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Business Law developed with the changing

practices of trade and commerce. The Indian Contract Act, 1872 is the foundation on which all business relations rest. It determines the circumstances in which promises made b the parties to a contract shall be legally binding. It also defines the remedies that are available against a person who fails to perform his contract, and prescribes conditions under the which the remedies are available. The Act originally had XI chapters and 238 sections. Chapter VII on Sale of goods Sections 73 to 123 has been repealed and new enactment Sale of goods Act came into existence. Chapter XI on Partnership (Sections 239 to 266)
PGDM 17 - BL: LAW OF CONTRACTS / TJK

An Agreement enforceable by Law is a Contract.

- S.2(h) Every promise and every set of promises, forming the consideration for each other, is an Agreement . - S.2(e) When a person to whom the proposal is made, signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a Promise - S.2(b) When one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a Proposal. - S.2(a)
PGDM 17 - BL: LAW OF CONTRACTS / TJK

Enforceable by Law

PGDM 17 - BL: LAW OF CONTRACTS / TJK

An offer is

an expression by one party of


his assent to certain definitive terms, which looks forward to acceptance by the other

to the exact same terms.


Offeror: the one making the offer. Offeree: the one to whom the offer is made.

PGDM 17 - BL: LAW OF CONTRACTS / TJK

AN

PGDM 17 - BL: LAW OF CONTRACTS / TJK

100 REWARD Carbolic smoke ball co 100 reward will be paid by the Carbolic Smoke Ball Company to any person who contracts the increasing epidemic influenza colds, or any disease caused by taking cold, after having used the ball three times daily for two weeks, according to the printed directions supplied with each ball. 1000 is deposited with the Alliance Bank, Regent Street, showing our sincerity in the matter. During the last epidemic of influenza many thousand carbolic smoke balls were sold as preventives against this disease, and in no ascertained case was the disease contracted by those using the carbolic smoke ball One carbolic smoke ball will last a family several months, making it the cheapest remedy in the world
PGDM 17 - BL: LAW OF CONTRACTS / TJK

Mrs. Elizabeth Carlill used the ball exactly according to instructions.

But she caught the flu. She sued for 100.

1. The advertisement was not correctly stated; 2. She had not acted in reliance on the Ad.; 3. She had not used the device as directed; 4. She had not contracted influenza; 5. The Co. had no notice of her purchase of the Ball; 6. There was no valid contract; 7. It was a gaming contract and not enforceable; 8. The advertisement was not a contractual offer or, if it was, it was not accepted; and, 9. If a contract, it was against public policy - void
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9
PGDM 17 - BL: LAW OF CONTRACTS / TJK

The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it. - S.3

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10

The communication of proposals, the acceptance of proposals, and the revocation of proposals and acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has the effect of communicating it.

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Section 3 divided
The communication of proposals, are deemed to be made by any act or omission are deemed to be made by any act or omission of the Proposer of the party proposing,
accepting or revoking, the acceptance of proposals, and the revocation of proposals and acceptances, respectively,

by which he intends to communicate such proposal,


acceptance or revocation,

or which has the effect of communicating it.


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Section 3 Modified
The communication of
proposals,

the acceptance of proposals,


and the revocation of proposals and acceptances, respectively,

are deemed to be made by any act or omission of the party


proposing,

accepting
or revoking,

by which he intends to communicate


such proposal,

acceptance
or revocation,

or which has the effect of communicating it.


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13

A boy ran away from his house. Father issued a

pamphlet, offering a reward to any body who finds the boy. One man did not see the pamphlet, but over heard part of a conversation and found the missing boy. Can he claim the reward offered ? Har Bhajan Lal Vs. Haricharan Lal AIR 1925 All 539.
Performance of the conditions of the proposal, or the

acceptance of any consideration for the reciprocal promise which may be offered with a proposal, is an acceptance of the proposal. S. 8 Display of goods at a shop with price tags attached. - Is it an offer? Pharmaceutical Society of G.Britain Vs. Boots cash chemists Ltd. All ER 482 (CA) Display of goods is only an invitation to offer.
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The communication of an acceptance is

Henthorn v Fraser (1892) 2.Ch.27. complete, where the circumstances are such is put in a course of that ,according to as against the proposer when it ordincry usages of mankind, the post might be power of transmission to him, so as to be out of the used as a means acceptor, the of communicating the acceptance of an offer, the acceptance is complete as soon as it comes to the as against the acceptor, when it is posted.
knowledge of the proposer. S .4
On 7th July, a Building society handed over a

written offer to sell a house to A. Acceptance was to be by post. On 8th July 12.30 PM, The society sent a letter revoking the offer. At 3.50 PM on the same day, A posted a letter
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A proposal may be revoked at any time before

Ramdas chakrabarti Vs. Cotton ginning the communication of its acceptance is Co complete as All 36 the proposer, but not Ltd (1887) 9 against afterwards. It follows from this section 4 and High court An acceptance may be revoked at any time 5 that notice of allotment of the is the beforeathe communication which acceptance is acceptance of the offer to purchase shares, complete as against the acceptor, but not is afterwards communicated to the allotee when it is- S.5 dispatched and from that moment, there is A letter of allotment of shares was claimed to complete contract by a company, or the have been postedfor hm. Whetherbut not he applicant denied to have received it. receives the letter is absolutely immaterial
Whether allotment of shares is binding on the

applicant?
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A proposal is revoked (1) by the communication of notice of revocation by the proposer to the other party; (2) by the lapse of the time prescribed in such proposal for its acceptance, or, if no time is so prescribed, by the lapse of a reasonable time, without communication of the acceptance; (3) by the failure of the acceptor to fulfill a condition precedent to acceptance; or (4) by the death or insanity of the proposer, if the fact of the death or insanity comes to the knowledge of the acceptor before acceptance.

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S.6
17

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 be void.

Nothing herein contained shall affect any

law in force in India, and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to
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18

Two or more persons are said to consent

when they agree upon the same thing in the same sense. - [S.13]
Consent is said to be free when it is not

caused by
(1) (2) (3) (4) (5)

coercion, as defined in section 15, or undue influence, as defined in section 16, or fraud, as defined in section 17, or misrepresentation, as defined in section 18, or mistake, subject to the provisions of S. 20,21& 22.

Consent is said to be so caused when it would not have been given but for the
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19

"Coercion" is the committing, or threatening to commit, any act forbidden by the IPC or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. S.15 C threatened to commit suicide and induced his wife

to release certain rights in an immovable property in favour of his brother. Is it coercion? Chikham Amiraju V Chikham Seshamma- (1917) 41 Mad 33 Held voidable, though suicide is not punishable under IPC,
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(1) A contract is said to be induced by "undue influence" where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. (2) In particular and without prejudice to the generally of the foregoing principle, a person is deemed to be in a position to dominate the will of another
where he hold a real or apparent authority over the

other, or where he stands in a fiduciary relation to the other; or where he makes a contract with a person whose mental capacity is temporarily or permanently
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(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, be unconscionable, the burden of proving that such contract was not induced by undue influence shall be upon the person in a position to dominate the will of the other. - S.16(3)
Nothing in the sub-section shall affect the

provisions of section 111 of the Indian Evidence Act, 1872 -S.16


PGDM 17 - BL: LAW OF CONTRACTS / TJK

Consent
22

"Fraud" means and includes any of the following

acts committed by a party to a contract, or with his connivance, or by his agents, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract;
the suggestion as a fact, of that which is not true, by one who does not believe it to be true; 2. the active concealment of a fact by one having knowledge or belief of the fact; 3. a promise made without any intention of performing it; 4. any other act fitted to deceive; 5. any such act or omission as the law specially declares to be fraudulent. Explanation:- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that , regard being had to them, it is the duty of the person keeping silence to speak or unless his silence is, in itself,
1.
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23

A sells, by way of auction, to B, a horse which A

knows to be unsound. A conceals the fact from B. In the above case, B is As daughter, and has just come of age. The relation between parties would make it As duty to disclose. Intentional misrepresentation is of the essence of fraud. Amina Vs Hasan koya AIR 2004 SC 1227 pregnancy evident. P. Sarojam V LIC AIR 1996 Ker 201 non disclosure in the Proposal for Insurance. Duty to speak Uberrima fides PL Raju V Dr. Nandan Singh (2205) 5 ALD 402 (AP): seller did not disclose pending litigation abut the property. Buyer allowed refund of money with
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Misrepresentation" means and includes (1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true; (2) any breach of duty which, without an 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 any one claiming under him; (3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is subject of the
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25

2
PGDM 17 - BL: LAW OF CONTRACTS / TJK

Aprilia World Service took the Spice Girls to court for damages of .

1.5 million They claimed that SGL knew of Miss Halliwell's plans to leave before their Spiceworld tour, which the company sponsored to the tune of 500,000. Aprilia produced 100s of Sonic Spice scooters featuring a silhouette of band members. The product flopped when Ginger left the group. The company lost in advertising and sales of the specially-made scooters. The Spice Girls, launched a counterclaim for 220,000 towards sponsorship fees, royalties and scooters as agreed by Aprilla. They also wanted quashing of a lower Court order asking them to pay 45,550 in damages for the scooters Aprilia supplied to them plus costs. The original deal was signed with Aprilia in May 1998, at which time Geri Halliwell told the company of her intention to leave the group - but said it would not be until after the tour. She changed her mind and quit weeks later. Aprilia argued that Miss Halliwell confided to Emma Bunton in March that she was leaving the band. The Spice Girls, failed to 27
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Smith v Land & House Property Corp (1884) 28

Ch D 7
The plaintiff put up his hotel for sale stating that it

was let to a 'most desirable tenant'. The defendants agreed to buy the hotel. The tenant was bankrupt. As a result, the defendants refused to complete the contract and were sued by the plaintiff for specific performance. The Court of Appeal held that the plaintiff's statement was not mere opinion, but was one of fact.
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28

Where both the parties to an agreement are

under mistake as to a matter of fact essential to the agreement, the agreement is void.
Explanation : An erroneous opinion as to the value of the

things which forms the subject-matter of the agreement is not be deemed a mistake as to a matter of fact

- S.20
Effect of mistake as to law - A contract is not

voidable because it was caused by a mistake as to any law in force in India; but mistake as to a law not in force in India has the same effect as a mistake of fact. - S.21 A contract is not voidable merely because it was caused by one of the parties to it being
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29

(a) A agrees to sell to B a specific cargo of

goods supposed to be on its way from England to Bombay. It turns out that, before the day of the bargain, the ship conveying the cargo had been cast away and the goods lost. Neither party was aware of the facts. The agreement is void. (b) A agrees to buy from B a certain horse. It turns out that the horse was dead at the time of the bargain, though neither party was aware of the fact. The agreement is void. (c) A, being entitled to an estate for the life of B, agrees to sell it to C. B was dead at the time of the agreement, but both parties were ignorant of the fact. The agreement is void.
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30

Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. - [S.11]

If a person, incapable of entering into a

contract is supplied with necessaries in life, the person who supplies is entitled to be reimbursed - [S.68]
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31

The Indian Majority Act of 1875, Section 3, as amended in 1999, states that every person domiciled in India shall attain the age of majority on completion of 18 years and not before. Mohiri Bibee v Dharmodas Ghosh (1903) 30 IA 114:30 Cal 539:. Dharmodas a minor, entered into a contract to borrow Rs. 20,000. The lender advanced Rs. 8,000 to him and Dharmodas executed a mortgage of his property in favour of the lender. Subsequently, the minor sued for setting aside the mortgage. The Privy Council held that sections 10 and 11 of the Indian Contract Act make the minor's contract void and therefore the mortgage was not valid. The privy council further held that as a minor's contract was void, any money advanced to him could not be recovered. Srikakulam Subrahmanyam v Kurra Sabha Rao (1949)
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32

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 judgment as to its effect upon his interests.


A person who is usually of unsound mind, but

occasionally of sound mind, may make a contract when he is of sound mind. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. - [S.12] A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of contract or form a rational judgment as to its effect on his interest, cannot contract whilst such delirium
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Indersingh v Paraneshwardhari Singh AIR 1957 Pat 491

A property worth about Rs. 25,000/- was agreed to

be sold by a person for Rs. 7,000/-. His mother proved that he was a congenital idiot, incapable understanding eh transaction and that he mostly wandered about. Sale was held to be void.

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34

Ryder v Wombwell (1868) LR 4 Exch 32 Earrings for a male, spectacles for a blind person, a wild animal, daily dinner with turtle and venison for a clerk with a salary of 1 a week are not necessaries.
You don't expect to be set up in a coach

and six, and to be fed on turtle soup and venison, with a gold spoon, as a good many of 'em do!" - Charles Dickens, Hard Times, Book 1, Chapter 11.
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35

When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called

a consideration for the promise

-S.2(d)
Contd.

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36

An agreement made without consideration is void,

unless:
(1) it is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other; or unless (2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless (3) it is a promise, made in writing and signed by the person to be charged therewith or by his agent generally or specially authorised in that behalf, to pay wholly or in part debt of which the creditor might have enforced payment but for the law for the limitation of suits.
In any of these cases, such an agreement is a

contract.

S.25

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37

Explanation 1 : Nothing in this section shall

affect the validity, as between the donor and donee, of any gift actually made. Explanation 2 : An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given. Surendra Behari Lal v Jodonath 1984 All LJ 21 : transfer of property to brother in law held void for want of consideration.
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The consideration or object of an agreement is lawful, unless It is forbidden by law; or is of such 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 the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void. S.23 Pierce v Brooks (1866) LR 1 Ex 213:

The defendant, a prostitute, was sued by the plaintiffs, coach-builders, for the hire of a brougham. The jury found that they knew her to be a prostitute, and supplied the brougham with a knowledge that it would be, as in fact it was, used by her as part 17 - BL:herOFdisplayTJK attract men.39 of LAW CONTRACTS / to PGDM

An agreement not enforceable by law is said to be void; - S.2(g) The following types of agreements are declared to be void:
1) 2) 3) 4) 5) 6) 7) 8)

Agreements of which consideration and objects are unlawful in part. S. 24 Agreements without consideration - S. 25 Agreements in restraint of marriage S. 26 Agreements in restraint of trade. S. 27 Agreements in restraint of legal proceedings S. 28 Unmeaning Agreements S. 29 Wagering Agreements S. 30 Agreements to do impossible acts. S. 56

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40

If any part of a single consideration for one or

more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void. Illustration : A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object of A's promise, and the consideration for B's promise, being in part unlawful. - S. 24 Pickering v Illfracambe 1868 LR 3 CP 235 : Where you cannot sever the legal part form the illegal part, the contract is altogether void. Otherwise, you can reject the bad part and
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41

Every agreement in restraint of the marriage

of any person, other than a minor, is void. - S. 26


Rao Rani v Gulab Rani LR 1942 All 810 :

Agreement between two co-widows that if any of them remarried, she should forfeit her right to the deceased husbands property. Held valid. all that was provided was that if a widow elected to remarry, she would be deprived of her rights
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42

Every agreement by which anyone is

restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception 1 - One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, Provided that such limits appear to the court reasonable, regard being had to
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43

Agreement among partners not to carry on

similar business during the continuance of partnership, on dissolution, on retirement from partnership , reasonable restrictions specifying the local limits are permissible. (S.11,36 of Partnership Act) Trade Combinations exclusive dealer arrangements Service Agreements and bonds.

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Trego V Hunt (1896) Ac, 26 It is difficult to imagine that when the goodwill and trade of a retail shop were sold, the vendor might the next day set up a shop within a few doors ad draw off all customers Gujarat Bottling co Ltd v Coca Cola Co (1995)5 SCC 545 The Agreement restrained the franchisee to manufacture, bottle, sell, deal or otherwise be concerned with the products, beverages of any other brands or trade marks/ trade names during subsistence of the agreement including the period of one year notice. The purpose the agreement was to promote trade and the restriction is operative only during the period the agreement is subsisting.
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45

As per S.28, every agreement, which restricts

absolutely from enforcing his rights under any contract, by the usual legal proceedings, or which limits the time within which he may thus enforce his rights, is void to the extent. Reference of future disputes and existing questions to arbitration is valid. [Ex to S. 28] Continental drug & C0 Ltd v Chemoids & Industries Ltd (AIR 1955 CAL 161) : The contract fell under the concurrent jurisdiction of both the Bombay and Alipore courts, but the contract provided that any dispute arising between the parties, settlement of the same legally or otherwise will be decided n Bombay - Partial restriction is valid.
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46

Agreements, the meaning of which is not certain, or

capable of being made certain, are void. S. 29

Guthying v Lynn (1831) 2 B Ad 232 A horse was bought for a certain price coupled with a promise to give 5 more if the horse proved lucky uncertain, void.
Further, an agreement to enter into an agreement in

future is void for uncertainty unless all the terms of the proposed agreement are agreed expressly or implicitly. next year, at a salary to be mutually agreed upon is
PGDM 17 - BL: LAW OF CONTRACTS / TJK

Thus, an agreement to engage a servant some time


47

Agreements by way of wager are void; and no suit shall be brought for recovering anything

alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which may wager is made. This section shall not be deemed to render unlawful a subscription or contribution, or agreement to subscribe or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be rewarded to the winner or winners of any horse-race. Nothing in this section shall be deemed to legalise any transaction connected with horse-racing, to which the provisions of section 294A of the Indian Penal Code (45 of 1860) apply.
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48

In Tracker vs. Hardy Cotton, L.J., described a

wager as follows: The essence of gaming and wagering is that one party is to win and the other to lose upon a future event which at the time of the contract is of an uncertain nature - that is to say, if the event turns out the other way he will win. Features of wager:

Uncertain event Mutual chances of gaining or losing. Neither party to have control over the event No other interest in the event.

Prize competitions which are games of skill are not

wagers. Contract of insurance with insurable interest are not


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49

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, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promise for any
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50

When the object of the contract is fulfilled,

the liability of either party under the contract comes to an end. The contract is then said to be discharged. Contract is discharged by different ways:
by Performance - (S. 31 67) by Impossibility of Performance ( S. 56) by Agreement (S.62- 67) and by Breach.

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51

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 provision of this Act, or of any other law. Promises bind the representative of the promisor in case of the death of such promisors before performance, unless a contrary intention appears from the contract. S.37
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52

Where a promisor has made an offer of performance

to the promisee, and the offer has not been accepted, the promisor is not responsible for nonperformance, nor does he thereby lose his rights under the contract. Every such offer must fulfill the following conditions (1) it must be unconditional; (2) it must be made at a proper time and place, and under such circumstances that the other party may have a reasonable opportunity of ascertaining that he is able and willing to do the whole of what he is bound by his promise to do; (3) if the offer is to deliver anything to the promisee, he must have a reasonable opportunity of seeing that the thing offered is the same. An offer to one of
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53

If it appears from the nature of the case that it was the

intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representative may employ a competent person to perform it. - S.40 When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. - S.41 In case of joint promises, performance must be jointly. In the absence of express agreement to the contrary, the promisee may compel any one or more of them to perform. The promisors have right of contribution and sharing the deficiency. In In case of joint promisees, the right to claim performance is jointly, in the absence of intension to the
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54

The performance of any promise may be made in

any manner, or at any time which the promisee prescribes or sanctions In cases where by the contract, promisor is to perform his promise without application by the promisee:1. If time is specified, the engagement must be performed within a reasonable time. (reasonable - a question of fact.) 2. If day for performance is specified, the promisor may perform it at any time during the usual hours of business on such day. 3. If no place is fixed for the performance, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform accordingly.
When application is required as per the contract,

and the same is to be performed on a certain day,


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55

According to Section 55, if the intention of

the parties was that time should the essence of the contract, then a failure to perform at the agreed time renders the contract voidable at the option of the opposite party. Time is generally considered to be the essence of the contract in the following three cases:
1. When the parties have expressly agreed to treat it as of the essence of the contract. 2. Where delay operates as an injury. 3.Where nature and necessity of the contract
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56

A contract by which one party promises to save

the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity". S. 124 A contacts to indemnify B against the consequences of any proceedings which C may take against B in respect of certain sum of 20 Rupees. This is a contract of indemnity. - [illus. to S. 124] Indemnifier: The person who gives the indemnity. Indemnified or indemnity holder:
57

A"contract of guarantee" is a contract to perform the

promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety", the person in respect of whose default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". - S. 126 If two comes to a shop and one buys, and the other to give him credit, promises the seller, if he does not pay you, I will . This is guarantee.

Mr. X is my tenant and you will sell him anything he 58

2 Parties indemnifier & indemnified

3 parties Principal Debtor, Creditor, Surety

Indemnifier promises to save the other from loss caused by conduct of himself or another.
The liability of indemnifier is primary and independent. Indemnifier's liability arises on happening of a contingency

The surety undertakes payment of debts of principal debtor, if the principal debtor fails to pay it.
Surety's liability is secondary
depend on Principal Debtor's default.

Duty/debt exist, the performance of which is guaranteed. The surety guarantees at the request of principal debtor. Surety can sue the principal debtor if he discharges the debt.

Indemnifier acts independently without any request.


The indemnifier cannot sue the third party on the contract.

Anything done, or any promise made, for the benefit

of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. - S. 127 A guarantee which extends to a series of transaction, is called, a "continuing guarantee. - S. 129 Terms of guarantee given by A: I hereby agree to be answerable to K for the amount of 5 sacs of flour to be delivered to T, payable in one month. Five sacs were supplied and paid for by T. subsequent supplies were not paid. Whether surety is liable? Kay v Groves (1829) 80 ER 1274: not a continuing guarantee.

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The liability of the surety is co-extensive with that of

the principal debtor, unless it is otherwise provided by the contract. - S. 128 `Co-extensive with that of the Principal debtor means that the surety is liable for the whole of the amount for which the principal debtor is liable and he is liable for no more A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. - [ Illus.S. 128] Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another
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By revocation by notice to the creditor as to the future

transactions of a continuing guarantee. (130) Death of surety, in the absence of contract to the contrary, as to future transactions for continuing guarantee. (131) Variance in the terms of contract between the principal [debtor] and the creditor, without the surety's consent, as to the transactions subsequent to the variation. (133) Discharge of the Principal Debtor by any contract between the creditor and the principal debtor. (134) By act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. (134) When the creditor compounds with, gives time, or agrees not to sue the Principal debtor. (135) Act or omission of Creditor impairing suretys remedy. (139) If the creditor loses, or parts with the security without his consent, discharge to the extent of security value. (141)
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when agreement made with third person to give time

to principal debtor (136) Creditor's forbearance to sue, in the absence of any provision in the guarantee to the contrary. (137) Release of one co-surety (also does not set free the surety so released from his responsibility to the other sureties.) (138) B owes to C a debt guaranteed by A. C does not sue B for a reasonable time and the debt became barred by the law of limitation. Whether Sec 137 apply in this case ? Mahanth Singh v U Ba Yi AIR 1939 PC 410: Yes Payment of lease rentals is guaranteed by the surety. The creditor prematurely terminates the lease. Unity finance Ltd v Woodcock. (1963) 1 WLR 455:

63

Surety has certain rights against


Debtor
Creditor and Co sureties. (if any)

Rights against the Debtor:


Right of subrogation S. 140 When the Surety has paid all that he is liable for , he

is invested with all the rights which the creditor had against the principal debtor. The surety steps into the shoes of the Creditor. Right to indemnify S. 145 In the contract of guarantee, there is an implied promise by the Principal debtor to indemnify the surety. Thus he can recover whatever sum he has

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Rights to securities S. 141


A surety has the benefit of every security which the

creditor has against the principal debtor at the time of entering into the guarantee, even if the surety does not know the existence of such security. If the creditor loses, or parts with the security without his consent, the surety is discharged to the extent of the value of the security.
Right to Share reduction
When a surety has guaranteed part of the debt, which

is paid to the creditor, and the principal debtor become insolvent, the surety is a creditor along with other creditors for distribution of share by Official Receiver.
Right of Set off.
The surety has the benefit of set off, if any, that the

Principal debtor had against the creditor.


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Release of one co-surety by the creditor does not

discharge the other. The released co surety will remain liable to other co-sureties, for contribution in the event of default. (138) Right to contribution
In the absence of contract to the contrary, co -sureties

between themselves are liable to share equally, the amount remaining unpaid by the Principal debtor. This rule is applicable even in cases where the sureties are co-sureties for the same debt or duty or different and even if the surety does not know about the availability of other sureties.
Equal contribution
Co-sureties who are bound in different sums are

liable to pay equally.


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An "agent" is a person employed to do any act for another, or to represent another in dealing with third persons. The person for whom such act is done, or who is so represented, is called the "principal. - [S.182] Principal Principals obligation to perform the contract

Agency Contract Contract with third party on behalf of principal

Agent

Third Party
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Principal should be competent to contract: Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. - S.183 Agent need not be competent to contract: As between the principal and third persons, any person may become an agent, but no person who is not of the age of majority and sound mind can become an agent, so as to be responsible to the principal according to the provisions in that behalf herein contained. S.184 Consideration for appointment not necessary:
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1.

By Express appointment:
Oral or in writing.

2.

By the Conduct or situation of the parties:


Implied agency arise form the conduct, situation or relationship of parties. Whenever a person places another in a situation in which that other is understood to represent or to act for him, he becomes an implied agent. Agency by holding out. Some affirmative conduct by the principal may create agency.

4.

By necessity of the case:

Implied authority in an emergency.

5.

By subsequent ratification of unauthorised act.

Ratification may be express or implied.

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Car for her. She was paying all the expenses of

maintenance and operation. Held that the son was an implied agent of the mother. When the son made a collision injuring his wife, she could sue the mother for the fault of her agent. Matheson v Smiley (1932) 2 DLR 781: The court held that a surgeon was entitled to recover from the deceased mans estate reasonable remuneration for his services when he had, without request, given aid to a man who attempted suicide. Gwilliam v Twist (1895) 2 QB 84: Omnibus of D was being driven by his servant. On the way, just a quarter mile from Ds Yard, the Police asked the driver (suspected to be drunk) to discontinue driving. The driver and conductor asked another person to drive the omnibus home. The new driver through his negligence injured P. P sued D. Held no agency
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To follow custom or instructions of Principal. If he acts otherwise, the loss should be sustained and profit should be accounted. (Ref. S. 211) Of reasonable care, skill and diligence. (S. 212) Skill required is as generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. He has to compensate the principal in respect of direct consequences of his own neglect, want of skill or misconduct To render proper account to the principal on demand (S. 213) To communicate with his principal (S. 214) To avoid conflict of interest. (S. 215) Not to make secret profits (S. 216) Not to delegate without principals consent. (S. 190) delegatus non potest delegare Exceptions: nature of work makes it necessary, existence of trade custom, purely ministerial action where personal or professional skill is not 71

Right to remuneration. (S. 219)


a reasonable remuneration, in the absence of agreement. In the absence of special agreement, remuneration is not due till

completion of the Act; but he may detain moneys received by him, although the whole of the goods consigned to him for sale are not sold.
Right of retainer of principal's money.

(S. 217)

on sums received on account of principal in the business of Agency. Right extends to his remuneration, advances made, and expenses

incurred in conducting the business of Agency.


Right of Lien on goods, Papers and other property (S. 221)
Particular lien on Principals property for money lawfully due to the

Agent.
Right to Indemnity (S. 222-223)
Agent is to be indemnified against the consequences of
all lawful acts in exercise of the authority conferred upon him. acts done in good faith, though it causes injury to rights of third party. No right to be indemnified, if the act to be performed is criminal. (S. 224)

Right to compensation. (S. 225) Agent must be compensated for injury caused to him by the

principal's neglect or want of skill.

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Acts of the Agent, within his authority bind the Principal. Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences as if the contracts had been entered into and the acts done by the principal in person. [S.226] Actual authority: The authority of an agent may be expressed or implied. -

[S.186] Express authority is given by words spoken or written. Implied authority is to be inferred from the circumstances of the case. Things spoken or written or the ordinary course of dealing, may be accounted circumstances of the case. ( S. 187)
Extent of agent's authority:

An agent, having an authority to do an act, has authority do every lawful thing which is necessary in order to do so such act. An agent having an authority to carry on a business, has authority to do every lawful thing necessary for the purpose, or usually done in the course, of conducting such business. 73

Ostensible or apparent authority: It is authority of an agent as it appears to others. When an agent has, without authority, done acts or incurred

obligations to third person on behalf of his principal, the principal is bound by such acts or obligations, if he has by his word or conduct induced such third person to believe that such acts and obligations were within the scope of the agent's authority. S.237 Authority in an emergency: S.189
An agent has authority, in an emergency, to do all such acts for the

purpose of protecting his principal from loss and would be done by a person of ordinary prudence, in his own case, under similar circumstances
Exceeding the Authority: (S. 227-228)
when agent exceeds his authority, actual or apparent, the principal is

not bound by the excess work. If it is separable form the authorised work, he is bound to that extent. If not separable, he may repudiate the whole contract.
Wrongful acts: (S. 238)
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In the absence of any contract to that effect an agent cannot

personally enforce contracts entered into by him on behalf of his principal, nor is he personally bound by them. Such a contract shall be presumed to exit in the following cases(1) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; (2) Where agent does not disclose the name of his principal; (3) Where the principal, though disclosed, cannot be sued. S.230 In cases where the agent is personally liable, a person dealing with him may hold either him or his principal, or both of them liable. S.233 If third party induces the principal or agent to believe that principal or agent will be exclusively liable, he is estopped from suing the other. (S. 234) Pretended agent is personally liable, unless ratified by the principal.(S. 235) A person with whom a contract has been entered into in the character of agent, is not entitled to require the performance of it, if he was in reality acting, not as agent, but on his own account. 75 S.233

An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of the agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming of unsound mind;or by the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for the relief of insolvent debtors. - S.201 When the Termination takes effect The termination take effect only when it becomes known to the agent and Third party so far as regards the agent and third party respectively. (S.208)

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Where the agent has himself an interest in the

property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest. - S.202 The principal may revoke the authority at any time before the authority has been exercised, so as to bind the principal. (S.203) Revocation or renunciation may be expressed or implied (S.207) Revocation operates prospectively. (S.204) Reasonable Notice of such revocation or renunciation required. (S.206) If agency is determined without reasonable notice, the parties have to compensate the resulting

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Sections 51 to 54 can be summarised as given

below: When reciprocal promises are to be simultaneously performed, the promisor is not bound to perform unless the promise is ready and willing to perform his promise. If the order in which such promises are to be performed is not expressly fixed, they will have to be performed in the order which the nature of the transaction admits. If one of the parties to such a promise prevents the other from performing his promise, the contract is voidable at the option of the party so prevented, and he is entitled to compensation. When the nature of such promises is such that one
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78

1. Anticipatory Breach:
Prior to the promised date of performance, the

promisor absolutely repudiates the contract.

2. Present Breach:
Failure to perform as promised or making it

impossible for the other party to perform. The innocent party is excused from performance or from further performance.
Frost v knight (1872) LR 7 Exch 111: D

promised to marry P on the death of his father. The father still living, D broke off the engagement. Suit filed without waiting for the death of his father, Valid.
PGDM 17/ BL- CONTRACT LAW / TJK

79

Anticipatory breach options for the injured party is

to sue at once or Consequences are :

wait

for

performance.

1. Party repudiating may choose to perform. 2. If while the contract is open, some event happens

which discharges the contract other wise than by repudiation, promisor may take advantage. Avery v Bowden 1855 5 E&B 714: D chartered Ps ship to load with a cargo. Before the appointed day, when the ship arrived, D requested the captain of the ship to go away since there was no cargo. The ship waited in the hope that the contract will be performed. Before the appointed day, war broke out which rendered the performance illegal. Held that it is frustration and not breach. 3. If the contract is open, damages will be assessed at the time fixed for performance. Otherwise, the measure 80
PGDM 17/ BL- CONTRACT LAW / TJK

Theory of unjust enrichment - Enrichment of

one person at the cost of another. Justice demands that this should be prevented. The indian Contract Act provides for 5 kinds of relations resembling those created by contract
S. 68 - Claim for necessaries supplied to person

incapable of contracting, or on his account S. 69 - Reimbursement of person paying money due by another, in payment of which he is interested. S. 70 - Obligation of person enjoying benefit of nongratuitous act S. 71 - Responsibility of finder of goods as a bailee. S. 72 - Liability of person to whom money is paid, or thing delivered, by mistake or under coercion
PGDM 17/ BL- CONTRACT LAW / TJK

81

Conditions: Payer must be interested in making payment. B is lessee of certain land. For default of land revenue due to the govt. by A (owner) the land is put up for sale. B pays the dues to the govt to avoid sale. A is bound to make good. He should not be bound to pay.
A worker was injured due to negligence of the

contractor. Port authority was under statutory liability to pay compensation. Suit against the contractor under this section failed.(Port Trust, Madras v Bombay Co- AIR 1967 Mad 318)
Defendant should be under legal compulsion to

pay. Not moral compulsion. compelled to pay,

Must

be
/ TJK

legally
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PGDM 17/ BL- CONTRACT LAW

Five conditions must be satisfied: A person should lawfully do something for another. He must not intend to act gratuitously The other party must enjoy the benefit. The beneficiary has the choice to reject the services. The services should have been rendered without request.

Neha Bhasin v Anand Raj anand - (2006) 132 DLT 196: Songs of N were recorded by the defendants. There was no contract between them. The defendants commercially marketed CDs of her song recordings. Held: since they did make business use of her work, a quasi contract
PGDM 17/ BL- CONTRACT LAW / TJK

.83

A person to whom money has been paid, or anything

delivered, by mistake or under coercion must repay or return it. - S.72 Sales Tax Officer v Kanhaiya Lal saraj AIR 1959 SC 135 : Tax was paid under UP Sales Tax law on certain transactions, and subsequently, the High court ruled that such levies are ultra vires. Money paid under mistake of law also comes under S.72. S. Ketrabarsappa v Indian Bank AIR 1987 Karnt 236: Bank made a credit entry in the customers account by mistake and the customer withdrew the money. He is bound to pay back the money along with interest. Union bank of India v A. T. Ali Hussain & Co- AIR
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84