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Indian Contract Act, 1872

Amity School of Business

• The Indian Contract Act extends to the whole of

India (except the State of Jammu and
Kashmir) and it came into force on the first day
of September 1872
• The law of contract is that branch of law which
determines the circumstances in which promises
made by the parties to a contract shall be legally
binding on them.
• The Act deals with:
1. The general principles of the law of contract
2. Some special contracts.

Agreement Amity School of Business

An agreement is defined as “every promise and every

set of promises, forming consideration for each
other” [Sec.2(e)]
Agreement= Offer + Acceptance
An agreement can be social or domestic in nature.
Example: A invites his friend B to come and stay with him.
A father promises to pay his son Rs. 100 every month as a pocket
“All Contracts are agreement but all
agreements are not contract.”

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Contract – “An agreement enforceable by law is a contract.” Sec.

• Contract = Agreement + Legal Obligation
The definition of Contract u/s2(h) emphasis:
• an agreement enforceable by law
• Consensus-ad-idem
• Contractual obligations
• Exceptions : Social & Domestic Agreements
Contracts –An agreement enforceable by law is a contract.
• An agreement not enforceable by law is said to be void.
• All agreements are contracts if they are made by the free
consent of parties competent to contract, for a lawful
consideration and with a lawful object, and are not hereby
expressly declared to be void.

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Agreement Legal Obligation


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Essential elements of a valid Contract

Acc. To Sec.10 “All agreements are contracts if they are made by the
free consent of parties competent to contract for lawful
consideration and with a lawful object, and are not thereby
expressly declared to be void.”
Thus the essential elements are:
1. Agreement: 2 elements- offer & acceptance
2. Intention to create legal relationship
3. Free consent: Free from-(i). Coercion, (ii). Undue influence, (iii).
Fraud (iv). Misrepresentation, (v). Mistake.
4.Parties competent to contract: Acc. to Sec.11 he
(i) Is of age of majority
(ii) Is of sound mind
(iii) Parties should not be disqualified by law.
Example: Due to minority, lunacy, idiocy, drunkenness or status.

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5. Lawful Consideration
6. Lawful Object
7. Agreement not declared illegal or void: agreement in restraint of
marriage, trade, legal proceedings
8. Certainty of meaning
9. Possibility of performance
10. Necessary legal formalities: Writing , registration & attestation, if so
required by law..

Classification of contracts
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1. On the basis of validity or enforceability

 Valid
 Voidable
 Void contract or agreement
 Illegal & Unenforceable
2. On the basis of formation
 Express contract
 Implied Contract
3. On the basis of execution:
 Executed Contract
 Executory Contract

Offer Amity School of Business

Offer – Acc. To Sec. 2(a) “When one person signifies to another

his willingness to do or to abstain from doing anything, with
a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal.”

• The person making the proposal or offer is called proposer,

offeror or promisor.
• The person to whom the offer is made is called offeree.
• When the offeree accepts the offer, he is called acceptor.
Three properties of an offer can be:
• Expression of readiness
• Presence of second party
• Intention of obtaining a response

Essential Characteristics of Offer
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• Offer must create legal relationship.

• Offer must be definite & certain.
• Offer must be communicated to the other party-
Lalman Shukla v. Gauri Dutt.
• Offer must be made with a view to obtaining the
• Offer should not contain a term the non-
compliance of which may amount to acceptance.
• A statement of price is not an offer- Harvey v.
• An offer may be general or specific- Carlill v.
Carbolic Smoke Ball Co.

Types of Offer
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1. Express offer.
2. Implied offer.
3. Specific offer.
4. General offer.
5. Cross offer.
6. Counter offer.

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• The case of Carlil Vs. Carbolic Smoke Ball Co. ( 1893) is an
illustration of a contract arising out of a general offer. The facts of the
case are : The defendants advertised their product “Carbolic Smoke
Ball”, a preventive remedy against influenza. In the advertisement
they offered to pay a sum of 100 pounds as reward to any one who
contracted influenza, colds or any disease caused by taking cold, after
having used the Smoke Ball three times a day for two weeks, in
accordance with the printed directions. They also announced that a sum
of 1000 pounds had been deposited with the Alliance Bank to show
sincerity in the matter. The plaintiff ( Mrs. Carlil ) relying on the
advertisement purchased a Smoke Ball from a chemist, used the same in
accordance with the directions of the defendants, but still caught
influenza. She sued the defendants to claim the reward of 100 pounds
advertised by them. It was held that this being a general offer addressed
to all the world had ripened into a contract with the plaintiff by her act of
performance of the required conditions and thus accepting the offer. She
was therefore, entitled to claim the reward.

Revocation of offer:
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Termination of offer:
Revocation of offer
According to Section 6, an offer stands lapsed in any of the
following circumstances:
• Communication of notice of revocation
• Lapse of time
• Failure to fulfil a condition precedent to acceptance
• Death or insanity of either party
• Refusal or counter offer
• Acceptance differs from the prescribed one
• Subsequent illegality or destruction of subject-matter

Acceptance: Amity School of Business
Section 2(b) defines as, “when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted.”

Acceptance of an offer may take place by express words – oral or written or

by conduct. Proposal when accepted becomes promise.
Essentials of a Valid Acceptance:
Acceptance must be absolute and unqualified (Sec.7)
Example: A offers to sell his car to B for Rs 50,000. B replies, ‘I can purchase
the car for the stated price provided you purchase my house for Rs.
40,000’. This does not amount to acceptance, but is a counter-offer.
• Acceptance must be communicated(Felthouse Vs Bindley)
• Acceptance must be according to the mode prescribed
• Acceptance to be given within a reasonable time if no time is set
• The offer must be in force
• Acceptance by offeree
• Acceptance of proposal is acceptance of all terms.
• Mental Acceptance is not sufficient in Law.

Consideration: Amity School of Business

It simply means that both the contracting parties are bound to

give something (of value) to each other. The term ‘consideration’
means something in return, i.e. quid-pro-quo.
Section 2(d) says, ‘when at the desire of the promisor, the
promise or any other person has done or abstained from doing,
or does or abstains from doing, or promises to do or to abstain
from doing something, such an act or abstinence or promise is
called a consideration for the promise.’
Example: A offers to sell his plasma TV set to B for Rs 50,000. B accepts
the offer. Here, B’s promise to pay Rs 50,000 is the consideration for A’s
promise to sell the TV and A’s promise to sell the TV is the consideration
for B’s promise to pay Rs 50,000.

Consideration: Amity School of Business

Essential elements of consideration:

• Contract must be supported by consideration: An
agreement made without consideration is void.
• Consideration must move at the desire of the
promisor. For Example: A saves B’s goods from fire without
being asked to do so. A cannot demand payment for his services.
• Consideration may move from the promisee or any
other person:
.[Chinnayya vs Ramayya]
• Consideration may be past, present or future:
• It must be of some value
• It must be real and not illusory
Contracts without consideration:
Exceptions Amity School of Business

• Agreements made on account of Natural Love and

• Promise to compensate
Promise to pay time-barred debt [section 25(3)]:
• Note: According to the law of limitation, a debt which remains
unpaid or unclaimed for a period of 3 years becomes a time barred
debt which is legally not recoverable.
Completed gifts
Example: X transferred some property to Y by a duly registered and
written deed as a gift.

Stranger to a Contract:
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Stranger to a contract cannot sue because of the absence of privity of contract

(i.e. relationship subsisting between the parties to a contract).
Example: X owes Y Rs 1, 00,000 and sells his property to Z. Z promises to pay off X’s debt to
Y. Z fails to pay. Y cannot sue Z because he is a stranger to a contract.

Privity Only parties to contracts should be able to sue to enforce their rights or
claim damages as such. However the doctrine has proven problematic due to
its implications upon contracts made for the benefit of third parties who are
unable to enforce the obligations of the contracting parties.

• In case of trust ( Khwaja Mohd. Khan Vs hussani Begum)
• In case of family settlement
• Acknowledgement
• Assignment of a contract: Where the benefit has been assigned, the assignee
can enforce the contract subject to all equities between the original parties to
the contract. An assignee of Insurance policy.

Capacity of Contract:
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Competency is an expression that describes a person’s aptness to do something.

Who is competent to contract? (Section 11):
“Every person who has attained the age of majority, is of sound mind, and is not
disqualified from contracting by any law, to which he is subject; is competent to
The following persons can be deemed to be incompetent to enter into a contract:
• Minors
• Lunatics
• Persons disqualified by law to which they are subject to.

1. Minor:
Acc. to Sec. 3 of the Indian Majority Act, 1875, a minor is a person, domiciled in
India, who has not attained the age of 18 years.
Minor’s contracts:
• An agreement with a minor is void “ab-initio”:
(Mohori Bibi vs Dharmodas Ghose- minor executed a mortgage)
• He can be a promisee or a beneficiary

Minor: Amity School of Business

• No estoppels against a minor: Where a minor by misrepresenting

his age has induced the other party to enter into a contract with
him, he cannot be made liable on the contract. There can be no
estoppels against a minor.
Example: M, a minor, obtains a loan by mortgaging his property. He is
not liable to refund the loan.
• His agreement cannot be ratified by him on attaining the age of
• A minor is always allowed to plead minority
• Contract for supply of necessaries: A person who has supplied
the necessaries to a minor or to those who are dependent on him is
entitled to be reimbursed from the property of such minor.
• He can be an agent: A minor can act as an agent. But he will not
be liable to his principal for his acts.

Unsound Mind: Amity School of Business

Unsound Mind:
According to Sec. 12, “A person is said to be of sound mind for the
purpose of making a contract, if at the time when he makes it, is
• To understand the terms of contract
• To form a rational judgement as to its effect upon his interests.”
• Example: idiots, lunatics and drunken person.

Persons disqualified by law:

• Alien Enemy
• Foreign Sovereigns and Ambassadors
• Convicts
• Insolvents

Consent: Amity School of Business
The term ‘consent’ indicates meeting of minds, i.e., contracting parties
understanding the same thing in the same sense.
According to sec.13, ‘two or more persons are said to have consented
when they agree upon the same thing in the same sense.’
Free consent:
According to Sec.14, ‘Consent is said to be free when it is not caused by
coercion, undue influence, fraud, misrepresentation, mistake.’
It simply means forcing or compelling (physically or mentally) a person to
enter into a contract.
According to Sec.15 “coercion is (i) the committing or threatening to
commit, any act forbidden by the Indian Penal Code (ii) the unlawful
detaining, or threatening to detain, any property to the prejudice of any
person whatever, with the intention of causing any person any person
to enter into an agreement.
Example: A hindu widow is forced to adopt X under threat that her
husband’s corpse (dead body) would not be allowed to be removed
unless she adopts X. The adoption is voidable as having been induced
by coercion. [Ranganaya Kamma vs Alwar Sette] 21
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Undue influence:
‘Undue’ means excessive or beyond what is expected or required while the term
‘influence’ refers a person’s indirect power over other people, events or
Section 16 (i) defines undue influence as follows: “a contract is said to be
induced by undue influence where the relations subsisting between the
parties are such that one of the parties is in a position to dominate the will of
the other and uses that position to obtain an unfair advantage over the
Example: A having advanced money to his son B during his minority. Upon B’s
coming of age, he obtained, by misuse of parental influence, a bond from B of a
greater amount than the sum due in respect of the advance. A thus employed
undue influence.
Fraud Amity School of Business

Fraud indicates wilful misrepresentation. Section 17 defines as, ‘fraud means and
includes any of the following acts committed by a party to a contract, or with his
connivance, or by his agent, with intent to deceive another party thereto or his agent, or
to induce him to enter into the contract.
• The suggestion, as a fact, of that which is not true, by one who does not believe it to be
• The active concealment of a fact by one having knowledge or belief of the fact
• A promise made without any intention of performing it.
• Any other act fitted to deceive.
Silence is fraudulent: where the circumstances are such that, “silence is in itself
equivalent to speech”.
Example: B says to A “if you do not deny it, I shall assume that the horse is sound”. A says
nothing. Here A’s silence is equivalent to speech.

Mere silence is not Fraud: A party to the contract is under no obligation to disclose the
whole truth to the other party. ‘Caveat Emptor’ i.e. let the purchaser beware.
Example: H sold to W some pigs which were to his knowledge suffering from fever. The pigs
were sold ‘with all faults’ and H did not disclose the fact of fever to W.

Misrepresentation: Amity School of Business

According to Sec. 18, “Misrepresentation” means:
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.
When there is any breach of duty of a person which brings an
advantage to the person committing it by misleading another to his
When a party causes, however, innocently, the other party to the
arrangement to make a mistake as to the substance of the thing
which is the subject of the agreement.

Mistake: Amity School of Business
According to Sec. 20, “A mistake is said to have occurred where the parties
intending to do one thing by error do something else. Mistake is an erroneous
belief concerning something.”
Mistake can be of two types:
1.Mistake of Law
Mistake of law may be –
• Mistake of law of the country: Ignorance of law is no excuse, is a well settled
rule of law.
• Mistake of law of foreign country: Such a mistake is treated as mistake of
fact, i.e. the contract is void if both the parties are under a mistake as to a
foreign law because one cannot be expected to know the law of other country.
2.Mistake of fact
Can be either—
• Bilateral mistake: It means where both the parties to the agreement are under
a mistake as to a matter of fact essential to the agreement, there is a bilateral
• Unilateral mistake: According to Sec.22, “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.”
Example: X sold Oats to Y by sample and Y thinking that they were old 25
Oats, purchased them. In fact, the Oats were new. It was held that Y
Lawful Object Amity School of Business
Legality of object:
The object and the consideration of an agreement must be lawful,
otherwise the agreement is void. According to sec. 23 of the
Indian Contract Act, 1872, the consideration is unlawful in the
following cases:

• If it is Forbidden by law
• If it defeats the Provisions of any Law
• If it is Fraudulent
• If it involves or implies injury to a person or property of
• If the court regards it as immoral or opposed to public

Void agreements Amity School of Business

Void agreements - An agreement not enforceable by law is said

to be void. [section 2(g)]. - - Note that it is not ‘void contract’,
as an agreement which is not enforceable by law does not
become ‘contract’ at all.

Following are void agreements –

• Both parties under mistake of fact (section 20)
• Unlawful object or consideration (section 24)
• Agreement without consideration (section 25)
• Agreement in restraint of marriage (section 26)
• Agreement in restraint of trade (section 27)
• Agreement in restraint of legal proceedings (section 28)
• Agreement to do an impossible Act (section 56).
Discharge of a Contract: Amity School of Business

Discharge of a contract means termination of the contractual

relationship between the parties. A contract is said to be
discharged when the rights and obligations of the parties under
the contract come to an end.
A contract may be discharged:
• By performance- actual or attempted
• By agreement or consent
• By impossibility of performance
• By lapse of time
• By operation of law
• By breach of contract

Discharge of a Contract: Amity School of Business

Discharge by Breach of Contract:

Breach of contract means a breaking of the obligation which a contract imposes. It occurs
when a party to the contract without lawful excuse does not fulfil his contractual obligation
or by his own act makes it impossible that he should perform his obligation under it.
Breach of contract may be:
• Actual Breach of contract
• Anticipatory or constructive Breach of contract

Remedies for breach of Amity School of Business

Remedies for Breach of Contract:
Whenever there is breach of contract, the injured party becomes entitled to any one or more of
the following remedies against the guilty party:
• Rescission of the contract
• Suit for damages
• Suit upon quantum meruit
• Suit for specific performance of the contract
• Suit for injunction
A. Rescission of the contract
When there is a breach of contract by one party, the other party may rescind the contract and
need not perform his part of obligations under the contract and may sit quietly at home if
he decides not to take any legal action against the guilty party.
• Example: A promises to B to supply 10 bags of cement on a certain day. B agrees to pay the
price after the receipt of the goods. A does not supply the goods. B is discharged from liability
to pay the price.
B. Suit for Damages:
Damages are a monetary compensation allowed to the injured party by the court for the loss or
injury suffered by him by the breach of a contract.

Remedies for breach of Contract:
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• Sue for damages:
1. Liability for special damages.
2. Liability to pay ordinary damages.
3. Liability to pay vindictive damages.
4. Liability to pay nominal damages.
5. Damages for inconvenience and discomfort

C. Quantum Meruit: The phrase means “as much as earned”. A right to sue on a quantum
meruit arises where a contract, partly performed by one party, has become discharged by
the breach of the contract or the contract is discovered void.
Example: P agreed to write a volume on an ancient armour to be published in a magazine owned
by C. For this, he was to receive $100 on completion. When he had completed part, but not
whole, of his volume, C abandoned the magazine. P was entitled to get damages for breach of
contract and payment quantum meruit for the part already completed.
D. Suit for specific performance:An aggrieved party may file a suit for specific performance
i.e., for a decree by the court directing the defendant to actually perform the promise that
he has made.
E. Suit for Injunction: Injunction is an order of a court restraining a person from doing a
particular act.
Example: A agreed to sing at B’s theatre for three months from 1st April and to sing for no one else
during that period. Subsequently she contracted to sing at C’s theatre and refused to sing at
B’s theatre. Held, A would be restrained by injunction from singing for C.

Performance of Contracts:
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According to Sec. 37, “The parties to a contract must either perform

or offer to perform their respective promises, unless such
performance is dispensed with or excused under the provisions of
this act, or of any other law.”
Types of performance:
Actual performance: Where the promisor has made an offer of
performance to the promise and the offer has been accepted by the
promise and performed, it is called an actual performance.
Example: X contracted to deliver to Y at his warehouse on 1st Oct., 100
bales of cotton of a particular quality. X brought the cotton of requisite
quality to the appointed place on the appointed day during the
business hours, and Y took the delivery of goods.
Attempted performance: Where a promisor has made an offer of
performance to the promise, and the offer has not been accepted by
the promise, it is called an attempted performance or tender.
Example: If Y refuses to take the delivery of goods, it is a case of
attempted performance.
• 32
Performance of contract
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By whom must contracts be performed?

1. Promisor himself
2. Agent
3. Legal Representative
4. Third party:
5. Joint promisees
Time & place of performance: Amity School of Business

• Where no application is to be made and no time is specified: The

contract must be performed within a “reasonable time” (Sec.46).
Reasonable time is a question of fact.

• Where a time is specified and no application is to be made: The

promisor may perform the promise at any time during the usual
hours of business on such day and at the place at which the promise
ought to be performed
Example: A promises to deliver goods at B’s warehouse on 1st Jan. On
that day A brings the goods to B’s warehouse, but after the usual
hours and they are not received. A has not performed his promise.

• Application for performance on a certain day and place: It is the

duty of the promisee to apply for performance at a proper place
and within the usual hours of business.
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• Application by the promisor to the promise to appoint place: It
is the duty of the promisor to apply to the promise to appoint a
reasonable place for the performance of the promise, and to
perform it at such place.

Example: A undertakes to deliver 1,000 quintals of jute to B on a fixed day. A

must apply to B to appoint a reasonable place for the purpose of receiving
it, and must deliver it to him at such place.

• Performance in manner or at time prescribed or sanctioned by

the promisee (Sec.50):
Indemnity and Guarantee Amity School of Business

• Contract of Indemnity:

• “A contract by which one party promises to save the other

from loss caused to him by the conduct of the promisor
himself or by the conduct of any other person, is called a
contract of indemnity” Sec.124

• The person who promises to make good the loss is called the
‘indemnifier’ (promisor), and the person whose loss is to be
made good is called the ‘indemnity-holder’ (promisee).

• Example: A contracts to indemnify B against the consequences

of any proceedings which C may take against B in respect of a
certain sum of Rs200. This is a contract of indemnity.
Contract of guarantee: Amity School of Business
• “A contract of guarantee is a contract to perform the promise, or discharge
the liability of a third person in case of his default” Sec. 126

• The person who gives the guarantee is called the ‘surety’;

• the person in respect of whose default the guarantee is given is called the
‘principal debtor’; and the person to whom the guarantee is given is called
the ‘creditor’.
• A guarantee may be oral or written.

• Example: S requests C to lend Rs. 500 to P and guarantee that if P fails to pay
the amount, he will pay. This is a contract of guarantee. S, in this case, is the
surety, c, the creditor.

• Essential features of a valid Contract of guarantee:

• Tripartite agreement
• Consent of three parties
• Existence of a Liability
• Essentials of a valid contract
• Guarantee not to be obtained by misrepresentation
• Guarantee not to be obtained by concealment of material facts
Extent of Surety’s liability:
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• In the absence of a contract to the contrary, the

liability of a surety is co-extensive with that of the
principal debtor. It means that the liability of the
surety is equal to that of the principal debtor
unless otherwise agreed.
Following points are worth noting:
• The liability of the surety may be made less than
that of the principal debtor by an express contract
to that effect.
• The liability of the surety arises immediately when
a default is made by the principal debtor.
Rights of Surety Amity School of Business

1. Right against the creditor

• Right of set-off: On being sued by the creditor, surety can rely
on any set-off or counter-claim which the debtor has against the
• On payment of guaranteed debt: surety has the right to
demand all securities from the creditor.
• Right of subrogation: After the payment by surety, he steps
into the shoes of creditor.

2. Right against the Principal debtor

• Right to be relieved of liability: Before the payment is due,
the surety can compel the principal debtor to relieve him from
liability by paying off the debt.
• Right to indemnity: between principal debtor and surety
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3. Right against the Co-sureties

• Co-sureties liable to contribute equally.
• Liability of co-sureties bound in different

Liability of surety: Liability of the surety is co-

extensive with that of the principal debtor,
unless it is otherwise provided by the
Discharge of Surety Amity School of Business

1. Discharge by revocation:
• Revocation by notice
• Revocation by death of surety
• Revocation by novation
2. Discharge by conduct of the creditor:
• Variance in terms of contract
• Discharge of principal debtor
• Loss of security
3. Discharge by invalidation of contract:
• Guarantee obtained by misrepresentation.
• Guarantee obtained by concealment
• Failure of consideration
• Guarantee on contract that creditor shall not act on it until a co-surety
Meaning of bailment (Sec. 148):
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• The word ‘Bailment’ is derived from the French

word ‘baillier’ which means ‘to deliver’.
• “A bailment is the delivery of the 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
• The person delivering the goods is called the
‘bailor’, the person to whom they are delivered is
called the ‘bailee’, and the transaction is called the
Essentials of bailment Amity School of Business

There are two persons namely Bailor and

Bailor means the person delivering the
goods, Bailee means the person to whom
the goods are delivered.
Their must be delivery of goods .
The goods must be in deliverable
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Only the goods are delivered but not the

ownership of goods, their must be
Bailey can use the goods.
Goods must be returned or disposed off
after the purpose is accomplished.
Duties and rights of Bailor Amity School of Business

and Bailee
Duties of bailor.
To disclose known faults.
To bear extraordinary expenses of
To indemnify bailee for loss in case of pre
mature termination of gratuitous
To receive back the goods.
To indemnify the bailee.
Duties of Bailee: Amity School of Business

• Duty to take reasonable care of goods

delivered to him
• Duty not to make unauthorised use of
goods entrusted to him
• Duty not to mix goods bailed with his
own goods
• Duty to return the goods
• Duty to deliver any accretion to the goods

Rights of bailor Amity School of Business

Basically the duties of bailee are the rights of

bailor. The various rights are:
• Right to claim damages in case of negligence
• Right to terminate the contract or claim
compensation in case of unauthorised use (Sec.
• Right to claim separation of goods or claim
compensation in case of unauthorised mixture
(Sec. 156)
• Right to demand return of goods (Sec. 160)
• Right to demand accretion of goods (Sec. 163)
Rights of bailee Amity School of Business

• Right to claim damages

• Right to claim reimbursement of expenses
• Right to be indemnified in case of premature termination
of Gratuitous Bailment (Sec. 159)
• Right to recover loss in case of Bailor’s defective title
• Right to recover loss in case of Bailor’s refusal to take the
goods back (Sec. 164)
PLEDGE (SEC 172) Amity School of Business

The bailment of goods as security for

payment of a debt or performance of a
promise is called “Pledge”.
The bailor in this case is called the
“pledger” or “pawnor” and the bailee is
called the “pledgee” or “pawnee”
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Rights of Pawnee.
Right of retainer.

Right to extraordinary expenses.

Right against true owner, when the Pawnor’s

title is defective.

Pawnee’s right to sell.

Rights of Pawnor Amity School of Business

• Right to get back goods.

• Right to redeem debt.
• Presentation and maintenance of the
• Rights of an ordinary debtor.
Duties of a Pawnor: Amity School of Business

• Duty to comply with the terms of Pledge

• Duty to compensate the Pawnee for
extraordinary expenses

Duties of a pawnee Amity School of Business

• Duty to take reasonable care of the goods

• Duty not to make Unauthorised use of
• Duty not to mix goods pledged with his
own goods
• Duty to return goods
• Duty to return accretion to the goods
Contract of Agency Amity School of Business

Agency is a special type of contract. The concept of agency was developed as

one man cannot possibly do every transaction himself. Hence, he should
have opportunity or facility to transact business through others like an

• The principles of contract of agency are –

(a) Excepting matters of a personal nature, what a person can do himself, he

can also do it through agent (e.g. a person cannot marry through an agent, as it
is a matter of personal nature)

(b) A person acting through an agent is acting himself, i.e. act of agent is act of
Principal. - - Since agency is a contract, all usual requirements of a valid
contract are applicable to agency contract also, except to the extent excluded
in the Act. One important distinction is that, no consideration is necessary
to create an agency.
Amity School of Business
• AGENT AND PRINCIPAL DEFINED - 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 so represented, is
called the “principal” [section 182]
• WHO MAY EMPLOY AGENT - Any person who is of the age of majority
according to the law to which he is subject, and who is of sound mind, may
employ an agent. [section 183]. - - Thus, any person competent to contract
can appoint an agent.
• WHO MAY BE AN AGENT - As between the principal and third persons
any person may become an agent, but no person who is not of the age of
majority and of sound mind can become an agent, so as to be responsible to
his principal according to the provisions in that behalf herein contained.
[section 184]. - -
The significance is that a Principal can appoint a minor or person of unsound mind
as agent. In such case, the Principal will be responsible to the third party..
However, the agent, who is a minor or of unsound mind, cannot be responsible to
Principal. Thus, Principal will be liable to third parties for acts done by Agent, but
agent will not be responsible to Principal for his (i.e. Agent’s) acts.
• CONSIDERATION NOT NECESSARY - No consideration is necessary to
create an agency. [section 185]. Thus, payment of agency commission is not
essential to hold appointment of agent as valid.
Classification of agents: Amity School of Business

• On the basis of extent of authority:

• General Agent: He is the one who has authority to do all acts in the
ordinary course of trade or profession. The authority is continuous unless it
is terminated.
• Special Agent: A special agent is one who has authority to do a particular
act in a particular transaction. The authority is limited to that particular act
only and his authority comes to an end when that act for which authority
was given is performed.
• Universal Agent: He is one who has authority to do all acts which the
principal can lawfully do and delegate. He has an unlimited authority to bind
the principal.
• Broker: A broker is one who negotiates and makes contracts between the
principal and the third party. He is not entrusted with the possession of
goods and hence he has no lien on the goods.

Classification of agents Amity School of Business

• Auctioneer: an auctioneer is one who is entrusted with the

possession of goods for sale at a public auction. He has only a
particular lien o the goods for his charges.
• Del-creder Agent: He is one who gives guarantee to his principal to
the effect that the third person with whom he enters into contracts
shall perform his obligation.
• Banker: he acts an agent of the customer when he collects cheques
or drafts or bills or buys or sells securities on behalf of his

Amity School of Business
Rights of an agent:
• Right to retain money due to himself.
• Right to receive remuneration.
• Right of lien.
• Right of indemnification.
• Right of compensation.
• Right of stoppage in transit.

AGENT’S DUTY TO PRINCIPAL - An agent has following duties towards

1. Conducting principal’s business as per his directions
2. Carry out work with normal skill and diligence
3. Render proper accounts
4. Agent’s duty to communicate with principal in the time of difficulty.
5. Not to deal on his own account, in business of agency
6. Agent’s duty to pay sums received for principal
7. Agent’s duty on termination of agency by principal’s death or insanity

• REMUNERATION TO AGENT - Consideration is not necessary for

creation of agency. However, if there is an agreement, an agent is entitled to
get remuneration as per contract.
Amity School of Business

• Recover damages from agent if he disregards directions of Principal
• Obtain accounts from Agent
• Recover moneys collected by Agent on behalf of Principal
• Obtain details of secret profit made by agent and recover it from
• Forfeit remuneration of Agent if he misconducts the business.

• Pay remuneration to agent as agreed
• Indemnify agent for lawful acts done by him as agent
• Indemnify Agent for all acts done by him in good faith
• Indemnify agent if he suffers loss due to neglect or lack of skill of
Creation of Agency: Amity School of Business

• Agency by Express Authority (Sec.186 and 187):

• An agency by express authority arises when an express authority is given to
the agent by spoken or written words.
• Example: X who owns a shop, appoints Y to manage his executing a power
of attorney in Y’s favour.
• Agency by Implied Authority (Sec. 187):
• An agency which has to be understood from the conduct and behaviour of
the parties is called implied agency.
• Example: A owns a shop in Shimla, living himself in Calcutta, and visiting
the shop occasionally. The shop is managed by B, and he is in the habit of
ordering goods from C in the name of A for the purposes of the shop and of
paying for them out of A’s funds with A’s knowledge. B has an implied
authority from A to order goods from c in the name of A for the purpose of
the shop.

Amity School of Business
• It includes the following:
• Agency by Estoppel: It arises when a person by his words or conducts induces third
persons to believe that a certain person is his agent.
• Example: X tells Y in the presence and within the hearing of Z that he (X) is z’s agent.
Z does not contradict this statement. Later on Y enters into a contract with X believing
that x is Z’s agent. In such a case Z is bound by this contract and a suit between Z
and Y, Z cannot be permitted to say that X was not his agent, even though X was not
actually his agent.
• Agent by Holding out: Such agency arises when a person by his past affirmative or
positive conduct leads third person to believe that person doing some act on his
behalf is doing with authority.
• Example: X allows Y, his servant to purchase goods for him on credit from Z and later
on pay for them. One day X pays cash to Y to purchase goods. Y misappropriates the
money and purchases goods on credit from Z. Z can recover the price of his goods
from X because X had held out Z as his agent on earlier occasions.
• Agency by necessity: It arises under following conditions:
• (i). There is an actual and definite necessity for acting on behalf of the principal
• (ii). It is impossible to communicate with the principal and obtain his consent.
• Example: X consigned some vegetables from Delhi to Mumbai by a truck. The truck
met with an accident. The vegetable being perishable were sold by the transporter.
This sale is binding on X.
Amity School of Business

• Agency by ratification (Sec.196): It means the subsequent

adoption and acceptance of an act originally done without
instructions or authority. Thus where a principal affirms the
unauthorised act of his agent, he is said to have ratified that act and
there comes into existence an agency by ratification.
• Example: A buys 5 bags of wheat on behalf of B. B did not appoint A
as his agent. B may, upon hearing of the transaction, accepts or
rejects it. If B accepts it, the act is ratified and A becomes his agent.
• Agency by Operation of Law: It is said to arise where the law
treats one person as an agent of another.
• Example: On formation of a partnership, every partner becomes the
agent of other partner.

Types of agent: Amity School of Business

Sub-Agent (Sec. 191):

“A sub-agent is a person employed by, and acting under the control of, the original agent in the
business of the agency.”
This means that he is the agent of the original agent. Can delegate the work to him if-
The nature of work is such that a sub-agent is necessary.

Example: A, a carrier, agreed to carry 70 bags of cotton waste from Morvi to Bhavnagar by a truck. A
asked A1, another carrier, to carry goods. The goods were damaged in transit. Held, A was liable
even though it was proved that A1 was the carrier.

Co-agent or substituted agent:

He is a person who is named by the agent, on an express or implied authority from the principal, to act
for the principal. He is not a sub-agent but an agent of the principal for such part of the business of
the agency as is entrusted to him.
Example: P directs A, his solicitor, to sell his estate by auction and to employ an auctioneer for the
purpose. A names A1, an auctioneer to conduct the sale. A1 is not a sub-agent but is P’s agent
for the conduct of the sale.

TERMINATION OF AGENCY Amity School of Business
Termination of Agency:
An agency may be terminated in any of the following ways:
By act of the parties
By operation of law
Termination by act of parties:
Agreement: An agency, like any other contract, can be terminated at any time
by the mutual agreement between the principal and the agent.
• Revocation by the principal: (Sec. 203 & 207) The principal may revoke
the authority of the agent at any time before the agent has exercised his
authority so as to bind the principal unless the agency is irrevocable.
Revocation can be express or implied in the conduct of the principal.
• Renunciation by the agent: (Sec. 206) An agency may also be terminated
by an express renunciation by the agent. He must give a reasonable notice
to the principal; otherwise he will be liable to compensate the principal for
any damage resulting thereby.
2 Amity School of Business
B.Termination by operation of Law:
Completion of the business of agency: An agency automatically comes to
an end when the business of agency is completed (Sec.201).
• Expiry of time: If the agent is appointed for a fixed term, the expiration of
the term puts an end to the agency, even though the business of the agency
may not have been completed.
• Death of the principal or the agent: After the death of the principal agency
terminates but the agent must take all reasonable steps for the protection of
the interests of the late principal entrusted to him
• Insanity of the principal or the agent: An agency also stands terminated
when the principal becomes of an unsound mind (Sec.201). it is the duty of
an agent to protect the interests of the former principal by taking all
reasonable steps.
• Insolvency of the principal: An agency terminates by the insolvency of the
• Destruction of the subject-matter: Where the agency is created for the
sale of a house and the house is destroyed by fire, the agency ends.
• Dissolution of a company
• Principal or agent becomes alien enemy