Unit - II

Business Law and Ethics
UNIT - II
THE INDIAN CONTRACT ACT, 1872
The laws of contract in India are contained in the Indian Contract Act, 1872. This Act is based
mainly on English Common Law which is to a large extent made up of judicial precedents. It
extends to the whole of India except the State of Jammu and Kashmir and came into force on
the first day of September 1872. The Act is not exhaustive. It does not deal with all the
branches of the law of contract. There are separate Acts which deal with contracts relating to
negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Further
the Act does not affect any usage or custom of trade (Sec. 1). A minor amendment in Section
28 of the Act was made by the Indian Contract (Amendment) Act, 1996.
1. General principles of the law of contract are expressed by sections 1 to 75
(a) The contracts of Indemnity and Guarantee are given under Secs. 124-147.
(b) Sections 124-147 and 182-238 contains the principles regarding contracts of Bailment and
Pledge and Contracts of Agency respectively.
The provisions of Indian Contract Act are subjection to some assumptions. The various
provisions of the Indian Contract Act, it will be proper to see some of the basic assumptions
underlying the Act include : (i) Subject to certain limiting principles, there shall be freedom of
contract to the contracting parties and the law shall enforce only what the parties have agreed
to be bound. The law shall not lay down absolute rights and liabilities of the contracting
parties. Instead it shall lay down only the essentials of a valid contract and the rights and
obligations it would create between the parties in the absence of anything to the contrary
agreed to by the parties ; and (ii) Expectations created by promises of the parties shall be
fulfilled and their non-fulfilment shall give rise to legal consequences. If the plaintiff asserts
that the defendant undertook to do a certain act and failed to fulfil his promise an action at law
shall apply.
Section 2(h) of the Indian Contract Act defines a contract as, "An agreement which is
enforceable at law."
This definition has two important components which constitute the basis for a contract. They
are: (1) An agreement, and (2) Legal obligation.
1. Agreement: Every promise and every set of promises, forming the consideration for each
other, is an agreement [Sec. 2 (e)]
On analysing the above definition the following characteristics of an agreement become

evident:
(a) Plurality of persons: There must be two or more persons to make an agreement because one
person cannot enter into an agreement with himself.
(b) Consensus-ad-idem : Both the parties to an agreement must agree about the subject-matter
of the agreement in the same sense and at the same time.
Trinity College of Engineering & Technology, Peddapalli

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2. Legal Obligation: As stated above, an agreement to become a contract must give rise to a
legal obligation. Obligation is an undertaking to do or to abstain from doing some definite act.
The obligation must be such as is enforceable by law. In other words, it must be a legal
obligation and not merely moral, social or religious. To take an example, "Please, come to my
house", says Ram to Mohan, "and we shall go out for a walk together". Mohan came to the
house of Ram but Ram could not leave the house because of some important engagement.
Mohan cannot sue Ram in damages for his not fulfilling the promise, the reason being that
there had been no intention between Mohan and Ram to create any legal obligation by the
agreement as made between them. In the circumstances, there was, in eye of law no contract
between Ram and Mohan.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
Students must remember that all agreements are not contracts. Only that agreement which is
enforceable at law is a contract. In other words, the parties to the agreement must have
intended that it shall have legal consequences and be Legally enforceable. An agreement which
is not enforceable at law cannot be a contract. Thus, the term agreement is wider in scope than
contract. All contracts are agreements but all agreements are not contact.
An agreement, to be enforceable by law, must possess the essential elements of a valid contract
as contained in section 10 of the Indian Contract Act.
According to Section 10, "All agreements are contract if they are made by 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."
As the details of these essentials form the subject-matter of our subsequent chapters, it is
proposed to discuss them in brief here.
The essential elements of a valid contract are as follows:
1. Offer and acceptance: There must be a 'lawful offer' and a 'lawful acceptance' of the offer,
thus resulting in an agreement. The adjective 'lawful' implies that the offer and acceptance
must satisfy the requirements of the Contract Act in relation thereto.
2. Intention to create legal relations: There must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations. Agreements
of a social or domestic nature do not contemplate legal relations, and as such they do not give
rise to a contract. An agreement to take dinner at a friend's house is not an agreement intended
to create legal relations and therefore is not a contract. Agreements between husband and wife
also lack the intention to create legal relationship and thus do not result in contracts.
3. Consensus ad idem: The minds of both the parties must be ad idem. In other words, the two
parties must have agreed about the subject matter of the contract at the same time and in the
same sense. For instance, if A who owns two cars, one Ambassador and the other Fiat, offers to
sell B one car, A intending it to be the Ambassador, B accepts the offer thinking that it is the
Fiat, there is no consensus and hence no contract.

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4. Competency of Parties: The parties to the agreement must be competent to contract. If either
of the parties to the contract is not competent to contract, the contract is not valid. According to
section 11 following are the persons who are competent to contract
(a) who have attained the age of majority according to the law to which they are subject;
(b) who are of sound mind;
(c) who are not disqualified from contracting by any law to which they are subject.
5. Lawful consideration: The third essential element of a valid contract is the presence of
'consideration'. Consideration has been defined as the price paid by one party for the promise
of the other. An agreement is legally enforceable only when each of the parties to it gives
something and gets something. The something given or obtained is the price for the promise
and is called 'consideration'. Subject to certain exception, gratuitous promises are not
enforceable at law.
The consideration may be an act (doing something) or forbearance (not doing something) or a
promise to do or not to do something. It may be past, present or future. But only those
considerations are valid which are lawful. The consideration is lawful, unless - it is forbidden
by law; or is of such a nature that, if permitted it would defeat the provisions of any law; or is
fraudulent; or involves or implies injury to the person or property of another; or is immoral; or
is opposed to public policy (Sec. 23).
6. Free Consent: An agreement must have been made by free consent of the parties. A consent
may not be free either on account of mistake in the minds of the parties or on account of the
consent being obtained by some unfair means like coercion, fraud, misrepresentation or undue
influence. In case of mutual mistakes, the contract would be void, while in case the consent is
obtained by unfair means, the contract would be voidable.
7. Lawful object: For the formation of a valid contract it is also necessary that the parties to an
agreement must agree for a lawful object. The object for which the agreement has been entered
into must not be fraudulent or illegal or immoral or opposed to public policy or must not imply
injury to the person or property of another (Sec. 23). If the object is unlawful for one or the
other reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a
house to a prostitute to carry on protection, he cannot recover the rent through a court of law.
8. Written and Registered: According to the Indian Contract Act, a contract may be oral or in
writing. But in certain special cases it lays down that the agreement, to be valid, must be in
writing or/and registered. For example, it requires that an agreement to pay a time barred debt
must be in writing and an agreement to make a gift for natural love and affection must be in
writing and registered (Sec. 25). Similarly, certain other Acts also require writing or/and
registration to make the agreement enforceable by law which must be observed.
Thus, (i) an arbitration agreement must be in writing as per the Arbitration and Conciliation
Act, 1996; (ii) an agreement for a sale of immovable property must be in writing and registered
under the Transfer of Property Act, 1882 before they can be legally enforced.

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9. Not declared to be void: The agreement must not have been declared to be expressly void.
Agreements mentioned in sections 24 to 30 have been expressly declared to be void.
10. Certainty: Section 29 of the Contract Act provides that "Agreements, the meaning of which
is not certain for capable of being made certain, are void". In order to give rise to a valid
contract the terms of the agreement must not be vague or uncertain. It must be possible to
ascertain the meaning of the agreement, for otherwise, it cannot be enforced.
Illustration :A agrees to sell B a hundred tons of oil. There is nothing whatever to show what
kind of oil was intended. The agreement is void for uncertainty.
11. Possibility of Performance: Yet another essential feature of a valid contract is that it must
be capable of performance. Section 56 lays down that "An agreement to do an act impossible
in itself is void". If the act is impossible in itself, physically or legally, the agreement cannot be
enforced at law.
Illustration : A agrees with B to discover treasure by magic. The agreement is not enforceable.
All the elements mentioned above must be present in order to make a valid contract. If any one
of them is absent the agreement does not become a contract.
KINDS OF CONTRACTS
Contracts Classified on the basis of Enforceability:
From the point of view of enforceability a contract may be valid or voidable or void or
unenforceable or illegal.
1. Valid contract: An agreement enforceable at law is a valid contract. An agreement becomes a

contract when all the essentials of a valid contract as laid down in section 10 are fulfilled. A
offers to sell his house for Rs. 10,000 to B. B agrees to buy it for this price. It is a valid
contract. A contract to enter into a contract is, however, not a valid contract.
2. Void contract: A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable. It is a contract without any legal effects. A contract may be valid at
the time when it is made but it may become void subsequent to its formation Thus, a contract
with one who had been an alien friend but later on becomes an alien enemy would be a case of
a void contract.
However, a void contract is not necessarily unlawful, it is destitute of legal effects. The law
will not enforce such a contract, nor can it be made valid by the parties.
A void contract should be distinguished from void agreement. An agreement not enforceable at
law is a void agreement. In the case of a void agreement no contract comes into existence. An
agreement with a minor is void. But in the case of void contract, a contract does come into
existence but subsequently ceases to be enforceable by law. An agreement which is void never
matures into a contract. An agreement which becomes illegal in the course of performance is a
case of avoid contract, while an agreement which is null and void ab initio is a case of a void

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agreement. Void contracts may better be called void agreements to avoid contradiction in
terms.
3. Voidable contract: According to Section 2(i), "an agreement which is enforceable by law at
the option of one or more of the parties thereto, but not at the option of the other or others, is a
voidable contract". Thus, a voidable contract is one which is enforceable by law at the option
of one of the parties. Until it is avoided or rescinded by the party entitled to do so by exercising
his option in that behalf, it is a valid contract.
Usually a contract becomes voidable when the consent of one of the parties to the contract is
obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable
at the option of the aggrieved party i.e., the party whose consent was so caused (Secs. 19 and
19A). But the aggrieved party must exercise his option of rejecting the contract (i) within a
reasonable time, and (ii) before the rights of third parties intervene, otherwise the contract
cannot be repudiated.
Illustrations : (a) A. threatens to shoot B if he does not sell his new Bajaj Scooter to A for Rs.
2,000. B agrees. The contract has been brought about by coercion and is voidable at the option
of B.
4. Unenforceable contract: It is a contract which is otherwise valid, but cannot be enforced

because of some technical defect like absence of a written form or absence of a proper stamp.
Such contracts must be sued upon by one or both of the parties. Such contracts cannot be
proved in the court. Such contracts will not be enforced by the courts until and unless the
defect is rectified.
Void agreement: "An agreement not enforceable by law is said to be void" (Sec.2 (g)). Thus a
void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of
law such an agreement is no agreement at all from its very inception. There is absence of one
or more essential elements of a valid contract, except that to 'free consent', in the case of a void
agreement. Thus, an agreement with a minor is void ab-initio as against him, because a minor
lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio,
of course with certain exceptions as laid down in Section 25.
5. Illegal Contract: A contract which is either prohibited by law or otherwise against the policy
of law is an illegal contract. It is void ab-initio. Thus, a contract to commit dacoity is an illegal
contract and cannot be enforced at law. An illegal contract should be distinguished from a void
contract. Both are unenforceable at law but there is something more in an illegal contract.
Every illegal contract is a void contract but every void contract may not be illegal contract e.g.
a wagering agreement is void but not illegal or an agreement with a minor is void but not
illegal. Every void contract is not illegal unless its object or consideration is (a) immoral or (b)
opposed to public policy etc. A void contract does not affect a collateral contract. But when a
contract is illegal collateral contracts depending thereon are also void. An illegal contract is
like an infectious disease and is fatal not only to the main contract but to collateral contract as
well.
Example : X borrows Rs. 10,000 from Y for the purpose of smuggling goods.

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Y knows the purpose of the loan. The agreement between X and Y is collateral to the main
agreement which is illegal. The collateral agreement is also illegal.
Difference between voidable contract and void agreement
1. A void agreement has from the very beginning no legal effects. It is unenforceable at law. A
voidable contract is one which one of the parties may affirm or reject at his option. It is valid
and enforceable till it is repudiated or rescinded.
2. The defect in the case of voidable contract is curable and may be condoned. But a void
agreement is void ab initio and its defects are incurable.
3. In the case of a void agreement even a third party cannot acquire any right from person
claiming under such contract while in the case of voidable contract, a third party can acquire a
valid title from a person claiming under such a contract.
4. Since a void agreement is unenforceable at law there does not arise any question of
compensation on account of the non-performance of the agreement. But in case of a voidable
contract, a person is entitled to compensation for loss or damages suffered by him on account
of the non-performance of the contract.
5. A voidable contract does not affect the collateral transaction. But where the agreement is
void on account of illegality of the object, the collateral transaction will also become void.
Contracts Classified on the basis of performance:
1. Unilateral contract: A unilateral contract is one in which a promise on one side is exchanged
for an act on the other wide. In such contracts one party to the contract has performed his part
and an obligation is outstanding against the other party. Thus, where a doctor in a private
clinic, examines a patient and gives the medicine, the patient alone remains liable to pay the
fees. It is a case of unilateral contract.
2. Bilateral contract: In such a contract a promise on one side is exchanged for a promise on
the other. It is a contract in which there is an obligation on the part of both the parties to do or
to refrain from doing a particular act. A promises to paint a picture in return for which B
promises to pay Rs. 500. Here a promises to paint the picture and B promises to pay. Each
party is thus both a promisor and a promisee.
3. Executed contract: A contract is said to be executed when one party to the contract has
performed his share of the obligation and the other party is still to perform his share of the
promise. In executed contracts, the contract does not come into existence until one party to it
has done all that he can be required to do. Thus, where A advertises a reward of Rs. 500 to
anyone who finds his missing dog, and when B knowing the offer brings the missing dog, A
becomes liable to pay Rs. 500.
4. Executory contract: It is a contract where some future act is to be done. It is one which is
either wholly unperformed, or there remains something to be one of both the sides. Thus,
where an agreement is made to build a house in six months, it is an executory contract.

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Contracts Classified on the basis of Mode of Creation
From the point of view of mode of creation a contract may be anyone of the following types :
1. Express contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made in words spoken or written, it is an express contract. For example
A tells B on telephone that he offers to sell his car for Rs. 1,00,000 and B in reply informs A
that he accepts the offer, there is an express contract.
2. Implied contract: Where both the offer and acceptance constituting an agreement
enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it
is an implied contract. Thus, where A, coolie in uniform takes up the luggage of B to be carried
out of the Railway station without being asked by B, and B allows him to do so, then the law
implies that B agrees to pay for the services of A, and there is an implied contract. Similarly,
where M, a professional shoe shiner starts polishing the shoes of N without being requested to
do so, and N allows M to polish his shoes knowing that M expects to be paid for the service,
there comes into existence an implied contract and N is under obligation to pay to M.
3. Constructive or quasi-contract: It is a contract in which there is no intention on either side to

make a contract, but the law imposes a contract. In such a contract rights and obligations arise
not by any agreement between the parties but by operations of law. Thus, a finder of lost goods
is under an obligation to find out the true owner and return the goods. Similarly, where certain
books are delivered to a wrong addressee, the addressee is under an obligation either to pay for
them or return them.
Offer and Acceptance
Proposal or Offer
According to Section 2(e) of the Indian Contract Act, When one person signifies to another
his willingness to do job, or to 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.
Elements/Main features of a Proposal
1. Existence of two parties: For a valid offer, there must be two parties. A person cannot
make an offer to himself.
2. Communication: The offer must be communicated to the offence. If it is never

communicated to the offence, it cannot be accepted and no valid contract comes into
existence.
3. Willingness: The offer must show willingness of the offer or. Mere telling or sharing a
plan is not an offer.
4. Intention of Obtaining Assent: The offer must be made with a view to obtain the assent
of the offeree. The offer made out of a prank or as a joke is not valid offer, and
therefore if accepted, it can never make the valid contract.

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5. May be positive or Negative: The offer may involve doing something or not doing
something-Section 2(o).The offer to do something is a positive offer or not to do
something is a negative offer.
Legal Rules as to Offer
1. Offer Must be definite, Unambiguous and certain
They must be vague or indefinite. If the terms are vague, it is not capable of being accepted as
the vagueness would not create any contractual relationship.
2. Offer should not bind the other party to reply
The offer should not bind the other party to reply. In the same way, if the offer should not
contain terms, non- compliance of which may be assumed as acceptance.
3. Offer must be made to create legal relationship
While making the offer, the aim of the offerer should be to primarily create a legal obligation.
An offer that creates only social or moral obligations does not constitute a valid agreement or
contract.
4. The offer may be general or specific
An offer is called specific when it is made to an individual or a group of individuals. In case of

a specific offer, only the person or group of persons to whom the offer is made can accept or
reject the offer.
5. The offer may be express or implied.
An offer does not necessarily need to be express. it can also be implied. According to Section
9(a) specific offer can be made in words-written or oral.
6. The offer should be a request and not an order.
The person making the offer has the right to set conditions to the acceptance of the offer, but he
does not have any right to set conditions to the non-acceptance of the offer.
7. The offer must be for a possible act
Man can do only what is possible, and the laws accepts that. An offer or a proposal to do
impossible is devoid of practicality or meaning. To make an offer which is humanly impossible
is not recognized by law and as such there can be no compliance.
8. The offer must be communicated
An offer, to be complete, must be communicated to the person to whom it is made so that he

can accept or not accept the offer. Unless the offer is communicated by the offerer (or by his
agent) to the offeree, there can be no acceptance of the offer and as such, no agreement can be
reached.

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1. Express Offer: The offer made by using words spoken or written is known as an express
offer.
2. Implied Offer: The offer which could be understood by a conduct of parties or circumstances
of case is called the implied offer.
3. Specific Offer: The offer made to a specific person or a particular person or two or more
than two specific persons. The specific offer is made to an ascertained person.
4. General Offer: It is not necessary that the offer should be made to a specific person. The
offer can be made to the world at large. If the offer is made to the world at large, it is known as
the general or public offer.
5. Cross Offer: When two parties exchange identical offers in ignorance at the time of each
others offer, the offers are called cross offers. There is not binding contract in such a case, as
ones offer cannot be construed as acceptance by the other.
6. Continuous Offer: It is the offer which is open for a continuous period of time,it is also
known as the open offer or the standing offer.
7. Counter Offer: When the offeree offers to qualified acceptance of the offer subject to
modifications and variations in the terms of original offer, he is said to have made a counter
offer. Counter-offer amounts to rejection of the original offer.
Acceptance:
A proposal or offer is said to have been accepted when the person to whom the proposal is
made signifies his assent to the proposal to do or not to do something [Section 2 (b)].
Rules governing acceptance

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1. Acceptance must be absolute and unqualified: As per section 7 of the Act, acceptance is
valid only when it is absolute and unqualified and is also expressed in some usual and
reasonable manner unless the proposal prescribes the manner in which it must be accepted. If
the proposal prescribes the manner in which it must be accepted, then it must be accepted
accordingly.
2. The acceptance must be communicated
An acceptance must be communicated to the person who made the offer. An offer made by the
intended offeree without the knowledge that an offer has been made to him cannot be deemed
as an acceptance thereto.
3. Acceptance must be in the prescribed mode
Where the proposal prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be accepted in a reasonable
manner.
4. Mere silence is not acceptance
The acceptance of an offer cannot be implied from the silence of the offeree or his failure to
answer, unless the offeree has in any previous conduct indicated that his silence is the evidence
of acceptance.
5. The proposer cannot prescribe the method of refusal
The proposer needs to be informed if the offer made by him is accepted, but he cannot insist on
him being informed of its non-acceptance. It is the right of the offeree to accept the proposal or
not to accept it.
6. An offer once rejected cannot be accepted until it is renewed.
A rejected offer is dead offer and needs to be revived before it can be considered for
acceptance.
7. Acceptance may be express or implied
Express acceptance may be written or by word of mouth whereas implied acceptance could be
reflected by the action or behaviour of the person accepting the offer. The later is also called
tacit acceptance. According to Section 8 of the Act, it acceptance can be acceptance by
performing conditions or acceptance by receiving consideration.
8. An action without the knowledge of the proposal is no acceptance
Without the knowledge of the proposal, even if the action conforms to the conditions of the
proposal, it does not constitute an acceptance. Acceptance can be given only by the person to
whom the proposal is made.

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9. Acceptance can only be given by the person to whom the offer is made
This is true of a specific proposal which can only be accepted by the person to whom it is
made.
10. Acceptance must be made before the lapse or withdrawal of an offer.
If the person making the offer has set a time limit for its acceptance, the offer must be accepted
within that time.
Consideration
Section 2 (d) of the Indian Contract Act, 1872 defines consideration as 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 abstain from doing something, such an act or
abstinence or promise is called consideration for the promise.
From the above definition it can be inferred that,
1. Consideration must be at the desire of the promisor.
(2) Consideration may move from one person to any other person
(3) Consideration may be past, present or future and
(4) Consideration should be real though not adequate.
Type of Consideration
1. Past Consideration: It is also known as executed consideration. One party to contract has
received the benefit before formation of contract.
2. Present Consideration: It is received at the time of formation of the contract. It is in process

of execution.
3. Future Consideration: It will be received by a party after the formation of the contract. It is
also called as executory consideration.
Legal Requirements Regarding Consideration:
1. Consideration means doing or not doing something: The consideration is some act or
abstinence. Some act means doing something while abstinence means not to do something.
Thus, a consideration can be positive or negative. To do something is known as positive
consideration while not to do something is known as negative consideration.
2. Consideration must move at the desire or Promisor: The consideration must move at the
desire of the Promisor. However, it is not necessary that it must for the benefit of the Promisor.
It can be for the benefit of a third person also.
3. Consideration can flow either from the promisee or any other person: The consideration for
a contract can move either from the promisee or from any other person. This point is made

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clear even by the definition of the word consideration, according to which at the desire of the
promisor, the promisee or any other person, doing something is consideration.
4. Consideration may be inadequate: Consideration need not necessarily be of the same value
as of the promise for which it is exchanged. But it must be something which can be inadequate
as well. Inadequate consideration would not invalidate an agreement but such inadequate
consideration could be taken into account by the court in deciding whether the consent of the
promisor was freely given.
5. Consideration may be Past, Present or Future: The consideration may be past, present or
future. A past consideration is valid in India while it is not regarded as valid in many other
countries.
Past consideration: When a consideration by a party for a present promise was given in the past
i.e. before the date of the promise, it is said to be a past consideration.
Present Consideration: A consideration to do or abstain from doing something given

simultaneously with the promise is a present consideration.
Future Consideration: When the consideration from one party to the other is to pass subsequent
to the act of doing or abstaining from doing something, it is called a future consideration.
6. Act Promisor bound to do is not consideration: If the promisor is legally bound or required
to perform something as a part of his duty, and he agrees to do so, it is not a valid
consideration. The consideration must be something different from promisors existing
obligation.
7. Consideration must be lawful: The consideration must be lawful. Lawful means as per the
provisions of an act. An unlawful act or benefit received in an unlawful manner is not regarded
as the consideration.
8. Consideration should be possible to perform: The consideration must be real and not
illusory. It means the consideration should not be impossible to perform. An act does not
recognize impossible performance. It may be physically impossible or can be legal impossible.
Validity of an Agreement without Consideration/Agreement without consideration-Exceptions
An agreement without consideration is void. Not only that, even inadequate consideration
would render the enforceability of the contract quite difficult as the free consent of the parties
would become suspect. The Act however contains certain exceptions to this important rule.
These are:
i. On account of natural love and affection: According to Section 25, An agreement made
without consideration is void unless 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.

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It follows, therefore, that the following four elements are essential for such agreement:
a) The agreement must be written.
b) The agreement must be registered under the prevailing law.
c) The parties to the agreement must be intimately related
d) There must be love and affection between the parties.
ii. Compensation paid for past voluntary services: A promise to compensate wholly or in part
for past voluntary services rendered by someone to promisor does not require consideration for
being enforced. However the past services must have been rendered voluntarily to the
promisor. Further the promisor must have been in existence at that time and he must have
intended to compensate.
iii. Promise to pay debts barred by limitation: Where there is a promise in writing to pay a debt,
which was barred by limitation, is valid without consideration.
iv. Creation of Agency: In term of section 185 of the Act, no consideration is necessary to
create an agency
v. In case of completed gifts, no consideration is necessary: This is clear from the Explanation
(1) to section 25 of the Act which provides that nothing in this Section shall affect the validity
as between donor and done of any gift actually made.
CAPACITY OF PARTIES
Section 11 provides three specific categories of persons who are not competent to enter into
contracts, namely
1) Minors;
2) People who are mentally incompetent; and
3) People disqualified by their legal status like insolvents.
A minor is a person who is not a major. According to The Indian Majority Act,1875, a minor is
one who has not completed his or her 18th year of age. A person attains majority on
completing his 18th year in India. In the following two cases, a person continues to be a minor
until he completes the age of 21 years.
(a) Where a guardian of a minor person or property has been appointed under the Guardians
and Wards Act, 1890; or
(b) Where the superintendence of a minor's property is assumed by a Court of Words.
Effects of minor's agreements

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A minor's agreement being void is wholly devoid of all effects. When there is no contract there
should be no contractual obligation on either side. The various rules regarding minor's
agreement are discussed below.
1. An agreement with or by a minor is void
Section 10 of the Contract Act requires that the parties to a contract must be competent and
Section 11 says that a minor is not competent. But neither section makes it clear whether the
contract entered into by a minor is void or voidable.
2. No ratification
An agreement with minor is completely void. A minor cannot ratify the agreement even on
attaining majority, because a void agreement cannot be ratified.
3. Beneficial agreements are valid contracts
Any agreement which is of some benefit to the minor and under which he is required to bear
no obligation, is valid. In other words, a minor can be a beneficiary e.g., a payee, an endorsee
of a promise under a contract
Example : (ii) X, a minor, insured his goods with an insurance company. The goods were
damaged. X filed a suit for claim. The insurance company took the plea that the person on
whose behalf the goods were insured was a minor. The court rejected the plea and allowed the
minor to recover the insurance money. [The General American Insurance Company Ltd. v.
Madan Lal Sonu Lal (1935) 59 Bom 656].
4. Liability for necessaries
The case of necessaries supplied to a minor or to any person whom such minor is legally bound
to support is governed by section 68 of the Indian contract Act. A claim for necessaries
supplied to a minor is enforceable at law. But a minor is not liable for any price that he may
promise and never for more than the value of the necessaries. There is no personal liability of
the minor, but only his property is liable. A minor is also liable for the value of necessaries
supplied to his wife.
The following have been held to be necessaries:
(i) Livery for an officer's servant.
(ii) Horse, when doctor ordered riding exercise.
(iii) Goods supplied to a minor's wife for her support.
(iv) Rings purchased as gifts to the minor's fiancee.
(v) A racing bicycle.
On the other hand, following have been held not to be necessaries :

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(i) Goods supplied for the purpose of trading.
(ii) A silver-gift goblet.
(iii) Cigars and tobacoo.
(iv) Refreshment to an undergraduate for entertaining.
5. The rule of estoppels(obstruction) does not apply to a minor
Where a minor by misrepresenting his age has induced the other party to enter into a contract
with him, he cannot be made liable on the contract. There can be no estoppel against a minor.
In other words, a minor is not estoppled from pleading his infancy in order to avoid a contract.
6. No Specific performance
A minor's contract being absolutely void, there can be no question of the specific performance
of such a contract. A guardian of minor cannot bind the minor by an agreement for the
purchase of immovable property; so the minor cannot ask for the specific performance of the
contract which the guardian had no power to enter into.
7. Liability for torts
A minor is liable in tort. Thus, where a minor borrowed a horse for riding only he was held
liable when he let the horse to one of his friends who jumped and killed the horse. Similarly, a
minor was held liable for his failure to return certain instruments which he had hired and
passed on to a friend. But a minor cannot be made liable for a breach of contract by framing
the action on tort. You cannot convert a contract into a tort to enable you to sue an infant.
8. Partnership
A minor being incompetent to contract cannot be a partner in a partnership firm, but under
section 30 of the Indian Partnership Act, he can be admitted to the benefits of partnership.
9. Minor agent
A minor can be an agent (Sec. 184). He shall bind the principal by his acts done in the course
of such an agency, but he cannot be held personally liable for negligence or breach of duty.
Thus in appointing a minor as an agent, the principal runs a great risk.
10. Minor and insolvency. A minor cannot be adjudicated as an insolvent, for, he is incapable
of contracting debts. Even for necessaries supplied to him, he is not personally liable, only his
property is liable (Sec. 68).
11. Contract by minor and adult jointly. Where a minor and an adult jointly enter into an
agreement with another person, the minor has no liability but the contract as a whole can be
enforced against the adult (Jamna Bai vs Vasanta Rao). In Sain Das vs Ram Chand, [(1923). 4

15
Lah. 334] where there was a joint purchase by two vendees, one of whom was a minor, it was
held that the vendor could enforce the contract against the major vendee.
12. Minor shareholder. A minor, being incompetent to contract, cannot be a shareholder of the
company. A company can also refuse to register transfer or transmission of shares in favour of
a minor unless the shares are fully paid.
It follows from it that a minor, acting through his lawful guardian, may become a shareholder
of the company, in case of transfer or transmission of fully paid shares to him. Logically also,
if a minor could legally hold property in his name, it would be wrong to debar him from
holding fully paid up shares in his own name.
PERSONS OF UNSOUND MIND
As stated earlier, the section 11 disqualifies a person who is not of sound mind from entering
into a contract. Contracts made by persons of unsound mind like a minor's contract are void.
The reason is that a contract requires assent of two minds but a person of unsound mind has
nothing which the law recognises as a mind.
Section 12 deals with the question as to what is sound mind for the purpose of entering into a
contract. It lays down that, "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".
The Section further states that :
(i) "A person who is usually of unsound mind, but occasionally of sound mind, may make a
contract when he is of sound mind." Thus a patient in a lunatic asylum, who is at intervals of
sound mind, may contract during those intervals.
(ii) "A person who is usually of sound mind, but occasionally of unsound mind, may not make
a contract when he is of unsound mind". Thus, a sane man, who is delirious from fever, or who
is so drunk that he cannot understand the terms of a contract, or form a rational judgement as to
its effect on his interest, cannot contract while such delirium or drunkenness lasts.
Unsoundness of mind may arise from:
(a) Idiocy It is God given and permanent, with no intervals of saneness. The mental powers
of an idiot are completely absent because of lack of development of the brain;
(b) Lunacy or Insanity It is a disease of the brain. A lunatic loses the use of his reason due to
some mental strain or disease. Of course he may have lucid intervals of sanity:
(c) Drunkenness It produces temporary incapacity, till the drunkard is under the effect of
intoxication, provided it is so excessive as to suspend the reason for a time and create
impotence of mind;

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(d) Hypnotism It also produces temporary incapacity, till the person is under the impact of
artificially induced sleep;
(e) Mental decay on account of old age, etc.
Effects of agreements made by persons of unsound mind: An agreement entered into by a

person of unsound mind is treated on the same footing as that of minor's and therefore an
agreement by a person of unsound mind is absolutely void and inoperative as against him but
he can derive benefit under it (Jugal Kishore vs Cheddu, 1903, ALL L.J.43). The property of a
person of unsound mind is, however, always liable for necessaries supplied to him or to any
one whom he is legally bound to support, under Section 68 of the Act.
DISQUALIFIED PERSONS
The third type of incompetent persons, as per Section 11, are those who are "disqualified from
contracting by any law to which they are subject". These are:
1. Alien enemies: An alien living in India is competent to contract with citizens of India. He
can maintain an action on a contract entered into by him during peace time. But if a war is
declared, an alien enemy cannot enter into any contract with an Indian citizen. Contracts
entered into before the declaration of war are either stayed or terminated but contracts entered
into during the war are unenforceable.
2. Foreign sovereigns and ambassadors: These persons are immune from the jurisdiction of
local courts, unless they voluntarily submit to its jurisdiction. These persons have right to
contract but can claim the privilege of not being sued. The rules regarding suits by or against
foreign sovereigns are laid down in sections 84 to 87 of Civil-Procedure Code.
Example: E, who was a diplomat and was on the staff of a foreign embassy rented a house
belonging to M.M. sued him for arrears of rent. It was held that no action could be brought
against him as he was protected by diplomatic privileges. [Engelke v. Musman (1928) A.C.
433].
3. Convict: A convict is one who is found guilty and is imprisoned. During the period of
imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts
made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the
Law of Limitation is held in abeyance during the period of his sentence.
4. Married women: Married women are competent to enter into contracts with respect to their
separate properties (Stridhan) provided they are Major and are of sound mind. They cannot
enter into contracts with respect to their husbands' properties. A married woman can, however,
act as an agent of her husband and bind her husband's property for necessaries supplied to her,
if he fails to provide her with these.

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5. Insolvents: An insolvent cannot enter into a contract as his property vests in the official
receiver or official assignee. This disqualification of an insolvent is removed after he is
discharged.
6. Joint-stock company and corporation incorporated under a special Act: (like L.I.C., U.T.I.).
A company/Corporation is an artificial person created by law. It cannot enter into contracts
outside the powers conferred upon it by its Memorandum of Association or by the provisions
of its special Act as the case may be. Again, being an artificial person (and not a natural
person) it cannot enter into contracts of a strictly personal nature e.g. marriage. FREE
CONSENT
According to section 13, "Two or more persons are said to consent when they agree upon the
same thing in the same thing in same sense." Thus, consent involves identity of minds in
respect of the subject matter of the contract. In English Law, this is called 'consensus-ad-idem'.
Effect of Absence of consent: When there is no consent at all, the agreement is void ab-initio,
i.e. it is not enforceable at the option of either party.
Example: X has one Maruti car and one fiat car. He wants to sell fiat car. Y does not know that
X has two cars. Y offers to buy X's Maruti car Rs 50,000. X accepts the offer thinking it to be
an offer for his Fiat car.
Here, there is no identity of mind in respect of the subject of the subject matter. Hence there is
no consent at all and the agreement is void ab-initio.
Meaning of Free consent:

It is one of the essential elements of a valid contract as it is evidenced by section 10 which
provides that all agreements are contracts if they are made by the free consent of the parties...
according to section 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.
Effect of Absence of free consent:

When there is consent but it is not free (i.e. when it is caused by coercion or undue influence or
fraud or misrepresentation), the contract is usually voidable at the option of the party whose
consent was so caused.
1. COERCION: Meaning of coercion [section 15]: It means compelling a person to enter into
a contract, by use of physical force/activities forbidden by Indian penal code, OR threatens to
do activities forbidden by I.P.C, OR threatens to damages the property.
Effect of coercion: Voidable and can be canceled at the option of aggrieved party. OR A
'suicide and a 'threat to commit suicide' are not punishable but an attempt to commit suicide is
punishable under the Indian penal code.
2. UNDUE INFLUENCE: Meaning of Undue influence [section 16(1)]: The term 'undue
influence' means dominating the will of the other person to obtain an unfair advantage over the
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other. According to section 16(1), a contract is said to be induced by undue influence where the
relations subsisting between the parties are such that one of them is in a position to dominate
the will of the other, and the dominant party uses that position to obtain an unfair advantage
over the other.
When two-partner are in relation, and one of them is dominant and other is in weaker position
and dominant person takes undue-Advantage, then it is called "Undue- influence."
Effect of undue influence [section 19A]: when consent to an agreement is caused by undue
influence, the agreement is a contract voidable at the option of the party whose consent was so
caused.
Comparison between coercion and undue influence:

Similarities: In case of both coercion and undue influence, the consent is not free and the
contract is voidable at the option of the aggrieved party.
3. FRAUD: Meaning and essential elements of fraud [section 17] : The term 'fraud' means a
false representation of fact made willfully with a view to deceive the other party. Fraud
includes following:
Wrong suggestion about a fact, knowing that it is not-true;

E.g. X sells to Y locally manufactured goods as imported goods charging a higher price, it
amounts to fraud. OR A seller claimed that his projector is made in Singapore, and sold it for
Rs. 100,000/- However the fact is that "Projector was made in south India".
Any activity declared fraud as per other law; under companies act and insolvency acts, certain
kinds of transfers have been declared to be fraudulent.
Note: In case of fraud, the seller is always liable even though buyer has an opportunity to
check the fraud. Any activity fitted (supported) to deceive. It covers those acts which deceive
but are not covered under any other clause.
Effect of Fraud [section-19]
The effects of fraud are as follows:

(a) The party whose consent was caused by fraud can rescind (cancel) the contract but he
cannot do so in the following cases:
Where silence amounts to fraud, the aggrieved party cannot rescind the contract if he
had the means of discovering the truth with ordinary diligence;
Where the party gave the consent in ignorance of fraud;
Where the party after becoming aware of the fraud takes a benefit under the contract;
Where an innocent third party before the contract is rescinded acquires for
consideration some interest in the property passing under the contract.
Where the parties cannot be restored to their original position.

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(b) The party whose consent was caused by fraud may, if he thinks fit, insist that the contract
shall be performed and that he shall be put in the position in which he would have been if the
representation made had been true.
The party whose consent was caused by fraud, can claim damage if he suffers some loss.
Weather silence is fraud? Comment:
General concept: According to explanation to section 17, "Mere silence as to facts likely to
affect the willingness of a person to enter into a contract is not fraud".
In other words, Silence is not fraud. It is buyer, who must check the goods & suitability.
E.g. X purchased a used computer from Z thinking it as a computer imported from USA, Z
failed to disclose the fact to X. On knowing the fact X wants to repudiate the contract. So, here
X cannot repudiate/rescind/cancel the contract.
Exceptions to the general rule:

The general rule that silence does not amount to fraud has the following exceptions. Where the
circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak. Such duty arises in the following two cases:
When silence is equivalent to speech: E.g. "A student of BBA select a Business law-book and
asks the seller". If seller don't stop me from buying this book, I will assume that "it is best".
The seller remained silent here the student will treat "silence" as speech. If the book was
inferior, then it is a case of fraud.
Disclosure of dangerous nature: E.g. Shyam sold his horse to Ram a buyer for Rs. 11000/-
Shyam knows that horse was "wicked" but fails to disclose it to buyer. Here seller has
committed fraud by remaining silent.
4. Misrepresentation:
The term "misrepresentation" means a false representation of fact made innocently or non-
disclosure of a material fact without any intention to deceive the other party. Section 18 defines
the term "misrepresentation" as follows
"Misrepresentation" means and includes-
The positive assertion, in a manner not warranted by the information of the person making it,
of that which is not true, though he believes it to be true;
Any breach of duly which, without an intent to deceive, gains an advantage to the person
committing it, or anyone claiming under him, by misleading another to his prejudice or to the
prejudice of anyone claiming under him;

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Causing, however innocently, a party to an agreement, to make a mistake as to the substance of

the thing which is the subject of the agreement.
Essential elements of misrepresentation:
By a party to a contract: The representation must be made by a party to a contract or by anyone

with his connivance or by his agent. Thus, the misrepresentation by a stranger to the contract
does not affect the validity of the contract.
False representation: There must be a false representation and it must be made without the
knowledge of its falsehood i.e. the person making it must honestly even it is to be true.
Representation as to fact: The representation must relate to a fact. In other words, a mere
opinion, a statement of expression or intention does not amount to misrepresentation.
"Innocent misstatement made into good faith OR without any intention to cause loss"
E.g. A farmer says that his land is very productive and produces 100 quintal per acre. This is
misrepresentation and buyer can cancel the contract.
Note: When the buyer has an opportunity to check the misrepresentation, but he fails then
buyer cannot cancel the contract.
E.g. An owner of factory, while selling his factory, express his opinion as my factory produces
1000 kg per ann-um and requested the buyer to find out exact production by checking
"production-record". If the buyer fails to check the production record then buyer cannot blame
seller.
Effect of misrepresentation [section 19]

The effects of misrepresentation are as follows:
Right to rescind the contract: The party whose consent was caused by misrepresentation can
rescind (cancel) the contract but he cannot do so in the following cases:
where the party whose consent was caused by misrepresentation had the means of
discovering the truth with ordinary diligence;
where the party gave the consent in ignorance of misrepresentation;
where the party after becoming aware of the misrepresentation, takes a benefit under
the contract;
where an innocent third party, before the contract is rescinded, acquires for
consideration some interest in the property passing under the contract;
where the parties cannot be restored to their original position.

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(b) Right to insist upon performance: The party whose consent was caused by
misrepresentation may if he thinks fit, insist that the contract shall be performed, and that he
shall be put in the position in which he would have been if the representation made had been
true.
Comparison between fraud and misrepresentation

Similarities: There are basically two similarities in case of fraud and misrepresentation as
follows:
In both the cases, a false representation is made by a party;
In both the cases, the contract is voidable at the option of the party whose consent is
obtained by fraud or misrepresentation.
5. Mistake:
Meaning of mistake [section 20]

A mistake is said to have occurred where the parties intending to do one thing by error do
something else. Mistake is "erroneous belief" concerning something.
Classification of Mistake of Law:

(a) Mistake of Indian Law (In sense of penalty): The contract is not voidable because
everyone is supposed to know the law of his country. e.g. disobeying traffic rules"
(b) Mistake of Foreign Law (void-ab-initio): A mistake of foreign law is treated as mistake
of fact, i.e. the contract is void if both the parties are under a mistake as to a foreign law
because one cannot be expected to know the law of other country.
Mistake of fact
Mistake of fact be either Unilateral mistake or Bilateral mistake.
Unilateral mistake [section 22]: The term 'unilateral mistake' means where only one party to
the agreement is under a mistake. According to section 22, "A contract is not voidable merely
because it was caused by one of the parties to it being under a mistake as to matter of fact."
Bilateral mistake [section 22]: The term 'bilateral mistake' means where both the parties to the
agreement are under a mistake. According to section 20, "where both the parties to an
agreement are under a mistake as to a matter of fact essential to the agreement, the agreement
is void."
Following may be cases of bilateral mistakes-

(i) Common mistake as to the existence of the subject.
(ii) Common mistake as to the fact fundamental to the agreement.
(iii) Mutual or non-identical mistake as to the identity of the subject matter.
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(iv) Mistake as to quality of subject-matter or promise.

(v) Mistake as to non-disclosure in contracts of utmost good faith.
Legality of object
According to section 10 of The Indian Contract Act, all agreements are contracts if they are
made by the free consent of parties competent to contract, for a lawful consideration and with a
lawful object and are not hereby expressly declared to void. It should be for lawful
consideration and with a lawful object.
What consideration and objects are lawful and what not (Section 23)
The consideration or object of an agreement is lawful, unless:
1. It is forbidden by law: When something is forbidden by law, an agreement to do that is

unlawful. An agreement to do what has been prohibited by the Indian Penal Code or by some
other law cannot be enforced.
2. Defeat the provisions of law: If the object or consideration of an agreement is of such a

nature that, if it is permitted, it would defeat the provisions of any law, such an agreement is
void. Certain acts may not be expressly forbidden by law, but if they result in circumventing
any law, they cannot be encouraged
3. Is fraudulent: If the consideration or object of an agreement is to commit a fraud, the

agreement is void. An agreement to avoid competition with one another cannot be considered
to be either fraudulent or opposed to public policy.
4. Agreement injurious to the person or property of another: If the consideration or the object
of an agreement is to cause an injury to the person or property of another, the agreement is
unlawful, and therefore void. Injury here means harm which is unlawful, for example, an
agreement to commit fraud or a tort
5. Immoral or opposed to public policy: If the consideration or object of an agreement is

regarded by a court to be immoral or opposed to public policy, the agreement is unlawful and
void. Public policy means the policy of the law at a stated time. An act which is injurious to the
interest of the society is against public policy. If an agreement is prejudicial to social or
economic interest of the community, it will be against public policy to enforce such an
agreement. On the one hand a persons right of contractual freedom should be maintained, on
the other hand if the contract is against public policy the law must not allow that to be
enforced.
Agreement declared void

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As per Section 2(g) of The Indian Contract Act , 1872 An agreement not enforceable by law is
said to be void, and as per Section 2(j) of The Act A Contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable.
Types of agreements expressly declared void:
1. Agreements by or with persons incompetent to contract.
A contract can also be void due to the impossibility of its performance. E g: If a contract is
formed between two parties A & B but during the performance of the contract the object of the
contract becomes impossible to achieve (due to action by someone or something other than the
contracting parties), then the contract cannot be enforced in the court of law and is thus void.
2. Agreement entered into through a mutual mistake of fact between the parties.
Any agreement with a bilateral mistake is void.(Section 20) :- Where both the parties to an
agreement are under a mistake as to matter of fact essential to agreement , the agreement is
void.
3. Agreement , the object or consideration of which is unlawful(Section 23)
A consideration is unlawful if-
It is forbidden by law
It would defeat the provisions of any law.
It is fraudulent
It causes injury to the person or property of another
The court regards it as immoral
The court regards it as opposed to Public Policy.
Agreement made without consideration
4. Agreement in restraint of marriage
Every agreement in restraint of marriage of any person other than a minor, is void(Section 26)
5. Agreement in restraint of trade.
Every agreement by which anyone is restrained from exercised a Lawful profession, trade or
business of any kind is void(Section 27)
6. Agreement in restraint of legal proceedings.(Section 28)
Every Agreement: by which any party is restricted absolutely from enforcing his legal rights
under any contract is void. Which limits the time within which an action may be brought is
void.

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7. Wagering agreements (Section 30)
An agreement between two persons under which money or moneys worth is payable by one
person to another on the happen or non happening of a future uncertain event is called a
wagering agreement.(Section 30)
8. Impossible agreements (Section 36)
Such an agreement can not be enforced since it is void whether the impossibility of the event
was known to the parties or not is immaterial.
Contingent Contract
According to Section 31 of Indian Contract Act, 1872. A contingent contract is a contract to

do or not to do something, if some even; collateral to such contract does or does not happen.
Example -
A contracts to pay B RS. 10000 if B's house is burnt. This is contingent contract.
Elements of contingent contract -
1. There should be a contract to do or not to do something, if some event, does or does not
happen.
2. Event should be collateral to such contract.
Enforcement of contracts contingent on an event happening -
According to Section 32 of the said Act, Contingent contracts to do or not to do anything in an

uncertain future event happens, cannot be enforced by law unless and until that event has
happened. If the event becomes impossible, such contracts becomes impossible, such contracts
become void.
Illustration:
A) A make a contract with B to buy B's horse if A survives C. This contract cannot be enforced
by law unless and until C dies in A's lifetime .
B) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse
has been offered, refuses to buy him. The contract cannot be enforced by law unless and until
C refuses to buy the horse.

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C) A contracts to pay B a sum of money when B marries C, C dies without being married to B.
The contract becomes void.
Elements:
i) When any contract to do and if an uncertain future event happens, cannot be enforced by law,
unless and until that event has happened
ii) When any contract not to do anything in an uncertain future event happens, cannot be
enforced by law unless and until that event has happened.
Contact become void -- If the event becomes impossible, such contract becomes impossible.
Enforcement of Contracts contingent on an event not happening (Section 33)
Contingent contracts to do or not to do anything if an uncertain future event does not

happen, can be enforced when the happening of that event becomes impossible, and not before.
Illustration
A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.
Essentials --
i) Contingent contract to do anything if an uncertain future event does not happen can be
enforced when the happening of the event becomes impossible and not before.
ii) Contingent contract not to do anything if an uncertain future event does not happen can be
enforced when the happening of that event becomes impossible and not before.
When event on which contract is contingent to be deemed impossible, if it is the future conduct
of a living person (Section 34) -
If the future event on which a contract is contingent is the way in which a person will
act at an unspecified time, the event shall be considered to become impossible when such
person does anything which renders it impossible that he should so act within any definite
time, or otherwise than under future contingencies.
Illustration
A agrees to pay B a sum of money if B marries C, C married D. The marriage of B to C

must now be considered impossible , although it is possible that D may Die and C may
afterwards marry B.

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When contracts become void which are contingent on happening of specified event within
fixed time (Section 35) -
Contingent contracts to do or not to do anything, if a specified uncertain event happens

within a fixed time become void if at the expiration of the time fixed such event has not
happened, or if, before the time fixed, such event becomes impossible.
When Contracts may be enforced, which are contingent on specified event not happening
within fixed time - Contingent contracts to do or not to do anything if a specified uncertain
event does not happen within a fixed time may be enforced by law when the time fixed has
expired and such event has not happened or before the time fixed has expired if it becomes
certain that such event will not happen.
Examples
i) A promises to pay B a sum of money if certain ship returns within a year. The contract may
be enforced if the ship regards within the year and becomes void if the ship is brunt with in the
year.
ii). A promise to pay B a sum of money if a certain ship does not return within a year. The
contract may be enforced if the ship does not return within a year or is burnt within the year
Agreements contingent on impossible event void (Section 36) -
Contingent agreements to do or not to do anything if an impossible event happens

are void whether the impossibility of the event is known or not to the parties to agreement at
the time when it is made
Examples -
i) A agrees to pay B, 1000 rupees if two straight lines should enclose a space. The agreement is
void.
ii) . A agrees to pay B 1000 rupees if B will marry A's daughter C. C was dead at the time of
the agreement the agreement is void
Performance and discharge of Contracts
Sec 37:- That 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
contract Act, or of any other law.
Performance: - Two types
1. Actual performance actually performed liability of such a party comes to an end.

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2. Attempted performance or tender of performance refusal to accept offer of performance by

promise [38]
Promisor is not responsible for non performance and they can sue the promisee for breach of
contract nor he (promisor) thereby lose his rights under the contract.
Essential of Valid tender
Tender or offer of performance to be valid must satisfy the following conditions:-
(i) It must be unconditional
Ex :- X offers to Y the principal amount of the loan. This is not a valid tender since the
whole amount of principal and interest is not offered.
(ii) It must be made at a proper time and place.
Ex:- If the promisor wants to deliver the goods at 1 am. This is not a valid tender unless it was
so agreed;
(iii) Reasonable opportunity to examine goods.
Ex:- Delivery of something to the promise by the promisor promise must have reasonable
opportunity of inspection.
(iv) It must be for the whole obligation :- goods and amount.
Ex:- X a debtor, offers to pay Y the debt due in installments and tenders the first
installment. This is not a valid tender minor deviation not invalid [Behari lal v ram gulam]
(v) It must be made to the promise or his duty authorized agent.
Ex:- It must be person who is willing to person his part of performance.
(vi) In case of payment of money, tender must be of the exact amount due and it must be in the
legal tender.
Type of Tender
A). Tender of goods and services
When a promisor offers to delivery of goods or service to the promise, it is said to be tender of
goods or services, if promisee does not accept a valid tender, It has the following effects:
(i) The promisor is not responsible for non performance of the contract.
(ii) The promisor is discharged from his obligation under the contract. Therefore, he need not
offer again.
(iii) He does not lose his right under the contract. Therefore, he can sue the promise.
B). Tender of money

28
Tender of money is an offer to make payment. In case a valid tender of money is not accepted,
it will have the following effects:
(i) The offeror is not discharged from his obligation to pay the amount.
(ii) The offeror is discharged from his liability for payment of interest from the date of the
tender of money.
BY WHOM CONTRACT MAY BE PERFORMED ?
The promise under a contract may be performed, as the circumstances may permit, by the
promisor himself, or by his agent or his legal representative.
1. Promisor himself : If there is something in the contract to show that it was the intention of
the parties that the promise should be performed by the promisor himself, such promise must
be performed by the promisor. This means contracts which involve the exercise of personal
skill or diligence, or which are founded on personal confidence between the parties must be
performed by the promisor himself.
2. Agent : Where personal consideration is not the foundation of a contract, the promisor or his
representative may employ a competent person to perform it.
3. Representatives : A contract which involves the use of personal skill or is founded on

personal consideration comes to an end on the death of the promisor. As regards any other
contract the legal representatives of the deceased promisor are bound to perform it unless a
contrary intention appears from the contract. (Section 37, para 2). But their liability under a
contract is limited to the value of the property they inherit from the deceased.
4. Third persons : When a promisee accepts performance of the promise from a third person, he
cannot afterwards enforce it against the promisor. That is, performance by a stranger, accepted
by the promisee, produces the result of discharging the promisor, although the latter has neither
authorised not ratified the act of the third party.
Example : A received certain goods from B promising to pay Rs. 10,000/-. Later on, A
expressed his inability to make payment. C, who is known to A, pays Rs, 6,000/- to B on
behalf of A. However, A was not aware of the payment. Now B is intending to sue A for the
amount of Rs. 10,000/- whether he can do so? Advice. As per Section 41 of the Indian Contract
Act, 1872, when a promisee accepts performance of the promise from a third person, he cannot
afterwards enforce it against the promisor. That is, performance by a stranger, accepted by the
promisee, produces the result of discharging the promisor, although the latter has neither
authorised nor ratified the act of the third party. Therefore, in the present instance, B can sue
only for the balance amount i.e., Rs. 4,000/- and not for the whole amount.
5. Joint promisors : When two or more persons have made a joint promise, then unless a
contrary intention appears from the contract, all such persons must jointly fulfil the promise. If
any of them dies, his legal representatives must, jointly with the surviving promisors, fulfill the

29
promise. If all of them die, the legal representatives of all of them must fulfil the promise
jointly. (Section 42).
Examples :
1. A promises to B to pay Rs. 1,000 on delivery of certain goods. A may perform this
promise either himself or causing someone else to pay the money to B. If A dies before
the time appointed for payment, his representative must pay the money or employ some
other person to pay the money. If B dies before the time appointed for the delivery of
goods, Bs representative shall be bound to deliver the goods to A and A is bound to pay
Rs. 1,000 to Bs representative.
EFFECT OF REFUSAL TO ACCEPT OFFER OF PERFORMANCE
According to Section 38 of the Act, where a promisor has made an offer of

performance to the promisee, and the offer has not been accepted, then the promisor is
not responsible for non performance; nor does he thereby lose his rights under the
contract. Every such offer must fulfil certain conditions which are as follows, namely:
(i) it must be unconditional;
(ii) it must be made at a proper time and place under such circumstances that
the persons to whom it is made, may have a reasonable opportunity of
ascertaining that the person by whom it is made is able and willing, there
and then to do the whole of what he is bound by his promise to do.
(iii) if the offer is an offer to deliver anything to the promisee, then 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.
EFFECT OF A REFUSAL OF PARTY TO PERFORM PROMISE
Primarily, it gives rise to certain rights to the other party. Let us now consider what
those rights are. When a party to a contract has refused to perform or has disabled
himself from performing his promise in entirety, the promisor may put an end to the
contract, unless he has signified by words or conduct, his acquiescence in its
continuance (Section 39). From language of Section 39 it is clear that in the case
under consideration, the following two rights accrue to the aggrieved party, namely,
(a) to terminate the contract;
(b) to indicate by words or by conduct that he is interested in its continuance.
In case the promisee decides to continue the contract, he would not be entitled to put
an end to the contract on this ground immediately. In either case, the promisee would
be able to claim damages that he suffers as a result on the breach.
LIABILITY OF JOINT PROMISORS

30
If two or more persons have made a joint promise, ordinarily all of them during their
life-time must jointly fulfill the promise. After death of any one of them, his legal
representative jointly with the survivor or survivors should do so (Sec. 42). After the
death of the last survivor the legal representatives of all the original co-promisors
must fulfil the promise.
For example, X, Y and Z who had jointly borrowed money must, during their life-
time jointly repay the debt. Upon the death of X his representative, say, S along with
Y and Z should jointly repay the debt and so on. This rule is applicable only if the
contract reveals no contrary intention.
We have seen that Section 42 deals with voluntary discharge of obligations by joint
promisors. But if they do not discharge their obligation on their own volition, what
will happen? This is what Section 43 resolves.
Accordingly,
(i) When two or more persons make a joint promise, the promisee may, in the absence
of express agreement to the contrary, compel any one or more of such joint promisors
to perform the whole of the promise.
(ii) If one of the joint promisors is made to perform the whole contract, he can call for
a contribution from others. For example, A, B and C jointly execute a promissory note
for Rs. 3,000 in favour of D. A is compelled to pay the whole amount. A, in such a
case would be able to realise Rs. 1,000 each from B and C. This rule may, however, be
modified by mutual agreement between the joint promisors.
(iii) If any of the joint promisors makes a default in making his contribution the
remaining joint promisors must bear the loss arising from such a default in equal
shares. In the above example, where A, B and C jointly executed the promissory note
for Rs. 3,000 and if C was unable to pay anything, then A would be able to realise
from B by way of contribution Rs. 1,500 instead of Rs. 1,000. We thus observe that
the effect of Section 43 is to make the liability in the event of a joint contract, both
joint and several, in so far as the promisee may, in the absence of a contract to the
contrary, compel anyone or more of the joint promisors to perform the whole of the
promise.
The effect of release of one of the joint promisors is dealt with in Section 44
which is stated below:
Where two or more persons have made a joint promise, a release of one of such joint
promisors by the promisee does not discharge the other joint promisor or joint
promisors; neither does it free the joint promisors so released from responsibility to
the other joint promisor or promisors.
RIGHTS OF JOINT PROMISEES

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The law is contained in Section 45 which is reproduced below : When a person has
made a promise to two or more persons jointly, then unless a contrary intention
appears from the contract, the right to claim performance rests, as between him and
them, with them during their joint lives, and after the death of any of them with the
representatives of such deceased person jointly with the survivor or survivors, and
after the death of the last survivor, with the representatives of all jointly. For
example, A, in consideration of Rs. 5,000 lent to him by B and C, promises B and C
jointly repay the sum with interest on a specified day but B dies. In such a case right
to demand payment shall rest with Bs legal representatives, jointly with C during Cs
life-time, and after the death of C, with the legal representatives of B and C jointly.
TIME AND PLACE FOR PERFORMANCE OF THE PROMISE
The law on the subject is contained in Section 46 to 50 provisions whereof are

summarised below:
(i) If no time is specified in a contract for the performance of the promise, the promise
must be performed within a reasonable time. The expression reasonable time is to be
interpreted having regard to the facts and circumstances of a particular case.
(ii) If a promise is to be performed on a specified date but the hour is not mentioned,
the promisor may perform it at any time during the usual hours of business, on such
day. For example, if the delivery of goods is offered say after sunset, the promisee
may refuse to accept delivery, for the usual business hours are, between 10 a.m. and 5
p.m. Moreover, the delivery must be made at the usual place of business.
(iii) When no place is fixed for the performance of a promise, it is the duty of the
promisor to ask the promisee to fix a reasonable place for the performance of the
promise. The foregoing rules regarding the time and place for the performance of
promise apply, only when the promisor undertakes to perform the promise without an
application being made by the promisee.
(iv) Where the promisor has not undertaken to perform the promise without an
application by the promisee, and the promise is to be performed on a certain day it is
the duty of the promisee to apply for performance at a proper place and within the
usual hours of business.
PERFORMANCE OF RECIPROCAL PROMISES
The law on the subject is contained in Sections 51 to 54. The provisions thereof are
summarised below
:
(i) General observations : A contract may consist of an act and a promise, or it may
32
consist of two promises, one being the consideration for the other. Thus, when A sells
500 quintals of rice to B who promises to pay the price after a month, the contract
would consist of an act performed by A and a promise made by B. On the other hand,
if A promises to deliver 500 quintals of rice and B promises to pay the price on
delivery, the contract would consist of two promises, one made by A to B and the
other given by B to A. Such promises are called reciprocal promises. Here, the
promise of A is the consideration for the promise of B and vice versa.
(ii) Simultaneous performance of reciprocal promises : Reciprocal promises may
have to be performed simultaneously, or one after the other. Where A promises to
deliver rice and B promises to pay the price on delivery, both the promises are to be
performed simultaneously, and both A and B must be ready and willing to perform
their respective promises. Such promises constitute concurrent conditions and the
performance of one of the promises is conditional on the performance of the other. If
one of the promises is not performed the other too need not be performed. If A, in the
above-mentioned illustration, is unwilling to deliver the rice on payment, A will be
guilty of breach of promise and the breach would relieve B of the obligation to
perform his promise and would enable B to treat the contract as at an end.
(iii) Performance of reciprocal promises where the order of performance is

expressly fixed : When the order of performance of the reciprocal promises is
expressly fixed by the contract, they must be performed in that order. For instance, A
and B contract that A shall build a house for B at a fixed price. As promise to build
the house must be performed before B can be called upon to perform his promise to
pay for it. The promise being dependent on each other, any breach thereof by A would
relieve B of the obligation to keep up his own promises, and would enable B to avoid
the contract.
(iv) Performance of reciprocal promises when the order of performance is fixed

by implication : The order of performance may sometimes be indicated not expressly,
but by the nature of the transaction. For example, A and B contract that A shall make
over his stock-in-trade to B at a fixed price, and B promises to give security for the
payment of the price. As promise to make over his stock need not be performed, until
the security is given by B, for the nature of the transaction required that A should have
the security from B before he delivers his stock.
(v) Effect of one party preventing another from performing promise : When in a
contract, consisting of reciprocal promises, one party prevents the other from
performing his promise, the contract becomes voidable at the option of the party so
prevented. The latter becomes entitled to get compensation from the other party for
any loss he sustains in consequence of the non-performance of the contract. For
instance, in a contract for the sale of standing timber, the seller is to cut and cord it,
whereupon buyer is to take it away and pay for it. The seller cords only a part of the
timber and neglects to cord the rest. In that event the buyer may avoid the contract
and claim compensation from the seller for any loss which he may have sustained for
the non-performance of the contract.
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EFFECT OF FAILURE TO PERFORM AT A TIME FIXED IN A CONTRACT IN

WHICH TIME IS ESSENTIAL
The law on the subject is contained in Section 55 which is reproduced below :

When a party to a contract promises to do certain thing at or before the specified time,
or certain things at or before the specified time, and fails to do any such thing at or
before the specified time, the contract, or so much of it as has not been performed,
becomes voidable at the option of the promisee, if the intention of the parties was that
time should be of essence of the contract.
If it was not the intention of the parties that time should be of essence of the contract,
the contract does not become voidable by the failure to do such thing at or before the
specified time; but the promisee is entitled to compensation from the promisor for any
loss occasioned to him by such failure.
But ordinarily, from an examination of a contract, it is difficult to ascertain whether

time is intended to be of essence by the parties at the time of its formation. In every
case, the intention is to be gathered from the terms of the contract.
In a mercantile contract, the general rule in this regard is that stipulations as to time,
except as to time for payment of money, are essential conditions, since punctuality is
of the utmost importance in the business world. Thus, on a sale of goods that are
notoriously subject to rapid fluctuation of market price, e.g. gold, silver, shares
having a ready market the time of delivery is of the essence of the contract.
But in mortgage bond, the time fixed for the repayment of the mortgage money can by
no means be regarded as an essential condition; consequently, the mortgaged property
can be regained even after the due date. Similarly, in a contract to sell land any clause
limiting the time of completion is not strictly enforced. But even in a contract for the
sale of land, time can be made the essence of the contract by express words.
Contract cannot be avoided where time is not essential : Where time is not
essential, the contract cannot be avoided on the ground that the time for performance
has expired: the promisee is only entitled to compensation from the promisor for any
loss caused by the delay. But it must be remembered that even where time is not
essential it must be performed within a reasonable time; otherwise it becomes
voidable at the option of the promisee.
Effect of acceptance of performance out of time : Even where time is essential the
promisee may waive his right to repudiate the contract, when the promisor fails to
perform the promise within the stipulated time. In that case, he may accept
performance at any time other than that agreed. In such an event, he cannot claim
compensation for any loss occasioned by the non-performance of the promise at the

34
time agreed, unless at the time of acceptance of the performance he has given a notice
to the promisor of his intention to claim compensation.
IMPOSSIBILITY OF PERFORMANCE
Section 56 contemplates various circumstances under which agreement may be void,

since it is impossible to carry it out. The Section is reproduced below: An agreement
to do an act impossible in itself is void. 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.
(1) Impossibility existing at the time of contract: When the parties agree upon
doing of something which is obviously impossible in itself the agreement would be
void. Impossible in itself means impossible in the nature of things. The fact of
impossibility may be and may not be known to the parties.
(i) If known to the parties: It would be observed that an agreement constituted, quite
unknown to the parties, may be impossible of being performed and hence void. For
example, B promises to pay a sum of Rs. 5,000 if he is able to swim across the Indian
Ocean from Bombay to Aden within a week. In this case, there is no real agreement,
since both the parties are quite certain in their mind that the act is impossible of
achievement. Therefore, the agreement, being impossible in itself, is void.
(ii) If unknown to the parties: Where both the promisor and the promisee are
ignorant of the impossibility of performance, the contract is void.
(iii) If known to the promisor only : Where at the time of entering into a contract,
the promisor alone knows about the impossibility of performance, or even if he does
not know though he should have known it with reasonable diligence, the promisee is
entitled to claim compensation for any loss he suffered on account of non-
performance.
(2) Supervening impossibility: When performance of promise become impossible or
illegal by occurrence of an unexpected event or a change of circumstances beyond the
contemplation of parties, the contract becomes void e.g. change in law etc.
APPROPRIATION OF PAYMENTS
(i) Application of Payment where debt to be discharged is indicated: The law on

the subject is contained in Section 59 reproduced below: Where a debtor, owing
several distinct debts to one person, makes a payment to him either with express
intimation or under circumstances implying that the payment is to be applied to the
discharge of some particular debt, the payment, if accepted, must be applied
accordingly.

35
(ii) Application of payment where neither party appropriates: The law on the
subject is contained in Section 61, reproduced below: Where neither party makes any
appropriation, the payment shall be applied in discharge of the debts in order of time,
whether they are or are not barred by the law in force for the time being as to the
limitation of suits. If the debts are of equal standing the payment shall be applied in
discharge of each proportionately.
The aforesaid rule is to be applied when there is nothing to show the intention of the
parties. If the debts are of the same date the payment shall be applied in discharge of
each proportionately. For example, there are two debts one of Rs. 500 and the other of
Rs. 700 that were incurred on the same date the debtor pays Rs. 600. Out of this sum,
a sum of Rs. 250 should be applied in discharge of the first debt and the balance of
Rs. 350 in discharge of the second debt.
CONTRACTS WHICH NEED NOT BE PERFORMED
Under this heading, we shall discuss the principles of Novation, Rescission and
Alteration and Remission. The law is contained in Section 62 to 67 of the Contract
Act. Section 62 is reproduced below: If the parties to a contract agree to substitute a
new contract for it, or to rescind or alter it, the original contract need not be
performed.
(a) Effect of novation: The parties to a contract may substitute a new contract for the
old. If they do so, it will be a case of novation. On novation, the old contract is
discharged and consequently it need not be performed. Thus it is a case where there
being a contract in existence some new contract is substituted for it either between the
same parties or between different parties the consideration mutually being the
discharge of old contract. Novation can take place only by mutual agreement between
the parties.
For example, A owes B Rs. 100. A, B and C agree that C will pay B and he will accept
Rs. 100 from C in lieu of the sum due from A. As liability thereby shall come to an
end, and the old contract between A and B will be substituted by the new contract
between B and C.
(b) Effect of rescission: A contract is also discharged by rescission. When the parties
to a contract agree to rescind it, the contract need not be performed. In the case of
rescission, only the old contract is cancelled and no new contract comes to exist in its
place. It is needless to point out that novation also involves rescission. Both in
novation and in rescission, the contract is discharged by mutual agreement.
(c) Effect of alteration of contract: As in the case of novation and rescission so also
in a case where the parties to a contract agree to alter it, the original contract is
rescinded, with the result that it need not be performed. In other words, a contract is
also discharged by alteration. The terms of contract may be so altered by mutual
36
agreement that the alteration may have the effect of substituting a new contract for the
old one. In other words, the distinction between novation and alteration is very
slender.
Novation and alteration: The law pertaining to novation and alteration is contained
in Section 62 to 67 of the Indian Contract Act. In both these cases the original
contract need not be performed. Still there is a difference between these two.
1. Novation means substitution of an existing contract with a new one. Novation may
be made by changing in the terms of the contract or there may be a change in the
contracting parties. But in case of alteration the terms of the contract may be altered
by mutual agreement by the contracting parties but the parties to the contract will
remain the same.
2. In case of novation there is altogether a substitution of new contract in place of the

old contract. But in case of alteration it is not essential to substitute a new contract in
place of the old contract. In alteration may be a change in some of the terms and
conditions of the original agreement.
(d) Promisee may waive or remit performance of promise : The law on the subject
is contained in Section 63 reproduced below : Every promisee may dispense with or
remit, wholly or in part, the performance of the promise made to him, or may extend
the time for such performance or may accept instead of its any satisfaction which he
thinks fit. In other words, a contract may be discharged by remission.
For instance, A sells his horse to B who promises to pay Rs. 500 for the horse. A may
accept, instead of Rs. 500 a necklace as the price of the horse.
DISCHARGE OF A CONTRACT
A contract may be discharged either by an Act of the parties or by an operation of law

in the different base set out below:
(i) Discharge by performance: It takes place when the parties to the contract fulfil
their obligations arising under the contract within the time and in the manner
prescribed. Discharge by performance may be (1) actual performance or (2) attempted
performance. Actual performance is said to have taken place, when each of the parties
has done what he had agreed to do under the agreement. When the promisor offers to
perform his obligation, but the promisee refuses to accept the performance, it amounts
to attempted performance or tender.
(ii) Discharge by mutual agreement: Section 62 of the Indian Contract Act provides
if the parties to a contract agree to substitute a new contract for it, or to refund or
remit or alter it, the original contract need not be performed. The principles of
Novation, Rescission, Alteration and Remission are already discussed.
37
(iii) Discharge by impossibility of performance: The impossibility may exist from

the very start. In that case, it would be impossibility ab initio. Alternatively, it may
supervene. Supervening impossibility may take place owing to:
(a) an unforeseen change in law,
(b) the destruction of the subject-matter essential to that performance;
(c) the non-existence or non-occurrence of particular state of things, which was
naturally contemplated for performing the contract, as a result of some personal
incapacity like dangerous malady;
(d) the declaration of a war (Section 56).
(iv) Discharge by lapse of time: A contract should be performed within a specified

period as prescribed by the Limitation Act, 1963. If it is not performed and if no
action is taken by the promising within the specified period of limitation, he is
deprived of remedy at law. For example, if a creditor does not file a suit against the
buyer for recovery of the price within three years, the debt becomes timebarred and
hence irrecoverable.
(v) Discharge by operation of law: A contract may be discharged by operation of law

which includes by death of the promisor, by insolvency etc.
(vi) Discharge by breach of contract:
We have seen contract must strictly perform according to its terms, But where the
promisor has neither performed his contract nor tendered performance and where the
performance is not excused by consent express or implied, or where the performance
is defective, there is a breach of the contract by him. Breach of contract may be
A). actual breach of contract or
B). anticipatory breach of contract.
Actual breach of Contract
(a) Actual Breach of Contract at the time when Performance is due where a person fails to
perform a contract, when performance is due the other party can hold him liable for
breach. But, if a party who has failed to perform the contract at the appointed time,
subsequently expresses willingness to perform the question whether he can do so or not
would depend upon whether time was of the essence of the contract or not. In all
mercantile contracts time is the essence of the contract and breach of contracts results
on failure to perform within the limited time.
(b) Actual Breach during the Performance of the contract- where a party apparently
performs the promise but the other party says that it is not a proper performance
according to the contract, the question arises whether there is a breach of the contract
exonerating the other party from performance of his part of the bargain.

38
(ii) Constructive or Anticipatory Breach of Contract
It may sometimes happens that even before the time of performance arrives the promisor may
do some act which makes the performance impossible or may definitely renounce the contract
or show his intention not to perform it.
Thus where A promised to assign to B within 7 years from the date of promise all his interests
in 4 houses for Rs. 10,000 and before the end of the years assigned all his interests to another
person, it was held that without waiting for the 7 years to elapse B could sue for breach of the
promise.
REMEDIES FOR BREACH OF CONTRACT
Where there is a breach of contract on the part of one party, the injured party becomes entitled
to any one or more of the following reliefs:
1. Rescission of the contract with the result that the injured party is freed from all obligations
under the contract;
2. Suits for damages;
3. Suit upon a quantum meruit;
4. Suit for specific performance of the contract;
5. Suit for an injunction.
1. Rescission
In one party has broken his contract, the other party may treat the breach as discharge, and
refuse to perform his part of the contract. He may also successfully defend an action for non-
performance, or an action brought for specific performance. Sec.75 further entitles him to
compensation for any damage he may have sustained through the non-fulfillment of the
contract.
For instance, A singer, contracts with B 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 Rs. 100 for each
nightss performance. On the sixth night, A willfully absents herself from the theatre, and B in
consequence, rescinds the contract. B is entitled to claim compensation for the damage which
he has sustained through the non-fulfillment of the contract.
2. Damages

39
Where a contract has been broken, the party who suffers by such breach is entitled, under
Sec.73 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 make the contract, to be likely to result from the
breach of it.
But compensation is not to be given for any remote or indirect loss or damage sustained by
reason of the breach. Compensation is also available against a party for breach of a quasi-
contract. Sec73 is based on the leading case of Hadley V. Baxendale (1854) 9 Ex. 34 the facts
the which are as follows:
The plaintiff, an owner of a mill, delivered a broken shaft to the defendant common carrier to
take to a manufacturer to copy it and make a new one. The carrier delayed delivery of the shaft
beyond a reasonable time, as a result of which the mill was idle for a longer period than should
have been necessary. The plaintiff did not make known to the defendant carrier that delay
would result in a loss of profits. Held, the carrier was not liable for loss of profits during the
period of delay.
Alderson, B observed in this case, When two parties have made a contract, which one of them
has broken, the damage which the other party ought to receive in respect of such breach should
be either such as may fairly be considered as arising naturally, i.e., according to the usual
course of things from such breach of contract itself, or such as may reasonably be supposed to
have been in the contemplation of both the parties a the time the contract was entered into as a
probable result of the breach. This statement of law is known as the Rule in Hadley v.
Baxendale.
The Principle enunciated in Sec. 73 is that a party who suffers by the breach of contract is
entitled to:
a) Such damages as naturally arose in the usual course of things, as a result of the breach;
b) and if he claims special damages for any loss sustained (which would not ordinarily flow
from the breach) he must prove that the other party knew at the time of making the contract
that the special loss was likely to result from the breach of the contract;
c) Such compensation is not to be given for any remote and indirect loss or damage sustained
by reason of the breach;
d) Compensation for quasi-contract as damage is the same as for a contract.
Following examples has been given under Sec. 73 of the Act
A contracts to sell and deliver 50 maunds of saltpetre to B at a certain paid on delivery a breaks
his promise. B is entitled to receive from A, by of the price for which B might have obtained
50 maunds of saltpetre of like quality a the time when the saltpetre ought to have been
delivered.
Liquidated Damages and Un-liquidated Damages

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Where there is breach of contract by one party, the other party is entitled to sue for damages.
Therefore, unless the court passes a decree for a specified amount, the claim for damages is
merely a right to sue and not a debt or actionable claim. Consequently, this claim can be
assigned or transferred, since it is not a debt under the law.
The suit may be for liquidated damages or un-liquidated damages.
Liquidated damages are damages agreed upon by the parties in the contract itself to be paid by
the party breaking the contract in case of breach. The plaintiff has only to prove the breach of
contract, and no proof of loss is required. But liquidated damages must appear to be a genuine
pre-estimate of the loss that will be caused to one party if the contract is broken by the other.
Where no damages are fixed by the contract, but the amount of compensation claim for a
breach of contract is left be assessed by the court, damages claimed are called unliquidated
damages.
Unliquidated damages may be classified as follows:
a) Ordinary Or Compensatory Damages
In deciding a suit for damages, the court has to answer two questions: (I) Proximity and
remoteness of damage (ii) Measure of damages. The judge has to first decide whether or not
the damage has resulted from proximate consequences of the breach, for remote consequences
are not regarded. Once the court has decided that the damage is sufficiently proximate, it will
the turn to the measure of damages, that is the amount of money that will compensate the
plaintiff. The question of remoteness of damage is governed by the maxim recognised in
Hadely v. Baxendale and Sec. 73 our contract Act. in jure unon remota causa, sed proxima
spectatur- In law not the remote cause, but the proximate cause is taken notice of.
Thus, if the damage of loss suffered by reason of the breach of the contract is remote or
indirect no compensation would be allowed. The aggrieved party however, would in case of
breach of contract, be entitled to recover compensation for damage or loss caused to him
thereby, if such loss or damage arose naturally and directly in the usual course of things from
such breach, of which the parties to the contract knew, at the time of making the contract, to be
likely to result from breach of contract.
Measure of damages
The measure of damages is the estimated loss directly and naturally resulting in the ordinary
course of events, from the breach of contract. The injured party is to be put in the same
financial position as he would have been if the contract had been performed according to its
terms.
In the case of sale and purchase, the damages, payable would be the difference between the
contract price and the market price at the date of the breach. The damages are calculated as on
the date of breach and any subsequent change of circumstances tending to an increase or
reduction of damage cannot be taken note of.

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A cow was sold with condition that it was free from disease. The cow was suffering from foot
and mouth disease at the time of sale. Not only the cow die but it also infected other cows of
the buyer. Held damages could be recovered for the entire loss.
b) Special Damages
Special damages are those resulting from a breach of contract under some special
circumstances. If at the time of entering into a contract a person has notice of special
circumstances which make special loss the likely result of the breach in the ordinary course of
things, than upon his breaking the contract and the special loss following the breach, he will be
required to make good the special loss. If therefore there be any special damage which is
attributable to the wrongful act, then special damages, if proved, will be awarded. Hence if an
unusual damage is likely to be sustained as the result of a breach of contract, its nature should
be communicated to the other party before the contract is made so that he contracts subject to
the prospective liability. Thus, if in Hadley v. Baxendale, the mill-owner had told the carrier
that delay would result in a loss of profits through stoppage of the mill, he would have
recovered damages for such a loss.
(c) Exemplary or Punitive Damages
These damages are sum awarded beyond the pecuniary loss sustained by the injured party.
Ordinarily, damages for breach of contract are intended to compensate the plaintiff, not to
punish the defendant. The object of exemplary damages is to punish the defendant and to deter
him and others from similar conduct in the future. Award of exemplary damages is made in
only two cases: (I) Breach of promise of marriage cases, (ii) where a bank wrongfully
dishonors a commercial customers cheque.
In a breach of promise to marry, the amount of the damages will depend upon the extent of
injury to the partys feelings. It is really and additionally sum known as a solatium awarded to
the jilted women as a solace for her injured feelings.
In the case of wrongful dishonor of a cheque of a customer who is a trader the rule is the
smaller the cheque dishonored the greater the damage.
(d) Nominal Damages
Nominal damages consist of a small of money, e.g., a rupee. They are a token award where
there has been an infringement of contractual right, but no actual loss has been suffered. These
damages are awarded to establish the right to decree for breach of contract.
(e) Contemptuous Damages
Damages are said to be contemptuous, when the court finds that a breach has been committed,
but that the breach is so insignificant or petty that a reasonable man would not have filed a suit.
A rupee or even less may be awarded to mark the courts disapproval of the plaintiffs conduct
in bringing the action. The law does not take account of trifling things; and where it does, It
awards also something of a contemptuous character. Such damages have been awarded to male
plaintiffs in breach of marriage actions.

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Liquidated Damages and PENALTY
Where the parties have fixed at the time of contract the damages that would be payable in case
of breach, a question may arise (in English law at least) whether the provision amounts to
liquidated damages or a penalty Courts in English give effect to liquidated damages, but
they relieve against penalty.
The test of the two is that where the amount fixed is a genuine per-estimate of the loss in case
of breach; it is liquidated damages and will be allowed, and if the amount fixed is without any
regard to probable loss, but in terrarium, is a penalty and will not be allowed.
In Indian law, there is no such difference between liquidated damage and penalty, as Sec. 74
specifically provides payment of only reasonable compensation sec. reads:
When a contract has been broken, if a sum is 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 or not actual damage or loss is proved to
have been caused thereby, to received from the party who has broken the contract a reasonable
compensation not excluding the amount so named or as the case may be the penalty stipulated
for. A stipulation for increased interest from the date of default may be stipulation by way of
penalty.....
The party suffering from breach is entitled to get the actual damages he has suffered. With
regard to the amount named in the contract, the compensation payable is the reasonable
amount up to the stipulated amount whether it is by way of liquidated damages or penalty.
a) A contracts with B to pay BB 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. 1000 as the Court considers reasonable.
b) A contracts with B that, if A practices as a surgeon within Calcutta he will pay B Rs. 5,000 A
practices as a surgeon in Calcutta. B is entitled to such compensation, not exceeding Rs. 5000
as the court considers reasonable.
c) A gives a recognizance binding him a penalty of Rs. 500 to appear in Court on a certain day.
He forfeits his recognizance. He is liable to pay the whole penalty
Payment of Interest
With regard to the payment of interest the following rules have been laid down.
1. Payment of interest in case of default. Where a contract provides that the amount should be
paid by a particular date and in default, it will be payable with interest, the court will give
effect to the stipulation if the interest is reasonable. Where the interest is exorbitant the Court
will give relief.
2. Payment of interest as higher rate Where the bound provides that in default of the payment
of the principal by a stated date enhanced interest should be payable, if the enhanced interest is
made payable from the date of default and is reasonable, it is regarded compensation and is

43
allowed. But if the enhanced interest is exorbitant, e.g. increase from 12 percent to 75 percent,
it will be penalty and relief will be granted against it.
3. Payment of compound interest. The Court do not lean towards compound interest, they do
not award in the absence of stipulation but where there is a stipulation for its payment it is the
absence of disentitling circumstances, allowed i.e. it will be allowed only if it is the absence of
disentitling circumstances allowed, i.e. it will be allowed only if it is not an enhanced rate.
3. Suit for Quantum Meruit
Quantummeruit as much as he has earned. Suing on quantum meruit is the suing for the value
of so much as is done. The in jured party can use for quantum meruit, i.e. if the injured party
has done can estimated at a money value of so much as he has already done.
A places an order with B for the supply of 100 chairs to be delivered by installments. B
delivers 20 chairs when A informs him that he will require no more. In this case As erudition
discharges B from the obligation to supply the remaining chairs. He can sue A for the breach of
contract for the value of 20 chairs already supplied. The later will be called suit for quantum
meruit.
4. Suit for Specific Performance
Instead of, or addition to awarding damages to the injured party a decree for specific
performance may be granted. Specific performance means the actual carrying out by the parties
carrying out their agreement. This remedy, however, is discretionary and will not granted in the
following cases.
1. Where monetary compensation is an adequate remedy. 2. Where the Court can not supervise
the execution of the contract, e.g. a building contract. 3. Where the contract is for personal
services. 4. Where one of the parties is a minor.
Specific performance is usually granted in contracts connected with land, e.g. purchase of
particular plot of house, or to take debentures in company. In the case of sale of goods, it will
only be granted in the case of specific goods and is not ordered as a rule unless the goods are
unique and cannot easily be purchased in the marked or are of special value to the party suing
by reason of personal or family associations.
5. Suit for Injunction
An injunction is a mode of securing the specific performance of a negative terms of the

contract. It is an order of the court whereby an individual is required to refrain from the further
doing of the act complained of. It may be used to prevent many wrongful acts, e.g. torts, but in
the context of contract the remedy will be granted to enforce a negative stipulation in a contract
in a case where damages would not be an adequate remedy. Thus , where a party to a contract
is doing something which he had promised not to do, the court may in its discretion, issue and
order to the defendant restraining him from doing what he promised not to do. Its application
may be extended to contracts where is no actual negative stipulation but where one may be
inferred. In Metropolitan Electric Supply Company v. Ginder (1901) 2 Ch. 799, G agreed to

44
make the whole electric required by his premises from the plaintiffs. Held, this was in
substance an agreement not to take energy from any other person and it could be enforced by
injunction.
Indemnity
The term Indemnity` Simply means Making Somebody Safe` or Paying Somebody back`.
Section 124 of contract Act defines that A contract by which one party. Promises to save the
other from loss caused to him by the conduct of the promise himself by the conduct of any
other person, is called a conduct of indemnity.
The party who gives indemnity or who promises to compensate for or to make good the loss, is
called. Indemnifier and the party for whose protection or safety the indemnity is given or the
party whose loss is made good is called Indemnified or indemnity holder.
Important features of an indemnity contract
1. Two party.
2. Promises for pay compensation of loss/damage.
3. Loss/damage may be the own or other person.
4. Creation of liabilities.
5. It must be faith.
6. All essential features of valid contract.
7. Compensation for actual loss/damage.
8. It may be express or implied. Loss/damage may be caused by some event, or accident,
or some natural phenomenon or disaster.
Rights of Indemnified (Indemnity-Holder) [Sec.125]
An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights

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1. Right to recover damages he is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of any matter covered by the contract.
2. Right to recover costs He is entitled to recover all costs incidental to the institution
and defending of the suit.
3. Right to recover sums paid under compromise he is entitled to recover all amounts
which he had paid under the terms of the compromise of such suit. However, the
compensation must not be against the directions of the indemnifier. It must be prudent
and authorized by the indemnifier.
4. Right to sue for specific performance he is entitled to sue for specific performance if
he has incurred absolute liability and the contract covers such liability. 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
It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack of
good faith and contravention of the promisors request. However, the right cannot be negatived
in case of oversight
Liabilities/Duties of Indemnified
Liabilities to pay all damages/losses.

Liabilities to pay all costs related to contract.
Liabilities to pay all sum which is received by sell for contract from indemnified.
Guarantee:
The object of the contract of guarantee is to enable. A person to obtain an employment, or a

loan, or some goods or service on credit.
According to section 126 of the contract Act 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 or guarantor & the person in respect
of whose default the guarantee is given is called the principal debtor or he is the party on

46
whose behalf. Guarantee is given and the person to whom the guarantee is given is called the
Creditor.
Essential features of a Guarantee Contract
Three parties
Three agreement
Concurrence of the three parties
Control may be experts or implies
It may be oral or written
Liability of surety is secondary is dependent on principal debtors default.
Guarantee must be in the knowledge of debtor.
All essential of a valid contract.
Guarantee must not be obtained by means of misrepresentation.
Existence of a primary liability.
Kinds of Guarantee:
Specific or Simple Guarantee: When a guarantee is given in respect to a single debt or specific
transaction is to come to an end when the guarantee debt is paid or the promise is duly
performed. It is called a specific or simple guarantee.
Continuing guarantee: Section 129, of the contract Act defines a guarantee which towards to a
series of transaction, is called a continuing guarantee, thus, a continuing guarantee is not
confined to a single transaction but keeps on moving to several transaction continuously.
Revocation of Guarantee:
Revocation of guarantee means cancellation of guarantee already accrued, it may be noted that
the specific guarantee cannot be revoked if the liability has already secured. However a
continuing guarantee can be revoked and on the revocation of such a guarantee. The liability of
the surety or guarantor comes to an end for the future transaction.
The surety continues to be liable for the transactions which have taken place up to the time of
revocation. A continuing guarantee may be revoked in any of the following ways a Guarantee
may be revoked in any of the following ways-
By notice of revocation.
By death of surely.
By discharge of surely in various circumstances
By novation (Sec.62)
By variance in terms (Sec. 133)
By release/discharge of principal Debtor (Sec.-134)
When the creditor events in to an agreement with the principal debtors (Sec.13..)
By creditor act or omission impairing suretys eventual remedy (Sec. 139)
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By loss of security (Sec. 141)

By invalidation of contract (Sec.142,143,144)
AG ENCY
Meaning of Agency: Agency is relation between an agent his principal created by an
agreement. Section 182 of the Contract Act defines an Agent as A person employed to do any
act for another, or to represent another in dealings with third persons. The person for whom
such act is done, or whom is so represented is called the principal.

48
Essential Features of Agency
The principal
The agent
An agreement
Consideration not necessary
Representative capacity
Good faith
The competence of the principal
Modes or Methods or Creation of Agency
1. Agency by express agreement [Section 186 and 187]
A contract of agency may be made by express words, whether written or oral.
2. Agency by implied agreement [Section 187]
An authority is said to be implied when it is to be inferred from the circumstances of the case.
(a) Agency by estoppels: When a principal by his conduct or act cause a third person to believe
that a certain person is his authorized agent the agency is aid to be an agency by estoppels.
(b) Agency by necessity: It mean the agency which comes into existence when certain
circumstances compel a person to act as an agent for an other without his express authority.
(c) Agency by holding out: When a principal by his active conduct or act and without any
objection permits another to act as his agent, the agency is the result of principals conduct as
to the agent.

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3. Agency by ratification [Section 196]
Ratification means confirmation of an act which has already been done. Sometimes, an act is
done by a person on behalf of another person but without another persons knowledge and
authority. If he accepts and confirm the act, he is said to have ratified it.
4. Agency by operation of law:
In certain circumstances the law treats a person as an agent of another person.
For example, (a) when a partnership is formed, every partner automatically becomes agent o
another partner. (b) when a company is formed its promoters are treated as its agents by
operation of law
RIGHTS AND DUTIES OF AGENT
Rights of an Agent
Right to retain money received on principals account.

Right to receive remuneration.
Right of lien on principals property.
Right to be indemnified.
Right to compensation for injury caused by principals neglet.
Duties of an Agent
1. To follow the direction of the principal.

2. To conduct the business of agency with reasonable skill and diligence.
3. To render accounts on demand
4. To communicate with the principal.
5. Not to deal on his own account
6. To pay the amounts received for the principal
7. Not to delegate his authority
8. Not to act in excess of authority
9. Duty on termination of agency by principals death or insanity.
TERMINATION OF AGENCY
Termination of agency means revocation (cancellation) of authority of the agent the modes of
termination of agency may be classified are as :
(a) Termination of Agency by the act of the Parties.
By revocation o authority by the principal

By renunciation (giving up) of business of agency by the agency
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By mutual agreement
(b) Termination of agency by Operation of Law
Completion of business of agency

Death or insanity of principal or agent
Insolvency of the principal
Destruction of subject matcer
Expiry of time
Agency subsequently becoming unlawful.
Termination of sub agents authority
Sale of Goods Act 1930
Till 1930,transactions relating to sale and purchase of goods were regulated by the Indian
Contract Act,1872.In 1930,Sections 76 to 123 of the Indian Contract Act, 1872 were repealed
and a separate Act called The Indian Sale of Goods Act,1930 was passed. It came into force
on 1st July,1930. With effect from 22nd September,1963,the word Indian was also removed.
Now, the present Act is called The sales of goods act,1930. This Act extends to the whole of
India except the State of Jammu and Kashmir.
Scope of the Act
The sale of Goods Act deals with Sale of Goods Act,1930,contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for
a price. Sec 4
Contract of sale is a generic term which includes both a sale as well as an agreement to sell.
SALE: It is a contract where the ownership in the goods is transferred by seller to the buyer
immediately at the conclusion contract.
EXAMPLE: A sells his house to B for Rs. 10,00,000. It is a sale since the ownership of the
house has been transferred from A to B.
AGREEMENT TO SELL: It is a contract of sale where the transfer of property in goods is to

take place at a future date or subject to some condition thereafter to be fulfilled.
EXAMPLE: A agreed to buy from B a certain quantity of nitrate of soda. The ship carrying the
nitrate of soda was yet to arrive. This is `an agreement to sale`. In this case, the ownership of
nitrate of soda is to be to transferred to A on the arrival of the ship containing the specified
goods (i.e. nitrate of soda) [Johnson V McDonald (1842) 9 M & W 600, 60 RR 838]

51
Difference between Sale and Agreement to Sell

1. Transfer of property
Sale: The property of goods passes from the seller to the buyer immediately. So the seller is no
more owner of the goods sold.
In an Agreement to Sell: The transfer of property of the goods is to take place at a future time
or subject to certain conditions to be fulfilled.
2. Type of goods
Sale : A sale can only be in case of existing and specific goods only.
In an Agreement to Sell : An agreement to sell is mostly in case of future and contingent goods
( associated or dependent ). Although it may refer to uncertain existing goods.
3. Risk of loss
Sale : In a sale if the goods are destroyed , the loss falls on the buyer even though the goods are
in the possession of the seller.
In an Agreement to Sell : In an Agreement to Sell if the goods are destroyed the loss falls on
the seller even though the goods are in the possession of the buyer.
4. Consequences of the breach
Sale : In a sale the buyer fails to pay the price of goods (or) if there is a breach of contract by
the buyer the seller can sue for the price even though the goods are still in his possession.
In an Agreement to Sell : If there is a breach of contract by the buyer the seller can only sue for
the damages and not for the price.
5. Right to re-sell
Sale : In a sale the seller cannot re-sell the goods.
In an Agreement to Sell : The buyer who takes the goods for consideration and without notice
of the prior agreement gets him a good title. The original buyer can only sue the seller for
damages.
6. General and particular property

Sale : The sale of contract plus conveyance and creates Jus in rem i.e., gives right to the buyer
to enjoy the goods as against the word and large including the seller.
In an Agreement to Sell : An agreement to sell is merely a contract pure and simple and creates
Jus in personam i.e., gives a right to the buyer against the seller to sue for the damages.
7. Insolvency of buyer
Sale : In a sale if the buyer becomes insolvent before he pays for goods, the seller in the
absence of the lien over the goods, must return them to the official receiver or assignee. He can
only claim the reteable dividend for the price of the goods.

52
In an Agreement to Sell : In an Agreement to Sell , If the buyer becomes insolvent and has not
yet paid the price the seller is not bound to part with the goods until he is paid for.
8. Insolvency of the seller
Sale : In a sale the seller becomes insolvent, the buyer being the owner is entitled to recover
the goods from the official receiver of the assignee.
In an Agreement to Sell : If the buyer who has paid the price, finds that the seller has become
insolvent he can only claim a rateable dividend and not the goods because property in them has
not yet passed to him.
Essential elements of Contract of sale
The general provisions of Indian Contract Act continue to be applicable to the contract of sales
of goods in so far as they are not inconsistent with the express provisions of Sale of Goods Act
(Section 3). Thus, for example, the provisions of Contract Act relating to capacity of the
parties, free consent, agreements in restraint of trade, wagering agreements and measure of
damages continue to be applicable to a contract of sale of goods. But the definition of
consideration stands modified to the extent that in a contract of sale of goods consideration
must be by way of price i.e., only money consideration [Section 2(10) and 4]
1. Seller and buyer: There must be a seller as well as a buyer. Buyer means a person who
buys or agrees to buy goods[Section 2910].Seller means a person who sells or agrees to sell
goods [Section 29(13)].
2. Goods: There must be some goods. Goods means every kind of movable property other
than actionable claims and money 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 [Section 2(7)].
3. Transfer of property: Property means the general property in goods, and not merely a special
property[Section 2(11)]. General property in goods means ownership of the goods. Special
property in goods means possession of goods. Thus, there must be either a transfer of
ownership of goods or an agreement to transfer the ownership of goods. The ownership may
transfer either immediately on completion of sale or sometime in future in agreement to sell.
4. Price: There must be a price. Price here means the money consideration for a sale of goods
[Section 2(10)].When the consideration is only goods, it amounts to a barter and not sale.
When there is no consideration, it accounts to gift and not sale.
5. Essential elements of a valid contract: In addition to the aforesaid specific essential

elements, all the essential elements of a valid contract as specified under Section 10 of Indian
Contract Act,1872 must also be present since a contract of sale is a special type of a contract.
AN AGREEMENT TO SELL

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Where under a contract of sale the transfer of property in the goods is to take place at a future
time or subject to same condition thereafter to be fulfilled, the contract is called an agreement
to sell [Section 7(3)]. It is an executory contract and refers to a conditional sale.
Examples:
(i) On 1 January, X agrees with Y that he will sell Y his scooter on 15 January for a sum of Rs
4,000. It is an agreement to sell, since X agrees to transfer the ownership of the scooter to y at
a future time.
(ii) X buys some furniture for Rs 5,000 and agrees to pay for that in the monthly instalments,
the ownership to pass to him on the payment of second instalment. There is an agreement to
sell for the furniture dealer.
Right to Resale
In a sale, the property is with the buyer and as such the seller (in possession of goods after
sale) cannot resell the goods. If he does so, the subsequent buyer having knowledge of the
previous sale does not acquire a title to the gods. The original buyer can sue and recover the
goods from the third person on owner, and can also sue the seller for the breach of contract as
well as for the tort conversion. The right to recover the goods from the third person is,
however, lost if the subsequent buyer had bought them bonfire without notice of the previous
sale (Section 30).
GOODS SUBJECT MATTER OF CONTRACT OF SALE

Goods form the subject-matter of a contract of sale. According to Section 2(7), goods means
every kind of movable property other than actionable claims and money; and includes stocks
and shares, growing crops, grass and things attached to or forming part of land which are
agreed to be severed before sale or under the contract of sale. Trade marks, copy rights, patent
rights, goodwill, electricity, water, gas are all goods.
Actionable claim and money are not goods. An actionable claim is something which can only
be enforced by action in a Court of law. A debt due from one person to another is an actionable
claim and cannot be bought or sold as goods. It can only be assigned. Money here means
current money and not old rare coins.
The definition of the term goods also suggests that it includes stocks and shares, growing
crops, grass and things attached to or forming part of land which are agreed to be severed from
land before sale. Growing crops and grass are included in the definition of the term goods
because they are to be severed from land. Trees which are agreed to be severed before sale or
under the contract of sale are goods [Badri Prasad v State of MP, AIR (1970) SC 706]
Goods may be classified into various types as shown below:

1. Existing goods; or
2. Future goods; or
3. Contingent goods
1. Existing goods
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Goods earned and possessed by the seller at the time of the making of the contact of sale are
called existing goods. Sometimes the seller may be in possession but may not be the owner of
the goods e.g. sale of goods by a mercantile agent. Existing goods may again be either specific,
or ascertained or unascertained.
a) Specific Goods
These are the goods which are identified and agreed upon at the time a contract of sale is made.
To be specific the goods must be actually identified; it is not sufficient that they are capable of
identification
e.g. If X who owns a number of horses, promises to sell one of them, the contract is for
unspecified goods.
b) Ascertained Goods
These are the goods which are identified in accordance with the agreement after the contract of
sale is made. Though commonly used as similar in meaning to specific goods, these are not
always the same.
c) Unascertained Goods
It means generic goods. These goods can be defined by description or even by sample. The
seller in the use of a contract for the sale of unascertained goods has the option, rather the right
to supply any goods of the kind or the quality contracted for. He is not bound to deliver any
particular goods and he may furnish any goods answering their description in the contract.
2. Future Goods
Goods to be manufactured, produced or acquired by the seller after the making of the contract
of sale are called future goods [Sec 2(6)]. These goods may be either not yet in existence or
be in existence but not yet acquired by the seller. It is worth noting that there can be no present
sale of future goods because property cannot pass in what is not owned by the seller at the time
of the contract. So even if the parties purport to effect a present sale of future goods, in law it
operates only as an agreement to sell [Sec 6(3)].
Examples:
X agrees to sell to Y all the mangoes which will be produced in this garden next year. It is
contract to sale of future goods, amounting to an agreement to sell.
P contracts on 1 January 1990, to sell to B ten bales of Egyptian cotton to be delivered and paid
for on 1 March, 1990. This is a valid contract of sale, amounting to an agreement to sell even
though P has no cotton bales with him at the time of making the contract.
3. Contingent Goods
Goods, the acquisition of which by the seller depends upon an uncertain contingency are called
contingent goods [Sec. 6(2)]. Obviously they are a type of future goods and therefore, a
contract for the sale of contingent goods also operates as an agreement to sell and not a sale
so far as the question of passing of property to the buyer is concerned. In other words, like the

55
future goods, in the case of contingent goods also the property does not pass to the buyer at the
time of making the contract.
ASCERTAINMENT OF PRICE (SECTIONS 9 & 10)

Price means the monetary consideration for sale of goods [Section 2(10)]. By virtue of
Section 9, the price may be (1) fixed by the contract, or (20 agreed to be fixed in a manner
provided by the contract, e.g. by a valuer, or (3) determined by the course of dealings between
the parties.
Conditions & 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 a
part of contract of sale. Whereas some of them may become a part of contract of sale.
Representations which become a part of contract of sale are termed as stipulations which may
rank as condition and warranty e.g. a mere commendation of his goods by the seller doesnt
become a stipulating and gives no right of action to the buyer against the seller as such
representations are mere opinion on the part of the seller. But where the seller assumes to assert
a fact of which the buyer is ignorant, it will amount to a stipulation forming an essential part of
the contract of sale.
Meaning of Conditions [Section 12(2)]
A condition is a stipulation
Which is essential to the main purpose of the contract

The breach of which gives the aggrieved party a right to terminate the contract.
Meaning of Warranty[Section 12(3)]
A warranty is a stipulation
Which is collateral to the main purpose of the contract

The breach of which gives the aggrieved party a right to claim damages but not a right
to reject goods and to terminate the contract.

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Conditions to be treated as Warranty [Section 13]
In the following three cases a breach of a condition is treated as a breach of a warranty:
1) Where the buyer waives conditions; once the buyer waives conditions, he cannot insist
on its fulfilment e.g. accepting defective goods or beyond the stipulated time amount to
waiving conditions.
2) Where the buyer elects to treat breach of the condition as a breach of warranty; e.g.
where he claims damages instead of repudiating the contract.
3) Where the contract is not severable and the buyer has accepted the goods or part
thereof, the breach of any condition by the seller can only be treated as breach of
warranty. It cannot be treated as a ground for rejecting the goods unless otherwise
specified in the contract. Thus, where the buyer after purchasing the goods finds that
some condition is not fulfilled, he cannot reject the goods. He has to retain the goods
entitling him to claim damages.
Express and Implied Conditions and Warranties
In a contract of sale of goods, conditions and warranties may be express or implied.
1. Express Conditions and Warranties: These are expressly provided in the contract. For
example, a buyer desires to buy a Sony TV Model No. 2020.Here,model no. is an
express condition. In an advertisement for Khaitan fans,guatantee for 5 years is an
express warranty.
2. Implied Conditions and Warranties: These are implied by law in every contract of sale of
goods unless a contrary intention appears from the terms of the contract. The various implied
conditions and warranties have been shown below:

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Implied Conditions
1. Conditions as to title [ Section 14 (a)]
There is an implied condition on the part of the seller that
In the case of a sale, he has a right to sell the goods, and

In the case of an agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.
2. Condition in case of sale by description [Section 15]
Where there is a contract of sale of goods by description, there is an implied condition that the
goods shall correspond with description. The main idea is that the goods supplied must be
same as were described by the seller. Sale of goods by description include many situations as
under:
i. Where the buyer has never seen the goods and buys them only onm the basis of description
given by the seller.
ii. Where the buyer has seen the goods but he buys them only on the basis of description given
by the seller.
iii. Where the method pf packing has been described.
3. Condition in case of sale by sample [Section 17]
A contract of sale is a contract for sale by sample when there is a term in the contract, express
or implied, to that effect. Such sale by sample is subject to the following three conditions:
The goods must correspond with the sample in quality.

The buyer must have a reasonable opportunity of comparing the bulk with the sample.
The goods must be free from any defect which renders them unmerchantable and which would
not be apparent on reasonable examination of the sample. Such defects are called latent defects
and are discovered when the goods are put to use.
4. Condition in case of sale by description and sample [Section 15]
If the sale is by sample as well as by description, the goods must correspond with the sample as
well as the description.
5. Condition as to quality or fitness [Section 16(1)]

58
There is no implied condition as to the quality or fitness for any particular purpose of goods
supplied under a contract of sale. In other words, the buyer must satisfy himself about the
quality as well as the suitability of the goods.
Exception to this rule:
There is an implied condition that the goods shall be reasonably fit for a particular purpose
described if the following three conditions are satisfied:
1. The particular for which goods are required must have been disclosed(expressly or
impliedly) by the buyer to the seller.
2. The buyer must have relied upon the sellers skill or judgement.
The sellers business must be to sell such goods.
6. Condition as to merchantable quality[Section 16(2)]
Where the goods are bought by description from a seller who deals in goods of that
description, there is an implied condition that the goods shall be of merchantable quality. The
expression merchantable quality means that the quality and condition of the goods must be
such that a man of ordinary prudence would accept them as the goods of that description.
Goods must be free from any latent or hidden defects.
7. Condition as to wholesomeness
In case of eatables or provisions or foodstuffs, there is an implied condition as to

wholesomeness. Condition as to wholesomeness means that the goods shall be fit for human
consumption.
8. Conditions implied by custom [Section 16(3)]
Condition as to quality or fitness for a particular purpose may be annexed by the usage of
trade.
Implied warranties
a) Warranty as to quiet possession [Section14(b)]
There is an implied warranty that the buyer shall have and enjoy quiet possession of the goods.
The reach of this warranty gives buyer a right to claim damages from the seller.
b) Warranty of freedom from encumbrances [Section 14(c)]

59
There is an implied warranty that the goods are free from any charge or encumbrance in favour
of any third person if the buyer is not aware of such charge or encumbrance. The breach of this
warranty gives buyer a right to claim damages from the seller.
Warranty as to quality or fitness for a particular purpose annexed by usage of trade

[Section 16(3)]
Warranty to disclose dangerous nature of goods
In case of goods of dangerous nature the seller fails to do so, the buyer may make him liable
for breach of implied warranty.
Performance of the Contract of sale
Meaning Sec.2(2): Delivery means voluntary transfer of possession from one person to
another.
Duty of Seller Sec.31: It is the duty of the Seller to deliver the goods and of the buyer to accept
and pay for them in accordance with the contract of Sale.
It is the duty of the seller and buyer that the contract is performed. The duty of the seller is to
deliver the goods and that of the buyer to accept the goods and pay for them in accordance with
the contract of sale.
Unless otherwise agreed, payment of the price and the delivery of the goods and concurrent
conditions, i.e., they both take place at the same time as in a cash sale over a shop counter.
Mode of delivery : Sec. 33: Delivery of Goods sold may be made by
(a) doing anything which the parties agree shall be treated as delivery ; or
(b) which has the effect of putting the Goods in the possession of the Buyer or of any person
authorized to hold them on his behalf
Delivery (Sections 33-39) Delivery is the voluntary transfer of possession from one person to
another. Delivery may be actual, constructive or symbolic.
Actual or physical delivery takes place where the goods are handed over by the seller to the
buyer or his agent authorized to take possession of the goods.
Constructive delivery takes place when the person in possession of the goods acknowledges
that he holds the goods on behalf of and at the disposal of the buyer.
For example, where the seller, after having sold the goods, may hold them as bailee for the
buyer, there is constructive delivery.
Symbolic delivery is made by indicating or giving a symbol. Here the goods themselves are
not delivered, but the means of obtaining possession of goods is delivered, e.g, by delivering

60
the key of the warehouse where the goods are stored, bill of lading which will entitle the holder
to receive the goods on the arrival of the ship.
Rules as to delivery
The following rules apply regarding delivery of goods:
(a) Delivery should have the effect of putting the buyer in possession.
(b) The seller must deliver the goods according to the contract.
(c) The seller is to deliver the goods when the buyer applies for delivery; it is the duty of the
buyer to claim delivery.
(d) Where the goods at the time of the sale are in the possession of a third person, there will be
delivery only when that person acknowledges to the buyer that he holds the goods on his
behalf.
(e) The seller should tender delivery so that the buyer can take the goods. It is no duty of the
seller to send or carry the goods to the buyer unless the contract so provides. But the goods
must be in a deliverable state at the time of delivery or tender of delivery. If by the contract the
seller is bound to send the goods to the buyer, but no time is fixed, the seller is bound to send
them within a reasonable time.
(f) The place of delivery is usually stated in the contract. Where it is so stated, the goods must
be delivered at the specified place during working hours on a working day. Where no place is
mentioned, the goods are to be delivered at a place at which they happen to be at the time of
the contract of sale and if not then in existence they are to be delivered at the place at which
they are manufactured or produced.
(g) The seller has to bear the cost of delivery unless the contract otherwise provides. While the
cost of obtaining delivery is said to be of the buyer, the cost of the putting the goods into
deliverable state must be borne by the seller. In other words, in the absence of an agreement to
the contrary, the expenses of and incidental to making delivery of the goods must be borne by
the seller, the expenses of and incidental to receiving delivery must be borne by the buyer.
(h) If the goods are to be delivered at a place other than where they are, the risk of deterioration
in transit will, unless otherwise agreed, be borne by the buyer.
(i) Unless otherwise agreed, the buyer is not bound to accept delivery in instalments.
Acceptance of Goods by the Buyer
Acceptance of the goods by the buyer takes place when the buyer:
(a) intimates to the seller that he has accepted the goods; or
(b) retains the goods, after the lapse of a reasonable time without intimating to the seller that

61
he has rejected them; or
(c) does any act on the goods which is inconsistent with the ownership of the seller, e.g.,
pledges or resells. If the seller sends the buyer a larger or smaller quantity of goods than
ordered, the buyer may:
(a) Reject the whole; or
(b) Accept the whole; or
(c) Accept the quantity be ordered and reject the rest. If the seller delivers with the goods
ordered, goods of a wrong description, the buyer may accept the goods ordered and reject the
rest, or reject the whole.
Where the buyer rightly rejects the goods, he is not bound to return the rejected goods to the
seller. It is sufficient if he intimates the seller that he refuses to accept them. In that case, the
seller has to remove them.
Instalment Deliveries: When there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid for, and either the buyer or the seller commits a
breach of contract, it depends on the terms of the contract whether the breach is a repudiation
of the whole contract or a severable breach merely giving right to claim for damages.
Suits for Breach of Contract
Where the property in the goods has passed to the buyer, the seller may sue him for the price.
Where the price is payable on a certain day regardless of delivery, the seller may sue for the
price, if it is not paid on that day, although the property in the goods has not passed.
Where the buyer wrongfully neglects or refuses to accept the goods and pay for them, the seller
may sue the buyer for damages for non-acceptance.
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer
may sue him for damages for non-delivery.
Where there is a breach of warranty or where the buyer elects or is compelled to treat the
breach of condition as a breach of warranty, the buyer cannot reject the goods. He can set
breach of warranty in extinction or diminution of the price payable by him and if loss suffered
by him is more than the price he may sue for the damages.
If the buyer has paid the price and the goods are not delivered, the buyer can sue the seller for
the recovery of the amount paid. In appropriate cases the buyer can also get an order from the
court that the specific goods ought to be delivered.

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Anticipatory Breach
Where either party to a contract of sale repudiates the contract before the date of delivery, the
other party may either treat the contract as still subsisting and wait till the date of delivery, or
he may treat the contract as rescinded and sue for damages for the breach.
In case the contract is treated as still subsisting it would be for the benefit of both the parties
and the party who had originally repudiated will not be deprived of:
(a) his right of performance on the due date in spite of his prior repudiation; or
(b) his rights to set up any defence for non-performance which might have actually arisen after
the date of the prior repudiation.
Measure of Damages
The Act does not specifically provide for rules as regards the measure of damages except by
stating that nothing in the Act shall affect the right of the seller or the buyer to recover interest
or special damages in any case were by law they are entitled to the same. The inference is that
the rules laid down in Section 73 of the Indian Contract Act will apply.

63

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Business Law and Ethics

THE INDIAN CONTRACT ACT, 1872

1. General principles of the law of contract are expressed by sections 1 to 75

On analysing the above definition the following characteristics of an agreement become

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ESSENTIAL ELEMENTS OF A VALID CONTRACT

The essential elements of a valid contract are as follows:

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(b) who are of sound mind;

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Contracts Classified on the basis of Enforceability:

1. Valid contract: An agreement enforceable at law is a valid contract. An agreement becomes a

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4. Unenforceable contract: It is a contract which is otherwise valid, but cannot be enforced

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Difference between voidable contract and void agreement

Contracts Classified on the basis of performance:

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Contracts Classified on the basis of Mode of Creation

3. Constructive or quasi-contract: It is a contract in which there is no intention on either side to

Offer and Acceptance

Elements/Main features of a Proposal

2. Communication: The offer must be communicated to the offence. If it is never

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Legal Rules as to Offer

1. Offer Must be definite, Unambiguous and certain

2. Offer should not bind the other party to reply

3. Offer must be made to create legal relationship

4. The offer may be general or specific

An offer is called specific when it is made to an individual or a group of individuals. In case of

5. The offer may be express or implied.

6. The offer should be a request and not an order.

7. The offer must be for a possible act

8. The offer must be communicated

An offer, to be complete, must be communicated to the person to whom it is made so that he

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Rules governing acceptance

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2. The acceptance must be communicated

3. Acceptance must be in the prescribed mode

4. Mere silence is not acceptance

5. The proposer cannot prescribe the method of refusal

6. An offer once rejected cannot be accepted until it is renewed.

7. Acceptance may be express or implied

8. An action without the knowledge of the proposal is no acceptance

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10. Acceptance must be made before the lapse or withdrawal of an offer.

From the above definition it can be inferred that,

1. Consideration must be at the desire of the promisor.

(3) Consideration may be past, present or future and

(4) Consideration should be real though not adequate.

2. Present Consideration: It is received at the time of formation of the contract. It is in process

Legal Requirements Regarding Consideration:

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Present Consideration: A consideration to do or abstain from doing something given

Validity of an Agreement without Consideration/Agreement without consideration-Exceptions

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a) The agreement must be written.

b) The agreement must be registered under the prevailing law.

c) The parties to the agreement must be intimately related

d) There must be love and affection between the parties.

2) People who are mentally incompetent; and

3) People disqualified by their legal status like insolvents.

(b) Where the superintendence of a minor's property is assumed by a Court of Words.