QUASI CONTRACTS, CONTINGENT CONTRACTS, TERMINATION OR DISCHARGE OF CONTRACTS

Although a Contract must contain certain essential elements, such as offer and
acceptance, capacity to contract, consideration and free consent, the Law sometimes,
implies a promise imposing obligations on one party and conferring right in favour of the
other even when there is no offer, no acceptance, no consensus ad idem, lawful
consideration, etc. and in fact neither agreement nor promise.

Such cases which are not contracts in strict sense but the court recognizes them as relations
resembling those of contracts and enforces them as if they were contracts are called as a
quasi-contract (i.e. resembling a contract )

Quasi contracts are based on principles of equity, justice and good conscience. It rests
upon the maxims, “No man must grow rich out of another person’s loss”.

Example 1: T, a tradesman, leaves goods at C’s house by mistake. C treats the goods as his
own. C is bound to pay for the goods. Example 2: A pays some money to B by mistake. It is
really due to C. B must refund the money to A. Example 3: A fruit parcel is delivered under a
mistake to R who consumes the fruits thinking them as birthday present. R must return the
parcel or pay for the fruits. Although there is no agreement between R and the true owner,
yet he is bound to pay as the law regards it a Quasi-contract

In above cases it is obligation which the law has created in the absence of any agreement,
that in equity and good conscience, one should not to retain something which in justice and
fairness belongs to another

Salient features of quasi contracts:

 Right is always a right to money and generally, though not always, to a liquidated sum of
money.
 It does not arise from any agreement of the parties concerned, but is imposed by the law.
 It is a right which is available not against all the world, but against a particular person

Damages is said to be liquidated when a specific sum of money has been expressly
stipulated by the parties to a bond or other contract as the amount of damages to be
recovered by either party for a breach of the agreement by the other side. A liquidated
damages clause (or an agreed damages clause), is a provision in a contract that fixes the
sum payable as damages for a party's breach. In comparison, un-liquidated damages are
damages for a party's breach which have not been pre-estimated.
The Principal function of a liquidated damages clause is to quantify the damages payable in
the event of breach of the contract. The clause will only be relevant once liability is proven or
admitted. In an action for breach of contract, to recover damages beyond nominal damages,
damage must either be proven or admitted. The advantage of a liquidated damages clause is
that there is no need to prove the actual loss, because the clause stipulates a pre-
assessment or pre-estimation of damages.1 Some of the advantages of including a liquidated
damages clause in a contract are that it:  provides certainty to the parties  facilitates the
recovery of damages by avoiding the requirement of proof of loss  simplifies the dispute
resolution procedure  may induce performance of the contract
By extension, “un-liquidated” damages would be the amount of damages you have to sue for
and prove in the event of a breach.
Cases Deemed as Quasi – Contracts (Sections 68 to 72)

Claims for necessaries supplied [Section 68]

Payment by an interested person [Section 69]
Obligation of a person enjoying benefit of non-gratuitous act [Section 70]
Responsibility of finder of goods [Section 71]
Money paid by mistake or under coercion [Section 72]

In none of these cases there exists any contract between the parties in the real sense.
However due to peculiar circumstances in which they are placed, the law imposes in each
of these cases the contractual liability and are Deemed as Quasi-Contracts

Claims for necessaries supplied [Section 68] - if a person, incapable of entering into a
contract, or any one whom he is legally bound to support, is supplied by another person with
necessaries suited to his condition in life, the person who has furnished such supplies is
entitled to be reimbursed from the property of such incapable person.

To establish his claim, the supplier must prove not only that the goods were supplied to the
person who was minor or a lunatic but also those they were suitable to his actual
requirements at the time of the sale and delivery

Payment by an interested person [Section 69] - A person, who is interested in the payment of
money which another is bound by law to pay, and who therefore pays it, is entitled to be
reimbursed by the other.

B holds land on a lease granted by A, the zamindar. Land Revenue is in Arrears and hence
Government has advertised for sale. The consequence of such sale will be annulment
(cancellation / termination / dissolution /elimination /invalidation) of B’s Lease. B pays the
arrears to Government to prevent sale and thus the consequent annulment of Lease. A is
bound to make good to B, the amount so paid.

Obligation of a 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 pay
compensation to the former in respect of, or to restore, the thing so done or delivered

Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his
own. He is bound to pay A for them

A saves B’s property from fire. A is not entitled to compensation from B, if the circumstances
show that he intended to act gratuitously.

ShyamLal vs. State of U.P. A- K a government servant was compulsorily retired by the
government. He filed a writ petition (appeal/ request /application) and obtained an
injunction/ban/sanction against the order. He was reinstated / replaced / recalled /
restored and was paid salary but was given no work and in the meantime
government went on appeal. The appeal was decided in favour of the government
and ‘K’ was directed to return the salary paid to him during the period of
reinstatement.
Responsibility of finder of goods (Section 71): ‘A person who finds goods belonging to
another and takes them into his custody is subject to same responsibility as if he were a
bailee

Thus a finder of lost goods has: (i) to take proper care of the property as man of ordinary
prudence would take (ii) no right to appropriate the goods and (iii) to restore the goods if the
owner is found.

Example: ‘P’ a customer in ‘D’s shop puts down a brooch/pin/ornament worn on her
coat and forgets to pick it up and one of ‘D’s assistants finds it and puts it in a drawer
over the weekend. On Monday, it was discovered to be missing. ‘D’ was held to be
liable in the absence of ordinary care which a prudent man would have taken

In Hollins vs. Howler - ‘H’ picked up a diamond on the floor of ‘F’s shop and
handed over the same to ‘F’ to keep till the owner was found. In spite of the best
efforts, the true owner could not be traced. After the lapse of some weeks ‘H’
tendered to ‘F’ the lawful expenses incurred by him and requested to return the
diamond to him. ‘F’ refused to do so. Held, ‘F’ must return the diamond to ‘H’ as he
was entitled to retain the goods found against everybody except the true owner

Money paid by mistake or under coercion [Section 72]- A person to whom money has been
paid or anything delivered by mistake or under coercion, must repay or return it

A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not
knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount
to B.

Every kind of payment of money or delivery of goods for every type of ‘mistake’ is
recoverable.

The word coercion is not necessarily governed by section 15 of the Act. The word is
interpreted to mean and include oppression, extortion/ pressure/ blackmail/ force/
squeezing, or such other means

A railway company refuses to deliver up certain goods to the consignee, except

upon the payment of an illegal charge for carriage. The consignee pays the sum
charged in order to obtain the goods. He is entitled to recover so much of the charge
as was illegally excessive

A payment of municipal tax made under mistaken belief or because of mis-

understanding of the terms of lease can be recovered from municipal authorities. The
above law was affirmed by Supreme Court in cases of Sales tax officer vs.
Kanhaiyalal

In a case where ‘T’ was traveling without ticket in a tram car and on checking he was
asked to pay `5/- as penalty to compound transaction. T filed a suit against the
corporation for recovery on the ground that it was extorted/ forced from him. The suit
was decreed/ruled/announced/declared in his favour- Trikamdas vs. Bombay
Municipal Corporation
CONTINGENT CONTRACTS - Section 31

A contract to do or not to do something, if some event, collateral to such contract, does or

does not happen,

Contracts of Insurance, indemnity and guarantee fall under this category

Meaning of collateral Event: Pollock and Mulla defined collateral event as “an event which is
neither a performance directly promised as part of the contract, nor the whole of the
consideration for a promise”. Example: A contracts to pay B ` 100,000 if B’s house is burnt. This
is a contingent contract. Here the burning of the B’s house is neither a performance
promised as part of the contract nor it is the consideration obtained from B. The liability of A
arises only on the happening of the collateral event.

The following are the essentials of a contingent contract.

• The performance of a contract will depend on happening or non-happening of a
future event or condition.
• Uncertainty and futurity of the event to which it is related;
• Uncertain future event must be collateral to the contract
• The Contingent Event should not be mere will of the promisor.
(Example 1: If A promises to pay B ` 100,000, if he so chooses, it is not a contingent
contract. (In fact, it is not a contract at all).

However, where the event is within the promisor’s will but not merely his will, it may be
contingent contract. If A promises to pay B `100,000 if A left Delhi for Mumbai on a
particular day, it is a contingent contract, because going to Mumbai is an
event no doubt within A’s will, but is not merely his will

The contingency which is the essence of a condition must be distinguished from mere
futurity. An obligation is not to be classified as conditional because its performance is not yet
due.

Harbakhash Singh Gill V. Ram Rattan- An agreement to sell unspecified half share in
the property is not contingent contract

Bhairon Prasad Chaurasiya V. Smt. Tara Devi- an agreement to sell a house is by no

means a ‘contingent contract.- It was contended that the contract is a ‘contingent
contract’ because of either of the parties to the contract may refuse to perform his
part on the contract. Court held that the argument is fallacious/
untrue/erroneous/wrong. Such a contingency would not be collateral to a
contract. An agreement to purchase a property is neither a contingent contract nor
can it be characterized as a mere possible right or interest.

Reciprocal promises are not contingent contracts as they cannot be said to be collateral to
each other

Enforcement of contingent contract- Section 32

The contingent contracts to do or not to do anything, on happening of uncertain future

event, cannot be enforced by law unless and until that event has happened. If the event
becomes impossible, such contracts become void.
 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, refused to buy him. The contract cannot be enforced by law
unless and until C refuses to buy the horse

A contract to pay B a sum of money when B marries C. C dies without being married
to B. The contract becomes void.

Enforcement of contacts contingent on an event not happening- Section 33- Contingent

contracts to do or not to do anything if an uncertain future event does not happen, can be
enforced when the happening of that event becomes impossible, and not before.

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.

Deemed impossible contract - Section 34 - if the future event on which a contract is

contingent is the way in which a person will act at an unspecified time, the event shall be
considered to become impossible when such person does anything which renders it
impossible that he should so act within any definite time, or otherwise than under further
contingencies.

A contract would cease to be enforceable if it is contingent upon the conduct of a living

person when that living person does something to make the ‘event’ or ‘conduct’ as
impossible of happening.

A agrees to pay B a sum of money if B marries C, C marries D. The marriage of B to C

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

In Frost V. Knight, the defendant (respondent / suspect/culprit) promised to marry the plaintiff
(accuser / petitioner / applicant) a on the death of his father. While the father was still alive,
he married another woman. It was held that it had become impossible that he should marry
the plaintiff and she was entitled to sue him for the breach of the contract

Contracts which are contingent on happening of specified event within fixed time- Section 35

1. Contingent on happening of specified event within the fixed time. Contingent

contracts to do or not to do anything, if a specified uncertain event happens within a
fixed time, become void if, at the expiration of the time fixed, such event has not
happened, or if, before the time fixed, such event becomes impossible.

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;

2. Contingent on specified event not happening within fixed time. Contingent contracts
to or not to do anything, if a specified uncertain event does not happen within a
fixed time, may be enforced by law when the time fixed has expired and such event
has not happened, or before the time fixed has expired, if it becomes certain that
such event will not happen.
 A promises to pay B a sum of money if a certain ship does not return within a
year. The contract may be enforced if the ship does not return within the
year, or is burnt within the year

Agreements contingent on impossible event void - Section 36

It does not matter whether the impossibility of the event is known or not to the parties to the
agreement at the time when it is made.

 A agrees to pay B `1,000/- if two straight lines should enclose a space. This agreement
is void.
 A agrees to pay B `1,000/- if B will marry A’s daughter C. C, was dead at the time of
the agreement. The agreement is void.
 ‘A’ agrees to pay ‘B’ `one lakh if sun rises in the west next morning. This is an
impossible event and hence void.
 X agrees to pay Y `1,00,000 if two straight lines should enclose a space. The
agreement is void.

Difference between Contingent contract and Wagering contract

 Meaning A contingent contract is a contract to do or not to do something with

reference to a collateral event happening or not happening. A wagering agreement
is a promise to give money or money’s worth with reference to an uncertain event
happening or not happening.

 Reciprocal promises- Contingent contract may not contain reciprocal promises.

A wagering agreement consists of reciprocal promises.

 Uncertain event- In a contingent contract, the event is collateral. In a wagering

contract, the uncertain event is the core factor.

 Nature of contract- Contingent contract may not be wagering in nature.A wagering

agreement is essentially contingent in nature.

 Interest of contracting parties Contracting parties have interest in the subject matter
in contingent contract. The contracting parties have no interest in the subject matter.

 Doctrine of mutuality of lose and gain -Contingent contract is not based on doctrine
of mutuality of lose and gain. A wagering contract is a game, losing and gaining
alone matters.

 Effect of contract Contingent contract is valid. A wagering agreement is void.

RULES FOR ENFORCEMENT -Summary

(a) If it is contingent on the happening of a future event, it is enforceable when the event
happens. The contract becomes void if the event becomes impossible, or the event does
not happen till the expiry of time fixed for happening of the event.
(b) If it is contingent on a future event not happening. It can be enforced when happening
of that event becomes impossible or it does not happen at the expiry of time fixed for non-
happening of the event.
(c) If the future event is the act of a living person, any conduct of that person which prevents
the event happening within a definite time renders the event impossible.
(d) If the future event is impossible at the time of the contract is made, the contract is void
ab initio

Wagering Contracts are void.

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1. Essential characteristics of a contingent contract: A contract may be absolute or

contingent. A contract is said to be absolute when the promisor undertakes to perform the
contract in all events. A contingent contract, on the other hand “is a contract to do or not
to do something, if some event, collateral to such contract does or does not happening
(Section 31).

It is a contract in which the performance becomes due only upon the happening of some
event which may or may not happen.

For example, A contracts to pay B `10,000 if he is elected President of a particular

association. This is a contingent contract.

The essential characteristics of a contingent contract may be listed as follows:

(i) There must be a contract to do or not to do something,

(ii) The performance of the contract must depend upon the happening or non-happening of
some event.
(iii) The happening of the event is uncertain.
(iv) The even on which the performance is made to depend upon is an event collateral to
the contract i.e. it does not form part of the reciprocal promises which constitute the
contract. The event should neither be a performance promised, nor the consideration for the
promise.
(v) The contingent event should not be the mere will of the promisor. However, where the
event is within the promisor’s will, but not merely his will, it may be a contingent contract.

The rules regarding the contingent contract are as follows”

(1) Contingent contract dependent on the happening of an uncertain future cannot be
enforced until the even has happened. If the even becomes impossible, such contracts
become void. (Sec.32).
(2) Where a contingent contract is to be performed if a particular event does not happening
performance can be enforced only when happening of that even becomes impossible (Sec.
33).
(3) If a contract is contingent upon, how a person will act at an unspecified time the event
shall be considered to become impossible; when such person does anything which renders
it impossible that he should so act within any definite time or otherwise than under further
contingencies. (Section 34,35).
(4) The contingent contracts to do or not to do anything if an impossible even happens, are
void whether or not the fact is known to the parties (Sec. 36).
2. Quasi Contracts: Under certain special circumstances obligation resembling those created
by a contract are imposed by law although the parties have never entered into a contract.
Such obligations imposed by law are referred to as ‘Quasi-contracts’. Such a contract
resembles with a contract so far as result or effect is concerned but it has little or no aaffinity
with a contract in respect of mode of creation. These contracts are based on the doctrine
that a person shall not be allowed to enrich himself unjustly at the expense of another.

The salient features of a quasi-contract are :

1. It does not arise from any agreement of the parties concerned but is imposed by law.
2. Duty and not promise is the basis of such contract.
3. The right under it is always a right to money and generally though not always to a
liquidated sum of money.
4. Such a right is available against specific person(s) and not against the whole world.
5. A suit for its breach may be filed in the same way as in case of a complete contract.

DISCHARGE OF A CONTRACT

A contract may be discharged by one of the following 8 ways

A) Discharge by Performance
B) Discharge by Mutual Agreement [Substitution (novation), Rescission, Alteration and
Remission
C) Discharge by Impossibility of Performance – Either existing or transpired (emerged /
became known, apparent, obvious), subsequently – Supervening Impossibility. Eg
unforeseen change in law, destruction of subject matter, personal incapacity,
declaration of war etc.
D) Discharge by Lapse of Time
E) Discharge by operation of Law
F) Discharge by Breach of Contract either actual or anticipatory.
G) A promise remitting performance of promise by promisor or accepting some other
satisfaction- discharge on ground of accord and satisfaction
H) Neglect or refusal to accord necessary or reasonable opportunities by promisee to
promisor

CONTRACT OF INDEMNITY AND GUARANTEE

Contract of Indemnity, Contract of Guarantee, Continuing Guarantee, Surety’s Liability,

Rights and discharge

Contract of Indemnity – Section 124 – The contract by which one party promises to save the
other party from the loss caused to him by the conduct of promisor himself or by the conduct
of any other person is called as CoI.

Indemnify means to compensate or to make good of loss. Thus under CoI, the existence of
Loss is essential.

All other essentials of a valid contract must be present – consideration, free consent,
competency, lawfulness of object

Contract of Fire or Marine Insurance are contract of Idemnity. However, there is no contract
of Indemnity contract in case of Life Insurance.

Two parties – The Indemnifier and Indemnified or the Indemnity Holder

Section 125 – Rights of Indemnity Holder when sued, is entitled to recover

 All damages he is compelled to pay in any suit iro any matter to which Indemnity
relates to.
 All Costs which he may be compelled to pay either in bringing suit of defending the
same till
o He does not contravene the orders of promisor.
o Acted as it would have been prudent for him to act in absence of CoI
o Or He is authorised by promisor to bring in or defend the suit.
 All sums that he may have paid under the terms of compromise- again under above
3 conditions.

However above is not the comprehensive list and promise has incurred any liability and it is
absolute he is entitled to call upon the Indemnifier to save him from the liability and pay it off

CONTRACT OF GUARANTEE – Section 126

A contract of Guarantee is a Contract to perform a promise made or discharge a liability of

a third person in case of his default

Three Parties – Surety – Person who Gives the Guarantee, A Principal Debtor – A person in
respect of whose default the Guarantee is given, A Creditor – A person to whom the
Guarantee is given.

Thus Guarantee is a promise to pay the debt owned by other in case of his(latter) default to
pay the same.

Three contracts including one implied contract of indemnity between surety and principal
debtor.

What is consideration for Guarantee ? Section 127

Anything done or any promise made for the benefit of Principal Debtor may be sufficient
consideration for Surety for giving Guarantee.

What are the essentials of a Valid Guarantee ?

 Existence of Principal Debt

 Benefit to Principal Debtor is sufficient Consideration for Guarantee. However Past
consideration is no consideration
 Consent of surety should not be obtained by misrepresentation of material fact or
concealment of material fact.
 It can be oral or written.
 Surety can be proceeded against without first proceeding against principal debtor
 If Co-surety does not join, the contract of Guarante is not valid.

WHAT IS DISTINCTION BETWEEN CONTRACT OF GUARANTEE AND CONTRACT OF INDEMNITY?

  Number of Parties
 Nature of Liability
 Time of Liability – Arises of happening of contingency and in case of CoG it is already
there in existence but crystalizes / matures / develops / manifests when Principal
debtor fails
 Time of Act
 Right to sue the Third Party – Indemnifier can’t sue the third party for loss in his own
name (unless assignment in its favour) as there is no privity of contract. Surety can
proceed against PD in his own right as he gets the right of creditor
 Purpose – Reimbursement of Loss Vs Security of Creditor
 Competency- In case of CoG, where a minor is PD, the CoG is still valid Vs Indemnity
All should be competent.
 Number of Contracts.

CONTINUING GUARANTEE – Section 129

A guarantee which extends to series of transactions is called as continuing guarantee.

The Liability of the surety continues till the performance or the discharge of all the
transactions entered into or till the guarantee is withdrawn.

WHEN IS SURETY DISCHARGED?

Revocation of Contract of Guarantee –

Conduct of Creditor -
Invalidation of contract of guarantee

Revocation of Contract of Guarantee – Sect 130 – in case of Continuing Guarantee. Further

sureties death operates and revocation of Contract of Continuing guarantee unless contrary
is agreed. Further estate of deceased surety is liable for the transactions those have taken
place during his lifetime. But not after surety’s death even if the creditor was not aware of
this.

Conduct of Creditor – Variance of Terms of contract without consent of surety. Where

principal debtor is released either by contract between creditor and PD or by any act or
omission of part of creditor, the legal consequence of which is discharge of the principal
debtor. If creditor compounds with, gives time to or agrees to not to sue PD. However surety
is not discharged if agreement is made by creditor with third person to give time to PD.
Creditors forbearance (patience / tolerance/ leniency / moderation) to sue PD does not
discharge surety unless contrary is agreed. Surety is discharged due to creditor’s act or
omission impairing surety’s eventual remedy.

Invalidation of contract of guarantee- Guarantee obtained by mis-representation is invalid.

Guarantee obtained by concealment (keeping silence as to material fact) is invalid.
Guarantee on contract that creditor shall not act on it until co-surety joins is not valid if other
person has not joined.

RIGHTS OF SURETY

Rights against PD – Subrogation (Step in shoes and recover amount) and indemnity. Surety,
upon payment of all liabilities and performance of all that he was liable for is invested with all
the rights of creditor against PD
Rights against Co-surety – Right to contribution – Equality of burden is basis of co-suretyship.
As between themselves they are liable to pay equal share of the whole debt or part which
remains paid by principal debtor. This is applicable even if they are co-surety without
knowledge of each other. However, co-surities which who are bound in different sums are
liable to pay equally as far as the limits of their respective obligations permit.

Rights against creditor – Right to security – Surety is entitled to every benefit which the
creditor has against the PD at the time when the contract of suretyship was entered into
irrespective of whether he was aware of existence of such other security or not.

Note - It may be noted that according to section 141, the surety is entitled to the benefit of
such good which are with the creditor. It covers situations where the goods are pledged to
the creditor and he has the possession of the goods. If he loses or parts with the goods, the
surety is discharged thereby. In case there is hypothecation of the goods, the goods remain
in the possession of the goods and there is no question of his losing or parting with the
same. If, therefore, hypothecated goods are lost without any fault of the creditor that will not
discharge the surety. In other words, since in the case of the hypothecated goods, the
creditor does not have the possession of the goods, the surety cannot invoke the provision
of section 141 in such case

M advances to ` 5,000 on the guarantee of P. The loan carries interest at ten percent per
annum. Subsequently, N becomes financially embarrassed. On N’s request, M reduces
the interest to six per cent per annum and does not sue N for one year after the loan
becomes due. N becomes insolvent. Can M sue P?
Answer
M cannot sue P, because a surety is discharged from liability when, without his consent, the
creditor makes any change in the terms of his contract with the principal debtor, no matter
whether the variation is beneficial to the surety or does not materially affect the position of
the surety (Section 133, Indian Contract Act, 1872).

Question 2
What are the rights of the indemnity-holder when sued?
Answer
Rights of Indemnity- holder when sued (Section 125):The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the promisor—
(1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
he did not contravene the orders of the promisor, and acted as it would have been prudent
for him to act in the absence of any contract of indemnity, or if the promisor authorised him
to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not 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.

It may be understood that the rights contemplated under section 125 are not exhaustive. The
indemnity holder/ indemnified has other rights besides those mentioned above. If he has
incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to
save him from the liability and to pay it off.

Question 3
Define contract of indemnity and contract of guarantee and state the conditions when
guarantee is considered invalid ?
Answer
Section 124 of the Indian Contract Act,1872 says that “A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself,
or the conduct of any person”, is called a “contract of indemnity”.

Section 126 of the Indian Contract Act says that “A contract to perform the
promise made or discharge liability incurred by a third person in case of his
default.” is called as “contract of guarantee”.

The conditions under which the guarantee is invalid or void are stated in section
142,143 and 144 of the Indian Contract Act are:
(i) Guarantee obtained by means of misrepresentation.
(ii) Creditor obtained any guarantee by means of keeping silence as to material
circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor
shall not act upon it until another person has joined in it as co-surety and
that other party fails to join as such.

Question 4
Mr. X, is employed as a cashier on a monthly salary of ` 2,000 by ABC bank for a
period of three years. Y gave surety for X’s good conduct. After nine months, the
financial position of the bank deteriorates. Then X agrees to accept a lower
salary of ` 1,500/- per month from Bank. Two months later, it was found that X
has misappropriated cash since the time of his appointment. What is the liability
of Y ?
Answer
If the creditor makes any variance (i.e. change in terms) without the consent of the
surety, then surety is discharged as to the transactions subsequent to the change.
In the instant case Y is liable as a surety for the loss suffered by the bank due to
misappropriation of cash by X during the first nine months but not for
misappropriations committed after the reduction in salary. [Section 133, Indian
Contract Act, 1872].

Question 5
A contracts with B for a fixed price to construct a house for B within a stipulated
time. B would supply the necessary material to be used in the construction. C
guarantees A’s performance of the contract. B does not supply the material as
per the agreement. Is C discharged from his liability.
Answer
According to Section 134 of the Indian Contract Act, 1872, 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 for the creditor,
the legal consequence of which is the discharge of the principal debtor. In the
given case the B omits to supply the timber. Hence C is discharged from his
liability.
DISCHARGE OF CONTRACTS

 Rights and obligations created by a contract come to an end,

 Termination of contractual relationship between the parties.
 Discharge amounts to end of contract

Modes of discharge of contracts:

1. Discharge by performance
2. Discharge by agreement
3. Discharge by lapse of time
4. Discharge by operation of law
5. Discharge by impossibility of performance
6. Discharge by breach of contract

1. Discharge by performance: (a) actual performance (b) attempted performance. Actual

performance is the fulfilment of the obligations arising from a contract by the parties to it, in
accordance with the terms of the contract
2. Discharge by agreement: The parties may agree to terminate the existence of the contract
by any of the following ways: (a) Novation. (b) Alteration (c) Rescission (d) Remission (e)
Waiver

Novation: Substitution of a new contract in place of the existing contract is known as

“Novation of Contract”. It discharges the original contract. May be between same or new
parties. Consent of All Parties Required.

Alteration means change in one or more of the terms of the contract. In case of novation,
there may be a change of the parties, while in the case of alteration, the parties remain the
same. But there is a change in the terms of the contract.

Rescission means “cancellation”. All or some of the terms of a contract may be cancelled.
Rescission results in the discharge of the contract.

Remission means acceptance of a lesser performance that what is actually due under the
contract. There is no need of any consideration for remission.

Waiver means giving up or foregoing certain rights. When a party agrees to give up its rights,
the contract is discharged

3. Discharge by lapse of time: The Indian Limitation Act has prescribed the period within which
the existing rights can be enforced in courts of law

Example: If a creditor does not file a suit within three years of debt, the debt
becomes time-barred. He is deprived of his legal remedy

4. Discharge by operation of law: A contract may be discharged by operation of law in the

following cases. (a) Death (b) Insolvency (c) Unauthorized material alteration. (d) Merger

 Death: In contracts involving personal skill or ability, death terminates the contracts
 Insolvency: The insolvency of the promisor discharges the contract. The promisor is
discharged from all liabilities incurred prior to his adjudication.
 Material alteration in the terms of the contract without the consent of the other
party discharges the contract - money to be paid, date of payment, place of payment
 Merger: When inferior rights of a person under a contract merge with superior
rights under a new contract,- part-time lecturer is made full-time lecturer, merger
discharges the contract of part-time lectureship

5. Discharge by impossibility of performance: Impossibility of performance results in the

discharge of the contract. An agreement which is impossible is void, because law does not
compel to do impossible things.
6. Discharge by breach: Breach means failure of a party to perform his obligations under a
contract. Breach brings an end to the obligations created by a contract. Example: A and B
wanted to marry each other. Before the time fixed for marriage, A goes mad. The contract
becomes void in ABOVE case

TERMINATION OF CONTRACT

The proper way, in which the agreement could be terminated by issuing of a notice to the
plaintiff, calling upon to complete the transaction within a particular time. Vendor must give
reasonable notice requiring the performance within a definite time.

SPECIAL CONTRACTS: INDEMNITY AND GUARANTEE; BAILMENT AND PLEDGE; LAWS OF

AGENCY

CONTRACT OF INDEMNITY

 Sections 124 and 125 deal with the contract of indemnity.

 Section 124 of the Act defines the expression ‘contract of indemnity’ as 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.
 To indemnify does not merely means to reimburse in respect of moneys paid, but to
save from loss in respect of the liability for which the indemnity has been given
 A contract of indemnity may be either expressed or implied.
 The New India Assurance Co. Limited V. State Trading Corporation of India’ –It was held
that almost all insurance other than life and personal accident insurances are contracts
of indemnity.
 Rights of indemnity holder when sued
 Section 125 provides the rights of indemnity holder when sued.
This section provides that the promisee, in a contract of indemnity, acting within the
scope of his authority, is entitled to recover from the promisor

o All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
o All costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the orders of the promisor, and acted as it
would have been prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorized him to bring or defend the suit;
o All the 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 promise to
make in the absence of any contract of indemnity, or if the promisor authorized
him to compromise the suit.

This section is not exhaustive and does not set out all the reliefs which an indemnity
holder who has been sued may get. It leaves untouched certain equitable reliefs
which he may get.

Even before damage is incurred, it is open to him to sue for the specific performance of
the contract of indemnity, provided that it is show, that an absolute liability has been
incurred by him and that the contract of indemnity covers the said liability.
 In contract of indemnity the costs reasonably incurred by indemnified in resisting or
reducing or ascertaining the claim may be recovered.

CONTRACT OF GUARANTEE

Section 126
 A contract to perform the promise, or discharge the liability of a third person in case of
his default.
 Consideration for guarantee Section 127 provides that anything done, or any promise
made, for the benefit of the principal debtor, may be a sufficient consideration to the
surety for giving guarantee
 Like any other contract, a contract of guarantee must be supported by consideration. It
is not necessary that the consideration should be received by the surety. Consideration
between the principal debtor and the creditor is good consideration for the guarantee
given by the surety.
 Consideration for past promise is void - A sells and delivers goods to B. C afterwards,
without consideration, agrees to pay for them in default of B. The agreement is voi
 The question as to whether the deed in question is a deed of guarantee or not depends
upon the terms under which the guarantor binds himself.

Liability of surety
 Section 128
 The liability of surety arises only when the principal debtor fails to pay the debt to the
creditor. The said section provides that the liability of the surety is coextensive with
that of the principal debtor, unless it is otherwise provided by the contract.
 The liability of the surety is co-extensive with that of the principal debtor and the surety
is liable to pay the entire amount his liability being immediate as held in ‘Gouri Prasad
V. Rabo India Finance Limited
 Where the letter of guarantee issued by a guarantor, guarantees repayment of only the
principal sum and does not guarantee the payment of any interest, he could not be
made liable for the payment of interest as held in ‘S.N. Prasad V. Monnet Finance
Limited

Continuing Guarantee
Section 129 of the
Act defines the expression ‘continuing guarantee’ as a guarantee which extends to a series of
transactions.
A guarantee for a future performance may either be restricted to a debtor or liability of a
certain amount to be incurred once for all, or it may be continuing. If the liability extends to a
single transaction, it is specific.
Revocation of continuing guarantee A continuing guarantee can be revoked by two ways- •
Revocation by surety; • Revocation on the death of surety. Revocation of continuing guarantee
by surety Section 130 provides that a continuing guarantee may at any time revoked by the
surety, as to future transactions, by notice to the creditor.
Revocation of continuing guarantee by surety’s death - Section 131 provides that the death of
the surety operates, in the absence of any contract to the contrary, as a revocation of
continuing guarantee, so far as regards future transactions.

Discharge of surety
The liability of the surety is discharged under the following circumstances-
• By giving notice to the creditor – Section 130;
• By the death of the surety – Section 131;
• By variance in terms of contract – Section 133;
• By release or discharge of principal debtor – Section 134;
• When creditor compounds with the principal debtor by giving time to, or agrees not to sue
principal debtor – Section 135;
• By creditor’ act or omission impairing surety’s eventual remedy – Section 139;

Which will not discharge the surety?

In the following circumstances the liability of the surety is not considered to be discharged-
• Section 136 – Where a contract to give time to the principal debtor is made by the
creditor with a third person, and not with the principal debtor, the surety is not
discharged;
• Section 137 - Mere forbearance on the part of the creditor to sue the principal
debtor or to enforce the other remedy against him, does not, in the absence of any
provision in the guarantee to the contrary, discharge the surety;
Example – B owes to C a debt guaranteed by A. The debt becomes payable.
C does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.

RIGHTS OF SURETY

The following are the rights available to the surety under this Act

• Section 140 – Right of surety on payment or performance – 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;

• Section 141 – Surety’s right to benefit of creditor’s securities – A surety is entitled to the
benefit of every security which the creditor had against the principal debtor at the time
when the contract of surety ship 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.

Section 140 provides for subrogation where the guarantor clears his liability by payment. He
is invested with all rights which the creditor had with the principal debtor. The section
enacts that in order that the surety may be invested with all the rights which the creditor
had against the principal debtor, the following conditions be fulfilled, namely-
• The guaranteed debt must have become due, or the principal debtor must have
made default in performing the guaranteed duty; and
• The surety must have paid the debt, that is, the whole debt, or the surety must
have performed all that is liable for. Unless the said two conditions have been
fulfilled, the surety cannot call upon the creditor to invest him with all the rights
which he had against the principal debtor.
BAILMENT AND PLEDGE