T I C A, 1872: HE Ndian Ontract CT

1
THE INDIAN CONTRACT ACT, 1872
Question 1
What is meant by ‘Undue Influence’? ‘A’ applies to a banker for a loan at a time where there is
stringency in the money market. The banker declines to make the loan except at an unusually
high rate of interest. A accepts the loan on these terms. Whether the contract is induced by
undue influence? Decide. (Nov. 2002)
Answer
Meaning of Undue Influence:
Section 16 of the Indian Contract Act, 1872, states that a contract is said to be induced by
undue influence where the relations subsisting between the parties are such that the parties
are in a position to dominate the will of the other and used that position to obtain an unfair
advantage over the other.
A person is deemed to be in that position:
(a) where he holds real or apparent authority over the other or stands in a fiduciary relation
to him;
(b) where he makes a contract with a person whose mental capacity is temporarily or
permanently affected by reason of old age, illness or mental or bodily distress.
(c) where a man who is in position to dominate the will of the other enters into contract with
him and the transaction appears to be unconscionable, the burden of proving that it is
fair, is on him, who is in such a position.
When one of the parties who has obtained the benefits of a transaction is in a position to
dominate the will of the other, and the transaction between the parties appears to be
unconscionable, the law raises a presumption of undue influence [section 16(3)]. Every
transaction where the terms are to the disadvantage of one of the parties need not necessarily
be considered to be unconscionable. If the contract is to the advantage of one of the parties
but the same has been made in the ordinary course of business the presumption of under
influence would not be raised.
In the given problem, A applies to the banker for a loan at a time when there is stringency in
the money market. The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is a transaction in the ordinary course of
business, and the contract is not induced by undue influence. As between parties on an equal
1.2 Business and Corporate Laws
footing, the court will not hold a bargain to be unconscionable merely on the ground of high
interest. Only where the lender is in a position to dominate the will of the borrower, the relief is
granted on the ground of undue influence. But this is not the situation in this problem, and
therefore, there is no undue influence.
Question 2
‘A’ stands surety for ‘B’ for any amount which ‘C’ may lend to B from time to time during the
next three months subject to a maximum of Rs.50,000. One month later A revokes the
guarantee, when C had lent to B Rs.5,000. Referring to the provisions of the Indian Contract
Act, 1872 decide whether ‘A’ is discharged from all the liabilities to ‘C’ for any subsequent
loan. What would be your answer in case ‘B’ makes a default in paying back to ‘C’ the money
already borrowed i.e. Rs.5,000? (Nov. 2002)
Answer
The problem as asked in the question is based on the provisions of the Indian Contract Act
1872, as contained in Section 130 relating to the revocation of a continuing guarantee as to
future transactions which can be done mainly in the following two ways:
1. By Notice : A continuing guarantee may at any time be revoked by the surety as to future
transactions, by notice to the creditor.
2. By death of surety: 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. (Section 131).
The liability of the surety for previous transactions however remains.
Thus applying the above provisions in the given case, A is discharged from all the liabilities to
C for any subsequent loan.
Answer in the second case would differ i.e. A Is liable to C for Rs. 5,000 on default of B since
the loan was taken before the notice of revocation was given to C.
Question 3
State the grounds upon which a contract may be discharged under the provisions of Indian
Contract Act, 1872 (Nov. 2002)
Answer
Discharge of a Contract:
A Contract may be discharged either by an act of parties or by an operation of law which may
be enumerated as follows :
(1) Discharge by performance which may be actual performance or tender of performance.
Actual performance is said to have taken place, when each of the parties has done what
he had agreed to do under the agreement. When the promisor offers to perform his
The Indian Contract Act, 1872 1.3
obligation, but the promisee refuses to accept the performance. It amounts to attempted
performance or tender :
(2) Discharge by mutual agreement : Section 62 of the Indian Contract Act, 1872 provides if
the parties to a contract agree to substitute a new contract for it or to refund or remit or
alter it, the original contract need not to be performed. Novation, Rescission, Alteration
and Remission are also the same ground of this nature.
(3) Discharge by impossibility of performance : The impossibility may exist from its initiation.
Alternatively, it may be supervening impossibility which may take place owing to (a).
unforeseen change in law (b). The destruction of subject matter (c). The non-existence or
non-occurrence of particular state of things d). the declaration of war (Section 56).
(4) Discharge by lapse of time : A contract should be performed within a specific period as
prescribed in the Law of Limitation Act, 1963. If it is not performed the party is deprived
of remedy at law.
(5) Discharge by operation of law : It may occur by death of the promisor, by insolvency etc.
(6) Discharge by breach of contract : Breach of contract may be actual breach of contract or
anticipatory breach of contract. When a person repudiates a contract before the
stipulated time, for its performance has arrived, it is an anticipatory breach. If one of the
parties to a contract breaks the contract the party injured thereby has a right of action for
damages as well as he is also discharged from performing his part of the contract
(Section 64).
(7) A promise may dispense with or remit the performance of the promise made to him or
may accept any satisfaction he thinks fit. In the first case, the contract will be discharged
by remission and in the second it is accord and satisfaction (Section 63).
(8) When a promisee neglects or refuses to afford the promisor reasonable facilities for the
performance of the promise, the promisor is excused by such neglect or refusal (Section
67).
Question 4
What is the status of a “finder of goods” under the Indian Contract Act, 1872? What are his
rights? (May 2003)
Answer
Status of a Finder of Goods & his Rights:
A person, who finds goods belonging to another and takes them into his custody is subject to
the same responsibility as a bailee. He is bound to take as much care of the goods as a man
of ordinary prudence would, under similar circumstances, take of his own goods of the same
bulk, quality and value. He must also take all necessary measures to trace its owner. If he
does not, he will be guilty of wrongful conversion of the property. Till the owner is found out,
the property in goods will vest with the finder and he can retain the goods as his own against
the whole world (except the owner, of course).
A finder of goods has the following rights under the Indian Contract Act, 1872
1. Right of lien: The finder of goods has a right of lien over the goods for his expenses. As
such he can retain the goods against the owner until he receives compensation for
trouble and expenses incurred in preserving the goods and finding out the owner. But he
has no right to sue the owner for any such compensation (Section 168).
2. Right to sue for reward. The finder can sue for any specific reward which the owner has
offered for the return of the goods. He may also retain the goods until he receives the
reward. (Section 168)
3. Right or resale: The finder has a right to sell the goods in the following cases:
(a) where the goods found is in danger of perishing;
(b) where the owner cannot, with reasonable diligence, be found out;
(c) where the owner is found out, but he refuses to pay the lawful charges of the finder;
and
(d) where the lawful charges of the finder, in respect of the goods found, amount to
2/3rd of its value.
Question 5
Explain the general rules of relating to “Acceptance” under the Indian Contract Act, 1872.
(May 2003)
Answer
General Rules of Acceptance: Following are the general rules regarding acceptance under
the Indian Contract Act, 1872:
1. Acceptance must be absolute and unqualified [Section 7(I)].
2. Acceptance must be in the prescribed manner. If the offer is not accepted in the
prescribed manner, then the offeror may reject the acceptance within a reasonable time.
3. Acceptance must be communicated to the offeree. If acceptance is communicated to the
person, other than the offeror, it will not create any legal relationship.
4. Acceptance must be given by the party to whom the offer is made.
5. Acceptance must be given within the prescribed time or within a reasonable time.
6. Acceptance cannot be given before communication of an offer.
7. Acceptance must be made before the offer lapses or is withdrawn.
8. Acceptance must show intention to fulfil the promise.
9. Acceptance can not be presumed from silence.
10. Doing of desired act amounts to acceptance.
Question 6
What tests can be applied in determining whether a person is an agent of another? State any
five circumstances whereunder an agent is personally liable to a third party for the acts during
the course of agency . (May 2003)
Answer
Determining Agency & Agent
The test for determining whether a person is or is not an agent is whether that person has the
capacity to bind the principal and make him answerable to a third person by bringing him (the
principal) into legal relations with the third person and thus establish a privity of contract
between the party and the principal. If yes, he is agent, otherwise not. This relationship of
agency may be created either by express agreement or by implication:
Under the following circumstances an agent is personally liable.
1. When he represents that he has authority to act on behalf of his principal, but who does
not actually posses such authority or who has exceeded that authority and the alleged
employer does not ratifies his acts. Any loss sustained by a third party by the acts of
such a person (agent) and who relies upon the representation is to be made good by
such an agent.
2. Where a contract is entered into by a person apparently in the character if agent, but in
reality on his own account, he is not entitled to required performance of it.
3. Where the contract expressly provides for the personal liability of the agent.
4. When the agent signs a negotiable instrument in his own name without making it clear
that he is signing as an agent.
5. Where the agent acts for a principal who cannot be sued on account of his being a
foreign Sovereign, Ambassador, etc.
6. Where the agent works for a foreign principal.
7. Where a Government Servant enters into a contract on behalf of the Union of India in
disregard of Article 299 (1) of the Constitution of India, In such a case the suit against the
agent can be instituted by the third party only and not by the principal (Chatturbhuj v.
Moheshwar).
8. Where according to the usage of trade in certain kinds of business, agents are personally
liable.
Question 7
Explain the concept of ‘misrepresentation’ in matters of contract. Sohan induced Suraj to buy
his motorcycle saying that it was in a very good condition. After taking the motorcycle, Suraj
complained that there were many defects in the motorcycle. Sohan proposed to get it repaired
and promised to pay 40% cost of repairs After a few days, the motorcycle did not work at all.
Now Suraj wants to rescind the contract. Decide giving reasons. (November 2003)
Answer
Misrepresentation & the Problem: According to Section 18 of the Indian Contract Act, 1872,
misrepresentation is there:
1. When a person positively asserts that a fact is true when his information does not
warrant it to be so, though he believes it to be true.
2. When there is any breach of duty by a person, which brings an advantage to the person
committing it by misleading another to his prejudice.3. When a party causes, however,
innocently, the other party to the agreement to make a mistake as to the substance of the
thing which is the subject of the agreement.
Problem:
The aggrieved party, in case of misrepresentation by the other party, can avoid or rescind the
contract [Section 19, Indian Contract Act, 1872]. The aggrieved party loses the right to rescind
the contract if he, after becoming aware of the misrepresentation, takes a benefit under the
contract or in some way affirms it. Accordingly in the given case Suraj could not rescind the
contract, as his acceptance to the offer of Sohan to bear 40% of the cost of repairs impliedly
amount to final acceptance of the sale [Long v. Lloyd, (1958)].
Question 8
Sunil delivered his car to Mahesh for repairs. Mahesh completed the work, but did not return
the car to Sunil within reasonable time, though Sunil repeatedly reminded Mahesh for the
return of car. In the meantime a big fire occurred in the neighborhood and the car was
destroyed. Decide whether Mahesh can be held liable under the provisions of the Indian
Contract Act. 1872. (November 2003)
Answer
The problem asked in the question is based on the provisions of section 160 and 161 of the
Indian Contract Act 1872. Accordingly, it is the duty of the bailee to return or deliver the goods
bailed according to the bailor’s directions, without demand, as soon as the time for which they
were bailed has expired, or the purpose for which they were bailed for any loss, destruction of
the goods from that time (Section 161), notwithstanding the exercise of reasonable care on his
part.
Therefore, applying the above provisions in the given case, Mahesh is liable for the loss,
although he was not negligent, but because of his failure to deliver the car within a reasonable
time (Shaw & Co. v. Symmons & Sons).
Question 9
What do you understand by “Agency by Ratification”? What is the effect of ratification? Point
out any four elements of a valid ratification. (November 2003)
Answer
Agency by Ratification; its effect & essentials of valid ratification:
Meaning: A person may act on behalf on another without his knowledge or consent. Later on
such another person may accept the act of the former or reject it. If he accepts the act of the
former done without his consent, he is said to have ratified that act and it places the parties in
exactly the same position in which they would have been the former had later’s authority at the
time he made the contract. Likewise, when an agent exceeds the authority bestowed upon him
by the principal, the principal may ratify the unauthorised act.
Effect of Ratification: The effect of ratification is to tender the acts done by one person
(agent) on behalf of another (principal), without his (principal’s) knowledge or authority, as
binding on the other person (principal) as if they had been performed by his authority (Section
196: Indian Contract Act, 1872).
Further, ratification relates back to the date when the act was done by the agent. This means
the agency comes into existence from the moment the agent first acted and not from the time
when the principal ratified the act.
Essentials of a valid Ratification
1. The agent must purport to act as agent for a principal who is in contemplation and is
identifiable at the time of contract.
2. The principal must be in existence at the time of contract.
3. The principal must have contractual capacity both at the time of the contract and at the
time of ratification.
4. The principal must have the full knowledge of all the material facts.
5. Ratification must be done with in a reasonable time of the act purported to be ratified.
6. The act to be ratified must be lawful and not void or illegal or ultra vires in case of a
company.
7. The whole transaction can be ratified.
8. Ratification must be communicated to the party who is sought to be bound by the act
done by the agent.
9. Ratification can be of the acts which the principal had the power to do.
10. Ratification should not put a third party to damages.
11. Ratification relates back to the date of the act of the agent.
Question 10
Shambhu Dayal started “self service” system in his shop. Smt. Prakash entered the shop, took
a basket and after taking articles of her choice into the basket reached the cashier for
payments. The cashier refuses to accept the price. Can Shambhu Dayal be compelled to sell
the said articles to Smt. Prakash? Decide. (May 2004)
Answer
Invitation to offer
The offer should be distinguished from an invitation to offer. An offer is the final expression of
willingness by the offeror to be bound by his offer should the party chooses to accept it. Where
a party, without expressing his final willingness, proposes certain terms on which he is willing
to negotiate, he does not make an offer, but invites only the other party to make an offer on
those terms. This is the basic distinction between offer and invitation to offer.
The display of articles with a price in it in a self-service shop is merely an invitation to offer. It
is in no sense an offer for sale, the acceptance of which constitutes a contract. In this case,
Smt. Prakash in selecting some articles and approaching the cashier for payment simply made
an offer to buy the articles selected by her. If the cashier does not accept the price, the
interested buyer cannot compel him to sell. [Fisher V. Bell (1961) Q.B. 394 Pharmaceutical
society of Great Britain V. Boots Cash Chemists].
Question 11
Akhilesh entered into an agreement with Shekhar to deliver him (Shekhar) 5,000 bags to be
manufactured in his factory. The bags could not be manufactured because of strike by the
workers and Akhilesh failed to supply the said bags to Shekhar. Decide whether Akhilesh can
be exempted from liability under the provisions of the Indian Contract Act, 1872. (May 2004))
Answer
Delivery of Bags
According to Section 56 (Para 2) of Indian Contract Act, 1872 when the performance of a
contract becomes impossible or unlawful subsequent to its formation, the contract becomes
void, this is termed as ‘supervening impossibility’ (i.e. impossibility which does not exist at the
time of making the contract, but which arises subsequently).
But impossibility of performance is, as a rule, not an excuse from performance. It means that
when a person has promised to do something, he must perform his promise unless the
performance becomes absolutely impossible. Whether a promise becomes absolutely
impossible depends upon the facts of each case.
The performance does not become absolutely impossible on account of strikes, lockout and
civil disturbances and the contract in such a case is not discharged unless otherwise agreed
by the parties to the contract (Budget V Bennington; Jacobs V Credit Lyonnais).
In this case Mr. Akhilesh could not deliver the bags as promised because of strike by the
workers. This difficulty in performance cannot be considered as impossible of performance
attracting Section 56 (Para 2) and hence Mr. Akhilesh is liable to Mr. Shekhar for non-
performance of contract.
Question 12
Mr. Seth an industrialist has been fighting a long drawn litigation with Mr. Raman another
industrialist. To support his legal campaign Mr. Seth enlists the services of Mr. X a legal
export slating that an amount of Rs. 5 lakhs would be paid, if Mr. X does not take up the brief
of Mr. Raman. Mr. X agrees, but at the end of the litigation Mr. Seth refuses to pay. Decide
whether Mr. X can recover the amount promised by Mr. Seth under the provisions of the Indian
Contract Act, 1872. (November 2004)
Answer
The problem as asked in the question is based on one of the essentials of a valid contract.
Accordingly, one of the essential elements of a valid contract is that the agreement must not
be one which the law declares to be either illegal or void. A void agreement is one without any
legal effect. Thus any agreement in restraint of trade, marriage, legal proceedings etc., are
void agreements. Thus Mr. X cannot recover the amount of Rs. 5 lakhs promised by Mr. Seth
because it is an illegal agreement and cannot be enforced by law.
Question 13
What is meant by Anticipatory Breach of Contract?
Mr. Dubious textile enters into a contract with Retail Garments Show Room for supply of
1,000 pieces of Cotton Shirts at Rs.300 per shirt to be supplied on or before 31 st December,
2004. However, on 1st November, 2004 Dubious Textiles informs the Retail Garments Show
Room that he is not willing to supply the goods as the price of Cotton shirts in the meantime
has gone upto Rs. 350 per shirt. Examine the rights of the Retail Garments Show Room in this
regard. (November 2004)
Answer
Anticipatory breach of contract

Anticipatory breach of contract occurs when the promisor refuses altogether to perform his
promise and signifies his unwillingness even before the time for performance has arrived. In
such a situation the promise can claim compensation by way of loss or damage caused to him
by the refusal of the promisor. For this, the promisee need not wait till the time stipulated in
the contract for fulfillment of the promise by the poimisor is over.
In the given problem Dubious Textiles has indicated its unwillingness to supply the cotton
shirts on 1st November 2004 it self when it has time upto 31 s’- December 2004 for performance
of the contract of supply of goods. It is therefore called anticipatory breach of contract. Thus
Retail Garments show room can claim damages from Dubious Textiles immediately after 1 st
November, 2004, without waiting upto 31 s’ December 2004. The damages will be calculated at
the rate of Rs. 50 per shirt i.e. the difference between Rs. 350/- (the price prevailing on 1s1
November) and Rs. 300/- the contracted price.
Question 14
Distinguish between Contract of Indemnity and Contract of Guarantee. (November 2004)
Answer
Contract of indemnity Contract of Guarantee

1. There are two parties to the contract viz. 1. There are three parties to the viz.
indemnifier (promisor) and the creditor, principal debtor and the surety
Indemnified (promise).
2 Liability of the indemnifier to the 2. Liability of the surety to the creditor is
indemnified is primary and independent. collateral or secondary, the primary
liability being that of the principal debtor.
3 There is only one contract in case of a 3 .In a contract of guarantee there are
contract of indemnity, i.e., between the three contracts, between principal
indemnifier and the indemnified. Debtor and Creditor; between creditor
and the surety and between surety and
principal debtor.
4 It is not necessary for the indemnifier to 4. It is necessary that surety should give
act at the request of the indemnified. the guarantee at the request of the
debtor.
5 The liability of the indemnifier arises 5. There is usually an existing debt or duty,
only on the happening of a contingency. the performance of which is guaranteed
by the surety.
6 An indemnifier cannot sue a third 6. 6. A surety, on discharging the debt due by
party for loss in his own name, because the principal debtor, steps into the shoes
there is no privity of contract. He can do of the creditor. He can proceed against
so only if there is an assignment in his the principal debtor in his own right
favour.
Question 15
Father promised to pay his son a sum of Rs. One lakh if the son passed C.A. examination in
the first attempt. The son passed the examination in the first attempt, but father failed to pay
the amount as promised. Son files a suit for recovery of the amount. State along with
reasons whether son can recover the amount under the Indian Contract Act, 1872
(May 2005)
Answer
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 10. According to the provisions there should be an intention to create
legal relationship between the parties. Agreements of a social nature or domestic nature do
not contemplate legal relationship and as such are not contracts, which can be enforced. This
principle has been laid down in the case of Balfour vs. Balfour (1912 2 KB. 571). Accordingly,
applying the above provisions and the case decision, in this case son cannot recover the
amount of Rs.1 lakh from father for the reasons explained above.
Question 16
A hire a carriage of B and agrees to pay Rs.500 as hire charges. The carriage is unsafe,
though B is unaware of it. A is injured and claims compensation for injuries suffered by him.
B refuses to pay. Discuss the liability of B (May 2005)
Answer
Problem asked in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 150. The section 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. Accordingly, applying the above provisions in the given case B is
responsible to compensate A for the injuries sustained even if he was not aware of the defect
in the carriage.
Question 17
M Ltd., contracts with Shanti Traders to make and deliver certain machinery to them by
30.6.2004 for Rs. 11.50 lakhs. Due to labour strike, M Ltd. could not manufacture and deliver
the machinery to Shanti Traders. Later, Shanti Traders procured the machinery from another
manufacturer for Rs.12.75 lakhs. Shanti Traders was also prevented from performing a
contract which it had made with Zenith Traders at the time of their contract with M Ltd. and
were compelled to pay compensation for breach of contract. Advise Shanti Traders the
amount of compensation which it can claim from M Ltd., referring to the legal provisions of the
Indian Contract Act. (May 2005)
Answer
Section 73 of the Indian Contract Act, 1872 provides for consequences of breach of contract.
According to it, when a contract has been broken, the party who suffers by such breach is
entitled to receive from the party who has broken the contract, compensation for any loss or
damage caused to him thereby which naturally arose in the usual course of things from such
breach or which the parties knew when they made the contract, to be likely to result from the
breach of it. Such compensation is not given for any remote and indirect loss or damage
sustained by reason of the breach. It is further provided in the explanation to the section that
in estimating the loss or damage from a breach of contract, the means which existed of
remedying the inconvenience caused by the non-performance of the contract must be taken
into account.
Applying the above principle of law to the given case, M Ltd is obliged to compensate for the
loss of Rs.1.25 lakhs (i.e. Rs.12.75 minus Rs.11.50 = Rs. 1.25 lakhs) which had naturally
arisen due to default in performing the contract by the specified date.
Regarding the amount of compensation which Shanti Traders were compelled to make to
Zenith Traders, it depends upon the fact whether M Ltd knew about the contract of Shanti
Traders for supply of the contracted machinery to Zenith Traders on the specified date. If so,
M Ltd is also obliged to reimburse the compensation which Shanti Traders had to pay to
Zenith Traders for breach of contract. Otherwise M Ltd is not liable.
Question 18
Mr. Ahuja of Delhi engaged Mr. Singh as his agent to buy a house in West Extension area.
Mr. Singh bought a house for Rs.20 lakhs in the name of a nominee and then purchased it
himself for Rs.24 lakhs. He then sold the same house to Mr. Ahuja for Rs.26 lakhs. Mr. Ahuja
later comes to know the mischief of Mr. Singh and tries to recover the excess amount paid to
Mr. Singh. Is he entitled to recover any amount from Mr. Singh? If so, how much? Explain.
(November 2005)
Answer
The problem in this case, is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 215 read with Section 216. The two sections provide, that where an
agent without the knowledge of the principal, deals in the business of agency on his own
account, the principal may:
(1) repudiate the transaction, if the case shows, either that the agent has dishonestly
concealed any material fact from him, or that the dealings of the agent have been
disadvantageous to him.
(2) claim from the agent any benefit, which may have resulted to him from the transaction.
Therefore, based on the above provisions, Mr. Ahuja is entitled to recover Rs.6 lakhs from
Mr. Singh being the amount of profit earned by Mr. Singh out of the transaction.
Question 19
Miss X, a film actress agreed to work exclusively for a period of two years, for a film
production company. However, during the said period she enters into a contract to work for
another film producer. Discuss the rights of the aggrieved film production company under the
Indian Contract Act, 1872. (November 2005)
Answer
Where a party comments a breach of negative term of a contract i.e., where he does
something which he promised not to do, the aggrieved party can go to court which may be
issue an order restraining him from doing what he promised not to do. Such an order of the
court is known as injunction. Since Miss X has agreed to work exclusively for the film
production company for a period of two years, the aggrieved film production company can go
to court and get injunction order restraining Miss X working for another film production
company. A similar decision was taken in the case of Warrior Bros vs. Nelson (1937) 1 K.B.
209
Question 20
“An agreement made without consideration is void. “With reference to provisions of the Indian
Contract Act, 1872 examine the validity of the statement and explain the cases in which the
statement does not apply. (November 2005)
Answer
Validity of an Agreement without consideration: The general rule is that an agreement
made without consideration is void (Section 25). In every valid contract consideration is very
important. A contract may only be enforceable when an adequate consideration is there.
However, the Indian Contract Act, 1872 contains certain exceptions to this rule. In the
following cases, the agreement though made without consideration, will be valid and
enforceable.
1. Natural Love and Affection: A written and registered agreement based on Natural Love
and Affection between the parties standing in near relation (e.g., husband and wife) to each
other is enforceable even without consideration. A contract in writing, registered on account of
natural love and affection between parties standing near relation to each other are the
essential requirements for valid contract though it is without consideration. (Rajlukhee Devee
vs. Bhootnath).
2. Compensation for past voluntary services: A promise to compensate, wholly or in
part, a person who has already voluntarily done something for the promisor, is enforceable
under (Section 25(2). In order that a promise to pay for the past voluntary services is binding,
the following essential factors must exist:
(i) the services should have been rendered voluntarily.
(ii) the services must have been rendered for the promisor.
(iii) the promisor must be in existence at the time when services were rendered.
(iv) the Promisor must have intended to compensate to the promisee.
3. Promise to pay time barred debt: Where a promise in writing signed by the person
making it or by his authorized agent, is made to pay a debt barred by limitation it is valid
without consideration [Section 25(3)].
4. Agency: According to Section 185 of the Indian Contract Act, 1872 no consideration is
necessary to create an agency.s
5. Completed gift: In case of completed gifts, the rule no consideration no contract does
not apply. Explanation (1) to Section 25 of the Act states “Nothing in this section shall affect
the validity as between the donor and donee, of any gift actually made.” Thus, gifts do not
require any consideration.
Question 21
Examine the validity of a contract when the acceptance from the offeree is obtained under
‘Coercion’ or under ‘Undue influence’. Point out the distinction between ‘Coercion’ and ‘Undue
influence’. (November 2005)
Answer
According to Section 19 of the Indian Contract Act, 1872 when consent to an agreement is
given due to coercion or undue influences, such a contract is voidable at the option of the
party whose consent was so obtained. The difference between coercion and undue influence
is as under:
Coercion Undue Influence

(a) It involves the physical force or threat. It involves moral or mental pressure.
The aggrieved party is complete to The aggrieved party believes that he
make the contract against its will. or she would make the contract.
(b) It involves committing or threatening to No such illegal act is committed or a
commit an act forbidden by Indian threat is given.
Penal Code for detaining or threatening
to detain property of another person.
(c) It is not necessary that there must be Some sort of relationship between
some relationship between the parties. the parties is absolutely necessary.
(d) Coercion need not proceed from the Undue influence is always essential
promisor nor need it be directed between the parties to the contract.
against the promisor.
(e) The contract is voidable at the option of Where consent is induced by undue
the party whose consent has been influence, the contract is either
obtained by the coercion. voidable or the court may set it sale
or enforce it in a modified form.
(f) In case of coercion where the The court has the distinction to
aggrieved party, as per Section 64, direct the aggrieved party to return
rescinds the contract any benefit the benefit in whole or in part or not
received has to be restored back to the to give any such directions.
other party.
Question 22
Ramaswami proposed to sell his house to Ramanathan. Ramanathan sent his acceptance by
post. Next day, Ramanathan sends a telegram withdrawing his acceptance. Examine the
validity of the acceptance in the light of the following:
(i) The telegram of revocation of acceptance was received by Ramaswami before the letter
of acceptance.
(ii) The telegram of revocation and letter of acceptance both reached together.
(May 2006)
Answer
The problem is related with the communication and time of acceptance and its revocation. As
per Section 4 of the Indian Contract Act, 1872, the communication of an acceptance is a
complete as against the acceptor when it comes to the knowledge of the proposer.
An acceptance may be revoked at any time before the communication of the acceptance is
complete as against the acceptor, but not afterwards.
Referring to the above provisions
(i) Yes, the revocation of acceptance by Ramanathan (the acceptor) is valid.
(ii) If Ramaswami opens the telegram first (and this would be normally so in case of a
rational person) and reads it, the acceptance stands revoked. If he opens the letter first
and reads it, revocation of acceptance is not possible as the contract has already been
concluded
Question 23
Explain the circumstances whereunder a party to a contract may be exempted from the
performance of contract on the ground of ‘Supervening impossibility’ under the Indian Contract
Act, 1872. (May 2006)
Answer
Supervening impossibility: When performance of a promise becomes impossible or illegal

by occurrence of an unexpected, event or a change of circumstances beyond the
contemplation of parties, is called supervening impossibility. In case of supervening
impossibility the contract becomes void.
Circumstances: A party to a contract may be excused from the performance of his
promise on the ground of ‘supervening impossibility’ under the Indian Contract Act,
1872 in the following circumstances.
(a) Accidental destruction of the subject matter of the contract: If the subject matter of the
contract is destroyed by an accident both the parties are excused from the performance
of the contract.
(b) Non-existence or non occurrence of a particular state of things: Non-existence or non
occurrence of a particular state of things of the contract exempts the parties from the
performance of the contract.
(c) Incapacity to perform a contract of personal services: In case of contract of personal

service, disability or incapacity to perform, caused by the act of God e.g. illness,
constitutes lawful excuse for non-performance of the contract.
(d) Change in law: Performance of a contract may also become impossible due to a
subsequent change in the law. The law passed after the contract may prohibit
performance of some act, which may be very basis of the contract. As such the contract
is discharged due to subsequent impossibility and the parties become free from their
mutual obligations.
(e) Outbreak of war: Contracts may be affected by war in a variety of ways, viz., (i) by
emergency legislation controlling prices or otherwise relating to restriction of trade; (ii) by
prohibiting or restraining transaction with alien enemy.
Question 24
Ravi becomes guarantor for Ashok for the amount which may be given to him by Nalin within
six months. The maximum limit of the said amount is Rs. 1 lakh. After two moths Ravi
withdraws his guarantee. Upto the time of revocation of guarantee, Nalim had given to Ashok
Rs. 20,000.
(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan.
(ii) Whether Ravi is liable if Ashok fails to pay the amount of Rs. 20,000 to Nalin ?
(May 2006)
Answer
Discharge of Surety by Revocation (Problem): As per section 130 of the India Contract
Act, 1872 a specific guarantee cannot be revoked by the surety if the liability has already
accrued. A continuing guarantee may, at any time, be revoked by the surety, as to future
transactions, by notice to the creditor, but the surety remains liable for transactions already
entered into.
As per the above provisions (i) Yes, Ravi is discharged from all the subsequent loan because
it’s a case of continuing guarantee. (ii) Ravi is liable for payment of Rs. 20,000 Nalin because
the transaction has already completed
Question 24
X, a minor was studying in M.Com. in a college. On 1 st July, 2005 he took a loan of Rs.
10,000 from B for payment of his college fees and to purchase books and agreed to repay by
31st December, 2005. X possesses assets worth Rs. 2 lakhs. On due date X fails to pay back
the loan to B. B now wants to recover the loan from X out of his (X’s) assets. Referring to the
provisions of Indian Contract Act, 1872 decide whether B would succeed. (November 2006)
Answer
Yes, B can proceed against the assets of X. According to section 68 of Indian Contract Act
1872 “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.” Since the loan given to X is for the necessaries suited to the conditions in
life of the minor, his assets can be sued to reimburse B.
Question 25
“The relationship of principal and agent (i.e. Agency) may be constituted by Subsequent
ratification by the principal.” Examine the validity of the statement and state the requisites of a
valid ratification in the light of the provisions of the Indian Contract Act, 1872.
(November 2006)
Answer
Where an agent does an act for his principal without his knowledge or authority or where he
exceeds the given authority, the principal is not held bound by the transaction so made.
However, Section 196 of the Indian Contract Act, 1872, permits the principal to ratify the act of
the agent. According to this section “Where acts are done by one person on behalf of another,
but without his knowledge or authority, he may elect to ratify or to disown such acts. If he
ratify them, the same effects will follow as if they had been performed by his authority “Agency
in such a case is said to be constituted by ratification.
To be valid, a ratification must fulfill the following conditions:
(i) The agent must purport to act an agent.
(ii) The principal must have been in existence at the time the agent originally acted.
(iii) Ratification may be expressed or implied (Section 197).
(iv) No valid ratification can be made by a person whose knowledge of the facts of the case
is materially defective (Section 198).
(v) Ratification must be of the entire transaction. A contract cannot be ratified partially
(Section 199).
(vi) Ratification of unauthorized act must not injure third person. (Section 200)
(vii) An illegal act cannot be ratified.
(viii) The person ratifying the act must have contractual capacity.
Question 26
Explaining the provisions of the Indian Contract Act, 1872, answer the following:
(i) 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 ?
(ii) C, the holder of an over due bill of exchange drawn by A as surety for B, and accepted by
B, contracts with X to give time to B. Is A discharged from his liability ?(November 2006)
Answer
(i) 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.
(ii) According to Section 136 of the Indian Contract Act, 1872, 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. In the given question the contract to give
time to the principal debtor is made by the creditor with X who is a third person. X is not
the principal debtor. Hence A is not discharged.
Question 27
Y holds agricultural land in Gujarat on a lease granted by X, the owner. The land revenue
payable by X to the Government being in arrear, his land is advertised for sale by the
Government. Under the Revenue law, the consequence of such sale will be termination of Y’s
lease. Y, in order to prevent the sale and the consequent termination of his own lease, pays
the Government, the sum due from X. Referring to the provisions of the Indian Contract Act,
1872 decide whether X is liable to make good to Y, the amount so paid ? (May 2007)
Answer
Yes, X is bound to make good to Y the amount so paid. Section 69 of the Indian Contract Act,
1872, provides that “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. In
the given case Y has made the payment of lawful dues of X in which Y had an interest.
Therefore, Y is entitled to get the reimbursement from X.
Question 28
Examine whether the following constitute a contract of ‘Bailment’ under the provisions of the
Indian Contract Act, 1872:
(i) V parks his car at a parking lot, locks it, and keeps the keys with himself.
(ii) Seizure of goods by customs authorities. (May 2007)
Answer
(i) No. Mere custody of goods does not mean possession. For a bailment to exist the bailor
must give possession of the bailed property and the bailee must accept it (Section 148,
Indian Contract Act, 1872 is not applicable).
(ii) Yes, the possession of the goods is transferred to the custom authorities. Therefore
bailment exists and section 148 is applicable.
Question 29
A contracted with B to supply him (B) 500 tons of iron-steel @ Rs. 5,000 per ton, to be
delivered at a specified time. Thereafter, A contracts with C for the purchase of 500 tons of
iron-steel @ Rs. 4,800 per ton, and at the same time told ‘C’ that he did so for the purpose of
performing his contract entered into with B. C failed to perform his contract in due course.
Consequently, A could not procure any iron-steel and B rescinded the contract. What would
be the amount of damages which A could claim from C in the circumstances ? Explain with
reference to the provisions of the Indian Contract, 1872. (May 2007)
Answer
The problem in the question is based on the provisions of the Indian Contract Act, 1872 as
contained in Section 73. Section 73 provides that when a contract has been broken the party
who suffers by such breach is entitled to receive from the party who has broken the contract
compensation for any loss or damage caused to him thereby which naturally arose in the usual
course of things from such breach or which the parties knew when they made the contract to
be likely to result from the breach of it. The leading case in this point is Hadley v Baxendale.
In “Hadley vs. Baxendale” it was decided that if the special circumstances under which the
contract was actually made were communicated by the plaintiffs to the defendants, and thus
known to both parties, the damages resulting from the breach of such a contract which they
would reasonably contemplate, would be the amount of injury which would ordinarily follow
from a breach of contract under these special circumstances so known and communicated.
In the instant case ‘A’ had intimated to ‘C’ that he was procuring iron steel from him for the
purpose of performing his contract with ‘B’ Thus, C had the knowledge of the special
circumstance. Therefore, ‘A’ is entitled to claim from ‘C’ Rs. 1,00,000 (difference between the
procuring price of iron steel and contracted selling price to ‘B’) being the amount of profit ‘A’
would have made by the performance of his contract with ‘B’. If A had not told C of B’s
contract then the amount of damages would have been the difference between the contract
price and the market price on the day of default
Question 30
‘X' agreed to become an assistant for 5 years to 'Y' who was a Doctor practising at Ludhiana.
It was also agreed that during the term of agreement 'X' will not practise on his own account in
Ludhiana. At the end of one year, ‘X' left the assistantship of 'Y' and began to practise on his
own account. Referring to the provisions of the Indian Contract Act, 1872, decide whether ‘X'
could be restrained from doing so? (November 2007)
Answer
An agreement in restraint of trade/business/profession is void under Section 27 of the Indian
Contract Act, 1872. But an agreement of service by which a person binds himself during the
term of the agreement not to take service with anyone else directly or indirectly to promote any
business in direct competition with that of his employer is not in restraint of trade. However in
the given case X cannot be restrained by an injunction from doing so.
Question 31
X transferred his house to his daughter M by way of gift. The gift deed, executed by X,
contained a direction that M shall pay a sum of Rs. 5,000 per month to N (the sister of the
executant). Consequently M executed an instrument in favour of N agreeing to pay the said
sum. Afterwards, M refused to pay the sum to N saying that she is not liable to N because no
consideration had moved from her. Decide with reasons under the provisions of the Indian
Contract Act, 1872 whether M is liable to pay the said sum to N. (November 2007)
Answer
As per Section 2 (d) of the Indian Contract Act, 1872, in India, it is not necessary that
consideration must be supplied by the party, it may be supplied by any other person including
a stranger to the transaction.
The problem is based on a case "Chinnaya Vs. Ramayya” is which the Court clearly observed
that the consideration need not necessarily move from the party itself, it may move from any
person. In the given problem, the same reason applies. Hence, M is liable to pay the said sum
to N and cannot deny her liability on the ground that consideration did not move from N.
Question 32
X, Y and Z jointly borrowed Rs.50,000 from A. The whole amount was repaid to A by Y.
Decide in the light of the Indian Contract Act, 1872 whether:
(i) Y can recover the contribution from X and Z,
(ii) legal representatives of X are liable in case of death of X,
(iii) Y can recover the contribution from the assets, in case Z becomes insolvent.
(November 2007)
Answer
Section 42 of the Indian Contract Act, 1872 requires that when two or more persons have
made a joint promise, then, unless a contrary intention appears by the contract, all such
persons jointly must fulfill the promise. In the event of the death of any of them, his
representative jointly with the survivors and in case of the death of all promisees, the
representatives of all jointly must fulfill the promise.
Section 43 allows the promisee to seek performance from any of the joint promisors. The
liability of the joint promisors has thus been made not only joint but "joint and several". Section
43 provides that in the absence of express agreement to the contrary, the promisee may
compel any one or more of the joint promisors to perform the whole of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may compel
every joint promisors to contribute equally to the performance of the promise (unless a
contrary intention appears from the contracts). If any one of the joint promisors makes default
in such contribution the remaining joint promisors must bear the loss arising from such default
in equal shares.
As per the provisions of above sections,
(i) Y can recover the contribution from X and Z because XYZ are joint promisors.
(ii) Legal representative of X are liable to pay the contribution to Y. However, a legal
representative is liable only to the extent of property of the deceased received by him.
(iii) 'Y' also can recover the contribution from Z's assets.
Question 33
Point out with reasons whether the following agreements are valid or void:
(i) Kamala promises Ramesh to lend Rs. 50,000 in lieu of consideration that Ramesh gets
Kamala’s marriage dissolved and he himself marries her.
(ii) Sohan agrees with Mohan to sell his black horse. Unknown to both the parties, the horse
was dead at the time of agreement.
(iii) Ram sells the goodwill of his shop to Shyam for Rs. 4,00,000 and promises not to carry on
such business forever and anywhere in India.
(iv) In an agreement between Prakash and Girish, there is a condition that they will not
institute legal proceeding against each other without consent..
(v) Ramamurthy, who is a citizen of India, enters into an agreement with an alien friend.
(May 2008)
Answer
Validity of agreements
(i) Void Agreement: As per Section 23 of the Indian Contract Act, 1872 an agreement is void
if the object or consideration is against the public policy.
(ii) Void Agreement: As per Section 20 of the Indian Contract Act, 1872 the contract caused
by mistake of fact are void. There is mistake of fact as to the existence of subject-matter.
(iii) Void agreement: As per Section 27 of the Indian Contract Act, 1872 an agreement in
restraint of trade is void. However, a buyer can put such a condition on the seller of good
will, not to carry on same business. However, the conditions must be reasonable
regarding the duration and the place of the business.
(iv) Void agreement: An agreement in restraint of legal proceedings is void as per Section 28
of the Indian Contract Act, 1872.
(v) Valid agreement: An agreement with alien friend is valid, but an agreement with alien
enemy is void.
Question 34
Ravi sent a consignment of goods worth Rs. 60,000 by railway and got railway receipt. He
obtained an advance of Rs. 30,000 from the bank and endorsed and delivered the railway
receipt in favour of the bank by way of security. The railway failed to deliver the goods at the
destination. The bank filed a suit against the railway for Rs. 60,000. Decide in the light of
provisions of the Indian Contract Act, 1872, whether the bank would succeed in the said suit?
(May 2008)
Answer
Rights of Bailee
As per Sections 178 and 178A of the Indian Contract Act, 1872 the deposit of title deeds with
the bank as security against an advance constitutes a pledge. As a pledge, a banker’s rights
are not limited to his interest in the goods pledged. In case of injury to the goods or their
deprivation by a third party, the pledgee would have all such remedies that the owner of the
goods would have against them. In Morvi Mercantile Bank Ltd. vs. Union of India, the
Supreme Court held that the bank (pledgee) was entitled to recover not only the amount of the
advance due to it, but the full value of the consignment. However, the amount over and above
his interest is to be held by him in trust for the pledgor. Thus, the bank will succeed in this
claim of Rs. 60,000 against Railway.
Question 35
R is the wife of P. She purchased some sarees on Credit from Q. Q demanded the amount
from P. P refused. Q filed a suit against P for the said amount. Decide in the light of
provisions of the Indian Contract Act, 1872, whether Q would succeed? (May 2008)
Answer
Problem on Agency
Problem as asked in the question is based on the provisions related with the modes of
creation of agency relationship under the Indian Contract Act, 1872. Agency may be created
by a legal presumption; in a case of cohabitation by a married woman (i.e. wife is considered
as an implied agent, of her husband). If wife lives with her husband, there is a legal
presumption that a wife has authority to pledge her husband’s credit for necessaries. But the
legal presumption can be rebutted in the following cases:
(i) Where the goods purchased on credit are not necessaries.
(ii) Where the wife is given sufficient money for purchasing necessaries.
(iii) Where the wife is forbidden from purchasing anything on credit or contracting debts.
(iv) Where the trader has been expressly warned not to give credit to his wife.
If the wife lives apart for no fault on her part, wife has authority to pledge her husband’s credit
for necessaries. This legal presumption can be rebutted only in cases (iii) and (iv).
Applying the above conditions in the given case ‘Q’ will succeed. He can recover the said
amount from ‘P’ if sarees purchased by ‘R’ are necessaries for her.
Question 36
M lends a sum of Rs.5,000 to B, on the security of two shares of a Limited Company on 1 st
April 2007. On 15 th June, 2007, the company issued two bonus shares. B returns the loan
amount of Rs.5,000 with interest but M returns only two shares which were pledged and
refuses to give the two bonus shares. Advise B in the light of the provisions of the Indian
Contract Act, 1872. (November 2008)
Answer
Bailee’s duties and Liabilities
The problem as asked in the question is based on the provisions of Section 163(4) of the
Indian Contract Act,1872. As per the section, “in the absence of any contract to the contrary,
the bailee is bound to deliver to the bailor, any increase or profit which may have accrued from
the goods bailed.”
Applying the provisions to the given case, the bonus shares are an increase on the shares
pledged by B to M. So M is liable to return the shares along with the bonus shares and hence
B the bailor, is entitled to them also (Motilal v Bai Mani ).
Question 37
B owes C a debt guaranteed by A. C does not sue B for a year after the debt has become
payable. In the meantime, B becomes insolvent. Is A discharged? Decide with reference to
the provisions of the Indian Contract Act, 1872. (November 2008)
Answer
Discharge of surety
The problem is based on the provisions of Section 137 of the Indian Contract Act, 1872
relating to discharge of surety. The section states that mere forbearance on the part of the
creditor to sue the principal debtor and/or to enforce any other remedy against him would not,
in the absence of any provision in the guarantee to the contrary, discharge the surety. In view
of these provisions, A is not discharged from his liability as a surety.
Question 38
“Good Girl” Soap Co. advertised that it would give a reward of Rs.1,000 who developed skin
disease after using, “Good Girl” soap of the company for a certain period according to the
printed directions. Miss Rakhi purchased the advertised “Good Girl” and developed skin
disease in spite of using this soap according to the printed instructions. She claimed reward of
Rs.1,000. The company refused the reward on the ground that offer was not made to her and
that in any case she had not communicated her acceptance of the offer. Decide whether Miss
Rakhi can claim the reward or not. Refer the relevant case law, if any. (November 2008)
Answer
General offer
Yes, Miss Rakhi can claim the reward of Rs.1,000 because the advertisement issued by the
company is an offer made to the public in general and hence any one can accept and do the
desired act. Where a general offer is of continuing nature, it will be open for acceptance to any
number of persons until it is retracted. The Contract Act posits that performance of the
conditions of a proposal is an acceptance of the proposal. So there is no need of actual and
formal offer and the communication of an acceptance of an offer. Relevant case law is Carlill
v. Carbolic Smoke Ball Co.
Make
Chapter 5 The Indian Contract Act, 1872 Your
Own
Notes
Chapter 5: 5.1
The Indian Contract

Act, 1872
Definitions [2]
Sec Definition
Proposal
When one person signifies to another,
a. his willingness to do or to abstain from doing anything,
2(a)
b. with a view to obtaining the assent of that other to such act or
abstinence,
he is said to make a proposal.
Promise
a. When the person to whom the proposal is made signifies his assent
2(b)
thereto, the proposal is said to be accepted.
b. A proposal, when accepted, becomes a promise.
Promisor & Promisee
2(c) a. The person making the proposal is called the “promisor”,
b. The person accepting the proposal is called the “promisee”
Consideration
When, at the desire of the promisor, the promisee or any other person has:
2(d) a. done or abstained from doing, or does or abstains from doing, or
b. promises to do or to abstain from doing, something,
such act or abstinence or promise is called a consideration for the promise
Agreement
2(e) Every promise and every set of promises, forming the consideration for
each other, is an agreement.
Void Agreement
2(g)
An agreement not enforceable by law is said to be void
Contract
2(h)
An agreement enforceable by law is a contract.
Voidable Contract
An agreement which is enforceable by law at the option of one or more of
2(i)
the parties thereto, but not at the option of the other or others, is a
voidable contract.
Void Contract
2(j) A contract which ceases to be enforceable by law becomes void when it
ceases to be enforceable.
Essentials of Valid Contract [10]

Agreement
In order to constitute a contract, there must be an agreement in first place. An agreement in
turn is composed of two elements-offer and acceptance. Thus there must be at least two
parties-one making the offer and another accepting it. The terms of offer must be definite and
the acceptance must be absolute and unconditional.
© CA Darshan D. Khare
Make
Your The Indian Contract Act, 1872 Chapter 5
Own
Notes
Chart for Understanding
5.2 Agreement
Offer by Acceptance Offer must It must be

Offeror by Offeree be definite unconditional
Legal Relationship
The parties must intend to create a legal relationship. Agreements of social or domestic nature
do not contemplate legal relationship, so they are not contracts.

Example of Legal Relationship
Husband promising his wife to buy A promises B to build House for A in exchange
her a ‘necklace’ on occasion of her of money is contract and therefore create legal
birthday is not a contract. relationship
Lawful consideration
The agreement must be supported by a lawful consideration. Consideration means ‘something in
return’. ‘Something in return’ may be an act or abstinence. But it must be real and lawful.

Example of Lawful consideration
Giving money in exchange of goods Bringing stars from sky is not real. Hence cannot be
bought is lawful consideration. considered as lawful consideration.
Capable Parties
The parties to an agreement must be capable of entering into a contract. A person is considered
incompetent if he is (a) not 18 or not above 18 years of age (b) of unsound mind (c) disqualified
from contracting by any law to which he is subject.

Example of Incompetent parties
Not 18 or not above 18 Person of Person Disqualified by

years of age unsound mind law
Make
Own
Notes
Lawful Purpose
The object of agreement must be lawful.
5.3
Example of Lawful Purpose
C pays fees to his Lawyer for fighting his case is L asks M to kill D in exchange of 50,000 Rs is
a lawful purpose Unlawful purpose
Free Consent
The consent of the parties must be free and genuine i.e. not induced by coercion, undue
influence, fraud or misrepresentation.

Example of Free Consent
A made proposal to B asking his consent in Z forced X to sign a promissory note at the point
writing without any pressure, is free consent of pistol, is not Free Consent
Valid Agreement
The agreement not expressly declared void or illegal by law. The terms of agreement must be
certain and capable of performance.
Example of Valid Agreement
D agrees to sell C garments. The type, quality, value etc. are A Promises B to bring rainfall through
not discussed. The agreement cannot be enforced as terms magic. Such agreement cannot be
are uncertain. enforced
Legal formalities
Where nature of agreement is such that it requires compliance of certain formalities, such
requirements should be fulfilled. A contract may require registration in addition of being in
writing. However as regards to legal effects, an oral contract has same weightage as a contract in
writing.
Distinction Between Agreement & Contract
Basic Agreement Contract
Meaning:
Make
Own
Notes
Creation of
Legal
5.4 Obligation:
One in Other:
Contract or Agreement to do Impossible Act is Void [56]

Meaning
Contingent agreements to do or not to do anything if an impossible event happens, are void,
even if the impossibility of the event is known or not known to the parties at the time when
agreement is made.
Compensation shall be given when fact is known

If a person promises to do particular act:
 knowing that such act is impossible or unlawful &
 the person to whom such promise is made does not know the fact that such act is
unlawful or impossible
than the promisor must make compensation for any loss which the promisee has sustained due
to non-performance of the promise.
Examples
A agrees to pay B 1,000 rupees if two-straight lines should enclose a space. The
agreement is void.
A agrees to pay B 2,000 rupees if B will marry A’s daughter C. C was dead at the time of
the agreement. The agreement is void.
Uncertain Agreement [29]

Agreements,
a. the meaning of which is not certain, or
b. not capable of being made certain, are void.

Example of Uncertain Agreement
A agrees to sell to B “all the grain in A’s A agrees to sell to B “my white house for Rs.
granary at Ramnagar @ 40 per Kg.” There 5 cr or Rs. 10 cr”. There agreement shows
is no uncertainty here to make the two prices making it uncertain. So
agreement void. agreement is void.
Make
Own
Notes
Classification of Contracts [2 and 9]

5.5
Creation Basis Execution Basis Enforceability Basis
Executed Contract Valid Contract

Express Contract
In which both the parties
Contract by Spoken or written
fulfilled their obligations.
words. Void Contract
Implied Contract Executory Contract

In which both the parties not Void Agreement
Contract by conduct of
person or circumstances of fulfilled their obligations.
cases. Voidable Contract
Contract
Partly Executed and Partly
Executory Contract Illegal Agreement
Offer or Proposal
Rules of Valid Offer or Proposal
1. Offer Must Be Communicated
Carlill Vs. Carbolic Smoke Ball Co.
Mrs. Carlill
1.It advertised to give
used smoke
reward of $100 to
balls but
person who contracted
contracted
influenza, after using its
influenza
Smoke balls
2.She claimed
reward but
Company resisted
3.Court held that Mrs
Carlill was entitled to a
reward
Fact of The Case

a. A pharmaceutical Company advertised that it would give a reward of $100 to any person who
contracted influenza, after using its Smoke balls for certain period according to the directions.
b. Mrs. Carlill bought these smoke balls and used them as directed but contracted influenza. She
claimed reward but Company resisted.
Question
Whether Company’s resistance to give reward is tenable?
Decision Of Court
It was held that the advertisement did not require any communication of compliance of the
condition, it was not necessary to communicate the same. Mrs Carlill was entitled to a reward of
$100 as she had performed the condition for acceptance.
Make
Own
Notes
Boulton Vs. Jones

5.6
1. J offered to purchase 50
feet leather from Z
2.Z sold his

business to
B
3.B supplied to leather to J but J refuses to accept the

leather. Held that where an offer is made to a specified
person only that person can accept such offer.
Fact of The Case

a. J offered to purchase 50 feet leather from Z.
b. Z in meantime sold his business to B.
c. So instead of Z, B supplied to leather to J.
d. J refused to accept the leather.
Question
Can J refuse such offer?
Decision Of Court
It was held that where an offer is made to specified person(Z), it is a specific offer. Only that
person can accept such specific offer, as it is special and exclusive to him. J can refuse to accept
the leather as he had not made offer to B.
Lalman Shukla Vs. Gauri Dutt
1. G’s told same to her munim L
1. G’s Nephew was missing 2. L went to search the boy

L claimed the reward for
3. G issued handbills offering finding the boy 4. L found the boy &
reward of Rs. 501 to anyone It was held that L is not brought him home.
who trace the boy eligible for reward as he was
unaware of the public offer
and acted without knowing
the same.
Fact of The Case

a. G’s nephew was missing.
b. L who was Munim of G went in search of missing boy.
c. Meanwhile G issued handbills offering reward of Rs. 501 to anyone who trace the boy.
d. L found boy and brought him home.
Question
Whether L is eligible to receive reward?
Decision Of Court
It was held that the reward for missing the child cannot be claimed by a person who traced the
child without any knowledge of the announcement. L shall not be eligible to receive reward.
Make
Own
Notes
2. Communication of Complete Offer/Proposal
Handerson Vs. Stevenson 5.7
Conditions were
printed on back of
1.X purchased ticket. It excluded
steamer ticket company from
liability of loss of
luggage
2.X’s Luggage was

lost
X is entitled to recover
the damages
as nothing written on
front of the ticket to
draw attention
Fact of The Case

a. X purchased steamer ticket for travelling from Dablin to White Haven
b. The conditions were printed on back of the ticket. One of the condition excludes company
from liability of the any loss, injury or delay to passenger or their luggage
c. There was nothing written on front of the ticket to draw attention of the passenger at
conditions on the back of the tickets
d. X’s Luggage was lost due to negligence of servants of the shipping company
Question
Whether X is entitled to recover the damages?
Decision Of Court
It was held that there was nothing written on front of the ticket to draw attention of the
passenger at conditions on the back of the tickets. Where a written document is presented to a
party for acceptance, a reasonably sufficient notice shall be given of the presence of terms and
conditions. Therefore X is entitled to recover the damages.
Olley Vs. Malborough Court Ltd.
2.They found a notice

on the wall excluding
owner’s liability for loss
by theft of articles
1.Mr. X & Mrs. X hired
3. Mr. X &
hotel room
Mrs. X ‘s
Luggage was
stolen
4.X is entitled to
recover the damages
as terms reviled after
accepting the
contract
Fact of The Case

a. Mr. X & Mrs. X hired room in hotel
b. When they entered the room they found a notice on the wall disclaiming the owner’s liability
for any loss arising by theft of articles.
Make
Own
Notes
c. Some of their items were stolen
Question
5.8 Can Mr. X & Mrs. X claim damages?
Decision Of Court
It was held that the terms of contract concluded before entering the room. Any terms reviled
after accepting the contract will be considered void and ineffective. Hence Mr. X & Mrs. X can
claim damages.
Parker Vs. S.E. Rail Co.
2. Terms and
1. P deposited his bags in the condition of
cloakroom at a railway station receipt had
and accepted receipt for same limited liability of
bags up to $ 10
2. P’s bag was lost

4. P will only receive $ 10
as attention to condition
was attracted.
3. He claimed the actual value

of the bag amounting to $24
Fact of The Case

a. P deposited his bags in the cloakroom at a railway station.
b. On the face of the receipt the words “See Back” are printed.
c. One of the conditions printed on back was “the liability of the railway company shall be
limited to $ 10 for any package.”
d. P’s bag was lost. He claimed the actual value of the bag amounting to $24.
Question
Can P claim $ 24 for lost Bag?
Decision Of Court
It was held that If the person receiving the ticket did not see or know that there was any writing
on the ticket, he is not bound by the conditions. Decision was in the favour of P.
3. Offer Must not be Burden on Offeree

An offer must not be burden on offeree to communicate his decision. An offer must not contain
any term the non-compliance of which amounts to acceptance.
Felth house Vs. Bindley
1. A offer to sell white

horse to B. if no reply is
given within 7 days A will
assume that contract is
being executed.
B did not reply on
4. A cannot enforce contract
as his assumption was wrong matter
3. A thought B
accepted the contract
Make
Own
Notes
Fact of The Case
a. A wrote to B “I will sell you my horse for Rs. 500. If I do not receive reply by next Sunday,
I shall assume that u have accepted the offer.” 5.9
b. B did not reply.
Question
Can A enforce the contract?
Decision Of Court
It was held that A cannot enforce the contract as offer must not be burden on offeree to
communicate his decision. An offer must not contain any term the non-compliance of which
amounts to acceptance.
4. Cross offer do not Conclude a Contract

Two offers which are identical in all respect made by two persons to each other ignorance of
each other’s offer known as “Cross Offer”. Cross offer do not conclude a contract.
Example of Cross Offer
A agrees to sell something to B B offers A to Buy same thing on

on certain terms same terms
5. Counter Offer
A counter offer amounts to rejection of the original offer.

Example of Counter Offer
Seller offers to sell her house for Buyer receives the offer and gives Seller a
$150,000, to be paid in 60 days counter offer of $140,000, payable in 45 days
6. Offer Vs. Invitation to Offer Vs. Intention to Offer

Offer/Proposal Invitation to Offer Intention to Offer
Offer is final expression of If a person without expressing his final The declaration of the
willingness to make a willingness proposes certain terms on statement indicating offer
person bound by his offer which he is willing to negotiate, it is may be made or invited in
if the other person called as invitation to offer and not future does not amount to
accepts it. offer. offer.
Example: Example: Example:
Make
Own
Notes
Pharmaceutical Society of Great Britain Vs. Boot Cash Chemist Ltd.
5.10
1.A self-service
system was there for
purchasing goods.
Goods displayed in the shop

with price tags. 2.A customer
Display of goods was not selected the
4.Held an offer. The Price tag on goods but shop
customer the goods is invitation to owner refuses
can’t sue offer to sell it.
Shopkeeper
3.Customer wanted
to sue shop keeper
Fact of The Case

a. Goods displayed in the shop with price tags.
b. A self-service system was there for purchasing goods.
c. One customer selected the goods but shop owner refuses to sell it.
Question
Whether the display of goods amounts to offer? Can customer sue shop keeper?
Decision Of Court
It was held that the display of goods was not an offer. The Price tag on the goods is invitation to
offer. Shopkeeper can refuse to sale good on basis of price tag. Hence customer can’t sue
shopkeeper.
Harris Vs. N. Nickerson
X came
1.Auctioneer from a
advertised in a distant
newspaper for sale of place for
office furniture the auction
4. X cannot
enforce the Advertisement made by 2. The auction
contract auctioneer was merely was cancelled.
expression of intention and
not an offer
3. X wanted to sue
auctioneer
Fact of The Case

a. An auctioneer advertised in a newspaper that a sale of office furniture will be held on a
particular day.
b. Mr. X with intention to buy furniture came from a distant place for the auction but the
auction was cancelled.
Question
Make
Own
Notes
Whether Mr. X can enforce auction or contract?
Decision Of Court
An offer must be distinguished from mere expression of intention. It was held that 5.11
advertisement made by auctioneer was merely expression of intention and not an offer which
could be accepted by travelling to the place of intended sale.
Revocation of Offer / Laps of Offer

A proposal is revoked due to following reasons
Communication of notice of revocation by the proposer to the other party;
By the lapse of the time prescribed in such proposal for its acceptance.
If no time is so prescribed, by the lapse of a reasonable time, without
communication of the acceptance;
By the failure of the acceptor to fulfill a condition precedent to acceptance.
By the death or insanity of the proposer, if the fact of the death or insanity comes
to the knowledge of the acceptor before acceptance.
Acceptance
Meaning [2(b)]
A proposal or offer is said to have been accepted when the person to whom the proposal is
made signifies his assent to the proposal to do or not to do something.
Rules governing acceptance

1. Acceptance must be absolute and unqualified
As per section 7 of the Act, Acceptance is
 Valid only when it is absolute and unqualified and
 Is also expressed in some usual and reasonable manner unless the proposal prescribes the
manner in which it must be accepted.

Example of above rule
A offers B to buy his motorcycle at Rs A offers B to buy his motorcycle at Rs 50,000. But in
50,000. B accepts it. Such acceptance is exchange of A’s offer B asks A to buy his Cycle for Rs 10000.
absolute and unqualified Such acceptance is not absolute and unqualified
2. The acceptance must be communicated

To conclude a contract between the parties, the acceptance must be communicated in some
perceptible form. Any conditional acceptance no acceptance. Further when a proposal is
accepted, the offeree must have the knowledge of the offer made to him. The acceptance must
relate specifically to the offer made.
3. Acceptance must be in the prescribed mode

Where the proposal prescribes the mode of acceptance, it must be accepted in that manner.
Where the proposal does not prescribe the manner, then it must be accepted in a reasonable
manner.
Make
Own
Notes
5.12 Example of above rule
L sends letter to M , offering to sell his house. L

asks M to reply by telegram. M shall then reply
only through telegram
4. Acceptance in reasonable time

The acceptance must be given within a reasonable time and before the offer lapses
5. Mere silence is not acceptance

The acceptor should expressly accept the offer. Acceptance can be implied also. Acceptance
must be given only by that person to whom it is made, that too only after knowing about the
offer made to him.
6. Acceptance by conduct
Acceptance has to be signified either in writing or by word of mouth or by performance of some
act. The last of the method, namely ‘by some act’ has to be understood as acceptance by
conduct.
Example of above rule
Tradesman receives an order from a customer, and the order is executed
accordingly by the trader, there is an “acceptance by conduct” of the offer made
by the customer. The trader’s subsequent act signifies acceptance.
Who Can Accept?
In Case of Specific Offer In Case of General Offer
Only that particular person or group of Any person if:

person to whom the specific offer has been a. He has the knowledge of the offer and
made and none else. b. He fulfils the term and conditions of the offer.
Mode of Acceptance
Express Acceptance Implied Acceptance
Expressly acceptance in writing. Execute any act result in implied in acceptance.
Legal Rules for Valid Acceptance [7]

General rules relating to Acceptance
1. Absolute & Unqualified Acceptance

The offeree should assent to all the terms of the offer. There must be no variation or reservation
i.e. acceptance must be unconditional.
Make
Own
Notes
2. Acceptance Must be Communicated
Brodgen Vs. Metropolitan Rly. Co.
5.13
1. Draft agreement was sent

to the manager of a Railway
Company for his approval
2. Manager
approved letter
but did not
dispatch.
3. Contract cannot be said as concluded

because Manager has not communicated
acceptance
Fact of The Case

a. A draft agreement relating to the supply of coal was sent to the manager of a Railway
Company for his approval.
b. The manager put the words “approved” on the agreement. However the manager forgot to
dispatch approved copy of the agreement.
Question
Whether the contract is concluded without communicating acceptance?
Decision Of Court
It was held that there was no contract as the Manager had not communicated his acceptance to
proposer.
3. Acceptance by Whom?
Powell Vs. Lee
1.A school advertised Mr. A was

for filling a vacancy for selected
the post of Headmaster in the
interview
2. Decision not
B was not authorised to communicated to
4. Committee A
perform such act. Hence
changed the contract is void
decision
3. B (A’s Friend) informed

A that he was selected
but committee changed
the decision
Fact of The Case

a. A school advertised for filling a vacancy for the post of Headmaster.
b. Managing committee interviewed many people and selected Mr A.
c. However, the decision of the managing committee was not communicated to Mr. A.
d. Mr. B who was the member of the managing committee & also the friend of Mr. A informed
Make
Own
Notes
Mr. A that he has been selected.
e. In meantime managing committee changed the decision and appointed other person.
5.14 Question
Whether communication by Mr. B amounts to acceptance? Dose it amounts to valid contract?
Decision Of Court
It was held that there was no contract between the parties as there was no authorised
communication made by the school authority, the person who informed him about his
appointment was not authorised to perform such act, and there was no intention to create a
contract on the part of the body, the managers.
4. Manner of Acceptance
Manner of Acceptance
No Manner of Prescribed manner of

Acceptance Acceptance
The offer must be accepted 1. The offer must be accepted in specified manner.
in some usual and 2. If the offer is not accepted in the prescribed manner, the offeror
reasonable manner. may reject acceptance within a reasonable time.
5. Time Limit for Acceptance

Time Limit of Acceptance
The offer Does not The offer Prescribe

Prescribe the Time Limit the Time Limit
The offer must be accepted in The offer must be accepted within

reasonable time. prescribed time.
Ramsgate Victoria Hotels Vs. Montefiore

A person applied for shares in a company in June. He cannot be bound by the
allotment made late in November since delay of 6 months in acceptance of
application for shares was unreasonable.
6. Acceptance Must Be Given Before offer Lapses or Revoked

1. Acceptance can be given only to an existing offer.
2. An offer open for a limited period can be accepted only before expiry of period.
3. An offer can be revoked before acceptance.
4. Acceptance is not valid if it is given after the offer is lapsed or revoked.
5. Acceptance cannot be given before the communication of offer is complete.
7. Mode of Acceptance
1. By any act and
2. By omission, intending thereby to, to communicate to the other or which has the effect of
communicating it to the other.
Make
Own
Notes
Communication of Acceptance and Revocation [4]

5.15
Communication of Acceptance
Against offeror Against the Offeree
When acceptance is put in When acceptance comes to

course of transmission. knowledge of offeror.
Communication of Revocation
Against Maker Against Acceptor
When revocation is put in course of When revocation comes to knowledge

transmission. of acceptor.
Time Limit for Revocation [5]
Revocation Of Time Limit for Revocation

Offer Before communication of acceptance is complete against offeror.
Acceptance Before communication of acceptance is complete against offeree.
Concept Analyser
Date of receipt Date of
Revocation / posting of Receipt of
Which is Valid?
Of Letter of letter of
Acceptance Revocation
1st May 2012 5th May 2012
Offer Offer is valid
(By Offeree) (By Offeree)
5th May 2012 1st May 2012
Offer Revocation of Offer is Valid.
(By offeree) (By Offeree)
2nd May 2012 2nd May 2012

Offer
(By Offeree) (By offeree)
1st May 2012 5th May 2012

Acceptance Acceptance / Contract is Valid
(By Offeror) (By Offeror)
5th May 2012 1st May 2012
Acceptance Revocation of Acceptance is valid.
(By offeror) (By Offeror)
2nd May 2012 2nd May 2012

Acceptance
(By Offeror) (By Offeror)
Make
Own
Notes
Consideration
Meaning [2(d)]
5.16
“When at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or abstain from doing something,
such an act or abstinence or promise is called consideration for the promise.”
(1) Consideration is the doing or not doing of something which the promisor desires to be
done or not done.
(2) Consideration must be at the desire of the promisor.
(3) Consideration may move from one person to any other person.
(4) Consideration may past present or future.
(5) Consideration be not adequate, but should be real.
Essentials of Valid Consideration

1. Consideration Must Move at Desire of Promisor
Durga Prasad Vs. Baldeo
Fact of The Case

a. D spent some money for renovation of market on request of collector.
b. After such renovation, a shopkeeper of the market promised to pay commission to D on
sale affected by him.
c. On non-performance of such promise by the shopkeeper, D sued him for recovery of
money.
Question
Whether D can recover money?
Decision Of Court
It was held that there was no consideration as money was not spent by plaintiff at request of
the defendants, but at instance of third person viz. the collector, thus the contract was Void.
A shopkeeper of
the market
promised to pay
1. D spent some money
commission to
for renovation of market
D on sale
on request of collector
affected by him.
2. Shopkeeper did not

perform Promise.
3. As money was not

spent by shopkeeper D sued
but by collector so him for
contract between D recovery
and shopkeeper was of money
void
Make
Own
Notes
Chinnaya Vs. Rammaya
Fact of The Case 5.17

a. A (an old lady) made contract with R (her daughter), that whole of the property shall be
gifted to R, if R agrees to pay annuity to C (sister of A).
b. R made a contract with C agreeing to pay her the annuities.
c. On death of A, R refused to pay annuity to C on ground that nothing was received from C as
consideration for annuity & agreement between C & R was void.
Question
Whether the contention of R is valid?
Decision Of Court
It was held that consideration need not necessarily move from promisee, it may move any other
person. Hence contention of R is not valid.
2.R made a
contract with
1.A made contract with R that C agreeing to
whole of the property shall be gifted pay her the
to R, if R agrees to pay annuity to C annuities
3.On death of
Consideration need not move A, R refused
from promisee, it may move any to pay
other person. So contention of R annuity to C
Is not valid
4.R
contended
that nothing
5.Contention of R is was received
not valid. R had to from C so
pay annuity agreement
between C &
R was void
2. Adequacy of Consideration is not Required

1. There must be consideration in every contract.
2. However, adequacy of consideration is not required.
3. Even if it is proved that such consideration is inadequate, the contract is not void.
4. The fact of inadequacy of consideration shall be given due weightage while determining
whether the consent of the promisor was freely given or not.
3. Consideration must be Different from Promisee’s Existing Obligation

Ramachandra Chintaman Vs. Kaluraju
The suit
was
successful
1. Client promised to pay additional Lawyer ask for

amount to his lawyer if he wins additional amount
Lawyer cannot ask for

additional amount as was
under a pre-existing
contractual obligation
Make
Own
Notes
Fact of The Case
a. A client promised to pay an additional amount to his lawyer if the lawyer wins the suit for him.
5.18 b. The suit was successful.
Question
Whether lawyer is entitled to additional amount for winning suit?
Decision Of Court
It was held that the promise was void for want of consideration. The lawyer was under a pre-
existing contractual obligation to render the best of his services under the original contract.
4. Consideration Must Be Lawful

The agreement will be void if consideration furnished by any party is unlawful.
5. Consideration must be Real and not Illusory

Consideration received by party must be of some value. Consideration must not be
illusionary. (i.e. existing only in name)
6. Natural love and affection

A written and registered agreement based on natural love and affection between the
parties standing in near relation to each other is enforceable even without
consideration.
Rajlukhy Devi Vs. Bhoothnath
1.Due to frequent quarrels

between husband and wife. Fed
up Husband agreed to pay some
money to wife
2. Agreement is made
in writing and
registered
3.Such agreement is void as

there was no love and
affection.
Fact of The Case

a. There are frequent quarrels between husband and wife.
b. One-day husband got fed up with his wife and agreed to pay a sum of money as maintenance
to his wife.
c. This agreement is made in writing and registered.
Question
Whether the agreement is valid?
Decision Of Court
It was held that such agreement is void as there was no love and affection.
7. Compensation for past voluntary services

A promise to compensate, wholly or in part, a person who has already voluntarily done
something for the promisor is enforceable under Section 25(2).
The following are the essential factors for this condition
(i) The services should have been rendered voluntary.
(ii) The services must have been rendered for the promisor.
Make
Own
Notes
(iii) The promisor must be in existence at the time when services were rendered.
(iv) The promisor must have intended to compensate the promisee.
5.19
8. Promise to pay time bared debt
Where a promise in writing signed by the person making it or by his authorised agent is
made to pay a debt barred by limitation it is valid without consideration [25 (3)]
9. Agency
According to Section 185 of the Indian Contract Act, no consideration is necessary to
create an agency.
10. Completed gift

In case of completed gifts the rule no consideration no contract does not apply.
Explanation (1) to Section 25 states nothing in this section shall affect the validity as
between the donor and donee of any gift actually made. Thus gifts do not require
any consideration.
11. Guarantee
In the contract of guarantee, consideration received by the principal debtor shall
be sufficient consideration for the surety.
12. Bailment
No consideration is required for Gratuitous bailment.
Privity of Contract
Meaning
1. The general rule is that parties to contract can only sue.
2. That means the person who is not the party to the contract cannot sue.
Dunlop Pneumatic Tyre Co. Vs. Selfridge and Co.
2.contract
1. D entered in provides that P
contract to sell shall not sell
certain tyres to P the tyres
below the price
4. Held that D was a third party 2. P sold certain tyres to S.

to the contract therefore there S resold the tyres at price
could be no enforcement below the listed price
3. D instituted suit against S
Fact of The Case

a. D entered in contract to sell certain tyres to P.
b. The contract provides that P shall not sell the tyres below the price.
c. In addition to this contract provides that at time of resale P also impose the same condition
on retailers.
Make
Own
Notes
d. P sold certain tyres to S. S resold the tyres at price below the listed price.
e. D instituted suit against S.
5.20 Question
Whether suit by D is maintainable?
Decision Of Court
It was held that Dunlop was a third party to the contract between the retailer and the
distributor, therefore there could be no enforcement. Therefore suit by D is not maintainable.
Exceptions of privity to contract

Exceptions
Creation of Trust Marriage and family Acknowledge Assignment of

Beneficiary is not a arrangements ments Contract
party to the Where a marriage or The person An assignee can
agreement creating family settlement is who becomes exercise all rights
a trust. However the made, the person who is an agent of a which could be
beneficiary is a beneficiary under such third party by exercised by the
allowed to sue the settlement is entitled to acknowledge assignor previously,
trustee for sue even though he may ment can be even if the assignee
enforcement of be a party to such sued by such was not a party to the
trustee’s duties. settlement. third party. original contract.
Capacity of Parties
Effects of Minor’s Agreement
1. Void Ab Initio
1. A minor is incompetent to contract.
2. Therefore any agreement made by minor is void ab initio.
3. The agreement with minor does not have any legal effect.
Mohori Bibi Vs. Dharamodas Ghose
1. He was paid a certain

amount for mortgage
the property
A minor entered into 2. Mortgagee filed a suit

agreement for mortgage of for recovery of money
property
3. Held that money advanced to

minor can’t be recovered as
contract with minor is void
Make
Own
Notes
Fact of The Case
a. A minor entered into agreement for mortgage of property.
b. He was paid a certain amount for mortgage the property. 5.21
c. Afterwards the mortgagee filed a suit against the minor for recovery of money paid to minor.
Question
Can mortgagee recover money?
Decision Of Court
It was held that Money advanced to minor cannot be recovered. As per Sec 10 and 11 of Indian
contract Act the Minor Contract is absolutely void.
2. Agreement for Benefit of Minor

1. The agreement creating obligation for minor is void as per Mohori Bibi Vs.
Dharamodas Ghose.
2. Thus the agreement for benefit of minor are valid as it does not create any
legal obligation.
3. Therefore the agreement for benefit of minor can be enforced by minor.
4. If the other party to the obligation failed to perform its obligation the minor
can claim restitution.
Khan Gul Vs. Lakha Singh
1. K gave Loan to L, on
misunderstanding that he was
major.
2. K filed a suit
for recovery of
money
3. held that minor shall not

be personally liable.
His estate shall be used to
recover Loan
Fact of The Case

a. L, a minor fraudulently showed him as major.
b. K gave him Loan, on misunderstanding that he was major.
Afterwards K filed a suit against L for recovery of Loan given to him.
Question
Can K recover money?
Decision Of Court
 The court may grant the relief to the other party who entered into the agreement with minor
on the basis of a misrepresentation made by the minor.
 If the minor received some consideration under the agreement the court may grant
restitution to the other party.
 However minor shall not be personally liable, means the restitution shall be made only to
such extent as the estate of minor has been benefited.
 The power of the court to grant relief is discretionary in nature.
 The court shall not grant relief if the other party had the knowledge of the fact that it was
entering into an agreement with a minor.
Make
Own
Notes
3. Rule of Estoppel
1. The rule of estoppel does not apply to agreement of minor, because it can amount to
5.22 enforcing void agreement.
2. Thus rule of estoppel does not apply against minor.
4. No rectification by Minor
1. The agreement entered by minor cannot be ratified by him after attaining
majority.
2. If minor wants to pay for the goods after attaining majority such agreement
shall be void for want of consideration.
5.Liability of Guardian
1. The guardian shall not be liable for the act of the minor.
2. The contract made by guardian on behalf of minor shall be valid if:
a. The contract is for benefit of minor.
b. The guardian has the authority to enter into such agreement.
6. Liability of Minor for Necessities

The minor shall be liable for the necessities supplied to him or any other person
dependant on minor.
Conditions
a. The liability is for only necessities of life depending on social status of minor.
b. The minor is not already in possession of such necessities.
c. The minor shall not be personally liable.
7. Position of Minor in Other Contracts

1. The minor cannot be guarantor.
2. Minor can be member if shares are fully paid up.
3. Minor can be apprentice provided he is of at least 14 years of age.
4. Minor cannot become a partner in a firm. However he can be admitted for
benefits of partnership.
Person of Unsound Mind

Unsound Mind consist of
Lunatics Idiots Drunken or intoxicated

A lunatic is a person who An idiot is a person who persons
is mentally deranged due has completely lost his A drunken or intoxicated
to some mental strain or mental powers. He does person suffers from
other personal not exhibit understanding temporary incapacity to
experience. He suffers of even ordinary maters. contract, i.e. at the time
from intermittent Idiocy is permanent when he is so drunk or
intervals of sanity and whereas lunacy denotes intoxicated that he is
insanity. He can enter periodical insanity with incapable of forming a
into contracts during the lucid intervals. An rational judgment. The
period when he is of agreement f an idiot, like position of a drunken or
sound mind. that of a minor, is void. intoxicated person is
similar to that of a lunatic.
Make
Own
Notes
Agreements entered into by persons of unsound mind are void
Persons of unsound mind are liable for necessities supplied to them or to anyone whom they are
legally bound to support. But even in such cases, no personal liability attaches to them. It is only 5.23
their estate which is liable.
Burden of Proof
The burden of proof that the person is of unsound mind lies on the party who challenges validity
of contract
Person Disqualified Under Law

Disqualified Person
Alien Enemy Convict Foreign Diplomats
1. Existing contract is 1. Existing contract is 1. Right to sue

suspended till war is suspended till conviction others is
over. is over. available
2. New contract cannot be 2. New contract cannot be 2. With approval
entered till war is over. entered till conviction is of CG.
3. Above 2 can be over.
executed with CG’s 3. Above 2 can be executed
approval with CG’s approval
Free Consent
Meaning
Section 13 Section 14
Two or more persons are said to have Consent is free when it is not caused by
consented when they agree upon the same coercion, undue influence, fraud,
thing in the same sense (Consensus-ad-idem). misrepresentation or mistake.
Coercion (15)
Coercion
Under Indian Penal Unlawful detention of

Code property
1. Actually committing offence under IPC 1. Actually detaining property

2.Threatening to commit offence under IPC 2. Threatening to detain the property
With intention to causing person to enter

into agreement
Make
Own
Notes
Some Important Points
1. It is immaterial whether Indian penal code (IPC) is or is not in force in the place where the
5.24 coercion is employed [Explanation to Section 15]
2. It is not required that coercion must proceed from the party to the contract. It may proceed
from a third person also
3. It is not necessary that coercion be immediately directed against the party whom it is
intended to induce to enter into a contract. It may be directed against any third person
whatever.
4. Coercion must be done to induce the other party to enter into a contract
Threat to commit suicide

Calcutta High Court held that “One committing suicide places himself or
herself beyond the reach of the law, and necessarily beyond the reach of any
punishment too. But it does not follow that suicide is not forbidden by the
Indian Penal Code, Section 306 of the IPC punishes abetment of suicide,
Section 309 punishes an attempt to commit suicide. Thus, suicide as such is
no crime, as indeed it cannot be, But its attempt is; its abetment too is. So it
may very well be said that the Indian Penal Code does forbid suicide.”
Undue Influence (16)

Condition of Undue Influence
Party is in dominant position
Party uses its dominant

position
Dominant party obtains

unfair advantage
Burden of Proof
Unconscionable 1. The burden of proof is on dominant party.
transaction 2. The dominant party has to prove that undue influence was
not employed.
1. The burden of proof is on the weaker party.
Any other
2. The weaker party has to prove that undue influence was
transaction
employed.
No Undue Influence
Every transaction where the terms are disadvantages to one party is not necessarily influenced
by undue influence. If contract is made in the ordinary course of business there is no undue
influence.
Distinction Between Coercion & Undue Influence

Basis Coercion Undue Influence
Governing
Section
Meaning
Make
Own
Notes
Intention 5.25
Punishment
Parties
Relationship
Between Parties
Legal Effect
Restitution
Essentials of Fraud (17)

Meaning
Fraud includes any of the following acts committed by a party to a contract, or with his
connivance or by his agent with intent to deceive another party thereto or his agent, or to
induce him to enter into the contract.
Representation of fact which is not true.
The active concealment of a fact by one having knowledge or belief of the fact.
A promise made without any intention of performing it.
Any other act fitted to deceive.
Any such or omission as to law specially declared to be fraudulent.
Make
Own
Notes
Silence as fraud
General Rule Mere silence which likely to affect the willingness of the party is not fraud.
5.26
a. Where there is fiduciary relationship i.e. trust on other party and party is silent
when it requires to speak about matters affecting contract.
Exceptions
b. When silence is equivalent to speech.
c. Partial disclosure of truth which deceives the other party is a fraud.
Essentials of Misrepresentation (18)
Only parties The party But the misrepresentation Other party acted
to the thinks that he represent was made innocently as per contract
contract shall makes ation is and not to deceive unknown of
be involved. representation false other party misrepresentation
Consequences of Coercion, Fraud, Misrepresentation (19)

1. Contract is voidable at the option of the aggrieved party.
Contract is 2. The party, However, may also insist that the contract should be
Voidable performed and that he should be put in the same position in which he
would have been, if the representation made had been true.
1. But a person who had the means of discovering the truth with ordinary
diligence cannot avoid a contract on the ground that his consent was
Contract Not caused by misrepresentation.
Voidable 2. Where a party to a contract perpetrates fraud or misrepresentation, but
the other party is not, in fact, misled by such fraud or misrepresentation,
the contract cannot be avoided by the latter.
1. As to the consequences of the recession of voidable contracts,
2. The party rescinding voidable contract should, if he has receive any
Restoration of
benefit there under from the other party to the contract,
Benefit
3. restore such benefit so far as may be applicable,
4. to the person from whom, it was received.
Mistake (20 to 22)
1.The contract is not voidable.

Mistake of law 2.Mistake as to foreign law is Bilateral Mistake
mistake of fact. 1.Both party at
mistake
Unilateral Mistake 2.If mistake is
Mistake 1.Only 1 party at mistake material
2.Contract is not voidable 3.Contract is void
Voidable as to a. Mistake as to
1.False identity of other party subject matter
2.Entering in to contract on b. Mistake as to
Mistake of Face inducement and without his possibility of
fault performance
Make
Own
Notes
Difference Between Unilateral & Bilateral Mistake

Basis Unilateral Mistake Bilateral Mistake 5.27
Meaning
Section
Effect
Difference Between Void & Voidable Contract

Basis Void Contract Voidable Contract
Meaning /
Definition
Status
Rights
Performance of
Contract
Reason
Effect
Damages
Make
Own
Notes
Legality of Object & Consideration

5.28 Unlawful Object
An agreement, the object or consideration of which is unlawful, is void. Agreement or
consideration is unlawful in following situations
When it is forbidden by law
If permitted then will defeat the provisions of any law
Fraudulent
Involves injury to the person or property of another
Immoral
Opposed to public policy
Object or Consideration against Public Policy

Agreement Example
An agreement made with an alien enemy in time of war is illegal on the
ground of public policy. This is based upon one of the two reasons:
either that the further performance of the agreement could involve
Agreements of trading
commercial intercourse with the enemy, or that the continued
with enemy
existence of agreement would confer upon the enemy an immediate or
future benefit. Contracts which are entered into the intention of the
parties can or cannot be carried out by postponing performance till the
end of hostilities.
Where the consideration in an agreement is to commit a crime, the
Agreement to commit a agreement is opposed to public policy. The Court will not enforce such
crime an agreement. Likewise an agreement to indemnify a person against
consequence of his criminal act is opposed to public policy and hence
unenforceable.
An agreement the object of which is to interfere with the
Agreements which
administration of justice is unlawful, being opposed to public policy.
interfere with
1. Interference with the course of justice
administration of justice
2. Stifling prosecution
3. Maintenance and champerty.
(a) Agreement restricting enforcement for rights: An agreement which
wholly or partially prohibits any party from enforcing his rights under or
Agreements in restraint
in respect of any contract is void to that extent.
of legal proceedings
(b) Agreements curtailing period of limitation: Agreements which
curtail the period of limitation prescribed by the Law of Limitation are
void because their object is to defeat the provisions of law.
Agreements for the sale or transfer of public officers and titles or for
Trafficking in public
the procurement of a public recognition like Padma Vibhushan or Parm
offices and titles
Veer Chakra for monetary consideration are unlawful, being opposed to
public policy.
Agreements tending to If a person enters into an agreement whereby he is bound to do
Make
Own
Notes
create interest opposed something which is against his public or professional duty, the
to duty agreement is void on the ground of public policy.
Agreements in restricting Agreements which unduly restrict the personal freedom of the parties 5.29
personal liberty to it are void as being against public policy.
Every agreement in restraint of the marriage of any person, other than
a minor, is void (Section 26). This is because the law regards marriage
of marriage
and married status as the right of every individual.
An agreement by which a person, for a monetary consideration,
promises in return to procure the marriage of another is void, being
Marriage brokerage
opposed to public policy. Similarly, an agreement to pay money to the
agreements
parent or guardian or a minor in consideration of his/her consenting to
give the minor in marriage is void, being opposed to public policy.
Agreements interfering Any agreement which interferes with the performance of martial duties
with martial duties is void, being opposed to public policy.
Agreements to defraud
An agreement the object of which is to defraud the creditors or the
creditors or revenue
revenue authorities is not enforceable, being opposed to public policy.
authorities
An agreement which interferes with the liberty of a person to engage
himself in any lawful trade, profession or vacation is called an
of trade
“agreement in restraint of trade.”
An agreement, the meaning of which is not certain, is void, but where
Agreement the meaning
the meaning thereof is capable of being made certain, the agreement is
of which is uncertain
valid.
A promise to give money or money's worth upon the determination or
Wagering agreement ascertainment of an uncertain event in which the parties have no
interest.
Maintenance & Champerty

“Maintenance” is an agreement to give assistance, financial or otherwise, to
another to enable him to bring or defend legal proceeding when the person
giving assistance has got no legal interest of his own in the subject-matter.
“Champerty” is an agreement whereby one party is to assist another to bring
an action for recovering money or property, and is to share in the proceeds of
the action. Under the English Law, both these agreements are void. If the
object of a contract is just to assist the other party in making a reasonable claim
arising out of a contract and them to have a fair share in the profit, the contract
is valid.
Partly Unlawful Agreements

If the agreement can be segregated
(a) The lawful part will be enforced.
(b) The unlawful part cannot be enforced.
If the agreement cannot be segregated the whole agreement shall be
considered as void.
Void Agreements- Agreement in Restraint of trade (27)

Meaning
The agreements in restraint of trade are void agreements.
An agreement which
(a) interferes with the liberty of a person
(b) to engage him in any unlawful trade, profession or vacation
(c) is called an “agreement in restraint of trade.”
Make
Own
Notes
Burden of Proof
1. Party supporting agreement must prove that, restraint is reasonably necessary for protection
5.30 of his interest.
2. Party challenging agreement must prove that restraint is injurious to the public.
Exceptions
Sale of Goodwill
Agreement restraining seller of goodwill from carrying on
same business is valid if:
a. Seller carrying on similar business.
b. the restriction apply within specified local limits.
Restriction on Existing partner

Agreement may provide that while continuance of business
partner shall not carry on any other business
Exceptions to
Section 27
Restriction on Outgoing Partner
1. shall not carry on similar business.
2. restriction in specified local limit for specified time.
Restriction in Case of Sale of Goodwill of Firm

1. Any partner shall not carry on similar business.
2.restriction in specified local limit for specified time.
Agreement in Restraint of Legal Proceeding (28)

Meaning
Agreement restricting enforcement for rights
An agreement which wholly or partially prohibits any party from enforcing his rights under or in
respect of any contract is void to that extent.
Agreements curtailing period of limitation
Agreements which curtail the period of limitation prescribed by the Law of Limitation are void
because their object is to defeat the provisions of law.
Exceptions
The agreement referring future dispute or present dispute to arbitrator is not void.
Wagering Agreements (30)

Meaning
A promise to give money or money's worth upon the determination or ascertainment of an
uncertain event in which the parties have no interest.
Essentials
Promise to pay money or money’s worth
The wagering agreement must contain a promise to pay money or money’s worth.
Uncertain event
The promise must be conditional on an event happening or not happening. A
wager generally contemplates a future event, but it may also relate to a past event
provided the parties are not aware of its result or the time of its happening.
Make
Own
Notes
Each party must stand to win or lose
Upon the determination of the contemplated event, each party should stand to
win or lose. An agreement is not a wager if either of the parties may win but 5.31
cannot lose or may lose but cannot win.
No control over the event
Neither party should have control over the happening of the event one way or the
other. If one of the parties has the event in his own hands, the transaction lacks an
essential ingredient of a wager.
No other interest in the event.
LOTTERY
A lottery, which is a game of chance, is a wagering agreement. An agreement to buy a ticket for
a lottery is also a wagering agreement. Section 294-A of the Indian Penal Code, 1960 provides
that anyone who keeps any office or place for the purpose of drawing any lottery (other than a
State lottery or a lottery authorised by the State Government) shall be punished with
imprisonment for a term which may extend to six months, or with fine, or with both. If the
lottery is authorised by the Government, the persons conducting the lottery will not be
punished, but the lottery remains a wager all the same.
The following transactions are, however, not wagers
A crossword competition involving a good measure of skill for its successful
solution. But if prizes of a crossword competition depend upon the
correspondence of the competitor’s solution with a previously prepared
solution kept with the editor of a newspaper, it is a lottery and a wagering
transaction competitions in games of skill are not wagers provided the
amount of prize does not exceed Rs. 1000.
A subscription or contribution or an agreement to subscribe or contribute
toward any plate (a cup or other prize for a race or other contest), prize or
sum of money of the value of Rs. 500 or above to be awarded to the winner
or winners of a horse race (Exception to Section 30).
Share market transactions in which delivery of stocks and shares is intended

to be given and taken.
Effect of Wagering Agreement

(i) Wagering agreements have been expressly declared to be void in India. In the State of
Maharashtra and Gujarat they have been declared to be illegal.
(ii) Suit to recover money deposited. Money deposited with a person (called stakeholder) to
be paid to the party winning upon a wager cannot be recovered by the winner. On the
other hand, the loser can recover his deposit from the stakeholder. But were the
stakeholder pays the money to the winner, the loser cannot recover it from him.
(iii) Collateral transactions. Since wagering agreements are void, transactions collateral to
them are not affected. However, in the State of Maharashtra and Gujrat, the wagering
agreements have been declared to be illegal.
Contingent Contracts (31)

Definition
A contingent contract is a contract to do or not to do something, if some event collateral to such
contract, does or does not happen e.g. contract of indemnity or of insurance.
E.g.: A contracts to pay B Rs. 10,000 if B’s house is burnt. This is a contingent contract.
Make
Own
Notes
Enforcement of Contingent Contracts on Happening of Event (32)
Contingent contracts to do or not to do anything if an uncertain future event happens cannot be
5.32 enforced by law unless and until that event has happened. If the event becomes impossible,
such contracts become void.
Illustrations
(a) A makes a contract with B to buy B’s horse if A survives C. This contract cannot be
enforced by law unless and until C dies in A’s lifetime.
(b) 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 by law unless and
until C refuses to buy the horse.
(c) A contracts to pay B a sum of money when B marries C. C dies without being married to B.
The contract becomes void.
Enforcement of Contingent Contracts on Non Happening of Event (Sec 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.
Illustrations
A agrees to pay B a sum of money if a certain ship does not return. This ship is sunk. The contract
can be enforced when the ship sinks.
Contingent contract Become Impossible due to Future Conduct of Person (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.
Illustrations
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.
Contingent Contracts Depending on Happening of Specific Event in Specific 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.
When contingent on specified event not happening within fixed time.

Contingent contracts to do 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.
Illustrations
(a) 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.
(b) 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.
Agreement Contingent on Impossible Event is Void (36)

Contingent agreements to do or not to do anything if an impossible event happens, 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.
Make
Own
Notes
Illustrations
(a) A agrees to pay B 1,000 Rs if two-straight lines should enclose a space. The agreement is
void. 5.33
(b) A agrees to pay B 1,000 Rs if B will marry A’s daughter C. C was dead at the time of the
agreement. The agreement is void.
Quasi Contracts
Meaning
In a contract, a promisor voluntarily undertakes an obligation in favour of the promisee. When a
similar obligation is imposed by law upon a person for the benefit of another even in the
absence of a contract. Such contracts are the quasi-contracts. These are based upon principles of
equity, justice and good Conscience.
Features
Such a right is always a right to money generally 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 against a particular person so looks like a contractual right
Types of Quasi Contract

Claim for necessaries supplied to persons incapable of contracting (68)
The supplier is entitled to claim their price from the property of such a person.
Same is the case if money has been advanced for the purchase of necessaries.
e.g. minor or a person of unsound mind
Right to recover money paid for another person (69)
A person who has paid a sum of money which another is obliged to pay, is
entitled to be reimbursed by that other person provided the payment has been
made by him to protect his own interest.
Obligation of a person enjoying benefits of non-gratuitous act (70)
Where, a person does some act or delivers something lawfully to another
person with the intention of receiving payments for the same, in such a case,
the other person is bound to make payment if he accepts such services or
goods or enjoys their benefit
Responsibility of a finder of goods (71)
"A person who finds goods belonging to another and takes them into his
custody is subject to the same responsibility as a bailee."
Therefore, he is required
a. To take proper care of the thing found as his own goods
b. Not to appropriate it to his own use,
c. To restore it to the owner when the owner is traced.
Right of finder
a. Finder is entitled to retain it against whole world.
b. Finder has lien for express incurred in preserving goods & finding true
owner.
c. However he cannot file suit for recovery of this money.
d. It he can claim recovered. If it was offered.
e. If true owners refuses to pay lawful charge he May Sale.
f. When goods are of perishable nature.
g. When lawful charge amount to two third of its values or more.
Make
Own
Notes
Liability for money paid or thing delivered by mistake or under coercion (72)
"A person to whom money has been paid, or anything delivered, by mistake or
5.34 under coercion must repay or return it
In each of the above cases, contractual liability is the creation of law and does
not depend upon any mutual agreement between the parties.
Performance of Contract
Meaning
(a) Parties to the contract must either perform or offer to perform their respective promises
unless such performance is dispensed with or excused under the provisions of the Contract
Act or of any other law. Promises bind the representatives of the promisor in case of death
of such promisor before performance, unless a contrary intention appears from the
contract.( Section 37).
(b) So it may be concluded that it is necessary for a party who wants to enforce the promise
made to him, to perform his promise for himself or offer to perform his promise. Only
after that he can ask the other party to carry out his promise.
By whom contract must be performed?
Contract can be performed by
Promisor himself Agent Representatives: Third Person Joint

promise has to be Where Generally upon the Where a promisee promisors
performed by the personal death of promisor, the accepts Where 2 or
promisor where consideratio legal representatives of performance from a more
the contracts are n is not the the third party he persons
entered into for foundation deceased are bound by cannot afterwards jointly
performance of of a the promise unless it is enforce it against promise,
personal skills, or contract, a promise for the promisor. Such a promise
diligence or the performance involving performance, where must be
personal promisor or personal skill or ability accepted by the performed
confidence, it his of the promisor. promisor has the jointly
becomes representati However the liability of effect of discharging unless a
absolutely ve can the legal promisor though he contrary
necessary that the employ a representative is has neither intention
promisor competent limited to the value of authorized nor appears
performs it person to property inherited by ratified the act of from
himself. perform it. him from the promisor. the third party. contract.
Time and place for performance of the promise (46 to 50)

The law on the subject is contained in Sections 46 to 50 provisions whereof are summarised
below:
1. If no time is specified in a contract for the performance of the promise, the promise must be
performed within a reasonable time. (46)
2. If a promise is to be performed on a specified date but the hour is not mentioned the
promisor may perform it at any time during the usual hours of business, on such day. (47)
3. When no place is fixed for the performance of a promise, it is the duty of the promisor to ask
the promise to fix a reasonable place for the performance of the promise. (49)
Make
Own
Notes
4. Where promisor has not undertaken to perform the promise without an application by the
promise, and the promise is to be performed on a certain day it is the duty of the promisee
to apply for performance at a proper place and within the usual hours of business. (48) 5.35
Performance of reciprocal promises (51 to 53)

1. General observations: where contract is consist of two promises which are consideration for
each other than promises are called reciprocal promises.
2. Simultaneous performance of reciprocal promises or one after other. (51)
3. Performance of reciprocal promise where the order of performance is expressly fixed (52)
4. Performance of reciprocal promise when the order of performance is fixed by implication
(implied order).
5. Effect of one party preventing another from performing promise (53): Then contract
becomes voidable at the option of the party prevented.
Reciprocal promise to do legal and illegal things (57)

When persons reciprocally promise,
a. first to do certain things which are legal and
b. secondly, under specified circumstances, to do certain other things
which are illegal,
the first set of promises is a contract, but the second is a void agreement.
Distinction between Secession and Assignment

Secession Assignment
Unlike succession, the assignor can assign only

When the benefits of a contract are given by the assets to the assignee and not the liabilities.
succession then both burden and benefits Because when a liability is assigned, a third
attaching to the contract are passed to the party gets involved in it. The debtor cannot
successor. through assignment relieve himself of his
liability to creditor.
Effect of refusal to accept offer of performance (38)

When offer is not accepted promisor is not responsible to fulfil his promise. Such offer must fulfil
certain conditions which are as follows, namely;
It must be unconditional
The offer is made at a proper time and place under such circumstances that the
person to whom it is made may have a reasonable opportunity of ascertaining that
the person by whom it is made is able and willing to do what he is bound to do,
then and there.
if the offer is an offer to deliver anything to the promisee, then the promisee must
have a reasonable opportunity of seeing that the thing offered is the thing that the
promisor is bound by his promise to deliver.
Liability of Joint Promisor (42 to 44)

If two or more persons have made a joint promise, ordinarily all of them during their life-time
must jointly fulfil the promise. After death of any one of
them, his legal representative jointly with the survivor or survivors should do so. After the death
of the last survivor the legal representatives of all jointly must fulfill the promise.
Make
Own
Notes
2 or
more 1 of them His legal
5.36 person dies representative
making shall perform
promise
If joint promisors don’t discharge their obligation as per section 42 then provisions will be as
follows as per Section 43:
Promisee may compel any one or more of such joint promisors to perform the
whole of the promise.
When one of the joint promisors is made to perform the whole contract, he can
call for a contribution from others.
If any of the joint promisors makes a default in making his contribution the
remaining joint promisors must bear the loss arising from such a default in
equal shares.
This rule does not apply in case of promise made by Principal debtor and surety to promisee. If
surety pays anything he can recover from the debtor but if principal debtor pays anything to
creditor he cannot recover this from surety as he is just discharging his own liability.
If original debtor is a single person then promisee will have to file suit against all the legal heirs
on the death of debtor not to any of them.
Section 44:
Where two or more persons have made a joint promise, a release of one of such joint promisors
by the promisee does not discharge the other joint promisor or joint promisors neither does it
free the joint promisors so released from responsibility to the other joint promisor or promisors.
Also release of one joint holder does not release the other holders.
Appropriation of Payments (59 to 61)

(i) Application of Payment where debt to be discharged is indicated [59]:
Then payment must be applied accordingly. The Latin maxim is quick quid soivitur, sovitur
secundum modum solventis. The meaning of this maxim is that whatever is paid, is paid
according to the intention or manner of the party paying.
(ii) Application of payment where debt to be discharged is not indicated [60]:

At the discretion of creditor for any lawful debt whether its recovery is or is not discovered by
the law in force for the time being as to the limitation of suits.
(iii) Application of payment where neither party appropriates [61]:

Application of money to discharge of the debts in order of time, whether they are or are not
barred by the law in force. If the debts are of equal standing the payment shall be applied in
discharge of each proportionately."
Make
Own
Notes
Discharge of Contract
5.37
By Laps of By Operation
Time of Law
By Mutual By Breach of
Agreement Contract
By By remission;
Impossibility By Accord or
of Performance Satisfaction
By By Neglect or
Performance Discharge refusal
Discharge by Impossibility of Performance (56 & 73)

Agreements become void when it becomes impossible to perform them due to a variety of
reasons. This is known as “impossibility of performance” and dealt with by section 56 of the
Act
Impossibility existing at the time of contract

If the impossibility is known to the parties Void
If the impossibility is unknown to the parties Void
promisee can
claim for
damages on
If impossibility known to the promisor only or he should have known with his
account of
due diligence
non-
performance.
Supervening impossibility
When performance of promise become impossible or illegal by occurrence of an unexpected
event or a change of circumstances beyond the contemplation of parties the contract becomes
void. Supervening impossibility can arise due to a variety of circumstances as stated below
Reasons of Supervening impossibility
Accidental Nonexistence Incapacity to If there is

If there is
destruction of or non- perform a any
occurrence of contract of any
the subject Change
a particular personal Outbreak
matter of the in Law
contract. state of services. of war
things.
Make
Own
Notes
Outbreak of war can consist of
(i) By emergency legislation controlling prices or relaxing restrictions of trade.
5.38 (ii) By prohibiting or restraining transaction with alien enemy.
What is not Supervening impossibility

Cases
Commercial
Impossibility
Default by 3rd
party
Strikes, Riots &

Civil
Disturbances
Self-Induced
Impossibility
Partial Failure of
Objects or Partial
Impossibility
Discharge by Mutual Agreement (62 & 63)
Novation (62)
a. Substitute new contract by old
b. Liability under contract can be transferred to 3rd party
with the consent
Alteration (62)
a. It should be done mutually
b. If such alteration is made by single party contract
become void
Remission (63)
Discharge by
a. Acceptance of lesser amount or lesser degree of
Mutual
performance for full discharge.
Agreement
b. Restriction in specified local limit for specified time.
Rescission (62)
a. Both parties agree to rescind
b. One party fails to perform his obligation other party may
rescind.
Waiver
Means dispute with performance; for this
1. Neither agreement.
2. Nor consideration is necessary.
Make
Own
Notes
Discharge by Operation of Law
Effect of failure to perform at a time fixed in a contract where time is essential
5.39
1. Contract is voidable at the option of promisee.
2. Contract cannot be avoided when time is not essential.
Discharge by Operation of Law

Death
Insolvency
Unauthorised
Alteration
Merger of Rights
Discharge by Breach of Contract

Meaning of Breach
Consequence of
Breach
Kinds of Breach (39)

Actual Breach Anticipatory Breach
 One party refuses or fails to do his  It occurs when the party declares his intention of not
part of the promise performing the contract before the performance is due
 It may take place ,(expressly or  It may take place by ,(expressly or impliedly)
impliedly) – (a) Refusing to perform his promise under the contract,
(a) On due date of performance or
(b) During the course of (b) By his act disabling himself from performing the
performance promise before due date of performance
Remedies for Breach of Contract

Rescission (39)
a. When a contract is broken by one partly,
b. the other party may treat the contract as rescinded.
c. In such a case aggrieved party is absolved of all his obligations under the
contract and
d. is entitled to compensation for any damages that he might have suffered.
Suit for Damages

Special damages
Where a party to a contract receives a notice of special circumstances affecting the contract, he
will be liable not only for damages arising naturally and directly from the breach but also for
special damages.
Make
Own
Notes
Liability to pay vindictive or exemplary damages
These are awarded for following
5.40
For breach of promise to marry; and
For wrongful dishonour by a banker of his customer's cheque.( A trader is

assumed to have bigger losses than a non-trader)
Liability to pay nominal damages

Where the plaintiff has proved that there has been a breach of contract but he has
not in fact suffered any real damage. It is awarded just to establish the right to
decree for the breach of contract.
Damages for deterioration caused by delay

It can be recovered from carrier even without notice. Deterioration not only means
physical damages but also mean loss of special opportunity for sale.
Liquidated damages and penalty

Sometimes parties to a contract stipulate at the time of its formation that on the breach of the
contract by either of them, a certain specified sum will be payable as damages. Such a sum may
amount to either “liquidated damages” or a “penalty”.
“Liquidated damages” represent a sum, fixed or ascertained by the parties in the
contract, which is a fair and genuine pre-estimate of the payable loss that might
ensue as a result of the breach, if it takes place.
A “penalty” is a sum named in the contract at the time of its formation, which is
disproportionate to the damage likely to accrue as a result of the breach. It is
fixed up with a view to securing the performance of the contract.
The rules for determining whether a stipulation is by way of a penalty or by way of liquidated
damages are as follows:
1. The parties to a contract may use the words “Penalty” or “liquidated damages”
interchangeably. It must ascertain whether a sum is in truth a penalty or liquidated damages.
2. The essence of a penalty is the payment of money stipulated is to compel the performance
of the contract by providing something by way of punishment if the contract is not
performed. The essence of liquidated damages is genuine per-estimate of damage, which
seems likely to be caused should the breach occur.
3. The sum stipulated is a penalty if-
(a) It is extravagant or unconscionable (unreasonable) in amount compared with the
greatest loss which could conceivably be proved to have followed from the breach;
(b) The breach consists of not paying a sum of money by a certain time and the sum
fixed is greater than the sum to be paid.
4. When a single lump-sum is made payable on the occurrence of one or more of several
events, some of which may occasion serious and other trifling damage, there is a
presumption that the sum is a penalty.
Payment of interest
The largest number of cases decided under Section 74 relate to stipulations in a contract
providing for payment of interest. “The following rules are observed with regard to payment of
interest:
1. Payment of interest in case of default.
2. Payment of interest at higher rate-
Make
Own
Notes
From the date of the bond From the date of default
A stipulation for increased interest A stipulation for increased interest from the date of
from the date of the bond, and not default may be a stipulation by way of penalty. When it is 5.41
from the date of default, is always in so, relief is granted against it. Whether such a stipulation
the nature of a penalty, and relief is is penal is a question of construction dependent on the
granted against it. terms of the contract and the circumstances of each case.
Payment of compound interest on default

At the same rate as simple interest At the rate higher than simple interest
A stipulation in a bond for payment of A stipulation in a bond for the payment of
compound interest on failure to pay simple compound interest at a rate higher than that of
interest at the same rate as was payable upon simple interest is a penalty and would be
the principal is not a penalty. relieved against.
Suit for specific performance

Where damages are not an adequate remedy in the case of breach of contract, the court may in
its discretion on a suit for specific performance direct in party in breach, to carry out his promise
according to the terms of the contract.
Suit upon Quantum Meruit

The phrase ‘quantum meruit’ literally means “as much as earned” or “according to the quantity
of work done”. A person who has begun a civil contract work and has to later stop the work
because the other party has made the performance impossible, is entitled to receive
compensation on the principle of ‘Quantum Meruit’.
Following are instances where ‘quantum meruit’ may arise

Where the work has been done and accepted under a contract which is subsequently discovered
to be void. In such a case, the person who has performed his part of the contract is entitled to
recover the amount for the work done and the party, who receives and accepts the benefit
under such contract, must make compensation to the other party.
Where a person does some act or delivers something to another person with the intention of
receiving payment, the other person is bound to make payment if he accepts such services or
goods or enjoys the benefits.
Where the contract is divisible and where a party performs a part of the contract and refuses to
perform the remaining part, the party in default may sue the other party who enjoyed the
benefit of the part performance.
Suit for injunction

Where a party to contract giving negative effect to terms of contract, the court may by issuing an
"injunction order" restrain him from doing what he promised not to do.
Contract of Indemnity & Guarantee

Introduction (124)
"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 other person is called as contract of
indemnity". It is a type of contingent contract.
Rights of indemnity-holder when sued if acting in scope of his authority (125)
All damages which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnify applies;
Make
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Notes
All cost for defending or bringing any suit if worked as a prudent person.
5.42
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.
Guarantee
Meaning of Certain Terms
Guarantee (126)
A contract of guarantee is a contract to perform the promise made or discharge
liability incurred by a third person in case of his default.
Implied promise to indemnify surety (145)

"In every contract of guarantee there is an implied promise by the principal
debtor to indemnify the surety; and the surety is entitled to recover from the
principal debtor whatever sum he has rightfully paid under the guarantee, but
no sums which he has paid wrongfully.
Consideration in case of a guarantee (127)

"Anything done, or any promise made, for the benefit of the principal
debtor may be a sufficient consideration to the surety for giving the
guarantee".
Nature of surety's liability (128)

"The liability of the surety is co-extensive with that of the principal debtor,
unless it is otherwise provided by the contract."
When the liability of the debtor is discharged, the liability of the surety is
automatically discharged. However, a surety's liability to pay the debt is not
discharged even if the creditor omits to sue the principal debtor since the
surety is separately liable on the promise of guarantee.
Continuing Guarantee (129)

1. "A guarantee which extends to a series of transactions is called a
"continuing guarantee" (129)
2. "The continuing guarantee may at any time be revoked by the surety as to
future transactions, by notice to the creditor". (130)
3. But where a continuing relationship is established on the faith of a
guarantee the guarantee cannot be annulled during the continuance of
that relationship.
4. "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." (131)
Discharge of Surety
Cases Particulars
Variation in Terms of By variance made without surety's consent in terms of contract,
Agreement [133] between principal debtor and creditor.
Make
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Notes
By any contract between the principal debtor and the creditor by
Contract Releasing which the principal debtor is released or by any act or omission of the 5.43
Principal Debtor [134] creditor the legal consequence of which is the discharge of the
principal debtor.
Where, however, a contract to give time to the principal debtor is
Extension of Time to
entered into by the creditor with a third person and not with principal
Principal Debtor [136]
debtor, the surely will not be discharged.
Where a creditor makes a composition (i.e., settlement) with, or
Settlement of Principal
promises to give time to the principal debtor, or promises not to sue
Debtor [135]
the principle debtor, by a contract.
Release of 1 Co-surety Further if there are co-sureties, a release by the creditor of one of
does not release other them does not discharge the other co-surety or co-sureties.
Co-surety [138]
When the creditor does any act which is inconsistent with the rights
Creditor act inconsistent
of the surety or omits to do any act which his duty to the surety
with Surety [139]
requires him to do.
Specific Guarantee:
Notice of Revocation by It can be revoked only if the liability of principal debtor has not arisen.
Surety Continuing Guarantee:
It can be revoked only in case of future transaction.
Right of surety against principal debtor and/or creditor

1) Against principal debtor:
1. Where a guarantee debt has become due on default of the debtor and surety is required to
pay it then he comes in the shoes of creditor.
2. Surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of surety ship was entered into whether or not the
surety was aware of the existence of such security.
3. 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 sums he has rightfully paid under the guarantee but not sum which he has paid
wrongfully. (145)
4. However surety can claim money only when he has actually paid not at the execution of
promissory note only.
2) Against creditor:
1. On payment of the amount by surety or performance of all that he is liable for, the surety is
subrogated to all the right that the creditor had against the debtor. (140)
2. Security has the right over every security which debtor has provided to creditor whether it is
in the knowledge of surety or not. If creditor has lost something of that than surety's liability
will get reduced upto that amount. But not so in case creditor has parted with that security
subsequent to the contract of guarantee.
3. At the time before the guaranteed debt has become due and before the surety is called
upon to pay the amount he has guaranteed, he has the right to require the creditor to sue
for and recover the guaranteed debt. Such a right is described as a right to file a " Quia timet
action" against the debtor. However, in such a case, the surety must undertake to indemnify
the creditor for the risk, delay and expense which he may incur in doing so. Sanderson v.
Aston- where a surety has guaranteed the fidelity of person and he finds that such a person
is persistently dishonest, he can call upon the creditor to dismiss him from his service.
4. Surety is entitled to plead any set-off which the principal debtor may have against the
creditor.
Make
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Notes
Guarantee When Invalid (142 to 144)
1. When guaranty has been obtained by means of miss-representation made directly by the
5.44 creditor or made with his knowledge and assent concerning a material part of the
transaction. (142)
2. When the creditor has obtained any guarantee by means of keeping silence as to material
circumstances. (143)
3. Silence means an intentionally concealment as different from a mere nondisclosure thereof.
There must exist some element of fraud.
4. When a 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. (144)
Distinction Between Contract of Indemnity & Contract of Guarantee

Basis Indemnity Guarantee
Meaning
Parties
Nature of
Liability of
Indemnifier &
surety
Number of
Contracts
Nature of
contract
Rights
Contingent or
Existing Liability
Make
Own
Notes
Contract of Bailment
Meaning
A bailment is defined under Section 148, as: 5.45
 an act whereby goods are delivered by one person to another
 for some purpose on a contract
 that the goods shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them.
 The person who delivers the goods is known as the "bailor" and the person to whom the
goods are delivered is known as the 'Bailee'
A bailment may be gratuitous or for reward.
1. A person who has custody without possession is not a Bailee.
2. A constructive delivery may also amount to delivery for bailment.
The Essential Characteristics of Bailment
Contract of Bailment • There must be a contract

• Contract must be expressed or implied.
Goods • Bailment can be made of goods only.
• The delivery must be from one person

Delivery to other.
• There must be delivery for some
purpose.
• The purpose must be agreed between
Purpose of Delivery
parties.
• The purpose can be expressed or
implied.
• The delivery of goods must be
purpose.
Return or Disposal conditional of return.
of goods • The goods must be returned or
disposed in agreed manner
• purpose.
Different forms of Bailment
Forms of Bailment
Delivery of goods by Goods given to a Hiring Delivering goods Delivering goods Delivering
one person to another friend for his own of to a creditor to for repair with goods for
to be held for the use without any goods serve as security or without carriage
bailor's use charge for a loan remuneration
Make
Own
Notes
Bailor’s Rights & Duties
5.46 Bailor
Rights Duties
1. To enforce bailee's duties: such as right 1. Disclose risk bearing fault in goods. If not
to claim compensation and damages: disclosed bailor shall be liable for damages.
a. For loss caused to goods 2. The bailor must reimburse to bailee for
b. For loss caused by unauthorised use of extraordinary expenses in any case of any
the goods bailment.
c. Arising out of mixing the goods of the 3. The bailor also reimburse ordinary
bailor with his own goods. expenses in case of gratuitous bailment.
2. To terminate the contract of bailment: if 4. The bailor shall indemnify bailee for any
the bailee does any act inconsistent with the loss cause due to defective title.
conditions of the bailment. 5. In case of Gratuitous bailment indemnify
3. To demand back goods: In case of bailee for any loss suffered in case of
gratuitous bailment premature termination of bailment.
4. To claim increase or profit from goods 6. Receive goods back after completion of
bailed. purpose. If not received back Bailor will be
personally liable for damages to goods.
Bailee’s Rights & Duties

Bailee
Rights Duties
1. To enforce bailor's duties and claim 1. Not to make an unauthorised use of

a. Compensation for non-disclosure of the goods bailed.
known defects. 2. Not to mix the goods bailed with his
b. To claim indemnification for any loss own goods, without consent.
or damage for defective title of the 3. If he does so then Bailee will bear the
bailor. expenses of separation or losses.
2. To deliver goods to one of several 4. To return the goods bailed on the
joint owners expiration of the period of bailment.
3. Delivery of goods to bailor without 5. accomplishment of the purpose of
title bailment without making any demand
4. Right of action against third parties: made.
If a third person wrongfully deprives 6. To deliver to the bailor any increase or
Bailee. profit accruing from the goods.
5. Right of lien: Right to retain the 7. Not to do anything inconsistent with
goods until the charges due are paid. the conditions of bailment.
Rights and duties of a finder of good (71,168,169)

Finder may claim compensation for the trouble and expenses incurred by him to
preserve the goods and to find out the true owner.
If the owner refuses to pay compensation then may retain the goods until he
receives it. But he cannot make a suit for this.
Make
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Notes
If any reward has been announced by the owner he has a right to claim such
reward. He can even sue for the reward. 5.47
Normally he cannot sale the goods but when real owner is not found out with
reasonable diligence, or if owner refuses to pay lawful charges then he can sale in
the market if it normally sold in the market.
He can sale goods when the article is in danger of being perished or losing the
greater part of its value;
He can sale goods when the lawful charges of the finder amounts to two-thirds or
more of the value of the article found
Pledge
Meaning
It is the bailment of goods as security for payment of debt or performance of a promise. When
goods have been pledged, the bailor is called the pawner and bailee the pawnee. In case of
pledge no transfer of any interest in property takes place; but a special right to property is
carved out in favour of the pledge, i.e. he has right to dispose of the property in certain
circumstances.
Pawnee's Rights (173 & 176)

Pawnee's right of retainer (173)
Not only for the payment of the debt or the performance of the promise,
but also for the recovery of the interest on the debt and other expenses
for preservation of goods
Pawnee's right of retention in regard to subsequent advances (174)
Subject to contrary, pawnee would not be entitled to retain the goods to
subsequent advances made by the pawnee.
Pawnee's right to extraordinary expenses incurred (175)

Expenses for preservation of the goods pledged but no special right to
retain the goods for such expenses. But he can take the action for such
expenses.
Pawnee's right where pawnor makes default (176)
The pawnee may bring a suit against the pawnor upon the debt or the
promise, and retain the goods pledged as a collateral security; or he may
sell the thing pledged on giving the pawnor a reasonable notice of the
sale. These two remedies are the alternatives not the cumulative.
If receipts are less then the debt amount then pawnee may make a suit
for the balance if more then he will have to refund back the money.
Pawnor's right to redeem (177)

If there is a time limit for the payment of the debt and pawnor make default,,
he may redeem the goods pledged at any subsequent time before the goods
are sold, but in that case, he must pay, in addition, any expenses occasioned by
the default.
The period for a suit against a pwanee to recover the things pledged is 3 years
from the date of pawnee's refusal to do so after demand (The Limitation Act-
1963)
Make
Own
Notes
Agency
Meaning
5.48
It is the relationship between two person where one person is employed (Known as Agent) by
another (known as Principal) to act on behalf of that later with the third person.
Salient features of agency (183-185 & 226)

Basis
Agent can render the principal answerable to a third person. A person does not
therefore become an agent of another merely because he is named as his agent
unless the above mentioned characteristic is present.
Consideration not necessary
The existence of consideration is not at all necessary for its validity (185)
Capacity to employ an agent
Only a person who has contractual capacity (a major and a person of sound mind)
can lawfully employ and agent. (183)
Capacity to become an agent
Any person can become an agent irrespective of whether he has contractual
capacity or not but a person who is not of the age of majority and of sound mind
cannot be agent so as to be responsible to his principal.
Modes of creation of agency relationship (187, 189, 196, 214, 237)

Agency by actual authority:
A contract of agency may be express (with spoken or written words) or
implied (from the circumstances of a case things spoken or written or the
ordinary course of dealing).
Agency by ratification (196)
Where a person acts for someone but without his knowledge or authority
and the other person subsequently accepts or ratifies the act agency be
ratification arises and ratifier is bound by the act as if he had expressly
authorised the person to do the act on his behalf.
Agency by ostensible authority
The conduct of the principal may give rise to a scope for an inference that an authority has been
conferred upon an agent even though no authority in fact was given. In such as situation the
agent contracts within his ostensible authority and the principal is bound to third parties for the
acts of his agent. Agency by ostensible authority may happen in two ways.
i) By estoppel
If a person permits or represents another to act on his behalf, so that a
reasonable person would infer that the relationship of principal and agent
had been created, then he will be stopped from denying his agent’s
authority and getting himself relived from his obligation to a third party by
proving that no such relationship in fact existed. A principal cannot
privately limit or revoke an authority which he has allowed his agent
publicly to assume.
ii) By cohabitation
Where a married woman is cohabiting with her husband, there is a
presumption of fact that she has authority to pledge his credit for
necessaries.
iii) By Holding out
Principal is bound by the act of agent if on the earlier occasion, he has
made other person to believe that such acts are done with his authority.
Make
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Notes
iv) Agency by necessity:
Under certain circumstances, a person may be compelled to act as a agent
to the other without requiring the consent of the principal. To constitute a 5.49
valid agency of necessity, following condition must be satisfied.
(a) There is no opportunity to communicate with his principal within
the time available.
(b) There should have been actual and definite commercial necessity
for the agent to act promptly.
(c) The agent should have acted bonafide and for the benefit of the
principal.
(d) The agent should have adopted the most reasonable and
practicable course under the circumstances, and
(e) The agent must have been in possession of the goods belonging to
his principal and which are the subject of contract.
(v) Actual authority and apparent authority:
1. Actual authority results from a manifestation of consent that he should
represent or act for the principal made by the principal to agent
himself. It may be express or implied
2. Apparent authority is where it results from a manifestation made by
the principal to third parties. It involves the assumption that there is in
fact no authority at all. Under this where a principal represents, or is
regarded by law as representing, that another has authority, he may be
bound as against a third party by the acts of that other person within
the authority which that person appears to have, though he had not
given. This emphasis to the relationship between principal and third
party.
Rules regarding ratification (197 to 200)

1. Ratification must be by a person of whom the agent professes to act. Ratification can't be
done for any act for which any principals is not permissible.
2. Ratification can be made only by a person who was in existence at the time of the act which
was subsequently sought to be ratified.
3. A valid ratification relates back to the actual date of the act ratified.
4. Ratification may either be express of it may even be implied in the conduct of the person on
whose behalf the acts are done (197)
5. No valid ratification can be made by a person whose knowledge of the facts of the case is
materially defective (198)
6. Ratification cannot be done for a part of the act if it is so done then it will amount the
ratification for full. (199)
7. One cannot ratify an act done without his authority if affecting 3rd person (200).
8. An illegal act cannot be ratified. Also a ratification cannot be made of a transaction which is
void ab initio.
9. Where an act has to be performed within a certain limit the ratification also must be made
within that time limit.
10. Ratification may be made of an act done by an agent in excess of his authority.
Make
Own
Notes
Extent of Agent's Authority (188, 189 & 229)
5.50 In normal circumstances
An agent having an authority to do an act or business has authority to do every lawful thing
which necessary for the purpose, usually done in the course of conducting such business (188)
Above may be expressly excluded by mutual contract.
In emergency:
To do all such acts for the purpose of protecting his principal from loss as would be done by a
person of ordinary prudence, in his own case, under similar circumstances. (189)
Notice to an agent:
If any information is obtained by an agent or any notice is given to him in the course of the
business of agency it will be deemed to have been obtained by or given to the principal (229).
Obligations cast on agent (Duties of an agent) (209 to 218)

Duty in conducting principal's business
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 agent
acts otherwise, if loss incurred to be borne by agent and if profit incurred to be
given to principal.
Requirement as to skill and diligence
He is required to conduct the business of the agency with as much skill as is
generally possessed by persons engaged in similar business, unless the principal
has notice of his lack of skill. Agent is always bound to act with reasonable
diligence and such skill as he possesses and to make compensation to his
principal in respect of direct consequences of his own neglect, want of skill or
misconduct (212)
Agent's duty to account
To render proper accounts to his principal whenever demanded by the latter
(213)
Payment of money
To pay to principal all sums received on his account (218). Even in case of
money received in illegal or void contract.
Duty to communicate:
In case of difficulty, an agent must use reasonable diligence to establish contact
with his principal, to obtain his instructions (214).
Right of the Agent (217 to 225)

Right of lien on principal's property
If the amount due to himself for commission, disbursement and services has
not been paid or accounted for him. It may be avoided by the express
agreement this right is there only when possession of the goods is lawfully
acquired by the agent. (221)
Right to be indemnified
Right to be indemnified against consequences of lawful acts in exercise of the
authority conferred upon him. (222)
Make
Own
Notes
Right to be indemnified against consequences of acts in good faith (223)
5.51
Prohibition of Law
Notwithstanding any express or implied promise in this regard, an agent
cannot claim to be indemnified against the consequences of an act which he
does but which is prohibited under the penal law of the country (224)
Injury Compensation
Compensation for injury caused by principal (225)
Right of retainer
An agent has to account for to his principal the balance of money received by
him as agent after the deduction (retaining)of moneys due to himself from
the principal on account of his remuneration and expenses etc. (217)
Right to remuneration
For the agreed upon or the normal remuneration in that business. He can
detain the money received on account of sale etc. (219). But an agent who is
guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of that part of the business of the agency which he
has is counted. (220)
When Agent is Personally Liable? (230 & 231)

(1) When there is an express agreement for so.
(2) When he does not have authority for what he has done or he represents himself as having
that authority which he does not have.
(3) When contract is entered into by a person apparently in the character of agent, but in
reality on his own account, he is not entitled to require performance of it. (236)
(4) In circumstances given by Section 230
 Where the contract expressly provides for the personal liability of the agent
 When the agent signs a negotiable instrument in his own name without making it; clear
that he is signing as agent.
 Where the agent worked for a foreign principal.
 Where the agent acts for a principal who cannot be sued on account of his being a
foreign Sovereign, Ambassador, etc.
(5) Where according to use of trade in certain kinds of businesses, agents are personally
liable.
(6) Where the agent has himself an interest in the subject-matter of the agency. Interest not
only of remuneration but some special type of interest should be there. In the case of an
agency coupled with such interest it cannot be revoked even by the insanity or death of
the principal.
Undisclosed Principal
Where an agent, having authority to contract, makes the contract in his own name, concealing
not only the name of his principal but also the fact that there is a principal, his principal is called
'undisclosed principal.' In this case mutual rights and liabilities of the parties are:
1. Agent is personally liable to third party.
2. If the third party comes to know the existence of the principal before obtained judgment
against the agent, he may sue either the principal or the agent or both.
Make
Own
Notes
3. Third party is entitled to be placed in the same situation as if the agent had been the
contracting party. thus the third party is not put to any disadvantage by principal's
5.52 intervention;
4. If the principal discloses himself before the contract is completed the third party may refuse
to fulfil the contract, if the can show that had he known the true position, he would not
entered into the contract.
Principal's Liabilities for Agent's Act

When agent act within the scope of his authority
The principal is liable for the acts of the agent done within the scope of his actual
or apparent authority. Where there are specific restrictions on the authority of
the agent, then the principal is not bound by it.
When the agent exceeds his authority
Principal is not liable but where that excess is separable from the total act then
upto the extent of the authority principal is liable.
Principal is bound by notice given to agent
Provided notice is given in the course of the business and in the course of
employment. This rule will not apply if agent is out to commit a fraud on the
principal.
Liability of principal by estoppel
A principal is liable where he has by words or conduct induced a belief in the
contracting party that the act of the agent was within the scope of his authority.
Here the liability of the principal is not based on any real authority, but is by
estoppel.
Liability for misrepresentation or fraud by an agent
If acting within the scope of his actual or apparent authority during the curse of
the agency business irrespective of the fraud is committed for the benefit of the
principal or that of the agent.
Where the Principal is unnamed
When an agent discloses the existence of the principal but does not disclose the
name of the principal. If however the agent refuses to disclose the identity of his
principal he will become personally liable on the contract.
Irrevocable Agency (202 & 204)

1. Where the agency is coupled with interest (202) - This rule is applicable only when the
agency is created of the protection of the interest of the agent, it does not apply where the
interest arises after creation of agency.
2. Where the agent has incurred personal liability - Principal cannot revoke the agency so as
to leave the agent to bear the liability and the losses in the contract.
3. Where the agent has partly exercised the authority
Sub–agent (19)
Meaning
A “sub-agent” is a person employed by, and acting under the control of the original agent in the
business of the agency (Section 19). This means he is the agent of the original agent. The relation
of the sub-agent to the original agent is, as between themselves, that of the agent and principal.
Exception
Section 190 provides that an agent may appoint a sub-agent and delegate the work to him if-
1. There is a custom of trade to that effect, or
2. The nature of work is such that a sub-agent is necessary.
Make
Own
Notes
3. There are some more exceptions recognised by the English Law. These exceptions are
also recognised in India and are as follows:
4. Where the principal is aware of the intention of the agent to appoint a sub-agent but 5.53
does not object to it.
5. Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
6. Where the act to be done is purely ministerial not involving confidence or use of
discretion.
7. Where power of the agent to delegate can be inferred from the conduct of both the
principal and the agent.
8. Where the principal permits appointment of a sub-agent.
Relationship between principal and sub-agent

As a general rule, an agent cannot delegate his authority to a sub-agent. But in certain
exceptional cases, he is permitted to do so. In such cases, the delegation of authority to a sub-
agent in proper. In all other cases, the appointment of a sub-agent is improper. The legal relation
between the principal and the sub-agent depends upon the crucial question, as to whether the
appointment of the sub-agent is proper or improper.
Where a sub-agent properly appointed:

(a) The principal is bound by the acts of the sub-agent if the sub-agent were an
agent originally appointed by the principal (192. Para 1)
(b) The agent is responsible to the principal of the acts of the sub-agent (192,
Para 2)
Where a sub-agent is not properly appointed.
Where an agent, without having authority to do so, has appointed a sub-agent,
the agent is responsible for the acts of the sub-agent to the principal and to
the third parties. The principal, in such case, is not represented by of
responsible for the acts of the sub-agent, nor is the sub-agent responsible to
the principal. (Section 193)
Termination of Agent's Authority

Revocation of authority by the principal
Renunciation of agency by the agent.
Completion of the business of agency.
Death or insanity of either party, e.g., the principal or the agent.
Insolvency of the principal.
The Indian Contract Act 1872
Definitions
CONTRACT : According to sec.2(h), a contract is defined as an

agreement enforceable before the law.
Definitions
Contract = Agreement + Enforceability Before Law
Agreement = Offer + acceptance
Enforceability By Law meaning – you can file a case
Source – Essential elements of a valid contract

ESSENTIAL ELEMENTS OF A VALID
CONTRACT (Sec.10)
2 parties
Offer & acceptance
Intention to create legal relationship
Consensus - ad - idem
Consideration
Capacity to contract
Free consent
Legality of object
Possibility of performance
Writing & registration
Offer
According to Sec.2(a), when a person made a proposal, when

he signifies to another his willingness to do or to abstain from
doing something.
Definitions
OFFER: According to Sec.2(a), when a person made a proposal,

when he signifies to another his willingness to do or to abstain from
doing something.
AGREEMENT = OFFER + ACCEPTANCE
CONSENSUS (AD – IDEM): According to Sec.13, meeting of minds or

identity of minds or receiving the same thing in same sense at same
time.
OFFER
According to Sec.2(a), when a person made a proposal, when he signifies to

another his willingness to do or to abstain from doing something.
TYPES OF OFFER
▪Express offer
▪Implied offer
▪Specific offer
▪General offer
▪Cross offer
▪Counter offer
▪Standing offer
Express offer - When offer is given to another person either in
writing or in oral.
Implied offer - When offer is given to another person neither in
writing nor in oral.
Specific offer - When offer is given to a specific person.
General offer - When offer is given to entire world at a
large.(Carlill Vs. Carbolic smoke ball Co.,)
Cross offer - When both the persons are making identical offers to
each other in ignorance of other’s offer.
Counter offer - When both the persons are making offers to
eachother which are not identical in ignorance of other’s offer.
Standing offer - An offer which remains continuously enforceable
for a certain period of time.
LEGAL RULES FOR OFFER
▪ Offer must be given with an intention to create a legal

relationship.(Balfour Vs. Balfour)
▪ Offer must be definite.(Taylor Vs. Portington)
▪ There is a clear cut difference between offer, invitation to offer,

invitation to sale. (Harris Vs. Nickerson)
▪ Offer must be communicated. (Fitch Vs. Snedkar)
▪ Mere statement of price of price is not an offer.(Harvey Vs. Facey)

Can Billy file a case ??
Is it a valid contract ?
Definitions
CONTRACT : According to sec.2(h), a contract is defined as an

agreement enforceable before the law.
AGREEMENT : According to sec.2(e), every promise or set of promises

forming consideration for each other.
PROMISE: According to sec.2(b), when a person made a proposal to

another to whom proposal is made, if proposal is assented there to.
ESSENTIAL ELEMENTS OF A VALID CONTRACT
Consensus (ad –
idem).
Acceptance
According to sec.2(b), when a person made a proposal to another

to whom proposal is made, if proposal is assented there to, it is
called acceptance.
Valid Acceptance
1. Acceptance must be given as per the mode prescribed by the

offerer.
2. Acceptance must be given before the lapse of time or within
reasonable time.
3. Acceptance must be unconditional.
4. Acceptance may be given by any person in case of general
offer.
5. Acceptance may be given by any specific person in case of
specific offer.
6. Acceptance must be communicated.
7. Mental acceptance is no acceptance or acceptance must not be
derived from silence.
8. Acceptance must not be precedent to offer.
CONSIDERATION
According to sec 2(d) consideration is defined as “when at the desire
of the promisor , or 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 an act or
abstinence or promise is called a consideration for the promise .

When a party to an agreement promises to do
something he must get “something” in return .This
“something” is defined as consideration.
LEGAL RULES AS TO CONSIDERATION

1)It must move at the desire of the promisor.
[Durga Prasad v. Baldeo ]
2)It may move by the promisee .
[Chinnaya v. Ramayya ]
3)It must be past ,present or future .
4)It need not be adequate .
5)It must be real .
6)It must not be illegal , immoral or opposed to public
policy .
STRANGER TO CONTRACT
It is general rule of contract that only parties to
contract can sue & be sued on that contract . This
rule is known as ‘Doctrine of privity’ i.e
relationship between the parties to contract .
Exceptions
1)A trust or a charge .
2)Marriage settlement , partition or other family
arrangements .
3)Estoppel
4)Assignment of contract .
5)Contract with agent .
6)Convenants running with land .
Contract without consideration is
void – Exceptions
Love & affection .
[Venkataswamy v. Rangaswamy]
Compensation for voluntary service .
Promise to pay a time – barred debt .
Completed gift .
Agency sec (185) .
Charity .
Contract of bailment sec(148 ) .
No consideration no contract
[Abdul Aziz v. Masum Ali]

[Kedarnath v. Gauri Mohamed ]
Intention to create legal relationship
Consensus (ad – idem)
Consideration
Capacity to contract
Free Consent
According to Sec. 13 ‘Two or more person are said to consent

when they agree upon the same things in the same sense.’
This mean that there should be perfect identity of mind

(consensus ad idem) regarding the subject-matter of contract.
According to Sec. 14 consent is said to be free when it is not

caused by any of the following :
1. Coercion
2. Undue Influence
3. Fraud
4. Misrepresentation
5. Mistake
Coercion
According to Sec 15, coercion means “Committing or threaten

to commit any act forbidden by Indian Penal Code 1860 or
unlawful detaining or threatening to detaining any other
persons property with a view to enter into an agreement. It is
immaterial whether the IPC is or is not in force where the
coercion is employed”
The threat amounting to coercion need not necessarily be from

a party to contract , it may also proceed from a stranger to the
contract.
Undue Influence
Undue influence is the improper use of any power possessed

over the mind of the contracting party.
According to Sec. 16 a contract is said to be affected by undue

influence when:
1. The relation subsisting between the parties are such that one
of the parties is in a position to dominate the will of the other
2. Use that position to obtain an unfair advantages over other.
Fraud
Fraud means method of misleading a person deliberately to

cause in him a wrong understanding of so as to obtaining that’s
person’s consent for a contact.
Misrepresentation
Misrepresentation is a false representation made innocently

without any intention of deceiving the other party. It may
include two things:
1. Wrong statement of a material facts not known to be

false
2. Non-disclosure of the facts where there is a large duty to
disclose without any intention to deceive.
Mistake
A mistake means an error in understanding the fact relevant for

formation of a contract.
Legality of Object
Possibility of Performance
Writing & Registration
Types of Contract
1. On the basis of Formation,

2. On the basis of Nature of Consideration,
3. On the basis of Execution and
4. On the basis of Validity.
On the basis of Formation
1. Express Contracts
2. Implied Contracts
3. Quasi Contracts.
On the basis of Formation
Express Contracts: The Contracts where there is expression or conversation are called
Express Contracts. For example: A has offered to sell his house and B has given acceptance.
It is Express Contract.
Implied Contract: The Contracts where there is no expression are called implied contracts.
Sitting in a Bus can be taken as example to implied contract between passenger and owner
of the bus.
Quasi Contract: In case of Quasi Contract there will be no offer and acceptance so, Actually
there will be no Contractual relations between the partners. Such a Contract which is
created by Virtue of law is called Quasi Contract. Sections 68 to 72 of Contract Act read
about the situations where court can create Quasi Contract.
On the basis of Nature of Consideration
1. Bilateral Contracts: If considerations in both directions are to be moved

after the contract, it is called Bilateral Contract.
2. Unilateral Contract: If considerations is to be moved in one direction only

after the Contract, it is called Unilateral Contract.
On the basis of Execution
1. Executed Contracts: If performance is completed, it is called executed

contract.
2. Executory Contracts: Where contractual obligations are to be performed

in future, it is called executor contract.
On the basis of Validity
1. Valid Contracts
2. Void Contracts
3. Voidable Contracts
4. Illegal Contracts
5. Unenforceable Contracts
Valid Contracts
The Contracts which are enforceable in a court of law are called Valid Contracts. To
attain Validity the Contract should have certain features like consensus ad idem,
Certainty, free consent, two directional consideration, fulfillment of legal
formalities, legal obligations, lawful object, capacity of parties, possibility of
performance, etc.
Void Contracts
A Contract which is not enforceable in a court of law is called Void Contract. If a

Contract is deficient in any one or more of the above features (Except free consent
and legal formalities). It is called Void Contract.
Voidable Contracts
A Contract which is deficient in only free consent, is called Voidable Contract. That
means it is a Contract which is made under certain pressure either physical or mental.
At the option of suffering party, a voidable contract may become either Valid or Void
in future.
Illegal
If the contract has unlawful object it is called Illegal Contract.

Unenforceable
A contract which has not properly fulfilled legal formalities is called unenforceable
contract. That means unenforceable contract suffers from some technical defect like
insufficient stamp etc. After rectification of that technical defect, it becomes enforceable
or valid contract.
Void Contracts and Illegal Contracts
All illegal Contracts are void, but all void contracts are not illegal: An illegal Contract
will not be implemented by court. So, illegal contract is Void. A void contract may not
be illegal because its object may be lawful.
Void Contracts and Voidable Contracts
A Voidable Contract may become Valid at the option of suffering party. But a
Void Contract can never and never become Valid.
…
…
The Sale of Goods Act 1930
Dr.Shradha Padhi
The Evolution
❑ Till 1930, transactions relating to sale and purchase of goods

were regulated by the Indian Contract Act, 1872.
❑ In 1930, Sections 76 to 123 of the Indian Contract Act, 1872
were repealed and a separate Act called ‘The Indian Sale of
Goods Act, 1930 was passed.
❑ It came into force on 1st July, 1930.
❑ With effect from 22nd September, 1963, the word ‘Indian’ was
also removed.
❑ Now, the present Act is called ‘The Sale of Good Act, 1930’.
❑ This Act extends to the whole of India except the State of
Jammu and Kashmir.
❑ According to Section 3, the provisions of the Indian Contract
Act, 1872, still continue to apply to contracts for the sale of
goods except where ‘The Sale of Goods Act’, 1930 provides for
the contrary.
Structure
# Chapter Sections
I Preliminary 1-3
II Formation of the Contract 4-17
III Effects of the Contract 18-30
IV Performance of a Contract 31-44
V Rights of unpaid seller against the Goods 45-54
VI Suits for breach of the Contract 55-61
VII Miscellaneous 62-66
Chapter I: Preliminary
Section 1: Short title, extent and commencement

Section 2: Definitions
Section 3: Application of provisions of Act 9 of 1872
Chapter II: Formation of the Contract
Contract of Sale
Section 4: Sale and agreement to sell
Formalities of the contract

Section 5: Contract of sale how made
Subject-matter of contract
Section 6: Existing or future goods
Section 7: Goods perishing before making of contract
Section 8: Goods perishing before sale but after agreement to sell
Chapter II: Formation of the Contract
The price
Section 9: Ascertainment of price
Section 10: Agreement to sell at valuation
Conditions and warranties

Section 11: Stipulations as to time
Section 12: Condition and warranty
Section 13: When condition to be treated as warranty
Section 14: Implied undertaking as to title, etc.
Section 15: Sale by description
Section 16: Implied conditions as to quality or fitness
Section 17: Sale by sample
Chapter III: Effects of the Contract
Transfer of property as between seller and buyer

Section 18: Goods must be ascertained
Section 19: Property passes when intended to pass
Section 20: Specific goods in a deliverable state
Section 21: Specific goods to be put into a deliverable state
Section 22: Specific goods in a deliverable state, when the seller has to do
anything thereto in order to ascertain price
Section 23: Sale of unascertained goods and appropriation
Section 24: Goods sent on approval or "on sale or return"
Section 25: Reservation of right of disposal
Section 26: Risk prima facie passes with property
Chapter III: Effects of the Contract
Transfer of title
Section 27: Sale by person not the owner
Section 28: Sale by one of joint owners
Section 29: Sale by person in possession under voidable contract
Section 30: Seller or buyer in possession after sale
Chapter IV: Performance of a Contract
Section 31: Duties of seller and buyer

Section 32: Payment and delivery are concurrent conditions
Section 33: Delivery
Section 34: Effect of part delivery
Section 35: Buyer to apply for delivery
Section 36: Rules as to delivery
Section 37: Delivery of wrong quantity
Section 38: Instalments deliveries
Section 39: Delivery to carrier or wharfinger
Section 40: Risk where goods are delivered at distance place
Section 41: Buyer's right of examining the goods
Section 42: Acceptance
Section 43: Buyer not bound to return rejected goods
Section 44: Liability of buyer for neglecting or refusing delivery of
goods
Chapter V: Rights of unpaid seller against
the Goods
Section 45: "Unpaid seller" defined

Section 46: Unpaid seller's rights
Section 47: Seller's lien
Section 48: Part delivery
Section 49: Termination of lien
Stoppage in transit
Section 50: Right of stoppage in transit
Section 51: Duration of transit
Section 52: How stoppage in transit is effected
Transfer by buyer and seller

Section 53: Effect of sub sale or pledge by buyer
Section 54: Sale not generally rescinded by lien or stoppage in
transit
Chapter VI: Suits for breach of the Contract
Section 55: Suit for price

Section 56: Damages for non-acceptance
Section 57: Damages for non-delivery
Section 58: Specific performance
Section 59: Remedy for breach of warranty
Section 60: Repudiation of contract before due date
Section 61: Interest by way of damages and special damages
Chapter VII: Miscellaneous
Section 62: Exchange of implied terms and conditions

Section 63: Reasonable time a question of fact
Section 64: Auction sale
Section 64A:In contracts of sale, amount of increased or
decreased taxes to be added or deducted
Section 65: Repeal
Section 66: Savings
Contract of Sale
According to Section 4(1) of the Sale of Goods Act, 1930,

“Contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer
for a price”. ‘Contract of Sale’ is a generic term which includes
both a sale as well as an agreement to sell.
Such a contract of goods may be absolute or conditional. There

may be contract of Sale between one part owner and the other
Formation of Contract of Sale
Section 5 of Sale of Goods Act lays down the rules as to how a contract of sale
may be made and has nothing to do with the transfer of property in goods.
According to this section, a contract of sale is made by an offer to buy or sell
by one person, and the acceptance of such offer by another person. And it
may be made in any one of the following modes:
❑ There may be immediate delivery of goods, but the price may be paid at
some future date
❑ There may be immediate payment of price, but the delivery may be
made at some future date
❑ There may be immediate payment of price and the immediate delivery of
goods
❑ The price and delivery of the goods may be postponed
❑ he price and delivery of the goods may be agreed to be made in
instalments
Sale of Goods
When under a contract of Sale the property in the goods is

transferred from the Seller to the Buyer, the Contract is called as
a Sale of Contract.
Essential Elements of Sale
❑ There must be a seller as well as a buyer. ‘Buyer’ means a person who buys
or agrees to buy goods [Section 2(1)]. ‘Seller’ means a person who sells or
agrees to sell goods [Section 2(13)].
❑ ‘Good’ means every kind of movable property other than actionable claims
and money.
❑ Property means the General property in goods, and not [Section 2(11)].
General property in goods means ownership of the goods.
❑ There must be a price. Price here means the money consideration for a sale
of goods [Section 2(10)]. When the consideration is only goods, it amount to
a ‘barter’ and not sale.
❑ In addition to the aforesaid specific essential elements, all the essential

elements of a valid contract as specified under Section 10 of Indian Contract
Act, 1872 must also be present.
Form
No particular form is necessary to constitute a contract of sale. A

contract of Sale may be in writing or by the word of mouth.
It may be express or may be implied from the conduct of parties

or from the course of dealings between the parties
Agreement to Sell
Where the transfer of property or transfer of ownership in the

goods is to take place at a future date or subject to some
condition thereafter to be fulfilled, the Contract is called as an
Agreement to Sell.
Agreement to Sell Vs. Agreement of Sale
An agreement to sell does not involve any immediate transfer

of property in the goods.
An agreement to sell becomes a sale when the time elapses or

the conditions are fulfilled subject to which the property in the
goods is to be transferred.
Sale Vs. Agreement of Sale
Nature of Contract
❑ Sale is an Executed Contract While an agreement to Sale is

an executory Contract.
❑ In executed contract one of the parties has already
performed his part of Contract
❑ On the other hand in executory Contract both the parties are
yet to perform their mutual promises
Creation of Right
❑ Sale affects a transfer of General property in the goods to

the Buyer in other words it creates “jus (right) in rem”. (Right
in rem means right against the whole world)
❑ An Agreement to sell creates “Jus (right) in personam” For eg
personal right only against the person for any default in
fulfilling his part of the Agreement
Passing of the Property
❑ In case of Sale , the property in goods passes to the Buyer

with the risk while in case of agreement to Sale, the risk and
property does not pass to the Buyer immediately
Remedies in Case of Breach of Contract by the Buyer
❑ In an agreement to sell, in case of breach of contract by the

Buyer the Seller is entitled to damages since the ownership
has not passed to the Buyer.
❑ In sale since the ownership has passed to the Buyer the
Seller is entitled to sue for the price of the goods sold even
though the goods may still remain in Seller’s possession and
also has a right of lien , stoppage in transit and resale
Remedies in Case of breach of Contract by the Seller
❑ If there is an agreement to Sell , and the Seller commits any

breach the buyer has only one remedy a personal remedy
against the Seller namely claim for the damages. The goods
are still the property of the Seller and he can deal with them
as he likes.
❑ if there is a Sale and the Seller commits a breach the buyer
has not only personal remedy against the seller , but also the
remedies which an owner has in respect of goods such as sue
the Seller etc.
Right to Re-Sell
❑ In an Agreement to Sell since the ownership has not passed

to the Buyer the Seller is at liberty to Sell the goods to the
Third Parties and the Buyer can claim damages from the
Seller.
❑ In sale since the ownership has passed to the Buyer the
Seller will be guilty of Conversion if he sells the goods to
third parties and the Buyer can sue and recover those goods
as owner even from the third person
Risk of Loss
❑ In an Agreement to Sell since the ownership does not pass to

the Buyer , if the goods are destroyed by an accident, the
loss will be the Seller’s even though the goods happen to be
in the Buyer’s possession.
❑ In a sale since the ownership has passed to the Buyer, even
though the goods are lost by an accident while is the Seller’s
possession the loss will be the Buyer’s.
Effect of Insolvency of the Seller
❑ In an Agreement to Sell, if the Buyer who has paid for the

goods finds that the Seller has become insolvent the buyer’s
right would be to prove the amount he has paid , in the
Seller’s insolvency.
❑ In Sale since the ownership has passed to the Buyer if the
Seller becomes insolvent the Buyer is entitled to recover the
goods from the Official Assignee or the Receiver
Effect of Insolvency of the Buyer
❑ In an Agreement to Sell if the Buyer becomes insolvent

without paying for the goods since the ownership has not
passed to the Buyer the Seller may refuse to deliver the
goods.
❑ In a Sale since the Ownership has passed to the Buyer if the
Buyer becomes insolvent without having paid for the goods ,
the Seller must deliver the goods to the Official Assignee or
Receiver and can claim a rateable dividend for the price of
the goods
Example
X agrees to buy 50 tons of oil from Y’s Cisterns. Y has several

cisterns with more than 50 tons of oil in them. This is merely
an agreement to sell the oil.
Example
X agrees to sell to Y 100 tons of Soda nitrate which is to arrive in

England by a particular ship. This is merely an agreement to sell
at a future date, subject to the condition that the specified ship
arrives in England and the further condition that it carries the
specified cargo on board.
Example
X agrees to lend an instrument to Y on the terms that if it is

damaged whilst in Y’s possession, Y must pay an agreed sum
as its value and keep the instrument. This is a conditional sale
and if the instrument is so damaged X may recover the agreed
sum as the price of the goods sold.
Meaning of Goods
As per Section 2(7), Goods means every kind of movable

property other than actionable claims and money, and
includes the following:
1. Stock and shares

2. Growing crops, grass and thing attached to or forming part
of the land which are agreed to be served before sale or
under the Contract of Sale.
Classification of Goods
Every kind of movable property, other than actionable claims

and money; and includes stocks and shares, growing crops,
grass and things attached to or forming part of the land which
are agreed to be severed before sale or under the Contract of
Sale. - Section 2(7)
Goods
Existing Goods Future Goods Contingent Goods

Existing Goods
Existing goods are goods which are either owned or possessed

by the seller at the time of the contract.
Existing Goods
Specific Goods Ascertained Goods Unascertained Goods
Goods which are Goods which are Goods which are not
identified and agreed ascertained or identified specifically identified but
upon at the time of the at the time of contract are indicated by
contract of sale and are made specific description
later on
Future Goods
Future goods are goods to be manufactured or produced or

acquired by the seller after the making of the contract of sale.
- [Section 2(6)]
A agrees to sell all the mangoes which will be produced in his

garden next season. This is an agreement for the sale of future
goods.
Contingent Goods
Where there is a contract for the sale of goods, the acquisition

of which by the seller depends upon a contingency which may
or may not happen - such goods are known as contingent
goods. Contingent goods fall in the class of future goods.
A agrees to sell a certain TV set provided he is able to get it from

its present owner. This is an agreement to sell contingent
goods. In such a case, if the contingency- does not happen for
no fault of the seller, he will not be liable for damages.
Document of Title of Goods
Document of title is a document used in the ordinary course of business
❑ As a proof of possession or control of the goods or

❑ Authorising the holder of the document to receive goods mentioned
therein or to further transfer such right to another person by a proper
endorsement or delivery
❑ The right of the possessor of document is unconditional
A document of title is also a proof that the goods are in the custody of the
issuing authority which will have the duties of a bailee in relation to the
goods and will deliver the goods to the holder of the document
The common documents of title to goods are:

❑ Bill of Lading
❑ Dock Warrant
❑ Wharfinger’s Certificate
❑ Railway Receipt:
❑ Delivery Order
Price
The price of goods is an important element of a valid sale. It is

the consideration for transfer or agreement to transfer the
property in goods from the seller to the buyer. Thus, there can
be no valid sale without a price.
According to Sec. 2(10) of Sale of Goods Act, “Price means the

money consideration for a sale of goods”.
In other words, the money paid for the purchase of goods is

called the price.
Modes of Fixing Price
(Sections 9 and 10)

The price may be fixed:
❑ At the time of contract by the parties themselves, or

❑ May be left to be determined by the course of dealings between the
parties
❑ May be left to be fixed in some way stipulated in the contract, or
❑ May be left to be fixed by some third-party.
Where the contract states that the price is to be fixed by a third-party and he
fails to do so, the contract is void. But if the buyer has already taken the
benefit of the goods, he must pay a reasonable price for them. If the
third-party's failure to fix the price is due to the fault of one of the parties,
then that party is liable for an action for damages.
Where nothing is said by the parties regarding price, the buyer must pay a
reasonable price, and the market price would be a reasonable price.
Conditions and Warranties
❑ As a rule, before a contract of sale is concluded, certain

statements are made by the parties to each other.
❑ If it is a statement by the seller on the reliance of which the

buyer makes the contract, it will amount to a stipulation.
❑ The stipulation may either be a condition or a warranty.
❑ Section 12 draws a clear distinction between a condition and

a warranty.
❑ Whether a stipulation is a condition or only a warranty is a

matter of substance rather than the form of the words used.
Conditions and Warranties
Condition: It is a stipulation essential to main purpose of the

contract, the breach of which gives right to the repudiate the
contract and to claim damages.
Warranty: It is a stipulation collateral to main purpose of the

contract, the breach of which gives rise to claim for damages but
not the right to reject the goods and treat contract as repudiated.
Conditions and Warranties can either be :

Express: which are expressly provided in the contract
Implied: which the law implies into the contract unless the
parties stipulate to the contrary
Conditions and Warranties - Difference
Conditions Warranties
A condition is essential to the It is only collateral to main
main purpose of the contract purpose of contract.
The aggrieved party can The aggrieved party can claim
repudiate the contract or claim only the damages in case of
damages or both in case of breach of warranty
breach of condition
A breach of condition may be A breach of warranty cannot be
treated as breach of warranty. treated as breach of condition.
Implied Conditions
❑ Condition as to title - seller has the right to sell. [Sec.14(a)]
❑ Sale by description - goods shall correspond with the

description. (Sec.15)
❑ Condition as to quality or fitness [Sec16(1)]
❑ Condition as to merchantability [Sec.16(2)]
❑ Condition implied by custom- fitness for a particular

purpose may be annexed by the usage of trade [Sec.16(3)]
❑ Sale by sample (Sec.17)

Implied Warranties
❑ Warranty of quiet possession [sec.14(b)].
❑ Warranty of freedom from encumbrances [sec.14(c)].
❑ Warranty as to quality or fitness by usage of trade [sec16(4)].
❑ Warranty to disclose dangerous nature of goods.

…..
THE NEGOTIABLE
INSTRUMENTS
ACT, 1881
Prof. Shradha Padhi
Maxim
Ignorantia juris non excusat

(Latin for "ignorance of law excuses no one”)
It is a legal principle holding that a person who is

unaware of a law may not escape liability for
violating that law merely because he or she was
unaware of its content.
Valid all over the world

The Basic
A Negotiable Instrument is a piece of paper which acts

as an alternative to a specified amount of money.
Most common examples :: Cheques and Demand Drafts

Snapshot
❑ An Act to define the law relating to promissory

notes, bills of exchange and cheques
❑ Enacted in 1881 and came into force w.e.f. 1st
March 1882
❑ Major modifications brought though The
Negotiable Instrument (Amendment) Act, 2018
❑ Draws heavily from English Negotiable Instrument
Act
❑ Extends to the whole of India
❑ 17 chapters and 148 sections
Definitions
Negotiation means ‘transferable by delivery’.
Instrument means ‘a written document’ by which a

right is created in favour of some person.
Thus, “a Negotiable Instrument” means “a

written document transferable by delivery”.
Section 13 of the Negotiable Instrument Act, 1881, defines a negotiable

instrument.
“A negotiable instrument means a promissory note, bill of

exchange or cheque payable either to order or to bearer.”
Chapters & Sections
Chapter Description Sections
1 Preliminary 1-3
2 Notes, Bills And Cheques 4 - 25
3 Parties To Notes, Bills And Cheques 26 - 45A
4 Negotiation 46 - 60
5 Presentment 61 - 77
6 Payment And Interest 78 - 81
7 Discharge From Liability On Notes, Bills And Cheques 82 - 90
8 Notice Of Dishonour 91 - 98
9 Noting And Protest 99 - 104A
10 Reasonable Time 105 - 107
11 Acceptance And Payment For Honour And Reference In Case Of Need 108 -116
12 Compensation 117
13 Special Rules Of Evidence 118 - 122
14 Crossed Cheques 123 - 131A
15 Bills In Sets 132 - 133
16 International Law 134 - 137
17 Penalties In Case Of Dishonour Of Certain Cheques For Insufficiency Of Funds In The Accounts 138 - 148
Sections 143 - 148 added though The Negotiable Instrument (Amendment) Act, 2018
Classification of Instruments
Tenor Holder
Demand Bearer
Time / Sight Order

Negotiable Instruments as per Law
The Act recognises only three kinds of negotiable

instruments under Section 13, but it does not exclude
any other negotiable instrument provided the
instrument entitles a person to a sum of money and is
transferable by delivery.
❑ Promissory Note
❑ Bill of Exchange
❑ Cheque
Promissory Note
Definition
Section 4 defines a promissory notes as under: “A ‘promissory

note’ is an instrument in writing (not being a bank-note or a
currency-note), containing an unconditional undertaking, signed
by the maker, to pay a certain sum of money only to, or to the
order of a certain person, or to the bearer of the instrument.”
The Act operates subject to the provisions of Sections 31 and 32 of

the Reserve Bank of India Act, 1934 which prohibits making or
issuing any promissory note or bill of exchange for the payment of
money payable to bearer on demand
One Rupee Note
Issued by Government of India
The printing of one-rupee notes was discontinued in 1994

because of high printing cost as compared to their lives.
Re-printing commenced in 2014

Bank Note
Issued by Reserve Bank of India
“I PROMISE TO PAY THE BEARER A SUM OF TWO THOUSAND RUPEES”.

Promissory Note
Characteristics
❑ It must be in writing
❑ It must certainly an express promise
❑ Promise to pay must be unconditional
❑ It should be signed by the maker
❑ The maker must be certain
❑ The payee must be certain
❑ The promise should be to pay money only
❑ The amount should be certain
❑ Date must be valid
Quick Quiz
Valid /Invalid
❑ I promise to pay B or order a sum of INR 500.
❑ I acknowledge myself to be indebted to B in INR 1000 to be
paid on demand
❑ I promise to pay B a sum of INR 500 seven days after my
marriage to C
❑ I promise to pay B a sum of INR 500 and my Pulsar bike on 1st
April next.
Promissory Note
Examples
Valid Promises
❑ I promise to pay B or order a sum of INR 500.
❑ I acknowledge myself to be indebted to B in INR 1000 to be
paid on demand
Invalid Promises
❑ I promise to pay B a sum of INR 500 seven days after my
marriage to C
❑ I promise to pay B a sum of INR 500 and my Pulsar bike on 1st
April next.
Quick Quiz
1. A promissory note, bill of exchange or cheque payable either

to order or to bearer is called
2. How many total sections are there in the Negotiable
Instruments Act?
3. Which section of Negotiable Instruments Act deals with
Promissory Note?
4. In which section bill of exchange is dealt with in Negotiable
Instruments Act?
5. What does Section 6 deals with in Negotiable Instruments
Act?
6. Which section in Negotiable Instruments Act deals with
Negotiable Instruments?
Quick Quiz
1. A promissory note, bill of exchange or cheque payable either

to order or to bearer is called – Negotiable Instrument
2. How many total sections are there in the Negotiable
Instruments Act? – 142
3. Which section of Negotiable Instruments Act deals with
Promissory Note? – Section 4
4. In which section bill of exchange is dealt with in Negotiable
Instruments Act? – Section 5
5. What does Section 6 deals with in Negotiable Instruments
Act? – Cheque
6. Which section in Negotiable Instruments Act deals with
Negotiable Instruments? – Section 13
Promissory Note
Parties
❑ Maker
❑ Payee
❑ Holder
❑ Endorser
❑ Endorsee
Let’s make it simpler

Sachin Dhoni
Dravid
Promissory Note
Types
❑ Promissory notes payable on demand

❑ Promissory notes payable after date (Sight)
❑ Joint promissory notes
❑ Joint and several promissory notes
Promissory Note
Specimen
Bill of Exchange
Definition
According to Section 5 of the act, a bill of exchange is “an

instrument in writing containing an unconditional order
signed by the maker, directing a certain person to pay a
certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument”.
Bill of Exchange
Characteristics
❑ It must be in writing.
❑ It must be signed by the drawer.
❑ The drawer, drawee and payee must be certain.
❑ The sum payable must also be certain.
❑ It should be properly stamped.
❑ It must contain an express order to pay money alone.
❑ The order must be unconditional
Bill of Exchange
Examples
Valid
❑. Please pay Rs. 500 to the order of A.
❑ Mr. A will oblige Mr. C, by paying to the order of P.
Invalid
❑ I shall be highly obliged if you make it convenient to pay
Rs.1000 to Suresh.
❑ Mr. Ramesh, please let the bearer have one thousand rupees,
and place it to my account and oblige
Bill of Exchange
Parties
❑ Drawer
❑ Drawee
❑ Acceptor
❑ Payee
❑ Endorser
❑ Endorsee
❑ Holder
❑ Drawee in case of need
❑ Acceptor for honour
Seller Purchaser Bank
Bank at BBSR
Railway Station presents the
sends the goods to documents to the
Whole seller at BBSR and gives wholesaler and
BBSR places order Consigner Copy hands over the
with the and Consignee Consignee copy
Manufacturer at Copy. The latter duly endorsed in
Chennai has to be produced favour of the
at destination to whole seller and
receive the goods. collects the
money.
Manufacturer
prepares the Bill of
Exchange (Invoice,
Whole Seller
Manufacturer Promissory Note Bank at BBSR
presents the
packs goods and and Consignee remits the funds to
Consignee Copy at
sends it to local Copy, duly the account of
the BBSR Railway
Railway Station for endorsed) and Manufacturer with
Station and
sending it to BBSR. submits it to the Bank at Chennai.
collects the goods.
Bank at BBSR who,
in turn, sends it to
Bank at Chennai.
Bill of Exchange
Types
❑ Inland and Foreign Bills

❑ Time and Demand Bills
❑ Trade and Accommodation Bills
Bill of Exchange
Specimen
Promissory Note V/s Bill of Exchange
Promissory
Parameter Bill of Exchange
Note
Section in NI Act 4 5
Number of parties 2 3
Unconditional Unconditional
Attribute
Promise Order
Acceptance Nor required Required
Primary and Secondary and
Liability of Maker
absolute conditional
Relationship with Payee Immediate Via intermediary
Cheque
Definition
Section 6 of the Act defines “A cheque is a bill of exchange drawn

on a specified banker, and not expressed to be payable otherwise
than on demand”.
A cheque is bill of exchange with two more qualifications:

1. It is always drawn on a specified bank
2. It is always payable on demand.
Consequently, all cheque are bill of exchange, but all bills are not
cheque.
Cheque
Characteristics
❑ In writing
❑ Express order to pay
❑ Definite and unconditional order
❑ Signed by the drawer
❑ Order to pay certain sum of money only
❑ Certain three parties
❑ Drawn upon a specified banker
❑ Payable on demand
❑ Must be paid within validity period
Cheque
Parties
❑ Drawer
❑ Drawee
❑ Payee
❑ Holder
❑ Endorser
❑ Endorsee

Sachin Bank Dhoni
Account Transfer
The simplest funds transfers occur between two customers of a

single Bank.
Hands over a cheque

Bob Harry
Bank_A
Bob’s Harry’s
Account Account
Transfer
……… ………
……… ………
Local Clearing
A bit more complex scenario will arise if the Payer and Payee
have accounts in different banks.
Clearing House
3
Service Clearing Service
2 4
Branch of House Branch of
Presenting Settlement Drawee
Bank 8 7
Branch Bank
1 9 6 5
Presenting Bank Branches Drawee Bank Branches

MICR Cheque
Magnetic Ink Character Recognition, MICR, is a technology for

automatic processing of large volumes of cheques.
Sample MICR Cheque
MICR Font
Cheque Truncation
Cheque truncation system (CTS) is an advancement of the MICR technology

with the replacement of the physical instrument with a digitally signed image
while utilizing all the information in the MICR band of the cheque.
❑ Movement of the physical instrument is curtailed

❑ Image of the payment instrument is captured along
with MICR data simultaneously
❑ Clearing Process completed based on Electronic data
and image of the Cheques
Front View Back View
Cheque
Specimen
Cheque V/s Bill Exchange
Parameter Cheque Bill of Exchange
Section in NI Act 6 5
Drawer Bank Person / Firm
Payment On demand Demand / Sight
Acceptance Not required Mandatory
Stamp Not required Mandatory
Crossing Allowed Not allowed
Countermanding Allowed Not allowed
Electronic Cheques
Cheque in the electronic form: A cheque which

contains the exact mirror image of a paper cheque, and is
generated, written and signed in a secure system ensuring
the minimum safety standards with the use of digital
signature
Truncated cheque: A cheque which is truncated during

the course of a clearing cycle, either by the clearing house or
by the bank whether paying or receiving payment,
immediately on generation of an electronic image for
transmission, substituting the further physical movement of
the cheque in writing.
Crossing of Cheques
Types of Crossing
❑ Bearer
❑ Crossed
General Crossing Special Crossing

Collection of Instruments
❑ Local Clearing
❑ Outstation Clearing
❑ Discounting / Purchasing
Dishonour of Cheques
Section 138
❑ Dishonour of cheque due to insufficiency of funds is a

criminal offence
❑ The drawer is punishable with an imprisonment of 2 years
and / or with a fine of twice the amount of the cheque
Dishonour of Cheques
Conditions for Punishment
❑ The reason of dishonour is insufficiency of funds

❑ Payment should be for discharge of a liability
❑ Must have been presented within validity period
❑ Notice have been served within a period of 15 days
Holder in Due Course
Section 9
“Holder in Due Course” means any person who for

consideration became the possessor of a promissory note, bill
of exchange or cheque if payable to bearer, or the payee or
endorsee thereof, if payable to order, before the amount
mentioned in it became payable, and without having
sufficient cause to believe that any defect existed in the title
of the person from whom he derived his title.
Characteristics
❑ Consideration
❑ Good faith
❑ Liability
❑ Maturity
Privileges
❑ All defects purged

❑ No effect of inchoate instrument
❑ All prior parties liable
❑ Can enforce payment of a fictitious bill
❑ No effect of conditional delivery
❑ No effect of absence of consideration
Payment in Due Course
Section 10
“Payment in Due Course” means payment in accordance with

the apparent tenor of the instrument in good faith and
without negligence to any person in possession thereof under
circumstances which do not afford a reasonable ground for
believing that he is not entitled to receive payment of the
amount therein mentioned.
Payment in Due Course
Essential Conditions
❑ It is in agreement with the apparent tenor of instrument

❑ It is made in good faith & without negligence
❑ It is made to the person who possesses the instrument
❑ Payment is made in money & money only.
The paying banker making payment in due course is protected.

Presumptions of Law
❑ Consideration
❑ Date
❑ Acceptance within reasonable time
❑ Transfer before maturity
❑ Sequence of endorsements
❑ Lost instrument was duly stamped
❑ The Holder is the Holder in Due Course
Dishonour
❑ Dishonour by non-acceptance (Section 91)

❑ Dishonour by non-payment (Section 92)
Remedies for Dishonour
❑ Notice of dishonour
❑ Noting and protesting
❑ Suit for money
Material Alteration
Section 87
Any material alteration of a negotiable instrument renders the

same void as against any one who is party thereto at the time
of making such alteration and does not consent thereto,
unless it was made in order to carry out the common
intention of the original parties
❑ Acceptor or endorser bound notwithstanding previous

alteration
❑ Alteration is not apparent
Negotiable Instruments as per Practice
There are certain other instruments which have acquired the

character of negotiability by the usage or custom of trade.
❑ Hundi
❑ Treasury bills
❑ Share certificates
❑ Bearer debentures
Quasi Negotiable Instruments
These are like as a negotiable instruments and are capable of

being transferred by endorsement but the transferor of such
documents cannot give to the holder any better title to the goods
than he himself possesses. Such instruments are termed as
‘quasi-negotiable instruments’ and the provisions of the
Negotiable Instruments Act do not apply to them.
❑ Railway receipts
❑ Bills of lading
Not Negotiable Instruments
Non-negotiable refers to something that cannot be bought,

sold, exchanged or transferred. Non-negotiable also can refer
to a term or condition that is not open to negotiation.
❑ Money orders
❑ Deposit receipts
❑ Postal orders
❑ Dividend Warrants
Key Features of Negotiable Instruments
❑ Easy Transferability
❑ Title
❑ Must be in writing
❑ Unconditional Order
❑ Payment (Amount, Time and Payee)
❑ Signature
❑ Delivery
❑ Stamping
❑ Right of file suit
❑ Notice of transfer
❑ Presumptions
❑ Number of transfer
❑ Rule of evidence
❑ Exchange
Banker’s Draft
❑ Recognized per practice

❑ Can not be payable to bearer
❑ Variant of a Cheque
❑ Drawer and Drawee are both banks
❑ Can not be countermanded
❑ Duplicate only against indemnity
❑ Also Known as Pay Orders / Banker’s Cheque
Negotiation
Section 14
When a promissory note, bill of exchange or cheque is

transferred to any person so as to constitute that person the
holder thereof, the instrument is said to be negotiated.
❑ There must be a transfer of the instrument to another

person
❑ The transfer must be made in such a manner as to
constitute the transferee the holder of the instrument
❑ The intention must be to pass the title
Modes of Negotiation
❑ Negotiation by delivery
❑ Negotiation by endorsement and delivery
Assignment
Transfer by assignment takes place when the holder of a

negotiable instrument sells his right to another person
without endorsing it.
The assignee is entitled to get possession and can recover

the amount due on the instrument from the parties thereto.
Negotiation V/s Assignment
Parameter Negotiation Assignment
Either by delivery
Written mandate is
Mode of transfer or by endorsement
mandatory
and delivery.
Consideration Presumed Needs to be proved
Notice of transfer Optional Mandatory
Negotiable
Transfer of Property
Relevant Act Instruments Act,
Act, 1882
1881
Holder in due
Applicable Not Applicable
course
Recapitulations
61
Recap
❑ Negotiable Instruments as per law
❑ Negotiable Instruments as per practice
❑ Quasi Negotiable Instruments
❑ Non Negotiable Instruments
❑ Classification of Negotiable Instruments
❑ Crossing of Cheques
❑ Holder and Holder in Due Course
❑ Payment in Due Course
❑ Negotiations versus Assignments
❑ Dishonour of Negotiable Instruments
❑ Remedies available for dishonour
❑ Material alterations
❑ Presumptions of Law
Quick Quiz
❑ Collect Answer Sheets

❑ Write your Name, Section and Roll # at top right
❑ No need to write down the question
❑ Precede your answer with Question # only
❑ There are 10 questions
❑ Each question carries ½ marks
✔ 0.25 marks for identification
✔ 0.25 marks for explanation
Time Allotted: 5 Minutes

Quick Quiz
State with reasons whether each of the following instruments is a

Time, Demand or Invalid Instrument.
A. I promise to pay B Rs 500.

B. I promise to pay B Rs 500 on demand.
C. Pay Rs 500 at sight.
D. Pay Rs 500 on presentment.
E. I promise to pay B Rs 500 after 3months.
F. I promise to pay B Rs 500 on 1st Jan. 1997.
G. I promise to pay Rs 500 after sight.
H. I promise to pay B Rs 500 after C’ s Death.
I. Pay B Rs 500 on or before 1st Jan. 2018.
J. Sell my diamond ring and pay the proceeds to B.
Quick Quiz
State whether the following statements are promissory

notes or not?
A. "I promise to pay B or order Rs. 500".
B. "I acknowledge myself to be indebted to B in Rs. 1,000 to be paid on
demand, for value received".
C. "Mr. B, I.O.U. Rs. 500".
D. “I am liable to B, in a sum of Rs.500 to be paid by instalments.
E. “I am bound to pay the sum of Rs.500 which I received from you.”
F. "I promise to pay B Rs. 500 and all other sums which shall be due to him".
G. "I promise to pay B Rs. 1,000 and the fine according to the rules".
H. "I promise to pay B Rs. 500, first deducting there out any money which he
may owe me".
I. "I promise to pay B Rs. 500 by instalments with a provision that no payment
shall be made after my death". Master Minds.
J. "I promise to pay B Rs. 500 first deducting there out any money which he
may owe me".
Case Study 1 (Problem)
What is the status of paying bank?
A draws a cheque in favour of his customer B, who

endorses the cheque in fovour of C. But another person D
obtains the payment by forging the signatures of C. The
drawee bank makes the payment without verifying the
endorsement. Later on C contends that bank is liable for
forged endorsement of D.
Case Study 1 (Solution)
What is the status of paying bank?
A draws a cheque in favour of his customer B, who

endorses the cheque in fovour of C. But another person D
obtains the payment by forging the signatures of C. The
drawee bank makes the payment without verifying the
endorsement. Later on C contends that bank is liable for
forged endorsement of D.
Solution: Paying bank will not be held liable if the payment

is otherwise in due course
What the bank will do?
A bearer cheque of Rs. 18000 is presented by the payee of

the cheque Mr. Anurag aged about 17 for payment across
the counter, from the account of a public limited
company. But the passing official refuses to make the
payment. The payee insists on either to pay or to give the
reasons in writing for non-payment.
Case Study 2 (Solutin)
What the bank will do?
A bearer cheque of Rs. 18000 is presented by the payee of

the cheque Mr. Anurag aged about 17 for payment across
the counter, from the account of a public limited
company. But the passing official refuses to make the
payment. The payee insists on either to pay or to give the
reasons in writing for non-payment.
Solution: The minor can obtain the payment and give valid
discharge. Bank can be held liable, if the payment is not
made
Who among the following is not liable on the cheque?
Mr. A receives a cheque of Rs. 5000 as payee and endorses

it in favour of Mr. B and he in turn endorses it to Mr. C
which reads as ‘pay to Mr. C. C endorses the cheque in
favour of Mr. D. When D approaches the bank for
obtaining payment, the cheque is dishonoured.
Case Study 3 (Solution)
Who among the following is not liable on the cheque?
Mr. A receives a cheque of Rs. 5000 as payee and endorses

it in favour of Mr. B and he in turn endorses it to Mr. C
which reads as ‘pay to Mr. C. C endorses the cheque in
favour of Mr. D. When D approaches the bank for
obtaining payment, the cheque is dishonoured.
Solution: B and D. Blank endorsement can be converted
into full endorsement by a holder by writing the name of
a person to whom he delivers the cheque. By doing so
the holder ceases to have any responsibility of an
endorser.
Thank You

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1

THE INDIAN CONTRACT ACT, 1872

Anticipatory breach of contract

Contract of indemnity Contract of Guarantee

Coercion Undue Influence

Supervening impossibility: When performance of a promise becomes impossible or illegal

(c) Incapacity to perform a contract of personal services: In case of contract of personal

bailment exists and section 148 is applicable.

The Indian Contract

Essentials of Valid Contract [10]

Offer by Acceptance Offer must It must be

Chart for Understanding

Chart for Understanding

Chart for Understanding

Not 18 or not above 18 Person of Person Disqualified by

Chart for Understanding

Distinction Between Agreement & Contract

Basic Agreement Contract

Contract or Agreement to do Impossible Act is Void [56]

Compensation shall be given when fact is known

Uncertain Agreement [29]

Chart for Understanding

Classification of Contracts [2 and 9]

Executed Contract Valid Contract

Implied Contract Executory Contract

Fact of The Case

Boulton Vs. Jones

2.Z sold his

3.B supplied to leather to J but J refuses to accept the

Fact of The Case

Lalman Shukla Vs. Gauri Dutt

1. G’s told same to her munim L

1. G’s Nephew was missing 2. L went to search the boy

Fact of The Case

2.X’s Luggage was

Fact of The Case

Olley Vs. Malborough Court Ltd.

2.They found a notice

Fact of The Case

Parker Vs. S.E. Rail Co.

2. P’s bag was lost

3. He claimed the actual value

Fact of The Case

3. Offer Must not be Burden on Offeree

Felth house Vs. Bindley

1. A offer to sell white

4. Cross offer do not Conclude a Contract

Chart for Understanding

Example of Cross Offer

A agrees to sell something to B B offers A to Buy same thing on

Chart for Understanding

6. Offer Vs. Invitation to Offer Vs. Intention to Offer

Goods displayed in the shop

Fact of The Case

Harris Vs. N. Nickerson

Fact of The Case

Revocation of Offer / Laps of Offer

By the failure of the acceptor to fulfill a condition precedent to acceptance.

Rules governing acceptance