LAW OF CONTRACT

INTRODUCTION
• Contracts are in every aspect of our everyday lives. This Act is connected with our
daily life. You do enter into many forms of oral, written, implied and expressed form
of contract.
• You are under a contract whenever you use your mobile phone or queue up your
favorite show on your television subscription service.
• When you buy thing and when you order something on online, all of these activities
are governed by the contracts.
• And that’s why, we need to known about and provisions and rules and regulations of
the Law of Contract Act.
• It is Special branch of Mercantile law which deals with the rights and obligation of
the parties arising out of business transaction.
HISTORY OF INDIAN CONTRACT ACT
• Before 1872, there was the English common law which was applied to Indian citizen
heterogeneously leading to many inconveniences.
• To stop this, statutes were enacted to regulated Contracts where parties were Muslim
and Hindus.
• If both parties were Hindu, they were regulated by the Hindus Law and in case of
Muslim, by Muslim Laws and usages.
• The Indian Contract Act as applied today’s was drafted originally by the “Third
Indian Law Commission” in the year 1861.
DEFINITION
Agreement:

• Section 2(e) defines agreement as under –

“Every promise and every set of promises forming the consideration for each
other.”

 In other words an agreement is an accepted proposal.

An agreement is a promise or arrangement between two or more people regarding a common

intention.

Proposal + Acceptance = Agreement

Types of Agreement:

1. Legal Agreement
2. Illegal Agreement
3. Void Agreement (S.2(g))
4. Voidable Agreement
5. Unenforceable Agreement
Contract:

• According to Section 2 (h) of Indian Contract Act,

“All agreement enforceable by law is a Contract”.

 Sir Fredrick Pollock opinions that, “all agreement and promises enforceable by law
are contracts”.
 Sir William Anson, “a legal contract is an agreement between two or more
individuals under which one party gets right to get some legally enforceable act
performed by another party”.

Contract Act defines a Contract as “An agreement which is enforceable by Law”. An

Agreement is a settlement between two parties, which contains obligations or promises which
both parties need to fulfil. When such an agreement is made binding by Law it becomes a
Contract.

Therefore, an agreement consists of reciprocal Promises which are to be performed by

parties to the contract. Promises are reciprocal when both parties have to perform something
for the other.

Proposal +Acceptance = Agreement + Legal Enforcement = Contract

• Formula given above clarify that a contract first of all required an agreement.
• An agreement, however, by itself would not result into a contract.
• But an agreement leading to emergence of legal relation and legal liability to perform
some duty becomes a contract.
• Thus, all agreements are not contracts. But all contracts must be agreement.

ESSENTIALS OF A VALID CONTRACT

1. Proposal:

• Section 2(a) of the Indian Contract Act,1872, defines proposal in these words:

 When one person signifies his willingness to another

 To do or to abstain from doing anything
 With a view to obtaining the assent of that another to such act or abstinence.
 He is said to make a proposal.

o Essential elements of proposal

 The offer must be show the willingness of offeror
 The offer must be made with the view to obtaining the assent of the offeree
 Nobody bound to accept offer
 The mere expression of willingness or expression made jokingly or desire
does not constitute an offer.
 Legal Relations – Intention to create legal relationship
 Case : Balfour V/s Balfour (1919 2 K.B. 571)
• Mr. B, who was posted in Ceylon, promised his wife living in England, to pay her a
monthly allowance, so long as she could not go to Ceylon for reasons of health.
• When Mr. B failed to honour his promise, and she filed a suit against him, the court
held that she could not enforce the obligation, as from the nature of the contract, it
was clear that no intention existed to give rise to a legal obligation.
• It was merely a domestic arrangement.
Example :-
1. : ‘A’ said to ‘B’ in conversation that, he intends to give Rs. 1000/- to that person, who
marries his daughter, with his consent. Here, there is no proposal from ‘A’. So, there
will be no contract between ‘A’ and ‘B’.
2. A tells B that he desires to marry by the end of 2018. it does not constitute an offer of
marriage by ‘A’ to ‘B’ because there is no expectation of acceptance from ‘B’.
• If he further adds will you marry me to the previous expression. Then it becomes an
offer.
Invitation to offer:
• Sometimes, there is merely a statement, which gives invitation to offer.
• Invitation to proposal is not a legal proposal.
a) Catalogue showing price list.
b) Tenders
c) Declaration of Intention
Case : Hariss V.s Nickerson (1873)
 Defendant gave Advertisement in Newspaper for auction
 Plaintiff reached
 Auction canceled
 Plaintiff claimed expenses
 Court refused

Types of offers:
1. Cross Offer :-
 Two offers which are similar in all respects made by two parties to each
other, in ignorance of each other’s offer are known as “Cross Offer”.
2. Counter Offer:-
 When a person to whom the offer is made, instead of accepting the terms
of the offeror desires to modification of the same.
3. Specific and General Offer :-
 When offer is given to a specific person, it is called specific offer.
 When offer is given to entire world at a large, it is called general offer
Case:-Carlill V/s. Carbolic Smoke Ball Co.
 The plaintiff believing the advertisement in a newspaper stating the use
of the smoke ball would prevent the influenza and flu. She used the
smoke ball as prescribed in the advertisement for some time and still had
an attack of influenza. She filed the suit for 100£ as mentioned in the
advertisement.
  The Court held that the contract between the company and the plaintiff
was a valid contract.
4. Standing or Open Offers:-
 An offer which remain continuously enforceable for a certain period of
time.
Communication of offer (section 3 )
 Communication is necessary factor in contract, without communication there will be
no legal contract.
 Communication - by word, writing or by conduct
Communication of offer when complete (section 4)
 The communication of the offer is complete when it comes to the knowledge of the
person to whom it is made.
Case : Lalman V/s Gauri Dutt (1833)
Revocation of proposal (s.5)
• A proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards.
Example:-
• A proposes, by a letter sent by post, to sell his Car to B.
• B accepts the proposal by a letter sent by post.
• A may revoke his proposal at any time before or at the moment when B posts his letter
of acceptance, but not afterwards.
Revocation how made (s.6) :-
• By notice
• By the lapse of time
• By failure to fulfill condition precedent
• By death or insanity of the offeror
• By counter offer
• By rejection
2. Acceptance (s. 2(b)):

• Section 2 (b) defines the acceptance as follows:

“When the person to whom proposal is made signifies his assent thereto, the proposal
is said to be accepted.”

 A proposal, when accepted, becomes a promise.

• Example :
• ‘A’ offer to buy B’s house for rupees 40 lacs and ‘B’ accepts such an offer. Now, it
has become a promise.
• When an offer is accepted and it becomes promise it also becomes irrevocable. No
legal obligation created by an offer.
  Essential elements :

 Acceptance must be absolute (S.7(1))

 The offeree’s approval cannot be conditional.

For example, ‘A’ wants to sell her car to ‘B’ for Rs 2 lakh, ‘B’ can’t come back and
says that she accepts the offer but will buy the same for Rs. 1 lakh.

 Acceptance must be told to the offeror

 If the acceptor just accepts the offer in his head and he does not mention the same to
the offeror, it cannot be called an Acceptance, whether in an express manner or an
implied manner.
 In a reasonable amount of time, the acceptance is given
 It’s very rare that an offer is always to get acceptance at any time and at all times.
Therefore, the offer defines a time limit. If it does not, it should not be acknowledged
forever.
 Mere silence is not acceptance
 If the offeree fails to respond to an offer made to him, his silence cannot be confused
with acceptance. But, there is an exception to this rule. It is stated that, within 3 weeks
of the date on which the offer is made, the non-acceptance shall be communicated to
the offeror. Otherwise, the silence shall be communicated as acceptance.

 When communication is complete?

 Communication of acceptance (Section 4)

 Communication of acceptance is complete -
 As against the proposer, when it is put in the course of transmission to him as to be
out of the power of the acceptor,
 As against the acceptor, when it comes to the knowledge of the proposer.

Example:

(a) A proposes, by letter, to sell a house to B at a certain price.

 The communication of the proposal is complete when B receives the letter.
(b) B accepts As proposal by a letter sent by post.
 The communication of the acceptance is complete,
 as against A, when the letter is posted;
 as against B, when the letter is received by A .

 Case Laws:
1. Felthouse V/s. Bindley (1862)
 Mere silence cannot be assumed as an acceptance of the offer.
2. Powell V/s. Lee (1908)
 The plaintiff applied for a job as headmaster and the school managers
decided to appoint him. One of them, acting without authority, told the
plaintiff he had been accepted. Later the managers decided to appoint
someone else. The plaintiff brought an action alleging that by breach of a
contract to employ him he had suffered damages in loss of salary. The
county court judge held that there was no contract as there had been no
authorised communication of intention to contract on the part of the body,
that is, the managers, alleged to be a party to the contract. This decision
was upheld by the King’s Bench Division.
 Revocation of acceptance (Section 5)
• An acceptance may be revoked at any time, but not afterward, before the
communication of the acceptance is complete as against the acceptor.
• Example:-
• A proposes, by a letter sent by post, to sell his house to B.
• B accepts the proposal by a letter sent by post.
• B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A, but not afterwards.

3. Consideration:

• Section 2(d) of the Indian Contract Act defines ‘Consideration’ as under :

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 a consideration for the promise.

 Legal Rules as to Consideration:

1. Consideration at desire of the promisor

Case:- Durga Prasad V/s. Baldeo (1880)
2. Consideration can be given by promisee or any other
Case :- Chainnaya V/s. Ramaya (1882)
 A lady transferred her property to her daughter (defendant), by a deed of
gift. Such deed was registered. One of the terms of the gift deed was that
the daughter would pay a sum of Rs. 653/- every year to the lady’s sister
(plaintiff). The defendant executed an agreement in favour of the plaintiff
promising to do the same. The defendant failed to pay the annual amount
to the plaintiff. Hence, the plaintiff sued the defendant for the recovery of
the same.
 It was decided by the Court that the agreement giving effect to transfer of
the estate to the respondent by her mother as a gift and the agreement to
pay annuity are simultaneous agreements. Hence both agreements shall
be considered as a single transaction considering the definition and
explanation of compensation that is given under section 2(d) of the Indian
Contract Act, 1872.
 Thus, it shall be the duty of the respondent to pay the said consideration
as she agreed to do so while accepting the estate as a gift from her
mother.

Privity of Contract (stranger to contract cannot sue)

Case :- Tweddle V/s. Atkison (1861)
 John Tweddle, father of William Tweddle, agreed with William Guy to
pay William Tweddle £100 after marrying his daughter. The written
agreement contained a clause which specifically granted William
Tweddle the power to sue for enforcement of the agreement. William
Guy died, and the estate would not pay and William Tweddle sued.
  The court held: Tweddle jr’s suit would not succeed as no stranger to the
consideration may enforce a contract, although made for his benefit.

• Exception to rule that a stranger to contract cannot sue :-

1. Trust of Contract right or beneficiary under contract
2. Conduct, Acknowledgement or Admission
3. Provisions of marriage expenses or maintenance under family arrangement
3. Consideration need not be adequate

Example: A agrees to sell his T.V. at Rs.1000. The price of the T.V. is
Rs.10,000. Here, the consent is free. Contract is legal.

4. Consideration may be for promise to do or abstain from doing

Example: ‘B’ is a tenant. ‘A’ is a landlord. ‘A’ wants to sue ‘B’ for non-payment
of rent. ‘A’ is a friend of ‘C’. ‘C’ agrees to pay it if ‘A’ does not file a suit.
5. Consideration could be:

1. Past Consideration, when the promisor has received consideration before the date of
the performance of the contract by any party. Eg. Advance money paid.
2. Present Consideration, when consideration is provided immediately when the
contract is made or executed. Thus it is also called “executed consideration.
3. Future Consideration, when consideration is paid after making of the contract. In
consideration given for ‘construction contracts’-Constructed building is given after
the execution of the contract.

6. Consideration should be actual

7. Consideration must be real
8. Consideration should not be immoral
 Exception to Consideration
(Agreement without Consideration)
(Section 25)

1. Promise due to Natural Love and Affection [S.25(1)]

 Near relatives – related by blood or marriage
 Written and register
Case: Rajlukhy Dabee V. Bhootnath Mookerjee
 The Defendant, Plaintiff’s husband, promised to pay her sum of money
every month for maintenance. This agreement was maintained under a
registered document that also stated certain quarrels and disagreements
between the two. The Calcutta High Court refused to treat the agreement
as one of the exceptions of the said Section as no traces of love and
affection were found between them due to the quarrels which compelled
them to separate.

2. Compensation for Past Voluntary Service [S.25(2)]

3. Promise to pay Time Barred Debt [S.25(3)]
 There must be written promise for its payment.
 Signed by debtor or agent
 The debt must be lawful

4. Competent Parties (S.11)

S. 11 of the Contract Act defines competence to contract as follow:-
 “Every person is competent to contract who is of the age of majority
according to the law to which he is subject, and who is of sound mind
and is not disqualified from contracting by any law to which he is
subject.
 In short Minor, Unsound mind and Insolvents are incompetent to
contract.

5. Legal rights and Obligations

6. Free Consent:
 According to Section 14 of the Act –
Consent is said to be free when it is not caused by –
 Coercion (S.15)
This section defines coercion as committing any act forbidden by The
Indian Penal Code 1860 or unlawful detaining of property, or
threatening to commit these acts. Coercion includes all such acts which
are forbidden by the Indian Penal Code.
 Undue influence (S.16)
“A Contract is said to be induced by undue influence
where,
i) the relations subsisting between the parties are such that one of the
parties in a position to dominate the will of the other, and
ii) uses the position to obtain an unfair advantage over the other.”

 Fraud (S.17)
“Fraud” means and includes any of the following acts committed by a
party to a contract, or with his connivance, or by his agent, with intent
to deceive another party thereto or his agent, or to induce him to enter
into the contract.

 Misrepresentation (S.18)
When false statements are innocently made without the intention to
deceive, then it amounts to misrepresentation. In misrepresentation, the
person making the statement is innocent and has no intention to
deceive the other party.

 Mistake
A contract is said to be void when both the parties to the agreement are
under a mistake as to a matter of fact.

7. Lawful Object and Consideration:

According to section 10, consideration and object of the contract should be lawful and
is an essential element of a contract.

Accordingly, Section 23 defines unlawful consideration. Unlawful consideration and

object is one which is either,
 1. forbidden by law;
2. or is of such a nature, that if permitted, then it would defeat the provisions of
law;
3. or the purpose of the contract is fraudulent;
4. or involves or implies giving injury or damage to someone or to someone’s
property; or
5. or the court considers it as immoral or against public policy.

If a contract shows any of these elements, then it is unlawful and void u/s 23.

8. Intention to create legal relations between the partiers

Intention to create a legal relationship is one of the most fundamental aspects of the
law. It is defined as the intention to enter a legally binding agreement or contract, it
implies that the parties acknowledge and accept legal consequence in case of a breach
of a contract. Intentions to create legal relations consist of readiness of a party to
accept the legal consequences of having entered into an agreement.

9. Not Expressly declared void

 Agreements restricting a marriage (section 26)

 Agreements restricting trade (section 27)
 Agreements in restraint of proceedings (section 28)

10. Other Legal Procedures

 In addition to all requisites stated above, the contract must be formed with the
necessary legal formalities such as writing, stamped, registration, sometimes
on the required stamp papers etc.

TYPES OF CONTRACTS:
On the Basis of possibility of enforcement
1. Void Contract (S.2(j))

Section 10 provides for certain essentials as follows, which all contracts must
fulfill to be considered valid:

 There must be free consent between the parties involved.

 The parties must be competent to contract.
 The consideration and object of the contract should be lawful.
 The contract must not be declared void under the law.

2. Voidable Contract (S.2(i))

 Voidable contracts are those contracts that can be made void on the will
of one of the parties. In these scenarios, generally, consent is not free and
it is obtained under coercion (Section 15), undue influence (Section 16),
fraud (Section 17) and misrepresentation (Section 18). Here, the party
defrauded or unduly influenced has the option to make the contract void.
3. Illegal Contract
 Contracts that violate the law of the land are illegal contracts. Section 10
states that the object or consideration of a contract should not be
unlawful. Thus, Section 10 prohibits illegal contracts. For example,
 contract killings facilitated by contracts for murder are illegal as murder
is a crime under Section 302 of the Indian Penal Code.
4. Unenforceable Contract
 If a contract is found to be unenforceable, the court will not order one
party to act or compensate the other for failing to meet the contract’s
requirements. While the elements of an enforceable contract (offer,
acceptance, and consideration) appear straightforward, there are severe
enforceability standards. A contract can be declared void for a variety of
reasons, including the circumstances surrounding the signing, the
contents of the agreement, or events that occur after the contract is
signed.
On the basis of liabilities
1. Executed Contract
 These are contracts whose obligation has been fulfilled. So the purchase of a
product or service is an executed contract.
2. Executory Contract
 These are contracts that are continuing in nature. For example, a lease
agreement. Here, throughout the term of the contract, the owner would allow
the tenant to stay in the former’s property and the tenant would pay monthly
rent.
3. Unilateral Contract
 As the name suggests, unilateral contracts are those contracts where only one
party makes a promise. The other party is not specified and the contract gets
completed by performance. The offeror cannot be asked to fulfil the offer until
performance is made by someone. The offer made is a general offer.
4. Bilateral Contract
 These are the contracts where reciprocal promises are made by the parties
involved. Thus, parties involved are fixed and the contract is formed by way
of communication of offer and acceptance. These are also called two-sided
contracts and are the most common type of contract in use.
On the basis of Formation
1. Express Contract
 Contracts are made of proposals or offers and acceptance of such proposals or
acceptance. Proposals and the acceptance of the same can be express or
implied. According to Section 9 of the Indian Contract Act, a proposal when
made in words is an express offer. Thus, an express contract is made in words,
either verbally or through written form. For example, A asks B whether he
would like to sell his house for an X amount. B agrees to the same by saying
yes. This is an example of an express contract. Thus in an express contract, the
terms of the contract are clearly expressed.

2. Implied Contract
 Section 9 also recognizes implied contracts. It states that an offer (or
acceptance) made through anything else other than words is an implied offer
(or acceptance). An implied contract is based on the actions, gestures etc. of
the involved parties. For example, in an auction, raising the numbered paddle
by the customer is an implied offer and the final bang of the gavel by the
auctioneer when a product is sold signifies that the offer is accepted. This is
thus an example of an implied contract.
DIFFERENCE BETWEEN AGREEMENT AND CONTRACT:

Agreement Contract

1. Depends on social relationship 1. Depends on financial and professional

matters.

2. Not to create obligation and get 2. To create legal obligation and to enforce it.
performance in every circumstances.

3. Absence of consideration in terms of 3. Financial consideration is there. Adequacy

money. of consideration is not required.

4. In case of breach by a party, it cannot be 4. It can be enforced by law in case of breach

enforced by law. by a party to the contract.

5. All agreement are not contract. 5. All contracts are agreement.

6. Suit for damages cannot be made in case 6. In case of breach, damages can be claimed.
of breach.

E-CONTRACT:
In today’s time, we are surrounded by the Contracts in our lives. We do daily basis contracts,
some we do knowingly and some without knowingly. The contract from buying a product
online to making a contract with an international identity through the internet makes an e-
contract between you and another party. E-contracts are also known as digital contracts. The
use of websites like Amazon and Flipkart, to buy online products is also an e-contract
example. There is no need to go anywhere to buy the product online.

 Meaning:
 An e-contract is a contract where the offer and acceptance, and consideration etc., are
done by electronic means.
 An E-contract is also a valid form of contract but there is just one important factor
involved is that the E-contracts come into force with the help of the Internet or digital
mode of communication.
 The contracts which are not paper-based and are created electronically in nature are
known as e-contracts.
 What is E-contract?
 The e-contract takes its legal authority from section 10A of the IT act. It says that
“Where the formation of the contract, offer and acceptance of the contract, as the
case may be, are expressed in electronic form, such contract shall not be deemed
unenforceable mere on the ground that it was created electronically.”
 It means the E-electronic contracts, which follow the essentials of a valid
contract and are made electronically, shall be enforceable by law.
 In the case of the State of Delhi vs Mohd. Afzal and others, the court held that the
electronic pieces of evidence are admissible as evidence in the court.
Essentials of E-contract:
• Offer
• Acceptance
 • Revocation of offer and acceptance
• Lawful Object
• Lawful Consideration
• Competent parties
• Free consent
• Certainty of Terms

CONTRACT OF INDEMNITY

In English law, “indemnity” refers to a promise to save a person and render them legally
harmless from the consequences of a particular act or incident.

The pledge could be explicit or assumed, based on the facts of the case.

The English meaning of indemnity is broad enough to encompass a promise of

indemnification against loss resulting from any source, such as a fire or other calamity.
Except for life insurance, every contract of insurance under English law is an indemnity
contract.

Defining contract of indemnity

The definition of “indemnity” as given in Section 124 of the Indian Contract Act is quite
narrow. It states that a contract by which one party promises to save the other, from a loss
caused to them by the contract of the promisor or by the conduct of any other person is called
a “contract of indemnity”. Thus, the loss must be caused by human agency and the contract
aims to rectify a loss caused by human agency. For example, if goods are lost at sea due to a
storm, the same cannot be considered to be within the purview of a contract of indemnity.

 The person who gives the indemnity is called the “indemnifier” and
 The person for whose protection it is given is called the “indemnity holder” or
“indemnified”.

Essentials

Thus the essentials of the special contract of indemnity can be summarised as follows-

1. There must be two parties, namely, promisor or indemnifier and the promisee or
indemnified or indemnity-holder.
2. A contract of indemnity is entered into, to protect the promisee from the loss. The loss
may be caused due to the conduct of the promisor or any other person.
3. The contract of indemnity may be expressed (i.e., made by words spoken or written)
or implied (i.e., inferred from the conduct of the parties or circumstances of the
particular case).
4. A contract of indemnity is a special contract. The principles of the general law of
contract contained in Section 1 to 75 of the Indian Contract Act, 1872 apply to them.
Therefore, it must possess all the essentials of a valid contract.
5. In indemnity contracts, there is only one contract that is between the Indemnifier and
the Indemnified.
Extent of liability under the contract of indemnity
Rights of indemnified

The rights of the indemnified or indemnity-holder, which can also be considered the duties of
the indemnifier are as follows:

1. Section 125 talks about the extent of liability that an indemnity-holder or indemnified
is protected against. According to Section 125(1), the indemnified is entitled to
recover all damages that they are compelled to pay in a suit with regards to any matter
the contract of indemnity applies, from the indemnifier.
2. Section 125 (2) states that the indemnified would also be able to recover all costs
from a suit which they initiated or a suit in which they are the defendants. In this case,
the indemnified must have acted in a way that would have been reasonable even in the
absence of a contract of indemnity and must not have gone against the orders of the
indemnifier. Further suits in which the indemnified is involved with the permission of
the indemnifier are also within this sub-clause.
3. Finally, Section 125(3) talks about sums made as a compromise concerning any suit.
The suit must fulfil the same conditions as was required for costs of suits as in Section
125(2).

Rights of indemnifier

1. After successful indemnification, the indemnifier gains rights over the indemnified
property of the indemnity-holder. Consequently, the indemnifier will have the right to
sue third parties over the indemnified property.
2. Indemnifiers have the right to pay for only those losses that are covered in the
indemnity contract.
3. The indemnifier has the right to recover money and possession from the indemnity-
holder in certain cases, as the contract may specify.

Commencement of liability

There is a difference of opinion in India among various High Courts regarding the time when
the liability of the indemnifier starts. English law initially stated that action for indemnity
cannot be brought against the indemnifier unless some loss is suffered by the indemnity-
holder. However, this principle evolved through judgments by the Court of Equity that
allowed for indemnity claims before the loss had been suffered.

CONTRACT OF GUARANTEE

Defining contract of guarantee

According to Section 126 of the 1872 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” and the person in respect of whose
default the guarantee is given is called the “principal debtor”.

The person to whom the guarantee is given is called the “creditor”. A guarantee may be either
oral or written. In English law, a guarantee is defined as “a promise to answer for the debt,
default or miscarriage of another”.

Example: Suppose a person A buys an item from B. C, another person states that if A does
not pay B for that item, C themself will pay for that. Thus, in the given scenario, A is the
principal debtor, B is the creditor and C is the surety. Thus, the primary motive behind the
creation of contracts of guarantee is to provide additional security to the creditor.

Essentials

Thus, the essentials of a contract of guarantee can be summarised as follows-

1. Can be an oral or written contract.

2. Presence of principal debtor, surety and creditor
3. Fulfilment of essentials of a standard contract including but not limited to-

1. Consideration to surety must be present

2. The guarantee should not be obtained by concealment or

Surety

A surety or guarantor is a person who comes forward to pay an amount when a person is
unable to do so. If a decree is passed in favour of a creditor and against a principal debtor, the
same can be extended to the surety as according to Section 128, the liability of a surety is co-
extensive with the principal debtor unless stated otherwise, as mentioned in the previous
section.

Discharge of surety

The methods by which the surety in a contract of guarantee can get discharged from the
contract are as follows-

1. by any variance of terms of the original contract of guarantee without the surety’s
consent.
2. by release or discharge of the principal debtor.
3. by way of contract between the creditor and principal debtor wherein the creditor
promises not to sue and give time to the debtor unless the surety assents to such a
contract.
4. by an act or omission by the creditor which affects the rights of the surety and
eventual remedy of the surety as against the principal debtor is affected.

However, a discharge of surety does not occur in the following circumstances-

1. When an agreement is made with a third person by the creditor to give time to the
principal debtor.
2. Mere forbearance to sue the principal debtor or enforce any other remedy does not
discharge the surety unless otherwise is provided in the concerned contract of
guarantee.
3. Discharge of one co-surety does not automatically discharge the others.

Rights of a surety

According to Section 140, once the surety performs the required act or omission or makes the
required payment to the creditor, the surety gains all the rights that the creditor had against
the principal debtor. Further, a surety is entitled to the benefit of every security that the
creditor has against the principal debtor at the time when the contract of suretyship is entered
into, whether the surety knows of the existence of such security or not.

In every contract of guarantee, a surety has the right to be indemnified by the principal
debtor. This promise is implied.
 Also, according to Section 146, co-sureties are liable to all contribute equally in a contract of
guarantee.

For example, A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of each 10,000 rupees, B in that of 20,000 rupees, C in
that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes default to the
extent of 30,000 rupees. Person A, B and C are each liable to pay 10,000 rupees.

CONTRACT OF BAILMENT

Defining contract of bailment

The word “bailment” comes from the French word “ballier”, which means “to deliver”.

Bailment is derived from the words ‘handing over’ and ‘change of possession’.

According to Section 148 of the Act, a bailment is defined as the conveyance of goods by one
person to another for a specific purpose with the condition that the items would be returned or
otherwise disposed of according to the directives of the person who delivered them.

The “bailor” is the person who delivers the merchandise.

The “bailee” is the individual to whom they are handed.

The main characteristic of bailment is that there is the delivery of possession for a temporary
purpose.

If there is a transfer of ownership, then it is no bailment.

The delivery is done with the promise that the bailee will restore the property to the bailor as
directed by the latter.

In Tilendra Nath Mahanta v. United Bank of India (2002), it was stated that the primary
responsibility of the bailee was to deal with the goods according to the directions of the
bailor.

Essentials

1. Delivery of possession of some goods.

2. Delivery of some goods for some purpose.
3. Return of the goods to the bailor after the end of bailment.

The delivery to the bailee may be made by doing anything which has the effect of putting the
goods in the possession of the intended bailee or of any person authorised to hold them on his
behalf. Essentially there are two types of delivery possible-

1. Constructive delivery involves a change of physical possession while goods remain

where they are. For example, delivery of a railway receipt amounts to delivery of the
goods.
2. Actual delivery involves physical handing over of goods by the bailor to the bailee.

Bailor

As mentioned above, the bailor is the person to whom the goods belong and is the one who
initiates the contract and transfers possession of their goods to another person.
There are two types of bailors-

1. Gratuitous bailor: A person, who lends his articles or goods without any charge, is
called a “gratuitous bailor”. His duty is naturally much less than that of a bailor for
hire or consideration. Section 150 states that a bailor is responsible for disclosing all
the known flaws of the good that is being given for bailment. Also, Section 162 states
that a gratuitous bailment terminates with the death of either the bailee or the bailor.
2. Bailor for reward: A bailor for consideration has a far bigger responsibility. He is
profiting from his occupation, so it is his responsibility to ensure that the commodities
he provides are reasonably safe for the bailment’s purposes. He has no defence if he
claims he was unaware of the flaw. He must inspect the goods and correct any flaws
that a reasonable assessment would have shown.

Rights and liabilities of a Bailor

Other important rights and liabilities of a bailor as given in the Indian Contract Act are as
follows-

1. Section 153 states that a bailor can terminate bailment if the bailee’s acts concerning
the bailed goods are inconsistent with the terms of bailment.
2. Section 158 makes it necessary for the bailor to pay for the expense that the bailee has
to undertake in relation to transportation etc. of the bailed goods if the latter is not
receiving remuneration of the same.
3. Section 163 states that the bailor is entitled to any increase or profit which may have
accrued from the goods by the bailee unless stated otherwise in the contract.
4. Section 164 re-iterates the bailor’s responsibility to the bailee and states that the
former shall be responsible for any loss which the bailee may sustain by the reason
that the bailor was not entitled to make the bailment or to receive back the goods or to
give directions respecting them.

Bailee

The person to whom the possession of certain goods is temporarily given is the bailee.

They have the following duties-

1. Duty to take reasonable care of goods bailed

2. Duty to not make unauthorised use of the good bailed
3. Duty to not mix own goods with the bailor’s goods
4. Duty to return the goods on fulfilment of purpose Bailment of finding

According to Section 71, a person who finds items belonging to another and takes them into
his custody is subject to the same liability as a bailee.

Because the role of the finder of goods is similar to that of a bailee, he is expected to exercise
the same level of care with the goods as a bailee under Section 151.

He also has all of the responsibilities of a bailee, including the obligation to return the goods
once the rightful owner is identified. If he refuses to return, he may face conversion charges.
Furthermore, he shall be liable for any loss, damage, or deterioration of the products as a
result of his failure to return the goods.

Section 168 further states that the finder of goods has no right to sue the owner for
compensation for the trouble and expense voluntarily incurred by him to preserve the goods
found. Also under Section 169, when a thing which is commonly the subject of sale is lost
and the finder cannot locate the original owner with reasonable diligence, the same can be
sold if the thing is in danger of perishing or losing the greater part of his value or when the
lawful charges of the finder in respect of the things is determined to be two-thirds of its
value.

CONTRACT OF PLEDGE

Defining the contract of pledge

“Pledge”, which is also called “pawn”, is a kind of bailment of good with a special purpose. It
is defined in Section 172 of the Contract Act.

The goods pledged to serve as security for the payment of a debt or performance of a
promise.

The bailor, in this case, is called the “pawnor” or “pledger” and the bailee in this case is
called the “pawnee” or “pledgee”.

The pawnee thus has a special property or special interest in the thing pledged.

The special property or interest is continuous and exists to compel the payment of the debt or
sell the property if the need arises.

The special nature of a pledged property was explained by the Supreme Court in Bank of
Bihar v. the State of Bihar (1971). Sometimes a case may arise when a pledge in which the
pawnor has a limited interest is made. Even then, the pledge is valid to the extent of that
interest.

Essentials

The following are the essentials-

1. There shall be a bailment for security against payment or performance of the promise.
2. The subject matter of the pledge is goods.
3. Goods pledged for shall be in existence.
4. There shall be the delivery of goods from pledger to the pledgee.

Rights of a pawnee

1. Section 173 gives the pawnee the right to retain the goods that have been placed to
them in case of the non-performance or non-payment of the debt by the pawnor.

Further, the pawnee is entitled to retain the goods or the expenses that he had to incur
for the possession and preservation of that pledged good.

2. Section 174 also states that unless stated otherwise by a contract it shall be presumed
that subsequent advances are included within the original debt and the good can be
retained to recover those advances.
3. Section 175 gives an additional right to the pawnee. This is the right to receive
extraordinary expenses from the pawnor which he had to undertake for the
preservation and possession of the good. The same right could be enforced by filing a
suit.
4. Upon default of payment by pawnor, Section 176 gives two distinct rights. First, the
pawnee can bring legal action against the pawnee and retain the goods as collateral
security. Secondly, the pawnee can also sell the pledged goods after giving reasonable
notice to the pawnor. If the cost of the pledged product is less than the debt, then the
pawnor continues to be liable. If it is more than that, the pawnee is liable to return the
surplus amount to the pawnor. Further, the pawnor is allowed to pay the amount after
 receiving notice of sale and before the actual sale takes place. But he will be liable to
pay for all extra expenses that the pawnee had to incur because of the default.

Rights and duties of a pawnor

The pawnor is responsible for repaying the loan or fulfilling the commitment, as the case may
be.

It is the pawner’s responsibility to reimburse the pawnee for any out-of-pocket expenses.

It is the pawner’s responsibility to disclose any hazards that may put the pawnee in jeopardy.

If the pawnee suffers a loss as a result of faults in the pledged goods, the pawnor must
compensate the pawnee.

The pawnor must pay the deficit if the pawnee sells the item because of the pawnor’s default.

On the other hand, the pawnor has the right to receive back the pledged good on successful
payment of debt or performance of the act as the case may be.

CONTRACT OF AGENCY

Defining contract of agency

According to Section 182, an “agent” is a person employed for acts/activities to be committed

for another person and to represent that person in dealings with a third person.

The person who employs an agent is called the “principal”. Thus, a “contract of agency”
involves the creation of a principal-agent relationship.

The relationship of principal and agent may be created in any of the following ways:

1. by express appointment,
2. by the conduct or situation,
3. by the necessity of the case,
4. by subsequent ratification of an unauthorised act, or
5. by the presumption of agency in a husband-wife relationship.

Essentials

1. Agreement between agency and principal

2. Competency of principal. Competency is determined by the same factors whose
fulfilment is required for a basic standard contract.

Although a minor is incompetent to appoint an agent, it was held in Madanlal

Dhariwal v. Bherulal (1964) that a guardian was allowed to appoint an agent for a
minor and such an appointment was protected by Indian law.

3. An agent is just the connecting link between the principal and third party and need not
be competent to make a contract with the third party on behalf of the principal. Thus,
anyone can act as an agent of the principal and enter into contracts on behalf of
them.
4. The contractual relationship must be created to enter into legal relations.
5. Consideration is not required in a contract of agency and this is given in Section 185.
 The law does not require any consideration as for the validity of a contract of agency.
Since consideration may be of some benefit to the plaintiff or some detriment to the
defendant, the principal’s willingness to be bound by the acts done by the agent on his
behalf serves as a sufficient detriment to the principal.

Principal-agent relationship
Duties of an agent

The duties of an agent are as follows-

1. A principal’s mandate must be carried out by an agent. They must complete the tasks
that have been assigned to them. In the absence of instructions, the agent should work
according to the trade’s customs. Any failure to do so would result in the agent being
held accountable for the principal’s loss.
2. According to Section 211, every agent is bound to carry on the business of the agency
with reasonable skill and care. The standard of care and skill which an agent has to
maintain depends upon the nature of his profession.
3. An agent has the duty to not delegate his duties.

The rule is contained in the maxim “delegatus non potest delegare” which means that
an agent to whom some authority has been delegated cannot delegate that authority to
another person.

4. Section 214 states that an agent has the duty to communicate with their principal.
5. The agent has the duty to not receive secret profits while in a contract of agency.
6. The agent has the duty to remit sums received on behalf of the principal.
7. The agent has the duty to avoid conflict of interest and not act on his account.

 An act to the contrary by the agent gives the principal two rights-

1. Section 215 says that the principal can repudiate the contract if the agent acts on their
own account and conceals materials from the former or engages in dealings which are
the disadvantages to the principal.
2. Section 216 says that in the event of the agent acting on their account the principal
will get the right to extract and receive from the agent any benefit that might have
arisen from those kinds of transactions.

Rights of agent and corresponding duties of the principal

1. According to Section 219, an agent is entitled to some amount of remuneration. It

becomes due to him with the completion of the activities assigned to him. This rule is
subject to special contracts between the principal and the agent.
2. All funds received on the principal account must be returned to the agency. However,
he has the right to keep all money owing to him from advances given or expenditures
properly paid by him in conducting such business, as well as any income that may be
payable to him for acting as an agent, out of any sums received on account of the
principal in the agency’s activity.
3. According to Section 221, an agent is entitled to retain goods, papers and other
property of the principal received by him until the amount due to himself for
commission, disbursement and services in respect of the same has been paid to him.
This provision is subject to the absence of any contract to the contrary.
4. Section 222-223 details how the agent has the right to be indemnified and the
principal has the duty to indemnify the agent.
5. Every principal has the duty to protect the agent from their neglect. In cases of
principal’s neglect causing injury to the agent, the latter must be compensated for the
same.
Liability of the principal

The liability of a principal can be discussed in the following aspect-

1. When an agent exceeds the authority granted to them by the principal, Section 227
states that a portion of the act performed by the agent may be within the authority
while the other party is outside. The principal is liable for the part of the act that is
within his or her authority, but not for the part that falls outside his or her power. This
can be further appreciated by looking at the Kerala High Court’s decision in
Ahammed v. Mammad Kunhi (1986). The agent in this instance was given power of
attorney to sell a half-right over a property. He did, however, sign a contract to sell
the entire land. It was held that the purchaser had rights over only that portion of the
land that the agent was originally asked to sell.
2. If the two parts cannot be separated, then the principal is not bound to recognize the
transaction. For example, if A authorises B to buy 500 sheep and B buys 500 sheep
and 200 lambs for a sum of ₹6000, A has to repudiate the whole transaction.
3. According to Section 229, any notice given to or information obtained by the agent
for the principal shall, as between the principal and the third person, have the same
legal consequences as if it had been obtained by the principal.
4. When agents acting in the course of the principal’s business make a misrepresentation
or commit fraud, it has the same effect on agreements made by such agents as if such
misrepresentation or fraud has been made or committed by the principal. Thus,
principles of vicarious liability apply.

FORMATION OR CREATION OF AGENCY

1. Actual Power Is Granted to the Agent to Act on Behalf of the Principal.

A contract of agency may be created by conferring authority to the agent. Such authority can
be either express or implied.

(a) Express authority: An express authority is directly granted to the agent by words, spoken
or written.
(b) Implied authority: When the authority granted to the agent can be determined from the
circumstances or necessity of the case or situations of the parties, the agency is said to be
formed impliedly.

2. Agent’s Authority to Act in a Situation of Emergency (By necessity)

According to section 189 of the Indian Contract Act, an agent has the authority to do every
such act that is necessary for protecting his principal from any kind of loss at the time of
emergency. For example, an agent for completing the sale can get the goods repaired for
passing on to the buyer.

3. Agency by the Law of Estoppel.

Sometimes the agent does not have any authority to do an act on behalf of the principal.
However, the principal develops a thought in the mind of the third person that the agent has
the authority to act on his behalf. And, in such cases, the principal is liable for the acts done
by the agent for the third person. This is known as the creation of agency by estoppel.
4. By Ratification.

When an act is done by the agent on behalf of the principal, without the authority to act, the
principal can either refuse from performing the liability or can ratify the same. When the
principal ratifies the act i.e. approves an act done without his authority, but on his behalf, he
is bound towards such an act. And consequently, this creates an agency by ratification
between the two.

TERMINATION OF AGENCY

There are various methods for the termination of the agency of an agent. These are mentioned
under section 201 of the Indian Contract Act. As per this section, the agency can be
terminated in the following ways:

1. By revocation of the agent’s authority by the principal.

 Revoke the authority given to his agent at any time before the authority has
been exercised so as to bind the principal.
 S. 207 further provides that revocation may be expressed Or implied by the
conduct of the principal.
 For Example - A empowers B to let A’s house. Afterwards A lets it himself.
Thus, it is an implied revocation of B’s authority.
 Similarly where the owner of a colliery appointed a sole selling agent for his
coals for seven years, it was held that the owner could sell the colliery even
before the expiry of this period and thus terminate the agency. He was not
bound to keep his colliery.

2. By renunciation of the business of agency by the agent.

 Section 206 provides that an agent may renounce the business of agency in the
same manner in which the principal has the right of revocation. In the first
place, if the agency is for a fixed period, the agent would have to compensate
the principal for any premature renunciation without sufficient cause.
Secondly, a reasonable notice of renunciation is necessary.

3. By the completion of the business of the agency.

 An agency is automatically and by operation of law determined when its

business is completed. Thus, For Example, the authority of an agent appointed
to sell goods cases to be exercisable when the sale is completed. He cannot
afterwards alter the terms of the sale. But the Allahabad and Calcutta High
Courts have held that agency is not terminated on the completion of the sale
but continues until payment of the sale proceeds to the principal.

4. By the death of the principal or the agent or when they become of unsound mind.

 An agency is determined automatically by the death or insanity of the

principal or the agent. Winding up of a company or dissolution of a
partnership has the same effect. Acts done by the agent before death of
 principal would remain binding but the acts done subsequent to death would
be invalid

5. By insolvency of the principal.

 An agency is terminated automatically on the principal being adjudicated

insolvent.