Indian Contract Act, 1872

 Introduction –
1) INDIAN CONTRACT ACT, 1872 governs law relating to contracts in India.
2) The Act was passed by British India and is based on the principles of English Common Law.
3) This Act is applicable to whole of India including Jammu and Kashmir.
4) The Act came into effect from 1st September, 1872 and applies to all contracts in India.

 Important Definitions under the Act –

1) Proposal – Sec 2(a)
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.
2) Acceptance – Sec 2(b)
When the 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
Person making the proposal is called the “promisor”, and the person accepting
the proposal is called the “promisee”.
3) Agreement – Sec 2(e)
Every promise and every set of promises, forming the consideration for each
other, is an agreement.
In simple words, Agreement = Offer + Acceptance
4) Void Agreement – Sec 2(g)
An agreement not enforceable by law is said to be void.
5) Contract – Sec 2(h)
An agreement enforceable by law is called as contract.
In simple words, Contract = Agreement + Enforceability
6) Voidable Contract –
An agreement which is enforceable by law at the option of one or more of the parties thereto,
but not at the option of the other or others.

 Is every agreement contract?

1) No, every agreement is not a contract.
2) An agreement to become a contract must give rise to a legal obligation (duty)
 3) An agreement can be –

Social obligation
Legal obligation

a) An agreement giving rise to social a) Agreement giving rise to legal

obligation is not a contract. obligation is a contract
b) Not covered under ICA, 1872 (Indian b) Covered under ICA, 1872
Contract Act, 1872)

Example –
a) An agreement between two persons to go together to the cinema, or for
a walk, or for a dinner is an agreement of social nature and not covered
under Indian Contract Act, 1872.
b) Domestic agreement between husband and wife is also not a contract.

4) Every contract is an agreement, but every agreement is not a contract

 Difference Between Agreement and Contract –

BASIS FOR
AGREEMENT CONTRACT
COMPARISON

Meaning When a proposal is accepted by the person When an agreement is enforceable by

to whom it is made, with requisite law, it becomes a contract.
consideration, it is an agreement.

Elements Offer and Acceptance Agreement and Enforceability

Defined in Section 2 (e) Section 2 (h)

In writing Not necessarily Normally written and registered

Legal obligation Does not creates legal obligation Creates legal obligation

One in other Every agreement need not be a contract. All contracts are agreement

Scope Wide Narrow

 Essential elements of a valid contract –

 Essential elements of a valid contract –

Under Section 10 – Not given under section 10 but still are

a) Agreement essentials of valid contract –
b) Free Consent a) Two parties
c) Competency of the parties b) Intention to create legal
d) Lawful Consideration relationship
e) Legal object c) Legal formalities
f) Not expressly declared to be d) Certainty of meaning
void e) Possibility of performance

1) Two parties –
There should be at least 2 parties for a contract.

2) Offer –
There shall be an offer or proposal by one party

3) Acceptance –
Offer made should be accepted by the other party

4) Lawful consideration –
The agreement shall be supported by lawful consideration

5) Lawful object –
The object and consideration of the contract shall be legal

6) Competent (capacity) to contract – Section 11

a) The parties to the contract shall be competent to contract
b) For a person to become competent to contract –
- Such person should be major (18+)
- Such person should be of sound mind (Section 12)
- Such person should not be disqualified by law

7) Free consent –
a) There shall be free consent between the parties to the contract
b) Consent is said to be free when the following elements are absent (Section 14)
- Coercion (Section 15)
- Undue influence (Section 16)
- Fraud (Section 17)
- Misrepresentation (Section 18)
- Mistake (Section 20, 21, 22)
 8) Intention to create legal relationships –
The intention of the parties to a contract must be to create a legal relationship between them.
Example: A husband promising his wife to buy her a ‘necklace’ on occasion of her birthday is not
a contract.

9) Possibility of performance –
The agreement should be capable of being performed
Example - if A promises B to bring rainfall through magic. Such agreement cannot be enforced

10) Legal formalities –

Legal formalities if any required for particular agreement such as registration, writing, they must
be followed

 Offer –

A) Definition – Section 2(a)

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

B) Types of offer –
1) General Offer - It is an offer to the whole world.
2) Specific offer - It is an offer made to a particular person or group of
persons.
3) Express offer - It is an offer which is made by words either oral or in
writing.
4) Implied offer - It is an offer which is made by conduct or gesture of the
parties.
5) Counter offer - When a person to whom the offer is made does not
accept the offer [as it is] he counters the condition. This is called counter offer.
6) Cross offer - When two offers of same terms and conditions cross each other at same time, it
is called cross offer.
7) Standing offer - An offer is a standing offer if it is intended to remain open for a specified
period

C) Essentials of valid offer –

1) Offer may be expressed or implied –
An offer may be expressed or may be implied from the conduct of the parties or
circumstances of the case.
2) Offer may be specific or general –
a) A specific offer is one which is made to a particular person. It can be accepted by the
person to whom it has been made, no one else can accept such an offer.
b) A general offer is an offer made to the public at large.
3) Offer must create Legal Relations –
 An offer to be valid must create legal relationship between the parties. Say for example a
dinner invitation extended by A to B is not a valid offer.
4) Offer must be Clear, not Vague –
The terms of an offer should not be vague (not clear / confusing)
For e.g. - A offers to sell B fruits worth Rs 5000/-. This is not a valid offer since what kinds
of fruits or their specific quantities are not mentioned.
5) Offer must be Communicated to the Offeree –
No offeree can accept the proposal without knowledge of the offer (Lalman Shukla v. Gauri
Dutt.)
6) A statement of price is not an offer
7) Offer cannot contain a Negative Condition –
The non-compliance of any terms of the offer cannot lead to automatic acceptance of the offer
Example: A offers to sell his cow to B for 5000/-. If the offer is not rejected by Monday it will be
considered as accepted. This is not a valid offer.
8) A mere statement of intention is not an offer. Thus, a person who attended the advertised
place of auction could not sue for breach of contract if the auction was cancelled
9) Offer must be distinguished from an invitation to offer –

BASIS FOR
OFFER INVITATION TO OFFER
COMPARISON

Meaning When one person expresses his will to When a person expresses something to
another person to do or not to do another person, to invite him to make an
something, to take his approval, is offer, it is known as invitation to offer.
known as an offer.

Defined in Section 2(a) of the Indian Contract Not Defined

Act, 1872.

Objective To enter into contract. To receive offers from people and

negotiate the terms on which the
contract will be created.

Essential to make Yes No

an agreement

Consequence The Offer becomes an agreement An Invitation to offer, becomes an offer

when accepted. when responded by the party to whom it
is made.

Harvey v Facey
 Facts –
 a) Harvey was interested in buying a Jamaican property owned by Facey. He sent Facey a telegram stating
“Will you sell us Bumper Hall Pen? Telegraph lowest cash price – answer paid.”
b) Facey responded stating “Bumper Hall Pen £900”
c) Harvey responded stating that he would accept £900 and asking Facey to send the title deeds.
d) Facey then stated he did not want to sell.
e) Harvey sued, stating that the telegram was an offer and he had accepted, therefore there was a binding
contract.

Decision –
 Telegram was an invitation to treat, not a valid offer. Therefore, no valid contract existed.
 The telegram only advised of the price, it did not explain other terms or information and therefore
could not create any legal obligation.
 Harvey’s telegram “accepting” the £900 was instead an offer which Facey could either accept or reject.
He rejected it so there was no contract created.

 Acceptance
A) Definition – Section 2(b)
“When the person to whom an offer is made signifies his assent thereto the proposal is said to
be accepted, A proposal when accepted becomes a promise.”

B) Essentials of valid Acceptance –

1) Acceptance must be absolute and unqualified –
a) There must be an absolute and unqualified acceptance of all the terms of the offer.
b) Qualified acceptance would amount to rejection of the offer
2) Acceptance must be communicated –
Acceptance must be communicated by the acceptor
3) Acceptance must be in a prescribed or reasonable mode –
a) Offer should be accepted in a prescribed mode.
b) If the offer or prescribes no mode of acceptance, the
acceptances must be communicated according in any
reasonable mode such as in writing or oral.
4) Acceptance must be given within a reasonable time and before the
offer lapses –
a) Acceptance must be given within specified time.
b) If no time is specified, then acceptance may be made within reasonable time.
c) Acceptance should be made before offer lapses (expires).
5) Acceptance cannot precede an offer –
a) Acceptance must be given after receiving the offer.
b) It should not precede the offer.
6) Acceptance must be given only by the person to whom the offer is made –
a) An offer can be accepted only by the person or persons to whom it is made
b) It cannot be accepted by another person without the consent of the offeror.
7) Rejected offer can be accepted only on renewal –
Rejected offer can be accepted only, on renewal; offer once rejected can’t be accepted
again unless a fresh offer is made.
 COMMUNICATION OF OFFER & ACCEPTANCE AND REVOCATION – Section 4
&5
1. Communication of offer is complete when it comes to the knowledge of offeree.
2. Communication of acceptance is complete

As against Offeror As against Offeree

When offeree puts the When the acceptance

acceptance in a course of comes to the
transmission and it is beyond knowledge of offeror
his reach to stop it
3. Revocation (withdrawal / cancellation) of offer –
Revocation of offer is valid before offeree puts the acceptance in course of transmission and it is
out of his reach to stop it.
4. Revocation of acceptance –
Revocation of acceptance is valid before acceptance comes to the knowledge of offeror

Contracts over the Telephone –

 Contract over telephone can be a valid contract.
 It is important that the acceptance must be audible, heard and
understood by the offeror.
 If during the conversation the telephone lines go “dead” and the
offeror does not hear the offeree’s word of acceptance, there is no
contract at the moment.
 If the whole conversation is repeated and the offeror hears and
understands the words of acceptance, the contract is complete

 How revocation of proposal is made – Section 6

 •By the communication of notice of revocation by the proposer to the other party;

•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

•By the failure of the acceptor to fulfil a condition precedent to acceptance; or

•By the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of
the acceptor before acceptance.
•offer is not accepted in the prescribed mode and if no mode is prescribed, in some usual and reasonable
manner or

•The offeree makes a counter-offer

 Consideration (quid pro quo)

A) Definition – 2(d)
‘When at the desire of the promisor, the promisee or any other person had 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.’

B) Meaning –
a) Consideration means something in return
b) It may be an act or abstinence or promise

Note –
As per Section 25 of the Indian Contract Act, 1872 “An agreement made without consideration
is void”

C) Types of consideration –

Past Consideration – Present consideration Future Consideration

In case of past consideration, (Executed consideration) – (Executory
the promisor had received the Present consideration is one in consideration)–
consideration before the date of which one of the parties to the when consideration is to
promise contract has performed his part move at a future date
of the promise, which then it is called as future
Constitutes the consideration consideration
for the promise by the other
side it is known as present
consideration.
D) Essentials of valid consideration –
1) Consideration must move at the desire of the promisor –
a) Consideration must move at the desire of the promisor.
b) whatever is done must have been done at the desire of the
promisor and not voluntarily or not at the desire of a third
party
Example:
 If Munna rushes to Circuit’s help whose house is on fire, there
is no consideration but a voluntary act. But if Munna goes to
Circuit’s help at Circuit’s request, there is good consideration
as Circuit’s did not wish to do the act gratuitously (without
consideration)
 Uday Bhai agrees to sell his horse to Majnu Bhai for ` 50,000. Here consideration for
Uday Bhai for selling horse to Majnu Bhai is consideration of ` 50,000 from Majnu Bhai
and consideration for Majnu Bhai paying ` 50,000 to Uday Bhai, is Uday Bhai selling his
horse. Here considerations had come at the desire of Promisor. Uday Bhai is a
promisor for Majnu Bhai and similarly Majnu Bhai is a promisor for Uday Bhai.

2) Consideration may move from the promisee or any other person:

a) Consideration may be furnished even by a stranger under Indian Law.
b) Consideration can be from any direction, even a stranger to contract can offer
consideration. Case law: Chinnayya v/s Ramayya

Chinnaya v. Ramaya, (1882) 4 Mad. 137

A lady by a deed (agreement) of gift made over certain property to her daughter directing her to
pay an annuity to the donors brother as had been done by the donor herself before she gifted the
property. On the same day, her daughter executed in writing in favour of the donors brother
agreeing to pay the annuity. Afterwards the donee (the daughter) declined to fulfil her promise to
pay her uncle saying that no consideration had moved from him. The Court, however, held that the
uncle could sue even though no part of the consideration received by his niece moved from him.
The consideration from her mother was sufficient consideration.

3) Consideration must be something of value –

Consideration must have some value in the eyes of law, and it should be real.

4) It may be an act, abstinence or a return promise –

a) Promise to not to smoke is a negative act (abstinence),
b) Promise to not to refer the matter to court (abstinence).
c) Promise to perform at the wedding anniversary or birthday party (promise to do).

5) It may be past, present or future which the promisor is already not bound to do –
a) According to Indian Law Consideration may be past, present or future.
b) But under English Law Consideration may be present or future. Past consideration is no
consideration according to English Law

6) It must not be unlawful –

 The consideration or object of an agreement is lawful, unless —
 It is forbidden (prohibited) by law;
 or is of such a nature that, if permitted, it would defeat the provisions of any law;
 or is fraudulent;
 or involves or implies injury to the person or property of another;
 or the Court regards it as immoral, or opposed to public policy

 NO CONSIDERATION – NO CONTRACT- Section 25

A) Meaning –
The general rule is ex-nudopacto non oritur actio i.e. an agreement
made without consideration is void.
Example –
If Salman promises to pay Aishwarya ` 1000 without any obligation
from Aishwarya then it will be void contract as there is no
consideration from Aishwarya towards Salman.

B) Exceptions –

Exceptions - 1) Promise made on account of natural love and affection

Under following 2) Promise to compensate for voluntary services

cases, a contract 3) Promise made to pay a time barred debt
will be valid even
4) Completed Gifts
without
consideration 5) Creation of agency
6) Contract of Guarantee
7) Remission

1) Promise made on account of natural love and affection –

An agreement made without consideration is valid –
a) It is expressed in writing.
b) It is registered under the law.
c) It is made on account of natural love and affection.
d) It is between parties standing in near relation to each other.

2) Promise to compensate for voluntary services –

Voluntary service means service done without any request. It will be valid if the following
conditions are satisfied –
a) The service should have been done voluntarily.
b) The service should have been done for the promisor.
c) The promisor must have been in existence at the time when the service was done.
d) The intention of promisor must have been to compensate the promisee.
 e) The service rendered must also be legal.
Example: Jethalal finds Babita’s purse and gives it to ‘her. Babita promises to give Jethalal
50 rupees. This is a valid contract.

3) Promise to pay time-barred debt –

a) A promise by a debtor to pay a time-barred debt is also a valid contract.
b) But the promise must be in writing.
c) It must be signed by the promisor or his authorised agent.
d) The promise may be to pay the whole or part of the debt.
Example: Ram owes Laxman 1,000 rupees but the debt is barred by the Limitation Act.
Ram signs a written promise to pay 500 rupees on account of the debt. The promise will
be valid and binding without any fresh consideration.

4) Creation of Agency –
a) No consideration is necessary to create an agency.
b) Thus, when a person is appointed as an agent, his appointment is valid even if there is
no consideration.

5) Completed Gifts –
a) Gifts once made cannot be recovered on the ground of absence of consideration.
b) Absence of consideration will not affect the validity of any gift already made.
Example: Virat gave a watch as a gift to Anushka on his birthday. Later on Virat cannot
demand the watch back on the ground that there was no consideration.

6) Contract of guarantee –
Contract of guarantee needs no consideration.

7) Remission –
Remission means lesser performance of the contract than what is actually to be performed.

 DOCTRINE OF PRIVITY OF CONTRACT / STRANGER TO CONTRACT –

Doctrine of privity of contract means stranger to contract cannot sue

Dunlop Pneumatic Tyre Co. v. Selfridge Ltd –

D supplied tyres to a wholesaler X, on condition that any retailer to whom X re-supplied the tyres
should promise X, not to sell them to the public below Ds list price. X supplied tyres to S upon this
condition, but nevertheless S sold the tyres below the list price. Held: There was a contract between D
and X and a contract between X and S. Therefore, D could not obtain damages from S, as D had not
given any consideration for Ss promise to X nor was he party to the contract between D and X.

Exceptions –
In the following cases, stranger to a contract can also sue

1. Beneficiary of a trust –
A trust is created for the benefit of a beneficiary. Hence, the beneficiary can enforce the
provisions of the trust even though he is a stranger to the contract.
 Example –
In a contract between Munnabhai and Circuit, beneficial right in
respect of some property may be created in favor of Chinki and in that
case, Chinki can enforce his claim on the basis of this right.
2. Provision in marriage settlement –
A stranger to the contract can sue on the contract where a provision is
made for him in marriage settlement.
3. Provision for maintenance or marriage expenses of female
members under a family arrangement –
In case a provision is made for the marriage or maintenance of a female member of the family
on the partition of a Hindu undivided family, the female member can enforce the promise
though she may be a stranger to a contract.
Example –
If Nikhil gives his Property in equal portions to his 3 sons with a condition that after his death
all 3 of them will give Rs 10,000 each to Neha, the daughter of Nikhil. Now Neha can prosecute
if any one of them fails to obey this.
4. Assignee of a contract –
a) The benefits of a contract may be assigned.
b) The assignee of a contract can enforce the benefits of a contract though he is not a party to
it.
Example: Rahul assigns his insurance policy in favour of his wife. The wife can enforce it
although she is not a party to it.

5. Acknowledgement of liability –
Where the promisor either by his conduct or acknowledgement or by part payment or by
estoppel creates privity of contract between himself and the stranger, the stranger can sue.
Example: Raju pays Shyam 500 rupees to be given to Baburao, Shyam acknowledges to
Baburao that he holds that amount for him. Baburao can recover the amount from Shyam.

6. Agency contract –
Contracts which are entered into by the agent on behalf of the principal can be enforced by the
principal even though he is not a party to the contract.

 Free consent
A) Meaning – Section 13
‘Two or more persons are said to consent when they agree upon
the same thing in the same sense.’

B) When consent is said to be free?

 As per section 14 of the Contract act consent is said to be free when following are absent –

-Coercion (Section -Mistake

-Undue influence -Fraud (Section -Misrepresentation
15) (Section 20, 21,
(Section 16) 17) (Section 18)
22)

Coercion – Section 15
A) Meaning of coercion –
Coercion means –
a) committing or threatening to commit any act forbidden
(prohibited) by Indian Penal Code against another person;
or
b) unlawful detaining or threatening to detain the property of
another person
c) with a view to obtain consent of another person

B) Who can exercise coercion –

Coercion may come from a person party to the contract or even third person not connected
with the contract directly.

C) Important points –
a) Prosecution – A mere (only) threat to prosecute a man or file suit against him does not
constitute a coercion.
b) High prices and high interest Rates – Charging high interest rate, high price etc. is not a
coercion as the same is not prohibited under the Indian Penal code.
c) A threat to commit suicide – Consent to an agreement may at times be obtained by
threatening to commit suicide. Threat to commit suicide also amounts to coercion.

D) What will be the effect if the consent is caused by coercion – Section 19

a) Agreement is voidable at the option of aggrieved party.
b) Aggrieved party has the option to cancel (rescind) the contract.
c) If the aggrieved party decides to rescind the contract, he must return (restore) all the
benefits received by such person.

Undue Influence – Section 16

A) Meaning of undue influence –
 A contract is said to be induced (caused) by “undue influence” where the relations
subsisting (existing) 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.

B) When a person is deemed to be in a dominating position?

a) Where he holds a real or apparent authority over the other
(e.g. master and servant)
b) where he stands in a fiduciary (trust) relation to the other
(e.g. Doctor and patient)
c) Where he makes a contract with a person whose mental
capacity is temporarily or permanently affected by reason of age, illness, or mental or
bodily distress (pain)
Note –
The burden of proving that the contract was not induced by undue influence shall lie upon
the person in a position to dominate the will of the other
C) There is presumption of undue influence in the following relationships –
a) Parent and child
b) Guardian and ward
c) Doctor and patient
d) Solicitor and client
e) Trustee and beneficiary
f) Religious advisor and disciple
g) Fiancé and fiancée

D) However, there is no presumption of undue influence in case of relationship of —

a) landlord and tenant
b) debtor and creditor
c) husband and wife.

E) What will be the effect if the consent is caused by Undue influence – Section 19
a) Agreement is voidable at the option of aggrieved party.
b) Aggrieved party has the option to cancel (rescind) the contract.
c) If the aggrieved party decides to rescind the contract, he must return (restore) all the
benefits received by such person

Fraud – Section 17
A) Meaning of fraud –
“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 or his agent, or to
induce him to enter into the contract:
 a) The suggestion, as a fact, of that which is not true
by one who does not believe it to be true;
a) The active concealment (to hide) of a fact by one
having knowledge or belief of the fact;
b) A promise made without any intention of
performing it;
c) Any other act fitted to deceive;
d) Any such act which the law specially declares to be
fraudulent
Note –
Deceive – intentionally cause (someone) to believe something that is not true
Connivance – willingness for being secretly involved in an immoral or illegal act.
B) Is silence fraud?
a) Whether silence is fraud or not depends upon various factors.
b) Normally speaking, silence does not amount to fraud.
c) However, silence will be considered as fraud in the following situations –
 When there is a duty to speak
 Where silence is equivalent to speech.
 Where there is change in circumstances

C) What will be the effect if the consent is caused by Fraud – Section 19

a) Agreement is voidable at the option of aggrieved party.
b) Aggrieved party has the option to cancel (rescind) the contract.
c) If aggrieved party decides not to cancel the contract then he may continue the contract
and claim damages from the other party.
d) If the aggrieved party decides to rescind the contract, he must return (restore) all the
benefits received by such person.

Contracts Uberrimae Fidei –

There are contracts in which the law imposes a special duty to act with the utmost good faith
i.e., to disclose all material information. Failure to disclose such information will render the
contract voidable at the option of the other party
Examples –
a) Contract of insurance of all kinds
b) Company prospectus
c) Contract for the sale of land
d) Contracts of family arrangements

Misrepresentation – Section 18
A) Meaning –
 a) A representation when wrongly made either innocently or
intentionally is a misrepresentation. When it is made
innocently or unintentionally it is misrepresentation and
when made intentionally or willfully it is fraud.
b) Misrepresentation means making any statement as true but
actually that statement is false.

B) What will be the effect if the consent is caused by Undue

influence – Section 19
d) Agreement is voidable at the option of aggrieved party.
e) Aggrieved party has the option to cancel (rescind) the contract.
f) If the aggrieved party decides to rescind the contract, he must return (restore) all the
benefits received by such person

Mistake

Mistake of Mistake of
law fact

Indian law Foreign law Bilateral Unilateral

mistake mistake

Valid Void Void Valid

Mistake of law – Section 21

Mistake of law of the country – Mistake of law of foreign country –

1) When a party enters into a contract, without the knowledge of 1) Such a mistake is treated as mistake of
law in the country, the contract is valid and not void. fact and agreement is such case is void.
2) A contract is not voidable because it was caused by a mistake 2) Ignorance of foreign law may be excused
as to any law in force in India.
3) The reason here is that Ignorantia juris non excusat
(ignorance of law is not an excuse at all).
4) However, if a party is induced (influenced) to enter into a
contract by the mistake of law then such a contract may be
avoided.
5) The principle in this case is ignorance of law is not an excuse.

Mistake of fact – Section 20

A) Bilateral mistake -
1) Where both the parties to an agreement are under a mistake as to a matter of fact essential to the
agreement, the agreement is void.
2) Mistake must be mutual i.e. both the parties should misunderstand each other

Types of mistakes falling under bilateral mistake are as follows –

(a) Mistake as to existence of subject matter: If both the parties are at mutual mistake as to
existence of the subject matter the agreement is void.
(b) Mistake as to identity of subject matter: It usually happens when both the parties have
different subject matter of contract in their mind. The contract is void due to mistake of
identify of subject matter.
(c) Mistake as to the quality of the subject matter: If the subject matter is something essentially
different from what the parties thought to be, the agreement is void.
(d) Mistake as to quantity of subject matter: Bilateral mistake as to quantity of subject matter
would render the contract void.
(e) Mistake as to title of subject matter: The agreement is void due to bilateral mistake as to title
of the subject matter.
(f) Mistake as to price of the subject matter: Mutual mistake as to price of the subject matter
would render the agreement void.
(g) Mistake as to possibility of performance of Contract - Impossibility may be:
Physical impossibility: A contract is void if it is identified to be non-feasible (not possible) due
to physical factors, like time, distance, height, etc.
Legal impossibility: A contract is void if it provides that something shall be done which as a
matter of law cannot be done.

B) Unilateral Mistake as to fact – Section 22

1) A contract is not voidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact.
2) A unilateral mistake is not allowed as a defense in avoiding a contract unless the mistakes brought
about by another party’s fraud or misrepresentation.

 Legality of Object – Section 23

Section 23 of the Indian Contract Act, 1872 provides that the consideration or object of an agreement is
unlawful if it is –

 forbidden by law; or
 it is of such nature that if permitted it would defeat the provisions of 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.

 Void and Illegal Contracts –

Consequence of Illegal Agreements

 an illegal agreement is entirely void;

 no action can be brought by a party to the contract to an illegal agreement. The maxim is “Ex
turpi cause non-oritur action” - from an evil cause, no action arises;
 money paid or property transferred under an illegal agreement cannot be recovered. The maxim
is in parti delicto potierest condition defendeties- In cases of equal guilt, more powerful is the
condition of the defendant;
 where an agreement consist of two parts, one part legal and other illegal,
and the legal parts is separable from the illegal one, then the Court will
enforce the legal one. If the legal and the illegal parts cannot be separated
the whole agreement is illegal; and
 any agreement which is collateral (connected) to an illegal agreement is
also tainted with illegality and is treated as being illegal, even though it
would have been lawful by itself

 Agreements Void as being opposed to Public Policy –

The following agreements are void as being against public policy but they are not illegal –

a) Agreement in restrain (restrict) of parental rights : An agreement by which a party deprives

himself of the custody of his child is void.
b) Agreement in restraint of marriage : An agreement not to marry at all or not to marry any
particular person or class of persons is void as it is in restraint of marriage.
c) Marriage brokerage or brokerage Agreements : An agreement to procure marriage for reward
is void. Where a purohit (priest) was promised Rs.200 in consideration of procuring a wife for
the defendant, the promise was held void as opposed to public policy, and the purohit could not
recover the promised sum.
d) Agreements in restraint of personal freedom are void : Where a man agreed with his money
lender not to change his residence, or his employment or to part with any of his property or to
incur any obligation on credit without the consent of the money lender, it was held that the
agreement was void.
e) Agreement in restraint of trade : An agreement in restraint of trade is one which seeks to
restrict a person from freely exercising his trade or profession.
  Void Agreements –
Following agreements have been expressly declared to be void by the Indian Contract Act –

- Agreement made by incompetent person - Agreement in restraint of marriage –

Section 26
- Agreement made under a bilateral - Agreement in restraint of trade – Section
mistake of fact – Section 20 27

- Agreement of which the consideration or - Agreement in restraint of legal

object is unlawful – Section 23 proceedings – Section 28
- Agreement of which the consideration or - Agreements void for uncertainty –
object is unlawful in part – Section 24 Section 29

- Agreement made without consideration - Wagering agreement

– Section 25
- Agreement to do impossible acts

a) Agreement by a minor (section 11) or a person of unsound mind (section 12).

b) Agreement of which the consideration or object is unlawful – Section 23
c) Agreement made under a bilateral mistake of fact material to the agreement –
Section 20
d) Agreement of which the consideration or object is unlawful in part and the
illegal part cannot be separated from the legal part – Section 24
e) Agreement in restraint of marriage – Section 26
Agreement is restraint of marriage is void.
Exceptions: a) Minors; b) Restraint for particular reasonable period is
valid
f) Agreement in restraint of trade is void.
Exceptions –
 An agreement through which an outgoing partner will not carry on the business of the
firm for a reasonable time will be valid, though it is in restraint of trade
 Where a person sells his business along with the goodwill to another person, agrees
not to carry on same line of business in certain reasonable local limits, such an
agreement is valid.
 An agreement of service through which an employee commits not to compete with his
employer is not in restraint of trade
 Trade Combinations are valid as long as they are not creating monopoly are valid
g) Agreement in restraint of legal proceedings – Section 28
An agreement which restricts or waives one’s right to sue or limits the time of justice is void.
Exceptions:
A contract by which the parties agree that any dispute between them shall be referred
to arbitration and will not be taken to the court is a valid contract.
h) Agreements void for uncertainty – Section 29
Agreements, the meaning of which is not certain, or capable of being made certain are void
i) Agreement by way of wager – Section 30
Payment of money or money’s worth upon ascertainment of future uncertain event is
known as wagering.

 Wagering Agreements –
A) Meaning of wagering agreements –
The literal meaning of the word “wager” is a “bet”. Wagering
agreements are nothing but ordinary betting agreements.
Example –
A and B enter into an agreement that if England’s Cricket Team wins
the test match, A will pay B Rs.100 and if it loses B will pay Rs.100 to
A. This is a wagering agreement and nothing can be recovered by
winning party under the agreement.

B) Essentials of wagering agreements –

a) One party should win and one part should loose
b) There should be mutual chance of gain or loss
c) No parties should have control over the event.

 Performance of contract
Meaning –
a) Every contract has certain obligations (duties) which are to be performed by the parties to the
contract.
b) When both the parties to the Contract fulfill their obligations towards each other, the contract is
said to be performed.
c) When both the parties to the contract have performed their obligations, the contract is said to
be discharged by performance

Who will perform the contract? - Section 40

1.Promisor himself

Legal Representative However, if the contract involves personal skills and if the
promisor dies, the contract becomes void

1.Agent of promisor

Third persons, if promise permits

 Example -
Adi promises to pay Manav 5,000 rupees. Adi may perform the obligation of giving 5,000 rupees to
Manav either by himself or he may appoint agent to perform the obligation.
If Adi dies before making the payment then legal reprentative of Adi must perform the promise.
Effect of Refusal to accept offer of performance -Section 38
When the promisor make offer to the promise for the performance of the contract and promise does
not accept it, then the promisor is not responsible for non-performance

Conditions –

1. It must be unconditional

2. Performance must be at a proper time and place

3. Performance must be within reasonable time.

4. Performance must give reasonable opportunity for inspection

Example:
Jay contracts to deliver to Veeru at his warehouse 100 Kg of Basmati rice of A grade quality on the 1st March,
2014,. In order to make an offer of a performance as per section 38, Jay must bring the rice to Veeru's
warehouse, on the fixed date (1st March, 2014), under such circumstances that Veeru may have a reasonable
opportunity of satisfying himself that the thing offered is Basmati rice of the quality contracted for, and that
there are 100 kg of rice.

Effect of Refusal of Party to Perform Promise Wholly - Section 39

a) If the promisor refuses to perform the contract wholly, the promisee may put an end to the
contract.
b) However, if the promisee has agreed to accept the performance even if it is not performed wholly
then the contract will continue.

Example:
Kanika Kapoor, a singer, enters into a contract with Neha Dhupia, the manager of a theatre, to sing at his
theatre two nights in every week during the next two months, and Neha Dhupia promises to pay her 100
rupees for each night’s performance. On the sixth night Kanika willfully absents herself from the theatre.
Neha is at liberty to put an end to the contract and it depends on her choice

Effect of accepting performance from third person - Section 41

When a promisee accepts performance of the promise from a third person, he cannot afterwards
enforce it against the promisor.
 Example:
Narendra and Rahul enter into a contract in which Narendra will supply raw materials to Rahul. The raw
material of Narendra is in Chennai's warehouse which is managed by Mr. Shah.
Narendra gave direction to Mr Shah to deliver raw material to Rahul which Mr Shah did and it was
accepted by Rahul. Now, Rahul cannot demand delivery of raw materials from Narendra.

Devolution (transfer) of Joint Liabilities - Section 42 and 43 and 44

1. Liability of joint promisor is joint and several
2. If any joint promisor dies, his legal representatives must jointly with the surviving promisors
fulfil the promise.
3. On the death of all the joint promisors, the representatives of all of them must jointly fulfil the
promise.
4. The promisee may compel (force) anyone of the joint promisor to perform the promise –
Section 43
5. Where a promisee releases one of the joint promisors, the release of one promisor does not
discharge the other joint promisors – Section 44
Note –
a) Each promisor may compel contribution–
Everyone will contribute equally or as per the terms and conditions agreed between the
joint promisor.
b) Sharing of loss by default in contribution–
If any one of two or more joint promisors makes default in such contribution, the remaining
joint promisors must bear the loss arising from such default in equal shares.

Examples:
(a)1) Raju, Shyam and Baburao jointly promise to pay Totla Seth `3,000. Totla Seth may compel (force) either
Raju or Shyam or Baburao to pay him ` 3,000.
(b)2) Raju, Shyam and Baburao jointly promise to pay Totla Seth the sum of `3,000. Baburao is compelled to
pay the whole. Raju is insolvent, but his assets are sufficient to pay one-half of his debts, Baburao is entitled
to receive ` 500 from Raju’s estate, and ` 1,250 from Shyam.
(c)3) Raju, Shyam and Baburao are under a joint promise to pay Totla Seth `3,000. Baburao is unable to pay
anything, and Raju is compelled to pay the whole. Raju is entitled to receive `1,500 from Shyam.
4) Raju, Shyam and Baburao are under a joint promise to pay Totla Seth ` 3,000, Raju and Shyam being only
sureties (gurantor) for Baburao. Baburao fails to pay. Raju and Shyam are compelled to pay the whole sum.
They are entitled to recover it from Baburao.

Devolution of Joint Rights (Section 45)

When a person has made a promise to two or more persons jointly then the right to claim performance
rests with all the joint promisee and if any of the joint promisee dies then the legal representative of
that joint promisee along with the surviving joint promisee shall claim the performance. If all the joint
promise die the legal representative of all joint promisee shall claim the performance.
 Example:
Bhuvam, in consideration of ` 5,000, lent to him by Ashish and Carry, promises Ashish and Carry jointly to
repay them 5,000 with interest on a day specified, but Ashish dies.
The right to claim performance rests with Ashish’s representative jointly with Carry during Carry’s life, and
after the death of Carry with the representatives of Ashish and Carry jointly.

Time and place for performance of contract – Section 46-50

1) Time for Performance of Promise, where no application is to be made and no time is specified –
Section 46
- Where the promise is to be performed without application by the promisee and no time for the
performance is specified then the contract shall be performed within reasonable time.
- Reasonable time differs case to case and if there is any dispute then court will decide the
reasonable time.

2) Time and Place for Performance of Promise, where time is specified and no application to be
made – Section 47
Where the promise is to be performed on fixed day without application by the promisee then the
promisor may perform the promise on that day during business hours and on such place as
specified.

Example:
Mukesh promises to deliver goods at Rahul’s warehouse on the 1st January. On that day Mukesh brings
the goods to Rahul’s warehouse, but after the usual hour for closing it, and they are not received.
Mukesh has not performed his promise.

3) Application for Performance on certain day to be at proper time and place – Section 48
When a promise is to be performed on a certain day and for that promisee has to make application
to promisor then it is the duty of the promisee to apply for performance at a proper place and
within the usual hours of business.

4) Place for Performance of Promise, where no application to be made and no place fixed for
performance – Section 49
When a promise is to be performed without application by the promisee and place of performance
is not fixed then it is the duty of the promisor to apply to the promisee to appoint a reasonable
place for the performance of the promise

Example:
John Cena promises to deliver a Car to Batista on a fixed day. John must apply to Batista to appoint a
reasonable place for the purpose of receiving it and must deliver it to him at such place.

5) Performance in Manner or at time prescribed or Sanctioned by Promisee – Section 50

 Where promisee specifies the manner or time of performance then promisor should perform
promise in the manner or time specified by the promisee.

Performance of Reciprocal Promises – Section 51 – 54 and 57

1) Simultaneous performance – Section 51
Promises are to be performed together by the promisor as well as promisee.

Example:
Kabir and Priti contract that Kabir shall deliver goods to Priti and Priti will pay the price for the goods.
Kabir need not deliver the goods, unless Priti is ready and willing to pay for the goods on delivery. Priti
need not pay for the goods, unless Kabir is ready and willing to deliver them on payment.

2) Order of performance – Section 52

promises should be performed in the fixed order and if no order is fixed then it can be
performed in any manner

Example:
A and B contract that A shall build a house for B at a fixed price and B shall make the payment after the
house is ready. A’s promise to build the house must be performed before B’s promise to pay for it.

3) Liability of party preventing event on which the contract is to take effect – Section 53
Where one party to a reciprocal promise prevents the other party from performing his promise,
the contract becomes voidable at the option of the party who is so prevented. The aggrieved
party can also recover compensation.

Example:
Karan and Amir contract that Karan shall execute certain work for Amir for 200 rupees. Karan is ready to
perform the work, but Amir prevents him from doing so. The contract is voidable at the option of Karan;
and, if Karan elects to rescind the contract then Karan is entitled to recover from Amir compensation for
any loss which he has incurred by its non-performance

4) Conditional and dependent – Section 54

Performance of the promise by one party depends on the prior performance of the promise by
the other party.

Example:
Karan contracts with Raj to execute certain builder ’s work for a fixed price, Raj supplying the raw
materials and timber necessary for the work. Raj refuses to furnish raw materials or timber, and the work
cannot be executed (done). Karan need not execute the work, and Raj is bound to make compensation to
Karan for any loss caused to him by the non-performance of the contract.

5) Legal and Illegal Reciprocal Promises – Section 57

 legal part illegal part

Valid Void

NOTE – But if the things are inseparable then the entire agreement is void

Time is Essence of the Contract – Section 55

Effect of failure to perform at a fixed time in a contract in which time is essential –

When the element of time is essential When the element of time is not essential
in the contract in the contract

if the promisor fails to perform the if the promisor fails to perform the
contract within the fixed period contract within the fixed period

Promisee has 2 options in this case, promisee can only claim

damages
Option 1 Option 2

Promisee can Promisee can

rescind (cancel) affirm (accept)
the contract the contract
and can claim and can claim
damages damages if he notifies
to the promisor

Agreement to do impossible acts – Section 56

1) An agreement to do an act impossible in itself is void.
2) Contract to do an act afterwards becoming impossible or unlawful —
A contract to do an act which, after the contract is made, becomes impossible or unlawful, or,
by reason of some event which the promisor could not prevent, becomes void when the act
becomes impossible or unlawful.
3) In such cases, promisor should compensate promisee for any loss.
 Examples:
a) A agrees with B to discover treasure by magic. The agreement is void
b) Hitesh and Makarand contract to marry each other. Before the time fixed for the marriage,. Hitesh
goes mad. The contract becomes void
c) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the
country in which the port is situated. The contract becomes void when war is declared

Appropriation of payments – Section 59,60 and 61

Where a debtor owes several debts to creditors then the provisions of section 59-61 comes into picture

There can be 3 situations for settlement of debt if debtor owes several debt to creditor

Situation 1 Situation 2 Situation 3

Where the debtor has where the creditor has where no one has specified
Specified – Section 59 specified – Section 60 Section - 61

Follow the instructions Follow the instructions of Debt should be appropriated

Of debtor and adjust the creditors and adjust the as per time.
Debt accordingly debt accordingly However, if 2 loans are taken
on same day the appropriation
must be done proportionately

Examples:
(a) Ranveer owes Ranbir several debts including, 1,000 rupees upon a promissory note which falls due on
the 1st June. He owes Ranbir no other debt of that amount. On the 1st June Ranveer pays to Ranbir `
1,000. The payment is to be applied to the discharge of the promissory note.
(b) Ranveer owes to Ranbir several debts, the sum of ` 567. Ranbir writes to Ranveer and demands
payment of this sum. Ranveer sends to Ranbir ` 567. This payment is to be applied to the discharge of the
debt of which Ranbir had demanded payment

 Quasi Contracts – Section 68-72

Meaning of quasi contract –
1) It is an implied contract. It is imposed by law and does not arise by agreement
2) The duty of a party and not the promise of any party is the basis of such
contract.
3) It is based on the principle of “prevention of unjust enrichment of one person
at the cost of another”
4) It is imposed by law and does not arise by agreement.
5) No essential of valid contract is required
6) The right is available against specific persons and not the whole world
 Types of Quasi-Contracts:

Claims for necessaries Payment by an Benefits of non- Responsibility of Money paid by

supplied to a person interested person. gratuitous act. (Sec finder of goods. mistake or under
incompetent to (Sec 69) 70) (Sec 71) coercion.
contract. (Sec 68)

A) Claims for necessaries supplied – Section 68

Where necessaries are supplied to a person who is incompetent to contract, the supplier is
entitled to recover the price from the property of the incompetent person.
Example: Gopal supplies Madhav, a minor, with necessaries suitable to his condition in life.
Gopal is entitled to be reimbursed from Madhav’s property.
B) Payment by a Person Having Some Interest in Payment – Section 69
a) The person making the payment must have some interest in paying the amount.
The person making the A person who is interested in the payment of money of which another is
bound (liable) by law to pay, and who therefore, pays it, is entitled to be reimbursed by the other
Conditions:
b) payment must not be bound by law to pay the amount.
c) The other person from whom the money is sought to be recovered must be legally bound to
pay the money.
C) Claim for any benefit received under a non-gratuitous act – Section 70
When a person lawfully does anything for another person or delivers anything to him, not
intending to do so gratuitously, such person who enjoys the benefit must reimburse the former
or must restore to him the thing so delivered.
Conditions:
a) The person must lawfully do something for another person or deliver something to him.
b) The person doing some act or delivering something must not intend to act gratuitously
c) The other person must voluntarily accept the acts or goods and he must have enjoyed their
benefits
D) Responsibility of finder of goods – Section 71
A person who finds goods belonging to another and takes them into his custody is liable as a
bailee. The finder of goods must try to find out the real owner of the goods and deliver the goods
to him on demand.
E) Money paid by mistake or under coercion – Section 72
A person to whom money has been paid or anything delivered by mistake or under coercion,
must repay or return it.
Example: Ram and Shyam jointly owe 1,000 rupees to Malinga. Ram alone pays the amount to
Malinga, and Shyam, not knowing this fact, later on also pays 1,000 to Malinga.
Malinga is bound to repay the amount to B.

 Contingent Contract – Section 31-36

 A contract may be -

Absolute contract - Contingent contract-

it is a type of contract where the promisor promises it is a type of contract where perfromance is
to the perform the contract without conditions. It is dependant on some conditions which may happen or
also known as unconditional contract may not happen.

A) Section 31 defines contingent contract as follows –

“a contract to do or not to do something if some event, collateral to such contract, does or does not
happen”
Example –
Vasuli Bhai contracts to pay Bappi Bhai 5 lakh rupees if Bappi Bhai’s house is burnt. This is a
contingent contract.
Contracts of insurance, indemnity and guarantee are also example of contingent contracts.

B) Essentials of Contingent Contract –

a) There must be a contract to do or not to do something
b) The performance of the contract depends upon the happening or non-happening of some event
in future
c) The event must be uncertain (not fixed)
d) The event must be collateral or incidental to the contract

C) Rules regarding contingent contract –

1) Enforcement of contingent contracts on an event happening – Section 32
Contracts which are contingent upon the happening of a future uncertain event cannot be
enforced by law unless and until that event has happened.
If the event becomes impossible, such contracts become void.
Example:
a) Alex promises to pay Peter 5,000 rupees if the ship reaches port. Now, contract will be
enforceable (valid) if ship reaches the port. On the other hand if ship does not reaches port
then contract will be void.
b) Janvi contracts to pay Hitesh a sum of 1 lakh rupees when Hitesh marries Makarand.
Makarand dies without being married to Hitesh. The contract becomes void.

2) Enforcement of contracts contingent on an event not happening – Section 33

Contracts contingent upon the non-happening of an uncertain future event can be enforced when
the happening of that event becomes impossible
Example: Alex agrees to pay Peter a sum of 10 lakh rupees if a certain ship does not return. The
ship is sunk. The contract can be enforced after the ship sinks. On the other hand, if ship would
have returned the contract would have become void.

3) Contingent Contracts Dependent on future conduct of a living person – Section 34

 If the future event on which a contract is contingent is dependent on the future act of a living
person then contract will become void if that person acts otherwise
Example – Sharvi agrees to pay Makarand 1 lakh rupees if Makarand marries Hitesh.
Hitesh marries Gaurang. The marriage of Makarand to Hitesh must now be considered
impossible, although it is possible that Gaurang may die and that Hitesh may afterwards marry
Makarand.

4) When contracts become void which are contingent on happening of specified event within fixed
time – Section 35
Contracts which are contingent upon the happening of a future uncertain event within a fixed
time will becomes void if the contract does not happen within fixed time.
Example –
a) Alex promises to pay Peter 5,000 rupees if the ship reaches port within 1 year. Now,
contract will be enforceable (valid) if ship reaches the port within one year. On the other
hand, if ship does not reach port within 1 year then contract will be void.
b) Alex promises to pay Peter 5,000 rupees if the ship does not reach port within 1 year. Now,
contract will be enforceable (valid) if ship does not reach the port within one year. On the
other hand, if ship reaches port within 1 year then contract will be void.

5) Agreements contingent on impossible events void – Section 36

Contingent agreements based on impossible event are void.
Example – Anuradha promised Shyam to pay 1 crore rupees if he brings Taj Mahal from Delhi
to Mumbai. This contract is void contract.

 Discharge of contract –
Meaning of Discharge of contract –
Discharge of contract means termination of contractual relationship between the parties. In simple words
discharge of contract means that contract comes to an end.

Modes of discharge of
contract

Discharge Discharge Discharge by Discharge by Discharge

Discharge by
by by lapse of operation of impossibility of by breach
performance
agreement time law performance of contract

A) Discharge by performance –
When the parties to a contract fulfil the obligations arising under the contract within the time and
manner prescribed, then the contract is discharged by performance.
Example: Peter agrees to sell his cycle to John for an amount of Rs 10,000 to be paid by John on
the delivery of the cycle. As soon as it is delivered, John pays the promised amount.
Since both the parties to the contract fulfil their obligation arising under the contract, then it is
discharged by performance.
 Discharge by the performance of a contract can be by -

Actual performance -
Attempted performance -
Actual performance is when all the parties to a
contract do what they had agreed for under the On the other hand, it is possible that when the
contract promisor attempts to perform his promise, the
promisee refuses to accept it. In such cases, it is
called attempted performance

B) Discharge by agreement
The parties may agree to terminate the existence of the contract by any of the following ways:
1) Novation - Section 62
a) Substitution of a new contract in place of the existing contract is known as “Novation of
Contract”.
b) It discharges the original contract.
c) The new contract may be between the same parties or between different parties.
d) Novation can take place only with the consent of all the parties.
Example: Raju owes money to Shyam under a contract. It is agreed between Raju, Shyam
and Baburao that Shyam should accept Baburao as his debtor, instead of Raju. The old debt
of Raju and Shyam is at an end and a new debt from Baburao to Shyam has been
contracted. There is novation involving change of parties.

2) Alteration - Section 62
a) Alteration means change in one or more of the terms of the
contract.
a) In case of novation there may be a change of the parties, while in
the case of alteration, the parties remain the same.
b) But there is a change in the terms of the contract.
c) Alteration can take place only with the consent of all the parties

3) Rescission - Section 62
It means the cancellation of the contract.

4) Remission – Section 63
It means the acceptance of lesser fulfilment of the terms of the promise
Example: Salman has borrowed ` 500 from Aishwarya. Salman agrees to accept ` 250 from
Aishwarya in satisfaction of the whole debt. The whole debt is discharged.

5) Waiver - Section 63
 Waiver means giving up or foregoing certain rights. When a party agrees to give up its rights,
the contract is discharged.
Example: A promises to paint a picture of B. B afterwards forbids him to do so. A is no longer
bound to perform the promise.

C) Discharge of a Contract by Lapse of Time –

The Limitation Act, 1963 prescribes a specified period for performance of contract.
If the promisor fails to perform and the promisee fails to take action within this
specified period, then the promisee cannot seek remedy through law. It discharges
the contract due to the lapse of time.
Example: Peter takes a loan from John and agrees to pay instalments every month
for the next five years. However, he does not pay even a single instalment. John calls
him a few times but then gets busy and takes no action. Three years later, he
approaches the court to help him recover his money. However, the court rejects his
suit since he has crossed the time-limit of three years to recover his debts.

D) Discharge by operation of law –

A contract may be discharged by operation of law in the following cases –
1) Death –
a) If contract involves personal skill then contract is discharged
b) If contract does not involve personal skill then the rights and liabilities of the deceased
person will pass on to his legal representatives.
2) Insolvency –
The insolvency of the promisor discharges the contract
3) Unauthorized material alteration –
Material alteration in the terms of the contract without the consent of the other party
discharges the contract.
4) Merger –
When inferior rights of a person under a contract merge with superior rights under a new
contract, the contract with inferior rights will come to an end. Examples: Where a part-time
lecturer is made full-time lecturer, merger discharges the contract of part-time lecturer ship.

E) Discharge by breach of contract –

Breach means failure of a party to perform his obligations under a contract. Breach brings an end
to the obligations created by a contract.

F) Discharge by impossibility of performance –

Impossibility of performance results in the discharge of the contract. An agreement which is
impossible is void, because law does not compel to do impossible things.
 Example: A and B wanted to marry each other. Before the time fixed for
marriage, A goes mad. The contract becomes void.

 Breach of Contract and Remedies for breach of contract

– Section 73-75
Meaning of breach of contract –
When a promise or agreement is broken by any of the parties, we call it a breach of contract. So when either
of the parties does not keep their end of the agreement or does not fulfil their obligation as per the terms of
the contract, it is a breach of contract. Breach of contract can be actual breach or anticipatory breach.

A) Anticipatory Breach of Contract

As the name suggests, an anticipatory breach is a breach of contract before the time of performance. So, if
a promisor denies to perform his promise and signifies his unwillingness before the time for performance,
then it is an anticipatory breach of contract.
Examples –
a) Peter enters into a contract with John on May 30, 2018. In the contract, Peter agrees to sell his house
to John provided he receives a token amount of Rs 5,00,000 from John on or before June 30, 2018.
However, on June 15, 2018, John informs Peter that he will not be able to provide the token amount
on the said date, thereby expressing rejection of the contract.
b) . Peter enters into a contract with John on June 01, 2018. As per the contract, Peter agrees to sell his
guitar to John on June 10, 2018, for an amount of Rs 5,000. However, he sells this guitar to Oliver on
June 07, 2018. Hence, it is an anticipatory breach of contract due to Peter’s conduct.
When a promisor refuses to perform his promise leading to an anticipatory breach of contract, the
promisee is excused from performance or from further performance of his obligations. Also, he can either:

- Treat the contract as cancelled and file a suit against the other party for damages arising from the
breach. This suit can be filed immediately without waiting until the date of performance specified in
the contract.
OR

- Choose not to cancel the contract but treat it as an operative and wait until the time of performance
has passed before holding the other party responsible for the damages caused due to non-
performance.

B) Actual Breach of Contract

While an anticipatory breach is before the time of perfromance, an actual breach of contract is on the
scheduled time of performance of the contract. An actual breach of contract can be committed either:
1] At the time when the Performance of the Contract is Due
Peter enters into a contract with John promising to deliver 50 bags of cotton to him on June 30, 2018.
However, on the scheduled day, he fails to deliver the same. This is an actual breach of contract. Also, this
breach is at the time the performance of the contract is due.

2] During the Performance of the Contract

An actual breach of contract can also occur when one party fails to perform his obligation, during the
performance of the contract. This refusal can be expressed in words or by action.

Summary –
Breach of contract

Anticipatory breach Actual breach

Breach before the due date Breach on the due date

Promise has 2 options

Actual breach of Actual breach of
Contract on the contract during
Option 1 Option 2 due date of its performance
Performance
rescind the wait till the due date
contract and rescind the contract promisee can rescind Promisee can
immediately on the due date and the contract on the reject the
and claim claim damages due date and claim performance
damages damages and claim damages

Following are the remedies for the breach of contract –

A) Recession of Contract
When one of the parties to a contract does not fulfil his obligations, then the other party can rescind
the contract and refuse the performance of his obligations.
As per section 65 of the Indian Contract Act, the party that rescinds the contract must restore any
benefits he got under the said agreement. And section 75 states that the party that rescinds the
contract is entitled to receive damages and/or compensation for such a recession
B) Sue for Damages
Section 73 clearly states that the party who has suffered, since the other party has broken promises,
can claim compensation for loss or damages caused to them in the normal course of business.
Such damages will not be payable if the loss is abnormal in nature, i.e. not in the ordinary course of
business. There are two types of damages according to the Act,
 Liquidated damages - Sometimes the parties to a contract will agree to the amount payable in case
of a breach. This is known as liquidated damages.
 Unliquidated Damages - Here the amount payable due to the breach of contract is assessed by the
courts or any appropriate authorities.
C) Sue for Specific Performance
 This means the party in breach will actually have to carry out his duties according to the contract. In
certain cases, the courts may insist that the party carry out the agreement.
So if any of the parties fails to perform the contract, the court may order them to do so. This is a decree
of specific performance and is granted instead of damages.
For example, A decided to buy a parcel of land from B. B then refuses to sell. The courts can order B to
perform his duties under the contract and sell the land to A.

D) Injunction
An injunction is basically like a decree for specific performance but for a negative contract. An
injunction is a court order restraining a person from doing a particular act.
So, a court may grant an injunction to stop a party of a contract from doing something he promised not
to do. In a prohibitory injunction, the court stops the commission of an act and in a mandatory
isnjunction, it will stop the continuance of an act that is unlawful.
E) Quantum Meruit
Quantum meruit literally translates to “as much is earned”. At times when one party of the contract is
prevented from finishing his performance of the contract by the other party, he can claim quantum
meruit.
So he must be paid a reasonable remuneration for the part of the contract he has already performed.
This could be the remuneration of the services he has provided or the value of the work he has already
done.
 Indian Contract Act, 1872

Overview of
the chapter
Section 124 - 238

Contract of Contract of Contract of Contract of Contract of

Indemnity - Guarantee - Bailment - Pledge - Agency -
Section 124 & 125 Section 126-147 Section 148-171 Section 172-181 Section 182-238

Contract of Indemnity – Section 124 and 125

A) Meaning of Contract of Indemnity – Section 124

 Contract of indemnity can be defined as a legal contract between two persons whereby
one party commits to indemnify, i.e. to compensate or reimburse, the loss incurred to
the other party, by the conduct of the party, who is making the promise or by the
conduct of the third party.
 Person who promises to save the other party from
loss is called as indemnifier
 Person who is promised to be saved against loss is
called as indemnity holder.
 The contract of indemnity is a form of contingent
contract
 The object of contract of Indemnity should not be
unlawful.
Examples –
1) Beta Insurance Company entered into a contract with Alpha Ltd., to compensate for
loss caused by accidental fire to the company’s stock of goods up to Rs. 50,00,000 for
a premium of Rs. 1,00,000. This is an express form of a contract of indemnity.
2) Baburao asks Shyam to beat Raju promising to indemnify Shyam against the
consequences. Shyam beats Raju and is fined rupees 1 lakh. Now, Shyam cannot
claim this amount from Baburao because the object of the agreement is illegal
Note –Contract of Fire insurance and Contract of Marine Insurance are examples of contract
of Indemnity but Contract of Life Insurance is not a contract of indemnity

B) Rights of Indemnity Holder – Section 125

 Any kind of damages which the indemnity holder is bound to pay in any suit concerned with
any issue to which the contract of indemnity applies.
 Any expenses which the indemnity holder is bound to pay, so as to bring or defend the suit.
 All the amount which the indemnity holder has paid, in connection to the settlement of the
suit.

Contract of Guarantee – Section 126 - 147

Meaning of Contract of Guarantee – Section 126

- A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a
third person in case of his default.
- A guarantee may be either oral or written.
 There are 3 parties to contract of
Guarantee –

Principal Debtor -
Surety - Creditor -
The person in respect of
The person who gives the the person to whom the
whose default the
guarantee is called the guarantee is given is called
guarantee is given is called
"surety" the "creditor"
the "principal debtor"

Principal Contract -
Between PD and
creditor Example –
Bahubali advances a loan of rupees 10,000 to
Bhallal Dev. Kattappa who is the boss of Bhallal
There are 3 Contracts Dev promises that in case Bhallal Dev fails to
Secondary Contract - repay the loan, then he will repay the same. In
in contract of
Between surety and PD
Guarantee – this case of a contract of guarantee, Bahubali is
the Creditor, Bhallal Dev the principal debtor and
Kattappa is the Surety.
implied -
Between Surety and PD

Consideration under contract of guarantee – Section 127

Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.

Example –
Mari requests Salman to sell and deliver to him goods on credit. Salman agrees to do so, provided Sunil
will guarantee the payment of the price of the goods. Sunil promises to guarantee the payment in
consideration of Salman 's promise to deliver the goods to Mari.
This is a sufficient consideration for Sunil 's promise.

Surety’s liability – Section 128

- The liability of the surety is co- extensive with that of the principal debtor, unless it is otherwise
provided by the contract.
- In simple words, the surety is liable for what the PD is liable.
- Liability of surety is secondary

Types of guarantee –

There are 2 types of guarantee

Continuing guarantee -
Specific guarantee -
Section 129 -
Guarantee which is only for a specific transaction
Guarantee which continues for
series of tansactions

Liability of surety –
1) In case of specific guarantee – limited only up to the particular transaction
2) In case of continuing guarantee – liability continues till the discharge of all the transactions or
withdrawal of all the transactions
 Discharge of surety –

Modes of discharge

By invalidation of Contract of
By revocation By conduct of creditor
guarantee

Revocation of continuing guarantee – Revocation of continuing guarantee by

Section 130 surety’s death – Section 131
A continuing guarantee may at any The death of the surety results into
time be revoked by the surety, as to revocation of a continuing guarantee with
future transactions, by notice to the respect to future transactions. However,
creditor. surety’s estate remains liable for past
transactions which have already taken place

Liability of two persons, primarily liable, not affected by arrangement between them that one shall be
surety on others default – Section 132
Where two persons contract with a third person to undertake a certain liability, and also contract with
each other that one of them shall be liable only on the default of the other, the third person not being a
party to such contract, the liability of each of such two persons to the third person under the first
contract is not affected by the existence of the second contract, although such third person may have
been aware of its existence.

Example –
a) Salman and Shahrukh make a joint and several promissory note to Amir.
b) Salman makes it, in fact, as surety for Shahrukh, and Amir knows this at the time when the note is
made.
c) The fact that Salman, to the knowledge of Amir, made the note as surety for Shahrukh, is no answer
to a suit by Amir against Salman upon the note. In simple words, Amir can recover amount from
Salman as well as Shahrukh.

1) Discharge of surety by the conduct of the creditor –

 Discharge of surety by variance in terms of contract. – Section 133
Any changes made in the terms of the contract between the principal debtor and the
creditor without the surety’s consent, discharges the surety as to transactions subsequent
to the change.
Examples –
1) Akshay becomes surety to Chunkey for Bilal conduct as a manager in Chunkey's bank.
Afterwards, Bilal and Chunkey contract, without Akshay's consent, that Bilal’s salary shall
be raised, and that he shall become liable for one-fourth of the losses on overdrafts. Bilal
allows a customer to overdraw, and the bank loses a sum of money. Akshay is discharged
from his suretyship by the variance made without his consent and is not liable to make
good this loss.
2) Chunkey agrees to appoint Bilal as his clerk to sell goods at a yearly salary, upon Akshay 's
becoming surety to Chunkey for Bilal 's duly accounting for moneys received by him as
such clerk. Afterwards, without Akshay’s knowledge or consent, Chunkey and Bilal agree
that Bilal should be paid by a commission on the goods sold by him and not by a fixed
salary. Akshay is not liable for subsequent misconduct of Bilal.
 3) Chunkey contracts to lend Bilal 5,000 rupees on the 1st March. Akshay guarantees
repayment. Chunkey pays the 5,000 rupees to Bilal on the 1st January. Akshay is
discharged from his liability, as the contract has been varied.

 Discharge of surety by release or discharge of principal debtor – Section 134

The surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released, or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.

 Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor – Section 135
A contract between the creditor and the principal debtor, by which the creditor makes a
composition (settlement) with principal debtor, or promises to give time to principal
debtor for repayment, or promises not to sue the principal debtor, then the surety will be
discharged. However, surety will not be discharged if he assents to such terms.

Cases where surety is not discharged – 136 to 138

 Case 1 = Surety not discharged when agreement made with third person to give time to principal
debtor – Section 136
Where a contract to give time to the principal debtor is made by the creditor with a third person, and
not with the principal debtor, the surety is not discharged.

 Case 2 = Creditor's forbearance (delay) to sue does not discharge surety – Section 137
Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy
against him does not, in the absence of any provision in the guarantee to the contrary, discharge the
surety.

 Case 3 = Release of one co-surety does not discharge others – Section 138
Where there are co-sureties, a release by the creditor of one of them does not discharge the others;
neither does it free the surety so released from his responsibility to the other sureties.

 Discharge of surety of creditor's act or omission impairing surety's eventual remedy –

Section 139 –
If the creditor does any act which is inconsistent with the rights of the surety, or omits to do
any act which his duty to the surety requires him to do, and the eventual remedy of the
surety himself against the principal debtor is thereby impaired, the surety is discharged.

 Loss of security – Section 141

If the creditor parts with or loses any security given to him at the time of the guarantee,
without the consent of the surety, the surety is discharged from liability to the extent of the
value of the security.

2) Discharge of surety by invalidation of Contract of guarantee

 Guarantee obtained by misrepresentation – Section 142
When a misrepresentation is made by the creditor or with his knowledge or consent,
relating to a material fact in the contract of guarantee, the contract is invalid

 Guarantee obtained by concealment – Section 143

When a guarantee is obtained by the creditor by means of keeping silence regarding some
material part of circumstances relating to the contracts, the contract is invalid

 Failure of co-surety to join as a surety – Section 144

 When a contract of guarantee provides that a creditor shall not act on it until another
person has joined in it as a co-surety, the guarantee is not valid if that other person does not
join.

Rights of surety –

Rights of surety

Against the co-

Against the
Against the PD sureties - Right
creditor
to contribution

Right of Right of Right to share

Right to security Right to set-off
subrogation indemnity reduction

A) Rights against Principal Debtor –

1) Rights of subrogation – Section 140
If surety has made the payment to creditor on behalf of PD then surety will have all the
rights that creditor had against the PD
2) Right of indemnity – Section 145
In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but no sums which he has paid
wrongfully.

B) Rights Against the creditor –

1) Surety's right to benefit of creditor's securities – Section 141
a) A surety is entitled to the benefit of every security which the creditor has against the
principal debtor at the time when the contract of suretyship is entered into, whether
the surety knows of the existence of such security or not;
b) And if the creditor loses, or, without the consent of the surety, parts with such security,
the surety is discharged to the extent of the value of the security.
2) Right to set off –
if the creditor sues the surety, for the payment of principal debtor’s liability then the surety
may have the benefit of the set off, if any, that the PD had against the creditor.
3) Right to share reduction –
The surety has to claim the proportionate reduction in his liability if the PD becomes
insolvent

C) Rights Against Co-sureties –

1) Co-sureties liable to contribute equally – Section 146
Where two or more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and whether with or without
the knowledge of each other, the co-sureties, in the absence of any contract to the contrary,
are liable, as between themselves, to pay each an equal share of the whole debt, or of that
part of it which remains unpaid by the principal debtor
Examples –
1) Anil, Bilal and Chunkey are sureties to Dinesh for the sum of 3,000 rupees lent to Mukesh.
Mukesh makes default in payment. Anil, Bilal and Chunkey are liable, as between themselves, to
pay 1,000 rupees each.
2) Anil, Bilal and Chunkey are sureties to Dinesh for the sum of 1,000 rupees lent to Mukesh, and
there is a contract between Anil, Bilal and Chunkey that Anil is to be responsible to the extent of
one-quarter, Bilal to the extent of one- quarter, and Chunkey to the extent of one-half. Mukesh
 makes default in payment. As between the sureties, Anil is liable to pay 250 rupees, Bilal 250
rupees, and Chunkey 500 rupees.

D) Liability of co-sureties bound in different sums – Section 147

Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit.

Examples –
 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. A, B and
C are each liable to pay 10,000 rupees.
 A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in the penalty of 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 40,000 rupees. A is
liable to pay 10,000 rupees, and B and C 15,000 rupees each.
 A, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely,
A in the penalty of 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 70,000 rupees. A, B and
C have to pay each the full penalty of his bond.

Contract of Bailment – Section 148-171

Meaning of Bailment – Section 148

1) A bailment is a transaction whereby one person delivers goods to another person for some
purpose, upon a contract that they are, when the purpose is accomplished to be returned or
otherwise disposed of according to the directions of the person delivering them
2) Bailment is an act of delivering goods to a bailee for a particular purpose, without transfer of
ownership.
3) Bailment is derived from French word ‘ballier’ which means ‘to deliver’
4) The person who delivers the goods is called the bailor and the person to whom they are
delivered is called the bailee.
5) The ownership of the goods remains with the bailor, the bailee getting only the possession

Essential elements of contract of bailment –

1. Contract
2. Delivery of goods and delivery can be –
a) Actual delivery
b) Symbolic delivery
c) Constructive delivery
3. There should be purpose
4. Possession
5. Return of goods

Forms of bailment –
 (1)Delivery of goods
by one person to
another to be held for
the bailor's purpose.
Finder of
Goods. Gratuitous
bailment

Forms of
Delivering bailment
Hiring of
goods for goods
carriage

Delivering goods
(1)Delivering goods
for repair with or
to a creditor to serve
without
as security for a loan.
remuneration

There are two types of contract of bailment –

Gratuitous bailment - Non- gratuitous bailment -

Free of charge either for the benefit of bailor or both the parties get some benefit
for the benefit of the bailee

Duties of bailor –
A) To disclose faults in the goods – Section 150
 It is the duty of the bailor to disclose to the bailee faults in the goods bailed, of which the
bailor is aware
 The bailor is bound to disclose to the bailee faults which materially interfere with the use
of them, or expose the bailee to extraordinary risks
 And if he does not make such disclosure, he is responsible for damage arising to the bailee
directly from such faults
 If such goods are bailed for hire, the bailor is responsible for such damage, whether he was
or was not aware of the existence of such faults in the goods bailed

B) To bear extra-ordinary expenses – Section 158

 It is the duty of the bailor to pay extra ordinary expenses to bailee if the bailement is non-
gratuitous
 It is the duty of the bailor to pay all the expenses to the bailee in case of gratuitous
bailment

C) Duty to indemnify bailee for premature termination – Section 159

The bailor should compensate the bailee for the loss or damage suffered by the bailee that is in
excess of the benefit received in case where bailor has lent the goods gratuitously and decides
to terminate the bailment before the expiry of period of bailment.

D) The bailor is responsible to the bailee for any loss which the bailee may sustain - Section 164
 E) Duty to take the goods back –
 It is the duty of the bailor to receive the goods back.
 If he does not receive the goods back, bailor is liable to compensate bailee for all the
necessary expenses incurred.

Duties of bailee –
A) To take proper care of goods – Section 151
 According to section 151, it is the duty of a bailee to take care of goods bailed to him
 Bailee should take care of these goods as an ordinary man will take care of his goods of the
same value, quality, and quantity
 Thus, if the bailee takes due care of goods then he will not be liable for any loss, deterioration
of such goods.
 Also, the bailee needs to take the same degree of care of goods whether the bailment is for
reward or gratuitous.
 However, the bailee is not liable for any loss due to the happening of any act by God or public
enemies though he agrees to take special care of the goods.

B) Not to make unauthorize use of goods bailed –

 As per section 153, the Bailee shall not make any unauthorized use of goods bailed.
 In case he makes any unauthorized use, then bailor can terminate the bailment.
 Bailor can also claim for damages caused to goods bailed due to unauthorized use as per
Section 154.

C) Keeps goods separate from his own goods –

1) The bailee needs to keep the goods separately from his own goods.
2) He should not mix the goods under bailment with his own goods.
3) In case bailee mixes the goods with his own goods without the consent of the bailor, then:
a) Bailor also has an interest in the mixture
b) If the goods can be separated or divided, the property in the goods remains with both
the parties.
c) But, the bailee bears the expenses of separation or any damages arising from the
mixture.
d) If it is not possible to separate the goods, the bailee shall compensate the bailor for the
loss of goods.

D) Not to set adverse title –

A bailee must not set an adverse title to the goods bailed.

E) Return Goods – Section 160 and 161

a) The duty of the bailee is to return the goods without demand on the accomplishment of the
purpose or the expiration of the time period.
b) In case of his failure to do so, he shall be liable for the loss, destruction, deterioration, damages
or destruction of goods even without negligence

F) Return increase or profits – Section 163

A bailee shall return the goods along with any increase or profit accruing to the goods to the bailor,
in the absence of any contract to the contrary. For example, A leaves a hen in the custody of B. The
hen gets a chick. B shall deliver the hen along with the chick to A.

Rights of bailor –
1) Right to terminate bailment – Section 153
A contract of bailment is voidable at the option of the bailor, if the bailee does any act with
regard to the goods bailed, inconsistent with the conditions of the bailment
2) Return of goods – Section 159
When the goods are bailed for consideration, the bailor has the right to demand their returns as
and when he wants even if he lent them for a specific period of time or purpose.
3) Right to sue bailee –
The bailor has thee right to sue bailee for enforcing all the liabilities and duties of him and it
includes –
a) Right to claim compensation for loss caused to the goods because of negligence of bailee.
 b) Right to claim damages for unauthorized use of goods.
c) Right to demand back the goods.
d) Right to any accretion to the goods bailed.
e) Right to claim compensation for unauthorized mixing of goods.
4) Right to file suit against wrong doer – Section 180 & 181

Suit by a bailor and bailee against wrong doers – Apportionment of relief or compensation
Section 180 obtained by such suits – Section 181
a) If a third person wrongfully deprives the Whatever is obtained by way of relief or
bailee of the use or possession of the compensation in any such suit shall be distributed
goods bailed, or does them any injury between bailor and bailee as per their respective
then the bailee is entitled to use such interest.
remedies as the owner might have used
in the situation if no bailment was made.
b) Bailee or bailor can file suit against a third
person for any damages suffered or injury
caused.

Rights of bailee –
1) Right to deliver the goods to any one of the joint bailors – Section 165
If several joint owners bailed the goods, the bailee has a right to deliver them to any one of the
joint owners unless there was a contract to the contrary.
Example: A, B and C are the joint owners of a harvesting combine. They delivered it on hire to
D for one month. After the expiry of one month, D may return the “combine” to any one of
the joint owners namely, A, B or C.

2) Right to deliver the goods to bailor without title –

If the bailor has no title to the goods, and the bailee in good faith delivers them back to or
according to directions of the bailor, the bailee is not responsible to the owner in respect of
such delivery.

3) Right to apply to court to decide the title to the goods – section 167
If the goods bailed are claimed by the person other than the bailor, the bailee may apply to the
court to stop its delivery and to decide the title to the goods.
Example: Deepika, a dealer in T.V. delivered a T.V. to Rhea for using in summer vacation.
Subsequently, Shraddha claimed that the T.V. belonged to her as it was delivered only for
repairs, to Deepika and thus, Rhea should deliver it to her. In this case, Rhea may apply to the
Court to decide the question of ownership of the T.V. so that she may deliver it to the right
owner.

4) Right of Lien –
The bailee has a right to exercise lien i.e., to refuse to return the goods to the bailor until his
lawful charges are paid to him.
a) Particular lien - Where the bailee has, in accordance with the purpose of the bailment,
rendered any service involving the exercise of labour or skill in respect of the goods bailed,
he has, in the absence of a contract to the contrary, a right to retain such goods until he
receives due remuneration for the services he has rendered in respect of them.
b) General lien - A general lien is a type of lien used by the lien-holder to retain any of the
debtor’s goods in the possession of the lien-holder until any debt due from the debtor has
been paid. Insurance brokers, packers, stockbrokers and bankers have a general lien over
the property of their clients or customers

5) Right to indemnity – Section 166

a) Bailee should be indemnified by the bailor for any loss incurred to him by reasons that the
bailor was not entitled to make the bailment or to receive back the goods or to give
directions in respect to them.
b) If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or
according to the directions of, the bailor, the bailee is not responsible to the owner in
respect of such delivery

6) Right to claim compensation in case of faulty goods – Section 150

Bailee is entitled to claim compensation from the bailor or any loss caused to him due to failure
of the bailor to disclose any faults in the goods known to him
 Note –
If the bailment is for hire, the bailor will be liable to compensate even if he had not knowledge
of faults in the goods.

7) Right to Claim extraordinary damages –

If bailee is required to incur any extraordinary expenses then he can hold the bailor liable for
such expenses.

BASIS FOR GENERAL LIEN PARTICULAR LIEN

COMPARISON
Meaning General lien alludes to the right to keep Particular lien implies a right of the
possession of goods belonging to other bailee to retain specific goods bailed for
against general balance of account. non-payment of amount.
Availability Any goods, in respect of which the Only against the goods, in which skill
amount is due to another person. and labor is exercised.
Automatic No Yes
Right to sale goods No right to sale the goods. In general, there is no right to sell goods,
however, the right can be conferred to
bailee in special circumstances.
Exercised by Bankers, Wharfngers, factors, policy Bailee, pledgee, finder of goods, agent,
brokers, attorneys etc. partner, unpaid seller etc.

Termination of bailment –
1. When the period or purpose is over:
In case the bailment is for a specific period or purpose, it is terminated on the expiry of that
period or on the completion of the purpose.
2. When the bailee makes unauthorized use of the goods:
In case the bailee makes unauthorized use of the goods bailed, the bailment is voidable at the
option of the bailor.
3. When the subject-matter is destroyed or becomes illegal:
In case the subject-matter is destroyed or becomes illegal, the bailment is terminated.
4. At the will of the bailor:
Where the bailment is gratuitous, it can be terminated merely at the sweet will of the bailor.
However, the termination should not cause loss to the bailee in excess of the benefit derived by
him. In case the loss exceeds the benefit derived by the bailee, the bailor must compensate the
bailee for such a loss.
5. When the bailor or bailee dies:
A gratuitous bailment is terminated by the death of the bailor or bailee.

Finder of goods –
A) The term 'finder of goods' means a person who has found some goods belonging to another. When a
person comes across some article he is under no duty to pick them up, but if he picks them up, he
becomes a finder of goods and is subject to the same responsibility as a bailee.
B) The obligations of a finder of goods:
1) He must take reasonable care of the goods:
2) He must not use the goods for his own purpose.
3) He must not mix them with his own goods.
4) He must make appropriate efforts to find the true owner of the goods.
C) Rights of finder of goods
1) Right to retain goods: The finder can retain the goods against the true owner until he receives
compensation for trouble and expenses incurred by him in preserving the goods and finding out the
owner. This right is known as the finder's lien on the goods
2) Right to sue for reward (Section 168)
3) Right to claim expenses incurred
4) Right of sale:
Section 169 permits the finder to sell the goods in the following cases:
a. If the owner cannot be found after reasonable search; or
b. If found, the owner refuses to pay the lawful charges to the finder; or
c. If the thing is in danger of perishing or losing the greater part of their value; or
 d. If the lawful charges of the finder amount to two - thirds of their value.
5) A finder of goods has a right to keep the goods with him against the whole world except the true
owner.

Contract of Pledge – Section 172-182

Meaning of pledge – Section 172

1) Pledge is defined under Section 172 as the bailment of goods as security for a payment of a debt
or performance of a promise is called pledge/pawn.
2) The person who makes such a bailment is called a pledger or pawnor and the bailee is known as
pawnee

Essentials elements of pledge –

1) Delivery of goods: Delivery of the goods may be actual or constructive or symbolic.
2) Goods must be the subject matter of the contract of pledge. The goods pledged must be in
existence
3) Purpose of pledge is security for payment of debt.
4) Pledge is specie of bailment

Pawnee’s rights –
A) Right of retain the goods pledged - Section 173 -
pawnee has the right to retain the goods pledged till the debt is repaid along with the interest.
Example –
Sunny pledges his gold jewelry for some loan from a bank. In such a case bank has all the rights
to retain the gold jewelry not only for adjustment of loan amount but also for payment of
interest accrued on such loan amount.
B) Right to retention of pledged goods for subsequent debts - Section 174 –
The pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for
any debt or promise other than the debt or promise for which they are pledged; but such
contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent
advances made by the pawnee.
Analysis –
in simple words, pawnee will have the right to retain only those goods for which debt is
outstanding and not to retain the goods which are not subject matter of pledge
C) Pawnee's right as to extraordinary expenses Incurred - Section 175 –
Pawnee has the right to claim any extraordinary expenses incurred for the preservation of the
goods pledged.
However, pledgee has no right to retain the goods for such expenses.
D) Pawnee's right where pawnor makes default - Section 176 –
a) If the pawnor makes default in payment of the debt, or performance, pawnee may retain
the goods or sell the goods.
b) If the proceeds of such sale are less than the amount due in respect of the debt or promise,
the pawnor is still liable to pay the balance.
c) If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over
the surplus to the pawnor.

Pawnor’s Rights –
1. Right to redeem - Section 177
a) If the pawnor makes the repayment of principal as well as interest without any default then
in that case, pawnor has the right to redeem the goods which he has pledged.
b) Even if the pawnor makes default in repayment of principal or interest then also pawnor has
the right to redeem the goods pledged before actual sale but in this case pawnor will have
to pay additional expenses, if any.

2. Pledge where pawnor has only a limited interest - Section 179

Where a person pledges goods in which he has only a limited interest, the pledge is valid to the
extent of that interest

Pledge by non-owner of goods –

A) Pledge by mercantile agents - Section 178
 a) Where a mercantile agent is in possession of goods or the documents of title to goods with
the consent of the owner then any pledge made by him, when acting in the ordinary course
of business of a mercantile agent, shall be as valid provided that the pawnee acts in good
faith and has not at the time of the pledge notice that the Pawnor has no authority to
pledge.
b) Pledge in this case can be effected through pledge of documents like a bill of lading or a
railway receipt etc.

B) Pledge by person in possession under voidable contract Section 178A –

When the pawnor has obtained possession of the goods pledged by him under a contract
voidable under section 19 or section 19A, but the contract has not been rescinded (Cancelled) at
the time of the pledge, the pawnee acquires a good title to the goods, provided he acts in good
faith and without notice of the pawnor's defect of title.

C) Pledge by a co-owner in possession –

Where the goods are owned by many persons then any of the co-owner can pledge the goods
with the consent of others.

D) Pledge by seller or buyer in possession –

A seller who has the possession of goods after goods have been sold or a buyer who has the
possession of goods with the consent of seller before sale can make a valid pledge.
Provided, pawnee acts in a good faith and have no knowledge of defect in the title of pawnor.

BASIS FOR COMPARISON BAILMENT PLEDGE

Meaning When the goods are temporarily handed When the goods are delivered to act as
over from one person to another person security against the debt owed by one
for a specific purpose, it is known as person to another person, it is known as
bailment. the pledge.

Defined in Section 148 of the Indian Contract Act, Section 172 of the Indian Contract Act,
1872. 1872.

Parties The person who delivers the goods is The person who delivers the goods is
known as the Bailor while the person to known as Pawnor while the person to
whom the goods are delivered is known whom the goods are delivered is known as
as Bailee. Pawnee.

Consideration May or may not be present. Always present.

Right to sell the goods The party whom goods are being The party whom goods are being delivered
delivered has no right to sell the goods. as security has the right to sell the goods if
the party who delivers the goods fails to
pay the debt.

Use of Goods The party whom goods are being The party whom goods are being delivered
delivered can use the goods only, for the has no right to use the goods.
specified purpose.

Purpose Safe keeping or repairs, etc. As security against payment of debt.

Contract of Agency – Section 182-238

Meaning of Principal and agent – Section 182

Agent - An "agent" is a person employed to do any act for another, or to represent another in dealings
with third persons.
Principal - The person for whom such act is done, or who is so represented, is called the "principal".
The Rule of Agency is based on the maxim "Quit facitper alium, facitper se" i.e., he who acts through an
agent is himself acting.
 Who can employ agent? – Section 183
Any person who is of the age of majority according to the law, and who is of sound mind, may employ
an agent. In simple words, a person who is capable to contract can appoint agent.

Who may be an agent? – Section 184

Agent may be of sound mind and may be major.
Note – A minor or a person who is of unsound mind may be appointed as an agent but he will not be
liable to any parties in the contract of agency because agent is never a party to the contract.

Express
Agreement
- Section
186

Implied
Agency by Agreement
necessity - Section
Modes of 187
creation
of
Agency

Agency by Agency by
estoppel - Ratification
Section - Section
237 196-200

1) Express Authority – Section 186

An authority is said to be express when it is given by words, spoken or written.

2) Implied Authority – Section 187

An authority is said to be implied when it is to be inferred from the circumstances of the case;
and things spoken or written, or the ordinary course of dealing, may be accounted
circumstances of the case

3) Agency by estoppel – Section 237

a) Agency by estoppel arises when say Mr. A makes a representation to a third party, whether
by words or conduct, that B is his agent, and subsequently that third party deals with B as
A's agent in reliance on such representation. A will not be permitted (is estopped) to deny
the existence of the agency if to do so would cause damage (usually financial loss) to that
third party.
b) When an agent has, without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts or obligations, if he has by his
words or conduct induced such third persons to believe that such acts and obligations were
within the scope of the agent's authority.

4) Agency by Ratification – Section 196-200

Agency by ratification arises when the principal ratifies (that is, approves and adopts) an act
which has already been done in his name and on his behalf by the agent who in fact, had no
actual authority (whether express or implied) to act on the principal's behalf when the act was
done.

Rights of person as to acts done for him without his authority, Effect of ratification – Section 196
Where acts are done by one person on behalf of another, but without his knowledge or authority, he
may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they
had been performed by his authority.

Essentials of a valid Ratification –

 Ratification may be expressed or Implied [Section 197]
 Knowledge requisite for valid ratification [Section 198]
  The principal cannot ratify a part of the transaction which is beneficial to him and reject the rest.
[Section 199]
 Ratification of unauthorized act cannot injure third person [Section 200] –
E.g. - A holds a lease from B, terminable on three months' notice. C, an unauthorized person,
gives notice of termination to A. The notice cannot be ratified by B, so as to be binding on A.
 Ratification should be done within reasonable time.
 Ratification must be communicated to the other party.
 Act to be ratified should not be void or illegal, for e.g. payment of dividend out of capital is void
and cannot be ratified
 Ratification should be done of those act for which principal has authority.

5) Agency by necessity –
In certain circumstances, a person who has been entrusted with another’s property may have to
incur unauthorized expenses to protect or preserve it. This is called an agency of necessity.
Example – A sent a horse by railway. On its arrival at the destination, there was no one to receive
it. The railway company, is bound to take reasonable steps to keep the horse alive, was an agent
of the necessity of A.

Wife as Agent –
Where a husband and wife are living together, we presume that the wife has her husband’s authority to
pledge his credit for the purchase of necessaries of life suitable to their standard of living.

But the husband will not be liable if he shows that:

- he had expressly warned the tradesman not to supply goods on credit to his wife; or
- he had expressly forbidden the wife to use his credit; or
- he already sufficiently supplies his wife with the articles in question; or
- he supplies his wife with a sufficient allowance

Extent of Agent’s authority

Normal circumstances: Section 188 In case of emergency : Section 189

An agent having an authority to do an act, has He has an authority in an emergency to do all such acts for
all the authority to do every lawful thing which the purpose of protecting his principal from loss as would
is necessary in order to do such act. Thus an be done by a prudent person, in his own case under similar
agent having an authority to carry on a circumstances.
business has authority to do every lawful thing To constitute a valid agency in an emergency, following
necessary and which is usually done in the conditions must be satisfied.
course of conducting such business. (a) Agent should not be a in a position or have any
opportunity to communicate with his principal
within the time available.
(b) There should have been actual and definite
commercial necessity for the agent to act promptly.
(c) The agent should have acted bonafide and for the
benefit of the principal.
(d) The agent should have adopted the most
reasonable and practicable course under the
circumstances, and
(e) The agent must have been in possession of the
goods belonging to his principal and which are the
subject of contract

Duties of Agent –
A) Duty in conducting principal's business - Section 211
1. An agent is bound to conduct the business of his principal according to the directions given
by the principal.
 2. In the absence of any such directions according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business.
3. When the agent acts otherwise, if any loss be sustained, he must make it good to his
principal, and if any profit accrues, he must account for it.

B) Skill and diligence required from agent – Section 212

Agent must act always as a person with diligence and skill normally exercised in the trade. He
would otherwise be responsible to compensate the principal for any loss suffered by the
principal for want of his skill’
Example - A, an agent for the sale of goods, having authority to sell on credit, sells to B on
credit, without making the proper and usual enquiries as to the solvency of B. B at the time of
such sale is insolvent. A must make compensation to his principal in respect of any loss thereby
sustained.

C) Agent’s accounts – Section 213

An agent is bound to render proper accounts to his principal on demand.

D) Agent’s duty to communicate with principal – Section 214

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions.

E) If an agent deals on his own account in the business of the agency, without first obtaining the
consent of his principal and informing him with all material circumstances, the principal may
repudiate the transaction – Section 215

F) Not to deal on his own account - Section 216

If an agent, without the knowledge of his principal, deals in the business of the agency on his
own account instead of on account of his principal, the principal is entitled to claim from the
agent any benefit which may have resulted to him from the transaction. In simple words agent
cannot make secret profits.

G) Agent’s duty to pay sums received for principal – Section 218

Subject to such deductions, the agent is bound to pay to his principal all sums received on his
account.

Rights of Agent –
A) Right of retain out of sums received on principal's account - Section 217:
 The agent can retain, out of any sums received on account of the principal in the business of
the agency for the following payments:
 All moneys due to him in respect of advances made
 In respect of expenses properly incurred by him in conducting such business
 Such remuneration as may be payable to him for acting as agent.

B) Right to remuneration - Section 219

a) An agent has a right to receive the agreed remuneration or in absence of agreement, a
reasonable remuneration for rendering the services to the principal that are not voluntary or
gratuitous.
b) He becomes eligible to receive the remuneration as soon as he completes the work that he
undertook.

C) Agent not entitled to remuneration for business misconducted – Section 220

An agent who is guilty of misconduct in the business of the agency, is not entitled to any
remuneration in respect of that part of the business which he has misconducted.

D) Lien on Goods – Section 221

 a) Some agents who have the possession of goods, securities or properties of their principal also
have a lien on these goods, securities or properties regarding their remuneration and also for
any expenses or liabilities that they incur.
b) When he is an unpaid seller, he has a right to stop the goods in transit

E) Right to be Indemnified – Section 222 and 223

An agent represents his principal to the third parties. As per sections 222 and 223, an agent has a
right to be indemnified by his principal for all charges, expenses, and liabilities that he incurs during
the course of the agency.

A) Non-liability of employer of agent to do a criminal act – Section 224

Where one person employs another to do an act which is criminal, the employer is not liable to the
agent, either upon an express or an implied promise, to indemnify him against the consequences of that
Act.
Example –
 A employs B to beat C, and agrees to indemnify him against all consequences of the act. B
thereupon beats C, and has to pay damages to C for so doing. A is not liable to indemnify B for
those damages.
 B, the proprietor of a newspaper, publishes, at As request, a libel upon C in the paper, and A
agrees to indemnify B against the consequences of the publication, and all costs and damages
of any action in respect thereof. B is sued by C and has to pay damages, and also incurs
expenses. A is not liable to B upon the indemnity.

B) Compensation to agent for injury caused by principal's neglect – Section 225

The principal must make compensation to his agent in respect of injury1 caused to such agent by the
principal's neglect or want of skill.

Liability of Principal and Agents to third parties –

Liability of Principal and Agents to third

parties

Principal is liable ( principal is liable for Agent is personally liable (agent is

agent’s act ) personally liable for his act)

Cases where principal is liable for agent’s act –

1) When agent exceeds his authority and principal ratifies it – Section 227
When an agent does more than he is authorized to do, and when the part of what he does,
which is within his authority, can be separated from the part which is beyond his authority, so
much only of what he does as is within his authority is binding as between him and his principal.
In simple words, principal will only be liable for those acts which are authorized by him.

2) Principal is bound by the notice given to agent – Section 229

Any notice given to or information obtained by the agent, provided it be given or obtained in the
course of the business transacted by him for the principal, shall, as between the principal and
third parties, have the same legal consequences as if it had been given to or obtained by the
principal.

3) Liability of pretended agent - Section 235

A pretended agent is a person who represents himself to be an agent of another, when in fact
he has no authority from him, whatsoever if the principal ratifies his acts as agent, he has no
liability.
 But if the principal refuses to ratify his acts, he becomes personally liable to third party

4) Liability for Misrepresentation or fraud by an agent when agent is acting within his authority –
Section 238
Misrepresentation made, or frauds committed, by agents acting in the course of their business
for their principals, have the same effect on agreements made by such agents as if such
misrepresentations or frauds had been made or committed by the principals; but
misrepresentations made, or frauds committed, by agents, in matters which do not fall within
their authority, do not affect their principals.

5) Liability of principal inducing belief that agent's unauthorized acts were authorized Section
237 –
When an agent has, without authority, done acts or incurred obligations to third persons on
behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or
conduct induced such third persons to believe that such acts and obligations were within the
scope of the agent's authority.
Illustration –
A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C,
being ignorant of Bs instructions, enters into a contract with B to buy the goods at a price
lower than the reserved price. A is bound by the contract.

6) Where the Principal is unnamed –

When the agent discloses the existence of principal but does not disclose, the name of principal,
in such a case the principal is liable for the acts of the agent.

7) When agent acts in emergency and good faith

8) When agent is incompetent to contract.

Cases where agent is personally liable for his act –

1) When he represents that he has authority to act an behalf of a principal, but who does not
actually possess such authority or who has exceeded the authority and the alleged employer
does not ratify his acts - Section 235.

2) Undisclosed agent - Section 236

Where a contract is entered into by a person apparently in the character of agent, but in reality
in his own account.

3) When he signs a negotiable instrument in his own name without making it clear that he is
signing as an agent.

4) When he is working for a foreign principal.

5) Where he is acting for a principal who cannot be sued on account of his being a foreign
sovereign, ambassador etc.

6) Where trade, usage or custom holds him liable in certain kinds of business.

7) Where the agency is coupled with interest in the subject matter of the agency.

8) Principal not bound when excess of agent's authority is not separable [Section 228] : Where
an agent does more than he is authorised to do, and what he does beyond the scope of his
authority cannot be separated from what is within it, the principal is not bound to recognise the
transaction
Example - A authorizes B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of 6,000 rupees. A may repudiate the whole transaction
Miscellaneous
A) Consequence of inducing agent or principal to act on belief that principal or agent will be
held exclusively liable – Section 234
 When a person who has made a contract with an agent induces the agent to act upon the
belief that the principal only will be held liable, or induces the principal to act upon the belief
that the agent only will be held liable, he cannot afterwards hold liable the agent or principal
respectively.

B) Right of person dealing with agent personally liable – Section 233

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.

Termination of contract of agency –

Termination of contract of agency

By the act of the parties – By the operation of law –

a) Mutual agreement a) Performance of contract:
b) Revocation by Principal (Section 203 to 207) b) Expiry of time
c) Renunciation by Agent c) Death / Insanity (Section 209)
d) Insolvency
e) Destruction of subject matter
f) Parties becoming alien enemies.

A) Mutual agreement –
An agency may be revoked at any time by the principal and agent through mutual agreement.

B) Revocation by principal – Section 203-207

1) Revocation where authority has not been exercised – Section 203
The principal may revoke agent’s authority any time before agent has exercised the
authority given by the principal –
2) Revocation where authority has been partly exercised – Section 204
The principal cannot revoke the authority given to his agent after the authority has been
partly exercised
Example - A authorizes B to buy 1,000 bales of cotton on account of A, and to pay for it out
of A's moneys remaining in B‟s hands. B buys 1,000 bales of cotton in his own name, so as to
make himself personally liable for the price. A cannot revoke B's authority so far as regards
payment for the cotton.
3) Compensation for revocation by principal, or renunciation by agent – Section 205
Where there is an express or implied contract that the agency should be continued for any
period of time, the principal must make compensation to the agent, or the agent to the
principal, as the case may be, for any previous revocation or renunciation of the agency
without sufficient cause.
4) Notice of revocation or renunciation – Section 206
Reasonable notice must be given of such revocation or renunciation, otherwise the damage
thereby resulting to the principal or the agent, as the case may be, must be made good to
the one by the other.

5) Revocation and renunciation may be expressed or implied – Section 207

Revocation and renunciation may be expressed or may be implied in the conduct of the
principal or agent respectively.

When termination of agent's authority takes effect as to agent, and as to third persons – Section 208
The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes
known to him, or, so far as regards third persons, before it becomes known to them.
Examples –
 A directs B to sell goods for him, and agrees to give B five per cent. commission on the price fetched
by the goods. A afterwards, by letter, revoke B's authority. B, after the letter is sent, but before he
 receives it, sells the goods for 100 rupees. The sale is binding on A, and B is entitled to five rupees as
his commission.
 A, at Madras, by letter, directs B to sell for him some cotton lying in a warehouse in Bombay, and
afterwards, by letter, revokes his authority to sell, and directs B to send the cotton to Madras. B, after
receiving the second letter, enters into a contract with C, who knows of the first letter, but not of the
second, for the sale to him of the cotton. C pays B the money, with which B absconds. C's payment is
good as against A.

In the following 2 cases, agency is irrevocable –

1) Where the agent has incurred personal liability
2) Where the agency is couple with interest.

Sub-Agent and Substituted Agent

A) Sub-Agent –
a) The term sub-agent is defined in Section 191 as, "a sub-agent is a person employed by and
acting under the control of the original agent in the business of agency."
b) Thus a sub-agent is an agent appointed by the agent.
c) The relation of the sub-agent to the original agent is that of the agent and the principal.
d) The general rule of law is that an agent cannot delegate his powers to another without the
consent of the principal.
e) This general principal is based upon the Latin Maxim "delegatus non Protest delegate"
which means a delegatee cannot further delegate.
f) In the following cases, however, the agent may appoint a sub-agent:
 Where the principal has expressly allowed the appointment of a sub-agent.
 Where the principal knows that the agent intends to appoint a sub-agent but he does
not object to it.
 Where the custom of trade permits the appointment of a sub-agent.
 Where the act to be done is purely ministerial and does not involve exercise of
discretion or any skill.
 Where unforeseen emergencies arise which makes the appointment of subagent
necessary.
g) Where a sub-agent is properly appointed (as mentioned in above cases), the principal is
bound and is liable to third parties for his act, as if he were an agent originally appointed by
the principal. The agent is responsible to the principal for the acts of the sub-agents. The
sub-agent is responsible for his acts to the agent and not the principal.

B) Substituted Agent –
a) Substituted agents are not sub agents.
b) They are agents of the principal.
c) Where the principal appoints an agent and if that agent identifies another person to carry
out the acts ordered by principal, then the second person is not to be treated as a sub agent
but only as an agent of the original principal.
Example –
A' directs 'B' his solicitor to sell his property by auction and 'B' appoints 'C an auctioneer. In
this regard, 'C is an agent of 'A' and not a sub agent. While, selecting a "substituted agent" the
agent is bound to exercise same amount of diligence as a man of ordinary prudence and if he
does so he will not be responsible for acts or negligence of the substituted agent

Sub agent Substituted agent

According to Section 191 of the Indian Contract Act, A Substituted agent is a person who is named by the
1872 - A “sub-agent” is a person employed by, and Agent for performing such part of the business of the
acting undue the control of, the original agent in the agency as is entrusted to him .
business of the agency .
A sub-agent works under, the control and directions A substituted agent works under the control and
of the agent directions of the principal.
The agent delegates to the sub-agent a part of his The agent does not delegate any part of his duties to
own duties. the substituted agent
The sub-agent is responsible to the agent alone. The substituted agent is responsible to the principal
The agent is responsible to the principal for the acts The agent is not responsible to the principal for the acts
of the sub-agent of the substituted agent.
The sub-agent has no right of action against the The substituted agent can sue the principal for
principal for remuneration due to him. remuneration due to him
.
The agent remains liable for the acts of the sub- The agent's duty ends once he has named the
agent as long as the sub agency continues. substituted agent
There is no privity of contract between the principal There is privity of contract between principal and
and the sub-agent. substituted agent.