CONTRACT ACT, 1872

Padmaja Dholakia
 CONTRACT ACT, 1872
• The Indian Contract Act, 1872 defines the term “Contract” under its section 2 (h) as “An agreement enforceable by law”. In
other words, we can say that a contract is anything that is an agreement and enforceable by the law of the land.
• This definition has two major elements in it viz – “agreement” and “enforceable by law”. So in order to understand a contract
in the light of The Indian Contract Act, 1872 we need to define and explain these two pivots in the definition of a contract.
• Agreement
• The Indian Contract Act, 1872 defines what we mean by “Agreement”. In its section 2 (e), the Act defines the term agreement
as “every promise and every set of promises, forming the consideration for each other”. Now that we know how the Act
defines the term “agreement”, there may be some ambiguity in the definition of the term promise.
• Promise
• This ambiguity is removed by the Act itself in its section 2(b) which defines the term “promise” here as: “when the person to
whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Proposal when accepted,
becomes a promise”.
• In other words, an agreement is an accepted promise, accepted by all the parties involved in the agreement or affected by it.
This definition thus introduces a flow chart or a sequence of steps that need to be triggered in order to establish or draft a
contract.
• For a contract to be valid and acceptable :
i. there should be an offer;
ii. The said offer should be accepted and the acceptance must be communicated to the person making the offer;
iii. Acceptance must be unconditional and absolute; and must not precede the offer;
iv. There must be a lawful consideration;
v. The parties must be competent to contract;
vi. The purpose of the Contract must be lawful.
• A Contract may be discharged in any of the following ways
• Discharge by Performance.
• Discharge by Mutual Consent or Agreement
• Novation - When a new contract is substituted for an existing contract
• Alteration
• Rescission
• Remission - Accepting the lesser sum of amount than what was contracted for
• Discharge by subsequent illegality or impossibility
• Destruction of Subject-matter
• Failure of ultimate purpose
• Death or personal incapacity of Promisor
• Change of Law
• Discharge by lapse of time
• Discharge by operation of law
• Discharge by breach of contract
• Anticipatory breach
• Actual breach
The remedy available to a person who has suffered due to the breach of the Contract :
• Suit for Damages
• Suit for specific performance of the contract
• Suit for injunction
Remedies for Breach of Contract
When a contract is breached, the injured party is entitled to one or more of the following remedies.
Section 73 : Compensation for loss or damage caused by breach of contract.
When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who
has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the
usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to
result from the breach by it.
Such compensation is not to be given for any remote or indirect loss or damage sustained by reason of the breach.
Section 74: Compensation for breach of contract where penalty is stipulated for –
Where a contract has been breached / broken, if a sum (of money) is named in the contract as the amount to be
paid in case of such breach, or if the contract contain any other stipulation by way of penalty, the party,
complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby,
to receive from the party who has broken the contract reasonable compensation not exceeding the amount so
named or, as the case may be, the penalty stipulated for.
In terms of Section 73 and Section 74, of the Contract Act, it can be held that :
i. Terms of the contract are required to be taken into consideration before arriving at the conclusion whether
the party claiming damages is entitled to the same.
ii. If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the
contract, unless it is held that such estimate of damages / compensation is unreasonable or is by way of a
 penalty, party who has committed the breach is required to pay such compensation and that is what is provided
in Section 73 of the Contract Act.
3. Section 74 is to be read along with Section 73 and, therefore in every case of breach of contract, the person
aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a
decree. The Court is competent to award reasonable compensation in case of breach, even if no actual damage
is proved to have been suffered in consequence of the breach of a contract.
4. In some contracts, it would be impossible for the Court to assess the compensation arising from breach and if
the compensation contemplated is not by way of penalty or unreasonable, the Court can award the same if it is
genuine pre-estimate by the parties as the measure of reasonable compensation
Oil and Natural Gas Corporation Ltd. vs Saw Pipes Ltd. AIR 2003 SC 2629
It is important that : in order to succeed in its claim to damages, the plaintiff must establish that the pre-mature
cancellation of the agreement was wrongful; if it was, the Plaintiff who was responsible for the breach of obligations
imposed under the agreement and the defendant’s termination thereof was not wrongful, held, the plaintiff’s suit
would not be maintainable : held in G.L. Kilikar vs State of Kerala AIR 1971 SC, 1196.

The Principle underlying assessment of damages : in case of breach of contract, damages may be claimed by one
party from the other. The damages may be liquidated or unliquidated.
Broadly, the principle underlying assessment of damages is to put the aggrieved party monetarily in the same
position, as far as possible, in which it would have been if the contract had been performed. Here the rule as to
remoteness of damages comes into play. Such loss may be compensated as the parties could have contemplated at
the time of entering into the contract. The party held liable to compensation for mental agony could not be
awarded. (Ghaziabad Development Authority vs Union of India AIR 2000 SC 2003)
Section 124: 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 a third party, is called
a ‘Contract of indemnity”.
For ex: A and B enter into a Contract for a sum of Rs. 2,00,000 to be paid by A to B, which in turn
B has to pay C. A promises (the promisor) to indemnify B (the promisor) (in the event of a default
by A in the payment) against any action (suit claim etc.) that C may take against B for the non-
payment.
In the above example, B will be entitled to claim from A all damages / costs and all other sums of
money which he may have be compelled to pay, in any suit / claim in respect of which the
promise to indemnify applies - Section 125.
Section 126: “Contract of guarantee” :
3 parties – Surety, Principal Debtor and Creditor.
A contract of guarantee is a contract to perform the promise or discharge the liability, of a 3rd
person, in case of a default (by such 3rd person).
The person giving the guarantee is called the “surety”, the person in respect of whose default the
guarantee is given is called the “principal debtor” and the person to whom the guarantee is given
is called the “creditor”.
A guarantee may be either oral or written.
Consideration for guarantee: There need not be a monetary consideration for giving a guarantee.
Anything done, or any promise made, for the benefit of the principal debtor, may be sufficient consideration to the surety for
giving the guarantee.
Section 128: Surety’s liability: the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise
agreed or provided in the contract of guarantee. That is, in the event of a breach of a Contract, between the principal debtor and
the creditor, the creditor can sue both, the principal debtor and the guarantor (surety) for the debt (or dues payable) for the
breach. The surety and the principal debtor become jointly and severally (i.e. together and separately) liable for the debt. –
[Central Bank of India vs C L Vimla AIR 2015 SC 2280].
Continuing guarantee: A continuing guarantee is a guarantee which extends to a series of transactions.
Grounds on which a guarantee can be revoked / discharged:
1. A guarantee (continuing or otherwise) can be revoked by the surety at any time, by giving notice to the creditors, for all
future transactions. Any transaction that has taken place before the date of notice of revocation has to be honoured by the
guarantor / surety.
2. The death of the surety operates, as a revocation of the guarantee (if it’s a personal guarantee), unless anything to the
contrary is agreed between the parties to the contract of guarantee.
3. Any variance made to the contract between the principal debtor and the creditor, without the consent of the surety, will
discharge the surety as to the transactions after the variance in the contract.
4. Discharge of surety by release or discharge of the principal debtor : If there is any contract entered into between the
principal debtor and the creditor where by the principal debtor is discharged from his debt, the surety will also be
discharged. Also any act or omission (to act), which, in law, will discharge the principal debtor, will also discharge the surety.
(for example: if the creditor fails to take action to recover dues for a period of 3 years, after which his claim to recover the
dues through the process of law is barred by the Law of Limitation, the claim against the surety will also be barred under
5. The surety is discharged when the creditor enters into a contract to give time to the principal debtor to pay his
debt or enters into a contract not to sue the principal debtor, unless the surety agrees to such a contract
between the creditor and the principal debtor.
6. However, release of one co-surety does not discharge the other sureties, where it is a contract of co-sureties.
7. Surety’s right to the benefit of any security held by creditor: A surety is entitled to the benefit of every
security which the creditor has against the principal debtor at the time when the contract of guarantee is
entered into, whether the surety is aware of the same or not; if the creditor loses or part with the security
(without the consent of the surety), the surety is discharged to the extent of the value of the security. For ex:
If the creditor hold certain shares or security of the principal debtor, the surety is discharged to the extent of
the value of such security held by the creditor and the creditor is bound to first give credit for the value of the
security held before he can claim the debt from the surety, on default by the principal debtor.
8. Guarantee obtained by misrepresentation is invalid: Any guarantee which has been obtained by means of
misrepresentation made by the creditor is invalid.
9. Guarantee obtained by concealment is invalid: Any guarantee obtained by the creditor by means of keeping
silent on material circumstances, is invalid.
Rights of a surety on payment or performance (on behalf of the principal debtor):
When a guaranteed debt becomes due or on default of the principal debtor, the surety performs a guaranteed
act/duty, or pays the guaranteed debt, then the surety steps into the shoes of the creditor as against the principal
debtor.
Example: A guarantees the payment of a debt by B to C. B fails to pay the debt. C calls upon A to pay the debt (in
place of B). After payment of the debt by A to C, A can now recover the amount of the paid debt from B. ( A steps
into the shoes of C to recover the debt from B).
Implied promise to indemnify the surety: In every contract of guarantee there is an implied promise by the
principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever
sum he has rightfully paid under the guarantee, but no sum he has wrongly paid.
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
AGENCY
Agent : is a person employed to do any act for another or to represent another in dealings with third parties.
Principal: The person for whom such act is done, or the person who is represented, is called the principal.
Any person who is of the age of majority and who is of a sound mind, i.e. any person who is eligible to contract, may employ an
agent.
Similarly, any person who is of the age of majority and who is of a sound mind; i.e. any person who is eligible to contract may
become an agent, in order to be responsible to his principal.
NO consideration is necessary to create an agency.
The Authority of an agent may be expressed or implied; It is said to be express when it is given by words spoken or written. The
authority is implied, when it is to be inferred from the circumstances of the case;
Extent of Agent’s authority: An agent, having an authority to do an act, has authority to do every lawful thing which is necessary
in order to do such act.
An Agent having an authority to carry on business, has authority to do every lawful thing necessary for the purpose, or usually
done in the course, of conducting such business.
Similarly, an agent has authority, in an emergency too, 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.
Sub-agent is a person employed by, and acting under the control of the original agent in the
business of agency.
However, an agent cannot lawfully employ another person to perform acts which he has,
expressly or impliedly, undertaken to perform personally., unless by the ordinary custom of the
trade, a sub-agent may, or from the nature of the agency, must be employed.
Sub-agent properly appointed: Where a sub-agent is properly appointed, the principal is, so far
as regards 3rd persons, represented by the sub-agent, and is bound by and responsible for his
acts, as if he were the agent originally appointed by the principal.
The Agent is responsible to the principal for the acts of the sub-agent.
The sub-agent is responsible to the agent for his acts, but not to the principal, except in case of
fraud or willful wrong.
Where an agent appoints a sub-agent, without authority to do so from the principal, such agent
shall be responsible to both the principal as well as 3rd parties for the acts of such sub-agent; the
principal is not responsible for the acts of the sub-agent to 3rd parties, nor is the sub-agent
responsible to the principal.
Where the principal directs the agent to appoint another person to carry on the work described
in the agency agreement, such other person, is not a sub-agent, but an agent of the principal for
such part of the business of the agency for which he is appointed.
For ex: if A directs B, his solicitor, to sell his estate by auction and to employ an auctioneer for 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.
Agent’s duty in naming such person: In selecting such agent for his principal, an agent is bound to exercise the same
amount of discretion as a man of ordinary prudence would exercise in his own case; and if he does this, he is not
responsible to the principal for the acts or negligence of the agent so selected.
For ex: 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 a choice negligently and the ship turns out to be unseaworthy and is lost. It is the
ship-surveyor, and not B who is responsible to A (the principal).
Termination or Revocation of Agency
An agency is terminated by:
i. The principal revoking his authority or
ii. By the agent renouncing the business of the agency; or
iii. By the business of the agency being completed; or
iv. By either the principal or the agent dying or becoming of unsound mind; or
v. By the principal being adjudicated an insolvent under the provisions of any Act for the time being in force.
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.
The principal may revoke the authority given to the agent, at any time before the authority has been exercised or
acted upon so as to bind the principal.
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.
Compensation for revocation by principal or renunciation by agent:
Where there is an express or implied contract that the agency should be continued for any period of time,
the principal must make compensation to the agent, or the agent to the principal, for any revocation without
cause.
Notice of revocation or renunciation: Reasonable notice must be given of such revocation or renunciation;
otherwise the damage thereby resulting to the principal or the agent, as the case may be, must be made
good, by one party to the other.
Revocation or renunciation may be express or implied : Revocation or renunciation of the agency may be
expressed or may be implied by the conduct of the principal or the agent respectively.
When termination of the agent’s authority takes effect as to agent, and /or third parties: The termination of
the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him
and so far as regards third parties, before it is known to them.
Agent’s duty on termination of agency by principal’s death or insanity: when an agency is terminated by the
principal’s death or insanity, 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.
The termination of a sub-agent’s authority: The termination of the authority of an agent causes the
termination (subject to the rules) of the authority of all sub-agents appointed by him.
Agent’s duty in conducting the principal’s business: An agent is bound to conduct the business of his
principal according to the directions given by the principal, or, in the absence of any such direction,
according to the custom which prevails in doing business of the same at the place where the agent conducts
such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his
principal, and if any profit accrues, he must account it.
Skill and diligence required from agent: 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 any direct
consequences of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are
indirectly or remotely caused by such neglect, want of skill or misconduct.
Agent’s accounts: An agent is bound to render proper accounts to his principal on demand.
It is the agent’s duty in cases of difficulty, to use all reasonable diligence in communicating with his principal and in seeking to
obtain his instructions.
If the agent has acted or dealt on his own account, under the authority of agency, without first obtaining the consent of his
principal or has concealed material facts from him; the principal may cancel the transaction, if the same is disadvantageous to
him. On the other hand, if the transaction is beneficial to the principal, he is entitled to the benefits of the same even if the agent
has acted beyond his authority.
The agent has a right to retain, out of any sums received on account of the principal in the business of agency, all moneys due to
himself in respect of the advances made or expenses incurred by him in conducting the business of agency, and also any such
remuneration payable to him.
The agent is bound, subject to such deductions as allowed, to pay to his principal all sums received on his account.
The agent is however not entitled to any remuneration for any misconduct of the business.
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property 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 to him.
When an agent has acted in good faith, the principal is liable to indemnify the agent against the consequences of those acts,
though it causes an injury to the rights of third parties.
The principal must pay compensation to his agent in respect of injury causes to such agent by the principal’s neglect or want of
skill.
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.
Any notice given to or information obtained by the agent, provided it is given or obtained in the course of the business of agency
transacted by him on behalf of the principal, shall be valid communication, as if given to the principal himself.
In the absence of any contract to that effect, an agent cannot personally enforce contracts entered into by him on behalf of his
principal, nor is he personally bound by them.
An agent acts for and on behalf of principal, prima facie a suit for specific performance of contract is not maintainable against
the former (i.e. agent). Se 230 of the Indian Contract Act read with Sec 2(2) of the Power of Attorney Act, 1882 prima facie
debars execution of such contract by an agent. – Punit Beriwala vs Suva Sanyal AIR 1998 Cal.
Where the contract is entered into by agent contracting on behalf of a foreign principal who is named and disclosed, the agent
cannot be sued personally nor made personally liable. Midland Overseas vs m.v. “CMBT Tana” AIR 1999 Bom 401.
When an agent makes a contract with a person who neither knows, nor has reason to suspect that he is an agent, his principal
may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he
would have had as against the agent, if the agent has been the principal.
If the principal discloses, himself before the contract is completed, the other contracting party may refuse to fulfil the contract,
if he can show that, he would not have entered into the contract, if he had known who was the principal in the contract or had
known that the agent was not the principal.
In cases where the agent is personally liable, a person dealing with him may hold either him or the principal, or both of them
liable. Ex: A enters into a contract with B to sell him 100 bales of cotton and afterwards discovers that he was acting as an agent
for C. A may sue either B or C for the price of the cotton.
A person who untruly representing himself to be the authorised agent of another, and thereby inducing a third person to deal
with him as such agent, is liable, if his alleged employer / principal does not ratify his acts, to make compensation to the other in
respect of any loss or damage which he has incurred by so dealing.
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.
Important Points to note
Duties and Liabilities fixed on each party;
Indemnities to be provided by each party for the performance of the contract;
Payment terms – invoice, credit period, due dates, interest payable;
Termination of the contract i.e. exit option available to both parties;
 Liabilities on termination;
 Grounds that constitute a breach;
 Remedy in the event of a breach;
Amendments if any;
 Dispute resolution clause;
 Jurisdiction of courts in the event of a dispute;
 Contract made in duplicate – each original;
 Digital or physical signatures;
 Copies to be maintained;