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A word about the book

There is no dearth of books on Business Law,

especially for the management courses. Yet this
attempt can be distinguished for its focus on
explaining the relevant provisions of law from a
managerial perspective. Certain Universities
including Pune University have long back changed
the nomenclature of the subject from „Business
Law‟ to „Legal Aspects of Business‟ with the
intent of conveying to the students (and the faculty
members dealing with the subject) that, while
dealing with the subject, the emphasis should be
on the Business rather than law. The title „Legal
Aspects of Business‟ carries this spirit unlike the
term Business Law which is more akin to terms
such as Civil Law or Criminal law.

My endeavour is to make the book more student-

friendly. I have explained the law in a language as
simple as possible, bearing always in mind that the
readers are management students and not the law
students. This had to be done not at the expense of
essential and minute discussion of law, wherever
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warranted. At the same time, I have not lost sight

of the fact that the book is intended for the would-
be managers. Its aim is to enable them to make
effective managerial decisions being aware of the
legal environment surrounding them.

I sincerely hope that this book, thus designed, shall

meet the approbation of the students and faculty
alike. I heartily welcome, nay, look forward to any
suggestions for improvement. Needless to say that
I shall be grateful for the same.
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Introduction to law relating to business

Knowledge of law, to a greater or lesser extent, is

essential for every individual. Hence it is popularly
said that ignorance of law is no excuse. The need
for the managers of any organization to know the
broad principles of law governing their decisions
and actions need not be over-emphasised. For
example, a manager dealing with a banker or
entering into contract with another on behalf of his
organization needs to know his rights and
obligations more than any ordinary individual. No
manager or his organization can afford a
managerial decision without any regard to its legal
repercussions.

The branch of law which controls and regulates the

business related activities or commercial activities
is known as Business Law. It is obvious that there
is bound to be a plethora of such legislations. It is
neither possible nor necessary to learn about all of
them. What is necessary is to study the laws that
are fundamental. They are fundamental in the
sense that the rules and principles embodied in
them are imported in other legislations. Therefore,
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a fair amount of knowledge of these fundamental

legislations would enable the managers to easily
understand the requirements under the other laws.
For example, after one has become adequately
familiar with the law of contract he is certainly in a
comfortable position to deal with a situation
involving law of insurance. This is so because
insurance is basically a contract and hence apart
from the insurance-specific rules, the principles of
law of contract are uniformly applicable.

We begin our discussion with law of contract

which is to be found in the Contract Act, 1872.

Chapter One
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Nature of agreement and contract:

The terms contract and agreement are used

interchangeably in day to day language and are
treated as synonymous. However, under the
Contract Act they are defined to mean different.

An agreement, in common sense, is a situation

where something suggested or proposed by one
person is consented to or is approved by another to
whom such suggestion is given or proposal is
made. In our daily life, we enter into innumerable
such agreements with various persons. For
example, when you suggest to your friend that you
two should have a cup of tea in the canteen, you
are putting forward a proposal to him. It may be
accepted or rejected by him. If accepted, it
becomes an agreement. However, when one trader
makes a proposal to another to buy any goods at a
certain price, the suggestion he is putting forth is
different. If his proposal is accepted by the trader
to whom the proposal is made, the result is an
agreement between the two as in the previous
example, but with a difference. The difference
between the two types of agreements is that the
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former is an agreement while the latter is a

contract.

The difference essentially lies in the fact that in the

former agreement there is no intention of the
parties to the agreement to create legal relations
and it is purely social in nature while such
intention is there in the case of the latter
agreement. Failure to honour the social agreement
may bring disrepute to the failing party, but not the
legal consequences. In both the cases, there is an
element of meeting of minds or concurrence
between the two individuals, but in the first case
the agreement is not backed by law. In the second
example, we notice that the concurrence between
the parties is not merely a social interaction, but
something more than that. The second example is
the case of contract which is also an agreement
with a difference and the difference is that it is
enforceable by law.

An agreement is defined as – „every promise and

every set of promises forming consideration for
each other is an agreement.‟ Therefore, a promise
is an agreement. An offer, when accepted,
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becomes a promise. So we can say that an

agreement is the result of an offer by one person
being accepted by the other (to whom the offer is
made). Every such agreement may not be a
contract. It depends on whether such agreement is
legally enforceable or not.

The definition of the term contract under the

Contract Act is therefore –

“Contract is agreement enforceable by law.”

It can be thus noticed that a proposal by one party

and its acceptance by the other give birth to an
agreement between the two. When such agreement
is legally enforceable, it is called a contract. We
can therefore say that –

Offer + Acceptance = Agreement

Agreement + Legal enforceability = contract

From the above equations we can conclude that

every contract is an agreement but every
agreement is not necessarily a contract. This is
so because in order to be a contract, the agreement
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needs legal enforceability. The question now arises

as to what is it that confers upon an agreement the
legal enforceability? In other words, under what
conditions an agreement becomes a contract?

An agreement becomes contract only when it

possesses certain characteristics or features. These
features are known as essential elements or
ingredients of contract. If all these essential
elements are present in an agreement, then it
acquires the status of contract. If any of these
essential elements is absent, the agreement remains
unenforceable by law and hence does not become
contract.

These essential elements are briefly discussed

below and those requiring elaboration are
separately discussed in the ensuing sections.

Essential elements of contract

1) Offer
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The terms offer and proposal mean the same thing.

The Contract Act uses the term proposal. Any
agreement between two or more parties has to
begin with one party putting forth a suggestion to
other so that the other person or persons can
consider the same and decide whether to agree
with the same or not. For example, A may say to B
that he wants to sell his car for Rs, 60000/- and
whether B is interested in buying the same. Here,
A is making an offer to B. Therefore,
communication of a lawful offer by one party is
the first step towards the formation of every
agreement. It is obvious that without any offer
there cannot be any agreement.

(The law relating to lawful offer is discussed in

chapter 2)

2) Acceptance

The person to whom the offer is made has now to

consider the offer and examine it from the view-
point of his benefits and decide whether to reject
the offer made or accept the same. Communication
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of lawful acceptance by the offeree is the next step

in the formation of contract. The moment a valid
offer is accepted by the offeree in a valid manner,
an agreement is born. (if other essential elements
of contract are also present, then a contract is
born.) Acceptance, in a way, makes the agreement
in its complete form. In the words of Sir Anson –
“Acceptance is to an offer what a lighted match is
to a train of gun powder. It produces something
which cannot be recalled or undone.” It means that
the gunpowder which is lying idle or dormant
explodes immediately the moment it comes in
contract with a lighted match. Similarly, an offer
by itself is inactive. The moment it is accepted it
becomes active i.e. it produces an agreement
giving rise to mutual rights and obligations.
Acceptance converts an offer into a promise.

(The law relating to Acceptance is discussed in

chapter 2)

3) Intention to create legal relations

The parties to the agreement must intend to create

legal relations among them. Agreements which are
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social or friendly in nature, for example going for a

picnic together or agreement to lunch together etc.
are the agreements where there is no intention of
the parties to create legal relationship between
them. As such, these agreements are not contracts.

The test to determine whether the parties have or

do not have any such intention is to ask a simple
question. Do the parties intend that legal
consequences should follow if any party breaks the
agreement? If the answer is positive, it shows that
the agreement is intended to be a contract. On the
other hand, if the answer is negative, the
agreement is not a contract.

To illustrate, take a case where one person invites

his friend at his home for lunch. On failure of the
friend to turn up for the lunch, the person giving
invitation cannot prosecute him for compensation
for the loss of unconsumed food. Similarly, if the
person giving invitation fails to arrange for the
lunch on arrival of the friend, the invitee cannot
prosecute him for the inconvenience caused.

In an interesting case (Balfour vs. Balfour), the

husband agreed to pay a monthly amount to his
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wife to meet the maintenance expenses. On his

failure the wife prosecuted him. The court held
that such agreement is not a contract and hence not
legally enforceable, because no legal relations
resulted from the agreement

It is always presumed that the intention to create

legal relationship is absent in social or domestic
agreement, whereas such intention is presumed to
exist in the agreements which are commercial in
nature or which are trading agreements. Thus, in
an agreement to buy and sell certain property,
there is an intention to create legal relations and
therefore such agreement is a contract.

4) Consideration

In simple terms, Consideration means the benefit

that each party stands to receive out of the
contract. When one person buys any property from
another, it is either because he wants to put the
property to use in a manner beneficial to him or he
may want to sell it at a higher price in future. In
either case, he receives or stands to receive some
benefit from the purchase of property. This benefit
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is his consideration. Similarly, the person who

sells the property receives the price of the property
and this payment of price is his benefit through the
agreement of sale. It is consideration for the seller.

Consideration is the price paid by one party for the

promise of the other.

If any party to the agreement stands to gain

nothing from the agreement, such agreement is not
enforceable by law as it is not a contract.
Consideration being as essential element of
contract, both the parties must benefit from the
agreement.

When „A‟ agrees to give a gift to „B‟ on his

birthday, the agreement between them is not a
contract because there is no gain for A. Therefore,
no legal consequences will follow if „A‟ later fails
or refuses to give the gift to „B‟. Gratuitous
promises are not enforceable at law.

Consideration has to be lawful and may be in the

form of doing something for the benefit of the
other or refraining from doing something for the
benefit of the other.
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(The law relating to Consideration is discussed in

chapter 3)

5) Capacity of parties or competence of parties

The parties entering into agreement must be

competent to contract or must have legal capacity
to enter into contract, otherwise such agreement is
not a contract and therefore not enforceable by
law. The term capacity should not be confused
with the term ability. Any person may have the
ability to enter into an agreement, but he may not
be competent to contract. For example, a minor
person i.e. one who has not completed his age of
18 years may enter into an agreement. But the
Contract Act declares a minor to be not competent
to enter into contract, except under certain
circumstances. Therefore, the agreement entered
into by or with a minor cannot be a contract and
therefore not enforceable by law.

A person who is minor or a person suffering from

insanity or madness is not competent to contract.
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Additionally, there are other categories of persons

who are declared to be incompetent to contract.

Competence of parties is an essential element of

contract and hence if any of the parties to an
agreement is not competent, such agreement is not
a contract.

(The law relating to competence to contract is

discussed in chapter 4)

6) Free consent

Free consent of all the parties to an agreement is

another essential element of contract. Mere
consent of the parties is not sufficient. Such
consent has to be a free consent, in the absence of
which the agreement may not be contract. There
are certain elements such as coercion, undue
influence etc. which vitiate free consent.

Two or more persons are said to consent when

they agree upon the same thing in the same sense.
The consent is said to be free when it is not
obtained by undue influence, coercion, fraud,
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misrepresentation or mistake. If the contract is

induced by any party by obtaining the consent of
the other using any of the first four factors, the
contract becomes avoidable at the discretion of the
party whose consent is so obtained. In other words,
such party has a choice whether to reject the
contract or accept it and insist on performance.

(The law relating to free consent is discussed in

chapter 5)

7) Lawful object

In order to be a contract, the purpose of the

agreement or its object must be lawful. If the
object with which an agreement is entered into is
unlawful, it is a case of illegal agreement, and
obviously such agreement cannot be a contract.

The object of an agreement is unlawful when –

 It is forbidden by law; or

 If permitted, it would defeat the provisions of

any law; or
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 It is fraudulent or involves injury to another

 It is immoral or opposed to public policy

An agreement where one person lends money to

another on interest is enforceable by law as it is a
contract. However, if the person lending money
knows that the money so lent is to be utilised for
production of illegal liquour, then it is a case of
illegal agreement and therefore it is not a contract.

8) Writing and registration

According to Contract Act, an oral contract is as

good as written contract. There is no general
requirement that a contract has to be in a written
form. However, in the case of certain agreements it
is the requirement of law that they shall be reduced
to writing, if they are to be legally enforceable.
Further, in some cases it is also required that the
agreement shall not only be in writing but it must
also be registered as per the law of registration of
contracts.
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For example, an oral agreement to buy or sell

movable goods is perfectly enforceable by law as it
is a contract. However, an agreement to buy or sell
immovable property such as land or building, has
to be in writing and also it has to be registered with
the competent authorities. If it is not written and
registered, such agreement will not be a contract
and therefore cannot be enforced in the court of
law.

9) Certainty

The Contract Act provides that if the meaning of

any agreement is not certain or the meaning is not
capable of being made certain, it is not enforceable
by law. In other words, if the terms of agreement
are such that they cannot be precisely interpreted
or if they are vague and ambiguous, such
agreement does not acquire the status of contract
and remains unenforceable at law.

The reason for this is simple. In the event of any

subsequent dispute between the parties over the
agreement, the court is expected to decide the
dispute on the basis of what was actually agreed
between the parties. However, if the agreement
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itself is so vague that no certain meaning can be

derived from it, no court can adjudicate the
dispute.

For example, A agrees with B to sell his house for

a good price. The term „good price‟ may mean any
price, because it is left to subjective interpretation
of different individuals. It is impossible for any
court to ascertain the intention of the parties. It is
also not possible for the courts to declare the price
in view of the prevailing market rates because the
intention of the parties at the time of entering into
agreement is more important and the sole
conclusive factor, and not the market rates.

10) Possibility of performance

Agreements must be capable of performance. An

agreement to do an act impossible in itself is void,
i.e. not enforceable at law.

For example, A agrees with B to make his dead

relative alive by magic in consideration of Rs.
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50,000/-. The agreement is not enforceable by law

and therefore not a contract.

Two points must be noted in this context.

It must be remembered that impossibility of

performance is not the same thing as difficulty in
performance. A person may undertake to do
something under an agreement which may require
no special effort. However, subsequent to
formation of agreement, he may realize that his
perception was wrong and the performance is more
demanding or exacting or it is more expensive.
Under such circumstances, the party has to
discharge his obligation under the agreement,
howsoever costly the performance is.

For example, „A‟ agrees to supply certain steel

products manufactured in his factory to „B‟ for
certain price. Later, „A‟ realizes that he has quoted
a price which is quite below the market rate. Here,
„A‟ has to perform his obligation even though it
may mean a loss to him. He cannot claim
impossibility of performance.
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The second point to be noted is that the

impossibility discussed here is the impossibility
existing at the time of formation of the agreement
and not the subsequent one. For example, „A‟
agrees to sell his house to „B‟ for a certain price.
Subsequent to the agreement, the house is
destroyed in earthquake. Now the performance has
become impossible. However, it is a case of void
contract. In other words, the agreement is a
contract at the time when it is entered into, but
subsequently becomes impossible. (Void contracts
are separately discussed under discharge of
contract.)

11. Not expressly declared as void

Certain agreements are expressly declared to be

void (i.e. not enforceable by law and therefore not
contracts) under the Contract Act. Agreement in
restraint of marriage, or agreement in restraint of
trade, or a gambling agreement are some of the
examples of agreements which can never attain the
status of contract. They are declared to be void and
not enforceable at law.
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Now we shall discuss the above essential elements

of contract in detail one by one. However, before
doing so, it would be more pertinent and suitable
to understand various „kinds of contracts‟ first.

Kinds of contracts

1. Void contract

In general sense, the term „void‟ means completely

lacking something or empty. In legal sense, the
term means „having no legal force.‟ Void contract,
therefore, means a contract which has no legal
value or effect at all. According to the Contract
Act – „A contract which ceases to be enforceable
by law becomes void, when it ceases to be
enforceable.‟

The term „ceases to be enforceable‟ means a

contract which was enforceable at law, but at some
subsequent point of time and due to some reasons,
it has lost the legal value and is no longer
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enforceable by law. Thus, a void contract is not

void from the time of its birth. It was binding on
the parties when it was entered into, however,
subsequent to its formation, it has become devoid
of legal value due to some reasons.

The reasons why a contract becomes a void are as

follows:

a. Supervening impossibility

After the formation of contract, its performance

may become impossible. This is known as
supervening impossibility. In such case, the
contract becomes void. For example, „A‟ contracts
to marry „B‟. After this contract, „B‟ goes mad.
The contract of marriage becomes void.

b. Subsequent illegality

„A‟, a merchant from Maharashtra contracts to sell

100 quintals of sugar to „B‟, another merchant
from Gujarat. After the contract has been entered
into, the Maharashtra Government prohibits sale of
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sugar outside the state of Maharashtra due to

scarcity of sugar. The contract now becomes void,
because the performance of the contract would
now be an illegality.

c. contingent future event becoming impossible

In a contract, where one party undertakes to do or

not to do something on the happening of an
uncertain future event, the contract becomes void
when the event becomes impossible. For example,
„A‟ contracts to sell to „B‟ certain raw material
which is arriving by ship, on the condition that the
ship reaches safely. The ship sinks at the sea
during its journey. Thus, the contract becomes
void.

2. Voidable contract

The contract, where one party (and that party

alone) has a choice whether to go ahead with the
contract or avoid or cancel it, is a voidable
contract. According to Contract Act, „an agreement
which is enforceable by law at the option of one
party, but not at the option of the other, is a
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voidable contract.‟ Such agreement is enforceable

by law or it is a perfect contract until avoided by
the party at whose option the contract was
voidable.

A contract becomes voidable when the consent of

one party has been obtained by fraud, undue
influence, coercion or misrepresentation. Such
contract is voidable at the option of the party
whose consent was so obtained. However, the
option to cancel the contract should be exercised
by the aggrieved party within a reasonable time
and before any third party interest is created.

For example, „A‟ threatens to shoot „B‟ if he does

not sell his house to „A‟ for Rs. 10 lacs. „B‟ agrees.
This contract has come into existence without free
consent of „B‟ i.e. by using coercion and therefore
such contract is voidable at the option of „B‟.

Similarly, when a party to the contract promises to

do a certain thing within a specified time, but fails
to do so, the contract becomes voidable at the
option of the other party, if the time is the essence
of the contract. For example, „A‟ agreed to sell and
deliver to „B‟ 100 quintals of sugar within 10 days.
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If „A‟ does not supply the sugar within the

specified time, the contract is voidable at the
option of „B‟.

Consequences of rescission of contract

If a party to a contract has a choice either to

avoid/cancel the contract or to go ahead with the
contract, and if such party chooses to cancel the
contract, then it is but necessary for such party to
return the benefits, if any, received from the other
party, under the contract. Further, the other party
obviously is under no obligation now to perform
his promise under the contract.

The Contract Act provides for the same thing. It

states that when a person at whose option a
contract is voidable rescinds it, the other party
need not perform any promise made by him under
the contract. If the party rescinding a voidable
contract has received any benefit from another
party under the contract, he shall restore such
benefit to the person from whom the benefit was
received.
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For example, „A‟ contracts to sell his house to „B‟

for a certain price. Later, „A‟ rescinds the contract
on the ground that his consent was obtained under
undue influence. If „A‟ has received any money
from „B‟ as part payment of the price, he must
refund the same to „B‟.

3. Illegal or unlawful contract

Such contract does not exist. The term illegal

contract is self-contradictory. If it is illegal, it
cannot be a contract. We have already seen above
that contract is agreement enforceable by law.
Thus, illegal contract would mean an illegal
agreement which is enforceable by law. Obviously,
such cannot be the case since no illegal agreement
can be enforced at law.
Therefore, it must be noted that there is no contract
as illegal contract or unlawful contract. Unless it is
lawful or legal, it cannot be a contract. (There can,
however, be an illegal agreement.)

Void agreements
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Another important term which is often confused

with the term void contract is void agreement.
There is marked difference between void
agreement and void contract. Void contract is
already discussed above.

Void agreement is an agreement which is never

enforceable at law. It is called void ab-initio i.e.
void (not enforceable by law) right from its birth
or inception.

For example, an agreement with a minor is a void

agreement, because a minor is not competent to
enter into contract. It is never enforceable at law.
On the other hand, void contract is an agreement
which is also a contract (enforceable by law) when
it is entered into, but has subsequently become not
enforceable due to certain reasons. These reasons
are already discussed above.

It may be noted that there no contract can be void

ab-initio, but an agreement can be void ab-initio
(right from inception)
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At this point, it shall be relevant also to see the

difference between void agreement and illegal
agreement.

Illegal agreement and void agreement are both

void ab-initio or not enforceable by law right from
the beginning. Except this similarity, there are
following differences between the two:

All illegal agreements are void but all void

agreements are not necessarily illegal. For
example, if the terms of the agreement are not
certain, it is a void agreement, but not an illegal
agreement. An agreement where one person agrees
to pay certain money to another for killing a third
person is a case of illegal agreement and obviously
it is void also.

Further, all the other agreements which are

connected with an illegal agreement or are
incidental to it are also illegal if the parties to other
agreements are aware of the illegality. So the
original illegal agreement is capable of passing the
stigma of illegality to other incidental agreements
also. Therefore, in the above example, any
 30

agreement between a financer and the person who

wants a third person killed is also an illegal
agreement, provided the person who lends money
is aware of the purpose for which the money is
going to be used.
On the other hand, if an agreement is merely void,
the incidental agreements are not void. For
example, „A‟ borrows money from „B‟ under an
agreement for buying some goods from „C‟, who is
a minor. The agreement between B and C is void,
because it lacks the essential element of contract
i.e. competence of parties. However, the collateral
agreement between A and B is not affected and it
remains a contract.

Express contracts are those contracts where the

offer and acceptance constituting the contract are
made in words, spoken or written. So an agreement
made over telephone or through correspondence is
an example of express contract.

Implied contract is one which is entered into by

the parties not through the words, but through their
conduct or behaviour. Thus, when a porter in
uniform approaches you at a railway platform and
takes up your luggage, and you show him the way
 31

to your compartment, there is an implied contract

between you and the coolie, under which you are
required to pay for his services. Both offer and its
acceptance have been communicated not by the
words, but by the conduct. Implied contracts have
the same force of law as the express contracts.

Quasi contract is a term used for such contractual

relations between the parties which exist as if the
parties have entered into a contract, without there
being any contract between the two in the usual
sense. Unlike other contracts, there is no offer or
acceptance. The parties may not have met each
other ever before and yet the relations that emerge
between them are such as if they have entered into
contract. In fact, the term quasi contract is not used
under the Contract Act. It provides for the „certain
relations resembling those created by contract.‟
For example, when one finds the goods lost by
another, he is under obligation to return the goods
to the owner. Similarly, when one makes an
overpayment to another by mistake, the person
receiving the excess money is under obligation to
refund the same. The Contract Act treats these
obligations as if they are contractual obligations
and therefore the term „quasi contract‟ is used.
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The Latin term quasi means – „as if or „almost‟ and

therefore quasi contract means – seemingly or
apparently a contract but not really a contract.

Chapter two

Offer and Acceptance

During our discussion in the last chapter on

essential elements of contract, we have seen that a
lawful offer is the first step in the formation of
contract. The second step is its acceptance by the
person to whom the offer is made. Once a lawful
offer is made and it is lawfully accepted, the
contract comes into existence. (Provided, of
course, the other essential elements are present.)

We shall now discuss the rules of lawful offer and

its lawful acceptance in detail.
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The Offer or Proposal

The terms Offer and Proposal are synonymous and

they mean one and the same thing. We shall use
both the terms in our discussion. The Contract Act
uses the term Proposal. It defines proposal as –
“when one person signifies to another his
willingness to do or 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.”

From the bare perusal of the above definition, the

following points can be easily noticed.

a. There must be expression or communication of

willingness to do or refrain from doing
something;

b. Such expression must be made to another

person;
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c. It must be made with the object of getting the

assent of that other person.

It follows that a general enquiry or a casual

declaration of intention is not an offer. For
example, „I may sell my house for Rs. 5 lacs‟ or „I
am thinking of selling my house if I get Rs. 5 lacs‟
is not a proposal.
On the other hand, „Will you buy my house for Rs.
5 lacs?‟ or „I am willing to sell my house to you
for Rs. 5 lacs‟ are the examples of proposal.

The person making the proposal is called the

promisor and the person accepting the proposal is
called the promisee.

Legal rules as to Offer

1. Offer may be express or implied. An offer can

be in words, spoken or written, or by conduct. An
offer which is made in words is called express
offer and the offer that is gathered from the
conduct of the person is call implied offer. When
„A‟ says to „B‟ that he wants to sell his house to
him for Rs. 5 lacs, it is an express offer. When a
 35

coolie approaches you at the railway platform and

picks up your bags, he is making an implied offer.

2. Offer must be capable of giving rise to legal

consequences and creating legal relation. An
offer by one person to his friend to take him to a
movie is not a valid offer in the eyes of law.
Ordinary social agreements do not involve legal
intentions and therefore are not binding. It is
presumed by law that offers made during the
course of business are intended to create legal
relations between the parties. Parties expect that
legal consequences shall follow if there is breach
of contract by any of the parties.
It may be noted that even in commercial
transactions, if the offer is made and accepted with
clear understanding that there shall be no legal
binding and that if the agreement is broken by
either party no legal consequences shall follow,
then such agreement shall not be a contract.

3. The terms of offer must be certain and

definite; the terms must not be vague or loose.
 36

In order to create a binding obligation, it is

necessary that the terms on which the parties agree
are certain. Therefore, the terms of offer must be
certain. In other words, the terms must not be so
worded that different interpretations are possible
for different persons.
For example, „A‟ buys a horse from „B‟ and
promises to buy another if the first one proves to
be lucky. In this case, there is no binding
obligation on „A‟ to buy the second horse because
what is a lucky horse is not certain.

4. An invitation to place offer is not an offer.

An offer must be distinguished from mere

quotation or invitation to offer. Certain
communications, either by way of advertisements
or otherwise, are such that they are meant to only
pass on the information to the people who may be
interested in the same. Such communication by
itself is not an offer. The person who is making
such communication is in fact inviting the others to
place their offers based on the information so
communicated, if they so wish.
For example, when you notice any garments
displayed at the window of a garment shop with a
 37

price tag attached, indicating that a particular

garment is for the price mentioned, it is not an
offer. It is only an invitation to you to enter the
shop and place your offer saying you would like to
buy that particular garment for the price. Now it is
for the shopkeeper either to accept your offer or
reject it. Display of garments with price tags is
merely circulation of information to others that the
shopkeeper would be interested in dealing with
any one who is willing to buy the garment roughly
for the stated price.
When you enter the shop to buy the garment, it is
you who is making an offer. When the shopkeeper
takes the money from you, he accepts the offer,
and the contract is formed. If the display of
garments or goods with prices marked on them is
considered to be an offer, then tender of money by
any person would be acceptance of the offer and
the contract is formed. It would be a binding
obligation on the shopkeeper to sell the item to
you, which is not the case.
Quotations, price-lists or display of goods with
prices marked etc. do not constitute offer.
Similarly, an advertisement of sale of goods by
action is not an offer. It is an invitation to others to
attend the action and place their offers by making
 38

highest bids at the auction. Furthermore, it is not

even obligatory on the auctioneer to conduct the
auction sale as per the advertisement and he may
withdraw the auction any time. The prospective
buyers or bidders cannot complain for the loss of
time and money in coming to the place of auction.

5. An offer may be general or specific

An offer is either general or specific depending on

to whom the offer is made. When „A‟ makes an
offer to „B‟ to sell his scooter for Rs. 10,000/-, we
call it a specific offer since the person to whom it
is made is a specific person. When „A‟ says to all
his friends in his class that anyone can buy his
scooter by paying him Rs. 10,000/-, it is called a
general offer.
When the offer is made to a certain person, it is
obvious that only he can accept the offer, whereas
in the case of a general offer, any person from the
world at large, (or any person from the group if the
offer is made to a group) can accept the offer. Such
offer is accepted by complying with the condition
prescribed in the offer. (In the above case, by
paying Rs. 10,000/-)
 39

If „A‟ has lost his book and says to „B‟ – “if you
find and return my book, I shall pay you Rs. 100/-
.” This is specific offer since the offeree is
ascertained and specific. On the other hand, if „A‟
declares in the class or puts up a Notice on the
Notice Board saying – “anyone who finds and
returns my book shall be paid a reward of Rs.
100/-”, it is a case of general offer.
Any person who finds the book and returns it to
„A‟ accepts the offer by fulfilling the requirement
mentioned in the offer. Consequently, there is a
contractual obligation on „A‟ to pay the reward to
that person.

It is worth noting here that offer must have been

communicated to the offeree i.e. offer must have
come to the knowledge of the offeree.

In other words, a person complying with the

requirement under the offer without the knowledge
of the offer cannot claim to have accepted the
same. In the above example, if a student from the
class of „A‟ who is not aware of any Notice of
reward, finds and returns the book to „A‟, cannot
be said to have accepted the offer because he did
 40

not know about the offer. As such, there is no

obligation on “A‟ to pay the reward to such person.

Another point worth noting is that special terms

which are intended to be part of the offer must
be specially communicated at the time of
acceptance or before the acceptance. Subsequent
communication of special terms will not be
binding on the acceptor. Take the above example
where one student returns the lost book to „A‟ with
its cover page torn or spoiled. „A‟ cannot refuse to
pay the reward on the ground that the cover page
of the book is torn or spoiled. Such special term
ought to have been communicated before the
contract came into existence.

6. Offer must not contain a term the non-

compliance of which would amount to
acceptance.

If a person making an offer to other states that if

the offeree does not respond or does not reject the
offer within a stipulated period, it shall be
presumed that the offer has been accepted by him.
Such offer is not a valid offer. The reason is
obvious. There cannot be any obligation on any
 41

person to respond to every communication made to

him. No contractual obligation can arise if he does
not reply.

7. Two identical cross-offers do not make a

contract.

When two persons make identical offers to each

other without being aware of each other‟s offer,
one offer cannot be treated as acceptance of the
other. For example, „A‟ writes a letter to „B‟
offering to sell his house for Rs. 5 lac. At the same
time, „B‟ writes a letter to „A‟ offering to buy his
house for the same price. These are cross offers
and none of them is acceptance, because there
cannot be any acceptance without the knowledge
of offer. As a result, there is no agreement.

Lapse and Revocation of Offer

Having discussed the rules of valid offer, let us

now understand the circumstances under which an
offer lapses or becomes invalid. Once an offer has
lapsed or has become invalid, there cannot be any
 42

acceptance of the same and consequently there

cannot be any resultant agreement.
An offer comes to end under the following
circumstances:

1. An offer lapses by rejection by the offeree

The most obvious mode by which an offer lapses

is its rejection. When „A‟ offers to sell his scooter
to „B‟ for Rs. 10,000 and if „B‟ declines or refuses
to buy the scooter, the offer is rejected and thus
lapses.

It may be noted that such rejection of offer may be

either an outright rejection or by any amendments
suggested by the offeree. Thus, if „A‟ offers to sell
his scooter to „B‟ for Rs. 10000/-, „B‟ may either
reject the offer or may agree to buy the same at Rs.
8000/-. In either case, it is rejection of the original
offer. This is so because when „B‟ suggests any
change in the terms of the offer, he is, by
implication, rejecting the terms of the offer as
originally proposed to him. Conditional acceptance
is nothing but rejection of offer. It may also be
 43

treated as counter-offer. In both the situations, the

offer lapses.

1 A says Will you buy my This is offer

to B scooter for Rs. by A to B
10000/-
2 B says I will buy it, but for This is
to A Rs. 8000/- rejection of
offer by B
and also a
counter offer
by B to A
3 A says No, I do not want to This is
to B sell it for Rs. 8000/- rejection by A
of the counter
offer made by
B
4 B says Okay, if you insist, I This is not
to A will buy it for Rs. an
10000/- acceptance
of the offer
made at
point No. 1.,
because no
 44

offer
survives
which can be
accepted.
Original
offer has
expired with
its rejection
at point No.
2. Hence this
is altogether
a fresh offer
by B to A. As
such, no
agreement
takes place
5 A says 1) Here then, take 1) This is
to B the scooter. acceptance by
OR A of the offer
2) No, I have of B made at
changed my mind. I point No. 4
do not want to sell OR
the scooter. 2) This is
rejection by A
of the offer of
B made at
 45

point No. 4

2. An offer lapses after the time stipulated or

after reasonable time.

An offer does not remain open for acceptance for

ever. It lapses when the time mentioned in the
offer for its acceptance has expired. If no such time
is specified in the offer, then the offer lapses after
the expiry of reasonable time. What is reasonable
time depends on the facts of the case.

For example, an employer posts his offer of

employment to a candidate after he has been
selected in the interview. If it is mentioned in the
appointment letter that the candidate has to
communicate his acceptance within a period of one
week, then the offer of employment lapses after
the week has expired. However, if no such time is
mentioned in the appointment letter, the offer
lapses after a reasonable period. In this case, what
is reasonable period would depend on the
understanding between the employer and the
candidate as regards the urgency in filling the
 46

vacancy and other factors prevailing at the time of

interview.

3. An Offer lapses if not accepted in the

prescribed mode, or in the usual or reasonable
mode.

As the offeror is entitled to receive the acceptance

within the prescribed time, (if at all the offeree
chooses to accept the offer) he is also entitled to
receive the acceptance in the mode prescribed by
him in the offer itself. If no such mode is
prescribed by him, the acceptor is bound to
communicate his acceptance in some usual or
reasonable mode.

Let us take the same example given above. The

employer posts his offer of employment to the
selected candidate stating that if the offer is
acceptable, the candidate should sign the copy of
appointment letter and return the same to the
employer‟s office. If the candidate, instead,
telephones the employer to communicate his
acceptance, the employer is entitled to insist that
the offer be accepted in the mode prescribed,
failing which he can treat the offer as rejected.
 47

However, if the employer does not so insist, he is

deemed to have accepted the acceptance.

4. An offer lapses by the death or insanity of

the offeror before acceptance.

If the offeror dies or becomes insane before

acceptance, the offer lapses provided that this fact
comes to the knowledge of the acceptor before
acceptance. The Contract Act provides that a
proposal is revoked by the death or insanity of the
proposer, if the fact of his death or insanity comes
to the knowledge of the acceptor before
acceptance.

It is clear from the language of the provision that if

the acceptance is given by the offeree in ignorance
of the death or insanity of the offeror, it is valid
acceptance since the offer does not lapse.

Similarly, if the offeree dies or if he becomes

insane before acceptance, the offer lapses.

5. An offer lapses by revocation

 48

An offer is revoked by the communication of

notice of revocation by the proposer to the other
party. A person may change his mind after having
made an offer and may thus withdraw or revoke
his offer. In such situation, there remains nothing
to be accepted. It must, however, be noted that
such revocation is possible only till the moment
the offer is not accepted. For example, „A‟ offers
to sell his scooter to „B‟ for Rs. 5000/-. He may
subsequently change his mind and communicate to
„B‟ that he is revoking the offer and that he does
not want to sell the scooter.

In the above example, if „A‟ asks „B‟ to

communicate within a week, it is not necessary for
„A‟ to keep the offer open for the week and then
revoke it. „A‟ may revoke the offer on the next day
itself, provided it has not been accepted by „B‟ by
that time.

The Acceptance
 49

Agreement comes into existence when an offer

made is accepted. It is the acceptance which gives
rise to contractual obligations. The term
Acceptance is defined under the Contract Act 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.”

Thus, „acceptance‟ is the expression by the offeree

giving assent to the terms of the offer. It is the
acceptance which converts the offer into a promise
and gives rise to contractual obligations.

In order that acceptance is valid, it has to be in

compliance of certain rules. Let us discuss these
rules one by one.

Legal rules regarding Valid Acceptance

1. Acceptance must be given only by the person

to whom the offer is made.

The definition of acceptance begins with the words

– „when the person to whom the offer is made‟ -,
meaning thereby that only the person or persons to
 50

whom the offer has been made are competent to

accept the offer. Thus, when „A‟ makes an offer to
„B‟, it is only „B‟ who can accept the offer and no
one else.
When an offer is made to a specified class of
persons (e.g. students of a particular class) a
student from that class can accept the offer. When
an offer is made to the world at large (e.g. reward
for finder of lost goods) it can be accepted by the
person having knowledge of the offer.
Let us take an example of „A‟ who is running a
motor driving school under the title „Mr. A‟s
driving school‟. He sells the business to „B‟ of
which „C‟ is not aware. He sends an offer letter to
„A‟ enrolling his name for specialized driving
classes which is now accepted by „B‟. Later, „C‟
cancels the idea of joining the driving classes. „B‟
cannot proceed against „C‟ because there is no
contractual relationship between „B‟ and „C‟.
The logic here is that if you intend to enter into
contract with „A‟, then „B‟ cannot put himself in
the place of „A‟ without your consent.

2. Acceptance must be absolute and unqualified

 51

In order to convert a proposal into a promise, the

acceptance must be absolute and unqualified i.e.
unconditional. In other words, if the offeree
decides to accept the offer, he has to accept the
whole of the offer as it stands and without making
any changes in the same. If the offeree suggests
any change in the terms of the offer, it would
amount to counter-offer or the rejection of the
original offer. But it is not a valid acceptance.

For example, If „A‟ offers to sell his scooter to „B‟

for Rs. 5000/-, „B‟ has to either reject the offer or
accept it. If he decides to accept the offer, he has to
merely give an affirmative response. If „B‟ adds
any conditions, there is no acceptance in the eyes
of law. Thus, if „B‟ accepts the offer willing to pay
Rs. 4000/- immediately and Rs. 1000/- in the next
month along with interest, it is a conditional or
qualified acceptance and therefore not a valid
acceptance.

3. Acceptance must be communicated in some

usual or reasonable manner, unless the manner
is prescribed in the offer itself.
 52

As already seen under our discussion on lapse of

offer, the acceptance must be communicated in the
manner prescribed in the offer. If the offer of
employment directs the candidate to sign his
acceptance on the copy of the appointment letter
and return the same to the employer, the candidate
has to exactly do the same. Telephonic
communication by the candidate that he is
accepting the employment is not a valid
acceptance in the eyes of law.

When the mode of acceptance is not prescribed in

the offer, the acceptance must be communicated in
some usual or reasonable mode. What is
reasonable depends on the facts of the case. In the
above example, if the appointment letter issued to
the candidate does not mention about the mode of
acceptance, but two copies of the offer-letters are
posted to him, it is reasonable to expect the
candidate to sign the duplicate and return the same.
Alternatively, telephonic confirmation of receipt of
the appointment letter along with acceptance
would be reasonable mode of acceptance.

Express Acceptance is one where it is

communicated through words, spoken or written.
 53

Implied Acceptance, on the other hand, is

communicated by the conduct of the acceptor.
Implied acceptance of an implied offer also gives
rise to legally enforceable agreement. If a shoe
polisher approaches you at the railway platform
and starts polishing your shoes, it is an implied
offer. If you allow him, it is your implied or tacit
acceptance, giving rise to contractual obligation
under which you are required to pay for his
services.

The Contract Act provides that if the acceptance is

not communicated in the mode prescribed by the
offeror, the offeror or proposer may, within a
reasonable time after the acceptance is
communicated to him, insist that his proposal shall
be accepted in the prescribed manner, and not
otherwise, but if he fails to do so, he accepts the
acceptance.

It may further be noted that mental acceptance is

not effective. In other words, the offeree having a
mind or desire to accept the offer is not sufficient.
Communication of acceptance must reach the
knowledge of the offeror. In the above example, if
the candidate signs the copy of the offer of
 54

employment, but does not post it, it cannot be

called valid acceptance.

4. Acceptance must be made within reasonable

time or before the offer is terminated.

As the offeror can prescribe the mode of

acceptance, he may also specify the time during
which the offer may be accepted. Acceptance
made after the expiry of the said time period is
ineffective and not valid. If the time limit is not
prescribed, then the offer must be accepted within
a reasonable time. Again, what is reasonable is a
question of fact. If the offer of employment
received by the selected candidate mentions the
time limit within which its acceptance has to be
communicated, the candidate has to abide by the
same, if he wants to accept the offer. However, if
no time limit is specified in the offer letter, the
offer has to be accepted within a reasonable
period. In this case, if the candidate conveys his
acceptance after one year, it is not a valid
acceptance.
 55

Communication of offer, Acceptance and their

Revocation

So far as the contracts which are entered into by

the parties in person, i.e. when they are face to face
there is no question of withdrawing the offer or
acceptance. An offer is made, acceptance is given
and the contract is born. In many cases, the
contract is immediately discharged where both the
parties perform their respective obligations under
the contract. For example, when you buy a pen
from a shopkeeper, every step is taken almost at
the same point of time. The offer is made,
acceptance given, (or rejected and counter offer
made and accepted) price paid, pen delivered and
the contract discharged.

However, when the parties are not face to face and

not dealing in person, and instead when they are
transacting with each other through
correspondence or by post, it is necessary to
determine at what point of time the contract has
come into existence. The moment a valid
acceptance is made, a contract is born. And once a
contract is born, both the parties are bound to each
 56

other under the terms of the contract. No one can

now retract. The primary purpose of Contract Act
is to assure the parties that promises once given
shall be fulfilled. Hence, it is crucially important to
ascertain from plethora of correspondence at what
point of time the contract has come into being.

In this behalf, the Contract Act lays down the

following rules:

1. Communication of offer.
Communication of offer is complete when it
comes to the knowledge of the person to whom it
is made. Thus, when an offer is made by post, the
communication of offer is complete when the letter
of offer reaches the offeree.

2. Communication of acceptance.
Communication of acceptance is complete –

a. as against the proposer, when it is put in a

course of transmission to him, so as to be out
of the power of the acceptor;
b. as against the acceptor, when it comes to the
knowledge of the proposer
 57

The Contract Act gives the following illustration to

simplify the rule.

(a) „A‟ proposes, by his letter, to sell a house to

„B‟ at a certain price.

The communication of proposal is complete when

„B‟ receives the letter.

(b) „B‟ accepts „A‟s proposal by a letter sent by

post.
The communication of acceptance is complete –

as against „A‟, when the letter is posted;

as against „B‟, when the letter is received by A

Communication of Revocation.

The communication of 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;
 58

As against the person to whom it is made, when it

comes to his knowledge.

(In the illustration give above -)

A revokes his proposal by telegram.

The revocation is complete as against A when the
telegram is dispatched. It is complete as against B
when B receives it.

B revokes his acceptance by telegram.

B‟s revocation is complete as against B when the
telegram is dispatched, and as against A when it
reaches him.

Revocation of proposal and acceptance

The Contract Act provides that –

A proposal may be revoked at any time before the

communication of its acceptance is complete as
against the proposer, but not afterwards.

An acceptance may be revoked at any time before

the communication of the acceptance is complete
as against the acceptor, but not afterwards.
 59

In order to better understand the above rules, let us

take an example.

A makes an offer to sell his house to B by post and

he sends the letter on 1st January. The
communication of offer is complete when this
letter reaches B. Now B writes back to A accepting
the offer by his letter which is posted on 4th
January. The communication of acceptance is
complete as against A on 4th January when the
letter is dispatched by B so as to be out of his
power. The communication of acceptance is
complete as against B when the letter reaches A.

It may be remembered that once the

communication of acceptance is complete as
against the proposer (i.e. 4th January), he cannot
revoke the proposal. The contract has now come
into existence giving rise to legal obligations. A
could have revoked his offer before the letter of
acceptance was dispatched by B, but not
afterwards.

Having sent the letter of acceptance, if B now

desires to revoke his acceptance, he has to
 60

communicate his revocation to A, before the

communication of acceptance is complete as
against B. In other words, B has to dispatch his
revocation of acceptance in such a way that it
reaches A before the acceptance comes to the
knowledge of A. In the above example, if B
(having dispatched his acceptance on 4th January,
now wants to revoke his acceptance, then he has to
send his revocation so that A receives the
revocation before he receives the acceptance.

To sum up the points discussed above, it can be

stated that –

1. The communication of a proposal is complete

when it comes to the knowledge of the person
to whom it is made.

2. The communication of an acceptance is

complete, as against the proposer, when it is
put in the course of transmission to him, so as
to be out of the power of the acceptor, and as
against the acceptor, when it comes to the
knowledge of the proposer.
 61

3. The communication of a revocation is

complete, as against the person who makes it,
when it is put into a course of transmission to
the person to whom it is made so as to be out
of the power of the person who makes it, , and
as against the person to whom it is made,
when it comes to his knowledge.

4. A proposal may be revoked at any time before

the communication of its acceptance is
complete as against the proposer, but not
afterwards. An acceptance may be revoked at
any time before the communication of the
acceptance is complete as against the acceptor,
but not afterwards.
 62

Chapter Three

Consideration

Consideration is an essential element of contract.

When two persons enter into an agreement, both
expect some benefit out of the agreement. This
benefit is called consideration under the Contract
Act. It is this benefit which distinguishes an
agreement from a contract. In other words, if the
parties to the agreement do not promise some
benefit to each other reciprocally, the agreement is
not a contract. Therefore, social agreements or
friendly agreements, where one person promises
another some benefit without any gain in return,
there is no intention to create serious business
relations between the parties. Parties to such
agreement do not intend that legal consequences
should follow, if the agreement is not honoured by
any one of them.
 63

In the words of Pollock – “an act or forbearance of

one party, or the promise thereof, is the price for
which the promise of the other is bought, and the
promise thus given for value is enforceable.”

Thus, consideration is the term used in the sense of

a quid pro quo (i.e. something in return) and must
be either a benefit to the promisor or a detriment to
the promisee or both.

A promises B to deliver a letter to C personally in

Mumbai if B would pay him Rs. 500/-. The
consideration for A‟s promise is the payment of
Rs. 500/- which is a benefit to A and detriment to
B. Looking at the contract the other way round, the
consideration for B‟s promise is A‟s taking the
pains of going to Mumbai and delivering the letter
which is a detriment to A and the benefit to B. It
must be remembered that the element of
detriment is essential for consideration.
Therefore, a promise to keep an offer open is not
an enforceable promise. (It is not a contract.) For
example, A makes an offer to B and says: “I will
keep the offer open for a week.” B replies: “I thank
you for keeping the offer open for a week.” Here,
there is an agreement between A and B under
 64

which A has promised something to B, but it is not

a contract. This is so because no consideration has
passed from B to A for A‟s keeping the offer open
for a week. However, if B promises to pay some
amount to A for keeping his offer open and A
accepts it, there would be binding contract on A‟s
part to keep the offer open for the week.

The point can be further explained by another

example. A promises to pay B Rs. 100 if B can
swim 2 miles at a stretch. It is a valid contract.
Swimming two miles at a stretch by B is
consideration for A because it involves some
detriment to B at the desire of A, even though
there may not be any benefit to A out of such
exercise. (See also „contribution to charity‟ at the
end of this chapter.)

Consideration is the foundation of contract because

it is the very purpose for which the parties enter
into contract with each other. In the common
example of sale and purchase of an article, the
seller enters into contract because his purpose is to
get the money or price from the sale of the article
and the buyer enters into contract because his
purpose is to obtain the article. The „payment of
 65

price‟ and „ownership of article‟ are the

consideration for the seller and the buyer
respectively. If one merely promises to give an
article to another without getting anything in
return, it is a promise of gift and without any
consideration. Hence, such agreement of gift is not
enforceable i.e. it is not a contract.

The Contract 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 abstain from doing,
something, such act or abstinence or promise is
called consideration for the promise.”

The following points can be noted from the

analysis of the definition.

a. It is an act or abstinence or a promise,

b. It is done at the desire of the promisor,
c. It is done by the promisee or any other person,
and
d. It may be something already done (past),
something being done (present) or something
to be done (future or executory)
 66

Rules of valid Consideration

Having understood the concept of consideration,

let us discuss the rules of valid consideration in
detail.

1. Consideration must move at the desire of the

promisor.

The definition of consideration begins with the

words „at the desire of the promisor‟ which means
the consideration must be given at the desire or
request of the promisor. Thus, anything done or
given voluntarily will not amount to consideration.
This is so because otherwise a person receiving
goods or services without any desire shall be
unnecessarily burdened with a contractual
obligation to pay for the same. If you are searching
for your valuable pen lost on the road and a passer-
by comes to your help voluntarily to trace the pen,
the services rendered by him cannot be called
consideration even though such services may be
useful in finding the pen. The services are not
rendered at your requirement. If they are to be
treated as consideration, you would be obliged to
 67

pay him for the services because then you have a

contractual duty to pay.

2. Consideration may move from the promisee

or any other person.

Consideration may be furnished by anyone. It need

not be from the promisee alone, but may proceed
from a third person also. A, by a deed of gift, made
over certain property to her daughter with a
direction that the daughter should pay an annuity
to A‟s brother, as was done by A earlier. The
daughter agreed, by giving a written assurance, to
pay the annuity. Afterwards the daughter refused
to pay the annuity claiming that the agreement
between her and the uncle (A‟s brother) was not
enforceable since there was no consideration to her
moving from her uncle. It was held by the court
that the agreement was enforceable and that the
consideration had moved from A to the daughter.
It was not necessary that the consideration ought to
move from the uncle alone.
It therefore follows that a person who is stranger to
the consideration can sue for the performance of
the contract, because the consideration moves on
his behalf from some other person. This is known
 68

as „Doctrine of constructive consideration‟ which

enables a stranger to the consideration to sue on
the contract, provided he is party to the contract.
However, if a person is stranger to the contract, he
cannot sue on the contract. For example, A, who is
indebted to B, sells his property to C, and C, i.e.
the purchaser of the property promises to pay the
debt of B. If C fails to pay the debt of B, B has no
right to file a suit against C because there is no
contract between B and C. Thus, the rule is that a
stranger to contract cannot sue on the contract.
(Trust, family settlements and agency are some of
the exceptions to this rule. A transfers property to
the trustee B for the benefit of C. C can sue on the
contract, though he was not a party. At the time of
partition of family property, a settlement may be
made for the benefit of other members of the
family. Such members can sue on the settlement
though they are not party to the settlement. Where
a contract is entered into by an agent, the principal
can sue on it.)

3. Consideration may be past, present or future

The words used in the definition clearly indicate

that the consideration (either in the form of some
 69

act or abstinence) may have been given in the past,

or being given in the present, or promised now but
to be given at some future time. Therefore, it is not
only the act or abstinence of the past or present
(something done or not done in the past or
something being done or not done in the present),
but also a promise to do or not to do certain act in
the future constitutes consideration.

At the desire of B, A renders to him services for a

month. After the month, B promises to pay Rs.
5000/- to A for his services. The consideration for
B when he makes such promise is past
consideration, because he has received the
services in the past.
Where A sells and delivers a pen to B and B pays
Rs. 10/- being the price of the pen, it is a case of
Present consideration. It may be noted that in this
transaction, if B promises to pay the price in
future, it is yet a case of present consideration.
Here, the consideration for B is the pen and
consideration for A is the promise of B to pay. It
can also be said that for B it is executed
consideration while for A it is executory
consideration.
 70

A promises to supply 5 tons of steel to B every

month and B promises to pay the agreed price at
the time of each delivery. This is an example of
Future consideration where a promise is
exchanged for promise and the promise is to do
something in future. It is also known as executory
consideration because the liability of both the
parties is outstanding.

4. Consideration must be „something of value‟

in the eyes of law.

The fourth essential element of consideration is

that it must be something of value in the eyes of
law. It should be noted that consideration need
not be adequate, because what is adequate is to
be decided by the parties and not by the law.
The law of contract insists on presence of
consideration and not its adequacy. For example, if
A promises to sell his car to B for Rs. 500/- (which
price is much below the market rate), the promise
is enforceable at law.

However, it may be noted that shockingly

inadequate consideration may be a good evidence
 71

to support a claim of any party that his consent to

the agreement was not a free consent.

Consideration must be real and not illusory.

Similarly, it must not be physically and legally
impossible. It must also not be uncertain. Promise
to make a dead man alive is not valid consideration
because it is not physically possible. A promise to
do something which is prohibited by law is illegal
consideration. A promise to pay a good price for
goods is vague and uncertain and hence not valid
consideration, because what is good price is not
certain.

When no consideration is necessary

Although as a general rule there cannot be any

contract without consideration, there are some
exceptions where an agreement is a contract even
without consideration. These are the exceptions to
the rule – „No consideration – no contract.‟
These exceptions are as follows.

a. Agreement made on account of natural love

and affection
 72

An agreement made without consideration is

enforceable as contract, if it is, a) Expressed in
writing,
b) Registered under the law of registration of
documents
c) Made on account of natural love and affection,
and
d) Between the parties standing in near relation to
each other

If the above four conditions are satisfied, an

agreement is a contract even when there is no
consideration.

Thus, where A promises in writing to his son that

he would transfer certain property to him and
registers the document, it is a contract. It must be
remembered that all the four conditions have to be
independently satisfied. Where a husband, due to
frequent quarrels and disputes, signs and registers
a promise to his wife that he would pay a certain
sum to her per month provided she stays away
from him, is not a contract. Here, though the three
conditions of near relations, writing and
registration are satisfied, the agreement is
 73

obviously not entered into out of natural love and

affection.

b. Agreement to compensate for past voluntary

services.

If a promise is made to a person who has already

voluntarily done something for the promisor in the
past, such promise is contract and enforceable at
law, though at the time of making the promise
there is no consideration moving from that person
to the promisor.
For example, A finds B‟s purse and returns it to
him. B promises to give him Rs. 100/-. This is a
contract.
It can be noticed from the above example, that –

 A has rendered services to B in the past and

such services were rendered voluntarily
without expecting anything in return or
without being required by B,
 B is under no obligation to make any promise
to A, and
 Yet B, subsequent to enjoying services of A,
makes a promise to compensate for the
services
 74

When B is making a promise to A, there is no

consideration moving from A to B, and as such in
the absence of consideration there is no contract.
This is as good as a promise of gift. However, such
promise is a contract even without consideration.
This exception is not limited to the promisor
receiving services himself. For example, A
supports B‟s minor and infant son which is the
duty of B. Subsequently, B promises to pay A‟s
expenses in so doing. This is a contract.
It may also be noted that the promisor need not be
competent to contract when he receives the
services. Thus a promise made after attaining
majority to pay for the foods supplied voluntarily
to the promisor during his minority is a contract.
Past consideration and compensating past
voluntary services must not be confused. In past
consideration, the services are not rendered
voluntarily and there is an obligation on the part of
the person receiving services to pay for the same.
On the other hand, under this exception, the
services are rendered voluntarily and there is no
obligation on the part of the promisor to make any
promise.
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c. Agreement to pay a time-barred debt.

In every country including India there is law of

limitation which prescribes the period within
which legal action can be taken against defaulting
person. This law is based on the principle that Law
comes to the help of those who are diligent about
their rights and not to the help of those who are
sleeping over their rights. Different periods of
limitation are prescribed under the Limitation Act
for initiating different types of proceedings. This
period is three years for money recovery suits.
Hence, on default by the debtor in repayment of
money-dues, the creditor must proceed against him
within a period of three years from the date of
default, otherwise the right of the creditor to
proceed against the debtor is lost and the debt
becomes a time-barred debt. It cannot be now
recovered. Here, as the creditor no longer has any
right to recover the debt, similarly the debtor has
no obligation to pay the debt. There fore, when the
debtor or his agent makes any promise to the
creditor to pay the time-barred debt, such promise
is without any consideration. However, such
promise or agreement is a contract even without
consideration.
 76

For example, A owes B a sum of Rs. 1000/- but

the debt is barred by the Limitation Act. A signs a
written promise to pay B Rs. 500/- (or Rs. 1000)
on account of the debt. This is a contract.
It means that now if A fails to pay the debt, B can
recover the amount from B. In other words, a fresh
period of limitation would start from the date of
the promise. For this exception to apply, the
following conditions must be satisfied.
 The debt must be such that the creditor cannot
recover on account of law for the limitation of
suits;
 There must be an express promise to pay the
time-barred debt. Mere acknowledgement of
indebtedness is not enough; and
 The promise must be in writing and signed by
the debtor or his agent.

d. Completed gift

Simply stated, a gift (and not a promise or

agreement to give a gift) is a contract and requires
no consideration.
We have seen that a promise of gift is not a
contract because there is no consideration moving
from the promisee to the promisor. However, if
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such gift is actually given it is binding on the

parties. In other words, it cannot be recovered by
the donor on the ground that there was no
contractual obligation to give the gift. For
example, A promises to give Rs. 100 to B on his
birthday. Such promise or agreement is not a
contract because there is no consideration for A.
However, when A actually gives the gift to B, such
completed gift is binding on them.

e. Contract of agency

Section 185 of the Contract Act provides that no

consideration is required to create agency. This is
to estop the principal from denying the contractual
obligations incurred through his agent on the
ground that there was no contract between the
agent and the principal as there was no
consideration.

f. contribution to charity

A promise, though gratuitous, would be

enforceable, if on the faith of the promise, the
promisee has suffered some detriment or
undertaken any liability. In our discussion on
 78

concept of consideration at the beginning of this

chapter, we have seen that consideration consists
of some detriment to the promisee, though it may
not be of any benefit to the promisor.

Thus, if A makes a promise to a hospital to donate

certain sum, and based on the promise the hospital
management undertakes construction of an
operation theatre, thereby incurring liability
towards the construction-contractors, the hospital
management can recover the amount from the
promisor, if he later refuses to pay the promised
amount.

In a decided case of Kedar Nath V/s Gori

Mohammad, the defendant had agreed to subscribe
Rs. 100 towards the construction of a Town Hall at
Howrah. The secretary of the Town Hall on the
faith of the promise called for plans and entrusted
the work to contractors and had undertaken
liability to pay them. It was held that, though the
promise was to subscribe to a charitable institution
and there was no benefit to the promisor, yet, it
was supported by consideration because the
secretary suffered a detriment in having
 79

undertaken a liability to the contractor on the faith

of the promise made by the defendant.
Two points need to be noted in this behalf. The
first is that the promisee must have incurred some
liability on the basis of the promise, in order to
make the promise legally enforceable. The second
point is that such promise can be enforced only to
the extent of detriment suffered or the liability
undertaken. If no liability is undertaken on the
basis of such gratuitous promise, it is not legally
enforceable.

g. Remission of performance

If the promisee agrees to accept a lesser

performance of the promisor in lieu of what was
agreed under the existing contract, such
subsequent agreement is a valid contract, even
though without consideration.

For example, a bank may enter into agreement

with a defaulting borrower whereby the bank may
permit the borrower to pay a lesser amount than
what is due and finally settle the loan account.
Such agreement by which the bank agrees to
accept a lesser performance than what it is entitled
 80

to (i.e. may agree to accept a lesser amount giving

up part of its claim) is an agreement without
consideration. However, it is a valid contract.
This exception is also applicable to contracts
where the promisee extends the time of
performance by the promisor. Such contracts need
not be supported by consideration.

Chapter 3

Capacity of Parties

The next essential element of a valid contract is

„capacity of parties‟ or „competence of parties‟ to
enter into contract. The Contract Act provides that
“every person is competent to contract who is of
the age of majority according to the law to
which is subject, and who is of sound mind, and
who is not disqualified from contracting by any
law to which is subject.”
 81

Therefore, a person in order to be competent to

enter into a valid contract must satisfy the
following conditions:

a. He must be a major, according to the law to

which he is subject;
b. He must be of sound mind; and
c. He must not be disqualified from contracting
by any law to which he is subject.
We shall now discuss these conditions one by one.

a. Minor

According to the Indian Majority Act, a person

who is under 18 years of age is a minor and a
person who has completed the age of 18 years is a
major. There is one exception to this general rule.
The minors whose property is under the control of
a guardian appointed by the court, attain majority
at the age of 21 years.

An agreement with a minor is absolutely void and

not enforceable by law against the minor. The law
 82

relating to agreements by or with a minor can be

stated as follows.

1. Minor‟s agreement is absolutely void and

minor cannot bind himself by a contract.

The law relating to minor is with a view to

protecting their interests rather than to debilitating
them from contracting. Therefore, there is nothing
in the Contract Act which prevents a minor from
becoming a promisee. The term incapacity means
the incapacity to bind oneself by any contract, and
not the incapacity to derive benefits under any
contract. An agreement entered into by or with a
minor is void as against him.

An agreement with a minor is void ab-initio i.e.

right from the beginning and the other party to the
agreement cannot enforce the agreement against
the minor. Even if a minor has received any benefit
under the agreement, he cannot be asked to return
the benefit or make compensation. Thus, if a minor
person has obtained a loan and makes a default in
its repayment, the creditor cannot sue the minor for
the recovery of loan.
 83

2. Agreements which are beneficial to minor are

valid contracts.

As we have noted earlier, the law relating to

agreements with minor is for protection of the
rights of minors. It does not prohibit the minor
from receiving any benefits through agreements.
Accordingly, any agreement under which a minor
has to merely receive certain benefits without there
being any obligation imposed on him is a valid
contract. Thus, if a minor lends money to another,
he can recover the money by filing a suit if there is
a default in its repayment.
Hence, a minor can be admitted in a partnership
firm, but only for sharing the profits of the firm
and he cannot be held liable for the losses. A
minor cannot take part in the management of the
firm. His liability to third parties is limited to the
extent of his share in the assets of the firm. He
cannot be held personally liable for any obligation
of the firm, as is the case with other partners.
Similarly, the Apprentices Act 1961 provides for
apprenticeship contract under which a minor can
be engaged as an apprentice in factories and
commercial establishments. The Apprentices Act
was passed with a view to providing opportunity to
 84

young persons to learn various trade skills. Under

the apprenticeship contract the minor is required to
pay the compensation amount if he discontinues
the training before the apprenticeship period.
Under The Trade Unions Act, 1926 a minor is
competent to become a member of a registered
trade union and though he cannot become an office
bearer of the trade union, he can enjoy all the
rights of a member, can execute instruments and
give aquittances as are necessary.

3. No ratification of agreement on attaining

majority.

Ratification is subsequent approval or

authorization of any act or agreement. An
agreement entered into by or with a minor cannot
be ratified on attainment of majority by the minor.
For example, if a minor of 15 years of age agrees
to sell his property after 5 years, he would have to
execute the sale at the age of 20 years, when he is
major. However, the earlier agreement being a
nullity and having no existence in the eyes of law,
there is in fact nothing to be ratified. In such a
situation the minor will have to enter into a fresh
contract of sale of property on attainment of
 85

majority. Ratification relates back to the time

when the agreement was made and it is essential
for valid ratification that the original agreement
was valid i.e. enforceable by law. Further, if a
minor borrows money during his minority and
executes a promissory note in relation to the same
debt on attaining majority, the promissory note is
null and void, because at the time when the
promissory note is made, it is without
consideration.

4. Non-applicability of principle of estoppel.

What would be the consequence if a minor has

falsely represented himself as major and induced
another person to enter into agreement? How does
the law deal with, especially, the benefits received
by the minor on account of such wilful
misrepresentation?
The principle of law of evidence which is
applicable to such representation under other cases
is known as „principle of estoppel.‟ This principle
states that, „where one person has, by his
declaration, act or omission, intentionally caused
or permitted another person to believe a thing to be
true and to act upon such belief, neither he or his
 86

representatives shall be allowed, in any suit or

proceedings between himself and such person or
his representative, to deny the truth of that thing.‟
The principle of estoppel is based on the rule that
no one shall be allowed to take the benefit of his
own wrong. For example, A represents himself to
B as agent of C and this representation is made by
A in the presence and within the hearing of C who
does not deny. The fact is that the agency of A has
been terminated by C few days ago. Here, C, by
his silence (omission) induced B to believe that A
is the agent of C. If now B transacts with A on the
belief of agency and incurs loss due to negligence
of A, C is liable to compensate B, as if he is the
principal of A.
The principle of estoppel is not applicable to
minors. Thus, a minor falsely claiming himself to
be major and obtaining a loan from a banker,
cannot be compelled to repay the loan and such
minor can always plead minority in defence of
non-payment of loan. In other words, a minor is
not estopped from pleading minority to avoid the
contractual liability.
The rule of estoppel does not apply to a minor on
the ground that if it applied it would give a handle
to dishonest traders to obtain false declaration in
 87

writing from the minor that he was a major at the

time of entering into the agreement. At the same
time, it must be noted that „minors cannot have a
privilege to cheat people.‟ Therefore, a minor may
be ordered by court to return the benefit which he
has received under such false representation. For
example, if a minor fraudulently overstates his age
and takes delivery of a motor car after executing a
promissory note in favour of the trader for its
price, the minor is not estopped from pleading
minority and can escape liability under the
promissory note. But the court on equitable
considerations may order restitution i.e. compel the
minor to return to the trader the car, if it is still
with the minor or can be traced.

5. Minor‟s liability for necessaries of life.

The Contract Act provides that if the necessaries of

life are provided to a minor by any person, such
minor is liable to pay for the same out of his
property, if any. Thus, if any person provides the
necessaries of life to a minor who is incapable to
entering into contract, he can recover the price of
such necessaries from the property of the minor. It
should be remembered that it is only the property
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of the minor that is liable, and not the minor

himself. If the minor who does not pay and also
has no property, then the price of the necessaries
cannot be recovered from the minor. What can be
called the necessaries of life for a particular minor
is a question of fact. Normally such necessaries
include food, medical treatment, shelter and
education. It may also include the cost of
defending the minor‟s interests in any civil and
criminal proceedings. But it does not include the
items of luxury.

6. Position of minor‟s parents

An agreement with a minor does not give the

creditor any rights against the minor‟s parents,
whether the agreement is for necessaries or not.
The moral obligation of a father to provide for his
child does not impose on him any liability to pay
the debts incurred by the child. The only case
where a parent may be liable is when the child is
contracting as an agent for the parent.

7. Other points to be noted

 89

 Minor can be an agent, but he cannot appoint

an agent. In other words, a minor cannot be a
principal.
 Minor cannot be adjudged insolvent, because
he is incapable of incurring any liability.
 In the case of joint contract with minor along
with an adult, it is the adult who is solely
liable for the contractual obligations. If a
minor and an adult jointly contract to purchase
any property, the seller could enforce the
contract against the adult.
 A minor cannot be a shareholder of any
Company. However, fully paid up shares can
be transmitted to him.
 If an adult is surety for the loan taken by a
minor, the adult is liable under the contract
though the minor is not, because the contract
between the surety and creditor is an
independent contract. Of course, a minor can
never be a surety for the loan of another.

b. Persons of unsound mind

In order to enter into a valid contract, it is also

necessary that each party must be of sound mind.
 90

What do we mean by „sound mind‟? Truly

speaking, no definition can be given of sound
mind, or for that matter of unsound mind.
However, the Contract Act gives us the definition
of a person of sound mind, but only for the
limited purpose of entering into a contract. In
other words, a person who is considered to be of
sound mind for the purpose of contracting may not
necessarily be of sound mind for other purposes.
The Contract Act provides: „A person is said to be
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
judgment as to its effects upon his interests.‟
Accordingly, the requirement of the Contract Act
is that the person entering into contract must
understand the nature of the contract as a whole
and must be in a position to determine whether it is
beneficial or detrimental to his interests. It must
be however remembered that what the law
contemplates is the ordinary prudence of an
average person. Shrewd and calculating business
mind is not the requirement. Hence, a contract
which eventually turns out to be detrimental to a
party cannot be avoided by him on the ground of
unsoundness of mind. What needs to be seen is
 91

whether the contracting party stood a reasonable

chance of benefiting from the contract or not. It
must be noted that burden of proving unsoundness
of mind is on the person who wishes to deny the
contract on the ground of his unsound mind.
A person, who is usually of unsound mind, but
occasionally of sound mind, may make a contract
when he is of sound mind. Similarly, a person who
is usually of sound mind, but occasionally of
unsound mind may not make a contract when he is
of unsound mind.
Unsoundness of mind may be due to Idiocy,
lunacy or insanity. It may be on account of
drunkenness or extreme old age. When any party
to a contract seeks to set aside the contract on any
of these grounds, he has to prove his disability.
An agreement entered into by a person of unsound
mind stands on the footing as that of minor‟s and
hence it is absolutely void and not enforceable by
law. If such person has derived any benefit out of
the agreement, he cannot be compelled to restore
the same to the other party. However, the property
of a person of unsound mind is liable for the
necessaries supplied to him, as in the case of
minor.
 92

d. Persons disqualified to contract

The third category of persons who are not

competent to contract are those who are
disqualified from contracting by any law to which
they are subject.
The following persons are disqualified to enter into
contract under certain circumstances as explained
below:

1. Alien enemies.
Alien is a person who is a citizen of a foreign
country living in India. He is an alien enemy when
his country is at war with India. (Alien friend is a
foreigner whose country is at peace with India.)
An alien living in India usually has full contractual
capacity. On the declaration of war between his
country and the Union of India he becomes an
alien enemy, and cannot enter into contracts during
the subsistence of the war, except by licence from
Central Government. Contracts made before the
war between an alien enemy and an India citizen
are suspended for the duration of war and are
revived after the war is over, provided they have
not already become time-barred.
 93

2. Foreign Sovereigns and Ambassadors.

Foreign sovereigns and ambassadors are not
disqualified from contracting. Such persons are
fully competent to contract, however they enjoy
certain privileges and therefore one has to be vary
careful while entering into contracts with them.
While they cannot be prosecuted in our Courts
except with the prior permission of the Central
Government, they can prosecute and enforce
contracts in our Courts.

3. Convicts
He is a person who has been found guilty by a
competent court in India and sentenced to
imprisonment. During the imprisonment, convicts
are not competent to contract. They cannot even
file suits on contracts made before imprisonment,
when they are imprisoned. When such person
gains freedom after being released, he becomes
competent to contract and also to institute suits on
earlier contracts. The period of limitation stops
running against him during the period when he is
in prison.
 94

4. Companies and other Legal or artificial

persons.
A Company or a Corporation is a legal or artificial
person which has no physical existence. Such legal
persons exist only in the eyes of law as they are
created by law. They cannot enter into contracts
the subject matter of which is beyond the scope of
their constitution. For example, the constitution of
a Company is its Memorandum of Association,
which lays the scope of its activities. A Company
cannot undertake any activity beyond its
Memorandum of Association and therefore cannot
enter into contracts relating to such activities. For
example, a Company incorporated for manufacture
of automobiles cannot enter into contract for
purchasing sugarcanes from cane-producers.
Trusts or Societies are other examples legal
persons. Similarly, a Trade union cannot enter into
contract beyond its Rules under the Trade unions
Act.
Further, a legal person cannot enter into those
personal contracts which can be entered into only
by natural persons, such as contract of personal
service, contract of marriage etc.

5. Insolvent.
 95

Insolvent is a person whose total liabilities are

more than his assents and who cannot satisfy all
his creditors fully. Unless such person is
discharged by the court, he cannot enter into
contracts for sale of his property which is vested in
the hands of the Official Receiver appointed by the
Court. Barring contracts of sale of property, such
persons are competent to contract.

Chapter 4
Free Consent

We have already seen that free consent of all the

parties to agreement is essential to the idea of
contract.

The term „Consent‟ is defined under the Contract

Act as –„two or more persons are said to consent
when they agree on the same thing in the same
sense.‟ In fact, when such consent is not there,
there is no agreement at all. Agreement involves
meeting of minds which is called „consensus ad-
idem.’
 96

For a valid contract what is necessary is free

consent. The term free consent is defined under the
Contract Act as under:
“Consent is said to be free when it is not caused
by –

1. coercion, or
2. undue influence, or
3. misrepresentation, or
4. fraud, or
5. mistake (subject to other provisions of the
Contract Act)

Consent is said to be caused when it would not

have been given but for the existence of such
coercion, undue influence, misrepresentation,
fraud or mistake.”

It means that if the consent of any of the parties to

the contract has been obtained by employing any
of the above means, it is not a free consent and
therefore there is no contract. The party who
alleges that his consent has been caused by any of
the above means must establish that he would not
have given his consent if he had known the truth or
if he had not been forced to agree.
 97

What is the consequence if the consent of one

party is not free would depend on the nature of
vitiating element involved. If the consent to
agreement is brought about by coercion, undue
influence, misrepresentation or fraud, it is not a
free consent and the contract is voidable at the
option of the party whose consent was so obtained.
On the other hand, if the consent is caused by
„bilateral mistake‟ as to matter essential to the
agreement, the agreement is void. In fact there is
no agreement at all.
Let us discuss these vitiating elements one by one
in detail.

Coercion

The term coercion is defined under the Contract

Act to mean –“the committing or threatening to
commit any act forbidden by the Indian Penal
Code or the unlawful detaining or threatening
to detain, any property, to the prejudice of any
person whatever, with the intention of causing
any person to enter into an agreement.”
 98

Coercion thus implies unlawful application of

force or pressure in order to induce a person to
give his concurrence or give his consent against his
will. The person who is unwilling to enter into an
agreement is forced and pressurized to agree.

For example, during the annual internal audit of a

Bank, the auditor notices that the accountant has
used the credit-documents of the Bank in favour of
local traders wrongfully to gain fraudulent benefits
from the traders. Though there is no monetary loss
caused to the Bank, it is a serious act of
misconduct on the part of Accountant. The Auditor
agrees not to report the misconduct to the superiors
only if the accountant sells his 2 acres of land to
him at half the market price. Here, the consent of
the accountant is obtained by coercion because the
auditor is committing an offence of “criminal
breach trust” forbidden under the Indian Penal
Code. In this case, after entering into contract with
the auditor, the accountant may set aside the
contract on the ground that his consent was not
free and that it was induced by coercion.
Similarly, where A threatens to shoot B unless he
sells his house to C and B agrees, the consent of B
is obtained by coercion. Here, A is threatening to
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commit an act forbidden by the Indian Penal

Code.

The following points may be noted in this context:

 Indian Penal Code may not be applicable at

the place where coercion takes place, yet the
consent is vitiated by coercion.
 Coercion need not necessarily proceed from a
party to the contract. It may proceed from any
person. Similarly, it may be directed against
any person and not necessarily against a party
to the contract. What is important is that the
consent of one party is obtained by use of
coercion.
 The term „forbidden under Indian Penal Code‟
is a wider term than „punishable under Indian
Penal Code.‟ Therefore, where the consent of
a party is obtained by „threat of committing
suicide‟, the consent is vitiated by coercion.
The acts of committing suicide or threatening
to commit suicide are not punishable under
the Indian Penal Code for obvious reasons,
but such acts are forbidden under the Code.
 100

A litigant decided to replace his advocate engaged

in a very important trial. The advocate refused to
return the original documents in his custody
pertaining to the case unless 50% extra fees were
paid. Any such agreement between the litigant and
his advocate in this case is hit by coercion and the
litigant can later set aside the contract, as it
involves unlawful detaining of any property.

Effect of coercion.

When consent to an agreement is obtained by

coercion, the agreement is a contract voidable at
the option of the party whose consent was so
caused. (For the nature of voidable contract, refer
to chapter 1) In other words, the party whose
consent is induced by coercion may either set aside
the contract or may affirm the agreement and insist
on the performance. Obviously, the second option
will be chosen by the party only when the contract
is beneficial to him in spite of coercion. If,
however, the party chooses to rescind the contract,
he must restore the benefits which he may have
received under the contract. The burden of proof to
establish coercion lies on the party who wants to
set aside the contract on the ground of coercion.
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Undue Influence

The definition of undue influence under the

Contract Act is reproduced below:

(1) A contract is said to be induced by „undue

influence‟ where the relations subsisting
between the parties are such that one of the
parties is in a position to dominate the will of
the other and uses that position to obtain
unfair advantage over the other.

(2) In particular and without prejudice to the

generality of the foregoing principle, a person
is deemed to be in a position to dominate the
will of another –
a. where he holds a real or apparent authority
over the other or where he stands in
fiduciary relation to the other; or
b. where he makes a contract with a person
whose mental capacity is temporarily or
permanently affected by reason of age,
illness, or mental or bodily distress.
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(3) Where a person, who is in a position to

dominate the will of another, enters into a
contract with him, and the transaction appears,
on the face of it, or on the evidence adduced,
to be unconscionable, the burden of proving
that such contract was not induced by undue
influence shall lie upon the person in the
position to dominate the will of the other.

In order to set aside a contract on the ground of

undue influence, the following two points need to
be independently established:

1)One party is in a position to dominate the will

of another; and
2)He actually used that position to obtain an
unfair advantage over the other

Generally, a person is considered to be in a

position to dominate the will of another when –

 Where he holds a real or apparent authority

over the other – for example the relationship
between master and servant, police officer and
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accused;

 Where he stands in a fiduciary relation to the

other – for example advocate and client,
doctor and patient, trustee and beneficiary etc.
(Fiduciary relation means a relation of trust
and confidence in each other)

 Where he makes a contract with a person

whose mental capacity is temporarily or
permanently affected – owing to extreme old
age, illness or mental or bodily distress

Thus, undue influence is a kind of moral coercion.

It negatively affects the free will of one and
compels him to do what is against his desire,
which he would not have done if left to his own
judgment. The following examples may be noted:
1. A needy borrower executed a mortgage deed
in favour of a moneylender to sell the
mortgaged property to the moneylender at a
shockingly low price, if he made a default in
repayment. This contract may be set aside by
the borrower on the ground of undue
influence.
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2. A‟s son has forged B‟s name to a promissory

note. B, under threat of prosecuting A‟s son,
obtains a bond from A for the amount of the
forged note. If B sues on this bond, the court
may set aside the bond.

Unconscionable Transactions

When a person, without being fraudulent, forces

another to enter into an agreement by making an
unconscientions use of his superior power he is
said to have made an „unconscionable bargain.‟
Obviously, such a bargain is voidable. These are
the transactions where one of the contracting
parties is in a dominant position and makes an
exorbitant profit of the other‟s distress.
However, it must be noted that the burden of
proving undue influence is on the party who
alleges the same. There cannot be any presumption
of undue influence in every contract where one
party gains unusually high profits.

For example, A applies to a banker for a loan at the

time when there is stringency in the money market.
The banker declines to make the loan except at an
unusually high rate of interest. A accepts the loan
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on these terms. This is a transaction in the ordinary

course of business and the contract is not induced
by undue influence.

Effect of undue influence

When consent to an agreement is caused by undue

influence, the agreement is a contract voidable at
the option of the party whose consent was so
caused. Any such contract may be set aside either
absolutely or, if the party who was entitled to
avoid it has received any benefit thereunder, upon
such terms and conditions as the court may deem
just and equitable.

Distinction between Coercion and Undue

Influence

TABLE TO BE INSERTED

Misrepresentation
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When any statement is made regarding any fact or

state of affairs, it is a representation. When such
representation is false, or is not correct, it is mis-
statement or misrepresentation. Such
misrepresentation may be either innocent or
deliberate. In the ordinary sense, therefore, the
term misrepresentation refers to both innocent
misrepresentation as well as dishonest
misrepresentation.
In law of contract, when any mis-statement made
innocently it is called „Misrepresentation‟ and
when it is made deliberately or with the intention
to deceive, it is called „Fraud‟.

According to Contract Act, Misrepresentation

means and includes –

a) the positive assertion, in a manner not

warranted by the information of the
person making it, of that which is not true,
though he believes it to be true; or

b)any breach of duty which, without an

intent to deceive, gains an advantage to
the person committing it, or any one
claiming under him, by misleading
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another to his prejudice or to the prejudice

of any one claiming under him; or

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.

Thus, misrepresentation takes place in the

following three cases:

a) There must be assertion and it must be false.

When a person makes any statement without
having sufficient grounds to support the
truthfulness of the statement, though he may
himself believe that it is true, it is a
misrepresentation.
For example, where B intends to purchase land of
A and A says to B that his land produces 50
quintals of wheat per acre. Based on the statement
of A, B purchases the land and later realizes that
the land produced only 30 quintals of wheat per
acre. This is misrepresentation.
It may be noted that mere expression of opinion or
salesmanship talk cannot be tantamount to
misrepresentation. For example, where a person
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selling his horse claims that his horse is the best in

the world, it is obvious that he does not have any
grounds to substantiate his statement. These are
mere words of praise and no prospective buyer
with average prudence shall ever make a decision
to purchase the horse solely on the basis of such
claim. Therefore, the buyer of the horse cannot set
aside the contract on the ground of
misrepresentation, claiming that the horse was not
the best in the world.

b) Breach of duty which brings an advantage to

the person committing it by misleading the other.
When a true statement made by a person
subsequently becomes false due to change in
circumstances, it is the duty of the person making
such statement to bring the change to the notice of
the person to whom the statement was made,
before he acts on such statement. If he does not
discharge this obligation, he shall be guilty of
misrepresentation.
For example, A has been issued a licence to run a
college canteen for a period 5 years which business
he desires to sell to B. During the negotiations A
informs B about the period of licence and his daily
sale in the canteen which is about Rs. 30,000/-.
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Both the statements are true. While the

negotiations are going on, the college terminates
certain courses reducing the number of students as
a result of which the daily sale is reduced to
Rs. 10000/-. However, A fails to inform B about
this development. B is entitled to rescind the
contract on the ground of misrepresentation.

c) Causing other party to make mistake about the

subject-matter of the agreement. In a contract of
cooking and selling huge quantity of pure
vegetarian food for a function organised by
vegetarian families, the caterer makes a
representation that no meat is ever cooked in his
restaurant. However, on certain occasions meat is
cooked there. The organisers would not have
ordered food from the restaurant but for the
representation. This is a misrepresentation.

From the above discussion, we notice that in order

to avoid a contract on the ground
misrepresentation, it is necessary to prove that –

a. there was a representation or assertion;

b. such assertion induced the aggrieved party
to enter into contract; and
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c. the assertion is not true.

Effects of misrepresentation

The Contract Act provides two options to the party

whose consent has been obtained by
misrepresentation. Such aggrieved party may –

a) either rescind/avoid the contract; or

b)accept and affirm the contract and insist that
he shall be placed in the position in which he
would have been, if the representation made to
him had been true.

Fraud

The term „Fraud‟ includes all acts committed by a

person with the intention to deceive another
person. The definition of fraud given under the
Contract Act is reproduced below.

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
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another thereto or his agent, or to induce him to

enter into the contract:

1. the suggestion, as a fact, of that which is not

true, by one who does not believe it to be true;
2. the active concealment of a fact by one having
knowledge or belief of the fact;
3. a promise made without any intention of
performing it;
4. an other act fitted to deceive;
5. any such act or omission as the law specially
declares to be fraudulent.

Explanation:

1)When a person makes a suggestion or

representation to another regarding something
and at the time of making such suggestion he
himself does not believe it to be true, it is
fraud. For example, when a coaching class for
accountancy expressly states to the students
desirous of taking admission that all its
teachers are chartered accountants, while none
of them, in fact, is, it is fraud.
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2)When the students inform the management of

the coaching class that they are taking
admission on the assumption that all its
teachers are chartered accountants and the
management observes silence, it is a case of
fraud, if the faculties are not chartered
accountants. Here, the management of the
class has not made any claim about the
qualifications of the teachers, yet they are
guilty of fraud because they have not spoken
when it was their duty to speak. It is thus
fraudulent silence. The students can avoid the
contract.

3)A promise made without any intention of

performing it is fraud. Whether a person
intends to perform his promise or not is a
question of fact. Therefore, such intention (or
its absence) is to be gathered from the
prevailing circumstances. For example, when a
person makes a purchase of goods on credit,
without disclosing the fact that insolvency
proceedings are pending and that he has no
source of income are the circumstances
sufficient to infer that he is making a promise
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without any intention of performing it.

4)“Any other act fitted to deceive” is a clause

which makes the list of fraudulent acts
complete and exhaustive. The other clauses
refer the acts of fraud with some specificity
and hence their extent is, in a way, limited.
This clause refers to an unlimited range of
acts, not referred to in other clauses, but which
have a fraudulent purpose behind them. Since
it is impossible to list all the fraudulent acts,
this clause covers all those left uncovered by
other clauses.

5)While Contract Act speaks about the

fraudulent acts generally, some other laws
declare certain acts of be fraudulent in nature.
The last clause deals with such acts. For
example, law of insurance requires full and
absolute disclosure by the person who
proposes to be insured. Any non-disclosure,
whether accidental or otherwise, is considered
fraudulent.

Effect of Fraud
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The party who has been induced to enter into a

contract by fraud has the following remedies
against the party guilty of fraud:

1. He can rescind/avoid the contract;

2. He can affirm the contract and insist on the
performance on the condition that he shall be
put in the position in which he would have
been, if the presentation made had been true;
3. He can sue the guilty party for damages, if
any. For example, if an unsound horse is sold
by fraud, the buyer can sue for damages for
any injury suffered by him due to horse-riding.

Distinction between fraud and

misrepresentation

We have seen earlier that the difference between

fraud and misrepresentation is rather subtle. Wilful
misrepresentation is fraud. The distinction between
the two is as follows:

1. Misrepresentation is innocent and without any

intention to deceive the other party, while
fraud implies such intention. Fraud is
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deliberate and wilful.

2. The party whose consent has been obtained by

misrepresentation has a right to rescind or
avoid the contract, whereas in fraud, in
addition to the right to rescind the contract, the
aggrieved party has a right to claim damages,
if any.

3. If the party alleging misrepresentation had the

means to discover the truth by ordinary
diligence, he cannot avoid the contract. But in
fraud in spite of availability of such means, the
contract is voidable at the option of the
defrauded party.

Mistake

A mistake is a belief based on or resulting from a

misunderstanding or faulty judgment. It is an
action or judgment that misguided or wrong. In
other words, it is an erroneous belief about
something. When a person has specific design or
purpose in mind for entering into any agreement,
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but the purpose stipulated in the agreement is

contrary, there is no will of the party entering into
agreement. It is an error in consensus and hence
there is no true agreement. The parties may
formally enter into an agreement but there is no
meeting of minds. Law therefore treats such
agreements as void i.e. not enforceable by law.

Mistake can be of two kinds:

1. Mistake of law
2. Mistake of fact

Mistake of law

Mistake of law again can be of two kinds; a)

mistake of law of the land, or 2) mistake of
foreign law. Every one is required to know the law
of the land and therefore it is said that ignorance of
law in no excuse. Thus, if a person makes a written
promise to his creditor to pay a time-barred debt
being ignorant about the law of limitation, he
cannot later seek to avoid the contract on the
ground that he did not know the law. He has to pay
the time-bared debt now that he has promised to
pay. (though he was under no obligation to pay
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before making the promise.) As for the mistake of

foreign law, it stands on the same footing as
mistake of fact. Mistake of fact is explained in the
ensuing discussion.

Mistake of fact

Mistake of fact can again be of two kinds:

1. Bilateral mistake
2. Unilateral mistake

Bilateral mistake

Bilateral means on the part of both the parties.

When both the parties to an agreement are under a
mistake as to a matter of fact, essential to
agreement, the agreement is void. It must be
noted that to make the agreement void on the
ground of mistake of fact, the mistake must be on
the part of both the parties and it must as to a
matter of fact essential to the agreement. It must be
a mutual mistake so as to negate consensus ad
idem.

For example, A, who has two cars x and y, offers

to sell car x, and B not aware that A has two cars
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and under the impression that car y is being

offered, accepts the offer. Here there is no real
consent and therefore the agreement is void.

The Contract Act further lays down that in order to

make the agreement void the mistake must relate
to some fact and not to judgment or opinion.
Which types of bilateral mistakes affect the
validity of agreements is a question of fact. Based
on judicial rulings, some of them can be stated as
follows.

a. Mistake as to identity of the subject-matter;

where the seller has different goods in mind and
the buyer has assumed otherwise.

b. Mistake as to existence of the subject-matter;

where the goods are destroyed (no longer in
existence) at the time of agreement without the
knowledge of both parties.
For example, in an agreement for sale of a house,
both parties are ignorant that the house is
destroyed in fire at the time of agreement.

c. Mistake as to the quantity of the subject-

matter; if both the parties are working under a
 119

mistake as to the quantity of the subject-matter, the

agreement is void.

d. Mistake as to quality of the subject-matter; if

there is a mutual mistake of both the parties as to
the quality of the subject-matter, that is, if the
subject-matter is something essentially different
from what the parties believed it to be, the
agreement is void.

Unilateral Mistake

A unilateral mistake is one where only one of the

parties to the agreement is under misstate as to a
matter of fact. As regards the effect of unilateral
mistake, the Contract Act provides that – „a
contract is not voidable merely because it was
caused by one of the parties to it being under a
mistake as to a matter of fact.‟
A contracts to rent a house from B for a monthly
rent of Rs. 10,000/- while the going rate of rent in
the same locality for a similar house is only Rs.
5000/- p.m. Here, A cannot avoid the contract on
the ground of mistake as it was for him to exercise
due diligence and care before entering into
contract. It is a unilateral mistake on the part of A
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and he has to only blame himself for his own

negligence.
Thus, a contract remains valid even if it is founded
on unilateral mistake unless such mistake is caused
by the other party by fraud or misrepresentation. If
the mistake is so caused, the contract is voidable at
the option of the aggrieved party.
As a general rule, a unilateral mistake cannot
affect the validity of contract. However, there are
certain exceptional circumstances where even a
unilateral mistake can make an agreement void.
Some of them are discussed below.

Mistake as to the identity of person contracted

with, where such identity is the purpose of the
agreement. For example, A, who is a regular
customer of certain food articles from B who runs
his business as “B and sons”, places his order
without the knowledge of the fact that the business
has been sold by B to C. B is a person trusted by A
for supply of wholesome food items and known for
his hygienic practices in preparation of food.
Without disclosing the fact of change over of
business, C accepts the order. Subsequently, on
coming to know that the goods would now be
supplied by C, and not by B, A seeks to cancel the
 121

agreement. C claims that it is unilateral mistake on

the part A. Here, A can cancel the agreement as it
is based on mistake as to identity of person
contracted with and such identity is important for
the contract.

Mistake as to the nature and character of a written

document. The second exceptional circumstance
where even a unilateral mistake may make an
agreement void is when a party puts his signature
on a formal written agreement under a mistake as
to the nature and character of the document.

For example, a Guarantor signs a suretyship-bond

with banker in relation to loan taken by his friend.
The bond contains a clause that the guarantor,
within a month, shall keep a term-deposit with the
bank for Rs. 1 lac, and on failure, shall pay to the
bank a monthly charge of Rs. 500/-. If the
guarantor does not intend to keep such term-
deposit with the bank, it is a unilateral mistake on
his part in signing the bond and as a rule he cannot
now avoid the obligation. However, it is a
unilateral mistake as to the nature and character of
the document and the mind of the signature- maker
did not go with the signature, and hence the
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agreement (as far as it relates to term-deposit) is

void.

Chapter 5

Legality of Object

We have seen in the first chapter that one of the

essential elements of contract is lawful object and
consideration. An agreement may have been made
with perfect compliance of all the legal formalities
and yet it may not be a contract, if the object of the
agreement is unlawful. As a result, such agreement
is void and not enforceable by law.
The term „unlawful‟ does not necessarily mean
„punishable‟ under the criminal law.

What considerations and objects are Unlawful?

The Contract Act provides that the consideration

or object of an agreement is lawful, unless –
 123

1. It is forbidden by law; or
2. is of such nature that, if permitted, it would
defeat the provisions of any law; or
3. is fraudulent; or
4. involves or implies injury to the person or
property of another; or
5. the Court regards it as immoral, or opposed to
public policy.
Let us discuss these clauses one by one with
examples.

1) If it is forbidden by law. A promise to do an

act which is punishable under the criminal law of
the country is obviously forbidden by law. Further,
certain legislations may prohibit certain kinds of
transactions, with or without prescribing any
punishment for the same. An agreement which
contemplates such promise is forbidden by law and
therefore void.

Example:

 A promises to pay to B Rs. 50,000/- if B gets

him employment in public service though A is
not otherwise qualified for the post. The
 124

agreement is void as it is for unlawful

consideration.
 A, a drunken driver through negligent driving,
causes injury to B‟s son. A promises B all the
medical expenses in addition to compensation
and B promises not to inform the police. The
agreement is void as the object is unlawful.

2. If it is of such a nature that, if permitted, it

would defeat the provisions of any law. This
clause refers to cases where the object or
consideration of an agreement is of such a nature
that, though not directly forbidden by law, it would
indirectly result in violation of any law in force.

Example

 An agreement between husband and wife to

live separately is void because if permitted
such agreement would defeat the provisions of
law on marriage.
 An agreement between an employee who
suffers from night-blindness and his employer
under which the employee accepts lesser
wages than what is prescribed under law on
 125

minimum wages, to compensate for his

disability is void.

3. If it is fraudulent. An agreement whose object

or consideration is to defraud others is unlawful
and therefore it is void agreement.

Example

A, a manager of an establishment, agrees to issue a

service certificate to B for its submission to
another establishment so as to help B get
employment there. B promises to pay Rs. 5000/- in
return. The purpose of the agreement is to commit
fraud and therefore the agreement is void.

4. If it involves injury to the person or property

of another. If the object or consideration of an
agreement is injury to the person or property of
another, it is an unlawful agreement and hence
void.

Example
A agrees to pay B a sum of money for writing and
publishing a defamatory article against C. A also
agrees to pay the compensation which B may have
 126

to pay to C in a suit for defamation brought by C.

The object of the agreement is unlawful as it
involves injury to the person of C and therefore it
is a void agreement.

5. If the court regards it as immoral or opposed

to public policy.

The terms „immoral‟ or „opposed to public policy‟

will always escape every attempt to define them.
No precise definition can ever be presented of
these terms. At the most one can give illustrations
of immorality or acts which are opposed to public
policy, that too only in a given context. This is so
because what is immoral (or moral) and what is
opposed to public policy would always depend on
the value system of a society at a given point of
time. These values change with the passage of time
and so do the concepts of morality and immorality.
Therefore one has to be very careful in
ascertaining the validity or invalidity of an
agreement on the touchstone of immorality or its
being opposed to public policy. Sending a girl-
child to school was considered immoral few
hundred years ago in many parts of India. Today,
 127

not sending a girl-child to school solely for her

being a girl would be considered immoral.
It is for this reason that the Contract Act gives
discretion to judicial authorities (when it provides:
„if the court regards…) to decide what is moral or
immoral rather than providing any definition of the
terms. Such definition would straitjacket the
Courts making them helpless in discharging their
role effectively. The courts are thus expected to
apply the yardstick of the prevailing social values
and adjudicate on the issues.
Again, the terms „opposed to public policy‟ and
„immoral‟ are not mutually exclusive of each
other. What is immoral is bound to be opposed to
public policy and the reverse is also true. It must
be remembered that public policy is not
government policy. Government policy is always
well-documented and expressed in precise terms,
which is impossible in the case of public policy.
Another point worth noting is that morality (or
immorality) is a term broader than legality (or
illegality). What is illegal is also immoral in most
cases but the reverse may not be true. For example,
smoking in the presence of parents may be
considered immoral, but it is not illegal.
 128

With the help of decided cases, the following

agreements can be stated to be immoral or opposed
to public policy.

a. An agreement between client and his advocate,

by which the client agrees to pay certain
percentage of recovery in a recovery of suit
filed by the client, is a void agreement being
against the professional code of conduct and
hence opposed to public policy.

b. An agreement between the Mukhia of a village

and the management of a nearby hospital by
which the Mukhia is to get commission on the
basis of number of patients admitted in the
hospital through him, is opposed to public
policy and hence void.

c. Marriage brokerage agreements whereby the

pundit or purohit is promised money for
procuring wife are opposed to public policy
and hence void.

d. An agreement between an employer and his

employee whereby the employee on joining
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his duties, agrees to serve for a minimum

number of years, failing which he would
compensate the employer is opposed to public
policy and hence not enforceable at law.

Effect of the object, which is unlawful in part

When the consideration or object of an agreement

is unlawful, the agreement is void and it is not a
contract at all. However, what is the consequence
if the object or consideration is partly lawful and
partly unlawful?
The Contract Act provides an answer to this
question which is stated below.

 Where persons reciprocally promise firstly to

do certain things which are legal and secondly
under specified circumstances, to do certain
other things which are illegal, the first set of
promises is a contract, but the second is a void
agreement.

Example: A and B agree that A shall sell B a

house for Rs. 10,000/-, but that if B uses it as a
gambling house, he shall pay A Rs. 50,000/-.
 130

The first set of reciprocal promises, namely, to

sell the house and to pay Rs. 10,000/- for it, is
a contract.
The second set is for an unlawful object,
namely, that B may use the house as gambling
house, and is a void agreement.

 If any part of a single consideration for one or

more objects, or any one or any part of any
one of several considerations for a single
object, is unlawful, the agreement is void. (i.e.
when the illegal part cannot be separated from
the legal part)

Example: A agrees to serve B as his

housekeeper and also to live in adultery with
him at a fixed salary. The whole agreement is
void. The part of the agreement which relates
rendering services as housekeeper and getting
salary cannot be contract because it cannot be
ascertained as to what was due on account of
adultery and what was due on account of
housekeeping.

Effect of illegal agreements on collateral

transactions
 131

In the first chapter of the book we have discussed

various kinds of contracts and agreement wherein
we have seen the difference between illegal
agreements and unlawful agreements. To repeat
briefly, it may be said that all the transactions
which are incidental or collateral to illegal
agreement also carry the stigma of illegality and
therefore cannot be contracts. However, in the case
of void agreements, the incidental or collateral
transaction do not become void and may be valid
contracts.

Void agreements are those which are not

enforceable by law. We have already discussed
certain types of void agreements such as
agreement with minors, agreement without
consideration, agreement made under a bilateral
mistake of fact essential to the agreement etc. In
addition to these, the Contract Act expressly
declares certain agreements to be void.
One of the essential elements of valid contract is
that it must not be expressly declared void under
the Contract Act.
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The Contract Act expressly declares the following

agreement to be void.

1. Agreement in restraint of marriage

An agreement, by which one party undertakes not
to marry at all or not to marry a particular person,
for consideration is a void agreement. However, an
agreement to marry a particular person and no one
else is a valid contract.

2. Agreement in restraint of trade

It is the constitutional right of every citizen of
India to practice any trade or profession of his
choice and therefore Contract Act declares that
every agreement by which any one is restrained
from exercising a lawful profession, trade or
business of any kind, is to that extent void.
It must be however noted certain such restrictions
have been recognised under other statutes and
hence such restrains are valid. For example,
Partners‟ agreement, by which restraint is put on
the partners not to carry on similar business either
during the period when they are partners or after
retirement, or within a specified locality are valid
contracts. Similarly, a trader, who sells „Goodwill‟
along with his business, can be restrained from
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carrying on a similar business either for a specified

period or for specified local limits.

3. Agreement is restraint of legal proceedings

An agreement by which a person is restricted
absolutely from enforcing his rights under any
contract by usual legal proceedings, or an
agreement, by which the time available to a person
to initiate legal proceedings under Limitation Act
is shortened, is a void agreement. However, an
arbitration agreement between two or more
persons to refer their disputes to arbitration is
valid.

4. Agreement the meaning of which is not

certain
Agreement the meaning of which is not certain, or
capable of being made certain, is void. An
agreement to sell a house for a good price is void
because what is a good price is not certain.

5. Agreement by way of wager

The term wager means a bet and wagering
agreements are nothing but betting agreements.
Where a person stands to win or lose depending on
happening or non-happening of an uncertain event
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and where none of the parties are interested in the

event itself, but only in the stake put in the
agreement, it is a wagering agreement and it is
void. However, the Lottery and horse races
authorized by Government are exceptions.

6. Agreement contingent on impossible events

Contingent agreements to do or not to do anything,
if an impossible event happens, are void whether
the impossibility of the event is known to the
parties at the time of the agreement or not. A
agrees to pay Rs. 100/- to B if two parallel lines
meet. It is a void agreement.

7. Agreement to do impossible acts

An agreement to do an act impossible in itself is
void. A agrees for money to make alive the wife of
B who is dead is a void agreement.

Chapter 6

Contingent contract
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In chapter 1 we have discussed various types of

contracts. One such type of contract is contingent
contract. It is proposed to explain the nature of
contingent contracts with little more elaboration
and hence the discussion of contingent contract is
included in this separate chapter.

The Contract Act defines a contingent contract as –

„a contract to do or not do something, if some
event, collateral to such contract does or does not
happen.‟ Thus, it is contract where the promisor is
required to perform his obligation under the
contract, only if certain event, which is collateral
to and stipulated in the contract, takes place or
does not take place.
For example, A contracts to sell 100 quintals of
wheat to B for Rs. 50000/- if the ship by which the
wheat is being transported returns safely.
In this contract, the liability of A to sell the wheat
arises only if the ship returns safely. If it does not,
there is no obligation on the part of A. If A agrees
to sell 100 quintals of wheat to B for Rs. 50000/-,
it is a simple and ordinary contract. It is also an
absolute contract, because its performance is not
dependent on any event. It is unconditional.
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Similarly, where A promises to pay Rs. 50000/- to

B, if a certain ship does not return safely, the
liability of A arises only when certain event (safe
return of the ship) does not happen.
A contract may be a) absolute or unconditional or
b) conditional or contingent. A contract is absolute
or unconditional where the promisor is bound to
perform his part in any event. It is conditional or
contingent when the performance of the promisor
is necessary only on happening or non-happening
of certain future event which is collateral to the
contract.

Contracts of insurance, contracts of indemnity

and contracts of guarantee are all contingent
contracts.

What is a collateral event?

What distinguishes a simple or absolute contract

from a contingent contract is the collateral event
on which the performance of the promisor
depends. A contract where performance by one
party is conditional upon the performance, or
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readiness and willingness to perform by the other,

is conditional, but not contingent.
A collateral event means an event which is neither
a performance directly promised as part of the
contract, nor the whole of the consideration for a
promise.
If A agrees to deliver 100 bags of wheat and B
agrees to pay the price only after delivery, the
obligation of B to pay is conditional upon A‟s
delivering the wheat, but this is not a contingent
contract because the event on which B‟s liability
depends is a part of the promise itself (or a pre-
condition) and not a collateral event. Also, if A
offers a reward for the recovery of his lost dog, it
is not a contingent contract. In fact, there is no
contract at all until someone acts on the offer, finds
the dog and brings it to A. Similarly, a contract to
pay a person for construction work on the
condition that he will not be paid till the whole
work is done, is not a contingent contract.

Essentials of contingent contract

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It can be seen from the above discussion that the

following two conditions are essential for a
contingent contract.

1. The performance promised under the contract

depends on the happening or non-happening of
some future event; and
2. The future uncertain event is collateral (or
incidental) to the contract.

Rules regarding performance of contingent

contracts

1. Contingent contracts to do or not to do

anything, if an uncertain future event
happens, cannot be enforced by law unless
and until that event has happened. If that event
becomes impossible, such contracts become
void. For 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. Contingent contracts to do or not to do

anything, if an uncertain future event does not
happen, can be enforced by law when the
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happening of that event becomes impossible,

and not before. For 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. For example, A
agrees to ay 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 not do anything, if

a specified uncertain event happens within a
fixed time, becomes void, if, at the expiration
of the time fixed, such event has not happened,
or if, before the time fixed, such event
becomes impossible. For example, A promises
to pay B a sum of money if a certain ship
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returns within a year. The contract can be

enforced if the ship returns within the year,
and becomes void if the ship is burnt within
the year, or if the ship does not return within
the year.

5. Contingent contracts to do or not to do

anything, if a specified uncertain event does
not happen within a fixed time, may
enforced by law when the time fixed has
expired and such event has not happened, or,
before the time fixed has expired, if it becomes
certain that such event will not happen. For
example, A promises to 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.

Difference between contingent contract and

wagering agreement

From the forgoing discussion it can be noticed that

a wagering agreement is also a contingent
agreement, because the performance depends on
happening or not happening of any future event.
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One person promising another that he would pay

Rs. 100/- if it rains that day, is an agreement where
the performance depends on whether it would rain
or not. Similarly, an Insurance Company
promising compensation to the insured if his house
is burnt is also an agreement where the
performance depends on whether the house is
burnt or not. The Contract Act prevents a wagering
agreement from being a contract and therefore
wagering agreement is a void agreement. The
differences between the two are as follows:

1. A contingent contract is a valid contract but a

wagering agreement absolutely void and not
enforceable by law.

2. In a contingent contract the parties have real

interest in the occurrence or on-occurrence of
the event e.g. insurable interest in the property
insured, but in a wager the parties are not
interested in the occurrence of the event except
for the winning or losing the bet amount.

3. In a contingent contract the future uncertain

event is merely collateral whereas in a
wagering agreement the uncertain event is the
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sole determining factor of the agreement.

Chapter 7

Performance and Discharge of Contract

Having discussed how a contract comes into

existence, we shall now see how a contract is
discharged. Every contract on coming into being
imposes certain obligations and confers certain
rights on the contracting parties. When these rights
and obligation come to end or when these rights
and obligations are extinguished, the contract is
discharged. A contract may be terminated or
discharged in any of the following ways:

1. By performance – actual or attempted

2. By mutual consent or agreement
3. By subsequent or supervening impossibility or
illegality
4. By lapse of time
5. By operation of law
6. By breach of contract
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Let us now discuss these modes of discharge of

contract one by one in detail.

1. Discharge by performance

The most obvious and normal way of discharge of

contract is by performance. When a contract is
duly performed by both the parties to the contract,
the contract comes to an end in the most desirable
and happy manner. Nothing more remains to be
done by either party or their rights against each
other as also obligations towards each other under
the contract are over and terminated.

Performance may be (a) actual performance, or (b)

attempted performance or Tender.

Actual Performance

When each party does what it undertook to do

under the contract within the time and in the
manner prescribed, it is called actual performance
of the contract. For example, A agrees to purchase
a car from B for Rs. 50000/- and promises to pay
on delivery of the car. B delivers the car to A at the
specified time and A makes the payment. The
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contract is discharged as both A and B have

discharged their respective obligations under the
contract.

The obligation may be discharged by the promisor

himself, or his agent, or legal representative
(unless personal skill of the promisor is involved)
or even by a third party on behalf of the promisor.
So far as the performance by a third party is
concerned, once such performance is accepted by
the promisee, the promisee has no right against the
promisor and the contract stands discharged as
regards the promisor. It must be remembered that
the contract must be performed in the manner and
within the time prescribed under the contract. If
the time and/or manner of performance is not
stipulated in the contract, then it has to be
performed within a reasonable time and in a
reasonable manner. What is reasonable depends on
the facts of each case.

Attempted Performance

Sometimes it so happens that a person who is

bound to perform a promise is willing and actually
offers to perform his promise as per the contract,
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but the other party does not accept the

performance. Such attempt on the part of one party
to the contract is called „attempted performance or
Tender‟. A valid tender of performance is equal to
actual performance and therefore it has the effect
of discharge of contract.
For example, A agrees to paint the house of B on
15th August and B agrees to pay him for the work.
It is also agrees that A should reach B‟s house in
the morning with his team of workers and
necessary equipments, paints etc. and complete the
paining work by the end of the day. A visits B‟s
house in the morning of 15th August but finds the
house locked all the day. Here, A has attempted to
perform his promise but B has failed to accept the
performance. Therefore, the contract is discharged
by attempted performance by A. Now B has to pay
A, though A has not painted the house.

Valid tender or offer of performance must satisfy

the following conditions:

1. Offer to perform must be unconditional. The

offer to perform must not be made subject to any
conditions. In the above example, if A offers to
perform provided B arranges lunch for the
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workers, it is not a valid tender.

2. Offer to perform must be at proper time and

place. An attempt to perform either before or after
the due time for performance (or at other place) is
not a valid tender. In the above example, if A goes
to B‟s house immediately after midnight of 14th
August and offers to paint the house, it is not the
proper time and therefore it is not a valid tender.

3. Offer to perform the whole of the obligation.

Thus, if A decides to paint only two rooms on 15th
August and rest of the rooms on other day, it is not
an offer to discharge the whole of the obligation
and as such it is not a valid tender.

2. Discharge by Mutual consent or Agreement

Contract is the result of an agreement between the

parties. As one agreement gives rise to a contract
binding the parties, a subsequent agreement
between the same parties can free them from their
obligations and the contract stands discharged. It
must be remembered that such subsequent
agreement between the parties by which they agree
 147

to free each other from the obligations arising out

of earlier contract, is also a contract in the legal
sense of the term. Such discharge of contract by
mutual consent or agreement can take place in the
following forms:

a. Novation. It occurs when a new contract is

substituted for an existing contract. For example,
A has to pay Rs. 500/- to B and B has to pay
Rs.500/- to C. By agreement, C accepts A as his
debtor thus discharging B. This is novation and
now under the new contract A has to pay Rs. 500
to C.

b. Alteration. When a significant and materially

important term of an existing contract is changed
by the parties, it may have the effect of giving
birth to an altogether new contract. When the
quantum of liability is changed or when the rate of
interest is changed, it is alteration.
In novation, there may be a change of parties also
while in alteration only the terms of contract are
changed and the parties remain the same.

c. Rescission. To rescind means to cancel. The

parties who have agreed to do something for each
 148

other may subsequently decide to cancel the idea.

In other words they agree not to bind each other
any longer on the basis of earlier contract. They
consent to the non-performance of obligations of
each other. A agrees to sell his house to B by
certain date. Before the date, both agree not to go
ahead with the sale and cancel the deal. By virtue
of subsequent agreement, earlier contract is
discharged.

d. Remission. Remission is accepting lesser

performance than what was contracted. A person,
who has been promised something under a
contract, may remit or give up either wholly or in
part the performance of the promise made to him
and for this purpose, no consideration is required.
For example, A is indebted to B for Rs. 5000/-, but
agrees to accept Rs. 4000/- as full and final
settlement of his claim, giving up the balance
amount. The promise of B to accept a lesser
amount does not require consideration and such
promise a valid contract. Once a party remits or
gives up what is due to him under contract,
naturally the contract is discharged.
3. Discharge by Subsequent or supervening
impossibility or illegality
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If the agreement is to do something which is

impossible at the time of agreement itself, then
such agreement is void and can never attain the
status of contract. However, in certain cases the
performance may be possible at the time of
formation of agreement making it a valid contract,
but later it may become impossible for some
reasons. This is known as subsequent or
supervening impossibility. In such case the
contract becomes void and hence is discharged.
A contract to do an act which, after the contract is
made, becomes impossible, or, by reason of some
event which the promisor could not prevent,
unlawful, becomes void when the act becomes
impossible or unlawful.
For example, A agrees to sell his house to B for a
certain price. Before the sale is executed, the house
is destroyed in fire. The contract is discharged.
Note that the subsequent impossibility is beyond
the control of the promisor and it is not self-
induced. Similarly, A, a merchant in Maharashtra
agrees to supply a specified quantity of wheat to B,
a trader in Gujarat. Subsequent to such contract,
the Maharashtra Government bans the sale of
wheat outside Maharashtra due to its scarcity. This
 150

subsequent change of law has rendered the

contract impossible to be performed and hence it
becomes void and is discharged. It should be
remembered that mere difficulty in performance
which was not known to the promisor at the time
of making the contract is not to be equated with
impossibility. For example, a sudden price rise in
the raw material or a strike by the workers etc, are
not the reasons for which a party can treat the
contract as discharged and free himself from the
obligation of performance.
Further, personal incapacity or death of the
promisor would also discharge the contract,
provided the performance of the contract depends
on the personal skill or qualifications of the
person. For example, a contract to marry is
discharged when one party dies or becomes insane;
or a contract by a painter to paint a picture is
discharged when the painter, subsequent to making
the contract, loses his hand in an accident.

4. Discharge of by lapse of time

If one party to a contract does not discharge its

obligation (or breaks the contract), the other party
gets a right to initiate proceedings against him for
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appropriate relief. Such action has to be taken

against the guilty party within the time prescribed
under the Limitation Act. Different periods of
limitation are prescribed under the Limitation Act
for different types of proceedings. For simple
money recovery suits, the period of limitation
prescribed is three years from the date of default in
repayment. Thus, for example, where A advances
money to B repayable by 31st December, on the
non-repayment by B, A must initiate proceeding
against B within a period of three years from 31st
December. If he does not do so, he loses his
remedy against B and the money becomes
irrecoverable. A has now no right to recover the
money and B has no obligation to repay. As such
the contract is discharged. (Note that discharge of
contract is a situation where the rights and
obligations of the parties towards and against each
other come to an end.)

5. Discharge by Operation of law

A contract is discharged by operation of law when

one of the parties to the contract becomes
insolvent. A contract is also discharged when there
is any material alteration made in a written
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document of contract by one party without the

consent of the other. Similarly, when the
corresponding rights and obligations under the
contract get consolidated or merged in the same
person, the contract is discharged. For example,
where a person issues a bearer cheque to another,
he has a contractual liability to arrange for the
payment of money mentioned on the cheque. The
payee may transfer the said cheque in favour of
another person and such transferee may further
transfer the cheque to yet another person. During
the course of circulation, the cheque may come
back in the hands of the original drawer. In such
event, the obligation to pay and right to receive
vest in the same person and as such, the contract is
discharged.

6. Discharge by breach of contract

When one party to the contract refuses or neglects

to discharge its obligation under the contract or
conveys its unwillingness to discharge the
obligation, by words or conduct, he commits
breach of contract. Breach of contract brings an
end to the obligations created under the contract
and the contract as such is discharged. Of course,
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the other party now has the right to take action

against the party at default, but the contract is
discharged.

Breach of contract may be of two kinds: a) Actual

breach; and b) Anticipatory breach.

Actual Breach of Contract

Actual breach occurs when a party fails to perform
his obligation at the time fixed for performance.
For example, if the contract provides for delivery
of goods by a particular day and the goods are not
delivered by that day, actual breach of contract
takes place. Thus, there cannot be any „actual
breach of contract‟ by non-performance, so long as
the time for performance has not arrived. It is only
when the time for performance has arrived and the
party required to perform does not perform that
„actual breach of contract‟ occurs.

Anticipatory Breach of Contract

The Contract Act provides that –„when a party to a

contract has refused to perform, or disabled
himself from performing, his promise in its
entirety, the promisee may put an end to the
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contract, unless he has signified, by words or

conduct, his acquiescence in its continuance.‟
Thus, as the title itself suggests, anticipatory
breach of contract is an anticipation that breach of
contract will invariably occur and this anticipation
is made obviously before the time for performance
has arrived. When one party to the contract
communicates to the other party, before the time
for performance has arrived, that he shall not
perform his obligation at the appointed time; or
when one party has placed itself in such a position
that it shall be impossible to perform its obligation
when it becomes due, anticipatory breach of
contract takes place.
It can be in the express form where a party
communicates to the other party, before the due
date of performance, his intention not to perform
it. For example, A contracts to sell 100 quintals of
wheat to B on 31st December. On 1st December A
informs B that he will not supply the wheat as
agreed. Implied form is by conduct of one of the
parties. Here a party by his own voluntary act
disables himself from performing the contract. For
example, A agrees to sell house to B on 31st
December, but sells the same to house to C on 1st
December.
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Effect of Anticipatory Breach of Contract

When there is an anticipatory breach of contract by

one party, the other party is excused from
performance. The other party has now an option by
which:

a. He may either treat the contract as rescinded and

sue the other party for damages for breach of
contract immediately without waiting till the due
date of performance, or

b. He may treat the contract as still operative and

binding and wait for the time of performance and
then hold the other party responsible for the
consequences of his non-performance. In other
words, he keeps the contract alive so that if the
other party, on second thought, wishes to perform
the promise, the opportunity is still available.

For example, A agrees to sell 100 quintals of

wheat to B who is a trader from another state, on
31st December. On 1st December, he informs B that
that he will not be able to sell the wheat. This is an
anticipatory breach of contract. Two courses are
 156

now open to B: (i) he may treat the contract as

rescinded and at once sue A for damages, or (ii) he
may wait till 31st December and if by then wheat is
not sold and delivered, sue A for damages. (If B
takes the second course, A has the advantage of
subsequent impossibility, if at all any taking place.
Thus, if the Government bans the sale of wheat on
15th December, A can take advantage of
supervening impossibility and B cannot recover
any damages from A.)

Chapter 8
Quasi-contracts

Every contract is the result of an agreement, which

agreement is based on an offer made by one person
and accepted by another person. But is some cases
there is no offer, no acceptance, and in fact no
agreement as such at all and yet, in the eyes of law
there is exists a contract between two parties
binding them under contractual obligations. In
other words, law creates a contractual relation
between two parties who never had any intention
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of entering into contract with each other. Such

contracts are known as „quasi-contracts.‟

The Contract Act does not use the term „quasi-

contract‟; instead it uses the expression, „certain
relations resembling those created by contracts.‟
Thus, the term quasi contract refers to those
contractual relations among the parties, which
arise not out of an agreement, in the accepted sense
of the word, but out of a peculiar circumstance
where law imposes obligations on the parties, as if
they have entered into contract with each other and
have incurred obligations.

Let us take a simple example, at this juncture, to

understand the nature of quasi contract. A person
finds goods on the road belonging to another. Is he
entitled to keep them with himself and enjoy the
benefits of the same? The Contract Act declares
such person as Bailee, i.e. the person who has been
entrusted with the goods and who is expected to
return the goods at a specified time. The law
assumes that there is a contractual relation between
the person who has lost the goods and the person
who has found them. The finder of the goods is
under obligation to return the goods to true owner
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and the owner is under obligation to pay the

expenses, if any to the finder of the goods for the
maintenance of the goods. The Contract Act
assumes that there is, thus, a contract between the
finder of the goods and the person who has lost the
goods and this contract is called „quasi-contract‟.
The relations existing between these two persons
are the relations resembling those created under a
contract.
It may be noted that for a breach of quasi contract,
the aggrieved party can sue the other party in the
same manner as in the case of an ordinary, usual
contract.

The obligations arising out of such quasi-contracts,

as provided under the Contract Act are discussed
below one by one.

1. Claim for necessaries supplied to a person

incapable of contracting or on his account.
If a person incapable of entering into a contract
(because of minority or insanity), or any one
whom he is legally bound to support, is supplied
by another person with necessaries suited to his
conditions in life, the person who has furnished
such supplied is entitled to be reimbursed from the
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property of such incapable person. (We have

already studied this in our discussion on
Agreement with minors.)
Agreement with a minor or mad or lunatic person
is not a contract because such person is not
competent to contract. Therefore, if goods or
services are supplied to such person, the provider
cannot sue him for the price. However, this
situation is an exception to the rule. The Contract
Act lays down that if the necessaries of life are
supplied to such person, then the property of such
person is liable to reimburse the supplier.
For example, A supplies B, a lunatic, with
necessaries suitable to his conditions in life. A is
entitled to be reimbursed from B‟s property.
Similarly, where 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.
The following points should be noted in this
context:
 There is no personal liability on such person
incapable of contracting, but only his property
is liable.
 The things supplied must be „the necessaries‟.
What is necessary for a particular person with
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regard to his position in the society is a

question of fact.
 The necessaries should be supplied to such
person or the person/s whom he is legally
bound to support, such as wife and children.

2. 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.
For example, A is a tenant in a house property and
B is the owner of the property. B fails to pay the
property tax with respect to the said property and
hence the Municipal Corporation proposes to
attach the same. A, the tenant pays the tax in order
to save the property. Here, law assumes a
contractual obligation on the part B to reimburse
the amount of tax to A, although there is no
contract between A and B.
It can be noticed from this example that – a) A is
interested in making the payment of tax to protect
his own interest and that the payment is not a
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voluntary one; B) The payment of was such that B

was bound by law to pay.

3. Obligation of person enjoying benefit of non-

gratuitous act.
Where 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.
In simple words, when one person does anything
for another, not by way of charity but expecting to
be paid for the same and the other person does not
reject the thing or service though he has an
opportunity to do so, then the latter person must
pay for it.
For example, A, a tradesman, leaves goods at B‟s
house by mistake. B treats the goods as his own.
He is bound to pay for them. (Alternatively, B
must restore or return the goods to A, charging A
for expenses, if any, in keeping custody of goods.)
But take an example where A saves B‟s property
from fire. A is not entitled to compensation from
B if the circumstances show that he intended to act
gratuitously.
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4. 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. (Broadly, Bailee is
a person who has been entrusted with some goods
by another for some purpose under the condition
that the goods shall be returned when the purpose
is accomplished.)
The liability of finder of goods is that he must try
to find the true owner of goods and till then has to
take due care of the goods; otherwise he is guilty
of criminal mis-appropriation under the Indian
Penal code. The right of finder of goods is that he
is entitled to from the true owner all expenses
incurred by him in preserving the goods. He can
refuse to return the goods till these expenses are
paid. He can sell the goods if they are perishable in
nature or where the charges for preserving the
goods amount to two-third of the value of the
goods.

5. 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.
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For example, A and B jointly owe Rs. 100/- to C.

A alone pays the amount to C, and B, now
knowing this fact, pays Rs. 100/- to C. Here, C is
bound to repay the amount to B. (here the payment
is made under mistake.)

A railway Company refuses to deliver up certain

goods to the consignee, except upon the payment
of an illegal charge for carriage. The consignee
pays the sum charged in order to obtain the goods.
He is entitled to recover so much of the charge as
was illegally excessive. (here the payment was
made under coercion.)

Chapter 9

Remedies for Breach of Contract

When a contract is broken, the injured party is

entitled to any one or more of the following reliefs:

1. Rescission of contract
2. Suit for damages
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3. Suit upon quantum meruit

4. Suit for specific performance of the contract
5. Suit for injunction.

Let us now discuss these remedies available to

injured poarty one by one in detail.

1. Rescission of contract

To rescind means to cancel. Rescission of contract,

therefore, means cancellation of the contract. It is a
remedy available to the injured party against the
other party who is guilty for breach of contract.
Rescission of contract absolves the injured party
from all its obligations under the contract. As it
takes two to form a contract, similarly it takes two
to cancel the contract. When there is breach of
contract, the guilty party may choose to do nothing
and be quiet taking no action against the guilty
party. If, however, the injured party wishes to sue
the guilty party for compensation for breach, he
has to first file a suit for rescission of contract.
When the contract is rescinded at the hands of the
court, the aggrieved party is free from all its
obligations under the contract; and he becomes
entitled to compensation from the other party for
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any loss sustained by him out of such breach of

contract.
Thus, rescission of contract is a relief to the
aggrieved party in the form of freedom from his
own obligation under the contract and obtaining to
himself the right to claim compensation from the
guilty party for the loss suffered by him on account
of breach of contract.

For example, A, a singer, contracts with B, the

manager of a theatre, to sing at his theatre for two
nights in every week during the next two months,
and B agrees to pay her Rs. 100 for each night‟s
performance. On the sixth night, A wilfully
remains absent from the theatre, and B, in
consequence, rescinds the contract. B is entitled to
claim compensation for the damage which he has
sustained through the non-fulfilment of the
contract.

2. Suit for Damages

The term „damages‟ is not the plural of the term

„damage‟. To damage means to harm or to cause
injury or to cause loss; and the term „damages‟
means monetary compensation for the damage or
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loss. Thus, suit for damages means suit for

compensation for the loss sustained by the injured
party on account of breach of contract. It should be
remembered that such compensation is not in the
nature of penalty. It is not a punishment awarded
to the guilty party of breach of contract. The
Contract Act is a civil law and the object of civil
law is to enforce the right, unlike criminal law
whose object is to punish the wrong. Therefore, the
object of awarding compensation to the injured
party is not to punish the party at default, but to put
the injured party in that position in which he would
have been if the breach had not been committed.
As a general rule, therefore, compensation must be
commensurate with the injury or loss sustained,
arising naturally from the breach; if actual loss is
not there, no damages would be awarded.
There are different kinds of damages that can be
awarded by the Court to the injured party. They are
discussed below one by one.

Ordinary or General Damages

When a contract is broken, the aggrieved party can

always recover ordinary or general damages from
the guilty party. It is the estimated loss directly and
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naturally arising from the breach of contract in the

ordinary course of events. They are restricted to
the proximate consequences of the breach of
contract. Remote or indirect consequences of
breach are not considered.
A leading case of Hadley vs. Baxendale is very
relevant here. The owner of a mill delivered a
broken shaft to the defendant, a common carrier to
take to a manufacturer, copy it and make a new
one. The carrier delayed delivery of the shaft
beyond a reasonable time, as a result of which the
mill was idle for a longer period than necessary.
However, the plaintiff, the owner of the mill had
not made it known to the carrier that any delay
would result in a loss of profits. In a suit filed by
the plaintiff for compensation, it was held by the
Court that the carrier was not liable for loss of
profits during the period of delay. “when two
parties have made a contract, which one of them
has broken, the damages which the other party
ought to receive in respect of such breach should
be either such as may fairly be considered as
arising naturally i.e. according to the usual course
of things, from such breach of contract itself, or
such as may reasonably be supposed to have been
in the contemplation of both the parties at the time
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the contract was entered into as a probable result

of the breach.”

Let us take another example. A contract to sell and

deliver 500 bales of cotton to B on a fixed day. A
knows nothing of B‟s mode of conducting his
business. A breaks his promise, and B, having no
cotton, is obliged to close his mill. A is not
responsible to B for the loss caused to B by the
closing of the mill. B can however claim ordinary
damages for the breach of contract.

A contracts to buy B‟s ship for Rs. 60,000/-, but

breaks his promise. As a consequence of breach, B
sold the ship in the open market and he could only
get Rs. 52,000/- for the ship. B can recover by way
of compensation Rs. 8000/- (60000 – 52000), the
excess of the contract price over the actual sale
price.

Special Damages

Special damages are those resulting from a breach

of contract under some peculiar circumstances.
They arise out of a special situation. When a
contract is broken, the injured party may suffer
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losses which are indirect or remote in nature as

compared to those which arise in the ordinary
course of events.
When a person knows, at the time of entering into
a contract, about the existence of a special
situation; and that if he breaks the contract it
would lead to special loss for the other party, he is
bound to make good such special loss. This is
called special damages.

For example, A, a builder, contracts to erect and

finish a house by the first 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 first of 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 for breach of that contract. A must
pay to B by way of compensation, (a) for the cost
of rebuilding the house, (b) for the rent lost, and
(c) for the compensation made to C.
It can be noticed from the above discussion that
two conditions must be satisfied before the injured
party can claim special damages from the guilty
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party. The first is that there must be a special loss

caused to the injured party as a result of breach of
contract and secondly, the existence of such special
circumstance must be within the knowledge of the
parties at the time of entering into contract.

Exemplary or Vindictive Damages

The object of awarding compensation is not to
punish the party who is responsible for breach of
contract. However, exemplary or vindictive
damages are awarded with a view to punishing the
guilty party and they are not granted as a rule. In
two cases, however, the court may award such
damages, namely, a) Breach of promise to marry,
and b) Dishonour of cheque of a trader customer
by his banker when there are sufficient funds to the
credit of customer to honour the cheque.
In a breach of contract to marry, the amount of
damages will depend upon the extent of injury to
the party‟s feelings, such as mental agony etc. and
in a breach of contract by banker, the amount of
damages will depend on the extent of disrepute
caused to the trader customer which in turn
depends upon the status of the party. Interestingly,
the norm of measure is – „the smaller the cheque,
the greater the damage.‟
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Nominal Damages
As the name suggests, these damages are nominal
in nature. They are awarded only for namesake.
When, in a breach of contract by one party, the
other party has not suffered any actual damage and
yet the other party wishes to place on record the
fact of such breach, such damages are awarded.
These damages are a very small amount of money,
say a rupee or two, claimed and awarded only for
the purpose of establishing the right of the injured
party.

Liquidated Damages and Penalty

Sometimes, the parties may fix, at the time of

entering into contract with each other, the amount
of compensation that would be payable in case of
breach. This is known as liquidated damages. It is
the requirement of law that such sum, determined
by the parties in advance, must be fair and
reasonable, because the law cannot support any
penal provision in a contract. In such cases, the
question that often arises is whether the amount of
compensation so fixed by the parties in advance is
„liquidated damages‟ or „Penalty‟?
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The Contract Act very clearly provides on the

issue. It states that regardless of what is stipulated
by the parties as amount of compensation payable
in case of breach, the Courts shall award only
reasonable compensation, but not exceeding the
amount fixed by the parties.

For example, A contracts to well certain goods

worth Rs. 100/- to B on a specified day and also
agrees to pay Rs. 500/- by way of compensation if
he fails to supply the goods by that day. If A
commits breach of contract, the Court is not bound
by the stipulation of the parties and shall award
only those damages which the Court thinks fair
and reasonable to cover the real loss suffered by
the injured party. The courts have to only ensure
that such damages do not exceed the amount
already fixed by the parties. In the above example,
therefore, the court shall award reasonable
damages, but not exceeding Rs. 500/-.

Rules regarding amount of damages

The rules applicable to the awarding of damages

may be summarized as follows:
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1. The damages are awarded to compensate the

injured party for the loss suffered due to
breach of contract, and not to punish the guilty
party.
2. The object is to place the injured party in the
same position as if the contract had been
performed.
3. Ordinarily, the injured party can recover by
way of compensation only the actual loss
suffered by him.
4. In calculating actual loss, the court will take
into account only such loss as may be fairly
and reasonably considered as arising naturally
and in usual course of things from breach of
contract.
5. Special or remote damages, i.e. damages not
arising naturally from the breach would be
awarded only if they were in contemplation of
both the parties at the time of entering into
contract.
6. The fact that damages are difficult to assess
cannot be the ground to prevent the injured
party to recover them.
7. Nominal damages may be awarded when there
is no actual or real loss arising out of breach.
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8. If the parties fix up in advance the sum

payable as damages in case of breach of
contract, the court will allow only reasonable
compensation so as to cover the actual loss
suffered, not exceeding the amount so
stipulated under the contract.
9. Vindictive damages cannot be awarded for
breach of contract, except for breach of
promise to marry or against a banker for
wrongful dishonour of a cheque.
10. It is the duty of the injured party to
minimize the loss as much as possible.
3. Suit upon Quantum Meruit

The expression „quantum meruit‟ literally means

„as much as earned‟ or „in proportion to the work
done.‟ This third remedy is available where a
contract, partly performed by one party, has been
discharged by breach of contract by the other
party, or when the contract becomes void (or is
discovered to be void).
A party has a right to claim on quantum meruit
either without or in addition to claiming damages
for breach of contract. The aggrieved party may
claim upon quantum meruit and may claim
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remuneration in proportion to work done or goods

supplied in the following circumstances:

1. Where the work has been done in furtherance of

a contract which is wrongfully terminated by the
other party.
For example, A engages B, a contractor, to
construct a building. After a part of the building is
constructed, A terminates the contract and prevents
B from constructing further. B is entitled to get
reasonable compensation on quantum meruit in
addition to the damages for breach of contract.

2. Where the contract „becomes void‟ or „is

discovered void‟ after some work has been done or
some goods or services have been supplied.
For example, A contract to carry out some repairs
in the house of B and B agrees to pay A per repair
work so carried out. After some work has been
done, the house is destroyed in fire and thus the
contract becomes void and is discharged. A is
entitled to compensation on quantum meruit for
the repairs carried out till the destruction of the
house.
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Let us take another example where a person has

been appointed as an employee in a Company by
the Director of the Company. After the employee
worked in the Company for some days, it is
discovered that the director had no authority to
engage an employee and the appointment was
invalid. His employment was therefore terminated.
The employee is now entitled to claim
compensation on quantum meruit for the days
worked. This may be in addition to the damages
for breach of contract.

It may be noted that a party who is guilty of breach

of contract may also recover compensation on
quantum meruit. For example, a transporter of
goods fails to take the goods at the agreed
destination due to breakdown of the vehicle. Thus,
it is he who has committed the breach of contract;
yet he can recover compensation on quantum
meruit for the distance traveled. However, it is
necessary that the part of distance traveled can be
considered as part performance of the contract. In
other words, the contract should be divisible.

4. Suit for specific performance

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Instead of or in addition to awarding damages to

the injured party, Court may direct the specific
performance of the contract. Specific performance
means the actual carrying out by the parties what
they had agreed to do. Thus, where A agrees to sell
an ancient painting to B for Rs. 50,000/- and later
refuses to sell the same, in a suit for specific
performance brought by B the court may order A
to specifically discharge his obligation under the
contract, namely, to sell the painting to B.
To put in other words, this remedy is granted when
the contracts relate to sale of land and buildings,
rare articles or certain unique goods having special
value. In such cases, monetary compensation is not
an adequate relief for the injured party.
This relief is not however available for breach of
every kind of contract. It is at the discretion of the
court and granted only when the court considers it
just and equitable to do so.

The relief of specific performance is not granted

in the following cases:

1. Where monetary compensation is an adequate

relief; Thus, where a promise to sell goods is
broken and similar goods can be easily be
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procured in the market, this relief is not

granted.
2. Where the Court cannot supervise the
execution of the contract; Where a builder
refuses to carry out construction as per
contract, the Court shall not grant specific
performance because the Court cannot
supervise the actual carrying out of the
construction work. (the injured party may
again approach the court with the grievance of
inferior construction and so on, and this will
lead to multiplicity of proceedings. Instead,
monetary compensation is the most
appropriate and adequate remedy.

3. Where the contract is for personal service; If a

singer breaks his contract to sing at a theatre
for a specified period, the Court shall not order
the singer to carry out the performance as
agreed, for obvious reasons. If a surgeon,
having agreed to perform a surgical operation
on a patient, later declines to do so, it shall be
risky for the patient to insist for specific
performance. He ought to be satisfied, instead,
with monetary compensation.
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4. When one of the parties is not competent to

contract; Thus, a minor cannot succeed in an
action for specific performance since he
cannot himself be sued for breach of contract.

5. Suit for Injunction

Injunction is a mode of securing the specific

performance of the negative terms of the contract.
„Injunction‟ is an order of a court restraining a
person from doing any particular act. Thus, in a
contract where a person undertakes not to do a
particular thing, and breaks the contract by
engaging himself in doing that thing, the other
party can get an order of injunction from the court
restraining the guilty party from doing what he had
agreed not to do.
For example, A, a singer, agrees to sing at the
theatre of B for ten nights in a month and not to
sing anywhere else during that period, B can get an
order from the court restraining A from singing
anywhere else during the said period. It shall be
thus noticed that injunction is rather a preventive
relief. (Specific performance is not possible here
because the contract is of personal nature; and
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injunction is meaningless and redundant when the

period is over.)

Chapter 10

Indemnity and Guarantee

This chapter onwards we shall discuss the nature

of and the rules governing certain special
contracts. We shall begin our discussion with
contracts of indemnity and guarantee. It may be
borne in mind throughout the discussion that all
special contracts are primarily contracts and
therefore they are governed by the provisions of
Contract Act. As such, they must have all the
essential elements of contract such competence of
parties, free consent, consideration etc.

What is contract of indemnity?

The Contract Act defines it as –„A contract by

which one party promises to save the other from
loss caused to him by the conduct of the promisor
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himself or by the conduct of any other person, is

called a contract of indemnity.‟ The person who
indemnifies or promises to make good the loss is
called the „Indemnifier‟ and the person who has
been so promised is called the „Indemnified‟ or
„Indemnity holder.‟

Where A contracts to indemnify B against the

consequences of any prosecution which C may file
against B in respect of a particular disputed matter,
there is a contract of indemnity. If the Court orders
B to pay any sum to C, A shall be required to pay
that amount to B under this contract of indemnity.
(A is the Indemnifier and B is the indemnity
holder.)
In this example we notice that the loss to the
indemnity holder is caused by a third party,
namely C. However, as per the definition, such
loss may be caused by the Indemnifier or any other
person, including the Indemnified.
Therefore, all insurance contracts are contracts of
indemnity.

Contracts of indemnity may be either express or

implied. There is an implied contract of indemnity
between the trustee and beneficiary, principal and
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agent, auctioneer and client etc. The express

contracts are ordinarily entered into by the persons
where one person, doing something at the request
of another or in the usual course of business for
that other, wishes to save himself from any
possible losses which he may incur in so doing.
Thus, where a banker, who is requested by the
widow of the deceased account holder, to release
the balance amount in favour of the widow, he
may ask her to execute an indemnity bond (which
is a contract of indemnity) by which the widow
undertakes to save the banker against any claims
made by other relatives of the deceased.

Rights of Indemnity-holder

Broadly speaking, the right of indemnity holder is

to recover all the expenses and losses incurred by
him (in respect of the subject matter of indemnity)
from the indemnifier.
Thus, in the above example where the banker
releases the amount in favour of the widow of the
deceased account-holder, he is entitled to recover
all damages which he may required to pay in a suit
by a third person.
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Secondly, he is entitled to recover all costs and

expenses reasonably incurred in defending himself
in the suit.
Lastly, he is entitled to recover all amounts which
he may have paid by way of compromise with the
third party, provided such compromise was done
with the consent of the indemnifier i.e. widow in
this case.

When does the liability of indemnifier

commence?
The Contract Act has not stated the time of the
commencement of the indemnifier‟s liability to
indemnify. Is the indemnity holder entitled to
recover the loss from the indemnifier only after
having suffered the loss? Or can the indemnity
holder require the indemnifier to step in without
waiting for the loss to actually occur?
In the above example, is the banker supposed to
approach the indemnifier for repayment of money
after he has paid the amount to a third party as per
the orders of the court or he can require the
indemnifier to step in the moment a suit is filed by
any other claimant? The courts in India have taken
the latter view in this regard. Justice Chagla had
observed – “It is true that under the English Law
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no action could be maintained until actual loss has

been incurred. It was very soon realized that an
indemnity might be worth very little indeed if the
indemnified could not enforce his indemnity till he
had actually paid the loss.” ----- “Indemnity is not
necessarily given by repayment after payment.
Indemnity requires that the party to be indemnified
shall never be called upon to pay.”

Contract of Guarantee

We have seen that in indemnity, one person

promises the other to save him from the loss
caused by the conduct of a third person. When
such promise is given at the request of such third
person, it is contract of guarantee. Thus, when A
promises B that he would repay the loan (given by
B to C) if C does not repay and when such promise
is given by A to B at the request of C, it is a
contract of guarantee.

The Contract Act defines the contract of guarantee

as – „A contract to perform the promise or
discharge the liability of a third person in case of
his default.‟
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Ordinarily, a contract of guarantee is made by a

person to help his friend obtain a loan or buy
goods on credit etc. The person who gives such
promise is called the „ Surety‟, the person in
whose respect the guarantee is given is called the
„Principal debtor‟ and the person to whom the
guarantee is given is called the „Creditor‟. A
contract of guarantee can be oral or written.
For example, B advances a loan to C and A
promises to B that if C does not repay the loan, A
would repay the same. This is a contract of
guarantee where A is the surety, B is the creditor
and C is the principal debtor.
It is worth noting here that the promise of A is
given to B at the request of C. If such promise is
given by A without any request from C, it would
be a contract of indemnity, and not guarantee.

Like contract of indemnity, a contract of guarantee

also must possess all the essential elements of a
contract. Further, it is necessary in a contract of
guarantee that there are three parties, namely, the
surety, the creditor and the principal debtor,
because without principal debtor there cannot be
any guarantee. The liability of the surety is
dependent on the default of the principal debtor. It
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must be noted that for a contract of guarantee there

must be an existing or future liability which is or
will be enforceable by law. Therefore, a guarantee
given for a non-enforceable obligation such as a
time-barred debt is not a valid guarantee.
However, a guarantee given in respect of a minor‟s
debit stands on a different footing. A minor, being
incompetent to contract, cannot incur any
contractual liability and therefore an agreement
with minor which imposes any obligation on the
minor is a void agreement, not enforceable by law.
But when the debt of minor is guaranteed, there is
an independent and direct contract between the
surety and the creditor. In a true sense, it is not a
contract of guarantee. A surety, therefore, can be
held liable for minor‟s debt, though not by virtue
of contract of guarantee but on account of a
separate principal contract between the surety and
the creditor.

Consideration for Guarantee

We have noted above that like any other contract, a

contract of guarantee must also possess all the
essential elements of contract such as free consent,
competence to contract. Similarly, it must have
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some consideration. The consideration for the

creditor and the principal debtor is obvious, but
what is the consideration for the surety? For
example, where A guarantees the repayment loan
given by B to C, consideration for B (the creditor)
may be the interest on loan, for C it is the
obtaining the loan itself. What is the consideration
for A?
The Contract Act answers the question when it
provides that – „anything done, or any promise
made, for the benefit of the principal debtor, may
be a sufficient consideration to the surety for
giving the guarantee.‟
It is the guarantee given by the surety which
induces the creditor to do something for the
principal debtor and therefore the credit given by
the creditor to the principal debtor at the request of
the surety is the consideration for the surety.
Hence, it is important to note here that a guarantee
given for a past debt would be invalid. For
example, A sells and delivers goods to B on credit.
C afterwards, without consideration, agrees to pay
for the goods in default of B. The agreement is
void and such guarantee cannot be enforced
against C.
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Distinction between Indemnity and Guarantee

A contract of Indemnity can be distinguished from

a contract of Guarantee on the following points:

1. In a contract of Indemnity there are two

parties – the Indemnifier and the Indemnity-
holder, whereas in a contract of guarantee
there are three parties – the creditor, the
principal debtor and the surety.
2. In a contract of indemnity there is only one
contract between the indemnifier and the
indemnified, while in a contract of guarantee
there are three contracts – one between the
principal debtor and the creditor, the second
between the surety and the creditor and the
third between the principal debtor and the
surety.
3. In Indemnity, a promisor (indemnifier) is
primarily and independently liable to
promisee. In a contract of guarantee, the
liability of promisor (surety) is secondary or
collateral, i.e. the surety is liable only when
the principal debtor makes default.
4. In the case of a contract of indemnity it is not
necessary for the indemnifier to act at the
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request of the debtor, whereas in the case of

contract of guarantee it is necessary that the
surety should give the guarantee at the request
of the debtor.
5. In a contract of guarantee, where the surety
discharges the debt payable by the principal
debtor to the creditor, the surety, on such
payment, is entitled to proceed against the
principal debtor in his own right, while in a
contract of indemnity, the indemnifier cannot
sue third parties in his own name. He must
bring the suit in the name of the indemnified.
For example, in an insurance against vehicle-
accident, the insurance Company
(Indemnifier), after having paid the Indemnity
holder in the event of accident and damage to
the insured vehicle, cannot proceed against the
third party for recovery of compensation. If it
desires to do so, it has to prosecute through the
indemnified.
6. In the case of guarantee, there is an existing
debt or liability, originally with the principal
debtor and which may or may not be shifted to
the surety. In Indemnity, there is no existing
obligation. It is merely a contingency.
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Nature of Surety‟s liability

The surety is liable only on default of the principal

debtor. So, unless the principal debtor has made a
default, the surety cannot be called upon to pay.
The moment the principal debtor makes a default
in discharging his obligation, the surely becomes
liable immediately, as if he were the principal
debtor. The surety has no right to ask the creditor
to proceed against the principal debtor first. It is
not after exhausting all the remedies against the
principal debtor that the creditor can proceed
against the surety, he can do so even without
proceeding against the principal debtor. The surety
cannot even demand a notice from the creditor
about the default of the principal debtor, because it
is primarily the duty of the surety to ensure that
principal debtor discharges his obligation.

The Contract Act provides that the liability of the

surety is co-extensive with that of the principal
debtor. In other words, the extent of the liability of
surety is the same as that of the principal debtor. It
can be neither more nor less, unless there is a
contract to the contrary. It means that by a special
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term in the contract the liability can be made less,

but never more.
For example, A pays a loan of Rs. 5000 to B and C
guarantees the repayment to the extent of Rs.
1000/-. On default by B, C is liable only for Rs.
1000/-.

An important point must always be borne in mind

that the contract between the surety and the
creditor is an independent contract, though the
liability of the surety arises only on default of the
principal debtor. If the debt becomes time-barred
against the principal debtor, the surety may still be
liable if his liability is still alive. For example, A
advances a loan to B and C guarantees the
repayment of the same. B makes a default in
repayment but A does not take any action against
B, as a result of which the debt has become time-
barred. In the meanwhile, in response to claim-
notice sent by A, C makes a part-payment of the
loan, thus keeping his liability alive and within the
period of limitation. Now though the debt against
B has become time-barred and B is no longer
obliged to pay anything to A, C is still liable to
repay the loan to A in entirety. Of course, C can
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afterwards recover from B the amount so paid to

A.

Continuing Guarantee

A guarantee given for a specific transaction or a

particular debt is called an „ordinary guarantee‟ or
„specific guarantee.‟ When it is given for a series
of distinct and separable transactions, it is called
„continuing guarantee.‟ Where A takes a loan from
B and C guarantees the repayment, it is a specific
guarantee. It comes to end when the debt is repaid.
On the other hand, when A agrees to supply goods
to B on credit whenever required and B agrees to
pay and settle his account on monthly basis, it is a
series of transactions. If C guarantees the payment
for the goods so purchased on credit, it is a
continuing guarantee.

Revocation of continuing guarantee

A specific guarantee can never be revoked.

However, a continuing can be revoked at any time
but only with respect to future transactions. Such
revocation takes place under the following
circumstances:
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1. By notice of revocation by surety

A continuing guarantee may, at any time, be
revoked by the surety, as to future transactions, by
notice to the creditor. The surety continues to be
responsible for the transactions that have taken
place prior to such notice.

2. By the death of the surety

The death of the surety operates, in the absence of
any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future
transactions. It is not necessary that the creditor
must have any notice of the death of the surety.
The property of surety is not liable if the creditor
allows advances to principal debtor in ignorance of
the death of surety.

3. Discharge of surety
As in the case of specific guarantee, in continuing
guarantee also the surety is discharged from his
liability under certain circumstances such as
variance of terms of contract, loss of security etc.
(these circumstance s are discussed under the
heading „discharge of surety‟)
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Rights of surety against the creditor

1. The surety has a right, at the time of payment of

debt, to claim from the creditor all the securities in
creditor‟s possession which he may have obtained
from the principal debtor in respect of the same
debt. These securities may have been obtained by
the creditor either at the time of contract or
subsequently, but they must be in respect of the
same debt. For example, if the debtor has
mortgaged any property with the creditor as a
security for repayment of loan and when the surety
makes the payment on default of the debtor, the
surety has a right to get the mortgage transferred in
his name. If the creditor has released any of the
securities without the consent and approval of the
surety, the surety is discharged to the extent of the
value of the securities so released.
For example, C advances to B, his tenant, Rs.
2000/- on the guarantee of A. C has also a further
security for the 2000/- rupees by a mortgage of B‟s
furniture. C cancels the mortgage, B becomes
insolvent, and C sues A on his guarantee. A is
discharged from liability to the amount of the
value of the furniture.
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2. The surety is also entitled to the benefit of any

set-off or counter claim, which the principal
debtor might possess against the creditor in respect
of the same transaction. Thus, where a creditor
owes any amount to the debtor in respect of the
same transaction, the surety is entitled to deduct
that amount and only pay the balance.

Rights of Surety against the Principal Debtor

1. Where a surety has paid the guaranteed debt on

its becoming due, or has performed the guaranteed
duty, on the default of the principal debtor, he is
invested with all the rights which the creditor had
against the principal debtor. In other words, the
surety steps into the shoes of the creditor and will
be able to exercise as against the principal debtor
all those rights and remedies which could be
exercised by the creditor. The surety is
subrogated to all rights which the creditor had
against the principal debtor.

2. The surety has a right to claim indemnity from

the principal debtor. In every contract of
guarantee there is an implied promise by the
principal[al debtor to indemnify the surety; and the
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surety is entitled to recover from the principal

debtor whatever he has rightfully under the
contract of guarantee. However, if the surety has
paid any sum „wrongfully‟ to the creditor, the
principal debtor is not liable to indemnify.
Another point worth noting here is that the surety
has a right to recover only that amount from
principal debtor which he has actually paid to the
creditor. Thus, if the surety pays any amount lesser
than stipulated under the guarantee by way of
compromise with the creditor, he can claim only
that amount which he has actually paid.

Rights of Surety against the co-sureties

Sometimes it may happen that one and the same

debt has been guaranteed by two or more sureties,
either jointly or severally. They are called co-
sureties and are liable to contribute towards the
payment of the guaranteed debt as per agreement
among them. In the absence of any such
agreement, if one of the co-sureties has paid the
entire debt, he has a right to contribution from the
other co-sureties.
All the sureties are entitled to share in the benefit
of any security or indemnity which any one of
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them has obtained from the principal debtor,

whether they knew of it or not.
Both the rights mentioned above are subject to the
condition that all the co-sureties have guaranteed
one and same debt.

Discharge of Surety

A surety is discharged from his liability under the

contract of guarantee under any one of the
following circumstances.

1. Notice of revocation.
We have already seen that a specific guarantee or a
guarantee for a single transaction cannot be
revoked at all. However, a continuing guarantee
may be revoked at any time by the surety by giving
notice to the creditor. Such revocation operates in
respect of future transactions. Of course, even after
revocation, the surety continues to be liable for the
transactions prior to the notice of revocation.

2. Death of Surety
The death of surety discharges him from his
liability, in case of a continuing guarantee, as
regards the future transactions. The property of the
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deceased surety is not liable for future transactions,

even if the creditor had no notice of the death of
the surety. It must be remembered that in the case
of a specific guarantee, or a guarantee for a single
transaction, surety is not discharged even after his
death, and his estate shall be liable, if the principal
debtor commits default in repayment of the debt.

3. Variance in terms of contract

Any variance, made without the surety‟s consent in
the terms of the contract between the principal
debtor and the creditor, discharges the surety as to
transactions subsequent to the variance. If the
terms of the contract of guarantee are altered
without the consent of the surety, the surety has a
right to say that the so altered contract is not the
one for which he agreed to be surety and therefore
he becomes free from all the obligations.
Let us take an example to understand this often
experienced situation. A advances an amount to B,
repayable in monthly installments, for which C is
the surety. On request of B but without the consent
of C, A allows B not to pay installments for a
consecutive period of six months. This is an
alteration made in the contract which has the effect
of discharging the surety from his liability. It is
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immaterial whether the alteration is innocent or

harmless or even purportedly beneficial for the
surety. If the contract for which the surety is liable
is no longer the same, his liability also cannot be
the same.

Let us take another example. A is appointed as

Recovery officer for a specified local area on a
fixed salary in a credit cooperative society and B is
the surety for the conduct of A. Later, and without
the knowledge or consent of B, A‟s area of
operation is increased and he is offered a
commission on the recovery amount instead of
salary. A commits fraud and the society suffers a
loss. B cannot be held liable because the variance
is made without his consent. The defence of the
society that change of duties and remuneration of
A has nothing to do with his fraudulent behaviour,
and that he could have committed fraud even
otherwise, is no good defence.

To avoid the surety being discharged on account of

such alterations in the contract, many creditors
unscrupulously incorporate a clause in the contract
of guarantee to the effect that the surety shall be
deemed to have always given his consent to all
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future variances, if any, made by the creditor.

Courts have taken a strict stand in such matters,
holding that such blanket consent obtained at the
time of entering into the contract itself is no valid
consent. Consent, to be genuine, must be obtained
at the relevant time, and not in advance.

4. 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. Any release of the
principal debtor is a release of the surety also.
Similarly, the surety is also discharged by any act
or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor.
For example, A gives a guarantee to C for goods to
be supplied by C to B. C supplies goods to B and
afterwards B becomes embarrassed and contracts
with his creditors (including C) to assign to them
his property in consideration of their releasing him
from their demands. Here B is released from his
debt by the contract with C, and A is discharged
from his suretyship.

5. Arrangement by the creditor with principal

debtor without surety‟s consent.
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Where the creditor, without the consent of the

surety makes an arrangement with the principal
debtor for composition, or promises to give him
time or not to sue him, the surety will be
discharged.
However, where there are co-sureties, a release by
the creditor of one of them does not discharge the
others; neither does it free the surety so released
from his responsibility to the other sureties.

6. Creditor‟s act or omission impairing surety‟s

eventual remedy
If the creditor does any act which is against the
rights of the surety, or omits to do any act which
his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the
principal debtor is thereby impaired, the surety is
discharged.
For example, B, a ship builder, contracts to build a
ship for C for a given sum, to be paid by
instalments as the work reaches certain stages, (the
last instalment not to be paid before the completion
of the ship). A becomes surety to C for B‟s due
performance of the contract. C, without the
knowledge of A pays the last instalment to B. A is
discharged by this payment.
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Similarly, A puts M as apprentice with B, and

gives a guarantee to B for M‟s loyalty and
faithfulness. B promises on his part that he will, at
least once month, see Minimum make up the cash.
B omits to see this done as promised and M
embezzles, i.e. misappropriates cash. A is not
liable to B on his guarantee.

7. Loss of security
If the creditor loses or, without the consent of the
surety, parts with the security given to him, at the
time of the contract of guarantee, the surety is
discharged from his liability to the extent of the
value of security. However, if the security is lost
due to act of God or under the circumstances
beyond the control of the creditor, the surety is not
discharged. Thus, if the creditor inadvertently
allows the principal debtor to sell the property
which was mortgaged as security for repayment of
loan, the surety is discharged to the extent of value
of the property. However, if the mortgaged
property is destroyed in fire, the surety is not
discharged.

8. Invalidation of the contract of guarantee

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If the contract between the creditor and the surety

is invalid for any reason, then the surety is
discharged from the responsibility. A contract of
guarantee may become invalid for the reasons such
as misrepresentation or fraud, or when any of the
essential elements of contracts is absent. Similarly,
if a surety has given the guarantee only on the
condition that some other person would join as co-
surety, and when such other person does not join
in, the guarantee is invalid. In a way, it is incorrect
to say that the surety is discharged from liability,
because in such cases his liability never comes into
effect.

Chapter 11

Bailment and Pledge

What is Bailment?

A Contract of Bailment is the next class special

contracts which we are going to discuss now. The
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word „bailment‟ is derived from the French word

„bailer‟ which means „to deliver‟, but in law it is
used to mean voluntary change of possession from
one person to another.

The Contract Act defines bailment as, - „Delivery

of goods by one person to another for some
purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise
disposed of according to the directions of the
person delivering them.‟
The person delivering the goods is called the
„bailor‟. The person to whom they are delivered is
called the „bailee‟. The transaction between them
is called the bailment.
The explanation appended to the definition further
states that a person already in possession of the
goods of another contracts t hold them as a bailee,
he thereby becomes the bailee, and the owner
becomes the bailor of such goods, although they
may not have been delivered by way of bailment.

Some examples of bailment

Before we proceed to discuss the features of

contract of bailment and the law governing such
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contracts, let us understand the nature of bailment

with the help of some examples. We shall thus be
in a better position to understand the relevant legal
provisions.

 A‟s scooter has some mechanical problem. He

takes it to B, a mechanic and leaves it with
him for repairs. B has to return the scooter to
A after repairs and A has to pay the services.
This is bailment. A is the bailor and B is the
bailee.

 A has a golden chip. He delivers it to a

goldsmith for the purpose of making an
ornament of it. The goldsmith has to hand over
the ornament to A after being paid the agreed
charges. This is bailment.

 A hires a locker in a bank to keep some

ancient coins which he has collected. A has to
pay the hire-charges and the bank has to safely
return the coins to him whenever demanded.
This is bailment.

What is not bailment?

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 A hands over certain metal articles to his

servant for polishing. The servant is directed
to keep them in a cupboard after polishing.
The servant is paid a fixed amount of monthly
wages. This is not bailment, because the
element of „transfer of possession‟ is absent.
When one hands over any goods to his servant,
they continue to be in his possession only. It is
just like taking out money from one pocket
and keeping it in the other. You do not call it a
payment.

 A deposits some amount in a bank which, or

any part of which, can be withdrawn at any
time as per the convenience of A. This is not
bailment because the bank is under no
obligation to return the same currency notes
and/or coins to the depositor.

Essential features of Bailment

The analysis of the definition of bailment reveals

the following features of bailment:
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1. It is a delivery of movable goods by one

person to another. Bailment can be only with
respect to movable goods and not immovable
property such land and building. Further, there
has to be a delivery of such movable goods by
one person to another. Delivery of goods by
a person to his servant is not a bailment.
Delivery can be either actual (handing over
physical possession) or notional, or
constructive. Notional or constructive delivery
is where actual physical possession is not, but
something is done which has the effect of
handing over of the goods. For example,
transfer of title deeds and documents such as
lorry-receipts or railway-receipt, or bill of
lading etc. where the transferee, by virtue of
possession of these documents is entitled to
get possession of the goods.

2. The goods are delivered for some purpose.

There must be some purpose for the transfer of
possession of goods. If there is no purpose, or
if the goods are delivered by mistake, there is
obviously no bailment.
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3. It is only the possession of the goods that is

transferred, not the ownership. In bailment
what is transferred is the possession of goods,
from one person to another. It is not the
ownership that is transferred. The bailee, i.e.
the transferee does not become the owner of
the goods.

4. Goods are to be returned or disposed of. The

goods are delivered by the bailor to the bailee
subject to the condition that when the purpose
is fulfilled, the goods shall be returned to the
bailor or disposed of according to the
directions of the bailor.

Kinds of Bailment

Bailments can be classified into three main

categories:

1. For the exclusive benefit of the bailor – e.g.

the goods are kept in the safe custody of the
bailee without any compensation to be paid.
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2. For the exclusive benefit of the bailee – e.g. a

loan of some article for temporary use, such as
lending a pen for writing etc.

3. For the mutual benefit of the bailor and the

bailee – This is the most comm0n type of
bailment, e.g. hiring the goods or giving the
goods for repairs etc. where the bailor receives
the services and the bailee receives the
charges.

Bailments can also be classified as –

1. Gratuitous bailment – where no remuneration

is payable either to the bailee or to the bailor,
e.g. where one lends a book to his friend.

2. Non-gratuitous bailment – where either the

bailor or the bailee is entitled to remuneration,
e.g. a car given on hire or a scooter given for
repairs.

Difference between Bailment and Sale

Sale of goods is a contract where the ownership of

goods is transferred from seller to buyer.
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Obviously, the buyer is under no obligation to

return the goods. In the case of bailment, it is only
the possession of goods that is transferred from
one person (bailor) to another (bailee), and the
bailee is bound to return the goods.
In the case of sale of goods, the consideration in
terms of payment of price always moves from
buyer (transferee) to seller (transferor), while in
the case of bailment, the consideration in terms of
payment of charges may move from bailor
(transferor) to bailee (transferee).

Difference between Bailment and Licence

Under a contract of licence one party is permitted

to place his goods in the premises belonging to the
other party. There is no delivery of goods.
Normally, the person granting licence to another to
use his premises for keeping goods is not
responsible for the safety of goods, unless
otherwise agreed. The bailee is always responsible
for safety of goods in his possession.

Duties of Bailee
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The bailee, i.e. the person to whom the goods are

delivered, has the following duties:

1. Duty to take reasonable care of goods

delivered to him. The Contract Act provides
that –„In all cases of bailment the bailee is
bound to take as much care of the goods bailed
to him as a man or ordinary prudence would,
under similar circumstances, take of his own
goods of the same bulk, quality and value as
the goods bailed‟. In other words, the bailee
has to take reasonable care of the goods as if
the goods were his own goods. However, if the
goods are damaged or destroyed when they are
in possession of the bailee in spite due care
taken by him, i.e. due to reasons beyond the
control of the bailee, he is not responsible for
the loss, unless there is a special contract to
the contrary between the parties.

2. Duty not to make unauthorised use of goods

entrusted to him. The bailee is under a duty
not to use the goods in manner inconsistent
with the terms of the bailment. If he does so,
the bailor can terminate the bailment; and if
any loss results from the use of the goods for a
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purpose other than the one agreed upon or in a

manner inconsistent with the agreement, the
bailee becomes responsible for such a loss. For
example, if a scooter is given to a mechanic
for repairs, he cannot ride the scooter for his
personal work.

3. Duty not to mix goods bailed with his own

goods. It is the duty of the bailee to keep the
goods of the bailor separate from his own. If
such intermixture of goods is done without the
consent of bailor and the goods so mixed are
separable or divisible (such as articles of
furniture), the parties remain the owners of
their respective shares, but the cost of
separation or any damage as a result of
mixture shall be borne by the bailee.

4. Duty to return the goods. It is the duty of the

bailee to return the goods without demand on
the expiry of the time fixed or when the
purpose is accomplished. If he does not return
or deliver as directed by the bailor, he
becomes liable for any loss, destruction or
deterioration of the goods even without any
negligence during the period it is detained.
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As regards the return of goods bailed by two

or more joint owners, the bailee may return the
goods to any one of them without the consent
of other bailors, unless there is a contract that
delivery must be given to all. Further, in the
absence of any contract to the contrary, the
bailee must return the profits which may have
accrued from the goods. This usually happens
in the case of animals. For example, where a
cow is left in the custody of bailee for taking
its care and the cow gets a calf, the bailee is
bound to return the cow as well as the calf to
the bailor.

Duties of Bailor

A bailor is a person who delivers the goods. His

duties are as follows:

1. Duty to disclose faults in the goods bailed.

The first and foremost duty of the bailor is to
disclose the faults in the goods bailed in so far
as they are known to him. If he fails to do so
and the defect causes any damage to the
bailee, the bailor is liable to pay compensation
for the same. For example, A lends a horse,
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which he knows to be vicious, to B, without

disclosing this fact. B rides the horse and is
thrown off, and is injured. A is responsible to
pay damages to B for the injury sustained.
There is a still responsibility placed on the
bailor in the case of non-gratuitous bailment or
bailment for hire (i.e. where the bailor is to
receive some charges from the bailee). The
bailor is responsible for any damage to bailee
due to defects in the goods, even if he is not
aware of the defects. In the above example,
even if the vicious nature of horse is not
known to A, and if B is injured while riding
the horse because it is vicious, A is liable to
pay damages to B. Unlike gratuitous bailor,
ignorance of the defects is no defence for him.

2. Duty to repay extraordinary expenses. The

bailee is responsible for the ordinary and
reasonable expenses of the bailment in the
case of gratuitous bailment. Thus, if a car is
lent by a person to his friend for journey, the
usual maintenance expenses will be borne by
the friend. However, if there are any
extraordinary expenses, the same shall be
borne by the bailor.
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In the case of bailment where the goods are to

be kept or carried or to have work done upon
them by the bailee for the bailor, and the
bailee is to receive no remuneration, it is the
duty of the bailor to repay all the expenses
(including ordinary expenses) incurred by the
bailee for the purpose of bailment.
Thus, where a horse is bailed for safe custody
and the bailee is to receive Rs. 100/- per day as
custody charges, the bailor is not liable to
repay the bailee the ordinary expenses of
feeding the horse. But if during the bailee‟s
custody the horse falls ill without any
negligence on his part, the bailor must repay
the bailee the medical expenses incurred in
connection with the treatment of the horse, as
they are extraordinary expenses.

3. Duty to indemnify bailee. The bailor is bound

to indemnify the bailee for any cost or loss
which the bailee may incur because of the
defective title of the bailor to the goods bailed.
For example, A and B are neighbors. A lends
the horse of B, without his consent, to his
friend C for use. B sues C and C is ordered to
pay compensation to B. A is bound to
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indemnify C for his losses.

4. Duty to receive goods back when offered.

When the purpose of bailment is accomplished
or when its period has expired and when the
bailee returns the goods at the proper time, it is
the duty of the bailor to receive the goods
back. If he fails to do so, he is liable for all the
expenses which are necessary and incidental to
the safe custody of goods.

Rights of bailee

We have discussed above the duties of bailor

which are nothing but his obligations towards the
bailee. As such, the duties of the bailor are the
rights of the bailee. For example, the bailor has a
duty to disclose the defects in the goods to the
bailee, and if he fails to do thereby causing any
injury to the bailee he has to pay compensation to
the bailee. The corresponding right of the bailee is
to recover compensation from the bailor if he
suffers any damage due to undisclosed defects in
the goods bailed to him. Similarly, the other rights
are – right to claim indemnity, right to claim
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reimbursement of expenses etc. In addition to these

rights, the bailee‟s right of lien is discussed below.

Bailee‟s lien

Right of lien is a right to retain possession of

goods belonging to another until certain claim is
settled or charges are paid with respect to the
goods. When a piece of cloth is given to a tailor for
stitching a shirt, the tailor has a right to retain the
possession of the shirt until the stitching charges
are paid. The right of lien (i.e. right to retain
possession of goods) obviously depends on the
possession of goods and therefore this right is lost
the moment the possession of goods is lost. As
such it is also called the right of „possessory lien.‟
Lien may of two types – „particular lien‟ and
„general lien.‟

Bailee‟s particular lien

The Contract Act provides that – „where the bailee

has, in accordance with the purpose of the
bailment, rendered any service involving the
exercise of labour or skill in respect of the goods
bailed, he has, in the absence of a contract to the
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contrary, a right retain such goods until he receives

due remuneration for the services he has rendered
in respect of them.‟
A particular lien is one which is available only
against that property in respect of which the skill
and labour are used, and is subject to the following
conditions:
1. The bailee must have rendered some service in
relation to the thing bailed and must be
entitled to some remuneration for the same,
which is not paid;
2. The service rendered by the bailee must be one
involving the exercise of labour or skill in
respect of the goods bailed, so as to confer an
additional value on the article. So a person
who takes an animal for feeding has no lien,
but a veterinary surgeon has.
3. The services must have been rendered in full
and in accordance with the instructions of the
bailor. A gives a piece of cloth to a tailor for
stitching a suit of it within a week. If B takes a
fortnight to complete the suit, he has no lien.
Bailee‟s general lien

A general lien is a right to detain any property

belonging to the other in respect of any payment
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lawfully due to the person exercising lien. It is the

right to retain the property of another for a general
balance of accounts.
 A Banker has a general lien on cash, cheques,
bills of exchange etc. of a customer for any
money due to him as a banker. (but if some
valuables are kept in the bank‟s locker for safe
custody, the banker has no lien over them).
 A Factor is an agent entrusted with the
possession of goods for the purpose of sale.
He can exercise his general lien in respect of
such goods belonging to the principal until his
dues such as commission etc. are paid by the
principal.
 A wharfinger has a general lien on the goods
as regards charges due for the use of wharf
against the owner of the goods. Wharf is a
level quayside area (metal or stone platform
alongside sea water) to which a ship may be
moored to load and unload and wharfinger is
the owner of such area.

So far as the advocates and solicitors are

concerned, it should be noted that they do not
have any lien over the papers and documents
belonging to client until the fees and other charges
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are paid. It has been held in number of cases that it

is professional misconduct on the part of advocate
to refuse to give the documents back to the client
on the ground that his fees are unpaid. The
Supreme Court has held in the case of RD Saxena
vs. Balram Prasad Sharma (AIR – 2000 – Supreme
Court – 2912) that an advocate holding the papers
and documents of his client is not a bailment. The
term „goods‟ used in the Contract Act does not
include such papers and documents because goods
means the salable goods. There is no scope of
converting the case file of the client into money
nor can they sold to any third party.

Rights of Bailor

We have seen earlier that the duties of bailor are

mostly the rights of bailee. Similarly, the rights of
a bailor correspond to the duties of the bailee.
These rights of a bailor based on the duties of a
bailee are briefly stated as follows:

1. Right to claim damages for loss caused to the

goods by negligence of the bailee;
2. Right to claim compensation for any damage
due to unauthorised use of goods bailed;
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3. Right to claim compensation for any loss by

unauthorised intermixture of bailed goods with
that of bailee‟s.
4. Right to demand the return of goods when
bailment period has expired or the purpose of
bailment is accomplished;
5. Right to claim any increase or profits that may
have accrued to the goods bailed.

The bailor has also the right to terminate the

bailment at any time if, with respect to the goods
bailed, the bailee does any act which is
inconsistent with the terms of bailment
In the case of gratuitous bailment, i.e. where the
goods are lent without any remuneration, the bailor
can demand the return of the goods even before the
term of bailment has not expired or the purpose is
not accomplished. He can do so even when the
bailee has well discharged his obligations. Such
bailment is at the pleasure of the bailor. However,
if, such premature termination of bailment causes
any loss to the bailee which is in excess of the
benefits actually enjoyed by him from the use of
the goods, the bailor must indemnify the bailee for
such loss.
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Rights of Bailor and Bailee against Third

parties

Bailee is a person who is entitled to possession of

goods during the period of bailment, and as such
the law empowers him with such remedies which
the owner has with respect to the goods bailed.
Thus, if a third person wrongfully deprives the
bailee of the use or possession of the goods bailed,
or causes any injury to the goods, the bailee can
prosecute him for compensation. The bailor, too,
can sue such third party. However, once a suit is
filed by one of them, the other cannot file any suit
on the same grounds, because there cannot be
double prosecution for similar cause of action. The
compensation so recovered is to be distributed
among the bailor and the bailee according to their
respective interests.
For example, a car is lent by a travel-agency to its
customer, which is forcefully used by a third party.
Either the agency or the customer can sue the third
party for compensation, but not both. If the agency
files the suit and recovers compensation from the
wrong-doer, it must hand over the amount to
customer after deducting the rent of the car.
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Termination of bailment

A contract of bailment stands terminated under the

following circumstances:

1. When the period for which goods were bailed

expires, the bailment is terminated.
2. When the purpose for which the goods were
bailed is accomplished, the bailment is
terminated.
3. If the bailee does any act with regard to the
goods bailed which is inconsistent with the
condition of bailment e.g. wrongfully uses
them, the bailment may be terminated by the
bailor even though the stipulated period has
not expired or the specified purpose has not
been accomplished.
4. A gratuitous bailment can be terminated at any
time by the bailor even before the stipulated
period is over or the purpose is achieved,
provided if such termination causes any loss to
the bailee in excess of the benefits, the bailor
has to compensate for the same.
5. A gratuitous bailment can stands terminated
on the death of either the bailor or the bailee.
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Finder of Goods

We have seen earlier in our discussion on „quasi

contracts‟ i.e. certain relations resembling those
created under a contract, that a finder of goods
belonging to another has a contractual obligation
towards the owner of the goods. This contractual
obligation in based on the principle that nobody
should be allowed to enrich himself wrongfully at
the expense of the other. The Contract Act
provides that a finder of goods belonging to
another and takes them in his custody, is subject to
the same responsibility as a bailee.

In other words, if a person finds the goods

belonging to another, he has no obligation to take
them in custody. However, if he takes charge of
the goods, he does not become the owner of the
goods, but he becomes responsible for the goods
just like a bailee in a gratuitous bailment.

Duties of finder of goods

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Every finder of goods has the same duties which

are imposed on a bailee under gratuitous bailment.
The other duties are:

1. Duty to find the true owner. The finder of

goods must make reasonable efforts to find the
true owner of the goods. What is a reasonable
effort depends on the facts of each case, i.e.
value of the goods found. Mere shouting for
the owner at the place where the goods are
found may be a sufficient search in case goods
of little value, whereas an advertisement in a
local newspaper may be necessary in case of
valuable goods.

2. Duty to take reasonable care of goods. A

finder of goods must take such care of the
goods as a person of average prudence would
take of his own goods under similar
circumstances.

Rights of finder of goods

The rights of a finder of goods are as follows:

 226

1. Right to retain possession of the goods until

the true owner is found. The ownership of
the goods found in public place vests in the
finder who takes charge of them as against the
whole world, except the true owner. Thus, a
person who finds a ring on a road and takes
custody of the same, can keep the same with
him as if it is his own.

2. Right of lien on the goods for expenses. The

finder of goods has a right to retain the goods
with him against the true owner until he
receives reasonable compensation for the
trouble and expenses incurred in preserving
the goods or finding the true owner.

3. Right to receive reward. If any reward has

been offered by the true owner for the return
of the goods lost, the finder can retain the
goods with him till the reward is paid to him.
However, it is necessary that he should have
known about the reward before he was set to
return the goods.

4. Right of sale. When a thing which is

commonly the subject of sale is lost, if the
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owner cannot with reasonable diligence be

found, or if he refuses, upon demand, to pay
the lawful charges of the finder, the finder may
sell it –
 When the thing is in danger of perishing
or of losing the greater part of its value; or
 When the lawful charges of the finder, in
respect of the thing found, amount to two-
thirds of its value.

Pledge or Pawn

Pledge or pawn is a contract by which an article is

deposited with a lender or promisee as security for
the repayment of a loan or performance of
promise. The Contract Act defines pledge as – „the
bailment of goods as security for payment of a
debt or performance of a promise is called pledge.‟
The bailor is called the „pawnor‟ and the bailee is
called the „pawnee‟.
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For example, A borrows Rs. 1000/- from B and

keeps his golden ring as security for repayment of
this borrowed amount. The bailment of ring is
called a pledge.
Thus, the possession of goods is given to the
Pawnee as a security for payment of debt. Pledge
is a special kind of bailment with a different
design. Like bailment, only movable goods can be
pledged. Movable goods include articles,
valuables, railway receipts, saving bank pass book
etc.

Difference between Bailment and Pledge

Pledge is a special kind of bailment and therefore

there are many similarities between the two. For
example, in the both the cases the ownership of
goods does not pass from one person to another.
Both relate only to movable goods. However, the
following points of difference must be noted:

1. In pledge, the possession of goods is

transferred to provide security for repayment
of loan or performance of a promise. A
bailment is for a purpose other than these, i.e.
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for safe custody, repairs, temporary use etc.

2. The pledgee (i.e.pawnee) has a right to sell the

goods pledged after giving notice to the
pledgor (i.e. pawnor), if the pledgor makes a
default in repayment of money. No such right
of is available to the bailee. He can retain the
goods (lien) and sue the bailor for recovery of
dues.

3. The pledgee cannot make any use of the goods

pledged with him. Use of goods by the
pledgee can never be the intention of parties in
pledge. However, such intention can be there
in the case of bailment.

Rights of Pawnee

1. Right to retain the goods. No property or

ownership in the goods passes to the pawnee
when the goods are given in his possession,
yet he gets a „special property‟ to retain the
goods until the payment of the debt, interest
on the debt and any other expenses incurred in
respect of the possession or for the
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preservation of goods are paid to him.

2. Subsequent advances. Goods are pledged as

a security at the time and in support of promise
of performance or promise of payment of
some debt. The pawnee may make certain
subsequent advances to the pledgor without
any further security or pledge. Unless
otherwise agreed between the pawnor and the
pawnee, the security by way of pledge of
goods shall also extend to the subsequent
advances made by the pawnor. For example, a
pawnee lends Rs. 1000/- to the pawnor and
pawnor pledges his golden ring worth Rs.
5000/- as security for repayment.
Subsequently, the pawnee lends another Rs.
1000/- to the same pawnor without any article
being pledged. The pledge of ring shall be
deemed to be security for both the advances,
unless there is any contract to the contrary.

3. Right to extraordinary expenses. The

pawnee is entitled to receive from the pawnor
extraordinary expenses incurred by him for the
preservation of the goods pledged. (He can sue
the pawnor for recovery of such expenses, but
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cannot retain the goods if these expenses are

not paid by the pawnor.)

4. Right to sell the goods in default by pawnor.

If the pawnor makes a default in payment of
debt or performance of promise, the pawnee
may –
a. Sue the pawnor for recovery of amount
due to him while retaining the goods
pledged as collateral security; or
b. Sell the goods pledged after giving the
pawnor a reasonable notice of the sale.

If the proceeds of the sale are not sufficient to

satisfy the debt, the pawnee may file a suit
against the pawnor for the recovery of balance.
If there is surplus, he must pay it to the
pawnor.

Duties of Pawnee

We have said that pledge is a special kind of

bailment. Therefore, the duties of pawnee are very
much similar to those of a bailee. They are briefly
stated as follows:
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1. To take as reasonable care of the goods

pledged as he would take of his own goods
under similar circumstances;
2. Not to make any use of the goods pledged;
3. Not to mix the goods pledged with his own
goods;
4. Not to sell the goods on default without giving
reasonable notice to the pawnee;
5. To return the goods pledged on receiving his
dues in full;
6. To deliver any accretion or increased in the
goods to the pawnor.

Rights of pawnor

The duties of the pawnee are the rights of the

pawnor. Thus, a pawnor can enforce all the duties
of pawnee by filing a suit against him, as of right.

Besides these rights, which correspond to the

duties of the pawnee, the right of defaulting
pawnor needs a little explanation. The Contract
Act provides that – „if a time is stipulated for the
payment of the debt, or performance of the
promise, for which the pledge is made, and the
 233

pawnor makes default in payment of the debt or

performance of the promise at the stipulated time,
he may redeem the goods pledged at any
subsequent time before the actual sale of them; but
he must, in that case, pay in addition, any expenses
which have arisen from his default.‟

Duties of Pawnor
The important duties of a pawnor are as follows:

1. To compensate the pawnee for any

extraordinary expenses incurred by him;
2. To discharge his obligation as per the terms of
the pledge.

Pledge by non-owners

So far we have discussed the provisions relating to

pledge where the assumption was that goods can
be pledged only by the owner of the goods. In
other words, a pledgor or a pawnor has to be the
owner of the goods pledged. However, under
circumstances the law also allows pledge by a
person who is not the owner but is in possession of
the goods. Let us now examine these
circumstances as follows.
 234

1. Mercantile agents. A mercantile agent is

defined under the Sale of Goods Act to mean –
„an agent having, in the customary course of
business as such agent, authority either to sell
goods, or to consign goods for the purpose of a
sale, or to buy goods, or to raise money on the
security of goods.‟ Therefore, a mercantile
agent is a person not only having mere
possession of goods belonging to another, but
is authorized to raise money on the security of
goods. A servant who has been entrusted with
the goods does not have the authority to
pledge the goods though he may be in
possession of the goods with the consent of the
owner. A mercantile agent, as such, may, in
the ordinary course of business, pledge the
goods and such a pledge will bind the owner.
Even in the cases where such agent does not
have any authority, pledges the goods, it will
be a valid pledge provided the pawnee does
not have any notice that the pawnor had no
such authority and if he acts in good faith.

2. Seller in possession of goods after sale. Sale

a contract where the ownership of the goods
 235

passes from seller to buyer. Thus, after the sale

is complete, the seller is no longer the owner
of the goods, but yet he may be in possession
of the goods. In such case, he cannot pledge
the goods because he is no longer the owner of
the goods. But a pledge created by him will be
valid provided the pawnee acted in good faith
and had no notice of the sale of goods to the
buyer.

Similarly, in an Agreement to Sell, where the

ownership of goods is yet to pass from seller
to buyer (it passes when the agreement to sell
becomes sale), and the buyer who is
possession of goods, pledges them, it will be a
valid pledge. It is necessary, however, that the
pawnee must have acted in good faith and
without any notice of the defective title of the
pledgor.

3. Persons in possession under voidable

contract. We have already seen during our
discussion on kinds of contracts that a
voidable contract is one which can be avoided
at the option of one party but not at the option
of the other. A voidable contract can be
 236

rescinded or cancelled by the party at whose

option the contract is voidable. If a person has
obtained possession of goods under a voidable
contract, he may or may not get title to the
goods depending upon whether the other party
rescinds the contract or affirms it. If the party
in possession of goods under voidable contract
pledges them, the validity of the pledge will
also depend on rescission of affirmation of the
contract by the other party. If the contract is
affirmed by the other party, no defect survives
and the pledge shall be valid. However, if the
contract is rescinded, the pledge shall not be
valid as if it is a pledge of stolen goods by a
thief.

4. Pledgor having limited interest. When the

pawnor is not the owner of the goods, but has
a limited interest in the goods which he pawns,
the pledge is valid only to the extent of such
interest. For example, A finds a watch on road
and gets it repaired by paying Rs. 100 as
repairing charges, and then pledges it for Rs.
500/-. The true owner can recover the watch
only on paying Rs. 100/- to the pledgee. Here,
the interest of pawnor is limited to Rs. 100/-
 237

and the pledge is valid to the extent of Rs. 10/-

only.

5. Co-owner in possession. One of the joint

owners in sole possession of goods can make a
valid pledge with the consent of the others.

Chapter 12

Agency

So far we have discussed the contracts entered into

by the persons themselves. In practice, people
enter into contracts, not necessarily by themselves,
but through someone else. For example, we engage
a broker to buy shares for us, we engage an estate
agent to sell or purchase house for us, and so on.
We engage a person to do these things on our
behalf and his actions are binding on us. This act
of engaging another person to do any act on our
 238

behalf or to represent us to some third party, by

itself, is a contract. It is a contract of agency. The
person appointing is called a Principal and the
person so engaged is called an Agent. We shall, in
this chapter, discuss the law relating to agency.

The Contract Act defines the terms Principal and

Agent as – „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‟.

The contract which creates the relationship of

„principal‟ and „agent‟ is called a contract of
agency. For example, where A appoints B to buy
some material for his factory, A is the principal, B
is the agent and the contract between the two is
agency. If B buys the raw material on credit from
C, then in the eyes of law there is a contractual
relationship between A and C and if there is breach
of contract on the part of either of the parties, the
other can initiate appropriate proceedings against
him.
 239

It shall be thus seen that an agent is merely a link

between his principal and a third party. He brings
his principal and the third party together and
establishes a contract between the two; dropping
himself from out of the transaction. When you
engage a person to sell your flat, he is your agent
who finds a suitable party and enters into contract
on your behalf. He thereafter ceases to be any part
of the transaction and the contract binds you and
the buyer of the flat, as if you have yourself made
the contract.

The Contract Act provides that – „contracts entered

into through an agent, and obligations arising from
acts done by an agent, may be enforced in the
same manner, and will have the same legal
consequences, as if the contracts had been entered
into and the acts done by the principal in person‟.

A buys goods from B, knowing that he is an agent

for their sale, but not knowing who the principal is.
B‟s principal is the person entitled to claim from A
the price of the goods and A cannot, in a suit by
the principal, set off against that claim any debt
due to himself from B.
 240

Essentials of Agency

The essential feature of agency is that one person

has the authority to act on behalf of the other
including entering into contract with third persons
on behalf of that other. A person giving advice to
another cannot be called an agent. Similarly, a
servant merely rendering services to his master is
not an agent. In both the cases, these persons do
not have any authority to enter into contract on
behalf of the person by whom they are engaged.
To understand the nature of agency, let us now see
how it differs from certain other relations.

Agent and Servant

Both agent and servant are the persons engaged by

another to do something for that other person, yet a
servant is not an agent. What distinguishes a
servant from an agent is that a servant does not
have any authority to bind the master through
contracts entered into by him, while the agent has
such authority. If, however, a servant is given such
authority, then to that extent he is an agent of his
master. An agent therefore is not a servant, but a
servant may be the agent of his master, depending
 241

on the nature of his duties and the authority

conferred on him.

Further, a master tells his servant „what to do‟ and

also „how to do it‟. The subtle difference therefore
is that an agent has discretion as to how to do
what he has been told to do, whereas the servant
has to only execute the directions and instructions
of his master. Broadly, the contract between the
principal and agent is a contract for services,
while the contract between a master and his
servant is a contract of services.

A person can be an agent for many persons at the

same time whereas there is limit as to how many
masters a servant can serve.

Agent and contractor

If the touchstone of distinction between „agent‟

and „servant‟ is the discretion available to agent in
performing the required task, what then is the
distinction between an agent and contractor?
Because just like an agent, a contractor also has
discretion to decide „how to do‟ what he has been
asked to do. Hence in the matter of using
 242

discretion, both agent and contractor are similarly

placed.

The difference between the two is that a contractor

cannot bind his employer in relation to other
persons through the contracts entered into by him,
as he does not represent his employer. On the other
hand, an agent represents his principal to the third
parties and can bind him in relation to third
persons through the contracts entered into by him
with the others. A contractor does not negotiate
with third parties on behalf of his employer
whereas the primary purpose of appointment of an
agent is that he should negotiate with third parties
and enter into contracts with them on behalf of his
principal.

Who may be a Principal?

Any person who is competent to contract may

appoint an agent to act on his behalf and to
represent him to third parties. A person who is
minor or lunatic cannot engage an agent and thus
cannot become principal.

Who may be an Agent?

 243

The Contract Act provides that – „as between the

principal and third persons, any person may
become an agent‟. Thus, in order to discharge the
functions of an agent it is not necessary that the
person should be competent to contract. Even a
person who is a minor or who is of unsound mind
can also become agent of another.

This is so because the agent acts on behalf of this

Principal and it is the principal who is liable to
third parties for the acts of agent. It is immaterial
whether the agent contractual capacity or not, as
the act of the agent is the act of the principal, and
the agent does not himself enter into contract. He
only brings about a contract between his principal
and another person. If the principal is willing to
run the risk, he may appoint even a lunatic as his
agent.

The next important question is whether the

agreement between a minor agent and his principal
(who is competent to contract) a contract? Where
an agent is an adult of sound mind, i.e. competent
to contract, the agreement between agent and his
principal is a valid contract and enforceable by
 244

law. As such, for any misconduct on the part of an

agent, the principal can sue him for compensation.
But if the agent is a person incompetent to
contract, then the principal cannot hold him liable
for misconduct or negligence.

An agent need not have capacity to contract. What

he needs is the authority of contract. Capacity is
the status given by law and authority is a status
given by agreement between the two parties. Here,
„capacity to contract‟ must be distinguished from
„authority to contract‟. Capacity means power to
bind oneself, whereas authority means power to
bind another. Capacity is a question of law,
whereas authority is a question of fact.

Consideration in Agency

An agency is a contract between the principal and

the agent, provided both are competent to contract.
Each has a right to recover compensation from the
other for any loss caused due to any misconduct or
negligence. (We have already seen that if an agent
is minor, agency is not a contract).
 245

An agent is normally paid remuneration in the

form of commission which is his consideration and
the service rendered by him to the principal is the
consideration for the principal. What, however, if
no commission is paid or offered? Will it still be a
contract in the absence of consideration?

The Contract Act states that – „No consideration is

necessary to create agency‟. In the chapter on
Consideration we have discussed the exceptions to
the rule –„no consideration – no contract‟, i.e. the
contracts without consideration. One such
exception is contract of agency. Thus, even if the
agent receives no consideration, the agency is a
contract. This is so because the agent is merely a
link between the principal and the third parties and
the contract that is eventually entered into is
between the principal and the third person.

Creation of Agency

An agency may be created in any one of the

following ways:
 246

GRAPH OF CREATI
ON

1. Agency by Express Agreement

The most usual mode of creation of agency is by

express agreement between the agent and the
principal. In a large number of business
transactions, agencies are created by word of
mouth. If such agencies are not recognised,
commerce and industry would hardly progress.
Both agent and principal negotiate the scope of
agency, the authority of the agent, the
consideration, if any, and the agreement is arrived
at. In certain cases, however, the appointment of
 247

agent has to be in writing and also registered with

the competent authority. For example, a power of
attorney holder is an agent of the person delegating
the power and this grant of power of attorney has
to be in writing on a non-judicial stamp paper and
registered as per law. Power of attorney can be
either general or particular. A general power of
attorney authorises the agent to do all the acts on
behalf of the principal. On the other hand, a
particular power of attorney authorises the agent to
do a particular act only.

2. Agency by Implied Agreement

As the name suggests, implied agency is to be

gathered from the conduct of the parties or is to be
inferred from the circumstances of the case. There
is no express agreement between the principal and
the agent. Such agency may in the following
forms:

a. Agency by estoppel;
b. Agency by holding out;
c. Agency by necessity;

Let us discuss them one by one.

 248

a. Agency by estoppel

The rule of estoppel may be briefly stated thus:

Where a person, by his own words or conduct, has
wilfully led another to believe that certain set of
circumstances or facts exist, and that other person
has acted on that belief, he is estopped or
precluded from denying the truth of such
statements, although such a state of thing did not in
fact exist.

Based on this rule, the Contract Act provides that –

„when an agent has, without authority, done acts or
incurred obligations to third persons on behalf of
his principal, the principal is bound by such acts or
obligations, if he has by his words or conduct
induced such third persons to believe that such acts
and obligations were within the scope of agent‟s
authority‟.

Thus, where A tells B in the presence and within

the hearing of P that he (A) is P‟s agent and P does
not contradict this statement, and later on B enters
into a transaction with A bona fide believing that
A is P‟s agent, then P is bound by this transaction,
 249

and in a suit between himself and B, he cannot be

permitted to say that A was not his agent, even
though A was not, in fact, his agent.

b. Agency by holding out.

Agency by holding out is a part of agency by

estoppel, yet there is a distinction between the two.
Agency by estoppel contemplates an omission on
the part of the principal to dispel the wrong belief
being formed by another person about the
existence of agency. In the case of agency by
holding out, some affirmative action on the part of
the principal is required.

A, as a custom, regularly sends B to make credit

purchases of raw material from the shop of C, and
later makes the payment on monthly basis. On one
occasion, he sends B with money to make a cash
purchase. However, B makes a credit purchase
pocketing the money. Here, A must pay for the
goods as the previous dealings justified C in
assuming that B was making credit purchase as
usual. Thus, A became liable on the principle that
having held out B as his agent on previous
occasions, he became bound by subsequent
 250

transaction entered into under similar

circumstances.

But where the agent is held out as having only a

limited authority to do acts of a particular
category, the principal is not bound by act outside
the authority.

Agency by Necessity

In certain emergency situations, the law confers

upon a person the authority to act on behalf of
another and bind such other person for the acts
done by him or hold him responsible for the
consequential obligations arising from such acts.
Such situation is obviously not an ordinary
situation. The person so acting is deemed to be an
agent in the eyes of law and the other person is
deemed to be the principal.
For example, A finds the house of B on fire.
Without any instructions from B, A takes initiative
and sets himself to extinguish the fire. In so doing,
though proper care is taken, some damage is
caused to the neighbour‟s house. A is an agent of
B by necessity and B is liable to compensate the
neighbour for the loss.
 251

Agency by necessity is conferred by law in certain

cases, where a person is faced with an emergency
in which the property or interests of another are in
imminent danger, and it becomes necessary in
order to preserve the property or interests, to act
before the instructions of the owner can be
obtained. The law assumes the consent of the
owner to the creation of the relationship of
principal and agent.
To create an agency by necessity, the conditions
that must be satisfied are – a) there should be a real
necessity for acting on behalf of the principal, b) it
should be impossible to communicate with the
principal within the time available, and c) such
agent should act in good faith and in the interest of
the principal.

Such agency arises where the agent exceeds his

authority in an emergency. For example, A
instructs B to take 100 kg. of fish from city X to
city Y. On the way, the vehicle breaks down and it
is impossible to reach city Y in time. Since the fish
is perishable in nature, B decides to sell it in the
local market for whatever price offered. The sale is
binding on A because B has acted out of necessity.
 252

Though B has exceeded his authority of agent,

such excess is covered by the agency by necessity.
Further, where a wife deserted by her husband,
and forced to live separate from him, can pledge
her husband‟s credit to buy all necessaries of life
according to the position of the husband even
against the wishes of her husband. Her dealings
would be binding on the husband.
Similarly, a road carrier of goods acting as a
bailee, in the event of an accident or emergency,
may sell or pledge part of the goods in order to
raise money to carry out urgent repairs to the
vehicle. Such sale or pledge would be binding on
the principal.

3. Agency by ratification

To ratify means to give formal consent or approval

to an act which was originally done without
authority. As a rule, no one can act as an agent of
another without the consent of that other person.
The person on whose behalf the act is purportedly
done has every right to disown it and deny any
liability arising out of such act. However, he may
find such act beneficial to him and therefore decide
to grant approval to it. In other words, he may
 253

adopt the transaction as if it was done with his

authority. This is called ratification. The Contract
Act provides that –„where acts are done by one
person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to
disown such acts. If he ratifies them, the same
effects will follow as if they had been performed
by his authority‟.

Such ratification relates back to the date of

transaction or the date on which the contract was
entered into by the agent (without authority) and
not from the date of ratification itself. To put it
differently, ratification is with retrospective effect.
It means that the agency is taken to have come into
existence from the moment the agent acted and
from the time when the principal ratified.

For example, L made an offer to M, the managing

director of a Company. M accepted the offer on the
Company‟s behalf, although he had no authority to
do so. L later gave notice to the Company that he
withdrew the offer. The Company subsequently
ratified M‟s unauthorised acceptance. As the
ratification dated back to the time of the
acceptance, the withdrawal of the offer was
 254

inoperative. (An offer once accepted cannot be

withdrawn.)
Ratification may be express or it may be implied
by the conduct of the parties.

Ratification has to be of the whole transaction and

must be within reasonable time. A principal cannot
ratify a transaction in part. In other words, there
cannot be partial adoption and partial rejection.
The principal cannot reject the obligations and
accept only the benefits. If he wants to avail
himself of the benefits of the transaction to be
ratified, then he must adopt the burden attached to
it also. Further, ratification must be within a
reasonable time after the contract by the agent.
Where the time for performance is fixed in the
contract, ratification must be within that time.

Nature and extent of Agent‟s Authority

The authority of an agent is the authority to bind

his principal in relation to the third parties. A
principal is bound by the dealings of his agent
provided the agent acts within the scope of
authority already determined under the contract of
agency and, of course, the authority which the law
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confers on every agent. Such authority can be

either express or implied. The Contract Act states
that an authority is said to be express when it is
given by words spoken or written. An authority is
said to be implied when it is to be inferred from
the circumstances of the case, or the ordinary
course of dealings.

As regards the extent of authority, the Contract

Act states that an agent, having an authority to do
an act, has authority to do every lawful thing
which is necessary in order to do such act. An
agent, having authority to carry on a business, has
authority to do every lawful thing necessary for the
purpose, or usually done in the course of
conducting such business.

For example, A is employed B, residing in

London, to recover at Mumbai a debt due to B. A
may adopt any legal process necessary for the
purpose of recovering the debt, and may give a
valid discharge for the same.

Similarly, A constitutes B his agent to carry on his

business of ship-builder. B may purchase timber
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and other materials and hire workmen for the

purpose of carrying on the business.

In other words, whatever that is done by an agent

lawfully in furtherance of the object of the agency
is also covered within the authority of the agent,
though for such acts there is no express authority
conferred on the agent.

As regards Agent‟s authority in an emergency,

the Contract Act provides that an agent has
authority, in an emergency; to do all such acts for
the purpose of protecting his principal from loss as
would be done by a person of ordinary prudence,
in his own case, under similar circumstances.
For example, an agent appointed for sale of certain
goods, also has the authority to have the goods
repaired, if such repairs become necessary.

Delegation of Authority

As we know, agency is a contract between two

persons whereby one person appoints another to
certain acts on his behalf or to represent him in
dealings with third parties. The reason why one
person so appoints another is because he finds the
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other to possess the necessary expertise and

competence to carry out the task. Obviously,
therefore, it is the requirement of agency that the
person so appointed i.e. the agent must perform the
obligations and duties by himself.

The Contract Act lays down that – „an agent

cannot lawfully employ another to perform acts
which he has expressly or impliedly undertaken to
perform personally, unless by the ordinary custom
of trade a sub-agent may, or from the nature of the
agency, a sub-agent must be employed.
Accordingly, an agent cannot delegate his powers
or duties to another without the express authority
of the principal, except in certain cases.

These exceptional cases where an agent can

delegate his authority to another, or in other words,
where an agent can appoint a sub-agent are as
follows:

When a sub-agent can be appointed

1. Where the principal, expressly or impliedly,

consented to such delegation of authority;
implied consent is by the conduct of the
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principal, e.g. where the principal knows about

the appointment of sub-agent, but does not
object to it.

2. Where there is a custom or practice of

appointment of sub-agent; e.g. when one is
engaged for running a business, he may
appoint a sub-agent for supply of raw material
necessary for the business;

3. When there is an emergency which requires an

agent to appoint a sub-agent in order to carry
out the object of agency effectively;

Effect of appointment of sub-agent

A sub agent is defined under the Contract Act as –

„a person employed by, and acting under the
control of, the original agent in the business of the
agency‟.
The appointment of a sub-agent is valid or proper
if it is made either with the consent of the principal
or under the circumstances mentioned above which
necessitate such appointment; otherwise the
appointment is improper or invalid. The effect of
appointment of sub-agent and the binding nature of
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dealings made by him depend on whether the

appointment of sub-agent is proper or improper.
If the appointment of a sub-agent is proper, the
Contract Act provides that the acts of such sub-
agent are binding on the principal as if he was
originally appointed by the principal. The agent is
responsible for the acts of the sub-agent and the
sub-agent is responsible for his acts to the agent,
but not to the
principal, except in case of fraud or wilful wrong.
Thus, in the case of any fraudulent act of sub-
agent, the principal may sue either the agent or the
sub-agent.

However, where a sub-agent is appointed

improperly i.e. without authority, the consequences
are as follows:

a. The principal is not liable for the acts of the

sub-agent.
b. The agent is responsible to the principal and
also the third parties for the acts of the sub-
agent.
c. Sub-agent is responsible only to the agent and
not to the principal. The principal has no right
to sue the sub-agent even for fraud or wilful
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wrong. (In the eyes of law, the relation

between the agent and sub-agent is that of
principal and agent).

Difference between Sub-agent and Substituted

agent

At this juncture, it is necessary to understand the

difference between a sub-agent and a substituted
agent. We have already seen the nature and
features of a sub-agent. As regards a substituted
agent, the Contract Act provides that – „when an
agent has express or implied authority of his
principal to name another person to act for the
principal and the agent names another person
accordingly, such person is not a sub-agent but a
substituted agent of the principal in respect of the
business which is entrusted to him‟

Thus, an agent merely names the substituted agent

at the request of the principal and there is a direct
relationship of agency between the principal and
the substituted agent.

For example, A directs B, his solicitor, to sell his

estate by auction, and to employ an auctioneer for
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the purpose. B names C, an auctioneer, to conduct

the sale. C is not a sub-agent, but is A‟s agent for
the conduct of the sale.

A authorises B, a merchant in Calcutta, to recover

the moneys due to A from C & Co. B instructs D, a
solicitor, to take legal proceedings against C &
Co., for the recovery of the money. D is not a sub-
agent but is solicitor of A, and therefore a
substituted agent of A.

The Contract Act imposes responsibility on the

original agent while appointing a substituted agent.
It lays down that – „in selecting such agent for his
principal, an agent is bound to exercise the same
amount of discretion as a man of ordinary
prudence would exercise in his own case; and, if
he does this, he is not responsible to the principal
for the acts of negligence of the agent so selected‟.

Therefore, the original agent must select the

substituted agent very carefully. If he makes the
selection carelessly, he is liable to the principal for
the negligence of the substituted agent.
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For example, A instructs B, a merchant, to buy a

ship for him. B employs a ship-surveyor of good
reputation to choose a ship for A. The surveyor
makes the choice negligently and the ship turns out
to be unseaworthy and is lost. B is not, but the
surveyor is, responsible to A. (However, if the
ship-surveyor so selected by the agent is a fresher
with little or no experience, B would be
responsible to A.)

Similarly, A consigns goods to B, a merchant, for

sale. B, in due course, employs an auctioneer in
good credit to sell the goods of A, and allows the
auctioneer to receive the proceeds of the sale. The
auctioneer afterwards becomes insolvent without
having accounted for the proceeds. B is not
responsible to A for the proceeds. (If, however, the
auctioneer selected by B were a person of doubtful
integrity with bad record, B would be responsible
to A.)

Kinds of Agents

Agents are of different types. The Contract Act

does not state anything about the kinds of agents.
By practice, they can be classified into different
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categories on the basis of their scope of authority.

The different kinds of agents are briefly explained
below:

1. General agent. A general agent is one who is

appointed to generally do all the things incidental
to and connected with the business for which he is
engaged. For example, a manager of a business can
do all the acts which are generally included in the
management of the business. The principal is
bound by all the acts of such agent, provided the
acts are ordinarily relevant and necessary for the
business.

2. Special or particular agent. He is appointed

for a particular or specific transaction, for example
an agent appointed for selling a house. The
authority of such agent is very limited and it
relates to a particular matter only. The principal is
not bound by the acts of such agent which are
outside his authority. Such agent may also be
appointed for representing the principal in
particular dealings.

3. Mercantile agent. Such agent has the authority

to buy and sell the goods of the principal, or to
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raise money on the security of the goods in the

course of business. The various types of mercantile
agents are:

a. Factor. He is an agent having authority to sell

the goods of principal in his own name. He can
pledge the goods for raising money and he has
very wide authority.

b. Commission agent. Such agent buys or sells

goods in his own name on such terms and
conditions which he considers to be in the best
interest of the principal. He receives agreed
commission for his services.

c. Del credere agent. Such agent not only enters

into contracts with third persons on behalf of the
principal, but also guarantees the performance of
such third persons. Of course he charges extra for
undertaking that the third persons shall discharge
their obligations under the contract. In simple
words, such agents act as surety as well.

d. Broker. He is employed for the purpose of sale

of goods of the principal. He does not have the
possession of goods. He simply brings the third
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persons into contact with the principal for

bargaining. If the deal is finalized, he becomes
entitled to his commission, which is called
brokerage.

4. Non-mercantile agent. Such agents include

advocates, attorneys, insurance agents, recovery
agents (in certain cases) etc.

Duties of Agent

The duties of an agent towards his principal are as

follows:

1. Duty to follow principal‟s instructions or

customs. The first and most important duty of
every agent is to act within the framework of
agency and not exceed the authority given to him.
He has to strictly adhere to the directions given to
him by the principal. If, in relation to certain
matter, there are no directions, the agent has to
follow the customary norms established in the
same kind of business. If the agent violates this
principle and causes any loss to the principal, he
must compensate the principal for the same. At the
 266

same time, if any profit is made by the agent by

exceeding the scope of authority, he must account
for it to the principal.

For example, A is engaged as agent in carrying on

a business for B. It is a custom to invest the money
in hand at interest from time to time. A omits to
make such investments. A must make good to B
the interest usually obtained by such investments.
B, a broker, in whose business it is not the custom
to sell on credit, sells goods of A on credit to C,
whose credit at the time was very high. G, before
making payment, becomes insolvent. B must make
good the loss of A.

2. Skill and diligence required from agent. An

agent is bound to conduct the business of the
agency with as much skill as is generally possessed
by persons engaged in similar business, unless the
principal has notice of his want of skill. The agent
is always bound to act with reasonable diligence,
and to use such skill as he possesses; and to make
compensation to his principal in respect of the
direct consequences of his own neglect, want of
skill or misconduct, but not in respect of loss or
 267

damage which are indirectly or remotely caused by

such neglect, want of skill, or misconduct.

For example, A, an agent for the sale of goods,

having authority to sell on credit, sells to B on
credit, without making proper and usual enquiries
as to the solvency of B. B, at the time of such sale,
is insolvent. A must make compensation to his
principal in respect of any loss thereby sustained.

Similarly, A, an insurance-broker employed by to

effect an insurance on a ship, omits to see that the
usual clauses are inserted in the policy. The ship is
afterwards is lost. In consequence of the omission
of the clauses, nothing can be recovered from the
insurance Company. A is bound to make good the
loss to B.

3. Duty to render accounts. An agent is bound to

maintain proper accounts of the principal‟s money
or goods and render them to the principal
whenever demanded. If he is instructed to submit
the accounts periodically, he must strictly follow
the instruction.
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4. Duty to communicate. It is the duty of an

agent, in cases of difficulty, to use all reasonable
diligence in communicating with his principal, and
I seeking to obtain his instructions.

5. Duty not to deal on his own account. The

business of agency must be conducted by the agent
on behalf of and in the name of principal only. He
must not deal on his own account. If the agent
deals on his own account without the consent of
the principal, the principal may repudiate the
transactions, if it can be shown that the
transactions have been disadvantageous to him.
The principal can also claim from the agent any
benefit which he may have obtained in doing the
business on his own account.

For example, A directs B t sell A‟s estate. B buys

the estate for himself in the name of C. A, on
discovering that B has bought the estate for
himself, may repudiate the sale, if he can show that
B has dishonestly concealed any material fact, or
that the sale has been disadvantageous to him.

Similarly, A directs B, his agent, to buy a house

for him. B tells A that it cannot be bought, and
 269

buys the house for himself. A may, on discovering

that B has bought the house, compel him to sell it
to A at the price he gave for it.

6. Duty to pay sums received for principal. An

agent is bound to pay to his principal all sums
received on his account. He must not make any
secret profits out of the business of the agency.

7. Duty on death or insanity of principal.

Agency stands terminated on death or insanity of
the principal. Upon termination of agency this
way, the agent is bound to take, on behalf of the
representatives of his late principal, all reasonable
steps for the protection and preservation of the
interests entrusted to him.

8. Duty not to delegate further. It is the duty of

every agent not to appoint any sub-agent or
delegate his authority to another without the
consent of his principal or under such
circumstances when law permits him to appoint a
sub-agent. He has to carry out the work of agency
himself. (This point is already discussed under the
heading „when can a sub-agent be appointed‟).
 270

Rights of Agent

An agent has the following rights against his

principal:

1. Right to receive remuneration. An agent is

entitled to receive the remuneration from his
principal, if so stipulated in the contract of agency.
Such remuneration becomes due only when the
work of agency is complete. When a particular
work is considered to be complete depends on the
terms of the contract. However, if an agent has
committed any misconduct in the business of the
agency, he is not entitled to any remuneration in
respect of that part of the business which he has
misconducted. In addition, he is liable to
compensate the principal for any loss arising out of
such misconduct.

2. Right of retainer.

An agent may receive certain amounts on behalf of

the principal during the course of business of
agency. If the agent has incurred any expenses for
the conduct of business, or has made any advances,
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or if any remuneration is due to him, he can retain

the amount, out of such sums received, to the
extent of what is payable to him.

3. Right of lien. Similar to the right of retainer, an

agent may also retain goods, papers and other
property, whether movable or immovable, of the
principal received by him, until the amount due to
himself for commission, disbursements and
services in respect of the same has been paid or
accounted for to him. However, an agent does not
have this right if it is expressly waived off in the
contract of agency.

4. Indemnity against consequence of lawful acts.

An agent has a right to be indemnified against the
consequences of all lawful acts done by him in the
course of business of agency. The Contract Act
provides that –„The employer of an agent is bound
to indemnity him against the consequences of all
lawful acts done by such agent in exercise of the
authority conferred upon him.‟

For example, B, at Singapore, under instructions

from A of Calcutta, contracts with C to deliver
certain goods to him. A does not send the goods
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and C sues B for breach of contract. B informs A

of the suit, and A authorises him to defend the suit.
B defends the suit and is compelled to pay
damages and costs, and incurs expenses. A is liable
to pay B for such damages, costs and expenses.

5. Indemnity against consequences of acts done

in good faith. An agent has a right to be
indemnified against the consequences of an act
done in good faith though it turns out to be
injurious to the rights of third persons. The
Contract Act provides that – „Where one person
employs another to do an act, and the agent does
the act in good faith, the employer is liable to
indemnify the agent against the consequences of
that act, though it causes an injury to the rights of
third persons‟.

For example, B, at the request of A, sells the goods

in the possession of A, but which A had no right to
dispose of. B does not know this, and hands over
the proceeds of the sale to A. Afterwards C, the
true owner of the goods, sues B and recovers the
value of the goods and costs. A is liable to
indemnify B for what he has been compelled to
pay to C and for B‟s own expenses.
 273

6. Right to compensation. An agent is entitled to

compensation from his principal if he sustains any
injury due to the negligence of the principal or lack
of skill on the part of the principal.

For example, A employs B as bricklayer in

building a house, and puts up the scaffolding
himself. The scaffolding is unskilfully put up, and
B is hurt as a consequence. A must make
compensation to B.

7. Other rights. The other general rights of an

agent include right to appoint a sub-agent, right to
do all the lawful things which are necessary for
effectively carrying out the business of agency,
right to use discretion in case of emergency, right
to renounce the agency, i.e. to terminate the
agency etc.

Rights and duties of Principal

The rights and duties of an agent are reciprocally

the duties and rights of his principal respectively.
The rights and duties of an agent have already
been discussed in the foregoing pages. Now we
 274

shall discuss the liability of principal to the third

person for the acts done by his agent.

Principal‟s liability to third persons for acts of

agent

The liability of principal to third persons for the

acts of his agent can be discussed under two
headings; one when the agent acts within the scope
of his authority, and second when the agent
exceeds the authority conferred on him.
In the former case, i.e. when the agent acts
lawfully within the scope of his authority, the
principal is liable to the third persons for the acts
of his agent. It is not necessary that act of the agent
is expressly authorised by the principal. For
example, when the agent acts in the event of
emergency in the interest of his principal, such acts
are binding on the principal. (This has been
already discussed.)
In the latter case, i.e. when the acts of agent are
beyond the authority conferred on him, the
principal has a choice either to disown such
unauthorised acts and repudiate the transactions (if
he finds them detrimental to his interests) or to
ratify the same. If he ratifies these acts, he is bound
 275

by those acts and becomes liable to third persons

as if he had originally authorised them. If he
chooses to disown them and repudiate the
transactions, he is not liable to third persons for
such acts. However, if the transaction is divisible
and a part of it can be separated as authorised, the
principal is liable only for the authorised part of
the transaction.

For example, A, being the owner of a ship and

cargo, authorises B to procure an insurance for Rs.
4000 on the ship. B procures a policy for Rs. 4000
on the ship, and another for the like sum on the
cargo. A is bound to pay the premium for the
policy on the ship, but not the premium for the
policy on the cargo.
However, where such separation is not possible,
the principal may repudiate the whole transaction.
For example, A authorises B t buy sheep for him.
B buys 500 sheep and 200 lambs for one sum of
Rs. 6000/-. A may repudiate the whole transaction.

Principal‟s liability for agent‟s

misrepresentation or fraud
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The Contract Act provides that –

„Misrepresentations made, or frauds committed by
agents acting in the course of their business for
their principals, have the same effect on
agreements made by such agents as if such
misrepresentations or frauds had been made, or
committed by the principals; but
misrepresentations made or frauds committed by
agents in matters which do not fall within their
authority, do not affect their principals.
We have already seen that an act of agent is
binding on the principal, provided the agent has
acted within the scope of his authority. Therefore,
if an agent, acting within his authority, has induced
a third person to enter into contract through
misrepresentation, it shall be assumed that it is the
principal who is guilty of misrepresentation. For
this purpose the law treats the principal and his
agent as one and hence it is immaterial who makes
the misrepresentation.
However, the principal is not liable for
misrepresentation made or fraud committed by the
agent in matters which do not fall within his
authority.
 277

For example, A appoints B as his agent to sell his

house. B makes a statement to C, a prospective
buyer that the house was painted with a costly
paint just a year ago. The statement is not based on
any valid ground and is therefore
misrepresentation. It shall be construed to be the
misrepresentation by the principal himself, because
the agent is acting within the scope of his
authority.
However, where A appoints B as agent to raise
money on his house by a second mortgage and the
agent makes a statement to the third person that the
house has not been mortgaged ever before, the
agent is exceeding his authority and the principal is
not liable for the fraud committed by the agent.

Consequence of notice given to agent

Any notice given to, or information obtained by

the agent, provided it be given or obtained in the
course of the business transacted by him for the
principal, shall, as between the principal and third
parties, have the same legal consequences as if it
had been given to or obtained by the principal.
 278

For example, A appoints B as agent to purchase

certain property. B decides to buy the property of
C and accordingly publishes a notice in the local
newspaper declaring his intention to do so. D
sends a notice to B that he has certain interests in
the property. B does not inform A about this and
completes the deal. If the title of C is defective, A
cannot be said to be a bona fide purchaser in good
faith, because he shall be deemed to have received
the notice sent by D. (though in fact he was not
aware of it.)

Termination of Agency

An agency may be terminated in any of the

following ways:
Termination of agency

The Graph
 279

1. Termination of agency by act of parties

An agency comes to end by act of parties in the

following cases:

a. Agreement. Agency is a contract between

principal and agent like any other contract. As a
contract can be terminated by a subsequent
agreement between the parties, agency can also be
terminated by principal and his agent by an
agreement. Both principal and agent arrive at an
agreement that the agency need not be continued
any further, and thus the agency stands terminated.

b. Revocation by the principal. The principal can

revoke the authority of his agent at any point of
time and by such act of the principal, the agency is
terminated. However, the following conditions
must be satisfied:
a. The agent must not have exercised his authority
so as to bind the principal; and b. the agency must
not be irrevocable. (for example, A gives authority
to B to sell A‟s land and pay himself, out of the
 280

proceeds, the debts due to him from A. A cannot

revoke this authority, nor can it be terminated by
his death or insanity.)

Termination of agency by revocation operates with

respect to future transactions. The principal must
give reasonable notice to the agent and to third
parties. Where the agency is created for a specified
period and the principal revokes the authority
before the expiry of the period, he must
compensate the agent for the loss, if any, due to
such revocation

c. Renunciation by the agent. As the principal

can revoke the authority given to his agent,
similarly an agent can renounce the authority given
to him and decline to continue to act as an agent.
The agent must give a reasonable notice to the
principal of his intention to renounce the authority;
otherwise he shall be liable to compensate the
principal for any loss resulting from such
renunciation.
If the agency is for a fixed period, and the agent
renounces it without sufficient cause before the
expiry of the period, he shall have to compensate
the principal for the resulting loss, if any.
 281

2. Termination by Operation of Law

An agency comes to end automatically by

operation of law in the following circumstances:

a. Completion of business of agency. An agency

automatically comes to end when the business, for
the purpose of which it was created, is completed.
When an agent is appointed to sell a particular
property, the agency is automatically terminated
when the property is sold.

b. Expiry of time. The agency which is created for

a fixed term comes to an end on the expiry of the
term, even though the business of agency has not
been completed. For example, where an agent is
appointed to manage a hotel business for one year,
the agency is terminated after expiry of one year
even if the hotel business continues.

c. Death or insanity of Principal or agent. On

the death of the principal or the agent, the agency
automatically comes to end. The law imposes a
responsibility on the agent to take every reasonable
step for the protection of his late principal‟s
 282

interests when he comes to know about his death.

The same rule is applicable in the event of insanity
of the agent or the principal. However, it may be
noted that a person of unsound mind can be
initially appointed as agent.

d. Insolvency of the principal. Agency comes to

end on the insolvency of the principal. The
Contract Act is silent as regards the fete of the
agency when the agent becomes insolvent.
However, going by the provisions relating to an
agent of unsound mind, it can be argued that a
person who is adjudicated insolvent can function
and continue to function as agent.

e. Destruction of the subject-matter. An agency

which has been created with reference to a
particular subject-matter only, shall stand
terminated when the subject-matter itself is
destroyed. For example, when agency is created
for the sale of a particular house and the house is
destroyed in earth-quake or fire, the agency also
will come to an end with the destruction of the
house.

f. Dissolution of Company etc. We have seen

 283

above that agency comes to end with the death of

the principal or the agent. Winding up of Company
or dissolution of a society etc. is the death of such
legal or artificial persons. Therefore, when the
principal or the agent is a legal person such as a
Company, the agency comes to end when the
existence of such legal person is terminated, i.e. on
dissolution of such person.

When termination becomes effective?

The Contract Act provides that – „The termination

of the authority of an agent does not, so far as
regards the agent, take effect before it becomes
known to him, or, so far as regards third persons,
before it becomes known to them‟.
In simple words it means that as between the
principal and the agent, termination of agency is
effective only when it comes to the knowledge of
the agent, and so fare as third parties are
concerned, it takes effect when it reaches their
knowledge. Thus, if the agency is terminated by
the principal by revocation, such termination shall
be effective from the time the agent comes to
know of the revocation and not before. Similarly,
if the agency is automatically terminated by the
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death or insanity of the principal, the termination

shall be effective only from the time when the
agent comes to know of the death or insanity of the
principal.
As regards the third persons, the termination of
agency shall be effective only when the third
persons know of the termination, and not before.
Therefore, it is not sufficient for a principal only to
give a notice of revocation to the agent, but he
must also give a public notice regarding the fact of
termination of agency.
For example, A directs B to sell goods for him, and
agrees to pay five per cent commission on the
price fetched by the goods. A afterwards revokes
B‟s authority. B after the letter is sent, but before
he receives it, sells the goods for 100 rupees. The
sale is binding on A, and B is entitled to five
rupees as his commission.

Irrevocable agency

It is but logical that a person who delegates

authority to another to act on his behalf or to
represent him to third persons, can always revoke
the authority at his will. Similarly, a principal too
always has a right to terminate the agency at his
 285

desire. However, in certain situations this right is

curtailed and the principal cannot terminate the
agency by revoking the authority given to the
agent. Such agency is called irrevocable agency.
These circumstances are discussed below:

1. Where the agency is coupled with interest.

Where the agent has himself an interest in the
property which forms the subject-matter of the
agency, the agency cannot, in the absence of an
express contract, be terminated to the prejudice of
such interest.

For example, where the debtor appoints his

creditor as agent to sell certain goods the proceeds
of which are to be adjusted against the dues
payable by the principal to the agent, such agency
cannot be terminated by revocation. Moreover,
such agency is not terminated even on the death or
insanity of the principal.
It is so because the agency is created for the
protection of interests of the agent who has his
interests in the subject matter of the agency. This
principle applies only where the agency is created
for the protection of the interests of the agent. The
agency does not become irrevocable if the interest
 286

of the agent in the subject matter arises subsequent

to the creation of the agency.

2. Where authority has been partly exercised.

The principal cannot revoke the authority given to
his agent after the authority has been partly
exercised, so far as regards such acts and
obligations as arise from acts already done in the
agency.
Thus, if an agent has, in furtherance of agency,
entered into contracts with third persons and has
thereby incurred liability, the principal cannot
unilaterally terminate the agency to the prejudice
of the agent.
For example, A authorises B to buy certain goods
on account of A and to pay for it out of A‟s money
remaining in the B‟s hands. B buys the goods in
his own name, so as to make himself personally
liable for the price. A cannot revoke B‟s authority
so far as regards payment for the goods.
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Chapter 13

Partnership

The law relating to partnership is to be found in the

Partnership Act, 1932. Contract of Partnership is a
special contract. Initially, the law of partnership
was a part of Contract Act and sections 239 to 266
of the Contract Act dealt with partnerships.
However, the need was felt to pass a separate
legislation on partnership and hence the
Partnership Act came into being with effect from
1st October 1932 and sections 239 to 266 were
repealed from the Contract Act.
Section 3 of Partnership Act provides that the
provisions of the Contract Act shall apply to every
contract of partnership, unless special provisions
of Partnership Act override them. In other words,
Partnership Act is a branch of general law of
contracts and the provisions of Contract Act shall
continue to apply to partnerships, except so far as
they are inconsistent with the express provisions of
Partnership Act.
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Definition and nature of partnership

Partnership is defined under the Partnership Act as

– „the relation between persons who have agreed to
share the profits of a business carried on by all or
any of them acting for all‟.

The analysis of the definition given above reveals

the following essential features of partnership:

1. Association of two or more persons.

It is essential that there must be more than one
person to constitute a partnership. A person cannot
be a partner of himself in the business. Such
persons must be natural persons who are
competent to contract. (Special position of minor is
discussed later.) The Partnership Act is silent as
regards the maximum number of partners.
However, the Companies Act lays down the
maximum number at 10 for a partnership carrying
on banking business and at 20 for a partnership
carrying on any other business. Therefore, a
partnership is illegal if it has more than 20 persons,
and, in the case banking partnership, if it has more
than 10 members. Further, if the number of
partners is reduced to one for any reason, e.g.
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death or insolvency of partners, it is no longer a

partnership.

2. Agreement.
A partnership can only arise as a result of an
agreement between two or more persons, who are
known as partners. Thus, the condition precedent
for a partnership is an agreement between the
persons who are desirous of forming themselves
into a partnership. Partnership can never be the
result of status or by operation of law as may
happen in certain other relations. For example, in
the case of quasi contract there are contractual
rights and obligations on the parties though they
have entered into any agreement as such.
Similarly, when a sole proprietor of a business
dies, a number of heirs may inherit his business but
they cannot be called partners because there is
absence of agreement to form a partnership. Mere
co-ownership cannot give rise to partnership.
Before partnership can come into existence there
must be an express or implied agreement among
co-owners to form a partnership. The agreement
must, of course, possess all the essential elements
of contract.
 290

3. Business. It is necessary that there is some

business to carry on for a partnership. Therefore,
an association of persons who come together for
some social or religious purpose cannot be termed
as partnership. The term „Business‟, however, is
used in the widest sense. It covers every type of
enterprise. It is immaterial whether it consists of a
series of operations or is confined to a single
venture.

4. Carried on by all or any of them. Mutual

agency. This is perhaps the most important
ingredient of partnership. Mutual agency is the
fundamental principle of partnership. In fact the
law of partnership is a branch of general law of
agency. Every partner is both an agent and
principal for himself and for others. Each partner is
the principal for other partners, thus bound by the
acts of the others, and in turn he is an agent for the
others so as to bind the others by his acts. Every
partner who conducts the business of the firm is
deemed in law to be the agent of all the partners. It
may be agreed among the partners that only one of
them shall carry on the business, nevertheless such
stipulation has no effect on the existence of the
partnership.
 291

5. Profit sharing. The agreement to carry on a

business must also contemplate sharing of profits
by all the partners. It is at the discretion of the
partners to decide as to what shall be the profit
sharing ratio of each partner, but sharing of profits
is a must. Therefore, if A carries on business with
B and C on the term that C shall have no share in
the profits of the business, then C is not a partner,
because his carrying on business is not for profits.
It must be noted that though sharing of profits of a
business is essential, sharing of losses is not.
Hence there can be a partnership where a partner
has agreed to share profits only, and not the losses.
Further, everyone who shares in the profits of a
business is not necessarily a partner. A manager of
a business with a share of profits is an employee of
the firm, and not a partner. This is so because here
the element of agency is absent.

„Partners‟, „Firm‟ and „Firm Name‟

The Partnership Act lays down that – „persons who

have entered into partnership with one another are
called individually „partners‟ and collectively „a
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firm‟, and the name under which their business is

carried on is called the „firm name‟

A partnership firm is not a legal entity; it is not

an artificial person as is the case of a Company.
“Firm” is only a convenient phrase to refer to the
association of two or more persons who constitute
the partnership. For the purposes of determining
the rights and obligations, there is no such thing as
a firm known to law. The rights and obligations of
a firm are in fact the rights and obligations of the
partners. The partnership firm has no existence
separate from its partners.

It is only for the purposes of Income-tax Act that a

firm is treated as assessee distinct from the
individual partners who constitute it. Otherwise, it
is only a collective description of the partners
together. The firm cannot possess property;
therefore it cannot be a debtor or a creditor. The
rights which a partner enjoys and the duties which
he owes, are enjoyed against and owed to the other
partners, and not to the firm. Therefore, if a suit is
filed by any of the partners against the others for
the enforcement of his rights, it is the partners who
are the parties to the suit and never the firm.
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A firm cannot be a partner in any partnership

business, but a partner in one partnership may
become member of another partnership business.
Partners have a right to carry on their business
under any name they like. It may be a combination
of initial letters of their names, or any other
fictitious name. However, such name must not
violate the rules applicable to trade names or
goodwill. Similarly, they should not use a name
which remarkably resembles with the name of
another organization so that the public is misled. A
name which, directly or indirectly, suggests the
sanction or patronage of the Government cannot be
used, except with the express permission of the
Government. A partnership firm cannot use the
word „Limited‟ as part of its name.

Difference between Partnership and Company

1. A Partnership firm has no existence apart

from its members. A Company is a separate
legal entity distinct from its members.

2. A member of Company does not represent

other members in their dealings and cannot
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contractually bind them with respect to the

contracts entered into by him. In other
words, a member of a Company is not an
agent of other member or members.
Partnership is based on the principle of
agency and every partner is essentially an
agent of all the other partners.

3. Liability of partners is unlimited, i.e. their

personal property is liable for the
satisfaction of the debts of the firm. (in fact
there are no debts of the firm; all debts are
the debts of partners only) In the case of
Company, the personal property of the
members is not liable for the debts of the
Company.

4. A partner cannot transfer his interest in the

firm to a third person without the consent of
the other partners, whereas a member of a
Company can transfer his financial interest
in the Company to any person without the
consent of other members, subject, of
course, to the regulations laid down in the
Articles of the Company.
 295

5. A Company has perpetual succession. Death

or insanity of members does not affect the
existence of the Company, while a
partnership is dissolved in such events.

6. A partnership cannot be formed when the

number of persons constituting it exceeds
20. In banking business, the maximum
number of partners is 50. The number of
members in a private Company cannot
exceed 50 and there is no limit on the
maximum number of members in the case of
a public Company.

Kinds of partnerships

On the basis of the objectives and the nature of the

association of persons who carry on business
together, the partnership firms can be classified
into following categories:

1. Partnership at will. When the partnership is

not for a fixed period, and the agreement of
partnership does not provide for its
determination (termination) in any other way,
 296

it is called partnership at will. The

continuation of such partnership depends on
the willingness of the partners to continue the
business and can be determined at the will of
any of the partners by giving notice to other
partners of his intention to dissolve the firm.
The continuance of such partnership is not
affected by the death or retirement of any
partner. However, where it is provided that the
partnership shall be dissolved by mutual
agreement, it is not a partnership at will,
because it cannot be dissolved on the notice by
one partner. The consent of all the partners is
necessary.

2. Partnership for a fixed term. When the

partners stipulate that they should carry on
business for a definite period of time, it is
called a partnership for a fixed term. When the
term is over, the partnership comes to an end.
If, however, the partners continue the business
even after the expiry of the term so fixed, their
rights and liabilities continue to be the same
and the partnership shall now be classified as
partnership at will.
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3. Particular Partnership. Where the

partnership is formed for the purpose of
charring on particular adventures or
undertakings, it is called Particular
partnership. Such partnership is usually
dissolved when the undertaking is completed.
For example, two persons together undertake
the project of construction of housing
complex. As soon as the housing complex is
fully constructed, the partnership shall come to
an end. If the firm proceeds to carry out other
undertakings or projects then in the absence of
any agreement to the contrary, the rights and
liabilities of the partners in the new
undertaking will continue to be the same.

Registration of partnership firms

The registration of a partnership firm is not

compulsory under the Partnership Act nor does the
Act provide for any penalty for non-registration of
a partnership firm. However, a partnership firm
which is not registered is deprived of certain
valuable rights which are otherwise available to a
partnership which is duly registered under the Act.
 298

It is therefore said that the Partnership Act ensures

the registration of partnership firms without
making it mandatory. In other words, though the
registration of a partnership firm is not mandatory,
it is in the interest of the partnership firm that it be
registered under the Partnership Act.

The following provisions of the Partnership Act

relating to registration of partnership firms may be
noted:

1. A Registrar of partnership firms is appointed

by the Government for a specified local area
having jurisdiction over that area for the
purpose of granting registration under the Act.

2. A partnership firm which is carrying on a

business in partnership in that area or which
proposes to carry on a business in that area and
desirous of registering itself, may apply to the
Registrar for registration.

3. The application for registration must be

submitted in the prescribed form with
necessary fees and a statement showing the
particulars such as – a) the name of the firm,
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2) the place of business of the firm, 3) other

places where business is carried on, 4) the date
on which each partner joined the business, 5)
The names in full and addresses of each
partner and 6) the duration of the firm.

The application and the statement have to be

signed by all the partners or their agents who
are duly authorised in this behalf.

4. The application and the statement is verified

by the Registrar and if he is satisfied, he shall
enter the name of the firm in a register called
„Register of Firms‟ and shall issue a
Certificate of Registration. Registration is
effective from the date on which the Registrar
enters the name of the firm in this Register of
Firms.

5. Any changes that may subsequently takes

place in matters such as, alteration in the name
of the firm, place of business, closing and
opening of branches, changes in the names and
addresses of partners, dissolution of
 300

partnership firm etc. have to be duly notified

to the Registrar who shall incorporate such
changes in the Register of Firms.

Effects of Non-registration

A partner cannot sue other partners or the firm for

any right arising out of the contract of partnership
or for any right conferred on him under the
Partnership Act. Thus, if a partner is not paid his
share of profits in the business, he cannot sue the
firm or the other partners for the same if the
partnership firm is not registered.

Similarly, no suit can be filed on behalf of an

unregistered firm against any third party for the
purpose of enforcing a right arising from the
contract until the firm is registered and the name of
the person filing the suit appears in the Register of
Firms.

However, the third parties have every right to file a

suit against the firms and the partners.
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Partnership property

It is necessary to ascertain the property of the firm

and distinguish it from the property of one or more
partners. Sometimes the partners allow the use of
their personal property for the business of firm,
though such property continues to be in the name
of the individual partner only. The distinction
between the personal property of any partner and
the firm‟s property becomes crucially important at
the time of dissolution of the partnership firm
because then the debts of the firm are to be paid
out of the property of the firm first.
It is open to the partners to agree among
themselves as to what is to be treated as the
property of the firm and what is to be the separate
property of one or more partners. Therefore, in the
absence of any agreement which provides
otherwise, the property of the firm shall include –

a. All property, rights and interests which have

been brought into the common stock for the
purposes of the partnership by the individual
partners, whether at the commencement of the
 302

business or subsequently added thereto;

b. The property which is acquired by the firm in

the course of its business with the money
belonging to the firm. This will also include
the property of any partner which is acquired
by him out of the secret profits made by him.

c. The goodwill of the business.

Relations of Partners to one another

We have already seen that partnership is

essentially the result of an agreement between the
persons who come together for the purpose of
carrying on a business. The relations of such
persons i.e. relations of partners with each other
are therefore also created and governed by the
same agreement. The partners are free to agree on
manner of conducting and managing the business,
share of each partner in the capital of the business,
their ratio of profit-sharing etc.
 303

However, where the partners fail to provide for

any of these things, the rules laid down in the
Partnership Act shall be applicable. These rules are
discussed below:

Rights of a Partner

1. Right to take part in the management. Every

partner has a right to take part in the conduct and
management of the business of the firm. It may be
noted that this rule, like most of the other rules, is
applicable only where the partnership agreement is
silent on this point and does not provide anything.

2. Right to be consulted. Every partner has a right

to be heard and consulted in all matters affecting
the business of the firm. If there is a difference of
opinion among the partners, the decision of the
majority shall prevail. Where the partners are
equally divided, the opinion of the partners who
oppose the proposal (for which the voting is done)
shall prevail. However, if the proposition put forth
touches the very nature of the business or if it is
relating to alteration in the partnership
constitution, no change shall be made unless all the
 304

partners agree.

3. Right of access to accounts. Regardless of

whether a partner is active or dormant, he has a
right of free access to all records, books and
accounts of the business and to examine them. He
may also engage an agent for this purpose if other
partners do not object to such agent.

4. Right to share profits. Every partner is entitled

to share in the profits equally, unless different
proportions have been agreed upon. It is not
necessary that such profit sharing has to be in
proportion to the contribution of capital. Similarly,
the extent or degree of work done by partners shall
not affect the profit sharing

5. Inertest of capital. No partner is entitled to

interest on the capital subscribed by him unless
there is an agreement providing for the same.
Again, such interest is payable only out of profits
of the firm, unless otherwise agreed.

6. Interest on advances. A partner who has

contributed more than the share of the capital for
the purposes of business is entitled to interest at a
 305

rate agreed upon, and if no rate is stipulated, at 6%

per annum.

7. Right to indemnity. A partner represents the

firm and in the course of such business, may incur
liabilities. He has a right to be indemnified by the
firm for all acts done by him in the course of the
partnership business. He must have, however,
acted in good faith and as a person of ordinary
prudence.

8. Joint owner of partnership property. Every

partner is a joint owner of the partnership property.
In the absence of any agreement to the contrary
which provides differently, every partner has equal
share in the property of the partnership.

9. Powers in emergency. A partner can do all

such things as may be necessary for protecting the
property of the firm, though he may not be
expressly authorised to do those acts. The right of
indemnity is enhanced here in case of emergency.
However, the partner must have acted in good faith
and in a manner in which a person of ordinary
prudence would have acted in respect of his own
 306

property.

10. No new partner to be introduced without his

consent. Every partner has a right to prevent a new
partner being introduced into the firm without his
consent.

11. No liability before joining. An incoming

partner has a right not be held liable for any debts
or liabilities of the firm before he became a
partner, save and except by his own consent.

12. Right to retire. Every partner has a right to

retire, if the contract so provides, failing which,
with the consent of other partners, and if the
partnership is a partnership at will, at any time by
giving notice to the other partners.

13. Right not be expelled. Every partner has a

right to continue in the partnership and not to be
expelled from it, unless there is a stipulation in the
agreement of partnership conferring powers on the
majority of partners to expel any partner. Again,
such power has to be exercised judicially by the
majority bona fide.
 307

14. Right to carry on competing business. An

partner has a right to carry on similar business in
competition with the firm‟s business, unless he has
been restrained from doing so by virtue of the
partnership agreement. An agreement in restraint
of trade is a void agreement, but in case of
partnership reasonable restrictions can be imposed
on the outgoing partner not to carry on a similar
business, either for a specified time or within a
specified local area or both. In the absence of any
such agreement every partner has a right to carry
on a business individually which may be similar to
the business of the firm.

15. Right after retirement to share in profits or

interest. Where a partner dies or otherwise ceases
to be a partner as result of retirement, expulsion,
insanity or any other cause and the other partners
continue to carry on the same business with the
property of the firm, without final settlement of
accounts with the outgoing partner, such outgoing
partner or his representative is entitled to share in
the profits of the firm or interest at the rate of 6%
per annum, at the option of the outgoing partner or
his representative.
 308

Duties of a Partner

The relations of partners with each other are based

on mutual trust and confidence. Each partner owes
a duty towards other partners to act in good faith
and for the benefits of the firm. The law requires
every partner to always place collective prosperity
first, before his individual profits. The Partnership
Act lays down that – „Partners are bound to carry
on the business for the firm to the greatest
common advantage, to be just and faithful to each
other, and to render true accounts and full
information of all things affecting the firm to any
other partner or his legal representative.‟

The duties of a partner can be stated as follows:

1. To work for greatest common advantage.

Since mutual confidence is the foundation of
partnership, it is the primary duty of every partner
to carry on the business of the firm to the greatest
common advantage.

2. To be just and faithful. Every partner must be

just and faithful to the other partners. Partnership
 309

being a fiduciary relationship, it is the duty of

every partner to exercise the utmost god faith and
fairness in his dealings with his co-partners.

3. To give full information. Every partner is an

agent of his other partners and as such is bound to
communicate full information to them. Thus, a
partner who obtains any information in the course
of the partnership must pass it on to the other
partners, so that notice to one partner is taken to be
notice to all partners.

4. To render true accounts. Every partner is

under obligation to keep and render true, proper
and correct accounts of the partnership. He must
allow other partners to inspect the books and
submit statements or explanations as regards the
monies he may have received in his hands in the
course of firm‟s business.

5. To indemnify for fraud or wilful neglect.

Every partner is bound to indemnify the firm for
any loss caused by his fraud in the conduct of
business. Any agreement between the partners
which grants immunity to any particular partner
against this obligation is null and void.
 310

Similarly, every partner has a duty to indemnify

the firm and other partners for the loss arising out
of his wilful neglect in the conduct of firm‟s
business. It must be however noted that wilful
neglect is something more than a mere failure to
perform ordinary duties. Wilful neglect has an
attribute of culpability which is absent in failure to
perform duties.

6. To share losses. Every partner is bound to share

the losses equally with the other partners.
However, the partners may agree to provide for
different proportions for such sharing of losses.

7. To attend diligently without remuneration.

Every partner is bound to attend diligently to the
business of the firm and in the absence of any
agreement to the contrary, he is not entitled to any
remuneration, whether in the form of salary,
commission, or otherwise, on account of his own
contribution in the conduct of the firm‟s business.
A partner who takes more trouble than others in
the management of the partnership business is not
entitled to any remuneration for his contribution.
However, it is a common practice to provide that a
certain partner who works more than others, say, a
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managing partner, will receive, in addition to his

share in profits, a salary or commission on account
of his additional services.

8. To hold and use the firm‟s property only for

the firm. It is the duty of every partner to hold and
use the property of the firm exclusively for the
firm. Such property belongs to all the partners
collectively and therefore the use of such property
must be for the common benefit of all the partners.

9. To account for private profits. The status of a

partner is that of trustee with respect to the
property of the firm. If he individually receives
any benefit out of the property of the firm, he must
account for it and pay it to the firm. Similarly, if he
receives any benefit by virtue of his membership
of the firm or connection with the firm, he must
pay it to the firm.

10. To account for profits of competing

business. The Contract Act provides that an
agreement in restraint of trade is void. But
Partnership Act permits an agreement between
partners that a partner shall not carry on business
other than the business of the partnership as long
 312

as he is partner. In the absence of such agreement,

partners are free to be interested in private business
of their own, provided the sane does not compete
with the business of the partnership.
No partner can carry on any business which is
likely to compete with the business of the
partnership, except with the consent of the other
partners. If a partner, without obtaining the consent
of the other partners, carries on a competing
business, he must account for the profits of such
business to the firm, and must also compensate the
firm for any loss sustained by the firm due to his
carrying such competing business.

11. Not assign his rights. No partner can assign

his partnership interest to any other person, so as to
make him a partner in the business. But a partner
can assign the profits and share in the partnership
business. Such transferee does not enjoy the status
of the partner and has only limited interest in the
share of profits of the transferring partner.

Relations of Partners to Third parties

 313

Every partnership is founded on the principle of

agency. Every partner, in respect of his dealings
with third parties, acts as an agent of other
partners. At the same time, he is also the principal
for other partners and hence is bound by the acts of
his co-partners. In fact the whole law of
partnership is a branch of law of agency. Since
each partner is an unlimited agent of every other
partner in every matter connected with the
partnership business, his acts bind the firm.

This general authority of a partner as agent of the

firm is described as „implied authority‟.
Implied authority of a partner.

A partner can do all those acts on behalf of the

firm for which he has been authorised by or under
the partnership agreement. This is known as the
expresses authority of partners. In addition, a
partner also has a right to do those things which
the law impliedly authorises him to do, without
there being any mention in the partnership
agreement. Of course, such acts must be done to
carry on the business of the firm in the usual way.
 314

This is known as the implied authority of a partner.

In other words, a partner has implied authority to
bind the firm by all acts done by him in all matters
concerned wit the partnership business and which
are done in the usual way and are not in their
nature beyond the scope of the partnership.

The question whether a given act has been done in

carrying on a business in the way, in which it is
usually carried on, must be determined by the
nature of the business, and by the practice of the
persons engaged in it. What is usual for one kind
of business may be unusual for another. For
example, in the case of commercial or trading
partnerships, every partner has an implied
authority to pledge or sell the partnership goods,
borrow money etc, in the name of the partnership
firm. However, when the partnership is not of
commercial nature, a partner has no implied
authority to borrow money or sell goods.

What is not included in Implied Authority?

In the absence of any usage or custom, the implied

authority does not empower any partner to do any
of the following acts.
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1. To submit a dispute relating to the business of

the firm to arbitrator;

2. To open a banking account on behalf of the

firm in his own name;

3. To compromise or relinquish any claim or

portion of a claim by the firm;

4. To withdraw a suit or proceeding filed on

behalf of the firm;

5. To admit any liability in a suit or proceeding

against the firm;

6. To acquire immovable property on behalf of

the firm;

7. To transfer immovable property belonging to

the firm; or

8. To enter into a partnership ob behalf of the

firm.
 316

It is open to the partners by means of an express

agreement to extend or limit the implied authority,
but the third parties will be bound by such
limitation only when they have notice of the same.

Liability of Partner for act of firm

Every partner is liable, jointly and severally, for all

acts of the firm done while he is a partner. What is
an act of firm? The Partnership Act defines Act of
firm as – „act of omission by all the partners, or by
any partner or agent of the firm which gives rise to
a right enforceable by or against the firm‟.
Therefore, when an act is done by all or any of the
partners in the name of and on behalf of the firm,
all the partners are liable and are bound by such
act. As we have already noted, „firm‟ is a
collective name for all the partners together and
every partner is an agent of other partners. It
therefore follows that when a partner does any act,
say, enters into contract with a third party, the
contractual liability is passed to the firm i.e. all the
other partners.

The only requirement is, however, that such act

must have been done in the name of the firm and
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on behalf of the firm. It may be noted that such act

is binding on every partner irrespective of whether
he is an active partner or a dormant partner.

For example, if a partner buys the usual stock for

the business of the firm, all the partners are liable
for the debt incurred. But where the partnership
business is of sale and purchase of cloth and a
partner buys fruits on credit on the firm‟s letter
head and in the name of the firm, the transaction is
obviously not for the purpose of firm‟s business
and he alone shall be liable. This is so because this
partner is not an agent of other partners for buying
fruits as it is not the business of partnership to buy
fruits.

Liability for the Wrongful Acts of a Partner

The principal is bound by all the acts of his agent

when such acts are done within the authority and
in the course of business of agency. This liability
extends to the wrongful acts of the agent also.
Similarly, every partner is liable for the negligence
and fraud of the other partners in the course of the
management of the business. In other words, the
firm is liable for an loss or injury caused to a third
 318

party by the wrongful acts or omission of a partner

if they were done by him while acting in the
ordinary course of the business of the firm or with
the authority of the co-partners.

A firm of solicitors would be liable for negligent

act of any of its partners and a firm of taxi drivers
would be liable for negligent driving of one of its
partners and so on.

Where a partner acting within his authority

receives money or property from a third party and
misapplies it, or a firm in the course of its business
receives money or property from a third party, and
the money or property is misapplied by any of the
partners while it is in the custody of the firm, the
firm is liable to make good the loss.

Types of partners

1. Actual or active or ostensible partner. He is a

partner by agreement who brings in capital and
actively participates in the conduct and
management of the business of partnership. He has
to issue a public notice if he intends to retire from
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the partnership if he wants to absolve himself from

the liability for the acts of other partners after his
retirement.

2. Sleeping or dormant partner. He does not take

any active part in the conduct of the business of the
firm. He may contribute to the capital of
partnership business and as such he is also known
as a financing partner. His liabilities are just like
any other partner though the third parties may not
know of his membership of the firm. Therefore, he
is just like an undisclosed principal. He is not
liable for any act of the firm after he ceases to be
partner even if he does not give any public notice.

3. Nominal partner. As the name suggests, such

person is a partner only in name. He does not take
active part in the business of the firm nor does he
contribute anything in the capital of the firm. He
does not have any share in the profits. He is
requested to lend his name to the firm because of
his reputation and the influence he yields in the
business community or in the society as a whole.
However, as a partner, such person is liable for the
acts of the firm.
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4. Working partner. A partner may be entrusted

with the management of the firm‟s business on
account of his expertise in the field. His
contribution to the conduct of firm‟s business is
more than other partners. He may be paid a salary
in addition to his share in the profits of the firm.
Like any other partner, he is bound by the acts of
the firm and others are bound by his acts.

5. Other types of partners include partners in

profits only, who do not share in the losses of the
firm and partners by estoppel (or holding out) who
become partners of a firm on the principle of
estoppel on the same lines as agency by holding
out. The later is not a partner in the accepted sense
of the word and is not entitled to any share in the
profits of the firm.

Dissolution

Dissolution of partnership and dissolution of firm

are two different things. The Partnership Act
provides that the dissolution of partnership
between all the partners of a firm is called the
dissolution of the firm. Hence, if the dissolution of
partnership is not between all the partners, it is
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not dissolution of the firm. Thus, dissolution of

firm includes dissolution of partnership but
dissolution of partnership does not necessarily lead
to dissolution of the firm.

Chapter 13

Contract of Sale of Goods

Brief introduction
 322

The law relating to sale of goods is to be found in

the Sale of Goods Act, 1930. Just like bailment
and agency, sale of goods is also a special kind of
contract and therefore the provisions of Contract
Act are applicable to it just like any other contract,
except in certain matters. In these matters, the
special provisions of this Act are applicable,
superceding the provisions of Contract Act.
Save and except these matters, all the rules of
Contract Act, as relate to competence of parties,
free consent, offer and acceptance etc. are also
applicable to contract of sale of goods.

Contract of Sale of Goods

A contract of sale of goods is a contract whereby

the seller –

(a) transfers or
(b) agrees to transfer the property in (i.e.
ownership of) goods,

to the buyer for a price.

The term contract of sale is a generic term and it

includes an actual sale as well as an agreement to
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sell. When the ownership of goods is transferred

from seller to buyer it is called „Sale‟, and where
the ownership of goods is to be transferred from
seller to buyer at some time in future it is called
„an agreement to sell‟. In other words, contract of
sale includes both „Sale‟ and „agreement to sell.‟

Essentials of contract of sale

We have seen above that contract of sale is a

contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a
price. The analysis of this definition reveals the
following essential features of contract of sale of
goods.

1. Two parties. The contract of sale is essentially

between two parties; the seller and the buyer, as a
person cannot buy his own goods. However, a
part-owner may sell his share to other part-owner
as a partner can always sell to the other partners.
Similarly, a partner can sell goods to his firm. But
a club consisting of several members does not sell
goods when it supplies certain items to its
members for price. The transaction is akin to sale,
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but not a sale. Here, the members are virtually

consuming their own property and the mode of
payment is a matter of internal arrangement
regulated by the rules of the club.

2. Transfer of property. The term „property‟ here

means the ownership. There must be transfer of
property or ownership from the seller to the buyer.
Mere transfer of possession of goods from one
person to another without transferring the
ownership is not a sale. Thus, when the goods are
pledged as security, there is a transfer of
possession but it is not a sale because the
ownership continues to be with the transferor.
Same is the case with the bailment of goods.

3. Goods. The subject-matter of contract of sale

must be „goods‟. Goods means every kind of
movable property other than actionable claims and
money; and includes stock and shares, growing
crops, grass, and things attached to or forming part
of the land which are agreed to be severed before
sale or under the contract of sale. Accordingly,
every kind movable property except money and
actionable claims are goods under the Sale of
goods Act. Money means current money i.e.
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recognised currency in circulation in the country.

Obviously money cannot be sold or bought. Old
and rare coins, which are not in circulation at
present can be treated as goods and hence bought
and sold like any other goods.
Actionable claim means a claim which can be
enforced by legal action. For example, if X has
borrowed money from Y, then Y has a claim
against X which can be enforced by taking legal
action i.e. filing a suit against X. This right or
claim of Y cannot be subject matter of sale of
goods because such claim is not goods.
Sale and purchase of immovable property is
governed by the provisions of Transfer of Property
Act, 1882.

4. Price. The consideration in a contract of sale of

goods must be money consideration which is
called „price‟. Thus, in order to be a sale under this
Act, goods must be sold or bought for money
consideration only. If the goods are sold in
exchange of some other kind of goods, it is barter
and not sale of goods. However, where goods are
sold partly for money and partly for goods, it is a
contract of sale of goods. If A sells a table to B in
return of two chairs, it is a general contract, but not
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contract of sale of goods. But if A sells his table to

B for Rs. 500/- (or for one chair and Rs. 250/-), it
is a contract of sale of goods.

5. Includes both „Sale‟ and „Agreement to sell‟.

„Contract of sale‟ includes both „sale‟ and
„agreement to sell‟. As already noted above, sale
implies immediate transfer of ownership from
seller to buyer whereas agreement to sell implies
such transfer at some time in future or subject to
fulfillment of some condition. Whether the parties
intend to transfer the ownership of goods
immediately or at some future time has to be
interpreted from the construction of the contract
and the facts of the case.

6. No formalities to be observed. The Sale of

goods Act does not lay down any special
formalities to be followed nor does it prescribe any
form to constitute a contract of sale of goods. It is
a kind of general contract and therefore all the
essential elements of contract, such as competence
of parties, free consent etc. must be present in
contract of sale of goods also. Further, contract of
sale may be oral or written. It may even be implied
from the conduct of the parties.
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Distinction between Sale and Agreement to sell

It is necessary to understand the difference

between the two as they have different legal
effects. The points of distinction can be stated as
follows:

1. Transfer of property (ownership). In a sale,

the property in goods passes to the buyer
immediately so that the seller is no longer the
owner of goods. In other words, a sale implies
immediate conveyance of property from the seller
to the buyer.
In „agreement to sell‟, there is no transfer of
property to the buyer at the time of the contract.
The transfer of property takes place later, so that
the seller continues to be the owner of the goods
until the agreement to sell is converted into a sale.
This conversion takes either after the expiry of
certain time or fulfillment of some condition.

For example, where a person purchases a golden

ring from a shop by making payment for the same,
it is a contract of sale as the ownership of the ring
has passed from seller to buyer at the time of
 328

contract. On the other hand, where a buyer

purchases 30 litres of oil from a shop which is to
be taken out a barrel containing 100 litres of oil, it
is „an agreement to sell‟ because the ownership of
30 litres of oil can pass to the buyer only when 30
litres of oil is separated from the bulk, weighed
and made ready for delivery. This „agreement to
sell‟ becomes a sale on fulfillment of certain
condition i.e. separation of specified quantity from
the bulk.

It must be remembered that transfer of possession

has nothing to do with the transfer of ownership of
goods. One who possesses the goods may not be
the owner of goods and vice versa.

2. Risk of loss. It is a general rule that unless

otherwise arranged and agreed, the risk of loss of
or damage to goods is always with the owner of
the goods. Therefore, in the case of sale, where
ownership has passed from seller to buyer, if the
goods are destroyed the loss falls on the buyer
even if the goods have not reached him, or are still
in possession of the seller. On the other hand, in
the case of agreement to sell, the seller continues
to be owner of goods and hence if the goods are
 329

destroyed the loss falls on the seller, even if the

goods are in possession of the buyer.

3. Consequences of breach. In the case of sale, if

the buyer refuses to pay the price of goods, the
seller can sue him for price even if the goods are in
his possession. However, in the case of agreement
to sell the ownership has not passed to the buyer
and hence if the buyer refuses to pay the price, the
seller can only sue for damages and not the price,
even if the goods are in possession of the buyer.

4. Right of resale. In sale, the seller cannot resell

the goods even if they are in his possession
because he is no longer the owner of the goods. If
he does so, the subsequent buyer having
knowledge of the previous sale cannot obtain any
title to the goods. The first buyer can sue and
recover the possession of goods from the second
buyer. However, in case of agreement to sell, the
property in goods remains with the seller and he
can lawfully sell the goods to another person who
will get a good title to goods irrespective of his
knowledge of previous sale. The original buyer can
sue the seller only for damages for breach of
contract.
 330

5. Insolvency of buyer before he pays for the

goods. In a sale, if the buyer becomes insolvent
before he pays the price of goods, the seller has to
deliver the goods to the Official Receiver
(appointed for the property of the buyer). The
seller is then treated like other creditors of the
buyer and is entitled only to a ratable dividend for
the price of the goods. But if it is an agreement to
sell, the seller may refuse to deliver the goods to
the Official Receiver unless the price is paid.

6. Insolvency of seller if the buyer has already

paid the price. In a sale, if the seller becomes
insolvent, the buyer is entitled to recover the goods
from Official Receiver, as he has become the
owner of the goods. On the other hand, if it is an
agreement to sell, and if the buyer has already paid
the price without receiving the goods, he can only
claim ratable dividend and not the goods, because
he has not yet acquired ownership of the goods.

Sale and Hire-Purchase Agreement

In a hire-purchase agreement, the hirer of goods

pays money to the owner of goods for using the
 331

goods, but the ownership of goods remains with

the person who gives goods on hire. Here the
owner of goods delivers the goods to a person who
agrees to pay certain stipulated periodical
payments as hire charges. Though the possession
of goods is with hirer, the ownership is still with
the person who allows his goods to be used by the
hirer. If the payments are made without any default
for a fixed period, the hirer gets an option to buy
the goods. The ownership of goods passes to the
hirer, now a buyer, once he exercises his option
and purchases the goods. Till then, he is not owner
of goods.
The distinction is important from the view-point of
legal effect in the event of insolvency of the hirer
of goods. In that case the owner can recover the
goods let on hire, because ownership of goods has
not passed to the hirer. Again, in a hire, the hirer
cannot pass on any title even to innocent and bona
fide third parties.
It must be noted that mere payment of price by
instalments does not make the transaction a hire-
purchase transaction. When the price is paid in
instalments, it is contract of sale where the
ownership has passed from seller to buyer; only
the payment of price is deferred. In such
 332

transactions, what is paid periodically is the part-

price of goods, and not the hire charges.

Goods

The subject matter of contract of sale is always

Goods. The term „Goods‟ has been defined under
the Act to mean – „every kind of movable property
other than actionable claims and money; and
includes stock and shares, growing crops, grass,
and things attached to or forming part of the land
which are agreed to be severed before sale or
under the contract of sale‟.

As we have noted earlier, actionable claim refers

to the claim of any person against other for the
enforcement of which legal action can be taken.
Such actionable claims are not goods; and
similarly, money, which is a medium of exchange,
also cannot be goods because it is for money that
we buy and sell goods. For example, one cannot
buy hundred rupees, but can buy something by
paying hundred rupees.
 333

Stock and shares, growing crops, grass, gas,

electricity, water, goodwill, furniture, garments,
books etc. are all examples of goods.

Goods may be (a) Existing, (b) Future or (c)

Contingent. The existing goods may be (a)
Specific, or (b) Generic; and further, (a)
Ascertained or (b) unascertained.

Existing goods
Goods which are physically in existence and which
are in seller‟s ownership and/or possession at the
time of entering into contract of sale are called
existing goods. Instances of goods possessed but
not owned by the sellers are sale by agents and
pledgees.
Existing goods may again be either specific or
unascertained.

Specific goods means goods identified and agreed

upon at the time of the making of contract of sale.
To be specific, goods must be actually identified or
individualised, and not merely identifiable. For
example, where A agrees to purchase a TV set
marked with particular manufacturing number, it is
contract of sale of specific goods or ascertained
 334

goods. In practice, on many occasions the term

specific goods is used as if it means the same thing
as ascertained goods, though there is a subtle
difference between the two.

Unascertained goods are not separately identified

or ascertained at the time of the making of the
contract. They are indicated or defined only by
description. For example, A has ten cows. He
promises to sell one of them to B, pointing it out to
B at the time of the sale. This is an example of sale
of specific goods. If, on the other hand, A merely
promises to sell any one of the ten cows, the
contract is of sale of unascertained goods.

Future goods. The Act makes it possible for a

person to sell or offer to sell future goods i.e.
goods which he does not own or possess at the
time of contract, but which he will manufacture or
produce or acquire after the making of the
contract, Future goods are not the same as
unascertained goods which form a class of existing
goods. „A‟ promises to sell to „B‟ certain steel
items after one month which he is going to
manufacture in his factory. This is a valid contract
of sale though „A‟, at the time of contract, has no
 335

product with him for sale. It may be noted that

there can be no present sale of future goods
because there is no question of passing of
ownership of goods from seller to buyer in such
contract. The ownership will necessarily pass at
some future time when the goods will come into
existence. Even if the parties claim to make a
contract of sale of future goods, in the eyes of law
it is only „an agreement to sell‟.

Contingent goods. In a way, the contingent goods

are a kind of future goods and therefore a contract
for the sale of contingent goods also operates as
„an agreement to sell‟. As in the case of future
goods, in the case of contingent goods also the
property in goods does not pass to the buyer at the
time of making the contract.
For example, A agrees to sell to B a specific rare
article for an agreed price, provided he can
purchase the article from the present owner. This is
a contract of sale of contingent goods. Here, the
performance of the contract depends on the
contingency which may happen or may not
happen.
 336

It may be noted that if the parties stipulate that

performance is subject to any contingency, no
damages shall be payable if the seller is unable to
sell the goods. In fact, the performance on the part
of the seller is not due unless the contingency
happens. On the other hand, if the performance is
not made subject to any such condition, the seller
is liable to pay damages to the buyer for his
inability to sell, on non-happening of the
contingency.

Perishing of goods

Where specific goods are the subject-matter of a

contract of sale (both sale and agreement to sell)
and they, without the knowledge of the seller,
perish at or before the time of the contract, the
contract is void. For example, A agrees to sell to B
a particular painting which he believes to be in his
possession. Later, it turns out that the painting was
stolen before the contract was made. There is no
subsisting contract based on the rule that mutual
mistake of a fact essential to the contract renders
the contract void. (Refer to the discussion on void
contract)
 337

It may be noted that it is only the perishing of

specific goods that affects the validity of contract
of sale. If the sale is of unascertained goods, the
contract will not become void under similar
circumstances. For example, where A, a dealer of
TV sets, agrees to sell to B five TV sets of a
particular brand and all the TV sets in A‟s shop are
destroyed by fire, the contract does not become
void. A must supply five TV sets to B after
purchasing them from the market or pay damages
to for breach of contract.

What would happen where the contract of sale is

of specific goods and only part of the goods are
damaged or destroyed? The answer will depend on
whether the contract is entire or divisible. If the
contract is one (not divisible) and part of the goods
are destroyed, the contract will become void. If the
contract is divisible, it will not become void and
the goods which are available in good condition
must be accepted by the buyer. Where a contract
was made for a parcel containing 700 bags of
groundnuts, and only 591 bags could be delivered
the remaining having been stolen, the contract was
held to be void and the buyer could not be
 338

compelled to take delivery of the 591 bags.

(Barrow Ltd. vs. Philips Ltd.)
It may be noted here that the contract was for the
parcel containing 700 bags. If the contract was for
the bags, each containing the same amount of
material and of the same price, the buyer would be
compelled to take the delivery of 591 bags and pay
for them.

Perishing of goods before sale but after

agreement to sell

Where the contract does not amount to sale, but is

only agreement to sell, and the goods, without any
fault of either the seller or the buyer perish or are
damaged subsequent to the agreement but before
the risk passes to the buyer (by virtue of agreement
to sell becoming contract of sale), the agreement to
sell becomes void and both the parties are excused
from performance.
Four conditions must be satisfied before the
agreement to sell can be avoided:
1. The contract must be an agreement to sell and
not an actual sale;
2. The loss must be specific;
 339

3. The loss must not be caused by the wrongful

act or default of either party; and
4. The goods must perish before the risk passes
to the buyer. (because if the risk has passed to
the buyer, he must pay for the goods, though
undelivered.)

Price

There cannot be any sale without a price. If there is

no valuable consideration to support a transfer of
ownership of goods from the owner to another
person, the transaction is a gift, and it is not
governed by the provisions of the Act. To
constitute a contract of sale, the transfer or
agreement to transfer property in goods must be
for a price. Price is defined as money consideration
in contract of sale. It may be paid in cash or by
cheque or by any other mode. The mode of
payment of price is immaterial. What is necessary
is the agreement to pay a price in money.

Modes of fixing the price

 340

The price may be fixed in any of the following

modes:

1. It may be expressly stated in the contract

itself. The parties are free to decide any price
they like and no court can question the
adequacy of the price. The price thus fixed in
the contract itself must be certain and
definite.
2. To be fixed in the manner stated in the
contract. The contract may provide for the
manner in which the price is to be fixed. For
example, it may be agreed that the buyer
would pay the market price prevailing on a
particular date or that the price would be
fixed by a valuer who is appointed by the
consent of the parties.
3. It may be fixed by the course of dealings
between the parties. If the buyer has been
regularly making purchases from the seller
and has been paying the price prevailing on
the date of placing the order, the course of
dealings suggest that in subsequent
transaction also the price which is prevailing
on the date of placing the order would be
paid. Further, if there is a custom to deduct
 341

discount at a particular rate, the same would

also be taken into account in determining the
price.
4. Reasonable price, in other cases. If the price
is not capable of being determined in
accordance with any of the above modes, the
buyer is bound to pay to the seller a
„reasonable price‟. What is reasonable price
is a question of fact and would depend on the
circumstances of each case.

Agreement to sell at valuation

We have seen above that one of the modes of

determining the price of goods is by valuation by a
third party appointed by the seller and buyer. If
such third party does not fix the price for any
reason, the contract becomes void. In such case, if
part of goods have been already delivered and
accepted, the buyer has to pay the reasonable price
for the goods so accepted.

The Act provides for „escalation clause‟ in the

contract of sale. Where, after making of the
contract and fixing the price but before the
delivery of the goods, a new or increased custom
 342

duty or excise duty, or sale or purchase tax is

imposed and the seller has to pay it, the seller is
entitled to add the same to the price. Similarly, if
the rate of duty or tax is lowered, the buyer would
be entitled to a reduction in price.

Earnest or Deposit

Sometimes the buyer pays part of the price in

advance as security for the due performance of his
part of the contract, and not as part-payment of
purchase money. The money so paid as security is
called Earnest or Deposit. If the purchase is carried
out, the deposit goes against the purchase money
and only the balance of the price is required to be
paid. But if the sale is cancelled through the fault
of the buyer, the deposit is forfeited to the seller. If
the sale goes off by the seller‟s default, he must
return the earnest money.

Chapter 14

Conditions and Warranties

 343

The parties are at liberty to enter into a contract

with any terms they please. These terms or
stipulations may be regarding the quality of goods,
the price and mode of payment, the delivery
schedule of goods and so on and so forth. Some of
these stipulations are very important as they relate
to the very purpose for which the buyer is
purchasing the goods. If such terms are broken by
the seller, the very purpose of purchase is defeated
and frustrated. In such case, the buyer may claim
that the seller has committed breach of contract.
These vital and important terms of contract of sale
are called „conditions‟.
As against these terms, there may be other
stipulations in the contract which are not so
important. If any of these terms is broken by the
seller, it may not result in frustration of the
purpose for which the buyer is purchasing the
goods, though it is a failure in compliance on the
part of the seller. Such minor or not so important
terms of the contract are called „warranties‟.

Definition of Condition
 344

A condition is a stipulation essential to the main

purpose of contract, the breach of which gives the
aggrieved party a right to repudiate the contract
itself. In addition, he may maintain an action for
damages for loss suffered, if any, on the ground
that the whole contract is broken and the seller is
guilty of non-delivery.

Definition of Warranty

A warranty is a stipulation collateral to the main

purpose of the contract, the breach of which gives
the aggrieved party a right to sue for damages
only, and not to avoid the contract itself. It is thus
a subsidiary promise.

It is clear from the above definitions that condition

is a stipulation in a contract of sale which is so
important that breach of which entitles the buyer to
repudiate the contract itself and file a suit for
compensation for breach of contract. Warranty is a
stipulation which is not so vital to the contract and
therefore if warranty is broken by the seller, the
buyer can only sue the seller for damages, but he
cannot avoid the contract as such.
 345

What terms in a contract of sale are conditions and

what terms are warranties is a question of fact and
it depends on the particulars of each case. Further,
the terminology used by the parties is not the
conclusive test to determine whether a particular
term is a condition or a warranty. The intention of
the parties and the other relevant surrounding
circumstances are to be taken into account for this
purpose. If the stipulation is such that its breach
would be fatal to the rights of the aggrieved party,
it is a condition and where it is not so, it is a
warranty.
Whether a stipulation in a contract of sale is a
condition or a warranty depends in each case on
the construction of the contract. A stipulation may
be a condition though called a warranty in the
contract.
For example, a man buys a particular horse which
is described to be quiet. If the horse turns out to be
vicious, the buyer‟s remedy is only to claim
damages, as it is breach of warranty. But if instead
of buying a particular horse, the buyer asks the
dealer to supply a quiet horse and the horse turns
out to be vicious, the buyer can reject the horse
and also ask for damages, as it is a breach of
condition.
 346

.
Difference between Condition and Warranty

The points of distinction between condition and

warranty can be stated as follows:

1. As to value and importance. A condition is a

stipulation which is essential to the main
purpose of the contract, whereas a warranty is
a stipulation which is collateral to the main
purpose of the contract.

2. As to breach. The breach of condition gives

the aggrieved party the right to repudiate the
contract and also to claim damages, whereas
the breach of warranty gives the aggrieved
party the right to claim damages only.

3. As to treatment. A breach of condition may

be treated as a breach of warranty, but a
breach of warranty cannot be treated as a
breach of condition.

When breach of condition may be treated as

breach of warranty
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In certain cases, the breach of condition is to be

treated as breach of warranty, as a consequence of
which the buyer loses the right to repudiate or
rescind the contract and has to be satisfied with
compensation only. These cases are as follows:

1. Voluntary waiver by the buyer. When there

is breach of condition by the seller, the buyer
is vested with the right to reject the goods and
treat the contract as repudiated. However, he
may choose not to exercise this right. He may
instead waive this right and treat the breach of
condition as breach of warranty, thereby not
repudiating the contract, but only claiming
compensation from the seller.
For example, where the seller supplies the
agreed quantity of garments of white colour
when the condition was to supply the garments
of red colour, it is a breach of condition and
the buyer has a right to reject the goods
treating the contract as broken by the seller.
However, the buyer may elect to accept the
delivery of garments treating the breach of
condition as breach of guarantee. In such case
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the buyer has the right only to claim damages

from the seller for breach of warranty.
2. Acceptance of goods by buyer. When the
buyer has accepted the delivery of goods, he
cannot subsequently reject them on the ground
that there had been a breach of condition. The
right is lost once he accepts the goods. He can
now only claim damages, treating the breach
of condition as breach of warranty.
If only part of the goods are accepted by the
buyer and if the contract is divisible, he can
reject the remaining goods which he has not
accepted. If the contract is indivisible, that is
to say, when the goods are priced for the
whole lot and not per unit or per piece etc.,
acceptance of goods in part amounts to
acceptance of goods in the whole and the
buyer is compelled to treat the breach of
condition as breach of warranty.
„Acceptance of goods‟ does not mean merely
taking the physical delivery of goods. The
buyer shall be deemed to have accepted the
goods when –a) he has communicated to the
seller that he has accepted the goods, or b)
when he does some act in relation to goods
which is inconsistent with the ownership of
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the seller. (e.g. he consumes the goods, or sells

them, or puts his mark on them etc.), or c)
even after lapse of reasonable time, he retains
the goods without communicating to the seller
that he has rejected the goods for breach of
condition. It is not necessary that the buyer, in
such case, should physically return the goods
to the seller. It is sufficient if he unequivocally
intimates to the seller about his rejection of
goods.

Express and Implied conditions and warranties

We have noted earlier that both conditions and

warranties are the terms in contract of sale of
goods. Express conditions and warranties are
those terms which are specifically incorporated in
the contract at the desire of the parties. Implied
conditions and warranties are those terms which
the law assumes to be included in every contract of
sale, even if they are not inserted in express words.
Therefore, implied conditions and warranties are
those terms in every contract of sale of goods
which the law assumes to be present unless they
are expressly negated by the parties.
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Implied conditions

Unless otherwise agreed by the parties, the

following conditions are always assumed by law to
be present in every contract of sale of goods:

1. Condition as to title. The first implied

condition on the part of the seller in every
contract of sale is that in the case of actual
sale, the seller has the right to sell the goods,
and in the case of agreement to sell, the seller
will have the right to sell the goods at the time
when the property in goods is to pass. Thus if
the seller‟s title is discovered to be defective,
the buyer is entitled to recover the price.
Where the buyer is dispossessed of the car
bought by him because the seller did not have
title to it, the buyer is entitled to recover the
full price even though he has used the car for
several months. In the case of breach of this
condition, the buyer has no option but to treat
it as breach of warranty because he has to
invariably return the goods to the true owner.
He can claim damages from the seller and also
recover the price paid in full.
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2. Condition in a sale by description. Where

there is a contract of sale of goods by
description, there is an implied condition that
the goods shall correspond with the
description. Where sale was made of a second-
hand reaping machine which the buyer had
never seen, but which the seller had stated to
be almost new and used very little, this was a
sale by description and, when the machine was
found to be old and repaired, there was a
breach of condition, and the buyer could return
the machine. This condition applies to both
specific and unascertained goods.
The description may be in terms of
characteristics of the goods or by mentioning
their trade mark or brand name such as
Basmati rice, Solapur cotton etc.

3. Condition in a sale by sample. Where the

goods are sold as per sample, the implied
conditions are, a) that the bulk shall
correspond with the sample in quality, b) that
the buyer shall have a reasonable opportunity
of comparing the bulk with the sample, and c)
that the goods shall be free from any defect,
rendering them unmerchantable, which would
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not be apparent on reasonable examination of

goods.

4. Condition in a sale by description and

sample. When the goods are sold by sample as
well as by description, there is an implied
condition that the bulk of the goods shall
correspond both with the sample and with the
description. If the goods supplied correspond
only with the sample and not with the
description or vice versa, the buyer is entitled
to reject the goods.

5. Condition as to fitness or quality. The

general rule of law is „caveat emptor‟, that is,
let the buyer be aware. Therefore, ordinarily,
in a contract of sale, there is no implied
condition or warranty as to the quality or
fitness for any particular purpose of goods
supplied. But where the buyer makes known to
the seller the purpose for which he is
purchasing the goods and the seller happens to
be a person whose course of business is to sell
goods of that description, then there is an
implied condition that the goods shall be
reasonably fit for such purpose. Thus, in order
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that a buyer can claim breach of condition, he

must have made known to the seller the
purpose for which he is buying the goods,
relying on the skill and judgment of the seller
and the seller must be dealing with such goods
in the ordinary course of his business.

6. Condition as to merchantability. This

condition is implied only where the sale is by
description. In such case even when the goods
answer to the description, till they have to
meet another condition of merchantable
quality. The merchantable quality means that
the goods are of such quality and are un such
condition that a reasonable man, acting
reasonably would accept them under the
circumstances of the case in performance of
his offer to buy those goods, whether he buys
them for his own use or to sell again. It should
be noted that merchantable quality does not
mean that the goods are quickly re-salable.
Again, if the buyer had an opportunity of
making the examination but he avoids
examining the goods, there is no implied
condition as to merchantability as regards
defects which such examination ought to have
 354

revealed. Therefore, this condition is

applicable only when the defects in the goods
are not noticeable through ordinary
examination and the seller is a dealer in the
goods of that description, whether he is the
manufacturer or not.

7. Condition as to wholesomeness. This

condition is implied only in a contract of sale
of eatables and provisions. In such cases the
goods supplied must not only answer to
description and be merchantable but also must
be wholesome, i.e. free from any defect which
renders them unfit for human consumption.

Implied Warranties

Certain terms of contract of sale of goods which

are warranties, are always assumed to be present in
every such contract unless otherwise agreed by the
parties and they are called implied warranties.
They are as follows:

1. Warranty of quiet possession. The first

warranty on the part of seller in every contract
of sale is that the buyer shall have and enjoy
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quiet possession of the goods. In a way, the

rights accruing to the buyer under this
warranty are included in the condition as to
title. Under this condition as well as the
warranty as to quiet possession, if the buyer
suffers on any count owing to defect in the
title of the seller, he has to return the goods to
the true owner and can claim damages from
the seller. This warranty differs from the
condition in that even if the buyer is not
compelled to return the goods, yet he can
claim damages from the seller for the
disturbance and inconvenience caused to him
by any temporary defect in the title of the
seller.
For example, where one joint owner of goods
sells the goods without the consent of the
other, the buyer will not get a good title to the
goods. The seller may subsequently pay off
the joint owner and pass on a clear title to the
buyer. Here, there is no breach of condition
but breach of warranty because the buyer‟s
right of peaceful and quiet possession is
violated. Hence, the buyer, though does not
return the goods, yet can claim damages from
the seller for the disturbance in his quiet
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possession.

2. Warranty of freedom from encumbrances.

When goods have encumbrances, it means that
they are charged for payment of some
outstanding dues. Ownership of such goods is
subject to payment of such charges. The seller
of such goods may be in possession of the
goods but his ownership is subject to the
condition that he pays the dues for which a
charge was created on the goods. When such
goods are sold without making them free of
encumbrances, the buyer does not get a good
title to the goods.
The implied warranty on the part of the seller
is that „the goods shall be free from any charge
or encumbrance in favour of any third party,
not declared or not known to the buyer before
or at the time when the contract is made.‟ If
the goods are afterwards found to be subject to
a charge and the buyer has to discharge the
same, there is breach of this warranty and the
buyer is entitled to damages.

Doctrine of Caveat Emptor

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The expression „caveat emptor‟ means „let the

buyer be aware‟. It is the duty of the buyer to be
careful while purchasing goods of his requirement
and, in the absence of any enquiry from the buyer,
the seller is not bound to disclose every defect in
goods of which he may be cognisant. It is the duty
of the buyer to thoroughly examine the goods and
ensure that they are suitable for the purpose for
which he is buying them. If the goods turn out to
be defective or if they do not suit his requirement,
the buyer cannot hold the seller liable for the same
as there is no implied undertaking by the seller that
he shall supply such goods as will suit the buyer‟s
requirement. Thus, if the buyer depends on his
own skill and judgment and makes a faulty choice,
he must thank himself for his loss, unless there was
a misrepresentation or fraud by the seller.

For example, A wanted to purchase 50 pens for the

clerks working in his office whose job was to
prepare handwritten reports with two copies.
Fountain-pens supplied by the seller were useless
because carbon copies could not be made with
such pens. A has to suffer the loss because as per
this doctrine, it was his responsibility to ensure
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that the pens he was buying were suitable for the

purpose.

Similarly, certain pigs were sold in auction „with

all faults.‟ The pigs were suffering from typhoid
fever and all of them but one died. They also
infected a few of the buyer‟s own pigs. It was held
that the seller was not bound to disclose that the
pigs were unhealthy. Caveat Emptor being the
rule, the buyer could not claim damages from the
seller.

The doctrine of caveat emptor is subject to certain

exceptions which are as follows:

Exceptions to Caveat Emptor

1. Where the seller makes a mis-representation

and the buyer relies on it, the doctrine of
caveat emptor does not apply. Such contract is
without the free consent of the buyer and
hence it is voidable at the option of the buyer
who has a right to rescind the contract.

2. When the seller obtains the consent of the

buyer by fraud or where the seller actively
 359

conceals the defects in the goods so that such

defects cannot be discovered on a reasonable
examination, the doctrine of caveat emptor
does not apply. Such a contract is also
voidable at the option of the buyer, who can,
in addition to rescission of contract, can claim
damages from the seller.

3. Where the buyer makes known to the seller the

purpose for which he requires the goods and
relies upon the seller‟s skill and judgment but
the goods supplied are unfit for the specified
purpose, the principle of caveat emptor does
not protect the seller and he is liable for
damages.

4. Where the custom or practice has established a

norm as to quality of fitness of goods and
seller does not comply with such norm, the
doctrine of caveat emptor does not apply.

5. In case of sale by description by the seller who

deals in such class of goods, there is an
implied condition as to goods being of
merchantable quality. If they are not, the rule
of caveat emptor will not protect the seller.
 360

(The doctrine will apply if the buyer has

examined the goods.)

Chapter 15

Transfer of Property

At the beginning of our discussion on this Act we

have seen that sale is a contract where there is a
transfer of property in goods from seller to buyer.
The expression „property‟ here means „ownership‟
and transfer of property means transfer of
ownership of goods from seller to buyer. We have
also seen that it is different from possession of
goods. Thus, it is possible that seller is still in
possession of goods sold though the ownership has
passed to the buyer; and the goods are in
possession of the buyer though the ownership is
still with the seller.

When is the property in goods transferred from

seller to buyer? It is important to know the answer
to this question because the precise moment of
time at which property in goods passes from the
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seller the buyer is of great significance from the

view point of its legal effects. They are as follows:

1. Risk passes with ownership. If the goods are

lost or damaged, it is the owner who has to
bear the loss. Hence it is necessary to know
whether the ownership of goods is with the
seller or the buyer at the time when the goods
are lost or damaged.

2. It is necessary also for taking action against a

third party who may be responsible for causing
damage to the goods, because it is only the
owner who can take such action.

3. In the event of insolvency of either seller or

buyer, whether the official receiver or assignee
can claim the goods or not would depend on
whether the ownership of goods is with the
seller or the buyer.

Rules regarding Transfer of Property in goods

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We shall now discuss the rules regarding transfer

of property in goods under the following two
heads:

 Transfer of property in specific or ascertained

goods,
 Transfer of property in unascertained and
future goods.

Transfer of property in specific or ascertained

goods

Where there is a contract for the sale of specific or

ascertained goods, the property in them is
transferred to the buyer at such time as the parties
to the contract intend it to be transferred. For the
purpose of ascertaining the intention of the parties
regard shall be had to the terms of the contract, the
conduct of the parties and the circumstances of the
case.
It is only when the intention of the parties cannot
be judged from the terms of contract or their
conduct or other circumstances that the following
rules shall apply regarding transfer of property.
 363

1. When goods are in deliverable state. Where

there is an unconditional contract for the sale
of specific goods in a deliverable state, the
property in goods passes to the buyer as soon
as the contract is made, and it is immaterial
whether the time of payment of the price or the
time of delivery of the goods or both are
postponed.
For example, „A‟ buys some books from a
bookshop for Rs. 1000 on credit for one week
and the shopkeeper agrees to send the books to
the house of „A‟. The property in books passes
to the buyer immediately irrespective of non-
payment of price and non-delivery of goods.
Therefore, if in the meanwhile, the shop
catches fire and books are destroyed, the loss
has to be borne by the buyer and he is bound
to pay the price.
The goods are said to be in „deliverable state‟
when they are in such a state that the buyer
would, under the contract, be bound to take
delivery of them. In the above example, if the
shopkeeper has to put any stamps on the books
or to pack them in a box or make a
consolidated list of the books or do anything
with respect to the books, they shall not be
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considered to be in a deliverable state until

such things are done, and the buyer does not
get ownership of them till then.

2. When the goods are not in a deliverable

state. Where there is a contract for the sale of
specific goods and the seller is bound to do
something to the goods in order to put them in
a deliverable state, the property in goods
passes to the buyer only when such thing is
done and the buyer is accordingly notified. It
shall be thus seen that merely putting the
goods in a deliverable state is not enough for
passing of property. It is further necessary that
the seller notifies to the buyer about the goods
now being in a deliverable state.

3. When the goods have to be measured or

weighed etc. for determining price. Where
there is a contract for the sale of specific goods
in a deliverable state, but the seller is bound to
weigh, measure, test or do some other act or
thing with reference to the goods for the
purpose of ascertaining the price, the property
does not pass to the buyer until such act or
 365

thing is done and the buyer has notice of it.

4. When goods are delivered on approval.

When goods are delivered to the buyer on
approval or „on sale or return‟, the property in
goods passes to the buyer

 When he signifies his approval or

acceptance to the seller, or does any other
act adopting the transaction, for example,
re-sells them or consumes them,
 If he retains the goods without giving
notice of rejection beyond the time fixed
for the return of goods, or if no time is
fixed, beyond a reasonable time.

For example, A book publisher delivered 100

text books to a college library on approval i.e.
on sale or return basis, within 10 days. On the
third day, there was a fire in the college library
without any fault on the part of college
management destroying all books. The book
publisher has to bear the loss as the property in
books was still with him.
However, if the college management retains
the books beyond 10 days without
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communicating anything to the publisher and

the books are destroyed in fire, the loss has to
be borne by the management since the
property in books has now passed to the
management and publisher is no longer the
owner of the books.

Transfer of property in Unascertained and

Future goods

The Sale of goods Act provides that where the

goods contracted to be sold are not ascertained or
where they are future goods, ownership will not
pass to the buyer, unless ad until the goods are
ascertained. Till then it is not a sale, but an
agreement to sell. The goods have to be
unconditionally appropriated to the contract so as
to bring them in a deliverable state, either by the
seller with the assent of the buyer or by the buyer
with the assent of the seller. Such assent may be
express or implied and may be given either before
after the appropriation is made.
Thus, in a sale of 100 litres of oil from a tank
containing large quantity of oil, the ownership of
100 litres of oil does not pass to the buyer until
100 litres of oil is separated from the tank and
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appropriated to the contract. Till then it is an

agreement to sell.
The process of ascertainment or appropriation
consists in earmarking or setting apart goods as
subject matter of the contract. It is separating the
goods, under contract, from the bulk by some
method such as weighing, measuring or counting
with the intention that such separated quantity of
goods can be delivered to the buyer.

Valid Appropriation
The ascertainment of the goods or their
appropriation may be made –

1. by the buyer with the seller‟s assent. Where

the goods are in the possession of the buyer, as
for example, where the buyer is a
warehouseman for the seller in respect of 60
bales of cotton and agrees to buy 25 bales out
of them, the buyer i.e. the warehouseman may,
with the seller‟s assent select 25 bales out 60,
and when he has done so, the goods (25 bales)
become appropriated and the ownership in
them passes to the buyer.
 368

2. by the seller with the buyer‟s assent. The more

common thing is for the seller to appropriate
the goods, but such appropriation must be with
the buyer‟s consent. In the above example, if
the bales were lying with the seller and he
selected 25 bales out of the lot with the
buyer‟s consent, the ownership of those 25
bales would pass to the buyer as soon as this is
done. Selection of goods by one party and the
adoption of that act by the other, converts the
„agreement to sell‟ into an „actual sale‟.

As regards delivery to carrier, a seller us deemed

to have unconditionally appropriated the goods to
the contract where he delivers the goods to a
carrier or other bailee for the purpose of
transmission to the buyer, and does not reserve the
right with respect to the goods. Reservation of the
right over the goods means reserving a right to
dispose of the goods until certain conditions like
payment of the price, are fulfilled. When seller
reserves such a right, the ownership of goods does
not pass to the buyer until those conditions are
satisfied. Thus, where the goods are put in the
course of transmission to the buyer and the seller
has reserved the right of disposal till payment of
 369

price, the buyer shall not become the owner of the

goods until the price is paid.

Transfer of Title

The general rule is that only the owner of goods

can sell them. If a person transfers goods not
belonging to him, the transferee gets no title. The
Act provides that „where goods are sold by a
person who is not the owner thereof and who does
not sell them under the authority or with the
consent of the owner, the buyer acquires no better
title to the goods than the seller had.‟ This rule is
expressed by the maxim – ‘nemo det quod non
habet,’ which means that no one can give what he
has not got. This rule is meant for the purpose of
protecting the true owner of goods against the sale
of his goods by the non-owners. The buyer of such
goods will not get any title to the goods because
the seller had not right to them. Therefore, if a
thief sells any stolen property, the buyer will not
get any title even if he has purchased the goods
bona fide and in innocence. Such buyer, according
to this rule, will have to return the goods to the true
owner, though he may have paid the price for the
same. Similarly, if A, the hirer of goods under a
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hire-purchase agreement, sells them to B, the

buyer B does not acquire ownership of goods as
against the true owner even if he has purchased the
goods in good faith and on payment of price. At
the most he may acquire the rights of a hirer of
goods, as these were the only rights which could
be legally transferred to the buyer. The buyer does
not get any better title than that of the seller.

However, there are certain exceptions to the rule

that a seller cannot give to buyer a better title than
he himself has. These exceptions are discussed
below:

Transfer of title by non-owners

1. An unauthorised sale by Mercantile agent.

Mercantile agent is an agent having, in the
customary course of business as such agent,
authority either to sell goods or to consign
goods for the purposes of sale, or to buy goods
or to raise money on the security of goods. If
such agent, who is generally assumed to be
authorised to sell the goods, sells them without
authority, he can pass a good title to the goods
to the buyer. In order that the buyer gets a
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good title to the goods through an

unauthorised sale by a mercantile agent, three
conditions must be satisfied.
a) the agent must be in possession of goods or
documents of title with the consent of the
owner;
b) he should sell the goods in the ordinary
course of business; and
c) the buyer must should act in good faith
without having an notice that the agent has not
authority to sell the goods.

2. Sale by joint owner. If one of several joint

owners of goods has the sole possession of
them by permission of the co-owners, the
property in the goods is transferred to any
person who buys them from such joint owner
in good faith without notice of the fact that the
seller has no authority to sell.
Thus, one joint owner of goods can sell and
give a good title to the buyer even if he is
acting without any authority from the other
joint owners.
A, B and C are joint owners of 100 bags of
wheat which bags are in the custody of A. A
sells them to D who purchases them without
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notice of absence of authority of A. D gets a

better title to goods than the title of A.
In the absence of this provision, D could have
at the most become a joint owner of goods and
would be entitled to only that share in the
goods which A had before the sale.

3. Sale by a person in possession under

voidable contract. When, in a contract, the
consent of one party is obtained by undue
influence, misrepresentation or fraud, the
contract is voidable at the option of the party
whose consent is so obtained. In other words,
such party can avoid the contract and when he
exercises such choice, the effects of contract
are nullified.
When a person is induced to sell his goods
under misrepresentation etc. he has a right to
rescind the contract and recover the goods
from the buyer who is responsible for
misrepresentation. However, if such buyer
sells the goods to a third innocent party before
the contract is rescinded, such third party
would get a good title to the goods even
though the title of the seller is defective. This
is so because the right to avoid a voidable
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contract exists only so long as the interests of

the third person have not intervened.
For example, if A induces B to sell his horse
for a very low price by misrepresentation or
fraud. The contract is voidable at the option of
B. If A sells the horse to C before B rescinds
the contract, C would get a good title to horse
even if the title of A is defective.
It must be noted that in such cases the buyer
must be acting in good faith and without
having any notice of the defective title of the
seller.

4. Sale by seller in possession after sale. In a

sale, ownership of goods immediately passes
from seller to buyer. If a seller, who happens
to be possession of goods after sale, again sells
the goods to a third person such sale is without
authority since the seller is no longer the
owner of goods. However, he conveys a good
title to the subsequent buyer provided the
buyer acts in good faith and without notice of
the previous sale. This rule is also applicable if
the seller pledges the goods either himself or
through his mercantile agent.
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5. Sale by buyer in possession after agreement

to buy. A buyer does not acquire title to goods
under agreement to buy. He simply gets a
promise that the goods will be sold to him at
some future time. However, where a buyer has
agreed to buy the goods and has obtained
possession of the same or the documents of
title to them with the consent of the seller,
resells or pledges the goods either himself or
through a mercantile agent, he will convey a
good title to the buyer or the pledgee provided
the person receiving the goods acts in good
faith and without notice of any lien or other
right of the original seller in respect of those
goods.
This is no applicable to a person who has
obtained possession of goods under a hire-
purchase agreement, because under such
agreement, the hirer merely gets an option to
buy.

6. Resale by an unpaid seller. Where an unpaid

seller has retained or regained the possession
of goods by exercising his right of lien or
stoppage of goods in transit, and he resells the
goods to a third person, such subsequent buyer
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acquires a good title to the goods as against the

original buyer, even though the resale may not
be in compliance of the rules laid down for
resale, e.g. notice to the first buyer.

7. Exceptions under other Acts. Some other

Acts also make provisions under which a non-
owner of goods can make a valid sale
conveying a good title to the buyer, such as –

a. Sale by finder of lost goods under certain

circumstances;
b. Sale by pawnee or pledgee under certain
circumstances;
c. Sale by Official Receiver of Assignee in
case of insolvency of an individual and
Liquidators of Companies;
d. Under the Negotiable Instruments Act, a
holder in due course gets a better title than
what is endorser had. In other words, a
person who takes a cheque in good faith
and for value becomes entitled to the
amount even if a takes the cheque from a
person who has found the cheque on road.
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Performance of contract of sale

Duties of buyer and seller

How are the parties to the contract of sale required

to perform their respective obligations under the
contract? The simple answer is, according to the
terms of the contract. The Sale of Goods provides
that it is the duty of seller to deliver the goods and
it is the duty of the buyer to accept them and pay
for them. Therefore, performance of contract of
sale of goods means delivery of goods by the seller
and acceptance of delivery of goods and payment
of price by the buyer, in accordance with the terms
of the contract. The parties are at liberty to
stipulate any terms of their choice as regards the
time, place and manner of delivery of goods by the
seller and its acceptance and payment of price by
the buyer.
It is only when the parties do not provide anything
in the contract regarding these matters that the
rules incorporated in the Act are made applicable.
These rules are discussed below.
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Delivery and modes of delivery

Delivery means voluntary transfer of possession of

goods from one person to another.
Delivery of goods can take place in any of the
following modes:
1. Actual delivery. Actual or physical delivery
takes place where the goods are handed over
by the seller to the buyer or his agent
authorised to take possession of the goods.
2. Symbolic delivery. It is made by indicating or
giving a symbol. Here the goods themselves
are not delivered, but the “means of obtaining
possession” the goods are is delivered to the
buyer, e.g. by delivering the key to the
warehouse where the goods are stored or the
bill of lading which will entitle the holder to
receive the goods on the arrival of the ship.
3. Constructive delivery or delivery by
attornment. Such delivery takes place when
the person in possession of the goods
acknowledges that he holds the goods on
behalf of and at the disposal of the buyer. For
example, the seller may agree, after the sale, to
hold the goods in his possession as bailee, as
per the instructions of the buyer. This is
 378

constructive delivery. Such bailee may be

either the seller himself or any third person.
For example, the seller may hand over the
delivery order to the buyer and also to the
warehouseman in possession of the goods. The
warehouseman who was till then holding the
goods as bailee for the seller may agree to now
hold the goods as a bailee of the buyer.

Rules regarding delivery

1. Buyer to be put in possession. Delivery

should have the effect of putting the buyer in
possession of goods. In order to constitute
delivery the buyer or his authorised agent must
have possession of the goods, i.e. the buyer
must be in a position to exercise some control
over the goods either directly or through an
agent. Such delivery may be actual, symbolic
or constructive.

2. Delivery and payment to be simultaneous.

Unless otherwise agreed, delivery of the goods
and payment of the price are concurrent
conditions. A contract of sale always involves
reciprocal promises; the seller promising to
 379

deliver the goods sold and the buyer to accept

and pay for them. In the absence of any
contract to the contrary, they are to be
performed simultaneously. Therefore, unless
the sale in on credit, the seller need not be
ready to deliver the goods before the price is
paid.

3. Buyer to apply for delivery. Though the

seller is bound to deliver the goods according
to the contract, yet he need not deliver them
until the buyer applies for delivery. The rule is
applicable even to the transactions where the
seller is yet to acquire the goods and notify the
buyer about the arrival of goods. In such cases
also, upon notification by the seller, the buyer
has to apply for delivery.

4. Effect of part delivery. A delivery of part of

the goods as an instalment of delivery of the
whole has the effect of passing of ownership
to the buyer of the whole goods. In other
words, when a delivery of part of the goods
has been made with the intention of delivering
the rest also, the property in the whole of the
goods is deemed to pass to the buyer as soon
 380

as some portion is delivered. For example,

where hundred litres of oil is sold in the pack
of ten litres each, delivery of 5 packs would
amount to passing of ownership of the whole
of the goods i.e. 100 litres of oil.
However, where the part is intended to be
severed from the whole, part delivery does not
amount to be delivery of the whole.

5. Time of delivery. The goods must be

delivered as per the terms of the contract.
Where the contract uses words like
„immediately‟, „forthwith‟ etc., it means that
quick delivery is intended. When no time is
fixed for delivery of the goods, the seller must
deliver them within a reasonable time and at a
reasonable hour. What is reasonable is a
question of fact and depends on the particulars
of each case.

6. Place of delivery. It is the duty of the seller to

deliver the goods at the place where it has
been agreed, under the contract during the
business hours on a working day. If the
contract does not stipulate any place of
delivery -
 381

a) goods are to be delivered at the place at

which they are at the time of making the
„contract of sale‟;
b) goods are to be delivered at the place where
they are at the time of „agreement to sell‟;
c) goods are to be delivered at the place where
they are manufactured or produced, if it is an
agreement to sell future goods.

In all the cases, the expenses of delivery are to

be borne by the seller unless otherwise agreed
between the parties.

7. Delivery of different quantity or quality. If

the delivery of goods is defective, in the sense
that it of a less or more quantity than what was
agreed, or of goods mixed with the goods of a
different description not included in the
contract, the buyer may reject the whole lot, or
accept the whole lot, or accept the quantity and
quality he ordered and reject the rest of the
goods so delivered.
In the case of rejection of goods, the buyer
need not return them to the seller, but it is
sufficient if he notifies to the seller the fact of
his rejection. If the buyer accepts short
 382

delivery or rejects the whole lot, he is entitled

to damages from the seller.

8. Delivery to carrier or wharfinger. The

delivery of goods by the seller to a carrier for
transmission to buyer or to wharfinger for safe
custody is prima facie deemed to be a delivery
of the goods to the buyer unless the right of
disposal has been retained by the seller.
Unless the buyer requires to dispatch the
goods at owner‟s risk, it is the duty of the
seller, when he delivers the goods to carrier or
wharfinger, to enter into a reasonable contract
on behalf of the buyer for the safety of the
goods, and if he fails to do so, and the goods
are lost or damaged, the buyer may decline to
treat the delivery to the carrier or wharfinger
as a delivery to himself or may hold the seller
responsible for damages.

Chapter 16
Unpaid seller and his rights
 383

Who is an unpaid seller?

The seller of goods is deemed to be an unpaid

seller –
 When the whole of the price has not been paid
or tendered; or
 When a conditional payment was made by a
bill of exchange or other negotiable
instrument, and the instrument has been
dishonoured.

In other words, an unpaid seller is one who has

sold goods on cash terms and has not received any
part of the price. It does not include a seller who
has sold goods on credit. The term seller includes
his agent. The seller is an unpaid seller even if a
part of the price remains unpaid.

Rights of Unpaid seller

An unpaid seller has two-fold rights:

 Rights of unpaid seller against the goods; and
 Rights of unpaid seller against the buyer
personally.

Rights of unpaid seller against goods

 384

An unpaid seller has the following rights against

the goods. It must be noted that the importance of
these rights lies in the fact that these rights are
available to an unpaid seller even though the
ownership of goods, i.e. property in goods has
already passed to the buyer. Thus, in a way, these
rights can be exercised by an unpaid seller in
respect to the goods not belonging to him.
These rights are –
1. Right of lien;
2. Right of stoppage of goods in transit; and
3. Right of resale.

1. Right of lien.
It is a right to retain the possession of goods and
refuse to deliver them to the buyer until the price is
paid or tendered. An unpaid seller in possession of
goods sold is entitled to exercise his lien on the
goods in cases where –

a) the goods have been sold without any stipulation

as to credit;
b) the goods have been sold on credit, but the term
of credit has expired;
c) the buyer becomes insolvent.
 385

The seller‟s lien is a possessory lien and hence it

can be exercised only so long as the seller is in
possession of the goods. It can be exercised only
for non-payment of price, and not for any other
charges such as godown charges or packing
charges etc. When the seller has made part
delivery of the goods, he can exercise lien on the
balance of the goods not delivered.
It may be remembered that this right of the seller is
regardless of transfer of property to the seller. In
other words, the unpaid seller can exercise this
right even if he is no longer the owner of the goods
and the property in the goods has passed to the
buyer. Correctly speaking, the right of lien is
available only when the ownership of goods has
passed to the buyer. When the property in goods
has not passed to the buyer, it is meaningless to
say that the seller has a right of lien on goods until
the price is paid. Lien presupposes the right to
retain the possession of goods belonging to another
until the price is paid. Therefore, it is only when
the property in goods has passed to the buyer that
the seller can exercise the right of lien on the
goods which may continue to be in his possession.
 386

If the property in goods has not passed to the

buyer, the seller has the right of withholding the
delivery of goods. The Act provides that where
the property in goods has not passed to the buyer,
the unpaid seller has, in addition to his other
remedies, a right of withholding delivery similar to
and coextensive with his rights of lien and
stoppage in transit where the property has passed
to the buyer.

Termination of lien

Lien on goods by the seller depends on physical

possession of goods by him. Once the possession
is lost, the right of lien is also lost. Accordingly,
the right of lien is lost or is terminated, -
a. When the seller delivers the goods to a carrier
or other bailee for the purpose of transmission
to the buyer without reserving the right of
disposal of the goods; or
b. When the buyer or his agent lawfully obtains
possession of the goods; or
c. When the seller expressly or impliedly waives
his right of lien.

2. Right of stoppage of goods in transit

 387

The right of stoppage in transit is a right of

stopping the goods while they are in transit,
resuming possession of them and retaining
possession until payment of the price. Thus, in a
way this right is an extension of the right of lien.
The right to retain the goods is lost when the
possession of goods is lost. Thereafter, the seller
has a right to regain the possession of goods
which is the right of stopping further delivery
transit of goods while they with a carrier for the
purpose of transmission to the buyer.
This right is available to the unpaid seller when –

1. The buyer becomes insolvent – when the

buyer has ceased to pay his debts in the
ordinary course of business, whether he is
declared insolvent or not.

2. The goods are in transit – the goods are neither

with the seller nor with the buyer, but are in
the custody of a carrier as an independent
middleman. (If the carrier is an agent of the
buyer, the transit comes to end the moment the
carrier receives the goods on behalf of the
buyer. If the carrier is an agent of the seller,
 388

the transit has not begun, because in the eyes

of law they are still in possession of the seller.)

Duration of transit

The right of stoppage of goods in transit is

available to unpaid seller only during the period
when the goods are transit. It is therefore important
to know when such transit begins and when it
ends. In other words, duration of transit is
significant because when the transit comes to an
end, the right of stoppage of goods also comes to
end.
Goods are deemed to be in course of transit from
the time when they are delivered to a carrier or
other bailee for the purpose of transmission to the
buyer, until the buyer or his agent takes delivery of
them. The goods are still deemed to be in transit if
they are rejected by the buyer.

The transit comes to an end in the following cases:

3. If the buyer obtains delivery before the arrival
of the goods at their destination.
4. If, after the arrival of the goods at their
destination, the carrier acknowledges to the
 389

buyer that he holds the goods on his behalf,

even if a further destination of the goods is
indicated by the buyer.
5. If the carrier wrongfully refuses to deliver the
goods to the buyer.

How stoppage in Transit Effected?

The unpaid seller may exercise his right of

stoppage in transit in the following ways:
a. By taking actual possession of goods
b. By giving notice of his claim to the carrier or
other bailee in whose possession the goods
are.
It is the duty of the carrier not to deliver the
goods to the buyer once he receives the notice
from the seller. If he makes a default, he is
liable for conversion.

Lien and Stoppage in Transit distinguished

The points of difference between right of lien and

right of stoppage of goods in transit are as follows:

1. The right of stoppage of goods in transit arises

only when the buyer is insolvent, but a right to
 390

lien can be exercised even when the buyer is

able to pay, but does not pay.

2. Lien is available only when the goods are in

actual possession of the seller, but goods can
be stopped in transit when the seller has parted
with the possession and the buyer has not
obtained the possession of goods.

3. When the possession is surrendered by the

seller, his lien is terminated, but his right of
stoppage commences and remains as long as
the goods are in transit and before they go into
possession of the buyer.

4. The right of lien is to retain possession while

the right of stoppage in to regain possession.

Effect of Sub-sale or Pledge by Buyer

What would happen to these rights of the seller if

the buyer sells or pledges the goods before these
rights are exercised by the seller? The answer is
that these rights of the seller are not affected by
buyer selling or pledging the goods or making any
disposition of them, unless A consents. For
 391

example, A sells certain goods to B and delivers

them to a carrier for transmission to B. Before the
goods are delivered to B, A comes to know that B
becomes insolvent. In the meanwhile, B sells the
goods to C. In this case, sale between B and C will
not affect the right of A to stop the goods in transit,
unless A has assented to such sale.

However, while the goods are transit, if the buyer

transfers the documents of title or pledges them to
a person in good faith and for consideration, then,
if the transaction is sale, the seller‟s right of lien or
stoppage is defeated. If the transaction is a pledge,
the seller‟s right of stoppage is subject to the
pledge, i.e. subject to the rights of pledgee. But in
such case, the unpaid seller can require the pledgee
to satisfy his claim against the buyer first out of
any other securities of the buyer in the hands of the
pledgee.

3. Right of Resale

The third right available to an unpaid seller is the

right of resale, the first two being the right of lien
and right of stoppage of goods in transit. It is
 392

called resale because there has been already a sale

by which the ownership has passed to the buyer.
This is a very valuable right because in the absence
of this right, the other two rights would be
meaningless. A regular businessman would not be
content with retaining or regaining the possession
of goods once sold, unless he has a right to resell
them to another person and complete the
transaction. An unpaid seller can resell the goods
in the following cases:

a. Where the goods are perishable

b. Where the right is expressly reserved in the
contract
c. Where the seller has given a notice to the
buyer of his intention to resell and the buyer
does not pay with a reasonable time.

If, on a resale, there is a deficiency between the

price due and the amount realized, the seller can
recover it from the buyer. But if there is a surplus
on resale, the seller need not hand over the surplus
to the buyer. The profit arising out of resale
belongs to the seller because the resale is the result
of breach of contract on the part of the buyer and
such a buyer cannot take advantage of his own
 393

wrong. However, if no notice is given by the seller

to the buyer of his intention to resell (notice is
required when the goods are not perishable and
right of resale is not expressly reserved in the
contract of sale), the seller cannot recover any loss
that he may incur on resale. Additionally, if he
makes any surplus on the resale, he has to share it
with the buyer.

Rights of Unpaid Seller against the Buyer

Personally

In addition to the rights against the goods which

we have discussed above, the unpaid seller has the
following rights against the buyer personally:

1. Suit for price. Where the property in the

goods has passed to the buyer, the seller is
entitled to sue for price, whether the
possession is with the buyer or the seller.
Similarly, where the price is payable on a
certain day irrespective of delivery, the seller
may sue for the price, if it is not paid on that
day, although the property in goods has not
passed.
 394

2. Suit for damages for non-acceptance. Where

the buyer wrongfully neglects or refuses to
accept and pay for the goods, the seller has a
right to sue the buyer for damages for non-
acceptance. Here, the buyer seeks to recover
the loss sustained by him due to breach of
contract by the seller rather than the price of
the goods.
The Act lays down the rules for calculating the
damages payable to seller in such case.
Accordingly, where there is a ready market for
the goods, the damages would be equal to the
difference between the contract-price and the
market-price. Where there is no available or
ready market for the goods, the measure of
damages would depend on the facts of each
case. Such damages may be equal to the full
price of the goods plus reasonable charge for
the care and custody of the goods.

Buyer‟s rights against seller

The Buyer has the following rights to sue the seller

for breach of contract:
 395

1. Suit for damages for non-delivery. Where

the seller wrongfully neglects or refuses to
deliver the goods to the buyer, the buyer may
sue him for damages for non-delivery. The
measure of damages, as in the case of non-
acceptance, would be the difference between
the contract-price and the market-price.

2. Suit for specific performance. A buyer can

get his contract specifically performed, i.e.
obtain an order of the Court compelling the
seller to deliver the goods he has sold, only
when the goods are specific or ascertained.
This remedy is discretionary and will be
granted only when damages would not be an
adequate remedy, for example, when the
goods are very rate or unique such as a rare
book or a painting of a dead painter etc.

3. Suit for breach of warranty. Where there is a

breach of warranty by the seller, the buyer is
entitled to damages if the price has already
been paid. If not, he can ask for reasonable
reduction in the price of the goods.
 396

4. Suit for breach of condition. The breach of

condition entitles the buyer to treat the
contract as repudiated. He can file a suit for
rescission of contract and also claim damages
on the ground that the whole contract is
broken by the seller.

5. Suit for recovery of price with interest. If

the buyer has already paid the price of the
goods, he can sue the seller for the refund of
the price along with interest on the price-
amount from the date of payment of price till
the date of such refund.

Auction Sale

A sale by auction is a public sale where goods are

offered to be taken by the highest bidder. It is a
proceeding at which people are invited to compete
with each other for the purchase of property by
successive offer of advancing sums.
The advertisement of an auction sale is merely an
„invitation to offer‟ and the bidders, at the time
when the auction is conducted, put forth their
respective offers. When the auctioneer accepts any
 397

of the offers, the contract is formed and the

ownership of goods is passed to the buyer, making
him liable to pay the price of the goods.
The manner of expressing the offer is normally by
shouting the amount of price which the intending
buyer is ready to pay for the goods. The manner of
expressing acceptance is normally the fall of
hammer by the auctioneer for three times in
succession. The offer stands accepted at the third
fall of the hammer.

The rules laid down under the Sale of goods Act

regulating the sale by auction are as follows:

1. where goods are put for sale in lots, each lot is

prima facie deemed to be the subject of a
separate contract of sale;

2. the sale is complete when auctioneer

announces its completion by the fall of the
hammer or in other customary manner, and,
until such announcement is made, any bidder
may retract his bid;

3. the seller himself or any one person on his

behalf may bid at the auction, provided such
 398

right is expressly reserved by the by the seller.

If such right is not expressly reserved, any
bidding by or on behalf of the seller is deemed
to be fraudulent. This is to prevent pretended
bidding so as to raise the price of the goods.

4. The sale may be notified to be subject to a

reserved price. It means that the goods shall
not be sold below a particular price which is
the minimum price the goods are expected to
fetch. Even if the auctioneer, by mistake,
accepts any bid below such price, no valid
contract comes into existence and he can
refuse to deliver the goods to the bidder,
though he may be the highest bidder.

5. If the seller makes use of pretended bidding to

raise the price, the sale is voidable at the
option of the buyer.

Chapter 17

Consumer Protection Act, 1986

 399

Introduction

Unfettered exploitation of consumers by the

traders and manufactures has been a regular
feature our mercantile system. It is true that
survival and growth of industries rest on the
support of consumers as a segment, but
individually every consumer is so weak that he is
virtually disregarded in every sphere of business
transactions. The reason for the helplessness of
consumers can be attributed to the lack of ability
on the part of consumers to organise themselves to
protect and promote their collective interests. We
notice that consumer movements in India have
always failed. There is a variety of reasons for
such failure. Chief among them are lack of
consumer education and consumer solidarity. One
more important reason for failure of consumer
movement is that consumers, though large in
number, are not geographically together nor do
they share a common aim.

Technically speaking, it was never the case that

consumers were ever truly without remedy against
the malpractices of traders and manufacturers.
 400

Supply of goods of inferior quality, charging of

excessive price, non-compliance of the assurances
and promises by the sellers were essentially a
breach of contract on the part of the sellers, for
which the doors of judiciary were always open to
consumers. In certain cases, albeit very few,
consumers have successfully made the sellers pay
for their wrongs through Courts by filing suits for
damages and compensation. But such remedial
measure of approaching the Courts and fighting a
legal battle against the sellers required a lot of
patience, and consumers needed to spend more for
obtaining a decree of court for compensation than
the amount of compensation itself. The amount of
time, money and energy that an ordinary consumer
has to expend to proceed against sellers was a
major deterrent and, as such, he had to be content
blaming his fate rather than resorting to judicial
means of redressal. Further, the number of years
the judicial system took to dispose a complaint of
consumer was so dismaying that an ordinary
consumer thought it wise to stay away from the
Courts. In short, the remedy was worse than the
disease.
 401

The primary object of the Consumer Protection

Act was to provide a cheap and speedy remedy to
the consumers who are aggrieved by the
malpractices of sellers. Separate judicial forums
are established under the Act, at the district, State
and Central level, to exclusively entertain and try
consumer disputes. These judicial authorities are
empowered to give appropriate relief, including
awarding compensation, to consumers. The Court
fee for filing a complaint in the consumer court is
very meager. Engagement of advocate is neither
necessary nor permitted. The courts are under
obligation to dispose the cases before them within
a prescribed time limit. All this was to encourage
the common consumers to come forward and seek
redressal of their grievances against the traders and
manufactures.

The Act extends to the whole of India and is

applicable to all goods and services as defined
under the Act.

Important definitions

Appropriate laboratory means a laboratory or

organisation –
 402

1. recognised by the Central Government;

2. recognised by a State Government, subject to
such guidelines as may be prescribed by the
Central Government in this behalf;
3. any such laboratory or organisation established
by or under any law for the time being in
force, which is maintained, financed or aided
by the Central Government or a State
Government for carrying out analysis or test of
any goods with a view to determining whether
such goods suffer from any defect.

Explanation
A consumer dispute is often relating to impure,
inferior or defective goods sold to him. While
deciding such disputes, it may become necessary
to analyse, test or inspect the goods. For the
purpose of carrying out this task, the Government
may establish laboratories having sufficient
facilities, or give sanction to any existing and well
equipped laboratory or organisation. Such
laboratory is called appropriate laboratory and the
consumer courts under the Act, when in need of
conducting any tests with respect to the goods
(relating to which any complaint is being
adjudicated), may refer them to such laboratory.
 403

Complainant means –
1. a consumer;
2. any voluntary consumer-association registered
under the Companies Act or under any other
law for the time being in force;
3. the Central Government or any State
Government;
4. one or more consumers, where there are
numerous consumers having the same interest;
5. in the case of death of a consumer, his legal
heir or representative.

Explanation
The definition of the term complainant is
important because it tells us who can file a
complaint before any of the judicial authorities
under the Act. A person can file a complaint
provided he is covered under this definition.
Accordingly, a consumer is obviously can be a
complainant and similarly, a registered consumers‟
association can also be a complainant. Where there
are several consumers having a similar grievance,
one or more of them can file a complaint on behalf
of all of them and it is not necessary that all should
join in contesting the dispute. It is sufficient if one
 404

or more of them appear before the court and

represent the others. Additionally, the Central or
any State Government can also be a complainant
and hence a consumer dispute can be filed by the
Central or State Government also. The cause of
action to proceed against trader or seller of goods
or any provider of services does not abate with the
death of consumer. In the event of his death, the
right to file complaint passes to his heir or legal
representative.

Complaint means any allegation in writing made

by a complainant that –
1. an unfair trade practice or a restrictive trade
practice has been adopted by any trader or
service provider;
2. the goods bought by him or agreed to be
bought by him suffer from one or more
defects;
3. the services hired or agreed to be hired or
availed of by him suffer from deficiency in
any respect;
4. a trader or the service provider has charged for
the goods or for the services mentioned in the
complaint, a price in excess of the price –
 405

a. fixed by or under any law for the time

being in force,
b. displayed on the goods or any package
containing such goods,
c. displayed on the price list exhibited by
him by or under any law for the time
being in force,
d. agreed between the parties.

5. goods which will be hazardous to life and

safety when used are being offered for sale to
the public, -
a. in contravention of any standard relating
to safety of such goods as required to be
complied with, by or under any law for the
time being in force,
b. in the trader could have known with due
diligence that the goods so offered are
unsafe to the public,

6. services which are hazardous or likely to be

hazardous to life and safety of the public when
used, are being offered by the service provider
which such person could have known with due
diligence to be injurious to life and safety.
 406

With a view to obtaining any relief provided

Consumer dispute means a dispute where the

person against whom a complaint has been made,
denies or disputes the allegations contained in the
complaint.

Defect means any fault, imperfection or

shortcoming in the quality, quantity, potency,
purity, or standard which is required to be
maintained by or under any law for the time being
in force or under any contract, express or implied,
or as is claimed by the trader in any manner
whatsoever in relation to any goods.

Deficiency means any fault, imperfection,

shortcoming, or inadequacy in the quality, nature
and manner of performance which is required to be
maintained by or under any law for the time being
in force or has been undertaken to be performed by
a person in pursuance of a contract or otherwise in
relation to any service.

Goods means the goods as defined in the Sale of

Goods Act, 1930.
 407

Manufacturer means a person who –

1. makes or manufactures any goods or part
thereof, or
2. does not make or manufacture any goods but
assembles parts thereof made or manufactured
by others, or
3. puts or causes to be put in own mark on any
goods made or manufactured by any other
manufacturer.
Restrictive Trade Practice means a trade practice
which tends to bring about manipulation of price
or its conditions of delivery or to affect flow of
supplies in the market relating to goods or services
in such a manner as to impose on the consumers
unjustified costs or restrictions and shall include –
1. delay beyond the period agreed to by a trader
in supply of such goods or in providing the
services which has led or is likely to lead to
rise in the price;
2. any trade practice which requires a consumer
to buy, hire or avail of any goods or services
as condition precedent to buying, hiring or
availing of other goods or services.

Explanation
 408

The provision relating to restrictive trade practices

owe their origin in the Monopolies and Restrictive
Trade Practices Act. These are the practices
adopted by traders to artificially increase the prices
of goods and services or to impose unfair
conditions on the consumers. These practices are
normally resorted to by the traders when there is
shortage of goods or services. For example, a
dealer of LPG cylinders may insist that consumer
must purchase a set of burners from his shop in
order to get a quick delivery of gas. It is a
restrictive trade practice and is prohibited under
the Act.

Service means service of any description which is

made available to potential users and includes, but
is not limited to, the provision of facilities in
connection with banking, financing, insurance,
transport, processing, supply of electrical or other
energy, board or lodging or both, housing
construction, entertainment, amusement or the
purveying of news or other information, but does
not include the rendering of any service free of
charge or under the contract of personal service.

Explanation
 409

The words, „but not limited to‟ occurring in the

definition are important. In the absence of these
words, the list of services mentioned in the
definition would be exhaustive and complete, and
no other service could fall within the meaning of
the term „service‟ under the Act. However, by
using these words, the legislatures have made it
clear that all kinds of services are intended to be
covered, and it is only by way of illustrations that
certain services are named in the definition. For
example, medical services are the services covered
under the Act, though they are not specifically
named in the definition of „Services‟.

Service rendered under any contract of personal

service is not the „service‟ as contemplated under
the Act and hence will be outside the scope of the
Act. In other words, where services are rendered
under the relationship of master and servant, the
master is not a consumer within the meaning of the
Act.

Who is a consumer?
 410

As we know, the primary object of the Act is

protection of consumers. Therefore, the definition
of the term „consumer‟ is most important, because
unless a person is a consumer within the meaning
of the Act, he cannot avail himself of any remedies
provided under the Act. A buyer of goods or hirer
of services can approach consumer court and file
his complaint only when he is a consumer, and not
otherwise.
Every buyer of goods or hirer of services cannot be
termed as consumer. The Act extends protection to
a common citizen who, because of time and money
constraint, cannot seek relief against the organised
and well-placed traders and manufacturers. As
such, the inexpensive and cheap remedy under the
Act must not be allowed to be used by the
commercial organisations whose purpose of
buying and selling is not the same as that of a
common man. Therefore, the legislatures intended
to exclude the traders and commercial
organisations from the definition of consumer.
The definition of consumer is as follows:

Consumer means any person who –

1. buys any goods for a consideration which has
been paid or promised or partly paid and partly
 411

promised, or under any system of deferred

payment and includes any user of such goods
other than the person who buys such goods for
consideration paid or promised or partly paid
or partly promised or under any system of
deferred payment when such use is made with
the approval of such person, but does not
include a person who obtains such goods for
resale or for any commercial purpose; or

2. hires or avails of any services for a

consideration which has been paid Respondent
promised or partly paid and partly promised,
or under any system of deferred payment and
includes any beneficiary of such services other
than the person who hires or avails of the
services for consideration paid or promised ,
or partly paid and partly promised, or under
any system of deferred payment, when such
services are availed of with the approval of the
first mentioned person but does not include a
person who avails of such services for any
commercial purpose.

Explanation: For the purposes of this clause,

„commercial purpose‟ does not include use by
 412

a person of goods bought and used by him and

services availed by him exclusively for the
purposes of earning his livelihood by means of
self-employment.

Explanation

The following points would make the definition

easy to understand:

1. Consideration. Consumer is a person who

buys goods or hires services for consideration.
In other words, he is a person who pays the
price of what he purchases. If goods are given
free of charge, the receiver of good is not a
consumer. Such consideration i.e. price may
be paid or promised (i.e. bought on credit) or it
may be partly paid and partly promised.
Further, the consumer may agree to pay the
price in instalments. A person who registers
himself for LPG gas connection with the
distributor is a consumer though at that time
he pays nothing and the payment is deferred
till the time of release of gas connection. Mode
of payment of consideration is not important.
What is important is that such person must be
 413

receiving the goods or services for some price.

If the goods are given as gift or distributed free
of charge as sample in any promotion
campaign of a new product, the recipient of
such goods is not a consumer and therefore
cannot file any complaint in consumer courts
against any defects in the goods.
A patient who receives treatment in a private
hospital and pays for the same is a consumer
within the meaning of this definition.
However, if he receives medical treatment in
any charitable hospital free of charge, he is not
a consumer. Similarly, a patient receiving
medical treatment free of charge from any
government hospital is also not a consumer.
During early years after the passing of this
Act, this point was heavily debated. It was
argued that so far as government hospitals are
concerned, it cannot be said that medical
treatment is given free of charge because such
hospitals are run with the money collected
from people by way of taxes and therefore
consideration is indirectly paid by the person
who receives medical treatment at government
hospitals. This contention has been rejected on
the ground that payment of taxes is under a
 414

statutory obligation without reference to any

special benefit to the tax-payer. Liability of a
person to pay tax is on the basis of his capacity
to pay and not on the basis of his likelihood of
using any government services. Hence, even a
tax-payer who uses government services free
of charge is not a consumer as payment of
taxes by him cannot be treated as
consideration.

2. User of goods/services with approval. In

addition to buyer of goods or hirer of services,
as discussed above, any person who actually
uses the goods or services with the approval of
such buyer or hirer is also a consumer under
the Act and hence is entitled to all the reliefs
which are available to the buyer or hirer. The
fact that there is no privity of contract between
the seller of goods and its user is no bar
against the user of goods to claim relief
against the seller under the Act. For example,
if a father buys certain cosmetics which are
used by his son, the son is the user of goods
with approval of father and is a consumer just
like his father. Hence, if the son suffers from
any injury to skin by use of such cosmetics, he
 415

is entitled to proceed against the dealer of

cosmetics under this Act. The fact that he has
not paid the consideration or that there is no
contract between the son and the dealer shall
not deprive the son of any remedies which are
available to the father. What is necessary is
that the use of goods or services by such
person must be with the approval of the buyer
of goods or hirer of services. Again, the
approval may be express or implied.

3. Commercial purpose. A person who obtains

goods for resale or commercial purpose is not
a consumer. Such person himself is a trader
and therefore he cannot be equated with
„consumer‟ as contemplated under the Act.
Thus, a person buying a note-book for using it
for himself is a consumer, but he cannot be
called a consumer if he buys a large quantity
of note-books in wholesale for the purpose of
selling them in retail to other individual users.
Such other individual buyers would, of course,
be consumers.

Going by this definition, therefore, a purchaser

of a telephone instrument for his residential
 416

use would be a consumer, but if he is running

a telephone booth and is buying the instrument
so that people can use the same by paying
requisite charges for the same, he would not be
a consumer, as he is making use of the
instrument for commercial purpose. Similarly,
a person buying a car would not be a consumer
with respect to the car, if he is using it as taxi,
as in such a case, he would be using the car for
commercial purpose.

However, the explanation appended to the

definition further clarifies what is not
commercial purpose. Accordingly, commercial
purpose does not include use by a person of
goods bought and used by him and services
availed by him exclusively for the purposes of
earning his livelihood by means of self-
employment.

This explanation has been subsequently added

to the definition so as to bring within the
purview of the definition all those persons
who would not have been considered
consumers by virtue of the earlier part of the
definition. For example, a person who is
 417

running a business of travel agency cannot be

called a consumer under the Act in respect of
any car he buys for his business, because he is
using the car for commercial purpose.
Similarly, a person buying a car and using it as
taxi also cannot be called consumer on the
same principle of „use for commercial
purpose‟. Although both the cases have a
common element of use of goods for
commercial purpose, there is a noticeable
difference between the two. A taxi driver
cannot be compared with the owner of a travel
agency.

Let us take another example where a tailoring

firm buys a sewing machine for its business.
Obviously, the firm cannot be called a
„consumer‟ within the meaning of this Act
because it is making use of the sewing
machine for commercial purpose. Now
consider the example of a poor widow. Having
no other source of income and having no skills
for better employment, she buys a sewing
machine so that she can stitch clothes of
people in the neighborhood, and earn some
money for her survival. Going by the principle
 418

of „use of goods for commercial purpose‟, she

would also not be a consumer within the
meaning of the Act. Placing the widow and the
tailoring firm on the same footing would be
unjust and contrary to the objects of the Act as
the avowed purpose of the Act is to protect the
interest of common consumers.

The Act therefore lays down that commercial

purpose does not include use of goods for
earning livelihood by means of self-
employment. Thus, in our examples discussed
above, the taxi driver, who drives the car
himself for earning his livelihood would be a
consumer with respect to the car. However, if
he employs another person as driver, he would
no be a consumer since he is not using the
goods by means of self-employment. A
tailoring firm is not a consumer with respect to
the sewing machines bought by it because the
machines are used by the tailors engaged by
the firm. The widow stands on the difference
footing since she is herself using the sewing
machine, i.e. using the goods by means of self-
employment. She is, therefore, consumer
under the Act with respect to the sewing
 419

machine, and as such, she can approach the

consumer court if the machine is defective.

Unfair Trade Practices

Let us first go through the definition of unfair trade

practices as given under the Act. It is reproduced
below.
„Unfair trade practice‟ means a trade practice
which, for the purpose of promoting the sale, use
or supply of any goods or for the provision of any
service, adopts any unfair method or unfair or
deceptive practice including any of the following
practices, namely –

1. the practice of making any statement, whether

orally or in writing or by visible representation
which, -
a. falsely represents that the goods are of a
particular standard, quality, quantity,
grade, composition, style or model;
b. falsely represents that the services are of a
particular standard, quality or grade;
c. falsely represents any re-built, second-
hand, renovated, reconditioned or old
goods as new goods;
 420

d. represents that the goods or services have

sponsorship, approval, performance,
characteristics, accessories, uses or
benefits which such goods do not have;
e. represents that the seller or the supplier
has a sponsorship or approval or
affiliation which such seller or supplier
does not have;
f. makes a false or misleading representation
concerning the need for, or the usefulness
of, any goods or services;
g. gives to the public any warranty or
guarantee of the performance, efficacy or
length of life of a product or of any goods
that is not based on an adequate or proper
test thereof;
provided that where a defence is raised to
the effect that such warranty or guarantee
is based on adequate or proper test, the
burden of proof of such defence shall lie
on the person raising such defence.
h. Makes to the public a representation in a
form that purports to be-
1. a warranty or guarantee of a product or
of any goods or services; or
2. a promise to replace, maintain or repair
 421

an article or any part thereof or to repeat

or continue a service until it has achieved
a specified result,
if such purported warranty or guarantee or
promise is materially misleading or if
there is no reasonable prospect that such
warranty, guarantee or promise will be
carried out;
i. Materially misleads the public concerning
the price at which a product or like
products or goods or services, have been
or are, ordinarily sold or provided, and,
for this purpose, a representation as to
price shall be deemed to refer to the price
at which the product or goods or services
has or have been sold by sellers or
provided by suppliers generally in the
relevant market unless it is clearly
specified to be the price at which the
product has been sold or services have
been provided by the person by whom or
on whose behalf the representation is
made.
j. Gives false or misleading facts
disparaging the goods, services or trade of
another person.
 422

Explanation: For the purposes of this

clause, a statement which is-
a. expressed on an article offered or
displayed for sale, or on its wrapper or
container, or
b. expressed on anything attached to,
inserted in, or accompanying an article
offered or displayed for sale, or on
anything on which the article is mounted
for display or sale, or
c. contained in or on anything that is sold,
sent, delivered, transmitted or in any other
manner whatsoever made available to a
member of the public,

shall be deemed to be a statement made to

the public by, and only by, the person who
had caused the statement to be so
expressed, made or contained.

2. permits the publication of any advertisement,

whether in any newspaper or otherwise, for the
sale or supply at a bargain price, of goods or
services that are not intended to be offered for
sale or supply at the bargain price, or for a
period that is, and in quantities that are,
 423

reasonable, having regard to the nature of the

market in which the business is carried on, the
nature and size of business, and the nature of
the advertisement.
Explanation: For the purpose of this clause,
„bargaining price‟ means a) a price that is
stated in any advertisement to be a bargain
price, by reference to an ordinary price or
otherwise; or
b) a price that a person who reads, hears or
sees the advertisement, would reasonably
understand to be a bargain price having
regard to the prices at which the product
advertised or like products are ordinarily sold.

3. permits –
a. the offering of gifts, prizes or other items
with the intention of not providing them as
offered or creating impression that
something is being given or offered free of
charge when it is fully or partly covered
by the amount charged in the transaction
as a whole;
b. the conduct of any contest, lottery, game
of chance or skill, for the purpose of
promoting, directly or indirectly, the sale,
 424

use or supply of any product or any

business interest.

4. Withholding from the participants of any

scheme offering gifts, prizes or other items
free of charge, on its closure, the information
about final results of the scheme.
Explanation: for the purposes of this sub-
clause, the participants of a scheme shall
deemed to have been informed of the final
results of the scheme where such results are
within a reasonable time published,
prominently in the same newspapers in which
the scheme was originally advertised.

5. permits the sale or supply of goods intended to

be used, or are of a kind likely to be used by
consumers, knowing or having reason to
believe that the goods do not comply with the
standards prescribed by competent authority
relating to performance, composition,
contents, design, constructions, finishing or
packaging as are necessary to prevent or
reduce the risk of injury to the person using
the goods;
 425

6. permits the hoarding or destruction of goods

or refuses to sell the goods or to make them
available for sale or to provide any service, if
such hoarding or destruction or refusal raises
or tends to raise or is intended to raise the cost
of those or other similar goods or services.

7. Manufacture of spurious goods or offering

such goods for sale or adopting deceptive
practices in the provision of services.

Explanation
Truly speaking, the term „unfair‟ cannot ever be
defined. At the most, one can give illustrations of
unfair practices indicating the intention of the
legislatures as to what should be included within
the sweep of the term unfair practices. Again, the
list of such unfair practices cannot be a complete
and exhaustive list because with the passage of
time, business people may invent newer and
different methods of deception to defraud common
consumers. Hence, the list of illustrations of unfair
practices is always open to additions.
The Act however makes an attempt to define the
term „unfair trade practices‟ by bringing out the
 426

broad meaning of it and providing the illustrations

of unfair trade practices. Inevitably, the definition
of unfair trade practice is quite lengthy. For the
purpose of convenience, we shall group these
unfair trade practices in seven categories
corresponding to the seven sub-sections of section
2 (r) which defines the term unfair trade practices.
Thus, the unfair trade practices can be grouped as
follows:

1. Making false statements and representations.

2. publication of bargain price
3. Gifts and prizes
4. Withholding information about results of any
scheme
5. Non-conformity to standards
6. Hoarding or destruction of goods
7. Spurious goods

We shall now discuss each of them briefly.

1. Making false statements and representations.

It is unfair trade practice on the part of a trader if

he makes any false representation regarding the
quality, quantity or grade of goods or services or
 427

represents old or second hand goods as new goods.

False representation as regards any sponsorship,
approval or performance of any goods or their
usefulness is also unfair trade practice. Further,
making any false and baseless representation as
regards the life of any product without proper test
and giving any warranty or guarantee of repairs or
replacement of product without intending to do so
is also an unfair trade practice.

2. Publication of bargain price.

It is an unfair trade practice on the part of a trader

to publish an advertisement for the sale of any
goods at a bargain price when he does not intend to
sell the product at that price. Similarly it is also
unfair trade practice to publish any statement
promising supply of goods for a period or in
quantity at the bargain price without any intention
to do so.

3. Gifts and prizes.

Offering any gifts, prizes or other items with the

intention of not providing them is an unfair trade
practice. Similarly, offering some product as free
 428

on the purchase of another product, when the price

of the product purportedly given free is already
included in the price of the product sold is also
unfair trade practice.

Though the definition of unfair trade practice

includes the practices of conducting lottery,
contest or other game of chance for the purpose of
promoting the sale of any product, the Supreme
Court has, in many cases, ruled that such practices
by themselves are not unfair trade practices.
Conducting a lottery or a game of chance would be
unfair trade practice if the purchasers are charged
separately for their participation in the scheme. For
example, where TV sets are sold along with
coupons and the lucky coupon-holder is to be
awarded any prize in a subsequent lucky-draw of
coupons, it cannot be called lottery in the accepted
sense of the word and there would be no unfair
trade practice. The purchaser of a TV set would get
his money‟s worth in the form of TV set itself. He
does not have to pay any separate price for
participating in the scheme of lucky-draw.
Participation in the scheme and standing to gain
the prize is an additional benefit given to the
buyer.
 429

4. Withholding information about results of any

scheme

Many traders introduce a scheme offering gifts,

prizes etc. in order to induce people to buy their
products. We have already seen above that offering
such gifts is not an unfair trade practice. However,
it is obligatory on the traders to declare the final
results of such scheme for the information of the
buyers. Withholding such information is an unfair
trade practice.
However, it is not necessary that the trader should
inform the buyers individually about the final
results of the scheme. If they are published in the
same newspaper in which the original scheme was
published, it shall be sufficient compliance of the
requirement.

5. Non-conformity to standards

Certain statutory and competent authorities such as

ISI or the ones created under standards of weights
and measures Act etc. prescribe standards in
relation to goods which are sold or supplied to
buyers. These standards may be with respect of
 430

performance of goods, their design, construction,

packaging etc. to prevent or reduce the risk of
injury to the person using the goods.
Selling or supplying the goods which do not
comply with these requirements is an unfair trade
practice.

6. Hoarding or destruction of goods.

In order to artificially increase the prices of goods

or services, the traders sometimes resort to the
practice of hoarding or even destroying the goods
or refuse to provide any service. It is an unfair
trade practice under the Act.

7. Spurious Goods

Spurious goods means fake or counterfeit goods or

which are not genuine goods. It is an unfair trade
practice to offer such goods for sale or to adopt
any deceptive practice in providing any service.

Consumer Disputes Redressal Agencies

The Consumer disputes redressal agencies are the

consumer courts established under the Act for the
 431

purpose of settling the disputes of consumers.

There are three such agencies operating at District,
State and National level. The composition and
functions of these agencies are as follows:

District Forum

Establishment of District Forum

1. Every State Government shall establish a

„Consumer Disputes Redressal Forum‟ to be
known as „District Forum‟ in each district of
the State.
2. The State Government may establish more
than one District Forum in a district if
necessary.

Composition of District Forum

a. Each District Forum shall consist of –

a. A person who is, or has been, or is

qualified to be a District Judge, who shall
be its President;
b. Two other members, one of whom shall
be a woman, who shall be not less than
 432

thirty-five years of age and shall possess a

bachelor‟s degree from a recognised
university. They shall be the persons of
ability, integrity and standing, and have
adequate knowledge and experience of at
least ten years in dealing with problems
relating to economics, law, commerce,
accountancy, industry, public affairs or
administration.

2. A person shall be disqualified for appointment

as member, if-
c. he has been convicted and sentenced to
imprisonment for an offence involving
moral turpitude; or
d. he is an undischarged insolvent; or
e. he is of unsound mind and stands so
declared by a competent Court; or
f. he has been removed or dismissed from
the service of the Government or a body
corporate owned or controlled by the
Government; or
g. he has such other disqualifications as may
be prescribed by the State Government.
 433

3. Every member shall hold office for a period of

five years from the date of appointment. A
member can be re-appointed for another term
if he is not otherwise disqualified. The age of
retirement for the members is sixty-five years.

Jurisdiction of District Forum

1. The District Forum has jurisdiction to decide

the complaints where the value of the goods or
services and the compensation claimed does
not exceed rupees twenty lakhs.

2. A complaint shall be instituted in District

Forum within the local limits of whose
jurisdiction-

a. the opposite party, or each of the opposite

parties, where there are more than one,
actually and voluntarily resides or carries
on business or personally works for gain
at the time of filing the complaint; or
b. any of the opposite parties, where there
are more than one, actually or voluntarily
resides or carries on business or
personally works for gain. However, in
 434

such case either the permission of District

Forum has to be obtained or the opposite
parties who do not reside or carry on any
business or personally work for gain, have
to give their consent; or
c. the cause of action, wholly or in part,
arises.

State Commission

Establishment of State Commission

Every State Government shall establish for the

State a „Consumer Disputes Redressal
Commission‟ to be known as „State Commission‟
for the State by issuing a notification in that behalf.

Composition of State Commission

1. Each State Commission shall consist of –

a. A person who is or has been a Judge of
High Court who shall be its President;
b. Not less than two members one of whom
shall be a woman who shall not be less
than thirty-five years of age and shall
 435

possess a bachelor‟s degree from a

recognised University. They shall be
persons of ability, integrity and standing,
and have adequate knowledge and
experience of at least ten years in dealing
with problems relating to economics,
commerce, law, accountancy, industry,
public affairs or administration. Not more
than half of the members shall be from
judicial background i.e. not having
experience of more than ten years of
working as presiding officer of any district
level court.

2. A person shall be disqualified for appointment

as a member, if-
a. he has been convicted and sentenced to
imprisonment for an offence involving
moral turpitude; or
b. he is an undischarged insolvent; or
c. he is of unsound mind and stands so
declared by a competent Court; or
d. he has removed or dismissed from the
service of the Government or a body
corporate owned or controlled by the
Government; or
 436

e. he has such financial or other interest, as

is likely to affect prejudicially the
discharge by him of his functions as a
member; or
f. he has such other disqualifications as may
be prescribed by the State Government.

3. Every member shall hold office for a period of

five years from the date of appointment. A
member can be re-appointed for another term
if he is not otherwise disqualified. The age of
retirement for the members is sixty-seven
years.

Jurisdiction of State Commission

1. State Commission has jurisdiction to entertain

complaints where the value of the goods or
services and compensation claimed exceeds
rupees twenty lakhs but does not exceed
rupees one crore.
2. It can entertain and decide appeals against the
orders of any District Forum within the State.
3. When it appears that any District Forum has
made any error of law or jurisdiction in any
 437

case pending before it, the State Commission

can call for the records of the case and pass
appropriate orders.
4. A complaint shall be instituted in a State
Commission within the limits of whose
jurisdiction.-
a. the opposite party or each of the opposite
parties, where there are more than one, at
the time of the institution of the
complaint, actually and voluntarily resides
or carries on business or has branch office
or personally works for gain; or
b. any of the opposite parties, where there
are more than one, at the time of the
institution of the complaint, actually and
voluntarily resides, or carries on business
or has a branch office or personally works
for gain. However, in such case either the
permission of the State Commission has to
be obtained or the parties who do not
reside or carry on business or personally
work for gain have to give their consent;
or
c. the cause of action, wholly or in part,
arises.
 438

National Commission

Establishment of National Commission

The Central Government shall establish a

„National Consumer Disputes Redressal
Commission‟ to be known as „National
Commission by issuing a notification in that
behalf.

Composition of the National Commission

1. The National Commission shall consist of-

a. a person who is or has been a Judge of the
Supreme Court, to be appointed by the
Central Government, who shall be its
President;
b. not less than four members, one of whom
shall be a woman, who shall not be less
than thirty-five years of age and shall
possess a bachelor‟s degree of any
recognised University. They shall be the
persons of ability, integrity and standing
and have adequate knowledge and
experience of at least ten years in dealing
 439

with problems relating to economics, law,

commerce, accountancy, industry, public
affairs or administration. Not more than
half of the members shall be from judicial
background i.e. not having more than ten
years experience as Presiding Officer of
any district level court.

2. A person shall be disqualified for appointment

as a member, if-
a. he has been convicted and sentenced to
imprisonment for an offence involving
moral turpitude; or
b. he is an undischarged insolvent; or
c. he is of unsound mind and stands so
declared by a competent court; or
d. he has been removed or dismissed from
the service of the Government or a body
corporate owned or controlled by the
Government; or
e. he has such financial or other interest as is
likely to affect prejudicially the discharge
by him of his functions as a member; or
f. he has such other disqualifications as may
prescribed by the Central Government.
 440

3. Every member shall hold office for a period of

five years from the date of his appointment. A
member can be re-appointed if he is not
otherwise disqualified. The age of retirement
for a member is seventy years.

Jurisdiction of the National Commission

1. The National Commission shall have the

jurisdiction to entertain the complaints where
the value of goods or services and
compensation claimed exceeds rupees one
crore.
2. It shall decide the appeals against the orders of
any State Commission.
3. Where any State Commission has made any
error of law or jurisdiction in any case, the
National Commission can call for the records
and pass appropriate orders.
4. The National Commission may, in the interest
of justice, transfer any complaint pending
before the District Forum of one State to a
District Forum of another State, and similarly,
from one State Commission to another State
Commission.
 441

Procedure on admission of complaint

We have already seen above that a complaint can

be filed by either a consumer or any voluntary
agency or even by any Government. Complaint
means an allegation about defect in goods or
deficiency in service, or about restrictive trade
practice or unfair trade practice etc. A complaint
can be filed in any of the Consumer Disputes
Redressal Agencies (Consumer Courts) according
to its jurisdiction.
The procedure to be followed by these agencies is
the same and can be summarized as follows. For
the purpose of convenience we shall refer to these
Consumer Courts, i.e. Consumer disputes redressal
agencies (District forum, State commission and
National commission) as Court:

1. On admission of complaint, a copy of the

complaint is forwarded to the opposite party
with a direction to submit his version of the
case, within thirty days or within such time as
may be extended.
 442

2. The opposite party may either deny the

allegations or admit the same. If the
allegations are admitted there is no question of
following the procedure any further and
appropriate orders will be passed. If the
opposite party denies the allegations or does
not respond at all, the case shall be taken up
for hearing.

3. If the complaint is about defect in goods which

needs proper analysis or test of goods, the
Court shall obtain a sample of goods from the
complainant and after proper seal, shall send it
to the appropriate laboratory for the analysis.
The laboratory shall conduct the test as per the
direction of the court in order to find out
whether the goods suffer from any defect as
complained. It shall submit its report and
findings to the court within 45 days or within
such time as extended by the court.

4. Before sending the sample of goods to the

laboratory for analysis, the court may direct
the complainant to deposit the necessary fees
towards the cost of such analysis. The court
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shall remit the fees to the laboratory.

5. The Court shall remit the amount of deposited

by the complainant to the credit of the
Appropriate laboratory to enable it to carry out
the analysis. On receiving the report from the
laboratory, the court shall forward its copy to
the Opposite party with its remarks.

6. If the correctness of the findings of the

appropriate laboratory or the methods of
analysis adopted by it are disputed by either of
the parties, the court shall require the disputing
party to submit its objections in writing and
then shall give an opportunity of being heard
to both the parties as regards the correctness or
otherwise of the report of the appropriate
laboratory. It shall then issue an appropriate
order.

7. Alternatively, the court shall settle the dispute

on the basis of evidence brought before it by
the parties. If the opponent does not present
his case, the court shall ex-parte settle the
dispute on the basis of evidence brought to its
notice by the complainant. If the complainant
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fails to remain present on the day of hearing

the dispute, the court may either dismiss the
complaint for default or decide it on merits.

8. Every complaint shall be heard as

expeditiously as possible and no adjournments
shall be ordinarily granted unless sufficient
cause is shown by the party seeking
adjournment. Normally a complaint shall be
settled within a period of five months from the
date the opposite party receives the notice,
where it requires analysis or testing the goods.
In other cases, i.e. where such analysis of
goods is not necessary, the complaint shall be
settled within a period of three months. If any
complaint cannot be settled within the time as
mentioned earlier, the court has to specify the
reasons in writing for such delay.

9. Where a complaint instituted before the

District Forum, the State Commission or, as
the case may be, the National Commission is
found to be frivolous or vexatious, it shall, for
reasons to e recorded in writing, dismiss the
complaint and make an order that the
complainant shall pay to the opposite party
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such cost, not exceeding ten thousand rupees,

as may be specified in the order.

10. The District forum shall be deemed to be a

Civil Court while deciding any complaint and
shall have the same powers as are vested in a
Civil Court, in respect of the following
matters, namely-

a. the summoning and enforcing the attendance

of any defendant or witness and examining
the witness on oath;
b. the discovery and production of any
document or other material object
producible as evidence;
c. the requisitioning of the report of the
concerned analysis or test from the
appropriate laboratory Respondent from any
other relevant source;
d. issuing of any commission for the
examination of any witness, and
e. any other matter which may be prescribed.

It may be noted that the procedure on admission of

complaint is the same for all the three forums, i.e.
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District Forum, State Commission and the

National Commission.

Consumer Protection Councils

For the purpose of promoting the interests of

consumers throughout the country and for
protection of their rights, the Act provides for the
establishment of Consumer Protection Councils.
These councils are at three levels; Central, State
and District. These councils are not judicial
authorities like Consumer disputes redressal
forums. They do not decide the consumer disputes.
They are established rather for the purpose
creating awareness among the consumers and for
protecting their rights.
The objects and functions of the councils at all the
three levels are the same, i.e. protection of rights of
consumers. Before we discuss their constitution,
let us understand the rights of consumers, as
recognised under the Act, for the protection of
which these councils are brought into force.

Rights of Consumers
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The objects of the councils shall be to promote and

protect the rights of the consumers such as –
1. the right to be protected against the marketing
of goods and services which are hazardous to
life and property;
2. the right to be informed about the quality,
quantity, potency, purity, standard and price of
goods or services, as the case may be, so as to
protect the consumer against unfair trade
practices;
3. the right to be assured, wherever possible,
access to a variety of goods and services at
competitive prices;
4. the right to be heard and to be assured that
consumer‟s interests will receive due
consideration at appropriate Forums;
5. the right to seek redressal against unfair trade
practices or restrictive trade practices or
unscrupulous exploitation of consumers; and
6. the right to consumer education.

Central Council
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1. The central Government shall establish by

issuing notification a Council to be known as
Central Consumer Protection Council, referred
to as Central Council.

2. The Central Council shall consist of Minister

of the Consumer Affairs in the Central
Government, who shall be its Chairman, and
such number of other members representing
such interests as may be prescribed.

3. The objects of the Central Council shall be to

promote and protect the rights of the
consumers. (As stated earlier)

4. The Central Council shall meet as and when

necessary, but at least one meeting shall be
held every year. The meetings shall be
conducted at such place and time as thought fit
by the Chairman and as per the procedure
prescribed.

State Council

1. The State Government shall, by issuing

notification, establish a Council to be known
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as “Consumer Protection Council for …(name

of the State)....”, referred to as State Council.

2. The State council shall consist of –

a. the Minister of Consumer Affairs in the

State Government who shall be its
Chairman;
b. such number of other official or non-
official members representing such
interests as may be prescribed by the State
Government;
c. such number of other official or non-
official members, not exceeding ten, as
may be nominated by the Central
Government;

3. The objects of every State Council shall be to

promote and protect,
within the State, the rights of consumers as
laid down earlier.

4. The State Council shall meet as and when

necessary, but at least two
meetings shall be held every year. The
meetings shall be conducted at
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such time and place as thought fit by the

Chairman and as per the
procedure prescribed.

District Council

1. The State Government shall establish for every

district, by notification, a council to be known
as the District Consumer Protection Council,
referred to as „District Council‟.

2. District Council shall consist of –

a. The Collector of the district, by whatever

name called, who shall be its Chairman;
b. Such number of other official and non-
official members representing such
interests as may be prescribed by the State
Government;

3. The objects of every District Council shall be

to promote and protect
the interests of consumers within the district,
as laid down earlier.
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4. The District Council shall meet as and when

necessary, but at least
two meeting shall be held every year. The
meetings shall be
conducted at the place and time as thought fit
by the Chairman and
shall be as per the prescribed procedure.
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