INDIAN CONTRACT ACT, 1872

MEANING AND TYPES OF CONTRACTS

The law relating to the contracts is contained in the Indian Contract Act,

1872. It is that branch of law which lays down the essentials of a valid contract, the
different modes of discharging the contract and the remedies available to the aggrieved
party in the case of breach of contract. It is the most important branch of business law. It
is, of particular importance to people engaged in trade, commerce and industry as bulk
of their business transactions are based on contracts.

A contract is an agreement made between two or more parties which the law will
enforce. Sec. 2 (h) of the Indian Contract Act defines it as An agreement enforceable
by law. Sec. 10 lays down that All agreements are contracts if they are made by the
free consent of parties competent to contract, for a lawful consideration and with a
lawful object and are not hereby expressly declared to be void.

CLASSIFICATION OF CONTRACTS

Contracts may be classified according to their validity, formation or performance.

I CLASSIFICATION ACCORDING TO VALIDITY

A contract is based on an agreement. An agreement becomes a contract when all the
essential elements referred to above are present. In such a case, the contract is a valid
contract. If one or more of these elements are missing, the contract is either voidable,
void, illegal or unenforceable.

Voidable Contract

Voidable contract is an agreement that is binding and enforceable, but because of the
lack of one or more of the essentials of a valid contract, it may be repudiated by the
aggrieved party at his option.

Example: A promises to sell his house to B for Rs.2 lakhs. A obtained Bs consent by
exercising fraud on the latter. The contract is voidable at the option of B.

Void Contract

A contract which is not enforceable by law is a void contract. It confers no right on any
person and creates no obligations.
Example: A promises for no consideration, to give to B Rs.1000. This contract is void.




Illegal Contracts

An illegal contract is one which are opposed to statutory law or public morals. It is
criminal in nature. The effect of an illegal contract is that, it not only makes the
transaction between the immediate parties void, but also render the collateral
transactions void.
Example: A borrows Rs.1000 from B for manufacturing bombs. As manufacturing
bombs is illegal, the contract is void.

Unenforceable Contract

An unenforceable contract is one which cannot be enforced in a Court of law because of
some technical defect.
Example:
(i) A debt barred by limitation is unenforceable.
(ii) A document for want of prescribed value of the stamp is unenforceable.
II CLASSIFICATION ACCORDING TO FORMATION

Contracts may be classified according to the mode of their formation as follows:

Express Contract

If the terms of a contract are expressly agreed upon, whether by words spoken or
written at the time of the formation of the contract, the contract is said to be an express
contract.

Implied Contract

An implied contract is one which is inferred from the acts or conduct of the parties or
course of dealings between them. It is not the result of any express promise or promises
by the parties but of their particular act.
Example: A, enters into a hotel and takes lunch. It is an implied contract that he has to
pay the cost of lunch after taking it.
III CLASSIFICATION ACCORDING TO PERFORMANCE
These may be classified as Executed contracts or Executory contracts,

Executed Contracts

An executed contract is one in which both the parties have performed their respective
obligations.
Example: A agrees to sell a book to B for Rs.200. When A delivers the book and B pays
the price, the contract is said to be executed.





Executory Contracts

An executory contract is one in which both the parties have yet to perform their
obligations. Thus in the above example, the contract is executory if A has not delivered
the book and B has not paid the price.

ESSENTIALS OF A VALID CONTRACT

A valid contract must have the following essentials:
1. Two parties: There must be two parties for a valid contract.
2. Offer and acceptance: There must be an offer and acceptance. One party making the
offer and the other party accepting it.
3. Consensus-ad-idem or Identity of Minds: The parties to the contract must have
agreed about the subject matter of the contract at the same time and in the same
sense.
Illustration: A has two houses, one at Karaikudi and another at Madurai.
He has offered to sell one to B. B accepts thinking to purchase the house at Karaikudi,
while A, when he offers, has in his mind to dispose of house at Madurai. There is no
Consensus-ad-idem.

4. Consideration: It means something in return. Every contract must be supported by
consideration.
Illustration: A offers to sell his watch for Rs.800 to B and B accepts the offer. Thus,
Rs.800 is the consideration for the watch and vice-versa. 5. Capacity: The parties to the
contract must be competent to contract. For example, a contract by a minor is void,
since he is not competent to contract.
6. Free Consent: The consent of the parties must be free from any flaw. It must not be
caused by a mistake or coercion or undue influence.
7. Lawful Consideration: The consideration to a contract must be lawful.
Illustration: A promises to pay Rs.500/- to B, in consideration of B murdering C. The
consideration is illegal.
8. Lawful object: The object of the contract must be lawful.
Illustration: A promises to pay Rs.500/- for letting Bs house for running a brothel. The
object is illegal. Hence, the contract is void.
Thus, the essence of a legal contract is that there shall be an agreement between two
persons, that one of them shall do something either for the benefit of the other or for his
own detriment and that these persons intend that the agreement shall be enforceable at
law.

OFFER AND ACCEPTANCE
OFFER

One of the early steps in the formation of contract lies in arriving at an agreement
between the contracting parties by means of offer and acceptance. One party makes a
definite proposal to the other, and that other accepts it in its entirety.
An offer is also called a proposal. Sec.2 (a) of the Indian Contract Act defines a
proposal 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 other to such act or
abstinence, he is said to make a proposal. The person making the proposal is called
the proposer, or offeror and the person to whom the proposal is made is called the
offeree.

LEGAL RULES RELATING TO OFFER

1. It must contain definite, unambiguous and certain and not loose and vague terms.
Montreal Gas Co Vs Vasey: It was held in this case, that a clause to favourably consider
the application for renewal, is ambiguous and not binding the company.
Taylor Vs Portington: The terms to put the house into thorough repairs and decorate
drawing rooms according to present style, were held uncertain.

2. It must intend to give rise to legal relationship. A social invitation, even if it is accepted
does not create legal relationship, because it is not so intended.
Balfour Vs Balfour: A husband promised to pay Rs.1000/- per month to his wife, staying
away from him. Held that the promise was never intended to be enforced in law.

3. It must be distinguished from a quotation or an invitation to offer.
MacPherson Vs. Appanna: P offered to buy Ds property for Rs.6000. D replied, Wont
accept less than Rs.10,000. P agreed to pay Rs.10,000. But D sold it to another
person. It was held that mere statement of price by D contained no implied contract to
sell it at that price.

4. An offer may be made to an individual or addressed to the world at large.
An offer is called a specific offer when it is made to a particular person.
Carlill Vs Carbolic Smoke Ball Co: The company has offered by advertisement, a
reward of 100 to anybody contracting influenza after using their smoke ball according
to their direction. Mrs. Carlill used it as directed but still had an attack of influenza.
Hence, she sued for the award of 100.
It was held that she was entitled to the award since an offer made at large, can ripen
itself into a contract with anybody who performs the terms of the offer.

5. Offer must be made with a view to obtaining the assent.
The offer to do or not to do something must be made with a view to obtaining the assent
of the other party addressed and not merely with a view to disclosing the intention of
making an offer.

6. An offer must be communicated to the offeree.
Lalman Shukla Vs Gowri Dutt: As nephew was missing. B, who was an employee of A,
volunteered his services to search for the boy. Meanwhile, A had announced a reward
to anybody who could trace the boy. B found the boy and brought him back to home
and sued for the reward. It was held that he was not entitled to the reward as he was
ignorant of the offer.
Section 4 lays down that the communication of an offer is complete only when it
reaches the offeree. So, an offer binds the offeror only when the offeree has the
knowledge of the offer.

ACCEPTANCE

Section 2 (b) of the Indian Contract Act defines acceptance 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. An offer, when accepted,
becomes a contract. Acceptance may be express or implied. It is express when it is
communicated by words spoken or written or by doing some required act. It is implied
when it is to be gathered from the surrounding circumstances or the conduct of the
parties.

Essentials of Valid Acceptance

1. Acceptance must be absolute and unconditional and should correspond with the
terms of the offeror. Otherwise, it amount to counter offer which may be accepted or
rejected by the offeror.
For example, A offers to sell his car for Rs.l lakh. B asks for Rs. 70,000.
It is not an acceptance, but a counter offer only.

2. An offer can be accepted only by the persons to whom the offer is made.
Boulton Vs Jones: A sold his business to B. This sale is not known to As customers.
So, Jones, who is a usual customer of the vendor, places an order for goods with the
vendor A by name. B, the new owner, receives the order and supplies the goods
without disclosing the fact of sale of business to him. It was held that the price could not
be recovered as the contract was not entered into with him.

3. Acceptance must be communicated in usual and reasonable manner. It may be made
by express words, spoken or written or by conduct of the parties, i.e. by doing an act
which amounts to acceptance according to the terms of the offer or by the offeree
accepting the benefit offered by the offeror.
Any method can be prescribed for the communication of acceptance. It must be
according to the mode prescribed or usual and reasonable mode.
Silence can never be prescribed as a method of communication. Hence, mere mental
assent without expressing it and communicating it by means of word or an act, is not
sufficient.
Example: A wrote to B, I offer you my car for Rs.10,000. If I dont hear from you in
seven days, I shall assume that you accept. B did not reply at all. There is no contract.
Brogden Vs Metropolitan Railway Co: The Manager of a railway company simply wrote
on the proposal approved and kept it in a drawer.
By oversight, it was not communicated. It was held that the acceptance was not
communicated and hence there was no contract.

4. Acceptance must be made within a reasonable time. If any time limit is specified, the
acceptance must be given within that time. If no time limit is specified, it must be given
within a reasonable time.
Example: On June 8 M offered to take shares in R company. He received a letter of
acceptance on November 23. He refused to take the shares. Held, M was entitled to
refuse as his offer had lapsed as the reasonable period during which it could be
accepted had elapsed.

5. Acceptance should be made before the offer lapses or is revoked or is rejected.

6. Acceptance cannot precede an offer. If the acceptance precedes an offer, it is not a
valid acceptance and does not result in a contract.
Example: In a company, shares were allotted to a person who had not applied for them.
Subsequently when he applied for shares, he was unaware of the previous allotment.
The allotment of shares previous to the application is invalid.

7. Communication of acceptance may be waived by the offeror.
This rule is established in the case of Carlill Vs Carbolic Smoke Ball
Company where the advertisement never wanted the communication, apart from
fulfilling the conditions of offer.
Acceptance, once made, Concludes the Contract
The rule is that when once an offer is accepted, it concludes the contract.
So, an acceptance is irrevocable. When a lighted match is applied to gun powder it
produces something which cannot be recalled. Sir William Anson compares here the
gun powder to an offer and the lighted match to acceptance and says that either
the gun powder may be allowed to become damp or it may be removed before the
lighted match is applied. So also an offer may be allowed to lapse for lack of
acceptance or may be revoked before acceptance is given. But when once acceptance
is given, it ripens into contract, just as when a lighted match is applied to gun powder it
produces an explosion. Thus he emphasizes two things: (i) There cannot be an
acceptance after revocation of the offer and
(ii) When once there is an acceptance, there can be no revocation.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

An offer, its acceptance and their revocation to be complete must be communicated.

1. The communication of an offer is complete when it comes to the knowledge of the
person to whom it is made.
Example: A proposes, by a letter, to sell a house to B at a certain price.
The letter is posted on 10th July. It reaches B on 15th July. The communication of the
offer is complete when B receives the letter on 15
th
July.

2. The communication of acceptance is complete
as against the proposer when it is put into 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.
Example: B accepts As proposal, in the above case, by a letter sent
by post on 16th July. The letter reaches A on 18th instant. The communication of the
acceptance is complete, as against A, when the letter is posted, i.e. on 16th. As against
B, when the letter is received by A, i.e. on 18th.

3. The communication 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.
Time for revocation of Offer and Acceptance
An offer may be revoked at any time before the communication of its acceptance is
complete as against the offeror, 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.

CONSIDERATION AND CAPACITY
Consideration is one of the essential elements of a contract. Consideration is known as quid pro
quo, i.e. something in return for something. When a party to an agreement promises to do
something, he must get something in return. This something is defined as consideration.
Section 2 (d) of the Indian Contract Act defines consideration thus: When at the desire of the
promisor, the promisee or any other person has done or abstained from doing, or does or
abstains from doing, or promises to do or abstain from doing something, such act or abstinence
or promise is called a consideration for the promise. legal rules as to consideration
1. Consideration at the Desire of the Promisor
Consideration must proceed at the request or desire of the promisor. Hence, acts done
voluntarily or at the request of third parties do not constitute a valid consideration.
Durga Prasad Vs Baldev: A built a market at the request of the Collector of the place. B
promised to pay A, commission on the articles sold in the market. It was held that Bs promise to
pay commission did not constitute a valid consideration because A did not build the market at
the request of B.

1. The Promisee or any other Person
Consideration may move from the promisee or any third party. Hence, a stranger to onsideration
can sue on the contract.

2. It may be an act, abstinence or forbearance or a return promise
i) An act, i.e. doing of something. In this sense consideration is in an affirmative form.
ii) An abstinence or forbearance, i.e. abstaining or refraining from doing something. In this
sense consideration is in a negative form.
Example: A promises B not to file a suit against him if he pays him Rs.10,000. The abstinence
of A is the consideration for Bs payment.
iii) A return promise.
Example: A agrees to sell his horse to B for Rs.30,000. Here Bs promise to pay the sum of
Rs.30,000 is the consideration for As promise to sell the horse, and As promise to sell the
horse is the consideration for Bs promise to pay the sum of Rs.30,000.

3. Consideration may be past, present or future

The words used in Sec.2(d) are: . has done or abstained from doing (past), or does or
abstains from doing (present), or promises to do or to abstain from doing (future) something
.. This means consideration may be past, present or future.
a) Consideration may be past: When consideration by a party for a present promise was given
in the past.
Example: A renders some service to B at latters desire. After a month B promises to
compensate A for the services rendered to him. It is past consideration.
b) Consideration may be present: When consideration is given simultaneously with promise, it is
said to be present consideration.
Example: A receives Rs.500 in return for which he delivers a watch to B. The money A receives
is the present consideration for which he delivers the watch.
c) Consideration may be future: When consideration from one party to the other is to pass
subsequently to the making of the contract, it is future consideration.
Example: A promises to deliver certain goods to B after a week and B promises to pay the price
after a fortnight. Consideration in this case is future.

4. Something in return for Something There must be something in return. This
something in return need not necessarily be equal in value to something given.
Consideration need not be adequate. But it must be real and lawful.
Example: A agrees to sell a cow worth Rs.1200 for Rs.10. He has given his consent freely. The
agreement is a contract though consideration is inadequate.

5. Consideration must be real and not illusory
Although consideration need not be adequate, it must be real, competent and of some value in
the eyes of the law.
Example: A promise to create treasure by magic or to join two straight lines together cannot be
regarded as valid consideration.

6. Consideration must be something which the promisor is not already bound to do
A promise to do what one is already bound to do, either by general law or under an existing
contract, is not a consideration.

7. Consideration should not be illegal, immoral or opposed to public policy
Example: A married woman was given money to enable her to obtain divorce from her husband
and then to marry the lender. Held, the agreement was immoral and the lender could not
recover the money.
Capacity to contract
The parties who enter into a contract must have the capacity to do so. Capacity means the
competence of the parties to understand the nature of the contract and the rights and liabilities
arising out of those contract.
According to Sec. 11, every person is competent to contract who
(a) is of the age of majority according to the law, to which he is subject,
(b) is of sound mind, and
(c) is not disqualified from contracting by any law to which he is subject.
Thus the following persons are incompetent to contract:
(i) Minors
(ii) Persons of unsound mind, and
(iii) Persons disqualified by any law to which they are subject incapacity to contract
Incapacity may arise out of (a) Status and (b) Mental deficiency.
(A) Incapacity Arising out of Status
Alien Enemies: An alien is a person who belongs to a foreign state. He may be an alien friend
or an alien enemy.
Contracts with an alien friend are valid. Contracts made with an alien enemy before the war may
either be suspended or discharged.
During the continuance of the war, an alien enemy can neither contract with an Indian subject
nor can he sue in an Indian Court.
Foreign Sovereigns, their diplomatic staff and accredited representatives of foreign States:
They have some special privileges and generally cannot be sued unless they of their own
submit to the jurisdiction of our law Courts. They can enter into contracts and enforce those
contracts in our Courts.
But an Indian citizen has to obtain a prior sanction of the Central Government in order to sue
them in our Courts.
Convict: A convict when undergoing imprisonment is incapable of entering into a contract.
Insolvent: The insolvent cannot enter into contract and bind his property as his property shall be
vested with the official receiver when he is adjudged as insolvent.
(B) Incapacity Arising from Mental Deficiency
A person is said to be mentally deficient when (a) he does not attain majority, e.g. a minor, or
(b) he is of unsound mind.
1. When he is a Minor
A minor is a person who has not completed 18 years of age. He attains majority on completion
of
18 years. A minor cannot enter into a valid contract.
2. When he is of Unsound Mind
Section 12 lays down that 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.
Illustration: A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during
those intervals.
Law relating to contracts entered into by minors
According to Sec.3 of the Indian Majority Act, 1875, a minor is a person who has not completed
eighteen years of age. He attains majority on completion of 21 years when his property
ismanaged by court of wards or a guardian.
1) A contract by a minor is void and inoperative ab initio (from the beginning).
Mohoribibi Vs Dharmodas Ghosh: A minor had executed a mortgage for Rs.20,000. The money-
lender had paid Rs.8000 on the security of the mortgage. The minor sued for setting aside the
mortgage. It was held that a contract by a minor was void and that the amount advanced by the
lender could not be recovered under Sections 64 and 65 of the Indian Contract Act.
2) Minors agreement cannot be ratified by him on attaining the age of majority.
Arumugam Vs Duraisinga: A minor, having given a promissory note during his minority, has
executed another note on attaining majority in settlement of the first note. It was held that the
second note executed by the minor is void.
3) He can be a promisee or a beneficiary. Incapacity of a minor to enter into a contract does not
debar him from becoming a beneficiary. Such contracts may be enforced at his option, but not
at the option of the other party.
Example: M aged 17, agreed to purchase a second-hand scooter for Rs.5,000 from S. He paid
Rs.200 as advance and agreed to pay the balance the next day. S told him that he had changed
his mind and offered to return the advance. S cannot avoid the contract.
4) If the minor has received any benefit under a void agreement, he cannot be asked to
compensate or pay for it.
Example: M, a minor, obtains a loan by mortgaging his property. He is not liable to refund the
loan. Not only this, even his mortgaged property cannot be made liable to pay the debt.
5) Minor can always plead minority. Even if he has, by misrepresenting his age, induced the
other party to contract with him, he cannot be sued either in contract or in tort for fraud.
The Court may, where a loan or some property is obtained by the minor by some fraudulent
representation and the agreement is set aside, direct him, on equitable consideration, to restore
the money or property to the other party. Whereas the law gives protection to the minors, it does
not give them liberty to cheat men.
6) There can be no specific performance of the agreements entered into by him as they are void
ab initio.
7) Minor cannot enter into a contract of partnership. But he may be admitted to the benefits of
partnership with the consent of other partners.
8) Minor cannot be adjudged as insolvent, because he is incapable of contracting debts.
9) Minor can be an agent, since an agent is merely a link between the principal and the third
party.
10) A contract by a guardian on behalf of the minor is enforceable by or against the minor,
provided the guardian is competent to contract and the contract is beneficial to the minor. But he
cannot purchase immovable property without obtaining the consent of the court.
11) A minor is liable for necessaries supplied to him.
Persons of unsound mind
One of the essential conditions of competency of parties to a contract is that they should be of
sound mind. Sec.12 lays down that 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 unsound mind.
Soundness of mind of a person depends on:
(i) his capacity to understand the contents of the business concerned, and
(ii) his ability to form a rational judgement as to its effect upon his interests.
If a person is incapable of both, he suffers from unsoundness of mind. Whether a party to a
contract is of sound mind or not is a question of fact to be decided by the Court.
Contracts of Persons on 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 contract during the period when he is sane and the contract is valid. The contract entered
during the period of insanity is not valid.
Idiots: An idiot is a person who has only physical maturity but not mental maturity. For instance,
an individual of age 25 can have the brain growth of only 10 years old. Hence he cannot
understand the nature of the transactions. Idiocy is permanent. An agreement with an idiot is
void.
Drunkard: A drunkard person suffers from temporary incapacity to contract, i.e. at the time when
he is incapable of forming a rational judgement. He can enter into a valid contract when he is
normal, and the contract entered during the period of intoxication is not valid.

FREE CONSENT
Consent: It means an act of assenting to an offer. According to Sec.13 Two or more persons
are said to consent when they agree upon the same thing in the same sense.
Free Consent: Consent is said to be free when it is not caused by
(1) Coercion as defined in Sec. 15, or
(2) Undue influence as defined in Sec. 16, or
(3) Fraud as defined in Sec. 17, or
(4) Misrepresentation as defined in Sec. 18, or
(5) Mistake, subject to the provisions of Secs.20, 21 and 22 (Sec.14).
When there is no consent, there is no contract.
Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing
but his consent is not free. The contract in this case is voidable at his option. flaw in consent
Coercion Undue influence Misrepresentation Mistake (Sec. 15) (Sec. 16)
Fraudulent or Innocent or Willful (Sec. 17) unintentional (Sec. 18)
Mistake of law Mistake of fact (Sec. 21) (Sec. 20)

Coercion
Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal
Code, 1860 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.
When a person is compelled to enter into a contract by the use of force by the other party or
under a threat, coercion is said to be employed.
The threat amounting to coercion need not necessarily proceed from a party to the contract. It
may proceed even from a stranger to the contract.
Example: A threatens to kill B if he does not lend Rs.1000 to C. B agrees to lend the amount to
C. The agreement is entered into under coercion.
Consent is said to be caused when it is obtained by:
1) Committing or threatening to commit any act forbidden by the Indian Penal Code.
Ranganayakamma Vs Alwar Chetti: A young girl of 13 years was forced to adopt a boy to her
husband who had just died by the relativesof the husband who prevented the removal of his
body for cremation until she consented. Held, the consent was not free but was induced by
coercion.
2) Unlawful detaining or threatening to detain any property
Muthiah Vs Muthu Karuppan: An agent refused to hand over the account books of a business to
the new agent unless the principal released him from all liabilities. The principal had to give a
release deed asdemanded. Held, the release deed was given under coercion and was voidable
at the option of the Principal.
Undue influence
Sometimes a party is compelled to enter into an agreement against his will as a result of unfair
persuasion by the other party. This happens when a special kind of relationship exists between
the parties such that one party is in a dominant position to exercise undue influence over the
other.
Sec. 16(1) defines 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.
The following relationships usually raise a presumption of undue influence, viz.,
(i) teacher and student,
(ii) guardian and ward,
(iii) trustee and beneficiary,
(iv) religious adviser and disciple,
(v) doctor and patient,
(vi) solicitor and client.
The presumption of undue influence applies whenever the relationship between the parties is
such that one of them is, by reason of confidence reposed on him by the other, able to take
unfair advantage over the other.
A person is deemed to be in a position to dominate the will of another where:
he holds a real or apparent authority over the other, e.g. the relationship between teacher
and the student.
he stands in a fiduciary relation (relation of trust and confidence) to the other. It is supposed
to exist, for example, between solicitor and client, trustee and beneficiary.
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. Such a relation exists, for
example, between a medical attendant and his patient.
Example: A spiritual guru induced his devotee to gift to him the whole of his property in return of
a promise of salvation of the devotee. Held, the consent of the devotee was given under undue
influence. (Mannu Singh Vs. Umadat Pandey).
Effect of undue influence
When consent to an agreement is obtained by undue influence, the contract is voidable at the
option of the party whose consent was so obtained.
Example: A money lender advances Rs.1000 to B, and agriculturist and by undue influence
induces B to execute a bond for Rs.2000 with interest at 6 per cent per month. The Court may
set the bond aside, ordering B to repay Rs.1000 with such interest as may seem to it
reasonable.
Difference between coercion and undue influence
1. The consent is obtained under the threat of an offence.
The consent is obtained by a person who is in a position to dominate the will of another.
2. Coercion is mainly of a physical character. It involves mostly use of physical or violent force.
Undue influence involves use of moral force or mental pressure to obtain the consent.
3. There must be intention of causing physical harm to any person to enter into an agreement.
Here the influencing party uses its position to obtain an unfair advantage over the other party.
4. It involves a criminal act. It involves unlawful act.
Misrepresentation and fraud
A statement of fact which one party makes in the course of negotiations with a view to inducting
the other party to enter into a contract is known as representation.
misrepresentation
A representation, when wrongly made is a misrepresentation.
A misrepresentation may be (i) innocent misrepresentation (ii) willful misrepresentation or fraud.
Innocent misrepresentation is a false statement which the person making it honestly believes to
be true or which he does not know to be false. It also includes non-disclosure of a material fact
or facts without any intent to deceive the other party.
Sec. 18 defines misrepresentation. According to it, there is misrepresentation:
(1) When a person positively asserts that a fact is true when his information does not warrant it
to be so though he believes is to be true.
(2) When there is any breach of duty by a person which brings an advantage to the person
committing it by misleading another to his prejudice.
(3) When a party causes, however innocently, the other party to the agreement to make a
mistake as to the substance of the thing which is the subject of the agreement.
Example: A told his wife within the hearing of their daughter that the bridegroom proposed for
her was a young man. The bridegroom, however, was over sixty years. The daughter gave her
consent to marry him believing the statement by her father. Held, the consent was vitiated by
misrepresentation and fraud.
Consequences of Misrepresentation
The aggrieved party, in case of misrepresentation by the other party, can
1) avoid or rescind the contract; or
2) accept the contract but insist that he shall be placed in the position in which he would have
been if the representation made had been true.
Fraud
Fraud exists when it is shown that a false representation has been made (a) knowingly, or (b)
without belief in its truth, or (c) recklessly, not caring whether it is true or false, and the maker
intended the other party to act upon it, or,
There is a concealment of a material fact or that there is a partial statement of a fact in such a
manner that the withholding of what is not stated makes that which is stated false.
The intention of the party making fraudulent misrepresentation must be to deceive the other
party to the contract or to induce him to enter into a contract.
According to Sec.17, 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 or to induce a person
to enter into a contract:
1. The suggestion that a fact is true when it is not true and the person making the suggestion
does not believe it to be true;
2. The active concealment of a fact by a person having knowledge or belief of the fact;
3. A promise made without any intention of performing it;
4. Any other act or omission as the law specifically declares to be fraudulent.
LEGALITY OF OBJECT
A contract must have a lawful object. The word object means purpose or design. In some
cases, consideration for an agreement may be lawful but the purpose for which the agreement
is entered into may be unlawful. In such cases the agreement is void. As such, both the object
and the consideration of an agreement must be lawful, otherwise the agreement is void.
Sec. 23. The consideration or object of an agreement is unlawful
1. If the object is forbidden by law.
Example: A promises to obtain for B an employment in the public service and B promises to pay
Rs.1,00,000 to A. The agreement is void, as the consideration is unlawful.
2. If the object is permitted, it would defeat the provisions of any law.
Example: N agreed to enter a companys service in consideration of a weekly wage of Rs.75
and a weekly expense allowance of Rs.25. Both the parties knew that the expense allowance
was a device to evade tax. Held, the agreement was unlawful.
3. If the object is fraudulent. An agreement which is made for a fraudulent purpose is void. Thus
an agreement in fraud of creditors with a view to defeating their rights is void.
4. If it involves or implies injury to the person or property of the another. Injury means wrong,
harm of damage.
5. If the consideration or the object is immoral.
Example: A agrees to let her daughter to B for concubinage (state of living together as man and
wife without being married). The agreement is unlawful, being immoral.
6. Where the object is opposed to public policy.
Unlawful and illegal agreements
An unlawful agreement is one which, like a void agreement, is not enforceable by law. An illegal
agreement, is not only void as between the immediate parties but also makes the collateral
transactions void.
Example: L lends Rs.50,000 to B to help him to purchase some prohibited goods from T, an
alien enemy. If B enters into an agreement with T, the agreement will be illegal and the
agreement between B and L shall also become illegal, because it is collateral to the main
transaction. L cannot, therefore, recover the amount.
Every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal.
Illegal acts are those which involve the commission of a crime or contain an element of obvious
moral turpitude and forbidden by law. On the other hand, unlawful acts are those which are less
rigorous in effect and involve a non-criminal breach of law. These acts do not affect public
morals, nor do they result in the commission of a crime. These are simply disapproved by law
on some ground of public policy.
Effects of Illegality
The general rule of law is that no action is allowed on an illegal agreement and the law will not
help both the parties to the agreement. agreements opposed to public policy
An agreement is said to be opposed to public policy when it is harmful to the public welfare.
Some of the agreements which are opposed to public policy and are unlawful are as follows:
1. Agreements of trading with enemy. An agreement made with an alien enemy in time of war is
illegal on the ground of public policy.
2. Agreement to commit a crime. Where the consideration in an agreement is to commit a crime,
the agreement is opposed to public policy. The Court will not enforce such an agreement.
3. Agreements which interfere with administration of justice. An agreement, the object of which
is to interfere with the administration of justice is unlawful, being opposed to public policy. It may
take any of the following forms:
(a) Interference with the course of justice. An agreement which obstructs the ordinary process of
justice is unlawful.
(b) Stifling prosecution. It is in public interest that if a person has committed a crime, he must be
prosecuted and punished.
(c) Maintenance and champerty. Maintenance is an agreement to give assistance, financial or
otherwise, to another to enable him to bring or defend legal proceedings when the person giving
assistance has got no legal interest of his own in the subject-matter.
4. Agreements in restraint of legal proceedings. Sec. 28 which deals with these agreements:
(a) Agreements restricting enforcement of rights. An agreement which wholly or partially
prohibits any party from enforcing his rights under or in respect of any contract is void to that
extent.
(b) Agreements curtailing period of limitation. Agreements which curtail the period of limitation
prescribed by the Law of Limitation are void because their object is to defeat the provisions of
law.
5. Trafficking in public offices and titles. Agreements for the sale or transfer of public offices and
titles or for the procurement of a public recognition like Padma Vibhushan or Param Veer
Chakra for monetary consideration are unlawful, being opposed to public policy.
Example: R paid a sum of Rs.2,50,000 to A who agreed to obtain a seat for Rs son in a Medical
College.
On As failure to get the seat, R filed a suit for the refund of Rs.2,00,000. Held, the agreement
was against public policy.
6. Agreements tending to create interest opposed to duty. If a person enters into an agreement
whereby he is bound to do something which is against his public or professional duty, the
agreement is void on the ground of public property.
7. Agreements in restraint of parental rights. A father, and in his absence the mother, is the legal
guardian of his/her minor child. This right of guardianship cannot be bartered away by any
agreement.
8. Agreements restricting personal liberty. Agreements which unduly restrict the personal
freedom of the parties to it are void as being against public policy.
9. Agreements in restraint of marriage. Every agreement in restraint of the marriage of any
person, other than a minor, is void (Sec. 26). This is because the law regards marriage and
married status as the right of every individual.
10. Marriage brokerage agreements. An agreement by which a person, for a monetary
consideration, promises in return to procure the marriage of another is void, being opposed to
public policy.
11. Agreements interfering with marital duties. Any agreement which interferes with the
performance of marital duties is void, being opposed to public policy. Such agreements have
been held to include the following:
(a) A promise by a married person to marry, during the lifetime or after the death of spouse.
(b) An agreement in contemplation of divorce, e.g. an agreement to lend money to a woman in
consideration of her getting a divorce and marrying the lender.
(c) An agreement that the husband and wife will always stay at the wifes parents house and
that the wife will never leave her parental house.
12. Agreements to defraud creditors or revenue authorities. An agreement the object of which is
to defraud the creditors or the revenue authorities is not enforceable, being opposed to public
policy.
13. Agreements in restraint of trade. An agreement which interferes with the liberty of a person
to engage himself in any lawful trade, profession or vocation is called an agreement in restraint
of trade.
Oakes & Co. Vs Jackson: An agreement between an employee and the company whereby the
employee agrees not to work in a similar company within a distance of 800 miles from Madras
after leaving the employment, is held void.

CONTINGENT CONTRACTS
Contingent means that which is dependent on something else. 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 (Sec. 31). For example, goods are sent on approval, the contract is a contingent
contract depending on the act of the buyer to accept or reject the goods.
There are three essential characteristics of a contingent contract:
1. Its performance depends upon the happening or non-happening in future of some event. It is
this dependence on a future event which distinguishes a contingent contract from other
contracts.
2. The event must be uncertain. If the event is bound to happen, and the contract has got to be
performed in any case it is not a contingent contract.
3. The event must be collateral, i.e. incidental to the contract.
Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent
contract.
Rules regarding contingent contracts
1. Contingent contracts dependent on the happening of an uncertain future event cannot be
enforced until the event has happened. If the event becomes impossible, such contracts
become void (Sec. 32).
Example: A contracts to pay B a sum of money when B marries C. C dies without being married
to B.
The contract becomes void.
2. Where a contingent contract is to be performed if a particular event does not happen, its
performance can be enforced when the happening of that event becomes impossible (Sec. 33).
Example: 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.
3. If a contract is contingent upon how a person will act at an unspecified time, the event shall
be considered to become impossible when such person does anything which renders it
impossible that he should so act within any definite time, or otherwise than under further
contingencies (Sec. 34).
Example: A agrees to pay B a sum of money if B marries C. C marries 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.
4. Contingent contracts to do or not to do anything, if a specified uncertain event happens within
a fixed time, become void if the event does not happen or its happening becomes impossible
before the expiry of that time.
Example: 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.
5. Contingent agreements to do or not to do anything, if an impossible event happens, are void,
whether or not the fact is known to the parties (Sec. 36).
Example: A agrees to pay B Rs.1,000 if B will marry As daughter, C. C was dead at the time of
the agreement. The agreement is void.
PERFORMANCE OF CONTRACT
Performance of a contract takes place when the parties to the contract fulfil their obligations
arising under the contract within the time and in the manner prescribed.
Offer to perform
Sometimes it so happens that the promisor offers to perform his obligation under the contract at
the proper time and place but the promisee does not accept the performance. This is known as
attempted performance or tender. Thus, a tender of performance is equivalent to actual
performance.
Requisites of a valid tender
1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of
the contract.
2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an
instalment when the contract stipulates payment in full is not a valid tender.
3. It must be by a person who is in a position, and is willing, to perform the promise.
4. It must be made at the proper time and place. A tender of goods after the business hours or
of goods or money before the due date is not a valid tender.
5. It must be made to proper person, i.e. the promisee or his duly authorised agent. It must also
be in proper form.
6. It may be made to one of the several joint promisees. In such a case it has the same effect as
a tender to all of them.
7. In case of tender of goods, it must give a reasonable opportunity to the promisee for
inspection of goods.
8. In case of tender of money, the debtor must make a valid tender in the legal tender money.
Contracts which need not be performed
A contract need not be performed
1. When its performance becomes impossible.
2. When the parties to it agree to substitute a new contract for it or to rescind or alter it.
3. When the promisee dispenses with or remits, wholly or in part, the performance of the
promise made to him or extends the time for such performance or accepts any satisfaction for it.
4. When the person at whose option it is voidable, rescindsit.
5. When the promisee neglects or refuses to afford the promisor resonable the facilities for the
performance of his promisee.
Example: A contracts with B to repair Bs house. A neglects or refuses to point out to A the
places in which his house requires repairs. B is excused for the non-performance of the
contract, if it is caused by such neglect or refusal.
6. When it is illegal.

TERMINATION AND DISCHARGE OF CONTRACT
Discharge of contract means termination of the contractual relationship between the parties. A
contract is said to be discharged when it ceases to operate, i.e. when the rights and obligations
created by it come to an end.
A contract may be discharged
1. By Performance
2. By Agreement or Consent
3. By Impossibility
4. By Lapse of Time
5. By Operation of Law
6. By Breach of Contract
1. Discharge by performance
Performance means the doing of that which is required by a contract. Discharge by performance
takes place when the parties to the contract fulfil their obligations arising under the contract
within the time and in the manner prescribed.
Performance of a contract is the most usual mode of its discharge. It may be
(1) Actual Performance: When both the parties perform their promises, the contract is
discharged.
Performance should be complete, precise and according to the terms of the agreement.
(2) Attempted Performance or Tender: Tender is not actual performance, but is only an offer to
perform the obligation under the contract.
2. Discharge by agreement or consent
Sec. 62 lays down that if the parties to a contract agree to substitute a new contract for it, or to
rescind or to alter it, the original contract is discharged and need not be performed.
The various cases of discharge of contract by mutual agreement are dealt with in Secs. 62 and
63 are given below:
(a) Novation (Sec. 62): Novation takes place when a new contract is substituted for an existing
one between the same parties.
Example: A owes money to B under a contract. It is agreed between A, B and C that B shall
henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new
debt from C to B has been contracted.
(b) Rescission (Sec. 62): Rescission of a contract takes place when all or some of the terms of
the contract are cancelled. It may occur
(i) by mutual consent of the parties, or
(ii) where one party fails in the performance of his obligation. In such a case, the other party
may rescind the contract without prejudice to his right to claim compensation for the breach of
contract.
Example: A promises to supply certain goods to B six months after date. By that time, the goods
go out of fashion. A and B may rescind the contract.
(c) Alteration (Sec. 62): Alteration of a contract may take place when one or more of the terms
of the contract is/are altered by the mutual consent of the parties to the contract. In such a case,
the old contract is discharged.
Example: A enters into a contract with B for the supply of 100 bales of cotton at his Godown
No.1 by the first of the next month. A and B may alter the terms of the contract by mutual
consent.
(d) Remission (Sec. 63): Remission means acceptance of a lesser fulfilment of the promise
made, i.e. acceptance of a lesser sum than what was contracted for, in discharge of the whole
of the debt.
Example: A owes B Rs.50,000. A pays to B and B accepts, in satisfaction of the whole debt,
Rs.20,000 paid at the time and place at which Rs.50,000 were payable. The whole debt is
discharged.
(e) Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be
bound by the contract. This amounts to a mutual abandonment of rights by the parties to the
contract.
(f) Merger: Merger takes place when an inferior right accruing to a party under a contract
merges into a superior right accruing to the same party under the same or some other contract.
Example: P holds a property under a lease. He later buys the property. His rights as a lessee
merge into his rights as an owner.
3. Discharge by impossibility of performance
If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule
is based on the following maxims:
1. Impossibility existing at the time of agreement. Sec. 56 lays down that an agreement to do
an impossible act itself is void. This is known as pre-contractual or initial impossibility.
2. Impossibility arising subsequent to the formation of contract. Impossibility which arises
subsequent to the formation of a contract (which could be performed at the time when the
contract was entered into) is called post-contractual or supervening impossibility.
Discharge by Supervening Impossibility
A contract is discharged by supervising impossibility in the following cases:
1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent
to its formation, is destroyed without any fault of the parties to the contract, the contract is
discharged.
Example: C let a music hall to T for a series of concerts on certain days. The hall was
accidentally burnt down before the date of the first concert. Held, the contract was void.
2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is
entered into between two parties on the basis of a continued existence or occurrence of a
particular state of things. If there is any change in the state of things which ought to have
occurred does not occur, the contract is discharged.
Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes
mad.
The contract becomes void.
3. Death or Incapacity for personal service: Where the performance of a contract depends on
the personal skill or qualification of a party, contract is discharged on the illness or incapacity or
death of that party. The mans life is an implied condition of the contract.
Example: An artist undertook to perform at a concert for a certain price. Before she could do so,
she was taken seriously ill. Held, she was discharged due to illness.
4. Change of law. When, subsequent to the formation of a contract, change of law takes place,
and the performance of the contract becomes impossible, the contract is discharged.
Example: D enters into a contract with P on 1st March for the supply of certain imported goods in
the month of September of the same year. In June by an Act of Parliament, the import of such
goods is banned. The contract is discharged.
5. Outbreak of war. A contract entered into with an alien enemy during war is unlawful and
therefore impossible for performance. Contracts entered into before the outbreak of war are
suspended during the war and may be revived after the war is over.
4. Discharge by lapse of time
The Limitation Act, 1963 lays down that a contract should be performed within a specific period,
called period of limitation. If it is not performed, and if no action is taken by the promisee within
the period of limitation, he is deprived of his remedy at law. For example, the price of goods sold
without any stipulation as to credit should be paid within three years of the delivery of the goods.
If the price is not paid and creditor does not file a suit against the buyer for the recovery of price
within three years, the debt becomes time-barred and hence irrecoverable.
5. Discharge by operation of law
A contract may be discharged by operation of law. This includes discharge
(a) By Death: In contracts involving personal skill or ability, the contract is terminated on death
of the promisor. In other contracts, the rights and liabilities of a deceased person pass on to the
legal representatives of the deceased person.
(b) By Merger: When an inferior right accruing to a party merges into a superior right accruing to
the same party under the same or some other contract, the inferior right accruing to the party is
said to be discharged.
(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities
incurred prior to his adjudication.
(d) By Unauthorised Alteration of the terms of a Written Agreement: Where a party to a contract
makes any material alteration in the contract without the consent of the other party, the other
party can avoid the contract. A material alteration is one which changes, in a significant manner,
the legal identity or character of the contract or the rights and liabilities of the parties to the
contract.
(e) By Rights and Liabilities becoming vested in the Same Person: Where the rights and
liabilities under a contract vested in the same person, for example when a bill gets into the
hands of the acceptor, the other parties are discharged.
6. Discharge by breach of contract
Breach of contract means a breaking of the obligation which a contract imposes. It occurs when
a party to the contract without lawful excuse does not fulfil his contractual obligation or by his
own act makes it impossible that he should perform his obligation under it. It confers a right of
action for damages on the injured party.
REMEDIES FOR BREACH OF CONTRACT
When a contract is broken, the injured party has one or more of the following remedies:
1. Rescission of the contract
2. Suit for damages
3. Suit upon quantum meruit
4. Suit for specific performance of the contract
5. Suit for injunction.
1. rescission
When a contract is broken by one party, the other party may sue to treat the contract as
rescinded and refuse further performance. In such a case, he is absolved of all his obligations
under the contract.
Example: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price
after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay
the price.
The Court may grant rescission
(a) where the contract is voidable by the plaintiff; or
(b) where the contract is unlawful for causes not apparent on its face and the defendant is more
to blame than the plaintiff.
When a party treats the contract as rescinded, he makes himself liable to restore any benefits
he has received under the contract to the party from whom such benefits were received. But if a
person rightfully rescinds a contract he is entitled to compensation for any damage which he
has sustained through non-fulfilment of the contract by the other party.
2. damages
Damages are a monetary compensation allowed to the injured party by the Court for the loss or
injury suffered by him by the breach of a contract. The object of awarding damages for the
breach of a contract is to put the injured party in the same position, so far as money can do it,
as if he had not been injured, i.e. in the position in which he would have been had there been
performance and not breach. This is called the doctrine of restitution.
The rules relating to damages may be considered as under:
1. Damages arising naturally Ordinary damages
When a contract has been broken, the injured party can recover from the other party such
damages as naturally and directly arose in the usual course of things from the breach. This
means that the damages must be the proximate consequence of the breach of contract. These
damages are known as ordinary damages.
Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.1000 per quintal,
the price to be paid at the time of delivery. The price of wheat rises to Rs.1200 per quintal and A
refuses to sell the wheat. B can claim damages at the rate of Rs.200 per quintal.
2. Damages in contemplation of the parties Special damages
Special damages can be claimed only under the special circumstances which would result in a
special loss in case of breach of a contract. Such damages, known as special damages, cannot
be claimed as a matter of right.
Example: A, a builder, contracts to erect a house for B by the 1st of January, in order that B may
give possession of it at that time to C to whom B has contracted to let it. A is informed of the
contract between B and C. A builds the house so badly that before the 1st January, it falls down
and has to be rebuilt by B, who, in consequence, loses the rent which he was to have received
from C, and is obliged to make compensation to C for the breach of the contract. A must make
compensation to B for the cost of rebuilding the house, for the rent lost, and for the
compensation made to C.
3. Vindictive or Exemplary damages
Damages for the breach of a contract are given by way of compensation for loss suffered, and
not by way of punishment for wrong inflicted. Hence, vindictive or exemplary damages have
no place in the law of contract because they are punitive (involving punishment) by nature. But
in case of (a) breach of a promise to marry, and (b) dishonour of a cheque by a banker
wrongfully when he possesses sufficient funds to the credit of the customer, the Court may
award exemplary damages.
4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach of a contract,
the damages recoverable by him are nominal. These damages merely acknowledge that the
plaintiff has proved his case and won.
Example: A firm consisting of four partners employed B for a period of two years. After six
months two partners retired, the business being carried on by the other two. B declined to be
employed under the continuing partners. Held, he was only entitled to nominal damages as he
had suffered no loss.
5. Damages for loss of reputation
Damages for loss of reputation in case of breach of a contract are generally not recoverable. An
exemption to this rule exists in the case of a banker who wrongfully refuses to honour a
customers cheque. If the customer happens to be a tradesman, he can recover damages in
respect of any loss to his trade reputation by the breach. And the rule of law is: the smaller the
amount of the cheque dishonoured, the larger the amount of damages awarded. But if the
customer is not a tradesman, he can recover only nominal damages.
6. Damages for inconvenience and discomfort
Damages can be recovered for physical inconvenience and discomfort. The general rule in this
connection is that the measure of damages is not affected by the motive or the manner of the
breach.
Example: A was wrongfully dismissed in a harsh and humiliating manner by G from his
employment. Held, (a) A could recover a sum representing his wages for the period of notice
and the commission which he would have earned during that period; but (b) he could not
recover anything for his injured feelings or for the loss sustained from the fact that his dismissal
made it more difficult for him to obtain employment.
7. Mitigation of damages
It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the
breach. He cannot claim to be compensated by the party in default for loss which he ought
reasonably to have avoided. That is he cannot claim compensation for loss which is really due
not to the breach, but due to his own neglect to mitigate the loss after the breach.
8. Difficulty of Assessment
Although damages which are incapable of assessment cannot be recovered, the fact that they
are difficult to assess with certainty or precision does not prevent the aggrieved party from
recovering them.
The Court must do its best to estimate the loss and a contingency may be taken into account.
Example: H advertised a beauty competition by which readers of certain newspapers were to
select fifty ladies. He himself was to select twelve out of these fifty. The selected twelve were to
be provided theatrical engagements. C was one of the fifty and by Hs breach of contract she
was not present when the final section was made. Held, C was entitled to damages although it
was difficult to assess them.
9. Cost of Decree
The aggrieved party is entitled, in addition to damages, to get the cost of getting the decree for
damages. The cost of suit for damages is in the discretion of the Court.
10. Damages agreed upon in advance in case of breach
If a sum is specified in a contract as the amount to be paid in case of its breach, or if the
contract contains any other stipulation by way of a penalty for failure to perform the obligations,
the aggrieved party is entitled to receive from the party who has broken the contract, a
reasonable compensation not exceeding the amount so mentioned.
Example: A contracts with B to pay Rs.1000 if he fails to pay B Rs.500 on a given day. B is
entitled to recover from A such compensation not exceeding Rs.1000 as the Court considers
reasonable.
Liquidated Damages and Penalty
Sometimes parties to a contract stipulate at the time of its formation that on the breach of the
contract by either of them, a certain specified sum will be payable as damages. Such a sum
may amount to either liquidated damages or a penalty. Liquidated damages represent a sum,
fixed or ascertained by the parties in the contract, which is a fair and genuine pre-estimate of
the probable loss that might arise as a result of the breach, if it takes place. A penalty is a sum
named in the contract at the time of its formation, which is disproportionate to the damage likely
to accrue as a result of the breach. It is fixed up with a view to securing the performance of the
contract.
Payment of Interest
The largest number of cases decided under Sec. 74 relate to stipulations in a contract providing
for payment of interest. The following rules are observed with regard to payment of interest:
1. Payment of interest in case of default.
2. Payment of interest at higher rate
(a) from the date of the bond, and
(b) from the date of default.
3. Payment of compound interest on default
(a) at the same rate as simple interest, and
(b) at the rate higher than simple interest.
4. Payment of interest at a lower rate, if interest paid on due date.
3. quantum meruit
The phrase quantum meruit literally means as much as earned. A right to sue on a quantum
meruit arises where a contract, partly performed by one party, has become discharged by the
breach of the contract by the other party.
4. specific performance
In certain cases of breach of contract, damages are not an adequate remedy. The Court may, in
such cases, direct the party in breach to carry out his promise according to the terms of the
contract. Some of the cases in which specific performance of a contract may, in discretion of the
Court, be enforced are as follows:
(a) When the act agreed to be done is such that compensation in money for its non-
performance is not an adequate relief.
(b) When there exists no standard for ascertaining the actual damage caused by the non-
performance of the act agreed to be done.
(c) When it is probable that the compensation in money cannot be got for the non-performance
of the act agreed to be done.
5. injunction Where a party is in breach of a negative term of a contract (i.e. where he is doing
something which he promised not to do), the Court may, by issuing an order, restrain him from
doing what he promised not to do. Such an order of the Court is known as injunction.
Example: W agreed to sing at Ls theatre, and during a certain period to sing nowhere else.
Afterwards W made contract with Z to sing at another theatre and refused to perform the
contract with L.
Held, W could be restrained by injunction from singing for Z.
QUASI CONTRACTS
Under certain circumstances, a person may receive a benefit to which the law regards another
person as better entitled, or for which the law considers he should pay to the other person, even
though there is no contract between the parties. Such relationships are termed quasi-contracts,
because, although there is no contract or agreement between the parties, they are put in the
same position as if there were a contract between them. These relationships are termed as
quasi-contracts.
A quasi-contract rests on the ground of equity that a person shall not be allowed to enrich
himself unjustly at the expense of another. The principle of unjust enrichment requires:
that the defendant has been enriched by the receipt of a benefit;
that this enrichment is at the expense of the plaintiff; and
that the retention of the enrichment is unjust.
Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract
is not a contract at all. A contract is not intentionally entered into. A quasi-contract, on the other
hand, is created by law.
Kinds of quasi contracts
1. Supply of necessaries (Sec. 68)
If a person, incapable of entering into a contract, or anyone whom he is legally bound to
support, is supplied by another 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.
Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to
be reimbursed from Bs property.
2. Payment by an interested person (Sec. 69)
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.
Example: P left his carriage on Ds premises. Ds landlord seized the carriage as distress for
rent. P paid the rent to obtain the release of his carriage. Held, P could recover the amount from
D.
The essential requirements are as follows:
(a) The payment made should be bonafide for the protection of ones interest.
(b) The payment should not be voluntary one.
(c) The payment must be such as the other party was bound by law to pay.
3. Obligation to pay for non-gratuitous acts (Sec. 70)
When a person lawfully does anything for another person 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.
Example: A, a tradesman, leaves goods at Bs house by mistake. B treats the goods as his own.
He is bound to pay for them to A.
Before any right of action under Sec. 70 arises, three conditions must be satisfied:
(a) The thing must have been done lawfully.
(b) The person doing the act should not have intended to do it gratuitously.
(c) The person for whom the acts is done must have enjoyed the benefit of the act.
4. Responsibility of finder of goods (Sec. 71)
A person, who finds goods belonging to another and takes them into his custody, is subject to
the same responsibility as a bailee. He is bound to take as much care of the goods as a man of
ordinary prudence would, under similar circumstances, take of his own goods of the same bulk,
quality and value.
He must also take all necessary measures to trace its owner. If he does not, he will be guilty of
wrongful conversion of the property. Till the owner is found out, the property in goods will vest in
the finder and he can retain the goods as his own against the whole world (except the owner).
Example: F picks up a diamond on the floor of Ss shop. He hands it over to S to keep it till true
owner is found out. No one appears to claim it for quite some weeks in spite of the wide
advertisements in the newspapers. F claims the diamond from S who refuses to return. S is
bound to return the diamond to F who is entitled to retain the diamond against the whole world
except the true owner.
The finder can sell the goods in the following cases:
when the thing found is in danger of perishing;
when the owner cannot, with reasonable diligence, be found out;
when the owner is found out, but he refuses to pay the lawful charges of the finder; and
when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of
the value of the thing found. (Sec. 169).
5. Mistake or coercion (Sec. 72)
A person to whom money has been paid, or anything delivered, by mistake or under coercion,
must repay or return it to the person who paid it by mistake or under coercion. The word
coercion is used in Sec. 72 in its general sense and not as defined in Sec. 15.
Example: A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not knowing
this fact, pays Rs.100 over again to C. C is bound to pay the amount to B.
Quantum meruit
Quantum meruit literally means as much as earned or as much as is merited. When a person
has done some work under a contract, and the other party repudiates the contract, or some
event happens which makes the further performance of the contract impossible, then the party
who has performed the work can claim remuneration for the work he has already done.
Likewise, where one person has expressly or impliedly requested another to render him a
service without specifying any remuneration, but the circumstances of the request imply that the
service is to be paid for, there is implied a promise to pay quantum meruit, i.e. so much as the
party rendering the service deserves. The right to claim quantum meruit does not arise out of
contract as the right to damages does; it is a claim on the quasi-contractual obligation which the
law implies in the circumstances.
The claim for quantum meruit arises only when the original contract is discharged. If the original
contract exists, the party not in default cannot have quantum meruit remedy; he has to take
resort to remedy in damages. Further the claim for quantum meruit can be brought only by the
party who is not in default.
The claim for quantum meruit arises in the following cases:
(a) When an agreement is discovered to be void (Sec. 65).
(b) When something is done without any intention to do so gratuitously (Sec.70).
(c) When there is an express or implied contract to render services but there is no agreement as
to remuneration.
(d) When the completion of the contract has been prevented by the act of the other party to the
contract.
(e) When a contract is divisible.
(f) When an indivisible contract is completely performed but badly.











SPECIAL CONTRACTS
CONTRACT OF INDEMNITY AND GUARANTEE
DEFINITION
Section 124 of the Indian Contract Act defines indemnity as 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. The person who
promises is called the Indemnifier and the person to whom the promise is made
is called the
Indemnified or Indemnity Holder.
Illustration: A promises not to construct buildings on a particular site so as to
prevent light and air to Bs house and in case of breach of such promise, to
indemnify for the consequent loss.
This is a contract of indemnity. A contract of insurance is also a contract of
indemnity.
RIGHTS OF AN INDEMNITY HOLDER
He is entitled to recover
all damages,
all costs which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnity applies, and
all sums which he may have paid under the terms of any compromise of any
such suit provided, such compromise was not contrary to the orders of the
promisor and was prudent or the promisor authorises him to compromise the suit.
CONTRACT OF GUARANTEE
Section 126 of Indian Contract Act defines guarantee as 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.
Illustration: A purchases goods from B on credit. C agrees to stand as a surety
which means that if A does not pay the price of the goods, he will pay. Here, A is
the principal debtor, B is the creditor and C is the surety or guarantee.
KINDS OF GUARANTEE
1. Specific Guarantee: When a guarantee extends to a single transaction or debt,
it is called a specific or simple guarantee. It comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.
2. Continuing Guarantee: When a guarantee extends to a series of transactions,
it is called a continuing guarantee (Sec.129). The liability of the surety in case of
a continuing guarantee extends to all the transactions contemplated until the
revocation of the guarantee.
Distinction between Contract of Indemnity and Contract of Guarantee
Contract of Indemnity Contract of Guarantee
1. There are two parties, namely Indemnifier and the Indemnified.
There are three parties, viz. the principal debtor, the creditor and the surety.
2. The liability of the Indemnifier is primary.
The liability of the surety is subsidiary.
3. The liability of the Indemnifier is contingent.
The liability of the surety is subsisting.
4. The Indemnifier cannot sue the third party in his name even after making good
the loss unless there is an assignment in his favour from the indemnified.
The surety can sue the principal debtor in his own name after paying the creditor.
RIGHTS OF SURETY
Rights against the Principal Debtor
1) After discharging the liability of the principal debtor, the surety is entitled to all
those rights which the creditor himself exercises against the principal debtor. This
right of the surety is called subrogation.
Illustration: The right of the creditor to receive dividends from the official assignee
when the principal debtor becomes bankrupt, can be exercised by the surety.
2) The surety can proceed against all those securities of the principal debtor,
which the creditor himself can proceed against.
3) The surety is entitled to be indemnified for all payments rightfully made by him.
Illustrations: 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.
Rights against the Creditor
1) The surety may require the creditor to sue the debtor. But he cannot compel
the creditor to do so.
2) In the case of fidelity contracts, he can insist upon the creditor to dispense with
the services of the principal debtor when his dishonesty is established.
3) He can claim set off or counter-claim which the principal debtor could have
obtained against the creditor.
4) On payment of the guaranteed debt, he can require the creditor to assign to
him all the securities held by the creditor in respect of the debt. If the creditor
loses or parts with such securities without the consent of the surety, the surety is
discharged to the extent of the value of the security.
Illustration: C advances to B, his tenant, Rs.2000 on the guarantee of A. C has
also a further security for the sum of Rs.2000 by mortgage of Bs 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.
Rights against the Co-Sureties
1) All the sureties shall bear equally, the loss caused by the insolvency of the
principal debtor. If one of them bears the entire loss in the first instance he can
claim contribution from other co-sureties.
2) Where the co-sureties agreed to become liable in different sums, they should
contribute, according to English Law, proportionately.
Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and
40,000 respectively, as sureties for Ds liability. Ds indebtedness was Rs.30,000.
A, B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law
they shall bear such loss equally but not exceeding the sums which they have
agreed to pay. So, A, B and C will have to pay Rs. 10,000 each.
DISCHARGE OF SURETY
1. The surety is discharged from liability if the contract of guarantee becomes
void or voidable, on the ground of misrepresentation or concealment by the
creditor with regard to a material circumstance, or on the ground that the
guarantee was given on condition that another person will join as a co-surety and
that such other person has not joined as such.
Illustration: 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 accounting. C gives his guarantee for Bs accounting. A does not acquaint C
with Bs previous conduct. B afterwards makes default. The guarantee is invalid.
2. The surety is discharged by revocation as to future transactions in case of
continuing guarantee.
3. The surety is discharged:
a) By variance of contract: Any variance in the terms of the contract between the
principal debtor and the creditor without the suretys consent discharges the
surety.
Illustration: C, contracts to lend B Rs.5000 on the 1st of March. A guarantees
repayment. C pays Rs.5000 to B on the 1st of January. A is discharged from his
liability, as the contract has been varied in as much as C might sueB for the
money before the 1st of March.
b) By release or discharge of principal debtor: The surety is discharged by any
contract between the principal debtor and the creditor by which the principal
debtor is discharged or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.
Illustration: 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 As performance
of the contract. B omits to supply the timber. C is discharged from his suretyship.
c) By composition with debtor: The surety is discharged when the principal debtor
and creditor enter into a contract by which the creditor (1) makes composition
with or (2) promises to give time or (3) promises not to sue the principal debtor.
d) By act or omission impairing suretys remedy: The surety is discharged, if the
creditor does any act inconsistent with the rights of the surety or omits to do any
act which his duty to surety requires him to do.
Illustration: A puts M as apprentice to B, and gives a guarantee to B for Ms
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 done as promised and M embezzles. A is not liable
to B on his guarantee.
e) Loss of security: The surety is discharged if the creditor loses or parts with the
securities belonging to the principal debtor, without the consent of the surety.
The surety is not discharged in the following cases:
1. A surety is not discharged when a contract to give time to the principal debtor
is made by the creditor with a third person and not with the principal debtor.
Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for
B, and accepted by B, contracts with M to give time to B. A is not discharged.
2. Mere forbearance on the part of the creditor to sue the principal debtor does
not discharge the surety.
Illustration: B owes 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 liability.