Law & Management of Contracts

By: Prof C.L.Bansal

Management Development Institute, Gurgaon
Preliminary Aspects of Contracts
 CONCEPT OF LAW
 Law is command of the sovereign which if violated is
visited with penalties
 Grundnorm represents the philosophical source of origin of
law
 In democratic countries, the constitution is taken as the
source of origin of law
 In India, there are three sources of law namely:
(1) Legislature (Direct Laws in the form of ‘ACT’)
(2) Executive (Subordinate Laws in the form of
‘RULES’)
(3) Judiciary (Indirect Law in the form of ‘JUDGMENTS’)
 All these laws are called ‘Positive Laws’ as they are
made by human beings
 WORLD LEGAL SYSTEMS
Three Legal Systems of the world include:
1: Common Law System deriving from judicial precedents &
principles of equity which prevails in UK, US and CW
countries
2: Civil Law System derived from Roman ‘corpus juris civilis’ is
codified form of law marked by comprehensiveness and
certainty which prevails in continental Europe’ Japan; China’
Indonesia.etc
3: Muslim Law prevalent in Saudi Arabia and Middle East
Countries is based on Holy Koran & is basically concerned
with religious matters
 CLASSIFICATION OF LAW
 According to Mode of Creation, law may either be
(i) Natural law based on principles of equity and morality
which are universal and eternal, or
(ii) Positive law which is man made law consisting of
statutes and codes which are prescriptive in nature
 According to Geography, law may be either (i)

International law, or (ii) Domestic law with two

branches as follows:
 Public Law for running the government through

constitution, administrative and criminal law

 Private Law for religious matters; private matters like

marriage, contracts; property; torts etc

 NATURE OF CONTRACT LAW
 Contract Law is a ‘POSITIVE LAW’ made by human agencies
 It is a branch of CIVIL LAW’ based on ‘common law system’
 It is contained in the CONTRACT ACT 1872
 Contract Act is a SUBSTANTIVE LAW dealing with contractual
rights and obligations of parties involved in commercial
transactions
 Contract law is FACILITATIVE to help commercial parties
formulate their contracts in accordance with the general
principles laid down in the Act
 Contract law does not apply to all types of contracts but only to
those “agreements which are enforceable at law”
 Contract law is not PRESCRITIVE i.e., it does not prescribe any
penalties or punishment in case of breach of contractual
promise
 SCOPE OF LAW OF CONTRACTS
 Contracting parties can frame the details of contract
while remaining within the purview of general principles
of the law of contracts
 Law of contracts does not override customs and usages
 Contract law is NOT A PROCEDURAL LAW
 It provides rules for following FOUR aspects relating to
contract:
1: Formation of Contracts
2: Void Agreements
3: Performance ( called ‘discharge’) of Contracts
4: Remedies for Breach of Contract
WHAT DOES CONTRACT LAW DEAL
WITH?
 Contract Law deals with the following categories of
contracts:
1:INDEMNITY CONTRACTS (promise to make good the
loss of another such as by insurance companies);
2: GUARANTEE CONTRACTS (undertaking to pay or
perform the promise of another);
3:CONTRACTS OF BAILMENT (temporary delivery of
possession of goods to another for a specific purpose);
4:PLEDGE (bailment of goods as security against loan);
5:CONTRACTS OF AGENCY (delegating authority to
another; &
6:CONTRACTS OF SALE OF GOODS
 MAKING A CONTRACT
 AGREEMENT is the starting point of a contract
 Section 2(e) defines an ‘agreement’ as ‘ an exchange of

promises between two or more parties’. For making an

agreement, following FIVE things are needed:
1: There must be Two Parties
2: One of the parties invites other to make an Offer
3: Invited Offeror has the option to ACCEPT or reject the OFFER
4: Consensus ad idem i.e., identity of minds through OFFER &
ACCEPTANCE coinciding
5: INTNTION TO CREATE LEGAL RELATIONS which is
presumed in commercial transactions but must be proved in
social transactions such as promise made by husband to wife
[BALFOUR v. BALFOUR]
INTENTION TO CREATE LEGAL
RELATIONS: LEGAL ISSUES
 Intention to contract is presumed in commercial transactions except
where parties have specifically expressed their intention to not treat
the agreement as a formal legal agreement [Rose & Frank Co v JR
Crompton & bros Ltd (1923) KB 261]
 In social transactions, there is no presumption of such intention as in
Balfour’s case where a wife’s claim for recovery of monthly stipend
was rejected for want of intention
 However, if intention is evident then consonant with ‘will theory’, court
shall enforce the expressed will of the parties despite social nature of
agreement as in Merritt v Merritt (1970) 1 WLR 1211 where the husband
had to transfer the ownership of flat to his divorced wife as agreed
between them
 If in a social agreement, the plaintiff undergoes a detriment like selling
off property at the behest of defendant and the latter later backs off as
in Parker v Clark (1960) 1 WLR 286, the former can recover
CONVERTING AGREEMENT TO CONTRACT
Section 2(h) defines a ‘CONTRACT’ as ‘agreement enforceable by law’.
In other words, contract is an enforceable agreement
 ‘Enforceability of the Agreement’ under section 10 depend on:

1. Free Consent which is not caused by:

(a) Coercion (violence or threat thereof to body or property of other party
or his relatives),(b) Undue Influence (domination of will of the other party;
(c) Fraud (making false representation knowingly),(d)
Misrepresentation (unwarranted statements not true to the knowledge of
the party making it , and (e) Mistake (erroneous belief in certain state of
things)
2:Contractual Capacity: no party being a (minor); of unsound mind,
disqualified by law
3:Lawful Consideration i.e. price
4:Lawful Object
5: Agreement must not be expressly prohibited

CONTRACTING METHODS
 CONTRACTING METHODS
Three contract styles are in vogue in India depending on choice
of parties and exigencies of public requirements:

1: Negotiated Consensus-ad-idem Contracts

2: GCC & SCC Contracts

3. Swiss Challenge Method of Tendering for Infrastructure

Projects

4. Standard Form Contracts

 NEGOTIATED CONTRACTS
 Most common form of making day to day contracts in
commercial markets or even private property transactions
 Parties may not straightway make an offer followed by its
acceptance
 Contracts may be made in a variety of different situations
like:
(i) Making queries
(ii) Sale on ‘self-service basis’
(iii) Buying goods ‘displayed in show windows with price
tags attached to articles’
(iv) Auctions or paper advertisement based transactions
 ANSWER TO A QUESTION
FACTS
In Harvey v Facey 1893 SC 522, A wrote a letter to B inquiring:
“Will you sell your Bumper Hall Penn located at such and such
destination? Quote lowest cash price”.
B answered, “ Yes, the house is on sale and the asking price would
be Rs One Crore”
A sends the demand draft for the quoted price
ISSUE:
Has any contract arisen between the parties?.
ANSWER:
B’s answer to A’s question does not amount to either offer or
acceptance
 STATEMENT OF INTENTION
Advertisement of an auction is illustrative of statements of intention
In Harris v Nickerson 1873 LR8 QB 286, a company published a
notice of auction specifying the items to be auctioned and the details
as to time, date and venue thereof which was in Delhi. A prospective
buyer from Mumbai came by air to Delhi to participate in the auction.
On reaching the venue, he found a notice notifying the postponement
of the auction till further notice.
ISSUE: Can Raju claim the amount of expenditure incurred on visiting
the venue from the auctioning company?
ANSWER: NO, since the notice of auction is only a statement of
intention. No contractual relationship can arise on the basis of an
auction notice.
 INVITATION TO MAKE OFFERS
Invitation to make Offers consists of an invitation to others to give
their proposals which the inviter may either accept or reject.
Examples of invitations include:
i. Tender Notices
ii. Auction Notices
iii. Price Catalogues / Price Lists,
iv. Goods Displayed in Show Windows
v. Goods sold on self- service basis
 Making of formal offer by the party who acts on the basis of

invitation and its acceptance by the other party leads to the

formation of an agreement(promise).
 An agreement is therefore the result of exchange of promises (offer

and acceptance) between two or more persons in which each

promise forms consideration for the other[Sec 2(g)]
 GCC & SCC CONTRACTS
GENERAL CONDITIONS OF CONTRACT (GCC)
 These are framed based on business policy for the guidance of prospective

contractors / suppliers.
 Its example is the condition that advance to the contractor shall be limited to

specified % of total contract price and shall be made after signing of contract
and on the basis of bank guarantee furnished by the latter
SPECIAL CONDITIONS OF CONTRACT (SCC)
 These are complementary to GCC such as that the amount of advance shall be

equal to 10% of contract price

WHEN ADOPTED?
 GCC/SCC route is used when large number of parties are expected to respond

to invitation such as a works contracts

FORM OF GCC & SCC CONTRACT
 A contract based on GCC & SCC is one page document incorporating the

scope of technical specifications, bid made by the contractor, and notification of

award and any other matter in accordance with various clauses of GCC-SCC
 SELF- CONTAINED CONTRACT
SELF- CONTAINED CONTRACT
 Based on negotiations about all the contractual terms which are

included in a comprehensive document

 Contractor/supplier has to prepare & present to the employer a draft

contract containing all the terms which will form basis of negotiations
WHEN ADOPTED?
This method is adopted in case of high value contracts and where
number of parties responding to invitation is small
FEATURES OF SCC CONTRACT
 It is one page document containing all clauses in one place

 It does not need reference to any other document and each clause is

self-contained & complete in all respects including remedies in case

of any default
CLASSIFICATION OF CONTRACTS
 CLASSIFICATION OF CONTRACTS-1
Contracts may be classified on FOUR basis as follows:
1: On the basis of Initiation
A: UNILATERAL CONTRACT
It is an offer made by a party without any reciprocation from another. On
fulfillment of conditions attached with the offer, initiating party is
irrevocably bound to honour its promise such as in ‘offer of reward for
missing person’
B: BILATERAL CONTRACT
It involves mutual exchange of promises between two or more parties
such as between buyers and sellers
2:On the basis of Formation
A: EXPRESS CONTRACT made in word-spoken or written
B: IMPLIED CONTRACT which is inferred from conduct or
circumstances
C: QUASI CONTRACT based on ground of equity, justice and good
conscience
 CLASSIFICATION OF CONTRACTS-2
3: On the basis of Performance
A: EXECUTED CONTRACTE which has been fully performed
B: EXECUTORY CONTRACT which remains to be performed by either
or both the parties
4: On the basis of Enforceability
A: VALID CONTRACT is one satisfying all the conditions of Section 10
and which creates rights in personam between parties
B: VOID AGREEMENT as per Section 2(g) is ‘an agreement not
enforceable by law’ since it does not meet one or more of the
conditions of a valid contract
C: VOID CONTRACT under Section 2(j) is a ‘contract which ceases to
be enforceable’. Though initially valid, it was rendered void but due to
subsequent unforeseen and uncontrollable change in circumstances
called ‘force majeure or supervening impossibility’ such as destruction
of property due to fire.
 CLASSIFICATION OF CONTRACTS-3
D: VOIDABLE CONTRACT under section 2(i) is an ‘agreement
enforceable at the option of one or more of the parties thereto but not
at the option of other or others’.
Contract becomes voidable due to:
(i) Absence of FREE CONSENT so that aggrieved party may either
perform such contract making it valid OR repudiate it within reasonable
time rendering it void
(ii) On a party being prevented from performance may opt to repudiate
the same
(iii) Failure to perform within prescribed time in case of contract in which
TIME IS THE ESSENCE makes the contract voidable at the option
of the other party
E: UNENFORCEABLE CONTRACT is valid but cannot be enforced due
to non-compliance with requirements as to registration or stamping
STANDARD FORM CONTRACTS
 STANDARD FORM CONTRACTS
 SFCs also known as ‘adhesion contracts’ are widely used in
several fields by housing companies, courier companies,
credit card firms, insurance and banking companies
 These are pre-printed likely to comprise harsh or onerous
conditions on the other party without any negotiations
 There are no negotiations with the customer who has to sign
the same on a ‘take it or leave it’ basis
 Most of the SFC clauses may be written in fine print in a
complicated legal language
 Once signed, the SFCs lead to a binding contract enforceable
against the party which has signed it while being fully
conscious of the terms thereof except for unreasonable terms.
.
FEATURES OF STANDARD FORM CONTRACTS

i. Little possibility of finding intricacies contained in the contract as these

contracts are made without any negotiation.

ii. There is no pre knowledge of full terms of contract for lack of access to
relevant contract.

iii. Due to unequal bargaining position, there may arise an unfair contract.

iv. On signing of the contract, the parties are bound by its terms.

v. There is a possibility of exploitation of weaker party since traditional law

of contracts regards contracts as private legislation and hence binding.
 CASE ON BINDING NATURE OF SFC
Bharathi Knitting Company v DHL Worldwide Express Courier 1996 SC
Facts: Appellant had sent certain goods abroad based on a pre-printed
contract which limited courier’s liability to only $100 besides excluding
indirect or special damages due to delay or non-delivery of consignment.
Due to undue delay in delivery, the German consignee paid a lower price
which led to appellant asking the courier company to reimburse the loss.
Issue: Would the appellant succeed in recovery of the loss?
Judgment:
On execution of SFC, a binding contract comes into existence and courts

cannot award compensation beyond the specified limit .

in the impugned case, both the parties enjoyed an equal bargaining

position. The courier has brought the limit on his liability to the notice of
appellant and has advised it to seek insurance cover to protect his interest.
Courts can do little except enforce the contract as finalized between the

parties.
REMEDIES AGAINST STANDARD FORM
CONTRACTS
1. Notice Theory:
Party issuing the SFC must give notice of the onerous conditions contemporaneously
with its issue and before the execution of contract (Siddalingappa v T. Nataraj AIR
1970 Mys. 154)
2. Fundamental Breach:
 Despite notice, the party imposing onerous conditions can not commit a breach of his

fundamental obligations.
 In Lilywhite v Mannuswami AIR1966 Mad 13, the receipt given by a drycleaner

mentioned at its back that in case of damage to clothes, the drycleaner will be liable to
pay half of the dry cleaning charges. Contract was strictly construed against the
drycleaner as it allowed him to commit fundamental breach
 In Firestone Tyre & Rubber Co. Ltd v Vokins & Co Ltd (1951) 1 Lloyd’s Rep 32 the SFC

provided
“We will deliver your goods at such and such place in the condition in which we receive
them but we will not be liable if they are lost or damaged for any cause whatsoever”. As
the breach goes to the root of the contract, it was held to be a fundamental breach and
hence not allowed.
REMEDIES AGAINST STANDARD FORM
CONTRACTS----------2
3. Contra Proferentem Rule:
Meaning ‘against the offeror,’ its object is to encourage parties to
negotiate fair terms. According to the rule of strict interpretation,
any ambiguity in a widely expressed contract shall be resolved in
favour of the weaker party
4. Unconscionability and Opposed to Public Policy :
SC has held that an unfair and unreasonable contract between
parties of unequal bargaining power is void being
unconscionable [ Central Inland Water Transport Corporation v
BrajoNath Ganguly 1986 AIR 1571,
5. Relief Under Section 31(1) of Specific Relief Act 1963
The court may direct cancellation of an instrument to prevent
injury to the applicant
RULES OF OFFER &
ACCEPTANCE
 OFFER AND ITS RULES
 Offer occurs under section 2(a) :when a 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”
 Rule of Offer are as follows:
a. Offer must be communicated to the other party since nobody can accept
what he does not know as in Lalman Shukla v. Gauri Dutt 1913 where a
servant found the missing nephew of his master but failed to recover the
award money as he performed that task without knowing of offer of award.
b. It must be made to obtain the assent of the other and must not be a
statement made in jest and excitement
c. Terms of the offer must be definite and clear such as an offer to sell 5
quintals of oil is not as per this requirement.
d. It may be express or implied, or specific i.e., made to a particular person; or
general i.e., made to the world at large as in Carlill v. Carbolic Smoke Ball
Co 1893 QB where the person complying with its conditions shall be entitled
to create a legal relationship.
 ACCEPTANCE & ITS RULES
 According to section 2(b), “when the person to whom the proposal is made signifies his
acceptance thereto, the proposal is said to be accepted. A proposal when accepted
becomes a promise”.
 RULES OF ACCEPTANCE are as follows:
o It must be made by the person to whom the proposal was made.
o It must be given by the person authorized to accept so that if it is given by some other
person such as a member of the ‘selection body’ to a candidate fro the position of
principal, was held to be no acceptance [Powell v. Lee (1908)]. Also in SAIL v. Salem
Stainless Steel Suppliers (1994) SC
o It must be communicated in the sense of some external manifestation. For instance in
Brogden v. Metropolitan Rly Co (1877), a draft agreement was approved by the
General Manager but he put it in the drawer and forgot everything about it. No
agreement has come about.
o It must be absolute, unqualified and unequivocal e,g., an application for shares was
made on the condition that applicant shall be appointed cashier in the company. Shares
were allotted but no post was given. Held, acceptance is not valid [Ramanbhai v.
Ghasibhai ILR 1918 B’y].
o Acceptance must be in the prescribed mode and within prescribed time [Ramsgate
Victoria Hotel Co v. Montefiore 1866 LR].
 RULES OF ACCEPTANCE---Contd
o Acceptance must be given before the offer lapses.
o Acceptance cannot be implied from silence. In Felthouse v, Bindley
(1863), a seller offered his car to another for Rs 95000 and wrote
that if nothing is heard from the latter, it will be presumed that the
offer has been accepted. No reply was given. There is no
agreement.
o Acceptance may be express or implied (section 9].

AGREEMENT TO AGREE IN FUTURE DOES NOT LEAD TO ANY

BINDING AGREEMENT unless all the terms and conditions are
finalized by both the parties [Foley v. Classique Coaches 1934
KB].
TIME & PLACE OF
FORMATION OF CONTRACT
 POSTAL COMMUNICATION RULES-1
 Before the advent of internet communication, most of the contracts were made by
post in which conveyance of communication vested in the hands of the P&T
Department
 Section 4 provides following THREE RULES as to postal communication
 Communication of Offer [COO] is complete when it comes to the knowledge of
the person to whom it is made such as a proposal letter posted on 7th March by A of
Delhi to B of Mumbai reaches the latter on 10th March.COO is complete on 10th
March
 Communication of Acceptance [COA] is complete against the proposer when
communication of acceptance is put into a course of transmission to him, AND as
against the acceptor when letter reaches the proposer
EXAMPLE: In the given example, suppose B sends acceptance to A’s proposal by a
letter posted at 10.30 am in Mumbai on 12th March which reaches A in Delhi on 16th
March.
In this case, the contract has been formed on the date when letter of acceptance
is posted i.e., an12th March and at Mumbai from where the latter has been posted.
 POSTAL COMMUNICATION RULES-2
NOTE: Contract is formed irrespective whether or not A has received the letter
or the letter is not delivered at all
 Communication of Revocation of Offer and Acceptance [COROF&A] is

complete against the person making it when it is put into a course of

communication, AND as against the person to whom it is made when it
reaches him
 Proposer may however revoke his proposal before posting of ‘letter of

acceptance’ by the acceptor

 Acceptance may be revoked before letter of acceptance reaches the

proposer
Example:
In the instant example, proposer A can revoke his proposal before posting of
letter of acceptance by B on 12th March
B may revoke his acceptance before his letter of acceptance reaches A i.e.
16th March
 POSTAL COMMUNICATION RULES-3
 PLACE OF FORMATION OF CONTRACT in the given case will be
MUMBAI
 Where letter of acceptance & letter of revocation of acceptance both
are received simultaneously, revocation is deemed to have taken
place irrespective which letter is opened first
 It has been laid down by the Supreme Court in Bhagwandas
Goverdhandas Kedia vs Girdharilal Parshottamdas & Co (1966) SC
543 that in case of contract by post, the contract is made at the
time and place where the letter of acceptance is posted. This
rule is based on commercial expediency though it makes
inroads in the concept of consensus
 All the above rules are called ‘MAILBOX RULES’
LEGAL IMPORTANCE OF TIME & PLACE
OF CONTRACT FORMATION
 Time & Place of formation of contract are important for determining
following issues:
(i) Ascertainment of time & place of acceptance which is the place of
formation of contract
(ii) Jurisdiction of Court depends on place of formation of contract
(iii) Availability of Right of Revocation of Offer and acceptance since
no revocation of offer can be made if communication of acceptance
is complete against the proposer
 Different rules will apply depending on whether the method of

communication adopted by the contracting parties is (a)

instantaneous like face-to face communication, or (b)‘non-
instantaneous’ communication like postal communication or e-mail
 JURISDICTIONAL ISSUE
 In the event of a dispute, it is important to ascertain the jurisdiction of in
which the suit shall be filed.
 Under section 4 of the Contract Act, the suit shall be filed in the court
where contract has been formed which is the place where ‘acceptance
letter’ has been posted in case of postal contracts,
 In the case of instantaneous contracts like telephone or internet, the
contract is said to have been formed where acceptance has been
received,
 Above rule contained in Section 4 of Contract Act accords with Section 20
of Civil Procedure Code, 1908 which lays down that the place of making
of contract is the one where the cause of action is deemed to have
arisen.
 However, the contracting parties may mutually decide a jurisdiction which
may be different from that where the cause of action has arisen i.e., the
place of formation of contract.
CONTRACTING PARTIES’ RIGHT TO CHOOSE
ONE OF THE JURISDICTIONS
CASE: SWASTIK GASES PVT LTD. v. INDIAN OIL COPORATION LtTD (2013) 9 SCC 32.
FACTS: The Jurisdiction clause in the contract between the appellant with registered
office at Jaipur (Rajasthan) and the respondent with registered office in Mumbai
(Maharashtra) provided that “the agreement shall be subject to the jurisdiction of the
courts at Kolkata”. On dispute between the parties, the appellants approached the High
Court of Rajasthan which dismissed the application but permitted the parties to approach
the Calcutta High Court.
ISSUE: Which place is the right jurisdiction for filing the suit?
JUDGMENT: Supreme Court held that where a contract specifies the jurisdiction at a
particular place, there is an inference that the parties intended to exclude all other courts
on the basis of the maxim “Expressio unius est exclusio alterius”. Thus the court at
Kolkata can entertain the dispute
 Where two or more courts have jurisdiction to try the suit under the CPC 1908, a

provision in the agreement that the dispute shall be tried in one of such Courts is not
contrary to public policy nor does it contravene Section 28 of the Contract Act.
 Such contract clause is valid as it does not amount to an absolute ouster of jurisdiction

Hakam Singh v. Gammon (India) Ltd (1971) 1 SCC 286

TIME & PLACE OF FORMATION
OF INSTATANEOUS
CONTRACTS
TYPES OF INSTANTAEOUS CONTRACTS
Instantaneous contracts are of following kinds:
(i) Face- to- face Contracts
(ii) Internet Contracts of following kinds:
 Email Contracts,
 Shrink-wrap Contracts,
 Click-wrap Contracts.
 Browse-wrap Contracts
LEGAL RULES
 The rules as to time & place of formation of instantaneous contracts
are totally different from those of non-instantaneous contracts
 Contract is made at the place one where acceptance is heard (face
to face contracts), or acceptance is received as specified in the
terms and conditions of the internet contract
RULES ABOUT THE TIME & PLACE OF
FORMATION OF INSTATANEOUS CONTRACTS
 Face to Face & Telephone
In these cases, the contract is formed the moment and at the place where
acceptance is heard by the promisor. Telephonic or telex contracts are considered
similar to face to face except for mechanical instruments
 Shrink-wrap Contracts
Applicable to sales of goods, the terms of contract are printed on the wrapper
containing the CD or DVD so that the contract is formed on the customer’s
opening of the packet. Jurisdiction is also specified on the wrapper.
 Click-wrap Contract
Contract is concluded the moment the cutomer, i.e., the offeror, assents to the
terms including jurisdiction by ticking the button with remark ‘I agree’ or ‘I like’.
 Browse-wrap Contract
Contract arises from browsing the website which contains a statement that that
use of website will signify assent to the conditions including jurisdiction posted on
another website which may be opened by opening a hyperlink given at the bottom
of the webpage.
RULES AS TO THE TIME & PLACE OF
FORMATION OF E-MAIL CONTRACTS
 E-mail contracts are considered non-instantaneous except for the
difference that these are sent through electronic means
 Once ‘send; key is pressed, the message goes out of the sender’s
control
 Transmission of message depends on viability of the ISP of both the
sender and the recipient
 There may be delay in transmission, mail may bounce back due to
error in address, message may be received in scrambled or
incomprehensible manner, the recipient may not read the message
 Legally, email is not akin to postal communication but virtually
instantaneous & therefore subject to ‘receipt rule’ in the sense that
contract is formed when and where the message enters the
electronic mail box of the receipient [Tenax Steamship Co Ltd v.
Owners of Motor Vessel Brimnes (1974) 3 All ER 88]
CONSIDERATION
 CONSIDERATION
 Consideration is the price for which the promise of another is bought.
 Consideration is always used in the sense of ‘quid pro quo’ i.e., something
in return.
 It may involve some benefit or some ‘detriment’ i.e., a loss or liability as in
the case of a guarantee.
 Section 2(d) has defined consideration as follows:
“(i) When at the desire of the promisor,
(ii) the promisee or any other person
(iii) has done or abstained from doing, or does or abstains from doing, or
promises to do or to abstain from doing,
(iv) something,
(v) such act or abstinence or promise is called a consideration for the
promise.’
 An agreement without consideration is not enforceable and therefore is
void.
 RULES OF CONSIDERATION
 It must move at the desire of the promisor. Any act or abstinence at the desire of third
party is not consideration.
Example: in Durga Prasad v. Baldeo, a market was constructed by a builders at the
orders of the Collector but the builder sued an allottee to recover money for two shops on
the ground of having the shops built. Held, the shops were not built at the behest of the
allotteee and builder cannot recover.
 It may move from the promisee or any other person. In Chinayya v. Rammaya 1882, it was
held that where consideration has been furnished by a stranger (sister of the respondent
and mother of the plaintiff), it will make the contract between the disputing parties valid.
 It may be an act, abstinence or forbearance such as in Kastoori devi v. Chiranji Lal 1960
where the wife withdrew suit against her husband on his agreeing to pay maintenance; or
a return promise.
 It may be past, present or future
 It must not consist of something which the promisor is already bound to do such as the
engagement of attorney for a fee with a further promise to pay him some additional
amount if case is decided in client’s favour. Advocate cannot recover the extra amount
promised by the client.
 It must be something of value and need not be adequate though inadequacy of
consideration may be a proof of absence of free consent.
 It must be real not illusory such as a promise by captain of a ship to pay double the salary
if crew helps him take the ship to the shore. Held the crew cannot recover the extra
amounts.
RULE OF ‘NO CONSIDERATION, NO
CONTRACT & ITS EXCEPTIONS
 Section 25 provides that a contract without consideration is void.
EXCEPTION TO RULE CONTAINED IN SECTION 25
 Section 25(1): Written and registered agreement between parties standing
in near relationship out of natural love and affection is valid. But nearness of
relationship cannot import ‘natural love and affection.’ [Rajlukhee Devi v.
Bhootnath Mukherjee 1900].
 Section 25(2) provides for the obligation of the person receiving the benefit
of past gratuitous services.
 Section 25(3): Written and registered promise by a debtor to pay a time
barred debt shall revive the lapsed debt for further time period of three
years from the date of the agreement.
 Explanation I to section 25 provides for the validity of gifts actually made
though without consideration.
 No consideration is required to create an agency.
RULE OF PRIVITY OF CONTRACT & ITS
EXCEPTIONS
 There is no relationship between a party to contract and a stranger on the basis of
absence of ‘privity of contract’.
 In following cases, parties may be bound even if there is no such privity between them:
(i) Where a charge or trust has been created, the beneficiary will no tbe a stranger
such as in Khwaja Mohd v. Husseini Begum 1910 where a daughter in law could
recover the ‘Kharcha-i-paan –daan’ from her father in law since the latetr has promised
with the lady’s father to charge certain properties in her favour if she agrees to marry
his son.
(ii) Where an arrangement has been made during partition of family property or in
some other family arrangement such as in Commissioner of wealth tax v. Maharani
Vijayba of Bhavnagar 1979 SC where giving of jewelry by the mother to one of her
sons to put their quarrels to end was held as valid.
(iii) Acknowledgement of payment for making it over to a third party such as where the
seller left the proceeds for transferring the same in favour of a particular party
[Devaraja Urs v. Krishniah 1952].
(iv) Contracts of agency are enforceable either by the principal or the agent.
(v) Holder in due course u/s 10 of NI Act 1889 can enforce negotiable instrument
against the parties liable.
LEGAL CAPACITY TO
CONTRACT
 CAPACITY TO CONTRACT
 One of the essential conditions of a valid contract is that it
must be made by persons competent to contract.
 Section 11 of the act has defined ‘capacity to contract as
follows:
‘Every person is competent to contract who is of the age of
majority according to the law to which he is subject, and who
is of a sound mind, and is not disqualified from contracting by
any law to which he is subject’.
Accordingly, the following persons are not competent to
contract:
(i) Minors;
(ii) Persons of Unsound Mind; and
(iii) Persons Disqualified by Law.
 MINORS
 Under Section 3 of the Indian Majority Act 1875, a minor
is ‘a person who has not completed eighteen years of
age.’
 In the following two cases, a person shall become major

on acquiring the age of 21 years:

(i) Where a guardian of a minor’s person or property has
been appointed under the Guardians and Wards Act
1890; and
(ii) Where the superintendence of a minor’s person is
assumed by the Court of wards
LEGAL POSITION OF MINOR UNDER
CONTRACT LAW
 Agreement with a minor is void ab nitio so that it does not create any rights and
obligations between the parties such as in Mohiri Bibi v. Dharmodas Ghose
(190) where mortgage of property by minor in consideration of loan from a
lender was cancelleld and the recovery of loan was also not permitted.
 No estoppel u/s 115 of Evidence Act 1872 against a minor so that a minor
cannot be held bound by if he has represented himself a s an adult in an
agreement with another party.
 No contractual liability in a tort so that no suit can be brought against a minor for
breach of contract or for damages if he refuses to repay a loan which he
obtained by misrepresenting his age [Leslie v. Sheill 1914 KB].
 No ratification of an agreement made during minority after attaining age of
majority since there was no consideration for the new contract [Nazir Ahmed v.
Jiwanda 1938 Lahore]. But if money is repaid after becoming adult, same
cannot be recovered [Anand Rai v. Bhagwan Rai 1940 All]. If some property or
money has been obtained by a minor by misrepresenting his age, he may be
asked to restore the same if it is traceable in specie under doctrine of restitution.
LEGAL POSITION OF MINOR UNDER
CONTRACT LAW
 Minor can be a beneficiary or a promisee under a contract i.e., contracts for
benefit of minor can be enforced by him such as a loan given by minor is
recoverable [Raghva Chariar v. Srinivasa 1916 Mad].
 Minor cannot be a partner but he can be admitted to profits of partnership.
 Minor can be appointed an agent but liability for agreements made by him
will devolve on the principal.
 Minor cannot be declared insolvent.
 Minor’s personal estate if any will be liable for necessaries supplied to him.
 Minor’s parents cannot be held liable even for necessaries supplied to him
except as a moral obligation.
PERSONS OF UNSOUND MIND [Section
12]
 A person is said to be of a sound mind for the purpose of making a contract
if at the time of making the contract he is: (i) capable of understanding the
contract ,and: (ii) of forming a rational judgment about the effects of contract
on his interest.
 A person who is usually of a sound but occasionally of an unsound mind
may make a contract when he is of a sound mind.
CATEGORIES OF PERSONS OF UNSOUND MIND
Following are the categories of persons of unsound mind:
I. Idiots i.e., a person without any mental faculties;
II. Lunatic whose suffers from intermittent intervals of sanity and insanity;
III. Intoxicated persons or those under the influence of psychopathic
substances
 PERSONS DISQUALIFIED BY LAW
 Aliens enemies from countries with which India does not have diplomatic
relations or is at war and any contracts prior to any such thing shall remain
suspended;
 Foreign Sovereigns, members of diplomatic corps, and accredited
representatives of foreign countries and international agencies;
 Convicts undergoing imprisonment;
 Married Hindu women except to the extent of ‘istridhan’ comprising her
lawful earnings, gifts by husband, matrimonial family, friends and parents.
Her husband’s property cannot be held liable for her business liabilities.
 Companies beyond the limits of ‘objects clause’ in the Memorandum of
Association.
FREE CONSENT
 MEANING OF FREE CONSENT
 One of the essentials of a valid contract as per Section 10 is that the
parties must make a contract with free consent.
 Under Section 14, consent is said to be free when it is not caused by any
of the following–
I. Coercion (Section 15), or
II. Undue Influence (Section16), or
III. Fraud (Section 17), or
IV. Misrepresentation (Section 18), or
V. Mistake (Sections 20, 21 and 22)
IMPLICATION OF NON-EXISTENCE OF FREE CONSENT
 When consent to an agreement is caused by fraud, coercion,
misrepresentation or undue influence, the agreement is voidable at
the option of the party whose consent was so caused.
 If the consent is caused by bilateral mistake the agreement is void but
in case of unilateral mistake, the contract remains valid.
 COERCION

Coercion” is (i) the committing, or threatening to commit, any act forbidden

by the Indian Penal Code, or the unlawful detaining, or
(ii) threatening to detain any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an
agreement.
Example: A by threatening to shoot B makes the latter to agree to sell his
property at a stated price. B’s consent has been obtained by coercion.
 Explanation to Section 15 extends the scope of application of IPC by
providing that “it is immaterial whether the Indian Penal Code is or is not in
force in the place where the coercion is employed.” e.g., A on board an
English ship on the high seas, causes B to enter into an agreement by act
amounting to criminal intimidation under the Indian Penal Code. Held the
contract is voidable at the option of B.
 In India, coercion may proceed from a person who is not a party to contract.
 Exceptions to Coercion: threat to strike; statutory compulsion
 UNDUE INFLUENCE
 A contract is said to be induced by “undue influence” if (i) the relations subsisting
between the parties are such that one of the parties is In a position to obtain an unfair
advantage over the other, and (ii) uses that position to gain unfair advantage over the
other.
WHEN IS A PERSON DEEMED TO BE IN A POSITION TO USE UNDUE INFLUENCE
I. where he holds a real (master and servant) or apparent authority over the other like
police officer over accused, income tax official over assessee; or
II. where he stands in a fiduciary relation to the other such as advocate and client, doctor
and patient, spiritual guru & disciple and ; or
III. where he contracts with a person whose mental capacity is temporarily or permanently
affected by reason of old age, prolonged illness, or mental or bodily distress.
BURDEN OF PROOF
The burden of proving that the contract was not induced by undue influence shall lie
upon the person who was in a position to dominate the will of the other and he can do
so by proving (i) adequacy of consideration, (ii) availability of advice, and (iii) making of
fullest disclosure to the opposite party.
EFFECT OF UNDUE INFLUENCE is to make the contract voidable at the option of the
party against whom it has been employed.
 FRAUD
 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:
(i) the suggestion as a fact, of that which is not true by one who does not believe it
to be true;
(ii) the active concealment of a fact by one having knowledge or belief of the fact;
(iii) a promise made without any intention of performing it;
(iv) any other act fitted to deceive;
(v) any such act or omission as the law specially declares to be fraudulent.
Exceptions to fraud: Mere silence is not fraud (sale of shares by one knowing
impending fall in the share market) unless the circumstances of the case are such
that:
(i) It is the duty of the person keeping silence to speaks such as in case of sale of
land, marriage agreements, or where parties have fiduciary relation, where contracts
is in the nature of uberimmae fidei; or
(ii) where silence is equivalent to speech such as where on inquiry by buyer of horse
about its being free of any history of illness, the silence of the seller is equal to
speech. OR if fraud could be discovered by ordinary diligence.
 CONSEQUENCES OF FRAUD
 Contract shall be voidable at the option of the party which has been
deceived except where the fraud could have been discovered by
ordinary diligence.
 Suit for Damages arising from fraud.
 Suit for Damages on the ground of fraud being a tort.
 Damages can be claimed only by the person with whom the
contract was made such as in a case an allottee purchased shares
of a company on the faith of a prospectus which had concealed
certain information. He could claim damages for false statements.
 But a buyer who purchases shares from the said allotteee cannot
avail the provisions of section 17 to rescind the contract and to
claim damages.
 MISREPRESENTATION
 Misrepresentation” means and includes—
(1) 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;
(2) any breach of duty which, without an intention to deceive, gains an
advantage to the person committing it, or any one claiming under him,
by misleading another to his prejudice or to the prejudice of any one
claiming under him;
Example: A sells his horse to B which is unsound but A himself does
not know about this fact. He tells B that the horse is sound. There is
misrepresentation
(3) 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.
  
 MISTAKE
 Mistake is not defined in the act but it means ‘an erroneous belief in
certain state of things.”
 Mistake may be either of (i) Law, or (ii) Facts.
 Mistake of law may be either of domestic law or of foreign law.
 Mistake of domestic law is not and excuse because every citizen is
assumed to know the law of the country.
 Mistake of foreign law id taken as mistake of facts and treated
accordingly.
 Again mistake may be either bilateral(Section 20) or unilateral (Section
22).
 Bilateral mistake leads to a void agreement due to absence of
consensus ad idem.
 However, unilateral mistake does not effect the validity of contract unless
it relates to identity of the party contracted with, or nature of the contract
 VARIOUS TYPES OF BILATERAL MISTAKES

(i) Mistake about existence of subject matter such as where A being

entitled to an estate during the lifetime of B agreed to sell his interest to C.
At the time of agreement B was dead but A & C were unaware of it. Held
the agreement is void.
(ii) Mistake about the title of the subject matter such as in Cooper v. Phibbs
1867 where a party agreed to lease a fishery to another which without the
knowledge of the latter already belonged to him. Held, agreement is void.
(iii) Mistake about the quality of the subject matter such as buying some
painting which both the parties believed to be by MF Hussein but in actual it
was a fake. The agreement is void.
(iv) Mistake about quantity of the subject matter such as the length of thread in
a cotton reel [Earnest Beck & Co v. Owski & CO 1924 AC]
(v) Mistake about price of the subject matter such as on figure of the price
getting erased
(vi) Mistake about possibility of performance such as purchase of ticket for
watching coronation ceremony which got cancelled due to king’s sickness.
VARIOUS TYPES OF UNILATERAL MISTAKES

 As already stated, unilateral mistake does not affect the validity of contract
and it will have to be performed.
Exceptions to unilateral mistake are as follows:
(i) Unilateral mistake about the identity of the person contracted with
so that if A mistakenly believes C to be B, the contract will be void [Cundy v.
Lindsay 1878 AC]
 Exception to Unilateral Mistake about Identity

Unilateral mistake about the attributes of the person contracted with [Phillip
v. Brooks (1919) KB
(ii) Unilateral Mistake about the Nature of the agreement such as signing
a document thinking it to be a Power of attorney whereas it is actually a
‘sale deed’ [Foster v. Mackinnon 1869 in which a person signed a Bill of
exchange thinking it to be a bank guarantee]
VOID AGREEMENTS:SECTIONS 23-30

There are following TWO categories of void agreements:

I: Agreements with unlawful Object &/or Consideration

(Section 23)

II. Per se Void Agreements (Sections 24 – 30)

VOID AGREEMENTS WITH UNLAWFUL
OBJECT & OR CONSIDERATION: SEC 30
Following types of consideration and object are considered unlawful if
it is:
 Illegal
 Forbidden by law (bigamy among Hindus)
 Defeating the provisions of any law like furnishing bail after taking
deposit from the defendant [Fateh Singh Vs Sanwal Singh (1978)]
 Fraudulent
 Involving/implying injury to the person or property of another
 Immoral (consideration for concubinage)
 Opposed to Public Policy [Gherulal Parikh Vs Mahadeodas (1969)]
i.e. something injurious to public welfare.
NOTE: There is no precise definition of ‘public policy’ as its meaning
keeps on changing with the exigencies of time
AGREEMENTS OPPOSED TO PUBLIC POLICY
 Trading with enemy
 Stifling prosecution (absolving offenders of criminal liability or
withdrawing a case)
 Maintenance (fomenting litigation) and Champerty (rendering
assistance in pursuing legal remedy and sharing benefits)
 Interference with court of justice (bribing or influencing judges)
 Trafficking in public offices
 Sale and purchase of titles /decorations /awards
 Marriage brokerage agreement such as buying brides from parents of
a child
 Agreements restricting personal liberty
 Agreements in restraint of parental rights
 Agreements interfering with marital rights/duties
 Agreement creating interest opposed to duty
 Agreements varying the period of limitation
EXPRESSLY DECLARED VOID AGREEMENTS

Following agreements have been expressly declared as

void:
(i) Agreements by incompetent persons such as minors,
persons of unsound mind, and persons disqualified by law
[Sec 11];
(ii) Agreements made under bilateral mistake [Sec 20];
(iii) Agreements with Unlawful object and consideration
[Sec 23];
(iv) Agreements with partly unlawful object and
consideration [Sec 24]; (v) Agreements without
consideration [Sec 25]
 PER SE VOID AGREEMENTS [SECTIONS 26-30]-1
 Agreements in Restraint of Marriage [Sec 26];
 Agreements in Restraint of Trade ( Sec 27) except the following:
1. Sale of Goodwill
2. No Compete Agreement under the Partnership Act:
(a) with newly admitted or retiring partner(s),
(b) between existing partners upon or in anticipation of dissolution,
(c ) with the buyer of firm’s goodwill
Exceptions to Section 27 include:
(i) Service contracts prohibiting double employment;
(ii) Employee Bonds where employee has to deposit security upfront
or submit a bond to serve the company for a specified period in
consideration of training; or bond with guarantee from a third party.
(iii) Agreements relating to non-disclosure, no poaching, non-
solicitation, confidentiality etc
PER SE VOID AGREEMENTS [SECTIONS 26-30]-2

 Agreements in Restraint of Legal proceedings (Sec

28): such as total prohibition on approaching courts or
variation of period of limitation on the right to seek legal
remedy [Sec 28]
Exceptions: Agreement to Refer a dispute to Arbitration
 Uncertain Agreements (Sec 29):
Agreements with uncertain meaning such as promise to
pay extra money if the horse proves lucky
Example: agreement to pay certain amount after
deductions as would be agreed upon between the parties
is void for uncertainty [Kalpana Devrao v Krishna Mitter
(1945)]
 WAGERING AGREEMENT [SECTION 30]
Wager is “An agreement by a party to pay money or money’s worth to another on the
happening of some uncertain event in consideration of other person’s promise to pay on the
non-happening of the event”.
Following are the essential ingredients of wager:
 There must be two persons
 There must b a promise to pay money or money’s worth
 The payment must be conditional on the happening or non-happening of an event
 Event must be uncertain
 Parties must have equal chance of winning or loosing so that if either may win but may not
lose or may lose but cannot win, it will not be a wager
 Neither party has any control on the event nor any other interest except winning

Example: Lottery is a wager as it is purely a matter of chance. It is an offence under Sec 294A
of IPC to conduct a lottery except where it is conducted by or under the patronization of a state
government for raising revenues for development
Exceptions to wager: (i) Game of skill- physical or mental (ii) Share market transactions (iii)
Insurance contracts because of the existence of insurable interest (iv) Crossword competitions
involving mental exercises rather than depending on sheer chance (v) Registered Chit funds
(vi) Horse races (vii) Agreement to subscribe or contribute a sum of Rs.500 or upwards to a
plate, plaque or award to be given to winner of any horse race
Consequences of Wager: Nothing won on a wager can be recovered through a legal action
QUASI CONTRACTS
 Basic Principles & Features of Quasi Contracts
 Quasi means ‘similar to’ or ‘resembling’
 Quasi contract is a relationship which resembles a contract
 It is not the outcome of any voluntary agreement between relevant
parties but because of creation of contractual obligations by law
 For above reasons, it is called ‘involuntary or implied in law’ contract
 It creates equitable obligations on the basis of ‘equity, justice, good
conscience’ (ex aequo et bono)
 It is based on the rule that ‘no man shall enrich himself at the expense
of another’
 Object of quasi contract is to prevent unjust enrichment by a person at
the cost of another
 Sections 68 to 72 of the Contract Act 1872 deal with these categories
of contracts
 These contracts are restitutory in nature
 QUASI CONTRACTS [SECTIONS 68-72]
1. Obligation of estate of incompetent person to reimburse the price of necessaries
supplied to him or his dependents [Sec 68]
2 Reimburse of money paid by another on behalf of another and in the payment of
which the payer is interested [Section 69)
3. Obligation of person enjoying benefit of non gratuitous acts/delivery made by
another [Sec 70]
4. Responsibility of Finder of goods [Sec 71]
 To take reasonable care of the goods
 To trace the owner
 Not to make unauthorized use of the goods
 To return the goods
The finder can retain the goods found if: .
• Goods are perishable
• The owner can not be found after reasonable search
• The owner refuses to pay reasonable expenses of finder
• The expenses of tracing the owner exceed 2/3rd of the value of goods found
5. Liability of person to whom money has been paid or things delivered by mistake or
under coercion [Sec 72]
 CASE ON SECTION 72[MONEY PAID BY MISTAKE]
K.S.SATYANARAYANA RAO v. V.R. NARAYANA RAO (1999) 6 SCC 104
FACTS: A house was sold by respondent (1st buyer) to appellant with authority
from the original owner. The buyer gave 2 cheques of 1 lakh each in the name
of owner and 1st buyer, Subsequently, deal fell through but owner refused to
pay back 1 lakh on the ground of ‘stranger to contract’.
ISSUE: Is the plea of ‘privity of contract taken by owner against the second buyer
correct? Which legal provision shall be applicable in this case?
JUDGMENT: The owner has not disputed the fact of having received the money.
But he is pleading doctrine of privity of contract.
Held, the case duly falls within the purview of Section 72 which makes liable the
person who has received whether by mistake or under coercion. The recipient
owner has the quasi contractual obligation to refund the payment with interest.
In absence of such obligation he will be enriching himself at the expense of
another which is not permissible.
CONTINGENT CONTRACTS
 CONTINGENT CONTRACTS
 Contracts may be either (i) absolute or (ii) conditional
 Absolute Contract
In it, the contracting parties must perform their reciprocal promises
independent of any condition or contingency. In other words, it has to
be performed in any event.
Example: A agreeing to pay Rs.300 to B for doing a particular job
 Conditional Contract
In it, the promisor undertakes to perform the contract only on the
happening or non-happening of a specified certain or uncertain event.
Example: A agreeing to pay Rs. 300 to B for doing a particular job
provided the job is certified by an engineer
 Contingent contract is a specie of conditional contract. However, a
promise to be performed after the lapse of a specified time is not a
conditional contract.
 Example: A contract clause providing for “delivery to be made as soon
as possible” does not make the contract conditional
 ESSENTIALS OF CONTINGENT CONTRACTS
Meaning of Contingent Contract[Sec 31]
“It is a contract to do or not to do something if some event collateral to such
contract does or does not happen”
EXAMPLE: A contract to pay B Rs.10000 if B’s house is burnt by fire. The
burning by fire is a collateral or contingent event
Collateral Event:
It is an event on the happening/non-happening of which the contract shall
become enforceable.
Example: A agrees to buy a boiler from B for a certain price if safety of the
boiler is certified by an engineer. Certification by the engineer is a collateral
event
Essentials of Contingent Contract
i. Performance of contract must be contingent on the happening or non-
happening of an event in future
ii. The event must be collateral to the contract
iii. The event must be uncertain (else the parties shall be bound to perform),
Examples : Insurance Contracts, Indemnity contracts, Guarantee Contracts
RULES APPLICABLE TO CONTINGENT
CONTRACTS -1 [SECTIONS 32-36]
Section 32:Performance contingent on happening of an uncertain
event:
Contract contingent upon the happening of an uncertain contingent
event shall be performed only if the event happens.
If happening of the event becomes impossible the contract shall become
void
Example: A agrees to buy B’s shop if B survives C. Only when C dies in
B’s lifetime, A shall buy the shop. If B dies earlier then C the contract shall
become void. Another example includes A contracts to sell his horse to B
for a specified price if C to whom horse has been offered refuses to buy it
Section 33: Performance contingent on non-happening of an event:
Contract contingent upon non-happening of an uncertain event shall be
performed only if happening of that event becomes impossible [Sec 33]
Example:
A agrees to buy certain commodities from B if certain ship does not reach
India. The ship is sunk. A shall perform his promise
RULES APPLICABLE TO CONTINGENT CONTRACTS-
2 [SECTIONS 32-36]
Section 34: Performance contingent on contemplated future conduct
of a living person shall be considered to have become impossible if the
impugned person so behaves that the contemplated conduct cannot occur
until under further contingencies [Sec 34].
Example:
A agrees to gift a necklace to B if C marries C. But C marries D. B’s
marriage with C has become impossible though it is possible that D may
die and C may marry B
Section 35: Performance contingent on happening or non-happening
of a collateral event within a fixed time:
If performance of a contract is contingent on the happening of a
collateral event within a fixed time, it shall be deemed to have become
void if at the expiration of time fixed, such event has not happened or
before the time fixed, such event has become impossible [Section 35
Para 1]
Example: A promises to pay specific amount of money if a certain ship
returns within a year. A shall pay if ship returns within a year. But contract
shall become void if the ship is sunk within a year
RULES APPLICABLE TO CONTINGENT
CONTRACTS-3 [SECTIONS 32-36]
If contract is contingent on the non-happening of a specified uncertain event
within a fixed time, it may be enforced when the time fixed has expired but
the event has not happened, or before the expiry of fixed time, the
happening of the event has become impossible [Sec 35,Para 2]

Example:
A agrees to pay B a certain sum if a certain ship does not return within a
year or is burnt within a year. If the ship does not return within a year or is
burnt, the money will be paid.

Section 36: Contracts contingent upon happening of a impossible

event are void whether the impossibility of the event is known or not at
the time of making of contract
Example:
A agrees to pay B Rs 2000 if two straight lines should enclose a space.
Agreement is void
 DEOKABAI v. UTTAM (1993) 4 SCC 181: CASE ON
CONTINGENT CONTRACT
 Appellant, an aged widow living with her widowed daughter and her two
children in Nagpur, agreed to sell her house to the respondent
contingent upon her getting a suitable accommodation after getting
permission from competent authority
 On seller’s failure to transfer property to the buyer, the latter sued for
specific performance and the lower courts ruled in his favour
 Supreme Court examined the nature of the contract and found that
performance of contract was contingent upon seller getting a suitable
accommodation u/s 32 failing which she was to refund the earnest
money in terms of the agreement
 The buyer can not compel transfer of property in his favour without the
buyer succeeding in getting a suitable property which had become
difficult due to rent control legislation.
 On the seller failing to get any alternative property, the contract b/w the
parties must be held to have become void.
 Seller shall refund the earnest money with interest @ 8%
DISCHARGE OF CONTRACTS
 MEANING & MODES OF DISCHARGE
 Discharge is the termination of contractual relationship between the
parties.
 Discharge of contract happens on performance of respective obligations

by the contracting parties

 If performance of obligation by either party or both the parties is is

subsisting, only the party which has performed its obligation is said to
be discharged but there is no ‘discharge of contract’
 Therefore, while discharge of contract leads to discharge of parties but

discharge of a party may not lead to discharge of contract

6- MODES OF DISCHARGE OF CONTRACT
1: Discharge by Performance
2: Discharge by Agreement
3: Discharge by Lapse of Time
4: Discharge by Operation of Law
5: Discharge by Impossibility
6: Discharge by Breach of Contract
DISCHARGE BY PERFORMANCE [Section 37]
 Parties to the contract must either (i) perform the contract, or (ii) offer to
perform their respective promises unless such performance is dispensed
with
 Performance may be dispensed with or excused under the Law of Contract
or any other law such as (i) termination by agreement (Section 62),
remission by the promisee (Section 63),voidable contract (Section 64), or
promisee’s refusal to accept (Section 67)
 On death of promisor, his representative is bound to perform the promise
unless contrary intention appears from the contract
 Performance may be (i) Actual performance, or (ii) Attempted performance /
Tender i.e., offer to perform in accordance with conditions laid down u/s 38
 If offer of performance is not accepted, the promisor need not perform nor
does he lose his rights under the contract
 Valid offer of performance must be (i) unconditional, (ii) made at fixed or
proper time and place, (iii) made to the promisee or one of the several
promisees, (iv) after providing opportunity to the promisee to ascertain that it
is in accordance with the terms of contract, & (v) to perform in full
 KINDS OF TENDER
 Tender may relate to (i) Tender of Money, or (ii) Delivery of goods
 In tender of money, the debtor shall seek the creditor & prove that he is

able and willing to pay the entire amount

 Refusal by the creditor to take payment will not discharge the debtor

 In tender of goods, refusal by the promisee shall discharge the promisor

from liability
WHO SHALL PERFORM:
Performance shall be made by the following:
(i) By the promisor himself in case of contracts involving personal skill like
singing; technical contracts [section 40]
(ii) By the Agent if there is no personal element [Section 40]
(iii) By the Legal Representative on death of promisor unless contrary
intention appears from the contract [section 37]
(iv) By the Third party in case of Assignment of Contract by the act of
parties OR by operation of law such as death or insolvency
TIME & PLACE OF PERFORMANCE [Sections 46-50]

 Where no application is to be made by promisee nor is time specified,

performance must be made within reasonable time (depending on
circumstances) [Sec. 46]
 Where time is specified but no application is to be made by the
promisee, performance may be made at any time during usual
business hours & at the place where it ought to be performed such as
delivery at buyer’s godown [Section 47]
 Where performance is to be made on a certain day after application by
the promisee, such application must be made asking for performance
at a proper place and during usual business hours [Sec 48]
 Where neither application is required nor is place pf performance fixed,
it is the duty of promisor to apply to the promisee to fix reasonable time
& place for performance & then perform at that place [ Sec 49]
 Where promisee has prescribed the manner and time of performance,
it is obligatory on the promisor to perform accordingly
 TIME AS ESSENCE OF CONTRACT
 Whether or not time is the essence in a contract depends on the (I) Intention of the parties [Hind
Construction v State of Maharashtra (1979) 2 SCC 70], (ii) Nature of the contract & (iii) delay operates as
injury

 Whether time is the essence or not is a mixed question of law and facts [Jagan Nath v. Ashok Kumar
(1987) 48 SC 497.

In case of commercial contracts, time is the essence of the contract [Mahabir Prasad Rungta v Durga Dutt
(1961)]

If time is the essence of contract, there can be no presumed extension of time [Mcdermott International Inc vs
Burn Standard Co. Ltd. & Ors 2006 SC]

If time is the essence of the contract, failure to perform within stipulated time gives the promisee the option to
treat the part of the contract as has not been performed within specified time as voidable

 Where time of performance is the essence of the contract, the extended time shall also be the essence of the
contract ( Mohd Habibullah v Bird & Co AIR 1922 PC 178)

Where time was not originally of the essence of the contract, but there has been undue delay, the promisee
may give notice requiring the contract to be performed within reasonable time. What is reasonable time will
depend on the nature of the transaction and on proper reading of the contract in its entirety

 In case of sale of immovable property, time cannot be presumed to be the essence except where there is
a provision to that effect in the contract [Chand Rani v. Kamal Rani AIR 1993 SC 1742]
CONSEQUENCES OF NON-PERFORMANCE WITHIN
FIXED TIME [ Section 55]
 On non performance within time where time is the essence shall
make so much of the contract as has not been performed voidable
at the option of the promisee [Section 55, para 1]
 Mere inclusion of penalty clause in the agreement does not make
the time as essence of the contract [Gomatinayagam Pillai v. Palamiswami
Nandan (1997) SCR 227]
 If the contract provides for extension of time, time is not the essence
of the contract & non adherence to timeline does not make the
contract voidable [Arosan Enterprises Ltd v. UOI (1999) 9 SCC 449]
 Acceptance of performance at other than the agreed time takes
away the discretion of promisee to treat time as the essence unless
he gives notice reserving his right to claim compensation despite
such acceptance
Hindustan Construction Contractors v. The State Of
Maharashtra  AIR 1979 SC 720
 Time period for completion of contract was fixed at 12 months with
provision for extension in certain contingencies on payment of fine or
penalty for every day / week for work remaining unfinished on the expiry of
the stipulated time
 Contractor applied for extension due to certain exigencies which was
refused and the appellant cancelled the contract
 Supreme Court held that in view of provision for extension of time in the
contract, time is not the essence
 Contract did not provide for urgent completion nor did the employer notify its
intention to treat the time as essence
 Employer could have granted extension which was not done
 Therefore, cancellation of contract is not valid and the appellant must refund
the forfeited security & also pay damages for breach of contract
 DISCHARGE BY PERFORMANCE

RULE: PERFORMANCE IS ALWAYS RECIPROCAL

Mutual and concurrent [Sec 51]: Where both parties are to perform simultaneously,
each should be ready and willing to perform at the same time. Promisor need not
perform unless promisee is ready and willing to perform.
Mutual and independent [Sec 52]
Such promise must be independently performed by each party without waiting for
performance by the other. The order of performance may be fixed by the contract. If
no order of performance is fixed, performance be given as per the nature of
transaction
If a party is prevented from performance, the contract shall be voidable at the option
of the party prevented without prejudice to his right to seek damages [Sec 53]
3. Mutual and Dependent [Sec 54]:
Where performance by one party depends on prior performance by the other and the
party which was to perform first fails to do so, the other party is discharged & entitled
to claim compensation
Example: A contracts with B to execute certain builders’ work for a fixed price. B
agrees to supply scaffolding for the work. B refuses to supply the scaffolding and the
work cannot be executed. A need not perform. B will have to compensate A for any
loss caused to A due to B’s nonperformance
NATIONAL INSURANCE CO v SEEMA MALHOTRA (2001) SC
 In this appeal against judgment of J&K HC, the main issue is the
justification of HC order that even though the premium cheque had
bounced, the insurance co may deduct the premium amount from
the total amount of indemnification
 SC decided that under section 54, the contract for insurance of car
is a mutual & dependant wherein the insured has to firstly pay the
premium to file claim for indemnity
 Since the premium cheque has bounced, there is no consideration
u/s 25 of Contract Act and also non observance of Section 64VB of
the Insurance Act 1938
 Due to non-payment of premium due to bouncing of cheque,
Section 54 of Contract Act has not been followed
 Insurance company is legally justified in rejecting the claim filed by
insured’s widow
APPROPRIATION OF PAYMENTS [SECTIONS 59-61]

RELEVANCE: Rules in Sections 59-61shall apply to application of

payment made by a debtor who owes several debts to a single
creditor & the payment is insufficient to discharge all of the debts
1. APPROPRIATION AT THE DISCRETION OF DEBTOR [Section
59] but creditor may refuse to follow debtor’s directions & return the
payment rather than accepting the same and applying it at his
discretion
2. APPROPRIATION AT THE DISCRETION OF CREDITOR [Section
60] in case debtor has not used his discretion which entitles the
creditor to apply the payment towards recovery of time-barred debt
3. CHRONOLOGICAL APPROPRIATION [Section 61] where neither
the creditor not the debtor has exercised its discretion. The rule is
that first credit shall exhaust the first debit in a chronological order
including the time barred debts
 DISCHARGE BY AGREEMENT

Mutual agreement of the following types will discharge the contract

 Novation i.e., Substitution of new contract for the existing one
between the same or different parties before breach
 Rescission i.e. cancellation of contract with court intervention
where there is a (i) voidable contract, or (ii) Other party fails to
perform
 Remission is the acceptance of lesser performance than what was
originally due [Kapurchard Godha v Mir Nawab Himayat Ali Khan
(1963)SC].
It is a unilateral act of the promisee when he opts to accept Rs 700
in place of the actual outstanding amount of Rs 1000.
 Waiver: Abandonment of right by a party to whom it is due
 Merger: Superior legal right getting overtaking an inferior legal right
 Alteration of one/more of the terms of the contract with
concurrence of the contracting parties
 DISCHARGE BY IMPOSSIBILTY

 Initial impossibility existing at time of formation of contract & whether or not it is known to
both the parties making the contract void. If impossibility is known to one of the parties but
not to the other, contract shall be voidable at the aggrieved party’s option
 SUPERVENING IMPOSSIBILITY arising subsequent to formation of contract making the

contract void (Sec 56)

 Supervening Imposibility is an event which is both unforeseen and uncontrollable

 Following contract are void due to supervening impossibility [Satyabrata Ghosh v

Magneeram Bangur & Co (1954)]

i. Destruction of Subject matter of contract [Taylor vs Caldwell]
ii. Outbreak of war
iii. Non-occurrence or non-existence of contemplated state of things [Krell Vs Henry]
iv. Death or incapacity of a party where performance depends on personal
skill/qualification
v. Change of law: In Mansingh Vs Khazan Singh (1961), a contract of sale of trees was
held to be discharged when state of Rajasthan forbade the cutting of trees
vi. Government Intervention [STC v. UOI (1994) Supp 3 SCC 40] where supply of silver
was banned by the governme
vii. Natural Causes like flood, earthquake [Tarapore & Co v. State of MP AIR SC
 FORCE MAJEURE
 Force majeure is an unforeseeable and uncontrollable situation which leads to the
discharge of contract.
 Section 56 considers only sovereign and natural events called ‘vis major’(in French)
under the Doctrine of Supervening Impossibility and has excluded other events unless
those are specifically included by using appropriate words
Progressive Constructions Ltd v NHAI: Weather does not qualify as force majeure
Facts: Contractor sought extension in time for completion of project which was granted by
means of a supplementary contract subject to right of employer to terminate the contract
except in case of force majeure. On failure of the contractor to adhere to timeline, the
respondent served notice of termination. The contractor alleged that time slippage has
been due to adverse climatic conditions
Issue : Do climatic conditions qualify as force majeure?
Decision: Weather conditions had always been predictable and do not fall in the category
of force majeure
• If weather was to be a condition of slow progress, it would have been a part of conditions
of contract
• There can be many excuses for not performing the contract but unless a particular
excuse forms part of contract, it can not be considered a force majeure
EXCEPTIONS TO DISCHARGE BY SUPERVENING
IMPOSSIBILITY
1. Difficulty of performance [Blackburn Bobbin Co. v. Alien and
Sons] wherein transportation costs went up due to blockage of
Suez canal requiring ships to take a circuitous route
2. Commercial impossibility such as non realization of expected
profit [Alopi Prashad v. UOI AIR 1960 SC ] in which case supplier of
ghee sought higher rates on account of price increase due to war
3. Impossibility due to default of a third party on whose promise
the performance was based [Ganga Saran v. Ram Charan Ram
Gopal (1952) where the contract obliged the seller to send goods
as long as its supplier continued to make the supplies]
4. Partial impossibility i.e failure of one of several objects [Henry
Bay Steam Boat Co v. Hutton 1903 KB]
5. Strikes [ONGC v. Saw Pipes] lockouts, civil disturbances
6. Self-induced impossibility arising from act or omission of a
contracting party
OTHER METHODS OF DISCHARGE OF CONTRACT

 Discharge By Lapse of Time as prescribed in the Limitation Act

1963
 Discharge By Operation of Law
(a) Death of either of the contracting party,
(b) Insolvency of a party’
(c) Unauthorized Alterations
 Discharge By Breach
◦ Actual Breach:
It occurs when performance is already due or during performance
◦ Anticipatory Breach [Sec 39]:
If before the due date, the promisor does something rendering the
performance of his promise unlikely, the promisee may consider
the promisor to have committed breach
REMEDIES FOR BREACH OF CONTRACT
 REMEDIES FOR BREACH OF CONTRACT-1

SUIT FOR RECISSION on:

(a) Failure by a party to perform its promise
(b) Voidable contract
(c) Contract being unlawful for causes not apparent on face of contract

LOSS OF RIGHT OF RECISSION if:

◦ Contract is ratified / affirmed
◦ Parties cannot be restored to original position,
◦ Third parties have acquired rights for value,
◦ The part sought to be rescinded is not severable from the rest
 REMEDIES FOR BREACH OF CONTRACT-2
2. SUIT FOR INJUNCTION
A direction to refrain from doing something which may lead to breach. It
may be:
(a) Temporary Injunction, or
(b) Perpetual Injunction [Sec 53 of Specific Relief Act (1963)]
Injunction is a kind of legal first aid but not a permanent solution.

3. SUIT FOR SPECIFIC PERFORMANCE at the discretion of the court

[Section 10 of Specific Relief Act (1963)]
It is granted in following cases:
i. Where money is not an adequate remedy
ii. Where there are no standards for ascertaining actual damage
No specific performance is ordered if:
(a) Contract is of personal nature, or
(b) Where court cannot supervise execution, or
(c ) Where money is an adequate remedy
 REMEDIES FOR BREACH OF CONTRACT-3
4. SUIT FOR MONETARY DAMAGES
Damages are the monetary compensation for the loss or injury suffered
Damages may be either
(i) Compensatory Damages u/s 73, or
(ii) (ii) Liquidated Damages u/s 74
Compensatory Damages (CD) are designed to compensate the aggrieved
party for the actual loss arising from breach.
CD may fall into following categories:
◦ ORDINARY DAMAGES which arose naturally from breach of promise
◦ SPECIAL DAMAGES arising from unusual circumstances which are
known to the parties
◦ EXEMPLARY DAMAGES in case of
(a) Breach of promise to marry,
(b) Wrongful dishonor of cheque by a bank due to non-diligence
◦ NOMINAL DAMAGES due to technical violation i.e., non observance of
legal duties & where not much of actual loss has arisen
 REMEDIES FOR BREACH OF CONTRACT-4

 RULES FOR CALCULATION OF CD AS LAID DOWN IN Hadley

v Baxendale and incorporated in Sec 73
(i) CD aim to place the aggrieved party in the same financial position
in which he were if contract had been performed [Murlidhar
Chiranjilal v Harishchander Dwarkadas (1962)].
(ii) CD= Market Price on the date of breach- Contract price
(iii) Only actual losses are recoverable but not the penalties
(iv) Remote damages arising indirectly cannot be recovered
(v) Damages towards mental anguish are not recoverable unless
breach was reckless or has caused bodily harm and the defaulting
party knew that breach will cause mental suffering
(vi) Difficulty of assessment is no ground to refuse damages.
Claimant has the duty to mitigate the loss
 LIQUIDATED DAMAGES [SECTION 74]
 LD represents a genuine pre-estimate of damages fixed by mutual
agreement between the parties at the time of formation of contract
 LD may be in the form of daily charges; specified % of total contract price;
or lump sum amount
 Courts can award reasonable compensation not exceeding the amount of
LD mentioned in contract
 LD and CD both cannot be levied (Sir Chunni Lal v Mehta and Sons Ltd
AIR 1962 SCC 1314)
 Intervention of court is needed to enforce recovery of LD or to ascertain
whether the amount stipulated as LD is actually a penalty
 LD runs from a fixed date but it is not necessary to provide that time is
the essence of the contract
 LD cannot be claimed as a matter of absolute right except on proof of
damages and when court considers the amount of LD to be reasonable
 In Maula Bux v. UOI 1970 SCR 929 and Fateh Chand v. Balkrishan
Das 1964 (1) SCR 515, it has been held that when the words of contract
are clear, there is nothing the court can do provided the sum mentioned
represents a genuine pre-estimate of the likely loss from breach
COMPARISON BETWEEN COMPENSATORY AND
LIQUIDATE DAMAGES
 Determined by the Court
 Computed after proof of breach
 CD = Actual Loss
 Time of performance is not the
essence but contract must be
performed within reasonable time
 Takes a long time due to proof of
breach and amount of damages
 Determined by contracting parties
 Granted after proof of breach
 LD= Genuine pre-estimate of
damages arising from breach
 Time of performance is the
essence of contract
 Less time consuming as the
claimant has to only establish
breach
 WHEN DOES LD AMOUNT TO PENALTY
 A claim based on LD shall be regarded as a penalty and hence not
recoverable if it more than the amount of actual loss
 It is for the defendant to prove that the amount of damages is
penalty & not LD
 Held in Dunlop Pneumatic Tyre Co v New Garage and Motor Co Ltd 1915
AC 79 that the stipulated amount would be penalty if:
(i) It is extravagant and unconscionable compared to greatest probable
loss that may ensue from breach
(ii)The sum payable as damages is far greater than sum payable under
the contract
(iii) A Single lump sum is payable in all events (minor or major)
(iv) Forfeiture of security without proof of loss (UOI V Rampur Distillery
AIR 1973 SCC 1098)
(v) As per the Explanation to Section 74 if the amount payable on default
shall be double of the money borrowed
In Kailash Nath Associates v. DDA (2012) SC, forfeiture of EMD despite
sale of allotted plot at four times the original allotment price to the
appellant was held to be ‘penalty’
 LOSS OF RIGHT TO CLAIM LIQUIDATED DAMAGES
1. Waiver of Right by the Employer as evidenced by:
 Failure to deduct LD as provided under the contract;
 Failure to fix the date from which LD is chargeable;
 Cessation of date of performance due to unanticipated circumstances
 Breach due to default of plaintiff
Example: Despite contractor’s failure to finish by the agreed date, the
employer allowed him to continue and to submit final bill without imposition
of penalty or rescission of contract. The work was got completed through
another contractor. The employer is deemed to have waived the right to
claim LD.
2. Failure due to Employer’s default due to:
 Not handing over the site at appropriate time
 Not providing drawings to contractor;
 Ordering extra works
3. FORCE MAJEURE
4. TIME NOT BEING THE ESSENCE OF CONTRACT
 5. SUIT ON QUANTUM MERUIT

Quantum Meruit means ‘as much as is merited’ or ‘as much as is

earned or warranted’. It is a claim for proportionate payment where a
contract has been partly performed due to fault on the defendant’s
part
This claim arises de hors (outside) the contract

Grounds for invoking quantum meruit:

◦ Work / service has not been completely performed
◦ Non completion is due to default on defendant’s part
◦ The person liable has enjoyed the benefit of non-gratuitous act
◦ Contact is divisible
◦ Claimant must not be in breach [Pural Lal Sah v. State of UP (1977)
SC
◦ If work has been badly performed, deduction based on quantum
meruit may be made
CONTRACTS OF GUARANTEE
 CONCEPT OF GUARANTEE
Definition
It is a promise by the surety to the beneficiary to perform the
promise or to discharge the liability of a third person in case of his
default
Number of Parties in Contract of Guarantee
Three parties in a guarantee include:
(i) Principal Debtor (for whom guarantee is given),
(ii) Creditor (Beneficiary of guarantee), and
(iii) Surety (the Guarantor)
There occur three separate contracts between the parties as follows:
i. Principal debtor and Creditor;
ii. Creditor and Surety; and
iii. Principal Debtor and Surety
Invalidity of contract between principal debtor and creditor does not affect the
validity of the contract between the creditor and surety
FEATURES OF CONTRACT OF GUARANTEE
 Surety’s liability is co-extensive with that of Principal Debtor
 Surety’s liability could be less than that of PD but not more
 Surety’s liability arises only on default by the principal debtor
 If the guarantee of surety is independent of default by the PD, it
will not be a guarantee ( PNB v Sri Vikram Cotton Mills AIR 1970
SC)
 After discharge of obligation, the surety steps into the shoes of the
creditor
 Surety is a favoured debtor so that on violation of terms of
guarantee, the contract shall become invalid
 There is no privity of contract between Surety and Principal Debtor
in the sense that surety is not bound by admissions made by
Principal Debtor
 RIGHTS OF SURETY
Rights against Principal Debtor
 Right of Indemnification from principal debtor (Section 145)
 Right of Subrogation (stepping into the shoes of the creditor) such as seeking
injunction against Principal Debtor to prevent disposition of properties by him
 Right to ask Principal Debtor to pay off his liabilities
2. Rights against Creditor
 Right of Set off of Principal Debtor’s claims against the creditor

 Right to Securities of the Principal Debtor after paying the Surety (Section 141)

 Right of Subrogation

3. Rights against Co-sureties

 Liability of co-sureties is joint and several

 Right of equal contribution limited to the maximum undertaken by any Surety (Section

146)
 Right to share benefit of securities

 Release of a Surety does not discharge others nor the Surety so discharged from his

obligation to other co-sureties (Sri Chand v Jagdish Prasad Kishan Chand AIR 1966
SC 1427)
 METHODS OF DISCHARGE OF SURETY
 Revocation by Notice of continuing guarantee
 Death of Surety operates as notice of revocation
 Variation in terms of contract between Principal Debtor and
Creditor without the consent of Surety (Sec. 133)
 Act or omission of Creditor releasing the Principal Debtor from
liability
 Release of Principal Debtor by Creditor without Surety’s consent
(Sec. 134)
 Composition with or giving time to the Principal Debtor (Sec.135)
 Creditor’s act or omission impairing Surety’s eventual remedy
(Sec. 139)
 Loss of security deposited by Principal Debtor with the Creditor
(Sec. 141)
 Guarantee obtained by fraud (Secs. 142, 143, 144
 BANK GUARANTEE
 It is given by a bank to a named Beneficiary (Creditor) at the request of the
Account Holder (Principal Debtor) towards EMD, Security Deposit, Warranty, or
Performance or Mobilization Advance
 The account holder (PD) shall pay margin money to the bank based on the
amount of guarantee
 Bank Guarantee is an autonomous independent contract not affected by the
invalidity of contract between Principal Debtor and Creditor
 Beneficiary has the unfettered right to invoke guarantee and the bank has
absolute duty to honour the guarantee without demur
 Guarantee is valid for a specified period within which it may be invoked
 Beneficiary must return duly discharged guarantee to the bank to confirm the
termination of guarantee
 Where the account holder seeks injunction against enforcement of guarantee, it
must prima facie establish fraud, irretrievable injury or some special equities
 Supreme Court in Hindustan Copper Ltd v Rana Builders Ltd (2001) SC371 held
that courts should avoid interfering with autonomy of bank guarantees to protect
fabric of trading operations except in a few cases
 TYPES OF BANK GUARANTEE
 Financial Guarantee towards purchase price, payment of
installments, Liquidated Damages, EMD; Mobilization Advance
 Non Financial Guarantee in a respect of bid guarantee,
performance guarantee, fidelity etc.
 Direct Guarantee given by the issuing bank to a Beneficiary at the
request of the account holder (Principal Debtor)
 Indirect Guarantee given by the issuing bank (second bank) in
beneficiary’s country at the behest of instructing bank (first bank)
with which the Principal Debtor has an account
PD (India) → Instructing Bank→ Issuing Bank → Beneficiary
(Abroad)
 Absolute or Unconditional Guarantee invocable without any
proof of breach called/without demur’
 Conditional Guarantee which is en-cashable on fulfillment of
prescribed conditions such as proof of breach
RULES OF ENFORCEMENT OF BANK
GUARANTEE
 No Injunction to restrain a beneficiary from invoking the guarantee
except in clear case of fraud (United Commercial Bank v Bank of India
AIR 1981 SC 1426) or irretrievable injustice (L&T v MSEB AIR 1996
SC 334) or special equities

 Dispute b/w PD and Beneficiary is no bar to invocation of

guarantee and the bank must honour guarantee notwithstanding any
dispute between the contracting parties [Ansal Eng. v Tehri Hydro
Development Corp. Ltd (1996) 5 SCC 450]

 Guarantee must be invoked before its expiry date

 Assignment of guarantee can be made by the beneficiary to another

party by instructing the bank but assignee has no right to invoke the
guarantee
BENEFICIARY NOT BOUND TO FIRSTLY
PROCEED AGAINST THE PRINCIPAL DEBTOR
Bank of Bihar v Damodar Prasad AIR 1969 SC 297
Issue:
Is the Creditor required to first exhaust remedies against PD
Decision: No
 Supreme Court has held that u/s 128 the liability of Surety (S) is co-

extensive with that of Principal Debtor so that the (S) surety cannot
dictate terms to C
 Surety cannot require Beneficiary Creditor to first proceed against

PD.
 Surety must honour his obligation to the Beneficiary.

 It is not mandatory for the bank to first exhaust his remedies

against the principal debtor

PENDING SUITS B/W PD & SURETY IS NO GROUND
FOR GRANT OF INJUNCTION
Ansal Engg Projects Ltd v Tehri Hydro Development Corp Ltd (1996) 5 SCC
450
It is a case of unconditional guarantee as follows:
• “ We, UCO Bank do hereby undertake to pay the amount due and payable under the
guarantee without any demur merely on demand from the Corp stating that the amount
claimed is due by way of loss or damage caused to or suffered by the Corporation by
reason of breach by the contractor of any of the terms contained in the said contract.
Any such demand made on the Bank shall be conclusive…..”
• Appellant committed breach leading to invocation of bank guarantee by the respondent
against which the appellant has sought injunction.
• SC justifying the refusal to grant injunction held that the bank guarantee can be
invoked notwithstanding any dispute b/w the PD and the Beneficiary (Tehri Hydro)
• Bank guarantee must be honoured unequivocally to ensure free flow of commerce &
trade, and faith in commercial banking transactions unaffected by pending disputes
between the beneficiary and the bank’s client (NTPC v Flowmore Pvt Ltd AIR 1996
SC445)
• Court can interfere only in case of fraud and special equities such as irretrievable
injury or injustice for which strong evidence must be given
CONDITIONAL GUARANTEE ENCASHABLE ON
COMPLIANCE OF STIPULATED CONDITION
 HINDUSTAN CONSTRUCTION CO LTD v. STATE OF BIHAR 1999 Supp (3)
SCR 554
ISSUE: CAN INJUNCTION BE SOUGHT BY A PERSON OTHER THAN THAT NAMED IN
THE BANK GUARANTEE
JUDGMENT
• Bank Guarantee is to secure "Advances“ given to the contractor as also to
secure performance of the work and is invokable by ‘Chief Engineer inwhose
favour it was issued.
 Despite that the language of the guarantee states it to be ‘unconditional’, it is in
fact conditional invokable by the Chief Engineer in whose favour it was
furnished
 Term ‘Chief Engineer’ is not defined in the GCC and it cannot include ‘Executive
Engineer’ by whom it had actually been invoked on the ground of abandonment
of contract by the Contractor
 Invocation by the Executive Engineer was therefore wrong and the bank was
justified in refusing to honor the same since special equities are in favor of the
appellant.
INVOCATION OF BANK GUARANTEE PENDING
ARBITRATION
NTPC v FLOWMORE PRIVATE LTD AIR 1996 SC 445
ISSUE: CAN BANK GUARANTEE BE INVOKED PENDING
ARBITRATION OF DISPUTE B/W PD AND BENEFICIARY?
 The bank guarantee provided “ We, Canara Bank….., do hereby guarantee and
undertake to pay the Owner immediately on demand any or, all moneys payable by the
Contractor ….at any time up to 31.12.1986 without any reference to the Contractors.
Any such demand made by the owner shall be conclusive and binding notwithstanding
any difference between the owner and the Contractor or any dispute pending before
any Court, Tribunal, Arbitrator or any other Authority”
 There were four guarantees in the same language as above.
 Pending arbitration the guarantees were duly renewed from time to time except for a
few and the NTPC as Beneficiary invoked all the guarantees
JUDGMENT
 No injunction shall be issued if the Bank guarantee is payable on demand and the
bank must pay on demand by the beneficiary.
 Pendency of disputes between the beneficiary and the Principal Debtor (account
holder) cannot be a ground for preventing encashment of guarantee by the Beneficiary
SALES OF GOODS ACT, 1930
 SALE AND AGREEMENT TO SELL

U/S 4, a contract of sale of goods may be either (i) Sale, or (ii) An Agreement
to Sell. A contract of sale may be absolute or conditional.
SALE
Where under a contract of sale the ‘property in the goods’ is immediately
transferred from the seller to the buyer. The term ‘property’ refers to the
ownership in the goods
AGREEMENT TO SELL
Where the transfer of property in the goods is to take place at a future time
or subject to some conditions thereafter to be fulfilled, it is called an
‘agreement to sell’.
An ‘agreement to sell’ becomes a ‘sale’ when the time elapses or the
conditions subject to which the property in the goods is to be transferred are
fulfilled.
Example: A agrees to sell his house to B for Rs.50 lakh on 1st of March.
Since B will become the owner on 1st of March (i.e. a future date), it is an
agreement to sell.
 REQUISITES OF CONTRACT OF SALE-1
1.There must be two parties:
The same person cannot be a seller as well as a buyer.
Example:
A sale of liquor by an unincorporated club to its members is not a
sale because club members members are joint owners. Each
member consumes his own property. The payment made by a
member to the club is to enable the club to buy the liquor so as to
continue the supply (Graff v. Evans).
EXCEPTION
However, a sale of buses by a company to a partnership firm whose
partners are its members constitutes a sale because a company is
an entity separate from its members (Chittoor Motor Transport
company v. ITO AIR 1996 SC 570)
For the same reason, the transactions of a company with its
members shall be ‘sales’
 REQUISITES OF CONTRACT OF SALE-2

2. Contract of sale must have all the essentials of a valid contract:

(State of Madras v Gannon Dunkerley and Company Limited, 1958).
3. Subject matter of sale must be Goods
Goods may be existing, future or contingent. Money, actionable claims
and immovable property don’t fall within the purview of goods.
4. There must be “Transfer of Property (Ownership)”
The term “property” means ‘general property’ i.e. complete ownership
rather than “special property” such as in the case of pledge.
5. Price
The general property in the goods is transferred for a price (money).
If goods are exchanged for goods, it would be a ‘barter’ but not a sale.
A transaction involving partly an exchange of goods and partly an
exchange for price shall be a ‘sale’.
 SALE
 Executed Contract
 Transfer of ownership occurs
immediately on making of contract
 Buyer as owner bears the risk
 Creates jus in rem i.e., rights to get
goods against the entire world
 On buyer’s breach, the seller can sue for
price but not for return of goods
 On seller’ breach, buyer can sue to
recover goods
 Seller cannot resell the goods even if he
has possession thereof
 On buyer’s insolvency, the seller shall
make over the goods to the liquidator
 On seller’s insolvency, the buyer has
right of ratable dividend for the price paid
AGREEMENT TO SELL
 Executory Contract
 Ownership is transferable subject to
certain conditions or arrival of a date
 Seller as owner bears the risk
 Creates personal rights (jus in
personam)
 On breach by buyer, the seller can sue
him for damages
 On seller’s breach, the buyer can sue
him for damages
 On buyer’s default, seller can deal with
the goods in any manner he likes
 On buyer’s insolvency, the seller need
not hand over goods to liquidator
 On seller’s insolvency, goods must be
handed over to liquidator
 SALE
 Immediate transfer of ownership
to buyer
 Buyer is the owner of goods
 Buyer cannot rescind the contract
 Buyer can transfer title to further
parties
 Payment is adjusted against total
price
 On default to pay any installment,
the seller can sue to recover those
HIRE PURCHASE
 Ownership is transferred on
payment of all installments
 Hire purchaser is bailee with
option to buy
 Hirer may rescind the contract by
stopping payment of installments
 Hirer cannot transfer title to third
parties as he is not the owner
 Payments are ‘hire charges’ for
use of goods
 Non- payment of any installment
entitles the seller to forfeit the
installments already paid and also
take back the goods
 GOODS [Section 7]

 Definition of ‘goods’ is inclusive as well as exclusive i.e., includes

and also excludes certain things
“Goods” include
(i) movable property of all kinds whether tangible or intangible like
water, electricity, patents, goodwill, etc
(ii) shares and stock,
(iii) standing crops,
(iv) goods attached to or forming part of earth but agreed to be
severed under the contract of sale
‘Goods’ do not include the following:
(a) Actionable Claims such as book debts, negotiable instruments
(b) Money which is legal tender but not old coins
 CLASSIFICATION OF GOODS
 There are THREE broad categories of ‘goods’ as follows:
 EXISTING GOODS which the seller both owns and possesses at the making
the contract and which are of further THREE sub-types as below:
(a) UNASCERTAINED GOODS which have neither been identified nor agreed
upon at the time of making the contract and for which only ‘agreement to sell
can be made
(b) ASCERTAINED GOODS are those which would be identified and agreed
upon subsequent to formation of contract
(c) SPECIFIC GOODS which are both identifies and agreed upon at the time of
making of contract of sale
 FUTURE GOODS which are to be manufactured, produced or acquired by the
seller after making the contract so that there can be only an agreement to sell
such goods. For instance, an applicant for shares is agreeing to buy future
goods (Morgan Stanley Mutual Fund v. Kartick Das 1994, 4SCC 225)
 CONTINGENT GOODS are those the acquisition of which depends on the
happening of a contingency. For example, a sale of 100 units of pullovers
which are to arrive from China in a ship
 CONDITIONS & WARRANTIES

 Representations called ‘stipulations’ made by a seller at the time of

making a sale with reference to goods may either be a ‘condition’ or
a ‘warranty’.
 CONDITION
A stipulation essential to the main purpose of the contract, the
breach of which gives rise to a right to repudiate the contract

 WARRANTY
A stipulation collateral to the main purpose of the contract, the
breach of which gives rise to only a claim for damages but not to
reject the goods and to repudiate the contract

 Whether a stipulation is a ‘condition’ or ‘warranty’ depends on the

construction of the contract.

 A stipulation may be a condition though called a warranty & vice

versa
 CONDITION
 Essential to main purpose of
contract
 Its breach gives the buyer the
right to repudiate the contract
 Breach of condition may be
treated as breach of warranty
 Condition may descend to the
level of warranty
WARRANTY
 Collateral to main purpose of
contract
 Its breach gives the right to
claim damages but not the
right to repudiate the contract
 Breach of warranty may not be
treated as breach of condition
 Warranty cannot become a
condition
 IMPLIED CONDITIONS IN CONTRACT OF SALE-1
 “Implied Conditions” are those introduced by law in the absence of any
express contract between the parties and are as follows:
 CONDITION AS TO TITLE
In a ‘sale’, the seller must have the right to sell the goods in praesento. I
In an ‘agreement to sell’, the seller must have the right to sell in futuro when property is to
pass else the buyer can repudiate the contract
 A sale made by infringing the trade mark amounts to breach of the condition as to

(Niblett Confectioners Materials Co. Ltd.)

 CONDITION AS TO SALE BY DESCRIPTION

It requires the goods to correspond with the description given in the form of symbols,
grade, brand etc. For example, basmati rice, champagne, MP wheat.

 SALE BY SAMPLE is subject to following conditions:

 The bulk must correspond with the sample,
 Buyer must be given a reasonable opportunity to compare the bulk with the sample
 Goods must be free from any defect which is not apparent on reasonable examination
 IMPLIED CONDITIONS IN CONTRACT OF SALE-2
 CONDITION ABOUT SALE BY SAMPLE AND DESCRIPTION requires the
goods to correspond with both
Example: In place of foreign refined rapeseed oil warranted equal to
sample, the actual supply was found to contain a mixture of hemp oil.
 CONDITION AS TO QUALITY/ FITNESS (Section16)

There is no condition that the good shall fit a particular purpose which the
buyer may have in his mind. The buyer should satisfy himself of the purpose
else Caveat Emptor shall apply.
However, the seller shall provide goods fitting the purpose of the buyer if:
 The buyer has informed the seller the purpose for which he needs the
goods,
 Buyer relies on the skill and judgment of the seller, and
 The seller deals in goods of that kind (Priest v. Last : Hot Water Bottle
case)
If purpose of the goods is known from their very nature, condition as to
fitness shall apply even in the absence of compliance with the above
 IMPLIED CONDITIONS IN CONTRACT OF SALE-3

 CONDITION AS TO MERCHANTABILITY
This conditions shall apply when goods are bought by description from a seller
who deals in goods of that kind.
Merchantable quality refers to the description under which the goods are
resold in the market
Exception
If buyer has examined the goods, there is no implied condition as to defects
which examination ought to have revealed

 CONDITION AS TO WHOLESOMENESS
It is applicable to provisions and foodstuffs which must both be merchantable
and suitable for human consumption [Frost v. Aylesbury Dairy (1949)]
 IMPLIED WARRANTIES

Warranty of ‘quiet possession’ flowing from condition as to title

[Section 14(b)]

 Warranty of ‘freedom from encumbrances in favour of a third party

 Warranty implied by usage of trade such as quality or fitness for a

particular purpose [Section 16(3)]

 Warranty of ‘disclosing dangerous nature of the goods’ i.e., giving

appropriate warning to the buyer about probable danger
 DOCTRINE OF CAVEAT EMPTOR

Doctrine cautions the buyer to be careful while making purchases else he will
be held responsible on ground of negligence in making the transaction
CASE:
Ahmedabad Municipal Corporation v Haji Abdul Gafur Haji Hussenbhai
1971 AIR 1201
Facts:
Appellant has sued the respondent buyer for recovery of property tax
outstanding against the property which the latter had bought in an auction
conducted by the appellant
No information about outstanding tax was provided to the buyer despite
inquiries to that effect.
Respondent has resisted the sale of property for recovery of arrears of
municipal taxes.
Issue: Can the auction purchaser be imputed with constructive knowledge of
existence of arrears of taxes under ‘caveat emptor’ despite his being a
transferee for consideration without notice?
 A’BAD MUNICIPAL CORPORATION v HAJI ABDUL -2
JUDGMENT
U/S 100 of TPA, a charge is not enforceable against the transferee of a property for consideration
who has no notice of the charge except when there is an express legal provision.
U/S 3 of TPA, the notice of a fact must be shown to exist actual or implied knowledge arising
from willful abstention from enquiry or search, or gross negligence
Respondent cannot be attributed with constructive knowledge of existence of tax arrears for the
following reasons;
i. the buyer could not have reasonably thought that the municipality did not cared to recover the
arrears of taxes;
ii. the municipal corporation was far more negligent and blameworthy than the respondent in
allowing the arrears to accumulate;
iii. though respondent made enquiries from the receivers, they did not give any intimation about
the arrears; and
iv. the building was in the occupation of tenants and the rent was recovered by the receivers, and
v. there is reasonable assumption that the municipal tax being a charge on the property and given
priority under Section 61 of Provincial Insolvency Act, 1920, must have been paid by the
receivers
vi. Official receivers while receiving rent from tenants did not discharge tax liability nor did they
provide information about non-payment of taxes to the purchaser in spite of inquiries by him
Therefore, the case is not covered by doctrine of caveat emptor and attachment of property by
municipality must be held to be illegal.
 TRANSFER OF OWNERSHIP IN GOODS

REASONS FOR ASCERTAINING THE TIME OF TRANSFER OF

OWNERSHIP are as follows:
◦ Transfer of Risk since risk prima facie passes with ownership
◦ Determination of rights and obligations of parties in respect of
goods
◦ Determination as to who has the right to file suit against third
parties
◦ Determination of Right of Resale which is exercisable only by
the owner
◦ Right to sue for price as it arises only on transfer of property in
goods to the buyer
◦ Determination of rights of liquidator on insolvency of either the
seller or buyer
 RULES FOR DETERMINING TRANSFER OF
OWNERSHIP
 The transfer of property in the goods to buyer depends on when the
parties intend it to pass
 Intention of the parties can be ascertained from the following:
(i) Terms of the contract,
(ii) conduct of parties, and
(iii) circumstances of the case [Section 19(2)]
 Intention of the parties to transfer ownership in the goods can be
ascertained by reference to sections 20,21,22 &
 Transfer of property in the goods will depend on the nature of goods
i.e., whether these are (i) existing goods, or (ii) future goods, or (iii)
contingent goods
RULES FOR DETERMINING INTENTION OF PARTIES-1

1.TRANSFER OF PROPERTY IN SPECIFIC GOODS

(a) When specific goods are in a deliverable state, the property in the goods shall pass as soon as an
unconditional contract for sale thereof is made irrespective of the time of payment of price or of
delivery of goods.
Meaning of ‘deliverable state’: ‘Goods’ are said to be in a ‘deliverable state’ when the buyer is bound
to take delivery thereof.
Example:
B agrees to buy A’s horse for Rs one lakh with price and delivery to be made simultaneously. Horse
becomes B’s property as soon as B’s offer is accepted by A
(b) When specific goods are not in a deliverable state, the property in them shall pass when (i)
goods are put in a deliverable and (ii) the buyer has notice thereof.
Example:
A purchased the entire quantity of oil lying with B. B had to put the oil in 200 barrels. About 50 barrels were filled in
A’s presence. Before the remainder could be filled, a fire destroyed the entire oil. A shall bear the loss of 50 barrels
which have been filled in his presence and the liability for the rest shall be borne by B.
(c). When specific goods are in a deliverable state but seller has to ascertain price thereof by
weighing, measuring or testing them, the property does not pass until such thing is done and the
buyer has noticed thereof.
Example:
289 bales of goat skin with each bale having 5 dozen skins were sold. Seller’s duty was to count the skins in each
bale. Before the seller could count, the bales were destroyed by fire. Since property has not passed, the loss shall
fall on the seller.
RULES FOR DETERMINING INTENTION OF PARTIES-2

2. TRANSFER OF PROPERTY IN UNASCERTAINED GOODS

I. Goods must be ascertained [Sec 18]
II. Goods must be in a deliverable state
III. Goods must be unconditionally appropriated to the buyer
IV. Unconditional Appropriation occurs when the seller does not reserve to
himself the right of appropriation such as by preparing the R/R in his
own or in his agent’s name
V. Methods of Appropriation
 By separating the goods in terms of quality & quantity with the consent
of the buyer
 By putting the contracted quantity in suitable receptacles with the
consent of the buyer
 By delivering the goods to common carrier for their transmission to the
buyer without reserving the right of disposal
RULES FOR DETERMINING INTENTION OF PARTIES-3

3.TRANSFER OF PROPERTY WHEN GOODS AER SOLD ON

‘SALE OR RETURN BASIS’ OR ‘ON APPROVAL’ [Section 24]
In case of ‘sale on approval’ or ‘on sale or return basis’, the property
passes if:
 Buyer signifies his approval, or
 Buyer adopts the transaction in any manner such as pledging
the goods
 Buyer retains the good without giving notice of rejection beyond
the time fixed for return of goods, or on expiry of reasonable
time if no time has been fixed such as not returning the horse
within 7 days of trial and the horse dies while in the custody of
the buyer
 MEWAR TENT FACTOR v UOI (1990) 1 SCC 71
Facts:
The appellant dispatched 1500 tents F.O. R Jodhpur destined for Kanpur after their
inspection by buyer’s agent. 95% of the price was payable on proof of dispatch and
balance after receipt of the goods in good condition at Kanpur. Buyer notified
shortage of 224 tents for which a sum of Rs 51,912 was deducted.
Issue: When and where has the transfer of property to seller taken place?
Judgment:
 Section 23(2) of the Act provides that when specific goods in a deliverable state are

delivered by the seller to the buyer or to a carrier or other bailee for the
transmission to the buyer without reserving the right of disposal, he is deemed to
have ‘unconditionally appropriated’ the goods to the contract
 Under section 39(1) of the Act, the property in the goods has been transferred to the

buyer by delivery and loading of goods at Jodhpur in the railway wagons.

 Consignee was therefore liable to pay the price of 224 tents which were alleged to

have been short supplied by the appellant.

 Section 61(2) provides for payment of interest at a rate which the court regards

reasonable, in the absence of contract to the contrary.

 Accordingly, the buyer shall pay interest @ 6% pa from date of delivery to the date

of claim by the appellant

 TRANSFER OF TITLE BY NON-OWNERS

 Only the seller can transfer a valid title to the goods

 If the seller has acquired goods through theft or borrowing etc. he
cannot be regarded an owner & his title is deemed to be defective
 Rule of ‘nemo dat quod non-habet’ provides that ‘no one can
transfer a better title tan his own’
 Any person buying goods from a non-owner (a person who has no
authority or consent of the real owner) cannot have a better title
than that of the transferor
 Buyer from a non-owner must restore the goods to the true owner
even if purchase had been made in good faith and for value
 The buyer can have remedy only against the transferor for damages
for breach of implied condition as to title
EXCEPTIONS TO RULE OF ‘NEMO DAT QUOD NON-
HABET’-1
1. TITLE BY ESTOPPEL
If the true owner by words or conduct leads the buyer to believe that the seller was the owner or had
his authority to sell, the person so representing cannot subsequently deny the seller’s authority to
sell
Example: A tells B in the presence of C (who is the real owner) that A is the owner. C keeps mum. If A
sells the goods to B, C cannot recover the goods from B because he is estopped from denying his
previous conduct
2. SALE BY MERCANTILE AGENT (Proviso to Sec 27):
Where the mercantile agent has possession of goods or of documents of title thereto with the consent
of the real owner, the sale made by him shall be valid if it is made in the ordinary course of business;
and the buyer has acted in good faith and has no notice of the want of title on the part of the seller.
Example:
A gave his car for sale to a mercantile agent with instruction not to sell below Rs.1 lac. However, the
agent sold the car below this price. The owner sued the buyer. Held that the buyer can retain the car
as he has purchased it from an agent in possession and has acted in good faith.

3. Sale by a co-owner in possession with consent of other co-owner (Sec 28): A sale by a co-
owner is valid provided the buyer purchases in good faith, for value and has no notice/suspicion of any
defect in seller’s authority to sell.
Example: A & B are the co-owners of a motorbike. A had the possession of the bike with the consent of
B. A sold it to C who bought in good faith. Held, C will get a valid title.
EXCEPTIONS TO RULE OF ‘NEMO DAT QUOD NON-
HABET’-2
4. SALE BY PERSON IN POSSESSION UNDER a VOIDABLE CONTRACT AS
DEFINED IN Sections 19 and 19 A of Contract Act (Section 29) is valid provided
contract has not been repudiated & the buyer acts in good faith, for value and without
notice of seller’s defect of title.
Example:
In Phillips v. Brooks (1919) a fraudulent person by misrepresenting himself as a reputed
person obtained a diamond ring for a useless cheque. Before discovery of his fraud, he
pledged the ring to a bona fide pledgee. Held the pledgee gets a good title
5. SALE BY SELLER IN POSSESSION AFTER SALE [Sec 30 (2)] : A sale, by a seller
in possession of goods/documents of title after sale will give the buyer a good title
provided he acts in good faith, for value and without notice of prior sale.
Example:
A purchases some skins from a broker. The goods remained with the broker pending
payment. A sold goods to B and gave him a cheque for transmission to the broker and
to take delivery. Thereafter, A sold goods to C who acted in good faith. Held C has a
good title.
NOTE: This provision does not apply to a person having possession of goods under a
hire purchase agreement
EXCEPTIONS TO RULE OF ‘NEMO DAT QUOD NON-
HABET’-3
6. SALE BY BUYER IN POSSESSION UNDER AN AGREEMENT TO SELL [Section
30(2)] :
A sale by a buyer having possession of goods with consent of seller is valid provided
the buyer acts in good faith, for value & without notice of defect in the title of such
seller.

7. SALE BY UNPAID SELLER (Sectio 54):

A sale by unpaid seller in possession of goods and in exercise of right of lien or
stoppage in transit will give the buyer a good title. There is no requirement as to good
faith on buyer’s part.

8. SALE IN FOLLOWING EXCEPTIONAL CIRCUMSTANCES:

◦ Purchaser from a finder of goods
◦ Sale by the pawnee
◦ Sale by an Official Assignee
NOTE: The rule of nemo dat quod non habet does not apply to negotiable
instruments
MORVI MERCANTILE BANK v UOI AIR 1965 SS 1954 -1

Facts:
A Bombay firm entrusted goods worth Rs. 35,500 to the Railway for carriage
from Thane to Delhi. The consignment was marked to "self." The the firm
endorsed the Railway Receipts to a Bank in consideration of an advance of
Rs. 20,000. When the goods reached the destination, the Bank refused to
take delivery claiming that they were not the goods consigned by the firm.
The Bank then filed a suit for the recovery of the value of the goods.
Issue: Did the endorsement of the R/R by the Bombay firm in favour of the
Bank constitute a valid pledge of the goods entitling the Bank to sue for
compensation?
Judgment:
Does delivery of R/R amount to ‘delivery of goods’? 
U/S 137 of TPA, Railway Receipt is a document of title to goods.
Section 2(4) of Sale of Goods Act 1930 has specifically included ‘R/R’ as a
document of title.
MORVI MERCANTILE BANK v UOI AIR 1965 SS 1954 -2

• In Halsbury’s Laws of England, a Railway Receipt may be transferable but it is

not a negotiable instrument unless there is a trade usage to that effect
• Endorsement of R/R does not create any rights in favour of the railway except
the right to collect goods
• Endorsee may bring an action as an assignee of the contract of carriage by
proving valid assignment
• No proof of assignment has been given by the appellant bank
• Negotiation of the R/R may pass property in the goods but cannot transfer the
contract contained in the receipt or the statutory contract under Sec 74 of the
Indian Railways Act.
• Negotiability is a creature of statute or mercantile usage, not of judicial decisions
• In the absence of any usage of trade or any statutory provision, a railway receipt
is not a negotiable instrument and its transfer to the railways cannot entitle the
endorsee to sue the carrier i.e., the railway in his own name
• Appellant has no right to file suit against the respondent except on proof of
assignment which has not been discharged by the appellant
 UNPAID SELLER

MEANING OF UNPAID SELLER [Section 45]

Unpaid seller is one to whom
(a) the whole or part of the price has not been paid or tendered, or
(b) a bill of exchange or other negotiable instrument has been given
as conditional payment, and the condition on which it was
received has not been fulfilled by reason of the dishonour of the
instrument or otherwise.

‘Seller’ includes “any person who is in the position of a seller such

as an agent of the seller to whom the bill of lading has been
indorsed, or a consignor or agent who has paid the price, or who is
directly responsible for payment of the price”
 RIGHTS OF UNPAID SELLER

Unpaid Seller has 2 different categories of rights as follows:

1. RIGHTS AGAINST GOODS

a. RIGHT OF POSSESSORY LIEN on the goods for the price while
he is in possession of them
b. RIGHT OF STOPPAGE OF GOODS IN TRANSIT in case of the
insolvency of the buyer after the seller has parted with their
possession
c. RIGHT OF RESALE as limited by this Act
d. RIGHT OF WITHOLDING DELIVERY in case the property has
passed to the buyer. This right is co-extensive with the rights of lien
and stoppage in transit
2. PERSONAL RIGHTS AGAINST THE BUYER
 UNPAID SELLER’S RIGHT OF LIEN
MEANING OF LIEN
Lien is the right to retain possession of goods until payment of the price

WHEN IS LIEN EXERCISABLE?

a. When goods have been sold without any stipulation as to credit
b. Where the goods were sold on credit but the term of credit has expired
c. Where the buyer has become insolvent

TYPES OF LIEN
1. General Lien
It can be exercised against all debts due from the buyer only by bankers, insurers, attorneys,
and factors.

2. Particular Lien
It is available to all types of sellers and can be exercised only upon goods against which the debt
is outstanding and even if possession of buyer.

Effect of Part delivery on Lien

Where an unpaid seller makes part delivery of the goods, he may exercise his
lien on the remainder unless such part delivery has been made under circumstances implying
waiver of lien.
Lien is indivisible so that the buyer cannot obtain part delivery on payment of proportionate price
of the goods
 TERMINATION OF LIEN

TERMINATION OF LIEN occurs in following situations:

a) Delivery of goods by the seller to a carrier or other bailee for the

purpose of transmission to the buyer without reserving the right of
disposal of goods
b) Lawful obtaining of goods by the buyer or his agent
c) Express or Implied Waiver of Lien such as by sending goods to
buyer’s shipping agent which if sent back to seller for packaging
shall not be subject to buyer’s lien even if the buyer becomes
insolvent in the meantime [Valpy v. Gibson 1847]
d) Tender of price by the buyer