Legal Aspects of Management - Study Material

THE INDIAN CONTRACT ACT, 1872
The Indian Contract Act, 1872 codifies the legal principles that govern
such ‘contracts’. The Act basically identifies the ingredients of a legally
enforceable valid contract in addition to dealing with certain special type
of contractual relationships like indemnity, guarantee, bailment, pledge,
quasi contracts, contingent contracts etc.
What is a contract?
While all contracts are agreements, all agreements are not contracts. An
agreement which is legally enforceable alone is a contract. Agreements
which are not legally enforceable are not contracts but remain as void
agreements which are not enforceable at all or as voidable agreements
which are enforceable by only one of the parties to the agreement.

The above observation would raise a question in our minds as to what is
the exact meaning of the words ‘agreements’ and ‘contracts’.
Section 2(b) while defining a ‘promise’ provides that “when the person
to whom the proposal is made signifies his assent thereto, the proposal
is said to be accepted. Proposal when accepted becomes a promise”.
Section 2(e) of the Act defines an agreement as ‘every promise and
every set of promises forming consideration for each other’.
Section 2(h) of the Act defines the term contract as “an agreement
enforceable by law”.
The above discussion can be diagrammatically represented as follows:
PROPOSAL
PROMISE
CONSIDERATION
AGREEMENT
LEGALLY ENFORCEABLE LEGALLY NOT ENFORCEABLE
CONTRACT VOIDABLE VOID
AGREEMENT AGREEMENT
Essentials of a Valid Contract
In order to create a valid contract, the following elements should be
present:
1. Intention to create legal obligation through offer and acceptance
should be present.
2. Free consent of the parties is necessary.
3. Competency or capacity of parties to enter into contract must be
ensured
4. Lawful consideration & lawful object should be present, and
5. Agreement not expressly declared to be void.
Offer and Acceptance : In the first place, there must be an offer
and the said offer must have been accepted. Such offer and acceptance
should create legal obligations between parties. This should result in a
moral duty on the person who promises or offers to do something
Case law:
In Balfour v. Balfour, a husband promised to pay maintenance allowance
every month to his wife, so long as they remain separate. When he
failed to perform his promise, she brought an action to enforce it. As
it is an agreement of domestic nature, it was held that it does not
contemplate to create any legal obligation.
Consent : The second element is the ‘consent’ of the parties. ‘Consent’
means ‘knowledge and approval’ of the parties concerned. This can
also be understood as identity of minds in understanding the term viz
consensus ad idem. Further such a consent must be free.
Illustration:- A threatened to shoot B if he (B) does not lend him Rs.2000
and B agreed to it. Here the agreement is entered into under coercion
and hence voidable at the option of B.
Capacity of the parties: The third element is the capacity of the
parties to make a valid contract. Capacity or incapacity of a person could
be decided only after reckoning various factors. Section 11 of the Indian
Contract Act, 1872 elaborates on the issue by providing that a person
who-
(a) Has not attained the age of majority,
(b) Is of unsound mind and
(c) Is disqualified from entering into a contract by any law to
which he is subject,
Should be considered as not competent to enter into any contract.
Therefore law prohibits (a) Minors (b) persons of unsound mind
[excluding the Lucid intervals] and (c) person who are otherwise
disqualified like an alien enemy, insolvents, convicts etc from entering
into any contract.
Consideration: The fourth element is the presence of
a lawful ‘consideration’. ‘Consideration’ would generally
mean ‘compensation’ for doing or omitting to do an act or deed. It is
also referred to as ‘quid pro quo’ viz ‘something in return for another
thing’. Such a consideration should be a lawful consideration.
Example:- A agrees to sell his books to B for Rs.100, B’s promise to pay
Rs.100 is the consideration for A’s promise to sell his books and A’s
promise to sell the books is the consideration for B’s promise to pay
Rs.100.
Not expressely declared to be void: The last element to clinch a
contract is that the agreement entered into for this purpose must not be
which the law declares to be either illegal or void.
Example:- Threat to commit to murder or making/publishing defamatory
statements or entering into agreements which are opposed to public
policy are illegal in nature. Similarly any agreement in restraint of trade,
marriage, legal proceedings etc are classic examples of void agreements
TYPES OF CONTRACT ON THE BASIS OF
VALIDITY FORMATION
PERFORMANCE
VALID CONTRACT EXPRESS CONTRACT EXECUTED CONTRACT
VOID CONTRACT IMPLIED CONTRACT EXECUTORY CONTRACT
VOIDABLE CONTRACT QUASI CONTRACT UNILATERAL CONTRACT
ILLEGAL CONTRACT BILATERAL CONTRACT
UNEBFORCEABLE CONTRACT
Void Contracts: section 2 (j) states as follows: “A contract which
ceases to be enforceable by law becomes void when it ceases to be
enforceable”. Thus a void contract is one which cannot be enforced by a
court of law.
Example: Mr. X agrees to write a book with a publisher. After a few
gays, X dies in an accident. Here the contract becomes void due to the
impossibility of performance of the contract
Voidable Contract: Section 2[i] defines that an agreement which is
enforceable by law at the option of one or more parties but not at the
option of the other or others is a voidable contract.
At this juncture it would be desirable to know the distinction between
a void contract and a voidable contract. The distinctions lie in three
aspects namely definition, nature and rights.
(a)Definition: A void contract cannot be enforced at all. A voidable
contract is an agreement which is enforceable only at the
option of one of the parties but not at the option of the other.
Therefore ‘enforceability’ or otherwise, divides the two types of
contract.
(b)Nature: By nature, a void contract is valid at the time when it is
made but becomes unenforceable and thus void on subsequent
developments or events like supervening impossibility, subsequent
illegality etc. Repudiation of a voidable contract also renders
the contract void. Similarly a contingent contract might become
void when the occurrence of the event on which it is contingent
becomes impossible.
(c)Rights: As regards rights of the parties, in the case of a void
contract there is no legal remedy for the parties as the contract
cannot be performed in any way. In case of voidable contract the
aggrieved party has the right to rescind it within a reasonable
time. If it is also rescinded, it becomes void. If it is not rescinded,
it is a valid contract.
Illegal Contracts: Illegal contracts are those that are forbidden by
law. An illegal contract is hence void also. Because of the illegality of
their nature they cannot be enforced by any court of law. In fact even
associated contracts cannot be enforced.
Though illegal agreements and void agreements appear similar they
differ in the following manner:
Scope: All illegal agreements are void. However void agreements might
not be illegal at the time of entering but would have become void
because of some of other factors.
Nature and Character: Illegal contracts are void since the very beginning
they are invariably described as void ab initio.
Effect on Collateral transactions: In the case of illegal contract, even the
collateral transactions namely transactions which are to be complied
with before or after or concurrently along with the main contract also
become not enforceable.
Penalty or punishment: All illegal agreements are punishable under
different laws say like Indian Penal Code etc. Whereas parties to void
agreements do not face such penalties or punishments.
Express Contracts: A contract would be an express contract if the
terms are expressed by words or in writing.
Implied Contracts: Implied contracts in contrast come into existence
by implication. Most often the implication is by law or by action.
Tacit Contracts: Tacit contracts are those that are inferred through
the conduct of the parties. A classic example of tacit contract would be
when cash is withdrawn by a customer of a bank from the automatic
teller machine [ATM]
Executed Contract: The consideration in a given contract could be an
act or forbearance. When the act is done or executed or the forbearance
is brought on record, then the contract is an executed contract.
Executory Contract: In an executory contract the consideration is
reciprocal promise or obligation.
Unilateral Contract: Unilateral contract is a one sided contract in
which only party has to perform his duty or obligation.
Bilateral Contract: A Bilateral contract is one where the obligation or
promise is outstanding on part of both the parties.
Proposal/Offer
The word ‘Proposal’ and the word ‘Offer’ mean one and the same thing
and therefore are used interchangeably. In terms of Section 2(a) of the
Act “a person is said to make a proposal when he 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”. It must
be appreciated that ‘doing an act’ and ‘not doing an act’ both have the
same effect in the eyes of the law, though one is a positive act and the
other is a negative act.
Illustrations:
1. Where “A” tells “B” that he desires to marry ‘B’ by the end of 2006,
there is no offer made unless he also asks “will you marry me?”,
conveying his willingness and tries to obtain the assent of ‘B’.
2. Where “A” offers to sell his car to ”B” it conveys his willingness
to do an act. Through this offer not only willingness is being
conveyed but also an intention to obtain the assent can be seen.
Classification of offer:
(i) General Offer: It is an offer made to public at large with or
without any time limit. In terms of Section 8 of the Act, anyone
performing the conditions of the offer can be considered to
have accepted the offer (Carill v. Carbolic Smoke Ball). Until the
general offer is retracted or withdrawn, it can be accepted by
anyone at any time as it is a continuing offer.
(ii) Special/Specific Offer: Where an offer is made to a particular
and specified person, it is a specific offer. Only that person can
accept such specific offer, as it is special and exclusive to him.
[Boulton v. Jones]
(iii) Cross Offer: As per section 2(b), when a person to whom the
proposal (offer) is made signifies his assent, the proposal is
said to be accepted. Thus assent can be only to a proposal. If
there was no proposal, question of its acceptance cannot arise.
For example, if A makes a proposal to B to sell some goods
at some specified price and B, without knowing proposal of
A, makes a proposal to purchase the same goods at the price
specified in the proposal of A, it is not an acceptance, as B was
not aware of the proposal made by A. It is only Cross proposal
(cross offer). And when two persons make offer to each other,
it cannot be treated as mutual acceptance. There is no binding
contract in such a case. [Tin v. Hoffmen &Co. 1873]
(iv) Counter Offer: Upon receipt of an offer from an offeror, if the
offeree instead of accepting it straightaway, imposes conditions
which have the effect of modifying or varying the offer, he is
said to have made a counter offer. Counter offer amounts to
rejection of original offer.
(v) Standing or continuing or open offer: An offer which is made to
public at large and if it is kept open for public acceptance for a
certain period of time, it is known as standing or continuing or
open offer. Tenders that are invited for supply for materials and
goods are classic examples of standing offer.
Rules relating to offer: Following are the rules for a valid and legal
offer:
(a) The ‘offer’ must be with intent to create a legal relationship.
(b) The offer must be certain and definite. It must not be vague. If
the terms are vague, it is not capable of being accepted as the
vagueness would not create any contractual relationship.
(c) The offer must be expressed or implied.
(d) The offer must be distinguished from an invitation to offer.
(e) The offer must be either specific or general.
(f) The offer must be communicated to the person to whom it is
made.
(g) The offer must be made with a view to obtaining the consent of the
offeree.
(h) An offer can be conditional but there should be no term in the
offer that non-compliance would amount to acceptance.
Acceptance
(1)Acceptance must be absolute and unqualified: As per section 7 of the
Act, acceptance is valid only when it is absolute and unqualified
and is also expressed in some usual and reasonable manner
unless the proposal prescribes the manner in which it must be
accepted. If the proposal prescribes the manner in which it must
be accepted, then it must be accepted accordingly.
‘A’ enquires from ‘B’, “will you purchase my car for Rs. 2 lakhs?”
If ‘B’ replies “ I shall purchase your car for Rs.2 lakhs, if you buy my
motorcycle for Rs.50000/-, here ‘B’ cannot be considered to have
accepted the proposal. If on the other hand ‘B’ agrees to purchase
the car from ‘A’ as per his proposal subject to availability of valid
Registration Certificate / book for the car, then the acceptance is
in place though the offer contained no mention of R.C book. This is
because expecting a valid title for the car is not a condition. Therefore
the acceptance in this case is unconditional.
(2)The Acceptance must be communicated: To conclude a contract between
parties, the acceptance must be communicated in some perceptible
form. Any conditional acceptance or acceptance with varying or too
deviant conditions is no acceptance.
(a) M offered to sell his land to N for $280. N replied purporting to
accept the offer but enclosed a cheque for $80 only. He promised to
pay the balance of $200 by monthly instalments of $50 each. It was
held that N could not enforce his acceptance because it was not an
unqualified one.
(b) ’A’ offers to sell his house to B for Rs.1000/-. B replied that “I can
pay Rs.800 for it”. The offer of ‘A’ is rejected by ‘B’ as the acceptance
is not unqualified. B however changes his mind and is prepared to pay
Rs.1000/-. This is also treated as counter offer and it is upto A whether
to accept it or not.
A mere variation in the language not involving any difference in the
substance would not make the acceptance ineffective.
(3)Acceptance must be in the prescribed mode: Where the proposal
prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be
accepted in a reasonable manner.
(4) The acceptance must be given within a reasonable time and before the offer
lapses.
(5) Mere silence is not acceptance: The acceptor should expressely accept
the offer. Acceptance can be implied also.
(6) Acceptance by conduct: As already elaborated above, acceptance has to
be signified either in writing or by word of mouth or by performance of
some act.
For example, where a tradesman receives an order from a customer, and
the order is executed accordingly by the trader, there is an “acceptance
by conduct” of the offer made by the customer, The trader’s subsequent
act signifies acceptance
Communication of offer: In terms of Section 4 of the Act, “the
communication of offer is complete when it comes to the person
to whom it is made”. Therefore knowledge of communication is of
relevance. Knowledge of the offer would materialize when the offer is
given in writing or made by word of mouth or some other conduct. This
can be explained by an example. Where ‘A’ makes a proposal to ‘B’ by
post to sell his house for Rs.5 lakhs and if the letter containing the offer
is posted on 10th March and if that letter reaches ‘B’ on 12th March the
offer is said have been communicated on 12th March when B received
the letter. Thus it can be summed up that when a proposal is made by
post, its communication will be complete when the letter containing the
proposal reaches the person to whom it is made.
Communication of acceptance: Section 3 of the Act prescribes in
general terms two modes of communication namely, (a) by any act and
(b) by omission, intending thereby to, to communicate to the other or
which has the effect of communicating it to the other.
Communication by act would include any expression of words whether
written or oral. Written words will include letters, telegrams, faxes,
emails and even advertisements. Oral words will include telephone
messages. Again communication would include any conduct intended
to communicate like positive acts or signs so that the other person
understands what the person ‘acting’ or ‘making signs’ means to say or
convey.
Communication can also be by ‘omission’ to do any or something. Such
omission is conveyed by a conduct or by forbearance on the part of one
person to convey his willingness or assent. However silence would not
be treated as communication by ‘omission’.
Communication of acceptance is also done by conduct. For instance,
delivery of goods at a price by a seller to a willing buyer will be
understood as a communication by conduct to convey acceptance.
Similarly one need not explain why one boards a public train or bus
or drop a coin in a weighing machine. The first act is a conduct of
acceptance and its communication to the offer by the public transport
authority to carry any passenger. The second act is again a conduct
conveying acceptance to use the weighing machine kept by the vending
company as an offer to render that service for a consideration.
Where a resolution passed by a bank to sell land to ‘A’ remained
uncommunicated to ‘A’, it was held that there was no communication
and hence no contract. [Central Bank v. Vyankatesh (1949) A. Nag. 286].
Let us now come to the issue of when communication of acceptance is
complete. In terms of Section 4 of the Act, it is complete,
(i) As against the proposer, when it is put in course of transmission to
him so as to be out of the power of the acceptor to withdraw the
same;
(ii) As against the acceptor, when it comes to the knowledge of the
proposer.
Communication of special conditions: Sometimes there are
situations where there are contracts with special conditions. These
special conditions are conveyed tacitly and the acceptance of these
conditions are also conveyed by the offeree again tacitly or without
him even realizing it.
For instance where a passenger undertakes a travel, the conditions of
travel are printed at the back of the tickets, sometimes these special
conditions are brought to the notice of the passenger, sometimes
not. In any event, the passenger is treated as having accepted the
special condition the moment he brought his ticket.
Where a launderer gives his customer a receipt for clothes received
for washing, the receipt carries special conditions and are to be
treated as having been duly communicated to the customer and
therein a tacit acceptance of these conditions is implied by the
customer’s acceptance of the receipt.
Communication of Performance
We have already discussed that in terms of Section 4 of the Act,
communication of a proposal is complete when it comes to the
knowledge of the person to whom it is meant. As regards acceptance
of the proposal, the same would be viewed from two angles. These
are (i) from the viewpoint of the proposer and (ii) the other from the
viewpoint of acceptor himself. From the viewpoint of the proposer,
when the acceptance is put in to a course of transmission and when
it would be out of the power of the acceptor. From the viewpoint of
acceptor, it would be complete when it comes to the knowledge of
the proposer.
The position was clearly explained in the famous case Carlill Vs
Carbolic & Smokeball Co. In this case the defendant a sole proprietary
concern manufacturing a medicine which was a carbolic ball whose
smoke could be inhaled through the nose to cure influenza, cold and
other connected ailments issued an advertisement for sale of this
medicine. The advertisement also included a reward of $100 to any
person who contracted influenza after using the medicine (which was
described as ‘carbolic smoke ball’). Mrs. Carlill bought these smoke
balls and used them as directed but contracted influenza. It was
held that Mrs. Carlill was entitled to a reward of $100 as she had
performed the condition for acceptance. Further as the advertisement
did not require any communication of compliance of the condition, it
was not necessary to communicate the same. The court thus in the
process laid down the following three important principles:
(i)an offer, to be capable of acceptance must contain a definite promise
by the offer or that he would be bound provided the terms specified by
him are accepted;
(ii) an offer may be made either to a particular person or to the publica
at large, and
(iii) if an offer is made in the form of a promise in return for an act, the
performance of that act, even without any communication thereof, is to
be treated as an acceptance of the offer.
Revocation of Offer and Acceptance
In term of section 4, communication of revocation (of the proposal or its
acceptance) is complete.
(i)as against the person who makes it when it is put into a course of
transmission to the person to whom it is made so as to be out of the
power of the person who makes it, and
(ii) as against the person to whom it is made, when it comes to his
knowledge.
The above law can be illustrated as follows:- If you revoke your
proposal made to me by a telegram, the revocation will be complete, as
for as you are concerned when you have dispatched the telegram. But
as far as I am concerned, it will be complete only when I receive the
telegram.
As regards revocation of acceptance, if you go by the above example, I
can revoke my acceptance (of your offer) by a telegram. This revocation
of acceptance by me will be complete when I dispatch the telegram and
against you, it will be complete when it reaches you.
In terms of Section 5 of the Act a proposal can be revoked at any time
before the communication of its acceptance is complete as against
the proposer. An acceptance may be revoked at any time before the
communication of acceptance is complete as against the acceptor
What is Consideration?
The expression ‘consideration’ has to be understood as a price paid for
an obligation. In Curie Vs Misa 1875 10 Ex 130 it was held (in UK) that
consideration is “some right, interest, profit or benefit accruing to one
party or forbearance, detriment, loss, or responsibility given, suffered or
under taken by the other”.
Section 2 (d) of the Act defines consideration as ‘when at the desire of
the promisor, the promisee or any other has done or abstained from
doing , or does or abstains from doing or promises to do or abstain
from doing something, such an act or abstinence or promise is called
consideration for the promise’.
Consideration is doing or not doing something, which the promisor
desires to be done or not done.
(1) Consideration must be at the desire of the promisor.
(2) Consideration may move from one person to any other person
(3) Consideration may be past, present or future and
(4) Consideration should be real though not adequate
In most cases the promisor for doing an act or not doing an act derives
some benefit by way of consideration. This consideration is identified as
quid pro quo from its promise of the promisor.
Whether gratuitous promise can be enforced?
The word “gratuitous” means ‘free of cost’ or ‘without expecting any
return’. It can be therefore inferred that a gratuitous promise will not
result in an agreement in the absence of consideration. For instance a
promise to subscribe to a charitable cause cannot be enforced.
Legal Requirements Regarding Consideration
Consideration must move at the desire of the promisor, either
from the promisee or some other third party. But consideration cannot
move at the desire of a third party. Where collector had passed an order
that any one using the market constructed by the Zamindar, for the
purpose of selling his goods should pay commission to the Zamindar,
it was held that it was not a proper order as the desire to receive
consideration had not emanated from the Zamindar but from a third
party namely the collector (Durga Prasad Vs Baldev (1880) 3, All 221).
Consideration can flow either from the promisee or any other
person:
‘A’ by a deed of gift made over certain property to her daughter with
condition that her brother should be paid annuity by A’s daughter.
On the same day A’s daughter executed a document agreeing to pay
annuity accordingly but declined to pay after sometime. A’s brother sued
A’s daughter. It was contended on behalf of A’s daughter that there
was no consideration from A’s brother and hence there was no valid
contract. This plea was rejected on the ground that the consideration
did flow from A to her daughter and such consideration from third party
is sufficient to enforce the promise of A’s daughter and to pay annuity to
A’s brother. [Chinya Vs Ramaya (1881) a.mad.137]
Executed and Executory consideration: Where consideration
consists of performance, it is called “executed” consideration.
Past consideration: The next issue is whether past consideration
can be treated as consideration at all. This is because consideration is
given and accepted along with a promise concurrently. However the Act
recognizes past consideration when it uses the expression in Section
2(d) ‘has done or abstained from doing’.
Adequacy of consideration: Consideration need not necessarily be of
the same value as of the promise for which it is exchanged. But it must
be something which can be inadequate as well.
In Chijjitumal Vs. Rampal Singh AIR, 1968, the Supreme Court reiterated
that consideration need not be material and may be even absent. In the
said case, the father had died leaving his house to two sons. They had
agreed to partition the house which did not admit the division in exactly
equal parts and one of the sons had agreed not to construct a door at
a certain place in his portion of the house. In a dispute, Court came to
the conclusion that the motive for the said agreement at the time when
it was made, was to avoid any dispute in future, and held that it was
sufficient consideration.
Performance of what one is legally bound to perform: The
performance of an act by a person who is legally bound to perform the
same cannot be consideration for a contract. Hence a promise to pay
money to a person is void, for it is without consideration.
Free Consent:
In terms of Section 13 of the Act, two or more persons are said to have
consented when they agree upon the same thing in the same manner.
This is referred to as identity of minds or “consensus-ad-idem”. Absence
of identity of minds would arise when there is an error on the part of the
parties regarding (a) nature of transaction or (b) person dealt with or (c)
subject matter of agreement. In such cases there would be no consent.
Where the persons refer to a ship of a name in the contract but each
of them had a different ship in mind though of same name, there is no
identity of minds and hence there is no consent.
Coercion (Section 15): “Coercion” is the committing, or threatening
to commit any act forbidden by the Indian Penal Code 1860, or the
unlawful detaining, or threatening to detain any property, to the
prejudice of any person whatever, with the intention of causing any
person to enter into an agreement.
X says to Y ‘I shall not return the documents of title relating to your
wife’s property, unless you agree to sell your house to e for Rs.5000’. ‘Y’
says, “All right, I shall sell my house to you for Rs.5000; do not detain
my wife’s documents of title”. X has employed coercion; he cannot
therefore enforce the contract.
Where husband obtained a release deed from his wife and son under
a threat of committing suicide, the transaction was set aside on the
ground of coercion, suicide being forbidden by the Indian Penal Code.
Undue Influence (Section 16): A contract is said to be induced by
“undue influence” where the relations subsisting between the parties are
such that one of the parties is in a position to dominate the will of the
other and uses that position to obtain an unfair advantage of the other.
The essential ingredients of undue influence are:
One of the parties dominates the will of the other and
(i)he has real or apparent authority over the other;
(ii) he is in a position to dominate the will of the other and
(iii) the dominating party takes advantage of the relation.
Following are the instances where one person can be treated as in a
position to dominate the will of the other.
(i)A solicitor can dominate the will of the client.
(ii) A doctor can dominate the will of his patient having protracted
illness, and
(iii) A trustee can dominate the will of the beneficiary.
Fraud (Section 17): Fraud means and includes any of the following
act committed by a party to a consent or with his connivance or by his
agent with intent to deceive another party thereto or his agent or to
induce him to enter into the contract.
The following can be taken as illustration of fraud:
·A director of a company issues prospectus containing
misstatement knowing fully well about such misstatement. It was
held any person who had purchased shares on the faith of such
misstatement can repudiate the contract on the ground of fraud.
· B discovered an ore mine in the estate of A. He conceals the mine
and the information about the mine. A in ignorance agrees to sell
the estate to B at a price that is grossly undervalued. The contract
would be voidable at the option of A on the ground of fraud.
· Buying goods with the intention of not paying the price is an act of
fraud.
· It will be interesting to know that not only Contract Act, but also
other Acts have specifically declared certain Acts and omission as
fraud. A seller of property should disclose any material defect in
the property. Concealing the information would be an act of fraud.
Any other act committed to deceive is fraud
Misrepresentation [Section 18]: ‘Misrepresentation’ does not involve
deception but is only an assertion of something by a person which is
not true, though he believes it to be true. Misrepresentation could arise
because of innocence of the person making it or because of he lacks
sufficient and reasonable ground to make it. A contract which is hit by
misrepresentation can be avoided by a person who has been misled.
Capacity to Contract
Age of Majority: In terms of Indian Majority Act, 1875 every domiciled
Indian attains majority on the completion of 18 yrs of age.
An agreement entered into by a minor is altogether void:
An agreement entered into by a minor is void against the minor and
the question of its enforceability does not arise. The Privy Council in
Mohiri Bibee vs. Dharmodos Ghose [1903] LR 30, CI 5395, decided that an
agreement where minor is a party is altogether void.
Minor can be a beneficiary: Though minor is not competent to
contract, nothing in the Contract Act prevents him from making the
other party bound to the minor. Thus, a promissory note duly executed
in favour of a minor is not void and can be sued upon him.
Minor can always plead minority: Any money advanced to a minor
cannot be recovered as he can plead minority and that the contract is
void.
Ratification of agreement not permitted: A minor on his attaining
majority cannot validate any agreement which was entered into when
he was a minor, as the agreement was void.
Liability for necessaries: Persons who supplied necessaries of life to
a minor or his family, is entitled to be reimbursed from the properties
of a minor, not on the basis of any contract but on the basis of an
obligation resembling a contract.
Contract by guardian is valid: Though an agreement with minor is
void, valid contract can be entered into with the guardian on behalf of
the minor. The guardian must be competent to make the contract and
the contract should be for the benefit of the minor.
But not all contracts by guardian are valid. A guardian cannot bind
a minor in a contract to purchase immovable properties. However, a
court appointed guardian can bind a minor in respect of certain sale of
property ordered by the court.
Sound mind: The next important requirement by way capacity
to contract is “sound mind”. A person will be considered to be of
sound mind if he at the time of entering into a contract is capable of
understanding it and forming a rational judgement as to its effect upon
his interest. A person who is of unsound mind but occasionally of sound
mind can enter into a contract when he is in sound mind though for
temporary periods. For example a person who is in lunatic asylum during
intervals of sound mind can enter into contracts. Similarly a person who
is generally of sound mind, but occasionally of unsound mind cannot
enter into a contract when he is of unsound mind.
Contract by disqualified persons: Apart from minors and persons
of unsound mind, there are others who are not capable of entering into
contract either wholly or partially. Contract by such persons are void.
Unlawful Object
In terms of section 23 of the Act ‘consideration’ or object is unlawful if
it is forbidden by law; or it would if permitted, defeat the provisions of
any law or is fraudulent or involves injury to the person or property of
another or is immoral or opposed to public policy.
(i)Where A, B & C enter into an agreement to share equally among
themselves certain gains acquired by fraud or loss acquired by fraud,
the agreement is void because the object being commission of fraud is
unlawful.
(ii) A promises to return the stolen property of ‘B’ if B would withdraw
the criminal case against him. The agreement is void as its object
namely withdrawing the case would mean stifling prosecution.
Unlawful Consideration:
Agreement forbidden by law: Acts forbidden by law means acts that
are punishable under any Statute or Rules or Regulations made under
any Statute.
For instance a plantation company that is commenced, for growing,
felling, and selling timber cannot enter into any agreement to grow and
sell sandalwood trees as felling of sandalwood is prohibited by law viz
Forest Act.
Consideration defeats the provision of law: Where a debtor agrees
not to plead limitation vis-à-vis his creditor, it is an agreement to defeat
Limitation Act.
Consideration that would defeat any rule for the time being
in force: A ‘will’ must be proved in order to be probated by a court. A
mere consent of parties by way agreement to except this requirement
of proof of genuineness or proper execution of will is not lawful and
therefore cannot be enforced under C.P.C.
Where consideration is fraud: ‘A’ is an agent for Zamindar, the
principal. He agrees for money to lease of land for ‘B’ from his principal
the Zamindar. The agreement between ‘A’ and ‘B’ is void as the
consideration is fraudulent.
Where object or consideration is unlawful because it involves or
causing injury to a person or loss of property: ‘A’ agrees to buy a
property from ‘B’ although A knows B had agreed previously to sell the
property to C. The intention of A here is to cause injury to the property
of C.
Where consideration is immoral: Where A agrees to let his house
to a prostitute on rent, and with A’s knowledge she carries on her
vocation, A cannot collect the rent as the agreement is void, the object
being void.
Where consideration is opposed to public policy
Trading with enemy
Stifling prosecution: Any agreement to stifle or prevent illegally any
prosecution is void as it would amount to perversion or abuse of justice.
Maintenance and Champerty: Maintenance is promotion of litigation
in which the litigant has no interest. Champerty is bargain whereby one
party agrees to assist the other in recovering property with a view to
sharing the profit of litigation.
Interference with course of law and justice
Marriage brokerage contract
Interest against obligation: An agreement by an agent to receive
without his principal’s consent compensation from another for the
performance of his agency is invalid
Sale of public Offices: An agreement to pay money to public servant
in order to induce him to retire from his office so that another person
may secure the appointment is void.
Agreement for creation of monopolies: Agreements having for their
object the establishment of monopolies are opposed to public policy and
therefore void.
Agreement in restraint of marriage: Every agreement in restraint of
marriage of any person other than a minor is void. So if a person, being
a major, agrees for good consideration not to marry, the promise is not
binding.
Agreement in restraint of trade: Any agreement through which
a person is restrained from exercising a lawful profession, trade or
business of any kind is to that extent is void. The object of this law is to
protect trade. Exceptions:
(i)Where a person sells his business along with goodwill to another
person, agrees not to carry on the same line of business in certain
reasonable local limits, such an agreement is valid
(ii) An agreement between manufacturer and a wholesale merchant that
the entire production during a period will be sold by the manufacturer to
the wholesale merchant is not in restraint of trade.
Agreement in restraint of legal proceedings: A contract by
which the parties agree that any dispute between them in respect of
any subject shall be referred to arbitration and that only the amount
awarded in such arbitration shall be recoverable is a valid contract.
Agreement Expressly Declared as Void
Where consideration is unlawful in part: ‘A’ has business interest
in Indigo, as a manufacturer. He also has interest in illegal traffic of
other goods. Where ‘A’ employs ‘B’ for a salary of Rs.2000/- to act as
superintendent of A’s entire business, the agreement is void as the
object of A’s promise is unlawful in part.
Agreement the meaning of which is uncertain: ‘A’ enters into an
agreement to supply 100 tonnes of oil, the agreement is not valid as the
meaning of it is uncertain since what type of oil that is promised to be
supplied is not clear. But on the other hand if ‘A’ is a dealer of coconut
oil only, then the meaning of the agreement would crystallize very easily
and then the agreement would be valid.
Wagering Agreement: ‘A’ agrees to pay Rs.500/- to ‘B’ if it rains and
similarly ‘B’ agrees to pay A if it does not. This is a classic case of a
wagering agreement. But where one of the parties has control over the
event, the agreement is valid. An agreement by way of a wager is void.
A good definition of wagering agreement would be the one given by
Anson: “A promise to give money or money’s worth upon determination
or ascertainment of an uncertain event”.
Speculative transactions: ‘A’ enters into an agreement with ‘B’ to
buy 100 bales of jute at Rs.150/- per bale for forward delivery after six
months. This is a proposed transaction of purchase @ Rs.150/- per bale.
What if the price at the time of delivery goes up to Rs.200/- ‘A’ has the
following two options:
(i)to take delivery of 100 bales at the contracted rate of Rs.150/- and
sell it to some other buyer and make a profit of Rs.50/- per bale or
(ii) to simply collect the difference of Rs.50/- per bale from ‘B’
Similarly what if the price at the time of delivery goes down to Rs.125/-
per bale? ‘A’ has the following two options:
(i)to take delivery of 100 bales at the contracted rate of Rs.150/- [and
perhaps sell it some buyer and incur a loss of Rs.25 per bale] or
(ii) to pay the difference of Rs.25/- per bale to B & close the contract.
By whom a contract may be performed
(i)Promisor himself
(ii) Agent
(iii) Representatives
(iv) Third person
(v)Joint Promisors
Distinction between Succession and Assignment
Succession: When the benefits of a contract are succeeded by a
process of law, both the burden and the benefit would sometimes
devolve on legal heir. For example ‘B’ is the son of ‘A’ the father. Upon
A’s death b will inherit all the assets and liabilities of ‘A’ [These assets
and liabilities are also referred to as debts and estates].
Assignment: Unlike succession, the assignor can assign only the
assets to the assignee and not the liabilities. Because when a liability is
assigned, a third party gets involved in it. The debtor cannot through
assignment relieve himself of his liability to creditor.
Effects of Refusal to Accept Offer of Performance
In any promise, the promisor should act first by offering a performance
also known as ‘tender’. In terms of section 38 of the Act, where the
promisee has not accepted the offer or tender of performance by the
promisor then the promisor is not responsible for non performance. In
this case the promisor does not also lose his rights under a contract.
Effect of a Refusal of a Party to Perform Promise
Where a party to a contract has refused to perform the promise he
has made or had disabled himself from performing his promise in
its entirety, the promisee may put an end to the contract, unless his
acquiescence in the continuance of the contract has been conveyed
either by words or by deeds [conduct].
Liability of Joint Promisor & Promisee
In terms of Section 42 of the Act “when two or more persons have
made a joint promise then unless a contrary intention appears from the
contract, all such persons, during their joint lives, and after the death of
any one of them, his representative jointly with the survivor or survivors
and after the death of last survivor, representatives of all jointly must
fulfil the promise”.
Rights of Joint Promisees
The rights of two or more promisees who are known as joint promisees
are discussed in section 45 of the Act. “When a person has made a
promise to two or more persons jointly, then unless a contrary intention
appears from the contract, the right to claim performance rests, as
between him and them, with them during their joint lives, and after the
death of any of them with the representatives of such deceased person
jointly with the survivor or survivors, and after the death of the last
survivor, with the representatives of all jointly”.
Time and Place for Performance of the Promise
Section 46 to 50 of the Act deals with the issue of “Time and Place” for
the performance of a promise.
Where no time is specified for performance of promise, it must
be performed within a reasonable time. What is reasonable time would
depend on the facts and circumstances of each case [section 46].
Where a promise is to be performed on a specified date but no
time is mentioned, then it can be performed at any time on that day
but during business hours only.
Where no place is fixed for the performance of a promise, it is
the duty of the promisor to ask the promisee to fix a reasonable place.
Where the promisor has not undertaken to perform the promise
without an application by the promisee and the promise is to be
performed on a certain day, it is the duty of the promisee to apply for
performance at a proper place and within usual hours of business.
Performance of Reciprocal Promise
Simultaneous performance of reciprocal promise [Section 51]:
‘A’ promises to deliver rice and ‘B’ promises to pay the price on delivery.
Both have to be performed simultaneously. Here both A and B must be
willing and ready to perform their accepted part.
Performance of reciprocal promise where the order is expressly
fixed: ‘A’ promises to build a house for ‘B’ and B promised to pay after
construction. Here ‘A’ must perform his promise before he cam call
upon B to fulfil his promise of payment of money. A’s performance of
the promise is a condition precedent to ‘B’ performing his part of the
promise. Any beach of promise by ‘A’ would enable ‘B’ to avoid the
contract.
Performance of reciprocal promise by implication: ‘A’ agrees to
make over certain stock in trade to ‘B’ and B agrees to provide certain
security for the value of stock in trade, then ‘A’ need not make over the
stock until ‘B’ provides the security as by implications ‘B’ is required to
perform his part first; otherwise A in the absence of any security will not
make over the stock to ‘B’.
Effect of one party preventing another from performing
promise: The person so prevented is entitled to get compensation for
any loss he may have sustained for the non-performance.
Effects of default as to promise to be performed first: ‘B’ a ship
owner agrees to convey A’ cargo from Calcutta to Mauritius for a freight.
Here the beginning part of the transaction is on ‘A’ as he has to provide
the cargo to B to enable B to perform his promise. Thus until cargo is
handed over by A, A cannot expect B to perform his promise nor would
B be in a position to perform his promise. This peculiar position arises
because of default on the part of one of the parties. Here B is entitled to
put an end to the contract and claim compensation for any loss he may
have suffered.
Position of legal and illegal parts of Reciprocal Promises:
Where ‘A’ agrees to sell his house to ‘B’ for Rs.50000/- and further ‘A’
insists and it is agreed that if the house is used as a gambling house,
then ‘B’ would pay another Rs.75000/-. In this case the first part is valid
as it is legal and the second part is void as it is illegal.
Alternative promise one branch being illegal
Impossibility of Performance:
Impossibility existing at the time of contract:
(i)If the impossibility is known to the parties: ‘A’ agrees to pay ‘B’ Rs.5000/-
if he would swim from Bombay to Aden in Indian Ocean in 7 days time.
This is an agreement where both the parties know that it is impossible
to swim the distance between Bombay to Aden in 7 days time and hence
it is void.
(ii) If unknown to parties: Even where both the promisor and promisee are
ignorant of the impossibility the contract is void.
(iii) If known only to the promisor: Where the promisor alone knows it is
impossible to perform or even if he does not know but he should have
known about the impossibility with reasonable diligence, the promisee is
entitled to claim compensation for the loss suffered because of failure of
the promisor to perform.
Supervening Impossibility:
(i)Accidental destruction of the subject matter of the contract: ‘A’ had agreed
with ‘B’ to hire for rent his music hall for holiday concerts on certain
specified dates. The music hall was destroyed before the specified
dates and hence it became impossible to hold stage concerts. It was
held that as the music hall ceased to exist, it is a case of supervening
impossibility and both the parties were excused from the performance of
the contract.
(ii) Non existence or non occurrence of a particular state of things
(iii) Incapacity to perform a contract of personal services
(iv) Change in law
(v)Outbreak of law
Doctrine of Frustration: The idea of “supervening impossibility” is
referred to as ‘doctrine of frustration’ in U.K. In order to decide whether
a contract has been frustrated, it is necessary to consider the “intention
of parties as are implied from the terms of contract”.
However in India the ‘doctrine of frustration’ is not applicable.
Impossibility of performance must be considered only in terms of section
56 of the Act. Section 56 covers only ‘supervening impossibility and not
implied terms’. This view was upheld by Supreme Court in ‘Satyabrata
Ghose vs Mugneeram Bangur A.I.R. (1954) S.C. 44 and Alopi Prasad vs Union of
India A.R. 1960 S.C 588’.
Appropriation of Payments
Application of payment where debt to be discharged is
indicated: Where a debtor owes a number of debts and he pays an
amount with express or implied instruction towards appropriation, the
debtor is at will to appropriate any debt and the creditor is bound by it.
This is set out in the Latin Maxim of “quicquid sovitur, sovit sectionundum
modum solventis” meaning that whatever is paid, is paid according to
intention or manner of party paying. The right of debtor to decide the
appropriation is also known as decision in Clayton’s case
Application of payment where debt to be discharged is not
indicated: In the famous case of Vinkatadri Appa Rao vs Parthasarthi
Appa Rao [(1921) L.R. 48. I.A. 150; 44 Mad 570 and 573], it was held that
creditor can decide at his discretion on the appropriation of payment
towards any lawful debt even if barred by limitation.
Application of payment when neither party appropriates: Where
there are two debts one Rs.500/- and another Rs.700/- falling due on
the same day, and if the debtor pays Rs.600/- the appropriation shall be
prorata of Rs.250/- and Rs.350/- for the two debts.
Contract Which Need not be Performed
Section 62 of the Act provides that “if the parties to a contract agree to
substitute a new contract for it or rescind or alter it, the original contract
need not be performed”.
Effect of novation: Novation means substitution. Where a given
contract is substituted by a new contract it is novation. The old contract,
on novation ceases. It need not be performed. Novation can take place
with mutual consent. However novation can take place by substitution
of new contract between the same parties or between different parties.
Novation results in discharge of old contract. This can be illustrated as
follows –
A owes money to B under a contract. It is agreed between A, B and
C that B shall thenceforth accept C as his debtor, instead of A. The
old debt of A to B is at an end, and a new debt from C to B has been
contracted.
Effect of Rescission: In case of rescission, the old contract is
cancelled and no new contract comes in its place. A contract is
also discharged by rescission. Sometimes parties may enter into an
agreement to rescind the previous contract. Sometimes, the contract is
rescinded by implication or by non-performance for a long time without
each other complaining about it.
Difference between novation and rescission: While novation
involves rescission, there is no novation in rescission. Both in novation
and rescission the contract is discharged by mutual agreement. In both
cases parties enter into a new contract to come out of the old contract.
The new agreement is the consideration for rescission.
Effect of alteration: Where the contract is altered, the original
contract is rescinded. Hence the old one need not be performed
whereas the new one has to be performed. Alteration involves both
rescission and novation. The line of difference between alteration and
novation is very thin. While there can be very minor alterations, there
cannot be unilateral material alteration to a contract. If it is done it will
be void.
Novation and alteration: Both in novation and in alteration the old
contract need not be performed.
Discharge of a Contract
A contract may be discharged in eight ways
(a) Discharge by performance
(b) Discharge by mutual agreement
(c) Discharge by impossibility of performance
(d) Discharge by lapse of time
(e) Discharge by operation of law
(f) Discharge by breach of contract
(g) A promisee may remit the performance of the promise by the
promisor
(h) When a promisee neglects or refuses to afford the promisor
reasonable facilities or opportunities for performance, promisor is
excused by such neglect or refusal.
Anticipatory Breach of Contract
Where the promisor refuses to perform his obligation even before the
specified time for performance and signifies his unwillingness, then there
is an anticipatory breach.
Actual Breach of Contract
Where one of the parties breaches the contract by refusing to perform
the promise on due date, it is known as actual breach of contract. In
such a case the other party to contract obtains a right of action against
the one who breached the contract.
Measurement of Damages
The compensation can be classified as:
(i)Those damages that usually arise in the event of breach of
contract and
(ii) Those damages which parties know and anticipated at the time of
entering into the contract which are called special damages. This kind
of special damages can be claimed only on previous notice.
Madras High Court in Madras Railway Company vs. Govind Ram, Mad.
176 upheld the same principle as above. In that case a tailor had
given his sewing machine to railways to be delivered at a station as
a consignment. He did not mention that any delay in delivering the
sewing machine would result in damages for the business of the tailor
as he had planned to do good business at the place proposed where
a festival was to be held. The sewing machine was delivered after
the festival was over. It was held that Railways was not responsible
for the damages as the Railway Authorities were not informed of the
specific purpose of delivery of the sewing machine.
Liability for Damages
The liability to pay damages is of four kinds. They are:
(i)liability for special damges
(ii) liability for exemplary damages
(iii) liability to pay nominal damages
(iv) liability to pay damages for deterioration caused by delay
How to Calculate the Damage
In case of a contract for sale of goods, where the buyer breaks the
contract, the damages would be the difference between the contract
price and market price as on the date of breach. Similarly where
the seller breaks the contract, the buyer can recover the difference
between market price and contract price as on date of breach.
Compensation for Breach of Contract
The compensation for breach of contract falls into two broad
categories namely liquidated damage and penalty.
Liquidated Damages and penalty: Following are the important
differences between liquidated damages and penalty.
(i)Liquidated damages are imposed by way of compensation, but
penalty is imposed by way of punishment.
(ii) Liquidated damages are assessed amounts of loss based on actual
or probable calculation. Penalty is not based on actual or probable. It
is imposed to prevent parties from committing breach.
(iii) Thought the English Law recognizes the difference between the
two, Section 74 of the Act does not recognize any difference between
the two.
Other Remedies:
(a) Rescission of contract
(b) Suit upon quantum meruit: The phrase “quantum meruit” literally
means “as much as is earned” or “according to the quantity of
work done”.
(c) Suit for specific performance
Contingent Contract
In terms of Section 31 of the Act contingent contract is a contract to
do or not to do something, if some event collateral to such contract
does or does not happen. Contracts of indemnity and contract of
insurance fall under this category.
For instance, if ‘A’ contracts to pay ‘B’ Rs.100000/- if B’s house is
destroyed by fire, then it is a contingent contract.
Rules Relating to Enforcement
(a) Contingency is the “happening of an event”
(b) Contingency is the non-happening of an event
(c) Contingent on the future contract of a living person
(d) Contingent on an impossible event
Quasi – Contracts
(a)In the first place, such a right is always a right to money and
generally, though not always, to a liquidated sum of money.
(b) Secondly, it does not arise from any agreement of the parties
concerned, but it is imposed by the law; and
(c) Thirdly, it is a right which is available not against all the world,
but against a particular person or persons only, so that in this
respect it resembles a contractual right.
Contract of Indemnity
In terms of Section 124 of the Act, ‘a contract by which one party
promises to save the other from loss caused to him by the conduct of
the promisor himself or the conduct of any person is called a contract
of indemnity’.
In a contract of indemnity, the promisee acting within the scope of
his authority is entitled to recover from the promisor
(a) All damages which he may be compelled to pay
(b) All costs which he may have been compelled to pay in any suit
(c) All sums which he may have paid under the terms of any suit.
Contract of Guarantee
A contract of guarantee is a contract to perform the promise made
or discharge liability incurred by a third person in case of his default.
For example, ‘A’ obtains housing loan from LIC Housing. In the event
of ‘A’ failing to repay, it is a contract of guarantee.
Nature of Surety’s Liability
As per Section 128 of the Act, the liability of the surety is coextensive
with that of the principal debtor unless otherwise it is
provided by the contract.
Continuing Contract
A guarantee which extends to a series of transactions is called
a ‘continuing guarantee’. Where ‘A’ promises ‘B’ to be responsible,
so long ‘B’ employs only ‘C’ to collect his rentals from tenants for
an amount of Rs.5000/-, there is a continuing guarantee by A to B
so long C is employed as rent collector. In other words A stands a
guarantor to B for rent collected by C.
Discharge of a Surety
The surety is discharged if the principal debtor is discharged
(a) By a contract or
(b) Any act or
(c) Any omission the result of which is the discharge of principal
debtor.
Where A contracts with B to build a house for him and if C stands as
surety for B, C as surety will stand discharged if A discharges B of his
obligation to build house.
Yet another example could be where A agrees to build a house for
B if B supplies the necessary timber and C stands as surety for A’s
performance. If B fails to supply the timber then both A and C stand
discharged.
Distinction between a Contract of Indemnity and a Contract
of Guarantee
(i)Number of parties: In a contract of indemnity there are only
two parties namely the indemnifier [promisor] and the indemnified
[promisee]. In a contract of guarantee there are three parties
creditor, principal debtor and surety.
(ii) Extent of liability: The liability of the indemnifier is primary and
independent. The liability of the surety is secondary as the primary
liability is that of the principal debtor.
(iii) Time of liability: The liability of the indemnifier arises only on
the happening of a contingency. In the case of guarantee, liability is
already in existence but specifically crystallizes when principal debtor
fails.
(iv) Time to act: The indemnifier need not necessarily act at the
request of indemnified. In case of guarantee surety must act by
extending guarantee at the request of debtor.
(v)Right to sue third party: In case of contract of indemnity,
indemnifier cannot sue a third party or loss in his own name as there
is no privity of contract. Such a right would arise only if there is an
assignment in his favour. On the other hand in the case of contract
of guarantee surety can proceed against principal debtor in his own
right because he gets all the right of a creditor after discharging the
debts.
What is Bailment?
Bailment etymologically means ‘handing over’ or ‘change of
possession’. As per Section 148 of the Act, bailment is an act whereby
goods are delivered by one person to another for some purpose, on
a contract, that the goods shall, when the purpose is accomplished,
be returned or otherwise disposed of according to the directions of
the person delivering them. The person who delivers the goods is the
bailor and the person to whom the goods are delivered is the bailee.
The essential characteristics of bailment are-
(a) Bailment is based upon a contract. Sometimes it could be implied
by law as it happens in the case of finder of lost goods.
(b) Bailment is only for moveable goods and never for immovable
goods or money.
(c) In bailment possession goods of change. Change of possession
can happen by physical delivery or by any action which has the
effect of placing the goods in the possession of bailee.
(d) In bailment bailor continues to be the owner of goods as there is
no change in ownership.
(e) Bailee is obliged to return the goods physically to the bailor. The
bailee cannot deliver some other goods, even not those of higher
value.
Different forms of Bailment: Following are the popular forms of
bailment
(1) Delivery of goods by one person to another to be held for the
bailor’s use.
(2) Goods given to a friend for his own use without any charge.
(3) Hiring of goods.
(4) Delivering goods to a creditor to serve as security for a loan.
(5) Delivering goods for repair with or without remuneration.
(6) Delivering goods for carriage.
Bailor’s Duties and Rights
The duties of bailor
(1) The bailor must disclose all defects/faults in the goods bailed.
(2) Where the bailment is gratuitous, the bailor must reimburse the
bailee for any expenditure incurred in keeping the goods.
(3) The bailor should reimburse the expenses.
(4) The bailor must compensate the bailee for the loss or damage
suffered.
(5) The bailor is bound to accept the goods after the purpose is
accomplished.
Rights of Bailor:
· Right to claim damages for loss
· Right to claim compensation for loss
· Right to claim damages arising out of mixing the goods of the
bailor with his own goods.
· Bailor has the right to terminate the contract.
· Bailor in the case of gratuitous bailment has a right to demand
the goods back even before the expiry of the period of
bailment.
· Bailor has a right to claim the increase or profit from the goods
bailed.
Duties and Rights of a Bailee
The duties of bailee are
(1) Bailee has no right to make unauthorized use of goods bailed
(2) Bailee has no right to mix the goods bailed with his own goods
without the consent of the bailor.
(3) Bailee has to return the goods on expiration of period of
bailment
(4) Bailee has a duty to return any extra profit accruing from
goods bailed
(5) Bailee has duty not to do anything inconsistent with the
condition of bailment
Rights of bailee: The bailee has the following rights:
§ To claim compensation for any loss arising
§ To claim indemnification for any loss or damage
§ To deliver back the goods to joint bailors according to the
agreement or directions
§ To deliver the goods back to the bailor whether or not the
bailor has the right to the goods
§ To exercise his “right to lien”
§ To take action against third parties
Rights and Duties of Finder of Goods
‘Finder of lost goods’ is as good as a bailee and he enjoys all the rights
and carries all the responsibilities of a bailee.
Pledge
Pledge is a variety or specie of bailment
Pawnee’s Rights
(1) Right of retainer
(2) Right to retention to subsequent debts
(3) Right to seek reimbursement of extraordinary expenses
(4) Right to sue
Rights of Pawnor
(1) Right to redeem
(2) Right to sue
WHAT IS AGENCY?
The Indian Contract Act, 1872 does not define the word ‘Agency’.
However the word ‘Agent’ is defined “as a person employed to do any
act for another or to represent another in dealings with third persons.”
The third person for whom the act is done or is so represented is
called ‘Principal’.
Salient Features of agency: Following are the four salient features of
agency
(a)Basis: The basic essence of ‘agency’ is that the principal is bound
by the acts of the agent and is answerable to third parties
(b) Consideration not necessary: Unlike other regular contracts, a
contract of agency does not need any consideration. In other
words, the relationship between the ‘principal’ and ‘agent’ need
not be supported by consideration.
(c) Capacity to employ an agent: A person who is competent to contract
alone can employ an agent. In other words, a person in order to
act as principal must be major and of sound mind.
(d) Capacity to be an agent: A person in order to be an agent must
also be competent to contract. In other words, he must also be a
person who has attained majority and is of sound mind.
Modes of Creation of Agency
(a) Agency by actual authority
(b) Agency by ratification
(c) Agency by ostensible authority
(d) Agency by necessity
(e) Actual authority and apparent authority
Extent of Agent’s Authority
(i)Agent’s authority in normal circumstances: An agent has the
power and authority to do all acts lawful and necessary in the normal
circumstances in discharge of his functions
(ii) Agent’s authority in emergency: An agent has the authority in an
emergency to do all such acts as a man of ordinary prudence would, for
protecting his principal from losses under similar circumstances
Duties and Obligations of an Agent
(a) Duty in conducting principal’s business
(b) The agent is liable to the principal for any loss if he deviates from
the above duty.
(c) Requirements as to skill and diligence
(d) Agents duty to account
(e) Duty to communicate
Rights of an Agent
· Right to lien on principal’s property
· Right to indemnification for lawful acts
· Right to indemnification against acts done in good faith
· Right to retention
· Right of remuneration
Principal’s Liability for Agent’s Act to Third Parties
(a) When agent acts within the scope of his authority
(b) Principal is bound by notice given to agent
(c) Liability for estoppels
(d) Liability for misrepresentation