. In this respect we may refer to section 32(2) which
reads:
A retiring partner may be discharged from any liability to
any third party for acts of the firm done before his retirement
by an agreement made by him with such third party and
the partners of the constituted firm, and such agreement
may be implied by a cause of dealing between such third
party and the reconstituted firm after he had knowledge of
the retirement. This sub-section is an instance of novation.
Where the arrangement is not with the creditor, the creditors
rights against the retiring partner are unaffected [Sarma v.
Phanindranath, (1931) 35 CWN 593].
A retiring partners liability continues till giving of notice. In
Bhaishankar v. Lakshmi [(1930) Bom. 449] where a person
entered into a transaction with a firm after the retirement of one
of the partners, but before notice of dissolution, and had never
been aware of the retired partners membership of the firm, it
was held that no liability could attach to the retiring member.
But the Calcutta High Court in Pramatha Chandra v.
Bhagwandas [(1931) 59 Cal. 40] had held that the rights of
third parties to sue a retiring partner upon post dissolution
transactions did not depend on the question whether they knew
that he was a partner prior to dissolution. The retiring partner,
therefore, continues to be liable so long as no public notice of
retirement is given as required under section 32(3). Where no
public notice of retirement of a partner is given and the retiring
partner pleads non-liability on the ground that the plaintiff was
apprised of the retirement before the suit, liability was
contracted, the burden is heavy on the retiring partner to prove
and establish the plaintiffs knowledge. [Kalaram v. Punjab
National Bank, (1935)39 CWN 412]. The persons who had
ceased to be partners would not be liable to third parties for the
acts done by the other partners subsequent to the dissolution of
the firm where the third parties had actual notice of the
dissolution when the acts were done [Natwarlal Ambalal &
Co. v. Chatuerbhai, (1977) 18 Guj. LR 127].
Liability for acts done after dissolution
Section 45 of the Act requires that a public notice of the fact of
dissolution should be given. An agency cannot be privately
terminated, nor can a firm. The fact of dissolution should be
publicly announced, so that those who have been dealing with
the firm should come to know that the authority of the partners
has been terminated. Where this is not done, the authority though
it stands determined between the partners publicly continues.
Consequently, if a partner contracts in the name of the firm and
the contract would have been within the scope of his implied
authority, his co-partners would become liable. The effect is
that persons dealing with a firm will not be affected by a
dissolution of which no public notice has been given, unless
they themselves had notice of such dissolution. This rule is made
clear by the Calcutta High Court in Jagat Chandra
Bhattacharjee v. Gunny Haji [(1926) 53 Cal. 214] thus :
The law which regulates the liability of partners for the
acts of their copartners is a branch of the law of agency;
and in the absence of any specific rule upon the subject
under the head of partnership, we must look to the law of
agency for the solution of our present question. Each
partner is the agent of his copartners for the purposes of
contracting debts and obligations in the usual course of
partnership business. And when this agency has once been
established, it does not cease as regards third persons, until
its termination has become known to them. In the case,
therefore, of a dissolution of partnership or of retirement
of one of its members, the agency as between the partners
themselves would cease from the time of such dissolution
or retirement; but as regards third persons the agency would
continue until it had been duly notified.
To this rule there are certain exceptions where no public notice
is required and the liability of the partner would cease from the
moment of dissolution. These are (1) deceased partner, (2)
insolvent partner, and (3) dormant partner i.e., one who was
not known to be a partner to the person dealing with the firm
after dissolution.
Liability to share personal profits
Section 50 of the Act reads :
Personal profits earned after dissolution: - Subject to
contract between the partners, the provisions of clause (a)
of section 16 shall apply to transactions by any surviving
partner or by the representatives of a deceased partner,
undertaken after the firm is dissolved on account of the
death of a partner and before its affairs have been
completely wound up
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"provided that where any partner or his representative has
bought the goodwill of the firm, nothing in this section
shall affect his right to the firm name.
Where the firm is dissolved on account of the death of a partner
and if, before its affairs are completely wound up, any
transaction is undertaken by the surviving partner or the
representative of the deceased partner, which brings him some
advantage at the expense of the firm, he is bound to share it
with other partners under the principle of section 16(a). Section
50 clearly says that such a profit would be accountable to the
other partners in the same manner as if it were earned in violation
of the duty under section 16(a). This sub-section provides that
a profit made by a partner for himself from any transaction of
the firm, or from the use of the property or business connection
of the firm or the firm name, has to be accounted and paid over
to the firm. Where a partner died and the business of the firm
was continued by the other partners without paying out the
interest of the deceased, his representatives were allowed to
claim profits subject only to deduction of an allowance by the
managing partners [Manley v. Sartori, (1926) All ER 661].
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182, Agency and Principal defined.- An agent is a
person employed to do any act for another, or to represent
another, in dealings with third person. The person for whom
such act is done or who is so represented, is called the
principal.
183. Who may employ agent .- 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.
184. Who may be agent.- As between the principal and third
persons, any person may become an agent, but no person who
is not of the age of majority and of sound mind can become an
agent, so as to be responsible to his principal according to the
provisions in that behalf if herein contained.
185. Consideration not necessary.- Nor consideration is
necessary to create an agency.
186. Agents authority may be expressed or implied.- The
authority of an agent may be expressed or implied.
187.Definition as express and implied authority.- An
authority is said to be express when it is given by words spoken
or written. An authority is said to be implied when it is to be
inferred from the circumstances of the case; and things spoken
or written, or the ordinary course of dealing, may be accounted
circumstances of the case.
188. Extent of agents authority.- An agent, having an
authority to do an act, has authority to do every lawful thing
which is necessary in order to do such act.
An agent having an authority to carry on a business, has
authority to do every lawful thing necessary for the purpose,
usually done in the course of conducting such business.
189. Agents authority in an emergency.- An agent has
authority, in the emergency, to do all such acts for the purpose
of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar
circumstances.
190. When agent cannot delegate.- An agent cannot lawfully
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
of the agency, a sub-agent must be employed.
191. Sub-agent defined.- A Sub-agent is a person
employed by, and acting under the control of the original agent
in the business of the agency.
192. 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, originally, and is bound by and responsible for his
acts, as if he were an agent originally, appointed by the principal.
Agents responsibility for sub-agent.- The agent is responsible
to the principal for the acts of the sub-agent.
Sub-agents responsibility.- The agent is responsible to the
principal for the acts of the sub-agent.
193. Agents 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, 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 persons; the principal is not represented, by or
responsible for the acts of the person so employed, nor is that
person responsible to the principal.
194. Relation between principal and person duly appointed
by agent to act in business of agency.- Where 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.
195. Agents 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 or negligence of the agent so selected.
196. Right to 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
ratify them, the same effects will follow as if they had been
performed by his authority.
197. 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.
198. 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.
199. Effect of ratifying unauthorized act forming part of a
transaction.- A person ratifying any unauthorized act done on
his behalf ratifies whole of the transaction of which such act
formed a part.
200. Ratification of unauhtorized act cannot injure third
person.- An act done by one person on behalf of another,
without such other persons authority, which, is done with
authority would have the effect of subjecting a third person to
damages, or of terminating any right or interest of a third person
cannot, by ratification, be made to have such effect.
201. 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
12. RELEVANT SECTIONS OF THE ACT
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adjudicated an insolvent under the provisions of any Act for
the time being in force of the relief of insolvent debtors.
202. Termination of agency, where agent has an interest in
subject matter.- Where the agent has himself an interest in
the property which forms the subject matter of the agency, the
agency cannot in the absence of an express contract, be
terminated to the prejudice of such interest.
203.When principal may revoke agents 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.
204. Revocation where authority has been partly exercised.-
The principal cannot revoke the authority given to his agent
after the authority has been partly exercised, so far as regards
such acts and obligation as arise from acts already done in
agency.
205. Compensation for revocation by principal, or
renunciation by agent.- Where there is an express or implied
contract that the agency should be the agent, or the agent to the
principal, as the case may be, for any previous revocation of
renunciation of the agency without sufficient cause.
206. Notice of revocation or renunciation.- Reasonable notice
must be given of such revocation of 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.
207. Revocation and renunciation may be expressed or
implied.- Revocation and renunciation may be expressed or
may be implied in the conduct of the principal or agent
respectively.
208. When termination of agents 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
before it becomes known to him, or , so far as regards third
persons, before it becomes known to them.
209. Agents duty on termination of agency by principals
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.
210. Termination of sub-agents authority.- The termination
of the authority of an agent causes the termination (subject to
the rules herein contained regarding the termination of an agents
authority) of the authority of all sub-agents appointed by him.
211. Agents duty in conducting principals business.- An
agent is bound to conduct the business of his principal according
to the directions given by the principal, or incase the absence
of any such directions, according to the custom which prevails
in doing business of the same kind of 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.
212. 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 persons 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.
213. Agents accounts.- An agent is bound to render proper
accounts to his principal on demand.
214. Agents duty to communicate with principal.- It is the
duty of an agent, in cases of difficult, to use all reasonable
diligence in communicating with his principal, and in seeking
to obtain his instructions.
215. Right to principal when agent deals, on his own account,
in business of agency without principals 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.
216. Principals 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 of his principal,
the principal is entitled to claim from the agent any benefit which
may have resulted to him from the transaction.
217. Agents right to retainer out of sums received on
principals 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 remuneration as may be payable to him for
acting as agent.
218. Agents 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.
219. When agents 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.
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220. 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.
221. Agents lien on principals 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.
222. 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.
223. 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 a causes an injury to the rights of third persons.
224. Non-liability of employer of agent to do a criminal act.-
Where one person employs 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.
225. Compensation to agent for injury caused by principals
neglect.- The principal must make compensation to his agent
in respect of injury caused to such agent by the principals
neglect or want of skill.
226. Enforcement and consequences of agents contracts.-
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 and the acts done by the principal in
person.
227. 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.
228. Principal not bound when excess of agents authority
is not separable.- Where an agent does more than he is
authorized 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.
229. Consequences of notice given to agent.- Any notice
given to or information obtained by the agent, provided it be
given or obtained between the principal and third parties, have
the same legal consequences as if it had been given to or
obtained by the principal.
230. 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 contrary.- Such a contract shall
be presumed to exist in the following cases:
(1) Where the contract is made by an agent for the sale or
purchase of goods for a merchant resident abroad;
(2) Where the agent does not disclose the name of his principal;
(3) Where the principal, though disclosed, cannot be sued.
231. Rights 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
rights as he would have had as against the agent if the agent
had been principal.
If the principal discloses himself before the contract is
completed, the other contracting party may refuse to fulfill the
contract, if he can show that, if he had know who was the
principal in the contract, or if he had know that the agent was
not a principal, he would not have entered into the contract.
232. Performance of contract with agent supposed to be
principal.- Where one person 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 rights and obligations subsisting between the agent and the
other party to the contract.
233. 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.
234. 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 induces
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 the agent or principal respectively.
235. Liability of pretended agent.- A person untruly
representing himself to be the authorized agent of another, and
thereby inducing 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.
236. Person falsely contracting as agent notentitled to
performance.- a person with whom a contract has been entered
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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.
237. Liability of principal inducing belief that agents
unauthorized acts were authorized.- When an agent has,
without authority, done acts or incurred obligations to third
persons on behalf of his principal, the principal is bound by
such acts or obligations, if he has by his words or conduct
induced such third persons to believe that such acts and
obligations were within the scope of the agents authority.
238. Effect, on agreement, of misrepresentation or fraud
by agent.- Misrepresentations made, or frauds 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 or frauds had been made or committed
by the principals; but misrepresentations, made, or frauds
committed, by agents, in matters which do not fall within their
authority, do not affect their principals.
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13. CASE LAW
R.L. Khanna v. Simla Banking and Industries [AIR 1959
Punj. 100]
A, the petitioner, gave the respondent Bank B certain treasury
bills for collection. B passed them on to C, the Federal Bank of
India for collection. The Treasury paid the amounts to C before
C went into liquidation. B claimed from the official liquidator
of C the said amounts. B and official liquidator entered into an
arrangement by which B was to be paid in full satisfaction fifty
percent of the amount. A applied under section 45B of the
Banking Companies Act claiming the entire amount from C.
The court held that A was entitled to priority to the extent of
the entire amount as A and B were principal and agent and C
was only Bs sub-agent. There was no privity of contract
between A and C.
Walsh v. C-Jones [(1978)2 App ER 1002]
In this case the plaintiffs had a block of three flats which they
desired to sell with vacant possession. They appointed an estate
agent to get occupants of the flats, but gave him no authority to
enter into any agreement for occupation without reference to
the principal. The defendants wanted a short term tenancy of
one of the flats. The agent allowed them three months with
option to renew and with an assurance that they could occupy
the flat to the exclusion of anyone else.
The issue before the court was whether such an agreement was
binding on the plaintiff and whether the agent created a tenancy
or a mere licence? The court said;
The agreement gave the defendants jointly an exclusive
possession of the flats. The reservation by the plaintiffs of right
of access did not of itself destroy the right granted to the
defendants of the exclusive possession of flats since the plaintiffs
had no right to occupy the flats as a residence or to put in anyone
else. The form signed by the defendants was a sham designed
to conceal the true nature of the agreement which was the grant
of a joint tenancy of the flat for three months. The plaintiffs
were bound by the agreement made by the agents with
defendants notwithstanding that he had been expressly told not
to create tenancy. Per curiam, although the grant of the right
of exclusive possession may create a licence and not a tenancy,
there was no authority for denying them exclusive possession.
The National Tobacco Co. of India Ltd., Calcutta v. Simla
Banking & Industrial Co. (AIR 1969 Punj. 121)
The Simla Bank in this case collected money from the customer
of the plaintiff company and remitted the same to plaintiff by
draft. The draft was dishonoured as there was no credit for the
bank which went into liquidation. The evidence disclosed that
the drafts were issued by the bank without making arrangements
to meet them, knowing full well they were not likely to be
honoured.
The issue involved was whether the agency had terminated on
the completion of the business.
The court held under such circumstances wherein the bank did
not discharge its primary fiduciary duty of providing the funds
to meet the drafts the fiduciary relationship between the bank
and the company was not terminated by merely issuing the
drafts. The plaintiff company was hence held entitled to claim
the amount as preferential creditor of the bank in liquidation.
Keighley Maxsted & Co. v. Durant [1901) A.C. 240]
In this case X was authorised to buy wheat on the joint account
of X and Y with a limit as to the price he could pay. X entered
into a contract for the purchase of wheat at a price in excess of
the limit on behalf of himself and Y. But he did not disclose to
the seller of the wheat his intention to contract on Ys behalf as
well as his own. Y later purported to ratify Xs act and was
subsequently sued by the seller for breach of contract.
The issue involved was whether a contract made by a man
purporting and professing to act on his own behalf alone and
not on behalf of a principal but having an undisclosed intention
to give the benefit of the contract to a third party, can be ratified
by that third party so as to render him able to sue or be liable to
be sued on the contract.
The court held this could not be done. The court stated that
civil obligations are not to be created by or founded upon
undisclosed intentions. If a relationship of principal and agent
is to exist and affect third parties, it must be based upon
knowledge on the part of all concerned, and their joint intention
that such a relationship should exist and affect rights and
liabilities.
Bolton Partners v. Lambert [1889)41 Ch.D. 295]
The defendants made an offer to the Managing Director of a
company, who having no authority to do so accepted it. That
gave the company an option to ratify the contract. But the
company ratified only after the defendant had withdrawn his
offer. The company brought an action against the defendants
for specific performance.
The issue was whether the doctrine of ratification related back
to the date when the offer was accepted first.
The court held that company was entitled to it. The companys
ratification related back to the date on which the Managing
Director first accepted the offer. Thus there was a contract
between the company and the defendant from that date. The
defendants revocation of his offer was ineffective. It was further
pointed out that it was not a question of withdrawal of offer,
but withdrawal from contract. The Managing Director having
accepted the offer though without authority there was a contract,
but it was not an offer, but a contract that was ratified.
Almunium Industries v. R. Almunium Ltd [(1976)2 All ER
552]
The plaintiff, a Dutch company, which manufactured almunium
foil, sold quantities of it to the defendants, an English Company.
A clause of the agreement of sale conferred on the defendants
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265
a power to sell unmixed foil and also imposed on them an
obligation to account to the plaintiffs for the proceeds of sales
to other.
The question involved was whether the defendants were
accountable to the plaintiffs.
The court held that although the defendants sold the unmixed
foil as principals, the foil nevertheless continued to be the
property of the plaintiff which the defendants were selling as
the plaintiffs agents. As such they were clearly accountable to
the plaintiffs and the latter were entitled to trace the proceeds
of the sale of unmixed foil, and to recover them in priority to
the secured and unsecured creditors of the ultimate purchasers,
who were in financial difficulties necessitating the appointment
of a receiver to disburse their estate according to law.
Wheels India Ltd., Mount Road v. Khem Chand Raj Kumar
1970(2) MLJ 648.
In this case the issues raised were whether the first defendant
was the agent of the second defendant ? Whether the defendant
had any responsibility to bear any extra freight ?
The contract of sale was concluded between the plaintiffs and
the second defendant, a foreign firm operating in Pittsburg,
Pennsylvania, U.S.A., for the goods which were shipped at
Baltimore.The second defendant was paid the price on tendering
the bill of lading to the American Bank. The ship got tied at
Saigon Port and was consequently delayed by six weeks in
coming to Madras, for the carrier had gone bankrupt and the
goods were of-loaded.The plaintiffs got worried as the steel
plates were required for immediate manufacture.They requested
the first defendant to intercede with his principal and arrange
for transhipment. It was only after the plaintiff had been obliged
to make their own arrangements for the transhipment that they
thought of the first defendant as a target for recovery of the
actual expenses to be incurred by them towards the shipment.
The defendants repudiated the liability to pay the charges
incurred by the plaintiff for the transhipment of goods from
Saigon to Madras. Thereupon the plaintiffs sued to recover the
expenses they had incurred. The Court held as follows :-
(i) An agent cannot be personally bound by a contract entered
into by him on behalf of his principal in the absence of any
provision to that effect in the contract. The law will however
presume such a contract in a case where the contract is by
the agent for sale or purchase of goods from a foreign
merchant. The presumption arising under Section 230(2)
is only a prima facie one rebuttable by the language or the
provisions of the contract. The first defendant was acting
as a representative or as a home agent of the second
defendant who was resident abroad during negotiations.
All that the first defendant did was only to bring the
plaintiffs and the second defendant together into contractual
relationship. When the ship was delayed in Saigon the
plaintiff looked to the defendant only for the transhipment.
The first defendant had no direct hand in that. Hence there
was no basis for holding that the contract for the supply of
goods was made by the 1st defendant on behalf of the
second defendant.
(ii) The second defendants liability to pay freight charges from
Baltimore to Madras was there and they paid it once. To
saddle them again with charges from Saigon to Madras
occasioned by the transhipment cannot be upheld as the
contract did not lay upon them an absolute obligation to
deliver possession of the goods to the plaintiff at the Port
of Madras. The C.I.F. contract was entered into by plaintiff
with open eyes and so he cannot contend that the defendants
promised to deliver physical possession in Madras.
(iii) It may be correct to say that the second defendant, having
undertaken the responsibility of shipping the goods was
under a legal obligation to choose a carrier who could
transport the goods from Baltimore to Madras without any
impediment. There is however no evidence for charging
the second defendant with negligence in their choice of the
carrier.
(iv) The second defendant being a foreign firm resident in
U.S.A. is not ordinarily subject to the jurisdiction of the
Madras High Court. It is a well settled rule of Private
International Law, that where a foreign company had chosen
to appear before the Court of another country and further
to plead on the merits of the case, it must be deemed that
the foreign company had submitted to the jurisdiction of
this Court, voluntarily notwithstanding its plea as to want
of jurisdiction.
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14. PROBLEMS
1. A entrusts B, a minor with a diamond ring worth Rs.1000/
- enjoining him not to sell the same for credit or any
amount less than Rs.900/-. B sells it to C on credit for Rs.
800/-. Examine the position of A, B and C.
2. A enters into a contract with B for buying Bs motor car as
agent of C, but without Cs authority. B repudiates the
contract before C comes to know of it. C subsequently
ratifies the contract and sues for specific performance. How
would you decide ?
3. A employed B to bet in a horse race. The agent carried out
the instructions and lost Rs.1000/-. Then A instructed the
agent not to pay the amount but the agent who was a member
of the race club paid the amount as he would otherwise be
expelled from the club. He then brought a suit to recover
the amount from A. Decide.
4. A employs B as his agent in Bombay to sell 100 bags of
turmeric and directs him to sell at Rs. 125/- per bag. The
agent sells the goods at Rs.112/- per bag but it was
discovered that the actual market rate on that date was
Rs.115/-. Is A entitled to any, and if so, to what damages.
5. A enters into a contract with B for purchase of yarn for
Rs.1000/-. B was acting as the agent of C but did not
disclose this fact to A. A claims to set off a sum of Rs.3000/
- due to him from B against the purchase price. How would
you advise ?
6. A employs B an auctioneer to sell his furniture in auction.
In the auction the custom of the business is to collect the
price before goods are delivered to the buyers. B sells the
furniture of A to C on credit as Cs credit is very high.
Before payment C becomes insolvent. Who is to bear the
loss ?
7. A owes B Rs. 500/-. He sells Rs.1000/- worth of rice to B.
B does not know that A is acting as agent for an undisclosed
principal, C. What are the rights of the parties ?
8. A is the owner of a motor lorry plying for hire. A engages
B and C as its driver and conductor respectively. The terms
of business for the carriage of goods are usually settled by
the driver and conductor and they collect the charges and
pay the same to A. D entrusts his goods to B and C for
carriage and pays the charges. B and C misappropriate the
goods. Is A liable to make good the loss to D ?
9. A, an auctioneer, is employed to sell the goods of B. A is
put in possession of goods to deliver the same to the
purchaser after sale. He has to retain his commission and
make over the balance to B. The purchaser takes delivery
of the goods but does not pay and says he will settle the
matter with B. Can A maintain an action against the
purchaser. Give reasons for the answer.
10. A , a merchant in Calcutta, has an agent B in London to
whom a sum of money is paid on As account with orders
to remit. B retains money for a considerable time. A in
consequence of not receiving the money becomes insolvent.
To what extent is B liable under the circumstances.
11. Firm was doing the business of buying and selling potatoes.
C, a partner entered into arrangement with the third person
to buy jointly a part of a cargo of potatoes for sharing the
profits of the venture. The venture having resulted in a
loss. Decide whether the partner had the implied authority
to bind the firm to a partnership with the third person, the
joint venture and whether a partner can enter into a
partnership on behalf of the firm.
12. A partner of a firm of manufacturers of Lungi cloth
contracted without the knowledge of his copartners to
supply a cloth dealer 3000 pieces of lungi cloth at a certain
rate. A sum of money was also advanced to him as an
earnest money. His firm failed to supply and was, therefore,
sued for damages for breach and refund of earnest with
interest. Discuss the liability of the firm.
13. One of the five brothers who inherited the business after
their father was infant. One application was filed to have
the partners of the firm adjudicated as insolvents. Discuss
whether minor can be adjudicated insolvent and his share
be seized by the receiver.
[Note: Specify your name, ID no. and address while sending answer papers]
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1. Bangia, R.K., Indian Contract Act, (1994) Allahabad Law Agency, Allahabad.
2. Cheshire and Fifoot, Law of Contract, (1986), Butterworths, London.
3. Fired, G.H.L., The Law of Agency, (1976), Butterworth, London.
4. Guest, A.B. (etd.), Chitty on Contracts, (1983), 25th Sweet & Maxwell, London.
5. Iyer, T.S.V., The Law of Contract (1983) Asia Law House, Hyderabad.
6. Iyer, T.S.V., Sale of Goods and Partnership Acts, Asia Law House.
7. Justice Malik and Justice Gyanakumar, Rajgopalachari's Commentaries on Indian Partnership Act, (1987), Law Publishers,
Allahabad.
8. Ramachandran, V.B., Law of Agency (1985), Eastern Book Company, Lucknow.
9. Reynolds, F.M.B., and Davenport, B.J. : Bowstead on Agency, (1976), Sweet & Maxwell, London.
10. Singh, Avtar : Law of Contract (1994), Eastern Book Co., Lucknow.
15 SUPPLEMENTARY READINGS
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SPECIAL CONTRACTS
Master in Business Laws
Law of Contracts
Course No: I
Module No: VIII
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
(Sys 4) - D:\shinu\lawschool\books\module\contract law_Revised
269
Material Prepared by :
1. Prof. P.C. Bedwa, LL.M., Ph.D.
2. Mrs. Radha Pyari, LL.M.
Material Checked by :
1. Ms. Archana Kaul, B.Sc., LL.M.
2. Ms. Sudha Peri, M.A., LL.M.
Material Edited by :
1. Prof. V.S. Mallar, M.A., LL.M.
2. Prof. N.L. Mitra, M.Com., LL.M., Ph.D.
National Law School of India University
Published by :
Distance Education Department
National Law School of India University
Post Bag No. 7201
Nagarbhavi, Bangalore - 560 072
270
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Instructions
After knowing the general principles of contract one has to apply the knowledge in understanding the basic
issues involved in various types of contract. Contract Act of 1872 included laws governing various types of
commercial contracts like the Sale of Goods (Sections 76 - 123 of the original Contract Act, since repealed),
Indemnity and Guarantee (Section 124-147); Bailment and Pledge (Sections 148 - 181); Agency (Sections
182-238); Partnership (Sections 239 -266) since repealed). Over the years Sale of Goods and partnership
Contracts assume high importance in the commercial world as a result of which separate Sale of Goods Act
was passed in 1930 and a separate Partnership Act was enacted in 1932, on which the law laid down in the
Contracts Act stood repealed.
In this Module we will be examining the character of the contract of some of the special commercial
contracts. Many of the commercial contracts which are very common now do not have an updated legal
structure or any law at all. As for example, Bailment and Pledge are having minimum legal structure with
definitional outline. But transactions like hypothecation, leasing of movable goods and hire purchase are
not having any legal definition nor do they have clear legal structure. Similarly law relating to carriers,
specially , 'by land' including the Railway Act, 1890 requires updating, and so also carriage by sea. We have
discussed in detail the essential features of these commercial Contracts many of which bear the standard
from.
It is necessary to remember in the changing commercial world various other classes of contracts do evolve
through commercial practices. Many of these types of contracts have either special laws for themselves or
attract special laws to be evolved. As for example, contracts relating to negotiable instruments are regulated
by Negotiable Instruments Act, 1881. Contracts relating to investments in securities presently attract updated
structure for stipulating the rule of the game.
Therefore, this Module is not exhaustive. It only contains some special contracts which are mentioned in the
Contract Act and some other very close to the same. You will be benefited to properly appreciate these
contracts, if you talk to your friends in the commercial world who enter these types of contracts every day.
As for example, to understand bailment you can discuss with the owner of a repairing shop or a dry cleaning
agency. In order to appreciate guarantee you may discuss with your friend working in a bank. All these
contracts have practical involvement in our day to day life. Therefore understanding them in depth shall
benefit you in your profession or service.
N. L MITRA
Course Co-ordinator
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SPECIAL CONTRACTS
TOPICS
1. Introduction .................................................................................................................... 272
2. Contract of Indemnity ................................................................................................... 273
3. Contract of Guarantee ................................................................................................... 277
4. Contract of Bailment ..................................................................................................... 294
5. Pledge & Hypothecation ................................................................................................ 306
6. Leasing & Hire-purchase .............................................................................................. 313
7. Carrier............................................................................................................................. 316
8. Relevant provisions of the Act ...................................................................................... 317
9. Case Law......................................................................................................................... 321
10. Problems.......................................................................................................................... 324
11. Supplementary Readings ............................................................................................... 325
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1. INTRODUCTION
Several instances of special contracts are included in the
Contract Act as for example, (a) Contract of Indemnity &
Guarantee (Sections 124-147); (b) Contract of Bailment
(Sections 148-181); and (c) Contract of Agency (Sections 182
- 238).
Several other special types of contracts were initially included
in the Contract Act but afterwards separate statutes were made
in those areas and consequently those chapters were repealed
from the Act. As for example, the Sale of Goods Act dealing
with sale of movable commodities was passed in 1932 and
chapter seven of the Contract Act dealing with Sale of Goods
in between Sections 76 - 123, was repealed. Similarly on
passing of the Partnership Act, 1932, chapter 11 of the Contract
Act on partnership was deleated.
The word 'Special Contract' signifies only a specialised type
of contract. Naturally the list is not exhaustive. The Contract
Act, in fact deals with general principles of contracts within
Chapter I to Chapter VI, i.e., in between Sections 1 - 75. From
Section 76 some types of contracts were discussed as stated
above. This chapter contains only those types of contracts
still provided in the Contract Act, and laws relating to Sale of
Goods or Partnership shall not be discussed unless otherwise
needed. It is also to be noted that many other types of contracts
can be made by the parties as for example, contracts dealing
with immovable properties can also be classified as special
contracts. For which there is a specific statute known as Transfer
of Property Act, 1882. Many types of contracts in movable &
immovable goods are not yet covered by specific statutes, such
as leasing of movable commodities, hire purchase and
instalment purchase etc.
Whatever may be the special nature of the contract requiring
certain special rules, all contracts entered into have to fulfil
the general principles as laid down in the Contract Act.
Contract Act is a definitional and amending Act. Therefore it
allows common practices in the trade and profession regulating
a special kind of contract peculiar to trade, commerce , industries
and profession. In so far types of contract of these nature, the
statute is not exhaustive. In many cases it may be observed
that the conventions on which commercial world reposes
nationally & internationally are based on common practices.
As such law relating to many types of commercial contracts
are not yet fully codified in India.
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2. CONTRACT OF INDEMNITY
SUB TOPICS
2.1 Definition & Meaning
2.2 Nature
2.3 Distinction: English and Indian law
2.4 Validity of indemnity
2.5 Contract when enforceable
2.6 Rights of indemnity holder
2.7 Rights of indemnifier promisor
2.8 Contract of Insurance as a Contract of indemnity
2.1 DEFINITION & MEANING
The term 'indemnity' literally means security against loss. In a
contract of indemnity one party viz., the indemnifier promises
to compensate the other party viz., the indemnified against
loss suffered by the latter. For example, A tells B "Let C have
these goods. I shall see you are paid." This is a contract of
indemnity. The English law definition of a contract of indemnity
is that "it is a promise to save a person harmless from the
consequences of an act." Thus it enfolds within its ambit losses
caused not merely by a human agency but also those caused by
accident or fire or other natural calamities. The definition of a
contract of indemnity as laid down in S.125 of the Indian
Contract Act confines itself to losses occasioned due to the act
of the promisor or due to the act of any other person. For
example, A promises to save B against any suit which C may
bring against B. This is a contract of indemnity. Similarly if A
promises to pay a certain amount owed by B to C but B fails to
pay and C files an action against B, A is liable to indemnify B.
According to Sec. 124 of the Indian Contract Act a contract by
which one party promises to save the other from loss caused to
him by the conduct of the promisor himself, or by the conduct
of any other person, is called a contract of indemnity. A promise
to be primarily and independently liable for another person's
conduct may amount to a contract of indemnity. Under a
contract of indemnity, liability of the promisor arises from loss
caused to the promisee by the conduct of the promisor himself
or by the conduct of another person [Punjab National Bank,
Ltd. v. Vikram Cotton Mills, (1970) 1 SCC 60]. Every contract
of insurance, other than life insurance, is a contract of indemnity.
The definition is restricted to cases where loss has been caused
by some human agency [Gajanan Moreshwar v. Moreshwar
Madan, AIR 1942 Bom 302].
Although the definition under Indian law contemplates only
losses of the above nature it cannot be said that the other types
of losses do not fall within the net of indemnity. The Act has
very well taken care of such losses under other chapters. For
example, loss due to fire or accident may be brought under
S.30 of the Act dealing with contingent contracts. Similarly
loss occasioned to the agent can be dealt under S.222 of the
Act defining the liability of the principal . Therefore though
there is a difference between English and Indian definitions as
to the term indemnity it need not be considered as material.
This has also been clarified in the case of Moreshwar v.
Moreshwar [AIR 1942 Bom 302] when Chagla J. observed
:"The Contract Act is both an amending and a consolidating
Act, and it is not exhaustive of the law of contracts to be applied
by the Courts in India. Section 124 deals only with one
particular kind of indemnity which arises from a promise made
by an indemnifier to save the indemnified from the loss caused
to him by the conduct of the indemnifier himself or by the
conduct of any other person, but does not deal with those classes
of cases where the indemnity arises from loss caused by events
or accidents which do not depend upon the conduct of
indemnifier any other person, or by reason of liability incurred
by something done by the indemnified at the request of the
indemnifier....." Therefore according to the learned Judge in
the above case the definition of indemnity is not merely confined
to that mentioned in S. 124.
2.2 NATURE
A contract of indemnity may be express or implied depending
upon the circumstances of the case, though S.124 of the Act
does not seem to cover the cases of implied indemnity. This
aspect was recognized in Secretary of State v. Bank of India
Ltd [(1938) 65 IA 286 (PC)] where a broker in possession of a
government promissory note endorsed it to a bank with forged
endorsement. The bank acting in good faith applied for and
got a renewed promissory note from the Public Debt Office.
Meanwhile the true owner sued the Secretary of State for
conversion who in turn sued the Bank on an implied indemnity.
The Judicial Committee observed that even the fact that S.21
of the Securities Act provides that an express indemnity
demanded was not inconsistent with the existence of an implied
right to indemnity under the law of India. Their lordships thus
laid down the principle:
"It is general principle of law when an act is done by one
person at the request of another which act is not in itself
manifestly tortious to the knowledge of the person doing
it, and such act turns out to be injurious to the rights of a
third party, the person doing it is entitled to an indemnity
from him who requested that it should be done".
The Indian Contract Act has also dealt with special cases of
implied indemnity under Sections 69, 145 and 222. Under S.
69 if a person who is interested in the payment of money which
another is bound by law to pay and therefore pays it, he is
entitled to be indemnified. For example, if a tenant pays certain
electricity bills to be paid by the owner, he is entitled to be
indemnified by the latter. Sec. 145 speaks of the right of a
surety to claim indemnity from the principal debtor for all sums
which he has rightfully paid towards the guarantee. Implied
indemniy is also embodied in S.222 dealing with the liability
of the principal to indemnity the agent in respect of all amounts
paid by him during the lawful exercise of his authority. The
case of Adamson v. Jarvis [(1827)4 Bing 66], illustrates this
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point. The plaintiff, an auctioneer, acting on the instruction of
the defendant sold certain cattle which subsequently turned
out to belong to some one else other than the defendant. When
the true owner sued the auctioneer for conversion, the auctioneer
in turn sued the defendant for indemnity. The court held that
the plaintiff having acted on the request of the defendant was
entitled to assume that, if what he did turned out to be wrongful,
he would be indemnified by the defendant.
2.3 DISTINCTION: ENGLISH & INDIAN
CONCEPTS
In English law, a contract of indemnity has been defined as a
promise to save another harmless from loss caused as a result
of a transaction entered into at the instance of the promisor.
This definition is of wider import than the definition under
section 124 of the Indian Contract Act, 1872, given above.
Under English law loss need not be the result of the conduct of
the promisor himself or another person. It may have been caused
by accident or events beyond anyone's control. In Indian law
the nature of loss is confined to the conduct of some person,
whereas in English law the nature of loss is not so restricted
i.e., loss may entirely be unconnected with the conduct of any
party.
2.4 VALIDITY OF INDEMNITY AGREEMENT
A contract of indemnity is one of the species of contracts. The
principles applicable to contracts in general are also applicable
to such contracts so much so that for the validity of a contract
of indemnity rules as to free consent, legality of object etc., are
equally applicable. Thus where consent to an agreement is
caused by coercion, fraud or misrepresentation, the agreement
is voidable at the option of the party whose consent was so
caused [See Sec. 19 read with Secs.15, 17 & 18]. As per the
requirement of the Contract Act, object of the agreement must
also be lawful. An agreement the object of which is opposed to
the law of the land or against the public policy, is either unlawful
or void depending upon the provision of the law to which it is
subject [See sec.23]. For example, an agreement to indemnify
sureties on a bail bond would be void, being against public
policy. Likewise where one requires another to perform an
illegal act promising to indemnify him for the consequences,
the agreement cannot be enforced.
2.5 CONTRACT WHEN ENFORCEABLE
Commencement of the liability of the indemnifier was a matter
of controversy for sometime. The question was whether the
liability of the indemnifier commences only when the
indemnified has actually suffered loss or when there is an
apprehension that the indemnified by all chances is likely to
suffer it. The former view can be traced from cases like
Shanker Nimbaji v. Laxman Sapdu [AIR 1940 Bom.161];
Chand Bibi v. Santhosh Kumar Pal [(1933)146 I.C. 863] etc.,
which were all rested on the principle that you must be
deminified before you can claim indemnity.
In Shanker Nimbaji v. Laxman Sapdu, the plaintiffs filed a
suit to recover Rs.5,000/- and interest from defendant by the
sale of a mortgaged property and, in case of deficit, for a decree
against the estate of defendant 2 which was in the hands of his
sons, the defendant 2 having died during the pendency of the
suit. It was held that the plaintiffs could not sue the defendant
in anticipation that the proceeds realised by the sale of the
mortgaged property would be insufficient and there would be
some deficit.
Similarly in the case of Chand Bibi v. Santhosh Kumar Pal,
the defendants father while purchasing certain property
covenanted to pay off a mortgage debt incurred by the plaintiff
and also promised to indemnify him if they were made liable
for the mortgage debt. The defendants father failed to pay off
the mortgage debt and the plaintiffs filed an action to enforce
the covenant. It was held that as the plaintiffs had not yet
suffered any damage, the suit was premature so far as the cause
of action on indemnity was concerned.
A different view-point regarding this was expressed as early as
1911 in the case of Re Richardson, Ex Parte The Governors
of St. Thomas Hospital where Buckley J. observed indemnity
is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnified shall never be called
upon to pay."
This view was subsequently upheld in the case of Osmal Jamal
& Sons Ltd. v. Gopal Purushotham [(1728) ILR 56 Cal. 262].
In that case the plaintiff company agreed to act as commission
agents for the defendants firm for the purchase and sale of
hessian and gunnies and charge commission on all such
purchases and the defendant firm agreed to indemnify the
plaintiff against all losses in respect of such transactions.
Relying on that agreement the plaintiff purchased certain hessian
from one Maliram Ramjidas. The defendant firm failed to pay
for or take delivery of the hessian. Then Maliram Ramji Das
resold it at a lesser price and claimed the difference as damages
from the plaintiff company. The plaintiff company went into
liquidation and the Official Liquidator filed a suit to recover
the amount claimed by Maliram from the defendant firm under
the indemnity. The defendants argued that in as much as the
plaintiffs had not yet paid any amount to Maliram in respect of
their liability they were not entitled to maintain their suit under
indemnity. Lord William J. negatived the contention and
decided in plaintiff's favour with a direction that the amount
when recovered from the defendant firm should be paid to
Maliram Ramjidas.
After the landmark decision in the case of Gajanan Moreshwar
v. Moreshwar Madan Mantri [AIR 1942 Bom. 302] it has
been well established that the liability of the indemnifier
commences as soon as the loss of the indemnified becomes
absolute. The facts of that case are that in the year 1934 the
plaintiff entered into an agreement with the Municipal
Corporation of Bombay for the lease of a particular plot of land
for a stipulated term. Pursuant to that agreement the plaintiff
was put into possession of that plot of land. At the request of
the defendant the plaintiff agreed to transfer the benefit of the
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aforesaid agreement to the defendant. Thereupon the defendant
entered into possession of the said plot and commenced to erect
a building thereon. Materials for construction were supplied
by one Keshav Das Mohan Das which amounted to more than
Rs.5,000/-. Keshav Das Mohan Das made pressing demands
upon the defendant for payment of that amount and at the request
of the defendant the plaintiff mortgaged the property to Keshav
Das Mohan Das by depositing the title deeds relating thereto to
secure payment of a sum of Rs.5,000/- with interest. Later a
futher sum exceeding Rs.5,000/- become payable by the
defendant to Keshav Das. The plaintiff again at the request of
the defendant effected a further charge on the property for a
further sum of Rs.5,000/- and interest. Later on the transfer of
the plot was duly sanctioned by the Municipality although no
formal lease was executed in favour of the defendant. In the
meantime the plaintiff had on several occasions requested the
defendant to release him of the mortgage debt and the further
charge to which the defendant did not react. Hence the plaintiff
filed a suit for indemnity in respect of liability arising under
the mortgage and charge.
Counsel for the defendant argued that unless and until the
indemnified had suffered actual loss he was not entitled to sue
the indemnifier and until the mortgagee filed a suit against the
plaintiff and obtained judgment, he was not entitled to sue the
defendant.
Rejecting the above argument the learned Judge observed : It is
true under English Common Law no action could be maintained
until actual loss had been incurred. It was very soon realised
that an indemnity might be worth very little indeed if the
indemnified could not enforce his indemnity till he had actually
paid the loss. If a suit was filed against him he had actually to
wait till a judgment before he could sue on his indemnity. It is
clear that this might under certain cirucmstances throw an
intolerable burden upon the indemnity holder. He might not be
in a position to satisfy the judgement and yet he could not avail
himself of his indemnity till he had done so. Therefore, the
Court of Equity stepped in and mitigated the rigour of the
Common Law. The Court of Equity held that if his liabiity had
become absolute then he was entitled either to get the
indemnifier to pay off the claim or to pay into Court sufficient
money which would constitute a fund for paying off the claim
whenever it was made. Therefore, if the indemnified has
incurred a liability and that liability is asbolute, he is entitled to
call upon the indemnifier to save him from the liability and to
pay it off.
It therefore follows from the above decisions that an
indemnifier's liability commences as soon as the loss of the
promisee becomes absolute, certain or imminent. It is not
necessary that the promisee should pay for the loss. This
principle has been followed in many subsequent cases.
2.6 RIGHTS OF INDEMNITY HOLDER
According to S. 125 of the Act, an indemnity holder is entitled
to recover:
(a) all damages paid in connection with any suit to which the
promise of indemnity applies; and
(b) all costs and sums which he may have paid in bringing or
defending any suit and any sum paid to effect a compromise,
provided he has acted as a prudent man in the absence of
indemnity would act, and he has not contravened the orders
of the promisor or acted upon the promisor's authorisation.
An established rule of law is that if a promisee acts on the faith
of a contract of indemnity or at the request of the promisor he
should be entitled to claim indemnity. This rule was applied in
a catena of English and Indian cases. It has been rightly
observed in the case of Lampleigh v. Braithwait {80 E.R. 255),
that when a person has .... altered his position in any way on
the faith of indemnity, and an action is brought against him for
the matter against which he was indemnified, and a verdict of a
jury obtained against him, it would be very hard indeed if when
he came to claim the indemnity the person against whom he
claimed it could fight the question again, and run the chance of
whether a second jury would take a different view and give an
opposite verdict. Therefore, by reasons of that contract of
indemnity, the judgment is conclusive, although the promisor
was not a party to it.
A corresponding Indian case of this point was that of Chiranjilal
v. Naraini [(1919)41 All. 395] where it was held that a promisee
had a cause of action as soon as a decree was passed against
him.
This right cannot be negatived in case of oversight [Yeung v.
Hongkong and Shanghai Banking Corp. (1980)2 All E.R.
599].
However, the right to indemnity cannot be claimed in the event
of dishonesty, lack of good faith and contravention of the
promisor's request.
2.7 RIGHTS OF PROMISOR
Section 125 of the Act only lays down the rights of the promisee
and is quite silent of the rights of the promisor as if the promisor
has no rights but only liability towards the promisee. It cannot
be presumed that as there is no specific provision in the Act
about the promisor's rights he cannot possess any rights. In the
logical state of things if we read S.141 of the Act which deals
with the rights of surety, we can easily conclude that the
promisor's rights would also be the same as that of the surety.
In Simpson v. Thomson [(1878) 3 AC 279] it was thus
observed:
"Where one person has agreed to indemnify another, he
will, on making good the indemnity, be entitled to succeed
to all the ways and means by which the person indemnified
might have protected himself against, or reimbursed himself
for the loss".
Furthermore, as regards the rights of promisor under a contract
of indemnity, the principle of subrogation is applicable because
it is an essential part of the law of indemnity, and is based on
equity and the Contract Act contains no provision in
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contravention with it [Maharana Shri Jarvat Singhji v. Secy.
of State for India, (1889) ILR 14 Bom 299].
2.8 CONTRACT OF INSURANCE AS A
CONTRACT OF INDEMNITY
In the contract of insurance, the insurer agrees to insure against
all losses arising out of any incident, on the property of the
insured. Thus any type of property insurance is basically a
contract of indemnity where the insurer agrees to indemnify
the loss of the assured. As such the contract of insurance must
have the following incidence of indemnity:
(1) the assured has to show that he has an interest in the subject
matter which may be subjected to loss [Castallial v. Preston
(1883)11 QBD 380] ;
(2) the insurer is to make good the loss on the happening of
the event against which the goods are insured ;
(3) the indemnity is related to the stipulated amount ; [Carriers
v. Cunard Steam Ship Company (1918) IKB 118] ;
(4) the contract is to pay up to the amount of the loss. The
assured cannot profit out of the insured event, and
(5) the amount of indemnification is dependant on the market
value.
According to Lord Justice Perbret the very foundation to the
insurance law is that..... the contract of insurance contained in
a fire or marine policy is a contract of indemnity and of
indemnity only, and that this means that the assured in the case
of loss against which the policy has been made, shall be fully
indemnified, but never more than fully indemnified. That is
the fundamental principle of insurance, and if ever a proposition
is brought forward which is at variance with it, that is to say
which either will prevent the assured from obtaining a full
indemnity, that position must certainly be wrong. Therefore,
all policies on property are contracts of indemnity and law would
not permit them to be otherwise construed [London Insurance
Co., v Preston, (1883) 11 QBD 380].
A fire or burglary insurance sometimes may not strictly be a
pure indemnity contract, when parties agree between
themselves that a definite amount shall be given by the insurer
to the insured irrespective of the amount of loss. In such a
case, though the contract is a contract of indemnity, the insurer
is entitled to the stipulated value in the event of the happening
of the insured event.
Life insurance on the other hand cannot be called as a contract
of indemnity. In Godsall v. Boldero [(1807)9 East 1972], the
court held that the policy for life insurance is a contract not to
make good a loss but to pay a sum of money on the death of the
party. In a life policy the loss of the policy holder cannot be
calculated on the basis of any reason or rhyme. Therefore, a
person may have several life policies and on his death, his
beneficiary will receive insured amount from all policies, but
in case of a property insurance, if a person has several policies
he is not entitled to all the policy amount in the event of loss of
the property. He is entitled to only the exact amount of loss
prorata from all policies.
Sometimes a life policy may also be an indemnity policy. As
for example, if a creditor takes a policy on the debtor, he is
entitled to the exact amount of the debt on the death of the
assured. Therefore the nature of the contract has to be
understood from the terms and conditions of the contract as a
whole.
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3. CONTRACT OF GUARANTEE
SUB-TOPICS
3.1. Definition and Meaning
3.2. Distinction between Indemnity and Guarantee
3.3. Essentials of a contract of guarantee
3.4. Kinds of guarantee
3.5. Rights of a surety
3.6. Liability of a surety
3.7. Discharge of surety
3.1 DEFINITION AND MEANING
A contract of guarantee is in essence a contract by which one
person (the guarantor) agrees to answer for some liability of
another (the principal debtor) to a third person (the creditor).
The contract may be constituted by a personal engagement on
the part of the guarantor, or by a charge on property without
any personal liability or by both. Prima facie a guarantor does
not merely undertake to perform if the principal debtor fails to
do so; he undertakes to see that the principal debtor will perform.
Important results flow from this prima facie rule of construction.
In particular it means that a guarantor is normally liable to the
same extent as the principal debtor for damages for breach of
the later's obligations even though he has not in terms guaranteed
the payment of damages [Moschi v. Lep Air Services Ltd
(1973) AC 331].
In English law guarantee has been defined as "a promise to
answer for the debt, default or miscarriage of another". Thus a
contract of guarantee is a collateral engagement to be liable for
the debt of another in case of his default.
The basic function of a contract of guarantee is to enable a
person to get a loan, or goods or an employment. Some person
to whom we may call guarantor comes forward and promises
the lender, or the supplier or the employer that he (who requires
loan, goods or employment) be trusted and in case of his default,
he (guarantor) undertakes to be responsible. Likewise were
the observation of the court in Birkmyr v. Darnell [(1704) 91
ER 27]. Section.126 of the Indian Contract Act defines contract
ofguarantee as: "A contract of guarantee is a contract to perform
the promise, or discharge the liability, of a third person in case
of his default. The person who gives the guarantee is called the
Surety'; the person in respect of whose default the guarantee is
given is called the principal debtor', and the person to whom
the guarantee is given is called the creditor'. A guarantee may
either be oral or written"
Section 126 of the Act specifically indicates that the contract
of guarantee postulates concurrence of three persons i.e., the
surety, the principal debtor and the creditor. A contract of
guarantee must therefore involve a contract to which all these
three parties are privy. In Duncan Fox & Co v. North & South
Wales Bank [(1880) 6 App Cas 1], it was pointed out by Lord
Selborne that there are three possible variations in the parties
to a contract of guarantee. The first and simplest case is that in
which all three parties concerned are parties to the contract in
the sense that both the principal debtor and the creditor agree
that the guarantor's liability is secondary only, and that the
principal debtor is primarily liable for the obligations
guaranteed. But it is also possible that the contract of guarantee
may be recognized only as between the principal debtor and
the guarantor, or as between the creditor and the guarantor, in
which event the rights and duties arising out of the contract of
guarantee only affect these parties.
A contract of guarantee or suretyship, is formed, like any other
ordinary contract, by offer and acceptance, supported by
consideration. That is to say it requires for its formation the
two positive elements of consensus ad idem and the presence
of either form of consideration and should not be vitiated by
the presence of any of the three elements of incapacity to the
contract, flaw in consent and the unlawful character of the
agreement.
As per section 126 of the Act, guarantee may be either oral or
written and in this respect it is distinct from English law where
under section 4 of the Statutes of Frauds, 1677, a contract of
guarantee must be evidenced by a memorandum in writing and
signed by the party charged therewith. Furthermore in India
guarantee may be express or implied or it may be inferred from
the course of conduct of the parties concerned. [See Mir
Niyamath Ali Khan v. Commercial and Industrial Bank
Ltd., AIR 1969 AP. 294].
3.2 DISTINCTION BETWEEN INDEMNITY AND
GUARANTEE
The distinction between a contract of guarantee and that of
indemnity is important and remains clarified in the Common
Law system. As per Halsbury, although a contract of guarantee
maybe described as a contract of indemnity in the widest sense
of the term 'indemnity', yet contracts of guarantee are
distinguished from contract of indemnity ordinarily so called
by the fact that a guarantee is a collateral contract, i.e., ancillary
or subsidiary to another contract, whereas an indemnity is a
contract by which the provision undertakes an original and
independent obligation. In certain cases, where there is primary
and secondary liability of two persons for one and the same
debt, they may stand in relationship to one another as principal
debtor and surety, even though no express contract of suretyship
exists. The existence of such a primary and secondary liability
does not, however in every case necessarily create the
relationship of principal debtor and surety. Thus despite the
fact that there is a primary and secondary liability, for instance,
between the transferee and the transferor of shares, the relation
between them is not that of principal debtor and surety.
[Halsbury, p.416].
As pointed out earlier there should be three sets of contractual
relationships in a contract of guarantee under S. 126, in
contradiction to contract of indemnity. One is between the
creditor and the principal debtor; the second between the creditor
and the surety; and the third, between the principal debtor and
the surety. If the first two are the only contracts, the case is
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clearly one of indemnity. It is the third contract-the one where
the principal debtor requests a third person expressly or by
necessary implication to act as surety that constitutes a contract
of guarantee.[Ramchandra B. Loyalka v. Shapurji N.
Bhownagree AIR 1940 Bom.315; Janwatory v. Jethmal AIR
1958 Raj. 343]. One of the essential elements required for a
transaction of a guarantee is the presence of three different
parties collaborating in the execution of a deed of guarantee.
Where this element is missing and the principal debtor is not
taken into consideration at all, the deed is not one of a guarantee
but is only an indemnity bond. [Ms.Radha Kanwar v. Ram
Narain AIR 1952 All 587]. Thus if a person undertakes to
reimburse another for some loss which may be caused to him,
by a third party or by himself, but not at the request, express or
implied, of the third party, then the person who, having
undertaken the liability and having been called upon to make
good the loss, will not be able to recover the loss so caused to
him from the principal debtor, the latter not being privy, but
virtually a stranger to the undertaking given to the promisee,
such a contract is not a contract of guarantee but one of
indemnity [Janwatory v. Jethmal AIR 1958 Raj. 343].
Amongst the procedural distinction between indemnity and
guarantee, one has to know that indemnity contracts are required
to be in writing and necessary stamp duty is to be paid, but a
contract of guarantee does not require any stamp duty and hence
it need not be in writing. The importance of this distinction
cannot be highlighted because guarantee contracts are obligatory
to be in writing if not compulsorily on an agreement bond, which
is the common practice. The guarantor has a contingent liability
which is collateral to the main transaction and arising only on
default of the principal debtor.
3.3 ESSENTIALS OF A CONTRACT OF
GUARANTEE
Some of the essential features of guarantee are as follows:
1. Contract of guarantee may be oral or written
According to English Law section 4, of the Statute of Frauds,
1877 renders an unwritten contract of guarantee unenforceable
on an action before a court of law. A valid guarantee contract
must be in writing and signed. Whereas under section 126 of
the Indian Contract Act, 1872, a contract of guarantee need not
necessarily be in writing. It may be expressed by word of mouth
or it may also be tacit or implied and may also be inferred from
the course of conduct of the parties.
2. Principal debt
The object of guarantee being securing the payment of debt,
the existence of a recoverable debt is necessary. Contract of
guarantee requires that there should be principal debtor and the
guarantor (surety) should undertake to pay the debt to the
creditor if the principal debtor fails in the performance of his
liability. For a valid guarantee there must be a principal debt
and there must be one who should undertake the liability of the
payment of principal debt on the default of the principal debtor.
The term liability in section 126 means liability enforceable by
law and there cannot be a contract to guarantee a time barred
debt. For example, A borrows money from B, C undertakes
that he will pay that debt in case A fails to pay. C has guaranteed
the repayment of debt on A's default. Thus the surety agrees to
run the risk for the payment of the principal debt on the default
of the principal debtor.
3. Consideration
The question as to what constitutes consideration for the promise
of surety has been discussed in many cases. In Marely v.
Boothby [(1825)3 Bing 107], Best C.J. observed, no court of
common law has ever said that there should be a consideration
between the persons giving and receiving the guarantee. It is
enough if the person for whom the guarantor becomes surety
receives a benefit, or the person to whom the guarantee is given
suffers inconvenience, as an inducement to the surety to become
guarantor for the principal debtor.
However, under English Law, the general rule of consideration
that, it must be either executed or executory but cannot be past
also applies to contracts of guarantee.
Surety for past debt is valid when there is fresh consideration
for the promise. It must be necessary that the intention to include
a past promise must be made clear so as to bind the surety for a
past debt. It has been stated that once a fresh obligation is
incurred, the liability for all obligations is coupled up. In
Carlesbury Brewery Malaysia v. Soon Heng AW & Sons,
[(1989)1 Mal LJ. 104 HC Kota Bahri], the court on going
through the guarantee found that it was within the contemplation
of the parties that the guarantors were to be saddled with the
liabilities accruing not only after but also before the signing of
the guarantee.
Under Indian Law, S.127 of the Act, provides that "anything
done, or any promise made, for the benefit of the principal
debtor, may be a sufficient consideration to the surety for giving
the guarantee."
Different interpretations are given to this section by various
High Courts. Some High Courts viewed that past consideration
also constitutes a valid consideration in a contract of guarantee.
Thus in Gulam Husain v. Faiyaz Ali Khan, [AIR 1940 Oudh
346], a surety bond was executed for an amount including a
past debt of the principal debtor - lessee. The surety contended
in appeal that his promise was not supported by consideration.
The court holding that the surety bond was not without
consideration observed, there is nothing in the bond to show if
arrears upto that amount were due from the lessee in respect of
any period of the lease subsequent to the first year. The surety
would not be liable. In Prasanjit Mahtha v. United
Commercial Bank, [AIR 1979 Pat. 151], it was held that a
guarantee given after the execution of the loan document is
valid. In a recent case the Bombay High Court in Union Bank
of India v. Avinash P. Bhonsle, [(1991) M.L.J. 1004], accepting
the validity of past consideration as good consideration in a
contract of guarantee, observed :
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It is well settled that just as illustrations should not be read as
extending the meaning of a section, they should also not be
read as restricting its operations, especially so, when the effect
would be to curtail a right which the plain words of the section
would confer.It is, therefore, clear that when the language of
the text of Sec. 127 of the Contract Act is clear and
unambiguous, the sweep of the text cannot be curtailed by using
illustration (c) to impose a limitation on the expression "anything
done or any promise made for the benefit of the principal debtor"
that it should be done at the time of giving the guarantee. The
language is wide enough to include anything that was done or
a promise made before giving the guarantee and would not
restrict the application of the section only to what was
contemporaneously done.
There are also contradictory judgments given by Andhra
Pradesh High Court in the case of M.N.A. Khan v. Commercial
& Industrial Bank, [AIR 1969 AP 294] and Calcutta High
Court in Allahabad Bank v. S.M. Engg. Industries [(1992)1
Cal.L.J. 448] where past consideration was held not to be a
valid, good consideration. In that case the bank was not allowed
to sue the surety without further or any advance made after the
date of the guarantee. In Kalicharan v. Abdul Rehman, [AIR
1918 PC. 226], a guarantee for leasing transactions was held
not to cover agreement which was concluded before the date of
the guarantee.
A keen insight into the above cases shows that the former view
regarding the validity of past consideration seems to be more
just. Moreover, the definition in S.2(d) of the Act also
contemplates past consideration as valid consideration and
therefore there should not be any reason why it should not be
applied in the case of contract of guarantee.
4. Consent of the surety should not have been obtained by
misrepresentation or concealment
Any guarantee which has been obtained by means of
misrepresentation made by the creditor or with his knowledge
of and assent, concerning a material part of the transaction is
invalid [S. 142]. And any guarantee which the creditor has
obtained by means of keeping silence as to the material
circumstances is invalid [S. 143]. For example: 1) A engages
B as clerk to collect money for him. B fails to account for
some of his receipts and A in consequence calls upon him to
furnish security for his duly accounting. C gives his guarantee
for B's duly accounting. A does not acquaint C with B's previous
conduct, B afterwards makes default. The guarantee is invalid;
2) A guarantees to C payment for iron to be supplied by him to
B to the amount of 2000 tons. B and C have privately agreed
that B should pay five rupees per ton beyond the market price,
such excess to be applied in liquidation of an old debt. This
agreement is concealed from A. A is not liable as surety.
Concealment under S. 143, is fraudulent. Indian law makes a
distinction between intentional concealment and mere non-
disclosure. To invalidate a guarantee thus, two points have to
be proved, first that there was misrepresentation as to a material
part of the transaction, or silence as to material circumstance
and, second, that the guarantee was in fact obtained by means
of such misrepresentation or silence. Indian courts have,
however, distinguished between fiduciary guarantees by person
in favour of banks. In the first case, the requirement as to the
disclosure of all material circumstances has to be strictly
satisfied. But, where the suretyship is with regard to an advance
to be made by a bank, the bank need not disclose part
indebtedness to the surety [Imperial Bank of India v. V. P.
Avanasi Chettiar AIR 1930 Mad 874; See also A. R.
Krishnaswamy Iyer v. Travancore National Bank AIR 1940
Mad 437 ].
5. Legal
A contract of guarantee must also satisfy the element of legality.
Illegality of object or consideration vitiates a contract of
guarantee. The term 'liability' under S.126 envisages a liability
enforceable by law. Therefore a contract to guarantee a time-
barred debt is void for illegality.
6. Flaw in consent
A contract of guarantee becomes invalid by reason of flaw in
consent. According to Ss.142 and 143, a contract of guarantee
becomes invalid if there is a misrepresentation or concealment
of material circumstances by the creditor. Hence if a creditor
knows of a previous misconduct of the principal debtor but
does not discloses it to the Surety, the Surety cannot be made
liable.
7. Existence of principal Debt
In addition to all the above essentials, it is necessary for a
contract of guarantee to be valid that there should be a principal
debt which forms the very basis of the contract. In Swam v.
Bank of Scotland[ (1836)10 Bligh NS 627] where a surety
guaranteed an overdraft which was declared void under a statute
the surety was discharged of his liability and the Court observed,
'if there is nothing due, no balance, the obligation to make that
nothing good itself amounts to nothing. If no debt is due, if
the banker is forbidden from having any claim against his
customer, there is no liability incurred by the co-obligers.
3.4 KINDS OF GUARANTEE
The liability of a surety squarely depends upon the nature of
guarantee stipulated in the contract. Since the obligation of a
surety arises on account of a debt or duty owed by the principal
debtor, the surety, who is altogether a stranger to the main
contract, may of his own will stipulate conditions or terms which
bind him to the contract, or he may make himself to be strictly
bound by the obligations of the principal debtor. Hence the
liability of the surety depends upon the nature of guarantee
which was agreed upon between the parties. The following are
the various kinds of guarantee which varies the obligations of a
surety according to its nature.
(i) Conditional Guarantee
A Surety may require a condition precedent to be fulfilled by
the creditor failing which he should not be made liable. A partial
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recognition of this principle is to be found in section 144 under
which it is stated that where a person gives a guarantee upon a
contract that a creditor shall not act upon it until another person
has joined it as co-surety, the guarantee is not valid if that
other person does not join.
In National Provincial Bank of England v. Brakenbury [
(1906)22 TLR. 797], the defendant signed a guarantee which
on the face of it was intended to be a joint and several guarantee
of three persons with him. One of them did not sign. There
being no agreement between the bank and the co-guarantors to
dispense with his signature, the defendant was held not liable.
In a similar case, James Graham & Co. v. South-Gate Sands,
(1985)2 All E.R. 344 CA, the plaintiff supplied timber to a
company of which the defendant was a director. The company
being unable to pay, the plaintiff agreed to suspend the claim
for a year provided the debt was jointly and severally guaranteed
by Company's three directors. A guarantee apparently signed
by the defendant and other directors, was duly provided. The
Company went into liquidation. The plaintiff sought to enforce
the guarantee. Before the trial of the action it was discovered
that the signature of one of the directors had been forged.
The Court said : "A joint guarantor under a guarantee which
showed on its fact that the other joint guarantors were intended
to be parties is not liable at law if the signature of one of the
guarantors is forged, since there is no contract of guarantee
unless all the anticipated parties to the Contract in fact became
bound".
(ii) Limited Guarantee
A surety may, while undertaking to guarantee a debt, place a
limit upon his liability, by which he expressly declares that my
liability under the guarantee shall not at any time exceed the
sum of Pound 500". In such a case, whatever may be owing
from the principal debtor, the liability of the surety cannot go
beyond the sum so specified. In Yarlagadda v. Devata China
Yerkayya, a case before A.P. High Court, a clause in a contract
of suretyship making the surety liable upto Rs.15,000/- further
declared that he would be liable for any amount that might be
finally decreed. It was held that the clause should be construed
as meaning not exceeding Rs.15,000/-.
If however, the surety undertakes to repay the whole debt of
Rs.5,000/ then his liability will be Rs.5,000/- plus interest
thereon.
(iii) Continuing Guarantee
Section 129 of the Indian Contract Act, 1872 defines a
continuing guarantee as one which extends to a series of
transactions. This kind of guarantee is intended to cover a
number of transactions over a period of time. The essence of a
continuing guarantee is that is applies not to a specific
transaction but to any number of transactions and makes the
surety liable for the unpaid amount at the end of the guarantee.
Examples (a) I do hereby guarantee the payment for goods to
be delivered in umbrellas and parasols to J in the sum of Pound
200.
(b) A guarantees payment to B, a Tea dealer to the amount of
Pound 100, for any tea he may from time to time supply to C.
B supplies C with tea to the above value of Pound 100 and C
pays B for it. Afterwards B supplies C with Tea to the value of
Pound 200. C fails to pay. The guarantee given by A was a
continuing guarantee and hence he was liable to B to the extent
of Pound 100.
Whether in a particular case the guarantee is continuing or not
is a question of the intention of the parties, "as expressed by the
language they have employed, understanding it fairly in the
sense in which it is used; and this intention is best ascertained
by looking to the relative position of the parties at the time the
instrument is written. The Court has power "not to alter the
language but to fill up the instrument where it is silent. In
construing the language of the parties the whole of their
expressions must be looked to, not merely the operative words.
Thus the following words were held to show that a guarantee,
which otherwise might have been confined to a single
transaction, was intended to be continuing :
"Having every confidence in him, he has but to call upon
us for a cheque and have it with pleasure for any account
he may have with you; and when to the contrary we will
write you".
Explaining the distinction between a continuing guarantee and
a specific guarantee.
Chorley and Tucker commented that a specific guarantee
provides for securing of a specific advance or for advances
upto a fixed sum, and ceases to be effective on the repayment
thereof, while a continuing guarantee covers a fluctuating
account such as an ordinary current account at a bank and
secures the balance owing at any time within the limits of the
guarantee. (Chorley and Giles, P. 332).
Thus in the case of Kay v. Groves [(1829)80 ER 1274], the
guarantee was in these 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 were actually supplied and T paid for
them. Further supplies were actually made during the same
month for which T failed to pay. When the surety was
sued, the Court held that it was not a continuing guarantee,
and therefore,there was no liablity for parcels delivered
for various subsequent periods."
Revocation of Continuing Guarantee
Under S.130 of the Contract Act, a continuing guarantee may
at any time be revoked by the surety as to future transactions,
by notice to the creditor. In such a situation, a surety becomes
liable for transactions already entered into whereas the future
transactions are affected by revocation. The case of Offord v.
Davies is a fitting illustration in this context. The defendants
guaranteed the repayment of bills to be discounted by the
plaintiffs for twelve months not exceeding Pound 600. The
defendants revoked the guarantee before any bill was
discounted. But the plaintiffs discounted the bills which
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remained unpaid. The question was whether the surety had a
right to revoke. The Court said that they had and consequently
they were not liable. [(142 ER 1336)]
In the case of a continuing guarantee, every credit given is a
separate transaction which makes the surety irrevocably liable,
but he may free himself from further liability.
Where the directors of a company guaranteed the payment of
the company's overdrafts and subsequently resigned their office
and the bank was informed, it was held that the liability of the
directors would be confined to the amount due up to the date of
resignation. (Hargopal Agarwal v. State Bank of India, [AIR
1956 Mad. 211)].
Whether a guarantee for payment of rent can be revoked depends
upon the fact of each case and the language employed by the
parties to express their intention. In a guarantee of this kind
where the surety died, the Court held that neither he could have
revoked the guarantee during his lifetime nor was his estate
released from liability. [ (Belfour v. Crace (1902, 1 Ch. 733)]
Joyle J. observed :
"The right to determine or withdraw a guarantee by notice
forthwith cannot possibly exist when the consideration for
it is indivisible, so to speak, and moves from person to
whom the guarantee is given once for all, as in the case of
the consideration being the giving or conferring an office
or employment upon any person whose integrity is
guaranteed."
However when a person guaranteed the payment of rent by his
servant and revoked the guarantee as soon as the servant left
his employment, he was held not liable for rents which became
due after the revocation. [Windfield v. Dest Croin, (1919 35
TLR, 432)].
For a revocation to be effective, notice to the creditor must be
clear and specific, and intended to terminate liability under the
guarantee. A denial of liability in a previous suit was held to
be not serving as a notice.(Bhikabhai v. Bai Bhuri, ILR 27
Bom.418).
(iv) Bank Guarantee
The wheels of international trade are largely run due to the
significant role played by modern banks. Banks play the role
of an intermediary between traders in and out of the country.
Bank guarantee acts a motivating force for buyers and sellers
to involve in international trade. Under a Bank guarantee, the
bank gives a 'performance bond' at the instance of a seller for
fulfilment of seller's obligation under the contract of sale, the
guarantee being that the guarantor would pay on first demand
without any condition or proof. In the words of Pollock &
Mulla, a bank guarantee has a dual aspect. It is not merely a
contract between a bank and the beneficiary of the guarantee, it
is also a security given to the beneficiary by a third party. In
seeking to enforce the guarantee the beneficiary in effect seeks
to realise the security furnished by the third party. The third
party, has, therefore locus standi to challenge the guarantee
enforcement. The Courts are slow to interfere with its operation
not merely on the ground of its importance in international trade
but the seller is assured of payment irrespective of the
compliance or non-compliance of the terms of the contract
between the seller and the buyer.
It is an established rule laid down in many English and Indian
cases that where a bank gives a guarantee to pay on first
demand' and without contestation' and without reference to
such party' and without questioning the legal relationship in
whose favour the guarantee was given and the party on whose
behalf it was given not withstanding any dispute between the
parties' the bank if obliged to pay according to the contractual
obligation and the court will not give an injunction restraining
to pay.
A leading case on this principle is the case of Maharashtra
Electricity Board, Bombay v. The Official Liquidator, High
Court, Ernakulam, [AIR 1982 SC 1497]. The main issue in
that case relates to the effect of liquidation proceedings on the
right of the Electricity Board to recover from the bank the sum
of Rs.50,000/- as per the terms of the bank guarantee. Under
the contract the bank has undertaken to pay any amount not
exceeding Rs.50,000/- to the Electricity Board within forty eight
hours of the demand. The payment of the amount guaranteed
by the bank is not dependent upon the proof of any default on
the part of the company in liquidation. When the Electricity
Board sought to enforce the guarantee, the Official Liquidator
filed an application before The Company Judge praying for an
order restraining the Electricity Board from realising the amount
covered by the guarantee on the ground that since the company
in liquidation had been ordered to be wound up the Electricity
Board could not claim the amount from the bank. The bank
contended that the amount of Rs.50,000/- was not being claimed
as a creditor of the company in liquidation but on the basis of
the bank guarantee, the liability under which was not affected
by the liquidation proceedings. The learned Company Judge
upheld the plea of the Official Liquidator and issued an order
restraining the Electricity Board from realising the amount from
the bank on the ground that since the bank would have recourse
to other securities given by the company in liquidation to the
bank for realising the amount paid by it in accordance with the
bank guarantee and such action of the bank would affect the
assets of the company in liquidation, it was not open to the
Electricity Board to claim the amount of guarantee from the
bank except as a creditor in the winding up proceedings. An
appeal filed by the Electricity Board before the Division Bench
of the High Court was dismissed. Hence the appeal was filed
in the Supreme Court. The Supreme Court setting aside the
order of the Company Judge and the Division Bench allowed
the appeal saying that the liability of the bank under the
guarantee is not dependant upon prior proof of any default on
the part of the company in liquidation. Hence the bank has to
pay the amount due under the guarantee.
In Banwari Lal v. Punjab State Co-op. Ltd. [AIR 1983
Del.86, 89], the Delhi High Court said that if scrutiny is
commenced in respect of the underlying contract, obviously
the autonomy and independence of an absolute guarantee would
be lost. Its enforcement would depend upon the result of an
inquiry. This would defeat the very purpose of a bank guarantee.
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The obligation of a bank under a bank guarantee is absolute
and the autonomy of a bank to honour it on demand should not
be normally interfered with, by an order for injunction
restraining the bank from paying. The Supreme Court in U.P.
Co.-op. Federation Ltd. v. Singh Consultant and Engineers
Ltd. [(1988)1 SCC 174], emphasised that the operation of a
bank guarantee should be stayed only in cases of serious dispute,
fraud or special equities.
In that case two bank guarantees were furnished by a contract
or for the proper construction and successful commissioning
of a vanaspati plant. The bank was not to revoke the guarantees
upto a fixed date and was to make unconditional payment on
demand. The Board was to be the sole judge of the fact whether
the contractor has fulfilled the terms of the contract. Disputes
arose as to the erection and performance of the plant between
the contractor and the Board. The contractor sought an
injunction to restrain the Board from enforcing the guarantee.
The court found no serious ground for doing so. The court felt
that respectability and reliability of the assured mode of payment
through confirmed letters of credit in international trade and
bank guarantee in national trade is necessary for the growth
and promotion of trade.
Shetty J. cited the dictum of Lord Diplock in U.C.M.
(Investments) v. Royal Bank of Canada who reviewing the
American authorities stated that fraudulant use of guarantee
papers by the seller is the only case in which the court should
stay misuse of a credit system.
The exception for fraud on the part of the beneficiary seeking
to avail himself of the credit is a clear application of the maxim
ex turpi causa non oritur actio, or if plain English is to be
preferred, 'fraud unravels all.'
The case of Dai-ichi Karkaria Pvt. Ltd. v. Oil and Natural
Gas Commission, [AIR 1992 Bom.309] holds a good
illustration of this kind of fraud where the Bombay High Court
emphatically asserted that the law cannot allow the benefit of a
bank guarantee to be claimed by unscrupulous methods. In
this case the party in question was compelled at the pain of
stopping business with him to drop from his bank guarantee
the original requirement that it would be encashable only when
the parallel amount of import duty paid by him was refunded to
him. As soon as ONGC attempted to enforce the altered
guarantee, he applied for and was granted a stay against such
encashment. He was the victim of undue influence bordering
on fraud and the special equities thus generated created the
necessity of rescuing the party from being victimised.
In Kirloskar Pneumatic Co. Ltd. v. National Thermal Power
Corporation, [AIR 1987 Bom.308], where a contractor gave a
bank guarantee along with his bid as was required by the tender
notice, the bidder, having the right to do so, withdrew his bid
before its acceptance, the Department was restrained encashing
the guarantee. There was no contract yet about which it would
be said that there was a breach. However, in D.T.H.
Construction Pvt. ltd. v. S.A.I.L., [AIR 1986 Cal. 31],
injunction was not granted as the grounds for preventing
enforcement of guarantee were held not to be sufficient. The
facts of the case are that the contract was for dredging and
deepening a reservoir. Advance payment was made to the
contractor for purchase of essential machinery on bank
guarantee. SAIL sought encashment on account of the
contractor's default. The contractor tried to prevent it on the
ground that the work assigned to him was impossible and that
important facts were suppressed from him. These grounds were
held not to be sufficient to prevent encashment.
The case law on this subject is immensely growing along with
the increasing international trade. Bank guarantee is enforced
with little interference from third party viz., the person on whose
behalf it was given. In the words of Sen J. in Centex (India)
Ltd. v. Vinar Impex Inc. [(1986)4 SCC 136], "Commitments
of banks must be allowed to be honored free from interference
from the courts. Otherwise, trust in international commerce
would be irreparably damaged." It is only in exceptional cases
that the courts will interfere with the machinery of irrevocable
obligations assumed by banks. They are the life blood of
international commerce - Kerr.J in R.D. Barbottle (Mercantile)
Ltd. v. National West Minister Bank Ltd. [(1977)3 WLR,.
752]. The only exception for enforcement of bank guarantee is
that of fraud.
Another important aspect in relation to bank guarantee is that
writ jurisdiction is not a proper remedy for demanding stay.
Further, enforcement of a bank guarantee cannot be made the
subject matter of arbitration proceedings. But where a bank
found that there was a pending arbitration under which the
liability of all parties had to be ascertained, the Karnataka High
Court upheld the decision of the bank to withhold payment in
the case of Kudremukh Iron Ore Co. v. Kerala Rubber Ltd.,[
AIR 1987 Kant. 139]. The majority view as expressed by the
Supreme Court is that it cannot be subject to arbitration
proceeding.
3.5 RIGHTS OF SURETY
I Rights against Principal Debtor
The rights enjoyed by a Surety can be well explained under
three important doctrines viz.,
i) doctrine of subrogation (S.140),
ii) doctrine of indemnity (S.145), and
iii) doctrine of contribution (S.147).
The rights of a surety lies against the principal debtor, creditor
and co-sureties.
The rights of a Surety as against the principal debtor can be
discussed under two heads viz.,
1) before payment; and
2) after payment.
The two rights of sureties arising before and after payment are
described in Snell's Principles of Equity, 467 (28th ed. by
P.V.Baker and St.Langan as under :
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"The Surety has an equitable right to compel the Principal
debtor to pay the debt and so relieve the Surety from the
necessity of paying it out of his pocket. It is in the nature
of quia timet, and is based on the principle that is
unreasonable that a man should always have a cloud hang
over him, so that he ought to be entitled to remove it. It is
therefore immaterial that the creditor has refused to sue or
that he has made no demand. A fortiori, the action lies
where the Principal debtor threatens to commit a breach of
the obligations which the Surety has guaranteed and an
order may be made even though the Principal debtor is
without funds. But an action will not lie where the debt is
not an actual, accrued or definite debt or, if on its true
construction, the guarantee precludes action before the
Creditor demands payment".
The case of Mamata Ghose v. United Industrial Bank, [AIR
1987 Cal.280], is a leading example regarding the right of a
surety before payment. In that case the surety found that the
amount having become due, the principal debtor was disposing
of his personal properties one after the other lest the surety,
after paying, may seize them, and sought a temporary injunction.
The Court granted the injunction. Sukumar Chakravarty J said
that if in any suit it is proved by affidavit or otherwise that the
defendant threatens, or is about to remove or dispose of property
with intent to defraud his creditors, the Court may grant a
temporary injunction to restrain such act or give such other
order for the purpose of staying or preventing the removal or
disposition of the property.
(i) Doctrine of Subrogation
Under Section 140 of the Act a surety on payment of the amount
due under the contract of guarantee to the creditor steps into
the shoes of the creditor and is invested with all the rights which
a creditor had before such payment. This doctrine derives its
source from the equitable principles laid down in the early 19th
century as propounded in the argument of the learned counsel
Sir Samuel Romilly in the case of Huguenin v. Basetey [9
R.R. 148] which was approved by the Court. The statement of
the principle was to this effect :
"A Surety is to be entitled to every remedy which the
creditor has against the principal debtor; to enforce every
security and all means of payment; to stand in the place of
the creditor, not only through the means of contract, but
even by means of securities entered into without the
knowledge of the Surety, having a right to have those
securities transferred to him, though there was no stipulation
for that, and to avail himself of all those securities against
the debtor. This right of Surety also stands not upon
contract, but upon a principle of natural justice."
A right of subrogation is available to the surety on payment of
the amount due to the creditor. One important point which
needs to be clarified at this juncture is the question as to the
right of a surety to avail the securities in case of payment against
part of the debt. Sometimes a surety guarantees only a part of
the debt by imposing a limit on the amount. For example A
acts as surety for the debt due by B to C to the extent of
Rs.10,000/- whereas the actual sum due is Rs.20,000/-. The
question here is whether on payment of
Rs.10,000/the surety can claim a right over securities over which
the creditor has a right. The amount of Rs.10,000/- paid by
surety may be payment of full amount so far as he and the
principal debtor are concerned. But it does not amount to full
satisfaction of the debt so far as the creditor is concerned. Hence
the surety cannot have any right over the securities till the whole
debt of the creditor is paid.
This principle was applied in the case of Goverdhan Lal v.
Bank of Bengal [(1890)15 Bom.48] where it was held that the
surety cannot have any rights until the creditor has been paid in
full, even though the surety might have paid all that he was
bound to pay under the contract. Farran J said : "The creditor's
right to hold his security until his whole debt is paid, is
paramount to the surety's claim upon such securities which only
arises when the creditors claim against such securities has been
satisfied."
However if the surety is given for a part of debt and payment is
made thereof, which amounts to payment of the whole debt as
between him and the creditor, then such payment entitles the
surety a right over the securities. This can be illustrated by a
simple example.
A guarantees the unpaid calls on shares of a company on shares
held by B. B commits default and A pays the amount due to
such shares. On such payment, though only a part of the debt
due by B, which amounts to payment for the whole debt as
against the Company, the surety 'A' is entitled to dividends on
those shares.
The intention of the legislature while enacting s.140 is to keep
alive for the surety's benefit any right of the creditor, under a
security or otherwise, which would otherwise have been
extinguished at law by payment of the debt or performance of
the duty.
We are not interested in anything else, at the moment, If the
right arising under this section can be exercised only in respect
of benefits/securities arising from the same transaction but not
in respect of others. Therefore as held in Bank of Baroda v.
Krishna Balab,[ (1975) A. Raj.1], where the surety's liability
is on the credit loan account of the debtor, he cannot, on payment
of that loan, claim the benefit of money lying in the cash credit
account.
The rights of a surety as against the principal debtor are also
embodies in S.141 by which he is entitled to the benefit of every
security which the creditor has against the principal debtor
whether he knows of its existence or not. If the security is lost
or parted with without his consent, he is entitled to a partial
discharge of his liability. However, loss arising due to an act of
God does not fall within S.141 so as to give the surety a right of
discharge.
The distinction between S.140 and 141 is that the former speaks
of right of a surety before payment while the latter speaks of
rights after payment. The only distinction between S.141 and
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the English Law is that under S.141 a surety's right is limited
only to securities at the time of contract whereas under English
law 'after taken' securities are also equally available to the surety.
Commenting on this aspect Sir Frederick Pollock stated that a
deliberate change from the English Law was not intended but
that the Act is only codification of equity some what out of
date. (Indian Contract Act and Specific Relief Act, Tenth Edn.,
1986 at P.757)
(2) Right to indemnity
This right is contained in section 145 of the Act which reads - "
Implied promise to indemnify surety.- In every contract of
guarantee there is an implied promise by the principal debtor to
indemnify the surety; and the surety is entitled to recover from
the principal debtor whatever sum he has rightfully paid under
the guarantee, but no sums he has paid wrongfully".
Illustrations appended to the section make the right to indemnity
clear. These read:
(a) B is indebted to C, and A is surety for the debt. C demands
payment from A, and on his refusal sues him for the amount.
A defends the suit, having reasonable grounds for doing
so, but is compelled to pay the amount of the debt with
costs. He can recover from B the amount paid by him for
costs, as well as the principal debt.
(b) C lends B a sum of money, and A, at the request of B,
accepts a bill of exchange drawn by B upon A to secure the
amount. C, the holder of the bill demands payment of it
from A, and on A's refusal to pay, sues him upon the bill.
A, not having reasonable grounds for so doing, defends
the suit, and has to pay the amount of the bill and costs. He
can recover from B the amount of the bill, but not the sum
paid for costs, as there was no real ground for defending
the action.
(c) A guarantees to C, to the extent of 2000 rupees, payment
for rice to be supplied by C to B. C supplies to B rice to a
less amount than 2000 rupees, but obtains from a payment
of the sum of 2000 rupees in respect of the rice supplied.
A cannot recover from B more than the price of the rice
actually supplied.
Thus the relation of surety and the principal debtor gives rise to
an implied promise on the part of the latter to indemnify the
former. Under this right the surety is entitled to recover from
the principal debtor whatever he has rightfully paid by virtue
of his being a surety to the creditor. This right of indemnity is
only in respect of payments which the surety has made rightfully
[Chekkera Ponnamma v. A. S. Thammayya, [AIR 1983 Kant
124]. The above referred illustrations make the point clear.
This must be noted that the various heads of indemnity that
could be claimed are those which we have studied under section
125 in the module.
II Rights against Creditor
(1) Right to Securities
Section 141 contains the most practical application of the
principle laid down in section 140 which we have discussed
earlier. Section 141 reads:
"141. Surety's right to benefit of creditor's securities -
- A surety is entitled to the benefit of every security which
the creditor has against the principal debtor at the time when
the contract of suretyship is entered into, whether the surety
knows of the existence of such surety or not; and if the
creditor loses, or, without the consent of the surety, parts
with such security, the surety is discharged to the extent of
the value of the security".
Illustrations
(a) C advances to B, his tenant, 2,000 rupees on the guarantee
of A. C has also a further security for the 2,000 rupees by a
mortgage of B's furniture. C cancels the mortgage. B
becomes insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the value of the
furniture.
(b) C, a creditor, whose advance to B is secured by a decree,
receives also a guarantee for that advance from A. C
afterwards takes B's goods in execution under the decree,
and then, without the knowledge of A, withdraws the
execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to
secure a loan from C to B. Afterwards, C obtains from B a
further security for the same debt. Subsequently, C gives
up the further security. A is not discharged.
The right under the section is limited to the securities existing
at the time of the formation of the suretyship contract
[Govardhan Lal v. Bank of Travancore, AIR 1968 SC 1432;
see also illustration (c) to the Section]. But the sale in English
law does not place any such limitation. In Forbes v. Jackson
[(1882) 19 ChD 615], where brief facts were: the principal
debtor borrowed 200 Pounds against the mortgage of his lease
hold premises and a policy of life insurance, the defendant
joining as surety. The debtor borrowed further sums on the
same securities without the knowledge of the surety. The
principal debtor failed to pay. Surety paid the debt along with
the interest and claimed both securities. The creditor demanded
payment of the further advance also. It was held that the surety
was entitled to have any security held by the creditor,
irrespective of whether it was taken before or subsequent to the
contract of surety. The difference between the Indian and
English law was explained in Amritlal v. State Bank of
Travancore, [AIR 1968 SC 1432] thus-
"It is true that section 141 has limited the surety's right to
securities held by the creditor at the date of his becoming
surety and has modified the English rule that the surety is
entitled to the securities given to the creditor both before
and after the contract of guarantee. But subject to this
variation, section 141 incorporates the rule of English law
relating to discharge from liability of a surety when the
creditor parts with or loses the security held by him".
When right to securities accrues
This aspect was discussed in Govardhandas v. The Bank of
Bengal [(1890) 15 Bom 48]. It was there laid down that the
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creditor's right to hold his security until his whole debt is paid,
is paramount to the surety's claim on such securities, which
only arises when the creditor's claim against surety, securities
has been fully satisfied.
(2) Right to share reduction
The section deals with the protection of the surety and the
reduction of his liability in proportion to the security lost or
parted with by the creditor without the surety's consent. Mere
passive inactivity or passive negligence of creditor by failing
to realize the debt from a collateral security may not in itself be
sufficient to discharge the surety since he can himself avoid the
consequence of such possibility by himself paying the debt and
becoming subrogated to the rights of creditor.
It has already been noted earlier that u/s 128 the liability of the
surety is co-extensive with that of principal debtor, unless it is
otherwise provided by the contract. It means that the contract
can provide about the lesser liability of surety than the debtor.
Thus if the surety undertakes to be liable to the extent of Rupees
1000/-, his liability is limited to that extent. It was held in
Hobson v. Boss [(1871) 6 ChD 792], that where the surety has
guaranteed only part of the debt, and pays it, he will be entitled
to the dividend from the debtor's estate, along with the creditor,
who may prove for the balance of the debt, the excess over the
amount guaranteed.
(3) Right of set-off
If the creditor sues the surety, the surety may have the benefit
of the set-off, if any, that the principal debtor has against the
creditor. He is entitled to use the defence of the debtor against
the creditor. If for example, the creditor owes him something,
or the creditor has in his hands some thing belonging to the
debtor for which the debtor could have counter claimed, the
surety can also put up that counter claim. He can claim such a
right not only against the creditor, but also against the third
parties who have derived their title from the creditor. Thus
where a mercantile agent sold the goods of his principal and,
being a surety for payment of the price to the principal, had to
pay it, he was held to have become entitled to the unpaid seller's
lien against the buyer and those deriving title from him
[Avtarsingh pp.471-72].
III Rights against co-sureties
(1) Effect of releasing a surety
Section 138 reads thus:
"Release of one co-surety does not discharge others.
Where there are co-sureties, a release by the creditor of
one of them does not discharge the others; neither does it
free the surety so released from his responsibility to the
other sureties".
A creditor is fully competent to discharge any of the co-sureties
from his liability, but the release of one surety will not have the
effect of releasing the other sureties [Sri Chand v. Jagdish
Prashad, AIR 1966 SC 1427], as the liability of sureties is
joint as well as several. Though the surety may be released by
the creditor, he would remain liable to the other sureties for
contribution in the event of default. According to section 138
of the Contract Act if a plaintiff has chosen not to proceed
against one or other of the sureties but has chosen to proceed
against the rest then the release of the one or the other co-sureties
by plaintiff will not free the guarantor from his responsibility
to the other sureties [United Bank of India v. Modern Stores
Ltd and others, AIR 1988 Cal 18].
(2) Right to contribution
Sections 146 and 147 fix the liability of co-sureties for the same
debt. Section 146 speaks thus:
" Co-sureties liable to contribute equally. Where two or
more persons are co-sureties for the same debt or duty, either
jointly or severally, and whether under the same or different
contracts, and whether with or without the knowledge of
each other, the co-sureties, in the absence of any contract
to the contrary, are liable as between themselves, to pay
each an equal share of the whole debt, or of that part of it
which remains unpaid by the principal debtor".
Illustrations appended to the section make the meaning clear
regarding the liability of the co-sureties thus--
(a) A, B and C are sureties to D for the sum of 3000 rupees
lent to E. E makes default in payment. A, B and C are
liable, as between themselves, to pay 1000 rupees each.
(b) A, B and C are sureties to D for sum of 1000 rupees lent to
E, and there is a contract between A, B and C that A is to
be responsible to the extent of one-quarter, B to the extent
of one-quarter and C to the extent of one-half. E makes
default in payment. As between the sureties, A is liable to
pay 250 rupees, B 250 rupees and C 500 rupees.
Above illustrations indicate that the co-sureties are liable to
contribute between themselves equally or in accordance with
the contract among themselves.
Here, for a clear understanding of this section you may refer to
S.43 which is analogous to this section. S. 43 deals with co-
promisor and this section deals with co-sureties. As under the
former section joint promisors are bound inter se to contribute
equally to the payment, so co-sureties have also the same
obligation. The right of contribution is not dependant on any
express agreement or contract. Any co-surety who has paid
the whole or part of the debt is, in the absence of any contract
to the contrary, entitled to recover the excess over his share
[See Kamal Chunder v. V Susila Bala, AIR 1938 Cal 405;
Davies v. Humphreys, (1840) 151 ER 361]. But where any
co-surety becomes insolvent, the other sureties must pay the
whole amount between them.
Section 141, which we have discussed earlier, is also applicable
to co-sureties i.e., they will also be entitled equally to the benefit
of securities. The rule is that a co-surety who has received a
counter security from the debtor must bring it in for the benefit
of his co-sureties [Muthuswami v. Rajalu AIR 1924 Mad 848].
Section 147 reads thus-
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"Liablity of co-sureties bound in different sums. Co-sureties
who are bound in different sums are liable to pay equally
as far as the limits of their respective obligations permit.
Illustrations to the section are
(a) A, B and C as sureties for D, enter into three several bonds,
each in a different penalty, namely: A in the penalty of
10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D's duly accounting to E.
D makes default to the extent of Rs 30,000 rupees. A, B
and C are each liable to pay 10,000 rupees.
(b) A, B and C as sureties for D, enter into three separate bonds,
each in a different penalty, namely: A in the penalty of
10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D's duly accounting to E.
D makes default to the extent of 40,000 rupees. A liable to
pay 10,000 rupees and B & C 15,000 rupees each.
(c) A, B and C as sureties for D, enter into three several bonds,
each in a different penalty, namely; A in the penalty of
10,000 rupees, B in that of 20,000 rupees, C in that of
40,000 rupees, conditioned for D's duly accounting to E.
D makes default to the extent of 70,000 rupees. A, B and
C have to pay each the full penalty of his bond.
Under this section equal contribution is subject to the maximum
limit, if any, fixed by a surety of his liability. This section
contemplates cases where several sureties make themselves
responsible for a debt, but upto a certain limit fixed by each.
This section says that each surety must contribute equally subject
to the limit given by each. It may be noted that the contribution
under the section is equal and not ratable or proportionate to
the maximum liability of each as in English law [See Ellsmere
Brewery Co v. Cooper (1896) I KB 75; Davies v. Humphreys,
(1840) 151 ER 361; Iyer, 515].
3.6 LIABILITY OF SURETY
I Liability of General
Section 128 sketches the ambit of the liability of the surety
when it enacts that his liability is co-extensive with that of the
debtor. At the same time it is impliedly indicative that surety's
liability would be reduced if the liability of the principal debtor
is reduced under a decree of the court, or his liability is reduced
or extinguished if the liability of the principal debtor is reduced
or extinguished in whole or in part by virtue of a statute. Hence
a statutory reduction or extinguishment of the principal debtor's
liability will operate as a pro-tanto reduction or extinguish much
of the surety's liability. In Narayan Singh v. Chatar Singh
[AIR 1973 Raj 347] the liability of an agriculturist, who was
the principal debtor, was scaled down under the Rajasthan Relief
of Agricultural Indebtedness Act, 1957. It was held that the
effect of scaling down the principal's liability was that the
surety's liability has also been reduced. It was thus held by
Tyagi, J.:
"The question may be viewed from another angle also and
it is that the surety, who has a right to be reimbursed by the
principal debtor for the amount paid by him on his behalf,
it allowed to realize the entire amount from the agriculturist
principal debtor after the decree-holder is permitted to get
the entire decretal amount from the surety then it would
mean that whatever benefit agriculturist debtor is entitled
to get under the provisions of the Act shall be denied to
him if the decree is allowed to be executed against the surety
judegment debtor because after its satisfaction the principal
judgement holder shall be required under the contract Act
to reimburse the surety".
Creditors option to sue
As under section 128 the liability of the surety is co-extensive
with that of the principal debtor unless it is otherwise provided
by the contract. It means that on making a default, the creditor
has the remedy to sue either the debtor or the surety for the
realization of the debt or he may sue both of them, the debtor
and the surety. Hence the liability of the surety is joint and
several with the principal debtor. It cannot be said that the
creditor must proceed against the debtor first and should only
approach the surety if he fails to realize the debt from the
principal debtor. Creditor has a right to proceed against the
surety directly without exhausting his remedies against the
principal debtor for realizing the decretal amount. The Supreme
Court in Bank of Bihar Ltd. v. Dr. Damodar Prasad [AIR
1969 SC 297 at p. 298] held that "before payments the surety
has no right to dictate terms to the creditor and ask him to pursue
his remedies against the principal in the first instance. In the
absence of some special equity the surety has no right to restrain
an action against him by the creditor on the ground that the
principal is solvent or that the creditor may have relief against
the principal in some other proceedings. Likewise where the
creditor has obtained a decree against the surety and the
principal, the surety has no right to restrain execution until the
creditor has exhausted his remedies against the principal."
But were the decree is passed against the mortgaged property,
principal debtor and the surety,the decree holder is required to
proceed first against the mortgaged property for the realization
of the debt and then against the guarantor [Union Bank of
India v. Manku Narayan, AIR 1987 SC 1078]. This decision
of the Supreme Court has curtailed the option available to the
creditor in the particular situation. But in 1992 the Supreme
Court in State Bank of India v. Industrial Export
Registration Ltd. [(1992) 3 SCC 159], held that the surety's
liability is co-existensive with that of the principal. It further
held that a decree does not put any fetter on any of the rights of
the decree holder... The choice of execution of the decree against
the mortgaged property or the money decree was the decree
holder's discretion.
Section 128 also gives option to the surety to specify in the
contract that his liability is limited and that it is not co-extensive
with that of the principal debtor. In the absence of any such
stipulation by the surety, his liability under the section must be
deemed co-extensive. The burden to prove that the liability is
limited is upon the surety. [Bharat National Bank Ltd.and
another v. Thakur Dass Madhok, AIR 1935 Lah. 729]. Hence
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in a contract of guarantee, the guarantor can limit his liability
under this section and in that case his liability would not be
beyond the limit.
Condition Precedent
Where a person gives a guarantee upon a contract that a creditor
shall not act upon it until another person has joined in it as co-
surety, the guarantee is not valid if that other person does not
join (Section 144). It emphasizes that the liability of the surety
is dependent on the condition precedent that a co-surety will
join. The liability of the surety would only arise if the co-surety
joins. Hence a surety who entered into the obligation upon the
understanding and faith that another person would also enter
into it, has a right in equity to be relieved on the ground that the
instrument has not been executed by the intended co-surety
[Erans v. Bremridge (1856) 8 D.M.G. 100]. Such a term is
usually inserted in contracts of guarantee in order to insure the
right of contribution from the co-surety.
II. Liability under continuing guarantee
The guarantees in trade transactions are usually given either to
secure the supply of goods on credit or advances of money and
may be limited in amount or absolutely unlimited, so far as the
surety's liability there under is concerned. Were there is
pecuniary limit, the guarantee continuing is not exhausted by
the first advance or credit equal to the prescribed amount. But
a guarantee though continuing and limited to a given sum, may
and sometimes does, stipulate that the surety shall only be liable
for a definite period of time and not longer. In the latter case, it
is obvious. It is often an interesting question of construction
whether the guarantee covers the transaction completed but not
matured during the time limit. The question whether a particular
guarantee is a continuing or non-continuing guarantee, is also
a question of construction of the contract, where it is not clear
either way from the face of the contract. Section 129 of the Act
defines a continuing guarantee as a guarantee which extends to
a series of transactions. The important and noteworthy point in
this regard is the fact that the section does not define nor lay
down any criteria of practical value as to what exactly a series
of transactions means. However, the Madras High Court has
for long been of the view that a request to advance money to
another person upto a certain limit for his trade is a continuing
guarantee [T.N.S. Fim v. V.P.S. Mohammad Hussain and
Others, (AIR 1933 Mad. 756].
At the same time we can take help of the illustrations appended
to section 129, which throw enough light on the way to interpret
the words "series of transactions." The illustrations read:
(a) A, in consideration that B will employ C in collecting the
rents of B's zamindari, promises B to be responsible to the
amount of 5,000 rupees for the due collection and payment
by C of those rents. This is a continuing guarantee.
(b) A guarantees payment to B, a tea dealer, to the amount
Pounds 100 for any tea he may from time to time supply to
C. B supplies C with tea to the above value of Pound 100,
and C pays for it. Afterwards, B supplies C with tea to the
value of Pounds 200. C fails to pay. The guarantee given
by A was a continuing guarantee, and he is accordingly
liable to B to the extent of Pounds 100.
(c) A guarantees payment to B of the price of five sacks of
flour to be delivered by B to C and to be paid for in a month.
B delivers five sacks to B. C pays for them. Afterwards B
delivers four sacks to C, which C does not pay for. The
guarantee given by A was not a continuing guarantee, and
accordingly he is not liable for the price of the four sacks.
A guarantee for a single specific transaction comes to an end as
soon as the liability under that transaction ends [Kay v. Groves
(1829) 80 ER 1274]. Where the plaintiff stood guarantee for a
licence for sale of liquor and under the terms of the licence, the
money was payable in installments, it was held that guarantee
was not a continuing one [Bhagvan Dass v. Secretary of State
AIR 1926 Bom. 465]. In Hasan Ali v. Waliulllah [(1930) All.
730] the Allahabad High Court laid down the test of a continuing
guarantee thus: where the guarantee has been given for the
performance of a definite engagement which has already come
into existence and is not contingent and the consideration for
which is not variable as the result of future dealings between
the parties, the contract is not one of continuing guarantee.
The essence of a continuing guarantee is that it applies not to a
specific number of transactions, but to any number of them and
makes the surety liable for the unpaid balance at the end of the
guarantee. The liability of the guarantor to pay remains alive
as long as the principal debtor does not clear the account [Union
Bank of India v. T.J. Stephens, AIR 1990 Ker.180].
III. Liability under a Bank Guarantee
The bank guarantee constitutes an agreement between the bank
and the creditor under which there is an absolute obligation of
the bank to make the payment of the creditor merely on demand
from the latter. The bank is prohibited under the guarantee
from raising any objection. Demand made on the bank in
accordance with the eventualities mentioned in the deed of the
guarantee is conclusive as regards the amount due and payable
by the bank [National Project Construction Corporation v.
M/s. Sadhu and Company, AIR 1990 P & H 300]. Thus the
Bank guarantee is an absolute undertaking for the payment of
amount whenever the creditor demands. Moreover the money
is payable on demand and not on breach [Maharashtra State
Electricity Board v. Official Liquidator, Ernakulam, AIR
1982 SC 1492]. Likewise suspension of the contract between
the contractor and the department on account of the contractor's
default did not have the effect of suspending the enforcement
of the bank guarantee given by an other person for the
contractor's due performance [Dena Bank v. Fertilizers
Corporation of India, AIR 1990 Pat.221]. Courts always
(except in cases of serious dispute, fraud or special equities)
refrain from granting injunction restraining performance of
contractual obligations arising out of bank guarantee between
the bank and another [United Commercial Bank v. Bank of
India, AIR 1981 SC 1426].
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3.7 DISCHARGE OF SURETY
Indian contract Act provides for discharge of surety under the
following circumstances:
1) Revocation by the surety [Section 130]
2) Surety's death [Section 131]
3) Variance in the terms of the contract [Section 133]
4) Release or discharge of principal debtor [Section 134]
5) When creditor compounds with, gives time to, or agrees
not to sue principal debtor [Section 135]
6) Creditor's act or omission impairing surety's eventual
remedy [Section 139]
7) Loss of security by the creditor [Section 141]
1. Revocation by the Surety
Section 130 says that a continuing guarantee may at any time
be revoked by the surety as to future transactions by notice to
the creditor. The act having left open to the parties to provide
as to the manner in which notice to the creditor under S. 130
could be given. If therefore the parties think of laying down a
particular method by which such a notice for revocation of the
guarantee under S. 130 has to be given, then such a contract is
binding contract and it cannot be easily brushed aside on a priori
consideration [Seth Dhanoomal Parsaram V. P. Kuppuraj,
AIR 1977 Mad 277]. Here under this section only a continuing
guarantee can be revoked and that too for future transactions.
It is worth noticing that revocation becomes effective for the
future transactions while the surety remains liable for
transactions already entered into. The following illustrations
appended to the section make the law well understandable.
a) A, in consideration of B's discounting, at A's request, bills
of exchange for C, guarantees to B, for twelve months, the
due payment of all such bills to the extent of 5000 rupees.
B discounts bills for C to the extent of 2000 rupees.
Afterward, at the end of twelve months, A revokes the
guarantee. This revocation discharges A from all liability
to B for any subsequent discount. But A is liable to B for
the 2000 rupees, on default of C.
b) A guarantees to B to the extent of 10000 rupees, that C
shall pay all the bills that B shall draw upon him. B draws
upon C. C accepts the bill. A gives notice of revocation.
C dishonours the bill at maturity. A is liable upon his
guarantee.
Illustration (a) makes the point clear that the surety's notice of
revocation is applicable on future transactions and not on the
transactions already made, whereas illustration (b) indicates that
where transactions have already been made they cannot be
revoked by a subsequent notice.
Revocation as to future transaction is possible, when there are
separate distinct transactions contemplated in the contract.
When the consideration is single and indivisible, for instance
where a continued relationship is established on the faith of a
certain guarantee, no revocation of the same is possible. Thus,
if a servant is employed on the basis of a guarantee as to his
good conduct, the guarantee is not revocable so long as the
servant continues in service [Lloyds v. Harper, (1880) 16 ChD
290].
2. Surety's death
Section 131 reads:
"The death of surety operates, in the absence of any contract
to the contrary, as a revocation of a continuing guarantee,
so far as future transactions".
The section is very clear to the fact that death of the surety
results in automatic revocation of the continuing guarantee
hence forth. This will effect the future transaction only. But if
there is any contract to the contrary surety's death would not
automatically revoke the guarantee. For example, if the contract
provides that in case of surety's death, his property or legal
representatives would be responsible for his liability under the
continuing guarantee, then the guarantee is not automatically
revoked on surety's death. A guarantee for the good behaviour
of a servant is not a continuing one and is not revocable as long
as he continues in job. Hence such a guarantee is not determined
by the surety's death unless there is agreement to the contrary
[Balur v. Crace, (1902) 1 ChD 733].
3. Variance in the terms of the contract
Section 133 reads:
"Any variance, made without the surety's consent, in the
terms of the contract between the principal debtor and the
creditor, discharges the surety as to transactions subsequent
to the variance".
Hence the surety is discharged when any variance is effected to
the main contract between the principal debtor and the creditor.
However, to cause discharge of surety, the variance must have
been made without the surety's consent". In Partap Singh v.
Keshavlal [AIR 1935 P C 21], an authoritative expression to
this point has been made. The case involved a guaranteed
transaction of an advance of Rs.1,25,000 on security of four
properties, where as the real transaction carried out was one of
an advance of Rs.1,000,000 on security of three properties. It
was held by the Privy Council that the sureties could not be
held liable in respect of the performance of the latter transaction,
which was not what they had contracted to guarantee. The
council, speaking through Lord Atkin, clarified the legal position
thus:
"the law on the discharge of sureties has been somewhat
obscured by the emphasis laid in the cases on an agreement
between the parties to vary in the terms of the original
agreement. The principle is that the surety, like any other
contracting party, cannot be held bound to something for
which he has not contracted. If the original parties have
expressly agreed to vary the terms of the original contract
no further question arises. The original for several
ycontract has gone, and unless the surety has assented to
the new terms, there is nothing to which he can be bound,
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for the final obligation of the principal debtor will be
something different from the obligation which the surety
guaranteed. Presumably he is discharged forth with on the
contract being altered without his consent, for the parties
have made it impossible for the guaranteed performance to
take place".
Lord Atkin, expounding the principle, was indeed circumspect.
He thus found its desirable to add that the application of this
principle must always depend upon a correct analysis of the
contract in fact made. Guarantees", he pointed out frequently
relate to obligations without special reference to any specific
contract between the creditor and the debtor. In such a case the
doctrine referred to would have a very limited application [p25].
The true rule, applicable to the contract of guarantee is that if
there is any agreement between the principals with reference to
the contract guarantees, the surety ought to be consulted. If the
alteration is to the disadvantage of the surety, or its unsubstantial
nature is not self evident, the surety can claim to be discharged.
The contract of surety should not be altered without his consent
and the creditor should not undertake to alter the contract and
then say, that though the contract had been altered, it was not
done to the disadvantage of the surety, especially when such
alterations were made with respect to material particulars
regarding the contract of guarantee [S. Perumal Reddiar v.
Bank of Baroda and Others, AIR 1981 Mad 180 at pp.191,
192]. In Ramanund v. Choudhury Soonder [(1878) 4 Cal
311 (P. C)] where, under the consent decree, it was provided
that in default of one instalment, the properties in suit may be
sold, and the surety proceeded against for any deficiency, the
Privy Council held that the decree holder's delay in actually
bringing the properties to sale had the effect of discharging the
surety pro tanto, as to interest due from the date of the order for
sale, because the act of the creditor in postponing the sale laid
an additional burden on the surety by increasing the interest.
In Bonar v. Macdonald [(1850) 3 HLC 226], where the
defendant guaranteed the conduct of Bank manager and the
bank afterwards without any communication to the surety raised
his salary on the condition that he would be liable for one fourth
of the losses on the discounts allowed by him. The manager
allowed a customer to over draw his account and the bank
suffered a loss. It was held that the new arrangement had
resulted in the discharge of surety. It was observed:
"Any variance in the agreement to which the surety has
subscribed, which is made without the surety's knowledge
or consent, which may prejudice him, or which may amount
to a substitution of a new agreement for a former agreement,
even though the original agreement may, notwithstanding
such variance, he substantially performed, will discharge
the surety".
One of the questions that concerns the courts is that where a
variation is not substantial or material or is beneficial to the
surety, will it discharge the surety. A problem of this nature
was before the Supreme Court in the Case M. S. Anirudhan v.
Thomco's Bank Ltd [AIR 1963 SC 746]. The appellant agreed
to stand surety upto Rs.25000/- to be allowed by the respondent
bank to the principal debtor. The bank agreed for an overdraft
upto Rs.20000/- only. Principal debtor himself altered the
amount from Rs.25000/- to Rs.20000/- without the consent of
the surety. The question before the supreme court was whether
such an alteration which was to the benefit of the surety, had
discharged the surety. The majority decision was that when
alteration is to the benefit of the surety, that is not a material
alteration. Such an alteration is unsubstantial and that does not
discharge the surety from liability. Hidayatullah J. observed:
"The question before me is whether a document jointly
executed by two persons creating a liability equal for both
is to be regarded as materially altered if the liability is
reduced equally for both but the alteration is made only by
one of them. In my opinion such an alteration to be regarded
as unsubstantial and not otherwise In my judgement,
the particular document, in this case cannot be said to have
been materially altered -- The alteration does not save the
surety from liability arising under it".
It is submitted that it is worth noticing that the Act does not
make any distinction between beneficial or prejudicial variances
to the surety in material particulars as compared to the original
one. If the terms of the contract are changed, the person who
signed the original contract cannot be made liable either on the
basis of original contract, because that has been destroyed by
alteration, or on the basis of altered contract, because he never
agreed to that [Bangia p.381].
4. Release or discharge of principal debtor
Section 134 of the Act provides that the surety is discharged by
any contract between the creditor and the principal debtor, by
which the principal debtor is released or by any act or omission
of the creditor, the legal consequence of which is the discharge
of the principal debtor. Mahanath Singh v. U Ba Yi [AIR
1939 P. C. 110] was a case that arose out of a suit against debtors
and the surety, where the names of the original debtors were
struck upon an application by the creditor. The Privy Council
held that the only result of the creditor's act was to preclude the
bringing by the creditor of a fresh suit in respect of the subject
matter against them, and is not to release or discharge the
principal debt. Lord Porter, speaking for the council, observed
that a surety is discharged if the creditor, without his consent,
either releases the principal debtor or enters into a binding
arrangement with him to give him time. In such a case the
ground of discharge is that the surety's right to pay the debt at
any time and after paying it, to sue the principal in the name of
the creditor is interfered with". " While an absolute release is
given", held his lordship, there is no room for any reservation
of remedies against surety.... Where, however, the debt has not
been actually released, the creditor may reserve his right by
notifying the debtor that he does and this reservation is effective
not only where the time of payment is postponed but even where
the creditor has entered into an agreement not to sue the debtor.
In neither case is there any deception of the debtor since he
knows that he is still exposed to a suit of the will of the surety".
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The council found that if the only result of striking out the
original debtors from the action was to preclude the bringing
by the creditor of a fresh suit in respect of the subject-matter
against them, and was not to release or discharge, the principal
debt, "then the debt remains debt though the creditor by reason
of rule of procedure cannot himself bring an action upon it".
Thus it was held that the surety could not be said to have been
discharged under those circumstances.
Section 134 provides two rules of discharge i.e.,
(i) release of the principal debtor, and (ii) Act or omission of
the creditor. We may make these two kinds clear hereunder
which release or discharge the surety from his liability:
(i) Release of the principal Debtor
As the liability of the surety is co-existent with the principal
debtor, if the creditor makes any contract with the principal
debtor by which principal debtor is released of his lability, the
necessary liability of the surety also disappears. As was
observed in George v. Jonesion [(1873) 8 Ex 81], "if the
creditor, without the consent of the surety by his won act
destroys the debt or derogate from the power which the law
confers on the surety to recover it against the debtor in case he
shall have paid it to the creditor, the surety is discharged". This
is what the following illustrations to the section indicate:
a) A gives a guarantee to C for goods to be supplied by C to
B. C supplies goods to B, and afterwards B becomes
embarrassed and contracts with his creditors including C
to assign to them his property in consideration of their
releasing him from their demands. Here B is released from
his debt by the contract with C, and A is discharged from
his suretyship.
Hence any release of the principal debtor is a release of the
surety. Likewise where the liability of the principal debtor
is reduced or extinguished under the provision of a statute,
it will operate as a pro tanto reduction or extinguishment
of surety's liability [Subramania Chettiar v. M. P.
Narayanaswami Gounder, AIR 1951 Mad 48]. But at
the same time it should be noted that a discharge which the
principal debtor may secure by reason of winding up or
insolvency does not absolve the surety of his liability
[Mahrashtra State Electricity Board v. Official
Liquidator, AIR 1982 SC 1497]. Similarly the take over
of undertakings under Statutory power, such as Sick Textiles
undertakings Notification Act 1974 does not discharge the
sureties of the borrowings of such undertakings [Bank of
Madura Ltd v. Bank of Baroda, (1987) 1 Mad L J 393].
b) A contracts with B to grow a crop of indigo on A's land
and to deliver it to B at a fixed rate, and C guarantees A's
performance of this contract of. B diverts a stream of water
which is necessary for irrigation of A's land and thereby
prevents him from raising the indigo. C is no longer liable
on his guarantee.
This illustration is also an instance of the surety being discharged
by an act of the creditor which has the effect to making
performance by the debtor impossible. Likewise, by operation
of law there is merger of the estate of the debtor and the creditor,
the surety's obligation comes to an end.
(ii) Act or omission of Creditor
Illustration (c) to the section reads:
c) A contracts with B for a fixed price to build a house for B
within a stipulated time. B supplying the necessary timber.
C guarantees A's performance of the contract. B omits to
supply the timber. C is discharged from his suretyship.
From this illustration it is clear that the act or omission of the
creditor should be something in the nature of a breach of the
contract on its part. For example, where the payment of rent
due under a lease is guaranteed and the creditor terminates the
lease, or where the payment of installments due under a hire
purchase is guaranteed and the creditor prematurely determines
the agreement, the effect would be the release of the surety
also.
While analyzing the impact of section 134 on the liability of
sureties, we should keep in mind the impact of section 136 read
with section 146. Under section 136 where there are more than
one sureties a release of one of them by the creditor will not
discharge the others and under section 146 even if one of the
co-sureties is released by the creditor, he would not be released
from his responsibility to contribute to the other sureties.
5. When creditor compounds with, gives time to or agreed
not to sue the principal debtor
Section 135 of the Act reads:
"A contract between the creditor and the principal debtor
by which the creditor makes a composition with, or
promises to give time to, or not to sue, the principal debtor,
discharges the surety, unless the surety assents to such
contract".
In this section three different circumstances releasing the surety
of his liability have been envisaged:
(1) When a creditor compounds with the principal debtor, (2)
When the former promises to give time to the latter, and
(3) When the former agrees not to sue the latter. In all
these three situations, the conditioning factor is undoubtedly
unless the surety assents to such contract". This principle
has been derived from the English common law [Polak v.
Everett, 1 GBD 669 at p.673-74]. However, the provisions
of section 135 have not been liberally construed by the
Indian courts. In Damodardas v. Muhammad [ILR 22
All 35], it was held that a mere gratuitous agreement by a
creditor to give time to the principal debtor could not
discharge the surety, but the agreement must amount to a
contract. In fact in Lal Behar v. Allahabad Bank [27 All
L J 1137], it was even held that the section contemplated a
subsequent contract between the creditor and the principal
debtor where by the time originally fixed was subsequent
contract the section had no application. However, the
subsequent contract may be either express or implied, i.e.,
inferred from the acts of the parties [Kally prosunnu v.
Umbica, 18 WR 417].
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Here under we may discuss in some detail circumstances
referred to in Section 135 for clear understanding:
(1) Creditor compounds with the principal debtor
When in a composition, the creditor voluntarily takes a certain
amount in full settlement of his claims against the debtor, without
the consent of surety, it means variation in the original contract.
Its obvious consequence is the discharge of surety. For example,
A stands surety for the repayment of a loan of Rs.4000/- to B
for C. If B and C thereafter agree that B would accept Rs.2000/
- in satisfaction of the whole amount of debt. C pays Rs.2000/
-, the surety is automatically discharged from his liability. In
Bombay Co v. Official Assignee, Madras [(1921) 44 Mad
381], it was held that a private composition with the debtor,
behind the back of the surety, will have the effect of discharging
the surety, but if the composition is made under the supervision
of the court and after notice to the surety, the liability of the
surety is not effected. At the same time it must be noted that a
compromise in terms of a court decree is different from private
composition. This does not discharge the surety, unless the
decree is collusive [City Bank N.A v. J. K. Jute Mills, AIR
1982 Del 487]. In Appunni Nair v. Issac [(1920) 43 Mad
272], in the case of consent decree without the surety's
knowledge or concurrence, the court observed that as the bond
was given to the court, the present section has no application at
all and held the surety not discharged.
(2) Creditor Promising to give time to the principal debtor
Giving time is the extension of the period at which by the
contract between them the principal debtor was originally
obliged to pay to the creditor by substituting a new and valid
contract between the creditor and the principal debtor to which
the surety does not assent [United Commercial Bank Ltd v.
Chara Grain Buyers Syndicate Ltd, AIR 1968 SC 1115].
In"brief giving time" contemplates a subsequent contract
between debtor and creditor whereby the time originally fixed
is extended without the surety's consent and the creditor then
precludes himself from suing for a certain time. In such a case
surety is discharged. The reason for such a discharge was thus
explained by the privy council in Mahanath Singh v. U Ba Yi
[AIR 1939 PC 110 at p. 111]:
"A surety is discharged if the creditor, without his consent,
either releases the principal debtor or enters into a binding
agreement with him to give him time. In each case the
ground of discharge is that the surety's right to pay the debt
any time and after paying it, to sue the principal in the name
of the creditor is interfered with".
Where under an agreement the creditor agrees to receive
payment in instalments from the debtor instead of in lumpsum,
it amounts to giving time to the debtor and it results in the
discharge of the surety. It must be remembered that surety is
only discharged where there is a contract between the creditor
and the principal debtor for extension of time, but where a
contract to give time to the principal debtor is made by the
creditor with a third person and not with the principal debtor,
the surety is not discharged [Section 136]. At the same time
judgement of Supreme Court in Amrit Lal v. State Bank of
Travancore [AIR 1968 SC 1432] is worth noticing - An
agreement between a creditor Bank and principal debtor
provided that the later should be responsible for the quality and
quantity of goods pledged with the bank and also for the
correctness of the statements and returns furnished to the bank
from time to time. The goods pledged were further declared
and agreed to be not actually weighed or valued in order to
verify the returns furnished by the debtor. When one occasion
the bank on actual weighment found some deficit in the quantity
of goods, it granted some time for the principal debtor to make
up the deficiency. It was held that the Bank's act of giving time
to the principal debtor did not tantamount to giving time with
in the meaning of this section so as could exonerate the surety.
So too in the case of a surety bond given to a court, the mere
fact that the court grants time to the debtor to pay does not
discharge the surety [Yusuf Moidu v. Haji Abdul Kadir &
Bros (1938) MWN 1131].
(3) Creditor agreeing not to sue the debtor
If the creditor under an agreement with the principal debtor
promises not to sue him for the payment of debt, the surety is
discharged from his liability. The main reason is that a surety
is entitled at any time to require the creditor to call upon the
principal debtor to pay off the debt when it is due and this right
is positively violated when the creditor promises not to sue the
principal debtor. Or we can say that the promise by the creditor
not to sue the principal debtor is inconsistent with the right of
the surety and that is why such action on the part of creditor
discharges the surety. Judgement in Ma Kwi v. On May [(1929)
Ran 187], illustrates the position that there must be a binding
contract, and not a bare statement of intention. In that case, a
tradesman supplied goods to certain employees and the
employer had stood surety for them. A statement by the trader
that he did not intend to sue the employees was held not to
discharge the surety.
Forbearance to Sue
Section 137 of the Act reads:
"137. Creditor's forbearance to sue does not discharge
surety- Mere forbearance on the part of the creditor to sue
the principal debtor or to inforce any other remedy against
him, does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety".
The section indicates that mere forbearance on the part of the
creditor does not discharge the surety [Union of India v.
Modern stores India Ltd, AIR 1988 Cal 18; Ushadevi v.
Bhagawandas, AIR 1967 M P 250]. This point is made clear
in the illustration appended to the section thus - B owes to C a
debt guaranteed by A. The debt becomes payable. C does not
sue B for a year after the debt has become payable. A is not
discharged from his suretyship. Section 137 clarifies in express
terms which is clearly implied in Section 135, that what is
needed to cause the discharge of the surety is not "mere
forbearance" on the part of the creditor to sue the principal
debtor, but a positive act, a promise or a contract, to give time
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or not to sue. In Hajarimal v. Krishna Rao [(1881) 5 Bom
647) Westropp, C.J.; observed that mere forbearance' means
"a forbearance not resting upon or in consequence of such a
promise to give time to, or not to sue the principal debtor, as is
the subject of S.135". In Kalicharan v. Abdul Rehman [(1919)
23 CWN 545], the judicial committee said that a mere
forbearance to sue the debtor does not discharge the surety.
The effect of an omission or forbearance to sue till the period
of limitation elapses, we have studies earlier in connection with
section 134. It may be mentioned that if the forbearance really
gives an advantage to the creditor, the court will adjust the
equities between the parties in such a manner that the surety's
liability is not enhanced. In the case of Ramanand v.
Chowdhury Soonder Narain, [(1878) 4 Cal 331 (P.C)], where
a decree-holder by postponing the sale of properties under a
decree increased burden of interest on the sureties who had
guaranteed payment of any deficiency after sale, the sureties
were held discharged from liability for interest subsequent to
the court's order for sale.
6. By impairing Surety's Remedy
The basic principal of section 139 of the Act is that it is the
duty of the person who has secured a guarantee to do every act
necessary for protection of the rights of the surety, as a surety
is a person who receives no benefit and no consideration out of
the transaction but has voluntarily accepted the liability of the
principal debtor to the creditor. By application of this section,
surety is discharged, when a creditor does any act which is in
consistent with the rights of the surety, or omits to do any act
which his duty to the surety required him to do and the eventual
remedy of the surety is impaired as a consequence thereof. The
impairment of the eventual remedy of the surety is essential for
application of section 139 in addition to the acts of commission
and omission on the part of the creditor. Section 139 reads as
under:
"If the creditor does any act which is inconsistent with the
right of the surety, or omits to do any act which his duty to
the surety requires him to do, and the eventual remedy of
the surety himself against the principal debtor is thereby
impaired, the surety is discharged".
Illustrations appended to the section are:
(a) B Contracts to build a ship for C for a given sum, to be
paid by instalments as the work reaches certain stages. A
becomes surety to C for B's due performance of the contract.
C, without the knowledge of A, prepays to B the last two
instalments. A is discharged by this prepayment.
(b) C lends money to B on the security of a joint and several
promissory note made in C's favour by B, and by A as
surety for B, together with a bill of sale of B's furniture,
which gives power to C to sell the furniture, and apply the
proceeds in discharge of the note. Subsequently, C sells
the furniture, but owning to his misconduct and wilful
negligence, only a small price is realized. A is discharged
from liability on the note.
(c) A puts M as apprentice to B, and gives a guarantee to B for
M's fidelity. B promises on his part that he will, at least
once a month see M make up the cash. B omits to see this
as promised, and M embezzles. A is not liable to B on his
guarantee.
After the surety has made the payments or performed the duty
on default of the principal debtor he is conferred with the same
rights which the creditor had against the principal debtor. This
means that firstly, the surety can claim indemnity from the
principal debtor for all the sums he has rightfully paid under
the guarantee. And secondly, he is also entitled to the benefits
of every security which the creditor has against the principal
debtor when the contract of surety is entered into [Sections 140,
141, and 145]. If the creditor's act or omission deprives the
surety of the benefit of this remedy, the surety is discharged
[Unity Finance Ltd v. Woodcock, (1963) IWL 455]. Thus
where the integrity of a cashier is guaranteed and the employer
undertakes to check his work once in a month ersion, namely
accepting Jesus Christ as the personal Saviour but neglect to
do so, the cashier embezzles, the surety is not liable. The same
duty requires the creditor to preserve the securities, if any, which
he has against the principal debtor. If he loses or parts with the
securities, the surety is discharged to that extent [State Bank
of India v. Praveen Tanneries, (1992) 2 An LT 5]. Similarly
in State of M.P. v. Kaluram, [AIR 1967 SC 1105], the M. P.
state made a contract for the sale of felled trees' to the highest
bidder in the auction sale. Payment was to be made in
instalments. Kaluram was a surety for the payment by the
purchaser. Purchaser failed to pay second and subsequent
instalments. The government allowed the purchaser to remove
felled trees from the forest despite default of payment. It was
held that since the state government had failed to take necessary
steps to recover the amount from the purchaser by allowing
him to take away the trees, the surety's remedy against the
purchaser had thereby been impaired, the surety (Kaluram) was
discharged from his liability.
It may be noted that if the goods are lost without the fault of the
creditor, the surety is not discharged thereby. For instance, when
the hypothecated goods are lost without any fault of the creditor
that does not discharge the surety [R. Lilavati v. Bank of
Baroda, AIR 1967 SC 1105].
7. Loss of security by the creditor
Section 141 reads:
"A surety is entitled to the benefit of every security which
the creditor has against the principal debtor at the time when
the contract of suretyship is entered into, whether the surety
knows of the existence of such security or not; and if the
creditor loses, or without the consent of the surety, parts
with such security, the surety is discharged to the extent of
the value of the security".
The expression "security" in section 141, is not used in any
technical sense; it includes all rights which the creditor had
against the property at the date of contract. The surety is entitled
on payment of the debt or performance of all that he is liable
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293
for, to the benefit of the rights of the creditors against the
principal debtor which arise out of the transaction which give
rise to the right or liability; he is therefore on payment of the
amount due by the principal debtor entitled to be put in the
same position in which the creditor stood in relation to the
principal debtor. If the creditor has lost or has parted with the
security without the consent of the surety, the latter is, by the
express provision contained in section 141, discharged to the
extent of the value of the security lost or parted with [see State
of M.P. v. Kaluram, AIR 1967 SC 1105]. But it must be noted
that a surety in the case of hypothecation is not entitled to invoke
section 141 of the Act for the benefit under the said section if
the creditor loses or without the consent of the surety, part will
the surety pledged, the surety is discharged to the extent of the
value of the security. Such a question cannot arise in the case
of hypothecation of goods for the simple reason that when the
goods are not in his possession, no question of losing or parting
with the same arises.
As in hypothecation, the possession of the goods hypothecated
is with the borrower, it would be wrong to say that the goods
are in the constructive possession of the creditor because it has
no effective control over them by hypothecation, only an
equitable charge is created and nothing more [Bank of India,
Bombay v. Yogeswar Kant Wadhera, AIR 1987 P&H 176].
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4 CONTRACT OF BAILMENT
SUB TOPICS
4.1 Introduction
4.2 Definition
4.3 Essential features
4.4 Bailor's Duties
4.5 Duty of bailee
4.6 Rights of bailee
4.7 Duty of Finder
4.8 Rights of Finder
4.1 INTRODUCTION
Bailment implies a sort of relationship in which the personal
movable property of one person temporarily goes into the
possession of another. The ownership of goods or articles is in
one person and the possession in another. It is the delivery of
person's movable property by one party (known as bailor) to
another (known as bailee) on the condition express or implied
that the property shall be returned to the bailor or shall be
delivered as soon as the purpose for which the bailment was
created is over. The transaction may be by way of lending,
pledge, hire or deposit for safe custody. Though bailment is
founded upon a contract, but a contract is not essential for
bailment. A bailee may be liable in tort to the bailor whether or
not there is any valid contract between the parties. Gratuitous
bailment in particular, is independent of the law of contract.
Again, a bailment created by contract is not necessarily
terminated by the contract coming to an end; and there may be
a valid bailment even though the contract from which it arises
is invalid or voidable, as where the bailee is a minor, or where
the bailee obtains goods by false presences. The essence of
bailment is possession. Bailment, at the present time, has
come to be recognized as a transaction sui generis. Lord
Denning observed in Building and Civil Engineering
Holidays Scheme Management v. Post office [(1965) All
ER 163 at p.167] :
"At common law, bailment is often associated with a
contract but that is not always the case An action against
a bailee can often be put, not as an action in contract, nor in
tort, but an action on his own, sui generis, arising out of
the possession had by the bailee of the goods".
Thus a bailment is more than a contract in the sense that it
involves the transfer to or acquisition by the bailee of possession,
a proprietary interest less than ownership and several remedies
in tort and crime are available to the bailee in virtue of his
enjoyment of possession. In State of Gujarat v. Memon
Mohammad Haji Hasan [AIR 1967 SC 1322] the Supreme
Court has observed thus:
"bailment is dealt with by the contract Act only in cases
where it arises from a contract, but it is not correct to say
that there cannot be a bailment without an enforceable
contract - - Nor is consent indispensable for such a
relationship to arise. A finder of goods of another has been
held to be a bailee in earlier instances".
4.2 DEFINITION
"Bailment" has been defined under section 148 of the Act in
the following terms:
148."Bailment", "Bailor", and "Bailee" defined - A
bailment - is the delivery of goods by one person to another
for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed
of according to the directions of the person delivering them.
The person delivering the goods is called the" bailor". The
person to who they are delivered is called the "bailee".
Explanation --- If a person already in possession of the goods
of another contracts to hold them as bailee, he thereby becomes
the bailee, and the owner becomes the bailor of such goods,
although they may not have been delivered by way of bailment.
4.3 ESSENTIAL FEATURES
S.148 of the Act emphasises the following essential ingredients
of bailment:
1) there must be a delivery of possession;
2) the delivery be of the goods;
3) delivery be made by the owner, called bailor;
4) delivery be to another person, known as bailee;
5) delivery be for a specific purpose; and
6) delivery be on condition that the goods be returned in their
We may now discuss in detail the essentials in a compact form:
I. Delivery of possession of goods for some purpose by the
bailor to bailee.
II. Delivery arising out of contract.
III. Return of goods by the bailee to bailor when purpose
accomplished.
I. Delivery of possession of goods by the bailor to the bailee
for some purpose
The important feature of bailment is the delivery of possession
of goods by one person (bailor) to another (bailee) for some
purpose. It follows that bailment can be of Chattels or goods
only, though money can also be a subject matter of bailment
under certain circumstances like coins or notes which have
ceased to be legal tender and have become the object of curiosity.
The bailment relates to a specific movable property of which
delivery of possession must be effected i.e., change of
possession is a must. Bare custody with out possession, like a
servant, or a guest using his host's goods is not a bailee [Reaves
v. Capper, (1838) 132 ER 1057]. Hence to constitute bailment
possession of goods must be handed over to the bailee for some
purpose i.e., for safe custody, for carriage or for repair etc.
Whatever the purpose may be, once the possession of goods is
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handed over, a bailment arises irrespective of the manner in
which this happens.
Where the bailor hands over the physical possession of goods
to the bailee it is called actual possession, but delivery need not
be always actual. Constructive or symbolic delivery will also
create the relation of bailor and bailee. Section 149 of the Act
clarifies this aspect, which reads:
"149. Delivery to bailee how made -- Delivery to bailee
may be made by doing anything which has the effect of
putting the goods in the possession of the intended bailee
or any person authorised to hold them on his behalf".
Explanation to S.148 provides that where the original delivery
is not by way of bailment, it may be possible to constitute the
relation of bailor and bailee by subsequent agreement. It is a
constructive delivery. A railway receipt is a document of title
relating to the goods covered by it, hence a transfer of it for
consideration effects a constructive delivery of the goods
[Morvi Mercantile Bank Ltd v. Union Bank of India, AIR
1965 SC 1954]. Handing over the keys of the godown may be
deemed to be delivery of goods - handing over the keys is the
symbolic or constructive delivery of goods. Likewise where a
bailor requests the bailee to allow him to retain the bailed goods
in his possession with a promise to hold the same for the bailee
and render possession whenever demanded by the bailee, it is
constructive delivery of goods [Bank of Chittoor v.
Narasimhulu Naidu, AIR 1966 AP 163]. In such situations
there may not be change in actual and physical custody but
there is a change in legal character of the possession of goods.
Thus delivery of goods, either actual or symbolic is a sine qua
non of a valid bailment.
When a person keeps goods in the possession of another person
but himself continues to have control over them this is not
sufficient delivery to constitute bailment. In Kaliaporumal
Pillai v. Visalakshmi [AIR 1938 Mad 32] plaintiff took her
old jewellery to the defendant (goldsmith) for melting and
converting them into new jewellery. Every evening she used
to receive the half made jewellery, locking them in the box and
leaving the box in the premises of the goldsmith, by keeping
the keys in her possession. One night jewellery was stolen. It
was held that mere leaving the box containing jewellery in the
defendant's house where they were being made by goldsmith
under the supervision of the plaintiff is not sufficient to constitute
delivery when particularly the keys were taken away by the
plaintiff. It was held that there was no bailment as the plaintiff
had not handed over the possession of the jewellery to the
defendant, and, therefore, the defendant could not he held liable
for the loss.
II. Delivery arising out of contract
Strictly speaking by virtue of S.148, the obligation of a bailee
can arise only out of a contact of bailment and not otherwise,
but as we have noticed earlier in introduction, the relation of
bailor and bailee can be created without a contract. Earlier
view of judiciary that bailment u/s 148 can only arise out of
contract is not convincing and logical [Ram Gulam v. Govt.
of U P, AIR 1950 All 106]. The law itself recognizes the finder
of goods as bailee [Trustees, Port Trust of Bombay v. Premier
Automobiles Ltd, 1981 SC 1982].
III. Return of goods by bailee to bailor when purpose is
accomplished
S.148 says that "the goods shall, when the purpose is
accomplished, be returned or otherwise disposed of according
to the directions of the person delivering them". Hence it is
necessary that the goods which form the subject matter of the
bailment should be returned by the bailee to the bailor after the
purpose or after the period of bailment. If the person to whom
the goods are delivered is not bound to restore them to the person
delivering them or to deal with them according to his directions,
their relationship will not be that of a bailor and bailee.
4.4 BAILOR'S DUTIES
Section. 150 of the Act deals with the duty of the bailor in
respect of the goods bailed by him. The section reads:
"The bailor is bound to disclose to the bailee faults in the
goods bailed, of which the bailor is aware, and which
materially interfere with the use of them, or expose the
bailee to extraordinary risks; and, if he does not make such
disclosure, he is responsible for damages arising to the
bailee directly from such faults.
If the goods are bailed for hire, the bailor is responsible for
such damage, whether he was or was not aware of the existence
of such faults in the goods bailed".
This section enunciates the duty of the bailor to disclose the
faults in the goods of which he has the knowledge and the
bailment of such goods without disclosure may interfere with
the use of the goods or expose the bailee to risks. On failure of
the duty to disclose, the bailor would be responsible for the
damages directly traceable to such fault in the goods bailed. In
case if the goods are bailed for hire, the bailor is responsible
whether he was aware or not of the existence of the fault in the
goods bailed. This aspect of the section imposes duty on the
bailor in two capacities or we may say that under this section
bailors are of two kinds :
1) gratuitous bailor, and
2) bailor for reward
1) Gratuitous bailor
A person who lends goods without any charge is known as
'gratuitous bailor'. Gratuitous bailor's duty has been laid down
in the first para of the section and law is made clear in illustration
(a) appended to the section which reads - A lends a horse, which
he knows to be vicious, to B. He does not disclose the fact that
the horse is vicious. The horse runs away. B is thrown and
injured. A is responsible to B for damages. The liability of the
bailor is subject to two conditions i.e.,
1. Bailor should have the knowledge of the defect in the goods
bailed.
2. The defect in the goods must be such as exposes the bailee
to extraordinary risks or materially interferes in the use of
goods.
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In Maffatt v. Bateman, [(1869)3 PC 115], where the defendant
took the plaintiff in his carriage gratuitously, without previously
examining the bolts and fastening of his carriage and during
the journey, an accident happened, the failure to examine the
carriage was held not to be negligence sufficient to charge the
owner. Here the bailor has no knowledge of the defect so there
was no failure on his part to disclose. He could only be liable
under the section if he had the knowledge of the fault and he
did not disclose.
2. Bailor for reward
Second para to the section deals with bailment of goods for
reward. Here bailor is liable irrespect of the fact whether he
had or had not the knowledge of the existence of the fault in the
goods bailed. Hence greater degree of responsibility is laid on
the bailor when the bailment is for hire. The rule is made clear
in the illustration (b) appended to section 150 thus - A hires a
carriage of B. The carriage is unsafe, though B is not aware of
it, and A is injured. B is responsible to A for injury. It indicates
that where the bailment is for hire or for reward, then the bailor
is liable to the bailee if he suffers any loss from the goods bailed.
This duty is based upon the principle that there is an implied
warranty of fitness, for the purpose for which the goods are
bailed. In Hyman v. Nye & Sons [(1881)6 QBD 685], plaintiff
hired a carriage and the horses and a driver from the jobmaster
for a particular journey. The carriage being defective broke
down and the plaintiff suffered injury thereby. The court held
that the jobmaster's duty was "to supply a carriage as fit for the
purpose for which it is hired as care and skill can render it."
that he has not discharged this duty, and that he was liable for
the injury to the plaintiff. Similarly in Reed v. Dean [(1949) 1
KB 188], where the plaintiff hired a motor launch, from the
defendant for a holiday on the river Thames, caught fire and
the plaintiff failed to extinguish the fire as the fire fighting
equipment was out of order and injured. Defendant was held
liable as there was an implied undertaking that the motor launch
was as fit for the purpose for which it was hired as reasonable
care and skill could make .
In addition to the study of section 150 concerning the duty of
the bailor, we have to study sections 158 and 164 which also
deal with the duty of bailor to pay to the bailee necessary
expenses incurred by him for the purpose of the bailment and
the bailor's duty to indemnify the bailee against any loss or
damage caused by bailor's want of title.
Section 158 provides as follows :
"Where, by the conditions of the bailment, the goods are to
be kept or to be carried, or to have work done upon them
by the bailee for the bailor and the bailee is to receive no
remuneration, the bailor shall repay to the bailee the
necessary expenses incurred by him for the purpose of
bailment."
Hence the section lays duty on the bailor to pay the necessary
expenses of the bailment, where bailment is gratuitous and the
bailment is for the benefit of the bailor. It is but natural that the
bailee must be reimbursed for the expenses incurred by him
upon the bailed goods. Though it has not been specifically laid
down in the section but we must take stock of the actual facts in
each individual case whether bailor to pay expenses or not.
Generally, ordinary and reasonable expenses of the bailment
are borne by the bailee but for any extraordinary expenses bailor
could be held liable to pay to the bailee. For example, if a
horse is sent for journey, feeding expenses of the horse would
be borne by the bailee. But if the horse is injured or falls sick
all reasonable expenses incurred on treatment by the bailee
would be borne by the bailor.
Further section 164 provides that :
"The bailor is responsible to the bailee for any loss which
the bailee may sustain by reason that the bailor was not
entitled to make the bailment, or to receive back the goods
or to give direction respecting them".
This section lays down the duty on the bailor to indemnify the
bailee if his title to make the bailment is defective. In this context
one thing must be remembered that this section practically
creates a warranty of title in case of bailment, and provides that
the bailor shall indemnify the bailee against any loss or damage
caused by his (bailor's) want of title. The bailee as observed
earlier, cannot set up the title of third parties, or set up any
adverse title to the property [Rogers v. Lambert, (1891) 1 QB
318]. But where both the bailor and a third party claim the
article bailed, the bailee may either return the goods to the bailor
or may file an interpleader action [Iyer 446].
4.5 DUTIES OF A BAILEE
I. Duty to take reasonable care
A bailee should act as a prudent man. Section 151 of the Act
provides a uniform standard of care for all cases of bailment, to
be observed by the bailee of the goods bailed to him. Under
this section even a gratuitous or involuntary bailee is bound to
bring into his duty the same amount of care as required of a
man of ordinary prudence under similar circumstances taking
of his own goods of the same type. If the bailee falls below this
standard, he will be liable for loss of or damage to the goods.
Section reads-
"In all cases of bailment the bailee is bound to take as much
care of the goods bailed to him as a man of ordinary
prudence would, under similar circumstances take of his
own goods of the same bulk, quality and value as the goods
bailed".
Along with this section it would be better if we refer to section
152 which is relevant to comprehend the application of the duty
of reasonableness casts on the bailee concerning the goods
bailed. Section provides:
"The bailee, in the absence of any special contract, is not
responsible for the loss, destruction or deterioration of the
thing bailed, if he has taken the amount of care of it
described in section 151."
Thus section 152 is subject to 151 which requires the bailee to
take care of the goods bailed to him as a man of ordinary
prudence would take of his own goods. Thus in cases governed
by sections 151 and 152 the loss or damages of goods entrusted
to a bailee is prima facie evidence of negligence. In Central
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Bank of India, Raigarh v. M/s. Grains and Gunny Agencies
and others [AIR 1989 MP 28], the bank filed a suit for the
recovery of loan advanced against pledge of certain goods. The
suit was dismissed as bank was unable to return the pledged
goods. The bank filed the appeal and contended that the goods
pledged were lost due to negligence of its staff, but it was
exonerated from the liability to return the goods in view of the
clause in the pledge agreement to the effect that the bank shall
not be responsible not withstanding anything to the contrary in
section 152 of the Indian Contract Act for any loss or
deterioration or damage to the pledged goods caused by theft,
fire, rain flood, earthquake, lightening or any other cause
whatever. The plea of the bank was that the expression 'any
other cause whatever' covered loss due to negligence of its staff
members. It was held, that the clause in the pledge agreement
nowhere exempts the bank from the liability for negligence of
its servants. The causes laid down in agreement are natural
causes without human intervention and which could not be
prevented by any amount of foresight or care. The loss of
goods on account of theft is an act of third party despite the
care taken by the bailee. Even assuming that the bank had a
right to claim exemption by virtue of special contract including
negligence of its servants, still the bank had to show that it took
as much care of the pledged goods as an ordinary prudent man
under similar circumstances takes of his own goods of the same
quality and value as required by section 151. In cases governed
by section 151 and 152 the loss or damages of goods entrusted
to a bailee is prima facie evidence of and therefore the burden
to disprove negligence lies on the bailee. The bailee has to
prove that he exercised due care and was not negligent. If inspite
of this loss occurred, he is absolved of all responsibility. In
instant case bank failed to prove that it took care of goods as a
prudent man and was not in a position to return them to the
defendants. The bank was not entitled to claim amounts since
it failed to mitigate the loss. Hence bank cannot be absolved
from its liability by immunity clause in invoking pledge
agreement.
The same rule as to burden of proof applies to the case of railway
administration. In Union of India v. Udho Ram & Sons [AIR
1963 SC 422] certain goods were consigned to the railway by
the plaintiffs from Calcutta to Delhi. During the transit some of
the goods out of the consignment were stolen. The plaintiff
filed a suit for the recovery of compensation for the same. The
trial court found that the wagon containing the consignment
was properly rivetted and sealed when train left Howrah at 1.30,
am but when the train reached Chandpur station after about 2
hours, the seals and rivets of one of the doors of the wagon
were found opened. The theft took place within 15 minutes
when the train stopped at the home signal at 2.05 am. It was
found that the railway protection force was also there in the
guard's van. The question for adjudication in this case was,
could the railway authorities be held liable for negligence in
the discharge of duty to take due care as prescribed by section
151 of the Act ? It was held that the railway did not take due
care. Firstly, they did not prove from record that the railway
protection police which escorted the train was sufficient in
strength and secondly, that unlike a prudent man, the railway
protection police did not keep an eye on wagons, particularly
when the train stopped, to prevent the theft of goods. The
defendants were held liable. Referring to the duty of care
expected of a bailee u/s 151, Justice Raghubar Dayal, observed:
"Needless to say that an ordinary person traveling in a train
would be particular in keeping an eye on his goods specially
when the train stops. It is not therefore imposing a higher
standard of care on the railway administration when it is
said that its staff, and especially the railway protection
police specially deputed for the purpose of seeing that no
loss takes place to the goods, should get down from the
wagon and keep an eye on the wagons in the train in order
to see that no unauthorized person gets at the goods".
But where bailee's own goods are lost along with the bailor's
goods then what would be the liability of the bailee towards the
bailor's goods ? In this situation it is natural that the bailee
would plead that he took as much care of bailor's goods as he
did for his own goods and therefore he is not liable. In Calcutta
Corporation Ltd. v. Prince Peter [AIR 1964 Cal. 374], where
a car delivered for repairs to a automobile garage was damaged
by fire, the plaintiff sued for compensation on the ground that
the defendants did not take as much care of the car bailed as a
man of ordinary prudence would under similar circumstances
take of his own goods. To come to the decision following facts
came to be noted. The garage was a pucca structure, walled
with wooden planks. In the garage were put not only vehicles
containing petrols but also other combustibles like thinners and
paints. The garage was partitioned by wooden walls and a part
of it was allowed to be used for cooking purposes. There was
inadequate arrangement for extinguishing fire. The room in
which plaintiff's car was kept could not be opened for 15 minutes
as the keys of the room were not available. It was held that the
defendants had not taken due care and they were liable.
The defendants in this case in order to avoid responsibility
pleaded that they took as much care of plaintiff's car as they
took of their own ones and that must be deemed to be sufficient
care on their part towards the car bailed. They further pleaded
that the plaintiff had the knowledge that the defendants keep
the cars in certain manner and therefore law of estoppel should
apply against the plaintiff. Both the contentions were repelled
by the court with the following observations :
"The words as a man of ordinary prudence would take of
his own goods' do not mean that if the bailee's own goods
are lost together with the bailed goods, kept at the same
place, it necessarily shows that the bailee has taken the
reasonable care required of him by law with respect to the
bailed goods. Even a knowledge on the part of the bailor
that the bailee keeps the goods in his possession in a
particular manner would not stop the bailor from pleading
that the bailee had failed to take the care required of him
by statute. A plea of this nature, based on the maxim
volenli non fit injuria' was rejected by the House of Lords
in Barbant and Co. v. King [(1895) AC 632]. The only
cases where the bailee would be immune are laid down in
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India, expressly in section 152 of the Contract Act, namely,
if he has taken the amount of the care of it as described in
section 151".
It was also observed in this case that the degree of care needed
varies with the kind of engagement, and therefore when a person
undertakes such a job, the law not only requires that he should
possess the requisite skill but also that he has the requisite plants
and appliances and that his premises are also reasonably suitable
for doing that job. Likewise where a commission agent
purchased on instruction silver bars and placed them in his pedhi
unlocked and unattended he would be guilty of negligence and
liable for loss of the bars [Lekhaji v. Mahadeo , AIR 1938
Bom 101], or where a pawnee kept the goods after tender of
the debt amount and the goods were stolen, he is liable for the
loss since to keep the goods after tender of the amount is at his
peril [Rampal v Gowrishankar, AIR 1952 Nag.8], or when a
carrier of goods transports jute in a boat which has number of
leaks and the goods get lost, carrier is guilty of negligence in
sending goods in defective boat [Lakshmi Narayan v. The
Secretary of State (1932) 27 Cal.W.N. 1017], or where the
plaintiff stayed at a hotel and his goods were stolen while he
was away, the hotel keeper was held liable as the room was, to
his knowledge, in an insecure condition [Jain & Sons v.
Comeron, (1922)44 All 735]. Each case referred to above
illustrates the example where the bailee was held liable for the
loss caused to the bailor due to lack of care on his part.
Involuntary Bailee
We have studied that bailment is a contract between the bailor
and bailee, still there may be situations where there may not be
any contract in that sense, but one person is held to be liable as
a bailee under the contract of bailment. This happens in the
cases where a person gets possession of goods without his
consent and through no conscious act on his part. In such a
situation the person who gets possession unconsciously is
known as involuntary bailee. For example, A goes to a certain
shop for certain purchases and leaves behind his brief case,
which is found by the owner of the shop who keeps it at his
table from where it is stolen by some one. In such a situation
though there is no contract between the owner of brief case and
the shopowner, but still he would be liable to the owner of the
loss to the extent as a bailee under the contract of bailment
because he failed to exercise that degree of care which was due
from him. In Newman v. Bourne & Hollings worth [(1915)
31 TLR 209], A a customer in B's shop puts down a brooch
with her coat, and forgot to pick it up, and left the shop. One of
B's assistants found the brooch and handed it over to B.. B,
put it in his desk instead of taking it to the lost property office,
from where it was lost. B was held liable to A because of the
absence of that ordinary care which in the circumstances a
prudent man would have taken. The taking of possession in
the circumstances involves an assumption of responsibility for
the safe keeping of goods. It was further held that the degree
of negligence must be measured by the apparent value of the
article. In a further case Elvin & Powell Ltd. Plummer Roddis
Ltd. [(1933)50 TLR 158] it was held that :
"If persons were involuntary bailees and had done
everything reasonable, they were not liable to pay damages
if something which they did resulted in the loss of the
property".
Under the above referred situation the position is that when a
finder accepts the responsibility to the goods his liability is that
of a gratuitous bailee. The finder of lost goods is not really a
bailee but he is treated as a gratuitous bailee for some purpose.
II. Duty not to make unauthorised use
The bailee is under a duty not to use the goods in any
unauthorised way. If he makes any unauthorised use of the
goods bailed there are two remedies available to the bailor :
1) The bailor may terminate the bailment
2) The bailor may recover compensation for any damages to
goods due to unauthorised use.
1) The bailor may terminate the bailment
If the bailor finds that the goods bailed are being used by the
bailee in a manner inconsistent with the condition of bailment,
he is entitle to terminate the bailment and claim back the goods
under section 153 of the Act which reads :
"A contract of bailment is voidable at the option of the
bailor, if the bailee does any act with regards to the goods
bailed, inconsistent with the condition of the bailment".
Illustration : A lets to B, for hire, a horse for his own riding.
B drives the horse in his carriage. This is, at the option of A, a
termination of the bailment.
Thus the bailee is therefore, precluded from using the goods
bailed, for his own personal advantage in any manner, what so
ever, without the consent of the bailor, express or implied, unless
such use is needful for its preservation. This is clear from the
illustration appended to the section which authorises the
termination of bailment.
2) The bailor may recover compensation
Section 154 of the Act emphasis that the goods bailed must be
used by the bailee strictly for the purpose for which have been
bailed. If the bailee uses the goods bailed in a many inconsistent
with the condition of bailment, he is liable to make compensation
to the bailor for any damage to the goods due to unauthorised
use. Any unauthorized use of goods makes the bailee absolutely
liable for any loss or damage to goods. Even an act of God or
inevitable accident would be no defence [L & N.W.Ry.Co.v.
Nielson, (1922)2 AC 263] such a liability arises even if the
unauthorised use was being made with care. Section 154 of
the Act which makes a provision in this respect reads as under:
"` If the bailee makes any use of the goods bailed, which is
not according to the conditions of the bailment, he is liable,
to make compensation to the bailor for any damage arising
to the goods from or during such use of them".
Illustrations: (a) A lends a horse to B for his own riding
only. B allows C, a member of his family, to ride the horse.
C rides with care, but the horse accidentally falls and is
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injured. B is liable to make compensation to A for the
injury done to the horse.
(b) A hires a horse in Calcutta from B expressly to march
to Banares. A rides with due care, but marches to Cuttack
instead. The horse accidentally falls and is injured. A is
liable to compensate B for the injury to the horse.
III. Duty not to mix
(i) Mixture of goods with bailor's consent
The bailee should maintain the separate identity of the bailor's
goods. He should not mix the goods of the bailor with his own
goods without the permission of the bailor. Where the bailee
mixes the goods of bailor with those of his goods with bailor's
consent, in such case the bailor and the bailee have proportionate
interest in the mixture thus produced. Section 155 which
contains this provision runs thus :
"If the bailee, with the consent of bailor, mixes the goods
of the bailor with his own goods, the bailor and the bailee
shall have an interest, in proportionate to their respective
shares, in the mixture thus produced".
(ii) Mixture of goods without bailor's consent
When the goods of the bailor are mixed by the bailee with his
own goods, depending upon the nature of goods, there are two
possibilities :
1. Bailor's and bailee's goods can be separated.
2. Bailor's and bailee's goods cannot be separated.
1) When mixed goods can be separated
When the bailee mixes the bailor's goods with his own, without
the consent of the bailor, and where the goods are separable,
then the bailor and the bailee remain the owners in accordance
with their respective shares, but the bailee is bound to bear the
cost of such separation and any damage arising from the mixture.
To this effect section 156 runs thus :
"Effect of mixture without bailor's consent when the goods
can be separated : If the bailee without the consent of the
bailor, mixes the goods of the bailor with his own goods,
and the goods can be separated or divided, the property in
the goods remains in the parties respectively but the bailee
is bound to bear the expense of separation or division, and
any damage arising from the mixture".
Illustration: A bails 100 bales of cotton marketed with a
particular mark to B. B. without A's consent, mixes the
100 bales with other bales of his own bearing a different
mark. A is entitled to have his 100 bales returned, and B is
bound to bear all the expenses incurred in the separation of
the bales, and any other incidental damages.
2. When the mixed goods cannot be separated
Where there has been a wrongful mixing, and where separation
is impossible, the bailor is only entitled to compensation. Section
157 makes the following provision in this regard.
"If the bailee, without the consent of the bailor, mixes the
goods of the bailor with his own goods in such a manner
that it is impossible to separate the goods bailed from the
other goods, and deliver them back, the bailor is entitled to
be compensated by the bailee for the loss of the goods".
Illustration: A bails a barrel of cape-flour worth Rs. 45/-
to B. B. without A's consent mixes the flour with country
flour of his own, worth only Rs. 25/- a barrel. B must
compensate A for the loss of his flour.
Where a bailee mixed his own goods with those of the bailor
and when ordered to return the goods of the bailor he offered to
return the goods without sorting them out, it was held that the
bailor was entitled to refuse to take delivery in toto and claim
compensation for loss or damage. The option is entirely his
[Dhanpatram v. Jaynarayan, (1961) 27 Cut LT 340].
IV. Duty to return
According to Ramana Maharshi there is a single immanenThe
bailee must return the goods to the bailor on the expiry of the
time fixed or when the purpose is accomplished without demand
from the bailor. If the bailee fails to return the goods he is
liable for damages occasioned by loss, distinction, or
deterioration during the period for which goods are detained.
Sections 160 and 161 make the under mentioned provisions
respectively in this regard:
"160: It is the duty of the bailee to return, or deliver
according to the bailor's directions, the goods bailed,
without demand, as soon as the time for which they were
bailed has expired, or the purpose for which they were
bailed has been accomplished".
"161: If, by the default of the bailee, the goods are not
returned, delivered or tendered at the proper time, he is
responsible to the bailor for any loss, destruction or
deterioration of the goods from that time".
By virtue of statutory provision if the bailee fails to return the
goods and keeps them at his own risk he would be responsible
for any loss or of damage to goods arising howsoever. For
instance, in Shaw & Co. v. Symmons & Sons [(1917)1 KB
799], were certain books were handed over to the book binder
(defendant) for binding and the book binder promised to return
with in a reasonable time, but failed to deliver when required
by the defendant within time.The books were subsequently burnt
in an accidental fire, it was held that the defendant was liable in
damages for the loss of books. When the loss takes place while
the bailee's wrongful action is in operation, there is no question
of any defence like act of God or inevitable accident being set
up. He is liable in any case.
As stated earlier, in keeping with the provision of section 151
and 152 a bailee is excused from realising the goods bailed to
the bailor where these have been taken away from him by
authority of law exercised through regular and valid
proceedings. In Jaggilal Kamlapat Oil Mills v. Union of India
[AIR 1976 SC 227] appellants gave consignments of mustard
oil to the respondents to be transported from Kanpur to Calcutta,
when the wagons carrying mustard oil reached Calcutta, Food
Inspector under lawful orders of the competent authority under
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the Calcutta Municipal Act seized the wagons on suspicion of
adulterated oil. On examination it was found that wagons
contained adulterated oil, thus oil was destroyed by the orders
of Calcutta High Court. It was held that the loss, damage or
destruction of the goods was not due to the misconduct of the
Railway administration or its servants, and the respondents were
not liable for the failure to deliver the goods back to the
appellants.
U/s. 161 bailee's liability to return the bailed articles
presupposes delivery of the articles to the bailor. Non return
of the articles on demand by the bailor gives the latter at his
choice either to sue for wrongful conversion or wrongful
detention. The bailor will become entitled to compensation
calculated on the value as on the date of the judgement in his
favour. As in the case of bailee making an unauthorised use of
the goods bailed, so also in case of default in returning the goods
on the due date, the bailee becomes responsible for loss,
destruction or deterioration of the article as from the date fixed
for return. Thus a railway company will be responsible for
delay in the delivery of goods at the proper time. Refusal to
grant delivery except upon an unjust or unreasonable condition
may amount to default within the meaning of the section [G.I.P.
Ry.Co. v. Manickchand Premji, (1931) Nag. 29; Hafizullah
v. Montague, (1934) 35 PLR 705; Iyer p. 534].
But in case the goods are lost not because of the negligence or
default of the bailee but because of the bailor's own default, the
bailee cannot be held liable for the loss. In Boseck & Co v.
Mandlestan [(1906) Punj Rec No. 70], the plaintiff sent
uninsured parcel of jewellery to defendant for repairs, directing
defendant to return them after repair as a value payable parcel
(value payable being the cost of repair of the jewellery), and
defendant acted accordingly. When parcel was tendered to the
plaintiff by the postal authorities he told post office to keep it
for him till he should send for it. The parcel was then lost when
it was with the post office. In an action by the plaintiff against
the defendant to recover the value of the contents of the parcel,
it was held that:
"1) there was no negligence on the part of the defendant in
sending an uninsured parcel, because it was sent uninsured by
the plaintiff's consent, as suggested by the course of dealings
between the parties, and
2) when the parcel was tendered by the post office to the
plaintiff, and he instead of taking the delivery, has asked the
post office to keep the same for him until he sends for it, the
post office became the plaintiff's agent in holding the parcel.
Since there was no negligence by the defendant and the parcel
was lost by the plaintiff's agent, the defendant could not be
made liable for the same".
Restoration of goods bailed gratuitously
When the goods are bailed gratuitously, i.e., when the bailor is
to receive no remuneration in respect of the goods bailed, then
the bailor will have to return goods bailed at any time on demand
by the bailor. Of course, if the bailor demands the return
unreasonably so that it causes any injury or loss to the bailee,
he can sue for compensation. Section 159 of the Act provides
the following provision in this regard:
"The lender of a thing for use may at any time require its
return, if the loan was gratuitous, even though he lent it for
a specified time or purpose. But, if, on the fact of such
loan made for a specified time or purpose; the borrower
has acted in such a manner that the return of the thing lent
before the time agreed upon would cause him loss
exceeding the benefit actually derived from the loan, the
lender must, if he compels the return, indemnify the
borrower for the amount in which the loss so occurred
exceeds the benefits so derived".
A gratuitous bailment is also terminated by the death either of
the bailor or the bailee. In this regard Section 162 states thus:
"Termination of gratuitous bailment by death: A gratuitous
bailment is terminated by the death either of the bailor or
the bailee".
Return when bailment by several joint owners
As regard the duty to return the goods, where the bailment is
made by two or more bailors, section 165 of the Contract Acts
provides :
"Bailment by several joint owners : If several joint owners
of goods bail them, the bailee may deliver them back to, or
according to the directions of, one joint owner without the
consent of all, in the absence of any agreement to the
contrary".
V. Duty not to set up jus tertii
Section 166 of the Act reads :
" If the bailor has no title to the goods, and the bailee, in
good faith, delivers them back to, or according to the
directions of the bailor, the bailee is not responsible to the
owner inrespect of such delivery".
The section emphasises that even if the bailor of goods has no
title to the goods and somebody else claims a better title, the
bailee cannot be made liable for the return of goods to the bailor.
The bailee's duty to return the goods is to the bailor only and
nobody else. A bailee is not entitled to set up, as against the
bailor's demand, the defence of jus tertii, that is to say, that the
goods belong to a third person [Rodgers Sons & Co. v.
Lambert & Co. (1891)1 QB 318 at p.325]. The bailee is
estopped from denying the right of the bailor to bail the goods
and to receive them back [J.L.Kamlapat Oil Mills v. Union
of India [AIR 1976 SC 227; section 117 of the Indian Evidence
Act 1872]. The third person, who claims better title than that
of the bailor, may take their delivery from the bailee only through
a court of law.
Where the goods were returned to the warehouse keeper who
had pledged them without the authority of the owner and the
pledgee did not know this fact, the pledgee was held to be not
liable to the true owner (Bank of Bombay v.Nandalal
Thakersey Das (1912) ILR 37 Bom 122]. Even if there is a
person who has a better title to the goods than that of the bailor
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301
or who claims ownership of the goods, the bailee may safely
return the goods to the bailor and he will not be liable to the
owner for conversion.
4.6 RIGHTS OF BAILEE
The bailee under the Indian Contract Act has the following
rights:
1. Right to recover expenses
2. Right to recover compensation
3. Right of lien
4. Right to sue
1. Right to recover expenses [S.158]
This right of the bailee has already been discussed under the
heading duty of the bailor (4.4)
2. Right to recover compensation [S. 164]
This right has also been discussed earlier under the heading
duty of the bailor (4.4)
3. Right of lien [Ss.170-171]
The right of lien is said to be a right to detain goods belonging
to another by a person in possession, until the sum claimed or
other demands of the person in possession is satisfied
[Hammonds v. Barclay, (1802)102 E.R. 356]. It is a principle
of English Common Law "that if a man has an article delivered
to him on the improvement of which he has to bestow trouble
and expense, he has a right to detain it until his demand is paid"
[Bevan v. Waters, (1828)3 Car & P 520]. The essential requisite
of a lien is therefore possession obtained previously and the
possession must have been acquired lawfully. The lien is in its
very nature, a right accessory to another right i.e., a right to
receive payment. The lien terminates (i) on payment, or (ii) on
giving possession, or (iii) by waiver of the lien, as, for example,
by making a contract inconsistent with the existence of the lien.
The Indian Contract Act recognises two kinds of lien - (1)
Particular lien, and (2) General Lien. The right of particular
lien' entitles the bailee to retain those very goods for the services
regarding which the remuneration is due. The general lien'
entitles the bailee to retain the goods of the bailor for a general
balance of account. Section 170 deals with a bailee's particular
lien and section 171 deals with the bailee's general lien. Now
hereunder we may be discussing both kinds of lien.
A. Particular Lien
Section 170 of the Act reads :
"Where the bailee has, in accordance with the purpose of
the bailment, rendered any service involving the exercise
of labour or skill in respect of the goods bailed, he has, in
the absence of the contract to the contrary, a right to retain
such goods until he received the remuneration for the
services he has rendered in respect of them .
Illustration: (a) A delivers a rough diamond to B, a jeweller
to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he .lm 5 is paid for the services
he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat. B
promises A to deliver the coat as soon as it is finished, and
to give a three month credit for the price. B is not entitled
to retain the coat until he is paid.
Particular lien is confined to the very goods in respect of which
labour or skill has been expended, and for which labour or skill
the bailee seeks remuneration. The work 'retain' has been used
in section 170 which implies prior possession lawfully acquired.
So, if the possession of goods is obtained by misrepresentation
or fraud, then no lien is attached to the goods. Further more,
the lien subsists only so long as possession lasts. But where
the person is deprived of the possession by fraud or force, the
lien continues. Again, if the person entitled to the lien parts
with the goods for a specific purpose, the lien is not lost. But if
the possession is voluntarily parted with, the lien is lost. The
lien consists only in the right to retain the goods. It must be
noted at the same time that when once the right of the bailee to
retain ends by parting with the possession of the goods, it cannot
be revived again even if he gets the possession again for some
purpose [Eduljee v. Cafe John Bros, AIR 1953 Nag. 249]. In
this case a second hand refrigerator was sold and delivery of
possession was handed over to the buyer. After sometime, due
to two defective parts of the refrigerator, the buyer handed
over these two parts for repair to the seller. The seller wanted
to exercise the right of lien over these parts for the price of the
refrigerator, the which has not been paid to him. It was held
that the seller's rights had come to an end when he had delivered
the refrigerator to the buyer, and this right was not revived by
his getting the possession of some parts of it again.
Under section 170 'particular lien' is available under the
following situations:
1) The bailee must have acted in accordance with the purpose
of bailment
In Skinner v. Jager [(1883) 6 All 139] a bailee who
undertook certain repairs to a musical instrument for a fixed
sum claimed lien not in respect of that amount settled for repair
but for some other repair work done to the instrument. The
court held that no lien could be had in regard to such work.
This principle was applied by the Calcutta High Court in Jaddah
v. King Emperor [(1926)53 Cal.174]. Brief facts were: A had
given an electric kettle to B an electric repairer, on the condition
that the article must be returned completely repaired within a
fixed period. Only a part of the work was done within the
stipulated time, but the repairer claimed a lien. The court
observed that it would be preposterous to lay down as a general
rule of law that a person who is entrusted with the repair of an
article can refuse to part with after doing a part of the work
which perhaps makes no improvement of any kind.
Again, it is not open to the bailee to retain goods bailed for one
purpose, as security for claims arising out of a different and
distinct matter. It must also be noted that where goods are
delivered to the bailee under a single contract, the bailee will
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have a lien on all the goods, though they may be delivered at
different times in different parcels. Similarly, a bania may
retain the whole quantity of goods as security for his claim, and
will be justified in refusing to deliver up a part on payment of
the value of that part [Miller v. Nasmyth's Press Co Ltd, (1882)
8 Cal 312; Mohari Bibi v. Shyama Bibi, (1930)30 Cal. 937;
Iyer p.542.]
2) The service must involve the exercise of labour or skill on
the goods bailed
In Scarfe v. Morgan [(1838) 150 ER 1430], it wad observed :
"Where a bailee has expended his labour and skill in the
improvement of the chattel delivered to him, he has lien
for his charge in that respect. Thus the artificer to whom
the goods are delivered for the purpose of being worked
up into form, or the barrier by whose skill the animal is
cured of a disease, or the horse breaker by whose skill he is
rendered manageable, have liens on the chattels inrespect
of their charges".
Thus the important condition for exercising lien upon goods is
that the bailee must have rendered some service involving the
exercise of labour or skill in respect of the goods bailed and the
labour or skill exercised by the bailee must be such as improves
the goods. It would follow that a bailment for mere custody
confers no lien, because no labour or skill is expended. Thus a
person receiving horse to graze on stipulated charges is not
entitled to claim lien on the horse for the stipulated charges.
But a trainer does get a lien upon the horse for the improvements
which he effects to the horse.
But the right to retain possession or to exercise the right of lien
on the goods is available to the bailee u/s.170 if there is no
contract to the contrary. In this respect we may refer to
illustration (a) appended to the section "A gives cloth to B , a
tailor, to make into a coat. B promises A to deliver the coat as
soon as it is finished, and to give a three months credit for the
price. B is not entitled to retain the coat until he is paid".
The section confers only the right to retain the goods inrespect
of which labour or skill has been employed. The right does not
extend to a right to sell the goods.
The right of lien contained in section 170 is available only in
the absence of a contract to the contrary. Hence this right can
be waived by the parties by an agreement. It means the bailee
may, if he so likes, waive his right of lien.
B. General Lien
U/s 171 right of general lien is available to certain types of
bailees. The section reads :
"Bankers, factors, wharfingers, attorneys of a High Court
and policy-brokers, may in the absence to the contract to
the contrary, retain, as a security for a general balance of
account, any goods bailed to them; but no other persons
have a right to retain as a security for such balance, goods
bailed to them, when there is an express contract to that
effect".
According to the right conferred under this section the bailee
may retain not only those goods of the bailor in respect of which
some particular services are rendered, but also other goods in
the possession of the bailee belonging to the bailor. So to say
general right is a privilege and is specially conferred upon the
following types of bailees :
1) Bankers;
2) Factors;
3) Wharfingers;
4) Attorneys of a High Court; and
5) Policy-brokers.
This means that the right is available to the above categories of
baillees only and to none else. For example in re : The Bombay
Saw Mills Co. Ltd. [(1889)13 Bom 314], the Secretaries and
Treasurers of a company which went into liquidation, claimed
to be creditors of the company in respect of advances made to
it by them and being in possession of all the property of the
company, they claimed lien for the amounts advanced by them.
The court held they were not entitled to a lien. They could not
claim general lien because they were not within the description
of the several persons mentioned in section 171; nor could they
claim any of the particular liens dealt within the Act.
Hereunder we will discuss each type of bailee's rights :
(1) Banker's General Lien
In the absence of any special contract to the contrary, the lien
extends to all bills, cheques and money entrusted or paid to the
bank and all securities deposited with it in its capacity as a
banker. The lien is applicable to negotiable instruments which
are remitted to the banker by the customer for the purpose of
collection. When collection has been made the proceeds may
be used by the banker in reduction of the customer's debt balance
unless otherwise earmarked. [Re Keever (1967) Ch. 182]. As
to the concept of banker's lien, the Supreme Court quotes the
following passage from 'Chalmers on Bill of Exchange' in
Syndicate Bank v. Vijay Kumar, [AIR 1992 SC 1066]:
"A banker's lien on negotiable securities has been judicially
defined as an implied pledge'. A banker has in the absence
of agreement to the contrary, a lien on all bills received
from a customer in the ordinary course of banking business
in respect of any balance that may be due from such
customer".
On the basis of this reservation the Supreme Court held that the
fixed deposit receipts deposited by way of security for cash
credit facility were usable as security against the customer's
other debts also. If, however, the bank knows that securities
belong to a third person and not its customer, he cannot exercise
the right of lien in respect of them.
Lien over money
Under the contract of bailment the "goods" are the subject matter
of bailment and in the Act itself word "goods" has not been
defined though the word 'goods' has been defined u/s 2(4) in
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the Indian Sale of Goods Act, 1930 as goods include every
kind of property other than actionable claims or money'. Hence
strictly speaking money is not goods and its deposit with the
bank is not bailment [Devendar Kumar v. Gulab Singh, AIR
1946 Nag.114], but following the English Law various High
Courts in India have held that a banker can exercise lien over
money deposited with it. For instance, when monies are held
in one account and the payer in respect of those moneys owes
the bank on another account, the banker's lien gives the bank a
charge on all the monies of the payer in its hands, so that they
may be transferred to whatever account the bank chooses, to
set off or liquidate the debt (Iyer p. 544).
But if there is an express contract between the parties contrary
to the statutory right of general lien, the right thereby is excluded.
For example, in Mercantile Bank v. Rochaldas [AIR 1926
Sind 225], where money was handed over to a bank for
transmission to another place and the bank had issued a demand
draft, it was held the money must be deemed to be held by the
bank under a special contract which excluded the banker's lien.
The reason is clear that it would be most unbusinessman like
and unreasonable for a banker to expect that a remitter who is
in urgent need of money at the place of payment would agree
to transmit money through the banker if he is told or has reason
to believe that the money is likely to be withheld in the exercise
of this alleged lien. [See Krishna Kishore Kar v. United
Commercial Bank, AIR 1982 Cal. 62].
Similarly in Vijay Kumar v. M/s. Jallunder Body Builders
[AIR 1981 Del 126] where the contract between the customer
(judgment debtor) and a bank was that the bank was to furnish
guarantee for a certain amount on the understanding that the
bank was to hold the fixed deposit receipts given by the customer
as security for the guarantee and the bank gave the bank
guarantee on behalf of the customer to the court. Subsequently,
the bank sought to utilise the amount of the fixed deposit receipts
to satisfy the claim on the over draft account, in which the
amount was due from the customer. It was held that the bank
cannot hold the fixed deposit receipts for the general balance
due to the customer in the customer's overdraft account, when
the endorsement of the bank manager on the reverse of the letter
given by the customer in connection with the guarantee on the
usual printed form indicated that the fixed deposit receipts were
given in connection with the bank guarantee only. The letter
had to be read with the endorsement and so read it would
constitute a contract to the contrary to the general lien of the
bank and the court, in whose favour guarantee was given, could
attach the fixed deposit receipts in the hands of the bank.
To sum up when the goods or money is for a specific purpose,
the bank cannot exercise general lien on the goods or money.
(2) Factor's Lien
A factor is an agent entrusted with the possession and control
of the goods to be sold by him for his principal [Steevens v.
Biller (1883) 25 Ch D 31]. He has a 'special property' in the
goods consigned to him. His lien extends to all lawful claims
against the principal as factor such as for advances or towards
remuneration in respect of losses or liabilities incurred in the
course of his employment [Hammonds v. Barclay (1802)2
East. 227]. The lien does not extend to goods acquired otherwise
than as factor or entrusted for a special purpose. [Iyer p.450].
It must be kept in mind that the factor can buy and sell goods in
the name of the principal or in his own name. It is not necessary
that he must disclose the name of the principal and as per practice
he usually buys and sells goods in his own name. Hence a
factor is entitled to contract in his own name and to receive
payments and his lien over the goods gives a special contractual
right. A factor, like a banker, will not have the right of lien on
such goods as have come to his possession for a specific purpose
which impliedly excludes the right of lien.
(3) Wharfinger's Lien
'Wharf' means a place contiguous to water, used for the purpose
of loading and unloading goods, and over which the goods pass
in loading and unloading. It is essential to a wharf that goods
should be in transit over it. The primary idea is that, it is a
place used, not for storing goods, but in the process of their
transit to or from water. A 'Wharfinger' is the person who owns
or keeps a Wharf, or has the management of it. A wharfinger
has general lien on the goods bailed to him until his wharfage,
which means, charges due for the use of his wharf, are paid
[Avtar Singh p.503]. In fact wharfinger is a custodian who has
by custom acquired a lien. The lien ordinarily is effective against
the owner of goods. He cannot claim a lien against the buyer
for charges due from the seller after he had notice of the sale.
(4) Attorney's Lien
Section 171 of the Act enacts a special rule of lien applicable
exclusively to attorneys who are also known as solicitors.
The nature of an attorney's lien has been discussed in Damodar
Dass v. Morgan & Co. [(1934) 60 Cal. 341], where it was
pointed out that an attorney in India has two kinds of liens; (1)
a passive or retaining lien, and (2) a common law lien on
property recovered through his efforts. So where an attorney
recovered money for his client, he is only entitled to a particular
lien in respect of fees due to him for that matter and cannot
have a general lien for other monies due to him on other papers
or documents. A solicitor or attorney has no longer right over
money which is the fruit of his exertion for the client when he
obtains possession of it than he has when it was still in deposit
with the court. A solicitor or attorney in India has the same
rights as his English counterpart [See Devikabar v. Jafferson,
(1886)10 Bom. 248; Mangal Chand v. Purna Chandra, AIR
1949 Cal. 505]. In Damodardas Agarwal v. R. Badrilal [AIR
1987 AP 264] Andhra Pradesh High Court has laid down the
law thus :
(1) The Common law right of passive and retaining lien
available to a solicitor in England is accepted by courts in
India as a part of the law of this country.
(2) The said Common law right is not abrogated by section
171, Contract Act.
(3) Section 171, Contract Act, enacts a special rule of lien
applicable exclusively to attorneys who are also known as
solicitors.
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(4) The other practitioners, who discharge the functions of
solicitors, are entitled to invoke the common law rights
applicable to solicitors though section 171 is inapplicable
to them.
(5) The practitioner forfeits the right of retaining lien the
moment he discharges himself or by his client for
misconduct.
Under the English law, a solicitor has three kinds of liens to
protect his rights to recover his costs from his client (1) a passive
or retaining lien, (2) a common law lien on property recovered
or preserved by his efforts, (3) a statutory lien enforceable by a
charging order [Damodar v. Morgan, (1933) 60 Cal.1442].
In India the first two kinds of liens under English law are
preserved u/s. 171 of the Act but there is no corresponding
provision to the third kind of lien and thus what is clear from
the above refered case [Damodardas Aggarwal v. R.Badrilal].
Under Section 171 general lien of attorneys is available to
advocates and all other legal practitioners. The attorney can
exercise this right of lien in respect of the papers etc. belonging
to his client which are with him. He can retain them until his
fees for professional services and other costs and expenses
incurred by him for the client are paid to him. If a solicitor is
discharged by the client, the client cannot take back his
documents until the costs etc. incurred by the solicitor and his
other charges are paid to him [Bal Keberbai v. Naranji, (1880)4
Bom. 352]. If he has not been discharged by the client, but
otherwise refuses to act for the client or is unable to work for
him, the right of lien does not exist.
This right of the attorney is also subject to any contract, express
or implied to the contrary. When a promissory note on which a
suit is founded is given to the Advocate it is deemed to be
produced in court at the earliest opportunity, the exercise of his
lien over the document will therefore be deemed to be excluded.
[Lalchand Ram Chand v. Pyare Dasarath Chamar, AIR
1971 MP 245].
(5) Policy-broker's Lien
A policy broker is a person who acts as an insurance agent to
effect a policy of marine insurance. u/s. 171 he has a general
right of lien. His lien extends to any balance on account of any
assurance due to him from a client.
4. Right to Sue [S.180]
The bailee may maintain an action of trespass or conversion or
for damages for destruction or injury to the goods against a
wrong doer, just as the bailor or the real owner can [Burton v.
Hughes, (1824)130 ER 272]. He is entitled to recover in this
manner, even if he is under his particular contract with the bailor,
not responsible for loss or damages to the goods. Section 180
of the act provides thus :
"If a third person wrongfully deprives the bailee of the use
or possession of the goods bailed, or does them any injury,
the bailee is entitled to use such remedies as the owner
might have used in the like case if no bailment has been
made; and either the bailor or the bailee may bring a suit
against a third person for such deprivation or injury".
Under this section it is not only the bailee who can bring the
action against the wrongdoer but bailor is also empowered to
bring such a action against the third party. This section gives
to the bailee full rights of an owner as against the third party.
He is entitled to damages against a wrongdoer, irrespective of
the consideration whether he is liable to the bailor or not [State
Bank of Hyderabad v. Susheela, AIR 1980 AP 1]. If a person
fraudulently or forcibly dispossesses the bailee of the goods
bailed, the bailee has a right to recover the goods. In
Purushottam Das Banarasi das v. Union of India [AIR 1967
All 549], where A took delivery of goods from railway by
producing forged railway receipt and subsequently pledged
those goods to B, it was held railway authorities had a right to
recover those goods from B. Hence section 180 enables a bailee
to sue any person who has wrongfully deprived him of the use
or possession of the goods bailed or has done them any injury
[Karnataka Electricity Board v. Halappa (1987)1 TAC 451.
For the complete study of section 180 it is essential to study
this section with section 181 which reads :
"Whatever is obtained by way of relief or compensation in
any such suit shall, as between the bailor and the bailee, be
dealt with according to their respective interests."
It means that where a bailee receives any relief or compensation
from the wrongdoer, he is liable to account to the bailor for
everything that he recovers beyond his own interest. It connotes
that whatever is obtained by the bailee, that be dealt with
between the bailor and the bailee accordingly to their respective
rights [Morvi Mercantile Bank v. Union of India, AIR 1965
SC 1984], i.e., bailee cannot keep beyond his interest. At the
same time it must be noted that a recovery by one will oust the
other of his right to recover, for there cannot be a double
satisfaction.
4.7 DUTY OF FINDER
A person who finds goods belonging to another and takes them
into his custody, is subject to the same responsibilities as a bailee
(S71). A person who finds goods and takes them into his
custody, takes upon himself all the liabilities and responsibilities
of a bailee and he is expected to take as much care of the goods
as a man of ordinary prudence would under similar
circumstances take of his own goods [S.151]. He cannot make
use of goods for his own purpose [S.154] and mix them with
his own goods [Ss.155-157]. As we have already studied the
liabilities and responsibilities of the bailee, we are not going to
discuss them again here. We will discuss next, the rights of
finder [Ss. 168-169].
4.8 RIGHTS OF FINDER
Sections 168 and 169 deal with the rights of finder of goods
which reads as under :
"168: The finder of goods has no right to sue the owner for
compensation for trouble and expense voluntarily incurred
by him to preserve the goods and to find out the owner; but
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305
he may retain the goods against the owner until he receives
such compensation; and where the owner has offered a
specific reward for the return of goods lost, the finder may
sue for such reward, and may retain the goods until he
receives it".
"169: When a thing which is commonly the subject of sale
is lost, and the owner cannot with reasonable diligence be
found, or if he refuses upon demand, to pay the lawful
charges of the finder, the finder may sell it -
(1) when the thing is in danger of perishing or of losing
the greater part of its value, or
(2) when the lawful charges of the finder, inrespect of
the thing found, amount to two-thirds of its value."
As per sections 168 and 169 finder has three rights :
1) Right of lien
2) Right of claiming reward, if announced by owner
3) Right to sell goods
(1) Right of Lien [S.168)
In English law as there is no right of remuneration, so there is
no question of lien of the finder upon the goods [Nicholson v.
Chapman, (1793)126 ER 536]. Unless the true owner has
intentionally abandoned the chattel, his title is not lost, and he
can recover it in the hands of anyone other than a purchaser in
open market. As against everyone save the true owner, the
property in a chattel found in a public or quasi public place
vests in the finder on his taking possession of it. Thus a person
who picks upon the floor of a shop, a packet of bank notes
accidentally dropped by a stranger, is entitled to the notes, as
against the whole world except the true owner [Bridges v.
Hawkesworth, (1851)21 LJQB 75], and it will not be open to
anyone who dispossesses the finder to plead as against him the
title of the true owner [Iyer, p.452]. But the position in India is
somewhat different in this regard as finder has been provided
with certain statutory rights. In India finder has not the right to
sue the owner for compensation for trouble and expense
voluntarily incurred by him to preserve the goods and to find
out the owner as per section 168. He has, however a kind of
lien inrespect of the goods found i.e., finder may retain goods
till he is compensated for the trouble and expense voluntarily
incurred by him for the preservation of goods and in finding
the owner.
(2) Right of claiming reward, if announced by owner [S.168]
In addition to the right to retain goods till compensation is paid
by the owner for trouble and expenses voluntarily incurred by
the finder in finding the owner and presenting the goods u/
s.168, finder has an additional right under the same section to
sue for reward where the owner has offered the specific reward
for the return of the goods lost and retain the goods until he
receives the reward. To claim reward under this situation is the
statutory right of the finder of goods and thus he has been vested
with the power to sue, but where no reward had been announced,
finder cannot sue but can retain the goods under the conditions
referred to in the section and can claim compensation only [See
Lalman Shukala v. Gauri Dutt (1913)11 All LJ 489]. Hence
the finder has a right to retain goods and refuse to deliver them
up except on payment of compensation or the reward as the
case may be.
But where the finder hands over the goods to the owner and the
owner promises to compensation, this would be a contract and
enforceable in view of section 25 (2) read with illustration (c)
to the section which reads - A finds B's purse and gives it to
him. B promises to give A Rs. 50/-. This is a contract."
(3) Right to sell goods [S.169]
Ordinarily, the finder, being a bailee of goods found is not
competent to sell them for it will be an act of conversion. But
section 169 empowers the finder to sell goods in the
circumstances referred to in the section. The conditions are :
(1) When the owner cannot be found with reasonable diligence,
or he refuses to pay lawful charges of the finder ;
(2) When the goods are of perishable nature, or in danger of
loosing quarter part of their value, or when the lawful
charges of the finder in respect of the thing found, amount
to two-third of its value.
As per the section these conditions apply to the goods which
are commonly the subject of sale i.e., the thing to be sold must
be an ordinary object of sale. The conditions referred to above
indicate this rule.
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5. PLEDGE & HYPOTHECATION
SUB-TOPICS :
5.1 Introduction
5.2 Essential features
5.3 Subject matter of pledge
5.4 Distinction: Pledge, Hypothecation, Bailment, Lien and
Mortgage
5.5 Who can pledge
5.6 Termination of pledge
5.7 Rights of pledgee/pawnee
5.8 Rights of pledgor/pawnor
5.9 Additional right of the hypothecatee
5.1 INTRODUCTION
A pledge or pawn is a bailment of goods by a debtor to his
creditor to be kept by him till the debt be discharged; the
bailment is intended to be a security for some debt or
engagement. Section 172 of the Indian Contract Act, 1972
defines a pledge as the bailment of goods as security for payment
of a debt or performance of a promise'. In brief pledge or pawn
is a bailment of personal property as a security for some debt or
engagement. A pledge can be created only in respect of a
chattel capable of delivery; thus, these can be no pledge of a
chose-in-action as such [Harrold v. Plenty (1901)2 Ch. 314,
316; Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322]. The
general property in the goods pledged remains in the pawner,
but a special property in them passes to the pawnee in order
that he may be able to sell the goods if his right to sell arises.
This special property is strictly only a right to possession of the
goods, together with a power of sale upon default. Sale upon
default in payment of the debt is an incident of pledge. Thus a
pledge is only a special kind of bailment, and the main basis of
distinction is the object of contract.
Pledge of the title deeds or ownership and/or possession
documents instead of the movable goods itself is known as
hypothecation. As for example, loan taken against an omnibus
may be secured by sanctioning loan, along with an agreement
in writing allowing the bank to secure possession of the property
if the payment is not made in time. This is known as
hypothecation. The omnibus clearly contains the inscription
that it is hypothecated to the concerned bank.
This clearly indicates that in pledge there are two parties i.e.,
pawnor (pledgor) who being liable to an engagement gives a
thing to one, called pawnee (pledgee) to whom he is liable, to
hold the thing as security for payment of debt or the fulfilment
of his liability.
5.2 ESSENTIAL FEATURES
There are three essential features of pledge, viz :
(1) there must be a bailment of goods i.e., delivery of goods;
(2) the bailment must be by way of security; and
(3) the security must be for payment of debt or the performance
of a promise. [See Shasade Begum Saheba v. Girdharilal
Sunghi, AIR 1976 AP 273]
Hence delivery is the most important requisite of a pledge [Ex
parte Parsons (1886) 16 QBD 532; see also Ideal Bank Ltd.
v. Pride of India Pictures Ltd, AIR 1983 Del 546]. We may
thus discuss in detail all the above essential features of pledge
hereunder.
(1) Delivery of Possession
Delivery is essential to identify a transaction as a pledge within
the ambit of section 172 of the Act. As the pledge is a bailment,
so the delivery of goods from pawner to pawnee is a must i.e.,
the transfer of possession from one person to another. Delivery
of the goods, either actual or constructive is a sine qua non of a
valid pledge. English law on the subject is that for the
completion of pledge it is not essential that there must be actual
delivery of goods to the pledgee, it is enough if there be a
symbolic or constructive delivery. Where it is practically
impossible to give physical delivery or possession of goods or
where goods remain in the possession of pledger for certain
purposes, symbolic delivery is enough. Delivery of the key of
the warehouse where the goods are stored or handing over the
delivery order directing the ware-houseman to deliver the goods
to the pledgee are illustrations of constructive delivery. Also
where the goods are in possession of third person and who on
the directions of the pledger consents to hold them on behalf
of the pledgee also constitutes delivery in law from the pledger
to the pledgee. This is also known as delivery by attornment.
In such situation we can say that pledge is legally delivered
possession though it does not pass from pledger to pledgee in
fact. Further the delivery and the loan need not be simultaneous.
It is enough if possession is delivered within a reasonable time
of the advance, in pursuance of the contract to pledge. [Madras
Official Assignee v. Mercantile Bank of India Ltd. (1935)
A.C. 53, 58-59] see also Hilton v Tucker, (1888) 39 Ch D
669] . On this aspect Indian law is the same as that of English
and the Indian courts invariably follow the English rulings.
(2) Pledge must be by way of security
The purpose for which the goods are pledged is basically a
security for the payment of a debt or performance of a promise
as per the directions of section 172 of the Act. When the goods
are pledged with the pawnee he becomes the secured creditor
of the pawner. Security can be of three types :
1) a simple lien;
2) a mortgage passing the property out and out; and
3) a security intermediate between a lien and mortgage, namely
a pledge, where by contract, a deposit of goods is made
security for a debt and the right to the property vests in the
pledgee so far as is necessary to secure the debt.
(3) Security must be for payment of debt or the performance
of a promise
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As has been said earlier that the purpose of pledging the goods
with the pledgee is to serve as security for the payment of loan
or for performance of a promise, so thereby the pledgee becomes
the secured creditor possessing a prior claim over the goods
pledged than other creditors. Thus in Bank of India v. Binod
Steel Ltd. [AIR 1977 MP 188] it was held that when certain
movables have been pledged by a company with a bank, they
cannot be attached and sold for satisfaction of the claims of
other creditors of the company without first satisfying the claim
of the bank. It must be remembered that a pledge is not a transfer
of any interest in the property for the benefit of the pledgee. It
only creates a special property on the chattels in favour of the
pledgee. Pledge only entitles the pledgee to keep the possession
of chattels till the realisation of the debt, the purpose for which
chattels have been pledged by way of security. If the pledgee
waives his right of possession, his claim over the property
(goods) comes to an end. In Syndicate Bank v. Official
Liquidator, M/s Prashant Engineering Co. (P) Ltd. [AIR
1985 Del 256], bank had advanced a loan to the company and
the company hypothecated the installed machinery in the
company with the bank as security for the payment of loan. On
the action brought by the bank against the company, simple
money decree for Rs. 2,11,897-20, was granted. It is important
to note that the bank neither took possession of the hypothecated
machinery itself nor it applied to court for its possession. Under
the circumstances it was held that as the bank did not avail of
its right as a hypothecatee, to have the possession of the
machinery itself or through the intervention of the court, so the
bank was deemed to have waived its right as a secured creditor
against the security.
5.3 SUBJECT MATTER OF PLEDGE
It is not all goods that can be the subject matter of a pledge, but
only those that the pledgee can sell effectively. Generally
speaking any kind of goods or documents may be pledged. A
document of title could be pledged by transfer of the same. A
bill of lading or railway receipt is document of title and a pledge
of it operates as a pledge of the goods. Government securities
cannot be pledged except by endorsement and delivery. Title
deeds of property are not 'goods' but they may be pledged u/s
172 of the Act. Promissory notes as a security device for a debt
is a valid pledge. A mere deposit of share certificates of a limited
company will not constitute a pledge as the depositee cannot
sell them. But if the deposit is accompanied by blank transfer
forms then it will constitute valid pledge. Delivery of negotiable
instruments which because of their very nature authorise the
pledgee to sell, is a valid pledge. These brief illustrations
indicate that any kind of personal property which is movable
and saleable can be the subject matter of pledge [Lallan Prasad
v. Rahmat Ali, AIR 1967 SC 1322].
5.4 DISTINCTION : PLEDGE, HYPOTHECATION,
BAILMENT, LIEN AND MORTGAGE
Pledge and Hypothecation
The Indian Contract Act does not contain any specific provision
to govern pledge without dispossession exclusively. However,
Indian law is familiar with pledges without dispossession
through the institution of hypothecation. Hypothecation, not
accompanied by possession by the pawnee, is a kind of a pledge.
It confers a good title upon the person in whose favour it is
made. The transaction is regarded as security and equity gives
effect to it. In the absence of fraud, there is no inherent illegality,
immorality or opposition to public policy in the non-possession
by hypothecatee of movables, and therefore, a contract for such
a hypothecation is valid contract, for it is a transaction which
has become customary throughout the country and is suitable
to the circumstances and business transactions of the people.
The difference between" pledge" and "hypothecation" lies in
the fact that in "hypothecation" possession of the goods is
retained by the owner and certain rights in that movable property
are transferred to the person in whose favour the property is
hypothecated [Bank of Maharashtra Ltd. v. Official
liquidator, AIR 1969 Mys. 280 ]; while in the case of" pledge"
the possession of the goods is actually delivered to the person
for whose benefit the pledge is made. In pledge the possession
of goods passes to the pledgee by way of "security" though the
possession may be constructive. The true distinction from
hypothecation is that the constructive possession of the goods
in the case of pledge is specifically secured by the term of the
contract and is continued throughout [Nadar Bank Ltd. v.
Canara Bank Ltd. AIR 1961 Mad. 326].
In order to determine whether a particular transaction of the
type of pledge constitutes a hypothecation without dispossession
from the pledger, one should find whether there was an intention
to create a security. If such an intention is evident, equity gives
effect to it. Indian Courts have also endorsed the English law
that hypothecation may be done not only of the movables
existing at the time of the transaction, but also of those movables
which may be subsequently acquired or bought. [See H.V.
Low & Co. Ltd. v. Pulinbihari Lal Singla and Others, AIR
1963 Cal. 154].
In case of pledge since the pledgee has been in possession of
goods, in the event of default by the pawner apart from other
rights the pledgee has a right of lien over the goods, i.e., he
may retain the goods pledged until payment of debt, or
performance of the promise etc. In case of hypothecation since
the possession of the goods remains with the owner the
hypothecatee cannot have the right of lien. He may, sell the
property in default [see State Bank of Baroda v. R.B. Hirabai,
AIR 1967 Guj 1; Bangia, p. 429]
Pledge & Bailment
Bailment being a wider term, includes pledge also. Pledge is a
kind of bailment of goods as security for the payment of a debt
or performance of a promise. it denotes that the goods are with
the pledgee as a security against the loan advanced or for the
performance of a promise, whereas when goods are given for
some other purpose, for example, a cycle is given for repairs, it
is bailment.
In case of bailment, if the bailor does not pay the lawful charges
due to the bailee in respect of the services etc. rendered by the
bailee, the bailee can exercise lien over the goods, bailed, i.e.,
he can retain them until the necessary payment is made to him.
In case of pledge the pledgee has not only a right to retain the
goods pledged until the repayment of debt or performance of
the promise, etc., but in the event of default by the pawnor in
payment of the debt, or performance of the promise at the
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stipulated time, he may even sell the goods, after giving a due
notice of sale to the pawnor.
Pledge, Lien and Mortgage
A pledge differs from both lien and mortgage. While sale upon
default of payment is an incident of pledge, in lien there is only
right to retain. Again a pledge unlike a lien is assignable.
In a mortgage of chattels, limited property passes by assignment
subject to a right of redemption but possession need not pass to
the mortgagee. While in a pledge there is only a bailment,
under a mortgage there is a sort of transfer of property.
5.5 WHO CAN PLEDGE
Ordinarily it is the owner of goods himself or any person
authorised by him who has the authority to pledge the goods.
A person only having the custody of goods, with the consent
of the owner, is not entitled to pledge the goods and if he does
so, the pledge will not be valid. Say if the tenant of a house is
in possession of all the furnitures provided by the landlord in
the house pledges the furniture, it would not be a valid pledge,
or if a servant is in possession of a gun of the employer, he is
not entitled to pledge the gun. The rule is that where goods are
left in the custody or care of a person for some specified purpose,
he cannot pledge them.
Same would be the case if a person fraudulently obtains the
goods and pledges them to some one. In Purshottam Das v.
Union of India [AIR 1967 All 549], where certain goods were
delivered by the Railway company to a person on a forged
railway receipt, were pledged with the defendant, a suit for the
recovery of goods against the defendant was filed. Defendant
imputed negligence on the part of the railway. But the court
held that the pledge was not valid and the defendant did not get
any rights as a pledgee, in the goods pledged. Thus the rule laid
down is that a bailee of goods is entitled to recover them from
a person, who takes them from his possession forcibly or
fraudulently. If such a person pledges them with another who
may have taken in good faith, the bailee would still be entitled
to recover from the pledgee. The principle is to protect the
individual interest in the ownership of property. But interest
acquired in the course of lawful transactions equally deserves
to be protected. Thus under sections 178, 178-A and 179 of
the Act certain exceptional cases have been recognised where
even a non-owner can make a valid pledge. This happens
where a person having possession of goods with the consent of
the owner pledges and confers rights on the pledgee. Exceptions
recognised by law are :
I. Pledge by Mercantile agent [s.178]
Section 178 indicates that the undermentioned essentials must
be satisfied before the non-owner can lawfully pledge the goods:
(1) He must be a mercantile agent.
(2) He should be in possession of the goods or of documents
of title thereto, with the consent of the owner.
(3) Pledge should have been made in the ordinary course of
business of the mercantile agent.
(4) Pledgee should have acted in good faith and at the time of
the transaction the pledgee should have no notice of the
fact that the pawner had no authority to pledge.
When these conditions are satisfied, the pledge though made
by a non-owner would be valid.
(i) Pledge should be by Mercantile agent
Non-owner making the pledge should be a mercantile' agent
as defined in the Indian Sale of Goods Act, 1930. Section 2(9)
of the Act defines a mercantile agent as a person who in the
customary course of his agency business has authority to sell
or buy goods or raise money on the security of goods.
Section 178 of the Act reads :
"Where a mercantile agent is with the consent of the owner,
in possession of goods or the documents of title to goods,
any pledge made by him, when acting in the ordinary course
of business of a mercantile agent, shall be as valid as if he
were expressly authorised by the owner of the goods to
make the same: provided that the pawnee acts in good
faith and has not, at the time of pledge, notice that the
pawner has no authority to pledge."
Explanation: In this section the expression mercantile
agent and "documents of title" shall have the meaning
assigned to them in the Indian Sale of Goods act, 1930".
(ii) Possession with owner's consent
Mercantile agent must be in 'possession of the goods' or the
documents of title to goods with the 'consent of the owner'. If
the possession is obtained dishonestly or by trick, a valid pledge
cannot be effected [See M/s Jute Distributors v. Sushil Kumar
Gupta, AIR 1974 Cal 386]. The term 'owner' means a person
having the right to authorise the sale, the word 'possession' is
understood in the ordinary sense and the phrase documents of
title to goods has been defined in section 2(4) of the Sale of
Goods Act thus :
"Documents of title to goods' includes a bill of lading, dock-
warrant, warehouse keeper's certificate, wharfinger's
certificate, railway receipt, warrant or order for the delivery
of goods and any other document used in the ordinary
course of business as proof of the possession or control of
goods, or authorising, or purporting to authorise, either by
endorsement or by delivery, the possession of the document
to transfer or receive goods thereby represented".
There may be circumstances where the mercantile agent may
not have been authorised to pledge the goods by the owner, yet
he must have obtained the possession of goods or the documents
of title to the goods with the consent of owner. The Supreme
Court in Central National Bank v. United Industrial Bank,
[AIR 1954 SC 181] laid down that the word 'consent' for this
purpose means agreeing on the same thing in the same sense as
defined in section 13 of the Contract Act.
If the consent is real, it is immaterial that it was obtained by
fraud or misrepresentation or with dishonest intention. All these
things may make the person receiving possession liable for some
offence, but the consent of the owner actually given is not
annulled thereby. Thus where a goldsmith obtained possession
of certain jewellery under the pretence that he had a customer,
and instead pledged it, the pledgee was said to have obtained a
good title [See Central National Bank v. United Industrial
Bank, AIR 1954 SC 181 at p.185; U.Sulamian v. Ma Ywet,
(1934) 151IC 413]
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(iii) Possession in the ordinary course of business
It is further necessary that the goods or the documents of title
to goods must have been pledged by the mercantile agent in the
ordinary course of business of a mercantile agent. Hence such
possession must have been obtained in his capacity as a
mercantile agent, and not in any other capacity. If I send my
television set to a mercantile agent to know the maximum
amount on which it can be pledged, the agent who has not been
authorised to pledge, pledges the same, pledge would be valid.
But if the mercantile agent gets possession in other capacity
than the mercantile agent, pledge made by him will not be valid.
For example, if I hand over certain goods to my friend for safe
custody who happens to be a mercantile agent and if he pledges
them, pledge would not be valid.
(iv) Pledgee acting in good faith
The pledgee who obtains a pledge must act in 'good faith', as
defined in section 3 (20) of the General Clauses Act, 1895 which
reads thus :
"A thing shall be deemed to be done in good faith' where
it is in fact done honestly, whether it is done negligently or
not".
In addition to action in 'good faith' of the pledgee, it is required
that the pledgee should not have notice of the pledgor's defect
of title. If the pledgee knows that the pledgor had a defective
title then the pledge would be invalid. In brief where a pledgee
knows the fact that the mercantile agent has no authority from
the real owner to pledge and is not acting on good faith, he is
not entitled to take advantage of the provision that a mercantile
agent's business includes making of a pledge and therefore it is
presumed that he had the authority to pledge.
II. Pledge by a person in possession under voidable contract
[S.178-A]
Section 178-A reads :
"When the pawner has obtained possession of the goods
pledged by him under a contract voidable under section 19
or section 19-A, but the contract has not been rescinded at
the time of the pledge, the pawnee acquires a good title to
the goods, provided he acts in good faith and without notice
of the pawner's defect of title".
Thus the rule is that if a person obtains possession of goods
under a contract which is voidable at the option of the lawful
owner by fraud, misrepresentation, coercion (S.19) or on the
ground of undue influence (S.19-A), he is entitled to make valid
pledge until the voidable contract is rescinded. There is in such
a case a de facto contract, though voidable on the ground of
fraud and the like. But the case would be different if the goods
are obtained by theft as defined in S.378 of the Indian Penal
Code or where the possession is obtained under a void
agreement. It is further necessary that the pledgee must be
acting in good faith and without notice about the pledgor's defect
in title.
III. Pledge by a person having limited interest [S.179]
Section 179 reads :
"Where a person pledges goods in which he has only a
limited interest, the pledge is valid to the extent of that
interest".
It denotes that where the pledgor is not the owner of the goods,
but has only a limited interest in the goods which he pledges,
for example, where he is a mortgagee, or he has lien with respect
to those goods, the pledge would be valid to the extent of such
interest. Thus when a pledgee further pledges the goods the
pledge would be valid only to the extent of his interest and his
interest is the amount for which the goods have been given to
him as a security. If he pledges for a larger amount, the original
pledgor will still be entitled to his goods on paying the amount
for which he himself pledged the goods. For example, where
A pledges certain jewellery with B for Rs. 10000/- and B further
pledges it to C for Rs. 15000/- here A has the right to take back
the jewellery by paying Rs.10000/- only because B's interest in
the jewellery is Rs. 10000/- only.
Pledge by seller in possession after sale
Section 30(1) of Indian Sales of Goods Act 1930 says that
where a person has sold goods but continues in possession of
them or of documents of title to them, he may sell them to a
third person, and if such person obtains delivery thereof in good
faith and without notice of the previous sale, he gets a good
title to them, although the property in the goods has passed to
the first buyer. A pledge, mortgage, or any other disposition of
goods is equally valid. The disposition may be made not only
by the seller in possession, but also by a mercantile agent acting
for him. For example, A sells goods to B. B for his own
convenience leaves the goods with A. A fraudulently sells the
goods to C, who buys them in good faith and with out notice of
the sale to B. C gets a good title to the goods. The delivery of
the goods by A to C has the same effect as if A were expressly
authorised by B to deliver the goods. the transaction would be
equally valid if A pledges or mortgages the goods to C. Thus
to enable the seller to pass a good title the following condition
must be complied with :
(1) the seller must continue in possession of the goods or of
the documents of title to goods as a seller. Possession as a
hirer or bailee of the goods from the buyer after delivery of
goods to him will not do;
(2) the goods must have been delivered to the buyer or the
documents of title must have been transferred to him. A
mere agreement for sale, pledge or other disposition will
not do; and
(3) good faith and absence of notice of the previous sale on
the part of the second buyer.
Pledge by buyer in possession after sale
Section 30(2) of the Sale of Goods Act deals with the converse
case of a sale or other disposition by the buyer of the goods in
which the property has not yet passed to him. Section says that
if the buyer obtains possession of the goods before the property
in them has passed to him, with the consent of the seller, he
may sell, pledge or otherwise dispose of the goods to a third
person, and if such person obtains delivery of the goods in good
faith and without notice of any lien or other right of the original
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seller in respect of the goods, he will get a good title to them.
Thus to enable the buyer to pass a good title following conditions
must be fulfilled :
(1) there must be possession of the goods or documents with
the consent of the seller;
(2) the goods must have been delivered to the buyer or the
documents of title transferred to him. A mere agreement
for sale, pledge or other disposition will not do ;and
(3) there must be good faith, and absence of notice of the seller's
right of property on the part of the second buyer (Mulla,
pp.73-74)
5.6 TERMINATION OF PLEDGE
By a bailment in pledge, the pledgee impliedly undertakes to
return the goods pledged to the pledgor upon payment of the
debt or the performance of the promise. Upon payment or the
performance of the promise, the contract is extinguished, and
the pledgee is divested of his special property in the goods.
5.7 RIGHTS OF PLEDGEE
The pledgee or the pawnee has the following rights under the
Indian Contract Act 1872;
(1) Right to retain goods pledged [Section 173-174]
"173: The pawnee may retain the goods pledged, not only
for a payment of the debt or the performance of the promise,
but for the interest of the debt, and all necessary expenses
incurred by him in respect of the possession or for the
preservation of the goods pledged".
"174: The pawnee shall not, in the absence of a contract to
that effect, retain the goods pledged for any debt or promise
other than the debt or promise for which they are pledged;
but such contract, in the absence of anything to the contrary,
shall be presumed in regard to subsequent advances made
by the pawnee.
The statutory provision u/s 173 recognises the pledgee's right
of retaining. He may retain the goods pledged not only for
payment of the debt or the performance to the promise, but for
the interest of debt, and all necessary expenses incurred by him
in respect of the possession or for the preservation of goods
pledged. It has been held by the Supreme Court in Lallan
Prasad v. Rahmat Ali and Another [AIR 1967 SC 1322] that
the pledgee cannot maintain a suit for recovery of debt and at
the same time retain the pledged property. The right of retainer
is limited by the prescription u/s 174 of the Act, that the pledgee
cannot, in the absence of a contractual stipulation, retain the
goods pledged for any debt or promise other than the debt or
promise for which they are pledged,but such contract, in the
absence of anything to the contrary, shall be presumed in regard
to subsequent advances made by the pledgee. Bombay High
Court in Cowsji Muncherji Banaji v. Official assignee of
Bombay [AIR 1928 Bom. 507] held that the pledge and
subsequent advances raise a presumption that there is a contract
to hold the pledge for such advances. Where, however, the
latter advance is separately secured, such presumption does not
arise. The right of retainer ends on proper tender of payment.
(2) Right to recover extraordinary expenses incurred [Section
175]
"175: The pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the preservation
of the goods pledged".
Whereas under the preceding section a pledgee can 'retain' the
possession of the goods for various claims, including the claim
for necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged, section
175 confers an additional right on the pledgee i.e., a right to
receive from the pledgor extraordinary expenses incurred by
him for the preservation of the goods. For example, where a
horse is pledged and it suffers an injury by accident, the pledgee
is entitled to recover the expenses which he incurs on the
treatment of the horse.
(3) Right to sell the pledged goods [Section 176]
In case of default on the part of the pledgor in the payment of
the debt, or performance of the promise at the stipulated time,
pledgee has been vested with the right of selling the goods under
section 176 of the Act, which reads :
"If the pawnor makes default in payment of the debt, or
performance, at the stipulated time of the promise, in respect
of which goods were pledged, the pawnee may bring a suit
against the pawnor upon the debt or promise and retain the
goods pledged as a collateral security; or he may sell the
thing pledged, on giving the pawnor reasonable notice of
the sale.
If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to
pay the balance. if the proceeds of the sale are greater than
the amount so due, the pawnee shall pay over the surplus
to the pawnor."
Under the above section pawnee has the following two alternate
rights :
(1) Right to Sue
The pawnee u/s 176 of the Act has been vested with the right of
bringing the suit for the amount due to him while retaining the
goods pledged as a 'collateral security', on the pawnor's default,
in payment, at the stipulated time [See T.S. Kotagi v.Tehsildar,
Gadag and Others, AIR 1985 Kant. 265; M/s. Tapanga Light
Foundry v. State Bank of India, Khurda, AIR 1987 Ori. 174].
Where a pawnee files a suit for recovery of debt, though he is
entitled to retain the goods, he is bound to return them on
repayment of debt. If the debt is paid he has to return the goods.
But if he sues on the debt denying the pledge, and it is found
that he was given possession of the goods pledged and had
retained the same, the pawnee has the right to redeem the goods
so pledged by payment of the debt. If the pawnee is not in a
position to redeliver the goods he cannot have both the payment
of the debt and also the goods. Where the value of the pledged
property is less than the debt and in a suit for recovery of debt
by a pledgee, the pledgee denies the pledge or is otherwise not
in a position to return the pledged goods he has to give credit
for the value of the goods and would be entitled then to recover
only the balance [Lallan Prasad v. Rahmat Ali, AIR 1967 SC
1322]
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311
It is not incumbent on the creditor that he must proceed against
the pledged property alone, and should not file suit for the
recovery of loan. For example, if on security of shares lender
advances an amount with a agreement that he will keep his lien
over the shares till amount is fully repaid with interest, lender
cannot be debarred from obtaining a personal money decree
against the borrower. This indicates that though one is in
possession of valuable security against the loan advanced he is
not barred from filing a suit for its recovery. This is what the
Allahabad High Court laid down in Kurilal Rungta v. Smt.
Banarsi Devi and Others [AIR 1986 All 94]. In this case the
lender had agreed to advance to the defendant-appellant a sum
of Rs.30000/- at the rate of 9% interest per annum against the
securities of shares. It was specifically mentioned in the deed
of arrangement that the lender will have a lien on the shares till
the borrower pays the full amount of loan with accrued interest
up to the date of repayment. The borrower agreed that he will
not in anyway assign, sell or dispose of the said shares without
previous knowledge and consent of the lender and without
repaying the full amount of Rs. 30000/- together with interest
there on and the shares of a certain mill were merely pledged as
security. Under the circumstances it was held that plaintiffs
were not obliged to proceed to get the said shares transferred in
their names or to proceed to recover the amount by proceeding
only against the said security.
Further more pawnee (pledgee) is required to take care of the
goods pledged to him as a man of ordinary prudence would
take of his own goods. If he fails in his duty he would be liable
to the pawnor. In Central Bank of India v. M/s.Grains &
Gunny Agencies [AIR 1989 M.P.28] food grain stocks pledged
against loan with the bank were damaged or lost. Bank took no
action to minimise the loss even on request of the pawnor. On
a suit for the recovery of out standing dues, bank claimed
exemption from liability for loss and damages by virtue of
special contract including negligence of his servants. It was
observed that section 152 (of the act) provides that the bailee,
in the absence of special contract, is not responsible for the
loss, destruction or deterioration of the things bailed, if he has
taken the amount of care prescribed by section 151. Thus section
152 is subject to section 151 which requires the bailee to take
care of the goods bailed to him as a man of ordinary prudence
would take of his own goods. Section 161 makes the bailee
responsible for delivery or tender at the proper time of the goods
bailed and in default makes him liable for any loss, destruction,
or deterioration thereof from that time. It is well settled that in
cases governed by sections 151 and 152, the loss or damages
of goods entrusted to a bailee is prima facie evidence of
negligence and therefore the burden to disprove negligence lies
on the bailee. The bailee has to prove that he exercised due
care and was not negligent. If inspite of this the loss occurred,
he is absolved of all responsibility. Even if the bank is entitled
to claim exemption by virtue of special contract including
negligence of its servants, still the bank has to show that it took
as much care of the pledged goods as an ordinary prudent man
under similar circumstances takes of his own goods of the same
quality and value as required by section 151. It was held that
the bank is liable for the loss of goods and, therefore, it was
not entitled to succeed in his claim against the pawnor in the
absence of the proof that care was taken by the bank to preserve
the goods.
(2) Right to Sell
Section 176 lays down that if the pawnor makes default in
payment of the debt, or performance, at the stipulated time of
the promise, in respect of which the goods were pledged, the
pawnee may bring a suit against the pawnor upon the debt or
promise, and retain the goods pledged as collateral security, or
he may sell the thing pledged, on giving the pawnor reasonable
notice of the sale.
A notice of the character contemplated by section 176 cannot
be implied. Such notice must be clear and specific in its
language and must indicate the intention of the pawnee to
dispose of the security. [Prabhat Bank ltd. v. Babu Ram,
AIR 1966 All 134]. Hence the provision of section 176 of the
Act is clear to the effect that the pawnor is entitled to reasonable
notice before sale of the pawned goods and the provisions are
mandatory in character. [See M/s. Tapanga Light Foundry v.
State Bank of India, Khurda AIR 1987 174]. Even if there is
a term in the contract of pledge to waive notice, still, the pledgee
is not relieved of his obligation to give notice before the sale of
pledged goods [Sri Raja Kakarl Puni Venkata v. Andhra
Bank (1960)1Andh WR 234]. Thus a sale by the pawnee
without giving a reasonable notice to the pawnor is void, and a
vendee without notice of the pledge takes only the limited rights
or interests of pledgee, in other words, he steps into the shoes
of pledgee. [See. T.S. Kotagi v. Tehsildar, Gadag and Others,
AIR 1985 Kant 265].
The notice must refer to the debt for which the goods were
pledged and for recovering of which goods are to be sold. mere
intimation that 'failing payment by certain date we shall arrange
for sale' is not sufficient notice u/s 176. The object of the
notice is to give the pawnor an opportunity to redeem; for the
right of redemption can be exercised till the moment of sale.
The right to sell is perfected with the giving of the notice of
sale, and it is open to the pawnee to sell at any time thereafter.
A sale by the pawnee after reasonable notice to the pawnor
confers a good title on the buyer of such goods.
In brief, sale under section 176 means the intended sale and
not the sale that has been actually arranged by the pawnee. The
law does not require that the pawnee should arrange for the
sale before hand and then give the pawnor a notice of the date,
time and place of that sale. All that is necessary is that a notice
should be given of the pawnee's intention to sell in default of
payment by the pawnor within a specified date. The reasonable
notice of sale u/s.176 therefore, does not require specification
of date, time and place of the sale [Hulas Kunwar v. Allahabad
Bank Ltd. AIR 1985 Cal.644].
Purchase by Pawnee
Supposing that a due notice of sale has been given so that the
pledgee gets the right to sell, may he buy the goods himself ?
Though the pawnee is not prevented from buying the pledged
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property himself in a bonafide sale, yet, if, in effect he takes
over the pledged property himself without the pledgor's
authority, the pawnee would be guilty of conversion.A
noticeable aspect is that though the pawnee would be liable for
conversion, the sale itself would not be liable to be set aside,
and at the same time, the pawnor would be entitled to damages
in case of improper sale. In Neekram v. Bank of Bengal,
[(1891)19 Cal.322 (PC)] judicial committee said that the effect
of the sale to himself by the pawnee (without the authorisation
of the pledgor) was not to altogether terminate the contract of
pledge so as to entitle the pawnor to recover the article without
payment of the debt. [See also Dhani Ram & Sons. v. Frontier
Bank, AIR 1962 Punj 321].
5.8 RIGHTS OF PLEDGOR
Pledgor's right to redeem
Section 177, which confers the right to redeem on the pledgor
reads:
"If a time is stipulated of the debt, or performance of the
promise, for which the pledge is made, and pawnor makes
default in payment of the debt or performance of the promise
at the stipulated time, he may redeem the goods pledged at
any subsequent time before the actual sale of them; but he
must, in that case, pay, in addition, any expenses which
have arisen from his default".
According to English Law where no time is stipulated for
redemption, the pledge is redeemable within the life time of
owner. Under section 176 the right of pawnor is extinguished
only when the pawnee makes actual sale of goods. Hence under
the Indian law the rule is that, so long as the sale does not take
place the pawnor is entitled to redeem the goods on payment of
the debt. It follows therefore, that where a pawnor is entitled to
redeem the goods on payment of the debt, on a suit for recovery
of debt, though the pawnee is entitled to retain the goods he is
bound to return them on payment of the debt [Lallan Prasad
v. Rehmat Ali, AIR 1967 SC 1322]. The principle underlying
is that the pawnee does not become the owner of the goods
automatically if the pawnor fails to redeem the goods pledged
with the pawnee within specific time. The ownership in the
goods remains in the pawnor and wholly revests in him on
payment of the debt or performance of the promise [See M.R.
Dhawan v. Madan Mohan, AIR 1969 Del. 313]. Where jewels
pawned with a pawn broker, were held not to have been
redelivered to the pawnor during his life time and the heir
brought a suit for redemption of the jewels, the court held that
in a case of wrongful detention, the pawnbroker was liable to
pay the value of the jewels as at the time of decree.
Right of redemption of goods also includes a right to any
accretion to the goods pledged. Thus, if a debtor pledges his
shares of a certain company with a bank, and during the period
of pledge the company issues bonus shares and right shares,
the pawnor on redemption will be entitled to such bonus and
right shares also [M.R. Dhawan v. Madan Mohan, AIR 1969
Del 313].
Under section 177 if the pawnor fails to seek redemption within
a reasonable time, he becomes liable to pay any expenses which
may have arisen from his default. The pawnor also has a right
of redemption under Art.70, Sec.1, of the Limitation Act 1963
where the period for a suit to recover a thing pledged is 30
years.
5.9 ADDITIONAL RIGHTS OF a HYPOTHECATEE
All rights and obligations of the pawnor and the pawnee are
applicable equally to an hypothecator and an hypothecatee
respectively. The hypothecatee has of course an additional right
to secure possession of the property of the goods, the title
document of which is already with the hypothecatee.
Hypothecation is analogous to equitable mortgage by depositing
title deeds of immovable property with the simple difference
that the ownership documents or title documents in
hypothecation relate to movable goods for which the
hypothecator did not pay the full consideration. It has been
already pointed out that in a pledge some movable goods are
kept in security whereas in hypothecation ownership documents
of some movable goods are kept in security. As such on failing
to 'receive the debt' the hypothecatee has the right to take
possession of the movable goods. At that stage when he takes
possession of the goods, hypothecation is turned into a pledge.
Therefore, non-payment of the dues by the debtor will entitle
the creditor i.e. the hypothecatee to secure possession of the
goods. Hypothecation in this sense is a pledge in abeyance.
Correspondingly the hypothecator has an additional duty over
and above the duty and liability attached to a pawnor. He has
to facilitate the transfer of possession of goods to hypothecatee.
As for example if an omnibus is hypothecated with a bank
against a loan sanctioned with a bank, the bank can attach the
omnibus in case the payment of loan is not fully made.
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SUB-TOPICS
6.1. Leasing agreement - Nature and meaning
6.2. Rights and duties of the Lessor & the Lessee
6.3. Hire Purchase agreement - nature and meaning
6.4. Difference between Hire purchase, Instalment purchase
agreement & Lease
6.5. Rights & duties of Hire - purchaser and hire vendor.
6.1 LEASING AGREEMENT- NATURE AND
MEANING
In India there is no law relating to leasing of movable property.
Lease agreements of movable properties are taken as a contract
of bailment, plain and simple, with no element of sale, in which
one allows another party the right to use goods for hire on
payment. In fact, under section 148, bailment is defined as
delivery of possession for some specific purpose, on the
accomplishment of which the goods are to be returned as per
the direction of the bailor. Strictly speaking bailment is a contract
for service on the goods bailed like repairing, treating or adding
any art or design on the goods bailed. As such, lease agreements
allowing use of goods against hire charges can be broadly
covered by bailment agreement but not rigidly as such. As for
example, in a contract of bailment the lessee does not have a
right to purchase at the end of the lease term. In case a contract
specifically includes this right, the lease becomes confused with
hire purchase contract. This leads to anamolous situation where
the ownership of the leased asset at the end of tenure would not
be definite. This type of understanding of leasing is befitting
with the definition of the term lease as provided in section 105
of the Transfer of Property Act. A lease of an immovable
property has been defined as 'a right to enjoy, such property for
a certain time or in perpetuity in consideration of a price to be
rendered periodically or on specified occasion to the transferor
by the transferee'. This definition of lease of immovable
property only allows the lessee to enjoy the property but does
not vest in him any right of ownership. Leasing agreements,
on the other hand, relating to movable goods is based on a pair
of contract in which the creditor purchases some goods on paper
and allows the lessee i.e., the principal debtor to enjoy the
property and pay the total consideration plus the rent on lease
in instalments or on such other terms, on payment of which the
lessee or the principal debtor becomes owner of the property.
In the modern world these types of lease agreements have
increased to a very large number for various types of consumer
and durable goods and services. It is true that rights of the
parties are governed by the terms of the contract inter se. But
very often the contract tends to become one sided with residual
right of the lessee in a state of limbo . It is therefore necessary
to have definite law relating to the lease.
This leasing can be of two varieties, namely, operating lease
and financial lease. In the lease agreement stipulated above
the type is financial lease where the rent includes the entire
capital value of the goods. In operating lease however the rental
value does not cover the capital cost. It only includes charges
of the use. As a matter of fact, operating lease of movable
goods is analogous to the lease of valuable goods as defined in
section 105 of the Transfer of Property Act. In the operating
lease the lessee must return the goods subject to fair wear and
tear. But in financial lease the lessee has to be the owner at the
end of the period within which the payment is to be made. As
has been already pointed out a financial lease has a couple of
agreements between the three parties namely, the supplier, the
principal debtor or the lessee, and the financial institution which
is the creditor and the lessor. But in operating lease there are
only two parties i.e., the lessor and the lessee. A financial lease
therefore requires a detailed drafting of the agreement between
the parties to respond to all eventualities. In case of any doubt
the laws of bailment in India may not be providing adequate
legal protection to the lessor and the lessee. There are other
problems as well. It has been pointed out by Prof. P.M. Bakshi
(Member, Law Commission), in one of his articles that
agreements bind the immediate parties and their assignees and
heirs but not the whole world. In juristic language, a right in
personam created between the lessor and the lessee, will not be
adequate to protect the interest of the lessor who is more anxious
in defending his right in rem, as he is out of possession. This
particular problem may need legislative intervention.
Prof. Bakshi has also stipulated two practical and legal
difficulties that may arise even in operating lease. Firstly, the
instruments 'lease' may become embeded in the sale agreement
and therefore it will be impossible to get the possession back
after the lease period. Forceable entry to take back the possession
may become a serious problem of law and order. Secondly, the
contractual laws for recapture and seizure may be held by the
court as 'against public policy'. Some other questions may
also arise according to him in absence of any suitable provision
of law. Is the lessor bailee liable if the equipment causes loss
to some one by reason of any defect or danger due to wrong
operations ? Does the liability arise only against the actual
user of the equipment or can it be projected against the owner
as well ? In India the development of insurance law specially
in this area has been very slow. Among other intricate problems
it may be pointed out that large finance lease may involve several
parties as co owners and the current tax laws do not allow
depreciation to the limited owners.
6.2 RIGHTS & DUTIES OF THE LESSOR & THE
LESSEE
Rights of the Lessor
(a) In operating lease the lessor has the right to receive the
rent as stipulated in the contract whereas in financial lease
the lease charge contains both rent for use and the capital
cost.
6. LEASING AND HIRE PURCHASE
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(b) In operating lease the lessor is entitled to get back the goods
subject to reasonable wear and tear at the end of the lease
period. In financial lease this right is not there, because at
the end of the lease period the lessee becomes the owner.
(c) In case of failure to pay rent or lease charge the lease
agreement may provide the right to recapture and seizure
in both operating and financial lease. This right may be
extended by clear provision in the contract, a right of entry
to the premises of the lessee.
(d) The lessor has a right to reasonable expenses for
implementing his rights on the failure of the lessee to pay
the rent or the leasing charges.
Duties of the Lessor
(a) Lessor has a duty to give the lessee an undisturbed and
peaceful possession. If there is a defective title of the lessor
for which the lessee has to suffer, the lessor is liable to
compensate the lessee.
(b) Lessor is under a duty to disclose all particulars of the goods
leased. In a modern contract lease of equipment, the lessor
is liable to pass on all technological information and the
technique of use including possible environmental impact.
In the event of non fulfilment of this duty the lessor is liable
to compensate the lessee for all wrong application of the
instrument, environmental hazards and non application of
safety measures.
Rights of the Lessee
(a) Lessee has a right to free and fair enjoyment of the property
during the lease period.
(b) Lessee has all other rights of a bailee, which includes right
to mix the goods with his own property, right of application,
right to separate, use and application etc.
(c) In case of a financial lease the lessee becomes the owner of
the property after payment of the lease charges.
Duties of the Lessee
(a) Lessee has to pay rent and lease charges in time.
(b) On failure to pay in time, an interest as agreed upon has to
be paid.
(c) To return back the commodity at the end of the lease period.
6.3 HIRE PURCHASE AGREEMENT - NATURE &
MEANING
Hire purchase agreement is an agreement in which the hire
vendor agrees to sell to the hire purchaser some movable goods,
after the hire purchaser pays in full over a period of time through
some instalments at regular intervals or in lump sum at the end
of a stipulated time. During this intermittent period the hire
purchaser is put into the possession of the goods for use as if he
is a hirer or a lessee. According to section 4(3) of Sale of Goods
Act, 1930 "where the transfer of property of goods is to take
place at a future time or subject to some condition thereafter to
be fulfilled, the contract is called an agreement to sell. Thus
hire purchase entitles the hire purchaser only to the possession
of goods for use and the title to the goods passes only after the
full terms and conditions are satisfied. In modern economy
hire purchase agreement assumes a very important role. Many
of the new consumer products are sold by the vendors to middle
class consumers on their terms and conditions. Hire purchase
not being sale is not subject to sales tax until it becomes a sale.
The hire vendor remains a lessor and the hire purchaser a lessee
until the final payment is made.
Presently in India there is no law relating to hire purchase
agreements excepting the general Contract and Sale of Goods
Acts. In 1983 a Bill was passed which was never made into
force. An Amendment Bill was moved in Rajya Sabha in 1989
but nothing further is known about the fate of the Bill. As on
date there is no specific statute governing hire purchase
contracts. Issues which are not covered by the Indian Contract
Act and the Sale of Goods Acts, are treated as a grey area where
Indian courts generally depend upon the law of England.
Hire purchase agreement is a kind of bailment and as such the
rights, duties and obligations of the parties are determined either
by the parties through agreement or by the law of bailment.
6.4 DISTINCTION BETWEEN HIRE PURCHASE,
INSTALMENT PURCHASE AGREEMENT AND
LEASE
1. Hire purchase and instalment purchase
It has already been pointed out that hire purchase is only an
agreement to sell, whereas, instalment purchase is a sale.
Though in both the cases the principal amount and interest on
the unpaid balance is paid in instalments, in instalment purchase
the ownership of goods passes to the buyer immediately, but in
hire purchase the ownership in the goods is to pass on a future
date on fulfilment of all terms and conditions. Consequently
other incidental issues arise out of the legal position. As for
example, if there is any accidental loss of the goods in the
possession of hire purchaser, the loss accrues to the hire vendor,
therefore the hire vendor has to take up insurance against the
risk. But in case of instalment purchase the risk of accidental
loss falls upon the instalment purchaser because he is the owner
of the property, without having any regard to the question as to
whose possession loss occurred. In case of a hire purchase the
hire vendor remains the owner of the goods. So in the event of
hire purchaser failing to pay an instalment the hire vendor may
possess the goods because the hire purchaser does not have a
better title than a lessee on consent of the lessor. But if it is an
instalment purchase the vendor cannot take back the commodity.
His remedy lies in compensation in so far as money can do it.
2. Hire purchase and lease
It has already been pointed out that an operation lease is almost
a hire purchase. In the last few years leasing institutions have
had a rapid growth. The institutional and operational leasing
are slightly different from the conventional hire purchase
contracts on the ground that there are three parties in a lease,
whereas in hire purchase there are only two parties. A leasing
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315
firm purchases the instrument on paper and leases it out to the
user charging rent for the use, whereas in hire purchase the
vendor remains as a lessor and the purchaser as lessee until the
full payment is made. In an operational lease the lessee can
never claim the property in goods whereas hire purchase
agreement is to conclude naturally with the transfer of
ownership. Hire purchase agreement is analogous to financial
lease. In financial lease also the lessee after paying all lease
charges which include hire charges, charges against capital and
interest, becomes the owner of the property. Truely speaking,
institutional financial lease and hire purchase agreements are
institutionally different because in hire purchase the hire vendor
remains the creditor whereas in financial lease the vendor is
paid off by the leasing company and the leasing company
thereafter becomes the creditor to whom the lessee must pay
the entire sum of capital, interest and hire charges for the
equipment. Thus there are two contracts between three partners
in financial lease, i.e., a contract of sale between the financier
and the vendor and a contract of hire purchase between the
financier and the buyer (lessee),
6.5 RIGHTS & DUTIES OF HIRE PURCHASER &
HIRE VENDOR
A. Rights of hire purchaser
(a) A hire purchaser has the right of possession over the
property.
(b) In case he has to suffer due to a defective title and
possession derived from hire vendor he has a right to be
compensated.
(c) He has a 'right to use' the goods, unlike a bailee for service.
(d) He has a right to acquire ownership of the goods on
fulfilment of requisite terms & conditions.
B. Duties of a hire purchaser
(i) He has to pay the prescribed instalments in time, failing
which he has to pay the interest thereof.
(ii) In case of failure to pay he has to allow the hire-vendor to
take back the possession.
(iii) He has a duty to take reasonable care of the goods as an
ordinary prudent man would, if the goods were his own.
C. Rights of the hire vendor
(i) He has the right to receive the instalment payment as per
the agreement. In case the hire purchaser fails to pay any
instalment, the payment already made on whatever account
becomes hire charges.
(ii) He has all the rights of a bailor according to the Indian
Contract Act.
(iii) He has a right to enter into premises and seize the goods,
as per the terms of the contract, in case the hire purchaser
fails to make payment in due time.
D. Duties of a hire-vendor
(i) The hire vendor has to put the hire purchaser in lawful &
undisturbed possession of the goods, failing which he is liable
to compensate the hire purchaser.
(ii) He has all other duties of a bailor as per the law of bailment.
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7. CARRIER
SUB-TOPICS
7.1. Introduction
7.2. Overview of Law of Carriage
(a) by land
(b) by air
(c) by sea
7.1 INTRODUCTION
Law relating to carriage regulates the contract with carriers.
Unlike any other special contracts, contract with carriers has a
very special significance for two reasons: one, a group of carriers
are known as 'common carriers' making the contract not only
a domain of private law but also a domain of public law.
Secondly, law relating to carriers contract in India, statutorily
speaking, is older than the general law of contract. As for
example, the 'Carriers Act' governing all contracts with common
carriers was codified in 1865. Some other related laws dealing
with common carriers are 'Indian Railway Companies Act, 1854,
subsequently replaced by Act of 1890 & 'Indian Tramways Act,
1863'. 'Carriage by Sea' had to be codified separately in 1925
with a view to update the law in tune with Brussels conference,
1922. Subsequently the law had to be up-dated to incorporate
some of the international agreements in this regard. Similarly,
the complexities in law relating to carriage by air has compelled
the government to bring out a new Act on 'Carriage by Air' in
1972, in place of the old Act of 1934. The new Act internalizes
Warsaw Convention, 1929 and Hague Protocol, 1955. The
general framework of the Carriers Act of 1865 is applicable in
all cases specially to the common carrier's in order to limit their
liability for loss or damage to property delivered to them to be
carried. It also empowers the common carriers to declare the
extent of their liability for criminal or negligent acts of their
servants. A common carrier has been defined as ,'carrier
managed by person other than the government, engaged in the
business of transporting for hire, property from place to place
by land and inland navigation'. To the extent of limiting liability
these contracts fall under special category.
7.2 (A) LAW OF CARRIAGE BY LAND
Contract of carriage is essentially a contract of bailment. The
objective of Carriers Act stipulates that it empowers a common
carrier to limit and define its liability for the negligent or criminal
acts of servants. As such, the Carriers Act makes certain
statutory limitations on liability of the common carrier.
As for example, sec. 3 insulates a common carrier from liability
for loss of certain goods if the value of the goods is more than
Rs.100, unless the person delivering the property declares the
value and description of the goods. But Indian Railways does
not come under the definition of common carriers, therefore,
the limitation of its liability cannot be based on the Carriers
Act. This is to be done within the parameters of the Indian
Railways Act, 1890. As for example, under sec. 72 of the Act,
the sender is bound to give such particulars as may be prescribed
by the railway administration, in respect of animals and other
enlisted goods under sec. 6 delivered for carriage. Sec.73 limits
the general responsibility of the railway administration as carrier
of animals & goods.
7.2 (B) LAW OF CARRIAGE BY AIR
The 'Carriage by Air Act, 1972' gives effect to the convention
for the unification of certain rules relating to international
carriage by air, signed by the contracting parties at Warsaw in
1929 as amended by the Hague protocol of 1955. According
to Sec.3 of the Act, the provision of the convention relating to
rights and liabilities of the carriers, passengers, consignees, and
other persons being specified in the first schedule have become
law in force in India. The Act specifies the liability on various
accounts. The first schedule contained in the Act specifies the
rules regarding documents of carriage, liability of the carrier
and general provisions. The second schedule, under sec. 4
provides the amended convention relating to the rights and
liabilities of the carriers, passengers, consignors, consignees
and others. So, the law relating to carriage by air is now
regulated completely by the two schedules specified under Ss.
3 & 4 of the Act.
7.2 (C) CARRIAGE BY SEA
The 'Carriage by Sea Act, 1925' has internalized the convention
adopted in Brussel in 1922 and the Rules adopted at the same
place in 1923, specially unifying international rules on bill of
lading. The Act also defines the responsibility, liabilities, rights
and immunities attaching to carriers under bill of lading. As
for example, under Sec.3 there is absolute warranty of sea
worthiness not to be implied in contracts to which the rules
apply. Sec.4 requires every bill of lading or similar document
of title to contain an express statement, that, the rules as laid
down in the schedule shall apply. The schedule contains detailed
rules relating to bill of lading on risks, responsibilities and
liabilties of the carrier, rights and immunities, surrender of rights
and immunities and corresponding increase of responsibility
and liabilities, special conditions and limitations of liabilities.
The rules contain 10 articles each having one or more clauses.
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Of Indemnity and Guarantee
124. "Contract of indemnity" defined -- A contract by which
one party promises to save the other from loss caused to him by
the conduct of the promisor himself, or by the conduct of any
other person, is called contract of indemnity".
125. Rights of indemnity-holder when sued -- The promisee
in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor".
(1) all damages which he may be compelled to pay in any suit
in respect of any matter to which the promise to indemnify
applies;
(2) all costs which he may be compelled to pay in any such
suit if, in bringing or defending it, he did not contravene
the order of the promisor, and acted as it would have been
prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorized him to bring or
defend the suit;
(3) all sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not
contrary to the order of the promisor; and was one which it
would have been prudent for the promisee to make in the
absence of any contract of indemnity, or if the promisor
authorized him to compromise the suit.
126. "Contract of guarantee", "surety", "principal debtor"
and "creditor" -- A contract of guarantee" is a contract to
perform the promise, or discharge the liability of a third person
in case of his default. The person who gives the guarantee is
called the "surety"; the person in respect of whose default the
guarantee is given is called the "principal debtor"; and the person
to whom the guarantee is given is called the creditor". A
guarantee may be either oral or written.
127. "Consideration for guarantee" -- Any thing done, or
any promise made, for the benefit of the principal debtor, may
be a sufficient consideration to the surety for giving the
guarantee.
128. Surety's liability -- The liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise
provided by the contract.
129. Continuing guarantee -- a guarantee which extends to a
series of transactions is called a "continuing guarantee".
130. Revocation of continuing guarantee -- A continuing
guarantee may at any time be revoked by the surety, as to further
transactions, by notice to the creditor.
131. Revocation of continuing guarantee by surety's death
-- The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions.
132. Liability of two persons, primarily liable, not affected
by arrangement between them that one shall be surety in
other's default -- Where two persons contract with a third
person to undertake a certain liability and also contract with
each other that one of them shall be liable only on the default of
the other, the third person not being a party to such contract,
the liability of each of such two persons to the third person
under the first contract is not affected by existence of the second
contract, although such third person may have been aware of
its existence.
133. Discharge of surety by variance in terms of contract -
- Any variance, made without the surety's consent, in the terms
of the contract between the principal debtor and the creditor,
discharges the surety as to transactions subsequent to the
variance.
134. Discharge of surety by release or discharge of principal
debtor -- The surety is discharged by any contract between
the creditor and the principal debtor, by which the principal
debtor is released, or by any act or omission of the creditor, the
legal consequence of which is the discharge of the principal
debtor.
135. Discharge of surety when creditor compounds with,
gives time to or agrees not to sue principal debtor -- A
contract between the creditor and the principal debtor, by which
the creditor makes a composition with, or promises to give time
to, or not sue the principal debtor, discharges the surety, unless
the surety assents to such contract.
136. Surety not discharged when agreement made with
third person to give time to principal debtor -- Where a
contract to give time to the principal debtor is made by the
creditor with third person, and not with the principal debtor,
the surety is not discharged.
137. Creditor's forbearance to sue does not discharge surety
-- Mere forbearance on the part of the creditor to sue the
principal debtor or to enforce any other remedy against him
does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.
138. Release of one co-surety does not discharge others --
Where there are co-sureties, a release by the creditor of one of
them does not discharge the others; neither does it free the surety
so released from his responsibility to the other sureties.
139. Discharge of surety by creditor's act or omission
impairing surety's eventual remedy -- If the creditor does
any act which is inconsistent with the right of the surety, or
omits to do any act which his duty to the surety requires him to
do, and the eventual remedy of the surety himself against the
principal debtor is thereby impaired the surety is discharged.
140. Rights of surety on payment of performance -- Where
a guaranteed debt has become due, or default of the principal
debtor to perform a guaranteed duty has taken place, the surety,
upon payment or performance of all that he is liable for, is
invested with all the rights which the creditor had against the
principal debtor.
8. RELEVANT PROVISIONS OF THE ACT
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141. Surety's right to benefit of creditor's securities -- A
surety is entitled to the benefit of every security which the
creditor has against the principal debtor at the time when the
contract of suretyship is entered into, whether the surety knows
of the existence of such security or not; and, if the creditor
loses, or, without the consent of the surety, parts, with such
security, the surety is discharged to the extent of the value of
the security.
142. Guarantee obtained by misrepresentation, invalid --
Any guarantee which has been obtained by means of
misrepresentation made by the creditor, or with his knowledge
and assent, concerning a material part of the transaction, is
invalid.
143. Guarantee obtained by concealment, invalid -- Any
guarantee which the creditor has obtained by means of keeping
silence as to material circumstances, is invalid.
144. Guarantee on contract that creditor shall not act on it
until co-surety joins -- Where a person gives a guarantee
upon a contract that creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if
that other person does not join.
145. Implied promise to indemnify surety -- In every contract
of guarantee there is an implied promise by the principal debtor
to indemnify the surety; and the surety is entitled to recover
from the principal debtor whatever sum he has rightfully paid
under the guarantee, but no sums which he has paid wrongfully.
146. Co-sureties liable to contribute equally -- Where two
or more persons are co-sureties for the same debt or duty, either
jointly or severally, and whether under the same or different
contracts, and whether with or without the knowledge of each
other, the co-sureties, in the absence of any contract to the
contrary, are liable, as between themselves, to pay each an equal
share of the whole debt, or of that part of it which remains
unpaid by the principal debtor.
147. Liability of co-sureties bound in different sums -- Co-
sureties who are bound in different sums are liable to pay equally
as far as the limits of their respective obligations permit.
Of Bailment
148. "Bailment", Bailor, and Bailee defined -- A "bailment"
is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according
to be the directions of the person delivering them. The person
delivering the goods is called the" bailor". The person to whom
they are delivered is called the "bailee".
149. Delivery to bailee how made -- The delivery to the
bailee may be made by doing anything which has the effect of
putting the goods in the possession of the intended baliee or
any person authorized to hold them on his behalf.
150. Bailor's duty to disclose faults in goods bailed -- The
bailor is bound to disclose to the bailee faults in the goods bailed,
of which the bailor is aware, and which materially interfere
with the use of them, or expose the bailee to extraordinary risks;
and if he does not make such disclosure, he is responsible for
damage arising to the bailee directly from such faults.
151. Care to be taken by the bailee -- In all cases of bailment
the bailee is bound to take as much care of the goods bailed to
him as a man of ordinary prudence would, under similar
circumstances take, of his own goods of the same bulk, quality
and value as the goods bailed.
152. Bailee when not liable for loss, etc., of thing bailed --
The bailee, in the absence of any special contract, is not
responsible for the loss, destruction or deterioration of the thing
bailed, if he has taken the amount of care of it described in
Section 151.
153. Termination of bailment by bailee's act inconsistent
with conditions -- A contract of bailment is avoidable at the
option of the bailor, if the bailee does any act with regard to the
goods bailed, inconsistent with the conditions of the bailment.
154. Liability of bailee making unauthorized use of goods
bailed -- If the bailee makes any use of the goods bailed which
is not according to the conditions of the bailment, he is liable to
make compensation to the bailor for any damage arising to the
goods from or during such use of them.
155. Effect of mixture, with bailor's consent, of his goods
with bailee's -- If the bailee, with the consent of the bailor,
mixes the goods of the bailor with his own goods, the bailor
and the bailee shall have an interest, in proportion to their
respective shares, in the mixture thus produced.
156. Effect of mixture, without bailor's consent when the
goods can be separated -- If the bailee, without the consent
of the bailor, mixes the goods of the bailor with his own goods,
and the goods can be separated or divided, the property in the
goods remains in the parties respectively; but the bailee is bound
to bear the expense of separation or division, and any damage
arising from the mixture.
157. Effect of mixture, without bailor's consent, when the
goods cannot be separated -- If the bailee, without the consent
of the bailor mixes the goods of the bailor with his own goods,
in such a manner that it is impossible to separate the goods
bailee from the other goods, and deliver them back, the bailor
is entitled to be compensated by the bailee for the loss of goods.
158. Repayment by bailor, of necessary expenses -- Where,
by the conditions of the bailment, the goods are to be kept or to
be carried, or to have work done upon them by the bailee for
the bailor, and the bailee is to receive no remuneration, the bailor
shall repay to the bailee the necessary expenses incurred by
him for the purpose of the bailment.
159. Restoration of goods lent gratuitously -- The lender
of a thing for use may at any time require its return, if the loan
was gratuitous, even though he lent it for a specified time or
purpose. But, if, on the faith of such loan made for a specified
time or purpose, the borrower has acted in such a manner that
the return of the thing lent before the time agree upon would
cause him loss exceeding the benefit actually derived by him
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from the loan, the lender must, be compels the return, indemnify
the borrower for the amount in which the loss so occasioned
exceeds the benefit so derived.
160. Return of goods bailed, on expiration of time or
accomplishment of purpose -- It is the duty of the bailee to
return, or deliver according to the bailor's directions, the goods
bailed, without demand, as soon as for which they were bailed
has expired, or the purpose for which they were bailed has been
accomplished.
161. Bailee's responsibility when goods are not duly
returned -- If, by the default of the bailee, the goods are not
returned, delivered or tendered at the proper time, he is
responsible to the bailor for any loss, destruction or deterioration
of the goods from that time.
162. Termination of gratuitous bailment by death -- A
gratuitous bailment is terminated by the death of either of the
bailor or of the bailee.
163. Bailor entitled to increase or profit from goods bailed
-- In the absence of any contract to the contrary, the bailee is
bound to deliver to the bailor, or according to his directions,
any increase or profit which may have accrued from the goods
bailed.
164. Bailor's responsibility to bailee -- The bailor is
responsible to the bailee for any loss which the bailee may
sustain by reason that the bailor was not entitled to make the
bailment, or to receive back the goods, or to give direction
respecting them.
165. Bailment by several joint owners -- If several joint
owners of goods bail them the bailee may deliver them back to,
or according to the directions of one joint owner without the
consent of all, in the absence of any agreement of the contrary.
166. Bailee not responsible on redelivery to bailor without
title -- If the bailor has no title to the goods, and the bailee, in
good faith, delivers them back to, or according to the directions
of the bailor, the bailee is not responsible to the owner in respect
of such delivery.
167. Right of third person claiming goods bailed -- If a
person, other than the bailor, claims goods bailed, he may apply
to the Court to stop the delivery of the goods to the bailor, and
to decide the title to the goods.
168. Right of finder of goods: may sue for specific reward
offered -- The finder of goods has no right to sue the owner
for compensation for trouble and expense voluntarily incurred
by him to preserve the goods and to find out the owner. but he
may retain the goods against the owner until he receives such
compensation; and where the owner has offered a specific
reward for the return of goods lost, the finder may sue for such
reward, and may retain the goods until he receives it.
169. When finder of thing commonly of sale may sell it --
When a thing which is commonly the subject of sale is lost, if
the owner cannot with reasonable diligence be found, or if he
refuses, upon demand, to pay the lawful charges of the finder,
the finder may sell it "
(1) When the thing is in danger of perishing or of losing the
greater part of its value, or
(2) When the lawful charges of the finder, in respect of the
thing found, amount to two-thirds of its value.
170. Bailee's particular lien -- Where the bailee has, in
accordance with the purpose of the bailment, rendered any
service involving the exercise of labour or skill in respect of
the goods bailed, he has, in the absence of a contract to the
contrary, a right to retain such goods until he receives due
remuneration for the services he has rendered is respect of them.
Of pledges
172. Pledge, Pawnor, and Pawnee, defined -- The bailment
of goods as security for payment of a debt or performance of a
promise is called pledge". The bailor is in this case called the
pawnor, the bailee is called the pawnee".
173. Pawnee's right of retainer -- The pawnee may retain
the goods pledged, not only for a payment of the debt or the
performance of the promise, but for the interest of the debt, and
all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledge.
174. Pawnee not to retain for debt or promise other than
that for which goods pledged: Presumption in case of
subsequent advances -- The pawnee shall not, in the absence
of a contract to that effect, retain the goods pledged for any
debt or promise other than the debt or promise for which they
are pledged; but such contract, in the absence of any thing to
the contrary, shall be presumed in regard to subsequent advances
made by the pawnee.
175. Pawnee's right as to extraordinary expenses incurred
-- The pawnee is entitled to receive from the pawner
extraordinary expenses incurred by him for the preservation of
the goods pledged.
176. Pawnee's right where pawnor makes default -- If the
pawnor makes default in payment of the debt, or performance,
at the stipulated time, of the promise, in respect of which the
goods were pledged, the pawnee may bring a suit against the
pawnor upon the debt or promise, and retain goods pledged as
a collateral security; or he may sell the thing pledged, on giving
the pawnor reasonable notice of the sale.
If the proceeds of such sale are less that the amount due in
respect of the debt or promise, the pawnor is still liable to pay
the balance. If the proceeds of the sale are greater than the
amount so due, the pawnee shall pay over the surplus to the
pawnor.
177. Defaulting pawnor's right to redeem -- If time is
stipulated for the payment of the debt, or performance of the
promise, for which the pledge is made, and the pawnor makes
default in payment of the debt or performance of the promise at
the stipulated time, he may redeed the goods pledges at any
subsequent time before the actual sale of them, but he must, in
that case, pay, in addition, and expenses which have arisen from
his default.
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178. Pledge by mercantile agent -- Where a mercantile agent
is with the consent of the owner, in possession of goods or the
documents of title to goods, any pledge made by him, when
acting in the ordinary course of business of a mercantile agent,
shall be as valid as if he were expressly authorised by the owner
of the goods to make the same. Provided that the pawnee acts
in good faith and has not at the time of the pledge notice that
the pawnor has authority to pledge.
178-A. Pledge by person in possession under voidable
contract -- When the pawner has obtained possession of the
goods pledged by him under a contract voidable under section
19 or section 19-A, but the contract has not been rescinded at
the time of the pledge, the pawnee acquires a good title to the
goods, provided he acts in good faith and without notice of the
pawnor's defect of title.)
179. Pledge where pawnor has only a limited interest --
Where a person pledges goods in which he has only a limited
interest, the pledge is valid to the extent of that interest.
Suits by bailees or bailors against wrong-doers
180. Suit by bailor or bailee against wrong-doer -- If a
third person wrongfully deprives the bailee of the use or
possession of the goods bailed, or does them any injury, the
bailee is entitled to use such remedies as the owner might have
used in the like case if no bailment had been made; and either
the bailor or the bailee may bring a suit against a third person
for such deprivation or injury.
181. Apportionment of relief or compensation obtained by
such suits - Whatever is obtained by way of relief of
compensation in any such suit shall, as between the bailor and
the bailee, be dealt with according to their respective interests.
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9. CASE LAW
1 Gajanan Moreshwar v. Moreshwar Madan [AIR 1942
Bom 302]
The plaintiff was a lease holder of a plot of land under the
Bombay municipality. He transferred the lease to the defendant.
The Municipality gave its approval but did not execute a separate
lease in favour of the defendant. So, the lease continued to
stand in the name of plaintiff. The defendant borrowed Rs.5000/
- from A. The lease hold interest was given as security to A.
Since the lease hold interest stood in the name of plaintiff, at
defendant's request plaintiff executed the mortgage though it
was the defendant that was interested and was really liable to
pay. The mortgage contained a personal covenant under which
the plaintiff could be made liable. The defendant did not pay
interest on the mortgage loan. Then the plaintiff brought the
suit for: (i) a declaration that he was entitled to indemnity from
defendant, (ii) an order that defendant should procure the
plaintiff's release from the mortgage debt. The defendant
contended that the suit was premature as the plaintiff had not
yet suffered any loss. The points in issue were (1) can the
plaintiff sue on the indemnity before he has suffered any loss?
(2) is plaintiff entitled to the relief claimed under sections 124
and 125 of the Contract Act?
It was held that the defendant had not denied that he should
indemnify the plaintiff. So there was no need for a declaration.
Sections 124 and 125 are not exhaustive. They deal only with
one kind of indemnity, that is indemnity which arises when
loss is occasioned by the conduct of indemnifier or of a third
party. They do not cover indemnity arising by plaintiff doing
something at defendant's request (which is the case here) or
from accident. As to remedies also section 125 is not exhaustive.
The indemnified has his remedies when he suffers loss. But in
equity in England he can sue when his liability has become
absolute and need not wait until he has suffered loss. This
remedy is available in India also. So the plaintiff will be granted
a decree that the defendant should procure his release or pay
into court the mortgage amount.
2 Amritlal Goverdhan Lal v. State Bank of Travancore [AIR
1968 SC 1432].
The respondent bank opened a cash credit account for D which
was guaranteed by the appellant. Goods pledged by D were
found on checking by the bank to be in deficit to the extent of
Rs.40,000/- and time was given to him to make up the deficit.
The appellant contended that he is thereby discharged from
liability. Point at issue was whether under such circumstances
the appellant is discharged from his liability.
It was held that extension of time for payment given to the
principal debtor, discharges the surety (S.135). But giving time
to make up the quantity of goods found to be short when
weighed cannot be considered to be a promise to give time for
payment. Shortage of goods to the extent of Rs. 40000/- gives
rise to rights under S.141. The bank has lost the security to the
extent of this shortage. The term security" in this context means
any kind of right which the creditor had against the property at
the date of the contract. Since the bank has lost goods to the
extent of Rs.40,000/- the liability of the surety (appellant) is
reduced by Rs.40,000/-. For the balance only he is labile.
3 E. H. Parakh v. King Emperor [AIR 1926 Oudh 202]
The applicant E. H. Parakh was the proprietor of a firm of
Motor engineers and coach builders at Lucknow. The firm was
entrusted with the possession of an American car "Moon" for
sale, by Raja Amarpal Singh, a talaqdar of the Partabgarh
district. While the car was still with the applicant's firm and
had not yet been sold, the management of the Raja's estate was
taken over by the Court of Wards. The manager of the Court of
Wards directed the applicant's firm to handover the car
belonging to Raja to Court of Wards. The applicant's firm did
not deliver the car in an attempt to exercise the right of general
lien over it, in respect of its claims against the Raja. The Deputy
Commissioner Partabgarh, thereupon issued a notice to the
applicant to show cause as to why he should not be prosecuted
for refusal to hand over the car in obedience to the orders of the
lawful authority. Applicant's firm challenged the order and
claimed the right of general lien over it.
It was held that the applicant's firm had a right of general lien
over this car, and its refusal to deliver the car in exercise of this
right could not make him liable for the alleged offence. It was
observed.
"there can be no doubt as to the fact that his (applicant's)
plea that under a factor's lien he is entitled to retain the car
until the general balance of account is settled is a plea which
cannot be ignored. In respect of criminal charges which
the Deputy Commissioner proposes to make against him it
is sufficient to say that the applicant cannot possibly be
considered to have offered any resistance to the taking of
any property by the lawful authority of any public servant,
nor can he be considered to have voluntarily obstructed a
public servant in the discharge of his public functions".
4 Union of India v. United India Fire, etc. Insurance Co
Ltd [AIR 1981 Mad 162]
Cotton bales belonging to the consignee company were
unloaded by the consignee company itself and kept outside the
railway goods shed and covered with tarpaulin. The consignee
company did not have sufficient warehousing facilities, and its
many goods including the cotton bales were lying in and outside
the goods shed. The company had provided watchman and the
railway protection staff was also there to take care of the goods.
The company did not take delivery of the goods inspite of
repeated requests to do so, and 13 days after the unloading of
the said bales, the cotton bales caught fire for unknown reasons.
The railway staff took all possible steps to extinguish the fire.
Consignee company filed a suit for damages due to the
negligence on the part of the railway authorities.
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The main issue for decision was whether under the
circumstances of the case railway authorities could be held liable
for the loss suffered by the consignee. It was held that the
railway authorities could not be held liable for negligence under
these circumstances.
5 Bank of Bihar v. Damoda Prasad [AIR 1969 SC 297]
The plaintiff bank lent money to Damodar Prasad, on the
guarantee of Paras Nath Sinha. Inspite of demands by the
bank the loan was neither repaid by Damodar Prasad (principal
debtor), nor by Paras Nath Sinha (the surety). The bank then
filed a suit against both the principal debtor and the surety. A
decree was passed in favour of the bank but with the condition
that the plaintiff bank shall be at liberty to enforce its dues
against the surety only after having exhausted its remedies
against the principal debtor. The plaintiff bank challenged the
validity of the condition in the decree that the bank should
enforce the decree against the surety only after exhausting all
remedies against the principal debtor.
The main issue was whether the condition imposed by the court
was valid? Supreme Court allowed the plaintiff's appeal and
the condition laid down in the decree was set aside. Court
observed:
"The demand for payment of the liability of the principal
debtor was the only condition for the enforcement of the
bond. That condition was fulfilled. Neither the principal
debtor nor the surety discharged the admitted liability of
the principal debtor inspite of demands. Under Section
128 of the Indian Contract Act, save as provided in the
Contract, the liability of the surety is co-extensive with that
of the principal debtor. The surety thus became liable to
pay the amount. His liability was immediate. It was not
deferred until the creditor exhausted his remedies against
the principal debtor."
6 Morvi Mercantile Bank v. Union of India [AIR 1965 SC
1954].
A business firm consigned certain goods through Railway for
being carried from Bombay to Okhala near Delhi, and to be
delivered to 'self'. The firm borrowed a sum of Rs.20,000/-
from the applicant bank and executed a promissory note in
favour of the bank and also endorsed the railway receipts
representing the goods, to constitute the railway receipt as a
security for the loan. The goods were lost in the transit. The
plaintiff bank brought an action against the railway as the
pledgee of the goods, which were lost during transit. The point
at issue before the Supreme Court was whether by the transfer
of the railway receipt the possession of the goods had been
transferred to the bank.
The respondent contended that the endorsement of the railway
receipt does not amount to pledge of the goods, and it at best
means the pledge of the railway receipt and not the goods.
It was held by a majority decision that according to the
prevailing Indian Law railway receipt is a document of title
and, therefore, delivery of railway receipt means delivery of
goods represented by the railway receipt. The transaction was
held to be a valid pledge and as such the bank was held entitled
to a claim against the railway for the value of the loan given
against the security of the railway receipt.
7. Ram Gulam and another v. Government of U.P. [AIR
1950 All. 206]
Order:- The suit giving rise to this application in revision was
instituted by the plaintiffs/applicants against the Government
of United Province for the recovery of certain ornaments, and
in the alternative for the recovery of Rs. 599.4 as their price.
These ornaments were stolen from the house of the plaintiffs.
They were recovered from another house, on a search made by
the police and seized as stolen property, in exercise of powers
conferred in that behalf by the Cr.P.C. They were produced as
exhibits at the trial of those, who were prosecuted in connection
with the theft. They were accordingly kept in the collectorate
Malkhana, from where they were stolen, and were untraceable.
The plaintiffs applied unsuccessfully to the Magistrate for an
order for their restoration to them and then instituted the present
suit, which was dismissed on the finding that the Government
was not liable to compensate the plaintiffs.
It appeared that the claim for the return of the ornaments was
not pressed for want of any cause of action, disclosed in the
plaint. These allegations did not disclose any cause of action
for the return of the ornaments. There was no averment of any
wrongful detention, but on the contrary there was the suggestion
that the ornaments were not in the possession of the defendant.
Indeed, it was an admitted fact during the trial that the ornaments
were stolen from the Malkhana and untraceable. The plaintiffs,
therefore, pressed the alternative relief only, for the recovery
of their price on the ground that the ornaments were lost on
account of the negligence of the Govt. servants, and the
Government was hence liable.
The decree of the court below had been assailed on the ground
that the position of the Government was that of a bailee and it
was liable to indemnify the plaintiffs, if the ornaments were
lost on account of the negligence of its servants.
This ground was held to be manifestly untenable and not
deserving any serious consideration, for the obligation of a
bailee is contractual obligation and sprang only from the contract
of bailment. It cannot arise independently of a contract. In this
case, the ornaments were not made over to the Government
under any contract whatsoever, in fact the ornaments were not
at all handed over by the plaintiffs to the Government. The
Government therefore, never occupied the position of a bailee
and is not liable as such to indemnify the plaintiffs.
8. Vasireddi Seetharamaiah v. Srirama Motor finance
Corporation Kakinada [AIR 1977 A.P. 164]
The plaintiff who had advanced certain loan to the defendant
for the purchase of a lorry got executed a promissory note and
a hire purchase agreement from defendant as the principal debtor
and defendant 2 as the guarantor. The lorry was involved in an
accident when nine instalments were paid and there was default
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in payment. The suit was filed for recovery of balance loan
against the principal debtor and the surety. The question before
the Court was whether the conduct of the plaintiff in not seizing
and selling the lorry on default by defendant 2 discharged the
surety from liability. Held that the mere fact that the plaintiff
did not file the suit immediately or seized the lorry, did not
absolve 2nd defendant from his liability as a surety.
9. Yeung v. Honkong and Shanghai Bank [(1980)2 All.E.R.
599]
Where a Bank acted in good faith at the request of the appellant-
stock brokers to transfer shares to one 'W' and the signatures of
the transferor were forged, which fact was not known to the
Stock-Broker, the Privy Council held that the stock-broker is
liable to indemnify the Bank on the principle that if a person
acts at the request of another which affects the rights of a third
person, yet if such act is not apparently illegal in itself but is
done honestly and bonafide in compliance with such request,
then he shall be bound to be indemnified against the
consequences of such act by the person making such request.
In the present case, the request by the stock-broker also included
a promise to indemnify the bank, if by acting on the request, it
caused actionable injury or damage to a third party. The promise
was acted by the bank acting on the request and became a
contractual indemnity.
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10 PROBLEMS
1. X a customer approached a BPL agent to buy a washing
machine on instalments. The agent agreed to the proposal
on the term that 25% of the value must be paid down and
the balance alongwith interest was to be deducted from the
monthly salary and paid to the agent's bank account. X's
employer also agreed to this term. Accordingly, X paid
Rs.6000/-, and agreed to pay Rs.2000/- pm as capital cost
and interest deductible from salary. Both the parties agreed
to take the delivery of the machine after 15 days. On the
13th day, the agents shop was set afire by a mob. The
shop including the merchandise were insured against all
types of risks. Insurance company refused to pay for the
washing machine. Decide.
2. X lends Y Rs.10,000/- at 6% interest per annum on a
promisory note. Z guarantees repayment of the loan. After
Y becomes embarrassed, X without the knowledge of Z
obtains a mortgage deed from Y by which Y agrees to pay
the sum on demand at 9% interest per annum. On Ys
default X files a suit against Y and Z. Discuss the liability
of Z.
3. A consigned goods worth Rs.40,000/- from Bombay to
Calcutta by rail. He pledged the railway receipt to the Bank
and borrowed Rs.20,000. The goods were lost in transit.
The plaintiff sued the railway i.e., government of India for
recovery of Rs.40,000/-. Discuss: (1) Whether pledge of
the railway receipt can be treated as pledge of goods. (2)
If so can the pledgee sue for the value of the goods
(Rs.40,000) or only for the amount advanced by him
(20,000)?
4. A bank advanced money to B on the security of sugar bags.
The sugar bags were in B's godown, which was locked and
the key was surrendered to the bank. C, the government
borke open the lock and seized 5000 maunds of sugar under
seizure order of the Rationing authority. The sale proceeds
of sugar was adjusted for recovery of arrears of Cane Cess
due from B to the Cane commissioner. The bank claims
the amount from the government. Discuss the rights and
duties of bank, government and the cane commissioner with
the support of case law, if any.
5. A gave a piece of cloth to B, a tailor to be stiched. B retained
the cloth for a period longer than was necessary and
neglected to return the suit even on A's persistent demand.
Subsequently a fire broke out in B's shop and the cloth was
destroyed. Is B liable for the loss? Suggest your answer
on the basis of statutory & case law.
6. Pesticides India wanted to purchase some goods from a
chemical corporation, and they gave some earnest money
and also bank guarantee by the State Bank of Jaipur. On
the supply of goods by the corporation, Pesticides India
was not satisfied with the performance and according to
them the supply had been wrongly made on "ex-godown"
basis instead of highsea" basis. The corporation demanded
the amount of the bank guarantee from the bank but the
Pesticides India sought to reastrain the bank from making
the payment. The bank had undertaken to pay on first
demand without protest or demur and without reference to
" Pesticides, and notwithstanding existence of any dispute
whatsoever" between the parties. Under such situation can
Pesticides India prevent the bank from honouring its
promise to pay? Discuss bank's dury.
7. The credit limit of the debtor which had been fixed at
Rs.1,00,000 was first reduced to Rs.50,000 and then again
raised to Rs. 1,00,000 without consulting the surety. This
was done by oral instruction to the cashier only, (and not
by altering any document). Is it alteration under the contract
Act which discharges the surety thereby? Discuss the law
on the subject briefly.
8. A, pledged some packages of tobacco to the Bank. The
packages were lying in A's godown. The godown was
locked and the key of the godown was given to the bank.
A failed to clear some income tax dues and the I.T.O ordered
the attachment of those packages of tobacco. The goods
were attached by the Collector and they were kept in the
same godown, the godown was locked and the key was
handed over to the Police. There were heavy rains, roof of
the godown leaked and the goods inside got damaged.
Discuss the liability of the government.
9. A wooden shop was hired under a written agreement that
the shop will be returned in the same condition, and the
hirer will be liable for any loss or damage to the shop. The
shop is burnt by the mob during the communal riots in the
City. Discuss the liability of the hirer.
10. A's porperty had been stolen. The same recovered by the
police and was kept in the police malkhana. From there it
was again stolen and could not be traced. A brought an
action to revocer the value of the property. Discuss the
liability of the State.
[Note: Specify your name, I.D. No. and address while sending answer papers]
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11 SUPPLEMENTARY READINGS
1. Avtar Singh, (1994), Law of Contract: Eastern Book Co., Lucknow.
2. Atiyah, P.S. & Others (Editors), (1983), Chitty on Contracts: Sweet & Maxwell, London.
3. Bangia, R. K. (1994), Indian Contract Act: Allahabad Law Agency, Allahabad.
4. Cheshire and Fifoot, (1986), Law of Contract: Butterworths, London.
5. Cheshire and Fifoot, (1977), Cases and Materials on Contract: Butterworths, London.
6. Joga Rao, S.V., (1991), Case book on Special Contracts: NLSIU Publication, Bangalore.
7. Pollock & Mulla, (1986), Indian Contract & Specific Relief Acts: N.M. Tripathi Private Ltd., Bombay.
8. Venkataraman, S., (1987), Iyer's law of contracts: Asia Law House, Hydearabad.
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DIGITAL CONTRACT
Master in Business Laws
Law of Contracts
Course No: I
Module No: IX
Distance Education Department
National Law School of India University
(Sponsored by the Bar Council of India and Established
by Karnataka Act 22 of 1986)
Nagarbhavi, Bangalore - 560 072
Phone: 3211010 Fax: 3217858
E-mail: mbl@nls.ac.in
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327
Materials Prepared By :
1. Prof. M.K. Nagaraja MA, LL.D, MBL.,
Indian Police Service, Bangalore
National Law School of India University
Published By
Distance Education Department
National Law School of India University,
Post Bag No: 7201
Nagarbhavi, Bangalore, 560 072.
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Digital Contracts
TOPICS
1. Formulation of Digital Contracts ............................................................ 329
2. Problems/Questions....................................................................................... 346
3. Case Laws......................................................................................................... 347
4. Bibliography.................................................................................................... 349
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INTRODUCTION:
A legally binding agreement between two or more persons by
which rights are acquired by one or more to acts or forbearance
on the part of the other or others.
-Sir William Anson.
Before analyzing the formulation of digital or e-contracts, it is
incumbent on every one of us to understand how exactly a
contract is formulated in the legal perspective. The juristic
concept of a contract comprises of two components, such as
vinculum juris (obligation) and consensus ad idem (agreement).
The former relates to the doing or abstaining from doing a
particular act, while the latter denotes meeting of identical minds
for mutual communication of their intentions. The obligations
must have a source in agreements (Sir John Salmond). One of
the two categories of moveable property, namely; chose-in-
action referring to Right in Personam is enforceable through
courts. For instance; shares, cheques, insurance policies and
debentures. The chose-in-possession referring to Right in
Rem is enforceable by use of force as a right to property. For
instance: right of private defence. An agreement fulfilling all
the requisites becomes a valid contract. Section-2 (h) of the
Indian Contract Act, 1872 defines a contract as an agreement
enforceable by law. An agreement being the most significant
component of a contract, it denotes every promise or every set
of promises, forming consideration for each other [Section-2
(e)]. The consideration denotes some right, interest, profit or
benefit accruing to one party, or some forbearance, detriment,
loss or responsibility, given, suffered or undertaken by the other
[Currie Vs Misa (1875) L.R. 10 Ex. 162] is another criterion that
determines the terms of the contract. Consideration is defined
as- When, at the desire of the promisor, the promissee or any
other person has done or abstained from doing, or does or
abstains from doing or promises to do or to abstain from doing
something, such act or abstinence or promise is called a
consideration to promise[Section-2 (d)]. Consideration means
one party agreeing to give something in lieu of something else,
except the social obligations that are excluded from its purview.
If goods are subject matter, price is the valuable consideration.
A promise is defined as 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
[Section-2 (b)]. It is evident that the promisor is a person making
the proposal, while the promissee is a person accepting the
proposal. A proposal is defined as When one person signifies
to another his willingness to do or to abstain from doing anything
with a view to obtaining the assent of that another to such act
or abstinence is said to make a proposal [Section-2(a)].
Whereas, an agreement having no legal effect is a void contract
and an agreement enforceable by law at the option of parties to
the contract is voidable contract. Illegal, immoral and agreements
contrary to the public policy are not sustainable under law. An
offer, invitation to offer (chaffer), tenders and quotations must
be drawn a clear distinction in every agreement. An
FORMULATION OF DIGITAL CONTRACTS
advertisement is an offer in certain cases, but need not always
be a mere invitation to offer. A tender is in the nature of a
continuing offer, but not necessarily an offer to the entire public.
Every offer must be communicated to the offeree, which must
be accepted (Lalman Vs Gouri Dutt, 11 A.L.J. 459). An offer
must contain definite terms, while acceptance must be absolute.
It is pertinent to observe that all agreements are contracts if
they are made by free consent of parties competent to contract,
for a lawful consideration and with a lawful object and are not
void contracts (Section-10 Act). The legal relationship between
the promisor or a person making the proposal and the promissee
or a person accepting the proposal forms the binding force in all
valid agreements. The offer and acceptance is complete when
the acceptor receives an offer and the acceptor sends his
communication of acceptance to an offeror. Under the
provisions of the Contract Law, an offer can be revoked before
the promisee accepts the offer, while an acceptance can be
revoked before it is communicated to the offeror. If the parties
intend to enter a contract by executing a written document as a
pre-condition and if no document is prepared, there is no valid
contract [Chillingworth Vs Esche, (1924) Ch. 97]. This old
concept may be overcome by proper documentation in the digital
environment. However, there cannot be a contract to make
contract or agreements to agree in future, except in the futures
contracts. How far the contracts made by word of mouth or
telephonic conversations are sustainable in the digital or
electronic environment becomes a relevant issue in the context
of using the mobile telephones in respect of e-business
transactions. The corporate companies can enter e-contracts,
acquire properties, right to sue, liability to be sued and to do
anything, which is not beyond the scope or object for which it
is brought into existence. Under the privity of contract, a stranger
to the contract cannot sue and only a party to the contract
becomes entitled to sue [Beswick vs. Beswick]. However, the
rights and obligations of the parties in the context of franchising
and sub-licencing should be examined in the digital environment
vis--vis privity of contract. Whether the third party can sue
the parties to the digital contract?
All the digital contracts are a matter of choice between the
parties. The digital contracts should not be contrary to the law
of the land or against the public policy as in the case of other
contracts. A contract may be express or implied. An express
contract is either written or oral, but evidence regarding the
formation of the contract must exist. On the other hand, implied
contracts are ordinarily by the behaviour of the party. For
instance, non-returning of the material sent for examination.
The parties to the contract should be legally competent. Under
the Force Majure Clause, a contract may not be possible to
perform if it is beyond the control of the party.
Status of e-document in the digital contracts:
This cogent issue will have to be analyzed in the context of
practical examples of e-commerce and other transactions taking
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place in the digital environment. The unprecedented growth of
information and communication technologies has produced
several far-reaching implications on the formation of e-contracts.
The communication of offer and acceptance is a complex
phenomenon in the digital contracts, as compared to the
contracts in a physical situation. All e-mails, hard copy of a title
document scanned with the help of a computer and transmitted
electronically or any other type of e-records downloaded from
the Internet or a Website by the authorized user will qualify to
be electronically disseminated documents. In this regard, fax
machines, copier machines, computer mainframes or computer
laptops inclusive of mobile telephones and telephony would be
of vital importance in electronic transactions. The US court
held that use of communication in the formation of contract was
held to be valid [Beatty Vs. First Exploration Fund Company
(1999).
There are three different categories of rules in the formulation of
digital contracts, such as-
1. General terms provided by the communication networks.
2. Specific rules for contractual relationship.
3. Rules under the legal framework.
The communication network service providers prescribe certain
general terms regarding the usage of the Internet or Website.
Similarly, the terms and conditions as may be prescribed by the
proprietors of software will have to be complied before availing
of software.
As regards the specific rules for contractual relationship, it is
the choice of the parties to the digital contract to provide terms
and conditions for performance of the contract and to settle the
dispute likely to arise in future. Such terms shall include the
jurisdiction, nature of contract, mode of electronic payment,
electronic documentation, delivery of goods and the nature of
services being rendered in the digital contract. The parties have
always an option to incorporate such terms while formulating
the digital contracts for easy enforcement. The reference clause
should be incorporated in the data message. The terms and
conditions of the digital contract must be made known to the
other party, which should be acceptable to the parties. Once a
valid e-agreement has been reached, the parties to the contract
perform the contract, failing which there is a breach of contract.
A party that breaches an agreement is liable to pay damages
without an agreement between the parties, the rights and
obligations of the parties to the digital contract would not arise.
Further, an agreement requires documentation security
procedures and the terms and conditions between the parties.
It is imperative that Article-9 (1) & (2) of the UNCITRAL Model
Law on Electronic Commerce, 1996 assures not only the
evidential weight to such transactions, but also admissibility to
e-records in evidence. Article-9 (1) reads, In any legal
proceedings, nothing in the application of the rules of evidence
shall apply so as to deny the admissibility of a data message in
evidence: a) on the sole ground that it is a data message or, b) if
it is the best evidence that the person adducing it could
reasonably be expected to obtain, on the grounds that it is not
in its original form. Further, Article-9 (2) reads, Information in
the form of data message shall be given due evidential weight.
In assessing the weight of a data message, regard shall be had
to the reliability of the manner in which the data message was
generated, stored and communicated, to the reliability of the
manner in which the integrity of information was maintained, to
the manner in which the originator was identified, and to any
other relevant factor. The purpose of Article-9 of the Model
Law is to assure both the admissibility of data in evidence and
its evidential value. Article-5 of the Model Law applies
specifically to the contractual relationships between the parties,
while Article-11 ensures the validity of digital contracts by
electronic means. Article-11 of the Model Law specifically deals
with the formation of digital contracts as well as the form in
which an offer and acceptance may be expressed. Article-11 (1)
reads, In the context of contract formation, unless otherwise
agreed by the parties, an offer and the acceptance of an offer
may be expressed by means of data message. Where a data
message is used, that contract shall not be denied validity or
enforceability on the sole ground that a data message was used
for that purpose. As between the originator and the addressee,
a data message is deemed to be that of the originator if it was
sent by a person who had the authority to act on behalf of the
originator or by any information system programmed by or on
behalf of the originator to operate automatically [Article-13 (2)
(a) & (b) of the Model Law]. In certain cases, computers generate
the data message, expressing offer and acceptance without
immediate human intervention, which might create doubts about
the intent by parties. The majority of the uncertainties inherent
in the mode of communication may be overcome by means of
proper documentation.
The e-mail, EDI (computer to computer transmission of data in a
standard format) and any other modern means of communication
are significant from the legal perspective, which involve two
issues, such as 1) legal nature of e-document warranting
admissibility & evidential weight and 2) validity of e-document
requiring authenticity and integrity of data text. The non-
adoption of I.T. Laws by the Nation-States or inadequacies of
law might result in uncertainties as to the legal nature and
validity of data message. Therefore, sound I.T. laws and standard
technical practices are essential wherever EDI, e-mails, or other
modern means of communication are used in the formulation of
digital contracts. A data message initiated as oral communication
may end up in the form of telecopy or the data message starting
as telecopy may end up as EDI message. All the constructed
contracts in the digital environment could be inferred based on
proper documentation, which is said to be complete when the
technical and legal requirements are met. The signature in the
digital terminology refers to the hash value of an e-document.
Unlike paper-based documents, EDI message and e-mails are
intangible in nature until they are reduced to hard copies or
displayed on the screen of the mainframe.
Electronic communication, such as e-mail and EDI assures
instantaneity and reduces the cost of communication in the
digital contracts. By availing e-mails, written or graphic
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communications could be ensured between the parties in respect
of their designated information system. The EDI assures
exchange of data message or electronic payments in a standard
format between the parties. In the digital contracts, the
franchising e-records should adequately cover the relationship
between the parties while adopting e-mails or EDI
communications in the performance of a contract by the third
party. In such circumstances, it becomes necessary that a
Franchisor and Franchisee enter an agreement regarding the
use and exchange of e-mails or EDI messages without posing
any threat to the confidentiality and integrity of data. If the
third party adopts e-mail or EDI processing, the agreement should
specify clearly the custodial structure of e-records to meet the
evidentiary requirements. In such situations, the data message
should be double or further encrypted to render it unintelligible
in the event of its interception during the transmission. The
data transmitted electronically splits into packets and travels
by different mode of communication before reaching and
assembling at the destination point.
It is also pertinent to realise that the Model Law adopts the
functional equivalent approach, so that each party can hold a
hard or soft copy of the same data that may be acceptable to
public authorities and courts. The levels of security to e-
document could be a matter of degree of care and caution, both
in the paper-based documents and the data message. In other
words, the parties to the digital contract should enable the data
message to enjoy the same level of legal recognition as
corresponding paper documents performing the same function.
It is even more necessary to understand that the functional
equivalent approach has been dealt with respect to the concepts
of writing, signature and original [Articles-6 to 8 of the
Model Law]. However, the Model Law does not create a
functional equivalent for the existing storage requirements of
the data message. This kind of ambiguity shall not be
precipitated to the national laws also.
Following are the general principles on which the Model Law is
based-
1. To facilitate e-commerce among and within nations.
2. To validate all transactions entered into by availing the new
technology.
3. To implement new information technologies.
4. To ensure uniformity of law all over the globe to facilitate
global transactions.
5. To ensure standard commercial practices.
The amendments to the Indian Penal Code of 1860, Indian
Evidence Act of 1872, Reserve Bank of India Act of 1034,
Company Act of 1956 and Bankers Books Evidence Act of 1991
have been brought about as a short-term measure. However,
the Shere Committee (1991) has recommended the enactment of
Data Protection Act, E-Commerce Act and E-Commerce Support
Act as a long-term measure. The Data Protection Act forms an
important Act in the formulation of digital contracts as far as the
corporate companies are concerned.
The notion of data message shall include all types of data
message generated, transmitted and stored by electronic or
optical means. The addressee is a person to whom the originator
intends to communicate by transmitting the given data message,
as opposed to any person who might receive or copy the data in
the course of its transmission. The originator is the person who
originates the data message even if that message is transmitted
by another person on his behalf. If an addressee communicates
his acceptance to the offer made by the offeror, the focus of
intent is also shifted to the addressee in the contractual
relationship. In the digital contracts, both offer and acceptance
are communicated purely in electronic environment. An
intermediary is a mere conduit in so far as receiving, transmitting
and storing data messages on behalf of another person. The
additional value added services may be performed by network
operators and other intermediaries, such as formatting,
translating, recording, authenticating, certifying, providing
security services for electronic transactions and preserving data
messages. The focus is on the rights and obligations of the
parties about their contractual relationship. An e-document is
deemed to have been despatched at the place where the
originator has a place of business or residence, while it is deemed
to have been received at the place where the addressee has a
place of business or residence. It is incumbent that parties
entering contract must indicate their e-mail ID for future
communications in the electronic environment. Whether a web
page is an open offer from the owner of a Website if the contents
imply his intention to enter an e-contract? What is the
responsibility of a web server or ISP? Whether an acceptance
of an open offer available on the web page by a netizen or a
subscriber would amount to the formation of e-contract? These
are a few questions, which might arise in the formation of digital
contracts.
The information system intends to cover the entire spectrum of
technical scenario including the communications network, e-
mail box or even a Telecopier used for transmitting, receiving
and storing information. The information cannot be denied legal
effectiveness, validity and enforceability solely because it is in
the form of data message.
While using the modern means of communication, the solutions
to the technical, legal and administrative challenges lies in the
adoption of policies by the corporate companies and the
governments. Even then, the well-established rules and standard
commercial practices are relevant [INCOTERMS].
The contractual relationship between the originator and the
addressee of a data message with a focus on the intent of the
parties forms the backbone of digital contracts. All e-agreements
entered between the parties, either bilateral or multi-lateral will
create rights and obligations in the performance or enforcement
of digital contracts.
Conventional paper vs. Data message communication:
The notion of data message is to fulfil the requirements of a
document, which involves four aspects namely:
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1. Original-Authenticity of data message.
2. Writing-Hard copy or computer printout.
3. Witnessing-Proper documentation.
4. Signature-Hash value of the digital signature.
In the paper-based environment, the original document is only
accepted to minimise the chance of its alteration, which would
be difficult to detect in copies. Whereas, the technical means in
the digital environment are available to certify the contents of a
data message to confirm its originality. The medium on which
the data is stored at the first instance is readable by machine
language only. If this proposition were to be taken into
consideration, the data message that an addressee receives
would only be a copy. It is true that the document should be
original from the viewpoint of evidence. When the computer
printout is made admissible in evidence, the notion of original
document in the digital or electronic environment does not arise
at all. The importance of the integrity of data message vis--vis
its originality lies in the systematic recording of the information
at the first instance, inclusive of affording protection against
data alteration. The simple criterion regarding the originality of
e-document or the first data depends on the levels of
authentication and integrity of data. As long as the data remain
intact and complete, necessary additions would not affect the
originality of an electronic document. All documents including
electronic records produced for the inspection of the court fall
within the definition of evidence [Amendment to Section-3 of
the Indian Evidence Act]. Where the law requires information
to be presented or retained in its original form, that requirement
is met by a data message if- a) there exists a reliable assurance
as to the integrity of the information from the time when it was
first generated in its final form, as a data message or otherwise
and b) where it is required that information be presented, that
information is capable of being displayed to the person to whom
it is to be presented [Article-8 of the Model Law]. The Mumbai
High Court Judge Justice Mr. Promod Khode in the TADA case
against Hindi cine artiste Mr. Sanjay Dutt observed that even if
the medium on which the data evidence is stored were to be
produced before the court for inspection, the presiding officer
of the court cannot make out the machine readable language
and the computer print out being the replica of what data has
been stored in the medium should be admissible in evidence. In
the electronic realm, authentication together with data integrity
is equivalent to the traditional signature. The source of the data
message could be confirmed by test case and call back
procedures, apart from adopting the appropriate security
measures. The parties intending to use EDI should agree to
avail the means to authenticate e-documents. The electronic
media is no obstacle in the formulation of digital contracts in
India, especially after the enactment of the I.T.Act, 2000.
The information presented in writing means that such
information be contained in e-document [Article-6 of the Model
Law]. The purpose is to fulfil all conceivable functions of a
writing, which focuses upon the information being reproduced
or read and accessible, so as to be usable for subsequent
references or purposes. There has been a debate about the
feasibility of the formation of digital contracts in electronic
environment, as against the existing paper-based contracts. In
this regard, the fulfillment of two requirements is essential, such
as-1) tangible evidence about the existence of data message in
a computer or the storage media and 2) the intent of the
contracting parties to bind themselves to an agreement already
entered. The data message need not be tangible as in the case
of paper-based contracts, but the evidence must be tangible.
After all, the parties are well aware of the consequences before
entering contracts in the digital environment. The levels of
security to an e-document are increasing with the advancement
in cryptographic technology. The computerized information
security assures confidentiality, authenticity (Kerberos system
is the best form of authentication in USA) and integrity of data.
Above all, the information is made accessible only to the parties
possessing the relevant keys. Once the Data Encryption
Standards are adopted, the parties to a digital contract can safely
transmit an e-document from the originator to the addressee.
The double and further encryption of the data text would assure
full security to an e-document, which is transmitted electronically.
The hash value helps the addressee to verify the genuineness
of electronic record by adopting the checksum method.
Encryption and decryption depends on the effective key
management by the parties to the digital contract. The
certification authorities, such as Satyam, Infoway etc certifies
the encrypted e-document or the digital signature, which can be
revoked under specific circumstances [Sections-37 & 38 of the
I.T.Act, 2000]. The information goes in a secured manner during
its electronic transmission between the contracting parties and
even to the banks for payment [OFT]. The Organization for
Economic Cooperation and Development (OECD) adopted
guidelines on cryptography on March 27, 1997 which aims at
prompting the used of cryptography for digital signatures.
These guidelines include the choice of cryptographic methods,
privacy protection, lawful access to the keys and encrypted
data, liability of those offering cryptographic services and
international cooperation. The digital signature in electronic
environment supplements the writing and signature of the
physical environment. The application of cryptography as a
security tool would take care of the integrity of the data against
any kind of alteration, modification and deletion of data during
its transmission. The parties to the digital contract should ensure
that e-document remains unaltered over a period and a permanent
record of transaction as in the case of a paper-based document.
Each party can hold a soft copy in addition to the hard copy of
the data for its reproduction whenever the necessity arises. It is
imperative that e-documents are acceptable to the public
authorities and courts since the stress is laid on e-governance
in these days. With the tremendous advancement made in the
storage technology, it is easier to store an electronic document
and preserve it for a long time. One must realise that after the
incident of attack on the WTC in USA, the back-up as well
archival concepts have assumed prominence. Every important
corporate company is going in for disaster security plans after
the WTC incident. In short, the focus should be on the intent of
the parties to formulate a contract in the digital environment
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than the document in a written form, which is taken care of, for
the reasons adduced supra. Therefore, the data message
constitutes as an electronic record of the intent of the parties.
The intangible electronic document becomes tangible the
moment it is retrieved from its storage device or a computer
printout is obtained [Read TADA case against Sanjay Dutt].
The legal rights and obligations of the parties to the contract
remains unchanged even in respect of an electronic document.
It would suffice if the requirement of writing were fulfilled,
which provides distinct levels of traceability, reliability and
unalterability. It cannot be construed that the data presented in
the written form should be a signed writing, as the data
message performs the conceivable functions of writing. Further,
the information is capable of being reproduced and read. The
software (Keys) necessary to render such information readable
shall be preserved. After all, the data message is intended to be
used as original e-document in a contractual transaction between
the originator and the addressee. Hence, there could be no
discriminatory treatment between the data message or a paper
based document. Moreover, it is incumbent to realise that the
paper-based transactions are also prone to fraud and forgery.
In the physical situation, the witnesses attest the document or
signatures of the contracting parties. In the electronic
environment, there is no scope for any one to attest his signature
to e-document. The proper documentation itself would be the
witnessing process of an electronic document.
The notion of signature is linked to the paper-based transaction.
The requirement of a signature in relation to a data message is
met if-a) a method is used to identify the originator and to
authenticate the data message by means of his approval of the
contents in the electronic document and b) adoption of
appropriate and reliable method by which the data message is
communicated in any relevant agreement [Article-7 of the Model
Law]. The function of a signature requires strict proof of identity
of originator of the data, certainty of his personal involvement
in the act of signing and his association with the content of
electronic document or data message. The signature performs
several functions, such as the intent of the party to bind by the
content of a signed contract, intent to endorse authorship of
the text and vetting the contents of the text. In addition to the
signature, the stamping, perforation and printed letterhead
provide another level of certainty to e-document. In the electronic
environment, the highest level of certainty about authentication
is a substitute for signature. The digital signature authenticates
an e-document transmitted or stored electronically. Once the
data message is authenticated and legal value assigned, it fulfills
the requirements of a signature in as much as it confirms the
identity of the author of e-document who approves its contents.
In other words, the legal functions of a signature are performed
by means of a method that identifies the originator of a data
message and confirms that the originator approved the content
of e-document. The method should be reliable for which the
data message is generated or communicated in any agreement
between the originator and the addressee. In order to determine
whether the method used is appropriate and fulfills the legal
and technical standards, several parameters may be taken into
consideration. They include the technical sophistication used
by the parties to the digital contract, nature of the contract,
functions of signature requirements, compliance to
authentication procedures and the significance of the content
of e-document.
The legal certainties:
The information stored accurately replicates by precision, except
where the data message is decoded or compressed or converted
in order to be stored. Wherever the need arises to retain the
data message or e-document, such document should be
accessible for the use of subsequent reference or purpose and
it should be retained in a format in which it was generated, sent
or received, an electronic document so retained should be able
to identify its origin. The Model Law ensures legal certainty
about the conclusion of contracts, especially the form in which
an offer and acceptance could be expressed since the technical
and legal solutions to certain uncertainties in the formulation of
digital contracts are essential, all e-agreements should be made
to overcome such uncertainties by way of express terms and
conditions. The legal recognition, admissibility and
authentication of e-document create the legal effectiveness and
legal value as evidence. The formation of contracts should be
designed to dispel uncertainty as to the time and place of
formation of contracts in cases where offer or acceptance is
exchanged electronically [Article-15 of the Model Law]. The
proper identity of the parties to the digital contract in electronic
environment assumes as prominent issue, which could be
ensured by authentication and subsequent documentation of
all correspondences between the parties to the contract. The
legal uncertainties inclusive of conflicting national laws could
be overcome by either amending the national laws or the parties
expressing their clear intent on the formation of digital contracts
without violating the public policy of the state or the national
laws. The authentication, identity of parties and the content
endorsement processes in the electronic environment would
remove uncertainties or ambiguities in the formation of digital
contracts. It becomes certain that the data message owes to the
originator, which acts as a substitute to the signature in the
paper-based contracts.
Where the originator sends an offer in a data message and
requests acknowledgement of receipt within a specified time,
such acknowledgement evidences that his offer has been
received by an offeree [Article-14 of the Model Law]. The
purpose of Article-14 (2) is to validate acknowledgement of any
communication made by an offeror. The originator of an offer is
free to transfer the offer to another party if he does not receive
the requested acknowledgement from the offeror (Addressee)
within the specified time frame. The addressee is prevented
from denying legal effect of the data message sent by the
originator, requesting an acknowledgement within a certain time
under the agreement if the requested acknowledgement is not
communicated. The I.T.Act, 2000 propagates the basic principles
that there should not be any discrimination between the data
message and the paper based documents, which facilitates
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formulation of digital contracts since the parties can rely upon
the data message in all their electronic communications. It also
assures certainty to the digital contracts with authentication of
data message. The data messages could be attributed to the
originator, who generates, sends, stores or transmits or causes
to do so to any other person [Section-2 (1) (za)]. The
authentication of the data message by code of encryption
confirms that the e-record originated from or on behalf of its
author. The technology helps the parties to adopt electronic
procedures as functional equilant of acknowledgement
(traditional way of RPAD) in the case of digital contracts. If the
originator requires that the data message shall be binding on
the addressee only upon receiving an acknowledgement from
him, the terms and conditions prevails. This procedure would
facilitate the offeror or originator to transfer his offer to contract
to another person if no response or acknowledge has been
received from the addressee. The originator is relieved of the
legal implications if the requested acknowledgement is not
received from the addressee. On the other hand, the addressee
has an option either to accept or not to accept an offer made by
the originator.
In the digital contracts, it becomes necessary to indicate the
time and place of receipt of electronic communication by the
offeror and offeree. The location of information system becomes
irrelevant for the simple reason that the parties communicate
from one country to another without being aware of the
information system through which they operate. The more
objective criterion would be the place of business of the parties.
The moment a data message enters the information system of
an intermediary or an offeror beyond the purview of an offeror,
the time of dispatch of such data message starts. The term
dispatch denotes the commencement of transmission of data
message electronically. The dispatch is complete when the data
message enters the designated information system of an offeree.
It would suffice if the data message enters the addressees
unilaterally designated information system for receipt of the
message. It would be irrelevant for an offeror to ascertain
whether the offeree opens the mailbox or not. In other words,
the information system may or may not be the information system
of an offeree and the message is deemed to have been received
by an offeree. On the other hand, an offeror must expressly
specify the address to which the acceptance should be sent.
The mere indication of e-mail or telecopy address on the
letterhead or data message can never be treated as an express
designation of one or more information systems. Hence, the
notion of information system assumes importance from the
viewpoint of dispatch and receipt of the data message. Another
criterion should be that the data message is intelligible and
capable of being used by the offeror. The encrypted message is
deemed to have been received before it is used by an offeree.
Whether improper or non-functioning of the information system
where data message cannot enter, could it be the parameter to
impose liability? This question must be analyzed in the context
of the technical issues and other circumstances inclusive of the
integrity of an addressee. The place of receipt of data message
assumes significance in the digital contracts. The offeree may
receive the data message transmitted by an offeror from his own
information system, located in his jurisdiction or retrieve such
data message from some other designated information system
located outside his jurisdiction. A logical connection should
be established between the offeror and offeree in order to
determine the designated information system as the place of
receipt of the data message. The originator or an offeror can
ascertain the place of receipt of the date message by an offeree.
Moreover, the parties to the digital contract may agree by
consensus what should be the designated information system
for receiving the data message. The United Nations Convention
on Contracts for International Sale of Goods, 1980 applies to all
international commercial contracts of sale of goods between
the trading and business houses, except the consumer goods.
A contract of international sale of goods need not be evidenced
in writing since the writing is defined along the lines of
UNCITRAL Model Law to mean any mode of communication
that preservers the record of the information contained therein
and is capable of being reproduced in tangible form [Article-
1.10]. The distinction between the deemed place of receipt and
the designated place of receipt should be analyzed copiously.
The deemed place of receipt of data message at the time of its
receipt contrary to the place where the data message actually
reached would be inappropriate if it does not fall within the
scope of computerized transmission of data message. The
location of information systems of the contracting parties cannot
be taken as the sole criterion to determine the place of business
for the simple reason that the data messages are received at a
particular information system. The dispatch of data messages
confirms the commencement of the electronic transmission as
the time of entering the information system, which is outside
the control of the originator. As regards the time of receipt, the
I.T.Act, 2000 lays down certain criteria, such as the receipt of
data messages occurs the moment it enters the computer resource
of the addressee or when the data message enters the designated
information system of the addressee and the receipt is deemed
to have occurred when the data message is retrieved by the
addressee. What happens if the data message is not intelligible
or unusable by the addressee? The addressee has an option to
communicate to the originator of the data about it. If the data
message fails to enter the information system of the addressee,
he cannot be held responsible. If the originator of the addressee
has more than one place of business, the principal place of
business shall be the place of business. If they have no place of
business, the usual place of residence shall be the deemed place
of business, including the place where the body corporate is
registered. The designated information system evidences the
reasonable connection between the parties of the contract.
Significance of authentication procedures:
The principle of attribution of e-document or data message to
the originator forms an important issue vis--vis application of
authentication procedures. In principle, the originator is bound
by the e-document, which is transmitted to the addressee
electronically in a digital contract. The addressee should have
proper access to the authentication procedure by virtue of his
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contractual relationship with the originator and applies such
procedures properly as agreed by the originator. The originator
has an option to deny by issuing notice to the addressee that
he had not communicated any e-document to him. Similarly, the
addressee having come to know that e-document was not that
of the originator, he need not proceed with the formation of the
digital contract. Once the originator agree that an addressee to
apply the authentication procedure, he is estopped at a later
stage to retract, provided that such application was an outcome
of proper verification of the originator as the source of e-
document. Even if the originator enters an agreement with an
intermediary (third party) to bind himself to the authentication
of e-document or authentication procedures, the requirements
corresponding to the authentication procedures are fulfilled. In
all such circumstance, the originator cannot be relieved upon
the consequences of transmission of e-document to an
addressee. The originator is excluded from the binding effect
from the date and time of receipt of notice by the addressee, but
not earlier to it. If the addressee proves that he had properly
applied the agreed authentication procedures of e-document
sent by the originator, the latter cannot escape from his liability.
The rights of the addressee would arise the moment he applies
the agreed authentication procedures of electronic document
or data message sent by the originator. On the other hand, the
originator is absolved of his liability the moment he issues the
notice to the addressee if the data message was not initiated by
him or by any other authorized person on his behalf.
In todays digital world, authentication of electronic transmission
assumes tremendous importance. In the physical world, the
signature authenticates writing and identifies the party signing
the document, who is aware of legal and commercial implications.
It also signifies his consent to the contracts of the document.
Under the digital contracts, an e-document denotes a data
message or paperless electronic form while the signature refers
to the digital signature. A digital signature is an encryption
form of e-document with the help of a hash function. The
digital signature authenticates the originator of the data message
or an e-document. The I.T.Act 2000 recognises the digital
signature and provides for its use. The digital signature means
authentication of an electronic record by means of an electronic
method or procedure [Section-2 (p)]. The provision regarding
the authentication of electronic record or a data message is laid
down under Secton-3 of the I.T.Act, 2000. An electronic record
means data, record or data generated, message or sound stored,
received or sent in electronic form or micro-film or computer
generated micro- fitche [Section-2 (t)]. An electronic form is
defined as any information generated, sent, received or stored
in media, magnetic, optical, computer memory, micro-film,
computer generated micro-fitche or similar device [Section-2
(r)]. The certifying authority grants the digital signature who
has got powers to suspend or revoke such digital certificates
[Sections-35, 37 & 38].
Legal framework of Information Technology Act, 2000:
The formulation of the digital contracts in India is in a primitive
stage since there are no court precedents to develop
jurisprudence on the contractual relationship between the parties
in the digital or electronic environment. Therefore, we have to
fall back upon the basic principles of Contract Law. The Council
of Europe has formulated e-contracts for its member States in
Europe. The formulation of digital contracts in electronic
environment and proper documentation are the two crucial
issues, which could be pondered over copiously.
A peep into the Information Technology Act, 2000 gives us an
idea about the formulation of the digital contracts in electronic
environment. The I.T.Act assures legal recognition to all types
of e-commerce carried out by means of Electronic Data
Interchange as an alternative to paper based transactions, which
may be defined as electronic transfer from computer to
computer of information using an agreed standards to structure
the information [Article-2 (b) of Model Law]. EDI has replaced
paper transaction with a structured electronic message, which
is more secured with enhanced efficiency than the e-mail
transactions. The International Chamber of Commerce (Paris)
assures uniform rules of conduct for interchange of trade by
Tele-transmission. Article-4 of the European Model Electronic
Interchange Agreements cover the content protocol,
acknowledgement, confirmation, accuracy and storage of
content. The European Council has adopted by its Directive
No. 94/820/EC in December 1994 on Model Interchange
Agreement, which obligates the network providers and the users
to comply with the procedures. The United Nations Economic
Commission for Europe has framed rules for electronic data
interchange based on the internationally agreed standards
relating to e-contracts. Article-4 of the European Model
Electronic Data Interchange Agreement provides that EDI
messages complying the terms of agreement shall constitute as
evidence admissible in law courts.
The fundamental issue involved in the digital contracts relate to
the following two issues-
(a) In the digital contracts, the time of despatch and time of
receipt of the proposal would take care of the time factor.
As regards the place of agreement, the transmission of
electronic document through the Internet defeats the
geographical boundary. Article-11 of the UNCITRAL Model
Law removes uncertainties about the conclusion of e-
contracts and deals with the form in which an offer or an
acceptance to be communicated electronically. After all,
electronic records and the digital signatures generated,
stored, processed, communicated are used in the formation
of digital contracts.
(b) In the authentication of electronic document in the digital
contracts, the authenticity, non-repudiation and integrity
of/to electronic record are essential elements in the
formation of digital contracts. Since the originator of an
electronic message or data text corresponds to an offer, the
authenticity of an electronic document that owes to its
creator would be of tremendous significance in all types of
electronic communications. When the e-mail sent by the
offeror enters the addressees computer resource or the
addressee retrieves the e-mail, the proposal/offer is
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complete. In this context, Section-2 (za) of the Information
Technology Act of 2000 is a relevant provision, which reads,
Originator means a person who sends, generates, stores
or transmits any electronic message or casuses any
electronic message to be sent, generated, stored or
transmitted to any other person but does not include an
intermediary. On the other hand, the addressee
corresponding to a person accepting such offer shall be an
acceptor within the scope of the definition given under
Section-2 (1) (b) of the Information Technology Act of 2000,
which reads, Addressee means a person who is intended
by the originator to receive the electronic record but does
not include any intermediary. When the addressee
dispatch e-mail to the offeror from his computer resource,
the acceptance is complete. A valid agreement entered
between the competent parties in the formation of digital
contract and any kind of breach thereafter would entail civil
action against the party concerned. An acknowledgement
regarding the receipt of offer by the offeree appears to be a
decisive factor in the formation of e-contracts, which will be
decided by an offeror. In this regard, Section-12 of the
Information Technology Act, 2000 is a relevant provision,
which reads, -
(1) Where the originator has not agreed with the
addressee that the acknowledgement of receipt of
electronic record be given in a particular form or by a
particular method, an acknowledgement may be given
by-
(a) any communication by the addressee, automated
or otherwise; or
(b) any conduct of the addressee, sufficient to
indicate to the originator that the electronic record
has been received.
(2) Where the originator has stipulated that that the electronic
record shall be binding only on receipt of an
acknowledgement of such electronic record by him, them
unless acknowledgement has so received, the electronic
record shall be deemed to have been never sent by the
originator.
(3) Where the originator has not stipulated that the electronic
record shall be binding only on receipt of such
acknowledgement, and the acknowledgement has not been
received by the originator within the time specified or agreed
or, if no time has been specified or agreed to within a
reasonable time, then the originator may give notice to the
addressee stating that no acknowledgement has been
received by him and specifying a reasonable time by which
the acknowledgement must be received by him and if no
acknowledgement is received within the aforesaid time limit
he may after giving notice to the addressee, treat the
electronic record as though it has never been sent.
If the transactions carried out in the electronic environment
materialize into a valid agreement between the parties, the digital
contract is complete. The attribution of electronic record is
made to its originator if he or his agent on his behalf transmits it
or from his designated information system where automated
response is ensured (Example: Website). In this perspective,
Section-11 of the Information Technology Act of 2000 would
be a relevant provision, which reads, -
An electronic record shall be attributed to the originator-
(a) if it was sent by the originator himself;
(b) by a person who had the authority to act on behalf of the
originator in respect of the electronic record; or
(c) by an information system programmed by or on behalf of
the originator to operate automatically.
Conspicuously, the time and place of despatch and receipt of e-
record is of immense relevance in the formulation of the digital
contracts. Normally, the parties to the contract agree to
communicate electronically between their designated
information systems. The control over the data message by the
originator ceases the moment it is dispatched from his information
system. Similarly, the acceptance by the addressee is complete
the moment he communicates his acceptance to the offeror from
his designated information system. The liability of the originator
would not seize if he dispatches the data message to the
addressee. It is important that the data message should enter
the addressees designated information system for retrieval.
Even the intelligible message received by the addressee would
not absolve the liability of the originator.
Section-13 of the Information Technology Act, 2000 reads, -
(1) Save as otherwise agreed to between the originator and
the addressee, the despatch of an electronic record occurs
when it enters a computer resource outside the control of
the originator.
(2) Save as otherwise agreed to between the originator and the
addressee, the time of receipt of an electronic record shall
be determined as follows, namely-
(a) if the addressee has designated a computer resource
for the purpose of receiving electronic records.
(i) receipt occurs at the time when the electronic
record enters the designated computer resource:
or
(ii) if the electronic record is sent to a computer
resource of the addressee that is not the
designated computer resource, receipt occurs
at the time when the electronic record is retrieved
by the addressee;
(b) if the addressee has not designated a computer
resource along with specified timings, if any, receipt
occurs when the electronic record enters the computer
resource of the addressee.
(3) Save as otherwise agreed to between the originator and the
addressee, an electronic record is deemed to be despatched
at the place where the originator has his place of business,
and is deemed to be received at the place where the
addressee has his place of business.
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337
(4) The provisions of sub-section (2) shall apply
notwithstanding that the place where the computer resource
is located may be different from the place where the electronic
record is deemed to have been received under sub-section
(3).
(5) For the purpose of this section-
(a) if the originator or the addressee has more than one
place of business, the principal place of business,
shall be the place of business;
(b) if the originator or the addressee does not have a
place of business, his usual place of residence shall
be deemed to be the place of business;
(c) usual place of residence, in relation to a body
corporate, means the place where it is registered.
The Information Technology Act, 2000 assures authentication
of e-records and affords legal recognition to the e-record as well
as the digital signature. The digital signature authenticates the
e-record and affords security while it is in transmission
electronically. Section-3 of the Act reads, -
(1) Subject to the provisions of this section, any subscriber
may authenticate electronic record by affixing his digital
signature.
(2) The authentication of the electronic record shall be effected
by the use of asymmetric crypto system and hash function,
which envelop and transform the electronic record into
another electronic record.
Explanation: For the purpose of this sub-section, hash function
means an algorithm mapping or translation of one sequence of
bits into another, generally smaller, set known as hash result
such that an electronic record yield the same hash result every
time the algorithm is executed with the same electronic record as
its input making it computationally infeasible-
(a) to derive or reconstruct the original electronic record from
the hash result produced by the algorithm;
(b) that have two electronic records can produce the same hash
result using the algorithm.
(3) Any person by the use of a public key of the subscriber can
verify the electronic record.
(4) The private key and the public key are unique to the
subscriber and constitute a functioning key pair.
Section-4 of the Act reads, -
Where any law provides that information or any other matter
shall be in writing or tin the typewritten or printed form, then,
notwithstanding anything contained in such law, such
requirement shall be deemed to have been satisfied if such
information or matter is-
(a) rendered or made available in an electronic form, and
(b) accessible so as to be usable for a subsequent reference.
Section-5 of the Act reads, -
Where any law provides that information or any other matter
shall be authenticated by affixing the signature or any document
should be signed or bear the signature of any person then,
notwithstanding anything contained in such law, such
requirement shall be deemed to have been satisfied, if such
information or matter is authenticated by means of digital
signature affixed in such manner as may be prescribed by the
Central Government.
There is need for authentication of data message and e-agreement
in the formulation of digital contracts. If the parties want to affix
your signature digitally, the hash function must be invoked.
VerySign, a web service provider offers the service of digital
signature. The affixation of hand signatures to the contracts in
the physical situation corresponds to private key in the digital
contracts and its confidentiality becomes very essential.
Evidentiary value under IEA:
It is pertinent to make a mention at this juncture that in the
physical environment, evidence recorded or stored by availing
the electronic gadgets were given the secondary evidentiary
status. For instance: the voice recorded with the help of a tape
recorder. Now-a-days, the digital voice recorder, digital cameras,
digital video cameras, video conferencing are adding a new
dimension to the evidentiary regime. Justice Gururajan, the
Karnataka High Court judge has held in a civil suit that video
conferencing evidence is valid. The emergence of information
and communication technology witnessed the sea change by
elevating the status of evidence recorded, generated or stored
electronically from the secondary to primary evidential status.
The shift in the paradigm owes to the efforts of the working
group of the UNCITRAL Model Law on electronic commerce
and the assigning of legal recognition to e-record or data
message. The new provisions have been incorporated to the
Indian Evidence Act, 1972 by way of amendments mentioned
below-
As regards the presumption of e-agreements, section-85A has
been inserted to the Indian Evidence Act of 1872, which reads,
The court shall presume that every electronic record purporting
to be an agreement containing the digital signatures of the parties
was so concluded by affixing the digital signature of the parties.
Section-85A has been inserted to Section-85 of the Indian
Evidence Act to assure validity to e-contracts. The presumptive
value is attributed to all electronic records, electronic records of
five years old, digital signature and electronic messages within
the scope of Sections-85B, 88A and 90A of the Indian Evidence
Act, 1972, which are reproduced below-
Section-85B:
(1) In any proceedings involving a secure electronic record,
the court shall presume unless contrary is proved that the
secure electronic record has not been altered since the
specific point of time to which the secure status relates.
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(2) In any proceedings, involving secure digital signature, the
court shall presume unless the contrary is proved that-
(a) the secure digital signature is affixed by subscriber
with the intention of signing or approving the
electronic record;
(b) except in the case of secure electronic record or a
secure digital signature nothing in this section shall
create any presumption relating to authenticity and
integrity of the electronic record or any digital
signature.
Section-88A:
The court may presume that an electronic message forwarded
by the originator through an electronic mail server to the
addressee to whom the message purports to be addressed
corresponds with the message as fed into his computer for
transmission, but the court shall not make any presumption as
to the person by whom such message was sent.
Explanation: For the purpose of this section, the expressions
addressee and originator shall have the same meanings
respectively assigned to them in clauses (b) and (za) of sub-
section (1) of section-2 of the Information Technology Act, 2000.
Section-90A:
Where an electronic record, purporting or proved to be five
years old, is produced from any custody which the court in the
particular case considers proper, the court may presume that
the digital signature which purports to be the digital signature
of any particular person was so affixed by him or any person
authorized by him in this behalf.
Explanation: Electronic records are said to be in proper custody
if they are in the place in which, and under the care of the person
with whom, they naturally be: but no custody is improper if it is
proved to have had a legitimate origin, or the circumstances of
the particular case are such as to render such an origin probable.
This explanation applies to the presumption as to Gazettes in
electronic form within the scope of Section-81A of Indian
Evidence Act, 1872.
Section-85C:
The court shall presume, unless contrary is proved, that the
information listed in a Digital Signature Certificate is correct,
except for information specified as subscriber information which
has not been verified, if the certificate was accepted by the
subscriber.
Sections-3, 17, 34 and 35 of the Indian Evidence Act, 1872 have
been amended suitably to afford conceptual clarity to an
electronic document or e-records.
Section-65B of the Act assures admissibility of electronic
records, which reads, -
(1) Not withstanding anything contained in this act, any
information contained in an electronic record which is printed
on a paper, stored, recorded or copied in optical or magnetic
media produced by a computer (hereinafter referred to as
the computer output) shall be deemed to be also a
document, if the conditions mentioned in this section are
satisfied in relation to the information and computer in
question and shall be admissible in any proceedings, without
further proof or production of the original, as evidence of
any contents of the original or of any fact stated therein of
which direct evidence would be admissible.
(2) The conditions referred to in sub-section (1) in respect of
a computer output shall be the following, namely:-
(a) the computer output containing the information was
produced by the computer during the period over
which the computer was used regularly to store or
process information for the purposes of any activities
regularly carried on over that period by the person
having lawful control over the use of the computer;
(b) during the said period, information of the kind
contained in the electronic record or of the kind from
which the information so contained is derived was
regularly fed into the computer in the ordinary course
of the said activities;
(c) throughout the material part of the said period, the
computer was operating properly or, if not, then
respect of any period in which it was not operating
properly or was out of operation during the part of
the period, was not such as to affect the electronic
record or the accuracy of its contents; and
(d) the information contained in the electronic record
reproduces or is derived from such information fed
into the computer in the ordinary course of the said
activities.
(3) Where over any period, the function of storing or processing
information for the purpose of any activities regularly carried
on over that period as mentioned in clause (a) of sub-section
(2) was regularly performed by computer, whether-
(a) by a combination of computers operating over that
period; or
(b) by different computers operating in succession over
that period; or
(c) by different combinations of computers operating in
succession over the period; or
(d) in any other manner involving the successive
operation over that period, in whatever order, of one
or more computers and one or more combination or
computers,
All the computers used for that purpose during that period
shall be treated for the purposes of this section as
constituting a single computer, and references in this section
to a computer shall be construed accordingly.
(4) In any proceedings where it is desired to give a statement in
evidence by virtue of this section, a certificate doing any of
the following thins, that is to say,
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339
(a) identifying the electronic record containing the
statement and describing the manner in which it was
produced;
(b) giving such particulars of any device involved in the
production of that electronic record as may be
appropriate for the purpose of showing that the
electronic record was produced by a computer;
(c) dealing with any of the matters to which the conditions
mentioned in sub-section (2) relate,
And purporting to be signed by a person occupying a
responsible official position in relation to the operation of the
relevant device or the management of the relevant activities
(whichever is appropriate) shall be evidence of the matter stated
in the certificate; and for the purposes of this sub-section it
shall be sufficient for a matter to be stated to the best of the
knowledge and belief of the person stating it.
(5) For the purposes of this section, -
(a) information shall be taken to be supplied to a computer
if it is supplied thereto in any appropriate form and
whether it is so supplied directly or (with or without
human intervention) by means of any appropriate
equipment;
(b) whether in the course of activities carried on by any
official, information is supplied with a view to its being
stored or processed for the purposes of those
activities by a computer operated otherwise than in
the course of those activities, that information, if duly
supplied to that computer, shall be taken to be supplied
to it in the course of those activities;
(c) a computer output shall be taken to have been
produced by a computer whether it was produced by
it directly or (with or without human intervention) by
means of any appropriate equipment.
Explanation: For the purposes of this section, any reference to
information being derived from other information shall be a
reference to its being derived therefrom by calculation,
comparison or any other process.
DIGITAL CONTRACTS BY THE CORPORATE
COMPANIES:
The promoters are the architects of a corporate company who
are responsible for floating or coming into existence of a
company, but not every member employed by the promoters
[Palmer]. The company cannot ratify the contracts entered by
the promoters after its incorporation [Kelner Vs Baxter, (1866)
L.R. 2 C.P.174]. Since the company was not in existence at the
stage of its promotion, it has no liability eventhough the
promoter has acted as companys trustee. At the most, the
promoter could be made liable in his personal capacity about
the pre-incorporation contracts entered by him, before floating
the company. He is also accountable to the company for the
secret profits or any property acquired by him in his transactions
relating to the pre-incorporation contracts. Since a promoter
stands in a fiduciary relationship, he has to make full disclosure
about the profits and properties acquired in the earlier
transactions where a promoter sells property without making
any disclosure. If the restitution is not possible, the corporate
company may recover the secret profits made by the promoter
by way of damages [Gluckstein Vs Barnes (1900), A.C. 240]. A
promoter is also liable for any misrepresentation made while
issuing the prospectus of the corporate company. At the time
of winding up of the company, the promoter can be made liable
for breach of trust or misfeasance.
Since the global business starts with a contract, it is obvious
that the multi-national or trans-national companies also explore
all possibilities about the formulation of digital contract in
electronic environment. In view of the radical change, all the
multi-national and trans-national companies inclusive of the
defence firms have entered into digital contracts. At present,
the disinvestment process has further favoured such companies
to formulate digital contracts with the involvement of government
agencies. It is pertinent to observe that the communication and
information technologies revolution has created a new business
scenario for the multi-national and trans-national companies
and revolutionized the cross-border trading and commercial
transactions inclusive of investments. The B2B and B2C types
of e-business have assumed tremendous significance in the
context of globalization and liberalization of economies of
different countries all over the globe. The technical collaboration
between the corporate companies, located in different parts of
the globe is yet another dimension of the digital contracts.
The process of conclusion of digital contracts between the
corporate companies by mutual consent in electronic
environment would give rise to certain technical, legal and
administrative challenges. The formation of digital contracts
by the corporate companies shall not be contrary to the public
policy of the sovereign state or the national laws. In every
digital contract, there must be a preamble containing the IP
address of the two contracting corporate companies, subject
matter of the contract, terms of electronic payments, mode of
settlement of future disputes and the nature of agreement. All
e-mails, hard copy of the title document scanned with the help
of a computer and transmitted electronically, or electronic records
downloaded from the Internet or Website by the authorized
user, as transmitted by the originator would qualify for
electronically disseminated documents. In this regard, Fax
Machines, Copier Machines, Computer Mainframes or
Computer Laptops inclusive of the Mobile Telephones and
Telephony would be of vital importance. In the digital contracts,
offer and acceptance are made purely in the electronic
environment. An e-record is deemed to have been dispatched
at the place where the originator has a place of business or
residence, while an e-record is deemed to have been received at
the place where the addressee has a place of his business or
residence. It is incumbent on the part of the corporate companies
entering digital contracts to necessarily indicate their respective
e-mail ID and the information system for contractual
communication. Whether a web page is an open offer from the
proprietor of a Website if the contents imply his intention to
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enter the digital contract? What is the responsibility of a web
server or an ISP? Whether an acceptance of an open offer
available on the web page would constitute a digital contract?
These are a few questions, which one should ponder over in the
formation of digital contracts by the corporate companies. The
evolving role of Information Technology in the formulation of
digital contracts assumes significance since the interaction takes
place through the technology, especially the Internet and
computer networking system.
The technological solutions have been evolved to overcome
the technical challenges in the formation of digital contracts
between the companies. The solution to the problem lies in the
proper access control, authenticity and integrity of data message.
As a security tool, the cryptography affords to provide better
solution regarding the authentication of the data. The double
or further encryption would assure better security to the data
message. The Data Encryption Standards and a combination of
all other solutions regarding the authentication, access control,
confidentiality, integrity and non-repudiation of data could be
ensured. The hash value helps to verify the integrity of an
agreement document transmitted by one company to another
company electronically. As regards the non-performance of the
digital contracts, the legal remedy lies in the provisions of
Information Technology Act, 2000 and other provisions.
Digital contracts for international sale of goods:
The globalization is an outcome of an integration of goods and
factor markets, such as technology, labour and raw materials
inclusive of the merger of national markets with the international
market. Whereas, the global economy is an outcome of an under
current movement of the western economic block for over 50
years. The IMF emerged as a result of Washington Consensus
to aid the countries not managing their economies properly.
Since the WTO controls the multi-lateral trade, the countries
negotiating with it must have symmetry of information after
mobilising the opinions of the interest groups within the country.
The communication and information technologies have
revolutionized the cross-border movement of investment, apart
from liberalizing international trade and services. Therefore, it
is high time that economic institutions must integrate trade and
investment. The effect of globalization sounds like creating a
system to create inter-dependency, perhaps due to the
interlocking of economies, culture, people etc.
The international business starts with a contract, especially the
contract of international sale of goods. The process of
conclusion of digital contracts in respect of international sale of
goods shall be by mutual consent only. As far as India is
concerned, the Sale of Goods Act, Indian Contract Act, 1872,
I.T.Act, 2000 and the international commercial practices govern
the digital contracts between the parties. The forum for resolving
the dispute and enforcement of award becomes yet another
issue in the digital contracts, which is dealt later. In view of the
conflicting legal systems and public policies of different
countries, the parties to the contract have a choice of law to
settle disputes under the umbrella of international law. The
parties entering digital contracts may specify terms and
conditions in e-agreements. In the absence of specific
agreement, the third party can find out at the time of dispute
settlement what was the intention of the parties to the digital
contract. The laws in the country of export or import should not
conflict with each other, while the parties to the contract make
an agreement.
The following are the four requirements to validate the electronic
agreements as far as international sale of goods is concerned-
1. A digital contract made not in contravention of EXIM Policy
for its enforceability.
2. Currency in which remittances are made must be a
convertible currency. The FEMA prescribes that the money
must be brought back to the country within a period of six
months from the date of such transaction.
3. The Compulsory Quality Control and Free Shipment Act
must be adhered to.
4. No one shall indulge in the act of FOREX depletion by
violating the Customs Act and other provisions.
UCPDC-500 & URR-525 ON TRADE CONTRACTS:
In the digital form of contracts on international trade and
commercial transactions, the importer is not assured of qualitative
goods since the entire contractual transactions rests on the
documentation. In other words, there is no chance for physical
inspection of goods by the buyer.
In trading contracts, the following types of contracts becomes
more relevant-
(a) Contract between the Importer and the Issuing Bank.
(b) Independent contract between the Exporter and the Issuing
Bank.
(c) Reimbursement agreement between the Importer and the
Issuing Bank located in the country of import.
The UCPDC-500 governs an instrument, while the URR-525
governs the bank-to-bank transaction. Article-23 of the UCPDC
deals with the Bills of Lading, while Article-4 delves on document
vis--vis goods & services and performance of digital contracts.
The Electronic UCPDC ensures the presentation of electronic
instruments and e-documents in the trading and commercial
contracts. The instruments must be genuine, failing which it
might result in trade frauds or commercial crimes of technical
sophistication. For instance, the Letter of Credit might be used
for money laundering purpose. The banker may return electronic
documents having any discrepancy to the porter to rectify them.
The bank will not accept the disputed e-document, but it can
keep the amount in reserve. It is incumbent to realise that the
commercial and financial instruments play a vital role in the
contractual relationship between the parties in the digital
contract. The law of the country or the ICC governs a Letter of
Credit, provided the parties to the digital contract agree to
negotiate with the ICC. On the other hand, bill of exchange is an
order given in writing by the importer to make payment in whose
name it is endorsed. The bill of exchange is a financial document,
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while the Letter of Credit is an instrument to receive payments
by the exporter. The bill of exchange can be passed to any
person any number of times, which the importer has to keep
track of it. Every Letter of Credit has an expiry date, shipment
date and negotiation date. The carrier who issues the Bill of
Exchange forms as an essential document for selling or
negotiating purpose since it is a document of title that can be
exchanged between the parties to the contract. The banks
provide a bridge of confidence in the business transactions
between exporter and importer. The documents are presented to
an Agent Bank. The exporter is assured of payment on
presentation of documents, but they have nothing to do with
the status of the goods. In the digital contracts relating to the
international sale of goods, Bill of Lading represents the goods.
The Advisory Bank verifies the authenticity of the documents,
while the Confirming Bank confirms such documents. The
Nominated Bank transfers the Letter of Credit and claims
payment from the Issuing Bank. The Negotiating Bank acts as
an agent on behalf of the Issuing Bank. The exporter must
receive the payment within 180 days of the date of shipment of
goods. The Clearing Bank collects money from the Issuing
Bank, while the Re-imbursement Bank makes payment to the
exporter.
Rights of importer:
The following rights of an importer are very important from the
viewpoint of the digital contracts-
(i) Goods not sent by the exporter within the specified time.
(ii) Right to sue the exporter for non-performance of the digital
contract entered with him.
(iii) Right to reject goods received with belated delay.
(iv) Right to reject goods if they are not in conformity with the
terms of the contract.
(v) Right to claim damages.
Acceptance Test:
In the context of contracts on the international sale of goods,
the acceptance test becomes a relevant issue. Once the
importer observes the acceptance test, the exporter is absolved
of his liability. The acceptance test comprises of the following
elements-
(i) When the importer communicates to the exporter about the
acceptance of goods in conformity with the contract or after
comparing the bulk with the sample.
(ii) Upon the delivering of goods, if the importer does any act
beyond the knowledge of the exporter absolves him of his
liability.
(iii) If the importer has not examined the goods delivered to him
within the specified time and fails to issue notice to the
exporter about the defects or contrary noticed by the
importer, the exporter is absolved of his liability.
(iv) Failure to accept goods by the importer within the specified
enable time.
(v) An importer delivering the goods to the third party by way
of sub-sale.
The goods received by an importer must be examined within a
reasonable time. The Convention on the International Sale of
Goods (CISG) prescribes 365 days within which the goods must
be rejected. An importer must send a notice of rejection to the
exporter if any defects in the goods are noticed, so that the
exporter may either cure or replace the defective goods. The
damages are the monetary losses suffered by the importer, which
includes actual or liquidated damages. The actual damage may
be the payment made by the importer to the exporter inclusive
of certain consequential damages. The liquidated damages are
the notional damages of the actual damages of goods, which
will be decided by the court. The Carriage of Goods by Sea Act
(Amendment) Act, 1994 prescribes for payment of damages,
except the damage caused due to the jettisoning of goods.
UCPDC-500 also deals with credits in addition to the trading
contracts. There is a provision to pay 50% of the credit to the
exporter as anticipatory credit.
The reliability and authenticity as applicable to all documents
are also extended to the multimodal transport documents. In
the international sale of goods, electronic communications are
used while transferring of rights in goods by way of transfer of
Bills of Lading [Articles-16 & 17 r/w Articles-6 & 8 of the Model
Law]. all the transport documents irrespective of the fact whether
they be negotiable or non-negotiable assumes significance in
the digital contracts of international sale of goods. The trading
States should decide about the inclusion or exclusion of
documents as charter-parties within the scope of that charter as
appropriate or inappropriate. The charter party refers to a
contract between the shipper (customer) and the carrier (owner
of the ship). Electronic documents or data messages are used in
place of paper-based documents while formulating the digital
contracts on international sale of goods, which would minimize
time (instantaneity) and cost (cheaper) factors. The rights and
obligations could be conveyed in any relevant agreement by
using data messages, if the standard form of reliability is adopted
to render such data messages unique. If the digital contract is
evidenced by e-documents, the rules applicable would be
different from paper-based documents. An express provision
shall be made to recognize the transmission of data message as
functional equivalent to the transfer of document of title
representing the goods. In the context of transfer of rights
through the data message, the functions performed through the
single transmission of paper-based Bill of Lading would imply
transmission of more than one data message. In the digital
contracts on carriage of goods, rights can be conveyed to only
one person at any given point of time to putforth his claim. In
other words, if the procedures are laid down to enable right or
obligation to be conveyed by electronic method, it becomes
necessary that guarantee of singularity shall be adopted as
one of the features. The technical security devices providing
such guarantee of singularity would be built into a
communication system requiring to demonstrate the reliability.
The single or joint ownership of rights is also possible in the
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goods or other rights specified in the Bill of Lading. A reliable
method of securing the data message purporting to convey any
right or obligation should be used. The reliable method should
ensure that no two media be used simultaneously for the same
purpose and prevent multiplication of the single data to avoid
the risk of duplicate transport documents. However, availing of
multiple forms of communication for different purposes would
not pose any problem. The use of paper-based communication
for ancillary message and electronic communication for Bills of
Lading would not be a problem at all. A greater degree of care
should be exercised against the possibility of incorporating the
same rights in the paper-based as well as data message at any
given point of time. The parties to the digital contracts of
international trade in goods and services must comply with the
terms and conditions, if they had earlier agreed to engage in
electronic communication rather than switching over to the
paper-based communication. The drop down to the paper-
based communication should be subject to an agreement of all
interested parties, which should not affect any right. The Hague
and Hague-Visby Rules specifies clearly that a contract of
carriage shall necessarily be covered by a Bill of Lading as
document of title. Whether these rules would automatically
apply to the digital contracts effected by one or more data
message? It is incumbent on our part to ponder over this
question in the context of the used of data messages in place of
the paper-based Bill of Lading under the substantive rule of law,
as may be applicable to the digital contracts, evidenced by data
messages. It is relevant in the light of granting, acquiring,
renouncing, surrendering, transferring or negotiating rights in
goods under the digital contracts.
The functions of Bill of Lading through EDI communication
includes: (a) it serves a receipt of cargo by the carrier (b) it
serves as an evidence of the contract of carriage of goods with
reference to its terms inclusive of the specific details of the ship,
name of the destination port, nature and quantity of goods and
(c) it serves as a document of title giving certain rights to its
holder. The rules of UN on Electronic Data Interchange for
Administration, Commerce and Transport (EDIFACT) fulfils the
first two conditions, while the Bill of Lading for Europe (BOLERO)
International Ltd., provides documentation in electronic form
since June 1998, based on legal binding environment and
common procedures. The BOLERO Title Registry being one of
its services allows the exchange of electronic Bills of Lading
(<http://www.boleroltd.com>). In the use of electronic Bills of
Lading through EDI, the problem lies in the carrier relying upon
the guarantee of singularity and uniqueness of the message for
delivering the goods. The BOLERO assures the holder of an
electronic Bill of Lading to register his rights. Under the
functional equivalent approach, the paper-based Bill of Lading
could be utilized. The carrier must on demand by the shipper,
issue Bill of Lading [Article-4 (1) of the Hamburg Rules].
ON-LINE FUTURES CONTRACTS:
The on-line futures contracts are agreements between the sellers
and buyers in an electronic environment, requiring the on-line
sellers to deliver to the on-line buyers a specified quantity and
grades of identified commodities at a fixed time in the future and
at the agreed prices. In futures contracts, the seller is called
SHORT and the buyer is called LONG. As they are highly
standardized contracts, they reduce transaction cost associated
with trading a deferred delivery instrument and trading is
restricted to organized stock exchanges. A financial futures
contract is an agreement to buy or sell, on any recognized stock
exchange a standard quantity of specific financial instrument of
a foreign currency at a future date and at a price agreed between
the two parties. Since the clearinghouse guarantees the
performance of on-line contract, the obligation lies on the
clearinghouse in addition to the buyer and the seller. The trading
in futures contract at all the futures exchanges confines to indices
and there is no individual scrips in which trading in futures
contract is permitted anywhere in the world. The stock index
futures contracts are used to hedge the stocks of shares by
acquiring a short position during the anticipated period of fall in
prices. A long position can also be acquired against anticipated
funds in futures as a hedge against the likely rise in prices. The
risk management through hedging and a more accurate price are
the two benefits of the futures contracts. Hedging is defined as
an activity of trading futures with an objective of reducing and
controlling the price risks. It differs from speculation where
traders willingly assume the risk with a fond hope of making
profits from price change. However, the uncertainty about the
quantity that would be sold or brought at some future date
cannot be hedged. The object of hedging is to eliminate or
control the variability in a firms net revenue because of the
change in price. The mechanism of hedging involves taking a
position in futures to reduce price risk. A short hedge is a
symbolic selling of a hedge, while a long hedge is a buying of
the hedge. The futures cash obligation may be in a form of
forwards contract to buy or sell a commodity. The value of cash
position may result in the gain or loss due to the change in cash
price. The speculators (profit seekers) and hedgers (risk
managers) buy and sell futures because they wish to speculate
about the future price levels of a particular commodity that
underlines a contract, so that they can make profit from changes
in the prices by buying at a low price and selling at a high price
in the future.
The new technology provides automated screen based trading
with the advancement in computer and communication
technologies. There is only one contract between the buying
and selling parties, but the clearinghouse will have two
contractual obligations, such as LONG and SHORT. A features
contract could be settled by making or taking physical delivery
or settlement by cash delivery, by making or off-selling future
transactions and by engaging in an exchange for physicals. In
futures contract, the rules are specified by the stock exchanges.
There are delivery months and exchange designated notice
days. At the beginning of the delivery month, all traders having
open position in that months contract are required to notify
their respective Futures Commission Merchants that thy intend
to make or take delivery during that month. They shall also
specify the quantity and the time when such deliveries are
desired. The Futures Commission Merchants will notify the
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clearinghouse of their customers intentions. Then the
clearinghouses match the positions of LONG and SHORT.
Thereafter, delivery notices are sent via customers respective
Futures Commission Merchants indicating to whom their
delivery obligations run, when, where and what quantity the
delivery shall be made. Upon the satisfactory delivery, the
clearinghouse extinguishes on its books the obligations of the
respective Future Commission Merchants, who in turn extinguish
the obligations of corresponding customers. The futures
contracts must obligate specifically the cash delivery as a
settlement procedure to avoid warehouse brokerage etcetera as
in the case of physical delivery. It is pertinent to note that
physical delivery requires actual purchasing or selling of a
commodity. The mechanism of cash delivery comprises of pricing
of the relevant futures contract equal to the cash price of the
underlining asset at that time at the close of the trading in that
contract. The money owing to either the SHORT or the LONG
on account of setting the future price equal to the cash price is
transferred via clearing house and the Futures Commission
Merchants from the party who owes money.
The exchange of futures for physicals is another form of physical
delivery and offers more flexibility in settling the contractual
obligations of the parties than exchange rules may permit. For
instance, LONG and SHORT may agree to deliver at a different
place or time against permissible rules of delivery and may even
agree to settle their contractual obligations with the delivery of
different commodity than the agreed one.
The price risk exists in the futures contract owing to the
uncertainty of future price levels. The deposit or margin in the
form of cash or securities made by the holders of futures (buyers
and sellers) futures contracts with their Futures Commission
Merchants (guarantee) that both LONG and SHORT ultimately
met their contractual obligations. Greater is the price volatility
higher is the initial margin requirement. The variation margin is
based on the difference between the current exchange settlement
price and previous settlement price. The features contracts are
made in the electronic environment since the communication
technology is suitable for such contracts.
Software Contracts:
Since the EC Directive assigns product liability to the software,
the digital contracts in computer software assume greater
significance. In St Albans City and District Council Vs.
International Computers Ltd., (1996), 4 All E.R. 481, the court
held that software constitute goods. The contracts for software
package, software licencing, software maintenance (support
contracts), agreements between the manufacturers and
distributors of software, bureau service contracts (party
possessing software provides facilities to another party having
no software) are the different types of software contracts of the
modern times. The software contracts play a vital and supportive
role in the digital contracts. The utility of software in generating,
transmitting, storing, encryption and decryption of data message
assumes tremendous importance. The contracts in respect of
software might relate to the use of computers or the Internet/
Website. The software refers to computer programs, which may
comprise- a) software written for a particular user (Bespoke
software) and b) software written for multiple users (off the
shelf software). The standard software is necessary for basic
programs, as needs of the mainframe or the Internet. The
licencing system provides an appropriate approach to the
exploitation of software. The proprietors of software make an
offer to the users through their Website to download from the
Internet and install in their mainframes. The licence has become
a vehicle by which the acquirer has a right to the use software.
The restricted rights of the acquirer and the obligations of the
supplier should be analysed carefully before formulating the
contracts in software. The licencing terms should be made
apparent to the acquirer of software before offer and acceptance
has occurred in a contract between the supplier and acquirer
[Scottish Case: Beta Computers (Europe) Ltd., Vs. Adobe
Systems (Europe) Ltd., (1996), FSR, 371]. This problem may
arise in the instances of e-mail orders or such orders placed with
the suppliers by the acquirers even by using mobile telephones.
The contractual obligations exist in the case of bespoke or
modified standard software to be compatible for the business of
acquirers. The contractual liability arises for supply of defective
software as a unique development in the information technology.
Revocation of digital contracts:
The digital contract as such cannot be revoked. However, an
offer may be revoked before e-mail or EDI enters the addressees
designated computer resource. Similarly, an acceptance could
be revoked before e-mail or EDI containing acceptance is
communicated to an offeror. In the digital contracts relating to
the international sale of goods, the parties may agree to the
revocation of the Letter of Credit before the shipment of goods
is made.
Jurisdiction vis-a-vis digital contracts:
The place of contract would normally the place where offer is
received or the place from where acceptance is transmitted. The
evolution of technologies has diminished the geographical
territoriality. Mr. D.Johnson and D.Post said, There is no
necessary connection between Internet and physical jurisdiction
in as much as the actual location of computers through which
information is routed along the Internet is of no consequences,
either to the ISP or receivers of information. The Internet-
based jurisdiction has resulted more from the defendants
purposeful availing of the privilege of doing business or
electronic communication over the forum jurisdiction. The
Pennsylvania district court delivered the first decision in USA
setting out all analytical framework for specific personal
jurisdiction based on the Internet activity [Zippo Manufacturing
Company Vs. Zippo.com Inc, 952 F. Supp. 1119, 1124 (WD Pa.
1996]. The traditional analysis of personal jurisdiction would
be applicable where an integral website is used actively by the
defendant to carry out transactions in as much as transmitting
data messages directly to an addressee. The courts have no
powers to exercise personal jurisdiction on the passive websites.
The exercise of jurisdiction in the interactive website should
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be determined by examining the level of interaction inclusive
of the commercial nature of the website. The plaintiff of Arizona
Corporation alleged that the defendant Florida Corporation who
infringed the trademark should be subjected personal
jurisdiction of the Federal court in Arizona, because the website
that advertised a product or service was intended for use on a
worldwide basis [Cybercell Inc Vs. Cybercell Inc, 130 F. 3d. 414
(9
th
Cir. 1997)]. The triple test principles adopted in Zippos
case was followed in this case also to determine whether a district
court can exercise specific jurisdiction over a non-resident
defendant and held that the defendant using the name of
cybercell was insufficient for personal jurisdiction, as it has
not conducted any commercial activity over the Internet in
Arizona. The triple test principle includes: a) The non-resident
defendant must do some act or consummate some transactions
with the forum or perform some act by which he purposefully
avails himself of the privilege of conducting activities in the
jurisdiction forum, thereby invoking the benefits and protection
b) The claim must be on which arises out of or results from the
defendants forum-related activities and c) Exercise of
jurisdiction must be reasonable. The purposeful availing of the
website and the structured conduct on the part of the defendant
would be necessary for personal jurisdiction. The court found
the general jurisdiction where a manufacturers website allowed
customers to shop on-line [Mieizkowski Vs. Masco Corporation,
997 F, Supp. 782 (E.D.TEX. 1998)]. The court held that the general
jurisdiction could not be based on mere act of transmitting
information through the use of interstate communication facilities
[California Software Inc Vs. Reliability Research Inc, 1356 (C.D.
Cal, 1986)]. The French court assumed the jurisdiction over
Yahoo Inc, a corporation located in Santa Clara country to
adjudicate a complaint of French resident that they could access
yahoo auction site on which Nazi memorabilia were being offered
for sale. When the Paris court ruled on May 22, 2000 that yahoo
incorporation was required to block access to such sites in
France, where sales of material are illegal, it allowed yahoo Inc
two months time to develop a plan for such selective blocking.
It should be noted that the US Supreme Court ruled in May,
2000 that an Internet Service Provider bore no responsibility for
the material it carried and that a court in Munich last year
overturned the conviction of the former head of CompuServe in
Germany for aiding and abetting the dissemination of illegal
content. The Eastern District of Michigan held that the sale by
a Texas resident of allegedly infringing items on electronic bays
Internet auction site to Michigan residents did not create
personal jurisdiction in Michigan over the Texas resident
[Winfield Collection Ltd. Vs. Mc Gauley, (E.D.Mich No. 99-EV-
758 75-DT, July 24, 2000)].
The American Bar Association presented the jurisdiction report
in July 2000, in which six recommendations have been made-
1. Not to assert personal and prescriptive jurisdiction on the
basis of accessibility to a passive website that does not
target the State. Personal and prescriptive jurisdiction to
apply to a website content provider or ASP in a jurisdiction.
An ASP is a sponsor, who is a habitual resident of the
jurisdiction, targeting the jurisdiction and the claim arising
out of the content of the site and the dispute arising out of
a transaction generated through a website or service that
does not target any specific jurisdiction, but it is interactive
and can be fairly considered to knowingly engage in
business transactions.
2. Purchasers and sellers to identify the jurisdiction in which
they habitually reside.
3. Sponsor to indicate the jurisdiction targets of their sites
and services, either by defining the express content of the
site or service, or listing destinations targeted or not targeted
and by deciding whether to engage in transactions with
those who access to site or service.
4. To prevent access by user to a site or service through the
use of disclosures, disclaimer, software and other
technological blocking or screening mechanisms should
insulate the sponsor from assertion of jurisdiction.
5. Personal or prescriptive or tax jurisdiction should not be
exercised merely because it is permissible under the
principles of international law or take into account the
sovereign interests of other States.
Regarding the contractual choice of law, three principles should
apply between the parties.
i) Absence of fraud or related abuse.
ii) It is mandatory that courts should enforce B2C contracts.
iii) Jurisdictional choices should be enforced where the
consumer bargains with the sellers.
LIMITATIONS OF THE DIGITAL CONTRACT:
Though the Arbitration & Conciliation Act, 1996 facilitates digital
contracts, the following limitations may be noted-
(i) E-Contracts cannot be made applicable to Joint Venture
Agreements, Sale Deeds, Wills and Lease Deeds in as much
as they are applicable to e-commerce transactions.
(ii) The Stamp Act and Registration Act are not amended to
suit the digital or electronic environment of the digital
contracts.
(iii) Since the Information Technology Act, 2000 excludes the
application of Negotiable Instruments Act, the electronic
payments made in respect of digital contracts needs clarity.
DISPUTE SETTLEMENT MECHANISM:
The disputes may arise due to the non-performance or the
breach of contractual obligations, which could be settled by the
dispute settlement mechanism, as agreed by the parties to the
digital contract. The non-performance of digital contracts might
be owing to the reason that delivery is not in conformity with
the contract or non-delivery of goods, breach of the terms of
contract or non-performance of the contract. The following are
the ways of negotiations under the dispute settlement
mechanism-
(i) Negotiation between the parties to the contract.
(ii) Negotiation by the third party, which cannot be enforced
unless the parties agree in writing. They adopt conciliation
and mediation methods in settling the disputes.
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345
(iii) Arbitration method where an award passed by the arbitrators
is final. The parties may nominate one arbitrator each, above
whom there would be an umpire.
Since most of the commercial transactions are based on contracts,
arbitration also becomes a part of the contract. There should be
an express clause inserted at the time of agreement between the
parties to refer any dispute to the ICC for settlement at a later
stage. The ICC is an international court of arbitration, which is
a professional body consisting of experts in the field. If the
parties belong to different countries, the arbitration is conducted
as per the ICC rules. The courts in every country should
recognize and enforce the award passed by the arbitration. The
arbitral award shall be enforced at the place where the parties
have concluded the contract. It should not be against the public
policy. The New York Convention recognizes the arbitration
agreement as well as enforcement of foreign arbitral awards.
This provision was given effect in India by the Arbitration and
Conciliation Act, 1996. The third party resolves the settlement
of a dispute between the parties since the judicial proceedings
are cumbersome and time consuming. The arbitrators settle
the dispute and pass an award, which is binding on the party.
The arbitrators should be odd in members as each party selects
his own arbitrator. Over and above, the third arbitrator acts as
an umpire. The Arbitration and Conciliation Act, 1996 not only
rationalized the arbitration procedures but also infused judicial
element. The party can prefer an appeal within three months of
the passing of an award by the arbitrators [Section-34].
346
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1. A & B initially agreed to communicate electronically
using their designated information systems in the formation
of digital contract. Mr. A, the originator despatched his
data message (offer) from his computer resource to the
computer resource of the addressee. Mr. A clearly indicated
in his data message to send an acknowledgement as soon
as the addressee receives the data message. Mr. B could
not send the acknowledgement, as the data message did
not enter his designated information system at all. After
the specified time limit, Mr. A sends his offer to another
person Mr. C, who accepts it. Mr. A sues Mr. B for
breach of e-agreement. Advice Mr. B.
2. Critically examine the functional equivalent approach,
favoured by the UNCITRAL Model Law, 1996.
3. Mr. Z, the addressee (offeree) sends his acceptance to the
computer resource of Mr. Y, the originator (offeror) through
e-mail. The computer programmer, employed by Mr. Y has
omitted to enter the IP address of Mr. Z while installing
the special software in the information system in checking
out spams. Consequently, the e-mail sent by Mr. Z could
not enter the designated information system of Mr. Y and
the digital contract does not materialize. Mr. Y transfers
the same offer to Mr. X, who accepts it and enters contract
with Mr. Y. Later, Z contends that acceptance was
PROBLEMS/QUESTIONS:
complete since he had dispatched an e-mail from his
computer resource to Mr. Y and sues him. Advice Mr. Z.
4. Analyse the principle of focus of intent on the part of
originator in the process of conclusion of digital contracts
between the parties.
5. Mr. N, an importer passes off the Bill of Lading
electronically to the third party Mr. L without the knowledge
of the exporter Mr. M in the contract of international sale
of goods. Mr. L, the holder of the Bill of Lading takes
delivery of goods. After the physical inspection of goods,
he notices that the goods supplied were not in conformity
with the samples. Mr. L wants to sue Mr. M and
approaches you for advice. Advice.
6. Mr. R, a resident of New York & Mr. S, resident of
Bangalore enters the digital contract to deal with computer
software having the product liability. For obvious reasons,
Mr. S winds up his business and communicates his
decision to Mr. R by sending an e-mail. Mr. R fails to
open his e-mail box for quite some time since he was away
on his business tour to Europe. In the mean time, one Mr.
Q, an ex-employee of Mr. S download the software
product from the Website of Mr. R by resorting to an act
of masquerading. Mr. R sues Mr. S for non-payment.
Advice Mr. S.
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CASE LAWS:
01 Doe Vs US
02 US Vs Simpson
03 US Vs Whitaker
04 US Vs Tank
05 R Vs Sipby
06 US Vs Glasser
07 US Vs Bonalla
08 US Vs Allen
09 US Vs Briscol
10 R Vs Cachrane
11 Glenclore International
A-g Vs Bank of China.
12 US Vs Poindexter
13 Beathy Vs First Exploration
Company
14 US Vs Miller
15 US Vs Cestinick
1513, 1517 (D.Hawaii 1992)
152, F. 3d. 1241 (10
th
Cir. 1998)
127, F. 3d. 595, 601 (10
th
Cir. 1997
200, F. 3d. 627, 630-31 (9
th
Cir. 2000)
(1990) 91 Cr. App. R 186
773, F. 2d. 1553 (11
th
Cir. 1985)
858, F. 2d. 1427, 1436 (9
th
Cir. 1988)
106, F. 3d. 695, 700 (6
th
Cir. 1997)
896, F. 2d. 1476, 1494 (7
th
Cir. 1990)
(1993) Crim. L.R. 98
34 (1995) TLR 617
951, F. 2d. 369 App. Case (1991)
(1988)
771, F. 2d. 1219, 1237 (9
th
Cir. 1985)
36, F. 3d. 904, 909 (10
th
Cir. 1994)
Held that the computer evidence fulfills the
best evidence rule.
Held that the prosecution has successfully
proved the computer printout of an Internet
Chat Centre
Held that a computer programmer or an
operator having first hand information can
testify computer printout.
Held that the log printout of a Chat Room is
admissible in evidence.
Held that e-document generated by computer
automation was held to be valid evidence.
Held that a person opposing the admissibility
of computer printout must prove the type of
better security needed for protection of data
stored in the computer system
US Supreme Court held that mere
apprehension that data contained in
computer system is an insufficient ground
to render it unworthiness.
Held that raising mere doubt of the
possibility of tampering data is insufficient
to render evidence inadmissible.
Held that e-records maintained during the
normal course of the business activity are
valid in evidence.
Held that there should be no errors or
system failure as criteria while determining
the authenticity of e-document.
Held that e-record generated by computer
automation without human intervention to
be treated as original
Held that the recovered deleted files are
admissible in evidence.
US court held that the use of electronic
communication was held to be valid in the
formation of digital contracts.
Held that a bank officer incharge of
computers can authenticate computerised
loan data.
Held that e-records generated in the course
of business activity are admissible in
evidence.
Sl. No Case law
Citation of the case law Court decision
348
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Sl. No Case law
Citation of the case law Court decision
16 R Vs Shepherd
17 R Vs Pettygrew
(1993) AC 380
(1980) 71 Cr. App. R 39
Held that a witness testifying the
computer printout must be familiar with
the operation of the computer.
Held that any mistake committed by the
computer programmer was an issue that
relates to evidential weight than
admissibility of evidence.
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349
A. BOOKS:
1. Rowland, D and Macdonald, E (1997) Information Technology Law,
Cavendish Publishing Ltd., (London).
2. Cristian, C (1998) Law of International on-line Business: A Global
Perspective, Sweet & Maxwell Ltd., (London).
3. Mittal, PP (2000) Law of Information Technology, Taxman Allied Services Private Ltd., (New York)
4. Rodney DR (2001) Guide to Cyber Laws, Wadhwa & Company, (New York).
B. STATUTES:
1. UNCITRAL Model Law on Electronic Commerce, 1996.
2. Information Technology Act, 2000.
3. Indian Evidence Act, 1872.
C. ARTICLES:
1. E-commerce ands Internet Law 2001: Selected Legal Issues-Denis T. Rice.
D. WEBSITES:
1. Functions of UNCITRAL-http://www.uncitral.org.
2. Business Internet Jurisdiction-http://www.suffolk.edu/ilawhightec/classes/cyberlaw/ejensen/paper.html.
3. Haber Section and W.S. Stornetta, How to time stamp a digital document-http://www.crypto.org/90procs/pprs/tstdd.htm.
1. Peritz, Computer Data and Reliability: a call for Authentication of Business Records under the Federal Rules of Evidence-
http://www.library.nwu.edu/law/depts/research.guides/libgui.html.
2. Requirements on Electronic Signature Service-http://www.cordis.ju.infosec/src/stud2fr.htm.
3. International Consensus Principles for Electronic Authentication, International Working Group on Electronic Authentication-
http://www.ilpf.org/digsig/int/prin.html.
4. Secure Electronic Signature-http://www.law.upenn.edu/library/ulc/uecicta/ect/897.htm.
5. Carole E.Handler & Criag A.Guthery, Cyberspace Licensing: Linking, Framing and Catching-http://www.legalwks.com.
6. Framework for Global Electronic Commerce-http://www.Cmcnyls.edu/paper/WHGIIFra.HTM.
7. Boris Kozolchyk, Evolution of the Ocean Bill of Lading from and Banking Law Perspective-http://www.webcom.com/
symbolpiones.model1.htm.
8. Livermore J. ET AL, Electronic Bills of Lading and Functional Equivalence-http://www.eli.warwick.ac.uk/jilt/ecomm/98.2liv.
9. Electronic Commerce and EDI MANAGING Electronic Record-http://www.gsliutexas/symbolssay/pubs/1389c5a.htm.
10. Peter Sommer, Digital Foot Prints: Assessing Computer Evidence-http://www.usdoj.gov/criminal/cybercrime/search.dics/
toc.htm.
BIBLIOGRAPHY