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Law of Contract
CHAPTER 3
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"NO CAUSE OF ACTION ARISES FROM A BARE PROMISE."
-
LEGAL MAXIM
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CHAPTER OBJECTIVES
After reading this chapter, you should be able to understand:
The need for the law of contract.
Basis and extent of the law of contract.
Meaning of a contract.
What is an agreement?
What is an enforceability of agreement?
Proposal (offer), its meaning and essentials, Legal rules as to valid
offer and lapse and revocation of proposal.
Acceptance, its meaning and essentials.
Communication of Proposal, Acceptance and Revocation.
Consideration, its meaning and essentials.
Capacity of parties:
Consent and free consent:
Legality of object and Consideration.
Expressly declared void agr~ement.
Distinctions between insurance .and wagering agreements.
Contingent Contract, its meaning and essentials.
Quasi Contract, its meaning and kinds.
Distinction between Contract and Quasi-Contract.
Performance of Contracts.
Discharge of Contract, its meaning and modes.
Remedies for breach of Contract.
Indemnity and Guarantee, Distinction between Indemnity and Guaranlll
.:. Discharge of surety from liability.
Bailment, its meaning, essential features:
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3.1 INTRODUCTION
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The law of contract is the basis upon which the super structure of all business is
built. It affects every person in one way or the other, as all of us enter in! some kind
of contract every day. All contracts are based on agreements whit are either
express or implied. Everyone of us enters into a number of contract almost
everyday. Most of the time we do so without realising what we are doing from the
view point of law. A person seldom realises that when he gives clothe for
drycleaning, or when he buys milk, bread or biscuits, or when he goes to auditorium
to see a movie, he is entering into a contract. In business transaction normally first
promises are made followed by performance. If parties were free to go back on their
promises without incurring any liability it would be impossible
to carryon any trade, industry or commerce.
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3.2 BASIS AND EXTENT OF THE LAW OF
CONTRACT
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In India, the law of contract is contained in the Indian Contract Act, 1872, here in
after referred to as the Act. It extends to whole of India except the State of J&K and
came into force on the first day of September, 1872. The Act is not exhaustive. It
does not deal with all the branches of the law of contract. There are separate Acts
which deal with contracts relating to negotiable instruments, transfer of property,
sale of goods, partnership, insurance etc.
3.3 Meaning of Contract
The word 'contract' is derived from the Latin 'Contractum' meaning drawing together According
to the Act, "An Agreement enforceable by law is- a Contract"l. Some authors have defined
contract in the following words:
"Every agreement and promise enforceable at law is a contract".
-Sir Federick Pollock
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3.4 WHAT IS AN AGREEMENT?
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According to the Act, "Every promise and every set of promises forming the
consideration for each other is an agreement."2
Now the question is, What is Promise? According to the Act" A proposal when
accepted becomes a promise"." Example:
Ram offers to sell his car to Shyam for Rs. 2,00,000. Shyam accepts the offer.
This offer after acceptance becomes promise and this promise is treated as an
agreement between Ram and Shyam.
Thus an agreement consists of a proposal (offer) by one party and its
acceptance by the other. In the form of an equation it can be shown as under:
Agreement = Proposal (or Offer) + Acceptance of Proposal (or Offer)
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3.5 WHAT IS AN ENFORCEABILITY OF
AGREEMENT?
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An agreement is enforceable by law if it creates some Legal Obligation. In other
words, the parties to an agreement must be bound to perform their promises. In
case of social or domestic agreements, the usual presumption is that the parties do
not intend to create legal relations. Example: Madhur invites his friend Vidur to a
dinner and Vidur accepts the invitation. If Vidur fails to turn up for dinner,
Madhur cannot go to the Court to claim his loss.
In commercial or business agreements the usual presumption is that the parties
intend to create legal relations. Example: Vikreta offers to sell his car to Kreta for
Rs. 1 lakh. Kreta accepts the offer. Such an agreement is a contract because it
creates legal obligation i.e. a duty enforceable by law.
From this, it will be clear that all contracts are agreements, but all agreements are
not contracts. Salmond has rightly observed: "The Law of Contracts is not the whole
law of agreements, nor is it the whole law of obligations. It is the law of those
agreements which create obligations and those obligations which have their source
in agreements."
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3.6 ESSENTIAL ELEMENTS OF A VALID
CONTRACT
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We have seen that a contract is an agreement enforceable by law. To be
enforceable by law, an agreement must possess the essential elements of a valid
contract. The Act (sections 10, 29 and 56) provides that all agreements are
contracts if they are made by the free consent of the parties, competent to contract,
for a lawful consideration, with a lawful object, are not expressly declared to be
void, and where necessary, satisfy the requirements of any law as to writing or
registration.
The essential elements of a valid contract are the following:
a. Proposal (offer) and Acceptance.
b. Intention to create Legal Relations.
c. Lawful Considerations.
d. Capacity of Parties.
e. Free Consent.
f. Lawful Object.
g. Writing and Registration.
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3.7 CLASSIFICATION OF CONTRACTS
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3.7.1 On the/basis of enforceability
a. Valid Contracts: Contracts which satisfy all the essential elements of a valid
contract;" are enforceable in a court of law.
b. Void Contract: A contract which ceases to be enforceable by law becomes
void when it ceases to be enforceable." A void contract is a nullity from its
inception. No rights accrue there under.
c. Voidable Contract: 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.'! A contract is voidable when one of the parties to the
contract has not exercised his free consent. One of the essential elements of a
formation of a contract, i.e. free consent. All voidable contracts are those which
are induced by c<:,undue influence, fraud or misrepresentation.
d. Illegal contracts: It is contrary to law and hence void abinitio.
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3.7.2 ON THE BASIS OF MODE CREATION
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a. Express contract: When the terms of a contract are reduced in writing or
are agreed upon by spoken words at the time of its formation, the contract
is express.
b. Implied contract: The terms of a contract are inferred from the conduct or
dealings between the parties. When the proposal or acceptance of any
promise is made otherwise than in words, the promise is said to be implied.
Such an implied promise leads to an implied contract. Example: A boards a
bus. It is implied from his conduct that A has entered into an implied
promise to purchase a ticket ..
c. Quasi contract: Constructive or Quasi contracts arise out of obligations
enjoyed by one person from the voluntary acts of the other which are
intended to be performed only on the happening of some future uncertain
event.
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3.7.3 ON THE BASIS OF THE EXTENT OF
EXECUTION
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a. Executed contract: Where both the parties have performed their
obligations, it is an executed contract. Even when one party to the contract
has performed his share of the obligation, the contract is executed, though
the other party is still under an outstanding obligation to perform his part of
the promise.
b. Executory contract: Where neither party to the contract has performed his
share of the obligation, i.e. both the parties have yet to perform their
promises, the contract is executory.
c. Contingent contract: A contingent contract is one in which a promise is
conditional and the contract shall be performed only on the happening of
some future uncertain event.
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3.8 PROPOSAL (OFFER) AND
ACCEPTANCE
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3.S.1 Meaning of Proposal
'Proposal' of the Act is synonymous with the term 'offer' of the English Law. The
words 'proposal' and 'offer' are used inter-changeably.
"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' .15 The first step towards creating a contract is that
one person shall signify or make a proposal to the other, with a view to obtaining
the assent or acceptance of that another to that act or abstinence. A proposal is
then said to be made.
In order to constitute a contract, a person should offer to do something. This offer
must be sufficiently communicated to the person for whom he intends to do
something with a view to obtaining his assent to it. The person who makes such an
offer or proposal is called the 'Offerer' or 'Proposer," the person to whom the
proposal or offer is made is called the 'prop osee ' or 'offeree' and the person
accepting it is called the 'promisee' or 'acceptor'.
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3.8.2 ESSENTIALS OF A PROPOSAL
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The definition of the word proposal given in the Act reveals the following three
essentials of a 'proposal'.
a. The expression of willingness: to do or to abstain from doing something.
b. This expression must be to another person.
c. This must be made with a view to obtaining the assent of the other person.
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3.8.3 LAPSE AND REVOCATION OF
PROPOSAL
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A proposal lapses and becomes invalid in the following circumstances:
a. An offer lapses after stipulated or reasonable time ."
b. A proposal lapses by not being accepted in the mode prescribed, or if no mode is
prescribed, in some usual and reasonable rnarmer.P"
c. A proposal lapses by rejection by the proposee ..
d. A proposal lapses by the death or insanity of the proposer or the prop osee before
acceptance.
e. A proposal lapses by revocation by the -proposer before acceptance."
f. Revocation by non-fulfillment of a condition precedent to acceptance."
g. A proposal lapses by subsequent illegality or destruction of subject matter.
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3.8.4 ACCEPTANCE
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A contract as already observed, emerges from the acceptance of an offer.
Acceptance is defined when the person to whom a proposal is made signifies his
assent thereto the proposal is said to be accepted. A proposal when accepted
becomes a promise." The person making the proposal is called the Promisor, and
the person accepting the proposal is called the Promisee." Performance of the
conditions of a proposal, the acceptance of any consideration for reciprocal promise
which may be offered with a proposal is an 'acceptance' of the proposal (Sec. 8). An
acceptance need not always be expressed in words. Performance of the conditions
of a proposal is an acceptance of the proposal. In order that there must be a
binding contract, there must be absolute and unconditional acceptance of the terms
of a proposal.
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3.9 CONSIDERATION
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3.10.1 Meaning of Consideration
Consideration is one of the essential elements of a valid contract. When a
person promises to do something, he must get 'something' in return. If he does
not get 'something' in return, the contract is, generally, not valid. This 'something'
is known as consideration. In other words, consideration is the price for which
the promise of the other party is bought. The Act defines consideration as "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"27
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3.9.2 ESSENTIALS OF A VALID
CONSIDERATION
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The essentials of consideration are as follows:
a. Consideration must move at the desire of the promisor: The act or
abstinence forming the Consideration must be done at the desire or request of
the promisor. If it is done at the instance of the third party or- without the desire of
the promisor it is not consideration. Example: Amar sees Bhushan's house on fire
and helps in extinguishing it. Amar cannot demand payment for his services-
because Bhushan never asked him to come for help.
b. Consideration may move from the promisee or any other person: The
consideration need not move from the promisee alone but may proceed from any
third person. Thus, as long as there is a consideration for a promise, it is
immaterial who has furnished it. This means that even a stranger to the
consideration can sue on a contract, provided he is a party to the contract. This is
also called as 'Doctrine of Constructive Consideration' . For example: X by a
deed of gift transferred
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a. certain property to her daughter Y with a direction that Y should pay Z an annuity.
Y executed a deed in writing in favour of Z an agreed thereby to pay the annuity.
Later Y refused to pay annuity c the plea that no consideration had moved from
Z. It was held that was entitled to maintain suit because a consideration need not
necessari. move from 'the promisee, it may move from any other person (i.e. X in
t~ present case)."
b. Consideration may be past, present or future.
c. Consideration must be 'Something of Value: The consideration need not b
adequate to the promise but it must be of some value in the eye of th law.
d. Consideration must be legal.
e. Consideration may be doing something, or abstaining from doing something
(positiv or negative act) or a promise to do something.
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3.9.3 NO CONSIDERATION, NO CONTRACT
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The general rule is that "an agreement made without consideration is void". But
there are a few exceptions to this rule. These exceptions are as follows:
a. Agreement made on account of natural love and affection: An agreement mad
without consideration is enforceable if, it is
i. made on account of natural love and affection.
ii. between parties standing in a near relation to each other.
iii. expressed in writing, and
iv. registered as per law.
b. Agreement to Compensate for past voluntary service: Example: A finds B'!
purse and gives it to B. B promises to give A Rs. 100. This is a Contract.
c. Agreement to pay a time barred debt: Where there is an agreement, made ir
writing and signed by the debtor or his authorised agent, to pay wholly 0: in
part a debt barred by the law of limitation, the agreement is valid ever though
it is not supported by any consideration.
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3.10 CAPACITY OF PARTIES
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3.10.1 Who is competent to Contract?
According to the Act
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every person is competent to contract, who: is of the age of
majority, according to the law to which he is subject, and is of sound mind, and is
not disqualified from contracting by any law to which he is subject.
3.10.2 Who is a Minor?
As per the Indian law." a person domiciled in India, who is under 18 years of age is
a minor. Accordingly every person who has completed the age of 18 years becomes
a major. Only when a person is under the guardianship of court of wards or under a
person appointed under the Guardians and Wards Act, then he attains majority on
completion of 21 years of age.
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3.10.3 POSITION OF AGREEMENTS BY
MINOR
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The law regarding minor's agreements may be summed up as under:
a. An agreement by a minor is absolutely void and inoperative as against him:
Law protects the rights of the minors, because their mental faculties are not
mature- they do not possess the capacity to judge what is good or bad for
them. In the leading case of Mohori Bibi vs. Dharam das Chose." a minor
executed a mortgage for Rs. 20000 and received Rs. 8000 from the
mortgagee. The mortgagee filed a suit for the recovery of his mortgage
money and for sale of the property in case of default. It was held that an
agreement by a minor was absolutely void as against him and therefore the
mortgagee could not recover the mortgage money nor could he have the
minor's property sold under his mortgage.
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a. No restitution: Except in certain cases. A minor cannot be ordered to make
compensation for a benefit obtained under a void agreement. However under
the Specific Relief Act, 1963,34 a minor may be asked to restore any benefit
which he may have received from other party.
b. Beneficial agreements are valid contracts: Any agreement which is of some
benefit to the minor and under which he is required to bear no obligation, is
valid. In other words, a minor can be a beneficiary.
c. No ratification on attaining the age of majority: Ratification means the
subsequent adoption and acceptance of an act or agreement. A minor's
agreement being a nullity and void ab-initio, has no existence in the eyes of
law. It cannot be ratified by the minor on attaining the age of majority.
d. The rule of estoppels does not apply to a minor: A minor is not stopped from
pleading minority in a suit against him even in those cases where he had
earlier misrepresented himself as a major to the other party.
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f. Minor's liability for necessaries: Minor's property is liable for reimbursing tl
person who has supplied necessaries to a minor (Sec. 68).
g. Specific Performance: Specific performance means the actual carrying out the
contract as agreed. Only a contract entered on behalf of a minor, by h
guardian is binding on the minor and can be specifically enforced by or agai~
the minor. Other than this, no other minor's agreement can be ordered Ii a
specific performance.
h. Minor Agent: A minor can be an agent." He binds his principal by his ac but is
not liable to him in any manner for losses suffered by the principia
i. Minor Partner: A minor being incompetent to contract cannot be a partner! a
partnership firm. But he can be admitted as a partner for the benefits ~
partnership (only for sharing of profits and not losses).
j. Minor and Insolvency: A minor cannot be declared insolvent as he is not
competer to contract.
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3.10.4 WHAT IS A 'SOUND MIND'?
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The. Act provides" A person is said to be of sound mind for the purpose of makirq a
contract, if at the time when he makes it, he is capable of understanding it ana of
forming a rational judgement as to its effects upon his interests. A person who is
usually of unsound mind but occasionally of sound mind may make a contract
when he ~s 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 .. "36
3.10.5 Position of Agreement with persons of Unsound
mind
Lunatics: A lunatic is a person who is mentally deranged due to some mental strain
or other personal experience. He suffers from intermittent intervals of sanity and
insanity. He can enter into contracts during the period when he is of sound mind.
Idiots: An idiot is a person who has completely lost his mental powers. Idiocy is
permanent whereas lunacy denotes peri odical insanity with lucid intervals. An
agreement of an idiot is void.
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3.10.6 PERSONS DISQUALIFIED BY LAW
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The third type of incompetent persons are those who are (disqualified from
contracting by any law to which they are subject'. They are:
a. Alien Enemies: An alien (citizen of a foreign state) is a person who is not a
citizen of India. When there is a war between India and another country, that
country's citizen becomes an alien enemy and cannot enter into contract.
b. Foreign Sovereigns and Ambassadors: They can enter into contracts and
enforce those contracts in our courts but they cannot be sued in our courts
without the sanction of the Central Government unless they choose to submit
themselves to the jurisdiction of our courts.
c. Convict: A convict is one who is found guilty by a court and is undergoing
sentence of imprisonment. During the period of his imprisonment, he is
incompetent to contract and also to sue on contract made before conviction.
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d. Company or Corporation: A company / corporation is an artificial person
created by law. It cannot enter into contract outside the powers, conferred
upon it by its Memorandum of Association (object clause) or by
the.provisions of its Special Act.
e. Insolvents: When a person's debts exceed his assets, he is adjudged
insolvent and his property stands vested in the Official Receiver or Official
Assignee appointed by the court. Such a person cannot enter into contracts
relating to his property.
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3.11 FREE CONSENT
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3.11.1 Meaning of Consent
Consent means an act of assenting to an offer. Two or more persons are saia
consent when they agree upon the same thing in the same sense."
3.11.2 Free Consent
Consent is said to be free when it is not caused by: Coercion, or Undue Influence,
or Fraud, or Misrepresentation, or Mistake."?
3.11.3 Effect of absence of free consent
When there is consent but it is not free (caused by coercion, undue influena fraud
or misrepresentation), the contract is voidable, at the option of the part whose
consent was so caused. When consent is caused by 'bilateral mistake' to a matter
of fact essential to the agreement, the agreement is void.
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3.11.4 COERCION
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Coercion means compelling a person to enter into a contract under a pressill or
a threat. The Act defines 'Coercion' as follows:
"Coercion is the committing or threatening to commit, any act forbidden by~
Indian Penal Code, or the unlawful detaining or threatening to detain, any proper
to the prejudice of any person whatever, with the intention of causing any per5(J
to enter into an agreement."40
Example: A Hindu widow was forced to adopt a boy under threat that her
husbard dead body would not be allowed to be removed if she does not adopt
the b~ She adopted the boy. Here, Widow's c~msent has been obtained by
coercion becas preventing the dead body from being removed for cremation is
an offence und! section 297 of the Indian Penal Code. (Ranganayakamma v.
Alwar Setti).
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3.11.5 ESSENTIALS OF COERCION
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I To constitute coercion the following are the essential features:
a. Coercion may proceed from any person and it is not necessary that it mus be
exercised by a party to the contract.
b. It may be directed against any person and not necessarily against the oth1:
contracting party.
c. Coercion may be an act causing physical hardship or unlawful detention of
property belonging to another. It may also include those cases where the
party is subjected to mental agony.
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3.11.6 UNDUE INFLUENCE
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The Act defines the term 'Undue Influence' as follows:
"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.r""
The Act further lays down that a person is deemed to be in a position to dominate the will of
another.
a. If he holds a real or apparent authoring over the other (e.g., the relationship between
father and son, or master and servant).
b. If he stands in a fiduciary relation to the other (e.g., the relationship
between doctor and patient, spiritual guru and disciple, lawyer and
client).
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 (e.g., old
illiterate persons)."
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3.11.7 FRAUD
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According to the Act, "Fraud means and includes any of the following acts
committed by the party to a contract, or with his connivance, or by his agents,
with intent to deceive another party there to or his agent, or to induce him to
enter into t contract:
a. The suggestion as a fact, of that which is not true, by one who does not
belie, it to be true:
b. The active concealment of a fact by one having knowledge or belief of the
fan
c. a promise made without any intention of performing it;
d. any other act intended to deceive; and
e. any such act or ommission as the law specially declares to be fraudulent."
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3.11.8 ESSENTIAL ELEMENTS
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Of fraud are as follows:
a. The fraud must be committed by a party to a contract or by anyone with his
connivance or by his agent.
b. There must be a false representation and it must be made with the knowledge
of its falsehood.
c. The representation must relate to a fact.
d. The fraud must have actually deceived the other party.
e. The party acting on the representation must have suffered loss.
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3.11.9 MISREPRESENTATION
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The Act, defines the term 'misrepresentation' as follows:
"Misrepresentation means and includes:
a. the positive assertion, in a manner not warranted by the information to the
person making it, of that which is not true, though he believes it to be true;
b. any breach of duty which, without an intent to deceive, gains an advantage
to the person committing it, or anyone claiming under him, by misleading
another to his prejudice or to the prejudice of anyone claiming under him;
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."
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3.11.10 ESSENTIAL ELEMENTS
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Of misrepresentation are as follows:
a. By a party to a contract: The representation must be made by a party to a
contract or by anyone with his connivance or by his agent.
b. False representation: There must be a false representation and it must be
made without knowledge of its falsehood.
c. Representation as to fact: The representation must relate to a fact. In other
words, a mere opinion, a statement of expression or 'intention does not
amount to misrepresentation.
d. Object: The representation must be made with a view to inducing the other
party to enter into contract but without the intention of deceiving the other
party.
e. Actually acted: The other party must have acted on the faith of the
representation.
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3.12 LEGALITY OF OBJECT AND
CONSIDERATION
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The object and the consideration of an agreement must be lawful, otherwise the
agreement is void. According to the Act, the consideration or the object of an
agreement is unlawful in the following cases:
a. If it is forbidden by law: An act, action or thing is said to be forbidden (i.e.
prohibited) by law when it is punishable under any enactment. For example:
Rangeela, a Hindu already married and his wife alive, entered into a marriage
agreement with Kumari an unmarried girl. This agreement is void because. the
second marriage is forbidden by Hindu Law.
b. If it is of such a nature that, if permitted it would defeat the provisions of any
law: Such an agreement is void. For example: Nirdhan borrowed Rs. 1 lakh
from Kuber and agreed not to raise any objection as to the limitation and that
Kuber may recover the amount even after the expiry of limitation period (i.e.,
three years). This agreement is void as it defeats the provisions of Limitation
Act.
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c. If it is fraudulent: An agreement whose object or consideration is to defraud
others, in unlawful and hence void. For example: A, Band C enter into an
agreement of the division among them of gains acquired by them by fraud.
The agreement is void, as its object is unlawful.
d. If it involves or implies injury to a person or property of another: If the object or
consideration of an agreement is injury to the person or property of another, it
is void, being an unlawful agreement. Example: An agreement to put certain
property to fire is unlawful and void.
e. If the Court regards it as 'Immoral or opposed to public policy: If the object or
consideration of an agreement is immoral or opposed to public policy, the
agreement is void. Any agreement which interferes with marital relations of
persons is regarded as immoral. Whenever an agreement is harmful to the
public welfare or any established interest of society, it would be void as being
against public policy.
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Example -1
X gave Rs. 1 lakh to Y a married woman to obtain a divorce from her husband. X
agreed to marry her as soon as she obtained a divorce. It was held that X could
not recover back the amount because the agreement was void as its object was
immoral.
Example - 2
A agrees to pay B, a major in the Army, Rs. 50,000 if he will assist his brother to
desert the army. The object of the agreement is opposed to public policy and
hence void.
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3.13 VOID AGREEMENT
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An agreement not enforceable by law is said to be void". Thus a void agreement does not give rise to any legal
consequences and is void ab-initio.
3.13.1 Void Agreement already discussed
The following type of void agreements have already been discussed:
a. Agreements by or with a person incompetent to contract. (paragraph 3.11)
b. Agreements made under a bilateral mistake of fact material to the agreement. (paragraph 3.12.15)
c. Agreements made without consideration. (paragraph 3.10)
d. Agreements the meaning of which is uncertain. (paragraph 3.6.8)
e. Agreements of which the consideration or object is unlawful. (paragraph 3.13)
f. Agreements to do impossible acts. (paragraph 3.6.9)
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3.13.2 EXPRESSLY DECLARED VOID
AGREEMENTS
38
is 'expressly declared' to be void under the Act. The following agreements have
been expressly declared to be void:
a. Agreements in restraint of marriage: Every individual enjoys the freedom to
marry. According to the Act "Every agreement in restraint of the marriage of
any person, other than a minor, is void ".?' The restraint may be general or
partial. An agreement agreeing not to marry at all, or a certain person, or a
class of persons, or for a fixed period is void. A promise to marry a particular
person, does not imply any restrain of marriage and is a valid contract. For .
example: Preeti agrees with Sambandh for good consideration that she will
not marry Kurup. It is void agreement.
b. Agreements in restraint of trade: The Constitution of India guarantees the
freedom of trade and commerce to every citizen. According to the Act "Every
agreement by which anyone is restrained from exercising a lawful profession,
trade or business of any kind, is to that extent, void"s2. There are some
exceptions to this rule like sale of goodwill, partner's agreements, trade
combinations or negative stipulations in service agreements wherein some
reasonable restrictions on trade are permitted in law.
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c) Agreements in restraint of legal proceedings: According to the Act'" the
following agreements amount to restraint of legal proceedings and are thus
void to that extent:
Agreements restricting enforcement of rights: An agreement by which any
party is restricted absolutely from enforcing his legal rights under or in respect
of any contract is void to that extent. Example: A clause in a contract provided
that no action should be brought upon it in case of breach. Such a clause is
void because it restricts both the parties from enforcing -their legal rights.
ii. Agreements limiting the period of limitation: An agreement which limits
the time within which an action may be brought so as to make it shorter than
that prescribed by the law of limitation, is void. For example: A clause in a
contract provides that no action should be brought after two years. Such a
clause is void because it limits the period of limitation to two years which is
less than the period of limitation (i.e. three years) prescribed by the law of
limitation.
Exceptions-Agreements or clause referring the dispute to arbitration or
subject to one court's jurisdiction are valid.
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d) Wagering agreements: The word 'wager' means 'a bet'. A wagering
agreement is an agreement between two persons under which money or
money's worth is payable, by one person to another on the happening or
non-happening of a future uncertain event. Example: X promises to pay Rs.
1,000 to Y if it rained on a particular day, and Y promises to pay Rs. 1,000
to X if it did not. Such agreement is a wagering agreement and thus void ."
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3.14 CONTINGENT CONTRACT
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3.14.1 Meaning
"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".55 Example: A contracts to
indemnify B upto Rs. 20,000 in consideration of B paying Rs. 1,000 annual
premium, if B's factory is burnt. This is a contingent contract. Contracts of insurance
and contracts of indemnity and guarantee are other examples of contingent
contracts.
3.14.2 Essentials of Contingent Contract
The essential features of a contingent contract are as follows:
a. Dependence on a future event: The performance of a contingent contract
depends upon the happening or non happening of some future event.
b. Collateral event: The event must be collateral (i.e. incidental) to the contract.
c. Uncertain event - The event must be uncertain.
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3.14.3 Rules regarding Contingent Contracts
a. Enforcement of contracts contingent on happening of a future uncertain.
Contingent contracts to do or not to do anything if an uncertain future event
happens can be enforced only when the event happens.
Illustration
A makes a contract with B to buy B's house if A survives
B. This contract cannot be enforced by law unless and until
C dies in A's lifetime.
b) Enforcement of contracts on the non-happening of a future uncertain event?
Contingent contracts to do or not to do anything if an uncertain future event
does not happen can be enforced only when the happening of the event
becomes impossible, and not before.
Illustration
A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks.
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c. Contracts contingent on future conduct of a living person" If the future event
on which a contract is contingent is the way in which a person will act at an
unspecified time, the event shall be considered to become impossible when
such person does anything which renders it impossible that he should so act
within any definite time, or otherwise than under future contingencies.
lItustration
A agrees to pay B a sum of money if B marries C. C married D. The marriage of B
to C must now be considered impossible although it is possible that D may die and
that C may afterwards marry B.
d) Contracts contingent on a specified event happening within a fixed time:"
Contracts contingent to do or not to do anything if a specified uncertain event
happens within a fixed time would become void if, at the expiration of the time
fixed, such event does not happen or if before the time fixed, such event
becomes impossible.
Illustration
A promises to pay B a sum of money if a certain ship returns within a year.
The contract may be enforced if the ship returns within the year, and becomes void
if the ship is burnt within the year.
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e) Enforcement of contingent contracts on specified event not happening within a 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 when such event has not happened, or shall
not happen within the time fixed.
Illustration
A promises to pay B 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 burnt within the year.
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3.15 QUASI-CONTRACT
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3.15.1 Meaning of Quasi-Contract
A Quasi-Contract is not a contract at all because the essential elements for the
formation of a contract are absent. It is an obligation imposed by law upon a person
for the benefit of another even in the absence of a contract. It is based on the
principle of equity, (i.e., fairness, moral justice or ethics) which means no person
shall be allowed to unjustly enrich himself at the expense of another. Such
obligations are called quasi-contracts or implied contracts because the outcome of
such obligations resemble those created by a contract.
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3.15.2 Kinds of Quasi-Contracts
The various kinds of quasi contract (or quasi-contractual obligations) are given
below:
a. Claim for necessaries supplied a person incapable of contracting or on his
account:
"If a person, incapable of entering into a contract, or anyone whom he is
legally bound to support, is supplied by another person with necessaries
suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person."62
[Refer to paragraphs 3.11.3(f) and 3.11.5(d)] Example: 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 B's property.
b. 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".63 For example: A, sub-tenant pays the arrears of
rent due by the tenant to the landlord,
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b. in order to save the tenancy from forfeiture. The sub-tenant is entitled to
recover from the tenant, the amount paid by him to the landlord, although
there is no contract between the two.
c. Obligation of person enjoying benefit of non-gratuitous act: "Where a
person lawfully does anything for another person, 0r" 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 deliverer's' For example: A, a tradesman, leaves
goods pay A for them.
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e) 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 bailee".65 For example: X a guest found a diamond ring
on a birthday party of Y. X told Y and other guests about it. He has
performed his duty to find the owner. If he is not able to find the owner he
can retain the ring as bailee.
f) Liability of person to whom money is paid, or thing delivered by mistake or
under coercion: "A person to whom money has been paid, or anything
delivered by mistake or under coercion, must repay or return it".66 For
example:
A and B jointly owe Rs. 1000 to C. A alone pays the amount to C, and B, not
knowing this fact, pays Rs. 1000 over again to C. C is bound to repay the
amount to B.
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3.16 PERFORMANCE OF CONTRACTS
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3.17.1 Meaning of Performance
Performance of contract means fulfilling of the terms of the contract by the
respective parties to the contract. The Act lays down "The parties to a contract must
either perform, or offer to perform, their respective promises, unless performance is
dispensed with or excused under the provisions of this Act, or of any other law". 67
It means that the performance may be either actual - by fulfilling all obligations by
the parties under the contract or attempted where an offer to perform one's
obligations has been made by the promise, but the performance is not complete
unless the offer of performance is accepted by the promise. by law.
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Promises bind the legal representatives of .the promisors in case of death
of such promisors before performance, unless a contrary intention
appears from the contract. The liability of the legal representative is
limited to the extent of the value of the property inherited from the
deceased.
Illustrations
A promises to deliver goods to B on a certain day on payment of Rs.
1,000.
A dies before that day. A's representatives are bound to deliver the goods
to Band B is bound to pay Rs. 1,000 to A's representatives.
A promises to paint a picture for B by a certain day, at a certain price. A
dies before the day. The contract cannot be enforced either by A's
representatives or by B.
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3.16.2 Who can demand performance
It is only the promisee who can demand performance of the promise. The general
rule is that "a person cannot acquire rights under a contract to which he is not a
party. "68
3.16.3 Who should perform the promise?
a. In case of personal contract by the promisor personally.
b. In case of non-personal contract:
i. By the promisor personally.
ii. By a third person on behalf of the promisor.
iii. In the event of the death of promisor - by his legal representatives.
c) In case of Joint promisor - by the promisors jointly or third person on behalf of
the promisors or their legal representatives.
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3.17 REMEDIES FOR BREACH OF CONTRACT
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3.17.1 Meaning of Breach of Contract
A breach of contract occurs if any party refuses or fails to perform his part of the
contract or by his act makes it impossible to perform his obligation under the
contract. In case of breach, the aggrieved party (i.e., the party not at fault) is
relieved from performing his obligation and gets a right to proceed against the
party at fault. As stated earlier [paragraph 3.18.2(f)] a breach of contract may
either be anticipatory or actual.
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3.17.2 Remedies of Breach of Contract
A remedy is the courses of action which are available to an aggrieved party for the
enforcement of a right under a contract. The various remedies available are:
Rescission of Contract": Rescission means a right not to perform obligations.
In case of breach of a contract, the promisee may put an end to the contract. In
such a case, the aggrieved party is discharged from all the obligations under the
contract and is entitled to claim compensation for the damage which he has
sustained because of the non-performance of the contract.
Suit for Damages: Damages are monetary compensation allowed for loss suffered
by the aggrieved party due to breach of contract. Damages may be of five kinds:
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I. Ordinary or general or compensatory damages: (i.e., damages arising
naturally from the breach).
II. ii. Special damages: (i.e., damages in contemplation of the parties at the time
of contract).
III. iii. Exemplary, Punitive or Vindictive damages: (i.e., damages which are in the
nature 'of punishment).
IV. iv. Nominal damages: (i.e., awarded only for the namesake).
V. Liquidated damages: Means a sum fixed up in advance, which is a fair and
genuine pre-estimate of the probable loss that is likely to result from the
breach. _
c) Suit for Specific Performance: Means demanding the court's direction to the
defaulting party to carry out the promise according to the terms of the contract.
For example: X agreed to sell an old painting to Y for Rs. 50000. Subsequently
X refused to sell the painting. Here, Y may file a suit against X for the specific
performance of the contract.
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d) Suit for Injunction: Means demanding court's stay order Injunction means
an order of the court which prohibits a person to do a particular act. For
example: W agreed to sing at L's theatre only during the contract period.
During the contract period, W made contract with Z to sing at another
theatre and refused to perform the contract with L. It was held that W could
be restrained by injunction from singing for Z.
e) Suit for Quantum meruit: Quantum-meruit means as much as is earned. In
this suit, claim is made to compensate for the work already done. For.
example: C an owner of a magazine engaged P to write a book to be
published by instalrnents in his magazine. After a few instalrnents were
published, the publication of the magazine was stopped. It was held that P
could claim payment for the part already published.
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3.18 INDEMNITY AND GUARANTEE
56
3.18.1 Contract of Indemnity
3.18.1A Meaning
The term 'Indemnity' means to make good the loss or to compensate the party
who has suffered some loss. "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"." For example:
A and B go into a shop. B says to the shopkeeper "Let A have the goods, I will
see that you are paid". The contract is one of Indemnity.
3.18.1B Parties
The person who promises to make good the loss is called the 'Indemnifier'
(promisor), and the person whose loss is to be made good is called the
'Indemnified or Indemnity holder' (promisee).
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3.18.2 Contract of Guarantee
3.18.2A Meaning
"A contract of guarantee is a contract to perform the promise or discharge the
liability of a third person in case of his default"." For example: A and B go into a
shop. A says to the shopkeeper, C, "Let B have the goods, and if he does not pay, I
will". This is a contract of guarantee.
3.18.2B Parties to a Contract. of Guarantee
There are three parties to a contract of guarantee.
Principal debtor: The person in respect of whose default the guarantee is given is
called the principal debtor. In the above example B is the principal debtor. ii.
Creditor: The person to whom the guarantee is given is called the' creditor'. C is the
creditor in the above said example.
iii. Surety: The person who gives the guarantee is called the 'surety'. A is the surety
in the above said example.
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3.20.2C Kinds of Guarantee
Guarantee may be classified under the following two categories:
Specific Guarantee: A guarantee which extends to a single debt or specific
transaction is called a 'specific guarantee'. The liability of the surety comes to an
end when the guaranteed debt is duly discharged or the promise is duly discharged.
Continuing Guarantee: A guarantee which extends to a series of transactions is
called a 'continuing guarantee'. A surety's liability continues until the revocation of
the guarantee.
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3.20.20 Discharge of Surety from Liability
A surety is said to be discharged when his liability as surety comes to an end. A
surety is freed from his obligation under a contract of guarantee under any of the
following circumstances:
a. Notice of revocation: A specific guarantee cannot be revoked once it is acted
upon. But a continuing guarantee may at any time, be revoked by the surety
as to future transactions by giving notice to the creditor.?'
b. Death of Sureiv": In case of a continuing guarantee the death of a surety also
discharges him from liability as regards transactions after his death, unless
there is a contract to the contrary.
c. Variance in terms of contract": /I 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.
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d) 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 of omissions of the creditor, the legal
consequence of which is the discharge of the principal debtor.
e) Arrangement by creditor with principal debtor without surety's consent": A
contract between the creditor and principal debtor, by which 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.
f) Creditor's act or omission impairing surety's eventual remedv": If a creditor
does any act which is inconsistent with the rights of the surety, or omits to do
any act, which is 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 ..
g) Loss of Securiiv": If the creditor loses (by negligence or carelessness) OJ'
without the consent of the surety, parts with security given to him, the surety is
discharged from liability to the extent of the value of security.
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3.19 BAILMENT AND PLEDGE
61
3.19.1 Meaning of Bailment
The word 'Bailment' is derived from the French word 'baillier' which means to
deliver. According to the Act. "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 direction of
the person delivering them". 83
The person delivering the goods is called the 'bailor'. The person to whom the
goods are delivered is called the 'bailee'.
3.19.2 Essential Features of Bailment
A bailment has the following characteristic features:
a. It is the delivery of movable goods.
b. The goods are delivered for some purpose.
c. Return of specific goods - The goods which form the subject matter of a
bailment must be returned to the bailor or otherwise disposed of according to
the directions of the bailor, after the accomplishment of purpose or after the
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3.19.3 Kinds of Bailment
Bailment may be classified from the point of view of benefit or reward. The benefit
may be exclusive to the bailor or bailee or mutual. Bailment on the basis of reward
may be:
a. Gratuitous: Neither the bailor nor the bailee is entitled to any remuneration i.e.
loan of book to a friend, depositing of goods for safe custody. It is for the
exclusive benefit of the bailor or bailee.
b. Non-Gratuitous: Here the goods ae given for reward, remuneration or for
some consideration e.g. car let out on hire, goods given for repairs or tailoring
for charges.
c. Pawn or Pledge: Goods delivered to another as a security for money borrowed
is called Pledge.
3.19.4 Bailment, Sale and License
In 'Sale' the ownership is transferred to the buyer whereas in the bailment the
ownership in goods is not transferred.
In a contract of 'License', one party is permitted to place his goods in the premises
belonging to other person. Thus in a contract of license, the goods are not delivered
to the licensor, while in bailment the goods are delivered to the bailee for safe
custody.
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3.19.5 Duties of Bailee
His duties are as follows:
a. To take reasonable care of goods delivered to him.
b. Not to make unauthorised use of goods entrusted to him.
c. Not to mix goods bailed with his own goods.
d. To return the goods.
e. To return accretions to the goods.
f. Not to set up any adverse title.
3.19.6 Duties of Bailor
His duties are as follows:
a. To disclose faults / defects in goods bailed.
b. To repay necessary expenses in case of gratuitous bailment.
c. To repay any extraordinary expenses in case of non-gratuitous bailment.
d. To indemnify bailee.
e. To receive back the goods.
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3.19.7 Rights of Bailee
His rights are as follows:
a. Enforcement of bailor's duties.
b. To deliver goods to one of several joint bailors.
c. To deliver goods, in good faith, to bailor without title.
d. Lien - is of two types - general or particular. Bailee has particular lien unless
the contract provides otherwise. 'Particular lien' means the right to retain that
particular property in respect of which the charge is due. 'General lien' means
the right to retain all the goods of the other party until all the claims of the
holder against the party are settled.
3.19.8 Rights of Bailor
His rights are as follows:
a. Enforcement of bailee's duties.
b. To terminate bailment if the bailee uses the goods wrongfully.
c. To demand return of goods at any time in case of gratuitous bailment.
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3.20 AGENCY
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3.20.1 General
It is not always possible for a person to do everything himself, hence it becomes
necessary to delegate some of the acts to be performed by another person.
Such other person is called an agent.
3.20.2 Definitions of Agent and Principal
II An agent is a person employed to do any act for another or to represent
another in dealings with third persons. The person for whom such act is done, or
who is represented, is called the principal" .85 The contract which creates the
relationship of 'principal' and 'agent' is called an 'agency'. For example: X
appoints Y to buy ten bags of wheat on his behalf, X is the principal, Y is the
agent and the contract between the two is 'agency'.
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3.20.3 General rules of Agency
There are two important general rules regarding agency, viz:
What one person can himself lawfully do, can as well get it done by any other person. This
rule is of course, subject to some exceptions, e.g., in case, of acts required to be performed
personally like marriage.
What a person does by another, he does by himself. In otherwords the acts of the agent are,
for all legal purposes, the acts of the principal.
3.20.4 Who may employ an Agent
Any person who is competent to contract may employ an agent. A minor or a person of
unsound mind cannot employ an agent."
3.20.5 Who may be an Agent
The Act lays down that "as between the principal and third persons any person may become
an agent";" Thus even a minor or a person of unsound mind can be appointed as agent, but
in such a case the principal shall be liable.
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