Contract Act

Business Environment CA Amit Kumar Gupta
MBA-I Semester-10-12
B.Com(H),B.Ed,M.Com,MBA,CA,
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THE INDIAN CONTRACT ACT, 1872
GENERAL PRINCIPLES OF CONTRACT

The Indian Contract Act extends to the whole of India and it came into force
on the first day of September 1872.
WHAT IS A CONTRACT?
An agreement enforceable by law is a contract [Sec. 2(h)]
Thus for the formation of a contract there must be:
1. An agreement
2. The agreement should be enforceable by law.
An agreement is defined as every promise and every set of promises

forming the consideration for each other and a promise is an accepted
proposal. [S. 2(e)]
ESSENTIALS OF A VALID CONTRACT
1.Offer and acceptance 2.Free 3.Capacity 4.Lawful 5 Lawful

consent to Consideration Object
contract
6.Agreement not expressly 7.Certainty 8.Possibility 9. Legal 10.Intention to

declared void Of of formalities create legal
meaning performance relationships
Section 10 0f the Indian Contract Act, 1872 defines a contract as “All

agreements are contracts if they are made with the free consent of the
parties competent to contract, for a lawful consideration and with a
lawful object and are not expressly declared to be void.”
FREE CONSENT OF PARTIES

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Sec. 13: “Two or more persons are said to consent when they agree upon
the same thng in the same sense.”
According to Sec.14, “Consent” is said to be free when it is not caused by:
a) Coercion, or b) Undue influence, or c) Fraud, or d) Misrepresentation,
or e) Mistake
CAPACITY TO CONTRACT / COMPETENCY OF PARTIES

According to Sec.11, “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
sound mind and is not disqualified from contracting by the law to which he is
subject.”
Thus a person who
a. is of the age of majority according to the law to which he is subject
is of sound mind – A person is said to be of sound mind for the purpose of

making a contract, if, at the time when he makes it, he is capable of
understanding it and of forming a rational judgement as to its
b. effect upon his interests.

c. is not disqualified from contracting by any law to which he is subject to
is competent to contract.
CONSIDERATION
According to Sec.2(d) “When, at the desire of the promisor, the promisee or
any other person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise”.
Thus “Consideration” means something in return, i.e.quid pro quo.In a
contract, both parties must exchange something of value, in order to make
the contract enforceable. Thereby, establishing the rule:” No consideration,
No Contract”. Where only one party to the agreement gives and the other
party does not give anything in reciprocation, it is said to be a gift and not a
contract.
Essential elements of a valid consideration:
• It must be given only at the desire of the Promisor :

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A’s son is lost and B goes in search of him: B would get the reward (if any)
only if he acts at the request of A, unless it is a public offer made by A.
• Reciprocation may be made by any one, either the promisee himself
or a third party.
• It may be Past, Present or Future
• It must have some value although it need not be adequate.
• It must be real and not illusory
FOR A LAWFUL CONSIDERATION AND OBJECT –
Consideration or object is UNLAWFUL if
(1)It is forbidden by law,
(2) Is of such a nature if permitted it would defeat the provisions of any law,
(3) It is fraudulent,
(4) The court regards it immoral,
(5) The court regards it opposed to public policy. Every agreement of which
the consideration or object is unlawful is void.
NOT EXPRESSLY DECLARED TO BE VOID
Agreements become void if consideration and object are unlawful in

parts.
Contracts may be classified as under:
a. Valid Contract: A contract which satisfies all the conditions

prescribed by law is a valid contract.
b. Void Contract: Although the terms,“Void” and “Contract” cannot go
hand-in-hand, since only agreements can be void, yet a contract,
when at the time of formation, was valid but later, due to certain
extrinsic change in circumstances, becomes unenforceable in the
court of law, it is known as a ‘Void Contract’
c. Void Agreement: “An agreement not enforceable by law is said to be
void”.Sec.2(g)Such agreements are void ab initio which means that
they unenforceable right from the time they are made.
d. Voidable Contract: “An agreement which is enforceable by law at the
option of one or more of the parties thereon, but not at the option of
the other or others, is a voidable contract.”Sec.2(i).
In simple words, a voidable contract is one, which may be set aside or

called off by one of the parties, generally because that party’s consent
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may not have been given of free will. In this case, one of the parties is
aggrieved and hence has an option either to cancel the contract or to
continue.
VOIDABLE CONTRACT
OPTION I OPTION II
The party may repudiate (not accept) The party may choose to continue with
the contract even if he had earlier the contract, even if his consent was
consented to it, since his consent was not free.
not free.
VOID, VOIDABLE AND UNENFORCEABLE CONTRACTS

There are three classifications of contracts that are not binding. A contract is
void if it is based on an illegal purpose or contrary to public policy. It will not
be recognized by court or enforceable by either party. A contract is voidable
if one of the parties has the option to terminate the contract. Contracts with
minors are examples of voidable contracts.
BILATERAL V. UNILATERAL CONTRACTS

Contracts may be bilateral or unilateral. The more common of the two, a
bilateral contract, is an agreement in which each of the parties to the contract
makes a promise or promises to the other party. For example, in a contract
for the sale of a home, the buyer promises to pay the seller Rs.2,00,000 in
exchange for the seller's promise to deliver title to the property. In a unilateral
contract only one party to the contract makes a promise. The most common
type of unilateral contract is an insurance contract. The insurance company
promises to pay the insured a stated amount of money on the happening of
an event if the insured pays premiums; note that the insured does not make
any promise to pay the premia.
EXPRESS CONTRACTS V. IMPLIED CONTRACTS

A contract can be either an express contract or an implied contract. An
express contract is one in which the terms are expressed verbally, either
orally or in writing. An implied contract is one in which some of the terms are
not expressed in words.

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IMPLIED IN FACT OR IMPLIED IN LAW

An implied contract can either be implied in fact or implied in law. A contract
which is implied in fact is one in which the circumstances imply that parties
have reached an agreement even though they have not done so expressly.
For example, by going to a doctor for a physical, a patient agrees that he will
pay a fair price for the service. If he refuses to pay after being examined, he
has breached a contract implied in fact.
QUASI-CONTRACTS
A contract which is implied in law is also called a quasi-contract, because it is
not in fact a contract; rather, it is a means for the courts to remedy situations
in which one party would be unjustly enriched were he or she not required to
compensate the other. For example, an unconscious patient treated by a
doctor at the scene of an accident has not agreed (either expressly or by
implication) to pay the doctor for emergency services, but the patient would
be unjustly enriched by the doctor's services were the patient not required to
compensate the doctor.
FORMATION OF A CONTRACT
For the formation of a contract the process of proposal or offer by one party
and the acceptance thereof by the other is necessary. This generally
involves the process of negotiation where the parties apply their minds, make
an offer, give acceptance and create a contract.
Offer[ S. 2(a)] When one person signifies to another his willingness to do or
abstain from doing anything with a view to obtaining the assent of the other
to such act or abstinence, he is said to make a proposal.
Requisites of a valid Offer - An offer to be valid must fulfill the condition
mentioned herein below:
a. Intention to create legal relationship
b. Certain and Unambiguous terms
c. Must not be a mere declaration of intention
d. Should be different from an invitation to offer
e. Should be properly communicated

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f. Should not contain any term, the non-compliance of which would

amount to acceptance.
Acceptance [S.2(b)]When the person to whom the proposal is made
signifies his assent thereto, the proposal is said to be accepted.
In order to convert a proposal into a promise, the acceptance must be
1. Absolute and unqualified – Any departure from the terms of the offer
or any qualification vitiates the acceptance unless it is agreed to by the
person from whom the offer comes. An acceptance with a variation is no
acceptance; it is simply a counter proposal.
2. Expressed in some usual and reasonable manner. – If the
proposer /offeror prescribes any particular manner of acceptance it has to be
made in that manner and where no manner is prescribed it should be in a
usual and reasonable manner. Communication of acceptance (before lapse
of time) is very vital, for the purpose of completing the primary requirements
of formation a contract.
FREE CONSENT OF PARTIES
Sec. 13: “Two or more persons are said to consent when they agree upon
the same thing in the same sense.”
According to Sec.14, “Consent” is said to be free when it is not caused by:
a) Coercion, or b) Undue influence, or c) Fraud, or d) Misrepresentation,
or e) Mistake
Consent is said to be free when it is NOT caused by
• Coercion [S.15]– Consent is said to be caused by coercion
when it is obtained by pressure exerted by either committing or
threatening to commit an act forbidden by the Indian Penal
Code or unlawfully detaining or threatening to detain any
property.
Illustration
A, on board an English ship on the high seas, causes B to enter into an
agreement by an act amounting to criminal intimidation under the Indian
Penal Code (45 of 1860).
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the law of
England, and although section 506 of the Indian Penal Code (45 of 1860)
was not in force at the time when or at the place where the act was done.

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• Undue influence [S.16]– A contract is said to be induced by

"undue influence" where the relation subsisting between the
parties are such that one of the parties is in a position to
dominate the will of the other and uses that position to obtain
an unfair advantage over the other.
Illustrations
(a) A having advanced money to his son, B, during his minority, upon B's
coming of age obtains, by misuse of parental influence a bond from B for a
greater amount then the sum due in respect of the advance. A employs
undue influence
• Fraud [S.17]– Means and includes the following acts done with
the intention to deceive or to induce a person to enter into a
contract. (a) the suggestion that a fact is true when it is not true
and the person making the suggestion does not believe it to be
true (b) active concealment of a fact by a person who has
knowledge or belief of the fact, (c) promise made without the
intention of performing it.
Illustration
A sells, by auction, to B, a horse which A knows to be unsound. A says
nothing to B about the horse's unsoundness. This is not fraud in A.
• Misrepresentation [S.18]– When a person positively asserts
that a fact is true when his information does not warrant it to be
so, though he believes it to be true, it is misrepresentation. A
breach of duty which brings an advantage to the person
committing it by misleading the other to his prejudice is also a
misrepresentation.
19. Voidability of agreements without free consent
When consent to an agreement is caused by coercion, undue influence fraud

or misrepresentation, the agreement is a contract voidable at the option of
the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or
misrepresentation, may, if he thinks fit, insist that the contract shall be
performed, and that he shall be put on the position in which he would have
been if the representations made had been true.
Exception: If such consent was caused by misrepresentation or by silence,
fraudulent within the meaning of section 17, the contract, nevertheless, is not

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voidable, if the party whose consent was so caused had the means of
discovering the truth with ordinary diligence.
Explanation: A fraud or misrepresentation which did not cause the consent to
a contract of the party on whom such fraud was practiced, or to whom such
misrepresentation was made, does not render a contract voidable.
Illustrations
(a) A, intending to deceive B, falsely represents that five hundred maunds
of indigo are made annually at A's factory, and thereby induces B to buy the
factory. The contract is voidable at the option of B.
(b) A, by a misrepresentation, leads B erroneously to believe that five
hundred mounds of indigo are made annually at A's factory. B examines the
accounts of the factory, which show that only four hundred maunds of indigo
have been made. After this B buys the factory. The contract is not voidable
on account of A's misrepresentation.
• Mistake [Ss.20,21]– Where both parties to an agreement are

under a mistake as to a matter of fact essential to the
agreement, the agreement is void. An erroneous opinion as the
value of the thing, which forms the subject matter of the
agreement, is not deemed as mistake as to a matter of fact.
Unilateral mistake, i.e. the mistake in the mind of only one party
does not affect the validity of the contract.
Effect of mistake as to law
A contract is not voidable because it was caused by a mistake as to any law

in force in India; but a mistake as to a law not in force in India has the same
effect as a mistake of fact.
Illustration
A and B make a contract grounded on the erroneous belief that a particular
debt is barred by the Indian Law of Limitation; the contract is not voidable.
Agreement void where both parties are under mistake as to matter of

fact
Where both the parties to an agreement are under a mistake as to a matter

of fact essential to the agreement, the agreement, the agreement is void.

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Explanation: An erroneous opinion as to the value of the things which forms

the subject-matter of the agreement, is not be deemed a mistake as to a
matter of fact.
Illustration
A agrees to sell to B a specific cargo of goods supposed to be on its way
from England to Bombay. It turns out that, before the day of the bargain in
the ship conveying the cargo had been cast away and the goods lost. Neither
party was aware of these facts. The agreement is void.
CAPACITY TO CONTRACT / COMPETENCY OF PARTIES

According to Sec.11, “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
sound mind and is not disqualified from contracting by the law to which he is
subject.”
Thus a person who
a. is of the age of majority according to the law to which he is subject
b. is of sound mind – A person is said to be of sound mind for the
purpose of making a contract, if, at the time when he makes it, he is
capable of understanding it and of forming a rational judgement as to
its effect upon his interests.
c. is not disqualified from contracting by any law to which he is subject to
d. is of the age of majority according to the law to which he is subject

e. is of sound mind – A person is said to be of sound mind for the
purpose of making a contract, if, at the time when he makes it, he is
capable of understanding it and of forming a rational judgement as to
its effect upon his interests.
f. is not disqualified from contracting by any law to which he is subject
Therefore, a minor is not competent to contract and an agreement by a minor
is void ab initio. He cannot ratify an agreement on attaining the age of
majority and validate the same. (Void ab initio means it has at no time had
any legal validity).
The following persons are therefore INCOMPETENT to contract:
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1. Minors: The law protects minor’s rights because they are not mature
and may not possess the competency to judge the implication of their
acts and omissions .An agreement with a minor, as such, is void ab
initio, i.e unenforceable right from its inception.
Mohori Bibee v. Dharmodas Ghose
D, a minor borrowed a sum from M by executing a mortgage of his property
in favour of M. Subsequently, D sued for setting aside the mortgage. The
Privy Council held that Sections 10 & 11 of the Indian Contract Act make the
minor’s agreement void and therefore the mortgage was not valid. M prayed
for refund of the amount by the minor. It was held that the money advanced
to the minor cannot be recovered because minor’s agreement is void.
2. Persons of unsound mind

a. Insane Persons
b. Congenital Idiots
c. Lunatics (permitted to contract during the period of lucidity, i.e.
when they are of
sound mind)
d. Drunken Persons
3. Persons disqualified by law to which they are subject
a. Convict – On who is sentenced to a term of imprisonment, has to
forgo many a Constitutional as well as contractual rights.
b. Alien Enemy – A national of a country with which one’s own country
is at war.
c. Foreign Sovereign – Persons holding senior Government positions,
representing other countries such as Ambassadors, High Commissioners,
Foreign Secretaries and the like, who enjoy special privileges and immunities
that do not make them subject to Indian laws(with exceptions). Hence, they
cannot be tried in Indian courts if they default on performance of a contract.
d. Insolvent – A person whose liabilities exceed his assets and as
such would not be able to honour and fulfill his commitments if he
enters into a contract.
CONSIDERATION

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According to Sec.2(d) “When, at the desire of the promisor, the promisee or

any other person has done or abstained from doing, or does or abstains from
doing, or promises to do or to abstain from doing, something, such act or
abstinence or promise is called a consideration for the promise”.
Thus “Consideration” means something in return, i.e.quid pro quo.In a
contract, both parties must exchange something of value, in order to make
the contract enforceable. Thereby, establishing the rule:” No consideration,
No Contract”. Where only one party to the agreement gives and the other
party does not give anything in reciprocation, it is said to be a gift and not a
contract.
Essential elements of a valid consideration:
• It must be given only at the desire of the Promisor :
A’s son is lost and B goes in search of him: B would get the reward (if any)
only if he acts at the request of A, unless it is a public offer made by A.
• Reciprocation may be made by any one, either the promisee himself
or a third party.
• It may be Past, Present or Future
• It must have some value although it need not be adequate.
• It must be real and not illusory
If one party does not give anything, such party cannot complain in case it is
aggrieved.
However, there may be exceptions to the rule “No consideration, No
Contract”; these are mentioned under Sec.25( which is also a part of the
discussion under “Void Agreements”)
An agreement made without consideration is void, unless -
(1) it is expressed in writing and registered under the law for the time being in
force for the registration of documents, and is made on account of natural
love and affection between parties standing in a near relation to each other;
or unless.
(2) it is a promise to compensate, wholly or in part, a person who has already

voluntarily done something for the promisor, or something which the promisor
was legally compellable to do; or unless.
(3) it is a promise, made in writing and signed by the person to be charged

therewith or by his agent generally or specially authorised in that behalf, to
pay wholly or in part debt of which the creditor might have enforced payment
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but for the law for the limitation of suits. In any of these cases, such an
agreement is a contract.
Explanation 1 : Nothing in this section shall affect the validity, as between the
donor and donee, of any gift actually made.
Explanation 2 : An agreement to which the consent of the promisor is freely

given is not void merely because the consideration is inadequate; but the
inadequacy of the consideration may be taken into account by the Court in
determining the question whether the consent of the promisor was freely
given.
FOR A LAWFUL CONSIDERATION AND OBJECT –

Consideration or object is UNLAWFUL if
(1) It is forbidden by law,
(2) Is of such a nature if permitted it would defeat the provisions of any law,
(3) It is fraudulent,
(4) The court regards it immoral,
(5) The court regards it opposed to public policy. Every agreement of which
the consideration or object is unlawful is void.
NOT EXPRESSLY DECLARED TO BE VOID
1. Agreements become void if consideration and object are unlawful
in parts.
2. Agreement without consideration is void, unless it is in writing and
registered, or it is a promise to compensate for something done, or is
a promise to pay a debt barred by limitation.
3. Agreement in restraint of marriage. Every agreement in restraint of
the marriage of any person, other than a minor is void. It is the policy
of law to discourage agreements, which restrain freedom of marriage.
Where a party is restrained from marrying at all, or for marrying for a
fixed period or from marrying a particular person, or class of persons,
the agreement is void.
4. Agreement in restraint of trade. Every agreement, by which one is
restrained from exercising a lawful profession, trade or business of
any kind, is to that extent void.
5. Agreement in restraint of legal proceedings. Every agreement by
which any party thereto is restricted absolutely from enforcing his
\rights under or in respect of any contract, by the usual legal
proceedings in the ordinary tribunals, or which limits the time within
which he may thus enforce his rights is void to that extent.
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6. Agreements for uncertainty. Agreements the meaning of which is

not certain, or capable of being made certain, are void.
7. Agreements by way of wager/ Bet. Agreements by way of wager are
void; and no suit shall be brought for recovering anything alleged to be
won on wager, or entrusted to any person to bide by the result of any
game or other uncertain event on which any wager is made. (Wager
means betting or gambling). However certain prizes for horseracing
are exempted.
Agreement to do an impossible act
An agreement to do an act impossible in itself is void.Contract to do act

afterwards becoming impossible or unlawful: A contract to do an act which,
after the contract is made, becomes impossible or, by reason of some event
which the promisor could not prevent, unlawful, becomes void when the act
becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be
impossible or unlawful: Where one person has promised to be something
which he knew or, with reasonable diligence, might have known, and which
the promisee did not know to be impossible or unlawful, such promisor must
make compensation to such promisee for any loss which such promisee
sustains through the non-performance of the promise.
PERFORMANCE OF CONTRACTS
Obligations of parties to contracts [S.37]
The parties to a contract must either perform, or offer to perform, their

respective promises, unless such performance is dispensed with or excused
under the provisions of this Act, or of any other law.
Promises bind the representatives of the promisor in case of the death of
such promisors before performance, unless a contrary intention appears from
the contract.
Illustration

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A promises to deliver goods to B on a certain day of payment of Rs. 1,000. A

dies before that day. A's representatives are bound to deliver the goods to B,
and B is bound to pay the Rs. 1,000 to A's representatives.
TYPES OF PERFORMANCE
Every contract consists of reciprocal promises. As a general rule, the parties
to a contract must perform or offer to perform their respective promises and
obligations. When one party performs his promise, he can enforce the
performance of the promise of the other party.
a) Actual Performance: When both the parties to the contract discharge

their respective obligations on the stipulated date and as per the conditions
laid down in the contract, they are said to have effected actual performance
of the contract.
b)Attempted Performance/ Tender of Performance: Where a promisor has

made an offer of performance to the promisee and the offer has been
accepted by the promisee, it is called an a
Effect of refusal to accept offer of performance[S.38]
Where a promisor has made an offer of performance to the promisee, and

the offer has not been accepted, the promisor is not responsible for non-
performance, nor does he thereby lose his rights under the contract.
Every such officer must fulfil the following conditions-
(1) it must be unconditional;
(2) it must be made at a proper time and place, and under such
circumstances that the person to whom it is made may have a reasonable
opportunity of ascertaining that the person by whom it is been made is able
and willing there and then to do the whole of what he is bound by his promise
to do;
(3) if the offer is an offer to deliver anything to the promisee, the promisee
must have a reasonable opportunity of seeing that the thing offered is the
thing which the promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences
as an offer to all of them.
Illustration

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A contracts to deliver to B at his warehouse, on the first March, 1873, 100

bales of cotton of a particular quality. In order to make an offer of
performance with the effect stated in this section, A must bring the cotton to
B's warehouse, on the appointed day, under such circumstances that B may
have a reasonable opportunity of satisfying himself that the thing offered is
cotton of the quality contracted for, and that there are 100 bales.
Effect of refusal of party to perform promise wholly [S.39]
When a party to a contract has refused to perform, or disabled himself from

performing, his promise in its entirety, the promisee may put an end to the
contract, unless he has signified, by words or conduct, his acquiescence in
its continuance.
Illustrations
(a) A, a singer, enters into contract with B, the manager of a theatre, to
sing at his theatre two nights in every week during next two months, and B
engages to pay her 100 rupees for each night's performance. On the sixth
night A wilfully absents herself from the theatre. B is at liberty to put an end
to the contract.
(b) A, a singer, enters into contract with B, the manager of a theatre, to
sing at his theatre two nights in every week during next two months, and B
engages to pay her at the rate of 100 rupees for each night. On the sixth
night A wilfully absents herself. With the assent of B, A sings on the seventh
night. B has signified his acquiescence in the continuance of the contract,
and cannot now put an end to it, but is entitled to compensation for the
damage sustained by him through A's failure to sing on the sixth night.
BY WHOM CONTRACTS MUST BE PERFORMED
Person by whom promise is to be performed [S.40]
If it appears from the nature of the case that it was the intention of the parties
to any contract that any promise contain in it should be performed by the
promisor himself, such promise must be performed by the promisor. In other
cases, the promisor or his representatives may employ a competent person
to perform it.
Illustration
A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B, or by causing it to be paid to B by another;
and, if A dies before the time appointed for payment, his representatives
must perform the promise, or employ some proper person to do so. .

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Effect of accepting performance from third person [S.41]
When a promisee accepts performance of the promise from a third person,

he cannot afterwards enforce it against the promisor.
DISCHARGE OF A CONTRACT
Discharge of a contract means termination of the contractual relations
between the parties to a contract. A contract is said to be discharged when
the rights and obligations of the parties to the contract come to an end.
MODES OF DISCHARGE OF A CONTRACT [Ss.37 to 75]
1.Discharge by Performance: A contract can be discharged by
performance in the following ways:
a. By Actual Performance: A contract is said to be discharged by actual
performance when the parties to the contract perform their promises in
accordance with the terms of the contract.
b. By Attempted Performance or tender: A contract is said to be
discharged by attempted performance when the promisor has made
an offer of performance to the promisee but it has not been accepted
by the promisee.
2. Discharge by Mutual Agreement:
a. Novation: means the substitution of a new contract for the original
contract.Such a new contract may be either between the same parties
or between different parties.The consideration of the new contract is
the discharge of the original contract.
b. Rescission: means the cancellation of the contract by any party or all
the parties to a contract.
c. Alteration: means a change in the terms of a contract with mutual
consent of the parties.Alteration discharges the original contract and
creates a new contract.However, parties to the new contract must not
change.
d. Remission: means acceptance by the promisee of a lesser fulfillment
of the promise made.
e. Waiver means intentional relinquishment of a right under the contract.
Thus it amounts to releasing a person of certain legal obligation under
the contract.

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3. Discharge by Operation of law

By death of the promisor, by insolvency, by unauthorized material alteration.
4. Discharge by Impossibility of Performance:
a. By Initial impossibility Agreements that are void ab initio e.g. An
agreement with a Minor would be impossible to perform due to initial
impossibility.
b. By Supervening(subsequent) impossibility also known as “Frustration”
Which may be caused due to:
 Destruction of Subject-matter
 Change in law
 Outbreak of War
 Death of parties
In Krell v Henry, the landlord was not allowed to charge rent from the one-
day tenant since the purpose for which the tenant had taken the room on hire
(to watch the coronation procession of the King-to-be) was frustrated, as the
procession was called off. Hence the subject matter in this case did not
materialize and the contract was discharged due to supervening impossibility
to perform.
5.Discharge by Breach
A contract is said to be discharged by breach of contract if any party to the
contract refuses or fails to perform his part of the contract or by his act
makes it impossible to perform his obligation under the contract. A breach of
contract may occur in following two ways;
a. Anticipatory breach of contract: occurs when the declares his intention
of not performing the contract before the performance is due. [Frost v.
Knight]
b. Actual breach – a breach that occurs during the course of
performance or on the due date of performance.
BREACH OF CONTRACT
The parties to a contract must either perform or offer to perform, their
respective promises, unless such performance is dispensed with or excused
under the provisions of the Act, or any other law.

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Promises bind the representatives of the promisor in the case of death of

such promisor before performance, unless a contrary intention appears from
a contract.
In a contract the agreement being enforceable by law, each party to the
contract is legally bound to perform his part of the obligation. Non-
performance of the duty undertaken by a party in a contract amounts to
breach of contract, for which he can be made liable.
REMEDIES
When a party to the contract commits a breach of contract, there are two
possible alternatives available to the other party.
Firstly to bring an action for the breach of contract, and secondly he may
bring an action for specific performance of the contract.
REMEDIES IN CASE OF BREACH
1. Compensation for loss or damage caused by breach of contract.
For the breach of contract damages is the most appropriate remedy. When a
contact has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract, compensation for any
loss or damage caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties knew when they
made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote or indirect loss or
damage sustained by reason of the breach.
In Hadley v. Baxendale it was laid down that the court would take into
account only such loss as may be fairly and reasonably considered arising
naturally from the breach of the contract itself.
Illustration
A contracts to buy B's ship for 60,000 rupees, but breaks the promise. A
must pay to B, by way of compensation, the excess, if any, of the contract
price over the price which B can obtain for the ship at the time of breach of
promise.
2. Compensation for breach of contact where penalty stipulated.

When a contract has been broken and a sum has been named in the
contract as the amount to be paid in case of such breach, or if the contract
contains any other stipulation by way of penalty, the party complaining of the
breach is entitled, whether actual damage or loss is proved to have been
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caused thereby, to receive from the party who as broken the contract
reasonable compensation not exceeding the amount so named or, the
penalty stipulated for.
Illustrations
(a) A contracts with B to pay B Rs. 1,000 if he fails to pay B Rs. 500 on a
given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A
such compensation, not exceeding Rs. 1,000, as the court considers
reasonable.
(b) A contracts with B that, if A practises as a surgeon within Calcutta, he
will pay B Rs. 5,000. A practises as a surgeon in Calcutta. B is entitled to
such compensation; not exceeding Rs. 5,000 as the court considers
reasonable.
3.Party rightfully rescinding contract entitled to compensation

A person who rightfully rescinds a contract is entitled to compensation for
any damage, which he has sustained through non-fulfillment of the contract.
Illustration
A, a singer, contracts with B, a manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay
her 100 rupees for each night's performance. On the sixth night, A willfully
absents herself from the theatre, and B, in consequence, rescinds the
contracts. B is entitled to claim compensation for the damage which he has
sustained through the non-fulfilment of the contract.
4. Quantum Meruit – ‘Quantum meruit’ means ‘as much as earned’. A

contract may come to end by * breach of contract * contract becoming void or
* Voidable contract avoided by party. In such case, if a party has executed
part of contract, he is entitled to get a proportionate amount i.e. ‘as much as
earned by him’. This is not by way of ‘damages’ or ‘compensation for loss’. - -
The principle is that even when contract comes to a premature end, the party
should get amount proportional to the work done/services provided/goods
supplied by one party. One party should not get enriched at the cost of
other.
5. Specific Performance

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Specific performance means actual execution of the contract as agreed

between the parties.
Specific Performance of any contract may, in the discretion of the court be
enforced in the following situations –
• When there exists no standard for ascertaining the actual damage
caused by the non-performance of the act agreed to be done; or
• When the act agreed to be done is such that compensation in money
for its non-performance would not afford adequate relief.
Exceptions: where compensation would be adequate relief are:
1. Agreement by a landlord for repair of the rented premises;
2. Contract for the mortgage of immovable property;
3. Contract for the sale of any goods, for instance machinery or
buffaloes. However, a contract to deliver rare coins would be
specifically enforceable, as compensation would not constitute
adequate relief in such a case;
4. An agreement to pay money by installments;
5. An agreement for lending money.
BESIDES THE FOLLOWING:
• A contract which runs into such minute or numerous details or which is
so dependent on the personal qualifications or volition of the parties,
or otherwise from its nature is such, that the court cannot enforce
specific performance of its material terms, cannot be specifically
enforced.
• Another situation when a contract cannot be specifically enforced is
where "the contract is in its nature determinable". A contract is said to
be determinable, when a party to the contract can put it to an end.
• A contract the performance of which involves the performance of a
continuous duty, which the Court cannot supervise, cannot be
specifically enforced.
CONTRACT OF INDEMNITY
"Contract of Indemnity" defined [S. 124]
A contract by which one party promises to save the other from loss caused to
him by the contract of the promisor himself, or by the conduct of any other
person, is called a "contract of indemnity".
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Illustration
A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of 200 rupees. This is
a contract of indemnity.
Rights of indemnity-holder when sued [S. 125]
The promisee in a contract of indemnity, acting within the scope of his

authority, is entitled to recover from the promisor-
(1) all damages which he may be compelled to pay in any suit in respect of
any matter to which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit, if in bringing
or defending it, he did not contravene the orders of the promisor, and acted
as it would have been prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorized him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of
any such suit, if the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for the promisee to
make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.
CONTRACT OF GUARANTEE [S. 126]
A "contract of guarantee" is a contract to perform the promise, or discharge

the liability, of a third person in case of his default. The person who gives the
guarantee is called the "surety", the person in respect of whose default the
guarantee is given is called the "principal debtor", and the person to whom
the guarantee is given is called the "creditor". A guarantee may be either oral
or written.
Consideration for guarantee [S. 127]
Anything done, or any promise made, for the benefit of the principal debtor,
may be a sufficient consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises
to guarantee the payment in consideration of A's promise to deliver the
goods. This is a sufficient consideration for C's promise.

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(b) A sells and delivers goods to B. C afterwards requests A to forbear to

sue B for the debt for a year, and promises that, if he does so, C will pay for
them in default of payment by B. A agrees to forbear as requested. This is a
sufficient consideration for C's promise.
(c) A sells and delivers goods to B.A afterwards, without consideration,
agrees to pay for them in default of B. The agreement is void.
Surety's liability [S. 128]
The liability of the surety is co-extensive with that of the principal debtor,
unless it is otherwise provided by the contract.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. The
bill is dishonoured by C. A is liable not only for the amount of the bills but
also for any interest and charges which may have become due on it.
MODES OF DISCHARGE OF A SURETY FROM HIS LIABILITY
Discharge of surety by variance in terms of contract [S. 133]
Any variance made without the surety's consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance.
Illustrations
(a) A becomes surety to C for B's conduct as manager in C's bank.
Afterwards, B and C contract, without A' s consent, that B' s salary shall be
raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to over-draw, and the bank loses a sum of
money.
A is discharged from his suretyship by the variance made without his
consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is
appointed by C, and of which the duties are defined by an Act of the
Legislature. By a subsequent Act, the nature of the office is materially
altered. Afterwards, B misconducts himself. A is discharged by the change
from future liability under his guarantee, though the misconduct of B is in
respect of a duty not affected by the later Act.

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Discharge of surety by release or discharge of principal debtor [S. 134]

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

agrees not to sue, principal debtor [S. 135]
A contract between the creditor and the principal debtor, by which the
creditor makes a composition with, or promises to give time to, or not to sue,
the principal debtor, discharges the surety, unless the surety assents to such
contract.
Surety not discharged when agreement made with third person to give
time to principal debtor[S. 136]
Where a contract to give time to he principal debtor is made by the creditor

with a third person, and not with the principal debtor, the surety is not
discharged.
Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B, and
accepted by B, contracts with M to give to B. A is not discharged.
Rights of surety on payment or performance [S. 140]
Where a guaranteed debt has become due, or default of the principal debtor
to perform a guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
Surety's right to benefit of creditor's securities[S. 141]

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A surety is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of suretyship
entered into, whether the surety knows of the existence of such security or
not; and if the creditor loses, or without the consent of the existence of such
security or not; and if the creditor loses, or without the consent of the surety,
parts with such security, the surety is discharged to the extent of the value of
the security.
Illustrations
(a) C advances to B, his tenant, 2,000 rupees on the guarantee of A. C has
also further security for the 2,000 rupees by a mortgage of B's furniture. C,
cancels the mortgaged. B becomes insolvent and C sues A on his guarantee.
A is discharged from liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B's is secured by a decree, receives also
a guarantee for that advance from A. C afterwards takes B's goods in
execution under the decree, and then, without the knowledge of A, withdraws
the execution. A is discharged.
(c) A, as surety for B, makes a bond jointly with B to C, to secure a loan from
C to B. Afterwards, C obtains from B a further security for the same debt.
Subsequently, C gives up the further security. A is not discharged.
Guarantee obtained by misrepresentation, invalid [S. 142]
Any guarantee which has been obtained by means of misrepresentation

made by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid.
Guarantee obtained by concealment, invalid [S. 143.]
Any guarantee which the creditor has obtained by means of keeping silence
as to material circumstances, is invalid.
Illustrations
(a) A engages B as clerk to collect money for him. B fails to account for
some of his receipts and A in consequence call upon him to furnish security
for his duly accounting. C gives his guarantee for B's duly accounting. A does
not acquaint C with B's previous conduct. B afterwards makes default. The
guarantee is invalid.
(b) A guarantees to C payment for iron to be supplied by him to B to the
amount of 2,000 tons. B and C have privately agreed that B should pay five
rupees per tonne beyond the market price, such excess to be applied in

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liquidation of an old debt. This agreement is concealed from A. A is not liable

as a surety.
BAILMENT
Section 148 of the Indian Contract Act, 1872 defines "Bailment" as

under:
A "bailment" is the delivery of goods by one person to another for some

purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to
the directions of the person delivering them.
The person delivering the goods is called the "bailor". The person to whom
they are delivered is called the "bailee".
Explanation: If a person already in possession of the goods of another
contract to hold them as a bailee, he thereby becomes the bailee, and the
owner becomes the bailor of such goods, although they may not have been
delivered by way of bailment.
Delivery to bailee how made
The delivery to the bailee may be made by doing anything which has the
effect of putting the goods in the possession of the intended bailee or of any
person authorised to hold them on his behalf.
DUTIES OF THE BAILOR AND THE BAILEE
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Bailor’s duty to disclose faults in goods bailed
The bailor is bound to disclose to the bailee faults in the goods bailed, of
which the bailor is aware, and which materially interfere with the use of them,
or expose the bailee to extraordinary risk; and if he does not make such
disclosure, he is responsible for damage arising to the bailee directly from
such faults.
If such goods are bailed for hire, the bailor is responsible for such damage,
whether he was or was not aware of the existence of such faults in the goods
bailed.
Illustrations
A lends a horse, which he knows to be vicious, to B. He does not disclose
the fact that the horse is vicious. The horse runs away. B is thrown and
injured, A is responsible to B for damage sustained.
2. Care to be taken by bailee
In all cases of bailment the bailee is bound to take as much care of the
goods bailed to him as a man of ordinary prudence would, under similar
circumstances, take of his own goods of the same bulk, quantity and
value as the goods bailed.
Bailee when not liable for loss, etc, of thing bailed
The bailee, in the absence of any special contract, is not responsible for the
loss, destruction or deterioration of the thing bailed, if he has taken the
amount of care of it described in section 151.
Termination of bailment by bailee's act inconsistent with conditions
A contract of bailment is voidable at the option of the bailor, if the bailee does
any act with regard to the foods bailed, inconsistent with the conditions of the
bailment.
Illustration
A lets to B, for hire, a horse of his own riding B drives the horse in his
carriage. This is, at the option of A, a termination of the bailment.
2.3.6 Liability of bailee making unauthorised use of goods bailed

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If the bailee makes any use of the goods bailed which is not according to the
conditions of the bailment, he is liable to make compensation to the bailor for
any damage arising to the goods from or during such use of them.
Illustration
A lends a horse to B for his own riding only. B allows C, a member of his
family, to ride the horse. C rides with care, but the horse accidentally falls
and is injured. B is liable to make compensation to A for the injury done to
the horse.
2.3.7 Bailee's particular lien
Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the
goods bailed he has in the absence of a contract to the contrary, a right to
retain such goods until he receives due remuneration for the services he has
rendered in respect of them.
Illustrations
(a) A delivers a rough diamond to B, a jeweller, to be cut and polished,
which is accordingly done. B is entitled to retain the stone till he is paid for
the service he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat, B promises A to deliver
the coat as soon as it is finished, and to give a three months' credit for the
price, B is not entitled to retain the coat until he is paid.
2.4 PLEDGE
2.4.1 Section 172 of the Indian contract Act defines "Pledge", "pawnor",
and "pawnee" as under:
The bailment of goods as security for payment of a debt or performance of a

promise is called "pledge". The bailor is in this case called the "pawnor". The
bailee is called "pawnee".
2.4.2 Pawnee's right of retainer
The pawnee may retain the goods pledged, not only for payment of the debt
or the performance of the promise, but for the interests of the debt, and all
necessary expenses incurred by him in respect of the possession or for the
preservation of the goods pledged.

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2.4.3 Pawnee not to retain for debt or promise other than that for which
goods pledged-Presumption in case of subsequent advances
The pawnee shall not, in the absence of a contract to that effect, retain the
goods pledged for any debt or promise of other than the debt or promise for
which they are pledged; but such contract, in the absence of anything to the
contrary, shall be presumed in regard to subsequent advances made by the
pawnee.
2.4.4 Pawnee's right as to extraordinary expenses incurred
The pawnee is entitled to receive from the pawnor extraordinary expenses

incurred by him for the preservation of the goods pledged.
2.4.5 Pawnee's right where pawnor makes default
If the pawnor makes default in payment of the debt, or performance, at the

stipulated time, of the promise, in respect of which the goods were pledged,
the pawnee may bring a suit against the pawnor upon the debt or promise,
and retain the goods pledged as a collateral security; or he may sell the thing
pledged, on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of the
debt or promise, the pawnor is still liable to pay the balance. If the proceeds
of the sale are greater than the amount so due, the pawnee shall pay over
the surplus to the pawnor.
2.4.6 Defaulting pawnor's right to redeem
If a time is stipulated for the payment of the debt, or performance of the

promise, for which the pledge is made, and the pawnor makes default in
payment of the debt or performance of the promise at the stipulated time, he
may redeem the goods pledged at any subsequent time before the actual
sale of them; but he must, on that case, pay, in addition, any expenses which
have arisen from his default.
SELF-ASSESSMENT
• Define “Bailment” and describe the essential elements of Bailment
• How different is Pledge from Bailment?
• Discuss the concepts of “bailment” and “pledge”.

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CHAPTER VI
2.5 CONTRACT OF AGENCY
2.5.1 Section 182 of the Indian Contract Act, 1872 defines "Agent" and
"Principal"
An "agent" is a person employed to do any act for another, who is so in

dealings with third persons. The person for whom such act is done, or
represented, is called the "principal".
‘Representative Capacity is the hallmark of Agency’ i.e the contract of
agency is based on the principle of representation of one person by another
in trade dealings.
2.5.2 Who may employ agent [S. 183]
Any person who is of the age of majority according to the law to which he is
subject, and who is of sound mind, may employ an agent.
2.5.3 Who may be an agent [S. 184]
As between the principal and third persons, any person may become an
agent, but no person who is not of the age of majority and sound mind can
become an agent, so as to be responsible to the principal according to the
provisions in that behalf herein contained.
2.5.4 CREATION OF AGENCY
Agency may be created by delegation of authority by the Principal; the
authority may be express or implied, by virtue of which the agent is bound
and accountable to the principal. However, the primary liability lies with the
Principal and he is, in most situations liable to third parties.
When one person acts on behalf of another, without his express
consent(obtaining approval later – i.e ratification), or he acts in an
emergency or in case of necessity, he is said to have acted with implied
authority
MODE1: AGENCY BY AUTHORITY; EXPRESS OR IMPLIED

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Agent's authority may be express or implied [S. 186]
The authority of an agent may be express or implied.

No consideration is necessary to create an agency
Express and Implied authority
An authority is said to be express when it is given by words spoken or

written. An authority is said to be implied when it is to be inferred from the
circumstances of the case; and things spoken or written, or the ordinary
course of dealing, may be accounted circumstances of the case.
Illustration
A owns a shop in Serampur, living himself in Calcutta, and visiting the shop
occasionally. The shop is managed by B, and he is in the habit of ordering
goods from C in the name of A for the purposes of the shop, and of paying
for them out of A's funds with A's knowledge. B has an implied authority from
A to order goods from C in the name of A for the purpose of the shop.
Extent of agent's authority [S. 188]
An agent, having an authority to do an act, has authority to do every lawful

thing which is necessary in order to do such act.
An agent having an authority to carry on a business, has authority to do
every lawful thing necessary for the purpose, or usually done in the course,
of conducting such business.
Illustrations
(a) A is employed by B, residing in London, to recover at Bombay a debt
due to B. A may adopt any legal process necessary for the purpose of
recovering the debt, and may give a valid discharge for the same.
(b) A constitutes B his agent to carry on his business of a shipbuilder. B
may purchase timber and other materials, and hire workmen, for the purpose
of carrying on the business.
Agent's authority in an emergency
An agent has authority, in an emergency, to do all such acts for the purpose
of protecting his principal from loss and would be done by a person or
ordinary prudence, in his own case, under similar circumstances.
Illustrations
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(a) An agent for sale may have good repaired if it be necessary.

(b) A consigns provision to be at Calcutta, with direction to send them
immediately to
C, at Cuttack. B may sell the provision at Calcutta, if they will not bear
the journey
to Cuttack without spoiling.
SUB-AGENT
When agent cannot delegate
An agent cannot lawfully employ another to perform acts which he has

expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub-agent may, or, from the nature of agency, a
sub-agent must, be employed.
"Sub-agent" defined [S. 191]
A "sub-agent" is a person employed by, and acting under the control of, the
original agent in the business of the agency.
Representation of principal by sub-agent properly appointed [S. 192]
Where a sub-agent is properly appointed, the principal is, so far as regards

third persons, represented by the sub-agent, and is bound by and
responsible for his acts, as if he were an agent originally appointed by the
principal.
Agent's responsibility for sub-agents: The agent is responsible to the
principal for the acts of the sub-agent.
Sub-agent's responsibility: The sub-agent is responsible for his acts to the
agent, but not to the principal, except in case of fraud or wilful wrong.
Agent's responsibility for sub-agent appointed without authority
Where an agent, without having authority to do so, has appointed a person to

act as a sub-agent, the agent stands towards such person in the relation of a
principal to an agent, and is responsible for his acts both to the principal and
to third person; the principal is not represented, by or responsible for the acts
of the person so employed, nor is that person responsible to the principal.
Substituted Agent is a concept wherein the agent is delegated the sole
function of appointing another agent who would work for the Principal. The
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first agent , thereafter ceases to continue as agent and the newly appointed
agent then takes over.
Relation between principal and person duly appointed by agent to act

in business of agency
When an agent, holding an express or implied authority to name another

person to act for the principal in the business of the agency, has named
another person accordingly, such person is not a sub-agent, but an agent of
the principal for such part of the business of the agency as is entrusted to
him.
Illustration
A directs B, his solicitor, to sell his estate by auction , and to employ an
auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. C
is not a sub-agent, but is A's agent for the conduct of the sale.
MODE 2: AGENCY BY RATIFICATION
Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If he
ratifies them, the same effects will follow as if they had been performed by
his authority.
Ratification may be express or implied
Ratification may be expressed or may be implied in the conduct of the person

on whose behalf the acts are done.
Illustration
A, without authority, buys goods, for B. Afterwards B sells them to C on his
own account; B's conduct implies a ratification of the purchase made for him
by A.
Requisites of a valid ratification:
• The principal must be in existence at the time the act to be ratified was
being performed.
• The principal must have capacity to contract, at the time the act was
being performed.
• The act must be done for or on behalf of the Principal
• The agent must communicate whole of the facts to the Principal
before getting the act ratified.

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• The principal must ratify the entire transaction.

• The act to be ratified must be legal.
• Ratification must be done within reasonable time.
• Ratification must be communicated to the concerned party.
• Ratification relates back to the date , the act was performed.
MODE 3: AGENCY BY NECESSITY
Agency by necessity arises under the following two conditions:
i. There is an actual and definite necessity for acting on behalf of the Principal,
and
ii. It is impossible to communicate with the Principal and obtain his consent.
iii. The act must have been done in the best interest of the Principal.
MODE 4: AGENCY BY OPERATION OF LAW
Agency by operation of law is said to arise where the law treats one person
as an agent of another.
MODE 5: AGENCY BY ESTOPPEL
Agency by Estoppel arises where a person, by his words or conduct induces
third persons to believe that a certain person is his agent. The person who
induces as such is estopped from denying the truth of the agency.
Illustration:
A tells B, in the presence and within the hearing of C that he is C’s agent. C
does not contradict this statement, although it is not true. Later on B enters
into a contract with A believing that A is C’s agent. In such a case, C is
bound by this contract and in a suit between C and B, C cannot be permitted
to deny his liability as A’s Principal.
2.5.5 REVOCATION OF AUTHORITY
Termination of agency [S. 201]
An agency is terminated by the principal revoking his authority, or by the

agent renouncing the business of the agency; or by the business of the
agency being completed; or by either the principal or agent dying or
becoming of unsound mind; or by the principal being adjudicated an insolvent
under the provisions of any Act for the time being in force for the relief of
insolvent debtors.

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When principal may revoke agent's authority
The principal may, save as is otherwise provided by the last preceding

section, revoke the authority given to his agent at any time before the
authority has been exercised, so as to bind the principal.
Compensation for revocation by principal, or renunciation by agent
Where there is an express or implied contract that the agency should be

continued for any period of time, the principal must make compensation to
the agent, or the agent to the principal, as the case may be, for any previous
revocation or renunciation of the agency without sufficient cause.
Notice of revocation or renunciation
Reasonable notice must be given of such revocation or renunciation,

otherwise the damage thereby resulting to the principal or the agent, as the
case may be, must be made good to the one by the other.
Revocation and renunciation may be expressed or implied
Revocation or renunciation may be expressed or may be implied in the

conduct of that principal or agent respectively.
Illustration
A empowers B to let A's house. Afterwards A lets it himself. This is an
implied revocation of B's authority.
When termination of agent's authority takes effect as to agent, and as

to third persons
The termination of the authority of an agent does not, so far as regards the
agent, takes effect before it becomes known to him, or, so far as regards
third persons, before it becomes known to them.
Illustration
A directs B to sell goods for him, and agrees to give B five per cent
commission on the price fetched by the goods. A afterwards by letter,
revokes B's authority. B after the letter is sent, but before he receives it,sells
the goods for 100rupees. The sale is binding on A,and B is entitled to five
rupees as his commission.
Agent's duty on termination of agency by principal's death or insanity

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When an agency is terminated by the principal dying or becoming of unsound

mind, the agent is bound to take on behalf of the representative, of his late
principal, all reasonable steps for the protection and reservation of the
interests entrusted to him.
Termination of sub-agent's authority
The termination of the authority of an agent causes the termination (subject

to the rules herein contained regarding the termination of an agent's
authority) of the authority of all sub-agents appointed by him.
2.5.6 AGENT'S DUTY TO PRINCIPAL
Agent's duty in conducting principal's business
An agent is bound to conduct the business of his principal according to the

directions given by the principal, or in the absence of any such directions
according to the customs which prevails in doing business of the same kind
at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal and
if any profit accrues, he must account for it.
Illustrations
A, an agent engaged in carrying on for B a business, in which it is the custom
to invest from time to time, at interest, the moneys which may be in hand, on
its to make such investment. A must make good to B the interest usually
obtained by such investments.
Skill and diligence required from agent
An agent is bound to conduct the business of the agency with as much skill
as is generally possessed by person engaged in similar business unless the
principal has notice of his want of skill. The agent is always bound to act with
reasonable diligence, and to use such skill as he possesses; and to make
compensation to his principal in respect of the direct consequences of his
own neglect, want of skill, or misconduct, but not in respect of loss or
damage which are indirectly or remotely caused by such neglect, want of
skill, or misconduct.
Illustration
A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of
money is paid on A's account, with order to remit. B retains the money for
considerable time. A, in consequence of not receiving the money, becomes
insolvent. B is liable for the money and interest, from the day on which it
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ought to have been paid, according to the usual rate, and for any further
direct loss as, e.g., by variation of rate of exchange-but not further.
Agent's, duty to communicate with principal
It is the duty of an agent in case of difficulty, to use all reasonable diligence in

communicating with his principal, and in seeking to obtain his instructions.
3. THE SALE OF GOODS ACT, 1930
Preamble to the Act:

“An Act to define and amend the law relating to the sale of goods.”
Scope of the Act:
The Sale of Goods Act, 1930 governs the contracts relating to sale of goods. It
applies to the whole of India except the State of Jammu & Kashmir.
The contracts for sale of goods are subject to the general principles of law relating
to contracts i.e. the Indian Contact Act,1872. A contract for sale of goods has,
however, certain peculiar features such as, transfer of ownership of the goods,
delivery of goods rights and duties of the buyer and seller, remedies for breach of
contract, conditions and warranties implied under a contract for sale of goods, etc.
These peculiarities are the subject matter of the provisions of the Sale of Goods
Act, 1930.
CHAPTER I
3.1 DEFINITIONS
1. Contract Of Sale: “A contract of sale is a contract whereby the seller
transfers or agrees to transfer the property in the goods to the buyer for a
price.”[Sec. 4(1)]
The essential elements of a contract of sale are:
a. Two parties and an agreement in between them i.e. “Seller and
Buyer”
b. Subject matter of contract i.e. “Goods”
c. Transfer of ownership as well as possession, from one party to the
other i.e.”Transfer of Property in the Goods”.

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d. Consideration i.e.”Price”
e. All the essential elements of a valid contract.
2. "buyer" means a person who buys or agrees to buy goods .Sec2(1)
3."delivery" means voluntary transfer of possession from one person to another.
Sec2(2)
4."document of title to goods" includes a bill of lading, dock- warrant,
warehouse keeper's certificate, wharfingers' certificate, railway receipt, 1 [multi
modal transport document], warrant or order for the delivery of goods and any
other document used in the ordinary course of business as proof of the possession
or control of goods, or authorizing or purporting to authorize, either by
endorsement or by delivery, the possessor of the document to transfer or receive
goods thereby represented. Sec.2(4)
5."future goods" means goods to be manufactured or produced or acquired by
the seller after the making of the contract of sale. Sec.2(6)
6."goods" means every kind of moveable property other than actionable
claims and money: and includes stock and shares, growing crops, grass, and
things attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale Sec.2(7)
7."price" means the money consideration for a sale of goods. Sec.2(10)
8."property" means the general property in goods, and not merely a special
property Sec.2(11)
9."quality of goods" includes their state or condition Sec.2(12)
10."seller" means a person who sells or agrees to sell goods. Sec.2(13)
11"specific goods" means goods identified and agreed upon at the time a
contract of sale is made Sec.2(14)

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CHAPTER II
4. 2 GOODS--Meaning of
Under the definition of "goods" as given in the Sales of Goods Act, "goods" must
be property and must be movable. Any kind of property which is movable would
fall within the definition of "goods" provided it was transmissible or transferable
from hand to hand or capable of delivery which need not necessarily, be in a
tangible in a physical sense.
Goods means every kind of immoveable property other than actionable claims and
money, and includes the following:
 Stocks and Shares
 Growing crops, grass and things attached to or forming part of the land
which are agreed to be served before sale or under the contract of sale
What is an “Actionable Claim”?
A claim to any debt or any beneficial interest in moveable property not in
possession. Such claims cannot be sold or purchased like goods, they can only be
assigned, e.g.a debt due from another person. In other words, an actionable claim

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is one which can be enforced in the court of law; it is a mere right and hence an
abstract in nature… not qualifying as goods.
TYPES OF GOODS
A. Existing Goods – The goods, which are either owned or possessed by the
seller at the time of the contract of Sale. These goods may further be sub-
divided as:
(i) Specific Goods—These are goods which are identified and
agreed upon at the time when a contract of sale is made. E.g an
automobile or a mobile phone.
(ii) Ascertained Goods – Goods are said to ascertained when out of
a massof unascertained goods, the quantity or number contracted
for is identified and earmarked for sale.
(iii) Unascertained Goods -- These are the goods which are not
identified and agreed upon at the time when a contract of sale is
made e.g goods in stock or lying in lots.
B. Future Goods – Means goods to be manufactured or produced or acquired
by the seller after the making of the contract of sale. In this case there can
only be an Agreement to Sell rather than a contract of sale.
4.2.1EFFECTS OF DESTRUCTION OF GOODS - ALREADY CONTRACTED
There are various kinds of goods and the parties have various options to agree
about the delivery of the goods. What shall be the fate of a contract if the goods are
perished or destroyed?
A) Destruction before making of contract -- Where in a contract for sale of
specific goods, at the time of making the contract, the goods, without knowledge of
the seller, have perished or become so damaged as no longer to answer to their
description in the contract, the contract shall become null and void. This is based
on the rule of impossibility of performance. Since the subject matter of the contract,
which is one of its essential ingredients, itself is destroyed, the contract cannot be
carried out.
'Perishing of goods' includes not only complete destruction of the goods when the
seller has been irretrievably deprived by the goods or when the goods have been
stolen or have in some other way been lost and are untraceable, but also when the
goods become un merchantable i.e. when the goods has lost their commercial
value.
B) Destruction After the Agreement to Sell but before Sale -- Where in an
agreement to sell specific goods, if subsequently the goods, without any fault on
the part of the seller of buyer, perish or become so damaged as no longer answer

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to their description in the agreement, the agreement shall become void, provided
the goods are perished before the ownership and risk passes to the buyer. This
rule is based on the ground of impossibility of performance.
If the title to be goods has already passed to the buyer, he must pay for the goods
though the same cannot be delivered.
4.2.2DOCUMENTS OF TITLE TO GOODS
A document of title to goods is one, which entitles and enables its rightful holder to
deal with the goods represented by it, as if he were the owner. It is used in the
ordinary course of business as proof of the ownership, possession or control of
goods. It authorises the possessor to receive the goods. It also confers a right on
the possessor to transfer the goods to another person, by mere delivery or by
proper endorsement and delivery.
Cash memo, bill of lading, dock warrant, warehouse keeper's or wharfinger's
certificate, lorry receipt (L/R), railway receipt (R/R) and delivery order are some of
the instances of document of title to goods.
CHAPTER III
3.3 DISTINCTION BETWEEN “SALE” AND “AGREEMENT TO SELL”
A 'sale' must be distinguished from an 'agreement to sell' since the legal
implications of the two terms are vastly different. A contract wherein, the property in
the goods is transferred from the seller to the buyer, the contract is called a sale,
but 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
are fulfilled subject to which the property in the goods is to be transferred.
1. Transfer of Ownership:
 In sale transfer of ownership of goods takes place immediately.
 In agreement to sell- transfer of ownership of goods is to take
place at a future time or subject to the fulfillment of some condition.
2. Executed or Executory Contract:
 Sale is an executed contract because nothing remains to be done.
 An agreement to sell is an executory contract because something
remains to be done.
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3. Conveyance of Property:
 Buyer gets a right to enjoy the goods against the whole world
including the seller. Therefore, a sale creates a jus in rem (Right
against property).
 Buyer does not get such right to enjoy the goods. It only jus in
personam (Right against the person)
4. Transfer of Risk:
 Transfer of risk of loss of goods takes place immediately because
ownership is transferred. As a result, in case of destruction of
goods, the loss shall be borne by the buyer even though the goods
are in the possession of the seller.
 Transfer of risk of loss of goods does not take place because
ownership is not transferred. As a result, in case of destruction of
goods, the loss shall be borne by the seller even though the goods
are in the possession of the buyer.
5. Consequences of breach:
 In a sale, if the buyer fails to pay the price of the goods he
purchases or if there is a breach of contract by the buyer, the seller
can sue for the price, even though goods are in his possession.
 In agreement to sell, if there is any breach of contract by the
buyer, the seller can sue for damages only.
CHAPTER IV
3.5 CONDITIONS AND WARRANTIES

It is usual for both seller and buyer to make representations to each other at
the time of entering into a contract of sale. Some of these representations
are mere opinions, which do not form part of contract of sale. Whereas some
of them may become part of the contract of sale. Representations, which
become a part of the contract of sale, are termed as stipulations which may
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rank as condition and warranty All such stipulations may not be of equal
importance. Some of them may be so important that the non-performance of
such stipulations may amount to a breach of contract. Such stipulations are
called conditions. There are certain stipulations, which are not of vital
importance --- these are called warranties.
Stipulations in the contract of sale regarding the quality and quantity of
goods, its colour and design, packing of delicate, valuable and breakable
goods etc. are considered as conditions and a seller has to deliver as per
conditions. Such conditions are stipulations which are essential to the main
purpose of the contract and the breach of such conditions give rise to a right
to treat the contract as repudiated.
Sec. 12(2) of the Act defines a condition as, “A condition is a stipulation
essential to the main purpose of the contract, the breach of which gives rise
to a right to treat the contract as repudiated.”
Those stipulations that are only collateral to the conditions in any contract are
said to be warranties, such as free enjoyment of goods and perhaps time of
delivery (where time is not essence of the contract).Breach of a Warranty
would enable the aggrieved party only to claim compensation and he cannot
repudiate the contract.
Sec. 12(3) defines warranty as, “A warranty is stipulation collateral to the
main purpose of the contract which gives a right to claim for damages, but
not a right to reject the goods and treat the contract as repudiated.”
Conditions and warranties may be express or implied.
Express conditions and warranties are which, are expressly provided in the
contract. Implied conditions and warranties are those which are implied by
law or custom; these shall prevail in a contract of sale unless the parties
agree to the contrary. Sections 14 to 17 contain provisions pertaining to
implied conditions and warranties. These may be cancelled or varied by
express agreement or by the course of dealings or by usage and customs.
3.5.1 IMPLIED CONDITIONS
i) Condition as to title [Sec.14(a)] -- In every contract of sale, unless the
circumstances of the contract are such as to show a different intention, there
is an implied condition on the part of the seller, that :
a. In case of a sale, he has a right to sell the goods, and
b. In case of an agreement to sell, he will have a right to sell the goods at
the time when the property is to pass.
The words 'right to sell' contemplate not only that the seller has the
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title to what he purports to sell, but also that the seller has the right to
pass the property. If the seller's title turns out to be defective, the
buyer may reject the goods.
ii) Condition as to Sale by Description [Sec. 15]-- In a contract of sale by
description, there is an implied condition that the goods shall correspond with
the description. The term ' sale by description' includes the following
situation;
a. Where the buyer has not seen the goods and buys them relying on
the description given by the seller.
b. Where the buyer has seen the goods but he relies not on what he has
seen but what was stated to him and the deviation of the goods from
the description is not apparent.
c. Packing of goods may sometimes be a part of the description. Where
the goods do not conform to be method of packing described (by the
buyer or the seller) in the contract, the buyer can reject the goods.
iii) Conditions in a Sale by Sample [Sec. 17]: A contract of sale is a
contract for sale by sample where there is a term in the contract, express or
implied to that effect. Usually, a sale by sample is implied when a sample is
shown and the parties intend that the goods should be of he kind and quality
as the sample is.
iv) Conditions in a sale by Sample as well as by Description [Sec.15]: A
vast majority of cases where samples are shown , are sales by sample as
well as by description. In a contract for sale by sample as well as by
description, the goods supplied must correspond both with the sample as
well as with the description. However, if the goods correspond to the
description but do not correspond to the sample, it will be treated as a breach
of Warranty and not Condition; in case of vice-versa, it will be treated as a
breach of Condition and not Warranty.
Section 16 describes the Doctrine of “Caveat Emptor”, which means ”buyer
beware”. This implies that the buyer must take all due care and sstisfy
himself as to the quality and fitness of the goods while purchasing.
Therefore, the buyer purchases the goods at his own risk, relying upon his
own skill and judgement.
However, in today’s concept of “Customer is King”, the doctrine of “Caveat
Emptor” will hold no substance as it amounts to putting the buyer at great risk
and thereby intimidating buyers instead of encouraging them to come and
buy. As such there are certain exceptions to this doctrine that act in favour of
the buyer. These exceptions thus cast a duty on the seller to meet every

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reasonable expectation of the buyer. These exceptions are thus in line with
the implied conditions of sale.
v) Condition as to Quality or Fitness [Sec.16(1)-being the first exception
to caveat emptor] -- Where the buyer, expressly or by implication, makes
known the seller the particular purpose for which goods are required, so as to
show that the buyer relies on the seller's skill or judgement and the goods
are of a description which it is in the course of the seller's business to supply
(whether or not as the manufacturer of producer), there is an implied
condition that the goods shall be reasonably fit for such purpose. In other
words, this condition of fitness shall apply, if:
a. The buyer makes known to the seller the particular purpose for which
the goods are required,
b. The buyer relies on the seller's skill or judgement,
c. The goods are of a description which he sellers ordinarily supplies in
the course of his business, and
d. The goods supplied are not reasonably fit for the buyer's purpose.
iv) Condition as to Merchantability[Sec.16(2)- being the second
exception to caveat emptor] -- Where the goods are bought by description
from a seller, who deals in goods of that description (whether or not as the
manufacturer or producer) there is an implied condition that the goods shall
be of merchantable quality.
Merchantable quality ordinarily means that the goods should be such as
would be commercially saleable under the description by which they are
known in the market at their full value.
v) Condition as to Wholesomeness -- In case of sale of eatable provisions
and foodstuff, there is another implied condition that the goods shall be
wholesome. Thus, the provisions or foodstuff must not only correspond to
their description, but must also be merchantable and wholesome. By
'wholesomeness' it means that goods must be for human consumption.
vi) Condition Implied by Custom or Trade Usage: An implied warranty or
condition as to quality or fitness for a particular purpose may be annexed by
the usage of trade. In certain sale contracts, the purpose for which the goods
are purchased may be implied from the conduct of the parties or from the
nature or description of the goods. In such cases, the parties enter into the
contract with reference to those known usage. For instance, if a person buys
a perambulator or a medicine the purpose for which it is purchased is implied
from the thing itself; the buyer need not disclose the purpose to the seller.
A condition becomes a warranty when --

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a) the buyer waives the conditions or opts to treat the breach of the
condition as a breach of warranty ; or
b) The buyer accepts the goods or a part thereof, or is not in a position
to reject the goods.
3.5.2 IMPLIED WARRANTIES
i. Implied Warranty of Quiet Possession [Sec.14(a)]-- In every
contract of sale, unless there is a contrary intention, there is implied
warranties that the buyer's shall have and enjoy quiet possession of
the goods. If the buyer's right to possession and enjoyment of the
goods is in any way disturbed as consequences of the seller's
defective title, the buyer may sue the seller for damages for breach of
this warranty.
ii. Implied Warranty of Freedom from Encumbrances [Sec.14(b)]--
The buyer is entitled to a further warranty that the goods shall be free
from any charge or encumbrance in favour of any third party not
declared or known to buyer before or at the time when the contract is
made. If the buyer is required to discharge the amount of the
encumbrance it shall be a breach of this warranty and the buyer shall
be entitled to damages for the same.
CHAPTER V
3.6 TRANSFER OF PROPERTY IN GOODS
Sections 18 to 26
The property in the goods is said, to be transferred from the seller to the
buyer when the latter acquires the proprietary rights over the goods and the
obligations linked thereto. 'Property in Goods' which means the ownership of
goods, is different from ' possession of goods' which means the physical
custody or control of the goods.
The transfer of property in the goods from the seller to the buyer is the
essence of a contract of sale. Therefore the moment when the property in
goods passes from the seller to the buyer is significant for following reasons:
a. Ownership -- The moment the property in goods passes, the seller
ceases to be their owner and the buyer acquires the ownership. The
buyer can exercise the proprietary rights over the goods. For example,

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the buyer may sue the seller for non-delivery of the goods or when the
seller has resold the goods, etc.
b. Risk follows ownership -- The general rule is that the risk follows the
ownership, irrespective of whether the delivery has been made or not.
If the goods are damaged or destroyed, the loss shall be borne by the
person who was the owner of the goods at the time of damage or
destruction. Thus the risk of loss prima facie is in the person in whom
the property is.
c. Action Against Third parties -- When the goods are in any way
damaged or destroyed by the action of third parties, it is only the
owner of the goods who can take action against them.
d. Suit for Price - The seller can sue the buyer for the price, unless
otherwise agreed, only after the gods have become the property of the
buyer.
e. Insolvency - In the event of insolvency of either the seller or the buyer,
the question whether the goods can be taken over by the Official
Receiver or Assignee, will depend on whether the property in goods is
with the party who has become insolvent.
Essentials for Transfer of Property -- The two essentials requirements for
transfer of property in the goods are:
1. Goods must be ascertained: Unless the goods are ascertained, they
(or the property therein) cannot pass from the seller to the buyer.
Thus, where there is a contract for the sale of unascertained goods,
no property in the goods is transferred to the buyer unless and until
the goods are ascertained
2. Intention to PASS Property in Goods must be there: In a sale of
specific or ascertained goods the property in them is transferred to the
buyer at such time as the parties to the contract intend it to be regard
shall be had to the terms of the contract, the conduct of the parties
and the circumstances of the case.
3.6.1TRANSFER OF TITLE
Where the goods are sold by a person who is not the owner thereof and who
does not sell them under the authority or with the consent of the owner, the
buyer acquires no better title than the seller had. As a general rule, no one
can sell the goods and give a title thereof unless he is the owner thereof.
This general rule is expressed by the maxim “Nemo dat quod non habet”—
meaning ‘one cannot give a better title than that he himself has’. Thus, the
seller cannot give the buyer of the goods a better title to the goods than he
himself has.
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There are, however, certain exceptions to the above maxim, which thus
make it possible for a Non-owner to sell goods in his own name. These
exceptions are as under:
1.Sale by Estoppel
Where the owner of the goods, by his words or conduct or by an act or
omission causes the buyer to believe that the seller has the authority to sell
the goods and induces the buyer to buy them, he cannot afterwards, contest
the claim of title set-up by the seller.
2.Sale by mercantile agent
Where a mercantile agent, with the consent of the owner, is in possession of
the goods or of documents of title to the goods, any sale made by him when
acting in the ordinary course of business, shall be binding on the owner and
shall be valid as if he were expressly authorized by the owner of the goods to
make the same
3. Sale by one of several joint owners
If one of the several joint owners of the goods has the sole possession of
them with the permission of the other co-owners, the property in the goods is
transferred to any person who buys them from such joint owner.
4.Sale by an unpaid Seller
Where an unpaid seller who has exercised his right of lien or stoppage in
transit, re-sells the goods, the buyer acquires a good title to the goods as
against the original buyer. (this topic is discussed subsequently)
5. Sale by Seller in possession of goods after sale & Sale by Buyer in
possession of goods before Sale:
In both the above situations, both, the seller as well as the buyer do not have
authority to sell and yet may effect a sale in which the eventual buyer gets a
good title to the goods.
The bottom-line, however, in all the above cases of sale by non-owners is
that the buyer must have bought the goods in “GOOD FAITH” i.e without
knowing about the ‘history’ of the goods and the fact that the seller is NOT
the owner of the goods. In other words if he is an innocent buyer he will get
good title(ownership) to the goods.

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CHAPTER VI
3.7 PERFORMANCE OF THE CONTRACT
The most usual form of performance of a contract of sale is by delivery
Section 2(2) of the Act defines delivery as a voluntary transfer of possession
of goods from one person to another.
Delivery of goods may be Actual, Symbolic or Constructive.
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a. 1. Actual delivery: Handing over of the goods by the seller to the buyer is
called actual delivery.
b. 2. Symbolic delivery: Delivery is said to be symbolic where some symbol of
the real possession or control over the goods is handed over to the buyer for
e.g. X sells to Y 100 bags of wheat lying in the godown of Z and hands over
the key of the godown to Y.
c. 3.Constructive Delivery: Delivery is said to be constructive where a person
who is possession of the goods, acknowledges to hold the goods on behalf
of the buyer. For e.g, X sells to Y 100 bags of wheat lying in Z’s warehouse.X
orders Z to deliver the wheat to Y.Z agrees to hold the 100 bags of wheat on
behalf of Y and makes the necessary entries in his books.
TYPES OF CONTRACTS (WITH REGARD TO DELIVERY OF GOODS)
There are various types of contracts from the point of view of the delivery of
goods.
i) F.A.S. or F.A.R. Contract - F.A.S. stands for 'Free Alongside Ship' and
F.A.R. stands for 'Free Along with Rail'. Under FAS or far contracts, the seller
is required to deliver the goods alongside the ship or rail named in the
contract and to notify the buyer that the goods have been so delivered. The
property in the goods passes to the buyer when the seller delivers the goods
alongside the ship or rail. Thereafter, it is the buyer's duty to arrange for the
contract of affreightment and insurance of the goods while the transit.
ii) F.O.B. OR F.O.R Contracts -- F.O.B. stands for 'Free on Board' and
F.O.R. stands for 'Free on Rail'. In a F.O.B. (or F.O.R.) contract, the seller is
required to deliver the goods on board the sip (or on rail), named in the
contract. Thus, the seller has to bear all expenses upto and including
shipment of goods on behalf of the buyer, who is responsible for their freight,
insurance and subsequent expenses.
Thus, as soon as the goods are put on board the ship, the property in them
passes to the buyer. This will be so even if the goods are not specific or
ascertained. The buyer is liable to pay the price even if the goods are lost in
transit. The property in goods shall, however not pass if the seller reserves
the right of disposal.
iii) C.I.F. Contract -- The words 'C.I.F.' stand for cost, insurance and freight.
A CIF contract is a type of contract wherein the price includes cost, insurance
and freight charges. Under a CIF contract the seller is required to insure the
goods, deliver them to the shipping company, arrange for their affreightment
and send the bill of lading and insurance policy together with the invoice and
a certificate of origin to a bank. The documents are usually delivered by the
bank against payment of seller since he continues to be the owner of goods

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until the buyer pays for them and obtains the documents. The property in the
goods passes to the buyer on the delivery of documents. The buyer is
equally protected as he is called upon to pay only against the documents and
the moment he pays, he obtains the documents, which enable him to get
delivery of the goods. If in the meantime the goods are lost neither the buyer
nor the seller is put to loss, whoever is the owner at the time of the loss can
recover it from the insurer.
iv) Ex-ship contracts -- Under an 'ex-ship contract the seller has to delivery
the goods to the buyer at the port of destination. In such contracts the
property in the goods does not pass until actual delivery. The goods are at
the seller's risk during the voyage. It is therefore, for the seller to insure the
goods to protect his interest. The seller is to pay the freight, or otherwise
release the ship owner's lien and to furnish the buyer with a delivery order or
an effectual direction to the ship owner to deliver.

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CHAPTER VII
3.8 RIGHTS OF AN UNPAID SELLER
Meaning of an unpaid seller[Sec.45(1)(2)]
The seller of goods is deemed to be an unpaid seller-
a.When the whole of the price has not been paid or tendered(offered).
b.When a bill of exchange or other negotiable instrument (such as cheque)
has been received as conditional payment, and it has been dishonoured.
The rights of an unpaid seller can broadly be classified under the following
two categories;
1. Right against the Goods
2. Right against the buyer personally
3.8.1 RIGHTS AGAINST THE GOODS
a) Where the property in the goods has passed to the buyer.
i. Right of Lien [Secs.47 to 49] -- 'Lien is the right to retain possession

of goods until certain charges in respect thereof are paid. An unpaid
seller who is in possession of the goods is entitled to retain them until
payment of the price, where --
a) The goods have been sold without any stipulation s to credit;
b) The goods have been sold on credit, but the term of credit has
expired or
c) The buyer becomes insolvent.
Where the goods have been sold on credit, the right of lien shall
remain suspended over the period of credit and shall revive on the
expiry of that period.
The right of lien is linked with possession of the goods and not with
the title. It is not affected even if the seller has transferred the
documents of title till he remains in possession of the goods. However,

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if the buyer has further transferred the documents of title to a bona

fide purchaser the seller's lien is defeated.
ii. Right of Stoppage in transit[Secs.50 to52] --The right of stoppage

of goods in transit, arises to an unpaid seller after he has parted with
the possession of the goods. The seller has the right to resume
possession of the goods while they are in the course of transit and to
retain them until payment or tender of the price.
The right of stoppage in transit is available to an unpaid seller, when

the buyer becomes insolvent and the goods are in transit.
The buyer is said to be 'insolvent' when he has ceased to pay his
debts in the ordinary course of business, or cannot pay his debts as
they becomes due whether he has committed an act of insolvency or
not.
iii. Right of Resale[Sec.54] -- The rights of lien and stoppage in transit,

would not have been of much value if he seller had no right to resell
the goods, because the seller cannot continue to hold the goods
indefinitely. Section 54 provides an unpaid seller with a limited right to
resell the goods.
An unpaid seller may resell the goods --

1) When the goods are of perishable nature, without giving any notice
to the buyer, of the resale.
2) In case of other goods, when after giving a notice to the buyer of his
intention to resell the goods, the buyer does not pay the price within a
reasonable time; and
3) Where the seller has expressly reserved the right of resale in the
contract. No notice to the buyer is required in that case.
b) Where the property in the goods has not passed to the buyer
1.Right of with holding Delivery -- Where the property in the goods has not
passed to the buyer, the unpaid seller has the right to withhold delivery of the
goods, which is similar to and co-extensive with his rights of lien and
stoppage in transit which he would have had if the property had passed.
2.Stoppage in Transit.
3.8.2 RIGHTS AGAINST THE BUYER PERSONALLY

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(Seller's Remedies Against buyer for Breach of Contract)-- Besides, the

above rights against the goods, an unpaid seller has certain rights against
the buyer personally. The seller enjoys the following rights in personam (also
known as remedies for breach of contract).
1. Suit for Price(S.55) -- When the property in the goods has passed to
the buyer, and the buyer wrongfully neglects or refuses to pay the
price, the seller is entitled to sue him for the price.
Where under a contract of sale the price is payable on a certain day

irrespective of delivery or passing of property, and the buyer refuses
or neglects to pay on that day, the seller may sue him for the price.
2. Suit for Damages for Non-Acceptance(S.56) -- Where the buyer
wrongfully neglects or refuses to pay for the goods, the seller may sue
him for damages for non-acceptance.
3. Suit for Damages for Repudiation of contract(S.60) before date of
delivery Where the buyer repudiates the contract before the date of
delivery, the seller may adopt any of the following two courses of
action, viz.-
a) The seller may treat the contact as rescinded and sue the buyer for
damages. This is also known as 'damages for anticipatory breach'.
The damages will be assessed according to the prices prevailing on
the date of breach.
b) The seller may treat the contract as subsisting and wait till the date
of delivery. The contract remains open at the risk and for the benefit of
both the parties. If the buyer subsequently chooses to perform there
shall be no damages; otherwise he shall be liable to damages
assessed according to the prices on the day stipulated for delivery.
4. Suit for Interest (S.61) --The seller may recover interest or special
damages whereby law interest or special damages may be
recoverable.
3.9 BUYER'S REMEDIES AGAINST SELLER FOR BREACH OF CONTRACT

A buyer also has certain remedies against the seller who commits a breach. These
are:
1. Suit for Damages for Non-Delivery- When the seller wrongfully neglects or
refuses to deliver the goods to the buyer, the buyer may sue the seller for damages
for non-delivery. This is in addition to the buyer's right to recover the price, if already
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paid, in case of non-delivery.

2. Suit for price- Where the buyer has paid the price and the goods are not delivered
to him, he can recover the amount paid.
3. Suit for specific performance- When the goods are specific or ascertained, a
buyer may sue the seller for specific performance of the contract and compel him to
deliver the same goods. The court orders for specific performance only when the
goods are specific or ascertained and an order for damages would not be an
adequate remedy. Specific performance is generally allowed where the goods are of
special significance or value e.g. a rare paining, a unique piece of jewellery, etc.
4. Suit for Breach of Warranty- Where there is a breach of warranty by the seller, or
where the buyer elects or is compelled to treat the breach of condition as breach of
warranty, the buyer cannot reject the goods. The buyer may, (a) set up the breach of
warranty in extinction or diminution of the price payable by him, or (b) sue the seller
for damages for breach of warranty.
5. Suit for Damages for Repudiation of contract before Due date-Where the
seller repudiates the contract before the date of delivery, the buyer may adopt any of
the following two courses of action --
A. He may treat the contract as rescinded and sue the seller for damages. This is
also known as 'damages for anticipatory breach'. The damages will be
assessed according to the prices prevailing on the date of breach.
B. He may treat the contract as subsisting and wait till the date of delivery. The
contract remains open at the risk and for the benefit of both the parties. If the
seller subsequently chooses to perform there shall be no damages otherwise
he shall be liable to damages assessed according to the prices on the day
stipulated for delivery.
6. Suit for interest- The buyer may recover such interest or special damages, as
may be recoverable bylaw. He may also recover the money paid where the
consideration for the payment of it has failed. In the absence of a contract to the
contrary, the court may award interest, to the buyer, in a suit by him for the refund of
the price in a case of a breach on the part of the seller, at such rate as it thinks fit on
the amount of the price from the date on which the payment was made.

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Contract Act

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Contract Act

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THE INDIAN CONTRACT ACT, 1872

GENERAL PRINCIPLES OF CONTRACT

An agreement is defined as every promise and every set of promises

ESSENTIALS OF A VALID CONTRACT

1.Offer and acceptance 2.Free 3.Capacity 4.Lawful 5 Lawful

6.Agreement not expressly 7.Certainty 8.Possibility 9. Legal 10.Intention to

Section 10 0f the Indian Contract Act, 1872 defines a contract as “All

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CAPACITY TO CONTRACT / COMPETENCY OF PARTIES

is of sound mind – A person is said to be of sound mind for the purpose of

b. effect upon his interests.

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NOT EXPRESSLY DECLARED TO BE VOID

Agreements become void if consideration and object are unlawful in

Contracts may be classified as under:

a. Valid Contract: A contract which satisfies all the conditions

In simple words, a voidable contract is one, which may be set aside or

VOID, VOIDABLE AND UNENFORCEABLE CONTRACTS

BILATERAL V. UNILATERAL CONTRACTS

EXPRESS CONTRACTS V. IMPLIED CONTRACTS

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IMPLIED IN FACT OR IMPLIED IN LAW

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f. Should not contain any term, the non-compliance of which would

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• Undue influence [S.16]– A contract is said to be induced by

19. Voidability of agreements without free consent

When consent to an agreement is caused by coercion, undue influence fraud

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• Mistake [Ss.20,21]– Where both parties to an agreement are

Effect of mistake as to law

A contract is not voidable because it was caused by a mistake as to any law

Agreement void where both parties are under mistake as to matter of

Where both the parties to an agreement are under a mistake as to a matter

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Explanation: An erroneous opinion as to the value of the things which forms

CAPACITY TO CONTRACT / COMPETENCY OF PARTIES

d. is of the age of majority according to the law to which he is subject

2. Persons of unsound mind

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According to Sec.2(d) “When, at the desire of the promisor, the promisee or

(2) it is a promise to compensate, wholly or in part, a person who has already

(3) it is a promise, made in writing and signed by the person to be charged

Explanation 2 : An agreement to which the consent of the promisor is freely

FOR A LAWFUL CONSIDERATION AND OBJECT –

6. Agreements for uncertainty. Agreements the meaning of which is

An agreement to do an act impossible in itself is void.Contract to do act

Obligations of parties to contracts [S.37]

The parties to a contract must either perform, or offer to perform, their

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A promises to deliver goods to B on a certain day of payment of Rs. 1,000. A

a) Actual Performance: When both the parties to the contract discharge

b)Attempted Performance/ Tender of Performance: Where a promisor has

Effect of refusal to accept offer of performance[S.38]

Where a promisor has made an offer of performance to the promisee, and

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A contracts to deliver to B at his warehouse, on the first March, 1873, 100

Effect of refusal of party to perform promise wholly [S.39]

When a party to a contract has refused to perform, or disabled himself from

Person by whom promise is to be performed [S.40]

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Effect of accepting performance from third person [S.41]