THE INDIAN CONTRACT ACT, 1872

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 INDEX

CHAPTER NAME PAGE NO.

A INTRODUCTION V

I PRELIMINARY 1-2

II NATURE OF CONTRACT 3-5

III KINDS OF CONTRACT 6-13

IV PROPOSAL OR OFFER 14-20

V ACCEPTANCE 21-24

VI CONSIDERATION 25-26

VII CAPACITY OF PARTIES 27-29

VIII FREE CONSENT 30-35

IX PERFORMANCE OF CONTRACT 36-39

X DISCHARGE OF CONTRACT AND FRUSTATION OF CONTRACT 40-42

XI QUASI CONTRACT 43

XII REMEDIES FOR BREACH OF CONTRACT 44-46

XIII INDEMNITY AND GUARANTEE 47-64

XIV BAILMENT AND PLEADGE 65-81

XV CONTRACT OF AGENCY 82-95

 THE INDIAN CONTRACT ACT, 1872

INTRODUCTION
The law of contract lays down the legal rules relating to promises: their formation, their performance, and
their enforceability. Explaining the object of the law of contract, Sir William Anson observes: “The law of
contract is intended to ensure that what a man has led to expect shall come to pass; that what has been
promised to him shall be performed.”
The word Contract’ is derived from the Latin word contructus which means “to work on contract.”
The law of contract is based on the principle laid down in the Latin phrase Pacta sunt servanda, which
means “agreements to be kept” or “pacts must be kept.”
Parties have the freedom to settle all the terms of their contract, subject only to the overall control of
law that there is no imposition (viz. undue influence, force, etc.), that the terms are reasonable and that
they are not opposed to public policy. For example, the parties may settle any consideration and the court
cannot interfere only because the consideration is inadequate or too small.
The law of contract in India is contained in the Indian Contract Act, 1872, which extends to the
whole of India except the State of Jammu and Kashmir. This Act is based mainly on English Common law
consisting of judicial precedents. The Act is not exhaustive as it does not deal with all the branches of the law
of contract. There are separate Acts which deal with contracts relating to negotiable instruments, transfer of
property, sale of goods, partnership, insurance, etc. Before 1930, the Act also contained provisions relating
to contracts of sale of goods and partnership.
Where no statutory provision to the contrary is in existence in the Indian Contract Act, the courts in
India have generally been guided by the Common Law of England.
The Act does not affect the provision of any Statute, Act or. Regulation not expressly repealed by it,
nor any usage or custom of trade, nor any incident of any contract not inconsistent with the provisions of
the Act (Sec. 1).

INDEX

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 Chapter I
PRELIMINARY

Preamble.- whereas it is expedient to define and amend certain parts of the law relating to contract;
Section 1. Short title, extent and commencement- This Act may be called the Indian Contract act, 1872. It
extends to the whole of India [except the state of Jammu and Kashmir]; and it shall come in to force on
the first day of the September, 1872.
Is the Indian contract Act, 1872 exhaustive in nature?
The Indian contract Act, 1872 is not exhaustive.

SCHEME OF INDIAN CONTRACT ACT, 1872

This Act has been divided into two parts:
a. General Principles [Ss. 1-75]
b. Specific Contract [Ss.124-238]

WHAT IS A CONTRACT?
A contract has been defined in section 2(h) as “an agreement enforceable by law.”
Thus, a contract consists of following two elements-
1. Agreement.
2. Legal obligation arising out of agreement.
According to Sir William Anson “A contract is an agreement enforceable at law made between two
or more persons by one or more to acts or forbearances on the part of other or others.”

NOW TO UNDERSTAND IT WE NEED TO KNOW:

What an Agreement is?
 Indian Contract Act Section 2(e) defines Agreement as “every promise and every set of promises
forming the consideration for each other is an agreement.”
In an agreement there is a promise from both sides. For example, A promises to deliver his watch to
B and in return B promises to Pay a sum of Rs. 5000 to A there is said to be an agreement between A
and B.
A promise is a result of an offer (proposal) by one person and its acceptance by the other. For example,
when A makes a proposal to sell his watch to B Rs. 5,000 and B accepts his proposal, there results a
promise between two persons.
Section 2(b) of the Act defines Promise as under:
“When the person to whom the proposal is made signifies his assent there to, the proposal is said to be
accepted. A proposal, when accepted becomes a promise. Thus, when there is proposal from one side and the
accepted of that proposal from other side, it results in a promise. This promise from the two parties to one
another is known as an agreement.”
“All contracts are agreement but all agreements are not contract”, because agreement of moral, religion
or social nature e.g. a promise to lunch together at a friend’s house or to take a walk together are not
contracts because they are not likely to create a duty enforceable by law for the simple reason that the
parties never intended that they should be attended by legal consequences. In other words “An agreement
which creates social obligation is not a contract.”
In business agreement the presumption is usually that the parties intend to create legal relations for
e.g. an agreement to buy certain specific goods at an agreed price e.g., 20 bags of wheat at Rs. 800 per bag
is a contract because it gives rise to duty enforceable by law, and in case of default on the other part of
either party an action for breach for breach of contract could be enforced through a court provided other
essential elements of a valid contract as laid down in section 10 are present, namely , if the contract was
made by free consent of the parties competent of contract, for a lawful consideration and with a lawful
object.

ACCEPTANCE
A proposal when accepted, result in an agreement. It is only after the acceptance of the proposal that a
contract between the two parties can arise. Sec. 2(b) defines ‘acceptance’ as follows:
“When the person to whom the proposal is made signifies his assent there to, the proposal is said to be accepted.
A proposal, when accepted becomes a promise. Thus, acceptance is the assent given to a proposal.”

CONSIDERATION
Consideration constitutes the very foundation of the contract. An agreeme not supported by consideration
CHAPTER I PRELIMINARY

is void.
Section 2 (d), Indian Contract Act defines consideration as under:
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or
does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or
promise is called a consideration for the promise.”

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 Chapter II
NATURE OF CONTRACT

According to Section 10, all agreements are contracts if they are made by the free consent of the parties,
competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the act
to be void, and, where necessary, satisfy the requirements of a law as to writing or attestation or registration.

THE ESSENTIALS OF VALID CONTRACT ARE AS FOLLOW:

Lawful Offer and Acceptance i.e. Offer from One Party and its Acceptance by the Other
There must be a ‘lawful offer’ and a ‘lawful acceptance’ of the offer, thus resulting in an agreement. The
adjective “lawful’ implies that the offer and acceptance must satisfy the requirements of the contract Act
in relation thereto.

Intention to Create Legal Obligations

There must be an intention among the parties that agreement should be attached by legal consequences
and create legal obligations. Agreements of social or domestic nature do not contemplate legal relation, and
as such they do not give rise to a contract.

For e.g.;
(a) An agreement to dine at a friend’s house is not an agreement intended to create legal relations and
therefore is not a contract.
(b) Agreements between husband and wife also lack intention to create legal relationship and thus do not
result in contracts.
In Balfour v. Balfour, where the defendant was a civil servant stationed in Ceylon. He and his wife
enjoying leave in England. When the defendant was due to return to Ceylon, his wife could not accompany
him because of her health. The defendant agreed to send her Rs. 300 a month as maintenance expenses
during the time they were thus forced to live apart. She sued for breach of the agreement. Her action was
dismissed on the ground that no legal relation had been contemplated and therefore there was no contract.
 Lawful Consideration
The third essential element of a valid contract is the presence of ‘consideration’. Consideration has been
defined as “the price paid by one party for the promise of other”. An agreement is legally enforceable only
when each of the parties to it gives something and gets something. The something given or obtained is the
price for the promise and is called ‘consideration’. But only those considerations are valid which ‘lawful’.
According to Section 23 “the consideration or object of an agreement is lawful, unless-
i It is forbidden by law;
ii Is of such a nature that, if permitted, It would defeat the provisions of any law;
iii It is fraudulent; or
iv Involves or implies injury to the property of another;
v Is 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.

Contractual Capacity of Parties

The parties to an agreement must be competent to contract; otherwise it cannot be enforced by a court of
law. In order to be competent to contract according to section 11 the parties must be:
i. Of the age of majority
ii. Of sound mind
iii. Must not be disqualified from contracting by any law to which they are subject.
Thus, if any of the parties to agreement suffer from minority, lunacy, idiocy, drunkenness, etc., the
agreement is not enforceable at law.

Free Consent
Consent means that the parties must have agreed upon the same thing in the same sense (section 13). Free
consent of all the parties to an agreement is another essential element of a valid contract.
There is absence of the ‘free consent’, if the agreement is included by any of the following factors:
(a) Coercion (section 15)
(b) Undue influence (section 16)
(c) Fraud (section 17)
(d) Misrepresentation (section 18)
CHAPTER II NATURE OF CONTRACT

(e) Mistakes (section 20-22)

If the agreement has by any of the first four factors, the contract would be voidable or void as the case
may be.

Lawful Object
For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a
lawful object.
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 The object for which the agreement has been entered in to must not be fraudulent or illegal or immoral
or opposed to public policy or must not imply injury to the person or property of another (section 23)
If the object is unlawful for one or the other of the reasons mentioned above the agreement is void.

Oral Writing and Registered

According to Indian contract act, a contract may be oral or in writing.
But in certain other special cases it lays down that the agreement, to be valid, must be in writing or/
and registered.

Certainty
Section 29 of the contract Act provides that “Agreements, the meaning of which is not certain or capable
of being made certain, are void.
In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain.
Illustration:
Amit agrees to sell Priya “a hundred pieces of soap.” There is nothing whatever to show what kind of soap
was indented. The agreement is void for uncertainty i.e. whether it was bathing soap, cloth or utensils
washing bar.

Not Expressly Declared Void

The agreement must not have been expressly declared to be void under the Act. Sections 24-30 specify
certain types of agreements, which have been expressly declared to be void.
For e.g.
An agreement in restraint of marriage. (section 26)
An agreement in restraint of trade (section 27)
An aAgreement in restraint of legal proceedings. (section 28)
An agreement by way of wager (section 30) etc.
Has been expressly declared void agreement.
CHAPTER II NATURE OF CONTRACT

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 Chapter III
KINDS OF CONTRACT

KINDS OF CONTRACT
The following chart explains the types of contract:

Kind of Contract

On the basis of it enforceability On the basis of mode of its creation

Valid Express
Voidable Implied
Void
Unenforeable
Illegal
Valid
The term enforceability means right of one party to the Contract (i.e. plaintiff) to approach court of
law in case when the other party (defendant) does not fulfill its promise given under the Contract.

Valid Contract
Valid contract is an agreement enforceable by law [section 2 (h)]. An agreement becomes enforceable by
law when all the essential elements of a valid contract as enumerated in section 10 are present.

Voidable Contract
According to section 2(i) “A contract which is enforceable by at the option of one or more of the parties
thereto, but not at the option of the other or others, is a voidable contract;
 Thus, voidable contract is one that is enforceable by law at the option of one of the parties. Until it is
avoided it is a valid contract.
When a Contract Becomes Voidable?
A contract becomes voidable when the consent of one of the parties to the contract is obtained by
a) Coercion (Section 15)
b) Undue influence (Section 16)
c) Fraud (Section 17)
d) Misrepresentation (Section 18)
Such a contract is voidable at the option of the aggrieved party i.e. the party whose consent was so
caused. But the party whose was so caused i.e. aggrieved party must exercise his option of rejecting the
contract within a reasonable time, and otherwise the contract cannot be repudiated.
Illustration
A, intending to deceive B, falsely represents that five hundred maunds of indigo are made annually at
A’s factory, thereby induces B to buy the factory. The contract is voidable at the option of B.
Amit threatens to shoot Bhanu if he does nit sell his car to Amit for Rs. 50,000. Bhanu agrees. The
contract has been brought by coercion and is voidable at the option of Bhanu.
Other Circumstances Under which a Contract Becomes Voidable
The Indian contract Act has laid down certain other situation also under which a contract becomes voidable.
When a contact contains reciprocal promises, and one party to the contract prevents’ the other from
performing his promise, then the contract becomes voidable at the option of the party so prevented (section
53).
Illustration
A and B contract that B shall execute certain work for A for a thousand rupees. B is ready and willing
to execute the work accordingly, but A prevents him from doing so. The contract is voidable at the
option of B; and, if he elects to rescind it, hr is entitled to recover from A compensation for any loss
which he has incurred by its non performance.
When a party to the contact promises to do a certain ‘thing within a specified time, but fails to do it,
then the contract becomes voidable at the option of promisee, if the intention of the parties was that time
should be of the essence of the contract.
E.g. Mohan agrees to sell and deliver 210 bags of pulses to Sohum for Rs. 5000 within four days. But
Mohan does not supply. The contract becomes voidable at the option of Sohum.
CHAPTER III KINDS OF CONTRACT

Void Contract
The word ‘void’ means ‘not binding in law’. Section 2(j) defines: A contract which ceases to be enforceable
by law becomes void when it ceases to be enforceable.

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 Void Agreements
According to Section 2(g) “an agreement not enforceable by law is said to be void”. The similarity between
void contracts and void agreements is that both do not give rise to any legal consequences.
Which are Expressly Declared’ Void Agreements?
The last essential of a valid contract as declared by Section 10 is that it must not be one which is ‘expressly
declared to be void by the Act. Thus, there arises a question, as to what are ‘expressly declared’ void
agreements?
The following agreements have been ‘expressly declared’ to be void by the Indian, contract Act:
(Section 24)
(Section 25)
(Section 26).
(Section 27).
(Section 28).
(Section 29).
(Section 30).
(Section 32)
(Section 56).

Agreement Unlawful in Parts

According to section 24 of the Indian Contract Act “if any part of a single consideration for one or more
objects, or any one or any part of any one of several consideration for a single object, is unlawful, the
agreement is void.”

Agreements without Consideration

Section 25 declares that an agreement without consideration is void. This is subject to few exceptions.

Agreements in Restraint of Marriage

Every individual enjoys the freedom to marry and so according to Section 26 of the Contract Act “every
agreement in restraint of the marriage of any person, other than a minor, is void.”
However, an agreement restraining the marriage of a minor is valid under this Section.
CHAPTER III KINDS OF CONTRACT

Agreements in Restraint of Trade

Section 27 declares, “Every agreement by which anyone is restrained from exercising a lawful profession, trade
or business of any kind, is to that extent void.”
Thus no person is at liberty to deprive himself of the fruit of his labor, skill or talent, by any contracts
that he enters into. It is to be noted that restraint should be reasonable.
Illustration

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An agreement no sell all produce to a certain party, with a stipulation that the purchaser was bound to
accept the quantity, was held valid because it aimed to promote business and did not restrain it (Mackenzie
vs. Striramiah).

Exception of Restraint of Trade

Yes, an agreement in restraint of tread is valid in the following cases:
i. Sale of goodwill
ii. Partners’ agreements:
iii. Negative provisos in service agreements
An agreement of service by which a person binds himself during the term of the agreement, not to
take service with anyone else, is not in restraint of lawful profession and is valid.

Agreements in Restraint of Legal Proceedings

According to section 28 of this Act,” every agreement-
(a) By which any party thereto is restricted absolutely from enforcing his right under or in respect of any
contract, by the ususal legal proceedings in the ordinary tribunals, or which limits the time within
which he may thus enforce his rights; or
(b) Which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability,
under or in respect of any contract on the expiry of a specified period so as to restrict any party from
enforcing his rights, is void to that extent.

Difference Between Voidable and Void Contract

Void Voidable
1. A void agreement has no legal effect from the 1. Voidable contract is valid and enforceable until
beginning (ab-initio). it is repudiated or rescinded.
2. Void agreement is void from the beginning and 2. The defect in voidable contract is curable and
its defect is incurable. may be ignored.
3. A void agreement deprives even a third party 3. In voidable contract, third party gets a valid title
from getting any right from such agreement. from a person claiming under such contract.
4. An aggrieved party is entitled to compensation
4. No question of compensation arises from non-
for loss or damage suffered by him on account of
performance of void agreement.
voidable contract.
CHAPTER III KINDS OF CONTRACT

Uncertain Agreements
According to uncertain agreements, the meaning of which is not certain, or capable of being Trade certain,
are void”. Thus, if the words used by the parties are vague or indefinite, the law cannot enforce the agreement.
Illustration
i. A agrees to sell to B “a hundred tons of oil.” There is nothing whatever to show what kind of oil was
intended. The agreement is void for uncertainty.
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 ii. A, who is a dealer in coconut oil only, agrees to sell to B “five liters of oil.” The nature of A’s trade
affords an indication of the meaning of the words, and A has entered into a contract for the sale of five
liter of coconut oil.
iii. A agrees to sell to B his car at a price to be fixed by C. As the price is capable of being made certain
there is no uncertainty here to make the agreement void.
iv. A agrees to sell to B “his bike for rupees twenty five thousand or rupees fifty thousand.” There is
nothing to show which of the two prices was to be given. The agreement is void.
Further an agreement “to enter into an agreement in future” is void for uncertainty unless all the
terms of the proposed agreement are agreed expressly or implicitly.

Wagering Agreements
Literally the word wager’ means ‘a bet’ something stated to be lost or won on the result of a doubtful issue,
and, therefore, wagering agreements are nothing but ordinary betting agreements.
Section 30 lays down that “agreements by way of wager are Void and no suit shall be brought for
recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any
game or other uncertain event on which any wager is made.
Illustration
i. Thus where A and B mutually agree that if India win today A will pay B Rs 1,100 and if it does not B
will pay A Rs 1,100 or
ii. Where X and O enter into an agreement that on tossing up a coin, if it falls head upwards X will pay
Rs 500 and if it falls tail upwards 0 will pay X Rs 500, there is a wagering agreement.

Exception to the Section 30

Horse Racing
This Section makes an exception in favor of certain prizes for horse racing by providing further that “This
Section shall not be deemed to render unlawful a subscription, or contribution, or agreement to subscribe
or contribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount
of five hundred rupees or upwards, to be awarded to the winner or winners of any horse race.”
Thus, a bet on a horse race carrying a prize of Rs. 500 or more to the winners has been made valid
under the exception. But with a view to protecting the poor persons from gambling, a bet on a horse race
carrying a prize of less than Rs. 500 remains a wager.
CHAPTER III KINDS OF CONTRACT

Agreements Contingent on Impossible Events

According to Section 36 Contingent agreements to do or not to do anything, if an impossible event appears,
are void, whether the impossibility of the event is known or not to the parties to the agreement at the time
when it is made”.
Illustration
i. Ana agrees to pay Bindu Rs 1,000 (as a loan) if two straight lines should enclose a space. The agreement
10
 is void)
ii. Ashu agrees to pay Bhanu Rs. 1,000 (as a loan) if Bhanu will marry Ashu’s daughter, Panorama.
Panorama was dead at the time of the agreement. The agreement is void.

Agreements to do Impossible Acts

According to section 56 “A agreement to do an act impossible is itself is void.”
Illustrations
i. A agrees with B to discover treasure by magic. The agreement is void.
ii. A agrees with B to walk with a speed of 100 Kilometers per hour if A gives him Rs. 1000. The agreement
is void.

Unenforceable Contracts
An unenforceable contract is one that is valid in itself, but is not capable of being enforced in a court of
law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time
barred by the law of limitation.
Illustration
i. An oral arbitration agreement is unenforceable because the law requires an arbitration agreement to
be in writing.
ii. Similarly, a bill of exchange or promissory note, though valid in itself, becomes unenforceable after
three years from the date the bill or note falls due, being time barred under the Limitation Act.

Illegal or Unlawful Contract

The word ‘illegal’ means ‘contrary to law’ and the term ‘contract means ‘an agreement enforceable by law.
As such to speak of an ‘illegal contract involves a contradiction in terms, because it means something like
this-an agreement enforceable by law and contrary to law.- Moreover, being of unlawful nature, such an
agreement can never attain the status of a contract. An illegal agreement is void ab-initio.
An agreement is illegal and void if its object or consideration:
Is forbidden by law or
Is of such a nature that , if permitted, it would defeat the provision 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 (Section 23)
CHAPTER III KINDS OF CONTRACT

Thus, an agreement to commit murder or assault or robbery or to make a gift in consideration of illicit
intercourse would be illegal and void ab-initio.
Which contracts are covered under Mode of Creation?
The following are the three kinds of contract from point of mode of creation
I. Express Contract: Where both the offer and acceptance constituting an agreement enforceable at law
are made in words spoken or written, it is an express contract.

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 Illustration
i. Kishore tells Suman on telephone that he offers to sell his car for Rs 2,00,000 and Suman in reply
informs Kishore that she accepts the offer; there is an express contract.
ii. Implied Contract: Where both the offer and acceptance constituting are agreement enforceable at
law are made otherwise than in words i.e., by acts and conduct or the parties, it is an implied contract.
Illustration
(a) Where A, a coolie in uniform takes up the luggage of 6 to be carried out of the railway station without
being asked by B, and B allows him to do so, then the law implies that B agrees to pay for the services
of A, and there is an implied contract.
(b) Similarly, where M, a professional shoe shiner starts polishing the shoes of N without being requested
to do so, and N allows M to polish his shoes knowing that M expects to be paid for the service, there
comes into existence an implied contract and N is under obligation to pay to M.
It is relevant to state that in respect of mode of creation, certain contracts may be a mixture of the
‘express’ and ‘implied’ types of contracts.
Illustration
i. A offer to buy B’s scooter for Rs 14,000 and B accepts the offer by sending the scooter itself. Here A’s
offer is expressed in words and B’s acceptance is implied from his conduct. It is a contract of mixed
character
III. Quasi Contract: Such a contract does not arise by virtue of any agreement, express or implied between
the parties but the law infers or recognizes a contract under certain special circumstances.
Sections 68-72 of the Contract Act describes the cases, which are to be deemed ‘Quasi contracts’.

CONTINGENT CONTRACTS (SECTION 31)

According to Section 31, a contingent contract “is a contract to do or not to do something, it’ some event,
collateral to such contract, does or does not happen.” For example, A contracts to pay B Rs. 10,000 if B’s house
is burnt, this is a contingent contract. The payment of the amount is contingent on the happening of the
collateral event i.e. burning of the house.

Enforcement of Contingent Contract

The rules governing the enforcement of various kinds of contingent contracts are as follows:
(i) Contracts contingent on an event happening - Contingent contracts to do or not to do anything if
an uncertain future event happens cannot be enforced unless and until that event happened. If the
CHAPTER III KINDS OF CONTRACT

event becomes impossible, the contract becomes void (Section 32).

For example, A makes a contract with B to buy B’s house if A survives C. This contract cannot be
enforced by law unless and until C dies in A’s life-time. Likewise, A makes a contract with B to sell
a horse to B at a specified price, if C, to whom the horse has been offered refuses to buy him. The
contract cannot be enforced unless and until C refuses to buy. But where A contracts to pay B a sum
of money if B marries C, C dies without being married to B, the contract becomes void.
(ii) Contracts contingent on the event not happening— Contingent contracts to do or not to do
anything if an uncertain Suture event does not happen, ‘can be enforced when the happening of that
12
 event becomes impossible, and not before (Section 33).
For example, A agrees to pay B a sum of money if a certain ship does not return. The ship is sunk. The
contract can be enforced when the ship sinks.
(iii) Contracts contingent on the future conduct of a living person— If the event contemplates the
way in which a particular individual will act at an unspecified time, the event shall be considered to
become impossible when such person does anything which renders it impossible that he should act so
within any definite time, or otherwise than under further contingencies (Section 34). If for example,
a person promises to marry a certain person and matries another, his marriage with the promisee is
then deemed to have become impossible.
(iv) Contracts contingent on happening of specified event within fixed time— If the contract
contemplates the happening of the event within a certain time, the contract becomes void if the event
does not happen or its happening becomes impossible before the expiry of that time. Where the
contract is to be performed if the event does not happen within a specified time, its performance can
be demanded if the event does not happen or its happening becomes impossible before the expiry of
that time (Section 35).
Thus, if A promises to pay B a sum of money if a certain ship returns within a year. The contract may
be enforced if the ship returns within the year, and becomes void if the, ship is burnt within the year.
(v) Contracts contingent on impossible event— If the performance is made to depend upon an event
which is already impossible ,the contract is void whether or not the fact is known t-6-nhe-parties
(Section 36). For example, A agrees to pay B Rs. 1,000 if two straight lines should enclose a space, the
agreement is void.

CHAPTER III KINDS OF CONTRACT

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 Chapter IV
PROPOSAL OR OFFER

MEANING OF TERM PROPOSAL OR OFFER

The first essential for creating a contract is a valid offer or proposal (the term ‘offer’ has been used in
English law and the term ‘proposal’ under the Indian law). Sec. 2(a) defines “proposal” as follows:
“When one person signifies to another his willingness to do or to abstinence, from doing
anything, with a view to obtaining the assent of that other such act or, abstinence, he is said to
make a proposal”.
The person making the proposal’ or ‘offer’ is called the promisor ‘offeror’, the person to whom the offer is
made is called the ‘offeree’, and the person accepting the offer is called the ‘promisee’ or ‘acceptor.

COMMUNICATION OF PROPOSAL
The first part of the definition of “proposal” lays emphasis upon the requirement that the willingness to
make a proposal should be “signified”. To signify means to indicate or declare. In the traditional language
of the law of contract, it means that the proposal should be communicated to the other party. The process
of making a proposal is completed by the act of communicating it to the other party. Section 3 recognises
the modes of communication:

S. 3. Communication, Acceptance and Revocation of Proposals

The communication of proposals, the acceptance of proposals, and the revocation of proposals and
acceptances, respectively, are deemed to be made by any act or omission of the party proposing, accepting
or revoking, by which he intends to communicate such proposal, acceptance or revocation, or which has
the effect of communicating it.
Thus, a proposal may be communicated in any way which has the effect of laying before the offeree
the willingness to do or abstain. It may, for example, be done by words of mouth, or by writing, or even by
conduct.
Implied Proposals
A man frequently expresses his desire to do something or to get something done by his actions. “Words
are not the only medium of expression. Conduct may often convey as clearly as words a promise, or an
assent to a proposed promise. An offer and acceptance need not always be formal, nor does the law of
contract require that consent to a contract must be in writing. Offer and acceptance can be spelt out from
the conduct of the parties which covers not only their acts but also omission.

S. 9. Promises, Express and Implied

In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express.
In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.

Communication When Complete

S. 4. Communication when complete. — The communication of a proposal is complete when it comes to
the knowledge of the person to whom it is made.
Therefore, an offer cannot be accepted unless and until it has been brought to the knowledge of the
person to whom it is made. This principle enabled the Allahabad High Court in Lalman Shukla v Gauri
Datt to deal with a matter involving a very crucial question on this point. Court said:
“Though an offer may be made to the whole world, a contract can arise only by acceptance
of the offer. Hence knowledge of the terms of the offer essential for acceptance. Thus where
a person sent his servant in search of his missing boy and subsequently offered a reward to
anyone who would found the boy, the servant, on finding the boy, could not claim the reward,
as his search for the boy could not be regarded as a consideration for the promise of reward.”

GENERAL OFFERS
It was suggested in the old case of Weeks v Tybald that an offer must be made to a definite person. That
case arose out of the defendant’s affirmation to the public that he would give £ 100 to him that should
marry his daughter with his consent. The plaintiff alleged that he did so and sued the defendant. Rejecting
the action, the court said: “It is not averred nor declared to whom the words were spoken.” The difficulty
suggested was that if an offer of this kind addressed to several persons could be accepted, the offeror would
find himself bound in innumerable contracts. This was, however, soon overruled.
The modern position is that an offer may be made to the world at large. But the contract is not made
with all the world. Contract is made only with that person who comes forward and performs the conditions
CHAPTER IV PROPOSAL OR OFFER

of the proposal. The principle is thus stated in Anson: “An offer need not be made to an ascertained person,
but no contract can arise until it has been accepted by an ascertained person.”
“A company offered by advertisement to pay £100 to anyone “who contracts the increasing
epidemic influenza, colds or any disease caused by taking cold, after having used the ball
according to printed directions”. It was added that “£ 1000 is deposited with the Alliance
Bank showing our sincerity in the matter”. The plaintiff used the smoke balls according to the
directions but she nevertheless subsequently suffered from influenza. She was held entitled to
recover the promised reward.”
15
 Section 8 of the Contract Act Incorporates this Principle
S. 8. Acceptance by performing conditions, or receiving consideration.— Performance of the conditions
of a proposal, or the acceptance of any consideration for a reciprocal promise which may be offered with a
proposal, is an acceptance of the proposal.
The principle of the section was followed by YEARS CJ of the Allahabad High Court in Har Bhajan
Lal v Har Charan Lal and applied to a situation where the terms of a general offer were substantially,
though not literally complied with.
“A young boy ran away from his father’s home. The father eventually issued a pamphlet,
offering a reward in these terms: “Anybody who finds trace of the boy and brings him home,
will get Rs 500.” The plaintiff was at the Dharamshala of a railway station, there he saw a boy,
overheard part of the conversation, realized that the boy was the missing boy and promptly
took him to the Railway Police Station and sent a telegram to the boy’s father that he had
found his son. It was held that the handbill was an offer open to the whole world and capable
of acceptance by any person who fulfilled the condition, and that the plaintiff substantially
performed the condition and was entitled to the amount offered.”

OFFER AND INVITATION TO TREAT (OFFER)

An offer should be distinguished from an invitation to receive offers. When a man advertises that he has
got a stock of books to sell, or houses to let, there is no offer to be bound by any contract. Where party,
without expressing his final willingness, proposes certain terms on which he is willing to negotiate, he does
not make an offer, but only invites the ‘other party to make an offer on those terms. This is perhaps the
basic distinction between an “offer” and an “invitation” to receive offers. The Privy Council in Harvey v
Facey has explained the distinction.
The plaintiffs telegraphed to the defendants, writing:
“Will you sell us Bumper Hall Pen? Telegraph lowest cash price”. The defendants replied, also by a telegram:
“Lowest price for Bumper Hall Pen, £ 900”.
The plaintiffs immediately sent their last telegram stating: “We agree to buy Bumper Hall Pen for £900
asked by you.”
The defendants, however, refused to sell the plot of land at that price. The plaintiffs contended that by
quoting their minimum price in response to the enquiry the defendants had made an offer to sell at that
price. But the Judicial Committee turned down the suggestion. Their Lordships pointed out that in their
first telegram, the plaintiffs had asked two questions, first, as to the willingness to sell and, second, as to
the lowest price. The defendants answered only the second, and gave only the lowest price. They reserved
CHAPTER IV PROPOSAL OR OFFER

their answer as to the willingness to sell. Thus, they had made no offer. The last telegram of the plaintiffs
was an offer to buy, but that was never accepted by the defendants. “Their Lordships are of opinion that
the mere statement of the lowest price at which the vendor would sell contains no implied contract to sell
at that price to the person making the inquiry.”

16
WHAT ARE THE ESSENTIALS OF A VALID OFFER?
A valid offer must be conformity with the following rules:

An offer may be ‘Express’ or ‘Implied:

An offer may be made either by words or by conduct. An offer that is expressed by words, spoken or written,
is called “Express offer’ and the one which is inferred from the conduct of a person or the circumstances of
the case is called an ‘Implied offer’
Illustrations
I. Mintu says to Nivesh that he will sell his cycle to him for Rs. 14, 00. This is an express offer.
II. A shoe shiner starts shining passenger shoes, without being asked to do so, in such circumstances that
any reasonable man could guess that he expects to be paid for this, he makes an implied offer.

An offer must contemplate to give rise to legal consequences and be capable of creating legal
relations:
If the offer does not intend to give rise to legal consequences, it is not a valid offer in the eye of law. In social
agreements or domestic arrangements the presumption is that the parties do not intend legal consequences
to follow the breach of agreement.
Illustrations
An offer to a friend to dine at the offeror’s place, or An offer to one’s wife to show her a movie is not a valid
offer because such agreement cannot give rise to a binding agreement, even though it is accepted and there
is consideration,

The terms of the offer must be certain, definite i.e. not loose or vague.
If the terms of the offer are not definite and certain, it does not amount to a lawful offer.
Illustrations
i. Anil purchased a horse from Yogita and promised to buy another, if the first one proves lucky. Anil
refused to buy the seconds horse. Y cannot enforce the agreement it being loose and vague.

An invitation to make offer is not an offer:

An offer must be distinguished from invitation to receive offer. In the case of invitation to receive offer the
CHAPTER IV PROPOSAL OR OFFER

person sending out the invitation does not make a offer but “only invites the other party to make an offer.
For examples,
(a) Quotation, catalogues of prices or display of goods with price marked thereon do not constitute an
offer. These are instead an invitation offer and hence if a customer asks for goods or makes an offer,
the shopkeeper is free to accept the offer or not.

17
 An offer may be ‘Specific’ or ‘General:
An offer is said to be specific when it is made to definite person or persons. Such an offer can be accepted
only by the person or persons to whom it is made.
Illustration
i. Where if makes an offer to N to sell his bicycle for Rs. 200, there is a specific offer and N alone can
accept it a general offer. On the other hand, offer which is made to the world at large or public in
general and may be accepted by any person who fulfils the requisite condition.

An offer must be communicated to the offeree:

An offer is effective only when it is communicated to the offeree. Until the offer is made known to the
offeree, there can be no acceptance and no contract.

An offer can be made subject to any terms and conditions.

As offeror may attach any terms and conditions to the offer he makes. He may even prescribe the Y mode
of acceptance. The offeree will have to accept at the terms of the offer. There is no contract, unless all the
terms of the offer are complied with and accepted in the mode prescribed. As regards mode of acceptance,
it must be noted that in case of deviated acceptance.
Illustration
i. If the offeror asks for sending the acceptance ‘by telegram’ and the offeree sends the acceptance ‘by
post, the offeror may decline to treat that acceptance as valid acceptance except he gives a notice to
that effect to the offeree within a reasonable time after the acceptance is communicated to him. If he
does not inform the offeree as to this effect, he is deemed to have accepted the deviated acceptance.

Two identical cross-offers do not make a contract.

When two parties make identical offers to each other. The offers are Cross-offers’ ‘Cross-offers’ do not
constitute acceptance of one’s offer by the other and as such there is no completed agreement.
Illustration
i. On 11 April 1980 Amithab wrote a Balram offering to sell him his house at Rs. 8, 00, 000. On the same
day, Balram wrote to Amithab offering to buy his house at Rs. 8, 00, 00. The emails crossed in the post.
There is no concluded contract between Amithab and Balram, because the offers were simultaneous,
each being made in ignorance of the other, and there is no acceptance of each other offer.
CHAPTER IV PROPOSAL OR OFFER

The answer to a question is not an offer.

The terms of an offer should be clear so that there is no confusion whether it is valid offer or an answer to
a question. An answer to a question cannot be taken as an offer.
Illustration
i. A send a telegram to B “Will you sell us Bumper Hall Pen (plot of land)? Telegraph lowest cash price?”
B telegraphed lowest price as Rs. 1 crore. A sends the telegram stating that” I agree to purchase the
18
 Bumper Hall Pen for 1 crore. Please send us your title details.” B refused to sell the plot of land at that
price. A brought legal action against B. The court held that B did not make any offer to sell plot at
that price, he simply answered the question asked by A. Thus B never expressed his willingness to sell
therefore he had made no offer.

WHEN AN OFFER LAPSES OR CAN BE REVOKED?

An offer lapses and becomes invalid i.e. comes to an end in the following circumstances:

An offer lapses after stipulated or reasonable time.

According to Section 6(2) “An offer lapses if acceptance is not communicated within the time prescribed
in the offer, or if no time is prescribed, within a reasonable time”. What is a reasonable time is a Question
of fact depending upon the circumstances of each case.
Illustration
i. An offer made by telegram suggests that a reply is required urgently and if the offeree delays the
communication his acceptance even by a day or two, the offer will be considered to have lapsed.

An offer lapses by not being accepted in the mode prescribed, or if no mode is prescribed, in
some usual and reasonable manner.
According to Section 7, “if the offeree does not accept the offer according to the mode prescribed the offer
does not lapse automatically. It is for the offeror to insist that his proposal shall be accepted only in the
prescribed manner, and if he fails to do so he is deemed to have accepted the acceptance”.

An offer lapses by rejection.

An offer lapses if the offeree has rejected it. The rejection may be express i.e., by words spoken or written,
or implied.
Illustration
i. Viplesh offered to sell his house to Pawan for Rs 9, 00,000. Pawan offered Rs. 8, 00,000 for which
price Viplesh refused to sell. Subsequently Pawan offered to purchase the house for Rs. 9, 00,000.
Viplesh, declined to continue to his original offer. Pawan filed a suit to obtain specific performance
of the alleged contract. The court dismissed the case and held that Viplesh was justified because no
contract had come into existence, as Pawan, by offering Rs. 8,00,000, had rejected the original offer.
Subsequent willingness to pay Rs.9, 00,000 could be no acceptance of Viplesh’s offer as there was no
CHAPTER IV PROPOSAL OR OFFER

offer to accept. The original offer had already comes to an end on account of ‘counter offer’
ii. Anmol, offered to sell his car to Bhanu for Rs. 1, 25,000. Bhanu said that he accepted the offer. if he
was appointed as General Manager of Anmol’s factory. Bhanu’s acceptance is “conditional acceptance’
which amounts to rejection of Anmol’s offer and there is no contract.

Counter Proposal
An acceptance with a variation (e.g. introduction of new terms) is no acceptance: it is simply a counter
proposal, which must be accepted by the original promisor before a contract is made. A counter offer
19
 implies that the stage of negotiation has not yet passed. A counter offer puts an end to the original offer and
it cannot be revived by subsequent acceptance by the acceptor unless it is renewed.
A case illustrative of counter offer is Hyde v. Wrench, where in response to an offer to sell an estate at
a certain price, the plaintiff made an offer to buy at a lower price. This offer was refused and subsequently,
the plaintiffs sought to accept the initial offer. It was held that no contract was made as the initial offer did
not exist at the time that the plaintiff tried to accept it, the offer having been revoked by the counter offer.
Illustration
i. Chintu makes an offer to Dimpu by letter. Immediately on receiving the letter Dimpu writes a letter
rejecting the offer. Before the rejection reaches Chintu, Dimpu changes his mind and telephones his
acceptance. There would be a contract between Chintu and Dimpu and the rejection shall not be
effective.

An offer lapses by the death or insanity of the offeror or the offeree before acceptance.

An offer lapses by revocation.

Revocation by non-fulfillment of a condition prior to acceptance.

An offer stands revoked if the offeree fails a condition precedent to acceptance. ILLUSTRATION:
i. Ashu offers to’ sell his mobile to Rajesh, for Rs. 4,000, if Rajesh joins the Lions Club within a week, the
offer hands revoked and cannot be accepted by Rajesh, if Rajesh fails to join the Lions club.

An offer lapses by subsequent illegality or destruction of subject matter.

An offer lapses if it becomes illegal after it is made, and before is accepted. In the same manner, an offer
may lapse if the thing, which is the subject matter of the offer, is destroyed or substantially impaired before
acceptance.
CHAPTER IV PROPOSAL OR OFFER

20
 Chapter V
ACCEPTANCE

A proposal, when accepted, results in an agreement. It is only after the acceptance of the proposal that a
contract between the two parties can arise.
According to 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.
The person making the proposal does not become bound thereby until acceptance. As soon as his
proposal is accepted that is known as promise whereby both the parties become bound.
When the proposal or acceptance is made in words, the promise is said to be express. When the
proposal or acceptance is made other than in words, the promise is said to be implied.
The offeree is not bound to accept the offer. He is free to reject it or make it to lapse by non-acceptance.
There are certain essential requirements of a valid acceptance-

COMMUNICATION OF ACCEPTANCE
1“When the person to whom the proposal is made signifies his assent thereto, the proposal said to be
accepted”. It means that the offeree must signify his assent, I communicate the acceptance.
When the parties are face-to-face communication could be oral.

1
 When they are at distant place communication could be made by post, by telegram, by a message on
phone through a messenger, or in any other reasonable manner. Sometimes the conduct of a person might
indicate his assent.
For example, when a passenger boards a bus and travels thereby, he impliedly assents to pay the
necessary fare. In order to create a contract acceptance of the offer and intimation of acceptance by some
external manifestation, which the law regards as sufficient is necessary.
The following rules should be kept in mind regarding the acceptance:
(a) Acceptance Express or Implied:

Mere silence is no acceptance. Silence does not per se amounts to communication. However, situation

their silence would be sufficient [Re Selectmove Ltd. (1995) 1 WLR 474].
(b) Communication of acceptance to third person:

acceptance is posted at a wrong address or to a wrong person (third person), that will not bind the

(d) Mode of communication:

Section 7 provides that acceptance has to be made in manner prescribed by the proposer (if not

such acceptance within reasonable time and if he fails to do so, the contract is concluded.
(e) When Communication of acceptance complete:
When the parties are in the presence of each other, the contract is concluded when accepted is
communicated to the proposer. This is ordinary rule.
As-soon as the communication of acceptance is complete that results in a contract whereby both the
parties become bound. In case the parties to the contract are present at the same place, one making

When the parties are at a distance and are contracting through post or by messengers, the proposer
become bound as soon as the acceptance is put in the course of transmission to him (e.g. when letter of
acceptance is posted by acceptor). But the acceptor will become bound only when the communication
of acceptance is received by the proposer i.e. ‘comes to the knowledge of the proposer.

ACCEPTANCE BY POST
According to Sec. 4 of this Act, the communication of a proposal is complete when it comes to knowledge
of the person to whom it is made.
CHAPTER V ACCEPTANCE

The communication of acceptance is complete-

as against the proposer, when it is put in the course of transmission to him so as to be out of the
power of the acceptor.
as against the acceptor, when it comes to the knowledge of the proposer.

22
Illustration
i. B accepts A’s proposal by a letter sent by post.
The communication of the acceptance is complete,
As against A, when the letter is posted;
As against B, when the letter is received by A.
In Adams v Lindsell13 (1818) 106 ER 250, on Sept. 2, the defendants sent a letter offering to sell goods to
the plaintiff. The letter added, “receiving your answer in course of post.” The letter reached the plaintiffs on
5th Sept. On the same day, the plaintiffs posted their letter of acceptance which reached defendants on 9th
Sept. The defendants had sold the goods on Sept. 8th. Held that a complete contract arises on the date when
the letter of acceptance is posted in due course (i.e. on Sept. 5th). Thus there is a binding contract between the
parties.

ACCEPTANCE SHOULD BE ABSOLUTE AND UNQUALIFIED

Section 7. Acceptance must be absolute. In order to convert a proposal into a promise the acceptance
must-

(2) be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in
which it is to be accepted. If the proposal prescribes a manner in which it is to be accepted, and
the acceptance is not made in such manner, the proposer may, within a reasonable time after the
acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed
manner, and not otherwise; but if he fails to do so, he accepts the acceptance.
2The acceptance of an offer must be absolute and unqualified and it should be expressed in some usual

and reasonable manner unless the tender prescribed any other manner in which it should be acceptance.
For a valid acceptance it is also essential that the acceptance should be absolute and unqualified.
When the, letter of acceptance contemplates future negotiations for finalization of the terms of contract,
there arises no contract, Here, unqualified means unconditional.
This section provides that in order to convert a proposal in to a promise, the acceptance must be
absolute and unqualified i.e. without any qualification or condition. For valid acceptance, there must be an
ad idem “concurrence of mind” i.e. agreeing on the same thing in the same sense and at the same time.

ACCEPTANCE SHOULD BE EXPRESSED IN USUAL/PRESCRIBED MANNER

According to sec. 7 (2), the acceptance must be “expressed in some usual and reasonable manner, unless
the proposal prescribes the manner in which it is to be accepted.”
It means that if the manner of acceptance has been prescribed by the proposal the acceptance has to
CHAPTER V ACCEPTANCE

be in the prescribed manner, otherwise the same may me made in some usual or reasonable manner.
i. Usual and Reasonable Manner:
Usual and reasonable manner of acceptance means the manner, which is usually adopted in a particular
kind of transaction according to the usage or custom of trade. Acceptance by post, telegram, telephone

23
 or though messenger by mouth or by conduct may be considered to be a usual.
ii. Prescribed Manner:
If the proposal prescribes any particular manner of acceptance, the acceptance must be made in that

iii. Silence is not acceptance:

accepted.
Mere silence is no acceptance. Silence does not per se amount to communication. However, situation

their silence would be sufficient [Re Selectmove Ltd. (1995) 1 WLR 474]
iv. Mental acceptance ineffectual:

Felthouse v. Bindley

letter put told Bindley, an auctioneer, to keep the horse out of a sale of his farm. Stock, as he intended
to reserve it for his uncle Mr. X. Bindley sold the horse by mistake, and Mr. X sued him for conversion

auction sale took place, there was no contract and therefore Me X had no right to complain of the sale.
Illustration
i.
her drawer and forgot all about it. This is UN communicated acceptance and does not amount to
acceptance and so do not make a contract. Silence is not acceptance and mental acceptance is not
considerable by law.

REVOCATION

a complete contract comes in to existence. Thus, revocation is an option given to the parties to stop the
contract from coming in to existence.

Revocation of Acceptance
Section 5 of this act provides that ”An acceptance may be revoked at any time before the communication
of the acceptance is complete as against the acceptor, but not afterwards”
CHAPTER V ACCEPTANCE

Illustration
A proposes, by a letter sent by post, to sell his house to B.
B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moments when B posts his letter of acceptance, but
not afterwards.
24
 Chapter VI
CONSIDERATION

Consideration constitutes the very foundation of the contract. An agreement not supported by consideration
is void (Section 25, Contract Act). The fact that a promise has been made for consideration goes to show
that parties contemplated the creation of legal obligation.
Section 2 (d), Indian Contract Act defines consideration as under:
“When, at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing, or promises to do or to abstain from doing
something, such act or abstinence or promise is called a consideration for the promise.”
Thus Consideration means, “The price paid for the promise”.
The three ingredients of this definition of consideration are:
I. That the act or abstinence, which is to be a consideration for the purpose, should be done at the desire
of the promisor,
II. That is should be done by promise or any other person,
III. That the act or abstinence may have been already executed or is in the process of being done or may
still be executory i.e. it is promised to be done.
Sir Frederick Pollock said that:
“An act or forbearance of one party, or the promise thereof, is the price for which the promise of
the other is bought, and the promise thus given for value is enforceable.”
There are following essentials to be satisfied in order that there is a valid consideration: -
i. Consideration to be given at the desire of the promisor.
ii. Consideration to be given by the promisee or any other person.
iii. Consideration may be Past, Present or Future in so far as the definition says that the promisee:
Has done or abstained from doing, or Does or abstains from doing, or Promises to do or to abstain
from doing, something
iv. There should be some act, abstinence or promise by the promisee, which constitutes consideration for
the promise
 It should be noted that Consideration need not be Adequate: Inadequacy of consideration is no bar
to a valid contract, unless it is an evidence of unfree consent. It mean, a contract which is supported by
consideration is valid irrespective of the fact the consideration is inadequate.
Are there Exceptions when Agreement without consideration is Valid?
As a general rule, declares that an agreement without consideration is void. Yes, Section 25, however,
mentions three exceptions, when there is no need of any consideration for the validity of the contract.

Promise Due to Natural Love and Affection

When the promise is made in favour of a near relation on account of natural love and affection, the same
is valid even though there was no consideration for such a promise.
Illustration
i. A promise, for no consideration, to give to B Rs. 1000. This is void agreement.
ii. A for natural love and affection, promises to give his son B Rs. 1.000. A put his promise to B into
writing and register it. This is a contract.

Compensation for Past Voluntary Services

When something has been done “at the desire of the promisor”, that constitutes a good consideration in
respect of a subsequent promise to compensate for what has already been done.
Illustration
i. A finds B’s purse and gives it to him, B promises to give A Rs 50, this is contract.
ii. A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contract.
iii. A rescued B from drowning in the river, and B, appreciating the service that has been rendered
promises to pay Rs 1,000 to A. There is a contract between A and B.

Promise to Pay a Time Barred Debt

Another situation when an agreement is a valid contract even without any consideration is’ a promise to
pay a time-barred debt.
A time barred debt cannot be recovered and therefore a promise to repay such debt consideration,
hence the importance of this exception.
Illustration
i. A owes B Rs 10,000, but the debt is barred by the Limitation Act. A makes a promise to pay B Rs. 5000
CHAPTER VI CONSIDERATION

on account of the debt. This is a contract.

Gift
A gift (which is not agreement) does not require consideration in order to be valid
Thus, in all of above mentioned four cases, an agreement is a contract even though there is no
consideration.
26
 Chapter VII
CAPACITY OF PARTIES

According to Section 11: “Every person is competent to contract who is of the age of majority according to
the law which he is subject, and who is of sound mind, and is not disqualified from contracting by any law
which he is subject.”
Three categories of persons are not competent to contract-
I. A person who has not attained the age of majority, (the age of majority is 18 years )
II. A person who is of unsound mind.
III. A person who has been disqualified from contracting by any law to which he is subject
Effects of minor agreement
A minor’s agreement is void ab initio.

MINOR’S AGREEMENTS
The law regarding minor’s agreements may be summed up as under:
An agreement by a minor is absolutely void and inoperative as against him:
In the leading case of Mohori Bibi v Dharmo Das Ghosh, a minor executed a mortgage for Rs 20,000 and
received Rs 8,000 from the mortgagee. The mortgagee filed a ‘suit for the recovery of his mortgage money
and for sale of the property in case of default. The Privy Council held that an agreement by a minor was
absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor
could he have the minor’s property sold under his mortgage.

Beneficial Contracts
The decision in Mohoribibi case is confined to cease where a minor is charged with obligations and the
contracting party seeks to enforce those obligations against him. Accordingly, a minor is allowed to enforce
a contract, which is of some benefit to him and under which he is required to bear no obligation. A minor
will have the option of retiring from a beneficial contract on attaining majority.
 PERSONS OF UNSOUND MIND
As stated earlier, as per Section 11 of the Contract Act, for a valid contract, it is necessary that each party
to it must have a ‘sound mind’.
Section 12 of the Contract Act defines the term ‘sound mind’ as follows: A person is said to be of sound
mind for the purpose of making a contract, if, at the time when he makes it, he is capable of understanding
it and of forming a rational judgment as to its effects upon his interests..
The section further states that:
(i) “A person who is usually of unsound mind, but occasionally of sound mind, may make a contract
when he is of sound mind.” Thus, a patient in a lunatic asylum, who is at intervals of sound mind, may
contract during those intervals.
(ii) “A person who is usually of sound mind, but occasionally of unsound mind, may not make a Contract
when he is of unsound mind.”
Illustration
a) A patient in a lunatic asylum, who is, at intervals, of sound mind, may contract during those intervals.
b) A sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a
contract, cannot contract whilst such delirium drunkenness lasts.

UNSOUNDNESS OF MIND MAY ARISE FROM

Idiocy
It is God given and permanent, with no intervals of saneness. The mental power of an idiot are completely
absent because of lack of development of the brain;

Lunacy or Insanity
It is a disease of the brain. A lunatic loses the use of his reason due to some mental strain or disease. Of
course he may have lucid interval of sanity.

Drunkenness
It produces temporary incapacity, till the drunkard is under the effect of intoxication, provided it is so
excessive as to suspend the reason for a time and create impotence of mind;
CHAPTER VII CAPACITY OF PARTIES

Hypnotism
It also produces temporary incapacity, till the person is under the impact of artificially induced sleep;

Mental Decay
It is on account of old age, etc. In cases where the contract is sought to be avoided on any of the above
grounds, the burden of proof lies on the party who sets up such a disability; but if unsoundness of mind is
once established the burden of proving a lucid interval is on him, who sets it up.
28
What shall be effects of agreements made by persons of unsound mind
An agreement entered into by a person of unsound mind is treated on the same footing as that of minor’s,
and therefore an agreement by a person of unsound mind is absolutely void and inoperative as against him
but he can derive benefit under it.

DISQUALIFIED PERSONS
Incompetent persons, as per Section 11, is those who are “disqualified from contracting by any law to which
they are subject” Thus

Alien Enemies
Alien friend can contract but an alien enemy can’t contract. An alien (citizen of a foreign country) living
in India can enter into contracts with citizens of India during peacetime only, and that too subject to any
restrictions imposed by the Government in that respect. On the declaration of a war between, his country
and India, he becomes an alien enemy and cannot enter into contracts. Contracts entered into before the
declaration of the war stand suspended and cannot be performed during the course of war, of course, they
can be revived after the war is over provided they have not already become time-barred.

Foreign Sovereigns and Ambassadors

One has to be cautious while entering into contracts with foreign sovereigns and ambassadors, because
whereas they can sue others to enforce the contracts entered upon with them, they cannot be sued without
obtaining the prior sanction of the Central Government. Thus they are in a privileged position and are
ordinarily considered incompetent to contract.

Convict
A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is
incompetents (a) to enter into contracts, and (b) to sue on contracts made before conviction. On the expiry
of the sentence, he is at liberty to institute a suit and the Law of Limitation is held in abeyance during the
period of his sentence.

Married Women
Married women are competent to enter into contracts with respect to their separate properties (Stridhan)
CHAPTER VII CAPACITY OF PARTIES

provided they are major and are of sound mind. They cannot enter into contracts with respect to their
husbands’ properties. A married woman can, however, act as an agent of her husband and bind her
husband’s property for necessaries supplied to her, if he fails to provide her with these.

Insolvent
An adjudged insolvent (before an ‘order of discharge) is competent to enter into certain types of contracts
i.e., he can incur debts, purchase property or be an employee but he cannot sell his property which vests in
the Official Receiver. After the order of discharge,’ he is just like an ordinary citizen.
29
 Chapter VIII
CAPACITY OF PARTIES

A mere consent is not enough for a valid contract. One of the essentials of a valid contract mentioned in
section 10 is that the parties should enter into the contract with their ‘Free Consent.
According to Section 14, consent is said to be free when it is not caused by
(1) Coercion, as defined in Section 15, or ,
(2) Undue influence, as defined in Section 16 or
(3) Fraud, as defined in section 17 or
(4) Misrepresentation, as defined in Section 18 or
(5) Mistake, subject to the provisions of section 20, 21 and 22.
If the consent of one of the parties is not free consent, i.e., one has caused it because of the above stated
factors the contract is not a valid one.
When consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation,
the agreement, is a contract voidable at the option of the party whose consent was so caused. If, however, the
consent is caused by mistake the agreement is void. For example, a person is induced to sign an agreement
by fraud, he may, on discovering the truth, either uphold the contract or reject it. Where consent is caused
by mistake, the agreement is void. A void agreement is not enforceable by law.
Examples of no free consent –
i. A threatens to shoot B, if B does not agree to sell his property to A at a stated price. B’s consent
obtained by coercion.
ii. A, a man enfeeble by disease or age, is induced, by B’s influence over him as his medical attendant, to
agree to pay B an unreasonable sum for his professional services, B employs undue influence.

Coercion
According to Section 15, Coercion is the committing, or threatening to commit, any act forbidden by the
Indian Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any
person whatever, with the intention of causing any person to enter into an agreement.
Illustrations
i. A clear illustration of coercion would be consent obtained at the point of pistol, or by threatening to
cause hurt, or by intimidation. The threat of suicidal amounts to coercion within section 15. Where a
contract was made to avoid the threatened prosecution, this was held to be no coercion (Askari Mirza
v. Bibi Jai Kishori (1912) 16 IC 344)
ii. A Madrasi gentleman died leaving a young widow. The relatives of the deceased threatened the widow
to adopt a boy otherwise they would not allow her to remove the dead body of her husband for
cremation. The widow adopted the boy and subsequently applied for cancellation of the adoption. It
was held that her consent was not free but induced by coercion, as any person who obstructed a dead
body from being removed for cremation, would be guilty of an offence under Section 297 of the I.P.C.
The adoption was set aside (Ranganayakamma v. Alwar Setti)
iii. Lalit threatens to shoot Manoj, if he does not let out his house to him. Manoj agrees to let out his to
Lilit. The consent of Manoj has been induced by coercion.

Undue Influence
Section 16 defines “Undue influence” as:
(1) A contract is said to be induced by “undue influence” where the relation subsisting between parties
are such that one of the parties is in a position to dominate the will of the other, and u that position to
obtain an unfair advantage over the other.
(2) In particular and without prejudice to the generality of the foregoing principle, a person deemed to be
in a position to dominate the will of another-
(a) Where he holds a real or apparent authority over the other; or where he stands in fiduciary relation to
the other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently af-
fected by reason of age, illness or mental or bodily distress.
(3) Where a person who is in a position to dominate the will of another, enters into a contract with him,
and the transaction appears, on the face of it or on the evidence adduced, to be unconscious able, the
burden of proving that such contract was not induced by undue influence shall lie upon the person in
a position to dominate the will of the other.
Illustration
i. A having advance money to his son, B, during his minority, upon B’s coming of age obtains, by misuse
of parental influence, a bond from B for a greater amount that the sum due in respect of the advance,
A employs undue influence.
CHAPTER VIII CAPACITY OF PARTIES

ii. Raja, a moneylender, advances Rs.50, 000 to Mahesh, a farmer, and by undue influence, induces
Mahesh to execute a bond for Rs. 1, 00,000 with interest at 10 percent per month. The court may set
the bond aside, ordering Mahesh to repay the s.50, 000 with such interest as may deem just A person
who has been induced to enter into a transaction (e.g., a gift, contract or guarantee) by the undue
influence of another (the wrongdoer) is entitled to set that transaction aside as against the wrongdoer.
The effect of undue influence, like coercion, is to make the contract voidable.
According to sec. 16 (1), where the relations subsisting between the parties are such that one of the
parties is in a position to dominate the will of other, and uses that position to obtain an unfair advantage
over the other, there is said to be undue influence.
31
 According to sec. 16 (2), a person is said to be able to dominate the will of another (a) where he holds
a real or apparent authority over the other, or where he stands in a fiduciary relation to the other, or (b)
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.
According to sec. 16 (3), where a person who is in position to dominate the will of another enters
into a contract with him, and the transaction appears, on the face of it or on evidence adduced, to be
unconscionable, the burden of proving that such contract was not induced by undue influence shall lie
upon the person in a position to dominate the will of the other.

WHAT ARE THE DIFFERENCES BETWEEN COERCION & UNDUE INFLUENCE?

The differences are as following:
Both coercion & undue influence vitiate consent and make the consent of one of the parties to contract is
not free. But the following are the points of distinction between the two:
Coercion Undue influence
1. In coercion, the consent of the aggrieved 1. In undue influence the consent of the aggrieved
party is obtained by committing or party is affected from the domination of the will
threatening to commit an act forbidden of one person over another.
by Indian Penal Code or detaining or
threatening to detain some property
unlawfully.
2. The party exercising coercion exposes 2. There is no criminal liability in case of undue
himself to criminal liability under the influence.
Indian Penal Code, besides an action on
contract.

Section 17 Defines Fraud as follows

Fraud means and includes any of the following acts committed by a party to contract, or with his connivance,
or by his agent, with intent to deceive another party thereto or his agent, or to induce him, to enter into the
contract:
(1) The suggestion, as to a fact, of that which is not true by one who does not believe it to be true;
(2) The active concealment of a fact by one having knowledge or belief of the fact:
Illustration
CHAPTER VIII CAPACITY OF PARTIES

i. Rahul sells his cow to Divas. Rahul knows that the cow has a cracked hoof that he fills up in such a way
that it is not visible; he affirms that the cow is sound. The defect is subsequent discovered by Divas.
There is fraud on part of Rahul hence’ contract is voidable at the option of Divas.
(3) A promise made without any intention of performing it:
Illustration
i. Varun purchases a ring from Prateek on credit without any intention of paying for it is clear case of
fraud from Varun side; hence contract is voidable at the option of Prateek.
(4) Any other act fitted to deceive;
32
 Illustration
i. Sonata presents herself as an agent to an insurance company and convinces Mala, who deposit some
amount to her. This is case of fraud and contract is voidable at the option Mala.
(5) Any such act or omission as the law specially declares to be fraudulent
Illustration
i. Rhythm sells his house to Shiva without informing him that it is already mortgaged to Ravi. An omis-
sion to make such a discloser amounts to fraud on part Rhythm; hence contract is voidable at the
option of Shiva.
Thus the essentials of fraud are:

be true

Can Silence be Fraudulent?

Mere silence as to facts likely to affect the willingness of a person to enter in to a contract is not fraud,
unless the circumstances of the case are such that, regard being had to them, it is the duty of the person
keeping silence to speak, or unless his silence, is, in itself, equivalent to speech.
The explanation to Section 17 deals with cases as to when silence is fraudulent.
Illustration
i. Suraj and Prakash, being traders, enter upon a contract. Suraj has private information of a change
in prices that would affect Prakash’s willingness to proceed with the contract. Suraj is not bound to
inform Prakash.
ii, Silence is fraudulent, if the circumstances of the case are such that it is the duty of the person keeping
silence to speak
In RC Thakkar v. Bombay Housing Board AIR 1973 Guj. 34, it was held that the following are the
ingredients of fraud:
1. There must be a suggestion as to a fact
2. The act suggested should not be true
3. The suggestion should have been made by a person who does not belief it to be true
4. The suggestion should be fraud to have been made with intent either to deceive or to induce the other
party to enter into contract in question. CHAPTER VIII CAPACITY OF PARTIES

Misrepresentation
When a false statement is made with the knowledge that it is false and also with the intention to deceive the
other party and make him to enter into a contract on that basis, it is known as fraud. But when the person
making a false statement believes the statement to be true and does not intend to mislead the other party to
the contract it is known as Misrepresentation. When the contract of a party to a contract has been obtained
by misrepresentation it is not free consent and the contract is voidable

33
 Section 18 defines misrepresentation as under “Misrepresentation” means and includes:
(1) The positive assertion, in a manner not warranted by the information of the person making it, of that
which is not true, though he believes it to be true;
Illustration
i. A says to B who intends to purchase his land, “My land produces 10 quintals of wheat per acre.” A,
believes the statement to be true, although he did not have sufficient grounds-for the belief. Later on,
it transpires that the land produces only 7 quintals of wheat per acre. This is a misrepresentation.
(2) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing
it, or anyone claiming under him, by misleading another to his prejudice or to the prejudice of anyone
claiming under him;
Illustration
i. A, before signing a contract with Z for sale of business, rightly states that his monthly sale is Rs.
20,000. This negotiation lasts for five month, when the contract for sale was signed. During this pe-
riod the production reduced to Rs.15,000 per month. A unintentionally keeps quite. This is case of
misrepresentation and is voidable at the option of Z
(3) Causing mistake innocently, about the subject matter.
Illustration
i. Dilip contract to sell 200 bags of wheat, in which no sulphur has been used in its cultivation. Sulphur,
however, had been used in 6 out of 500 acres of land. The buyer would not have purchased the wheat
for the representation. There is misrepresentation.

Case law
Mohanlal v. Sri Gungagi Cotton Mills Co. (1900) 4 CWN 369
A statement is said to be warranted by the information of the person making it when he receives the
information from a trustworthy source. It should not be mere hearsay;
A contract the consent to which is induced by misrepresentation is voidable at the option of the
deceived party. Misrepresentation means misstatement of a fact material to the contract. When a person
makes a false statement which he himself believes to be true, and he does not intend to deceive the other
party, there is “misrepresentation.”
Oriental Banking Corporation v. John Fleming (1879) 3 Bom 242
The plaintiff having no time to read the contents of a deed signed it as he was given the impression by the
defendant that it contained nothing but formal matters already settled between them. The deed however
contained a release in favour of the defendant. Accordingly, the defendant was allowed to avoid the deed.
CHAPTER VIII CAPACITY OF PARTIES

Mistake
Consent obtained by mistake is also not free consent. Mistake or error makes the contract void i.e. it s not
enforceable at the option of either party.
If such a misunderstanding or misapprehension had not been there, probably they would not have
entered into the agreement. Such contracts are said to have been caused by mistake.

34
Section 20 provides that “where both the parties to an agreement are under a mistake as to matter of fact
essential to the agreement, the agreement is void
The three conditions which must be fulfilled are:
I. Both the parties must be under a mistake ie, the mistake must be mutual. Both the parties should
misunderstand each other so as to nullify consent.
Illustration
i. Menu, having two houses A and B, offers to sell house A, and Neal not knowing that Menu has two
houses, thinks of house B and agrees to buy it. Here there is no real consent and the agreement is void.
II. Mistake must relate to some fact.
Illustration
i. If A buys a motorcar, thinking that it is worth Rs 70,000, and pays Rs. 70,000 for it, when it is only
worth Rs 50,000, the contract remains valid. A has to blame himself for his ignorance of the true value
of the motorcar and he cannot avoid the contract on the ground of mistake.
III. The fact must be essential to the agreement:
This mean fact must be such which goes to very root of agreement.

EFFECTS OF MISTAKE
Mistake makes an agreement void in the followings conditions

Mistake of Both Parties:

To make an agreement void on account of the mistake, the mistake must be common or mutual.

Erroneous Opinion
The explanation to section 20 provides that an erroneous opinion as to the value of the thing (subject
matter of agreement) is not a mistake.

Mistake of Fact Not of Law

Section 21 declares that a contract is not voidable because it is caused by a mistake as to any law in force in
India, viz. A and B makes a contract grounded on the erroneous belief that a particular debt is barred by
the Indian law of limitation. But a mistake as to a foreign law will avoid. CHAPTER VIII CAPACITY OF PARTIES

35
 Chapter IX
PERFORMANCE OF CONTRACT

Every contract consists of reciprocal promises. Each party to a contract is bound to perform the made by
him.
Performance of Contract means, “Fulfilling of the legal obligation created under the contract by both the
promisor and promise”.
According to section 37: “The parties to a contract must either perform or offer performance is dispensed
with or excused under the provisions of his Act, or of any other law”.
The parties to the contract have a duty to:
(i) Perform, or
(ii) Offer to perform their respective promises.
According to Sec. 38, where a promisor has made an offer of performance to the promisee, and the offer
has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his
right under the contract.
Section 38 further lays down that every such offer of performance must fulfill the following conditions:

Offer of Performance or Tender

When the promisor is willing to perform the contract and he offers to perform the same, the promisee has
a duty to accept the performance of the contract.
(1) The tender must be unconditional:
(2) The tender must be at proper time and place:
(3) The Promisee must be given an Opportunity to ascertain that the Goods are according to the Contract:
(4) An offer of Performance to one of the Joint Promisees is Valid Tender.
What will happen if before Performance a party dies?
If a party to the contract dies before he has performed the contract that, by itself, does not put an end to the
obligation to perform the same. Promisees bind the representatives of the promisors in case of the death of
such promisors before performance, unless contrary intention appears from the contract.

By whom contract should be performed:

The Contract must be performed by
I) Performance by the Promisor or his Agent:
According to section 40, “If it appears from the nature of the case that it was the intention of the
parties to any contract that any promise contained in it should be performed by the promisor himself
such promise must be performed by the promisor. In other case, the promisor or his representatives
may employ a competent person to perform it.”
II) Joint Promisors and nature of their Liability:
Section 42 to 44 of the Contract Act deals with the question of liability of the joint promisor. The
following rules are contained in these sections.
a) The Liability of the Joint Promisors Is Joint and Several: -
b) Contribution between Joint Promisors:
Since the liability of the joint promisors is joint and several, one of them say have performed the whole
of the promise. He may have, for instance, paid for the share of the other also. If that is so, he has a
right to claim contribution from the others.
(III) Time and Place of Performance:
The parties are free to decide as to when and where the performance of the contract is to be made.
Sections 46 to 50 lay down the principle for the performance of contracts containing different
stipulations as to time and place for the performance of the contracts.
(a) Time for Performance of Promise, where no Application is to be made and no Time are specified: -
According to section 46:
“Where by the contract, a promisor is to perform his promise without application by the promisee,
and no time for performance is specified, the engagement must be performed within a reasonable
time.
Explanation: - The question “what is a reasonable time” is in each particular case, a question of fact.”
(b) Time and place for performance of promise, where time is specified, and no application to be
CHAPTER IX PERFORMANCE OF CONTRACT
made: -
According to section 47:
“When a promise is to be performed on a certain day, and the promisor has undertaken to perform it
(without application by the promisee, the promisor may perform it at any time during the usual hours
of business on such day and at the place at which promise ought to be performed.”
Illustration:
i. A promise to deliver goods at B’s warehouse on the 1st January. On that day A brings the goods to B’s
warehouse, but after the usual hour for closing it, and they are not received. A has not performed his
promise.

37
 (c) When the promisee is to apply for performance, he must do so at proper time and place:
According to section 48:
“When a promise is to be performed on a certain day, and the promisor has not undertaken to per-
form it without application by the promisee it is the duty of the promisee to apply for performance at
a proper place and within the usual hours of business.
Explanation: - The question “what is a proper time and place” is, in each particular case, a question
of fact.”
(d) Place for performance of promise, where application to be made and no place fixed for
performance:
When a promise is to be performed without application by the promisee, and no place is fixed for the
performance of it, it is the duty of the promisor to apply to the promisee to appoint a reasonable place
for the performance of the promise, and to perform it at such place.
Illustration:
A undertakes to deliver 1000 bags of wheat to B on fixed date. ‘A’ must apply to ‘B’ to appoint a reason-
able place for the purpose of receiving it and must deliver it to ‘B’at such place.
(e) The performance of any promise may be made in any manner, or at any time that the promisee
prescribes or sanctions:
Illustration
i. A owes B 2000, Rupees. B accepts some of A’s goods in reduction of debt. The delivery of goods oper-
ates as a part payment.

Effect of Failure to Perform the Contract in Time (Sec. 55)

When one party fails to perform the contract in time what remedy the other party can have in such a case
Section 55 mentions two different remedies: one in a case when the time of performance is of the essence
of the contract and the other when the time is not of the essence of the contract.
(i) When Time is the Essence of the Contract:
When time is the essence of the contract, non-performance of the contract in time would frustrate the
purpose that the parties have in mind, and therefore, if in such a case there is delay in the performance
by one party, the other party has a right to avoid the contract.
Thus party has two remedies:
I. To avoid the contract or
II. To get the damages.
CHAPTER IX PERFORMANCE OF CONTRACT

Illustration:
i. A agrees to deliver the caterers on B’s wedding anniversary but fails. Here time was the essence of the
contract hence B can ayoid the contract as well as can claim for the damages from A.
(ii) When Time is not of the Essence of the contracts:
1In the absence of an agreement, time is not of the essence of a contract for sale of an immovable
property and the plaintiff has every right if the plaintiff exercises his right to claim specific performance
within the period of limitation prescribed by law.
It has been noted above that when time is of the essence of the contract, the delay in performance by
one party entitles the other to avoid the contract. When the time is not the essence of the contract, it
38 1 Faujmal v. Nathumal AIR 1965 Raj. 115
 must be performed within a reasonable time. The delay in the performance of such a contract does not
make the contract voidable, but the remedy available to the aggrieved party in such a case is to claim
compensation.
Thus,
a) The party can only claim damages
b) The party cannot avoid the contract:
(D) Performance of Reciprocal Promises.
Section 2(f) says: “Promises which form the consideration or the part of consideration for each other
are called the reciprocal promises”.
Sections 51 to 54 deal with the performance of reciprocal promises. The rules contained in these
sections are as under.
(1) Contracts Requiring Simultaneous Performance (Section 51): According to section 51, “When a
contract consists of reciprocal promises to be simultaneously performed, no promisor need perform
to be simultaneously performed, no promisor need perform his promise(unless the promisee is ready
and willing to perform his reciprocal promise.
(2) When the order of Performance Expressly Fixed by Contract (Section 52): When the order in
which reciprocal promises are to perform is expressly fixed by the contract, they (shall be performed
in that order, and where the order is not expressly fixed by the contract, “they shall be performed in
that order which the nature of the transaction requires.
(3) One party preventing the other from performing his reciprocal promise (Section 53): When one
party is ready and willing to perform his part of contract but the other prevents him, then the party
preventing is at fault. The party who has been prevented from performing the contract has (two
remedies:
(i) To avoid the contract.
(ii) To claim the compensation for the loss suffered by him due to non-performance of contract.
(4) Non-performance of reciprocal promise by the party who is to perform first. (Section 54): When the
parties have decided about the order of performance, and one of the parties is to perform his promise
first, and the other thereafter, then the non performance by one who is to perform it first disentitles
him from claiming performance from the other, and also renders him liable to pay compensation to
other party for any loss arising out of the non performance of the contract.

DOCTRINE OF SEVERABILITY
CHAPTER IX PERFORMANCE OF CONTRACT
1. Reciprocal promise to do legal and illegal thing. (Section 57): Where person reciprocally promise,
firstly to do certain things which are legal, and secondly, to do certain other things which are illegal,
the first set of promises are a contract but the second one is a void agreement.
2. Alternative promise, one branch being illegal (Section 58): In case of an alternative promise, one
branch of which is legal and other illegal, the legal branch alone can be enforced.

39
 Chapter X
DISCHARGE OF CONTRACT AND FRUSTRATION OF CONTRACT

‘When an agreement, which was binding on the parties to it, ceases to bind them, the contract is said to be
discharged.’
When the contract is considered as discharged. A contract may be discharged in the following ways:
(1) By performance of the contract.
(2) By breach of the contract
(3) By impossibility of performance
(4) By mutual consent or agreement.
(5) By lapse of time
(6) By operation of love

By Performance of the Contract

Each party to a contract is bound to perform his part of obligation. After the parties perform their part
under the contract, the contract comes to an end. In such a case the contract is said to be discharged
Contract by performance.

By Breach of the Contract (S- 39)

Breach of contract is a legal concept in which a binding agreement is not honored by one or more of the
parties to the contract by non-performance or interference with the other party’s performance.

How the Contract can be Breached

The breach of contract may be either:
1. Actual, i.e., nor-performance of the contract on the due date of performance,
2. Material breach: A actual breach is any failure to perform that permits the other party to the contract
to either compel performance, or collect damages because of the breach.
Anticipatory breach of contract i.e. before the due date of performance has come.
Anticipatory breach is an unequivocal to indication that the party will not perform when performance
is due, or a situation in which future non-performance is inevitable. An anticipatory breach gives the
non-breaching party the option to treat such a breach as immediate, and, if repudiatory, to terminate the
contract and sue for damages .

By Impossibility of Performance (Sec 56)

If the performance of a contract is impossible the same is void, both in India and England.

Initial Impossibility
An agreement to do an act impossible in itself is void. The object of making any contract is that the parties
to it would perform their respective promises. If a contract is impossible of being performed, the parties to
it will never be able to fulfill their object, and hence such an agreement is void.
Section 56 Para one says that an agreement to do an impossible act is void.
Illustration of Physical Impossibility:
i. A agrees with B to discover treasure by magic. The performance of the agreement being impossible,
the agreement is void.
ii. Similarly, an agreement to bring a dead man to life is also void.

Subsequent impossibility:

CHAPTER X DISCHARGE OF CONTRACT AND FRUSTRATION OF CONTRACT

The performance of the contract may be possible when the contract is entered into but because impossible
or unlawful. Section 56 (Para 2) makers the following provision regarding the validity of such contracts:
“A contract to do an act which after the contract is made, becomes impossible or, by reason of some event
which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or
unlawful.”
It means that every contract is based on the assumption that the parties to the contract will be able to
perform the same when the due date of performance arrives. If because of some event, the performance has
either become impossible or unlawful, the contract becomes void.
This second Para of section 56 embodied the English “Doctrine of Frustration”.
In Paradine v. Jane, it was pointed out that subsequent happenings should not affects a contract already
made which was later overruled.
In Taylor v. Caldwell, Court held that the contract was not absolute s its performance depended upon the
continued existence of the hall.

41
 Illustration:
i. A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract
becomes void.
ii. A contract to take in cargo for B at a foreign port. A’s Government afterward war against the country
in which the port is situated. The contract becomes void when war is declared.
iii. Rachel contracts to pay Joey £500 to paint her house on October 1, but the house burns to the ground
before the end of September, Rachel is excused from her duty to pay Joey the £500, and he is excused
from the duty to paint her house.
A famous English case which established this doctrine at common law is Taylor v. Caldwell:
Defendants Caldwell & Bishop owned Surrey Gardens & Music Hall, and agreed to rent it out to the
plaintiffs, Taylor & Lewis, at the rate of £100/day. The plaintiffs had planned to use the music hall for four
concerts for four different dates during the summer of 1861, and had intended to provide a .variety of
extravagant entertainments, including a singing performance by Sims Reeves. According to the contract
the parties had signed, the defendants were to provide most of the performers. The plaintiffs were to receive
the gate receipts and advertise for these events. Then, tragically, on June 11, 1861, a week before the concert
was to be given, the music hall burned to the ground. The plaintiffs sued the music hall owners for breach
of contract for failing to rent the music hall. There was no clause within the contract itself which allocated
the risk to the underlying facilities, except for the phrase “God’s will permitting” at the end of the contract.
Judge Blackburn began his opinion by stating that the destruction of the music hall was the fault of neither
party, and rendered the performance of the contract by either party impossible. Thus it was held that
both parties were excused from their obligations under their contract. The following can be the reason of
frustration:
(a) Death or Incapacity of a party.
(b) Frustration Due to Change of Circumstances:
CHAPTER X DISCHARGE OF CONTRACT AND FRUSTRATION OF CONTRACT

By Mutual Consent and Agreement (Ss. 62- 67)

Discharge by operation of law

A contract terminates by operation of law in following cases:

42
 Chapter XI
QUASI CONTRACT

Chapter V (sections 68-72) of Indian Contract Act deals with “certain relations resembling those created by
contract.”
It incorporates those obligations that are known as “Quasi Contracts” under English law.

KINDS OF QUASI CONTRACT

(a) Claim for necessaries supplied to a person incompetent to Contract (Section 68)
Where one person supplies necessaries suited to the condition of the life of a person, who incompetent
to contract or to anyone whom such incompetent reason is legally bound to support, the person
furnishing such supplies is entitled to a reimbursement from the property of such incompetent person.
(b) Reimbursement of money paid, due by another, in paying of which he is interested Section 69):
Reimbursement of person paying money due by another in payment of which he is interested: - “A
person who is interested in the payment of money which another is bound by law to pay, who therefore
pays it, is entitled to be reimbursed by the other”.
(c) Obligation of person enjoying benefit of Non-gratuitous Act (Section 70):
Where a person lawfully does anything for another person, or delivers anything to him, not intending
to do so gratuitously, and such other person enjoys the benefit thereof the latter is bound to make
compensation to the former in respect of, or to restore, the thing so done or delivered”.
(d) Responsibility of Finder of Goods (Section 71).
Section 71 contemplates another quasi-contractual situation, i.e., when a person is a finder of goods,
although as between the finder and the owner of the goods there is no contract, yet the following
responsibility has been fixed by section 71, on the finder of goods.
The section reads as follows:
“A person who finds goods belonging to another, and takes them into his custody is subject to the
same responsibility as a bailee.”
(e) Liability of a person getting unjust benefit under Mistake or coercion (Section 72):
Sections 72 covers a situation where money has been paid or anything delivered, by one person to
another either by mistake or under coercion. According to this section.
“A person to whom money has been paid, or anything delivered, by mistake or under coercion, must
repay or return it.”
 Chapter XII
REMEDIES FOR BREACH OF CONTRACT

What all remedies are available to the injured party on breach of Contract
The remedies available under Indian Contract Act are
(A) Rescission of contract and Suit for damages: When there is breach of contract the sufferer party can
rescind the contract and need not have to perform his part of obligation. But in case aggrieved party
intends to sue the guilty party for damages for breach of contract, he has to file the suit for rescission
of contract. When the court grants rescission, the aggrieved party becomes entitled for damages that
were sustained because of non-fulfillment of the contract.
Illustration:
i. A contract to supply 200 bags of rice to B for Rs. 9000 on 12 January, if A fails to supply the goods on
appointed day, B need not pay the price. B can file the suit to rescind the contract and also suit for
damages from A.

KINDS OF DAMAGES
Section 73 and 74 contain rules regarding the remedy of Damages, which is available on the breach of
a contract. Section 73 incorporates the rule regarding damages, which was laid in Hadley v. Baxendale
(1854) in England. Generally there are two kinds of damages allowed to the injured party.

How Many Kinds of Damages are there

According to this rule, on the breach of contract such damages can be recovered.
(a) Ordinary Damages:
As may fairly and reasonably be considered arising naturally, i.e., according to the usual course of
things from such breach, or as may reasonably be supposed to have been in the contemplation of both
parties at the time they made the contract.
(b) Special Damages:
In either case it is necessary that the resulting damage is the probable result of the breach of contract.
The liability of the party making the breach of contract depends on e knowledge, imputed or actual,
of the loss likely to arise in case of breach of contract.
Special damages or excess loss arising from the special circumstances
If the loss on the breach of contract does not arise naturally, i.e., according to the usual course of things but
it arises due to some special circumstances the person making the breach of contract can be made liable
for the same provided that those special circumstances were brought to:’ knowledge at the time of making
the contract.

MEASURE OF DAMAGES
After it has been established that a certain consequence of the breach of contract is proximate not remote
and the plaintiff deserves to be compensated for the same, the next question that arises is regarding the
‘Measure of damages for the same.

Liquidated damages and Penalty

Penalty means, “A sum fixed in advance, which is extravagant in comparisons with the greatest loss that
could be proved to have followed from the breach of contract. Simply, if the compensation n agreed upon
is excessive and highly disproportionate to the likely loss, viz., the amount is fixed in at terrorem, with a
view to discourage breach of contract, it is known as penalty.
Sometimes the parties to a contract, at the time of making the contract agree as to the amount of
compensation payable in the event of breach of contract. The amount of compensation payable in the
event of breach of contract. The amount of compensation so agreed beforehand may be either liquidated
damages or penalty. If the compensation to be paid on the breach of contract is the genuine pre-estimate of
the prospective damages, it is known as liquidated damages.

Suit upon Quantum Meruit:

Quantum Meruit means “As much as is earned” or ‘in proportion to the work done”.

i. If A and. B have entered into a contract, is prevented by B from performing the rest of his obligation
Under the contract, A can recover from B reasonable remuneration for whatever he has already done

CHAPTER XII REMEDIES FOR BREACH OF CONTRACT

ii. If A agree to deliver B, 500 bags of cement & when A has already delivered 100 bag, B refuses to accept
any further supply, A can recover from B the value of wheat which he has already delivered.

Suit for specific Performance:

Specific performance means, “The actual carrying out of the contract as agreed Under certain Circumstances
an aggrieved party may file a suit for specific performance, I.e., for a decree by the court directing the
defendant to actually perform the promise that he has made.

Suit for an Injunction

Injunction is “an order of a court restraining a person from doing a particular act.
Thus ‘injunction’ is a preventive relief.
45
 SPECIFIC CONTRACT II
So far, the general principles which apply to all types of contracts have been discussed. These are contained
in section 1 to 75 of the Act. The remaining sections of the Act (viz. Ss. 124 to 238) deal with three specific
kinds of contracts, namely-
1. Indemnity and Guarantee: Ch. VIII: Ss. 124-147
2. Bailment: Ch. IX: Ss. 148-181
3. Agency: Ch. X: Ss. 182-238
[Note- Sections 77 to 123 have been repealed, and are now embodied in the Indian sale of goods Act. The
remaining Ss. 239 to 266 have also been repealed and now constitute the Indian Partnership Act.]
CHAPTER XII REMEDIES FOR BREACH OF CONTRACT

46
 Chapter XIII
INDEMNITY AND GUARANTEE

(CH. VIII: SS. 124-147)

The term ‘Indemnity’ means ‘promise to make good the loss’. Generally, indemnity is protection against
loss, especially in the form of a promise to pay, or payment for loss of money, goods, etc. It is a security
against, or compensation for loss, etc.
According to section 124 of the Indian Contract Act, 1872, contract of indemnity is - “a contract by which
one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by
the conduct of any other person, is called a contract of indemnity”.
Thus a contract of indemnity is a contract is whereby one party promises to save the other from loss
caused to him by the conduct of the promisor or any other person.
Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
Scope of section 124- the definition of a contract of indemnity under this section is narrower than the one
under the English law. The scope of “indemnity” is by the very process of definition restricted to cases
where there is a promise to indemnify against loss, caused:
(a) by the promisor himself, or
(b) by any other person.
The definition excludes from its purview cases of Toss arising from accidents like fire or perils of the
sea. Loss must be caused by some human agency 1(Gajanan Moreshwar v. Moreshwar Madan). Contracts
of insurance against loss are covered by the chapter on Contingent Contracts 2(Tropical Insurance Co. v.
Zenith Life Insurance)
The person making such promise is called ‘indemnifier”. The other person whose loss is to be indemnified
is called ‘Indemnity Holder or Indemnified’.

1 (1942) 203 IC 261: AIR 1942 Bom 302: 44 Bom LR 703)

2 (1941) 196 IC 198(Lah).
 INDEMNITY AND CONTINGENT CONTRACT
It will be observed that a contract of indemnity is really a kind of contingent contract. It is an original and
direct engagement between two parties, whereby one promises to save another harmless from the result of
the conduct of the promisor or of any other person.
3Section 124 recognises only such contract as a contract of indemnity where there is a promise to save
another person from loss which may be caused by the conduct of the promisor himself or by conduct of
any other person. It does not cover a promise to compensate for loss not arising due to human agency.
Therefore, a contract of insurance is not covered by the definition of sec. 124.
Thus, if under a contract of insurance, an insurer promises to pay compensation in the event of loss by fire,
such a contract does not come within the purview of section 124. Such contracts are valid contracts, as
being contingent contracts as defined in section 31.
4United India Insurance Company v. M/s Aman Singh Munshilal, In this case the cover note stipulated
delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a godown
and thereafter to be carried to the destination. While the goods were in the godown, the goods were
destroyed by fire. It was held that the goods were destroyed during transit, and the insurer was liable as per
the insurance contract.

CONSIDERATION AND OBJECT MUST BE LAWFUL

It may be noted that the consideration and object of a contract of indemnity must be lawful. Thus, an
agreement to indemnify the printer or publisher of a libel by the writer of the same cannot be enforced.
Similarly, an agreement by an accused or any other person to indemnify the person who has given who has
given bail is illegal, and cannot be enforced.

INSURANCE CONTRACTS
Contracts of insurance, which are the commonest examples of contracts of indemnity under the English law,
are not contract of indemnity under the Indian contract act, according to which indemnity is restricted
to those cases only in which the loss which is sought to be reimbursed, is caused by the conduct of the
promisor or any other person. The loss must be such as the promisor has taken upon himself to indemnify.
Life insurance contract is, however, not a contract of indemnity. A contract of life insurance may provide
the payment of a certain sum of money either on the death of a person, or on the expiry of a stipulated
CHAPTER XIII INDEMNITY AND GUARANTEE

period of time (even if the assured is still live). In such a case, the question of amount of loss suffered by its
assured, or indemnity for the same, does not arise.
Indian Contract Act does not specifically provide that there can be an implied contract of indemnity.
The Privy Council has, however, recognised an implied contract of indemnity also (Secretary of State v.
The Bank of India Ltd., AIR 1938 PC 191).

Object
The main object of the contract of indemnity is to protect the promisee from loss or damage upon the
happening of a contingency (uncertain event).
48 3 Secretary of State v. Bank of India, AIR 1938 PC 191
4 AIR 1994 P. & H. 206
Adamson v. Jarvis (1827) 4 Bing 66: In this case, the plaintiff, ‘an auctioner sold Cattle under instructions
from the defendant. But, the defendant was not a real owner. The real owner proceeded against the auctioner.
Then, the auctioner sued the defendant. Held that the suit is actionable, as a Contract of Indemnity
The Law Commission of India in its 13th Report (1958) on Indian Contract Act, 1872, has recommended
the amendment of section 124. According to its recommendation, “the definition of the ‘Contract of
Indemnity’ in section 124 be expanded to include cases of loss caused by events which may or may not
depend upon the conduct of any person. It should also provide clearly that the promise may also be implied.

Rights of Indemnity Holder or liability of indemnifier (Sec. 125)

Section 125 of the Indian Contract Act, 1872 deals with the “Rights of Indemnity Holder or the liability of
Indemnifier”. It runs as follows -
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from
the promisor –
1. all damages, which he may be compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies (in simple words, to recover all damages of the subject matter).
2. all costs, which he may be compelled to pay in any such suit if, in bringing or defending it, he did
not contravene the orders of the promisor, and acted as it would have been prudent for him to act in
the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the
suit. (In simple words, to recover all incidental charges and costs of bringing or defending any suit,
provided:
i. acted under the authority of the indemnifier;
ii. did not act in contravention of the orders of the indemnifier; and
iii. acted in such a way as a prudent man would not act in a Similar circumstance.
3. To recover all sums, which he may have paid under the terms of any compromise of any such suit,
if the compromise was not contrary to the orders of the promisor and was one which it would have
been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit. (In simple words, to recover all sums paid by him for
compromise of any such suit, if the compromise is within the purview of the contract of indemnity).
According to section 125 of the Indian Contract Act, 1872, an indemnity holder is entitled to recover the
following amounts from the indemnifier, provided the indemnity holder must have acted within the scope
of his authority.
CHAPTER XIII INDEMNITY AND GUARANTEE
1. He can recover all damages which he may be compelled to pay in any suit in respect of any matter to
which indemnity has been given.
2. He is entitled to all costs which he is compelled to pay in bringing or defending any suit, provided:
(i) he acted under the authority of the indemnifier,
(ii) did not act in contravention of the orders of the indemnifier and
(iii) acted in such a way as a prudent man would act in a similar circumstance.
3. He can recover all sums which has been paid by him for a compromise of any such suit, if the
compromise was within the purview of the contract of indemnity. The above said rights are the rights
of an indemnity holder when sued. Besides those rights, he has other rights also.

49
 Liability of Indemnifier
The extent of indemnity holder’s right will be treated as the extent of indemnifier’s liability under the
contract of indemnity.
There had been a controversy as to the question, whether the indemnifier can be asked to indemnify
before the indemnity holder has actually suffered the loss, or his liability arises only after the loss has been
suffered by the indemnity holder.
According to English Common Law, no action could be brought against the indemnifier until the
indemnity holder had suffered actual loss. This situation created a great hardship in those cases where
the indemnity holder was not in a position to meet the claim out of his pocket Relief was provided to the
indemnity holder in such cases by the Court of Equity. According to the rules evolved by the Court of
Equity, it was no more necessary for the indemnity holder to be demnified before he could be indemnified.
In other words, the indemnity holder can now compel the indemnifier to save him from the loss in respect
of liability against which indemnity has been promised.

The rights of the indemnity holder (liabilities of indemnifier) have been explained in:
Gajanan Moreswar vs. Moreswar Madan : AIR 1942 Bom. 302; 44 Bom. LR 703.
Facts: Gajanan, the plaintiff in the instant case was a leaseholder of a plot of land under the Bombay
Municipality for a long period. He transferred the lease to the defendant, Moreswar Madan and the same
was approved by the Municipality. But no execution to that effect was made in favour of the defendant.
So, the lease continued to remain in the name of the plaintiff. The defendant borrowed Rs. 5,000/- from
‘A’. The lease-hold interest was given | as security to ‘A’. The plaintiff at the defendant’s request, executed
the mortgage. The defendant agreed to pay the principal and interest and release the mortgage. As the
defendant did not pay and release the mortgage deed, the plaintiff sued the defendant for indemnity. The
defendant contended that the suit was premature as the plaintiff had not yet suffered any loss. But the court
did not consider/allow the above contention and held the defendant liable.
Referring to the equitable principle and also the desirability of its being followed in India, Chagla, J.
while delivering the judgement in the Bombay High Court decision of Gajanan Moreshwar v. Moreshwar
Madan observed:
“The Court of equity held that if his (indemnity-holder’s) liability had become absolute, then he was
entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which
would constitute a fund for paying off the claim whenever it was made...I have already held that Ss. 124 and
CHAPTER XIII INDEMNITY AND GUARANTEE

125, Contract Act, are not exhaustive of the law of indemnity and the Courts here would apply the same
equitable principle that the Courts in England do. Therefore, if the indemnified has incurred a liability and
that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to
pay it off.”
The Law Commission of India has expressed the opinion that “the view expressed by Chagla, J. is
correct and should be adopted by the legislature.” The Law Commission recommended that as in English
Law, “the right of the indemnity-holder should be more fully defined and the remedies of an indemnity-
holder should be indicated even in cases where he has not been sued.”

50
 Thus, it is clear from the above that, Sec.125 confers on the indemnity holder the right to: i) recover
all damages; ii) to recover all incidental charges and costs of the suit; and iii) to recover sums paid by him
under compromise.

Rights of Indemnifier
The Indian Contract Act, 1872 made no provision on this point. However, the rights of the indemnifier are
the same as to that of the rights of the ‘Surety’ in a Contract of Guarantee as laid down in Sections 140-147
of the Act.

CONTRACT OF GUARANTEE
The expression “Guarantee literally means “assurance given by one person to another at the default of some
other”. It is also known as the Contract of “Suretyship”.
Section 126 of the Indian Contract Act, defines the Contract of Guarantee as follows:
A contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third
person in case of his default. The person who gives guarantee is called ‘Surety’. The person in respect
of whose default the guarantee is given is called the “Principal Debtor’ and the person to whom the
guarantee is given is called the ‘Creditor’.

Example of Contract of Guarantee

An example of ‘contract of guarantee’ is given by court in case of Birkmyr v. Darnell case. In this case,
court said that if two persons come to a shop and one buys and other gives him credit, promises the seller
“if he not pay you, I will pay you”. This type of collateral undertaking to be liable for the default of another
is called the ‘contract of guarantee.’
The object of a contract of guarantee is to provide additional security to the creditor in the form of
a promise by the surety to fulfil a certain obligation, in case the principal debtor fails to do that.

Essentials of the Contract of Guarantee

Principle debt:
There must be a principle debt. The main object of ‘contract of guarantee’ is to secure a debt, so far a
CHAPTER XIII INDEMNITY AND GUARANTEE
‘contract of guarantee’ there must be valid debt. In a contract of guarantee one person agrees to answer
for some liability of another to a third person.
Guarantee for void debt-
Sometimes, guarantee even for avoid debt may be held enforceable. In Kashiba v. Shripath case, it was held
that where minor’s debt is knowingly guaranteed, surety should be held liable as principle debtor.

51
 Illustration
A) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B.

Section 142 and 143 provide that the guarantee obtained by misrepresentation or concealment of fact
is invalid.

Section 126 declares that a guarantee may be either oral or written.

Distinction between the contracts of indemnity and guarantee

Indemnity and guarantee have a common feature that both are a device for providing protection against
probable loss. In either case, the loss may arise due to human conduct. However, the technique of providing
protection and the number of parties involved mark some differences between them.

Contract of indemnity Contract of guarantee

1. there are two parties namely: 1. there are three parties namely:
a) indemnifier; and a) surety
b) indemnity holder b) creditors; and
c) Principal Debtor
2. There is only one contract i.e. between indemnifier 2. there are three contract i.e. between
and indemnity holder. a) Surety and creditors
b) Principal debtor and surety, and
c) Creditors and principal debtor.
3. The liability under contract of indemnity is 3. Under the contract of guarantee, the liability
contingent in the sense that it may or may not arise. is subsisting in the sense that once the guarantee
has been acted upon, the liability of the surety
automatically arises, though it remains in a
suspended state/animation till the principal debtor
commits default.
4. The object or purpose of this contract is to 4. The object or purpose is to provide security to
CHAPTER XIII INDEMNITY AND GUARANTEE

reimburse the loss. the creditors.

5. Stranger to contract cannot sue. 5. Stranger to contract can sue.
Indemnifier must always bring suit in the name If the surety discharges the debt payable by the
of indemnified and cannot sue third parties in his principal debtor he steps into the shoes of creditor
own name. and becomes entitled to realize the money paid in
his own right.
6. The liability of indemnifier is primary and 6. Surety’s liability is collateral or secondary.
independent.

52
SURETY OR GUARANTOR
(Extent of Surety’s Liability or “Surety is a favoured Debtor or the Liability of Surety is co-extensive with that
of Principal Debtor) Surety is also known as ‘Guarantor’. Surety is one of the three parties in a Contract of
Guarantee. Before explaining Surety’s Liability, it is necessary to explain in brief the meaning and definition
of the Contract of Guarantee.

Surety’s Liability:
Section 128 of the Indian Contract Act, deals with the nature and extent of surety’s liability. It runs as
follows -
“The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided
by the contract.”
Illustration:
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is
liable, not only for the amount of the bill, but also for any interest and charges which may have become due
on it.
According to this section, the liability of Surety is co-extensive with that of the principal debtor. In other
words, his liability is the same with that of principal debtor. Surety cannot be held liable for more than the
amount, if there is an agreement to that effect.
Eg. Suppose the amount of debt is Rs. 10,000/- Surety gives undertaking to the extent of Rs. 5,000/- Surety
cannot be held liable for more than Rs. 5,000/- in the event of default by Principal Debtor.
The relevant cases on this point is -
Yerlagaddav. Devata China Yerakayya, A.I.R. 1966 A.P. 151
In this case, the bond executed by the surety limited his liability to the tune of Rs. 15,000/- with a stipulation
that he might be liable to any amount that might be finally decreed. It was held that the respondent (surety)
“had undertaken the liability only to the tune of Rs. 15,000/- and the clause rendering himself liable to any
amount that might be finally decreed should be construed as meaning not exceeding Rs. 15,000/-.”
Aditya Narayan Chauresia v. Bank of India, A.I.R. 2000 Pat. 222 :
In this case, it has been held by the Patna High Court that if the guarantors bind themselves upto a certain
maximum limit their liability cannot go beyond that. CHAPTER XIII INDEMNITY AND GUARANTEE

The liability of Surety arises, when there is a default on the part of the ‘Principal Debtor’. The liability
of Surety is secondary or collateral. (Exists side by side or contingent) However, the Creditor can sue the
Surety first, unless there is an agreement to the contrary.
Creditor can sue the surety without exhausting remedies against the Principal Debtor:
The liability of surety is Joint and Several. The liability is joint in the sense; the Creditor can sue both the
Principal Debtor and the Surety. The liability of Surety is several in the sense, the creditor can sue him
alone, leaving the principal Debtor. If the Creditor sues both the Principal Debtor and the Surety, and
obtains decree, the decree may be executed first against the Surety also. There is no hard and fast rule that
the creditor should proceed first against the Principal Debtor and Surety later.
53
 The relevant leading case on this point was explained by the Supreme Court in Bank of Bihar v.
Damodar Prasad as follows -
“Before payment, the surety has no right to dictate terms to the creditor and ask him to pursue
his remedies against the principal in the first instance. In the absence of some special equity, the
surety has no right to restrain an action against him by the creditor on the ground that the principal is
solvent or that the creditor may have relief against the principal in some other proceedings. . Likewise,
where the creditor has obtained a decree against the surety and the principal, the surety has no right
to restrain execution against him until the creditor has exhausted his remedies against the principal.”
“[he amount from the hypothecated property. The corporation could straightaway proceed against the
surety without first proceeding against the company. The order directing the corporation to first proceed
against the company was orcheld to be not proper.
In a subsequent case, Union of India v. Manku Narayana, (1987) 2 SCC 335: AIR 1987 SC 1078,
the Supreme Court held that the creditor must proceed against the mortgaged property first and then
only against the surety for the balance, even if the decree is a composite one against the principal debtor,
mortgaged property and the guarantor. In that case only a portion of the decree was covered by the mortgage
and the court did not consider it relevant whether the two portions of the decree were severable or not.
This decision has been overruled by the Supreme Court in State Bank of India v. Indexport Registered.
In this case a composite decree was passed against the surety, the borrower and the mortgaged property of
the borrower.

Action against Principal Debtor alone

The creditor can proceed against the principal debtor alone. His suit cannot be rejected on the ground that
he has not joined the guarantor as a defendant to the suit (Union Bank of India v. Noor Dairy Farms,
(1997) 3 Bom CR 126). Dismissal of the suit against the principal debtor does not of itself absolve the surety
of his liability under the contract of guarantee (Karnataka State Industrial Investment and Development
Corporation Ltd. v. State Bank of India, (2004) 4 Kar LJ 266 (DB).
A surety was allowed to be impleaded where his liability had already been reduced and his position
would have been prejudiced if in the proceedings against the principal debtor this fact was not brought to
the notice of the deciding authority (B.R Thadani v. Oriental Bank of Commerce, (2002) 2 Bom CR 263
(Bom).

Suit against Surety alone

CHAPTER XIII INDEMNITY AND GUARANTEE

A suit against the surety without even impleading the principal debtor has been held to be maintainable.
In this case, the creditor, in his affidavit, had shown sufficient reasons for not proceeding against the
principal debtor (Pradip D Kothari v. Ceat Financial Services Ltd, 2000 AIHC 4247 (Mad). A contract
of guarantee was made enforceable by its terms against the guarantors severally and jointly with that of
the principal debtor company. It was held that the creditor had the option to sue the company alongwith
guarantors as co-defendants or guarantors alone (Vijay Singh Padole v. Sicom Ltd, (2000) 4 MH LJ 772).
Sunder Singh vs. Punjab National Bank AIR 1992 All 132:
In this case, the plaintiff bank sued the defendant, Sunder Singh without taking any action against the
principal debtor or the property hypothecated for repayment of the loan. The Supreme Court through
54 Venkataramaiah J., justified the action of the plaintiff bank and held the defendant (surety) liable.
Section 144 speaks about the condition precedent. Where there is a condition precedent to the surety’s
liability, he will not be liable unless that condition is first fulfilled. A partial recognition of this principle is
to be found in Section 144 which runs as follows -
“Where a person gives a guarantee upon a contract that creditor shall not act upon it until another person
has joined in it as cosurety, the guarantee is not valid if that other person does not join.”
National Provincial Bank of England v. Brackenbury, (1906) 22 TLR 797 : In this case, the defendant
signed a guarantee which on the face of it was intended to be a joint and several guarantee of three
other persons with him. One of them did not sign. There being no agreement between the bank and the
co-guarantors to dispense with his signature, the defendant was held not liable.

Surety’s liability in respect of void and voidable Contracts:

The liability of Surety arises, when the Creditor proceeds against him. The contract between Surety and
Creditor is independent, not collateral. It cannot always be said that Surety is liable if the Principal Debtor
is liable. Sometimes Surety may be liable, even though Principal Debtor is not liable. .
Example: Suppose the Principal Debtor is a minor. Then the contract with Minor is void. A minor can be
a promisee (beneficiary), but cannot be a promisor. In such a case, Surety is liable as a principal debtor.
Kashiba v. Sripal Narshiv, ILR(1894) 19 Bom 697 :
In this case, Farran, J., observed -
“There is nothing unlawful, immoral or even improper in lending money to the minor, and we can
see no reason in the absence of enactment to the contrary, why a person cannot contract to guarantee the
performance by a third person of the duty of imperfect obligation. The case is perhaps still more clear if
the promise of the infant to repay the money is void. In that case the contract of the so-called surety is not
a collateral but a principal contract.”
Kelappan Nambiar v. Kunhi Raman, AIR 1957 Mad 164: In this case, the Madras High Court held that
a surety incurs no liability by guaranteeing a debt by a minor for his liability is coextensive with that of the
principal debtor. While delivering the judgement, Rajgopala Ayyangar, J., observed -
“In the absence of special circumstances, like fraudulent representation or in the absence of other
features from which a court could infer the contract to be one of indemnity, as defined in Section 124 of
the Indian Contract Act, the liability of the surety is only ancillary and can rest only on the valid obligation CHAPTER XIII INDEMNITY AND GUARANTEE
on the part of the party whose debt or obligation is guaranteed.”
The learned Judge also pointed that Kashiba’s case if understood in the light of the above observation,
is not against the view for obligation undertaken by father seems to be one of indemnity rather than of
guarantee. Thus unless it is clear that the contract is of indemnity, the liability of surety is ancillary and rests
on a valid obligation on the part of the party whose debt or obligation is guaranteed.
Thus the surety will be liable in respect of a void debt provided that it is a contract of indemnity but
will not be liable if it is a contract of guarantee. It may be submitted that the view of Rajagopala Ayyangar, J.,
appears to be correct but in the absence of a clear observation by the highest tribunal the position is likely
to remain fluid.
55
 Surety’s liability in respect of Continuing Guarantee:
Section 129 of the Indian Contract Act, 1872 deals with continuing guarantee. It runs as follows-
“A guarantee, which extends to series of transactions is called a ‘Continuing Guarantee’.
Illustrations
(a) A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be
responsible, to the amount of Rs. 5,000, for the due collection and payment by C of those rents. This
is a continuing guarantee.
Surety is liable for all such transactions during the continuance of the suretyship.
In view of the facts and circumstances stated above, it is said that “Surety is a favoured Debtor”.
In the words of Lord Selborne “A surety is undoubtedly and not unjustly an object of some favour both at
law and at equity”.

Co-Sureties:
Sections 138, 144, 146 and 147 of the Indian Contract Act, 1872 lay down the provisions relating to
liability of Co-sureties.

Section 138 - Co-surety: Meaning:

Where there are two or more sureties in a Contract of Guarantee, they are called ‘CoSureties’. The liability
of Co-surety is joint and several. In other words, the Creditor can sue both debtor and all co-sureties or
can sue all the sureties jointly or he can sue one or more co-sureties. If all co-sureties are jointly sued, they
have to meet the liability proportionately.
Eg. ‘A’ lends ‘B’ Rs. 30,000/- against guarantee by ‘C’, ‘D’ and ‘E’. If ‘A’ sues all (“C’ ‘D’ ‘E’), they have to pay
@ Rs. 10,000/- each.
In case only one Co-surety is sued, and he has met the entire liability, he can sue the other Co-sureties for
contribution proportionately. In the absence of an agreement to the contrary, all Co-sureties are equally
liable. In case of any agreement, the degree of liability varies from one Co-surety to other. Eg. ‘A’ lends
‘B’ Rs. 30,000/- ‘C’ gives guarantee upto 50% (Rs. 15,000/-) while ‘D’ and ‘E’ guarantee 25% each. In this
example, the extent of Cosurety’s liability differs.
CHAPTER XIII INDEMNITY AND GUARANTEE

Release of one co-surety does not discharge other (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.

Guarantee on contract that creditor shall not act on it until co-surety joins (Section 144):
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another
person has joined in it as co-surety, the guarantee is not valid if that other person does not join.

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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.
Illustrations:
(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in payment. A, B
and C are liable, as between themselves, to pay 1,000 rupees each.
(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A,
B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C
to the extent of one-half, E makes default in payment. As between the sureties, A is liable to pay 250
rupees, B 250 rupees, and C 500 rupees.

Liabilities 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
obligation permits.
State bank of India v. G.J.Herman, AIR 1998 Ker.161, in this case, it has been held that when there is a
composite decree against the principle debtor and the sureties, the creditors has the discreation to decide
against whom he wants to proceed. Neither the court nor a co-surety can insist that the creditor should
first proceed against another surety before proceeding against him. Such a direction would go against the
co-extensiveness of the liability of the sureties with that of the principal debtor.

Continuing Guarantee:
Continuing Guarantee Sections 129 to 131 of the Indian Contract Act, 1872 lay down the provisions
relating to “Continuing Guarantee’.
Where a guarantee extends to a series of transactions, it is called “Continuing Guarantee’. In this case,
surety’s liability extends to all the transactions comtemplated until the guarantee is revoked. In continuing
guarantee, the liability extends to series of transactions.
Section 129, which deals with continuing guarantee runs as follows –
“A guaranteed which extends to a series of transactions, is called a “contingent guarantee.” CHAPTER XIII INDEMNITY AND GUARANTEE

(a) A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be
responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents.
This is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of 100 pounds, for any tea he may from time
to time supply to C. B supplies C with tea to above the value of 100 pounds, and C pays B for it.
Afterwards, B supplies C with tea to the value of 200 pounds. C fails to pay. The guarantee given by A
was a continuing guarantee, and he is accordingly liable to B to the extent of 100 pounds.

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 Revocation of Continuing Guarantee (Sec. 130):
Sec. 130 deals with “revocation of continuing guarantee” It reads as follows -
“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to
the creditor.
Illustrations:
(a) A, in consideration of B’s discounting, at, A’s request, bills of exchange for C, guarantees to B, for
twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C
to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the
2,000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon
him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity.
A is liable upon his guarantee.
A continuing Guarantee may be revoked by the Surety in the following ways:
i) By Notice;
ii) By Death of the Surety (sec. 131) and
iii) Any other mode.
i) By Notice:
The Continuing Guarantee may be revoked by the surety at any time as to future transactions by
giving notice to the creditor.
ii) By Death of the Surety (Sec. 131):
Section 131 of the Indian Contract Act, 1872 deals with “Revocation of Continuing Guarantee by
surety’s death”. It reads as follows -
“The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions.”
Continuing guarantee stands revoked on the death of the Surety. The liability does not extend to the
legal heirs/representatives unless there is an agreement to that effect.
iii) By other mode: Continuing Guarantee is revoked by all such modes, when surety is discharged from
the liability.
CHAPTER XIII INDEMNITY AND GUARANTEE

Discharge of Surety’s Liability

Sections 130 to 139 of the Indian Contract Act, 1872 lay down the provisions relating to “discharge of
surety”. Discharge of surety means termination of Surety’s liability. Surety is said to be discharged, when
his liability comes to an end. Following are the different modes, by which surety is discharged from the
liability.
1. Revocation of Liability (Section 130);
2. By Death (Section 131);
3. By Novation (Secton 62);
4. By Variance in the terms of the contract (Sec. 133);
5. Discharge or Release of Principal Debtor (Sec.134);
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 6. When creditor compounds with, gives time to, or agrees not to sue, the principal debtor (Section
135);
7. By creditor’s act or omission impairing surety’s eventual remedy (Section 139);
8. By loss of the security by the creditor (Section 141); and
9. By Invalidation of Contract (Section 142).

By Revocation (Sec.130)
In Continuing Guarantee, the surety can revoke his liability as to the future transaction by giving a notice
to the Creditor. But, he cannot revoke in respect of a specific guarantee or in respect of the transaction
already entered into. Eg. ‘A’ executed a guarantee to ‘B’ to give a loan of Rs. 10,000/- to ‘C’. ‘A’ can revoke
the guarantee to be discharged from the liability before the loan is given by ‘B’. If the loan has already been
received by ‘C’, ‘A’ cannot revoke the guarantee.
Section 130, which deals with “revocation of continuing guarantee” reads as follows -
“A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to
the creditor.”
Illustrations:
(a) A, in consideration of B’s discounting, at, A’s request, bills of exchange for C, guarantees to B, for
twelve months, the due payment of all such bills to the extent of 5,000 rupees. B discounts bills for C
to the extent of 2,000 rupees. Afterwards, at the end of three months, A revokes the guarantee. This
revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the
2,000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills that B shall draw upon
him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity.
A is liable upon his guarantee.

By Death (Section 131)

Section 131 speaks about the revocation of continuing guarantee by surety’s death. It runs as follows -
The death of surety operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions.
In other words, death of surety extinguishes the liability and does not extend to the legal representatives
CHAPTER XIII INDEMNITY AND GUARANTEE
unless there is an agreement to that effect.

By Novation (Section 62)

Novation means substitution of a new contract of guarantee in the place of an old/existing contract of
guarantee. The novation may be between the same parties or different parties under same terms or different
terms and conditions. The surety is liable under the terms of the old contract. When, the old contract, by
novation gets discharged, the surety also gets discharged from the liability.
Section 62 speaks about the effect of novation, rescission, and alteration of contract. It reads as follows -

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 “If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original
contract need not be performed.”
Illustrations:
(a) A owes B 1,000 rupees. A enters into an agreement with B, and gives B a mortgage of his (A’s) estate
for 5,000 rupees in place of the debt of 10,000 rupees. This is a new contract and extinguishes the old.
(b) A owes money to B under a contract. It is agreed between A, B and C, that B shall thenceforth accept
C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been
contracted. A owes B 1,000 rupees under a contract, B owes C 1,000 rupees, B orders A to credit C
with 1,000 rupees in his books, but C does not assent to the agreement. B still owes C 1,000 rupees,
and no new contract has been entered into.

By Variance in the terms of the Contract (Sec.133)

Section 133 provides for discharge of surety by variance in terms of contract”. It runs as follows-
“Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor
and the creditor, discharges the surety as to transactions subsequent to the variance.”
Illustrations:
(a) A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards, B and C contract, without
A’s consent, that B’s salary shall be raised, and that he shall become liable for one-fourth of the losses
on overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged
from his suretyship by the variance made without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which
the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is
materially altered. Afterwards, B misconducts himself. A is discharged by the change from future
liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the
later Act.
When the surety gives guarantee (undertakes the liability) on certain terms, the terms shall remain
unchanged during (throughout) the period of guarantee. If there is any variance (change) in the terms
of the contract between the principal debtor and creditor, without the consent of the surety, the surety
gets discharged as regards transactions subsequent to such. In other words, the surety is not liable for the
altered contract. The plea that the alteration is not prejudicial or it is beneficial to the surety is not a ground
for denying the discharge.
CHAPTER XIII INDEMNITY AND GUARANTEE

Pratap Singh vs. Kesavalal : ‘X’ agreed to give a loan to ‘Y’ on the security of four properties. ‘A’ gave
guarantee. Actually, X’ gave a loan of smaller amount on the security of three properties. As there was a
change in the terms of the original contract, the guarantor was discharged from the contract/liability.

Release or Discharge of Principal Debtor (Section 134):

Section 134 provides for “Discharge of surety by release or discharge of principal debtor”. It runs as follows-
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.
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Illustrations :
(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods to B, and afterwards B
becomes embarassed and contracts with his creditors (including C) to assign to them his property
in consideration of their releasing him from their demands. Here B is released from his debt by the
contract with C, and A is discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo on A’s land and to deliver to B at a fixed rate, and C
guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation
of A’s land, and thereby prevents him from raising the indigo. C is no longer liable on his guarantee.
When the principal Debtor is discharged from the liability, it also discharges surety from the liability.
When the principal debtor clears the debt in full and is discharged from the liability it also discharges the
surety from the liability. Any act or omission on the part of the creditor, may discharge the surety from the
liability.
Eg. ‘A’ against the guarantee by ‘B’ agreed to supply construction material to ‘C’ to build a house.
Omission or failure to supply the construction material by ‘A’, discharges ‘B’ from the liability.

When creditor compounds with, gives time to, or agrees not to sue the principal debtor (Sec.
135):
Section 135 mentions further circumstances when a contract between the creditor and the principal debtor
can result in the discharge of the surety. It runs as follows -
“A contract between the creditor and the principal debtor by which the creditor makes a composition
with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract.”
According to this section, a contract between the creditor and the principal debtor discharges the surety in
the following three circumstances –
(i) When the creditor makes composition with the principal debtor,
(ii) When the creditor promises to give time to the principal debtor, and
(iii) When the creditor promises not to sue the principal debtor.
It may be noted that in the above stated circumstances, the surety is discharged if the creditor and the
principal debtor make such contract without the consent of the surety. It such a contract is made with the
consent of the surety, he would not be discharged.
CHAPTER XIII INDEMNITY AND GUARANTEE

Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy (Sec. 139):
Section 139 of the Indian Contract Act, 1872 runs as follows -
“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.”
Illustrations :
(a) B, contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain
stages. A becomes surety to C for B’s due performance of the contract. C, without the knowledge of A,
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 prepays to B the last two instalments. A is discharged by this prepayment.
(b) A puts M as apprentice to B, and gives a guarantee to B for M’s fidelity. B promises on his part that
he will at least once a month, see M make up the cash. B omits to see this done as promised, and
Membezzles. A is not liable to B on his guarantee.
M.R.Chakrapani v. Canara Bank, A.I.R. 1997 Guj. 48 : In this case, the property hypothecated to the
bank was sold by the principal debtor. The surety immediately furnished particulars of the sale to the bank,
but the bank took no steps either to trace and seize the property or failed to take any action against the
principal debtor by lodging a complaint with the police or filing a case in a criminal court for tracing and
attachment of property and recovering the dues. It was held that the surety was discharged due to inaction
of the bank.

By loss of the security by the creditor (Sec. 141)

Section 141 deals with surety’s rights to the benefit of creditor’s securities. It runs as follows -
“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; and if the creditor loses, or without the consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security.”
Illustrations:
(a) C, advances to B, his tenant 2,000 rupees on the guarantee of A. C has also a further security for the
2,000 rupees by a mortgage of B’s furniture. C, cancels the mortgage. B becomes insolvent and C sues
A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a guarantee for that advance
from A. C afterwards takes B’s goods in execution under the decree, and then, without the knowledge
of A, withdraws the execution. A is discharged.

By Invalidation of the Contract (Section 142)

According to Sec. 142, guarantee obtained by misrepresentation is invalid. It reads as under -
“Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, is invalid.”
When the contract is declared invalid subsequently, the surety is discharged from the liability.
CHAPTER XIII INDEMNITY AND GUARANTEE

Example: When a Surety is consented to, by employing a flaw in consent (mis-representation etc.) and
such contract is voidable, the surety is discharged from the liability.

Surety’s Rights
Sections 140 to 147 of the Indian Contract Act confer on Surety certain rights, which may be explained
under the following heads:
1. Rights of Surety as against the Creditor;
2. Rights of Surety as against Principal Debtor; and
3. Rights of Surety as against Co-sureties
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Rights of Surety as against the Creditors:
i) Right to securities with the creditor (Sec.141):
Section 141 provides for surety’s right to the benefit of creditor’s securities. It runs as follows -
“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; and if the creditor loses, or without the consent of the surety, parts with such security, the
surety is discharged to the extent of the value of the security.”
Illustrations :
(a) C, advances to B, his tenant 2,000 rupees on the guarantee of A. C has also a further security for the
2,000 rupees by a mortgage of B’s furniture. C, cancels the mortgage. B becomes insolvent and C sues
A on his guarantee. A is discharged from liability to the amount of the value of the furniture.
State of M.P. v. Kaluram, A.I.R. 1967 S.C. 1105: In this case, the surety was discharged by the loss of
security by the creditor. The facts of the case are as follows. The respondent, Kaluram, was a surety for the
payment of felled trees which were sold by the appellant to one Jagat Ram. The buyer of the trees was to
make the payment in four instalments. He paid only one instalment and then defaulted. The appellant had
a right under the contract to prevent the purchaser from removing the trees when he was in default. The
appellant failed to do so. The court held that the appellant, by allowing the buyer to take away the trees, had
allowed the security to be lost, and the surety was, therefore, discharged to that extent.
According to Section 141, surety has a right to demand from the creditor, all the securities, which the
creditor had, if he paid the debt in full against the default of the principal debtor. The surety cannot exercise
the right over the securities for making part payment as laid down in the case of Goverdhandas vs. Bank of
Bengal.
ii) Right to request:
Surety has a right to request the creditor to elect/choose the principal debtor to sue before he (surety)
is called upon to pay the debt.

Rights against the Principal Debtor

i) Right of Subrogation (Sec.140)
Section 140 confers on Surety, the right of subrogation. The term “Subrogation literally means
“transfer of right (to sue) from one person to another”. In a contract of guarantee the right of charge over
the securities is vested in the creditor. According to Sec. 140, where the surety has cleared/paid the debt in CHAPTER XIII INDEMNITY AND GUARANTEE
full against the default by the principal debtor, all the rights, which the creditor has against the principal
debtor get transferred to the surety. In other words, the surety enters into the shoes of the creditor and can
sue the principal debtor for recovery of the payment made by him (i.e. by surety).
Section 140, which confers on surety, the right of subrogation runs as follows -
“Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty
has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the
rights which the creditor had against the principal debtor.”

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 ii) Right of Indemnity (Sec.145)
In a contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety,
from losses caused to him as a result of the contract. In other words, the surety can recover from the
principal debtor whatever sum he might have rightfully paid under the guarantee.
Surety’s right of indemnity is enshrined in section 145 of the Indian Contract Act, 1872, which runs
as follows:
“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 had rightfully paid under
the guarantee, but no sums which he has paid wrongfully.”
Illustrations:
(a) B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues
him for the amount. A defends the suit having reasonable grounds for doing so, but he is compelled
to pay the amount of debt with costs. He can recover from B the amount paid by him for costs, as well
as the principal debt.
(b) C lends B a sum of money, and A, at the request of B, accepts a bill of exchange drawn by B upon A to
secure the amount. C, the holder of the bill, demands paymentof it from A, and, on A’s refusal to pay,
sues him upon the bill. A, not having reasonable grounds for so doing, defends the suit, and has to pay
the amount of the bill and costs. He can recover from B the amount of the bill, but not the sum paid
for costs, as there was no real ground for defending the action.
C.K. Aboobacker v. K.P. Ayishu, A.I.R. 2000 NOC 29 (Kerala):
In this case, it has been held by the Kerala High Court that a guarantor is liable for any payment or performance
or any obligation only to the extent the principal debtor has defaulted. If a substantial portion of the loan
has been paid by the principal debtor, the guarantor is to pay only the balance due. According to section
145, after the surety has paid the amount, the principal debtor should indemnify the surety for everything
the surety has rightfully paid under the contract of guarantee.
iii) Right to be relieved: Surety has a right to compel the principal debtor to relieve him from the liability
by paying off the debt.

Rights of Surety against Co-sureties (Sec. 146)

In a contract of guarantee, if there are two or more sureties, they are called “Co-sureties”. The liability of the
Co-sureties is joint and several. The creditor may sue one or all. If only one surety is sued and he alone has
CHAPTER XIII INDEMNITY AND GUARANTEE

paid the debt, he may ask/demand the Cosureties to contribute proportionately. Such right of the Surety to
demand contribution from the Co-sureties is called “the right of contribution”
Section 146 of the Indian Contract Act, 1872 confers on ‘surety’ the right of contribution. In other
words, section 146 says that the co-sureties are liable equally. It runs as follows -
“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.”

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 Chapter XIV
BAILMENT AND PLEDGE

Chapter IX containing sections 148 to 181 of the Indian Contract Act, 1872 lays down the provisions relating
to the Contracts of Bailment and Pledge.
The term Bailment is derived from the French Word ‘Bailor’, which means ‘to deliver’. It means change of
possession voluntarily from one person to another.
Eg. ‘A’ delivers a cloth to ‘B’, a tailor for making a shirt. The contract between ‘A’ & ‘B’ is bailment. ‘A’
is a Bailor, and ‘B’ is a Bailee. Similarly, Radio & T.V. repairers; Motor Vehicles’ Mechanics; Tailors and
Launderers.

ESSENTIAL ELEMENTS
To constitute Bailment, the following conditions are to be satisfied.
1. Delivery of goods for a specific purpose.
2. Contract
3. Return or disposal of goods.
1. Delivery of goods: To constitute bailment, there must be a delivery of goods from one person to
another for some specific purpose. Delivery means transfer of possession of the goods from one
person to another. The delivery of goods to the bailee may be made by doing anything, which has the
effect of putting the goods in the possession of the intended bailee or his authorised agent. Delivery
need not always be actual. It may sometimes be a constructive or symbolic delivery. Section 149 of the
Indian Contract Act, 1872 recognises other than actual delivery also. It provides:
“The delivery to the bailee may be made by doing anything which has the effect of putting the goods in the
possession of the intended bailee or of any person authorised to hold them on his behalf.”
Transferring of the key of the godown may be deemed to be delivery of the goods. Explanation to
section 148 gives an illustration of constructive theory. According to this provision : “ If a person already
in possession of the goods of another contracts to hold them as a bailee, he thereby becomes the bailee,
and the owner becomes the bailor of such goods although they may not have been delivered by way of
bailment.” For example, A sells his watch to B. Instead of delivering the watch to B, A is asked to continue to
 keep the watch with him for one month on B’s behalf. After this arrangement, A is the bailee of the watch.
The watch was already in the possession of A. Earlier he was having it himself as the owner, but now he
holds the same as a bailee for B. A finder of goods is also deemed to be the bailee of those goods.
Jagdish Chandra Trikha v. Punjab National Bank, A.I.R. 1998 Delhi 266 :
In this case, the plaintiff ’s father had entrusted a box containing 480 tolas, i.e. about 5600 grams gold
ornaments and jewellery to the defendant Bank at Peshawar (now in Pakistan) before the partition of the
country. The jewellery box was locked, wrapped and sealed when delivered. A proper receipt describing
the contents of the box was given by the Bank. From Peshawar the box came to Lahore Branch of the Bank
and thereafter to the Delhi Branch. It was found that when the jewellery box was delivered to the plaintiff
in Delhi, it was not in the same condition as it was delivered at Peshawar. The Lahore branch of the bank
had put their own wrapper on the box and it was not locked.
The plaintiff claimed the gold ornaments and jewellery deposited with the bank or their value
amounting to Rs. 3,72,400. It was held that the position of the bank was that of a bailee and it failed in its
duty to take due care of the goods and return them to the plaintiff. The Bank was held liable to pay the sum
of Rs. 3,72,400 alongwith simple interest @ 12% p.a. from the date of the institution of the suit till the date
of realisation of the amount.
2. Contract: There can be no bailment without a contract. Bailment is a contract and hence, the essentials
of contract under Section 10 of the Indian Contract Act viz., competence of parties, free consent,
lawful object etc. are to be satisfied.
Ram Gulam vs. Govt. of U.P., AIR 1950 All 106:
In this case, the Allahabad High Court expressed the view that obligation of a bailee can arise only out of
a contract of bailment and not otherwise. In this case, the plaintiff ’s property had been stolen. The same
was recovered by the police and was kept in the police Malkhana. From there, it was again stolen and could
not be traced. The plaintiff brought an action to recover the value of the property. The State was held not
liable, firstly, because it did not occupy the position of a bailee and, therefore, it was not liable as such,
and secondly, the police, when it took and kept the property in its possession, was acting in discharge of
obligations imposed by law, rather than in obedience to some executive orders.
The point of discussion in the above case that a bailment cannot arise without a contract does not
appear to be convincing. The law itself recognises the finder of goods as bailee. In some subsequent cases,
it has been held that bailment can be there even without a contract.
It has been rightly observed that many bailments arise out of contract, but the better opinion is that it
is possible for bailment to exist without contract. It may also be noted that the term ‘contract
CHAPTER XIV BAILMENT AND PLEDGE

In Section 148 does not mean that there should always be a formal and complete contract. It may also
be implied from the circumstance.
3. Return or disposal of goods: In bailment, the goods are delivered for a specific purpose viz., safe
custody, repair, carriage etc. After the purpose is accomplished, the goods may be returned to the
Bailor in the same or altered condition, or may be disposed of as directed by the Bailor.
United Breweries Ltd. v. State of A.P., (1997) 3 S.C.C. 530 : 1997 A.I.R. S.C.W. 1414
In this case, the appellants sold beer in bottles to the customers. The customers were required to pay cost
of beer and to deposit a sum for bottle which was refundable. The customers were advised to collect empty
66
bottles from the consumers and return them to the appellants and get back their deposit for the bottles. For
this purpose the appellants issued circulars to its buyers. The circulars contained following main points:
(1) The refundable deposits were being collected on the bottles and the crates.
(2) The appellant advised its customers to collect forty paise per bottle from the customers as deposit.
(3) The customers were advised to collect the empty bottles from the consumers and return them to the
appellant.
(4) The empty bottles and crates were to be taken back by the trucks of the appellant, the drivers of which
were authorised to issue a receipt for the empty bottles against which the appellant would issue credit
notes. At the time of the next booking of the next consignment, the customers would get advantage of
the credit notes.
The above arrangement suggested that there was a continuous process by which the appellant would
sell beer to its customers in bottles and crates and collect the sale price of the beer and also deposits for the
crates and bottles. The customers on their turn, would sell beer to the consumers and apart from the price
of the beer would also receive forty paise per bottle as deposit to ensure returns of the bottles. The bottles
would ultimately be taken back by the appellant for which the trucks would be sent and the credit notes
would be given to the customers for the return of the empty bottles and crates. This scheme of recycling
the bottles and crates would keep down the costs and ultimately would have the effect of reducing the price
of beer and encouraging the customers to buy beer in larger quantities. It was also found that as a matter
of fact that the rate at which the customers were required to make the deposit of the beer bottles was less
than the cost of the beer bottles. From the foregoing facts the Supreme Court came to the conclusion that
the intention of the brewer did not appear to have been to sell the beer bottles, on the contrary the brewer
was trying to ensure that the bottles in which the beer was supplied to the consumers through its customers
were brought back to it so that they could be used again. The Supreme Court therefore held that there was
no sale of bottles but in clear terms it was a bailment.
3. Bailment and Sale
Sale literally means “transfer of absolute interest in property (movable goods or immovable) from one
person to another in lawful consideration of price paid or promised.
Section 4(1) of the Sale of Goods Act, 1930 defines “Contract of Sale of Goods”, as a contract whereby
the seller transfers or agrees to transfer the property in goods to the buyer for a price.
The person who sells or agrees to sell is called ‘Seller’ or ‘Vendor’ (Sec. 2(13). The person who buys or
agrees to buy is called ‘Buyer’ or ‘Purchaser’ (Sec. 2(1). The contract between the Seller and Buyer is called
‘the contract of Sale”. CHAPTER XIV BAILMENT AND PLEDGE

67
 Following are the notable points of distinction between bailment and sale.

Bailment Sale
1. The object of bailment is temporary possession of 1. The object of sale is permanent transfer to the
the permanent transfer to the · goods in the hands of purchaser.
the bailee.
2. The ownership does not change. The bailor is the 2. After sale transaction, the purchaser becomes
owner of the goods before, during and after the period owner. The seller does not possess any connection
of bailment. with the property sold.

3. The bailee cannot appropriate the property bailed 3. The purchaser can appropriate the property
to him. purchased by him.
4. The bailor pays some nominal charges to the bailee 4. The transferee shall have to pay the full market
for the services rendered by him. Some times, he is value of the property to buy property.
not required to pay any charges.
5. On certain occassions, the bailee can exercise his 5. The seller of the property has no such right of lien.
right of lien over the goods bailed. However, an unpaid seller of goods can exercise lien
or stoppage in transit.

4. Bailment and Agency Agency: Sections 182 to 238 of the Indian Contract Act, 1872 lay down the
provisions relating to the Contract of Agency.
When a person appoints another to act on his behalf with a third party, it is called ‘Agency’. The
person who appoints is called ‘Principal’. The other person, who is appointed, is called ‘Agent. The contract
between them (i.e. Principal and Agent) is called ‘Contract of Agency’.
Note: Agency is the legal relationship between an agent and Principal; to bring the principal into legal
relationship with the third party.
Example: ‘A’ appoints ‘B’ to purchase some property on his behalf. Here, ‘A’ is principal and ‘B’ is Agent.
The relationship between ‘A’ and ‘B’ is called Agency.

DEFINITION OF AGENT AND PRINCIPAL (SEC. 182)

CHAPTER XIV BAILMENT AND PLEDGE

An ‘Agent’ is a person employed to do any act for another or to represent another in dealings with third
person. The person for whom such act is done or who is so represented is called the ‘Principal’.
Any person, who is a major and is of sound mind, may appoint an agent (Sec. 184). Consideration is
not necessary for creation of an agency (Sec. 185).

68
Following are the notable points of distinction between bailment and agency.
Bailment Agency
1. The bailee does not represent the bailor. He does 1. The agent represents his principal, and derives
not derive any authority from the bailor certain power from his principal.
2. A bailee cannot sell the property under bailment. 2. An agent can sell the property.
3. A bailee has no such powers. 3. An agent can contract with others.
4. A bailee cannot transfer the ownership of the 4. An agent can transfer the ownership of the property.
property.
5. A bailee must have possession of the property. 5. An agent may or may not have possession of the
property.

KINDS OF BAILMENT
Bailment may be classified under the following heads:
1. Bailment for the benefit of the Bailor.
2. Bailment for the benefit of the Bailee.
3. Bailment for the benefit of both the bailor and bailee.
4. Gratuitous Bailment.
5. Non-gratuitous Bailment.
1. Bailment for the benefit of the Bailor:- Where a bailor delivers his goods to a bailee normally for a
safe custody without any reward, it is called “the bailment for the benefit of the bailor”.
2. Bailment for the benefit of the Bailee:- If the bailor delivers/lends goods to a bailee without any hire
for his use, it is called “the bailment for the benefit of the Bailee”.
3. Bailment for the benefit of both the bailor and bailee:- If the goods are delivered for consideration,
both the bailor and bailee derive benefit and hence, it is called “the bailment for the benefit of both the
bailor and bailee”.
4. Gratuitous Bailment:- A bailment made without any consideration for the benefit of the bailor or for
the benefit of the bailee is called “Gratuitous Bailment”.
5. Non-Gratuitous Bailment:- It is a bailment for reward. It is for the benefit of both the bailor and
bailee.

Right and duties of Bailor and Bailee

CHAPTER XIV BAILMENT AND PLEDGE

Where a person has a right, there is a corresponding duty on another. Rights and duties are corresponding
to each other and are correlative. Therefore, the rights of the Bailor are the Duties of the Bailee. Similarly,
the duties of the Bailor are the rights of the Bailee.

Duties of Bailor
Section 150 classifies bailors into two categories for the purpose of their duties, namely -

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 (1) A gratuitous bailor.
(2) A bailor for reward.
(1) Gratuitous Bailor: A gratuitous bailor is one who lends his goods without consideration. Since he
receives no consideration, his duty is much less than that of a bailor for reward. He is bound to disclose
to the bailee the fault in the goods bailed. But he is liable to disclose, the faults of which he is aware
and which may materially interfere with the use of them, if the bailor does not make such disclosure
he will be responsible for damage arising to the bailee directly from such faults. It is well settled that a
gratuitous bailor is not liable for faults or defects in the goods lent of which he is not aware.
For example, A lends a horse, which he knows to be vicious, to B. He does not disclose the fact that
the horse is vicious. The horse runs away. B is thrown and injured. A is responsible to B for damage
sustained.
(2) Bailment for Reward: Second part of Section 150 of the Indian Contract Act, 1872, provides that -
“If the 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.”
For example, A hires a carriage of B. The carriage is unsafe, though B is not aware of it, and A is
injured. B is responsible to A for the injury.
Hyman v. Nye & Sons, (1881) 6 Q.B.D. 685 : In this case, the plaintiff hired a carriage and horses from the
defendant for a particular journey. The carriage being defective, it was upset and the plaintiff was injured
thereby. The defendant was held liable for injury to the plaintiff.
The duties of bailor may be explained with reference to the following heads namely -
i) To disclose known facts of the goods bailed (Sec. 150)
ii) To bear the extraordinary expenses (Sec. 158)
iii) To indemnify the loss (Sec.159)
iv) To take back the goods (Sec.161).

To disclose known facts of the goods bailed (Sec.150)

Bailor has a duty to inform the Bailee, the faults and defects of the goods bailed. Otherwise, he is liable. Eg.
‘A’ lends his defective vehicle to ‘B’. ‘A’ knows the defect, but does not disclose the same to ‘B’. ‘A’ is liable for
the loss suffered by ‘B’.

Section Reads as Follows

“The bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and
CHAPTER XIV BAILMENT AND PLEDGE

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.

Relevant case on this point is: Lyell vs. Ganga Dai

In this case, the defendant (Bailor) delivered the goods of a dangerous character (explosives) to a carrier
(Bailee). In an action by the plaintiff, the defendant was held liable (for non-disclosure).

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To bear extraordinary expenses (Sec. 158):
The Bailor has a duty to meet the extraordinary expenses incurred by the Bailee. He is also responsible for
the ordinary and reasonable expenses. Section 158 reads as follows -
“Where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work done
upon them by the bailee for the bailor and the bailee is to receive no remuneration, the bailor shall repay
to the bailee the necessary expenses incurred by him for the purpose of the bailment.”

To indemnify the loss (Sec.159)

Indemnity means promise to make good the loss. Bailor has a duty to indemnify the loss suffered by the
bailee under the contract. Section 159 runs as follows -
“The lender of a thing for use may at any time require its return, if the loan was gratuitous, even though
he lent it for a specified time or purpose. But if, on the faith of such loan made for a specified time or
purpose, the borrower has acted in such a manner that the return of the thing lent before the time agreed
upon would cause him loss exceeding the benefit actually derived by him from the loan, the lender must,
if he compels the return, indemnify the borrower for the amount in which the loss so occasioned exceeds
the benefit so derived.”

To take back the goods (Sec.161)

In bailment, the goods are delivered for a specific purpose. After the purpose is served, the goods may be
returned to the bailor. Then, he has a duty to take them back.
When the purpose of bailment is accomplished or the time for which the goods were bailed has
expired, the bailee should return the goods to the bailor without demand. If he fails to do so, he will keep
the goods at his risk and will be responsible for any loss of or damage to the goods arising howsoever.
Section 161 deals with the bailee’s responsibility, when goods are not duly returned. It runs as follows -
“If by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is
responsible to the bailor for any loss, destruction or deterioration of the goods from that time.

Rights of Bailor
The Rights of the bailor are stated hereunder.
i) Enforcement of Rights
CHAPTER XIV BAILMENT AND PLEDGE

ii) To avoid the contract

iii) Right to claim increase in profit.
iv) Right against third party (subrogation).
i) Enforcement of rights: The Bailor can sue the Bailee to enforce his rights or the duties and liabilities
of the Bailee.
ii) To avoid the contract: The bailor has a right to avoid or terminate the contract, if bailee acts contrary
to the terms of the contract.

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 iv) Rights against third party (Subrogation): This point is discussed in ‘Doctrine of Subrogation’.
‘Subrogation’ means “transfer of right (to sue) from the person to another person”. If the third party
causes loss to the goods in bailee’s possession, bailor can sue that third party. In subrogation, the
bailee’s right to sue the third party gets transferred/ subrogated to the bailor. In other words, the bailor
enters into the shoes of the bailee and acquires the right to sue the third party.

Rights and Duties of Bailee

“Bailee’ is a person to whom goods are delivered under a contract of bailment. Following are the rights and
duties of the Bailee.

Duties of Bailee
The duties of the bailee may be explained under the following heads:
i) To take care of the goods bailed (Sec.151)
ii) Not to make unauthorised use of the goods bailed (S.154)
iii) To act in conformity with terms and conditions of the Contract (Sec. 153)
iv) Not to mix the goods bailed with his own goods (S.155) and
v) To return the goods bailed, after the purpose is accomplished (Sec. 160)
i) To take care (Section 151):
Section 151 of the Act imposed a duty on bailee, as a reasonable and prudent man, to take much
care of the goods bailed. The burden of proof that he had taken a reasonable care and had not acted
negligently lies on the bailee. Section 151 runs as follows -
“In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a man
of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk,
quality and value as the goods bailed.”
Calcutta Credit Corporation v. Prince Peter, A.I.R. 1964 Cal. 374 :- It was held in this case that loss
of bailee’s goods along with bailor’s goods is not an evidence that he had taken proper care.
i) Baldeo Narain vs. State of Bihar (1959) : The plaintiff in the instant case was an agent of the State
Government. His duty was to procure paddy and to store them in the godown. Due to heavy rain, the
paddy was washed away. It was held that the plaintiff was entitled to indemnity, since the loss was due
to act of God.
ii) Unauthorised use (Section 154): Section 154 deals with liability of bailee making unauthorised use
of goods bailed. It reads as follows -
CHAPTER XIV BAILMENT AND PLEDGE

“If the bailee makes any use of the goods bailed which is not according to the conditions of the bailment,
he is liable to make compensation to the bailor for any damage arising to the goods from or during such
use of them.”
Iilustration
(a) A lends a horse to B for his own riding only. B allows C, a member of his family, to ride the horse. C
rides with care, but the horse accidentally falls and is injured. B is liable to make compensation to A
for the injury done to the horse.
(b) A hires a horse in Calcutta from B expressly to march to Benares. A rides with due care, but marches
to Cuttack instead. The horse accidentally falls and is injured. A is liable to make compensation to B
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 for the injury to the horse. The Bailee must not misuse or make unauthorised use of the goods bailed.
If he does so, he is liable to pay compensation to the bailor.
Example:
‘A’ lends his horse to ‘B’ for his own riding only. But, ‘B’ allows ‘C’, his family member to ride the horse. ‘C’
rides with care. But, the horse accidentally falls and is injured. ‘B’ is liable to make compensation to ‘A’ for
the injury done to the horse.
iii) To act in conformity with terms and conditions (Sec.153): The bailee must act in compliance with
the terms and conditions of the contract. Non-compliance leads to the contract becoming voidable at
the option of the bailor. Eg. ‘A’ lets to ‘B’, for hire, a horse for his own riding. But ‘B’ drives the horse in
his carriage. It amounts to non-compliance and ‘A’ can avoid the contract.
Section 153 provides for termination of bailment by bailee’s act inconsistent with conditions. It reads as
follows -
“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.
Illustration :
A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option of
A, a termination of the bailment.
iv) Not to mix goods (Section 155):
The bailee should not mix the goods bailed with his own goods without the consent of the bailor.
When the goods are mixed, they may or may not be separable. If separable, the cost of separation should
be borne by the bailee. If the goods mixed are inseparable, bailee has to bear the loss.
Example:
‘A’ bails 100 bales of cotton marketed with a particular mark to ‘B’. ‘B’, without ‘A’s consent, mixes the 100
bales with other bales of his own bearing a different mark. ‘A’ is entitled to have his 100 bales returned and
‘B’ is bound to bear all expenses incurred in the separation of the bales and any other incidental damage.
Section 155 provides for Effect of mixture, with bailor’s consent, of his goods with bailee’s. It reads as
follows -
“If the bailee, with the consent of the bailor, mixes the goods of the bailor with his own goods, the bailor
and the bailee shall have an interest, in proportion to their respective shares, in the mixture thus produced.
v) To return the goods (Section 160): Section 160 provides for return of goods bailed, on expiration of
time or accomplishment of purpose. It reads as follows -
CHAPTER XIV BAILMENT AND PLEDGE

“It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed,
without demand, as soon as the time for which they were bailed has expired, or the purpose for which they
were bailed has been accomplished.
In bailment, the goods are delivered for a specific purpose. After the purpose is accomplished, the
bailee has a duty to return the goods to the bailor (or dispose of them as directed by the bailor).

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 Rights of Bailee
The rights of the Bailee may be explained under the following heads :
i) Right to recover expenses (Section 158)
ii) Right to recover compensation (Section 164)
iii) Right to Lien (Sections 171 & 172); and
iv) Right against third party (Right of subrogation) (Sec.180)
i) Right to recover expenses (Sec. 158):
The bailee has a right to recover all the expenses incurred and remuneration for the services rendered
by him under the contract. Section 158 confers on bailee right to recover necessary expenses incurred
on bailment. It reads as follows -
“Where, by the conditions of the bailment, the goods are to be kept or to be carried, or to have work
done upon them by the bailee for the bailor, and the bailee is to receive no remuneration, the bailor
shall repay to the bailee the necessary expenses incurred by him for the purpose of the bailment.”
Eg. A leaves his horse with his neighbour, B, for safe custody for one week. B is entitled to recover the
expenses incurred by him in feeding the horse.
ii) Right to recover compensation (Sec.164):-
The bailee is entitled to recover compensation from the bailor for the loss sustained. Sometimes the
bailor may not be entitled to make the bailment, or to receive back the goods. This may result in some
loss to the bailee. The bailee is entitled to recover from the bailor such loss as may be caused due to the
above stated reason. The provision in this regard is contained in Section 164, which reads as under:
“The bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the
bailor was not entitled to make the bailment, or to receive back the goods, or to give directions
respecting them.”
iii) Right of Lien (Sections 170 & 171):
The terms ‘Lien’ means “right to retain the goods till the dues are cleared.” The lien is of two types
namely
(1) General lien; and
(2) Particular lien.
The general lien entitles the bailee to retain the goods of the bailor for a general balance of account.
The particular lien entitles him (bailee) to retain the goods for the services rendered by him in which
remuneration is due).
Section 170 confers on bailee particular lien. It runs as follows
CHAPTER XIV BAILMENT AND PLEDGE

“Where the bailee has, in accordance with the purpose of the bailment, rendered any service involving the
exercise of labour or skill in respect of the goods bailed, he has in the absence of a contract to the contrary,
a right to retain such goods until he receives due remuneration for the services he has rendered in respect
of them.
Illustrations :
(a) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is accordingly done. B is
entitled to retain the stone till he is paid for the services he has rendered.
(b) A gives cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is finished,
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 and to give a threemonths credit for the price. B is not entitled to retain the coat until he is paid.
Section 171, which speaks about ‘general lien’ reads as under
“Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may, in the absence of a
contract to the contrary, retain as a security for a general balance of account, any goods bailed to them; but
no other persons have a right to retain, as a security for such balance, goods bailes to them, unless there is
an express contract to that ffect.
It has been noted above that a particular lien is a right to retain those very goods in respect of which
some services, etc. are rendered by the bailee. On the other hand, general lien entitles the bailee to retain
goods of the bailor “for a general balance of account”. According to this right, the bailee may retain not only
those goods of the bailor in respect of which some particular services are rendered, but also other goods in
the possession of the bailee belonging to the bailor.
Shivam Construction Co. v. Vijaya Bank, Ahmedabad, A.I.R. 1997 Guj. 24 : In this case the bank had
given overdraft facility to a partnership firm and its partners for granting overdraft facility. The partners and
the firm made a default in repayment of loan inspite of notices given by the bank. It was held that in such a
situation, under the terms of the loan, as well as in exercise of the right of “set off ’ and also by way of banker’s
“general lien”, the bank was entitled to liquidate the Fixed Deposit Receipts and appropriate that amount
towards overdraft account.
Smt. K.S. Nagalambika v. Corporation Bank, Virajpet, A.I.R. 2000 Kant. 201 : In this case, it has been
held that a bank has a general lien over the Fixed Deposit Receipts of the customer. The bank is entitled to
adjust the amount of the FDRs towards the loan account.
iv) Right against third party (Sec.180): If a third person deprived bailee from possession or enjoyment
of the goods bailed, he can sue such third party. This right to sue third party is also available to the
bailor under the right of subrogation.
Section 180, which confers on bailor and bailee right to sue the third person/wrongdoer runs as follows -
“If a third person wrongfully deprives the bailee of the use of possession of the goods bailed, or does them
any injury, the bailee is entitled to use such remedies as the owner might have used in the like case if no
bailment had been made; and either the bailor or the bailee may bring a suit against a third person for such
deprivation or injury.

Distinction between Particular Lien and General Lien

Following are the main points of difference between general and particular liens : CHAPTER XIV BAILMENT AND PLEDGE

(a) The right of particular lien can be claimed by every bailee who has in accordance with the purpose of
a bailment, rendered any service involving the exercise of labour or skill in respect of the goods bailed
provided that there is no contract expressing a contrary intention. On the other hand, the right of
general lien can be claimed only by bankers, factors, wharfingers, attorneys of High Courts and policy
brokers.
(b) The right of particular lien can be claimed only in respect of goods upon which some labour or skill
has been exercised by the bailee. The right of general lien, on the other hand, can be claimed in respect
of any goods for any charge due in respect of other goods.

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 (c) Thirdly, and lastly, the right of particular lien can be successfully claimed if by the exercise of labour or
skill, there has been some improvement of the goods but the same is not necessary in case of general
lien.

Finder of Lost Goods (Ss. 71, 168 & 169)

The position of a bailee is similar to that of a finder of lost goods. Sections 71, 168 and 169 of the
Indian Contract Act, 1872 deal with the position of the finder of lost goods. Section 71 speaks about the
responsibility of finder of goods., while sections 168 and 169 deal with the rights of the finder of lost goods.
Section 71 says that, when a person finds some goods belonging to another and takes them into his
custody, he is called “Finder of lost goods”. His position is the same to that of a bailee. He is supposed to
take care of the goods found and has an obligation/duty to return them to the real owner. If he does not do
so or misappropriates the goods, he is subject to civil and criminal liability.
According to Sec.71 of the I.C.Act, 1872 “a person, who finds goods belonging to another and takes
them into his custody, is subject to the same responsibility as a bailee. Further, according to Sec.403, Indian
Penal Code, 1860, “a person, who misappropriates a thing, of which he is a finder, is punishable with
imprisonment of either description for a term, which may extend to two years or with fine or with both.
The finder of lost goods has to make necessary efforts to find out the real owner. He can dispose of
the goods if they are of perishable nature and pay the amount to the real owner after deducting the lawful
charges.
Sections 71, 168 and 169 of the Indian Contract Act, 1872 lay down the provisions relating to the finder
of lost goods.
Rights: The rights of the finder of lost goods are enshrined in Sections 168 and 169 of the I.C. Act, 1872.
i) Right to retain: The finder of lost goods has a right to retain the possession of the goods until the true
owner is found. He has a right to take action against any other person (except the true owner), who
deprives him of the possession of the goods.
ii) Right of Lien: The finder of lost goods has the right of lien to retain the goods against the true owner
until he receives such compensation. Where the owner has offered a specific reward (for the return of
the goods lost) he may sue for such reward and may retain the goods until he receives it.
iii) Right to Sue (Sec. 168): Section 168 confers on the finder of goods, right to sue for specific reward
offered. It reads as follows -
“The finder of goods has no right to sue the owner for compensation for trouble and expense voluntarily
incurred by him to preserve the goods and to find out the owner, but he may retain the goods against
CHAPTER XIV BAILMENT AND PLEDGE

the owner until he receives such compensation; and, where the owner has offered a specific reward for
the return of goods lost, the finder may sue for such reward, and may retain the goods until he receives
it.
iv) Right to Sell (S.169): Section 169 says that, when finder of thing commonly on sale may sell it. It runs
as follows -
“When a thing which is commonly the subject of sale is lost, if the owner cannot with reasonable diligence
be found, or if he refuses upon demand, to pay the lawful charges of the finder, the finder may sell it –
(i) When the thing is in danger of perishing or of losing the greater part of its value, or

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(ii) When the lawful charges of the finder, in respect of the thing found, amount to two-thirds of its value.
According to Sec.169, the finder of lost goods has a right to sell if the true owner is not found despite
making all efforts or the true owner refuses to pay the lawful charges.

PLEDGE (SECTION 172)

Pledge is a special kind of bailment. It is also known as ‘Pawn’. If the goods are bailed as a security for
payment of a debt or performance of a promise, it is called “Pledge’. The person delivering the goods
(Bailor) in this case is called “Pledger or ‘Pawner’. The person to whom the goods are delivered (Bailee) is
called the ‘Pledgee’ or ‘Pawnee’.
Section172, of the Indian Contract Act, 1872 defines “Pawn” or “Pledge”, “Pawner” and “Pawnee” as
“the bailment of goods as security for payment of a debt or performance of a promise, is called pledge’. The
bailor in this case is called the ‘Pawner’ or ‘Pledger’. The bailee is called the “Pawnee’ or ‘Pledgee’.
Example: If a farmer delivers to the Bank 100 bags of wheat as security for obtaining a loan, it is called
pledge. The farmer is called pledger or pawner. The Bank is called pledgee or pawnee.
‘A’ borrows Rs. 10,000/- from ‘B’ and keeps his gold chain with ‘B’ as security for the payment of the
debt. In this example, the bailment of the gold chain is a “Pledge’ or ‘Pawn’. ‘A’ is the *Pledger’ or ‘Pawner’
and ‘B’ is the ‘Pledgee or Pawnee’.

Essential Elements of the Pledge or Pawn (Sec. 172):

To constitute pledge, the following conditions are to be satisfied.
i) Delivery of Goods
ii) Security for payment of Debt and
iii) The subject matter must be movable property.
i) Delivery of Goods: To constitute pledge, there should be bailment of goods i.e. the delivery of goods
from one person to another. The delivery of possession may be actual or constructive.
Bank of Chittor v. Narasimhah, A.I.R. 1966 AP 163: In this case, the bank allowed the property
pledged to them (a cinema projector and accessories) to remain with the pledgers who sold it to a
third person. It was held that it was a case of constructive delivery and therefore the sale was subject
to the pledge.
ii) Security for payment of Debt: To constitute pledge, the purpose of bailment is to make the goods
bailed to serve as the security for the payment of a debt, or performance of a promise. (In simple
words, the goods are delivered as security for the payment of a debt or performance of a promise).
CHAPTER XIV BAILMENT AND PLEDGE

Bank of India v. Binod Steel Ltd, A.I.R. 1977 M.P. 188: In this case, it has been held that when
certain movables have been pledged by a company to a bank, they cannot be attached and sold for
satisfaction of claims of other creditors of the company without first satisfying the claim of the bank.
iii) Movable property: In pledge, the subject matter of the property must be a movable property, which
includes goods, chattels, valuables and documents.

77
 Bailment and Pledge
Both bailment and pledge have some common features. In the former, there is a delivery of goods for some
specific purpose., while in the latter, the delivery of goods is as security for payment of a debt. Following
are the notable points of distinction between the two-
Bailment Pleage
1. Sections 148 to 171 of the I.C. Act deal with 1. Sections 172 to 181 of the Act deal with pledge.
bailment.
2. It is made for any purpose. 2. It is made for specific purpose.
3. The bailee can use the goods. 3. Pledgee cannot use the goods.
4. The bailee has no right to sell the goods bailed. 4. The pledgee/pawnee has a right to sell the goods
pledged if the pledger could not (fails to) redeem
them within the stipulated period/time.
5. Bailee can exercise lien on goods only for labour 5. Pledgee can exercise lien goods only for labour and
and service. even for non payment of service
interest.
Note:- Bailment and Pledge are almost one and the same. In case of the former, goods are not delivered as
security, while in the latter (pledge) the goods are delivered as security. The rights and duties of the Bailor
and Bailee are identical to the rights and duties of the pledger/pawner and pledgee/pawnee respectively.

Rights and Duties of Pawnee and Pawnor

If the goods are bailed (delivered) as security for payment of a debt or performance of a promise such
bailment is called “Pledge”. The bailor is called ‘pledger and the bailee is called ‘Pledgee’. Pledge, Pledger
and Pledgee are also known as Pawn, Pawnor and Pawnee respectively.

Rights of Pledgee or Pawnee (Ss.173 to 176):

A pawnee has the following rights.
1. Right to retain the goods pledged (Ss. 173 & 174)
2. Right to recover extraordinary expenses (S.175)
3. Right to sue and to sell the pledged goods (S.176)
1. Right to retain or the Right of retainer (Ss.173 & 174): Sections 173 and 174, which confer on
pawnee, the right of retaining or the right to retain reads as follows -
CHAPTER XIV BAILMENT AND PLEDGE

Pawnee’s right of retainer (Sec. 173):

The pawnee may retain the goods pledged, not only for payment of the debt or the performance of the
promise, but for the interests of the debt, and all necessary expenses incurred by him in respect of the
possession or for the preservation of the goods pledged.
Pawnee not to retain for debt or promise other than that for which goods pledged - presumption in
case of subsequent advances: The pawnee shall not, in the absence of a contract to that effect, retain the
goods pledged for any debt or promise other than the debt or promise for which they are pledged; but such
78
contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances
made by the pawnee.
In simple words, Sec. 173 confers on the pawnee, a right to retain the goods pledged not only for
payment of the debt or performance of the promise, but also for the interest of the debt and all necessary
expenses incurred by him in respect of the possession or for the preservation of the goods pledged. However,
he cannot retain any other goods other than the goods pledged. This right of pawnee is also termed as the
“Pawnee’s right of particular lien”. (Sec. 174).
Smt. Aratibala Mohanty v. State Bank of India and others, A.I.R. 1991 Ori 260 : In this case, the
petitioner had taken the loan on the pledge agreement. On account of order of attachment from the court
and seizure of the property, the Bank which had the obligation to deliver back the possession of the goods
when the pawnee exercised her right of redemption, did not discharge that obligation. The Division Bench
of the Orissa High Court held that the bank as the pawnee having refused to perform its obligation of
redelivering the goods on debts being satisfied cannot claim any interest for the said period.
2. Right to recover extraordinary expenses (Sec.175): Section 175 confers on pawnee, right to recover
extraordinary expenses from the pawnor. It runs as follows -
“The Pawnee is entitled to receive from the Pawnor, extraordinary expenses incurred by him for the
preservation of the goods pledged.”
Example:
If the Pawnee has to arrange for a bank locker for the safety of the goods or he spends some amount for
insuring the goods, he can recover such expenses from the Pawnor.
Haridas Mundhra v. National and Grindlay’s Bank Itd, A.I.R. 1963 Cal 132 at p. 134: In this case,
Bachawat J. aptly remarked : “ The right to retain the pawn and the right to sell it are alternative and not
concurrent rights. While the pawnee, he does not sell; and when he sells he does not retain. But the pawnee
has the right to sue on the debt or on the promise concurrently with his right to retain the pawn or to sell
it. The retention of the pawn does not exclude his right of suit since the pawn is collateral security only.
Nor does the sale of the pawn destroy his right; the pawner is still liable on the original promise to pay the
balance due.”
3. Right to sue and to sell the pledged goods (Sec.176): Section 176 confers on pawnee, right, where
pawnor makes default. It reads as follows -
“If the pawnor makes default in payment of debt, or performance; at the stipulated time of the promise,
in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt
or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving CHAPTER XIV BAILMENT AND PLEDGE

the pawnor reasonable notice of the sale.

If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor
is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee
shall pay over the surplus to the pawnor.”
This section confers the following rights on the pawnee, on the pawnor’s default in fulfilling his promise:
(i) he may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a
collateral security, or
(ii) he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
79
 In simple words,if the pawnor makes default in payment of the debt or performance of the promise in
respect of which the goods were pledged, the pawnee may sue the pawnor or sell the goods pledged after
giving reasonable notice to the pawnor.
Bank of Bihar v. The State of Bihar, A.I.R. 1971 Sc 1210: In this case, it was held that the pledgee has a
right to be paid in priority to third parties who are unsecured creditors of the pledge. See also comments
under Sec. 181 for rights against trespassers.

Duties of Pawnee:
The duties of Pawnee are identical to that of a bailee as stated below:
1. The Pawnee must take care of the goods pledged as a reasonable and prudent man to take care of the
goods bailed under similar circumstances.
2. He must not make unauthorised use of the goods pledged.
3. He should not mix the goods pledged with his own goods without the consent of the pawnor. He has
a duty to return the goods pledged on payment of the amount due or on performance of his promise.
5. He must act in conformity with terms and conditions of the contract of pledge/pawn.
Rights of Pawnor (Sec.177) - Section deals with defaulting pawner’s right to redeem. It reads as follows -
“If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge
is made, and the pawnor makes default in payment of the debt or performance of the promise at the
stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them,
but he must, in that case, pay, in addition, any expenses which have arisen from his default.

Sec. 177 confers on the Pawnor, the following rights.

1. He has a right to redeem (to set back) the goods pledged. This right is called the right of redemption.
2. He has a right to insist upon the pawnee for proper preservation and maintenance of the goods
pledged.
Duties of the Pawnor:- The rights of the pawnee are corresponding to the duties of the pawnor as stated
above.

Pledge by Non-Owners

(Nemo dat quod non habet)

CHAPTER XIV BAILMENT AND PLEDGE

The general rule is that, it is only the real owner, who can ordinarily create a valid pledge. This rule has been
enshrined in the Latin maxim “Nem odat quod non habet”. This principle aims to protect the proprietory
interest of an individual. In other words, a person, who has a valid title over the goods (property) i.e. owner
of the goods alone can create a valid pledge. However, this rule is subject to certain exceptions.
Following are such exceptional cases in respect of which a non-owner can create a valid pledge.
1. Pledge by Mercantile Agent (Sec. 178)
2. Pledge by a person in possession of goods under voidable contract (Sec. 178A)
3. Pledge by a co-owner
80 4. Pledge by a person having limited interest (S.179)
5. Pledge by a seller in possession of goods after sale; and
6. Pledge by a buyer in possession of goods.
1. Pledge by Mercantile Agent (Sec.178) : Section 178 deals with pledge by Mercantile Agent. It reads
as follows -
“Where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of
title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile
agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same;
provided that the pawnee acts in good faith and has not at the time of the pledge notice that the
pawnor has not authority to pledge.
Explanation: In this section, the expressions ‘mercantile agent and documents of title shall have the
meanings assigned to them in the Indian Sale of Goods Act, 1930 (3 of 1930).
A mercantile agent is a person, who by virtue of customary trade practice, is authorised to sell or
buy goods belonging to others. He may be entrusted with the possession of the goods or title deeds.
Therefore, any pledge made by him is valid.
Pledge by a person in possession of goods under voidable contract (Sec. 178 A): Section 178 A
(substituted by Act 4 of 1930) provides for pledge by person in possession under voidable contract. It
reads as follows -
“When the pawnor has obtained possession of the goods pledged by him under a contract voidable
under section 19 or section 19 A, but the contract has not been rescinded at the time of the pledge,
but 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. Pledge by such person is valid provided:
a) the contract has not been rescinded before the contract of pledge;
b) the pawnee acts in good faith; and
c) the pawnee has no notice as to the pawnor’s defective title.
3. Pledge by Co-Owner: A Co-owner, who is in possession of the goods, with the consent of the other
co-owner/co-owners can pledge the goods.
4. Pledge by a person having limited interest (Sec.179): Section 179 deals with pledge, where pawnor
has only a limited interest. It reads as follows -
“Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent
of that interest.”
In simple words, if a person has a limited interest in the goods, he can pledge the goods to the extent
of his interest.
Example : ‘A’ gives/delivers a piece of cloth to ‘B’, a tailor for stitching a shirt. The stitching charge Rs.
50/- is not paid by ‘A’ and ‘B’ exercises (particular) lien over the shirt to the extent of Rs. 50/- In other
CHAPTER XIV BAILMENT AND PLEDGE

words, ‘B’ has a limited interest in the shirt. If ‘B’ pledges the shirt to ‘C’ for Rs. 100/- the pledge is valid
to the extent of Rs.50/-. If ‘A’ pays Rs.50/- to ‘C’, ‘C’ is bound to return the shirt to ‘A’.
5. Pledge by a seller in possession of goods after sale: A seller, who is in possession of the goods after
sale, is no more the owner. However, pledge of the goods by him is valid, provided the pledgee/
pawnee had acted in good faith and had no notice as to the previous sale.
6. Pledge by a buyer in possession of goods:- A buyer who is in possession of the goods before payment
of the price in full can make a valid pledge provided:
i) the pawnee acts in good faith; and
ii) he has no notice as to the pawner’s defective title.
81
 Chapter XV
CONTRACT OF AGENCY

Chapter X containing sections 182 to 238 of the Indian Contract Act, 1872 lay down the provisions relating
to the contract of “Agency”.
When a person appoints another to act on his behalf with a third party, it is called ‘Agency’. The
person who appoints is called ‘Principal’. The other person, who is appointed is called ‘Agent’. The contract
between them (i.e. Principal and Agent) is called ‘Contract of Agency’.
‘Agency is the legal relationship between an agent and Principal; to bring the principal into legal
relationship with the third party.’
Example:
‘A’ appoints ‘B’ to purchase some property on his behalf. Here, ‘A’ is principal and ‘B’ is Agent. The
relationship between ‘A’ and ‘B’ is called Agency.

Definition of Agent and Principal (Sec.182)

Section 182 of the Indian Contract Act, 1872 defines Agent and Principal as follows -
“An ‘Agent’ is a person employed to do any act for another or to represent another in dealings with third
persons. The person for whom such act is done or who is so represented is called the “Principal’.”

Qualification:

Who may employ agent (Sec. 183):

Section 183 says that “any person who is of the age of majority according to the law to which he is subject, and
who is of sound mind, may employ an agent.” In other words, any person, who is a major and is of sound
mind may appoint an agent.
Who may be an agent (Sec. 184):
According to section 184, any person may become an agent. But in case where acts of agent make principal,
agent must be of competent to contract, i.e., he must have attained the age of majority and should be sound
mind.
1Consider is not necessary- An agent can work without taking any commission.

Essential Elements of Agency to constitute Agency, the following ingredients are to be satisfied -
i) Principal must be competent to contract (S. 183)
ii) Any person may become an Agent (S. 184)
iii) Consideration not necessary (S.185)
i) Principal must be competent to contract (S. 183): Section 183 envisages qualification to act as
principal as enshrined under Sec. 11 of the Indian Contract Act, 1872 namely a) age of majority and
b) soundness of mind. Section 183 runs as follows -
“Any person who is of the age of majority according to the law to which he is subject, and who is of sound
mind, may employ an agent.”
According to Section 11 of the Act, every person is competent to contract who is of the age of majority
and of sound mind, and is not disqualified from contracting by any law to which he is subject.
Thus principal should be competent to contract. It may however, be noted that Section 183 requires
a person to be major and of sound mind to employ agent. It does not speak of third requirement, i.e.
not being disqualified from contracting by any law to which he is subject. It appears that if a person is
of sound mind and is a major, he may employ an agent irrespective of the fact that he may be deprived
of his right of contracting generally by any statute. It is, however, clear that a minor cannot employ an
agent and the appointment of an agent by a minor will be void.
ii) Any person may become an Agent (S. 184): Section 184 says that any person can be an agent. It
reads as follows -
“As between the principal and third persons any person may become an agent, but no person who is not
of the age of majority and of sound mind can become an agent, so as to be responsible to his principal
according to the provisions in that behalf herein contained.”
iii) Consideration not necessary (S.185): Section 185 lays down that consideration is not necessary for
creation of a contract of agency. This provision may be treated as 4th exception to the general rule,
“a contract without consideration is void”. In other words, as per these exceptions, a contract without
consideration is valid. CHAPTER XV CONTRACT OF AGENCY

Creation of Agency
The word ‘agency’ is used to connote the relation which exists where one person has an authority or capacity
to create legal relations between a person occupying the position of principal and third parties.
The relation of agency arises, whenever one person, called the ‘agent has authority to act on behalf
of another called the ‘principal and consents to act. Whether that relation exists in any situation depends
not in the precise terminology employed by the parties to describe their relationship. If an agreement in
substance contemplates the alleged agent acting on his own behalf and not on behalf of the principal, then
1 Section 185
83
 although he may be described in the agreement as an agent, the relation of agency will not have arisen.
Conversely, the relation of agency may arise despite a provision in the agreement that it shall not. An act
done by an agent on behalf of the principal binds the principal towards a third person.
The relationship of Principal and Agent between the person represented and the person representing
has to exist in order that the principal’s liability towards the third person, arises.
Agency may be created under the following ways:
1. By Express Agreement (Section 186).
2. By Implied Agreement (Section 187)
(A) Agency of Estoppel.
(B) Agency by Holdingout.
(C) Agency by Necessity.
3. By Ratification (Section 197).
4. By Operation of Law.
1. By Express Agreement (Section 186): According to section 186 of the Indian Contract Act, 1872, the
contract of agency may be express or implied. Express in the sense, it may be oral or in writing. It is a
practice in many cases, to appoint agents by using the power of attorney on a stamped paper.
2. By Implied Agreement (Section 187): Section 187 defines express and implied authority as follows
“An authority is said to be express when it is given by words spoken or written. An authority is said to be
implied when it is to be inferred from the circumstances of the case; and things spoken or written, or the
ordinary course of dealing, may be accounted circumstances of the case.”
An Implied Agency may be created from the conduct, situation or relationship of the parties. It may
be inferred from the circumstances of the case. Implied agency includes:
A) Agency by Estoppel;
B) Holding out; and
C) Necessity
A) Agency by Estoppel: It is based on the ‘Doctrine of Estoppel’. If the principal by his conduct or
statement leads another person to believe that a person is his agent, he can not deny him as his agent
later.
Eg. ‘A’ says ‘B’ in the presence of ‘C’ that he is the agent of ‘C’. If ‘C’ does not deny the statement, he can
not deny ‘A’ as his agent later.
Sometimes the agent has neither express nor implied authority to do an act on behalf of the principal,
but the principal by his conduct creates an impression in the mind of the third person that the agent
has an authority to act on his behalf. In such a case, the principal is liable towards the third person
CHAPTER XV CONTRACT OF AGENCY

for the acts done by the agent, on the ground of the application of the law of estoppel. The basis of
the action is what appears to the third person to be an authority, i.e. apparent or ostensible authority
conferred on the agent.
Section 237 of the Indian Contract Act, 1872 speaks about the liability of principal inducing belief
that agent’s unauthorised acts were authorised. It reads as follows -
“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 obligation, 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.”

84
 Illustrations:
(a) A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being
ignorant of B’s 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.
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in violation of private
orders from A. The sale is good.
B) Agency by Holding out: It is branch of the Agency by Estoppel. If one person knowingly admits
another to act on his behalf, and allows him to do so, later he cannot deny the act of that person. If
he does not want to do so he should express his objectiòn to that act immediately. If he allows him to
do the acts on his behalf, later he is estopped, the act becomes valid under agency. This is called the
“Doctrine of Estoppel or Agency by Holding Out”.
Example:
(i) A was the shop owner. B managed the shop. B regularly placed orders with C on A’s name, and A used
to pay them. This practice ran for months. Later, B purchased certain goods from C and absconded
from the city. A was liable.
(ii) A was the owner of the goods. He handed over the goods to B along with their title to goods. B sold
the goods to C, who purchased them in good faith. A was bound by the sale.
(iii) A is the son of B. A gave order for furniture to furniture dealer D. D supplied the furniture and ar-
ranged it in the presence of B. B gave certain instructiorîs as to how they should be arranged. B is
bound to pay the cost of furniture.
C) Agency by Necessity:
Agency of necessity is created in cases of emergencies. In these cases, the persons who perform their
services as agents do not seek prior permission or appointment from the principals. The principals
are also in certain difficult situations and they could not give their assent or refusal, but accept the
services rendered by such persons. Therefore law confers authority on a person to act as an agent for
another, without the consent of that person (principal). Such an agency is called ‘Agency by Necessity’.
Matheson v. Smiley (1932): In this case, an unconscious person was brought by some unknown
persons before a surgeon. He attempted to commit suicide. The surgeon tried to save his life. He also
incurred huge expenses. The Court held that the surgeon was entitled to recover the medical expenses
and service charges.
An agency of necessity is thus created in case of an injured person, who is in need of medical attend-
ance. In certain circumstances, a person will be compelled to act as an agent for others.
D) Distinction between Agency by Necessity and Agency by Estoppel:
Despite some similarities, the notable points of distinction between the agency by necessity and agen-
cy by estoppel are detailed below -
CHAPTER XV CONTRACT OF AGENCY

Agency of Necessity Agency by Estoppel

1. It is created in emergency. 1. It is created in general.
2. There are no chances of obtaining the principal’s 2. The principal gives his consent, by his conduct. There
consent. is no express consent. However, the incidence of agency
is known to him. He silently admits it.

85
 3. In an agency of necessity, the 3. In this case, the person who acts as an agent, acts
according to the ‘will’ of the principal. There are chances
person who acts as an agent, should take all
and time, to the principal to intervene in the act, but he
precautions necessary to perform that act.
does not intervene it, and moreover allows the agent to
There are no chances of obtaining the principal’s
do the act.
instructions.
4. The burden of proof lies upon the agent to a great 4. The burden of proof lies upon the principal to a great
extent that he was compelled to perform that act. extent that he did not give any consent, and the act was
done without his knowledge.
3. Agency by Ratification (Section 196-200): Sections 196 to 200 of the Indian Contract Act, 1872 lay
down the provisions relating to Agency by Ratification. Section 196 refers to right of person as to acts
done for him without his authority-Effect of ratification. Section 197 says that ratification may be
expressed or implied. Section 198 speaks about knowledge requisite for valid ratification. Section 199
deals with effect of ratifying unauthorised act forming part of a transaction and finally section 200
provides for ratification of unauthorised act cannot injure third person.
Sometimes, a person (Agent) does not act for another (Principal) without his consent or his knowledge.
If the act is accepted later, it is said to be ratified. It is called ‘ratification’. If the principal ratifies the act
of his agent, it is called ‘Agency by Ratification’. Eg. ‘A’ purchased a house for ‘B’ without his consent.
‘B’ accepted it later and paid the amount. It is an agency by ratification.
By ratification we mean an act which the principal confirms unauthorised acts of the agent. That
is to say, even if the agent enters into a contract without the authority, consent or knowledge of the
principal may, if he likes, ratify it and thereby accept the benefits and obligations arising out of such a
contract.

Essentials
Ratification to be valid and enforceable, the following ingredients are to be satisfied-
i) The act should be done on behalf of another person. (Sec. 196).
ii) The principal should be in existence, and competent to contract when the act is done.
iii) Ratification may be express or implied.(Sec. 197).
iv) Ratification should be with full knowledge of the facts.(Sec. 198).
v) Ratification should be of the whole transaction. (Sec. 199).
vi) Ratified acts should not be injurious to third person.(Sec: 200).
vii) Ratification should be made within a reasonable time.
4. Agency by Operation of Law : Sometimes Agency is created by operation of law. When a company
CHAPTER XV CONTRACT OF AGENCY

is formed, its promoters act as its agents by operation of law. Similarly, partners are the agents of the
Partnership Firm.

Delegation of Authority
Delegatus non potest delegare ‘or’ Authority once delegated can not be further delegated ‘or’
Himself a delegate, an agent can not further delegate.

86
Delegation of Authority
(Sec. 190) The expression ‘Delegation of Authority’ means “transfer of authority/power by the superior to
the subordinate to act on his behalf ”. When an agent has undertaken to perform certain duties personally,
he is not allowed to delegate his duties to another person. The rule is contained in the maxim (Delegatus
non potest delegare’, which means that an agent to whom some authority has been delegated cannot further
delegate that authority to another person. The relationship of principal and agent is based on confidence
and trust. When the principal has reposed trust in a particular agent, the agent cannot substitute another
person in his place. In other words, an agent cannot employ a subagent to get the work done through him.
An agent, who has undertaken to do some work personally, cannot employ a sub-agent to do the same.
However, this rule is subject to an exception under section 190.
Section 190 envisages that an agent cannot delegate unless the custom or trade so permits. It runs as
follows -
“An agent cannot lawfully employ another to perform acts which he has expressly or impliedly undertaken to
perform personally, unless by the ordinary custom of trade a sub-agent may, or, from the nature of the agency,
a sub-agent must, be employed.”
Example :
When a person (Principal) employs another (agent) to act on his behalf, it is called the ‘delegation of
authority’. The person (agent) so appointed is called the ‘the delegate’.
The general rule is that “an agent, being a delegate can not further delegate his authority”. (An agent
cannot delegate his duties to another person). In other words, where a work had already been entrusted/
assigned to an agent, the work should not be further entrusted by the agent to another person.

Sub Agent:
If an agent (original agent ) appoints another person as his agent, he is called sub-agent. In other words,
sub-agent is a person employed by the original agent. He acts under the control of the original agent. The
relationship between agent and sub-agent is that of the principal and agent.
According to Sec.191 of the I.C. Act, ‘a subagent’ is a person employed by, and acting under the control of,
the original agent in the business of the agency.

Exceptions:
Section 190 of the Indian Contract Act, 1872 provides for two exceptions for the appointment of a sub-
CHAPTER XV CONTRACT OF AGENCY

agent as follows:
1. Where the custom or trade permits the appointment of a sub-agent.
Example:
An advocate, who is engaged to attend to a work in court may delegate it to another advocate.
2. Where the appointment of a sub-agent is necessary for the nature of the work.
In addition to the above, following are some more exceptions recognised by the English Law and are
also accepted in India.
i) Where the principal permits him to appoint a sub-agent.
87
 ii) Where the principal is aware of the intention of the agent to appoint a sub-agent and he (principal)
does not object to it; and
iii) Where necessity arises for the appointment of a sub agent.
An agent appointed under any one of the above circumstances, is called “properly appointed sub-
agent”. He acts under the control of the original agent (Sec.191).
Relationship between Principal and Sub-Agent: The legal relation between the sub-agent and the
principal depends upon whether the appointment is proper or improper. When the subagent is properly
appointed, he can represent the principal as regards parties. So, such third parties can sue the principal.
Between the sub-agent and the principal there is no privity of contract. So the sub-agent is responsible for
his acts to the Agent and not to the principal. The Agent would be responsible to the principal for the sub-
agent’s acts. If there is fraud or wilful wrong, however, the sub-agent also becomes directly responsible to
the principal (Sec. 192).
When the sub-agent is improperly appointed, the principal is not represented by him and is not bound
by his acts. The third parties concerned cannot look to the principal but can only look to the agent for the
fulfilment of the contract entered into by them with the sub-agent. Further, the sub-agent is not responsible
only to the agent. The Agent would be responsible both to the principal and to the third parties (Sec. 194).

Co-Agent or Substituted Agent

Section 194 of the Indian Contract Act, 1872 deals with the appointment of a Co-agent or Substituted
agent. Substituted agent is a person, who is named by the agent with the express or implied authority of the
principal. In other words, he is named by the agent at the request of the principal.
Example:
‘A’ instructs his agent ‘B’ to purchase a horse for him. If ‘B’ engages ‘C’ at the desire of ‘A’ for the
purpose, ‘C’ is called substituted agent.
Sub-agent acts under the control of the Agent, while the substituted agent is not answerable to the
Agent, and acts under the Control of the Principal.

Distinction between Sub-agent and Substituted-agent:

A sub-Agent is a person who is under the control of the original agent (Sec. 191). Such a person can
be properly appointed when the custom of trade permits such appointment or the nature of the agency
necessitates such employment (Sec. 196). A substituted agent, on the other hand, is a person who is named
by the Agent for performing such part of the business of the agency as is entrusted to him (i.e. the substituted
CHAPTER XV CONTRACT OF AGENCY

Agent). A substituted agent can be appointed by the agent only when the principal has given him express or
implied authority to do so (Sec. 194). Following are the notable points of distinction between the sub-agent
and substituted agent.

Rights and Duties of Agent

The rights and Duties of the Agent are corresponding to the duties and rights of the Principal.

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Duties of an Agent:

1. Duty to conduct the principal’s business (Sec.211):

An agent has a duty to act according to the directions of his principal, otherwise he is liable. If there
are no such directions, he is bound to conduct the business according to the custom which prevails in
doing business of the same kind and place where the agent conducts such business. If the agent does
not conduct the business according to the directions of the principal or in its absence according to
the prevalent custom, he will be liable for any loss sustained and will also be bound to account for any
profit accruing in the business.
Section 211 imposes on agent, duty in conducting principal’s business. It runs as under -
“An agent is bound to conduct the business of his principal according to the directions given by the
principal, or in the absence of any such directions according to the custom which prevails in doing
business of the same kind at the place where the agent conducts such business. When the agent acts
otherwise, if any loss be sustained, he must make it good to his principal, and, if any profit accrues, he
must account for it.
Illustrations:
(a) A, an agent engaged in carrying on for B a business, in which it is the custom to invest from time to
time, at interest, the moneys which may be in hand, omits to make such investment. A must make
good to B the interest usually obtained by such investment.
(b) B, a broker in whose business it is not the custom to sell on credit, sells goods of A on credit to C,
whose credit at the time was very high. C, before payment, becomes insolvent. B must make good the
loss to A.
Section 211 of the Indian Contract Act, 1872 only says that an agent is bound to conduct the business
of his principal according to the directions of the latter, or in the absence of any such direction,
according to the customs which prevail in doing business of the same kind. It does not speak of any
notice at all. The agent is, however, not bound to take any separate or special care. This has been held
in Padam Parshad y. The Punjab National Bank Ltd., A.I.R. 1974 P & H 22, wherein the dealer, after
having consigned the goods, handed over the receipt to the Bank with a Hundi and instructed to
collect the amount from the consignee and to hand over the receipt to the consignee. The Bank sent
the receipt by ordinary post and the receipt was lost in the transit. It was submitted that the documents
of this nature should have been sent by registered post because even apart from the terms of the
agreement, the Bank which was the agent of the plaintiff, had to act like a prudent man who would
have ordinarily sent such like documents by registered post. It was held that this argument would not
be available to the appellant, because the parties had to be bound by the terms of the agreement itself.
CHAPTER XV CONTRACT OF AGENCY

It is not a case where there was no written agreement and the agent was supposed to act on his own.
If according to the agreement, the defendant was not required to send the documents by registered
post, he was not duty bound to do so.
The agent is always bound to act with reasonable diligence, and to use such skill as he possesses; and
to make compensation to his principal in respect of the direct consequences of his own neglect, want
of skill, or misconduct, but not in respect of loss or damage which is indirectly or remotely caused by
such neglect, want of skill, or misconduct.

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 Illustration
(a) A, a merchant in Calcutta, has an agent, B, in London, to whom a sum of money is paid on A’s account
with orders to remit. B retains the money for a considerable time. A, in consequence of not receiving
the money becomes insolvent. B is liable for the money and interest, from the day on which it ought
to have been paid, according to the usual rate, and for any further direct loss - as e.g. by variation of
rate of exchange - but not further.
(b) A, a merchant in England, directs B, his agent at Bombay, who accepts the agency, to send him 100
bales of cotton by a certain ship. B, having it in his power to send the cotton, omits to do so. The ship
arrives safely in England. Soon after her arrival the price of cotton rises. B is bound to make good to A
profit which he might have made by 100 bales of cotton at the time the ship arrived, but not any profit
he might have made by the subsequent rise.
An agent is under a duty to conduct the business of agency with reasonable deligence and skill, he
possesses. Otherwise, he is liable to make compensation to the principal in respect of the loss as a
consequence of his neglect.
Jayabharathi, Corporation v. Sy. P.N.S.N. Rajesekar Nadar, A.I.R. 1992 SC 596: In this case, the
defendant respondent grossly misconducted himself in first communicating to the applicant that the
goods had been purchased for him at the rate of Rs. 36/per pound when they had not been and further
in another communication to have told him that those goods would be despatched the moment the
strike of transporters was over. His turning around to say that in fact the goods could not be purchased
by him at all as their delivery was dependent on a third party and which third party was dependent on
yet another party for delivery of goods appears to us an afterthought. For such neglect and misconduct
of the agent misinforming his principal his conduct, squarely comes within the wide terms of section
212 of the Indian Contract Act, 1872 and he therefore must bear the burden to pay damages.
3. To render proper accounts (Sec.213): Section 213 imposes an obligation on agent that, he(agent) is
bound to render proper accounts to his principal on demand.
4. To communicate difficulties (Sec.214): It is the duty of an agent, in cases of difficulty, to use all
reasonable deligence in communicating with his principal, and in seeking to obtain his instructions.
5. Not to deal on his own account (Sec.215): Section 215 deals with right of principal when agent deals,
on his own account, in business of agency without principal’s consent. It reads as follows -
“If an agent deals on his own account in the business of the agency, without first obtaining the consent
of his principal and acquainting him with all material circumstances which have come to his own
knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that
any material fact has been dishonestly concealed from him by the agent, or that the dealings of the
agent have been disadvantageous to him.
Illustrations:
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(a) A directs B to sell A’s estate. B buys the estate for himself in the name of C. A, on discovering that B has
bought the estate for himself, may repudiate the sale, if he can show that B has dishonestly concealed
any material fact, or that the sale has been disadvantageous to him.
(b) A directs B to sell A’s estate. B, on looking over the estate before selling it, finds a mine on the estate
which is unknown to A. B informs A that he wishes to buy the estate for himself, but conceals the
discovery of the mine. A allows B to buy, in ignorance of the existence of the mine. A, on discovering
that B knew of the mine at the time he bought the estate, may either repudiate or adopt the sale at his

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 option.
An agent should not without the consent of the principal, deal on his own account with the business
of the agency. If he does so, the principal can claim any benefit resulting from the transaction or re-
pudiate the transaction, if he finds that, it is disadvantageous to
6. Not to make secret profits (Sec.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.”
Illustration:
(a) A, directs B, his agent, to buy a certain house for him. B tells A that it cannot be bought, and buys the
house for himself. A may, on discovering that B has bought the house, compel him to sell it to A at the
price he gave for it. An agent, without the knowledge of his principal, should not deal in the business
of agency on his own to make secret profits. If so, the principal is entitled to claim such profits.
Eg. ‘A’ directs his agent ‘B’ to buy a land for him. ‘B’ tells ‘A’, that it cannot be bought and buys for him-
self. ‘A’ can compel his agent ‘B’ to sell it to ‘A’ for the same price.
Happisley v. Knee Brothers, (1905) 1 K.B. 1 : In this case, the defendants, auctioneers, were engaged
by the plaintiff for the sale of certain property. The plaintiff agreed to pay them certain commission
and certain other expenses. While charging the full amount from the plaintiff, they did not deduct
the discount received from printers and advertisers honestly believing that they could keep the said
discounts themselves. It was held that the defendants were bound to account to the plaintiff the said
discounts received by them.
7. Not to disclose confidential matters: An agent has a duty to maintain the secrecy of the business of
agency and should not disclose the confidential matters. Otherwise, he is held liable.
8. Not to delegate authority (Sec.190): Sec.190 says that, an agent, being a delegate, cannot delegate his
duties to another person unless by the ordinary custom of trade, a sub-agent may, or from the nature
of the agency, a sub-agent must be employed. This rule is enshrined in a Latin maxim “delegatus non
potest delegare”. In other words, an agent, being a delegate, cannot further delegate. In other words, an
agent cannot appoint further, an agent for himself i.e. sub-agent.
9. To pay the amounts received for the principal (Sec.218): An agent has a duty to pay to the principal
all sums received by him on account of the principal after deducting his dues.
Narayan Chandra Ghosh v. Biswajit Lahiri, A.I.R. 2006 Cal. 94 : In this case, the plaintiff filed a
suit against the defendant owner of a vessel and his agent for short landing of goods. It was held that
the agent who is said to have a limited responsibility of loading and un-loading cannot be made liable
unless material is placed before the court to show that the agent has agreed to take the responsibility
CHAPTER XV CONTRACT OF AGENCY

in making the delivery.

Rights of an Agent
An agent has the following Rights against the principal.
1. Right to receive remuneration (Sec.219):
According to section 219, an agent is entitled to his agreed remuneration or commission. If the amount
of remuneration/commission is not fixed in advance, he is entitled for a reasonable remuneration. An
agent, who is guilty of misconduct in the business of agency, is not entitled to any remuneration.
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 Section 219 operates when agent’s remuneration becomes due. It runs as follows -
In the absence of any special contract, payment for the performance of any act is not due to the agent until
the completion of such act; but an agent may detain moneys received by him on account of goods sold,
although the whole of the goods consigned to him for sale may not have been sold, or although the sale
may not be actually complete.
2. Right of lien (Sec.221):
Section 221 confers on agent, right of lien. Lien means right to retain the property or goods till the
dues are cleared/paid. An agent has a right of lien against the goods, papers and other property,
whether movable or immovable of the principal till his commission and other payments are made to
him.
Section 221 runs as follows -
In the absence of any contract to the contrary, an agent is entitled to retain goods, papers, and other
property, whether movable or immovable, of the principal received by him, until the amount due to
himself for commission, disbursements and services in respect of the same has been paid or accounted
for to him.
3. Right of indemnity (Sec.222):
Section 222 confers on agent, right of indemnity. Indemnity means promise to make good the loss.
If the agent suffers any loss in discharge of his duties, he has a right to indemnify such loss from the
principal.
Section 222 runs as follows -
“The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by
such agent in exercise of the authority conferred upon him.”
Illustrations :
(a) B, at Singapore; under instructions from A of Calcutta, contracts with C to deliver certain goods to
him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and
A authorises him to defend the suit. B defends the suit, and is compelled to pay damages and costs,
and incurs expenses. A is liable to B for such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, a merchant, there, contracts with C for the purchase of 10
cakes of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates
the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs and incurs
expenses. A is liable to B for such damages, costs and expenses.
4. Right of compensation (Sec.225): An agent is entitled to claim compensation for the injuries suffered
as a consequence or want of skill of the principal. Section 225 provides for compensation to agent for
injury caused by principal’s neglect. It runs as follows
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“The principal must make compensation to his agent in respect of injury caused to such agent by the
principal’s neglect or want of skill.”
Illustrations:
(a) A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding
is unskillfully put up, and B is in consequence hurt. A must make compensation to B.
8. Personal Liability of Agent An agent is a person, who is employed to bring the principal into
contractual relations with third parties. So, the agent, in his own name, can neither enforce nor bound
by the contracts concluded by him on behalf of the principal. Therefore, the general rule is that only
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 the principal, who can sue and be sued for the acts of the agent under such contracts. However, there
are some exceptions to this rule under section 230. Section 230 says that an agent cannot personally
enforce, nor be bound by, contracts on behalf of principal. It runs as follows -
“In the absence of any contract to that effect an agent cannot personally enforce contracts entered into by
him on behalf of his principal, nor is he personally bound by them.”

Presumption of Contract to The Contrary

Such a contract shall be presumed to exist in the following cases :
(i) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident
abroad;
(ii) Where agent does not disclose the name of his principal;
(iii) Where the principal, though disclosed, cannot be sued.
In other words, the agent himself in some exceptional cases acquires certain rights and liabilities so as to
enable him to sue and be sued in his own name as stated below :
1. If the principal is residing abroad (Foreign principal);
2. If the Agent does not disclose the name of the principal (undisclosed principal);
3. If the principal is under Legal Disability;
4. If the Agent is an Auctioneer; and 5. Where there is an agreement to that effect.
1. Foreign Principal (Sec. 230(1)): When an agent has entered into a contract for the sale or purchase
of goods on behalf of a principal resident abroad, the presumption is that the agent undertakes to
be personally liable for the performance of such a contract. If the circumstances indicate that the
agent does not want to undertake personal liability, e.g., he discloses the names and particulars of the
foreign principal, the agent is not personally liable in such a case (1999).
U.R. Mohana Krishnan v. Chimanlal Desai & Co.,A.I.R. 1960 Mad 452 :
In this case, it was held by the Madras High Court that the agent will be personally liable only where it is
established that he contracted on behalf of his principal resident abroad signed on behalf of his principal
or that the contract was in fact between an Indian merchant and an Indian agent who contracted on behalf
of a foreign principal.
2. Undisclosed Principal (Sec.230(2)) :- An undisclosed principal is one, whose name is not disclosed
by his agent. There are certain circumstances in which the agent says that, somebody is the principal
and does not disclose his name. When the principal’s name is not disclosed, the agent is presumed to
be liable (Sec.230(2)) and hence, he can sue and be sued.
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The rule that an undisclosed principal cannot sue upon the contract is enshrined in the principle “that
no one can sue upon a contract whose name does not appear in it as a party to it”. (Any person who is
not a party to the contract cannot sue : privity of contract).
According to section 230(2) “where the agent, does not disclose the name of his principal, the presumption
shall exist that he can personally enforce contracts entered into by him and be personally bound by them”.
If an agent, makes a contract with a person who neither knows, nor has reason to suspect, that he is
an agent, his principal may require the performance of the contract; but the other contracting party
has as against the principal, the same rights as he would have had as against the agent if the agent had
been the principal.
Exception : 93
 According to Cheshire, the doctrine of undisclosed principal may be regarded as an exception to
the above rule of privity of contract under certain circumstances. In other words, an undisclosed
principal can sue in his own name provided, the following two conditions are satisfied:
i) At the time of the contract, the agency must have been in existence; and
ii) The contract should not expressly or impliedly confine its and operation only to the parties actually
named in it.
3. Legal Disability of the Principal : Where the principal is under a legal disability due to unsoundness
of mind etc. and cannot be sued, the agent is personally liable.
4. If the Agent is an Auctioneer : If the auctioneer is an agent, he can sue the purchaser directly.
5. Agreement: If the contract specifically provides for the personal liability of the agent, the agent can
sue and be sued in his own name.

Termination of Agency (Revocation of Authority, Ss. 201-210)

Sections 201 to 210 of the Indian Contract Act, 1872 lay down the Provisions relating to the termination of
Agency or revocation of Authority. Termination of Agency means putting an end to the legal relationship
between principal and agent.
Section 201 provides for termination of agency. It reads as follows -
“An agency is terminated by the principal revoking his authority; or by the agent renouncing the business of the
agency; or by the business of the agency being completed; or by either the principal or agent dying or becoming
of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for the
time being in force for the relief of insolvent debtors.”
Section 202 deals with termination of agency, where agent has an interest in subject-matter. Section 203 says
that when principal may revoke agent’s authority. Section 204 deals with revocation where authority has
been partly exercised. Section 205 provides for compensation for revocation by principal, or renunciation
by agent. Section 206 makes provision for notice of revocation or renunciation. Section 207 states that
revocation and renunciation may be expressed or implied. Section 208 speaks about, when termination
of agent’s authority takes effect as to agent, and as to third persons. Section 209 deals with agent’s duty on
termination of agency by principal’s death or insanity and section 210 deals with termination of sub-agent’s
authority.
A contract of agency stands terminated under any of the following means –
1. By the Act of Parties:
a) By Agreement;
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b) By Revocation of the Principal;

c) By Revocation of an Agent (Renunciation by Agent)
2. By Operation of Law:
a) By Completion of Agency;
b) By Expiry of time;
c) Death or Insanity of Principal or Agent;
d) Insolvency of Principal;
e) Destruction of the subject matter;
f) Principal becoming an alien enemy;
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 g) Dissolution of Company or Firm.
1. By the Act of Parties: Termination of Agency by the Act of Parties takes place in the following ways:
a) By Agreement: Agency may be terminated at any time by a mutual agreement between the principal
and agent.
b) Revocation by Principal: The principal may revoke the agency at any time by giving notice to the
agent. Section 203 says, when principal may revoke agent’s authority. It reads as follows -
“The principal may, save as is otherwise provided by the last preceding section, revoke the authority given
to his agent at any time before the authority has been exercised so as to bind the principal.”
c) Renunciation by Agent: Renunciation means “withdrawing from responsibility as agent”. As the
principal can revoke the agent’s authority, so also the agents can renounce the agency. The agent must
give to his principal reasonable notice of renunciation, otherwise he will be liable to make good for
the damage caused to the principal for want of such notice(sec. 206). Like revocation, renunciation
may also be express or implied (Sec. 207). Where the agency is for a particular time, premature renun-
ciation, without sufficient cause, will make the agent liable to his principal (Sec. 205).
2. By Operation of Law: Termination of Agency by Operation of Law takes place in the following cases:
a) By Completion of Agency: Agency comes to an end after the completion of the work for which the
agency is created.
b) By Expiry of time: If the agency is created for a particular time, it is terminated after the expiry of the
time.
c) Death or Insanity of Principal or Agent: Section 209 imposes on agent, duty to terminate the con-
tract of agency on the death of the principal. In other words, agency comes to an end on the death or
insanity of the principal or agent. Section 209 reads as follows -
“When an agency is terminated by the principal dying or becoming of unsound mind, the agent is bound
to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and
preservation of the interests entrusted to him.”
d) Insolvency (Bankruptcy): If the principal becomes an insolvent, agency comes to an end (S.201). An
insolvent or bankrupt is a person, who is unable to run the business due to excess of liabilities over
assets.
e) Dissolution of Company or Firm: A Company or Firm may be regarded as a principal in the contract
of agency. If the Company or Firm is dissolved, the agency comes to an end.
f) Destruction of the subject matter:
If the subject matter of the agency is destroyed, agency comes to an end.
Example:
An agency is created for sale of a house. If the house caught fire before the sale, the agency comes to
an end. (In this contract, house is the subject matter).
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g) Principal becoming an alien enemy:

An Agency may be created between the Principal and Agent belonging to two countries during peace
time. Later, war broke-out between the two countries. Then, the principal becomes an alien enemy
and hence, the contract of agency comes to an end.

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